MILTON R. SANTOS vs. U.S. BANK NATIONAL ASSOCIATION, trustee, & others.
No. 15-P-334
Appellate Court of Massachusetts
July 8, 2016
89 Mass. App. Ct. 687 (2016)
KATZMANN, MILKEY, & BLAKE, JJ.
Suffolk. February 24, 2016. - July 8, 2016.
Discussion of the Federal Home Affordable Modification Program, which provides relief to borrowers who have defaulted or who are likely to default on their home mortgage payments. [688-689]
In a civil action brought in Superior Court by a homeowner mortgagor alleging, inter alia, that the foreclosing defendants failed to provide him with notice of his right to cure a home mortgage default as required under
In a civil action brought in Superior Court by the plaintiff mortgagor alleging that the defendant mortgagee and mortgage servicers had negligently processed his loan modification applications made pursuant to the Home Affordable Modification Program (HAMP), the judge erred in denying the defendants’ motion to dismiss for failure to state a claim, where, as a matter of law, HAMP did not create a duty of care owed by lenders and servicers to borrowers; and where the plaintiff failed to establish an alternate legal basis for the existence of such a duty. [698-702]
CIVIL ACTION commenced in the Superior Court Department on March 28, 2011.
The case was heard by Heidi E. Brieger, J., on a motion for
Michael J. Traft (Robert Graves also present) for the plaintiff.
Sean R. Higgins (Michael Stanley also present) for the defendants.
KATZMANN, J. The plaintiff mortgagor Milton R. Santos1 appeals from orders of a Superior Court judge dismissing his claim that the mortgagee and mortgage servicing defendants2, 3 violated
Background. We recite the facts alleged in Santos‘s complaint as supplemented by the undisputed facts in the summary judgment record and descriptions of HAMP from case law.
1. HAMP.4 “HAMP was part of Congress‘s response to the financial and housing crisis that struck the country in the fall of 2008.” Spaulding v. Wells Fargo Bank, N.A., 714 F.3d 769, 772 (4th Cir. 2013). Acting under authority conferred by the Emergency Economic Stabilization Act of 2008 (EESA),
“HAMP aims to provide relief to borrowers who have defaulted on their mortgage payments or who are likely to default by reducing mortgage payments to sustainable levels. . . . Under HAMP, loan servicers receive incentive payments for each permanent loan modification completed. . . . Mortgage lenders approved by Fannie Mae must participate in HAMP. . . . Lenders servicing mortgages not owned or guaranteed by Fannie Mae or Freddie Mac may elect to participate in HAMP by executing a Servicer Participation Agreement with Fannie Mae in its capacity as financial agent for the United States.” Id. at 176-177. “Loan
“The Secretary negotiated Servicer Participation Agreements (SPAs) with dozens of home loan servicers. . . . Under the terms of the SPAs, servicers agreed to identify homeowners who were in default or would likely soon be in default on their mortgage payments, and to modify the loans of those eligible under the program.” Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 556 (7th Cir. 2012). On August 20, 2009, U.S. Bank executed an SPA with Fannie Mae. “The Department of the Treasury and Fannie Mae have issued a series of directives that provide guidance to mortgage servicers implementing HAMP. Under the guidelines, servicers may identify and solicit borrowers who are in default on their mortgage payments, or soon will be, and evaluate their eligibility to participate in HAMP.” Markle, 844 F. Supp. 2d at 177.
“HAMP urges banks and loan servicers to offer loan modifications to eligible borrowers with the goal of reducing [their] mortgage payments to sustainable levels, without discharging any of the underlying debt.” Young, 717 F.3d at 228 (quotation omitted). Under the guidelines, HAMP-eligible homeowners are offered a trial period plan (TPP) in which the homeowner undertakes to pay modified mortgage payments for a three-month trial period. “The standard-form TPP represents to borrowers that they will obtain a permanent modification at the end of the trial period if they comply with the terms of the agreement.” Markle, 844 F. Supp. 2d at 177. Freddie Mac “is the sole compliance agent responsible for enforcing HAMP.” Spaulding, 714 F.3d at 774.
“Perhaps not surprisingly, given the large stakes for financially stressed homeowners, and in light of widespread media reports of bureaucratic bungling (and worse) on the part of lenders, mortgage servicers, and their myriad agents, HAMP has given rise to a large number of civil claims by mortgagors against financial industry firms.” Ibid.
2. Santos‘s mortgage history. On April 28, 2006, Santos purchased a residential property in Revere (property) for $368,000. He financed the purchase with two mortgage loans that together covered 100 percent of the purchase price.5 After an assignment from the initial lender, Santos‘s first mortgage in the amount of
Santos defaulted on his mortgage in 2008. Between 2009 and 2010, the defendants evaluated Santos several times for a permanent loan modification under HAMP. Despite Santos‘s participation in a three-month HAMP TPP, the defendants ultimately denied all of Santos‘s applications for a permanent loan modification under HAMP. In April, 2010, the defendants offered Santos an in-house modification (that is, not a HAMP modification) that Santos declined.
On July 22, 2010, the defendants foreclosed on the mortgage and purchased the property at the foreclosure sale for $212,415.
3. Procedural history. Subsequent to foreclosure, on March 7, 2011, the defendants initiated a summary process action in the District Court. Santos answered the summary process complaint, asserting, inter alia, that he was in the process of bringing a case in Superior Court against the defendants for various claims, including a violation of
On March 29, 2011, Santos in fact filed a verified complaint in Superior Court alleging that the defendants negligently failed to adhere to HAMP guidelines in processing his loan modification applications (count I) and seeking a declaration that the foreclosure was invalid because the defendants failed to send him notice of his ninety-day right to cure prior to foreclosure in violation of
Meanwhile, the summary process action in District Court proceeded, culminating in a judgment in favor of U.S. Bank for possession on December 1, 2011. Santos‘s appeal from the judgment of possession was dismissed.8
The defendants moved to dismiss the Superior Court action pursuant to
In an order dated January 3, 2013, the Superior Court judge dismissed Santos‘s § 35A claim on the basis of claim preclusion where the claim could have been brought in the summary process action between the identical parties. However, the judge denied the defendants’ motion to dismiss Santos‘s negligence claim, allowing it to proceed based on her conclusions that, under Federal law, Santos is a third-party beneficiary under the SPA between Fannie Mae and U.S. Bank and that, as a third-party beneficiary, Santos could pursue a claim for negligent performance of the duties imposed by the SPA. However, when the case later came before her for summary judgment on the negligence claim, the same judge granted summary judgment in favor of the defendants on the basis that, under the economic loss theory as articulated in FMR Corp. v. Boston Edison Co., 415 Mass. 393, 395 (1993), Santos had not presented evidence of a legally cognizable injury that would support his negligence claim.
Discussion. Although the orders on appeal arise from different stages of the litigation, we review the allowance of motions to dismiss and motions for summary judgment de novo. “We review a grant of summary judgment de novo to determine whether, viewing the evidence in the light most favorable to the nonmoving party, all material facts have been established and the moving party is entitled to a judgment as a matter of law. . . . De novo
Although the judge did not have the benefit of some of the recent opinions of the Supreme Judicial Court in the mortgage context, we are satisfied that the § 35A claim was properly dismissed under the circumstances here, where Santos should have litigated it in the summary process action. Because we agree with the overwhelming weight of authority that borrowers cannot maintain negligence actions against lenders for failure to adhere to HAMP guidelines, we conclude that Santos‘s negligence claim should have been dismissed pursuant to the rule 12(b)(6) motion and was therefore properly, if belatedly, resolved in the defendants’ favor on summary judgment.
1. Right to cure violation. Santos contends that the defendants failed to provide him with notice of his right to cure the mortgage default as required under
a. Res judicata. “The term ‘res judicata’ includes both claim preclusion and issue preclusion. Claim preclusion makes a valid, final judgment conclusive on the parties and their privies, and prevents relitigation of all matters that were or could have been adjudicated in the action. This is based on the idea that the party to be precluded has had the incentive and opportunity to litigate the matter fully in the first lawsuit. The invocation of claim preclusion requires three elements: (1) the identity or privity of the parties to the present and prior actions, (2) identity of the cause of action, and (3) prior final judgment on the merits.” Kobrin v. Board of Registration in Med., 444 Mass. 837, 843 (2005) (quotations and citation omitted). “It is the general rule that when two different actions involving the same parties and the same claim are pending at the same time, the final judgment first rendered is entitled to res judicata effect in the second action, regardless of which was commenced first.” Wright Mach. Corp. v. Seaman-Andwall Corp., 364 Mass. 683, 690 (1974), citing
The elements of claim preclusion were satisfied here. The parties were identical to or in privity with those in the summary process action. The cause of action was also sufficiently identical where Santos framed his § 35A claim as one that would establish that the foreclosure was invalid, which would also have defeated U.S. Bank‘s title in the summary process action. That summary process action proceeded to final judgment. The summary process judgment, which became final when Santos‘s appeal was dismissed, established U.S. Bank‘s superior title and subsumed all related claims, including the question whether any defect in the notice of right to cure undermined U.S. Bank‘s title.
Santos contends that claim preclusion is inapplicable to his § 35A claim because he preserved the issue by explicitly reserving his right to bring an action in Superior Court for violation of § 35A in his summary process answer. However, litigants cannot unilaterally reserve rights to bring claims in later actions. Rather, the preservation of claims in this manner is the exclusive province of the court hearing the action. “Under a generally accepted exception to the res judicata doctrine, a litigant‘s claims are not precluded if the court in an earlier action expressly reserves the litigant‘s right to bring those claims in a later action” (emphasis added). Perroncello v. Donahue, 64 Mass. App. Ct. 564, 570 (2005), S.C., 448 Mass. 199 (2007), quoting from Apparel Art Intl., Inc. v. Amertex Enterprises Ltd., 48 F.3d 576, 586 (1st Cir. 1995), and citing Restatement (Second) of Judgments § 26(1)(b) (1982). See Chadbourne v. Chadbourne, 245 Mass. 383, 384 (1923) (res judicata not applicable to question that “not only was not litigated but was expressly reserved by the court“). Absent a judicial reservation, res judicata principles prohibit parties from proceeding by way of “piecemeal litigation, offering one legal theory to the court while holding others in reserve for future litigation should the first theory prove unsuccessful.” Bagley v. Moxley, 407 Mass. 633, 638 (1990) (claim that was “capable of being raised” and “should have been raised” in prior action is “barred from relitigation” in subsequent action).
Santos‘s opposition to application of res judicata is further weakened by the absence of any plausibly legitimate reason for trying to pursue piecemeal litigation. In his answer to the summary process action, Santos noted that he was “in the process of bringing a court case against [U.S. Bank] alleging wrongful
Santos also did not suggest in his summary process answer, or any other filing, that he doubted the District Court‘s jurisdiction. The elucidation provided by subsequently decided cases does not support Santos‘s claim - never raised in either proceeding below - of jurisdictional confusion. For example, Bank of America, N.A. v. Rosa, 466 Mass. 613 (2013), may have clarified the expanded jurisdiction of the Housing Court, but U.S. Bank brought its summary process action in District Court. Santos has not suggested any basis to doubt the District Court‘s jurisdiction even prior to Rosa. See
Finally, where Santos requested, but did not receive, a stay of the summary process action, it was unreasonable for him to
It is not acceptable for a homeowner mortgagor to seek to force a foreclosing lender to litigate in multiple venues across separate proceedings by unilaterally holding certain claims back from summary process when those claims are within the summary process court‘s jurisdiction and assertedly essential to the determination of superior title. “Res judicata will be employed by the courts to prevent the splitting of a cause of action where the party to be precluded (here [Santos]) had both the opportunity and the incentive to litigate all related matters fully in the original lawsuit.” Mancuso v. Kinchla, 60 Mass. App. Ct. 558, 567 (2004). See id. at 562 (applying Federal res judicata law and concluding that dismissal of State court action after resolution of previously filed Federal action between same parties arising from same nucleus of operative facts was appropriate response to plaintiff‘s “disfavored claim splitting contrary to well-established doctrine and policy“). We therefore conclude that application of res judicata is appropriate here where it will “serve to ‘relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication.‘” Bagley, 407 Mass. at 636, quoting from Anderson v. Phoenix Inv. Counsel of Boston, Inc., 387 Mass. 444, 449 (1982).
Furthermore, the policy considerations underlying res judicata generally are particularly applicable here as they are consistent with “the legislative goal of ‘just, speedy, and inexpensive’ resolution of summary process cases,” which policy “is compromised if the [summary process court] must stay summary process proceedings while litigation on the validity of the foreclosure proceedings continues in another court.” Bank of N.Y. v. Bailey, 460 Mass. 327, 334 (2011). See Federal Natl. Mort. Assn. v. Rego, 474 Mass. 329, 339 (2016) (presentation of all defenses and counterclaims, including those not affecting right to posses-
b. Impact of recent Supreme Judicial Court decisions. Santos also contends that his claim cannot be precluded where he believes that the concurring opinion in U.S. Bank Natl. Assn. v. Schumacher, 467 Mass. 421 (2014) (Schumacher), decided after the relevant events here, supports the approach he pursued below. But Santos‘s reliance on Schumacher is misplaced. In Schumacher, the Supreme Judicial Court held that a borrower‘s “challenge to the notice [issued pursuant to G. L. c. 244, § 35A,] should have been raised in an independent equity action in the Superior Court, not in a postforeclosure summary process action in the Housing Court where the only legal issue for the court is whether the mortgagee obtained title to the property in strict accordance with the power of sale.” Id. at 429. But the court also stated that “the proper avenue by which a homeowner can challenge a mortgagee‘s compliance with
In his concurring opinion in Schumacher, then Justice Gants provided further explication of the implications of the majority‘s opinion. He wrote that “where a defendant in the summary process action claims a violation of the requirements in § 35A to provide timely and adequate written notice of the right to cure the default, the defendant must prove more than a mere violation of § 35A to defeat the eviction because, as the court notes, § 35A is not one of the statutes relating to the foreclosure of mortgages by the exercise of a power of sale. Rather, to defeat the eviction, the defendant must prove that the violation of § 35A rendered the foreclosure so fundamentally unfair that she is entitled to affirmative equitable relief, specifically the setting aside of the foreclosure sale for reasons other than failure to comply strictly with the power of sale provided in the mortgage.” Id. at 432-433
We understand Schumacher, as explicated by Justice Gants, to explain that a homeowner claiming a right to cure notice violation must take affirmative action in Superior Court prior to foreclosure, and certainly prior to finding herself a defendant in a postforeclosure summary process action, if she hopes to halt the foreclosure process by showing something less than a violation of § 35A that would render foreclosure fundamentally unfair. See Bank of N.Y. Mellon Corp. v. Wain, 85 Mass. App. Ct. 498, 501 (2014). “[T]he appropriate avenue for a borrower to raise a challenge to the form of notice given under § 35A is by means of an equitable action, prior to foreclosure, seeking to enjoin the foreclosure” (emphasis added). Haskins v. Deutsche Bank Natl. Trust Co., 86 Mass. App. Ct. 632, 634 (2014), citing Schumacher, 467 Mass. at 422 n.4. See Gold Star Homes, LLC v. Darbouze, 89 Mass. App. Ct. 374, 379-380 (2016). If a homeowner waits until he is being evicted in a postforeclosure summary process action, he will have to show a violation of § 35A that rises to the level of fundamental unfairness.10 Accordingly, the summary process action was indeed the proper venue for Santos to litigate his § 35A claim after foreclosure. There was no need for him to go to Superior Court.
At oral argument, Santos suggested that it would be unfair to hold him to a procedural landscape that had yet to fully take shape when he sought to pursue the § 35A claim in Superior Court. He contends that the summary process court‘s jurisdiction to deal with the equity complaint he sought to pursue in Superior Court was questionable at the time. This is no doubt a challenging area of the law. See Schumacher, 467 Mass. at 431 (Gants, J., concurring) (“[O]ur jurisprudence in this area of law is difficult for even attorneys to understand“). Indeed, Schumacher clarified the role of § 35A claims in summary process proceedings. This
Santos‘s own briefing in Superior Court demonstrates this very point. In his supplemental memorandum in opposition to the defendants’ motion to dismiss, Santos contended that:
“Massachusetts foreclosure law includes the right-to-cure notice in a mortgage‘s power of sale requirements. . . . [B]ecause a foreclosure cannot begin until the right-to-cure notice requirement is complied with,
G. L. c. 244, § 35A is part of the mortgage‘s power of sale requirements. . . .G. L. c. 244, § 35A is part of the ‘statutes relating to the foreclosure of mortgages by the exercise of a power of sale.’ . . . Plaintiff‘s claim is based upon the ‘strict compliance’ standard required for non-judicial foreclosures.”
The established law was already clear that postforeclosure summary process defendants could put the plaintiff‘s title in issue. See Bank of N.Y. v. Bailey, 460 Mass. at 333 (“Challenging a plaintiff‘s entitlement to possession has long been considered a valid defense to a summary process action for eviction where the property was purchased at a foreclosure sale“). See also New England Mut. Life Ins. Co. v. Wing, 191 Mass. 192, 195 (1906); Sheehan Constr. Co. v. Dudley, 299 Mass. 51, 53 (1937); Wayne Inv. Corp. v. Abbott, 350 Mass. 775, 775 (1966). Santos was well aware of the state of the law as he cited several cases standing for this very proposition in his summary process answer, including language in Wayne Inv. Corp., 350 Mass. at 775, that a bank‘s acquisition of title in strict compliance with the power of sale “is subject to challenge” in a summary process action.
Where Santos believed that § 35A was included in the mortgagee‘s power of sale requirements and he understood that strict compliance with the power of sale was a defense to summary process, he faces no unfairness in being held to litigate his § 35A claim in the summary process action.
2. Negligent loan modification processing. Santos contends that the defendants were negligent in their handling of his applications for HAMP loan modification. This claim fails as a matter of law and should have been dismissed pursuant to the defendants’ rule 12(b)(6) motion.
It is now well-established that, as a matter of law, HAMP does not create a duty of care owed by mortgagees to mortgagors. See, e.g., MacKenzie v. Flagstar Bank, FSB, 738 F.3d 486, 495-496 (1st Cir. 2013) (decided subsequent to judge‘s order on motion to dismiss here). The rejection by the United States Court of Appeals for the First Circuit (First Circuit) of HAMP-based negligence claims is consistent with that of the majority of Federal court decisions in Massachusetts (before and after MacKenzie) as well as across the country. The consensus among these courts is that there is no private right of action under HAMP11 and that borrowers are not intended third-party beneficiaries of SPAs or similar contracts between lending banks and Fannie Mae.12 Although the concepts of private rights of action, intended beneficiary status, and duty of care are all somewhat interconnected in the context of HAMP-based negligence claims, the former two are clearly questions of Federal law while the latter is resolved with reference to State common-law principles. Nonetheless, the clear trend of Federal courts applying State law is that neither HAMP nor the relationship between a borrower and her servicer/lender imposes any duty of care owed by lending banks and servicers to borrowers. See, e.g., Wigod, 673 F.3d 547 (applying Illinois law); Spaulding, 714 F.3d 769 (applying Maryland law); Milton v. U.S. Bank Natl. Assn., 508 Fed. Appx. 326 (5th Cir. 2013) (per curiam) (applying Texas law); Rush v. Freddie Mac, 792 F.3d 600 (6th Cir. 2015) (applying Michigan law); Markle, 844 F. Supp. 2d at 185 (declining “the invitation to recognize in the HAMP guidelines a new duty of care, thus far unrecognized by Massachusetts courts“); Brown vs. Bank of America Corp., U.S. Dist. Ct., No. 10-11085 (D. Mass. Mar. 31, 2011) (“[W]hile violation of a regulation such as HAMP may provide evidence of
In declining to dismiss Santos‘s negligence claim pursuant to rule 12(b)(6), the judge concluded that Santos had alleged a plausible claim for negligence based on her determination that Santos was a third-party beneficiary of the SPA between U.S. Bank and Fannie Mae. The First Circuit has reached the opposite conclusion. See MacKenzie, 738 F.3d at 492 (borrowers may not enforce HAMP guidelines by claiming third-party beneficiary status under SPA). In our view, the basis of the judge‘s denial of the motion to dismiss as to the negligence claim is no longer viable. See Markle, 844 F. Supp. 2d at 180 (“[I]t is . . . generally established that federal common law controls the interpretation of contracts entered into pursuant to federal law and to which the United States is a party“); Seidel vs. Wells Fargo Bank, N.A., U.S. Dist. Ct., No. 12-10766-RWZ (D. Mass. July 3, 2012) (“HAMP is a federal program and as such interpretation of the HAMP contract is controlled by federal law“).
Thus, if Santos‘s negligence claim is to survive, he must identify an alternate legal basis for the existence of a duty of care. Santos has failed to establish the existence of such a duty.14
In general, “[t]he relationship between a borrower and lender
There are some exceptions to this general rule. For example, mortgage holders do in fact have a duty to “act in good faith and must use reasonable diligence to protect the interests of the mortgagor” in the context of an extrajudicial foreclosure and exercise of power of sale. Williams v. Resolution GGF Oy, 417 Mass. 377, 382-383 (1994) (quotation omitted). See West Roxbury Co-Op. Bank v. Bowser, 324 Mass. 489, 492 (1949) (“It is familiar law that a mortgagee in exercising a power of sale in a mortgage must act in good faith and must use reasonable diligence to protect the interests of the mortgagor“). Lenders also have a duty of good faith and fair dealing in the performance of their obligations under the mortgage. See Shawmut, 34 Mass. App. Ct. at 25 (“[U]nder Massachusetts law, every contract contains an implied covenant of good faith“).
However, neither the implied covenant nor the duties arising from foreclosure extend to preforeclosure loan modification processing where the mortgage loan documents do not themselves contemplate such modifications.15 See MacKenzie, 738 F.3d at 493 (“[I]n the event of foreclosure, the existence of a duty of good faith is tied directly to the mortgagee‘s contractual right to exercise a power of sale“); Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 385 (2004) (covenant of good faith and fair dealing may not “be invoked to create rights and duties not otherwise provided for in the existing contractual
In the absence of a duty of care owed to him by the defendants, Santos‘s negligence claim fails even if we assume that he could show statutory or regulatory violations in connection with the defendants’ processing of his HAMP modification applications because “statutory or regulatory violations cannot give rise to a negligence claim when there is no independent duty of care between the parties.” MacKenzie, 738 F.3d at 495. HAMP itself does not provide that duty of care. See Larivaux vs. Bank of America, N.A., U.S. Dist. Ct., No. 12-11172-FDS (D. Mass. June 6, 2013) (“Because no duty of care is established by the HAMP guidelines, plaintiff has not set forth a plausible claim for negligence“). In affirming the dismissal of a HAMP-based negligence claim, the First Circuit further explained that “[w]here an independent duty of care exists, the violation of a statute or regulation can provide evidence of a breach of that duty, even if the statute or regulation itself does not create a private right of action. But in the absence of an independent duty, a plaintiff cannot proceed with a negligence claim based solely on a statutory or regulatory violation.” MacKenzie, 738 F.3d at 496.
Because we conclude that Santos‘s negligence claims falter on the element of duty, we need not address the defendants’ additional contentions regarding infirmities on other elements of the claim.17
The order allowing the motion to dismiss is affirmed. The order allowing the defendant‘s motion for summary judgment is also affirmed.
So ordered.
Where Santos has not raised claims alleging a breach of contract with respect to the TPP or a violation of c. 93A, we do not address their hypothetical viability.