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Mortgage Foreclosure and Non-record Assignees

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices Summer 2008, Volume 7, Number 3

Mortgage Foreclosures by Non-record Assignees — In Re Schwartz and Revised REBA Title Standard 58

by Ward P. Graham, New England Division Counsel

The Problem: Wrong Foreclosing Entity May Result in Invalid Foreclosure

It has become increasingly common practice among secondary market lenders and investors and their servicing companies to foreclose mortgages in the name of an entity that has no record title to the mortgage at the time of the commencement of foreclosure proceedings. In most cases, it seems, the foreclosing entity does not have record title to the mortgage at any time during the foreclosure process. Assignments from the record holder to the foreclosing lender are more and more often executed after the foreclosure sale and not recorded until all the other foreclosure documents are recorded, often months after the foreclosure sale. 

In these circumstances, the question becomes whether the foreclosing entity had any right to be foreclosing the mortgage and thereby taking title to the property away from the borrowers. Recent bankruptcy court decisions indicate that a Massachusetts mortgage foreclosure may be invalid if the entity foreclosing cannot establish definitively that it was the holder of the note and mortgage at the commencement of the foreclosure process.[1]

Revised REBA Title Standard 58

In order to address the concern raised by these recent bankruptcy cases, the Real Estate Bar Association for Massachusetts (“REBA”) has adopted a revision to Title Standard 58, which deals with out-of-order recording of discharges and assignments. Paragraph 3 of the Standard already provides that the above issue is resolved where there is:

The recording of an Assignment of Mortgage executed either prior, or subsequent, to foreclosure where said Mortgage has been foreclosed, of record, by the Assignee.

The revision to the Standard adds a cautionary sentence to Paragraph 3:

However, if the Assignment is not dated prior, or stated to be effective prior, to the commencement of a foreclosure, then a foreclosure sale after April 19, 2007 may be subject to challenge in the Bankruptcy Court, see In re Sima Schwartz, 366 B.R. 265 (Bankr.D.Mass. April 19, 2007).

The Caveat to the Standard has also been amended. The Caveat had already pointed out that neither of the foreclosure statutes commonly employed in Massachusetts (power of sale and entry) “require record title as a condition to foreclosure.” A second sentence has been added to the Caveat cautioning that “[t]he Bankruptcy Court for the District of Massachusetts, however, in In re Sima Schwartz, supra, held that where the Assignment was not signed until after the foreclosure sale, the foreclosure was invalid.” [Italics in original. Emphasis by underline added.]

To better understand the reason for the revision to Title Standard 58 and what conveyancers need to look out for, let’s take a look at the bankruptcy cases that prompted the revision.

The Bankruptcy Cases

1. In Re Schwartz, 366 B.R. 265 (April 19, 2007)(Rosenthal, J.)

See [2

(a) Background

In Re Schwartz is, so far as this author is aware, the first bankruptcy case in Massachusetts to deal squarely with this issue. In the Schwartz case, a mortgage foreclosure by Deutsche Bank (“Deutsche”) had occurred on May 24, 2006. The debtor, acting pro se, filed a bankruptcy petition on November 13, 2006. On December 10, HomeEq Servicing Corporation (“HomeEq”), on behalf of Deutsche, filed a motion for relief from stay to pursue an eviction action against the debtor.[3] The court denied this motion expressing doubt about the standing of “the moving party” to bring the motion. On January 8, 2007, HomeEq filed a second motion for relief and it is the ruling on that motion that resulted in the reported decision.

(b) The confusing facts as to who held the mortgage at the time of the foreclosure[4]

(1) On July 22, 2005, the Debtor signed a promissory note in the amount of $272,000 in favor of First NLC Financial Services, LLC. (“First NLC”). The note was secured by a mortgage on the debtor’s property granted to Mortgage Electronic Registration Systems, Inc. (“MERS”) acting solely as the nominee for First NLC and its successors and assigns.

(2) By a “Validation of Debt” letter dated November 7, 2005, HomEq informed the debtor that it was the servicing agent for Ocwen Federal Bank FSB (“Ocwen”), which the letter identified as the creditor with respect to the mortgage.[5]

(3) On January 17, 2006, HomEq sent the debtor a default letter. This letter [contrary to the earlier servicing notice letter] stated that HomeEq was the servicing agent for Deutsche.[6]

(4) In March, 2006, Deutsche, representing that it was the assignee of the mortgage, filed in the Land Court a complaint to foreclose mortgage under the Servicemembers’ Civil Relief Act. Judgment in favor of Deutsche was issued on May 23, 2006.

(5) A “Notice of Intent to Foreclose and Intent to Pursue Deficiency After Foreclosure of Mortgage” dated May 5, 2006, was sent to the Debtor. The letter was signed by Deutsche as Trustee by its attorneys, Doonan, Graves, & Longoria L.L.C.

(6) A foreclosure sale was held on May 24, 2006, at which Deutsche purchased the property. As reflected in the Certificate of Entry to Foreclose dated May 24, 2006, the witnesses certified that Attorney Longoria “duly authorized agent of Deutsche Bank National Trust Company, as Trustee pursuant to authority contained in a Power of Attorney recorded herewith” made entry upon the premises. The referenced Power of Attorney was not produced to the Court.

(7) On September 7, 2006, a foreclosure deed in favor of Deutsche was executed. The foreclosure deed is signed by John A. Dunnery and Jeff Szymendera, both identified as vice presidents of HomEq. The foreclosure deed has a handwritten notation referencing a “power of attorney recorded in book 33822 page 354.” The Court was not given a recorded copy of the foreclosure deed or the recorded power of attorney.

(8) The Court, however, was provided with an unrecorded copy of a “Uniform Durable Power of Attorney” that is dated September 18, 2006.[7] The power of attorney purports to be from Deutsche, which the document identifies as the current mortgagee, and appoints “Reneau J. Longoria”, among others, as its attorney for the purpose of foreclosing the mortgage. The power of attorney is signed by Jeff Szymendera as Deutsche's attorney in fact. As other documents establish, Mr. Szymendera is a vice president of HomEq.

(9) There were two assignments presented to the court. One, strangely enough, submitted by the debtor rather than Deutsche, was dated May 23, 2006 (the date of the Land Court judgment and the day before the foreclosure auction), in which MERS as nominee for First NLC assigned its or First NLC's interest in the mortgage to Deutsche. Deutsche did not have this assignment and did not rely on it. Instead, Deutsche submitted an assignment dated June 14, 2006, signed by John A. Dunnery, whom the assignment identifies as a vice president of MERS, and alleged by Deutsche to have been recorded the same day.[8]

(c) Discussion

Although this case is reminiscent of the famous Abbott and Costello skit, “Who’s on First?,” the court narrowed down the issue to “who was the proper party to be foreclosing this mortgage?”[9] As an indication of the court’s frustration with many foreclosures that are conducted by entities with no demonstrated connection to the note or mortgage, the court observed:

As many homeowners know or come to learn, it is not uncommon for notes and mortgages to be assigned, often more than once. When the role of a servicing agent acting on behalf of a mortgagee is thrown into the mix, it is no wonder that it is often difficult for unsophisticated borrowers to be certain of the identity of their lenders and mortgagees. On more than one occasion this Court has heard debtors complain that they did not know to whom or where they were supposed to send their mortgage payments. In fact the Court has observed instances in which attorneys representing alleged mortgagees or their servicing agents did not know whether the client was a mortgagee or a serving agent, or how their client came to acquire its role.

Id., at 266. The court was further frustrated by Deutsche’s counsel’s memorandum, which contained a broad overview of foreclosure procedures in Massachusetts, a discussion of MERS’s right to act as a nominee to conduct foreclosure proceedings[10] and a statement that “there is no requirement that an assignment be recorded prior to the foreclosure,” Id., at 269, but which did not address the central issues of whether Deutsche Bank was, in fact, the holder of the mortgage at the time of the foreclosure and what HomeEq’s authority was to act on behalf of Deutsche in conducting the foreclosure. Citing Lamson v. Abrams, 305 Mass. 238, 25 N.E.2d 374 (1940), the court agrees that the assignment making the foreclosing entity the holder of the note and mortgage need not be recorded before the foreclosure.[11] However, the court points out the critical difference here is that the assignment Deutsche provided to the court and relied on was not even signed until after the foreclosure sale occurred. Schwartz, supra, at 269. In the court’s view,

Acquiring the mortgage after the entry and foreclosure sale does not satisfy the Massachusetts statute. While “mortgagee” has been defined to include assignees of a mortgage, in other words the current mortgagee, there is nothing to suggest that one who expects to receive the mortgage by assignment may undertake any foreclosure activity. Cf. [Lamson v. Abrams, supra.]

Id.[12] The court goes on to observe that, even if the May 23, 2006, assignment that the debtor introduced, but Deutsche did not rely on, was nonetheless the operative one, “Deutsche represented that it was the mortgagee far earlier, including in documents filed with the Land Court and in the notices published in the newspaper suggesting that Deutsche is confused as to when it acquired the mortgage.” Id. Notice here that the court is not saying that Deutsche needed to be the actual holder of the mortgage “far earlier” than the foreclosure sale. The court only points out that Deutsche represented itself to be the mortgagee far earlier than even the May 23rd assignment would have justified and this suggests that Deutsche was confused as to when it did in fact acquire the mortgage.

In determining that the foreclosure sale was not proper, the court pointed not only at the inability of Deutsche to show it held the mortgage at the time of the foreclosure sale, but also at the fact that “many of the crucial documents, including the power of attorney authorizing Attorney Longoria to conduct the foreclosure sale, were executed by HomEq which, although representing that it is the attorney-in-fact for Deutsche, failed to produce any documentation as to its status.” Schwartz, supra, at 269. In addition, the Durable Power of Attorney upon which Attorney Longoria relied for her authority to perform the entry on May 24th was itself not even signed until September 18, 2006, some four months after the foreclosure sale. There is no mention in the Schwartz decision indicating whether there was any language in the POA retroactively ratifying Attorney Longoria’s actions on behalf of Deutsche but it is reasonable to assume that, if such language was there, the court would have mentioned it.

2. In Re Maisel, 378 B.R. 19 (November 15, 2007) (Rosenthal, J.)

(a) Introduction

Judge Rosenthal’s follow-up decision in In Re Maisel reinforces the theme of mortgagee standing established in In Re Schwartz.

In Maisel, the players were Wells Fargo Bank, National Association, as Trustee for Morgan Stanley Capital I, Inc. Trust 2004-OP1 Mortgage Pass-Through Certificates, Series 2004-OP1 (“Wells Fargo”), which filed a Motion for Relief from Stay and for Leave to Foreclose on October 12, 2007, and Option One Mortgage Corporation (“Option One”), which was the original mortgagee as well as the record mortgagee at the time the Motion for Relief was filed. At the hearing on the motion on October 25, 2007, Wells Fargo’s counsel presented to the court an Assignment from Option One to Wells Fargo, but it was dated October 16, 2007, “four days after the filing of the Motion for Relief.” [Emphasis included in the decision.] Maisel, supra, at 20. As a result of the assignment being dated after the Motion for Relief was filed, the issue again became one of standing and whether Wells Fargo had the requisite status as mortgagee to bring a motion for relief from stay to foreclose.

(b) Wells Fargo’s lack of standing

Finding it appropriate to comment once again on the lending industry’s foreclosure practices as of late, the court observed:

Unfortunately, concomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system. It is the lenders' responsibility to comply, and this Court's responsibility to ensure compliance, with both the substantive and procedural requirements of the Bankruptcy Code. See In Re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio, 2007).

Maisel, supra, at 20-21.[13] Among those requirements is the necessity for a creditor to establish its standing to seek relief from stay. In order to do that, the creditor must show that it is “a party interest” as required by §362(d) of the Bankruptcy Code. Id., at 21. “A party seeking relief from the automatic stay to exercise rights as to property must demonstrate at least a colorable claim to the property.” Id., quoting from In Re Huggins, supra, fn. 8, 357 B.R. at 185, which, in turn, was citing Grella v. Salem Five Cent Savings Bank, 42 F.3d 26 (1st Cir. 1994).

Because the assignment to Wells Fargo was dated after the filing of the motion, the court found that Wells Fargo had not demonstrated the requisite status as a party in interest having a colorable claim to the property even though the assignment was dated only a few days after the filing of the motion and before the hearing on the motion. The court rejected Wells Fargo’s argument that standing should be evaluated at the time of entry of an order on the motion for relief from stay not at the time of filing. Wells Fargo relied for its argument on the case of Saffran v. Novastar Mortgage, Inc., No. 07-40257, slip op. (D.Mass. Oct. 18, 2007) decided between the filing of Wells Fargo’s motion for relief and the hearing on the motion.

(c) Foreclosing party can be true mortgagee or party-in-interest status before formal assignment of mortgage

Distinguishing the Saffran case because of its facts and because it arose in the context of a motion for stay pending appeal of the allowance of a Motion for Relief from Stay,[14] the court pointed out that the facts in that case revealed that Novastar was the original lender and the mortgage was to MERS as nominee for Novastar. When the debtor in that case had filed for bankruptcy, Novastar filed a motion for relief from stay on June 18, 2007, and the bankruptcy court allowed the motion. Thereafter, on October 8, 2007, MERS assigned the mortgage to Novastar but the assignment recited that it was effective as of February 5, 2007, well before the motion for relief was filed. The District Court found in favor of Novastar on the basis that Novastar had “‘retained the authority to invoke the statutory power of sale ... and to appear in court to protect its financial interests ... had sufficient financial interest to have standing to seek relief from stay.’ [Saffran, supra, slip op.] at 5-6.” Maisel, supra, at 21.

Distinguishing Saffran, the court in Maisel stated:

It is important to recognize that in Saffran, Novastar was at all times the holder of the note and had a financial interest in that capacity. In the situation at hand, [Wells Fargo] was an unrelated third party that had no interest in the mortgage or note until after the Motion for Relief was filed and, therefore, [Wells Fargo] did not have standing to seek relief from stay.

Id., at 21-22. This is consistent with the court’s perception of its responsibility to “preserve the rights of debtors,” Id., at 22, and to require adherence by creditors to the Bankruptcy Code and the court’s rules. If creditors fail to do so, as Judge Boyko put it in Ohio, the court will “stop them at the gate.” In Re Foreclosure Cases, supra, at 3. More explicitly, Judge Rosenthal in Maisel cautions lenders and their servicers and counsel that

[a]ny motion filed with the Court must be true and have support as of the date of the motion. For example, a movant cannot state that it is the “current holder” of an instrument if it is not. . . . Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.

Id. Furthermore, pointing out that compliance with these rules is not difficult; the judge even gives lenders and their servicers and counsel a road map as to how to comply with these rules:

If the claimant acquired the note and mortgage from the original lender or from another party who acquired it from the original lender, the claimant can meet its burden through evidence that traces the loan from the original lender to the claimant. A claimant who is the servicer must, in addition to establishing the rights of the holder, identify itself as an authorized agent for the holder.

Id., quoting from In Re Parrish, 326 B.R. 708, 720 (Bankr.N.D.Ohio 2005).

3. Relationship of In Re Maisel to In Re Schwarz — So when must a foreclosing lender be the actual holder of the note and mortgage?

(a) How do Maisel and Schwartz relate to the issue of who can foreclose a mortgage?

As we have seen, in Schwartz, the primary issue was the standing and authority of Deutsche Bank to foreclose a mortgage pre-bankruptcy when it could not prove its status as “mortgagee” (i.e., as actual holder of the mortgage) at any time during that process. A secondary issue related to the authority of HomeEq to act as Deutsche’s agent for that purpose. The primary issue in Maisel was the required proof of “standing” by a lender (or its agent) seeking relief from stay to foreclose a mortgage on property of a bankruptcy debtor. Putting together these two cases with the backdrop of the Ohio foreclosure cases, we can discern the Bankruptcy Court’s view on who can conduct a mortgage foreclosure sale.

(b) Mortgagee (and agent) status at the time of filing for relief from stay

If the debtor in default under a mortgage has filed bankruptcy before or during the foreclosure process, the foreclosing lender will be required, of course, to file for relief from stay to commence or continue the foreclosure. We know from Maisel and Judge Rosenthal’s discussion of Saffran that foreclosing lenders and their counsel are going to have to provide proof that, at a minimum, the foreclosing lender is a “party in interest” and has a “colorable claim against the property of the estate” by virtue of the mortgage to be foreclosed. There is a distinction, however, between having sufficient standing to obtain relief from stay and being able to commence or continue the mortgage foreclosure.

(1) Note holder – Standing for relief from stay

It is clear from Maisel and the court’s discussion of Saffran that the foreclosing lender must show at least that it is the holder of the note at the time of filing a motion for relief from stay. Most often, and preferably, that will be accomplished by an assignment instrument that assigns the note and, customarily, the mortgage along with it. However, it is important to keep in mind that the note can also be transferred by an allonge or a simple endorsement to the note. Indeed, this is the premise behind the MERS system. Either way, however, the transfer of the note, either alone or in combination with the transfer of the mortgage, must occur (be dated) before the motion for relief is filed.

(2) Relief from stay likely dependent upon actual mortgagee foreclosing

Based on the Schwartz case, it is unlikely that the bankruptcy court will grant relief from stay and allow the commencement or continuation of the foreclosure unless the party moving for relief can show that

1. it is not only the holder of the note but, if it has commenced or will continue the foreclosure in its own name, it also is the holder of the mortgage through an existing assignment or a confirmatory assignment to be obtained and the assignment is or will be dated or effective prior to the commencement of the foreclosure process or, if not yet commenced, prior to the filing of the motion for relief, or

2. it is the holder of the note but, for example, MERS as its nominee is the mortgagee and will be commencing or continuing the foreclosure as mortgagee under a MERS mortgage, or

3. it is the duly authorized agent for the holder of the note and mortgage and the foreclosure will be conducted in the name of the correct holder or has been commenced and will be continued in the name of the correct holder.

(c) Foreclosure completed before bankruptcy — Post-foreclosure assignments

(1) Assignment dated after foreclosure sale

One thing was made clear in the Schwartz decision regarding the timing of an assignment of a foreclosed mortgage to the foreclosing lender. If it is dated after the foreclosure sale, the bankruptcy court does not consider that the foreclosing lender was the “mortgagee” under the Massachusetts foreclosure statutes and will likely avoid the foreclosure sale. In Schwartz, the foreclosure occurred on May 24, 2006. The assignment relied upon by Deutsche Bank was dated June 14, 2006, some three weeks after the foreclosure sale. There was no effective date on the assignment making it effective prior to the foreclosure sale and the bank apparently could not produce a note or any other documentation showing it to have held the note and/or mortgage prior to June 14th despite commencing and conducting the foreclosure in its name.

(2) Assignment dated before foreclosure sale but after commencement of foreclosure process

This is where the Schwartz decision becomes a little less clear. While Deutsche Bank had produced for the court and relied on an assignment dated three weeks after the foreclosure sale, the debtor somehow produced a copy of an assignment that was dated May 23, 2006, the day before the foreclosure sale. Inexplicably, Deutsche Bank continued to rely on the June 14th assignment. Nonetheless, the court stated that, even if Deutsche had produced and relied on the May 23rd assignment, it would have been to no avail as it had “represented that it was the mortgagee far earlier, including in documents filed with the Land Court and in the notices published in the newspaper suggesting that Deutsche is confused as to when it acquired the mortgage.” Schwartz, supra, at 269.

A close reading of the court’s statement as to Deutsche Bank’s confusion over when it became the holder of the mortgage and, therefore, the mortgagee entitle to foreclose, reveals that the court does not specify the particular point in relation to these events at which Deutsche must establish its status as mortgagee. The observation is simply that it represented itself to be the mortgagee throughout the entire foreclosure process when it could not point to any time during that process that it was, in fact, the mortgagee until, at best, the day before the foreclosure sale and that was not good enough.

Consequently, the Schwartz decision indicates that, to survive a bankruptcy challenge to its mortgage foreclosure, a foreclosing lender will have to be able to show by documentary evidence that it was the holder of the mortgage well prior to the foreclosure sale. Given the reliance by the court on the term “mortgagee” as used in the foreclosure statutes and the court’s determination that only a “mortgagee” (or its duly authorized representative)[15] can, therefore, properly foreclose a mortgage, it seems reasonable to conclude from the court’s analysis that it is, essentially, requiring a “mortgagee” to actually be the mortgagee at whatever stage of the statutory foreclosure process it is purporting to act as such, including the commencement of the foreclosure. It is that determination that resulted in the revision to Paragraph 3 of REBA Title Standard 58 and its Caveat.

Three issues remain unclarified by the Schwartz decision and the other bankruptcy decisions discussed as well as from the revision to Title Standard 58:

1. Can a Note Holder who does not have an assignment of the mortgage be considered the “mortgagee” for purposes of foreclosure?

2. Can a mortgage be foreclosed by a “mortgagee” who is not the note holder, such as MERS?

3. When does a mortgage foreclosure “commence” — the filing of the Servicemembers’ Civil Relief Act (“SCRA” or “the Act”) complaint, the obtaining of a judgment thereunder or the publishing of the first foreclosure notice required by G.L. c. 244, §14?

(3) Can a note holder who does not have an assignment of a mortgage be a “mortgagee” for purposes of foreclosing?

Based on the cases discussed in this article, an assignment executed after either the commencement of the foreclosure process, or even after the date of the foreclosure sale, should be sufficient to validate the foreclosure if the foreclosing lender was the actual note holder at the commencement of the foreclosure process. The problem is that, unless the assignment at least recites that it was effective as of a date prior to the commencement of the foreclosure, Title Standard 58 now casts doubt on reliance upon such an assignment and additional documentary proof if the assignee’s pre-foreclosure note holder status will undoubtedly be required by anyone passing on the title derived from the foreclosure, especially a bankruptcy court.

(a) Non-MERS Mortgages

At this juncture, it is not clear from Schwartz that the bankruptcy court considers the mere holding of the note to be sufficient to establish status as a mortgagee for purposes of authority to foreclose a mortgage as opposed to possibly obtaining relief from stay. However, there is certainly Massachusetts precedent for the often-stated proposition that the mortgage follows the note. See Maglione v. BancBoston Mortgage Corp., 29 Mass.App.Ct. 88, 90, 557 N.E.2d 756, 757 (1990)(“Although a mortgage vests title, that title is defeasible and is an off-shoot of the underlying debt. ‘[T]he debt,’ as the venerable maxim puts it, ‘is the principal and the mortgage an incident . . . .’ ”). See also REBA Title Standard No. 58, Comment (c)(“Further [where] a note has been transferred to Endorsee, Endorsor holds [the] mortgage in a Resulting Trust for Endorsee, even if there is no assignment of it. Weinberg v. Brother, 263 Mass. 61, 160 N.E. 403 (1982), Young v. Miller, 26 Gray 152, 154 (1856).”).

Whether based on these principles a court would authorize a mortgage foreclosure by a note holder who is not the holder of the mortgage by assignment remains an open question. The Schwartz decision did not answer the question because of the simple fact that HomeEq, Deutsche Bank and their attorneys did not produce any documentation to the court showing that Deutsche Bank held even the note, let alone the mortgage, prior to the questioned foreclosure sale or, for that matter, at anytime prior to the June 14, 2006, assignment.

Based on the court’s reference to the requirement that a foreclosure be undertaken only by a “mortgagee,” it is at least questionable whether the bankruptcy court would find note holder status alone to be sufficient to foreclose a mortgage. We will have to await further judicial development on this issue but the aforementioned case law and title standard could be argued for the proposition that an actual note holder can foreclose the mortgage securing the debt even if a formal assignment of the mortgage hasn’t yet occurred but, if obtained and dated post-foreclosure in confirmation of the earlier transfer of the note, that should validate the foreclosure.

(b) MERS Mortgages

The one area in which there should be less of question is in the case of MERS mortgages. What if the behind-the-scenes holder of the note secured of record by the MERS mortgage wants to foreclose the mortgage? Given the nature of the MERS system, the underlying note holder’s interest as such will not appear of record unless it is the original nominor lender. As indicated in the Maisel case, in order to pursue a foreclosure of a MERS mortgage, the note holder will have to show that it is the actual holder in order to meet the threshold requirement of being the proper party in interest for purposes of obtaining relief from stay. In addition, the MERS mortgage will have to be assigned of record to the foreclosing note holder in order to perfect its status as “mortgagee” entitled to foreclose the mortgage.

The question is whether a MERS assignment to the behind-the-scenes note holder must occur before the foreclosure sale or the commencement of the foreclosure process or it can be accomplished post-foreclosure by an assignment dated and, of course, recorded, after the foreclosure.[16] Certainly, it the assignment occurs before the commencement of the foreclosure process, that’s not any more of an issue than it is for an assignment from any other record holder of the mortgage. What about an assignment during the foreclosure process?

(i) Post-Commencement Assignment by MERS to Foreclosing Note Holder

For a MERS mortgage, an assignment of the mortgage from MERS to the actual note holder occurring after the commencement of the foreclosure process should be sufficient to support the foreclosure, at least where the assignment states that it is effective as of a date prior to the commencement of the foreclosure. However, because the bankruptcy courts are becoming more and more suspicious about whether the foreclosing lender actually held the note as well as the mortgage, it is possible that, in the context of a motion for relief from stay, a bankruptcy court may request documentation to show that the note was, in fact, held before the commencement of the foreclosure or before the filing for relief.

In Saffran v. Novastar Mortgage, Inc., discussed in the Maisel case, Novastar was the actual holder of the note and original lender under a MERS mortgage, had commenced foreclosure of the MERS mortgage by filing a Motion for Relief from Stay in the debtor’s bankruptcy. The bankruptcy court had allowed the motion even though MERS had not yet assigned the mortgage to Novastar. The debtor appealed to the District Court and filed an emergency motion for stay of the foreclosure pending the appeal. In the meantime, MERS assigned the mortgage to Novastar by an assignment, which recited that it was effective several months prior to Novastar’s motion for relief. The District Court denied the debtor’s motion to stay the foreclosure pending appeal.

Although the court in Maisel did not directly comment on whether the retroactive assignment in Saffran (dated October 18, 2007, but reciting an effective date of February 5, 2007) would have been sufficient had it occurred in the Maisel case between Option One and Wells Fargo, the court did emphasize the importance of recognizing that, in Saffran, “Novastar was at all times the holder of the note and had a financial interest in that capacity,” Maisel, supra, at 21-22, whereas, in Maisel, Wells Fargo had no interest as note holder or mortgagee until the assignment four days after the motion for relief was filed. Id.

Since the court specifically pointed out the post-dated but purportedly retroactive assignment in Saffran as a distinguishing factor but mentioned nothing about any retroactive recitation in the post-dated assignment in Maisel, it is reasonable to presume that the post-dated assignment to Wells Fargo in Maisel did not have any such retroactive recitation and Wells Fargo could not otherwise prove it held the note or mortgage at the time it filed its motion for relief.

Given the Maisel court’s emphasis in distinguishing Novastar’s actual note holder status in the Saffran case from Wells Fargo’s total lack of status as either a note holder or a mortgagee in Maisel, it is likewise reasonable to presume that the decision in Maisel would very well have turned out differently for Wells Fargo had it been able to prove that it actually held the note at the time of filing the Motion for Relief from Stay. It is also possible that a post-filing assignment that recited that it was effective as of a date prior to the filing for relief would have resulted in less inquiry as to Wells Fargo’s actual status as a note holder as of the earlier date. The post-filing but retroactive assignment from Option One may well have been sufficient to perfect Wells Fargo’s status as mortgagee entitled to foreclose as well as its status as note holder entitled to file the motion in the first instance.

(ii) Post-Foreclosure Assignment by MERS to Foreclosing Note Holder

It is possible that a MERS assignment to the foreclosing lender that is dated post-foreclosure, but recites an effective date prior to the commencement of the foreclosure, would be subject to less scrutiny by the bankruptcy court in a post-foreclosure bankruptcy case reviewing the foreclosure than in a pre-foreclosure bankruptcy case dealing with a relief from stay. Nonetheless, the foreclosing lender (and foreclosure counsel) should be prepared upon challenge to produce the endorsed note or other evidence that the note was, indeed, transferred to the lender as of the retroactive date of the assignment or the date of commencement of the foreclosure.

In the situation in which the MERS assignment is post-foreclosure but doesn’t recite a prior effective date, it is certainly more likely than not, given the MERS system, that the assignee lender was the note holder prior to the commencement of foreclosure, but the bankruptcy court may still require proof. Under the revisions to Title Standard 58, even a MERS mortgage that is assigned after the commencement of foreclosure (and especially after the foreclosure sale) is now suspect if it does not recite a retroactive date prior to the commencement of the forclosure.

(4) Another MERS issue: Can a mortgage be foreclosed by a “mortgagee” who is not the note holder, such as MERS?

There is recognition in Massachusetts that a note and mortgage may be, by contract, separated and held by different entities and it is possible for the mortgage holder to foreclose the mortgage even if not also the note holder. For example, in a MERS mortgage, MERS is the mortgagee as nominee for the lender. The lender holds the note and can assign the note off record without holding or assigning the mortgage, which remains held by MERS until MERS assigns it. This arrangement is by contract. Even though MERS does not hold the note, because of the contractual provisions in the MERS mortgage allowing MERS to foreclose, the Massachusetts bankruptcy court has recognized MERS’s right to foreclose a MERS mortgage without being the note holder. See In Re Huggins, supra, discussed in fn. 8, supra.[17]

n addition, distinguishing the Lamson v. Abrams case cited in Schwartz,[18] the First Circuit Court of Appeals, in Nichols v. Cadle Company, 139 F.3d 59 (1998), has recognized the ability of an Assignor of a Collateral Assignment of a note and mortgage to specifically retain, in its loan agreement with the collateral Assignee, the right to collect on and enforce the collaterally assigned note and mortgage. This makes sense since the original borrower is not a party to the collateral assignment loan transaction and remains liable to pay the original note holder.

Thus, there is ample precedent and statutory support for the proposition that a mortgage can be foreclosed by one who is not the actual note holder if the power to foreclose has been contractually given (as in a MERS mortgage) or retained (Nichols v. Cadle, supra).

(d) For purposes of applying Title Standard 58 in the context of the recent bankruptcy cases, when does a foreclosure commence?

As the revisions to Paragraph 3 and the Caveat of Title Standard 58 point out, where a title is dependent on a mortgage foreclosure and the foreclosing lender obtains an assignment of the mortgage after the commencement of the foreclosure, the title is suspect unless the assignment is either dated prior to the commencement of the foreclosure or it recites that it is effective prior to the commencement of the foreclosure. The question then becomes, when does the foreclosure commence? Based on the distinct aspects of Massachusetts foreclosure procedures under the Massachusetts Servicemembers’ Civil Relief Act (St. 1943, c. 57, as amended)[19] and Massachusetts foreclosure practice under G.L.c. 244, it is this author’s conclusion that, if a SCRA judgment is rendered finding that the debtor is not entitled to the benefits of the Act, then commencement of the foreclosure begins with the first notice published under c. 244, §14.[20]

(1) Schwartz analysis

This question was not answered in the Schwartz decision because Deutsche Bank could not prove status as either a note holder or a mortgagee at any time before the foreclosure sale occurred. As mentioned earlier, the court would not have accepted the assignment dated the day before the foreclosure sale as sufficient to support Deutsche Bank’s right to conduct the foreclosure even if Deutsche Bank had produced and relied on it. The court then observes that Deutsche Bank “represented that it was the mortgagee far earlier” including the commencement of the Servicemembers’Relief Act action in Land Court and the publication of notices under G.L.c. 244, §14. However, the court did not specifically address the particular point in time at which Deutsche Bank was required to prove its status as “mortgagee” in order to validate the foreclosure.

At the same time, in reading the court’s analysis in Schwartz, several factors played into the court’s decision in concluding that Deutsche Bank could not prove it was entitled to foreclose the subject mortgage. The court discusses the plight of borrowers in trying to figure out at any given point in time who holds their note and mortgage and who they owe their payments to. The court disapprovingly discusses the lack of documentation from the Bank and the Bank’s counsel to support the Bank’s alleged status as mortgagee and HomeEq’s alleged status as attorney-in-fact.

Taking those factors into account, the court quotes G.L.c. 244, §1, which authorizes a “mortgagee” to foreclose by entry or by action and incorporates that statutory provision into the other factors discussed in the case. The thrust of the court’s legal analysis is based on the Massachusetts foreclosure statutes and the court decides that only a “mortgagee,” or one properly acting for the mortgagee, is authorized to foreclose a mortgage and deprive the borrowers of their property.

Significantly, there was no mention of Deutsche Bank having to prove its status as a foreclosing mortgagee in the SCRA action in the Land Court. The court only mentions that action in the context of how long before the foreclosure sale Deutsche Bank had represented itself to be the mortgagee without being able to produce any documentation to support that representation.

(2) Massachusetts law

To start with, it is important to note that the SCRA action is designed for one purpose and one purpose only: to determine whether the debtor in a mortgage foreclosure situation is a member of the military having the benefit of the protections of the Act to either prevent or stay the foreclosure or to invalidate it post-foreclosure. Contrast that with the focus of the bankruptcy court in Schwartz and the other bankruptcy cases discussed in this article, which was on the status of the foreclosing lender as a mortgagee entitled to exercise the rights of foreclosure.

In the case of Beaton v. Land Court, 367 Mass. 385, 326 N.E.2d 302 (1975), the debtors facing foreclosure sought to file an answer in the Soldiers and Sailors’ Civil Relief (“SSCRA”) action commenced in the Land Court. The Land court refused to allow the filing of the answer because it asserted a number of defenses and claims designed to stop the foreclosure sale (many of which were already being raised in a separate pending superior court action brought by the respondents against the foreclosing lender) but the answer did not assert that either of the debtors was entitled to the benefits of the Act.

In an appeal of the denial of a Write of Mandamus brought by the respondents against the Land Court, the Supreme Judicial Court sustained both the Land Court’s refusal to accept the answer and the single justice’s denial of the Writ on the basis that the respondents had no claim to the benefits of the Act and that all of the other defenses and claims they asserted were properly the subject matter of their superior court action and were irrelevant to the Land Court action. The Court discussed the limited purpose of the SSCRA action in the Land Court as follows:

The point to be made here is that actions taken to comply with the 1940 Relief Act, such as the steps prescribed by St.1943, c. 57, as amended, are not in themselves mortgage foreclosure proceedings in any ordinary sense. Rather, they occur independently of the actual foreclosure itself and of any judicial proceedings determinative of the general validity of the foreclosure. Statute 1943, c. 57, as amended, simply establishes procedures whereby mortgagees, in addition to taking all steps necessary to foreclose, can make certain that there will be no cloud on the title following the foreclosure as a result of an interested party having been in, or just released from, military service and thus under the protective umbrella of the 1940 Relief Act. [Citation omitted.] If a foreclosure were otherwise properly made, failure to comply with the 1940 Relief Act would not render the foreclosure invalid as to anyone not entitled to the protection of that act. [Citations omitted.][Emphasis added.]

Id., 367 Mass. at 390, 326 N.E.2d at 306. Thus, there really are two purposes of the SCRA (formerly SSCRA): first, to determine whether the debtor has the benefits of the SCRA and, second, once the determination is made that the debtor does not, to remove the cloud on title that would exist without such court determination. The SCRA is, thus, focused on the status of the debtor and not on the status of the plaintiff lender or on the “general validity of the foreclosure.” Id.

More recently, this principle was applied by the Land Court in Pellegrini v. Silva, 13 L.C.R. 567, 2005 WL 3036321 (2005)(Long, J.). In the Pellegrini case, a sister of two brothers bought and took an assignment of an institutional note and mortgage granted by the two brothers and in default. The sister had lived in the property for several years taking care of their mother who, inexplicably, gave the property to the two brothers in her will. The brothers took out a loan, granted a mortgage and soon thereafter defaulted. After about eight years, the brothers never made any payments to the sister, who was still living in the property, and the sister commenced foreclosure by entry and recorded an appropriate Certificate of Entry under c. 244, §2. After three years of possession, the sister brought a quiet action in Land Court against the brothers. Among the other challenges to the foreclosure based on family relationship and whether the sister had remained peaceably in possession for purposes foreclosure, the brothers also challenged the foreclosure because the sister had never brought an SCRA action.

Relying on Beaton v. Land Court, supra, and quoting essentially the same language quoted above in this article, the Land Court found that the foreclosure was valid despite the failure to bring a pre-foreclosure SCRA action, since the two brothers neither asserted that they were in the military service and entitled to the benefits of the act nor offered and proof that they were. Reiterating the limited purpose of the SCRA, the court stated:

The Servicemembers Civil Relief Act only protects mortgagors who are entitled to its protection. Absent such protection, failure to comply with the Act will not invalidate the foreclosure. [Emphasis added.]

Pellegrini, supra, 13 L.C.R. at 569, 2005 WL 3036321 at p. 5.

Just a few months ago, the case of Blackfoot Capital, LLC v. Campaniello, 16 L.C.R. 1, 2008 WL 54762 (Jan. 4, 2008)(Sands, J.), addressed the same issue. In the Blackfoot Capital case, the plaintiff had commenced an SCRA action in the Land Court and the defendant was given the appropriate notices. The defendant never filed any answer or objections in the Land Court. For reasons not explained in the decision, the plaintiff did not seek or obtain a judgment and went forward with the foreclosure sale. Two months after the foreclosure sale, the plaintiff filed an Affidavit as to Military Service with the Land Court but did not proceed further until several months after that when it filed for and obtained a dismissal of the case. In the meantime, the plaintiff had filed a complaint to remove the cloud on title because of its failure to complete the SCRA action before the foreclosure.

As in Beaton and Pellegrini, the defendant raised a number of defenses and counterclaims attempting to invalidate the foreclosure, most of which were beyond the court’s jurisdiction, such as a c. 93A claim. Among them, however, was a claim that the plaintiff’s failure to complete the SCRA action invalidated the foreclosure. Both parties agreed that the plaintiff had not complied with the SCRA but the court determined from the pleadings that the defendant was not in the military and not entitled to the benefit of the Act. Relying on Beaton and reciting the same quote recited above in this article, Judge Sands concluded:

Beaton makes it clear that Plaintiff's noncompliance with the Act does not render the foreclosure invalid so long as Campaniello was not entitled to the benefits of the Act. As a result, I find that Plaintiff's failure to comply with the terms of the Act in conjunction with the foreclosure sale is not a cloud on title to Locus.

Blackfoot Capital, LLC, supra, 16 L.C.R. at 2, 2008 WL 54762 at p. 3.

Taken together, these three cases amply demonstrate the point made by the SJC in the Beaton case that the SCRA proceeding is not a mortgage foreclosure proceeding “in any ordinary sense” but it occurs “independently of the actual foreclosure itself” and, more importantly, independently of “any other judicial proceedings determinative of the general validity of the foreclosure.” Beaton, supra. It would seem to this author that the latter statement would include a post-SCRA-judgment review of the related foreclosure proceedings by another state or federal court, including the bankruptcy court. While not mentioned in the Beaton case in this regard, another court, including a federal bankruptcy court, would also be bound to afford the Land Court’s judgment full faith and credit.[21]

(e) Conclusions

Title Standard 58 strikes an appropriate balance between existing Massachusetts precedent on the issue of post-foreclosure assignments to the foreclosing lender and the question raised in the Schwartz case as to the validity of a foreclosure sale in bankruptcy where the foreclosing lender is not the record holder at the time of foreclosure or the commencement of the foreclosure and obtains an assignment post-foreclosure. Until further judicial development on the issue of when the foreclosure commences, Title Standard 58 does not take a position as to whether the “commencement of foreclosure” relates to the filing of the SCRA complaint or the publishing of the first notices under c. 244, §14. Given Massachusetts law regarding the limited purpose of the SCRA action and the distinction between that action and the foreclosure proceedings that follow, or even coincide, with it, a good case can be made that an SCRA judgment that the debtor is not entitled to the benefits of the act should be given full faith and credit whether the lender can prove it was the mortgage entitled to bring the action or not.

1 The same issue arises at later stages of the foreclosure process where an entity other than the mortgagee who began the foreclosure appears to take over the foreclosure process midstream. For purposes of this article, however, we will deal only with the situation in which the same entity both commences and concludes the foreclosure process. [Back to text]

2 In addition to the discussion in the Schwartz case of the legal principles involved in holding that only the actual holder of the mortgage can foreclose it (by itself or through a duly authorized agent), the facts of the case and the discussion of how poorly the lender’s position was presented to the court provides some insight as to how poorly some lenders and servicers are keeping their records and how little of the loan documentation is provided or available to their foreclosure counsel. [Back to text]   

3 Apparently, HomeEq had not only acted on behalf of Deutsche in conducting the subject foreclosure sale but, inexplicably, also continued to do so in the bankruptcy case and was the entity that filed the motion for relief from stay even though Deutsche was by then the actual title holder under the foreclosure deed dated and recorded almost two months before the bankruptcy was filed. [Back to text]

4 The facts are essentially quoted from the case at pages 267-268. Emphasis by underlining has been added. [Back to text]

5 No evidence was presented to the court to show any assignment from either MERS or First NLC to Ocwen or to otherwise explain why HomeEq’s letter alleged Ocwen to be the creditor at that time. The mystery was never resolved in the case but it was not important to the decision. [Back to text]

6 “Again there was nothing in the record to indicate that the MERS or First NLC (or even Ocwen) notified the Debtor of the purported assignment.” Schwartz, supra, at 267. [Back to text]

7 The court doesn’t even waste its time pondering the strangeness of using a “Uniform Durable Power of Attorney” for an entity but you will see certain foreclosure shops using these with perplexing frequency. [Back to text]

8 As is readily apparent from some of the underlined portions of the facts, the multifarious roles in which the various parties to the subject foreclosure process claimed to act was both confusing and, in some instances, conflicting. [Back to text]

9 It is clear in the decision that the court was not very happy in receiving from HomeEq, in purported support of its authority to conduct the foreclosure sale for Deutsche, “a jumble of documents and conclusory statements, some of which are not supported by the documents and indeed even contradicted by them” causing the court to “[spend] considerable time sifting through the various documents they provided.” Id., at 266. [Back to text]

10 The discussion of the authority of MERS to foreclose was, coincidentally, completely unnecessary by the time the memorandum was submitted as the Massachusetts bankruptcy court had decided just a few weeks before that MERS can be a proper party to foreclose a mortgage granted to and still held by MERS at the time of foreclosure. See In Re Huggins, 357 B.R. 180 (December 14, 2006)(Somma, J.). In addition, as the court pointed out and as the attorney for Deutsche apparently conceded at some point, the discussion was irrelevant because, while the mortgage at issue was still held of record by MERS at the time of the foreclosure, the foreclosure was neither conducted by MERS nor conducted on its behalf. [Back to text]

11 In Lamson, Lender A held a note and mortgage which it then collaterally assigned to Lender B from whom Lender A had borrowed money and to whom Lender A gave a note to repay the loan. The assignment was absolute in its terms like any standard assignment but it was not recorded. Upon default of the underlying borrower, Lender A foreclosed by entry and obtained rent from a tenant. A junior mortgagee who had previously foreclosed a second mortgage challenged Lender A’s foreclosure and sought the several months rent he’d lost. The court found that Lender B was the actual holder of the note and mortgage originally given to Lender A even though Lender B never recorded the assignment and that the tenant should not have paid rent to Lender A even though Lender A would have appeared to be the record holder of the mortgage. The problem for the tenant was that he didn’t rely on the record. He simply responded to a demand for attornment from Lender A after Lender A’s entry and possession to foreclose. [Back to text]

12 The statute upon which the court relied for identifying who can foreclose a mortgage is G.L.c. 244, §1, the foreclosure by entry statute, rather than c. 244. §14, the foreclosure by power of sale statute. G.L.c. 244, §1 authorizes a “mortgagee” to foreclose by entry. The court was relying on the term “mortgagee” in the statute as indicating the actual holder of the mortgage not one who expects to become a holder. Ch. 244, §14, is a little broader, authorizing not only a “mortgagee or person having his estate in the land mortgaged” to foreclose, but also “a person authorized by the power of sale, or the attorney duly authorized by a writing under seal,” among others not here pertinent. The broader foreclosure authority under c. 244, §14 would probably not have made any difference to the court in this case even if it had been brought to the judge’s attention. [Back to text]

13 A similar but somewhat more caustic observation was made by the federal district court judge in Ohio (Boyko, J.) in the case cited by Judge Rosenthal. In the Ohio District Court case, Judge Boyko addressed the standing of Deutsche Bank to commence a number of judicial foreclosure proceedings brought in the federal court, purportedly on diversity grounds. Obviously not pleased with what the court observed as Deutsche Bank’s cavalier attitude with respect to various aspects of the mortgage foreclosure process, particularly with respect to the Bank’s inability to prove its mortgage holder status and standing to bring the foreclosure actions, the judge opined that “[p]laintiff’s ‘Judge, you just don't understand how things work,’ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” In Re Foreclosure Cases, supra, slip op., fn. 3, at p.3. In dismissing all dozen or so of Deutsche Bank’s foreclosure actions, Judge Boyko further commented:

There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution's favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit — to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. Counsel for the institutions are not without legal argument to support their position, but their arguments fall woefully short of justifying their premature filings, and utterly fail to satisfy their standing and jurisdictional burdens. The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the Court to stop them at the gate.
Id. [Back to text]

14 The court in Schwartz noted that “[t]he issue of standing in Saffran came before the District Court on a motion for stay pending appeal, and since there was not a full evidentiary hearing on the merits, the Saffran decision is of limited precedential value.” Maisel, supra, fn. 1 at 21. At the same time, it is important to note that the motion for relief from stay to foreclose was allowed by the bankruptcy court and it was that allowance that was being appealed. [Back to text]

15 Compare G.L.c. 244, §1 (a “mortgagee” may foreclose by entry or action) with c. 244, §14 (a “mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, or the attorney duly authorized by a writing under seal” may conduct a foreclosure under power of sale). [Back to text]

16 Based on the Schwartz case, the foreclosing entity must be able to show it was a “mortgagee” at the commencement of the foreclosure process, not just by the time of the foreclosure sale. However, as discussed infra, another question is whether the foreclosure commences with the SCRA action or with the first publications under the customary power of sale procedures under.G.L c. 244, §14. In this author’s opinion, it is the latter, in the event that an SCRA judgment is issued finding the debtor not entitled to the benefits of the Act. [Back to text]

17 This finding is consistent with the language in G.L.c. 244, §14, quoted in fn. 15, supra. Based on the contractual provisions of a MERS mortgage, MERS can be considered as any one or more of “a mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale.” [Back to text]

18 See discussion of Lamson v. Abrams in fn. 11, supra. [Back to text]

19 While the federal act has been amended and its name changed from “Soldiers’ and Sailors’ Civil Relief Act” to “Servicemembers’ Civil Relief Act,” Massachusetts has not followed suit yet, but the Land Court refers to the action using the federal name. [Back to text]

20 Of course, if the debtor files bankruptcy during the SCRA action, that will stay the action and the bankruptcy court is free, the state court judgment not having been issued, to require the foreclosing lender to prove its status as note holder and/or mortgagee in order to obtain relief from stay to continue the SCRA action and proceed to foreclosure. [Back to text]

21 For a recent discussion of the principles of full faith and credit due state court judgments by federal courts, see In Re Sonus Networks, Inc., Shareholder Derivative Litigation, 499 F.3d 47 (1st Cir. 2007). [Back to text]