foreclosure 2

On October 3, the Supreme Judicial Court (SJC) heard oral argument in yet another case involving a foreclosure – Eaton v. Federal National Mortgage AssociationEaton raises the important question of whether, to properly foreclose, a mortgagee must hold the underlying, defaulted promissory note.  Interestingly, about a week before the argument in Eaton, the federal district court in Massachusetts issued a decision in Rosa v. Mortgage Electronic Registration Systems, Inc. (pdf) answering that same question “no.”

In Eaton, the borrower (Henrietta Eaton) took out a mortgage loan from BankUnited.  However, the mortgage named Mortgage Electronic Registration Systems, Inc. (MERS) as BankUnited’s nominee, and expressly granted MERS the power of sale.  BankUnited assigned Eaton’s promissory note to Federal National Mortgage Association (Fannie Mae), which engaged Green Tree Servicing, LLC (Green Tree) to service the loan.  Eaton made some payments to Green Tree, but eventually stopped paying and defaulted.

Eaton’s mortgage was also assigned, but not to Green Tree.  In contrast to the situation in U.S. Bank National Association v. Ibanez (pdf) (see related commentary here), there was no claim in Eaton that the mortgage assignment came too late.  Rather, after the foreclosure sale was completed, and in the context of an eviction proceeding, Eaton claimed that the foreclosure was invalid because his mortgage and promissory note had been improperly separated from one another.  A Superior Court judge entered a preliminary injunction stopping the eviction, and that order was the subject of the SJC’s review.

At oral argument, the SJC grilled both attorneys pretty thoroughly.  However, by the end, the momentum seemed to be in Fannie Mae’s favor.

One issue was whether separating the mortgage from the note could result in the borrower being forced to pay the mortgage holder while remaining on the hook to the note holder for the same debt.  It seemed that the justices were in agreement with Fannie Mae that, while this “double liability” scenario was theoretically possible, there was no evidence it had ever occurred.  The justices did seem somewhat concerned about the lack of clarity over who can initiate a foreclosure – that is, whether a servicer such as Green Tree was authorized to make that decision.

Fannie Mae relied on recent state and federal court decisions supporting its view that the note and mortgage need not be united in one owner.  On this point, the justices noted that Eaton’s mortgage itself made clear that it could be assigned, and that such assignments are a regular feature in today’s economy.

Eaton tried to get the justices to focus – as have some other states – on sections of the Uniform Commercial Code (UCC) governing promissory notes.  However, the court seemed reluctant to accept that invitation, pointing out that notes and mortgages serve different purposes and are governed by different legal principles.  Eaton cited some 19th century Massachusetts cases suggesting that notes and mortgages must be unified, but the court did not seem to feel constrained by these older cases, instead referring to the contractual rights Eaton had granted in the mortgage, which could be seen as waiving any common law requirement of unity.  Some of the justices – particularly Justice Cordy –focused on the fact that Eaton had stopped paying the note, and therefore was subject to foreclosure.  Overall, they did not seem impressed by Eaton’s claim that she was entitled to know exactly whom she was not paying.

Not discussed at the Eaton argument were some of the broader ramifications of the case.  In addition to throwing into doubt past foreclosure sales where the mortgage holder did not also hold the note, the case raises questions regarding whether past mortgage discharges have been validly granted by mortgage holders who were not in possession of the note.  However, these issues might be avoided where third-party purchasers have relied on the state of the record title.

In Rosa v. MERS, U.S. District Court Magistrate Judge Robert Collings provides a possible roadmap for the SJC in Eaton.  Judge Collings treated the question of whether the note and mortgage must be united in a straightforward fashion, principally relying on a recent decision by Judge Dennis Saylor in Kiah v. Aurora Loan Services, LLC (pdf) (presently on appeal to the First Circuit Court of Appeals) and other district court bankruptcy decisions.  In both Rosa and Kiah, MERS was the mortgagee as nominee for a lender that had been dissolved after the loan, but before MERS assigned the mortgage to the entity that held the foreclosure sale (in Kiah, the foreclosing party did hold the promissory note).

Although a lengthy decision, Rosa deals with many of the key legal issues in one paragraph (citations omitted):

In Massachusetts, ‘courts have generally held that MERS may both foreclose and assign mortgages held in its name.’. . . While MERS never actually holds the note, it is authorized to transfer the mortgage on behalf of a note holder by virtue of its nominee status . . . . [A] mortgagee has authority to assign a mortgage because the mortgagee retains title to the mortgage and has a fiduciary duty to act on behalf of a note owner, and the right to assign is consistent with such duty . . . . If MERS is named as mortgagee in a recorded mortgage, it is authorized to conduct a foreclosure . . . .

Rosa noted that some jurisdictions require a mortgagee to prove both its nominee relationship with the note holder and the note holder’s authorization of the mortgage assignment.  However, Rosa held that, under M.G.L. c. 183, §54B, it is enough if the person executing the assignment purports to be an officer of the mortgage holder of record, and the assignment is executed before a notary public.  In addition, because MERS was mortgagee for the original note holder and its successors and assigns, it didn’t matter that the original lender had been dissolved.  MERS continued to hold the mortgage in trust for whatever entity happened to own the note.

Regarding the issue in Eaton, Judge Collings pointed to language in Ibanez (“the assignment of the note does not carry with it the assignment of the mortgage”), and also cited the district court’s own decisions in Aliberti v. GMAC Mortgage, LLC (pdf) (“Plaintiffs incorrectly assert that the mortgagee must also hold the note in order to foreclose.”) and Valerio v. U.S. Bank, N.A. (pdf).

It will be interesting to see whether, and if so how, the SJC addresses these federal decisions when it issues its opinion in Eaton.  We expect the Eaton opinion around February, 2012 and will post it as soon as it’s released.