Case No.

IN THE SUPREME COURT OF CALIFORNIA
Jose Gomes,
Plaintiff and Appellant, vs. (Super. Ct. N O. 37-200900090347-CU-OR-CTL) Ct. App. No. D 057005

Countrywide Home Loans, Inc., et al.,
Defendants and Respondents.

PETITION FOR REVIEW
After a decision of the Court of Appeal of the State of California Fourth Appellate District, Division One

EHUD GERSTEN, SBN 236159 Gersten Law Group 3115 Fourth Avenue San Diego, CA 92103 Telephone: 619-600-0098 Facsimile: (619) 600-0083 Email: egersten@gerstenlaw.com Attorneys for Petitioner and Appellant Jose Gomes

TABLE OF CONTENTS

PETITION FOR REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ISSUE PRESENTED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 WHY REVIEW SHOULD BE GRANTED. . . . . . . . . . . . . . . . . . . . 1 FACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. 2. Background and superior court proceedings. . . . . . . . . . . . . 3 The court of appeal’s decision.. . . . . . . . . . . . . . . . . . . . . . . . 4

ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1. Does California’s nonjudicial foreclosure scheme preclude a challenge to MERS’s authority?.. . . . . . . . . . . . . 4 By signing the deed of trust, did Gomes waive his right to challenge MERS’s authority to foreclose?. . . . . . . . 9

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CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 CERTIFICATE OF LENGTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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TABLE OF AUTHORITIES CASES Moeller v. Lien (1994) 25 Cal.App.4th 822. . . . . . . . . . . . . . . . . . . 7 Ohlendorf v. Am. Home Mortg. Servicing, 2010 U.S. Dist. LEXIS 31098 (E.D. Cal. 3/31/10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

STATUTES Civil Code § 2924(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5 Civil Code § 2943 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3, 5 Civil Code § 3275.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Civil Code §§ 2924 to 2924k. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

OTHER AUTHORITY M. Powell and G. Morgenson, “MERS? It May Have Swallowed Your Loan,” New York Times, Sunday Business Section, March 6, 2011, http://www.nytimes.com/2011/03/06/business/06mers.html ......................................................3

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PETITION FOR REVIEW
ISSUE PRESENTED
Regarding nonjudicial foreclosure, the court of appeal held that “nowhere does the statute provide for judicial action to determine whether the person initiating the foreclosure process is indeed authorized,” and it saw “no ground for implying such an action.” Slip Op. 8. Can it be the public policy of California that a homeowner is not entitled to know if the company taking his house actually has the right to foreclose?

WHY REVIEW SHOULD BE GRANTED
Petitioner Jose Gomes sued to determine whether the owner of the promissory note on his home loan had authorized foreclosure. The court of appeal held that “[n]othing in the statutory provisions establishing the nonjudicial foreclosure process suggests that such a judicial proceeding is permitted or contemplated.” Slip Op. 8. The court of appeal apparently believes that California homeowners are basically dishonest, and prone to filing suit “solely to delay valid foreclosures.” Op. 9 (emphasis added, presumption in the original). Oblivious to the nationwide crisis, it apparently believes that greedy homeowners are taking advantage of an innocent banking industry. Thousands of honest Californians are in trouble on their mortgages through no fault of their own. Yet the court of appeal has now slammed the

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courthouse door on every California homeowner facing foreclosure. It has decided that California’s chief interest is in giving banks a “quick, inexpensive, and efficient” way to put people out of their homes. Op. 8, fn. 5. Should homeowners have the right to come into court to find out who owns their loan? Or should a homeowner who questions the authority of the company foreclosing on him be left entirely without a cause of action? The Civil Code is, as the court of appeal put it, “unambiguously silent” on the subject. It is therefore up to this Court to decide how to apply a 19 th Century statute to a 21 st Century financial machine. The financial institutions will warn of opening the floodgates of litigation, but they have within their own control the means to prevent it. If the banks had simply given Jose Gomes the information he requested—as Civil Code § 2943 required— this lawsuit could have been avoided. Their failure and refusal to comply made his speculation about whether MERS lacked authority to foreclose ripen into overt suspicion. If the demurrer had not been overruled, he could have asked questions to confirm or dispel that suspicion. Because this petition thus raises a pure policy question— one of first impression, affecting thousands of homeowners throughout the state—this Court should take a closer look.

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FACTS 1. Background and superior court proceedings
Jose Gomes borrowed money on his house, entered into a note and deed of trust, but eventually defaulted. MERS, acting solely as a “nominee,” instructed Recontrust to start foreclosure. But Gomes, like everyone else who reads or watches the news, knew that the mortgage industry has been fraught with paperwork errors, and sometimes with outright fraud.1 Hoping to salvage his situation and save his home, he went to a lawyer, who wrote to the loan servicer as Civil Code § 2943 allows and asked for information about the loan and its beneficiary. It never came. He then sued the servicer and MERS for wrongful initiation of foreclosure and various other claims, and sent discovery seeking information about the assignments and current ownership of his loan. Defendants did not respond to discovery; they demurred. The trial court sustained the demurrer without leave to amend.

Media coverage of this issue is far too widespread for a comprehensive overview here. A recent article in the New York Times is illustrative: M. Powell and G. Morgenson, “MERS? It May Have Swallowed Your Loan,” New York Times, Sunday Business Section, March 6, 2011, available online at http://www.nytimes.com/2011/03/06/business/06mers.html (“How can MERS . . . foreclose on homeowners, when it has not invested a dollar in a single loan? [¶] And, more fundamentally: Given the evidence that many banks have cut corners and made colossal foreclosure mistakes, does anyone know who owns what or owes what to whom anymore?”). 3

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2.

The court of appeal’s decision
On February 18, 2011, the day of oral argument, the court

of appeal affirmed the trial court’s decision sustaining without leave to amend defendants’ demurrer to plaintiff’s complaint.

ARGUMENT 1. Does California’s nonjudicial foreclosure scheme preclude a challenge to MERS’s authority?
Gomes’s argument rests on a simple premise: to be valid, a notice of default and election to sell under a power of sale in a deed of trust must be recorded by a person entitled by law to record it. Under Civil Code § 2924(a)(1), those persons are “the trustee, mortgagee, or beneficiary, or any of their authorized agents.” (Emphasis added.) Therefore, a valid foreclosure requires a chain of actual authority to foreclose—a chain that leads from the loan’s beneficial owner to the entity that begins the foreclosure process, and then to the entity that sells the property. Since the chain starts with the beneficial owner, that person’s title to the promissory note must be good as of the date the notice of default is recorded. Despite defendants’ efforts to deride it as one, this is not just a produce-the-note case. In an age of electronic recordkeeping it may be unreasonable—even if it would still be wise—to require production of the original, wet-ink promissory note as a precondition to foreclosure. But in an age of electronic recordkeeping it is completely reasonable to require that a foreclosing 4

entity at least show that its authority comes from the current noteholder. Civ. Code §§ 2924(a)(1), 2943. In a judicial foreclosure, this chain of authority has to be proved; that is, the foreclosing party must establish standing to foreclose. Gomes wanted similar assurance that the entity exercising the power of sale in his deed of trust had that authority. Yet the court of appeal denied his right to seek it. The court hinted that it might have allowed a challenge to MERS’s authority to foreclose if Gomes had pleaded specific facts to support his allegation that MERS’s authority was defective. Op. 14–15. But because nothing was recorded between the deed of trust (recorded in MERS’s name) and the notice of default (also recorded in MERS’s name), Gomes could not allege defects particular to his case. Instead, Gomes alleged that MERS was never assigned the promissory note and so could not have foreclosed on its own initiative. At most, MERS could have acted as the agent of unknown parties in the chain of assignments, but only if it had actual authority to foreclose. And to satisfy the statute of frauds, that authority had to have been in writing. Thus MERS’s fictional designation as the “beneficiary” under this deed of trust does nothing to prove its authority to foreclose or to instruct Recontrust to do so. MERS itself is fundamentally a fiction—a firewall designed to insulate lenders from borrowers. MERS does not own loans; it is at best a database of information about loans. It handles roughly half of all American mortgages yet has very few employees, just an army of “vice presidents” who in fact work for 5

loan servicers like Countrywide. It appears that Countrywide, allegedly acting as agent for the original lender’s current assignee, told MERS to foreclose. Gomes is speculating, of course, since the banks refused to give him any information 2 and he was demurred out of court before he had a chance to take any discovery. MERS’s contention that all steps were in fact taken to establish its agency on behalf of each of the loan’s successive beneficial owners has no support beyond its own bare say-so. Gomes challenges that position by alleging that the secondary mortgage market, at all relevant times, was marked by endemic failures to validly assign and properly document the assignment of loans. That fact, if taken as true, is reason to suspect that MERS cannot trace its authority to foreclose his mortgage back to Gomes’s original lender, and therefore cannot foreclose or authorize Recontrust to do so. Yet the court of appeal found this pleading insufficient, characterizing it as “speculative.” Op. 10. The court of appeal’s holding places Gomes and other homeowner plaintiffs in a Catch-22: they cannot plead their case more specifically because the foreclosing parties refuse to give them information about the chain of assignments. Assignments and authorizations occur in a black box. Absent judicial intervention, borrowers are powerless to look inside the box. Defects

The court of appeal was also unsure: “Accompanying the notice of default was a declaration signed by an employee of Countrywide, which apparently was acting as the loan servicer.” Op. 3 (emphasis added). 6

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that would render foreclosures invalid if they came to light may be commonplace, but borrowers are prevented from seeing them. The rationale for the holding is that the Legislature, in Civil Code §§ 2924 to 2924k, has established a “comprehensive framework for the regulation of a nonjudicial foreclosure sale,” and does not expressly grant a right of action to test whether a noteholder’s nominee has authority to foreclose. Op. 7, citing Moeller v. Lien (1994) 25 Cal.App.4th 822, 830. Moeller involved a borrower’s attempt to use Civil Code § 3275, a general antiforfeiture statute, in seeking relief after a trustee’s sale. The court rejected that as an attempt to engraft a new cure provision onto the statutory scheme. But Moeller’s refusal to make the forecloser jump through new hoops does not mean that a borrower cannot ask whether it has any right to jump in the first place. Gomes contends that, by specifying the persons entitled to record a notice of default, the Legislature impliedly authorized a cause of action to test whether a person who records a notice is in fact one of the persons specified. He contends that, since the huge boom in the secondary mortgage market and the ensuing foreclosure crisis are recent phenomena, there is no reason to assume that the Legislature expressly omitted this protection. Rather, the Court should infer it as a matter of logic and fundamental fairness. When § 2924 was enacted, banks lent money to people they knew. The borrower came in, sat across from the banker, and the banker had a chance to decide if the borrower looked like a good risk. The borrower gave a trust deed to a fiduciary, someone the 7

bank could rely on to sell the property if the borrower defaulted. But if a foreclosure started, there was no question who was taking that step: it was the bank—the same bank that lent the money. If for some reason the loan had been assigned, the borrower could easily learn the assignee’s identity at the county recorder’s office. In either case, he knew exactly where to go to renegotiate his loan if a change in his circumstances made the original loan terms insupportable. The Legislature’s silence indicates only that it never contemplated that a borrower might have to file suit to learn the noteholder’s identity. But the court of appeal held that, because the scheme makes no explicit provision for such a cause of action, the cause of action is barred. It said that the Legislature was “unambiguously silent” on the matter. Op. 11. The court expressed its concern to avoid even “the possibility of lawsuits filed solely for the purpose of delaying valid foreclosures.” Op. 9 (emphasis added). In so doing it also precluded any judicial remedy against invalid foreclosures, or any way to tell the difference. Thus, based entirely on the Legislature’s silence, the court attributed a policy decision to it: that the hidden beneficiary’s convenience trumps the homeowner’s right not to be foreclosed on by the wrong person. The question for this Court is whether that conclusion is compelled by the nonjudicial nature of the statutory scheme.

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2.

By signing the deed of trust, did Gomes waive his right to challenge MERS’s authority to foreclose?
As an independent ground for its decision, the Court of

Appeal pointed to the deed of trust itself: The deed of trust that Gomes signed states that “Borrower [i.e., Gomes] understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property . . . .” Op. 3. But MERS cannot hold “legal title” to the interests granted by the borrower: a deed of trust conveys legal title to the trustee, and MERS is not the trustee. The parenthetical says that MERS is nominee for the Lender’s successors and assigns—something that could not possibly have been known when Gomes signed the deed of trust, since at that point there were no successors or assigns of the Lender. The trust deed could not bind any assignee who chose not to nominate MERS. Thus a borrower should be allowed to verify that MERS is, in fact, the nominee of the current noteholder, and not merely of the original lender. It appears that the court of appeal read this language to mean that Gomes waived his right to ask whether the lender or its assign in fact authorized MERS to foreclose. Thus the court held that “Gomes’s agreement that MERS has the authority to 9

foreclose . . . precludes him from pursuing a cause of action premised on the allegation that MERS does not have the authority to do so.” Op. at 3, 12-13. Of course, the idea that Gomes actually “agreed” that MERS could foreclose is a fiction. The language in the deed of trust is so vague and convoluted that lawyers and courts around the country have struggled to understand it. It says, for example, that MERS is the “beneficiary” of the trust deed—a notion that even the court of appeal could not swallow. Op.12, fn. 9. But to agree that MERS could foreclose as “nominee” if authorized by the proper party is not to agree that MERS could foreclose even if it was not in fact so authorized. Nor did Gomes agree that MERS could foreclose even if the person who authorized it to initiate foreclosure was not in fact the proper person to do so—the lender or its successor or assign when the notice of default was recorded. See Ohlendorf v. Am. Home Mortg. Servicing, 2010 U.S. Dist. LEXIS 31098 (E.D. Cal. 3/31/10). In Ohlendorf, MERS recorded an assignment of the deed of trust to AHMSI and AHMSI assigned it to Deutsche Bank nearly a month after Deutsche Bank initiated foreclosure. Both assignments were backdated. The plaintiff sued for wrongful initiation of foreclosure. The court denied the defendants’ motion to dismiss, stating that although California law did not require that they have possession of the note, “of course they must prove they have the right to foreclose.” Ohlendorf, at *22 (slip op.). At most, MERS may have been an agent of a proper party 10

when it initiated Gomes’s foreclosure, but it also may not have been. If it was not, it had no right to initiate foreclosure. Nor does the court below say otherwise. It recognizes that MERS purported to act as the proper party’s agent. But it says Gomes cannot question whether this was true. That is not what Gomes agreed to. And it is fundamentally unfair—not just to Gomes, but to all California borrowers.

CONCLUSION
For its own profit, the mortgage industry has devised a new electronic system of perfect opacity, privatizing the system of land-title recording that has served Anglo-American jurisdictions for centuries and replacing it with MERS. This Court alone can determine if California homeowners have any right to question MERS’s role and authority in foreclosing on them. If this Court fails to act, the opinion below will remain as the final expression of the public policy of California: the courts must stand aside while its citizens lose their homes. This court of appeal’s decision in this matter should be reviewed.

Dated: March 29, 2011

Respectfully submitted,

EHUD GERSTEN Attorney for Plaintiff and Appellant Jose Gomes 11

CERTIFICATE OF LENGTH
I certify that this brief was prepared using Word Perfect, which reports that it contains a total of 2,658 words, including footnotes but excluding tables. I declare under penalty of perjury under California law that the foregoing is true and correct.

Dated: March 29, 2011

EHUD GERSTEN

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PROOF OF SERVICE BY MAIL STATE OF CALIFORNIA, COUNTY OF SAN DIEGO: I, the undersigned, say: I am a person over the age of eighteen years and not a party to this action. My business address is 3115 Fourth Avenue, San Diego, CA 92103. On March 29, 2011, I caused to be served a true copy of the attached P ETITION FOR R EVIEW by placing it, in a sealed envelope with postage thereon fully prepaid, in the United States mail at San Francisco, California, addressed as follows:

Mark Joseph Kenney Severson & Werson One Embarcadero Center, Ste 2600 San Francisco, CA 94111-2600 (Attorneys for Respondents) Court of Appeal of the State of California, Fourth Appellate District, Division One 750 B Street, Suite 300 San Diego, California 92101

Office of the District Attorney Appellate Division P. O. Box X-1011 San Diego, CA 92112

Honorable Steven R. Denton Superior Court of California County of San Diego Hall of Justice, 6 th Floor 330 W. Broadway San Diego, CA 92101

I declare under penalty of perjury under California law that the foregoing is true and correct. Dated: March 29, 2011

_______________________________

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