Banks beware.  If other states follow the lead of decisions being made in Massachusetts, then an onslaught of litigation resulting from ForeclosureGate in Florida, and elsewhere, is inevitable. 

First, the Massachusetts ruling in Ibanez goes against Wells Fargo and US Bancorp.

Earlier this month (January 7, 2011), the highest appellate court in the State of Massachusetts, its Supreme Judicial Court, released its opinion in the case styled U.S. BANK NATIONAL ASSOCIATION, trustee vs. ANTONIO IBANEZ, Cause No. SJC-10694, opining that financial institutions Wells Fargo and US Bancorp had wrongly foreclosed on two homes since when they sold these properties at foreclosure sales in July 2007, neither bank could substantiate their legal title or ownership of the properties at the time of the sale.

Here, the two banks filed suit against the defaulting properties, in an abundance of caution after making the mistake of first publishing their foreclosure notices in the wrong newspaper. Defendant Ibanez did not respond to this lawsuit (at first) and defaulted because he was not living at the property and was not aware of the filing.

Read the complete Ibanez opinion here.  Perhaps most telling is the language (and attitude) presented in the concurrance of Justice Cordy (joined by Justice Botsford):

I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it. As the opinion of the court notes, such strict compliance is necessary because Massachusetts both is a title theory State and allows for extrajudicial foreclosure.

The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought *656 these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court's opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.

What is more complicated, and not addressed in this opinion, because the issue was not before us, is the effect of the conduct of banks such as the plaintiffs here, on a bona fide third-party purchaser who may have relied on the foreclosure title of the bank and the confirmative assignment and affidavit of foreclosure recorded by the bank subsequent to that foreclosure but prior to the purchase by the third party, especially where the party whose property was foreclosed was in fact in violation of the mortgage covenants, had notice of the foreclosure, and took no action to contest it.

Second, the Massachusetts High Court Agrees to Hear Bevilacqua

Usually, the rulings of the Massachusetts Land Court are reviewed by a mid-level appellate court before the case ever appears before the Judicial Supreme Court of that state.  However, this high court has the ability to choose to hear cases directly from the lower courts, bypassing intermediate review, and this month the court has done this in an Ibanez-related case, now before it as Cause No. 10880 and styled Francis Bevilacqua v. Pablo Rodriguez.

In Bevilacqua, a real estate investor bought residential property at a foreclosure sale and thereafter renovated it into four condominiums, which he sold.  Here, Francis Bevilacqua filed suit against the original property owner (who was foreclosed upon) in an attempt to clear his title (and presumably, defend against the predictable condo owners' suits). 

Land Court Judge Keith Long ruled against him, opining that US Bancorp had improperly foreclosed upon Mr. Rodriguez thereby leaving Mr. Rodriguez with full legal title and the bank with the ability to merely quitclaim whatever interest it had in the property to Mr. Bevilacqua at the foreclosure sale.  Similarly, Mr. Bevilacqua could not transfer any legal title in the four condos to their purchasers: he had no legal title to convey since it remains, in the opinion of Judge Long, with Pablo Rodriguez.

From Judge Long's opinion:

Plaintiff Francis Bevilaqua holds no title to the property at 126-128 Summer Street in Haverhill. That title is held by defendant Pablo Rodriguez. What Mr. Bevilaqua has is a quitclaim deed from US Bank, N.A., which conducted an invalid foreclosure sale on the property (it was not the holder of the mortgage at the time the sale was noticed and conducted as required by G.L. c. 244, § 14) [Note 1] and thus acquired nothing from that sale. See US Bank v. Ibanez, 17 LCR 202 (Mar. 26, 2009) & 17 LCR 679 (Oct. 14, 2009) and cases cited therein. US Bank therefore had nothing to convey, and its purported conveyance to Mr. Bevilaqua was a nullity. See Bongaards v. Millen, 440 Mass. 10 , 15 (2003).

Despite this, Mr. Bevilaqua now seeks to create a full, fee simple title in himself — quite literally, something from nothing — through the “try title” procedure of G.L. c. 240, §§ 1-5. He cannot do so, for the reasons set forth below. Accordingly, his complaint is DISMISSED in its entirety, with prejudice.

[Analysis omitted from quote.]

For the foregoing reasons, the plaintiff’s claims are dismissed in their entirety, with prejudice. Judgment shall enter accordingly. [Note 6] I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied.

If the property owners who defaulted on their loans still own this real estate, then what?  The ramifications of this as a reality are overwhelming: what impact on their income tax? what happens to the new owners' tax deductions?  Can they be evicted? Where is the title insurance exposure here? 

The truth is that financial institutions were faced with an unprecedented number of people not paying their home loans.  In response, mistakes were made.  Unscrupulous service providers (apparently including law firms) became involved and got greedy.

However, rulings that hold to traditional land law (however understandable) are not recognizing the unique circumstances these financial institiutions faced, to deal with as best they could.   The number of bank failures in this country is high and growing higher: you can monitor the FDIC Failure List here.

In 2010, 143 banks failed after 2009 saw 140 banks fail.  So far, 7 banks (including the First Commercial Bank of Florida in Orlando) have failed this month. 

The ramifications of a weakening financial system being met with this new line of cases cannot, and should not, be ignored.