SER U.S. Bank National Assoc. v. Hon. Warren R. McGraw, Judge

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
January 2015 Term
FILED
_______________ February 5, 2015
released at 3:00 p.m.
RORY L. PERRY II, CLERK
No. 14-0776 SUPREME COURT OF APPEALS
_______________ OF WEST VIRGINIA
STATE OF WEST VIRGINIA EX REL.
U. S. BANK NATIONAL ASSOCIATION, ET AL.,
Petitioners
v.
THE HONORABLE WARREN R. McGRAW,
JUDGE OF THE CIRCUIT COURT OF WYOMING COUNTY,
WEST VIRGINIA; AND WYOMING COUNTY, WEST VIRGINIA,
Respondents
ORIGINAL PROCEEDING IN PROHIBITION
WRIT GRANTED
Submitted: January 13, 2015
Filed: February 5 , 2015
Michael W. Carey, Esq. Harry F. Bell, Jr., Esq.
David R. Pogue, Esq. Jonathan W. Price, Esq.
Carey, Scott, Douglas & Kessler, PLLC The Bell Law Firm, PLLC
Charleston, West Virginia Charleston, West Virginia
Joseph T. Cramer, Esq. Charles Clinton Hunter, Esq.
Shuman, McCuskey & Slicer, PLLC Reich and Binstock, LLP
Charleston, West Virginia Houston, Texas
Thomas M. Hefferon, Esq. Counsel for Respondent
Goodwin Procter, LLP Wyoming County, West Virginia
Washington, D.C.
Jared M. Tully, Esq.
Frost Brown Todd, LLC
Charleston, West Virginia
Thomas V. Flaherty, Esq.
Flaherty, Sensabaugh & Bonasso, PLLC
Charleston, West Virginia
Counsel for the Petitioners
JUSTICE KETCHUM delivered the Opinion of the Court.
SYLLABUS BY THE COURT
1. “The provisions of a written agreement are binding upon the parties thereto and the
fact that such agreement was not recorded does not relieve said parties of their obligations
thereunder.” Syl. pt. 1, Farrar v. Young, 159 W.Va. 853, 230 S.E.2d 261 (1976).
2. It is not mandatory under West Virginia’s recording statutes that an assignment of
a trust deed or mortgage, securing a promissory note for the purchase of real estate, be
recorded in the office of the clerk of the county commission. The failure to record the
assignment, however, affords no protection to the assignee with regard to other creditors or
bona fide purchasers of the real estate for value, without notice of the unrecorded assignment.
Ketchum, Justice:
This original proceeding in prohibition concerns whether the assignment of a trust
deed, securing the payment of a promissory note for the purchase of residential real estate,
must be recorded in the office of the clerk of the county commission.
A putative class action was filed in the Circuit Court of Wyoming County against the
petitioners, U. S. Bank National Association, et al. (“trustees”), by the respondents,
Wyoming County and all other similarly situated West Virginia counties (“Wyoming
County”). Wyoming County alleged that the recording of trust deed assignments in county
record books is required by State law.
Rather than recording trust deed assignments in county record books, the trustees have
been registering the assignments, also described as a transfer of rights under the trust deeds,
with a private corporation known as Mortgage Electronic Registration Systems, Inc.
(“MERS”).1 Contending that trust deed assignments need not be recorded in county record
1
Although the terms “trust deed” (“deed of trust”) and “mortgage” are often used
interchangeably, there is an important distinction. This Court recently explained in
Sostaric v. Marshall, _ W.Va. _, 766 S.E.2d 396 (2014):
A deed of trust is, in effect, a mortgage. Both instruments secure
payment of a debt. The primary difference is that the holder of a trust deed
does not have to apply to a court in order to foreclose, whereas the holder of
a mortgage is required to apply to a court in order to foreclose.
1
books under West Virginia law, the trustees moved to dismiss the complaint.
On July 22, 2014, the circuit court entered an order denying the trustees’ motion to
dismiss. The circuit court ruled that trust deed assignments are required to be publically
recorded and that Wyoming County is entitled to show that the trustees have been unjustly
enriched by using MERS, rather than recording the assignments in the county record books
and paying the recording fees.
The trustees ask this Court to prohibit the enforcement of the July 22, 2014, order
and dismiss Wyoming County’s putative class action.2
Although “mortgages,” as such, are not used in this State, Arnold v. Palmer,
Trustee, 224 W.Va. 495, 502 n. 10, 686 S.E.2d 725, 732 n. 10 (2009), Young v. Sodaro,
193 W.Va. 304, 307 n. 7, 456 S.E.2d 31, 34 n. 7 (1995), we will use both terms, “trust
deed” and “mortgage,” in this opinion, particularly in view of the references to MERS
and the nationwide business practice of loan pooling and securitization.
2
Ordinarily, the denial of a motion to dismiss is interlocutory and is subject to
neither an appeal nor prohibition. State ex rel. Arrow Concrete Co. v. Hill, 194 W.Va.
239, 245, 460 S.E.2d 54, 60 (1995). See Rule 16(a) of the West Virginia Rules of
Appellate Procedure which states that the issuance of an extraordinary writ is “sparingly
exercised.”
However, relief in prohibition may be considered where the facts are not in
dispute, and an appeal from a crucial legal ruling would prove inadequate. State ex rel.
Preiser v. MacQueen, 177 W.Va. 273, 275 n. 2, 352 S.E.2d 22, 24 n. 2 (1985). Thus, in
the current matter (a putative class action involving a pure question of law concerning the
recording of trust deed assignments) relief in prohibition may be considered. See F. D.
Cleckley, R. J. Davis, L. J. Palmer, Litigation Handbook on West Virginia Rules of Civil
Procedure § 12(b)(6)[2][d] (4th ed. 2012) (Although the denial of a motion to dismiss
may not, ordinarily, be challenged by a writ of prohibition, relief in prohibition may be
2
Upon review, this Court concludes that West Virginia law does not require that the
assignment of a trust deed, securing the payment of a promissory note for the purchase of
residential real estate, must be recorded in the office of the clerk of the county commission.
The circuit court exceeded its jurisdiction in allowing the Wyoming County action to go
forward, and the trustees are, therefore, entitled to relief in prohibition.
I.
Pooling, Securitization and Registration with MERS
This proceeding arises in the context of a major exception in the housing finance
industry to the traditional situation where a trust deed, securing the payment of a promissory
note, was rarely assigned. The trustees herein were involved in the business practice of loan
pooling and securitization. Briefly stated, pooling and securitization constitute a process of
“distributing risk by aggregating debt instruments in a pool, then issuing new securities
backed by the pool.” Dictionary of Business and Economics Terms 639 “securitization”
(5th ed. 2012).
sought where the remedy of appeal is manifestly inadequate.).
3
The structure of loan pooling and securitization is complex and need not be set forth
in detail for purposes of this opinion.3 A summary of the practice, pertaining to the parties
in this action, can be discerned from the allegations in the complaint. A pool of mortgage
loans, originating from a lender, is sold to a special-purpose entity known as the depositor.
The depositor serves as a conduit to separate the pooled mortgage loans from the lender’s
other assets and liabilities. The depositor then sells or transfers all rights to the mortgage
loans to a trust which issues certificates to investors. The trustees in this action are
fiduciaries of such trusts. Through the loan pooling and securitization process, investors
holding trust certificates can expect an isolated cash flow from their mortgage-backed
securities, free from competing claims.
It is undisputed that the trust deeds in this action have been recorded in the record
books of the respective West Virginia counties. However, loan pooling and securitization
is all about the transfer of the promissory notes, and the assignment or transfer of rights under
the trust deeds, from the lenders and depositors to the various trusts. Here, none of the
assignments or transfers of rights under the trust deeds have been recorded in the respective
offices of the clerk of the county commission. Consequently, no recording fees pertaining
to assignments or transfers have been paid.
3
Loan pooling and securitization, in the context of a bank audit conducted by an
accounting firm, were involved in Grant Thornton, LLP v. Kutak Rock, LLP, 228 W.Va.
226, 229, 719 S.E.2d 394, 397 (2011).
4
Instead, Mortgage Electronic Registration Systems, Inc., or “MERS,” a private
corporation, was created by the mortgage industry to eliminate the need for publically
recorded assignments and the expense associated therewith. MERS maintains a computer
database designed to track the ownership rights to mortgage loans throughout the United
States. Moreover, at the loan’s origination, MERS is designated by the lender and the
borrower in the trust deed as the nominee for the lender and the lender’s successors and
assigns, as well as the trust deed beneficiary. The trust deed, but not the assignments or
transfers thereof, is recorded in the office of the clerk of the county commission.4
Thus, the role of MERS in loan pooling and securitization is twofold: (1) It serves as
a registry for the transfer of ownership rights under the trust deeds and mortgages, and (2)
it serves as the purported mortgagee under the trust deeds and mortgages, which, the trustees
contend, makes the recording of trust deed assignments or transfers in county record books
unnecessary.5
4
An excellent summary and analysis of loan pooling and securitization in the
mortgage industry can be found in A. J. Levitin, The Paper Chase: Securitization,
Foreclosure, and the Uncertainty of Mortgage Title, 63 Duke L.J. 637 (2013).
5
According to the complaint, MERS now recommends that, in preparation for
foreclosure, a trust deed assignment be recorded “from MERS to the trust that allegedly
holds the accompanying note and that seeks to commence foreclosure proceedings.”
5
II.
Wyoming County’s Class Action
On March 27, 2012, a putative class action was filed in the Circuit Court of Wyoming
County by Wyoming County, “on behalf of itself and all other similarly situated West
Virginia Counties.” The defendants named in the complaint were trustees U. S. Bank
National Association; Bank of New York Mellon; Bank of America, National Association;
Deutsche Bank; J. P. Morgan Chase & Co.; and John Does 1-20 (various corporations,
banking associations, partnerships, limited liability companies or other entities).
The complaint alleged that, although the trusts ostensibly received all rights to the
mortgage loans, the promissory notes they hold constitute unsecured debts. That is because
county records only show the trust deeds in the name of the original lenders, without any
assignments of the trust deeds to others. According to the complaint, in the absence of valid
assignments, title to the trust deeds, priority, and the right to foreclose remain with the
original lenders. The complaint alleged that, to enjoy the benefits of loan pooling and
securitization, the trustees must record the assignments of the trust deeds from the original
lenders to the pooled-loan depositors, and from the depositors to the trusts, with payment of
the accompanying recording fees.6
6
W.Va. Code, 59-1-10(a)(1) [2012], provides that the cost of admitting a trust deed
to record in the office of the clerk of the county commission is fifteen dollars. Likewise,
Wyoming County asserts that it is entitled to a payment of fifteen dollars for each
recorded assignment.
6
The relief demanded in the complaint was, inter alia, an injunction requiring the
trustees to record all prior trust deed assignments from the original lenders to the depositors
and from the depositors to the trusts, and pay the recording fees, “in order to clear title to
properties in the Counties.”
In February 2014, the trustees filed a motion to dismiss the action for failure to state
a claim upon which relief can be granted. See W.Va. R. Civ. P. 12(b)(6). The circuit court
denied the motion in a brief order entered on July 22, 2014. The circuit court held that the
counties have a duty to maintain accurate records regarding interests in real property.
Therefore, in this action, the counties should be afforded an opportunity to show that,
although the trustees are required to record, or cause to be recorded, trust deed assignments,
the trustees have been circumventing that requirement by solely using the MERS registry,
thereby unjustly enriching the trustees and harming the counties through lost revenue.
The trustees challenge that ruling in this original proceeding in prohibition.
III.
Standard for Relief in Prohibition
This Court has original jurisdiction in prohibition proceedings pursuant to art. VIII,
§ 3, of the Constitution of West Virginia. In considering whether to grant relief in
7
prohibition, this Court stated in the syllabus point of State ex rel. Vineyard v. O’Brien, 100
W.Va. 163, 130 S.E. 111 (1925): “The writ of prohibition will issue only in clear cases
where the inferior tribunal is proceeding without, or in excess of, jurisdiction.” Accord syl.
pt. 1, State ex rel. Progressive Classic Ins. Co. v. Bedell , 224 W.Va. 453, 686 S.E.2d 593(2009).
In the current matter, in which the trustees contend that the circuit court is exceeding
its jurisdiction in allowing the action to go forward, the relevant guidelines are found in State
ex rel. Hoover v. Berger, 199 W.Va. 12, 483 S.E.2d 12 (1996). Syllabus point 4 of Hoover
holds:
In determining whether to entertain and issue the writ of prohibition for
cases not involving an absence of jurisdiction but only where it is claimed that
the lower tribunal exceeded its legitimate powers, this Court will examine five
factors: (1) whether the party seeking the writ has no other adequate means,
such as direct appeal, to obtain the desired relief; (2) whether the petitioner
will be damaged or prejudiced in a way that is not correctable on appeal; (3)
whether the lower tribunal’s order is clearly erroneous as a matter of law; (4)
whether the lower tribunal’s order is an oft repeated error or manifests
persistent disregard for either procedural or substantive law; and (5) whether
the lower tribunal’s order raises new and important problems or issues of law
of first impression. These factors are general guidelines that serve as a useful
starting point for determining whether a discretionary writ of prohibition
should issue. Although all five factors need not be satisfied, it is clear that the
third factor, the existence of clear error as a matter of law, should be given
substantial weight.
Accord State ex rel. Fillinger v. Rhodes, 230 W.Va. 560, 564, 741 S.E.2d 118, 122 (2013);
8
syl. pt. 2, State ex rel. West Virginia Nat’l Auto Ins. Co. v. Bedell, 223 W.Va. 222, 672
S.E.2d 358 (2008).
IV.
Discussion
In the complaint, Wyoming County does not allege that the MERS registry is illegal
per se. Instead, Wyoming County contends that the trustees’ exclusive use of MERS for the
assignment or transfer of a trust deed circumvents this State’s statutory requirement that trust
deed assignments must be publically recorded. Wyoming County asserts that the use of
MERS (1) undermines the integrity of the counties’ real property records, to the detriment
of an open and vibrant real estate market, (2) fails to provide transferees in the MERS
registry with adequate perfection of the debts secured by the trust deeds, (3) deprives the
counties of revenue, and (4) unjustly enriches the trustees through the nonpayment of
recording fees.
However, seeking relief in prohibition, the trustees contend that West Virginia law
does not require that trust deed assignments be publically recorded. The trustees insist that
the recording of assignments is optional. Noting that appropriate fees were paid to the
counties when the trust deeds were recorded, the trustees assert that they have not been
unjustly enriched by failing to record assignments where there is no requirement to do so.
The trustees assert that the Wyoming County action threatens to unsettle the terms set forth
9
in the trust deeds between lenders and borrowers, to which Wyoming County is not a party.
Pursuant to art. IX, § 11, of the Constitution of West Virginia, the clerk of the county
commission has a duty to record and preserve “deeds and other papers presented for record.”
Derivative of that provision are a number of statutes relating to the public recording of deeds,
trust deeds and other documents concerning land transactions. W.Va. Code, 39-1-2 [1933],
for example, addresses specific requirements for recording deeds, trust deeds and other
documents in the office of the clerk of the county commission. Moreover, W.Va. Code, 39-1­
11 [1963], provides for the placement of writings, authorized by law to be recorded, “in a
well-bound book, carefully to be preserved,” with a grantor and grantee index. See also
W.Va. Code, 38-12-9 [1923], specifically providing for the recording and indexing of
assignments “admitted to record” in the office of the clerk of the county commission.
Nothing in those statutes mandates the public recording of deeds, trust deeds or trust deed
assignments.
In the case of deeds, this Court has recognized that an unrecorded deed is valid, except
as against a bona fide purchaser of the property, without notice of the unrecorded deed. See
McElwain v. Wells, 174 W.Va. 61, 64, 322 S.E.2d 482, 485 (1984) (“Even an unrecorded
deed is good against a grantor and his heirs.”) In the case of bona fide purchasers, the
syllabus point in Alexander v. Andrews, 135 W.Va. 403, 64 S.E.2d 487 (1951), holds:
10
A grantee in a conveyance of land, to be protected against a prior
unrecorded deed for the same property, and to a different person, must be a
complete purchaser, without notice of the prior deed, and have paid in full the
purchase price for the land purchased by him; but he will be protected to the
extent of any purchase money paid therefor before such prior deed is recorded.
Accord syl. pt. 3, Wolfe v. Alpizar, 219 W.Va. 525, 637 S.E.2d 623 (2006). See syl. pt. 1,
United Fuel Gas Co. v. Morley Oil & Gas Co., 101 W.Va. 83, 131 S.E. 716 (1926) (To be
protected against a prior unrecorded deed, one must be a complete purchaser, must have had
no notice of the prior contract or deed, and have paid all the purchase money for the land
purchased by him.)
In the current matter, the deeds conveying residential real estate, and the trust deeds
securing payment of the promissory notes, were, in fact, publically recorded. Assignments
of the trust deeds were not. The issue before this Court is whether the recording of trust deed
assignments in the office of the clerk of the county commission is mandatory under West
Virginia law.
Three additional statutes are relevant to this Court’s inquiry. W.Va. Code, 40-1-8
[1993], provides that a written contract for the conveyance of an interest in real estate “shall,
from the time it is duly admitted to record, be, as against creditors and purchasers, as valid
as if the contract were a deed conveying the estate or interest embraced in the contract.” That
11
statute simply places an unrecorded written contract concerning a conveyance of real estate
on the same footing as an unrecorded deed. In conjunction with that statute, W.Va. Code,
40-1-9 [1963], provides that such contracts, deeds, trust deeds or mortgages, “shall be void,
as to creditors, and subsequent purchasers for valuable consideration without notice,” until
the time of recording in the county where the property is located. Again, nothing in those
statutes mandates the public recording of such documents as a matter of law. In any event,
W.Va. Code, 40-1-16 [1963], states that the provisions of W.Va. Code, 40-1-8, and W.Va.
Code, 40-1-9, “shall have no application to the transfer or assignment of any interest created
by a trust deed or mortgage.” (Emphasis added)
The import of those statutes is that a party assigning a trust deed or mortgage, or
receiving an assignment, is under no statutory duty to record the assignment in the office of
the county clerk. Recording a trust deed assignment is not mandatory. The assignment is
valid among the parties thereto, without any failure of the security, represented by the
underlying trust deed or mortgage, for payment of the promissory note. Syllabus point 1 of
Farrar v. Young, 159 W.Va. 853, 230 S.E.2d 261 (1976), confirms: “The provisions of a
written agreement are binding upon the parties thereto and the fact that such agreement was
not recorded does not relieve said parties of their obligations thereunder.”
Of course, the failure to publically record places the assignment at risk with regard
12
to other creditors and bona fide purchasers of the property, without notice of the unrecorded
assignment. In that regard, syllabus point 5 of Citizens Nat’l. Bank of Connellsville v.
Harrison-Doddridge Coal & Coke Co., 89 W.Va. 659, 109 S.E.892 (1921), states, in part:
An assignment of a mortgage, as contradistinguished from an
assignment of a note or bond mentioned, described and secured in it, is a
conveyance of real estate or a contract for such conveyance, . . . and, for
protection against the [original] mortgagee and a subsequent purchaser of the
mortgaged property for value, the assignee must cause it to be admitted to
record.
That same principle is expressed in vol. 5, H. T. Tiffany, The Law of Real Property
§ 1457 (1939):
An “assignment of mortgage,” that is, a transfer of the debt secured by
mortgage, together with an express transfer of the mortgage security, is usually
regarded as within the operation of the recording acts, this being sometimes
expressly provided by statute. The requirement that such an assignment shall
be recorded does not render an unrecorded assignment invalid, but it prevents
the assignee from asserting any rights by reason of the assignment as against
persons who, not knowing of the assignment, and seeing no assignment of
record, acted on the assumption that there had been no assignment.
See 55 Am. Jur. 2d Mortgages § 924 (2009) (“The assignment of a note and mortgage does
not need to be recorded to be valid.”).
13
The petition filed by the trustees does not allege a current dispute of priorities over
a parcel of real estate between a trust deed assignee and a bona fide purchaser for value.
Rather, the question is whether this State’s recording statutes require that a trust deed
assignment be publically recorded to have validity in the first instance. The answer is no,
although the failure to record exposes the assignee to an element of risk. Accordingly, this
Court holds that it is not mandatory under West Virginia’s recording statutes that an
assignment of a trust deed or mortgage, securing a promissory note for the purchase of real
estate, be recorded in the office of the clerk of the county commission. The failure to record
the assignment, however, affords no protection to the assignee with regard to other creditors
or bona fide purchasers of the real estate for value, without notice of the unrecorded
assignment.
Our holding is not affected by the fact that this proceeding arose in the context of the
MERS system, whereby trust deed and mortgage assignments (also described as a transfer
of rights in the security for the debt) have been registered in the MERS database. The
Wyoming County complaint demands the recording of all such assignments, including those
from the original lenders to the pooled-loan depositors, and from the depositors to the trusts,
“in order to clear title to properties in the Counties.” The trustees assert, however, that the
recording of assignments within the MERS system is merely academic, since MERS is
named in the trust deed or mortgage as the beneficial owner of the debt secured by the trust
14
deed, as well as the nominee for the lender and the lender’s successors and assigns.7 Thus,
according to the trustees, MERS serves as the mortgagee of record, which renders additional
recording with the county clerk unnecessary.
We find the following decisions supporting the trustees’ position to be noteworthy:
Boyd County ex rel. Hedrick v. MERSCORP, Inc., 985 F.Supp.2d 823 (E.D. Ky. 2013)
(Action dismissed where counties alleged that MERS, et al., had devised and executed a
scheme to avoid paying recording fees for mortgage assignments.); Union County, Ill. v.
MERSCORP, Inc., 920 F.Supp.2d 923 (S.D. Ill. 2013) (Class action against electronic
mortgage registry dismissed: the recording of mortgages and mortgage assignments not
statutorily required.); Fuller v. MERS, 888 Fed.Supp.2d 1257, 1279 (M.D. Fla. 2012) (“The
Florida Legislature has not yet provided a statutory remedy for Plaintiff [Clerk] to recover
fees for unfiled assignments.”); Plymouth County, Iowa ex rel. Raymond v. MERSCORP,
Inc., 886 F.Supp.2d 1114 (N.D. Iowa 2012) (Putative class action dismissed, where county
alleged that mortgage registry was unjustly enriched by registry’s failure to record all
mortgage assignments.).
7
W.Va. Code, 39-1-2 [1933], sets forth the general requirement that the clerk shall
not record a document that secures the payment of a debt, unless the document sets forth
therein “who, at the time of the execution and delivery thereof, is the beneficial owner of
the debt secured thereby.”
15
Upon review of the law in this area, the inexorable conclusion is that the most
important factor to be considered is the specific wording of the public recording statutes of
the jurisdiction under consideration. In this proceeding, we have determined that the
recording statutes in West Virginia do not require that the assignment of a trust deed be
recorded in the office of the clerk of the county commission. Any amendments or additions
to this State’s recording statutes are to be considered by the West Virginia Legislature.8
V.
Conclusion
The Circuit Court of Wyoming County exceeded its jurisdiction in entering the July
8
Currently, for example, W.Va. Code, 38-12-10 [1987], establishes a cause of
action against a party holding a recorded lien who fails to execute a proper release. With
regard to releases, the following comment appears in vol. 5, C. Palo, Tiffany Real
Property § 1391.50 (Cum. Supp. 2014-15):
The development of a secondary market for residential mortgages, as
well as a number of changes in the title insurance and mortgage closing
service industries, have resulted in a complicated process for the pay-off,
discharge and release of mortgage instruments. The Uniform Residential
Mortgage Satisfaction Act (URMSA) was developed by the National
Conference of Commissioners on Uniform State Laws in 2004, with the
goal of ensuring that mortgagees promptly file documents to clear titles in
public records when debt has been paid off, and to provide uniformity
among the states regarding the payoff and release of mortgage loans
secured by residential real property. North Carolina and Alabama have
enacted laws based on URMSA, and other states are considering adopting
the legislation.
(Emphasis added). See vol. 7B, Uniform Laws Annotated, “Uniform Residential
Mortgage Satisfaction Act” 417 (2006).
16
22, 2014, order which denied the trustees’ motion to dismiss. The trustees are granted relief
prohibiting the enforcement of the order, and the circuit court is directed to dismiss the
Wyoming County action with prejudice.
Writ Granted.
17