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Can't Imagine How Many Copyright Laws I am Breaking - but this is Important
Foreclosure Is Valid Because MERS Has Power to Designate New Trustee under
Deed of Trust,
Even Though It Holds No Interest in Underlying Note.
A district court in California has held that MERS had the power to
designate a new trustee under a deed of trust (thus validating the
designee's foreclosure), even though neither MERS nor the designee held any
interest in the underlying promissory note. [Lane vs. Vitek Real Estate
Industries Group, 2010 Westlaw 1956707 (E.D. Cal.).]
Facts: Two borrowers filed suit against their mortgage lenders and
Mortgage Electronic Registration Systems, Inc. ("MERS"), claiming that the
defendants had wrongfully conducted a nonjudicial foreclosure sale of the
borrowers' home. MERS had been initially designated as the "nominal
beneficiary" under the deed of trust and had then executed a substitution of
trustee in favor of another entity, following the borrowers' default.
As part of the borrowers' wrongful foreclosure claim, they asserted
that the foreclosure was improper because none of the parties to the
foreclosure were beneficiaries of the underlying note and instead held
interests in the deed of trust. MERS moved to dismiss that aspect of the
borrowers' claim.
Reasoning: The court ruled in favor of MERS, holding that MERS and
its assignees could foreclose on the deed of trust, even though MERS held no
interest in the underlying note:
Under California Civil Code section 2924(a)(1), a trustee, mortgagee or
beneficiary or any of their authorized agents may conduct the foreclosure
process. Under California Civil Code section 2924b(4), a person authorized
to record the notice of default or the notice of sale includes an agent
for the mortgagee or beneficiary, an agent of the named trustee, any person
designated in an executed substitution of trustee, or an agent of that
substituted trustee. . . . . There is no stated requirement in
California's nonjudicial foreclosure scheme that requires a beneficial
interest in the Note to foreclose. Rather, the statute broadly allows a
trustee, mortgagee, beneficiary, or any of their agents to initiate
nonjudicial foreclosure. Accordingly, the statute does not require a
beneficial interest in both the Note and the Deed of Trust to commence a
nonjudicial foreclosure sale.
This interpretation is consistent with the rulings of this court, along with
many others, that MERS has standing to foreclose as the nominee for the
lender and beneficiary of the Deed of Trust and may assign its beneficial
interest to another party.
AUTHOR'S COMMENT: Although there is some disagreement across the country on
this issue (see below), the emerging trend in California is to validate the
role of MERS as a nominee. The court in Lane relied primarily upon the
wording of the statute to reach that result. However, Stephen Dyer (one of
my four co-authors of California Real Estate Finance) has alerted me to a
possible contractual glitch resulting from Paragraph 24 of the standardize
Freddie Mac form, used throughout California, which provides: "Lender, at
its option, may from time to time appoint a successor trustee to any Trustee
appointed hereunder by an instrument executed and acknowledged by Lender and
recorded in the office of the Recorder of the county in which the Property
is located . . . . This procedure for substitution of trustee shall govern
to the exclusion of all other provisions for substitution." [Source:
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