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Mortgage Electronic Registration Systems, Inc. v. Koeppel

United States District Court, N.D. California, San Jose Division

June 21, 2019

MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Plaintiffs,
v.
GARY MERLE KOEPPEL, et al., Defendants.

          ORDER DENYING MOTION TO DISMISS; DENYING MOTION FOR SANCTIONS RE: DKT. NOS. 22, 26

         Defendants Gary Merle Koeppel and Emma K. Koeppel have moved to dismiss the complaint filed by Plaintiff Mortgage Electronic Registration Systems, Inc. (“MERS”) and have moved for Rule 11 sanctions against MERS and its counsel. Per Civil Local Rule 7-1(b), the Court has taken these motions under submission without oral argument. Having considered the papers filed by the parties and the arguments therein, the Court denies both motions.

         I. Plaintiff's Allegations

         This case concerns a property on Outlook Drive in Carmel, California (the “Property”). Compl. ¶ 11. Defendants are the record owners of the property. Id. ¶ 12. On July 19, 2005, they obtained a $1.335 million residential mortgage loan with respect to the property from Central Pacific Mortgage (“CPM”) through a promissory note (the “Note”) and secured it with a deed of trust (the “DOT”). Id. ¶ 37. Defendants signed the DOT and initialed each page. Id. ¶ 48; Ex. A. Under the DOT, Defendants are the “Borrower.” Ex. A at 1. CPM is the “Lender.” Id. The Note defines MERS as “a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is the beneficiary under this Security Instrument. . . .” Id. at 2 (bold in the original). The DOT provides:

Borrower understands and agrees 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 and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.

Id. The DOT was recorded by the Monterey County Recorder on July 28, 2005. Id. With respect to the Note, the DOT provides, in part, “The Note or a partial interest in the Note (together with this Security Instrument) can be sold one or more times without prior notice to Borrower.” Id. at 11. After the Note and DOT were executed, Plaintiffs allege that it transferred the Note to “subsequent entities.” Compl. ¶ 45.

         MERS's role as to the DOT is typical for the services it provides to its members. See Id. ¶¶ 16-27. Generally, when a borrower signs a deed of trust or mortgage as part of the “closing” to a property, that document will grant a security interest in the property to MERS as the beneficiary/mortgagee as the nominee for the lender and the lender's successors and assigns. Id. ¶ 19. MERS will generally have the right to exercise the lender's rights regarding the property, even if the promissory note is sold to a different entity. Id. ¶¶ 20-21. Approximately 60 percent of residential mortgages in the United States identify MERS as mortgagee, beneficiary or grantee. Id. ¶ 24. One of the key services that MERS provides to its members is to receive service of legal process related to secured properties. Id. ¶ 26. MERS can then notify the note holder and can take other action to protect the security interest. Id.

         On August 31, 2015, Defendants filed an action in the Superior Court of Monterey County to quiet title to the Property against CPM, “All Persons or Entities Unknown, Claiming Any Legal or Equitable Right, Title, Estate, Lien or Interest in” the Property and assorted Doe Defendants (the “Quiet Title Action”). Id. ¶ 49; Ex. B. Defendants' state court complaint alleged that CPM was in “SOS/FTB Suspended Status, ” that it could not defend itself, and that its agent for service of process had resigned in 2008. Compl. ¶¶ 51-52; Ex. B ¶ 2. The state court complaint did not identify MERS or any other entities as defendants even though it referenced MERS and attached the DOT as an exhibit. Compl. ¶¶ 53, 57-57, 63; see generally Ex. B. Defendants did not notify MERS of the state court action. Compl. ¶¶ 62-63. Defendants averred that the Property was “free and clear as to any securitization instrument, and or any secured interest, ” and based on this claim they asked that the court in the Quiet Title Action to quiet title “exclusively” in them. Ex. B ¶ 29. After Defendants requested entry of default in the state court action, no defendant or their representatives appeared at the default hearing. Compl. ¶¶ 65-67. The state court entered a Judgment for Quiet Title, Cancellation and Expungement of Deed of Trust (the “Judgment”), quieting title to the Property in Defendants as against “CENTRAL PACIFIC MORTGAGE COMPANY, and ‘ALL PERSONS or ENTITIES UNKNOWN, CLAIMING ANY LEGAL or EQUITABLE RIGHT, TITLE, ESTATE, LIEN or INTEREST in the PROPERTY DESCRIBED in this COMPLAINT ADVERSE to [Defendants'] TITLE, or ANY CLOUD UPON [Defedants'] TITLE THERETO.” Compl. ¶ 67; Ex. D. Defendants then ceased making payments on the Note. Compl. ¶ 69. MERS alleges that Defendants intentionally failed to provide notice of the state court action to MERS despite actual and constructive knowledge of MERS's claim and interest in the Property. Compl. ¶ 72; see also Id. ¶¶ 71-75.

         MERS alleges that the Judgment caused it harm. The Judgment deprived MERS of its bargained-for security interest in the property. So, MERS could not defend the rights of subsequent owners and servicers of the Note, who were members of MERS. Id. ¶ 76-77. MERS had contracted with them to receive notice of legal actions concerning the property, such as the state court action, and to provide them with notice to ensure the security of the Note was protected. See Id. And more generally, the Judgment harmed MERS overall business model, the “essence” of which is to protect its clients' interests in mortgaged properties. Id. ¶ 78.

         MERS brings this lawsuit asking this Court to set aside the Judgment.

         II. Motion to Dismiss

         The Court begins its analysis by recognizing that the factual allegations here are very similar to two recent cases brought by MERS in Central District of California: MERS. v. Robinson filed in 2013 and MERS v. Johnston filed in 2015. In Robinson and Johnston, both sets of the defendants obtained loans-secured by deeds of trust-to purchase real properties. Mortg. Elec. Registration Sys. v. Robinson, 45 F.Supp.3d 1207, 1208 (C.D. Cal. 2014) (“Robinson I”); Mortg. Elec. Registration Sys. Inc. v. Johnston, 2016 WL 7339873, at *1 (C.D. Cal. Dec. 14, 2016) (“Johnston I”). Those deeds of trust and the DOT here contain identical language regarding MERS's role as beneficiary to the deed of trust and right to foreclose or sell the subject properties on behalf of the lenders. Compare Robinson I, 45 F.Supp.3d at 1208 with Johnston I, 2016 WL 7339873, at *1 with Ex. A at 2 (all three deeds of trust provide that MERS is the nominee for the lenders and the lenders' assigns and successors and that “Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but . . . MERS . . . has the right . . . including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.”). The Robinson and Johnston defendants filed quiet title actions in state court, but did not name MERS as a defendant. Robinson I, 45 F.Supp.3d at 1208-09; Johnston I, 2016 WL 7339873, at *1. The defendants obtained quite title judgments expunging the deeds of trust. Robinson I, 45 F.Supp.3d at 1209; Johnston I, 2016 WL 7339873, at *1. MERS then sued in the Central District to set aside the quite title judgments. Robinson I, 45 F.Supp.3d at 1209; Johnston I, 2016 WL 7339873, at *2. Both district courts granted summary judgment in favor of MERS and issued declaratory judgments voiding the quite title judgments. Mortg. Elec. Registration Sys., Inc. v. Robinson, 2015 WL 993319, at *9 (C.D. Cal. Feb. 27, 2015) (“Robinson II”); Johnston I, 2016 WL 7339873, at *3, 5. The Ninth Circuit affirmed both grants of summary judgment. Mortg. Elec. Registration Sys., Inc. v. Robinson, 671 Fed.Appx. 562, 563 (9th Cir. 2016) (“Robinson III”); Mortg. Elec. Registration Sys. Inc v. Johnston, 749 Fed.Appx. 601, 602 (9th Cir. 2019) (“Johnston II”). Defendants assert that this case is distinguishable from Robinson and Johnston, but, at most, they merely identify inconsequential factual differences without explaining how or why those differences alter the legal analysis here.

         a. Legal Standard

         Federal Rule of Civil Procedure 8 requires a complaint to contain “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id.

         b. ...


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