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Is it Bad or is it Good? (The Sequel)

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Summer 2002, Volume 1, Number 2

Is it Bad or is it Good? (The Sequel)
by Gary F. Casaly, Special Counsel

In my last article appearing in The Massachusetts Focus I pointed out some instances where a title that looked bad was in fact good. The problem with these kinds of titles is, at worst, probably embarrassment if the title is rejected. But there's another group of masquerading titles that are not so kind. They mean business, and they can get you into a whole lot of trouble. These titles are the ones that look good, but in fact are bad. Here are a few examples of bad titles that disguise themselves as looking good.

Foreclosures and Constructive Trusts

Let's say your examiner drops an abstract on your desk and notes on the report page only the typical outstanding mortgage and maybe an easement or two. Big deal. As a conscientious conveyancer you of course read the title in its entirety, page-by-page. The chain seems to come down quite nicely, but you note nestled in the first few pages of the abstract that there had been a foreclosure of a mortgage and you decide to take a close look at the foreclosure documents to make sure that they all comply with the requirements of G.L.c. 244 and any other applicable laws. Of course, you establish that the parties who gave the mortgage in fact owned the property (good starting point!) and that the mortgage properly described the property and contained among other things a power of sale. The mortgage is from three individuals to a bank, is properly drafted and contains the necessary statutory language. The description is fine and the instrument is properly executed and acknowledged. Things seem to be in order.

The mortgage has marginal references on it indicating that it went through foreclosure. You examine the documents that are referenced and you note right off the bat that there are no proceedings under the Soldiers and Sailors Civil Relief Act, but this does not disturb you because one or more of the Title Standards cures the issue. So far, so good. The marginally-referenced instruments include an entry, an affidavit of sale and a foreclosure deed. You decide to inspect these documents with near-microscopic precision. The affidavit at first looks to be in order, but a closer inspection suggests that the publication dates were not properly spaced, but the entry looks good and three years have passed so you figure that makes everything okay. One of the mortgagors apparently made a high bid at the auction and the bank's foreclosure deed runs to her, and she then sells the property and off it goes, down the chain - right into your lap.

Something disturbs you about the title but you can't seem to put your finger on it. You keep going back to the affidavit which discloses an apparently defective sale, but then your eyes wander to the entry that seems to cure the defect. Back and forth you go, eyeing each of these instruments in succession. There's something not right here. What is it?

All of a sudden you recall reading something about a case called Salter v. Quinn, 334 Mass. 220, 134 N.E.2d 749 (1956). That's it! That's the issue. The title is bad. But how come?

It was held in Salter that when A and B gave a mortgage to a bank and the bank foreclosed the mortgage and B bid in at the foreclosure sale, the law would impress a trust on the property held by B for the benefit of A, his co-borrower. The court in Salter said such a title can be rejected.

The doctrine announced in Salter presents a conveyancing nightmare, which is easily spotted - provided you know what you're looking for! When multiple mortgagors give a mortgage that thereafter goes into default and one of the borrowers takes title from the foreclosing mortgagee an issue arises, at least when it appears that the foreclosure by sale was defective (as was the case in Salter) and the foreclosure stands solely upon the effectiveness of the entry. The court held that since the foreclosure sale under the power contained in the mortgage was defective the deed from the bank to the purchaser (one of the mortgagors) amounted to the purchase of an encumbrance by one cotenant at a time while both cotenants are actually in possession or are entitled to immediate possession. Such a transfer of an encumbrance is deemed to have been made for the benefit of all cotenants and the cotenant who makes that purchase is deemed to be holding the encumbrance for the others in a fiduciary capacity. In holding that the purchaser could rightly reject the title, the court said: "The facts concerning the title of the [seller] and the probable interest of [the borrower who did not participate in the foreclosure purchase] in such title plainly appear in the records of the registry of deeds …. This we think is enough to put the careful conveyancer on his guard and cast doubt upon the record title."

The foreclosure in Salter was by entry only (the sale having been deemed to be defective for a technical reason), so when one of the mortgagors took a deed from the mortgagee who had made the entry that deed amounted to an assignment of the mortgage (the three year period of redemption not having expired) and so the "cotenants [were] actually in possession or [were] entitled to immediate possession." The decision in Salter did not go so far as to reach the point, but it is wondered whether the oddity that Salter poses would apply in the case of foreclosures by sale.

Foreclosures and Revival

There are other circumstances when a mortgagor comes back into title and this can cause problems. This is where there are multiple mortgages on a property - a first and second, for example - and the first mortgage is foreclosed. If properly done, the foreclosure of the priority mortgage will "wipe out" the subordinate mortgage, but if the borrower comes back into title this otherwise eliminated lien can be "revived." It's easy enough to spot this issue when, soon after the foreclosure by the lender, the owner, due to some financial windfall, is able to reacquire the property from the foreclosing entity and takes title in his or her own name. Any second mortgage that had previously been "wiped out" will be revived by this reacquisition.

The real problem arises when the reacquisition by the foreclosed-upon owner occurs later on in the chain of title. Let's say, for example, that John gives a first mortgage to the bank and a second mortgage to the credit union. The bank's mortgage is foreclosed properly and the bank bids in and takes title. Of course, the credit union's mortgage is thereby extinguished. The bank then sells the property to Sally. Sally then sells to Mary, who sells to Bill, and so on. If John comes back into title later on in the chain his mortgage to the credit union will be revived. This fact, however, can be easily missed if you're not paying attention, especially where there have been intra-family transfers throughout the chain that tend to camouflage the problem.

It's worth noting that the revival issue appears not to cause a problem if the second mortgage (in this case the one to the credit union) made reference to the bank mortgage as a superior lien. In Huzzey v. Heffernan, 143 Mass. 232 (1887) A gave a mortgage to M-1 and a second mortgage to M-2. The mortgage to M-2 specifically excepted from the covenants of warranty the mortgage that had been given to M-1. M-1 foreclosed its mortgage and sold the property to a stranger who reconveyed the property to A. The question was whether the mortgage to M-2 was revived. The court recited the general rule:

If a man convey, with full covenants of warranty, land to which he had not title, and he afterwards acquires a good title, his after-acquired title inures to the benefit of his grantee in the prior deed, upon the ground that he is estopped to say that he was not seized in fee to the estate which he has conveyed with warranty.

The court, however, put great weight on the exception in the covenants in M-2's mortgage as to the prior mortgage that was granted to M-1, and said:

[t]o give the doctrine of estoppel operation [in this case] … would be to enlarge [the] covenant [given in M-2's mortgage] to a general covenant of warranty.

The result is that there is revival only if there is no mention of the first mortgage in the body of the second mortgage. (Actually, Huzzey was decided on the fact that the exception to the prior mortgage was in the covenants set forth at length in the mortgage to M-2, but at least one commentator has said - and I would agree - that the result should be the same even where no covenants are set forth in the mortgage and the reference to the prior mortgage is merely included somewhere in the body of the second mortgage.)

The Mortgage That Can't Be Foreclosed

I bet you think I'm going to write about a mortgage that does not contain a power of sale. Of course, if there's no power of sale - statutory or otherwise - then there can be no foreclosure sale or auction. But the mortgage can still be foreclosed by action or entry, so such a mortgage would not fit into the category of an "unforeclosable mortgage."

What I mean by a mortgage that can't be foreclosed is one that has in fact evaporated - but you may not be aware that that's the case. Many times in a title you come across an assignment of a mortgage. Most assignments are the "vanilla-flavored" kind: the original mortgagee assigns the mortgage to an investor. Sometimes, however, you come across a mortgage assignment to the mortgagor. We all know that most such assignments would cause a "merger," resulting in the mortgage being unified with the equity of redemption. That certainly would cause the mortgage to evaporate. But there are cases where an assignment of a mortgage can likewise cause the mortgage to evaporate, but this fact may not be as clear on the record title.

If the money used to pay off an encumbrance comes from the party who is obligated to pay the debt, an assignment of the encumbrance even to another party will have the effect of a discharge. "[W]hen the money is paid by one whose duty it is by contract, or otherwise, to pay the mortgage, it is a release, though in form it purports to be an assignment." Lyndon v. Campbell, 198 Mass. 29 (1908).

Ordinarily, you wouldn't care whether an assignment discharged a mortgage or not. But if the assigned mortgage is thereafter foreclosed and is the source of your title, this can make for some trouble. If the mortgage has been extinguished, its foreclosure would be a nullity.

The situation can arise in basically two ways and in each instance there's generally some fraud going on. Let's say that you're examining a title and see that John gave a mortgage to the bank. Then you see an execution against John. The execution, of course, messes up John's ability to sell his home. If John were to have a "typical closing" his mortgage to the bank would be paid off during the closing, the amount owed under the execution would be withheld to satisfy the creditor and John would get what ever was left over. John decides instead to buy the mortgage from the bank and take an assignment (it costs him no more than if the mortgage proceeds were withheld at a closing to pay off the mortgage) and then foreclose the mortgage. (The mortgage is not merged into the equity of redemption because the execution stands in the way of any such merger and keeps the mortgagee's interest and the equity of redemption effectively "separated.") Anyone (including John) who purchases at the foreclosure sale runs the risk of a challenge to the title (probably from the execution creditor) that the assignment to John effectively extinguished the mortgage because the funds used to buy the mortgage were John's.

Even if the assignment runs to another party the challenge can occur. In Widett & Widett v. Snyder, 392 Mass. 778 (1984) that's just what happened. Although there was no foreclosure in Widett, the priority of various mortgages was at stake. In that case the owner of property paid a lender the amount owed on a mortgage and had an assignment of the mortgage made to his son. The court said that the rule announced in Lyndon v. Campbell would apply and the assigned mortgage was extinguished.

The rule doesn't revolve around who physically cuts the check to pay the mortgage but rather whose funds are used to make the payment. For example, in Heller Financial v. Insurance Company of North America, 410 Mass. 400, 573 N.E.2d 8 (1991) where an insurance company anticipated liability under a bond it had issued in the event that a mortgage on the insured's property was foreclosed, it set up a fund in which it deposited money for the purchase of the mortgage in order to avoid the foreclosure. The funds were disbursed to the accounts of the mortgagor-insured, who paid the mortgage and directed that an assignment of the mortgage be made to the insurance company. In connection with the question as to whether the assigned mortgage was thereby extinguished, the court noted "[p]ayments were made by using [the insured's] checks, but the funds belonged to [the insurance company]," and therefore held that the payment was not made by one whose duty it was to pay the mortgage. (The fact that the insurance company made the payments to protect its own interests did not change this result. It never was obligated to pay off the mortgage, although it decided to do so.)

The Disappearing Easement

Here's another one of those instances when a title looks good but in fact it is bad. The problem in this case is that an appurtenant easement that provides access or utilities to the property spontaneously disappears because of the doctrine of merger which, due to the peculiar facts, could be easily missed by the examiner.

Imagine a property that has been granted an easement. The property in chief (the dominant estate) is on Smith Street. The easement that services this property is located on other land situated on Jones Street. The Jones Street property (the servient estate) is very large. The easement is located in the back of the property, far away from Jones Street, so the only way you'd realize that the servient estate was on Jones Street would be if you focused on that portion of the land actually abutting Jones Street far away from the easement area.

Of course, in determining that the easement was properly granted you'd examine the title to the servient estate along with the title to the dominant estate, but once the easement was effectively created there would be no further reason to continue to examine the title to the servient estate. After the easement had been granted there would be nothing that the owner of the servient estate could do to adversely affect it. A mortgage granted on the servient estate would be of no concern to you and even delinquent taxes and a subsequent tax taking would not disturb or affect the easement. (See G.L.c. 60, §45 that provides that any tax deed would be subject to any lawfully existing easements.)

Of course, the title to the dominant estate tumbles down the chain with, in each instance, the appurtenant right referenced in the successive deeds, or maybe without reference to any appurtenant right. (Such lack of reference would not prevent the appurtenant right from being conveyed. See G.L.c. 183, §15.)

Along the way, a certain set of facts cause the easement to evaporate. I've already stated how the easement in our case is going to disappear: the doctrine of merger will do it in. Everyone knows that when the servient and dominant estates come into a common ownership that an appurtenant easement which theretofore serviced the dominant estate will collapse. But sometimes the merger can occur and yet not be noticed by the examiner. Imagine that after the easement was created as an appurtenance that the servient estate, or the portion thereof over which the easement existed, was sold to the owner of the dominant estate. That fact alone would merge the easement, but would you find the deed? Remember, it's unlikely that you or your examiner would be running the title to the servient estate. There's really no reason to do so (except to avoid the very issue we're discussing). And certainly, you'd not be running the owner of the dominant estate in the grantee index! My guess is that you would never notice or care about any deed from the servient owner to the dominant owner.

So, now we have a merger of the easement. Then what happens? The owner of the dominant estate (and, as it turns out, also the servient estate, or the relevant portion thereof), who is the person you are running in the index, sells what was once the servient estate. Under Houghton v. Rizzo, 361 Mass. 635, 281 N.E.2d 577 (1992) you're duty-bound to look at all conveyances out from your owner even as to non-locus property (in the event that the owner in the deed decides to impose a reciprocal easement on retained property), but give me a break. Jones Street? Your property is on Smith Street! (Or perhaps the described property makes reference to no street in the area, especially where the conveyance from the servient owner, and now from the common owner, is of "internal" property far removed from Jones Street, or even Smith Street. No clue here!) When the conveyance is made of this property - which may very well have been back to a successor of the original servient owner who wanted to reacquire the property - no easement is reserved by the common owner for the benefit of the dominant estate. So now we have a merged easement - poof, it's gone - by reason of a deed from the servient owner to the dominant owner, and a severance of the once servient property without the creation of a new easement by way of a deed from the common owner. And, all this with the real possibility that the two deeds were never discovered!

Now comes the time to pass the title on the dominant estate. Up to now the two conveyances that I've discussed and which have destroyed the easement and prevented its re-creation have occurred "in the background," and may very well not have been noticed. The deed for the dominant estate is drafted, and mentions (or maybe not) the easement right that was forged some time ago and that appears to have tumbled down with the title to the present time. The only thing is, there is no easement that can be granted or created! Ponder that for a bit.