The Massachusetts non-judicial foreclosure statutes require a mortgagee to either hold the note or prove its authority to act on behalf of the note holder before the mortgagee can exercise a power of sale in the mortgage, the Massachusetts Supreme Judicial Court has ruled.

The June 22, 2012, decision in Eaton v. Federal National Mortgage Association will not affect completed foreclosures because the court gave its ruling prospective effect only. But we anticipate that it will have a significant impact on pending and future mortgage foreclosure‑related litigation in Massachusetts by adopting the “show me the note” theory frequently advanced by borrowers in an attempt to avoid foreclosure.

When the plaintiff in Eaton obtained her mortgage loan, she signed a promissory note payable to the bank making the loan and a mortgage that gave Mortgage Electronic Registration Systems (MERS) legal title to her home with power of sale as the bank’s “nominee.” MERS subsequently assigned its interest as mortgagee to another company and recorded the assignment. After the plaintiff defaulted on her mortgage payments, the assignee foreclosed by exercising the power of sale.

The plaintiff thereafter filed an action to stop her eviction and invalidate the foreclosure sale on the grounds that the assignee did not hold her note at the time of the foreclosure. The trial court, finding that the plaintiff would likely succeed on her claim, entered a preliminary injunction blocking the eviction.

The question on appeal was whether, for a valid foreclosure sale to occur under Massachusetts law, both the mortgage and the underlying note must be held by the foreclosing party. To answer that question, the court was required to determine the meaning of the term “mortgagee” in the Massachusetts statutes that provide for a power of sale. Observing that such meaning “was not free of ambiguity,” the court construed the term to refer to “the person or entity then holding the mortgage and also either holding the mortgage note or acting on behalf of the mortgage holder.”

Because the trial court had based its decision on the view that a mortgagee must have physical possession of the note to foreclose, the Supreme Judicial Court vacated the preliminary injunction and remanded the case to the trial court for it to also consider whether the company that was the assignee of MERS’s interest had authority to act on behalf of the note holder. The court noted that the designation of MERS in the mortgage as the bank’s “nominee” could have “some bearing on the agency question.”

While rejecting the interpretation urged by the defendants and various industry amici, the court agreed that its contrary interpretation should not apply retroactively. Accordingly, the court held that its ruling would “apply only to mortgage foreclosure sales for which the mandatory notice of sale has been given after the date of this opinion.”

In addition to the statutory ambiguity and the court’s not having previously “considered directly” the question before it, the considerations cited by the court for making the ruling prospective only included its concern about “significant difficulties in ascertaining the validity of a particular title” if the ruling were to have retroactive application because the Massachusetts recording system “has never required mortgage notes to be recorded.”

The “show me the note” theory was recently rejected by the Arizona Supreme Court, which held that nothing in Arizona’s non-judicial foreclosure statutes mandates that a beneficiary of the deed of trust must show possession of, or otherwise document its right to enforce, the underlying note prior to the trustee’s exercise of the power of sale.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions.

The Consumer Financial Services Group also produces the CFPB Monitor, a blog that focuses exclusively on important developments from the Consumer Financial Protection Bureau. To subscribe to the blog, use the link provided on the right. For more information, please contact CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or, or Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or, Martin C. Bryce, Jr., at 215.864.8238 or, or Christopher J. Willis at 678.420.9436 or  

Copyright © 2012 by Ballard Spahr LLP.
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