Amicus Brief Levitin Supplemental for Eaton v FNMA in MA

8/3/2019 Amicus Brief Levitin Supplemental for Eaton v FNMA in MA

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COMMONWEALTH OF MASSACHUSETTSSUPREME JUDICIAL COURTS . J . C . NO. 11041

-HENRIETTA EATONPlaintiff-Appellee

V .

FEDERKL NATIONAL MORTGAGE ASSOCIATION & ANOTHERDefendants-Appellants

--ON APPEAL FRO M MASSACHUSETTS SUPERIOR COURTCIVIL ACTION NO. 11-1382SUPPLEMENTAL AMICUS C U R I A E BRIEF OF

PROFESSOR ADAM J. LEVITIN

Adam J. LevitinProfessor of L a wGeorgetown University Law Center600 New J e r s ey Ave., NWWashington, DC 20001( 2 0 2 ) 6 6 2 - 9 2 3 4adam. l e v i t i . n @ a w . qeorqetown . d ~J a n u a r y 2 0 , 2012

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Table of ContentsI. Statement of Interest of Amicus Curiae ............ 511. Statement of the Issues..,....................... 5111. Argument ........................................ 5A. Appellants and the Mortgage Industry as a WholeHad C l e a r Notice of What the Law Requires and CannotClaim Surprise ..................................... 4B. The Scope of the Naked Mortgagee Problem IsUnknown ............................................ 7C . Adverse Possession, Pleading Standards, Burdens ofProof, and Laches Would Effectively Bar Most ClaimsR e l a t i n g to Past I n v a l i d Foreclosures .............. 8D. Title Insurance Protects Against Defects in theChain of Title, and T i t l e Insurers Should Not BeProtected from the Risks They Assumed ............. 11E. Concerns About Clouded Title Are B e s t Addressed bythe Legislature ................................... 14

IV. Conclusion ...................................... 15


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Table of AuthoritiesCasesBank of N.Y. v. Bailey, 460 Mass. 327, 328(2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * . . . . . . . 5 , 6Bevilacqua v. Rodriquez, 460 Mass. 762(2011) .................................... 4 , 5 , 6, 11Carpenter v. Longan, 83 U.S. 2 7 1 , 2 7 4 (1872), ..... -3Commonwealth v. Christian, 430 Mass. 552, 568 (Mass,2000). ................................................G.E.B. v.S.R.W., 422 Mass. 158, 166( 1 9 9 6 ) ) ............................................. 11Iannacchino v. Ford Motor Co., 451 Mass. 623, 635(2008) .............................................. 9Stewart v. Finkelstone, 206 Mass. 2 8 , 3 6 (Mass.1910), .............................................. 1~Totman v. Malloy, 431 Mass. 143, 145 (2000) .........U.S. Bank Nat'l Ass'n v. Ibanez458 Mass. 6 3 7 (Mass. 2011) ................ , 5 , 6, 1 5West Broadway Task Force v. Boston Housing Authorite,414 Mass. 394 ( 1 9 9 3 ) ................................ 11StatutesM.G.L. C. 106 3-309.... ............................ 7M.G.L. C . 185 24 .................................. 12M.G.L. C. 18.5 45 .................................. 12M.G.L. c. 185 5 9 9 .................................. 12M .G . L . c. 1 8 5 101 ................................. 12M.G.L. c, 185 S 102 ................................. ~2M . G . L , c . 185 108 ................................. ~2


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M.G.L. C. 260 21 .................................. 8Cal. Civ. Code 2924 ............................... 15735 111. Con. Stat. 5/15-1509(c) ................... 15Court RulesMassachusetts Rule of Appellate Procedure 13(b) .....Massachusetts Rule of Appellate Procedure 16(1)..1/ 10

Other AuthoritiesGlendon J. Buscher, Jr., A B r i e f History of t h e LandCourt, Mar. 8, 2006, athttp://www.mass.~qov/courts/courtsandiudgecourts/iandcou~t/lchist3.html ... ................ ............. 3--Restatement (3d) on Property, 5 5.4(c) ............ 2 , 6


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I. Statement of Interest of Amicus CuriaeAdam J. Levitin is a Professor of Law at the

Georgetown University Law Center. He has no financialinterest in this case. A statement o f interest isavailable in his original am i c u s brief,11. Statement of the Issues

Whether requiring unity of the mortgage andunderlying promissory note f o r a valid foreclosurewould cloud title on properties with foreclosures i nthe chain of title and, if so, whether a unityrequirement should be applied prospectively only?111. Argument

The Courts request for supplemental briefingbruited concern about clouding title in theCommonwealth from a ruling that foreclosure by a nakedmortgagee-a mortgagee that is not also the obligee onthe mortgage note-is invalid.

These concerns appear to have been first raisedin a letter to the Court from amici Real Estate BarAssociation ( R E B A ) and the Abstract Club datedDecember 7 , 2 0 1 1 . This letter violated MASS. R. APP. PRO.16(1) by submitting not just a supplemental citationto the Court, but also commentary on that citation.See Commonwealth v. Christian, 430 Mass. 552, 568(Mass. 2000) (Rule 16(1) does not authorizereargument in the disguise of a supplementarycitation. ) .APP. PRO . 13(b) by failing serve said submission, asREBA and the Abstract Club also violated MASS. R .


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Requiring unity of the note and mortgage for avalid foreclosure cou l d , no doubt, cloud title in somecases. The scope of this problem is unknown, however,and there are numerous reasons to believe it would bequite limited in practice if applied retrospectivelyand even more limited in adverse economic impact onthe residents of the Commonwealth.

There is nothing radical about Appellee'sposition that a naked mortgage may not foreclose. Thisrule is deeply rooted in common law and history and isdirectly stated in the Restatement (3d) on Property,5.4(c) (1997):

A mortgage may be enforced only by, or inbehalf of, a person who is entitled toenforce the obligation the mortgage secures.This prohibition is based on conunon sense, namely thata mortgage is but an incident to a note and withoutevidence of the underlying obligation and a default onit, there is nothing to trigger the mortgagee's rightsunder the mortgage instrument. Carpenter v. Lonqan, 83U.S. 271, 274 (1 87 2) ("The note and mortgage are

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well as a subsequent letter with a supplementalcitation, dated December 9 , 2011, on amici who do notsupport their position.not specify a remedy for such violations; it isinstead the Court's prerogative, but an appropriates a n c t i o n would be to disregard the submission.

T h e Massachusetts Rules of Appellate Procedure do

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inseparable; the former as essential, the latter as anincident. An assignment of the note carries themortgage with it, while an assignment of the latteralone is a nullity.").

The traditional prohibition on foreclosure bynaked mortgagees also protects homeowners against therisk of double satisfaction; were the rule otherwise,homeowners would have to pay once to s e t t l e with themortgagee, but that would not discharge the note.Similarly, were the rule otherwise, the mortgage wouldhave a life of its own so discharging the note wouldnot eliminate the mortgage.

None of this should have surprised Appellants orany other party engaged in mortgage lending.Appellants are sophisticated entities that conductbusiness nationwide. They were on c lear notice whatthe l a w requires, as shown by the Restatement ( 3 d ) onMortgages, and there has never been anything toindicate that the Commonwealth stands as an exceptionfrom these long-standing principles of property law.

Instead, Appellants chose to ignore the law basedon the calculation that non-compliance and itsattendant risks would be more profitable thancompliance. This was a business decision, and

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Appellants should not he permitted to have their cakeand eat it too, and certainly not on the grounds thatan adverse ruling would cloud title in theCommonwealth. Appellants' own wrongdoing should not b ethe b a s i s of their defense,

That said, the Court must of course be cognizantof the implications of its ruling on third-parties. A5this brief explains, there are several reasons to beskeptical that there will be substantial harm tothird-parties or to the clarity of title in theCommonwealth. First, there is nothing in the record toindicate that the practice of foreclosure by nakedmortgagees is widespread. Second, adverse possession,pleading standards, burdens of proof, and laches limitthe likelihood that most past foreclosures could besuccessfully challenged. Third, title insurance standsas a protection f o r innocent parties in those caseswhere past foreclosures could be successfullychallenged. If there is a clouded title problem, it isone that is best addressed by the legislature, as haso c c u r r e d i n other states, where the finality offoreclosure sales is protected by statute.A. Appellants and t h e Mortgage Industry as a Whole HadC l e a r Notice of What th e Law R e q u i r e s and Cannot C l a i mSurprise

Previously, in U.5. Bank Nat'l A s s ' n v. Ibanez,

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458 Mass. 637 (2011), this Court made clear thatpossession of the note i s insufficient f o r aforeclosure; a noteholder who is not the mortgagee maynot foreclose. This Court then extended that ruling inBevilacqua v. Rodriguez, 460 Mass. 762 (2011), whichtaught that an improper non-judicial foreclosure isincapable of passing good title to the foreclosuresale purchaser, and in Bank of N.Y. v . Bailey, 460Mass. 327, 328 (2011), which held that the HousingCourt has jurisdiction to hear a challenge to titleraised by a former homeowner as a defense to a summaryprocess eviction action by a pa r t y acquiring theproperty pursuant to a foreclosure sale.

while the Court's ruling on these cases wasimportant and timely, the outcomes in these unanimousholdings should not have surprised the pa r t i e s : Ibanezapplied b a s i c commercial law and real estateprinciples that a transfer is not made until it ismade and that transfers of real property must complywith the Statute on Frauds, and BeviLacqua was animportant restatement of the fundamental rule o fcommercial law, nemo dat, that one cannot transferwhat one does not have. Similarly, the ruling inBailey was a natural extension of the rulings in

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Tbanez.The present case deals with the situation in

which the party prosecuting the foreclosure holds themortgage, but not the note. Forbidding a nakedmortgagee from foreclosing is hardly a radicalextension of the Law; the Restatement ( 3 d ) on Property,B 5 , 4 ( c ) makes clear that a foreclosure must bebrought by the obligee of the note or its agent: "Amortgage may be enforced only by, or in behalf of, aperson who is entitled to enforce the obligation themortgage secures." This is so because of theineluctable logic of the mortgage being but anincident to the note and without a life of its own. Tothe extent that the mortgage industry ha5 disregardeda legal principle so commonsensical anduncontroversial that it has been encapsulated in aRestatement, it does so at its peril.

It is hard to reconcile a position that expressesretroactivity concerns about foreclosures done bynaked mortgagees with the Ibanez, Bevilacqua, andBailey rulings, which were not restricted solely toprospective foreclosures. In the year since the Ibanezruling, the Massachusetts mortgage lending market hasnot collapsed nor ha5 title become clouded throughout

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Massachusetts, It is hard to believe that the sky willnow fall if the Court applies what has always been thelaw not just in Massachusetts, but nationwide.B. The Scope of t h e Naked Mortgagee Problem Is Unknown

There is simply no record to show how widespreadthe practice of foreclosure by naked mortgages hasbeen in the Commonwealth. There is been tremendousvariation in foreclosure practices by mortgagees, andthis makes it hazardous to suppose that the actions ofthe defendants in the instant case are in any wayrepresentative o f mortgagees in general or that therehas been a wide-scale problem of foreclosures by nakedmortgages. This initial empirical caveat should temper

'It is important to note that lost promissory notedo not create a naked mortgagee problem. A lost noteonly matters if the note i s a negotiable instrumentand thus the reification of the obligation itself. Ifa note is non-negotiable, then it is simply a regularcontract, and the l o s s of the physical original doesnot affect the ability o f the obligee to enforce thecontract, as long as the terms of the contract can beproven and the Statute of Frauds satisfied. Fornegotiable notes, the General Assembly has addressedthe Lost note problem via M.G.L. Gh. 106 S 3-309,entitled "Enforcement of Lost, Destroyed, or StolenInstrument," which provides a method for theenforcement of lost negotiable notes.of the note cannot be sufficiently emphasized. Absentthe terms o f the note, i t is impossible to know theamount owed, as the nate provides not only theprincipal and interest and amortization schedule, butalso for other various fees which might apply, such aslate fees and attorneys' fees. Without knowing theamount owed, it is impossible to know what payment is

The importance of being able to prove the terms

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any consideration of the impact of a retroactivelyapplicable ruling.C , A d v e r s e P o s s e s s i o n , P l e a d i n g S t a n d a r d s, B ur de ns ofProof, and L ac he s Would E f f e c t i v e l y Bar Most C i a i m sR e l a t i n g t o Past I n v a l i d F o r e c l o s u r e s

There are several factors that should assuageconcerns about clouded title resulting from aretroactively applicable ruling requiring a u n i t y ofthe note and mortgage f o r a valid foreclosure. Adversepossession, pleading standards, burdens of proof, andequitable defenses such as laches all combine to makethe likelihood of successful challenges to pastforeclosures unlikely in most cases, thereby sharplylimiting the retroactive effect of a rulinginvalidating foreclosures by naked mortgagees,

Massachusetts adverse possession law creates anouter bound on the extent of clouded title for non-registered property. The adverse possession period inMassachusetts is twenty years, M.G.L. c h . 260, 21.'

necessary to satisfy the note. What's more, it isimpossible to know if a foreclosure results i n adeficiency or the lender or not. Thus, while a lostnote will present complications fo r a mortgagee, theforeclosure process simply cannot work in theCommonwealth without knowing what the amount owed onthe note is, which in turn requires knowing the termsof the note.Massachusetts does not require intent as anelement of adverse possession. Totman v. Malloy, 4 3 1Mass. 1 4 3 , 145 ( 2 0 0 0 ) ("The guiding principle behindthe elements of adverse possession is not to ascertain

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Thus, pre-1992 foreclosures should not create aclouded title issue.

For more recent foreclosures, Massachusetts'spleading standards and burdens of proof present animportant obstacle to successful challenges to pastforeclosures. In Iannacchino v. Ford Motor Co., thisCourt announced a more rigorous pleading standard thatrequires more than mere factual allegations"consistent with[ an entitlement to relief," but alsothat the allegations "possess enough heft to show thatthe pleader is entitled to relief,'' 451 Mass. 623, 635( 2 0 0 8 ) (internal quotations omitted). In p r a c t i c a lterms, this would require a plaintiff seeking toinvalidate a past foreclosure to allege that theforeclosure w a s under t aken by a naked mortgagee.

In few, if any cases would plaintiffs have abasis or making such allegations beyond sheerconjecture for precisely the reasons discussed in theDec. 7, 2011 Rule 16(1) submission from the RealEstate Bar Association ( REBA ) and the Abstract Club tothe Court:4 it is impossible to tell from land records

the intent or state of mind of the adverse claimant,but r a t h e r to provide notice to the true owner,allowing fox the legal vindication o f propertyrights. ' ) .See supra note 1 re: validity o f the submission.


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Laches provides a defense against litigation broughtunseasonably in which delay has caused the ddendantto be at a disadvantage, such as incurring expense orobligations. See, e.g., G.E.B. v . S.R.W., 4 2 2 Mass.158, 166 (1996); W. Broadway Task Force v. BostonRous. Auth., 414 Mass. 3 9 4 ( 1 9 9 3 ) ; Stewart v.Finkelstone, 206 Mass. 28, 3 6 (Mass. 1910). This isprecisely the sort of defense that should protectpurchasers of properties with foreclosures far back inthe chain of title.D. Title In su ra n ce Protects Against Defects i n t h eChain of T i t l e , and T i t l e Insurers Should Not B eProtected from the Risks They AssumedIn the event that a past foreclosure could be

successfully challenged, title insurance would protectthe current occupants of the property and result in aclearing o f title. A purchaser o f any type of propertyalways faces the risk of clouded title; this is anunavoidable risk of commerce. Some purchasers chose toassume this risk and self-insure. Others opt forthird-party insurance.

In Massachusetts, property title may be insuredeither through a "public option" of registration ofthe land in a Torrens registration system r u n by theLand Court or through private title-insurancecompanies. To the extent that property owners have no t


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obtained some form of title insurance, the Cou r tshould not be overly concerned about clouded title, asthis is a risk that these property owners assumed uponpurchase (and depending on the terms of t h e propertysale, they may have a warranty action against theirseller). And those property owners with a form oftitle insurance are protected from the problems ofclouded title. The question, then, is simply whetherthe title insurers will have to pay on their policiesfor the risks they assumed.

Massachusetts offers property owners the optionof registering their property in a Torrens landregistration system. In this system, a property ownerbrings an action fo r registration, the Land Courtexamines title to the prope r ty , and if title is clearthe Land Court issues a judgment of registration inexchange for a fee of .l% (10 basis points) of theassessed value of the property. M.G.L. c. 185, S 2 6 ,45, 99. Registration vest6 indefeasible title i n theregistrant; any party with a claim to title can onlyrecovec monetarily and from the registration system'sinsurance fund, and must bring a cla im within a six-year statute of limitations. M.G.L. c. 185 S S 101-102,108. Approximately 2 0 % - 3 0 % of Massachusetts properties

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If, after all this, some title insurers arereluctant to assume the risks of insuring title onproperties with a foreclosure in the chain of title,it presents an opening for their competitors to gainmarket share. Title insurers' revenue comes i n sinqle-premium payments and thus depends on constantlyunderwriting new policies. Therefore, title insurerscan hardly afford to abstain from any segment of themarket, not least because they are competing againstthe "public option" of title insurance viaregistration.

What is really at s t a k e here is not the futureavailability o f title insurance on properties withforeclosures in their chain of title, but whetherprivate title insurance companies will have to pay outon some of their existing policies. That is the gambleinvolved with insurance, and if title insurers havenot been careful with their underwriting, it is notf o r the Court to save them from themselves.E. Concerns Abou t C lo ud ed T i t l e A r e B e s t A d d r e s s e d b yth e Legislature

To the extent that a clouded title problememerges, it is best addressed by the legislature.Indeed, legislatures in other states have chosen tospecifically protect the finality of foreclosure sales

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5by statute. e,.g., Cal. Civ. Code 2 9 2 4(upholding finality of non-judicial foreclosuresales); 7 3 5 Ill. Con. Stat. 5/15-1509(c) (upholdingfinality of judicial foreclosure sales). The GeneralAssembly remains free t o do so if it believes such astep is necessary.IV. Conclusion

In the year since this Court's ruling in Ibanez,the sky has not fallen. It will not fall if this Courtrules f o r Appellee and makes its ruling retroactivelyapplicable. Instead, it will permit those wrongfullyforeclosed homeowners who have the wherewithal tobring l i t i g a t i o n and to overcome the significant legalhurdles to obtain just recoveries.

Respectfully submitted,

600 New Jersey Ave., NWWashington, DC 2 0 0 0 1-.dam. lcv i t [email protected] rqe town .edu-( 2 0 2 ) 6 6 2 - 9 2 3 4

Dated January A, 0 1 2In judicial foreclosure states, challenges topast foreclosures are necessarily barred by timelinessrequirements for appeals and,= judicata.
mailto:[email protected]:[email protected]:[email protected]

Amicus Brief Levitin Supplemental for Eaton v FNMA in MA

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