Commonwealth Prop. Advocates Llc v. Mortgage Elec. Registration System Inc.

• Decision Date: 10 August 2011
• Docket Number: No. 20100888–CA.,20100888–CA.
• Parties: COMMONWEALTH PROPERTY ADVOCATES, LLC, Plaintiff and Appellant,v.MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC.; CitiMortgage, Inc.; and John Does of unknown number, Defendants and Appellees.
• Court: Utah Court of Appeals

263 P.3d 397

686 Utah Adv. Rep. 11

2011 UT App 232

COMMONWEALTH PROPERTY ADVOCATES, LLC, Plaintiff and Appellant,

v.MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC.; CitiMortgage, Inc.; and John Does of unknown number, Defendants and Appellees.

No. 20100888–CA.

Court of Appeals of Utah.

July 14, 2011.Rehearing Denied Aug. 10, 2011.

E. Craig Smay, Salt Lake City, for Appellant.Anthony C. Kaye, Angela W. Adams, and Steven D. Burt, Salt Lake City, for Appellees.Before Judges DAVIS, McHUGH, and VOROS.

OPINION

DAVIS, Presiding Judge:

¶ 1 Commonwealth Property Advocates, LLC (CPA) appeals from the district court's grant of summary judgment in favor of defendants Mortgage Electronic Registration System, Inc. (MERS) and CitiMortgage, Inc. (Citi). We affirm.

BACKGROUND

¶ 2 A home buyer (Home Buyer) executed a promissory note (the Note) in favor of her lending bank (Lender) for $417,000 secured under the terms of a Deed of Trust describing property in Eagle Mountain, Utah, as collateral for the debt. The Deed of Trust identified MERS as the “nominee for Lender and Lender's successors and assigns” and as the “beneficiary under this Security Instrument.” In the original Note, Lender assigned its servicing rights to Citi, which at all relevant times remained the servicer of the Note and to which Home Buyer made payments. Home Buyer defaulted on the Note, and on approximately December 8, 2009, the Successor Trustee to the Deed of Trust recorded a Notice of Default and Election to Sell.¹ On December 6, 2009, MERS assigned its “beneficial interest” to Citi, which was recorded on January 6, 2010. On December 31, 2009, a quitclaim deed was recorded by which Home Buyer transferred her interest in the Eagle Mountain property to CPA.

¶ 3 CPA filed a complaint in February 2010 that stated four causes of action based upon its assertion that the Deed of Trust was separated from the Note shortly after being executed and therefore is and “has been unenforceable by defendant[s]” for quite some time. In support of its arguments, CPA alleged that Lender promptly sold the debt represented by the Note to the Federal National Mortgage Association (Fannie Mae) and subsequently securitized Home Buyer's debt.² CPA argues that the

sale of the loan to Fannie Mae, and any further re-sale as mortgage-backed securities, transferred the beneficial interest in the trust deed to the current owner of the debt, [i.e., the investors in the mortgage-backed securities] and that defendants, having been paid off in the sale of the loan, could not seek a second payoff by foreclosure of the Trust Deed.This principle, CPA argues, is supported by Utah Code section 57–1–35, see Utah Code Ann. § 57–1–35 (2010) (“The transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor.”). The securitization, CPA claims, separated the debt from the security, “releas[ing] the realty from enforcement of the security by” MERS and Citi. Although CPA claims this does not exonerate the debt obligation, it also argues, somewhat contrarily, that this leaves the Note entirely unsecured by the property under the terms of the Deed of Trust.³ It is for this alleged “cloud on the title” that CPA initiated the immediate lawsuit seeking estoppel, declaratory judgments, quiet title, and refunds.

¶ 4 MERS and Citi moved to dismiss CPA's complaint, stating that CPA's argument “that transferring a note secured by a trust deed as part of a securities transaction renders the note an unsecured obligation ... is without legal support and fails as a matter of law.” In its memorandum decision, the district court converted the motion to dismiss to one for summary judgment because of what it determined to be extraneous document evidence attached to both parties' pleadings. See generally Oakwood Vill. LLC v. Albertsons, Inc., 2004 UT 101, ¶ 12, 104 P.3d 1226 (“[A] motion to dismiss ‘shall be converted into one for summary judgment if matters outside the pleadings are presented to and not excluded by the court.’ ” (quoting Utah R. Civ. P. 12(b))). The district court subsequently granted summary judgment in favor of MERS and Citi. In rendering its decision, the district court ruled that “[t]he premise underlying each of [CPA's] causes of action is an assertion that Defendants lost the right to initiate foreclosure proceedings on the property when the Note was ‘securitized.’ ” The district court then characterized this underlying principle as a “mere conclusory allegation[ ],” see Chapman ex rel. Chapman v. Primary Children's Hosp., 784 P.2d 1181, 1186 (Utah 1989), and found that “the express terms of the Trust Deed unassailably provide that MERS has the right to foreclose upon the Property, even if [Lender] sold the Note.” CPA moved to reconsider on the ground that the conversion of the motion to dismiss into a motion for summary judgment was improper. The district court denied CPA's motion to reconsider. CPA now appeals from the final summary judgment order, arguing again that the district court's conversion of the motion to dismiss into a motion for summary judgment was improper. CPA requests that we reverse and remand with instructions for the district court to deny MERS and Citi's motion to dismiss based on its assertion that its “underlying principle”-that securitization stripped MERS and Citi of the right to initiate foreclosure proceedings on the Eagle Mountain property-is a factual statement. See generally Berneau v. Martino, 2009 UT 87, ¶ 3, 223 P.3d 1128 (explaining that when ruling on a motion to dismiss, the district court must assume the factual statements contained in the complaint are true).

ISSUES AND STANDARDS OF REVIEW

¶ 5 Although often overlapping, CPA basically presents two issues on appeal. First, CPA argues that under the terms of the Deed of Trust, the securitization of the Note stripped the assignee of its ability to foreclose on behalf of successor beneficiaries and that Utah Code section 57–1–35 supports this contention. This presents a legal question, which we review for correctness. See State v. Pena, 869 P.2d 932, 935–36 (Utah 1994) (“Legal determinations ... are defined as those which are not of fact but are essentially of rules or principles uniformly applied to persons of similar qualities and status in similar circumstances.”).

¶ 6 Second, CPA argues that the district court erred when it converted the motion to dismiss into one for summary judgment and that it would have been inappropriate to grant the motion to dismiss. A district court's ruling on either a motion to dismiss or a motion for summary judgment is a legal question which we review for correctness, see U.S.A. United Staffing Alliance, LLC v. Workers' Comp. Fund, 2009 UT App 160, ¶ 7, 213 P.3d 20; see also Jacobsen Constr. Co. v. Teton Builders, 2005 UT 4, ¶ 10, 106 P.3d 719 (observing that the district court's denial of a motion to dismiss is a legal question to be reviewed under a correctness standard). “In order to justify reversal[,] the appellant must show error that was substantial and prejudicial in the sense there is at least a reasonable likelihood that in the absence of the error the result would have been different.” Ortega v. Thomas, 14 Utah 2d 296, 383 P.2d 406, 408 (1963); see also Utah R. Civ. P. 61 (providing that a harmless error is one that “does not affect the substantial rights of the parties” and must be disregarded).

ANALYSIS

I. Effect of Securitization

¶ 7 CPA's complaint raises three substantive causes of action.⁴ First, CPA seeks an “Estoppel/Declaratory Judgment,” alleging that MERS and Citi failed to respond to information requests regarding the interests of their “assignees.” Without this information, CPA argues, Home Buyer and CPA, as Home Buyer's successor in title, are at risk of multiple claims on the Note that render proper discharge of the obligation impossible. CPA argues that this refusal to supply information estopped MERS and Citi from foreclosing on the Deed of Trust and that a declaratory judgment should be entered declaring “that defendants ... lack any interest under the Trust Deed.”

¶ 8 In its second cause of action, CPA again seeks a declaratory judgment that MERS and Citi lack any interest under the terms of the Deed of Trust. In support of this contention, CPA argues that MERS, Citi, and any investors who invested in Home Buyer's securitized debt, failed to obtain assignment of the Deed of Trust. Because of this, and in light of CPA's claimed acquisition of the property as a “bona fide purchaser” for value without notice of the other parties' claim under the Deed of Trust, CPA contends that MERS, Citi, and the securities investors cannot assert any rights under the Deed of Trust. As mentioned in the first cause of action, CPA attributes its lack of notice to MERS's and Citi's failure to respond to its information requests.

¶ 9 Third, CPA seeks a decree quieting title in its favor, “leaving any obligation under the Note unsecured by any interest in the subject property.” As stated in the first two causes of action, CPA claims that because MERS and Citi failed to retain an interest under the Note, and because of the fragmentation of the debt via securitization, CPA no longer knows who the obligee of the debt is and therefore cannot safely discharge the obligation under the Note.

¶ 10 We agree with the district court that CPA's “underlying principle” that securitization of the Note nullified MERS's and Citi's rights under the terms of the Deed of Trust is a “mere conclusory allegation[ ],” see Chapman ex rel. Chapman v. Primary Children's Hosp., 784 P.2d 1181, 1186 (Utah 1989), an “inference suggested but not established,” and an “assumption.” This conclusion is not affected by whether CPA was prepared for the motion to be treated as one for summary judgment; rather, our conclusion is consistent with the rights carved out for MERS by the terms of the Deed of Trust incorporated into the complaint, which, as the...