A ruling from the 9th Circuit Court – Cervantes vs. Countrywide gives legitimacy to MERS and deals a major blow to many of the arguments that attorneys representing homeowners try to make.

The 9th Circuit takes appeals from Arizona, California, Hawaii, Montana, Nevada, Idaho, Oregon, and Washington.

Patrick Pulatie at LFI Analytics shared his opinions on the case via email and I wish to pass them along….

Hello Mish

Cervantes vs. Countrywide is an Arizona case appealed to the 9th Circuit after the Arizona District Court Ruled against the homeowners without leave to amend the complaint.

The primary argument of Cervantes were the MERS operation was fraudulent and unlawful, and that use of MERS split the Deed and Note. Other issues were addressed, but the most important parts are in regards to MERS.

Here are the key points and court rulings …

Homeowners Claim: The homeowners claimed that MERS was a “sham beneficiary” and use of MERS was unlawful and misrepresentative.

Ruling: The Court found that the MERS operation had been disclosed in detail to the borrowers through the Deed of Trust. Therefore, there was no misrepresentation. This is especially important in that it destroys arguments for fraud on the part of MERS.

Note: This does not cover loans originated in the name of the lender and later transferred to MERS. However, since a Deed of Trust generally states that the Note and Deed can be transferred, a later transfer to MERS will be difficult to argue, though no MERS information would be present.

Homeowners Claim: An attempt was made to claim that use of MERS as a beneficiary would not allow for foreclosure, since MERS was not a true beneficiary. They attempted this argument though they were procedurally incorrect in how they attempted to do so.

Court Ruling: The Court essentially dismissed this claim because Arizona law appears not to support such a claim. Furthermore, the Court looked at other jurisdictional rulings and found that courts generally did not support such claims when the borrower was in default, and damages could not be shown. Cervantes was in default, and did not allege claims of damage, so there was no “stated claim”.

Homeowners Claim: MERS split the Note and Deed and that eliminated any possibility of foreclosure.

Court Ruling: The court ruled against this action. They cited that though there might have been a question of MERS being a legal beneficiary, some entity still had the right to foreclose. If MERS had been trying to foreclose, then the Court “might” have looked deeper into MERS, but the Deed had been assigned, so the foreclosure could occur.

The key element of this portion of the ruling suggests that use of MERS does not split the Note and Deed permanently, and by inference, that MERS does have an ability to execute assignments.

Note: No mention of “robo-signing” exists in this ruling. That is because when the original complaint had been filed, “robo-signing” was not commonly known to exist.

If there has been any indication of where the Court would rule on “robo-signing”, it would exist in the comments about Agency. If MERS is an agent for the lender, then “robo-signing” would not be an issue, except in cases of outright forgery. Even then, the issue of “damages” would be hard show since a defaulted borrower has not been harmed, especially if the home is in a Negative Equity situation.

The “Certifying Officer” for MERS issue was not addressed either. My opinion is that as longer as it can be shown that the Certifying Officer was such by corporate resolution, then there would be no issue.

The Court also ruled that the Deed and Note might not be able to be enforced if MERS or the Trustee were not agents of the lenders. This argument is what most attorneys miss. MERS is about Agency Relationships, and what constitutes Agency under the laws of the specific state.

This ruling gives a greater legitimacy to MERS. It addresses the splitting of the Note and Deed of Trust and the argument that such prevents any foreclosure from ever occurring, and solidly denies the argument.
The ruling also gives greater credibility to MERS being an Agent for the lender, provided that MERS can prove the Agency relationship. In most cases, this is not an issue.

The OCC Consent Decree further reinforces the Agency relationship, in that it decrees that MERS is an agent of lenders, and that gave the OCC the right to include MERS in their actions. It also reinforces the argument that Certifying Officers are legitimate.

Claims against MERS for misrepresentation have been dealt a serious and potentially fatal blow. The fact that the Court identified in the Deed of Trust that MERS had been fully disclosed, and the borrower signed the Deed of Trust should prove to eliminate such arguments.

If one looks close at the ruling, he will notice that the attorneys have failed to “present a claim” or have failed to “allege” certain issues. This is something I have noticed with almost all lawsuits. Attorneys fail to state claims, or do so ambiguously, especially in fraud allegations. Such claims require a heightened level of pleading.

At this point, homeowner attorneys have been severely restricted in what they can argue. They must now rely upon trying to prove no Agency relationship between the lender and MERS exists, or that the Certifying Officer was not legitimate, primarily through forgery, or through lack of a Corporate Resolution.

Additionally, the attorney will need to show how a borrower who was in default, was harmed by the foreclosure being procedurally incorrect. This is a tough argument to make, one that I usually cannot accomplish.

Patrick Pulatie is the CEO for LFI Analytics. He is not an attorney and does not provide legal advice. He has simply provided his opinion of the important facts for this ruling.

I am not a lawyer and neither is Pulatie. However, I agree with this court ruling. Here is a key snip written by Circuit Judge Callahan in easy to understand language.

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.


The district court properly dismissed the plaintiffs’ First Amended Complaint without leave to amend. The plaintiffs’ claims that focus on the operation of the MERS system ultimately fail because the plaintiffs have not shown that the alleged illegalities associated with the MERS system injured them or violated state law. As part of their fraud claim, the plaintiffs have not shown that they detrimentally relied upon any misrepresentations about MERS’s role in their loans. Further, even if we were to accept the plaintiffs’ contention that MERS is a sham beneficiary and the note is split from the deed in the MERS system, it does not follow that any attempt to foreclose after the plaintiffs defaulted on their loans is necessarily “wrongful.” The plaintiffs’ claims against their original lenders fail because they have not stated a basis for equitable tolling or estoppel of the statutes of limitations on their TILA and Arizona Consumer Fraud Act claims, and have not identified extreme and outrageous conduct in support of their claim for intentional infliction of emotional distress.

Thus, we AFFIRM the decision of the district court.

I am not a fan of MERS by any means. It has deficiencies. However, there is no legal basis for broad actions based on MERS alone.

Nonetheless, I am all in favor of severe penalties in cases of genuinely faulty foreclosures such as on the wrong person, on the wrong house, or the mortgage was already paid off.

However, those few cases get all the hype and attention. Rock solid cases like this are ignored by those with an axe to grind against MERS.

FHFA Lawsuit Against 17 Banks Not Related to MERS

Please note that lawsuits based on MERS and the $196 billion lawsuit by the FHFA against 17 banks are not related. For details on the latter, please see Is it Acceptable to Present a $196 Billion Sac-O’-Sheet to Sophisticated Investors as Diamonds-in-the-Rough?

Common Sense Ruling of 9th Circuit Court

I remain steadfast that people who do not pay their mortgages should stand to lose their homes. MERS is no excuse or reason to stop such foreclosures. I applaud the well written, common sense ruling by the Arizona Circuit.

To end the housing crisis, we need more foreclosures faster, not more delays. Once home prices fall to affordable levels, buyers will step in. Delays that allow people to live in their houses for years on end without paying a mortgage will only extend the crisis.


The original title of this post was Arizona Circuit Court Ruling Legitimizes MERS. The title is misleading. It should say 9th Circuit Court.

A lawyer friend writes …

The 9th Circuit takes appeals from Arizona, California, Hawaii, Montana, Nevada, Idaho, Oregon, and Washington. It’s one of 11 federal courts of appeal and is headquartered in San Francisco. It’s not an “Arizona” Circuit court. This is a more important decision than you indicate.

Moreover, Republican Callahan was joined by two Clinton Democrats, Tallman and Rawlinson. Tallman is very highly respected.

All are viewed as moderates. This appears to be a real, non-political “bipartisan” decision.

Mike “Mish” Shedlock
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