Real estate attorneys, title insurers await Ibanez verdict

Issue April 2010

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.