October 20, 2011
Practice Group:
Mortgage Banking &
Consumer Financial
Products
Beginning to See the Light: The Ninth
Circuit, the MERS MDL, and Other Courts
Reject Claims Challenging MERS
By R. Bruce Allensworth, Brian M. Forbes, Gregory N. Blase, and Roger L. Smerage
I. Introduction
For the past several years, anti-foreclosure advocates have challenged the role played by the Mortgage
Electronic Registration Systems, Inc. (“MERS”) in the residential mortgage market.1 Yet, recent
decisions in federal and state courts have rejected these attacks, dismissing as baseless, claims of fraud
in connection with the MERS system. Many of these decisions expressly acknowledge the lawful and
legitimate role played by MERS in the mortgage market and foreclosure process.
Recently, the United States Court of Appeals for the Ninth Circuit rebuffed an attempt by borrowers to
invalidate deeds of trust that name MERS as the nominee of the lender. In Cervantes v. Countrywide
Home Loans, Inc., et al.,2 the Ninth Circuit affirmed the dismissal of a putative class action, finding
that the plaintiffs “cannot establish that they were misinformed about the MERS system, relied on any
misinformation in entering into their home loans, or were injured as a result of the misinformation. If
anything, the allegations suggest that the plaintiffs were informed of the exact aspects of the MERS
system that they now complain about when they agreed to enter into their home loans.”3
Following after Cervantes, the Arizona federal district court presiding over the multidistrict litigation
concerning the formation and operation of MERS (the “MERS MDL”) dismissed plaintiffs’ most
recent amended class action complaint finding that it failed to cure the defects in earlier pleadings.4
Having given plaintiffs several opportunities to amend, the court dismissed plaintiffs’ complaint with
prejudice and without leave for further amendment.
Finally, two California courts of appeal recently upheld MERS’s authority to foreclose on a residential
deed of trust under the state’s non-judicial foreclosure statute.
II. Cervantes v. Countrywide Home Loans, Inc., et al.
A. The District Court Dismisses Cervantes with Prejudice
The plaintiffs filed the Cervantes action in Arizona federal court in March 2009. In their amended
complaint, they alleged that MERS was fraudulently identified on residential mortgages and deeds of
trust, which prevented borrowers from learning the actual holders of their notes and mortgages. The
various lender, servicer, and trustee defendants filed motions to dismiss.
The MERS MDL court dismissed the action with prejudice, denying as futile the plaintiffs’ request to
file a further amended complaint. In particular, the district court rejected plaintiffs’ claim that the
Beginning to See the Light: The Ninth Circuit, the MERS MDL, and
Other Courts Reject Claims Challenging MERS
MERS system is somehow unlawful.5 Rather, the court stated that it “fails to see how the MERS
system commits a fraud upon Plaintiffs.”6 The court further rejected plaintiffs’ contention that MERS
is a “sham” beneficiary because it “never owns or acquires any beneficial interest in any of the loans it
is named as the beneficiary under a deed of trust.”7 The court found this argument unconvincing
because: (1) to accept its premise would invalidate any agreement in which a beneficiary took “less
than the full rights possessed by the entity … granting the beneficiary status;” (2) plaintiffs did not and
could not allege that “they were somehow induced to enter into their loans on the basis that MERS
was a genuine and not a ‘sham’ beneficiary;” (3) plaintiffs could not allege “what effect, if any, listing
… MERS … as a ‘sham’ beneficiary on the deed of trust had upon their obligations as borrowers;”
and (4) plaintiffs had failed to identify any controlling authority to support their contention that the
MERS system is fraudulent.8
The court emphasized that “[t]he fact that MERS does not obtain … rights … to collect mortgage
payments or obtain legal title to the property in the event of non-payment does not transform MERS’s
status into a ‘sham.’”9
B. The Ninth Circuit Affirms the Dismissal of Cervantes
On appeal, the Ninth Circuit considered whether the district court (1) correctly dismissed the action,
and (2) should have entertained plaintiffs’ request, made orally at the hearing on the motion to
dismiss, for leave to file a further amended complaint.
The Ninth Circuit first described MERS and its role in the mortgage market. The court noted that
“MERS is a private electronic database, operated by MERSCORP, Inc., that tracks the transfer of the
‘beneficial interest’ in home loans, as well as any changes in loan servicers.”10 “At the origination of
the loan, MERS is designated in the deed of trust as nominee for the lender and the lender’s
‘successors and assigns,’ and as the deed’s ‘beneficiary’ which holds legal title to the security interest
conveyed.”11 The court observed that the process of having to record any assignment of a beneficial
interest in a mortgage or deed of trust “became cumbersome to the mortgage industry, particularly as
the trading of loans increased.”12 MERS, therefore, “was designed to avoid the need to record
multiple transfers of the deed by serving as the nominal record holder of the deed on behalf of the
original lender and any subsequent lender.”13
Next, the Ninth Circuit ruled that plaintiffs could not state a fraud claim where they failed to identify
any allegedly false statements about MERS or specify how they relied on such statements and suffered
damages as a result. Rather, the court stated that the fraud claim “is undercut by the terms in
Cervantes’s standard deed of trust, which describe MERS’s role in the home loan.”14 In support of
this conclusion, the court cited to several loan terms, including: (1) the statement that “MERS is acting
‘solely as a nominee for Lender and Lender’s successors and assigns’ and holds ‘only legal title to the
interest granted by Borrower in this Security Instrument;’” (2) the fact that “the deed states that the
loan or a partial interest in it ‘can be sold one or more times without prior notice to Borrower,’ but that
‘[i]f there is a change in Loan Servicer, Borrower will be given written notice of the change;’” and
(3) the term providing that “MERS has ‘the right to foreclose and sell the property.’”15 The court
reasoned that “[b]y signing the deeds of trust, the plaintiffs agreed to the terms and were on notice of
the contents.”16
2
Beginning to See the Light: The Ninth Circuit, the MERS MDL, and
Other Courts Reject Claims Challenging MERS
Finally, the court ruled that the “plaintiffs’ oral request to add a” claim for wrongful foreclosure “was
procedurally improper and substantively unsupported.”17 The court rejected plaintiffs’ “novel theory
… that all transfers of the interests in the home loans within the MERS system are invalid because the
designation of MERS as a beneficiary is a sham and the system splits the deed from the note, and,
thus, no party is in a position to foreclose.”18 The court stated that “notes and deeds are not
irreparably split: the split only renders the mortgage unenforceable if MERS or the trustee, as nominal
holders of the deeds, are not agents of the lenders.”19
III. Dismissal of the Consolidated Amended Complaint in the
MERS MDL
MERS, and others in the mortgage industry, obtained a significant ruling on October 3, 2011, when
the MERS MDL court (Judge Teilborg) dismissed the consolidated amended complaint with
prejudice.20 The court denied plaintiffs’ request for leave to further amend their complaint on the
basis that they had failed to correct the numerous deficiencies in their earlier pleadings despite
multiple opportunities to do so. “Having already granted plaintiffs several bites at the apple, it is
unclear what factual details plaintiffs could plead to cure the deficiencies” in their complaint.21
The court rejected plaintiffs’ theory that the identification of MERS on a deed of trust causes a socalled “splitting” of the note from the security instrument and that such a splitting precludes nonjudicial foreclosure. Instead, citing to the Ninth Circuit’s decision in Cervantes, the court stated that
“even granting that MERS is a sham beneficiary and the note is split from the deed, plaintiffs’ alleged
conclusion that, as a necessary consequence, no party has the power to foreclose does not hold.”22
Nor, the court held, could plaintiffs challenge any assignment of a deed of trust.23 Rather, the court
found that plaintiffs had “specifically agreed” in their deeds of trust that “MERS holds legal title to the
secured interests and is the beneficiary or lienholder of record, as the nominee or agent for Plaintiffs’
lenders and the lenders’ ‘successors and assigns.’”24
IV. Other Recent Decisions Regarding MERS
In two recent decisions, the California Courts of Appeal have upheld MERS’s standing to foreclose.
In Calvo v. HSBC Bank USA, N.A.,25 the California Court of Appeal for the Second District held that
California law and the borrower’s deed of trust both provided legal authority for MERS to foreclose.
The Calvo court ruled that the relevant portion of the applicable California non-judicial foreclosure
“statute states that a ‘trustee, mortgagee, or beneficiary, or any of their authorized agents,’ may initiate
the foreclosure process.”26 The court found that the borrower’s deed of trust expressly authorized
MERS to initiate foreclosure in the event of default. The court concluded that MERS could foreclose
because “MERS was both the nominal beneficiary and agent (nominee) of the original lender and also
of HSBC Bank, which held the note at the time of the foreclosure sale of plaintiff’s residence.”27
Similarly, in Robinson v. Countrywide Home Loans, Inc.,28 the California Court of Appeal for the
Fourth District agreed with an earlier decision in Gomes v. Countrywide Home Loans, Inc.,29 which
held that California’s non-judicial foreclosure statute “does not provide for a preemptive suit
challenging [MERS’s] standing” to foreclose.30
3
Beginning to See the Light: The Ninth Circuit, the MERS MDL, and
Other Courts Reject Claims Challenging MERS
V. Conclusion
While borrowers opposing foreclosure will likely continue to challenge the role played by MERS in
the mortgage industry, a growing list of decisions across the country are dismissing such challenges.
Authors:
R. Bruce Allensworth
bruce.allensworth@klgates.com
+1.617.261.3119
Brian M. Forbes
brian.m.forbes@klgates.com
+1.617.261.3152
Gregory N. Blase
gregory.blase@klgates.com
+1.617.951.9059
Roger L. Smerage
roger.smerage@klgates.com
+1.617.951.9070
1
For discussion of earlier developments regarding MERS, please see two prior client alerts, Life on MERS:
Mapping the Landscape, Mortgage Banking & Consumer Financial Products Alert, by R. Bruce Allensworth, Brian M.
Forbes, Gregory N. Blase, and Roger L. Smerage, June 17, 2011, available at http://www.klgates.com/life-on-mersmapping-the-landscape-06-17-2011/, and Loan Holders are from Venus and Plaintiffs are from MERS, Mortgage Banking
& Consumer Financial Products Alert, by R. Bruce Allensworth, Brian M. Forbes, and Gregory N. Blase, October 15,
2010, available at http://www.klgates.com/newsstand/Detail.aspx?publication=6709.
2
--- F.3d ---, 2011 WL 3911031 (9th Cir. Sept. 7, 2011).
3
Id. at *1.
4
In December 2009, the Judicial Panel on Multidistrict Litigation established a multidistrict litigation proceeding in
federal court styled In re MERS Litigation (the “MERS MDL”). The MERS MDL is pending before Judge James Teilborg,
the same judge who presided over the Cervantes matter. To date, six putative class actions from Arizona, California, and
Nevada, and over eighty individual actions from around the nation, alleging various fraud-based claims in connection with
the MERS system have been transferred to the MERS MDL for consolidated pre-trial proceedings. K&L Gates LLP
represents certain defendants in the MERS MDL.
5
No. CV 09-517-PHX-JAT, 2009 WL 3157160, at *10 (D. Ariz. Sept. 24, 2009) (Teilborg, J.), aff’d, 2011 WL
3911031 (9th Cir. Sept. 7, 2011).
6
Id.
7
Cervantes, 2009 WL 3157160, at *10.
8
Id. at *10-11 (emphasis added).
9
Cervantes, 2009 WL 3157160, at *10.
10
2011 WL 3911031, at *1.
4
Beginning to See the Light: The Ninth Circuit, the MERS MDL, and
Other Courts Reject Claims Challenging MERS
11
Id. at *2.
12
Id.
13
Id.
14
Id. at *5.
15
Id.
16
Id.
17
Id. at *6.
18
Id. at *7. Regarding the procedural defect with the plaintiffs’ request to amend the complaint, the Ninth Circuit
noted that “[t]he district court’s local rules require the plaintiffs to submit a copy of the proposed amended pleadings along
with a motion for leave to amend.” Id. at *6 (citing D. Ariz. Civ. L.R. 15.1). The court concluded that the plaintiffs’ failure
to provide a proposed amended complaint and their inability “to provide the district court with an explanation of the legal
and factual grounds for adding the claim” supported dismissal of the action without leave to amend. Id.
19
Id. at *7. The Ninth Circuit did state that “[t]he legality of MERS’s role as a beneficiary may be at issue where
MERS initiates foreclosure in its own name, or where the plaintiffs allege a violation of state recording and foreclosure
statutes based on the designation.” Id. This non-binding observation did not save the plaintiffs’ claims because their
amended complaint did “not present either of these circumstances.” Id.
20
In March 2011, the court had directed the plaintiffs in approximately seventy of the consolidated actions,
including the six original class actions, to file a consolidated amended complaint.
21
In re MERS MDL, No. 2:09-md-2119, slip op. at 19:5-7 (D. Ariz. Oct. 3, 2011).
22
Id. at 6:1-3 (quoting Cervantes, 2011 WL 3911031, at *7) (internal quotations omitted).
23
Id. at 7:26-8:4.
24
Id. at 6:8-11.
25
--- Cal. Rptr. 3d ----, 2011 WL 4035791 (Cal. App. 2d Dist. 2011).
26
Id. at *5 (quoting Cal. Civ. Code § 2924).
27
Id.
28
--- Cal. Rptr. 3d ----, 2011 WL 4012207 (Cal. App. 4th Dist. 2011).
29
192 Cal. App. 4th 1149, 121 Cal. Rptr. 3d 819 (Cal. App. 4th Dist. 2011).
30
Robinson, 2011 WL 4012207, at *2.
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Beginning to See the Light: The Ninth Circuit, the MERS MDL, and
Other Courts Reject Claims Challenging MERS
K&L Gates’ Mortgage Banking & Consumer Financial Products practice provides a comprehensive
range of transactional, regulatory compliance, enforcement and litigation services to the lending and
settlement service industry. Our focus includes first- and subordinate-lien, open- and closed-end
residential mortgage loans, as well as multi-family and commercial mortgage loans. We also advise
clients on direct and indirect automobile, and manufactured housing finance relationships. In addition,
we handle unsecured consumer and commercial lending. In all areas, our practice includes traditional
and e-commerce applications of current law governing the fields of mortgage banking and consumer
finance.
For more information, please contact one of the professionals listed below.
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Beginning to See the Light: The Ninth Circuit, the MERS MDL, and
Other Courts Reject Claims Challenging MERS
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7