Recent Changes in Massachusetts Foreclosure Law Causes Disruption in Conveyance Practices

June 1, 2010

A recent case decided in March 2009 by the Massachusetts Land Court invalidated two Massachusetts foreclosure sales based on whether the foreclosing entities had “the right… to foreclose the subject mortgage in light of the fact that the assignment of the foreclosed mortgage… was not executed or recorded until after the exercise of the power of sale.”

This Land Court decision has caused havoc to the Massachusetts conveyance practice, causing the Massachusetts Supreme Judicial Court (“SJC”) to bypass the Massachusetts Appeals Court and hear the case promptly.

Ibanez Decision

In U.S. Bank National Association v. Ibanez, et al, 17 LCR 679 (2009), which was actually three (3) consolidated cases, the three plaintiff banks each noticed foreclosure sales and named themselves as the foreclosing parties.  The three cases (Ibanez, Larace and Rosario) presented three slightly different fact patterns. Each involved a residential mortgage loan that was securitized and sold on the secondary market. In each case, mortgage assignments were not recorded contemporaneously with changes in ownership of the underlying loans.   In each case, the loan went into default, the mortgage was foreclosed, and the plaintiff bank purchased the subject property…

Cases 1 and 2: Ibanez and Larace

In U.S. Bank NA v. Ibanez, the first M.G.L. c. 244, §14 notice was published in June 2007 and the foreclosure auction was conducted in July 2007 by U.S. Bank National Association, as trustee of a named securitized trust into which the Ibanez mortgage had been deposited, but the assignment into U.S. Bank as trustee was both dated and recorded in September 2008, about 14 months after the notice and auction.

In Wells Fargo Bank NA v. Larace, the first M.G.L. c. 244, §14 notice was also published in June 2007 and the foreclosure conducted by Wells Fargo Bank NA as trustee in July 2007, but the assignment into Wells Fargo was dated and recorded in May 2008, about 10 months after the notice and auction (although it bore the statement that it was “effective” as of April 2007).

In both Ibanez and Larace, Justice Keith C. Long of the Land Court found the foreclosures to be invalid because (a) their published notices of sale failed to name the mortgage holders as required by Massachusetts M.G.L. c. 244, §14; and (b) the banks were not assigned an interest in those mortgages until after the foreclosure sales had taken place, and therefore were not the record holders of the mortgages at the time of the sales.

Case 3: Rosario

By contrast, in the third case, LaSalle Bank NA v. Rosario, the first M.G.L. c. 244, §14 notice was published and the auction conducted by LaSalle Bank in June 2007; the assignment into LaSalle was dated November 2006 and recorded (with the certificate of entry and foreclosure deed) in September 2008.

The Land Court ruled in Rosario that, even though it was not recorded until after the foreclosure, where the assignment into the foreclosing entity could (according to its date of execution and acknowledgment) have been presented at the time of the foreclosure auction as proof that the foreclosing entity was in fact the holder of the mortgage at the time of the first notice, the foreclosure by LaSalle was valid.

Applying Ibanez: Githira

The issue has already been raised in the Massachusetts courts since the Ibanez decision, namely in U.S. Bank National Association v. Githira, 17 LCR 697 (2009).  In Githira, plaintiff U.S. Bank was seeking to remove a cloud on its title to a parcel of land stemming from plaintiff’s exercise of the power of sale contained in the mortgage before it received authority to do so under the provisions of the Servicemembers’ Civil Relief Act.  The complaint did not mention any other title defects.

Citing Justice Long’s ruling in Ibanez, Justice Charles W. Trombly, Jr., dismissed plaintiff’s petition to remove the cloud on the title, holding that plaintiff was not even the holder of the mortgage, by record or in fact, on the day of the foreclosure sale.  Specifically, Justice Long found that the foreclosure auction took place and was recorded prior to the execution and recording of an assignment of mortgage that made plaintiff the holder of the mortgage upon which it had foreclosed.

Consequences of Ibanez

Understandably, mortgage and title insurance companies have been overwhelming concerned about the Ibanez decision.  Some lenders are re-doing foreclosures and some are just waiting it out, while most title insurance companies are unwilling to issue policies where mortgage assignments were obtained subsequent to publication of foreclosure notices and the foreclosure sale.

Future of Ibanez

It was no surprise to those in the legal profession, who have been carefully watching the development and application of the Ibanez decision, when both plaintiffs and defendants recently asked the Massachusetts Supreme Judicial Court to take the case.

The SJC recently announced that it will take the Ibanez case through a process that allows the SJC to bypass the Massachusetts Appeals Court.  The SJC is expected to rule within a year.

Recommendations

In taking Ibanez on review, the SJC is likely to address a number of issues that have been briefed extensively by plaintiffs and defendants, as well as numerous other interested parties, such as the Real Estate Bar Association of Massachusetts, which publishes the Title Standards regularly relied upon by Massachusetts real estate practitioners and title insurance counsel.

In addition to the widespread attention given to the Ibanez case, the Land Court’s decision also has several unfortunate implications for real estate practitioners and consumers in Massachusetts who have previously purchased foreclosed properties, the titles to which were presumed to have been good, clear record and marketable, based upon the then current understanding of the law, Title Standards, and customary practices.  For example, Title Standard 58, which was quoted and discussed in the Land Court decision,[1] provides for reliance on assignments with effective dates prior to commencement of the foreclosure but prospectively cautions about reliance on assignments that are dated after the occurrence of a foreclosure without a recitation of an earlier effective date in the case of foreclosure sales held after the date of In re Sima Schwartz, 366 B.R. 265 (Bankr. D. Mass. 2007).[2]

In considering the entirety of the Ibanez decision, the Court should focus on the following two points, as paraphrased from the brief submitted by REBA to the Land Court prior to its decision:

  1. It is settled Massachusetts law that the holder of a debt secured by the mortgage should be treated as the holder of the mortgage; and
  2. An existing recordable assignment is not necessary for compliance with M.G.L. c. 244, §14.

According to Footnote 19 of the Land Court’s Ibanez decision, a lender may a only be the “holder of a mortgage” by being the holder of a fully executed assignment, in recordable form, that complies with the Statute of Frauds at the time that a determination is made as to whether or not the entity claiming to be a holder, is a holder.  However, under Massachusetts case law, that is just not the case.  In fact, the record holder of a mortgage who does not hold the underlying debt holds the mortgage in a resulting trust for the benefit of the holder of the note, and a transferee holder of a mortgage note is entitled to compel a formal assignment of the mortgage securing it at any time and such an assignment is confirmatory of what the note transferor should have done when the note was originally transferred. Eno & Hovey, 28 Mass. Prac. §9.49 (4th Ed., 2004); Morris v. Bacon, 123 Mass. 58, 59 (1877), General Ice Cream Corp. v. Stern, 291 Mass. 86, 89 (1935); Maglione v. BancBoston Mortgage Corp., 28 Mass. App. Ct. 88,90 (1990) (Kass, J.).

At the very least, the Land Court should have recognized and acknowledged as valid the assignment offered by the plaintiff in the Larace case.  The Larace assignment is distinguishable from the Ibanez assignment because it contained an “effective date” that predated the steps taken by the plaintiff lender in foreclosing on the subject property.  As the Land Court recognized, and the plaintiff acknowledged, on a practical level, the circumstances of modern day securitized lending and the packaging and sale of residential loans often results in multiple transactions which are difficult to trace (even for the original mortgage holder and eventual holder by assignment).  Ordinary and customary business transactions should be afforded credence, especially when it is known that in practice, the “effective dates” on an assignment generally reflect the actual date on which the underlying notes were transferred.

The SJC should accept the Larace assignment based on the fact that its effective date predated any and all M.G.L. c. 244, §14 notices as well as the subsequent foreclosure absent proof to the contrary.

If allowed to stand, the Ibanez decision would establish a bright line standard that a fully executed, recordable assignment of mortgage must actually exist and be in the possession of the foreclosing lender prior to auction sale publication in order to have a valid mortgage foreclosure pursuant to G.L. c. 244, § 14.  However, such a position would stretch the limits of existing Massachusetts case precedent beyond the SJC and Massachusetts Appeals Court’s previous decisions.  For example, in Bottomly v. Kabachnick, 13, Mass.App.Ct. 480,434 N.E.2d 667 (1982) and Roche v. Farnsworth, 106 Mass. 509 (1871), no one was identified as the holder of the mortgage. The complete lack of any identification of the holder of the mortgage led those courts to determine that it was not unreasonable to require that the party acting under the power of sale to state the property it intended to sell, who was proposing to make the sale, and who advertises the sale.

The cases listed above are clearly distinguishable from the cases that will soon be before the SJC.  In Ibanez and Larace, the notices appropriately identified the party who intended to make the sale, the party who was the holder of the debt in default and to whom a formal assignment of the mortgage could be executed and delivered for recording upon request. It would require the SJC to take an extreme and unreasonably strict position to invalidate otherwise properly conducted foreclosures simply because the party conducting the sale had not yet received the formal assignment of the mortgage even though it was entitled to the assignment at any time, particularly where there is no evidence that anyone was detrimentally misled or harmed in any manner by the lack of prepublication receipt of the assignment, let alone the recording of it.

This bright line standard also places an undue emphasis on record title to the mortgage while ignoring Massachusetts’s case precedent focusing on the true ownership of the debt.  It is the debt that shapes the relationships of parties involved in a foreclosure and not the status of the record holder.  The assignment of mortgage process should be viewed as the confirmation or ratification of the debt transfer.

Conclusion

This Land Court decision has already caused havoc to the Massachusetts conveyance practice, and critics recognize its potential to cause thousands of real estate titles to become unmarketable.  For these reasons and others detailed above, the SJC should focus on the law but also consider the safeguards that are already in place to give notice to homeowners facing a mortgage foreclosure.  There are numerous demands imposed upon a foreclosing party in order to foreclose under M.G.L. c. 244, §14, including demand letters, notice letters, and notice of the filing of the Servicemembers Civil Relief Act.  Based on all the precautions established by the legislature to provide notice to the defaulting borrower, the identity of either the holder of the debt or its duly appointed servicing agent or both should be clear to the borrower by the time the foreclosure sale takes place.  For all these reasons, the SJC should overturn the decision of the Land Court or at the very least recognize assignments containing an “effective date” that predates the steps taken by a mortgage holder in foreclosing.

The Massachusetts real estate attorneys at Goldman & Pease, located in Needham, concentrate in Massachusetts condominium law and real estate law and serve the greater Boston metro region including Alston, Arlington, Belmont, Brighton, Brookline, Cambridge, Canton, Dedham, Dover, Milton, Natick, Needham, Newton, Norwood, Waltham, Watertown, Wayland, Wellesley, Weston, West Roxbury, Westwood, and all of Massachusetts.


[1]Please note that the Land Court’s decision did not cite the most recent version of Title Standard 58, which was revised in May 2008.

[2] This was a bankruptcy court case in which the court held that where an assignment was not signed until after the foreclosure sale, the foreclosure was invalid.