The Home Equity Theft Reporter Cases & Articles: Bay State High Court To Foreclosure Fraud Banksters: 'You Can't Give What You Don't Have!" (No Matter How Unwitting Or Lacking In Bad Faith Buyer Is)

Tuesday, October 25, 2011

Georgetown University Professor of Law Adam J. Levitin writes in Credit Slips:

The Massachusetts Supreme Judicial Court just handed down a second major mortgage foreclosure ruling, Bevilacqua v. Rodriguez. The case was an Ibanez follow-up dealing with the rights of a purchaser at an invalid foreclosure sale. I thought this was a no brainer case and said so in an amicus brief co-authored with some of the Credit Slips crew.(1)

As the trial court noted,(2) the foreclosure sale purchaser has to lose otherwise I could actually sell you the Brooklyn Bridge or some other property I don't own.

What was cool about this case from an academic perspective was that it pitted two heavyweight, Latin-inscribed principles of commercial law against each other: the nemo dat quod non habet principle (you can't give what you don't have) and the bona fide purchaser principle (one who takes in good faith for value and without notice of defect will get legal protection against claims).

While these are both venerable principles of commercial law, there should have been no question that nemo dat prevails. It is arguably the foundational principle of commercial law: the most one party can transfer to another are the rights it has.

We have one critical carve-out to that principle, the holder-in-due-course doctrine, but the holder-in-due-course is much like the bona fide purchaser: it only applies if you take in good faith and without notice of defect. And if you're buying at a non-judicial foreclosure sale, you've got notice of possible defect (and one might argue about good faith). It's a little like the problem of finding a bargain when shopping--if it's too good of a deal, it could be a fraudulent transfer.

And so the Massachusetts Supreme Judicial Court held. If the foreclosure was done improperly, the foreclosing party didn't have title to the property and thus couldn't transfer title to the purchaser. The court didn't dismiss the suit with prejudice, so Mr. Bevilacqua could get the property--if the foreclosure is done right in the first place, but that means starting over again.

A lot of people think that the ruling in Bevilacqua will kill the REO market. I doubt it. It might make it a bit harder to get title insurance, but the title insurers have to keep issuing titles because they need the cash flow. If there's a widespread problem, they're already insolvent, so why not keep on doing business? There's no tort of deepening insolvency (at least in Delaware).

As with Ibanez, the Supreme Judicial Court merely upheld very sensible principles that shouldn't be controversial: you need to be the mortgagee to foreclose and you can't sell what you can't deliver.

What's kind of astounding is that the banks have had the chutzpah to challenge these basic principles of commercial law, as if centuries of commercial law jurisprudence should suddenly bend to their convenience. This is the same sort of arrogance that engendered the creation of MERS and the Article 9 mortgage transfer process.

There's a third case awaiting decision from the Massachusetts Supreme Judicial Court, Eaton v. Fannie Mae [go here for court docket with links to all briefs] which deals with the question of whether a "naked mortgagee"--a mortgagee that isn't the noteholder--can foreclose. I filed an amicus arguing no way no how, but we'll see how the court rules.(3)