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: 

http://www.courts.ca.gov/opinions/documents/S183703.PDF.

 

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
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: Cal Sup Ct Reverses Appellate Court, Holds NBA Preempts State "Convenience Check" Law

Reversing the Court of Appeal, the California Supreme Court recently held that the National Bank Act preempts California's credit disclosure requirements for credit card issuers that issue "convenience checks" to their cardholders, ruling that the disclosure requirements "significantly impaired" national banks' powers to engage in the business of banking, including "loaning money on personal security."  In so ruling, the Court held that national banks need not make a factual showing to demonstrate significant impairment.
 
A copy of the opinion is available at: 

http://www.courts.ca.gov/opinions/documents/S183703.PDF.

 

Defendant national bank ("Issuing Bank") issued a credit card to plaintiff ("Cardholder") and subsequently sent Cardholder preprinted draft instruments, commonly known as "convenience checks," as an additional means of using his credit card account.  The convenience checks did not include the detailed disclosures that California state law requires credit card issuers to provide along with such checks.
 
Cardholder used the checks to make purchases and incurred finance charges in excess of the finance charges Cardholder would have otherwise incurred had he simply used his credit card for the purchases. 

 

Seeking monetary and injunctive relief, Cardholder filed a putative class action suit against Issuing Bank, alleging that Issuing Bank had engaged in unfair competition in violation of California's Business and Professional Code by failing to make the required state-law disclosures. 
 
Before the trial court, Issuing Bank argued that the National Bank Act ("NBA") and its federal regulations preempted the state disclosure law, and, in light of a Ninth Circuit decision involving the same factual and legal issues, renewed its motion for judgment on the pleadings.  See Rose v. Chase Bank USA, N.A., 513 F.3d 1032, 1034 (9th Cir. 2008) (NBA preempted California convenience check disclosure requirements and national bank's failure to attach the disclosures to its convenience checks was therefore not unlawful). 

 

Relying on Rose, the trial court granted Issuing Bank's motion.  Cardholder appealed.
 
The Court of Appeal reversed, ruling in part that the NBA did not preempt California's disclosure requirements because California law did not "significantly impair" the powers of national banks, as the state law did not forbid national banks from making loans through the use of convenience checks, but merely required "clear and conspicuous" disclosures to be attached to the convenience checks.  The Appellate Court also held, despite the Ninth Circuit's preemption ruling in Rose, that Issuing Bank had failed to make the required factual showing of significant impairment.

 

Issuing Bank sought review by the California Supreme Court, which reversed and remanded.

 

As you may recall, the NBA authorizes national banks "[t]o exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental power as shall be necessary to carry on the business of banking; . . . by  . . . loaning money on personal security. . . ."  12 U.S.C. § 24 (Seventh). 

 

In addition, California's Civil Code section 1748.9 requires "[a] credit card issuer that extends credit to a cardholder through the use of a preprinted check or draft [to] disclose on the front of an attachment that is affixed by perforation or other means to the preprinted check or draft, in clear and conspicuous language, all of the following information:  (1) that 'use of the attached check or draft will constitute a charge against your credit account.' (2) The annual percentage rate and the calculation of finance charges, as required by . . . [federal Regulation Z] . . . . (3) Whether the finance charges are triggered immediately upon the use of the check or draft."  Cal. Civ. Code. § 1748.9(a).

 

The California Supreme Court noted that under the "significant impairment test," codified into federal law by the Dodd-Frank Wall Street Reform and Consumer Protection Act, section 1748.9's disclosure requirements imposed conditions on the powers conferred on national banks by the NBA, which expressly include "loaning money on personal security."  See 12 U.S.C. § 25b(1)(B)(preemption standards for national banks and subsidiaries); Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996)(state consumer financial laws are preempted if the state law prevents or significantly interferes with a national bank's exercise of its powers).  See also Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007)(subsidiaries of national banks not subject to Michigan's bank regulatory regime).

 

In so ruling, like the United States Supreme Court in Barnett Bank, the California Supreme Court observed that there was no indication in the NBA that Congress intended to subject a national bank's powers to local law.   Moreover, the California Supreme Court pointed out that section 1748.9 imposed detailed requirements as to the content, language, manner, and format of disclosures that exceeded any requirements imposed by federal law. 
  
Thus, disagreeing with the Court of Appeal's characterization of section 1748.9's requirements as not "forbidding" the exercise of national banks' powers and therefore not a "significant impairment" to the exercise of those powers, the California Supreme Court reasoned that "to say that [Issuing Bank] may offer convenience checks so long as it complies with section 1748.9 is equivalent to saying that [Issuing Bank] may not offer convenience checks unless it complies with section 1748.9.  . . . [T]he effect of section 1748.9 is to forbid national banks from offering credit in the form of convenience checks unless they comply with state law."   

 

The California Supreme Court also noted that, even if California's disclosure requirements were not particularly onerous, any ruling that the state law requirements could stand would potentially subject national banks to the various disclosure rules of all fifty states.  

 

Importantly, disagreeing with the Court of Appeals, the California Supreme Court also emphasized that national banks need not make a factual showing to demonstrate significant impairment.  According to the California Supreme Court, requiring individual national banks to make a factual showing of significant impairment would be impractical, partly because preemption rulings would then vary depending on the particular operations of individual banks and preemption law would therefore lack consistency.

 

Also rejecting Cardholder's arguments as to the meaning of the NBA and that section 1748.9 was a law of general applicability, the Court noted, first, that Cardholder's reading of "subject to law" ran counter to the historical interpretation of the NBA as preempting state law "absent express language that makes a federal banking power subject to state law."  Second, the Court concluded that section 1748.9 was not a generally applicable law similar to a law against unconscionable contracts, because section 1748.9 expressly targets "credit card issuer[s]" and mandates specific and affirmative conduct on the part of such entities.  The Court pointed out that, although section 1748.9 applied equally to all credit card issuers in California, including national banks, section 1748.9 nevertheless restricted national banks' federal powers to engage in the "business of banking."
 
Accordingly, the California Supreme Court ruled that section 1748.9's disclosure requirements "significantly impaired" the exercise of authority granted to national banks under the NBA, and were therefore preempted.   

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: Cal App Ct Rules Holder of "Sold Out Second" Assigned Prior to F/C of First Lien Could Still Pursue Deficiency

Reversing the lower court's ruling to the contrary, the California Court of Appeal, Fourth District, recently held that a separate "sold-out" junior lien holder could pursue a deficiency against a debtor, ruling that California's anti-deficiency statute did not apply where junior and senior liens were held by different entities at the time of the senior trustee's sale and there was no intent to evade the antideficiency statute at the time of loan origination.
  
A copy of the opinion is available at: 

http://www.courts.ca.gov/opinions/documents/G045936.PDF.

 

Defendant-borrower ("Borrower") refinanced a loan with a so-called "piggyback loan," consisting of two separate loans, a senior loan and a junior loan, evidenced by separate promissory notes and separate deeds of trust on the same piece of real estate.  Shortly after the loan transaction, the lender assigned the junior loan to another financing company, which in turn assigned the loan to a bank.  Borrower defaulted on both the junior and senior loans.  The lender then assigned its senior lien to a debt buyer, which conducted a non-judicial foreclosure sale of the property, thereby extinguishing the security of the junior lien. 

 

Following the foreclosure sale, the junior lien was assigned to plaintiff ("Junior Lienholder"), a purchaser of non-performing loans.  Junior Lienholder filed suit against Borrower, asserting causes of action for breach of contract, money lent, and money had and received, among others.   The parties filed cross-motions for summary judgment. 

 

The trial court granted Borrower's motion, ruling that California's anti-deficiency statute precluded recovery on the loan formerly secured by the junior lien which, in the court's view, was not a true "sold-out" junior lien, because Borrower's loan from a single lender was originally structured with two notes and trust deeds as a way to thwart California's anti-deficiency statute. 

 

Junior Lienholder appealed.  The Court of Appeal reversed.

 

As you may recall, California's anti-deficiency statute limits the right to obtain a deficiency judgment against a debtor where a foreclosure sale recovers less than is owed on a debt.  The statute provides in relevant part: "[n]o judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property . . . executed in any case in which the real property . . . has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust."   Cal. Civ. Proc. §580d. 
 
The Appellate Court reviewed the history of and policies behind California's anti-deficiency laws and noted that section 580d clearly applied to situations where a junior lienor foreclosed its lien pursuant to a trust deed and thus barred that junior lienor from obtaining a deficiency judgment against the debtor.  See National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 1221 (2001)(discussing the "one form of action" rule). 

 

The Court also observed that the law is less clear where, as in this case, a single lender has made multiple loans secured by multiple deeds of trust on a single piece of property, assigned the junior loan to a third party,  and the assignee of the senior lien has held a non-judicial foreclosure that eliminated the security of the the junior lienor.
 
Relying on a California Supreme Court opinion, the court noted that section 580d did not refer to  multiple liens on a single piece of property and did not apply where a different entity's senior trustee's sale rendered the junior lien unsecured.  See Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 43-44 (1963)(section 580d inapplicable to  "sold-out" junior lienor who may pursue debtor for amounts owed).    

 

As in Roseleaf, the Appellate Court noted that in cases involving multiple notes and trust deeds held by different parties, section 580d's policy concerns about a single secured creditor obtaining both a non-judicial foreclosure and a deficiency judgment did not come into play.  Quoting Roseleaf, the Court explained, "[t]he junior's right to recover should not be controlled by the whim of the senior, and there is no reason to extend the language of section 580d to reach that result."  Roseleaf, supra, 59 Cal.2d at 44.

 

The Appellate Court thus rejected Borrower's argument that section 580d should be applied whenever a single lender makes multiple loans secured by multiple trust deeds on a single piece of real estate, regardless of whether the parties' intent was to thwart section 580d.  See Simon v. Superior Court, 4 Cal. App. 4th 63 (1992)("Assuming, arguendo, legitimate reasons do exist to divide a loan to a debtor into multiple notes thus secured, section 580d must nonetheless be viewed as controlling where . . . the senior and junior lienors are identical and those liens are placed on the same real property").
 
In so doing, the Court distinguished the facts of this case, where the lender assigned the junior lien shortly after loan origination, from the situation where a single creditor, holding both the senior and junior liens, assigned the junior lien after the trustee's sale on the senior lien.  In such a scenario, the Court noted, the assignee would simply stand in the position of the assignor, and section 580d would apply to prevent a deficiency judgment against the debtor.  Bank of America, N.A. v. Mitchell, 204 Cal. App.4th 1199, 1207 (2012).
 
The Court further rejected Borrower's assertion that the status of the junior lienor should be determined by applying section 580d at the time of loan origination rather than at the time of the senior trustee's sale.  The Court pointed out that, according to Borrower's reading of section 580d, "assignment of junior liens at any time . . . would be ineffectual in changing the section 580d consequences that have attached to multiple loans . . . ." 

 

Thus, the Court stressed that the critical factor in this case was that, at the time of the senior trustee's sale, the junior and senior lienors were different entities.  The Court further pointed out that there was no evidence in this case of any intent to avoid the consequences of section 580d. 

 

Accordingly, the Appellate Court rejected the trial court's analysis and reversed.

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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