Court Opinion

ID: 4504400
Source: CourtListenerOpinion
Date Created: 2020-02-04 20:17:15.305488+00
Date Added: 2024-06-11T13:40:13.184934
License: Public Domain

Filed
                                                                                      Washington State
                                                                                      Court of Appeals
                                                                                       Division Two

                                                                                      February 4, 2020

    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

                                        DIVISION II
 FLOYD and MARGARET SCOTT, husband                                 No. 51742-6-II
 and wife,

                                Appellants,
                                                            UNPUBLISHED OPINION
         v.

 ALLY BANK CORP., FEDERAL HOME
 LOAN MORTGAGE CORPORATION;
 OCWEN HOME LOAN SERVICING, INC.;
 AND QUALITY LOAN SERVICES CORP.
 OF WASHINGTON; MORTGAGE
 ELECTRONIC REGISTRATION SYSTEMS,
 INC.; AND JOHN DOES 1-10,

                                Respondents.

        MAXA, C.J. – Margaret and Floyd Scott appeal the trial court’s order dismissing the

lawsuit they filed against Ally Bank Corp., Mortgage Electronic Registration Systems (MERS),

Federal Home Loan Mortgage Corporation (Freddie Mac), Ocwen Home Loan Servicing, and

Quality Loan Services Corporation (collectively, defendants).

        Margaret Scott executed a promissory note payable to Ally Bank, secured by a deed of

trust on Scott’s home that named Ally Bank as lender and MERS as nominee for lender and

beneficiary. At some point, Freddie Mac became the owner of the note and Ocwen became the

loan servicer. Ocwen also became the holder of the note. Ocwen appointed Quality as successor

trustee of the deed of trust.
No. 51742-6-II

       Scott defaulted on the promissory note. When Quality issued a notice of trustee’s sale for

the home at Ocwen’s direction, the Scotts filed a lawsuit to enjoin the foreclosure and asserted

claims for violation of the Consumer Protection Act (CPA), chapter 19.86 RCW.1 The trial court

denied the request for an injunction and ultimately dismissed the Scotts’ claims under CR

12(b)(6).

       The Scotts argue that even though Ocwen was the holder of the promissory note, Ocwen

did not have authority to act because it did not also own the promissory note. We hold that the

trial court did not err in dismissing the Scotts’ lawsuit because as the note holder, (1) Ocwen was

authorized to initiate foreclosure proceedings and (2) Ocwen was the beneficiary of the deed of

trust and therefore had authority to appoint Quality as successor trustee. Therefore, defendants’

conduct did not constitute an unfair or deceptive act or practice under the CPA as a matter of

law. Accordingly, we affirm the trial court’s dismissal of the Scotts’ claims.

                                             FACTS

Promissory Note and Deed of Trust

       On May 18, 2012, Margaret Scott executed a promissory note for $122,600 in favor of

Ally Bank as the lender. The note was secured by a deed of trust on Scott’s home in Vancouver,

Washington. The note required Scott to make monthly payments beginning July 1, 2012. The

note stated that Scott would be in default if she failed to make a monthly payment on the due

date. The note later was endorsed in blank by Ally Bank.

1
 The Scotts also asserted a tortious interference with business expectancy claim, but on appeal
neither party raises any issues relating to the dismissal of that claim. Therefore, we do not
address that claim and affirm the dismissal of that claim.

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No. 51742-6-II

       Section 22 of the deed of trust stated, “Lender shall give notice to Borrower prior to

acceleration following Borrower’s breach of any covenant or agreement.” Clerk’s Papers (CP) at

72. The notice was required to specify the default, the action required to cure the default, the

date by which the default must be cured, and that failure to cure may result in acceleration of all

sums due and sale of the property at a public auction. Paragraph 22 further provided that, in the

event of the Borrower’s uncured default, “Lender at its option . . . may invoke the power of

sale.” CP at 72. “If Lender invokes the power of sale, Lender shall give written notice to

Trustee of the occurrence of an event of default and of Lender’s election to cause the Property to

be sold.” CP at 72.

       At some point after execution of the note and deed of trust, Freddie Mac became the

owner of the promissory note secured by the deed of trust. The Scotts agree that Freddie Mac

was the owner of the note at all relevant times. On June 29, 2015, MERS assigned the deed of

trust to Ocwen.

Foreclosure Action

       Scott made monthly payments on the mortgage from July 2012 through December 2014,

but she failed to make the January 2015 payment or subsequent payments.

       On November 30, 2016, Ocwen appointed Quality as successor trustee. The appointment

referred to Ocwen as “the present Beneficiary, the actual holder of the promissory note secured

by the Deed of Trust.” CP at 94. On the same date, Ocwen issued a Declaration of Holder of

Note (Beneficiary Declaration), which was a sworn statement by Ocwen’s contract management

coordinator that Freddie Mac was the owner of the note secured by the deed of trust and that

Ocwen was the actual holder of the note.

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No. 51742-6-II

          In December 2016, Quality sent Scott a notice of default. The notice stated that Freddie

Mac was the creditor on the loan, Ocwen was the servicer of the loan, and that Scott owed over

$20,000 in overdue payments, late charges, and advances on the loan.

          In February 2017, Quality recorded a notice of trustee’s sale for June. The notice stated

that Scott had until May 29, 2017 to cure the default by paying the amount then owing.

Scotts’ Lawsuit

          On May 26, 2017, the Scotts filed a lawsuit against the defendants. The Scotts asserted

claims for damages under the CPA and for tortious interference with a business expectancy.

They claimed that Ocwen had improperly initiated foreclosure proceedings, Quality had never

lawfully been appointed successor trustee, and Freddie Mac had colluded with Ocwen and

Quality in the foreclosure. The Scotts filed a motion for a preliminary injunction, which was

denied.

          At some point, the Scotts apparently paid the arrearages on the note and reinstated the

note and deed of trust. Quality recorded a notice of discontinuance of trustee’s sale in August

2017.

          Freddie Mac, Ocwen, and MERS filed a motion to dismiss under CR 12(b)(6).2 They

argued that the Scotts’ claims under the CPA should be dismissed because they failed to

establish an unfair or deceptive act, injury, or causation. The trial court granted the motion to

dismiss.

          The Scotts appeal the trial court’s order dismissing their CPA claim.

2
 Ally Bank filed a separate motion to dismiss the Scotts’ complaint under CR 12(b)(6), which the
trial court granted after the Scotts failed to respond.

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No. 51742-6-II

                                            ANALYSIS

A.     LEGAL PRINCIPLES

       1.   Standard of Review – CR 12(b)(6)

       We review de novo a trial court’s ruling on a CR 12(b)(6) motion to dismiss. Wash.

Trucking Ass’ns v. Emp’t Sec. Dep’t, 188 Wash. 2d 198, 207, 393 P.3d 761 (2017). Dismissal is

appropriate where it appears beyond doubt that a plaintiff will be unable to prove any set of facts

that would justify recovery. Id. We assume the truth of the allegations in the plaintiff’s

complaint and may consider hypothetical facts not included in the record. Id.

       Under CR 12(b)(6), the trial court generally can consider only the allegations contained

in the complaint and cannot look beyond the face of the pleadings. Jackson v. Quality Loan

Serv. Corp., 186 Wash. App. 838, 844, 347 P.3d 487 (2015). If the trial court considers

information outside the complaint, the motion must be converted to a summary judgment motion

under CR 56. McNamara v. Koehler, 5 Wash. App. 2d 708, 713, 429 P.3d 6 (2018), review

denied, 192 Wash. 2d 1021 (2019).

       However, a trial court can consider certain types of outside information on a CR 12(b)(6)

motion, including: (1) documents specifically referenced in the complaint but not attached; and

(2) through judicial notice, public documents if their authenticity cannot reasonably be disputed.

Jackson, 186 Wash. App. at 844. In addition, a trial court can consider information outside of the

complaint without converting a CR 12(b)(6) motion to a summary judgment motion if “the ‘basic

operative facts are undisputed and the core issue is one of law.’ ” Trujillo v. Nw. Tr. Servs., Inc.,

183 Wash. 2d 820, 827 n.2, 355 P.3d 1100 (2015) (quoting Ortblad v. State, 85 Wash. 2d 109, 111,

530 P.2d 635 (1975)).

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No. 51742-6-II

       Here, the Scotts’ complaint referenced the promissory note, deed of trust, notice of

assignment from Ally Bank to GMAC Mortgage, notice of default, assignment of deed of trust

from MERS to Ocwen, and Ocwen’s appointment of Quality as successor trustee. These

documents were attached to the Scotts’ motion for a preliminary injunction, which was filed at

the same time as the complaint. The trial court properly considered these documents.

       The defendants attached a number of documents in opposition to the Scotts’ motion for a

preliminary injunction, including an endorsed copy of the promissory note, Ocwen’s Declaration

of Holder of Note, and the notice of trustee’s sale. The defendants later submitted the notice of

discontinuance of trustee’s sale. The court stated that it was taking judicial notice of “the

documents present in the record.” Report of Proceedings (March 16, 2018) at 20. The Scotts did

not object to this judicial notice of documents, and therefore the trial court properly considered

these additional documents.

       We review the trial court’s order under the CR 12(b)(6) standard, considering the

allegations in the Scotts’ complaint as well as the documents that the trial court considered.

       2.    Nonjudicial Foreclosure

       The Deed of Trust Act (DTA), chapter 61.24 RCW, “provides an alternative to judicial

foreclosure by allowing for the private sale of foreclosed property.” River Stone Holdings NW,

LLC v. Lopez, 199 Wash. App. 87, 92, 395 P.3d 1071 (2017). The underlying deed of trust creates

three distinct roles: a lender, a borrower, and a trustee who holds the deed as security for the

lender. Id. at 93. If the borrower defaults on the obligations owed to the lender, the trustee may

foreclose on the property in a trustee’s sale. Id.; RCW 61.24.030(3)3.

3
  RCW 61.24.030 was amended in 2018. Because those amendments do not impact the statutory
language relied on by this court, we cite to the current version of the statute.

                                                  6
No. 51742-6-II

       The DTA provides detailed procedures under RCW 61.24.030, .031, and .040 for

foreclosing a deed of trust and conducting a trustee’s sale. “If a trustee fails to strictly comply

with the DTA, the trustee lacks statutory authority to conduct a trustee’s sale and any such sale is

invalid.” Terhune v. N. Cascade Tr. Servs., Inc., 9 Wash. App. 2d 708, 718, 446 P.3d 683 (2019).

       3.    CPA Claim

       The Scotts’ asserted cause of action is a violation of the CPA. The CPA provides that

“[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any

trade or commerce are . . . unlawful.” RCW 19.86.020. To succeed on a CPA claim, the Scotts

must establish “(1) an unfair or deceptive act (2) in trade or commerce (3) that affects the public

interest, (4) injury to the plaintiff in his or her business or property, and (5) a causal link between

the unfair or deceptive act complained of and the injury suffered.” Trujillo, 183 Wash. 2d at 834-

35. Whether an act is unfair or deceptive under the CPA is a question of law. Id. at 835.

       The Scotts apparently paid the arrearages on the note and reinstated the note and deed of

trust, and the trustee’s sale was discontinued in August 2017. Damages are not recoverable

under the DTA if no foreclosure sale has occurred. Lyons v. U.S. Bank Nat. Ass’n, 181 Wash. 2d
775, 784, 336 P.3d 1142 (2014). However, a CPA claim may be maintained in that situation

based on a violation of the DTA. Id. at 784-85. As a result, the Scotts could assert a CPA claim

based on defendants’ wrongful conduct during a nonjudicial foreclosure process, even without a

completed foreclosure sale. Trujillo, 183 Wash. 2d at 834.

B.     ALLEGED UNFAIR AND DECEPTIVE PRACTICES

       The Scotts’ briefs do not explicitly address the CPA, but they claim that the defendants

engaged in conduct that violated the DTA. To prevail under their CPA claim, the Scotts must

establish that the defendants engaged in unfair or deceptive acts. Therefore, we treat the Scotts’

                                                   7
No. 51742-6-II

claims regarding unlawful conduct under the DTA as claims that the defendants engaged in

unfair or deceptive acts.

        The Scotts provide a number of arguments that address a single claim: that because

Ocwen was merely the holder and not the owner of the promissory note, Ocwen did not have the

authority to initiate foreclosure proceedings and did not have authority to appoint Quality as

successor trustee. We reject these claims.

        1.    Ocwen’s Authority to Initiate Foreclosure Proceedings

        The Scotts argue that a holder of a promissory note who is not also the note’s owner

cannot initiate foreclosure proceedings. We disagree.

              a.   Freddie Mac and Loan Servicer

        The Supreme Court in Brown v. Department of Commerce explained how Freddie Mac

does business. 184 Wash. 2d 509, 520-23, 359 P.3d 771 (2015). Freddie Mac purchases mortgage

notes from the original lenders, and often pools them with other notes into a trust. Id. at 521.

Freddie Mac then compensates another entity to service the loan, and controls the actions of the

servicer through a detailed handbook. Id. If the borrower defaults on a loan, Freddie Mac’s

handbook authorizes the servicer to initiate foreclosure proceedings in the servicer’s own name.

Id. at 522.

        In order to give the servicer legal authority to foreclose, Freddie Mac requires that notes

be endorsed in blank, and possession of the note is transferred to the servicer. Id. at 522-23. But

Freddie Mac still owns the note. Id. at 523.

              b.   Authority of Holder

        Under RCW 61.24.005(2), the beneficiary of a deed of trust is the holder of the

instrument secured by that deed of trust. RCW 62A.3-301 provides that the holder of an

                                                 8
No. 51742-6-II

instrument is entitled to enforce that instrument, and “[a] person may be a person entitled to

enforce the instrument even though the person is not the owner of the instrument.” See Brown,
184 Wash. 2d at 525. “Washington’s deed of trust act contemplates that the security instrument

will follow the note.” Bain v. Metro. Mortg. Group, Inc., 175 Wash. 2d 83, 104, 285 P.3d 34

(2012). As a result, “[t]he DTA beneficiary has the power to appoint a successor trustee and to

instruct the trustee to initiate nonjudical foreclosure.” Blair v. Nw. Tr. Servs., Inc., 193 Wash. App.
18, 31, 372 P.3d 127 (2016). “[O]nly the actual holder of the promissory note . . . may be a

beneficiary with the power to appoint a trustee to proceed with a nonjudical foreclosure.” Bain,
175 Wash. 2d at 89.

       A “holder” includes a person who is in possession of a negotiable instrument that is

payable to “bearer.” RCW 62A.1-201(b)(21)(A). When a holder makes a blank endorsement –

an endorsement that does not specify the person to whom the instrument is payable – that

instrument is treated as payable to bearer. RCW 62A.3-205(b); see Terhune, 9 Wash. App. 2d at

723. A party’s declaration that it is the holder of a promissory note is sufficient proof under the

DTA of holder status. RCW 61.24.030(7)(a); Brown, 184 Wash. 2d at 541-42, 547.

       In Brown, the court confirmed that the beneficiary of a deed of trust is the holder of the

promissory note secured by that deed of trust, not the owner of the note. 184 Wash. 2d at 540. This

court has interpreted Brown as compelling the conclusion that the note holder has the authority to

initiate foreclosure proceedings even when the holder is not also the note owner. River Stone

Holdings, 199 Wash. App. at 97.

       Here, Ally Bank endorsed Scott’s promissory note in blank. Therefore, the person in

possession of the note was the holder under RCW 62A.1-201(b)(21)(A). Ocwen issued a

“Declaration of Holder of Note (Beneficiary Declaration),” a sworn statement that Ocwen was

                                                 9
No. 51742-6-II

the actual holder of the note. Therefore, as holder of the note, Ocwen was entitled under RCW

62A.3-301 and Brown to initiate foreclosure proceedings on the deed of trust.

              c.   Scotts’ Arguments

         The Scotts make a number of detailed arguments to support their position that a person

must be both the owner and holder of a promissory note to initiate foreclosure proceedings. We

reject these arguments.

         First, the Scotts argue that the court in Brown was incorrect when it stated that a note

holder can enforce a deed of trust without also being the note owner. The Scotts state:

         [I]n Washington, as in practically every other non-judicial foreclosure state, the
         myth that the security follows the note doctrine means the security follows a transfer
         of the right to enforce the note, regardless of note ownership, currently prevails.
         RCW 61.24.030(7)(a); Brown v. Department of Commerce, 184 Wash. 2d 509 (2015).
         Destroying this destructive myth is one of the primary goals of this brief.

Br. of Appellant at 20. The Scotts also urge this court to be “open to the possibility, however

infinitesimal the possibility is in the Court[’s] . . . mind, that Brown was wrongly decided.” Br.

of Appellant at 25.

         Contrary to Brown, the Scotts claim that the security follows the sale of the note, not the

transfer of the right to enforce the note. As a result, they contend that only the owner of a note

can initiate foreclosure proceedings. They rely on an analysis of RCW 62A.9A-203(a), (b), and

(g), regarding the attachment and enforcement of security interests. They also rely on RCW

62A.9A-109(a)(3), which states that chapter 62A.9A RCW applies only to sales of promissory

notes.

         However, we are bound to follow the Supreme Court’s rulings in Brown. River Stone

Holdings, 199 Wash. App. at 97. In addition, the court in Brown expressly discussed RCW

                                                  10
No. 51742-6-II

62A.9A-203 and RCW 62A.9A-109(a) in its analysis. 184 Wash. 2d at 528-29. Therefore, we

decline the Scotts’ invitation to disregard Brown.

       Second, the Scotts argue that under section 22 of the deed of trust, only the lender could

initiate foreclosure proceedings. They point out that under RCW 61.24.030(3), one of the

requirements for a trustee’s sale is that a default has occurred in the secured obligation, “which

by the terms of the deed of trust makes operative the power to sell.” The Scotts emphasize that

section 22 provided that the “Lender” (1) must give notice of acceleration that specifies the

default and the ability to cure, (2) upon default may “invoke the power of sale and/or any other

remedies permitted by Applicable Law,” and (3) shall give notice to the trustee of the default and

the lender’s election to cause the property to be sold. CP at 72. The Scotts argue that until the

lender – not some other party – performs all of these steps, there can be no default and therefore

no foreclosure.

       According to the Scotts, Ocwen had no authority to initiate foreclosure proceedings

because it was not the “lender” referenced in the deed of trust. They acknowledge that section

13 of the deed of trust extends the benefits of the the deed of trust’s agreements to the lenders

“successors and assigns.” CP at 69. But the Scotts claim that Ocwen was not Freddie Mac’s

successor or assign, but was merely the holder of the note.

       However, as the court noted in Brown, Freddie Mac authorizes loan servicers like Ocwen

to foreclose on loans that are in default. 184 Wash. 2d at 522. As a result, Ocwen clearly was

acting as Freddie Mac’s agent when it initiated foreclosure proceedings against Scott’s property.

The Scotts argue that the deed of trust did not authorize the lender to act through an agent. That

may be true, but the deed of trust also does not prohibit acting through an agent. The court in

Bain stated that nothing in its opinion “should be construed to suggest an agent cannot represent

                                                 11
No. 51742-6-II

the holder of a note. Washington law, and the deed of trust act itself, approves of the use of

agents.” 175 Wash. 2d at 106. The same rule applies to allow Freddie Mac as the lender’s

successor and assignee and owner of a note to act through Ocwen.

       Third, the Scotts argue that because Ocwen was not a party to or third party beneficiary

of the deed of trust, it could not enforce that deed of trust. However, RCW 62A.3-301 expressly

states that the holder of a promissory note is entitled to enforce that note. The Scotts cite no

authority for the proposition that only a party to a deed of trust can initiate foreclosure

proceedings to enforce the note the deed of trust secures.

       We hold that Ocwen did not violate the DTA or otherwise engage in unfair and deceptive

acts by initiating foreclosure proceedings as the holder of Scott’s note.

       2.    Quality’s Appointment as Successor Trustee

       The Scotts argue that Ocwen did not lawfully appoint Quality as successor trustee of the

deed of trust because Freddie Mac, not Ocwen, was the beneficiary of the promissory note. We

disagree.

       RCW 61.24.010(2) authorizes the beneficiary of a promissory note to appoint a successor

trustee of the deed of trust. As discussed above, Ocwen was the holder of Scott’s promissory

note and therefore under settled law was the beneficiary of that note. RCW 61.24.005(2);

Brown, 184 Wash. 2d at 540.

       The Scotts argue that Freddie Mac was the beneficiary of the deed of trust under the

terms of the deed of trust. They claim that the deed of trust conveyed rights to the lender, not to

the holder. In addition, the Scotts note that section 24 of the deed of trust states that the lender

may appoint a successor trustee. However, as discussed above, Ocwen was acting on behalf of

Freddie Mac in appointing the successor trustee and proceeding with foreclosure.

                                                  12
No. 51742-6-II

       We hold that Ocwen did not violate the DTA or otherwise engage in unfair and deceptive

acts by appointing Quality as successor trustee.

       3.   Summary

       We hold that the Scotts failed to establish an unfair act or practice under the CPA.

Accordingly, we hold that the trial court did not err in granting defendants’ motion to dismiss

with regard to the Scotts’ CPA claim.4

C.     CONSTITUTIONALITY OF 2018 AMENDMENT TO RCW 61.24.030(7)(a)

       The Scotts argue that the 2018 amendment to RCW 61.24.030(7)(a) violates Article 1,

Section 10 of the United States Constitution and Article 1, Section 23 of the Washington

Constitution, or alternatively that RCW 61.24.030(7)(a) renders unenforceable the power of sale

clause in the deed of trust. We decline to address this issue.

       In 2018, the legislature amended RCW 61.24.030(7)(a) by replacing “owner” with

“holder” as follows:

       That, for residential real property, before the notice of trustee’s sale is recorded,
       transmitted, or served, the trustee shall have proof that the beneficiary is the
       ((owner)) holder of any promissory note or other obligation secured by the deed of
       trust. A declaration by the beneficiary made under the penalty of perjury stating
       that the beneficiary is the ((actual)) holder of ((the)) any promissory note or other
       obligation secured by the deed of trust shall be sufficient proof as required under
       this subsection.

LAWS OF 2018, ch. 306, § 1.

       However, the effective date of this amendment was June 7, 2018. LAWS OF 2018 at ii.

The trial court’s order of dismissal was entered on March 16, 2018. Therefore, the amendment

4
  The defendants also argue that the Scotts failed to allege injury or causation under the CPA.
Because we hold that the Scotts failed to establish an unfair or deceptive act, we do not consider
these issues.

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No. 51742-6-II

had no bearing on the trial court’s order and is immaterial to this appeal. We do not give

advisory opinions. Gunn v. Riely, 185 Wash. App. 517, 532, 344 P.3d 1225 (2015).

D.     ATTORNEY FEES ON APPEAL

       The defendants request attorney fees on appeal under the deed of trust. We decline this

request.

       Generally, attorney fees will be awarded only when authorized by contract, statute, or

recognized ground of equity. Podbielancik v. LPP Mortg. Ltd., 191 Wash. App. 662, 673, 362
P.3d 1287 (2015). Section 26 of the deed of trust states, “Lender shall be entitled to recover its

reasonable attorneys’ fees and costs in any action or proceeding to construe or enforce any term

of this Security Instrument.” CP at 73.

       However, the issue in this appeal is not the enforcement of the deed of trust. Instead, the

appeal involves the Scotts’ CPA claim based on an alleged violation of the DTA. The CPA

claim only tangentially relates to the deed of trust. Accordingly, we deny the defendants’ request

for attorney fees.

                                          CONCLUSION

       We affirm the trial court’s CR 12(b)(6) dismissal of the Scotts’ claims.

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No. 51742-6-II

        A majority of the panel having determined that this opinion will not be printed in the

Washington Appellate Reports, but will be filed for public record in accordance with RCW

2.06.040, it is so ordered.

                                                      MAXA, C.J.
 We concur:

 MELNICK, J.

 GLASGOW, J.

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