On June 22, 2012, the SJC issued a decision in Eaton holding that a foreclosure by sale pursuant to a mortgage power of sale provision must be conducted by a mortgagee that either holds the underlying mortgage note or is acting on behalf of the note holder. The plaintiff in Eaton executed a promissory note in favor of BankUnited, FSB (“BankUnited”), when she refinanced her home. That same day, the plaintiff executed a mortgage that identified Mortgage Electronic Registration Systems, Inc. (“MERS”) as the mortgagee, acting as the nominee of the lender, BankUnited. The mortgage contained a remedy provision that permitted the lender to invoke the statutory power of sale upon a default by the plaintiff. The mortgage also provided that MERS had the right as nominee for the lender, “if necessary to comply with law or custom, . . . to foreclose and sell the Property; and to take an action required of Lender[.]”

MERS later assigned its interest in the mortgage to Green Tree Servicing, LLC (“Green Tree”). When the plaintiff defaulted on the note, Green Tree moved to foreclose on the property pursuant to the mortgage’s power of sale provision. A foreclosure sale occurred and the purchaser, Fannie Mae, commenced an action to evict the plaintiff from the property. The plaintiff argued that the foreclosure sale was invalid, and as a result she could not be evicted, because Green Tree was not the holder of her mortgage note at the time it foreclosed. The case was transferred to the SJC after the lower court preliminarily enjoined Fannie Mae from evicting the plaintiff.

The SJC looked to both common law principles and relevant statutory provisions in considering the issue. First, the Court acknowledged that Massachusetts common law allows a mortgage and underlying note to be split. It stated that, in such circumstances, common law dictates the mortgagee holds the mortgage in trust for the note holder and is “without authority to foreclose on his own behalf[.]” Next, the Court addressed the meaning of the relevant foreclosure statute, G.L. c. 244, §14, which financial servicers have understood to authorize a mortgagee, regardless of its relationship to the underlying note, to invoke the statutory power of sale in Massachusetts. The SJC concluded that while the plain language of G.L. c. 244, §14 appears to authorize any “mortgagee” to invoke the statutory power of sale, when read in the context of related statutes, it is clear that the legislature intended the term “mortgagee” to mean “a mortgagee who also holds the underlying mortgage note.” The Court further held, however, there was nothing in the statutes that precluded the application of general agency principles to the foreclosure process. Therefore, an authorized agent of a note holder may act on behalf of the note holder as a mortgagee. The Court noted that a mortgagee may establish its role as an agent of the note holder by filing an affidavit in the appropriate registry of deeds.

The Court took the rare precaution of giving its decision only a prospective effect due to concerns that it would “wreak havoc with the operation and integrity of the title recording and registration systems by calling into question the validity of any title that has a foreclosure sale in the title chain.” As a result of Eaton, going forward, mortgagees must be careful not to invoke the statutory power of sale in Massachusetts unless they are either the holder of the underlying note or acting as an authorized agent of the note holder.  In order to avoid claims regarding the validity of foreclosures, it will likely become common practice for foreclosing parties in Massachusetts to record affidavits concerning their relationship to the note or note holder.