In yet another attack on Mortgage Electronic Registration Systems (MERS), the U.S. Bankruptcy Court for the Southern District of California has refused to allow the assignee of a deed of trust (DOT) to regain possession of a home on which it had foreclosed where the assignment had not been recorded.

MERS was the original named beneficiary in the DOT securing the borrower’s loan and, despite the assignment of the original lender’s interest in the note and DOT, MERS remained the named beneficiary of record on the DOT when the assignee foreclosed. The Bankruptcy Court, in In re Eleazar Salazar, issued on April 11, 2011, held that MERS’ recorded interest did not allow the assignee to bypass the California Civil Code Section 2932.5 requirement that an assignment be recorded before the assignee exercises the power of sale under a DOT.

The borrower had filed for bankruptcy relief on the eve of a state court trial in an unlawful detainer action brought by the assignee to regain possession of the borrower’s home. In opposition to the assignee’s motion for relief from the bankruptcy automatic stay to proceed with the detainer action, the borrower asked the Bankruptcy Court to reinstate his loan and allow him to cure the default. He argued that the assignee’s failure to record the assignment invalidated the foreclosure sale.

As an initial matter, contrary to the assignee’s argument that Section 2932.5 applied only to assignees of mortgage loans, the Bankruptcy Court held that the provision was applicable to a nonjudicial foreclosure sought under either a mortgage or a DOT. According to the Court, the borrower’s acknowledgment in the DOT that MERS could exercise the lender’s rights as necessary to comply with law or custom could not be read as a waiver of the borrower’s right under Section 2932.5 to be informed of an assignee’s identity.

In rejecting the assignee’s argument that MERS’ recorded interest as beneficiary of the DOT was sufficient to satisfy Section 2932.5, the Court noted that it was joining “the courts in other states that have rejected MERS’ offer of an alternative to the public recording system.” Among such courts was the U.S. Bankruptcy Court for the Eastern District of New York, which held in In re Agard that MERS lacked authority to assign mortgages. (Click here to read an earlier legal alert summarizing Agard.) The Bankruptcy Court concluded that because the assignee’s failure to record the assignment created the possibility that the foreclosure sale was void and the borrower was still the owner of the property, the automatic stay should continue in place to protect the borrower’s potential interest.