Thursday, October 11, 2012

FYI: Nevada Supreme Court Rules Foreclosure Proper When Bank Entitled to Enforce Both Note and DOT

The Nevada Supreme Court recently held that (1) to participate in Nevada's Foreclosure Mediation Program, the party seeking to foreclosure must demonstrate that it is both the beneficiary of the deed of trust, and the current holder of the promissory note;  (2) where MERS is the named beneficiary, but a different entity holds the promissory note, the note and deed of trust are split such that nonjudicial foreclosure is improper;  and (3) any such split may be cured "when the promissory note and deed are reunified." 
A borrower executed a note and deed of trust with a lender to obtain a home loan.  The terms of the note allowed the lender to transfer it.  The deed of trust named MERS the beneficiary, as the nominee of the lender and the lender's successors and assigns, and provided that MERS had the right to foreclose on the subject property. 
The note and deed of trust were transferred and assigned several times. At the time of the instant litigation, MERS had assigned the deed of trust to a bank (the "bank",) the respondent in this action.  The conveyance language in the assignment of deed of trust provided that it was assigned and transferred "together with the note..."  The note was endorsed in blank and was in the possession of the bank's foreclosure trustee ("trustee"). 
When the borrower stopped making payments, the bank sent him a notice of default, and notified the borrower that he could choose to enter Nevada's Foreclosure Mediation Program ("FMP").  The borrower chose to do so, and the parties participated in the mediation program without coming to an agreement.  The mediator's report did not indicate that the bank failed to participate in good faith, or otherwise failed to meet the requirements of the FMP. 
The borrower filed a pro se petition for judicial review, arguing among other things that bank had failed to show that it had legal authority to foreclose on the borrower's home.  The lower court ruled in favor of the bank, and the borrower appealed. 
As you may recall, the statutory scheme for nonjudicial foreclosures in Nevada requires the trustee to obtain and record an FMP certificate before proceeding with a foreclosure.  See NRS 107.086.  In order to obtain that certificate, a foreclosing party must show, among other things, that it has the requisite authority over the note, and that it is the beneficiary, or a representative of the beneficiary, of the deed of trust.  Id. at 107.086(4). 
On appeal, the Court began by examining whether the bank had standing to participate in the FMP.  It recited the statutory standards mentioned above, and also noted that "to have standing to foreclose, the current beneficiary of the deed of trust and the current holder of the promissory note must be the same." 
The borrower argued that the bank did not legally become the beneficiary of the deed of trust, because MERS did not provide evidence that it had authority from the originator to assign the originator's interest in the same.  Accordingly, the Court considered "whether the use of MERS irreparably 'splits' the note and the deed of trust," which would render the bank incapable of participating in the FMP and foreclosing on the borrower's property.
The Court rejected the borrower's argument, ruling that "nothing in Nevada law prohibited MERS' actions..."  However, the question of how to determine a beneficiary's rights where the note and deed of trust were "split" remained unresolved.
To answer that question, the Court first surveyed the "traditional rule" for resolving that issue, whereby "a court need follow only the ownership of the note, not the corresponding deed of trust, to determine who has standing to foreclose."  Under that rule, the Court explained, MERS' attempt to assign the deed of trust without possessing the promissory note would have no force. 
The Court declined to adopt the "traditional rule," finding it to be inconsistent with the statutory scheme discussed above.  The Court reasoned that Nevada's requirement that a foreclosing party must have the authority to enforce both the deed of trust and the note would be "superfluous" under the traditional rule. 
Accordingly, the Court rejected the "traditional rule" in favor of the "restatement rule," which provides that "a promissory note and deed of trust are automatically transferred together unless the parties agree otherwise." 
The Court then scrutinized the deed of trust and note at issue here.  It found that MERS was the beneficiary under the former document, for two reasons: first, "it is an express part of the contract that [the Court] is not at liberty to disregard," and second "it is prudent to have the recorded beneficiary be the actual beneficiary and not just a shell for the 'true' beneficiary."  Similarly, the Court relied on the terms of the note to hold that "MERS holds an agency relationship with [the originator] and its successors and assigns with regard to the note." 
That did not conclude the Court's analysis.  The Court also observed that because MERS was the beneficiary of the deed of trust, but not the holder of the note, the two documents were "effectively inception." That presented a problem because the "holder of a note is entitled to a distinctly different set of rights than that of a note holder."  Specifically, the Court explained that the holder of a note is entitled to payments only, whereas the beneficiary of a deed of trust has the right to use the property as a means of satisfying repayment.
Nevertheless, the Court noted that "this split at the inception of the loan is not irreparable or fatal," explaining that it can be cured when the same entity acquires both the deed of trust and the note.  However, the Court emphasized that the foreclosure would be prevented "unless the two documents are ultimately held by the same party." 
With the appropriate standards in place, the Court had little difficulty in holding that the bank was entitled to enforce both the deed of trust and the note. 
This was so because the bank produced copies of the deed of trust and assignment at the mediation.  Further, the Court held that MERS' assignment of the deed of trust, which provided that the deed of trust was assigned "together with the note," was effective in transferring the latter document.  The Court reached that conclusion because of its conclusion that "MERS, as agent (nominee) for [the originator's] successors and assigns, can transfer the note on behalf of the successors and assigns..."  The Court also determined that the bank was entitled to enforce the note, because the bank's trustee "physically possessed the note," which was indorsed in blank.
The Court therefore held that "[b]ecause [the bank] was entitled to enforce both the note and the deed of trust, which were reunified, we conclude that [the bank] demonstrated authority over the note and to foreclose."  Accordingly, Nevada Supreme Court affirmed the judgment of the lower court. 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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