North Texas Mers Usdc

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U.S. DlSTRICT COURTNORTHERN DlSTRICT OF TEXASFILEDIN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TE SFORT WORTH DIVISION

DEC 22 2011CLERK, U.S. DISTRICT COURT

JANE McCARTHY I by____ - = - - ~ - - - - - -Deputy

P l a i n t i f f lVS.

NO. 4:11-CV-356-ABANK OF AMERICA, NAIBAC HOME LOANS SERVICING I LP Iand FEDERAL HOME LOAN MORTGAGECORPORATION

Defendants .

MEMORANDUM OPINIONand

ORDER

Now pending in th e above-capt ioned ac t ion are the motions ofdefendan ts Bank of America l N.A. ("BOA II ) I BAC Horne LoansServ ic ing l LP f / k / a Countrywide Horne Loans Serv ic ing ("BAC II ) I andFed era l Horne Loan Mortgage Corpora t ion ("Freddie Mac ll ) to dismissthe compla int of p l a i n t i f f l Jane McCarthYI fo r f a i l u r e to s t a t e ac la im. Afte r having cons idered the pa r t i e s l f i l i n g s l th e record land app l i cab le l eg a l a u t h o r i t i e s l the cour t has concluded t h a tth e motions should be denied .

I.

BackgroundThe background of t h i s case i s as fo l lows: P l a i n t i f f Jane

McCarthy i n s t i t u t ed t h i s ac t ion by a pleading in th e D i s t r i c t


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Cour t of Tar ran t County, Texas, 67th Ju d i c i a l Di s t r i c t Court , onMay 4, 2011, aga ins t BOA, BAC, and Freddie Mac ( co l l e c t i v e ly ,"defendan t s") , as Cause No. 67 -252640 -11. Defendants removed th ecase to t h i s cour t on May 27, 2011. BOA and BAC f i l ed a motionto dismiss on Ju ly 5, 2011, t h a t was d i r ec t ed a t p l a i n t i f f ' ss t a t e cour t p e t i t i o n . The cour t denied th e motion to dismiss andgran ted leave to p l a i n t i f f to f i l e an amended complain t .

P l a i n t i f f ' s amended complain t ("Complaint") as se r ted th efol lowing cla ims aga ins t defendants: (1) breach of con t rac t ; (2)v io la t ions of th e Texas Finance Code and th e Texas Decept iveTrade Prac t ices Act ("DTPA"); (3) unreasonable co l l ec t ion ; (4)negl igent misrepresenta t ion and gross negl igence; and (5 ) s u i t toqu ie t title. P l a i n t i f f seeks ac tu a l and exemplary damages, anorde r fo r an account ing , and dec la ra to ry and in junc t ive r e l i e f tomain ta in possess ion and rega in title to th e prope r ty .

P l a i n t i f f made th e fo l lowing a l l ega t ions in th e Complaint:On May 28, 2004, p l a i n t i f f executed a note payable to

Countrywide Home Loans, Inc . ("Countrywide") and a deed of t r u s tcovering p l a i n t i f f ' s proper ty a t 4617 Cougar Ridge Road in FortWorth, Texas, 76126. 1 Compl. a t 3. The deed of t r u s t des igna ted

1Although plaint iff references in her complaint the deed of trust as "Exhibit A, attached heretoand incorporated herein for all purposes," the deed of trust is not attached as Exhibit A to the Complaint.Instead, plaintiff attaches a letter from Bank of America, N.A., dated March 7, 2011, as Exhibit A.However, a copy of the deed of trust was attached to plaintiffs original state court pleading as an exhibit.(continued ..)

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Countrywide, o r any holder of the note who i s en t i t l ed to rece ivepayment of the note , as the "Lender ." The func t ion of the deedof t r u s t was descr ibed as fo l lows: "This Secur i ty Ins t rumentsecures to Lender: (i) the repayment of the Loan and a l lrenewals , extens ions and modif ica t ions of the Note; and ( i i ) theperformance of Borrower ' s covenants and agreements under t h i sSecur i ty Ins t rument and the Note." Not ice of Removal, Ex. I , Ex.A a t 3. 2 I t named Mortgage Elec t ron ic Reg is t r a t ion Systems, Inc.("MERS"), so le ly as Countrywide ' s nominee, as benef ic ia ry underthe deed of t r u s t . The l imi ted capac i ty and funct ion of MERS wasexpla ined in the deed of t r u s t as fo l lows:

Borrower unders tands and agrees t ha t MERS holdsonly l ega l title to the i n t e re s t s granted by Borrowerin t h i s Secur i ty Inst rument , but , i f necessary tocomply with law o r custom, MERS (as nominee fo r Lenderand Lender ' s successors and ass igns) has the r i gh t : toexercise any o r a l l of those i n t e re s t s , inc luding, butnot l imi ted to , the r igh t to forec lose and s e l l th eProper ty ; and to t ake any ac t ion requi red of Lenderinc luding, but not l imi ted to , r e leas ing and cance l ingt h i s Secur i ty Inst rument .

Id . The note made no re fe rence to MERS. MERS purported toass ign the note and deed of t r u s t to BOA. However, MERS did not

l( ... continued)Consequently, the court will t reat the text of the deed of trust as part of plaintif fs complaint for motionto-dismiss purposes.

2The term "Security Instrument" refers to the deed of trust given by plaintiff to Countrywide assecurity for payment of the promissory note given by plaintif f to Countrywide in May 2004; the word"Borrower" refers to plaintiff; the word "Loan" refers to the debt evidenced by the note, plus addedcharges due under the note, and all sums due under the deed of trust.

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own the note , thus it could not ass ign the note , and i t sassignment of the deed of t r u s t to BOA sepa ra t e from the note wasof no force o r e f f e c t . When the note was purpor tedly ass igned toBOA, p la in t i f f was in d e f au l t on payment of the note .

More s pe c i f i c a l l y on th e sub jec t of separat ion of the notefrom the deed of t r u s t , and the lack of ownership of the note byBOA when BOA and BAC conducted the forec losure about whichp la in t i f f complains , p l a i n t i f f a l l eged :

30. MERS i s not the payee of the promissory noteand MERS never held the promissory note . The Deed ofTrust does not provide t h a t MERS could t r a ns f e r thepromissory note ; the re fo re the language in theassignment of the deed of t r u s t purpor t ing to t r a ns f e rthe promissory note i s i n e f f e c t i v e . Simply being abenef ic ia ry o r having an assignment of the deed oft r u s t i s not enough to be en t i t l ed to forec lose on adeed of t r u s t . For there to be a va l id assignment fo rthe purposes of forec losure both the note and the deedof t r u s t must be ass igned .

31. An assignment of the deed of t r u s t separa tefrom the note has no " force ." MERS never held thepromissory note , thus i t s assignment of th e deed oft r u s t to BOA separa te from th e note had no force . MERShad no separa te agency con t rac t with Countrywideregarding t h i s loan .

Compl. a t 12-13 (c i t a t ions omit ted) .Pla in t i f f fu r the r al leged t ha t : In 2008, p la in t i f f f i l ed fo r

bankruptcy and "began the loan modif ica t ion process ." Id .Between 2009 and Apri l 2011, she communicated with Countrywide,BOA, BAC, and Freddie Mac about making a loan modi f ica t ion , but

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she cont inued to rece ive forec losure no t ices from BOA in th emai l . Id . a t 4-8. Then, on A p r i l 7, 2011, p l a i n t i f f came homeand "found a big orange s ign from a r e a l t o r on h er gate t h a ts ta ted her house had been forec losed on A p r i l S , 2011." Id . a t9. Freddie Mac l a t e r sent p la in t i f f a not ice to vaca te l e t t e r ,dated Apr i l 9, 2011, informing p l a i n t i f f t h a t Freddie Macpurchased th e home a t the forec losure sa le , id . a t 10, fo r$166,242, id . a t 11. P l a i n t i f f at tempted to have th e forec losurerescinded, bu t received no response from BOA. Id . a t 10. Atpresen t , "Freddie Mac i s a t t empt ing to e v i c t P l a i n t i f f and s e l lth e prope r ty . " Id . a t 11.

BAC, BOA, and Freddie Mac f i l ed motions to dismiss theComplaint fo r f a i l u r e to s t a t e a claim fo r r e l i e f . In d i r e c tresponse to p l a i n t i f f ' s a l l ega t ions tha t MERS had no au thor i ty toass ign th e note to BOA, and t h a t without ownership of th e noteBOA had no au th o r i t y t o forec lose on p l a i n t i f f ' s proper ty , BOAas se r ted in i t s motion to dismiss t ha t :

The content ion Defendants must be the ho lders o f th eNote to proceed with a forec losure sa le i s i n c o r re c t - because Mortgage Elec t ronic Regis t r a t ion Systems, Inc .("MERS") had th e power to forec lose and s e l l th eProperty , and had th e power to ass ign these r i gh t s to[BOA], MERS's ass ignment to [BOA] was s u f f i c i e n t togive [BOA] the au thor i ty to fo rec lose .

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According to Pla in t i f f [ [BOA] has to be the ho lderof the Note and Deed of Trus t to forec lose and MERScould not ass ign th e Note[ so [BOA] did and does nothave th e au th o r i t y t o fo rec lose . This argument i si ncor rec t . Pursuant to th e terms of the Deed of Trus t - which was executed by Plain t i f f --MERS i s named as thebenef ic ia ry and nominee fo r th e or ig ina t ing lender[ aswell as i t s successors and ass igns . In t h a t samedocument [ P l a i n t i f f acknowledged MERS had th e r i g h t toexe rc i se any o r a l l of th e i n t e re s t s gran ted byP l a i n t i f f in th e Deed of Trust " including[ but no tl imi ted tOt the r i g h t to forec lose and s e l l th eProper ty ."

Br. in Supp. of BOA's Mot. a t 7-8 ( footnotes omit ted) .P l a i n t i f f f i l ed a response [ to which defendants f i l e d a

reply[ and p la in t i f f f i l ed a su r - rep ly .I I .

AnalysisMost of the grounds of the motions to dismiss appear to have

meri t [ bu t t he re i s a major impediment to th e grant ing of themotions . As th e United Sta tes Supreme Cour t so c l e a r ly explainedapproximately 140 years ago:

Th e note and mortgage are inseparable ; th e formeras essen t i a l [ th e l a t t e r as an inc iden t . An assignmentof the note c a r r i e s th e mortgage with i t t while anassignment of th e l a t t e r alone i s a nUl l i ty .

Carpenter v . Longan [ 83 U.S. 271[ 274 (1872) ( footnote omitted) .This bas ic p ropos i t i on has of ten been reaf f i rmed . See Baldwin v.Sta te of Mo.[ 281 U.S. 586[ 596 (1930) (Stone[ J .[ concur r ing) ;Nat ional Live Stock Bank v. F i r s t N a t ' l Bank[ 203 U.S. 296[ 306

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(1906); Kirby Lumber Co. v. Will iams, 230 F.2d 330, 336 (5th Cir .1956); In re Veal , 450 B.R. 897, 916-17 (B.A.P. 9 th Cir . 2011);In re Vargas, 39 6 B.R. 511, 516 (Bankr. C.D. Cal . 2008); In reLeisure Time Spor t s . Inc . , 194 B.R. 859, 861 (B.A.P. 9th Cir .1996); B e l l i s t r i v. Ocwen Loan Serv ic ing . LLC, 284 S.W.3d 619,623 (Mo. C t. App. E.D. 2009) .

I f the ho lder o f the deed of t r u s t does no t own o r hold th enote , th e deed of t r u s t serves no purpose, i s impotent , andcannot be a veh ic l e fo r depr iv ing the gran to r of the deed oft r u s t of ownership of the prope r ty descr ibed in the deed oft r u s t . The so le purpose of the deed o f t r u s t i s to securepayment of the no te . Th e very , and so le , purpose of aforec losure sa le pursuant to th e deed of t r u s t i s to obta in fundsfo r payment of the no te . I f the ho lder o f the deed of t r u s t doesno t own o r hold the note , and the re were to be a forec losureunder th e deed o f t r u s t , the re i s no assurance t h a t th e proceedsof th e forec losure would be used fo r the purpose in tended by th edeed o f t r u s t , i . e . , to be appl ied as payment o f , o r on, theno te . That i s no t to say t h a t th e owner o r holder of the notecannot arrange fo r an agent o r nominee, ac t ing on i t s beha l f , toconduct a forec losure for th e benef i t of th e owner o r holder o fthe no te . But t h a t i s qu i te a d i f f e r e n t propos i t i on fromas s e r t i o n s t h a t the ho lder o f th e deed of t r u s t who does not own

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o r hold the note has the power to t r a ns f e r the note from theor ig ina l note holder to another and t ha t an en t i ty t ha t does notown or hold the note can conduct a forec losure under the deed oft r u s t .

The cour t d i sagrees with the con tent ion of BOA tha t BOA didnot have to be the owner or holder of the note to proceed withthe forec losure sa le . The re l iance by defendants on Chapter 51of the Texas Property Code i s misplaced. Procedures out l in ingthe s teps and requirements fo r a forec losure a re contained inChapter 51. Under the Property Code, MERS was a mortgagee basedon e i t he r the de f in i t i on of a ~ b o o k en t ry sys tem," Tex. Prop.Code 51.0001(1) (defining ~ b o o k en t ry system") and (4)(defining ~ m o r t g a g e e " ) , or a l t e rna t ive ly , the de f in i t i on of a~ h o l d e r of a secur i ty ins t rument ," id . 51.0001(4) and (6)(defining ~ s e c u r i t y instrument" as a ~ d e e d of t r u s t , mortgage, oro ther con t rac t l i en on an i n t e r e s t in rea l proper ty") . Once MERSass igned i t s i n t e r e s t in the deed of t r u s t to BOA, BOA became the~ h o l d e r of a secur i ty instrument" and was the re fo re a~ m o r t g a g e e . " Id . The Property Code s t a t e s t ha t a ~ m o r t g a g e se rv ice r , " such as BAC, ~ m a y adminis te r the forec losure ofprope r ty under sec t ion 51.002 on beha l f of a mortgagee, i f :

(1) the mortgage se rv ice r and the mortgagee haveente red in to an agreement grant ing the cur ren t mortgagese rv ice r au thor i ty to s e rv ice the mortgage; and

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(2) the not ices required under Section 51.002(b)disclose tha t the mortgage serv icer i s representing themortgagee under a servicing agreement with themortgagee and the name of the mortgagee and:(A) the address of the mortgageei or(B) the address of the mortgage servicer , i fthere i s an agreement granting a mortgageservicer the authori ty to service themortgage.

rd. 51.0025 ( t i t led "Administration of Foreclosure by MortgageServicer") . However, inherent in the procedural s teps out l inedin the Texas Property Code i s the assumption tha t whatever ent i tyqual i f ies as a "mortgagee" e i ther owns the note or i s serving asan agent for the owner or holder of the notei and, the s ta tu teassumes that when a foreclosure i s conducted by someone otherthan the owner or holder of the note, the person conducting theforeclosure wil l be act ing as agent or nominee for the owner orholder. 3

Otherwise, the Texas s ta tutory law would make no sense, andwould be direc t ly a t odds with long-standing, basic principlesgoverning the relat ionship between real es ta te borrowers, on theone hand, and t he i r corresponding secured real es ta te lenders, on

3The legislative history confirms that all the Legislature intended to do was to make proceduralchanges, with no changes in substantive Texas law. See House Comm. on Financial Institutions, BillAnalysis, Tex. H.B. 1493, 78th Leg., R.S. (2005).

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the o the r . As the Missouri Cour t of Appeals so cogent lyexpla ined in B e l l i s t r i v. Ocwen Loan Servic ing , LLC:

General ly, a mortgage loan cons i s t s of apromissory note and secur i ty ins t rument , usua l ly amortgage o r a deed of t r u s t , which secures payment onthe note by giv ing the lender the a b i l i t y to forecloseon the prope r ty . Typical ly , the same person holds boththe note and the deed of t r u s t . In the event t ha t thenote and the deed of t r u s t are s p l i t , the note , as aprac t i ca l mat ter becomes unsecured. Resta tement(Third) of Proper ty (Mortgages) 5.4 . Comment. Theprac t i ca l e f f ec t of s p l i t t i n g the deed of t r u s t fromthe promissory note i s to make it impossible fo r theholder of the note to forec lose , unless the holder ofthe deed of t r u s t i s the agent of the holder of thenote . withou t the agency re l a t ionsh ip , the personholding only the note l acks the power to fo rec lose inthe event of defau l t . The person hold ing only the deedof t r u s t wi l l never exper ience defau l t because only theholder of the note i s en t i t l ed to payment of theunder ly ing ob l iga t ion . The mortgage loan becamei ne f f e c t ua l when the note holder d id not a l so hold thedeed of t r u s t .

284 S.W.3d a t 623 ( c i t a t ion omi t ted) . Also pe r t i ne n t i s theholding of the bankruptcy cour t fo r the D i s t r i c t of Idaho in Inre Wilhelm t ha t the language of a deed of t r u s t such as the onea t i ssue in the i n s t an t act ion does not g ive MERS author i ty tot r ans f e r the promissory note secured by the deed of t r u s t . 407Br. 392, 404 (Bankr. D. Idaho 2009) .

There might wel l be a way defendants can show in support ofan appropr ia te motion fo r summary judgment the fac t s necessary toes t ab l i s h propr i e ty of the foreclosure a t i s sue . However, therei s nothing in the record before the cour t a t t h i s t ime

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es tab l i sh ing tha t p la in t i f f cannot preva i l on h er theory t ha t theforec losure on he r proper ty was improper because it was conductedby, o r a t th e behes t of , BOA a t a t ime when BOA d id not own o rhold the note t h a t was secured by the deed of t r u s t pursuant towhich the forec losure was conducted.

Therefore ,The cour t ORDERS t ha t such motions to dismiss be, and are

hereby, denied.SIGNED December ~ 2 0 1 1 .

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