two (A1074067).jpgIn the last few weeks the Supreme Judicial Court (SJC) decided two more cases dealing with the effects of botched foreclosure sales. 

The more important decision is U.S. Bank National Association v. Schumacher (pdf).  Schumacher arises from M.G.L. c. 244, §35A, which the Legislature enacted in 2007 in response to the foreclosure crisis.  This statute requires foreclosing banks to notify homeowners that they have 90 days to cure a payment default before payment of the note can be accelerated, and mandates that the written notice contain certain information.  Before Schumacher, some lower courts had ruled that a bank’s failure to strictly comply with those requirements was fatal to a foreclosure sale.  In such cases, even a post-foreclosure buyer of the property would have no title.  This result was especially problematic since nothing regarding a bank’s compliance or non-compliance with §35A would appear in the property’s title at the registry of deeds.

In Schumacher, the issue arose in the context of a summary process case brought by a foreclosing bank against a defaulting homeowner, after the bank purchased the home at its own foreclosure sale.  The court first ruled that the sole issue in the eviction case was whether the bank had acquired its title in compliance with both the power of sale in the mortgage and the statute governing foreclosures under a power of sale.  Prior SJC decisions had emphasized the need for banks to strictly comply with the procedural requirements of that statute. 

Next, the court noted that this issue should have been raised by a Superior Court challenge, not as a defense to an eviction case in Housing Court.  The SJC went on to hold that §35A governs when a bank can accelerate payment after a default.  As such, it is not a statute that pertains to the foreclosure of mortgages by a power of sale.  Therefore, a bank’s failure to strictly comply with §35A does not automatically void the foreclosure sale.

In a concurring opinion, Justice Ralph Gants provides a nice road map to future litigants.  He makes clear that homeowners can raise a bank’s non-compliance with §35A before a foreclosure sale by seeking an injunction in Superior Court to stop the sale.  However, in a post-foreclosure summary process action, homeowners cannot rely on a bank’s failure to comply strictly with § 35A.  Instead, they must prove that “the violation of §35A rendered the foreclosure so fundamentally unfair that [they are] entitled to affirmative equitable relief, specifically the setting aside of the foreclosure sale ‘for reasons other than failure to comply strictly with the power of sale provided in the mortgage.'”

This ruling should be particularly helpful to people who have purchased property from a bank at or after a foreclosure sale.  These good faith buyers should be in a strong position to argue that their title is good and cannot be challenged by the foreclosed-upon homeowner.  For homeowners who feel that their bank has acted improperly, the lesson is to take action promptly.

The SJC’s decision in Galiastro v. MERS, Inc. (pdf) is of more limited application.  Galiastro was on appeal when the SJC decided Eaton v. Federal National Mortgage Association, 462 Mass. 569 (2012) (see our prior post here).  In Eaton, the SJC ruled that the foreclosing bank must hold both the mortgage and the promissory note it secures, or be acting on behalf of the note holder, when conducting a foreclosure sale.  However, in order to avoid throwing into doubt all previous foreclosure sales, the SJC made its ruling in Eaton prospective only.  Because the plaintiffs in Eaton had filed the case, they also got the benefit of that ruling.

Galiastro simply extends the application of Eaton to cases that were pending at the appellate level when Eaton was decided.  The SJC sagely notes that, “[w]here multiple cases await appellate review on precisely the same question, it is inequitable for the case chosen as a vehicle to announce the court’s holding to be singled out as the ‘chance beneficiary’ of an otherwise prospective rule.”