Massachusetts Foreclosures Valid Even if Foreclosing Party Does Not Physically Hold the Note

In the Press · July 16, 2012

On June 22, 2012, in a closely-watched
case handled by Prince Lobel’s Consumer Financial Services Group, Massachusetts’
highest court confirmed that a mortgagee is not required to have physical
possession of the promissory note to foreclose. 
Rather, all that is required is proper authorization from the note
holder.  Although the decision should not
significantly impact current foreclosure procedures in Massachusetts, the
Supreme Judicial Court (SJC) suggested foreclosing entities file an affidavit
to establish the required authorization before foreclosure.  This novel procedure would alter the current
custom and practice in Massachusetts.   

In Eaton
v. Federal National Mortgage Association
, the SJC overturned a lower
court’s holding that there must be “unity” of the note and mortgage in order
for a foreclosure to be valid.  The case
arose out of a 2009 foreclosure conducted by Green Tree Servicing LLC, which
held the mortgage by assignment but not the corresponding note. The lower court
granted injunctive relief preventing the plaintiff’s eviction and finding that
she was likely to succeed on her claim that the foreclosure was invalid.  In particular, the lower court held that the
note and mortgage “must be reunited in order to effectively foreclose the
mortgagor’s right to redeem the Property.”

Authorized
Agent of Note Holder Can Foreclose Without Physical Possession of the Note.
On appeal, the
SJC considered Mass. Gen. Laws c. 244, § 14, which permits a “mortgagee” to
foreclose.  The court found that the term
“mortgagee” was not “free from ambiguity” and construed “the term to refer to the
person or entity then holding the mortgage and also either holding the mortgage
note or acting on behalf of the note holder.” 
Thus, the SJC held that the foreclosing entity did not need to
“physically possess[]” or “actually hold[]” the note in order to effect a valid
foreclosure.  The decision “permit[s] one
who, although not the note holder himself, acts as the authorized agent of the
note holder, to ‘stand in the shoes’ of the ‘mortgagee’” and foreclose without
physically holding the note.

Prospective
Application Only. 
The SJC limited the effect of its
decision “to foreclosures under the power of sale where statutory notice is
provided after the date of this decision.” 
Thus, the decision is prospective only, and does not impact past
foreclosures.

Proof
by Statutory Affidavit. 
Although the express language of
the MERS mortgage at issue in this case grants the mortgagee authority to
exercise the power of sale on behalf of the lender, the SJC expressed doubt as
to whether this would be sufficient to establish the authority to
foreclose.  Instead, the SJC identified a
procedure to establish the validity of foreclosure.  The SJC suggested that “a foreclosing
mortgage holder . . . may establish that it either held the note or acted on
behalf of the note holder at the time of a foreclosure sale by filing an
affidavit in the appropriate registry of deeds pursuant to G.L. c. 183, § 5B. .
. Such an affidavit may state that the mortgagee either held the note or acted
on behalf of the note holder at the time of the foreclosure sale.”  Filing such an affidavit allows servicers and
MERS to establish that they are authorized to foreclose when acting on behalf
of securitized trusts or other investors who hold the note. 

Endorsement
of the MERS System. 
While the SJC did not
specifically rule on the validity of the MERS system, the decision implicitly
endorses it.  Not only did the court explain
the MERS system in detail, but it responded to the concern of an amicus curiae that
“because ‘the essence of the MERS system is that MERS does not hold the
underlying notes . . . and holds the mortgages only as nominee for the holder
of the note,’ there will effectively be a presumption that the mortgagee did
not hold the note at the time of foreclosure.” 
The SJC cited MERS’ Rules of Membership and indicated that, if these
rules were complied with, the foreclosing entity would likely be in compliance
with the court’s holding.  Additionally,
the SJC addressed the concern by reiterating that “the relevant mortgage
foreclosure statutes . . . authorize a party who holds the mortgage directly
and who serves as the agent of the note holder to qualify as the ‘mortgagee’
entitled to foreclose under the power of sale.” 
Thus, the fact that the statutory power of sale is contained in a MERS
mortgage should not entitle a plaintiff challenging the validity of a
foreclosure sale to a presumption that an assignee who forecloses did not hold
the note.

Conclusion. 
To prevent collateral attack on a foreclosure, a mortgagee should now
alter the existing practice and file an affidavit under G.L. c. 183, § 5B to
establish either that it holds the note or has authority on behalf of the note
holder to foreclose.  The affidavit may
not be conclusive evidence of the mortgagee’s right to foreclose and thus
potentially subject to collateral attack by the mortgagor, but it is likely to
be sufficient to defeat a preliminary injunction. 

For assistance with
consumer finance related issues, please contact Richard Briansky, the author of this Alert.  You
can reach Richard at 617 456 8052 or rbriansky@princelobel.com.