You can not evict if you did not have the note or properly assign the trust deed

11 04 2012

TABLE OF CONTENTS

I.          STATEMENT OF THE CASE…………………………………..….7

 

A.        PROCEDURAL HISTORY………………………………….7

 

B.        STATEMENT OF FACTS………………………………..…7

 

II.         STANDARD OF REVIEW………………………………..………10

 

III.       ARGUMENT……………………………………………………….11

 

A.        INTRODUCTION………………………………………….11

 

B.        RESPONDENT LACKED STANDING TO BRING THIS ACTION……………………………………………………………12

 

1.   IN FINDING FOR RESPONDENT THE COURT BELOW WRONGLY ASSUMED THAT EITHER A RELATIONSHIP EXISTED BETWEEN MERS AND MORTGAGEIT WHICH GAVE MERS THE AUTHORITY TO ASSIGN THE DEED OF TRUST AND THE POWER OF SALE CONTAINED THEREIN OR MERS WAS THE BENEFICIARY UNDER THE DEED OF TRUST……………………………………….………13

 

a.         MORTGAGEIT DID NOT CONFER THE AUTHORITY TO ASSIGN THE DEED OF TRUST TO MERS……………………………………………………….14

 

(1)       MERS Was Not A Beneficiary Under The Deed Of Trust………………………………………..…….15

 

(2)       MERS Is Not An Agent/Nominee Of Mortgageit With Respect To The Assignment Of The Deed Of Trust At Issue……………….……………..18

 

 

 

 

 

2.   THE POWER OF SALE IN THE DEED OF TRUST WAS NEVER ASSIGNED FROM MORTGAGEIT TO RESPONDENT AND, THEREFORE, RESPONDENT DID NOT HAVE THE POWER OF SALE AT THE TIME OF THE FORECLOSURE SALE OF THE SUBJECT PROPERTY……21

 

3.   EVEN IF MERS WAS PROPERLY ASSIGNED THE POWER OF SALE IN THE DEED OF TRUST, IT LACKED STANDING TO TRANSFER THE NOTE BECAUSE IT NEVER OWNED IT………………….…………………..……25

 

C.        THE NOTICE OF DEFAULT AND SUBSTITUTION OF TRUSTEE WERE VOID BECAUSE THE ENTITIES EXECUTING THE DOCUMENTS DID NOT HAVE THE LEGAL AUTHORITY TO DO SO……………………………………………………….29

 

D.        THE COURT’S APPLICATION OF THE PRESUMPTION SET FORTH IN SECTION 2934A(D) TO THIS MATTER WAS IMPROPER AND ERRONEOUS…………………………………31

 

E.         THERE WAS NO LEGAL REQUIREMENT FOR APPELLANTS TO ESTABLISH PREJUDICE TO DEFEAT RESPONDENT’S CLAIM PURSUANT TO CODE OF CIVIL PROCEDURE SECTION 1161A……………………………….…34

 

IV.       CONCLUSION……………………………………………………36

 

 

 

 

                                              TABLE OF AUTHORITIES

 

CASES

 

In re Agard, 2011 WL 499959 (Bkrtcy E.D.N.Y)………..…14, 19, 23, 26, 27

Bank of America, N.A. v. La Jolla Group II (2005)

129 Cal.App.4th 706 ……………………………………………………..22, 23

California Viking Sprinkler Co. v. Pacific Indem. Co. (1963) 213 Cal. App. 2d 844, 29 Cal. Rptr. 194…………………………………………………….19, 20

Carpenter v. Longan, 83 U.S. 271 (1872)……………………………26, 27, 28

Cheney v. Trauzettel (1937) 9 Cal. 2d 158…………………………………..11

Cisco v. Van Lew (1943) 60 Cal.App.2d 575……………………………….18

Common Cause v. Board of Supervisors (1989), 49 Cal. 3d 432, 261 Cal. Rptr. 574, 777 P.2d 610…………………………………………………………….12

Dimock v. Emerald Properties (2000) 81 Cal. App. 4th 868………….32, 33, 34

Domarad v. Fisher & Burke Inc. (1969) 270 Cal.App.2d 543……………….28

Fisher v. Salmon (1851) 1 Cal. 413…………………………………………..19

Gantman v. United Pac. Ins. Co. (1991) 232 CA3d 1560, 284 CR 188……12

Ghirardo v. Antonioli (1994) 8 Cal.4th 791…………………………………10

Johnson v. Razey (1919) 181 Cal. 342………………………………………28

Kelly v. Upshaw (1952) 309 Cal. 2d 179……………………………….27, 28

Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 101 Cal.App.4th 1317…………………………………………………………….10

Little v. CFS Service Corp. (1987) 188 Cal. App. 3d 1354………….24, 33, 34

Malkoskie v. Option One (2010) 188 Cal. App. 4th 968……………………..11

McGhan Medical Corp. v. Sup. Ct of San Diego County (1992) 11 Cal.App.4th 804……………………………………………………………………………10

MERS v. Nebraska Dep’t. of Banking and Finance, (2005)

704 N.W.2d 784…………………………………………………………16, 17

Merscorp, Inc., v. Romaine, 8 N.Y.3d 90, 828 N.Y.S.2d 266, 861 N.E.2d 81 (N.Y.2006)………………………………………………………………13, 14

Miller v. Cote (1982) 127 Cal. App. 3d 888………………………………….30

In re Mitchell, US Bk Ct.Nev. Case No. BK-S-07-16226

(August 19, 2008)…………………………………………………………….15

Nagle v. Macy (1858) 9 Cal. 426……………………………………………25

Polhemus v. Trainer (1866) 39 Cal. 685…………………………………….28

Santens v. Los Angeles Finance Co. (1949) 91 Cal. App.2d 197…………..28

Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735…………..22

System Inv Corp. v. Union Bank (1971) 21 Cal. App. 3d 137………………29

U.S. Bank v. Ibanez, No. SJC-10694, 2011 WL 38071 (Mass. Supreme Jud. Court, January 7, 2011)………………………………………………………24

In re Vargas 396 BR 511, 517 (Bankr. C.D. Cal. 2008)……………………..28

Videau v. Griffin (1863) 21 Cal. 389………………………………………..19

Watkins v. Bryant (1891) 91 Cal. 492……………………………………….25

STATUTES

 

California Civil Code section 1091…………………………………………..19

California Civil Code section 2309………………………………………….19

California Civil Code section 2923.5………………………………………..16

California Civil Code section 2924………………….7, 11, 24, 29, 31, 33, 34

California Civil Code section 2924(a)(1)………………………………..12, 29

California Civil Code section 2924(a)(1)(C)…………………………….11, 30

California Civil Code section 2932.5………………………22, 24, 25, 30, 32

California Civil Code section 2934a(d)……………..…..9, 25, 31, 32, 33, 36

California Civil Code section 2936………………………………………22, 27

California Code of Civil Procedure section 100…………………………….7

California Code of Civil Procedure section 367…………………………….12

California Code of Civil Procedure section 1161a……………………….11, 34

 

 

I.

                                            STATEMENT OF THE CASE

A.        PROCEDURAL HISTORY

This case arises out of an order in favor of Respondent in an Unlawful Detainer proceeding and, in particular, finding that Respondent had complied with the provisions of California Civil Code section 2924 et seq. despite evidence that Respondent had not obtained any power of sale set forth in the Deed of Trust at or prior to the time of the related Trustee’s Sale.  In arriving at such finding the Court below determined that Respondent was entitled to possession of the real property at issue.   The Court thereafter issued a ruling in favor of Respondent and this Appeal followed.  The Court’s final judgment of the Court, which is appealable to this Court pursuant to CCP Section 100, was entered on June 25, 2010. The notice of appeal was filed on August 19, 2010.

B.        STATEMENT OF FACTS

Appellants are a homeowner and a tenant who have asserted they were foreclosed on and evicted unlawfully.  Specifically, Appellants alleged that they were foreclosed on by Respondent which had no legal standing to initiate or conclude a non-judicial foreclosure.  Consequently, Respondent was without any legal authority to bring the underlying action which is the subject of this Appeal.  Appellants’ contentions were that the foreclosure sale was void as Respondent was without any legal right to do so and that the Respondent was never a holder of the Power of Sale contained in the Deed of Trust on or before the date that the Trustee’s Sale took place.  The supporting evidence presented at trial consisted of, inter alia, the Deed of Trust (“DOT”) identifying the Lender as MortgageIt, Inc. (“MortgageIt”) and recorded on October 18, 2005 (Clerk’s Transcript (“CT”), at 57-86 and Exhibit “11” at Trial); a Notice of Default (“NOD”) which was either executed by Quality Loan Service Corporation (“Quality”) as an authorized agent of MortgageIt or as the Trustee under the Deed of Trust (CT, at 87-90, and Exhibit “12”), which was recorded on January 5, 2009; a Substitution of Trustee (“SOT”) signed by Christina Allen, Duly Appointed Offer, of Select Portfolio Servicing, Inc., Attorney in Fact for U.S. Bank, National Association, as trustee, on behalf of the hoders [sic] of the Terwin Mortgage Trust 2006-5 Asset-Backed Ceritificates, TMTS Series 2006-5, and recorded on February 18, 2009 (CT at 91-95 and Exhibit “13”); an Assignment of Deed of Trust (“Assignment of DOT”) signed by Bill Koch as an Assistant Secretary of Mortgage Electronic Registration Systems, Inc. (“MERS”), as Nominee for MortgageIt, and recorded on February 27, 2009 (CT at 96-7 and Exhibit “14”),  and a Trustee’s Deed Upon Sale in favor of Respondent (CT at 175-176) and recorded on July 22, 2009, which indicates that a Trustee’s Sale was held on July 15, 2009 and that U.S. Bank, National Association, as trustee, on behalf of the hoders [sic] of the Terwin Mortgage Trust 2006-5 Asset-Backed Ceritificates, TMTS Series 2006-5 was the “foreclosing beneficiary.”   CT at 12-14.  The Assignment of the Deed of Trust was executed and recorded AFTER the Substitution of Trustee and Notice of Default.  Thus, Quality acted prior to having the legal authority to do so.  Moreover, no evidence of any written authorization conferring the rights of an Agent from MortgageIt to MERS was ever presented by Respondent.  Appellants noted at trial that the Assignment of Deed of Trust in favor of Respondent was recorded nine calendar days after the Substitution of Trustee and fifty-three days after the Notice of Default.

Despite the anomalies noted by Appellants, the Court found that Respondent complied with the statutory requirements and entered judgment in its favor on June 25, 2010.  The Court’s judgment was based on the following analysis:

“COMMENTS; THE COURT FINDS IN FAVOR OF PLAINTIFF. DEFENDANT’S CHALLENGE TO THE VALIDITY OF THE SALE IS DENIED. THE COURT FINDS APPLICABLE THE PRESUMPTION STATE IN CODE OF CIVIL PROCEDURE SECTION 2934A(D) AND FINDS NO PREJUDICE TO THE DEFENDANTS DUE TO SIGNATORY AND RECORDATION REQUIREMENTS.” CT, at 110.

Appellants filed their notice of appeal on August 19, 2010.  CT at 141-5.

II.

                                               STANDARD OF REVIEW

The standard of review involving issues wherein the law is applied to facts that are not in dispute was stated in McGhan Medical Corp. v. Sup. Ct of San Diego County (1992) 11 Cal.App.4th 804 at 810, as follows:

“If … the question requires us to consider legal concepts in the mix of fact and law and to exercise judgment about the values that animate legal principles, then the concerns of judicial administration will favor the appellate court, and the question should be classified as one of law and reviewed de novo. … This is so because usually the application of law to fact will require the consideration of legal concepts and involve the exercise of judgment about the values underlying legal principles.(Emphasis added).  (Accord  Ghirardo v. Antonioli (1994) 8 Cal.4th 791 and Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 101 Cal.App.4th 1317).”

Accordingly, the Standard of Review for determining whether Respondent was a “real party in interest,” and all other issues in this matter is de novo.

 

III.

ARGUMENT

A.        INTRODUCTION

In an action for unlawful detainer, California Code of Civil Procedure Section 1161a requires proof from the plaintiff that the property at issue was “duly sold in accordance with Section 2924 of the Civil Code.”  Thus, title, to the extent required by Section 1161a “not only may, but must be tried” in such actions.  Malkoskie v. Option One (2010) 188 Cal. App. 4th 968, 974.  Consequently, the plaintiff must “prove a sale in compliance with the statute and deed of trust, followed by purchase as such sale and the defendant may raise objections” on that phase of the issue of title.  Cheney v. Trauzettel (1937) 9 Cal. 2d 158, 159-60.

With regard to the Notice of Default, Section 2924(a)(1)(C) provides that it “shall” include “a statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust or mortgage that is in default.” (emphasis added).  Thus, a stranger to the deed of trust cannot elect to invoke the power of sale in the deed of trust.  The power is reserved exclusively for the “beneficiary.”  Cal. Code Civ. Proc. § 2924(a)(1)(C).

To the contrary, other ministerial duties required by the non-judicial foreclosure statutes can be delegated by the beneficiary to, e.g., “the trustee, mortgagee, or beneficiary, or any of their authorized agents.”  Cal. Code Civ. Proc. § 2924(a)(1).

B.        RESPONDENT LACKED STANDING TO BRING THIS ACTION

In California, every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute.  Cal. Code Civ. Proc. § 367.  Moreover, contentions based on lack of standing or that a party is not a real party in interest involve jurisdictional challenges and may be raised at any time in the proceeding.  Common Cause v. Board of Supervisors (1989), 49 Cal. 3d 432, 261 Cal. Rptr. 574, 777 P.2d 610 (1989).

In an unlawful detainer action, the “real party in interest” is the person or entity who owns or holds title to the claim or property involved.   See Gantman v. United Pac. Ins. Co. (1991) 232 CA3d 1560, 1566, 284 CR 188, 192.  Here, Respondent claimed to be, and had the burden of prove in establishing that it was, the “real property in interest” as a result of the Assignment of the Deed of Trust from MERS and the non-judicial foreclosure sale of the Subject Property.  However, the assignment from MERS to Respondent was invalid and did not transfer any interest.  Therefore, Respondent did not acquire the power of sale and was not the real party in interest because it did not validly hold the power of sale at the time of the trustee’s sale.

Moreover, Respondent did not have a beneficial interest in the Subject Property at any time before or during the underlying action.  Consequently, as a result of Respondent’s lack of standing to bring the action, the judgment in favor of Respondent must be set aside and the action dismissed with prejudice.

1.         IN FINDING FOR RESPONDENT THE COURT BELOW WRONGLY ASSUMED THAT EITHER A RELATIONSHIP EXISTED BETWEEN MERS AND MORTGAGEIT WHICH GAVE MERS THE AUTHORITY TO ASSIGN THE DEED OF TRUST AND THE POWER OF SALE CONTAINED THEREIN OR MERS WAS THE BENEFICIARY UNDER THE DEED OF TRUST

“In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track ownership interests in residential mortgages. Mortgage lenders and other entities, known as MERS members, subscribe to the MERS system and pay annual fees for the electronic processing and tracking of ownership and transfers of mortgages. Members contractually agree to appoint MERS to act as their common agent on all mortgages they register in the MERS system.”  Merscorp, Inc., v. Romaine, 8 N.Y.3d 90, 828 N.Y.S.2d 266, 861 N.E.2d 81 (N.Y.2006) (footnotes omitted).

“The initial MERS mortgage is recorded in the County Clerk’s office with ‘Mortgage Electronic Registration Systems, Inc.’ named as the lender’s nominee or mortgagee of record on the instrument. During the lifetime of the mortgage, the beneficial ownership interest or servicing rights may be transferred among MERS members (MERS assignments), but these assignments are not publicly recorded; instead they are tracked electronically in MERS’s private system. In the MERS system, the mortgagor is notified of transfers of servicing rights pursuant to the Truth in Lending Act, but not necessarily of assignments of the beneficial interest in the mortgage.”  Id.

a.         MORTGAGEIT DID NOT CONFER THE AUTHORITY TO ASSIGN THE DEED OF TRUST TO MERS

To track the chain of title in this action from Appellant to Respondent, it is first necessary to analyze the DOT, the relationship between MortgageIt and its “nominee” (MERS), and MERS itself.  The DOT provides that MERS is both the nominee of the Lender and the beneficiary under the DOT.  See In re Agard, 2011 WL 499959, *20 (Bkrtcy E.D.N.Y.) (“MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”).  However, a nominee of a beneficiary is not the same as being the beneficiary.  In re Mitchell, US Bk Ct.Nev. Case No. BK-S-07-16226 (August 19, 2008), at p. 6.  The deed of trust in Mitchell contained a similar statement, namely that MERS is the nominee and beneficiary of Fremont.  This statement does not mean that MERS is the beneficiary.

The Mitchell court held that a “beneficiary” is defined as “one designated to benefit from an appointment, deposition or assignment or to receive something as a result of a legal arrangement or instrument.” Id. (citing Blacks Law Dictionary).   No California statute or decision holds that anyone other than the beneficiary or its assignee is entitled to “payments made on the notes” secured by Deeds of Trust.  Accordingly, it is not factually or legally possible for MERS to be anything more than an agent or attorney in fact.

Moreover, as set forth below, when each of MERS’s dual positions are analyzed separately, it is clear that the legal requirements are not satisfied for either.

(1)       MERS Was Not A Beneficiary Under The Deed Of Trust

With regard to the claim in the DOT that MERS was the “beneficiary,” and not just the nominee/agent, under the DOT or the lender or obligee under the Note, the evidence presented at trial was inconsistent with this statement.  Specifically, Mr. Timothy Donlon of Quality testified that Quality executed the Notice of Default in January 2009 as the agent for MortgageIt, not MERS.  Reporter’s Transcript (“RT”), at 26:20-3.  However, Mr. Donlon later testified that the Section 2923.5 Declaration was executed on behalf of Respondent as beneficiary on December 29, 2008, approximately two months prior to the recording of the Assignment of DOT.  RT, at 36:3-23; CT, at 106.  Thus, it is undisputed that MERS was not the “beneficiary” when it alleged assigned the DOT to Respondent in February 2009.

Additionally, MERS is judicially estopped from asserting as such, in fact or as a matter of law, as it has represented the contrary to several courts.  In MERS v. Nebraska Dep’t. of Banking and Finance (2005) 704 N.W.2d 784, it represented to the Supreme Court of the State of Nebraska that:

MERS shall have no rights whatsoever to any payments made on account of such mortgage loans, to any servicing rights related to such mortgage loans, or to any mortgaged   properties securing such mortgage loans. MERS agrees not to assert any rights … with respect to such mortgage loans or mortgaged properties.”

Id.  at 787 (emphasis added).  “Further, MERS argues that it does not own the promissory notes secured by the mortgages and has no right to payments made on the notes. MERS explains that it merely “immobilizes the mortgage lien while transfers of the promissory notes and servicing rights continue to occur.”  Id. (emphasis added).

Additionally, “counsel for MERS explained that MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever. MERS merely tracks the ownership of the lien and is paid for its services through membership fees charged to its members. MERS does not receive compensation from consumers. The Department does not take issue with this characterization of MERS’ services.”  Id. (emphasis added).

MERS is clearly not a “Beneficiary” as defined under California law.  That is, MERS is listed as a beneficiary in name only and not pursuant to any legal definition.  MERS has made it clear that it does not benefit from being named as the beneficiary in deeds of trust.  It does not receive any payments thereunder or any consideration for the assignment or sale of the deed of trust. There are NO California statutes or decisions which hold that anyone other than the Beneficiary or its assignee is entitled to “payments made on the notes” secured by Deeds of Trust.  Accordingly, it is not factually or legally possible for MERS to be anything more than an agent or attorney in fact.

(2)       MERS Is Not An Agent/Nominee Of Mortgageit With Respect To The Assignment Of The Deed Of Trust At Issue

With regard to MERS’s claim in the DOT that it was the nominee of MortgageIt, the word “nominee” connotes only the delegation of authority to the nominee in a representative or “nominal” capacity, i.e., not a transfer or assignment to the nominee of any property in, or ownership of the rights of the person nominating him, or her or it.  Cisco v. Van Lew (1943) 60 Cal.App.2d 575.  In Cisco, supra, the court additionally held that:

“The word nominee ordinarily indicates one designated to act for another as his representative in a rather limited sense. In the absence of an assignment from McGuire to the Ciscos or some other effective substitution of the Ciscos for McGuire as the purchasers, no rights become vested in the Ciscos which they are entitled to assert on their own behalf independently of McGuire. (emphasis added).

MERS’s corporate officers have asserted that it was and is a synonym for “Agent.”  It is MERS’s tacit or explicit assertions that it is the “common agent” of several hundred or thousand various lenders that creates significant legal issues involving Agency law.  See Agard, supra, at *15.  Here, MERS and MortgageIt did not satisfy the legal requirements for an agency relationship to transfer interests in real property.  See Agard, supra, at *19 (holding that there was insufficient evidence to establish an agency relationship between MERS and its member).

Specifically, California Civil Code section 1091 states, in its entirety:

An estate in real property, other than an estate at will or for a term not exceeding one year, can be transferred only by operation of law, or by an instrument in writing, subscribed by the party disposing of the same, or by his agent thereunto authorized by writing.” (emphasis added).

Thus, the only way for an interest in real property to be transferred is through a written instrument.  Additionally, for an agent to transfer an interest in real property, there must be a written authorization from the principal which allows the agent to do so.  Accordingly, in California, agencies involving the transfer or pledge of interests in real estate must be evidenced by a writing.  Cal. Civ. Code §§ 1091 and 2309; Videau v. Griffin (1863) 21 Cal. 389 at 391; Fisher v. Salmon (1851) 1 Cal. 413).   The burden of proving agency, as well as scope of the agent’s authority, rests upon the party asserting the existence thereof.  California Viking Sprinkler Co. v. Pacific Indem. Co. (1963) 213 Cal.App.2d 844, 29 Cal.Rptr. 194

Consequently, for MortgageIt to validly authorize MERS to transfer or sell its interest in the DOT that it acquired upon origination of the loan, there must be a written authorization executed by MortgageIt for MERS to do so.  It is nonsensical to argue that a third party (MERS) which did not lend any money to anyone would automatically, or as a matter of law, obtain a security interest in real property based solely upon a borrower’s execution of a deed of trust.  The borrower does not define the relationship between the Lender and MERS.

Moreover, the borrower’s execution of the deed of trust cannot, as a matter of law, create a written agency relationship between two other entities or simultaneously give two separate entities the right to exercise the power of sale.  If true, borrowers would be forced to deal with the Lender and MERS as both would be capable of exercising the power of sale.  The California non-judicial foreclosure statutes were not enacted to allow for such confusion and double recovery.

Thus, MERS can only be an agent retained by the lender, i.e., MortgageIt, to handle the assignments or transfer of the deed of trust.  Consequently, a written authorization was required and none was introduced at trial by Respondent.  Therefore, as Respondent did not satisfy its burden of proof in establishing that it received a valid interest in the Subject Property from MERS, the judgment must be overturned.

Moreover, the evidence at trial was inconsistent with the theory that MERS was acting as the agent for MortgageIt.  Specifically, Mr. Donlon testified that Respondent had been acting as the beneficiary approximately two months before Respondent was assigned the DOT.  RT, at 36:3-23; CT, at 106.  Thus, MortgageIt no longer had an interest in the DOT to assign by the time the Assignment of the DOT was recorded on February 27, 2009.

As the agency relationship between the two entities does not allow for one to transfer an interest in real property for the other, the eventual Assignment of the DOT from MERS to Respondent was void as MERS had nothing to assign.  As no evidence of a writing conferring such authority on MERS was admitted at trial, U.S. Bank did not satisfy its burden of establishing a proper chain of title from MortgageIt to it. That is, because MERS could not have been the agent or attorney in fact of MortgageIt, the assignment of the DOT from MERS to U.S. Bank is a legal nullity

2.         THE POWER OF SALE IN THE DEED OF TRUST WAS NEVER ASSIGNED FROM MORTGAGEIT TO RESPONDENT AND, THEREFORE, RESPONDENT DID NOT HAVE THE POWER OF SALE AT THE TIME OF THE FORECLOSURE SALE OF THE SUBJECT PROPERTY

The power of sale in a deed of trust is not the same as a security interest.  The assignment of the former is the subject of Section 2932.5, while the latter is governed by Section 2936.  With regard to the power of sale, Civil Code section 2932.5 makes it clear that:

“Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.” (Emphasis added).

The statute is clear in that it expressly identifies both an “encumbrancer” and “an instrument intended to secure the payment of money.”  Indeed, the Fourth District Court of Appeals has expressly applied the language of the statute to Deeds of Trust stating:

A recorded assignment of note and deed of trust vests in the assignee all of the rights, interests of the beneficiary including authority to exercise any power of sale given the beneficiary.”  Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735 at 744 (emphasis added).

Moreover, Section 2932.5 was enacted for the protection of the trustor, not the beneficiary.  Specifically, in Bank of America, N.A. v. La Jolla Group II (2005) 129 Cal.App.4th 706, 712, the court stated that

“The power of sale only exists if it is expressly granted by the trustor in the security documents.  The statutory scheme governing nonjudicial foreclosures does not expand the beneficiary’s sale remedy beyond the parties’ agreement, but instead provides additional protection to the trustor:  Statutory provisions regarding the exercise of the power of sale provide substantive rights to the trustor and limit the power of sale for the protection of the trustor.”  (emphasis added).

Thus, Section 2932.5 was enacted to protect the trustor and alleviate confusion as to which entity had the power of sale at any particular time.  On the other hand, MERS was created solely to save money.  Agard, supra, at *13 (“MERS was created to alleviate problems created by, what was determined by the financial community to be, slow and burdensome recording processes adopted by virtually every state and locality. In effect the MERS system was designed to circumvent these procedures. MERS, as envisioned by its originators, operates as a replacement for our traditional system of public recordation of mortgages.”).

Here, Respondent is a securitized trust.  Increasingly it is being shown that serious questions arise as to the ownership of a given mortgage loan and the rights associated with such ownership.  Most recently, the Massachusetts Supreme Judicial Court in the matter of U.S. Bank v. Ibanez, No. SJC-10694, 2011 WL 38071 (Mass. Supreme Jud. Court, January 7, 2011), held that where a foreclosing party conducts a non-judicial foreclosure sale it MUST hold the requisite Power of Sale at or before the time of sale.  In the Ibanez case, the foreclosing entities, two Trustees of securitized trusts, one of which was Respondent, did not hold the Power of Sale at the time of sale and, accordingly, the sales were deemed void.

The same applies in California.  Specifically, neither the “mortgagee” nor “encumbrancer,” i.e., MortgageIt, assigned the power of sale to Respondent.  Instead, it was allegedly assigned to it by MERS but it was never assigned to MERS.  Thus, MERS had nothing to assign.  Moreover, the assignment has no legal existence prior to recordation.  Otherwise, the plain language of CC 2932.5 would be rendered meaningless.  Accordingly, it was not possible for either Respondent or Quality to establish it complied with Civil Code section 2924 et seq as neither of them held the rights, title or interest of a beneficiary at the time of the sale.

Where the defect in a foreclosure sale is the failure to comply with a statutory provision which is mandatory, the sale is void.  Little v. CFS Service Corp. (1987) 188 Cal. App. 3d 1354, 1358.  Thus, the non-compliance with Section 2932.5 voids the sale. Unlike Section 2934a(d) with regard to substitution of trustees, there is no provision which validates upon recordation, foreclosure actions by the assignee after execution of the assignment but prior to recordation.  Therefore, it is only upon recordation of the Assignment of DOT that Respondent was permitted by law to initiate the foreclosure.  Its actions prior to its authorization to act including the recording of the SOT are invalid.  In light of the foregoing, there can be little doubt that any actions taken by an assignee prior to the recording of the assignment are a legal nullity.

3.         EVEN IF MERS WAS PROPERLY ASSIGNED THE POWER OF SALE IN THE DEED OF TRUST, IT LACKED STANDING TO TRANSFER THE NOTE BECAUSE IT NEVER OWNED IT

Standing to foreclose in California requires ownership of the note. The beneficiary must be an obligee of the secured obligation (usually the payee of a note) because otherwise, the deed of trust in its favor has no purpose.  Watkins v. Bryant (1891) 91 Cal. 492; Nagle v. Macy (1858) 9 Cal. 426.  Neither MERS’s status as a nominee for the beneficial owner, nor its status as a beneficiary under the DOT is sufficient to create standing to foreclose.

Therefore, as set forth above, MERS is not an actual beneficiary of anything.  It is only a nominal beneficiary or nominee/agent under the DOT.  Both the Note and DOT identify the lender as MortgageIt.  In fact, MERS is never mentioned in any California promissory notes.  Moreover, there is no statement in the DOT that the note has been transferred to MERS or to any other entity.  Accordingly, MERS lacked the legal authority to assign the DOT because the Note and the DOT were owned by separate entities at the time.

Consequently, even if MERS held the power of sale from the DOT at the time of the assignment to Respondent, it had no beneficial interest in the Note.  See Agard, supra, at * 12 (“By MERS’s own account, it took no part in the assignment of the Note in this case, but merely provided a database which allowed its members to electronically self-report transfers of the Note. MERS does not confirm that the Note was properly transferred or in fact whether anyone including agents of MERS had or have physical possession of the Note. What remains undisputed is that MERS did not have any rights with respect to the Note and other than as described above, MERS played no role in the transfer of the Note.”).

Additionally, the splitting of ownership of the note and the deed of trust is even more problematic.  As stated by the court in Agard,

“In simple terms the Movant relies on the argument that a note and mortgage are inseparable. See Carpenter v. Longan, 16 Wall. 271, 83 U.S. 271, 274, 21 L.Ed. 313 (1872). While it is generally true that a mortgage travels a parallel path with its corresponding debt obligation, the parties in this case have adopted a process which by its very terms alters this practice where mortgages are held by MERS as “mortgagee of record.” By MERS’s own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS’s name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together, Movant must prove not only that it is acting on behalf of a valid assignee of the Note, but also that it is acting on behalf of the valid assignee of the Mortgage.”  Agard, supra, at *13.

Under California law, the same legal principle applies.  Thus, the mortgage or deed of trust follows the note.  That is, if the creditor transfers the note but not the deed of trust, the transferee receives a secured note, i.e., the security follows the note.  Cal. Civ. Code § 2936.  However, if the transferee is given the deed of trust without the note accompanying it, the transfer has no meaningful rights except the possibility of a legal action to compel payment under the note, if such was the agreement.  Kelly v. Upshaw (1952) 309 Cal. 2d 179; Polhemus v. Trainer (1866) 39 Cal. 685.  Likewise, an assignment of the deed of trust without transfer of the obligation (the promissory note) is completely ineffective. Kelly, supra, at 192; Johnson v. Razey (1919) 181 Cal. 342; Domarad v. Fisher & Burke Inc. (1969) 270 Cal.App.2d 543, 553-554; Santens v. Los Angeles Finance Co. (1949) 91 Cal. App.2d 197, 202.

Therefore, MERS was not a beneficiary under the DOT as the Note was held by another, albeit unknown, entity, as is always the case with MERS.  That is, even if MERS is the beneficiary under the Deed of Trust (which it is not), without ownership of the Note, it did not have an enforceable right. See, e.g., In re Vargas 396 BR 511, 517 (Bankr. C.D. Cal. 2008) (“[w]hile the note is essential, the mortgage is only ‘an incident’ to the note.”); see also Carpenter v. Longan (1872) 83 U.S. 271, 275.

In summary, although standing to enforce the note through foreclosure in California may not require physical possession of the original note, it requires ownership of the note.  Thus, the beneficiary of the deed of trust must be an obligee of the secured obligation (payee of the note) because otherwise the deed of trust in its favor has no purpose. Therefore, MERS had no status as a beneficiary under the DOT when the note is owned and held by another entity and, thus, MERS did not have standing to assign the note to Respondent for the purpose of instituting foreclosure proceedings against the Subject Property.  As only MortgageIt appears to have had an ownership interest in the note, it is the only entity who could have assigned it to Respondent.  Again, for MERS to assign it to Respondent on behalf of MortgageIt, there must be a written authorization from MortgageIt allowing MERS to do so.  As none was introduced at trial, the assignment of the DOT to Respondent was invalid and void as Respondent never acquired the legal authority to enforce the note.

C.        THE NOTICE OF DEFAULT AND SUBSTITUTION OF TRUSTEE WERE VOID BECAUSE THE ENTITIES EXECUTING THE DOCUMENTS DID NOT HAVE THE LEGAL AUTHORITY TO DO SO

The non-judicial foreclosure statutes set forth in California Civil Code Section 2924 et seq., require strict compliance.  System Inv Corp. v. Union Bank (1971) 21 Cal. App. 3d 137, 152-3 (“The statutory requirements must be strictly complied with, and a trustee’s sale based on a statutorily deficient Notice of Default is invalid.”).  As set forth above, there was no compliance at all as the NOD and SOT were recorded BEFORE the Assignment of the DOT.

With regard to the NOD, the plain language of Civil Code section 2924(a)(1) makes it clear that only the original “trustee, mortgagee, or beneficiary” may “file for record, in the office of the recorder of each county wherein the mortgaged or trust property or some part or parcel thereof is situated, a notice of default.”  Indeed, if the legislature had not intended for the beneficiary of a deed of trust to be the de facto holder of the Power of Sale, it would not have required that the beneficiary set forth the nature and extent of the default in the Notice of Default as required by section 2924(a)(1)(C) which states, in pertinent part, that “A statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust or mortgage that is in default.” (emphasis added).

Here, the NOD was executed and recorded by Quality prior to it being substituted in as trustee through the SOT.  Thus, the NOD is invalid because it was either (1) recorded by a “trustee” who was not a trustee at the time of recordation; or (2) recorded by an agent of a “beneficiary,” MortgageIt or MERS, neither of which had a beneficial interest in the DOT at the time of recordation.  See Miller v. Cote (1982) 127 Cal. App. 3d 888, 894.  The “electing beneficiary” must have legal power deriving from the original Note or Deed of Trust.  Here, MERS did not have either.  Thus, the NOD was recorded by a stranger to the DOT.

Accordingly, there seems to be no dispute that an Assignment of the Power of Sale, as specified in Civil Code section 2932.5 must be acknowledged and recorded to be effective.  As Respondent did not establish at trial that it was properly assigned the power of sale, there was no legally cognizable basis for a trustee’s sale.  Thus, as Respondent did not show compliance with California Civil Code section 2924, it was not entitled to a judgment in the underlying action.

D.        THE COURT’S APPLICATION OF THE PRESUMPTION SET FORTH IN SECTION 2934A(D) TO THIS MATTER WAS IMPROPER AND ERRONEOUS

In its ruling, the Court applied the presumption set forth in Section 2934a(d) which sets forth that

“A trustee named in a recorded substitution of trustee shall be deemed to be authorized to act as the trustee under the mortgage or deed of trust for all purposes from the date the substitution is executed by the mortgagee, beneficiaries, or by their authorized agents.  . . .  Once recorded, the substitution shall constitute conclusive evidence of the authority of the substituted trustee . . . to act pursuant to this section.”  Accordingly, pursuant to Section 2934a(d), the basic fact of such presumption is the recording of a substitution of trustee.  If the basic fact is not shown, the presumption has no effect.”

However, implied in the presumption is the requirement of a valid substitution of trustee.  If the substitution is not valid, the presumption would conclusively allow a trustee named in a forged substitution, or substitution filed by a stranger with no connection to the property, to have any action undertaken in either situation conclusively presumed to be authoritatively taken.

Here, the SOT recorded on February 18, 2009, is a substitution by a stranger.  Due to non-compliance at the time of the recordation with the required prior recorded assignment to Respondent pursuant to Section 2932.5, Respondent had no power to make said substitution.  While Section 2934a(d) statutorily makes acts taken by a trustee after execution of a substitution, but before recordation, retroactively valid upon recordation of the substitution, there is no corresponding provision pursuant to Section 2932.5 for the Assignment of DOT to Respondent.  That is, Respondent’s acts prior to recordation are not statutorily retroactive.

Consequently, the conclusive presumption of authority set forth in Section 2934a(d) based on the recordation of the SOT on February 18, 2009, before Respondent was empowered to act in any capacity in the foreclosure of the Subject Property, is invalid, a nullity, and void.  Therefore, the presumption is ineffective to conclusively establish anything.

The case at bar is substantially similar to Dimock v. Emerald Properties (2000) 81 Cal. App. 4th 868.  In Dimock, the substitution of trustee voided the foreclosure action initiated by the trustee of record prior to the recordation of the substitution.  Thus, the court found that because the initial trustee was deprived of its power to convey the property by the substitution of trustee, the trustee’s deed upon sale executed by the initial trustee was void.

Similarly, Respondent had no power to substitute a trustee prior to February 27, 2009, when by recordation it was allegedly assigned the DOT from the original beneficiary, all actions taken by any trustee (other than Investors Title – the trustee listed in the DOT) were void, including the recording of the NOD upon which the trustee’s sale was based.  Thus, the void deed in Dimock based on substituting a trustee out by recordation is equivalent to the void SOT signed and recorded by Respondent before it was empowered to do so by recordation.  Little, supra, 188 Cal. App. 3d at 1354 (“A void contract cannot be given any effect whatsoever [citation omitted].  It binds no one and is a mere nullity.  [citation omitted].”).

Respondent’s SOT, prior to its empowerment to initiate foreclosure on February 27, 2009, provided no authority to initiate foreclosure on behalf of Respondent.  Thus, Respondent did not prove compliance with Section 2924 and was not entitled to the presumption set forth in Section 2934a(d).  Alternatively, there was ample evidence at trial, as set forth above, to overcome any presumption based on the lack of legal authority to assign anything to anyone.

E.        THERE WAS NO LEGAL REQUIREMENT FOR APPELLANTS TO ESTABLISH PREJUDICE TO DEFEAT RESPONDENT’S CLAIM PURSUANT TO CODE OF CIVIL PROCEDURE SECTION 1161A

Contrary to the Court’s ruling, in an unlawful detainer action brought pursuant to CCP Section 1161a, there is no requirement that the defendant establish prejudice to defeat the plaintiff’s claim.  Instead, the plaintiff in a Section 1161a unlawful detainer action has the burden of establishing compliance with the non-judicial foreclosure statutes set forth in Section 2924, et seq.  When attacking a void sale as a defendant in an unlawful detainer action, the defendant is not required to meet any of the burdens that might be imposed when, as a matter of equity, a party is affirmatively seeking to set aside a voidable trustee’s sale.  Dimock, supra (citing Little, supra, 188 Cal. App. 3d at 1354).

Additionally, the non-judicial foreclosure statues must be strictly construed.  If the legislature had intended for prejudice to be an element in a defense, it would have included the element in Section 1161a and/or Section 2924 et seq.  Moreover, the law never places any burdens of proof on a defendant with regard to the claims against the defendant.  It is the plaintiff that must satisfy its burden of establishing each and every element of its case.  Unlawful detainer actions are no different.  Alternatively, the judgment should be set aside and remanded so that Appellants can introduce evidence of prejudice as there was no way for them to know that it was a required element until after the trial concluded and the judgment was rendered.

 

IV.

CONCLUSION

            In the instant matter there was never any evidence presented, nor do Appellants believe such evidence existed, authorizing MERS to act as the agent or attorney in fact of MortgageIt.  In light of clear statutory requirements there can be little question that absent such authority any action taken by a purported agent is void.  Here the execution of an Assignment of Deed of Trust from MERS to Respondent was a legal nullity.

Even if such assignment was legally valid, there is no logical or legal basis for holding that the NOD and SOT, which were executed and recorded prior to the Assignment of the DOT, were valid as such a holding would be inconsistent with existing decisional and statutory law.  Accordingly, the trustee’s sale was void and a legal nullity.

Lastly, the Court’s application of the presumption set forth in Section 2934a(d) and requirement that Appellants show prejudice were improper.  In light of the foregoing, the decision of the Court below should be reversed in its entirety and its orders vacated.

 

 

 

 
 

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