James v. Recontrust Co.

• Decision Date: 29 February 2012
• Docket Number: Case No. 3:11–cv–00324–ST.
• Citation: 845 F.Supp.2d 1145
• Parties: Douglas A. JAMES and Eileen M. James, Husband and Wife, Plaintiffs, v. RECONTRUST COMPANY, an unknown Entity Operating in the State of Oregon, BAC Home Loan Servicing Limited Partnership, a Texas Limited Partnership, Mortgage Electronic Registration System, Inc., a Delaware Corporation, Northwest Mortgage Group, Inc. an Oregon Corporation, Defendants.
• Court: U.S. District Court — District of Oregon

845 F.Supp.2d 1145

Douglas A. JAMES and Eileen M. James, Husband and Wife, Plaintiffs,

v.RECONTRUST COMPANY, an unknown Entity Operating in the State of Oregon, BAC Home Loan Servicing Limited Partnership, a Texas Limited Partnership, Mortgage Electronic Registration System, Inc., a Delaware Corporation, Northwest Mortgage Group, Inc. an Oregon Corporation, Defendants.

Case No. 3:11–cv–00324–ST.

United States District Court, D. Oregon.

Feb. 29, 2012.

Terry Scannell, Law Office of Terry Scannell, Portland, OR, for Plaintiffs.

Megan E. Smith, Pilar C. French, Lane Powell PC, Portland, OR, for Defendants.

Robert J. Pratte, Fulbright & Jaworski LLP, Minneapolis, MN, for Defendant, Mortgage Electronic Registration System, Inc.

OPINION AND ORDER

SIMON, District Judge.

I. INTRODUCTION

In the summer of 2007, Plaintiffs Douglas A. James and Eileen M. James (“Plaintiffs”) obtained a loan, secured by a trust deed, to purchase their home in Clackamas County, Oregon. When Plaintiffs defaulted on their loan three years later, Defendants ReconTrust Company (“RTC”), BAC Home Loan Servicing L.P. (“BACHLS”), and Mortgage Electronic Registration System, Inc. (“MERS”) began the non-judicial foreclosure process set forth in the Oregon Trust Deed Act (“ODTA”), Or. Rev. Stat. (“ORS”) § 86.705, et seq. Plaintiffs filed suit in state court to stop the foreclosure, and Defendants removed the case to federal court. Dkt. 1. Defendants then moved to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Dkt. 24. United States Magistrate Judge Janice Stewart issued Findings and Recommendation (“F & R”), concluding that this court should grant Defendants' motion. Dkt. 41. Plaintiffs filed timely objections, Dkt. 48, and Defendants responded. Dkt. 54. Under the Federal Magistrates Act, 28 U.S.C. § 636(b), this court must review de novo those portions of Judge Stewart's F & R to which Plaintiffs object. Judge Stewart's report and the parties' objections and responses place before me an issue with which courts have been struggling, both in Oregon and nationwide.

The OTDA requires that the trustee or beneficiary of a trust deed publicly record all assignments of the trust deed in the county or counties where the underlying real property is located before the trustee may conduct a “foreclosure by advertisement and sale,” i.e. a non-judicial foreclosure. ORS § 86.735(1). Unless all such assignments have been publicly recorded, a foreclosure may occur only by using the more cumbersome, but also more protective, process of a judicial foreclosure under which the foreclosure is supervised by a judge.

The primary question presented in this case is whether an entity such as MERS may be a “beneficiary” under the OTDA if it is neither a lender nor a successor to a lender. If MERS can be a “beneficiary” under the OTDA in such circumstances, then any assignments of the trust deed that were not publicly recorded and made only among the members of MERS (and privately recorded only within the MERS internal database) would not preclude the availability of a non-judicial foreclosure. If, however, MERS is not a beneficiary under the OTDA, then the existence of any assignments by a trustee or beneficiary that were not publicly recorded in appropriate county files would preclude a non-judicial foreclosure.

Plaintiffs contend that, despite the trust deed's explicit declaration that MERS is the beneficiary, the real beneficiary was first the original lender and then, in turn, each of several successor lenders (or noteholders). As the lender and then the successor noteholders transferred the note and assigned the trust deed, no party recorded these assignments in the county records, according to Plaintiffs. Instead, MERS remained listed in the county records as the only beneficiary until it recorded an assignment to BACHLS, after which BACHLS appointed a new trustee. Plaintiffs argue that, under these facts, Defendantshave not satisfied ORS § 86.735(1) and may not non-judicially foreclose.

Defendants respond that the OTDA permits MERS, as the nominee, or agent, for the lender and its successors, to be the beneficiary. Defendants add that the trust deed, which was signed by Plaintiffs, expressly names MERS as the beneficiary. Accordingly, Defendants contend, the lender and successor noteholders did not need publicly to record assignments of the trust deed because MERS, until its assignment of the trust deed to BACHLS, was always the beneficiary. The only assignment that is required, Defendants argue, is the assignment from MERS to BACHLS, and MERS recorded that assignment. Defendants contend, therefore, that they have satisfied ORS § 86.735(1) and a non-judicial foreclosure may proceed.

The resolution of this case requires statutory interpretation of several provisions of the OTDA and the application of these provisions to MERS and the underlying loan and security documents, all in the context of Oregon real estate finance law. Because MERS is a nationwide entity that appears to use standard language in its real estate documents, some courts have looked for guidance to legal decisions from other states. Care must be taken, however, because different states have different real estate laws, including different recording and foreclosure statutes. Also, some states are “mortgage states,” which use mortgages as the principal security instrument for financing real property. Other states, like Oregon, are “trust deed states,” which primarily use deeds of trust and a third-party trustee. Further, some states, like Oregon, are “lien theory states,” while other states are “title theory states.” These differences, more fully explained below, can be outcome determinative in answering a question like the one presented in this case. For these reasons, a legal analysis from one state might not be fully transferable to another state, even though, facially, it may appear to be so.

The short answer to the primary question presented in this case is that, in Oregon, under the definition of “beneficiary” set forth in the OTDA, only an original lender or a successor to the lender may be a beneficiary under a trust deed. Because MERS is neither a lender nor a lender's successor, it is not a beneficiary within the meaning of the Oregon statute, notwithstanding any contractual agreement among the parties in the loan and related security documents declaring that MERS is a beneficiary. This conclusion is based on a statutory interpretation of the OTDA in the context of Oregon's law of real estate finance. It is, therefore, a conclusion that is specific to Oregon. In addition, the court finds that under well-established Oregon law, a transfer of a note automatically causes an assignment of the trust deed that is associated with that note. Further, ORS § 86.735(1) requires the public recording in county land records of all assignments of the trust deed before a non-judicial foreclosure sale may be held. Accordingly, Plaintiffs have sufficiently stated a claim for relief under ORS § 86.735(1).

The court also concludes that MERS, when authorized by its principal (or principals) to do so, may act as a “nominee,” or agent, for the lender and the lender's successors and may make assignments of the trust deed both on the lender's behalf and on behalf of the lender's successors. Finally, the court finds that there is an insufficient factual basis set forth in the complaint to sustain Plaintiffs' general allegations of unauthorized “robo-signing.” Thus, the court concludes that Plaintiffs have failed to state claims for relief other than claims based on ORS § 86.735(1). Defendants' motion to dismiss, therefore, is GRANTED in part and DENIED in part, as more fully described below. Before explaining how I arrive at these conclusions, I offer a brief introduction to both MERS and Oregon's law of real estate finance.

II. MERS AND OREGON REAL ESTATE FINANCE LAW

A. MERS

In a typical financed residential real estate transaction, the purchaser signs two distinct but related documents. One is a promissory note, which is evidence of the purchaser's promise to repay the lender the amount of the loan plus interest. The second is a security instrument, usually a mortgage or a trust deed, which conveys to the lender an interest in the property in order to secure fulfillment of the repayment promise described in the note. See59 C.J.S. Mortgages § 204 (2011); G. Nelson and D. Whitman, Real Estate Finance Law § 2.1 (5th ed. 2007).

After a lender has made a loan, it may, and often does, sell both the note and the security instrument on the secondary market. Such sales are made either to a government-sponsored enterprise, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or to a private institution. These transfers on the secondary market help supply capital for home loan lending and are “an important element of national housing policy.” G. Nelson and D. Whitman, Real Estate Finance Law § 5.27, pg. 531 (5th ed. 2007). Many notes and security instruments are eventually sold to investment trusts, which bundle them into pools and issue bonds to investors through a process known as securitization. See id. at § 11.3. The transfer of a security instrument is called an “assignment.” See id. at § 5.27, pg. 530.

Oregon, like many states, permits, and for some purposes requires, the holder of a security instrument publicly to record assignments in county land records where the property is located. See generallyORS §§ 86.060 (mortgages), 86.735 (trust deeds), 93.710 (mortgages and trust deeds). As the sale of loans and their associated security instruments on the secondary market increased, recording assignments “became cumbersome to the mortgage industry [.]” Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir.2011).¹ To reduce the need for recording assignments, the industry created MERS. R.K. Arnold, ...