The Massachusetts Supreme Judicial Court (“SJC”) recently issued a landmark decision, U.S. Bank, Nat. Ass’n v. Schumacher, on an issue the Massachusetts Superior and Housing Courts have been grappling with for the past four years: the effect on a foreclosure sale of a lender’s failure to strictly comply with the Massachusetts notice of right to cure statute, Mass. Gen. Laws c. 244, § 35A (“35A”). In Schumacher, the SJC held that the 35A requirement that a notice of right to cure (the “35A Notice”) be sent is not part of the foreclosure process and, therefore, strict compliance with its provisions is not necessary. In other words the 35A Notice is a “pre-foreclosure” requirement. Thus, Massachusetts law requiring strict compliance with the laws that govern foreclosure does not apply to the 35A Notice.
In the midst of the significant increase in the number of foreclosure sales, the Massachusetts legislature enacted 35A to slow down the foreclosure process and provide borrowers with an opportunity to work out a loan modification to avoid foreclosure. Pursuant to that statute, a foreclosing entity is required to provide a borrower with the 35A Notice. Under 35A, the 35A Notice must provide the borrower with various information including the amount necessary to cure the default, the identity of the mortgagee, and information concerning foreclosure avoidance options. The 35A Notice also gives borrowers a 90-day or a 150-day reprieve before the mortgagee can start foreclosure proceedings. The issue raised in Shumacher is whether naming the wrong mortgagee in the 35A Notice invalidates the foreclosure sale.
In 2010, the SJC issued a decision confirming the principle that a failure to strictly comply with the statutory power of sale voided any subsequent foreclosure sale. Borrowers who remained in their foreclosed properties began using that principle to defend themselves against post-foreclosure eviction proceedings in the Massachusetts Housing Court, arguing that 35A was part of the statutory power of sale and that a defect in the 35A Notice, no matter how trivial, voided the foreclosure sale. Curiously, many courts, both Housing and Superior, were accepting these arguments and voiding foreclosure sales based upon minor inaccuracies in 35A Notices, leaving lenders forced to unwind foreclosures and start anew based on nothing but insignificant inaccuracies.
On March 12, 2014, the SJC weighed in. The Schumachers, defending against a post-foreclosure eviction in the Housing Court, noted that the 35A Notice identified U.S. Bank, N.A., as a trustee of a mortgage loan trust as the mortgagee. Unfortunately, at the time of the 35A Notice, the mortgage had not yet been assigned out of MERS and into the trust, meaning that the 35A notice inaccurately identified the mortgagee. The SJC held that such a fact was not sufficient to automatically void the foreclosure sale. In short, this means that although it is best practice to ensure that the assignment of mortgage is executed before the 35A Notice is mailed, failing to do so will not automatically void a foreclosure sale that otherwise complied with the statutory power of sale and related statutes. The rationale for the SJC’s decision was that the mailing of the 35A Notice is not part of the foreclosure process and therefore need not be complied with strictly. Such a holding rids thousands of prior foreclosures of the pre-existing threat of judicial invalidation.
There are two related issues which are of particular importance. First, it must be noted that the 35A Notice in Schumacher was mailed by the loan servicer, and this fact was not commented upon by the SJC. Borrowers have long argued, and some courts have even held, that the 35A Notice must be mailed by the mortgagee itself. Second, the concurring opinion of three of the SJC Justices cannot be overlooked. The majority opinion suggested that a borrower may only allege a violation of the statutory power of sale in defense of eviction and that any claim related to 35A must be raised in the Superior Court prior to foreclosure. In their opinion, the concurring Justices clarified their understanding of the majority opinion. They stated that although a violation of 35A did not automatically void a foreclosure sale, the violation could be, under the right set of facts, so fundamentally unfair as to entitle the borrower to equitable relief setting aside the foreclosure sale.
Based on the majority opinion, it is clear that the mere sending of the 35A Notice by the servicer instead of by the mortgage holder and the failure to assign the mortgage prior to the mailing of the 35A Notice do not rise to the level of being fundamentally unfair. The concurring Justices also noted that such a claim could be made in defense of a post-foreclosure eviction of a holdover borrower in the Housing Court despite the majority’s suggestion otherwise. These arguably differing opinions will likely provide the next battleground between creditors’ attorneys and borrowers’ attorneys. In any event, under the holding of Schumacher, expect a number of creditors’ attorneys to start successfully pressing motions in the Massachusetts Housing and Superior Courts to dismiss foreclosure challenges based upon inaccurate 35A Notices.