Eaton v. Fannie Mae Analysis

The Massachusetts Supreme Judicial Court finally issued its long-awaited ruling in Eaton v. Fannie Mae. This case involved the question of whether a "naked mortgagee"--a mortgagee that was not also the holder of the promissory note--had standing to foreclose. (Full disclosure:  I submitted a pair of amicus briefs in the case arguing that foreclosure required the mortgage and the note to be united.)

The SJC held that in Massachusetts a foreclosing party must have both the mortgage and the note or be acting on behalf of a party with the note. Critically, however, the SJC restricted the ruling to a prospective application. That means that past foreclosures cannot be reopened because of this case, so the financial services industry just dodged billions in liability for wrongful foreclosures and evictions, and the title insurance industry did as well. (Note that Massachusetts has a public option title insurer--a Torrens system of land registration that covers perhaps a third of the properties in the state. If the whole state were covered, there'd be no problem.)

In the immediate term, I'd score the case as a major victory for the financial services industry, which avoided liability for its failure to comply with state law foreclosure requirements. Going forward, however, things are more complicated.

Post-Eaton it is clear that in Massachusetts if one wants to foreclose one must have both the note and mortgage. That seems to tee up the chain of title issue about the note as the next stop on the SJC litigation train. Lenders were previously able to avoid chain of title questions because they would foreclose without the note. Now they've got to show that they are the note holder or acting on the note holder's behalf. Merely proving agency is insufficient; a servicer must show that it is agent for the note holder, so there will be a question of whether the securitization trust has title. Given what Ibanez said about confirmatory assignments not having any effect absent evidence of the original assignment, this is going to put servicers in an awkward place when the evidence of the note assignment isn't there. 

There are some dangerous dicta in the case, however.  First, footnote 28 notes that the foreclosing party can establish that it is the note holder or acting on its behalf by filing an affidavit to that effect with the registry of deeds. I fear that is an invitation to a repetition of affidavit fraud. We're going to see lots of affidavits filed claiming ownership of notes even when that ownership cannot in fact be proven.   

Second, the SJC was not careful in its terminology. The SJC refers to "note holder," but then defines "note holder" as the "owner" of the mortgage (footnote 2).  "Holder" is a negotiable instrument concept. "Owner" is not. And "person entitled to enforce" another negotiable instrument concept is nowhere to be found.  In footnote 26, the SJC sidestepped the question of whether the note at issue was negotiable, assuming that there's no possible conflict between UCC Article 3 and its ruling. I'm not so sure. Of course, one could read Eaton to mean that to foreclose one must be the mortgagee and also a "person entitled to enforce" or that person's agent. This all assumes, however, that UCC Article 3 applies to the note in question. 

Stepping back, I understand that the SJC was reluctant to potentially cloud title on Massachusetts properties that had passed through foreclosure. Yet, I'm still disappointed to see the SJC give a pass to the financial services industry. Surely there was a way to craft a remedy that would have protected the interests of innocent foreclosure sale purchasers while nonetheless imposing liability for illegal foreclosures. In any case, I suspect that this is not the end of major foreclosure litigation in Massachusetts.