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Prospective Effect of Eaton Should Chill Litigation In 'Unity of Note and Mortgage' Cases

The Supreme Judicial Court's ("SJC's") self-imposed limitation on applicability of Eaton v. Federal National Mortgage Association, 462 Mass. 569 (2012) should reduce to a trickle the once-steady stream of foreclosure-related claims asserting that a mortgagee must hold the underlying note in order to effectively foreclose in Massachusetts. 

In Eaton, the Court held that its decision would apply only to mortgage foreclosure sales wherein the statutory notice of foreclosure was given after the date of the decision itself, which was June 22, 2012.  The SJC acknowledged that this limitation was unusual, since its interpretation of a statute normally applies from the date of the statute's enactment forward.  But the Court found good reason for departing from the norm in Eaton, including that "the use of the term 'mortgagee' in the statutory scheme governing mortgage foreclosures was not free of ambiguity . . . [and] none of our [prior] cases has considered directly the question whether a mortgagee must also hold the note or act on behalf of the note holder in order to effect a valid foreclosure by sale."

In Fitch Law Partners LLP's view, Eaton unassailably holds that a mortgagee initiating a foreclosure sale was not required to hold the note or act as agent for the note holder before June 22, 2012.

Accordingly, pending "unity of note and mortgage" claims concerning foreclosure sales initiated before Eaton should be subject to ready dismissal (if not voluntary withdrawal).  At least one Court has acted in accordance with this view.  In a Memorandum dated July 3, 2012, federal Judge Michael A. Ponsor dismissed an Eaton-style claim for reasons including the fact that the subject foreclosure process had been initiated long before the date Eaton came down.  (The case, pending in the District of Massachusetts, is styled Woods v. Wells Fargo Bank, N.A., C.A. No. 11-cv-30216-MAP.)  As to future foreclosures, both the language of the Eaton opinion and some recently-passed Massachusetts legislation should encourage practitioners to document compliance with the Eaton ruling in every foreclosure proceeding.  

At least one commentator has suggested in a Massachusetts Lawyers Weekly article that a consumer protection claim brought pursuant to G.L. c. 93A might lie where an Eaton-type claim does not.  As a threshold matter, even if such claims were viable they would be limited to foreclosure sales conducted within four years of commencement of any such action.  See G.L. c. 260, ยง 5A (stating statute of limitations in consumer protection claims is four years).  

More importantly, however, it is difficult to see how a mortgagee could have acted in an "unfair and deceptive" way in a pre-Eaton foreclosure by proceeding without possession of the note or authority granted by the note holder when the SJC has stated: (i) ambiguity existed in the relevant statutes prior to Eaton; (ii) no prior SJC decision directly addressed the issue, and (iii) Eaton's requirement of an agent-principal relationship does not apply retroactively.  Since unity of note and mortgage or an agency relationship were not needed to effectively pass title in a foreclosure sale prior to Eaton, it is hard to see how acting without them could have been unfair or deceptive.  And notably, no language in Eaton suggests that its application is prospective only as to title-related claims.  

All things considered, Eaton should serve to reduce the volume of pending or future litigation related to the "unity of note and mortgage" theory - not increase it.

To view author Jennifer E. Greaney's biography and find her contact information, click here.

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