Archive for Mortgage Law

5th Cir. Holds Threat of Lawsuit to Collect Partially Time-Barred Debt Did Not Violate FDCPA

In a split decision, the U.S. Court of Appeals for the Fifth Circuit recently decided that attorneys representing a condominium association did not violate the federal Fair Debt Collection Practices Act by threatening non-judicial foreclosure on debt that was partially but not fully time barred.

A copy of the opinion in Mahmoud v. De Moss Owners Ass’n Inc. is available at:  Link to Opinion.

The plaintiffs owned a condominium in Houston, Texas. They sued the condominium ownership, its management company and its collection lawyers concerning their efforts to collect assessments and other charges under the association’s declaration and related documents.

At the trial court level, the plaintiffs alleged common law claims of breach of contract, wrongful foreclosure, negligent misrepresentation, breach of fiduciary duty and violations of the FDCPA, the Texas Fair Debt Collection Practices Act and the Texas Deceptive Trade Practices Act. The district court granted the defendants’ motion for summary judgment and the plaintiffs appealed.  The Fifth Circuit affirmed the lower court ruling.

By way of background, the assessments stretched back several years. Arguably, some but not all of the debt was beyond the Texas four-year statute of limitations.

The Court was not swayed by the collection law firm’s argument that it was exempt from liability under section 1692f(6) of the FDCPA because it was merely enforcing security interests. The Court relied on its earlier decision in Kaltenbach v. Richards, which held that once a party satisfies the general definition of debt collector, it satisfies the definition for all purposes even when attempting to foreclose on security interests. Here, the Court concluded, there was “no serious contention” that the law firm was not a debt collector.

Turning to the 1692g claim, the collection law firm had sent a two-page letter referencing the debt. The plaintiffs claimed the validation letter “overshadowed” their FDCPA rights because it demanded that the defendants “needed to pay ‘on or before the expiration of thirty (30) days from and after” the date of the letter “or nonjudicial foreclosure would occur.”  However, section 1692g provides that a debtor has 30 days from receipt of a validation letter to make a written dispute which freezes collection activity until the debt collector provides verification. The plaintiffs alleged that the law firm’s demand for payment within 30 days of the date of the verification letter “overshadowed” the longer period provided by section 1692g, which is focused on the date the debtor receives the validation letter.

The Court disagreed, concluding that a “fair interpretation” of the letter demonstrates the plaintiffs were not deprived of their validation rights because the longer 30-day validation language was listed not once, but three times, and in bold type.

Next, the Court addressed the plaintiffs’ claim that the law firm threatened a lawsuit on time-barred debt.  Examining the Texas Property Code, the Court found that condominium assessments were “covenants running with the land” and that the unpaid assessments and other charges constituted a real property lien. The Court noted there was no Texas case law to answer what limitations period covered such real property liens, but assumed, to resolve this case, that the four-year general statute would bar a small portion of the overall debt.

Whether the letter violated the FDCPA for threatening a suit on a time-barred debt provided a more compelling argument. Just last year in Daugherty v. Convergent Outsourcing, Inc., the Fifth Circuit ruled the FDCPA was violated when a letter merely offered to “settle” a time-barred debt, but did not otherwise threaten a lawsuit.

The Court found the facts here contained important distinctions from Daugherty. First, unlike Daugherty, only a portion of the debt was alleged to be time-barred, less than 25 percent. Second, in Daugherty there was no dispute that the limitations period applicable to the entire debt had expired, but here it was uncertain whether the limitations period had run. Finally, because the letter in Daugherty did not disclose that a payment made after the debt was time barred could restart the limitations period, the letter arguably would mislead consumers in taking an action adverse to their interests.

Here, however, the plaintiffs were not misled because the condominium was ultimately foreclosed for the amount that was demanded.

In reaching its conclusion, the Court went to great lengths to stress the nature of the debt (i.e. real estate debt) and hinted that it might not rule favorably if the debt were of another type, like a credit card.

1st Cir. Rejects Borrower’s Loan Modification Fraud Allegations as Untimely

The U.S. Court of Appeals for the First Circuit recently held that a borrower cannot invoke the discovery rule to assert an otherwise untimely Massachusetts UDAAP claim (Chapter 93A) relating to a loan modification agreement, because the alleged harm was not “inherently unknowable” at the time of its occurrence.

In so ruling, the Court determined that the borrower knew he was required to make monthly payments when he signed the loan modification agreement.  Therefore, the statute of limitations began to run when the borrower stopped making payments, not when the creditor provided notice of the default.

A copy of the opinion in Rezende v. Ocwen Loan Servicing, LLC is available at:  Link to Opinion.

In August 2005, the borrower obtained two loans to refinance his mortgage loan.  The borrower executed mortgages identifying Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee “solely as nominee” for the lender and its successors and assigns.

In June 2010, MERS assigned one of the mortgages to a bank as trustee for securitized trust.

The borrower obtained a loan modification in March 2010.  But, he did not receive any statements for the modified loan until September 2010.  The borrower made payments from September 2010 through June or July 2013, at which time the defendant servicer returned his latest payment and informed him that the loan was in default.

The borrower sued the servicer and trustee (collectively, “defendants”) to stop the foreclosure.  The trial court granted the defendants’ motion for judgment on the pleadings under Fed. R. Civ. P. 12(c) and dismissed all six counts of the borrower’s complaint.

On appeal, the borrower argued that the trial court’s entry of judgment was premature and challenged the court’s findings that: (1) he lacked standing to raise a quiet title claim, and (2) his claim under Massachusetts’s consumer protection law (“Chapter 93A claim”) was time barred.

Initially, the Court found that the defendants’ Rule 12(c) motion was timely filed on January 25, 2016, and the motion was not heard until May 25, 2016. The Court noted that the borrower had ample time to seek leave to amend his complaint, but he chose not to do so.  Because the borrower failed to plead any set of facts that would entitle him to relief, the Court agreed with the trial court’s assessment that the defendants were entitled to judgment on the pleadings.

The First Circuit then turned to the issue of the borrower’s standing to quiet title.

As you may recall, under Massachusetts law, a mortgagor lacks standing to bring a quiet title action as long as the mortgage remains in effect.  See, e.g., Oum v. Wells Fargo, N.A., 842 F. Supp. 2d 407, 412 (D. Mass. 2012), abrogated on different grounds by Culhane v. Aurora Loan Servs. of Nebraska, 708 F.3d 282 (1st Cir. 2013).

The borrower argued that the defendants were responsible for his default.  However, the Court rejected the argument because “what matters is the existence of a mortgage, not whether the underlying loan is in default.”

The borrower then argued that MERS’s assignment of the mortgage to the trustee was void because MERS failed to seek permission from the bankruptcy court to assign the mortgage after the original lender had filed for bankruptcy.  However, the Court held that the borrower waived this argument by failing to cite to any authority whatsoever in support of his conclusory assertion.

Moreover, the First Circuit also held that the borrower lacked standing to challenge a mortgage assignment based upon an alleged deviation from the trust agreement.

In addition, the Court determined that the trial court correctly found that the Chapter 93A claim was time barred.

The borrower alleged that the delay caused by the defendants’ failure to provide him monthly statements between March and September 2010 was an “unfair and deceptive practice.”  But, in the First Circuit’s view, this meant that the claim accrued by September 2010 and expired by September 2014 – well before the borrower brought suit in June 2015.  See Mass. Gen. Laws ch. 260, § 5A (setting a four-year statute of limitations).

The borrower argued that the “trigger” for his claim was the defendants’ notifying him in June 2013 that he was in default, but the Court found that the predicate harm was the defendants’ failure to timely send statements to the borrower in 2010.  The Court rejected the borrower’s use of the discovery rule “to salvage his untimely claims” because, as the trial court noted, the alleged harm was not “inherently unknowable at the time of [its] occurrence.” Latson v. Plaza Home Mortg., Inc., 708 F.3d 324, 327 (1st Cir. 2013).

Specifically, the Court noted that the borrower knew he was required to make monthly payments when he signed the loan modification agreement in 2010.  The defendants’ delay in issuing statements and the borrower’s default were, in the Court’s view, not “inherently unknowable” harms.  Id.

Accordingly, the First Circuit affirmed the trial court’s judgment.

Maryland High Court Holds Utility Company Did Not Have Super Lien on Real Estate

The Court of Appeals of Maryland, the state’s highest court, recently held that a real estate development company’s recording of a declaration for utility infrastructure expenses did not create a lien on the referenced real estate, and instead it should have followed the Maryland Contract Lien Act procedures to create a lien and establish its priority for the delinquent assessments purportedly owed by a mortgagee.

A copy of the opinion in Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC is available at:  Link to Opinion.

A real estate development company purchased land for a 330-lot residential development and assumed responsibility for the construction of water and sewer facilities. The developer recorded a declaration stating that the expense of creating that infrastructure would be passed on to the future homeowners in the form of an annual assessment with the future homeowner’s liability secured by a lien granted by the homeowner on the homeowner’s property.

The homeowners were to pay the utility company for the expenses in 23 equal installments of $700 for each lot on the first of each year following conveyance of the lot to the homeowner. The declaration stated that by accepting a deed to a lot, the owner of the lot agreed to pay the annual expenses and granted the utility company a lien to secure the payment of those expenses, but the declaration did not state the value of the lien it sought to create.  The declaration further stated that the utility company could foreclose under the Maryland Contract Lien Act, Maryland Code, Real Property Article (“RP”), §14-201 et seq., if the lot owner failed to pay.

The developer and homebuilders were explicitly excluded from any obligation to pay the annual assessment while they owned the lots.  The developer recorded the declaration with a copy of the lots in the development but did not pay recordation and transfer taxes, which would have amounted to approximately $60,000.

The water and sewer infrastructure was installed and the developer contracted with a construction company to build homes on the lots. A copy of the declaration was attached to the lot purchase agreement and incorporated by reference and was disclosed to each home purchaser as part of the sales transaction.

A man purchased a lot with a home, and the recorded deed stated that it was made “subject to all easements, covenants, and restrictions of record.” When the man failed to pay the assessments, the utility company recorded two statements of lien stating that the property was covered by the declaration and subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.

The man then sold the property to a woman who financed the purchase with a loan secured by a deed of trust. In the deed conveying the property to her, the man stated that he had not encumbered the property, but he failed to reference the declaration or the statements of lien and the deed did not state that it was “subject to all easements, covenants and restrictions of record” as the previous deed had. Thus, the property was sold with the statements of lien not being paid, cleared, or released.

The woman refinanced the loan on the property and the mortgage lender conducted a two-party title search that included only the woman and the man from whom she had purchased the property. Again, when the loan closed, the statements of lien were not paid, cleared, or released.  The new loan was secured by a new deed of trust in favor of the mortgage lender, who sold the loan to a bank that later sold it to the current mortgagee.

The statements of lien expired under RP § 14–204(c) (requiring foreclosure within three years from recordation) without being paid or foreclosed. Several years later, the utility company filed for foreclosure against the property for the unpaid water and sewer charges based on the declaration. The mortgagee filed a motion to dismiss the foreclosure and a declaratory judgment action. The utility voluntarily dismissed the foreclosure lawsuit.

In the declaratory judgment action, the trial court held that the declaration was a covenant running with the land and was a “super lien” in favor of the utility that had priority over the lender’s deed of trust because it was recorded before the first homeowner purchased the lot. The trial court rejected the mortgagee’s argument that the declaration would then be invalid under the rule against perpetuities, faulted the mortgagee for not discovering the declaration in a more comprehensive title search, and ruled that the failure to pay recordation and transfer taxes with the filing of the declaration did not affect its validity.  The trial court implicitly rejected the mortgagee’s argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the declaration.

The mortgagee appealed, and the Court of Special Appeals affirmed the trial court’s ruling. The Maryland Court of Appeals granted the mortgagee’s petition for certiorari.

The Maryland Court of Appeals rejected the developer’s and utility’s argument that simply recording the declaration established a lien, explaining that doing so was inconsistent with the language and legislative history of the Maryland Contract Lien Act. The Court explained that a lien could not be created on the property by the declaration without following the “coherent framework” and procedures established by the act.

The Court of Appeals held that the declaration, as a covenant that runs with the land, fell within the statutory definition of “contract” under RP §14-201(b)(1) of the Maryland Contract Lien Act, but that the declaration did not itself create an enforceable lien without following the act’s procedures.

The Court held that, in order to create and enforce an actual lien under RP §14-202(a), the declaration should have expressly provided for the creation of a lien and expressly described the party in whose favor the lien was created and the property against which the lien was imposed. The developer and utility failed to follow those procedures.

Additionally, the Court noted, instead of paying the recordation or transfer taxes that would have established a lien, the developer and utility treated the declaration as a notice instrument that merely authorized the establishment of a lien pursuant to the Maryland Contract Lien Act.

The failure to follow the Maryland Contract Lien Act’s procedures continued when the utility pursued foreclosure. The Court of Appeals held that, in order to establish the lien under RP §14-203(a)-(b), written notice should have been given within two years of the breach of the declaration to the party whose property was subject to the lien and that notice should have included certain information specified in the statute. The Court also noted that the utility company, when seeking to enforce the lien, should have then foreclosed on it just as it would a deed of trust, as prescribed by RP § 14-204.

The Court of Appeals rejected both the developer’s and utility’s argument that Maryland common law and the Maryland Rules of foreclosure supported their separate theories that the declaration created a lien because they had misread both.  The Court also rejected the developer’s and utility’s analogizing of their responsibility for constructing the infrastructure to the responsibility of a governmental entity who does the same and receives lien priority because neither the developer nor the utility were governmental entities.

Accordingly, the judgment of the Court of Special Appeals was reversed, and the action was remanded with instructions to remand it to the trial court with instructions to vacate the declaratory judgment previously entered and enter a new declaratory judgment consistent with the opinion and assessing costs to be paid by the developer and utility.

9th Cir. Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute

The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar’s prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada’s superpriority lien provision and invalidated a homeowners association foreclosure sale that purported to extinguish Freddie Mac’s interest in the property.

A copy of the opinion in Berezovsky v. Bank of America is available at:  Link to Opinion.

In 2013, an investor purchased a home at a homeowners association foreclosure sale for $10,500 and recorded a deed in his name. The purchaser argued that Nevada’s superpriority lien provision, Nev. Rev. Stat. § 116.3116, allowed the association to sell the home to him free and clear of any other liens.  The Federal Home Loan Mortgage Corporation (“Freddie Mac”) claimed it had a priority interest in the purchased home.

As you may recall, Freddie Mac is under Federal Housing Finance Agency conservatorship, meaning the FHFA temporarily owned and controlled Freddie Mac’s assets.  See 12 U.S.C. § 4617(b)(2)(A)(i) (FHFA acquired Freddie Mac’s “rights, titles, powers, and privileges … with respect to [its] assets” for the life of the conservatorship).

Protection of the FHFA’s assets is provided for in 12 U.S.C. § 4617(j)(3), a provision of the Housing and Economic Recovery Act of 2008 (HERA). Also known as the Federal Foreclosure Bar, 12 U.S.C. § 4617(j)(3)’s prohibition on nonconsensual foreclosure protected the FHFA’s conservatorship assets.  (“No property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FHFA], nor shall any involuntary lien attach to the property of the [FHFA].”).

The purchaser sued to quiet title in Nevada state court.  Freddie Mac intervened and counterclaimed for the property’s title, removed the case to federal district court, and moved for summary judgment.  The FHFA joined Freddie Mac’s counterclaim.  Together the federal entities argued that the purchaser did not acquire “clean title” in the home because the Federal Foreclosure Bar preempted Nevada law, and invalidated any purported extinguishment of Freddie Mac’s interest through the association foreclosure sale.  The trial court ruled in favor of the federal entities.

On appeal, the purchaser argued that the Federal Foreclosure Bar did not apply in this case, and even if it did, Freddie Mac lacked an enforceable property interest due to a split of the note and the security instrument.

First, the purchaser argued that the Federal Foreclosure Bar did not apply to private homeowners association foreclosures generally, because it protected the FHFA’s property only from state and local tax liens.

To determine whether the Federal Foreclosure Bar applied to private foreclosures, the Ninth Circuit began by examining the HERA statute’s structure and plain language.  The section titled “Property protection” did not expressly use the word “taxes.”  12 U.S.C. § 4617(j)(3).  The statute did not limit “foreclosure” to a subset of foreclosure types.  Id.

In the Ninth Circuit’s view, a plain reading of the statute revealed that the Federal Foreclosure Bar was not focused on or limited to tax liens, and therefore the provision should apply to any property for which the FHFA served as conservator and immunized such property from any foreclosure without FHFA consent.  12 U.S.C. § 4617(j)(1), (3).

The purchaser citied F.D.I.C. v. McFarland, 243 F.3d 876 (5th Cir. 2001) as support for his argument that the Federal Foreclosure Bar applied only to tax liens.

In McFarland, the Fifth Circuit interpreted 12 U.S.C. § 1825(b)(2), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that governed Federal Deposit Insurance Corporation receiverships.  The FIRREA provision is worded identically to HERA’s Federal Foreclosure Bar provision except that the word “Corporation” appeared in the former where “Agency” appeared in the latter.  Compare 12 U.S.C. § 1825(b)(2) with 12 U.S.C. § 4617(j)(3).  The court in McFarland declined to extend § 1825(b)(2) to private foreclosures.

The Ninth Circuit, however, distinguished McFarland and reasoned that the statutory framework in that case was different from the framework surrounding the Federal Foreclosure Bar.  Specifically, the Ninth Circuit found that unlike § 1825, § 4617(j) did not include any language limiting its general applicability provision to taxes alone.

Therefore, the Ninth Circuit held that the language of the Federal Foreclosure Bar cannot be fairly read as limited to tax liens.

The purchaser then argued that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and the FHFA implicitly consented to the foreclosure when they took no action to stop the sale.

The Ninth Circuit rejected this argument because the plain language of the Federal Foreclosure Bar did not require the Agency to actively resist foreclosure.  See 12 U.S.C. § 4617(j)(3) (flatly providing that “[n]o property of the Agency shall be subject to … foreclosure, or sale without the consent of the Agency”).

Thus, the Court concluded that the Federal Foreclosure Bar applied generally to private association foreclosures and specifically to this foreclosure sale.

Next, the Ninth Circuit addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law, which had triggered multiple lawsuits in Nevada.

As you may recall, “[t]he Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail.”  Gonzales v. Rich, 545 U.S. 1, 29 (2005).  Preemption arises when “compliance with both federal and state regulations is a physical impossibility, or … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  Bank of Am. v. City & Cty. Of S.F., 309 F.3d 551, 558 (9th Cir. 2002).

First, the Ninth Circuit determined that the Federal Foreclosure Bar did not demonstrate clear and manifest intent to preempt Nevada’s superpriority lien provision through an express preemption clause.  Nevertheless, the Court found that the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada’s superiority lien law.

Nevada law allowed homeowners association foreclosures under the circumstances present in this case to automatically extinguish a mortgagee’s property interest without the mortgagee’s consent.  See Nev. Rev. Stat. § 116.3116.  Because the Federal Foreclosure Bar prohibited foreclosures on FHFA property without consent, in the Ninth Circuit’s view, Nevada’s law was an obstacle to Congress’s clear and manifest goal of protecting the FHFA’s assets in the face of multiple potential threats, including threats arising from state foreclosure law.

Therefore, as the two statutes impliedly conflict, the Ninth Circuit held that the Federal Foreclosure Bar preempted the Nevada superpriority lien provision.

In addition, the purchaser argued that even if the Federal Foreclosure Bar applied to this case and was preemptive, Freddie Mac did not hold an enforceable property interest for “splitting” the note from the deed of trust, and failing to present sufficient evidence to establish its interest for purposes of summary judgment.

The Ninth Circuit rejected these arguments because Nevada law recognized that, in an agency relationship, a note holder remained a secured creditor with a property interest in the collateral even if the recorded deed of trust named only the owner’s agent.  Although the recorded deed of trust here omitted Freddie Mac’s name, Freddie Mac’s property interest is valid and enforceable under Nevada law.

Moreover, Freddie Mac introduced evidence showing that it acquired the loan secured by the subject property in 2007, and that the beneficiary of the deed of trust was Freddie Mac’s authorized loan servicer.

The Appellate Court concluded that the trial court correctly found Freddie Mac’s priority property interest enforceable under Nevada law. Accordingly, the Ninth Circuit affirmed the trial court’s summary judgment in favor of Freddie Mac and the FHFA.

11th Cir. Holds Servicer Did Not Violate RESPA by Omitting Loan Owner’s Phone Number, Damages Allegations Insufficient

In an unpublished ruling, the U.S. Court of Appeals for the Eleventh Circuit recently held that a mortgage servicer did not violate the federal Real Estate Settlement Procedures Act or its implementing regulation (at 12 C.F.R. § 1024.36(d)(2)(i)(A)) by failing to provide the loan owner’s phone number in response to a borrower’s request for information (“RFI”).

In so ruling, the Court also held that:

(1) The borrower’s allegation of having expended “certified postage costs of less than $100 for mailing” was not sufficient to meet the requirement of “actual damages” under RESPA at 12 U.S.C. § 2605; and

(2) The borrower’s allegation that the servicer “has shown a pattern of disregard to the requirements imposed upon Defendants by Federal Reserve Regulation X” was not sufficient to meet the requirement of a “pattern or practice of noncompliance” under RESPA at 12 U.S.C. § 2605.

A copy of the opinion in Mejia v. Ocwen Loan Servicing, LLC is available at:  Link to Opinion.

A borrower sent an RFI to a servicer requesting the loan owner’s identity and contact information.  The servicer responded to the request identifying the loan owner and providing its contact information, but the servicer did not include the loan owner’s phone number.

The borrower filed suit in state court against the mortgage servicer alleging that the servicer violated RESPA, 12 U.S.C. 2601 et seq., because the servicer did not provide the loan owner’s phone number in response to the RFI and that the servicer demonstrated a pattern of disregard to the requirements Regulation X imposed upon the servicer.  The borrower also alleged that he incurred the following actual damages: “certified postage costs of less than $100 for mailing” the RFI along with attorney’s fees and costs.

The servicer timely removed the matter to federal court, and then moved to dismiss arguing the borrower failed to state a claim.  The servicer first argued that Regulation X and RESPA did not require it to provide the loan owner’s phone number in response to the RFI. The servicer also argued that the court should dismiss the claim for failure to allege actual damages or a pattern or practice of noncompliance as required under the relevant provisions of RESPA.

As you may recall, section 1024.36(d) of Regulation X requires that a servicer must respond:

“Not later than 10 days (excluding legal public holidays, Saturdays, and Sundays) after the servicer receives an information request for the identity of, and address or other relevant contact information for, the owner or assignee of a mortgage loan.” 12 C.F.R. § 1024.36(d)(2)(i)(A).

The trial court observed that whether section 1024.36(d) requires a servicer to provide a loan owner’s phone number in response to an RFI turns on whether “other relevant contact information” includes a phone number.

Although Regulation X and RESPA do not define this phrase, this does not end the inquiry.  The trial court analyzed whether the phrase “has a plain and unambiguous meaning with regard to the particular dispute” because “[i]f the statute’s meaning is plain and unambiguous, there is no need for further inquiry.”  United States v. Silva, 443 F.3d 795, 797-98 (11th Cir. 2006).  This analysis also applies to Regulation X.  See, e.g., O’Shannessy v. Doll, 566 F. Supp. 2d 486, 491 (E.D. Va. 2008).

The trial court noted that the regulation requires a servicer to provide “contact information, including a telephone number, for further assistance,” but this “inclusion is conspicuously missing from the applicable provision specifying the information that must be included in response to a request for the identity of the owner or assignee of the loan.” 1024.36(d)(1)(i)-(ii).

Thus, the trial court held that the plain language of § 1024.36(d) does not require a servicer to provide the phone number for the owner or assignee of a loan.

The trial court found no contrary legal authority disputing its interpretation.  The trial court therefore declined to read a requirement into section 1024.36(d) that servicers must provide the loan owner’s phone number in response to an RFI, and dismissed the borrower’s claim with prejudice.

The trial court next turned to the servicer’s motion to dismiss the borrower’s statutory damages claim.  As you may recall, under RESPA a borrower that proves a section 2605 violation may recover:

“(A) any actual damages to the borrower as a result of the failure; and

(B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section, in an amount not to exceed $2,000.” 12 U.S.C. § 2605(f)(1).

Damages are an essential element of a RESPA claim.  Renfroe v. Nationstar Mortgage, LLC, 822 F3d 1241, 1246 (11th Cir. 2016).  Moreover, “a plaintiff cannot recover pattern-or-practice damages in the absence of actual damages.” Id. at 1247 n.4.

The trial court recognized that shortly after Renfroe, the Supreme Court of the United States held that standing requires a plaintiff to have “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.”  Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016). Thus, “[t]o establish an injury in fact, a plaintiff must show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” Id. at 1548 (quoting Lujan v. Defs. Of Wildlife, 504 U.S. 555, 560 (1992)). Further, “Article III standing requires a concrete injury” for a “statutory violation.” Id. at 1549.  Here, the borrower did not suffer a “concrete injury in fact.”  Thus, the borrower “cannot assert a statutory violation.”

The trial court also examined the borrower’s claim that the servicer engaged in a pattern or practice of noncompliance with RESPA.  Pattern or practice suggests “a standard or routine way of operating.”  McLean v. GMAC Mortgage Corp., 595 F. Supp. 2d 1360, 1365 (S.D. Fla. 2009), aff’d, 398 F. App’x 467 (11th Cir. 2010). Thus, a failure to respond to one or two qualified written requests does not constitute a “pattern or practice.” Id.

Here, the borrower merely alleged that the servicer “has shown a pattern of disregard to the requirements imposed upon Defendants by Federal Reserve Regulation X.”  This bare bones and conclusory allegation failed to allege “enough facts to state a claim to relief that is plausible on its face.”  Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

Thus, the trial court concluded that the borrower’s complaint did not contain enough facts to plausibly allege that the servicer engaged in a pattern or practice of noncompliance with RESPA.

Accordingly, the trial court dismissed the borrower’s statutory damage claim because the borrower did not suffer a concrete injury in fact, and because the borrower did not sufficiently allege facts to state a claim that the servicer engaged in a pattern or practice of noncompliance with RESPA.

The borrower appealed.

The Eleventh Circuit found no merit in borrower’s claim, and summarily affirmed the trial court’s ruling in favor of the servicer and against the borrower for all the “reasons stated in the District Court’s dispositive order.”

8th Cir. Holds Deficiency Claim Time Barred Despite Intervening Bankruptcy

The U.S. Court of Appeal for the Eighth Circuit recently affirmed a bankruptcy court’s rejection of a proof of claim filed by a creditor where the claim was based upon a debt which was time barred by the creditor’s failure to comply with the applicable state law deadline for pursuing a deficiency judgment following a non-judicial foreclosure.

A copy of the opinion in Melikian Enterprises, LLLP v. McCormick is available at:  Link to Opinion.

The underlying debt at issue arose from a commercial loan from the creditor to a company owned by the debtors which was secured by a mortgage against certain real property located in Arizona.  The debtors were guarantors on the loan from the creditor.  Following the default on the loan, the creditor filed an action in the state court of Arizona to recover the balance of the note or alternatively, the deficiency balance due following a trustee’s sale of the property.

Shortly after the creditor filed the state court action, the debtors filed a petition for relief pursuant to chapter 11 of the Bankruptcy Code – effectively preventing the creditor from affecting service on the debtors in that action.  The state court dismissed the creditor’s complaint for its failure to perfect service.  In a parallel non-judicial foreclosure, the trustee’s sale of the property proceeded on Oct. 9, 2012.

The creditor then proceeded to file a proof of claim in the debtors’ chapter 11 proceeding based upon their guarantee of the loan to which the debtors objected because it allegedly failed to reflect the market value of the property.  The chapter 11 plan was approved and the bankruptcy case closed as fully administered on Nov. 14, 2013.  Due to various delays, the hearing on the debtors’ objection to the proof of claim was not heard until several months after the close of the bankruptcy matter in April 2014.

In support of their objection, the debtors argued that the creditor’s claim was barred by Arizona law because the creditor failed to maintain a deficiency action within 90 days of the trustee’s sale. In opposition to the objection, the creditor argued that the Arizona law was preempted by various provisions of the Bankruptcy Code.

The bankruptcy court determined that automatic stay provisions of Section 362 of the Bankruptcy Code impliedly preempted the state law concerning the 90-day deadline — by preventing the creditor from perfecting service on the debtors — but, Section 108(c) provided for the resumption of any state limitations following the expiration of the automatic stay. Under this legal framework, the bankruptcy court determined that the creditor was required to proceed with its deficiency action per Arizona state law no later than Dec. 16, 2013 which it failed to do so.  Thus, the bankruptcy court concluded that the creditor’s claim was barred.

The creditor appealed to the district court which upheld the bankruptcy court’s ruling, and subsequently, this appeal was brought to the Eighth Circuit.

On appeal the creditor raised four primary arguments: (1) the Bankruptcy Code broadly preempts the Arizona law such that the creditor was not required to comply with the statutory deadlines due to the bankruptcy; (2) the mere filing of its state court action was sufficient to comply with the Arizona law; (3) the bankruptcy court had exclusive jurisdiction over the claim which obviate the need for a separate state court action for the deficiency; and (4) the limitations imposed by the Arizona law never lapsed.

The Eighth Circuit began its analysis by explaining the extent of implied preemption of state law by the Bankruptcy Code.

As explained by the Court, preemption may be “implied, for example, when federal and state laws directly conflict, when state law stands as an obstacle to accomplishing the purpose of federal law, or when federal law is so pervasive that it reflects an intent to occupy the regulatory field.” Symens v. SmithKline Beecham Corp., 152 F.3d 1050, 1053 (8th Cir. 1998).  Absent clear congressional intent, there is a general presumption against implied preemption.

The creditor argued that the mandatory language of Section 502 of the Bankruptcy Code concerning the adjudication of claims precluded the need to comply with the Arizona time limits for deficiency judgments.

Section 502 states that the bankruptcy court “shall determine the amount of [a] claim” following a hearing. The Court disagreed, and explained that the right to a claim arises in the first instance from the underlying substantive law creating the debtor’s obligation, and thus, the bankruptcy courts must “consult state law in determining the validity of most claims.”  Travelers Cas. & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 450 (2007).

The applicable Arizona statute provides that “[W]ithin ninety days after the date of [a trustee’s sale], an action may be maintained to recover a deficiency judgment] against any person” obligated — directly or indirectly — under the contract secured by the deed of trust.  Ariz. Rev. Stat. s. 33-814(A) (“Section 33-814”).  If no action is brought within that timeline the statute provides that “the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.” Id. at s. 33-814(D).  Per the courts in Arizona, this provision has been deemed a statute of repose.

The Court determined that Section 502 did not impliedly preempt Section 33-814 of the Arizona Statute. Consequently, the Eighth Circuit held, the bankruptcy court correctly looked to the Arizona statute to determine the validity of the creditor’s proof of claim.

Similarly, the Court rejected the creditor’s argument that Section 362 of the Bankruptcy Code impliedly preempted Section 33-814 because it made it impossible to comply with the 90-day deadline in Section 33-814. The Court declined to directly address whether or not the automatic stay of Section 362 preempted state law, because it held that Section 108 of the Bankruptcy Code governed this situation.

As you may recall, Section 108 of the Bankruptcy Code provides that if a non-bankruptcy law fixes a time period for commencing a civil action against a debtor “and such period has not expired before the date of the filing of the petition” then the period does not expire until the later of: (1) the end of the period provided by the non-bankruptcy law or (2) “30 days after notice of termination or expiration of the stay under Section 363.”

Pursuant to Section 33-814, the 90-day period at hand expired on Jan. 7, 2013 – i.e. 90 days after the trustee’s sale on Oct. 9, 2012. However, the automatic stay in the bankruptcy did not expire until Nov. 14, 2013 when the chapter 11 case was closed.  Accordingly, the Court found that the bankruptcy court correctly concluded that pursuant to Section 108(c)(2) the operative deadline for the creditor to seek a deficiency judgment under Section 33-814 lapsed on Dec. 16, 2013.

The Eighth Circuit quickly rejected the creditor’s argument that a motion filed by a co-creditor after the close of the chapter 11 was effective in extending the automatic stay.  As explained by the Court, these types of motions in reopening a chapter 11 by creditors is typically ministerial in nature and lacks independent legal significance.

The Court found no merit to the creditor’s argument that its state court complaint was sufficient to comply with Section 33-814.  In reliance on a state court opinion applying Section 33-814, the Court agreed that the state court action would have been sufficient but determined that the creditor’s failure to continue or preserve its state court action after the trustee’s sale was dispositive.  See Valley Nat’l Bank of Ariz. v. Kohlhase, 897 P.2d 738, 741 (Ariz. Ct. App. 1995).

The creditor’s argument that the bankruptcy court had exclusive jurisdiction was also unavailing.  As explained by the Eighth Circuit, regardless of the exclusive jurisdiction provided to the bankruptcy court to determine the validity of the claim under Section 502 of the Bankruptcy Code, it was still required pursuant to the Bankruptcy Code and Supreme Court precedent to apply the underlying state law framework — which the Eighth Circuit held the bankruptcy court correctly did in this matter.

Accordingly, the Eighth Circuit affirmed the bankruptcy court’s rejection of the creditor’s claim.

Illinois App. Court (1st Dist) Holds 7-Month Delay in Paying Overdue HOA Assessments May Not Extinguish HOA Lien

The Appellate Court of Illinois, First District, recently reversed a trial court order granting summary judgment in favor of a mortgage servicer and against a condominium association (COA) holding that a material question of fact existed regarding whether the servicer promptly paid assessments that accrued after the foreclosure sale, as required under section 9(g)(3) of the Illinois Condominium Property Act to extinguish the COA’s lien for pre-foreclosure sale assessments.

A copy of the opinion in Country Club Estates Condominium Association v. Bayview Loan Servicing, LLC is available at:  Link to Opinion.

In November 2014, a mortgage servicer purchased a condominium unit through a foreclosure sale.  At this time the unit had almost $14,000 in unpaid monthly assessments to the COA. Initially, the servicer refused to pay any assessments, past or present.

In April 2015, the COA sued the servicer under the Illinois Forcible Entry and Detainer Act (735 ILCS 5/9-101 et seq.) seeking possession and $18,659.26 in unpaid assessments.  Almost two months after the COA filed the lawsuit, and seven months after the servicer purchased the unit, the servicer paid the amount of assessments that accrued after the foreclosure sale.

The servicer filed a summary judgment motion arguing that under section 9(g)(3) of the Illinois Condominium Property Act (765 ILCS 605/9(g)), paying the assessments owed after the foreclosure sale extinguished the COA’s lien for pre-foreclosure sale assessments.

The trial court granted partial summary judgment to the servicer as to the pre-sale assessments and certified this issue for appeal.  This appeal followed.

On appeal, the COA argued that under 1010 Lake Shore Association v. Deutsche Bank National Trust Co., 2015 IL 118372, a foreclosure buyer must promptly pay current assessments to extinguish an association’s lien for any outstanding pre-sale assessments.

As you may recall, Section 9(g) of the Illinois Condominium Property Act states that:

“(1) If any unit owner shall fail or refuse to make any payment of the common expenses or the amount of any unpaid fine when due, the amount thereof shall constitute a lien on the interest of the unit owner in the property.

(3) The purchaser of a condominium unit at a judicial foreclosure sale shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale. Such payment confirms the extinguishment of any lien created pursuant to paragraph (1) or (2) of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses.” 765 ILCS 605/9(g).

The Appellate Court observed that a foreclosure buyer’s duty to pay monthly assessments clearly starts on “the first day of the month after the date of the judicial foreclosure sale.” Id. However, section 9(g)(3) does not contain a time limit to extinguish an association’s lien. Thus, the Appellate Court looked beyond the statute’s language to determine the legislature’s intent.

The Appellate Court noted that section 9(g)’s legislative history does not contain any debate regarding the extinguishment clause.  However, on separate occasions the legislature expressed concern about the difficulties condominium associations face when a unit owner does not pay their assessments and the unit then goes into foreclosure. The Appellate Court found these concerns “pertinent to the interpretation of section 9(g)(3).” For example, in this case the former unit owner had not paid assessments since 2011, “thus exposing the Association’s other unit owners to the obligation to pay more than their share of common expenses to cover the shortfall.”

The servicer argued that paying post-foreclosure assessments, regardless of the timing, extinguished the COA’s lien for pre-sale delinquent assessments. The Appellate Court disagreed because the Illinois Supreme Court in the 1010 Lake Shore case held that “[t]he first sentence of section 9(g)(3) plainly requires a foreclosure sale purchaser to pay common expense assessments beginning in the month following the foreclosure sale. The second sentence provides an incentive for prompt payment of those postforeclosure sale assessments.”

The servicer further argued that even with no time limit to extinguish an association’s lien, the statute still incentivizes prompt payment of assessments when they become due, because foreclosure buyers normally want to quickly unencumber and sell their new asset.

However, the Appellate Court concluded that the servicer’s seven-month delay in paying the assessments in this case belied this argument.

The servicer also argued that 1010 Lake Shore is distinguishable because the foreclosure buyer there did not pay any assessments making the court’s “prompt payment” discussion dictum. The Appellate Court rejected this distinction because it cannot ignore the Supreme Court’s dicta.  See Exelon Corp. v. Department of Revenue, 234 Ill. 2d 266, 282 (2009)

Thus, the Appellate Court held that “to extinguish an association’s lien for pre-foreclosure-sale assessments, a foreclosure buyer must make ‘prompt’ payment of current assessments.”  As a mortgage foreclosure is a proceeding in equity, “whether a particular payment is ‘prompt’ is fact-based, taking the particular circumstances and the equities of the situation into account.”

The Appellate Court next examined whether the servicer promptly paid the assessments here. The Appellate Court found that absent any extenuating circumstances, assessments should be tendered the month after purchase because to “permit indefinite delay on the part of foreclosure buyers would impose unacceptable hardship upon the buyer’s fellow unit owners, who in many instances are already losing thousands of dollars in unpaid assessments as a result of the unit’s foreclosure.”

The Appellate Court rejected the servicer’s argument that this case is analogous to Pembrook Condominium Association-One v. North Shore Trust & Savings, 2013 IL App (2d) 130288, and 5510 Sheridan Road Condominium Association v. U.S. Bank, 2017 IL App (1st) 160279, where a foreclosure buyer’s payment of post-sale assessments extinguished the condominium association’s lien for presale assessments.

In the Appellate Court’s view, Pembrook did not hold that a foreclosure buyer that fails to promptly pay post-foreclosure assessments may still claim the benefit of section 9(g)(3). Instead, the Pembrook court held only that payment made about a month and a half after the first payment became due was sufficient under the circumstances.  Further, the Court noted, there is “a material distinction between a seven-week delay and a seven-month delay in payment.”

The Sheridan Road court held that the phrase “the first day of the month after the date of the judicial foreclosure sale” set the time when the obligation to pay post-sale assessments begins. Id. However, this did not set a payment deadline.  Thus, the Appellate Court found Sheridan Road distinguishable and held “that payment must be prompt under the circumstances (though not necessarily strictly by the first of the month after the sale) to extinguish an association’s lien.”

Moreover, to the extent that Pembrook or Sheridan Road impose no time deadline on foreclosure buyers, the Appellate Court rejected that conclusion because it is inconsistent with 1010 Lake Shore.

The servicer next argued that even if 1010 Lake Shore requires prompt payment, it should not apply retroactively to this case. The Appellate Court disagreed finding that “1010 Lake Shore did not create a requirement of promptness; it merely articulated the requirement that was already implicit in the purpose underlying section 9(g)(3).”

Finally, the Appellate Court considered whether the servicer promptly paid the assessments here.  However, the record did not contain the reasons why the servicer may have delayed payment so the Appellate Court could not say that the servicer’s “tender was not prompt as a matter of law.”

Accordingly, the Appellate Court reversed the trial court’s summary judgment order and remanded the case for further proceedings consistent with its opinion.

1st Cir. Rejects Borrowers’ Attempt to Void Loan Using Massachusetts’s ‘Obsolete Mortgage’ Statute

The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of a lawsuit by borrowers seeking to enjoin a mortgage foreclosure sale, holding that (a) the original lender’s nominee, MERS, could validly assign the mortgage without holding beneficial title to the underlying property and that borrowers do not have standing to challenge a mortgage assignment based on an alleged violation of a trust’s pooling and servicing agreement; and (b) the mortgage was not void under Massachusetts’s “obsolete mortgage” statute, under which a mortgage becomes obsolete and is automatically discharged five years after the expiration of the stated term or maturity date of the mortgage, as acceleration of the note did not trigger the subject limitations period.

A copy of the opinion in Hayden v. HSBC Bank USA, National Association is available at:  Link to Opinion.

A husband and wife took out an $800,000 purchase money loan secured by a mortgage on their home in 2007. The mortgage identified Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee, acting solely as nominee for the lender and the lender’s successors and assigns. The mortgage also gave MERS power of sale over the property in the event of default.

MERS assigned the loan in 2008 to a new mortgagee. The borrowers defaulted on the loan in 2008. In 2010, the mortgagee “reassigned the mortgage to itself as trustee for [another trust].”

The borrowers “filed several bankruptcy petitions and requested injunctive relief, thereby delaying foreclosure until 2016.”   The mortgagee gave the borrowers notice of a foreclosure sale in June 2016 and, in response, the borrowers sued the mortgagee and the loan servicer to enjoin the sale.

The trial court denied the borrowers’ request for a preliminary injunction and granted the defendants’ motion to dismiss for failure to state a claim, holding that the mortgagee had the right to foreclose under Massachusetts law and the mortgage was not rendered “obsolete” or void under Massachusetts law. Mass. Gen. Laws ch. 260, § 33.  The borrowers appealed to the First Circuit.

On appeal, the First Circuit rejected the borrowers’ argument that the mortgage could not foreclose because the first assignment by MERS was invalid, finding that the trial court correctly rejected this argument because “this claim is foreclosed by precedent, which holds that MERS can validly assign a mortgage without holding beneficial title to the underlying property, … and that borrowers do not have standing to challenge a mortgage assignment based on an alleged violation of a trust’s pooling and servicing agreement.”

The Court also concluded that the district court “properly dismissed [the borrowers’] obsolete mortgage claim, which has no basis in the plain text of the statute or in precedent. Under Massachusetts’s obsolete mortgage statute … a mortgage becomes obsolete and is automatically discharged five years after the expiration of the stated term or maturity date of the mortgage.”

The Court reasoned that there was no textual support in the statute at issue — Mass. Gen. Laws ch. 260, § 33 — for the borrowers’ argument “that the acceleration of the maturity date of a note affects the five-year limitations period for the related mortgage.” It found inapposite a 2015 Massachusetts Supreme Judicial Court decision because “it makes no mention of the impact of the accelerated note on the obsolete mortgage statute’s limitations period.”

Accordingly, the trial court’s ruling was summarily affirmed.

Fla. App. Court (5th DCA) Reverses Foreclosure Judgment That Excluded Interest, Escrow

The District Court of Appeal of the State of Florida, Fifth District, recently reversed final judgment of foreclosure entered in favor of a mortgagee that omitted interest and escrow amounts due, and remanded to the trial court to modify judgment to include these amounts.

In so ruling, the 5th DCA determined that the mortgagee met its burden to provide the trial court with figures necessary to calculate the interest and escrow amounts through its witnesses’ testimony and evidence.

The Court further reversed the trial court’s dismissal of a homeowner’s association as a party to the foreclosure action, concluding that neither the HOA nor the mortgagee had presented competent evidence to establish lien priority.

A copy of the opinion in Fogarty v. Nationstar Mortgage, LLC is available at:  Link to Opinion.

In April 2013, a mortgage servicer mailed a notice of default to the borrowers, alleging a default, and requiring immediate payment of $124,082.20 to cure the default.   After the borrowers failed to cure the default, the mortgagee filed a foreclosure complaint seeking the principal amount due on the note and mortgage, along with interest from the date of default, late charges, costs of collection, reasonable attorney’s fees, and other expenses as permitted by the mortgage.

The complaint also included the subject property’s homeowner’s association as a defendant to the foreclosure proceedings, asserting that any interest it may claim in the mortgaged property “is subordinate, junior, and inferior to the lien of [mortgagee’s] mortgage.”

In its answer and affirmative defenses, the HOA among other things sought judgment proving that its interest was superior to that of the mortgagee, citing its recorded declaration to support its purported entitlement to expenses and assessments.  The borrowers also answered and asserted lack of standing, failure to satisfy a condition precedent, and lack of certification as affirmative defenses.

At the close of trial, the borrowers moved for involuntary dismissal, arguing that the payment history was improperly admitted, and that the mortgagee had failed to establish any amounts due for interest and escrow.  The HOA also moved for involuntary dismissal, arguing that the mortgagee failed to present any evidence that its claim was superior to the HOA’s.

Despite the mortgagee’s request for judicial notice of the recorded general warranty deed and recorded mortgage to prove its priority over the HOA’s lien, the trial court entered judgment in favor of the mortgagee and against the borrowers only in the amount of the principal amount, and dismissed the HOA from the action, holding that “their lien is superior to the mortgage and they are not foreclosed.”

The borrowers appealed the final judgment of foreclosure, and the mortgagee cross-appealed the award that was limited to only principal, and the dismissal of the HOA as a superior lienholder.

The 5th DCA first considered the mortgagee’s argument that the court erred by omitting interest and escrow from the judgment.

At trial, the mortgagee’s witness testified to the fixed interest rate and unpaid principal for determination of the amount of interest due, and provided the court with the figures necessary to determine the escrow amount.  The Appellate Court concluded that these figures were supported by the payment history, and the note, which combined with the witnesses’ testimony, provided the trial court with competent, substantial evidence to easily calculate the interest and escrow amounts.

Accordingly, the 5th DCA reversed and remanded the foreclosure judgment for the trial court to modify final judgment to include interest and escrow amounts.

As to the trial court’s determination that the HOA’s lien was superior to that of the mortgagee, the Appellate Court reversed dismissal of the HOA, citing a lack of competent evidence to establish which party had a superior interest and remanded for the trial court to reinstate the HOA as a party to the litigation, and allowing either party to request an evidentiary hearing to resolve the issue.

DC Cir. Confirms Mediation Not Required Prior to Judicial Foreclosure

The U.S. Court of Appeals for the District of Columbia Circuit recently affirmed the dismissal of a borrower’s counterclaims and the entry of summary judgment in the mortgagee’s favor, holding that the borrower failed to state claims (a) for declaratory and injunctive relief for allegedly failing to properly foreclose a deed of trust; (b) for supposedly violating the federal Fair Debt Collection Practices Act (FDCPA);  (c) quiet title;  (d) for supposedly violating the Fair Credit Reporting Act (FCRA);  and (e) civil conspiracy.

In so ruling, the Court held that District of Columbia law clearly does not require mediation prior to judicial foreclosure.

A copy of the opinion in Bank of New York Mellon v. Henderson is available at:  Link to Opinion.

The borrower took out a loan in 2003 secured by a deed of trust on his home in Washington, D.C., but defaulted in 2012. The loan was assigned to the bank in 2013 by the original lender.  The mortgagee filed a foreclosure action in the Superior Court for the District of Columbia, but the case was removed to federal court by the Internal Revenue Service, which was named as a party.

The borrower raised a number of counterclaims against the mortgagee.  The trial court granted summary judgment in the mortgagee’s favor and dismissed the borrower’s counterclaims challenging the validity of the assignment of the loan and deed of trust. The borrower appealed.

The D.C. Circuit first addressed whether summary judgment was appropriate, finding that “[b]ecause [the borrower] provided no evidence to indicate the Bank is not the rightful holder of the Note, there is no dispute of material fact that the Bank holds the Note.”  The Appellate Court held that, because “D.C. law allows the holder of a note to enforce the deed of trust by judicial foreclosure, … the district court properly entered summary judgment for judicial foreclosure.”

The Court then rejected the borrower’s argument that the mortgagee violated the National Housing Act, 12 U.S.C. § 1701x(c)(5), by not providing him with “notice of the ‘availability of homeownership counseling’” and also violated D.C. law by not providing him with “notice of his right to ‘foreclosure mediation.’”

The D.C. Circuit reasoned that the mortgagee’s law firm provided the borrower with a letter “advising him of his default and of a telephone number to call for homeownership counseling,” and the borrower “does not explain why this was insufficient notice.”

The Court also disagreed that D.C. law “requires mediation prior to judicial foreclosure.”

The D.C. Circuit refused to address the borrower’s argument that the mortgagee violated the pooling and servicing and trust agreements for the loan at issue, because “even a pro se complainant must plead factual matter that permits the court to infer more than the mere possibility of misconduct.”

The Court next rejected the borrower’s FDCPA claim because that statute only applies to debt collectors, not creditors like the mortgagee here collecting its own debt.

The D.C. Circuit also rejected the borrower’s quiet title claim because his argument that the mortgagee “has no right to the property … is contradicted by the Deed of Trust signed by [the borrower].”

The Court affirmed the trial court’s dismissal of the FCRA claim on the basis that “there is no private cause of action for the alleged violations,” because the borrower did challenge the ruling in his brief and, therefore, “forfeited his claim.”

Finally, the D.C. Circuit found that the trial court correctly dismissed the civil conspiracy claim because the borrower “failed to meet the heightened pleading requirements for fraud” by not providing any evidence supporting an inference that an illegal agreement existed among the alleged conspirators, the bank, “unknown new investors,” and the mortgagee’s attorney, to defraud the borrower.

Accordingly, the trial court’s judgment in favor of the mortgagee was affirmed.

11th Cir. Confirms Servicer May Designate Address for QWRs

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a summary judgment ruling in favor of a mortgage servicer, holding that the servicer had no duty to respond to a Qualified Written Request (“QWR”) under the federal Real Estate Settlement Procedures Act (RESPA) because the borrower failed to send the QWR to the servicer’s designated address for QWR receipt.

A copy of the opinion in Bivens v. Bank of America, NA is available at:  Link to Opinion.

A mortgage servicer sent a letter to a borrower advising that the lender transferred the servicing of the borrower’s mortgage loan to the servicer. The letter notified borrower of three separate addresses to use for correspondence — one address for General Correspondence, one address for all Disputes/Inquiries, and one address for Payment Remittance.  The otherwise identical addresses contained different post office box numbers.

After receiving the service transfer notice, borrower’s counsel sent correspondence designated as a QWR under RESPA, 12 U.S.C. § 2605(e), to the servicer at the servicer’s General Correspondence address.  The letter disputed the servicer’s standing to enforce the note, requested the loan owner’s name, address and phone number, and requested a certified copy of the note in its current condition.

The servicer received the letter at its General Correspondence address and forwarded the letter to its Disputes/Inquiries department. In response to the QWR, the servicer sent the borrower two letters.  The first letter identified the holder of the note.  The second letter advised the borrower that he mailed his letter to the wrong address, and once again notified the borrower of the correct Disputes/Inquiries address. However, the servicer failed to timely provide the borrower a certified copy of the note in its current condition.

The borrower sued the servicer alleging that he was entitled to actual and statutory damages under RESPA because the servicer did not properly respond to his purported QWR.

The servicer moved for summary judgment claiming, among other things, that the purported QWR did not trigger its acknowledgment and response obligations under RESPA because the borrower did not mail the letter to the correct address.  The trial court granted the servicer summary judgment.  Specifically, the trial court found that the servicer had no duty to respond to the QWR because the borrower mailed the QWR to the wrong address.

This appeal followed.

Initially, the Eleventh Circuit observed that when a borrower submits a QWR then the servicer must provide “a written response acknowledging receipt of the correspondence” and otherwise respond within specified time periods.  12 U.S.C. § 2605(e)(1)(A), (e)(1)(B), (e)(2).

As you may recall, RESPA authorized the Secretary of the Department of Housing and Urban Development “to prescribe such rules and regulations” and “make such interpretations . . . as may be necessary to achieve [the statute’s] purposes.”  12 U.S.C. § 2617 (repealed 2011).  The Secretary then promulgated Regulation X, 24 C.F.R. § 3500.21 (repealed 2014), RESPA’s primary implementing regulation.

Regulation X authorized servicers to “establish a separate and exclusive office and address for the receipt and handling of qualified written requests.”  24 C.F.R. § 3500.21(e)(1). The Secretary’s final rulemaking notice indicated that when a servicer designates an address for receiving QWR’s, “then the borrower must deliver its request to that office in order for the inquiry to be a ‘qualified written request.’”  Real Estate Settlement Procedures Act, Section 6, Transfer of Servicing of Mortgage Loans (Regulation X), 59 Fed. Reg. 65,442, 65,446 (Dec. 19, 1994).

Later, the Dodd-Frank Wall Street Reform and Consumer Protection Act transferred the Secretary’s rulemaking authority to the Consumer Financial Protection Bureau.  The CFPB rescinded the version of Regulation X at issue in this case, and promulgated a new Regulation X that also permits a servicer to require borrowers to send QWR’s to a designated address. 12 C.F.R. §§ 1024.35(c), 1024.36(b).

The borrower maintained that he did not have to send the QWR to the Disputes/Inquiries address because the servicer did not designate a specific address to receive only QWRs. The borrower argued that designating a general address to receive Disputes/Inquiries was insufficient.  Instead, the borrower argued, section 3500.21 required the servicer to explicitly use the term “qualified written requests.”

The Eleventh Circuit rejected this argument.  As the servicer directed borrowers to send “all written requests to the specified address,” it necessarily directed borrowers to send QWRs to the specified address.  The Eleventh Circuit also noted that the servicer used “more accessible language than Regulation X required,” because borrowers probably would be more familiar with lay terms like “disputes,” “inquiries,” and “written requests” than with the statutory term, “qualified written request.”

Further, the Eleventh Circuit observed that it would be “perverse” to penalize a servicer for subjecting itself to the additional administrative burden to evaluate and sort a larger quantity of mail to identify QWRs to minimize consumer confusion.

The Court noted that this does not mean that a servicer may designate an address to receive QWR’s with terminology so vague that it would fail to advise a borrower of the specified address intended for QWRs.  Instead, the Court held that a servicer must designate an exclusive address for QWRs that is “clear to a reasonable borrower.”

The Eleventh Circuit had “little difficulty” in determining that the servicer met this standard.

The borrower also argued that he did not have to send his QWR to the Disputes/Inquiries address because the servicer did not “establish a separate and exclusive office” solely to respond to QWRs. The Eleventh Circuit noted that it construes “[r]egulations with a common sense regard for regulatory purposes and plain meaning.”  United States v. Fuentes-Coba, 738 F.2d 1191, 1195 (11th Cir. 1984). The Court held that the borrower’s proposed construction of section 3500.21(e)(1) fails this test because it would frustrate, not serve, the regulation’s purpose.

The Eleventh Circuit noted that the section 3500.21(e)(1) was designed “to help servicers timely respond to QWRs by enabling them to more easily identify and prioritize correspondence that purport to be QWRs.”  To require “a servicer to maintain a separate office for the sole function of processing QWRs would impose high costs on the servicer while providing little benefit.”  The borrower argued that a servicer could train employees at a QWR-only processing facility, but the Eleventh Circuit rejected this argument because a servicer could also train employees at a common mail processing office.

The Eleventh Circuit concluded that it is more sensible to construe Section 3500.21(e)(1) to allow a servicer to designate an office “separate” from any other office as its exclusive office for receiving QWRs, without any regard to any other function that office may serve. This “construction accords with § 3500.21(e)(1)’s text and purpose.”  The Court held that the servicer therefore “successfully invoked § 3500.21(e)(1) by directing borrowers to mail QWRs to a particular office, even though it used that office for other purposes as well.”

Thus, the Eleventh Circuit held that a servicer does not have to devote an offer for the separate and exclusive purpose of processing QWRs to “establish a separate and exclusive office” to receive and handle QWRs.

Accordingly, the Eleventh Circuit affirmed the trial court’s summary judgment ruling in favor of the servicer and against the borrower.

 

ED NY Holds ‘Door Knocker’ Notice Did Not Violate FDCPA, But ‘Hello Letter’ May Have

The U.S. District Court for the Eastern District of New York recently granted in part and denied in part a mortgage servicer’s motion to dismiss a borrower’s claim that the servicing transfer notice supposedly violated the federal Fair Debt Collection Practices Act (FDCPA) because it allegedly did not disclose that the debt was increasing due to interest, and that a “door knocker” notice posted on the borrower’s door failed to state that it was from a debt collector.

The Court held that under Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2d Cir. 2016), a debt collector must disclose that a debt is increasing due to interest and fees, and accordingly denied the servicer’s motion to dismiss on that issue.

However, the Court granted the servicer’s motion to dismiss as to the claim that the “door knocker” notice failed to state that it was a communication from a debt collector because the least sophisticated consumer would understand that the letter was from a debt collector.

A copy of the opinion in Baptiste v. Carrington Mortgage Services, LLC is available at:  Link to Opinion.

The mortgage loan servicer began servicing the mortgage when it was in default.  The servicer sent a servicing transfer notice to the borrower and advised him that “going forward, all mortgage payments should be sent to [the servicer], but that ‘[n]othing else about [the] mortgage loan will change.”

The letter also stated “[t]his notice is to remind you that you owe a debt.  As of the date of this Notice, the amount of debt you owe is $412,078.34.”  Id. The notice further stated that the servicer was “deemed to be a debt collector attempting to collect a debt and any information obtained will be used for that purpose.” Id. at *3.

Later, the servicer posted a notice on the door of the debtor’s home stating: “Date 02/23/17 Dear Borrower: Rego Baptiste URGENT NOTICE: Please contact your mortgage servicer immediately at: (800) 561-4567. Thank you.”

The borrower filed suit against the servicer asserting violations of 15 U.S.C. §1692e(10) for failing to disclose in the letter that the balance on his debt was increasing due to interest and of §1692e(11) for failing to state in the notice that it was from a debt collector.

The servicer moved to dismiss.

The Court rejected the servicer’s argument that the notice was not a collection attempt and thus not subject to § 1692e. Instead, the Court found that under Hart v. FCI Lender Servs., Inc., 797 F.3d 219 (2nd Cir. 2015), the notice was a collection attempt because it referenced the debt and directed that payments be sent to the servicer, it referenced the FDCPA and included the required § 1692g notice, and included a statement that it is an attempt to collect a debt.

The Court held that under Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2nd Cir. 2016), when a debt collector notified a debtor of an account balance, it must disclose that the “balance may increase due to interest and fees.” Avila, 817 F.3d at 76.

The Court also rejected the servicer’s argument that Avila should not apply because even a least sophisticated debtor knows that interest continuously accrues on an unpaid mortgage balance and that fees will be incurred if the mortgage is not timely paid. The Court pointed out that because the mortgage was in default at the time the servicer began servicing it, it was subject to the FDCPA and that there was no authority holding that servicers collecting on defaulted mortgages are treated differently than any other debt collectors under the FDCPA.

The Court found that the notice did not meet Avila’s safe harbor requirements and that such a violation would be material because it “could impede a consumer’s ability to respond to . . . collection.”  Id. at *12. Accordingly, the Court denied the motion to dismiss as to the servicing transfer notice.

As for the “door knocker” notice, the Court found that a least sophisticated consumer would “surmise” that it was from the servicer “whom he would know as a debt collector.”  Id. at *12. The Court found this sufficient because the FDCPA “requires no magic words or specific phrases to be used” but only requires that the least sophisticated consumer understand. The Court concluded that “even the least sophisticated consumer would know that a mortgage servicer is a debt collector.”

Accordingly, the Court granted the motion to dismiss as to the “door knocker” notice, but denied the motion as to the servicing transfer notice.