No.

In theSupreme Court of the United StatesJose Gomes,

Petitioner,

v.

Countrywide Home Loans, Inc.,Mortgage Electronic Registration Systems, Inc.,

and ReconTrust Company, N.A,Respondents.

On Petition for Writ of Certiorari to the CaliforniaCourt of Appeal, Fourth District, Division One

PETITION FOR WRIT OF CERTIORARI

Ehud GerstenCounsel of Record for Petitioner Gersten Law Group 3115 Fourth Avenue San Diego, CA 92103 619-600-0098

QUESTION PRESENTED

California’s statutory scheme for nonjudicialforeclosure permits only the trustee, mortgagee,beneficiary, or their authorized agent to initiateforeclosure proceedings. Does a state appellate courtdecision construing the statute in a manner thatstrips homeowners of any way to enforce thatlimitation deprive them of due process of law bypermitting unauthorized persons to foreclose?

TABLE OF CONTENTS

OPINIONS BELOW. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

CONSTITUTIONAL AND STATUTORYPROVISIONS INVOLVED. . . . . . . . . . . . . . . 1

INTRODUCTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A. The parties’ dealings . . . . . . . . . . . . . . . . 7

B. Proceedings below .. . . . . . . . . . . . . . . . . . . . . 9

REASONS FOR GRANTING THE PETITION. . . . 14

A. The California court’s decision deprivedPetitioner of his right to due processunder the Fourteenth Amendment tothe United States Constitution. . . . . . . . . . . 14

B. Petitioner has substantial informationsupporting his allegation that MERSlacks authority to foreclose on his home.. . . 18

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

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TABLE OF CONTENTS OF APPENDIX

1. Opinion of California Court of Appeal, FourthDistrict, Division One, February 18, 2011. . A1

2. California Supreme Court’s denial of review,May 18, 2011. . . . . . . . . . . . . . . . . . . . . . . . A22

ii

TABLE OF AUTHORITIES

CASES

Bank of N.Y. v. Silverberg, 2011 NY Slip Op 05002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Brinkerhoff-Faris Trust & Savings Co. v. Hill, 281U.S. 673 (1930). . . . . . . . . . . . . . . . . . . . . . . . . . 15, 17

Castro v. Executive Trustee Services, LLC, 2009 U.S.Dist. LEXIS 14134 (D.Ariz. 2009). . . . . . . . . . . . . . 13

Domarad v. Fisher & Burke, 270 Cal.App.2d 543(1969). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Garfinkle v. Superior Court, 21 Cal.3d 268 (1978).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 17

In Re Agard, Bk #810-77338 (E.D.N.Y., 2011). . . 20-22

Landmark National Bank v. Kesler (September 19,2009) 2009 Kan. LEXIS 834. . . . . . . . . . . . . . . . . . . 23

MERS v. Nebraska Dept. of Banking (2005) 270 Neb.529, 704 N.W.2d 784. . . . . . . . . . . . . . . . . . . . . . . . . 22

MERS v. Nebraska Dept. of Banking, 270 Neb. 529,704 N.W.2d 784 (2005). . . . . . . . . . . . . . . . . . . . . . . 22

Moeller v. Lien, 25 Cal.App.4th 822 (1994). . . . . . . 11

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Ohlendorf v. American Home Mortgage Servicing,Inc., 2010 U.S. Dist. LEXIS 31098 (E.D.Cal. 2010).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Richards v. Jefferson County, Alabama, 517 U.S. 793(1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Shelley v. Kraemer, 334 U.S. 1 (1948). . . . . . . . . . . 14

Weingartner v. Chase Home Finance, LLC, 702F.Supp.2d 1276 (D.Nev. 2010).. . . . . . . . . . . . . 11, 12

CONSTITUTION AND STATUTES

28 U.S.C. § 1257(a).. . . . . . . . . . . . . . . . . . . . . . . . . . 1

California Civil Code § 2924 et seq.. . . . . . . . . . . 5, 9

California Civil Code § 2924(a)(1). . . . . . . . . . . . . . . 2

California Civil Code § 2943(b)(1). . . . . . . . . . . . . . . 2

United States Constitution, Amendment 14, § 1. . . 2

iv

OPINIONS BELOW

The opinion of the California Court of Appeals,Fourth Appellate District, Division One, is reportedat Gomes v. Countrywide Home Loans, Inc., 192Cal.App.4th 1149, 121 Cal.Rptr.3d 819 (2011).(Appendix, page A1) The California Supreme Court1

denied review, without opinion, on May 18, 2011.(A22)

JURISDICTION

The court of appeal entered its judgment onFebruary 18, 2011. The California Supreme Courtdenied review on May 18, 2011. This Court’sjurisdiction is invoked under 28 U.S.C. § 1257(a).

CONSTITUTIONAL AND STATUTORYPROVISIONS INVOLVED

All persons born or naturalized in theUnited States, and subject to the juris-diction thereof, are citizens of the UnitedStates and of the State wherein theyreside. No State shall make or enforceany law which shall abridge theprivileges or immunities of citizens of theUnited States; nor shall any State

References to the Appendix are given in parentheses,1

with page numbers preceded by the letter “A.”1

deprive any person of life, liberty, orproperty, without due process of law; nordeny to any person within its jurisdictionthe equal protection of the laws.

United States Constitution, Amendment14, Section 1.

The trustee, mortgagee, or beneficiary, orany of their authorized agents shall firstfile for record, in the office of the recorderof each county wherein the mortgaged ortrust property or some part or parcelthereof is situated, a notice of default.

California Civil Code § 2924(a)(1)(specifying contents of that notice).

A beneficiary, or his or her authorizedagent, shall, within 21 days of the receiptof a written demand by an entitledperson or his or her authorized agent,prepare and deliver to the persondemanding it a true, correct, andcomplete copy of the note or otherevidence of indebtedness with anymodification thereto, and a beneficiarystatement.

California Civil Code § 2943(b)(1).

2

INTRODUCTION

In 2010, financial institutions seized more thanone million homes across the United States throughforeclosures. The number of foreclosure-relatedfilings soared to 2.9 million. According to one realestate analyst, this number would have been farlarger except for one thing—a slowdown in fore-closures due to growing questions of the legality ofmany of these actions:

“Total properties receiving foreclosurefilings would have easily exceeded 3million in 2010 had it not been for thefourth-quarter drop in foreclosureactivity—triggered primarily by thecontinuing controversy surroundingforeclosure documentation and pro-cedures that prompted many majorlenders to temporarily halt some fore-closure proceedings,” said James J.Saccacio, chief executive officer ofRealtyTrac. 2

The “continuing controversy” was the alarmingrealization by state and federal law enforcementagencies, real estate professionals, and consumeradvocates that mortgage fraud among foreclosing

http://www.reuters.com/article/2011/01/13/us-usa-housin2

g-foreclosures-idUSTRE70C0YD201101133

banks and other lenders had become a nationwideepidemic of malfeasance affecting untold thousandsof homeowners.

In October 2010, the Attorneys General of all fiftystates launched a joint multistate investigation intothe mortgage practices of lenders, including Bank ofAmerica (Countrywide’s successor), JP MorganChase and Ally Bank, among others. Investigations3

by state agencies, journalists, and attorneys repre-senting borrowers continue to uncover a morass ofnegligence and fraud. Discrepancies in foreclosurefilings include missing promissory notes, backdatedassignments, forgeries of signatures on assignmentsand deeds of trust (“robosigning”), and the falsenotarizing of recorded documents. These misdeedscontribute to the processing of thousands of fore-closures by companies making billions of dollars withlittle oversight or inquiry as to the foreclosures’legality. Misconduct has been found or suspected inboth judicial and non-judicial foreclosures.

In California, most foreclosures are nonjudicial. Apromissory note for the money to buy real propertymay be secured by a lien on the property in the formof a deed of trust. That deed of trust grants the

http://www.businessweek.com/news/2010-10-13/attorney3

s-general-in-50-states-open-foreclosure-probe.html4

trustee the power of sale if a homeowner such asPetitioner defaults on his loan. The lender mayforeclose using a nonjudicial scheme established bythe state legislature and embodied in California CivilCode § 2924 et seq. Nonjudicial foreclosure is alsoavailable to lenders in twenty-eight other states.These statutes have allowed much of the foreclosureabuse to take place, often with little or no recoursefor the defrauded homeowner.

One of the factors contributing to the problem ofimproper foreclosures is lenders’ common practice ofassigning tasks such as collection of payments to a“loan servicer,” which acts as the lender’s ostensibleagent. The loan servicer, often a large financial insti-tution such as Bank of America, not only managesaccounts but, in the event of a default, may have thepower to authorize the trustee to foreclose.

Using a loan servicer is convenient for the lenderor its assignees, but it creates insurmountableproblems for borrowers in financial straits. Loanservicers collect fees for a wide range of services,including overseeing foreclosures, and a large ser-vicer may manage hundreds of thousands or evenmillions of loans. Trying to renegotiate the terms of aloan with a servicer—or even getting current infor-mation from the servicer—becomes a frustrating taleof unreturned phone calls, lost documents, misrepre-

5

sentations, and eventual foreclosure despiteborrowers’ best efforts to avoid losing their homes.

Another contributing factor is lenders’ widespreaduse of a “nominee beneficiary” of the deed of trust,Mortgage Electronic Registration Systems, Inc.(“MERS”). Created by the financial services industryto avoid the necessity of recording millions of deedsof trust and assignments as loans pass through thesecondary investment market, MERS’s sole purposeis to minimize costs for the lenders and streamlinethe foreclosure process.

MERS exists because of the proliferation ofmortgage-backed securities, such as collateralizeddebt obligations and other derivatives. A lender mayimmediately recoup its investment on a loan byselling it to investors. Those investors may, in turn,create large pools of loans to be used as collateral forsecondary market instruments. Naming MERS as abeneficiary of the deed of trust lets the industryrecord that deed only once, even if the loan itself isresold over and over during the life of the pool inwhich it has been placed. This scheme obscures themovement of a borrower’s promissory note throughthe secondary investment market. The use of MERShas created a system with a total lack of trans-parency that can be—and has been—used to maskfraud, negligence, and incompetence.

6

Yet the California courts have now slapped downPetitioner’s request that Respondents prove theirright to foreclose. In ruling to uphold the dismissal ofPetitioner’s suit, the State of California, through itsjudicial branch, has said to Petitioner and tothousands of homeowners across the state: “You haveno right to proof that the claim on your home islegitimate.” This ruling deprives homeowners of dueprocess under the Fourteenth Amendment of theConstitution.

STATEMENT

A. The parties’ dealings

In 2004, Petitioner executed a promissory notesecured by a deed of trust for a loan of $331,000 tobuy a home in San Marcos, California. The deed oftrust identified the lender as KB Home MortgageCompany and the trustee as First American TitleCompany. It also identified MERS as follows: “MERSis a separate corporation that is acting solely as anominee for Lender and Lender’s successors andassigns. MERS is the beneficiary under this securityinstrument.”4

MERS describes itself as follows:4

MERS was created by the mortgage bankingindustry to streamline the mortgage processby using electronic commerce to eliminate7

Petitioner’s loan servicer, Countrywide HomeLoans, Inc., was formerly one of the country’s largestoriginators of subprime mortgage loans. After sub-stantial losses due to the collapse of home prices andthe subsequent default of many of its loans, Bank ofAmerica acquired Countrywide in July 2008.

In March 2009, Recontrust N.A., purporting to act

paper. Our mission is to register everymortgage loan in the United States on theMERS® System.

Beneficiaries of MERS include mortgageoriginators, servicers, warehouse lenders,wholesale lenders, retail lenders, documentcustodians, settlement agents, titlecompanies, insurers, investors, countyrecorders and consumers.

MERS acts as nominee in the county landrecords for the lender and servicer. Any loanregistered on the MERS® System isinoculated against future assignmentsbecause MERS remains the mortgagee nomatter how many times servicing is traded.MERS as original mortgagee (MOM) isapproved by Fannie Mae, Freddie Mac,Ginnie Mae, FHA and VA, California andUtah Housing Finance Agencies, as well asall of the major Wall Street rating agencies.

http://www.mersinc.org/about/index.aspx 8

as an agent for MERS, caused a notice of default andelection to sell to be mailed to Petitioner. Petitioner’sattorney asked Countrywide for loan information,including documents required to be provided underthe federal Truth in Lending Act; a copy of the note;documents evidencing any sale, transfer, or assign-ment of the note; and a beneficiary statement andpayoff demand statement under California CivilCode § 2943. Countrywide responded with a genericletter promising a more complete response within 20business days. When counsel received no furtherresponse from Countrywide, Petitioner suedCountrywide, MERS, and Recontrust in state court.

B. Proceedings below

Petitioner’s suit alleged that the foreclosure wasimproper because the parties conducting it did nothave the current noteholder’s authority to foreclose.The trial court sustained defendants’ demurrerwithout leave to amend, holding that Petitioner hadfailed to state a cause of action. Petitioner appealedthe judgment to the California Court of Appeal forthe Fourth Appellate District.

The focus of Petitioner’s claims was that, underCalifornia’s nonjudicial foreclosure statutes, CivilCode § 2924, et seq., Petitioner was entitled to proofthat the loan servicer, trustee, or an entity such as

9

MERS, either named in the deed of trust or actingthrough assignments of interest, had the legalauthority on behalf of the promissory note’s currentholder to foreclose on the security.

In upholding the trial court’s ruling dismissingPetitioner’s claims, the California Court of Appealheld that the foreclosure statutes did not entitle aborrower to know if in fact a duly authorized partywas pursuing the foreclosure on behalf of the currentnoteholder:

He is seeking to impose the additionalrequirement that MERS demonstrate incourt that it is authorized to initiate aforeclosure. As we will explain, such arequirement would be inconsistent withthe policy behind nonjudicial foreclosureof providing a quick, inexpensive andefficient remedy.

(A10)

The court’s fixation on providing lenders with aconvenient remedy ignores the statute’s otherpurposes:

The purposes of this comprehensivescheme are threefold: (1) to provide thecreditor/beneficiary with a quick, inex-pensive and efficient remedy against adefaulting debtor/trustor; (2) to protect

10

the debtor/trustor from wrongful lossof the property; and (3) to ensure that aproperly conducted sale is final betweenthe parties and conclusive as to a bonafide purchaser.

(A9, quoting from Moeller v. Lien, 25Cal.App.4th 822, 830 (1994) (emphasisadded.)

Indeed, the California Supreme Court has statedthat protecting the debtor/trustor is the main goal ofthe statutory scheme: “[T]hese statutory regulationswere enacted primarily for the benefit of the trustorand for the greatest part limit the creditors’ other-wise unrestricted exercise of the contractual power ofsale upon default by the trustor.” Garfinkle v.Superior Court, 21 Cal.3d 268, 279 (1978).

In reaching its dubious conclusion that a home-owner has no remedy to prevent nonjudicial fore-closure by an unauthorized person, the court refusedto follow the reasoning of three federal district courtcases, saying that none recognized a cause of actionrequiring a defendant to prove its authority to fore-close, and in each case the complaint identified aspecific factual basis for alleging that the foreclosurewas not instituted by the correct party. (A12) Thesestatements mischaracterize the cases in question.

In Weingartner v. Chase Home Finance, LLC, 70211

F.Supp.2d 1276 (D.Nev. 2010), the plaintiffs alleged,inter alia, a claim for injunctive relief on the groundthat foreclosure was wrongful because the purportedtrustee who recorded the notice of default was notactually the trustee. The defendants brought a com-bined motion to dismiss for failure to state a claim,and for summary judgment. The district court deniedboth motions with respect to the claim for injunctiverelief because copies of purported assignmentsindicated that the alleged trustee may not have beenthe trustee. Id., at 1281-82. The court took judicialnotice of the assignments at the defendants’ request.Id., at 1279 n. 1. The district court opinion gave noindication as to what specifically was alleged in thecomplaint.

In Ohlendorf v. American Home MortgageServicing, Inc., 2010 U.S. Dist. LEXIS 31098 (E.D.Cal. 2010), the defendants moved to dismiss forfailure to state a claim and, as in Weingartner,requested that the district court take judicial noticeof assignments supposedly conferring the right toforeclose. Id., at *5-*6. Noting that the assignmentsappeared to be backdated, and that recordingbackdated assignments may taint the notice ofdefault, the court concluded that the defendantsfailed to demonstrate that the assignments werevalid. Id., at *23-*24. “Accordingly, defendants [sic]

12

motion to dismiss plaintiffs’ wrongful foreclosure isdenied insofar as it is premised on defendants beingproper beneficiaries.” Id., at *24.

In Castro v. Executive Trustee Services, LLC, 2009U.S. Dist. LEXIS 14134 (D.Ariz. 2009), Arizona lawrequired that ETS or MERS be the lawful holder ofthe promissory note in order to foreclose. The districtcourt denied the defendants’ motion to dismiss theplaintiffs’ claim for declaratory relief. “Havingelected to proceed via Rule 12(b)(6), rather than Rule56, [the motion] will be denied because the recordcontains insufficient information to resolve the issuewhether ETS or MERS is entitled to enforce theinstrument as a matter of law.” Id., at *16-*17. Inother words, rather than dispose of the matter at thepleading stage, the court required the defendants tomove for summary judgment and produce evidencedemonstrating that they were entitled to foreclose.

In the instant case, the California Court ofAppeal also affirmed the order sustaining defend-ants’ demurrer on the independent ground thatPetitioner agreed in the deed of trust that “MERS (asnominee for Lender and Lender’s successors andassigns) has . . . the right to foreclose and sell theProperty.” (A16) But MERS’s right to foreclosederives from the noteholder, not the borrower. Thetrust deed cannot bind an assignee of the note, and a

13

borrower should be allowed to verify that MERS is,in fact, the nominee of the current noteholder.Nothing in the statutes explicitly bars Petitionerfrom demanding to know the identity of the principaltaking his home.

REASONS FOR GRANTING THE PETITION

A. The California court’s decision deprivedPetitioner of his right to due processunder the Fourteenth Amendment to theUnited States Constitution.

Petitioner is not challenging the constitutionalityof California’s statutory nonjudicial foreclosurescheme. Rather, Petitioner contends that it is theCalifornia courts’ construction of that otherwise validstatutory scheme that has deprived him of dueprocess: it left him without a remedy to protect hishome from foreclosure by persons acting withoutauthority. “That the action of state courts and ofjudicial officers in their official capacities is to beregarded as action of the State within the meaning ofthe Fourteenth Amendment, is a proposition whichhas long been established by decisions of this court.”Shelley v. Kraemer, 334 U.S. 1, 14 (1948). Speci-fically, a state appellate court decision can itselfdeny a litigant due process of law. Richards v.Jefferson County, Alabama, 517 U.S. 793, 803-05

14

(1996) (Alabama Supreme Court’s extremeapplication of state-law res judicata principles was adenial of due process).

In Brinkerhoff-Faris Trust & Savings Co. v. Hill,281 U.S. 673 (1930), the plaintiff bank sued to enjoina county treasurer from collecting a portion ofcertain taxes assessed against its shareholders onthe ground that the assessor denied the shareholdersequal protection by assessing their shares at fullvalue, while other classes of property were assessedat 75% of value or less. Earlier Missouri SupremeCourt decisions had held that no administrativeboard, including the state tax commission, couldgrant the relief plaintiff sought, and that a bill inequity such as plaintiff’s complaint for injunctiverelief was the appropriate and only remedy. The trialcourt refused to grant the injunction and dismissedthe action, and the plaintiff appealed. The MissouriSupreme Court, contrary to its prior decision, heldthat the state tax commission could have granted therequested relief if the plaintiff had complained to itin a timely manner. It then affirmed the trial court’sjudgment because the plaintiff had an adequate legalremedy that it failed to pursue (complaint to thestate tax commission), and thus was not entitled toequitable relief in the form of an injunction.

The United States Supreme Court granted the

15

plaintiff’s petition for certiorari and reversed theMissouri Supreme Court decision. Justice Brandeis,writing for the Court, emphasized that it is for thestate courts to determine the law of the state, andthat the U.S. Supreme Court was not concerned withplaintiff’s rights on the merits. Rather, its concernwas that the Missouri Supreme Court decision,reversing its prior holding regarding the powers ofthe state tax commission, deprived the plaintiff ofdue process by denying it an opportunity to be heard.

By denying to it the only remedy everavailable for the enforcement of its rightto prevent the seizure of its property, thejudgment deprives the plaintiff of itsproperty. . . . [¶] If the result abovestated were attained by an exercise of thestate’s legislative power, the transgres-sion of the due process clause of theFourteenth Amendment would beobvious. [Citation] The violation is nonethe less clear when that result is accom-plished by the state judiciary in thecourse of construing an otherwise valid[citation] state statute. The federalguaranty of due process extends to stateaction through its judicial as well asthrough its legislative, executive, oradministrative branch of government.

Id., at 679-80. 16

As in Brinkerhoff-Faris, the California courts’decision in the instant case leaves Petitioner with noremedy to prevent the seizure of his property.Petitioner does not seek to add a requirement notalready present in the statutes. Rather, he contendsthat the statutes must be construed so as to affordhim a meaningful opportunity to enforce thestatute’s existing terms before his home is seized.The California courts’ construction of the statutoryscheme as barring Petitioner’s suit challengingMERS’s right to foreclose denies him any suchopportunity, and thereby deprives him of due processin violation of the Fourteenth Amendment.

Rather than construe the statutory scheme so asto protect the debtor/trustor, which is its primarypurpose (Garfinkle, supra), the courts’ decision hasconstrued the statutes to protect the purportedtrustee and a sham beneficiary, MERS, from havingto prove their right to foreclose. It denies theborrower the opportunity to be heard when hequestions whether the beneficiary and the trusteeare who they say they are—that they have in factbeen authorized to take the borrower’s home.

17

B. Petitioner has substantial informationsupporting his allegation that MERSlacks authority to foreclose on his home.

MERS’s protean role in foreclosures is pernicious.Depending on the situation, MERS has presenteditself as a beneficiary—as it has here—or, when itsuits its purposes, as a “mere nominee” with no bene-ficial interest in any of the promissory notes securedby deeds of trust.

The language in the deed of trust has the warpedsurreality of an M.C. Escher engraving. On the onehand, the Borrower grants the Property and power ofsale “to Trustee, in trust.” Mere lines later, thedocument states that MERS holds “only legal title tothe interests granted by Borrower” and has “theright to foreclose and sell the Property.” Yet this isimpossible: the property is held by a trustee underthe deed of trust. The court of appeal held that“under California law MERS may initiate foreclosureas the nominee, or agent, of the noteholder.” (A14)But there has never been any answer to Petitioner’soriginal question: Who is the noteholder?

The court of appeals sidestepped this question byholding that Petitioner had agreed in the deed oftrust to grant MERS the power to foreclose:“Specifically, Gomes agreed that ‘MERS (as nominee

18

for the Lender and Lender’s successors and assigns)has . . . the right to foreclose and sell the Property.’”(A16) But MERS’s right to foreclose derives solelyfrom the noteholder. Gomes, as the borrower, waspowerless to authorize MERS to foreclose.

The California nonjudicial foreclosure schemeitself is irrelevant. Petitioner is asking only thatRespondents prove that they are the proper partiesto invoke that scheme because they are, in fact,either the original parties to the promissory note anddeed of trust or the assigns or agents of those parties.This is not a novel, out-of-the-mainstream issue. It5

has arisen in courts across the country in both stateand federal jurisdictions.

Based on MERS’s own contradictory positionsregarding its authority and role in the chain of title,state and federal courts, including bankruptcy courtsin the Ninth Circuit, have questioned MERS’sauthority to enforce or transfer an ownershipinterest in a promissory note. United StatesBankruptcy Courts in jurisdictions from New York to

This case should not be confused with the many “show-5

me-the-note” cases in which courts have consistentlyruled that foreclosing entities do not have to produce thenote under California’s foreclosure statutes. Petitioner isnot asking to see the original note.19

California have repeatedly questioned the legal basisfor MERS’s role in foreclosures. In New York, theBankruptcy Court analyzed MERS’s authority in InRe Agard, Bk #810-77338 (E.D.N.Y., 2011), in partdue to the dozens of cases MERS brought in thatdistrict for relief from stay. Language in the mort-gage documents, similar to that in a deed of trust inCalifornia, described MERS as the nominee of thelender and beneficiary of the deed of trust. Agardheld that MERS was neither:

By MERS’s own account, it took no partin the assignment of the Note in thiscase, but merely provided a databasewhich allowed its members to electron-ically self-report transfers of the Note.MERS does not confirm that the Notewas properly transferred or in factwhether anyone including agents ofMERS had or have physical possession ofthe Note. What remains undisputed isthat MERS did not have any rights withrespect to the Note and other than asdescribed above, MERS played no role inthe transfer of the Note.

In Re Agard at 22.

Thus MERS claims to have no rights in the promis-sory notes secured by mortgages or deeds of trust.

20

Petitioner’s inquiry is further justified by theAgard court’s recognition that whatever the borrowermay understand and agree to in the deed of trustconveys no actual authority to MERS. The agencyrelationship on which the California courts relied iscreated not by the agent, nor by the belief or assentof a third party such as Petitioner, but by theprincipal.

Other than naming MERS as “nominee”,the Mortgage also provides that theBorrower transfers legal title to thesubject property to MERS, as theLender’s nominee, and acknowledgesMERS’s rights to exercise certain of theLender’s rights under state law. This too,is insufficient to bestow any authorityupon MERS to assign the mortgage. InBank of New York v. Alderazi, the courtfound “[t]he fact that the borroweracknowledged and consented to MERSacting as nominee of the lender has nobearing on what specific powers andauthority the lender granted MERS.”Alderazi, 900 N.Y.S.2d at 824. Even if itdid bestow some authority upon MERS,the court in Alderazi found that themortgage did not convey the specific rightto assign the mortgage.

In Re Agard at 31. 21

In a more recent case decided in New York’sSupreme Court, Appellate Division, Bank of N.Y. v.Silverberg, 2011 NY Slip Op 05002, the court wasfaced with facts similar to those in Agard. Acknow-ledging the ubiquitous reach of MERS—it holdsapproximately 60 million loans and is involved inapproximately 60% of loans in the U.S.—the courtnevertheless ruled that, despite language in themortgage (similar to that in Petitioner’s deed oftrust), MERS lacked the authority to assign the rightto foreclose because it was never the holder or anassignee of the note:

This Court is mindful of the impact thatthis decision may have on the mortgageindustry in New York, and perhaps thenation. Nonetheless, the law must notyield to expediency and the convenienceof lending institutions. Proper proceduresmust be followed to ensure the reliabilityof the chain of ownership, to secure thedependable transfer of property, and toassure the enforcement of the rules thatgovern real property.

Id.

In MERS v. Nebraska Dept. of Banking, 270 Neb.529, 704 N.W.2d 784 (2005), MERS sought adeclaration that it was not a “mortgage banker” and

22

therefore not subject to the license and registrationrequirements of Nebraska’s Mortgage BankersRegistration and Licensing Act. Counsel for MERSexplained its limited role:

MERS does not take applications,underwrite loans, make decisions onwhether to extend credit, collectmortgage payments, hold escrows fortaxes and insurance, or provide any loanservicing functions whatsoever. MERSmerely tracks the ownership of the lienand is paid for its services throughmembership fees charged to its members.

Id. at 534.

Finding that MERS had only an incidental role, andlacked any ownership interest in the notes securedby the mortgages, the Nebraska Supreme Court heldthat MERS was not a mortgage banker within themeaning of the Nebraska Act. Id. at 535.

MERS took a much different position inLandmark National Bank v. Kesler, 2009 Kan.LEXIS 834 (September 19, 2009), when it sought tointervene in a foreclosure action involving a secondmortgage note in which MERS had been named asthe lender’s “nominee.” The original lender hadassigned the mortgage to Sovereign Bank, but theassignment had not been recorded in the county

23

where the property was located. Neither Sovereignnor MERS had been given notice of a foreclosureaction filed by the first mortgage holder. The prop-erty was sold at a sheriff’s sale. Sovereign learned ofthe foreclosure, objected to the sale, and argued thatMERS—which had not been named as a party in theforeclosure action—was a contingently necessaryparty. MERS then sought to intervene.

The Kansas Supreme Court held that MERS hadno standing. The mortgage instrument describedMERS as functioning “solely as nominee” for thelender, but did not define the term “nominee.” Thecourt noted that MERS’s counsel had at varioustimes described its role as nominee as holding themortgage “in street name”; later he stated that thenominee “is the mortgagee and is holding themortgage for somebody else”; at another point hedeclared that the nominee “is more like a trustee ormore like a corporation, a trustee that has multiplebeneficiaries”; thus, you do not serve the benefi-ciaries, “you serve the trustee of the trust; you servethe agent of the corporation.” Id., 2009 Kan. LEXIS834 * 8. Counsel for the property’s buyers described anominee as a “representative in a rather limitedsense” and later “like a power of attorney.” Id.

The Kansas court concluded that the relationshipMERS had to Sovereign was more akin to that of a

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straw man than to a party possessing all the rightsgiven a buyer. Id. at *9. It cautioned that the MERSsystem “made it difficult for unsophisticated borrow-ers to be certain of the identity of their lenders andmortgagees. (Citation.) . . . MERS creates a systemin which the public has no notice of who holds theobligation on a mortgage.” Id. at *11.

This warning relates exactly to what Petitionerwas seeking. Yet the California courts have decidedhe has no right to be heard on that question. TheCalifornia courts have denied Petitioner any right tolearn the identity of the current holder of the promis-sory note secured by the deed of trust, and thus toascertain whether or not the holder authorizedMERS to foreclose. The State of California is nolonger merely regulating or creating a privatescheme for lenders; it has taken overt official actionto protect lenders, trustees, and MERS from the legalconsequences of their negligent or fraudulent mis-conduct. Contrary to what the courts may havethought at one time, the foreclosure statutes, asinterpreted by the courts in this case, no longer offerthe borrower any protection from negligence, incom-petence, or even intentional fraud.

Because Petitioner’s case was dismissed at theinitial pleading stage, this ruling is particularlyinsidious. The State has thus cut off any opportunity

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for discovery to determine what role MERS actuallyplayed. The court of appeal described MERS as the“nominee, or agent, of the noteholder.” (A14) Butthat was merely its assumption. Nowhere inPetitioner’s complaint did he allege that MERS wasthe agent of the noteholder. Thus, by dismissing thecase at the earliest possible stage, and cutting offPetitioner’s ability to do any discovery, the court leftunexamined the question as to whether there actu-ally is an agent-principal relationship between thecurrent noteholder and MERS. The court’s reasoningthat the deed of trust authorizes MERS to forecloseignores the fact that, regardless of the language inthe deed of trust, that instrument is only incidentalto the promissory note it secures. Domarad v. Fisher& Burke, 270 Cal.App.2d 543 (1969).

[W]e note the following establishedprinciples: that a deed of trust is a mereincident of the debt it secures and thatan assignment of the debt carries with itthe security; that a deed of trust isinseparable from the debt and alwaysabides with the debt, and it has nomarket or ascertainable value, apartfrom the obligation it secures; and that adeed of trust has no assignable qualityindependent of the debt, it may not beassigned or transferred apart from the

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debt, and an attempt to assign the deedof trust without a transfer of the debt iswithout effect.

Id. at 553-554 (citations and internalquotations omitted).

MERS claims that it has the authority toforeclose as the noteholder:

In mortgage foreclosure cases, theplaintiff has standing as the holder of thenote and the mortgage. When MERSforecloses, MERS is the mortgagee and itis the holder of the note because a MERSofficer will be in possession of theoriginal note endorsed in blank, whichmakes MERS a holder of the bearerpaper. MERS will not foreclose unlessthe note is endorsed in blank andheld by MERS.

http://www.mersinc.org/Foreclosures/index.aspx (emphasis added).

Thus, as MERS concedes, if a lender or assigneecannot find the original note (which securitizationoften makes impossible), it will not foreclose. What isimportant in this statement by MERS is that it isreferring to the promissory note itself, not the deed oftrust. This is in essence what Petitioner was askingfor: not the original note, which is not required under

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California’s foreclosure scheme, but the identity ofthe holder of the note.

Recognizing the growing trend of courts to denyMERS the right to foreclose, effective April 1, 2011,the Federal Home Loan Mortgage Corporation(“Freddie Mac”) which buys mortgages in the second-ary market, barred MERS from foreclosing in its ownname on loans held by the company. This is no in-6

significant decision. According to its website, in theten years ending in 2009, Freddie Mac investedapproximately $4.9 trillion in more than 30 millionloans, including $800 million in almost 3.6 millionloans in California alone.7

The court of appeal was concerned about theeffect of such litigation on the foreclosure process,but it ignored the effect on homeowners like Peti-tioner. The court’s rationale is that, if inquiries suchas Petitioner’s were allowed, then suits wouldpossibly be filed “solely for the purpose of delayingvalid foreclosures.” (A12)

But if the foreclosure is valid, the foreclosing

Freddie Mac Bulletin 2011-5, March 23, 20116

http://www.freddiemac.com/corporate/company_profile/o7

ur_role_state/

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party should be able to produce documentation, suchas assignments of the promissory note, to show theborrower that the lender or its assigns authorizedthe foreclosing party to proceed. The court’s concernregarding frivolous delaying tactics is unwarranted,especially when weighed against the risk that aborrower could lose his or her home in a fraudulentnonjudicial foreclosure.

If eliminating delay in foreclosing on a borrower’smost valuable asset is their overriding concern, thenCalifornia’s courts have surrendered fairness anddue process, the cornerstones of our judicial system,to the private interests of some of this country’s mostpowerful financial institutions.

CONCLUSION

Review and reversal of the decision below iswarranted. The Petition for a writ of certiorarishould be granted.

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Respectfully submitted,

Ehud GerstenCounsel of Record for Petitioner3115 Fourth AvenueSan Diego, CA 92103619-600-0098

August 2011

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