The U.S. Court of Appeals for the Fifth Circuit recently reversed a trial court's judgment in favor of a mortgage servicer ruling that the servicer had violated its obligations under a Trial Period Plan (TPP) in connection with a proposed loan modification when the servicer failed to offer a permanent loan modification after the borrower made payments in compliance with the "grace period" provisions of the TPP.
A copy of the opinion is available at: Link to Opinion
The case arises out of a Trial Period Plan ("TPP") offered in response to a borrower's ("Borrower") request for assistance from his home loan Servicer ("Servicer") after Borrower defaulted on his home loan. The TPP required three payments. The TPP stated that Borrower must make the payments on January 1, February 1, and March 1. It also contained provisions which stated the payments must be made in the month in which they were due.
After Borrower made the three payments in the months in which they were due, but not on the first day of each month, Servicer informed Borrower he was ineligible for the permanent modification as he failed to comply with the terms of the TPP. Servicer then posted Borrower's property for foreclosure.
Borrower filed suit against Servicer alleging breach of contract. The trial court granted summary judgment in favor of Servicer, declining to give force to the grace period provisions of the TPP and thus finding that Borrower failed to comply with the provisions of the TPP's payment deadlines. Borrower appealed.
The Borrower and secured property were located in Texas. Under Texas law, a plaintiff in a breach of contract action must show: "(1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained by the plaintiff as a result of the breach" to establish a breach of contract claim. Smith Int'l, Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007).
Servicer first argued that the TTP was not a valid binding contract. However, the Fifth Circuit found the text of the TPP made clear that Servicer intended to be bound by the terms of the TPP upon Borrower's performance.
The Court referenced specific provisions of the TPP in reaching this decision including the following language: "If you successfully complete the [TTP] by making the required payments, you will receive a permanent modification with an interest rate of 6.375% which will be fixed for 480 months from the date the modification is effective." The Fifth Circuit also referenced the provision stating: "If you make your new payments timely we will not conduct a foreclosure sale." And finally, the Court noted the TPP expressly defined the terms of acceptance as "[t]he terms of this offer are accepted and the terms of your [TPP] are effective on the day you make your first trial period payment, provided you have paid it on or before the last day of [January 2019]." Thus, the Court found that an enforceable contract was created when Borrower made the first trial period payment on January 18, 2019.
Alternatively, Servicer argued that Borrower failed to comply with the requirement of the TPP that he make payments "in a timely manner." In support of this argument, Servicer noted the TPP established monthly deadlines of January 1, February 1, and March 1, 2019 on which payments were to be made, and that Borrower failed to meet these payment deadlines.
The Fifth Circuit rejected this argument because the language of the TPP also established a grace period which allowed for the acceptance of payments as long as they were made "in the month in which it is due." Although the Court noted neither the TPP nor the parties used the term "grace period" to describe the language in the TPP, the Court found it was plainly contemplated by the text.
In response, Servicer argued that the Fifth Circuit should ignore the grace period as it irreconcilably conflicted with the monthly deadlines, and the express statement that "time is of the essence." The Court disagreed, noting that grace periods are common features of contracts and that grace periods and deadlines are in fact designed to co-exist.
Finally, the Fifth Circuit noted that even if the two provisions were irreconcilably conflicted, Servicer would have had to articulate some theory as to why the deadline provision should be favored over the grace period provision. "[R]espect for text requires that 'judges must do the least damage they can.'" Id. (quoting Herrmann v. Cencom Cable Assocs., 978 F.2d 978, 983 (7th Cir. 1992)).
The Fifth Circuit found Servicer's failure to provide a reason as to why favoring the deadlines would "do the least damage" to the text of the TPP fatal to its case. Id. Because "if [the Court] [we]re truly unable to discern which provision should control, the proper resolution is to apply the unintelligibility canon and to deny effect to both provisions." Id. (cleaned up). Thus, both provisions would be ignored, and the Court would have reversed accordingly.
Thus, the Fifth Circuit ruled that Servicer violated its obligations under the TPP by refusing to grant the permanent loan modification and proceeding with foreclosure after Borrower met his obligations. The Court therefore reversed and remanded for further proceedings.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Admitted to practice law in Illinois
Alabama | California | Florida | Illinois | Massachusetts | New Jersey | New York | Ohio | Pennsylvania | Tennessee | Texas | Washington, DC
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates and webinar presentations are available on the internet, in searchable format, at:
Financial Services Law Updates
The Consumer Financial Services Blog™