Two recent Massachusetts Appeals Court decisions offer both clarity and caution to mortgage lenders seeking to enforce their loan documents. These decisions address the importance of properly drafting prepayment provisions in promissory notes and of exercising diligence in foreclosing upon Massachusetts mortgages.

In Forty Pine, LLC v. Country Bank for Savings, 95 Mass. App. Ct. 1108 (2019), the Massachusetts Appeals Court addressed whether a bank could impose a prepayment premium on a borrower in connection with the acceleration of its loan following the borrower’s default. In 2011, an individual landowner transferred commercial real estate in Ware, Massachusetts to Forty Pine, LLC. At the time of transfer, Country Bank for Savings held a mortgage on the Ware property securing a commercial promissory note. The mortgage contained a provision that required the Bank’s written consent before ownership of the Ware property could be transferred to a person or entity other than the original landowner. The Bank consented to the 2011 transfer to Forty Pine. Later, in 2012, Forty Pine attempted to gain the Bank’s consent for a subsequent transfer of the Ware property. After several months had passed without securing the Bank’s consent, Forty Pine proceeded with the transfer anyway. Several days later, the transferee further transferred the Ware property, again without the Bank’s consent.

In response, the Bank demanded that Forty Pine pay the promissory note in full, including a prepayment premium. The Bank later clarified that it was also accelerating payment of the promissory note because of Forty Pine’s breach of the transfer prohibitions in the mortgage. At trial, the Superior Court ruled that relevant language in the promissory note, requiring “all Prepayments, whether by acceleration or otherwise” to “be applied against the principal payments due,” permitted the imposition of the prepayment premium. On appeal, the Appeals Court considered whether the promissory note allowed the Bank to include a prepayment premium upon acceleration.

According to the Appeals Court, a lender may collect a prepayment premium when repayment of a promissory note is accelerated if the terms of the note expressly provide that such a prepayment premium will apply, regardless of whether early repayment is voluntary or involuntary. The Appeals Court reasoned that the terms of the Bank’s note did not satisfy the requirements of this exception. Noting that neither the provision defining a prepayment premium nor the provision defining a prepayment included any reference to acceleration, and reasoning that the note’s “whether by acceleration or otherwise” language was not sufficiently explicit, the Appeals Court held that the promissory note failed to expressly provide that a prepayment premium was due upon acceleration.

In Property Acquisition Group, LLC v. Ivester, 95 Mass. App. Ct. 170 (2019), the Appeals Court addressed a lender’s duty to exercise good faith and reasonable diligence in the foreclosure of a mortgage. In 2003, the Ivesters purchased residential real estate in Lynnfield, Massachusetts. The Ivesters encumbered the Lynnfield property with a mortgage, which was eventually assigned to Fannie Mae. After the Ivesters stopped making loan payments in 2013, Fannie Mae exercised its rights under the mortgage to sell the property at foreclosure. Fannie Mae exercised all of the statutory requirements for foreclosure by power of sale pursuant to M.G.L. c. 244, §§ 11-17B. At auction, the winning bidder for the Lynnfield property was a representative of Property Acquisition Group, LLC, whose bid prevailed at $355,000 over Fannie Mae’s opening bid price of $329,000. This bid, however, was significantly below the appraised value of $975,000 which the Ivesters offered via expert testimony and which reflected the additional development potential of the Lynnfield property.

Under Massachusetts law, mortgagees exercising a power of sale must exercise good faith and reasonable diligence to protect the interests of the mortgagor. This duty goes beyond mere compliance with the terms of the power of sale contained in a mortgage or with the statutory requirements of M.G.L. c. 244, § 14. To satisfy the duty of good faith and reasonable diligence, mortgagees must use reasonable diligence to sell the foreclosed property for as much as reasonably possible. While the ultimate sale price alone is not determinative of whether a mortgagee has satisfied its duty, failure to take actions that a prudent owner would take in selling its own property, combined with an inadequate sale price, can be detrimental. In Ivester, the Appeals Court noted that Fannie Mae failed to obtain any appraisals, evaluations or expert opinions to determine the value of the Lynnfield property prior to the auction, including its potential value as a development site. Although not specifically addressed in Ivester, other Massachusetts cases have suggested that lenders should take additional steps to market the mortgaged property, beyond mere legal notices required in exercising the statutory power of sale.

The Appeals Court considered Fannie Mae’s actions in connection with the foreclosure sale and found them to be insufficient. While the Appeals Court conceded that an expert appraisal may not always be required to determine fair market value, it held that prior to conducting a foreclosure sale, a mortgagee must in some way ascertain the fair market value of the property in order to satisfy its duty of good faith and reasonable diligence in selling the property. It further advised that mortgagees should consider a property’s development potential as part of its fair market value when reasonable diligence reveals such development potential to exist. The Appeals Court remanded the case to the trial court for a determination of damages and advised that the measure of damages should be the difference between what the Lynnfield property would have been sold for at auction if Fannie Mae had satisfied its duty of good faith and reasonable diligence and what the Lynnfield property actually sold for. The Appeals Court, however, did not invalidate the foreclosure sale.

Taken together, Forty Pine and Ivester remind mortgage lenders that careful drafting and statutory compliance will relieve many, but not all, barriers to enforcement. Loan documents should expressly state that the prepayment premium will be due upon acceleration of the debt. And, while the loan documents may not expressly require any particular actions by a lender in foreclosing upon its mortgage, lenders must nevertheless take affirmative steps to determine the fair market value of the borrower’s property and market the property in a manner reasonably designed to achieve such value.