FYI: Md App Court Rejects Borrower's Foreclosure Challenge Asserting Last-Minute Short-Sale Offers

The Court of Special Appeals of Maryland recently affirmed the denial of a borrower’s exceptions to a foreclosure sale under a deed of trust, where the borrower claimed that the trustees breached their fiduciary duty to obtain the best possible price by refusing to entertain last minute or post-sale “short sale offers” presented by the borrower’s counsel.

 

A copy of the opinion is attached.

 

Following a default on a mortgage loan and the initiation of a foreclosure action, Appellant (Borrower) requested mediation, which resulted in the lender affording Borrower sixty (60) days to pursue a short sale and other loss mitigation options.  After this period expired without any accord, Appellees, substitute trustees under the deed of trust (Trustees), proceeded to advertise the property for sale by public auction.

 

Days before the scheduled sale, Borrower filed an emergency motion to stay the sale, claiming that he had two short-sale offers to purchase the property for $601,000 and $550,000, respectively.  Both offers required the property to be sold free and clear of liens, and failed to mention or account for a junior deed of trust or IRS tax lien.  Also, neither offer had been approved by the lender.  Nevertheless, Borrower claimed that these short sale options would “secure the best obtainable price under the circumstances and further the strong preference in Maryland to avoid foreclosure.”

 

The trial court denied the motion as untimely, and the property was sold at auction to the lender for $617,605.

 

Borrower filed exceptions to the sale, asserting for the first time that he had procured a third proposed contract for a short sale, with an offer in the amount of $650,000, which he claimed was more favorable than the foreclosure sale price.  Borrower had obtained the third offer days before the sale, but did not present it to the trustees until after the sale.  The offeror was the same individual who had presented the prior $601,000 offer, and as with the prior offers, this third offer required the property to be free and clear of liens, and gave the offeror the right to withdraw the contract if this condition was unmet.  Notably, the third offer also did not provide for the IRS tax lien ($16,999), the presence of a junior deed of trust ($62,007), and commissions for the real estate brokers.

 

Although conceding that that the foreclosure sale price was not inadequate, Borrower claimed that Trustees had a duty to obtain the best possible price, even if that means withdrawing the property from the foreclosure sale.

 

The trial court rejected Borrower’s challenge and ratified the foreclosure sale, concluding that Trustees did not act improperly in declining to halt the sale process upon learning of the new offers.  Borrower appealed, and the Court of Special Appeals affirmed.

 

As an initial matter, the Maryland Appellate Court determined that Borrower’s allegations that Trustees ignored a putative better offer constituted the type of irregularity that could be raised as exceptions to a foreclosure sale under Maryland Rule 14-305(d).  Op. at 11.  However, the Court determined that the foreclosure sale and the conduct of Trustees were proper, Op. at 16, and that the Trustees were not obligated to halt or reschedule the sale, even if they had learned of a short sale offer just prior to the sale.  Op. at 14.  Nor were Trustees required to personally “invite” the putative short-sale offeror to the foreclosure sale.  Op. at 4, n. 7.

 

As you may recall, in conducting foreclosure sale pursuant to the power of sale under a Maryland deed of trust, the trustee is “bound, for the protection of the interests of all parties concerned, to bring the property into the market as to obtain a fair market price,” and should exercise the “same degree of judgment and prudence that careful owner would exercise in the sale of his own property.’”  Carroll v. Hutton, 88 Md. 676, 679 (1898).  However, “trustees have discretion to outline the manner and terms of the sale, provided that their actions are consistent with the deed of trust and the goal of securing the best obtainable price[.]”  White v. Simard, 383 Md. 257, 312 (2004).

 

Thus, the trustee “is not bound to accept every bid.  He is necessarily clothed with a prudent and sound discretion, and the court will always sustain him in refusing bids which would manifestly defeat and frustrate the very object and purpose of a sale.”  Gray v. Viers, 33 Md. 18, 22 (1870); see D’Aoust v. Diamond, 424 Md. 549, 583 (2012).  Further, “[a] trustee is also entitled to exercise personal judgment when determining the price to accept for the sale of the property.”  Id.

 

In this case, the Court observed that “[t]here were no assurances that the [short sale] bid would hold up.”  Op. at 15.  Moreover, the Court noted three significant facts:  “(1) the fact that the bidder did not appear at the sale; (2) [Borrower]’s counsel did not attempt to alert the trustees, pre-sale, to the existence of the bid, or if so, alleviate any concerns the trustees might have as to the bona fides of the offer; and (3) the offer did not account for the tax lien or junior mortgage on the property.”  Id.  Thus, the Court determined that, “[i]n the final analysis, we are not inclined to question the actions of a trustee who acts in good faith in rejecting an offer, or who was unaware of the existence of an offer at the time of the foreclosure sale.  A trustee is not obligated to reopen the sale to entertain an offer, whether sound or speculative, that arrives after the sale has been completed.”  Id.

 

Finally, the Court held that “[t]he foreclosure sale before us, and the conduct of the trustees, pass muster.  There is nothing in this record to support a conclusion that the trustees failed to exercise an appropriate degree of prudence, case, diligence, and judgment.”  Op. at 16.  “Given the presumption in favor of the regularity of the sale, the lack of any challenge to the notice and description of the property, the lack of any demonstration that the amount offered was firm and the bidder capable of appearing at the sale to close a deal, and finally, the fact that the trustees had not learned of the high bid until after the hammer had fallen on the only bid advanced at the sale, we are not persuaded that the trial court erred in rejecting Borrower’s challenge.”  Id.

 

Accordingly, the Maryland appellate court affirmed the denial of Borrower’s challenge to the foreclosure sale.

 

 

 

 

 

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
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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FYI: DC Cir Upholds Denial of Servicer's Motion to Enforce Consent Judgment in Nationwide Mortgage Settlement

The U.S. Court of Appeals for the D.C. Circuit recently held that a prior settlement and release between the United States and several loan servicers did not bar the United States from asserting the same claims where there were material violations of HUD or FHA requirements.  In doing so, the Court narrowly construed the release to include only those claims based on filing a false annual certification.

 

A copy of the opinion is available at:  Link to Opinion

 

Asserting allegations under the False Claims Act, 31 U.S.C. § 3729, and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), 12 U.S.C. § 1833a, the United States, forty-nine states, and the District of Columbia sued several loan servicers, including Appellant, in the U.S. District Court for the District of Columbia.  The allegations arose from the loan servicers’ supposed misconduct in issuing home mortgage loans insured by the Federal Housing Administration (FHA).  Subsequently, the parties settled the lawsuit.

 

Pursuant to the settlement, Appellant paid roughly $5 billion dollars for the release of claims – including those under FIRREA, the False Claims Act, and the Program Fraud Civil Remedies Act, 31 U.S.C. § 3801 – “where the sole basis for such claim or claims is that [Appellant] submitted to HUD-FHA… a false or fraudulent annual certification” that it had complied with all regulations necessary to maintain FHA approval.  Slip op. at p. 2.  Reiterating the meaning of this “sole basis” language, the release provided:

 

“For avoidance of doubt, this Paragraph means that the United States is barred from asserting that a false annual certification renders [Appellant] liable… for loans endorsed by [Appellant] for FHA insurance during the period of time applicable to the annual certification without regard to whether any such loans contain material violations of HUD-FHA requirements, or that a false individual loan certification… renders [Appellant] liable under the False Claims Act for any individual loan that does not contain a material violation of HUD-FHA requirements.”

 

Slip op. at p. 3.  In the consent judgment, the D.C. federal court retained exclusive jurisdiction to enforce its terms to resolve “any dispute arising out of matters” within the scope of the release.

 

Thereafter, the United States filed suit against Appellant in the U.S. District Court for the Southern District of New York, again alleging claims under the False Claims Act and FIRREA (NY Lawsuit).  These claims also arose from alleged misconduct in issuing FHA-insured loans.  In response, Appellant moved the D.C. federal court for an injunction, enforcing the consent judgment and barring all claims in the NY Lawsuit.  The district court denied the motion.

 

On appeal, the U.S. Court of Appeals for the D.C. Circuit affirmed.  Analyzing the language of the release between the United States and Appellant, the Court held that the settlement “expressly confines the release of claims to those for which liability is predicated on the specific conduct of filing a false annual certification.”  Slip op. at p. 4.  Moreover, the Court noted that the United States expressly preserved its right to pursue claims “for conduct with respect to the insurance of residential mortgage loans that violates any laws, regulations or other HUD-FHA requirements applicable to the insurance of residential mortgage loans by HUD.”  Id. at p. 5.

 

Notably, the Court rejected Appellant’s argument that it was released from liability for company-wide conduct that was the subject of its annual certifications.  See id. at p. 4.  Rather, according to the Court, the settlement released “only the far narrower category of [Appellant’s] liability for all of the individual loans made pursuant to the false annual certification that did not themselves transgress any regulatory directives.”  Id. at p. 6.  Thus, if the same conduct that gave rise to a false certification also resulted in HUD or FHA violations, then the claim was not released.

 

Although Appellant pointed to a parenthetical in the release for support, the Court held that such language, in context, cannot sweep any further than the “sole basis” language that it describes.  See Chickasaw Nation v. United States, 534 U.S. 84, 89 (2001).

 

Turning to the NY Lawsuit, the Court determined that, although the complaint came close to asserting released claims, counsel for the United States repeatedly conceded that, to comport with the terms of the release, there had to be material violations of HUD or FHA regulations with respect to individual loans.

 

Accordingly, the D.C. Circuit affirmed the district court’s denial of the Appellant’s motion to enforce the consent judgment.

 

 

 

 

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
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: Minn Supreme Court Rules Minn State Law Allows Private Right of Action for HAMP SPA and Guideline Violations

The Minnesota Supreme Court recently held that a borrower has standing to sue for damages under Minnesota law against a loan servicer for violation of a HAMP servicer participation agreement and related HAMP guidelines, even though the borrower is not a party to the HAMP servicer participation agreement.

 

Specifically, the Court held that Minnesota Statutes s. 58.18 provides a borrower a private right of action to claim damages when a servicer fails to follow HAMP guidelines despite the borrower not being a party to the HAMP agreement.  

 

A copy of the opinion is available at:  Link to Opinion

 

As you may recall, Congress authorized the Troubled Asset Relief Program (“TARP”) and the Making Home Affordable Program, which included the Home Affordable Modification Program (“HAMP”).  Under HAMP, a non-government entity had the ability enter into a servicer participation agreement (“SPA”) and would receive financial incentives for modifying mortgages. Under the SPA, the servicer is required to follow the HAMP program directives and guidelines.

 

In 2006, Plaintiff borrower (“Borrower”) entered into a mortgage with a lender to purchase a home.  The loan and servicing rights were subsequently transferred to Defendant Loan Servicer (“Servicer”).

 

In April 2010, Borrower’s prior loan servicer gave her forbearance and payment restructuring under the “Homeowner Unemployment Assistance Forbearance Agreement” which lowered her monthly payments to $300.00 a month. As soon as Borrower’s loan servicing rights were transferred to Servicer, it notified Borrower it would no longer accept the modified monthly payments. Servicer then initiated foreclosure proceedings against Plaintiff.  

 

Borrower filed a class action against Servicer alleging violations of Minnesota’s consumer protection statutes, negligence, and breach of contract. Specifically, Borrower alleged that Servicer violated the SPA it entered into with the Federal National Mortgage Association by failing to follow the applicable guidelines established by HAMP.  Servicer filed a motion to dismiss arguing Borrower did not have standing to maintain her complaint.

 

The trial court granted Servicer’s motion in part “because HAMP does not create a private right of action and because the SPA’s do not give rise to a third party beneficiary claim.” The trial court further concluded that Borrower had no standing to bring suit because there was no breach of contract between Borrower and Servicer, and Borrower was not a party to the SPA allegedly breached. Borrower appealed and the trial court’s ruling was affirmed by the interim appellate court. 

 

Borrower again appealed and the Supreme Court granted review. Borrower argued she had standing under Minnesota Statutes section 58.18 subd. 1 to pursue her claim, while Servicer argued Borrower did have not standing to bring her lawsuit.  Servicer further argued federal law preempted Borrower’s state law claims and that section 58.18 was unconstitutional because it violated the U.S. and Minnesota’s constitution’s contracts clauses.

 

The Court first examined whether Borrower had standing to sue Servicer for breach of the SPA.  Minnesota Statute section 58.18 subd. 1 provides that “a borrower injured by a violation of the standards, duties, prohibitions, or requirements of section 58.13… shall have a private right of action.” Section 58.13 subd. 1(a)(5) states a loan servicer shall not “fail to perform in conformance with its written agreements with borrowers, investors, other licensees, or exempt persons.”

 

Borrower alleged that Servicer breached a written agreement by failing to follow HAMP guidelines, in violation of section 58.13 subd. 1(a)(5), which resulted in a premature home foreclosure. The Court determined Borrower’s allegations fell “within the plain language of section 58.18(1),” and thus Borrower had standing to pursue her claim.

 

Servicer argued section 58.18 should be construed with existing common law absent “a clear and manifest intent by the legislature to abrogate common law.”  Servicer asserted that Borrower could not allege a breach of the SPA because she would not have standing to do so under common law.  The Court held that section 58.13 abrogated common law because it expressly gave a third party the right to bring a breach of contract claim.

 

Servicer next argued that allowing Borrower to bring a cause of action under section 58.18 would open the door to “unlimited and disruptive litigation by parties with no relationship to the myriad agreements that servicers have with other entities.”  However, the Court stated the plain language of the statute permits Borrower’s claims and allowing such claims does “not confound the Legislature’s purpose or lead to an absurd result.”

 

Servicer next argued that the enactment of Minnesota Statutes section 582.043 suggested that section 58.18 did not create a private right of action for HAMP violations. Section 582.043 provides a borrower the ability to enjoin or set aside a foreclosure sale based on a violation of mitigation requirements. The Court rejected Servicer’s for two reasons. First, section 582.043 only allows for an injunction or the setting aside of a foreclosure sale and not any damages or other remedies meaning the two statute’s remedies are not duplicative. Second, the fact the Legislature created a new cause of action does not mean all other statutory causes of action are extinguished. The fact the legislature enacted section 582.043 therefore does not affect Borrower’s section 58.18 claim.

 

Servicer also argued implied conflict preemption prevented Borrower’s action. Implied conflict preemption occurs when “it is impossible for a private party to comply with both the state and federal requirements, or because the state law stands as an obstacle to the accomplishment and execution of the purpose and objective of Congress.”

 

Servicer argued section 58.18 created an obstacle to HAMP’s objective of increasing servicer participation and lowering foreclosure rates “because allowing a private right of action to borrowers such as Borrower would ‘have a chilling effect on servicer participation due to fear of exposure to private lawsuits.’”

 

The Court held that because state law did not impose additional duties on servicers or obligations, state law cannot be said to frustrate congressional purposes in such a way as to provide a basis to conclude that Congress preempted state law. Thus, the Court overruled Servicer’s preemption argument.

 

Servicer also argued that because HAMP does not provide a private remedy, there cannot be any state remedy, “because it would be an ‘end-run’ around Congress’ decision not to provide a federal cause of action.” The Court quickly rejected Servicer’s argument stating that the “absence of a federal remedy does not support the conclusion that HAMP preempts the private right of action provided for in section 58.18.

 

Lastly, Servicer argued that section 58.18 violates the “Contracts Clause” because it impairs Servicer’s SPA obligations.  However, “[w]hen the statute was in force and effect at the time the contract was made, there is no impairment, because existing statutes are read into future contracts and enter into the contract terms by implication” W. States Utils. Co. v. City of Waseca, 242 Minn. 302, 312, 65 N.W.2d 255, 263 (1954). Section 58.18 went into effect in 2007 and Servicer entered into the SPA in 2009 meaning section 58.18 was read into the SPA. Therefore, the Court determined that section 58.18 did not violate the Contracts Clause of the United States and Minnesota Constitutions.

 

Accordingly, the Minnesota Supreme Court reversed and remanded.

 

 

 

 

 

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
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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.

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