Va. Sup. Ct. Holds General District Court Must Dismiss Unlawful Detainer Case Where Borrower Raises Bona Fide Dispute of Title from Foreclosure Sale

In Parrish v. Federal National Mortgage Association, the Supreme Court of Virginia reversed the judgment of the Circuit Court (in an appeal from the General District Court), which granted possession in favor of Fannie Mae in an unlawful detainer case (i.e. an eviction case).  Specifically, the Supreme Court held that, where a borrower raises a bona fide question as to the validity of title in a case originally filed in the General District Court (or subsequently appealed to the Circuit Court from the General District Court), the case must be dismissed without prejudice because the General District Court lacks original subject matter jurisdiction to adjudicate the validity of title.

The Court explained that in order to raise a bona fide dispute to title, a borrower is required to raise sufficient facts that would otherwise survive a Demurrer (Motion to Dismiss).  The Court noted that the jurisdictional limitations at issue did not apply to unlawful detainer actions originally brought in the Circuit Court pursuant to Virginia Code § 8.01-124, nor does such holding impact prior cases where the homeowner failed to raise such issues.

A copy of the opinion can be found here.  

Background

Borrowers owned certain property secured by a deed of trust.  Following a foreclosure sale of the property, the trustee conveyed the property to Fannie Mae.  Fannie Mae sent the Borrowers a notice to vacate, and later filed a summons for unlawful detainer in the General District Court.

Borrowers filed a response to the Unlawful Detainer Action, which argued that the foreclosure was invalid because the deed of trust incorporated 12 C.F.R. § 1024.41(g), which prohibits foreclosure if a borrower submitted a completed loss mitigation application more than 37 days before the foreclosure sale.  Borrowers claimed to have submitted a complete application within such timeframe.  Because Fannie Mae (who, according to the Borrowers’ allegations, was also their lender) instigated the foreclosure despite their allegedly timely filed loss mitigation application, Borrowers alleged that Fannie Mae breached their deed of trust.

The General District Court awarded Fannie Mae possession, and the Borrowers filed a de novo appeal to the Circuit Court.  In the Circuit Court (which was sitting as an appellate court), Fannie Mae filed a motion for summary judgment, arguing that its trustee’s deed was prima facia evidence of its right of possession.   Fannie Mae also moved to exclude evidence of any defense contesting the validity of the trustee’s deed, arguing that  the General District Court (and the circuit court sitting as an appellate court) lacked subject matter jurisdiction to adjudicate title in an unlawful detainer proceeding.   The Circuit Court agreed, granted Fannie Mae’s motions, and awarded it possession.  Borrowers thereafter filed this appeal to the Supreme Court of Virginia.

Discussion

At the outset, the Supreme Court agreed that the General District Court (or in this case the Circuit Court which was hearing an appeal from the General District Court), lacked subject matter jurisdiction to adjudicate title.

In the context of an unlawful detainer case, “[t]he validity of the plaintiff’s right of possession is an issue that, when disputed, must be determined in the adjudication of the of the unlawful detainer action.”  Op. at 4.  Where a plaintiff (such as a foreclosure purchaser) claims a right of possession acquired after the defendant’s original, lawful entry, the plaintiff must show the validity of its right of possession.   See Op. at 4.  Consequently, “[w]hen the plaintiff’s after-acquired right of possession is based on a claim of title, the plaintiff may be required to establish the validity of that title.” Op. at 5.

According to the Court, “[i]n most foreclosure cases, a trustee’s deed will satisfy the foreclosure purchaser’s burden to establish that it acquired a right of possession after the homeowner’s original, lawful entry, and the homeowner will have no good-faith basis to contest it. However, in limited circumstances, the homeowner could allege facts sufficient to place the validity of the trustee’s deed in doubt. In such cases, the General District Court’s lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try unlawful detainer and the court must dismiss the case without prejudice.”  Op. at 6.

The Court emphasized that “[t]he question of title raised by the homeowner’s allegations must be legitimate. . . .  Because a court always has jurisdiction to determine whether it has subject matter jurisdiction, the court has the authority to explore the allegations to determine whether, if proven, they are sufficient to state a bona fide claim that the foreclosure sale and trustee’s deed could be set aside in equity. Stated differently, the allegations must be sufficient to survive a demurrer had the homeowner filed a complaint in circuit court seeking such relief.”  Op. at 6 (citations and quotations omitted).

However, the Court noted that “[a] general allegation that the trustee breached the deed of trust is not sufficient. The homeowner’s allegations must (1) identify with specificity the precise requirements in the deed of trust that he or she asserts constitute conditions precedent to foreclosure, (2) allege facts indicating that the trustee failed to substantially comply with them so that the power to foreclose did not accrue, and (3) allege that the foreclosure purchaser knew or should have known of the defect.”  Op. at 7, n. 5.  

In this case, the Court determined that the Borrowers raised a bona fide question of title in the underlying unlawful detainer proceeding.  The Court observed that the Borrowers alleged that 12 C.F.R. § 1024.41(g) was incorporated in their deed of trust as a condition precedent, that they submitted a complete loss mitigation application, and that none of the exceptions applied.  Op. at 8-9.  The Court also inferred that Fannie Mae, as foreclosure purchaser, was aware of the alleged violation of the deed of trust “because it was the lender that allegedly committed the violation.”  Op. at 9.  Consequently, the Supreme Court concluded that these allegations were sufficient, and if proved, could satisfy a court of equity to set aside the foreclosure.”  The Court therefore vacated the judgment in favor of Fannie Mae, and dismissed the summons for unlawful retainer. 

Md. App. Holds that Trustees’ Lack of Physical Presence (as Opposed to Constructive Presence by Telephone) At Auction Does Not Invalidate Foreclosure Sale

In Fisher v. Ward, a majority of a panel of the Court of Special Appeals of Maryland affirmed the trial court’s ratification of a foreclosure sale, determining that the trustee’s constructive presence by telephone, rather than “in-person” presence at the foreclosure auction, did not warrant invalidating the sale absent a showing of prejudice.   Rather, the “absence of the trustee from the sale is merely a circumstance to be considered by the court in the ultimate determination of the fairness of the proceedings.”  Op. at 8.  “Absent other irregular factors,” the intermediate appellate court concluded, “‘presence’ by telephone did not create unfairness or prejudice to [the borrower] to warrant reversal…”  Op. at 10.

A copy of this opinion is available here.

Background

Following Borrower’s default on her mortgage payments, the lender appointed Trustees to begin foreclosure proceedings.  At the sale, although none of the Trustees were physically present, one Trustee monitored the sale and was connected by cell phone to the auctioneer, who was at the sale.   Auctioneer announced the initial bid, which the Trustee had offered via telephone, on behalf of the lender, which was conceded to be more than the fair market value of the property.  Op. at 3.  Borrower filed exceptions to the sale, claiming that the sale was unlawful because no Trustee was physically present, and that the report of sale incorrectly represented that the Trustee had directed and supervised the auction.      

In response, Trustees asserted that the constructive presence of the trustee was sufficient to satisfy the “presence” requirement, and that Borrower suffered no prejudice from the alleged irregularity.   The trial court overruled the Borrower’s exceptions, and Borrower appealed.

Discussion

Although the Court of Special Appeals determined that “ancient” precedent required a trustee to attend the sale, Op. at 6-7 (citing Hopper v. Hopper, 79 Md. 400 (1894)), the Court observed that case law “condoned, if not actually permitted” the concept of constructive presence.  Op. at 7 (discussing Wicks v. Westcott, 59 Md. 270 (1883)).   Thus, “absence of the trustee from the sale is merely a circumstance to be considered by the court in its ultimate determination of fairness of the proceedings.”  Op. at 8. 

“[W]hat is sufficient to constitute constructive presence will depend on the facts before the court.”  Op. at 8.  On the record of this appeal, the Court deemed the Trustee “readily accessible” throughout the sale via the auctioneer’s cell phone, and concluded that “[a]ny problems or concerns could have easily been addressed.”  Op. at 8-9.   Notably, the proceedings were “brief and uncluttered,” no competing bids or questions to the auctioneer were presented, and no objections were made by persons in attendance.  Op. at 8.  Consequently, the Court was satisfied that the Trustees satisfied the requirement that the “property [be] sold under such conditions and terms as to the advertisement and otherwise, as a prudent and careful man would employ, seeking to obtain the best price for his own property.”  Op. at 9 (citations omitted).

Moreover, the ratification of a foreclosure sale is presumed to be valid.  Op. at 9.  Although the burden is on an excepting party to show prejudice caused by any irregularities in the sale, there is also a heightened scrutiny of the sale when the foreclosure sale purchaser is the mortgagee or his assignee.  Op. at 9-10.  “Despite the heightened standard, the burden continues to be borne by the excepting party to show both invalidity and resulting prejudice.”  Op. at 10.  In this case, the Borrower’s challenge was based solely on the “absentee participation” of the Trustee in the sale itself; no assertion of irregularity was asserted to any other aspect of the proceeding, and there was no challenge to the sufficiency of the price.   Op. at 10.  “Absent other irregular factors,” the Court concluded that, although required, the Trustee’s “presence” at the sale by telephone did not create unfairness or prejudice to Borrower to warrant reversal of the foreclosure judgment.  Op. at 10.  Accordingly, the appellate court affirmed the judgment of the trial court.  Op. at 10.

In a concurring opinion, one judge agreed there was no prejudice, and therefore that reversal was not appropriate.   Concurring Op. at 5.  However, according to the concurring judge, “the failure of a trustee (or an empowered and properly supervised delegate) to physically attend the sale remains an irregularity in the sale, which, should it result in actual prejudice, would be fatal to the sale.”  Concurring Op. at 1.

Md. App. Ct. Reverses Dismissal of Foreclosure Case; Non-Borrower Spouse’s Post-Sale Challenge to Due-On-Sale Clause was Untimely Post-Sale

In Devan v. Bomar, the Court of Special Appeals reversed the dismissal of a foreclosure case, where such dismissal was premised on a non-borrowing spouse’s claim that the secured party violated federal law prohibiting the exercise of a “due-on-sale” clause, where title to the property was transferred to a surviving spouse upon the death of her husband.  The Court reaffirmed that such pre-sale challenges must be made prior to the foreclosure sale, explaining that “[a]s with statutes of limitations generally, procedural deadlines for raising certain challenges are established and strictly enforced.  An unexcused failure to comply with a clear deadline may doom what might otherwise have been a highly meritorious challenge, has it been timely filed.”  Op. at 1.

A copy of the opinion is available here.

Background

Husband and Wife owned their marital home as tenants by the entireties, however, only Husband was a borrower under the promissory note.  Following his death in 2008, Wife continued making monthly mortgage payments.  After her husband’s estate was closed, the loan servicer refused to accept further monthly payments from her, and demanded payment in full.  Thereafter, foreclosure proceedings were initiated, and nearly one-year later, the property was sold to the lender. 

After the sale, Wife filed exceptions to the sale claiming that she was wrongly prevented from making payments on the promissory note in violation of federal prohibitions on the exercise of a “due-on-sale” clause upon a transfer caused by the death of a spouse.   See 12 C.F.R. § 591.5(b).  The trial court sustained the exception, and set aside the foreclosure sale.  The substitute trustees appealed.

Discussion

As an initial matter, the Court determined that it need not consider the binding effect of the federal regulation.  Rather, the Court noted that the appeal concerned the procedural issue of whether a challenge to the sale based upon a violation of the regulation must be raised before the foreclosure sale, or if it is one that may also be raised as a post-foreclosure exception.

Under Maryland law, a foreclosure proceeding is a two-step process.  “A borrower’s ability to challenge a foreclosure sale is in part determined by whether relief is requested before or after the sale. Prior to the sale, a borrower may file a motion to stay the sale and dismiss the foreclosure action under Maryland Rule 14-211. . . . The situation is different after a foreclosure sale.” Op. at 5 (quoting Thomas v. Nadel, 427 Md. 441, 443-44, 48 A.3d 276 (2012)).

Consequently, the Court reaffirmed that “[a] post-sale exception to a foreclosure sale is not an appropriate vehicle to challenge the broad equities of the entire foreclosure proceeding itself. It is, rather, a narrow challenge to the procedures employed in the execution of the sale process itself.” Op. at 8.

In this case, the Court observed that Wife’s claim was “a sweeping attack on the Bank’s entitlement to initiate the foreclosure proceeding at the very outset,” Op. at 12, that was “fully knowable” to Wife a full year before the sale.   Thus, the Court determined that the subsequent challenge, whatever might have been its merit, simply came too late.  “Bad timing can be as fatal as lack of merit.”  Op. at 12.

The Court rejected attempts to “wriggle out” from prior decisions establishing the timing requirements of a foreclosure challenge.   The Court determined inapplicable its decision in Bierman v. Hunter, 190 Md. App. 250, 988 A.2d 530 (2010), in which the intermediate appellate court upheld a challenge to a foreclosure sale where a spouse proved her signature on the mortgage documents were forged.   The Court noted that part of the rationale in that case had been expressly rejected by subsequent opinions of the Court of Appeals, and noted that “[t]he Bierman opinion, despite its earlier tilt in a different direction, does not help [Wife] in this case.”  Op. at 17.  

Accordingly, finding Wife’s claims untimely, the Court reversed the trial court’s order to set aside the sale, and determined moot the substitute trustee’s evidentiary challenges to the trial court’s ruling.