TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

STATEMENT OF THE CASE

I. The Nature of the Case.

II. The Course of Proceedings.

III. Disposition in the Court Below.

IV. Statement of Facts.

SUMMARY OF THE ARGUMENT

ARGUMENT

I. MOTION TO DISMISS STANDARD.

II. MERS IS CONTRACTUALLY AND STATUTORILY AUTHORIZED TO FORECLOSE WHERE IT IS THE MORTGAGEE AND EXPRESSLY GRANTED THE

iv

1

1

1

3

4

5

7

10

10

POWER OF SALE IN THE MORTGAGE ........... 13

A. The Galiastros Expressly Granted MERS Authority to Foreclose in the Mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . 13

B. Massachusetts Courts Have Consistently Ruled That MERS Can Foreclose. . . . . . . . . . . . . . . . . . . . . . . . . . 14

C. The Majority of Courts Around the Country Agree that MERS Can Foreclose. . . . . . . . . . . . . . . . . . . . . . . . . . 18

D. The Minority Decisions Cited by the Galiastros are Distinguishable and/or Inconsistent with Massachusetts law .................. 20

i

III. MASSACHUSETTS' NON-JUDICIAL FORECLOSURE STATUTE DOES NOT REQUIRE THE FORECLOSING PARTY TO HOLD OR PRODUCE THE NOTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

A. The Galiastros' Reliance on Eaton v. Fed Nat'l Mortgage Assoc. is Misplaced. . . . . . . . . . . . . . . . . . . . . . . . . . 2 7

B. Eaton Does Not Analyze the Statutory Power of Sale And the Alternative Statutory Authorities to Foreclose Provided in G.L. c. 244 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

C. G.L. c. 244 is Unambiguous and Eaton Should Not Have Gone Beyond the Literal Meaning ................ 32

D. The So-Called Common Law Cases Cited in Eaton Pre-Date the Modern Foreclosure Statute and Do Not Support the Supposed Requirement that There Be Unity of the Note and Mortgage ....................... 34

IV. THE GALIASTROS' TORT CLAIMS FAIL BECAUSE THERE HAS NOT BEEN A FORECLOSURE SALE AND, THEREFORE, THEY HAVE NO DAMAGES ......................... 35

V. THE GALIASTROS WAIVED ANY APPEAL OF THE DISMISSAL OF THEIR 93A CLAIMS AGAINST MERS.

VI. THE GALIASTROS' 93A CLAIM FAILS BECAUSE MERS WAS NEVER ENJOINED BY THE FREMONT INJUNCTION AND THE LOAN DOES NOT MEET THE INJUNCTION CRITERIA.

A. The Fremont Injunction.

B. MERS Did Not Violate the Fremont Injunction Because it Was Not

36

37

37

Enjoined. . . . . . . . . . . . . . . . . . . . . . . . . . . 40

ii

C. The Galiastrost Loan Does Not Satisfy Essential Fremont Factors .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

VII. THE SUPERIOR COURT CORRECTLY DISMISSED THE CONSPIRACY CLAIM BECAUSE THERE WAS NO UNDERLYING WRONG ..................... 42

VIII. THE SUPERIOR COURT CORRECTLY DISMISSED THE CONSPIRACY CLAIM BECAUSE THE GALIASTROS FAILED TO PLEAD SUFFICIENT FACTS TO SUPPORT THE CLAIM ............. 42

A. The Galiastros Did Not State a Claim For Coercive Civil Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . 44

B. The Galiastros Cannot State a Claim for Concerted Action Civil Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . 4 6

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

ADDENDUM Add. 1

SUPPLEMENTAL APPENDIX S.A. 1

CERTIFICATE OF COMPLIANCE

iii

Adamson v. Mortgage Elec. Registration SYS·• InC·•

28 MaSS· L. Rptr. ~53 (Mass. super. ct. zonl .................... ~s, 25

CASESS

Aetna cas. sur. co. v. P & B Autobody, 43 F.3d ~546 l~st cir. ~9941 ............... 44, 46

Aliberti v. GMAC Mortgage, LLC, 20~~ U.S. nist. LEXlS 4SB5B (D. MaSS· Apr. zs, zo1l.l ................................. 25

Ashcroft v. Iqbal, ~29 s. ct. ~937 tu.s. zoo9l ................ n. ~2 Barrett Assoc., rnc. v. Aronson. 346 Mass. ~so l~963 l ........................... 35

Bell Atl. CorP· v. TwomblY, sso u.s. 544 (2007) ............................ ~0 Bellistri v. ocwen Loan serv., 2B4 s.w.3d 6~9 (MO. Ct. APP· 2009) ........ 23, 24

BliSS Valley PrOP·• LLC v. E~iopuloS, 2005 MaSS· super. LEXlS 29~ (2005) .... ······ ... 43

Boston BoUS· Auth. v. National conference of Firemen

and oilers, Local 3, 4SB MaSS· ~55 (MaSS· 20~0) ................................... 32

commonwealth v. Fremont, 23 MaSS· L· Rptr. 567 (MaSS· super. Ct. Feb. z6, zoos) ............................. passim

coromon~ealth v. Fremont InV· & Loan. 24 MaSS· L. ReP· ~2 (MaSS· SUP· Ct. March 3 ~, 2 oos l ............................ passim

coromon~ealth v. Fremont Nev. & Loan. 452 Mass. 733 tzooBl ........ ············· .. pass~ crowleY v. Adams, 226 MaSS· SB2 (~9~7) .... ············· .... ·· 34, 35

Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674 (2011) ........................... 10

Depauw v. Liquidation Prop., Inc., 2011 U.S. Dist. LEXIS 14465 (E.D. Mich. Feb 14, 2011) .................................. 18

Dept. of Cornrn. Affairs v. Mass. State Coll. Bldg. Auth., 378 Mass. 418 (1979) .................... 33

E.A. Miller, Inc. v. S. Shore Bank, 4 0 5 Mass . 9 5 ( 19 8 9 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Eaton v. Fed. Natn'l Mortgage Assoc., Docket No. 11-01382 (Suffolk Sup. Ct. June 17, 2011) ............................. passim

Elias v. HorneEQ Serv., 2009 U. S. Dist. LEXIS 14907 (D. Nev. 2009) .... 19

Fazio v. Bank of Am., NA, 27 Mass. L. Rep. 81 (Mass. Super Ct. May 13 , 2 0 1 0 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1

Fleming v. Dane, 3 o 4 Mass . 4 6 ( 19 3 9 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5

Gardner v. Am. Horne Mortgage Serv., Inc., 2010 U.S. Dist. LEXIS 12068 (E.D. Cal. 2010) ... 26

Gerrnon v. BAC Horne Loans, L.P., 2011 U.S. Dist. LEXIS 17084 (S. D. Cal. Feb. 22, 2011) ................................. 18

Gomes v. Countrywide Horne Loans, Inc., 121 Cal. Rptr. 3d 819 (Cal. App. 4th Dist. 2011) ..................... 19

Gomez v. Countrywide Bank, FSB, 2009 U.S. Dist. LEXIS 108292 (D. Nev. 2009) .... 19

Haley v. Elegen Horne Lending LP, 2010 WL 1006664 (D. Nev. Mar. 16, 2010) ........ 36

Haser v. wright, 65 Mass. App. Ct. 903 (2005) ................... 36

v

Horbal v. Cannizzaro, 26 Mass. L. Rptr. 388 (Mass. Super. Ct. 2009) .. 42

Iannacchino v. Ford Motor Co., 451 Mass. 623 (2008) ................ 10-11, 12, 42

In re Huggins, 357 B.R. 180 (Bankr. D . Mass . 2 o o 6 ) . . . . . . . . . . . . . . . . . . . . . 15 , 16 , 1 7 , 2 3

In re Lopez, 446 B.R. 12 (Bankr. D. Mass. February 9, 2 011) .............................. 16

In re Marron, 2011 Bankr. LEXIS 2487 (Bankr. D. Mass. June 2 9 , 2 0 11 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 , 2 7

In re Martinez, 444 B.R. 192 (Bankr. D. Kan. Feb. 11, 2 011) ............................. 18 , 21

In re MERS Litig. (MDL), Docket No. 09-2119-JAT (D. Ariz. Jan. 2 5 , 2 011) ................................. 18

In re Smith, 366 B.R. 149 (Bankr. D. Col. 2007) ............. 19

Jackson v. Mortgage Elec. Registration Sys., Inc., 770 N.W. 2d 487 (Minn. 2009) ............... 19, 22

Jeffrey v. Rosenfeld, 179 Mass. 506 (1901) ........................... 26

Jurgens v. Abraham, 616 F. Supp. 1381 (D. Mass. 1985) ........... 44-45

Kiah v. Aurora Loan Servs., LLC, 2010 U.S. Dist. LEXIS 121252 (D. Mass. Nov. 16, 2010) ................................. 15

Kramer v. Zoning Bd. of Appeals of Somerville, 65 Mass. App. Ct. 186 .......................... 12

Kurker v. Hill, 44 Mass. App. Ct. 184 (1998) ................... 44

vi

Lamson & Co., Inc. v. Abrams, 3 o 5 Mass . 2 3 8 ( 19 4 0 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 7

Landmark Bank v. Kessler, 2 8 9 Kan . 52 8 ( Kan . 2 0 o 9 ) . . . . . . . . . . . . . . . . . . . 2 0 , 2 1

Latham v. Homecomings Fin., LLC, 2009 Mass. Super. LEXIS 406 (Mass. Super. 199) ............................. 41

Linkhart v. U.S. Bank Nat'l Assoc., 2010 U.S. Dist. LEXIS 48281 (S. D. Cal. 2010) .............................. 18

Lyons v. Mortgage Elect. Registration Sys., Inc., 2011 WL 61186 (Mass. Land. Ct. Jan 4 1 2 0 11 ) • • • • • • • • • • • • • • • • • • • • • • • • • • • 15 I 16 I 1 7

McAuslan Nutting, Inc. v. Futurity Thread Co., 2 54 Mass . 216 ( 19 2 6 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5

McGinnis v. GMAC Mortgage Corp., 2010 U.S. Dist. LEXIS 90286 (D. Utah 2010) ..... 19

McKenna v. Wells Fargo Bank, N.A., 2011 U.S. Dist. LEXIS 28719 (D. Mass. Mar. 21, 2 011) ................................. 2 5

Miller v. Skogg, 2011 U.S. Dist. LEXIS 10887 (D. Nev. Feb 3, 2011) ................................... 18

Morgera v. Countrywide Home Loans, Inc., 2010 U.S. Dist. LEXIS 2037 (E.D. Cal. 2010) .... 18

Mortgage Elec. Registration Sys., Inc. v. Azize, 965 So.2d 151 (Fla. Dist. 2d Ct. App. 2007) .... 19

Mortgage Elec. Registration Sys., Inc. v. Saunders, 2 0 1 0 Me . 7 9 ( 2 0 1 0 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

Mortgage Elec. Registration Sys. v. Ventura, 2006 Conn. Super. LEXIS 1154 (Conn. Super. Ct. 2006) .' ..................................... 19

Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177 (N.D. Cal. 2009) .......... 19

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•

Quintero Family Trust v. Onewest Bank, F.S.B., 2010 U.S. Dist. LEXIS 6618 (S.D. Cal. 2010) .... 26

Residential Funding Co, LLC v. Saurman, 2011 Mich. App. LEXIS 719 (Mich. Ct. App. Apr. 21, 2 011) ................................. 21

Santarose v. Auruora Bank FSB, 2010 U.S. Dist. LEXIS 78007 ( s. D. Tex. 2 010) ............................ 18 -19

Sawyer v. Mortgage Elec. Registration Sys., Inc., 2010 WL 996768 (N.D. Tex. Feb. 1, 2010) ........ 18

Silva v. OneWest Bank, FSB, 2010 Mass. Super. LEXIS 106 (Mass. Super. Ct. May 19 , 2 o 1 0 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1

Sullivan v. Brookline, 435 Mass. 353 (2001) ........................... 32

Trent v. Mortgage Elec. Registration Sys., Inc., 288 Fed. Appx. 571 (11th Cir. 2008) ............ 18

U.S. Bank Nat'l Assoc. v. Ibanez, 458 Mass. 637 (2011) ............ 8, 23, 24, 26, 27

Valerio v. U.S. Bank, N.A., 716 F. Supp. 2d 124 (D. Mass. 2010) ............ 25

Wolcott v. Winchester, 81 Mass . 4 61 ( 18 6 o ) . . . . . . . . . . . . . . . . . . . . . . . . 3 4 , 2 5

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STATUTES:

Massachusetts General Laws

c. 93A ............................... 2, 9, 36, 37 c. 106, §3-101 et ~ ......................... 17 c. 183, § 21 ............................... 13, 24 c. 244, § 14 ............................... passim St. 1857, c. 229, § 1 .................. 30, 31, 32

MCL 600.3204 (i) (d) .................................. 21

M.R.A.P. 18 (b) ....................................... 3 Rule 12 (b) (6) ................................. 3, 4, 10

OTHER AUTHORITIES:

Black's Law Dictionary, 8th ed. 2004 ................. 17 Black's Law Dictionary, 9th ed. 2009 ................. 33

ix

STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

I. Whether Mortgage Electronic Registration

Systems, Inc. ("MERS"), which is the record mortgagee

of the Galiastros' mortgage specifically granted the

statutory power of sale, is entitled to foreclose

under G.L. c. 244, § 14?

II. Whether a foreclosing party must possess or

produce the promissory note to validly foreclose?

III. Whether MERS violated an injunction entered

against Fremont Investment and Loan in another case by

sending a notice of foreclose on the Galiastros'

mortgage?

IV. Whether a civil conspiracy claim exists

against a lawyer and client where lawful foreclosure

is pursued, but not completed?

STATEMENT OF THE CASE

I. The Nature of the Case.

The Galiastros admit they defaulted on their

mortgage by failing to make monthly payments. Even

though they admit the default, they admit that MERS is

the record mortgagee (acting as nominee for the lender

and lender's successors and assigns, and they admit

that they expressly granted MERS the statutory power

1

of sale, the Galiastros claim that MERS is not

entitled to foreclose because it is not the holder of

their promissory note.

The Galiastros also contend that MERS conspired

with its foreclosure counsel to fraudulently avoid a

2008 preliminary injunction that enjoined Fremont

Investment & Loan ("Fremont") from foreclosing on

certain adjustable rate loans that it originated and

still holds. 1 While Fremont did originate the

Galiastros' loan, Fremont sold it prior to the

injunction. So, it was not subject to the injunction.

Furthermore, the Galiastros' loan does not contain the

four characteristics that the Court found

presumptively unfair.

The Galiastros appeal the dismissal of their

five-count complaint in which they alleged: 1) that

Defendants lack standing and authority to foreclose;

2) that Defendants violated G.L. c. 93A based on the

Fremont injunction; 3) civil conspiracy; 4) fraud; and

5) injunctive relief. All five claims were based on

the following two legal theories: (1) MERS allegedly

lacks standing and authority to foreclose; and (2)

1 Commonwealth v. Fremont Inv. & Loan, 24 Mass. L. Rep. 12, *17 (Mass. Sup. Ct. March 31, 2008).

2

MERS' initiation of foreclosure violated the Fremont

injunction. The Superior Court correctly dismissed

the Galiastros' Complaint because it did not

demonstrate a plausible entitlement to relief.

II. The Course of Proceedings.

On March 29, 2010, the Galiastros filed a

Complaint with a motion for preliminary injunction to

enjoin the scheduled foreclosure of their home. See

Appendix, Page 1 (App. 1) . 2 On July 8, 2010, the

Worcester Superior Court (Moriarty II, J.) denied the

Galiastros' injunction motion noting, "[u]pon

consideration of the briefs and arguments of counsel,

I am not persuaded that the plaintiffs enjoy a

likelihood of success on the merits and accordingly

the motion is DENIED." MERS then moved to dismiss the

Galiastros' Complaint under Rule 12(b) (6) of the

Massachusetts Rules of Civil Procedure. Co-Defendant

Harmon Law Offices, P.C. ("Harmon") also moved to

dismiss. After a consolidated hearing on the motions

2 The Galiastros omitted documents related to the injunction from the Appendix despite disclosing, under M.R.A.P. l£(b), that they would include "[a]ll pleadings contained on the docket in this matter" in the joint Appendix. While these documents are in the record, the excluded orders are provided in MERS' Supplemental Appendix for the Court's reference.

3

1 to dismiss, the Worcester Superior Court (McCann, J.)

granted MERS' motion to dismiss for "[the] reasons set

forth in defendant's Memorandum and as to all counts."

See Nov. 3, 2010 Order (S.A. 1). The Court also

granted Harmon's motion to dismiss. (App. 172). On

November 24, 2009, the Galiastros filed a Notice of

Appeal. (App. 173). On January 19, 2011, the Court

entered a Judgment on the Motion to Dismiss. (App.

175). On or around February 3, 2011, the Galiastros

filed a second notice of appeal. (App. 177).

III. Disposition in the Court Below.

The Worcester Superior Court granted MERS' motion

to dismiss under Rule 12(b) (6) without a written

memorandum for the "reasons set forth in the

defendant's memorandum and as to all counts." See

Order dated Nov. 3, 2010. (S .A. 1) . 3 On January 20,

2011, the Worcester Superior Court entered Judgment on

the motion to dismiss for both defendants "for the

reasons set forth in the Defendant's memorandum."

(App. 175).

3 Plaintiff's omitted this order from their Appendix.

4

I

I

IV. Statement of Facts.

As they must, MERS accepts the Galiastros' well-

pled factual allegations as true for the purposes of

the appeal of the motion to dismiss. 4 On July 26,

2006, the Galiastros obtained a home mortgage loan

from Fremont in the principal amount of $436,000 {the

"Loan") by executing a promissory note in favor of

Fremont {the "Note"). {App. 64). As security for the

Loan, the Galiastros granted a mortgage on real

property located at 23 Christina Road, Milford,

Massachusetts {the "Mortgage") to MERS. {App. 45) . 5

Under the terms of the mortgage:

{App.

"MERS" is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender's successor's and assigns. MERS is the mortgagee under this security instrument.

45). MERS' rights and authority are provided in

the Mortgage:

4 Since the Galiastros filed a preliminary injunction motion with their verified complaint, the exhibits attached to the injunction motion are treated as part of the Complaint. They are referenced in the Complaint, were relied upon by both parties and the Court below, and their authenticity is not disputed.

5 Additional copies of the note and mortgage are provided in the Supplemental Appendix for the Court's convenience as the copies in the Appendix are difficult to read.

5

'l

TRANSFER OF RIGHTS IN THE PROPERTY

The Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions, and modifications of the Note; and (ii) the performance of Borrower's covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS, with power of sale, [the following described Property] .

(App. 47) (emphasis added). The Mortgage continues:

_Borrower understands and agrees that MERS holds only legal title to the interests granted by the Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property ...

(App. 47) (emphasis added).

The principal amount of the Loan was $436,000.

(App. 64). It was a thirty-year fixed rate loan with

an 8.1% interest rate. The initial monthly payments

of $3,064.33 began on September 1, 2006. (App. 64) .

Shortly after origination, Fremont transferred its

interest in the Loan to a mortgage securitized trust.

(Compl. ~~ 6-8) (App. 2). MERS remained the record

mortgagee.

6

The Galiastros defaulted on their monthly

mortgage payments and MERS filed a Servicemember's

Action in the Land Court to begin foreclosure. MERS

gave the statutory notices required under G.L. c. 244,

§ 14. However, the foreclosure sale was not

completed. The Galiastros allege that MERS' attempt

to foreclose violated the Fremont injunction and that

by beginning, but not completing, foreclosure, it has

committed fraud and engaged in a conspiracy with its

legal counsel.

SUMMARY OF THE ARGUMENT

The Superior Court correctly dismissed the

Galiastros' Complaint because the Galiastros did not

plead facts demonstrating a plausible entitlement to

relief on any of their claims. The Galiastros'

contention that they were wrongfully denied discovery

is misplaced because they are not entitled to

discovery where they did not state a claim. (pp. 10-

12)

The Galiastros' contention that MERS lacks

authority to foreclose is belied by Massachusetts law

and the mortgage contract itself. MERS is authorized

to foreclose under the letter of the non-judicial

foreclosure statute, G.L. c. 244, § 14, and the

7

express terms of the mortgage. Under the Mortgage,

the Galiastros made MERS the mortgagee and expressly

granted MERS the power of sale. G.L. c. 244, § 14

expressly authorizes the mortgagee or the person with

the power of sale the right to foreclose. Since MERS

is both the mortgagee and has the power of sale, it is

authorized to foreclose. The majority of state and

federal decisions in Massachusetts and throughout the

country support MERS' authority to foreclose. {pp. 13-

24)

The Galiastros' argument that a foreclosing party

must hold the underlying promissory note at the time

of foreclosure is misplaced. The Massachusetts

foreclosure statute does not expressly, or even

impliedly, mention any note holder requirement.

Massachusetts state and federal courts, with one

recent exception, have repeatedly ruled that

Massachusetts does not require the foreclosing party

to be the note holder. In addition, the SJC's recent

decision in u.s. Bank Nat'l Assoc. v. Ibanez6 belies

the Galiastros' position because the SJC clearly

stated that the focus is on whether the person

6 458 Mass. 637 {2011).

8

foreclosing is the mortgagee. The note has no impact

on the validity of a foreclosure. (pp. 24-35)

MERS did not, and could not, have violated the

injunction entered in Commonwealth v. Fremont Inv. &

Loan7 because MERS was not enjoined. It was not even a

party in that case. While the Galiastros' loan was

originated by Fremont, it is clear from the face of

their Complaint that Fremont had no interest in the

loan at the time of the foreclosure and is not alleged

to have taken any action. Since only Fremont, and not

MERS, was enjoined, MERS could not have violated the

injunction. In addition, the Galiastros' loan did not

even satisfy the four required factors that Fremont

found "presumptively unfair." Therefore, the

injunction, even if it applied to MERS, would not have

prevented foreclosure. (pp. 37-41)

The Superior Court correctly dismissed the

Galiastros' remaining claims for fraud, civil

conspiracy, and G.L. c. 93A because they are all

premised on the flawed underlying theories discussed

above. In addition, the Galiastros have waived their

G.L. c. 93A claim because they did not argue (or even

7 23 Mass. L. Rptr. 567 (Mass. Super. Ct. Feb. 26, 2008).

9

mention) it in their brief. The fraud and conspiracy

claims both fail because the Galiastros have not

alleged, or sustained any damages, where a foreclosure

did not occur. Those claims also fail because the

underlying tort claims, discussed above, fail.

Finally, each of the tort claims fail because the

Galiastros have not alleged sufficient facts to

survive 12(b) (6) scrutiny under Iannacchino v. Ford

Motor Co. 8 Instead, the Galiastros rely on unsupported

conclusions and bare bone recitations of the elements

- precisely the type of allegations that fall short of

pleading a plausible entitlement to relief. (pp. 36,

42-46)

ARGUMENT

I. MOTION TO DISMISS STANDARD.

The allowance of a Rule 12(b) (6) motion to

dismiss is reviewed de novo. Curtis v. Herb Chambers

I-95, Inc., 458 Mass. 674, 676 (2011). The

Massachusetts Supreme Judicial Court heightened Rule 8

pleading requirements by adopting the federal Rule

12(b) (6) motion to dismiss standard articulated by the

United States Supreme Court in Bell Atl. Corp. v.

Twombly, 550 U.S. 544 (2007). See Iannacchino v. Ford

8 4 51 Mass . 6 2 3 , 6 3 5 - 3 6 ( 2 0 0 8 ) .

10

Motor Co., 451 Mass. 623, 635-36 (2008). Now, a

plaintiff must provide a sufficient factual basis for

her claims, and cannot survive on the mere hope that

discovery might provide such a basis. Id.

'While a complaint attacked by a ... motion to dismiss does need not detailed factual allegations _a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief requires more than mere labels and conclusions ... Factual allegations must be enough to raise a right to relief above the speculative level _ [based] on the assumption that all the allegations in the complaint are true (even if doubtful in fact

What is required at the pleading stage are factual 'allegations plausible suggesting (not merely consistent with) ' an entitlement to relief, in order to 'reflect[ ] the threshold requirement of [Fed.R.Civ.P.] 8(a) (2) that the 'plain statement' possess enough heft to 'sho[w] that the pleader is entitled to relief.'

Id. "The plausibility standard is not akin to a

'probability requirement,' but it asks for more than a

sheer possibility that a defendant has acted

unlawfully. Where a complaint pleads facts that are

'merely consistent with' a defendant's liability, it

stops short of the line between possibility and

plausibility of 'entitlement to relief.'" Ashcroft v.

Iqbal, 129 S. Ct. 1937, 1953 (U.S. 2009). Rule 8 now

has teeth, and the Galiastros' have not satisfied

their burden.

11

The Galiastros contend that their Complaint

should not have been dismissed because they did not

have a chance to conduct discovery. The Galiastros'

argument misses the mark. A party only "unlocks" the

door to discovery by showing a plausible entitlement

to relief. See Iqbal, 129 S. Ct. at 1950 ("Rule 8 _

does not unlock the doors of discovery for a plaintiff

armed with nothing more than conclusions"). This had

been the rule in Massachusetts even before

Ianacchinno. See E.A. Miller, Inc. v. S. Shore Bank,

4 OS Mass. 95, 100 ( 1989) (holding litigants must make

a threshold showing that there is factual and legal

basis to support their claim before being entitled to

discovery); Kramer v. Zoning Bd. of Appeals of

Somerville, 65 Mass. App. Ct. 186, 196 at n.10 (2005)

(validating trial court decision to not allow

discovery before motion to dismiss) . Since the

Galiastros were unable to clear the modest hurdle of

pleading a plausible entitlement to relief, they were

not entitled to discovery.

12

II. MERS IS CONTRACTUALLY AND STATUTORILY AUTHORIZED TO FORECLOSE WHERE IT IS THE MORTGAGEE AND EXPRESSLY GRANTED THE POWER OF SALE IN THE MORTGAGE.

MERS is contractually authorized to foreclose

because it is the "mortgagee" and the Galiastros

expressly granted MERS the statutory power of sale.

MERS is statutorily authorized to foreclose under

Massachusetts' non-judicial foreclosure statute, G.L.

c. 244, § 14.

A. The Galiastros Expressly Granted MERS Authority to Foreclose in the Mortgage.

The Galiastros executed and granted a Mortgage to

MERS. The Mortgage designates MERS as the "mortgagee

under [the] Security Instrument." See Mortgage, Page

1 (App. 45) . In that capacity, MERS acts " ... solely as

nominee for Lender and Lender's successor's and

assigns." Id. (App. 45). In addition to making MERS

the mortgagee, the Galiastros expressly granted MERS

the statutory "power of sale" and the "right to

foreclose and sell the property." See Mortgage, Page

3 (App. 47). The statutory power of sale is set forth

in G.L. c. 183, § 21 and is incorporated by reference

into the Mortgage. It authorizes the mortgagee "or

his executors, administrators, successors, or assigns ...

13

to sell the mortgaged premises" after default.

Consistent therewith, Massachusetts' non-judicial

foreclosure statute, G.L. c. 244, § 14, authorizes the

"mortgagee or ... a person authorized by the power of

sale~" to foreclose. Section 14 provides:

The mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, or the attorney duly authorized by a writing under seal, or the legal guardian or conservator of such mortgagee or person acting in the name of such mortgagee or person, may, upon breach of condition and without action, do all the acts authorized or required by the power ...

G.L. c. 244, § 14. {emphasis added). Since the

foreclosure statute permits the "mortgagee" and "a

person authorized by the power of sale" to

foreclosure, and MERS is both the mortgagee and has

the power of sale, MERS is authorized to foreclose in

Massachusetts.

B. Massachusetts Courts Have Consistently Ruled That MERS Can Foreclose.

Since the power to foreclose is statutory and

state-specific, decisions analyzing Massachusetts'

non-judicial foreclosure statute, G.L. c. 244, § 14,

are more persuasive then decisions interpreting other

state laws. The Massachusetts Land Court, the

Massachusetts Superior Court, and Massachusetts

14

federal courts have all ruled that MERS has standing,

and is authorized, to foreclose. See ~' Adamson v.

Mortgage Elec. Registration Sys., Inc., 28 Mass. L.

Rptr. 153, *3 (Mass. Super. Ct. 2011) (denying

preliminary injunction noting "MERS has authority as

mortgagee under the Mortgage to foreclose on the

Property and the Mortgage specifically grants MERS the

power to foreclose"); Lyons v. Mortgage Elect.

Registration Sys., Inc., 2011 WL 61186 (Mass. Land.

Ct. Jan 4, 2011) (ruling MERS had authority, as

mortgagee with the express power of sale, to foreclose

under Massachusetts law); In re Huggins, 357 B.R. 180,

182 (Bankr. D. Mass. 2006) (granting relief from stay

to foreclosure after analyzing MERS' authority in

mortgage under Massachusetts foreclosure statute) .

Massachusetts courts have also validated MERS

authority to assign mortgages. See In re Marron, 2011

Bankr. LEXIS 2487 (Bankr. D. Mass. June 29, 2011) ("In

Massachusetts ~ courts have generally held that MERS

may both foreclose and assign mortgages held in its

name."); Kiah v. Aurora Loan Servs., LLC, 2010 U.S.

Dist. LEXIS 121252 (D. Mass. Nov. 16, 2010)

(validating MERS assignment noting "MERS had the power

to act as the agent of any valid note holder under the

15

terms of the mortgage documents."); In re Lopez, 446

B.R. 12, 19-20 (Bankr. D. Mass. February 9, 2011)

(allowing motion for relief from stay, finding MERS,

as nominee for lender and lender's successor's and

assigns, has authority to assign mortgage).

In Lyons, plaintiff obtained a mortgage loan and

executed a promissory note in favor of the lender.

Like the Galiastros, Lyons granted a mortgage naming

MERS as the mortgagee "as nominee for the Lender and

the Lender's successor and assigns." Id. at 2.

Lyons' also granted MERS the statutory "power of

sale." Id. Lyons filed a lawsuit challenging MERS'

power and authority to foreclose. On the defendant's

motion to dismiss, the Land Court ruled that there was

"no viable basis for Plaintiffs' claim that the

foreclosure sale of the Property should be invalidated

because MERS foreclosed on the property as nominee for

[lender]." Id. The Court specifically noted that

"the mortgage itself specifically names MERS (as

nominee for the Lender) as the 'mortgagee,' and

expressly grants the power of sale to MERS as

nominee." Id.

Likewise, in In re Huggins, 357 B.R. 180, 182

(Bankr. D. Mass. 2006), the Bankruptcy Court for the

16

District of Massachusetts considered a virtually

identical mortgage provision. There, MERS brought a

motion for relief from the automatic stay to foreclose

on the debtor's residence. Id. at 183. The mortgage

contained the provision that "MERS is a separate

corporation that is acting solely as nominee for [the

lender] and [the lender's] successors and assigns.

MERS is the mortgagee under this Security Instrument.n

Id. The debtor argued that MERS lacked standing to

foreclose because it did not have a property or

ownership interest in the rights of the lender, and as

such, was not the real party in interest. Id. In

holding that MERS had standing, the court explained

that "a nominee is generally understood as a person

designated to act in place of another.n Id. (citing

Black's Law Dictionary (8th ed. 2004)). Since MERS was

acting as a nominee and was expressly granted the

"power of salen including the power to "do all acts

authorized by the powern the Court found that it could

pursue foreclosure. Id.

The Galiastros' mortgage is substantively the

same as the mortgages in Lyons or In re Huggins.

Since MERS is the mortgagee and has the power of sale,

it is authorized to foreclose under Massachusetts law.

17

C. The Majority of Courts Around the Country Agree that MERS Can Foreclose.

Since MERS' authority to foreclose derives mostly

from state statute, decisions from Massachusetts

courts based on Massachusetts laws are more persuasive

than other states' decisions. But, the overwhelming

majority of courts in other states have also ruled

that MERS has the legal right and standing to

foreclose. See ~~ Trent v. Mortgage Elec.

Registration Sys., Inc., 288 Fed. Appx. 571, *1 (11th

Cir. 2008); In re MERS Litig. (MDL), Docket No. 09-

2119-JAT (D. Ariz. Jan. 25, 2011); In re Martinez, 444

B.R. 192, (Bankr. D. Kan. Feb. 11, 2011), motion to

reconsider denied; Germon v. BAC Home Loans, L.P.,

2011 U.S. Dist. LEXIS 17084, *5-6 (S. D. Cal. Feb. 22,

2011); Depauw v. Liquidation Prop., Inc., 2011 U.S.

Dist. LEXIS 14465, *2-3 (E.D. Mich. Feb 14, 2011);

Miller v. Skogg, 2011 U.S. Dist. LEXIS 10887, *9 (D.

Nev. Feb 3, 2011); Linkhart v. U.S. Bank Nat'l Assoc.,

2010 U.S. Dist. LEXIS 48281, *6-8 (S. D. Cal. 2010);

Morgera v. Countrywide Home Loans, Inc., 2010 U.S.

Dist. LEXIS 2037, *21-22 (E.D. Cal. 2010); Sawyer v.

Mortgage Elec. Registration Sys., Inc., 2010 WL

996768, at *3 (N.D. Tex. Feb. 1, 2010); Santarose v.

18

i l

Auruora Bank FSB, 2010 U.S. Dist. LEXIS 78007, *12

(S.D. Tex. 2010); McGinnis v. GMAC Mortgage Corp.,

2010 U.S. Dist. LEXIS 90286, *7-8 (D. Utah 2010);

Pantoja v. Countrywide Horne Loans, Inc., 640 F. Supp.

2d 1177, 1189 (N.D. Cal. 2009); Elias v. HorneEQ Serv.,

2009 U. S. Dist. LEXIS 14907 at *1 (D. Nev. 2009);

Gomez v. Countrywide Bank, FSB, 2009 U.S. Dist. LEXIS

108292, *7-8 (D. Nev. 2009); In re Smith, 366 B.R.

149, 151 (Bankr. D. Col. 2007); Gomes v. Countrywide

Horne Loans, Inc., 121 Cal. Rptr. 3d 819 (Cal. App. 4th

Dist. 2011); Mortgage Elec. Registration Sys., Inc. v.

Azize, 965 So.2d 151, 153 (Fla. Dist. 2d Ct. App.

2007); Jackson v. Mortgage Elec. Registration Sys.,

Inc., 770 N.W. 2d 487, 503 (Minn. 2009); Mortgage

Elec. Registration Sys. v. Ventura, 2006 Conn. Super.

LEXIS 1154, *3-4 (Conn. Super. Ct. 2006). While there

are a few minority cases that rule that MERS cannot

foreclose, those cases are distinguishable because

they are based on different state statutes, involve

different facts, or are simply incorrectly decided.

19

D. The Minority Decisions Cited by the Galiastros are Distinguishable and/or Inconsistent with Massachusetts law.

Notwithstanding the wealth of state and federal

case law validating MERS' authority and standing to

foreclose, the Galiastros cite to minority decisions

questioning MERS' authority. See App. Brief P. 31.

These cases are either distinguishable, inconsistent

with Massachusetts law, or both.

The Galiastros cite to the Kansas Supreme Court

decision in Landmark Bank v. Kessler to support their

argument that MERS lacks standing to foreclose. 289

Kan. 528 (Kan. 2009). Kessler, however, was not a

challenge to MERS' authority to foreclose. Kessler

merely decided whether MERS was a "contingently

necessary party" entitled to set aside a default

entered in a mortgage foreclosure action where it was

the nominee for a second priority lender and had not

been given notice of a judicial foreclosure action.

Id. The Kansas Supreme Court specifically stated that

it was not deciding whether MERS was entitled to be a

party to the initial foreclosure action. Id. at 542.

since MERS was acting as a nominee and the record

lender was given actual notice of the suit, the court

refused to treat MERS as a contingently necessary

20

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l

l

party and refused to remove the default. To be

certain that the holding of Kessler did not go

further, the Kansas Bankruptcy Court, which would be

bound to follow Kansas' highest court, subsequently

found that MERS has standing to foreclose and

specifically discussed why Kessler did not compel a

different result. See In re Martinez, 444 B.R. at

204-05 (distinguishing Kessler) .

The Galiastros also cite to a recent decision by

the Court of Appeals of Michigan in Residential

Funding Co, LLC v. Saurman, 2011 Mich. App. LEXIS 719

(Mich. Ct. App. Apr. 21, 2011). Saurman is a prime

example of why the specific state statute governs

MERS' authority. Michigan's foreclosure statute,

unlike Massachusetts' statute, expressly requires that

the foreclosing party is "the owner of the

indebtedness ... " Id. at *7-8 (citing MCL

600.3204(1) (d)). Since MERS was admittedly not the

"owner of the indebtedness," the court ruled that MERS

could not foreclose under Michigan law. 9 The court,

however, contrasted Michigan's foreclosure statute

9 Defendants do not concede that Saurman was rightly decided. The dissenting opinion of Justice Kurtis T. Wilder reflects a more rational, well-reasoned analysis.

21

with Minnesota's foreclosure statute because Minnesota

had decided the same issue in MERS' favor. Id. (citing

Jackson v. Mortgage Elec. Registration Sys., Inc., 770

N.W.2d 487 (Minn. 2009). The Court noted that

Minnesota's foreclosure statute specifically permitted

foreclosures by a nominee "in the exact position of

MERS." Id. (noting "the Minnesota statute ~ revolves

around the mortgage, unlike MCL 600.3204(1) (d), which

uses the term indebtedness, which ~ is a reference to

the note, not the mortgage"). The Massachusetts

statute is more akin to the Minnesota statute (and

different from the Michigan statute) because it

focuses on the mortgage, not the note, and permits

agents and others to foreclose.

The Galiastros also rely on the Supreme Judicial

Court of Maine's decision in Mortgage Elec.

Registration Sys., Inc. v. Saunders, 2010 Me. 79

(2010) holding that MERS lacks standing to judicially

foreclose. In holding that MERS could not foreclose,

the Maine Supreme Court distinguished its judicial

foreclosure scheme from the non-judicial foreclosure

scheme of other states (like Massachusetts) noting

that "in other jurisdictions utilizing non-judicial

foreclosure, MERS has been able to institute

22

foreclosure proceedings based on its designation in

the mortgage as the 'mortgagee of record.'" The court

specifically cites the Massachusetts bankruptcy court

decision In re Huggins as an example of a non-judicial

foreclosure state where MERS may foreclose.

Finally, the Galiastros cite Bellistri v. Ocwen

Loan Serv., 284 S.W.3d 619 {Mo. Ct. App. 2009 ) . In

Bellistri, the Missouri Court of Appeals denied

summary judgment to a mortgagee in a quiet title

action because the assignee of the mortgage was not

the assignee of the note. In reaching its decision,

the court relied on two rules both of which do not

apply in Massachusetts. First, Missouri follows the

rule that the note follows the mortgage. Id. at 623

{"when the holder of the promissory note assigns or

transfers the note, the deed of trust is also

transferred.") Massachusetts does not. See Ibanez,

458 Mass. at 652 ( ... "the assignment of the note does

not carry with it the assignment of the mortgage.")

Second, in Missouri, the note and mortgage are

"inseparable." Id. at 623. In Massachusetts, they

are separable. See Ibanez, at 652-53 {commenting the

holder of the mortgage "holds the mortgage in trust

for the purchaser of the note"). Thus, the facts of

23

Bellistri would yield a different outcome in

Massachusetts.

III. MASSACHUSETTS' NON-JUDICIAL FORECLOSURE STATUTE DOES NOT REQUIRE THE FORECLOSING PARTY TO HOLD OR PRODUCE THE NOTE.

Massachusetts is a non-judicial foreclosure

state. See U.S. Bank Nat'l Assoc. v. Ibanez, 458

Mass. 637, 645-46 (2011). A mortgage holder can

foreclose without judicial action by exercise of the

statutory power of sale set forth in G.L. c. 183, § 21

consistent with the procedural requirements of G.L.

c. 244, § 14. Id. Because of the substantial power

inherent in Massachusetts' non-judicial foreclosure

scheme, the law requires strict compliance with the

letter of the non-judicial foreclosure statute. Id.

at 646. Nowhere in either the statutory power of

sale, G.L. c. 183, § 21, or foreclosure under the

power of sale, G.L. c. 244, § 14, is there any

requirement that the foreclosing party hold the note.

Since Massachusetts requires strict compliance with

the letter of the foreclosure statute, and there is

nothing in the letter of the statute requiring the

note, there can be no requirement that a foreclosing

mortgagee hold the note.

24

Massachusetts state and federal courts, until one

recent decision, 10 had been in complete agreement that

Massachusetts does not require the foreclosing party

to hold or produce the note. See Adamson, 28 Mass. L.

Rptr. at *4 ("As mortgagee, MERS was not required to

hold the Note at the time of foreclosure sale.")

Aliberti v. GMAC Mortgage, LLC, 2011 U.S. Dist. LEXIS

45858 (D. Mass. Apr. 28, 2011) ("Plaintiffs

incorrectly assert that the mortgagee must also hold

the note in order to foreclose."); Valerio v. U.S.

Bank, N.A., 716 F. Supp. 2d 124, 128 (D. Mass. 2010)

(noting statute governing statutory power of sale is

addressed to mortgagees rather than note holders);

McKenna v. Wells Fargo Bank, N.A., 2011 U.S. Dist.

LEXIS 28719, *7-8 (D. Mass. Mar. 21, 2011) ("Under

Massachusetts law, the current record mortgagee and

holder of the mortgage is the proper party to

foreclose upon a property. The Massachusetts statute

10 Eaton v. Fed. Natn'l Mortgage Assoc., Docket No. 11-01382 (Suffolk Sup. Ct. June 17, 2011), petition for interlocutory appeal pending, (discussed below at Part III(A-D).

25

'I

governing foreclosures makes no mention of note

holders.") . 11

Any question about who is authorized to foreclose

appeared to be finally decided by the SJC in Ibanez.

Ibanez, 458 Mass. at 651. In Ibanez, the SJC held that

only a valid mortgage holder can foreclose a mortgage

under Massachusetts law. Id. Ibanez rejected the idea

that being the note holder had any bearing on the

right to foreclose. Ibanez, at 652-653 (noting

Massachusetts, unlike other states, does not follow

the mortgage follows the note rule) . This is because

the note and the mortgage are separate instruments

each affording a distinct remedy. See Jeffrey v.

Rosenfeld, 179 Mass. 506, 509 (1901) ("[t]he mortgage

is a separate instrument from the note. At law and in

equity the holder can enforce his remedy upon the

11 California, which also has non-judicial foreclosure, has also rejected claims that foreclosing entities must hold the note to foreclose. See Gardner v. Am. Home Mortgage Serv., Inc., 2010 U.S. Dist. LEXIS 12068 (E.D. Cal. 2010) ("[C]ontrary to Plaintiff's assertions, the party initiating the foreclosure process need not be in possession of the note"); Quintero Family Trust v. Onewest Bank, F.B.B., 2010 U.S. Dist. LEXIS 6618, *6 (S.D. Cal. 2010) ("[U]nder California law there is no requirement for production of the original note to initiate non­judicial foreclosure proceedings."). Massachusetts, like California, has no statutory requirement to produce a note as a prerequisite for foreclosure.

26

L

mortgage independently of or concurrently with that on

the note"). Thus, the mortgage and the note may be

held by different persons. Ibanez, at 652-53; Lamson &

Co., Inc. v. Abrams, 305 Mass. 238, 245 (1940). When

the note and mortgage are held by separate persons,

the holder of the mortgage is deemed to hold the

mortgage in trust for the benefit of the owner of the

note. Ibanez, at 652. "[T]he mortgagee retains legal

title _ with a fiduciary duty to act on behalf of the

owner of the note_" In re Marron, at *11. Therefore,

the mortgage holder may still foreclose when the note

is held separately. It does so for the benefit of the

note holder.

A. The Galiastros' Reliance on Eaton v. Fed Nat'l Mortgage Assoc. is Misplaced.

In Eaton v. Fed. Nat'l Mortgage Assoc., Docket

No. 11-0138 (Suffolk Sup. Ct. June 17. 2011) the

Suffolk Superior Court (Mcintyre, J.) preliminarily

enjoined the post-foreclosure eviction of a former

borrower because, although the foreclosing entity was

the record holder of the mortgage, it was not the

27

~;~--------------------...................... .

holder of the underlying promissory note. 12 Id. at 9.

Eaton obtained a mortgage loan from Bank United and

signed a promissory note to Bank united. Id. at 1.

The loan was secured by a mortgage granted by

Plaintiff to "Mortgage Electronic Registration

Systems, Inc. ("MERS") acting as nominee for Bank

United." Id. 13 MERS assigned the mortgage to Green

Tree Servicing, LLC. Green Tree was the highest

bidder at its duly noticed foreclosure auction. Id.

at 2. Green Tree assigned its winning bid to Federal

National Mortgage Association (FNMA) who brought an

eviction action in the Boston Housing Court. Id.

Eaton filed a separate case and injunction motion in

Superior Court to enjoin the housing court eviction.

Green Tree provided the Superior Court with a copy of

the promissory note that had been indorsed in blank,

but stipulated that Green Tree "did not hold the Note

when the foreclosure occurred." Id.

The Eaton court granted the injunction on the

unprecedented legal theory that Massachusetts' common

12 ,Eaton is now pending before a full panel of the Appeals Court. See Appeals Court Docket No. 2011-J-0311.

13 The Court does not reference the standard MERS language that MERS acts "solely as nominee for the Lender and the Lender's successors and assigns."

28

L

law requires a foreclosing mortgagee to not only be a

valid assignee of the mortgage, but also be the holder

of the promissory note. Id. at 3-4. The Eaton Court,

like the Galiastros, relied on dated decisions from

the 1800s and early 1900s. Based on these decisions,

the Eaton court interpreted the term "mortgagee" in

G.L. c. 244, § 14 to include and mean "note holder."

B. Eaton Does Not Analyze the Statutory Power of Sale And the Alternative Statutory Authorities to Foreclose Provided in G.L. c. 244, § 14.

While Eaton focuses on the term "mortgagee" in

G.L. c. 244, § 14, it ignores section 14's alternative

foreclosure authority. Section 14 also allows a

person authorized by the power of sale to foreclose.

Here, the Galiastros granted MERS the statutory

power of sale. Thus, regardless of whether Eaton

correctly interpreted the term "mortgagee" to include

a requirement that a foreclosing party also be the

holder of note, section 14 specifically provides that

the person granted the statutory power of sale may

foreclose. There is no possible interpretation of the

phrase "a person authorized by the power of sale" that

could conceivably include a requirement that the

person with the power of sale must also hold the note.

29

----------................. .. Therefore, MERS, which has the power of sale, is

expressly authorized by statute and the parties'

contract to foreclose.

The "power of sale" language in G.L. c. 244, § 14

is also important in highlighting another problem in

Eaton's reasoning. The authority to foreclose under

the power of sale was not included in the version of

the foreclosure statute that Eaton uses as support for

its interpretation of the term "mortgagee." In Eaton,

the court rejected the defendant's argument that the

current non-judicial foreclosure statute, G.L. c. 244,

§ 14, supplanted any common law rule that there must

be unity of the note and mortgage at the time of

foreclosure. The Court cited and quoted St. 1857,

c. 229, § 1 (Add. 4), a predecessor foreclosure

statute similar to, but fundamentally different than,

G.L. c. 244, § 14. Eaton reasoned that since dated

common law cases required unity of the note and

mortgage to foreclose (a point which is itself not

accurate) and these cases were decided after the

enactment of the statute, the legislature must have

intended that the word "mortgagee" to mean that the

foreclosing party also had to be the note holder.

30

The 1857 version of the statute, however, did not

give the person granted the power of sale the specific

authority to foreclose. The statutes are materially

different:

St. 1857, c. 229, § 1 G • L • c . 2 4 4 I § 14

In all cases, in which a The mortgagee or person power of sale is contained having his estate in the in a mortgage deed of real land mortgaged, or a property, the mortgagee, person authorized by the or any person having his power of sale, or the estate therein, or in or attorney duly authorized by such power authorized by a writing under seal, to act in the premises, or the legal guardian or may ... conservator of such

mortgagee or person acting the name of such mortgagee or person, may ...

Unlike the 1857 statute, several different persons are

given the statutory power to foreclose under the

current foreclosure statute including those that may

or may not be the note holder. The current statute

explicitly contemplates persons other than the note

holder because if "a person authorized by the power of

sale" was always going to be the mortgagee (or the

note holder) then the statute would be redundant and

the power of sale provision would be meaningless.

There would be no reason to twice give the same person

31

, I

the power to foreclose unless someone other than the

mortgagee or note holder could foreclose. 14

c. G.L. c. 244 is Unambiguous and Eaton Should Not Have Gone Beyond the Literal Meaning.

The term "mortgagee" is not ambiguous and there

is no basis to go beyond the literal meaning of the

statute to create additional foreclosure requirements.

"It is a fundamental canon of statutory construction

that 'statutory language should be given effect

consistent with its plain meaning and in light of the

aim of the Legislature unless to do so would achieve

an illogical result.'" Boston Hous. Auth. v. National

Conference of Firemen and Oilers, Local 3, 458 Mass.

155, 162 (Mass. 2010) (quoting Sullivan v. Brookline,

435 Mass. 353, 360 (2001). "Words are to be accorded

their ordinary meaning and approved usage [and ... w] here,

as here, the language of a statute is unambiguous, it

is conclusive as to the intent of the Legislature."

14 In addition, the predecessor statute was a part of a judicial foreclosure process. See St. 1857, c. 229, § 1 (stating, "In all cases_") The current statute is a non-judicial process. See G.L. c. 244, § 14 (removing "In all cases ... " and adding " ... and without action" to statute) . If there was a requirement that the foreclosing party be the note holder then there would have to be a procedure in place explaining when and where the note must be produced. There is none.

32

l I

Id. The Court does "- not look to extrinsic sources to

vary the meaning of an unambiguous statute unless a

literal construction would yield an absurd or

unworkable result. Id. (citing Dept. of Comm. Affairs

v. Mass. State Cell. Bldg. Auth., 378 Mass. 418, 427

(1979).

Notwithstanding that the term "mortgagee" is

clearly defined as "one to whom property is

mortgaged ... " (see Black's Law Dictionary, 9th ed. 2009),

Eaton went beyond the plain meaning of the statute to

add requirements that are inconsistent with the

statutory scheme. G.L. c. 244, § 14 deals with the

power of sale contained in mortgages granted by G.L.

c. 183, § 21. Both statutes effect the transfer of

property interest through the power of sale. Neither

includes any language regarding the note or underlying

debt obligation; neither even references G.L. c. 106,

§ 3-101 et ~ (the statute governing negotiable

instruments); and neither has any requirement that a

foreclosing party possess the note.

33

D. The So-Called Common Law cases Cited in Eaton Pre-Date the Modern Foreclosure Statute and Do Not support the Supposed Requirement that There Be Unity of the Note and Mortgage.

In Eaton, the court acknowledges that the note

and mortgage may be held by separate persons, but then

says that "as this court reads the common law, the two

instruments must be re-united in order to effectively

foreclose the mortgagor's right to redeem the

property." Eaton, at 4. The case law cited for that

authority is not compelling. The Superior Court cites

Wolcott v. Winchester, 81 Mass. 461, 465 (1860) and

Crowley v. Adams, 226 Mass. 582, 585 (1917). At best,

however, these cases are dicta. Neither case involved

a borrower's challenge to foreclose.

Wolcott involved a question of priority between

two people each claiming to be an assignee of the same

mortgage. As between the two claimants, the Court

found in favor of the one that held both the

underlying debt and the mortgage (as opposed to the

one that held just an assignment of the mortgage)

because the other should have known that the debt was

essential to his interest. The Court held only that

the party that held both the debt and mortgage had a

superior property interest. The Court distinguishes

34

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l

Wolcott from a situation where a party holds the debt

and seeks to foreclose without legal title in the

mortgage. Id. at 465-66.

Crowley involved a person attempting to foreclose

on a mortgage where the underlying debt had already

been paid off. The Court merely held that where the

debt has been satisfied, there is no right to

foreclose. Id. at 244. Neither Crowley or Wolcott

support the broad conclusion urged by the Galiastros

or stated in Eaton.

IV. THE GALIASTROS' TORT CLAIMS FAIL BECAUSE THERE HAS NOT BEEN A FORECLOSURE SALE AND, THEREFORE, THEY HAVE NO DAMAGES.

The Superior Court correctly dismissed the

Galiastros' conspiracy, fraud, and other tort-based

claims because the Galiastros have not suffered any

harm or damages. In order to state a tort claim, a

party must have and allege damages. See Barrett

Assoc., Inc. v. Aronson, 346 Mass. 150, 152-53 (1963)

(listing damages as element of fraud claim); McAuslan

Nutting, Inc. v. Futurity Thread Co., 254 Mass. 216,

218 (1926) (stating conspiracy claim must allege

35

damages) . 15 Here, the alleged foreclosure sale was not

completed. Therefore, the Galiastros did not sustain

any harm and the Superior Court correctly dismissed

the tort claims.

V. THE GALIASTROS WAIVED ANY APPEAL OF THE DISMISSAL OF THEIR 93A CLAIMS AGAINST MERS.

The Galiastros waived any appeal of the dismissal

of their Chapter 93A claim because they did not argue

it in their brief. In fact, G.L. c. 93A is not even

cited in their brief. The Massachusetts Rules of

Appellate Procedure make clear that a party wishing to

bring a claim before the court must address it in the

brief. See Haser v. Wright, 65 Mass. App. Ct. 903,

904 (2 005) (citing Mass. R. A. P. 16 (a) ( 4) , as amended,

"the appellate court need not pass upon questions or

issues not argued in the brief"). Because the

Galiastros do not make any argument regarding the 93A

claim, they have waived their appeal of the dismissal

of that claim.

15 See also, Haley v. Elegen Home Lending LP, 2010 WL 1006664, *1-2 (D. Nev. Mar. 16, 2010) ("a claim for wrongful foreclosure does not arrive until the power of sale is exercised").

36

I

VI. THE GALIASTROS' 93A CLAIM FAILS BECAUSE MERS WAS NEVER ENJOINED BY THE FREMONT INJUNCTION AND THE LOAN DOES NOT MEET THE INJUNCTION CRITERIA.

Even assuming arguendo that the Galiastros did

not waive the 93A claim dismissal, they still failed

to plead facts sufficient to support a claim based on

the Fremont injunction because MERS was not subject to

the injunction. Further, the Galiastros' loan does

not meet two of the four factors required in Fremont.

Thus, the Galiastros' insinuation that MERS'

foreclosure was designed to "circumvent" the Fremont

injunction is wholly speculative and misplaced. The

Superior Court correctly dismissed the 93A claim

because neither MERS nor this Loan were subject to the

injunct ion. 16

A. The Fremont Injunction.

In Commonwealth v. Fremont Inv. & Loan, the

Massachusetts Attorney General brought a consumer

protection action under G.L. c. 93A against Fremont

Investment & Loan, the originator of various mortgage

loans, claiming that its loans were unfair. The

16 While it is outside the four corners of the complaint, and, therefore, beyond the scope of a motion to dismiss, MERS actually gave Attorney General notice (even though it was not required to) and she issued a "no objection" letter.

37

Superior Court issued a preliminary injunction

prohibiting Fremont from foreclosing on mortgages with

the following four characteristics without first

getting Attorney General approval:

(1) the loans were adjustable rate mortgages with an introductory rate period of three years or less;

(2) the loans featured an introductory rate for the initial period that was at least three percent below the fully indexed rate;

(3) the loans were made to borrowers for whom the debt-to-income ratio would have exceeded fifty percent had Fremont measured the borrower's debt by the monthly payments that would be due at the fully indexed rate rather than under the introductory rate; and

(4) the loan-to-value ratio was one hundred percent, or the loan featured a substantial prepayment penalty (defined by the judge as greater than the "conventional prepayment penalty" defined in G.L. c. 183C, § 2) or a prepayment penalty that extended beyond the introductory rate period.

On appeal, the SJC affirmed the injunction noting

that loans with all four of the characteristics are

unfair because a borrower could not reasonably be

expected to repay the loan or obtain refinancing.

Fremont, 452 Mass. 733, 743 (2008). Neither the

Superior Court's Order nor the SJC's holding meant (as

the Galiastros contend) that all Fremont originated

loans are presumptively unfair. Indeed, the SJC noted

38

that of the 14,578 loans issued by Fremont between

January 2004 and March 2007, only 50-60% of those

loans were sub-prime. Id. at 736. For loans that did

not have all four characteristics, Fremont only had to

give the Attorney General notice of intent to

foreclose. Id. at 740.

At the time of the injunction, Fremont only held

290 of the loans that it originated. It serviced

another 2,200. Id. at 736, n.6. In other words,

there were many loans originated by Fremont that were

not subject to the injunction because they had already

been transferred or assigned to another entity or they

had been discharged. When the Attorney General

learned that Fremont intended to sell its remaining

loans, she filed an emergency motion to modify the

injunction. On March 31, 2008, the Court revised the

injunction to prohibit Fremont from selling its loans

unless the purchaser agreed to be bound by the

injunction. See Commonwealth v. Fremont Inv. & Loan,

24 Mass. L. Rep. 12, 2008 Mass. Super. LEXIS 132, *17

(hereinafter "Fremont II") (Mass. Super. Ct. March 31,

2008) (modifying injunction to prevent Fremont from

transferring, assigning, or selling residential

mortgage unless assignees agree to be bound by

39

1 i

injunction) . The injunction had no retroactive

effect.

B. MERS Did Not Violate the Fremont Injunction Because it Was Not Enjoined.

MERS was not a party to the Fremont case and it

was not enjoined or subject to the Fremont decision.

The Fremont injunction has absolutely no effect

whatsoever on mortgages transferred by Fremont before

the date of the injunction. As the Galiastros allege,

Fremont transferred the loan shortly after the

origination in 2006. (Comp. ,, 6-8). Since the

transfer was well before the 2008 injunction, neither

MERS nor the assignee of the loan could have been

enjoined. 17 Therefore, MERS could not have violated

the injunction by beginning the foreclosure process.

17 Even the Attorney General recognized this problem. This is the reason that she moved to modify the injunction to prevent Fremont from escaping the injunction by selling its remaining loans to an entity that would not be covered by the injunction. See Fremont II, at *2-3. The Superior Court commented, "[w]ithout the requested modification, Fremont could simply sell those loans ... to third parties as if the preliminary injunction did not exist_" Id. at *3.

40

c. The Galiastros' Loan Does Not Satisfy Essential Fremont Factors.

Not only was MERS not enjoined, but the

Galiastros' Loan does not even meet the first two

required Fremont elements because it is not an

adjustable rate mortgage. The Loan had a fixed, never-

adjusting, interest rate of just 8.100%. Therefore,

the Galiastros' Loan was not presumptively unfair.

See~~ Fazio v. Bank of Am., NA, 27 Mass. L. Rep.

81 (Mass. Super. Ct. May 13, 2010) (denying

preliminary injunction because Plaintiffs "failed to

show that their mortgage satisfied all four of the

criterian); Silva v. OneWest Bank, FSB, 2010 Mass.

Super. LEXIS 106, *9-10 (Mass. Super. Ct. May 19,

2010) (denying preliminary injunction because loan did

not have defined adjustable rate feature) ; see also

Latham v. Homecomings Fin., LLC, 2009 Mass. Super.

LEXIS 406, *16 (Mass. Super. 199) (granting summary

judgment where plaintiff's loan did not meet all four

Fremont criteria). Thus, even the Attorney General

would not have objected to the foreclosure.

Therefore, the Superior Court correctly dismissed any

claims based on the Fremont injunction.

41

VII. THE SUPERIOR COURT CORRECTLY DISMISSED THE CONSPIRACY CLAIM BECAUSE THERE WAS NO UNDERLYING WRONG.

Since the Galiastros did not state a valid

underlying cause of action, the claim for conspiracy

must fail as well. A plaintiff cannot prevail on a

conspiracy claim if there is no underlying tort. See

Iannacchino, 451 Mass. at 628 (noting dismissal of

conspiracy claim because underlying 93A claim failed) ;

Herbal v. Cannizzaro, 26 Mass. L. Rptr. 388, *6 (Mass.

Super. Ct. 2009) (quoting "it is well settled that

'(n)o action in tort lies for conspiracy to do

something unless the acts actually done, if done by

one person, would constitute a tort'"). Since the

Galiastros have not stated a valid underlying tort

claim against MERS, their conspiracy claim must also

fail.

VIII. THE SUPERIOR COURT CORRECTLY DISMISSED THE CONSPIRACY CLAIM BECAUSE THE GALIASTROS FAILED TO PLEAD SUFFICIENT FACTS TO SUPPORT THE CLAIM.

The Galiastros have not plead sufficient facts to

show a plausible entitlement to relief on their

conspiracy claim because it is based on unsupported

conclusions and a barebones recitation of elements

without alleging any actual facts. Reduced to its

42

______________ ........ core, the Galiastros allege; 1) that Harmon was legal

counsel to MERS; 2) that it prepared MERS' foreclosure

documents; and 3) that MERS could not foreclose on its

own. See Compl. ,, 49, 52, 74-76 (factual conspiracy

allegations). From this, the Galiastros conclude that

Harmon intentionally foreclosed when it was not

authorized to do so and that it intentionally evaded

the Fremont injunction. They conclude that this

"infers" an agreement between MERS and Harmon to

commit a wrongful act. Compl. , 76.

Essentially, the Galiastros argue that any time a

party is represented' by counsel and there is a

challenge to the validity of their legal conduct, a

conspiracy claim lies against the client and counsel.

Massachusetts law, however, does not recognize an

attorney-client conspiracy when an attorney acts only

to represent a client in a legal proceeding. See

Bliss Valley Prop., LLC v. Eliopulos, 2005 Mass.

Super. LEXIS 291, *16 (2005) (dismissing conspiracy

claim against attorneys noting " ... representing their

clients in various legal proceedings _ fell well

outside the conspiracy mold."). Here, Harmon acted

solely as counsel to MERS. Therefore, it cannot be a

co-conspirator.

43

Regardless of whether a client and attorney can

ever be co-conspirators, the Galiastros' civil

conspiracy claim still fails. Massachusetts

recognizes two different types of civil conspiracy.

Kurker v. Hill, 44 Mass. App. Ct. 184, 188-89 (1998).

First, there is a "very limited cause of action" for a

coercive type of civil conspiracy. Aetna Cas. Sur. Co.

v. P & B Autobody, 43 F.3d 1546, 1563 (1st Cir. 1994).

Second, there is a common law joint liability

conspiracy. Id. at 1564. This form of civil

conspiracy requires "a common design or an agreement,

although not necessarily express, between two or more

persons to do a wrongful act and, second, proof of

some tortious act in furtherance of the agreement."

Id. The Superior Court correctly rejected both types

of conspiracy.

A. The Galiastros Did Not State a Claim For Coercive Civil Conspiracy.

To state a claim for coercive civil conspiracy,

the Galiastros must plead facts that establish "that

[all] defendants, acting in unison, had some peculiar

power of coercion over the plaintiff[s] that they

would not have had if they had been acting

independently." Jurgens v. Abraham 616 F. Supp. 1381,

44

1386 (D. Mass. 1985). The most common instance of a

coercive civil conspiracy is found "in the combined

action of groups of employees or employers, where

through the power of combination pressure is created

and results brought about different in kind from

anything that could have been accomplished by separate

individuals." Fleming v. Dane, 304 Mass. 46, 50

(1939). Outside of this and related scenarios,

instances of coercive conspiracy are rare and should

be added to with caution. Id.

The Galiastros' coercive conspiracy claim fails

because the Galiastros have not alleged any facts to

show that MERS and Harmon had any peculiar combined

power of coercion. To the contrary, MERS simply hired

local counsel to conduct a foreclosure. The

Galiastros did not allege any facts showing any out of

the ordinary power inherent in the MERS-Harmon

relationship nor did they allege that MERS "ganged up"

or used strength in numbers to coerce the Galiastros

to do anything. Therefore, the Superior Court

correctly rejected the Galiastros' coercive conspiracy

theory.

45

B. The Galiastros Cannot State a Claim for Concerted Action Civil Conspiracy.

In order to state a "concerted action"

conspiracy, the Galiastros must allege that MERS

participated in concerted action and agreed with one

or more persons to do a wrongful act, and that MERS

committed some tortious act in furtherance of the

agreement. See Aetna Casualty Surety Co., 43 F.3d at

1564. The Superior Court correctly rejected this

theory because there was no "wrongful act."

In addition, the Galiastros have not alleged any

facts supporting a claimed agreement between Harmon

and MERS to do anything wrongful. The Galiastros also

do not allege that MERS committed any independent

tortious act in furtherance of any allege concerted

action. Harmon simply acted as legal counsel to MERS

in conducting a foreclosure following an undisputed

default. Not only was foreclosure not wrongful, but

it was the natural and proximate result of payment

default. In addition, it was conducted in the name of

the mortgagee. The Superior Court correctly dismissed

the conspiracy claim because the Galiastros failed to

meet their pleading burden.

46

CONCLUSION

For the reasons set forth herein, this Court

should affirm the Superior Court's dismissal of

Galiastros' Complaint against MERS because the

Galiastros have not plead facts demonstrating a

plausible entitlement to relief. MERS is authorized

to foreclose by the terms of the mortgage and the

Massachusetts foreclosure statute. MERS did not, and

could not, have violated the Fremont injunction

because it was not enjoined and the loan did not

satisfy the four facts. Therefore, this Court should

the Superior Court's dismissal of MERS.

Jeffrey S. Patterson (BBO # 671383) jeffrey.patterson@nelsonmullins.com David E. Fialkow (BBO # 666192) david.fialkow@nelsonmullins.com Nelson Mullins Riley & Scarborough LLP One Post Office Square, 30th Floor Boston, Massachusetts 02109 (617) 573-4700 ( 617) 57 3-4 710 (fax)

Dated: September 1, 2011

47

ADDENDUM TABLE OF CONTENTS

M. G. L . c . 18 3 I § 21 ............................. Add . 1

M.G.L. c. 244, § 14 ............................. Add. 2

s t . 18 57 I c . 2 2 9 I § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Add . 4

Commonwealth v. Fremont Inv. & Loan, 24 Mass. L. Rep. 12 (Mass. Sup. Ct. March 31, 2008) ............................ Add. 5

Commonwealth v. Fremont, 23 Mass. L. Rptr. 567 (Mass. Super. Ct. Feb . 2 6 , 2 0 0 8 ) ............................ Add . 11

Lyons v. Mortgage Elect. Registration Sys., Inc., 2011 WL 61186 (Mass. Land. Ct. Jan 4, 2011) .............................. Add. 28

Eaton v. Fed. Natn'l Mortgage Assoc., Docket No. 11-01382 (Suffolk Sup. Ct. June 1 7 , 2 0 11) ............................ Add . 3 1

ANNOTATED LAWS OF MASSACHUSETTS Copyright© 2011 Matthew Bender & Company, Inc.,

a member of the LexisNexis Group All rights reserved

***Current through Act 92 of the 2011 Legislative Session***

PART II REAL AND PERSONAL PROPERTY AND DOMESTIC RELA TJONS TITLE I TITLE TO REAL PROPERTY

Chapter 183 Alienation ofLand

GO TO MASSACHUSETTS CODE ARCHIVE DIRECTORY

ALMGL ch. 183, § 21 (2011)

§ 21. Statutory Forms- Statutory Power of Sale in Mortgage.

Page 1

The following "power" shall be known as the "Statutory Power of Sale", and may be incorporated in any mortgage by reference:

(POWER)

But upon any default in the performance or observance of the foregoing or other condition, the mortgagee or his executors, administrators, successors or assigns may sell the mortgaged premises or such portion thereof as may remain subject to the mortgage in case of any partial release thereof, either as a whole or in parcels, together with all improvements that may be thereon, by public auction on or near the premises then subject to the mortgage, or, if more than one parcel is then subject thereto, on or near one of said parcels, or at such place as may be designated for that purpose in the mortgage, first complying with the terms of the mortgage and with the statutes relating to the foreclosure of mortgages by the exercise of a power of sale, and may convey the same by proper deed or deeds to the purchaser or purchasers absolutely and in fee simple; and such sale shall forever bar the mortgagor and all persons claiming under him from all right and interest in the mortgaged premises, whether at law or in equity.

Add. 1

ANNOTATED LAWS OF MASSACHUSETTS Copyright© 2011 Matthew Bender & Company, Inc.,

a member of the LexisNexis Group All rights reserved

***Current through Act 92 of the 2011 Legislative Session***

PART III COURTS, JUDICIAL OFFICERS AND PROCEEDINGS IN CIVIL CASES TITLE III REMEDIES RELATING TO REAL PROPERTY

Chapter 244 Foreclosure and Redemption of Mortgages

GO TO MASSACHUSETTS CODE ARCHIVE DIRECTORY

ALMGL ch. 244, § 14 (2011)

§ 14. Procedure in Foreclosure Under Power of Sale; Form and Publication of Notice.

Page I

The mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, or the attorney duly authorized by a writing under seal, or the legal guardian or conservator of such mortgagee or person acting in the name of such mortgagee or person, may, upon breach of condition and without action, do all the acts authorized or required by the power; but no sale under such power shall be effectual to foreclose a mortgage, unless, previous to such sale, notice thereof has been published once in each of three successive weeks, the first publication to be not less than twenty-one days before the day of sale, in a newspaper, if any, published in the town where the land lies or in a newspaper with general circulation in the town where the land lies and notice thereof has been sent by registered mail to the owner or owners of record of the equity of redemption as of thirty days prior to the date of sale, said notice to be mailed at least fourteen days prior to the date of sale to said owner or owners to the address set forth in section sixty-one of chapter one hundred and eighty-five, if the land is then registered or, in the case of unregistered land, to the last address of the owner or owners of the equity of redemption appearing on the records of the holder of the mortgage, if any, or if none, to the address of the owner or owners as given on his deed or on the petition for probate by which he acquired title, if any, or if in either case no address appears, then to the address to which the tax collector last sent the tax bill for the mortgaged premises to be sold, or if no tax bill has been sent for the last preceding three years, then to the address of any of the parcels of property in the name of said owner of record which are to be sold under the power of sale and unless a copy of said notice of sale has been sent by registered mail to all persons of record as of thirty days prior to the date of sale holding an interest in the property junior to the mortgage being foreclosed, said notice to be mailed at least fourteen days prior to the date of sale to each such person at the address of such person set forth in any document evidencing the interest or to the last address of such person known to the mortgagee. Any person of record as of thirty days prior to the date of sale holding an interest in the property junior to the mortgage being foreclosed may waive at any time, whether prior or subsequent to the date of sale, the right to receive notice by mail to such person under this section and such waiver shall be deemed to constitute compliance with such notice requirement for all purposes. If no newspaper is published in such town, or if there is no newspaper with general circulation in the town where the land lies, notice may be published in a newspaper published in the county where the land lies, and this provision shall be implied in every power of sale mortgage in which it is not expressly set forth. A newspaper which by its title page purports to be printed or published in such town, city or county, and having a circulation therein, shall be sufficient for the purpose.

The following form of foreclosure notice may be used and may be altered as circumstances require; but nothing herein shall be construed to prevent the use of other forms.

Click here to view form

Add.2

ALM GL ch. 244, § 14 Page 2

A notice of sale in the above fonn, published in accordance with the power in the mortgage and with this chapter, together with such other or further notice, if any, as is required by the mortgage, shall be a sufficient notice of the sale; and the premises shall be deemed to have been sold, and the deed thereunder shall convey the premises, subject to and with the benefit of all restrictions, easements, improvements, outstanding tax titles, municipal or other public taxes, assessments, liens or claims in the nature of liens, and existing encumbrances of record created prior to the mortgage, whether or not reference to such restrictions, easements, improvements, liens or encumbrances is made in the deed; but no purchaser at the sale shall be bound to complete the purchase if there are encumbrances, other than those named in the mortgage and included in the notice of sale, which are not stated at the sale and included in the auctioneer's contract with the purchaser.

Add.3

564

Cltap.22D

)lortsagce m:Ly, llpfJU ltrcnct1 of tbto C'OIJI1ition, give uot..ica, &c.

1857.-CHAPTERS 229, 230.

of the acts of the rear ei~>hteen hundred aud thirtv-eight, entitled, "1\.n Act ·rolatin; to Divorce" is hereby repealed! provided, that this act sbail not alfect a.;JY case or proceedings now pending. [Approved lVlay 21}, 1857 .] -----·-·-·--------·----··---......... _ .......... ····-···-·-·-.. ··--.A:-. AcT t.o peJ·[If'tualt>. the E'·id,•nct< of Ti1.\c to Tl.t>al Property obtained

under l\Iortgagr Ih~,,ds containiug a Pow(H" of Salr.

Be it t'nclcte<l, (~·c., a.sfol/ou:s: 8r:cno:-; 1. In all cnses, in which u. power of sale is

conta.incd in a mortgage deed of real property, the mortgagee, ot· n.uy person lwYing his est.·1tc iherein, or in or by such power rwthorized to act in the premises. may, upon n. breach of the euuditiou f.hcreof, give such uolices n.nd do all such acts as are authorizrxl or required by such power: aud. he shull, ·withiu t.ldrty dnys after selling snch real property, in JHu·~nanee of such pni\Ter, file a copy of the notice and his aflidavit, in the ollice of the registry of deeds in the county m counties whe1·e such real property is sjtnated; which aili­duvit shall ~et fortlt his acts in the premises fully and pu.rt.icula.J"!y. Such alliuavit and copy of notice shall be recorded h.v the regi~ter, wit.h a note of reference thereto, on the margi11 of the rc<.:ord of the mortgage deed. And if it ~:ihall appear hy HIGh aOlda.Yi~, that ho has in all re.••pccts complied with the requisitions of such power of sale; in relalion to all thiugs to be done by him before selling such rcnl pmporty, and has sold the same in the nHllllWr required by mcl1 power or sale, the affidavit, or a duly certified office •·· · cupy of tlte record thereof, sha.ll be admitted ~~s evidence that the pow·er of sn.lc was dnly executed.

s.1. nmy h:.r .u SECTION 2. H the mortgage deed >Yas executed lJy a man duiw or ..tower. h[lving ;1t that time 110 lawful wlfe, or if being married, t.he

wife of the morlgagoe joined h1 such deed, iu token of her release. nf dower, sut!h sale shall be effectual to bar all claim and possibility of dower in such real property. [ Approt~ed Jl'ltr.y 21), 1 ~:) 7. J

Chap. '230 A::<~ AcT in ar\ilition to an Act to in(:orporate the West Rc•xbury Railroad.·. Company. ··

Be it enacted, t~·c., as follows: Sr~CTJOK 1. The \Vest Roxbury Railroad Company is hereby

n.ntltot·ized to lay n. track or tracks, front the liue separating.tlle town o!' W e;-;t 1\oxl.mry, and the city of Roxbury, on Centre Steeet, throngh alld orcr Centre, Lowell, Wa~hington and 'l're:­mont Street:;, i 11 the eit.y of Roxbury, and oYer Tremont Str'eet. in tltc city of Bosto11 ; and to connect said track or tracks w:ith the track or trade; of the ~1c~ropolitan Railroad Company,

Add.4

West law Page I

Not Reported in N.E.2d, 24 Mass.L.Rptr. 12, 2008 WL 1913940 (Mass.Supcr.) (Cite as: 2008 WL 1913940 (Mass.Super.))

H

Superior Court of Massachusetts, Suffolk County.

COMMONWEALTH of Massachusetts, Plaintiff v.

FREMONT INVESTMENT & LOAN, and Fremont General Corporation, Defendants.

No. 07-4373-BLSI.

March 31, 2008.

lJIEUORANDUM AND ORDER ON COMMON­WEALTH'S MOTION TO MODIFY THE PRE­

LIMINARY INJUNCTION RALPH D. CiA:-ns, Justice.

*1 On February 25, 2008, this Court, after making findings of fact and conclusions of law on the Commonwealth's motion for a preliminary in­junction, issued a preliminary injunction ordering

the defendant Fremont Investment & Loan ("Fremont" or the "Bank") as follows:

I. Before initiating or advancing a foreclosure on any mortgage loan originated by Fremont that is (a) NOT presumptively unfair, because it does not possess each of the four characteristics identi­fied above, or (b) NOT secured by the borrower's principal dwelling, or (c) that is secured by a

dwelling that is vacant or uninhabitable, Fremont shall first give the Attorney General 30 days ad­vance written notice so that the Attorney General

can verify that the proposed foreclosure falls out­side the scope of this Preliminary Injunction. If the Attorney General has not given written notice of an objection to Fremont by the 30th day, based on her finding that the loan is presumptively un­fair and is secured by the borrower's principal

dwelling and that the dwelling is both inhabited and inhabitable, Fremont may proceed with the foreclosure. If the Attorney General has given written notice of an objection, Fremont shall pro­ceed in accordance with paragraph 2 below.

2. Before initiating or advancing a foreclosure on any mortgage loan originated by Fremont ( 1 )(a) that is presumptively unfair, because it possesses each of the four characteristics identified above, and (b) secured by the borrower's principal dwelling, and (c) where the dwelling is neither vacant nor uninhabitable, or (2) in which the At­

torney General has provided a written objection

in accordance with paragraph 1 above, Fremont shall give the Attorney General 45 days advance written notice of the proposed foreclosure, identi­

fying the reasons why foreclosure is reasonable under the circumstances and/or why the Attorney General's written objection under paragraph 1 above is in error. If the Attorney General has not given written notice of an objection to Fremont by the 45th day, Fremont may proceed with the foreclosure.

3. If the Attorney General has timely given a written objection under paragraph 2 above, the Attorney General and Fremont shall within the next 15 days attempt to resolve their differences regarding the foreclosure. If these differences have been resolved, the Attorney General will no­tify Fremont in writing that she has withdrawn her written objection. If these differences arc not resolved, Fremont may proceed with the foreclos­ure only with the prior approval of this Court (or a special master appointed by this Court), which

it may seek on the 16th day.

4. In considering whether to approve the foreclos­ure, this Court will determine (a) whether the loan is actually unfair and is actually secured by the borrower's primary residence that is both in­habited and inhabitable, (b) whether Fremont has taken reasonable steps to "work out" the loan and avoid foreclosure, and (c) whether there is any fair or reasonable alternative to foreclosure. This Court will seek to expedite these decisions but, if the number of such matters grows too large, this Court may need to appoint a special master to as­sist the Court..

Add.S © 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 2 Not Reported in N.E.2d, 24 Mass.L.Rptr. 12, 2008 WL 1913940 (M s ) . ass. uper. (Cite as: 2008 WL 1913940 (Mass.Super.))

*2 Findings of Fact and Conclusions of Law on Plaintiffs Motion for a Preliminary Injunction

("Preliminary Injunction Decision") at pp. 28-29.

On March 20, 2008, Fremont issued a press re­lease announcing that it had entered into an Asset

Purchase Agreement ("the Agreement") with Car­

rington Mortgage Services, LLC ("Carrington") to sell Fremont's rights to service mortgage loans cur­

rently owned by certain securitization trusts sponsored by Carrington's corporate parent. Under

this Agreement, roughly 300 of the 2,200 mortgage

loans in Massachusetts that are currently being ser­

viced by Fremont (but are not owned by Fremont)

will be sold to Carrington upon the scheduled clos­

ing on April I, 2008. The Agreement provides that

Carrington will perfonn the Assumed Liabilities, but those Assumed Liabilities as defined in the Agreement include only those arising from any ''action, event, obligation, circumstance or condi­

tion occurring or existing after the Closing Date" of

April I, 2008. Agreement at §§ 1.1 & 2.3. The

Agreement takes pains to add, "For the avoidance

of doubt, [Carrington] will not assume or have any Liability or responsibility with respect to any Liab­

ility of any nature or kind whatsoever relating to

[Fremont's] business or the Purchased Assets that exist or arises out of the operation or ownership of [Fremont's] business or the Purchased Assets prior

to the closing .... " Agreement at § 2.3. In short, un­der this Agreement, Carrington expressly does not agree to accept the obligations imposed upon Fre­

mont with regard to these loans under this Court's

February 25, 2008 preliminary injunction.

When the Commonwealth learned of this

Agreement, the Commonwealth promptly moved to modify the preliminary injunction to prevent Fre­mont from assigning the ownership rights or servi­cing obligations of the mortgage loans governed by

this preliminary injunction unless the obligations of

the Court's Order were assigned with these loans

and the assignee agreed to accept those obligations. After hearing, the Commonwealth's motion for a

modification of the preliminary injunction is AL-

LOWED in part.

DISCUSSION Fremont correctly observes that the Attorney

General asked this Court in her initial motion to en­

join the assignment of Fremont's Massachusetts

loans, and this Court chose not to include such a

prohibition in its preliminary injunction. While this Court did not wish to prohibit Fremont from exiting the subprime mortgage business, which Fremont

had said was its plan, this Court did not anticipate

that Fremont would think that, without prior court

approval, it could assign any of the loans covered

by the preliminary injunction without making any

such assignment subject to the obligations in the preliminary injunction, that is, without assigning

those obligations along with the loans. This Court plainly erred in failing to anticipate that possibility.

The Court's failure to anticipate this possibility,

however, is of little consequence for two reasons.

First, no closing has yet occurred with respect to

the assignment of any of these loans, so this Court still has the opportunity to prevent any such assign­ment if it finds it appropriate to do so. Second, it is

of no legal consequence whether the Common­wealth moves to modify the preliminary injunction to prohibit any such assignment (as it has done), or if Fremont moves to clarify the preliminary injunc­tion to ensure that it does not bar such an assign­

ment (which it did not do), since the legal standard for considering either motion is the same. As the

Commonwealth correctly observes, in considering

whether to modify a preliminary injunction issued

under G. L. c. 93 ·'\. ~ 4, this Court, having already

determined that the Commonwealth is likely to pre­vail, should focus on whether the grant of the modi­

fled relief will promote or adversely affect the pub­lic interest. Ci.L. c. 93/\, ~ 4; CommomFeolrh 1'.

/'vfass. CRJNC, 392 IV!ass. 79, 89-90 ( 19S4).

*3 In all but the most unusual circumstances, this Court agrees with the Commonwealth that the

modification it seeks is necessary to prevent Fre­mont from escaping the obligations imposed under the preliminary injunction by assigning these loans

Add.6 © 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 3 Not Reported in N.E.2d, 24 Mass.L.Rptr. 12,2008 WL 1913940 (Mass.Super.)

(Cite as: 2008 WL 1913940 (Mass.Super.))

or the servicing rights to these loans to third parties without also expressly requiring those third parties to abide by those obligations. Without the requested moditication, Fremont could simply sell those loans or servicing rights to third parties as if the prelimin­

ary injunction did not exist, because the assignment need not require the assignee to agree to be bound by the obligations in the preliminary injunction. This Court cannot permit so simple an "end run"

. FNl around Its orders.

FN l. All parties agree that the servicing rights that Fremont's exercises with respect

to the loans it services but does not own give Fremont broad discretion in determin­ing what should be done in the event the borrower defaults, including the power to waive, modify, or vary any term of the loan, postpone strict compliance with the terms of the loan, or grant an indulgence to the borrower. In effect, the servicer of the loan has essentially the same authority to "work-out" the loan as an owner of the loan would have had if it had not delegated the servicing of the loan.

Fremont argues that, pragmatically, if this

Court were to require any assignee to accept the ob­ligations of the preliminary injunction, the effect of such a requirement would be to prohibit any assign­ment of these loans or servicing rights, because no mortgage institution would agree to an assignment carrying that ''baggage." This Court does not find Fremont's reasoning persuasive. While Fremont for purposes of its interlocutory appeal may wish to

characterize this Court's preliminary injunction as extraordinarily burdensome, perhaps even draconi­

an, it is expressly intended to be rather modest in its scope. Indeed, this Court notes that in many ways the relief granted by the Court i~ narrower in scope than the Term Sheet letter agreement that Fremont voluntarily entered into with the Attorney General on July I 0, 2007. The spirit of the preliminary in­junction, as this Court expressly noted in its de­cision, is that "Fremont, having helped borrowers

get into this mess, now must take reasonable steps to help them get out of it." Preliminary Injunction Decision at 28. All that the preliminary injunction does is ensure that Fremont take all reasonable steps to help borrowers avoid foreclosure on unfair loans it issued, and explore fair and reasonable al­

ternatives to foreclosure. !d. at 28-29. If Fremont has taken such reasonable steps (which Fremont contends it routinely takes), then this Court will ap­prove the foreclosure.

It is noteworthy that Fremont has chosen not to test the procedure the Court put in place-since the issuance of the Preliminary Injunction Decision, Fremont has failed to notify the Attorney General of its intent to proceed with any foreclosure of a Massachusetts loan. This Court is confident that, if Fremont were to employ the procedure rather than rail against it, it would find that the procedure is far from onerous. If it turns out to be onerous, this Court will modify it as needed. Consequently, while this Court understands that third parties may be wary of purchasing loans or servicing obliga­tions that require them to accept the obligations in the Preliminary Injunction Decision, this Court is confident that they will be increasingly willing to

do so once they see that the obligations are emin­ently workable.

*4 To be sure, assignees may require Fremont to discount the price for these loans or servicing rights to induce them to accept these obligations with the assignment, but that discount is simply the price that Fremont must pay for having entered into the unfair loans in the first place. Therefore, when Fremont argues that it will be unable to assign its

loans or servicing rights if the assignee were re­quired to accept the obligations in the preliminary injunction, all that it credibly says is that (I) poten­tial assignees will be wary of the burden imposed by these obligations, a wariness that is greater be­cause of their uncertainty as to how these obliga­tions will be applied in practice, and (2) it will re­ceive less for these assignments than it otherwise would because assignees will demand a discounted

Add.7

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Not Reported in N.E.2d, 24 Mass.L.Rptr. 12,2008 WL 1913940 (Mass.Super.) (Cite as: 2008 WL 1913940 (Mass.Super.))

price in return for accepting these obligations. The first concern wi11 diminish over time, when all will see that the obligations are less burdensome in practice than feared. The second concern is simply the unhappy consequence that Fremont deserves for having unfairly issued loans that borrowers could not be expected to afford if they could not refin-

F\J2 ance.

FN2. This Court also notes that the only

persons who provided affidavits attesting to the impossibility of assigning these loans or servicing rights if they were sub­ject to the preliminary injunction are Fre­mont's own officers. The record contains no affidavit from any impartial expert in

the mortgage industry.

Therefore, if there were not unusual circum­stances, this Court would simply modify the pre­liminary injunction as requested by the Attorney General and enjoin the closing on the Agreement with Carrington unless the Agreement were modi­fied so that Carrington agreed to abide by the pro­cedure in the preliminary injunction. There are, however, unusual circumstances in this case---on March 26, 2008, the Federal Deposit Insurance Corporation issued a Supervisory Prompt Correct­ive Action Directive against Fremont ("the FDIC Directive"). The FDIC Directive observes that, in a letter dated May 24, 2007, the FDIC notified Fre­mont that it was undercapitalized and required Fre­mont to submit an acceptable capital restoration plan by July 9, 2007. The plan submitted by Fre­

mont on August 9, 2007 was found unacceptable by the FDIC. Fremont submitted a revised capital res­toration plan on November 9, 2007, but Fremont stated the plan was obsolete on March 17, 2008. Since Fremont had failed to submit an acceptable

capital restoration plan and failed to comply with its capital maintenance provisions, and since the financial condition of its parent, Fremont General Corporation, continued to deteriorate, the FDIC ordered Fremont and/or its parent to take one of two alternative courses of action within 60 days: (I)

either Fremont "shall sell enough voting shares or obligations of the Bank so that the Bank will be ad­equately capitalized after the sale and/or" (2) Fre­mont shall accept an offer to be acquired by another bank and its corporate parents shall divest them­

selves of the Bank. FDIC Directive at 3.

Fremont contends that its sale to Carrington of the rights to service mortgage loans owned by Car­rington is part of its effort to return to adequate

capitalization mandated by the FDIC. Fremont ob­serves that the Massachusetts loans comprise only a small fraction of the loans whose servicing rights arc being sold, and that this sale is essential if Fre­mont is to meet the FDIC's 60-day deadline. Fre­mont also notes that, if this Court were to enjoin the sale unless Carrington agreed to abide by the oblig­ations in the preliminary injunction, the Asset Pur­chase Agreement could not close on April I and it is uncertain whether Carrington would agree to pro­ceed with the sale at a later date, since Carrington took pains to include language in the Agreement making clear that the only liabilities it was assum­ing were those that arose after the closing. This Court preliminarily finds each of these assertions to be accurate. Therefore, this Court must deal with the probability that enjoining the sale of the 300 Massachusetts loans whose servicing rights would be sold under the terms of the Asset Purchase Agreement would prevent the Agreement from closing on April I, and the significant possibility that this modification of the preliminary injunction may prevent this Agreement from closing within

the 60 day deadline set by the FDIC.

*5 The Attorney General and Fremont agree that, if Fremont were to fail to meet the conditions set by the FDIC Directive within the 60-day dead­

line, the almost certain result would be that the FD­IC would place Fremont under FDIC receivership. Being placed under receivership would constitute an Event of Default under the Pooling and Service Agreements that govern the Carrington loans which Fremont is presently servicing, and that Default would permit the Trustee for these loans (which ap-

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Page 5 Not Reponed in N.E.2d, 24 Mass.L.Rptr. 12,2008 WL 1913940 (Mass.Super.)

(Cite as: 2008 WL 1913940 (Mass.Super.))

parently is Deutsche Bank) to terminate all of Fre­mont's rights to service these loans and transfer

those servicing rights to another entity. Therefore, this Court must also deal with the possibility that, if it seeks to protect the 300 Massachusetts borrowers at issue by enjoining Fremont from entering into the Asset Purchase Agreement, it may increase the likelihood that Fremont would fall into receiver­

ship, which would result in the termination of its servicing rights over these Carrington loans, which would mean that these loans would ultimately be serviced by a third party entity not governed by the preliminary injunction. In short, if this Court at­tempts to protect those 300 Massachusetts borrow­ers by enjoining the Carrington sale unless the As­set Purchase Agreement is revised to be subject to the preliminary injunction, the attempt may help to push Fremont into receivership and, by doing so, would fail to protect those Massachusetts borrow­

ers.

As a result, this Court is left with two poor

choices-enjoin Fremont from entering into the As­set Purchase Agreement and accept the risk that the preliminary injunction would ultimately still not help the 300 Massachusetts borrowers at issue if Fremont falls into receivership, or permit Fremont to proceed with the sale under the terms of the Agreement and allow the servicing rights to be as­signed to a third party not bound by the preliminary

injunction. This Court finds that the second poor al­temative better protects the public interest, largely because this Court does not find it to be in the pub­lic interest for Fremont to fall into FDIC receiver­ship, especially since a receivership would make it even more difficult to protect the interests of the re­maining 2,200 borrowers whose loans Fremont will

. . FNi conttnuc to own or service. · -

F\:3. This Court's balancing of interests in favor of allowing the Carrington sale to close is reinforced by a letter sent by Car­rington this morning to the Attorney Gen­eral which offers two proposals in keeping with the spirit (albeit not the letter) of this

Court's preliminary injunction. Those al­ternative proposals invite the Department

of Banking or the Attorney General to vet Carrington's foreclosure decisions before any foreclosure is instituted.

While that painful balancing means that this Court will not enjoin the closing of the Asset Pur­

chase Agreement with Carrington, it docs not mean that this Coun will not modify the preliminary in­junction as requested by the Attorney General. Fre­mont has advised the Coun that there are no other assignments on the cusp of being entered into that would affect the Massachusetts borrowers, so this Coun is not faced with the same dilemma as to the other loans that it faces with the Carrington loans. While the public interest balancing of risks may tilt in favor of Fremont as to the Carrington loans, it tilts in favor of the Attorney General as to the re­maining 300 loans that Fremont owns and the I ,900 loans that it services but does not own. F"J4 There­fore, this Coun hereby modifies the preliminary in­junction to add a fifth term to the four already in the pre! iminary injunction:

FN4. This Court acknowledges the risk of confusion that arises from the fact that Fre­mont services 300 loans owned by Car­rington and also owns 300 loans that it also services. The former 300 loans are being assigned to Carrington under the Asset Purchase Agreement; the latter 300 loans

are not affected by the Agreement.

*6 5. Pending final adjLtdication of this action or further order of this Court, Fremont shall not sell, transfer, or assign (i) any mortgage loan origin­ated by Fremont that is secured by any residential property in Massachusetts, or (ii) the legal oblig­ation to service any mortgage loan origiHatcd by Fremont that is secured by any residential prop­

erty in Massachusetts, unless:

a. Fremont gives the Massachusetts Attorney General written notice of its intent to enter into such an assignment, including a copy of the pro-

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Not Reported in N.E.2d, 24 Mass.L.Rptr. 12, 2008 WL 1913940 (Mass.Super.) (Cite as: 2008 WL 1913940 (Mass.Super.))

Page 6

posed agreement, at least five business days be­fore executing the purchase agreement,

b. the obligations of this Court's Preliminary In­junction, including but not limited to this restric­tion upon further sale, transfer. or assignment, are also assigned with the sale or assignment of the loans or servicing rights,

c. the assignee agrees in the written assignment to

be governed by the tem1s of the Preliminary In­junction and its obligations, and

d. a copy of the executed written assignment is provided within five business days of its execu­tion to the Attorney General.

Notwithstanding this modification. Fremont is not enjoined from closing on the Asset Purchase Agreement entered into with Carrington on March 17, 2008, provided this Agreement closes before May 25, 2008 (the 60-day deadline estab­lished in the FDIC Directive).

ORDER For the reasons stated above, this Court hereby

ALLOWS the Attorney General's motion to modify the preliminary injunction to the extent that, pending final adjudication of this action or further order of this Court, this Court ORDERS as follows:

I. Pending final adjudication of this action or further order of this Court, Fremont shall not sell, transfer, or assign (i) any mortgage loan originated by Fremont that is secured by any residential prop­

erty in Massachusetts, or (ii) the legal obi igation to service any mortgage loan originated by Fremont that is secured by any residential property in Mas­sachusetts, unless:

a. Fremont gives the Massachusetts Attorney General written notice of its intent to enter into such an assignment, including a copy of the pro­posed agreement, at least five business days be­fore executing the purchase agreement,

b. the obligations of this Court's Preliminary In-

junction, including but not limited to this restric­

tion upon further sale, transfer, or assignment, are also assigned with the sale or assignment of the

loans or servicing rights,

c. the assignee agrees in the written assignment to be governed by the terms of the Preliminary In­junction and its obligations, and

d. a copy of the executed written assignment is provided within five business days of its execu­

tion to the Attorney General.

2 Notwithstanding this modification, Fremont is not enjoined from closing on the Asset Purchase Agreement entered into with Carrington on March 17, 2008, provided this Agreement closes before May 25, 2008.

Mass.Super.,2008. Com. v. Fremont Tnv. & Loan Not Reported in N.E.2d, 24 Mass.L.Rptr. 12, 2008 WL 1913940 (Mass.Super.)

END OF DOCUMENT

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Page 1 Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass. Super.)

(Cite as: 2008 WL 517279 (Mass.Super.))

Superior Court of Massachusetts,

Suffolk County.

COMMONWEALTH of Massachusetts, Plaintiff

v. FREMONT INVESTMENT & LOAN, and Fremont

General Corporation, Defendants.

NO. 07-4373-BLS I. Feb. 26, 2008.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF'S MOTION FOR A PRE­

LIMINARY INJUNCTION R.ALPH D. GA~TS, Justice.

*1 The defendant Fremont Investment & Loan

(''Fremont" or the "Bank") is a California state­

chartered industrial bank that, between January 2004 and March 2007, originated 14,578 loans to

Massachusetts residents secured by mortgages on

owner-occupied homes. Of those loans, only

roughly 3,000 remain active; roughly 2,500 contin­ue to be serviced by Fremont Most of these loans

were made in what has become known as the

"sub-prime" market, in which customers who gen­

erally would not have qualified for traditional

prime mortgages were provided loans at higher rates of interest. Not surprisingly, in these times, a

significant number of these loans are in default and Fremont seeks to foreclose on some of them. On

October 4, 2007, the Commonwealth of Massachu­

setts, acting through the Massachusetts Attorney

General, filed the instant complaint alleging that

Fremont, in its past lending practices in the sub­prime market, has engaged in unfair and deceptive

acts or practices in violation of G.L. c. 9~A, ~ 2. The Attorney General now moves for a preliminary injunction that would bar Fremont, during the pen­

dency of this action, from initiating or advancing any foreclosure on any residential mortgage loan in

Massachusetts without the written consent of the Attorney General's Office.

BACKGROUND

On March 7, 2007, after having being advised

of charges of unsound banking practices brought

against it by the Federal Deposit Insurance Corpor­

ation ("FDIC"), Fremont, without admitting the al­leged charges, entered into a Stipulation and Con­

sent to the Issuance of an Order to Cease and Desist

("Consent Agreement"). Under the Consent Agree­

ment, Fremont was ordered to cease and desist from, inter alia:

• (b) "operating the Bank without effective risk management policies and procedures in place in

relation to the Bank's primary line of business of

brokered subprime mortgage lending;"

• (d) "operating with inadequate underwriting cri­teria and excessive risk in relation to the kind and

quality of assets held by the Bank;"

• (f) "operating with a large volume of poor qual­ity loans;"

• (g) ''engaging in unsatisfactory lending prac­

tices;"

• (l) "marketing and extending adjustable-rate

mortgage ("ARM") products to subprime borrow­ers in an unsafe and unsound manner that greatly

increases the risk that borrowers will default on the loans or otherwise cause losses to the Bank, including ARM products with one or more of the

following characteristics:

(i) qualifying borrowers for loans with low initial

payments on an introductory or "start" rate that will expire after an initial period, without an ad­equate analysis of the borrower's ability to repay

the debt at the fuliy-indcxed rate;

(ii) approving borrowers without considering ap­

propriate documentation andior verification of

their income;

(iii) containing product features likely to require

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Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

frequent refinancing to maintain an affordable

monthly payment and/or to avoid foreclosure;

*2 (iv) including substantial prepayment penal­tics and/or prepayment penalties that extend bey­

ond the initial interest rate adjustment period;

( v) providing borrowers with inadequate andior

confusing information relative to product

choices, material loan terms and product risks, prepayment penalties, and the bonower's obliga­tions for property taxes and insurance;

(vi) approving bonowers for loans with inad­

equate debt-to-income analyses that do not prop­

erly consider the borrowers' ability to meet their

overall level indebtedness and common housing expenses; and/or

(vii) approving loans or 'piggyback' loan ar­

rangements with loan-to-value ratios approaching or exceeding 1 00 percent of the value of the col­lateral;" and

• (m) making mortgage loans without adequately considering the borrower's ability to repay the

mortgage according to its terms."

FNl Consent Agreement at 2-4.

FN I. As has already been noted by the Court, this Consent Agreement was a set­

tlement of the charges brought by the FD­IC, without any admission of wrongdoing

by Fremont. As a result, this Court docs not consider this Consent Agreement to be

evidence that Fremont had engaged in any

of the conduct it agreed to "cease and de­

sist" from doing in the future. This Court

discusses the Consent Agreement, not be­cause it is evidence of Fremont's past con­duct (which it is not), but because it is too important a part of the background and

context of this action to be ignored.

On or about July 10, 2007, Fremont and the

Massachusetts Attorney General entered into a

Term Sheet letter agreement ("Term Sheet") that

set forth a procedure that Fremont agreed to follow before foreclosing on any of the Massachusetts res­idential mortgage loans it continued to own or ser­

vice. In a nutshell, under the Term Sheet, Fremont

agreed to provide the Attorney General with the

Loan Documentation regarding a troubled loan at

least 90 dar~~efore commencing any .foreclosure proceeding. · ~ During that 90 day penod, the At­

torney General could object to the foreclosure, and state her reasons for doing so. If there were an ob­jection, Fremont agreed not to proceed with the

foreclosure and instead to negotiate in good faith to resolve the Attorney General's objection, perhaps

by agreeing to revise the terms of the loan or arran­

ging for replacement financing. If no resolution could be reached, Fremont was free to proceed with

foreclosure, but only after giving the Attorney Gen­eral fifteen days advance notice, which allowed her

time to determine whether she would seek to enjoin the foreclosure.

FN2. Under certain conditions, Fremont could ask the Attorney General to expedite her review of the Loan Documentation and

wait only 45 days before commencing a

foreclosure proceeding.

Pursuant to this Term Sheet agreement, Fre­

mont sent the Attorney General the Loan Docu­mentation for 119 loans subject to a 90 day review.

On October 4, 2007, the Chief of the Consumer

Protection Division of the Attorney General's Of­fice wrote that the Attorney General objected to foreclosure as to all of them. Fremont had also sent

the Attorney General the documentation for another

74 loans which it wished to foreclose upon, subject

to an expedited 45 day review. As to each of the 74

loans, Fremont represented that the homes to be foreclosed upon were not owner-occupied and that Fremont had been unable to contact the borrower, despite repeated attempts to do so. As to these 74 loans, also on October 4, the Attorney General ob­jected to foreclosure as to only one. In short, on Oc­tober 4, 2007, the Attorney General objected to

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Page 3 Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 5!7279 (Mass.Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

every foreclosure proposed by Fremont except as to

those loans where the home was not owner-occu­pied and Fremont had been unable to contact the borrower. That same day, it filed the complaint in the instant action.

*3 The Tenn Sheet agreement was terminable at will by either party. On December 10, 2007, Fre­

mont exercised its right to terminate in a letter to

the Attorney General, writing that "it is now appar­

ent that the Attorney General has no intention of engaging in a meaningful review process on a bor­rower-by-borrower basis, but rather is seeking wholesale discontinuance of all foreclosure refer­rals and sales." In that same letter of termination, Fremont stated that it was committed to continue to attempt loan modifications and other means of "workout" to avoid foreclosure, and would continue to provide the Attorney General with a loan file pri­or to referring the loan for foreclosure.

With the Term Sheet agreement no longer in force, the Attorney General asks this Court to en­join Fremont from initiating or advancing any fore­closure without the Attorney General's written con­sent. Alternatively, she proposes a more limited preliminary injunction in which Fremont would be enjoined from initiating or advancing any foreclos­

ure of what she characterizes as "Presumptively Unfair Loans," which she defines as ARMs with a low introductory rate of three years or less in which either (a) the combined loan-to-value ratio was 90 percent or higher, (b) the loan was approved on a "stated income" basis. meaning that Fremont essen­tially ac<.:epted the borrower's statement of income without requiring verification, or (c) the loan had a prepayment penalty. However, the Attorney Gener­al offered one exception to the prohibition on fore­closure of Presumptively Unfair Loans-Fremont

could proceed with the foreclosure if it could demonstrate the presence of one of three Mitigating Factors: (I) the borrower consented in writing to

the foreclosure, (2) the property was vacant and un­inhabitable, or (3) the property was a vacant invest­ment property. The Attorney General would have

45 days to verify the existence of the Mitigating Factor and determine whether to dispute it. If she did dispute it, Fremont would need the approval of the Court to proceed with the foreclosure. As to loans that were not Presumptively Unfair, under the alternative proposed by the Attorney General, Fre­mont would be required, as under the Term Sheet

agreement, to provide the Attorney General with

loan documentation at least 90 days prior to initiat­ing the foreclosure and, if she objected to the fore­closure, Fremont would need court approval before proceeding with the foreclosure.

FINDINGS OF FACT "By definition, a preliminary injunction must

be granted or denied after an abbreviated presenta­tion of the facts and the law." Packaging Industries Group, !11c. ,. Cheney JKO 1\fass. 609, 61 (J (I 9XO).

In other words, in finding the facts on a motion for preliminary injunction, this Court must "play the cards it is dealt," which may be a t~1r more modest deck than it may be dealt at trial, after discovery has been completed. Consequently, the pre! iminary findings of fact below are based on the affidavits and attached exhibits furnished by the parties, as well as reasonable inferences from that evidence.

*4 During the relevant time period in question­January 2004 to March 2007, when Fremont stopped originating residential mortgage loans­Fremont was a substantial lender in the sub-prime mortgage market. ft is difficult to ascertain from this record what percentage of Fremont's residential loans could fairly be characterized as sub-prime loans, but this Court estimates that it was between

F'l3 50-60 percent. · In all (or virtually all) of these loans, Fremont did not interact directly with the borrower. Rather, these loans were brought to Fre­

mont by mortgage brokers who were independent contractors, compensated through a broker's fee that was paid upon the closing of the loan. Typic­ally, the broker would contact one of Fremont's ac­count executives to request a certain loan product and provide the borrower's credit report and Joan application. The account executive would determ-

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Not Reported in N .E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass. Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

ine if the prospective borrower was "prequalified" and, if so, send the broker a non-binding interest rate quote on the requested loan product, and set forth the conditions the borrower needed to meet to obtain the loan. Once the borrower had agreed to proceed with the loan, the broker would send the account executive the documentation necessary to satisfy the prequalification conditions, generally the

appraisal of the property, the required disclosures, and documentation regarding employment and in­

come. All of this information was then sent to an account manager at one of Fremont's operation cen­ters, where it would be examined by the underwrit­ing department for final approval. If approved, the loan would proceed to closing, with the Bank re­taining an attorney to protect its interests at the closing.

F\13. 38.4 percent of the loans were fixed rate loans, which this Court assumes were

generally not sub-prime. This Court infers that the vast majority of the 64 percent of loans that were ARMs were sub-prime, in large part because a substantial percentage of Fremont's loans-38.4%-were "stated in­come" loans, and this Court expects that all or virtually all of these "stated income" loans were sub-prime ARMs.

As noted, 38.4 percent of these loans were

''stated-income" loans in which the borrower was permitted to state his income without having to

provide the usual verifying documentation, such as income tax returns, W-2s, or pay stubs. For these loans, the only "underwriting" that Fremont did re­garding the income stated was to compare the salary stated with the salary typical for such an oc­cupation in that geographic area, using data ob­tained from salary.com. These loans were, in the­ory, designed for those borrowers who could not verify their income with income tax returns or who had unreported income, but the extraordinarily high percentage of these loans-38.4 percent-strongly suggests that they were not limited to these rather unusual circumstances. Since there was a substan-

tially greater risk that the borrower had inflated his income with "stated-income" loans, the borrower paid a higher interest rate than for documented

loans.

The very essence of a sub-prime mortgage loan is that the bank is lending money to a borrower who poses a greater than average credit risk, and de­mands a higher rate of interest in return for that in­creased risk. In order to reduce the interest rate, vir­

tually all Fremont sub-prime mortgages were ARMs, with a low introductory rate (pejoratively referred to as a "teaser rate") which would continue generally for two or three years, at which time the Joan would be adjusted to a variable rate based on a market rate of interest-the 6-month London Interb­ank Offered Rate ("LIBOR"), plus an additional percentage to reflect the high risk of the loan (known as the "rate add," e.g. LIBOR plus 5). The introductory rate would be considerably lower than the adjusted rate, so the amount of mortgage in­terest would substantially increase once the adj us­ted rate kicked in even if the LIBOR had not changed or had even fallen (known as "payment shock"). Most ARMs limit the extent of the pay­ment shock by limiting the percentage increase that may occur during each period of adjustment, so the

adjustable interest rate would increase with each adjustment until it would reach the LIBOR plus the rate add (but not exceed the maximum interest rate

cap). Most of the ARMs that Fremont provided were 2/28 or 3/27, meaning they were 30 year loans where the introductory rate remained for two or three years, with adjustments every six months after the introductory period. The lower the introductory rate and the lower the limits on the interest rate in­crease that may occur upon each adjustment, the longer it would take for the actual interest rate to reach the LIBOR plus the rate add. Once it reached that level, the interest rate would increase or de­crease based on changes in the market rate of in­

terest.

*5 In determining whether a borrower qualified for the loan, Fremont's underwriting department

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Page 5 Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Supcr.) (Cite as: 2008 WL 517279 (Mass.Super.))

generally looked at the debt-to-income ratio, that is, the ratio between the borrower's monthly debt pay­ments (including the applied-for mortgage) and his monthly income. While there were exceptions, gen­

erally the borrower needed to have a debt­to-income ratio less than or equal t.o 50 (sometimes

) . d l'f I· N4 I I I . 55 percent m or er to qua 1 y. · n ca cu atmg the prospective borrower's monthly debt payments, Fremont's underwriters used the monthly mortgage payments for the introductory period, not the monthly mortgage payment that would be due un­der the "fully indexed rate," that is, the LIB OR at the time of the inception of the Joan plus the rate

add. As a result, many marginal credit risks quali­fied for ARMs based solely on the low introductory rate, but would _not have qualified using the fully

f-N., indexed rate. · -

F!'J4. For all of Fremont's originated loans during the relevant time period, which in­cluded both fixed rate loans and ARMs, the average debt-to-income ratio was 42.76 percent.

FN5. The evidence in the preliminary in­junction record does not permit this Court to infer the percentage of overall borrow­ers who would fit into this category, or their overall number. The evidence is suffi­cient to infer that the number of these bor­rowers was substantial, based on Fremont's willingness to lend to poor credit risks and

the substantial difference between the debt burden with the introductory rate vs. fully

indexed rate.

Even relying on the low introductory rate to de­termine the debt-to-income ratio, there were still in­terested borrowers who did not qualify. For these borrowers, Fremont offered what it called an exten­ded amortization option, which was essentially a 40 year note, with monthly payments reduced from the 30 year note because they were spread out over the 40 year period, with a balloon payment due at the end of 30 years (since the loan would not be fully amortized by that time). 12.2 percent of all Fre-

mont's originated loans contained this extended amortization option with a balloon payment after 30 years.

Not surprisingly, the poor credit risks who were the target audience for sub-prime mortgage loans also often had little or no savings, so Fremont offered borrowers mortgage loans that required little or no down-payment, referred to in the lend­ing industry as loans with a loan-to-value ratio equal to or approaching I 00 percent. While some first mortgages provided l 00 percent financing, most I 00 percent financing was accomplished with

a first mortgage providing 80 percent financing and a second mortgage providing the remaining 20 per­cent financing, referred to in the industry as "piggy-back loans."

The benefit to consumers from sub-prime mort­gages was that they were eligible to obtain mort­gages they would not otherwise have been eligible to obtain, albeit at higher rates of interest, and thereby could purchase homes they would not oth­erwise have been able to purchase. Consumers ob­taining sub-prime mortgages shared the same risks that every person faced who stretched themselves financially to purchase their home-the usual danger of being unable to meet the mortgage payments be­cause of a future reduction in income from the loss of a job or a sudden increase in other expenses, per­haps resulting from an illness in the family. These risks were greatest for those borrowers with the highest debt-to-income ratios and the fewest assets, since they had no cushion to deal with financial ad­versity. Some of these consumers, however, faced an especially grave risk-those with 2/28 or 3/27 ARMs with low introductory rates, who qualified for a mortgage only based on those low introduct­ory rates and would not have otherwise qualified if the fixed index rate had been used by Fremont's un­derwriting department to determine eligibility. As to these loan customers, when the payment shock set in, their debt would exceed 50% of their in­come, sometimes by a considerable amount, and they foreseeably could no longer afford to pay the

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Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

mortgage. These customers, often relying on the ad­vice of their mortgage broker, generally understood

that they would need to refinance the loan at or be­fore the date the introductory rate ended so that

they could continue to pay the low monthly pay­

ments provided by the so-called teaser rate and

avoid the payment shock that would force them into

foreclosure. However, what these customers often

did not understand was that, if they had purchased a I 00 percent financing mortgage, whether through a

single loan or piggyback loans, they would only be

eligible for refinancing if the fair market value of

their property increased during those two or three

years of the introductory rate because, if it fell, they

would not be able to refinance their home for more than it was worth. For these borrowers, unless their

income considerably increased, they would be

doomed to default and foreclosure if the housing market fell (as, of course, it did).

*6 Consequently, it is hardly surpnsmg that when the Attorney General looked carefully at the

Loan Documentation that Fremont provided on Au­

gust 30, 2007 regarding 98 loans that it proposed to foreclose it found that:

• All 98 were ARMs. 93 had two year introduct­

ory rates, while four had a three year rate.

• All would produce payment shock when the in­troductory rate period concluded. The introduct­

ory rate on these loans varied from 6.1 percent to

12.4 percent. The payment shock increase could increase the interest rate 3 percent, with the po­

tential of another 1.5 percent interest hike every

six months.

• 90 percent o.f the 98 had a 1 00 percent loan­. f,N6

to-value rallo.

r:N6. 30 of the 98 loans were structured to amortize over 40 or 50 years, with a bal­

loon payment due on the 30th year. While

it is not surprising to find these loans in

trouble, the record sheds no light as to

whether extended amortization loans were

more difficult to refinance.

14 of the 98 loans had a prepayment penalty, in

which the borrower was required to pay up to six months worth of interest if he paid off the note

(through sale or refinancing) before a designated

period. For 13 of these 14, the prepayment penal tie~

I. d I d . h . d . d J· :'-Jt app 1e on y unng t e mtro uctory peno ; for one, it extended through the first year of the

payment shock period. Consequently, for these bor­

rowers who were eligible for the loan only because

the teaser rate was used to calculate the debt-in­come ratio, the timing of refinancing was critical­

they could not afford to pay the mortgage after pay­

ment shock set in but they would pay a substantial prepayment penalty if they refinanced during the

introductory period. Consequently, these borrowers had little real discretion as to when to refinance; for

all practical purposes, it was essential that they close on the refinanced loan right when the intro­

ductory rate ended. If they were unable to refinance

during this brief window, they would be unable to afford the mortgage payments, which would plal:e

them in default, which would increase the amount

needed to refinance, which would make it even

harder to qualify for the refinancing.

J:N7. 12 imposed prepayment penalties

over two years; 1 imposed it only for the first year of the loan.

All of the dangers this Court has cited are present even if the loan application accurately

states the borrower's income. All of these dangers

obviously are exacerbated if the loan application

wrongly inflates the borrower's income or assets,

because then the debt-to-income ratio used by un­derwriting to determine whether the prospective borrower qualifies for the Juan is based on an in­

flated income figure. It is too strong to say that ''stated income" loans invite the borrower to com­

mit such fraud, because the borrower is required to state his income on the loan application under the

pains and penalties of perjury. However, it is fair to

infer that "stated income" loans present a far great-

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Page 7 Not Reponed in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 5 I 7279 (Mass. Super.)

(Cite as: 2008 WL 517279 (Mass.Super.))

cr risk of fraud than full documentation loans, be­

cause not only is the lender for these loans not re­quiring any documentation of the borrower's in­come, expenses, or employment but the lender is also implicitly telling the borrower that it will not

verify the borrower's statements on the loan applic­

ation by looking at these documents. Not surpris­

ingly, 50 of the 98 loans in the Attorney General's

sample of loans targeted by F,rpmont for foreclosure ,, d. "1 J·NX were state mcome oans.

FN~. The affidavit of the Attorney Gener­

al's financial investigator who conducted

this analysis is unclear as to whether the

actual number of the ''stated income" loans

was 50 or 60. This Court has chosen the

lower number, thereby giving Fremont the

benefit of the ambiguity.

*7 The preliminary injunction record reflects that, at least in a few of these mortgage loans, the

loan application falsely described the borrower's occupation and substantially inflated the borrower's income. Specifically, the Attorney General submit­ted eight affidavits from lenders facing foreclosure.

In six of these applications, the borrower's stated

income was substantially inflated on the loan ap­

plication. In each of these six false loan applica­

tions, this Court finds that the mortgage broker

either prepared the loan application and inflated the income without the borrower's knowledge or per­mission (even though each borrower signed the loan application under the pains and penalties of

perjury) or acted in complicity with the borrower in

misrepresenting the borrower's income in order for the borrower to qualify for the loan. There is no

evidence that Fremont knew of these misrepresenta­

tions. Nor is there any evidence that Fremont will­

fully blinded itself to the fact that some of the mort­

gage brokers who brought loans to it were know­ingly int1ating the borrower's income. Nor does this Court find, based on this record, that Fremont reck­

lessly supervised its brokers by continuing to do business with them after Fremont learned that the brokers had a pattern or practice of inflating the

borrower's income on the loan applications they had

submitted. In short, with respect to the falsified loan applications, the evidence in the record reflects that Fremont was a victim of these misrepresenta­

tions and did not encourage or tolerate them.

Nor does this record reflect that Fremont made

false representations to borrowers regarding the

terms of their Joan. From the few closing docu­

ments that are before the Court, there is no evid­

ence that the terms were concealed or misrepresen­ted in the closing documents. Nor is there any evid­

ence that Fremont representatives made such mis­

representations. Indeed, apart from the closing at­

torney that Fremont retained, the borrowers who

submitted affidavits did not appear to speak directly

with any Fremont representative; they spoke only

with their mortgage broker. To be sure, there is

evidence that, in some of the loan transactions, the

brokers had mischaracterized the loan terms and

made vague promises of refinancing that they reneged upon when the time for refinancing arose,

but there is no evidence that Fremont joined in making any of these misrepresentations or baseless promises or even knew of them. There is also evid­

ence that at least some ofthe borrowers either did not read the closing documents or did not truly un­

derstand their terms, but this Court does not find Fremont responsible for that misunderstanding, es­

pecially since many of the loan documents are forms required under federal law.

The remaining question, then, for this Court is whether the Attorney General is likely to prevail in

proving that certain of the sub-prime mortgage loans offered by Fremont were, as the Attorney

General describes it, "structurally unfair," whose is­

suance was an unfair act or practice in violation of

G.L. c. tJ3A. * 2. This Court will address that ques­

tion in its Conclusions of Law.

CONCLUSIONS OF LAW *8 G.L. c. 93:\. ~ 2(a) makes unlawful any

"[u]nfair or deceptive acts or practices in the con­duct of any trade or commerce."(; L c. 93A. ~ 2 (a). The Supreme Judicial Court has stated "that the

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Page 8

following arc 'considerations to be used in detem1-

ining whether a practice is to be deemed unfair: (I) whether the practice ... is within at least the penum­

bra of some common-law, statutory, or other estab­

lished concept of unfairness; 2) whether it is im­

moral, unethical, oppressive, or unscrupulous; (3)

whether it causes substantial injury to consumers

(or competitors or other businessmen).' " Dara­

cumm lnter(uce, Inc. \'. Comp11rent orld, inc, Jl)6

Mass. 7o0, 778 ( l n6) quoting PMP .·1s.wcs., inc. v.

(1/ohe Newspaper Co., 366 M a~s. 593, 590 ( 1975 ),

quoting 29 Fed.Reg. 8325, 8355 (I 964). An act or

practice that is deceptive or fraudulent may be

found ro be unfair, but an act or practice need not

be deceptive or fraudulent to be unfair. See Atas­sachuserrs Farm Bureau Federation, Inc. l'. Blue

('nJ\'S of Mossachusetts. Inc .. 403 Ma~s. 722. 720

( )cJK<J). An act may be unfair even if it docs not vi­

olate a statute, or a regulation issued under c;. L. c.

0.\1\, ~ 2. See Sclmhoch t•. ffuli.ldi!J!d Fmuno· Co1p., 375 Mas:;. 133, 137 (1978) ("We reject the

argument that an act or practice which is authorized

by statute can never be an unfair or deceptive act or

practice under~ 2(al or G.L. c. 03A."). "[WJhether

an act or practice violates a statute or rule promul­

gated under G.L. c. 93A, § 2, is but one of several

factors to be applied to all the circumstances of the

transaction ... in determining whether it is unfair or

dcccpti ve." H il /ingham \'. Uornemann. 5 :'i !Vlas:-. App.Ct. 166, l7(J (2002). Similarly, as the Su­

preme Judicial Court has made clear, an act may vi­

olate Chapter 03A without constituting a cause of

action under any common Jaw tort:

Chapter 93A is "a statute of broad impact which

creates new substantive rights and provides new

procedural devices for the enforcement of those

rights." Slone\' r. We.I'{H'ood Auto, Inc., 366 Mass.

6X~. 693 (I 075). The relief available under c.

03!\ is "sui generis. It is neither wholly tortious

nor wholly contractual in nature, and is not sub­

ject to the traditional limitations of preexisting

causes of action." /d. at 704. It "mak[es] conduct

unlawful which was not unlawful under the com­

mon law or any prior statute." CotJ/11/onwe,drh v.

fJeCuris, 3<i(l l'vfass. 234. 244 n. k ( 1974 ). Thus, a

cause of action under c. <J3i\ is ''not dependent on

traditional tort or contract law concepts for its

definition." !Idler 1. Silvah/'(/nch Con,·Tr. Corp.,

376 Mass. 621. 62(, ( 197S). See Nei , .. Burle1:,

3illi Ma,s. 307. 313 ( 1983) ("[AJnalogies

between common law claims for breach of con­

tract, fraud, or deceit and claims under c. 9 3/\ arc

inappropriate because c. 93A dispenses with the

need to prove many of the essential elements of

those common law claims").

Ka!tar v. Dcmoulos, 433 Mass. I. 12-13 (2000)

*9 Here, at the time that Fremont issued the

mortgage loans at issue in this motion, there was no

federal or Massachusetts statute or regulation ap­

plicable to all mortgage loans that expressly prohib­

ited Fremont from issuing adjustable rate mortgage

loans, loans with a loan-to-value ratio of 100 per­

cent, "stated income" loans, or loans with a prepay­

ment penalty. Nor was there any federal or Mas­

sachusetts statute or regulation applicable to all

mortgage loans that provided that a borrower could

not qualify for a mortgage loan if his debt­

to-income ratio exceeded 50 percent or some other

percentage ceiling. Nor was there any federal or

Massachusetts statute or regulation applicable to all

mortgage loans that prohibited these practices from

occurring together-that is, there was no federal or

Massachusetts statute or regulation that expressly

declared that a bank could not issue a 2/28 ARM,

stated income loan with a loan-to-value ratio of I 00

percent and a prepayment penalty for the early pay­

off of that loan (through sale or refinancing) to a

borrower with a debt-to-income ratio exceeding 60

percent. Nor is there any indication from the record

that it was unusual for sub-prime lenders to engage

in any or all of these practices.

There were, however, Massachusetts statutes

and regulations that prohibited many of these prac­

tices in "high cost mortgage loans," defined as a

loan secured by the borrower's principal dwelling in

which:

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Page 9 Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass. Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

• for a first mortgage, the interest rate exceeded

by more than 8 percentage points the yield on

United States Treasury securities having compar· able maturity periods, or

• the total points and. fees were greater than 5 per­cent of the total loan or $400, excluding up to 2 ·'bona fide loan discount points" paid by the bor­

rower to lower the benchmark rate of interest.

G.L c. I ~DC. ~ 2. The Predatory Home Loan

Practices Act ("the Act"), enacted on August 9,

2004 and made effective on November 7, 2004,

prohibited lenders from making a "high cost mort·

gage loan" "unless the lender reasonably believes at

the time the loan is consummated that I or more of the obligors will be able to make the scheduled pay­

ments to repay the home loan based upon a consid­

eration of the obligor's current and expected in­come, current and expected obligations, employ­

ment status, and other financial resources other than

the borrower's equity in the dwelling which secures

repayment of the loan." G.L. c. 183C. ~ 4. The Act

provided lenders with a safe harbor in making a reasonable determination regarding the borrower's ability to repay-if the borrower's debt-to-loan ratio was 50 percent or less, the borrower was presumed

able to make the scheduled payments. Id. Sec also 209 Cl\1R 3 2.34(c) (same). The Act also prohibited

lenders from adding prepayment fees or penalties to

high cost mortgage loans. Id. at § 5. A violation of

the Act was deemed a violation of Che~prcr 9JA. Id. at § 18(a).

The spirit of the Act is that a lender engages in predatory lending, which is an unfair act in viola­

tion of Chapter 93A, when it makes a loan charging

either high points, fees, or interest to a borrower

whom the lender reasonably believes will be unable to make the scheduled payments and will therefore

face the likelihood of foreclosure. It is noteworthy

that the issuance of such a loan is deemed to be un­fair under Clwptcr 93A even if the lender provides

fair and complete disclosure of the terms of the loan and the borrower is fully informed of the risks he faces in accepting the loan. The unfairness,

therefore, does not rest in deception but in the

equities between the parties. See Swanson 1·.

Ba11kc:rs Lifi· c·o. 3S9 Mass. ,;45, 349 (!91\3) ("In

determining whether an act or practice is unfair, as

opposed to deceptive, we must evaluate the equities between the parties"). The Legislature plainly deemed it predatory and, thus, unfair for a lender to make a high cost home loan, quickly reap the finan­

cial rewards from the high points, fees, or interest,

and then collect the balance of the debt by foreclos­

ing on the borrower when, as the lender reasonably

should have foreseen, he cannot meet the scheduled

payments. The Legislature, equally plainly, was

disturbed by mortgage foreclosures of the borrow­er's principal dwelling, and thought it unfair for a

lender to issue a mortgage loan that the lender reas­onably believes will result in foreclosure of the bor­

rower's home, even if the high cost of the loan fairly reflects the risk of the loan ..

*10 The Attorney General has not alleged or

sought to prove that the loans at issue in this case

were "high cost mortgage loans" governed by the Act. Yet, it is reasonable for this Court to consider whether the loans at issue in this case fall within the "penumbra" of the concept of unfairness reflec­ted in the Act. This Court finds that, as to some

types of loans, they do. Under the Act, it was unfair to issue a mortgage loan when the lender reason­ably believed that the borrower could not meet the

scheduled payments. In the instant case, for those

home mortgage loans which:

1. were adjustable rate loans with an introductory period of three years or less (generally, a 2/28 or

3/27 ARM);

2. with an introductory or "teaser" rate for the initial period that was significantly lower than the ''fully· indexed rate " that is at least 3 percent be-

' ' FN9 low the "fully indexed rate;" ·

FN9. As an example, if the teaser rate is 7 percent, but the rate will reset to the six­month LIBOR plus a margin of 6 percent,

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! Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

Page 10

the fully indexed rate will be 11 percent if

the six-month LIBOR at the time of the loan origination is 5 percent.

3. where the debt-to-income ratio would have ex­

ceeded 50 percent had Fremont's underwriters measured the debt, not by the debt due under the teaser rate, but by the debt that would be due at the ''fully indexed rate,"

the lender reasonably should have recognized (in

the absence of significant liquid or easily liquid­ated assets) that the borrower would not be able

to meet the scheduled payments once the "teaser" rate expired at the close of the introductory peri­

od. Loans with these three characteristics, there­fore, were doomed to foreclosure unless the bor­

rower was able to refinance the loan at or around the close of the introductory period. Tf housing prices declined, however, refinancing was not reasonably likely for these loans if they bore a

fourth characteristic-a loan-to-value ratio of 100

percent or a substantial prepayment penalty (that

is, a prepayment penalty beyond the

''conventional prepayment pe~Jalt~,'' defined in h ' 1 I'" C' ' 2) I· N I J t e Act, G .. -· c. "·' . ~ , or a prepay-

ment penalty that extended beyond the introduct­ory period.

FN I 0. The Act defines a "conventional prepayment penalty" as "any prepayment

penalty or fee that may be collected or

charged in a home loan, and that is author­

ized by law other than this chapter, provided the home loan (1) does not have

an annual percentage rate that exceeds the

conventional mortgage rate by more than 2

percentage points; and (2) does not permit any prepayment fees or penalties that ex­

ceed 2 per cent of the amount prepaid." G .. L. c. i 1\JC, ~ 2.

Consequently, for loans with these four charac­teristics, the lender reasonably should have recog­

nized that, after the introductory period, the bor­

rower would be unlikely to make the scheduled mortgage payments and the loan was doomed to

foreclosure unless the fair market value of the prop­

erty had increased, thereby enabling the borrower

to refinance the loan and obtain a new "teaser" rate

for the introductory period. Given the fluctuations in the housing market and the inherent uncertainties

as to how that market will fluctuate over time, this Court finds that it is unfair for a lender to issue a

home mortgage loan secured by the borrower's principal dwelling that the lender reasonably ex­

pects will fall into default once the introductory

period ends unless the fair market value of the

home has increased at the close of the introductory period. To issue a home mortgage loan whose suc­

cess relies on the hope that the fair market value of

the home will increase during the introductory peri­od is as unfair as issuing a home mortgage loan whose success depends on the hope that the bor­rower's income will increase during that same peri-

FNll od.

FN 11. While the fair market value of hous­

ing in Massachusetts has risen 603% from

1980 to the third quarter of 2007 (compared to inflation of slightly over

250% during that period), its long-term in­vestment value docs not mean that these prices can reliably be expected to increase

each year. Office of Federal Housing En­terprise Oversight, Change in OFHEO

State House Price Indexes (2007 Q3 Data);

Consumer Price Index, Int1ation Calculat­or. Over the past 20 years, housing prices in Massachusetts have fallen twice, in

1989-1992 and 2006-2007. See Kristopher

Gerardi, Adam Hale Shapiro, and Paul

Willen, ''Subprime Outcomes: Risky Mort­gages, Homcownership Experiences, and Foreclosures," Working Papers: Federal Reserve Bank of Boston, www.bos.frb.org/economiclwp!index. htm at 48. Similarly, the New York Stock Ex­

change's Dow Jones Index increased I ,678% between the beginning of 1980 and

the end of the third quarter of 2007, but it, too, experienced three significant periods

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Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

Page II

of negative and/or stagnant growth, in 1978-1982, 1987-199!, and 2001-03. Dow Jones Industrial Average, viewed at fin­ance.yahoo.com/echarts. While in hind­

sight these price drops may be seen as pre­dictable, considering, in the words of

former Federal Reserve Board Chief Alan Greenspan, the "irrational exuberance" of these markets, they are rarely reliably pre­dicted before they happen and do not occur in easily predictable cycles.

The empirical data in the Federal Re­

serve Bank Working Paper cited above demonstrate the extraordinary impact of

falling housing prices on foreclosures. The study estimated that, over the past 12 years, 18 percent of borrowers who purchased their homes with sub-prime mortgages suffered a foreclosure, as compared to only 3 percent who pur­chased their homes with prime mort­gages. Subprime Outcomes at 2. The study found that:

[H]ouse price appreciation plays a dom­

inant role in generating foreclosures: homeowners who have suffered a 20 per­cent or greater fall in house prices are about fourteen times more likely to de­fault on a mortgage compared to homeowners who have enjoyed a 20 per­cent increase. We attribute most of the dramatic rise in foreclosures in 2006 and

2007 in Massachusetts to the decline in house prices that began in the summer of

2005. Subprime lending played a role but that role was in creating a class of homeowners who were particularly sens­itive to declining house price appreci­ation, rather than, as is commonly be­lieved, by placing people in inherently problematic mortgages.

!d. at I. The study also determined that rates of foreclosure "are highly sensit-

ive," not only to house prices, but "to the initial combined loan-to-value ratio at origination .... " !d. at 2. The authors wrote:

Subprirne lenders created a group of bor­

rowers that were much more likely to de­fault for at least two reasons. First, while they did not invent zero-equity borrow­

ing, they did allow a much larger frac­tion of borrowers to start homeowner­ship with no cushion against negative [house price appreciation]. Second, subprime lenders allowed borrowers with a history of cash flow problems and with monthly payments that exceeded fifty percent of current income to enter homeownership.

!d. at 4. In short, the study confirms the extraordinarily high risk of foreclosure that arises in a volatile housing market

when subprime lenders approve loans with the four characteristics identified above.

* 1 I Therefore, just as a high cost mortgage loan is treated as structurally unfair under the Act if the lender reasonably believed at the time the loan was issued that the borrower would be unable to make the scheduled payments, this Court finds that it is within the penumbra of that concept of unfair­ness that any mortgage loan secured by the borrow­er's principal dwelling should be presumed to be structurally unfair if the loan possesses the four characteristics described above:

!. The loan is an ARM with an introductory peri­od ofthree years or less;

2. The loan has an introductory or "teaser" rate for the initial period that is at least 3 percent lower than the fully indexed rate;

3. The borrower has a debt-to-income ratio that would have exceeded 50 percent if the lender's

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Page 12 Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 5 (Cite as· 2008 WL 517279 (M S 17279 {Mass.Super.)

• ass. uper.))

underwriters had measured the debt, not by the

debt due under the teaser rate, but by the debt due under the fully indexed rate; and

4. The loan-to-value ratio is 100 percent or the

loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the in­troductory period.

The effect of the presumption is to shift the burden of production to the lender to demonstrate that .the loan was not actually unfair, perhaps by s

howmg that the borrower had other assets that real­istically could have enabled the borrower to meet

the scheduled payments and avoid foreclosure, or

other reasonable means of obtaining refinancing even if the fair market price of the mortgaged home

had fallen. This presumption would not change the

burden of proving a Chapter 93.1\ violation; the bur­

den of proving that the loan was unfair remains with the plaintiff borrower.

The Attorney General justly may ask why "stated income" applications loans are not included among the characteristics used to determine wheth­er a loan is presumptively unfair, since "stated in­come" loans are so prone to foreclosure. The reason

is that ''stated income" loans are no more prone to

foreclosure than full documentation loans if the

statements in the application are accurate; they be­

come more prone to foreclosure only if the applic­

ant (or the broker with the acquiescence or ignor­ance of the applicant) falsely inflates his income or

assets. While such loans may not be prudent for a

bank to issue because they fail to protect the bank from the risk of fraud, they cannot be said to be un­fair to the borrower for this reason. ln other words

a borrower may not fairly complain that a bank wa~ unfair to him by giving him an opportunity to lie on

his loan application without any meaningful risk of getting caught.

Fremont justly may ask why this Court is ex­tending to all home mortgage loans this principle­that it is unfair for a lender to approve a home

mortgage loan secured by the borrower's principal

residence when the lender reasonably should have

recognized that the Joan is doomed to foreclosure unless the borrower's income or the fair market value of the residence increases-when the Legis­lature declared this to be an unfair act only for high cost mortgage loans. The reason is that this Court does not believe the Legislature believed this prac­

tice to be tolerable for mortgage loans that did not

meet the definition of high cost mortgage loans.

Rather, this Court believes that the Legislature thought it sufficient to focus on high cost mortgage loans because it did not imagine that lenders would issue loans with this degree of risk unless they were

high cost mortgage loans. What has changed since the Legislature promulgated the Act is the increas­

ing prevalence of mortgage-backed securities,

which enabled lenders such as Fremont to assign large quantities of their high-risk mortgages, take a

quick, profit, and avoid the risks inherent in the f-NP

loan. - Consequently, since those purchasing the mortgages to package them as mortgage-backed securities were careless in evaluating the risks of these loans, lenders such as Fremont could profit from sub-prime mortgages that fell below the defin­ition of high risk mortgage loans. As the mortgage market changes, so, too, must the understanding of what lending conduct is unfair.

FN 12. See Interagency Guidance on Subprime Lending, issued by the United

States Office of the Comptroller of the Currency, the Board of Governors of the

Federal Reserve Board, the FDIC, and the Office of Thrift Supervision, March I,

1999 at 6 ("Strong demand from investors and favorable accounting rules often allow

securitization pools to be sold at a gain,

providing further incentive for lenders to

expand their subprime lending program.).

* l 2 Fremont also justly may observe that the lending conduct this Court describes as unfair was not generally recognized in the industry to be unfair at the time these loans were made. Yet, for at least three reasons, this does not mean it is inappropriate

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Not Reported in N.E.2d, 23 Mass.L.Rptr. 567,2008 WL 517279 (Mass. Super.)

(Cite as: 2008 WL 517279 (Mass.Super.))

for this Court to find its conduct to be unfair. First,

as noted earlier, the meaning of unfairness under

Chapter 93A is not fixed in stone; nor is it limited

to conduct that is unlawful under the common law

or prior statutes. Sec Karrar l'. Demuulos, 433 \<1•ts~. at I 2-1 3. Rather, it is forever evolving, not

only to adapt to changing social, economic, and

technological circumstances, but also to reflect

what we have learned to be unfair from our experi­

ence as a commonwealth. Sec Ad v. Bw!ev. 38X

Mass. 307. 3 13 ( !91\3) ("This flexible set of

guidelines as to what should be considered lawful

or unlawful under c. 93/\ suggests that the Legis­

lature intended the terms 'unfair and deceptive' to

grow and change with the times."); Lo\t'e/l Gas Co.

v. A f(umey General, 3 77 Mass. 3 7. 51 ( 1979 J (citations omitted) (quoting Judge Learned Hand's

view that part of the Federal Trade Commission's

duty is "to discover and make explicit those unex­

pressed standards of fair dealing which the con­

science of the community may progressively devel­

op.")

Second, Fremont had more than fair warning of

the dangers posed by the loans bearing the four

characteristics identified above. On October 8,

1999, in its Interagency Guidance on High LTV

Residential Real Estate Lending, issued by the

United States Office of the Comptroller of the Cur­

rency, the Board of Governors of the Federal Re­

serve Board, the FDIC, and the Office of Thrift Su­

pervision, lending institutions were warned:

Recent studies indicate that the frequency of de­

fault and the severity of losses on high LTV

[loan-to-value] loans far surpass those associated

with traditional mortgages and home equity

loans. The higher frequency of default may indic­

ate weaknesses in credit risk selection andior

credit underwriting practices, while the increased

severity of loss results from deficient collateral

protection. In addition, the performance of high

LTV borrowers has not been tested during an

economic downturn when defaults and losses

may increase.

!d. at 2 (footnote omitted). In this report, a high

LTV real estate loan was defined as a loan on a res­

idential property that equaled or exceeded 90 per­

cent of the real estate's appraised value, unless the

loan had appropriate credit support, such as mort­

gage insurance or other readily marketable collater­

al. !d. at I. It was reasonable to expect that the fre­

quency of default and the severity of losses would

be even greater as the LTV approached 100 per­

cent. Indeed, an Office of the Comptroller of the

Currency Advisory Letter (AL 2003-2), issued by

the Deputy Comptroller for Compliance, dated Feb­

ruary 21, 2003 forewarned that it may be found un­

fair to extend loans bearing the four characteristics

identified by this Court:

*13 The terms 'abusive lending' or 'predatory

lending' arc most frequently defined by reference

to a variety of lending practices. Although it is

generally necessary to consider the totality of the

circumstances to assess whether a Joan is predat­

ory, a fundamental characteristic of predatory

lending is the aggressive marketing of credit to

prospective borrowers who simply cannot afford

the credit on the terms being offered. Typically,

such credit is underwritten predominantly on the

basis of the liquidation value of the collateral,

without regard to the borrower's ability to service

and repay the loan according to its terms absent

resorting to that collateral.... When a Joan has

been made based on the foreclosure value of the

collateral, rather than on a determination that the

borrower has the capacity to make the scheduled

payments under the terms of the loan, based on

the borrower's current and expected income, cur­

rent obligations, employment status, and other

relevant financial resources, the lender is effect­

ively counting on its ability to seize the borrow­

er's equity in the collateral to satisfy the obliga­

tion and to recover the typically high fees associ­

ated with such credit. Not surprisingly, such cred­

its experience foreclosure rates higher than the

norm.

Jd at 2.

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-.-...... _

Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.) (Cite as: 2008 WL 517279 (Mass.Super.))

Page 14

Third, even the federal agencies whose failure

to monitor lending practices contributed to the cur­

rent sub-prime lending crisis now recognize that

mortgage loans bearing these four characteristics

generally are imprudent and present an unaccept­able risk of foreclosure. The most recent Statement on Subprime Mortgage Lending issued on July I 0,

2007 by the United States Office of the Comptroller of the Currency, the Board of Governors of the

Federal Reserve Board, the FDIC, the Office of

Thrift Supervision, and the National Credit Union

Administration recognizes the "substantial risks to

both consumers and lenders" of sub-prime ARM

loans bearing certain characteristics, including low teaser rates. Federal Register, Vol. .72, No I 31,

37569 (July 10, 2007) at 37572. Specifically, the Statement declares:

Prudent qualifying standards recognize the poten­

tial effect of payment shock in evaluating a bor­

rower's ability to service debt. An institution's

analysis of a borrower's repayment capacity

should include an evaluation of the borrower's

ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortiz­ing repayment schedule.

ld at 37573. Although this Statement did not address specifically whether it would be unfair un­der consumer protection principles for a lender to approve a loan that the borrower could not afford to

repay at the fully indexed rate, the Statement did

characterize as a "fundamental consumer protection

principle" that loans should be approved "based on

the borrower's ability to repay the loan according to its terms." !d. at 37574. In essence, now that the

foreseeable perils of these sub-prime lending prac­tices have been experienced, to the great detriment

of homeowners, financial institutions, the securities market, and the overall economy, these federal agencies have belatedly recognized that it is both

imprudent and unfair to approve a mortgage loan that the borrower cannot reasonably be expected to

repay if housing prices were to fall. Just because we, as a society, failed earlier to recognize that

loans with these four characteristics were generally

unfair docs not mean that we should ignore their

tragic consequences and fail now to recognize their

unfairness. In short, approval of loans bearing these four characteristics, in the absence of other liquid or easily liquidated assets or special circumstances,

was unfair before and it is unfair today, even if we were too blind earlier to recognize its unfairness.

* 14 To be sure, the fact that Fremont's loans

bearing these four characteristics were not gener­

ally recognized to be unfair at the time these loans

originated is not irrelevant to this Court's considera­

tion of this case. This Court will certainly take that

factor into account in determining what preliminary

injunctive remedy is appropriate to address the un­fairness.

Moreover, even if a Fremont loan were to be preliminarily found unfair (rather than simply pre­

sumptively unfair), that finding does not mean that

the borrower is released from his obligation to re­

pay this debt. The borrower received the money

that was lent pursuant to a written loan agreement and presumptively is expected to repay the loan. The impact of this preliminary injunction will be nil upon a borrower who can afford to repay the Joan; its impact will be felt only by those who cannot af­

ford to repay the loan in full and now face the risk

of foreclosure. The reason is that the unfairness of these loans rests in their vulnerability to foreclos­

ure, not in the rate of interest charged or their lend­ing terms.

In determining whether to grant a preliminary injunction, this Court must perform the three-part

balancing test articulated in f>ackuging lnduslries

Group, Inc. l'. Chenev, 3 80 Mass. 609, (> 16-(J I 7

( 1980). First, the court must evaluate the moving party's claim of injury and its likelihood of success on the merits. ld at 617. Second, it must detennine whether failing to issue a preliminary injunction would subject the moving party to irreparable in­jury-losses that cannot be repaired or adequately compensated upon final judgment. ld at 617 & n. I l. Third, "[i]f the judge is convinced that failure to

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f Page 15

Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.)

(Cite as: 2008 WL 517279 (Mass.Super.))

issue the injunction would subject the moving party

to a substantial risk of irreparable harm, the judge

must then balance this risk against any similar risk

of irreparable harm which granting the injunction

would create for the opposing party." 1d at 617. In

balancing these factors, "[w]hat matters as to each

party is not the raw amount of irreparable harm the party might conceivably suffer, but rather the risk

of such harm in light of the party's chance of suc­cess on the merits. Only where the balance between these risks cuts in favor of the moving party may a

preliminary injunction properly issue." !d. When

the preliminary injunction is sought by the Attorney

General, this Court must also consider whether a

preliminary injunction would serve the public in­

terest. Communwealrh v. ELM t\fedi('(J/ l.ahurator­

ws. /r,, .. , 3.1 Mass.App.Ct. 71, ~n (1992). See also

JJruuf.:lil!e 1'. (1uldsrein. 3l)X \1ass. 44.1. 447 ( 1983).

This Court finds that the Attorney General is

likely to prevail in proving that many of the mort­

gage loans issued by Fremont secured by the bor­

rower's primary residence that bear the four charac­

teristics outlined above are not merely pre­sumptively unfair but actually unfair under Ch~1pt..:r

93 A. This Court also finds that, with a carefully

measured preliminary injunction, the balance of

harms favors the Attorney General. This Court re­cognizes that an overly broad preliminary injunc­tion may not achieve a balance of harms that favors

the Attorney General.

*IS The Court's preliminary injunction shall re­

quire the following procedure before Fremont initi­

ates a foreclosure proceeding:

I. Before initiating or advancing a foreclosure on

any mortgage loan originated by Fremont that is (a) NOT presumptively unfair, because it does not possess each of the four characteristics identi­fied above, or (b) NOT secured by the borrower's

principal dwelling, or (c) that is secured by a dwelling that is vacant or uninhabitable, Fremont

shall first give the Attorney General 30 days ad­vance written notice so that the Attorney General

can verify that the proposed foreclosure falls out-

side the scope of this Preliminary Injunction. If

the Attorney General has not given written notice

of an objection to Fremont by the 30th day, based

on her finding that the loan is presumptively un­

fair and is secured by the borrower's principal

dwelling and that the dwelling is both inhabited

and inhabitable, Fremont may proceed with the

foreclosure. If the Attorney General has given written notice of an objection, Fremont shall pro­

ceed in accordance with paragraph 2 below.

2. Before initiating or advancing a foreclosure on

any mortgage loan originated by Fremont ( 1 )(a)

that is presumptively unfair, because it possesses

each of the four characteristics identified above,

and (b) secured by the borrower's principal

dwelling, and (c) where the dwelling is neither

vacant nor uninhabitable, or (2) in which the At­torney General has provided a written objection in accordance with paragraph 1 above, Fremont

shall give the Attorney General 45 days advance written notice of the proposed foreclosure, identi­

fying the reasons why foreclosure is reasonable under the circumstances and/or why the Attorney

General's written objection under paragraph I above is in error. If the Attorney General has not

given written notice of an objection to Fremont

by the 45th day, Fremont may proceed with the foreclosure.

3. If the Attorney General has timely given a written objection under paragraph 2 above, the Attorney General and Fremont shall within the

next 15 days attempt to resolve their differences

regarding the foreclosure. If these differences

have been resolved, the Attorney General will no­

tify Fremont in writing that she has withdrawn

her written objection. If these differences are not resolved, Fremont may proceed with the foreclos­ure only with the prior approval of this Court (or a special master appointed by this Court), which

it may seek on the 16th day.

4. In considering whether to approve the foreclos­

ure, this Court will determine (a) whether the loan is actually unfair and is actually secured by

Add.25 © 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 16

Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Supcr.) (Cite as: 2008 WL 517279 (Mass.Super.))

the borrower's primary residence that is both in­habited and inhabitable, (b) whether Fremont has taken reasonable steps to "work out" the loan and avoid foreclosure, and (c) whether there is any fair or reasonable alternative to foreclosure. This

Court will seek to expedite these decisions but, if the number of such matters grows too large, this Court may need to appoint a special master to as­sist the Court.

* 16 In designing this preliminary injunction, this Court anticipates that Fremont will act respons­ibly in attempting to "work out" mortgage loans prior to instituting foreclosure, and that the Attor­ney General will act judiciously in determining which loans do not warrant foreclosure. This Court also recognizes that, while it can establish a process that will permit the parties to resolve the vast ma­jority of these issues, it cannot delegate to any party the power ultimately to determine whether a mort­gage loan is actually unfair or whether foreclosure is the proper last resort.

Nothing in this Preliminary Injunction is inten­ded in any way to interfere with or be inconsistent with the FDIC's Consent Agreement with Fremont. That Consent Agreement expressly declares that its provisions do not bar a state Attorney General from seeking further remedies against Fremont for unfair or deceptive practices. Consent Agreement at 23. Implicitly, if the Attorney General were to prevail, preliminary injunctive relief ordered by a court to ameliorate the adverse consequences of Fremont's unfair practices are also not barred by the Consent Agrl'ement. Nor are the terms of this Preliminary

Injunction so harsh as to interfere with the FDJC's

objective of restoring Fremont to firmer financial footing through the restoration of sound banking practices.

Finally, this Court emphasizes that borrowers who have received presumptively unfair loans from Fremont should not interpret this preliminary in­junction to mean that they have been released from their obligation to repay these loans. They have not been given any such release. Borrowers share with

Fremont the responsibility for having entered into a mortgage loan that they now cannot repay. The spirit of this decision is simply that Fremont, hav­ing helped borrowers get into this mess, now must take reasonable steps to help them get out of it.

ORDER For the reasons stated above, this Court hereby

ALLOWS the Attorney General's motion for a pre­liminary injunction to the extent that, pending final adjudication or further orderr of this Court, this

Court ORDERS as follows:

I. Before initiating or advancing a foreclosure on any mortgage loan originated by Fremont that is (a) NOT presumptively unfair, because it does not possess each of the four characteristics identified above, or (b) NOT secured by the borrower's prin­cipal dwelling, or (c) that is secured by a dwelling that is vacant or uninhabitable, Fremont shall first give the Attorney General 30 days advance written notice so that the Attorney General can verify that the proposed foreclosure falls outside the scope of this Preliminary Injunction. If the Attorney General has not given written notice of an objection to Fre­mont by the 30th day, based on her finding that the loan is presumptively unfair and is secured by the borrower's principal dwelling and that the dwelling is both inhabited and inhabitable, Fremont may pro­ceed with the foreclosure. If the Attorney General has given written notice of an objection, Fremont shall proceed in accordance with paragraph 2 be­

low.

*17 2. Before initiating or advancing a fore­

closure on any mortgage loan originated by Fre­

mont (I )(a) that is presumptively unfair, because it possesses each of the four characteristics identified above, and (b) secured by the borrower's principal dwelling, and (c) where the dwelling is neither va­cant nor uninhabitable, or (2) in which the Attorney General has provided a written objection in accord­ance with paragraph I above, Fremont shall give the Attorney General 45 days advance written no­tice of the proposed foreclosure, identifying the reasons why foreclosure is reasonable under the cir-

Add.26 © 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

r

Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008 WL 517279 (Mass.Super.)

(Cite as: 2008 WL 517279 (Mass.Super.))

cumstances and/or why the Attorney General's writ­

ten objection under paragraph l above is in error. If

the Attorney General has not given written notice of an objection to Fremont by the 45th day, Fre­mont may proceed with the foreclosure.

3. If the Attorney General has timely given a

written objection under paragraph 2 above, the At­

torney General and Fremont shall within the next

15 days attempt to resolve their differences regard­

ing the foreclosure. If these differences have been

resolved, the Attorney General will notify Fremont

in writing that she has withdrawn her written objec­tion. If these differences are not resolved, Fremont

may proceed with the foreclosure only with the pri­

or approval of this Court (or a special master ap­pointed by this Court), which it may seek on the

16th day.

4. In considering whether to approve the fore­

closure, this Court will determine (a) whether the

loan is actually unfair and is actually secured by the

borrower's primary residence that is both inhabited and inhabitable, (b) whether Fremont has taken reasonable steps to ''work out" the loan and avoid foreclosure, and (c) whether there is any fair or

reasonable alternative to foreclosure. This Court will seek to expedite these decisions but, if the

number of such matters grows too large, this Court

may need to appoint a special master to assist the

Court ..

Mass.Super.,2008. Commonwealth v. Fremont lnv. & Loan Not Reported in N.E.2d, 23 Mass.L.Rptr. 567, 2008

WL 5 l 7279 (Mass. Super.)

END OF DOCUMENT

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Page 17

.. Westlaw

Not Reponed in N.E.2d, 2011 WL 61186 (Mass.Land Ct.)

(Cite as: 2011 WL 61186 (Mass.Lund Ct.))

H Only the Westlaw citation is currently available.

Massachusetts Land Court.

Department of the Trial Court, Worcester County. Daniel J. LYONS et ux, Plaintiff,

V.

MORTGAGE ELECTRONIC REGTSTRATION

SYSTEMS, INC.,

and Countrywide Home Loans, Inc., its Successors and

Assigns, Defendants.

No. 09 MISC. 416377(JCC). Jan. 4, 20! 1.

DECISION ALLOWING DEFENDANTS' MO­TION TO DISMISS THE COMPLAINT UN­

DER MASS. R. CJV. J>. 12(B)(6) JUDITH C. CUTLER, Justice.

*1 In this action, Plaintiffs Daniel J. Lyons and Tammy A. Lyons challenge the validity of a fore­closure deed issued for property at 2 J Chapin Street in Northborough, Massachusetts (the ''Property").

Defendant Mortgage Registration Systems, Inc.

("MERS") as nominee for Defendant Countrywide

Home Loans, Inc. ("Countrywide;;~ issued said Foreclosure Deed to a third party · after con­

ducting a foreclosure sale on October 26, 2009. In

their Verified Complaint, the Plaintiffs assert that

MERS did not have proper authority to conduct the foreclosure sale and that, therefore, the sale was

void as a matter of law. The Plaintiffs claim that,

because the foreclosure sale was conducted by a party lacking the statutory power of sale under the

mortgage, there is a cloud on the Plaintiffs' title to the Property. Finally, the Plaintiffs assert that only the lender, as the holder of the note, has the right to

execute the power of sale under the mortgage until,

and unless, it has assigned that mortgage. The

Plaintiffs contend that there is no such assignment of record here, and seck cancellation of any unre­corded assignments which may have been made.

Page 1

F:--J t. Said foreclosure deed was issued to

the Bank of New York Mellon flk/a The Bank of New York as Trustee for the Cer­

tificate Holders CW ABS, Inc. Asset­Backed Certificates Series 2005-17.

On February 9, 2010, Defendants MERS and

Countrywide filed a Motion to Dismiss Plaintiffs' Complaint, under Mass. R. Civ. P. t 2(b)(6). On

February 26, 2010, the Plaintiffs filed their Opposi­tion thereto. A hearing on the Motion was held on

June 9, 2010, at which time the court invited the

parties to submit certain supplemental documenta­tion referenced in, and/or n;:lied upon, in the Plaintiffs' Verified Complaint.!-· NZ The Defendants

submitted additional documents on June 21 and

June 23, 201 0; the Plaintiffs submitted additional

documents on June 22, 20 l 0.

FN2. An evaluation under 12(b)(6) can

properly include the entirety of documents integral to, referenced in, or explicitly re­lied upon in the complaint, even if they

were not attached to said complaint. See. e.g., Juhn\tun 1'. l3ox. 453 Mas~. 569, 5K3

(~00()) and i\-lonam v. Kohricf; 0/l\hore

Fund. Ud. 442 Mus~. 43, 45, 11. 4 (2004),

and cases cited therein.

After considering the documents which are ref­

erenced in, or are integral to, the Complaint (including the Plaintiffs' Certificate of Title to the

Property, the Note and Mortgage, and the Foreclos­ure Deed and Affidavit), the parties' written memoranda of law, and representations made dur­

ing the hearing on the Defendants' Motion to Dis­miss, I conclude that the Plaintiffs are not entitled to relief under any of the theories advanced in their Complaint. The Defendants' Motion to Dismiss is

ALLOWED.

The salient facts in this case are not disputed. The Plaintiffs arc listed as owners of the Property on Transfer Certificate of Title No. 14907, issued

Add.28 © 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

Not Reported in N.E.2d, 2011 WL 61186 (Mass.Land Ct.) (Cite as: 201 I WL 61186 (Mass.Land Ct.))

by the Worcester County District Registry of the FN3 Land Court on May 7, 2003. · · On November 22,

2005, the Plaintiffs executed a note in favor of

Countrywide in the amount of $200,000 (the

"Note"). On the same day, the Plaintiffs granted a

mortgage on the Property, to secure the Note. Said mortgage was registered on November 30, 2005 in

the Worcester County Registry District of the Land Court as Document No. 89!53 (the "Mongage"),

and noted as an encumbrance on the Plaintiffs' Cer­

tificate of Title to the Property. There are no as­

signments of the Mortgage (to MERS or any other party) noted on Certificate ofTitle No. 14907.

FN3. Prior to the issuance of said Certific­

ate, the Plaintiffs had acquired fractional interests in the Property under Transfer

Certificate No. 14 789. Said Certificate No.

14789 was cancelled when Transfer Certi­ficate No. 14907 was issued to the Plaintiffs.

*2 The Mortgage executed by the Plaintiffs identifies Countrywide as the "Lender" and MERS as the mortgagee. The Mortgage states that

MERS is a separate corporation that is acting solely as nominee for Lender and Lender's suc­cessors and assigns. MERS is the mortgagee un­der this Security Instrument.

The Mortgage further provides, under the head-ing "POWER OF SALE," that

[t]his Security Instrument secures to the Lender:

(i) the repayment of the Loan, and all renewals,

extensions and modifications of the Note; and (ii)

the performance of Borrower's covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower does hereby mortgage, grant, and conve.v to lv!ERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS, with power of sale, the following de­scribed property ... 21 Chapin Street, Northbor­ough Massachusetts. (Emphasis added).

Page 2

In their Motion to Dismiss, the Defendants as­

sert that MERS, as designated mortgagee under the

express terms of the Mortgage, was entitled, upon

breach of the Mortgage conditions, to execute the power of sale contained in the Mortgage, by con­ducting a foreclosure auction pursuant to Ci. L.c.

244. § 14. In the Plaintiff~' Opposition to the Mo­tion, they do not deny that they were in default of their obligations under the Mortgage prior to the

foreclosure sale. Nor do the Plaintiffs argue that the

foreclosure sale was not conducted in accordance

with statutory procedures for notice and advert­

ising. Rather, the Plaintiffs contest the authority of

MERS to foreclose on the Property and conduct the foreclosure sale, by asserting that only Country­wide, as Lender, was authorized do so where there

is no record that the Mortgage was ever assigned to

MERS. The Plaintiffs, moreover, contest the legal­ity of the "MERS as nominee" for Lender arrange­

ment specified in the Mortgage, asserting that such an arrangement unlawfully separates the note and the mortgage.

The Mortgage expressly designates MERS as the mortgagee (solely as nominee for the Lender, and its successors and assigns). Moreover, for the

purpose of securing the Borrowers' performance under the Mortgage and the Note, the Mortgage in­cludes the Lyons' express grant and conveyance of

the Property, with the power of sale, to M ERS as nominee in said capacity.

There is no viable basis for the Plaintiffs' claim that the foreclosure sale of the Property should be

invalidated because MERS foreclosed on the Prop­

erty as nominee for Countrywide. The Mortgage it­self specifically names MERS (as nominee for the Lender) as the "mortgagee," and expressly grants the power of sale to MERS as nominee. I find noth­ing in G.L. c. 244, 0 14 which would obviate these . FN4 , nghts.

FN4. Section 14 of Cha plc..:r 244, entitled "Procedure in Foreclosure Under Power of Sale; Form and Publication of Notice," provides, in relevant part that "[t]he mort-

Add.29 t'l 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

Not Reported in N.E.2d, 2011 WL 61186 (Mass.Land Ct.) (Cite as: 2011 WL 61186 (Mass.Land Ct.))

gagee ... , or a person authorized by the power of sale ... may, upon breach of con­dition and without action, do all the acts authorized or required by the power ... (Emphasis added).

The U.S. Bankruptcy Court's decision in In re l!uggins, 357 B.R. !80 ( Bankr.D.Mass.2006), also

illuminates the fallacy in the Plaintiff:~· arguments that MERS lacked authority to foreclose as the Lender's "nominee" because such an arrangem,ent

I , II h d J·:\JS un awtu y separates t e note an mortgage. Addressing circumstances strikingly similar to

those in the instant case, the Bankruptcy Court ruled in Huggins that ''MERS as the mortgagee

named in a recorded mortgage (albeit in a nominee capacity)" was authorized under G.L.~.:. 244, ~ 14 to

exercise the power of sale. In re Hug~.;in.1, 357 B.R. at I 03. The Bankruptcy Court also found no discon­nection between the note and the mortgage where MERS was acting as nominee for the lender which held the note, and that

FN5. The cases cited by the Plaintiffs to support their arguments are either not rel­evant to question of whether a lender's nominee may exercise the power of sale, or

arc not controlling because the cases arc from another jurisdiction.

*3 the logic of a denial of MERS's foreclosure right as mortgagee would lead to anomalous and perhaps inequitable results, to wit, if MERS can­not foreclose though named as mortgagee, then

either fthe lender] can foreclose though not named as mortgagee or no one can foreclose, out­

comes not reasonably or demonstrably intended by the parties.

In r,· llztggills, 357 B.H .. at I l-\4.

Here, too, the Plaintiffs expressly granted the Mortgage to MERS (as nominee for the Lender), with the power of sale. As a result of this grant, MERS needed no assignment. Where such an ar­rangement is entirely consistent with the express terms of the Mortgage, as well as with Massachu-

Page 3

sctts law, the Plaintiffs' complaint docs not "plausibly suggest an entitlement to relief." fun­

nacchino l'. Ford Motor Company. 45 I Mass. 623, 636 (200R). Accordingly, Judgment shall enter dis­missing the Plaintiffs' Complaint, with prejudice.

Mass.Land Ct.,20ll.

Lyons v. Mortgage Elec. Registration Systems, Inc. Not Reported in N.E.2d, 2011 WL 61 I 86 (Mass.Land Ct.)

END OF DOCUMENT

Add.30 :g 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

\'

---' . l ' ··~ '

SUFFOLK, ss.

COM;v10NWEAL TH OF MASSACHlJSETfS

IIE1\'RIETTA EATON

vs.

SliPF:RIOR COURT CIVIL ACTION 'i 0 .~J J -I.J.8..l.~

// -;Ji)-'

FEDERAL NATIONAL ,\40RTCAGE ASSOClATION & anothcr 1

MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF'S MOTIOI\ v:.·:: F()J{ PI<EI .. JMINl\llY INJtJNCrfJ()N

The plaintiff Henrietta Eaton ("Eaton") brought this action against defendants

Fdcral National Mortgage Association ("Fannie Mac") and Green Tree Servicing, LLC

("Green Tree") (collectively, "Defendants"). The matter is before the court on Eaton's

motion for a preliminary injunction to enjoin Fannie Mae from prosecuting a summary

process eviction ca.<;e brought against Eaton in the Boston Housing Court. for the

reasons discussed below, Eaton's morion f'ur a preliminary injunction is ALLOWED.

BACKGROUND

On September 12,2007, Eaton executed a note in f<1vor of BankUnitcd, FSB in

the amount of $145,000 (the "Note"). To secure that obligation, Eaton

contemporaneously granted a mongage on her home to Mortgage:: Electronic Registration

Systems, Inc. ("MERS") acting a.'> nominee for Bank United, FSB (the "Mortgage").

MEI(S subsequently assigned the Mortgage to Green Tree~ the assignm~·m does not

reference the Note.

--····-·--·-·- ·--·-·------i (in:en Tree Servicing, LLC

Add.31

Due to Eaton's nti!un: to make payments on the Note. Green Tree moved to

foreclose on her horne. On November 24. 2009, Green Tree conducted a foreclosure

auction where it.submitl<..:d the highest hid of $170.185.89. CJrcen Tree later assigned its

rights to the winning bid ro Fannie Mae.

On January 25, 10 I 0, Fannie Mac commenced a summary process action in

Boston Housing Court to evict Eaton. In response, Satan filed a counterclaim,

contending that the foreclosure was invalid. Eaton maintained that because Green Tree

did not possess the Note at the time of the foreclosure, it did not have the authority to

enforce the Note through the foreclosure process. After oral argument and hearing on the

issue, the Housing Court granted a stay of the summary process action allowing Eaton to

seck relief in the Superior Court. Eaton now seeks a preliminar:v injunction to prevent the

eviction action from proceeding further.

The Defendants hnve produced a photocopy of the Note. It is endorsed in blank

:md does not bear an allonge indicating when it was endorsed or who held it at the time of

the forcdosure. For the purposes of this motion only, Defendants stipulate that Green

Tree did not hold the Note when the foreclosure occurred.

DISCUSSION

To obtain iqjunctivc relief a plaintiff must demonstrate that: ( 1) she is·tikely to

succeed on the merits of her claim; (2) irreparable harm will result absent the injunction;

and (3) the irreparable ham1 outweighs any harm the defendant will sutter if the

injunction is granted. t.?s:1agi!lgJQdus. Gr,n., Inc. v. ~h~J.ley, 3RO Mass. 609, 617 (1980).

2

Add.32

A. Jf an if1.iynctiotillnot_granted. Eaton will sutler irr~n~rabl~_bann tl.ill! QU!wcighs atl):__Qotcnti<ll ham1 to the Defendants.

Eaton has clearly demonstrated that she will suffer irreparable harm without an

injunction and that such harm outweighs any harm Fannie :'viae rnay ~uffcr if an

injunction is granted. Absent an injunction, Fannie Mae will proceed \\ith its eviction

action against Eaton and she >viii lose her horne. The loss of one's property is a

considerable ham1. See Strm:.l9n v. (hm!m.i9.D Mo.r_tg.JJn re ~yay_tQ.Q), ](iO B.R. 8. II

(Ban.kr. D. Mass. 2007) (in granting injunction based on debtor's claim of invalid

foreclosure, finding that "the loss of the [d)ebtor's home would constitute an irreparable

harm"). Fannie Mae, conversely. is likely to face only financial loss if an injunction is

granted. Significantly, any such loss will be mitigated by momhly use and occupancy

payments which have been ordered hy the Housing Court during the pendency ot this

action

Eaton argues that the tcm~closure of her home was invalid because Green Tree did

not hold the Note when the foreclosure occurred. The Defendants. however, contend that

because Green Tree possessed the Mortgage, it had sufficient authority to foreclose on

Eaton's horne. This court tinds that L~aton is likely to succeed on the merits of her claim.

I. Under the common law, both mortga,;e und mortgage note must he held by the foreclosing entity to validly.fim·dose.

In the course of commerce, the two instmments acquired hy a lender when a

mortgage loan is funded may then.:afler be separately transferred or assigned; the

promissory note (evidencinr,, the deht) and the mortgage note (securing the debt) may

travel independently. !:<:HnSQLL& Co.J.nc. v. Abrams, 305 Mass. 238, 245 (1940); M.G.I..

3

Add.33

\"'

'

2!8 s. 28. But as th1s court rc:ads the common law, th(~ two instruments must be re-united

in order to effectively foreclose the mortgagor's right ro redeem 1 he property. See

Wg!gll v. WiQ~hest~_r. IS I Mass. 4() J, 465 ( 1860) (''the posst·ssion of the debt [is)

essential to an effective mongage ... withow it (one cannot] maintain an action ro

foreclose the mortgage."): (}0\VI~Y...X:.:..J\~iams, 226 Mass. 582.585 (1917) ("possession of

the note I is j essential to an enforceable mortgage without wh 1ch I no) mortgage could

effectively be foreclosed . .''j It appears that this possession must be actual and physical.

See Qeffen v. Paletz, 3 12 1\-Liss. 48, 54 ( 1942) ( .. the {assignee of the mortgage] never had

possession of the (promissory J note and consequently, is not a 'Holder' or 'Bearer").

Thus, as Eaton accurately points out, Massachusetts courts have historically held

that one must hold both the mortgage and the mortgage note before initiating foreclosure.

This rule 11ows from rhe tact that a mortgage, by definition, is simply a security IClr the

note. Private Lendi!]g_& P1JI.9h4~ing, Inc. v. Fir$J Afl1. Title lnLro .. 54 Mass. App. Ct.

532, 537 (2002). ft is "but an incident to the debt." Perr~ v. ~)liver, 317 Mass. 538, 54!

(1945); set: Q~ral !_~ Cs~g!.ll__(or.IL:. v . . Stem, 291 Mass. 86,89 (1935). Without the

mortgage note, a mortgagee holds nothing more than ''a mere technical interest" in tnJst

for the note holder. ':}/ olco_li. R l Mass. at 465; see Morris v. Ba~9J.l, 123 Mass. 58, 59

( 1877) (mortgagee without mongage note holds "naked legal title" in trust); Young v.

MilJgr, 72 Mass. !52, 154 ( 1856) (mortgagee without mortgage note holds a "barren fee"

in trust); Sanger v. B~ng~J.tt. 78 Mass. 365, 367 (1859) ("A mortgage cannot be made

available without connecting it with the debt or duty secured thereby. To one who has

not the debt, it is of no value as property, as it could at most lx: only resorted to aS a trust

for the benefit of tl1e holder of the note."). The mortgage note has a pamsitic quality, in

4

Add.34

that its vitality depends on the promissory note. See ~}~[fen at 54. (''iftht: debt itself

were not in existence, the assignee has ... at most a naked legal title to the mortgage.)

There is no inconsistency between this analysis and the recent decision in

U.S.Ban.k .. tlation:ll Association v. !bang, 458 Mass. 637 (2011). lQanez restated

common law of the Commonwealth to the effect thnt rhc assignment of a mortgage must

be efft:crive heforc l'orcclosurc in order tube valid. In ib!lncz. it was undisputed that the:

foreclosing entities were the note holders. The plaintiffs argued that, as note holder,<,.

they had a suflicicnt financial interest to foreclose. Not so, said the Court; as note

holders separated from the mortgage due to a lack of effective assignment, they h11d only

a beneficial interest in the mortgage note. The Court held that the power of snle statute.

by its tem1s, granted that authority to the mongagee, not to the owner of the bencficJ~Ji

intcn:st. 2 The SJC did not address the authority of the assignee of the mortgage not in

possession of the note to foreclose.

Emphasizing the age ofthe Massachusetts appellate cases upon which Eaton

relies, Defendants argue that G. L. c. 244, § I 4 has supplanted the rule articulated in

Y/olcott. and related cases.

2. G. L. c. 24-/, .i\ 14 has no! superseded the common law.

General Laws c. 244, § 14 provides th<Jt:

The mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, or the attorney duly authorized h) a writing under seal, or the legal guardian or conservator of such mortgagee or person acting in the name of such mortgagee or person, may, upon hrcach of condition and \Vithout action, do all the acts authorized or rcqlJired by lhe power (ofsalej ....

2 Such power can be rightfully exercised by "the mortg<~gee or his executors, administrator~. StKee~\or~ nr assigns.'' M .G.L c. I !D §21

Add.35

The Defendant:. observe thar that this ::,latute is directed solely to the mortgaxee without

reference to rhe hold,_,,. of tht: underlying note. They invite this coun to consider the plain

meaning of the statute. However, the plain meaning of morrgagee. as intended by the

legislature at enactment and the present day interpretation of the tem1, may \vell differ:'

Moreover. this court must be cautious bcfi)re interpreting a statute .. as effecting a

material change in or a repeal of the common law unless che intent to do so is cleurly

expressed." !3rear v. _Fagan, 447 Mass. 68, 72 (2006) (quoting Pin~ v. :White, 320 Mass.

487,491 (1946)) (internal quotes omitted); see Cornrru:.r£i.~l Wharf E. Condo. Ass'n v.

Waterfront Parki~, 407 Mass. 123, 129 (!990) (court should not presume that

I .egislature intended ''a radical change in the common law without a clear expression of

such intent."). No showing has been made to date that the Legislature clearly intended to

modify the common law to accommodate the present interpretation. 4

The legislative history of G. L. c. 244, § 14 reveals no such intent. Chapter 244, §

14 has its roots in an 1857 statute, which also uses the term mortgagee wirhow reference

to tlw note holder. The 1857 stature stutes in relevant pan:

ln all cases, in which a power of sale is conwined in a mortgage deed of real property, the mortgagee, or any person having his estate therein, or in or by such power authorized to act in the premises, may, upon a breach of the condition thereof, give such notices and do all such acts as are authorized or required by such power ....

----------------' Black's Law Dictionary defined mortgagee as "he that takes or receives a mortgage" in the First rlm>Ugh Fifth editions spanning 1891 to 1979. It was rendered gender-neutral in the Sixth edition. In 1999, the term wa~ defined "one 10 whom property is mortgaged; the mortgage-creditor, or lender· ·also lt~rrned mortgage- holtkr": rJris tt'mlinology is retained into the Ninth tx!ition. This is persuasive of the proposit1on that, leaving aside conveyancers, those having reason to use the term in general legal discour;e intended mortgagee w mean rlw holder of the note and the mungagc, <llld not the assignee of the mortgagr only

4 No appellate coun ofthe Commonwealth ha.\ mt1fied the Defendants' interpretation, although ir has heen

adopted by a nurnher of trial courts.

Add.36

St. 1857, c 229. §I. This statute was in effect when the Wolcott and Crov.lev couns ' ·---- --------

ohscrved that one must hold the note in order to enforce it through foreclosure. Thus. the

courts evident] y bel icved that the term mortgagee as used in the 1857 statute pre:;umes

that the mongage holder is also the holder of the mongage note. Because G. L. c. 244.

§ 14 is so similar 10 the 1857 statute. the assumption underlying the !857 statute must

exist in §14.

It is also apparent from the larger context of G. L. c. 244 that the Legislature

likely did not intend the word mortgagee to mean that one can initiate a t(m~closurc

without the note. General Laws c. 244. § 178 which deals with the deficiency after

foreclosure provides in relevant pan:

No action for a deficiency shall be brought after June thirtieth, nineteen hundred and forty-six by the holder ofa mortgage nore or other obligation secured by mortgage of real estate ajier a foreclosure sale by him taking place after January first, nineteen hundred and forty-six unless a notice in writing of the mortgagee's intention ro foreclose the mortgage has been mailed, postage prepaid, by registered mail with return receipt requested, to the defendant sought to be charged with the deficiency at his last address then known to the morrgagee, together with a warning of liability for the deficiency, in substantially the form below, not less than twenty­one days before the date of the sale under the power in the mortgage, and an affidavit has been signed and sworn to, within thirty days after the foreclosure sale, of the mailing of such notice. A notice mailed as aforesaid shall be a sufficient notice, and such an affidavit made within the time specified shall be prima facie evidence in such action of the mailing of such notice. (italics supplied.)

The section implicitly assumes that the holder of the mortgage is also the holder of the

mortgage note. It uses the tcnn mortgagee and holder <?fa mortga~;e note

interchangeably. The use ofthe tem1 mongage note when modem parlance would call

for promnsory note reflects a common understanding of generic terms, bad when the

7

Add.37

' i!

_.JJ. j

statute was enacted. The phrase "foreclosure sale hy· him" in the first sentence refers to

the holder of the mortgage note. undcm1 ining De tendants · interpretation.

··Where two statutes deal with the same subject they should be interpreted

harmoniously to effectuate a consistent body of law." Boston Hous. AuJ.h: v. L.a(>QI

Rel_a_tions Comm 'n. J 98 Mass. 7 l 5. 718 ( 1986 ). Sections 14 and I 7B both address the

collection of a loan secured by a mortgage. In order for the two provisions within G. L.

c. 244 to be read harmoniously, the term morrgagee must refer to a party in possession of

both the mortgage and the note securing it. 5

To support their reading of mortgagee in G. L. c. 244, § 14, the Defendants rely

on a !\1assachusetts federal district court case and a Massachusetts Superior Court case

that rejected argumems similar to Eaton's based on the statute's language. See Valerio v.

U.S.J}ank. N.:\., 716 F. Supp. 2d 124, 128 (D. Mass. 2010) (noting statute governing

statutory power of sale is addressed to mortgagees rather than note holders); 6_Q.~.mson v.

Mor:tg§l.!e Elec. R~llistratiQ!LSy,<i,_,.J.Dc., 2011 Mass. Super. LEXIS 32 at *9~ I 0 (Mass.

Super. 20 II) (same); see also Alil:;l~rti v. GMA~~JY1qr:t.g<1g~,.JJ.,J;., 20 II U.S. Dist. LEX IS

45858 at* 15 (D. Mass. 20!!) (citing Valerio); Mcc..K<;nllli v. Wells Fargo Bank, N.A, U.S.

Dist. LEXIS 28719 at *7 (D. Mass. 2011) (same). These decisions were based on the

plaintiffs' failure to cite supporting authority. The VJlJ~rio court emphasized plaintilTs

failure to provide it any Massachusetts case law on the subject. 716 F. Supp. 2d at 128.

------~-------

5 The Defendant's usage of"mortgagee" also renders the statute inconsistent witll G. L. c. I 06, § 3·30 I, a

statute passed after G. L c. 244, § 14. Subject to certain exceptions not relevant here, under§ 3-301, the only person entitled to enforce a promissory note is the holder of the note. Citing Pemsteig v. Stimpson, 16 Mass. App. Ct. 2ll3 (1994), the Defendants argue that § 1-301 does not govern promissory notes. Pcmstc.m. however, only stands for the proposition that Article 9 of the Massachusetts version of the Uniform Commercial Code("{ JCC") does not apply to a guarantee contract. In contrast, First Nat. Bank of Cape ~od v. North AQ!!.m~Hoosac Sav. Bank suggests that Article 3 is applicable to mortgage notes. 7 Mass. App. Ct. 790, 796 ( 1979) ("The Uniform Commercial Code continues to recogni7.e the negotiability of a note which is secured by a real estate mortgage.").

Add.38

Likewise, in _t'\damson, the coun noted the "absence of authority" for rlaintiff's

proposition. 2011 Mass Super. LEXIS 32 at *9. In contrast. Eaton h:::; persuasively

cited Massachust!tts authority to support her argument

3. Sound reason supporrs requiring the mortgaxe and mongage note to he umfied utj(·)/·cc!osure

In finding that Eaton is likely to succeed on her claim, the coun 1s d.lgnizant of

sound rt'ason that •.vould hav(~ historically supponed the common law rule requiring the

uniflcation of the promissory note and the mortgage note in the forcclosmg entity prior to

foreclosure. Allowing foreclosure by a mongagec not in possession of the rnongage now

is potentially unfair to the mortgagor. !\holder in due course of the promissory note

could seck to recover against the mortgagor, thus exposing her to double liability. See i:

,Slar MLm]t.. Inc. v. R~, 940 F. Supp. 512,520 (D. E.D.N.Y. 1':>96); Cf. ~-:ooperstcin

v. f3ogas, 317 Mass. 341,344 (1944) (noting thataJlowing a creditor of the mortgagee to

reach and apply the interest of the debtor in the mongage itself would "leav[ e J the note

outstanding as a valid obligation of the mortgagor to the holder ofthe note who might

possibly be a person other than the mo11gagee. ").

CONCLUSION AND ORDER

For the reasons set forth above, Eaton's motion for preliminary in1unction is

ALLOWED. Fannie Mae is hereby enjoined until further ordn of this court from

proceeding with its previously commenced summary process action Hou~ing Court

Docket 2010-SP-0379 with respect to Eaton's residence at 141 Dd<>rcst Street,

Ro:))indale, Massachusetts, or l'rorn interfering with the Eaton's rossession and enjoyment

thcrcuf.

9

Add.39

Fannie Mae has requested the disposition of this case be accelerated due to the

delay interposed by Housing and Superior Court proceedings. For that reason, and

recognizing that the validity of foreclosure deeds is a matter of urgent concern, the case is

scheduled for a Rule 16 conference on June 29, 201 J at 2:00PM to establish the tracking

order.

June 17, 20!1

l(J

~':~Cidlrr---rrances A. ivlclntyre Justice, Superior Court

Add.40

SUPPLEMENTAL APPENDIX TABLE OF CONTENTS

Clerk's Notice

Judgment on Motion to Dismiss

Mortgage

S.A. 1

S.A. 2

S.A. 3

Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S .A. 21

I . Commonwealth of Massachusetts County of Worcester The Superior Court

Civil Docket WOCV201 0-00678

RE: Gailiastro et al v Mortgage Electronic Registration Systems Inc et al

TO: David E Fialkow, Esquire Nelson Mullins Riley & Scarborough LLP 1 Boston Place Suite 4040 Boston, MA 021 08

CLERK'S NOTICE

This is to notify you that in the above referenced case the Court's action on 10/28/2010:

RE: Defendant Mortgage Electronic Registration systems Inc's MOTION to Dismiss (MRCP 12b) Complaint or Anne- Marie Gailiastr01

Joseph A Galiastro ; Memo in support riled; Plaintiff's Opposition ; Plaintiff's memo in support riled; Notice or riling ; rule 9A Document list

is as follows:

Motion (P#7) ALLOWED for reasons set forth in defendant's Memorandum and as to all counts (JohnS McCann, Justice) Notices mailed 11/3/2010

Dated at Worcester, Massachusetts this 3rd day of November, 2010.

BY:

Telephone: 508-831-2360 (Session Clerk) or 508-831-2350

Copies mailed 11/03/2010

Dennis P. McManus, Esq., Clerk of the Courts

Joseph W. Spillane Assistant Clerk

abled individuals who need handicap accommodations should contact the Administrative Office of the

1erior Court at (617) 788-8130 -- cwresu1t_2.wpd 1s73133 motallow jurgiel

Q A 1

Gailiastro et al,

VS

Commonwealth of Massachusetts County of Worcester The Superior Court

CIVIL DOCKET# WOCV201 0-00678

Plaintiff{s)

Mortgage Electronic Registration Systems Inc et al, Defendant(s)

JUDGMENT ON MOTION TO DISMISS (Mass.R.Civ.P. 12b)

This action came on for hearing before the Court, John McCann, Justice upon the Defendant's, Mortgage Electronic Registration Systems Inc, Harmon Law Offices PC, motion to dismiss pursuant to Mass. R.Civ.P. 12(b), and upon consideration thereof,

It is ORDERED and ADJUDGED:

That the Complaint of the plaintiff (s}, Anne- Marie Gailiastro, Joseph A Galiastro is hereby dismissed against the defendant (s), Mortgage Electronic Registration Systems Inc, Harmon Law Offices PC, for the reasons set forth in the Defendant's memorandum.

Dated at Worcester, Massachusetts this 19th day of January, 2011.

I I [,_ . .c?' ~ By: ....... ;............. ~ ....... ~:~ ............... .

Assistant Clerk

Entered:O..;J

Copies mailed 01/)a/2011

cvdjudl2b_l.wpd 1589247 judl2b spillane

Return To: FREMONT INVESTMENT & LOAN P.O. BOX 34078 FULLERTON, CA 92834-34078

Prepared By: BARBARA LICON

7000210975

Bk: 39475 Pg: 285

Bk: 3&476 Pg; 28 F>•ge; I ot te c?131!,.,_Doc: MTG

•c..vv 10:63 AM

-----------I Space Abo .. Thlr Lint For Aocordinc Data}-----------

MORTGAGE MIN~---~

DEFINmONS

Words used in multiple sections of this document are defined below and other words are defmed in Sections 3, It, 13, 18, 20 and 21. Certain rules regarding the usage of words used in this document are also provided in Section 16.

(A) "Security Instrument" means this document, which is dated Ju I y Z6, 2006 togeuw with all Riders to this document. (B) "Borrower" i.1 JOSEPH A. GALIASTRO AND ANNE-MARIE Ill. OALIASTRO

Borrower is U1e morq:agor under this Security Instrument. (C) "MERS" is Mortgage Electtonic Registration Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is the mortgagee under this Security Instrument. I\1ERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, Ml 48501·2026, tel. (888) 679-MERS.

MASSACHUSETTS-Single Family-Fennle M .. /Futddle Meo UNIFORM INSTRUMENT WITH MERS

Form 3022 1101

S.A. 3

(D) "Lender" is FREMONT INVESTMENT ·& LDAN

Lender is a CORPORATION organized and existing under the laws of CALrFDRNI A Lender's address is 2727 E IMPERIAL HIGHWAY, BREA CA 92821

Bk: 39475 Pg: 286

(E) "Note" means the promissory note signed by Borrower and dated Ju I y 26, 2006 The Note states that Borrower owes Lender Four Hundred Th i rty-s 1 x Thousand and

No/100 ---------------------------------------------- Dol~ (U.S.$ 4 36,000. 00 ) plus interest. Borrower has promised to pay this debt in regular Periodic Payments and to pay the debt in full not later than August 1, 2036 . (F) "Property" means the property that is dest.'ribed below under the heading "Transfer of Rights in the Property." (G) "Loan" means the debt evidenced by the Note, plus interest, any prepayment charges and late charges due under the Note. and all sums due under this Security Instrument, plus intcresL , {H) "Riders" means all Riders to this Security Instrument that are executed by Borrower. The following Riders are to be executed by Borrower [check box as applicable]:

0 Adjustabl~ Rate Rider 0 Condomini~m Rider . §Second Home Rider CiJ Balloon RJder 0 P~ned Umt Develo~ment Rtder 1-4 Family Rider 0 VA Rtder 0 Btweekly Payment Rtder Other(s} (specify)

(I) "Applicable Law" means all controlling applicable federal, state. and local statutes, regulalions, ordinances and adminiscrative rules and orders (that have the effect of law) as well as all applicable final, non-appealable judicial opinions. (J) "Community Association Dues, Fees, and Assessments" means all dues, fees, assessments and other charges that are imposed on Borrower or the Property by a condominium association, homeowners associauon or similar organization. (K) "Electronic Funds Transfer" means any transfer of funds, other !han a transaction originated by check, draft, or similar paper instrument. which is initiated through an electronic terminal, t~lcphonic inscrument, computer, or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an accounl Such term includes, but is not limited to, point-of-sale ll'ansfers, automated teller machine transactions, transfel'8 initiated by telephone, wire transfers, and automated clearinghouse ttansfers. (L) "Escrow Items'' means those items that are described in Section 3. {M) "Miscellaneous Proceeds" me.ms any compensation, settlement, award of damages, or proceeds paid by any third party (other than insurance proceeds paid under the coverages described in Section 5) for. (i) dan1age to, or desttuction of, !he Property: (ii) condemnation or other taking of all or any part of the Property; (iii) conveyance in lieu of condemnation; or {iv) misrepresentations of, or omissions as to, the va1ue and/or c:ondition of the Property. (N) "Mortgage Insurance" means insurance protecting Lender agwnst the nonpayment of, or default on, the Loan. (0) "Periodic Payment" me.ms !he regularly scheduled amount due for (i) principal and interest under the Note. plus (ii) any amounts under Section 3 of this Security lnsttument. (P) "RESPA" means the Real Eswte Settlement Procedures Act (12 U.S.C. Section 2601 et seq.) and its implementing regulation, Regulation X (24 C.F.R. Part 3500), llS they might be amended from time to time, or any addiuonal or successor legislation or regulation that governs the same subject matter. As used

lnhlals:~ •·6A(MA) 1o•o'1

~ . Page 2 of 15 Form 3022 1/01

S.A. 4

Bk: 39475 Pg: 287

in lhis Security lnstrwnem. '"RESPA'" refers to all requirements and restrictions !hat are imposed in regard ro a "federally related mortgage loan" even if 1M Loan d~ not qualify as a "federally related mortgage Joan" under RESPA. (Q) "Successor in Interest of Borrower" means any party lhat has taken title ro lhe Property, whether or not that party ha~ assumed Borrower's obligations under lhe Note and/or !his Security InsD'Ument.

TRANSFER OF RIGIITS IN TiiE PROPERTY This Security Instrument secures ro Lender: (i} !he repayment of lhe Lean. and all renewals, extensions and modifications of the Note; and (ii) the performance: of Borrower· s covenanu and agrec:mcnts under this Security Instrument and lhe Note. For !his pwpose, Borrower does hereby mortgage, grant and convey 10 MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MBRS, with power or sale. the following described property located in the County ofNORFOLK

[Type of Rccordinr Jurisdiction) [Name of Rccordinc 1urisdic1i011l:

SEE LEGAL DESCRIPTION ATTACHED HERETO AND MADE APART THEREOF

Parcel ID Number: 367403885386850 which currently has !headdress of 23 CHRISTINA RD (Sucorl

MIL FORD !City! , Massachusetts 01757 !Zip Code! {"Pro erty Address"):

~OGETHER WITH all the improvements now or hereafter erected on the properly, and all easements, appurtenances, and fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this Security InsD'Ument. All of the foregoing is referred to in lhis Security Instrument as the "Property.'' Borrower understands and &gTees that MERS holds only legal title 10 the interesrs granted by Borrower in lhis Security Instrument. but, if necessary 10 comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to e~ercise any or all of those interests, including. but not limited 10, lhe right 10 foreclose and sell the Property; and ro take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.

BORROWER COVENANTS that Borrower is lawfully seised of the esrate hereby conveyed and has the right 10 mortgage, grant and convey the Property and that the Properly is unencumbered, except for encumbrances of record. Borrower warrants and will defend generd.lly the title ro the Property against all claims and demands, subject tO any encumbrances of record.

THIS SECURITY INSTRUMENT combines uniform covenanu for national use and non-uniform covenants wilh limited variations by jurisdiction to constitute a unifonn security instrument covering real property.

G!·&A(MA) ID'Oll ..

S.A. 5

Form 3022 1/01

Bk: 39475 Pg: 288

UNIFORM COVENANTS. Borrower and Lender covenant and agree as follows: 1. Payment of Principal, Interest, Escrow Items, Prepayment Charges, and Late Charge.,.

Borrower shall pay when due the principal of, and imerest on, the debt evidenced by the Note and any prepayment Chlll'ges and late charges due under the Note. Borrower shall also pay funds for Escrow Irems pursuant to Secuon 3. Payments due under the Note and this Securily Instrument shall be made in U.S. currency. However, if any check or other insttument received by Lender as payment under the Note or thi~ Security Instrument is returned to Lender unpaid, Lender may require that any or aU subsequent payments due under the Note and this Security Instrument be made in one or more of the following forms, as selected by Lender: (a) cash; (b) money order; (c) certified check, bank check, treasurer's check or cashier's check, provided any such check is drawn upon an institution whose deposits are insured by a federal agency, instrumentality, or entity; or (d) Electronic Funds Transfer. .

Payments are deemed •~o4 -9Y Lender when received a~ the location designated in the Note or at such other location as may be designated by Lender in accordance with the notice provisions in Section 15. Lender may return any payment or partial payment if the payment or partial paymcniS are insuffiCient to bring the Loan current. Lender may ac~ept any payment or partial payment insuffiCient 10 bring the Loan currenr, without waiver of any rights hereunder or prejudice to its rights to refuse such payment or partial paymenl8 in the future, but Lender is not obligated 10 apply such payments at the time such payments are accepted. If each Periodic Payment is applied as of its scheduled due date, then Lender need not pay interest on unapplied funds_ Lender may hold such unapplied funds until Borrower makes payment to bring the Loan current. If Borrower docs not do so within a reasonable period of time, Lender shall either apply such funds or return them 10 Borrower. If not applied earlier. such funds will be applied 10 the outstanding principal balance under !he Note immediately prior 10 foreclosure. No offset or claim which Borrower might have now or in the future llgainst Lender shall relieve Borrower from making paymeniS due under the Note and this Security Instrument or performing the covenants and agreemeniS secured by this Security Instrument.

l. Application of Payments or Proceeds. Except as otherwise described in this Section 2. all payments accepted and applied by Lender shall be applied in the following order of priority: (a) interest due under the Note; (b) principal due under the Note: (c) amounts due under Section 3. Such payments shall be applied to each Periodic Payment in the order in which it became due. Any remaining amounrs shall be applied fiTSt to fare charges. second to any other amounts due under this Security Instrument. and then to reduce the principal balance of tht: Note.

H Lender receives a payment from Borrower for a delinquent Periodic Payment which includes a sufficient amount to pay any late charge due, the payment may be applied 1.0 the delinquent payment and the late charge. If more than one Periodic Payment is outstanding, Lender may apply any payment received from Borrower to the repayment of the Periodic Payments if, and to the extent that, each payment can be paid in full. To the extent that any excess exists after the payment is applied 10 the full payment of one or more Periodic PQyments, such excess may be applied to any late charges due. Voluntary prepayments shall be applied first to any prepayment charges and then as described in the Note.

Any application of payment&, insurance proceeds, or Miscellaneous Proceeds 10 principal due under the Note shall not extend or postpone the due dare, or change the amount, of the Periodic Payments.

J. Funds for Escrow Items. Borrower shall pay 10 Lender on the day Periodic Payments are due under the Note, until the Note is paid in full, a sum (the "Funds") 10 provide for payment of amounts due for: (a) caxes and assessments and other items whic.:h can attain priority over this Security Instrument as a lien or encumbrance on the Property; (b) leasehold payments or ground rents on the Property, if any; (c) premiums for any and all insurance required by Lender under Section 5; and (d) Mortgage Insurance premiums, if any, or any sums payable by Borrower to Lender in lieu of the payment of Mortgage Insunlllce premiums in accordance with the provisions of Secuon 10. These items are called "Escrow Items." At origination or at any time during the term of the Loan, Lender may require that Community Association Dues. Fees, and Assessments, if any, be escrowed by Borrower, and such dues, fees and assessments shall be an Escrow Item. Borrower shall promptly furnish to Lender all notices of amounts to be paid under this S~lion. Borrower shall pay Lender the Funds for Escrow Items unless Lender waives Borrower's obligation to pay the Funds for any or all Escrow Items. Lender may waive Borrower's obligation to pay to Lender Funds for any or all Escrow Items at any bme. Any such waiver may only be in writing. In the event of such waiver, Borrower

··6A(MA) fO<OII ,.,

S.A. 6

Form 3022 1101

Bk: 39475 Pg: 289

shall pay direcUy, when and where payable, the amouniS due for any Escrow Items for which payment of Funds has been waived by Lender and, if Lender requires, shall furnish 10 Lender receip!& evidencing such payment within such time period as Lender may require. Borrower's obligation 10 make such paymen!& and 10 provide receipts shall for all purposes be deemed to be a covenant and agreement conlained in this Security Instrumcnl. as the phrase "covenant and agru.ment" is used in Section 9. If Bonower is obligated 10 pay ~-crow Items directly, pursuant 10 a waiver. and Bomower fails 10 pay the amount due for an Escrow Item, Lender may e:w-cise irs rights under Section 9 and pay such amount and Borrower shall then be obligated under Section 9 10 repay to Lender any such amount. Lender may revoke Lhe waiver as 10 1111y or all ~row hems at any Lime by a notice given in accordance with Section 15 and, upon such revocation, Borrower shall pay to Lender all Funds, and in such amounts. that are then required under this Section 3.

Lender may, at any time, collect and hold Funds in an amount (a) sufficient 10 permit Lender 10 apply the Funds at the Lime specified under RESPA, and (b) not to exceed the maximum amount a lender can require under RESPA. Lender shall estimate the amount of Funds due on the basis of cuJTCnt data and reasonable estimates of expenditures of future Escrow Items or otherwise in accordance with Applicable Law.

The Funds shall be held in an institution whose deposits are insured by a federal agency, insttumen!ality, or entity (including Lender, if Lender is an institution whose deposits are so insured) or in any Federal Home Loan Bank. Lender shall apply the Funds to pay the Bscrow Irems no later than the time specified under RESPA. Lender shall not charge Borrower for holding and applying the Funds, annually analyzing the escrow ac;count, or verifying the Escrow I_tems, unless Lender pays Borrower interest on the Funds and Applicable 1.-aw permits Lender to make such a charge. Unless an agreement is made in writing or Applicable Law requires interest 10 be paid on the Funds, Lender shall not be required 10 pay Borrower any interest or earnings on the Funds. Borrower and Lender c1111 a!,>ree in writing. however, that interest shall be paid on the Funds. Lender shall give 10 Borrower, without chiiTge, an annual accounting of the Funds as required by RESPA.

If there is a surplus of Funds held in escrow, as deftned under RESP A, Lender shall account to Borrower for the excess funds in accordance with RESPA. If there is a shortage of Funds held in escrow, as defined under RESPA, Lender shall notify Borrower as required by RESPA, and Borrower shall pay to Lender the amount necessary to make up the shortage in accordance with RESPA. but in no more than 12 monLhly payments. If there is a deficiency of Funds held in escrow, as defined under RESPA, Lender shall notify Borrower as required by RESPA, and Borrower shall pay 10 Lender the amount necC$sary 10 make up the deficiency in accordance with RESPA, but in no moro than 12 monthly payments.

Upon payment in fuU of all sums secured by this Security Tnsttument, Lender shall promptly refund 10

Borrower any Funds held by Lender. 4. Ch11rges; Liens. Borrower shall pay aU taxes, assessments, charges, fines, and impositions

attributable ro the Property which can attain priority over this Security Instrument, leasehold payments or ground rents on tl1e Property, if any, and Community AssociaLion Dues, Fees, and Assessments, if any. To tl1c extent that these items are Escrow Items, Borrower shall pay them in the manner provided in Section 3.

Borrower shall promptly discharge any lien which has priority over this Security lnsttument unless Borrower: (a) agrees in writing to the payment of the obligation secured by the lien in a manner acceptable 10 Lender, but only so long as Borrower is performing such agreement; (b) centesiS the lien in good faith by, or defends against enforcement of the lien in,legal proceedings wh1ch in Lender's opinion operate to prevent the enforcement of the lien while those proceedings are pendmg, but only until such proceedings are concluded; or (c) secures from the holder of the lien 1111 agreement satisfactory to Lender subordinating the lien 10 this Secunty Instrument. If Lender determines that any part of the Propeny is subject 10 a lien which can attain priority over this Security fnscrument, Lender may give Borrower a notice identifying Lhe lien. Within I 0

··&A{MA) 10.011

"' ..... r-

S.A. 7

Form 3022 1101

Bk: 39475 Pg: 290

days of the date on which that notice is given, Borrower shall satisfy the lien or take one or more of the actions set forth above in tlli.~ Section 4.

Lender may require Borrower to pay a one-time charge for a real eslate tax verification and/or reporting service used by Lender m connection with this Loan.

S. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the tc:rm • extended coverage," and any other hazards including, but not limited 10, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the arnouniS (including deductible levels) and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan. The msurance carrier providing the insurance shall be chosen by Borrower subject 10 Lender's right 10 disapprove Borrower's choice, which right shall not be exercised unreasonably. Lender may req~ Borrower to pay, in connection with this Loan, either: (a) a one·time charge for flood zone determination. certification and ~TaCking services; or (b) a one· time charge for flood :tone determination and certifu:ation services and subsequent charges each umc remappings or similar changes occur which reasoiUibly might affect such detennination or certification. Borrower shall also be responsible for the payment of any fees imposed by the Federal Emergency Management Agency in connection with the review of any flood zone determination resulting from an objection by Borrower.

lf Borrower fails. to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender's option and Borrower's ell.pense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower's equity in the Property, or the contents of the Property, against any risk, hazard or liabilit)' and might provide greater or lesser coverage than was previously in effect. Borrower acknowledges that the cost of the insurance coverage so oblained mighL significantly exceed tile cost of insurance !hat Borrower could have obtained. Any amounts disbursed by Lender under this Section 5 shall become additional debt of Borrower secured by this Security Instrument. These amouniS shall bear in~'t at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting paymenL ·

All insurance policies required by Lender and renewals of such policies shall be subject to Lender's right to disapprove such policies, shall include a standard mortgage clause, and shall name Lender as mortgagee and/or as an additional loss payee. Lender shall have the right to hold the policies and renewal certificates. If Lender requires, Borrower shall promptly give to Lender all receipts of paid premiums and renewal notices. If Borrower obtains any form of insurance coverage, not otherwise required by Lender, for damage to. or desa-uction of, !he Ptopeny, such policy shall include a standard mortgage clause and shall name Lender as mortgagee and/or as an additional loss payee.

In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender. Lender may make proof of loss if not made promptly by Borrower. Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether· or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened. During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity ro inspect such Property 10 ensure lhe work has been completed to Lender's satisfaction. provided that such inspection shall be undcrlaken promptly .. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as !he work is completed. Unless an agreement is made in writing or Applicable Law requires interest to be paid on ruch msurance proceeds, Lender shall n01 be required to pay Borrower any inlerest or earninss on such proceeds. Fees for publtc adjus~ers, or other third parties, retained by Borrower shall not be paid out of the insurance proceeds and shall be the sole obligation of Borrower. If the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess. if any. paid to Borrower. Such insurance proceeds shall be applied in the order provided for in Section 2 .

~·6A(MA) !0<01l Pag•aot 15 ..... ~ ,.,.,., ""

S.A. 8

Bk: 39475 Pg: 291

If B orrowcr abandons the Property. Lender may file, negotiate and settle any available insurance claim and related mat~ers. If Borrower does not respond within 30 days to a notice [rom Lender that the insurance carrier has offered 10 settle a claim, then Lender may negotiate and settle the claim. The 30-day period will beg in when the notice ts given. In either event, or if Lender acquires the Property under Section 22 or otherwise, Borrower hereby assigns to Lender (a) Borrower's rights to any insurance jm>ceeds in an amount not to exceed the amoums unpai4 under the Note or this Security Inslrllment, and (b) any other of Borrower's rights (other than the right to any refund of unearned premiums paid by Borrower) under all insurance policies covering the Property, insofar as such rights are applicable to the coverage of the Property. Lender may use the insurance proceeds either to repair or restore the Property or to pay amounts unpaid under the Note or this Security lns!I'Ument, whether or not then due.

6. Occupancy. Borrower shall occupy, establish, and use the Property as Borrower's principal residence within 60 days after the execution of this Security lnsttument and shall continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing. which consent shall not be unreasonably withheld, or unless ex\Cfluating cin:umstances exist which are beyond Borrower's contJOI.

7. Preservation, Maintenance and ·Protection of the Property; Inspections. Borrower shall not destroy. dam11ge or impair the Property, allow the Propeny to deteriorate or commit waste on the Property. Whether or not Borrower ~~ residing in the Property, Borrower shall maintain the Property in order to prevent the Propeny from deteriorating or decrcasin& in value due to its condition. Unless it is determined pursuant 10

Section 5 that repair or restoration is not economically feasible, Borrower shall promptly repair the Property if damaged to avoid further deterioration or damage. rr insurance or condemnation proceeds are paid in connection with damage 10. or the taking of, the Property, Borrower shall be responsible for repairing or restoring the Property only if Lender has released proceeds for such purposes. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress paymeniS as the work is completed. If the insurance or condemnation proceeds are not sufficient 10 repair or restore the Property, Borrower is not relieved of Borrower's obligation for the completion of such repair or restoration.

Lender or its agent may make reasonable enllies upon and inspections of the Property. If it has reasonable cause, Lender may inspect the interior of the improvements on the Property. Lender shall give Borrower notice at the time of or prior to suet\ an interior inspection specifying such reasonable cause.

8, Borrower's Loan Application. Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower's knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are notlimited.to, representationS concerning Borrower's occupancy of the Property as Borrower's principal residence.

9. Protection of Lertder's Interest in the Property and Rights Under this Security Instrument. If (a) Borrower fails to perform the covenants and agreements conlained in this Security Insttument, (b) there is a tegal proceeding that mighl significantly affect Lender's interest in the Property and/or rights under this Security Instrument (such a.~ a proceeding in bankruptcy, probate, for condernnatwn or forfeiture, for enforcement of a lien which may attain priority over this Security Instrument or to enforce laws or regulations), or (c) Borrower has abandoned the Propeny, then Lender may do and pay for whatever is reason~ble or appropriate to protect Lender's interest in the Property and rights under this Security TnstJument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Lender's actions can include, but are not limited to: (a) paying any sums secured by a lien which has priority over this Security Instrument; (b) appearing in court; and (c) paying reasonable

~-6A(MA) iO<OI)

Initials:~ Pa~•7of 15 Form 3022 1/01

S.A. 9

attorneys' fees to prou:ct irs 1nteres1 in the Property and/or rights under !his Security Ins1rument, including its secured posJIJon m a bankruptcy proceeding. Securing the Property includes. but is not limited to, cntenng the Property to make repairs, cnange locks. replace or board up doors and windows, drain water from pipes, eliminate building or olher code violations or dangerous conditions, and have utilities turned on or off. Although Lender may lake action under this Section 9, Lender does not have to do so and is not under any duty or obligation to do so. It is agreed lhat Lender incurs no liability for not laking any or all actions authoriud under this Section 9.

Any amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrumenl These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment

If this Security InsD'ument is on a leasehold, Borrower shall comply with all the provisions of the lease. If Borrower acquises fee tille to the Property, the leasehold and the fee title shall not merge unless Lender agrees 10 lhe merger jn writing.

10. Mortgage Insurance. If Lender required Mortgage Insurance as a condition of making the Loan, Borrower shalf pay the premiums required 10 maimain the Mortgage Insurance in effect If, for any reason, the Mortgage Insurance coverage required by Lender ceases to be available from lhe mortgage insurer lhat previously provided such insurance and Borrower wa.s required 10. make separately designated paymeni.S toward the premiums for Mortgage Insurance, Bon ower shall pay·lhe premiums required co obtain coverage substantially equivalent to the Mortgage I nsurancc previously in effect, at a cost substantially equivalent to the cost to Bonower of the Mortgage Insurance previously in effect, from an alternate mortgage insurer selected hy Lender. Jf substantially equivalent Mortgage Insurance coverage is not available. Borrower shall continue 10 pay 10 Lender the amount of the separately designated payments that were due when !he insurance coverage ceased to be in effect. Lender will accepr, use and rclllin these payments as a non-refundable loss reserve in lieu of Mortgage Insurance. Such loss reserve shall be non-refundable, notwithstanding the fact that the Loan is uiUmately paid in full, and Lender shall not be required to pay Borrower any interest or earnings on such loss reserve. Lender can no longer require loss reserve paymenlS if Mortgage lnsurill'lce coverage (in the amount and for the period lhat Lender requires) provided by an insurer selected by Lender again becomes available, is obtained, and Lender requires separately designated paymenlS toward the premiums for Mortgage Insurance. lf Lender required Mortgage Insurance as a condition of making the Loan and Bonower was required to make separately designated payments toward the premiums for Mortgage Insurance, Bonowcr shill! pay the premiums required to maintain Mortgage Insurance in etlect, or to provide a non-refundable loss reserve. until Lender's requirement for Mortgage Insurance ends in accordance with any writJen agreement between Borrower and Lender providing for such termination or until ttrmination is required by Applicable Law. Nothing in this Section 10 affects Borrower's obligation 10 pay interest at the rate provided in the Note.

Mongage lnsur1111cc reimburses Lender (or any entity lhat purcha.~es the Note) for certain losses it may incur if Bonowcr does not repay !he Loan as agreed. Borrower is not a party 10 the Mortgage Insur1111ce.

Mongage insurers evaluate their tOtal risk on all such insurance in force from time to time, and may enter into agrecmenlS with other par!i.Cil that share or modify their risk, or reduce losses. These agreement~ are on terms and condiuons that arc satisfactory to the mortgage insurer and the other party (or parties) lO these agreemenLS. These ugreemenrs may require the mortgage insurer to make paymenl3 using any source of funds !haL the mortgage insurer may have available (which may include funds obtained from Mortgage Insurance premiums).

As a result of lhese agreements, Lender, any purchaser of the Note, another insurer, any reinsurer, any other entity, or any affiliate of any of the foregoing, may receive (directly or indirectly) amounts that derive from (or might be characterized as) a portion of Borrower's payments for Mortgage Insurance. in exchange for sharing or modifying the mongagc insurer's risk, or reducing losses. If such agreement provides that an affiliate of Lender takes a share of the insurer's risk: in exchange for a share of the premiums paid to the insurer, the arrangement is often termed "captive reinsurance." Further:

(a) Any such agreements will not affect tbe amounts that Borrower has agreed to pay for Mortgage Jnsurance, or any other terms of the Loan. Sucb agreements will not increase the amount Borrower will owe for Mortgage Insurance, and they will not entitle Borrower to any refund.

(b) Any such agreements will not affect the rights Borrower has • ir any · with respect to the

~·6A(MA) ro•o') lnhialc:~

Form 3022 1101 Page 8 of 15

S.A. 10

Bk: 39475 Pg: 293

Mortgage Insurance under the Homeowners Protection Act of 1998 or any other law. These rights may include the right to receive certain disdosures, to request and obtain cancellation of the Mortgage Insurance, to have tbe Mortgage Insurance terminated automatically, and/or to receive a refund of any Mortgage Insur11nce premiums that were unearned at the time of such cancellation or termination.

11. Assignment of Miscellaneous Proceeds; Forfeiture. Ali Miscellaneous Proceeds are hereby assigned lO and shall be paid to Lender.

If the Property is damaged, such Miscellaneous Proceeds shall be applied to restoration or repair of the Property, if lhe restoration or repair Js economically feasible and Lender's security is not lessened. During $UCh repair and restoration period, Lender shall have the right to hold such Miscellaneous Proceeds until Lender has had an opponunity to inspect such Property to ensure lhe work has been completed to Lender's satisfaction, provided that such inspection shall be undertaken promptly. Lender may pay for the repairs and restoration in a single disbursement or in a series of progress payments as the work is completed. Unless an agreemem is made in writing or Applicable Law requires interest to be paid on such Miscellaneous Proceeds, Lender shal~ not be required to pay Borrower any interest or earnings on such Miscellaneous Proceeds. If the restoration or repair ts not economically feasible or Lender's security would be lessened. lhe Miscellaneous Proceeds shall be applied to the sums secured by this Security Jnsaument, whether or not then due, with the excess. if lillY, paid to Borrower. Such Miscellaneous Proceeds shall be applied in the order .provided for in Section 2.

In the event of a total taking, destruction. or loss in value of lhe Propeny, lhe MisceUaneous Proceeds shall be applied to the sums secured by this Security lnsaument, whether or not then due. with the excess, if any. paid to Borrower.

In the event of a partial laking, desauclion, or loss in value of the Property in which the fair market value of Ute Property immediately before the partial taking, destruction, or loss in value is equalro or greater lhan the IUTIOunt of the sums secured by this Security Instrument immediately before the partial taking, destruction, or loss in value, unless Borrower and Lender otherwise agree in writing, the sums secured by this Security Inscrument shall be reduced by the amount of the Miscellaneous Proceeds multiplied by Lhe lollowing fraction: (a) the total amount or the sums secured immediately before the partial laking, destruction, or loss in value divided by (b) the fair market value of the Property immediately before the partial taking, destruction, or loss in value. Any balance shall be paid to Borrower.

In the event of a parual Laking, destruction, or loss in value of the Properly in which the fair market value of the Property immediately before the partial laking, descruction, or loss in value is less than Lhe amount of the sums secured immediately before the partial taking, destruction, or loss in value. unless Borrower and Lender otherwise agree in writing. the Miscellaneous Proceeds shall be applied to lhe sums secured by this Security fnsllument whether or not the sums are then due.

If the Property is abandoned by Borrower, or if. after notice by Lender to Borrower that the Opposing Party (as defined in the next sentence) offers to make an award to setlle a daim for damages. Borrower fails to respond to Lender within 30 days after lhe date the notice is given, Lender is authorized to collect and apply the Miscellaneous Proceeds either to restoration or repair of the Property or to the sums secured by thi.~ Security Instrument, whether or not then due. "Opposing Party" means the third party lhal owes Borrower Miscellaneous Proceeds or the party against whom Borrower has a right of action in regard lO Miscellaneous Proceeds.

Borrower shall be in default if any action or proceeding, whether civil or criminal, is begun that, in Lender's judgment, could result in forfeiture of the Property or olher material impairment of Lender's interest in the Property or righ!S under thts Securily Instrument. Borrower can cure such a default and, if acceleration has occurred, reinstate as provided in Section 19, by causing the action qr proceeding to be dismissed with a rubng !hal, in Lender's judgment, precludes forfeiture of the Property or other material impairment of Lender's interest in lhe Property or rights under this Security Instrument. The proceeds of any award or claim for damages that are attributable to the impairment of Lender's interest in the Property arc hereby assigned and shall be paid to Lender.

All Miscellaneous Proceeds that are not applied to restoration or repair of lhe Property shall be applied in the order provided for in Section 2.

12. Borrower Not Released; Forbearance fly Lender Not 11 Waiver. Extension of the time for payment or modification of amortization of the sums secured by !llis Securny Instrument granted by Lender

tnllill,;~ ~-6A(MA) ID<DlJ Form 3022 1/01

S.A. 11

Bk: 39475 Pg: 294

to Borrower or any Successor in Interest of Borrower shall not operate to release chc liability of Borrower or any Successors m interest of Borrower. Lenda shall not be required to commence proceedings against any Successor tn Interest of Borrowa or 10 refuse to extend orne for payment or otherwise modify amortizJ!tion of che sums secured by this Security lnsuumenl by reason of any demand made by the original Borrower or any Successors m lmerest of Borrower: Any forbearance by Lender in exercising any right or remedy tncludmg, wuhout hmu.auon, Lender's acceptance of payments from third persons, entities or Successors in Interest of Borrower or m amounts less !han the amount then due, shall not be a waiver of or preclude the exercise of any nght or remedy.

13. Joint and Several Liability; Co-signers; Successors and Assigns Bound. Borrower covenants and agrees that. Borrower's obligations and liability shall be joint and several. However, any Borrower who co-signs thts Secunty Instrument but does not execute the Note (a "co-signer"): (a) is co-signing this Security Instrument only ro mortg.age, grant and convey the co-signer's interest in the Property under the c.enns of this Secunry Instrument; (b) ts not personally obbgated to pay the sums secured by this Security Instrument; and (c) agrees that Lender and any other Borrower can agree 10 extend, modify, forbear or make any accommodations with regard to the terms of this Security Instrument or the Note without the co-signer's consenl

Subject to the provisions of Section 18, any Successor in [nterest of Borrowec who assumes Borrower's obligations under this Security Inslrument in writing, and is approved by Lender, shall obtain all of Borrowe1's rights and benefits under this Security lnstrumenL Borrower shall not be released from Borrower's obligations and liability under this Security lnsuument unless Lender agrees 10 such release in wnting. The covenants and agreements of this Security Instrument shall bind (except as provided in Section 20) and benefit the successors and as~igns of Lender.

14. Loan Charges. Lender may charge Borrowa recs for services paformed in connection with Borrower's default, for the purpose of protecting Lender's mterest in the Property and rights under this Security Instrument, including, bul not limited to. at10meys' fees. property inspection and valuation fees. In regard to any other fees, the absence of express authority in this Security Instrument 10 charge a specific feo to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that liTe expressly prohibited by this Secunty Instrument or by Applicable Law.

If the Loan is subject to a law which sets maximum loan charges, and chat law is finally interpreted so that the mterest or olher loan charges collected or to be collected in connection with the Loan exceed the permllted limits, chen: (a) any such loan charge shall be reduced by the amount necessary to reduce the charge to the permitted limit; and (b) any sums already collected from Borrower which exceeded permitted limiL~ will be refun·ded to Borrower. Lender may choose to make this refund by reducing che principal owed under the Note or by making a direct payment 10 Borrower. If a refund reduces principal, the reduction will be 1reatcd as l!· partial prepayment without any prepayment charge (whethec or not a prepayment charge is provided for under the Note). Borrower's acceptance of any such refund made by direct payment to Borrower will constitute a waiver of any right of action Borrower might have arising out of such ovacharge.

15. Notices. All notices given by Borrower or Lender in connection wlth this Security Instrument must be in writing. Any notice to Borrower in connection with this Security Instrument shall be deemed to have been given to Borrower when mailed by fim class mail or when actually delivacd to Borrower's notice address if sent by other means. Notice to any one Borrower shall constitute notice to all Borrowers unless Applicable Law expressly requires otherwise. The nouce address shall be the Property Address unless Borrower has desJgnated a substitute notice address by notice to Lender. Borrower shall promptly notify Lender of Borrower's change of address. If Lender specifies a procedure for reporting Borrower's change of address, chen Borrower shall only report a change of address through that specified procedure. There may be only one designated notice address under this Secunty Instrument at any one time. Any notice to Lender shall be given by delivering it or by mailing it by frrst class mail 10 Lender's address st.ated herein unless Lender flas designated another address by notice to Borrower. Any notice in connection with this Security Instrument shall not be deemed to have been given 10 Lender until actually received by Lender. If any notice required by this Security Instrument is also required under Applicable Law, che Applicable Law requirement will satisfy the corresponding requirement under thiS Security Instrument.

16. Governing Law; Severability; Rules of Construction. This Security Instrument shall be governed by federal law anrl the law of the jurisdiction in which the Property is located. All nghts and obligations

··6A(MA) IO•Oil ,., ln111a11·~

(V

S.A. 12

Form 3022 1/01 r l j

Bk: 39475 Pg: 295

conlained in this Security Instrument are subject 10 any requiremeniS and limitations of Applicable Law. Applicable Law might explicitly or implicitly allow l.he parties 10 agree by contract or it might be silent, but such silence shall not be construed as a prohibition against agreement by con!l'act. In the event that any provision or clause of this Security Instrument or the Note conflicts with Applicable Law, such conflict shall not affect other provisions of tlus Secunty Ins!I'Ument or the Note which can be given effect without the confiicung provision.

As used in this Security lnsttument: (a) words of the masculine gender shall mean and include corre.~ponding neuter words or words of the feminine gender: (b) words in the singular shall mean and include the plural and vice versa; and (c) the word "may" gives sole discretion without any obligation to take any 11ction.

17. Borrower's Copy. Borrower shall be given one copy of the Note and of thi.~ Security Instrument 18. Transfer or the Property or a Beneficial Interest in Borrower. As used in this Section 18,

"Interest in the Propeny" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or eserow agreement. the intent of which is the transfer of titie by Borrower at a future date 10 a purchaser.

If all or any part of the Property or any Interest in the Property is sold or a:ansferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or ttansferred) without Lender's prior written consent, Lender may reqUire immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender If such exercise is prohibited by Applicable Law.

If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails 10 pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security lnsll'ument without further notice or demand on Borrower.

19. Borrower's Right to Reinstate Arter Acceleration. If Borrower meets certain conditions, Borrower ~hall have the right to have enforcement of this Security Instrument discontinued at any time prior to the earliest of: (a) five days before sale of the Property pursuant to any wwer of sale conlained in this Security Instrument: (b) such other period as Applicable Law might specify for the termination of Borrower's right to reinstate; or (c) en!ry of a judgment enforcing this Secunty Instrument Those conditions are that Borrower: (a) pays Lender all sums which then would be due under this Security Inslrument and the Noll: as if no acceleration had occurred; (b) cures any default of any other covenants or agreements; (c) pays all expenses incurred in enforcing tl1is Security Instrument, including, but not limited to, reasonable auomeys' fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender's 1ntcrcst in U1c Properly and rights under this Security Insttument: and (d) takes such action as Lender may rei!Sonably require to assure that Lender's interest in the Property and rightS under this Security Instrument. and Borrower's obligation to pay lhe sums secured by this Security Instrument, shall continue unchanged. Lender may require !hat Borrower pay such reinstatement sums and expenses in one or more of the following forms, a.~ selected by Lender; (a) cash; (b) money order; (c) certified check, bank check, treasurer's check or cashier's check, provided ·any such check is drawn upon an institution whose deposiiS are insured by a federal agency, instrumentality or entity: or (d) Eleca:onic Funds Transfer. Upon reinstatement by Borrower, this Security Instrument and obligations secured hereby shall remain fully effective as if no acceleration had occuned. However, this right to reinstate shall not apply in the case of acceleration under Section 18.

20. Sale of Note; Change or Loan Servicer; Notice or Grievance. The Note or a partial inierest in the Note (IOgether with this Security InslJumenl) can be sold one or more times without prior notice to Borrower. A sale m1ght result in a change in the entity (known as the "Loan Servicer") that collects Periodic PaymentS due under the Note and this Security lnsttument and performs other mortgage loan servicing obligations

.under the Note, this Security Instrument, and Applicable Law. There also might be one or more changes of t11e Loan Servicer unrelated to a sale of the Note. If there i3 a change of the Loan Servicer, Borrower will be given written notice of the change which will state the name and address of the new Loan Servicer, the address to which payments should be made and any other information RESPA requires in connection

··6A(MA) fO<O'I .$

Initial•:~· Pape1to115 cv

S.A. 13

Form 3022 1101

Bk: 39475 Pg: 296

With a notice of lransfer of servicing. If the Note is sold and thereafter the Loan is serviced by a Loan · Servicer other than the purchaser of the Note, the mongage loan &erVicing obligations to Borrower will

remain with the Loan Servicer or be transferred to a successor Loan Servicer and are not ossumed by the Note purchaser unless otherwise provided by the Note purchaser.

Neither Borrower nor Lender may commence, join, or be joined to any judicial action (as either an individual liugant or the member of a class) that arises from the other party's actions pursuant to this Security Instrument or that a_llcges that the other party has breached any provision of, or any duty owed by reason of, this Security Instrument, until such Borrower or l.eclder has notified the other pany (wilh such notice given in compliance willl the requirements of Section 15) of such alleged breach and afforded !he other pany hereiO a rea.~onable period after the giving of such notice 10 take corrective action. If Applicable Law provides a time period which must elapse before cerl.ain action can be taken, !hat lime period will be deemed 10 be reasonable for purposes of !his paragraph. The notice of acceleration and opportunity to cure given 10 Borrower pursuant to Section 22 and lhe notice of acceleration given to Borrower pum~ant 10 Section 18 shall be deemed to satisfy lhe notice and opporrunity to talc.e corrective action provisions of lhis Section 20.

21. Ha7.ardous Substances. As used in lhis Section 21: (a) "Hazardous Substances" are those substances defined as tollic or hazardous substances, pollutants, or wastes by Environmenlal Law and lhe following subslatlces: gasoline, kerosene, olher flammable or toxic petroleum products, IO:~tic pesticides and herbicides, volatile solvents, materials containing asbestos or formaldehyde, and radioactive ma!Mials; (b)

"Environmental Law" means federal laws and laws of !he jurisdiction where the Property is located that relate 10 heallh, safety or environmental protection; (c) ''Environmental Cleanup" inCludes any response action, ren1edial action, or removal action, as defined in Environmenw Law; and {d) an "Environmenral Condition" means a condition that can cause, contribute 10, or otherwise trigger an Environmental Cleanup.

Bom1wer ~hall not cause or permit the presence, use, disposal, storage, or release of any Hazardous Subslilncc.~. or threaten to release any Huardous Substances, on or in the Property. Borrower shall not do, nor allow anyone else to do, anything affecting lhe Property (a) that is i.n violation of aqy Environmental Law, (b) which creates an Environtnenla.l Condition, or (c) which, due 10 the presence, liSe, or release of a Hazardous Substance, creates a condition that adversely affecl8 the value of the Properly. The preceding two sentences shall not apply to the presence, use, or storage on the Property of small quantities of Hazardous SubsLMces lhat are gener.illy recognized 10 be appropriate 10 normal residential uses and to maintcniiJlce of the Property (including, but not limited to, hazardous substances in consumer products).

Borrower shall promptly give Lender wriuen notice of (a) any investigation, claim, demand, lawsuit or other action by any governmcnla.l or regulatory agency or private party involving the Property and any Hazardous Substance or Environmcnla.l Law of which Borrower has actual knowledge, (b) anr Environmental Condition, mcluding but not limited 10, any spilling, leaking, discharge, release or threat of release of any Hazardous Substance, and (c) any condition caused by the pxesence, use or release of a Hazardous Substance which adversely affects the value of the Property. If Borrower learns, or is nolified by ll.lly governmental or regulatory authority, or any private party, that any removal or other remediation of any HaUU'dous Substance affet·ting the Property is necessary, Borrower shall prompr.Jy take all necessary remedial actions in m:cordance with Environmental Law. Nolhing herein shall ~nate any obligation on Lender for an Environmental Cle.-ulup.

Initial•:~ Ga·6A(MA) {O~Ot) Form 3022 1/01

S.A. 14

Bk: 39475 Pg: 297

NDN·UNIFORM COVENANTS. Borrower and Lender further covenant and agree as follows:

22. Acceleration; Remedies. Lender shall give notice to Boi'TOwer prior to acceleration following Borrower's breach of any covenant or agreement in this Security ID5trurnent (but not prior to ucceleratiun under Section 18 unless Applicable Law provides otherwise}. The notice shaD spedf'y: (a) the default; (b) the action required to cure the default; (c) a date, not las than 30 days from the date the notice is ginn to Borrower, by which the default must be cured; and (d) that faUure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration and 'the right to bring a court action to asset! the non-existence of a default or any other defense of Borrower to acceleration and sale. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment In full of all sums secured by this Security Instrument without further demand and may invoke the STATUTORY POWER OF SALE and any other remedies permitted by Applicable Law. Lender shall be entitled to collect all expenses incurred In pursuinr the remedies provided In this Section :Z2, including, but not limited to, rea.~onable attorneys' fees and costs or title evidence.

Ir Lender invokes the STATUTORY POWER OF SALE, Lender shall mail a copy of a notice of sale to Borrower, and to other persons prescribed by Applicable Law, In the manner provided by Applicable Law. Lender shall publish the notice of' sale, and the Property shall he sold in the manner prescribed by Applicable Law. Lender or its designee may purchase the Property at any sale. Tbe proceeds of the sale shall be applied in the following order: (a) to all expenses of the sale, including, but uot limited to, reusonable 11ttorneys' fees: (b) to all sums secured by this Security Instrument; and (c) any ex~ lu the person or persons legally entitled to it.

23. Release. Upon payment of all sums secured by this Security Inslrumenl, Lender shall discharge this Security Instrument. Borrower shall pay any recordation cosiS. Lender may charge Borrower a fee for releasing this Security Instrument, bul only if the fee is paid to a third party for services rendered and the charging of tho fee is pennitted under Applicable Law.·

Z4. Waivers. Borrower waives all rights of homesiead exemption in the Property and relinquishes all rights of cunesy and dower in the Property.

··6A(MA) 10<01) • Pao• 13 ol 16

11111111•:~ Form 3022 1101

S.A. 15

Bk: 39475 Pg: 298

BY SIGNING BELOW, Borrower accep!S and agrees to the lcrms and covenants contained in this Security Instrumenl and in any Rider executed by Borrower and recorded with il.

Wimesses:

(Seal) ·Bonower

----------------------<Sw) ----------------------~eal) ·Borrower

----------------------~w) ----------------------(5~ .. Borrower

___________________ (sw) (Seal)

-Bom)wet ·Borrower

··6A(PtlA) to•o•J • P•o• 14 oil!~- Form 3022 T /01

S.A. 16

Bk: 39475 Pg: 299

COMMONWEALTH OF MASSACHUSETTS, Middlesex County ss:

On this 26th personally appeared

day of July, 2006 , before me, the undersigned notary public, Anne-Marie M. Galiastro and Joseph A. Galiastro

proved to me through saosfactory evidence of identification, which Was/were Mass. Drivers licenses 10 be !he person(s) whose name(s) is/are signed on the preceding document, and acknowledged 10 me that he/she,lthey signed it volurnarily for its stated purpose. My Commission Expires: 11/05/2010 (Seal)

··6A(MA) iO<Oli

"' lnltlels: :d[!r--~ Form3022 1/01

S.A. 17

•

···· ···-------------·-·-····-····------Bk: 39475 Pg: 300···

t.xhiblt A

The land together with the Duildings thereon situated in Milford, worcester County. Massachusetts Deinq described as LOT so located on Christina rtoad, as shown en a plan of land entitled "'SOUTH CENTP.AL ESTATES' 'Definitive• Plan of Land in MILFORD, MASS. scale: 4 0 feet: to an Inch Date: August 16, 1.994, Guerriere & Ha.~non, Inc., Engineering ' Land Surveying, 3 3 3 West Street I Mi.lfcrd, Mass. Ol757", said plan recorded with the Worcester District Registry of Oeeda, in Plan iook 688, Plan 17.

Said LOT SO containa 45,280 square feet more or less according to said plan.

The premises are conveyed sul;)ject to a utility easement and. temporary construction ea•ement as shown on said plan.

The premises are conveyed together with th~ right to use streets as shown on said plan in common with others entitled thereto for all purpo1ea for which public ways may be used in the Town of Milford, Mas•achuaett.a.

No conveyance of any fee in any rtreet or_wa.y ia made to grantees.

Tne premise• are conveyed subject to Covenant• dated November lS, l994 and recorded with the Worcetter Di•triet Regi•tr¥ of Deeds in Book 16737, Page 303, as amended in Book 16900, Page 28 and in Book 1712-t I Page :a;z 1 and in Book l8824, Page 184, as affected by certificates of Performance recorded in Book 171241 .Page 214 and in Book l8 4 3 0, Page 16 1 5'id in liD* 19'316 Page 173.

For Mortgagors' title see deed at Book 36740 Page 388.

S.A. 18

· ··--·-··-ek: 39475 Pg: 301 -

BALLOON PAYMENT RIDER (FIXED RATE)

THIS BALLOON PAYMENT RIDER (the "Security Instrument Rider'1 is made this 26th day of Ju I y, 2006 , and is incorporated into and shall be deemed to amend ;~nd supplement !he Mortgage, Deed of Trust, or Security Deed (the "Security Tnstrument") of the s<~me di!te given by the undersigned ("Borrower") to secure Borrower's Note (!he "Note") to FA EMONT INVESTMENT & LOAN ("Lender") of the Slime date

anti covering tlle property described in the Security Instrument and located at:

23 CHRISTINA ROAD MILFORD, MA 01757 [Propeny Address)

THE NOTE IS PAYABLE IN FULL AT MATURITY. BORROWERMUST REPAY THE ENTIRE UNPAID PRINCIPAL BALANCE OF THE NOTE, TOGETHER WITH ALL UNPAID INTEREST AND LOAN CHARGES THEN DUE, IN A SINGLE BALLOON PAYMENT. THE LENDER IS UNDER NO OBLIGATION TO REFINANCE TIIE NOTE AT THAT TIME. BORROWER Wn..L, THEREFORE, BE REQUIRED TO MAKE PAYMENT OUT OF OTIIER ASSETS THAT BORROWER MAY OWN, OR BORROWER WILL HAVE TO FIND A LENDER, WHICH MAY BE THE LENDER NAMED IN THE NOTE, WILLING TO LEND BORROWER THE MONEY. IF BORROWER REFINANCES TilE NOTE AT MATURITY, BORROWER MAY HAVE TO PAY IUGHER INTEREST RATES ON THE NEW WAN THAN THE INTEREST RATE PAID ON THE NOTE. FURTHER, lF BORROWER REFINANCES, BORROWER MAY HAVE TO-PAY SOME OR ALL OF Tim CLOSING COSTS NORMALLY ASSOCIATED Wim A NEW LOAN EVEN IF BORROWER OBTAINS REFINANCING FROM THE SAME LENDER. ADDITIONAL in the Security follows:

1. Payments

COVENANTS. In addition to the covenants and agreements made Instrument, Borrower and Le!lder further covenant and agree as

Borrower has executed a Balloon Payment Rider to Note (the "Note Rider") dated the !:alne date a~ this Security 1 nstrumenr Rider. The Note Rider modifies, ame:nds, and suppleme:nts Section 3 of' U1e Note to read, in its entirety, as follows;

llALFlXRD rg 1105/06 p. l of2

S.A. 19

Bk: 39475 Pg: 302

3. PAYMENTS (A) Time and Place or Payments

(B)

I will pay principal and interest by making a payment every molllh. l will mak~ my monthly payment on the fIrst day of each month begiruling on September 1, 2006 . I will make these payments every month until [ have paid ~II of !he principal and interest and any other charges described below that 1 may owe under this Note. Bach monthly payment will be applied as of its scheduled due date and will be applied to interest before Principal. On August 1, 2036 which is called the "Maturity Date"), I will pay the entire unpaid Principal balance of this Note, together with all accrued but unpaid interest and all charges due uuder this Note, in a single payment (the "Balloon Payment"). I understand and acknowledge that the Balloon Paymmt due on the Maturity Date will be much larger than a regular monthly payment and that the Note Holder has no obligation to refinance the Balloon Payment.

I will make my monthly payments at 2727 E IMPERIAL HIGHWAY, BREA CA 92821 or at a different place if required by the Note Holder.

Amount of Monthly Payments My monthly payment will be in the amount of U.S. S 3,064.33

z. Effect of No I.e Rider

The Note Rider contains the following provisions:

''This Note Rider moditie$, amends and supplements the Note. To the extent of any inconsistency between t.he provisions of tllis Note Rider and the provisions of the Note, the provisions of this Note Rider shall prevail over and supersede the inconsistent provisions of the Note. Ex.t:ept as modif1cd, amended or supplemented by this N()te Rider, the Note shall remain in full force and effect."

BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Balloon Payment Rider.

("'"-,:-=i~~:::r::::-'?'-v~~·~~~.__· --::-(Seal) ~~GALIASTRO -Bonower

------------~:--(Seal) -Borrower

-------------_,--<Seal) -Borrower

------------__,.-(Seal) -Borrower

--------------::--(.Seal) -Borrower

[Sign Original Only]

13AI.FIXR2 rc 1105106 p. l ofl

ArnST: WORC. Anthony J. Vigliotti, Register

S.A. 20

• NOTE

July 26, 2006 ID•Iel

BREA, CA 92821 [City!

23 CHRISTINA ROAD MILFORD, MA 01757

IPropeny Addreu)

I. BORROWER'S PROMISE TO PAY

•

·In return for a loan that I have received, 1 promise 10 pay U.S. S plus interest, cp !he order of the Lender. The Lender is

436, 000. 00 (this amount is called "Principal").

FREMONT INVEStMENT & lOAN

I will make all paymenrs under this N01e in !he form of cll!h, check or money order. I undcrsl81ld !hat the Lender may transfer this Note. The Lender or anyone who lakes this Note by transfer and who is entitled

to receive payments under this Note is called the "Note Holder. •

2. INTEREST Interest will be ~arged on unpaid principal until the full amount of Principal has been paid. I will pay interest at a yearly rate

of 8. 1 DDO %. · · The interest rate required by this Section 2 is the rate I will pay both before and after any default described in Section 6(B) of

\his Note.

3. PAYMENTS u SEE BALLOON PAYMENT RIDER ATTACHED HERETO AND MADE A PART HEREOF ... (A) Time and Place of Payments · I will pay principal and interest by making a payment every monlh .• 1 will make my monthly payment on the first day of each month beginning on Saptellb&r 1 , 2006 . 1 will

make these pllyment.s every month untill have paid all of the principal and intcrest and any other charges descnbed below that I may owe under this Note. Eacll monthly payment will be applied as of its scheduled due date and will be i.Jl'Piicd 10 intereSt before Principal. If, on August 1 , 203 6 . Tstill owe amounts under this Note, I will pay those amounts in full an that date, which is called lhe "Maturity Date."

lwillmaltemymonlhlypaymentsat2727 E IMPERIAL HIGHWAY, BREA CA 92821 or at a different place if required by the Nort. Holder.

(8) Amount or Monthly Payments My mon~ly payment will be in the amount of U.S.$ 3, 064. 33·

4. BORROWER'S RIGHT TO PREPAY 1 have lhe rightiO make payments of Principal at any time before they are due. A payment of Principal only is known as a

"Prepayment." When I mlllce a Prepayment, I will tell the Note Holder in writing thai I am doing so. I may not designate a payment as a Prepayment if I have not made all the monthly payments due under the Note.

I may make a full Prepayment or partial Pz:epayments without paying a Prepayment charge. The Note Holder will use my Prepayments to reduce \he amount of Principal that I owe under this Note. However. the Nort. Holder may apply my Prepayment to the accrued and unpaid interest on the Prepayment amount, before applying my Prepayment 10 reduce the Principal amount of the Nort.. If I make a partial Prepayment, there will be no changes in the due date or in the amount of my monthly payment unless the Note Holder agrees in writing to those changes.

MUL TISTATE FIXED RATE NOTE·Single Family·Fannl• lbe/Fredclle Mac UNIFORM INSTRUMENT

G ·SN !o<I05\.01 Form 3200 1/01 ~ VMP 1>401\TOAG~ FORMS ·(I00)621·7U1 - ~Ill 1111 ~~~ 11111111 Ill/

S.A. 21

• 5. LOAN CHARGES

If a Jaw, which applies to this loan and which sel! maximwn loan charges, is finally inwpreted so that !he in~erest or other Joan charges collected or to be collecltd in connection with this loan exceed lhe pennilt£d limits, then: (a) any such loan charge shall he reduUd by the amount necessary to reduce the charge to the pumiUed umil; and (b) any sums already collected from me which exceeded permitted limits .will be refunded 10 me. The Note Holder may choose 10 make this refund by reducing the Principal! owe under this Note or by making a direct payment to me. If a refund reduces Principal, the reduction will be treated as 11 partial Prepayment

6. BORROWER'S FAILURE TO PA \'AS REQUIRED (A) Latr Charge for Overdue Paymenu If the Note Holder has not received the full amount of any monthly payment by the end of 15

after the dare it is due, I will pay a late charge to the Note Holder. The amount of the charge wiU be 3 . 0 calendar days

%of rny overdue payment of principal and interest. I will pay this late cbarge prompdy but onJ.y once on each lace payment.

(B) Default If 1 do not pay the full amount of each monthly payment on the date it is due, J wlU be in default.

(C) Notice or Default If I am in defaul~ ·the Note Holder may send me a written notice telling me that if I do not pay the ovudue amount by il

certain date, the Note Holder may require me to pay immediately lhe full amount of Principal which has not been pllid and all the interest that rowe on !hat amount That date must be at least 30 daya after the date on wh.ich the notice is mailed to me or delivered by other means.

(D) No Wainr By Note Holder Even if, at a time when I am in default, the Note Holda does not require me to pay immediately in full as described above,

the Note Holder will still have the right to do so if I am in default at a later time.

(~) Payment of Note Holder's Costs and El'penses If the Note Holder has required me to pay immediately in full as doscribed above, the Note Holder will have the right to be

paid back by me for all of its costs 1111d expenses in enforcing !his Note to the extent not prohibited by applicable law. Those expenses include, for example, ~nable attorneys' fees.

7. GIVING OF NOTICES Unless applicable law requires a different method, any notice that must be given to me under this Note will be given by

delivering it or by mailing il by first class mail to me at the Property Addrets above or at a different address if I give the Note Holder a notice of my different address.

Any notice that must be given to the Note Holder under this Note will be given by delivering it or by mailing it by fiiSt Class mail to the Note Holder at the addtess stated in Section 3(A} above or at a different address if I am given a. notice o( !bat different address.

8. OBLIGATIONS OF PERSONS UNDER TFnS NOTE If more than one person signs Ibis Note, each. person is fully and persot1ally obligaltd to keep aU or the promises made in this

Note, including !he promise to pay the full amount owed. Any person who is a guarantor, SUJUy or endorser of this Note Is also obligated to do lhese thi(lgs. Any person whQ talces ovu these obligations, including the obligations of a gulrlUllOI, surety or endorser of this Note, is also obligated to keep all of the promises made in lhls Note. The Note Holder may enforce its righlS under lllis Note against each person individually or against all of us togelher. This means rhatany one of us may be required to pay 1111 of !he amounts owed under this Note.

9. WA.IVRRS I and any other person who has obligations under !his Note waive !be rights of Presentment and Notice of Dishonor.

"Presentment" menns the right 10 require the Note Holder 10 demand paymcnr of amounts due. ''Notice of Dishonor" means the right to require the Note Holder to give notice to orber persons !hat amounts due have not been paid.

.. ·SN fOOOSJ.OI II>

P•t•2 of 3

S.A. 22

Form~ j _, v

• 10. UNIFORM SECURED NOTE

This Note is a uniform instrument with limited varilltions in some jurisdictions. In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust, or Security Deed (the "Security Instrument''), dated the same date as this Note, protects the Note Holder from possible losses which might result if l do not keep the promises which I make in !his Nme. That Security lnsaumem describes how and under what conditions 1 may be required to make immediate payment in full of all amounts I owe under !.his Nou~. Some of those conditions are described as foUows:

' If all or any part of th~ Property or any Interest in the Propeny is sold or aansferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferud) without Lender's prior written consent, Lender may require Immediate payment in full of all sums secured by !his Security Instrument However, this option shall not be e~ercised by Lender if such tlt'ercise is prohibited by Applicable Law.

If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less th1111 30 days from lhe date the notice is given in accordance with Section !5 within which Borrower must pay all sums secured by this Security lnsaument. If Borrower fails to pay these sums prior to the expiration of lhis period, Lender may invoke lillY remedies permitted by lhis Security Insb'ument without further notice or demand on Borrower.

•• SEE BALLOON PAYMENT RIDER ATTACHED HERETO AND MADE A PART HEREOF ••

Wl1NESS THE HAND(S) AND SEAL(S) OF THE UNDERSIGNED.

~~"'=Pc~........,~+-"-'::::.o,.>O"""'-.~"--"------' (Seal) -=.......j-t~~li+.~~~~----<Seai) ~Borrower

______________ (Seal)

-Borrower

---------------<Seal) ·Borrower

________________ (Seal)

-Borrower

·Borrower

--------------<Seal} -Borrower

--------------<Seal) ·Borrower

-----------------~w) ·Borrower

{Sign Original Only!

Q ·SN roooS).o' Ill

Page 3 of J Form 3200 1/0T

S.A. 23

• . .

BALLOON.NOTE ADDENDUM (CONDITIONAL MODlFICATI?~ AND EXTENSION OF LQAN TERMS).

THIS BALLOON NOTE ADDENDmYt is 1118d~ m4 . 2.6th ·· · day of Ju 1 y, · 2006 _ , and is incor.pQtated inlO and shall be deemed to amend and supplement the Balloon Ncite made by the undersigned (the "Borrower") irr favor of

FREMONT INVESTMENT & LOAN

(!he ''Lender") and dated !he same date as the Addendum (the ''Note"). The interest rate slated on the Note is called the "Note Rate." The date of !he Note is called the "Note Date."

I (the Borrower) understand the Lendei may transfer the Note, the related Mortgage, Deed of Trust, or Deed to Secure Debt (the "Security Instrument") and this Addendum. The Lender or anyone who takes the Note, Security lnSII'ument and tlns Addendum by rransfer and who is entitled to receive payments under the Note is called the "Note Holder."

ADDITIONAL COVENANTS. In addition 10 the covenants and agreements in the Security Instrument, Borrower, and Lender, further covenant and abrree as follows {despite anything to the contrary contained in the Security Instrument or the Note):

I. CONDITIONAL MODIFrCA. TION AND EXTENSION OF LOAN TERMS

At the maturity date of the Note and Security Instrument (the "Note Maturity Date"), I will be able to extend the Note Matunty Date to 9 I 1 I 4 6 , (the "E.xtendcd Maturity Date") and modify the Note Rate Ul the "Modified Note Rate" decermmed in accordance with Section 3 below if all the conditions provided in Sections 2 and 5 below are met (the "Conditionlll Modification and Extension Option"). If those conditions ace not met, I understand that the Note Holder is under no obligauon to refinance the Note or to modify the Note, reset the Note Rate or extend the Note Maturity Date, and that I will have to repay !he Note from my own resources or find a lender willing 10 lend me the money to repay the Note.

2. CONDITIONS TO OPTION

If I want to exercise the Conditional Modification and Extension Option, certain conditions must be met as of the Note Maturity Date. These conditions are: (a) I must still be the owner and occupant of the propeny subject to the Security lnstrumem (the "Property"): (b) I must be current in my monthly payments and cannot have been more than 30 days late on any of the 12 scheduled monthly payments immediately preceding the Note Maturity Date; (c) there ace no liens, defectS, or encumbrances against the Property, or ather adverse matters affecting title to the Property (except for ta.xes and special assessments not yet due and payable) arising after the Security Instrument was recorded; (d) the Modified Note Rate cannot be more than 5 percentage points above the Note Rate; and (e) 1 must make a written request 10 the Note Holder as provided in Section 5 below.

J. CALCULATING THE MODIFIED NOTE RATE

The Modified Note Rate will be a fixed rate of interest equal to the Federal Home Loan Mongage Corporation's required net yield for 30-year fixed rate mor1gages subject to a 60-day mandatory delivery commitment, plus one-half of one percent (0.5%), rounded to tlle_ nearest one-eighth of one percent (0.125%) (the "Modified Note Rate"). The required net yield shall be the applicable net yield in effect on the date and time of day that the Note Holder receives notice of my election 10 exercise the Conditional Modification and Extension Opuon. If this required net yield is not available, the Note Holder will determine the Modified Note Rare by using comparable information.

MUL TISTATE BALLOON NOTE ADDENDUM (MODIFICATION AND EXTENSION)·Singl& Family­Freddie Moo UNIFORM INSTRUMENT

0®B79N (0005)

1879NHIA

Pao• 1 ol 2

VI.IP I(ORTGAGE FOAMS· (100)521-7291

S.A. 24

. 4. CALCULA TlNG THE NEW PAYMENT AMOUNT

Provided the Modifi~ Note Race as ca.Jculaled in Section 3 ~bove is not gTeatcr than 5 percentage points above the Note Rate and all other condinons required in Section 2 above are satisfied. !he Note Holder wiiJ derermine !he amount of the monlllly payment !hat will be sufficient ro repay in full (a) !he unpaid principal, plus (b) accrued but unpaid interest, plus (c) all olher sums I will owe under !he Nore and Security Insrrumelll on the Nate Maturity Date· (assuming my monthly payments then are 'urrent, as required under Section 2 above), over the remaining extended tum at !he Modified Note Rate in equal monthly payments. The re~ull of !his calculation will be the new amount of ~y principal and interest payment every month until the Note is fully paid.

S. EXERCISING THE CONDITIONAL MODIFICATION AND EXTENSION OPTION

The Note Holder will notify me at least 60 calendBI days in advance of the Nate Maturity Date 1111d advise me of the principal, accrued but unpaid interest, and all other sums l atn expected to owe on the Note Maturity Date. The Note Holder also will ad vise me that I may exercise the Conditiontll Modification and Extension Option if the conditions in Section 2 above are met. The Note Holder will provide my payment record information, together with the natne, title and address of the person representing the Note Holder !haL r must notify in order to exercise the Conditional Modification and ExtenSion Option. rf I meet the conditions of Section 2 above, 1 may exercise the Conditional Modification and Extension Opdon by notifying the No~e Holder no earlier than 60 calendar days and no later than 45 calendar days prior ro theNme Maturity Dale. The Note Holder will calculate the fixed Modified NOte Rate based upon the Federal Home Loan Mongage CoiTJoralion 's applicable published required net yield in effect on the date notificilliOn is received by the Note Holder and as calculated in Section 3 above. I will then have 30 calendar days to provide the Note Holder wilh acceptable proof of my required ownership, occupancy and property lien status. Before the Note Maturily Date the Note Holder will advise me of the new interest rate (the Modified Note Rate), new monthly paymenl amount and 11 date, time und place at which 1 must appear to sign any documents required to complete the required Note Rate modification and NoiC MaturitY Date extension. I understand the Note Holder will charge me a $250 processing fee and the costS associated with the exercise of the Conditional Modification and Ex.tension Option, including but not limited to the cost of updating the. title insurance policy.

BY STONING BELOW. BORROWER accepts and agrees to the terms and covenants contained in this Balloon Note Addendum.

~q~ad . . J Ei>A:GAUASTRo (Seal) ~.Borrower

---------------- (Setll) ·Borrower

~-879N JOoo•J

1879N1MA

(Seal)· ·Borrower

----------------------------(S~) ·Borrower

(Seal) ·Borrower

----------------(Seal) ·Borrower

-------------- (Seal) ·Burrower

[Sign Orrgina/ Only/

Form 3291 1/01

S.A. 25

.. . .. B~loon Payment Rider to Note

(Fixed Rate)

THIS LOAN IS PAYABLE IN FULL AT MATURITY. YOU MUST REPAY THE ENTIRE UNPAID PRINCIPAL .BALANCE OF THE LOAN, TOGETHER WITH ALL. UNPAID INTEREST 'AND LOAN CHARGES THEN DUE, IN A SINGLE BALLOON PAYMENT. THE LENDER IS UNDER NO OBLIGATION TO REFINANCE THIS LOAN AT THAT TIME. YOU WILL, THEREFORE, BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT YOU MAY OWN, OR YOU WILL HAVE TO FlND A LENDER, WHICH MAY BE THE LENDER YOU HAVE TinS LOAN Wmi, WD..llNG TO LEND YOU THE MONEY. IF YOU REFINANCE TillS LOAN AT MATIJRITY, YOU MAY HAVE TO PAY HIGHER INTEREST RATES ON THE NEW LOAN THAN TilE INTEREST RATE PAID ON TIDS LOAN. FURTHER, IF YOU REFINANCE, YOU MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE SAME LENDER.

THIS BALLOON PAYMENT RIDER TO NOTE (the "Note Rider") is made this 26th day of July, 2008 and is incorpordted into and shall be deemed to amend

and supplement 111e Note (che "Note") made by rhe undersigned (the "Borrower') in favor of FREMONT !NVESTI!IENT & LOAN {the "Lender") and dated the same date as this Nme

Rider.

ADDITIONAL COVENANTS. Jn addition to the covenants and agreements made in the Note, Borrower and Lender further covenant and agree as follows.

1. P11ymen1s Section 3 of the Note is moditied, amended and supplemented to read, in its entirety, as follows:

"3. PAYMENTS (A) Time and Place or P~yments

I will pay principal and interest by nuking a payment every month. I will make my monthly paymellt on the first day of each month begiruting on September 1, 2006 . I Will make these payments every month until I have paid all of the principal and interest and any other charges described below that I may owe under this Note. Each ruonthly payment will be applied as of its scheduled due date and will be applied to inlerest before Principal. On August 1, 2036 (which is called the "Maturity Date"), l will pay the entire unpaid Principal balance of this Note, together with all accrued but unpaid interest and all charges due under tl1is Note. in a single payment (the "Balloon Payment"). 1 understand and acknowledge that U1e Balloon Payment due on the Maturity Date will be much larger than a regular monthly payment and that the Note Holder has 110 obligation te refmance the Balloon Payment. ! will n~ake my monthly payments at 2727 E IMPERIAL HIGHWAY, BREA CA 92821 or at a different place if required by the Note Holder.

(BJ Amounl of Monthly Payments My monthly payment will be in the amount of U.S.$ 3,064.33

2. Effect of Note Rider This Note Rider modifies, amends and supplements Ute Note. To the extent of any inconsistency between the provisions of this Note Rider and the provisions of che Note, the provisions of chis Note Rider shall prevail over and supersede the incon..~stent provisions of the Note. Except as modified, amended or supplemented by this No1e Rider, U1e Note shall remain in full force and effect.

BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Balloon Payment Rider to Note.

llALFrXNI cl Sn4/05 nS .. A. 26

(Seal) -Borrower

(Seal} -Borrower

(Seal) -Borrower

(Seal} -Borrower

[Sign Original Only]