Summary
Massachusetts conveyancing practice has struggled to keep up with modern mortgage lending practices. The ownership of a loan may be divided and freely transferred numerous times on the lenders’ books, but the documentation actually on file at the Registry of Deeds often lags far behind. The Land Court decided that foreclosures were invalid when the lender brought the ownership documentation up-to-date after the sale had already taken place.
Decision
On March 26, 2009, the Massachusetts Land Court ruled in U.S. Bank National Association v. Ibanez that the party conducting a foreclosure sale must either be the actual record holder of the mortgage at the time the foreclosure notices are published, or must hold the mortgage under an unrecorded assignment which is available for inspection at the foreclosure sale.
This decision resolved three residential foreclosure cases with similar, but slightly different, sets of facts. In the first, the foreclosing party had no interest in the mortgage at the time the foreclosure notices were published or at the time of the actual auction sale, but acquired the mortgage by assignment 14 months after the auction. In the second, the foreclosing party acquired the mortgage 10 months after the sale, at which time the documents were assigned an effective date prior to foreclosure. In the third case, the foreclosing party held an unrecorded assignment at the time of the sale, but did not record it with the Registry of Deeds for more than a year. The court held that only the third sale was valid.
There were good arguments in favor of upholding the foreclosures. First, even though the foreclosing party had no documented interest in the mortgage at the time of foreclosure, the doctrine of "estoppel by deed" could have been invoked to save the foreclosure. "Estoppel by deed" is where a later acquisition of title can relate back to fix a title defect. In addition, there is an old law that "the mortgage follows the note," stemming from the era when notes were endorsed by hand, which could have been extended to include transfers made on bank records.
However, the court followed the general requirement of "strict compliance" with the foreclosure statute (G.L. c. 244, § 14) and found that the first two situations did not comply with the statutory requirement that the published notice identify "the holder of the mortgage."
While there were no other bidders at these particular sales, the court discussed the chilling effect that missing documentation could have on an auction sale. The court noted that it took months after two of the sales to obtain the correct documentation and asked whether a bidder would simply bypass these sales and bid at another sale where there would not be a delay in closing and less of a risk as to whether the documents would appear at all.
Significance
This court decision requires foreclosing lenders to assure that all paperwork is up-to-date before the publication of the foreclosure notices and the auction sale. While this has always been the better practice, some lenders have had difficulty keeping pace with the volume and schedule of sales.
Other courts are also confronting the issue of correctly identifying the lender. In a 2008 Massachusetts bankruptcy case, the court sanctioned a lender $250,000, its national law firm $100,000, and its local law firm and the partner in charge $25,000 each for misrepresenting the lender’s identity. A case now pending in federal court in Massachusetts seeks class action certification, declaratory and injunctive relief, and money damages for completed foreclosures and future foreclosures on the same facts as the two foreclosures voided in Ibanez.
If you would like to learn more about any of the information presented here, or have questions about any real estate matter, please contact Robert Schlein at rschlein@princelobel.com or 617 456 8098 or Richard Briansky at rbriansky@princelobel.com or 617 456 8052.
Note: None of these cases involve mortgages held by the Mortgage Electronic Registration System, Inc. (MERS®). The Land Court’s own guidelines, revised in February 2009, permit mortgages to be held and discharged by MERS without any reference to the institution for which MERS is holding the mortgage, provided that certain safe harbor language is included in the MERS mortgage. Title Standard No. 72 of the Massachusetts Real Estate Bar Association likewise permits discharges by MERS of mortgages it holds of record.