The Massachusetts Supreme Judicial Court (“SJC”) recently issued another decision affecting the foreclosure of mortgages in Massachusetts. In Easthampton Savings Bank v. City of Springfield, No. 11612, slip op. (Mass. Dec. 19, 2014), the SJC struck down two mortgage ordinances adopted by the City of Springfield (“City”) in 2011, holding that both ordinances are preempted by existing state laws.
The ordinances deal with the foreclosure process and were adopted in response to a wave of foreclosures triggered by the economic downturn of 2008. One ordinance establishes a program requiring mandatory mediation between borrowers and lenders of residential properties. The other ordinance requires owners of residential buildings that are vacant or undergoing foreclosure to register with the City and specifies minimum maintenance requirements. The SJC held that both ordinances conflict with and are preempted by state law. The SJC also held that a monetary charge imposed on foreclosing lenders to register property with the City is a lawful fee and not a tax.
The lawsuit was brought in state court by six banks holding mortgages on properties in the City. The banks sought declaratory and injunctive relief from the enforcement of the ordinances. The City removed the case to federal court and the federal district court entered summary judgment for the City. On appeal the First Circuit concluded that the case centered on unresolved questions of state law better suited for resolution by the SJC.
The mediation ordinance, “Facilitating Mediation of Mortgage Foreclosures of Owner Occupied Residential Properties,” is codified in Chapter 7.60 of Title 7 of the Revised City Ordinances (the “Mediation Ordinance”). The Mediation Ordinance establishes a program requiring mandatory mediation between borrowers and lenders regarding residential properties. The mediation involves a conference at which the two parties must make a good faith effort to renegotiate the terms of the mortgage that was the subject of the notice or otherwise to resolve the pending foreclosure. If the parties make a good faith effort but cannot resolve the issue, the lender will obtain a certificate from the City stating that the lender has satisfied its obligations under the Mediation Ordinance and can proceed to foreclose under M.G.L. c. 244 (“Foreclosure Statute”). Failure of a lender to comply with the Mediation Ordinance results in a $300 per day fine, with each day of noncompliance constituting a separate violation.
The SJC held that the Mediation Ordinance is preempted by the Foreclosure Statute. The SJC reasoned that the foreclosure process is a matter of state regulation and not one of local concern. The Mediation Ordinance does not allow a lender to proceed with foreclosure before obtaining a certificate of good faith mediation. This requirement directly impedes the process of foreclosure detailed in the Foreclosure Statute, making it impossible for a lender to comply with both the Foreclosure Statute and the Mediation Ordinance. The SJC therefore held that the Mediation Ordinance is invalid.
The foreclosure ordinance, “Regulating the Maintenance of Vacant and/or Foreclosing Residential Properties and Foreclosures of Owner Occupied Residential Properties,” is codified in Chapter 7.50 of Title 7 of the Revised City Ordinances (the “Foreclosure Ordinance”). The Foreclosure Ordinance requires owners of residential buildings that are vacant or undergoing foreclosure to register with the City. The definition of “owner” under the Foreclosure Ordinance includes “a mortgagee of any such property who has initiated the foreclosure process.” The foreclosure process is initiated by taking possession of a residential property pursuant to the Foreclosure Statute, or by commencing a foreclosure action on a property in court. In addition, under the Foreclosure Ordinance if the mortgage authorizes the lender’s entry on the property to make repairs upon the borrower’s failure to do so, the lender has “initiated” the foreclosure process regardless of whether the borrower has vacated the property.
Under the Foreclosure Ordinance, an owner is responsible for the maintenance of the property. The Foreclosure Ordinance specifies the minimum maintenance requirements and requires the posting of a $10,000 cash bond against the possibility of noncompliance. Upon the satisfaction of the maintenance conditions, the City will issue a certificate of compliance to the owner. Failure to comply with the Foreclosure Ordinance results in a $300 per day fine, with each day of noncompliance constituting a separate violation.
The SJC held that the Foreclosure Ordinance was preempted by M.G.L. c. 21E, the Massachusetts Oil and Hazardous Material Release Prevention Act, and by the State Sanitary Code, M.G.L. c. 111, §§ 127A-127N, and was therefore invalid.
Lastly, the Foreclosure Ordinance imposes a charge on foreclosing lenders to register the property with the City. The banks challenged this charge as an unlawful tax instead of a lawful fee. After reviewing the characteristics that distinguish a fee from a tax, the SJC concluded this charge was a lawful fee, and not a tax. The SJC reasoned that the fee is not collected to raise revenue, like a tax, but rather to compensate the City for regulatory expenses incurred in entering, inspecting and securing non-compliant properties. In addition, a fee is charged for a particular governmental service that benefits the party paying the fee. In this case, the City provides a particularized service to the banks “in the form of maintaining property values of their loan collateral through enforcement of the foreclosure ordinance after foreclosure has commenced.” As a result, the SJC upheld the registration fee under the Foreclosure Ordinance.
Other Massachusetts municipalities have enacted similar ordinances regulating the foreclosure process. In light of the SJC’s holding that the Springfield ordinances are preempted by various state laws, other similar ordinances may also be of questionable validity.