2016 Foreclosure Year in Review
Post-recession litigation travails for lenders seem to be subsiding, as courts seem to be experiencing “wrongful foreclosure” fatigue, and the borrowers present less sympathetic profiles. Unlike 2008’s Klem, where the borrower suffered from dementia and was the subject of a guardianship and lost substantial equity due to an avoidable foreclosure, 2016 saw appellate cases involving borrowers who engaged in serial strategic defaults not compelled by financial distress (Patrick v. Wells Fargo) and another borrower who had already lost most of her claims in federal court, and made multiple trips to appellate courts, and was found to have testified inconsistently on key issues. (Bavand v. OneWest Bank).
The five-year litigation journey taken by Marisa Bavand tracks the tortuous path of borrowers and lenders in the wake of the Great Recession. With a decision by the Court of Appeals on November 28, 2016, the Bavand saga seems to be coming to an end. The iterative process of honing the analysis of the Deed of Trust Act has now closed more doors to claims that go beyond disputing a default and whether a foreclosure may proceed. Much of the law that has evolved in the past few years, which gave borrower’s attorneys encouragement, came about from a casual approach to file management by volume-driven loan servicing agencies and affiliates. In this history, MERS was no friend to the lender.
Marisa Bavand was an IndyMac borrower on a residential loan secured by a deed of trust. After IndyMac failed, its assets were sold to OneWest Bank, including the Bavand loan. OneWest became the holder of the Bavand Note, which had been endorsed in blank by IndyMac. Bavand defaulted on the loan in September 2010. Thereafter, MERS executed and recorded an Assignment of Deed of Trust, which purported to assign to OneWest "all beneficial interest" under Bavand's deed of trust. In 2011, OneWest appointed a successor trustee to commence a nonjudicial foreclosure sale, which was eventually discontinued. No trustee’s sale occurred. At the end of 2011, Bavand sued, claiming a wrongful foreclosure, violation of the Deed of Trust Act, violation of the Fair Debt Collection Practices Act and a Consumer Protection Act claim.
OneWest moved Bavand’s lawsuit to the federal courts, and in 2014 prevailed there on most of Bavand’s claims. On appeal, Bavand abandoned the Fair Debt Collection claim, and the appellate court made short work of the Deed of Trust Act claims. The following principles, having been much litigated in the past few years, are now clear:
- The holder of the Note may enforce the obligations under the Deed of Trust. It is the status as holder rather than owner that is dispositive of the right to enforce the collateral instruments which secure repayment of the Note.
- The MERS purported assignment was irrelevant to OneWest’s authority to foreclose, in light of OneWest’s status as a holder of the Note.
- The successor trustee did not need to obtain proof that OneWest held the Note, as long as the trustee had “[a] declaration by the beneficiary . . . that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust” as provided for by the post-recession amendments to the Deed of Trust Act.
- Where no foreclosure sale occurs, there are no recoverable damages under the Deed of Trust Act arising from a claim of wrongful foreclosure.
Having disposed of all of the federally related claims, the case was sent back to state court for litigation of Bavand’s remaining claims, many of which were procedural in nature. The most nettlesome of claims in foreclosure litigation has been the Consumer Protection Act claim. To succeed on a CPA claim, a claimant must establish "(1) an unfair or deceptive act (2) in trade or commerce (3) that affects the public interest, (4) injury to the plaintiff in his or her business or property, and (5) a causal link between the unfair or deceptive act complained of and the injury suffered." A claimant must establish all five elements to prevail.
CPA claims have been problematic to dispose of through summary proceedings because of the breadth of conduct which can be characterized as an unfair or deceptive act. This has been particularly true with regard to MERS and high-volume foreclosure firms, where the execution of documents was flawed or mismanaged. Here, MERS’ execution of the Assignment of the Deed of Trust became the focus, as MERS was never the holder of the Note and therefore not entitled to exercise rights arising under the Deed of Trust. Recording that Assignment was “presumptively deceptive.”
Having found deceptive conduct, the Court then shifted its focus to the fifth element of the CPA claim—the need to show that the deceptive act caused injury. As the holder of the Note, the Court held that OneWest could enforce the Deed of Trust. Therefore, MERS’ deceptive act led to no harm to Bavand.
Trujillo v. Northwest Trustee Services, Inc., 183 Wn.2d 820 (2015) widened the range of damages recoverable in a CPA claim arising from a foreclosure action, to include “investigation expenses and other costs associated with dispelling the uncertainty about who owns the note . . .” To address the claim for investigative costs by Bavand, the Court returned to the distinction between ownership of the Note (which may be owned by a pool of investors, for example) and the holder of the Note (more likely to be the institutional lender servicing the loan). All enforcement rights flow from the status as holder; ownership is irrelevant. Based on that distinction, the Court held that the cost of investigation about ownership is not a source of compensable damages. Further, because recovery of damages on a CPA claim is limited to injuries to one in their business or property, emotional distress claims are also not recoverable under the CPA. With those rulings, there was nothing left of Bavand’s claims.
Other highlights from the year in foreclosure:
Jordan v. Nationstar Mortgage, LLC held that lenders could not engage in self-help to secure property pending a foreclosure. In short, if a lender is concerned that the property is subject to damage or waste, and wants to secure it prior to foreclosure, the best path is to seek appointment of a custodial receiver to maintain the property pending the foreclosure sale. This is not nearly as expensive a process as the typical case where a receiver is hired to manage the liquidation of assets and sale of the property. To read more about Jordan, click here.
Edmundson v. Bank of America and 4518 S. 256th LLC v. Gibbon addressed the need to be unambiguous when the objective is to accelerate the unpaid balance of a Note, in the wake of a default. For installment payment contracts (like the typical promissory note), once acceleration occurs, the statute of limitation begins to run. Absent acceleration, the statute runs anew from each missed payment. Thus, once the decision has been made to enforce the Note, it is important to make the acceleration of payments clear, and then follow through to a conclusion. A more detailed discussion can be found here.
Umpqua Bank v. Shasta Apartments, LLC held that a court approved property sale by a receiver presented no impediment to a deficiency judgment against the borrower or guarantor. Bero v. Name Intelligence, Inc. held that a receivership can be terminated even if not all claims have been resolved. It is not mandatory to continue the process to the bitter, and unproductive end, particularly if the principal antagonists have another path to resolve their disputes. Bero is discussed in more detail here.
What does the future hold? Perhaps more now than any time since 2009, it may fairly be said that we live in uncertain times. By synthesizing the lessons of litigation over the past few years, choosing the best remedy—and how to properly implement that choice—is at least a little clearer.
Tom Lerner represents lenders in loan documentation and enforcement, including realization on collateral and litigation in state and bankruptcy courts, as part of the Stokes Lawrence Financial Services Group. Tom can be reached at 206.892.2147 or Tom.Lerner@stokeslaw.com.