California bankruptcy court rules against MERS

A California bankruptcy court says Mortgage Electronic Registration Systems cannot help a trustee establish legal standing to foreclose on a securitized mortgage unless the trustee already possesses an actual assignment of interest in the loan. The case — Salazar v. U.S. Bank — comes out of California’s Southern District U.S. Bankruptcy Court and is attracting attention from foreclosure attorneys as it seems to contradict another ruling, Gomes v. Countrywide. While the bankruptcy court’s decision is only binding in its own jurisdiction and is tied to a very narrow issue filed in bankruptcy court, the opinion does challenge the role MERS plays in the foreclosure process when dealing with securitized loans held by a trustee. California uses a nonjudicial foreclosure process. A MERS spokesman said the company cannot comment on pending litigation since the case is ongoing. The case began when U.S. Bank, which is a unit of U.S. Bancorp (USB), foreclosed on Eleazar Salazar as trustee for C-Bass Mortgage Loan Asset-Backed Certificates, Series 6000-CB. U.S. Bank initiated the action, citing its power under the original deed of trust. Salazar alleged “at the time it foreclosed, U.S. Bank was not the original beneficiary of record, and it had not recorded an assignment of the deed of trust conveying to it an interest in the deed of trust.” Salazar tried to invalidate the foreclosure sale, prompting U.S. Bank to file its own lawsuit to gain possession of the property. Salazar then filed for Chapter 13 bankruptcy, seeking to get the loan reinstated so he could attempt to cure the mortgage. At the same time, U.S. Bank sought relief from a stay on the foreclosure process. Salazar pushed back, saying U.S. Bank had no standing to seek relief from the court’s grant of a stay on the foreclosure because U.S. Bank’s foreclosure sale was defective because it never recorded “an assignment of interest” in the loan before the foreclosure — a requirement under California Civil Code section 2932.5. U.S. Bank said the California statute does not apply to a deed of trust and alleged “MERS’ status as the original beneficiary of the deed of trust obviated the recording of the assignment to U.S. Bank.” The bankruptcy court disagreed with this argument and essentially discredited MERS ability to establish foreclosing authority, saying even if MERS was the beneficiary at the time of foreclosure, the Reston, Va.-based firm had no authority apart from a nominal role based on the deed of trust. “Something very significant in this case is that the court found that the statute applies to deeds of trust, not merely mortgages,” said Francisco Aldana, an attorney for Salazar. The banks are trying to say 2932.5 only applies to mortgages — not deeds of trust. But this court says there is no distinction, deeds of trust and mortgages are the same thing.” The bankruptcy court’s decision is gaining attention from foreclosure attorneys in the state because it seems on the surface to contradict the Gomes v. Countrywide decision. In that case, the Court of Appeals of the 4th Appellate District said the language in a deed of trust gives MERS the authority to initiate a foreclosure. The Gomes decision “validates the MERS process” in nonjudicial states,” A MERS spokesperson said at the time of that decision. Aldana says the Salazar case is different from Gomes in that “in Gomes, the borrower, actually acknowledged that MERS can foreclose.” “In the Salazar case, MERS was the beneficiary at the time of inception,” but by the time, the deed of trust was foreclosed, “MERS was no longer the beneficiary,” Aldana said. Comparatively, “in the Gomes case, MERS was the beneficiary at the same time,” and the appellate court “did not want to interfere in a nonjudicial foreclosure.” Write to Kerri Panchuk.