Bucci v. Lehman Bros. Bank, FSB

• Decision Date: 12 April 2013
• Docket Number: No. 2010–146–Appeal.,2010–146–Appeal.
• Citation: 68 A.3d 1069
• Parties: Anthony BUCCI et al. v. LEHMAN BROTHERS BANK, FSB et al.
• Court: Rhode Island Supreme Court

68 A.3d 1069

Anthony BUCCI et al.

v.LEHMAN BROTHERS BANK, FSB et al.

No. 2010–146–Appeal.

Supreme Court of Rhode Island.

April 12, 2013.

Keven A. McKenna, Esq., Providence, Corey J. Allard, Esq., for Plaintiffs.

Charles C. Martorana, Esq., for Defendants.

Present: SUTTELL, C.J., GOLDBERG, FLAHERTY, ROBINSON, and INDEGLIA, JJ.

OPINION

Justice FLAHERTY, for the Court.

In this case, we are asked to determine whether a nominee of a mortgage lender, who holds only legal title to the mortgage, but who is not the holder of the accompanying promissory note, may exercise the statutory power of sale and foreclose on the mortgage. On May 15, 2007, Anthony Bucci borrowed $249,900 from Lehman Brothers Bank, FSB (Lehman Brothers) to finance the purchase of a home, and he signed an adjustable rate note (note) that evidenced the debt. On that same date, he and his wife, Stephanie Bucci (collectively, the Buccis or plaintiffs) executed a mortgage on the property that secured the loan.¹ Like many loans in the modern era of lending, even though the note was made payable to the lender—in this case Lehman Brothers—the mortgage was granted to Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for the lender and the lender's successors and assigns. In October 2008, the plaintiffs ceased making loan payments, thereby defaulting on the note. Sometime thereafter, MERS initiated foreclosure proceedings. A foreclosure sale was scheduled, but the day before it was to take place, the plaintiffs commenced an action seeking a declaratory judgment and injunctive relief, in which they sought to prevent MERS from exercising the power of sale contained in the mortgage. The trial justice denied the plaintiffs' request, and judgment was entered on behalf of the defendants on September 21, 2009. The plaintiffs timely appealed to this Court. For the reasons set forth in this opinion, we affirm the judgment of the Superior Court.

IFacts and Travel

AMERS

To begin, we believe that it is important to an understanding of this case to set forth a description of MERS and the role that it plays in the mortgage industry. In 1993, several major participants in the lending community collaborated to form a national electronic registration system that would track the transfer of ownership interests in residential loans (the MERS® System). MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 828 N.Y.S.2d 266, 861 N.E.2d 81, 83 (2006). The MERS® System was developed to allow for more efficient transfers of those interests in the primary and secondary mortgage markets. Jackson v. Mortgage Electronic Registration Systems, Inc., 770 N.W.2d 487, 490 (Minn.2009).

The primary mortgage market consists mainly of home loans that are made to consumers. Jackson, 770 N.W.2d at 490. However, the loans are often “bundled” and sold to institutional investors on the secondary mortgage market. Id. In turn, the institutional investors often repackage and resell the loans or securitize them and sell shares of the resulting securities. Id. According to MERS, prior to the creation of its registration system, the constant buying and selling of mortgage-backed loans became costly and time-consuming, because each transfer required that an assignment of the mortgage be recorded in the local land evidence records. It also became difficult to determine what entity owned the beneficial interests in these loans at any given time, because those interests were bought and sold with such frequency, often leading to recording errors. Mortgage Electronic Registration Systems, Inc. v. Bellistri, 2010 WL 2720802, at *7 (E.D.Mo. July 1, 2010). The MERS® System was developed to bring efficiency and order to this increasingly complex industry. Jackson, 770 N.W.2d at 490.

In order to take advantage of the MERS® System, lenders and other entities must become members of MERSCORP, Inc. (MERSCORP), the corporation that owns the system. MERSCORP is also the parent company of defendant MERS. Bellistri, 2010 WL 2720802, at *6. In a typical MERS transaction, when a loan is made by a member of MERSCORP, the member will be designated as the lender in the promissory note, and MERS will be named in the mortgage as the mortgagee, acting as nominee for the lender and the lender's successors or assigns. Jackson, 770 N.W.2d at 490. Whenever a note is sold, assigned, or otherwise transferred to another MERSCORP member, MERS remains as the mortgagee of record. As a result, there is no need to record an assignment of the mortgage in the land evidence records. Id. It is only when a loan is transferred to a nonmember that an assignment of the mortgage must be executed and recorded. Id. at 491. Consequently, loans can be transferred more quickly and economically, and each transfer can be tracked on the MERS® System. ²Id. The typical MERS loan, as just described, was exactly the type of transaction that occurred between plaintiffs and defendants in the matter that confronts this Court.

BThe Note and Mortgage

In this case, the note included a promise by Mr. Bucci to pay “to the order of [Lehman Brothers],” and it further provided that “[Lehman Brothers] may transfer this Note.” The mortgage document defined “Borrower” as plaintiffs Anthony and Stephanie Bucci and further provided that the “Borrower is the mortgagor under this Security Instrument.” The mortgage document also provided that “MERS is a separate corporation that is acting solely as a nominee for Lender”—which the mortgage document defined as Lehman Brothers—“and Lender's successors and assigns.” It went on to say in clear and unequivocal language that “MERS is the mortgagee under this Security Instrument.”

The operative language of the mortgage document read as follows:

“ * * * Borrower does hereby mortgage, grant and convey to MERS, (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS, with Mortgage Covenants upon the Statutory Condition and with the Statutory Power of Sale, the [mortgaged] property * * *.”

“ * * *

“Borrower 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.”

The mortgage document further provided that

“[t]he Note or a partial interest in the Note (together with this Security Instrument) can be sold one or more times without prior notice to Borrower [.] A sale might result in a change in the entity (known as the ‘Loan Servicer’) that collects Periodic Payments due under the Note and this Security Instrument and performs other mortgage loan servicing obligations under the Note, this Security Agreement, and Applicable Law[.] There also might be one or more changes of the Loan Servicer unrelated to a sale of the Note[.]”

Additionally, the mortgage document stated that

“Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement in this Security Instrument * * *. If the default is not cured on or before the date specified in the notice, Lender at its option may * * * invoke the STATUTORY POWER OF SALE and any other remedies permitted by Applicable Law.”

The mortgage document also required that, “[i]f Lender invokes the STATUTORY POWER OF SALE, Lender shall mail a copy of a notice of sale to Borrower.”

CTravel

After Mr. Bucci defaulted on the note, defendant Aurora Loan Services, LLC (Aurora), the loan servicer at the time, sent Mr. Bucci a letter notifying him that the loan was in default, that he had the right to cure the default, and that “Aurora * * * may start legal action to foreclose on the Mortgage.” ³ When the note was not brought current, MERS, as the mortgage holder and named mortgagee under the mortgage and as nominee for the beneficial owner of the note, initiated foreclosure proceedings by sending out notices of foreclosure. A foreclosure sale was scheduled for July 10, 2009.

One day before the scheduled foreclosure, plaintiffs filed a verified complaint in the Superior Court, seeking declaratory and injunctive relief. Specifically, plaintiffs launched a fusillade of claims, asking the court to declare that: (1) Lehman Brothers was the lender relative to this matter; (2) MERS was not a lender relative to this matter; (3) pursuant to the loan documents, only the lender could invoke the statutory power of sale contained in the mortgage; (4) the pending foreclosure violated the terms and conditions of the loan documents and Rhode Island statutory law; (5) the pending foreclosure be ordered cancelled; (6) plaintiffs could not legally designate MERS as nominee of the lender; (7) there was no proof of agency between MERS and Lehman Brothers; and (8) Aurora, as a servicer, was not allowed by statute to foreclose on a mortgage that it did not own. The plaintiffs also sought injunctive relief to preclude defendants from exercising the statutory power of sale contained in the mortgage.

The plaintiffs argued that the language of the mortgage did not authorize MERS to foreclose. Specifically, they pointed to a provision that said “Lender * * * may invoke the STATUTORY POWER OF SALE,” and they asserted that this language precluded MERS from foreclosing because the mortgage defined Lehman Brothers as the lender, not MERS. Furthermore, they asserted that Lehman Brothers never designated MERS as its nominee because, although the mortgage named MERS as nominee, Lehman Brothers never signed the mortgage.

Additionally, plaintiffs argued that MERS was prohibited from foreclosing by G.L.1956 §§ 34–11–21 and 34–11–22.⁴ Specifically, they contended that § 34–11–22 permitted only a mortgagee to exercise...