State ex rel. U.S. Bank Nat'l Ass'n v. McGraw

Decision Date05 February 2015
Docket NumberNo. 14–0776.,14–0776.
Citation234 W.Va. 687,769 S.E.2d 476
PartiesSTATE of West Virginia ex rel. U.S. BANK NATIONAL ASSOCIATION, et al., Petitioners v. The Honorable Warren R. McGRAW, Judge of the Circuit Court of Wyoming County, West Virginia; and Wyoming County, West Virginia, Respondents.
CourtWest Virginia Supreme Court

Michael W. Carey, Esq., David R. Pogue, Esq., Carey, Scott, Douglas & Kessler, PLLC, Joseph T. Cramer, Esq., Shuman, McCuskey & Slicer, PLLC, Thomas M. Hefferon, Esq., Goodwin Procter, LLP, Washington, D.C., Jared M. Tully, Esq., Frost Brown Todd, LLC, Charleston, West Virginia, Thomas V. Flaherty, Esq., Flaherty, Sensabaugh & Bonasso, PLLC, Charleston, WV, for Petitioners.

Harry F. Bell, Jr., Esq., Jonathan W. Price, Esq., The Bell Law Firm, PLLC, Charleston, WV, Charles Clinton Hunter, Esq., Reich and Binstock, LLP, Houston, TX, for Respondent Wyoming County, West Virginia.

Opinion

KETCHUM, Justice:

This original proceeding in prohibition concerns whether the assignment of a trust deed, securing the payment of a promissory note for the purchase of residential real estate, must be recorded in the office of the clerk of the county commission.

A putative class action was filed in the Circuit Court of Wyoming County against the petitioners, U.S. Bank National Association, et al. (trustees), by the respondents, Wyoming County and all other similarly situated West Virginia counties (Wyoming County). Wyoming County alleged that the recording of trust deed assignments in county record books is required by State law.

Rather than recording trust deed assignments in county record books, the trustees have been registering the assignments, also described as a transfer of rights under the trust deeds, with a private corporation known as Mortgage Electronic Registration Systems, Inc. (“MERS”).1 Contending that trust deed assignments need not be recorded in county record books under West Virginia law, the trustees moved to dismiss the complaint.

On July 22, 2014, the circuit court entered an order denying the trustees' motion to dismiss. The circuit court ruled that trust deed assignments are required to be publically recorded and that Wyoming County is entitled to show that the trustees have been unjustly enriched by using MERS, rather than recording the assignments in the county record books and paying the recording fees.

The trustees ask this Court to prohibit the enforcement of the July 22, 2014, order and dismiss Wyoming County's putative class action.2

Upon review, this Court concludes that West Virginia law does not require that the assignment of a trust deed, securing the payment of a promissory note for the purchase of residential real estate, must be recorded in the office of the clerk of the county commission. The circuit court exceeded its jurisdiction in allowing the Wyoming County action to go forward, and the trustees are, therefore, entitled to relief in prohibition.

I.Pooling, Securitization and Registration with MERS

This proceeding arises in the context of a major exception in the housing finance industry to the traditional situation where a trust deed, securing the payment of a promissory note, was rarely assigned. The trustees herein were involved in the business practice of loan pooling and securitization. Briefly stated, pooling and securitization constitute a process of “distributing risk by aggregating debt instruments in a pool, then issuing new securities backed by the pool.” Dictionary of Business and Economics Terms 639 “securitization” (5th ed.2012).

The structure of loan pooling and securitization is complex and need not be set forth in detail for purposes of this opinion.3 A summary of the practice, pertaining to the parties in this action, can be discerned from the allegations in the complaint. A pool of mortgage loans, originating from a lender, is sold to a special-purpose entity known as the depositor. The depositor serves as a conduit to separate the pooled mortgage loans from the lender's other assets and liabilities. The depositor then sells or transfers all rights to the mortgage loans to a trust which issues certificates to investors. The trustees in this action are fiduciaries of such trusts. Through the loan pooling and securitization process, investors holding trust certificates can expect an isolated cash flow from their mortgage-backed securities, free from competing claims.

It is undisputed that the trust deeds in this action have been recorded in the record books of the respective West Virginia counties. However, loan pooling and securitization is all about the transfer of the promissory notes, and the assignment or transfer of rights under the trust deeds, from the lenders and depositors to the various trusts. Here, none of the assignments or transfers of rights under the trust deeds have been recorded in the respective offices of the clerk of the county commission. Consequently, no recording fees pertaining to assignments or transfers have been paid.

Instead, Mortgage Electronic Registration Systems, Inc., or “MERS,” a private corporation, was created by the mortgage industry to eliminate the need for publically recorded assignments and the expense associated therewith. MERS maintains a computer database designed to track the ownership rights to mortgage loans throughout the United States. Moreover, at the loan's origination, MERS is designated by the lender and the borrower in the trust deed as the nominee for the lender and the lender's successors and assigns, as well as the trust deed beneficiary. The trust deed, but not the assignments or transfers thereof, is recorded in the office of the clerk of the county commission.4

Thus, the role of MERS in loan pooling and securitization is twofold: (1) It serves as a registry for the transfer of ownership rights under the trust deeds and mortgages, and (2) it serves as the purported mortgagee under the trust deeds and mortgages, which, the trustees contend, makes the recording of trust deed assignments or transfers in county record books unnecessary.5

II.Wyoming County's Class Action

On March 27, 2012, a putative class action was filed in the Circuit Court of Wyoming County by Wyoming County, “on behalf of itself and all other similarly situated West Virginia Counties.” The defendants named in the complaint were trustees U.S. Bank National Association; Bank of New York Mellon; Bank of America, National Association; Deutsche Bank; J.P. Morgan Chase & Co.; and John Does 1–20 (various corporations, banking associations, partnerships, limited liability companies or other entities).

The complaint alleged that, although the trusts ostensibly received all rights to the mortgage loans, the promissory notes they hold constitute unsecured debts. That is because county records only show the trust deeds in the name of the original lenders, without any assignments of the trust deeds to others. According to the complaint, in the absence of valid assignments, title to the trust deeds, priority, and the right to foreclose remain with the original lenders. The complaint alleged that, to enjoy the benefits of loan pooling and securitization, the trustees must record the assignments of the trust deeds from the original lenders to the pooled-loan depositors, and from the depositors to the trusts, with payment of the accompanying recording fees.6

The relief demanded in the complaint was, inter alia, an injunction requiring the trustees to record all prior trust deed assignments from the original lenders to the depositors and from the depositors to the trusts, and pay the recording fees, “in order to clear title to properties in the Counties.”

In February 2014, the trustees filed a motion to dismiss the action for failure to state a claim upon which relief can be granted. See W.Va. R. Civ. P. 12(b)(6). The circuit court denied the motion in a brief order entered on July 22, 2014. The circuit court held that the counties have a duty to maintain accurate records regarding interests in real property. Therefore, in this action, the counties should be afforded an opportunity to show that, although the trustees are required to record, or cause to be recorded, trust deed assignments, the trustees have been circumventing that requirement by solely using the MERS registry, thereby unjustly enriching the trustees and harming the counties through lost revenue.

The trustees challenge that ruling in this original proceeding in prohibition.

III.Standard for Relief in Prohibition

This Court has original jurisdiction in prohibition proceedings pursuant to art. VIII, § 3, of the Constitution of West Virginia. In considering whether to grant relief in prohibition, this Court stated in the syllabus point of State ex rel. Vineyard v. O'Brien, 100 W.Va. 163, 130 S.E. 111 (1925) : “The writ of prohibition will issue only in clear cases where the inferior tribunal is proceeding without, or in excess of, jurisdiction.” Accord syl. pt. 1, State ex rel. Progressive Classic Ins. Co. v. Bedell, 224 W.Va. 453, 686 S.E.2d 593 (2009).

In the current matter, in which the trustees contend that the circuit court is exceeding its jurisdiction in allowing the action to go forward, the relevant guidelines are found in State ex rel. Hoover v. Berger, 199 W.Va. 12, 483 S.E.2d 12 (1996). Syllabus point 4 of Hoover holds:

In determining whether to entertain and issue the writ of prohibition for cases not involving an absence of jurisdiction but only where it is claimed that the lower tribunal exceeded its legitimate powers, this Court will examine five factors: (1) whether the party seeking the writ has no other adequate means, such as direct appeal, to obtain the desired relief; (2) whether the petitioner will be damaged or prejudiced in a way that is not correctable on appeal; (3) whether the lower tribunal's order is clearly erroneous as a matter of law; (4) whether the lower tribunal's order is an oft repeated error or manifests persistent disregard
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