Foreclosure-Gate 2.0 : The road goes ever on

Mass Supreme Court to Consider Whether Buyers Out of Faulty Foreclosures Actually Own Property

Posted: 21 Jan 2011 06:29 AM PST

Oh boy, if you think the Massachusetts Supreme Judicial Court decision on Ibanez, which raised serious questions about the validity of transfers in mortgage securitizations, turned heads in the banking industry, you ain’t seen nothin’ yet.

The SJC is considering what has the potential to be another widely-watched case, Bevilacqua v. Rodriguez. Note this case was heard at the lower court level by the same land court judge, Keith Long, that ruled on Ibanez, and the SJC in large measure affirmed Long’s take in that case. The issue is key: whether a buyer can own a piece of real estate acquired from a party that lacked the right to foreclose upon the previous owner.

The background via Bloomberg (hat tip April Charney):

Francis J. Bevilacqua III went to Long’s court to force the original owner to say whether he had a claim on the property in Haverhill, about 36 miles (58 kilometers) north of Boston. A city assessment website lists four condominiums at the location with a total value of $600,300.

Bevilacqua asked Long whether he could try to find the original owner through newspaper notices, said his lawyer Jeffrey B. Loeb, of Rich May PC in Boston, in a phone interview.

In August, Long ruled that Bevilacqua wasn’t the property’s owner and didn’t have standing to inquire about claims. U.S. Bancorp, which sold Bevilacqua the property in 2006, conducted an invalid foreclosure because it didn’t properly own the mortgage at the time, Long said.

The mortgage transfer to U.S. Bancorp, which oversees the mortgage-backed trust containing the loan, happened after the foreclosure, Long said. All Bevilacqua had was a deed from an invalid foreclosure sale, the judge said.

“I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied,” Long wrote.

The really funny part here is that when contacted, the bank that sold the property to Bevilacqua, US Bank, piously said it wasn’t a party to the lawsuit, as if it and other servicers won’t be in the crosshair of a lot of litigation if this ruling goes against them.

This is the plaintiff’s argument, which presumably would also hew with the banks’ position:

In their appeal brief, Bevilacqua’s lawyers argue that Long confused requirements for the law used to prove one’s title to a property with those for the law their client sued under, the so- called try-title statute, through which one party seeks to force another to assert or waive a potential claim on the property.

“The Land Court made this finding despite the existence of a recorded deed conveying the property to Bevilacqua,” they wrote. The lawyers said that even if the Ibanez ruling means Bevilacqua doesn’t have “legal title,” he has “record title” because of the deed.

“Anyone conducting a title search would be led to believe that Bevilacqua is the record owner of the property,” they wrote. “Bevilacqua recognizes, without conceding, that Rodriguez may have a claim to the property.”

A ruling against Bevilacqua would cast a shadow over sales of property in foreclosure out of real estate securitizations and would create a major impetus for legislative intervention, aka yet another bailout, in the foreclosure mess. It could even raise questions about whether loan mods and short sales are valid since the servicer in securitizations may not be acting on behalf of the owner, which may not be the trust, but instead an entity earlier in the securitization chain.

This sword of Damocles will hang over the banks for some months; oral arguments in Bevilacqua are slotted for April. Stay tuned.