Errors made by lender invalidate foreclosure

Condo misidentified in mortgage docs
Published: 5:06 pm Thu, January 31, 2013 By Eric T. Berkman

Mistakes discovered in mortgage and foreclosure documents invalidated the foreclosure sale of a condominium unit, a Housing Court judge has determined. The plaintiff bank, which foreclosed on the unit and purchased it at auction, provided documentation containing erroneous references to unit numbers that were never subject to the mortgage. The defendant unit owner argued that because the mistakes were never corrected, she maintained the superior right of possession. Judge MaryLou Muirhead agreed. “The plaintiff knew or should have known that the property it was selling at the auction was not properly described in the notice or the mortgage document and did not take any steps to correct the errors before the property was advertised,” Muirhead said,

denying the plaintiff’s motion for summary judgment. “As a result, this court cannot find that the plaintiff strictly complied with the power of sale.” The eight-page decision is East West Bank v. Chung, Lawyers Weekly No. 17-001-13. The full text of the ruling can be ordered by clicking here. Expansion of ‘Ibanez’? Defense counsel Howard M. Berger of Andover called the ruling a “dramatic expansion” of the Supreme Judicial Court’s landmark 2009 decision in US Bank National Association v. Ibanez. In that case, the SJC invalidated foreclosure sales in situations in which a bank, after it has been assigned a mortgage, forecloses before it officially owns the mortgage. Muirhead extended Ibanez to cover situations in which a foreclosing bank has neglected to correct errors in the documentation, Berger said. “This is certainly a good decision regarding evictions [following a foreclosure sale],” he said. “It will require absolute precision by foreclosing mortgagees before people can be dispossessed of their property.” At the same time, Berger said, the decision raises questions about the rights of attaching creditors of record. Such liens and attachments are typically voided by a foreclosure sale. “The question is whether this decision, by invalidating the foreclosure, reinstates such third-party liens and attachments previously thought to be wiped out,” he said. “In this case the property was actually encumbered by an attachment secondary to the mortgage, though it wasn’t part of the record. … So is that attaching creditor — if and when they can foreclose — still in the picture?”

Timothy D. Wenger of Partridge, Snow & Hahn in New Bedford, who represented the plaintiff, declined to comment. But Boston attorney Christopher S. Pitt, past president of the Real Estate Bar Association, said the ruling is helpful. “By holding the banks to a responsible standard of care in documenting the mortgage and the foreclosure, the court is performing a useful public service to any potential buyer,” said the Robinson & Cole lawyer, who was not involved in the case. He also described the defendant as an “undeserving windfall beneficiary” of the court’s action, considering that the errors in question, which she and her attorney could have picked up on by paying more attention at the closing, arguably caused her no harm. Nonetheless, Pitt said, “most people would agree that the responsibility for getting the documentation correct up front is primarily on the lender, and so if there are errors in the mortgage, the lender should be held to account and has only itself to blame.” At the same time, Pitt expressed concern about the “chilling effect” an epidemic of faulty loan documentation could have on the foreclosure market. “If there is a general perception in the marketplace that mortgage documentation has been botched by the banks, this will discourage people from bidding, which reduces the likelihood that the foreclosure sale will bring a fair price for the homeowner who is losing the property,” he said. Richard D. Vetstein, a lawyer in Framingham who has written extensively about foreclosure issues on his real estate blog, called the ruling “interesting,” noting that it was the first time he had seen such a situation come up in an eviction case.

“But it comes up during title exams, which is another reason to get title insurance,” Vetstein said. As a practice pointer, Vetstein added, “the lender should have brought a claim for reformation in Land Court to correct the errors or to re-foreclose correctly.” Foreclosure sale In May 2007, defendant Tera Chung acquired Unit 1602 of the Grandview Condominium building at 165 Tremont St. in Boston. Shortly afterward, she executed a note in favor of United Commercial Bank. The note, which was secured by a mortgage but was not recorded, identified the subject property as “165 Tremont Street #1602.” The description of the property gave the same address, but later made references to “Unit 1603” and “Unit 101.” Neither of those units, however, was ever subject to the mortgage. On Dec. 20, 2010, United Commercial Bank assigned the mortgage to the plaintiff, East West Bank. The plaintiff recorded the assignment with the Suffolk Registry of Deeds on Jan. 6, 2011. The owner apparently defaulted on her mortgage payments; in December 2011, the plaintiff sent two default notices and a foreclosure notice. That month the plaintiff published three notices of a Dec. 30 foreclosure sale of the property in The Boston Globe. While the notices identified the property to be sold as “mortgaged premises located at Unit 1602” of the Grandview Condominium, they further stated that the property was “more particularly described as … Unit 1603” with an additional reference to a “Unit 101.”

The auction proceeded as scheduled and the plaintiff, as high bidder, took title by foreclosure deed dated Jan. 30, 2012. The plaintiff subsequently filed a summary process action in Housing Court to evict the defendant from the premises. As part of that proceeding, the plaintiff filed a motion for summary judgment arguing that it now had a superior right to possession. The defendant filed a cross-motion arguing that the foreclosure was invalid and thus so was the sale, leaving her with the superior right to possession of the premises. Lack of reasonable diligence “It is settled that, in executing a power of sale contained in a mortgage, the mortgagee is bound to exercise good faith and put forth reasonable diligence, as the mortgagee is a trustee for the benefit of all persons interested,” Muirhead said in addressing the parties’ motions. “The insistence of the Supreme Judicial Court on strict compliance with the power of sale reinforces the mortgagee’s obligations.” And when a bank fails to exercise good faith and reasonable diligence, that can invalidate a title sale, even if the bank literally complied with the terms of the power, she added. “While mistakes can be corrected, this one was not and it creates a problem for the plaintiff,” Muirhead said. Specifically, she said, it creates the type of problem the SJC addressed in Ibanez. “‘[W]ith so many foreclosed properties available for purchase, why bid on a property with even the possibility for trouble?’” the judge said, quoting Ibanez. “Why bid on a property [where the address] is not crystal clear? Why take the risk of uncertainty? Since these concerns affect the ability to obtain clear, marketable title, why bid a reasonable market value instead of a discount price to account for that risk?”

Since the plaintiff could not establish strict compliance with the language of the power of sale in the mortgage, it would not be able to prove a superior right to possession of the premises, Muirhead said. Accordingly, she found that the defendant’s cross-motion should be granted.