Monday, February 4, 2013

FYI: MA SJC Vacates SCRA-Related Judgment in Favor of Loan Owner for Lack of Standing

The Massachusetts Supreme Judicial Court recently held that, in order to establish standing in a servicemember proceeding under Massachusetts law to determine whether a borrower in default on a home mortgage loan was entitled to the protections of the federal Servicemembers Civil Relief Act, a plaintiff loan owner was required to present evidence showing its status as either the mortgagee or as an agent of the mortgagee.  A copy of the opinion is attached.


Plaintiff bank, the trustee of a pool of securitized mortgages ("Loan Owner"), filed a complaint in equity under the Massachusetts Soldiers' and Sailors' Civil Relief Act ("Massachusetts Act") to determine whether defendant borrower ("Borrower") was entitled to foreclosure protections under the federal Servicemembers Civil Relief Act ("SCRA").  In its "servicemember complaint," Loan Owner asserted that it was the assignee and holder of Borrower's mortgage, supporting its assertion with a mortgagee's affidavit signed by the loan servicer ("Servicer").  Servicer averred that it had provided the Borrower with notice advising her of her right to cure her loan default, and that it was authorized to act on behalf of either the "Mortgagee or one holding under the Mortgagee." 


Borrower conceded that she was not entitled to foreclosure protection under the SCRA, but nevertheless moved to dismiss Loan Owner's complaint, arguing that Loan Owner lacked standing to bring a servicemember proceeding because it was unclear whether Loan Owner was in fact the holder of her mortgage loan. 


Following discovery, the lower court denied Borrower's motion to dismiss, concluding that Loan Owner had standing because Loan Owner had the contractual right to purchase Borrower's mortgage.  Concluding that "it is sufficient if the plaintiff satisfies the general requirements of standing," the lower court determined that the plaintiff in a servicemember proceeding "need not be the current holder of the note or the mortgage to have standing. . . ."


Borrower moved for reconsideration, which the lower court denied.   The lower court later entered judgment allowing Loan Owner to enter and to foreclose on Borrower's property in accordance with the terms of Borrower's mortgage.  Borrower appealed and, on its own motion, the Massachusetts Supreme Judicial Court ("SJC") transferred the case to itself.


The SJC vacated the judgment for entry and sale, and remanded, ruling that plaintiffs in servicemember proceedings must establish standing by presenting evidence as to their status as mortgagees or as the agents of such mortgagees.


As you may recall, the SCRA "provides for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service."  50 U.S.C. § 502.  To that end, the SCRA provides that a "sale, foreclosure, or seizure of property for a breach of a [loan] obligation" conducted while a party is in the military "shall not be valid" unless done pursuant to court order or agreement between the parties.  50 U.S.C. § 533.


In addition, the Massachusetts Act sets forth jurisdictional limitations, and expressly permits only those defendant mortgagors who assert entitlement to protection under the SCRA to appear in proceedings brought pursuant to the SCRA.  See St. 1943, c. 57, § 1 (1943), as amended ("Such proceedings shall be limited to the issues of the existence of such persons and their rights if any.").  Further, the Massachusetts Act limits the relief granted where a defendant mortgagor is not entitled to SCRA protections to a decree by the court stating that the mortgagor is not entitled to such protections, which decree bars the named defendant from later challenging the foreclosure or seizure under the SCRA. 


The SJC noted that the lower court erred in accepting Borrower's filings and allowing her to appear and be heard at all because Borrower had failed to assert in her responses that she was entitled to protections of the SCRA.  The SJC went on to explain, however, that notwithstanding the limitation on a non-servicemember's ability to raise standing as an issue, as a matter of subject matter jurisdiction, Loan Owner was required to establish that it had standing to allow the court to decide the merits of the claim.   Accordingly, the SJC ruled that a plaintiff in a servicemember proceeding is required to establish standing, even if the defendant is statutorily prohibited from appearing.  See Bevilacqua v. Rodiquez, 460 Mass. 762, 763-64 (2011). 


Turning to the issue whether a plaintiff in a servicemember proceeding must be a mortgagee in order to establish standing, rather than a mere holder of contractual right to purchase a mortgage, the SJC noted that to have standing a litigant must show that the challenged action caused him injury and must have a definite interest in the case such that his rights would be affected by the outcome of the case.  See Sullivan v. Chief Justice for Admin. & Mgt. of the Trial Court, 448 Mass. 15, 21 (2006); Bonan v. Boston, 398 Mass. 315, 320 (1986).


Applying this standard to the servicemember proceeding, the SJC, citing the purpose behind the SCRA, explained "[b]ecause nonmortgagees cannot, by law, take actions to foreclose that would trigger the protections accorded servicemember by the SCRA, extending standing in servicemember proceedings to nonmortgagees would not further the stated purpose of the SCRA."  See Eaton v. Federal Nat'l Mortg. Ass'n, 462 Mass. 569, 571 (2012).  In addition, noting that the SCRA also ensures that a foreclosure will not subsequently be deemed invalid for failure to provide SCRA protections to those so entitled, the SJC pointed out that non-mortgagees, being unable to foreclose, "could not suffer the loss that the servicemember proceeding redresses."


Thus, observing that plaintiffs with only the option to become a mortgage holder do not have the present authority to foreclose and that their interest in ascertaining whether a borrower is entitled to SCRA protections is limited to the SCRA's impact on the present value of their mortgage investment, the SJC concluded that such an interest does not give rise to the type of definite injury "within the area of concern" of the SCRA. 


Moreover, referring to the statutory notice requirements of the Massachusetts Act, the SJC pointed out that the notice form contains language identifying the plaintiff as one "claiming to be the holder of a mortgage."  Therefore, the Court reasoned, only current mortgagees may bring an action under the Massachusetts Act.  


Accordingly, ruling that the lower court applied the wrong standard in determining whether Loan Owner had standing in the servicemember proceeding, the SJC vacated the judgment for entry and sale, and remanded for further proceedings. 



Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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