Sunday, July 7, 2013

FYI: 4th Cir Holds Alleged Oral Promises of Loan Modification Insufficient to Set Aside Foreclosure Sale

The U.S. Court of Appeals for the Fourth Circuit recently held, in an unpublished opinion, that a lender's oral promises that it would provide a loan modification failed to satisfy the statute of frauds, and therefore could not support a borrowers' equitable claim to set aside a foreclosure sale, given the undisputed default.  A copy of the opinion is attached.


According to their Complaint, Plaintiff-borrowers ("Borrowers") obtained a loan which was secured by a deed of trust on their home.  Shortly thereafter, the lender sold the loan but retained the obligation to function as the loan's servicer.  After Borrowers experienced difficulty in making loan payments, they began the application process for loan modification under the Home Affordable Modification Program (HAMP).  However, the process was delayed, with Borrowers and servicer finding fault in each other.


Prior to a final decision on Borrowers' loan modification application, they received a notice of foreclosure, stating that, because they had defaulted on the loan, their property would be sold at auction.  Upon receipt of such notice, Borrowers contacted the servicer.  According to Borrowers, a servicer representative informed them orally that "their loan modification was in process, and that no foreclosure would occur."  Nevertheless, the foreclosure sale proceeded consistent with the notice.  About one week after the foreclosure sale, Borrowers received written notice from the servicer that their loan modification application had been denied.


Borrowers filed suit against the servicer, the loan owner, and the substitute trustee (collectively, "Defendants") asserting six claims, including a quiet title claim and a claim for equitable relief to set aside the foreclosure sale.  Defendants removed the case to federal court on the basis of federal question jurisdiction under 28 U.S.C. §1331, asserting that Borrowers' claims were preempted by the Home Owners Loan Act, 12 U.S.C. §§1461-1470, as the servicer is a federal savings bank.  Subsequently, Borrowers filed a motion to remand.  In Defendants' opposition, they argued that, in addition to federal question jurisdiction, the court had diversity jurisdiction over the action.


The federal district court denied Borrowers' motion to remand without stating which basis it was exercising jurisdiction.  Following a hearing, it granted defendants' motion to dismiss, finding that Borrowers failed to state a claim under Fed. R. Civ. P. 12(b)(6).  Upon Borrowers' appeal, this matter came before a three-judge panel in the Fourth Circuit Court of Appeals.  In an unpublished opinion, the Fourth Circuit affirmed.


Before addressing the Borrowers' allegations, the Fourth Circuit considered the jurisdiction issue.  Although Defendants did not raise diversity jurisdiction in their notice of removal, and did not argue diversity jurisdiction until opposition to Borrowers' motion to remand, the Court held that jurisdiction was proper because the parties were completely diverse.  In support of its holding, the Fourth Circuit determined that the citizenship of the substitute trustee of a deed of trust should not be considered for jurisdictional purposes under the fraudulent joinder doctrine.  The fraudulent joinder doctrine provides that the citizenship of a non-diverse defendant may be disregarded where "there is no possibility that the plaintiff would be able to establish a cause of action" against the non-diverse party.  Hartley v. CSX Transp. Inc., 187 F.3d 422, 424 (4th Cir. 1999).


Here, according to the Fourth Circuit, Borrowers lacked any possibility of prevailing on their three claims against the substitute trustee.  As to the quiet title action, the Court noted that Borrowers had not and could not allege that the substitute trustee had any basis for asserting a competing ownership claim to the property.  Borrowers allegations related to their claim for equitable relief to set aside the foreclosure sale were similarly lacking as against the substitute trustee.  Finally, Borrowers claim under the Virginia Consumer Protection Act against the substitute trustee also failed because (i) the substitute trustee was validly appointed under Virginia law and (ii) Borrowers did not allege that the substitute trustee owed them any fiduciary duties under the terms of the deed of trust, see Warner v. Clementson, 254 Va. 356, 492 S.E.2d 655, 657 (1997) (holding that, under Virginia law, the duties of a trustee under a deed of trust are limited and defined by the instrument under which the trustee acts).


The Fourth Circuit next considered whether dismissal of the quiet title claim and the claim for equitable relief to set aside the foreclosure sale was appropriate.  With respect to the quiet title claim, the Court quickly disposed of Borrowers' arguments that MERS was improperly named as beneficiary and that the substitute trustee was invalidly appointed.  To the contrary, the Court found that naming MERS as beneficiary was valid and served merely to establish a consistent beneficiary that enhanced "the ease with which the deed of trust could be transferred."  Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 622 (4th Cir. 2011).  Also, the Court determined that the appointment of the substitute trustee conformed to Virginia law.  See Va. Code §55-59(9).


As for Borrowers' claim for equitable relief to set aside the foreclosure sale, Borrowers asserted that they relied on alleged oral promises by the servicer that it would modify the terms of the loan and that the foreclosure and sale of the property, of which Borrowers were notified in writing, would not take place. 


Although the Fourth Circuit noted that "any such promises certainly would have been improper," it held that "such alleged oral promises cannot serve as a basis to set aside a foreclosure sale of real property."  In support of its holding, the Court cited the statute of frauds, which provided that "oral promises and contracts affecting real property are not enforceable."  See Va. Code §11-2.


Accordingly, the Fourth Circuit Court of Appeal affirmed the lower court's denial of Borrowers motion to remand, and its grant of Defendants' motion to dismiss for failure to state a claim.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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