Friday, May 10, 2013

FYI: E.D. Va. Rejects Borrower's Attempt to Assert Private Right of Action Using National Mortgage Servicing Settlement

The U.S. District Court, Eastern District of Virginia, recently ruled that:


(1) a borrower had no enforcement rights under the national mortgage servicing settlement agreement and consent judgment between loan servicers and state attorneys general (National Mortgage Servicing Settlement), as she failed to overcome the presumption that individual borrowers are mere incidental beneficiaries of the settlement rather than the intended beneficiaries;


(2) the borrower failed to allege state-law breach of contract claims, arising from an implied covenant of good faith and fair dealing or violations of the National Mortgage Servicing Settlement, as the loan servicer had the express contractual right to foreclose and had no duty to facilitate a loan modification or to review her loan modification application in accordance with the servicing standards under the National Mortgage Servicing Settlement, because the settlement was not the "applicable law" at the time borrower obtained her home mortgage loan.


A copy of the opinion is attached.


Plaintiff borrower ("Borrower") obtained a home mortgage loan from defendant lender and servicer ("Servicer") that was secured by a deed of trust on her property.   Due to a reduction in income, Borrower applied to Servicer for a loan modification and was granted a temporary modification.   However, while Borrower's loan was still under review for a permanent modification, Servicer initiated foreclosure proceedings and scheduled a foreclosure sale.


Shortly before the scheduled foreclosure sale, Borrower filed a complaint in state court against Servicer and a law firm ("Law Firm") that Borrower incorrectly believed was the substitute trustee, seeking damages and a preliminary injunction enjoining Servicer from foreclosing prior to a "proper" loan modification review.  In her complaint, Borrower alleged in part that Servicer violated the March 2012 National Mortgage Servicing Settlement between the U.S. Department of Justice and state attorneys general ("Consent Judgment"), which sets forth mortgage servicing standards aimed at protecting homeowners from certain practices, such as "dual tracking."  Borrower also brought breach of contract claims under Virginia law based on a supposed implied covenant of good faith and fair dealing under the loan agreement and alleged violations of the servicing standards set forth under the Consent Judgment.


Removing the case to federal court, Servicer and Law Firm each moved to dismiss.  Borrower sought to remand the case back to state court, alleging that the federal court lacked subject matter jurisdiction.   The district court denied Borrower's motion to remand and dismissed her complaint.


Concluding that Law Firm was improperly named as a party in this case, and that the court thus had diversity jurisdiction, the District Court denied Borrower's motion to remand and granted Law Firm's motion to dismiss.  See, e.g., Monton v. America's Servicing Co., No. 2:11cv678, 2012 U.S. Dist. LEXIS 117259, at *13 (E.D. Va. Aug. 20, 2012); Correll v. Bank of America, N.A., No. 2:11cv477, 2012 U.S. Dist. LEXIS 12960, at *16-17 (E.D. Va. Feb. 2, 2012); Mayes v. Rapoport, 198 F.3d 457, 461 (4th Cir. 1999).


Next, the court addressed Borrower's assertion that Servicer was obligated to follow the mortgage servicing standards set forth in the Consent Judgment.  In so doing, the court explained that the Consent Judgment was essentially a contract between the parties and that, as a non-party to the contract, Borrower would become legally entitled to a benefit promised under the Consent Judgment only if the contracting parties so intended.  See Astra USA, Inc. v. Santa Clara County, 131 S. Ct. 1342, 1347 (2011); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750 (1975); Bell v. Countrywide Bank, No.  2:11cv271, 2012 U.S. Dist. LEXIS 104728, at 7-8 (D. Utah July 26, 2012). 


Specifically, pointing out that the government acts in the interest of the general public rather than to benefit individual members of the public, the court explained that third parties to consent decrees are presumed to be mere incidental beneficiaries and must therefore "demonstrate that the contracting parties 'intended the third party to be able to sue to protect [the] benefit' the consent judgment conferred on the third party; it is not sufficient to show simply that the parties had some intent to benefit the third party."  Securities and Exchange Commission v. Prudential Securities, Inc., 136 F.3d 153, 158-59 (D.C. Cir. 1998).


Thus, in concluding that Borrower alleged no facts to show that individual borrowers were the intended beneficiaries under the Consent Judgment, and further noting that the Consent Judgment itself indicated that the parties thereto did not intend individual borrowers to be able to sue to protect the benefits it conferred, the court pointed out that the language in the Consent Judgment specified that "[a]ny enforcement action under this Consent Judgment may be brought by any Party to this Consent Judgment . . . ."  Ruling that Borrower was therefore not eligible to bring an enforcement action under the Consent Judgment, the court accordingly dismissed Borrower's claim as to Servicer's alleged "dual tracking."


Turning to Borrower's state-law breach of contract claims, the court rejected Borrower's assertions that Servicer breached the covenant of good faith and fair dealing under the loan agreement by failing to "properly review" her loan modification application and "properly service" her loan.  In so doing, the court noted that, although contracts governed by Virginia law contain an implied covenant of good faith and fair dealing, "when parties to a contract create valid and binding rights, an implied covenant of good faith and fair dealing is inapplicable to those rights" and will thus not prevent a party from exercising its explicit contractual rights.  See Ward's Equipment, Inc. v. New Holland North America, Inc., 493 S.E.2d 516 (Va. 1997); Virginia Vermiculite, Ltd. v. W.R. Grace & Co., 156 F.3d 535, 541-42 (4th Cir. 1998). 


Moreover, the court pointed out that the servicing standards set forth under the Consent Judgment did not apply at the time Borrower obtained her mortgage loan and thus did not govern the manner in which Servicer handled her loan modification application or the foreclosure proceedings.  Explaining that the deed of trust provided that all rights and obligations were subject to "applicable law," the court concluded that this provision referred only to then-existing law that applied directly to the contract.  See Condel v. Bank of America, N.A., 2012 U.S. Dist. LEXIS 93206, at *23-24 (E.D. Va. July 5, 2012).  Accordingly, the court concluded that Borrower could not assert a claim for breach of contract based on Servicer's alleged breach of the Consent Judgment.


Finally, the court also rejected Borrower's claim for breach of duty to mitigate damages, reasoning that failure to mitigate damages is an affirmative defense, not an independent cause of action and that Servicer had an express contractual right to foreclose.  The court also rejected Borrower's request for a preliminary injunction enjoining the foreclosure, because she failed to demonstrate that she was likely to succeed on the merits.


Accordingly, the court denied Borrower's motion to remand, granted the motions to dismiss, and dismissed Borrower's complaint in its entirety. 




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
Mobile: (312) 493-0874


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