Foreclosure Law and Practice in Massachusetts

In 1994, three cases had a significant impact on the manner in which foreclosures are conducted. The purpose of this article is to analyze those three cases and to suggest what the responsibilities of a mortgagee are in conducting a mortgage foreclosure.

A five-member majority in the United States Supreme Court case of BFP, Petitioner v. Resolution Trust Corporation, as Receiver of Imperial Federal Savings Association, 114 S.Ct. 1754 (1994) ("BFP") provided a somewhat surprising reversal of bankruptcy decisions in a number of different jurisdictions commencing with the Durett case in the Fifth Circuit which held that a foreclosure sale, which yielded 57% of a property's fair market value, could be set aside as a fraudulent conveyance for failing to obtain "reasonably equivalent value" for the property as required by the Bankruptcy Code and indicated in dicta that a sale for less than 70% of fair market value should be invalidated. That "Durett Rule" had continued to be applied by some bankruptcy courts under the new Bankruptcy Code.

In BFP, the RTC requested that the Supreme Court hold that a non-collusive and regularly conducted nonjudicial foreclosure sale could not be challenged as a fraudulent conveyance under federal bankruptcy law because the consideration received in such sale establishes "reasonably equivalent value" under federal bankruptcy law as a matter of law. The Court so held. The majority decision focused on the difference between a sale at fair market value and a forced sale at a foreclosure sale. The Court concluded that Congress' use of the language "reasonably equivalent value" in the Bankruptcy Code did not mean fair market value. The Court undertook a review of the history of foreclosure law and concluded that an essential state interest was involved at issue, i.e. the security of titles to real estate, which should be a question of state law and that so long as the foreclosure was conducted in a non-collusive manner then whatever the local state law determined to be fair value should govern. The majority's position was that since foreclosure law has historically been a state law issue the Court should not construe the federal Bankruptcy Code to supplant state law unless Congress made that abundantly clear in the Bankruptcy Code.

Justice Souter wrote the dissent for four members of the Court and began by stating: "The Court today holds that by the terms of the Bankruptcy Code Congress intended a peppercorn paid at a non-collusive and procedurally regular foreclosure sale to be treated as the 'reasonbl[e] equivalent' of the value of a California beach front estate. Because the Court's reasoning fails to overcome the implausibility of that proposition and to justify engrafting a foreclosure sale exception on to [the Bankruptcy Code] in derogation of the straightforward language used by Congress, I respectfully dissent." Justice Souter went on to articulate and expound upon that statement.

Prior to the BFP decision, title insurance companies, in light of Durett Rule and its adoption by the Bankruptcy Courts in the First Circuit, as a matter of underwriting, required a "Ruebeck Affidavit" in connection with a transfer of title within one year following a foreclosure sale. This required the attorney or the lender to certify not only that the foreclosure had been conducted in accordance with applicable law but that the property had been appraised and that the bid at the auction was at least seventy percent of the appraised value and that the auctioneer conducted the foreclosure sale by advertising in various newspapers and otherwise conducted it in a fair and open manner so that in the event that the conduct of the foreclosure sale was challenged in a bankruptcy proceeding it would be likely that the foreclosure sale would withstand that challenge. The result of that requirement was that hundreds and hundreds of dollars were added to the cost of foreclosure even where there was no equity and where the owner filed bankruptcy prior to the foreclosure and when the mortgagee had no intention of seeking a deficiency.

In light of the BFP case, one must look to state law to determine what the responsibilities of a mortgagee are in conducting a foreclosure sale.

The Massachusetts Court of Appeals answered that question in the case of Pemstein v. Stimson, 630 N.E. 2d 608 (Mass. App. Ct. 1994) ("Pemstein"). In Pemstein the issue was whether or not a guarantor of a commercial loan had the right to raise the issue of whether or not a foreclosure sale of commercial real estate was conducted in a commercially reasonable manner under the Uniform Commercial Code. Indeed, the jury reached a verdict upon special questions that the foreclosing mortgagee had not conducted the foreclosure sale in a commercially reasonable manner notwithstanding the fact that the mortgagee had complied with all of the so-called "Ruebeck" requirements. The trial judge, however, found against the defendant reasoning that the standards of Article 9 of the Uniform Commercial Code (G.L.c.106, Section 9-504) had not been imported to land foreclosure in Massachusetts.

The Pemstein case was decided some two months prior to the BFP so the Court took some time in analyzing the so-called "Durett Rule" as applied by the Bankruptcy Court in cases in the First Circuit as set forth in In re Gen. Indus., Inc. 79 B.R. 124, 131-134 (Bankr. D. Mass.1987) and what state law required. The Court reviewed the Massachusetts cases on foreclosure law and concluded that Massachusetts case law has provided that so long as the statutory norm as found in G.L. c. 244, Sections 11-17B governing foreclosure of real estate mortgages had been adhered to, Massachusetts cases have generally regarded that as satisfying the fiduciary duty of a mortgagee to deal fairly with the mortgaged property unless the mortgagee's conduct manifested fraud, bad faith, or the absence of reasonable diligence in the foreclosure sale process. A low price for the collateral does not by itself indicate bad faith or lack of diligence in the disposition of mortgaged real estate and nor does such an indication flow from the circumstance that the mortgagee turns out to be the sole bidder at the foreclosure sale. The Court stated that it would not fulfill the reasonable expectations of lenders or borrowers to have, after every real estate foreclosure sale, a postlude of litigation about whether the presale marketing effort had been sufficiently astute and aggressive. That statement by the Court is consistent with the thinking embodied in the majority opinion in BFP. The Pemstein case, therefore, is a clear indication of what the Court will expect for compliance with foreclosure laws in the Commonwealth of Massachusetts, i.e. only minimal advertising and sales efforts as a matter of real estate law.

But what about Justice Souter's concern in the BFP case about the sale of a California beachfront estate for a peppercorn? And do those two cases mean that the gentrification as codified in the Uniform Commercial Code with respect to commercial borrowings and non-real estate collateral requiring such things as honesty in fact in the dealings between the parties and the requirement of disposition of collateral in a commercially reasonable manner is completely inapplicable to real estate foreclosures?

The answer to those questions may very well have been answered in the case of Commie Williams & another v. Resolution GGF OY, 630 N.E. 2d 581 (Mass. 1994) ("Oy") which involved a suit brought by a mortgagor for a violation of G.L. Chapter 93A. There the trial judge found that the mortgagee failed to act in good faith and with reasonable diligence and thereby violated G. L. Chapter 93A, Sections 2(a) and 9 in the foreclosure of residential property owned by the plaintiff. The Appeals Court, in an unpublished memorandum, affirmed the Superior Court characterizing the matter as presenting "close case." The Supreme Judicial Court reversed, holding that the findings of the Superior Court were without support based on the facts. The Court did, however, review the law of the Commonwealth relative to the obligation of a mortgagee in exercising the power of sale. The Court noted that the mortgagee "must act in good faith and must use reasonable diligence to protect the interest of the mortgagor . . . The mortgagee's duty is more exacting when it becomes the buyer of the property. 'When a party who is entrusted with a power to sell attempts also to become a purchaser, he will be held to the strictest good faith and the utmost diligence for the protection of the rights of his principal' . . . Consistent with these requirements, the mortgagee has a duty to 'obtain for the property as large a price as possible'. . .". Although the foregoing language may seem to be at odds with the language in Pemstein, given both the BFP and Pemstein decisions and the state's interest in transferability of land, it is likely that Pemstein will be looked at for the standard required in foreclosures under real estate law and that Oy will be looked at as a case on contractual/93A/fiduciary duty law of a lender to a borrower providing rights to a borrower for monetary damages if it appears from the facts that an injustice has been done to a mortgagor.

So the question becomes, practically speaking, what course of action should a mortgagee take in connection with a foreclosure? Fortunately, based upon those cases, a mortgagee may take steps based upon reason and fair dealing.

In connection with a foreclosure where the owners have already filed bankruptcy or the mortgagee has no intention to seek a deficiency and the mortgage debt is clearly in excess of the value of the property, it would seem clear that the mortgagee has to do no more than comply with the statutory advertising requirements, i.e. advertising for three successive weeks in a newspaper published or having a circulation in the town in which the property is located. If under those same circumstances the mortgagee would still like to see if the property could be sold at a foreclosure, the auctioneer could always advertise once or twice in the local newspaper or in a large metropolitan which draw the attention of investors and/or home buyers to that particular property, depending upon its locality.

In those instances where there is equity in the property or where the mortgagee does intend to seek a deficiency, a mortgagee would probably be prudent to engage in at least the type of advertising that had previously done under the so-called "Ruebeck" requirements. Clearly, the experience of the auctioneer and the recommendations of the auctioneer as to advertising would be important.

Another important aspect of the foreclosure would be to inform the mortgagor that it would be in the mortgagor's best interest to cooperate with the foreclosure process, including making reasonable representations at the time of sale as to when the mortgagor intends to vacate the property and to make the premises available for inspection to interested purchasers. That will always enhance the bidding process and, if a mortgagor refuses to so cooperate, the mortgagor will have a far greater burden of showing that the mortgagee acted unreasonably in connection with its conduct of the foreclosure sale.

Thomas V. Bennett, Esq. (tvb@barronstad.com)

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