Published on: July 23, 2012
On June 22, 2012, the Massachusetts Supreme Judicial Court (SJC) issued a highly anticipated decision in the case of Eaton v. Federal National Mortgage Association. The decision resolves a number of inconsistent and contrary decisions amongst Massachusetts Superior courts, the Land Court and U.S. District Court on the issue of whether there must be “unity” of the note and mortgage for a mortgagee to be legally entitled to foreclose on a defaulted borrower. Said differently, must a party hold both the note and the mortgage before it can foreclose on a homeowner. Some courts have said yes, others no. Through the SJC’s decision in Eaton, the issue is now resolved.
Henrietta Eaton was the owner of a property in Roslindale. Eaton gave a mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee for BankUnited FSB. MERS subsequently assigned the mortgage to Green Tree Servicing, LLC. The assignment did not reference an assignment of the note evidencing the loan made by BankUnited to Eaton. After defaulting on her payments, Green Tree foreclosed on the mortgage and bought the property back at the sale. Green Tree then assigned its rights as high bidder to FNMA and FNMA became record owner of the property. Thereafter, FNMA filed an action in Boston Housing Court to evict Eaton from her former home.
Eaton hired counsel to challenge her eviction in Housing Court and also filed a separate action in Suffolk Superior Court to obtain an injunction against FNMA to prevent her eviction. Through the Superior Court action Eaton also sought to invalidate the foreclosure sale. Eaton’s primary argument was that Green Tree was not the holder of the note when it foreclosed, thus rendering Green Tree unauthorized to conduct a foreclosure sale. If Eaton were correct, the foreclosure sale would be invalidated and Green Tree would have to acquire the note from the current holder and foreclose a second time.
The stakes of Eaton were extremely high. Many members of the real estate bar feared the wide spread negative implications of a unity requirement since such a ruling would call into question nearly every single foreclosure sale conducted in the recent past and beyond.
In Friday’s opinion, the SJC ruled that unity of the note and mortgage is in fact required as a prerequisite to foreclosure. The Court interpreted the term “mortgagee” in statutes pertaining to foreclosure to be defined as “the person or entity then holding the mortgage and also either holding the mortgage note or acting on behalf of the note holder.” As a result, in order for a party to foreclose on a homeowner, that party must be the holder of the mortgage (the lien on the property) as well as the holder of the note (the instrument which evidences the debt incurred by the borrower to obtain the property).
However, the court struck a very important balance with its decision in two important ways. Firstly, the decision is prospective in nature only. Thus, any foreclosure previously done cannot be challenged as not complying with the unity mandate of Eaton. Even if a foreclosed homeowner could prove that their bank did not possess the note at the time of foreclosure, the sale cannot be undone by a court since the Eaton decision will only be a requirement for foreclosures conducted after the decision. Secondly—and more importantly—the decision provides that, as an alternative to a mortgagee holding the note, the foreclosing party may “act on the behalf of the note holder.” Consequently, if a foreclosing mortgagee does not have actual physical possession of the note, it can obtain an affidavit or other documentation from the holder of the note stating that the party holding the mortgage is authorized to foreclose on behalf of the note holder, making the logistics of foreclosure far easier for mortgagees.
Courts will very rarely make a decision prospective. Since Courts interpret existing law, a decision will retroactively affect events of the past that occurred after that law was enacted. This is, in part, because litigants have acted in reliance on how laws are written and a Court’s decision gives further meaning to those laws.
However, in Eaton, the court was cognizant of several important practical considerations which resulted in the prospective impact of the decision as well as the fact that the decision announced a “new common law rule”. The court noted the arguments made by counsel for FNMA as well as that of several amicus briefs filed by members of the real estate bar (including a brief filed by REBA and co-drafted by MEEB’s Tom Moriarty), that a decision requiring unity of the note and mortgage would “wreak havoc with the operation and integrity of the title recording and registration systems by calling into question the validity of any title that has a foreclosure sale in the title chain.”
These practical issues regarding the potential impact of the ruling were surely influential on the Court and making a prospective ruling which is highly favorable to both FNMA and all other lenders. Arguably, issuing a prospective decision was beneficial to the entire real estate industry, including consumers, as there is now certainty in the legal viability of the tens of thousands of foreclosures in the recent economic downturn. This certainty includes the fact that individuals who bought homes from banks post-foreclosure can be assured that their title is not in question and cannot be attacked on unity grounds at some point in the future.
A retroactive decision likely would have resulted in a cavalcade of litigation by foreclosed homeowners as a means of delaying foreclosure or getting back in their home, albeit temporarily. Courts would have been inundated with new complaints and title insurers flooded with new claims. Essentially, any individual foreclosed upon could call upon their bank to prove that the bank held the note at the time of the foreclosure sale, or was otherwise authorized by the note holder to conduct the sale. If no such proof could be provided in court, the foreclosure sale would be invalidated and title would revert back to the former owner, even if that foreclosure sale occurred years before. Providing such proof would be incredibly difficult on banks due to the fact that mortgages were often assigned numerous times and also bundled with other mortgages by the thousands and converted into securities called collaterized debt-obligations, one of the chief contributors to the most recent financial crisis.
Mortgagee Must Hold the Note or Act on Behalf of Note Holder
The second and more important balance striking accomplished by the SJC was the language of the decision allowing for a mortgagee to be “acting on behalf of the note holder” as an alternative to actual physical possession of the note. This language was expanded upon by the Court.
We do not conclude that a foreclosing mortgagee must have physical possession of the mortgage note in order to effect a valid foreclosure. There is no applicable statutory language suggesting that the Legislature intended to proscribe application of general agency principles in the context of mortgage foreclosure sales.
In other words, a note holder can authorize the mortgage holder—if the mortgage and note are held by different parties—to conduct the foreclosure sale. Since mortgages were bought and sold by banks to other banks or financial institutions, often without proper assignments, notes often stayed with the original lender or had an unclear chain of title. While this issue was in part the result of oversight and the need to quickly turn new mortgages into securities, lenders also based their practice on their good-faith belief that Massachusetts law did not require a mortgagee to hold the note in order to foreclose.
While the court did not specifically define “acting on behalf,” it would appear that a mortgagee can simply obtain an affidavit or other similar documentation from the note holder which authorizes the mortgagee to foreclose. The timing of such authorization was also not specified. It is unclear whether a bank could obtain the written authorization after the sale, but before the foreclosure deed is recorded. The safest practice would be to obtain written authorization prior to filing a complaint in the Land Court which starts the foreclosure process.
The Court’s Analysis
The Court’s decision rested on a review of the specific language of applicable foreclosure statutes—in particular the use of the word “mortgagee” in those statutes—as well as case law interpreting foreclosure statutes as far back as the mid 1800’s. In reviewing statutory language, the Court found that the term mortgagee was ambiguous and did not refer to just the holder of the mortgage as FNMA argued. Rather, the Court determined that “the term ‘mortgagee’ appears in several of these [foreclosure] statutes, and its use reflects a legislative understanding or assumption that the ‘mortgagee’ referred to also is the holder of the mortgage note.”
With respect to the common law, the Court stated that “the basic nature of a mortgage as security for an underlying mortgage note, and the role of a ‘bare’ mortgagee as equitable trustee for the note holder—it appears that, at common law, a mortgagee possessing only the mortgage was without authority to foreclose on his own … or otherwise disturb the possessory interest of the mortgagor.”
Based on this analysis, the Court determined that M.G.L. c. 244, sc. 14 (pertaining to foreclosures under the Power of Sale contained in virtually every mortgage) required the foreclosing mortgagee to be both the holder of the note and holder of the mortgage. . In conjunction with the seminal Ibanez decision (which requires that the mortgagee hold an assignment of the mortgage in recordable form prior to publishing the first notice of sale), Eaton has done much to provide clarity where much uncertainty existed. The worst case scenario of a retroactive decision strictly requiring actual physical possession of the note by the mortgage holder would have had profound effects on the real estate market in Massachusetts. Perhaps most importantly, the world of real estate has not been thrown into chaos and disorder. The Court’s fair and well reasoned opinion averts that potential disaster and provides a great deal of assurance to banks, homeowners, brokers and lawyers alike.
For a copy of the Eaton decision please [click here].