The Massachusetts Supreme Judicial Court recently held that the “statutory power of sale” as defined in M.G.L. ch. 181, § 21 was incorporated by reference in a lender’s form reverse mortgage instrument even though the lender used the term “power of sale” rather than the specific term “statutory power of sale.”
Accordingly, the SJC ruled, the lender was able to utilize the Massachusetts statutory power of sale.
A copy of the opinion is available at: Link to Opinion.
In 2007 and 2008, three elderly borrowers each obtained loans from the same lender secured by reverse mortgages against their respective properties. The lender used a standard form for its reverse mortgage instruments.
In Paragraph 9 of the reverse mortgage instruments, grounds for acceleration of the debt included, among other things, the death of the borrowers or if the mortgaged properties were no longer the borrowers’ principal residence. Paragraph 10 provided that “Lender may enforce the debt only through the sale of the property.”
Paragraph 20 outlined the lender’s remedies in the event of default and provided in relevant part: “If Lender requires immediate payment in full under Paragraph 9, Lender may invoke the power of sale and any other remedies permitted by applicable law . . . At this sale Lender or another person may acquire the Property. This is known as ‘foreclosure and sale.’ In any lawsuit for foreclosure and sale, Lender will have the right to collect all costs allowed by law.”
Thereafter, two of the borrowers died and the other was unable to continue living in her property. Alleging default, the lender brought separate actions in the Land Court against the borrowers seeking a declaratory judgment allowing it to foreclose pursuant to the statutory power of sale (“SPOS”) as set forth in M.G.L. ch. 181, § 21 (“§ 21”). The lender moved for partial judgment on the pleadings in all three actions seeking a judicial declaration that the language in Paragraph 20 of the reverse mortgages incorporates the SPOS as defined in § 21.
The Land Court granted the motions finding that the lender’s reverse mortgages incorporated the SPOS by reference because the SPOS is a “remed[y] permitted by applicable law.” The Land Court then reported the three cases to the Appeals Court pursuant to Mass. R. Civ. P. 64(a) and the Supreme Judicial Court transferred the cases from the Appeals Court on its own motion.
At issue before the Massachusetts SJC was whether the standard form language in the reverse mortgages incorporated the SPOS as set forth in § 21.
As Massachusetts is a non-judicial foreclosure state, the Court first examined the nature of the “power of sale” which allows mortgagees to foreclose without a judicial proceeding if such authority is granted in the mortgage. The Court explained that the power of sale is regulated through a detailed statutory framework and is limited by, among other things, the requirements set forth in § 21, which defines the “statutory power of sale” and provides that it “may be incorporated in any mortgage by reference.”
The SJC noted that there are generally three methods of incorporating the SPOS into a mortgage: (1) by incorporating the exact language defining a statutory power of sale in § 21 into the text of the mortgage; (2) by referring to the definition generally by use of the term “statutory power of sale”; or (3) by including language in the mortgage defining a power substantially similar to that of the statutory power. However, the Court determined that the lender’s reverse mortgages clearly did not incorporate the SPOS by either the first or third method.
Thus, the Court examined whether the reverse mortgages adequately referred to the SPOS in § 21 by allowing the lender to “invoke the power of sale and any other remedies permitted by applicable law,” even though Paragraph 20 did not expressly use the term “statutory power of sale.” To resolve this issue, the Court applied principles of contract interpretation.
First, the SJC determined that the omission of the word “statutory” before the language “Lender may invoke the power of sale” in Paragraph 20 rendered the reverse mortgages ambiguous on their face as to whether they incorporated the SPOS. The Court noted that inclusion of the phrase “and any other remedies permitted by applicable law” did not resolve the ambiguity because it could reasonably be understood to refer to remedies other than the SPOS, and therefore, exclude the SPOS.
The Court also found that the ambiguity was further exacerbated when viewing the reverse mortgage contracts as a whole because other provisions appeared to contemplate judicial foreclosure, rather than foreclosure by power of sale. For example, Paragraph 11 provided that the borrowers’ right to reinstatement “applies even after foreclosure proceedings are instituted” and Paragraph 20 stated that “[i]n a lawsuit for foreclosure and sale, Lender will have the rights to collect all costs allowed by law.”
Moreover, the notice the lender is required to send the borrowers under Paragraph 20 must advise that “Borrower has the right in any lawsuit for foreclosure and sale to argue that Borrower did keep promises and agreements . . . and to present any other defenses that Borrower may have.” The SJC noted that it has found substantially similar language to be misleading with disastrous consequences and such language was inconsistent with the practices of a non-judicial foreclosure state.
Thus, the Court found that the facial ambiguity of the phrase “power of sale and any other remedies permitted by applicable law,” combined with the repeated references to judicial foreclosure, rendered the language in Paragraph 20 susceptible of more than one meaning. Citing Lechmere Tire & Sales Co. v. Burwick, 360 Mass. 718, 720-721, the Court then noted that because the language is ambiguous and the reverse mortgages are standardized contracts of adhesion, the language should be construed against the drafting party (lender) and the interpretation, that an objectively reasonable borrower of reverse mortgages would give the language, should be adopted.
However, the application of the rule required “that the alternative interpretation placed upon the alleged ambiguity . . . be, under all circumstances, a reasonable and practical one.” See Shea v. Bay State Gas Co., 383 Mass. 218, 225 (1981). Thus, even construing the language against the lender, the Court found that the only “reasonable and practical” interpretation of the reverse mortgages was that they incorporated the SPOS.
In so finding, the SJC explained that it was important that the cases involved reverse mortgages where the borrower makes no monthly payments and cannot be held personally liable for the debt, and where the lender’s only recourse upon default is to obtain payment through a foreclosure sale. The Court reasoned that without a power of sale, the lender could only recover the principal of the loan by either (1) foreclosure through entry, a process that would take three years; or (2) foreclosure by action, which was rarely used in Massachusetts. The Court thus concluded that no reasonable borrower in Massachusetts would expect any lender to enter into a reverse mortgage without retaining a power of sale.
As there is no “power of sale” in Massachusetts except the SPOS, the Court found that the power of sale granted in the reverse mortgages must necessarily be a SPOS governed by § 21. To interpret the power of sale in Paragraph 20 any other way would render the provision a nullity and go against a court’s preference for an “interpretation ‘which gives a reasonable, lawful and effective meaning to all manifestations of intention, rather than one which leaves a part of those manifestations unreasonable, unlawful or [of] no effect.’” See Ferri v. Powell-Ferri, 476 Mass. 651, 654-655 (2017).
Thus, the SJC held that the language of Paragraph 20 of the reverse mortgages incorporated the statutory power of sale as defined in M.G.L. ch. 181, § 21.
Accordingly, the Court affirmed the orders of the Land Court granting the lender’s partial motion for judgment on the pleadings in each case.