Cal App Ct Upholds Dismissal of MERS Challenge

A borrower obtained a loan in the amount of $331,000 from a lender to finance the purchase of real estate. In connection with that transaction, he executed a promissory note (the “Note”), which was secured by a deed of trust. The deed of trust identified the lender, as well as naming Mortgage Electronic Registration Systems, Inc. (“MERS”) as beneficiary.


After the borrower defaulted on his loan payments, he was mailed a notice of default and election to sell, which initiated a non-judicial foreclosure process. The notice of default was sent to borrower by ReconTrust, which identified itself as an agent for MERS. Accompanying the notice of default was a declaration signed by an employee of Countrywide, which was acting as the loan servicer.

The borrower then filed a lawsuit against Countrywide, MERS and ReconTrust, attempting to allege a number of different causes of action. The only causes of action at issue on the appeal were the first and second causes of action.

The borrower’s first cause of action was titled “Wrongful Initiation of Foreclosure” and alleged that “the person or entity who directed the initiation of the foreclosure process, whether through an agent of MERS or otherwise, was neither the Note's rightful owner nor acting with the rightful owner's authority.” In other words, the first cause of action asserted that MERS did not have authority to initiate the foreclosure because it was not authorized to do so by the current owner of the Note.

The borrower’s second cause of action sought declaratory relief on the issue of whether California “[Civil Code section 2924, subdivision (a)] allows a borrower, before his or her property is sold, to bring a civil action in order to test whether the person electing to sell the property is, or is duly authorized to so by, the owner of a beneficial interest in it.” The court noted that although designated a cause of action for declaratory relief, the second cause of action served simply as a legal argument in support of the first cause of action. The defendants filed a demurrer as to the first and second causes of action, which the trial court sustained without leave to amend.

In sustaining the ruling of the trial court, the appellate court first noted that California’s non-judicial foreclosure scheme is set forth in California Civil Code sections 2924 through 2924k, which “provide a comprehensive framework for the regulation of a non-judicial foreclosure sale pursuant to a power of sale contained in a deed of trust.” The court noted that “[t]he purposes of [the] comprehensive scheme are threefold: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.” Finally, the court stated that

“[b]ecause of the exhaustive nature of this scheme, California appellate courts have refused to read any additional requirements into the non-judicial foreclosure statute.”

With the purpose of California’s comprehensive non-judicial foreclosure scheme in mind, the court ruled that the borrower was “attempting to interject the courts into” the scheme without pointing to any legal authority to do so. The borrower argued that such authority was provided by Civil Code section 2924, subdivision (a). The court rejected the argument noting that Section 2924, subdivision (a)(1) states that a “trustee, mortgagee, or beneficiary, or any of their authorized agents” may initiate the foreclosure process. The court further ruled that “nowhere does the statute provide for a judicial action to determine whether the person initiating the foreclosure process is indeed authorized, and we see no ground for implying such an action.”

The court then discussed three federal district court cases, which the borrower cited as purported legal authority for the alleged right to challenge an entity’s ability to initiate the foreclosure process. The court found that the cases were not controlling, nor were they on point, as none recognized “a cause of action requiring the noteholder's nominee to prove its authority to initiate a foreclosure proceeding.” Further, the court noted that “the district court cases from outside of California are inapposite because they do not apply California non-judicial foreclosure law.”

Finally, the borrower argued that even if California's non-judicial foreclosure law did not provide for the filing of a lawsuit to determine whether MERS had been authorized by the holder of the Note to initiate a foreclosure, the court should nevertheless interpret such a right as the “[l]egislature may not have contemplated or had time to fully respond to the present situation.” Again, the court rejected this argument, finding that “because California's non-judicial foreclosure statute is unambiguously silent on any right to bring the type of action identified by [the borrower], there is no basis for the courts to create such a right.” The court therefore held that “the trial court properly sustained Defendants’ demurrer to the first and second causes of action in [the borrower’s] complaint.”

In addition, the appellate court went on to hold that “[a]s an independent ground for affirming the order sustaining the demurrer. . . even if there was a legal basis for an action to determine whether MERS has authority to initiate a foreclosure proceeding, the deed of trust. . . establishes as a factual matter that [borrower’s] claims lack merit.” The court noted that the language of the deed expressly stated MERS had the authority to initiate a foreclosure.

Finally, the court held that the borrower would not be able to cure the defects of his complaint simply by amending the allegations. The court therefore held that “the trial court properly sustained the demurrer without leave to amend.”