[authors: Justin R. Cochran and Robin E. Perkins]
The Nevada Supreme Court validates the use of the Mortgage Electronic Registration System, Inc. (MERS), allowing foreclosures to proceed. On September 27, 2012, the Nevada Supreme Court issued Edelstein v. Bank of New York Mellon, 128 Nev. Adv. Op. 48 (Sept. 27, 2012), clarifying and establishing rules affecting the transfer of real property interests. Prior to this decision, judges in Nevada struggled with the effect of MERS as a nominee or beneficiary of a deed of trust. This holding abolishes the repeatedly asserted claim that MERS, as a nominee or beneficiary, invalidates the security interest and prohibits foreclosure. This landmark decision eliminates a major stumbling block faced by lenders and servicers defending wrongful foreclosure claims.
The primary holding of Edelstein establishes that designating MERS as a nominee and beneficiary does not irreparably “split” the promissory note from the deed of trust and, so long as the note and deed of trust are ultimately reunited in the same party, a trustee’s sale can proceed. Edelstein validates MERS’s use and legitimacy for the financial services industry in Nevada. Under Edelstein, the parties in interest have the opportunity to cure potential assignment and transfer irregularities that may have occurred during the life of the mortgage paper, so long as the foreclosing party has possession of both the note and deed of trust upon foreclosure. In owner-occupied residential property, however, a borrower in default may elect to mediate under the state-run foreclosure mediation program. If chosen, the amended foreclosure mediation rules require the beneficiary, or its agent, to bring certified copies of the note and deed of trust and any assignments thereof. See FMR 11. Similarly, after the passage of AB 284, an affidavit accompanying all notices of default filed after July 1, 2011 requires the trustee, beneficiary or agent to verify information concerning the note, deed of trust and assignments. Nevertheless, in a litigation context, Edelstein should prove invaluable in providing the financial services industry with the tools it needs to successfully protect its interests.
The Court noted that planned “separation” of the note and deed of trust does not render either instrument void. Although both the note and deed of trust must be held together in some combination of either the beneficiary and noteholder being the same entity or sharing an agency relationship, nothing requires them to be unified at a time prior. In essence, their being held by different entities as the result of securitization, for example, prior to foreclosure has no effect on a subsequent foreclosure in the name of a holder then in possession of both.
In Edelstein, the Nevada Supreme Court also adopted the Restatement (Third) of Property (Mortgages) § 5.4 (1997), which states that a mortgage note and deed of trust are automatically transferred together, unless the parties agree otherwise. Accordingly, if a foreclosing entity can demonstrate an assignment of either the note or the deed of trust, that alone is sufficient to establish authority to foreclose. Nevertheless, the Nevada Supreme Court found that the deed of trust and note were “split” in this case because at inception, MERS was the “beneficiary” under the deed of trust, while the original lender was the noteholder. Admittedly, this aspect of the holding creates a certain degree of confusion, because the Court also found that MERS was the agent of the holder of the note and, that where an agent of a secured party has actual possession of a note, the secured party has taken actual possession. In light of its express adoption of the Restatement (Third) of Property (Mortgages) § 5.4 (1997) that the security follows the note—and vice versa—the Court certainly could have omitted the notion that the note could be “split” from the deed of trust as a matter of law.
Notwithstanding, Edelstein’s utility remains, because the Nevada Supreme Court’s holding that MERS’s recording of the assignment of the deed of trust containing express language that the deed of trust was assigned “together with the note or notes,” properly transfer both the deed of trust and note to the assignee, here, Bank of New York Mellon. In accepting that language in a recorded assignment as sufficient to affect a transfer of both the deed of trust and note, the burden of proof on a foreclosing beneficiary is substantially minimized. At least, in the non-bankruptcy context, foreclosing beneficiaries and their agents can now rely upon this holding to validate the effectiveness of similar language included in assignments, thus demonstrating a proper assignment of the note through a recorded document, rather than by testimonial evidence.
The Court further clarified the definition of “agency” among lenders, beneficiaries, servicers and trustees, by expressly recognizing various agency relationships. The Court held that MERS, designated as a “nominee,” is an agent for a lender, or its successors and assigns. The Court acknowledged that a servicer is also an agent for the lender or beneficiary and, found that, although helpful, the production of a servicing agreement is not required by Nevada law or the Foreclosure Mediation Program Rules in order to establish a servicer’s authority to foreclose. The Court further confirmed that a trustee is an agent for the lender or beneficiary and, thus, the lender or beneficiary is entitled to enforce a note even when its trustee is in possession of the note. Expressly acknowledging the reality that foreclosure is based on several entities working together as agents, Edelstein is favorable to beneficiaries as it validates these relationships and reduces the burden in establishing these agents’ relationships and authority to act on behalf of the beneficiary.
Although not without certain inconsistencies, the Edelstein opinion overall provides helpful guidance regarding establishing foreclosure authority in defending wrongful foreclosure, quiet title and other real property claims in both consumer and commercial finance litigation and in interrelated non-judicial foreclosure proceedings.