Obtaining loans to purchase property, the plaintiffs (“Borrowers”) executed notes secured by mortgages on real estate. To facilitate securitization, numerous financial institutions pooled the mortgages together and transferred them to various trusts, in which investors then purchased interests in the form of mortgage-backed securities. The trustees entered into contractual agreements with loan servicers (the “Servicers”) who would, among other things, (i) convey payments received from Borrowers to the appropriate trustee and (ii) make certain disbursements, i.e. delinquency advances (temporary advances to keep principal and interest flowing to trustees and investors), to the trustees in the case of non-payment by Borrowers.
Borrowers eventually failed to make the required mortgage payments and the Servicers consequently made the delinquency advances. The Servicers also initiated foreclosure proceedings as agents of the trustees. On behalf of a putative class of similarly situated borrowers, Borrowers brought suit invoking the Massachusetts Uniform Commercial Code and arguing that the Servicers’ delinquency advances constituted payments of their loans. As such, Borrowers contended, there was no default under the loans and the Servicers had negligently foreclosed on their property. The district court disagreed and ruled against the Borrowers, and the Borrowers appealed. The United States Court of Appeals for the First Circuit disagreed as well and affirmed the district court’s judgment.
Per the court, Borrowers’ “crafty contention hinge[d] on whether the money that the [Servicers] paid constituted ‘payment’ on the borrowers’ outstanding debts. The Massachusetts UCC [would say] yes if the payments were ‘made (i) by or on behalf of a party obliged to pay the instrument, and (ii) to a person entitled to enforce the instrument [i.e. the mortgagee].” Additionally, “Whether the servicers paid ‘on behalf of’ the [Borrowers], in turn, depend[ed] on whether the [Servicers] acted ‘with the intention to satisfy the debt.’”
The court found no allegations in the Borrowers’ complaint that the Servicers intended the delinquency advances to satisfy the Borrowers’ debt. To the contrary, the documents in the record “belie[d] any plausible inference that the payments were done with an intent to pay [Borrowers’] debt.” For example, certain of the contractual agreements between the trustees and the Servicers explicitly “acknowledge[d] (over a dozen times) that borrower’s failure to pay the debt constitutes a ‘default’ on the mortgage” and provided for remedies (including foreclosure) in connection therewith. In the court’s opinion, “Affording these remedies would be curious (perhaps outright bizarre) if [Servicers’] payments were intended to eradicate [Borrowers’] unpaid debt.” The court concluded, “[T]his is the only reading of these agreements that makes sense, given the realities of the mortgage-backed securities market and the [Servicers’] concomitant need to keep ancillary fees on the property current. . . . it is simply not plausible that the payments were intended to satisfy the underlying debt.”
