Wednesday, June 27, 2012

FYI: Mass SJC Rules Mortgagee of Record + Holder or Agent of Note Holder May Foreclose

The Massachusetts Supreme Judicial Court recently held that, in order to conduct a valid foreclosure pursuant to a power of sale in Massachusetts, a foreclosing "mortgagee" must at the time of sale be both the mortgagee of record and the holder of the underlying promissory note, or act as the authorized agent on behalf of the actual note holder. 
Also, recognizing the ruling's potential impact on prior foreclosures, the Court clarified that its decision would apply only to future mortgage foreclosure sales.
A copy of the opinion is available at: 
Plaintiff borrower ("Borrower") obtained a mortgage refinancing loan that was ultimately sold on the secondary mortgage market to defendant mortgage purchaser ("Loan Owner").  Borrower executed both a promissory note and a mortgage that named Mortgage Electronic Registration Systems, Inc. ("MERS") as mortgagee, as nominee for the lender.  The mortgage referenced the underlying promissory note and contained a power of sale provision, specifying that, in the event of default, the lender could "invoke the statutory power of sale and any other remedies permitted by applicable law."
Borrower defaulted on her loan.  MERS assigned its interest as mortgagee to defendant loan servicer ("Servicer"), which later foreclosed on Borrower's home pursuant to the power of sale contained in the mortgage.  Servicer purchased the property at the subsequent foreclosure sale, and afterwards assigned the foreclosure deed to Loan Owner. 
When Loan Owner brought an action to evict Borrower from the property, Borrower filed a counterclaim, arguing that the foreclosure sale was invalid because Servicer did not hold Borrower's Note at the time of the foreclosure sale and thus lacked authority to foreclose.
Borrower also filed a complaint for injunctive and declaratory relief.  In addition to filing a motion for a preliminary injunction as to the pending eviction, Borrower sought a declaration that the foreclosure sale and ensuing deed were null and void because the Servicer was not the holder of both the note and mortgage at the time of the foreclosure.   For purposes of Borrower's motion for preliminary injunction only, Servicer and Loan Owner (collectively "Defendants") stipulated that Servicer did not hold Borrower's mortgage note at the time of the foreclosure sale.
Relying on common law, the trial court ruled that a valid foreclosure sale pursuant to a power of sale required physical unity of the mortgage and the underlying note in possession of the foreclosing mortgagee at the time of the sale.  Thus, based partly on the stipulation that Servicer did not hold the note at the time of the foreclosure sale, the trial court granted the preliminary injunction, ruling that Borrower would likely succeed in proving that the sale was void and that Defendants had no authority to evict Borrower and take possession of the property.
Appeals ensued.  After the Appeals Court denied Defendants' petition for interlocutory review, the Supreme Judicial Court transferred the case for direct appellate review to determine Borrower's likelihood of prevailing on the merits. 
As you may recall, Massachusetts law allows a foreclosure sale pursuant to a power of sale, providing that "upon any default . . .  the mortgagee or his executors, administrators, successors or assigns may sell the mortgaged premises  . . . by public auction . . . first complying with the terms of the mortgage and with the statutes relating to the foreclosure of mortgages by the exercise of a power of sale, and may convey the same by proper deed  . . . to the purchaser . . .  and such sale shall forever bar the mortgagor  . . . from all right and interest in the mortgaged premises, whether at law or in equity."  G.L. c. 183 § 21.
In addition, Massachusetts foreclosure law provides in relevant part:  "[t]he mortgagee .  . . , or a person authorized by the power of sale, . . . may, upon breach of condition and without action, do all the acts authorized or required by the power; but no sale under such power shall be effectual to foreclose a mortgage, unless, previous to such sale, [proper notice is given]."  G.L. c. 244 § 14 ("Section 14").
The Massachusetts Supreme Judicial Court began its analysis with an overview of the applicable common law of mortgages, concluding that, under common law, where a mortgage and note are separated, a foreclosing mortgagee lacks authority to foreclose.  See, e.g., U.S. Bank, N.A., v. Ibanez, 458 Mass. 637, 652 (2011) (where mortgage and note are separated, "holder of mortgage holds the mortgage in trust for the purchaser of the note").  See also Wolcott v. Winchester, 15 Gray 461, 465 (1860)(mortgage separated from note is "a mere technical interest"); Howe v. Wilder, 11 Gray 267, 269-70 (1858)(holder of mortgage could not foreclose where it no longer held the underlying note).
Nevertheless, in addressing Defendants' argument that Massachusetts statutory law expressly authorized MERS and its assignees to foreclose under the power of sale, the Court pointed out that for a foreclosure sale pursuant to a power of sale to be valid, the mortgagee must first comply not only with the mortgage, but also with applicable non-judicial foreclosure statutes. 
In so doing, the Court rejected the Defendants' assertion that there was no ambiguity in the term "mortgagee" in Section 14, and therefore that the mortgagee of record need not also hold the note in order to be able to foreclose.  Instead, the Court held that the use of the term in other statutory provisions reflected an understanding that a "mortgagee" was also the holder of the mortgage note.  Accordingly, in light of both the common law and the statutory use of the term "mortgagee," the Court ruled that a "mortgagee" in Section 14 refers to the mortgagee who also holds the underlying note.
Importantly, however, the Massachusetts Supreme Judicial Court also ruled that a foreclosing mortgagee need not have physical possession of the mortgage note in order to conduct a valid foreclosure.  Observing that there was no applicable statutory language prohibiting the application of agency principles within the context of mortgage foreclosure sales, the Court ruled that the authorized agent of the note holder, such as Servicer in this case, may therefore act as the "mortgagee" and conduct a valid foreclosure sale pursuant to a power of sale, even if the agent is not the actual note holder.
Cognizant of the potentially disruptive effects of its ruling, and mindful of the arguments presented in the numerous amicus briefs filed by industry participants, the Court expressly ruled that its interpretation of "mortgagee" would have prospective effect only.
Turning back to Borrower's request for a preliminary injunction, the Court noted that because Borrower's allegations were based solely on "information and belief," Borrower had not provided an adequate factual basis for the granting of a preliminary injunction insofar as she had failed to establish that Servicer neither held the note nor acted on behalf of Loan Owner. 
Accordingly, the Court vacated the trial court's order granting the preliminary injunction and remanded the case for further proceedings.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Chicago, Illinois 60602
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