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IN RE CRUZ | CA BK Court “2932.5, Foreclosure of the Property was wrongful due to MERS’ unauthorized substitution of trustee”

IN RE CRUZ | CA BK Court “2932.5, Foreclosure of the Property was wrongful due to MERS’ unauthorized substitution of trustee”


In re: CIRILO E. CRUZ JUANA CRUZ, Chapter 13, Debtors,

CIRILO E. CRUZ, Plaintiff,

v.

AURORA LOAN SERVICES LLC; SCME MORTGAGE BANKERS, INC.; ING BANK, F.S.B.; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.; and DOES 1 to 100, Defendants,

Bankruptcy No. 11-01133-MM13, AP: 11-90116-MM.

United States Bankruptcy Court, S.D. California.

August 11, 2011.

MEMORANDUM DECISION ON MOTIONS TO DISMISS SECOND AMENDED COMPLAINT

MARGARET M. MANN, Bankruptcy Judge.

I. INTRODUCTION

The Court has considered the Motions (“Motions”) to Dismiss the Second Amended Complaint (“SAC”) of debtor and plaintiff Cirilo E. Cruz[1] (“Cruz”) brought pursuant to Fed. R. Bankr. P. 7012, incorporating by reference Fed. R. Civ. P. 12(b)(6), by Defendants Aurora Loan Services (“Aurora”), Mortgage Electronic Registration Systems, Inc. (“MERS”), and ING Bank, F.S.B. (“ING”).[2] The Court grants the Motions in part and denies them in part for the reasons set forth in this Memorandum Decision.

All Truth-In-Lending-Act (“TILA”) related causes of action are dismissed with prejudice. The Court concludes that Cruz cannot state a cause of action under any theory challenging the TILA disclosure because his claims are either unripe or barred by the statute of limitations. The TILA allegations cannot be stated as state law claims because of federal preemption as an alternative ground for dismissal. The Motions are granted to the additional extent they assert the foreclosure of the Property was wrongful due to MERS’ unauthorized substitution of trustee.

The Court denies the Motions to the extent that they assert ING was not required to record its assignment of beneficial interest before it foreclosed. The Motions request the Court reconsider its holding in U.S. Bank N.A. v. Skelton (In re Salazar), 448 B.R. 814, 822-24 (Bankr. S.D. Cal. 2011), that California Civil Code § 2932.5[3] pertains to both mortgages and deeds of trust. For the additional reasons set forth in this Memorandum Decision, the Court reaffirms its analysis in Salazar and concludes that ING’s failure to record its beneficial interest rendered its foreclosure sale void.

II. FACTUAL ANALYSIS

A. Standard of Review

The Court assumes the allegations of the SAC are true for purposes of the Motions and construes them liberally in favor of Cruz. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007); Gilligan v. Jamco Development Corp., 108 F.3d 246, 249 (9th Cir. 1997). However, the Court must also find that the SAC pleads sufficient facts to state a claim of relief that is “plausible on its face.” Twombly, 550 U.S. at 570; Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009) (citing Twombly). The SAC allegations must “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555; see also Iqbal, 129 S. Ct. at 1950 (citing Fed. R. Civ. P. 8(a)(2)).

B. Factual Summary

The SAC allegations relate to the 2004 financing of Cruz’s residence located at 3148 Toopal Drive, Oceanside, CA 92054 (” Property”), by a loan provided by SCME (“Loan”) documented by a variable interest rate note (“Note”) and deed of trust (” DOT”). Aurora was the servicer of the Loan and MERS was the initial nominal beneficiary of the Loan. Cruz claims the TILA disclosure provided to him when the Loan was made was misleading by understating its total cost through maturity, which caused him to forego less expensive financing alternatives.

After Cruz defaulted on the Loan, Defendants commenced the foreclosure process. ING had become the successor beneficiary under the DOT at some time before, but never recorded an assignment of beneficial interest. Cruz then entered into a forbearance agreement with Aurora. ING foreclosed on the Property on June 2, 2010 during the extended forbearance period agreed to by Aurora, even though Cruz was current on his payments at the time. ING’s interest, as assignee beneficiary, first appeared of record in the Trustee’s Deed Upon Sale (“Trustee’s Deed”), recorded a few weeks after the foreclosure. The Trustee’s Deed identified ING as the foreclosing beneficiary.

C. Procedural History

Cruz and his wife filed their joint Chapter 13 bankruptcy petition on January 25, 2011, and Cruz filed his First Amended Complaint (“FAC”) about a month thereafter. Defendants responded to the FAC with motions to dismiss brought pursuant to Fed. R. Bankr. P. 7012, incorporating by reference Fed. R. Civ. P. 12(b)(6) (“First Motions”). These were denied in part and granted in part in this Court’s order entered May 24, 2011 (” FAC Order”). The First Motions were denied to the extent they related to Aurora’s forbearance agreement. The Court also denied the First Motions pertaining to whether causes of action were stated under TULA and under California Business and Professions Code § 17200 (“Section 17200″). The Court granted the First Motions with leave to amend as to whether the TILA causes of action were barred by the statute of limitations; whether MERS had authority to substitute the trustee under the DOT; whether ING’s interest was required to be of record; and whether Cruz could allege facts to tender the Loan amount to set aside the foreclosure under TILA or to claim damages. The Court also granted leave to amend for Cruz to clarify which Defendants were named in the different causes of action.

In response to the FAC Order, Cruz filed his SAC,[4] to which Defendants responded with these Motions.

III. LEGAL ANALYSIS

A. The First Third and Tenth Causes of Action of the SAC are Preempted.

Cruz attempts in the first, third and tenth causes of action to allege his TILA claims indirectly under Section 17200, and as state law fraud and negligent misrepresentation claims. Since these causes of action rely upon the TILA disclosures made to Cruz when the Loan was made, they must be dismissed with prejudice due to federal preemption. In Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1003 (9th Cir. 2008), the Section 17200 claims were alleged based upon TILA disclosures. The Ninth Circuit dismissed these claims, finding Congress intended for TILA to preempt the field. Id. at 1004-06. Here as well, although the deceit and Section 17200 claims do not reference TILA, they are based solely upon the representations mandated by TILA. As in E*Trade Mortg. Corp., id., attempts to camouflage these claims from TILA scrutiny cannot save them from dismissal.

B. The First. Third and Tenth Causes of Action Relating to TILA Disclosures are Not Timely.

Even if the preemption bar did not apply, the Court concludes the first, third and tenth causes of action should still be dismissed. The FAC Order at ¶¶ 12-14 granted leave to amend the TILA causes of action to specify when Cruz discovered, or should have discovered, the harm of the alleged TILA inaccuracy. Gutierrez v. Mofid, 39 Cal. 3d 892, 897-98 (1985) (relevant discovery time is of the nature of the harm, not the existence of legal remedies). This is the date of discovery under state law for statute of limitations tolling purposes. See Grisham v. Philip Morris USA, Inc., 40 Cal. 4th 623, 646 (2007) (personal injury claim for a tobacco company’s misrepresentation accrued at the time that “the physical ailments themselves were, or reasonably should have been, discovered”).

Rather than providing more detail on when the harm was discovered, as required by the FAC Order, the SAC hedges the issue. It alleges that Cruz could not have discovered the understatement of the cost of the 2004 Loan until the TILA disclosure was reviewed by an expert in 2010. Alternatively, the SAC alleges that the harm could not be discovered until 2015, when the interest rate will become variable. SAC ¶ 23. But under either discovery date, Cruz cannot state a cause of action.

If the alleged harm occurred when the Loan was made in 2004 by misleading Cruz into a bad financing choice, then the cause of action is barred by the three year statute of limitations for state law deceit claims. Cal. Code Civ. Pro. § 338(d). Even though a complicated analysis is required, it is possible to discern from the Loan documents attached to the SAC that the total cost of financing on the TILA disclosure differed from the stated interest rate. Although Cruz only alleges state law deceit claims, the Court finds persuasive Ninth Circuit authority that addressed when the harm of TILA misrepresentations should be discovered. Although these claims are alleged under state law, both federal and state courts have applied TILA to assess related state law claims. See e.g. Pacific Shore Funding v. Lozo, 138 Cal. App. 4th 1342, 1347 (2006); Rubio v. Capital OneBank, 613 F.3d 1195, 1203 (9th Cir. 2010). Under Meyer v. Ameriquest Mortgage Co., 342 F.3d 899, 902 (9th Cir. 2003), because the plaintiffs “were in full possession of all information relevant to the discovery of a TTLA violation and a § 1640(a) damages claim on the day the loan papers were signed,” they could not toll the statute of limitations.

Cruz was in full possession of the Loan documentation in 2004. Because there are no allegations of fraudulent concealment, or any other action on the part of any Defendant to cover up the misrepresentations, the deceit causes of action accrued when the Loan was made. Id. This was the date the harm to Cruz could have been determined from the face of the Loan documents.

The alternative explanation of the discovery of the harm is that it has not yet occurred and will not occur, if at all, until the interest rate on the Loan becomes variable in 2015. SAC ¶ 23-33. Whether the Loan will be more or less expensive than either the stated 5.85% initial contract rate, or the projected variable index rate of 4.85% starting in 2015, cannot be known until 2015. It is beyond the capabilities of this Court, or any expert or jury, to speculate about future interest rates. If interest rates drop below the index assumption used when the Loan was made, Cruz will receive a windfall. If they rise, Cruz will suffer loss assuming he is still paying on the Loan. This lack of a concrete impact on the parties renders these claims unripe for resolution. See Thomas v. Union Carbide Agricultural Prod. Co., 413 U.S. 568, 580 (1985) (ripeness doctrine prevents premature adjudication where the impact of a claim against the parties cannot be known); see also Exxon Corp. v. Heinze, 32 F.3d 1399, 1404 (9th Cir. 1994).

The first, third and tenth causes of action, to the extent they are related to the TTLA disclosures,[5] are accordingly dismissed with prejudice because they are either barred by the statute of limitations or are unripe.

C. The Eighth and Ninth Causes of Action for Wrongful Foreclosure and Quiet Title Cannot Be Based upon a Wrongful Substitution of Trustee. But Only upon Section 2932.5.

There are two separate factual scenarios alleged in the wrongful foreclosure causes of action: 1) that MERS lacked authority to substitute Quality as trustee of the DOT; and 2) that ING had no recorded beneficial interest at the time it foreclosed. The second scenario, but not the first, alleges a viable cause of action.

1. The Substitution of Trustee by MERS was Valid.

In the FAC Order, Cruz was directed to specifically allege why MERS, as the nominee of the Lender under the DOT and the beneficiary of record, lacked authority under § 2934a(a)(1)(A) to substitute the trustee. The Court earlier ruled in the FAC Order that if MERS was authorized by the Lender under the DOT to substitute the trustee, this substitution would be valid.

Instead of alleging specific facts that MERS was not authorized by the Lender to substitute the trustee, Cruz relies upon general allegations that two parties cannot both be the beneficiary. SAC ¶ 101. These allegations seem to leave the resolution of whether MERS was authorized to substitute the trustee to the outcome of the litigation. But California law does not provide a cause of action to determine whether or not a party has authority to institute foreclosure proceedings. Gomes v. Countrywide Home Loans, 192 Cal. App. 4th 1149, 1154-56 (2011).

Cruz separately alleges that ING was the beneficiary throughout the foreclosure process.[6] He argues in his opposition that the DOT follows the Note, and MERS could not have been the beneficiary once ING was assigned the Note. This argument ignores that once ING was entitled to enforce the Note, it became the Lender under the DOT, even if its interest was not yet of record. As such, ING could direct MERS, as the beneficiary of record and as the Lender’s nominee, to substitute Quality as the trustee of the DOT. Ferguson v. Avelo Mortgage LLC, 195 Cal. App. 4th 1618, 1628 (2011) (authorized beneficiary may substitute the trustee). Avelo relied upon § 2934a which specifically authorizes substitutions of trustees to be recorded after the substituted trustee takes action. Id.

Leave to amend the substitution of trustee claim will not be granted because Cruz’ allegations that ING was the beneficiary throughout the foreclosure process disprove this claim. Abagninin v. AMVAC Chem. Corp., 545 F.3d 733, 742 (9th Or. 2008) (leave to amend may be denied if the allegation of other facts, consistent with those plead, cannot cure the deficiency).

2. Section 2932.5 Applies to Deeds of Trust.

Although Cruz’s other causes of action are fatally defective, Cruz has properly stated claims for wrongful foreclosure and quiet title based upon ING’s non-judicial foreclosure of the DOT.[7] Section 2932.5 required that ING’s interest be of record at the time of the foreclosure sale, and it was not. MERS was the beneficiary of record when ING foreclosed, but ING was the actual foreclosing beneficiary.[8] The Trustee’s Deed identified ING as the foreclosing beneficiary, and that recital is a binding statement of fact. Bank of America v. La Jolla Group II, 129 Cal. App. 4th 706, 731-32 (2005). Because ING lacked an interest of record, it was not authorized to proceed with the foreclosure sale under § 2932.5, rendering the sale void. Dimock v. Emerald Properties, 81 Cal. App. 4th 868, 874 (2000) (sale under deed of trust by former trustee void, and tender of the amount due is unnecessary); Bank of America, 129 Cal. App. 4th at 712.[9]

To reevaluate whether § 2932.5 concerns both mortgages and deeds of trust, the Court has carefully considered the” intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance . . .” to attempt to determine how the California Supreme Court would rule. Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996). The Court remains convinced that the highest court in this state would hold that § 2932.5 requires an assignee trust deed beneficiary to record its interest before it non-judicially forecloses.

a. The Plain Language of § 2932.5 Can Be Applied to Deeds of Trust.

Defendants first contend the plain language of § 2932.5[10] cannot accommodate deeds of trust within its ambit. Starting with a review of the statutory language, and considering its legislative history, see Conservatorship of Whitley, 50 Cal. 4th 1206, 1214 (2010), the Court finds the plain language of § 2932.5 easily pertains to deeds of trust:

Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.

(Emphasis added). The statute does not only apply to mortgagees but also to other encumbrancers. That a beneficiary under a deed of trust is an encumbrancer is confirmed by the California Supreme Court. “(M)ortgagees and trust deed beneficiaries alike hold security interests in property encumbered by mortgages and deeds of trust.” Monterey S. P. P’ship v. W. L. Bangham, 49 Cal. 3d 454, 461 (1989) (rejecting that a deed of trust conveyed true title to the trustee). Section 2932.5 further provides that the “power [of sale] is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument.” As the assignee of the Note, ING was the party entitled to the payment of money. It took title to the Property in satisfaction of the secured debt at the time of the foreclosure sale. Each of the clauses of § 2932.5 applies comfortably to deeds of trust.

The legislative history of § 2932.5 also supports its application to deeds of trust as well as mortgages. Section 2932.5 succeeded to § 858 verbatim as part of the 1986 technical revisions to California trust law. See Recommendation Proposing the Trust Law (Dec. 1985) 18 Cal. Law Revision Rep. (1985) p. 764; Selected 1986 Trust and Probate Legislation, (Sept. 1986) 18 Cal. Law Revision Com. Rep. (1986) p. 1483, available at http://www.clrc.ca.gov/Mreports-publications.html#V18. These technical revisions included two changes to California foreclosure law pertaining to deeds of trust-to renumber § 2932.5 as part of the non-judicial foreclosure statute, and to add § 2934b to apply Probate Code §§ 15643 (vacancy in the office of trustee) and 18102 (protections for third persons dealing with former trustee.) Had § 2932.5 been limited to mortgages, there would have been no need to revise it at the time of the other revisions to California trust law.

Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 742 (1979) cited the predecessor to § 2932.5; i.e., § 858 to validate the exercise of the power of sale by a trust deed beneficiary of record. Tamburri v. Suntrust Mortg., Inc., 2011 U.S. Dist. LEXIS 72202 * 12-13 (N.D. Cal. July 6, 2011) recognized that whether § 2932.5 applies to deeds of trust raises a serious question sufficient to grant a preliminary injunction against the sale of foreclosed property. The two authoritative treatises that discuss § 2932.5 also agree that deeds of trust fall within its purview. 4 Harry D. Miller & Marvin B. Starr, California Real Estate, §§ 10.2, 10:38, 10:39[11] (3d ed. 2010); and Cal Jur 3d (Rev) Deeds of Trust § 112.[12]

Defendants do not discuss the interpretation of § 2932.5 by these persuasive treatises and other authorities. They point instead to the conveyance language of the DOT, which conveys title to the Property, “with power of sale,” to the trustee, to claim the beneficiary cannot be the “encumbrancer” in whom a power of sale is vested. Not only does this contention ignore that the power of sale in the DOT is controlled and must be invoked by the beneficiary, it seeks to revive the outdated title distinction between mortgages and deeds of trust rejected by the California Supreme Court.

b. Defendants’ Primary Authority is Out-Dated.

Defendants primarily[13] rely on Stockwell v. Barnum, 7 Cal. App. 413, 416-17 (1908), and the District Court cases[14] that follow it, to assert the power of sale in a deed of trust is held by the trustee, not the beneficiary. Stockwell is not a sound basis to determine how the California Supreme Court would apply § 2932.5 because it relies upon the archaic title theory of deeds of trust rather than the modern lien theory. 4 Witkin Sum. Cal. Law STRP § 6(2) (10th ed.) (“In most situations, the title theory has been disregarded, and the deed of trust has been deemed to create a mere lien on the property.”).

In Stockwell, id. at 415, an assignee of a note and deed of trust failed to record her interest before the property was sold at a foreclosure sale. Before the foreclosure sale, the borrower had conveyed the property to someone else. Stockwell held that the purchaser at the foreclosure sale had superior title over the successor owner because the predecessor statute to § 2932.5 only applied to mortgages. Id. Its reason for the distinction was that a deed of trust “instead of creating a lien only, as in the case of a mortgage, passes the legal title to the trustee, thus enabling him in executing the trust to transfer to the purchaser a marketable record title.” Id. at 417.[15]

This reasoning of Stockwell is now inapposite. Under Monterey, 49 Cal. 3d at 461, a deed of trust is no longer a conveyance of actual title to the Property, but merely a lien. The borrower now retains actual title to the property. Bank of Italy Nat. Trust & Sav. Assn. v. Bentley, 217 Cal. 644, 656 (1933). That this title theory is discredited by the Supreme Court is recognized by the Ninth Circuit. Olympic Federal Sav. & LoanAsso. v. Regan, 648 F.2d 1218, 1221 (9th Cir. 1981) (mortgages and deeds of trust are “legally identical,” so that the borrower retains actual title to the property that the Internal Revenue Service can redeem despite the presence of a junior deed of trust). See also Aviel v. Ng, 161 Cal. App. 4th 809, 816 (2008) (to interpret a subordination clause in a lease, the terms mortgages and deeds of trust were treated as synonymous based upon Bank of Italy, 217 Cal. at 656).

This Court finds the California Supreme Court is likely to overrule Stockwell’s holding that the trustee of a deed of trust holds actual legal title, rather than a lien. It has done so before. Monterey, 49 Cal. 3d at 463 (overruling Johnson v. Curley 83 Cal. App. 627 (1927), which held that beneficiaries under a deed of trust were not necessary parties to an action to have that deed declared void for fraud).

c. The Beneficiary, Not the Trustee. Holds the Power of Sale.

A better predictor than Stockwell, 7 Cal. App. at 416-17, of whether the California Supreme Court would apply § 2932.5 to deeds of trust, is that Court’s analysis of the respective roles of trust deed trustees and beneficiaries found in Monterey, 49 Cal. 3d at 463. The trustee merely holds bare legal title to the extent necessary to reconvey the lien if the debt is paid, or to foreclose the security interest if it is not. Id. at 460. The trustee is bound by no fiduciary duties, and has no duty to defend the rights of the beneficiary, or authority to appear in the suit in its behalf. Id. at 462. The trustee of a deed of trust serves merely as a common agent of both parties. Vournas v. Fidelity Nat. Tit. Ins. Co. 73 Cal. App. 4th 668, 677 (1999). Because the beneficiary’s economic interests are threatened when the existence or priority of the deed of trust is challenged, it is the real party in interest under a deed of trust. Monterey, 49 Cal. 3d at 461 (trust deed beneficiary must be named in a mechanics lien foreclosure suit since trustee does not protect its interests). See also Diamond Heights Village Assn., Inc. v. Financial Freedom Senior Funding Corp., 196 Cal. App. 4th 290, 304 (2011) (beneficiary is the real party in interest in a fraudulent conveyance action to void the security).

To claim the trustee, rather than the beneficiary, is the party who holds the power of sale under the deed of trust, elevates form over substance. The beneficiary is the real party in interest and should comply with § 2932.5.

d. Section 2932.5 Protects Borrowers’ Rights.

The California Supreme Court is clear that the distinction between mortgages and deeds of trust is inapplicable where necessary to protect a borrower’s rights. Bank of Italy, 217 Cal. at 658. Even though other statutes address the notices required to be sent to the borrower,[16] who no longer has a right to redeem the property after any foreclosure,[17] the borrower still has a right to strict construction of all of the non-judicial foreclosure statutes, including § 2932.5, to prevent an improper sale of its property. See System Inv. Corp. v. Union Bank, 21 Cal. App. 3d 137, 153 (1971) (harshness of non-judicial foreclosure justifies strict compliance with statutes); Bank of America, 129 Cal. App. 4th at 712 (“Statutory provisions regarding the exercise of the power of sale provide substantive rights to the trustor and limit the power of sale for the protection of the trustor,” citing Miller & Starr, § 10:123 (3d ed. 2003)). Deeds of trust are “far more widely used in this state” than mortgages. 4 Witkin Sum. Cal. Law STRP § 4 (10th ed.) (Citations omitted). Application of § 2932.5 to deeds of trust advances California’s broader statutory scheme to protect borrowers, consumer and otherwise, from a wrongful foreclosure.

MERS argues that the assignee beneficiary need not record its interest to prevent a gap in title. It again confuses the title to the lien of the deed of trust with title to the Property. That MERS was the beneficiary of record even though ING was the foreclosing beneficiary created a gap in title to the lien. ING was a stranger to the record before the foreclosure giving rise to suspicion that the sale was not authorized. This is the very risk that § 2932.5 was intended to safeguard. Stockwell, 7 Cal. App. at 416-17 (“the record should correctly show the authority of a mortgagee or his assigns to sell” to ensure that the title so conveyed be free from suspicion).

D. MERS Remains a Party to the Eighth and Tenth Causes of Action.

MERS seeks to dismiss the only two causes of action against it in the SAC, the eighth (wrongful foreclosure) and the tenth (Section 17200). MERS remains a party to the wrongful foreclosure cause of action due to this Court’s ruling on § 2932.5, even though the substitution of trustee claims found in that cause of action are dismissed. Because MERS may be liable for wrongful foreclosure on that basis, Cruz has also stated a viable 17200 claim as well.

Section 17200 establishes a disjunctive three part definition prohibiting any “unlawful, unfair, or fraudulent business practice.” “Each of these three adjectives captures a `separate and distinct theory of liability.'” Rubio, 613 F.3d at 1203, citing Kearns v. Ford Motor Co., 567 F.3d 1120, 1127 (9th Cir. 2009). As amended by Proposition 64, Section 17200 is applicable to protect consumers who have suffered an injury in fact as well as business competitors. Californians for Disability Rights v. Mervyns’LLC, 39 Cal. 4th 223, 228 (2006).

Since MERS is not alleged to have participated in any fraudulent activity, the last prong is not at issue. Under its “unlawful” prong, Section 17200 borrows violations of other laws and makes them independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999). Although not a criminal statute, violation of other civil statutes can satisfy Section 17200. State Farm Fire & Casualty Co. v. Superior Court, 45 Cal. App. 4th 1093, 1103 (1996) (unlawful prong includes “anything that can properly be called a business practice and that at the same time is forbidden by law,” including antidiscrimination laws, antitrust laws, environmental protection laws, fish and game laws, housing laws, labor laws, vehicle laws, and criminal laws (citations omitted)); Rubio, 613 F.3d at 1204 (TILA violation). The “unfair” prong is measured by the alternative public policy test adopted by Rubio, 613 F.3d at 1205, citing Gregory v. Albertson’s, Inc., 104 Cal. App. 4th 845, 854 (2002). This test looks to whether the practice violates public policy as declared by “specific constitutional, statutory or regulatory provisions.” Rubio, 613 F.3d at 1205. In Rubio, the Ninth Circuit simply noted that the statutory policy behind TILA would satisfy the “unfair” prong of the test. It in effect collapsed the two prongs where statutory violations are alleged. Id.

The allegations of the SAC support MERS’ involvement in the violation of § 2932.5. MERS was the beneficiary of record, even though ING was the foreclosing beneficiary. The “unlawful” prong is met; as is the “unfair prong” under these allegations, and MERS will not be dismissed from either the eighth or tenth causes of action.

IV. CONCLUSION

The distinction between mortgages and deeds of trust is more one of terminology than substance as Monterey, 49 Cal. 3d at 464 stated: “Regrettably, it appears to be too late in the development of our vocabulary to rename deeds of trust and the `trustees’ who act under those instruments.” Weighing the dubious continuing viability of the Stockwell case against the other authority cited in this Memorandum Decision, the Court concludes that ING as the foreclosing beneficiary under the DOT is as subject to the mandates of § 2932.5 as if it held a mortgage. The DOT gives the authority to exercise the power of sale to ING, who is the real party in interest by law for foreclosure matters. For the same reasons as a mortgagee must record its interest before it forecloses, so must a beneficiary of a deed of trust under § 2923.5. The ministerial role of the trustee does not justify any distinction between the two instruments for purposes of § 2932.5 because the trustee as agent simply acts at the direction of the beneficiary.

This Memorandum Decision will constitute the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. Counsel for Cruz is directed to prepare an order in accordance with this Memorandum Decision within ten days of the date of entry.

IT IS SO ORDERED.

[1] The Court rules on the Motions despite the recent death of plaintiff Cruz. His demise does not abate this adversary proceeding, which pursues claims which now either belong to his estate or successor. Fed. R. Civ. P. 25 applies to allow the substitution of the successor of the deceased party in this case. Hawkins v. Eads, 135 B.R. 380, 384 (Bankr. E.D. Cal. 1991); see Fed. R. Bankr. P. 7025. The Court will decide any motion of substitution by any party or by the successors of Cruz at a later time. Hawkins, 135 B.R. at 384. The Chapter 13 case remains pending as Cruz’s wife is a co-debtor, and its status will be addressed in the bankruptcy case in chief pursuant to Fed. R. Bankr. P. 1016.

[2] Defendant SCME Mortgage Bankers, Inc. (“SCME”) has been defunct since 2007 and has not responded in any way to the complaints filed by Cruz. Quality Loan Service Corporation (“Quality”) has been deleted as a Defendant in the SAC, likely due to its filing of a Declaration of Nonmonetary Status pursuant to Cal. Civ. Code § 29241 (“Status Declaration”) to which Cruz did not timely object. In the Status Declaration, Quality stated it did not hold title to the Property and only served as the parties’ agent. Quality also agreed to be bound by any nonmonetary order or judgment of this Court. The Court will thus address the SAC only as it pertains to the moving parties Aurora, ING and MERS (collectively “Defendants”).

[3] All references to a statutory section are references to the California Civil Code unless otherwise specified.

[4] The SAC alleges ten causes of action: 1) intentional misrepresentation as to SCME and ING; 2) intentional misrepresentation as to Aurora and ING; 3) negligent misrepresentation as to SCME and ING; 4) negligent misrepresentation as to Aurora and ING; 5) breach of contract as to Aurora and ING; 6) breach of implied covenant of good faith and fair dealing as to ING and Aurora; 7) promissory estoppel as to ING and Aurora; 8) wrongful foreclosure as to ING, Aurora and MERS; 9) quiet title as to ING; and 10) violation of Section 17200 as to all Defendants.

[5] Cruz argued that since the Court denied the First Motions to dismiss the Section 17200 cause of action, MERS is precluded from challenging it again. But the Court’s analysis of the ripeness of this dispute is based upon new allegations of the SAC found in paragraph 23-that Cruz “would have discovered the interest rate discrepancy in the year 2015 when his payments would have deviated significantly from what the TILA disclosure statement reflected.”

[6] In SAC ¶ 100, Cruz alleges that “ING claims that they are and were the beneficiary of the Deed of Trust throughout the foreclosure process.” Cruz also alleges in SAC ¶ 61 that “Aurora was acting as agent for ING,” including when Aurora entered into the “Forbearance Contract” in October 2009. SAC ¶ 83.

[7] Although not the focus of his SAC, which is instead on the substitution of trustee under the DOT, Cruz alleges sufficient facts to assert this claim in SAC ¶ 106.

[8] Defendants do not contest that § 2932.5, if applicable, was not complied with by ING’s foreclosure without its interest being of record. They merely contest whether the statute applies to deeds of trust, or only to mortgages.

[9] Avelo, 195 Cal. App. 4th at 1628, on which Aurora relies for the broad statement that tender is required in any case seeking to set aside a completed sale, is not to the contrary. Avelo recognized that an unauthorized foreclose sale was void, but did not find the sale at issue was unauthorized. There, the substitution of trustee was signed by a lender before it was assigned any interest in the deed of trust. Because § 2934a retroactively validates a substitution of trustee by an unauthorized beneficiary, the substitution of trustee was deemed valid as of the time the deed of trust was assigned. Id., citing Dimock, 81 Cal. App. 4th at 876-78.

[10] Aurora and ING also direct the Court to a portion of § 2920(b) asserting that mortgages and deeds of trust are mutually exclusive under the foreclosure statute. This assertion ignores that § 2920(b) by its express terms only applies “(f)or purposes of Sections 2924 to 2924h, inclusive . . .” This limited exclusion of a deed of trust from the definition of a mortgage is patently inapplicable to § 2932.5.

[11] MERS incorrectly cites 4 Harry D. Miller & Marvin B. Starr, California Real Estate, §§ 10:2, 10:38, 10:39 (3d ed. 2010) (“Miller & Starr”) despite it being cited by MERS as an authoritative source on real estate. MERS quotes Miller & Starr to state that (“An assignment of the note and deed of trust need not be recorded to be effective. . . .”). The text quoted by MERS pertains only to the effectiveness of assignments between the assignee and assignor, but not to § 2932.5. Miller & Starr in the same section, § 10:39, proceed to specifically apply § 2932.5 to deeds of trust as well as mortgages: “In the case of a deed of trust or mortgage with a power of sale, an assignee can only enforce the power of sale if the assignment is recorded, because the assignee’s authority to conduct the sale must appear in the public records.”

[12] Cal Jur 3d (Rev) Deeds of Trust § 112 cites § 2932.5 and other authority for the following:

The assignment of a note and trust deed ordinarily vests in the assignee all the rights and interest of the beneficiary. The assignee becomes the equitable owner of the security and is entitled, as successor to the beneficiary, to all that is equitably due on the trust deed including interest on the amount secured to the date of payment or tender. The assignee has a right to bring a foreclosure action and may exercise the power of sale in a security instrument if the assignment is duly acknowledged and recorded.

[13] Defendants also cite two cases, neither of which supports that a deed of trust grants the power of sale to the trustee, rather than the beneficiary. Garretson v. Post, 156 Cal. App. 4th 1508, 1516 (2007) was actually a SLAPP case against the beneficiary arising from a claim of wrongful foreclosure, which summarily described the non-judicial foreclosure process. Py v. Pleitner, 70 Cal. App. 2d 576, 579 (1945) involved an obsolete difference between the right of redemption between mortgages and deeds of trust, rather than whether the trustee or beneficiary held the power of sale. Since Code of Civil Procedure § 729.010 now provides for a right of redemption following a judicial sale under either a mortgage or a deed of trust, Civ. Proc. § 729.010 (Deering 2011), it is particularly inapposite here.

[14] This Court respectfully is not bound by these District Court decisions. See State Compensation Ins. Fund v. Zamora (In re Silverman), 616 F.3d 1001, 1005 (9th Cir. 2010) (reserving whether bankruptcy courts are bound by district court decisions within the district where the bankruptcy court sits, but recognizing problems with a non-uniform body of law might result).

[15] Stockwell, 7 Cal. App. at 417, secondarily based its holding on its conclusion that “[i]t is immaterial who holds the note,” a conclusion recognized by Defendants as erroneous. In fact, they assert who holds the Note is dispositive, rather than “immaterial.” Defendants claim that because ING was the holder of the Note at the time of the foreclosure, it was unnecessary for it to record the assignment, because when the Note was transferred to ING, the beneficial interest in the DOT automatically transferred with it. Polhemus v. Trainer, 30 Cal. 686, 688 (1866) (interest in the collateral subject to the mortgage “does not pass unless the debt itself [is] assigned”). That ING is entitled to enforce the Note does not alone obviate compliance with § 2932.5, which also requires the assignment be recorded before the power of sale is exercised by the beneficiary.

[16] MERS correctly points out that notice requirement for borrowers are also addressed by other statutes. See §§ 2924b(b)(1) (trustor and mortgagee must receive copy of recorded notice of default via mail), 2924b(b)(2) (trustor and mortgagee must receive copy of recorded notice of sale via mail) and 2937 (trustor and mortgagee of residential property must receive notice of assignment of servicing of mortgage of trust deed via mail). This does not change the Court’s view addressed in Salazar, 448 B.R. at 821, that § 2932.5 helps ensure borrowers know who actually owns the loan and is the real party in interest during the foreclosure process. Id. at 818.

[17] See footnote 13, infra.

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In re: DOBLE | CA BK Judge Rips Deutsche, MERS, LPS System & Multiple “True & Correct” Copies of Note

In re: DOBLE | CA BK Judge Rips Deutsche, MERS, LPS System & Multiple “True & Correct” Copies of Note


CESAR M. DOBLE,

v.

DEUTSCHE BANK NA T’L TRUST
COMPANY, AS TRUSTEE OF THE
HARBORVIEW MORTGAGE LOAN TRUST
2005-5, MORTGAGE LOAN PASSTHROUGH
CERTIFICATES, SERIES 2005-5
AND ONEWEST BANK, F.S.B.

Excerpts:

Instead, One West forwarded the Complaint to an outside vendor, Lender Processing Services (“LPS”), which is retained by One West to handle routine legal matters, but not litigation. LPS then exacerbated the problem by assigning an incorrect response date and sending the Complaint to the wrong outside counsel.

[…]

The most disconcerting misrepresentation to the Court was Defendants’ submission of multiple “true and correct”  copies of the Note under penalty of perjury without any endorsement from Plaza.  Whether the Note was endorsed is central to the merits ofthis case. When Defendants finally submitted an endorsed copy of the Note on November 8, 2010, they attempted to pass off the first three unendorsed copies of the Note as “illegible.” The first three copies of the Note were fully readable, so the phantom endorsement page was not a problem with legibility. The timing of this tardily produced endorsement, produced after several requests, suggests it was added only in response to the litigation.

To add to the Court’s incredulity, Defendants have never answered the Court’s specific questions as to when and under what circumstances this newly proffered endorsement was executed.

[…]

The first two causes of action seek damages and disallowance of Defendants’ secured and unsecured claims for lack of standing on four separate grounds: (a) MERS’ assignment of the DOT to One West and, in tum, One West’s assignment to Deutsche Bank, were invalid; (b) Defendants have no interest in the Note nor any right to enforce it under California law; (c) the assignment of the DOT to Deutsche Bank was not of public record; and (d) Defendants violated New York Trust law so that Deutsche Bank cannot be the owner of the Loan as a matter oflaw. Where a secured creditor cannot establish a right to enforce a loan, it has no standing to file or defend a claim, or to seek relief from stay. In re Gavin, 319 B.R. 27,32 (B.A.P. 1st Cir. 2004); In re Hayes, 393 B.R. 259,269-70 (Bankr. D. Mass. 2008).

Although the Court rejects Doble’s New York Trust claims and his avoiding power claim, the record here supports Doble’s first three standing claims. MERS had no authority to assign the DOT, under its terms and as a matter oflaw, without the authority to assign the Note. The Note was not assigned until it was endorsed by Plaza. Until that endorsement, the MERS’ assignments were a nullity. Deutsche Bank currently lacks authority to enforce the Loan as the assignee of Plaza, and will continue to lack authority until it records its assignment.

[…]

III. CONCLUSION

The Court denies Defendants’ request to set aside the clerk’s entry of a default, but grants their Motion to Dismiss the portions of the first and second causes of action relating to Doble’s New York Trust claims and avoiding power claims. Defendants’ Motion to Dismiss Doble’s third and fourth causes of action is also granted. As to the remainder of the first and second causes of action, the Court finds MERS’ limited role as beneficiary of the DOT did not provide talismanic protection against the myriad foreclosure deficiencies committed by Defendants [*47] regarding this Loan. MERS’ role did not provide Defendants the authority to enforce the DOT, the ability to assign the Note without an endorsement from Plaza, or an exception to their obligation to record the assignment to Deutsche Bank. The Court will allow Doble to produce additional evidence in support of his claims, but not his wife’s claims. The Court will disallow Defendants’ secured and unsecured claims without prejudice. Defendants may file an amended proof of claim in this case if they fully address the defects identified in this Memorandum Decision.

The Court orders Defendants to appear and show cause why they should not pay Doble’s attorneys fees for their conduct in this action, and schedules a status conference for April 28, 2011 at 3:00 in Department 1 of this Court.

Dated: April 14, 2011

/s/ Margaret M. Mann

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In re: CESAR M. DOBLE, Chapter 13, Debtor,
CESAR M. DOBLE, Plaintiff,
v.
DEUTSCHE BANK NAT’L TRUST COMPANY, AS TRUSTEE OF THE HARBORVIEW MORTGAGE LOAN TRUST 2005-5, MORTGAGE LOAN PASS-THROUGH CERTIFICATES, SERIES 2005-5 AND ONEWEST BANK, F.S.B., Defendants.

Bankruptcy No: 10-11296-MM13, AP: 10-90308-MM.

United States Bankruptcy Court, S.D. California.

April 14, 2011.

MEMORANDUM DECISION RE MOTION TO VACATE CLERK’S ENTRY OF DEFAULT AND MOTION TO DISMISS COMPLAINT; ORDER TO SHOW CAUSE FOR CONTEMPT OF COURT

MARGARET M. MANN, Bankruptcy Judge

Defendants OneWest Bank, F.S.B. (“OneWest”) and Deutsche Bank National Trust Company (“Deutsche Bank”), as Trustee of the HarborView Mortgage Loan Trust 2005-5, Mortgage Loan Pass-Through Certificates, Series 2005-5 Under the Pooling and Servicing Agreement Dated June 1, 2005, were defaulted by debtor Cesar Doble (“Doble”) when they failed to timely respond to the complaint in this action (“Complaint”). The Complaint challenges Defendants’ right to assert claims based upon a loan secured by Doble’s residence, and seeks damages for Defendants’ refusal to modify the loan. After the default, Defendants brought a Motion to Vacate Clerk’s Entry of Default and a Motion to Dismiss Plaintiffs Complaint. The Court held several continued hearings on both motions, at which additional evidence and argument were presented.

Due to Defendants’ misconduct in this case and others that threatens the integrity of the judicial process the Court declines to set aside the default. The Court also issues an order to show cause why Defendants should not be held in contempt and ordered to pay Doble’s attorneys fees. Despite this ruling, the Court will not allow Doble relief he is not entitled to receive. The Court also grants much of the Defendants’ Motion to Dismiss. Further proceedings will be scheduled to determine the judgment to be entered in this case.

I. FACTUAL BACKGROUND

A. The Loan

Doble and his wife Martha Doble own a residence located at 1466 Heatherwood Avenue in Chula Vista, California (“Property”). The Property is encumbered by a deed of trust (“DOT”) securing a promissory note (“Note”) payable on its face to Plaza Home Mortgage, Inc. (“Plaza”), executed in connection with a $650,000 loan (“Loan”) made by Plaza. The DOT identifies Plaza as “Lender,” and Mortgage Electronic Registration Systems, Inc. (“MERS”) as beneficiary. The DOT grants Lender the right to repayment of the Loan and performance of Borrower’s covenants, explicitly stating that MERS “holds only legal title to the interests granted by Borrower” and MERS may exercise “any or all… interests, including … the right to foreclose and sell the Property” only “if necessary to comply with law or custom.”[1]

The Dobles defaulted on the Loan a few years later and sought to take advantage of the federal Home Affordable Mortgage Program (“HAMP”) by modifying the Loan so they could afford the payments. After a trial loan modification was granted, the Dobles made two payments in the modified amount. Despite the last payment under the modified Loan being in default, the Dobles were offered a permanent modification to the Loan, which they attempted to accept. Thereafter, the Dobles made no more payments under the Loan.

B. The Bankruptcies

Martha Doble filed a chapter 13 bankruptcy case in 2009 (Case No. 09-16970-LA13, Bankr. S.D. Cal.), which was dismissed. Doble filed this Chapter 13 bankruptcy case on June 28, 2010. The Complaint filed by Doble the day after he filed bankruptcy seeks damages and equitable relief, alleging that Defendants have no secured or unsecured claims in this case, that they violated the automatic stay by seeking to foreclose on the DOT without owning the Loan, and that they failed to discharge their responsibilities regarding modifying the Loan. Based upon a slew of contradictory documents purporting to transfer interests in the Note and DOT among the Defendants, Plaza and MERS, OneWest and Deutsche Bank have each represented to the Court to be the owner of the Loan in both cases. One West has separately asserted it is the servicer of the Loan.

C. Defendants’ Failure to Respond to the Complaint

The summons to the Complaint established a response date of July 29, 2010. Together with the Complaint, the summons was promptly served and received by Defendants. Pursuant to their servicing agreement, Deutsche Bank forwarded the Complaint to OneWest’s legal headquarters in Pasadena on July 2. Deutsche Bank then apparently did nothing further to respond to the Complaint, and OneWest misplaced the Complaint, failed to calendar a response, and did not otherwise follow-up on the matter.

The Complaint resurfaced after a response was due. When it was found on August 4, OneWest compounded the error. It did not follow internal protocol, which would have required the Complaint be sent to its litigation office in Austin, Texas, for referral to outside counsel. Instead, OneWest forwarded the Complaint to an outside vendor, Lender Processing Services (“LPS”), which is retained by OneWest to handle routine legal matters, but not litigation. LPS then exacerbated the problem by assigning an incorrect response date and sending the Complaint to the wrong outside counsel. In a final mishap, outside counsel neglected to look at the response date on the summons, and then waited another week until August 11 to request an extension. By this point, the default had already been entered.

Defendants filed their Motion to Vacate the Default and their Motion to Dismiss the Complaint on August 31, 2010. Defendants initially offered a declaration of outside counsel to explain their failure to timely respond to the Complaint. Counsel averred that he received the assignment of the Complaint on August 4, with a referral form showing a due date of August 20, although Defendants’ Motion to Vacate contrarily states Defendants mistakenly believed the due date was August 11. Counsel apparently relied upon the incorrect due date on the referral form calculated by the outside vendor, and did nothing to confirm the correct response date, which was apparent from the face of the summons. Not until August 11 did counsel contact Doble to request an extension. Defendants were already in default by this time, and the extension was denied.[2]

Because the Defendants initially provided no reason for their failure to respond to the Complaint until after the response was overdue, the Court asked a series of questions regarding the improper calendaring. In response to the Court’s questions, Defendants submitted the declaration of OneWest employee, Charles Boyle, who was resident in the Austin, Texas office. This employee averred that, after receipt of the Complaint in Pasadena, the Complaint was inadvertently logged into an automated referral system by a non-legal staff employee who has since resigned. Boyle averred this error was discovered the first week of August by a supervisor who re-referred the Complaint to local counsel.

Since Defendants had still not answered many of the Court’s questions, the Court again requested more information. Specifically, the Court requested Defendants provide more information regarding: 1) Boyle’s personal knowledge of the events in Pasadena given his residence in Texas; 2) what happened to the Complaint during the first month after it was served, and 3) why outside counsel waited seven days to contact Doble after receiving the Complaint on August 4. Finally, at the hearing on December 16, 2010, in response to questions asked from the bench, counsel for Defendants provided a more complete story: the Complaint had been lost, there were multiple departures from protocol, and several attorneys had received the Complaint and not bothered to review it. After a final attempt to clarify some of the facts pertaining to ownership of the Loan and why Defendants failed to timely respond to the Complaint, the Court took the matter under submission on February 3, 2011.

II. ANALYSIS

A. Defendants have not Demonstrated Good Cause to Vacate the Clerk’s Default

Rule 55(c) permits the Court to set aside an entry of default only “for good cause.” Defaulting parties have the burden of proving good cause. Franchise Holding II, LLC v. Huntington Restaurants Group, Inc., 375 F.3d 922, 926 (9th Cir. 2004) (quoting TCI Group Life Ins. Plan, Life Ins. Co. of N. Am. v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001)).

To determine whether good cause exists, courts consider (1) whether the default is the result of the defaulting party’s” culpable conduct”; (2) whether the defaulting party has a” meritorious defense”; or (3) whether reopening the default would “prejudice”[3] the innocent party. United States v. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010).[4] The test for good cause is disjunctive, and the defaulting party must prove all three factors favor setting the default aside. Franchise Holding, 375 F.3d at 926; Mesle, 615 F.3d at 1091. If any one factor favors upholding the default, the Court need not set it aside. Id. However, all doubt should be resolved in favor of a trial on the merits. Id. While there was no prejudice to Doble for the delayed response, the Court is without doubt that Defendants’ pervasive misconduct alone precludes a finding of good cause to set aside the default.

To determine whether Defendants have a meritorious defense, the Court has evaluated Defendants’ Motion to Dismiss, including admitting evidence and taking judicial notice as requested of the documents of public record in the case. SeeLee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001). The Court agrees that Doble cannot state a claim for relief on his third, fourth, and part of his first and second causes of action, and dismisses these claims with prejudice. Upon a proper motion to enter a default judgment under Rule 55(b)(2), the Court will exercise its discretion to permit the submission of evidence from all parties on whether Doble can prove his prima facie case on the other claims. However, Defendants will be prohibited from presenting a case in defense of Doble’s claims because the default will be upheld. Fed. R. Evid. 210; Fed. R. Civ. P. 55(b)(2);

1. Defendants Are Culpable

A defendant’s conduct is culpable if it is consistent with a “devious, deliberate, willful, or bad faith failure to respond.” Mesle, 615 F.3d at 1092. Where a defendant’s actions are negligent, and not intentional, the defendant is not culpable. Id.; TCI, 244 F.3d at 698-99. For “legally sophisticated” defendants, however, intentionality is assumed because legally sophisticated parties are held to understand the consequences of their actions. Mesle, 615 F.3d at 1093. As large financial institutions, OneWest and Deutsche Bank are sophisticated parties.

Where sophisticated defendants are aware of the pendency of a suit, but are indifferent to the consequences of not responding, culpability may be found even when bad faith is absent. Franchise Holding II, 375 F.3d at 926 (defendant was culpable for failing to respond despite plaintiffs warning it would seek a default after side-agreement negotiations broke down); Direct Mail Specialists, Inc. v. Eclat Computerized Technologies, Inc., 840 F.2d 685, 690 (9th Cir. 1988)Oracle USA, Inc. v. Qtrax, Inc., No. C09-3334 SBA, 2010 U.S. Dist. LEXIS 97630, at *12-*13 (N.D. Cal. Sept. 3, 2010) (defendant’s conduct was culpable when defendant did not respond to accommodate the convenience of the CEO, cost considerations, and its hope for a settlement); Markel Ins. Co. v. Dahn Yoga & Health Ctrs., Inc., No. C09-1221RSM, 2010 U.S. Dist. LEXIS 58763, at *11-*15 (W.D. Wash. May 17, 2010) (defendants were culpable where one failed to keep registered service agent updated on its address and another failed to inform itself that the client had waived a service problem). (defendant was culpable in not responding due to a mistaken belief service was improper);

Defendants’ conduct can only be described as an intentional disregard for their obligations to comply with Court procedures and provide candid answers to the Court’s questions. As in Franchise II, Oracle, Direct Mail, and Markel,[5] properly calendared the response date. Whether due to apathy or profit maximizing considerations, Defendants relied exclusively upon a non-attorney outside vendor, contrary to protocol, and failed to properly implement litigation procedures. See Franchise II, 375 F.3d at 926; Oracle, 2010 U.S. Dist. LEXIS 97630, at * 10-12 (defendants failed to appropriately allocate corporate resources to respond to the litigation). This misplaced reliance on a non-attorney to calculate a response time is similar to the conduct of the defendants in Direct Mail and Markel, who erred in their analysis that service was improper. See Direct Mail, 840 F.2d at 690; Markel, 2010 U.S. Dist. LEXIS 58763, at *16 (“[Defendant] will not be heard to object that service was improper, nor blame its failure to respond … on poor document management policies.”). Defendants’ multiple errors are also thus distinguishable from Park v. U.S. Bank Nat’l Ass’n, No. 10cvf1546-WQH-WMc, 2010 U.S. Dist. LEXIS 123119, at *8-*10 (S.D. Cal. Nov. 19, 2010), where the defendants’ failure to answer was the result of an unintentional administrative error rather than culpable misconduct. While the Court appreciates that mistakes happen and isolated negligence can be excusable neglect, see Pioneer, 507 U.S. at 407-08,[6] what happened here was not mere negligence. Defendants were aware of the suit and the consequences of the default, but repeatedly failed to follow their own protocols. Defendants have never explained why none of Defendants’ three attorneys

Compounding their culpability problems, the Court finds that Defendants’ initial explanation of the default was neither candid nor credible. A “devious” failure to respond is culpable. Mesle, 615 F.3d at 1092. The full story belies their initial characterization that their errors in handling the Complaint were minor and isolated. No less than six mistakes or breaches of protocol occurred in how the Complaint was handled: (1) both copies of the Complaint were not sent immediately to Boyle in Austin, Texas, where litigation was to be handled; (2) the Complaint was lost for a month; (3) when the Complaint was found on August 4, 2010, it was not sent to Austin as protocol demanded, but mistakenly logged into the non-attorney LPS system; (4) LPS miscalculated the response date for the Complaint; (5) LPS incorrectly assigned the response to a law firm who was not the appropriate counsel to handle litigation for OneWest; and (6) Outside counsel failed to check the correct response date and relied upon the LPS miscalculation. The Court cannot accept Boyle’s claim that new intake protocols have solved OneWest’s systemic problems. Defendants themselves could not fully explain what went wrong in their efforts to respond to the Complaint. Even after three tries, Defendants have left questions unanswered.

Defendants’ disregard for their obligations of candor to the Court and compliance with Court procedures, not only in connection with the entry of default, but also in the presentation of numerous other documents to the Court on the merits, is culpable. The default will not be set aside.

2. Defendants Acted in Bad Faith

Defendants’ conduct in presenting evidence on the merits of this case and others demonstrates a callousness towards their legal obligations that amounts to bad faith; an additional reason not to set aside the default. Defendants filed numerous pleadings in this case and in the Martha Doble case seeking the Court’s assistance in enforcing the Loan.[7][8][9] tell a convoluted tale as to who owns the Loan and is thus entitled to enforce it. This Court was forced to repeatedly request additional evidence from Defendants to evaluate their own motions. Defendants’ pleadings and transactional documents

The most disconcerting misrepresentation to the Court was Defendants’ submission of multiple “true and correct” copies of the Note under penalty of perjury without any endorsement from Plaza. Whether the Note was endorsed is central to the merits of this case. When Defendants finally submitted an endorsed copy of the Note on November 8, 2010, they attempted to pass off the first three unendorsed copies of the Note as “illegible.” The first three copies of the Note were fully readable, so the phantom endorsement page was not a problem with legibility. The timing of this tardily produced endorsement, produced after several requests, suggests it was added only in response to the litigation. To add to the Court’s incredulity, Defendants have never answered the Court’s specific questions as to when and under what circumstances this newly proffered endorsement was executed. For the purpose of its analysis on the merits, the Court finds that the endorsement was not made until it was presented to the Court on November 8, 2010.[10]

This lack of candor in the presentation of evidence on the merits supports a finding of bad faith in regard to the default. The court system can only function if parties take their representations and responsibilities seriously. Chambers v. NASSCO, Inc., 501 U.S. 32, 43, 47 (1991); see also In re Snyder, 472 U.S. 634, 641 (1985). Courts have held that a lender’s actions amount to bad faith where the lender is shown to have routinely misrepresented its role in bankruptcy cases, caused unnecessary litigation, or prejudiced another party. See Ameriquest Mortg. Co. v. Nosek (In re Nosek), 609 F.3d 6, 9 (1st Cir. 2010). In two previous cases before this Court, Defendant OneWest has been ordered to show cause for failing to comply with its obligations as a party before the Court. See In re Carter, Ch. 13 Case No. 10-10257-MM13 (Bankr. S.D. Cal.); In re Telebrico, Ch. 13 Case No. 10-07643-LA13 (Bankr. S.D. Cal.). Not only in this action, but in others as well, One West has demonstrated a “confusion and lack of knowledge, or perhaps sloppiness, as to their roles.” Ameriquest, 609 F.3d at 9.[11]

Because Defendants’ conduct in not responding to the Complaint was intentional and in bad faith, the Court will not set aside the default.

B. Resolution of the Merits of the Case

To uphold the default entered against Defendants, the Court must consider both the merits of Defendants’ defense and the merits of Plaintiff’s case, as challenged in Defendants’ Motion to Dismiss. Mesle, 615 F.3d at 1094 (defaulting party must present a valid defense before court can set aside a default); Fed.R. Civ. P. 55(b); Eitel v. McColl, 782 F.2d 1470, 1471 (9th Cir. 1986); Cashco Fin. Servs. v. McGee (In re McGee), 359 B.R. 764, 771 (B.A.P. 9th Cir. 2006) (default judgment requires assessment of the merits of plaintiff’s claims).[12] This task is made more difficult since neither Doble’s Complaint, nor Defendants’ Motion to Dismiss, is a model of clarity. Five causes of action are alleged in the Complaint, but more than five are presented.

Defendants’ Motion to Dismiss complicates the analysis further since it questions a few, but not all, of Doble’s claims. Defendants claim MERS had authority to transfer the Loan as a matter of law, but not that the assignment was properly executed or acknowledged. Defendants dispute Doble’s attempt to employ 11 U.S.C. §544(a) to set aside the MERS’ assignment to OneWest. They also argue HAMP does not provide a private cause of action. Defendants do not, however, address the state law claims contained in the fifth cause of action.

Sorting the parties’ claims and defenses, the Court concludes some of Doble’s claims lack merit, and others require further evaluation. Even though the Court will uphold the default entry resulting from Defendants’ culpable conduct, it will nevertheless dismiss with prejudice Doble’s third and fourth causes of action, and part of Doble’s first and second causes of action relating to New York Trust law and 11 U.S.C. § 544(a). See Moore v. United Kingdom, 384 F.3d 1079, 1090 (9th Cir. 2004) (invalid causes of action may be dismissed despite default). The Court will hold further proceedings on the remaining claims to respect the due process rights of Defendants. Danning v. Lavine, 572 F.2d 1386, 1388-89 (9th Cir. 1978) (default judgment proceedings should be consistent with due process).

1. Defendants’ Secured and Unsecured Claims (1st and 2nd Causes of Action)

The first two causes of action seek damages and disallowance of Defendants’ secured and unsecured claims for lack of standing on four separate grounds: (a) MERS’ assignment of the DOT to OneWest and, in turn, OneWest’s assignment to Deutsche Bank, were invalid; (b) Defendants have no interest in the Note nor any right to enforce it under California law; (c) the assignment of the DOT to Deutsche Bank was not of public record; and (d) Defendants violated New York Trust law so that Deutsche Bank cannot be the owner of the Loan as a matter of law. Where a secured creditor cannot establish a right to enforce a loan, it has no standing to file or defend a claim, or to seek relief from stay. In re Gavin, 319 B.R. 27, 32 (B.A.P. 1st Cir. 2004); In re Hayes, 393 B.R. 259, 269-70 (Bankr. D. Mass. 2008).

Although the Court rejects Doble’s New York Trust claims and his avoiding power claim, the record here supports Doble’s first three standing claims. MERS had no authority to assign the DOT, under its terms and as a matter of law, without the authority to assign the Note. The Note was not assigned until it was endorsed by Plaza. Until that endorsement, the MERS’ assignments were a nullity. Deutsche Bank currently lacks authority to enforce the Loan as the assignee of Plaza, and will continue to lack authority until it records its assignment.

a. MERS Cannot Transfer DOT Enforcement Rights to Defendants

Defendants’ Motion to Dismiss relies upon MERS’ status as nominal beneficiary of the DOT[13] to establish their standing to enforce the Loan. They cite several cases which have so held. Lane v. Vitek Real Estate Indus. Group, 713 F. Supp. 2d 1092, 1099 (E. D. Cal. 2010); Hafiz v. Greenpoint Mortg. Funding, Inc., 652 F. Supp. 2d 1039, 1043 (N.D. Cal. 2009); Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1190 (N.D. Cal. 2009); see also Perry v. Nat’l Default Servicing Corp., No. 10-CV-03167-LHK, 2010 U.S. Dist. LEXIS 92907, at *11 (N.D. Cal. Aug. 20, 2010).[14] The Court does not disagree with these cases to the extent they hold MERS need not have physical possession of the note to commence a foreclosure, and securitization of a mortgage note need not impact the enforceability of the mortgage itself. The key issue before the Court is different: whether MERS had statutory authority to assign the DOT under its terms, particularly when MERS held no rights under the Note. To decide this issue, the Court rejects Defendants’ invitation to overlook the statutory foreclosure mandates of California law, and rely upon MERS as an extra-judicial commercial alternative.[15]

The DOT is a four party instrument among the Dobles as Borrowers, Plaza as Lender, First American Title as trustee, and MERS as beneficiary. The Lender’s rights regarding the Loan are pervasive. The Lender (Plaza) is entitled to receive all payments under the Note, to control enforcement of the DOT under its terms, and only the Lender is entitled to conduct a nonjudicial foreclosure.[16]

MERS has none of these rights under the DOT and is not even mentioned in the Note. MERS is not given any independent authority to enforce the DOT under its terms, and its status as beneficiary under the DOT is only “nominal.” While the Borrowers acknowledge in the DOT that MERS can exercise the Lender’s rights as “necessary to comply with law or custom,[17] this acknowledgement is not accompanied by any actual allocation of authority to nonjudicially foreclose on the Property, nor is such authority allocated in any other document in the record. See also, e.g., LaSalle Bank Nat’l Ass’n v. Lamy, No. 030049/2005, 2006 NY Slip Op 51534U, slip op. 2 (N.Y. Sup. Ct. 2006); MERS v. Saunders, 2 A.3d 289, 295 (Me. 2010) (“MERS’ only right is to record the mortgage. Its designation as the `mortgagee of record’ in the document does not change or expand that right….”). Defendants’ authority to foreclose cannot, therefore, be derived from MERS because MERS never held such authority.[18] Shannon v. General Petroleum Corp., 47 Cal. App. 2d 651, 661 (1941) (assignment can only carry rights owned by the assignor.)

Even though MERS’ status as the nominal beneficiary of the DOT may have allowed it to assign that limited status, this authority does not convey a right to enforce the Loan. An assignment of a mortgage without assignment of the corresponding debt is a nullity under controlling law. Carpenter v. Longan, 83 U.S. 271, 275 (1872); Kelley v. Howarth, 39 Cal. 2d 179, 192 (1952); Johnson v. Razy, 181 Cal. 342, 344 (1919) (“A mortgage is mere security for the debt, and it cannot pass without transfer of the debt.”); Polhemus v. Trainer, 30 Cal. 686, 688 (1866) (interest in the collateral subject to the mortgage does not pass “unless the debt itself [is] assigned.”). Within California’s comprehensive statutory nonjudicial foreclosure scheme found at Civil Code sections 2920-2955, four separate statutes corroborate that the secured debt must be assigned with the deed of trust.[19]

Since MERS could not assign any enforcement rights under the Note or DOT because it held none, Defendants could not rely on the invalid MERS assignment to enforce the DOT. Polhemus, 30 Cal. at 688; see also U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 651 (2011). They had to receive an assignment from Plaza as the payee of the Note before the MERS assignment of its nominal interest in the DOT could have any enforceable impact.

b. Defendants’ Right to Enforce the Note

A negotiable promissory note such as the Note can only be enforced in accordance with Article 3 of the Commercial Code (“CCC”), Cal. Com. Code §§ 1101-16104 (Deering 2011). The CCC permits enforcement of a note by a party who: (1) holds a directly endorsed note (section 1205(21)); (2) previously had the ability to enforce the note, but it was lost, destroyed, or stolen (section 3309); (3) has possession of an endorsed-in-blank instrument (section 1205(21)); or (4) can prove both possession of the enforcement rights received from its transferor (section 3301). Id; In re McMullen Oil Co., 251 B.R. 558, 568 (Bankr.C.D. Cal. 2000); In Re Carlyle, 242 B.R. 881, 887 (Bankr. E.D. Va. 1999). These requirements apply to every link in the chain of transfer of the note. Where a note has been assigned several times, each assignment in the chain must be valid or the party claiming the note cannot enforce it. In re Gavin, 319 B.R. 27, 32 (B.A.P. 1st Cir. 2004); In re Wells, 407 B.R. 873 (Bankr. N.D. Ohio 2009). Even if a party is the owner of a promissory note, it is not entitled to enforce the note unless it meets the statutory criteria for enforcement. Cal.Com. Code §3203(b) cmt. 2.

Enforcement option 1 is not applicable. The Note is not payable to Defendants, but to Plaza. Neither Defendant can enforce the Note as a direct payee or endorsee. In re Wilhelm, 407 B.R. 392, 402 (Bankr. D. Idaho 2009); Chicago Title Ins. Co. v. Allfirst Bank, 905 A.2d 366, 374 (Md. 2006). No claim was made that the Note was lost or stolen, which eliminates option 2.

As to option 3, not until November 8, 2010 did Defendants produce the Note endorsed in blank by Plaza. An endorsement is not effective until it is signed. Com.Code §3203(c); Security Pacific Nat. Bank v. Chess, 58 Cal. App. 3d 555, 564 (1976). Until the note is properly endorsed, assignments of the deed of trust do not serve to transfer enforcement rights. Id. The endorsement must be on the note or attached. Lopez v. Puzina, 239 Cal. App. 2d 708, 714 (1st Dist. 1966).

Defendants did not attempt to demonstrate the requirements of option 4; that they had possession of the Note and that Plaza had transferred to them the right to enforce it even without an endorsement. Instead, they erroneously relied upon the MERS assignment. Com.Code § 3203 (1), (2) n. 17; In re McMullen Oil Co., 251 B.R. 558, 567 (Bankr. CD. Cal. 2000); In re Agard, No. 10-77338-reg, 2011 Bankr. LEXIS 488, at *58 (Bankr. E.D.N.Y. Feb. 10, 2011) (“[E]ven if MERS had assigned the Mortgage acting on behalf of the entity which held the Note at the time of the assignment, this Court finds that MERS did not have authority, as “nominee” or agent to assign the Mortgage absent a showing that it was given specific written directions by its principal.”). Under the circumstances of this case, the Court declines to give the Defendants another chance to “prove the transaction.” Instead, the Court finds that Defendants did not have any right to enforce the Note before November 8, 2010, when they produced an endorsement of the Note from Plaza.

c. Deutsche Bank’s Assignment of the DOT Must Still be Recorded

Although Deutsche Bank met the first of the foreclosure prerequisites to enforce the power of sale in the DOT under Civil Code section 2932.5[20] when it became the holder of the Note on November 8, 2010, it still failed to meet the second. Civil Code section 2932.5 requires that the assignee of the secured debt record its interest before it can exercise the power of sale under the DOT and nonjudicially foreclose. Deutsche Bank admits it has recorded neither of the two assignments from OneWest to Deutsche Bank. Deutsche Bank, therefore, still lacks authority to enforce the DOT, and any enforcement actions taken thus far are void. Ibanez, 458 Mass, at 651; Polhemus, 30 Cal. at 688.

d. New York Trust Law

As part of the first and second causes of action, Doble alleges that Deutsche Bank cannot own the Loan because the Loan was not properly transferred to it in accordance with New York Trust law and the trust documents. Under the terms of the Purchase and Servicing Agreement (“PSA”), Doble alleges all assets to be part of the trust had to be conveyed before June 1, 2005. Since none of the assignments of the Loan met that deadline, Doble claims Deutsche Bank has no interest in the Loan. Defendants, in turn, claim Doble has no standing to challenge the trust, citing Rogan v. Bank One, N.A. (In re Cook), 457 F.3d 561, 567 (6th Cir. 2006). While the Court agrees that Doble has no standing to interfere with trust administration, he does have standing to challenge Defendants’ assertion they had standing to file a claim and to seek to foreclose the Loan. Wilhelm, 407 B.R. at 400.

The Court nevertheless finds the allegations of this claim to be too flawed to remain a part of this suit. See Eitel, 782 F.2d at 1471. Based on the allegations of the Complaint, the Court cannot determine whether the Loan was validly conveyed to the trust, whether the trust is invalid, or what effect such an invalidation would have on Defendants’ claim.[21] Doble has provided no legal support for his claims. His citation to New York Estate Powers and Trusts Law section 7-2.4 (Consol. 2010), to support that any “sale, conveyance, or other act” in “contravention” of the trust is void, is incorrect.[22]

Doble’s New York trust claim within the first and second causes of action therefore will be dismissed with prejudice.

2. The Assignments May Not be Avoided (2nd Cause of Action)

The Court agrees that Doble has no viable avoiding power claim to assert as a result of Defendants’ recordation of assignments after the Martha Doble bankruptcy case was filed. Doble was provided constructive notice of Defendants’ lien from the recordation of the DOT, regardless of whether interests in the Loan were later transferred. In re Cook, 457 F.3d at 568; Kapila v. Atl. Mortg. & Inv. Corp. (In re Halabi), 184 F.3d 1335, 1338 (11th Cir. 1999); see also In re Probasco, 839 F.2d 1352, 1354 (9th Cir. 1988) (applying California law, a bona fide purchaser who records prevails over a prior transferee who failed to record). The Court also notes these claims are property of the Martha Doble bankruptcy estate, not this case. Doble thus lacks standing to assert this claim. See Estate of Spirtos v. One San Bernardino County, 443 F.3d 1172, 1176 (9th Cir. 2006) (husband does not have authority to assert claims on the part of wife without substantial proof of standing). This part of the second cause of action is also dismissed with prejudice.

3. Violation of Stay (3rd Cause of Action)

Doble’s third cause of action alleges[23] that Assignments 2 and 3 from OneWest to Deutsche Bank were executed post-petition in Martha Doble’s case, and are void and in violation of his co-debtor stay under 11 U.S.C. §1301. In response, Defendants assert that the stay is not violated by assignments of their mortgage interests post-petition, because those interests do not belong to Martha Doble’s bankruptcy estate.

The Court agrees that this is not a valid cause of action. Because the automatic stay only applies to transfers of a debtor’s property interests under 11 U.S.C. § 362(a)(3), Defendants’ transfers of their interests in the Loan do not violate the automatic stay. Halabi, 184 F.3d at 1337; Cook, 457 F.3d at 568. This cause of action will be dismissed with prejudice.

4. Violation of Bankruptcy Code (4th Cause of Action)

Doble specifically seeks damages and sanctions relating to Defendants’ proof of claim and false declaration filed in the relief from stay motion in Martha Doble’s case. Defendants’ only response to this is to reiterate that the unrecorded assignment is not avoidable under § 544(a). Defendants fail to address any other allegations in this cause of action.

Despite Defendants’ failure to cogently respond to this cause of action, the Court finds Doble has no standing to assert damages in his wife’s bankruptcy case. Doble was not a joint debtor in that case, and Martha Doble is not a party in this case. See In re Scott, 437 B.R. 376, 379-80 (B.A.P. 9th Cir. 2010). This cause of action is not viable to the extent it seeks damages for Doble in his wife’s case, and it will be dismissed with prejudice.

5. Loan Modification Claims (5th Cause of Action)

In the fifth cause of action, Doble alleges an array of theories complaining of Defendants’ conduct in the loan modification process, including that they engaged in unlawful business practices, violated California’s Consumer Legal Remedies Act, California Civil Code Section §§ 1750-1759, and breached the covenant of good faith and fair dealing. In response, Defendants only challenge whether HAMP establishes a private cause of action, based on Doble’s allegation he is an intended third party beneficiary under the HAMP contract.

The facts alleged in the Complaint, as well as the additional evidence proffered by the parties in response to the Court’s inquiries, reflect ongoing efforts by Doble to modify the Loan over a period of eighteen months. Doble claims the efforts were successful, and Defendants should be bound by the permanent loan modification they offered him in May 2010. Defendants claim the Loan modification effort failed because Doble failed to make all of the payments due during the trial period. To resolve this basic controversy requires further evidentiary proceedings, since the communications by Defendants were confusing and contradictory, but Doble did fail to make all of the required payments even if there was a binding loan modification with Defendants. To facilitate the evidentiary hearing, the Court will preliminarily address Doble’s theories of recovery.

Courts have differed on whether HAMP permits a private right of action. Compare Benito v. Indymac Mortg. Servs.,and Escobedo v. Countrywide, No. 09-cv-1557 BTM (BLM), 2009 U.S. Dist. LEXIS 117017, at * 4-*7 (S.D. Cal. Dec. 15, 2009) (same), with Marques v. Wells Fargo Home Mortgage Inc., No. 09-cv-1985-L (RBB), 2010 U.S. Dist. LEXIS 81879, at *19-*20(S.D. Cal. Aug. 12, 2010) (finding a borrower is a third party beneficiary with regard to certain contract terms that are not discretionary, and HAMP otherwise has no enforcement remedies). In determining whether a party is an intended beneficiary of a government contract, a court must examine “the precise language of the contract for a clear intent to rebut the presumption that the third parties are merely incidental beneficiaries.” County of Santa Clara v. Astra USA, Inc., 588 F.3d 1237, 1244 (9th Cir. 2009), cert. granted sub. nom, Astra USA, Inc. v. Santa Clara County, 131 S.Ct. 61 (2010) (failure to include express language identifying parties as intended beneficiaries is not dispositive). To the extent Doble can prove a specific provision of HAMP was violated, and compliance with the provision was mandatory for Defendants, he may be able to prove a valid cause of action as a third party beneficiary of HAMP. No. 2:09-CV-001218-PMP-PAL, 2010 U.S. Dist. LEXIS 51259, at *20-*21 (D. Nev. May 21, 2010) (holding a borrower is not a third party beneficiary),

Doble’s other claims are not invalid as a matter of law even if he cannot establish a direct cause of action under HAMP. Failure to establish a HAMP third party beneficiary contract cause of action does not preclude state law claims relating to the Lender’s alleged misconduct. Escobedo, 2009 U.S. Dis. LEXIS 117017, at * 10 (allowing claims for violation of unfair business practices under Cal. Bus. & Prof. Code § 17200); Villa v. Wells Fargo Bank, N.A., No. 10CV81 DMS (WVG), 2010 U.S. Dist. LEXIS 23741, at *9 (S.D. Ca. 2010) (allowing an amendment to allege misrepresentation claims); Aceves v. U.S. Bank, N.A., 192 Cal. App. 4th 218, 233 (2d Dist. 2011) (allowing promissory estoppel and fraud claims). Doble’s claims under the California Legal Remedies Act, Cal. Civ. Code §§ 1750-1759, and his claims for breach of the covenant of good faith and fair dealing, therefore, cannot be dismissed as a matter of law at this time.

C. Order To Show Cause

Based on the facts and circumstances described in this Memorandum Decision, the Court orders that Defendants appear and show cause why they should not pay Doble’s attorney’s fees for their conduct in this action. This order to show cause is issued pursuant to this Court’s authority under 28 U.S.C. § 157, 11 U.S. C. § 105, Bankruptcy Rule 9011(c)(1)(b) and the Court’s inherent power to monitor the proceedings before it for the benefit of the Court, the profession and the public. Chambers v. NASCO, Inc., 501 U.S. 32, 43, 47 (1991); In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1305 (11th Cir. 2006) (“it is within a court’s discretion to assess attorney’s fees on a party … for actions taken in bad faith”).

III. CONCLUSION

The Court denies Defendants’ request to set aside the clerk’s entry of a default, but grants their Motion to Dismiss the portions of the first and second causes of action relating to Doble’s New York Trust claims and avoiding power claims. Defendants’ Motion to Dismiss Doble’s third and fourth causes of action is also granted. As to the remainder of the first and second causes of action, the Court finds MERS’ limited role as beneficiary of the DOT did not provide talismanic protection against the myriad foreclosure deficiencies committed by Defendants regarding this Loan. MERS’ role did not provide Defendants the authority to enforce the DOT, the ability to assign the Note without an endorsement from Plaza, or an exception to their obligation to record the assignment to Deutsche Bank. The Court will allow Doble to produce additional evidence in support of his claims, but not his wife’s claims. The Court will disallow Defendants’ secured and unsecured claims without prejudice. Defendants may file an amended proof of claim in this case if they fully address the defects identified in this Memorandum Decision.

The Court orders Defendants to appear and show cause why they should not pay Doble’s attorneys fees for their conduct in this action, and schedules a status conference for April 28, 2011 at 3:00 in Department 1 of this Court.

[1] See infra Part II.B.1.a.

[2] Doble’s reason for not agreeing to set aside the default was his frustration with the “false documents” submitted regarding ownership of the Loan.

[3] To be prejudicial, reopening the default must result in greater harm than a mere delay in relief. Mesle, 615 F.3d at 1095; see also Franchise Holding II, 375 F.3d at 926 (plaintiff was prejudiced where there was a possibility that a delay in judgment would allow defendant an opportunity to hide assets). Here, Defendants have asserted that Doble is not prejudiced by their delay and there is no evidence before the Court to the contrary. Ultimately, however, since Rule 55(c)’s good cause factors are disjunctive, and Defendants’ conduct is culpable, a prejudice analysis is unnecessary.

[4] The Rule 55(c) good cause factors are identical to those used to consider whether relief should be granted from a default judgment under Rule 60(b). See Mesle, 615 F.3d at 1091; TCI, 244 F.3d at 696. However, while the factors are the same, the standards for evaluating the factors are distinct. O’Brien v. R.J. O’Brien & Assocs., Inc., 998 F.2d 1394, 1401 (7th Cir. 1993). Rule 55(c)’s relief from default standard is less rigorous than the relief from judgment standard of Rule 60(b). Hawaii Carpenters’ Trust Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986) (“The different treatment of default entry and judgment by Rule 55(c) frees a court considering a motion to set aside a default entry from the restraint of Rule 60(b) and entrusts determination to the discretion of the court.”); accord Tessill v. Emergency Physician Assocs., 230 F.R.D. 287, 289 (W.D.N.Y. 2005).

[5] These three attorneys are the Deutsche Bank counsel who forwarded the Complaint to OneWest, the OneWest Corporate Legal Department who received both the OneWest Complaint it received on its own behalf and the Complaint sent by Deutsche Bank, and Burnett & Matthews, the first outside counsel who received the Complaint.

[6] This reading of culpability is consistent with the Supreme Court’s interpretation of the analogous “excusable neglect” standard of Rule 60(b)(1). Pioneer Inv. Serv. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380, 393, 395-97 (1993) (a party’s failure to respond is excusable if inadvertent or negligent); Mesle, 615 F.3d at 1092; Franchise Holding II, 375 F.3d at 927.

[7] In the Martha Doble case, in a Declaration filed May 4, 2010, Deutsche Bank, through its purported power of attorney, One West, claimed to be the owner of the Loan based upon a chain of assignments. Deutsche Bank claimed the same in its proof of claim. However, in this case, OneWest filed the proof of claim for the Loan identifying itself as the creditor. In this adversary case, Defendants averred MERS assigned all beneficial interest under the DOT to OneWest on October 22, 2009 and OneWest assigned all beneficial interest to Deutsche Bank in an unrecorded assignment dated May 19, 2010. This assignment to Deutsche Bank on May 19, 2010, however, is dated after Deutsche Bank averred to this Court on May 4, 2010 that it was the owner of the Loan. Separately, Deutsche Bank has also claimed it owned the Loan as of 2008 without evidentiary support.

[8] The Court on October 5, 2010 issued a tentative ruling continuing the hearing on the Motions and seeking additional evidence regarding who had the right to foreclose the Loan, and whether the Loan Modification Agreement, which Doble alleges he executed on June 3, 2010, was also executed by Defendants. The Court issued another tentative ruling on December 15, 2010 seeking an “explanation from Defendants regarding the contradictory statements submitted by Defendants under penalty of perjury in both Debtor’s and Martha Doble’s bankruptcy cases regarding the identity of the owner of the Note,” the role of OneWest, and the circumstances of the endorsement of the Note. The Court inquired twice more regarding the circumstances of the alleged loan modification and the Defendants’ default.

[9] Defendants provided the Court with an “Assignment of Deed of Trust” executed on June 26, 2009 through which MERS, as the original beneficiary, purports to assign to OneWest all beneficial interest under the DOT, “together with the Note” (“Assignment 1″). However, One West did not record its interest until after its foreclosure proceedings were started. On July 14, 2009, a Notice of Default on the loan was recorded by OneWest, even though OneWest lacked any recorded interest in the Loan at the time. Only when OneWest recorded a Notice of Sale on the Loan on October 22, 2009, did it finally record Assignment 1.

On November 24, 2009, OneWest executed, but did not record, an Assignment of Deed of Trust to Deutsche Bank “together with the Note” (“Assignment 2″). Then on May 19, 2010, OneWest executed but did not record another Assignment of Deed of Trust “together with the Note” (“Assignment 3″) to Deutsche Bank. Deutsche Bank curiously produced a copy of a power of attorney it granted to OneWest regarding ownership of the Loan. Whatever significance this power of attorney has, it does not support the assignment from OneWest to Deutsche Bank because Deutsche Bank had no apparent rights to the Loan before it received them from OneWest.

[10] This sanction is similar to the entry of a default judgment against Defendants for their bad faith failure to comply with the orders of this Court. See, e.g., Carter v. Brooms (In re Brooms), No. NC-10-1117-KiSah, 2011 Bankr. LEXIS 648, at *21 (B.A.P. 9th Cir. Jan. 18, 2011) (upholding the court’s default judgment pursuant to 7016(d) for a party’s failure to comply with a pre-trial order).

[11] Specifically, an inability to coherently prove ownership is both endemic to the industry, and a common problem. Ameriquest, 609 F.3d at 9; see also, e.g., U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011) (holding US Bank did not sufficiently demonstrate it held title to a mortgage under Massachusetts law prior to foreclosure where US Bank alleged it received title pursuant to a trust agreement and did not provide the trust agreement but, instead, provided an unsigned offer of mortgage-backed securities to potential investors that did not specifically identify the mortgage in question).

The Court’s finding here is consistent with the findings of the academics and reporters who note this pattern of behavior is common in the mortgage industry. Studies have shown that mortgage holders and servicers routinely file inaccurate claims, some of which may not be lawful. See Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Tex. L. Rev. 121, 123-24 (2008); Andrew J. Kazakes, Developments in the Law: the Home Mortgage Crisis, 43 Loy. L.A. L. Rev. 1383, 1430 (2010) (citing David Streitfeld, Bank of America to Freeze Foreclosure Cases, N.Y. Times, Oct. 2, 2010, at B1) (reporting that after revelation of Porter’s study several Banks froze foreclosures); Eric Dash, A Paperwork Fiasco, N.Y. Times, Oct. 24, 2010, at WK5 (reporting the repeal of the initial freeze and the problems banks faced in clearing up foreclosure paperwork). The Inspector General overseeing the recent financial crisis has studied this issue and concluded:

Anecdotal evidence of [loan servicers’] failures [have] been well chronicled. From the repeated loss of borrower paperwork, to blatant failure to follow program standards, to unnecessary delays that severely harm borrowers while benefiting servicers themselves, stories of servicer negligence and misconduct are legion, and . . . they too often have financial interests that don’t align with those of either borrowers or investors.

Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly Report to Congress 12 (Jan. 26, 2011), available at http://www.sigtarp.gov/ (follow link for “Quarterly Report to Congress”).

[12] After entry of a default, a court may exercise its discretion to enter a default judgment on the merits of the case. Fed. R. Civ. P. 55(b); Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). The Ninth Circuit in Eitel identified the following factors for a court to consider in exercising that discretion:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

Eitel, 782 F.2d at 1471-72.

[13] The DOT states “MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the beneficiary under this Security Instrument.” DOT at p. 1.

[14] Under Ninth Circuit law this Court may decline to follow these decisions because it is not bound. State Compensation Ins. Fund v. Zamora (In re Silverman), 616 F.3d 1001, 1005 (9th Cir. 2010). While the Ninth Circuit reserved the issue of whether bankruptcy courts are bound by district court decisions within the district where the bankruptcy court sits, it recognized that such a requirement “could create the same problem of subjecting bankruptcy courts to a non-uniform body of law.” Id.

[15] The Court notes that circumventing the public recordation system is, in fact, the purpose for which the MERS system was created. Merscorp, Inc. v. Romaine, No. 179, 2006 NY Slip Op. 9500, slip op. 6 (Ct. of Appeals 2006). Creation of a private system, however, is not enforceable to the extent that it departs from California law as explained in this Memorandum Decision.

[16] Under the DOT, the Lender is secured the right to: “(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.” In addition, under the covenants executed between the Lender and Doble, the Lender is granted exclusive authority to accelerate repayment, “give notice to Borrower prior to acceleration,” “invoke the power of sale” through written notice to the Trustee in the event of default, and appoint successor trustees. DOT at pp. 2, 11, 12.

[17] The DOT provides, “Borrower understands and agrees 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 of Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing or cancelling this Security Instrument.” DOT at p. 3 (emphasis added).

[18] Since the briefing on this matter was completed, Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1151-58 (4th Dist. 2011) was decided. Gomes held that there is no cause of action under Civil Code section 2924(a)(1) that would permit a borrower to test MERS’ authority to initiate a nonjudicial foreclosure without a specific factual basis for the challenge. Neither Gomes nor Civil Code section 2924(a)(1) however, address Civil Code section 2932.5, applicable when an assignee forecloses. Id. at 1155. Instead, Gomes relied upon the borrower’s acknowledgement of MERS’ authority in the DOT to allow MERS to foreclose as nominal beneficiary. Gomes, 192 Cal. App. 4th at 1157-58. MERS, here, had no such authority under the DOT. The Lender, not MERS, has the right to “invoke the power of sale” under the DOT.

[19] These statutes are: Civil Code sections 2932.5 (assignee of secured debt cannot nonjudicially foreclose without right to payment and a recorded assignment), 2935 (notice of an assignment of a mortgage does not change the borrowers’ obligation to make payments to the holder of the note), 2936 (transfer of a note carries with it an assignment of the debt, not vice versa), and 2937 (borrowers must be notified of transfers of servicing rights).

[20] Civil Code section 2932.5 provides:

Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.

Civ. Code § 2932.5 (Deering 2011) (emphasis added). While the exact language of Civil Code section 2932.5 mentions mortgages and not deeds of trust, the distinction between the two instruments is obsolete. N. Brand Partners v. Colony GFP Partners, L.P. (In re 240 N. Brand Partners), 200 B.R. 653, 658 (B.A.P. 9th Cir. 1996) (“The terminology creates a difference without distinction.”); Yulaeva v. Greenpoint Mortg. Funding, Inc., No. S-09-1504, 2009 U.S. Dist. LEXIS 79094, at *4 (E.D. Cal. Sept. 3, 2009) (citing 4 B.E. Witkin, Summary of California Law, ch. VIII, § 5 (10th ed. 2005)); Bank of Italy Nat. Trust & Sav. Assn. v. Bentley, 217 Cal. 644, 656 (1933) (legal title under a deed of trust, though held by the trustee to the extent necessary for execution of the trust, does not carry any “incidents of ownership of the property”); see also 1 Roger Bernhardt, California Mortgages, Deeds of Trust, and Foreclosure Litigation, § 1.35 (4th ed. 2009); Bank of Italy Nat. Trust & Sav. Assn. v. Bentley, 217 Cal. 644, 656 (1933) (legal title under a deed of trust, though held by the trustee to the extent necessary for execution of the trust, does not carry any “incidents of ownership of the property”); 4 Harry D. Miller & Marvin B. Stan, Miller & Starr California Real Estate, § 10:1 n. 9 (3d 2010) (citing Dowarad v. Fisher & Burke, Inc., 270 Cal. App. 2d 543, 553 (1st Dist. 1969)) (mortgages and deeds of trust have the same effect and economic function and are “subject to the same procedures and limitations on judicial and nonjudicial foreclosure”).

[21] Specifically, the Court is unclear as to (1) whether the PSA intended to transfer the Loan to the trust (Was Doble’s Loan listed on the mortgage schedule?); (2) whether, if the PSA did intend to transfer the Loan to the trust, whether it made the transfer and documentation of the transfer was lost or whether the Loan was never transferred at all (Was the mortgage file conveyed to the trustee? Did the trustee certify the receipt of the mortgage file? Did the trustee attempt to exercise the Repurchase Provisions of the trust?); (3) whether, if the PSA intended to transfer the Loan, the parties failed to properly transfer it or whether the Loan was properly transferred but subsequent documentation was lost; and (4) whether, if the PSA did not intend to transfer the Loan to the trust, a subsequent transfer to the trust is valid under the terms of the PSA (Did the trustee receive an REMIC opinion? Did the trustee make other arrangements prior to the subsequent transfer to protect the trust’s REMIC status? Does a violation of the trust’s REMIC status negate the transfer or simply leave the trust vulnerable to an REMIC adverse event for purposes of the Tax Code?)

[22] New York Estate Powers and Trusts Law is not relevant here. Under section 11-1.1(a), New York Estate Powers and Trusts Law explicitly excludes business trusts. The Trust here is registered with the SEC, and the PSA provides for the issuance of certificates and the election of REMIC status with the IRS. Trusts whose shares are traded on the American Stock Exchange and that qualify as “real estate investment trusts” under the Internal Revenue Code are considered business trusts. Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d 1140, 1141 (C.A.N.Y. 1979). As a business trust, New York’s Estate Powers and Trusts Law does not govern Deutsche Bank’s ownership of the Loan. Rather, the ownership issue is governed by law applicable to trusts generally. See, e.g., Fogelin v. Nordblom, 521 N.E.2d 1007, 1012 (Mass 1988); In re Great Northern Iron Ore Props., 263 N.W.2d 610 (Minn. 1978).

[23] While Doble does not limit the cause of action to just this allegation, and instead states “the actions of [Defendants] as set forth hereinabove” constitute violations of the stay, these allegations are too diffuse to address without more specificity.

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CA BK Court Rejects MERS’ Offer Of An Alternative To The Public Recording System | IN RE: SALAZAR

CA BK Court Rejects MERS’ Offer Of An Alternative To The Public Recording System | IN RE: SALAZAR


“MERS System in not an Alternative to Statutory Foreclosure Law”

[ipaper docId=52898750 access_key=key-2jhywofse98k69c693yd height=600 width=600 /]

Via: FindsenLaw

© 2010-15 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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