Editor: David Reiss
Brooklyn Law School

January 7, 2013

District Court of Arizona Dismisses Homeowners’ 72-Member Complaint, Finding MERS’ Securitization System Consistent with Theories of Real Property Law

By Joseph Kelly

In In re MERS Litigation, the District Court of Arizona dismissed all seventy-two member cases of a multi-district litigation “Consolidated Amended Complaint” (CAC) brought on behalf of numerous homeowners. Plaintiffs alleged defendants, including MERS, had violated various state statutes including ARS Sec. 33-420, NRS Sec. 107.080, and ORS Sec. 86.735, and committed the tort of wrongful foreclosure, amongst other violations. Eleven defendants filed motions to dismiss, with several additional defendants filing joinders to MERS’ motion.

The crux of plaintiffs’ claims turned on the position that “naming MERS as a beneficiary on the deeds of trusts, and the subsequent operation of the MERS system, splits the MERS deeds of trust from their promissory notes and renders these notes unsecured and unenforceable.” Plaintiffs premised this argument on three basic theories of real property law.

First, to foreclose you need to be a beneficiary.

MERS is not and has never been.

Second, to foreclose the deed of trust must be a valid enforceable security instrument.

The MERS Deeds of Trust are not and never were because they never named a valid beneficiary and were split from the note they were supposed to secure at the time of their creation.

Third, if MERS was actually in possession of some right as an agent under the Deed of Trust, its attempted assignment was ineffective because only the true beneficiary (i.e. principal) can make such an assignment.

The court rejected plaintiffs’ theories and in turn the CAC in its entirety. First, the court rejected the notion that naming MERS as a beneficiary completely destroys the security and bars all attempts at non-judicial foreclosure. Citing the 9th Circuit, the court stated “even granting that MERS is a sham beneficiary and the note is split from the deed [the] conclusion that …no party has the power to foreclose does not hold.”  (emphasis added, internal citations omitted). Second, the court rejected the notion that MERS’ assignments were invalid because they never possessed the promissory notes. Referring to the language in plaintiffs’ Deeds of Trust – the court relied on the provisions granting MERS legal title to the secured interests and the power to assign those interests as dispositive. In turn, the court dismissed all twelve of plaintiffs’ claims for relief. Additionally, though plaintiffs did not explicitly request leave to file an amended complaint, the court found that there would be some level of prejudice to defendants, and that “futility – weighs heavily against granting leave to amend” as “plaintiffs [have already had] several bites at the apple.” Accordingly, the court dismissed with prejudice.

While the court noted the argument was moot for purposes of this decision, it did grant one small victory to plaintiffs in agreeing that the Housing and Economic Recovery Act of 2008 (“HERA”) does not preclude courts from enjoining foreclosures. Defendant Federal Housing Finance Agency (“FHFA”) as Conservator of Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) had intervened in nine separate cases pending in this litigation. In their motion to dismiss, FHFA relied on the language of U.S.C. Sec. 4617(f) that restricts judicial action that would “restrain or affect” the powers of FHFA to argue courts lacked the power to issue injunctions in non-judicial foreclosures. The court disagreed, stating there was no “authority standing for the proposition that the FHFA, or a similarly situated entity, may never be enjoined from bringing a non-judicial foreclosure. If plaintiffs overarching MERS argument was correct, and [Fannie Mae and Freddie Mac had] no enforceable interests in the properties at issue, then FHFA would also lack any enforceable interest.”

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