“In Roman mythology, the god Janus, for whom each year’s first month is named, was the deity of beginnings and endings. According to legend, the titan Saturn gave the two-faced god the power to see both the future and the past. Romans carved both of Janus’ two faces on gates and doorways to solemnize momentous transitions. Most notably, in the Roman Forum, the Senate erected the ritual gates called the Janus Geminus, which the Romans opened in times of conflict. At war’s outset, priests made sacrifices here to curry favor from the gods and forecast the prospects of success. No deity better symbolizes what financiers hoped to create when they founded the Mortgage Electronic Registration System (MERS). MERS sits as a dichotomous, enigmatic gatekeeper on the vestibule of our nation’s complex and turbulent mortgage finance industry. Financiers invoked MERS’s name at the beginning of millions of subprime and exotic mortgage loan transactions and again invoke its name as they attempt to terminate so many of these loans through foreclosure. Like Janus, MERS is two-faced: impenetrably claiming to both own mortgages and act as an agent for others who also claim ownership.” Professor Christopher Peterson, “Two Faces: Demystifying The Mortgage Electronic Registration System’s Land Title Theory”
In a stunning rejection of the earlier Beyer and James cases [severely criticized by yours truly here, here, here, here, here and [satirically] here – PCQ] holding that MERS and Big Banks may ignore the plain language of the mandatory recording law found at ORS 86.735(1), recently appointed U.S. Federal District Judge Michael H. Simon, issued a 41-page Opinion and Order [here] that should be required reading for all lawyers and laypersons interested in the current MERS issues bouncing around in Oregon’s state and federal courts. Quoting Lake Oswego attorney Kelly Harpster’s statement to the Oregonian, Judge Simon’s ruling is “the most thorough and thoughtful analysis of the MERS issue that has yet been published ….”
The court’s written opinion, in clear, cogent and concise language, systematically dismantled the Big Banks’ arguments set out in the cookie cutter pro-MERS briefs that they uniformly file across the country whenever MERS is attacked as a sham. And MERS was not without its big guns in the recent James case. It was represented by the 900-lawyer Fullbright and Jawarski international law firm, in tandem with its local counsel, 200-lawyer Lane Powell, PC.
On the side of the angels was The Law Office of Terry Scannell, ably assisted by a host of unnamed, but heroic, consumer and foreclosure defense attorneys who freely donated their time, effort, support, and collective intelligence to this huge win. They know who they are. Congratulations all!
Procedural Background. If you’re reading this article, you are likely familiar with the ongoing debate as to whether ORS 86.735(1) requires that all assignments of a trust deed must be publically recorded in the county records before commencing a non-judicial foreclosure in Oregon. For a brief summary, go to this link.
Up until now, the score was tied at 2 and 2. The McCoy decision by Federal Bankruptcy Chief Judge Frank R. Alley III, held that if banks want to foreclose Oregonians out of their homes, they must follow the plain language of ORS 86.735(1) and record all assignments of the trust deed – from first to last. Then along came the Hooker decision by Federal District Court Judge Owen Panner, which followed much of the reasoning of Judge Alley.
On the other side of the scoreboard were the two, more recent, Federal Court decisions referenced above, Beyer and James, holding that the plain language of ORS 86.735(1) – which has remained substantially unchanged and unchallenged since its inception in 1959 – did not really mean what it said. ORS 86.735(1) provides:
“The trustee may foreclose a trust deed by advertisement and sale in the manner provided in ORS 86.740 to 86.755 if: (1) The trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee are recorded in the mortgage records in the counties in which the property described in the deed is situated***”
The Beyer opinion was written by Federal Judge Michael Mosman; the James decision was issued by a Federal Magistrate, Janice Stewart. This meant that if Mr. and Mrs. James timely objected to her ruling [known as “Findings and Recommendations” or “F&Rs” – PCQ], the assigned federal district court judge – in this case, Judge Simon – must review those F&Rs objected to, “de novo” – i.e. all over again. Judge Simon complied in spades, and revisited each major argument made by the MERS attorneys, and each major point made by Judge Mossman and Magistrate Stewart in their respective opinions.[1]
The Main Issue. Judge Simon succinctly identified it as follows:
“The primary question presented in this case is whether an entity such as MERS may be a ‘beneficiary’ under the OTDA [the Oregon Trust Deed Act – PCQ] 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.”
The reason that the definition of “beneficiary” is pivotal is because MERS has consistently argued that it has been contractually appointed as the “nominee” of the lender to act as the “beneficiary.” If true, then that designation would give MERS the ability to do things that the OTDA only permits beneficiaries to do; i.e. assign the trust deed and appoint a successor trustee. Furthermore, if permitted to act as the de jure beneficiary of record, then all of the de facto off-record assignments are irrelevant, and MERS’ “single assignment” to the foreclosing bank legally complies with ORS 86.735(1). But if MERS is wrong, it places into question the ability of any MERS member bank that has relied upon the off-record registration model, to legally conduct a non-judicial foreclosure.
From this starting point, Judge Simon methodically addressed each side’s arguments. However, in doing so, he has also written a very good primer on MERS, Oregon real estate finance law, and Oregon foreclosure law – both judicial and non-judicial. Since I could not presume to do a better job, let me just suggest to readers seeking a more complete understanding of the MERS landscape in Oregon, that they focus on pages 3 through 11 of Judge Simon’s well-written opinion, here.
There were several “take-aways” in Judge Simon’s written ruling. Discussed below are those findings I believe are particularly significant:
Finding: MERS is Not a Beneficiary Under Oregon’s Trust Deed Act. Following standard methodology in determining the Oregon Legislature’s intent, Judge Simon concluded that the definition of a “beneficiary” found in ORS 86.705(2)[2] can really only refer to the holder of the promissory note [sometimes referred in his opinion as the “noteholder” – PCQ] which the trust deed secures.[3] He based his conclusion upon a plain reading of several other provisions in the OTDA. Judge Simon went to great lengths examining these other statutes to support his reasoning that the noteholder could have been the only logical person or entity intended to be the “beneficiary.”
With regards to the earlier Beyer decision that concluded otherwise, Judge Simon simply said: “I respectfully decline to adopt the reasoning in Beyer.” Judge Mosman in the Beyer decision was so intent on concluding that MERS receive a “benefit” he gratuitously found that MERS had the right to receive borrowers’ payments under the promissory note – something that MERS itself denies. Judge Simon knew better, noting that such a result “invites a variety of incongruous applications….” [such as borrowers making their mortgage payments to MERS, etc. – PCQ][4]
Effect of Finding that MERS is not the Beneficiary. For the last few years now, MERS has argued that the Oregon Legislature’s definition of a trust deed beneficiary was never intended to require that the beneficiary and the note holder be one and the same. Judge Simon’s conclusion drives a stake through the heart of that argument. [I will put a different point on it – admittedly with less finesse than Judge Simon – MERS’ arguments that it may serve not only as the lender’s nominee, but also the lender, are not only specious, but they are an affront to anyone conversant with 5th grade-level English. [Imagine going to any standard dictionary and finding the definition of “beneficiary” to include persons having no right to receive a benefit – yet that is what MERS contends for in its legal arguments. Judge Simon rightly concluded that since MERS is – by its own admission – a mere “nominee” or “agent” of the lender – it is not “the lender.” Therefore, as a mere agent, MERS can receive no benefit under the trust deed. End of discussion….]
Not being a beneficiary means that MERS may not “act” like a beneficiary; ergo, it may not assign trust deeds and it may not appoint successor trustees to foreclose Oregon homeowners.
Finding: The Big Banks’ Single Assignment Theory is Rejected. Once MERS convinced Judge Mosman and Magistrate Stewart that it could legally act as a Beneficiary, it then argued that its member banks’ foreclosures were legally compliant with ORS 86.735(1) by the “single assignment” from MERS to the foreclosing lender.[5]
Obviously, Mr. and Mrs. James took the opposite position – i.e. that MERS was a sham designed to avoid the recording law, and that all of the successive assignments of the trust deed, from start to finish, had to be recorded before the foreclosing bank was compliant with ORS 86.735(1). Until that happened, the foreclosure was invalid.
Judge Simon sided with the James, holding that “…the noteholder, not MERS, is the beneficiary of the trust deed.” Moreover, he concluded that since the trust deed follows the note[6], “…the transfer of the note necessarily causes an assignment of the security instrument [i.e. the trust deed], even if the security instrument is not formally assigned.” [Underscore mine. – PCQ]
Judge Simon rejected Magistrate Stewart’s conclusion that these automatic assignments of the trust deed that occur by operation of law when the promissory note is transferred were “not the same act as an assignment of the trust deed by the trustee or the beneficiary contemplated by ORS 86.735(1).” Over nearly three pages of his opinion, Judge Simon meticulously dissected the case of Jackson v Mortgage Elec. Registration Sys., Inc., 770 N.W 248 (Minn. 2009), upon which Magistrate Stewart relied. In doing so, he concluded that the Jackson case was distinguishable from the Oregon law for one basic reason – Minnesota real estate law uses mortgages[7] while Oregon law uses trust deeds[8], to securitize the promissory note:
“Under the OTDA, therefore, the trustee holds legal title to the trust deed and the beneficiary holds equitable title to the trust deed. Because MERS is neither the trustee nor the beneficiary, it holds no title at all.”
****
“ORS §86.735(1), therefore, requires the recording of assignments of both legal and equitable title, which is different from the law in Minnesota according to Jackson. Further, because the noteholder, not MERS, is the beneficiary, ORS § 86.735(1) requires the recording of an assignment of the beneficial interest for each transfer of the note.”
Effect of Rejecting the Single Assignment Argument. Simply stated, Judge Simon concluded that from the lender who actually funds the loan, to the lender who conducts the foreclosure, every time the trust deed is transferred by operation of law [i.e. because of the transfer of the promissory note – PCQ], and every time the trust deed is transferred by a formal assignment document, ORS 86.735(1) requires that each event must be recorded.[9] How the banks intend to comply is impossible to fathom. I suspect some banks, fearful of further judicial backlash, will simply start conducting judicial foreclosures, since ORS 86.735(1) does not apply to that process.
Finding: The Big Banks and MERS May not “Contract Around” the OTDA. The lending industry has used a standard form trust deed that contains express [and very self-serving – PCQ] language to the effect that the borrower voluntarily agrees that MERS may serve in its capacity as the “beneficiary,” and this should be binding. Accordingly, MERS argued that regardless of the statutory definition of a “beneficiary” in ORS 86.705(2), the parties may “contract around” that law. Judge Simon found otherwise, saying that the OTDA serves a “broad and important public purpose” and therefore it was not something that can be waived. He also noted that the entire statutory scheme in ORS Chapter 90, the Oregon Residential Landlord Tenant Act (“ORLTA”), sets de minimus standards for landlord compliance, but makes them subject to the proviso: “unless the parties agree otherwise….” [10] No such latitude is found in the OTDA, and therefore, concluded Judge Simon, it is reasonable to believe that the OTDA was not intended to be a set of laws that could be contractually waived or avoided.
Effect of Finding that MERS may not “Contract Around” ORS 86.705(2). This further places into question the entire MERS business model. It’s one thing for Judge Simon to find that MERS does not fall within the legal definition of a “beneficiary” but his ruling that the lender and borrower cannot agree otherwise, seems to seal MERS’ fate; metaphorically, MERS is no longer invited to come in through the front door, and now it can’t sneak in through the back.
[To Be Continued….]
[1] Sidebar Comment: Nothing is more gratifying to an amateur blogger like myself, than to have an “I told you so!” moment. I had more than one such moments while reading Judge Simon’s opinion. At various places in the opinion Judge Simon effectively dispatched several MERS’ arguments made in the earlier Beyer and James cases – arguments that I found specious at the outset. The reason for my frustration was that the MERS lawyers were able to unabashedly rely upon pure sophistry, since they did not have to contend with real lawyers on the other side – both cases were brought by pro se’ plaintiffs. I view the recent James redux as a victory for Plain English and Basic Logic. – PCQ
[2] Note: Judge Simon referred to subsection (2) of the statute found in the 2011 Oregon laws. The link I have provided cites to the 2009 edition of the same law, and the relevant language is found at subsection (1). For some reason, the publishers of Oregon Revised Statutes are able to get the printed version out faster than the online version. So much for technology….
[3] Judge Simon noted that the term “beneficiary” does not expressly refer to the one holding the “note” in order to “encompass all possible security arrangements.” Lest anyone wonder what those “arrangements” might include, the answer is that the trust deed not only secures “payment” but also “performance.” For that reason, trust deeds are used to secure a personal guaranty of the promissory note that might be given by a third party to the bank. A guarantor whose obligation is secured by the trust deed is not a “noteholder.”
[4] As pointed out in my earlier post on the Beyer decision, here, this conclusion [that MERS has the right to receive borrowers’ payments – PCQ) is simply a finding that resulted because the judge was not familiar with MERS’ business model. Remember, the Beyers were pro se’ litigants – meaning that they had no attorney. You can be sure that the MERS attorneys had no desire to correct Judge Mosman’s erroneous conclusion. They were happy with the win, even though it was based upon a misunderstanding of what MERS purports to do.
[5] If the original loan did not name MERS as the Beneficiary, then presumably that assignment, i.e. the one to MERS in the first place, would also have to be recorded prior to commencement of the foreclosure as well. Thus there would have to be two assignments, one to MERS and the last from MERS – PCQ
[6] This well established Oregon law has been memorialized in a famous poem by an unknown author. It can be found here.
[7] A 2-party instrument, mortgagor (borrower) and mortgagee (lender). Upon default of the promissory note, the mortgagee-lender has the power of foreclose.
[8] A 3-party instrument, grantor (borrower), beneficiary (lender) and a trustee who retains the power to sell the property upon default of the note.
[9] Query: How does one “record” on the public record an event that only occurred by operation of law? Recording assumes that a tangible document has been prepared and signed by one or both parties before a notary public.
[10] While Judge Simon’s observation is a good one, the ORLTA is much more restrictive than this language suggests. That is, notwithstanding the clause, “unless the parties agree otherwise,” ORLTA contains some very stringent language at the commencement of Chapter 90, to wit: ORS 90.130 imposes an obligation of good faith as a “condition precedent to the exercise of a right or remedy under this chapter.” ORS 90.150 permits a court to unilaterally refuse to enforce any provision of the rental agreement that it concludes was “unconscionable when made.” The initial reason for the disparity in statutory protection between ORLTA and the OTDA may have been a fundamental one: Consumer advocates initially believed that tenants needed more protection from landlords than borrowers from banks. Today, I submit that is not the case. Most landlords understand, respect, and actually strive to follow the law. The same cannot be said of Big Banks.
