Property Law Developments—Joseph William Singer

Many courts uphold acceleration clauses in commercial leases that require tenants to pay the rest of the rent due for the remainder of the lease term if the tenant breaches the lease. Such clauses are usually not enforced in the context of residential leases because they disclaim the duty to mitigate damages. The only issue for acceleration clauses in commercial leases is whether the amount exceeds a reasonable estimate of the likely damages from breach and thus constitute an invalid “penalty” rather than a valid liquidated damages clause. See, e.g., Cummings Properties, LLC v. National Communications Corp., 869 N.E.2d 617 (Mass. 2007). Many courts make this determination by assuming that the landlord still has a duty to mitigate damages by attempting to relet the premises and thus the remaining rent will be invalid if it far exceeds the damages that would be sustained if the landlord found a replacement tenant. See HealthSouth Rehabilitation Corp. v. Falcon Management Co., 799 So. 2d 177 (Ala. 2001). However, some courts hold that the duty to mitigate damages is irrelevant in this context. NPS, LLC v. Minihane, 886 N.E.2d 670 Mass. 2008). The Massachusetts Appeals Court recently explained that this means that it does not matter when the breach occurs during the course of the lease, i.e., at the beginning when many months or years of rent are left and the landlord might be able to obtain a replacement tenant and mitigate damages, or at the end of the lease when replacement of the tenant might be impossible within the remaining time. The only thing that matters is whether the figure chosen by the parties in the acceleration clause (the remaining rent for the lease term) is a reasonable estimate of the damages that might be sustained upon the tenant’s breach. Although this is a difficult determination to make, the court explained that acceleration clauses in commercial leases are presumptively enforceable and should be disregarded only if they are clearly unreasonable. Panagakos v. Collins, 80 Mass. App. Ct. 697, 2011 WL 5067707 (Mass. App. Ct. 2011).

In an important but almost inevitable case, Bevilacqua v. Rodriguez,  2011 WL 4908845 (Mass. 2011), the Supreme Judicial Court of the Commonwealth of Massachusetts held that a lender who does not follow proper procedures to foreclose on property cannot pass good title to a subsequent purchaser. The court’s earlier ruling in U.S. Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40 (Mass. 2011) had held that a nonjudicial foreclosure cannot lawfully happen unless the party conducting the foreclosure can show requisite assignments of the mortgage given it the right to foreclose. In Bevilacqua, the original buyer Rodriguez granted a mortgage to MERS (Mortgage Electronic Registration Systems, Inc.) as nominee for the real lender Finance America, LLC. At the time of the private foreclosure proceedings, MERS had not formally assigned the mortgage from the original lender to U.S. Bank National Association (US Bank); for that reason, the foreclosure brought by US Bank was invalid. The buyer at the foreclosure sale (also US Bank as trustee for a securitized pool of mortgages) could not therefore transfer good title to the property. Thus the buyer Bevilacqua had no title to the property and no standing to bring a quiet title action against the original owner/borrower. The court did suggest that the buyer could sue the bank from whom he tried to obtain title in order to get relief either in the form of damages or actions would satisfy the statute of frauds and actually result in a clear transfer of title from the original owner to the subsequent buyer.

A dispute has arisen between South Essex Register of Deeds John O’Brien and the Massachusetts Real Estate Bar Association (REBA) over O’Brien’s refusal to allow seemingly “robo-signed” mortgage documents to be recorded in the Registry of Deeds. REBA contends that state law allows the recording of any document “purporting” to be signed by an authorized signatory to a mortgage or a mortgage assignment. Mass. Gen. Laws ch. 183, § 54B. But Register O’Brien points to 1,300 documents received that were signed “Linda Green” but which exhibit different handwriting styles and different titles, and some were filed after 2010 when it was believed that Green stopped working for a mortgage company. O’Brien takes the position that he will not record documents signed by “known robo-signers” and he will also forward suspicious documents to the Attorney General’s office for investigation of mortgage fraud. Scott Pitman & MIchael Pill, To record or not to record robo-signed documents? 40 Mass. Lawyers Weekly 9 (Sept. 26, 2011).

Idaho, Indiana, Mississippi and Montana have all passed statutes prohibiting enforcement of any transfer fee covenants entered into after the dates the legislation goes into effect. See 2011 Idaho Sess. Laws 107; 2011 Ind. Acts 136; 2010 Miss. Gen. Laws 348; 2011 Mont. Laws 259. Transfer fee covenants are promises inserted in deeds to pay a fee to the original seller of the property any time it is sold in the future. Such fees were abolished in New York State in 1852 in the case of DePeyster v. Michael, 6 N.Y. 467 (1852) as a vestige of feudalism.

A federal District Court judge in Massachusetts has ruled in the case of Dixon v. Wells Fargo Bank, 2011 WL 2945795 (D. Mass. 2011), that a ban cannot induce a homeowner to stop making mortgage payments as a prerequisite to negotiations to modify the mortgage and then use that failure to make the mortgage payments as a predicate for foreclosing on the property and evicting the owner. The bank’s representation that it would renegotiate following the borrower’s cessation of mortgage payments constituted a promise on which the borrower reasonably relied and that promise could be equitably enforced by denying the bank the right to foreclose in the circumstances. The court did not find a promise by the bank to modify the mortgage but it did have a duty to negotiate the modification in good faith before foreclosing.

Attorney General Martha Coakley announced that the Commonwealth of Massachusetts settled a lawsuit with a subprime mortgage lender that originated subprime mortgages it knew were likely to fail and which not only targeted African American and Latino borrowers but gave its employees discretion to charge higher fees to such borrowers. The company will pay a penalty of almost $10 million to the Commonwealth and will direct its mortgage servicer to modify $115 million in loans either by writing down the principal balance of lowering interest rates. read article The settlement is based on the legal ruling in the earlier case of Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548 (Mass. 2008), which held that it might violate the state consumer protection act to market mortgages that were almost certain to end in foreclosure.

In an extension of its earlier ruling in U.S. Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40 (Mass. 2011) that a foreclosure is invalid unless the party seeking foreclosure proves that it owns the mortgage (has the right to foreclose) at the time of the foreclosure, the Supreme Judicial Court of the Commonwealth of Massachusetts ruled in the case of Bank of New York v. KV Bailey, 2011 WL 3307553 (Mass. 2011),  that a homeowner could challenge an eviction from his home even though it was foreclosed in a private sale to determine whether the mortgagor/lender had the power to foreclose. Because Massachusetts uses private foreclosure rather than court-supervised foreclosure, the ruling extends court supervision of foreclosure to homeowners by effectively requiring foreclosing parties to have proof of the right to foreclose before the foreclosure sale. It does so by denying power to evict an occupying homeowner without proof of the right to possession of the premises. Because the law generally protects a peaceable possessor of land unless the one seeking possession can show a better title denial of the right to evict has the effect of regulating the prior foreclosure process, which, in turn, will require that the market for transfers of mortgages comply with the requisite formalities of the statute of frauds.

An appellate court in New York has held that MERS (Mortgage Electronic Registration Systems) cannot file foreclosure lawsuits in its own name because it does not “own” the mortgage, having neither the right to payment under the note nor the right to foreclose. Bank of N.Y. v. Silverberg, 2011 WL 2279723 (N.Y. App. Div. 2011). Despite the fact that the parties put MERS’s name on the mortgage, it is not the real party in interest, having no right to payment under the note

On May 19, 2011, the Maine Supreme Court denied summary judgment on a foreclosure claim when it found that affidavits filed by the lender were suspect and possibly fraudulent. HSBC Mortgage Services, Inc. v. Murphy, 2011 Me. LEXIS 59, 2011 ME 59 (Me. 2011). The question was whether the note had been validly assigned from the original lender to the entity now seeking to foreclose. The court found the affidavits testifying to that effect to be inherently untrustworthy because (1) one affidavit swearing that a mortgage assignment had been recorded was signed before the assignment was recorded, (2) another affidavit and assignment suggested the same person was simultaneously the vice president of both the assignor and the assignee, (3) an affidavit’s jurat was dated four days before the affidavit was signed, and (4) an affidavit in support of a summary judgment motion that was denied provided information vital to the entry of a judgment that was unavailable until over four months after the affidavit was signed. The court remanded for further proceedings.

The New Jersey legislature joined an increasing number of states that have passed statutes prohibiting enforcement of transfer fee obligations. 2010 N.J. Laws 102, codified at  N.J. Stat. 46:3-28 to -33. read article The act applies prospectively only. Transfer fee obligations are duties to pay moneys to a prior seller of the land every time it is sold. Such fees restrain alienation of land and were held to constitute illegal vestiges of feudalism in the mid-nineteenth century. See DePeyster v. Michael, 6 N.Y. 467 (1852).

In a straight-forward application of the usual rule, the Maine Supreme Judicial Court recognized an exception to the statute of frauds by enforcing an oral promise to convey land when the promisee relied on the promise and built a house on the land. In this case, the promise was made by parents to their son and daughter. The daughter built a home on the land with the parents’ assistance and then asked for a deed to the land. When the parents refused, she sued them seeking a court order to them to transfer title to the land to her and the court granted her request. Harvey v. Dow, 11 A.3d 303 (Me. 2011).

The states disagree about whether parties to real estate transactions can sue each other for fraud when the contract of sale contains a “non-reliance clause” stating that neither party is relying on any representations made by the other party that are not included in the written contract. Some states allow such claims on the ground that “fraud vitiates consent” and such clauses do not amount to agreements to be defrauded. But other states hold that such clauses immunize the contracting parties from claims of fraud based on oral statements made prior to the deal. The Texas Supreme Court has waffled on this issue, first holding that contracts can be avoided on the ground of fraudulent inducement, Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990), and then ruling that the sophisticated parties are free to bargain around this rule by non-reliance clauses, Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997). See also Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008). However, the court clarified in Italian Cowboy Partners, Ltd. v. Prudential Ins. Co., 2011 Tex. LEXIS 291 (Tex. 2010), that  a non-reliance clause in a real estate contract will not immunize a real estate seller from liability for fraud if it contains a “standard merger clause” which recites that no representations were made other than those in the contract. Only if the clause states that the buyer is not relying on oral statements made by the seller would the buyer be foreclosed from suing for damages for fraud or to rescind the agreement because of fraud. Another way to waive the right to sue for fraud is to do so directly by a clear statement waiving the right to sue for fraudulent inducement.

In this case, the court allowed tenants to rescind a restaurant lease and recover damages when the landlord lied about the condition of the premises which were afflicted with persistent sewer gas odor.

An Alabama judge refused to allow a trustee to foreclose on a mortgage that had been made part of a securitized package of loans because there was no signed endorsement on the note (the contract creating the original loan) when the mortgage was transferred to the trust that held the securitized mortgages. Because the parties did not strictly adhere to the writing requirement in the state version of the UCC (Uniform Commercial Code) — a particularized version of the statute of frauds — the transfer of the mortgage never occurred and the trustee has no power to foreclose. Nor did the trustee have the rights of a “holder” of the note under the UCC because it did not acquire the note in a manner that complied with the rules in its foundational documents. In effect the party bringing the foreclosure action could not show that it had acquired the right to foreclose through properly executed documents evidencing the transfers of the mortgage from the original lender down the chain of title. see article

In the case of Bevilacqua v. Rodriguez, 2010 WL 3351481 (Mass. Land Ct. 2010), the court held that parties cannot cure an invalid foreclosure by a quiet title action.The bank that brought the foreclosure action had no proof at the time of the foreclosure that it owned the mortgage (the right to foreclose) because it had no written assignment from the prior mortgagee. For that reason, the foreclosure was invalid under the rule adopted by the Supreme Judicial Court of the Commonwealth of Massachusetts in U.S. Bank National Ass’n v. Ibañez, 458 Mass. 637 (2011). Ibañez held that foreclosures are invalid if the mortgagee bringing the foreclosure action cannot (at the time the foreclosure action) produce a written document proving that it was assigned the benefit of the mortgage from the prior mortgage holder. Thus when the bank sought a declaratory judgment that the foreclosure was valid, the court rejected its claim. That meant that a subsequent purchase of the property by a third party did not convey good title to the third party. Bevilacqua restates the Ibañez rule but goes further and holds that the third party cannot bring a quiet title action to seek a judgment that it has title to the property. Because it has a quitclaim deed from a seller who has no valid title, it cannot legitimately argue a basis for a quiet title action, leaving title with the party who held it prior to the invalid foreclosure.