Edelstein v. Bank of New York Mellon
On September 27, 2012, the Supreme Court of Nevada issued Edelstein v. Bank of New York Mellon. In 2006, Edelstein executed a promissory note in favor of New American Funding. The Deed of Trust 11 ( DOT’) showed New American Funding as the lender, Chicago Title as the trustee, and MERS as the beneficiary. The DOT described MERS as a corporation acting solely as nominee for lender, and lender’s successors and assigns. The DOT also characterized MERS as the beneficiary, and later characterized MERS as the beneficiary of the security instrument (solely as nomine for lender and lender’s successors and assigns). The DOT also stated that borrower understands and agrees that MERS holds only legal title to the interest granted by borrower, but that MERS (as nominee for lender) has the right to exercise any and all of those interests, including the right to foreclose and to take any action required of lender.
Subsequently, both the note and DOT were transferred several times. New American Funding endorsed the note through an allonge to Countrywide Bank, N.A., which then endorsed the note to Countrywide Home Loans, which in turn endorsed the note in blank. The DOT was also conveyed when MERS assigned its beneficial interest under the DOT to Bank of New York Mellon (BNY Mellon). BNY Mellon designated ReconTrust as its new trustee replacing Chicago Title.
The borrower defaulted and received the mandatory notice from the trustee advising the borrower that he could participate in Nevada’s Foreclosure Mediation Program (FMP), and the borrower did so elect. In 2009, the Nevada legislature created the FMP, which requires the trustee to serve an election of mediation form with the notice of default on the borrower, and if the borrower elects to mediate, the beneficiary (or representative) must do a number of things, such as attend the mediation, provide the required documents, and have a person present with authority to modify the loan, in order for an FMP certificate to issue. Certain documents are required to determine whether the person attending has the necessary decision making authority, and whether the party seeking to foreclose is in fact the beneficiary of the DOT (or a permissible representative). In other words, the legislative intent is to ensure that whoever is foreclosing actually has the authority to foreclose or modify the loan.
The borrower argued to the district court that BNY Mellon failed to provide sufficient documents concerning the note, DOT and mortgage assignment, and that BNY Mellon did not have the authority (or provide access to a person with the authority) to modify the loan as required by the 2009 statute. The district court concluded that a FMP certificate should be issued to BNY Mellon which would permit BNY Mellon to move forward with the foreclosure. The borrower appealed the decision.
The Nevada Supreme Court recognized that Nevada statutory law requires the same entity to hold the note and the DOT in order to foreclose. The borrower argued at mediation that no documents were provided demonstrating a clear chain of both the DOT and the note from New American Funding to BNY Mellon. Specifically, he asserted that because MERS was merely a nominee and failed to provide evidence that MERS could act on behalf of New American Funding to assign its interest in the DOT to BNY Mellon, BNY Mellon could not legally become beneficiary and note holder for the purpose of participating in the mediation. In other words, the borrower argued that BNY Mellon lacked the authority to foreclose because the note was 11Split” from the DOT.
The court acknowledged that designating MERS in the DOT as the beneficiary did effectively 11Split” the note and the DOT at loan origination. The court added that whether designating MERS as the beneficiary in the DOT evidences an agreement to split the note from the DOT was an issue of first impression. Consequently, the court analyzed what it described as the traditional rule” concerning notes and mortgages, and compared it to the rule set forth in the Restatement of Property. Under the traditional rule, the transfer of the note carries with it the DOT, and therefore under this rule, splitting the note and the DOT is impossible because the holder of the note always has both.
With respect to the rule set forth by the Restatement of Property, a note and DOT are automatically transferred together unless the parties agree otherwise. New American Funding was the initial holder of the note, whereas MERS was characterized in the DOT as a separate corporation acting solely as a nominee for lender. The DOT also stated that MERS was the beneficiary under the DOT. The court concluded that MERS, as a nominee, was an agent for the lender and its successors. Therefore, MERS held an agency relationship with New American Funding. Under the DOT, MERS has the right to exercise all rights and interests of the lender. The court, in citing the Ninth Circuit case, Cervantes v. Countrywide, explained that a holder of a note is only entitled to repayment, whereas a holder of a DOT alone does not have a right to repayment, but rather has the right to foreclose as a means of satisfying repayment. The court, in adopting the Restatement approach, held that the separation of the not from the DOT was not fatal, so long as the two documents were realigned and ultimately held by the same party. In this case, there was an assignment of the DOT from MERS into BNY Mellon. In addition, BNY Mellon was in possession of the original note which was endorsed in blank. Therefore, the court concluded that the note and the DOT were reunified and BNY Mellon possessed the authority to foreclose.