Homeowners challenging robosigning, MERS System may proceed with ‘false documents’ claim against financial institutions, Ninth Circuit rules

Posted
by Michael Heygood

Homeowners around the country have gone to court to challenge the use of the Mortgage Electronic Registration Systems, Inc. (“MERS”), an electronic mortgage registration system (“the MERS System”) by financial institutions. The MERS System is a private electronic database that records the ownership of and servicing rights in home loans. Various financial institutions are members of the MERS System.

The MERS Mortgage Recording System

Under the MERS System, the lender owns the home loan borrower’s (or mortgagor’s) promissory note. MERS, as the “nominee” of the lender and of any assignee of the lender, is designated in the deed of trust (or mortgage) as the “beneficiary” (or mortgagee) under the deed of trust. MERS rather than the lender or lender’s assignee is recorded as the beneficiary under the deed of trust in the recording system of the county where the property is located.

Use of the MERS System typically begins when a borrower from a MERS member signs a promissory note and a deed of trust. The MERS member takes possession of the note, and MERS is recorded as the beneficiary under the deed of trust. The note is almost always assigned to others, often several times over. If the note is assigned to a MERS member, MERS remains the beneficiary under the deed of trust. About half of the residential mortgages in the United States are now recorded with MERS named as the beneficiary under the deed of trust.

According to MERS members, the advantage of the MERS System is that it allows residential lenders to avoid the work and expense of recording every change of ownership of promissory notes. Of course, this advantage accrues almost exclusively to financial institutions.

Critics argue that the MERS System has substantially undermined what had been a comprehensive, stable, and relatively reliable public system of recording interests in residential real estate. Information regarding ownership of notes for residential loans that are processed through the MERS System is not available to the general public. It is impossible to determine from an inspection of county records who is the actual owner of any note secured by a deed of trust for which MERS is named as the beneficiary. Because the identities of the actual owners of the notes and beneficiaries of the deeds of trust are not public knowledge, renegotiation of mortgage loans processed through the MERS System is very difficult, often impossible. In short, the familiar county-by-county public recording system is thus replaced by a largely invisible and not always reliable system of voluntary record-keeping by MERS members.

MERS litigation and the MDL

There has been a wave of litigation challenging various aspects of the MERS System. The results have been inconsistent. Some states have upheld the MERS System on issues ranging from foreclosure authority to recording requirements and other states have reached essentially opposite conclusions.

A number of federal lawsuits challenging the formation and operation of the MERS System were consolidated by the Judicial Panel on Multidistrict Litigation and transferred in part to a Multidistrict Litigation Court (“the MDL Court”) in the District of Arizona. The JPML remanded to the respective transferor courts all claims “unrelated to the formation and/or operation of the MERS system.”

Plaintiffs in the actions before the MDL Court are borrowers who reside in Arizona, California, Nevada, Oregon, and South Carolina, and whose notes and deeds of trust were processed through the MERS System. Defendants are various financial institutions who have, or have had, interests in the notes and deeds of trust or who have otherwise been involved in the operation of the MERS System.

The MDL district court dismissed the Plaintiffs’ consolidated complaint with prejudice. The plaintiffs appealed to the Ninth Circuit. The court of appeals affirmed the dismissal of many claims but did reinstate one of the Plaintiffs’ claims. In re Mortgage Electronic Registration Systems, Inc., — F.3d —-, 2014 WL 2611314 (9th Cir. June 12, 2014).

Arizona’s false documents statute

The Ninth Circuit held the district court erred by dismissing the Plaintiffs’ claims for violations of Arizona’s false documents statute, Ariz.Rev.Stat. § 33–420. The Plaintiffs’ complaint alleges that the defendants filed false notices of trustee sale, notices of substitution of trustee, and assignments of deed of trust. The complaint alleges that these documents were notarized in blank and “robosigned” with forged signatures. Robosinging refers to the practice of mortgage servicing companies having employees sign foreclosure documents without reviewing them and without actual first-hand knowledge. Rather than actually reviewing the individual details of each case, robosigners simply sign the documents automatically, i.e., like a robot.

The district court had concluded that § 33–420 does not apply to the specific documents that the Plaintiffs’ allege to be false. The Ninth Circuit pointed out that—after the district court’s ruling — in Stauffer v. U.S. Bank National Ass’n, 233 Ariz. 22, 308 P.3d 1173, 1175 (Ariz.Ct.App.2013) — the Arizona Court of Appeals held that a § 33–420(A) damages claim is available in a case in which plaintiffs alleged as false documents “a Notice of Trustee Sale, a Notice of Substitution of Trustee, and an Assignment of a Deed of Trust.” These are precisely the types of the documents that the MDL Plaintiffs allege to be false.

“A distinct and palpable injury”

The district court had also held that Plaintiffs lacked standing to sue under § 33–420 on the ground that, even if the documents were false, appellants were still obligated to repay their loans. This is a common argument made against homeowners trying to assert claims regarding the use of the MERS system in the foreclosure process. According to the district court, because the Plaintiffs were in default they suffered no concrete and particularized injury.

The Ninth Circuit again looked the to the Stauffer decision. The court of appeals noted that, on virtually identical allegations, the Arizona Court of Appeals held to the contrary in Stauffer. The plaintiffs in Stauffer were defaulting residential homeowners who brought suit for damages under § 33–420(A) and to clear title under § 33–420(B). One of the grounds on which the documents were alleged to be false was that “the same person executed the Notice of Trustee Sale and the Notice of Breach, but because the signatures did not look the same, the signature of the Notice of Trustee Sale was possibly forged.” Stauffer, 308 P.3d at 1175 n. 2. The trial court dismissed on the pleadings. The Arizona Court of Appeals reversed the dismissal under both §§ 33–420(A) and (B). It wrote:

Appellees argue that the Stauffers do not have standing because the Recorded Documents have not caused them any injury, they have not disputed their own default, and the Property has not been sold pursuant to the Recorded Documents. The purpose of A.R. S. § 33–420 is to “protect property owners from actions clouding title to their property.” We find that the recording of false or fraudulent documents that assert an interest in a property may cloud the property’s title; in this case, the Stauffers, as owners of the Property, have alleged that they have suffered a distinct and palpable injury as a result of those clouds on their Property’s title.

Id. at 1179 (citation omitted). The Ninth Circuit concluded, based on Stauffer, that the Plaintiffs had standing to sue.

The court of appeals also rejected the argument that the Plaintiffs had not pleaded their robosigning claims with sufficient particularity to satisfy the Federal Rules of Civil Procedure. Finding the claims were adequately pled, the court of appeals reversed the dismissal of the false documents cause of action.

MDL and complex litigation at Heygood, Orr & Pearson

Heygood, Orr & Pearson are very comfortable and experienced with the complex and challenging world of multidistrict litigation. As one example, Michael Heygood and other lawyers at Heygood, Orr & Pearson were designated “Lead Plaintiffs’ Counsel” last year by the federal court that presided over numerous wrongful death lawsuits regarding the Watson fentanyl patch that were consolidated for pretrial purposes in MDL No. 2372 — In re: Watson Fentanyl Patch Products Liability Litigation, before the United States District Court for the Northern District of Illinois.

To be successful in complex litigation such as MDL proceedings, clients need educated, experienced attorneys like those at Heygood, Orr & Pearson. We have the experience and knowledge to guide our clients through class action litigation from beginning to end. And we have the financial resources to help them stand toe-to-toe with some of the biggest corporations in the world through what is often a lengthy, complicated and exmpensive process.

Contact Heygood, Orr & Pearson for your free case evaluation and to learn more about your legal right to compensation. You can reach us by calling toll-free at 1-877-446-9001, or by filling out the free contact form located on this website.