Mortgage Electronic Registration Systems, Inc. v. Koeppel

Background

The case involved property on Outlook Drive in Carmel, California. Gary Merle Koeppel and Emma K. Koeppel were the record owners. In 2005, they obtained a $1.335 million residential mortgage loan from Central Pacific Mortgage, which was later described as defunct. The loan was evidenced by a promissory note and secured by a deed of trust recorded in Monterey County.

The deed of trust identified Mortgage Electronic Registration Systems, Inc. (MERS) as the beneficiary, acting as nominee for the lender and the lender’s successors and assigns. It also gave MERS the right to exercise the interests granted under the deed of trust, including the right to foreclose and sell the property. The deed allowed the note to be sold without prior notice to the borrowers and stated that the deed’s agreements would benefit the lender’s successors and assigns.

In 2015, the Koeppels filed a California state-court quiet-title action against Central Pacific Mortgage and unknown persons or entities claiming an interest in the property. MERS was not named. The state court entered a judgment in the Koeppels’ favor in 2017, ordered the deed of trust expunged, and recorded the judgment. The Koeppels then stopped making mortgage payments.

MERS filed this federal action seeking an order voiding the state-court quiet-title judgment or declaring that the judgment did not eliminate the deed of trust or MERS’s rights. The Koeppels answered and filed a third-party complaint asserting seven claims against counter-defendants: intentional misrepresentation, conspiracy to commit forgery, cancellation of instruments, violations of the Racketeer Influenced and Corrupt Organizations Act, violations of California Business and Professions Code section 17200, unjust enrichment, and quiet title.

MERS’s Motion for Judgment on the Pleadings

A motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) challenges whether the pleadings support relief after an answer has been filed. The court applies a standard functionally identical to a motion to dismiss and may grant the motion when the pleadings show that no material factual dispute remains and the moving party is entitled to judgment as a matter of law.

The court held that California’s quiet-title statutes required the Koeppels to name MERS as a defendant. Those statutes require a quiet-title plaintiff to name people with adverse claims to the plaintiff’s title, including recorded claims or claims known to the plaintiff or reasonably apparent from inspecting the property.

The deed of trust was recorded and known to the Koeppels. It identified MERS as beneficiary and gave MERS authority to foreclose and sell the property. The court concluded that these rights constituted an adverse claim. It also noted that the Koeppels’ own pleadings admitted that MERS claimed an ownership interest in the debt and note and an interest in the property through the deed of trust.

The court rejected the Koeppels’ arguments that MERS was only a nominee, lacked a protected interest, was not the “true” beneficiary, or needed to prove a separate agency agreement with Central Pacific Mortgage or its successors. The court said those issues were not necessary to decide whether MERS had an adverse claim that required it to be named in the quiet-title action. The court also held that MERS’s authority under the deed of trust continued even though the original lender had become defunct.

The court rejected the Koeppels’ affirmative defenses, including lack of standing, comparative and contributory negligence, failure to mitigate, estoppel, unclean hands, lack of injury or damages, failure of consideration, and several other defenses. Some defenses were inapplicable, some were unsupported or waived because the Koeppels did not address the arguments, and others had already been rejected in an earlier order.

The court granted MERS’s motion for judgment on the pleadings. It declared the state-court quiet-title judgment null and void, ordered that the Koeppels hold the property subject to the deed of trust, and required removal and cancellation of the quiet-title judgment and notice of pending litigation from the land records.

Counter-Defendants’ Motion to Dismiss

MERS, Nationstar Mortgage LLC, U.S. Bank, N.A., and Wells Fargo, N.A. moved to dismiss the Koeppels’ third-party complaint. The court agreed that the seven claims were based on two central theories: that MERS could not be the beneficiary under the deed of trust and that the note was forged.

The court rejected the theory that MERS could not be a beneficiary because it did not hold, own, or receive payments under the note. Under the deed of trust and the cited California authorities, MERS could be the beneficiary and could act under the deed of trust even if it was not the economic beneficiary. The court also held that the original lender’s dissolution or suspension did not prevent MERS from acting as its nominee or agent. The alleged sale or securitization of the loan likewise did not eliminate MERS’s authority under the deed of trust.

The court also rejected the Koeppels’ assertion that the note was forged because the version they examined was a copy. California’s nonjudicial-foreclosure statutes do not require the party initiating foreclosure to possess the original note. The court further held that the California Uniform Commercial Code provisions concerning negotiable instruments did not control the nonjudicial foreclosure process at issue.

The Koeppels also argued that they did not have to make payments until they received official notice that the debt had been transferred. The court held that any claim based on federal notice-of-transfer requirements was time-barred under the facts alleged. The court explained that if the debt was never transferred, the notice provision did not apply; if it was transferred in 2005, the one-year limitations period had expired. The court stated that the Koeppels’ allegations showed they knew by at least 2015 that the debt had been transferred to Lehman Brothers.

Because the court rejected the beneficiary and forgery theories supporting all seven claims, it granted the counter-defendants’ motion to dismiss. It declined to allow the Koeppels to amend because amendment would be futile.

Other Disposition

The court found MERS’s motion to strike portions of the Koeppels’ expert reports moot. It directed the Clerk to close the file and stated that judgment in favor of MERS and the counter-defendants would follow.