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BAIN v. METROPOLITAN MORTG. GROUP, INC.
285 P.3d 34 (2012)
Kristin BAIN, Plaintiff,
v.
METROPOLITAN MORTGAGE GROUP, INC., IndyMac Bank, FSB; Mortgage Electronics Registration Systems; Regional Trustee Service; Fidelity National Title; and Doe Defendants 1 through 20, inclusive, Defendants.
Kevin Selkowitz, an individual, Plaintiff,
v.
Litton Loan Servicing, LP, a Delaware limited partnership; New Century Mortgage Corporation, a California corporation; Quality Loan Service Corporation of Washington, a Washington corporation; First American Title Insurance Company, a Washington corporation; Mortgage Electronic Registration Systems, Inc., a Delaware corporation; and Doe Defendants 1 through 20, Defendants.
Nos. 86206-1, 86207-9.
Supreme Court of Washington, En Banc.
Argued July 7, 2011.
Decided August 16, 2012.
Ann T. Marshall, Kennard M. Goodman, Bishop White Marshall & Weibel PS, Douglas Lowell Davies, Davies Law Group, Russell Brent Wuehler, DLA Piper LLP, Jennifer Lynn Tait, Nicolas Adam Daluiso, Robinson Tait PS, Seattle, WA, Heidi E. Buck, Bellevue, WA, Charles Thomas Meyer, Attorney at Law, Newport Beach, CA, Robert J. Pratte, Fulbright & Jaworski, LLP, Minneapolis, MN, Robert Norman, Jr., Houser & Allison, Irving, CA, Mary Stearns, McCarthy & Holthus, LLP, Poulsbo, WA, Melissa Robbins Coutts, San Diego, CA, for Defendants.
James T. Sugarman, Attorney at Law, Seattle, WA, amicus counsel for Attorney General of State of Washington.
Scott Erik Stafne, Rebecca Thorley, Andrew J. Krawczyk Stafne Law Firm, Arlington, WA, Ha Thu Dao, Grand Central Law, PLLC, Lakeland, FL, Timothy Charles Robbins, Nicholas D. Fisher, Attorneys at Law, Everett, WA, amicus counsel for Homeowners' Attorneys.
David A. Leen, Leen & O'Sullivan PLLC, Seattle, WA, Geoff Walsh, Boston, MA, amicus counsel for National Consumer Law Center.
Shawn Timothy Newman, Attorney at Law, Olympia, WA, amicus counsel for Organization United for Reform Our Washington.
CHAMBERS, J. ¶ 1 In the 1990s, the Mortgage Electronic Registration System Inc. (MERS) was established by several large players in the mortgage industry. MERS and its allied corporations maintain a private electronic registration system for tracking ownership of mortgage-related debt. This system allows its users to avoid the cost and inconvenience of the traditional public recording system and has facilitated a robust secondary market in mortgage backed debt and securities. Its customers include lenders, debt servicers, and financial institutes that trade in mortgage debt and mortgage backed securities, among others. MERS does not merely track ownership; in many states, including our own, MERS is frequently listed as the "beneficiary" of the deeds of trust that secure its customers' interests in the homes securing the debts. Traditionally, the "beneficiary" of a deed of trust is the lender who has loaned money to the homeowner (or other real property owner). The deed of trust protects the lender by giving the lender the power to nominate a trustee and giving that trustee the power to sell the home if the homeowner's debt is not paid. Lenders, of course, have long been free to sell that secured debt, typically by selling the promissory note signed by the homeowner. Our deed of trust act, chapter 61.24 RCW, recognizes that the beneficiary of a deed of trust at any one time might not be the original lender. The act gives subsequent holders of the debt the benefit of the act by defining "beneficiary" broadly as "the holder of the instrument or document evidencing the obligations secured by the deed of trust." RCW 61.24.005(2). ¶ 2 Judge John C. Coughenour of the Federal District Court for the Western District of Washington has asked us to answer three certified questions relating to two home foreclosures pending in King County. In both cases, MERS, in its role as the beneficiary of the deed of trust, was informed by the loan servicers that the homeowners were delinquent on their mortgages. MERS then appointed trustees who initiated foreclosure proceedings. The primary issue is whether MERS is a lawful beneficiary with the power to appoint trustees within the deed of trust act if it does not hold the promissory notes secured by the deeds of trust. A plain reading of the statute leads us to conclude that only the actual holder of the promissory note or other instrument evidencing the obligation may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property. Simply put, if
MERS does not hold the note, it is not a lawful beneficiary. ¶ 3 Next, we are asked to determine the "legal effect" of MERS not being a lawful beneficiary. Unfortunately, we conclude we are unable to do so based upon the record and argument before us. ¶ 4 Finally, we are asked to determine if a homeowner has a Consumer Protection Act (CPA), chapter 19.86 RCW, claim based upon MERS representing that it is a beneficiary. We conclude that a homeowner may, but it will turn on the specific facts of each case. FACTS¶ 5 In 2006 and 2007 respectively, Kevin Selkowitz and Kristin Bain bought homes in King County. Selkowitz's deed of trust named First American Title Company as the trustee, New Century Mortgage Corporation as the lender, and MERS as the beneficiary and nominee for the lender. Bain's deed of trust named IndyMac Bank FSB as the lender, Stewart Title Guarantee Company as the trustee, and, again, MERS as the beneficiary. Subsequently, New Century filed for bankruptcy protection, IndyMac went into receivership,1 and both Bain and Selkowitz fell behind on their mortgage payments. In May 2010, MERS, in its role as the beneficiary of the deeds of trust, named Quality Loan Service Corporation as the successor trustee in Selkowitz's case, and Regional Trustee Services as the trustee in Bain's case. A few weeks later the trustees began foreclosure proceedings. According to the attorneys in both cases, the assignments of the promissory notes were not publically recorded.2
1. The FDIC (Federal Deposit Insurance Corporation), in IndyMac's shoes, successfully moved for summary judgment in the underlying cases on the ground that there were no assets to pay any unsecured creditors. Doc. 86, at 6 (Summ. J. Mot., noting that "the [FDIC] determined that the total assets of the IndyMac Bank Receivership are $63 million while total deposit liabilities are $8.738 billion."); Doc. 108 (Summ. J. Order).
2. According to briefing filed below, Bain's "[n]ote was assigned to Deutsche Bank by former defendant IndyMac Bank, FSB, and placed in a mortgage loan asset-backed trust pursuant to a Pooling and Servicing Agreement dated June 1, 2007." Doc. 149, at 3. Deutsche Bank filed a copy of the promissory note with the federal court. It appears Deutsche Bank is acting as trustee of a trust that contains Bain's note, along with many others, though the record does not establish what trust this might be.
3. While the merits of the underlying cases are not before us, we note that Bain contends that the real estate agent, the mortgage broker, and the mortgage originator took advantage of her known cognitive disabilities in order to induce her to agree to a monthly payment they knew or should have known she could not afford; falsified information on her mortgage application; and failed to make legally required disclosures. Bain also asserts that foreclosure proceedings were initiated by IndyMac before IndyMac was assigned the loan and that some of the documents in the chain of title were executed fraudulently. This is confusing because IndyMac was the original lender, but the record suggests (but does not establish) that ownership of the debt had changed hands several times.
4. In 2008, the legislature amended the deed of trust act to provide that trustees did not have a fiduciary duty, only the duty of good faith. Laws of 2008, ch. 153, § 1, codified in part as RCW 61.24.010(3) ("The trustee or successor trustee shall have no fiduciary duty or fiduciary obligation to the grantor or other persons having an interest in the property subject to the deed of trust."). This case does not offer an opportunity to explore the impact of the amendment. A bill was introduced into our state senate in the 2012 session that, as originally drafted, would require every assignment be recorded. S.B. 6070, 62d Leg., Reg. Sess. (Wash. 2012). A substitute bill passed out of committee convening a stakeholder group "to convene to discuss the issue of recording deeds of trust of residential real property, including assignments and transfers, amongst other related issues" and report back to the legislature with at least one specific proposal by December 1, 2012. SUBSTITUTE S.B. 6070, 62d Leg., Reg. Sess. (Wash. 2012).
5. At oral argument, counsel for Bain contended the reason for MERS's creation was a study in 1994 concluding that the mortgage industry would save $77.9 million a year in state and local filing fees. Wash. Supreme Court oral argument, Bain v. Mortg. Elec. Registration Sys., No. 86206-1 (Mar. 15, 2012), at approx. 44 min., audio recording by TVW, Washington's Public Affairs Network, available at http://www.tvw.org. While saving costs was certainly a motivating factor in its creation, efficiency, secondary markets, and the resulting increased liquidity were other major driving forces leading to MERS's creation. Slesinger & McLaughlin, supra, at 806-07.
6. Available at http://www.npr.org/blogs/money/ 2010/09/16/129916011/before-toxie-was-toxic.
7. MERS insists that borrowers need only know the identity of the servicers of their loans. However, there is considerable reason to believe that servicers will not or are not in a position to negotiate loan modifications or respond to similar requests. See generally Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 WASH. L.REV. 755 (2011); Dale A. Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It, 37 PEPP. L.REV. 737, 757-58 (2010). Lack of transparency causes other problems. See generally U.S. Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011) (noting difficulties in tracing ownership of the note).
8. Perhaps presciently, the Senate Bill Report on the 1998 amendment noted that "[p]ractice in this area has departed somewhat from the strict statutory requirements, resulting in a perceived need to clarify and update the act." S.B. Rep. on Engrossed Substitute S.B. 6191, 55th Leg., Reg. Sess. (Wash. 1998). The report also helpfully summarizes the legislature's understanding of deeds of trust as creating three-party mortgages:
Background: A deed of trust is a financing tool created by statute which is, in effect, a triparty mortgage. The real property owner or purchaser (the grantor of the deed of trust) conveys the property to an independent trustee, who is usually a title insurance company, for the benefit of a third party (the lender) to secure repayment of a loan or other debt from the grantor (borrower) to the beneficiary (lender). The trustee has the power to sell the property nonjudicially in the event of default, or, alternatively, foreclose the deed of trust as a mortgage.
Id. at 1.
9. Available at http://www.leg.wa.gov/Code Reviser/Pages/bill_drafting_guide.aspx (last visited Aug. 7, 2012).
10. Wash. Supreme Court oral argument, supra, at approx. 34 min., 58 sec.
11. Several portions of chapter 61.24 RCW were amended by the 2012 legislature while this case was under our review.
12. At oral argument, counsel for MERS was asked to identify its principals in the cases before us and was unable to do so. Wash. Supreme Court oral argument, supra, at approx. 23 min., 23 sec.
13. The record suggests, but does not establish, that MERS often acted as an agent of the loan servicer, who would communicate the fact of a default and request appointment of a trustee, but is silent on whether the holder of the note would play any controlling role. Doc. 69-2, at 4-5 (describing process). For example, in Selkowitz's case, "the Appointment of Successor Trustee" was signed by Debra Lyman as assistant vice president of MERS Inc. Doc. 8-1, at 17. There was no evidence that Lyman worked for MERS, but the record suggests she is 1 of 20,000 people who have been named assistant vice president of MERS. See Br. of Amicus National Consumer Law Center at 9 n. 18 (citing Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 WM. & MARY L.REV. 111, 118 (2011)). Lender Processing Service, Inc., which processed paperwork relating to Bain's foreclosure, seems to function as a middleman between loan servicers, MERS, and law firms that execute foreclosures. Docs. 69-1 through 69-3.
14. MERS string cites eight more cases, six of them unpublished that, it contends, establishes that other courts have found that MERS can be beneficiary under a deed of trust. Resp. Br. of MERS (Selkowitz) at 29 n. 98. The six unpublished cases do not meaningfully analyze our statutes. The two published cases, Gomes v. Countrywide Home Loans, Inc., 192 Cal.App.4th 1149, 121 Cal.Rptr.3d 819 (2011), and Pantoja v. Countrywide Home Loans, Inc., 640 F.Supp.2d 1177 (N.D.Cal.2009), are out of California, and neither have any discussion of the California statutory definition of "beneficiary." The Fourth District of the California Court of Appeals in Gomes does reject the plaintiff's theory that the beneficiary had to establish a right to foreclose in a nonjudicial foreclosure action, but the California courts are split. Six weeks later, the third district found that the beneficiary was required to show it had the right to foreclose, and a simple declaration from a bank officer was insufficient. Herrera v. Deutsche Bank Nat'l Trust Co., 196 Cal.App.4th 1366, 1378, 127 Cal.Rptr.3d 362 (2011).
15. See 18 STOEBUCK & WEAVER, supra, § 17.3, at 260 (noting that a deed of trust "is a three-party transaction in which land is conveyed by a borrower, the `grantor,' to a `trustee,' who holds title in trust for a lender, the `beneficiary,' as security for credit or a loan the lender has given the borrower"); see also U.S. Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011) (holding bank had to establish it was the mortgage holder at the time of foreclosure in order to clear title through evidence of the chain of transactions).
16. Wash. Supreme Court oral argument, supra, at approx. 8 min., 24 sec.
17. The trustee, Quality Loan Service Corporation of Washington Inc., has asked that we hold that no cause of action under the deed of trust act or the CPA "can be stated against a trustee that relies in good faith on MERS' apparent authority to appoint a successor trustee, as beneficiary of the deed of trust." Br. of Def. Quality Loan Service at 4 (Selkowitz). As this is far outside the scope of the certified question, we decline to consider it.
18. Also, while not at issue in these cases, MERS's officers often issue assignments without verifying the underlying information, which has resulted in incorrect or fraudulent transfers. See Zacks, supra, at 580 (citing Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing: Hearing Before Subcomm. on H. and Cmty. Opportunity H. Fin. Servs. Comm., 111th Cong. 105 (2010) (statement of R.K. Arnold, President and CEO of MERSCORP, Inc.)). Actions like those could well be the basis of a meritorious CPA claim.
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