• Ninth Circuit Rules Against Putative Class Action Involving MERS
  • September 16, 2011 | Authors: David N. Anthony; Jon S. Hubbard; Nicholas R. Klaiber; John C. Lynch
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Washington Office
  • In yet another chapter of the ongoing battle surrounding the legal status of the Mortgage Electronic Registration System (MERS), the U.S. Court of Appeals for the Ninth Circuit affirmed on September 7 an Arizona federal district court’s dismissal of fraud and wrongful foreclosure claims against numerous MERS members. This advisory explains the ruling in Cervantes v. Countrywide Home Loans, Inc., No. 09 1734 (9th Cir. Sept. 7, 2011) that rejected the plaintiffs’ claims.

    As the court explained, “MERS is a private electronic database ... that tracks the transfer of the ‘beneficial interest’ in home loans....” When a MERS member originates a loan, MERS is designated a “nominee” for the lender (and its successors and assigns) and holds legal title as “beneficiary” under the deed of trust. Transfers of the beneficial interest between MERS members often are not recorded, depending on local state recording requirements.

    The plaintiffs sought to challenge this system in two ways. First, they alleged that MERS “splits” the note and deed of trust by allowing a transfer of the beneficial interest in the loan while maintaining MERS as the deed holder. Second, the plaintiffs contended that without any financial interest in the loan, MERS’s status as a beneficiary is a sham.

    Based on these allegations, the plaintiffs sued the defendant lenders and MERS participants on several fraud-based theories. The plaintiffs also sought to amend their complaint to add a claim for wrongful foreclosure.

    The court first rejected plaintiffs’ fraud-based claims, reasoning that the express language of the plaintiffs’ deeds of trust naming MERS as nominee for the lender and beneficiary vitiated any notion that the defendants misrepresented MERS’s role. This deficiency also rendered futile any attempt to amend the fraud-based claims in the complaint.

    The court then addressed plaintiffs’ request to add a wrongful foreclosure claim premised on the assertion that MERS is a “sham” beneficiary under their deeds of trust, and this “sham” arrangement left no party in a position to foreclose. The court disagreed, explaining that regardless of MERS’s authority, “the lenders would still be entitled to repayment of the loans and would be the proper parties to initiate foreclosure after the plaintiffs defaulted on their loans.”

    The court also noted that the plaintiffs had failed to allege any violations of Arizona recording and foreclosure statutes related to any purported “splitting” of the notes and deeds of trust.