UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
CENTRAL DIVISION

 In re:
JAMES E ALGER, JR. and
DEBORAH J ALGER
Debtors

 

JAMES E. ALGER, JR. and DEBORAH J. ALGER, Plaintiffs,

v.

COUNTRYWIDE HOME LOANS, INC., MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., and BANK OF NEW YORK MELLON, F/K/A THE BANK OF NEW YORK, AS TRUSTEE FOR THE CERTIFICATEHOLDERS CWALT, INC., ALTERNATIVE LOAN TRUST 2006-11CB MORTGAGE PASS-THROUGH CERTIFICATES, 11CB, Defendants.

Excerpt:

Each acknowledgment form that the Algers signed contained the following language: “The undersigned each acknowledge receipt of two copies of NOTICE of RIGHT TO CANCEL and one copy of the Federal Truth in Lending Disclosure Statement.” It is unclear whether the Algers acknowledged that each of them received two copies for a total of four or whether they each acknowledged receipt of two copies in total. In analyzing the identical acknowledgment language in In re Cromwell, Judge Hillman, too, found the language ambiguous:

The placement of the word “each” before “acknowledge” renders the phrase susceptible to two meanings. First, that the Debtors acknowledged each receiving two copies as the Defendants[] assert, or second, that they each acknowledged receipt of a total of two copies as the Debtors suggest. While I understand that Countrywide intended the former as that is what the law required, the average consumer would not have necessarily known that. 2011 WL 4498875, at *17. The existence of this ambiguity neutralizes any presumption created by the acknowledgment in favor of delivery of the requisite number of Notices. See id. (resolving the ambiguity “against the drafter of the Acknowledgment such that it did not create a presumption of adequate delivery of a total of four copies”).

In the absence of a presumption of adequate delivery, the burden shifts to the defendants to prove that the Algers each received two copies of the Notice for a total of four for the couple. See id. While the defendants rely on the deposition testimony of Ms. Manugian as evidence of her general practice during closings to establish that the Algers received four copies, the Algers have attested through their affidavits that the first time their loan file was opened after the closing it contained a total of three Notices. The question of how many copies of the Notice the Algers received remains a genuine and material fact in dispute. The defendants’ motion for summary judgment is therefore DENIED.

[…]

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
CENTRAL DIVISION

In re:
SIMA SCHWARTZ
Debtor

SIMA SCHWARTZ
Plaintiff

v.

HOMEQ SERVICING, AGENT FOR
DEUTSCHE BANK NATIONAL TRUST
COMPANY, AS TRUSTEE and
DEUTSCHE BANK NATIONAL
COMPANY, AS TRUSTEE
Defendants

MEMORANDUM OF DECISION AND ORDER

After the plaintiff, Sima Schwartz, presented her case in chief during the first day of the trial in
this adversary proceeding, upon oral motion of the defendants, HomEq Servicing and Deutsche Bank
National Trust Company, as Trustee, I granted judgment on partial findings in favor of the defendants
on all counts of the complaint, pursuant to Fed. R. Civ. P. 52(c), made applicable to this proceeding by
Fed. R. Bankr. P. 7052. Ms. Schwartz then moved for a new trial as a result of which judgment was
vacated on count I of the complaint only. Schwartz v. HomEq Servicing (In re Schwartz), 2011 WL
1331963 (Bankr. D. Mass. Apr. 7, 2011). In count I, Ms. Schwartz alleges that the May 24, 2006
foreclosure sale of her home by Deutsche was invalid because Deutsche did not own the mortgage on
the property at the relevant time.1 I reopened the trial so that the defendants could present their case
with respect to that count, which they did on June 1, 2011. Based on the evidence and legal
submissions presented by the parties, my findings of fact, conclusions of law and order are set forth
below.

Jurisdiction and Standing

Core jurisdiction over this case is conferred upon the bankruptcy court by 28 U.S.C.
§ 157(b)(2)(G) and (O). See Atighi v. DLJ Mortg. Capital, Inc. (In re Atighi), 2011 WL 3303454, at
*3 (B.A.P. 9th Cir. Jan. 28, 2011). Ms. Schwartz’s standing to seek relief is based on her property
interest in light of the alleged wrongful foreclosure. Brae Asset Fund, L.P. v. Kelly, 223 B.R. 50, 56
(D. Mass. 1998).

Legal Framework

Mass. Gen. Laws ch. 244, § 14 establishes the procedure for a mortgagee to foreclose a
mortgage by exercise of the statutory power of sale. The statute provides that prior to a foreclosure
sale a notice of the sale must appear weekly for three consecutive weeks in a newspaper either
published in or generally circulated in the city or town where the property is located. The
Massachusetts Supreme Judicial Court has recently clarified that a foreclosing mortgagee must hold
the mortgage as of the date that the first notice of sale is published. U.S. Bank Nat. Ass’n v. Ibanez,

The Defendants’ Case

It is undisputed that Deutsche was not the original mortgagee of the mortgage on Ms.
Schwartz’s home, so it must prove that the mortgage was assigned to it prior to the date when the first
foreclosure notice was published. As discussed in the memorandum and order on the plaintiff’s
motion for a new trial, while the evidence established that an assignment of the mortgage from
Mortgage Electronic Registration Systems, Inc. (“MERS”) to Deutsche was executed on May 23,
2006, the day before the foreclosure sale, this assignment, being well after the notice of foreclosure
sale was first published, did not confer on Deutsche the power to foreclose on May 24. The Supreme
Judicial Court in Ibanez, however, offered an alternative method for a party to acquire sufficient rights
in a mortgage to qualify to foreclose:

Where a pool of mortgages is assigned to a securitized trust, the executed agreement
that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that
clearly and specifically identifies the mortgage at issue as among those assigned, may
suffice to establish the trustee as the mortgage holder.

Ibanez, 458 Mass. at 651.

With this in mind, the defendants introduced into evidence at trial all of the agreements
tracking the transfer of Ms. Schwartz’s mortgage loan from its originator, First NLC Financial
Services, LLC (“First NLC”), to Deutsche, complete with the necessary schedules of the pooled
mortgage loans specifically identifying her mortgage as being among those transferred. The
defendants argue that these agreements, together with other evidence introduced by them, establish that
Deutsche was the holder of the mortgage well in advance of the first publication of the notice of sale.
At trial, Ronaldo Reyes, a Deutsche vice president, testified that he had management
responsibility over the administration of the Morgan Stanley Home Equity Loan Trust 2005-4 (the
“Trust”) and that Deutsche had always been the trustee of the Trust. He testified that in his capacity
as vice president he had access to the books and records of the Trust and was qualified to authenticate
and testify about the documents admitted into evidence by the defendants. During the course of his
testimony, Mr. Reyes authenticated executed copies of each of the agreements discussed below, and
demonstrated that Ms. Schwartz’s mortgage loan was included on the mortgage loan schedules
attached as exhibits to several of the agreements. Mr. Reyes testified that each was used in the
ordinary course of Deutsche’s business as trustee of the Trust.

The following documents were admitted into evidence: (i) the mortgage on Ms. Schwartz’s
home; (ii) the original promissory note executed by Ms. Schwartz, which Mr. Reyes noted was
endorsed in blank by First NLC; (iii) the Amended and Restated Mortgage Loan Purchase Agreement
(the “Loan Purchase Agreement”) dated as of September 1, 2005 by and between Morgan Stanley
Mortgage Capital, Inc. (“MS Mortgage Capital”) and First NLC; (iv) the Assignment and Conveyance
Agreement dated September 29, 2005, by and between First NLC and MS Mortgage Capital; (v) the
Bill of Sale dated November 29, 2005 by and between MS Mortgage Capital and Morgan Stanley ABS
Capital I Inc. (“MS ABS Capital”); and (vi) the Pooling and Servicing Agreement (the “PSA”) dated
as of November 1, 2005 by and among MS ABS Capital, HomEq Servicing Corporation, JPMorgan
Chase Bank, National Association, First NLC, LaSalle Bank National Association and Deutsche. Mr.

Findings of Fact2

1. On July 22, 2005, Ms. Schwartz refinanced the mortgage loan on her property at 23 Sigel Street,
Worcester, Massachusetts, executing a promissory note in the amount of $272,000 payable to First
NLC and a mortgage securing her obligation under the note naming MERS, solely as nominee for
First NLC, its successors and assigns, as mortgagee.

2. The mortgage, which was duly recorded at the Worcester District Registry of Deeds, includes the
statutory power of sale under Mass. Gen. Laws. ch 183, § 21 which is invoked by reference to the
statute and which permits a mortgagee to foreclose a mortgage by public auction sale of the
property upon the mortgagor’s default in performance or breach of any conditions thereof.

3. On May 3, May 10 and May 17, 2006, a notice of foreclosure sale was published in the Worcester
Telegram and Gazette stating that “Deutsche Bank National Trust Company, as Trustee,” the
“present holder” of the mortgage, intended to foreclose the mortgage by public sale of Ms.
Schwartz’s property on May 24, 2006.

4. On May 23, 2006, Liquenda Allotey, described as a vice president of MERS, executed an
Assignment of Mortgage for the purpose of assigning the mortgage from MERS to “Deutsche Bank
National Trust Company, as Trustee.”

5. Deutsche, in its capacity as trustee of the Trust,3 conducted the foreclosure sale as scheduled on
May 24, 2006, bid in its mortgage debt and purchased the property.

6. In its answer, Deutsche admitted that a foreclosure deed conveying the property to itself was
recorded on October 13, 2006. There has been no evidence presented of any subsequent
conveyance of the property and hence I find that Deutsche remains the record owner of the Sigel
Street property.

7. As she testified on the first day of trial, Ms. Schwartz continues to reside in the Sigel Street
Property.

8. The original promissory note executed by Ms. Schwartz was endorsed in blank by an officer of
First NLC.

9. The original mortgagee as identified in the mortgage on Ms. Schwartz’s home was MERS, as
nominee for First NLC, its successors and assigns.

10. In accordance with Section 2 of the Loan Purchase Agreement, First NLC agreed to sell “Mortgage
Loans” to MS Mortgage Capital.

11. The Loan Purchase Agreement defines a “Mortgage Loan” as
An individual Mortgage Loan which is the subject of this Agreement, each Mortgage
Loan originally sold and subject to this Agreement being identified on the applicable
Mortgage Loan Schedule, which Mortgage Loan includes without limitation the
Mortgage File, the Monthly Payments, Principal Prepayments, Liquidation Proceeds,
Condemnation Proceeds, Insurance Proceeds, Servicing Rights and all other rights,
benefits, proceeds and obligations arising from or in connection with such Mortgage
Loan, excluding replaced or repurchased mortgage loans.

12. On September 29, 2005, by way of the Assignment and Conveyance Agreement, First NLC sold,
transferred, assigned, set over and conveyed to MS Mortgage Capital “all right, title and interest of,
in and to the Mortgage Loans listed on the Mortgage Loan Schedule attached hereto as Exhibit A.”

13. Ms. Schwartz’s mortgage loan was listed on the exhibit attached to the Assignment and Conveyance Agreement.

14. First NLC, therefore, transferred all of its right, title and interest in Ms. Schwartz’s mortgage loan
to MS Mortgage Capital on November 29, 2005.

15. By the Bill of Sale dated November 29, 2005, MS Mortgage Capital, as the “Seller,” transferred to
MS ABS Capital “all the Seller’s right, title and interest in and to the Mortgage Loans described on
Exhibit A attached hereto.”

16. Ms. Schwartz’s mortgage loan was listed on Exhibit A to the Bill of Sale.

17. MS Mortgage Capital, therefore, transferred its entire interest in Ms. Schwartz’s mortgage loan to
MS ABS Capital on November 29, 2005.

18. Section 2.01 of the PSA, which was dated November 1, 2005, provides that the MS ABS Capital,
as “Depositor,”

concurrently with the execution and delivery hereof, hereby sells, transfers, assigns, sets
over and otherwise conveys to [Deutsche] for the benefit of the Certificateholders,
without recourse, all the right, title and interest of the Depositor in and to the Trust
Fund, and the Trustee, on behalf of the Trust, hereby accepts the Trust Fund.

19. The “Trust Fund” includes all of the mortgage loans listed on an attached mortgage loan schedule.

20. Ms. Schwartz’s mortgage loan was listed on the mortgage loan schedule attached to the PSA.

21. While the PSA provides that the mortgage loans were transferred from MS ABS Capital to
Deutsche, “concurrently with the execution and delivery hereof” on November 1, 2005, the Bill of
Sale provides that MS ABS Capital did not acquire the mortgage loans until November 29, 2005.
The November 2009 PSA indicates, however, that the transaction in which MS ABS Capital would
transfer the loans to Deutsch, as trustee of the Trust, would not be consummated until November
29, 2005, which is defined as the “Closing Date.” Therefore, MS ABS Capital transferred Ms.
Schwartz’s mortgage loan to Deutsche, as trustee of the Trust, on the Closing Date of November
29, 2005, which is the same date as the Bill of Sale by which MS ABS Capital acquired the loan
from MS Mortgage Capital.

22. Section 2.01(b) of the PSA provides that if

any Mortgage has been recorded in the name of Mortgage Electronic Registration
System, Inc. (“MERS”) or its designee, no Assignment of Mortgage in favor of the
Trustee will be required to be prepared or delivered and instead, the applicable Servicer
shall take all reasonable actions as are necessary at the expense of the applicable
Originator to the extent permitted under the related Purchase Agreement and otherwise
at the expense of the Depositor to cause the Trust to be shown as the owner of the
related Mortgage Loan on the records of MERS for the purpose of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.

23. Thus MS ABS Capital did not assign to Deutsche the mortgage on Ms. Schwartz’s home in
connection with the transaction through which it transferred Ms. Schwartz’s mortgage loan
pursuant to the PSA.

24. In the chain of transactions by which Ms. Schwartz’s mortgage loan was sold, initially by First
NLC to MS Mortgage Capital, next by MS Mortgage Capital to MS ABS Capital and finally by
MS ABS Capital to Deutsche, the seller sold all of its right, title and interest in the mortgage loans
being transferred. However, as the mortgage itself was originally in the name of MERS as
mortgagee, and not First NLC, First NLC never held legal title to the mortgage and could not have
transferred such title to MS Mortgage Capital. Consequently, neither MS ABS Capital nor
Deutsche, as successors to First NLC and MS Mortgage Capital, obtained legal title to the
mortgage. This is consistent with § 2.01 of the PSA quoted above.

25. As of November 29, 2005, the Closing Date defined in the PSA, MERS continued to hold legal
title to the mortgage on Ms. Schwartz’s home as nominee for First NLC, its successors and assigns.

26. MERS continued to hold legal tile to the mortgage until May 23, 2006, when it assigned the
mortgage to Deutsche.

27. The custodial log establishes that Deutsche received Ms. Schwartz’s mortgage loan documents,
including the promissory note and mortgage instrument, on September 15, 2005 (presumably in
anticipation of the November loan sale), and retained custody of these documents until March 27,
2006, when they were sent to HomEq. The custodial log indicates that the documents were sent
to HomEq for servicing and lists the reason for the transfer as “foreclosure.” According to the
custodial log, the loan documents were returned to Deutsche on May 24, 2006, the day of the
foreclosure sale.
Conclusions of Law

In In re Marron, 2011 WL 2600543, at *5 (Bankr. D. Mass. June 29, 2011), I held that where a
loan was secured by a mortgage in the name of MERS, even when the loan itself changed hands
several times, MERS remained the mortgagee in its capacity as nominee for the original lender, its
successors and assigns.4 As MERS was the mortgagee, it had the authority to assign the mortgage to
the foreclosing entity. In this case too, while Ms. Schwartz’s loan passed from hand to hand, MERS
remained the mortgagee throughout. While MERS held only bare legal title to the mortgage on
behalf of Deutsche, the successor to First NLC, until it assigned the mortgage to Deutsche on May 23,
2006, only MERS had the authority to foreclose.

Having determined that MERS, and not Deutsche, held legal title to the mortgage on Ms.
Schwartz’s home mortgage as of May 3, 2006, when the notice of the foreclosure sale of her home was
first published, it follows that Deutsche did not have the right to exercise the statutory power of sale
and to foreclose the mortgage. See, e.g., Novastar Mortgage, Inc. v. Safran, 79 Mass. App. Ct. 1124,
948 N.E.2d 917 (2011) (finding, in a post-foreclosure eviction proceeding, that the foreclosing entity
had the burden to prove its title to the property by establishing that the mortgage had been assigned to
it by MERS “at the critical stages of the foreclosure process.”). By publishing notice of the
foreclosure sale when it was not the mortgagee, Deutsche failed to comply with Mass. Gen. Laws ch.
244, § 14, and thus its foreclosure sale is void. Ibanez, 438 Mass. at 646-47.5 A declaratory
judgment to that effect shall enter on count I of the complaint.

SO ORDERED.

At Worcester, Massachusetts this 22nd day of August, 2011.

By the Court,
Melvin S. Hoffman
U.S. Bankruptcy Judge

Footnotes:

1 The complaint is unclear as to the relief Ms. Schwartz seeks as a result of the allegedly invalid
foreclosure. In addition to the allegation that the defendants did not own the mortgage, Ms. Schwartz
alleges that she was damaged by the foreclosure sale, which “was conducted fraudulently, in bad faith”
and to her detriment. I previously found that Ms. Schwartz failed to produce any evidence of the
defendants’ intent to defraud her. In addition, Ms. Schwartz failed to establish the extent of her
damages or that the foreclosure sale was conducted in bad faith. Though Ms. Schwartz does not
expressly request a declaratory judgment as to the validity of the foreclosure, based on the allegation of
invalidity in the complaint, and the parties’ arguments in the course of trial, I will consider count I of
the complaint to be a request for a declaratory judgment that the foreclosure sale was invalid.

2 Any finding of fact which should more properly be considered a conclusion of law, and vice versa,
shall be deemed as such.

3 The documents pertaining to the foreclosure sale identify Deutsche as “Deutsche Bank National
Trust Company, as Trustee” without identifying the trust.

4 The sophisticated financial minds who wrought the MERS regime sought to simplify the process of
repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage
assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the
residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal
courts. Professor Alex Tabarrok of George Mason University has observed “[t]he law of unintended
consequences is when a simple system tries to regulate a complex system.” Alex Tabarrok, The Law
of Unintended Consequences, Marginal Revolution (Jan. 24, 2008, 7:47 am),
http://marginalrevolution.com/marginalrevolution/2008/01/the-law-of-unin.html.

5 Deutsche presented sufficient evidence to prove that either it or HomEq, its agent, had possession of
both the Schwartz mortgage and promissory note as of May 3, 2011. The note was endorsed in blank,
which gave Deutsche the right to enforce the note. The fact that Deutsche had possession of the
mortgage, however, is irrelevant to its status as mortgagee. While a promissory note endorsed in
blank may be enforced by the party in possession of the note, this is not the case with a mortgage.
“Like a sale of land itself, the assignment of a mortgage is a conveyance of an interest in land that
requires a writing signed by the grantor.” Ibanez, 458 Mass at 649. Deutsche had not received a
written assignment of the mortgage from MERS prior to May 3, 2011. The fact that it had possession
of the mortgage instrument did not render Deutsche the mortgagee and thus it lacked the power to sell
the property.

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Ibanez, 458 Mass. at 651 (emphasis added). None of the evidence thus far presented at trial indicated that the plaintiff’s mortgage was part of the Trust Fund, or how the Depositor acquired the Trust Fund.

In re: SIMA SCHWARTZ, Debtor.

SIMA SCHWARTZ, Plaintiff,

v.

HOMEQ SERVICING, AGENT FOR DEUTSCHE BANK NATIONAL TRUST COMPANY, AS TRUSTEE and DEUTSCHE BANK NATIONAL COMPANY, AS TRUSTEE, Defendants.

Case No. 06-42476-MSH, Adv. Pro. No. 07-04098.

United States Bankruptcy Court, D. Massachusetts, Central Division.

April 7, 2011.

MEMORANDUM AND ORDER ON PLAINTIFF?S MOTION FOR A NEW TRIAL

Excerpt:

A central question at trial was whether defendant Deutsche was the owner of the mortgage on the plaintiff’s home during the foreclosure process which resulted in the foreclosure sale of the home on May 24, 2006.2 The plaintiff introduced into evidence a document entitled “Assignment of Mortgage” dated May 23, 2006, which reflected the assignment of the plaintiff’s mortgage from the original mortgagee, Mortgage Electronic Registration Systems, Inc., as nominee for First NCL Financial Services, LLC, to defendant Deutsche. During the plaintiff’s case, all parties agreed that this assignment was dated prior to the date of the foreclosure sale. No party disputed its authenticity or validity. Because the assignment was executed prior to the foreclosure sale and its validity was not questioned, I ruled at trial that the plaintiff had failed to carry her burden of proving that Deutsche was not the owner of the mortgage when it foreclosed.

In her motion for a new trial, the plaintiff argues that I misconstrued Massachusetts law, pointing out that the Massachusetts Supreme Judicial Court in U.S. Bank. Nat’l Ass’n v. Ibanez, 458 Mass. 673, 941 N.E.2d 40 (2011) recently held that in order for a foreclosure sale to be valid the mortgage must have been assigned to the foreclosing entity not merely before the sale, but prior to the first publication of notice of that sale required by Mass. Gen. Laws. ch. 244, § 14. Ibanez, 458 Mass. at 647-48. I agree with the plaintiff’s interpretation of Ibanez and since the May 23, 2006 assignment was executed after the foreclosure notices had been published, I could not rely on the assignment exclusively in granting the defendants judgment on partial findings. In light of the foregoing I must determine whether and to what extent to open the March 6, 2011 judgment for the defendants.

In Count I of the complaint, the plaintiff seeks a ruling that the foreclosure sale was invalid. Not only does the March 23, 2006 assignment fail to establish the validity of the foreclosure sale, it constitutes the only evidence presented that at the time Deutsche began publishing notice of the sale, Deutsche was not the holder of the mortgage. The defendants argue that the pooling and servicing agreement dated November 1, 2005 which is listed in the joint pretrial  memorandum as a trial exhibit provides evidence that the mortgage on the plaintiff’s property was assigned to Deutsche well before the foreclosure process had begun. The excerpt of the pooling and servicing agreement that was admitted during the plaintiff’s case in chief, however, provides no such evidence. The excerpt indicates that an entity defined as the “Depositor” assigned the “Trust Fund”, which I presume included mortgages listed on a mortgage loan schedule not provided, to Deutsche, as Trustee for the benefit of the certificateholders of the Morgan Stanley Home Equity Loan Trust 2005-4. In Ibanez, the Supreme Judicial Court held that where, as here, a recordable assignment was not executed prior to the first publication of a notice of a foreclosure sale, the foreclosing entity may nevertheless prove that it was the mortgagee at the relevant time. The Court observed:

[w]here a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage.

Ibanez, 458 Mass. at 651 (emphasis added). None of the evidence thus far presented at trial indicated that the plaintiff’s mortgage was part of the Trust Fund, or how the Depositor acquired the Trust Fund.

I find that the plaintiff has presented sufficient evidence of the chain of title of the mortgage on her property to carry her burden of persuasion that the mortgage was not owned by Deutsche before the first publication of the notice of foreclosure sale. I must, therefore, vacate and open the judgment for the defendants on Count I of the complaint.

Continue below:

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In re: JOSE D CRUZ, Chapter 13, Debtor.
JOSE D CRUZ, Plaintiff,
v.
HACIENDA ASSOCIATES, LLC and WELLS FARGO BANK, N.A., Defendants.

Case No. 10-43793-MSH, Adv. Pro. No. 11-04006.

United States Bankruptcy Court, D. Massachusetts, Central Division.

January 26, 2011.

MEMORANDUM OF DECISION ON PLAINTIFF’S EMERGENCY MOTION FOR PRELIMINARY INJUNCTION

MELVIN S. HOFFMAN, Bankruptcy Judge

Before me is the emergency motion of the plaintiff, Jose D. Cruz, for a preliminary injunction barring defendant Wells Fargo Bank, N.A. from foreclosing its mortgage on the plaintiff’s residence at 73 Bolton Street, Marlborough, Massachusetts. After a preliminary hearing on the motion on January 18, 2011, I entered a temporary restraining order enjoining the foreclosure sale, which had been scheduled for that day, but permitted Wells Fargo to postpone the sale by public proclamation to a date after January 25, 2011. On January 25th, I held an evidentiary hearing on the motion. After reviewing the complaint and the evidence submitted by the parties, and for the reasons stated below, I will grant the plaintiff’s motion and enter a preliminary injunction subject to certain conditions.

In accordance with Fed. R. Civ. P. 65, made applicable to this proceeding by Fed. R. Bankr. P. 7065, my decision whether or not to grant a preliminary injunction must be based on the evidence before me, including the verified complaint and affidavits submitted by the parties. I consider the plaintiff’s complaint to be a verified complaint because the plaintiff filed an affidavit dated January 13, 2011 in which he verified the facts alleged in the complaint. The plaintiff also filed the affidavit of Joseph Molina of GIM Services, Inc., who averred that his office submitted a loan modification application to Wells Fargo on behalf of the plaintiff on November 29, 2011. According to Mr. Molina’s affidavit, after several inquiries regarding the status of the loan modification application, his office was informed by telephone on January 19, 2011 (after the complaint had been filed) that the plaintiff’s loan modification application had been denied, and that the reason given for the denial was the approaching foreclosure sale. Mr. Molina also averred that Wells Fargo has not yet communicated this denial to the plaintiff in writing. Lastly, the plaintiff submitted the affidavit of his attorney, Michael Shepsis, who averred that he had contacted Wells Fargo’s foreclosure counsel on several occasions regarding the status of the loan modification and as of January 18, 2011, he had not received any notice that the application had been denied.

In order to obtain a preliminary injunction, the requesting party must demonstrate that (i) there is a likelihood of success on the merits of his claim; (ii) that he will suffer irreparable harm if the injunction is not granted; (iii) that the harm to the requesting party if the injunction is not granted is greater than the harm to the opposing party if it is granted; and (iv) that the public interest would not be adversely affected by the issuance of the injunction. See Sunshine Development, Inc. v. F.D.I.C., 33 F.3d 106, 110-11 (1st Cir. 1994).

On the issue of irreparable harm, the plaintiff seeks in Counts I (breach of contract) and V of his complaint (breach of duty of good faith and reasonable diligence) judgment canceling the pending foreclosure sale of his home. Accordingly, I find that absent an injunction the plaintiff will be irreparably harmed because a foreclosure sale will effectively deprive him of the relief requested in those counts of his complaint.

The question of whether the plaintiff is likely to succeed on the merits of his complaint is really the critical factor to be determined here. See Narragansett Indian Tribe v. Guilbert, 934 F.2d 4, 6 (1st Cir. 1991). The plaintiff argues that Wells Fargo, which is a participant in the federal government’s Home Affordable Modification Program (“HAMP”), breached its obligation under the program by scheduling a foreclosure sale of the plaintiff’s property while the plaintiff’s application for a loan modification was under consideration by it. HAMP arose out of the Emergency Economic Stabilization Act of 2008, and is administered by the Federal National Mortgage Association (“Fannie Mae”) as the agent of the Department of the Treasury. Speleos v. BAC Home Loans Servicing, L.P., 2010 WL 5174510, *1 (D. Mass. 2010). The program requires that all mortgage loans owned or guaranteed by Fannie Mae or the Federal Home Loan Mortgage Corporation (“Freddie Mac” and together with Fannie Mae, the government-sponsored agencies or “GSEs”) that meet certain requirements be evaluated by the loan servicers for loan modifications. If a borrower qualifies, then the servicer is obligated to modify the loan in accordance with a predefined formula that reduces the borrower’s monthly payment to 31% of his gross income for the first five years.[1] In addition, many servicers of mortgage loans not owned by the GSEs have executed so-called Servicer Participation Agreements (“SPAs”) with Fannie Mae, as agent for the Treasury Department, by which they agree to review and modify loans on similar terms. The Treasury Department, through Fannie Mae, has established guidelines that servicers must follow in evaluating and approving loan modification requests by borrowers. These guidelines are binding on each servicer by way of its servicing agreements with the GSEs or the SPA to which it was a party. I take judicial notice of the fact that Wells Fargo has executed an SPA, and is thus obligated to follow the HAMP requirements with respect to evaluating a loan modification application.[2]

The plaintiff points to Supplemental Directive 09-01, the first of the Treasury Department’s HAMP guidelines, to support his allegation that servicers such as Wells Fargo are prohibited from foreclosing on mortgages that are under review for loan modification. This directive also requires servicers to seek alternatives to foreclosure in the event that a loan modification is denied.[3] The plaintiff alleges that Wells Fargo scheduled the foreclosure sale of his property while his loan was being reviewed for a HAMP modification, and that this alleged violation of the HAMP guidelines constituted a breach of contract and of Wells Fargo’s duty to act in good faith and with reasonable diligence, justifying, among other things, cancellation of the foreclosure.

The plaintiff’s breach of contract claim in Count I of the complaint is premised on the proposition that he is a third party beneficiary of the Wells Fargo’s SPA or its servicing agreements with the GSEs. While the HAMP program was intended to benefit homeowners by helping them avoid foreclosure, the majority of courts considering the issue have held that consumers have no private cause of action as third party beneficiaries to enforce HAMP violations by their servicers. See McKensi v. Bank of Am., N.A., 2010 WL 3781841, *5-6 (D. Mass. 2010) (“the existing case law weighs decisively in favor of defendant: numerous district courts have interpreted identical HAMP agreements and have come to the conclusion that a borrower is not a third party beneficiary.”) (quoting Hoffman v. Bank of Am., N.A., 2010 WL 2635773 (N.D. Cal.) and citing additional cases); but see Reyes v. Saxon Mortgage Services, Inc., 2009 WL 3738177, *2 (S.D. Cal.) (plaintiff’s complaint alleging a third party beneficiary status with respect to a HAMP violation was “sufficient to state a plausible claim for breach of contract under a third party beneficiary theory”). Very recently, Judge Gorton of the U.S. District Court in Massachusetts cited the proposition in Restatement (Second) of Contracts § 311(b) that one must look to a contract itself to determine whether the parties intended to give rights to third party beneficiaries. Speleos, 2010 WL 5174510 at *5. He held that although the various SPAs and servicing agreements related to HAMP serve to benefit borrowers, nothing in the contracts themselves indicate an intent to create a private right of action in favor of borrowers. I agree with the majority view that the plaintiff is not a third party beneficiary of Wells Fargo’s SPA or other relevant HAMP servicing agreements and, therefore, I find that the plaintiff is not likely to succeed on Count I of the complaint.

In Count V of his complaint, the plaintiff alleges that Wells Fargo breached its duty to act in good faith and with reasonable diligence by attempting to foreclose its mortgage on the plaintiff’s property. Massachusetts courts have consistently held that in addition to complying with the statutory requirements governing mortgage foreclosure set forth in Mass. Gen. Laws ch. 244, a mortgagee must act in good faith and must use reasonable diligence to protect the interests of the mortgagor. Williams v. Resolution GGF OY, 417 Mass. 377, 382-83 (1994). In Snowden v. Chase Manhattan Mortgage Corp., 2003 WL 22519518 (Mass. Super.), the court held that a lender breached this duty by foreclosing a mortgage the day after receiving notice that the borrower had negotiated an agreement to sell the property at a price beneficial to the lender. The court noted that mortgagees in Massachusetts must act as a “trustee for the benefit of all persons interested.” Id. at *2 (quoting Taylor v. Weingartner, 233 Mass. 243, 247 (1916)).

The plaintiff argues that by scheduling a foreclosure sale while the plaintiff’s loan modification request was pending, Wells Fargo breached its duty to act in good faith and with reasonable diligence to protect the plaintiff’s interests. The plaintiff’s argument finds support in Speleos, which concluded that even though the borrowers had failed to state a claim for relief under third party beneficiary theory, they could state a claim for negligence on the theory that the defendants had a duty under the HAMP guidelines not to proceed with a foreclosure sale while evaluating the borrowers for a loan modification. Speleos, 2010 WL 5174510 at *6. The plaintiff’s allegation in Count V of the complaint that Wells Fargo breached its duty of good faith and reasonable diligence is comparable to the negligence claim in Speleos.

The evidence thus far indicates that Wells Fargo scheduled and intended to conduct a foreclosure sale of the plaintiff’s property while the plaintiff’s request for a loan modification was pending before it. Even if the modification was denied on January 19, 2011, eight days prior to the rescheduled foreclosure sale, the plaintiff was not given written notice of the denial nor was he offered other foreclosure mitigation options as required under HAMP guidelines. I find, therefore, that there is a substantial likelihood that the plaintiff will prevail on Count V of his complaint.

In addition, I find that the plaintiff has satisfied the remaining requirements for injunctive relief. While it is possible that the value of the plaintiff’s property may depreciate as this case proceeds (although Wells Fargo offered no evidence on this point), I find that any potential detriment to Wells Fargo from depreciation is outweighed by the enormity of the harm to the plaintiff from a foreclosure sale. Further, my order that the plaintiff make payments to the Chapter 13 trustee will protect Wells Fargo from depreciation and unpaid real estate taxes in the event it ultimately prevails in this action. Finally, I find that it is in the public interest to ensure that lenders foreclose on properties only when they are entitled to do so. Also, the neighbors surrounding the plaintiff’s property will likely benefit if foreclosure can be avoided.

Under Fed. R. Bankr. P. 7065 the court may require a party who benefits from a preliminary injunction to post security to protect the enjoined party in the event that the injunction turns out to have been wrongly issued. Here, the plaintiff’s first and second amended Chapter 13 plans filed in the main case, dated September 24 and October 11, 2010 respectively, each contained provisions in which the plaintiff agreed to make monthly payments to Wells Fargo while his loan modification application was under review. At the evidentiary hearing on the plaintiff’s motion, the plaintiff’s counsel conceded that these payments have not been made to date. The Chapter 13 trustee noted that the plaintiff’s amended Schedule J accompanying his bankruptcy petition lists a total of $1800 in expenses to be dedicated to home mortgage and real estate tax payments. In his memorandum of law in support of his motion for injunctive relief, the plaintiff indicates that his current monthly income is $5829, plus $1,200 in rental income from a tenant. Based on these amounts, a hypothetical HAMP loan modification would involve an initial monthly payment of $1806.99, equal to 31% of total income, after subtracting 25% of the rental income to account for vacancy risk. Accordingly, the preliminary injunction will be conditioned on the plaintiff’s making monthly payments of $1800 to the Chapter 13 trustee. This payment requirement shall be retroactive to October 1, 2010 (the first month after the plaintiff proposed to make these payments in his September 24, 2010 amended Chapter 13 plan). Payments shall be held by the trustee for the benefit of Wells Fargo and paid to Wells Fargo in the event it prevails in this action.

The plaintiff shall make payments of $1800 per month to the Chapter 13 trustee on the first day of each month beginning on February 1, 2011, with a ten day grace period for late payment. In order to catch up on payments due for October through January, the plaintiff shall make a double payment of $3600 on the first day of March, April, May and June. The failure of the plaintiff to make any payment when due will be grounds for vacating the injunction.

A separate order shall enter.

[1] See, e.g., Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages, Version 3.0 (hereinafter “HAMP Handbook”) at 65, available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhahandbook_30.pdf.

[2] See Wells Fargo Servicer Participation Agreement, available at http://www.treasury.gov/initiatives/financial-stability/housing-programs/mha/Documents_Contracts_Agreements/093010wellsfargobanknaSPA(incltransmittal)-r.pdf; see also HAMP Handbook, supra note 1 at 17 (explaining the role of the SPA).

[3] Each of the GSEs has its own version of this directive, but all contain the prohibition against foreclosure while loans are under review for modification.

Opinion Below…

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