Mortgagees beware – the Supreme Judicial Court has ruled that a foreclosing entity must strictly comply with the provisions of the mortgage which delineate the notice of default to homeowners. This case extends the rule, set out in United States Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637 (2011), that strict compliance with the power of sale provisions and the statutory notice requirements is necessary to result in a valid foreclosure.
Lesley Phillips and Linda Pinti (“Pinti”) brought suit in Superior Court seeking to prevent their eviction as a result of Harold Wilion’s summary process action against them. Wilion purchased the property at a foreclosure sale, conducted by Emigrant Mortgage Company, Inc. by exercise of the power of sale contained in the Pinti mortgage. Pinti sought a declaratory judgment that the foreclosure sale was void because Emigrant failed to comply with paragraph 22 of the mortgage, which concerns the mortgagee's provision of notice to the mortgagor of default and the right to cure, and also the remedies available to the mortgagee upon the mortgagor's failure to cure the default, including the power of sale. The language of paragraph 22 was the standard mortgage instrument language, and required that the notice of default inform the homeowner:
“of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of [the homeowner] to acceleration and sale.”
The notice sent to Pinti by Emigrant, however, included the following language:
“notice is hereby given that [the homeowners] have the right to assert in any lawsuit for foreclosure and sale the nonexistence of a default or any other defense [they] may have to acceleration and foreclosure and sale.”
The Superior Court granted summary judgment in favor of Wilion, concluding that there was no requirement that Emigrant strictly comply with paragraph 22 of the mortgage, because the provision has no direct relationship to the power of sale, and dismissed Pinti’s complaint. Pinti appealed, and the SJC opted to take the case for itself.
A majority of the Court interpreted a long line of mortgage foreclosure cases to stand for the proposition that a mortgagee “must strictly comply not only with the terms of the actual power of sale in the mortgage, but also with any conditions precedent to the exercise of the power that the mortgage might contain.” Relying upon an old case, Foster, Hall & Adams Co. v. Sayles, 213 Mass. 319 (1913), the SJC determined that “the sending of the prescribed notice of default is essentially a prerequisite to use of the mortgage's power of sale,” and that “the ‘terms of the mortgage’ with which strict compliance is required -- both as a matter of common law under this court's decisions and under § 21 -- include not only the provisions in paragraph 22 relating to the foreclosure sale itself, but also the provisions requiring and prescribing the preforeclosure notice of default.”
The concern, the SJC said, is that the notice sent by Emigrant did not inform the homeowners that they must initiate a lawsuit to challenge the foreclosure – the notice seems to say that the homeowners will have an opportunity to raise any valid defenses in a later foreclosure action. Because Massachusetts is a nonjudicial foreclosure State, that “later” action never arrives, thereby depriving a homeowner of the opportunity to contest the foreclosure. The Court also noted that it is “hardly unfair or burdensome” to require a mortgagee to comply with the terms of its own mortgage document.
The Court distinguished its decision in U.S. Bank Nat'l Ass'n v. Schumacher, 467 Mass. 421 (2014), on the grounds that G.L. c. 244, § 35A, the statute at issue in Schumacher, is not related to the exercise of the power of sale, but concerns the provision of a sufficient period of time to permit a homeowner to cure a default. Therefore, the Court decided, the defective notice sent to Phillips and Pinti rendered the foreclosure sale void.
Lest mortgagees become unduly concerned about pending or past foreclosures being invalidated on the grounds of a notice failure, the SJC stated that this decision is prospective only. However, in addressing a concern raised by the dissent that, because the notice sent pursuant to paragraph 22 of the mortgage is not recorded, one looking to purchase at a foreclosure sale will not be able to assess the validity of their purchase, the Court stated:
“There may not be a statutory requirement at this time, but a mortgagee remains free to execute and then record an affidavit of compliance with the notice provisions of paragraph 22 that includes a copy of the notice that was sent to the mortgagor pursuant to that paragraph, and we presume that going forward, as a general matter, mortgagees will do so.”
The three-justice dissent reached the opposite conclusion: that the notice required by paragraph 22 of the mortgage was not a component of the power of sale, and that therefore the foreclosure sale was merely voidable, not void. This interpretation, as the dissent noted, would provide additional protection to bona fide purchasers, which the majority’s interpretation does not. Moreover, the dissent concluded that paragraph 22 of the mortgage serves essentially the same function as the G.L. c. 183, § 35A notice that isn’t subject to strict compliance, as decided by Schumacher. The dissent also raised concerns that the rule set by the majority will allow undoing of foreclosures after conveyances, perhaps even a chain of conveyances, to bona fide purchasers, to their extreme detriment.
There are a number of important takeaways from this case: 1) mortgagees must strictly comply with the notice provisions of paragraph 22 of the standard mortgage instrument, and inform mortgagors of their right to initiate a lawsuit to challenge the pending foreclosure; 2) mortgagees should, from now on, record the paragraph 22 notice sent to the mortgagor at the applicable Registry of Deeds to permit future purchasers to review it prior to foreclosure; and 3) it may be wise to pay attention to other provisions in the standard mortgage instrument which could possibly be construed as a condition precedent to the exercise of the power of sale, because the SJC has indicated a willingness to define that term broadly.
The full decision in Pinti v. Emigrant Mortgage Co., Inc. (SJC 11742) (July 17, 2015) can be found here.