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Court Rules Against the Robinson’s in Quiet Title Case  (You can’t file for quiet title and not invite MERS to the party.)

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When we last bid adieu to our intrepid homeowners, Daniel and Darla Robinson (“And Here’s to You, Mr. & Mrs. Robinson – Will Quiet Title Hold Up in California?) MERS had suffered a largely procedural setback on top of a default judgment that could have led to the expunging of the Deed of Trust to the Robinson’s home and their title being quieted.  The couple had filed a “Motion for Judgment on the Pleadings,” and we were awaiting the judge’s decision. (Mortgage Electronic Registration Systems et al. v. Robinson et al.  Case No. CV 13-7142 PSG (ASx)

In case anyone’s memory requires a little refreshing, in January of 2012, the couple filed suit in the Los Angeles County Superior Court with the goal of quieting title to their property.

Now, when you file for quiet title the rule is that you have to give notice to everyone with an interest or “adverse claim” in the property.  After finding that now bankrupt, United Pacific Mortgage… their original Lender under the Deed of Trust… was the only recorded beneficiary, they simply named only that company as a defendant in their quiet title action.

They intentionally did not name MERS as a party to the suit, because for one thing, there was no recorded assignment to MERS on file at the county recorder, and besides that, as a “nominee,” or agent of United Pacific Mortgage, they reasoned that MERS would have no independent interest in the property and therefore would not require any notification of their suit.

Not surprisingly, United Pacific Mortgage failed to respond to the complaint or show up in court… bankrupt companies so rarely do either, as one would imagine… and the couple secured a default judgment for quiet title with an order expunging the Deed of Trust.  Defendants recorded the judgment in the Los Angeles County Recorder’s Office.

As both sides thought would be the case, United States District Judge in the Central District of California, The Honorable Philip S. Gutierrez found the matter to be one that he would rule on without additional oral argument and so his decision on the Robinson’s motion, which was very much like a motion to dismiss the case, was expected in a matter of days or weeks.

Well, late last week, on September 16th, Judge Gutierrez ruled… and DENIED the Robinson’s motion.  As stated in the judge’s 10-page decision…

The Deed of Trust identified United Pacific Mortgage as the “Lender” on the loan and Mortgage Electronic Registration Systems, Inc. (“MERS”) as “a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns.”  Not only that, but the Deed of Trust also provided: “MERS is the beneficiary under this Security Instrument, stating that, “The beneficiary of this Security Instrument is MERS (solely as nominee for Lender and Lender’s successors and assigns) and the successors and assigns of MERS.”

Further, the Robinson’s Deed of Trust also stated the following:

Borrower [i.e., Defendants] understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) 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 Lender including, but not limited to, releasing and canceling this Security Instrument.

In ruling in favor of MERS, and denying the Robinson’s motion, the court recognized that MERS’ claims are ultimately based on their contention that, under California law, MERS was entitled to be named in the Robinson’s quiet title action.

The Robinsons, on the other hand continue to disagree, arguing that all claims made by MERS “must therefore necessarily fail.”  The couple also argues that the Court lacks subject matter jurisdiction, that MERS lacks standing, and that MERS may not prosecute this action in their own name as a “real party in interest.”

The Court, however, was very clear in stating the reasons it was NOT persuaded by any of those arguments after receiving additional briefing on the issue, and I’m going to paraphrase in order to simplify those reasons below for homeowners and others.

1. Was MERS Entitled to be Named in the Robinson’s Quiet Title Action?

The Court ruled that YES… MERS was entitled to be named and therefore should have been notified of the Robinson’s quiet title action.  And you know why, right?  Come on… it’s really as much based in common sense as it is law.

The court reasoned that the purpose of a quiet title action is, “to establish title against adverse claims to real or personal property or any interest therein.” Cal. Civ. Proc. Code § 760.020; Walters v. Fid. Mortgage of Cal., Inc., 730 F. Supp. 2d 1185, 1197 (E.D. Cal. 2010)

Quoting Newman v. Cornelius, 3 Cal. App. 3d 279, 284 (1970))…

“The purpose of a quiet title action is to determine ‘all conflicting claims to the property in controversy, and to decree to each such interest or estate therein as he may be entitled to.’”  Therefore, California law requires a quiet title plaintiff to name as defendants those persons “having adverse claims to the title of the plaintiff against which a determination is sought.”

As used in this context, “claim” includes “a legal or equitable right, title, estate, lien, or interest in property or cloud upon title.”

The court also noted that “claim” is intended in its broadest possible sense.  (Emphasis mine.)  So, the court reasoned that, “in addition to persons required to be named as defendants, a quiet title plaintiff may elect to include “all persons unknown” with adverse claims to the property.

And even so, the plaintiff filing for quiet title in California, must name those persons “having adverse claims that are of record or known to the plaintiff or reasonably apparent from an inspection of the property.”  Cal. Civ. Proc. Code § 762.060(b).

In this case it is undisputed that the Deed of Trust was recorded and known to the Robinsons when they filed their quiet title action.  The Deed of Trust identifies MERS as “the beneficiary under this Security Instrument,” and provides that “MERS (as nominee for Lender and Lender’s successors and assigns) has the right to . . . exercise any or all . . . interests” granted under the Deed of Trust, “including, but not limited to, the right to foreclose and sell the Property.”FAC ¶ 50; Exh. 1, p. 4.

And that’s true, right?  The Robinsons knew of MERS, they just chose not to recognize MERS as having any independent interest in the property, and therefore they didn’t need to notify MERS.

Or, let’s be honest about this… a more accurate way to describe what happened here, would be to say that the Robinsons didn’t want to notify MERS, because they wanted the default judgment that was likely to result from only naming their bankrupt original lender.  I understand perfectly… in fact, I find it a perfectly understandable strategy, but it is just that… a strategy.

They didn’t want to notify MERS, and their rationalized argument would be that they didn’t have to notify them.  In other words, they took a shot… but ultimately it was shot down.

The Court said it this way…

“Whatever the full scope of MERS’s rights and interests under the foregoing provisions, it can hardly be disputed that by those provisions MERS made some adverse “claim” against Defendants’ title.” 

The Court also went on to revisit many of the California decisions, infamous among homeowners and foreclosure defense lawyers alike, that have regularly upheld MERS as being authorized to sell the subject property.  

As found in the written decision…

In fact, when considering deeds of trust materially identical to the one at issue here, courts applying California law have regularly held that they authorize MERS to foreclose and sell the subject property.

See, e.g., Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1157-58 (2011); Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1189-90 (N.D. Cal. 2009) (collecting cases and noting “courts have been clear” that MERS is authorized by these deeds of trust to conduct foreclosure). At a minimum, this “right of sale provided by the deed of trust is an interest in the property.” Yulaeva v. Greenpoint Mortgage Funding, Inc., 2009 WL 2880393, at *9 (E.D. Cal. Sept. 3, 2009) (emphasis added).

More accurately, Judge Gutierrez reasoned about the Deed of Trust that it is “effectively a lien on the property, citingWalters, 730 F. Supp. 2d at 1199 (emphasis added); Monterey S. P. P’ship v. W. L. Bangham, Inc., 49 Cal. 3d 454, 460 (1989) “In practical effect . . . a deed of trust is a lien on the property.”

Interestingly, the judge also reasoned that the Robinsons themselves even argue that by the provisions at issue, MERS “instantly clouds title.”  And therefore, these considerations were sufficient to satisfy the Court that, under the Deed of Trust, MERS held an adverse “claim” to the Robinson’s title.  (See Yulaeva, 2009 WL 2880393, at *9 (finding MERS held adverse claim to title under materially identical deed of trust).

Finally, because this claim was recorded and therefore known to the Robinsons, this Court ruled that they were required to name MERS as a defendant in the quiet title action.

And yes… Judge Gutierrez also pointed out some additional decisions that would have said a few things otherwise, but as found in the written decision, “in any event, this Court sees no need here to look beyond the California Supreme Court’s much more recent statement that the security interest granted under a deed of trust is “in practical effect . . . a lien on the property.” Monterey S. P. P’ship, 49 Cal. 3d at 460.

2. Now, the judge did consider the other arguments made by the Robinsons… things like:

• MERS was not entitled to be named as a defendant because its status as a “beneficiary” under the Deed of Trust is a “fiction.”
• Language in the Deed of Trust identifying MERS as a “beneficiary” contradicts language identifying MERS as “a separate corporation that is acting solely as the nominee for lender and lender’s successors and assigns.
• MERS was not entitled to the payments owed by the borrower to the lender.
• Despite express provisions to the contrary, MERS is not truly a “beneficiary” under the Deed of Trust, but instead holds “nominal beneficial status only.”

However, the judge pointed out that MERS’ right to be named as a defendant in the quiet title action does not turn on whether it was a “beneficiary” under the Deed of Trust. Rather, it turns on whether MERS had an adverse “claim,” and as discussed above, the Court concluded that MERS did hold such a claim.

The Court also pointed out that a second problem with the arguments being made by the Robinsons is that “one of the two cases they cite for support flatly rejects it.”

“In Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256 (2011), the California Court of Appeal considered a deed of trust identical in all material respects to the one at issue here, and concluded: MERS was the beneficiary under the deed of trust because, as a legally operative document, the deed of trust designated MERS as the beneficiary. Given this designation, MERS’s status was not reasonably subject to dispute.”

The Fontenot court also said:

“There is nothing inconsistent in MERS’s being designated both as the beneficiary and as a nominee, i.e., agent, for the lender. The legal implication of the designation is that MERS may exercise the rights and obligations of a beneficiary of the deed of trust, a role ordinarily afforded the lender, but it will exercise those rights and obligations only as an agent for the lender, not for its own interests.

Other statements in the deed of trust regarding the role of MERS are consistent with this interpretation, and there is nothing ambiguous or unusual about the legal arrangement.”

HOWEVER… returning to the common sense part of deciding this issue, the judge basically said that excusing the Robinson’s failure to include MERS in the quiet title action on the grounds that the Robinsons dispute the validity of the interests asserted by MERS in the Deed of Trust… BECAUSE SETTLING SUCH DISPUTES IS EXACTLY THE POINT OF FILING A QUIET TITLKE ACTION.

The Court also addressed the remaining issues, such as “subject matter jurisdiction” by the Court, whether MERS has standing, and whether MERS is a “Real Party in Interest,” and although you’re certainly welcome to read the judge’s thoughts on those matters HERE, I see no percentage in my attempting to simplify anything… the sections addressing these claims are all short and to the point.

So, the bottom-line is… and just as can be found under the “Conclusion” heading of the written decision…

“For these reasons, the Court rejects (the Robinson’s) contention that they were not required to name (MERS) as defendants in the quiet title action…”

“… the Court finds that (Robinson’s) have failed to establish they are entitled to judgment as a matter of law…”

“Accordingly, (Robinson’s) motion for judgment on the pleadings is DENIED.”

So… three weeks ago when my article’s headline pertaining to this case asked the question, “Will Quiet Title Hold Up in California?”  We now have our answer, and make no mistake about it… it seems to be A VERY LOUD… NO.

Mandelman out. 

Related articles

• MERS hot streak continues

BEAU BIDEN, GOOD MOVE.

Beau Biden, Delaware AG, Moves To [Intervene in the proposed] Bank Of America Mortgage Deal, Signaling Concerns

First Posted: 8/5/11 06:22 PM ET Updated: 8/5/11 06:57 PM ET

WASHINGTON -- Delaware Attorney General Beau Biden signaled his intent Friday to intervene in a proposed $8.5 billion settlement over troubled mortgage securities between Bank of America and a group of investors, uniting with his New York counterpart Eric Schneiderman, who argued a day earlier that the deal is unfair and its participants committed fraud.

Ian McConnell, director of Biden's consumer protection unit, told a New York state judge that the state of Delaware intends to file paperwork early next week asking to become a full party in the suit. If granted, that status would allow the state to comment on and question virtually every move "from start to finish" as Bank of America and the investors attempt to end their multi-billion dollar spat.

It would also give Delaware the right to investigate the claims the deal strives to settle, like whether the lender and the other bank involved in the case, Bank of New York Mellon, followed state law when creating these mortgage securities, and when they moved to foreclose on homeowners who defaulted on their obligations.

The two attorneys general represent states whose laws govern nearly all mortgage securitization trusts, vehicles that bundle home loans and issue notes to investors. Both offices have teamed up to investigate allegations that Wall Street firms failed to properly assemble loan documents in accordance with their states' laws when creating mortgage securities.

Schneiderman, New York's attorney general, argued in court papers Thursday that the bank overseeing the trusts, Bank of New York Mellon, "knowingly, repeatedly, and consistently" misled investors into thinking that the mortgage bonds were created properly. The bank also put its own interests before those of the investors it was supposed to be representing, he said.

BNY Mellon, one of the largest U.S. banks by assets, engaged in "repeated fraud and illegality," Schneiderman charged, which occurred "literally hundreds of times."

Schneiderman linked the paperwork failures to the foreclosure crisis, arguing that the alleged shortcomings in gathering and processing documents effectively had led to "foreclosure fraud," like in cases that involved so-called "robo-signing."

A BNY Mellon spokesman called Schneiderman's charges "baseless." McConnell declined to comment on Schneiderman's allegations.

The action by Schneiderman and Biden threaten the proposed accord between BofA and 22 of the world's most prominent investors. The investors had demanded Bank of America repurchase home loans packaged into 530 mortgage trusts with a original loan balance of $424 billion. The proposed $8.5 billion payout represents less than 4 cents on the dollar of the current unpaid balance, or about $220 billion, according to Bank of America's most recently quarterly filing with the Securities and Exchange Commission.

McConnell said in a phone interview that 527 of the trusts were created per New York law. The remaining three are governed by Delaware law, he said.

"We have enough information to think we have reasons to be concerned," McConnell said. "There may be serious issues regarding conflicts and concerns over the general value proposition of the deal for Delaware investors."

Bank of America is effectively indemnifying BNY Mellon for costs and liabilities arising from its duties as trustee. Some investors not party to the current deal have charged that BNY Mellon has a conflict of interest. New York's top law enforcement officer agrees.

"There's a paucity of information," McConnell said of the settlement deal and of how the final dollar figures were derived. "We'd be in a position to gather more information" when Delaware joins the suit, he added.

Countrywide Financial, the nation's largest mortgage lender when purchased by BofA in 2008, failed to properly pool loan documents needed for the creation of mortgage securities, and BNY Mellon effectively looked the other way in its role as overseer of these instruments, Schneiderman said in court documents. This "apparently triggered widespread fraud," he said.

BNY Mellon should have known the mortgage securities were improperly created because the evidence was "abundant," Schneiderman said, citing the bank's own documents, news coverage of the issue and foreclosure actions brought on BNY Mellon's behalf.

In addition, Schneiderman accused Bank of America of fabricating the missing documents when it came to foreclosing on homeowners who defaulted on their loans.

If the settlement is not finalized, Bank of America's future mortgage-related losses could be "substantially different" than what the lender has set aside and already braced investors for, the bank said in its filing.

Shares of Bank of America, the largest U.S. bank by assets, touched $8.03 in New York trading on Friday, a 52-week low. They're down 26 percent over the past month.

The cost to protect Bank of America's bonds against default have surged more than 17 percent since last Friday, according to Markit.

It now costs $207,000 to protect $10 million of BofA's debt, as of Friday's close. Last week, it cost just $176,000. The price of credit protection generally increases as investor confidence deteriorates.

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ZERO HEDGE: FOLLOW THIS BLOG!

BofA's $8.5 Billion Settlement
Could Fall Apart
After Request Made To Move
Mortgage Case
From State To Federal Court

Submitted by Tyler Durden on 08/26/2011 12:54 -0400

• Asset-Backed Securities

 

• BAC

 

• Bank of America

 

• Bank of America

 

• Bank of New York

 

• Countrywide

 

• New York State

 

• PrISM

 

• Reuters

 

• Wachtell Lipton

As most know by now, the ridiculously low $8.5 billion putback settlement, which was supposed to have been closed by now, and which was the key driver in preventing Bank of America from trading far, far lower (and requiring much more capital), is the wildcard that would allow the bank to package tens if not hundreds of billions of claims against the bank in a "tidy (and very small) little package." The key factor allowing this settlement to be structured in its existing form, was that the lawsuit was filed in New York State Court, which allows for a little something known as Article 77, or a provision permitting "special proceeding related to express trust." The details are provided below, but in essence boil down to the following: the settlement in its current form can only be enacted if the lawsuit is conducted under New York State law. Well, minutes ago, David Grais, attorney for Walnut Place, which as we have repeatedly observed represents those interests who claim the $8.5 billion settlement is massively insufficient and are engaged in litigation seeking far greater recoveries, filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new. More than anything, this latest development may explain why Bank of America has been scrambling to raise tens of billions in the open market as an adverse court decision, one granting Grais' request, means the bank is suddenly open to unlimited downside capital risk. In the meantime, add major litigation headline risk to everything else that BAC has going for it...

Manal Mehta explains why this could be a gamechanger:

If this happens, basically renders the Article 77 irrelevant. Article 77 is a New York Statute.  Bank of America wanted to use Article 77 to make the settlement binding upon all 530 trusts including those who objected to the settlement.  Class action in Federal Court allows parties to opt out of the settlement.

And here is Reuters' Allison Frenkel explaining the nuances of Article 77:

There was a lot of chest thumping Wednesday by noteholders who don't like the proposed $8.5 billion settlement between Bank of America and investors in securities backed by Countrywide mortgages. Bill Frey of Greenwich Financial, a firm that structures asset-backed securities, told Tom Hals of Reuters that he had been "bombarded" with e-mails from angry Countrywide noteholders. He's urging them to rise up in opposition to the settlement proposal. "If investors were to open their mouths," Frey told Hals, "they can push for a better and fairer settlement, or they can get two cents on the dollar like they are getting."

Good luck with that.

The lawyers who structured the BofA settlement saw such protests coming from a mile away and armored the deal against them. Their most powerful defense? The New York state law they chose as a vehicle for judicial approval of the settlement: Article 77, which provides for a "special proceeding related to express trust."

It's a creative use of the law, to say the least. Article 77, which allows a trustee to seek a judicial endorsement of trust-related decisions, is usually invoked in garden-variety trust disputes, not $8.5 billion deals affecting hundreds of trust beneficiaries. But the Countrywide securitizations that the BofA settlement addresses were offered via 530 different trusts, making trust law a legitimate prism through which to assess the proposal. Moreover, there is precedent for using Article 77 to win court approval of decisions by trustees in commercial cases, according to a brief filed in conjunction with the BofA agreement, which cites a 1998 case called In re Application of IBJ Schroder Bank & Trust Co.

The lawyers who put together the BofA deal-- principally Kathy Patrick and Robert Madden of Gibbs & Bruns (for a large investor group); Ted Mirvis of Wachtell, Lipton, Rosen & Katz (for Bank of America); and Jason Kravitt and Matthew Ingber of Mayer Brown (for Bank of New York Mellon, the trustee in the securitizations)-weighed all kinds of options for obtaining judicial approval of the settlement. They considered state and federal courts in various jurisdictions, but ultimately came to a consensus that an Article 77 proceeding made the most sense, even though the law had never been applied to any trust matter of this scope and size "You could think of this as 530 trusts all being heard," said Madden of Gibbs & Bruns. "It's very pragmatic."

It's also weighted in favor of deal supporters. Here's the beauty of the Article 77 vehicle for BofA and BoNY: Under trust law, the bar for blocking a decision by the trustee is incredibly high. Anyone with an interest in the trust has a right to challenge the trustee's decision. But unless objectors can show that the trustee, in this case BoNY, abused its discretion, acted unreasonably, or otherwise breached its fiduciary duty to the trusts' beneficiaries, the court is not supposed to interfere with the trustee's power.

That's a tough standard to meet for anyone who doesn't like the proposed BofA deal. The trust contracts signed by investors in the Countrywide securitizations clearly state that the trustee, BoNY, has the power to enforce the terms of the trust. The contracts don't expressly give BoNY the power to settle claims-which may be an avenue of attack on the deal for challengers-but New York case law provides considerable precedent. So assuming the court agrees that the trustee has the power to settle on behalf of noteholders, the judge's only inquiry is whether the trustee acted unreasonably.

In their petition requesting approval of the deal, BoNY's lawyers from Mayer Brown lay out all of the precautionary measures the trustee took to assure a reasonable settlement. Among other steps, BoNY brought in five expert consultants to opine on the legal and practical considerations any trust-by-trust litigation against Bank of America would entail. The expert opinions led the trustee to a determination that the most noteholders could get by litigating against the bank was $8.8 to $11 billion--and that's without discounting for any of the defenses BofA could raise. "A settlement payout of $8.5 billion is viewed by the trustee as falling within a small variance of that pre-discounted settlement range," the petition says. Weighed against the uncertainty of years-long litigation, it's going to be very difficult to show that an $8.5 billion settlement-in which investors retain their notes, as well as potential securities law claims-is an unreasonable abuse of the trustee's discretion.

And the just released court filing.

BOFA Supreme Court Removal

 


 

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