A unanimous decision by the Massachusetts Supreme Judicial Court on January 7, 2011 rocked the banking world, immediately generating news headlines like Top Mass. Court Says Banks Can't Foreclose Without Proper Title (Westlawnews) and Top Massachusetts Court Rules Against Foreclosing Banks (Chicago Tribune). Shares in Wells Fargo fell 4 % and U.S. Bancorp fell 14 % and Bank of America fell 2.8 %, on a day when the stock market was up.

The cases are U.S. Bank N.A. v. Ibanez and Wells Fargo Bank N.A. v. LaRace et al, Massachusetts Supreme Judicial Court, No. SJC-10694.

The Ibanez decision is just the latest in a series of state court decisions which hold that, as the headline states, banks can't foreclose without proper title. The facts of both the iba and the LaRace mortgages are not uncommon.

FACTUAL SUMMARY

The iba mortgage

The mortgage was originated on December 1, 2005 by Rose Mortgage, Inc. and recorded the next day. Rose executed an assignment in blank; i.e., without any named assignor being specified. At some point the blank was filled in with Option One Mortgage Corporation and that assignment was recorded on June 7, 2006. On January 23, 2006, obviously before recording, Option One executed an assignment in blank. U.S. Bank stated that the mortgage being foreclosed was assigned three times after the assignment to Option One, then bundled into a pool of 1,220 other mortgages and assigned one more time to U.S. Bank, "as trustee for the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z. With this last assignment, the Ibanez and other loans were pooled into a trust and converted into mortgage-backed securities that can be bought and sold by investors--a process known as securitization."

The mortgage was originated on May 19, 2005 by Option One and recorded the same day. On May 26, 2005 Option One executed an assignment in blank.

"According to Wells Fargo, Option One assigned the LaRace mortgage to Bank of America in a July 28, 2005, flow sale and servicing agreement. Bank of America then assigned it to Asset Backed Funding Corporation (ABFC) in an October 1, 2005, mortgage loan purchase agreement. Finally, ABFC pooled the mortgage with others and assigned it to Wells Fargo, as trustee for the ABFC 2005-OPT 1 Trust, ABFC Asset-Backed Certificates, Series 2005-OPT 1, pursuant to a pooling and servicing agreement (PSA)."

The website of the Massachusetts Supreme Judicial Court represents that it is the oldest continuously functioning court in the western hemisphere. It is a well respected court and the briefing was extensive. In addition to the briefs of the parties, four amicus briefs were filed. An amicus brief was filed by a Mortgage Fraud and Forensic Analyst and Certified Fraud examiner, who had been appointed by the trial court. Amicus briefs were also filed by the Real Estate Bar Association of Massachusetts, the National Consumer Law Center and the Massachusetts Attorney General.

For simplicity the phrase deed of trust is used interchangeably with the word mortgage in this article. Massachusetts, like Nevada, allows non-judicial foreclosures of notes secured by mortgages or deeds of trust. Both states are "title theory" states in which a mortgage is a transfer of legal title to secure a debt. In the simplest explanation, the lender can foreclose after a borrower stops paying his/her mortgage. However, because there is no judicial oversight, the lender must strictly follow the terms of the power sale in the loan document. If there is a defect in the execution of the power of sale, "the sale is wholly void" under an 1871 Massachusetts case. State case authority from Massachusetts and Michigan is cited to support the rule that if the foreclosing party lacks "jurisdiction and authority" the foreclosure sale is void.

Further, notice requirements must be fulfilled. Importantly, the opinion states that "the mortgagor is entitled to know who is foreclosing and selling the property, the failure to identify the holder of the mortgage in the notice of sale may render the notice defective and the foreclosure sale void." Failure to strictly comply with the notice requirements would render the sale void.

Because it is a transfer of an interest in land, a valid mortgage requires a writing signed by the grantor. Whether they are bundled or not, mortgages remain legal title to land and are subject to the laws respecting real estate titles. There must be a clear chain of title evidencing ownership of the mortgage and the foreclosing entity must hold the mortgage at the time of the notice.

The opinion makes the following basic statements regarding title to real property.

The conclusion is that the securitization documents did not prove that U.S. Bank in the iba case and Wells Fargo in LaRace case were the holders of the respective mortgages at the time of the publication of the notices and the sales.

Three other arguments raised by the banks were addressed in the opinion. First, the assignments in blank were not valid assignments. "We have long held that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment." ³

Second, mere possession of the note is not sufficient to prove ownership of the note. A valid assignment, or a court order of assignment, is required to required; otherwise the mortgage holder remains unchanged.

Third, postsale assignments will not cure a defect that existed on the dates of the publication of the notice or the foreclosure sale. Because they did not have the assignments when the notice was published and the foreclosure sale occurred, the U.S. Bank and Wells Fargo lacked the authority to foreclose at the time. Thus, their published claims of being the holders of the mortgages at the time of the publication of the notice and the foreclosure sale were false. Simply stating an earlier effective date does not alter this fact. An assignment of a mortgage is a transfer of legal title and it becomes effective only on the date of the transfer; "it cannot become effective before the transfer." While an earlier assignment can be confirmed, a confirmatory assignment cannot confirm an assignment that was not validly made earlier nor can it backdate an assignment being made for the first time.

The Ibanez decision is a unanimous decision. Two justices wrote a separate, concurring opinion to their surprise at the banks’ "utter carelessness with which the banks documented the titles to their assets." The concurring opinion notes that the strict compliance necessary in a title theory state because of the non-judicial nature of foreclosure proceedings in those states.

It is important to remember that in the cases being reviewed the banks were the plaintiffs, that therefore bore the burden or proof. In Nevada judicial foreclosure is a rarity for this very reason. However, neither the reasoning nor the law in the Ibanez decision is either complicated or expansionary. It just applied common law principles of property ownership and conveyances to what is a routine set of facts.


Endnotes

1.  Mass. G. L. C. 183 § 21 states :

Section 21. The following "power" shall be known as the "Statutory Power of Sale", and may be incorporated in any mortgage by reference:

(POWER.)

But upon any default in the performance or observance of the foregoing or other condition, the mortgagee or his executors, administrators, successors or assigns may sell the mortgaged premises or such portion thereof as may remain subject to the mortgage in case of any partial release thereof, either as a whole or in parcels, together with all improvements that may be thereon, by public auction on or near the premises then subject to the mortgage, or, if more than one parcel is then subject thereto, on or near one of said parcels, or at such place as may be designated for that purpose in the mortgage, first complying with the terms of the mortgage and with the statutes relating to the foreclosure of mortgages by the exercise of a power of sale, and may convey the same by proper deed or deeds to the purchaser or purchasers absolutely and in fee simple; and such sale shall forever bar the mortgagor and all persons claiming under him from all right and interest in the mortgaged premises, whether at law or in equity

2. Mass. G. L. C. 244 § 14 states :

Section 14. The 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, or the legal guardian or conservator of such mortgagee or person acting in the name of such mortgagee or person, may, upon breach of condition and without action, do all the acts authorized or required by the power; but no sale under such power shall be effectual to foreclose a mortgage, unless, previous to such sale, notice thereof has been published once in each of three successive weeks, the first publication to be not less than twenty-one days before the day of sale, in a newspaper, if any, published in the town where the land lies or in a newspaper with general circulation in the town where the land lies and notice thereof has been sent by registered mail to the owner or owners of record of the equity of redemption as of thirty days prior to the date of sale, said notice to be mailed at least fourteen days prior to the date of sale to said owner or owners to the address set forth in section sixty-one of chapter one hundred and eighty-five, if the land is then registered or, in the case of unregistered land, to the last address of the owner or owners of the equity of redemption appearing on the records of the holder of the mortgage, if any, or if none, to the address of the owner or owners as given on his deed or on the petition for probate by which he acquired title, if any, or if in either case no address appears, then to the address to which the tax collector last sent the tax bill for the mortgaged premises to be sold, or if no tax bill has been sent for the last preceding three years, then to the address of any of the parcels of property in the name of said owner of record which are to be sold under the power of sale and unless a copy of said notice of sale has been sent by registered mail to all persons of record as of thirty days prior to the date of sale holding an interest in the property junior to the mortgage being foreclosed, said notice to be mailed at least fourteen days prior to the date of sale to each such person at the address of such person set forth in any document evidencing the interest or to the last address of such person known to the mortgagee. Any person of record as of thirty days prior to the date of sale holding an interest in the property junior to the mortgage being foreclosed may waive at any time, whether prior or subsequent to the date of sale, the right to receive notice by mail to such person under this section and such waiver shall be deemed to constitute compliance with such notice requirement for all purposes. If no newspaper is published in such town, or if there is no newspaper with general circulation in the town where the land lies, notice may be published in a newspaper published in the county where the land lies, and this provision shall be implied in every power of sale mortgage in which it is not expressly set forth. A newspaper which by its title page purports to be printed or published in such town, city or county, and having a circulation therein, shall be sufficient for the purpose.

The following form of foreclosure notice may be used and may be altered as circumstances require; but nothing herein shall be construed to prevent the use of other forms.

(Form.)
MORTGAGEE’S SALE OF REAL ESTATE.

By virtue and in execution of the Power of Sale contained in a certain mortgage given by............ to............ dated............ and recorded with
.....
Deeds, Book............, page............, of which mortgage the undersigned is the present holder,............

(If by assignment, or in any fiduciary capacity, give reference.)

.....
for breach of the conditions of said mortgage and for the purpose of foreclosing the same will be sold at Public Auction at............o’clock,............ M. on the............ day of............ A.D. (insert year),............ (place)............ all and singular the premises described in said mortgage,

(In case of partial releases, state exceptions.)

To wit: "(Description as in the mortgage, including all references to title, restrictions, encumbrances, etc., as made in the mortgage.)"

Terms of sale: (State here the amount, if any, to be paid in cash by the purchaser at the time and place of the sale, and the time or times for payment of the balance or the whole as the case may be.)

Other terms to be announced at the sale.

(Signed) ___________________________________________________________________

Present holder of said mortgage.___

A notice of sale in the above form, published in accordance with the power in the mortgage and with this chapter, together with such other or further notice, if any, as is required by the mortgage, shall be a sufficient notice of the sale; and the premises shall be deemed to have been sold, and the deed thereunder shall convey the premises, subject to and with the benefit of all restrictions, easements, improvements, outstanding tax titles, municipal or other public taxes, assessments, liens or claims in the nature of liens, and existing encumbrances of record created prior to the mortgage, whether or not reference to such restrictions, easements, improvements, liens or encumbrances is made in the deed; but no purchaser at the sale shall be bound to complete the purchase if there are encumbrances, other than those named in the mortgage and included in the notice of sale, which are not stated at the sale and included in the auctioneer’s contract with the purchaser.

3.  Mass. G. L. C. 183 § 3 states :

Section 3. An estate or interest in land created without an instrument in writing signed by the grantor or by his attorney shall have the force and effect of an estate at will only, and no estate or interest in land shall be assigned, granted or surrendered unless by such writing or by operation of law.

Relevant, corresponding Nevada statutes are set forth below.

POWER OF SALE IN DEED OF TRUST

NRS 107.080 Trustee's power of sale: Power conferred; required notices; effect of sale; circumstances in which sale may be declared void; duty to record; fees.

1. Except as otherwise provided in NRS 107.085 and 107.086, if any transfer in trust of any estate in real property is made after March 29, 1927, to secure the performance of an obligation or the payment of any debt, a power of sale is hereby conferred upon the trustee to be exercised after a breach of the obligation for which the transfer is security.

2. The power of sale must not be exercised, however, until:

(a) Except as otherwise provided in paragraph (b), in the case of any trust agreement coming into force:

(1) On or after July 1, 1949, and before July 1, 1957, the grantor, the person who holds the title of record, a beneficiary under a subordinate deed of trust or any other person who has a subordinate lien or encumbrance of record on the property has, for a period of 15 days, computed as prescribed in subsection 3, failed to make good the deficiency in performance or payment; or

(2) On or after July 1, 1957, the grantor, the person who holds the title of record, a beneficiary under a subordinate deed of trust or any other person who has a subordinate lien or encumbrance of record on the property has, for a period of 35 days, computed as prescribed in subsection 3, failed to make good the deficiency in performance or payment;

(b) In the case of any trust agreement which concerns owner-occupied housing as defined in NRS 107.086, the grantor, the person who holds the title of record, a beneficiary under a subordinate deed of trust or any other person who has a subordinate lien or encumbrance of record on the property has, for a period that commences in the manner and subject to the requirements described in subsection 3 and expires 5 days before the date of sale, failed to make good the deficiency in performance or payment;

(d) Not less than 3 months have elapsed after the recording of the notice.

3. The 15- or 35-day period provided in paragraph (a) of subsection 2, or the period provided in paragraph (b) of subsection 2, commences on the first day following the day upon which the notice of default and election to sell is recorded in the office of the county recorder of the county in which the property is located and a copy of the notice of default and election to sell is mailed by registered or certified mail, return receipt requested and with postage prepaid to the grantor or, to the person who holds the title of record on the date the notice of default and election to sell is recorded, and, if the property is operated as a facility licensed under chapter 449 of NRS, to the State Board of Health, at their respective addresses, if known, otherwise to the address of the trust property. The notice of default and election to sell must:

(b) If the property is a residential foreclosure, comply with the provisions of NRS 107.087.

4. The trustee, or other person authorized to make the sale under the terms of the trust deed or transfer in trust, shall, after expiration of the 3-month period following the recording of the notice of breach and election to sell, and before the making of the sale, give notice of the time and place thereof by recording the notice of sale and by:

(a) Providing the notice to each trustor, any other person entitled to notice pursuant to this section and, if the property is operated as a facility licensed under chapter 449 of NRS, the State Board of Health, by personal service or by mailing the notice by registered or certified mail to the last known address of the trustor and any other person entitled to such notice pursuant to this section;

(b) Posting a similar notice particularly describing the property, for 20 days successively, in three public places of the township or city where the property is situated and where the property is to be sold;

(c) Publishing a copy of the notice three times, once each week for 3 consecutive weeks, in a newspaper of general circulation in the county where the property is situated; and

(d) If the property is a residential foreclosure complying with the provisions of NRS 107.087.

5. Every sale made under the provisions of this section and other sections of this chapter vests in the purchaser the title of the grantor and any successors in interest without equity or right of redemption. A sale made pursuant to this section may be declared void by any court of competent jurisdiction in the county where the sale took place if:

STATUTE OF FRAUDS

NRS 111.210 Contracts for sale or lease of land for periods in excess of 1 year void unless in writing.

NRS 111.220 Agreements not in writing: When void. In the following cases every agreement is void, unless the agreement, or some note or memorandum thereof expressing the consideration, is in writing, and subscribed by the person charged therewith:

2. Every special promise to answer for the debt, default or miscarriage of another.

RECORDING STATUTES

NRS 111.315 Recording of conveyances and instruments: Notice to third persons.

Every conveyance of real property, and every instrument of writing setting forth an agreement to convey any real property, or whereby any real property may be affected, proved, acknowledged and certified in the manner prescribed in this chapter, to operate as notice to third persons, shall be recorded in the office of the recorder of the county in which the real property is situated or to the extent permitted by NRS 105.010 to 105.080, inclusive, in the Office of the Secretary of State, but shall be valid and binding between the parties thereto without such record.

NRS 111.325, Unrecorded conveyances void as against subsequent bona fide purchaser for value when conveyance recorded.

Every conveyance of real property within this state hereafter made, which shall not be recorded as provided in this chapter, shall be void as against any subsequent purchaser, in good faith and for a valuable consideration, of the same real property, or any portion thereof, where his own conveyance shall be first duly recorded.