The U.S. Court of Appeals for the Fifth Circuit recently affirmed entry of summary judgment against a homeowner borrower’s wrongful foreclosure claims premised upon receipt of a defective pre-foreclosure notice that erroneously provided a 30-day deadline to cure from the date the notice of default letter was printed, rather than the day the letter was mailed as required under the terms of the deed of trust.
In so ruling, the Fifth Circuit concurred that the borrower’s claims could not survive summary judgment because the minor non-compliance with the terms of the deed of trust failed to result in prejudice to the borrower who did not possess adequate funds to cure the default within 30 days’ receipt of the notice, and the lender did not accelerate for nearly nine months after mailing the notice of default letter.
A copy of the opinion in Casalicchio v. BOKF, NA is available at: Link to Opinion.
In August 2016, a homeowner borrower fell behind on his payments and defaulted on his mortgage loan. After missing two consecutive payments his mortgage lender generated a form letter notice of default letter dated Sept. 5, 2016, informing the borrower: (i) that further delinquency would result in acceleration; (ii) that borrower could prevent acceleration by paying the past-due balance within 30 days; and (iii) that after acceleration he would retain the right to reinstate the loan by making missed payments and retained rights to assert defenses to acceleration and foreclosure.
The subject deed of trust that secured the mortgage loan provided that the lender shall provide notice to the borrower prior to acceleration specifying “(a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to [borrower], by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice will result in acceleration of the sums secured by [the deed of trust] and [a] sale of [borrower’s] [p]roperty.”
Here, the lender’s automated system calculated a 30-day cure window from the printing date of Sept. 5, 2016 — not the Sept. 12, 2016 day it was mailed — and erroneously instructed the borrower to deliver “a cashier’s check or certified funds for the total [past-due] amount . . . by noon on 10/05/16.”
Although the borrower remained delinquent after the Oct. 5, 2016, the lender chose not to immediately accelerate and even provided the borrower with loan modification proposals in November 2016 and March 2017 which he declined to accept, eventually leading the lender to accelerate the loan on June 12, 2017 and advise the borrower that a foreclosure sale was scheduled for the following month. Thereafter, on July 4, 2017, the property was sold to a buyer which took title and initiated eviction proceedings in state court, which the borrower vigorously and successfully resisted, maintaining possession of the property while remaining delinquent on the loan.
The borrower filed suit in Texas state court against the lender and buyer seeking a declaratory judgment voiding the foreclosure sale, damages for an alleged breach of the deed of trust, and an injunction barring the buyer from pursuing eviction on the basis that the notice of default failed to comply with the 30-day notice provision under the deed of trust. The lender and buyer removed the case to federal court.
The federal trial court granted summary judgment in their favor and dismissed the borrower’s suit with prejudice. The instant appeal ensued.
The sole issue on appeal was whether the notice of default’s “minor, technical” deviations from the deed of trust’s requirements justified setting aside the foreclosure sale.
The borrower argued that because the deed of trust entitled him to a “date, not less than 30 days from the date the notice [of default was] given,” the lender’s failure to provide a deadline 30 days from the day that the notice of default was mailed triggers the longstanding Texas rule that non-judicial foreclosure sales are void when they fail to conform to the terms of a deed of trust. See, e.g., Slaughter v. Qualls, 162 S.W.2d 671, 675 (Tex. 1942).
However, despite the borrower’s conclusory claim that he was “damaged” by the defect in the notice of default, the Fifth Circuit noted that the record conclusively demonstrated that the notice of default’s incorrect deadline was insignificant, as it was undisputed that the lender did not accelerate the loan 30 days after printing the notice of default nor 30 days after it was received by the borrower, but provided nearly nine months’ opportunity for the borrower to cure the default before accelerating the loan.
Moreover, the borrower conceded that he did not have adequate funds to make the missed payments at any point between the incorrect 30-day deadline set forth in the notice of default letter (Oct. 5, 2016) and the applicable 30-day deadline after the borrower’s receipt of same (Oct. 12, 2016).
Acknowledging that there is some support under Texas law for the borrower’s position that non-compliance with a deed of trust’s provisions is a mistake that cannot be excused or mooted by any later developments, the Texas Supreme Court has repeatedly moderated its rule that the “terms of a deed of trust must be strictly followed,” since the 1980s, and most recently in Hemyari v. Stephens, clarified that harmless mistakes do not void otherwise-valid foreclosure sales. See University Savings Association v. Springwoods Shopping Center, 644 S.W.2d 705 (Tex. 1983) (no wrongful foreclosure where failure to record a notice of appointment until two days after the trustee’s sale did not result in any prejudice or harm); Jasper Federal Savings & Loan Association v. Reddell, 730 S.W.2d at 672 (Tex. 1987) (actual notice can preclude wrongful foreclosure liability when a lender fails to provide notice required by a deed of trust but not otherwise required by law); Hemyari v. Stephens, 355 S.W.3d 623, 628 (Tex. 2011) (harmless failure to comply with a deed of trust’s requirements does not void an otherwise-valid foreclosure sale).
Thus, because the lender’s “minor defect” did not result in any different outcome for the borrower and was insufficiently prejudicial to justify setting aside an otherwise valid foreclosure sale, the trial court’s grant of summary judgment to the lender and buyer was affirmed.