BOSTON Top Massachusetts judges grilled attorneys on both sides of a widely watched foreclosure case that could impact thousands of property owners across the state, and beyond.
The Supreme Judicial Court of Massachusetts on Monday wrestled over whether faulty mortgages and land records should be left in place as the basis for further property sales.
Massachusetts' high court already shook the banking sector once this year. On January 7 the court voided the seizure of two homes by Wells Fargo & Co and US Bancorp after they failed to show they held mortgages at the time they were foreclosed. See story: nN07198844
The Massachusetts cases are among the earliest to address the validity of foreclosures done without proper documentation, an issue that temporarily ground home seizures to a halt at several banks last year.
The latest case, Bevilacqua v. Rodriguez, raises similar issues and also involves US Bancorp. The key issue is whether a local developer had clear title to a property before he resold it, and whether banks or a previous owner should be liable for errors in the records.
Banks and mortgage companies have lined up behind the developer, while state officials and housing activists have blasted his claims as examples of a flawed mortgage system.
"This case exemplifies the continuing harms caused by the securitization of mortgage loans and a secondary mortgage market that ignored state law in an effort to sell and resell mortgages and securities backed by mortgages," Massachusetts Attorney General Martha Coakley wrote in a filing.
A lower court had ruled the bank did not hold a valid mortgage assignment when it foreclosed on a property in Haverhill, Massachusetts, a suburb north of Boston.
The bank transferred the title to Francis Bevilacqua, a developer who turned the building into four condominium units. In a bid to establish clear rights to the title, Bevilacqua sued the previous owner who had been foreclosed upon and sought a waiver of any title claims.
But the lower court ruled that Bevilacqua did not hold title to the property, and that a better target would be the companies that gave him the faulty title.
At oral argument on Monday, Justice Ralph Gants said that siding with the banks could give rise to what he called "The Brooklyn Bridge problem," where even partial records would allow people to sell real estate they do not properly own, even the famed bridge in New York City.
But the justices seemed equally cautious in siding against the developer, as it could destabilize other property deals and arrangements.
"Say you have a situation where thousands of people have purchased in good faith from banks who have foreclosed on properties. Those titles...they're all void? That's a situation you are comfortable with?" Justice Robert Cordy asked an attorney from Coakley's office.
The court did not announce a decision from the bench. While any ruling would only apply in Massachusetts, it could influence other judges across the country.
The defendant, original property owner Pablo Rodriguez, has not appeared or filed motions in the proceedings, said a consumer-protection attorney, Paul Collier, who helped write a friend-of-the-court brief taking a stand similar to the state officials.
A ruling against the developer could introduce uncertainty and delays on many real estate projects, the industry has argued.
The case in the Supreme Judicial Court of Massachusetts is Francis J. Bevilacqua III v. Pablo Rodriguez, SJC-10880.
(Reporting by Ross Kerber; Editing by Dan Levine, Dave Zimmerman)