Alert April 15, 2014

First Circuit Rules on Borrower’s Challenge to Foreclosure under Massachusetts Law

Continuing a trend of rejecting challenges to foreclosure by Massachusetts borrowers, the First Circuit affirmed dismissal of a complaint alleging several commonly made arguments in foreclosure litigation. After defaulting, the borrower’s home was foreclosed upon. The borrower filed suit alleging wrongful foreclosure, slander of title and unfair and deceptive business practices under Massachusetts law. The lender moved to dismiss the borrower’s suit, which was granted by the lower court. The borrower appealed.

In the appeal, the borrower alleged that the Mortgage Electronic Recording System, the electronic loan registry that serves as mortgagee as nominee for the lender and successor noteholders, lacked authority to assign the mortgage to the lender who ultimately foreclosed on the borrower. The First Circuit, noting that it had twice rejected this argument under Massachusetts law, rebuffed it again. The Court detailed “MERS’s business model,” which relies on MERS’s “ability to remain mortgagee of record, possessing a legal interest in a homeowner’s mortgage, while the beneficial interest in that accompanying note is transferred among MERS’s member institutions.” The fact that MERS tracks mortgage transfers electronically does not make these transfers “electronic assignments,” or otherwise cast doubt upon MERS’s authority to assign mortgages on behalf of its members, according to the Court. The Court also rejected the borrower’s allegation that the assignment of his mortgage from MERS to the foreclosing lender was “robo-signed,” again relying on a recent opinion in which the First Circuit had rejected this argument. Here, as there, the borrower asserted “no particular legal theory as to why a ‘robo-signed’ document is necessarily invalid.” And, because the signature was notarized, under Massachusetts law it was generally binding upon the entity, MERS, on whose behalf the signature was executed.

The Court also considered the borrower’s allegation that the MERS assignment violated the pooling and servicing agreement of the trust into which his loan was securitized because (1) there were no assignments to securitization intermediaries and (2) the assignment occurred after the closing date of the trust. Considering the claim under Massachusetts law, rather than New York law (as borrower did not argue below, but asserted on appeal), the First Circuit ruled that the borrower’s allegation, even if true, would only render the assignment voidable—not void. And, under Massachusetts law, a borrower lacks standing to challenge a mortgage assignment that is not void, but merely voidable, and thus capable of subsequent ratification.   Next, the Court rejected the borrower’s argument that the current mortgage-holder failed “to unify the mortgage and note,” because the argument was based on a Massachusetts Supreme Judicial Court ruling, Eaton v. Fed. Nat’l Mortg. Ass’n, 462 Mass. 569 (2012), that applies only prospectively, to conduct occurring after Eaton was issued, and to cases already on appeal while Eaton was decided. Though the borrower had filed his complaint before Eaton was decided, it was not on appeal at the time, and so Eaton did not apply. Finally, the Court refused to consider the borrower’s argument related to the validity of the notice he received—though the First Circuit observed that, had the borrower not waited until his appeal to raise this claim, but instead pled the claim in his complaint, it may have survived a motion to dismiss.