Banks, homeowners seeking to avoid foreclosure, and purchasers of foreclosed homes looking to quiet title have been engaged in legal battles across the country, stemming from the lack of precision in the paperwork of mortgages and notes, particularly as those documents were transferred among institutions creating mortgage-backed securities. The Massachusetts Supreme Judicial Court (SJC) has tackled these issues in a series of three decisions, most recently its June 22, 2012, decision in Eaton v. Federal National Mortgage Association, Docket No. SJC-11041. As the real-estate bar assesses the impacts and plots strategy going forward, homeowners, banks, and title insurers attempt to find a path to certainty; and other states look at the Massachusetts decisions as potential guidance.
In the Beginning, There Was Ibanez
The SJC first made waves in this area in its decision in U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011). In Ibanez, the SJC ruled that the foreclosing banks could not foreclose because the mortgages in question had not been assigned to them at the time of the foreclosure. Despite the chaos that this created, Ibanez paperwork issues generally could be corrected by the foreclosing entities by simply executing the proper assignments and re-noticing the foreclosure sale. More careful practices would allow future foreclosures to avoid this problem. However, the status of purchasers of those foreclosed properties in violation of Ibanez remained uncertain.
Bevilacqua Clarifies Some of the Problems Created by Ibanez
The SJC offered some clarity for these new owners (and their title insurers) in its widely anticipated decision in Bevilacqua v. Rodriguez, 460 Mass. 762 (2011), regarding the rights of and procedures available to owners who purchased foreclosed properties with Ibanez title issues. The decision was a decidedly mixed bag for parties seeking to remedy the title issues created by Ibanez, eliminating one potential legal avenue for curing a cloud on title created by an untimely assignment, but also making clear that at least one potential statutory remedy remain available to litigants.
The Bevilacqua case arose out of a cloud on title caused by an Ibanez-like assignment issue. In March 2005, PabloRodriguez granted a mortgage on his Haverhill, Massachusetts, property to the Mortgage Electronic Registration Systems (MERS), as nominee for Finance America, LLC. U.S. Bank N.A., successor in interest to Finance America, foreclosed on the Rodriguez property pursuant to the statutory power of sale and executed a foreclosure deed transferring the property to itself as lender. Nearly one month after the completion of the foreclosure sale and execution of the deed, MERS executed an assignment of the mortgage to U.S. Bank. Later, U.S. Bank executed a confirmatory foreclosure deed to itself, as trustee for a loan trust, and then granted a quitclaim deed to FrancisBevilacqua as the new owner.
Seeking to clear any cloud on title that might exist as a result of the untimely assignment from MERS to U.S. Bank, Bevilacqua brought a statutory “try title” action in the Massachusetts Land Court Department of the trial court pursuant to M.G.L. c. 240, §§ 1–5. This “try title” action allows a person claiming title to land in which he or she is in possession to file a petition compelling anyone claiming an interest in the property to either disclaim interest or assert a claim to the property by filing a complaint. The statute requires that a plaintiff have physical possession of the property and record title. Rodriguez was never located and never entered an appearance in the action. The land court determined, however, that Bevilacqua did not hold record title to the property because U.S. Bank’s foreclosure was invalid under Ibanez. Simply put, because U.S. Bank had foreclosed prior to receiving an assignment of the mortgage, the foreclosure was void. As a result, U.S. Bank did not hold title to the property when it executed the foreclosure deed and subsequent quitclaim deed it granted Bevilacqua. Bevilacqua could not prove he had record title and, as a result, did not have standing to bring the try title action. The land court dismissed the action with prejudice and Bevilacqua appealed.
The SJC Says No but Provides a Road Map to Solving the Problem
On appeal, Bevilacqua argued that the quitclaim deed from U.S. Bank, even if insufficient to convey title, was sufficient to show standing. The SJC rejected Bevilacqua’s assertion and stated that a deed that conveys no title could not provide grounds for standing given that “there is nothing magical in the act of recording an instrument with the registry that invests an otherwise meaningless document with legal effect.” Similarly, Bevilacqua could not demonstrate a chain of title by tracing his quitclaim deed to the mortgage, because he had alleged that U.S. Bank was not the assignee of the mortgage when it foreclosed on Rodriguez.
The SJC also held that Bevilacqua was not a bona fide purchaser because the recorded documents made clear that the foreclosure sale had been conducted before U.S. Bank was assigned the mortgage. If the underlying transaction had been simply voidable, a bona fide purchaser without notice might take good title. However, the unauthorized foreclosure sale conducted by U.S. Bank was void because of the untimely assignment to U.S. Bank. Accordingly, the court could not “conclude that Bevilacqua [was] a bona fide purchaser for value and without notice that U.S. Bank’s title was doubtful.”
Given that Bevilacqua was unable to prove his record title to the property, the SJC upheld the land court’s judgment of dismissal, with one change. The SJC directed the land court to revise its ruling to a dismissal without prejudice, ensuring that Bevilacqua would not be barred from bringing other actions having to do with title to the property. Moreover, as it had done in the Ibanez decision by raising the possibility of foreclosure by entry under M.G.L. c. 244 §§ 1 and 2, the SJC left the door open to at least one other remedy to clear clouds on title resulting from an Ibanez assignment issue.
Specifically, the court stated that an ineffective foreclosure deed could instead function as an assignment of the mortgage and assumed “without deciding, that there is a factual basis on which Bevilacqua may claim to be the assignee of the [Rodriguez] mortgage,” thereby clearing the way for Bevilacqua, as assignee of the mortgage from U.S. Bank, to institute his own foreclosure on the property. Accordingly, if Bevilacqua could show a “chain of assignments” from the original mortgagee, he could be the holder of the Rodriguez mortgage, foreclose, and clear title to the property.
SJC Announces New Rule in Eaton
In its third decision in Eaton v. Federal National Mortgage Association, the SJC upheld a controversial decision of the trial court holding that a foreclosing entity must have possession of both the mortgage and underlying note at the time of foreclosure. This opinion represents a departure from the prevailing understanding of the law in Massachusetts, a fact the SJC appears to recognize in its holding that the new rule will be prospective in application.
Eaton Defaults but Fights Eviction Challenging Paperwork
Henrietta Eaton refinanced the mortgage on her home in Boston in 2007 by executing a promissory note in favor of BankUnited, FSB. That same day, consistent with standard industry practice, Eaton also executed a mortgage in favor of MERS, as nominee for BankUnited. The mortgage included the statutory power of sale and provided that “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; and to take any action required of Lender. . . .”
Two years later, MERS assigned its interest as mortgagee to Green Tree Servicing, LLC, and recorded the assignment in the Suffolk County Registry of Deeds. The record before the court contained no evidence of a corresponding transfer of the note. However, the note was indorsed in blank by BankUnited on an undetermined date. Eaton subsequently defaulted on her payments on the note. Green Tree, as assignee of MERS, foreclosed on Eaton’s Boston home through exercise of the power of sale contained in the mortgage. An auction was conducted in November, 2009, at which Green Tree was the highest bidder. The record did not identify the note holder at the time of the foreclosure sale. Green Tree assigned the rights to its bid to Fannie Mae and a foreclosure deed was recorded in the registry of deeds.
When Fannie Mae commenced a summary-process eviction action in the housing court against Eaton in early 2010, Eaton filed a counterclaim in which she alleged that the underlying foreclosure sale was invalid because Green Tree was not the holder of Eaton’s note at the time of the foreclosure sale and therefore lacked the requisite authority to foreclose on her property. The housing court granted a 60-day stay of the summary-process action to allow Eaton an opportunity to seek relief in the superior court.
Eaton’s subsequent complaint in the superior court sought a declaration that the foreclosure sale and the subsequent foreclosure deed were null and void. Eaton also sought both a preliminary and a permanent injunction barring Fannie Mae from taking possession of or conveying the Eaton property. For the purposes of the preliminary injunction only, Fannie Mae stipulated that Green Tree was not the holder of Eaton’s note at the time of the foreclosure. The superior court judge preliminarily enjoined Fannie Mae from proceeding with Eaton’s eviction. Fannie Mae appealed the decision, and the case was transferred to the SJC.
Mortgage and Note Must Be Held by the Foreclosing Entity
In its decision, the SJC noted that although Massachusetts common law allows the mortgage and note to be separated, “where a mortgage and note are separated, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment.” The mortgage and the note, although often viewed as two halves of one transaction, serve different functions—the note evidences the underlying debt, while the mortgage merely secures the debt.
The mortgagee’s power of sale in Massachusetts is defined and governed by statutes, specifically, M.G.L. c. 183, § 21 and c. 244, §§ 11-17C. On appeal, Fannie Mae argued that the use of the word “mortgagee” in Chapter 244, § 14 necessitated the conclusion that a foreclosing entity merely needed to possess the mortgage to foreclose. The SJC, however, disagreed, noting that Chapter 244, § 14 is one section “in a set of provisions governing mortgage foreclosures by sale.” The SJC held that given that the word “‘mortgagee’ appears in several of these statutes, and its use reflects a legislative understanding or assumption that the ‘mortgagee’ referred to also is the holder of the mortgage note,” the word “mortgagee” in section 14 must also reflect the legislative understanding that the mortgagee is also the holder of the note. Accordingly, the SJC upheld the decision of the trial court, with one change. While the trial court had held that only one holding the note could properly conduct a foreclosure sale, critically the SJC held that a foreclosure sale could also be properly conducted by an entity authorized to act on behalf of the note holder. This change allows servicers that hold the mortgage to notice and conduct foreclosure sales on behalf of their note-holder clients, which blunts the potential impact of the black-letter holding of the case given that it is now typical that a mortgage servicer conduct a mortgage sale on behalf of the underlying note holder.
However, much as it did in Ibanez and Bevilacqua, in Eaton the SJC carved out a way forward for lenders, servicers, and those carefully monitoring the evolution of foreclosure jurisprudence in Massachusetts. Exercising its discretion, the SJC held that its analysis of the term “mortgagee” was a new interpretation of Chapter 244, § 14 and held that the application of Eaton would be prospective. Accordingly, Eaton applies only to foreclosures sales “for which the mandatory notice of sale has been given after” June 22, 2012. Absent this holding by the SJC, Eaton could potentially have called into question the validity of every title in Massachusetts that had a foreclosure sale anywhere in the chain.
Although the law now appears clear, there is no doubt that the state of foreclosures in Massachusetts is still uncertain. However, at each turn, the SJC has provided a path forward for those seeking to clear these titles clouded by Ibanez, Bevilacqua, and Eaton. Although protection as a bona fide purchaser is not available, property owners who claim title under these circumstances are not left without a remedy, and foreclosing entities moving forward will need to be sure that they hold the note, or are acting on behalf of an entity that does, in addition to being the mortgage holder. How they do so, and whether this new requirement affects the pace of foreclosures in Massachusetts, remains to be seen.
Keywords: real estate litigation, Ibanez, Bevilacqua, Eaton, Massachusetts SJC
Kendra L. Berardi is an associate in the Boston, Massachusetts, office of Robinson & Cole LLP and is an assistant editor of the Real Estate Litigation Committee newsletter.