IN RE: MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., JONATHAN E. ROBINSON; SALLY J. ROBINSON-BURKE; ROSA A. SILVAS; JOSEPHA S. LOPEZ; JOSE TRINIDAD CASAS; MARIA C. CASAS; LYNDON B. GRAVES; TYRONE EVENSON; MICHELLINA EVENSON; BRYAN GRAY, [for complete list of plaintiff/appellants, see Notice of Appeal]; PABLO LEON, Plaintiffs-Appellants,
AMERICAN HOME MORTGAGE SERVICING, INC.; AMERICA'S SERVICING COMPANY; AMERICA'S WHOLESALE LENDER; AURORA LOAN SERVICES, LLC; AZTEC FORECLOSURE CORP.; BAC HOME LOANS SERVICING LP; BANK OF AMERICA, NA; BANK OF NEW YORK MELLON; CALIFORNIA RECONVEYANCE CO.; CENTRAL MORTGAGE CO.; COOPER CASTLE LAW FIRM LLP; CR TITLE SERVICES, INC.; DEUTSCHE BANK; EXECUTIVE TRUSTEE SERVICES, LLC; FEDERAL HOME LOAN MORTGAGE CORPORATION; FEDERAL HOUSING FINANCE AGENCY; FEDERAL NATIONAL MORTGAGE ASSOCIATION; FIDELITY NATIONAL TITLE INSURANCE CO.; FIRST AMERICAN LOAN STAR TRUSTEE SERVICES, LLC; FIRST HORIZON HOME LOAN CORP.; G.E. MONEY BANK; GMAC MORTGAGE, LLC; HOUSEKEY FINANCIAL CORP.; HSBC MORTGAGE CORPORATION, USA; HSBC MORTGAGE SERVICES, INC.; HSBC BANK, U.S.A., N.A.; IB PROPERTY HOLDINGS; JPMORGAN CHASE BANK; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.; MERSCORP, INC.; MORTGAGE IT, INC.; MTC FINANCIAL, INC., DBA Trustee Corps.; NATIONAL CITY MORTGAGE; PNC FINANCIAL SERVICES GROUP, INC.; NATIONAL DEFAULT SERVICING CORP.; NDEX WEST LLC; OLD REPUBLIC NATIONAL TITLE INSURANCE CO.; QUALITY LOAN SERVICE CORPORATION; RECONTRUST COMPANY; SAXON MORTGAGE, INC.; T.D. SERVICE COMPANY; UTLS DEFAULT SERVICES, LLC; WELLS FARGO BANK, NA; WESTERN PROGRESSIVE TRUSTEE, LLC; CITYMORTGAGE, INC.; LIME FINANCIAL SERVICES LIMITED, Defendants - Appellees
Argued and Submitted, San Francisco, California:
November 7, 2013.
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Appeal from the United States District Court for the District of Arizona. D.C. No. 2:09-md-02119-JAT. James A. Teilborg, Senior District Judge, Presiding.
Robert Hager and Treva Hearne (argued), Hager & Hearne, Reno, Nevada; William A. Nebeker, Valerie R. Edwards (argued), and Lisa Irene Streu, Koeller Nebeker Carlson & Haluck, LLP, Phoenix, Arizona; and Sheryl Serreze, Reno Law Group, LLC, Reno, Nevada, for Plaintiffs-Appellants.
Andrew Martin Jacobs, Snell & Wilmer, LLP, Tucson, Arizona; Andrew R. Louis, Buckley Sandler, LLP, Washington, D.C.; Cynthia Lynn Alexander and Kelly Harrison Dove, Snell & Wilmer, LLP, Las Vegas, Nevada; Patrick G. Byrne, Gregory J. Marshall, Barbara Dawson, Snell & Wilmer, LLP, Phoeniz, Arizona; Michael R. Pennington, Bradley Arant Boult Cummings, LLP, Birmingham, Alabama; Matthew P. Previn, Buckley Sandler LLP, New York, New York; Henry Faulkner Reichner and Ira S. Lefton, Reed Smith LLP, Philadelphia, Pennsylvania; Thomas Hefferon (argued) and Joseph Yenouskas, Goodwin Proctor LLP, Washington, D.C.; Gary Edward Schnitzer, Kravitz, Schnitzer, Sloane and Johnson, Las Vegas, Nevada; Gregory B. Iannelli, Bryan Cave, LLP, Phoenix, Arizona; Thomas Justin Cunningham, Hugh Balsam, J. Matthew Goodin, Phillip Russell Perdew, Locke Lord, LLP, Chicago, Illinois; Justin Donald Balser, Akerman Senterfitt, Denver, Colorado; Kristin Schuler-Hintz, McCarthy & Holthus, LLP, Las Vegas, Nevada; Paul M. Levine, Matthew A. Silverman, McCarthy, Holthus & Levine, LLP, Scottsdale, Arizona; Robert W. Norman, Houser & Allison, APC, Irvine, California; Ariel Edward Stern, Akerman, LLP, Las Vegas, Nevada; Jonathan D. Fink, Wright, Finlay & Zak, Newport Beach, California; Christopher Jorgensen, Lewis Roca Rothgerber, LLP, Las Vegas, Nevada; Ann Martha Andrews, Lewis Roca Rothgerber, LLP, Phoenix, Arizona; Stefan M. Palys, Stinson Morrison Hecker, LLP, Phoenix, Arizona; David Ray Hall, Parsons Behle & Latimer, Salt Lake City, Utah; LeAnn Pedersen Pope, Danielle Jean Szukala, Burke, Warren, Mackay & Serritella, PC, Chicago, Illinois; Jennifer Reiter, Maynard Cronin Erickson Curran & Sparks, PLC, Phoenix, Arizona; Kent F. Larsen, Joseph T. Prete, Smith Larsen & Wixom, Las Vegas, Nevada; Laurel I. Handley, Pite Duncan, LLP, San Diego, California; David Winthrop Cowles, William Morris Fischbach, III, Leonard McDonald, Jr., Tiffany & Bosco, PA, Phoenix, Arizona; Kevin Hahn, Malcolm & Cisneros, Irvine, California; Aaron Michael Waite, The Cooper Castle Law Firm, LLP, Las Vegas, Nevada; Lucia Nale, Thomas V. Panoff, Mayer Brown, LLP, Chicago, Illinois; Lauren Elliott Stine, Quarles & Brady, LLP, Phoenix, Arizona; Karen Ann Braje, Dennis Peter Maio, Reed Smith, LLP, San Francisco, California; Michael Q. Eagan, Jr., Elizabeth Allen Frohlich, Morgan Lewis & Bockius, LLP, San Francisco, California; Lorenzo Emilio Gasparetti, Reed Smith, LLP, Los Angeles, California; Ira S. Lefton, Reed Smith, LLP, Philadelphia, Pennsylvania; Gregory Wendell Falls, Sherman & Howard, LLC, Phoenix, Arizona; Mark S. Landman, Landman Corsi Ballaine & Ford PC, New York, New York; Howard Lindenberg, Federal Home Loan Mortgage, McLean, Virginia; Jill L. Nicholson, Jonathan William Garlough, Joanne Lee, Foley & Lardner, LLP, Chicago, Illinois; Howard N. Cayne, David Fauvre, Arnold & Porter, LLP, Washington, D.C.; Steven Edward Guinn, Laxalt & Normura, Ltd., Reno, Nevada; James R. Condo, Snell & Wilmer, LLP, Phoenix, Arizona; Christina Wang (argued), Fidelity National Law Group, Henderson, Nevada; Neil Ackerman, Neil Ackerman, LLP, Las Vegas, Nevada; Keith Beauchamp, Roopali H. Desai, Coppersmith Schermer & Brockelman, PLC, Phoenix, Arizona; Benjamin B. Klubes, Buckler Sandler, LLP, Washington, D.C.; Robert Bruce Allensworth, Gregory N. Blase, Brian M. Forbes, K& L Gates, LLP, Boston, Massachusetts; Rachel E. Donn, Marilyn Fine, Meier & Fine, LLC, Las Vegas, Nevada; Peter E. Dunkley, Wolfe & Wyman, LLP, Las Vegas, Nevada; Gregory L. Wilde, Tiffany & Bosco, PA, Las Vegas, Nevada; Douglas Erickson, Maynard Cronin Erickson Curran & Sparks, PLC, Phoenix, Arizona; Robert M. Brochin (argued) and Benjamin Weinberg, Morgan Lewis & Bockius, LLP, Miami, Florida; Brian J. Schulman, Laura Sixkiller, Greenberg Traurig, LLP, Phoenix, Arizona; Richard Joseph Reynolds (argued), Burke Williams & Sorensen, LLP, Santa Ana, California; William F. Hyder, William F. Hyder, PC, Phoenix, Arizona; David H. Pittinsky, Ballard Spahr, LLP, Philadelphia, Pennsylvania; Abran Vigil, Ballard Spahr, LLP, Las Vegas, Nevada; Adam Kyle Bult, Brownstein Hyatt Farber Schreck, LLP, Las Vegas, Nevada; Edward A. Treder, Barrett Daffin Frappier Treder & Weiss, LLP, Diamond Bar, California; Ann Martha Andrews, Lewis Roca Rothgerber, LLP, Phoenix, Arizona; Barbara Dawson, Snell & Wilmer, LLP, Phoenix, Arizona; Kelly Harrison Dove, Snell & Wilmer, LLP, Las Vegas, Nevada; Randall W. Edwards, O'Melveny & Myers, LLP, San Francisco, California; Elizabeth Lemond McKeen, O'Melveny & Myers, LLP, Newport Beach, California, for Defendants-Appellees.
Before: A. Wallace Tashima, William A. Fletcher, and Jacqueline H. Nguyen, Circuit Judges. Opinion by Judge W. Fletcher.
W. FLETCHER, Circuit Judge:
Mortgage Electronic Registration Systems, Inc. (" MERS" ), a subsidiary of MERSCORP, Inc., operates an electronic mortgage registration system (" the MERS System" ). MERS is distinct from the MERS System. 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. We described the operation of the System in our recent decision in Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir. 2011). We have before us an appeal from an order of the district court dismissing plaintiffs' claims related to the formation and operation of the MERS System. We dismiss in part, affirm in part, and reverse in part.
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. (For convenience, we will use the terms " borrower," " deed of trust," and " beneficiary," rather than " mortgagor," " mortgage," and " mortgagee." ) 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. MERS contends that there is no need to record the assignment of the note so long as the assignee is a MERS member. However, when an assignment is made to a nonmember of MERS, the identity of the assignee is recorded. About half of the residential mortgages in the United States are now recorded with MERS named as the beneficiary under the deed of trust. See Robo-signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing: Hearing Before the Subcomm. on Hous. and Cmty. Opportunity of the H. Comm. on Fin. Servs., 111th Cong. 101 (2010) (statement of R.K. Arnold, President and CEO, MERSCORP, Inc.); see also Jesse Hamilton, U.S. Regulators Examining Departures at Mortgage Registry, Bloomberg (Apr. 15, 2014, 9:01 PM), http://www.bloomberg.com/news/2014-04-16/u-s-regulators-examining-departures-at-mortgage-registry.html.
The MERS System has been sharply criticized. See, e.g., Tanya Marsh, Foreclosures and the Failure of the American Land Title Recording System, 111 Colum. L. Rev. Sidebar 19, 23-24 (2011) (noting that MERS has been a " controversial innovation" and highlighting that the System's " inherent opaqueness" may conceal " shoddy recordkeeping practices" ); Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359, 1374, 1407 (2010) (outlining MERS's " [q]uestionable" legal foundations and arguing that " [t]he shift away from recording loans in the name of actual mortgagees and assignees represents an important policy change that erodes not only the tax base of local governments, but also the usefulness of the public land title information infrastructure" ); Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 Wm. & Mary L. Rev. 111, 120, 125-27 (2011) (criticizing the " incoherence of MERS's legal position" regarding MERS's status with respect to mortgages registered in the MERS System, which is " exacerbated by a corporate structure that is so unorthodox as to be considered arguably fraudulent," and criticizing the unreliability of the MERS database); David P. Weber, The Magic of the Mortgage Electronic Registration System: It Is and It Isn't, 85 Am. Bankr. L.J. 239, 239-40, 264 (2011) (describing MERS's " imperfect implementation and lack of transparency" ); see also Michael Powell & Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, N.Y. Times, March 6, 2011, http://www.nytimes.com/2011/03/06/business/06mers.html (describing the " mounting" legal challenges facing MERS).
The obvious advantage of the MERS System is that it allows residential lenders to avoid the bother and expense of recording every change of ownership of promissory notes. See, e.g., Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho L. Rev. 805, 808 (1995); About Us, MERS, http://www.mersinc.org/about-us/about-us (last visited May 5, 2014) (stating that MERS was " created by the mortgage banking industry to streamline the mortgage process" ). Critics have pointed out, however, that this advantage accrues almost exclusively to financial institutions, and that the MERS System has a number of disadvantages: It has substantially undermined what had been a comprehensive, stable, and relatively reliable public system of recording interests in residential real estate. Ownership of notes for residential loans that are processed through the MERS System is now recorded in the System's electronic database, but that information 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. The familiar county-by-county public recording system has thus been replaced, in significant part, by a largely invisible and not always reliable system of voluntary record-keeping by MERS members. See, e.g., Alan M. White, Losing the Paper -- Mortgage Assignments, Note Transfers, and Consumer Protection, 24 Loy. Consumer L. Rev. 468, 502-04 (2012). Further, 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. The MERS System has also facilitated the bundling of promissory notes into investment pools, and the sale of interests in those pools to downstream investors. Before the mortgage loan crisis in 2008, the bundling of notes and sale of interests to investors greatly encouraged the flow of money into the overheated residential mortgage market.
Some states have enacted legislation to mitigate the difficulties created by the widespread use of the MERS System. Many of these statutes seek to increase transparency in the foreclosure process by requiring that foreclosure notices provide more information to the homeowner about the parties involved in the foreclosure proceedings. See generally John Rao et al., Nat'l Consumer Law Ctr., Foreclosures 146-47 & n.349 (3d ed. 2010) (compiling laws in California, Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and North Carolina). California, under whose law a number of claims in this case arise, has recently enacted the Homeowner Bill of Rights. Among other things, the new California statute seeks to ensure that " borrowers who may qualify for a foreclosure alternative are considered for, and have a meaningful opportunity to obtain, available loss mitigation options," including by streamlining communication between the distressed borrower and foreclosing party. See Assemb. B. 278, 2011-2012 Leg., Reg. Sess. (Cal. 2012); S.B. 900, 2011-2012 Leg., Reg. Sess. (Cal. 2012).
There has been a wave of litigation in state and federal courts challenging various aspects of the MERS System. Almost all of the relevant law is state rather than federal. The results under state law have been inconsistent. See Weber, supra, at 246-56 (cataloguing the " schizophrenic position of state courts" on issues relating to the MERS System). Some state supreme courts have upheld the MERS System on issues ranging from foreclosure authority to recording requirements. See, e.g., Renshaw v. Mortg. Elec. Registration Sys., Inc., 155 Idaho 656, 315 P.3d 844, 846-47 (Idaho 2013) (holding that MERS may be a beneficiary as nominee for the lender, that assignments of the deed of trust between MERS members need not be recorded, that MERS was not liable to the borrower in negligence, and that the Idaho Consumer Protection Act did not provide a cause of action to the borrower); Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 501 (Minn. 2009) (holding that Minnesota law does not require recording of assignments of promissory notes among MERS members); Edelstein v. Bank of N.Y. Mellon, 286 P.3d 249, 252 (Nev. 2012) (stating that, although a split note and deed are not enforceable, under Nevada law " any split is cured when the promissory note and the deed of trust are reunified" ); Bucci v. Lehman Bros. Bank, FSB, 68 A.3d 1069, 1081, 1083-89 (R.I. 2013) (holding that MERS had the contractual authority to invoke the power of sale and the right to foreclose and that Rhode Island law did not preclude foreclosure where the noteholder and the mortgagee were not the same entity).
Other state supreme courts have reached essentially opposite conclusions. See, e.g., Mortg. Elec. Registration Sys., Inc. v. Sw. Homes of Ark., 2009 Ark. 152, 301 S.W.3d 1, 4 (Ark. 2009) (holding that, because MERS receives no payments on the debt, it is not the beneficiary, even though it is so designated in the deed of trust); Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 216 P.3d 158, 166-67 (Kan. 2009) (" [I]n the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable." ); Mortg. Elec. Registration Sys., Inc. v. Saunders, 2010 ME 79, 2 A.3d 289, 297 (Me. 2010) (holding that MERS lacked standing to foreclose as the lender's nominee); CPT Asset Backed Certificates, Series 2004-EC1 v. Cin Kham, 2012 OK 22, 278 P.3d 586, 592-93 (Okla. 2012) (holding that the putative noteholder lacked standing to foreclose because MERS lacked authority to assign the note, though it arguably had authority to assign the mortgage); Brandrup v. ReconTrust Co., N.A., 353 Ore. 668, 303 P.3d 301, 304-05 (Or. 2013) (en banc) (holding that MERS was not the " beneficiary" of a deed of trust under the Oregon Trust Deed Act absent conveyance to MERS of the beneficial right to repayment, and that MERS could not hold or transfer legal title to the deed as the lender's nominee); Bain v. Metro. Mortg. Grp., Inc., 175 Wn.2d 83, 285 P.3d 34 (Wash. 2012) (en banc) (holding that " MERS is an ineligible '" beneficiary" within the terms of the Washington Deed of Trust Act' if it never held the promissory note or other debt instrument secured by the deed of trust," and that " characterizing MERS as the beneficiary has the capacity to deceive" and may give rise to an action under the Consumer Protection Act); see also MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 861 N.E.2d 81, 88-89, 828 N.Y.S.2d 266 (N.Y. 2006) (Kaye, C.J., dissenting in part) (identifying concerns with the MERS system and " at least a disparity between the relevant statute . . . and the burgeoning modern-day electronic mortgage industry" ).
Federal courts, applying state law, have reached similarly disparate results. Compare, e.g., Montgomery Cnty., Pa. v. MERSCORP, Inc., 904 F.Supp.2d 436, 441 (E.D. Pa. 2012) (applying Pennsylvania law and holding that the County's allegations that MERS violated recording statutes by failing to record assignments stated a claim for relief), In re Thomas, 447 B.R. 402, 412 (Bankr. D. Mass. 2011) (applying Massachusetts law and holding that " [w]hile the assignment purports to assign both the mortgage and the note, MERS . . . was never the holder of the note, and therefore lacked the right to assign it. . . . MERS is never the owner of the obligation secured by the mortgage for which it is the mortgagee of record" ), and In re Wilhelm, 407 B.R. 392, 404 (Bankr. D. Idaho 2009) (applying Idaho law and holding that MERS is not authorized " either expressly or by implication" to transfer notes as the " nominal beneficiary" of the lender), with Town of Johnston v. MERSCORP, Inc., 950 F.Supp.2d 379, 384 (D.R.I. 2013) (holding Rhode Island law does not require recording of assignments among MERS members); DeFranceschi v. Wells Fargo Bank, N.A., 837 F.Supp.2d 616, 623 (N.D. Tex. 2011) (granting summary judgment to defendants on plaintiffs' claims that assignments by MERS were invalid and rendered foreclosure defective), and Moore v. McCalla Raymer, LLC, 916 F.Supp.2d 1332, 1344-45 (N.D.Ga. 2013) (applying Georgia law and holding that, even assuming the plaintiff had standing to challenge the foreclosure on the theory that MERS assignments were invalid, that theory did not provide a basis for a wrongful foreclosure claim).
A number of federal lawsuits challenging the formation and operation of the MERS System were consolidated by the Judicial Panel on Multidistrict Litigation (" the JPML" ) 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 " claims unrelated to the formation and/or operation of the MERS system." Judge Teilborg of the MDL Court issued a series of orders determining which claims had been transferred to the MDL Court, and which had been remanded to the transferor courts. In an early order on the merits, the MDL Court dismissed several of the transferred actions. We affirmed that dismissal in Cervantes . 656 F.3d 1034.
Plaintiffs in the remaining actions before the MDL Court filed a single Consolidated Amended Complaint (" CAC" ). Plaintiffs 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 ...