Bloomberg News

Home Sale After Bad Foreclosure Isn’t Valid, Court Rules

October 18, 2011

(Updates with Coakley’s comment in ninth paragraph.)

Oct. 18 (Bloomberg) -- A Massachusetts man who bought property in a faulty foreclosure sale isn’t the true owner and so doesn’t have the right to sue over it, the state’s high court ruled.

The Supreme Judicial Court, which in January found that banks can’t foreclose on a house if they don’t own the mortgage, went one step further in a closely watched case and said a sale after that foreclosure doesn’t transfer the property. Therefore, the buyer couldn’t bring his court action against a previous owner, the court ruled.

The high court upheld a lower-court decision that said Francis J. Bevilacqua III, the buyer of residential property in Haverhill, Massachusetts, never owned it because U.S. Bancorp foreclosed before it got the mortgage. Today’s ruling could have implications in the foreclosure crisis, in which banks are accused of clouding home titles through sloppy transferring of mortgages.

“By alleging that U.S. Bank was not the assignee of the mortgage at the time of the purported foreclosure, Bevilacqua is necessarily asserting that the power of sale was not complied with, that the purported sale was invalid, and that his grantor’s title was defective,” the court wrote. “In light of its defective title, the intention of U.S. Bank to transfer the property to Bevilacqua is irrelevant and he cannot have become the owner of the property pursuant to the quitclaim deed.”

‘Disappointed’ in Ruling

Jeffrey B. Loeb, a lawyer for Bevilacqua, said that while he is “disappointed” in the ruling, it holds out a possible solution for so-called third-party buyers: re-foreclosure.

“It reaffirms the concept that a defective foreclosure deed operates as an assignment of the mortgage and if you can trace the ownership of the mortgage, that person would have the right to re-foreclose,” said Loeb, of Rich May PC in Boston.

The state high court’s January ruling in the earlier case, U.S. Bank v. Ibanez, didn’t address the status of third-party buyers who purchase property from someone who conducted an invalid foreclosure.

The Mortgage Bankers Association and the American Land Title Association wrote friend-of-the-court briefs against the lower-court Bevilacqua decision. Massachusetts Attorney General Martha Coakley wrote one arguing the decision should be upheld. The court heard oral arguments May 2.

‘Domino Effect’

“In the rush to foreclose, the banks’ reckless origination and foreclosure practices have created a domino effect that has harmed Massachusetts homeowners as well as third-party purchasers,” Coakley said in a statement today. “This is yet another clear demonstration that the only way we are going to restore a healthy economy is to address the foreclosure crisis and hold the banks accountable for their actions.”

Bevilacqua bought the property in 2006 from U.S. Bancorp, which oversees the mortgage-backed trust containing the loan. The bank isn’t a party to the case.

“The court said he doesn’t have ownership rights but he has rights as a mortgagee and so he has the right to foreclose,” Loeb said.

Re-foreclosure may present problems because someone else could win the auction, Richard D. Vetstein, a real-estate lawyer in Framingham, Massachusetts, who has represented clients in situations similar to Bevilacqua’s, said in a phone interview.

‘High and Dry’

“They’re saying the innocent third-party purchaser, they’re out of luck,” Vetstein said of the Bevilacqua decision. “The court ruled that not only doesn’t he own it, but he has no standing under that procedural mechanism to have the court decree him as the owner. It’s another Ibanez case, where an innocent person bought at foreclosure and he’s left high and dry.”

Vetstein said one option is to track down the previous owner and get a deed from that person. Bevilacqua never located the previous owner. The situation is especially difficult for owners without title insurance, Vetstein said.

The Ibanez and Bevilacqua cases both originated before Massachusetts Land Court Judge Keith C. Long in Boston.

Bevilacqua went to Long’s court to force the original owner to say whether he had a claim on the property. A city assessment website lists four condominiums at the location with four separate owners and a total value of $600,300.

In August 2010, Long ruled that Bevilacqua wasn’t the property’s owner and didn’t have standing to inquire about claims. U.S. Bancorp conducted an invalid foreclosure because it didn’t properly own the mortgage when it sold the property to Bevilacqua, Long said. The mortgage was assigned to it after the foreclosure sale by Merscorp Inc.’s Mortgage Electronic Registration Systems, a national database of mortgages.

‘Invalid Foreclosure’

All Bevilacqua had was a deed from an invalid foreclosure sale, the judge said.

The servicer of the mortgage-backed trust the loan was in would have handled the foreclosure and sale, not U.S. Bancorp, Teri Charest, a spokeswoman for the Minneapolis-based bank, said in January.

In his appeal, Bevilacqua argued that Long confused requirements for the law used to prove one’s title to a property with those for the law he sued under. Through that law, the so- called try-title statute, one party seeks to force another to assert or waive a potential claim on the property.

Bevilacqua argued that he had the right to bring the try- title case because he had “record title” to the property through the deed he got from U.S. Bancorp.

Justice Francis X. Spina, who wrote the opinion, said it had been more than a century since the court had addressed the question of standing in try-title cases.

The case is Bevilacqua v. Rodriguez, 10880, Supreme Judicial Court of Massachusetts (Boston).

--Editors: Mary Romano, Glenn Holdcraft

To contact the reporter on this story: Thom Weidlich in New York at tweidlich@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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