August 12, 2019Donald Pocock Appointed Chair of ABA Consumer Litigation Committee
January 22, 2019
In a recent Order by a judge in the Business Litigation Section of the Suffolk County (Massachusetts) Superior Court, the Court found that the Boston Redevelopment Authority (“BRA”) could challenge the validity of a foreclosure sale by the defendant-bank on a condominium that had been purchased by the mortgagor through BRA’s affordable housing program. See Boston Redevelopment Auth’y d/b/a Boston Planning and Dev. Agency v. Boston Private Bank and Trust Co. et al., No. 1884CV01578‑BLS1 (Nov. 6, 2018 Order) (Order on Defendants’ Mass. R. Civ. P. 12(b)(6) Motions to Dismiss). The BRA was not a party to the underlying mortgage loan by and between the mortgagor and the defendant-bank. However, the Court found that the BRA had plausibly alleged that the mortgagor’s property deed included a “Deed Rider Covenant for Affordable Housing” that provided certain rights to the BRA, and which amounted to an encumbrance on the condominium in favor of the BRA. As such, the Court found, the defendant-bank owed a duty at common law to exercise good faith and reasonable care in foreclosing by sale, not only to the mortgagor but to any holders of junior liens and encumbrances, including the BRA. The BRA’s allegations that the defendant‑bank breached that duty (by deeding the condominium to itself after a default by the high bidder at foreclosure) survived the Rule 12(b)(6) stage.
However, the Court’s Order should not be misconstrued to mean that foreclosures may broadly be challenged in the interests of affordable housing or other public interests, by public agencies or otherwise. Non-parties to a mortgage loan, and persons who have no interest in or claim to the subject property, generally have no standing to challenge a foreclosure sale – whether pursuant to a contract theory or at common law. The BRA case is no exception. The Court – applying longstanding Massachusetts law – merely found that the BRA qualified as the holder of a junior encumbrance on the subject property by virtue of the rights afforded to it under the Deed Rider Covenant issued to the mortgagor, and that the defendant-bank owed it certain duties in foreclosing as a result. See, e.g., Pehoviak v. Deutsche Bank Nat’l Trust Co., 85 Mass. App. Ct. 56, 62 (2014) (foreclosing mortgagee owes duty of good faith and reasonable diligence in exercising the power of sale to mortgagor and to “those holding junior encumbrances or liens”) (quotation and citation omitted).
In fact, the Court’s Order sets important limits on the grounds on which a junior lienholder may challenge a foreclosure sale. For example, the Court rejected the BRA’s theory that the foreclosure violated G.L. c. 244, § 35B (requiring mortgagees to make good faith efforts to avoid foreclosure with respect to certain loans). The Court found that § 35B affords rights to homeowners only (i.e, the mortgagor on the mortgage loan), not junior lienholders. The BRA had no standing to bring such a claim.
The same logic would preclude a junior lienholder from challenging a foreclosure sale under similar state laws designed to protect the mortgagor, such as G.L. c. 244, § 35A (requiring notice to mortgagors of their right to cure default before foreclosure), or under consumer‑protective federal laws such as the Real Estate Settlement Procedures Act. Similarly, junior lienholders would have no standing to challenge compliance with Paragraph 22 of the standard Massachusetts mortgage (requiring mortgagees to give certain pre-foreclosure notice to mortgagors), as they are not parties to the underlying mortgage loan.
Therefore, mortgagees foreclosing on properties on which there are junior liens or encumbrances should be aware that – in addition to the requirement that the notice of foreclosure be served on junior holders (see G.L. c. 244, § 14) - they owe limited duties in foreclosing to these entities. However, if faced with a lawsuit filed by a junior holder of a lien or encumbrance, foreclosing mortgagees should understand that most laws and theories of recovery will afford putative relief only to the mortgagor, not the junior holder. Nelson Mullins’s team can help your company defend against threatened or actual litigation concerning the validity of a foreclosure. Please contact me if you have been sued or threatened with suit concerning the validity of a foreclosure sale, or under related state and federal laws.
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