California Court Rules: MERS Can’t Foreclose, Citibank Can’t Collect

“Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is VOID under California Law.”


If you read that sentence and thought… “MERS,” then you’re already in the club.  If you’ve never heard of MERS, and have no idea what is meant by being “in the club,” don’t worry, this is a club that just about every homeowner is invited to join.  In fact, you may already be a member and not even know it.

MERS is the acronym used to describe Mortgage Electronic Registration Systems, Inc.  Best I can tell, our friends in the mortgage banking industry created MERS to make it easier for banks and servicers to sell and transfer our mortgages at the speed of light during the real estate bubble. According to the company’s Website:

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

MERS acts as nominee in the county land records for the lender and servicer.  Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded.


I have to tell you… I hate these guys already.  Their attitude alone bothers me.  I looked at pictures of their three top executives on their Website and thought to myself… “No way I’d be friends with these guys.”  Probably not very fair of me, but as far as I’m concerned, when it comes to anything that talks like that and was created by the mortgage banking industry… “fair,” is where you go on Sunday to have popcorn and cotton candy.  Just so we’re clear.

MERS, which is a company that I hear doesn’t even have employees, has been about as controversial as you get ever since houses started dropping like flies into foreclosure back in 2007-08.  God forbid you find yourself losing your home to foreclosure, you’ll very likely find a representative from MERS looking smug and acting like the owner of your mortgage.  But, MERS is not the owner of your mortgage, of course, and now a bankruptcy court judge in the Eastern District of California has officially said that he agrees.

MERS is a relatively new development in the mortgage world, and as the foreclosure crisis began the courts pretty much let them do whatever they wanted to do, as the party in interest in a foreclosure action.

But, that was before the foreclosures became a full fledged tsunami, and homeowners watched the bankers first get bailed out, and then pay out billions in bonuses before treating every single American homeowner/taxpayer who applied for a loan modification like insignificant garbage.

In response, homeowners, having been trained for over 200 years in the fine art of pushing back when shoved, went to their lawyers, and those lawyers started asking questions, as they are prone to do.  Many started with questions like: “Who the heck is this MERS guy and why does he think he has any right to be foreclosing on my client’s home?”

For almost two full years, it seemed to me that judges, who frankly weren’t used to foreclosures being challenged, basically yawned and gave the house back to the bank.  Then, starting about a year ago, give or take, things started to change.  Judges started to listen to the points being raised as related to MERS showing up as the party in interest ready to foreclose, and the more the judges learned, the more they saw problems with what MERS was doing.  As time went on the tide seemed to shift a bit and several decisions weren’t falling as MERS would have liked for one reason or another.

According to the company’s Website, MERS “is a proper party that can lawfully foreclose as the mortgagee and note-holder of a mortgage loan.”  Here’s what it says on the MERS Website:

FORECLOSURES

(“MERS”) is In mortgage foreclosure cases, the plaintiff has standing as the holder of the note and the mortgage. When MERS forecloses, MERS is the mortgagee and it is the holder of the note because a MERS officer will be in possession of the original note endorsed in blank, which makes MERS a holder of the bearer paper.


But, in this latest decision, the bankruptcy judge in California didn’t agree, writing in his opinion:

“Since no evidence of MERS’ ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another. Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law.”


Did you get that?  Since MERS didn’t own the underlying note, it couldn’t transfer the beneficial interest of the Deed of Trust to Citibank.

According to several attorneys, this opinion should serve as legal basis to challenge a foreclosure in California that has been based on a MERS assignment.  It could also be used when seeking to void any MERS assignment of the Deed of Trust, or the note, to a third party for purposes of foreclosure; and should be sufficient for a borrower to obtain a TRO against a Trustee’s Sale, and a Preliminary Injunction preventing any sale, pending litigation filed by the borrower that challenges a foreclosure based on a MERS assignment.

In this decision the court found that MERS was acting “only as a nominee,” under the Deed of Trust, and that there was no evidence of the note being transferred. The judge’s opinion in this case also said that “several courts have acknowledged that MERS is not the owner of the underlying note and therefore could not transfer the note, the beneficial interest in the deed of trust, or foreclose on the property secured by the deed”, citing cases of: In Re Vargas, California Bankruptcy Court; Landmark v. Kesler, Kansas decision as to lack of authority of MERS; LaSalle Bank v. Lamy, a New York case; and In Re Foreclosure Cases, the “Boyko” decision from Ohio Federal Court.

And the court concluded by stating:

“Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case.”


Oh my… well, that really is something.  MERS can’t foreclose and Citibank can’t collect?  I believe you would have to say that MERS and Citibank were already in a hard place when the judge inserted a rock.  MERS can’t foreclose and Citi can’t collect… I am absolutely loving this, I have to say, but I suppose giddy would be an inappropriate response, so I’ll just say, “how interesting”.

This decision means that if a foreclosing party in California, that is not the original lender, claims that payment is due under the note, and that they have the right to foreclose on the basis of a MERS assignment, they’re wrong… based on this opinion.  The bottom line is that MERS has no authority to transfer the note because it never owned it, and that’s a view that even seems to be supported by MERS’ own contract, which says that “MERS agrees not to assert any rights to mortgage loans or properties mortgaged thereby”.

What this may mean to California’s homeowners in bankruptcy court…

  • It should serve as a legal basis to challenge any foreclosure in California based on a MERS     assignment.
  • It should serve as the legal basis for voiding a MERS assignment of the Deed of Trust, or the     note, to a third party for purposes of foreclosure.
  • It should be an adequate basis for obtaining a TRO against a Trustee’s Sale
  • It should be the basis for a Preliminary Injunction barring any sale pending litigation filed by the borrower that challenges a foreclosure based on a MERS assignment.

In addition, some lawyers believe that this ruling is relevant to borrowers across the country as well, because the court cited non-bankruptcy cases related to the lack of authority of MERS, and because this opinion is consistent with prior rulings in Idaho and Nevada Bankruptcy courts on the same issue.

I don’t know about you, but I feel like watching a marching band.  76 trombones, baby, 76 trombones.

Comments

  1. Robin says

    The originating lender/broker bears the responsibility of registering the loan with MERS, and at its inception there were many who lacked the capability to do so. It wasn't mandatory. It was - simply - complicated.

    E-commerce rocks, and I wanted to see the mortgage industry get there just like propery&casualty insurance did. While I think it was a great idea to automate the myriad loan transfers that occur post-origination so as to maintain a clear path of ownership for the consumer's interest , MERS failed to do that and lost its luster with the muddiness of "physical" ownership of Notes over which it had no control.

    As participation in MERS became more prevalent, the errors and short-givings of the process began to manifest themselves, but IMHO too late for the early-signers-on who were the big originating/servicers. Something as simple as a modification to correct a typo in the vesting on a Mortgage (and coordination with the corresponding Note) was painful for a small originator. For the big guys it was either excrutiatingly irritating or largely ignored.

    Registrants with MERS (originating lenders) would initially go through the normal procedure of having their own mortgage registered upon closing, and that would subsequently be registered with MERS when placed "on sale" to the secondary market who was then designated as the "Nanny of Note" (not a legal term) thereafter. Problem here (and it took the legal system years to figure this out) is that the physical note was never passed to MERS, but merely "monitored" by MERS as having being passed according to the reports of MERS subscribers. They (MERS) had no control over the physical transfer of these notes beyond a contractual "understanding" with their subscribers, to whom they held no liability.

    I have this piece of paper here. If I type and transmit to you -- my third party recordation service -- online what's on this paper, do you agree to keep record of it for me? Great. Can I hold you liable if I lose this piece of paper or fail to enforce it with the original signers or guarantors of credit? Nope. If the folks I told you I transferred the paper to do the same, are you responsible for that? Nope.

    Big can of worms, and they're all squirming.

  2. charleswaynecox says

    Please cite the case you are referring to in your article re MERS and Citibank.

  3. mandelman says

    Sorry about that, I meant to post the case, but forgot:

    Case Title: Rickie Walker
    Case no. 10-21656 - E - 11
    Date: 5-20-10

    And if you want me to email you the case minutes, just send me an email and I'll forward you the PDF. Email me at mandelman@mac.com.

  4. rjoseph says

    In response to Robin, I hope you are not trying to defend MERS or a Rockin' E-commerce way of allowing a recording entity as the entity to control whether a family should get to stay in their home. In Michigan, we have a few big collection firms, even the remaining "small town" banks use them. They utterly refuse to talk to a homeowner during the foreclosure process.

    Trust me when I say this, because I have "worked" with them for over 22 years, defending homeowners. Enter MERS. Go ahead and try top call them. The problem is that no body is actually accountable on the Plaintiff.Mortgagee side during this process. The attorneys are never available and you cannot call MERS. There are no settlement discussions or proposals to try to stop the snowball from crashing down on the FAMILIES.

    Yes, the non-computerized, real live, actual people, who thought they were dealing with people when they mortgaged their homes. They thought this, because the brokers who sold them the great mortgage led them to believe this. Or their neighbor, the small town banker, told them this at their kids Little League game. Now, at the first sign of trouble, the poor slob has to deal with a large law firm, from another city, who only provides computerized messages. Or, thank god, MERS!! As Martin might say, "Yippee!!!".

    I have no problem if lenders want to record a mortgage in a far away county using MERS. But if someone wants to take away a four year old child's treehouse, they better have the D--n note and they better have the authority to work out a settlement. Every contract (note and/or mortgage) carries an implied covenant to act in good faith. That doesn't mean there should never be a foreclosure. It DOES mean there should never be a foreclosure without some type of dialogue.

    MERS, by its own corporate mandate eliminates that possibility, without notice to the mortgagor (trust me on that, too, I know, personally). The same with the automated law firms, which are the next to go.

    Martin, I am ready to ride my chair into court to to battle again. I think I can remember how to tie a necktie and I know I can bang on the table as loud as the next guy. First, we crush MERS, then we force the bastards to actually deal, face to face, with the problem they created.

    Finally, this decision, because it is in a federal court, can be used in all federal courts. While perhaps not binding on a Michigan bankruptcy court or a state court, it is a precedent on a fairly novel issue. Homeowners should copy the citation in you response, above, and give it to their attorney in case he can't find it. Then urge him to fight like the devil, because, despite even the best intentions behind the creation of MERS (and I doubt there are any), that is who you are fighting if you want to save your home. I know, because I have been there personally.

  5. mandelman says

    If you're serious about battling for the rights of homeowners again, there is no one I'd rather help do just that. Call me and let's get a game plan going. I can get you plugged into the best lawyer networks in the country and they will share all of their pleadings and anything else you need to short cut the learning curve. [/i]

  6. ppulatie says

    Martin,

    Unfortunately, the Walker case is not the norm. There are very few bk judges that are willing to accept such arguments. The Northern District of CA refuses to listen, among others.

    There have been three good cases on MERS, coming out of the Eastern District which was Walker, the Central District and Judge Buford in Vargas, and a decision in the Southern District. For all the bk cases files, this is not much.

    Until there are Appellant Court rulings, these singular actions don't mean much.

    BTW, there is apparently a ruling in San Mateo County regarding MERS. I have yet to receive it, but it was supposed to do a good job regarding MERS. Of course, it will likely be appealed.


    BTW, Walker was in May. It took a couple of months to get around.

  7. rjoseph says

    One pretty interesting thing: As I told folks earlier, I now have a permanent loan modification from IndyMac/OneWest. I just received the permanent docs. I will forward a copy to you. In the agreement is a specific provision whereby my wife and I have to recognize and approve of MERS. We have to agree that MERS can sue us and/or foreclose on us. Don't tell me that this CA case isn't worrisome to MERS in particular and the banksters in general. Dick

  8. smoolynog says

    I can't wait to see other courts rules in line with in re walker.

    Here are some cases that have similar issues...

    CASE DECISIONS REGARDING PROOF OF CLAIM
    Please see list below of hidden case law hidden from the public, supporting our position
    that the banks operate in fraud.
    CASE DECISIONS:
    Patton v. Diemer, 35 Ohio St. 3d 68; 518 N.E.2d 941; 1988). A judgment
    rendered by a court lacking subject matter jurisdiction is void abinitio. Consequently, the
    authority to vacate a void judgment is not derived from Ohio R. Civ. P. 60(B), but rather
    constitutes an inherent power possessed by Ohio courts. I see no evidence to the contrary
    that this would apply to ALL courts.
    “A party lacks standing to invoke the jurisdiction of a court unless he has, in an
    individual or a representative capacity, some real interest in the subject matter of the
    action. Lebanon Correctional Institution v. Court of Common Pleas 35 Ohio St.2d 176
    (1973).
    “A party lacks standing to invoke the jurisdiction of a court unless he has, in an
    individual or a representative capacity, some real interest in the subject matter of an
    action.” Wells Fargo Bank, v. Byrd, 178 Ohio App.3d 285,2008-Ohio-4603,897 N.E.2d
    722(2008). It went on to hold, ” If plaintiff has offered no evidence that it owned the note
    and mortgage when the complaint was filed, it would not be entitled to judgment as a
    matter of law”
    (The following court case was unpublished and hidden from the public)
    Wells Fargo, Litton Loan v. Farmer, 867 N.Y.S.2d 21 (2008). “Wells Fargo does
    not own the mortgage loan… Therefore, the… matter is dismissed with prejudice.”
    (The following court case was unpublished and hidden from the public)
    Wells Fargo v. Reyes, 867 N.Y.S.2d 21 (2008). Dismissed with prejudice, Fraud
    on Court & Sanctions. Wells Fargo never owned the Mortgage.
    (The following court case was unpublished and hidden from the public)
    Deutsche Bank v. Peabody, 866 N.Y.S.2d 91 (2008). EquiFirst, when making the
    loan, violated Regulation Z of the Federal Truth in Lending Act15 USC §1601and the
    Fair Debt Collections Practices Act 15 USC §1692; "intentionally created fraud in the
    factum" and withheld from plaintiff… "vital information concerning said debt and all of
    the matrix involved in making the loan".
    (The following court case was unpublished and hidden from the public)
    Indymac Bank v. Boyd, 880 N.Y.S.2d 224 (2009). To establish a prima facie case
    in an action to foreclose a mortgage, the plaintiff must establish the existence of the
    mortgage and the mortgage note. It is the law's policy to allow only an aggrieved person
    to bring a lawsuit . . . A want of "standing to sue," in other words, is just another way of
    saying that this particular plaintiff is not involved in a genuine controversy, and a simple
    syllogism takes us from there to a "jurisdictional" dismissal:
    (The following court case was unpublished and hidden from the public)
    Indymac Bank v. Bethley, 880 N.Y.S.2d 873 (2009). The Court is concerned that
    there may be fraud on the part of plaintiff or at least malfeasance Plaintiff INDYMAC
    (Deutsche) and must have "standing" to bring this action.
    (The following court case was unpublished and hidden from the public)
    Deutsche Bank National Trust Co v.Torres, NY Slip Op 51471U (2009). That
    "the dead cannot be sued" is a well established principle of the jurisprudence of this state
    plaintiff's second cause of action for declaratory relief is denied. To be entitled to a
    default judgment, the movant must establish, among other things, the existence of facts
    which give rise to viable claims against the defaulting defendants. “The doctrine of ultra
    vires is a most powerful weapon to keep private corporations within their legitimate
    spheres and punish them for violations of their corporate charters, and it probably
    is not invoked too often…”
    Zinc Carbonate Co. v. First National Bank,103 Wis. 125,79 NW 229(1899). Also see:
    American Express Co. v. Citizens State Bank, 181 Wis. 172, 194 NW 427(1923).
    (The following court case was unpublished and hidden from the public)
    Wells Fargo v. Reyes, 867 N.Y.S.2d 21 (2008). Case dismissed with prejudice,
    fraud on the Court and Sanctions because Wells Fargo never owned the Mortgage.
    (The following court case was unpublished and hidden from the public)
    Wells Fargo, Litton Loan v. Farmer, 867 N.Y.S.2d 21 (2008). Wells Fargo does
    not own the mortgage loan. "Indeed, no more than (affidavits) is necessary to make the
    prima facie case." United States v. Kis, 658 F.2d, 526 (7th Cir. 1981).
    (The following court case was unpublished and hidden from the public)
    Indymac Bank v. Bethley, 880 N.Y.S.2d 873 (2009). The Court is concerned that
    there may be fraud on the part of plaintiff or at least malfeasance Plaintiff INDYMAC
    (Deutsche) and must have "standing" to bring this action. Lawyer responsible for false
    debt collection claim Fair Debt Collection Practices Act,15 USCS §§ 1692-1692o, Heintz
    v. Jenkins,514 U.S. 291; 115 S. Ct. 1489, 131 L. Ed. 2d 395 (1995). and FDCPA Title 15
    U.S.C. sub section 1692. In determining whether the plaintiffs come before this Court
    with clean hands, the primary factor to be considered is whether the plaintiffs sought to
    mislead or deceive the other party, not whether that party relied upon plaintiffs'
    misrepresentations.
    Stachnik v. Winkel,394 Mich. 375, 387; 230 N.W.2d 529, 534 (1975).
    "Indeed, no more than (affidavits) is necessary to make the prima facie case."
    United States v. Kis, 658 F.2d, 526 (7th Cir. 1981). Cert Denied, 50 U.S. L.W.
    2169; S. Ct. March 22, (1982). “Silence can only be equated with fraud where there is a
    legal or moral duty to speak or when an inquiry left unanswered would be intentionally
    misleading.”
    U.S. v. Tweel,550 F.2d 297(1977). “If any part of the consideration for a promise
    be illegal, or if there are several considerations for an un-severable promise one
    of which is illegal, the promise, whether written or oral, is wholly void, as it is impossible
    to say what part or which one of the considerations induced the promise.”
    Menominee River Co. v.Augustus Spies L & C Co., 147 Wis. 559 at p. 572;132
    NW 1118(1912).Federal Rule of Civil Procedure 17(a)(1) which requires that “[a]n
    action must be prosecuted in the name of the real party in interest.” See also, In re
    Jacobson, 402 B.R. 359, 365-66 (Bankr. W.D. Wash. 2009); In re Hwang, 396 B.R. 757,
    766-67 (Bankr.C.D. Cal. 2008).
    Mortgage Electronic Registration Systems, Inc. v. Chong, 824 N.Y.S.2d
    764 (2006). MERS did not have standing as a real party in interest under the Rules to file
    the motion… The declaration also failed to assert that MERS, FMC Capital LLC or
    Homecomings Financial, LLC held the Note.
    Landmark National Bank v. Kesler, 289 Kan. 528,216 P.3d 158(2009).
    “Kan. Stat. Ann. § 60-260(b) allows relief from a judgment based on mistake,
    inadvertence, surprise, or excusable neglect; newly discovered evidence that could not
    have been timely discovered with due diligence; fraud or misrepresentation; a void
    judgment; a judgment that has been satisfied, released, discharged, or is no longer
    equitable; or any other reason justifying relief from the operation of the judgment. The
    relationship that the registry had to the bank was more akin to that of a straw man than to
    a party possessing all the rights given a buyer.” Also In September of 2008, A California
    Judge ruling against MERS concluded, “There is no evidence before the court
    as to who is the present owner of the Note. The holder of the Note must join in the
    motion.”
    LaSalle Bank v. Ahearn, 875 N.Y.S.2d 595 (2009). Dismissed with prejudice.
    Lack of standing.
    Novastar Mortgage, Inc v. Snyder 3:07CV480 (2008). Plaintiff has
    the burden of establishing its standing. It has failed to do so.
    DLJ Capital, Inc. v. Parsons, CASE NO. 07-MA-17 (2008).

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