Firm Commentary: For all Internet trained lawyers: The silver bullet does not exist. Splitting of the loan theories, MERS as a boogieman, securitization as a defense will not result in borrower’s receiving free houses. Don’t believe the hype. If someone tells you otherwise; they are selling you something…an audit? A boilerplate lawsuit? or a fractionalized interest scam, perhaps?
Courts continue to bend over backwards to ensure that the “free house” dream never materializes. And for good reason: to invalidate thousands of mortgages would be to unfairly punish the pension plans, insurance companies and governments that INVESTED into mortgage backed securities. It is these investors, NOT THE BANKS, which ultimately pay the highest price of such an outcome. As to the standing issue, the bottom line is that some entity has the right to foreclose and recover the value of the collateral. Court’s are reluctant to allow technical errors in the securitization process to result in mass windfalls for defaulted borrowers.
If you are a homeowner in financial distress, you may have options, but understand that saving a home in this environment is a grind that takes planning, persistence and INCOME. Don’t delude yourself: if you have already lived in a property for three years without income and without making a mortgage payment, than you have ALREADY received a very substantial economic benefit. The best you may do is damage control, a graceful exit and cash for keys with no debt. Even if you have income, if your property is not under water, where is a lender’s incentive to modify your loan? Your personal problems, needs and wishes will always take a back seat to the comparative analysis of modification versus foreclosure and reinvestment of the sale proceeds. Unfortunately for homeowners, the servicers get to pick the modification winners and the losers, not the courts.
The article below, written by an attorney who represents mortgage company, lays out some relavant case law history related to “internet theories” and celebrates a recent Nevada Supreme Court decision that will make it easier to allow MERS to foreclose.
Killing the MERS Boogeyman: a Clarification of a Secured Creditor’s Standing in Bankruptcy
BY SHERRY A. MOORE, ESQ., ON DECEMBER 1ST, 2012
by: Sherry A. Moore, Esq., Associate Attorney, McCarthy & Holthus, LLP
During my tenure as an attorney primarily representing creditors, I have encountered numerous challenges to my clients’ standing. Such challenges have taken on many forms; however, the one constant challenge has been that the presence of Mortgage Electronic Registration System (MERS) in the security instrument renders the document invalid as the result is the split of the security from the right to payment thus preventing foreclosure. Another variation of this split the note argument relates to the allegedly fraudulent securitization process itself and the execution of assignments of security instruments long after the closing of the trust pools. However, thanks to recent decisions in both the Nevada Supreme Court and Nevada Bankruptcy Court, it appears that the efforts expended in the attempt to invalidate MERS may have been in vain.1<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn1>
On March 31, 2009, in In re Mitchell, the Court ruled that MERS lacked standing to file a Motion for Relief from Automatic Stay on behalf of lenders seeking to foreclose on delinquent debtors in bankruptcy because MERS failed to produce evidence that MERS as the named nominee was entitled to enforce the note or that MERS was the agent of the note’s holder.2<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn2> In fact, the evidence indicated that the note had been sold, and consequently, MERS, as the named nominee of an entity that no longer possessed an ownership interest in the note, no longer had any interest in the note.3<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn3> /sup> Therefore, MERS was not a real party in interest pursuant to Fed. R. Civ. P. 17.4<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn4> This ruling struck a significant blow to the mortgage lending industry, not only because most secured creditor actions in bankruptcy were up to that point being brought in the name of MERS, but because it gave credence to the idea that MERS’s inclusion in the deed of trust possibly resulted in invalidation of that security agreement despite the parties’ agreement to the contrary. Thus, the MERS boogeyman was born.
However, on September 27, 2012, the Nevada Supreme Court issued Edelstein v. Bank of New York Mellon. The Nevada Supreme Court held that a) MERS can be a beneficiary of a deed of trust; b) adopting the Restatement Rule, providing that unless the parties agree otherwise, the transfer of either the Deed of Trust or Note transfers the other document along with it; c) and finally while naming MERS as a beneficiary in the deed of trust splits the note from the deed of trust, such a split is not irreparable because an Assignment of Deed of Trust effectively reunites the note and Deed of Trust.5<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn5> This opinion fathered in the context of an appeal from a pre-foreclosure mediation has helped to clarify the issue of standing to bring an action be it a motion for relief from stay or a foreclosure itself.
The Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals in In re Veal ruled that a secured creditor establishes standing with respect to a Motion for Relief if it has “a colorable claim to receive payment pursuant to the Note, which it [can] accomplish either by showing it [is] a ‘person entitled to enforce’ the Note under Article 3 [of the Uniform Commercial Code] or by showing that it [has] some ownership or other property interest in the Note.” 6<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn6> With respect to standing to enforce a Proof of Claim, a secured creditor must “show that it [is] a ‘person entitled to enforce’ the Note, or [is] the agent of such person.7<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn7> Thus, the standard requirement for filling a Proof of Claim and collecting payments under it is higher than the standing requirement to seek relief from stay, which requires only that it must demonstrate that it has some property interest in the Note. By extension, it can be argued that In re Veal in conjunction with Judge Jones’ decision in In re Weingartner that the transfer of the note containing a valid endorsement also transfers the corresponding Deed of Trust along with it 8<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn8>, renders an assignment of Deed of Trust unnecessary. Additionally, prior to October 2011, Nevada Law did not require the recordation of assignments of the Deed of Trust.9<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn9>
However, on July 7, 2011, the Nevada Supreme Court issued the Leyva v. National Default Corp. decision. In Leyva, the Court ruled that a party seeking to enforce a Promissory Note must show either a valid negotiation of the instrument or to prove up the transfer of the unendorsed instrument in order to enforce the instrument.10<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn10> However, and frustratingly, in a footnote in Leyva, the Nevada Supreme Court specifically refused to address the issue of whether Nevada would adopt either the Traditional or the Restatement Rule.11<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn11> Consequently, rather than clarifying the issue of standing, Leyva served to further complicate matters by appearing to overturn the Traditional Rule while simultaneously refusing to address it.
While at first glance it appears that Leyva and the issue of standing to participate in a state mediation program is irrelevant to the question of a creditor’s standing in the bankruptcy context (after all, a creditor is not seeking to mediate or foreclose in bankruptcy), the Honorable Bruce A. Markell in the In re Gareffa decision found otherwise. The Court noted that while Leyva had failed to answer the question of whether an assignment of the Deed of Trust was required for a creditor to establish its standing to enforce both the Note and the Deed of Trust, he was nevertheless confident that the Nevada Supreme Court would eventually rule that “the requirement of a formal written assignment for a party seeking to foreclose is not entirely at odds with the absence of any such requirement in [the bankruptcy] context.”12<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn12> In other words, while a secured creditor may be required to record an assignment prior to foreclosure, the recordation of an assignment is unnecessary to prosecute an action in bankruptcy court. While Gareffa resulted in some much-needed-and-appreciated clarity regarding the applicability of an assignment with respect to the establishment of a creditor’s standing in bankruptcy, confusion nevertheless remained in light of Leyva. So while the Federal Courts had been followingWeingartner and adopting the Traditional Rule,13<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn13> the Nevada Supreme Court left open the question as to whether it would adopt the Traditional Rule (wherein the Deed of Trust follows the Note, but the Note does not follow the Deed of Trust) or the Reinstatement Rule and Judge Markell was trying to predict the future, with as it turns out some success.
Shortly after Judge Markell’s prediction, the Nevada Supreme Court issued its declaration in Edelstein clarifying once and for all that if a Promissory Note and Deed of Trust are split, it is not irrevocable and the split is cured by assignment of the Deed of Trust to the holder. Further, Edelstein has finally answered the unanswered question in Leyva by formally adopting the Restatement Rule.14<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn14>More importantly for our purposes, Edelstein has already been adopted by the Nevada bankruptcy court. In In re Stanley, Debtor Charles Stanley alleged, inter alia, that the Deed of Trust had been split from the Promissory Note when the Assignment of Deed of Trust had been executed after the closing date of the trust pool. Judge Markell quickly dismissed Stanley’s splitting-of-the-note argument, noting that Edelstein rejects his theory.15<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn15> Additionally, Judge Markell notes in Stanley that a debtor lacks standing to allege that a deed of trust and note are split when an assignment is executed in violation of the terms of a pooling and servicing agreement.16<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn16>
In conclusion, while Edelstein and Stanley may not lead to the decrease in the efforts of desperate borrowers seeking to invalidate their security interests to avoid foreclosure (Cervantes certainly did not stop them17<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn17> ), they are nevertheless monumental in that they have clarified what is required for a secured creditor to demonstrate its standing in bankruptcy court: at least, in Nevada.
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1. The cases of Edelstein and Stanley (discussed infra) are monumental in that they could possibly lead to the propriety of MERS recommencing initiating actions in bankruptcy and foreclosure. However, in July 2011, MERS revised its Rules of Membership (more specifically Rule 8) to prohibit MERS members from initiating foreclosure proceedings or filing a Motion for Relief or Proof of Claim in the name of MERS, even providing sanctions to those MERS members who do so. Granted this revision could have been promulgated in response to the Mitchell (discussed infra) and other adverse decisions as they relate to the use of MERS’s name in pleadings, but it still too early to predict whether Rule 8 will be amended to reflect these and other recent rulings favorable to MERS.
2. In re Mitchell, 2009 Bankr. LEXIS 876, *24 (Bankr. D. Nev. 2009) (“MERS may not enforce the notes as the alleged beneficiary.” While MERS may have standing to prosecute the motion in the name of its Member as nominee, there is no evidence that the named nominee is entitled to enforce the note or that MERS is the agent of the note’s holder”), aff’d on other grounds 423 B.R. 914 (D. Nev. 2009) (affirming that MERS lacked standing because it was unable to produce either the promissory note or written authority from the note holder, while simultaneously noting that the bankruptcy court’s ruling in In re Mitchell was a minority viewpoint, noting that MERS is authorized by other states’ statutes to foreclose)
3. Id.
4. Id. at *21.
5. Edelstein v. Bank of New York Mellon, 128 Nev. Adv. Op. 48 (Sep. 27, 2012)
6. Veal v. Am. Home Mortg. Servicing (In re Veal), 450 B.R. 897, 913 (B.A.P. 9th Cir. 2011)
7. Id.
8. In re Weingartner v. Chase Home Finance, LLC, 702 F.Supp. 2d 1276, 1293 (D. Nev. 2010)(“A security instrument (e.g., mortgage or deed of trust) follows the debt (e.g., promissory note), not the other way around.”)
9. See Nev. Rev. Stat. § 106.210 (“Any assignment of a mortgage of real property . . . and any assignment of the beneficial interest under a deed of trust must be recorded in the office of the recorder of the county in which the property is located. If the beneficial interest under a deed of trust has been assigned, the trustee under the deed of trust may not exercise the power of sale pursuant to NRS 107.080 unless and until the assignment is recorded pursuant to this subsection.”)
10. Leyva v. National Default Corp, 255 P.3d 1275, 1279 (Nev. 2011)
11. Leyva, 255 P.3d at 1280, n.7 (“Since the documents provided at the mediation did not establish transfer of either the mortgage or the note, we express no opinion on the issue addressed in the Restatement (Third) of Property section 5.4 concerning the effect on the mortgage of the note having been transferred or the reverse.”)
12. In re Gareffa, Case No. 09-20800-bam, Docket # 109, * 12 (Bankr. D. Nev. Aug. 3, 2012) (“This court predicts the Nevada Supreme Court will resolve the question in a manner consistent with the reasoning set forth above.”)
13. Weingartner, 702 F.Supp. at 1293
14.Edelstein, at *15 (“we decline to adopt the traditional rule and instead consider the Restatement approach”)
15. In re Stanley, Case No. 11-15621-bam, Docket # 73, *18 (Bankr. D. Nev. Oct. 12, 2012) (“Stanley counters with the theory that the timing of the MERS assignment, having occurred after the Note and Deed of Trust were transmitted to BAC, effected a separation of those instruments, leaving BONY with a claim against the Note, but no claims as against the Property. Edelstein, however, rejects Stanley’s theory.”)
16. Id. at 18, n.26 (“To the extent Stanley’s arguments concern compliance with the terms and conditions of the CWALT Trust, this court remains unconvinced that he has standing to raise such issues.”(citing Livonia Prop. Holdings, L.L.C. v. 12840-12976 Farmington Rd. Holdings, L.L.C., 717 F.Supp. 2d 724, 748 (E.D. Mich. 2010), aff’d, 399 F.App’x 97 (6th Cir. 2010)
17. Cervantes v. Countrywide Home Loans, 656 F.3d 1034, 1044 (9th Cir. 2011)(“the notes and deeds are not irreparably split: the split only renders the mortgage unenforceable I MERS or the trustee, as nominal holders of the deeds, are not agents of the lenders.”)
Firm Commentary: For all Internet trained lawyers: The silver bullet does not exist. Splitting of the loan theories, MERS as a boogieman, securitization as a defense will not result in borrower’s receiving free houses. Don’t believe the hype. If someone tells you otherwise; they are selling you something…an audit? A boilerplate lawsuit? or a fractionalized interest scam, perhaps?
Courts continue to bend over backwards to ensure that the “free house” dream never materializes. And for good reason: to invalidate thousands of mortgages would be to unfairly punish the pension plans, insurance companies and governments that INVESTED into mortgage backed securities. It is these investors, NOT THE BANKS, which ultimately pay the highest price of such an outcome. As to the standing issue, the bottom line is that some entity has the right to foreclose and recover the value of the collateral. Court’s are reluctant to allow technical errors in the securitization process to result in mass windfalls for defaulted borrowers.
If you are a homeowner in financial distress, you may have options, but understand that saving a home in this environment is a grind that takes planning, persistence and INCOME. Don’t delude yourself: if you have already lived in a property for three years without income and without making a mortgage payment, than you have ALREADY received a very substantial economic benefit. The best you may do is damage control, a graceful exit and cash for keys with no debt. Even if you have income, if your property is not under water, where is a lender’s incentive to modify your loan? Your personal problems, needs and wishes will always take a back seat to the comparative analysis of modification versus foreclosure and reinvestment of the sale proceeds. Unfortunately for homeowners, the servicers get to pick the modification winners and the losers, not the courts.
The article below, written by an attorney who represents mortgage company, lays out some relavant case law history related to “internet theories” and celebrates a recent Nevada Supreme Court decision that will make it easier to allow MERS to foreclose.
Killing the MERS Boogeyman: a Clarification of a Secured Creditor’s Standing in Bankruptcy
BY SHERRY A. MOORE, ESQ., ON DECEMBER 1ST, 2012
by: Sherry A. Moore, Esq., Associate Attorney, McCarthy & Holthus, LLP
During my tenure as an attorney primarily representing creditors, I have encountered numerous challenges to my clients’ standing. Such challenges have taken on many forms; however, the one constant challenge has been that the presence of Mortgage Electronic Registration System (MERS) in the security instrument renders the document invalid as the result is the split of the security from the right to payment thus preventing foreclosure. Another variation of this split the note argument relates to the allegedly fraudulent securitization process itself and the execution of assignments of security instruments long after the closing of the trust pools. However, thanks to recent decisions in both the Nevada Supreme Court and Nevada Bankruptcy Court, it appears that the efforts expended in the attempt to invalidate MERS may have been in vain.1<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn1>
On March 31, 2009, in In re Mitchell, the Court ruled that MERS lacked standing to file a Motion for Relief from Automatic Stay on behalf of lenders seeking to foreclose on delinquent debtors in bankruptcy because MERS failed to produce evidence that MERS as the named nominee was entitled to enforce the note or that MERS was the agent of the note’s holder.2<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn2> In fact, the evidence indicated that the note had been sold, and consequently, MERS, as the named nominee of an entity that no longer possessed an ownership interest in the note, no longer had any interest in the note.3<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn3> /sup> Therefore, MERS was not a real party in interest pursuant to Fed. R. Civ. P. 17.4<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn4> This ruling struck a significant blow to the mortgage lending industry, not only because most secured creditor actions in bankruptcy were up to that point being brought in the name of MERS, but because it gave credence to the idea that MERS’s inclusion in the deed of trust possibly resulted in invalidation of that security agreement despite the parties’ agreement to the contrary. Thus, the MERS boogeyman was born.
However, on September 27, 2012, the Nevada Supreme Court issued Edelstein v. Bank of New York Mellon. The Nevada Supreme Court held that a) MERS can be a beneficiary of a deed of trust; b) adopting the Restatement Rule, providing that unless the parties agree otherwise, the transfer of either the Deed of Trust or Note transfers the other document along with it; c) and finally while naming MERS as a beneficiary in the deed of trust splits the note from the deed of trust, such a split is not irreparable because an Assignment of Deed of Trust effectively reunites the note and Deed of Trust.5<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn5> This opinion fathered in the context of an appeal from a pre-foreclosure mediation has helped to clarify the issue of standing to bring an action be it a motion for relief from stay or a foreclosure itself.
The Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals in In re Veal ruled that a secured creditor establishes standing with respect to a Motion for Relief if it has “a colorable claim to receive payment pursuant to the Note, which it [can] accomplish either by showing it [is] a ‘person entitled to enforce’ the Note under Article 3 [of the Uniform Commercial Code] or by showing that it [has] some ownership or other property interest in the Note.” 6<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn6> With respect to standing to enforce a Proof of Claim, a secured creditor must “show that it [is] a ‘person entitled to enforce’ the Note, or [is] the agent of such person.7<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn7> Thus, the standard requirement for filling a Proof of Claim and collecting payments under it is higher than the standing requirement to seek relief from stay, which requires only that it must demonstrate that it has some property interest in the Note. By extension, it can be argued that In re Veal in conjunction with Judge Jones’ decision in In re Weingartner that the transfer of the note containing a valid endorsement also transfers the corresponding Deed of Trust along with it 8<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn8>, renders an assignment of Deed of Trust unnecessary. Additionally, prior to October 2011, Nevada Law did not require the recordation of assignments of the Deed of Trust.9<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn9>
However, on July 7, 2011, the Nevada Supreme Court issued the Leyva v. National Default Corp. decision. In Leyva, the Court ruled that a party seeking to enforce a Promissory Note must show either a valid negotiation of the instrument or to prove up the transfer of the unendorsed instrument in order to enforce the instrument.10<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn10> However, and frustratingly, in a footnote in Leyva, the Nevada Supreme Court specifically refused to address the issue of whether Nevada would adopt either the Traditional or the Restatement Rule.11<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn11> Consequently, rather than clarifying the issue of standing, Leyva served to further complicate matters by appearing to overturn the Traditional Rule while simultaneously refusing to address it.
While at first glance it appears that Leyva and the issue of standing to participate in a state mediation program is irrelevant to the question of a creditor’s standing in the bankruptcy context (after all, a creditor is not seeking to mediate or foreclose in bankruptcy), the Honorable Bruce A. Markell in the In re Gareffa decision found otherwise. The Court noted that while Leyva had failed to answer the question of whether an assignment of the Deed of Trust was required for a creditor to establish its standing to enforce both the Note and the Deed of Trust, he was nevertheless confident that the Nevada Supreme Court would eventually rule that “the requirement of a formal written assignment for a party seeking to foreclose is not entirely at odds with the absence of any such requirement in [the bankruptcy] context.”12<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn12> In other words, while a secured creditor may be required to record an assignment prior to foreclosure, the recordation of an assignment is unnecessary to prosecute an action in bankruptcy court. While Gareffa resulted in some much-needed-and-appreciated clarity regarding the applicability of an assignment with respect to the establishment of a creditor’s standing in bankruptcy, confusion nevertheless remained in light of Leyva. So while the Federal Courts had been followingWeingartner and adopting the Traditional Rule,13<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn13> the Nevada Supreme Court left open the question as to whether it would adopt the Traditional Rule (wherein the Deed of Trust follows the Note, but the Note does not follow the Deed of Trust) or the Reinstatement Rule and Judge Markell was trying to predict the future, with as it turns out some success.
Shortly after Judge Markell’s prediction, the Nevada Supreme Court issued its declaration in Edelstein clarifying once and for all that if a Promissory Note and Deed of Trust are split, it is not irrevocable and the split is cured by assignment of the Deed of Trust to the holder. Further, Edelstein has finally answered the unanswered question in Leyva by formally adopting the Restatement Rule.14<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn14>More importantly for our purposes, Edelstein has already been adopted by the Nevada bankruptcy court. In In re Stanley, Debtor Charles Stanley alleged, inter alia, that the Deed of Trust had been split from the Promissory Note when the Assignment of Deed of Trust had been executed after the closing date of the trust pool. Judge Markell quickly dismissed Stanley’s splitting-of-the-note argument, noting that Edelstein rejects his theory.15<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn15> Additionally, Judge Markell notes in Stanley that a debtor lacks standing to allege that a deed of trust and note are split when an assignment is executed in violation of the terms of a pooling and servicing agreement.16<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn16>
In conclusion, while Edelstein and Stanley may not lead to the decrease in the efforts of desperate borrowers seeking to invalidate their security interests to avoid foreclosure (Cervantes certainly did not stop them17<http://considerchapter13.org/2012/12/01/killing-the-mers-boogeyman-a-clarification-of-a-secured-creditors-standing-in-bankruptcy/?utm_source=Dec%203%20Email&utm_campaign=dec32012&utm_medium=email#_ftn17> ), they are nevertheless monumental in that they have clarified what is required for a secured creditor to demonstrate its standing in bankruptcy court: at least, in Nevada.
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1. The cases of Edelstein and Stanley (discussed infra) are monumental in that they could possibly lead to the propriety of MERS recommencing initiating actions in bankruptcy and foreclosure. However, in July 2011, MERS revised its Rules of Membership (more specifically Rule 8) to prohibit MERS members from initiating foreclosure proceedings or filing a Motion for Relief or Proof of Claim in the name of MERS, even providing sanctions to those MERS members who do so. Granted this revision could have been promulgated in response to the Mitchell (discussed infra) and other adverse decisions as they relate to the use of MERS’s name in pleadings, but it still too early to predict whether Rule 8 will be amended to reflect these and other recent rulings favorable to MERS.
2. In re Mitchell, 2009 Bankr. LEXIS 876, *24 (Bankr. D. Nev. 2009) (“MERS may not enforce the notes as the alleged beneficiary.” While MERS may have standing to prosecute the motion in the name of its Member as nominee, there is no evidence that the named nominee is entitled to enforce the note or that MERS is the agent of the note’s holder”), aff’d on other grounds 423 B.R. 914 (D. Nev. 2009) (affirming that MERS lacked standing because it was unable to produce either the promissory note or written authority from the note holder, while simultaneously noting that the bankruptcy court’s ruling in In re Mitchell was a minority viewpoint, noting that MERS is authorized by other states’ statutes to foreclose)
3. Id.
4. Id. at *21.
5. Edelstein v. Bank of New York Mellon, 128 Nev. Adv. Op. 48 (Sep. 27, 2012)
6. Veal v. Am. Home Mortg. Servicing (In re Veal), 450 B.R. 897, 913 (B.A.P. 9th Cir. 2011)
7. Id.
8. In re Weingartner v. Chase Home Finance, LLC, 702 F.Supp. 2d 1276, 1293 (D. Nev. 2010)(“A security instrument (e.g., mortgage or deed of trust) follows the debt (e.g., promissory note), not the other way around.”)
9. See Nev. Rev. Stat. § 106.210 (“Any assignment of a mortgage of real property . . . and any assignment of the beneficial interest under a deed of trust must be recorded in the office of the recorder of the county in which the property is located. If the beneficial interest under a deed of trust has been assigned, the trustee under the deed of trust may not exercise the power of sale pursuant to NRS 107.080 unless and until the assignment is recorded pursuant to this subsection.”)
10. Leyva v. National Default Corp, 255 P.3d 1275, 1279 (Nev. 2011)
11. Leyva, 255 P.3d at 1280, n.7 (“Since the documents provided at the mediation did not establish transfer of either the mortgage or the note, we express no opinion on the issue addressed in the Restatement (Third) of Property section 5.4 concerning the effect on the mortgage of the note having been transferred or the reverse.”)
12. In re Gareffa, Case No. 09-20800-bam, Docket # 109, * 12 (Bankr. D. Nev. Aug. 3, 2012) (“This court predicts the Nevada Supreme Court will resolve the question in a manner consistent with the reasoning set forth above.”)
13. Weingartner, 702 F.Supp. at 1293
14.Edelstein, at *15 (“we decline to adopt the traditional rule and instead consider the Restatement approach”)
15. In re Stanley, Case No. 11-15621-bam, Docket # 73, *18 (Bankr. D. Nev. Oct. 12, 2012) (“Stanley counters with the theory that the timing of the MERS assignment, having occurred after the Note and Deed of Trust were transmitted to BAC, effected a separation of those instruments, leaving BONY with a claim against the Note, but no claims as against the Property. Edelstein, however, rejects Stanley’s theory.”)
16. Id. at 18, n.26 (“To the extent Stanley’s arguments concern compliance with the terms and conditions of the CWALT Trust, this court remains unconvinced that he has standing to raise such issues.”(citing Livonia Prop. Holdings, L.L.C. v. 12840-12976 Farmington Rd. Holdings, L.L.C., 717 F.Supp. 2d 724, 748 (E.D. Mich. 2010), aff’d, 399 F.App’x 97 (6th Cir. 2010)
17. Cervantes v. Countrywide Home Loans, 656 F.3d 1034, 1044 (9th Cir. 2011)(“the notes and deeds are not irreparably split: the split only renders the mortgage unenforceable I MERS or the trustee, as nominal holders of the deeds, are not agents of the lenders.”)
