On January 7, 2011, the Massachusetts Supreme Court, in U.S. Bank National Association v. Ibanez, held that a foreclosure sale was void if the lender could not prove that it had the power to foreclose at the time of the foreclosure. In Ibanez, the court held that the lender failed to prove that it had the right to foreclose at the time of the sale and it questioned whether it ever obtained the right to foreclose. Like California, Massachusetts has a foreclosure statute that allows lenders to foreclose without court approval. In the Ibanez case, the bank foreclosed on the property and a year later, sued to clear title and validate the foreclosure sale. During that suit, which the homeowner did not contest, the lender was unable to demonstrate that it had received an assignment of the deed of trust prior to the foreclosure, or in fact, that it ever received a valid assignment. While this case is a big win for debtors in Massachusetts, its impact in California is likely to be minimal.
First, as a matter of law in Massachusetts, the controlling document as to ownership of the loan is the deed of trust. The opposite is true in California, where the promissory note is the controlling document. In Ibanez, the Court noted that the lenders were able to show that they held the promissory note. As such, if the same facts occurred in California, the Court would likely have upheld the foreclosure.
Second, the Massachusetts Court set an incredibly low standard for lenders. It stated that it was only seeking some document that showed an assignment of the Deed of Trust by the original lender and that the assignment did not even need to be recorded. Any showing by a lender that it was the owner of the note should be sufficient, even if the Ibanez holding is adopted in California. It seems unlikely that lenders will continue to make the same mistakes that they have in the past with the sloppy recordkeeping.
It will be interesting to watch whether California follows Massachusetts’s lead in this area. If California does rule that the foreclosures are void, it would make it substantially easier for Plaintiff’s to overcome the Tender Offer rule. (See Julia Wei’s Article on Foreclosure Litigation for a thorough analysis of the issues)
Practice Notes – If you are a bank, this ruling should not have a substantial impact as it merely requires some documentation that the foreclosure was proper. If you are a homeowner, while this may lead to setting aside the foreclosure, it will not grant you the home free and clear of the loan. The lender would merely have to foreclose again.