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Financial Services Law Insights and Observations

Oregon Bankruptcy Court Allows MERS Wrongful Foreclosure Claim To Proceed

State Issues

On February 7, the U.S. Bankruptcy Court for the District of Oregon allowed a wrongful foreclosure claim to proceed based in part on plaintiff’s allegation that not every transfer of the loan was recorded in the land records. McCoy v. BNC Mortgage, Inc. et al., No. 10-06224 (Bankr. D. Or. Feb. 7, 2011). In McCoy, plaintiff received a mortgage loan secured by a deed of trust naming MERS as the "Beneficiary." According to the allegations in plaintiff’s complaint, the beneficial interest in the loan was sold several times, and was eventually securitized into a mortgage-backed security. According to plaintiff, none of the transfers was recorded in the county land records. Plaintiff eventually defaulted on the loan and, after the substitute trustee issued a notice of default, filed a chapter 7 bankruptcy petition. The assignee of the deed of trust was granted relief from the automatic stay to foreclose and plaintiff was discharged. Simultaneous with the discharge, plaintiff filed a chapter 13 bankruptcy, despite having been "informed by the court that he [was] ineligible for a discharge of debts due to the discharge received in the previously filed chapter 7 case." The assignee was again granted relief from the stay. Plaintiff then filed a lawsuit for wrongful foreclosure and to quiet title in state court. The lawsuit was removed from state court to federal court and then transferred to the bankruptcy court, where the assignee moved to dismiss both claims. The court dismissed the quiet title claim, which was based on the allegation that plaintiff no longer owed any money on the loan because his obligation was paid by "income from the trust, credit default swaps, TARP money, or federal bailout funds," because it was based on "conclusory legal allegations." The court allowed the wrongful foreclosure claim to proceed, however, finding that plaintiff’s allegations state a plausible claim that the assignee did not satisfy Oregon’s non-judicial foreclosure requirements. According to the court, the Oregon non-judicial foreclosure requirements were not met because - according to the allegations in the complaint - MERS was not a beneficiary as defined by the Oregon foreclosure statute (regardless of how it was defined under the deed of trust) and because not every transfer of the beneficial interest in the loan was recorded. The court noted in dicta, however, that Oregon’s judicial foreclosure statute allows for foreclosures where not every transfer has been recorded.

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