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1st Cir. Holds FCA Does Not Require Lender to Propose Pre-Foreclosure Restructuring Plan

mortgage lawThe U.S. Court of Appeals for the First Circuit recently held that the federal Farm Credit Act does not require a lender to propose a restructuring plan of its own before pursuing foreclosure remedies.

A copy of the opinion in Puerto Rico Farm Credit, ACA v. Eco-Parque del Tanama Corp. is available at:  Link to Opinion.

The borrowers defaulted on a loan extended by the lender. The loan was subject to the FCA, 12 U.S.C. 2001 et seq., which sometimes requires the lender to restructure a loan rather than foreclose.

The borrowers applied to restructure the distressed loan, but the lender rejected the application. The lender eventually brought this foreclosure action, and the trial court ultimately granted summary judgment for the lender and denied the borrowers’ motion for reconsideration. The borrowers timely appealed.

The First Circuit began its analysis by recounting that a lender need not accept a plan of restructuring that the borrower cannot perform because the FCA only requires restructuring when it would cost the lender no more than foreclosure. 12 U.S.C. § 2202a(e)(1); 12 C.F.R. § 617.7415(d).

Absent unusual circumstances not present here, the Court determined that a failed attempt at restructuring followed by foreclosure would likely cost the lender here more than would foreclosure alone.

The borrowers countered that the lender was required to propose its own restructuring plan after it denied the borrowers’ restructuring application. In response, the First Circuit acknowledged that the FCA does “not prevent a qualified lender from proposing a restructuring plan for an individual borrower in the absence of an application for restructuring from the borrower.” 12 U.S.C. § 2202a(d)(2).

However, the Court also reasoned that a grant of permission does not require a lender to propose a restructuring plan of its own, much less to do so when the borrower’s financial circumstances reveal no basis for concluding that a reasonable restructuring is possible.

There being no other preserved challenge to the trial court’s finding that the lender properly considered and rejected the requested restructuring, the First Circuit affirmed the trial court’s grant of summary judgment in favor of the lender.

The borrowers’ subsequent motion for reconsideration in the trial court focused on their assertion that the lender should have estimated a higher cost of foreclosure in comparison to the cost of restructuring. However, given the fact that the borrowers demonstrated no ability to perform their obligations under the proposed restructuring, the First Circuit held that any challenge to the lender’s estimate of the transactional costs of foreclosure could not change the outcome.

Accordingly, the First Circuit also affirmed the trial court’s denial of the borrowers’ motion for reconsideration.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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