Breaking Down Brandrup: A First Look At The Oregon Supreme Court’s Landmark Decision on MERS
The Oregon Supreme Court recently published anxiously-awaited opinions in two MERS cases: Brandrup v. ReconTrust Company, N.A. and Niday v. GMAC Mortgage, LLC. Since that day attorneys have been poring over every jot and tittle looking for confirmation, meaning, instruction, loopholes, and more. In short, attorneys have been busy trying to figure out how to keep attorneys busy for the second half of the foreclosure crisis.
In this two-part first look, we will not attempt to bore into the finer points or critique the weaker points or ask the questions that are begging still to be asked. We aim merely to summarize what has been said for those wise or fortunate readers who have yet to slog through over 70 pages of dense legal analysis. For those who made the attempt but never reached the pinnacle, put down your pickaxes and pull up a seat. We have a curious tale to tell.
PART ONE: BREAKING DOWN BRANDRUP
For the past year, the name “Niday” has been spoken in soft whispers by anxious bankers, attorneys, homeowners, judges, and legislators, but in the days to come the name “Brandrup” will be heard more frequently. The Brandrups are one of four sets of plaintiffs who filed cases against MERS, Bank of America, and other entities involved in foreclosing their homes under the Oregon Trust Deed Act (OTDA). Because resolution of the cases turned on novel questions of state law, the district court certified four questions for the Oregon Supreme Court to answer.
MERS Dressed in Sheep’s Clothing Is Still a Wolf
The first two questions concern whether Mortgage Electronic Registration Systems, Inc. (MERS) can be the beneficiary of a trust deed in Oregon. The term “beneficiary” is defined by statute to mean “a person named or otherwise designated in a trust deed as the person for whose benefit the trust deed is given.” MERS focused on the phrase “named or otherwise designated,” arguing that the trust deeds at issue name MERS as the beneficiary. Plaintiffs focused on the second part of the definition, arguing that the “person for whose benefit the trust deed is given” is the lender.
If you were brave enough to read the stacks of briefing filed by the parties and various amici or “friends of the court,” you know already that there were dozens of finer, more technical arguments made in support of or in addition to these basic arguments. But for purposes of this article, we will ignore those finer points unless they are critical to understanding the court’s opinion.
The court agreed with the parties that the core question is one of statutory construction—in other words, the court must determine what meaning the legislature intended when it defined the term “beneficiary”.
The court first explained that the benefit of a trust deed is “the security it provides with respect to an obligation owed by the grantor to the beneficiary.” In plainer terms, the benefit of a trust deed is that it creates a lien on the property that the beneficiary can foreclose if the grantor defaults on the loan. The net proceeds from the foreclosure sale are paid to the beneficiary to satisfy the debt. The court noted that many other provisions of the OTDA are consistent with, and only with, the court’s interpretation. MERS’ interpretation, if correct, would render those provisions meaningless.
But what about the phrase “named or otherwise designated”? Doesn’t the court’s reading render that phrase meaningless? It does not, the court explained, because that phrase imposes a requirement that the trust deed name or designate the person to whom the grantor owes the debt. The court’s interpretation gives full effect to both parts of the definition.
So if the standard MERS trust deed names MERS as the beneficiary but designates the lender as the person to whom the obligation is owed, which one is, in fact, the beneficiary? Applying the court’s construction, the answer is easy to see: MERS is but a wolf in sheep’s clothing, or more specifically, a mere agent in beneficiary’s garb. The lender, or its successor in interest, is the true beneficiary because the lender alone is, and is designated as, the person to whom the obligation is owed.
The Magical Mystery of MERS’ “But The Trust Deed Says So” Arguments
Not content to let common sense and plain language get in the way, MERS argued that, even if the court’s statutory construction is correct, the terms of the trust deed trump the statute. The court wisely rejects these “But The Trust Deed Says So” arguments.
First, the court notes that the question of MERS’ status “does not hinge on the parties’ intent; rather it depends on legislative intent.” The meaning of “beneficiary” is not only determined by statute, “that meaning is incorporated into, and cannot be altered by, the party’s agreement.”
Although the court need not have said more than that, the court takes a short detour near the end of this section of the opinion to explain that it is a “fundamental principle in mortgage law…that a foreclosing party must have the power to enforce the underlying note.” This “functional unity” between the beneficiary and the person entitled to enforce the note (the “PETE”) “has longstanding roots in the common law itself.”
In other words, for the court to hold that MERS is a beneficiary would not only contradict the plain language of the statute but would upset a fundamental principle of law. And if you hadn’t guessed already, courts generally refrain from throwing out centuries of foundational law on the drop of a hat—even if the requesting party is a mortgage industry darling.
In answering the second question, the court takes on another “But The Trust Deed Says So” argument. MERS has long argued, with occasional success, that the law or custom clause in a MERS trust deed magically transforms MERS into a PETE so that MERS does satisfy the statutory definition of “beneficiary.”
The argument is a wonder of circular logic and goes something like this. The trust deed states that “if necessary to comply with law or custom, MERS…has the right: to exercise any or all of [the interests the trust deed grants to the lender].” Given the court’s construction of the statute, the only way MERS can legally be the beneficiary of the trust deed is if MERS has or acquires the right to enforce the note. Therefore, to comply with the OTDA, the trust deed must give MERS the right to enforce the note—even if it does not. (It is unclear from the briefing whether a top hat, magic wand and smoke machine are necessary to complete this magical transformation, but one may assume.)
There are at least two wee problems with MERS’ arguments (aside from the bizarre logic of it). First, the trust deed grants to the lender a beneficial interest in the lien but does not convey the right to enforce the note. The note does that. Second, MERS is not a party to the note and is not a person entitled to enforce it under the Uniform Commercial Code. Inexplicably, MERS seems to be thoroughly confused about the differences between notes and trust deeds.
Fortunately, the court did its homework and well understands the differences. As the court explains, “the interests that are granted by the grantor in a trust deed are different from the right to repayment under a related promissory note.” The trust deed conveys two interests: a lien on the property and a beneficial interest in that lien. “Although related to [those] interests…[the] right to repayment is not one of those interests.” Because the law or custom clause does not purport to grant MERS the right to repayment, the law or custom clause cannot magically transform MERS into a beneficiary, regardless of the quality of the wand or the quantity of smoke produced.
The Final Word On MERS As Beneficiary
The answers to the first two questions posed in Brandrup can be summarized as follows: That old gray MERS, she ain’t what she claimed to be. MERS is not and never has been a beneficiary under Oregon law. MERS is, at most, a limited agent of the true beneficiary: the lender or the lender’s successor in interest. Common sense has won the day.
Unfortunately, that is not the end of the story. Now that the characters are fully developed and the plotline advanced, the court introduces tension leading to a climax and denouement. So after a brief intermission, please take your seats before the curtain rises on Brandrup’s second act.
Recording an Unrecordable Assignment and The Old Case of Barringer v. Older
Undoubtedly MERS’ attorneys and bankers everywhere huddled in their office corners weeping and gnashing their teeth when reading the first half of Brandrup. Some no doubt longed for their childhood teddy bears and blankets to comfort them upon learning that MERS simply does not work in Oregon the way that the mortgage industry intended. But we have told only the first half of the story so far.
Homeowners that had success in stopping nonjudicial foreclosures relied on a requirement in the OTDA that “any assignments of the trust deed…by the beneficiary” first must be recorded in the public land records. In a typical foreclosure of a MERS trust deed, only one assignment is recorded: an assignment from MERS to the loan servicer or the current owner of the note. Any intervening transfers between MERS members are not recorded. Because the vast majority of loans are sold shortly after origination, there are almost always intervening transfers so the failure to record those assignments had become low-hanging fruit in the MERS wars.
As the court reaffirmed, the transfer of a promissory note secured by a mortgage or trust deed automatically transfers that mortgage or trust deed. Therefore, transfers of the note between MERS members do effect assignments of the trust deed. So the only question is whether such assignments must be recorded.
MERS argued that assignments that occur automatically, by operation of law, are not the kind of assignments that must be recorded. In fact, by definition such assignments occur in the absence of a formal writing that can be recorded. Nevertheless, plaintiffs argued that “any assignments” means just that: any, all, every.
Once again, the question is one of statutory construction, but in this case the court had little to go on. The phrase “any assignments” is ambiguous: it could refer equally to any recordable assignment or to any assignment in whatever form. Unlike “beneficiary,” the term “assignment” is not defined in the OTDA, and there was no legislative history to guide the court. While some cases refer to mortgage transfers that occur automatically as “assignments,” standard dictionary definitions vary.
Although the court grounds its decision in an old case interpreting the meaning of a former statute, the court seems mostly persuaded by the argument that a recording requirement “assumes the existence of an assignment in recordable form.” The court notes that plaintiffs’ construction would turn the recording requirement into a drafting requirement—that every time a note is transferred a recordable assignment also must be created to preserve the right to foreclose nonjudicially. If the legislature intended to impose such a requirement, it did not clearly say so.
To buttress its view, the court examined its prior decision in Barringer v. Loder. In 1905, when Barringer was decided, two statutes governed mortgage assignments. The first stated that “mortgages may be assigned by an instrument in writing, executed and acknowledged with the same formality as required in deeds and mortgages of real property.” The second required that “every assignment of mortgage shall be recorded.” Note the similarity between the second statute and the recording requirement at issue in Brandrup.
In Barringer, the Supreme Court held that the first statute authorized but did not require mortgages to be transferred by a formal written assignment. Mortgages also could be transferred by operation of law simply by endorsing and delivering the note. The second statute merely required that, if a mortgage is formally assigned, that assignment must be recorded. In other words, the phrase “every assignment” in the mortgage recording statute meant “every formal written assignment.”
In 1959, when the OTDA was enacted, the now former recording statute remained in effect and the legislature would be presumed to know how the court had interpreted it. In light of that fact, the court felt compelled to construe the phrase “any assignments” in the same way—to mean “any formal written assignment” and not every assignment in whatever form.
Therefore, the failure to record intervening transfers of the trust deed between MERS members is not a bar to foreclosing nonjudicially. That portion of the Court of Appeals decision in Niday is reversed. Score one for MERS.
Before You Put Down That Teddy Bear…
Surely bankers’ hearts beat a little faster as they read the court’s construction of the recording statute. The Supreme Court had just plucked the low-hanging fruit from homeowners’ hands. Foreclosure defense attorneys who read beyond the glorious first half of the opinion surely curled beneath their desks with cheap booze in hand. Without the easy certainty of the assignments issue, they would have to do more research and discovery and, worst of all, they would be forced to start all over again drafting new form complaints.
Yet even as the court gaveth to bankers with one hand, it tooketh away with the other—a cruel trick that is repeated often throughout Brandrup. Bankers, after all, want certainty, or more precisely, blanket immunity from wrongdoing, intentional or otherwise. The court had other plans:
Although we have concluded that the lender or its successors need not record assignments of the trust deeds that occur by operation of law, the fact remains that, when those persons fail to do so, they are vulnerable to challenges that may force them to judicially establish their interests and authority to act.
In plain English, lenders that take paperwork shortcuts can foreclose nonjudicially, but those information gaps may result in more lawsuits and, when homeowners sue, lenders must provide “definitive documentation” that establishes the right to foreclose. Ouch!
Before Brandrup, some lower courts, including the one in Niday, dismissed such lawsuits out of hand without requiring the foreclosing party to establish its right to do so. After Brandrup, judges are on notice that more is required under Oregon law.
Of course, having to hire an expensive lawyer to file an expensive lawsuit to find out whether the right person is foreclosing is hardly cause to do a victory dance around the living room. The court does offer assurance that “the grantor is entitled to know the identity of the beneficiary” because provisions of the OTDA “assume that the true beneficiary must be identifiable.” But that assurance is little more than a clarification that the true beneficiary must be named in the notice of sale, a practice that rarely has been seen in Oregon until now but will undoubtedly become the norm.
To summarize, the answer to the third certified question is a resounding “NO”—assignments that occur by operation of law need not be recorded. For those unwilling to trust a beneficiary designation in the notice of sale, they can file suit and force the lender to establish its right to foreclose—but not without cost. (Lawyers rejoice.)
The Paradox of Superagency and MERS’ Sham Assignments
By all rights, the court should have quit while it was ahead. In addition to smartly resolving the two most vexing issues in the MERS wars, the court answered many niggling little questions of law that have arisen since the foreclosure crisis began. In fact, judges hoping for clear direction going forward arguably have more cause to celebrate than the parties.
Unfortunately, one certified question remained unanswered. By the time the court was done answering, it had become two questions.
For years, MERS has been executing and recording sham assignments. The assignments purport to convey either MERS’ or the original lender’s interest in the trust deed to the current servicer or note owner. The assignments are shams for three reasons. First, at the time they are executed, neither MERS nor the original lender has any interest to convey. Second, MERS claims to be acting on behalf of the current beneficiary, but by definition the current beneficiary already holds the beneficial interest in the trust deed so the assignment does not transfer anything at all. Third, the assignment does not reflect the actual chain of transfers that took place before so it is not a memorialization of an assignment that previously occurred by operation of law.
The fourth certified question arguably relates to this practice of executing and recording sham assignments. After a lengthy discussion, the court splits the question into two parts. First, can MERS transfer legal title to a trust deed apart from the note? Second, as common agent for the lender and its successors in interest, can MERS nevertheless act on their behalf “with respect to the nonjudicial foreclosure process.”
Read closely, only the first question relates to MERS authority to execute assignments. The second question seems to be a simple agency issue—can MERS perform acts on behalf of a lender or its successors if it is a duly appointed agent? But the court’s discussion of the second question does not draw the distinction the question itself appears to.
With respect to the first question, whether MERS can assign legal title to the trust deed, the court has little difficulty answering “no.” The court explains that “the trustee holds legal title to the lien conveyed by the trust deed.” The beneficiary holds equitable title to the lien. MERS is neither the trustee nor the beneficiary, so MERS holds neither legal nor equitable title. Again, MERS is just a wolf dressed like a beneficiary and not an actual beneficiary. Since MERS does not hold legal title to the trust deed, MERS cannot convey legal title on its own behalf.
So far, so good—but pay close attention to the italicized language above. MERS can do nothing on its own behalf because MERS is not a beneficiary. But MERS could be an agent. In fact, MERS may even be a superagent that has uncommon powers of agency.
Agency, of course, is all around us. Employees, attorneys, realtors—these are all agents, people we authorize to perform acts on our behalf. A whole body of law has developed around agency, appropriately called “agency law.” Agency law tells us, for example, that to be an agent, one must act on behalf of and be subject to the control of the principal.
To the extent that MERS acts on behalf of and is subject to the control of the beneficiary, MERS is merely acting as an agent. As Jerry Seinfeld once said in a very different context, there isn’t anything wrong with that. Presumably that is why MERS argued that “[w]hen MERS executes an assignment of the trust deed, it is doing so as nominee agent of the then-note owner” and not on behalf of the original lender. In other words, MERS was arguing that it was just an old-fashioned agent.
The problem is that each time the note was transferred, equitable title to the trust deed automatically followed (because the mortgage always follows the note). That means that the current beneficiary already has equitable title to the trust deed, so it would be a meaningless act for the beneficiary to transfer to itself what it already has. When MERS does something on behalf of the beneficiary, it is like the beneficiary is doing the same thing itself. So old-fashioned agency is not enough to save MERS’ sham assignments.
And this is where things get a little strange. The court could have said that the assignment is a sham but it matters not because all of the assignments that occurred after the trust deed was recorded were assignments by operation of law. Recall that, in answer to the third certified question, the court held that assignments that occur by operation of law need not be recorded. So what purpose does the sham assignment serve if not to satisfy the recording requirement? The court never tells us.
Instead, the court muses (or, in lawyer lingo, says in dicta) that if MERS is the common agent for the lender and each successor in interest, and if each authorized MERS to transfer equitable title to the trust deed, then MERS may be able to execute and record a sham assignment. Even if the original lender ceased to exist and therefore could no longer control MERS. And even if the predecessors to the current beneficiary no longer have any interest left to transfer.
The authority of wimpy, old-fashioned agents terminates automatically when the principal ceases to exist, and such agents have no greater powers than their principals do. But the court left open the possibility that MERS is a superagent with power to execute assignments that leap over intervening transfers in a single bound. A superagent may be able to transfer an interest that the original lender no longer has and even if the original lender no longer exists, or may be able to “transfer” something from the current beneficiary to itself, something the beneficiary itself could not do.
Critically, the court did not find that MERS is in fact a superagent that can leap chains of assignments in a single bound. Instead the court concluded that MERS may be a superagent, but it depends on the evidence. “[T]hat evidence [was] not present in the record” before the court. For now, it will be left to trial courts to figure out whether such a thing as superagency exists and whether it resurrects MERS to its former glory in practice, if not in name.
Of course, foreclosure defense attorneys have stopped reading by now and are crawling around their offices desperately searching for another bottle of cheap liquor. And bankers are setting aside their teddy bears and wondering whether superagency might yet save the MERS system. Even now they are clipping out that portion of the dissenting opinion that suggests that, even though MERS is not a beneficiary, the difference between beneficiary and agent in light of the majority’s view may be merely semantic. May be.
Wrapping Up Brandrup With a Bow
In the end, what does Brandrup really say? MERS is not a beneficiary, but as an agent of the beneficiary, MERS can perform any act in the foreclosure process on the beneficiary’s behalf assuming that MERS has authority to do so. That authority may include the right to execute sham assignments. Nevertheless, such assignments are not necessary to satisfy the recording requirement of the OTDA. Only formal assignments must be recorded and not transfers of the trust deed that occur by operation of law.
Despite all that, homeowners are and have always been entitled to know who the true beneficiary is. The true beneficiary is not MERS. It is the person entitled to enforce the note and that person must be named in the notice of sale. When doubts remain and homeowners bring suit, judges cannot waive off those claims but must require the beneficiary to produce “definitive documentation” establishing its right to foreclose.
Final Thoughts As The Curtains Fall
Like every good Hollywood franchise these days, sequels are inevitable. Brandrup does not resolve the issues in the cases before the district court but merely provides the court direction about the proper construction of Oregon law. The real battle has only begun for those plaintiffs.
As we will see in Part Two, Niday is not yet over either but is remanded back to the trial court for further proceedings. The Supreme Court made crystal clear that Niday was entitled to proof that MERS was acting as a duly authorized agent when it attempted to foreclose and that its principal is a person entitled to enforce the note. Who knows what the evidence will show? Keeping the paperwork in order has never been the mortgage industry’s strong suit, which is what brought us all here in the first place.
For now, there is nothing to do but read the opinions again and again until the pithiest quotes roll off the tongue and the murkiest passages lose all meaning and significance. Lawyers will go back to their lawsuits and lenders will go back to foreclosing and judges will wrestle with the loose ends and the clever new arguments that were never before now conceived.
For struggling homeowners who continue to be victimized by predatory loan servicing, there is hope in the revamped foreclosure mediation program that launches in early August and in new federal servicing rules that go into effect next January. And even in Brandrup there is a reaffirmation of homeowners’ rights and a promise of greater transparency in the future.
COMING SOON! Read Part Two: Getting To Know Niday
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Sad state of affairs when criminal banks have to hide behind some bs company that does zero and they get away with fraudulently stealing Americans homes on loans they never made.This crap has got to stop and we need to make are voices against the corruption heard or there will be no end to the crimes they do to you and me.