Banksters Dodge 'Ticking Time Bomb' Of Crappy Massachusetts Real Estate Titles; State High Court Says Lenders Failing To Strictly Comply w/ Conditions Precedent To Exercise Of Power Of Sale Will Result In Void (As Opposed To Voidable) Foreclosure Sales, But Refuses To Apply Ruling To Past Sales

From a comment on the website of Massachusetts law firm Johnson & Borenstein, LLC:

• Mortgagees beware – the Supreme Judicial Court has ruled that a foreclosing entity must strictly comply with the provisions of the mortgage which delineate the notice of default to homeowners. This case extends the rule, set out in United States Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637 (2011), that strict compliance with the power of sale provisions and the statutory notice requirements is necessary to result in a valid foreclosure.
  
  Lesley Phillips and Linda Pinti (“Pinti”) brought suit in Superior Court seeking to prevent their eviction as a result of Harold Wilion’s summary process action against them. Wilion purchased the property at a foreclosure sale, conducted by Emigrant Mortgage Company, Inc. by exercise of the power of sale contained in the Pinti mortgage. Pinti sought a declaratory judgment that the foreclosure sale was void because Emigrant failed to comply with paragraph 22 of the mortgage, which concerns the mortgagee's provision of notice to the mortgagor of default and the right to cure, and also the remedies available to the mortgagee upon the mortgagor's failure to cure the default, including the power of sale.
  
  
  ***
  
  The Superior Court granted summary judgment in favor of Wilion, concluding that there was no requirement that Emigrant strictly comply with paragraph 22 of the mortgage, because the provision has no direct relationship to the power of sale, and dismissed Pinti’s complaint. Pinti appealed, and the SJC opted to take the case for itself.
  
  A majority of the Court interpreted a long line of mortgage foreclosure cases to stand for the proposition that a mortgagee “must strictly comply not only with the terms of the actual power of sale in the mortgage, but also with any conditions precedent to the exercise of the power that the mortgage might contain.”
  
  Relying upon an old case, Foster, Hall & Adams Co. v. Sayles, 213 Mass. 319 (1913), the SJC determined that “the sending of the prescribed notice of default is essentially a prerequisite to use of the mortgage's power of sale,” and that “the ‘terms of the mortgage’ with which strict compliance is required -- both as a matter of common law under this court's decisions and under § 21 -- include not only the provisions in paragraph 22 relating to the foreclosure sale itself, but also the provisions requiring and prescribing the preforeclosure notice of default.”
  
  The concern, the SJC said, is that the notice sent by Emigrant did not inform the homeowners that they must initiate a lawsuit to challenge the foreclosure – the notice seems to say that the homeowners will have an opportunity to raise any valid defenses in a later foreclosure action. Because Massachusetts is a nonjudicial foreclosure State, that “later” action never arrives, thereby depriving a homeowner of the opportunity to contest the foreclosure. The Court also noted that it is “hardly unfair or burdensome” to require a mortgagee to comply with the terms of its own mortgage document.
  
  The Court distinguished its decision in U.S. Bank Nat'l Ass'n v. Schumacher, 467 Mass. 421 (2014), on the grounds that G.L. c. 244, § 35A, the statute at issue in Schumacher, is not related to the exercise of the power of sale, but concerns the provision of a sufficient period of time to permit a homeowner to cure a default. Therefore, the Court decided, the defective notice sent to Phillips and Pinti rendered the foreclosure sale void.(1)
  
  Lest mortgagees become unduly concerned about pending or past foreclosures being invalidated on the grounds of a notice failure, the SJC stated that this decision is prospective only.(2)

For more, see New Requirements For Foreclosing Mortgagees Courtesy Of The Supreme Judicial Court.

For the court ruling, see Pinti v. Emigrant Mortgage Co., No. SJC-11742 (Mass. July 17, 2015).

Thanks to Deontos for the heads-up on the court ruling.

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(1) The court's discussion on finding the foreclosure sale void, as opposed to merely voidable, follows:

• Given our conclusion, the question presents itself whether Emigrant's failure to comply strictly with the default notice provisions of paragraph 22 renders the title obtained by Wilion as a result of the subsequent foreclosure sale voidable rather than void.[23] See Chace v. Morse, 189 Mass. 559, 561-562 (1905), and cases cited. As the court observed in Chace, this is not always an easy question to answer:
  
  "The distinction between the two classes of cases [void and voidable] has not been very clearly defined, and the decisions in the different jurisdictions do not entirely agree. It has repeatedly been said that in order to make a valid sale under a power in a mortgage, the terms of the power must be strictly complied with. Roarty v. Mitchell, 7 Gray, 243 [(1856)]; Smith v. Provin, 4 Allen, 516 [(1862]). . . . Where the sale is to foreclose a mortgage for a breach of the condition, there is no authority to sell unless there is a breach, and an attempted sale would be without effect upon the right of redemption. So, where a certain notice is prescribed, a sale without any notice, or upon a notice, lacking the essential requirements of the written power, would be void as a proceeding for foreclosure. Moore v. Dick, 187 Mass. 207 [(1905)]. But if everything is done upon which jurisdiction and authority to make a sale depend, irregularities in the manner of doing it, or in the subsequent proceedings, which may affect injuriously the rights of the mortgagor, do not necessarily render the sale a nullity. The sale will be invalid so far as to enable the mortgagor, or perhaps the purchaser, to avoid it, and still be effectual if all the parties interested desire to have it stand."
  
  Id. See Bevilacqua v. Rodriguez, 460 Mass. 762, 778 (2011) ("Generally, the key question in this regard is whether the transaction is void, in which case it is a nullity such that title never left possession of the original owner, or merely voidable, in which case a bona fide purchaser may take good title").
  
  As the quoted passage from Chace, supra, suggests, a bona fide purchaser's "title is not to be affected by mere irregularities in executing a power of sale contained in a mortgage, of which irregularities he has no knowledge, actual or constructive." Rogers, 169 Mass. at 183-184. As applied to this case, therefore, the question of void versus voidable may be reframed to ask whether the failure of Emigrant, as the mortgagee, to send the plaintiffs a notice of default providing the actual information required by the terms of the mortgage concerning the plaintiffs' right "to bring a court action" in order to raise any defense to the foreclosure sale is a "mere irregularity" that does not affect the validity of the property's title.
  
  As previously discussed, in a nonjudicial foreclosure jurisdiction like Massachusetts, misstating this information in a way to suggest that a mortgagor with a defense does not need to initiate a lawsuit but may wait to respond to a foreclosure lawsuit filed by the mortgagee can have disastrous consequences for the mortgagor: if the mortgagor has a valid defense to the foreclosure sale going forward, but is not made aware that he or she must initiate an action in court against the mortgagee to raise that defense, the sale may well proceed and result in title passing to a bona fide purchaser without knowledge of the issue — at which point, and depending on the nature of the defense, the mortgagor's right to redeem his or her home may well be lost. See Bevilacqua, 460 Mass. at 777-778.[24] Emigrant's failure to provide the required and correct information on this point in the notice of default cannot fairly be described as a "mere irregularit[y] in executing a power of sale contained in a mortgage." Rogers, supra. Contrast Chace, 189 Mass. at 562. The failure renders the subsequent foreclosure sale to Wilion void.
  
  The position taken by the dissent is that strict compliance by Emigrant with the notice of default provisions in paragraph 22 was required, but that Emigrant's failure to do so did not render the foreclosure sale void. See post at ___. In the dissent's view, the result in this case is essentially controlled by our decision in Schumacher. See post at ___. The dissent reasons that § 35A, the subject of Schumacher, and the notice of default provisions in paragraph 22 are birds of a feather in terms of purpose and operation; that for the same reasons Schumacher concludes § 35A was not a statute relating to the foreclosure by sale, so paragraph 22 is not a term of the mortgage concerned with foreclosure by sale; and, consequently, as was the case in Schumacher, Emigrant's defective notice of default rendered the foreclosure sale only voidable, not void.
  
  We disagree. The dissent fails to take into account the distinction — reflected in our cases and in the language of § 21 — between the "terms of the mortgage" instrument relating to foreclosure by exercise of the power of sale, and "statutes" relating to foreclosure by the power of sale. But this distinction is a critical one. As discussed previously, that § 35A is not one of the statutes relating to foreclosure by the power of sale to which § 21 refers does not answer whether the provisions of paragraph 22 qualify as "terms of the mortgage" relating and integrally connected to the power of sale under § 21. And as to that question, this court's decisions about mortgage terms indicate that by structure and content, the notice of default required to be given under paragraph 22 is integrally connected, and operates as a prerequisite, to the proper exercise of the mortgage instrument's power of sale. Emigrant's strict compliance with the notice of default required by paragraph 22 was necessary in order for the foreclosure sale to be valid; Emigrant's failure to strictly comply rendered the sale void.

(2) Prospective vs. Retroactive effect

On this very significant point, the Massachusetts high court's desire here was to dodge, at all costs, the disaster with real estate titles that would have arisen throughout the state (the "ticking time bombs" of void - as opposed to voidable - titles) had the court applied this ruling retroactively. Some may remember that the court took this same dodge several years ago in Eaton v. Federal Nat'l Mtge. Ass'n, 462 Mass. 569 (2012).

In this regard, this case represents a significant win for the banksters in that the court decided to give this ruling prospective (ie. "going forward") effect only (although it does apply the ruling to the parties to this litigation as well), thereby rendering the ruling inapplicable to any past foreclosures (and, thus, obliterating any "ticking time bomb" problem that would have occurred with the flood of past foreclosure sales that would have been voided had the court decided to give this ruling retroactive effect).

The court addressed this point at the end of its majority opinion:

• We turn to the question whether our decision in this case should be given prospective effect only, because the failure of a mortgagee to provide the mortgagor with the notice of default required by the mortgage is not a matter of record and, therefore, where there is a foreclosure sale in a title chain, ascertaining whether clear record title exists may not be possible.
  
  We confronted the same issue in Eaton, 462 Mass. at 586-587. As Eaton also indicates, in the property law context, we have been more willing to apply our decisions prospectively than in other contexts. See id. at 588.
  
  We conclude that in this case, because of the possible [me here - "disasterous"] impact that our decision may have on the validity of titles, it is appropriate to give our decision prospective effect only: it will apply to mortgage foreclosure sales of properties that are the subject of a mortgage containing paragraph 22 or its equivalent and for which the notice of default required by paragraph 22 is sent after the date of this opinion.
  
  As in Eaton, however, and for the reasons stated there, we will apply our ruling to the parties in the present case. See id. at 589, and cases cited.[25]

The court also noted, in footnote 25 of the majority opinion, that it expressly declined to decide whether it will apply their ruling to cases currently pending on appeal:

• The parties have not argued, and we do not reach, the question whether our holding in this case should be applied to any other class of cases pending on appeal. See Galiastro v. Mortgage Elec. Registration Sys., Inc., 467 Mass. 160, 167-170 (2014).

By giving this ruling prospective, as opposed to retroactive, effect only, the court appears to reaffirm the notion held by some that, no matter how badly the banksters screw up, they can usually count on the government (ie. the court system is part of the judicial branch of government) to somehow pull their collective asses out of the fire.

Failure To Allege: Void (As Opposed To Merely Voidable) Transfer, Risk Of Double Payment Or Other Prejudice Is Fatal To Borrowers' Foreclosure Defense As Nebraska High Court Says Homeowners Lacked Standing To Challenge Allegedly Faulty Mortgage Assignment From One Bankster To Another

As has been been observed by at least one lender-favoring commentator:(1)

• Attacking sufficiency, accuracy, or validity of assignments of mortgages and deeds of trust has been among the most common strategies employed by borrowers to challenge foreclosures. Allegations regarding the status of MERS, the legal authority of the individual executing the assignment, and the timing of the assignment’s recording have all been raised and litigated in courts throughout the United States.
  
  Recently, however, the Nebraska Supreme Court joined a growing number of state courts that have rejected such arguments, citing fundamental questions about borrowers’ standing to challenge contracts in which they have no legally cognizable interest.

However, the point the commentator and others fail to emphasize, and what some courts throughout the country are either missing, or less-than-effective foreclosure defense attorneys are failing to raise, is the fact that, in order to have standing to challenge said assignments, an allegation that the assignment is absolutely void, and an allegation that some injury or prejudice (or risk thereof) due to the faulty assignment is present and must be sufficiently plead, briefed, and ultimately proven by the homeowners.

This appears to be the case in the recent ruling by the Nebraska Supreme Court referenced above.

Buried on the 16th page of the 18-page ruling, and on the basis of what it pointed out earlier in its ruling, the Nebraska high court made this observation:

• We need not decide in this case whether a borrower who is at risk of paying the same debt twice, or otherwise at risk of prejudice from an improper assignment, would have standing to challenge that assignment of its mortgage.
  
  Had the Marcuzzos established an injury that directly related back to the assignment of their mortgage, our holding may have been different.
  
  But no such injury caused by the assignment is alleged or found. Strictly applying Nebraska law, the Marcuzzos were not a party to the assignment. Nor was the assignment made for their benefit. Thus, the Marcuzzos cannot challenge the assignment contract's validity.

Clearly, the court here is telegraphing to anyone who's bothering to pay attention (ie. hopefully, homeowners in foreclosure, foreclosure defense attorneys, etc.) that challenging said assignment requires an allegation (which must be plead and proven) that the assignment is absolutely void (ie. void ab initio, invalid, ineffective, etc.) and not merely voidable, and an allegation that the homeowners face some harm or risk of harm due to the faulty assignment. In this case, the homeowner, according to the court, didn't bother to even allege a void assignment, harm, or risk of harm, much less prove it.

In laying its groundwork for this observation (which it acknowledges is an exception to the general rule that one cannot challenge the validity of a contract to which it is neither a party nor a third-party beneficiary), the court made reference to a recent federal appeals court case in which the homeowner succeeded in challenging a mortgage assignment to which it was not a party:

• Some courts while accepting this general rule have recognized an exception if the borrower can show actual prejudice by the improper assignment of the loan.[22]
  
  For example, if the borrower was at risk of paying the same debt twice, then the borrower could establish a concrete injury arising from the improper assignment of the mortgage.[23]
  
  If the borrower can show any injury that is directly traceable to the assignment of the mortgage, then, under this exception, the borrower would have standing to challenge that assignment.
  
  Only one circuit court has held that the borrower does not need to demonstrate injury in order to have standing to challenge the validity of an assignment that the borrower was not a party to.[24] But, the court strictly circumscribed the type of challenge for which a borrower may have standing.[25]
  
  In Culhane v. Aurora Loan Services of Nebraska,[26] the First Circuit Court of Appeals held that a borrower can have standing to challenge the assignment of his or her mortgage where the borrower is arguing the mortgage is invalid, ineffective, or void. Examples of void assignments include where the right attempted to be assigned is not assignable, or a prior revocation of the assignment.[27]
  
  However, the Culhane court held that a borrower does not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party, but otherwise effective to pass legal title.[28]
  
  The plaintiff in Culhane argued that the assignor of the mortgage never had valid title to the mortgage, and therefore never had the right to assign the mortgage.[29] If true, the mortgage assignment would be void ab initio.
  
  The First Circuit Court of Appeals found that the harm to the plaintiff in such circumstances would be the foreclosure, which could be traced directly to the creditor's "exercise of the authority purportedly delegated by the assignment."[30] The court also found two key facts in favor of standing in light of the allegations presented: (1) that, in Massachusetts, debtors have a statutory right under state law to ensure that any attempted foreclosure on his or her home is conducted lawfully and (2) that the mortgage contained a power of sale without prior judicial authorization.[31] The court was careful to caution that its holding was narrow, specific to Massachusetts law, and applied only when the borrower challenged the mortgage assignment as invalid, ineffective, or void.[32]
  
  We find Culhane to be distinguishable from the case at bar. The Marcuzzos did not allege a void assignment. They did not allege that MERS, or Bank of the West, had no legally cognizable right to assign under the mortgage documents.
  
  Instead, the Marcuzzos' argument is that the assignment paperwork between the assignor and Bank of the West did not follow the proper procedural framework. Even if this were true, the assignment would not be defective.[33]

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Based on the forgoing, it appears clear that to have any chance at successfully challenging a faulty mortgage assignment, the homeowner must sufficiently plead, brief and prove that:

• the defective aspects of the assignment render it void ab initio (ie. ineffective, invalid, a nullity) and not merely voidable, and
• the homeowner faces some prejudice (ie. injury or risk of injury - risk of paying debt twice (ie. "double collection" on the part of note holder(s)), lack of assignor's right to assign, assignee's lack of title) which, as the court put it, "could be traced directly to the creditor's exercise of the authority purportedly delegated by the assignment."

For the Nebraska Supreme Court ruling, see Marcuzzo v. Bank of the West, 290 Neb. 809 (Neb. May 1, 2015).

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(1) See Borrowers Cannot Challenge Mortgage Assignments, Says Nebraska Joining Other States.

(2) For earlier posts providing examples of homeowners who have successfully challenged mortgage assignments, despite the fact that they were not parties to the assignment, see:

• Homeowners Have Standing To Challenge Faulty Mortgage Assignments From One Bankster To Another, But Only Where Defects Render Conveyance Absolutely Void, Not Merely Voidable,
  .
  1st Circuit: Borrower Has Standing To Challenge Mortgage Assignments When Invalid, Ineffective, Or Void; Transfers That Are Merely Voidable Are Immune From Protest,
  .
  Michigan Trial Court OKs Homeowner Challenge To Validity Of Mortgage Assignment Where Assignee's Lack Of Title Is Raised As A Defense (reversed on other grounds, HSBC Bank USA, NA v. Young, No. 313212 (Mich. App. 2014) (unpublished) (appeal denied HSBC v. Young, 2015).