by Steven Altieri
Framingham real estate attorney Richard Vetstein recently
represented a family who had bought a house out of foreclosure
about a year ago, then invested in excess of $100,000 in
improvements to the property with the intention of selling it to
their daughter. Before they could complete the sale, a title issue
came up and put the transaction on hold.
The glitch was the downstream result of a controversial land
court decision in the US Bank v. Ibanez foreclosure case,
which will soon be heard by the Massachusetts Supreme Judicial
Court. The land court ruled that the foreclosure of the
Ibanez property was invalid because US Bank did not have an
assignment at the time of the foreclosure.
Framingham real estate attorney Richard Vetstein recently
represented a family who had bought a house out of foreclosure
about a year ago, then invested in excess of $100,000 in
improvements to the property with the intention Many hundreds, if
not thousands, of foreclosed property titles could be similarly
invalid all across Massachusetts. Attorneys are concerned that a
retroactive application of the case's decision could further
depress sales of foreclosed properties.
In Vetstein's client's case, when the original owner was
foreclosed upon, the mortgage company did not have a properly
recorded assignment. To clear the title, Vetstein had to track down
the original owner in Alabama, and persuade him to sign over the
deed to the property. "They can close now that the title issue is
solved, but in a lot of cases, [they are] not going to be able to
be solved," said Vetstein "We were lucky, that's what it came down
to."
Vetstein, who has blogged on the Ibanez case at length, thinks
that the court might uphold the Ibanez decision. Previously, many
lenders had not recorded mortgage assignments in a timely manner,
only recording them after a foreclosure, to clean up the title.
During the overheated mortgage market, mortgages were
routinely passed from lender to lender and many buyers were
foreclosed upon for unpaid mortgages by lenders that didn't have
assignment at the time of foreclosure.
"On foreclosures that have already been completed, if this
decision is or has already been taken at face value, this is a huge
problem," says Laurel H. Siegel, a Boston real estate attorney and
co-chair of the Massachusetts Bar Association's Property Law
Section. "It's the retroactive part that's so troubling. Are we
going to bankrupt the title companies?"
Many attorneys share Siegel's fears. If Ibanez is applied
retroactively, then sales of properties that were foreclosed upon
and sold and perhaps even sold again could be ruled invalid. Owners
would then try and clear the title in land courts. In some cases,
the foreclosure process may even have to start all over again --
and title insurers would be stuck with the legal bill for settling
title.
According to Elizabeth J. Barton, Siegel's co-chair and counsel
for title insurer CATIC, no title insurers will currently write a
policy on properties with a potential title issue. Sales of
foreclosed properties have therefore stopped. In cases where sales
of foreclosed or formerly foreclosed properties are taking place,
Barton says that insurers have had to provide letters of
indemnification so that the closing can take place. Barton hopes
that the SJC will rule to have Ibanez applied prospectively. She
reasons that mortgage companies are likely to more closely follow
the letter of the law. Clearer titles will make things easier on
the title company and remove its liability on older policies where
there may be a hitherto unknown Ibanez style title issue.
Siegel also thinks that a prospective judgment would be best.
"Lenders are now on notice that they need to record their
assignments promptly and should be able to comply with this
requirement."
Frank Reynolds, a Lexington-based real estate attorney with more
than 40 years' experience, thinks that it's too early to predict
the SJC's rule. "I can't tell you how it's going to be decided, but
there is an awful lot of equity and public policy involved. The
appeal itself is like a little phone book. You could have a short
career just becoming an expert on this case," he said.
It's expected that those representing the lenders will argue for
dismissal of the Ibanez verdict or at least for its prospective
application, and challenge the land court's factual or legal
conclusions.
"What they are trying to do is get the courts to recognize that
these were [foreclosure] procedures that weren't challenged prior
[to this case]," said Ward P. Graham, a longtime title attorney.
The Ibanez decision, he added, "is a radical shift in the
application of GL 244 14." For that reason, Graham also thinks that
it would make sense for the SJC to apply the decision
prospectively.
"Given the current constitution of the court and their
tendencies of recent years to be kind of moving towards some
pro-consumer decisions, I wouldn't be surprised if they upheld the
land court, probably by a slim margin, and so for people who are
stuck with an Ibanez issue, that is in essence the worst-case
scenario," he said.
Indeed, it's unlikely that a pro-consumer verdict upholding the
Ibanez decision would actually help consumers. Homebuyers or
investors who thought they had gotten a good deal and a clean title
on a foreclosed property will instead be saddled with hefty legal
bills on a property they can't sell.
The title issues that Ibanez raises can be solved through a
quiet title action, getting an original owner to sign over the deed
to the property as Vetstein did, and re-doing the foreclosure. All
of these procedures are time-consuming and hit or miss.
Graham thinks that if Ibanez is upheld and all
foreclosures with an improper assignment are invalidated, there may
be one other recourse for perfecting title. "Most, if not all, 244
14 Ibanez-issued cases may have the benefit of foreclosure by
entry," said Graham.
It seems that few attorneys would welcome a flood of new
business related to the Ibanez decision. "I don't know of any real
estate attorney using Ibanez as a business development opportunity,
mainly because solving these title defects, if at all, is
incredibly difficult and in some cases impossible. It's a
'lose-lose' in many situations" said Vetstein.
However, should the SJC uphold Ibanez, Vetstein foresees many
claims against the foreclosing lenders and the foreclosure attorney
for failing to convey good title. "There will also be claims for
rescission of these transactions. There is a class action against
lenders and foreclosing attorneys which could encompass many
millions in potential damages." he says.
Barton thinks that the lenders are seeing the worst of it. "Some
of the law firms that represent lenders have had quite a bad
season," she says.