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Ninth Circuit Throws Out Challenge to MERS for Failure to State Injury or Misinformation - Cervantes v. Countrywide

September 15, 2011

As Chino foreclosure defense lawyers, we've blogged before about the use of MERS, or the Mortgage Electronic Registration System, in the mortgage industry. MERS is a private company that mortgage lenders use to track ownership of loans; it allows lenders to bypass local land office registration. Critics allege that it contributes to the disorganization that has characterized much of the bursting of the housing bubble. A proposed class of homeowners challenged MERS in Cervantes et al. v. Countrywide Home Loans et al., a Ninth U.S. Circuit Court of Appeals ruling that ultimately did not go their way. Olga Cervantes and other Arizona homeowners alleged a conspiracy by MERS and participating lenders to commit fraud, but the district court dismissed this for failure to state a claim and the Ninth Circuit upheld that ruling.

When a borrower takes out a mortgage, both the promissory note to repay the loan and the mortgage/deed of trust securing the loan must be registered with the county office; sales should also be registered. This became annoying for the mortgage industry as it began trading debt obligations, so it invented MERS to serve as the nominal holder of the note and deed. Thus, actual changes in loan ownership are not recorded with counties, but in a proprietary MERS database; county records show MERS as owner unless the new owner is not a MERS member. When a loan is foreclosed, the foreclosing lender or its agent must own both the deed and the note. The plaintiffs in this case allege that MERS-involved foreclosures are illegal because MERS splits the deed away from the note. Because MERS does not have any financial interest in the loans, the plaintiffs say, it cannot be the beneficiary of the lender. Their lawsuit against a variety of lenders alleged conspiracy to commit fraud, and the defendants moved to dismiss for failure to state a claim. The plaintiffs moved for leave to amend and filed a proposed second amended complaint, but the district court denied this and granted the defendants' motion to dismiss. This appeal followed.

Before the Ninth Circuit, plaintiffs argue that they sufficiently alleged a conspiracy based on fraud. However, the court said, their claims do not meet several elements necessary under Arizona fraud law. They did not identify any material facts about MERS that were misrepresented to them, the court said, nor did they rely on misrepresentations when they took out their home loans. Their allegations that having MERS as a beneficiary rendered them unable to modify their loans are also insufficient, the Ninth Circuit said, because they were unable to explain those assertions. Furthermore, the description of MERS in at least one deed of trust explains the role of MERS as a beneficiary, the court asserted. The Ninth said the proposed Second Amended Complaint would not solve the problem, because none of the proposed allegations cure these deficiencies. Thus, it ruled that the district court was correct to dismiss the case. It also upheld the district court's denial of leave to add a wrongful foreclosure claim. However, this request was made only orally, making it "procedurally improper" and unsupported by required filings. Finally, the Ninth said, the wrongful foreclosure argument cannot stand because MERS was not the foreclosing entity, and thus allegations that MERS is a sham beneficiary are irrelevant.

This case joins a long line of MERS cases dating back to the 1990s, although the most relevant ones are more recent. Our Anaheim foreclosure defense attorneys have written about one or two cases in which the borrower succeeded in ending the foreclosure based on the involvement of MERS or shoddy paperwork from that system. Many other borrowers have not been so lucky, however. As this case shows, the mere involvement of MERS -- however shady the borrower may find it -- is not an adequate basis for a complaint of fraud. These defendants had other seemingly valid complaints, however, including that two named plaintiffs negotiated contracts in Spanish and then were presented with papers in English. This is illegal under state and federal law, and indeed, the plaintiffs might have prevailed if they had filed suit sooner. That's why it's vital to get in touch with an experienced Murietta foreclosure defense lawyer as soon as you believe your rights were violated.

Howard Law, P.C., represents people across California who are victims of predatory lending, false representations in lending and wrongful foreclosure. If you'd like to talk more about your rights and your legal options, send us a message through our website or call us today at 1-800-872-5925.

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