Southern California (909)890-9192 begin_of_the_skype_highlighting (909)890-9192 end_of_the_skype_highlighting in Northern California(925)957-9797
“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:
(“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.
“Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is VOID under California Law.”
The Proof of Claim at issue, listed as claim number 5 on the court’s official
claims registry, asserts a $1,320,650.52 secured claim. The Debtor objects to
the Claim on the basis that the claimant, Citibank, N.A., did not provided any
evidence that Citibank has the authority to bring the claim, as required by
Federal Rule of Bankruptcy Procedure 3001(c), rendering the claim facially
The court’s review of the claim shows that the Deed of Trust purports to have
been assigned to Citibank, N.A. by Mortgage Electronic Registration Systems,
Inc. as nominee for Bayrock Mortgage Corporation on March 5, 2010. (Proof of
Claim No. 5 p.36-37, Mar. 19, 2010.) Debtor contends that this does not
establish that Citibank is the owner of the underling promissory note since the
assignor, Mortgage Electronic Registration Systems, Inc. (“MERS”), had no
interest in the note to transfer. Debtors loan was originated by Bayrock
Mortgage Corporation and no evidence of the current owner of the promissory
note is attached to the proof of claim. It is well established law in the
Ninth Circuit that the assignment of a trust deed does not assign the
underlying promissory note and right to be paid, and that the security interest
is incident of the debt. 4 WITKIN SUMMARY OF CALIFORNIA LAW, SECURED TRANSACTIONS IN REAL
PROPERTY §105 (10th ed).
MERS AND CITIBANK ARE NOT THE REAL PARTIES IN INTEREST
Under California law, to perfect the transfer of mortgage paper as collateral
the owner should physically deliver the note to the transferee. Bear v. Golden
Plan of California, Inc., 829 F.2d 705, 709 (9th Cir. 1986). Without physical
transfer, the sale of the note could be invalid as a fraudulent conveyance,
Cal. Civ. Code §3440, or as unperfected, Cal. Com. Code §§9313-9314. See ROGER
BERNHARDT, CALIFORNIA MORTGAGES AND DEEDS OF TRUSTS, AND FORECLOSURE LITIGATION §1.26 (4th
ed. 2009). The note here specifically identified the party to whom it was
payable, Bayrock Mortgage Corporation, and the note therefore cannot be
transferred unless the note is endorsed. See Cal. Com. Code §§3109, 3201, 3203,
3204. The attachments to the claim do not establish that Bayrock Mortgage
Corporation endorsed and sold the note to any other party.
TRANSFER OF AN INTEREST IN THE DEED OF TRUST ALONE IS VOID
MERS acted only as a “nominee” for Bayrock Mortgage under the Deed of Trust.
Since no evidence has been offered that the promissory note has been
transferred, MERS could only transfer what ever interest it had in the Deed of
Trust. However, the promissory note and the Deed of Trust are inseparable.
“The note and the mortgage are inseparable; the former as essential, the later
as an incident. An assignment of the note carries the mortgage with it, while
an assignment of the latter alone is a nullity.” Carpenter v. Longan, 83 U.S.
271, 274 (1872); accord Henley v. Hotaling, 41 Cal. 22, 28 (1871); Seidell v.
Tuxedo Land Co., 216 Cal. 165, 170 (1932); Cal. Civ. Code §2936. Therefore,
if on party receives the note an another receives the deed of trust, the holder
of the note prevails regardless of the order in which the interests were
transferred. Adler v. Sargent, 109 Cal. 42, 49-50 (1895).
Further, 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 upon the property secured by the
deed. See In re Foreclosure Cases, 521 F. Supp. 2d 650, 653 (S.D. Oh. 2007);
In re Vargas, 396 B.R. 511, 520 (Bankr. C.D. Cal. 2008); Landmark Nat’l Bank
v. Kesler, 216 P.3d 158 (Kan. 2009); LaSalle Bank v. Lamy, 824 N.Y.S.2d 769
(N.Y. Sup. Ct. 2006). 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 underling 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 with out ownership of the underlying note
is void under California law. Therefore Citibank has not established that it
is entitled to assert a claim in this case.
MULTIPLE CLAIMS TO THE BENEFICIAL INTEREST IN THE DEED OF TRUST AND OWNERSHIP
OF PROMISSORY NOTE SECURED THEREBY
Debtor also points out that four separate entities have claimed beneficial
ownership of the deed of trust. (Obj. to Claim 3-5, Apr. 6, 2010.) The true
owner of the underling promissory note needs to step forward to settle the
cloud that has been created surrounding the relevant parties rights and
interests under the trust deed.
11 U.S.C. §502(a) provides that a claim supported by a Proof of Claim is
allowed unless a party in interest objects. Once an objection has been filed,
the court may determine the amount of the claim after a noticed hearing. 11
U.S.C. §502(b). 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. The objection is sustained and
Claim Number 5 on the court’s official register is disallowed in its entirety,
with leave for the owner of the promissory note to file a claim in this case
by June 18, 2010.
The court disallowing the proof of claim does not alter or modify the trust
deed or the fact that someone has an interest in the property which can be
subject thereto. The order disallowing the proof of claim shall expressly so
The court shall issue a minute order consistent with this ruling.
Southern California (909)890-9192 in Northern California(925)957-9797