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Knecht v. Fidelity National Title Insurance Co.

United States District Court, W.D. Washington, Seattle

August 14, 2014

JOHN KNECHT, et al., Plaintiffs,
v.
FIDELITY NATIONAL TITLE INSURANCE COMPANY, et al., Defendants.

ORDER

RICHARD A. JONES, District Judge.

I. INTRODUCTION

This matter comes before the court on a motion for summary judgment from Defendants Deutsche Bank National Trust Company ("DB") and Mortgage Electronic Registration Systems, Inc. ("MERS"), a motion for summary judgment from Defendant Fidelity National Title Insurance Company ("Fidelity"), and a motion for partial summary judgment from Plaintiff John Knecht. The court finds oral argument unnecessary. For the reasons stated herein, the court GRANTS Defendants' motions in part and DENIES them in part, (Dkt. ##67, 69) and DENIES Mr. Knecht's motion (Dkt. #64). A bench trial on the claims that survive Defendants' motions will begin on November 12, 2014. A schedule for pretrial submissions concludes this order.

II. BACKGROUND

The court has already considered this dispute in a March 11, 2013 order granting in part and denying in part Defendants' motions to dismiss. Although the court dismissed some of Mr. Knecht's claims without prejudice, he declined to amend his complaint. The court now considers whether to grant summary judgment on the claims that survived the motions to dismiss: Mr. Knecht's claim for specific violations of the Washington Deed of Trust Act (RCW Ch. 61.24), his claim to enjoin a trustee's sale of his North Bend residential property, his claim for violations of the Washington Consumer Protection Act (RCW Ch. 19.86, "CPA"), and a few claims for declaratory relief.

Each of those claims arises from a $315, 000 loan in 2006 from American Brokers Conduit ("ABC") to Mr. Knecht, which is memorialized in an adjustable-rate promissory note. ABC secured that loan with a deed of trust to Mr. Knecht's North Bend residential property. The deed of trust named ABC as the lender, Fidelity National Title Company of Washington (a different entity than Fidelity, the Defendant in this case) as the trustee, and MERS as the beneficiary of the deed of trust. The deed of trust stated that MERS acted "solely as a nominee for [ABC] and [ABC]'s successors and assigns."

Mr. Knecht is in default on that loan, which no one disputes. He has been in default since 2010. Mr. Knecht does not dispute that he has not made loan payments since then, and he does not dispute that he cannot afford to pay what he owes.

DB and Fidelity have three times attempted to foreclose Mr. Knecht's deed of trust. DB purports to be the owner of Mr. Knecht's note, and thus purports to be the beneficiary entitled to foreclose. It purports to have appointed Fidelity in September 2010 as the trustee entitled to conduct the foreclosure, and it was Fidelity who recorded notices of trustee's sales in October 2010, September 2011, and June 2012. Fidelity and DB ultimately abandoned each of these attempted foreclosures. There is no trustee's sale currently pending, [1] although Defendants are conspicuously silent about whether they intend to conduct a sale in the future. It is difficult to imagine that they have any other intent. Mr. Knecht is still in default on the loan; it would appear that DB's only means of cutting its losses is to foreclose.

The dispute at the core of this dispute requires two critical determinations. First, the court must decide if DB is entitled to summary judgment that it was, throughout its foreclosure efforts, the beneficiary of Mr. Knecht's deed of trust. If it was not, it had no authority to appoint Fidelity as a successor trustee, and Fidelity had no authority to conduct foreclosure proceedings. Second, the court must decide if either Fidelity or Mr. Knecht are entitled to summary judgment that Fidelity complied with RCW 61.24.030(7), the provision of the Deed of Trust Act that requires a trustee to have proof that the beneficiary is the owner of the note secured by the deed of trust. As the court will explain in Part III of this order, DB is not entitled to summary judgment that it was the beneficiary, and neither Mr. Knecht nor Fidelity is entitled to summary judgment that Fidelity had the requisite proof of DB's beneficiary status. Resolving both of those issues will require a bench trial. In Part IV, the court will address Mr. Knecht's specific claims to determine which will be at issue at trial.

The court applies the familiar summary judgment standard, which requires it to draw all inferences from the admissible evidence in the light most favorable to the nonmoving party. Addisu v. Fred Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir. 2000). Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(a). The moving party must initially show the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The opposing party must then show a genuine issue of fact for trial. Matsushita Elect. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The opposing party must present probative evidence to support its claim or defense. Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1558 (9th Cir. 1991). The court defers to neither party in resolving purely legal questions. See Bendixen v. Standard Ins. Co., 185 F.3d 939, 942 (9th Cir. 1999).

III. ANALYSIS

A. Is DB the Beneficiary of Mr. Knecht's Deed of Trust?

A deed of trust is a three-party transaction in which a borrower (the grantor of the deed of trust) conveys title to her property to a trustee, who holds the title in trust for the lender, who is the beneficiary of the deed of trust. Bain v. Metro. Mortgage Group, Inc., 285 P.3d 34, 38 (Wash. 2012). The deed of trust grants the beneficiary a power of sale that it can invoke if the borrower defaults, in which case the trustee is empowered to sell the property at a trustee's sale. Id. Washington's Deed of Trust Act places non-waivable restrictions on the power of sale and the means by which the trustee can conduct a sale. Id. ("The legislature has set forth in great detail how nonjudicial foreclosures may proceed. We find no indication that the legislature intended to allow the parties to vary those procedures by contract.") Provided the trustee and beneficiary comply with the Deed of Trust Act, the trustee can sell the property without judicial oversight.

Mr. Knecht contends that DB is not (and was not) the beneficiary of his deed of trust.

1. MERS Falsely Declared Itself the Beneficiary of Mr. Knecht's Deed of Trust, and Purported to Convey to DB Rights That MERS Never Held.

From its inception, Mr. Knecht's deed of trust ran afoul of the Deed of Trust Act by designating MERS as its beneficiary. The Act declares that the beneficiary of a deed of trust is "the holder of the instrument or document evidencing the obligations secured by the deed of trust...." RCW 61.24.005(2). Banks and other well-heeled financial interests, in an effort to facilitate the easy transfer of mortgage obligations, created MERS in the mid 1990s. Bain, 285 P.3d at 39-40. MERS is, in essence, a database for tracking mortgage rights that permits MERS's member institutions to transfer mortgage obligations without publicly recording the transfers. Id. In Washington, lenders hoping to take advantage of the MERS system designated MERS as the beneficiary of deeds of trust, just as ABC did in Mr. Knecht's deed of trust. But it is now clear that Washington law does not permit MERS to act as a beneficiary unless it is also the "holder" of the note secured by the deed of trust. Bain, 285 P.2d at 47.

There is no suggestion that MERS ever held Mr. Knecht's note, and yet it purported in April 2010 to assign to DB "the Promissory Note secured by [the Knecht] deed of trust and also all rights accrued or to accrue under said Deed of Trust." The assignment, which is recorded in King County, was executed by "MERS as nominee for [ABC], " but there is no evidence that ABC actually authorized MERS to effect the transfer. See Bavand v. OneWest Bank, FSB, 309 P.3d 636, 649 (Wash.Ct.App. 2013) (noting MERS's failure to establish its agency relationship with a noteholder).

There is no dispute in this case that MERS lacked the power to transfer anything to DB. DB does not rest its claim to be the beneficiary of Mr. Knecht's deed of trust on the MERS assignment, or at least it does not do so in these motions. Indeed, DB consistently refuses to acknowledge that MERS purported to assign not only the deed of trust, but Mr. Knecht's note as well. DB avoids the MERS assignment, it appears, because it prefers that the court not focus on that apparently void transfer of the deed of trust and note. DB prefers that the court conclude that it acquired its interest in the deed of trust and note without MERS's assistance.

2. The Declaration from Mr. Knecht's Bankruptcy Does Not Entitle DB to Summary Judgment.

The court now considers DB's evidence that it obtained its alleged interest in Mr. Knecht's Note from a source other than MERS. DB relies on a version of Mr. Knecht's note that is endorsed in blank by ABC. Ewbank Decl. (Dkt. #68), Ex. B. There is no evidence as to how DB acquired that note. The note is in the record via a declaration from DB's counsel stating merely that the endorsed document is a true and correct copy of the note. Id. ¶ 3. That statement raises more questions than it answers. The endorsement is undated, but it was plainly executed after Mr. Knecht signed the note. There is no direct evidence that DB acceded to ABC's rights as the lender on the note and the beneficiary of the deed of trust.

Instead of direct evidence, DB asks the court to rely on documents filed in Mr. Knecht's 2010 bankruptcy proceeding, which preceded the foreclosure attempts at issue in this case. In the bankruptcy proceeding, a person claiming to be the authorized agent of American Home Mortgage Servicing, Inc. ("AHMSI"), filed a March 2010 declaration stating that AHMSI was a servicer for DB. Ewbank Decl. (Dkt. #68), Ex. C. It also stated that DB was "the holder and owner" of the Knecht note. Id. ¶ 6. The declaration purports to attach "documents evidencing the ownership of the loan including the Note and Deed of Trust, " id., but the only documents attached to it are the note and deed of trust.[2] The declarant (a "Bankruptcy Specialist" residing in Florida) stated that he had "personal knowledge" of the facts to which he attested. Id. ¶ 1. But the only basis he states for his "personal knowledge" of the ownership of the note is that he "personally reviewed the business records related to this loan...." Id. ¶ 4. He does not reveal what those business records are. If DB (or anyone else) has business records that establish DB's ownership of Mr. Knecht's note, those records are not before the court.

DB relied on the declaration in the bankruptcy proceedings in its motion for relief from the automatic bankruptcy stay. No one opposed that motion, and the Bankruptcy court merely signed DB's proposed order. DB does not argue that the order is entitled to res judicata or issue preclusive effect. It nonetheless suggests that because no one objected in the bankruptcy court to its assertion that it was entitled to foreclose, its status as beneficiary is now an established fact. The court disagrees.

DB does not explain the apparent inconsistency between the bankruptcy declaration and MERS's assignment of the note and deed of trust on April 1, 2010. If the bankruptcy declaration accurately claimed that DB was the "holder and owner" of Mr. Knecht's note as of late March 2010, why did MERS purport to assign the note to DB at the beginning of April 2010? DB suggests no answer.

3. Trial is Necessary to Determine Whether DB Is the Beneficiary of the Deed of Trust.

Perhaps recognizing that its own proof is shaky, DB insists that it is Mr. Knecht's burden to prove that DB does not own the note. The only authority it cites for that proposition is a decision from one of this District's judges in which the court held that where the beneficiary attempting to foreclose "was the original lender, " conclusory allegations that the beneficiary had no authority to foreclose were inadequate to state a claim. Coble v. Suntrust Mort., Inc., No. C13-1978JCC, 2014 U.S. Dist. LEXIS 23921, at *10 (W.D. Wash., Feb. 18, 2014). The court in Coble did not address anyone's burden of proof, and granted the borrower leave to amend to more ...


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