The Supreme Court of Washington has determined that, under the Washington deed of trust act, only the actual holder of a promissory note can be the beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property. If a party, MERS in this case, does not hold the note, that party is not the lawful beneficiary with power to direct a trustee to foreclose. Moreover, a homeowner may be able to state a claim under Washington's Consumer Protection Act based on a defendant's representation that it was a beneficiary if, in fact, it is not the lawful beneficiary. However, the mere fact that a defendant is listed on the deed of trust as a beneficiary is not itself an actionable injury.
The Supreme Court of Washington issued its opinion, en banc, in Bain v. Metropolitan Mortgage Group, Inc., on August 16, 2012. The case revolved around two homeowners who, after defaulting on their mortgages, sued to stop MERS and its appointed trustees from initiating foreclosure sales, claiming that MERS was not the proper beneficiary under the Washington trust deed statute. The primary issue in the case was whether MERS could be a lawful beneficiary with the power to appoint a trustee without actually holding the promissory notes secured by the deeds of trust at issue. The court held:
"A plain reading of the statute leads us to conclude that only the actual holder of the promissory note or other instrument evidencing the obligation may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property. Simply put, if MERS does not hold the note, it is not a lawful beneficiary."
The court reasoned that the deed of trust act must be construed in favor of borrowers since it provides an easy mechanism for foreclosure, without judicial oversight. Because of the relative ease with which a beneficiary can initiate foreclosure, and the resulting forfeiture of the borrower's interests, the act must be evaluated from the borrower's perspective. In addition, the deed of trust act should be construed to further three basic objectives: "First, the nonjudicial foreclosure process should remain efficient and inexpensive. Second, the process should provide an adequate opportunity for interested parties to prevent wrongful foreclosure. Third, the process should promote the stability of land titles."
Washington's trust deed statute defines "beneficiary" as "the holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation." MERS argued that the context of the statute requires that MERS be recognized as the proper beneficiary because the intent of the legislature was to create a more efficient remedy for default, not to put up barriers preventing foreclosure. Further, MERS argued that the deed of trust language allows it to act as the beneficiary and the parties are entitled to contract around the statutory definitions. Finally, MERS argued that since it was the holder of the deed of trust, it was the proper beneficiary.
The court disagreed with MERS on each of these points. First, it held that a proper beneficiary must either actually possess the note or be the payee. Second, the court determined that the parties could not avoid the statutory definitions by contractually altering the definition of beneficiary. Finally, the court held that, under the relevant statutory scheme, the deed of trust follows the note, not the other way around. Accordingly, MERS cannot be the beneficiary by virtue of it possessing the deed of trust.
The court further observed that MERS acting as the beneficiary undermined some of the goals of the deed of trust statute. That scheme was designed, in part, to encourage borrowers and lenders to be able to work together to modify loans and otherwise resolve problems. Since MERS does not negotiate with borrowers on behalf of the actual note holders, and since, at least in this case, MERS could not identify the actual note holders, allowing MERS to act as the beneficiary would undermine these goals. Based on these concerns, the court held that MERS could not be deemed an agent of the actual note holders.
With regard to the deceptive trade practices claims, the court held that MERS's representations that it was the beneficiary could deceive a substantial portion of the public and, further, that such representations could have a broad public impact given that MERS is involved in as many as half of the mortgages in this country. Accordingly, the court held that, depending on the specific facts of the case, a party may be able to prove violations of the consumer protection statute when MERS holds itself out as a beneficiary of a note and deed of trust in the State of Washington.
In summary, MERS may not hold itself out as a beneficiary in the State of Washington unless it has actual possession of the promissory note or other documentation evidencing it holds the obligation secured by the deed of trust.