Comes a Storm: Walker v. Quality Loan Service Corp. of Washington
On August 5, 2013, a Washington appellate court held for the first time that a property owner could recover on a claim of "wrongful foreclosure" even though no sale occurred, and where the property owner's damages were limited to "inconvenience" and nominal costs to defend against or to investigate the basis of a threatened foreclosure. Because a claim of wrongful foreclosure may also give rise to a cause of action under the Consumer Protection Act and federal Fair Debt Collection Act, each of which provides for a recovery of attorney fees for an injured (and successful) plaintiff, it is certain that this decision will lead to a wave of new litigation against lenders. New lawsuits have already been filed.
The source of the problem in this case was Mortgage Electronic Registration Systems, Inc. (MERS), which was attempting to circumvent its prior appellate loss in Bain v. Metro. Mortgage Grp., Inc., 175 Wn.2d 83 (2012) where the Washington Supreme Court held that MERS could not appoint a successor trustee to foreclose if it did not hold the promissory note secured by the deed of trust to be foreclosed. While Bain was largely confined to MERS, the holding in the new decision is broader. MERS' sharp practices have caused the contagion to spread.
The new case, Walker v. Quality Loan Service Corp. of Washington et al., No. 65975-8-1 (Aug. 5, 2013), arose from nonjudicial foreclosure of residential property. Walker had signed a promissory note and a deed of trust naming Credit Suisse Financial Corporation (Credit Suisse) as lender, and MERS as "a separate corporation that is acting solely as nominee for Lender and Lender's successors and assigns. MERS is the beneficiary under this Security instrument."
Beneficiary Is the Holder of the Note
This labored construction is the first hint of trouble. Under Washington law, the beneficiary is the holder of the note secured by the deed of trust. Unless MERS purchased the note from the lender, it was not the beneficiary. Instead, the lender remained as the beneficiary and MERS' effort to turn a new fiction into reality was not effective. MERS was nothing more than a servicing agent, if that.
More mischief followed. Select Portfolio Servicing, Inc. (Select) (thus far a stranger to the transaction), purporting to act as beneficiary, appointed Quality Loan Service Corporation of Washington (Quality) as successor trustee under the deed of trust. One month later, MERS, as nominee for Credit Suisse, belatedly assigned its interest in the deed of trust and the promissory note to Select. Quality then recorded a notice of trustee's sale for Walker's property.
Walker filed a lawsuit to enjoin the trustee's sale and to recover damages. Even though no foreclosure sale took place, Walker characterized his claim as one for "wrongful foreclosure." Walker argued that under the Bain decision, MERS could not be the deed of trust beneficiary and lacked the authority to assign the deed of trust and the note to Select. Because the assignment to Select was ineffective, Select's designation of Quality as successor trustee was similarly ineffective. Therefore, Quality lacked authority to initiate a nonjudicial foreclosure proceeding.
The court found that Walker's "wrongful foreclosure claim" was more accurately characterized as one for "damages arising from [Deed of Trust Act] violations." Citing Bain, the court reasoned that only a beneficiary has the power to appoint a successor trustee, and only a lawfully appointed successor trustee has the authority to issue a notice of trustee's sale. The court agreed with Walker that because MERS never held the note, it never had the authority to act as beneficiary under the Deed of Trust Act and lacked the authority to assign the Note and Deed of Trust to Select. Because Select was not a lawful beneficiary at the time it appointed Quality, it followed that Quality had no authority to commence the foreclosure. The court added that the current version of the Deed of Trust Act, RCW 61.24.030, requires the trustee to have proof that the beneficiary is the owner of the obligation secured by the deed of trust before issuing a notice of trustee's sale, which was a step that Quality failed to perform.
Deed of Trust Act ‘Construed in Favor of Borrowers’
The court rejected Select and Quality's argument that Washington does not recognize a claim for wrongful initiation of a foreclosure sale when no sale in fact occurs. Citing Klem v. Washington Mut. Bank, 176 Wn.2d 771, 295 P.3d 1179 (2013), the court stated that the specific remedies provided in the Deed of Trust Act are not exclusive, and that the Deed of Trust Act "must be construed in favor of borrowers because of the relative ease with which lenders can forfeit borrowers' interests and the lack of judicial oversight in conducting nonjudicial foreclosure sales." The court stated that the legislature amended the Deed of Trust Act in 2009, "explicitly recogniz[ing] a cause of action for damages for failure to comply with the [Act]."
In addition to its analysis of Walker's Deed of Trust Act claims, the court concluded that Walker may be able to show that Quality and Select violated the Fair Debt Collection Practices Act, 15 U.S.C. § 1692f(6), and the Consumer Protection Act (CPA), RCW 19.86.020, by threatening nonjudicial foreclosure when they had no authority to do so. In discussing proof of harm sufficient to establish a CPA violation, the court cited Panag v. Farmers Ins. Co. of Washington, 166 Wn.2d 27, 204 P.3d 885 (2009), where the Washington Supreme Court held that the injury requirement of the CPA "is met upon proof the plaintiff's property interest or money is diminished because of the unlawful conduct even if the expenses caused by the statutory violation are minimal." On this basis, the court concluded that "[i]nvestigative expenses, taking time off from work, travel expenses, and attorney fees are sufficient to establish injury under the CPA."
At the heart of the case is the claim that the lender—or its successors—failed to materially comply with the provisions of the Deed of Trust Act. While the fulcrum on which Walker's case turned was MERS' impropriety in trying to characterize itself as a beneficiary under the deed of trust when that was not the case, plaintiffs' counsel can be expected to assert that any flaw in the nonjudicial foreclosure process is a "failure to materially comply with the provisions of the Deed of Trust Act." For lenders and their counsel, it elevates the degree of care to be taken before commencing foreclosures.