Recent Massachusetts Decision Highlights Importance of Using Precise Remedy Provisions in Mortgages
A recent decision of the Supreme Judicial Court of Massachusetts highlights the importance of using clear and unambiguous remedy provisions in residential mortgages and deeds of trust.
James B. Nutter & Co. v. Estate of Murphy, 478 Mass. 664 (2018), involved a lender's efforts to non-judicially foreclose under a reverse mortgage. Under a reverse mortgage, often used by elderly homeowners, a homeowner borrows a loan secured by a mortgage or deed of trust against the borrower's residence. When the borrower dies or is no longer able to live in the property, the loan becomes due. The lender typically then sells the property pursuant to applicable state law to recover the amounts loaned.
At issue in Nutter was whether the reverse mortgage properly incorporated Massachusetts' non-judicial foreclosure procedure. The lender in Nutter made three loans secured by a form reverse mortgage. The mortgage provided that, in the event of default, "[l]ender may invoke the power of sale and any other remedies permitted by applicable law….At this sale Lender or another person may acquire the Property. This is known as 'foreclosure and sale.' In any lawsuit for foreclosure and sale, Lender will have the right to collect all costs allowed by law."
After the homeowners passed away and the loans became due, the lender sued for a declaration that it was entitled to foreclose under Massachusetts' statutory power of sale. The homeowners' estates responded that the mortgage failed to incorporate the statutory power of sale described in Mass. Gen. Laws ch. 183, § 21. This statute defines the "statutory power of sale" in Massachusetts and provides that it may be incorporated into any mortgage by reference. The trial court ruled in favor of the lender, and the borrowers' estates appealed.
The Supreme Judicial Court criticized the lender at length for not being more explicit in describing its remedies in the event of default. It noted that, because the mortgage did not use the term "statutory" in describing the "power of sale," the mortgage was ambiguous as to whether it incorporated the statutory power. The court also noted that the mortgage contained numerous other provisions that seemed to contemplate judicial foreclosure.
However, the court ultimately held that the mortgage did incorporate the statutory power of sale by reference. It noted that, in the context of "contracts of adhesion" such as form loan documents, Massachusetts courts interpret a contract in the same manner as an objectively reasonable person in the non-drafting party's position. Here, an objectively reasonable borrower would have understood the mortgage to refer to the statutory power of sale. The two other methods of foreclosing under Massachusetts law—foreclosure by entry and foreclosure by action—are much more cumbersome and less frequently used.
As the court explained, the lender could have avoided this problem simply by using the term "statutory power of sale" instead of the term "power of sale." The fact that the court viewed this as a close issue underscores the need for lenders to be explicit in describing their remedies upon default.