Counsel’s Corner: Settling an Age-Old Debate Over the Definition of ‘Beneficiary’

Dan Ross is the Managing Director of Weinstein & Riley, P.S., located in the Washington office. He has been practicing law with the firm since 2006. Ross’s practice focuses on bankruptcy, real estate, commercial and creditor rights representation. Ross represents client in Federal and State Court proceedings. He is licensed in 12 states and Washington. D.C. Ross recently discussed with DS News a case regarding beneficiary declarations required under the Washington Deed of Trust Act (DTA).

In Brown vs. Washington State Department of Commerce (filed October 22, 2015), the Northwest Justice Project on behalf of borrowers Darlene Brown and Brian Longworth, brought the action against the Department of Commerce claiming that the Department was improperly exempting certain loan servicers from mediation under the Foreclosure Fairness Act (FFA). The issues came down to competing definitions of owner and beneficiary, and the Washington State Supreme Court rejected the borrowers’ contentions. The court ruled that under the Washington DTA, an entity is exempt from mandatory foreclosure mediation if it has certified to the Department of Commerce that it was a federally-insured deposit institution and that it was not a beneficiary of deeds of trust for more than 250 trustee sales of owner-occupied residential properties for the prior year. The court’s decision was that beneficiary meant the holder of the note, and that the holder of the note does not also have to the owner of the note.

DS News: How long has the note holder vs. note owner debate been going on?

Ross: This issue has been debated for years. Before the Brown v. Washington State Department of Commerce decision, counsel for consumers were trying to argue that the owner needs to be the holder, and now this decision has come out that they can be separate entities. In the beneficiary declaration language, the key is to use the actual holder language, which means that you have actual possession of the note. The big issue is going to possession of the note as the actual holder.

This decision was a victory for servicers. It also provides clarity on something that has been less clear in past decisions. Debtors’ counsel is now able to argue the owner of the note versus the holder of the note issue that they were trying to do before.

DS News: What effect will the decision in the Brown case have going forward?

Ross: It reinforces what a lot of servicers’ attorneys have been saying for the few years, which is that if you list that you’re the actual holder of the note, that should be sufficient. It clears up an issue that’s been going on for many, many years.

There is an incredibly high burden on the servicers and the trustees to make sure that everything is 100 percent accurate and not ambiguous in a beneficiary declaration before initiating foreclosure proceedings otherwise both the trustee and servicer could be found to have violated the DTA.  Any ambiguities as to who holds the note or who has the authority to enforce the note must be cleared up prior to proceeding with a foreclosure.

DS News: How does the ruling in the Brown case affect foreclosure mediation?

Ross: A lot of states have mediation. Part of the Brown case from October is borrowers’ attorneys trying to challenge whether or not certain owners and servicers were going to be required to do mandatory mediation. There is a loan exemption of 250—if you file more than 250 loans through foreclosure a year, then you’re required to be part of this mandatory mediation program. The borrowers’ attorneys were trying to argue that the owners should be the ones that count the loans, so if it’s Fannie Mae or Freddie Mac, that would count toward that 250 loan exemption, even though it was a smaller servicer. In that sense, that was a big win for the smaller servicers, since they won’t be required to participate in mediation.