In Bevilacqua v. Rodriguez, the Supreme Judicial Court heard a number of strategies for establishing clear title to previously foreclosed properties – and shot down almost all of them. Still, the door was left at least partially open, though the court has not made it easy.

Under a previous ruling in U.S. Bank Nat’l Assn v. Ibanez, it was determined that a lender who began foreclosure proceedings before a mortgage was properly assigned to it had no right to sell the property. The Bevilacqua decision carried the Ibanez decision to its logical conclusion: If the seller had no right to sell the property, then the purchaser did not receive title to the property.

The mortgage in question was assigned to US Bank, the foreclosing entity, only after the foreclosure proceedings – an illegal practice under Ibanez. The property was then sold to Francis Bevilacqua, but because of the most recent decision, it was ruled that because the property was illegally and improperly foreclosed on in the first place, he never had clear title.

Complicating matters is the fact that, before the case, Bevilacqua had converted the property into condominiums – extending the title problems to the next generation of owners.

Bevilacqua offered several alternative theories supporting his ownership of the property – all of which the Court rejected:

Bevilacqua asserted that a quitclaim transferring interest in the property from U.S. Bank to him was sufficient to convey title. The court disagreed, reasoning that the quitclaim deed from US Bank to Bevilacqua transferred only the claim to the property that US Bank had; since US Bank’s foreclosure was not effective to transfer title to US Bank, US Bank had no title to transfer to Bevilacqua.

Bevilacqua asserted that the quitclaim deed, coupled with the chain of grants that preceded it, was sufficient to convey title to him. Citing Ibanez, the Court held that the defective foreclosure was fatal to Bevilacqua’s claim, and that the chain of grants recorded after the defective foreclosure but prior to the quitclaim deed (such as the “confirmatory foreclosure deed,” which could not confirm that which never properly existed) could not cure the fatal flaw.

Bevilacqua asserted that he held title as assignee of the mortgage. The Court rejected this theory because they saw it as inconsistent with the relief Bevilacqua was seeking. Bevilacqua’s “try title” action sought to eliminate Rodriguez’s claim to the property; however, if the mortgage was still in effect, then Rodriguez – the mortgagor – would still hold the equity of redemption and his rights could not be eliminated. The Court did hold out hope, however, that Bevilacqua could ultimately establish a claim (in a subsequent action) based on the argument that the quitclaim deed was effective to assign the mortgage – the only rights US Bank held at the time of transfer – to Bevilacqua and that Bevilacqua, therefore, could foreclose as the mortgagee. But stay tuned for the decision in Eaton v. FNMA, in which the SJC is considering whether the mortgagee must also hold the promissory note in order to have the right to foreclose.

Bevilacqua argued that he had acquired title as a bona fide purchaser for value. The Court eliminated this argument for two reasons. First, since the foreclosure was void under the Ibanez decision, it had no effect to divest the original owner of title, so title was not available to be acquired by a bona fide purchaser. Second, since the documents on record at the registry (a public record) clearly documented that US Bank had conducted the foreclosure before MERS had assigned the mortgage to it, Bevilacqua did not purchase the property without notice of the title defects.

Innocent Bystanders

The Court left Bevilacqua with some possible courses of action, but no clear remedies.

One option is to pursue the theory that Bevilacqua is the current assignee of the mortgage and, as the holder of the mortgage, is entitled to foreclose. A second option is for US Bank to re-foreclose, as the mortgage was eventually assigned to it after the original foreclosure.

In either case, foreclosure could be under a power of sale or by entry, both of which have problems. The problem with foreclosure under a power of sale is that it requires new notices and a new sale, at which Bevilacqua could be outbid for the property.

The problem with foreclosure by entry is that it takes time: Three years from the date on which a certificate of entry is recorded. In the meantime, Bevilacqua, his lender, the existence of the condominium, the rights of the condo purchasers and the rights of the lenders financing the condo purchasers are all in limbo.

Since Ibanez, foreclosing mortgagees have been more careful to record assignments prior to foreclosure and to record a certificate of entry at the time of foreclosure. For these transactions, either the foreclosure by sale will be effective, or the foreclosure by entry ultimately will cure any defects.

For pre-Ibanez foreclosures, however, properties could already have changed hands several times, and subsequent purchasers and lenders may be affected by a foreclosure defect.

Some have suggested the Legislature should fashion a statutory solution. But that, too, would be difficult. Could such a solution protect the purchasers (such as Bevilacqua and the condo owners) without the political risk of appearing to protect the foreclosing lenders who created the problem? Would such a solution have retroactive effect (protecting all the purchasers of foreclosed properties since the dawn of defective foreclosures) or only prospective effect?

For now, the Bevilacqua decision must stand as a cautionary tale: Purchasers, lenders, and title insurers must always examine the chain of title to any property carefully to confirm that any foreclosure in its history was effective. For any defective foreclosure, a prompt and direct remedy – whether by re-foreclosure, a new deed from the prior owner, or any other solution – is a must.

The sooner the title is cleared, the fewer innocent bystanders will be harmed.

Nancy R. Wilsker is a partner in the Boston office of law firm Hinckley, Allen & Snyder LLP.