The U.S. Court of Appeals for the First Circuit recently ruled that a borrower stated a plausible claim for wrongful foreclosure under Section 14 of the Massachusetts foreclosure law, where the complaint set forth allegations challenging whether the assignment of the loan to the foreclosing trustee took place prior to the foreclosure action to confer power of sale under the foreclosure statute, and that without further discovery, questions existed as to whether a purported "confirmatory assignment" in fact documented a bona fide assignment that had taken place before the foreclosure.
The Court also ruled that the borrower could amend her complaint to sufficiently plead her claims for fraud and unfair and deceptive trade practices in relation to the foreclosure, as the lower court erroneously based its analysis of the sufficiency of those claims on its finding that a valid pre-foreclosure assignment had in fact occurred.
A copy of the opinion is available at: http://www.ca1.uscourts.gov/pdf.opinions/11-2431P-01A.pdf.
Plaintiff borrower ("Borrower") obtained a residential mortgage loan that was sold on the secondary mortgage market shortly after it was executed as part of a pool of securitized mortgages held by defendant bank ("Loan Owner"), as trustee. A so-called "Pooling and Servicing Agreement ("PSA") partly governed the operations of the trust, including the timing as to when mortgage loans could be transferred into the trust. The various transfers of the loan were not recorded in the county registry of deeds as they occurred.
Borrower defaulted on the mortgage loan, and Loan Owner foreclosed on her property. Initially acting pro se, Borrower filed a complaint in Massachusetts state court against Loan Owner, the loan servicer, and others (collectively, "Defendants"), alleging that the assignment of her loan to the Loan Owner occurred after the deadline set forth for such transfers in the PSA. This, Borrower, asserted, rendered both the assignment of the loan into the trust as well as the foreclosure null and void under Massachusetts law, because the defendants lacked power of sale under Section 14 as they did not hold the note and the mortgage at the time they began the foreclosure proceedings against her.
As support for her assertion, Borrower attached to the complaint a document entitled "Corporate Assignment of Mortgage" ("Corporate Assignment"), which purported to assign Borrower's loan to Loan Owner and which was recorded in the registry of deeds after the date of the foreclosure. The Corporate Assignment specified the date of assignment as being over a year after the PSA's supposed cut-off date for transfers into the trust. Borrower also argued that Defendants lacked standing to foreclose because they did not have possession of the note at the time of the publication of the scheduled foreclosure sale of the property.
In addition to seeking declaratory relief as to the validity of the foreclosure, the complaint included various other allegations, including failure to comply with the Massachusetts requirement for "foreclosure by entry," lack of standing to foreclose, fraud, and unfair and deceptive trade practices in violation of Massachusetts law.
Defendants removed the case to federal court and moved to dismiss for failure to state a claim, arguing that Borrower was barred from litigating the foreclosure as she failed to enjoin the foreclosure proceedings, and that she could not challenge the assignment of the mortgage because she was neither a party to the PSA nor a third-party beneficiary thereof.
Defendants also asserted in part that the Corporate Assignment clearly indicated that the mortgage had been assigned to Loan Owner at the time of the filing of the foreclosure action, even if the Corporate Assignment itself was executed after the foreclosure, because the Corporate Assignment was a proper "confirmatory assignment" under the Supreme Judicial Court's decision in U.S. Bank, N.A. v. Ibanez, 941 N.E.2d 40 (Mass. 2011)("Ibanez").
In addition, Defendants argued among other things that Borrower failed to plead the fraud claim with sufficient particularity and that Borrower failed to allege any unfair or deceptive practices or indicated how she was injured by Defendants' conduct.
After a hearing, the lower court dismissed the case in its entirety without leave to amend, concluding in part that the Corporate Assignment evidenced a valid assignment consistent with Ibanez. The court also concluded that Borrower failed to plead fraud with sufficient particularity, that her argument that Loan Owner had to hold both the mortgage and the note in order to foreclose was meritless, and that she lacked standing to challenge the assignment as she was neither a party to nor a third-party beneficiary of the PSA. Borrower appealed.
The First Circuit reversed in part, finding that the complaint stated a plausible claim for violations of Section 14 of the Massachusetts foreclosure law, and remanded to allow Borrower to amend her complaint as to the claims for fraud and unfair and deceptive trade practices.
As you may recall, Section 14 permits only "the mortgagee or his executors, administrators, successors or assigns" to exercise the power of sale under a mortgage, which may be exercised only if the foreclosing entity is the "assignee of the mortgage at the time of the notice of sale and the subsequent foreclosure sale." See Ibanez, 941 N.E.2d at 49-51; Mass. Gen. Laws ch. 244, § 14 ("Section 14").
In addition, in order to state a claim for fraud, a complaint must plead: (1) that the statement was knowingly false; (2) that [defendants] made the false statement with the intent to deceive; (3) that the statement was material to the plaintiffs' decision . . .; (4) that the plaintiffs reasonably relied on the statement; and (5) that the plaintiffs were injured as a result of their reliance." Doyle v. Hasbro, Inc., 103 F.3d 186, 193 (1st Cir. 1996). See also United States ex rel. Rost v. Pfizer, Inc., 507 F.3d 720, 731 (1st Cir. 2007); Fed. R. Civ. P. 9(b).
Finally, Massachusetts law provides that in the event of a foreclosure by entry "a memorandum of the entry shall be made on the mortgage deed and signed by the mortgagor or person claiming under him, or a certificate, under oath, of two competent witnesses to prove the entry shall be made." Mass. Gen. Laws ch. 244, § 2 ("Section 2").
Noting that Borrower's complaint lacked clarity, and focusing for the most part on whether Defendants held power of sale under Section 14, and whether a valid assignment had occurred prior to the initiation of the foreclosure, the First Circuit concluded that Borrower alleged sufficient facts to set forth a plausible claim under Section 14, without addressing the validity of the assignment into the trust under the PSA.
In so doing, the First Circuit pointed out that at the time this case began, a mortgagee seeking to execute under the mortgage had to possess only the mortgage to initiate foreclosure proceedings, not both the note and mortgage. Cf. Eaton v. Fed. Nat'l Mort Ass'n., 469 N.E.2d 1118 (Mass. 2012)(ruling prospectively only that a "mortgagee" refers to the person or entity holding the mortgage at the time of filing of foreclosure action and also either the note or acting on behalf of the note holder). Moreover, the Court emphasized that by pointing out in her complaint the discrepancy in the dates listed for the purported date of assignment and the date of the recording of the assignment -- which was after the foreclosure began and just a few days before the foreclosure sale of Borrower's property -- Borrower had stated a plausible claim that the assignment may have actually taken place after the foreclosure had been finalized and was thus not merely a "confirmatory assignment."
Rejecting Defendants' argument that the document was clearly a confirmatory assignment recognized by the Supreme Judicial Court in Ibanez as a valid means of documenting that a bona fide assignment had taken place prior to foreclosure, the Court stressed the holding in that case that a foreclosure carried out by an entity lacking power of sale is void. Ibanez, 941 N.E.2d at 50, 53.
Thus, noting that the Corporate Assignment attached to Borrower's complaint plainly indicated that it was recorded after the foreclosure, and purported to reference a pre-foreclosure assignment in its heading but did not also indicate in its body that it was a confirmation of a written pre-foreclosure assignment, the Court concluded that the lower court erred in ruling that Borrower could make no plausible claim under Section 14.
With respect to Borrower's claims for fraud and unfair and deceptive trade practices, in reviewing Borrower's complaint to determine whether it met the fraud pleading requirements under both Massachusetts law and the Federal Rules of Civil Procedure, including the specific requirement that a complaint plead injury as a result of plaintiff's reliance on the defendant's false representations, the Court agreed with the lower court that Borrower's complaint did not meet the threshold particularity requirements that must be pled in order to state a claim for fraud. The First Circuit further noted in part that the complaint failed to provide notice to Defendants regarding the discrete acts that allegedly were unfair or deceptive "within the penumbra of some . . . concept of unfairness [or deceptiveness]." See Kenda Corp. v. Pot O'Gold Money Leagues, 329 F.3d 216, 234 (1st Cir. 2003)(noting that the applicable statute does not define "unfair" and "deceptive"); Mass. Gen. Laws ch. 93A, § 2.
In short, the Court stressed that to state a claim for unfair and deceptive practices it was not enough for Borrower to broadly allege that Defendants foreclosed on her property in violation of Massachusetts foreclosure law, but that Borrower must allege some "extortionate quality that gives . . . the rancid flavor[s] of unfairness [and deceptiveness]." See Arthur D. Little, Inc. v. Dooyang Corp., 147 F.3d 47, 55 (1st Cir. 1998).
Nevertheless, the First Circuit ruled that Borrower could amend her complaint, reasoning that the lower court erred insofar as it applied its erroneous findings regarding Borrower's Section 14 claim that a valid pre-foreclosure assignment had taken place to its analysis of her claims for fraud and unfair and deceptive practices.
The Court expressly did not address Borrower's argument that the assignment of the loan into the trust occurred after the cut-off date for transfers of loans into the trust in violation of the PSA, relying instead on its ruling that the Borrower alleged enough facts to set forth a plausible claim for violations of Section 14.
Accordingly, the First Circuit remanded the case back to the lower court.
Ralph T. Wutscher
McGinnis Wutscher LLP
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