FYI: RI Sup Ct Rejects Borrower's MERS Challenge

The Rhode Island Supreme Court recently held that MERS had both contractual and statutory authority to foreclose on behalf of the owner of a home mortgage loan, reasoning that the express language in the mortgage agreement and Rhode Island's non-judicial foreclosure law allowed MERS to serve as the lender's nominee and as "mortgagee" with the power of sale. 

 

The Court further ruled that Rhode Island law did not require MERS to physically possess both the mortgage and the underlying note in order to have standing to foreclose, as long as an agency relationship existed between MERS and the owner of the loan such that the beneficial and legal interests remained unified. 

 

A copy of the opinion is attached.

 

Plaintiffs borrowers ("Borrowers") obtained a loan from defendant bank ("Bank") that was secured by a mortgage on Borrowers' property.    The mortgage named Mortgage Electronic Registration Systems, Inc. ("MERS") as "nominee for [Bank] and [Bank's] successors and assigns," and expressly stated that "MERS is the mortgagee under this Security Instrument."    The mortgage further stated "[b]orrower understands and agrees that MERS holds only legal title to the interests granted . . .  in this Security Instrument, but  . . .  MERS . . . has the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the property, and to take any action required of [Bank] . . . ." 

 

The mortgage also provided that the promissory note and security instrument could be sold without notice to Borrowers, and that such sale might result in a change in the loan servicer entitled to collect payments on the debt.   Finally, the mortgage stated in part that "[Bank] at its option may . . . invoke the statutory power of sale and any other remedies permitted by Applicable Law."

 

Borrowers defaulted on the loan, and MERS initiated foreclosure proceedings as the mortgage holder and named mortgagee under the mortgage, and as nominee for Bank.  The day before the scheduled foreclosure sale, Borrowers filed a lawsuit against Bank and MERS (collectively "Defendants"), seeking declaratory and injunctive relief to prevent MERS from exercising the power of sale contained in the mortgage.  The lower court denied Borrowers' request for relief and entered judgment on behalf of the Defendants.  Borrowers appealed to the Rhode Island Supreme Court, arguing that MERS lacked both the contractual and statutory authority to foreclose.  The Rhode Island Supreme Court affirmed.

 

As you may recall, Rhode Island law allows the "statutory power of sale" to be incorporated into any mortgage by reference and provides that in the event of default, a mortgagee, or the mortgagee's successors or assigns, may sell the property secured by the mortgage.  R.I.G.L. § 34-11-22. 

 

Providing an overview of the MERS system of mortgage registration and explaining the role of a "nominee," the Rhode Island Supreme Court first addressed Borrowers' assertion that MERS lacked the contractual authority to exercise the power of sale, noting the express provisions in the mortgage granting MERS the power of sale and laying out the capacity in which MERS held title.  As the Court explained, "[t]hese [mortgage] provisions are clear and leave no room for interpretation."   The Court thus ruled that MERS had the contractual right to foreclose and the authority to exercise that right.  

 

In so ruling, the Court also concluded that a provision in the mortgage referencing Bank's authority to invoke the power of sale did not negate previous language granting MERS the right to foreclose and sell the property.  The Court further noted that by accepting the statements of fact in an affidavit that MERS was Bank's agent and nominee, Borrowers had waived their argument that MERS was not authorized to act on Bank's behalf because Bank never actually signed the mortgage.   

 

Turning to Borrowers' assertions that MERS lacked the statutory power of sale, the Rhode Island Supreme Court pointed out that Section 34-11-22 established a uniform power of sale provision that contracting parties were free to include in their mortgage agreements if they so chose, but that the provision did not specify whom parties could name as mortgagee.   Accordingly, the Rhode Island Supreme Court agreed with the lower court that MERS was the "mortgagee" under the mortgage, first, because the mortgage agreement Borrowers executed expressly so provided and, further, because as the Bank's nominee, MERS was the mortgagee with authority to foreclose.  The Court thus concluded that as nominee under the mortgage, MERS had power of sale under Section 34-11-22 absent a "clear and certain" violation of the law or public policy, which was not present in this case.  See Gorman v. St. Raphael Academy, 853 A.2d 28, 38 (R.I. 2004).

 

Finally, with respect to Borrowers' argument that Rhode Island's non-judicial foreclosure scheme implicitly required the same entity to both own and hold the note in order to allow that entity to foreclose, the Rhode Island Supreme Court, citing a recent Massachusetts decision, concluded that, because Rhode Island did not explicitly preclude foreclosures by entities acting as agents on behalf of the note owner, MERS was not statutorily prohibited from foreclosing under the mortgage.  See Eaton v. Federal National Mortgage Assoc., 969 N.E.2d 1118, 1129-31 (Mass. 2012)(concluding that a foreclosing mortgagee need not have physical possession of the note to foreclose where it acts as the authorized agent of the note holder).  Pointing out in part the difference between legal and equitable title, the Court explained, "any of the obligations placed upon a 'mortgagee' may be fulfilled by either the mortgage holder or the owner of the note, provided that an agency relationship exists between the two."   See Culhane v. Aurora Loan Services of Nebraska, No. 12-1285, 2013 WL 563374 (1st Cir. Feb. 15, 2013).

 

Accordingly, the Rhode Island Supreme Court affirmed the lower court's denial of declaratory and injunctive relief. 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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FYI: Ninth Circuit Rejects Borrower's Attempt to Oppose Removal Based on "Prior Exclusive Jurisdiction" or Colorado River Doctrines

The U.S. Court of Appeals for the Ninth Circuit recently ruled in part that neither the "prior exclusive jurisdiction" doctrine, nor the so-called Colorado River abstention doctrine, applied to borrowers' foreclosure-related claims to support remand of their case to state court.  In so ruling, the Court concluded that: (1) removal to federal court on grounds of diversity terminated the state court's jurisdiction over borrowers' property; and (2) there were no "pending state court proceedings" involving borrowers' property to support remand. 

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2013/04/12/11-17432.pdf.

 

Plaintiffs borrowers ("Borrowers") obtained a home mortgage loan from defendant bank ("Bank") that was secured by a deed of trust.  Borrowers eventually defaulted on their loan, and the trustee under the deed of trust initiated foreclosure proceedings.

 

Following unsuccessful foreclosure mediation, Borrowers filed a complaint in Nevada state court against Bank, the original and substitute trustees, the loan servicer and others associated with the loan and trust deed (collectively, "Defendants"), alleging among other things wrongful foreclosure, fraud, unfair lending practices, and unfair and deceptive trade practices, and seeking to quiet title.  Borrowers also filed a notice of lis pendens.

 

Defendants removed the case to federal court on grounds of diversity, and moved to dismiss.   The trustee under the deed of trust additionally moved to expunge the lis pendens in order to proceed with the foreclosure.  The lower court granted the motions to dismiss.  Borrowers appealed, arguing that the lower court should have remanded back to state court instead. 

 

The Ninth Circuit affirmed, ruling that the prudential rules on which Borrowers relied for remand were inapplicable.

 

As you may recall, once a notice of removal has been filed, the state court is prohibited from proceeding with the case "unless and until the case is remanded."  28 U.S.C. § 1446(d).

 

In addition, under the so-called "prior exclusive jurisdiction" doctrine, which prevents both a state and federal court from asserting concurrent control over a single piece of property, once either a state or federal court has jurisdiction over the property, that property "is withdrawn from the jurisdiction of the courts of the other authority . . . ."  See State Engineer v. S. Fork Bank of Te-Moak Tribe of W. Shoshone Indians, 339 F.3 804, 809 (9th Cir. 2003).  See also United States v. One 1985 Cadillac Seville, 866 F.2d 1142, 1145 (9th Cir. 1989)(explaining that prior exclusive jurisdiction is a prudential, but mandatory, common law rule of judicial abstention). 

 

Also, under the "Colorado River abstention" doctrine, a federal court weighs certain factors to determine whether it should dismiss the federal suit because of the "presence of a concurrent state proceeding."  See Colorado River Water Conservation Dist. V. United States, 424 U.S. 800, 818 (1976)("Colorado River").

 

In rejecting Borrowers' arguments that their case should have been remanded to state court on grounds that either the prior exclusive jurisdiction doctrine, or the Colorado River abstention doctrine, mandated the federal court to do so, the Ninth Circuit concluded that neither doctrine applied in this case.   As the Court explained, the doctrine of prior exclusive jurisdiction applies to a federal or state court's jurisdiction over property only where the other court first asserted and then retained that jurisdiction in a separate, concurrent proceeding.  See, e.g., Chapman v. Deutsche Bank Nat'l Trust Co., 651 F.3d 1039, 1043 (9th Cir. 2011); United States v. Alpine Land & Reservoir Co., 174 F.3d 1007, 1012-14 (9th Cir. 1999).  Here, however, because Defendants properly removed the case, the state court no longer had jurisdiction over the property and was unable to retain such jurisdiction.  

 

Applying similar reasoning, the Ninth Circuit also determined that the Colorado River doctrine was inapplicable, noting that among the factors listed in Colorado River to ascertain whether a federal suit should be dismissed "due to the presence of a concurrent state proceeding" was whether a court previously exercised jurisdiction over the property that is the subject of the lawsuit.  Colorado River, 424 U.S. at 818. Thus, pointing out again the absence of any concurrent state proceedings in this case, the Court concluded that the Colorado River doctrine did not apply here.

 

Accordingly, the Ninth Circuit affirmed the lower court's rulings.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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FYI: 6th Cir Upholds Dismissal of MERS Challenge Filed After Expiration of Michigan's Post-Foreclosure Redemption Period

The U.S. Court of Appeals for the Sixth Circuit recently upheld the dismissal of a challenge to a non-judicial foreclosure sale based on an allegedly defective assignment of mortgage from MERS to the owner of the underlying loan, filed after the expiration of Michigan's post-foreclosure redemption period. 

 

In so doing, the Court ruled that, in instances where the redemption period has passed, a defective foreclosure sale could be set aside only upon a showing of fraud or irregularity in the foreclosure process that prejudiced borrower such that, absent such a defect in the foreclosure process, the borrower would have been in a better position to preserve his interest in the property.

 

A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/13a0102p-06.pdf.

 

Plaintiff borrower ("Borrower") refinanced his home mortgage loan with a lender ("Lender") and secured the loan with a mortgage against his property.  The mortgage provided that Mortgage Electronic Registration Systems, Inc. ("MERS") was the nominee for Lender and Lender's successors and assigns.  Shortly after the execution of the loan agreement, Lender sold the loan on the secondary market to defendant securitized trust ("Loan Owner") for which defendant loan servicer ("Servicer") serviced the loan.

 

After Borrower defaulted on the loan, MERS assigned the mortgage to Loan Owner.  Over two years later, Servicer, through its attorneys ("Law Firm"), sent Borrower a letter notifying him that he was in default on the loan.  Law Firm specified that the letter was sent on behalf of Servicer as "the creditor to whom your mortgage debt is owed or the servicing agent for the creditor to whom the debt is owed."   Several months later, Law Firm published the statutorily required notices of the scheduled property sale in a local newspaper, identifying Loan Owner as the holder of the loan by assignment.  Loan Owner purchased the property at the sheriff's sale.

 

Almost seven months after the sale, Borrower filed a complaint in state court, seeking to have the foreclosure sale set aside on grounds that the assignment was "robo-signed" and that MERS lacked capacity to assign the mortgage.  The defendants removed the case to federal court, where they moved to dismiss.  The lower court granted the dismissal.  Borrower appealed.   The Sixth Circuit affirmed.

 

As you may recall, Michigan's so-called "foreclosure-by-advertisement" statute governs the steps a mortgagee must take to validly foreclose, and allows mortgage borrowers six months after the foreclosure sale to redeem the property.  See Mich. Comp. Laws §§ 600.3204(8); 600.3236.  After the redemption period lapses, the mortgagor's right, title, and interest in the property are extinguished.  See Mich. Comp. Laws  § 600.3236.

 

Noting that the six-month redemption period had lapsed by the time Borrower filed his complaint, the Appellate Court rejected Borrower's assertion that because the assignment of mortgage to Loan Owner was defective the foreclosure sale should be set aside.  In so doing, the Court pointed out that, even if there were a defect in the assignment, a third party to the assignment such as Borrower could only challenge the assignment if that challenge would render the assignment completely void.  Stressing that a "clear showing of fraud or irregularity " in the foreclosure procedure itself was necessary to have the sale set aside, the Court explained that defects in a foreclosure only result in a voidable foreclosure, rather than one that is void.  See, e.g., Kim V. JPMorgan Chase Bank, N.A., 825 N.W.2d 329, 337 (Mich. 2012); Schulties v. Barron, 167 N.W.2d 784, 785 (Mich. Ct. App.  1969); Sweet Air Inv., Inc., v. Kenney, 739 N.W.2d 656, 659 (Mich. Ct. App. 2007).

 

The Court thus also observed that, due to the lapse of the redemption period, in order to have the foreclosure sale in this case set aside, Borrower had to show he had been prejudiced by MERS's supposed non-compliance with Michigan's foreclosure-by-advertisement statute, such that he would have been in a better position to preserve his interest in the property absent MERS's alleged non-compliance with the statute.   The Court noted Borrower's failure to show that he would be subject to liability from any creditor other than Loan Owner, or that he would have been in a position to keep the property absent the alleged defect in the mortgage assignment.

 

Concluding that Borrower failed to show that he was prejudiced by any alleged defect in the mortgage assignment, or by any alleged fraud in the foreclosure process, the Court affirmed the dismissal of Borrower's case.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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