The Supreme Court of Virginia recently reversed the dismissal of a borrower’s claims for damages under her FHA deed of trust for a failure to hold a face-to-face meeting prior to foreclosure. Because the deed of trust incorporated federal HUD regulations, including 24 C.F.R. § 203.604(b), the Court held that the lender was required to make reasonable efforts to arrange a face-to-face meeting with the borrower as a condition precedent to foreclosure.
As the complaint alleged that lender failed to do so, the Court determined that the borrower sufficiently stated a breach of contract claim against the lender, as well as a breach of fiduciary duty claim against the substitute trustee who conducted the foreclosure sale.
A copy of the opinion is available at: http://www.courts.state.va.us/opinions/opnscvwp/1130494.pdf
After a borrower (“Borrower”) defaulted on her mortgage loan, and after a six-month forbearance period, the loan owner (“Lender”) informed her that it would be foreclosing on her home (“Property”). Following an intervening bankruptcy petition, which was soon dismissed, Borrower made several monthly payments but failed to bring the loan current. Ultimately, in May 2011, Lender again informed her that her loan was “in foreclosure.”
Six months later, the Substitute Trustee sold the Property at foreclosure sale to an independent third-party (Purchaser). Days prior to the sale, Borrower had informed an agent of the Purchaser that the Property was “in litigation.” Although the city had assessed the Property at $223,000 for tax purposes, the property sold for $115,200.
Following the sale, Borrower sued her Lender, Substitute Trustee, and Purchaser, claiming that the deed of trust incorporated certain HUD regulations, including 24 C.F.R. § 203.604(b), relating to acceleration and foreclosure. Borrower claimed that, under those regulations, the foreclosure could not proceed until (a) she was three months in arrears, and (b) the Lender had made reasonable efforts to arrange a face-to-face meeting with her.
Borrower sought monetary damages for breach of contract and breach of fiduciary duty against the Lender and Substitute Trustee respectively. Borrower also sought to rescind the foreclosure due to the alleged insufficiency of price compared to the Property’s assessed value, and sought to quiet title in her favor. In response, Defendants filed demurrers challenging the sufficiency of the complaint, which the trial court sustained. The action was dismissed and the present appeal followed.
As you may recall, the Department of Housing and Urban Development (HUD) requires that, for FHA mortgage loans, absent certain exceptions not relevant here, “[t]he mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid.” 24 C.F.R. § 203.604(b). Further, HUD requires that the mortgagee ensure that all servicing requirements – including the face-to-face interview – have been met “[b]efore initiating foreclosure.” 24 C.F.R. § 203.606(a).
Just as in Mathews v. PHH Mortgage Corp., 283 Va. 723, 724 S.E.2d 196 (2012), Borrower’s deed of trust “incorporated certain [HUD] regulations… and mandated that foreclosure was not permitted where it violated such HUD regulations.” Slip op. at 9. In Mathews, the Court determined that a trustee’s power to foreclose “does not accrue until its conditions precedent have been fulfilled. The fact that a borrower is in arrears does not allow the trustee to circumvent the conditions precedent.” Mathews, 283 Va. at 731, 724 S.E.2d at 199.
In the present case, the Court first noted that the pleadings established that Borrower was more than three months in arrears on her mortgage. Also, as to Borrower’s claim that Lender breached their forbearance agreement, the Court upheld the trial court’s finding that Borrower did not allege that she tendered a lump sum for all amounts owed. Thus, these allegations were not sufficient to establish a claim.
However, the Virginia Supreme Court reversed the dismissal of the breach of contract claim, holding that the deed of trust “required [Lender] to have or make reasonable efforts to arrange a face-to-face meeting with [Borrower] as a condition precedent to foreclosure.” Borrower plead that Lender “did neither.”
The Court also reversed the dismissal of the breach of fiduciary duty claim, observing that the Borrower sufficiently plead that the Substitute Trustee breached its fiduciary duty by “holding a foreclosure sale before the requirement was fulfilled.”
The Court affirmed the dismissal of Borrower’s related rescission claims, as insufficiently plead. Observing that Borrower is attempting to set aside a completed foreclosure sale to an independent third party, the Court held that “[a]bsent evidence of fraud, a sale will not be set aside for an inadequate price.” Musgrove v. Glasgow, 212 Va. 852, 854, 188 S.E.2d 94, 96 (1972). Further, the Court rejected Borrower’s argument that the Purchaser was not a bona fide purchaser because it was on notice that she disputed the sale. Borrower’s pre-sale conversation with the Purchaser was “simply not enough to negate [his] status as a bona fide good faith purchaser.”
Additionally, the Court upheld the dismissal of Borrower’s quiet title claim. “[T]o survive demurrer in the foreclosure context, the former homeowner must plead that she fully satisfied all legal obligations to the real party in interest.” See Tapia v. U.S. Bank, N.A., 718 F.Supp.2d 689, 700 (E.D. Va. 2010), aff’d 441 Fed. Appx. 166 (4th Cir. 2011). Here, Borrower’s allegations reveal that she has not satisfied all legal obligations to Lender.
Accordingly, the Court affirmed in part, and reversed in part, the trial court’s sustaining of Defendants’ demurrers, and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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