Culhane v. Aurora Loan Servs. of Neb.

• Decision Date: 15 February 2013
• Docket Number: No. 12–1285.,12–1285.
• Citation: 708 F.3d 282
• Parties: Oratai CULHANE, Plaintiff, Appellant, v. AURORA LOAN SERVICES OF NEBRASKA, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

708 F.3d 282

Oratai CULHANE, Plaintiff, Appellant,

v.AURORA LOAN SERVICES OF NEBRASKA, Defendant, Appellee.

No. 12–1285.

United States Court of Appeals,First Circuit.

Feb. 15, 2013.

George E. Babcock, with whom Rockwell P. Ludden and Ludden Kramer Law P.C. were on brief, for appellant.

Reneau J. Longoria, with whom John A. Doonan, Erin P. Severini and Doonan, Graves & Longoria, LLC were on brief, for appellee.

Before LYNCH, Chief Judge, SOUTER,^* Associate Justice, and SELYA, Circuit Judge.

SELYA, Circuit Judge.

As the millennium dawned, American financial markets soared to new heights. One of the vehicles that propelled this dizzying flight involved the bundling and securitization of residential mortgage loans.¹ But all good things come to an end, cf. Geoffrey Chaucer, Troilus and Criseyde (circa 1374) (“There is an end to everything, to good things as well.”), and it was not long before the economy faltered and the housing bubble burst. A rash of residential mortgage foreclosures followed.

Novel practices had been devised to facilitate the bundling and securitization of residential mortgage loans-and those practices gave rise to hitherto unanswered questions in the foreclosure context. The fact pattern here is emblematic: the mortgagor's note was delivered to one party (the lender) and then transferred; the mortgage itself was granted to a different entity, Mortgage Electronic Registration Systems, Inc.,² and later assigned to the foreclosing entity. We are asked, as a matter of first impression for this court, to pass upon not only the legality and effect of this arrangement but also the mortgagor's right to challenge it. The substantive law of Massachusetts controls our inquiry.

After careful consideration, we conclude that, in the circumstances of this case, the mortgagor has standing to contest the validity of the mortgage assignment made by MERS to the foreclosing entity. We also conclude, however, that the MERS framework is faithful to the age-old tenets of mortgage law in Massachusetts and that, therefore, the foreclosure here was not unlawful.

I. BACKGROUND

The relevant facts are essentially undisputed. In April of 2006, plaintiff-appellant Oratai Culhane refinanced the mortgage on her single-family home in Milton, Massachusetts. To accomplish this refinancing, she delivered a promissory note in the face amount of $548,000 to the lender, Preferred Financial Group, Inc., doing business as Preferred Mortgage Services (Preferred). She simultaneously executed a separate mortgage indenture in favor of MERS as “nominee for [Preferred] and [Preferred]'s successors and assigns.” This mortgage, which secured the promissory note, was recorded on April 11, 2006 in the Norfolk County Registry of Deeds.

Under the terms of the mortgage, MERS, as mortgagee of record, held legal title to the mortgaged premises. As such, it enjoyed a power of sale “solely as nominee” for the lender.

At this juncture, we think it helpful to provide some background about the mysterious entity known as MERS. We introduce this subject with a riddle: What entity is not a bank but claims to hold title to approximately half of all the mortgaged homes in the country? The answer is MERS. See Michael Powell & Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, N.Y. Times, Mar. 6, 2011, at BU1.

MERS was formed by a consortium of residential mortgage lenders and investors desiring to streamline the process of transferring ownership of mortgage loans in order to facilitate securitization. See Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L.Rev. 1359, 1368–69 (2010). Various entities involved in the residential mortgage lending business can become “members” of MERS. As such, they pay an annual fee and agree to the rules of membership. Lender members may name MERS as mortgagee in mortgages that they originate, service, or own.

MERS's mortgagee status is narrowly circumscribed: it acts solely as “nominee” for the owner or servicer of the mortgage, including the owner's or servicer's successors and assigns. There is one condition: the party for whom MERS serves as nominee must be a member of MERS. The upshot of this arrangement is that MERS holds the legal title to the mortgage as mortgagee of record, but it does not have any beneficial interest in the loan.

MERS maintains an electronic database cataloguing the mortgages that it holds. This database tracks the identities of the noteholders and servicers of the underlying loans. When a note is sold by one MERS member to another, the sale is memorialized in the MERS database, and MERS remains the mortgagee of record.

If a note within the MERS system is sold to a nonmember, MERS assigns the mortgage to the new noteholder or its designee. MERS's involvement ends at that point. To expedite the execution of assignments, MERS designates “certifying officers.” These “certifying officers” are typically employees of member firms. MERS authorizes these persons, through formal corporate resolutions, to execute assignments on its behalf. This system reduces paperwork and avoids fees that otherwise would be required to record assignments of mortgages at local recording offices. Similarly, it facilitates the bundling and securitization of loans.

This case offers a paradigmatic example of how the MERS framework operates. After making the loan, Preferred (a MERS member) subsequently transferred the plaintiff's note to fellow MERS member Deutsche Bank Trust Company Americas (Deutsche), as trustee for Residential Accredit Loans Inc., Mortgage Asset–Backed Pass–Through Certificates, Series 2006–QO5 (RALI 2006 Trust).³ Although the endorsement was undated, the cut-off date for mortgage loans to be transferred into the RALI 2006 Trust was May 1, 2006, so the endorsement necessarily took place on or before that date (the validity of this transfer was unsuccessfully challenged below, but the plaintiff does not contest it in her appellate briefs).

At the times relevant hereto, defendant-appellee Aurora Loan Services of Nebraska (Aurora), acting for Deutsche, had the responsibility of servicing the loans held in the RALI 2006 Trust. In an assignment dated April 7, 2009, MERS transferred the mortgage to Aurora. This assignment, recordedon April 24, 2009, was executed by Joann Rein, who is both an employee of Aurora and a “certifying officer” for MERS.

When the plaintiff fell behind in her note payments, Aurora—now both servicer of the note and mortgagee of record—initiated foreclosure proceedings. It first filed a complaint in the Land Court seeking a declaration that the plaintiff was not entitled to the protections of the Servicemembers Civil Relief Act (SCRA), 50 U.S.C. app. § 533. The Land Court ruled that the SCRA presented no obstacle to Aurora's enforcement of its power of sale. SeeMass. Gen. Laws ch. 183, § 21; id. ch. 244, § 14.

Next, Aurora published a notice of intent to foreclose the mortgage and sent copies of this notice to all the required parties. See id. ch. 244, § 14. The foreclosure, originally set for October 22, 2009, was postponed from time to time due to the plaintiff's requests for loan modifications under the Home Affordable Modification Program, 12 U.S.C. § 5219a, and a series of abortive bankruptcy proceedings. When these hurdles were cleared, the foreclosure was set for June 20, 2011.

Three days before the rescheduled foreclosure, the plaintiff repaired to the state superior court seeking both injunctive relief and monetary damages. Citing diversity of citizenship and the existence of a controversy in the requisite amount, Aurora removed the case to the federal district court. See28 U.S.C. §§ 1332(a), 1441. It then moved for summary judgment. After some preliminary skirmishing, the inquiry narrowed to the question of how, if at all, MERS's involvement in the chain of title impacted Aurora's authority to foreclose. The district court resolved this question in favor of Aurora. Culhane v. Aurora Loan Servs., 826 F.Supp.2d 352, 378–79 (D.Mass.2011).

On December 8, 2011—ten days after the district court entered summary judgment—Aurora foreclosed the mortgage on the plaintiff's property by entry and sale, purchasing the property for $490,000.

II. ANALYSIS

In Massachusetts, when a mortgage includes a power of sale—as this mortgage does—the mortgagee “may foreclose without obtaining prior judicial authorization ‘upon any default in the performance or observance’ of the mortgage, including, of course, nonpayment of the underlying mortgage note.” Eaton v. Fed. Nat'l Mortg. Ass'n, 462 Mass. 569, 969 N.E.2d 1118, 1127 (2012) (footnote and internal citation omitted) (quoting Mass. Gen. Laws ch. 183, § 21). The Massachusetts Supreme Judicial Court (SJC) recently interpreted the statutes governing foreclosure by sale as requiring a foreclosing mortgagee both to control the note (either as the noteholder or as its agent) and to hold the mortgage. Id. at 1129 & n. 20, 1131. The SJC expressly stated that this binary requirement constituted a new statutory interpretation and, therefore, was to be given only prospective effect. See id. at 1132–33;accord McKenna v. Wells Fargo Bank, 693 F.3d 207, 215 (1st Cir.2012).

In the case at hand, the plaintiff does not contest that, at the time of the foreclosure, Deutsche held her note and that Aurora was properly denominated as the Deutsche loan servicer. At that time, the mortgage stood in Aurora's name—but the plaintiff does not concede the validity of the assignment from MERS to Aurora. Our inquiry, therefore, focuses on the validity of that assignment.⁴

There is, however, a threshold issue. Because Aurora insists that the plaintiff lacks standing to challenge the validity of the assignment to Aurora, we start with this issue.

A. Standing.

Whether a mortgagor has standing to challenge the assignment of her mortgage—an assignment to which she is not a party and of which sh...