The Supreme Court of Washington recently held that the provisions in a deed of trust allowing a servicer to enter and secure a property after default and before the completion of a foreclosure conflict with Washington state law, and are therefore unenforceable.
The Court also held that Washington’s receivership provisions at chapter 7.60 RCW are not the only remedy for servicers to gain access to a borrower’s property.
A copy of the opinion in Jordan v. Nationstar Mortg., LLC is available at: Link to Opinion.
The borrower defaulted on her mortgage loan. Pursuant to a provision in the deed of trust, one of the servicer’s representatives came to the borrower’s home, inspected it, determined the property was vacant and changed the locks to the door. A phone number was placed on the door to contact to gain access to the property.
The borrower disputed her home was vacated. She contacted the number provided and gained access to the property. The next day she claims she vacated the property.
The borrower filed a putative class action against the servicer, purporting to represent a class of 3,600 homeowners in Washington who, under similar deed of trust provisions, were locked out of their homes.
The deed of trust provisions allowed the servicer to enter the borrower’s home upon default without providing any notice (“entry provisions”). However, the borrower asserted claims against the servicer for trespass, breach of contract, and supposed violations of the Washington Consumer Protection Act, Ch. 19.86 RWC, and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. Accordingly, one of the primary issues was whether the entry provisions in the deed of trust conflict with Washington law.
The trial court certified the proposed class, and the servicer removed the case to federal district court. The federal district court certified the following two questions of Washington state law to the Supreme Court of Washington:
- Under Washington’s lien theory of mortgages and RCW 7.28.230(1), can a borrower and lender enter into a contractual agreement prior to default that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure?
- Does chapter 7.60 RCW, Washington’s statutory receivership scheme, provide the exclusive remedy, absent post default consent by the borrower, for a lender to gain access to an encumbered property prior to foreclosure?
The Supreme Court of Washington answered both questions in the negative.
As to the first question, the Court noted that the entry provisions in the deed of trust allow a servicer to enter the property after an event of default. However, the Court also noted that Washington law prohibits a servicer from taking possession of collateral prior to foreclosure. The Supreme Court of Washington held that, because the entry provisions in the deed of trust allow the servicer to take possession of the collateral prior to foreclosure, the entry provisions are in conflict with Washington law and are unenforceable.
The Court explained that “it is the general rule that a contract which is contrary to the terms and policy of an express legislative enactment is illegal and unenforcible [sic].” State v. Nw.Magnesite Co., 28 Wn.2d 1, 26, 182 P.2d 643 (1947). While there is “overarching freedom to contract,” provisions are unenforceable where they are prohibited by statute. State Farm Gen. Ins. Co. v. Emerson, 102 Wn.2d 477, 481, 687 P.2d 1139 (1984).
As you may recall, Washington law prohibits a lender from taking possession of property before foreclosure of the borrower’s home. More specifically, RCW 7.28.230 provides that:
(1) A mortgage of any interest in real property shall not be deemed a conveyance so as to enable the owner of the mortgage to recover possession of the real property, without a foreclosure and sale according to law.
The Supreme Court of Washington noted that courts have interpreted RCW 7.28.230(1) to mean that a mortgagor’s default does not terminate the mortgagor’s right to possession and that the mortgage can retain possession until the foreclosure process is completed. Howard v. Edgren, 62 Wn.2d 884, 885, 385 P.2d 41 (1963).
Here, the servicer argued that exercise of the entry provisions in the deed of trust do not constitute possession. To answer the first question, the Court had to determine if the entry provisions cause the servicer to gain possession. The Court held it did.
The Supreme Court of Washington looked to several definitions of the “possession.” Under any definition, the Court held, the conduct allowed under the entry provisions constitutes possession because the actions satisfy the key element of possession, which is control.
The Court noted that the servicer here drilled out the existing locks and replaced them with its own. The Court opined that rekeying the property has the effect of informing the borrower that the servicer now has control. Thus, the Court held, the borrower was left with no method of entering her property.
Even though the servicer provided the borrower with a method to reenter the property, the Court held that the action of changing the locks and allowing for reentry only after contacting the servicer was a clear expression of control.
Accordingly, the Court held the entry provisions in the deed of trust allow the servicer to take possession of the property after default and prior to the completion of a foreclosure. The Supreme Court of Washington held that, because Washington law prohibits taking possession of the borrower’s property before foreclosure, the entry provisions are in conflict with Washington state law and cannot be enforced.
As to the second certified question, the Court held that Chapter 7.60 RCW is not the exclusive remedy for lenders to gain access to a property.
Chapter 7.60 RCW governs receiverships in Washington. A “receiver” is a third party appointed by a court to manage the property as the court directs. 18 WILLIAM B. STOEBUCK & JOHN W. WEAVER, WASHINGTON PRACTICE: REAL ESTATE: TRANSACTIONS, § 18.6, at 310 (2d ed. 2004). Even if a mortgage clause provides for the appointment of a receiver, lenders are not immediately entitled to one. STOEBUCK & WEAVER, § 18.6, at 312. Although statutory grounds exist for a court-appointed receiver prior to foreclosure, it is rarely sought. Id.
The borrower here argued that the entry provisions in the deed of trust attempted to bypass the receivership statutes. The Court read the statutes as not being concerned with a servicer’s access to the collateral property but rather merely setting forth requirements should a receiver be necessary.
Thus, the Supreme Court of Washington held that the entry provisions in the deed of trust do not attempt to circumvent the receivership statutes and thus do not conflict with chapter 7.60 RCW.
The statute provides, in relevant part:
A receiver may be appointed by the superior court of this state in the following instances, but except in any case . . . in which a receiver’s appointment with respect to real property is sought under (b)(ii) of this subsection, a receiver shall be appointed only if the court additionally determines that the appointment of a receiver is reasonably necessary and that other available remedies either are not available or are inadequate.
RCW 7.60.025(1). “Subsection (b)(ii) provides that a receiver may be appointed after the commencement of a foreclosure proceeding on a lien against real property where the appointment is provided for by agreement or is necessary to collect rent or profits from the property.”
Under subsection (b)(ii), a receiver shall be appointed, but only if the court makes additional findings. First the court must find a receiver is “reasonably necessary.” RCW 7.60.025(1)(b)(ii). Second, the court must determine that “other available remedies either are not available or are inadequate.” RCW 7.60.025(1).
The Supreme Court of Washington held that the plain language of the statute does not suggest that chapter 7.60 RCW was intended to be an exclusive remedy. The Court noted there are other remedies outside of appointing a receiver but it was not for the Court to determine what those remedies are.
Accordingly, the Court answered the second certified question in the negative, ruling that “[t]he text of the receivership statutes, the legislative intent behind them, and public policy considerations compel us to find that chapter 7.60 RCW is not the exclusive remedy for lenders to gain access to a borrower’s property.”