Last Friday the Supreme Judicial Court (SJC) issued its anxiously-anticipated decision (pdf) in Eaton v. Fannie Mae.  The decision is written by Justice Margot Botsford.

As foreshadowed in our previous posts here and here, Eaton resolves the debate among lower Massachusetts courts and federal judges over whether Massachusetts law requires a foreclosing mortgage holder to also hold the promissory note secured by the mortgage.  A decision requiring unity of the mortgage and note threatened to wreak havoc on innumerable titles of foreclosed properties dating back through centuries, where it is now impossible to determine if the foreclosing party actually held the note.

The Eaton decision begins by noting that “in Massachusetts a mortgage and the underlying note can be split.”  However, given “the basic nature of a mortgage as security for an underlying mortgage note, and the role of a ‘bare’ mortgagee as equitable trustee for the note holder – it appears that, at common law, a mortgagee possessing only the mortgage was without authority to foreclose on his own behalf the mortgagor’s equity of redemption or otherwise disturb the possessory interest of the mortgagor.”

The court then turns to the effect of G.L. c. 244, § 14, which provides in part:  “The mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, … may, upon breach of condition and without action, do all the acts authorized or required by the power….”  The foreclosing party argued that this language unambiguously gives the mortgagee the power to foreclose regardless of whether it was also the note holder.  But, the SJC looks to other sections of Chapter 244 to reject that argument: 

The term ‘mortgagee’ appears in several of these statutes, and its use reflects a legislative understanding or assumption that the ‘mortgagee’ referred to also is the holder of the mortgage note.

Applying the basic principle that statutes should be construed harmoniously, the court construes

the term ‘mortgagee’ in G.L. c. 244, § 14, to mean a mortgagee who also holds the underlying mortgage note.  The use of the word ‘mortgagee’ in § 14 has some ambiguity, but the interpretation we adopt is the one most consistent with the way the term has been used in related statutory provisions and decisional law, and, more fundamentally, the one that best reflects the essential nature and purpose of a mortgage as security for a debt.

The court responds directly to the real estate bar’s concerns regarding mortgages held by MERS, pointing out that the most recent version of MERS’s Rules appears “to recognize that there needs to be a connection made between the mortgage and the underlying debt as a condition precedent to an effective foreclosure by sale.” 

In a minor victory for the bank, the SJC rejects as without any statutory basis the Superior Court judge’s ruling that a foreclosing mortgagee must have physical possession of the mortgage note in order to effect a valid foreclosure.  The court rules that it is sufficient if the foreclosing mortgagee is proceeding as the authorized agent of the note holder.

Importantly, the court also addresses the concern expressed in the opening of this entry that this rule would throw into question all previous foreclosure sales. 

It has been represented to us by the defendants and several amici that lawyers and others who certify or render opinions concerning real property titles have followed in good faith a different interpretation of the relevant statutes, viz., one that requires the mortgagee to hold only the mortgage, and not the note, in order to effect a valid foreclosure by sale. We have no reason to reject this representation of prior practice, and in that context, we recognize there may be significant difficulties in ascertaining the validity of a particular title if the interpretation of ‘mortgagee’ that we adopt here is not limited to prospective operation, because of the fact that our recording system has never required mortgage notes to be recorded.

Accordingly, the court holds that, “[i]n the exceptional circumstances presented here, and for the reasons that we have discussed, we exercise our discretion to hold that the interpretation of the term ‘mortgagee’ in G.L. c. 244, § 14, and related statutory provisions that we adopt in this opinion is to apply only to mortgage foreclosure sales for which the mandatory notice of sale has been given after the date of this opinion.”  (footnote omitted).

Finally, the SJC provides some practical guidance regarding how a mortgagee may proceed in the future:  “It would appear that at least with respect to unregistered land, a foreclosing mortgage holder … may establish that it either held the note or acted on behalf of the note holder at the time of a foreclosure sale by filing an affidavit in the appropriate registry of deeds pursuant to G.L. c. 183, § 5B. The statute allows for the filing of an affidavit that is “relevant to the title to certain land and will be of benefit and assistance in clarifying the chain of title.” Such an affidavit may state that the mortgagee either held the note or acted on behalf of the note holder at the time of the foreclosure sale. See G.L. c. 183, § 54B.”  The Land Court likely will provide for the registration of such an affidavit, or will create its own mechanism for ensuring compliance with Eaton where registered land is foreclosed.