Do-overs Denied in Massachusetts Foreclosure Lawsuits

Published on: November 1, 2009

Following Land Court Justice Keith C. Long’s March 26, 2009, ruling that invalidated two mortgage foreclosures conducted by U.S. Bank and Wells Fargo Bank, those banks moved to vacate the Court’s judgment. In U.S. Bank National Association v. Ibanez & two companion cases, Land Court Miscellaneous Case Nos. 384283, 386018, 386755 (KCL) (Mar. 26, 2009), the Court found that two 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. Although both banks bid successfully at the foreclosure sales, and subsequently recorded all the relevant documents, neither bank had a record interest in the properties at the time of either publication or foreclosure. Consequently, the Court found the banks’ foreclosures void as a matter of law.

On October 14, 2009, Judge Long issued a Memorandum and Order denying the banks’ motions to vacate, and rejecting all of the banks’ arguments. In so doing, he reminded the banks that lawsuits are a serious matter and not a place for “do-overs”. Judge Long also stated that the issues in this case are not merely problems with paperwork, but rather that they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts Legislature.

“This case illustrates that when a lender needs to foreclose, it has to select counsel who will get it right the first time,” said Laura Brandow, an attorney at Marcus, Errico, Emmer & Brooks, P.C., who handles mortgage foreclosures for a number of local banks. “Anytime we do a mortgage foreclosure, we always make sure to have all assignments on record prior to starting legal proceedings. That way, we know that we will not run into the problems faced by the banks in the Ibanez cases,” she added.

In moving to vacate the Land Court’s judgment, the banks advanced five unpersuasive arguments. First, the banks contended that they were surprised when the Court looked at whether they were mortgage holders at the time of notice and sale in connection with their motions for default judgment. Judge Long found that the banks cannot credibly claim surprise that this would be an issue or that a judgment would enter against them on this issue. The banks had requested broad declarations that the homeowners’ rights in the properties had been extinguished and that title vested in them as a result of the foreclosure sales. The Court found that this necessarily involved their compliance with G. L. c. 244, § 14, since they could only conduct a valid sale if they met its requirements. Moreover, the Land Court had asked the banks, in connection with their motions for default judgment, to address a Bankruptcy Court case which held that acquiring the mortgage after the entry and foreclosure sale does not satisfy G. L. c. 244, § 14. The Court noted that the banks argued on this issue at length in their motions, and that as a result they were not surprised in the slightest that the “present holder of the mortgage issue” would be addressed in the court’s ultimate resolution of the case.

Second, the banks argued that had they known the issue was going to be addressed, they would have pled their case differently or more narrowly. Judge Long blasted this argument by stating essentially that litigants cannot seek a do-over by waiting for the decision, and then if dissatisfied, amend the pleadings to remove the issue. The Court stated that when a plaintiff requests a declaration of the parties’ rights as its prayer for relief, it has no grounds to object when that declaration is made, even if it is different from the one it desired. Here, if the banks wanted something narrower than what their complaints requested, according to the Court, they were obligated to say so explicitly.

Third, the banks insisted that since the defendant homeowners had been defaulted, it was inappropriate for judgment to be entered against the plaintiff banks, and at worst, their motions for default judgment should simply have been denied with leave for them to amend to try again. Instead, Judge Long stated that the Court took as true all of the factual allegations pled in the complaints (a post-notice, post-sale mortgage assignment to the plaintiffs), and entered the judgment that was lawful in light of the facts established, even though the judgment was uncontested and unfavorable to the moving party.

Fourth, based on new evidence and new arguments the banks submitted post-judgment, the banks maintained they were the “present holder of the mortgage” within the scope and meaning of G. L. c. 244, § 14, at the time of notice and sale. The banks claimed that they possessed the note (endorsed in blank), an assignment of the mortgage in blank (i.e. without an identified assignee), and a contractual right to obtain the mortgage at those times.

The Court rejected the banks’ new factual allegations and argument they were the present holders of the mortgages. Addressing the newly alleged facts, Judge Long stated that none of them were evident based on recorded documents at the Registry at the time of notice and sale, and all of them require a close reading of complex securitization documents, which lack evidentiary support. Notwithstanding the new facts presented, Judge Long reaffirmed his earlier ruling that a foreclosure is invalid under G. L. c. 244, § 14, where it fails to name the present holder of the mortgage, and that post-sale mortgage assignments to the successful bidder do not suffice under G. L. c. 244, § 14.

In both cases, Option One Mortgage Corporation (which was the original mortgagee in one case and an assignee in the other) executed blank mortgage assignments to third parties, which were never recorded. The Court found that these blank mortgage assignments were not legally recordable under G. L. c. 183, § 6C, which establishes recording requirements for mortgages and assignments, and because they failed to name an assignee, they were ineffective to transfer an interest in the mortgages. Option One, in its capacity as “originator” sold the loans to either Lehman Brothers or Bank of America, setting forth a process whereby these loans were placed into pools with other loans, securitized, with certificates being sold to investors. While the loans at issue changed ownership several times prior to foreclosure, none of these transactions appeared as a matter of public record.

The Court thus considered the blank mortgage assignments to be “bearer paper,” which while negotiable by whichever entity that possessed it, were ineffective to transfer a title interest. Judge Long noted that a mortgage is a conveyance in land, and nothing is conveyed unless and until it is validly conveyed. Judge Long also rebuffed the notion that a change in the law is warranted to reflect “industry standards and practice.” He noted that if those standards and practice have brought us to the present situation, we should learn from that experience.

The Court also rejected the banks’ fifth argument that in the event that the Court disagreed with that their possession of the note, an assignment in blank, and a contractual right sufficed to make them “present holders of the mortgage,” they contended that the foreclosure sales were nonetheless valid because they were authorized by the last record holder of the mortgage and the plaintiffs acted as the “agent” of that holder. Judge Long dismissed this argument on the grounds that nothing in the record showed that another entity acting in its capacity as loan servicer for Option One, had the capacity to dispose of Option One’s assets. Moreover, the Court stated that G. L. c. 244, § 14, requires complete transparency, particularly when what is at stake is of utmost importance and finality – the complete extinguishment of a person’s rights in his or her property, often the home where that person’s family lives, and the transfer of those rights to someone who wants complete assurance of good title to that property so that he or she can live there without concern.

In conclusion, the Court found that the issues in these cases lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature, and that to accept the banks’ arguments would be to allow them to take someone’s home without any demonstrable right to do so, based upon the assumptions that they ultimately will be able to show that they have that right, and that potential bidders will be undeterred by the lack of a legal foundation for the sale and will nonetheless bid full value that that foundation will ultimately be produced, even if it takes a year or more.

[Ibanez Decision]