AMENDED MEMORANDUM DECISION RE MOTION FOR RELIEF FROM AUTOMATIC STAY
US Bank National Association (“US Bank”), Trustee for the C-BASS Mortgage Loan Asset-Backed Certificates, Series 2006-CB2, nonjudicially foreclosed on the residence of Debtor Eleazar Salazar (“Salazar”), by exercising the power of sale under the deed of trust. At the time it foreclosed, U.S. Bank was not the original beneficiary of record, and it had not recorded an assignment of the deed of trust conveying to it an interest in the deed of trust.
After the foreclosure, two lawsuits were filed in state court: Salazar filed to invalidate the foreclosure sale and to seek damages against U.S. Bank and other parties, 1 and U.S. Bank filed to regain possession of the residence through an unlawful detainer action against Salazar. The unlawful de-tainer suit was on the verge of trial when Salazar filed his chapter 13 bankruptcy case.
In his bankruptcy, Salazar seeks to reinstate U.S. Bank’s loan against his residence and cure the default, and U.S. Bank seeks relief from stay in the bankruptcy to proceed with its unlawful detainer action. 2 Salazar opposes stay relief, arguing U.S. Bank does not have standing to seek relief from stay because the foreclosure sale was defective, due to U.S. Bank’s failure to record an assignment of its interest before foreclosures as required by California Civil Code section 2932.5. 3 US Bank responds *817 that Civil Code section 2932.5 is not applicable to its deed of trust, and MERS’ status as the original beneficiary of the deed of trust obviated the recording of the assignment to U.S. Bank.
While U.S. Bank meets the minimal test for standing to seek relief from stay, Salazar’s foreclosure sale challenge must still be addressed to resolve the merits of U.S. Bank’s relief from stay motion. Relying upon controlling California statutory and decisional authority, the Court concludes MERS’ original involvement in this loan does not provide talismanic protection against U.S. Bank’s foreclosure deficiencies. US Bank’s failure to record its beneficiary status before foreclosure left Salazar with equitable title to his residence. Although this equitable title must be finally established in an adversary proceeding rather than a relief from stay motion, Salazar has demonstrated a prima facie case that the foreclosure sale was void. Salazar thus has a significant property interest entitled to protection by the automatic stay, and the Court denies relief at this time.
I. BACKGROUND
Accredited Home Lenders, Inc. (“Accredited”) made a loan (“Loan”) to Salazar in October 2005 secured by his residence located at 1268 Emerald Way, Calexico, California (“Property”). Salazar executed a promissory note (“Note”) to Accredited to document the Loan. To secure the Loan, Salazar executed a four party deed of trust (“DOT”) among Salazar as “Borrower,” Accredited as “Lender,” Chicago Title Company as trustee, and MERS as beneficiary.
Under the DOT, the Lender’s rights regarding the Loan are pervasive. The Lender is entitled to receive all payments under the Note and to enforce the DOT, including the exclusive right to conduct a nonjudicial foreclosure. 4
MERS has none of these rights under the DOT, 5 and is not even mentioned in the Note. MERS is not given any independent authority to enforce the DOT under its terms and MERS’ status as beneficiary under the DOT is only “nominal.” While the Borrower acknowledges in the DOT that MERS can exercise Lender’s rights as “necessary to comply with law or custom,” 6 this acknowledgement is not accompanied by any actual allocation of authority to nonjudieially foreclose on the DOT; nor is such authority allocated in any other document in the record.
*818 After Salazar defaulted under the Loan, foreclosure proceedings were instituted. In June 2009, MERS signed a substitution of trustee. Whether MERS retained any interest in the Loan after this time is not clear. Both Litton Loan Servicing, LP (“Litton”) and Quality Loan Service Corp. (“Quality”) were at different times identified as the party that Salazar should contact with questions about the foreclosure. MERS had no apparent role in the foreclosure sale held on December 7, 2009, which was largely run by Litton and Quality based upon the documents in the record. When the Trustee’s Deed Upon Sale (“Trustee’s Deed”) was recorded on December 14, 2009, U.S. Bank was identified as the “foreclosing beneficiary,” not MERS. While U.S. Bank has presented evidence that the Note was endorsed in blank, no evidence was offered as to when U.S. Bank was assigned Accredited’s interests as Lender in the Note and DOT, and no assignment to U.S. Bank of the beneficial interest in the DOT appears in the public records.
While some of the foreclosure claims were pending in district court, the unlawful detainer action came on for trial in state court on September 1, 2010, and was continued to October 1, 2010. This bankruptcy case was filed the day before the continued trial, which stayed the unlawful detainer action. US Bank then filed this relief from stay motion (“Motion”) on October 26, 2010, which was heard on November 23, 2010, continued to January 11, 2011, and continued again to January 25, 2011 to allow for the submission of evidence and additional briefing.
II. ANALYSIS
To determine whether to grant U.S. Bank’s Motion, the Court must first decide whether U.S. Bank has standing to bring it. The Court must then address the merits of the Motion, which will require consideration of whether Salazar retains any interest in the Property that is necessary for an effective reorganization, and whether allowing the unlawful detainer action to proceed in state court will promote the efficient administration of the bankruptcy and limit prejudice to the parties.
A. Standing
Due to the limited scope and expedited nature of a relief from stay proceeding, the standing requirement is not difficult to meet. Section 362(d) of the Bankruptcy Code provides that stay relief may be granted to a “party in interest,” and any party affected by the stay should be entitled to seek relief. 3 Collier on Bankruptcy ¶ 362.07[2] (3d ed. rev. 2010). In the Ninth Circuit, challenges to secured claims are typically resolved in plenary proceedings.
Johnson v. Righetti (In re Johnson),
A prima facie case of standing requires the moving party demonstrate an undisputed interest in the bankruptcy case that is hindered by the automatic stay. Standing is lacking where a secured creditor cannot present the rudimentary elements of its claim.
In re Gavin,
US Bank is the record title owner of the Property under the recorded Trustee’s Deed, even if the foreclosure sale was invalid. US Bank therefore has standing to seek relief from stay. Even though U.S. Bank has established a prima facie case of standing, however, the Court must still determine if U.S. Bank’s foreclosure sale was valid to rule on the merits of the Motion.
B. Salazar’s Property Interest in the Residence
Whether Salazar may retain valuable equitable title in the Property despite the foreclosure sale is critical to the Motion.
McCarthy, Johnson & Miller v. North Bay Plumbing, Inc. (In re Pettit),
If U.S. Bank’s foreclosure sale was invalid, Salazar has an interest in the Property which militates in favor of continuing the stay. If U.S. Bank was not authorized to foreclose the DOT under Civil Code section 2932.5, the foreclosure sale may be void, and Salazar would not need to tender the full amount of the Loan to set aside the sale.
Bank of America, N.A. v. La Jolla Group II,
1. Assignments Must be Recorded Before Foreclosure
US Bank, as the foreclosing beneficiary and assignee of Accredited’s interest in the
*820
Loan, had to meet both requirements of Civil Code section 2932.5
7
for the foreclosure to be valid. Under that statute, first, U.S. Bank had to be entitled to payment of the secured debt. Civ.Code § 2932.5;
see also
Civ.Code § 2936 (Deering 2010); Comm.Code § 9203(a), (g) (Deering 2011);
Carpenter v. Longan,
Second, Civil Code section 2932.5 also requires that U.S. Bank’s status as foreclosing beneficiary appear before the sale in the public record title for the Property. This second requirement was not met. US Bank offers two primary reasons why a recorded assignment of the DOT is unnecessary: (1) Civil Code section 2932.5 applies to mortgages, and not to its DOT; and (2) MERS’ recorded interest as the nominal beneficiary was sufficient to satisfy Civil Code section 2932.5, particularly since the transfer by Accredited to U.S. Bank could be tracked in the publicly accessible MERS system.
The Court’s analysis leads it to conclude that Civil Code section 2932.5 requires U.S. Bank’s assigned beneficial interest be recorded despite MERS’ initial role under the DOT, and that the statutory foreclosure scheme trumps MERS’ proposed alternative system.
2. Civil Code Section 2932.5 Applies to Deeds of Trust
In claiming Civil Code section 2932.5 does not apply to its DOT, U.S. Bank relies on
Caballero v. Bank of America,
No. 10-CV-02973,
Historically, a technical distinction existed between deeds of trust and mortgages. For deeds of trust, title vested in the trustee. For mortgages, title remained with the mortgagors. This distinction, however, has been determined to be obsolete.
Bank of Italy Nat. Trust & Sav. Assn. v. Bentley,
The outdated distinction between mortgages and deeds of trust is especially moribund in the context of borrower’s rights in the nonjudicial foreclosure context, such as the borrower rights protected by Civil Code section 2932.5.
Bank of Italy,
The borrower concern addressed by Civil Code section 2932.5 — that it be able to identify the assignee of its loan — is more exigent, not less, than it was during the Great Depression, when
Bank of Italy
was decided. Problems with the residential mortgage foreclosure process have been widely chronicled.
See
Katherine Porter,
Misbehavior and Mistake in Bankruptcy Mortgage Claims,
87 Tex. L. Rev. 121, 148-49 (2008),
cited in Ameriquest Mortg. Co. v. Nosek (In re Nosek),
Because controlling Supreme Court authority requires this Court to enforce statutory borrower protections regardless of whether nonjudicial foreclosure is sought under a mortgage or a deed of trust, the Court must conclude Civil Code section 2932.5 applies to U.S. Bank’s DOT here.
3. Recorded Assignment Necessary Despite MERS’ Role
US Bank also claims MERS’ status as nominal beneficiary under the DOT obviated the recording of the assignment of the DOT under Civil Code section 2932.5. This claim fails because MERS was not the beneficiary at the time of the foreclosure here, even if it was initially the nominal beneficiary under the DOT. The DOT also does not grant MERS any authority apart from the nominal role.
The recitals in the Trustee’s Deed identify U.S. Bank alone as the foreclosing beneficiary, and this recital provides “pri-ma facie evidence of the truth of the statements.” DOT at ¶ 22.
10
See also Bank of America,
In
Gomes,
the Court of Appeal held Civil Code section 2924(a)(1) does not establish a cause of action to permit a borrower to test MERS’ authority to initiate a nonjudicial foreclosure, where there is no specific factual basis to challenge this authority. Civil Code section 2924(a)(1) permits an array of authorized parties to take the steps to initiate foreclosure, including the trustee, beneficiary and their authorized agents.
Gomes,
Gomes
also relied upon the borrower’s acknowledgement of MERS’ authority to foreclose as nominal beneficiary.
Gomes,
Salazar’s acknowledgment could also not be interpreted as an enforceable waiver of his right as borrower under Civil Code section 2932.5 to be informed of the identity of the assignee. The acknowledgement fails to meet the stringent test for waivers of residential borrower protections in the foreclosure context. Under
Cathay Bank v. Lee,
As a matter of fact, U.S. Bank did not rely on MERS to nonjudicially foreclose on Salazar’s residence here. As a matter of law, Salazar’s acknowledgment cannot be read as a waiver of his right to be informed of a change in beneficiary status. For both of these reasons,
Gomes,
4. MERS System is not an Alternative to Statutory Foreclosure Law
The Court also rejects U.S. Bank’s invitation to overlook the statutory foreclosure mandates of California law, and rely upon MERS as an extra-judicial commercial alternative.
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The full scope of California’s nonjudicial foreclosure law, found at Civil Code sections 2020-2955, exhaustively covers every aspect of the real estate foreclosure process and must be respected.
I.E. Associates v. Safeco Title Ins. Co.,
US Bank as the foreclosing assignee was obligated to record its interest before the sale despite MERS’ initial role under the DOT, and this role cannot be used to bypass Civil Code section 2932.5. Since U.S. Bank failed to record its interest, Salazar has a valid property interest in his residence that is entitled to protection through the automatic stay.
C. Cause Does Not Exist to Grant Relief from Stay
US Bank seeks relief from stay on two statutory grounds: 11 U.S.C. § 362(d)(1) (2011) (cause, including lack of adequate protection of an interest in property), and 11 U.S.C. § 362(d)(2) (2011) (lack of equity and property not necessary for an effective reorganization). Whether the stay should be lifted to permit the unlawful detainer litigation to proceed in
*825
state court under 11 U.S.C. § 362(d)(1) and (2) requires consideration of the following factors: effective administration of the estate, avoiding prejudice to the parties, and promoting judicial economy.
Benedor Corp. v. Conejo Enters. (In re Conejo Enters.),
1. Effective Administration of the Estate
Maximizing the opportunities for reorganization of the estate is the most important factor in determining whether to grant relief from stay to permit litigation in another forum to proceed.
Conejo,
2. Prejudice to the Parties
Denying relief from stay at this time is the least prejudicial option for both parties. Even if the stay prohibits U.S. Bank from regaining possession of the Property in the near term, that inconvenience is appropriate because the foreclosure process was flawed. The Court has scheduled a further hearing on relief from stay to determine the economic feasibility of Salazar’s plan, and also to order that adequate protection payments be made to U.S. Bank to prevent diminution of the value of its collateral. 11 U.S.C. §§ 361, 363(e) (2011);
United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd.,
In contrast, Salazar could be substantially prejudiced by loss of his property interest if the unlawful detainer action proceeded even though the foreclosure sale may be void. Salazar has established a prima facie case of ownership of the Property, subject to whatever defenses U.S. Bank might bring in the state court proceeding. These rights should be protected by the automatic stay, assuming U.S. Bank’s economic interests in the Loan are adequately protected.
3.Considerations of Judicial Economy
Challenges to U.S. Bank’s foreclosure sale are simultaneously pending in state and bankruptcy court, creating the potential for confusion and a waste of judicial resources. Even if not specifically raised in the unlawful detainer proceeding, the validity of the foreclosure sale could be decided by default.
Cheney v. Trauzettel,
III. CONCLUSION
Even though U.S. Bank has standing to seek relief from stay as the record title owner of the Property, Salazar currently has an equitable title interest for the automatic stay to protect. The Court rejects the claim that MERS’ limited role in the DOT provides it carte blanche authority over the nonjudicial foreclosure process. To enable the bankruptcy and foreclosure issues between the parties to be efficaciously addressed, the Court denies the Motion without prejudice. A status conference will be held on this matter on April 21, 2011 at 2:00 p.m. in this Court to determine the amount of the adequate protection payments to be provided to U.S. Bank and to schedule necessary future proceedings consistent with this ruling.
This Memorandum Decision will constitute the Court’s findings of fact and conclusions of law. Counsel for Salazar is directed to prepare an order in accordance with this Memorandum Decision within ten (10) days of the date of entry.
IT IS SO ORDERED.
Notes
. The foreclosure suit was removed to district court, which was remanded to state court after the federal claims were dismissed.
. The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 (2010). This is a core proceeding under 28 U.S.C. § 157(b)(2)(G) (2010).
.All statutory references hereafter are to California Codes unless otherwise specified.
. Under the DOT, the Lender has the exclusive right to: "(i) the repayment of the Loan, and all renewals, extensions and modifications of the Note; and (ii) the performance of Borrower's covenants and agreements under this Security Instrument and the Note.” In addition, under the covenants executed between Lender and Salazar, Lender is granted exclusive authority to accelerate repayment, "give notice to Borrower prior to acceleration,” and "invoke the power of sale” through written notice to the Trustee in the event of default, and appoint successor trustees. DOT at pp. 3, 13.
. The DOT defines MERS as a "separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns.” The DOT states, "MERS is the beneficiary under this Security Instrument.” DOT at p. 2.
.The DOT on page three in the description of collateral section, provides that "Borrower 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 of 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; and to take any action required of Lender including, but not limited to, releasing or cancelling this Security Instrument.” DOT at p. 3 (emphasis added).
. Civil Code section 2932.5 provides:
Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assign-ee if the assignment is duly acknowledged and recorded.
Civ.Code § 2932.5 (Deering 2011) (emphasis added).
. Despite its respect for these decisions, this Court is not bound by them.
State Compensation Ins. Fund v. Zamora (In re Silvennan),
. The two other historical distinctions between mortgages and deeds of trust identified in
Bank of Italy,
. Paragraph 22 of the DOT, which provides for the Lender’s Acceleration and Remedies, includes the following: "The recitals in the Trustee's deed shall be prima facie evidence of the truth of the statements made therein.” DOT at p. 13.
.This Court is, in any event, not bound by the
Gomes
decision because it believes the California Supreme Court would have followed its decision in
Polhemus v. Trainer,
. MERS was not the payee of the secured debt, and thus could not satisfy the first requirement of Civil Code section 2932.5 in any event.
.
Cathay Bank’s
holding,
. The Court notes that circumventing the public recordation system is, in fact, the purpose for which the MERS system was created.
Merscorp, Inc. v. Romaine,
. Whether the bankruptcy court should abstain from deciding state law issues pending in an imminent state court trial was previously determinative in the stay relief context.
In re Tucson Estates, Inc.,