9th Cir Rejects MERS Challenge, Rejects Equitable Tolling Theory Based on Spanish-Language Negotiations, Rejects Borrowers' IIED Claim

The U.S. Court of Appeals for the Ninth Circuit recently ruled in favor of Mortgage Electronic Registration Systems, Inc. ("MERS") in a putative class action challenging the MERS system under common law fraud and state UDAP theories.


The Court also rejected the borrowers' equitable tolling argument as to the TILA and state UDAP statute of limitations, based upon the borrowers speaking only Spanish but their loan documents being only in English. In addition, the Court held that providing an unaffordable loan to a borrower was not "extreme and outrageous" as is required to state a claim for intentional infliction of emotional distress.

A copy of the opinion is available at:
http://www.ca9.uscourts.gov/datastore/opinions/2011/09/07/09-17364.pdf

The three named plaintiffs in the case obtained home loans or refinanced existing loans in 2006. The plaintiffs each executed a deed of trust in favor of their lender, naming MERS as the "beneficiary" and as the "nominee" for the lender and lender's "successors and assigns." The plaintiffs do not speak or read English, and negotiated the mortgage loans with their lenders in Spanish, but were provided with, and signed, copies of their loan documents written in English.

The plaintiffs subsequently defaulted on their loans. Following default, their respective lenders appointed trustees to initiate nonjudicial foreclosure proceedings. MERS's beneficial interests in the deeds of trust were all assigned to a foreclosure trustee.

The plaintiffs filed their putative class action, alleging conspiracy by their lenders and others to use MERS to commit fraud. They also alleged that their lenders violated the federal Truth in Lending Act ("TILA"), and the Arizona Consumer Fraud Act ("ACFA"), and committed the tort of intentional infliction of emotional distress ("IIED") by supposedly targeting the plaintiffs for loans they allegedly could not repay when the loans were extended.

The trial court dismissed the plaintiffs' first amended complaint, without leave to amend. Further, the trial court denied leave to file a proposed second amended complaint, and to add a new claim for wrongful foreclosure.

On appeal, the plaintiffs only addressed the district court's: (1) dismissal of their claim for conspiracy to commit fraud through the MERS system; (2) failure to address their oral request for leave to add a wrongful foreclosure claim; (3) dismissal of the foreclosure trustee from the suit; (4) denial of leave to amend their pleadings regarding equitable tolling of their TILA and ACFA claims; and (5) dismissal of their claim for IIED.

On appeal, the Ninth Circuit noted that the main premise of the plaintiffs' lawsuit was that the MERS system impermissibly "splits" the note and deed of trust by facilitating the transfer of the beneficial interest in the loan among lenders while maintaining MERS as the nominal holder of the deed. The Ninth Circuit rejected this theory.

The plaintiffs' lawsuit was also premised on the fact that MERS does not have a financial interest in the loans, which, according to the plaintiffs, renders MERS's status as a beneficiary a sham. The Ninth Circuit rejected this theory, also.

With respect to the conspiracy to commit fraud claim, the plaintiffs alleged that MERS members conspired to commit fraud by using MERS as a sham beneficiary, supposedly promoting and facilitating predatory lending practices through the use of MERS, and supposedly making it impossible for borrowers or regulators to track the changes in lenders.

In upholding the lower court's ruling that the plaintiffs failed to state a cause of action, the Ninth Circuit held "[t]he plaintiffs' allegations fail to address several of [the] necessary elements for a fraud claim."

Specifically, the plaintiffs failed to identify any false representations made to them about the MERS system, and failed to allege they relied on misrepresentations about MERS in deciding to enter into their home loans.

Moreover, the Ninth Circuit found the plaintiffs' allegations were undercut by the language in the standard deed of trust, which provided that MERS was acting "solely as a nominee for Lender and Lender's successors and assigns" and holds "only legal title to the interest granted by Borrower in this Security Instrument." The Court held that "[b]y signing the deeds of trust, the plaintiffs agreed to the terms and were on notice of the contents." The Court further held that "[i]n light of the explicit terms of the standard deed. . ., it does not appear that the plaintiffs were misinformed about MERS's role in their home loans."

With respect to the wrongful foreclosure claim, the Ninth Circuit held that "[t]he plaintiffs' oral request to add a wrongful foreclosure claim was procedurally improper and substantively unsupported." The plaintiffs based their wrongful foreclosure claim on the novel theory that "all transfers of the interests in the home loans within the MERS system are invalid because the designation of MERS as a beneficiary is a sham and the system splits the deed from the note, and, thus, no party is in a position to foreclose."

The Court rejected this argument, holding "[e]ven if MERS were a sham beneficiary, the lenders would still be entitled to repayment of the loans and would be the proper parties to initiate foreclosure after the plaintiffs defaulted on their loans." The Court further held that "the notes and deeds are not irreparably split: the split only renders the mortgage unenforceable if MERS or the trustee, as nominal holders of the deeds, are not agents of the lenders."

With respect to the allegations against the foreclosure trustee, the Court noted the only allegations the plaintiffs directed against the foreclosure trustee was that the trustee supposedly "failed to recognize that its appointment was invalid." The Ninth Circuit held the plaintiffs failed to state a cause of action, because the trustee had an "'absolute right' under Arizona law 'to rely upon any written direction or information furnished to him by the beneficiary.'"

The plaintiffs also asserted that the district court failed to address the equitable tolling of their purported claims under TILA and the ACFA. The plaintiffs alleged their TILA claim should have been tolled because they only speak Spanish, but received their loan documents in English. The Court disagreed, finding "the plaintiffs have not alleged circumstances beyond their control that prevented them from seeking a translation of the loan documents that they signed and received."

Further, the Court also held that the plaintiffs failed to state a claim for equitable estoppel because they "failed to specify what true facts are at issue, or to establish that the alleged misrepresentation and concealment of facts is 'above and beyond the wrongdoing' that forms the basis for their TILA and [ACFA] claims."

Finally, with respect to the IIED allegations, the Ninth Circuit held the plaintiffs failed to state a cause of action because they "essentially allege that the lenders offered them loans that the lenders knew they could not repay," which was not "extreme and outrageous" as is required to state a claim for IIED.