Property Law Developments—Joseph William Singer

In a classic application of a traditional doctrine of contract law, the Massachusetts Land Court allowed a mortgage document to be reformed because of mutual mistake. Citibank, N.A. v. Heywood, 2014 WL 2158409 (Mass. Land Ct. 2014). While courts are very reluctant to amend written property documents or contracts because of unilateral mistake, it is standard practice to ignore the written terms of the agreement, despite the statute of frauds, when the evidence shows that it does not reflect the intent of both parties. The court noted that [A] court acting under general principles of equity jurisprudence has broad power to reform, rescind, or cancel written instruments, including mortgages, on grounds such as fraud, mistake, accident, or illegality” as long as the mistake was mutual.

The Ninth Circuit held that a mortgage servicer that allegedly engaged in robo-signing may well have violated an Arizona statute, Ariz. Rev. Stat. § 33-420, that criminalizes filing false property title documents with the state recording offices. In re Mortg. Electronic Registrations Systems, Inc (Robinson v. Am. Home Mortg. Serv. Inc.), 2014 WL 2611314, 2 014 U.S. App. LEXIS 10934 (9th Cir. 2014). There was  evidence that trustee’s sale documents were notarized in blank and signed later by a person other than the one who was supposed to sign the document. Such signings were also done in bulk (robo-signing) and because not signed by the correct person were forged. In addition, notaries are supposed to witness the signature not notarize a blank document before any signature appears. The case is notable because the servicer was MERS (Mortgage Electronic Registration Systems, Inc.). Judge William Fletcher engaged in a detailed discussion about the advantages and disadvantages of the MERS system.

The Massachusetts Supreme Judicial Court ruled in Martin v. Simmons Props., Inc., 2014 WL 128537 (Mass. 2014), that the servient estate owner is entitled to narrow an easement as long as this does not interfere with the uses for which the easement was initially created. The court applied the traditional rule that easements are encumbrances on land and to be construed narrowly. At the same time, the touchstone was the intention of the parties that created the easement, determined both by the language in the easement and the circumstances at the time of creation of the easement. Because the documents and plan creating the easement did not specify an exact width of the easement or require that it be kept open through its full extent, the easement owner was entitled only to such use as was needed to afford access to the dominant estate. The court also reaffirmed the traditional rule that nonuse of an easement is not sufficient to establish abandonment of it.

Several lawsuits have been in progress arguing that MERS violated state recording statutes by not recording mortgage assignments and thus cheating recording offices out of fees they otherwise would have earned. Interpreting Illinois law, the Seventh Circuit rejected that claim as have other courts that addressed the issue. Union County v. MERSCORP, Inc., 2013 WL 6017394 (7th Cir. 2013) (applying Ill. law). The court explained that Illinois law agrees with almost all other states in providing a voluntary recording system that is intended to protect those who record; that system does not require property transactions to be recorded for them to be valid. It merely protects bona fide purchasers from prior claims against which they had no notice.

Disagreeing with the ruling of the Massachusetts Supreme Judicial Court in Reagan v. Brissey, 844 N.E.2d 672 (Mass. 2006), an appeals court in New Mexico held that open space designated on a recorded plat is not sufficient to create an easement of access by owners of lots on the map in the absence of evidence the developer made representations to buyers inducing them to buy in reliance on promises those lots would remain open. The mere presence of open space on the map was insufficient to prevent the developer from selling that open space for development purposes. Agua Fria Save The Open Space Ass’n v. Rowe, 255 P.3d 390 (N.M. 2011)

The Nebraska Supreme Court ruled that a potential buyer who had an oral contract to buy real estate did not have a right to just compensation when the property was condemned by public authorities. American Central City, Inc. v. Joint Antelope Valley Auth., 2011 WL 2420787 (Neb. 2011). Although oral agreements to buy property are enforceable despite the statute of frauds in cases of part performance, the Nebraska Supreme Court ruled that the potential buyer’s sole remedy was against the seller of the property rather than the public authorities that took the property by eminent domain.

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).

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.

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

The New York and Delaware Attorneys General have asked for information from two trustees of mortgage bundles (Bank of New York Mellon and Deutsche Bank) to determine whether they complied with all contractual obligations in the process of bundling the mortgages and selling shares to investors. The trusts that bundled the mortgages were supposed to ensure that proper paperwork was completed in transferring “ownership” of  the mortgages to the trust to ensure that the investors were actually investing in something that the trust owned. Many of the bundling contracts required the trust to examine the individual mortgages to ensure a proper chain of title and failure to do so would constitute a breach of contract that could lead to the whole thing unraveling. Read article

Defendants unknowingly built their house on land that belonged to the plaintiff who also did not know that the land belonged to him. The mistake was discovered after the house was built and plaintiff sued to eject the trespassers from his land. The Washington Supreme Court denied injunctive relief, adopting the relative hardship doctrine. The court granted plaintiff damages for the value of the land encroached on by his neighbor’s structure but denied plaintiff an injunction ordering the structure removed. Proctor v. Huntington, 238 P.3d 1117 (Wash. 2010).

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.

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.

A New Jersey trial court has interpreted a state statute, N.J. Stat.. §2A:50-56,  to require mortgage foreclosure notices to include the name of the lender (the current holder of the mortgage) as well as contact information. Because a notice included only the name of the mortgage servicer, the court dismissed the foreclosure complaint. read article

In the case of Wells Fargo Bank, N.A. v. Ford, 2011 N.J. Super. LEXIS 13 (N.J. Super. Ct. App. Div. 2011), the court remanded to allow the bank to provide proof that it had a right to foreclose through authenticated writings proving that it was assigned the mortgage and note by the prior holder of the mortgage and that it had the right to foreclose at the time the foreclosure action was brought.

A bank lost the mortgage note and thus could not pass it along when it assigned the mortgage to the Bank of America, preventing the Bank of America from producing the note to prove that it had the right to foreclose on the property. The loan in question had been securitized and transferred from the original mortgagee, Washington Mutual Bank, to LaSalle Bank (the holder of the securitized and pooled loans) which was then acquired by Bank of America. Because Bank of America could show evidence of the assignment (but not written proof of the original mortgage), the trial court allowed it to foreclose on the ground that the mortgagor/homeowner would otherwise be unjustly enriched. In effect, the court used equitable principles to create an exception to the applicable statute of frauds which requiring a writing for the mortgage to be enforceable via foreclosure. The case is Bank of America, N.A. v. Alvarado, (N. J. Ch. Ct. 2011). See Mary Pat Gallagher, Judge Finds Equity Allows Foreclosure to Proceed Though Mortgage Note Lost, 203 N.J. L.J. 1 (Jan 24, 2011).

The Supreme Court of New Jersey has issued an order setting a hearing for January 19, 2011, asking all mortgage loan servicers in the state to explain why the state should not stop all foreclosures for irregularities. A lower court judge had issued a more limited administrative order involving loan servicers who had filed more than 200 foreclosure actions in 2010. The Supreme Court is concerned about recent disclosure of serious flaws in recent foreclosures, especially since most foreclosures in the state are uncontested.

Three large lenders, GMAC Mortgage, JPMorgan Chase, and Bank of America, have all suspended foreclosures because of irregularities in documents used to proof that they are entitled to foreclose. Various newspaper articles have talked about “technical” problems or “paperwork” problems but the real issue is that banks have obligations to prove they “own” the mortgage and have a right to foreclose, at least in states that require court proceedings for foreclosure. The problem is that many lenders did not keep accurate written records of all the assignments of these mortgages.

The statute of frauds in every state requires mortgages to be in writing and some states require them to be recorded. In lieu of providing a paper trail, some lenders have provided courts with affidavits that swear that the signing party has seen proof that the lender owns the mortgage and is entitled to foreclose. But some of the affiants now admit that they “signed” hundreds or thousands of affidavits a day, obviously with no knowledge of the underlying facts. If this is true, it is a fraud on the court and may have resulted in foreclosures when the bank was not legally entitled to foreclose. In addition, notaries often approved signed affidavits even though they did not witness the signatures as required by law.

Attorneys General in several states are now investigating these practices to see if they violate state consumer protection or property laws or if they are actionable violations of court rules. See article.