By: Joshua D. Feil
Last month, the Oregon Court of Appeals held in Nationstar Mortgage, LLC v. Niday that when one party “is in possession of [a] promissory note indorsed in blank and [the other party] is in default of [its] obligations under the promissory note and deed of trust,” the first party has the right to pursue judicial foreclosure of its interest. Despite the defendants’ contention that the case presented “unresolved issues of transfer and ownership” of the promissory note and trust deed, the Court of Appeals observed that the “undisputed evidence” in the case showed that Nationstar was in possession of the promissory note and that the defendants were in default of their obligations under the note and the trust deed securing it.
The short opinion cited two 2016 Court of Appeals decisions. Deutsche Bank Trust Co. Americas v. Walmsley held that the “holder” of a note has the right to enforce its terms in the event of default. Nationstar Mortgage, LLC v. Peper, held that, under the Uniform Commercial Code as enacted in Oregon, a holder of a promissory note indorsed in blank may enforce the note in the event of default.
Mortgage Electronic Registrations Systems, Inc. (“MERS”) was one of the defendants in the 2017 Nationstar case. Since the housing market crash in 2007, MERS-related litigation has been a driving force in Oregon appellate courts’ interpretation of Oregon secured transaction law, including the Oregon Trust Deed Act (“OTDA”). In 2013, the Oregon Supreme decided two MERS/OTDA cases on the same day. In Brandrup v. ReconTrust Co. and Niday v. GMAC Mortgage, LLC, it held that under the OTDA, a trust deed beneficiary must be “entitled to repayment of the [promissory] note” and that a party lacking that right, even if named as a beneficiary, is not a “beneficiary” under the OTDA. Therefore, such a party cannot foreclose a trust deed acting as a beneficiary.
However, the court also said that MERS could act as an agent for the trust deed beneficiary in foreclosing a trust deed, and that a transfer of a note secured by a trust deed is not an “assignment” under the OTDA. While the transfer of a note “result[s] in an equitable transfer of the associated trust deed by operation of law,” because this type of transfer is not an assignment, it does not need to be recorded for a party to nonjudicially foreclose under the OTDA in the event of default.
The 2017 Nationstar case and the 2013 Brandrup/Niday decisions mean that if a party is holder of a promissory note indorsed in blank and secured by a trust deed, it may direct MERS or its loan servicer to act as its agent and foreclose if the grantor has defaulted on its obligations. A grantor can still challenge the foreclosure by arguing that transfers of the note were the result of fraud, undue influence or similar theories, but may not rely on the absence of a recorded trail of transfers of the note indorsed in blank as a defense.
Plaintiffs continue to pursue MERS-related litigation. In 2016, following a settlement between MERS and Multnomah County, eleven Oregon counties sued MERS and several other financial institutions in Oregon over MERS’s system of acquiring trust deeds and mortgages. As this and other cases work their way through Oregon’s courts, more court interpretations of Oregon secured transaction law are likely to follow. The lawyers in Saalfeld Griggs’ Financial Services Industry and Creditors’ Rights practice groups closely track these developments and are experienced in this evolving area of the law. If you have any questions about MERS litigation, the OTDA or other secured transactions, please contact a professional in one of these groups.
Please contact Josha Feil at 503-399-1070 / JFeil@sglaw.com, or another member of our Litigation or Creditor’s Rights & Bankruptcy groups if you have questions.