Saturday, June 22, 2013

FYI: 1st Cir Rules RI Fed Ct's "Stay" on Some 700 Foreclosures Improper

The U.S. Court of Appeals for the First Circuit recently ruled that various Rhode Island federal court orders imposing a "stay" on mortgage foreclosures and eviction proceedings were actually preliminary injunctions under Federal Rule 65, and as such required defaulted mortgagors to show the likelihood of prevailing on their claims that MERS and other mortgagees lacked authority to assign mortgages and foreclose under Rhode Island law.  


Due to the volume of affected cases and in "belated compliance" with Rule 65(a)(1), the Court of Appeals remanded to determine whether the injunctions should remain in effect, and to establish specific time and expense limits on the ongoing court-ordered mediation in the pending actions challenging the foreclosures. 


A copy of the opinion is available at:


Plaintiffs, defaulted residential mortgage borrowers ("Borrowers"), filed suit to prevent foreclosure of their property or to avoid eviction, arguing that Mortgage Electronic Registration Systems, Inc. ("MERS") and other mortgagees (collectively, "Defendants") allegedly lacked authority to foreclose under Rhode Island's non-judicial foreclosure scheme.  The cases, numbering almost 700, were either filed in or removed to federal court.  In two of the cases, a magistrate recommended dismissal, reasoning that Borrowers lacked standing to challenge Defendants' assignments of the original mortgagees' interests.  The lower court, not having acted on the magistrate's recommendation in the two cases, put all the pending cases on a Foreclosure Docket established to manage the large number of cases.


The lower court also appointed a Special Master to handle mandatory mediation intended to resolve Borrowers' cases challenging the foreclosure actions against them, and issued orders imposing a "stay" on the foreclosure and eviction proceedings, but failed to set time and cost limitations on the court-ordered mediations. 


Although the stay orders did not at first expressly prohibit Defendants from initiating non-judicial foreclosures, when one of the Defendants attempted to do so in one of the cases on the Foreclosure Docket, the lower court issued an order continuing the stay in all the cases on the Foreclosure Docket, thus preventing Defendants from foreclosing on any of the properties that were the subject of pending cases on the docket.


In their interlocutory appeal and petition for mandamus, Defendants argued that the lower court's stay orders were in fact in the nature of a preliminary injunction, and thus required notice and hearing and, in addition, that the lower court erred in failing to set time and cost limits when referring the cases to mandatory mediation.


Agreeing with Defendants, the First Circuit concluded in part that the "stay" was a preliminary injunction that failed to satisfy Rule 65, and accordingly remanded for a hearing on whether Borrowers had a substantial likelihood of prevailing in the pending actions to justify continuing the mediation order.


As you may recall, Federal Rule of Civil Procedure provides that a preliminary injunction may be imposed "only on notice to the adverse party," and requires a hearing and findings that the party seeking the injunction has a substantial likelihood of success in the pending action, and would suffer irreparable harm in the absence of the injunction.  Fed. R. Civ. Pro. 65. 


Having concluded in part that it had jurisdiction to hear the appeal in this case because, despite its label as a "stay," the order was actually an injunction, the First Circuit focused on Borrowers' likelihood of successfully challenging the foreclosures.  In so doing, the Court noted that the so-called "stay" actually prohibited Defendants from exercising their statutorily authorized non-judicial foreclosure powers, that the lower court had threatened to impose sanctions for violations of its order, and that the lower court never established a cut-off for completion of the mediation process. 


Moreover, citing the "close concordance of the injunction and the mediation order," the First Circuit also concluded that it had pendant jurisdiction over Defendants' appeal concerning the lack of time and expense limits on the mandatory mediation of the foreclosure cases, noting that the injunction effectively operated to keep the mediation alive and to allow Borrowers to remain in their mortgaged properties indefinitely.  


The First Circuit concluded that both the mediation order and the injunction suffered from error.  Specifically, the Court first pointed out that Defendants were not provided formal notice, and that Borrowers had not demonstrated in hearings their likelihood of success in challenging the foreclosures.  In so doing, the First Circuit rejected Borrowers' assertions that Defendants had the opportunity for hearings, observing that the lower court expressly instructed the Special Master to avoid the issue common to all parties of jurisdictional standing to challenge the foreclosures. 


Second, the Court also noted that the mandatory mediation failed to conform to the standard of reasonable trial court discretion, in that there were no prospective limits placed on the period during which mediation must be completed or on the costs to which parties may be subjected.  See In Re Atl. Pipe Corp., 304 F.3d 135 (1st Cir. 2002).


Bearing in mind that, given the size of the Foreclosure Docket, simply vacating the injunction and mediation orders would create chaos for the lower court,  the First Circuit opted to "tolerate the status quo long enough to give the parties time to plan for contingencies." 


Accordingly, the First Circuit remanded to allow the lower court to correct errors in failing to comply with Rule 65's notice, hearings, and findings requirements, stressing that Borrowers' bore the burden of demonstrating probable success as a condition of continuing the injunction against the foreclosures.  The Court further instructed the lower court to set time and cost limits for any remaining cases that go through the court ordered mediation.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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