Court Opinion

ID: 5138199
Source: CourtListenerOpinion
Date Created: 2021-12-21 14:54:39.062156+00
Date Added: 2024-06-11T10:39:44.706001
License: Public Domain

2016 UT App 107

              THE UTAH COURT OF APPEALS

                  STERLING FIDUCIARIES LLC,
                         Appellant,
                              v.
                 JPMORGAN CHASE BANK NA,
                          Appellee.

                           Opinion
                      No. 20150358-CA
                      Filed May 19, 2016

         Third District Court, West Jordan Department
               The Honorable James D. Gardner
                         No. 130412969

           Dwight J. Epperson, Attorney for Appellant
          James D. Gilson and J. Tayler Fox, Attorneys
                         for Appellee

SENIOR JUDGE PAMELA T. GREENWOOD authored this Opinion, in
 which JUDGE STEPHEN L. ROTH concurred. 1 JUDGE GREGORY K.
               ORME concurred in the result.

GREENWOOD, Senior Judge:

¶1     Sterling Fiduciaries LLC (Sterling) appeals the district
court’s grant of summary judgment in favor of JPMorgan Chase
Bank NA (Chase). We affirm.

1. Senior Judge Pamela T. Greenwood sat by special assignment
as authorized by law. See generally Utah R. Jud. Admin. 11-
201(6).
           Sterling Fiduciaries v. JPMorgan Chase Bank

                       BACKGROUND 2

¶2      On April 19, 2007, Kimberly and Kip McRae executed a
promissory note in the amount of $900,000 in favor of Taylor
Bean & Whitaker Mortgage Corp. (TBW) in connection with a
mortgage on real property. The note was secured by a trust deed
recorded on April 24, 2007. Mortgage Electronic Registration
Systems Inc. (MERS) was listed as the beneficiary of the trust
deed as nominee for TBW and its successors and assigns,
holding legal title to the beneficial interests granted to those
entities or individuals. The trust deed stated that the note “can
be sold one or more times without prior notice to Borrower.”

¶3     After the trust deed was recorded, TBW transferred its
interest in the promissory note to Bank of America and its
servicing rights to Washington Mutual Bank. On March 31, 2009,
Chase obtained the servicing rights from Washington Mutual,
and on May 27, 2010, it obtained the promissory note from Bank
of America. As nominee, MERS facilitated and tracked these
transfers, but none of the transfers was recorded with the Salt
Lake County Recorder.

¶4     On October 10, 2010, the McRaes filed a quiet title action
against TBW, asserting that the trust deed was void because
TBW no longer had an interest in the note or trust deed. The
McRaes’ complaint purported to bring an action against both
TBW and “any other person claiming an interest in the
Property.” Neither MERS nor Chase was named in the
complaint, but the McRaes published notice to all unknown
parties. When TBW failed to respond to the McRaes’ complaint,
the district court entered default judgment in favor of the

2. The facts are not disputed. Sterling challenges the district
court’s summary judgment only as a matter of law. See Utah R.
Civ. P. 56(a).

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            Sterling Fiduciaries v. JPMorgan Chase Bank

McRaes against TBW on December 19, 2011, which was recorded
on January 10, 2012. On September 22, 2011, before the default
judgment was entered, the McRaes recorded a quitclaim deed
transferring the property to Sterling.

¶5     The McRaes continued to make payments on the
promissory note to Chase until November 1, 2012. When the
note fell into default, MERS assigned its interest in the trust deed
to Chase. That assignment was recorded with the Salt Lake
County Recorder on February 6, 2013.

¶6     On October 15, 2013, Sterling filed a complaint against
Chase, asserting that the assignment to Chase was void because
no document evidencing Chase’s interest was recorded in the
county records prior to the recording of the quitclaim deed and
because title to the property had been quieted in December 2011.
Chase filed a motion for summary judgment, arguing that it was
not necessary for it to record the assignment of the promissory
note in order to protect its interest and that the default judgment
quieted title only as to TBW.

¶7     The district court granted Chase’s motion, concluding that
the default judgment did not quiet title as to Chase’s or MERS’s
interests in the property, since neither of those parties were
named or served in that action. Sterling now appeals.

             ISSUE AND STANDARD OF REVIEW

¶8     Sterling argues that the district court erred in granting
summary judgment in Chase’s favor. We review a district court’s
ruling on a motion for summary judgment for correctness.
Prince, Yeates & Geldzahler v. Young, 2004 UT 26, ¶ 10, 94 P.3d
179.

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           Sterling Fiduciaries v. JPMorgan Chase Bank

                          ANALYSIS

¶9     Sterling raises two arguments challenging the district
court’s summary judgment ruling. First, Sterling argues that any
interest Chase may have had in the property was nullified and
released by the default judgment against TBW. Second, Sterling
argues that Chase’s unrecorded interest in the property was void
against Sterling because Sterling was a bona fide purchaser. We
conclude that the default judgment quieted title only as to TBW.
We further conclude that Sterling was not a bona fide purchaser,
because it had constructive notice of Chase’s interest.

     I. The Default Judgment Quieted Title Only as to TBW.

¶10 Default judgment on a quiet title action may be entered
only against “persons named in the summons and complaint
who have been served and against all unknown persons as
stated in the complaint and summons who have been served by
publication.” Utah Code Ann. § 78B-6-1315(4) (LexisNexis 2012).
Because the recorded trust deed provided constructive notice of
MERS’s and Chase’s interests, Chase could not have been
considered an “unknown” person. Accordingly, the default
judgment cannot be read as quieting title as to Chase.

¶11 Constructive notice may consist of either record notice,
“which results from a record or which is imputed by the
recording statutes,” or inquiry notice, “which is presumed
because of the fact that a person has knowledge of certain facts
which should impart to him, or lead him to, knowledge of the
ultimate fact.” FDIC v. Taylor, 2011 UT App 416, ¶ 36, 267 P.3d
949 (citation and internal quotation marks omitted). Here,
Sterling had record notice of MERS’s interest in the trust deed
because the trust deed was recorded before the quitclaim deed to
Sterling. As a consequence of that notice, Sterling also had
inquiry notice regarding Chase’s interest.

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            Sterling Fiduciaries v. JPMorgan Chase Bank

¶12 The trust deed at issue in this case stated that MERS was
the beneficiary of the trust deed “as a nominee for Lender and
Lender’s successors and assigns.” The trust deed indicated that
MERS held “legal title to the interests granted by [the McRaes]
in” the trust deed and had the authority to exercise the beneficial
rights on behalf of the lender and its successors.

¶13 Trust deeds naming a beneficiary to act on behalf of the
lender and the lender’s successors are frequently employed as a
means to facilitate the securitization of mortgages. See
Commonwealth Prop. Advocates, LLC v. Mortgage Elec. Registration
Sys., Inc., 680 F.3d 1194, 1197 n.2 (10th Cir. 2011) (defining
“securitization” as the “process of pooling loans and selling
them to investors on the open market”).

              When a borrower takes out a home loan, the
      borrower executes two documents in favor of the
      lender: (1) a promissory note to repay the loan, and
      (2) a deed of trust, or mortgage, that transfers legal
      title in the property as collateral to secure the loan
      in the event of default. State laws require the
      lender to record the deed in the county in which
      the property is located. Any subsequent sale or
      assignment of the deed must be recorded in the
      county records, as well.

             This recording process became cumbersome
      to the mortgage industry, particularly as the
      trading of loans increased. It has become common
      for original lenders to bundle the beneficial interest
      in individual loans and sell them to investors as
      mortgage-backed securities, which may themselves
      be traded. MERS was designed to avoid the need to
      record multiple transfers of the deed by serving as
      the nominal record holder of the deed on behalf of
      the original lender and any subsequent lender.

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            Sterling Fiduciaries v. JPMorgan Chase Bank

              At the origination of the loan, MERS is
      designated in the deed of trust as a nominee for the
      lender and the lender’s “successors and assigns,”
      and as the deed’s “beneficiary” which holds legal
      title to the security interest conveyed. If the lender
      sells or assigns the beneficial interest in the loan to
      another MERS member, the change is recorded
      only in the MERS database, not in county records,
      because MERS continues to hold the deed on the
      new lender’s behalf. If the beneficial interest in the
      loan is sold to a non-MERS member, the transfer of
      the deed from MERS to the new lender is recorded
      in county records and the loan is no longer tracked
      in the MERS system.

Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039
(9th Cir. 2011) (citations omitted).

¶14 This practice has come under fire in recent years and has
been the subject of a number of lawsuits challenging MERS’s
authority as a nominee for its members. In Commonwealth
Property Advocates, LLC v. Mortgage Electronic Registration System,
Inc., 2011 UT App 232, 263 P.3d 397, we considered whether
transferring a note secured by a trust deed rendered the note an
unsecured obligation, extinguished MERS’s beneficial interest as
nominee for the lender, or precluded MERS from foreclosing on
property on behalf of the new holder of the promissory note. Id.
¶¶ 2–5. We held that MERS’s beneficial interest in the trust deed
was not extinguished with the transfer of the note and that the
trust deed’s language making MERS a nominee for both the
lender and its successors and assigns was enforceable. Id. ¶¶ 11–
14. In other words, parties to a security instrument may “validly
contract at the outset to have someone other than the beneficial
owner of the debt act on behalf of that owner to enforce rights
granted in [the security instrument].” Id. ¶ 13 (alteration in
original) (citation and internal quotation marks omitted); accord

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            Sterling Fiduciaries v. JPMorgan Chase Bank

Commonwealth, 680 F.3d at 1204; Mitchell v. ReconTrust Co., 2016
UT App 88, ¶¶ 21–22.

¶15 In Delo v. GMAC Mortgage, LLC, 302 P.3d 658 (Ariz. Ct.
App. 2013), the Arizona Court of Appeals considered the related
question of whether MERS, as nominee for a lender under a trust
deed, must be named as a defendant in a tax-lien foreclosure
against property subject to the trust deed. Id. at 662–63. As in this
case, the trust deed in Delo named MERS “as the nominee for the
lender, . . . [the] beneficiary, and the holder of legal title.” Id. at
663. The court held that, in light of MERS’s identification in the
trust deed, “a diligent search for the true holder of the
[promissory note], for purposes of giving proper notice of the
tax-lien foreclosure lawsuit, would have included providing
notice of the lawsuit to MERS.” Id. Thus “those who purchase
tax liens and seek to foreclose on them must give MERS notice of
the foreclosure proceedings when [MERS is] identified in the
deed of trust.” Id. at 662.

¶16 The reasoning of the Arizona Court of Appeals is
consistent with our holding in Commonwealth upholding the
validity of MERS’s beneficial interest in the trust deed and
acknowledging the parties’ right to appoint MERS to act on
behalf of the lender. See Commonwealth, 2011 UT App 232, ¶¶ 11–
14. We agree with the Arizona Court of Appeals that one aspect
of MERS’s beneficial interest is the right to notice. 3 See Delo, 302
P.3d at 663. The recorded trust deed identified MERS’s beneficial
interest in the property, and MERS therefore should have
received notice of the quiet title action filed by the McRaes.

3. Although Delo and our decision in Commonwealth involved
foreclosure of a tax lien and foreclosure of a trust deed,
respectively, their analysis of MERS’s rights in those contexts is
also relevant to determining whether MERS has the right to
notice in the context of a quiet title action.

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           Sterling Fiduciaries v. JPMorgan Chase Bank

Without such notice, the default judgment could not quiet title as
to MERS.

¶17 MERS’s recorded interest in the property, in turn, put
potential buyers of the property on inquiry notice regarding
Chase’s interest in the property. The language of the trust deed
indicated that MERS was nominated to act “as a nominee for
Lender and Lender’s successors and assigns.” (Emphasis added.)
The trust deed further provided that the note “can be sold one or
more times without prior notice to Borrower.” (Emphasis added.)
This language put potential buyers on notice that the promissory
note might be held by someone other than the named lender.

¶18 Further, the fact that the trust deed named MERS as the
nominee should have put potential buyers on notice that an
unnamed lender may hold an interest in the property. As
discussed above, “MERS was designed to avoid the need to
record multiple transfers of the deed by serving as the nominal
record holder of the deed on behalf of the original lender and
any subsequent lender.” Cervantes v. Countrywide Home Loans,
Inc., 656 F.3d 1034, 1039 (9th Cir. 2011). It should have been
apparent to Sterling that it could identify the current lender or
investors simply by contacting MERS, who “is the sole record
keeper for the transactions between its members.” See Delo, 302
P.3d at 662–63. Because MERS’s interest in the property put the
McRaes on inquiry notice regarding Chase’s interest, the notice
to unknown parties by publication was not valid as to Chase and
the default judgment could not quiet title as to Chase.

¶19 Furthermore, despite the McRaes’ attempt to quiet title as
to both TBW and “any other person claiming an interest in the
Property,” the default judgment unambiguously stated that
“Plaintiffs are awarded quiet title judgment against Defendant”
and explicitly defined “Defendant” as TBW. This language
unambiguously limits the default judgment to TBW. Thus, even

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           Sterling Fiduciaries v. JPMorgan Chase Bank

if Chase could be considered an unknown person, the default
judgment would not quiet title as to Chase.

            II. Sterling Is Not a Bona Fide Purchaser.

¶20 Our determination that Sterling had constructive notice of
MERS’s and Chase’s interests in the property also precludes
Sterling from establishing that it was a bona fide purchaser. Utah
Code section 57-3-103 provides that unrecorded documents are
“void as against any subsequent purchaser of the same real
property, or any portion of it, if: (1) the subsequent purchaser
purchased the property in good faith and for a valuable
consideration; and (2) the subsequent purchaser’s document is
first duly recorded.” Utah Code Ann. § 57-3-103 (LexisNexis
2010). “In order to be a good faith purchaser, a subsequent
purchaser must take [title to] the property without notice of a
prior, unrecorded interest in the property.” FDIC v. Taylor, 2011
UT App 416, ¶ 25, 267 P.3d 949 (alteration in original) (citation
and internal quotation marks omitted). Had Sterling conducted a
diligent inquiry regarding the true owner of the note, it would
have discovered Chase’s interest. Thus, Sterling could not have
been considered a good faith purchaser and cannot establish its
priority over Chase.

                         CONCLUSION

¶21 Because we determine that the trust deed provided
constructive notice of both MERS’s and Chase’s interests in the
property, we conclude that the default judgment did not quiet
title as to Chase and that Sterling was not a bona fide purchaser.
Accordingly, we affirm the district court’s grant of summary
judgment in favor of Chase.

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