Saturday, March 31, 2012

FYI: 9th Cir Voids Foreclosure Sale, Holds Mortgagee Failed to Properly Announce Postponement of Sale, Allows Damages to Borrower

The U.S. Court of Appeals for the Ninth Circuit recently held that: (1) a mortgagee's failure to publicly announce the postponement of a foreclosure sale violated Hawaii's non-judicial foreclosure statute, (2) the proper remedy for such violation was voiding the subsequent foreclosure sale, (3) such violation constituted a deceptive trade practice under Hawaii law, (4) the proper determination of damages for the deceptive practice required a finding that the deceptive practice was the cause of Debtor's damages, and (5) on remand, calculation of attorneys' fees may take into account the mortgagee's settlement offer to the Debtor.
A copy of the opinion is available at: 
Plaintiff-appellant ("Debtor") allegedly defaulted on a home mortgage loan.  During the course of the ensuing foreclosure action, and shortly before the scheduled foreclosure sale of the property, the Debtor filed for Chapter 13 bankruptcy protection.   As a result of the bankruptcy, the loan owner and mortgage servicer (collectively "Lender") postponed the sale of the property and publicly announced the postponement in a manner consistent with Hawaii foreclosure law. 
Having to postpone the sale again, however, on the date of the scheduled sale, Lender's counsel sent its secretary to the location of the sale in order to announce that the sale was being postponed one more time.  While at the site of the scheduled foreclosure sale, the secretary asked a number of persons in attendance if they were interested in purchasing the Debtor's property, but allegedly failed either to announce to anyone that the sale had been postponed again or to post any information about the postponement.
The Lender then moved for relief from the automatic stay in order to proceed with the sale at a later date.  The bankruptcy court granted the motion, and the property was sold to the Lender who also obtained an order of eviction in a subsequent eviction proceeding. 
The Debtor filed a complaint in bankruptcy court alleging among other things that the sale of the property violated the automatic stay, breached the terms of the mortgage contract, constituted an unfair and deceptive trade practice under Hawaii law, and violated the statutory requirements for non-judicial foreclosures.
The bankruptcy court determined that the Lender's failure to publicly announce the postponement of the foreclosure sale violated the "public announcement" requirement under Hawaii's non-judicial foreclosure statute.  The bankruptcy court also ruled that the Lender had breached the mortgage contract in that the contract required compliance with state law in any foreclosure proceeding.  The bankruptcy court thus voided the foreclosure sale of the property.
The bankruptcy court also concluded that the improper postponement constituted an unfair and deceptive trade practice in violation of Hawaii law, and thus awarded treble damages to the Debtor based on the Debtor's lost equity in the house and the rental value of the house for the time that she was not in possession of the property.  The court also awarded attorney fees for defending the eviction action.   In addition, the court awarded attorneys' fees to the Debtor for the breach of contract claim and the consumer protection claim.   Allocating the fees equally between the contract and consumer claims, the court calculated the amount of attorneys' fees for the contract claims as twenty-five percent of the judgment, the statutory limit that prevailing parties may collect under Hawaii law
Lender appealed, challenging the bankruptcy court's determinations of liability, damages, and attorney fees.  The Debtor cross-appealed, claiming that the attorneys' fees for the contract claim should not have been limited to twenty-five percent of the value of the equity.  The Ninth Circuit's Bankruptcy Appellate Panel ("9th Cir BAP") reversed, ruling that the Lender had satisfied the public announcement requirement, had not breached the mortgage contract, and that there had been no deceptive practice. 
The Debtor appealed.  The Ninth Circuit reversed on the issue of liability and remanded for a determination on damages and attorneys' fees.
As you may recall, under Hawaii law, a foreclosure sale may be postponed by the mortgagee "by public announcement." HRS § 667-5.  Hawaii also permits a prevailing party in contract claims to collect attorney's fees up to twenty-five percent of the judgment.  HRS § 607-14.  In addition, a consumer who establishes a violation of Hawaii's unfair or deceptive practices act is entitled to treble damages for damages sustained as a result of the deceptive action.  HRS §§ 480-2(a), 480-13. 
The Ninth Circuit noted first that Hawaii law does not define the term "public announcement,but determined that under the plain meaning of the statute no such announcement had been made. In so doing, the Court took issue with the 9th Cir BAP's reliance on statutory context and purpose to define the term, in lieu of the plain language.  Accordingly, the Ninth Circuit concluded that the Lender had violated the "public announcement" requirement of HRS 677-5. 
Turning to the issue of remedies for violating foreclosure procedure, the Ninth Circuit ruled that Hawaii law requires strict compliance with the requirements of the non-judicial foreclosure statute.   In so ruling, the court relied on the Hawaii Supreme Court's opinion in Lee v. HSBC Bank USA, 218 P.3d 775 (Haw. 2009), which held that non-compliance with the foreclosure statute invalidates a subsequent foreclosure sale.  See also Silva v. Lopez, 5 Haw. 262, 1884 WL 6695 (1884) (technical violations of foreclosure procedures void a foreclosure sale).  The Court thus concluded that the proper remedy was avoidance of the foreclosure sale.  The Court further ruled that breach of the mortgage contract requiring the Lender to comply with the non-judicial foreclosure statute was an alternative basis for voiding the sale.
With regard to the deceptive practices claim, the Ninth Circuit agreed with the bankruptcy court's determination that because the failure to make a public announcement of the postponement of the foreclosure sale was "likely to mislead a consumer," it constituted a deceptive practice under HRS § 480-2.  The Court noted, however, that (1) in order to be entitled to damages for such deceptive practice, the Debtor must demonstrate that the enumerated damages were traceable to the improper postponement of the foreclosure sale, and (2) the bankruptcy court's failure to specify the cause of the Debtor's damages could suggest that the Debtor's losses stemmed from her default rather than from the improper manner in which the postponement was handled.  Accordingly, the Court remanded the case back to the bankruptcy court to determine the cause of Debtor's damages, including the loss of the property.
Moreover, in light of the its remand of the damages-causation issue, the Ninth Circuit also vacated the award of attorneys' fees.  In addressing the bankruptcy court's calculation of attorneys' fees, the Court pointed out that, consistent with its recent decision in Ingram v. Oroudjian, 647 F.3d 925 (9th cir. 2011), the bankruptcy court could consider evidence of a settlement offer the Lender purportedly made to the Debtor. 
In addition, the Ninth Circuit rejected the Debtor's argument that it was improper to limit the amount of attorneys' fees for the breach of contract claim to twenty-five percent of the value of the lost equity under Hawaii law.  In so ruling, the Court noted that the debtor's complaint requested only monetary damages and that her subsequent election to recover the mortgaged property did not allow the amount of fees recovered to exceed the twenty-five percent statutory limit under section 607-14.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Chicago, Illinois 60602
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