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Olga Cervantes, An Unmarried Woman v. Countrywide Home Loans

September 7, 2011

OLGA CERVANTES, AN UNMARRIED WOMAN; CARLOS ALMENDAREZ, A MARRIED MAN; ARTURO MAXIMO, A MARRIED MAN, INDIVIDUALLY AND ON BEHALF OF A CLASS OF SIMILARLY SITUATED INDIVIDUALS, PLAINTIFFS-APPELLANTS,
v.
COUNTRYWIDE HOME LOANS, INC., A NEW YORK CORPORATION; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., A SUBSIDIARY OF MERSCORP, INC., A DELAWARE CORPORATION; MERSCORP, INC.; FEDERAL HOME LOAN MORTGAGE CORPORATION, A FOREIGN CORPORATION, AKA FREDDIE MAC; FEDERAL NATIONAL MORTGAGE ASSOCIATION, A FOREIGN CORPORATION; GMAC MORTGAGE, LLC, A DELAWARE CORPORATION; NATIONAL CITY MORTGAGE, A FOREIGN COMPANY AND A DIVISION OF NATIONAL CITY BANK, A FOREIGN COMPANY; J.P. MORGAN CHASE BANK, N.A., A NEW YORK CORPORATION; CITIMORTGAGE, INC., A NEW YORK CORPORATION; 16977HSBC MORTGAGE CORPORATION, U.S.A., A DELAWARE CORPORATION; AIG UNITED GUARANTY CORPORATION, A FOREIGN CORPORATION; WELLS FARGO BANK, N.A., A CALIFORNIA CORPORATION, DBA WELLS FARGO HOME EQUITY; BANK OF AMERICA, N.A., A FOREIGN CORPORATION; GE MONEY BANK, A FOREIGN COMPANY; PNC FINANCIAL SERVICES GROUP, INC., A PENNSYLVANIA CORPORATION; NATIONAL CITY CORPORATION, A D.C. NO. SUBSIDIARY OF PNC FINANCIAL SERVICES GROUP; NATIONAL CITY BANK, A SUBSIDIARY OF NATIONAL CITY CORPORATION; MERRILL LYNCH & COMPANY, INC., A SUBSIDIARY OF BANK OF AMERICA CORPORATION; FIRST FRANKLIN FINANCIAL CORPORATION, A SUBSIDIARY OF MERRILL LYNCH & COMPANY, INC.; LASALLE BANK, N.A., A SUBSIDIARY OF BANK OF AMERICA; TIFFANY & BOSCO P.A., AN ARIZONA PROFESSIONAL ASSOCIATION, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the District of Arizona James A. Teilborg, District Judge, Presiding

The opinion of the court was delivered by: Opinion by Judge Callahan

FOR PUBLICATION

OPINION

Argued and Submitted February 16, 2011-San Francisco, California

Before: Richard C. Tallman, Johnnie B. Rawlinson,* and Consuelo M. Callahan, Circuit Judges.

*Due to the death of the Honorable David R. Thompson, the Honorable Johnnie B. Rawlinson, United States Circuit Judge for the Ninth Circuit, has been drawn to replace him on this panel. Judge Rawlinson has read the briefs, reviewed the record, and listened to the audio recording of oral argument held on February 16, 2011.

OPINION

CALLAHAN, Circuit Judge:

This is a putative class action challenging origination and foreclosure procedures for home loans maintained within the Mortgage Electronic Registration System (MERS). The plaintiffs appeal from the dismissal of their First Amended Complaint for failure to state a claim. In their complaint, the plaintiffs allege conspiracies by their lenders and others to use MERS to commit fraud. They also allege that their lenders violated the Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq., and the Arizona Consumer Fraud Act, Ariz. Rev. Stat. § 44-1522, and committed the tort of intentional infliction of emotional distress by targeting the plaintiffs for loans they could not repay. The plaintiffs were denied leave to file their proposed Second Amended Complaint, and to add a new claim for wrongful foreclosure based upon the operation of the MERS system.

On appeal, the plaintiffs stand by the sufficiency of some of their claims, but primarily contend that they could cure any pleading deficiencies with a newly amended complaint, which would include a claim for wrongful foreclosure. We are unpersuaded that the plaintiffs' allegations are sufficient to support their claims. Although the plaintiffs allege that aspects of the MERS system are fraudulent, they cannot establish that they were misinformed about the MERS system, relied on any misinformation in entering into their home loans, or were injured as a result of the misinformation. If anything, the allegations suggest that the plaintiffs were informed of the exact aspects of the MERS system that they now complain about when they agreed to enter into their home loans. Further, although the plaintiffs contend that they can state a claim for wrongful foreclosure, Arizona state law does not currently recognize this cause of action, and their claim is, in any case, without a basis. The plaintiffs' claim depends upon the conclusion that any home loan within the MERS system is unenforceable through a foreclosure sale, but that conclusion is unsupported by the facts and law on which they rely. Because the plaintiffs fail to establish a plausible basis for relief on these and their other claims raised on appeal, we affirm the district court's dismissal of the complaint without leave to amend.

I. The focus of this lawsuit-and many others around the country-is the MERS system.

1. How MERS works

MERS is a private electronic database, operated by MERSCORP, Inc., that tracks the transfer of the "beneficial interest" in home loans, as well as any changes in loan servicers. After a borrower takes out a home loan, the original lender may sell all or a portion of its beneficial interest in the loan and change loan servicers. The owner of the beneficial interest is entitled to repayment of the loan. For simplicity, we will refer to the owner of the beneficial interest as the "lender." The servicer of the loan collects payments from the borrower, sends payments to the lender, and handles administrative aspects of the loan. Many of the companies that participate in the mortgage industry-by originating loans, buying or investing in the beneficial interest in loans, or servicing loans-are members of MERS and pay a fee to use the tracking system. See Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 490 (Minn. 2009).

When a borrower takes out a home loan, the borrower executes two documents in favor of the lender: (1) a promissory note to repay the loan, and (2) a deed of trust, or mortgage, that transfers legal title in the property as collateral to secure the loan in the event of default. State laws require the lender to record the deed in the county in which the property is located. Any subsequent sale or assignment of the deed must be recorded in the county records, as well.

This recording process became cumbersome to the mortgage industry, particularly as the trading of loans increased. See Robert E. Dordan, Mortgage Electronic Registration Systems (MERS), Its Recent Legal Battles, and the Chance for a Peaceful Existence, 12 Loy. J. Pub. Int. L. 177, 178 (2010). It has become common for original lenders to bundle the beneficial interest in individual loans and sell them to investors as mortgage-backed securities, which may themselves be traded. See id. at 180; Jackson, 770 N.W.2d at 490. MERS was designed to avoid the need to record multiple transfers of the deed by serving as the nominal record holder of the deed on behalf of the original lender and any subsequent lender. Jackson, 770 N.W.2d at 490.

At the origination of the loan, MERS is designated in the deed of trust as a nominee for the lender and the lender's "successors and assigns," and as the deed's "beneficiary" which holds legal title to the security interest conveyed. If the lender sells or assigns the beneficial interest in the loan to another MERS member, the change is recorded only in the MERS database, not in county records, because MERS continues to hold the deed on the new lender's behalf. If the beneficial interest in the loan is sold to a non-MERS member, ...


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