In Fontenot v. Wells Fargo Bank, N.A. (— Cal.Rptr.3d —-, Cal.App. 1 Dist., August 11, 2011), a Court of Appeal considered a borrower’s challenge to the foreclosure of her property on the ground that the assignment of an interest in a promissory note relating to the property by Mortgage Electronic Registration Systems, Inc. (“MERS”) was invalid. The Court of Appeal held the borrower failed to state a claim against MERS because, although MERS had no power in its own right to assign the note, it was acting as a nominee for the original lender, who did possess an assignable interest.
Arlene Fontenot (“Fontenot”) gave Alliance Bancorp a $1 million promissory note that was secured by a deed of trust in the real property she purchased. Alliance Bancorp identified MERS as its “nominee” in the deed of trust. MERS “is a private corporation that administers a national registry of real estate debt interest transactions.” MERS members “assign limited interests in the real property to MERS, which is listed as a grantee in the official records of local governments, but the members retain the promissory notes and mortgage servicing rights.” This arrangement allows the notes to be transferred among MERS members without the notes having to be recorded in the public records. Although the owner of a promissory note that is secured by a deed of trust is ordinarily designated as the beneficiary of the deed of trust, in the MERS arrangement “MERS is designated as the beneficiary in deeds of trust, acting as ‘nominee’ for the lender, and granted the authority to exercise legal rights of the lender.”
In December 2007, MERS assigned the deed of trust to HSBC Bank USA, N.A. (“HSBC”). In the early part of 2008, HSBC designated Wells Fargo Bank, N.A. (“Wells Fargo”) as it’s “attorney in fact” and recorded a substitution of trustee and named NDEx West, LLC, (“NDEx”) as the new trustee. However, NDEx had previously served Fontenot with a notice of default in November 2007, approximately two months before it was substituted as the trustee of the deed of trust. Wells Fargo later foreclosed on Fontenot’s property and sold it.
Fontenot brought a lawsuit against Wells Fargo and MERS and other entities involved in the transactions. Fontenot alleged the foreclosure was unlawful because MERS had made an invalid assignment of an interest in the promissory note and Wells Fargo had breached an agreement to forbear from foreclosure. The trial court granted judgment in favor of MERS and Wells Fargo.
First, the Court of Appeal found the trial court did not abuse its discretion in taking judicial notice of the content of documents submitted by MERS. MERS submitted to the trial court two deeds of trust, an assignment of a deed of trust, and the documents required for nonjudicial foreclosure. Fontenot did not contest the authenticity of the documents but did oppose the trial court taking judicial notice of the facts within the documents. The Court of Appeal held the trial court did not abuse its discretion in taking judicial notice of the documents submitted by MERS.
Fontenot claimed that purported assignment of the deed to HSBC was invalid because MERS did not possess an interest in the note. Fontenot asserted that because the assignment of the note to HSBC was invalid, Wells Fargo lack the authority to foreclose. The Court of Appeal rejected Fontenot’s argument and affirmed the judgment of the trial court in favor of MERS and Wells Fargo.
Fontenot had the burden of proving that the assignment was invalid. The nonjudicial foreclosure statutes are comprehensive and a sale pursuant to the statutory scheme “is presumed to have been conducted regularly” and the person challenging the validity of the foreclosure must rebut this presumption. Fontenot did not meet her burden to rebut the presumption of validity.
The Court of Appeal rejected Fontenot’s claim that MERS lacked the authority to assign the note. MERS’s lack of a possessory interest does not necessarily lead to the conclusion that MERS did not have the authority to assign the note. “While it is true MERS had no power in its own right to assign the note, since it had no interest in the note to assign, MERS did not purport to act for its own interests in assigning the note.” Instead, MERS was acting as a nominee for the original lender. “A ‘nominee’ is a person or entity designated to act for another in a limited role—in effect, an agent.”
The question of whether “MERS had the authority to assign the lender’s interest in the note must be determined by reference to that agreement.” The first deed of trust listed MERS as the nominee and provided that the borrower agreed that “MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or customs” MERS, as the lender’s nominee “has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required by the Lender, including but not limited to, releasing and canceling the security interest.” The Court found that Fontenot’s “allegation that MERS was merely a nominee is insufficient to demonstrate that MERS lacked authority to make a valid assignment of the note on behalf of the original lender.”
Fontenot also asserts the trial court erred in granting judgment in favor of Wells Fargo because it breached an agreement to forbear from foreclosure. Fontenot claims she entered into a special forbearance agreement with Wells Fargo pursuant to which she would pay four payments of between $8,000 and $8,500 and a balloon payment of over $59,000. Under the agreement, if Fontenot failed to make the required payments, Wells Fargo would be entitled to reinstitute foreclosure proceedings.
Fontenot alleged that soon after she made the first payment, she received a letter from Wells Fargo stating that it was reducing her monthly mortgage payments from $7,395.82 to $4,895.82 for the next six months. Fontenot claimed she made two more payments under the forbearance agreement and then accepted the offer of reduced payments and submitted a payment of $4,895.82. However, even after instructed to do so by the trial court, Fontenot never presented the reduction in payment letter to the court. Therefore, the Court of Appeal held that Fontenot failed to show the trial court erred in granting judgment to Wells Fargo on her claim that it breached an agreement to forbear from foreclosure.
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