BART G. BRANDRUP and JESSICA D. BRANDRUP, husband and wife, Plaintiffs,
RECONTRUST COMPANY, N.A.; BANK OF AMERICA, N.A., successor by merger with BAC Home Loans Servicing, LP; THE BANK OF NEW YORK MELLON, fka The Bank of New York, as Trustee for The Certificate Holders Cwalt, Inc., Alternative Loan Trust 2006-2CB, Mortgage Pass-through Certificates; and MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Defendants. RUSSELL R. POWELL and DIANE L. POWELL, husband and wife, Plaintiffs,
RECONTRUST COMPANY, N.A.; BANK OF AMERICA, N.A., successor by merger with BAC Home Loans Servicing, LP; THE BANK OF NEW YORK MELLON, fka The Bank of New York, as Trustee for The Certificate Holders Cwalt, Inc., Alternative Loan Trust 2007-OH3, Mortgage Pass-through Certificates, series 2007-OH3; and MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Defendants. DEANIRA MAYO and REYNALDA PAEZ PLANCARTE, Plaintiffs,
RECONTRUST COMPANY, N.A.; BANK OF AMERICA, N.A., successor by merger with Bac Home Loans Servicing, LP; DEUTSCHE BANK NATIONAL TRUST COMPANY, as Trustee for the Certificate Holders of the Morgan Stanley ABS Capital I, Inc., Trust 2005-HE2, Mortgage Pass-through Certificates, Series 2005-HE2; and MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Defendants. OMID MIRARABSHAHI, Plaintiff,
RECONTRUST COMPANY, N.A.; BANK OF AMERICA, N.A., successor by merger with Bac Home Loans Servicing, LP; THE BANK OF NEW YORK MELLON, fka The Bank of New York, as Trustee for The Certificate Holders of CWMBS, INC., CHL Mortgage Pass-Through Trust 2007-4, Mortgage Pass-through Certificates, Series 2007-4; and MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Defendants.
On certified questions from the United States District Court; certification order dated April 2, 2012, certification accepted July 19, 2012, argued and submitted January 8, 2013 United States District Court 311CV1390HZ, 311CV1399HZ, 311CV1533SI, 312CV0010HA
Jeffrey A. Myers, Bowles Fernández Law LLC, Lake Oswego, argued the cause for plaintiffs. With him on the briefs were Jeffrey A. Myers, John Bowles, and Rick Fernández.
Gregory A. Chaimov, Davis Wright Tremaine LLP, Portland argued the cause for defendant Mortgage Electronic Registration Systems, Inc. With him on the brief were Kevin H. Kono, Frederick B. Burnside, and P. Andrew McStay, Jr., Davis Wright Tremaine LLP, Portland.
Thomas M. Hefferon, Goodwin Proctor LLP, Washington DC, argued the cause for defendants ReconTrust Company, N.A.; Bank of America, N.A.; The Bank of New York Mellon; and Deutsche Bank National Trust Company. With him on the brief were Steven A. Ellis, Washington DC, and Thomas W. Sondag, Pilar C. French, and Peter D. Hawkes, Lane Powell PC, Portland.
Rolf C. Moan, Assistant Attorney General, Ellen F. Rosenblum, Attorney General, and Anna M. Joyce, Solicitor General, filed a brief on behalf of amicus curiae State of Oregon.
Nanina D. Takla, Law Office of Phil Goldsmith, Portland, filed a brief on behalf of amicus curiae Oregon Trial Lawyers Association.
Sara Kobak, W. Michael Gillette, and Jordan Silk, Schwabe, Williamson & Wyatt, PC, Portland, filed a brief on behalf of amicus curiae Oregon Land Title Association.
Thomas W. Brown, Thomas M. Christ, and Robert E. Sabido, Cosgrave Vergeer Kester LLP, Portland, filed a brief on behalf of amici curiae Mortgate Bankers Association, Oregon Bankers Association, and Independent Community Banks of Oregon.
These cases come before this court on four certified questions of law from the United States District Court for the District of Oregon. See Brandrup v. ReconTrust Co., 352 Or 320, 287 P.3d 423 (2012) (accepting certified questions); ORS 28.200 to 28.255 (providing procedure for certifying questions to the Oregon Supreme Court and authorizing court to answer certified questions). The questions all are concerned with a practice that has arisen in the home mortgage industry in the last twenty years -- that of drafting mortgages and trust deeds so that a certain Delaware corporation, Mortgage Electronic Registration Systems, Inc. (MERS), rather than the lender, is identified as the security instrument's "mortgagee" or "beneficiary." That practice allows lenders and other entities dealing in home loans to track their transactions in a database maintained by MERS. In Oregon, the practice has come under scrutiny in a number of foreclosure cases arising under the Oregon Trust Deed Act (OTDA), ORS 86.705 to ORS 86.795.
As will be explained more fully below, the OTDA provides an alternative to the traditional judicial foreclosure process that is available only when the home loan is secured by a trust deed, and, even then, only when certain conditions are satisfied. One condition for foreclosing under the OTDA is that "any assignments" of the trust deed by the trust deed "beneficiary" be recorded in the real property records of the county where the encumbered property is situated. ORS 86.735(1). Some homeowners threatened with foreclosure under the OTDA have recognized that, although the original lenders transferred their interests to other parties, the changes in beneficial ownership were not recorded in the real property records of the counties where their properties are situated. Those homeowners have resisted foreclosure under the OTDA on the ground that the transfers were not recorded. They argue, inter alia, that ORS 86.735(1) requires the recording of any assignment of a trust deed by the owner of the beneficial interest in the trust deed and that the identification of MERS as the trust deed "beneficiary" is ineffective.
Some cases filed in Oregon state courts that have raised these issues have been removed to federal court, and the judges within the District of Oregon have used differing analyses and reached differing conclusions. See, e.g., Sovereign v. Deutsche Bank, 856 F.Supp.2d 1203 (D Or 2012); James v. ReconTrust Co., 845 F.Supp.2d 1145 (D Or 2012); Reeves v. ReconTrust Co., 846 F.Supp.2d 1149 (D Or 2012); Beyer v. Bank of America, 800 F.Supp.2d 1157 (D Or 2011). Recognizing that the issues turn on the proper construction of Oregon statutes and that this court is the ultimate arbiter of such matters, the district court in these cases certified the following questions to this court:
Certified Question No. 1: May an entity, such as MERS, that is neither a lender nor successor to a lender, be a 'beneficiary' as that term is used in the Oregon Trust Deed Act?
Certified Question No. 2: May MERS be designated as beneficiary under the Oregon Trust Deed Act where the trust deed provides that MERS "holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests"?
Certified Question No. 3: Does the transfer of a promissory note from the lender to a successor result in an automatic assignment of the securing trust deed that must be recorded prior to the commencement of nonjudicial foreclosure proceedings under ORS 86.735(1)?
Certified Question No 4: Does the Oregon Trust Deed Act allow MERS to retain and transfer legal title to a trust deed as nominee for the lender, after the note secured by the trust deed is transferred from the lender to a successor or series of successors?
We accepted the district court's certification and allowed the parties in the federal cases to present their views. We answer those questions -- in two instances as reframed -- as follows:
(1) "No." For purposes of ORS 86.735(1), the "beneficiary" is the lender to whom the obligation that the trust deed secures is owed or the lender's successor in interest. Thus, an entity like MERS, which is not a lender, may not be a trust deed's "beneficiary, " unless it is a lender's successor in interest.
(2) We reframe the second question as follows:
Is MERS eligible to serve as beneficiary under the Oregon Trust Deed Act where the trust deed provides that MERS "holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests"?
Answer: "No." A "beneficiary" for purposes of the OTDA is the person to whom the obligation that the trust deed secures is owed. At the time of origination, that person is the lender. The trust deeds in these cases designate the lender as the beneficiary, when they provide: "This Security Instrument secures to Lender: (i) the repayment of the loan, and all renewals, extensions and modifications of the note; and (ii) the performance of borrower's covenants and agreements under this security instrument and the note." Because the provision that MERS "holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS * * * has the right to exercise any or all of those interests, " does not convey to MERS the beneficial right to repayment, the inclusion of that provision does not alter the trust deed's designation of the lender as the "beneficiary" or make MERS eligible to serve in that capacity.
(3) "No." ORS 86.735(1) does not require recordation of "assignments" of a trust deed by operation of law that result from the transfer of the secured obligation.
(4) We answer the question, as reframed below, in two parts:
(4)(a) "Does the Oregon Trust Deed Act allow MERS to hold and transfer legal title to a trust deed as nominee for the lender, after the note secured by the trust deed is transferred from the lender to a successor or series of successors?"
Answer: "No." For purposes of the OTDA, the only pertinent interests in the trust deed are the beneficial interest of the beneficiary and the legal interest of the trustee. MERS holds neither of those interests in these cases, and, therefore, it cannot hold or transfer legal title to the trust deed. For purposes of our answer to the first part of the fourth certified question, it is immaterial whether the note secured by the trust deed has previously been "transferred from the lender to a successor or series of successors."
(4)(b) "Does MERS nevertheless have authority as an agent for the original lender and its successors in interest to act on their behalves with respect to the transfer of the beneficial interest in the trust deed or the nonjudicial foreclosure process?"
Answer: The power to transfer the beneficial interest in a trust deed or to foreclose it follows the beneficial interest in the trust deed. The beneficiary or its successor in interest holds those rights. MERS's authority, if any, to perform any act in the foreclosure process therefore must derive from the original beneficiary and its successors in interest. We are unable to determine the existence, scope, or extent of any such authority on the record before us.
As a preface to our explanation of those answers, we set out the following legal and factual background.
A. Mortgages, Trust Deeds, and the Oregon Trust Deed Act
When a person borrows money to purchase a home, in Oregon as elsewhere, the loan usually is memorialized in a promissory note that contains the borrower's written, unconditional promise to pay certain sums at a specified time or times. Generally, the borrower and lender also enter into a separately-memorialized security agreement -- a mortgage or, more commonly in Oregon, a trust deed. See generally Grant Nelson and Dale Whitman, Real Estate Finance Law §§ 2.1, 5.27, 5.28 (5th ed 2007); Joseph L. Dunne, Enforcing the Oregon Trust Deed Act, 49 Willamette L Rev 77, 81-85 (2012). Oregon subscribes to the "lien theory, " rather than the "title theory, " of mortgages. Under the title theory, the borrower conveys actual title to the burdened property to the lender to secure the obligation to repay. Under the lien theory, the borrower merely conveys a "right, upon condition broken, to have the mortgage foreclosed and the mortgaged property sold to satisfy [the underlying debt]." Schleef v. Purdy, 107 Or 71, 78, 214 P 137 (1923). Thus, in the traditional security arrangement --the mortgage -- the borrower conveys to the lender a lien on the property being purchased, to secure the promise to repay that is contained in a promissory note. If the borrower defaults on the note, the lender, or the lender's successor in interest, may exercise its right to sell the property to satisfy the obligation, but it must do so by bringing a judicial action against the borrower. Id. at 75-79; ORS 88.010 (except as otherwise provided by law, lien upon real property shall be foreclosed by a suit).
The OTDA, Or Laws 1959, ch 625, codified at ORS 86.705 to ORS 86.795, was enacted in 1959 to provide an alternative to the judicial foreclosure process. Ronald Brady Tippetts, Note, Mortages -- Trust Deeds in Oregon, 44 Or L Rev 149, 149-50 (1965). That nonjudicial alternative is available when the parties use a trust deed to secure the loan. A trust deed is a deed executed under the OTDA that "conveys an interest in real property to a trustee in trust to secure the performance of an obligation the grantor or other person named in the deed owes to a beneficiary." ORS 86.705(7). The OTDA permits the trustee appointed under a trust deed to advertise and sell the property to the highest bidder without judicial involvement. ORS 86.710; ORS 86.755. Like a mortgage, a trust deed creates a lien on real property to secure an underlying obligation in the event of a default. See ORS 86.705(7); see also Sam Paulsen Masonry v. Higley, 276 Or 1071, 1075, 557 P.2d 676 (1976) (mortgage or trust deed creates only lien on real property). Indeed, a trust deed creates two distinct interests -- a legal interest and a beneficial interest. First, a trust deed "conveys an interest in real property to a trustee in trust to secure the performance of an obligation." ORS 86.705(7). That legal interest includes the power to sell the obligated property in the manner prescribed in the statute on the grantor's default. ORS 86.710. However, if the trustee utilizes its power of sale, the proceeds of the sale, after expenses, must be applied "to the obligation secured by the trust deed" -- that is, to satisfy the obligation that the borrower owes to the beneficiary. ORS 86.765(2). Accordingly, the trustee holds and exercises its legal interest in the encumbered property for the benefit of the trust deed's "beneficiary" -- the person "named or otherwise designated in [the] trust deed as the person for whose benefit [the] trust deed is given." ORS 86.705(1). The second interest that is created by a trust deed -- the beneficial or equitable interest in the lien granted therein -- thus is held by the beneficiary. That interest is the security for the performance of the obligation that is owed to the beneficiary. ORS 86.705(7).
A trustee may conduct a nonjudicial foreclosure sale only when certain conditions are satisfied. See ORS 86.735 (setting out conditions). Those conditions include: (1) recording of "[t]he trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee * * * in the mortgage records of the counties in which the property described in the deed is situated, " ORS 86.735(1); (2) a default on the obligation, "the performance of which is secured by the trust deed, " ORS 86.735(2); (3) recording of a notice of default containing the trustee's or beneficiary's election to sell the property to satisfy the obligation, ORS 86.735(3); and (4) the absence of any pending or completed action for recovery of the debt, with limited exceptions. See, e.g., ORS 86.735(4).
In addition to those conditions, the OTDA prescribes notice requirements that protect trust deed grantors from unauthorized nonjudicial foreclosures and sales of property. Among other things, a trustee is required to provide to the grantor and other interested parties at least 120 days' advance notice of the trustee's sale. ORS 86.740(1). Although judicial involvement is not required to complete a foreclosure by advertisement and sale, the 120-day advance notice period gives a grantor time to seek judicial intervention in certain circumstances, as plaintiffs in these cases have done.
The grantor has a right to cure the default at any time up to five days before the date last set for the sale. ORS 86.753. If the trustee has complied with the statutory notice requirements and the default is not cured, the trustee may sell the property at a public auction to the highest bidder without judicial oversight. ORS 86.755. In contrast to the judicial foreclosure process, a grantor has no statutory right to redeem the property after a completed trustee's sale. Compare ORS 88.080 (providing right of redemption after sale) with ORS 86.770(1) (trustee's sale forecloses and terminates interests in property of any person to whom required notice of the sale was given). After a trustee's sale, the trustee must execute and deliver a trustee's deed to the purchaser, which must recite details of the foreclosure. ORS 86.775. If the trustee's deed is recorded in the pertinent county records, the facts recited in the deed are considered prima facie evidence of the truth of the matters set forth therein, and are conclusive in favor of a purchaser for value who relies on them in good faith. ORS 86.780.
Of course, only a small portion of the property transactions involving trust deeds end in foreclosure. If the borrower repays the loan secured by the trust deed in full, the trustee must "reconvey the estate of real property described in the trust deed" (that is, release the lien on the property) to the borrower, ORS 86.720, and that reconveyance may be publicly recorded in the pertinent real property records.
B. Assignment and Recording of Trust Deeds
Mortgages or trust deeds may be transferred in a variety of ways. By statute, mortgages may be "assigned by an instrument in writing, " and such written assignments may be recorded in the pertinent real property records. ORS 86.060 ("mortgages may be assigned by an instrument in writing * * * and recorded in the records of mortgages of the county where the land is situated"). But mortgages also have been held to "follow" the promissory notes that they secure so that, by operation of law, the sale or transfer of a promissory note effects an equitable transfer of the mortgage that secures that note. Bamberger v. Geiser, 24 Or 203, 206-07, 33 P 609 (1893) ("where a debt is secured by mortgage, the debt is the principal and the mortgage is the incident, and * * * an assignment of the debt is an assignment of the mortgage"); Barringer v. Loder, 47 Or 223, 229, 81 P 778 (1905) (same).
Although the recordation of a mortgage or trust deed assignment generally is not required to make the transfer legally effective between the parties, it is necessary and desirable for protecting an assignee's interest under the security instrument against a purchaser in good faith for valuable consideration. See Willamette Col. & Credit Serv. v. Gray, 157 Or 77, 83, 70 P.2d 39 (1937) (assignee of mortgage was not obliged to take and record written assignment to acquire title as between immediate parties but was required to do so to maintain lien against innocent purchaser); see also ORS 93.640 (every conveyance, deed, or assignment affecting an interest in real property which is not recorded as provided by law is void as against any subsequent purchaser in good faith for valuable consideration). The recordation of a trust deed assignment is necessary for an additional reason: As described above, __ Or at __ (slip op at 6-7), the trust deed and "any assignments of the trust deed by the trustee or the beneficiary" must be recorded in the relevant land records before the nonjudicial foreclosure procedure set out at ORS 86.740 - ORS 86.755 may be invoked. ORS 86.735(1). C. The MERS Corporation
MERS is a creature of the real estate finance industry. In the mid-1990's, large players in the industry, including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), decided to create a database that would electronically track ownership in secured real estate loans as they were bought and sold in a secondary market, generally in packages now known as mortgage-backed securities. R. K. Arnold, Yes, There is Life on MERS, 11 Prob & Prop 33, 33-34 (1997). They created MERSCorp Holdings, a "member-based organization made up of thousands of lenders, servicers, sub-servicers, investors and government institutions." See MERSCORP Holdings, Inc., http://www.mersinc.org/about-us/faq (accessed May 22, 2013). The primary product of MERSCorp Holdings was and is the "MERS System, " a "national electronic database that tracks changes in mortgage servicing and beneficial ownership interests in loans secured by residential real estate." Id.
But there is another significant aspect of MERS; that entity serves as the designated mortgagee or beneficiary, as the nominee of the lender, for all mortgages and trust deeds registered in the MERS System. Id. Christopher L. Peterson, Foreclosure, Subprime Lending, and the Mortgage Electronic Registration System, 78 U Cincinnati L Rev 1359, 1361-62 (2009). MERS, however, does not make, service, or invest in loans. Id. at 1371.
D. The Trust Deeds and Plaintiffs' Challenges
The certified questions that are before this court arise out of four separate actions challenging a trustee's attempt to nonjudicially foreclose a trust deed securing residential property. In each case, homeowners (collectively, "plaintiffs") financed the purchase of a residence in Oregon with a loan from a lender that is a member of MERS. In each case, the homeowners signed (1) a promissory note pledging to repay the money borrowed, plus interest, according to a prescribed schedule and by a specified date, and (2) a "Deed of Trust, " granting to a named trustee the property they had purchased with the loan, "in trust, with power of sale, " to secure the payment of the promissory note and other related promises.
Except for the names and property descriptions, the trust deeds in the four cases are identical. In a "definition" section, each trust deed identifies the "Borrower, " "Lender" and "Trustee" by name, and then sets out the following ...