Bay State High Court: Innocent 3rd Party Purchaser At Faulty F'closure Sale Left Holding The Bag; Unwitting Buyer Merely Acquires Mortgage Assignment

In Boston, Massachusetts, Bloomberg reports:

• A Massachusetts man who bought property in a faulty foreclosure sale isn’t the true owner and so doesn’t have the right to sue over it, the state’s high court ruled. The Supreme Judicial Court, which in January found that banks can’t foreclose on a house if they don’t own the mortgage,(1) went one step further in a closely watched case and said a sale after that foreclosure doesn’t transfer the property. Therefore, the buyer couldn’t bring his court action against a previous owner, the court ruled.



• The high court upheld a lower-court decision that said Francis J. Bevilacqua III, the buyer of residential property in Haverhill, Massachusetts, never owned it because U.S. Bancorp foreclosed before it got the mortgage. Today’s ruling could have implications in the foreclosure crisis, in which banks are accused of clouding home titles through sloppy transferring of mortgages.(2)



• “By alleging that U.S. Bank was not the assignee of the mortgage at the time of the purported foreclosure, Bevilacqua is necessarily asserting that the power of sale was not complied with, that the purported sale was invalid, and that his grantor’s title was defective,” the court wrote.



• “In light of its defective title, the intention of U.S. Bank to transfer the property to Bevilacqua is irrelevant and he cannot have become the owner of the property pursuant to the quitclaim deed.”
  
  ‘Disappointed’ in Ruling
  
  Jeffrey B. Loeb, a lawyer for Bevilacqua, said that while he is “disappointed” in the ruling, it holds out a possible solution for so-called third-party buyers: re-foreclosure. “It reaffirms the concept that a defective foreclosure deed operates as an assignment of the mortgage and if you can trace the ownership of the mortgage, that person would have the right to re-foreclose,” said Loeb, of Rich May PC in Boston.



• The state high court’s January ruling in the earlier case, U.S. Bank v. Ibanez, didn’t address the status of third-party buyers who purchase property from someone who conducted an invalid foreclosure.

***

• Domino Effect’
  
  “In the rush to foreclose, the banks’ reckless origination and foreclosure practices have created a domino effect that has harmed Massachusetts homeowners as well as third-party purchasers,” Coakley said in a statement today. “This is yet another clear demonstration that the only way we are going to restore a healthy economy is to address the foreclosure crisis and hold the banks accountable for their actions.”



• Bevilacqua bought the property in 2006 from U.S. Bancorp, which oversees the mortgage-backed trust containing the loan. The bank isn’t a party to the case. “The court said he doesn’t have ownership rights but he has rights as a mortgagee and so he has the right to foreclose,” Loeb said.



• Re-foreclosure may present problems because someone else could win the auction, Richard D. Vetstein, a real-estate lawyer in Framingham, Massachusetts, who has represented clients in situations similar to Bevilacqua’s, said in a phone interview.
  
  ‘High and Dry’
  
  “They’re saying the innocent third-party purchaser, they’re out of luck,” Vetstein said of the Bevilacqua decision. “The court ruled that not only doesn’t he own it, but he has no standing under that procedural mechanism to have the court decree him as the owner. It’s another Ibanez case, where an innocent person bought at foreclosure and he’s left high and dry.”

For the story, see Home Sale After Bad Foreclosure Isn’t Valid, Court Rules.

For the ruling, see Bevilacqua v. Rodriguez, No. 10880 (Mass. October 18, 2011).

See also, Credit Slips: Nemo Dat Trumps Bona Fide Purchaser.

Thanks both to Mike Dillon at GetDShirtz.com and to Deontos for the heads-up on the ruling.

(1) U.S. Bank v. Ibanez, 458 Mass. 637 (Mass. 2011).

(2) At the risk of emphasizing what may be obvious to many, this 'crappy title' problem can affect both those properties that have gone through foreclosure, as well as those that haven't.

For more on the crappy title problem in connection with the filing of bogus land documents and improperly foreclosing on homes, see:

• Daily Finance: Why the Foreclosure Mess Settlement Proposal Can't Fix the Damage,
• Naked Capitalism: On the Clouded Title Mess and the Difficulties of Cleaning It Up.