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SJC-12325

JAMES B. NUTTER & COMPANY vs. ESTATE OF BARBARA A. MURPHY & others1 (and two consolidated cases2).

Suffolk. October 2, 2017. - January 18, 2018.

Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

Mortgage, Foreclosure. Real Property, Mortgage.

Civil actions commenced in the Land Court Department on October 27, 2015; January 28, 2016; and February 11, 2016, respectively.

A motion for partial judgment on the pleadings was heard by Robert B. Foster, J., and the cases were reported by him to the Appeals Court.

The Supreme Judicial Court on its own initiative transferred the cases from the Appeals Court.

1 Patrick F. Murphy, individually and as personal representative of the estate of Barbara A. Murphy; Thomas E. Murphy; John F. Murphy; Mary C. Murphy; Internal Revenue Service, Technical Service Group; Massachusetts Department of Revenue -- Estate Tax Unit; and Secretary of Housing and Urban Development. 2 James B. Nutter & Company vs. Estate of Mary B. Jamieson & others; James B. Nutter & Company & another vs. David E. Sweeney & others. 2

Daniel Bahls (Uri Strauss also present) for Brett Jamieson. Effie Gikas Tchobanian for the plaintiff. Elaine Benkoski, for Estate of Barbara A. Murphy & others, was present but did not argue.

GANTS, C.J. In 2007 and 2008, three elderly homeowners

obtained loans from James B. Nutter & Company (Nutter), secured

by reverse mortgages on their homes. A few years later, two of

the borrowers died; the third took ill and could no longer live

in her home. Alleging default, Nutter now seeks to foreclose on

the mortgages. Rather than proceed directly to foreclosure,

however, Nutter brought separate actions in the Land Court

against each borrower or the executors of their estate,3 seeking

in each case a declaratory judgment allowing it to foreclose

pursuant to the statutory power of sale.

Each of the reverse mortgages adhered to Nutter's standard

form, which states in paragraph 20 that, in the event of

default, "[l]ender may invoke the power of sale and any other

remedies permitted by applicable law." The issue we must

resolve is whether this language in the reverse mortgage

incorporates the statutory power of sale as set forth in G. L.

c. 183, § 21, and allows Nutter to foreclose on the mortgaged

3 While litigation was pending, the third borrower also died. James B. Nutter & Company (Nutter) amended its complaint, naming the executors of her estate as defendants. 3

property in accordance with the requirements in § 21. We hold

that it does.

Background. 1. Reverse mortgages. For many retirees, one

of the most reliable potential sources of income in later life

is the accrued equity in their homes. See Consumer Financial

Protection Bureau, Issue Brief: The costs and risks of using a

reverse mortgage to delay collecting Social Security, at 8

(2017). In order to secure cash for their living expenses, many

retirees choose to borrow against their home equity. Id. at 9.

One way for them to do so is through a home equity

conversion mortgage, which is a unique kind of loan available to

homeowners age sixty-two or older. See Consumer Financial

Protection Bureau, Reverse Mortgages: A Discussion Guide, at 1,

3 (2017). These mortgages are commonly referred to as "reverse

mortgages" because, instead of making payments to the lender,

the borrower receives cash from the lender, either as a line of

credit, in monthly payouts, or as a lump sum. Id. at 3, 12. As

in a traditional mortgage, a reverse mortgage is secured by the

borrower's home. Unlike a traditional mortgage, however, the

loan does not become due until the borrower dies or no longer

lives in the home; interest and fees are added to the loan

balance over time and the entire balance is typically paid from

the sale of the home. Id. at 3, 7. 4

Another distinctive feature of a reverse mortgage is that

typically it secures a nonrecourse loan, meaning that the

borrower is not personally liable for repayment of the debt. In

other words, the lender must "look exclusively to the mortgaged

property for repayment." Summers v. Financial Freedom

Acquisition LLC,

(1st Cir. 2015).4

2. Nutter's actions for declaratory judgment. Nutter uses

a standard form for its reverse mortgages. Paragraph 9 of this

form states the grounds for acceleration of the debt. It

provides that Nutter can require immediate payment in full if,

among other grounds, the borrower dies, or the mortgaged

property is no longer the borrower's principal residence.

Paragraph 10 provides that the borrower shall have no personal

liability for repayment of the debt and that Nutter cannot

obtain a deficiency judgment against the borrower in the event

of foreclosure: "Lender may enforce the debt only through sale

of the Property." Paragraph 20 outlines Nutter's remedies in

the event of default. It states, in relevant part:

4 To give an example of one way a reverse mortgage works, suppose a sixty-two year old homeowner has recently retired and decides to take out a loan of $250,000, secured by a reverse mortgage on her home. She receives the $250,000 as a lump sum, continues to live in her home, and makes no payments to the lender during her lifetime. The entire $250,000 loan becomes due, along with the accrued interest and fees, when she dies. Her heirs, who have inherited the home, must now repay the loan -- which they can do by selling the home. If they do not repay the loan, the lender's only option is to foreclose on the mortgage and sell the home. 5

"Foreclosure Procedure. If Lender requires immediate payment in full under Paragraph 9, Lender may invoke the power of sale and any other remedies permitted by applicable law. . . . At this sale Lender or another person may acquire the Property. This is known as 'foreclosure and sale.' In any lawsuit for foreclosure and sale, Lender will have the right to collect all costs allowed by law."

In these three actions, Nutter moved for partial judgment

on the pleadings, seeking a judicial declaration that the

language in paragraph 20 incorporates the statutory power of

sale as defined in G. L. c. 183, § 21. The judge granted

Nutter's motions, concluding that Nutter's reverse mortgage

incorporated the statutory power of sale by reference because

the statutory power of sale is a "remed[y] permitted by

applicable law." The judge reported the three cases to the

Appeals Court pursuant to Mass. R. Civ. P. 64 (a), as amended,

(1996), and we transferred them to this court on

our own motion.

Discussion. The interpretation of a contract is a question

of law, which we review de novo. See Balles v. Babcock Power,

Inc.,

(2017). To determine whether Nutter's

reverse mortgages incorporate the statutory power of sale, we

must first examine the nature of the power of sale in

Massachusetts.

1. Power of sale. Massachusetts is a nonjudicial

foreclosure State, meaning that it "does not require a 6

[mortgagee] to obtain judicial authorization to foreclose on a

mortgaged property." U.S. Bank Nat'l Ass'n v. Ibanez,

(2011) (Ibanez). Since at least the beginning of

the nineteenth century, Massachusetts has allowed mortgagees to

foreclose without a judicial proceeding pursuant to the "power

of sale," if such power is granted in the mortgage itself. See

Eaton v. Federal Nat'l Mtge. Ass'n,

, 580 n.16

(2012). The power of sale evolved in recognition of "the desire

to have a more speedy process of foreclosing than was furnished

by suit or entry."

at 580 n.15, quoting A.L. Partridge,

Deeds, Mortgages and Easements 201 (rev. ed. 1932). It soon

became "a very frequent provision in deeds of mortgage."

quoting 1 F. Hilliard, Mortgages 119 (1856).

The Legislature has chosen to regulate the power of sale

through a detailed statutory framework, set out in G. L. c. 244,

§§ 11-17C. See Eaton,

. Chief among these

statutory provisions is G. L. c. 244, § 14, which provides that

any foreclosure by power of sale will be ineffectual unless

certain notice requirements are met. See

at 581 &

n.17; Ibanez,

.

The power of sale also is limited by the requirements of

G. L. c. 183, § 21, which was enacted in 1912 as part of "An Act

to shorten the forms of deeds, mortgages and other instruments

relating to real property." St. 1912, c. 502. See Pinti v. 7

Emigrant Mtge. Co.,

(2015). As the title of

the act suggests, the purpose of § 21 was "to give the power of

sale [a] 'statutory form to shorten the length of mortgage

instruments.'" Id., quoting Eaton,

n.16.

Accordingly, § 21 defines the "statutory power of sale" and

provides that it "may be incorporated in any mortgage by

reference."5

But the statutory power of sale is far more than a mere

contractual shorthand; § 21 establishes affirmative requirements

that a mortgagee must meet in order to foreclose by power of

5 General Laws c. 183, § 21, provides:

"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." 8

sale.6 See Eaton,

("A foreclosure sale

conducted pursuant to a power of sale in a mortgage must comply

with all applicable statutory provisions, including in

particular G. L. c. 183, § 21 . . ."). Failure to strictly

adhere to the requirements of § 21 renders a foreclosure sale

void. Ibanez,

.

2. Nutter's form reverse mortgage. In order for a

mortgagee to exercise the statutory power of sale, the mortgage

must itself grant such a power. See

. We conclude,

as several Land Court judges have concluded, that there are

generally three methods of incorporating the statutory power of

sale into a mortgage: first, by incorporating the exact

language defining the statutory power of sale in § 21 into the

text of the mortgage; second, by referring to this definition,

generally by use of the term "statutory power of sale"; or

third, by including language in the mortgage defining a power

substantially similar to that of the statutory power. See,

e.g., Norton v. Joseph, 17 Land Ct. Rptr. 40, 41 (2009), aff'd,

6 The Legislature has made this clear in the design of its statutory framework, which integrates § 21 into its other provisions regulating the power of sale in G. L. c. 244, §§ 11- 17C. For example, G. L. c. 244, § 15, requires a mortgagee who forecloses by power of sale to record an affidavit showing that "the requirements of the power of sale and the law have been complied with;" such an affidavit serves as "conclusive evidence . . . that the sale complied with [G. L. c. 244] and [G. L. c. 183, § 21]" (emphasis added). G. L. c. 244, § 15 (b), (c). 9

(2010), citing The Massachusetts Co. v.

Midura, 3 Land Ct. Rptr. 138, 138 (1995).

We agree with the Land Court judge that Nutter's reverse

mortgages do not incorporate the statutory power of sale under

either the first or third method. The mortgage does not recite

the exact language of § 21. Nor does it define a power

"substantially similar" to the statutory power of sale.

The more difficult question is whether paragraph 20

adequately refers to the statutory power of sale in § 21 by

allowing the lender to "invoke the power of sale and any other

remedies permitted by applicable law," even though it does not

expressly use the term "statutory power of sale." This is a

matter of contract interpretation, to which we apply the

traditional principles of contract law.

"[W]hen the language of a contract is clear, it alone

determines the contract's meaning." Balles,

.

Contractual language is ambiguous "if it is susceptible of more

than one meaning and reasonably intelligent persons would differ

as to which meaning is the proper one." Citation Ins. Co. v.

Gomez,

(1998). When the language is

ambiguous, it is construed against the drafter, "if the

circumstances surrounding its use . . . do not indicate the

intended meaning of the language." Merrimack Valley Nat'l Bank

v. Baird,

(1977). "The author of the 10

ambiguous term is held to any reasonable interpretation

attributed to that term which is relied on by the other party."

Finally, we construe a contract as a whole, so as "to give

reasonable effect to each of its provisions." J.A. Sullivan

Corp. v. Commonwealth,

(1986).

These familiar principles are supplemented with more

specific rules of construction where, as here, the contracts at

issue are standardized contracts of adhesion. Although

typically when confronted with ambiguous language a court will

examine extrinsic evidence to determine what the parties meant

the contract to say, see Bank v. Thermo Elemental Inc.,

(2008), such an inquiry is impracticable

where the nondrafting party had no ability to influence the

language of the contract. See Restatement (Second) of Contracts

§ 211 comment c (1981) ("The customer [in a standardized

agreement] . . . is commonly not represented in the drafting").

Thus, when interpreting adhesion contracts, we seek to

effectuate, not the actual intentions of the parties in each

transaction, but instead the meaning an objectively reasonable

person in the nondrafting party's position would give to the

language in the contract. See, e.g., Golchin v. Liberty Mut.

Ins. Co.,

(2013) (standard insurance

policies must be interpreted in light of "what an objectively

reasonable insured . . . would expect to be covered" [citation 11

omitted]). See also Restatement (Second) of Contracts, supra at

§ 211 comment e ("courts in construing and applying a

standardized contract seek to effectuate the reasonable

expectations of the average member of the public who accepts

it").

Here, having considered both the language of paragraph 20

and the form reverse mortgage as a whole, we conclude that the

mortgage is ambiguous as to whether it incorporates the

statutory power of sale. Paragraph 20 of the reverse mortgage

states that the "[l]ender may invoke the power of sale and any

other remedies permitted by applicable law." Because it omits

the word "statutory," this language is ambiguous on its face as

to whether it includes the statutory power of sale. The

inclusion of the phrase "and any other remedies permitted by

applicable law" does not eliminate this ambiguity because it can

reasonably be understood to exclude the statutory power of sale:

the word "other" indicates that this language refers to remedies

other than the power of sale, and under standard rules of

grammar, the modifying phrase "permitted by applicable law"

would apply only to the immediately preceding term -- that is,

"any other remedies" -- and not to the term "power of sale."

See, e.g., Russell v. Boston Wyman, Inc.,

(1991) ("The 'rule of the last antecedent' holds that

'qualifying phrases are to be applied to the words or phrase 12

immediately preceding and are not to be construed as extending

to others more remote'" [citation omitted]).

This ambiguity is only exacerbated by the surrounding

language. See Balles,

("To determine whether

[contractual] language . . . is ambiguous, we look both to the

contested language and to the text of the contract as a whole").

The reverse mortgage contains language that appears to

contemplate judicial foreclosure rather than foreclosure by

power of sale: paragraph 11 of the mortgage provides that the

borrower's right of reinstatement "applies even after

foreclosure proceedings are instituted" (emphasis added), and

paragraph 20 states that "[i]n any lawsuit for foreclosure and

sale, Lender will have the right to collect all costs allowed by

law" (emphasis added). Such language is plainly inconsistent

with the practices of a nonjudicial foreclosure State like ours.

In addition, the notice that Nutter is required to send to

the borrower under paragraph 20 states, "Borrower has the right

in any lawsuit for foreclosure and sale to argue that Borrower

did keep promises and agreements . . . and to present any other

defenses that Borrower may have" (emphasis added). In the past,

we have found substantially similar language contained in a

notice of default to be seriously misleading to borrowers. In

Pinti,

, we noted the significant risk of

confusion that stemmed from such language, explaining: 13

"[I]n a nonjudicial foreclosure jurisdiction like Massachusetts, misstating . . . information in a way to suggest that a mortgagor with a defense does not need to initiate a lawsuit but may wait to respond to a foreclosure lawsuit filed by the mortgagee can have disastrous consequences for the mortgagor: if the mortgagor has a valid defense to the foreclosure sale going forward, but is not made aware that he or she must initiate an action in court against the mortgagee to raise that defense, the sale may well proceed and result in title passing to a bona fide purchaser without knowledge of the issue -- at which point . . . the mortgagor's right to redeem his or her home may well be lost." 7

The cases on appeal here are distinguishable from Pinti,

where the issue was whether the default notice complied with the

requirements set out in the terms of the mortgage itself. See

. But we draw a broader lesson from Pinti, which is

that in a nonjudicial foreclosure State like ours, generic

standardized language that does not reflect that fact creates a

needless risk of misunderstanding and confusion. Here, the

facial ambiguity of the phrase "power of sale and any other

remedies permitted by applicable law," combined with the

repeated references to judicial foreclosure throughout the

mortgage, renders the language in paragraph 20 "susceptible of

more than one meaning." Citation Ins. Co.,

.

Because the language in paragraph 20 has more than one

potential meaning and is in a contract of adhesion, we construe

7 The language at issue in Pinti v. Emigrant Mtge. Co.,

(2015), contained in a default notice, stated that the borrowers had "the right to assert in any lawsuit for foreclosure and sale the nonexistence of default or any other defense". 14

it against the party that drafted it -- here, Nutter -- and

adopt the interpretation that an objectively reasonable borrower

of reverse mortgages would give to the language in the contract.

See Lechmere Tire & Sales Co. v. Burwick,

(1972) ("an 'adhesion' contract [is] to be construed strictly

against [the party] in whose behalf it ha[s] been drafted").

See also Restatement (Second) of Contracts, supra at § 211

comment c ("standard terms . . . are construed against the

draftsman"). We note that this analysis is necessary only

because of Nutter's draftsmanship. If the term "power of sale"

was meant to refer to the statutory power of sale, Nutter could

have avoided any ambiguity simply by adding the word

"statutory."8 Having said that, the rule construing ambiguities

against the drafter does not require us to adopt the

interpretation claimed by the estates of the borrowers in these

8 Nutter could have easily adopted the language in the standard form required by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) for mortgages executed in Massachusetts, which not only provides that the mortgagee may invoke "the STATUTORY POWER OF SALE," but also requires notice informing the borrower of "the right to bring a court action to assert the nonexistence of a default or any other defense" (emphasis added). Massachusetts--Single Family--Fannie Mae/Freddie Mac Uniform Instrument, Form 3022 (rev. 10/16). In contrast to the standard form mortgages required in judicial foreclosure States, it does not contain any language suggesting that foreclosure requires a judicial proceeding. Contrast with, e.g., New York--Single Family--Fannie Mae/Freddie Mac Uniform Instrument, Form 3033 (1/01) ("Lender may bring a lawsuit to . . . have the Property sold"). 15

cases. "A prerequisite to the application of [that] rule is

that the alternative interpretation placed upon the alleged

ambiguity . . . be, under all circumstances, a reasonable and

practical one" (citation omitted). Shea v. Bay State Gas Co.,

(1981).

Even construing the ambiguous language against Nutter, we

conclude that the only "reasonable and practical" interpretation

of the mortgage is that it incorporates the statutory power of

sale.

It matters that this is a contract for a reverse

mortgage, rather than a traditional mortgage, where the borrower

makes no monthly payments of principal or interest, where the

lender cannot hold the borrower personally liable for the debt,

and where the lender's only recourse on default is to obtain

repayment through a foreclosure sale. Without a power of sale,

the only way that a lender can recover the principal of the

loan, not to mention interest and fees, is through foreclosure

by entry -- a process that would take three years -- or

foreclosure by action, "a method rarely used" in Massachusetts.

Beaton v. Land Court,

(1975).9 In these

9 In a foreclosure by entry, a mortgagee who peaceably enters a property and remains for three years, after recording a certificate or memorandum of entry, can thereby foreclose the borrower's right of redemption. G. L. c. 244, §§ 1, 2. In a foreclosure by action, the mortgagee must sue to foreclose on the property, in accordance with the ordinary rules of procedure governing all actions. G. L. c. 244, §§ 3, 4. See Beaton v. Land Court,

(1975). 16

circumstances, no reasonable borrower in Massachusetts would

expect that a lender would enter into a reverse mortgage without

retaining a power of sale. See Starr v. Fordham,

(1995) ("a contract should be construed to give it effect as

a rational business instrument" [citation omitted]).

Having concluded that the only "reasonable and practical"

interpretation of this form reverse mortgage is that it grants a

power of sale, that power of sale necessarily must be a

statutory power of sale, because in Massachusetts there is no

power of sale except the statutory power of sale. The power of

sale -- that is, the power to foreclose without judicial

authorization -- cannot be exercised in Massachusetts unless it

conforms to the statutory requirements of § 21. The

Legislature's carefully crafted statutory framework leaves no

room for parties privately to agree on a purely contractual,

unregulated power of sale.10

To read the term "power of sale" in paragraph 20 as

referring to anything other than the statutory power of sale

would therefore render the provision a nullity, leaving the

10 Parties do remain free, of course, to include within a mortgage specific terms governing the exercise of the power of sale that add to the requirements of G. L. c. 183, § 21. This is specifically contemplated by § 21, which requires a foreclosure by power of sale to "comply[] with the terms of the mortgage" as well as the relevant statutes. See, e.g., Pinti,

(default notice violated condition precedent to exercise of power of sale contained in mortgage). 17

lender with no ability to obtain repayment through a power of

sale. See Ferri v. Powell-Ferri,

(2017)

("the court will prefer an interpretation 'which gives a

reasonable, lawful and effective meaning to all manifestations

of intention, rather than one which leaves a part of those

manifestations unreasonable, unlawful or [of] no effect'"

[citation omitted]). "It is neither reasonable nor practical to

interpret [a] clause as being meaningless." Shea,

. We therefore conclude that no reasonable borrower in

Massachusetts would understand that this power of sale would be

anything other than a statutory power of sale.11

By interpreting Nutter's reverse mortgage to incorporate

the statutory power of sale, we bring these mortgages fully

within the regulatory ambit of the statutes and case law that

govern foreclosures in Massachusetts. Nutter may not foreclose

unless it strictly complies with the requirements in § 21, which

in turn requires strict compliance with all other statutes

related to the exercise of the power of sale. G. L. c. 183,

§ 21. See Eaton,

; Ibanez,

.

11 Such a reading would also present a contradiction with the phrase that follows the term "power of sale": ". . . and any other remedies permitted by applicable law." Presumably a mortgage that requires "other remedies" to be consistent with applicable law would not contemplate a power of sale that is not. 18

Conclusion. For the reasons stated above, we conclude that

the language of paragraph 20 of Nutter's reverse mortgages

incorporates the statutory power of sale as defined in G. L.

c. 183, § 21. We therefore affirm the orders allowing Nutter's

partial motion for judgment on the pleadings in each case.

Judgments affirmed.