FYI: Ill App Ct Allows For Deficiency Judgments Even When Borrower Only Served Through Co-Resident

The Illinois Appellate Court for the First District recently held that:  (1) actions for mortgage foreclosure and deficiency judgments may occur in the same proceeding; and (2) "personal service" for purposes of obtaining a deficiency judgment against a defendant includes service by leaving a copy with a co-resident of the borrower. 
 
A copy of the opinion is available at:

http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1110529.pdf.

 

After defendant-appellee mortgage borrower ("Borrower") failed to make payments on a mortgage loan on a multi-unit  property in Chicago, appellant mortgage lender ("Bank") brought an action to foreclose the mortgage and obtain a deficiency judgment against the Borrower.  The mortgage specifically provided for the mortgagee's right to obtain a judgment for any deficiency still owed after a foreclosure sale of the property. 

 

The Cook County sheriff served the foreclosure notice by abode service -- that is, by leaving the summons and complaint at the Borrower's home with an adult member of the Borrower's family and mailing copies of the documents to the Borrower at the same address.  The Borrower never answered the complaint or appeared in the foreclosure case.   The trial court entered a default judgment against the Borrower along with an order for the sale of the property.  The order provided that the Bank was entitled to a deficiency judgment against the Borrower for any amount still owing on the mortgage loan after the sale of the property. 

 

Following the foreclosure sale, which brought in less than the amount owed on the loan, the Bank filed motions to confirm the sale and for a deficiency judgment against the Borrower.  The trial court later confirmed the sale, but denied the Bank's motion for a personal deficiency judgment, reasoning that, because the Borrower had been notified of the foreclosure by abode service, the Borrower had not been personally served as required by the Illinois Mortgage Foreclosure Law.  The Bank appealed.  The Appellate Court reversed, agreeing with the Bank that abode service constitutes "personal service" in foreclosure actions. 

 

As you may recall, the Illinois Mortgage Foreclosure Law ("Foreclosure Law") provides in part that an order confirming a foreclosure sale may include a personal deficiency judgment against the defendant, provided the defendant has been personally served or has made an appearance in the foreclosure case.  See 735 ILCS 5/15-1508(b), 15-1508(e).  The Foreclosure Law also provides that Article II of the Illinois Code of Civil Procedure governs service of process in foreclosure actions. 735 ILCS 5/15-1107(a).    Article II of the Illinois Code of Civil Procedure, in turn, provides that service of process of the summons and foreclosure complaint on an individual may be accomplished either by abode service, as was done in this case, or by serving the defendant personally.  735 ILCS 5/2-203(a) ("Section 2-203"). 

 

After providing an overview of the evolution of Illinois foreclosure and deficiency law, the Court noted among other things that current foreclosure statutes specifically allow a foreclosure complaint to include a request for a personal deficiency judgment and that, where the defendant is personally liable for the deficiency and has been personally served in a manner provided for under Section 2-203, a court "shall" enter a deficiency judgment.  See 735 ILCS 5/15-1508(e). 

 

As the Borrower had failed to appear in the case, the appellate court focused on the meaning of "personal service" under the Foreclosure Law.  The Court observed that, although the Foreclosure Law does not define the term "personal service," Section 2-203 specifically permits abode service as a means of obtaining personal jurisdiction over a defendant.  The Court explained, "where there is abode service as set forth in section 2-203, a court hearing a foreclosure action or any other action at law or equity would have personal jurisdiction over a defendant residing [in Illinois]."  Accordingly, the Court determined that the Foreclosure Law allows foreclosure and deficiency actions to proceed together in one proceeding.

 

In addition, noting that the defendant had been properly served in accordance with Section 2-203, and that the lower court therefore had personal jurisdiction over the defendant in the foreclosure action, the court ruled that "abode service satisfies the service requirements of section 15-1508."

 

Thus, the appellate court concluded that abode service is personal in nature for purposes of the Foreclosure Law, and that allowing actions for a deficiency and foreclosure to proceed together in a single proceeding is consistent with the purpose of the Foreclosure Law.  A different result, the court held, would be absurd and result in a mortgage lender having to go through the inconvenience of filing a separate deficiency suit in which abode service alone would provide the court with personal jurisdiction over the defendant. 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
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FYI: 1st Cir Holds Waiver of TILA Rescission in Loan Mod Valid, APR as to Performance-Based Rate Correct, and Omission of "Monthly" Did Not Violate TILA

The U.S. Court of Appeals for the First Circuit recently held that:  (1) a borrower's waiver of his right to rescind his mortgage loan under TILA was valid and binding; and  (2) the lender's interest rate disclosures incorporating a performance-based interest rate did not violate either the federal Truth in Lending Act, or the Massachusetts Consumer Credit Cost Disclosure Act; and  (3) omission of the word "monthly" from the disclosure of the payment schedule did not violate TILA. 

 

A copy of the opinion is available at:

http://www.ca1.uscourts.gov/pdf.opinions/11-1188P-01A.pdf.

 

Appellant-borrower (the "borrower") entered into an agreement with appellee-lender (the "lender") for a mortgage loan.  At the loan closing, the borrower received various Truth-in-Lending disclosures, including of the Annual Percentage Rate ("APR") for the loan.  The APR was calculated using a performance-based rate, for which the borrower would become eligible if he made two years of timely payments. 

 

The borrower filed for bankruptcy, and began extensive loan modification negotiations with the servicer of his home loan.  Those negotiations resulted in an agreement whereby, among other things, the borrower agreed to waive and relinquish all claims that he might have regarding the loan. 

 

The borrower did not meet the terms of the loan modification agreement, and attempted to rescind the loan.  The borrower then sued, alleging violations of the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA") -- specifically, he alleged that APR calculation was not made in conformity with applicable regulations; that the finance charge was underestimated; and that the time of the installment payments was not specified. 

 

The bank moved to dismiss the borrower's complaint, arguing that it was time-barred and that the borrower had not stated a claim under either the Truth in Lending Act ("TILA") or the MCCCDA.  In the alternative, the bank argued that the borrower had waived any TILA or MCCCDA claims he might have pursuant to the modification agreement.  The bankruptcy court granted the motion to dismiss.  The borrower appealed, and the district court affirmed the bankruptcy court's holding.  Again, the borrower appealed.

 

The First Circuit began its analysis by noting the substantial similarities between TILA and MCCCDA, and citing case law providing that the MCCCDA should be construed in accordance with TILA.  Turning to the substance of the borrower's appeal, the First Circuit first examined the borrower's argument that, by signing the loan modification agreement, he did not waive his right to rescind the transaction. 

 

As you may recall, TILA provides that the Federal Reserve Board (the "Board") may prescribe regulations authorizing modification or waiver of "any rights created under this section."  15 U.S.C. Sec. 1635(d) (emphasis added).   The borrower argued that as no regulations had been prescribed by the Board authorizing waiver under his circumstances, the loan modification agreement's provisions regarding waiver were ineffective. 

 

The First Circuit disagreed. It noted that the statutory language cited by the borrower provided for waiver only of rights created under Section 1635.  However, the borrower attempted to rescind his transaction some six years after the loan was originated, and thus the borrower was pursuing a "rescission in recoupment" under state law.  The First Circuit explained that both TILA and MCCCDA preserve, but do not create, borrowers' rights to rescission in recoupment.  Therefore, the FRB's regulations were irrelevant, and the First Circuit held that the borrower's waiver was valid.

 

The borrower also argued that recognizing his waiver would thwart the policy goals of TILA and the MCCCDA.  The Court disagreed, noting that the borrower's waiver was made with the assistance of counsel, was approved by the bankruptcy court, and was the product of extensive negotiations.   Therefore, TILA's policy of ensuring informed decision-making for unsophisticated consumers did not apply. 

 

Next, the First Circuit turned to the borrower's contentions regarding the disclosures he received at the closing of his loan transaction.  The Court concluded that even if the borrower had not waived his rescission claims, he nevertheless "failed to state a claim for relief under the TILA or the MCCCDA." 

 

The Court addressed the borrower's claim that including the performance-based reduction in interest in the APR calculation was improper.  It noted that TILA requires that the disclosures, including the APR disclosures, "reflect the terms of the legal obligation between the parties."  12 C.F.R. Sec. 226.17(c)(1).  As the borrower was legally obligated to make timely payments, and the lender was legally obligated to reduce the interest rate following a certain number of timely payments, the First Circuit held that the lender complied with TILA's APR disclosure and calculation requirements.  The First Circuit further relied on the FRB's Official Staff Commentary, which states that the APR should account for changes in the interest rate over the life of the loan.

 

The borrower also argued that the increased interest rate consequent to his failure to make timely payments constituted an undisclosed finance charge.  Again, the First Circuit disagreed, noting that TILA's commentary provides that interest rate increases resulting from late payments are unanticipated, and therefore not considered "finance charges."  Commentary, 12 C.F.R. Sec. 226.4(c)(2)-1. 

 

Finally, the borrower argued that the disclosures he received specified that he would make 360 payments within 30 years, but did not specify monthly payments.  The First Circuit stated that "we believe that a reasonable person reading the TIL disclosure would have understood that his payments were to made on a monthly basis."  Therefore, and relying on the fact that the First Circuit has not adopted "hypertechnicality" with regard to TILA cases, the Court held that the failure to specify monthly payments did not violate TILA. 

 

Accordingly, the First Circuit affirmed the judgment of the lower court. 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: US Sup Ct Holds CROA Claims Subject to Arbitration

The U.S. Supreme Court recently held that claims arising under the federal Credit Repair Organizations Act are subject to arbitration, and that the CROA does not override the Federal Arbitration Act's mandate to enforce arbitration agreements, notwithstanding the CROA's private right of action and nonwaiver-of-rights provision.   

 

A copy of the opinion is available at: 

http://www.supremecourt.gov/opinions/11pdf/10-948.pdf.

 

Plaintiffs-Respondents ("Debtors") applied for and obtained a credit card in response to promotional material from a marketer of credit cards, allegedly targeted at individuals with a history of poor credit as a way to improve their credit scores.  Debtors agreed in their credit applications to submit any claims arising from the credit cards to mandatory binding arbitration. 

 

Upset over alleged hidden costs and other supposedly improperly disclosed terms of the credit card agreement, Debtors filed a class action lawsuit in federal court claiming that the credit card marketer and issuer (the "Alleged Credit Repair Companies") had engaged in unfair and deceptive practices in violation of the Credit Repair Organizations Act, 15 U.S.C. §1679 et seq. (CROA).  In their complaint, the Debtors alleged that the Alleged Credit Repair Companies supposedly failed among other things to disclose in the written credit card materials the assessment of high fees that significantly reduced the amount of the advertised available credit.  

 

The district court denied the Alleged Credit Repair Companies' motion to compel arbitration, concluding that claims brought under the CROA were not subject to arbitration, because of its provisions establishing a right to sue and prohibiting the waiver of "any right under the [CROA]."  The Alleged Credit Repair Companies appealed, and the Ninth Circuit affirmed.  The Supreme Court reversed and remanded, ruling that the Federal Arbitration Act ("FAA") requires the enforcement of the arbitration provision in the credit card agreements.

 

As you may recall, the FAA provides that a written contractual arbitration provision is enforceable to the same extent as any valid contract.  See 9 U.S.C. §2. See also, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. __, __ (2011).  Accordingly, following its prior FAA opinions, the Court noted that the FAA requires the enforcement of arbitration agreements in accordance with their terms, unless a "contrary congressional command" dictates otherwise.  

 

The Court then examined the CROA to determine whether its provisions provided the "congressional command" to override the FAA.  The Court noted that the CROA provides a private right of action and sets forth certain disclosure requirements for consumer contracts, one of which is a statement that a consumer has the "right to sue a credit repair organization that violates the [CROA]."   The CROA also contains a nonwaiver provision that prohibits the waiver of consumer rights afforded by the CROA.  See 15 U.S.C. §1679c(a)(requiring statement disclosing the right to dispute inaccurate credit information and to obtain a copy of credit report, and that the consumer has "a right to sue a credit repair organization that violates the [CROA]"), 1679f(a)(prohibiting waiver of any "right of the consumer" under the CROA), 1679g(a)(establishing liability for violations and setting damages for both individual and class actions).

 

The Court rejected the Debtors' argument that the nonwaiver provision in Section 1679f(a) rendered the binding arbitration agreement unenforceable.  In so ruling, the Court specifically stated that the "right to sue" phrase in the disclosure provision of Section 1679c(a) does not provide consumers with the right to bring an action in court.  According to the Court, the disclosure provision merely gives consumers the right to receive the statement describing the consumer protections that the law provides elsewhere, such as the right to dispute inaccurate information in one's credit report or the right to cancel a consumer contract within 3 days.

 

The Court thus concluded that the private right of action under the CROA was part of a formulation of a cause of action under the CROA, but was insufficient to rise to the level of a "congressional command" to override the FAA's mandate to honor arbitration agreements.   Accordingly, while recognizing the private right of action under the CROA, the Court determined that the arbitration provision in the credit card agreement was nevertheless enforceable. 

 

In support of this interpretation, the Court pointed out that its previous opinions addressing arbitration agreements with respect to federal causes of action "repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of civil liability in court."   See Gilmer v. Interstate/Johnson Lane Corp.  500 U.S. 20, 28 (1991); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 240 (1987); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 473 U.S. 614, 637 (1985). 

 

Noting, however, that none of the federal statutes in those prior cases involved a nonwaiver provision, as the CROA does, the Court nevertheless concluded that the CROA's nonwaiver provision failed to reflect congressional intent that the CROA should supplant the FAA.  The Court also noted that its interpretation allows parties to remain free to specify the parameters of judicial action with regard to initial arbitral adjudication, "so long as the guarantee of §1679g--the guarantee of the legal power to impose liability--is preserved." 

 

The Court opined that had Congress intended the CROA to prohibit the use of arbitration agreements, Congress would have done so expressly, as it had done in other federal statutes that specifically prohibit such agreements, rather than ambiguously in the CROA's right-to-sue and nonwaiver provisions.   Finally, the Court held that, as the CROA is silent on whether claims  may proceed to arbitration, the FAA requires the enforcement of the arbitration provision in the credit card agreements the Debtors signed.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: Mich App Ct Holds Breach of CMBS Loan Agreement Resulted in Loan Becoming Fully Recourse

The Michigan Court of Appeals recently held that a borrower's violation of a CMBS loan agreement resulted in the loan becoming fully recourse against both the borrower and the guarantor.  A copy of the opinion is attached.

 

Defendant Cherryland Mall Limited Partnership obtained a commercial mortgage-backed securities loan, for which defendant David Schostak was the guarantor.  The loan was transferred to the plaintiff, and made part of a real estate mortgage investment conduit trust. 

 

When Cherryland failed to make payments on the loan, the plaintiff foreclosed.  After the sheriff's sale, the plaintiff was left with a substantial deficiency.  The plaintiff then sued Cherryland and Schostak, alleging that it was entitled to recover the deficiency because Cherryland's insolvency constituted a failure to maintain its single purpose entity ("SPE") status, as required by the agreement between the parties. 

Following discovery, the plaintiff filed several motions for summary disposition, seeking a judgment for the deficiency, among other things.  The lower court found for the plaintiff.  Cherryland and Schostak appealed, contesting whether Schostak was liable for the entire deficiency, because insolvency was a violation of Cherryland's SPE status. 

 

The Court began with an in-depth examination of the typical structure of CMBS loans of the sort at issue.  It noted that such loans typically feature an agreement by the lender not to pursue recourse liability against the borrower, in exchange for the borrower agreeing to a series of "separateness covenants," whereby the borrower agrees to "ring-fence" the financed asset from "all other endeavors, creditors and liens."  The separateness covenants may include an agreement by the borrower to remain solvent.  A breach of these separateness covenants allows the lender to seek recourse liability against the borrower. 

 

On appeal, the defendants argued that the mortgage was extinguished upon foreclosure, thus barring the plaintiff's lawsuit because the terms and conditions of the mortgage no longer existed. 

 

The Court disagreed.  It cited binding precedent providing that "an action at law may be instituted for the deficiency on statutory foreclosure of a mortgage."  New York Life Ins. Co. v. Erb, 276 Mich 610, 615 (1936).  The Court further observed that the basis for such a lawsuit is not the mortgage, but the note - and the note in this matter provided that debt was to be fully recourse against the borrower, in the event that the borrower did not maintain its status as a SPE. 

 

Next, the defendants advanced several arguments based on contract interpretation.  The defendants argued that the terms of the mortgage were unambiguously non-recourse; and that failure to remain solvent did not constitute a violation of SPE status.  To support the latter argument, the defendants pointed out that "SPE" was never defined in the mortgage. 

 

The Court therefore scrutinized the terms of the mortgage.  It noted that the requirement that the borrower remain solvent was included under the heading "Single-Purpose Entity/Separateness."  Therefore, it concluded that the "natural and logical" conclusion was that solvency was a condition necessary to maintain SPE status. 

 

Further, the Court observed that accepting the defendants' arguments would mean that the mortgage provided that there was nothing that the borrower must do to maintain SPE status.  As the loan documents stated in numerous places that a failure to maintain SPE status would result in the loan becoming fully recourse, the Court stated that the defendants' interpretation was unreasonable. 

 

Therefore, the Court held that "[h]aving admittedly become insolvent, Cherryland violated the SPE requirements, resulting in the loan becoming fully recourse." 

 

In reaching that conclusion, the Court acknowledged that its interpretation of the contract "seems incongruent with the perceived nature of a non-recourse debt," and further acknowledged the contention of various amici that its holding could "indicate economic disaster for the business community in Michigan."  Nevertheless, the Court maintained that it was not its job to "save litigants from their bad bargains," nor to address matters of public policy. 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: Cal App Ct Confirms No Relief Under 2923.25 Post-Sale, Actual Tender Required Post-Sale, Borrowers Had No Claim for Elder Abuse

The California Court of Appeal, Third Appellate District, recently upheld the dismissal of a wrongful foreclosure action, holding that:  (1) California Civil Code section 2923.5 provides no remedy after a foreclosure sale;  (2) that borrowers failed to tender arrearages before attacking the sale; and  (3) that borrowers failed to state a claim for dependent adult abuse, because they failed to establish that the residence was wrongfully taken.  The Court declined to determine whether the federal Home Owners Loan Act preempted the dependent adult abuse claim, but recognized that at least one federal district court in California has held that it does. 

 

A copy of the opinion is available at:

http://www.courtinfo.ca.gov/opinions/documents/C066130.PDF

 

Due to procedural violations, the Court held that borrowers had abandoned most of their arguments, and thus only two issues remained before the court.  The first issue was whether the borrowers stated a cause of action based on alleged violations of California Civil Code section 2923.5.  The second issue was whether those facts would support a violation of the California Welfare and Institutions Code section 15610.30, involving elder or dependent adult abuse. 

 

The borrowers had fallen behind in their mortgage loan payments.  Although the defendants pursued alternatives to foreclosure, foreclosure proceedings began, allegedly without informing the borrowers of the reason why a loan modification was not granted.  One of the borrowers allegedly is a dependent adult, and the defendants allegedly had actual notice of her status.

 

The borrowers, relying on California Civil Code section 2923.5, contended that the defendants failed to fully and fairly explore alternatives to foreclosure.  As you may recall, section 2923.5 generally prohibits filing a default notice until 30 days after the lender contacts the borrower to assess the borrower's financial situation and to explore options for the borrower to avoid foreclosure.  The Court determined, however, that in order to avoid running afoul of the federal Home Owners Loan Act, the only available remedy under section 2923.5 is "more time" before a foreclosure sale occurs.  After the sale, there is no relief under the statute.  More importantly, the statute does not require the lender to modify the loan.

 

The Court also determined that the borrowers were required to tender arrearages before attacking the sale.  The second amended complaint merely alleged the borrowers' offers to tender.  The Court observed that a full tender must be made to set aside a foreclosure sale, based on equitable principles.  The Court determined that allowing the borrowers to recoup the property without full tender would award them an inequitable windfall and would allow them to evade their lawful debt.  Accordingly, the Court held that the borrowers failed to show that they could plead a viable claim under section 2923.5.

 

With respect to the borrowers' claim of dependent adult abuse, the trial court found that the borrowers failed to allege any property was taken wrongfully, as required under section 15610.30 of the California Welfare & Institutions Code.  The Court of Appeals agreed.

 

The Court noted that, although the borrowers alleged "undue financial loss," due to the "abrupt" sale of the property, the alleged "undue" loss was not explained in either the complaint or the briefs.  The Court recognized that legally foreclosing on a home in not actionable, merely because it requires the former owner to move out.  Therefore, the Court found unavailing the borrowers' claim that the dependent borrower had to hastily locate a new residence that sufficiently provided for her disability.  Accordingly, the Court held that the borrowers failed to demonstrate that they could plead a viable claim.

 

The Court declined to determine whether the federal Home Owners Loan Act ("HOLA") preempted the borrowers' dependent adult abuse claim.  It noted, however, that the federal district court in the Central District of California in Cosio v. Simental, No. CV 08-6853 PSG (PLAX), 2009 U.S. Dist. LEXIS 8385 (C.D. Cal. Jan. 27, 2009), has held that HOLA does preempt such claims.

 

Because the borrowers could present no allegations sufficient to state a claim, the Appellate Court affirmed the trial court's demurrers of the borrowers' second amended complaint and refusal to grant leave to file a third amended complaint.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: 10th Cir Rejects Argument that MERS Had No Authority to Foreclosure w/o Authorization From Every Investor in Securitization

The U.S. Court of Appeals for the Tenth Circuit recently rejected a contention that "securitization of a note renders the holder of the underlying trust deed...unable to foreclose absent authorization by every investor holding an interest in the securitized note." 

 

A copy of the opinion is available at:

http://www.ca10.uscourts.gov/opinions/10/10-4182.pdf. 

 

Commonwealth Property Advocates, LLC ("Commonwealth") acquired title to various properties in Utah from borrowers in default.  Commonwealth then sued various parties involved in the origination, servicing and ownership of the mortgage loans secured by those properties, arguing among other things that those parties had no authority to foreclose because the relevant notes had been securitized.  The defendants in each case filed motions to dismiss, which were granted by the lower court.  Commonwealth appealed.  The Tenth Circuit consolidated the cases for purposes of opinion. 

 

The Tenth Circuit noted numerous issues with Commonwealth's pleadings.  Specifically, the "causes of action" raised by Commonwealth were in fact forms of relief, and Commonwealth's statements of the issues raised on appeal "provide little help in determining what exactly [Commonwealth] is appealing."

 

Nevertheless, the Tenth Circuit determined that "the claim [Commonwealth] pursues on appeal is simply that Defendants had no authority to foreclose because they transferred the debt."  The Court construed this claim as "one for wrongful foreclosure under Utah law." 

 

Having determined the issues before it, the Court next considered the facts of the consolidated cases.  It observed that in each case, the relevant trust deeds provided Mortgage Electronic Registration System ("MERS") with the authority to foreclose and sell the property, and identified MERS as the nominee for the lender and the lender's successors.  Therefore, the Court noted that MERS appeared to have authority to foreclose. 

 

Commonwealth argued that the trust deed provisions were invalid, because they purportedly conflict with a Utah statute providing that "[t]he transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor."  Utah Code Ann. Sec. 57-1-35.  Commonwealth claimed that as a result of the transfer of the note in the securitization process, MERS could no longer foreclose because they no longer had a security interest in the property.  Commonwealth further argued that MERS could only foreclose if they received written authorization from each investor to do so.   

 

The Tenth Circuit determined that Commonwealth's claims were without merit.  It noted that a Utah state court, considering similar allegations by the same plaintiff, held that the plaintiff had "failed to explain how the securitization of the Note could have revoked [the provision in the Deed of Trust providing MERS with the authority to foreclose]."  Commonwealth Prop. Advocates v. Morg. Elec. Registration Sys., Inc., 263 P.3d 397, 402 (Utah Ct. App. 2011). 

 

Further, the same state court held that the plain language of Sec. 57-1-35 "does nothing to prevent MERS from acting as nominee for Lender and Lender's successors...when it is permitted by the Deed of Trust."  Id.at 403. 

 

Because this matter was before the Tenth Circuit on diversity jurisdiction, the Court deferred to the Utah Court of Appeals' prior opinion, and in so doing held that Commonwealth's claims "have no legal basis under Utah law."  Consequently, the Tenth Circuit affirmed the judgment of the lower court.  

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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