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Nemo Dat Trumps Bona Fide Purchaser

posted by Adam Levitin

The Massachusetts Supreme Judicial Court just handed down a second major mortgage foreclosure ruling, Bevilacqua v. Rodriguez.  The case was an Ibanez follow-up dealing with the rights of a purchaser at an invalid foreclosure sale. I thought this was a no brainer case and said so in an amicus brief co-authored with some of the Credit Slips crew. As the trial court noted, the foreclosure sale purchaser has to lose otherwise I could actually sell you the Brooklyn Bridge or some other property I don't own.

What was cool about this case from an academic perspective was that it pitted two heavyweight, Latin-inscribed principles of commercial law against each other:  the nemo dat quod non habet principle (you can't give what you don't have) and the bona fide purchaser principle (one who takes in good faith for value and without notice of defect will get legal protection against claims). While these are both venerable principles of commercial law, there should have been no question that nemo dat prevails. It is arguably the foundational principle of commercial law:  the most one party can transfer to another are the rights it has.  

We have one critical carve-out to that principle, the holder-in-due-course doctrine, but the holder-in-due-course is much like the bona fide purchaser:  it only applies if you take in good faith and without notice of defect. And if you're buying at a non-judicial foreclosure sale, you've got notice of possible defect (and one might argue about good faith). It's a little like the problem of finding a bargain when shopping--if it's too good of a deal, it could be a fraudulent transfer.  

And so the Massachusetts Supreme Judicial Court held.  If the foreclosure was done improperly, the foreclosing party didn't have title to the property and thus couldn't transfer title to the purchaser. The court didn't dismiss the suit with prejudice, so Mr. Bevilacqua could get the property--if the foreclosure is done right in the first place, but that means starting over again.

A lot of people think that the ruling in Bevilacqua will kill the REO market. I doubt it. It might make it a bit harder to get title insurance, but the title insurers have to keep issuing titles because they need the cash flow. If there's a widespread problem, they're already insolvent, so why not keep on doing business? There's no tort of deepening insolvency (at least in Delaware). 

As with Ibanez, the Supreme Judicial Court merely upheld very sensible principles that shouldn't be controversial:  you need to be the mortgagee to foreclose and you can't sell what you can't deliver. What's kind of astounding is that the banks have had the chutzpah to challenge these basic principles of commercial law, as if centuries of commercial law jurisprudence should suddenly bend to their convenience. This is the same sort of arrogance that engendered the creation of MERS and the Article 9 mortgage transfer process.  

There's a third case awaiting decision from the Massachusetts Supreme Judicial Court, Eaton v. Fannie Mae, which deals with the question of whether a "naked mortgagee"--a mortgagee that isn't the noteholder--can foreclose. I filed an amicus arguing no way no how, but we'll see how the court rules.  

Comments

Kudos to all involved here.

Judge Long should be running for president as he has gone a long way in resolving our crisis with your assistance.

@Richard:

x2

Thanks to Adam Levitin and Katie Porter for submitting amicus briefs.

Interestingly enough Judge Long was appointed to Land Court(which was being expanded at the time from two to three justices Long being the newest) by none other than former MA Gov. Mitt Romney now running for president. It is truely a small world.

"What's kind of astounding is that the banks have had the chutzpah to challenge these basic principles of commercial law, as if centuries of commercial law jurisprudence should suddenly bend to their convenience." That's a bit of an exaggeration.

I know it's fashionable to bash banks these days, but nothing about this case threatened "basic principles of commercial law." Giving the purchaser standing to pursue a try title action may have been a bit silly given that it was clear he didn't have good title to the property, but regardless of the decision in this case, the "nemo dat quod non habet" principle would have remained intact.

I guess the question remains: Who is messing up the real estate market?

Is it those foreclosing without authority or is it those contesting that the foreclosures are illegal (not in the criminal sense, necessarilly)?

IMHO, it is the former. We need a system that assures land titles are proper. It is one of the essential pillars of our society.

I have little sympathy for those who go through foreclosure because they have defaulted on their mortgages. I am more concerned with the integrity of the system.

By the way, I would have liked the headline to have alluded to the movie.

Maybe: Found Nemo devours Home Purchaser.

Does anyone know who regulates title insurance companies? Is there any regulatory mechanism in place to ensure they have the funds to pay claims?

We bought a foreclosure because of the title insurance coverage. If that insurance turns out to be like the rustproofing warranty we bought with our first new car - the company went out of business less than one year later - that would not be good!

I think that Bevilacqua got it right, but I think that nemo dat is a bit overrated as a foundational principle of law. Many persons can give title without having it themselves: holders of negotiable paper, merchants of chattels in which they deal, trustees.

Nobody is going to buy the Brooklyn Bridge in good faith from a guy in a trench coat, and it really doesn't make much difference for small-ticket items.

I'd say that nemo dat only has real bite in two areas of law: real estate and art law. By no coincidence, these are the only things with long chains of title that are not protected by negotiability.

Karen,
Check with your state insurance regulator. Most (all?) title insurers are regulated by states, like other insurers. Most insurers are further protected by "guarantee funds", which are kind of like mini-FDICs, except not as reliable. It all varies by state.

Adam:

what is your view of the applicability of Bevilaqua to California [whose statutory scheme permits the holder of the DOT to foreclose without producing the note] in those cases where the securitization trust never got the notes and DOTS in strict compliance with the PSAs?

It seems to me there will be a better argument to quiet title since otherwise it is possible a seller cannot deliver good title.

I am writing an article exploring the possible traction that Ibanez may have in other non-judicial foreclosure states--California being one. My reading of the law there is that the deed of trust follows the note. Hence, an assignment or transfer of the note carries with it the deed of trust. An attempt to assign the deed of trust without the debt has no effect. The California Court of Appeals has squarely ruled that the deed of trust can only be foreclosed by the owner of the note. Santens v. Los Angeles Fin. Co., 91 Cal. App. 2d 197, 201-02, 204 P.2d 619 (Cal. Ct. App. 1949)(resolving who had a superior interest in the property at issue—a judgment creditor who executed or the owner of the note and deed of trust and deciding in favor of the owner of the note and deed of trust because he acquired his rights before the judgment creditor). See also Cockerell v. Title Ins. & Trust Co., 42 Cal. 2d 284, 291, 267 P.2d 16, 20 (Cal. 1954)(appoving the holding in Santens that the deed of trust can only be foreclosed by the owner of the note). From what I have found, the cases to the contrary are federal court cases that pronounce on this issue without delving into state law or certifying the question to the state courts. My article should be up on SSRN in December.

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