Clouds Not Lifting Over Massachusetts Foreclosure Storm

Published on: August 1, 2009

Rain is falling on two banks that brought complaints in the Land Court to remove clouds on title which lingered following their attempts to foreclose mortgaged properties in Springfield, while a third bank apparently lives on the sunny side of the street.

U.S. Bank, Wells Fargo Bank, and LaSalle Bank each noticed foreclosure sales and named themselves as the foreclosing parties. They bid successfully at the foreclosure sales, and subsequently recorded all the relevant documents.

None of the banks, however, had a record interest in the properties at the time of either publication or foreclosure. The banks could not obtain title insurance for the properties, which made them effectively unsaleable. This led the banks to seek relief in the Land Court.

On March 26, 2009, Land Court Justice Keith C. Long, issued a decision and judgment which invalidated the foreclosures conducted by U.S. Bank and Wells Fargo Bank. According to the Court in U.S. Bank National Association v. Ibanez & two companion cases, Land Court Miscellaneous Case Nos. 384283, 386018, 386755 (KCL) (Mar. 26, 2009), the foreclosures were invalid because their published notices of sale failed to name the mortgage holders as required by G. L. c. 244, § 14, and because the banks were not assigned an interest in those mortgages until after the foreclosure sales had taken place.

By contrast, the Court found that LaSalle Bank’s foreclosure was not rendered invalid despite its failure to record the assignment reflecting its status as holder of the mortgage prior to the foreclosure since it was, in fact, the holder by assignment at the time of the foreclosure, it truthfully claimed that status in the notice, and it could have produced the unrecorded assignment if asked.

The Real Estate Bar Association for Massachusetts (REBA), commented: “The decision, particularly if applied retroactively, would create problems with many titles where assignments of mortgage were recorded out of order or secured subsequent to the publication of the notice and the actual foreclosure auction.”

“Any time we do a mortgage foreclosure for one of our bank clients, we always record all necessary assignments and other documents prior to filing a complaint with the Land Court. By doing this, there is no confusion as to who holds the mortgage, and there will be no issues later on with a judgment issuing prior to the date of an assignment,” said Laura Brandow, an attorney at Marcus, Errico, Emmer & Books, P.C., who handles mortgage foreclosures for a number of local banks.

The Court noted that G. L. c. 244, § 14, which controls the requirements for the notice that must be published prior to a foreclosure auction, is, broadly speaking, a consumer protection statute, and one that requires strict compliance with its notice provisions. Judge Long stated that one of those requirements is that the notice identify the holder of the mortgage, and that failure to do so renders the sale void as a matter of law.

The decision recognized that titles arising from mortgage foreclosures can have many problems, and highlighted several questions, including: Did the party conducting the foreclosure have the authority to do so and, if challenged, can it prove that it had such authority? Will a purchaser at the foreclosure sale get good title and will he get it in prompt fashion? With so many foreclosed properties available for purchase, why bid on a property with even the possibility for such trouble? Why take the risk that the foreclosing party will be able to produce the documents promptly after the auction takes place, that those documents will be complete and in proper form, or even that the foreclosing party will still be in existence, with intact files and knowledgeable employees able to find those files so that the proper paperwork can be completed? Since these concerns affect the ability to obtain clear, marketable title, why bid a reasonable market value instead of a discount price to account for that risk?

Judge Long observed that none of this is the fault of the mortgagor, yet the mortgagor suffers due to fewer or no bids in competition with the foreclosing institution. He remarked that only the foreclosing party is advantaged by the clouded title at the time of auction, because it can bid at a lower price, hold the property in inventory, and put together the proper documents at any time it chooses.

The banks attempted to defend the validity of the post-foreclosure assignments (U.S. Bank and Wells Fargo Bank) and post-foreclosure recording of the assignments (in all cases), making essentially three arguments.

First, they said that the language of G. L. c. 244, § 14, does not require that the notice name the holder of the mortgage. The Court found this argument unpersuasive because case law interpreting the statute requires that the notice name the holder; the notice form included in the statute is part of the statute and clearly contemplates that the present holder of the mortgage be identified in the notice; and the language of the statute clearly contemplates that the “holder of the mortgage” is the entity which must give notice.

Second, they argued that the statute should be read in its practical application because each mortgagor had ample time and opportunity to exercise his rights in equity to challenge the foreclosure at the time it was ongoing and failed to do so. The Court found this argument unavailing because it places the burden and expense of a lawsuit on the mortgagor and allows a statutory violation with potentially severe adverse consequences to proceed unchecked if a lawsuit is not brought, and is contrary to the consumer protection nature of the statute.

Additionally, the Court found that it completely misses the point of the publication requirement because the purpose is to notify potential bidders who do not have that information and whose bids may be chilled by concerns over the foreclosing party’s inability to show, in recordable form, an assigned interest in the mortgage it purports to foreclose. Moreover, the Court found that there is nothing difficult or inhibitive in a requirement that assignment documents be in place at the time of notice and auction.

“The entities that run the large mortgage pools often insist that attorneys they hire must complete the entire foreclosure process within a very short period of time. As a result, some attorneys choose to move forward with the foreclosure process even though they have not obtained and recorded all the documents that they need to do it the right way. Their hope is that they can conduct the foreclosure auction under the time frames they’re given, and then finish up the paperwork at a later date,” said Brandow. “We would never do it this way for our bank clients. It has to be done correctly,” she added.

Third, the banks claimed that case law and prevailing title practice support post-notice/post-auction assignment, so long as the ultimate assignee was the foreclosing party. The Court rejected this argument on the grounds that case law unequivocally holds that a notice that fails to identify the holder of the mortgage is defective, thereby rendering the foreclosure sale void as a matter of law. Moreover, the Court found that the cases cited by the banks either predated G. L. c. 244, § 14, had no precedential value, or did not reflect the holding the banks argued.

The decision also questioned the validity of REBA Title Standard No. 58, which deals with out of order recording of mortgage discharges and assignments. Judge Long found that REBA Title Standard No. 58, has never been reviewed or ruled on by any court, and a portion of it misconstrues G. L. c. 244, § 14, and its interpreting case law.

Simply stated, the Court held that G. L. c. 244, § 14, requires publication in the name of the holder of the mortgage for the foreclosure sale to be valid. The Court reasoned that the statute does so to assure potential bidders that the foreclosing party can promptly deliver good title and to prevent opportunities for collusion and for taking unfair advantage of the mortgagor. According to Judge Long, to allow a foreclosing party, without any interest in the mortgage at the time of the sale (recorded or unrecorded), to conduct the sale in these circumstances, bid, and then acquire good title by later assignment is completely contrary to G. L. c. 244, § 14’s intent and commands.

The Court stated that the best practice is to put the assignment on record prior to notice publication so it is available for all to examine. Judge Long also noted that at the very least, the assignment should be fully executed and available, in recordable form, at the time of the foreclosure sale.