A Mortgage Bank may LOSE its right to foreclose

Can a mortgage bank lose its right to foreclose on real estate that is in foreclosure? This case comes out of the United States District Court, District of Massachusetts.  The underlying facts are fairly commonplace.  The debtor-homeowner bought a house in Massachusetts and, at the time of purchase (May 28, 2004), executed a Note and a Mortgage.  MERS was named mortgagee (which was the popular thing to do back in the day), and the mortgage was recorded in the county registry shortly thereafter.

Fast forward several years, and the debtor-homeowner has filed for Chapter 7 bankruptcy in February 2010.  On July 22, 2010, CitiMortgage filed a motion for relief from stay in the debtor-homeowner’s bankruptcy case, alleging that it was the holder of the Mortgage.  The Court entered a discharge in the underlying bankruptcy case on August 3, 2010, without having first ruled on CitiMortgage’s pending motion.  Finally, on December 13, 2010, the Court granted CitiMortgage’s motion for relief from stay.  (For those that are unfamiliar, when a bankruptcy case is open and active, most all creditor activity has to stop.  If a creditor wants to enforce a debt, such as continue with an eviction or proceed with a foreclosure, the creditor must first obtain an Order for the Court granting it relief from the automatic stay.  That is, the Court Order gives the creditor permission to proceed with its enforcement of the debt.)

On April 16, 2012, MERS assigned the mortgage to CitiMortgage.  On December 11, 2014, CitiMortgage notified the debtor-homeowner that it was intending to sell the house, as per Massachusetts law.  The sale was scheduled for January 12, 2015, but the debtor-homeowner brought a case in state court to enjoin CitiMortgage.  CitiMortgage moved the case to federal court.  In this case, the debtor-homeowner was plaintiff, and alleged three causes of action.

Two of the causes of action are not of importance for this article, and were dismissed by the Court.  The last claim by the debtor-homeowner alleged that CitiMortgage does not have the right to foreclose, since the obligation to pay the loan was discharged in bankruptcy.  (Massachusetts law is such that, to foreclose on a property, the party seeking foreclosure must own both a mortgage and an enforceable underlying note.)  In this case, the debtor-homeowner argued successfully that since his obligations under the note were discharged in the bankruptcy case, CitiMortgage cannot, under state law, have authority to foreclose.  The Court declined to answer that question, and so this case will have to be litigated.

This case is interesting in that it reveals the risky practices that lenders engaged in with mortgages.  In this case, MERS was the mortgagee of record well beyond the bankruptcy case.  This case also brings to light the “holder of the note” defense in foreclosure cases.  In most jurisdictions, a party cannot foreclose unless the have an interest in both a lien (mortgage) and a monetary claim (note).  What is a little troubling about this opinion is that a debtor can file for bankruptcy, have their personal liability discharged on the note, and that would preclude a lender’s right to foreclose.  This seems to be at odds with the Bankruptcy Code, since in Chapter 13 cases, a debtor cannot modify a first mortgage on their principal residence.  It will be interesting to observe the result of this case, and whether the tactic pops up elsewhere.