Massachusetts Foreclosure Law and Practice
by Thomas V. Bennett

In 1994, three significant cases affecting foreclosure law were decided. The United States Supreme Court held that foreclosure was strictly a state law matter and that the federal Bankruptcy Code was inapplicable in determining the manner in which a foreclosure sale must be conducted and the results achieved. A Massachusetts Appeals Court decision suggested that under state real estate law a foreclosure sale would be valid so long as, in accordance with statute, the mortgagee advertises in a local newspaper once a week for three successive weeks and gives notice to the owner and junior creditors. And a Massachusetts Supreme Judicial Court case suggested that the mortgagee must act in good faith and use reasonable diligence to protect the interest of the mortgagor. A more extensive review of those cases appears in the author's article entitled "Current Foreclosure Law and Practice in Massachusetts" which was published in BANKER & TRADESMAN newspaper on August 28, 1995 and appears elsewhere in this Web site.
 

Two more recent cases, one decided in the Bankruptcy Court and one decided in the Massachusetts Land Court, indicate that the validity of a foreclosure will depend upon the good faith efforts and reasonable diligence of the mortgagee in protecting the interest of the mortgagor.
 

The Bankruptcy Court decision, at first blush, appears to conflict with the holding of the Land Court. In the Bankruptcy Court case, the property was sold at 45% of its fair market value and the Court invalidated the sale. In the Land Court case the property was sold for 50% of its fair market value and the Court upheld the foreclosure. However the conflict was more apparent than real. The results were dissimilar but the reasoning in the two cases was very much the same. The mortgagee in the Bankruptcy Court case did virtually nothing to enhance the results at the foreclosure sale while the mortgagee in the Land Court case took reasonable steps to do so.
 

In the Bankruptcy Court case, the mortgage foreclosure involved the home of a self-employed, divorced mother living alone and having adult children. The Court found that the owner was having difficulty with her mortgage payments, was unable to effectively communicate with the mortgagee, and got very little information from the mortgagee's attorney. The mortgagee complied with state law as to required advertising and notices but placed no display ads and failed to obtain an appraisal. Although the Court found that the property was worth $190,000.00, it was sold at auction for $86,500.00, a thousand dollars over the bank's bid.
 

The Court invalidated the sale, finding that the buyer, an experienced purchaser at real estate sales, lacked the equity favoring a bona fide purchase for value. Given those facts, if you were the judge, what would you have done? The mortgagee in this case basically got what it deserved. The mortgagee did not place any of the normal display advertisements even though there was plenty of equity in the property to cover the cost of those ads. In addition, even though mortgagees usually provide borrowers at closing a plethora of disclosures, here, when the property was to be foreclosed, the mortgagee provided very little information to the borrower relative to how she should attempt to keep her home or to maximize the price at the foreclosure sale.
 

The Land Court case involved a piece of commercial real estate. The borrower filed a chapter 11 bankruptcy plan, had the property appraised, and "crammed down" the mortgagee's balance from $1,055,637.00 to $1,000,000.00. The mortgagee assented to the chapter 11 plan of the mortgagor but the mortgagor failed to follow through with the plan and, ultimately, the mortgagee obtained relief from the bankruptcy automatic stay and proceeded to foreclose.
 

The mortgagee complied with the requirements for statutory advertising and notice and also placed display ads in the Boston Globe and delivered 475 notices to potential bidders who might be interested in this type of property. The bank's bid at the foreclosure sale was $500,000.00.
 

The borrower attacked the sale on what the borrower believed to be improper ads. The borrower also took action at the sale which tended to chill the bidding at the sale. The Court found significant that the bank was owed more than a million dollars at the time of the auction which was in excess of the most recent appraised value and that the owner was immune from the deficiency judgment due to the bankruptcy filing.
 

Interestingly enough, the auctioneer in both cases was Paul E. Saperstein Co., Inc. In the Bankruptcy Court case, the auctioneer was specifically instructed not to follow its normal advertising procedures which, the Court in that case found, 80% of the foreclosing mortgagees did follow. One can only speculate that if the auctioneer had been permitted to follow its normal procedures, the Bankruptcy Court's decision would have been the same as the Land Court decision.
 

It appears that if a mortgagee wants justice, the courts will require that the mortgagee do justice to the mortgagor. What the judge in the Bankruptcy Court case found was that the mortgagee did not do justice to the mortgagor and what the judge in the Land Court case found was that the mortgagee did do justice to the mortgagor.
 

So, where does this leave us? Exactly where we were in 1995. The suggestions in my earlier Article remain applicable and bear repeating.
 

A mortgagee should 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 of seeking a deficiency judgment against the owner, and the mortgage debt is clearly in excess of the value of the property, the mortgagee need 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) and give the statutory notices.
 

If under those same circumstances the mortgagee would still like to see if the property can be sold at a foreclosure, the auctioneer can always advertise once or twice in the local newspaper or in a large metropolitan, which draws 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 intends to seek a deficiency, the mortgagee should place display adds and do whatever else is reasonably appropriate and customary to promote the sale. Clearly, the recommendations of the auctioneer as to advertising should be considered.
 

A Mortgagee should also inform the mortgagor that it would be in the mortgagor's best interests 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 making the premises available for inspection to interested purchasers. That will always enhance the bidding process. 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.

 

If you have questions regarding this or any real estate matter, please contact Thomas V. Bennett at tvb@barronstad.com or (617) 531-6574.

Read more about real estate law - Thomas V. Bennett's weekly column "Open House" in The Boston Courant.