Getting To Know Niday: A Further Look at the Oregon Supreme Court’s Landmark Decisions on MERS

THIS IS PART TWO OF A TWO-PART SERIES ON THE RECENT OREGON SUPREME COURT DECISIONS INBRANDRUP V. RECONTRUST AND NIDAY V. GMAC. BOTH CASES INVOLVE LEGAL ISSUES ARISING OUT OF THE NONJUDICIAL FORECLOSURE OF MERS TRUST DEEDS. READ PART ONE: BREAKING DOWN BRANDRUP. Hurricane Niday touched ground nearly one year ago when the Oregon Court of Appeals held that lenders could not use MERS to avoid recording trust deed assignments while relying on a nonjudicial foreclosure process that required that very thing. What a difference a year makes. In Brandrup v. ReconTrust, the Oregon Supreme Court answered four questions of law certified to it by a district court. In brief, the court held that MERS is not the beneficiary of a MERS trust deed in Oregon, but assignments of the trust deed that occur by operation of law need not be publicly recorded. (For a complete summary of the Brandrup decision, read Part One: Breaking Down Brandrup.) While Brandrup contains a detailed analysis of legal issues raised by naming MERS in a trust deed, Nidaydemonstrates how that analysis should be applied in individual cases. Brandrup is the idea. Niday is the idea in action. What Makes Niday Unusual In the early years and all across the nation, MERS regularly foreclosed in its own name without legal challenge. When the foreclosure crisis began, consumer attorneys took a closer look and lawsuits challenging MERS’s authority to foreclose sprang up all across the United States. State supreme courts soon split over the legality of MERS’s foreclosures and the issue suddenly catapulted MERS into the national spotlight. To put an end to the litigation frenzy, in early 2011 MERS amended its rules to forbid members from foreclosing in MERS’s name. Niday predates that amendment. In 2009, a nonjudicial foreclosure of the trust deed on Plaintiff Rebecca Niday’s home was commenced in MERS’s name. The Notice of Default and the Notice of Sale identified MERS alone as the beneficiary. Not a single trust deed assignment was recorded in the public land records. Niday filed suit in Clackamas County Circuit Court to stop the foreclosure. Her attorney argued that MERS was not the beneficiary of the trust deed and that neither MERS, nor the trustee, nor the loan servicer had a demonstrated legal interest in the mortgage loan. Defendants fired back with a motion for summary judgment, arguing that it was “indisputable” that Niday was in default and that the trustee and servicer were entitled to foreclose.  (For the uninitiated, it is plainly unlawful to nonjudicially foreclose a trust deed in the absence of a default, but lenders frequently argue that a homeowner in default has no right to contest a wrongful foreclosure.) Defendants asserted in an affidavit that Aurora Bank was the assignee of the original lender and the current owner of the note and that GMAC was the loan servicer. No evidence was offered to show how Aurora or GMAC acquired an interest in the note and trust deed. (For reasons we won’t discuss here, it is unlikely Aurora Bank was in fact the owner of the note at the time of the attempted foreclosure. If Defendants misrepresented the identity of the note owner, Niday could get even more interesting on remand.) At oral argument, Niday’s attorney contended that MERS was not the trust deed beneficiary and that transfers of the note had resulted in unrecorded trust deed assignments. Niday’s arguments fell on deaf ears, and the judge granted summary judgment in Defendants’ favor. In mid-2012, the Court of Appeals reversed the trial court, and Defendants appealed to the Oregon Supreme Court. In early June 2013, the Supreme Court issued its decision together with its decision in Brandrup. Applying Brandrup to the Beneficiary Issue In Brandrup, the Supreme Court held that MERS is not the beneficiary of a MERS trust deed. As defined by the Oregon Trust Deed Act (OTDA), the beneficiary is the person entitled to enforce the note—at origination, the lender. Although MERS was named as beneficiary, the statute trumps any contrary provision in the trust deed. In fact, the statutory definition “is incorporated into, and cannot be altered by, the party’s agreement.” The record in Niday showed that Greenpoint was the original lender and therefore beneficiary of the trust deed. MERS was, at most, an agent of the beneficiary. On these grounds, the court agreed with the Court of Appeals that MERS is not the beneficiary of Niday’s trust deed. Applying Brandrup to the Assignment Issue Since evidence showed that the note was transferred one or more times after origination, there is no question that there exist unrecorded assignments of the trust deed that occurred by operation of law. Applying the reasoning in Brandrup, however, so long as those assignments were never reduced to a writing in recordable form, there is no legal requirement that those assignments be publicly recorded. (“[T]he very concept of recordation—assumes the existence of an assignment in recordable form.”) In other words, transfers of the trust deed by Greenpoint and its successors that occurred by operation of law were not “assignments” within the meaning of the OTDA and need not be recorded prior to foreclosing nonjudicially. Since Niday’s attorney did not introduce evidence of any unrecorded formal assignments, there was no issue of material fact about violations of the recording requirement. Niday Gets Interesting Up to this point, the opinion is little more than a recap of Brandrup. The court makes simple work of showing that MERS is not the beneficiary but that there is no evidence that Defendants violated the OTDA’s recording requirement. But then things get interesting. If you read Part One: Breaking Down Brandrup, you may recall the court’s warning to lenders that, if they choose not to record a complete chain of assignments, the resulting information gaps will leave lenders “vulnerable to challenges that may force them to judicially establish their interests and authority to act”. Nidayexemplifies how courts must proceed when a grantor challenges a nonjudicial foreclosure in Oregon. That process bears little resemblance to how some courts have disposed of contested foreclosures…until now. The trial court erred in Niday not because there were unrecorded assignments, but because there was another issue of material fact that remained in dispute, making summary judgment inappropriate. The contested fact? Whether any defendant “possessed a qualifying legal interest in the trust deed or note that would allow them to initiate foreclosure under the OTDA.” Why does that issue arise at all? Because Niday alleged that she received a Notice of Sale that identified MERS as beneficiary, MERS was not the beneficiary, and she had “no knowledge or information as to whether or how any of defendants had acquired any legal rights in the note and trust deed.” Since there were no publicly recorded assignments to provide clarity, it was impossible for Niday to identify the true beneficiary of her trust deed. Recall that in Brandrup, the court expressly held that “a notice of sale must include the name of the ‘beneficiary’.” The court also found that “the OTDA is laced with provisions that indicate that the grantor is entitled to know the identity of the beneficiary,” and together “those provisions all assume that the true beneficiary must be identifiable.” In Niday, the notice of sale did not include the name of the true beneficiary and nothing in the record established that person’s identity—i.e., the identity of the successor-in-interest to Greenpoint who held the right to enforce the note and trust deed. Even though a beneficiary is not legally required to record assignments that occur by operation of law, the resulting information gaps in the land records render the foreclosure “vulnerable to challenges.” Consistent with Brandrup, Niday could therefore require Defendants to “judicially establish their interests and authority” to foreclose through “definitive documentation.” What Constitutes “Definitive Documentation”? It is notable in Niday what evidence is not sufficient to establish authority to foreclose. Defendants submitted copies of the note and trust deed, an affidavit of the loan servicer describing “the relevant transactions,” a MERS Milestone Report, and a copy of MERS’s appointment of the successor trustee. But all of that evidence wasinsufficient to justify summary judgment in Defendants’ favor. Defendants also produced the original note at the hearing. Merely producing the note, however, is also insufficient to establish the right to foreclose. The original note by itself does not establish who qualifies as its holder (i.e., the person in possession with the right to enforce the note). The note by itself does not establish who is its owner (i.e., the person ultimately entitled to the economic benefit of the note). Although GMAC claimed to “hold” the note as servicer, GMAC did not claim to be the owner or to be acting on its own behalf in the foreclosure proceeding. Of equal importance, there was “no evidence in the record as to whether or how the note had been transferred” to GMAC. To establish that the foreclosing party is the person entitled to enforce the note and trust deed requires something more than merely producing the note or a MERS Milestone Report. According to the court, the foreclosing party needs to come forward with admissible evidence demonstrating who presently possesses the note, who owns the note, and how those interests were acquired from the original lender. Defendants’ evidence fell far short. Establishing Agency It gets worse for lenders. In a case like Niday, in which the true beneficiary is acting through an agent, even judicially establishing interests in the note and trust deed is not sufficient. In Niday MERS purported to act as the agent of Greenpoint and its successors-in-interest. Therefore, the court held that, in addition to establishing the identity and authority of the beneficiary, Defendants also needed to establish the existence and scope of MERS’s authority to act on behalf of the beneficiary. More specifically, the court held that MERS must “demonstrate that it has an agency relationship with the beneficiary and that the agency agreement is sufficiently expansive.” To establish that agency relationship, MERS must introduce admissible evidence showing “who succeeded to the lender’s [Greenpoint’s] rights, whether those persons manifested consent that MERS act on their behalf and subject to their control, and whether MERS has so agreed to act.” As you may have gathered, the required inquiry is fact-intensive, which translates into litigator lingo as “expensive and uncertain.” If lenders think recording paper assignments is a hassle, imagine what they think about the court’s alternative. Ultimately, Niday affirms the Court of Appeal’s reversal of summary judgment, but on different grounds. The trial court erred by granting judgment because there remained disputed issues of fact relating not to assignments but to the identity of the beneficiary and the scope of MERS’s authority as an agent. For Rebecca Niday, the fight goes on. What Do Brandrup and Niday Mean Going Forward? But what do Brandrup and Niday mean for homeowners facing nonjudicial foreclosure in the future? In plain language, the court effectively said, “Lenders, you can transfer your interests without obtaining recordable assignments and the law will not prevent you from foreclosing nonjudicially in Oregon, but neither will the law prevent the grantor from challenging the foreclosure and forcing you to establish your right to foreclose in court.” More tersely, you can do it the easy way (record a complete chain of assignments) or you can do it the hard way (provide definitive documentation of how and to whom the interests were transferred and, if relying on an agent, proof of the existence and scope of the agent’s authority to act). Lenders were hoping to do neither. The failure to record assignments by operation of law is no longer a legal bar to nonjudicial foreclosure in Oregon. Significantly, lenders won that battle. And lenders only have to do things “the hard way” if a homeowner challenges the foreclosure in court, an expensive and uncertain process that few struggling homeowners can afford. If lenders have their paperwork in order, then they should be able to make the required showing, allowing even contested foreclosures to move forward with minimal delay. Lenders no doubt despise the uncertainty, but it could have come out worse for them. Much worse. In short, due process is alive and well in Oregon, even for homeowners in default; but for those asking tough questions, getting answers may come at a steep price. Parting Thoughts Although Brandrup does all the heavy intellectual lifting, Niday is key to understanding how contested foreclosures should be decided going forward: What showing is required to establish the right to foreclose? What evidence is sufficient to meet that burden? Is merely showing up in court with the original note endorsed in blank sufficient to meet the foreclosing party’s burden? After Niday, it seems clear that more is required. Furthermore, the reasoning of Brandrup and Niday should apply with equal force in contested nonjudicial andjudicial foreclosure proceedings. There is nothing conceptually different about the two when the contested issue is who has the right to foreclose. In reality, of course, it is up to judges to embrace the logic of the decisions and apply it to individual cases. Many questions remain, some of them fine legal questions that matter little to struggling homeowners who want nothing more than a fair and honest opportunity to modify a loan or negotiate a short sale. For them, the relaunch of the foreclosure mediation program this August likely holds more promise than the next round of foreclosure litigation. For the rest of us, the foreclosure battles rage on. The above was provided to us by Oregon counsel as quoted in