SELECT PORTFOLIO SERVICING, INC., as agent for U.S. BANK NATIONAL ASSOCIATION v. NANCY M. NEEDEL and PETER NEEDEL

Introduction

This action arises from a dispute concerning an allegedly defective mortgage between the parties that encumbers only one spouse’s interest in a property owned by a married couple as tenants by the entirety. Plaintiff, Select Portfolio Servicing, Inc., (“SPS”) commenced this action on June 21, 2007, seeking to foreclose on the property at 19 Radcliffe Road, Belmont, Massachusetts, owned by Nancy and Peter Needel as tenants by the entirety. Despite the Needels’ default, SPS has been unable to foreclose on the property because the mortgage agreement between the parties lacks the signature of Peter Needel. In its complaint, SPS asserts three separate grounds upon which it should be afforded relief. Count I requests that this Court declare that defendant Peter Needel ratified the mortgage agreement and is liable under the mortgage. Count II requests reformation of the mortgage agreement such that the mortgage encumbers the interests of both Nancy and Peter Needel. Count III requests, in the alternative, that this Court declare that the plaintiff is equitably subrogated to a pre-existing mortgage, which was discharged by payment of funds from the proceeds of plaintiff’s mortgage. The prior mortgage correctly encumbered both Nancy and Peter Needels’ interest in the property.

The defendant’s answer asserts several counterclaims against SPS and requests rescission of the mortgage and note, as well as attorney’s fees and costs. Count I alleges a claim for violation of G. L. c. 209, § 1. Count II alleges that SPS’s actions related to attempting to publish notice to foreclose on the defendants’ property violated the covenant of good faith and fair dealings. Count III alleges that the Needels have suffered emotional distress as a result of SPS’s attempt to foreclose on the property. Count IV asserts violations of Mass. R. Civ. P. 11 and G.L. ch. 231 § 6 (f) stating that the plaintiff’s pleadings are insubstantial and frivolous.

On November 4, 2008, SPS submitted Plaintiff’s Motion for Partial Summary Judgment for Count III of its complaint. Defendants’ filed their opposition and cross-motion for summary judgment on January 2, 2009. Arguments on the motions were heard on February 6, 2009, and the matters were taken under advisement.

Undisputed Facts

After reviewing the record before the Court, I find that the following facts are not in dispute:

1. Select Portfolio Servicing, Inc., formerly known as Fairbanks Capital Corp., is the servicing agent of U.S. Bank National Association for the mortgage agreement and note at issue in this action

2. U.S. Bank National Association is the successor-in-interest to New Century Mortgage Association, the previous holder of the mortgage agreement and note at issue in this action.

3. Nancy and Peter Needel own the property, known as and numbered 19 Radcliffe Road, Belmont, Massachusetts, as tenants by the entirety (“Property”).

4. On or about December 5, 2000, the Needels executed a mortgage on the Property with Full Spectrum Lending, Inc., (“Full Spectrum Mortgage”) in the amount of $440,000. That mortgage is recorded in the Middlesex South Registry of Deeds. (Pl.’s Mot. Summ. J. Ex. 6).

5. On or about November 15, 2001, Nancy Needel executed a new mortgage agreement on the Property with New Century (“New Century Mortgage”) in the amount of $485,000.

6. As part of the New Century mortgage agreement, New Century dispersed $443,392.04 to Full Spectrum Lending, Inc., to satisfy and discharge the Full Spectrum Mortgage in full.

7. No payments have been made on the New Century Mortgage since September 12, 2003.

8. The parties to this action, or their predecessors in interest, were involved in a prior 2005 action in Middlesex Superior Court (“2005 action). See Needel v. U.S. Bank Nat’l Ass’n, MICV 2005-00489, Memorandum and Order (Mass. Middlesex Super. Ct. 2005).

9. In the 2005 action the Needels filed affirmative claims against U.S. National Bank Association (“U.S. Bank”).

10. Count I of the 2005 action asserted that “[t]he actions of [U.S. Bank] constitute a violation of Mass. Gen. Law ch. 209 s. 1.” Id.

11. Count II of the 2005 action asserted that “[t]he actions of [U.S. Bank] in proceeding with the foreclosure of the property, including but not limited to, the publication of the Order of Notice I the Belmont Herald, constitute a breach of the covenant of good faith and fair dealings.” Id.

12. Count II of the 2005 action asserted that U.S. Bank “knew or should have known that the action of [U.S. Bank] in foreclosing on the Property of the [Needels] in violation of Mass. Gen. Law. Ch. 209 s. 1, would cause the [Needels] emotional distress. The actions of [U.S. Bank] are the direct and proximate cause of [the Needels] emotional distress.” Id.

13. The 2005 action was dismissed by the Superior Court’s grant of a motion to dismiss filed by U.S. Bank pursuant to Mass. R. Civ. P. 12 (b)(6). Id.

14. The Needels’ appealed the dismissal of their affirmative civil action against U.S. Bank. That appeal was subsequently dismissed with prejudice by stipulation of the parties.

Summary Judgment

“Summary judgment is granted where there are no issues of genuine material fact, and the moving party is entitled to judgment as a matter of law.” Mass. R. Civ. P. 56(c); Ng Bros. Constr., Inc. v. Craney, 436 Mass. 638 , 643-44 (2002). Whether a fact is material is determined by the substantive law and “[a]n adverse party may not manufacture disputes by conclusory factual assertions.” Ng Bros., 436 Mass. at 648; see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For any claim that the moving party does not have the burden of proof at trial, a movant may demonstrate the absence of a triable issue by either submitting affirmative evidence that negates an essential element of the opponent’s case, or by “demonstrating that proof of that element is unlikely to be forthcoming at trial.” Flesner v. Technical Commc’ns Corp., 410 Mass. 805 , 809 (1991). Furthermore, the party opposing summary judgment “cannot rest on his or her pleadings and mere assertions of disputed facts to defeat the motion for summary judgment.” LaLonde v. Eissner, 405 Mass. 207 , 209 (1976).

Based on the undisputed facts before this Court, I find that certain issues are ripe for summary judgment and shall rule on them accordingly.

Res Judicata

Both parties contend that the claims brought by their opponent are barred by the doctrine of res judicata. Res judicata consists of both claim and issue preclusion. Kobrin v. Bd. of Registration in Med., 444 Mass. 837 , 843 (2005). Claim preclusion is the doctrine that “makes a valid, final judgment conclusive on the parties and their privies, and prevents relitigation of all matters that were or could have been adjudicated in the action.” O’Neil v. City Manager of Cambridge, 428 Mass. 257 , 257 (2005). “The invocation of claim preclusion requires three elements: (1) the identity or privity of the parties to the present and prior actions, (2) identity of the cause of action, and (3) prior final judgment on the merits.” Kobrin, 444 Mass. at 843.

Issue Preclusion is the doctrine that “prevents relitigation of an issue determined in an earlier action where the same issue arises in a later action, based on a different claim, between the same parties or their privies.” Kobrin, 444 Mass. at 843. For issue preclusion to apply the party asserting issue preclusion must show that “(1) there was a final judgment on the merits in the prior adjudication; (2) the party against whom preclusion is asserted was a party (or in privity with a party) to the prior adjudication; and (3) the issue in the prior adjudication was identical to the issue in the current adjudication.” Id. In addition, a party may only invoke the doctrine of issue preclusion “to prevent relitigation of issues actually litigated in the prior action.” Kobrin, 444 Mass. at 844 (citing Fidelity Mgt. and Research Co. v. Ostrander, 40 Mass. App. Ct. 195 , 199 (1996)).

Furthermore, res judicata is an affirmative defense that must be plead in a party’s first response to an affirmative pleading. Mass. R. Civ. Pro. 8(c). Failure to plead an affirmative defense listed under Mass. R. Civ. Pro. 8(c) acts to waive that defense. See Rattigan v. Wile, 445 Mass. 850 , 863 (2006) (determining that the failure to comply with Mass. R. Civ. Pro. 8(c) is sufficient in itself to bar assertion of res judicata as an affirmative defense); see also Sharron v. City of Newton, 437 Mass. 99 , 102 (2002) (stating that it is well established that the omission of an affirmative defense from an answer constitutes a waiver of that defense).

I. Counts I, II and III of the Needels’ counterclaims.

The plaintiff, SPS, first asserted the defense of res judicata in Plaintiff’s Motion To Dismiss, filed in response to defendants’ answer and counterclaims. In its motion for summary judgment, SPS reasserts that Counts I, II and II of the Needels’ counterclaims are barred by claim preclusion.

Counts I, II and III of the Needels’ counterclaims are identical to affirmative claims filed by Needels against U.S. Bank National Association (U.S. Bank), SPS’s predecessor in interest, in a 2005 Superior Court action. See Needel v. U.S. Bank Nat’l Ass’n, MICV 2005-00489, Memorandum and Order (Mass. Middlesex Super. Ct. 2005). The 2005 action was dismissed on the grant of U.S. Bank’s motion to dismiss pursuant to Mass. R. Civ. P. 12(b) (6). The Needels appealed that dismissal to the Court of Appeals. On March 20, 2008, their appeal was dismissed with prejudice by stipulation of the parties.

SPS is correct in its assertion that the Needels’ counterclaims are barred by claim preclusion. Specifically the three requirements for claim preclusion are met.

(1) The identity of the parties or their privies are the same in both the 2005 Action and in the current action. The Needels are named parties to both actions and SPS is the privy of U.S. Bank, the defendant in the 2005 action. (2) The counterclaims asserted by the Needels in the current action are identical to the claims they filed against U.S. Bank in the 2005 Action. See Needel v. U.S. Bank Nat’l Ass’n, MICV 2005-00489; (Pl.’s Mot. Summ. J. Ex. 26.). (3) The Needels’ counterclaims were previously adjudicated on the merits because the identical claims were dismissed by the Appeals Court with prejudice. Bagley v. Moxley, 407 Mass. 633 , 636 (1990) (noting that a dismissal with prejudice constitutes the adjudication of a claim on the merits as fully and completely as if that adjudication resulted from a trial).

Because the requirements for preclusion of Count I, II and III of the Needels’ counterclaims are met, those claims are dismissed.

II. Select Portfolio’s claim against Mr. Needel individually.

The Needels waived the affirmative defense of res judicata when they failed to plead the defense in their answer pursuant to Mass. R. Civ. Pro. 8(c). Despite waiver of the defense, the defendants are also unable to show that SPS’s claim against Peter Needel is barred by either claim or issue preclusion.

The Needels assert that the 2005 Action brought against U.S. Bank bars any claim SPS may bring against Peter Needel in the current action. However, the defendants cannot show that any aspect of SPS’s current claim has ever been adjudicated on the merits, because although the Needels brought the 2005 Action against U.S. Bank, U.S. Bank never filed an answer or counterclaims in response to the case against them. See Needel v. U.S. Bank Nat’l Ass’n, MICV 2005-00489. Furthermore, because the claims brought by the Needels were dismissed by grant of U.S. Bank’s motion to dismiss pursuant to Mass. R. Civ. P. 12 (b) (6), U.S. Bank was never obligated to assert any claims in the 2005 Action. Despite the attempt by the Needels to frame the dismissal of their affirmative action as having adjudicated SPS’s current claims, the dismissal of the Needel’s claims with prejudice applied only to those claims brought by the Needels against U.S. Bank.

For the reasons stated above, no aspect of SPS’s claim in the current action is bared by the doctrine of res judicata.

Equitable Subrogation

SPS argues that because the defendants discharged the existing Full Spectrum Mortgage with the proceeds from the New Century Mortgage, this Court can use its power in equity to subrogate plaintiff’s New Century Mortgage for the Full Spectrum Mortgage. The effect of this subrogation would be that SPS would substitute the non-defective Full Spectrum Mortgage for the defective New Century Mortgage and would enjoy the full, undivided and total security interest in the subject property afforded to Full Spectrum by the defendants under the Full Spectrum Mortgage.

The law of this Commonwealth affords the Court broad power over mortgages. East Boston Sav. Bank v. Ogan, 428 Mass. 327 , 328 (1998). With respect to the discharge of a pre-existing mortgage obligation, “[i]t is the general rule that, where a mortgage has been discharged by mistake, equity will set the discharge aside and reinstate the mortgage to the position the parties intended it to occupy, where the rights of intervening lienors have not been affected.” Northeastern Co-op. Bank v. MacLean, 300 Mass. 285 , 292 (1938). The remedy of subrogation falls within the broad equity powers of the Court and can be used when such a remedy is required to prevent either party from being unjustly enriched. East Boston Sav. Bank, 428 Mass. at 329.

In the present case, SPS paid the outstanding balance of $443,392.04 owed by the Needels on the Full Spectrum Mortgage as part of a refinancing. Since that transaction, the Needels defaulted on the New Century Mortgage and prevented SPS from foreclosing on the property by relying on a defect in the mortgage agreement. That defect is the lack of Mr. Needel’s signature on the New Century mortgage agreement.

By relying on a defect in the New Century Mortgage agreement to both avoid making payments and prevent SPS from foreclosing, the Needels have avoided their mortgage obligations without consequence and are unjustly enriched. Because of the Needels’ unjust enrichment, equitable subrogation is available as a remedy in this case.

However before utilizing equitable subrogation as a remedy, the Court is required to determine that, “(1) the subrogee made the payment to protect his or her own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt paid, (4) the subrogee paid off the entire encumbrance, and (5) subrogation would not work any injustice to the rights of the junior lien holder.’” East Boston Sav. Bank, 428 Mass. at 330, (citing Mort v. U.S., 86 F.3d 890, 894 (9th Cir. 1996)). Equitable subrogation “is ‘a broad equitable remedy’ and, depending on the individual case, it may apply even where one or more of these factors are absent.” Id.

The remedy of equitable subrogation is available to the Court in this case as the plaintiffs satisfy the requirements for such relief. East Boston Sav. Bank, 428 Mass. at 300. More specifically:

1) SPS’s predecessor in interest issued the New Century mortgage and made payments to discharge the Needels’ previous Mortgage. Those payments were made to discharge the only other mortgage on the property, thus protecting New Century’s full mortgage interest.

2) SPS’s predecessor in interest issued the New Century Mortgage and paid off the balance of the Full Spectrum Mortgage as part of a business transaction. Because New Century’s payment of the balance of the Full Spectrum Mortgage was due to obligations created in a business transaction that payment was not voluntary. East Boston Sav. Bank, 428 Mass. at 330, (citing Mort, 86 F.3d at 894).

3) The debt paid by SPS’s predecessor in interest was a debt owed by the Needels due to the Full Spectrum Mortgage on their property and was not an independent debt owed by SPS’s predecessor in interest.

4) The proceeds from the New Century mortgage paid off the entire $443,392.04 owed by the Needels under the Full Spectrum Mortgage.

5) Upon the discharge of the Full Spectrum Mortgage, the New Century Mortgage became the only mortgage on the property. Because the New Century mortgage was, and continues to be, the sole mortgage on the property, there are no junior lien holders that would be injured by the subrogation of the New Century Mortgage for the Full Spectrum Mortgage.

Because the requirements for equitable subrogation are met, this Court holds that the New Century Mortgage held by SPS is subrogated for the Full Spectrum Mortgage in the amount of $443,392.04, the full balance of the Full Spectrum Mortgage discharged by proceeds from the New Century Mortgage. SPS shall also enjoy the full rights and remedies of the Full Spectrum Mortgage to recover the payoff amount of $443,392.04 plus interest accrued. However, the Court finds that the record contains insufficient evidence as to the appropriate amount of interest due based on the Full Spectrum Mortgage amount of $443,392.04. Therefore there is a trial-able issue of fact as to the amount of interest owed by the Needels to SPS based on the mortgage amount of $443,392.04. Summary judgment is therefore inappropriate on the issue of the amount of interest owed.

Encumbrance of Nancy Needel’s Interest Under the New Century Mortgage

In its complaint, SPS requests that the Court declare Nancy Needel’s individual interest in the subject property encumbered by the difference between the $443,392.04 discharged on the Full Spectrum Mortgage and total amount issued to the Needels under the New Century Mortgage (approximately $485,000). The Court finds that there is a material issue of fact with respect to the intent of the parties under the New Century Mortgage and the encumbrance of Nancy Needel’s interest in the disputed property under that Mortgage. Despite the Needels’ admission that the proceeds of the New Century Mortgage were used to discharge their entire obligation under the Full Spectrum Mortgage, the Needels allege that they did not execute the note for the New Century Mortgage agreement. Because of this allegation, summary judgment on this issue is not appropriate as there is an issue of material fact surrounding the nature of the transaction between the parties and whether Nancy Needel’s individual interest in the property is encumbered by the New Century Mortgage agreement.

Defendants’ Counter Claim Pursuant to G. L. c. 231 § 6 (f)

Count IV of the Needels counterclaims states that the pleadings filed by SPS are insubstantial, frivolous and in violation of Mass. R. Civ. P. 11 and G. L. c. 231 § 6 (f). G.L. 231 § 6 (f) requires that “a finding, verdict, decision, award, order or judgment has been made by a judge or justice or by a jury, auditor, master or other finder of fact” prior to filing a claim for insubstantial or frivolous pleadings. No such finding, verdict, decision, award, order, or judgment has yet been made in this action and consequently Count IV of the Needels counterclaim is not properly before this court. Accordingly Count IV of the defendants’ counterclaim is dismissed without prejudice.

Conclusion

I. For the reasons stated above, Plaintiffs Motion for Partial Summary Judgment is ALLOWED IN PART and DENIED IN PART.

A. Plaintiff’s motion for the equitable subrogation of SPS’s mortgage to the pre-existing mortgage in the amount of $443,392.04 plus accrued interest is ALLOWED.

B. Plaintiff’s motion to be awarded interest in the amount of $261,648.08 based on the balance of the pre-existing mortgage is DENIED and the amount of accrued interest is to be determined at trial.

C. Plaintiff’s motion to declare Nancy Needel’s individual interest in the subject property encumbered by the New Century Mortgage for the amount in excess of the Full Spectrum mortgage is DENIED and the issue is to be determined at trial.

D. Plaintiff’s motion to dismiss the Needels’ counterclaims on res judicata grounds is ALLOWED and those counterclaims are hereby dismissed.

II. For the reasons stated above, Defendant Peter Needel’s Cross-Motion for Summary Judgment is DENIED.

Charles W. Trombly, Jr.

Justice

Dated: April 22, 2009