Deutsche Bank Nat'l Trust Co. v. Walker Cnty.

• Decision Date: 28 June 2019
• Docket Number: 1160926
• Citation: 292 So.3d 317
• Parties: DEUTSCHE BANK NATIONAL TRUST COMPANY, AS TRUSTEE OF ANY SPECIFIC RESIDENTIAL MORTGAGE-BACKED SECURITY (RMBS) AT ISSUE, et al. v. WALKER COUNTY et al.
• Court: Alabama Supreme Court

292 So.3d 317

DEUTSCHE BANK NATIONAL TRUST COMPANY, AS TRUSTEE OF ANY SPECIFIC RESIDENTIAL MORTGAGE-BACKED SECURITY (RMBS) AT ISSUE, et al.

v.WALKER COUNTY et al.

1160926

Supreme Court of Alabama.

June 28, 2019

Barry A. Ragsdale and R. Ryan Daugherty of Sirote & Permutt, P.C., Birmingham; and Robert M. Brochin and Clay M. Carlton of Morgan, Lewis & Bockius LLP, Miami, Florida, for appellants MERSCORP, Inc., n/k/a MERSCORP Holdings, Inc., and Mortgage Electronic Registration Systems, Inc.

Michael R. Pennington of Bradley Arant Boult Cummings LLP, Birmingham; Elizabeth A. Frohlich of Morgan, Lewis & Bockius LLP, San Francisco, California; and Allyson W. Ho of Morgan, Lewis & Bockius, LLP, Dallas, Texas, for appellant Deutsche Bank National Trust Company.

Allan S. Jones of Carr Allison, Birmingham, for appellant CIS Financial Services, Inc., d/b/a CIS Home Loans.

Justin L. Jones, James C. King, Henry C. Wiley, and Franklin G. Williams of King, Wiley & Williams, Jasper; Richard Frankowski of The Frankowski Firm, LLC, Birmingham; and Keith McKerall of Burke Harvey, LLC, Birmingham, for appellees.

Robert K. Spotswood, Michael T. Sansbury, and Morgan B. Franz of Spotswood Sansom & Sansbury, LLC, Birmingham, for amici curiae Alabama Bankers Association, Inc., Business Council of Alabama, and Mortgage Bankers Association of Alabama, Inc., in support of appellants.

SHAW, Justice.

Deutsche Bank National Trust Company ("Deutsche Bank"); MERSCORP, Inc., and Mortgage Electronic Registration Systems, Inc. (hereinafter referred to collectively as "MERS"); and CIS Financial Services, Inc. ("CIS"), the defendants below (all hereinafter referred to collectively as "the defendants"), petitioned this Court for permission, pursuant to Rule 5, Ala. R. App. P., to appeal the trial court's denial of their motions seeking to dismiss the claims of the plaintiffs--Walker County and Rick Allison, in his official capacity as judge of probate of Walker County (hereinafter referred to collectively as "the plaintiffs")--seeking class-based relief on behalf of themselves and all other similarly situated Alabama counties and judges of probate. For the reasons discussed below, we reverse and remand.

Facts and Procedural History

In what the record presently before us describes as a "substantively identical prior pending action," this Court explained the pertinent factual background surrounding the underlying dispute as follows:

"At issue is a particular aspect of the mortgage-securitization process. The process begins when a borrower secures a note to pay a lender by executing a mortgage on the real property the borrower, or mortgagor, purchases with the loan from the lender, or mortgagee. The mortgage is recorded in the probate office of the county in which the property is located. See §§ 35–4–50, 35–4–51, 35–4–62, 35–4–90, Ala. Code 1975 (‘the recording statutes’). Loans between borrowers and lenders compose the primary mortgage market.

"The note associated with the mortgage is a negotiable instrument, however, under Article 3 of the Uniform Commercial Code, and as such it can be bought and sold. When loans between borrowers and lenders are pooled and sold on the secondary mortgage market, investors benefit by receiving a low-risk investment and borrowers benefit by receiving loans at lower interest rates. Such is the process of securitization.

" ‘The process of "securitization" can be described as the process of distributing risk by aggregating debt instruments in a pool, then issuing new securities backed by the entire pool. This reduces the risk of investors' loss from default on any one debt instrument. For mortgage loans, investment banks take pools of real property loans and then use the cash flows from the loan payments to pay the bondholders secured by the underlying mortgage loans. In the residential context, the process of securitization can be boiled down to the pooling of various residential mortgage loans and issuing securities backed by the mortgage loans.

" ‘The general process of creating a residential mortgage-backed securitization (RMBS) is to first have a lender or lenders originate various mortgage loans to borrowers. Next, the originating lenders transfer these loans to a free-standing entity, known generally as a SPV, specifically created for the securitization. As an independent entity, the SPV is protected from any bankruptcy or insolvency proceedings of the originating lender. The SPV aggregates the mortgage loans into pools and issues securities to investors, with the proceeds from the securities being used to pay the originating lender for selling the loans. Thereafter, the investors of these securities receive the proceeds from, and the credit risks of, the mortgage loans in the underlying pool. In many cases, the originating lender will continue to collect the loan payments from the borrowers as they become due and will simply pass the collected monies onto the investors. The investors are protected, by the laws governing assignments, from certain origination and servicing risks assumed by the originating lenders and servicers, and therefore the investors can accept a lower interest rate and yield on the loans.’

"Derrick M. Land, Residential Mortgage Securitization and Consumer Welfare, 61 Consumer Fin. L.Q. Rep. 208, 209 (2007) (footnotes omitted).

"The rights and obligations of the parties in the above-described securitization process typically are set forth in a pooling and servicing agreement (‘PSA’). The PSA also explains the role of the trustee that holds the residential mortgage-backed securities (‘RMBS’)....

"Although the development of the secondary mortgage market benefited both investors and mortgagors, the ‘recording process became cumbersome to the mortgage industry, particularly as the trading of loans increased.’ Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir. 2011). This is where MERSCORP and MERS entered the process. MERS was created to streamline the mortgage process through the use of electronic documentation. ‘MERS is a private electronic database, operated by MERSCORP, Inc., that tracks the transfer of the "beneficial interest" in home loans, as well as any changes in loan servicers.’ Cervantes, 656 F.3d at 1038. ‘Officially launched in 1997, [MERS] is a corporation owned by its members who are typically also users of the MERS system. It is funded by membership and transaction fees that members pay for use of the system.’ Robert E. Dordan, Mortgage Electronic Registration Systems (MERS), Its Recent Legal Battles, and the Chance for A Peaceful Existence, 12 Loy. J. Pub. Int. L. 177, 181 (2010). ‘MERS does not solicit, fund, service, or actually own any mortgage loans.’ Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359, 1361 (2010). Instead, when a mortgage is executed, the borrower and the lender designate MERS as mortgagee ‘acting solely as nominee for the Lender and Lender's successors and assigns.’ ‘The loan is then assigned to a seller for repackaging through securitization for investors. Instead of recording the assignment to the seller or the trust that will ultimately own the loan, however, the originator pays MERS a fee to record an assignment to MERS in the county records.’ Peterson, 78 U. Cin. L. Rev. at 1370. ‘The benefit of naming MERS as the nominal mortgagee of record is that when the member transfers an interest in a mortgage loan to another MERS member, MERS privately tracks the assignment within its system but remains the mortgagee of record.’ Jackson v. Mortgage Elec. Registration Sys., Inc., 770 N.W.2d 487, 490 (Minn. 2009). Thus, ‘[t]he MERS system is designed to allow its members, which include originators, lenders, servicers, and investors, to assign home mortgage loans [on the secondary market] without having to record each transfer in the local land recording offices where the real estate securing the mortgage is located.’ Id."

Ex parte MERSCORP, Inc., 141 So. 3d 984, 986-88 (Ala. 2013) (footnotes omitted).

Deutsche Bank serves as trustee for numerous residential mortgage-backed security ("RMBS") trusts containing mortgages for properties located in Walker County and other Alabama counties (hereinafter referred to collectively as "the counties"). In this case, the plaintiffs initiated the underlying litigation against Deutsche Bank "seeking to recover the benefit [Deutsche Bank allegedly] received by relying on the real property recording systems of the Counties without compensating the Counties for that benefit." The complaint alleged:

"In connection with the creation of various [RMBS] trusts that purportedly hold mortgage loans on properties located in the Counties, [Deutsche Bank] represented at the time these trusts were created that they possessed all the rights to certain mortgage loans attached to these properties, free and clear of any encumbrance.... The Defendants, however, did not record, or cause to be recorded, certain mortgage assignments at the time the trusts were created, nor did they pay the accompanying fees, which are preconditions for enjoying the enumerated benefits and are required by statute. Rather, Deutsche Bank transferred notes to the trusts they administered and recorded the change in note ownership only in the records of [MERS].... Transfers within the MERS system are insufficient to perfect the mortgage for the transferee and incapable of satisfying the requirement that conveyances be recorded."

Thus, according to the plaintiffs, Deutsche Bank had represented "to the public and to RMBS investors that the RMBS trusts had the benefit of perfected mortgages, a benefit that[, according to the plaintiffs,] could only be obtained by properly using the Counties' services for recording assignment." More specifically, the plaintiffs alleged that Alabama law requires mortgage assignments to be recorded; therefore, they maintained, the above-described...