CPT Asset Backed Certificates v. Cin Kham

• Decision Date: 07 May 2012
• Docket Number: No. 108,384.,108,384.
• Citation: 2012 OK 22,77 UCC Rep.Serv.2d 88,278 P.3d 586
• Parties: CPT ASSET BACKED CERTIFICATES, SERIES 2004–EC1, Plaintiff/Appellee, v. CIN KHAM and Ngul Liam Cing, Defendants/Appellants.
• Court: Oklahoma Supreme Court

278 P.3d 586

77 UCC Rep.Serv.2d 88

2012 OK 22

CPT ASSET BACKED CERTIFICATES, SERIES 2004–EC1, Plaintiff/Appellee,

v.CIN KHAM and Ngul Liam Cing, Defendants/Appellants.

No. 108,384.

Supreme Court of Oklahoma.

March 6, 2012.

Rehearing Denied May 7, 2012.

ON APPEAL FROM THE DISTRICT COURT OF TULSA COUNTY; HONORABLE DAMAN H. CANTRELL, DISTRICT JUDGE

¶ 0 Appeal from an order denying Petition and Motion to Vacate Default Journal Entry of Judgment granted in favor of CPT Asset Backed Certificates, Series 2004–EC1, by the Bank of New York Mellon, a New York Banking Corporation, as Trustee under the Pooling and Servicing Agreement dated as of November 1, 2004, against Cin Kham and Ngul Liam Cing.

REVERSED AND REMANDED FOR FURTHER PROCEEDINGS

Phillip Aaron Taylor, Taylor & Associates, Broken Arrow, Oklahoma, for Appellants.

Steven A. Heath, Baer, Timberlake, Coulson & Cates, Tulsa, Oklahoma, for Appellee.

COMBS, J.

FACTUAL AND PROCEDURAL HISTORY

¶ 1 On August 27, 2004, the appellants, Cin Kham and Ngul Liam Cing (Appellants), executed an adjustable rate note in favor of Encore Credit Corporation, a California Corporation (Encore). Contemporaneously, the Appellants executed a mortgage to secure the note. The mortgage names Mortgage Electronic Registration Systems, Inc. (MERS), as the mortgagee and further states “MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns.” Encore is identified as the Lender in this mortgage.

¶ 2 On or about November 1, 2008, Appellants defaulted on the note. Appellee, CPT Asset Backed Certificates, Series 2004–EC1, by the Bank of New York Mellon, a New York Banking Corporation, as Trustee under the Pooling and Servicing Agreement dated as of November 1, 2004 (Appellee), filed a foreclosure petition on May 11, 2009. Appellants failed to answer the petition and a default judgment was entered against them on July 31, 2009. A hearing to confirm the sale was set for March 9, 2010. On March 9, 2010, Appellants filed a Petition and Motion to Vacate challenging Appellee's standing to foreclose on the subject property.¹ On May 5, 2010, the trial court denied Appellants' petition to vacate judgment but granted leave to file a writ of prohibition.² Appellants filed an application to assume original jurisdiction and petition for writ of prohibition in this Court on June 3, 2010. This proceeding was recast as an appeal on October 26, 2010. A petition in error was filed on November 11, 2010, and a second amended petition in error was filed on December 22, 2010.

STANDARD OF REVIEW

¶ 3 The standard of review for a trial court's ruling either vacating or refusing to vacate a judgment is abuse of discretion. Ferguson Enterprises, Inc. v. Webb Enterprises, Inc., 2000 OK 78, ¶ 5, 13 P.3d 480, 482;Hassell v. Texaco, Inc., 1962 OK 136, 372 P.2d 233. A clear abuse-of-discretion standard includes appellate review of both fact and law issues. Christian v. Gray, 2003 OK 10, ¶ 43, 65 P.3d 591, 608. An abuse of discretion occurs when a court bases its decision on an erroneous conclusion of law, or where there is no rational basis in evidence for the ruling. Fent v. Oklahoma Natural Gas Co., 2001 OK 35, ¶ 12, 27 P.3d 477, 481.

MERS BACKGROUND

¶ 4 Mortgage Electronic Registration Systems, Inc., is “a private corporation that administers the MERS system, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans.” Mortgage Electronic Registration Systems, Inc. v. Nebraska Dept. of Banking & Fin., 270 Neb. 529, 704 N.W.2d 784, 785 (2005). “In 1993, the MERS system was created by several large participants in the real estate mortgage industry.” Matter of MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 828 N.Y.S.2d 266, 861 N.E.2d 81, 83 (2006). “Although at first MERS was only able to attract the participation of Fannie Mae and Freddie Mac, private label subprime mortgage securitizers began using MERS in 1999.” (emphasis original) ³ Today, “[o]ver half the nation's mortgage loans are now recorded under MERS name.” ⁴ “... MERS is legally involved in the origination of approximately 60% of all mortgage loans in the United States.” ⁵ MERS's “mission is to register every mortgage loan in the United States on the MERS System.” ⁶

¶ 5 Any explanation or description of the MERS system must begin with an understanding of traditional mortgage lending and the American real property recording systems. “Public land title records have been a fundamental feature of American law since the founding of the Republic.” ⁷ They have been adopted in all fifty states and an analogous recording system has been adopted for personal property interests under Article 9 of the Uniform Commercial Code (UCC). “The early colonial objective of these laws was, as it is today, to prevent disputes over property rights and to facilitate the use of land as collateral by creating a transparent public record that provides certainty in private bargains.” ⁸

¶ 6 In traditional mortgage lending, mortgages were recorded in the public land records so that mortgagees would not “risk losing the ability to enforce their contract as against a subsequent purchaser for value.” ⁹ Any transfer of the Lender's rights was accomplished through the process of assignment and recorded in the public record.

¶ 7 The legal foundation of traditional mortgage lending is the longstanding rule that the mortgage follows the note. “Courts are virtually unanimous in holding that where a mortgage lender with a promissory note negotiates that note to a holder, the holder of the promissory note also obtains any mortgage securing that note.” ¹⁰ Over one hundred years ago, the United States Supreme Court held: “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.” Carpenter v. Longan, 16 Wall. 271, 83 U.S. 271, 274, 21 L.Ed. 313 (1872).

¶ 8 Oklahoma law is in accord. “In Oklahoma, ownership of the note is controlling, and assignment of the note carries with it assignment of the mortgage. ... An assignment of the mortgage to one other than the holder of the note is of no effect.” BAC Home Loans Serv'g, L.P. v. White, 2011 OK CIV APP 35, ¶ 10, 256 P.3d 1014, 1017, citing Gill v. First Nat. Bank & Trust Co. of Oklahoma City, 1945 OK 181, 159 P.2d 717, 719. “A mortgage securing the payment of a negotiable note is merely an incident and accessory to the note, and partakes of its negotiability. The indorsement and delivery of the note carries with it the mortgage without any formal assignment thereof.” Chase v. Commerce Trust Co., 1923 OK 676, 224 P. 148(syl. n. 1 by the Court).

¶ 9 Time-honored conservative mortgage lending practices changed beginning in the early 1990's as loans, many of them subprime, were sold and resold, often multiple times, on the secondary market. The loans were transferred among banking institutions to be pooled into trusts. Mortgage-backed securities were then sold to investors, a process known as “securitization.”

¶ 10 MERS was “[e]stablished to facilitate the residential loan securitization markets, ...” ¹¹ “MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper.” ¹² “MERS essentially privatized part of the mortgage recording system,” namely the portion that records mortgage assignments. Jackson v. MERS, Inc., 770 N.W.2d 487, 490 (Minn.2009).

¶ 11 Under the MERS system, MERS is named the “mortgagee” in the security instrument either at closing or by subsequent recorded assignment. At the same time, it is termed the “nominee” of the lender. According to MERS: “[N]o mortgage rights are transferred on the MERS system. The MERS system only tracks the changes in servicing rights and beneficial ownership interests. Servicing rights are sold via a purchase and sale agreement. Beneficial ownership interests are sold via endorsement and delivery of the promissory note.” ¹³ MERS considers both events to be “non-recordable.” ¹⁴ MERS remains the mortgagee of record without regard to which entity holds the note so long as the note holder is a MERS member. MERS maintains that “[a]ny loan registered on the MERS system is inoculated against future assignments because MERS remains the mortgagee no matter how many times servicing is traded.” ¹⁵

¶ 12 The perceived advantage of the MERS system for mortgage lenders is twofold. First, lenders avoid the filing fees associated with the recording of each assignment of the note.¹⁶ Second, until recently, MERS would “bring foreclosure proceedings in its own name rather than the name of the actual owner of the loan, which is often a trust owned by investors.” ¹⁷ That authority has been questioned in several jurisdictions.

¶ 13 The appellate courts of several states have addressed the impact of the MERS designation on later foreclosures of the pledged property. For example, in Landmark Nat. Bank v. Kesler, 289 Kan. 528, 216 P.3d 158 (2009), MERS, as nominee of the second mortgagee, assigned the second mortgage to Sovereign Bank. The first mortgagee foreclosed, naming the borrower and second mortgagee as defendants, and took a default judgment. The trial court denied the motion of MERS and Sovereign Bank to set aside the default judgment. The Kansas Supreme Court affirmed, reasoning MERS lacked any enforceable rights because there was no evidence MERS owned the promissory note secured by the mortgage. Landmark Nat. Bank v. Kesler, supra, at 167–168. Similarly, appellate courts in Arkansas, Missouri, Maine and Vermont have refused to allow MERS or its assignee to assert rights against the mortgagor because it did not hold the note secured by the mortgage. Mortgage Elec. Registration System v. Southwest Homes of Arkansas, 2009 Ark. 152, 301 S.W.3d 1;Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619 (Mo.App....