Articles Posted in Mortgages

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When faced with an impending mortgage foreclosure, many homeowners may have defenses or other legal options that could result in a more favorable outcome.  The Appeals Court of Massachusetts recently reviewed a case on March 31, 2017 that involved defendants who had lost their home to foreclosure.house

At the foreclosure sale in 2013, the high bid did not cover all of the defendants’ remaining debt on the mortgage, leaving a deficiency.  The defendants had been paying the premium for a mortgage insurance policy, as required by their original lender. The insurer, the plaintiff in the case, sued the defendants to recover the deficiency.  The plaintiff moved for summary judgment on a contractual subrogation theory.  The lower court granted the motion and entered a judgment for approximately $41,000 against the defendants.  The defendants appealed the judgment to the higher court.

On appeal, the defendants contended that the lower court erred in entering its judgment because there was a factual dispute as to whether the plaintiff actually paid its insured and acquired any contractual subrogation rights against the defendants.  In support of their argument, the defendants alleged there was no evidence that the plaintiff complied with two provisions of the insurance contract relevant to subrogation.

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Some homeowners can choose to take a bank loan secured by a reverse mortgage on their property, but they should be aware of the potential consequences in the event of a default.  In a January 18, 2017 case before the Massachusetts Land Court, a bank sought a determination of its rights to foreclose on a reverse mortgage and enter a default judgment against the deceased homeowner’s estate and heirs.  The homeowners purchased the subject property in 1984 and executed a reverse mortgage to the plaintiff in 2008.  After they passed away, the plaintiff accelerated the debt and declared the loan secured by the reverse mortgage to be in default.sale

The Land Court had previously determined in other cases that the plaintiff’s standard mortgage form was sufficient to incorporate the statutory power of sale by reference.  However, the plaintiff also moved the court for additional relief in the form of a declaration that the estate was in default of the mortgage and that the default permitted the plaintiff to foreclose on the mortgage, pursuant to the power of sale to satisfy the estate’s obligations.  The larger issue in the case was whether the Land Court had subject matter jurisdiction to provide the relief requested by the plaintiff.

The Massachusetts Land Court has jurisdiction over matters in which any right, title, or interest in land is involved.  Since Massachusetts is a title theory state, and a mortgage is an interest in the property that secures the mortgage debt, the mortgagee has a right, title, or interest in that property.  However, with a statutory power of sale, a mortgagee may foreclose without prior judicial intervention.  Although it is regulated by statute, non-judicial foreclosure occurring pursuant to a private power of sale in the mortgage is a private procedure involving private parties.  Therefore, absent some controversy over title or interest in the mortgaged real property, the land court lacks jurisdiction to consider other aspects of an action involving the ability to foreclose.

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Property rights are often defined in a contract executed by the parties involved in the transaction.  In an August 1, 2016 decision, the Massachusetts Land Court examined a contract for a reverse mortgage in order to determine the right of the mortgage lender to foreclose.  The lender had used a standard contract to issue the mortgages, which did not explicitly incorporate the statutory power of sale under G.L. c. 183, § 21.  The lender filed an action with the Land Court, seeking a declaration that their reverse mortgage forms nevertheless include these rights.dollars

A reverse mortgage is a loan or line of credit available to a person over the age of 62 who has equity in real estate, typically the person’s home.  The loan provides the borrower with cash, usually in the form of a single lump-sum payment, and is secured by the borrower’s equity in the real estate.  The borrower does not make monthly repayments towards the loan, but instead, the loan is due and payable in full when the borrower dies, sells the home, or no longer uses the home as her principal residence.

Pursuant to Massachusetts law, if a mortgage provides for a power of sale, the lender, in exercising the power, may foreclose without obtaining prior judicial authorization.  In order for a lender to foreclose by exercise of the power of sale, the mortgage itself must grant the lender the statutory power of sale.  The statutory power may be incorporated into a mortgage in three ways:  (1) by including the exact language of the statute defining it in the text of the mortgage; (2) by referring to the definition, generally by use of the term “Statutory Power of Sale”; or (3) with language in the mortgage defining a power substantially similar to that of the statutory power.

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In a recent case, the Massachusetts Land Court ruled on whether a bank could reform an existing mortgage it held with the defendant.  In JP Morgan Chase Bank, N.A. v. Niakaros (Mass. Land Ct. Dec. 13, 2016), the defendant had sought a personal loan in 2007 to pay off an existing mortgage on property owned by his trust, without having to grant a new mortgage on the property.  The bank agreed to the personal loan, and at the closing, the defendant confirmed to the closing attorney that he did not intend to grant a mortgage.  The mortgage was never recorded.temple

The bank failed and was placed in receivership in 2008, and the loan was eventually sold to the plaintiff.  Realizing that both the note and the mortgage on the property were given to the defendant individually, rather than by the trust that owns the property, and that the mortgage was never registered, the plaintiff brought an action to reform the mortgage to name the trust as mortgagor and have it registered.  The primary issues for the land court were whether there was a mutual mistake in the naming of the defendant personally as mortgagor, and whether the defendant would be so unjustly enriched that the mortgage should be reformed.

In Massachusetts, a court has broad power to reform, rescind, or cancel written instruments, including mortgages, on grounds such as fraud, mistake, accident, or illegality.  A reformation based on a mistake will only be allowed if there is full, clear, and decisive proof that the mortgage failed to express the intent that both parties had in making it.  In JP Morgan Chase Bank, the land court ruled that the plaintiff failed to establish that the bank and the defendant made a mutual mistake in executing the mortgage from the defendant individually.  The court credited the testimony of the defendant, in that he communicated his intent to acquire a personal loan and not encumber his trust’s rental property to representatives of the bank as well as the closing attorney.  The court also noted that the note and the mortgage were consistent with the defendant’s description of an individual loan.

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In some cases, there may be grounds to defend against a foreclosure on your home and bring a counterclaim to recover damages. In Fitchburg Capital, LLC v. Bourque (Mass. Land Ct. Nov. 14, 2016), the Massachusetts Land Court decided an appeal concerning issues related to the mortgage foreclosure on the defendant’s property. The plaintiff initially brought an action against the defendant to clear a cloud on title attributable to its mortgage foreclosure without having first obtained a judgment under the Soldiers and Sailors Civil Relief Act against the defendant. In related proceedings, the Supreme Judicial Court invalidated that foreclosure, finding that the mortgages on the property were obsolete and deemed discharged. The remaining issue for the land court in Fitchburg Capital concerned the defendant’s counterclaims against the plaintiff, one of which was for the conversion of rental income that the plaintiff had allegedly appropriated while it had possession of the property following the foreclosure sale.apartment for rent

The plaintiff argued that the defendant should be barred by the doctrine of judicial estoppel from seeking a claim for the conversion of rental income generated by the property because the defendant failed to report the claim he had against the plaintiff during his bankruptcy proceedings. Judicial estoppel is an equitable doctrine that precludes a party from asserting a position in one legal proceeding that is contrary to a position it had previously asserted in another proceeding. A defense of judicial estoppel requires that the position being asserted in litigation must be directly inconsistent with the position asserted in prior proceedings, and the party must have succeeded in convincing the court to accept its prior position.

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The Appeals Court of Massachusetts found in favor of homeowners who were sued by their mortgage company after it failed to obtain the signature of the borrower’s spouse on the paperwork. In Salem Five Mortg. Co., LLC v. Lester (Mass. App. Ct. Oct. 13, 2016), the defendant filed a complaint against the plaintiffs, seeking to reform the parties’ residential mortgage. The superior court judge granted summary judgment in favor of the defendant, which was reversed on appeal.mortgage dispute

In Salem Five Mortg. Co., LLC, the plaintiffs, a married couple, took title to property as tenants by the entirety in a quitclaim deed in 2008. Although the plaintiffs took title jointly, the husband obtained the loan for the property in his name alone, and only he signed the mortgage document encumbering the property. In 2012, the defendant brought suit, seeking relief on four legal theories:  reformation of the mortgage on the ground of mutual mistake, reformation of the deed on the ground of mutual mistake, equitable subrogation of the wife’s interest to prevent unjust enrichment, and imposition of an equitable mortgage. The lower court held that the reformation of the mortgage was justified on the basis of mutual mistake and granted summary judgment.

In cases of mutual mistake in Massachusetts, reformation may be available when the other party knew or had reason to know of the mistake. The defendant, as the party seeking recovery for a unilateral mistake, must present full, clear, and decisive proof that a mistake occurred and that the other party knew or had reason to know of the mistake.

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The Appeals Court of Massachusetts recently decided a case stemming from a home equity conversion mortgage, also known as a reverse mortgage, between a homeowner and her lender. In Fin. Freedom Acquisition, LLC v. Laroche, 90 Mass. App. Ct. 1104 (2016), the bank sought a declaration from the court that the homeowner’s property was subject to the mortgage, despite the fact that it had been previously conveyed to her son. After a judge dismissed the bank’s claims, the bank appealed.reverse mortgage

In Fin. Freedom Acquisition, LLC v. Laroche, two years prior to executing the reverse mortgage, the homeowner had deeded the home’s fee simple interest to her son, retaining a life estate for herself, for estate planning purposes. Later, the homeowner began researching the possibility of supplementing her income through a reverse mortgage. Deciding to move forward, the homeowner acquired a reverse mortgage from the plaintiff, secured by her home. Prior to closing on the reverse mortgage, the plaintiff discovered that the property had been deeded to the homeowner’s son and noted in the closing documents that a re-conveyance back to the homeowner would be required to complete the transaction. Nevertheless, the closing proceeded without the re-conveyance, and the bank granted the homeowner a mortgage on the property while she received proceeds from the loan. Five years later, the bank again noticed that the property had not been re-conveyed and requested that the homeowner’s son transfer the fee simple back to the homeowner. When he refused to do so, the bank brought an action seeking a declaration that the son’s remainder fee simple interest was subject to the bank’s mortgage.

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In a recent case, a Massachusetts Land Court was presented with a motion to vacate judgment to prevent the foreclosure action and sale of property owned by the defendants. In Town of Russell v. Barlow (Mass. Land Ct. July 13, 2016), the town filed a complaint in 2003 to foreclose on the property at issue as the result of a tax lien. In 2008, a judgment was entered foreclosing the defendants’ right of redemption. The defendants filed their petition to vacate in 2014, contending that the tax taking and foreclosure were invalid because the town violated their due process rights. The court ultimately granted the defendants’ motion and vacated the judgment.house

Massachusetts law generally requires a petition to vacate a decree of foreclosure to be filed within one year of the entry of the decree. The judgment may be vacated within one year if the court determines it is required to accomplish justice. However, the strict application of the one-year limitation may be excused when there has been a denial of due process, which is typically based on a violation of due process rights and the property owner’s ability to participate in the original litigation. Due process, in turn, requires notice of a petition to foreclose by certified mail, but it does not require actual notice.

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Some foreclosure cases can become complicated, especially when multiple actions are filed in different courts with jurisdiction over a particular aspect of the dispute. In Merrill Lynch Credit Corp. v. Bishay (Mass. Dist. Ct. May 6, 2016), the foreclosure sale purchaser brought a residential summary process action against the former owners after they refused to vacate their home. The action was stayed while the former owners challenged the purchaser’s title in a separation action. The former owners then moved to amend their answer and counterclaim in the current case. The trial court denied the motion to amend and entered judgment awarding possession of the property to the purchaser.Foreclosure proceedings

In Bishay, the defendants were owners of the residential property at issue. In 2004, the defendants borrowed $650,000 from the bank, secured by a mortgage on the property. After the defendants eventually defaulted on the loan, the bank initiated foreclosure proceedings. The plaintiff acquired title to the property pursuant to a foreclosure deed, following an auction conducted by the bank. When the defendants failed to vacate the premises, a summary process action was filed against them. The defendants also challenged the validity of the title to the property in a separate action in the Land Court. The District Court action was stayed pending the outcome of the challenge to the title.

On appeal, the issue before the Massachusetts District Court was whether the judge erred in denying the defendants’ motion to amend their answer filed in the residential summary process action. In Massachusetts, the rules of civil procedure allow any party to amend its pleading once as a matter of course within 20 days after it is served, or after that time expires, by leave of court or by written consent of the adverse party. The court should allow a motion to amend unless it has a good reason, such as prejudice to the non-moving party.

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In a new opinion, the Appeals Court of Massachusetts reviewed a foreclosure case involving a summary process action brought against the mortgagor-occupant. In Gold Star Homes, LLC v. Darbouze, 89 Mass. App. Ct. 374 (2016), the defendant and mortgagor initially filed a complaint with the Land Court against the plaintiff and purchaser of the property, alleging unlawful foreclosure. The plaintiff then brought a summary process action against the defendant in the Housing Court. The lower court ruled in favor of the plaintiff on its summary process action, despite the defendant’s pending suit against it.foreclosure

The purpose of summary process is to enable the holder of the legal title of property to gain possession of the premises wrongfully withheld. Legal title is established in summary process by proof that the title was acquired strictly according to the power of sale provided in the mortgage, and that alone is subject to challenge. If there are other grounds to set aside the foreclosure, the defendant must seek affirmative relief in equity.

On appeal, the defendant contended that the judge should not have proceeded on the plaintiff’s summary process action while his related, prior action sought a declaration invalidating the foreclosure sale. The appeals court disagreed, explaining that the relief sought by the plaintiff in the Housing Court, i.e., summary process and eviction, was not available as a counterclaim in the defendant’s Land Court action. The court also noted that the defendant could have asked the Land Court to stay her eviction pending the outcome of its decision, but she did not. As a result, and since the trial in the Housing Court was fair, the appeals court held that the lower court did not err by proceeding with the trial.

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