Alert June 11, 2013

Oregon Supreme Court Holds MERS Cannot Be Beneficiary Under State Law

In two related opinions, the Oregon Supreme Court issued long-awaited rulings concerning the nonjudicial foreclosure of trust deeds that named MERS as "beneficiary," on behalf of the lender and subsequent noteholders who are members of the MERS system. Plaintiffs, borrowers who defaulted on their mortgage loans, filed suit against MERS and other entities related to its nonjudicial foreclosure under Oregon’s Deed of Trust Act procedures and sought to enjoin the foreclosure proceedings. Plaintiffs contended that although the trust deed identified MERS as the beneficiary, neither MERS nor any of the other entities involved in the foreclosure had any legal or beneficial interest in the trust deed that would allow them to proceed under Oregon law.

The United States District Court for the District of Oregon certified four questions to the Oregon Supreme Court: (1) may an entity, such as MERS, that is neither a lender nor a successor to the lender, be a "beneficiary" as that term is used in the Oregon Deed of Trust Act?; (2) may MERS be designated as beneficiary under the Oregon statute where the trust deed provides that MERS "holds only legal title to the interests granted by Borrower in this Security Instrument, but if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors or assigns) has the right to exercise any or all of those interests?"; (3) does the transfer of a promissory note from the lender to a successor result in an automatic assignment of the securing trust deed that must be recorded prior to the commencement of nonjudicial foreclosure proceedings under the Oregon statute?; and (4) does the Oregon Deed of Trust Act allow MERS to retain and transfer legal title to a trust deed as nominee for the lender, after the note secured by the trust deed is transferred from the lender to a successor or series of successors? After re-framing two of the questions, the Oregon Supreme Court answered negatively to most of the certified questions.

The opinions had two central holdings. First, the Court agreed with plaintiffs that MERS cannot be "beneficiary" of a trust deed. Because Oregon law defines "beneficiary" as "the person for whose benefit the trust deed is given," only the lender (or successive owner of the debt) meets this definition of "beneficiary." Second, the Court rejected borrowers’ argument that, before foreclosing nonjudicially, lenders must record an assignment for every promissory note transfer. Instead, the Court held that lenders are not required to record a trust deed assignment for every promissory note transfer. Although Oregon law requires that "any assignment of the trust deed" be recorded to foreclose non-judicially and under the common-law principle that "[a] trust deed follows the promissory note that it secures," trust deed assignments do occur by operation of law, the statutory requirement, according to the Court, only extends to written assignment documents. The Court explained that the legislature did not intend assignments by operation of law to come within the purview of the recording statutes.

Of import, the opinions left open the question of whether a proper "beneficiary" is the owner of the debt, the "person entitled to enforce the note" (i.e., often the servicer) or both. On the fourth question, which the Court reframed to ask, in part, whether MERS had authority, nevertheless, as an agent for the original lender and its successors in interest to act on their behalves with respect to the transfer of the beneficial interest in the trust deed or the nonjudicial foreclosure process, the Court concluded that it did not have sufficient information on record to answer that question. As a result, all cases were remanded back to the trial courts for further fact-finding to determine whether MERS had agency authority to act on behalf of the owner of the debt when it took the challenged actions related to nonjudicial foreclosures.