Consumer Finance Litigation

Oratai Culhane v. Aurora Loan Services of Nebraska

United States Court of Appeals

First Circuit

February 15, 2013

Relevant Facts: In April 2006, Culhane refinanced a mortgage on her single family home and delivered a promissory note to Preferred Financial Group, Inc. d/b/a Preferred Mortgage Services (the "Lender" or "Preferred"). Culhane simultaneously executed a mortgage in favor of MERS as nominee for Preferred and Preferred's successors and assigns. After making the loan, Preferred transferred Culhane's note to Deutsche Bank Trust Company Americas ("Deutsche"), as trustee for Residential Accredit Loans, Inc. Mortgage Asset-Backed Pass-Through Certification, Series 2006-Q05 (the "Trust"). Aurura Loan Services of Nebraska ("Aurora") acted as the loan servicer for Deutsche. On April 7, 2009, MERS transferred by assignment the mortgage to Aurora. The assignment, recorded on April 24, 2009, was executed by Joann Rein, who is both an employee of Aurora and a certifying officer for MERS. After Culhane defaulted on her promise to pay, Aurora instituted foreclosure proceedings. The case made its way to the First Circuit via Culhane's challenge regarding the validity of MERS' assignment to Aurora. Before addressing the validity argument, however, the Court had to consider whether a Massachusetts mortgagor with a mortgage that contains a power of sale had standing to challenge a mortgage assignment to which she is not a party. The Court examined this issue in the context of Massachusetts law. In Massachusetts, a mortgagor has a legally cognizable right to challenge a foreclosing entity's ability to enforce its mortgage. In certain circumstances, this might require a challenge to the validity of an assignment of mortgage which claims to transfer the mortgage to a successor mortgagee. Believing that the standing doctrine acts as a shield to protect the court from improperly adjudicating a dispute, rather than as a sword to deprive mortgagors of legal protection, the Court concluded that a mortgagor has standing to challenge the assignment of a mortgage on her home to the extent that such challenge is necessary to contest a foreclosing entity's status as mortgagee. The Court cautioned that its holding should be construed narrowly in the context of the given facts. Specifically, while a mortgagor has standing to challenge a mortgage assignment as invalid, ineffective or void, a mortgagor does not have standing to challenge other deficiencies in the assignment which might render the mortgage merely voidable at the election of one of its parties, but otherwise effective to pass legal title. Here, the challenge was based on the argument that MERS never properly held the mortgage and, thus, had no interest to assign, thereby rendering it void not just voidable. Thus, Culhane had standing to challenge the validity of the assignment. Finding that appellant had standing to challenge the assignment from MERS to Aurora, the Court next addressed the issue of whether the assignment was, in fact, a valid assignment. The Court rejected Culhane's argument that the MERS designation in the mortgage was a nullity. Importantly, the Court confirmed there is no reason to doubt the legitimacy of the arrangement whereby MERS holds bare legal title as mortgagee of record and the note holder alone enjoys the beneficial interest in the loan. In doing so, the Court recognized long standing principles of mortgage law. Particularly, the Court acknowledged that a mortgage loan requires the execution of two separate, but related, documents - a promissory note and a mortgage. The note establishes the borrower's promise to repay the lender, or noteholder. The mortgage, in a title theory state, effectuates legal title to the subject property from the mortgagor to the mortgagee for the sole purpose of securing the loan. It follows, then, that the mortgagee holds bare legal title to the mortgaged property. The note and mortgage need not be held by the same entity. The two documents exist on distinct principles. Logically, with the instant facts, MERS, just as any other mortgagee who holds bare legal title to a mortgaged property, held the right to assign that legal title to Aurora. That assignment constitutes to a valid assignment. As such, Aurora properly held the mortgage and possessed the authority to foreclose. The Court quickly dismissed appellant's argument that Ms. Rein's dual relationship with Aurora and MERS somehow undermined the legitimacy of Ms. Rein's ability to execute the assignment. Appellant raised other arguments not substantively entertained by the Court. In the end, the Court affirmed the District Court of Massachusetts in finding that Aurora's foreclosure of appellant's property complied with applicable law, as the assignment of mortgage was valid and Aurora properly exercised its statutory power of sale as both the holder of the mortgage and the loan servicer for the note holder.