Monday, November 7, 2011

Bay State Appeals Court: Failure To Record Loan Extensions, Passage Of Time Fatal To Mortgages; Lenders Left Holding Bag With Voided Lien Interests

Lexology reports:

  • The Massachusetts Appeals Court recently issued two separate decisions interpreting Massachusetts General Laws c. 260, § 33, the Obsolete Mortgages statute. The result, in both cases, was a finding that each lender's mortgage had been discharged, notwithstanding the fact that the party seeking to obtain the benefit of the discharge had actual knowledge that there was an off-record extension of the mortgage.


  • In Harvard 45 Associates, LLC v. Allied Properties and Mortgages, Inc., & others, 80 Mass. App. Ct. 203 (2011), the plaintiff, Harvard 45 Associates, LLC ("Harvard 45"), brought a quiet title action in the Land Court after acquiring title to property in Westwood, Massachusetts at a sheriff's sale. The complaint alleged that a mortgage granted to Allied Properties and Mortgages, Inc. (the "Allied Mortgage") on May 31, 2001 had been discharged under G.L. c. 260, § 33, due to the fact that it had been greater than five (5) years from the August 31, 2001 term stated in the Allied Mortgage and no extension of the mortgage had been recorded.


  • In Housman v. LBM Financial, LLC, 80 Mass. App. Ct. 213 (2011), the plaintiff, Charles J. Housman, Trustee of Pine Banks Nominee Trust ("Housman"), was the successful bidder at a foreclosure sale of a second mortgage. Subsequent to the foreclosure of the second mortgage, the first mortgagee, LBM Financial, LLC ("LBM"), moved to foreclose a mortgage (the "LBM Mortgage") dated May 9, 2003 and containing a term of four months. While the parties to the LBM Mortgage had executed an extension of the LBM Mortgage prior to the expiration of its original term, the extension was never recorded. The foreclosure sale of the LBM Mortgage was held seven (7) days after the LBM Mortgage would have been discharged based on G.L. c. 260, § 33 and assuming the unrecorded extension of the term of the LBM Mortgage was not recognized. Housman filed an action in the Superior Court, alleging that the foreclosure sale of the LBM Mortgage was a nullity. The Superior Court granted LBM's motion to dismiss, holding that Section 33 did not apply due to Housman's actual knowledge of the extension of the first mortgage. Housman appealed the Superior Court decision.

  • On appeal, the Appeals Court, in two separate decisions rendered on August 25, 2011, held that the Allied Mortgage and the LBM Mortgage had been discharged as a matter of law. In reaching this conclusion, the Appeals Court focused on the issue of whether actual knowledge that a mortgage has been extended is sufficient to prevent the mortgage from being discharged in the absence of a recorded extension.(1)

For more on the appeals court's reasoning on why it left the mortgage lenders holding the bag in each case, see The Importance Of Recording Mortgage Extensions (may require subscription; if no subscription, TRY HERE - then click appropriate link for the story).

(1) In Housman v. LBM Financial, LLC, the court made this observation:

  • We conclude that the meaning of the statute is clear on its face. The language of the statute plainly discharges as matter of law all mortgages five years after the date on which they became due, unless an extension, acknowledgment, or affidavit is recorded within that period of time. The requirements of the statute are clear and must be strictly satisfied.

    Our reading of the statute finds support in Federal court decisions interpreting the same language. Rejecting the argument that § 33 applies only to defunct or inactive mortgages, the United States Bankruptcy Court concluded, "[t]he language of the Obsolete Mortgages [s]tatute is unambiguous and contains no exceptions. A mortgagee's actions, short of timely recording an appropriate document, are ineffective to extend an expired mortgage. Had the legislature intended the Obsolete Mortgages [s]tatute to have a more narrow application, ... it was certainly capable of drafting the statute accordingly."
    In re 201 Forest St., LLC, 404 B.R. 6, 10 (Bankr.D.Mass.2009).

    Reversing on other grounds, the reviewing court agreed that "[t]he effect of the Obsolete Mortgages [s]tatute is to extinguish the mortgagee's rights as mortgagee."
    LBM Fin., LLC v. 201 Forest St., LLC, 422 B.R. 888, 893 n. 7 (B.A.P. 1st Cir.2010).

    The Bankruptcy Court also considered LBM's attempted foreclosure of another property owned, for a period, by Pine Banks, subject to LBM's mortgage on it, and reached the same conclusion we adopt today, finding that a purported extension is invalid if not recorded pursuant to the requirements of § 33. See
    In re Shamus Holdings, LLC, 409 B.R. 598, 602 (Bankr.D.Mass.2009). See also Motta v. Andre, 434 B.R. 193, 201 (Bankr.D.Mass.2010).

    We also find support for our approach in the decisions of other states, which have strictly construed the recording requirements of mortgage extensions.

    The Supreme Court of Iowa concluded that the failure to record an extension precludes an action between mortgagor and mortgagee to foreclose a mortgage that has been discharged pursuant to the state's "Foreclosure of Ancient Mortgages" statute. See
    Willow Tree Invs., Inc. v. Wilhelm, 465 N.W.2d 849, 850 (Iowa 1991).

    See also
    Pro-Max Corp. v. Feenstra, 117 Nev. 90, 95 (2001) (concluding similar statute in Nevada was unambiguous and operated to extinguish any debt on real property secured by a deed of trust ten years after the debt becomes due in the absence of a recorded extension).

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