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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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NC Appeals Court Reversal IN THE MATTER OF FORECLOSURE OF A DEED OF TRUST

NC Appeals Court Reversal IN THE MATTER OF FORECLOSURE OF A DEED OF TRUST


IN THE MATTER OF THE FORECLOSURE OF A DEED OF TRUST FROM ELOISE HALL TO SIDNEY P. JESSUP, TRUSTEE, DATED OCTOBER 2, 2007 AND RECORDED IN BOOK 1745, PAGE 243, DARE COUNTY PUBLIC REGISTRY; SEE SUBSTITUTION OF TRUSTEE RECORDED IN BOOK 1812, PAGE 300.

No. COA10-1002.Court of Appeals of North Carolina.

Filed March 15, 2011.Oliver & Friesen, PLLC, by Jonathan E. Friesen, for Eloise Hall respondent appellant.

Hornthal, Riley, Ellis & Maland, LLP, by L. Phillip Hornthal, III, for Bank of Currituck petitioner appellee.

McCULLOUGH, Judge.

Eloise Hall (“respondent-appellant”) appeals from an order entered by the trial court authorizing a substitute trustee to proceed with foreclosure on her property pursuant to the terms of a deed of trust held by the Bank of Currituck. We reverse.

I. Background

On 19 April 2007, Matthew Hall, President of Outer Banks Construction Co., Inc. (“OBC”), executed a promissory note in favor of the Bank of Currituck (the “Bank”) in the principal amount of $550,000 with a maturity date of 18 April 2008 (the “2007 Note”). The purpose of the 2007 Note was to provide a back-up letter of credit on which OBC’s bonding company could draw for the building of a construction project. The 2007 Note was labeled “Loan Number 65257145.”

Subsequently, on 2 October 2007, respondent-appellant, mother of Matthew Hall, executed a North Carolina Future Advance Deed of Trust (the “Deed of Trust”) to the Trustee for the Bank, which was recorded in the office of the Register of Deeds of Dare County on 4 October 2007. The Deed of Trust contained the following provision:

This Deed of Trust is given to secure all present and future advances made or to be made pursuant to the terms of the obligation. . . . [T]he maximum amount of present and future obligations which may be secured at any one time is $350,000.00 . . . . The period within which any and all future advances are to be made and secured hereunder is the period between the date hereof and April 18th 2008.

The Deed of Trust further provided that the “loan documents” secured by the Deed of Trust included:

[A] Promissory Note, issued by [the Bank] dated February 15th, 2007 in the face amount of $150,000 and modified and reduced to $80,000 on July 26th, 2007 and an Irrevocable Letter of Credit issued by [the Bank] dated April 19th, 2007 in the aggregate face amount of up to $550,000, and a Back up Line of Credit Facility dated April 19th, 2007 in the face amount of up to $500,000 executed by Matthew F. Hall President as [sic] Outer Banks Construction Co[.] Incorporated[.]

The Deed of Trust provisions made no reference to securing any renewals, modifications, or extensions of the obligations listed. At the time the Deed of Trust was executed, the present obligation secured totaled zero, as reflected on the face of the Deed of Trust.

On 2 October 2007, respondent-appellant also executed a Hypothecation Agreement. The terms of the Hypothecation Agreement authorized “Matthew Hall President Outer Banks Construction Co. Inc.” to hypothecate or pledge as collateral certain property of Eloise Hall to secure “any present or future indebtedness, obligation or liability howsoever evidenced, . . . or any extension, modification or renewal thereof, the undersigned [Eloise Hall] hereby consenting to the extension or renewal . . . and waiving any notice of any such extension, modification or renewal.”

As of 18 April 2008, the maturity date on the 2007 Note, OBC’s bonding company had made no demands on the letter of credit. Therefore, on 19 April 2008, Matthew Hall executed a new promissory note in the principal amount of $550,000 (the “2008 Note”). The 2008 Note was labeled “Renewal of 65257145.” In August 2008, OBC’s bonding company began making draws on the letter of credit. No payments were made on the 2008 Note, and OBC defaulted.

The Substitute Trustee commenced this action upon filing a Notice of Hearing on Foreclosure of Deed of Trust on behalf of the Bank on 5 October 2009. A hearing was conducted before the Clerk of Superior Court of Dare County on 15 January 2010. The Clerk entered an order authorizing the Substitute Trustee to proceed with foreclosure under the terms of the Deed of Trust. Pursuant to statute, the order made the following findings of fact:

1. That The Bank of Currituck is the holder and owner of the [2008 Note], . . . and the balance and amounts due on [the 2008 Note] constitutes a valid debt owed by Outer Banks Construction Co., Inc. to The Bank of Currituck.

2. That the debtor, Outer Banks Construction Co., Inc., is in default under the [2008 Note] and the deed of trust . . . securing the debt which is identified and referred to hereinabove.

3. That said debt owed by Outer Banks Construction Co., Inc. to The Bank of Currituck is secured by [the Deed of Trust] . . . pursuant to the terms and provisions of the Hypothecation Agreement. . . .

4. That, under the terms and provisions of the deed of trust, the Substitute Trustee has the authority to foreclose under the power of sale set forth in the deed of trust.

5. That notice of this hearing has been served upon [all proper parties] . . . .

. . . .

7. The deed of trust contains a power of sale. The note holder has the right to have the deed of trust foreclosed under the power of sale contained and set forth therein.

On 25 January 2010, respondent-appellant filed notice of appeal with the Clerk of Superior Court of Dare County. On 5 March 2010, a hearing was conducted in the Superior Court of Dare County. At the hearing, the trial court considered the documents involved and heard the testimony of Mr. Lee Wilson, credit administrator for the Bank. Mr. Wilson testified that it was the understanding of the parties that the 2008 Note was merely an extension of the 2007 Note for an additional year because of construction delays on the project for which the 2007 Note was issued and that the Deed of Trust would continue to secure the renewal. However, Mr. Wilson acknowledged that he was not present at the time of the signing of the 2008 Note. On 29 March 2010, the trial court entered an order affirming the findings of fact made by the Clerk of Court and authorizing the Substitute Trustee to proceed with foreclosure under the terms of the Deed of Trust. Respondent-appellant appeals.

II. Standard of Review

N.C. Gen. Stat. § 45-21.16 (2009) provides that a mortgagee who seeks to exercise a power of sale under a deed of trust may do so only upon proper notice to all interested parties and only after a hearing before the clerk of superior court. Id. Any party may appeal from the clerk’s findings to the superior court. N.C. Gen. Stat. § 45-21.16(d1). The superior court, like the clerk of court, is limited in its review to determination of four factual issues set out in N.C. Gen. Stat. § 45-21.16(d):

[T]he trial court in the appeal of a foreclosure action is to conduct a de novo hearing to determine the same four issues determined by the clerk of court: (1) the existence of a valid debt of which the party seeking foreclosure is the holder, (2) the existence of default, (3) the trustee’s right to foreclose under the instrument, and (4) the sufficiency of notice of hearing to the record owners of the property.

In re Foreclosure of Azalea Garden Bd. & Care, Inc., 140 N.C. App. 45, 49-50, 535 S.E.2d 388, 392 (2000) (citing In re Foreclosure of Goforth Properties, Inc., 334 N.C. 369, 374, 432 S.E.2d 855, 858 (1993)). “The applicable standard of review on appeal where . . . the trial court sits without a jury, is whether competent evidence exists to support the trial court’s findings of fact and whether the conclusions reached were proper in light of the findings.” Id. at 50, 535 S.E.2d at 392 (citing Walker v. First Federal Savings and Loan, 93 N.C. App. 528, 532, 378 S.E.2d 583, 585, disc. review denied, 325 N.C. 320, 381 S.E.2d 791 (1989)).

III. Discussion

Respondent-appellant assigns error to the trial court’s findings of fact that the 2008 Note is secured by the Deed of Trust and that such Deed of Trust secures the 2008 Note pursuant to the terms of the Hypothecation Agreement. Respondent-appellant contends that neither the terms of the Hypothecation Agreement nor the provisions of the Deed of Trust extend her property as collateral to secure the debt incurred under the 2008 Note. We agree.

To be a valid lien on real property, North Carolina law requires a deed of trust to specifically identify the obligation it secures. Putnam v. Ferguson, 130 N.C. App. 95, 98, 502 S.E.2d 386, 388 (1998); In re Foreclosure of Enderle, 110 N.C. App. 773, 775, 431 S.E.2d 549, 550 (1993); see also In re Head Grading Co., Inc., 353 B.R. 122, 123 (Bankr. E.D.N.C. 2006) (“North Carolina law requires deeds of trust to specifically identify the debt referenced therein.”). In the present case, the Deed of Trust very specifically describes the obligation secured as including:

[A] Promissory Note, issued by [the Bank] dated February 15th, 2007 in the face amount of $150,000 and modified and reduced to $80,000 on July 26th, 2007 and an Irrevocable Letter of Credit issued bythe Bank] dated April 19th, 2007 in the aggregate face amount of up to $550,000, and a Back up Line of Credit Facility dated April 19th, 2007 in the face amount of up to $500,000 executed by Matthew F. Hall President as [sic] Outer Banks Construction Co[.] Incorporated . . . . [

(Emphasis added.) Therefore, the Deed of Trust explicitly secures the 2007 Note.

In addition, our Supreme Court has held that a deed of trust executed as security for a debt will secure all renewals of the debt unless a different intent appears. Wachovia Nat’l Bank v. Ireland, 122 N.C. 571, 574, 29 S.E. 835, 835 (1898)See In re Blevins, 255 B.R. 680, 684 (W.D.N.C. 2000) (affirming Bankruptcy Court’s holding that, under North Carolina contract law, a promissory note executed as a renewal does not cancel the original promissory note or the deed of trust securing the debt incurred under the original promissory note). Our Supreme Court has further held, “Where a note is given merely in renewal of another note and not in payment thereof, the effect is to extend the time for the payment of the debt without extinguishing or changing the character of the obligation[.]” Dyer v. Bray, 208 N.C. 248, 248, 180 S.E. 83, 83 (1935). Accordingly, a promissory note executed as a renewal only operates as an extension of time for payment and will continue to be secured by a deed of trust that secures the original debt, unless a contrary intent appears. (“The deed contains a covenant that the charge shall be binding for all renewals of the debts specified. This would be so without any agreement, unless a different intent appeared.”). Although more than a hundred years old, this holding has never been overturned and still serves as controlling precedent in North Carolina today.

In the present case, respondent-appellant disputes that the 2008 Note, in addition to the 2007 Note, is secured by the Deed of Trust. The face of the 2008 Note specifically states that it is a “renewal of” loan number “65257145.” This loan number is the loan number of the 2007 Note. Therefore, the documents indicate the fact that the 2008 Note was issued as a renewal of the 2007 Note, and because a renewal note is not intended to extinguish the original obligation, the Deed of Trust that encompasses the original 2007 Note also secures the new 2008 Note, unless a contrary intent appears. The Bank maintains that the Deed of Trust “evinces the intent” that the Deed of Trust secures the 2008 Note based simply on the fact that the 2008 Note is a renewal of the 2007 Note. However, counter to the Bank’s assertion, the terms of the Deed of Trust do in fact reflect the contrary intent that the debts incurred under the 2008 Note are not secured under the Deed of Trust.

On the face of the Deed of Trust appears the following future advances clause:

This Deed of Trust is given to secure all present and future advances made or to be made pursuant to the terms of the obligation. The amount of the present obligation secured hereunder is $00.00 (zero) and the maximum amount of present and future obligations which may be secured at any one time is $350,000.00 (three hundred and fifty thousand dollars). The period within which any and all future advances are to be made and secured hereunder is the period between the date hereof and April 18th, 2008. This Deed of Trust is made pursuant to Article 7 of Chapter 45 of the North Carolina General Statutes.

(Emphasis added.) Article 7 of Chapter 45 of the North Carolina General Statutes addresses “Instruments to Secure Future Advances and Future Obligations.” N.C. Gen. Stat. §§ 45-67 through -79 (2009). The future advances clause in the Deed of Trust is consistent with the provisions of N.C. Gen. Stat. § 45-68(1) (2007) (amended 2009) in effect at the time the Deed of Trust was executed, which instructs that a security instrument, including a deed of trust, shall secure future advances and future obligations so as to give priority so long as certain criteria are stated in the security instrument. Id. Notably, one term that must be stated in a deed of trust is: “The period within which future obligations may be incurred, which period shall not extend more than 15 years beyond the date of the security instrument . . . .” Id. Therefore, in anticipation of any extensions or renewals, the Bank could have secured priority for future advances or future obligations for up to fifteen years pursuant to the terms of the statute in effect at that time. However, the Deed of Trust expressly limits the time period for which future advances “are to be made and secured hereunder” to the period expiring on 18 April 2008. As such, the Deed of Trust evinces the intent to limit the extent to which the Deed of Trust secures future advances to only those made prior to 18 April 2008.

Furthermore, our courts adhere to the central principle of contract interpretation that “`[t]he various terms of the [contract] are to be harmoniously construed, and if possible, every word and every provision is to be given effect.'” Duke Energy Corp. v. Malcolm, 178 N.C. App. 62, 65, 630 S.E.2d 693, 695 (2006) (quoting Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293, 299-300, 524 S.E.2d 558, 563 (2000)); see also In re Den-Mark Const., Inc., 398 B.R. 842, 850 (Bankr. E.D.N.C. 2008) (“Contract interpretation in North Carolina must favor an interpretation of a contract that gives meaning to every clause over an interpretation that does not.”). “It is a well-settled principle of legal construction that it must be presumed the parties intended what the language used clearly expresses, and the contract must be construed to mean what on its face it purports to mean.” Self-Help Ventures Fund v. Custom Finish, ___ N.C. App. ___, ___, 682 S.E.2d 746, 749 (2009) (internal quotation marks and citations omitted). “Moreover, all contemporaneously executed written instruments between the parties, relating to the subject matter of the contract, are to be construed together in determining what was undertaken.” Id. (internal quotation marks and citation omitted). “Thus, where a note and a deed of trust are executed simultaneously and each contains references to the other, the documents are to be considered as one instrument and are to be read and construed as such to determine the intent of the parties.” In re Foreclosure of Sutton Investments, 46 N.C. App. 654, 659, 266 S.E.2d 686, 689 (1980).

In the present case, respondent-appellant executed two documents contemporaneously on 2 October 2007: the Deed of Trust and the Hypothecation Agreement. Respondent-appellant contends that the trial court erred in finding that the Deed of Trust secures the 2008 Note pursuant to the terms of the Hypothecation Agreement. Respondent-appellant argues that in construing the Deed of Trust and the Hypothecation Agreement together, the intent of the parties was to limit the period in which advances could be made and secured under the Deed of Trust. We find respondent-appellant’s argument particularly persuasive under the facts of this case.

The primary purpose of the Hypothecation Agreement signed by respondent-appellant on 2 October 2007 is to:

[A]uthorize[] Matthew Hall President Outer Banks Construction Co. Inc. (Debtor) to hypothecate, pledge and/or deliver to [the Bank] . . . property (Collateral) described below belonging to the undersigned [Eloise Hall], and the undersigned agrees that when so hypothecated, pledged and/or delivered said Collateral shall be collateral to secure any present or future indebtedness, obligation or liability howsoever evidenced, owing by Debtor to [the Bank], or any extension, modification or renewal thereof, the undersigned hereby consenting to the extension or renewal . . . and waiving any notice of any such extension, modification or renewal.

The language of the Hypothecation Agreement thereby authorized OBC to pledge the property of respondent-appellant for any present or future obligations to the Bank, including any extensions or renewals of those obligations. The future advances provision in the Deed of Trust, on the other hand, made no provision for extensions or renewals of the specified obligations and expressly limited both the amount that the Deed of Trust would secure, as well as the period within which advances could be made and secured. Further, the Deed of Trust expressly stated the final date for payment of the obligation secured thereunder was 18 April 2008, the same maturity date reflected on the 2007 Note. Construed together, the instruments reveal that respondent-appellant provided OBC with the authority to pledge her property as security for any renewals or extensions on the obligations, but limited the initial time period during which any advances would be secured by that property to the period ending 18 April 2008.

Respondent-appellant cites McNeary’s Arborists v. Carley Capital Group, 103 N.C. App. 650, 406 S.E.2d 644 (1991) in support of her contention that the future advances time limitation stated in the Deed of Trust must control. In McNeary’s Arborists, the deed of trust at issue explicitly stated that “the period within which future obligations may be incurred hereunder expires March 3, 1988.” Id. at 651, 406 S.E.2d at 645. Subsequently, on 10 June 1988, the parties modified the terms of the deed of trust to extend the time period within which future advances may be made. Id.Id. at 652, 406 S.E.2d at 645. Accordingly, we agree with respondent-appellant’s contention that the express time limitation for future advances contained in the terms of the Deed of Trust controls and evinces the intent of the parties that the property of respondent-appellant pledged as collateral was meant to secure only those advances made prior to 18 April 2008. However, this Court found that any obligations incurred in the interim period between 3 March and 10 June 1988 did not have seniority over an intervening mechanic’s lien filed against the subject property pledged as collateral under the deed of trust. This Court held: “Under the explicit terms of [the lender’s] deed of trust, the period within which Carley’s future obligations could be incurred expired on 3 March 1988.”

Alternatively, the Bank contends that, because the 2008 Note is a renewal of the 2007 Note, any advances made under the 2008 Note should not be considered an advance made after the expiration of the future advances period, but rather should be considered as the original debt. The only case applying North Carolina law on which the Bank relies for its contention is In re Blevins, 255 B.R. 680 (W.D.N.C. 2000). In Blevins, the debtors both applied for and receivedId. at 682. Both loans were secured by deeds of trust pledging certain real property of the debtor as collateral. Id. The original promissory notes specifically provided that the debtor would continue to be obligated to pay the loans, “even if the loans were renewed or extended.” Id. When the 1992 Notes became due one year later, the debtor was unable or unwilling to pay the amounts owed on the notes at that time, and instead of foreclosing on the notes, the lender allowed the debtor to extend the loans for an additional year pursuant to a renewal note. Id. at 682-83. Therefore, the debtor executed renewal promissory notes on the 1992 Notes in 1993, 1994, and 1995. Id. at 683. The bankruptcy court, applying North Carolina contract law, held that the renewal notes executed by the debtor in 1993, 1994, and 1995 “were merely extensions of the 1992 Promissory Notes and therefore did not cancel the 1992 Notes or the 1992 Deeds of Trust executed by the Debtor.” Id. at 684. two loans from the lender in December 1992.

Unlike the facts in Blevins, in the present case no amounts were owed at the time of the original maturity date of the 2007 Note, which was 18 April 2008. The renewal notes in Blevins extended the time for payment on amounts already advanced and owed under the original note for which the deed of trust was executed. However, in the present case, the 2008 Note, despite being labeled a “renewal” of the 2007 Note, was not an extension of time for payment, as no debt was owed under the original 2007 Note which the Deed of Trust secured. Had the amounts been advanced under the original 2007 Note and renewed under the 2008 Note, as in Blevins, then the advances would have been made prior to the 18 April 2008 expiration date and would have been secured by the Deed of Trust. Such is not the case here.

Additionally, the North Carolina Supreme Court case of Ireland, 122 N.C. 571, 29 S.E. 835, which established the rule regarding renewals on which the Bank relies, is also distinguishable from the facts of the present case. In Ireland, the deed of trust at issue contained an express covenant that the property pledged as collateral “shall be binding for all renewals of the debts specified.” Id. at 574, 29 S.E. at 835. However, in the present case, the Deed of Trust made no covenants for renewals. Rather, the Deed of Trust expressed a clear intent to limit the initial period for which the collateral would be pledged as security to cover advances made before 18 April 2008.

Lastly, this result is compelled by the “well[-]settled” principle “that a power of sale contained in a deed of trust must be exercised in strict conformity with the terms of the instrument.” Sutton Investments, 46 N.C. App. at 659, 266 S.E.2d at 688. If the language in a separate instrument is contradictory, “language in a deed of trust expressly limiting the exercise will govern.” Id. at 659, 266 S.E.2d at 689.

In the present case, the Deed of Trust expressly limits the collateral pledged as security for only those advances made prior to 18 April 2008. The facts before the trial court unequivocally established that all advances made to OBC were under the 2008 Note and were made after the 18 April 2008 date. Despite signing a new promissory note, the Bank overlooked the term limit under the Deed of Trust securing its future advances. As between the two parties, the responsibility of ensuring that future advances are adequately secured falls on the Bank. The Bank failed to execute a modification of the time period for which future advances would be secured under the Deed of Trust, despite both its ability to extend the term pursuant to N.C. Gen. Stat. § 45-68 and OBC’s authority to pledge the collateral for such a modification, extension, or renewal pursuant to the Hypothecation Agreement. As such, the Deed of Trust expired on 18 April 2008, since no sums were advanced prior to that date, and all advances made after that express date pursuant to the 2008 Note were no longer secured under the Deed of Trust. Thus, the trial court erred in finding that the Deed of Trust secures the debt evidenced by the 2008 Note either by its terms or pursuant to the terms and provisions of the Hypothecation Agreement. Consequently, the trial court erred in finding that OBC is in default under the Deed of Trust and that the Substitute Trustee thereby has the authority to foreclose on respondent-appellant’s property under the Deed of Trust’s power of sale provision.

IV. Conclusion

We hold the trial court erred in its findings of fact that the debt owed by OBC to the Bank as evidenced by the 2008 Note is secured by the Deed of Trust pursuant to the terms of the Hypothecation Agreement and that OBC is in default under the Deed of Trust. Because these findings are not supported by competent evidence, the trial court erred in its conclusion that the Substitute Trustee is entitled to foreclose on respondent-appellant’s property pursuant to the power of sale under the terms of the Deed of Trust. Accordingly, the order of the trial court authorizing the Substitute Trustee to proceed with foreclosure under the power of sale contained in the Deed of Trust must be reversed.

Reversed.

Judges GEER and STEPHENS concur.

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MERS ‘GETS FORECLOSED’| ASSIGNS NADA TO BAC fka COUNTRYWIDE

MERS ‘GETS FORECLOSED’| ASSIGNS NADA TO BAC fka COUNTRYWIDE


Court of Appeals of Ohio

UNION BANK CO. v. NORTH CAROLINA FURNITURE EXPRESS, LLC.

2010 Ohio 4176

The Union Bank Company, Plaintiff-Appellee,
v.
North Carolina Furniture Express, LLC, et al., Defendants-Appellants, and
Jeffrey Smith, et al., Defendants-Appellees.
Bac Home Loans Servicing Lp, Plaintiff-Appellant,
v.
Jeffrey T. Smith, et al., Defendants-Appellees.

Case No. 2-10-01

Court of Appeals of Ohio, Third District, Auglaize County.

Date of Decision: September 7, 2010.

Jason A. Whitacre, Laura C. Infante and Kathryn M. Eyster for Appellant, BAC Home Loans Servicing, L.P., fka Countrywide Home Loans Servicing, L.P.

Randy L. Reeves and Sarah N. Newland for Appellees, Jeffrey Smith and Kandi Smith.

John F. Moul for Appellee, Treasurer of Auglaize County

Jerry M. Johnson and Christine M. Bollinger for Appellee, The Union Bank Company

Thomas J. Katterheinrich for Appellee, Minster Bank.

OPINION

PRESTON, J.

{¶1} Appellant-defendant, BAC Home Loans Servicing, L.P., f.k.a. Countrywide Home Loans Servicing, L.P., (hereinafter “BAC”), appeals the Auglaize County Court of Common Pleas’ judgments, which vacated BAC’s foreclosure action and denied motions to consolidate and substitute BAC as a party-defendant. For the reasons that follow, we affirm.

{¶2} This case involves two separate foreclosure actions filed in the Auglaize County Court of Common Pleas that sought judgments on certain notes and mortgages encumbering the same parcel of real estate, commonly known as 422 South Franklin Street, New Bremen, Ohio (hereinafter “the property”). The facts of this case are largely not in dispute. On November 13, 2002, Jeffrey Smith and Kandi Smith (hereinafter “the Smiths”), who were members of North Carolina Furniture Express, L.L.C., executed a note in favor of SIB Mortgage Corp., a New Jersey corporation (hereinafter “SIB”), and a mortgage in favor of Mortgage Electronic Registration Systems, Inc. (hereinafter “MERS”), solely as nominee for SIB Mortgage Corp., for $141,000.00. The mortgage was subsequently recorded in the Auglaize County Recorder’s Office on November 18, 2002.

{¶3} Several years later, on January 19, 2007, the Smiths executed another note and mortgage in favor of appellee Minster Bank (hereinafter “Minster Bank”) for $30,000.00. This mortgage was recorded in the Auglaize County Recorder’s Office on January 26, 2007. Then, on March 5, 2007, the Smiths executed three separate notes and mortgages in favor of appellee The Union Bank Company (hereinafter “Union Bank”) for $100,000.00, $25,000.00, and $24,500.00, which were subsequently recorded in the Auglaize County Recorder’s Office on March 9, 2007.[ 1 ]

{¶4} On July 23, 2008, Union Bank filed a complaint for foreclosure against the property, which was designated Case No. 2008 CV 0267 (hereinafter “the 2008 foreclosure”). In the complaint, Union Bank listed North Carolina Furniture Express, L.L.C., the Smiths, Minster Bank, MERS, SIB, the Auglaize County Treasurer, and Entrust Administration, Inc. as defendants possibly having an interest in the property. All named defendants were served with notice. According to the record, MERS was served on July 30, 2008, and SIB was served on November 14, 2008. Minster Bank and the Smiths filed timely answers to the complaint.

{¶5} Union Bank filed a motion for default judgment against defendants MERS, SIB, and Entrust Administration, Inc., on March 10, 2009. The motion for default judgment was sent to all named defendants in the matter, including MERS and SIB. The trial court granted Union Bank default judgment on March 10, 2009, specifically stating that the defendants had “been legally served with summons and that Defendants are in default for answer or appearance and therefore has no interest in and to said premises and the equity of redemption of said Defendants in the real estate described in Plaintiff’s Complaint shall be forever cut off, barred, and foreclosed.” (2008 CV 0267, Mar. 10, 2009 JE). On March 11, 2009, Union Bank filed a motion for summary judgment against the Smiths, Minster Bank, and the Auglaize County Treasurer. Similarly, a copy of the motion for summary judgment was sent to all named defendants in the matter, including MERS and SIB. On March 30, 2009, the trial court granted the motion for summary judgment and issued a judgment of foreclosure providing that the lien priority on the property was as follows: the Auglaize County Treasurer, Minster Bank, and then Union Bank.

{¶6} Shortly thereafter, the Smiths filed for bankruptcy on May 12, 2009, causing the matter to be stayed. On June 9, 2009, the bankruptcy court issued a relief from stay and abandonment for Union Bank, which allowed the 2008 foreclosure matter to continue effective on July 31, 2009, and the property was scheduled for sheriff’s sale on October 1, 2009. However, due to a notice of sale not being received or served on all party defendants, the sale was cancelled and rescheduled for December 4, 2009.

{¶7} During this time and right after the Smiths had filed for bankruptcy, on June 1, 2009, MERS (acting solely as a nominee for SIB) assigned appellant BAC its interest in the property. (2009 CV 312, Oct. 7, 2009 JE, Ex. A). Consequently, on August 28, 2009, BAC filed a complaint for foreclosure against the property in the Auglaize County Court of Common Pleas, which was designated Case No. 2009 CV 0312 (hereinafter “the 2009 foreclosure”). Along with the complaint, BAC filed a preliminary judicial report showing what it believed to be a representation of any and all interests in the property.[ 2 ] In its complaint, BAC named the Smiths, Minster Bank, Union Bank, and the Auglaize County Treasurer as defendants having a possible interest in the property. Only Minster Bank and Union Bank filed answers to the complaint.[ 3 ] Thereafter, on October 7, 2009, BAC filed a motion for default judgment against the non-answering parties, and that same day, the trial court issued a judgment entry and decree in foreclosure granting BAC’s motion for default judgment and listing the lien priority on the property in the following order: the Auglaize County Treasurer, BAC, Minster Bank, and then Union Bank.

{¶8} As a result, on October 9, 2009, Union Bank filed a motion contra to BAC’s motion for default judgment and a motion to dismiss BAC’s complaint in the 2009 foreclosure action based on the existence of the 2008 foreclosure action. Additionally, on October 16, 2009, Union Bank and Minster Bank filed a joint motion to vacate the judgment entry of default in the 2009 foreclosure action, since they had not been afforded sufficient time to respond to BAC’s motion before the judgment entry of foreclosure had been granted.

{¶9} In response to the existence of the 2008 foreclosure action, on October 21, 2009, BAC filed several motions, which included: (1) a motion to substitute defendant BAC for defendant MERS; (2) a motion to set aside the default judgment action entered against MERS in the 2008 foreclosure action; (3) a motion to stay the 2008 foreclosure default judgment entry pending resolution of the motion to set aside the judgment entry; (4) a motion to consolidate cases 2008 CV 0267 and 2009 CV 0312; or in the alternative (5) a motion for leave to file an answer to the 2008 complaint and cross-claim.[ 4 ] Union Bank filed a response opposing all of BAC’s motions in the 2008 foreclosure case.

{¶10} In both of the foreclosure actions, the trial court set all of the motions for a hearing, which was held on November 3, 2009. Thereafter, on December 3, 2009, the trial court issued a judgment entry addressing the issues in both the 2008 and 2009 foreclosure cases, but specifically stating that it was not consolidating the cases for any other purposes other than the issues presented at the November 3, 2009 hearing. Consequently, in its judgment entry, the trial court vacated part of the 2009 foreclosure action, citing that the foreclosure portion of the action had been a “clerical error” within Civ.R. 60(A). Nevertheless, the trial court found that there had been no error as against the Smiths, and thus it allowed the 2009 foreclosure action to stand, but again only as against the Smiths individually. In addition, the trial court dismissed the 2009 foreclosure complaint on the basis of res judicata, and denied the motion to consolidate and motion to substitute defendant BAC as a party-defendant in the 2008 foreclosure action finding that BAC had not acquired an interest in the property by operation of the doctrine of lis pendens.

{¶11} BAC now appeals and raises four assignments of error. For ease of our discussion we also elect to address all of BAC’s assignments of error together.

ASSIGNMENT OF ERROR NO. I

THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT FAILED TO EXPRESSLY RULE ON APPELLANT’S MOTION TO SET ASIDE DEFAULT JUDGMENT AND FAILED TO APPLY THE PROPER STANDARD FOR RULING ON SUCH A MOTION.

ASSIGNMENT OF ERROR NO. II

THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT VACATED THE OCTOBER 7, 2009 JUDGMENT ENTRY IN CASE NUMBER 2009 CV 0312 PURSUANT TO CIV.R. 60(A).

ASSIGNMENT OF ERROR NO. III

THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT REPRIORITIZED THE LIENS AGAINST THE PROPERTY SUBJECT TO CASE NUMBERS 2008 CV 0267 AND 2009 CV 0312.

ASSIGNMENT OF ERROR NO. IV

THE TRIAL COURT ERRED AND ABUSED ITS DISCRETION WHEN IT FOUND THAT BAC DID NOT OBTAIN AN INTEREST IN THE PROPERTY WHEN IT OBTAINED ITS ASSIGNMENT BY OPERATION OF THE LIS PENDENS DOCTRINE.

{¶12} Essentially, BAC argues that the follwing decisions in the trial court’s December 3, 2009 judgment entry were erroneous: (1) its ruling on the motion to substitute; (2) failing to rule on its motion to set aside the default judgment pursuant to Civ.R. 60(B); (3) vacating part of the 2009 foreclosure action; and (4) its reprioritization of the liens against the property in the 2008 foreclosure action.

{¶13} As stated above, the trial court first denied the motion to substitute BAC as a party-defendant on the basis that it did not obtain any interest in the subject real estate when it obtained its assignment from MERS. (Dec. 3, 2009 JE at 3-4). As a result, the trial court vacated part of the 2009 foreclosure action (only as against the banks) and failed to address BAC’s motion to set aside the default judgment pursuant to Civ.R. 60(B). (Id.). After reviewing the record and the applicable law, we believe that the trial court did not abuse its discretion in rendering its December 3, 2009 judgment entry.

{¶14} First, we will address the motion to substitute BAC as a party-defendant for MERS in the 2008 foreclosure action. Civ.R. 25 governs the substitution of parties. Specifically, Civ.R. 25(C) provides that “[i]n cases of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original action.” The decision of whether to allow a substitution of parties is discretionary with the trial court and may be granted only upon a finding of a transfer of interest. Ahlrichs v. Tri-Tex Corp. (1987), 41 Ohio App.3d 207, 534 N.E.2d 1231. As a result, this Court uses an abuse of discretion standard of review when determining whether a trial court erred with respect to a motion to substitute pursuant to Civ.R. 25. Argent Mtge. Co. v. Ciemins, 8th Dist. No. 90698, 2008-Ohio-5994, ¶9, citing Young v. Merrill Lynch, Pierce, Fenner & Smith (1993), 88 Ohio App.3d 12, 623 N.E.2d 94. An abuse of discretion constitutes more than an error of judgment and implies that the trial court acted unreasonably, arbitrarily, or unconscionably. Blakemore v. Blakemore (1983), 5 Ohio St.3d 217, 219, 450 N.E.2d 1140. When applying the abuse-of-discretion standard, a reviewing court may not simply substitute its judgment for that of the trial court. Id.

{¶15} While an assignment typically transfers the lien of the mortgage on the property described in the mortgage, as BAC acknowledged in its reply brief, an assignee can only take, and the assignor can only give, the interest currently held by the assignor. R.C. 5301.31. With that stated, it is clear under the facts of this case that BAC never obtained an interest in the property; thus, it could not have been substituted as a party-defendant in the 2008 foreclosure action. Here, with respect to the 2008 foreclosure action, the date the last party was served with notice was on January 28, 2009, which was almost six months before the purported assignment from MERS to BAC. Next, on March 11, 2009, the trial court issued a judgment entry of default against MERS foreclosing on its interest in the property. Once again, this default judgment was entered against MERS almost three months before the purported assignment from MERS to BAC occurred. The effect of this default judgment against MERS resulted in MERS having “no interest in and to said premises and the equity of redemption of said Defendants in the real estate described in Plaintiff’s Complaint shall be forever cut off, barred, and foreclosed.” (2008 CV 0267, Mar. 10, 2009 JE). Nevertheless, according to the documents filed by BAC to evidence its assignment from MERS, MERS assigned its interest to BAC on June 1, 2009. (2009 CV 312, Oct. 7, 2009 JE, Ex. A). Consequently, as a result of the already entered default judgment against MERS, when BAC was assigned MERS’ interest in the property on June 1, 2009, BAC did not receive a viable interest in the property. See Quill v. Maddox (May 31, 2002), 2nd Dist. No. 19052, at *2 (mortgagee’s assignee failed to establish that it had an interest in the property, as mortgagee’s interest was foreclosed by the court before mortgagee assigned its interest to assignee, which could acquire no more interest than mortgagee held). Thus, we find that it was reasonable for the trial court to have denied the motion to substitute BAC as a party-defendant for MERS given its lack of interest in the property.

{¶16} Additionally, BAC argues that the trial court erred because it did not apply the GTE Automatic standard to its motion for relief from judgment. See GTE Automatic Elec., Inc. v. ARC Industries, Inc. (1976), 47 Ohio St.2d 146, 150, 351 N.E.2d 113. In particular, BAC claims that the trial court never ruled on its Civ.R. 60(B) motion. BAC claims that not addressing its motion was erroneous. However, in this particular case, in light of our discussion above, there would have been no need to address the motion and apply any standard to the motion for relief from judgment because BAC lacked standing to challenge the default judgment entered against MERS.

{¶17} Civ.R. 60(B) allows “a party or legal representative” to vacate a default judgment upon successfully demonstrating that: “(1) the party has a meritorious defense or claim to present if relief is granted; (2) the party is entitled to relief under one of the grounds stated in Civ.R. 60(B)(1) through (5); and (3) the motion is made within a reasonable time * * *.” GTE Automatic Elec., Inc., 47 Ohio St.2d at 150, (emphasis added). However, BAC was neither a party nor was it a legal representative since it was not included in the original 2008 foreclosure action and was not allowed to be substituted as a party-defendant for MERS. Central Ohio Receivables Co. v. Huston (Sept. 20, 1988), 8th Dist. No. 87AP1-185, at *2-3 (holding that an assignee did not have standing to challenge a default judgment entered against its assignor). Accordingly, BAC lacked standing to challenge the default judgment entered against its assignor MERS in the 2008 foreclosure action, and the trial court did not abuse its discretion when it failed to rule on its motion.

{¶18} With respect to the trial court’s decision to vacate the 2009 foreclosure action, we note that the trial court did not vacate the 2009 foreclosure action in its entirety; rather, the court only vacated the portion of the action that pertained to an interest in the property. As we will discuss in further detail below, after dismissing the parties who were brought in because they had an interest in the property (i.e., Union Bank and Minster Bank), the only aspect in the 2009 foreclosure action that remained was the default judgment action against the Smiths. (Dec. 3, 2009 JE at 3-4). Nevertheless, we find that the trial court’s decision to vacate part of the 2009 foreclosure action was not an abuse of discretion.

{¶19} First of all, since MERS’ interest in the property had already been foreclosed prior to the filing of the 2009 foreclosure action, BAC did not obtain any interest in the property when it was assigned the mortgage from MERS, thus, BAC could not have brought a foreclosure action at all. Moreover, typically a pending foreclosure action between the same parties is grounds for abatement or dismissal of an assignee’s complaint. Avco Financial Services Loan, Inc. v. Hale (1987), 36 Ohio App.3d 65, 520 N.E.2d 1378; High Point Assn. v. Pochatek (Nov. 30, 1995), 8th Dist. Nos. 68000, 68395, at *3; Bates v. Postulate Invests., L.L.C., 176 Ohio App.3d 523, 2008-Ohio-2815, 892 N.E.2d 937, ¶16. Accordingly, it was reasonable for the trial court to dismiss BAC’s complaint based on the fact that the 2008 foreclosure action was still pending at the time BAC filed its 2009 foreclosure action. Therefore, although we may not agree with the trial court’s grounds for vacating most of the 2009 foreclosure action, we find that the trial court’s decision was reasonable under the circumstances and was not an abuse of discretion.

{¶20} Finally, as mentioned above, despite the trial court’s denial of the motion to substitute and its decision to vacate the 2009 foreclosure action as it related to any interest in the property, the trial court did add BAC as a lienholder in the December 3, 2009 judgment entry and stated that BAC had a fourth priority lien against the property. (Dec. 3, 2009 JE at 4). BAC claims this decision was also an abuse of discretion. Specifically, BAC claims that because the trial court recognized it had a lien against the property when it added BAC to the 2008 foreclosure lienholder list, the trial court clearly abused its discretion when it only recognized BAC as being the fourth priority lienholder, despite the fact that it had been assigned MERS lien, which would have given it the first priority lienholder to the property. Overall, BAC claims that the trial court could not have recognized it had an interest in the property without finding that it was also the first priority lienholder. While we acknowledge that the trial court obviously recognized that BAC had an interest the property, we disagree with BAC’s argument that this interest had to come from MERS’ first priority lienholder status pursuant to the mortgage.

{¶21} Despite the fact that the trial court vacated most of the 2009 foreclosure action, the trial court found that BAC’s default judgment and decree of foreclosure was valid but only as against the Smiths. This was because “as between BAC and Defendants Smith, BAC should obtain recovery of its Promissory Note, as assigned.” (Dec. 3, 2009 JE at 4). “The right to judgment on the note is one cause of action. The right to foreclose a mortgage is another cause of action. One is legal-the other is equitable.” Fifth Third Bank v. Hopkins, 177 Ohio App.3d 114, 2008-Ohio-2959, 894 N.E.2d 65, ¶15, quoting Fed. Deposit Ins. Corp. v. Simon (Aug. 17, 1977), 9th Dist. No. 8443. This is because a “mortgage is merely security for a debt and is not the debt itself.” Id., quoting Gevedon v. Hotopp, 2nd Dist. No. 20673, 2005-Ohio-4597, ¶27. As another appellate court explained:

A mortgage is a form of secured debt where the obligation, evidenced by a note, is secured by the transfer of an interest in property, accomplished by the delivery of a mortgage deed. Upon breach of condition of the mortgage agreement, a mortgagee has concurrent remedies. It may, at its option, sue in equity to foreclose, or sue at law directly on the note; or, bring an action in ejectment, Equity Savings & Loan v. Mercurio (1937), 24 Ohio Law Abs. 1, 2. Thus, suit on the note was not foreclosed by the disposition of the previous action in foreclosure, * * * Broadview Savings and Loan Company v. Crow (Dec. 30, 1982), 8th Dist. Nos. 44690, 44691, & 45002, at *3.

{¶22} As we explained above, BAC did not obtain an interest in the property since the mortgage it had obtained from MERS had already been foreclosed. Nevertheless, the default judgment entered against the Smiths in the 2009 foreclosure action gave BAC a judgment lien on the note, so BAC still had a right to collect its unsecured judgment lien out of the proceeds from the sale of the real estate. However, BAC’s judgment lien was not superior to those of Minster or Union Bank’s liens because BAC’s judgment on the note had not been issued until after the Smiths had executed mortgages to Minster and Union Bank. Therefore, we find that the trial court did not abuse its discretion when it recognized BAC’s judgment lien against the property in the 2008 foreclosure action and only recognized it as the fourth lienholder, because BAC’s lien was the result of the promissory note assigned from SIB, and not a result of the mortgage assigned by MERS.

{¶23} Overall, while we may not necessarily agree with all of the doctrines and rules the trial court used in reaching its decision, we nonetheless have held that “[a] judgment by the trial court which is correct, but for a different reason, will be affirmed on appeal as there is no prejudice to the appellant.” Wedemeyer v. U.S.S. F.D.R. (CV-42) Reunion Assoc., 3d Dist. No. 1-09-57, 2010-Ohio-1502, ¶50 quoting Davis v. Widman, 184 Ohio App.3d 705, 2009-Ohio-5430, 922 N.E.2d 272, ¶16 (citations omitted). Based on our discussion above, we find that the trial court did not abuse its discretion when it denied the motion to substitute BAC as a party-defendant for MERS in the 2008 foreclosure case on the basis that BAC did not acquire any interest in the property, when it failed to rule on BAC’s Civ.R. 60(B) motion, when it partially vacated the 2009 foreclosure action, and when it allowed BAC to have a fourth priority judgment lien.

{¶24} BAC’s first, second, third, and fourth assignments of error are, therefore, overruled.

{¶25} Having found no error prejudicial to the appellant herein in the particulars assigned and argued, we affirm the judgments of the trial court.

Judgments Affirmed

WILLAMOWSKI, P.J., concurs in Judgment Only.

ROGERS, J., Concurring in Part and Dissenting in Part.

{¶26} I respectfully concur in part and dissent in part from the decision of the majority.

{¶27} As to Assignment of Error No. I, I concur fully with the majority’s finding that the trial court did not err in denying BAC’s motion to substitute it as a party-defendant for MERS. I agree with the majority’s finding that, when the trial court issued a judgment entry against MERS foreclosing on its interest on March 11, 2009, MERS no longer had any viable interest in the property which it could assign to BAC on June 1, 2009. As such, I agree that, given BAC’s lack of interest in the property, the trial court was reasonable in denying BAC’s motion to substitute.

{¶28} Additionally, I wish to emphasize that the mortgage designated MERS “solely as nominee for SIB Mortgage Corp.” As expressed in my dissent in Countrywide Home Loans Servicing, L.P. v. Shifflet, et al., 3d Dist. No. 9-093-1, 2010-Ohio-1266, ¶¶18-21, I believe this language served solely to designate MERS as an agent for purposes of servicing the note and mortgage, and did not transfer to MERS any interest in the real estate or the repayment of moneys loaned. Therefore, it was never a real party in interest.

{¶29} Additionally, I believe that the majority’s finding in Assignment of Error No. I, with which I concur, is inconsistent with the remainder of the majority opinion.

{¶30} In its analysis of Assignment of Error No. II, the majority finds that the trial court did not abuse its discretion when it vacated the second foreclosure action (filed by BAC) and its default judgment because (1) BAC never obtained any interest in the property when MERS assigned to it the Smiths’ mortgage, and (2) a pending foreclosure action may be grounds for dismissal of an assignee’s complaint where the action is between the same parties. Nevertheless, the trial court did not vacate the portion of the second foreclosure action against the Smiths individually. Further, in its analysis of Assignment of Error No. II, the majority finds that the trial court did not abuse its discretion in listing BAC as the fourth priority lienholder because (1) BAC had a right to collect its unsecured judgment lien from the sale of the real estate foreclosed upon, and (2) BAC’s judgment lien was subordinate to Minster and Union Bank’s interests.

{¶31} While I agree with the majority’s conclusion that the trial court did not err in vacating portions of the second foreclosure action, I believe the trial court erred in failing to vacate the entire second foreclosure action. I find inconsistent the majority’s finding that any interest MERS had in the property was extinguished on March 11, 2009, and, thus, that it passed no viable interest to BAC, and the majority’s subsequent validation of the trial court’s finding that BAC’s default judgment and decree of foreclosure was valid against the Smiths. For the same reason, I find inconsistent the majority’s validation of the trial court’s prioritizing of BAC as the fourth lienholder in its December 2009 entry. I believe that the March 11, 2009 default judgment extinguished both the legal and equitable interests MERS, and consequently, BAC, had in the property. I would, therefore, reverse the trial court’s judgment, finding that it should have vacated the entire second foreclosure action and that it abused its discretion in recognizing BAC as a lienholder in the first foreclosure action, to which it was never a party. See, also, Fifth Third Bank v. Hopkins, 177 Ohio App.3d 114, 2008-Ohio-2959, ¶20 (Carr, P.J., concurring) (noting that, “[I]f such subsequent claims are not barred, consumers will be needlessly forced to defend numerous separate lawsuits. The ramifications could be onerous. First, to pay to defend against multiple lawsuits, debt-laden consumers might be forced to assume even greater financial burdens, taking out second or third mortgages on subsequent real estate purchases. This cycle could lead to consumers’ overextending themselves financially and facing additional subsequent foreclosure actions. Second, I believe that these subsequent lawsuits for money due, which could be resolved in conjunction with an initial foreclosure action, would clog the dockets of our trial courts”).

{¶32} I also disagree with the trial court’s application of the lis pendens doctrine, which it used to support its conclusion that BAC never obtained an interest in the property. I do not believe this is an appropriate use of lis pendens, but rather that any interest MERS had, and consequently that BAC could have obtained, was extinguished as operation of judgment.

{¶33} Finally, even if BAC had a valid assignment from a real party in interest, I would find that BAC’s foreclosure filing was barred by res judicata as argued in Union Bank’s “Motion in Contra to Plaintiff’s Motion for Default Judgment and Motion to Dismiss Plaintiff’s Complaint.” The Supreme Court of Ohio has held that “[t]he doctrine of res judicata encompasses the two related concepts of claim preclusion, also known as * * * estoppel by judgment, and issue preclusion, also known as collateral estoppel.” Grava v. Parkman Twp., 73 Ohio St.3d 379, 381, 1995-Ohio-331. This Court has previously held that “[c]laim preclusion prevents subsequent actions, by the same parties or their privies, based upon any claim arising out of a transaction that was the subject matter of a previous action.” Dawson v. Dawson, 3d Dist. Nos. 14-09-08, 10, 11, 12, 2009O-hio-6029, ¶36. Additionally, “[w]here a claim could have been litigated in the previous suit, claim preclusion also bars subsequent actions on that matter.” Dawson, 2009-Ohio-6029, at ¶36, citing Grava, 73 Ohio St.3d at 382. Here, Union Bank obtained a default judgment against BAC concerning the same subject matter in March 2009. Consequently, I would find BAC’s foreclosure filing in August 2009 to be barred by res judicata.

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Posted in bac home loans, chain in title, concealment, conflict of interest, conspiracy, CONTROL FRAUD, corruption, dismissed, foreclosure, foreclosure fraud, foreclosures, MERS, mortgage, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS INC., stopforeclosurefraud.comComments (1)

MERS and OCWEN GET CAUGHT IN NEVADA

MERS and OCWEN GET CAUGHT IN NEVADA


On June 23, 2009, MERS substituted MTC Financial Inc., d.b.a. Trustee Corps, as trustee. (See Id., Ex. B.) Trustee Corps recorded a notice of trustee’s sale (“NOS”) on or about September 15, 2009, indicating that it would sell the Property on October 5, 2009, (see Id., Ex. C), but Plaintiff claims to have never received notice of the NOS, (see id. ¶ 63).

The most obvious potential defect in this foreclosure stems from the fact that Trustee Corps was substituted as trustee after it recorded the NOD, but before it recorded the NOS. In Nevada, the power of sale cannot be exercised until one of two particular entities–the beneficiary or the trustee–or an agent thereof, records the NOD. Nev. Rev. Stat. § 107.080(2)(c). Trustee Corps was not such an entity when it recorded the NOD. Thus, unless Trustee Corps can provide evidence indicating that the beneficiary–Taylor–or the trustee–Equity Title–caused Trustee Corps to file the NOD, it may be liable for wrongful foreclosure.
Further complicating matters, some other unusual events occurred prior to the filing

[ipaper docId=36861562 access_key=key-2dltthz8x68xbfnhkc8z height=600 width=600 /]

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Posted in chain in title, conflict of interest, conspiracy, CONTROL FRAUD, corruption, deed of trust, discovery, dismissed, foreclosure, foreclosure fraud, foreclosures, MERS, mortgage, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS INC., note, Ocwen, reversed court decision, trustee, trustee sale, TrustsComments (1)


GARY DUBIN LAW OFFICES FORECLOSURE DEFENSE HAWAII and CALIFORNIA
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