Va. Supreme Ct. Holds After-Acquired Property Statute Does Not Affect Priority Of Third Parties; Prior Recorded Deed Of Trust Not “Duly Admitted To Record” Where Outside Chain Of Title

In Deutsche Bank National Trust Company v. Arrington, a priority dispute concerning real property, the Supreme Court of Virginia held that the after-acquired property statute, which validated prior conveyances where the grantor subsequently obtains an interest in property, “only applies between the parties to a deed and does not affect the rights of third parties or influence the relative priority of their interests.” Op. at 12.  The Court further held that a bank whose deed of trust was recorded first, but was made by a grantor outside the chain of title, was not “duly admitted to record” and therefore was not entitled to priority against lien creditors.

A copy of the opinion is available here.

In Arrington, the Court considered a priority dispute between a Bank’s deed of trust, and a subsequently recorded deed of trust in favor of the borrower’s former spouse (Wife) to secure payments as part of a contempt order.  Specifically, a divorce decree provided that certain property held by the couple would be conveyed solely to Husband, and that Husband would make several payments over time to Wife for ten years.  Following the entry of this divorce decree, in 2004, Wife conveyed her interest by deed of gift to Husband, which was recorded in the land records.

The following year, in 2005, Husband conveyed the Property to Third Party by general warranty deed, which was also recorded in the land records.  Despite such conveyance, which had divested Husband of record title, in 2006, Husband executed a deed of trust in favor of Bank, which was also recorded in the land records. 

Thereafter, in 2009, because he had fallen behind in his payments to Wife as provided in the divorce decree, to purge his contempt, the court required Husband to execute a deed of trust in favor of Wife (“Wife’s Deed of Trust”), which was recorded in the land records to secure repayment of amounts referenced in the divorce decree.

Prior to Wife’s recording her deed of trust, Third-Party executed a general warranty deed re-conveying the property back to Husband, which was recorded in the land records.   Immediately thereafter, Wife’s Deed of Trust was recorded, together with a copy of the divorce decree and contempt order.  

Bank filed a complaint seeking a declaration that the Bank Deed of Trust was a valid first priority lien on the Property.  In response, Wife filed an answer requesting a declaration that Wife’s Deed of Trust was a valid first priority lien.  Upon cross-motions for summary judgment, the trial court held that Wife’s Deed of Trust enjoyed priority, because when she recorded her deed of trust, Husband was the record owner of the property, whereas when the Bank recorded its deed of trust, Third Party was the record owner of the property.  The trial court also held that the after-acquired property statute, Virginia Code § 55-52, could not elevate the Bank Deed of Trust in priority over Wife’s Deed of Trust.  On appeal, the Supreme Court of Virginia affirmed.

The Court rejected the Bank’s argument that it held priority once Husband was re-vested with the property from Third Party under the after-acquired property statute.  The Court held that the statute itself was limited by its terms to the grantor and grantee, i.e., Husband and the Bank.  Specifically, the statute, Virginia Code § 55-52, provides:

When a deed purports to convey property, real or personal, describing it with reasonable certainty, which the grantor does not own at the time of the execution of the deed, but subsequently acquires, such deed shall, as between the parties thereto, have the same effect as if the title which the grantor subsequently acquires were vested in him at the time of the execution of such deed and thereby conveyed.

Id.  (Emphases added).

Determining that the statute applied not only to deeds, but also to deeds of trust, see Op. at 7, the Court explained, “[r]ead in its entirety, Code § 55-52 provides that when a grantor purports to convey property — without holding title — to a grantee, the grantor cannot thereafter deny that title has actually passed to the grantee. . . . Code § 55-52 governs the rights of a grantee vis-à-vis the grantor. It does not purport to affect the deeds of third parties, in this instance [Wife], or influence the relative priority of their interests.” Op. at 5-6. 

The Court thereafter determined the priorities of the parties based upon the recording act, Virginia Code § 55-96, which provides:

Every (i) such contract in writing, (ii) deed conveying any such estate or term, (iii) deed of gift, or deed of trust, or mortgage conveying real estate . . . shall be void as to all purchasers for valuable consideration without notice not parties thereto and lien creditors, until and except from the time it is duly admitted to record in the county or city wherein the property embraced in such contract, deed, or bill of sale may be.

Id.  Under the Recording Act, the Court explained, the “[Bank] Deed of Trust does not impair [Wife’s] priority if she is either (1) a purchaser for valuable consideration without notice or (2) a lien creditor, and the [Bank] Deed of Trust was not ‘duly admitted to record’ before she qualified as either. If she is a lien creditor and the [Bank] Deed of Trust has not been ‘duly admitted to record,’ then it is irrelevant whether she had notice of Bank's interest.” Op. at 8-9.

After easily determining Wife to be a lien creditor under her deed of trust, see Op. at 10-11, the Court determined that the Bank Deed of Trust was void as to Wife, because it was not “duly admitted to record” as it was recorded prior to Husband holding record title.  Op. at 12.  “Because the [Bank] Deed of Trust was not properly recorded in the chain of title, it was not ‘duly admitted to record’ even though it was recorded before [Wife] acquired her interest. Finally, because [Wife] is a lien creditor, whether she had actual or constructive notice of the [Bank] Deed of Trust is irrelevant. See Code § 55-96(A)(1). Therefore, [Wife] qualifies as a lien creditor under Code § 55-96(A)(1), and as a result, the [Wife] Deed of Trust has priority over the [Bank] Deed of Trust.”  Id.

Accordingly, the Supreme Court affirmed, concluding that the Wife’s deed of trust was entitled to priority.

Va. Supreme Court Rejects Borrowers’ Damages and Rescission Claims premised upon alleged failure to Hold Face-to-Face Meeting provided for FHA-Insured Loans

The Supreme Court of Virginia, in Ramos v. Wells Fargo, affirmed the dismissal with prejudice of borrowers’ breach of contract action against their lender.  The borrowers complained, inter alia, that the lender failed to attempt a “face-to-face” interview prior to foreclosing under a deed of trust incorporating certain HUD regulations.  The Court held that the borrowers failed to state a claim because they failed to sufficiently plead damages in their second amended complaint, which failed to include an ad damnum clause.  The Court also rejected the Borrower’s attempt to rescind the sale to a third-party purchaser, even though settlement on the foreclosure sale had not yet occurred.

In doing so, the court clarified the reach of Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014) and Mathews v. PHH Mort’g Corp., 283 Va. 723, 724 S.E.2d 196 (2012) by reinforcing that a borrower still must provide factual allegations of compensable injury or damages, even where conditions precedent to foreclosure were not satisfied.  The court also clarified that rescission of a foreclosure is only permitted in exceptional circumstances.  A copy of the reported order can be found here.

Following the foreclosure of their home, Borrowers filed suit against the Bank, claiming that it “wrongfully initiated” foreclosure.  After their original and first amended complaints were dismissed on demurrer, the Borrowers’ second amended complaint alleged that their Federal Housing Administration (“FHA”) insured mortgage loan documents incorporated certain regulations promulgated by the Department of Housing and Urban Development (“HUD”).  They specifically cited 24 C.F.R. § 203.604, concerning the “requirements for the acceleration of a loan and subsequent foreclosure in the event of a borrower's payment default.”  Slip Op. at p. 2.

The Borrowers alleged that the Bank failed to comply with this regulation “by not having, or attempting to have, a ‘face-to-face meeting’ with appellants following their payment default.”  Id.  Borrowers claimed such a meeting was a “condition precedent to foreclosing on the property,” without which the Bank’s “authority to call a default had not accrued” thereby rendering the foreclosure unlawful.  Id.  They further asserted that the third-party purchaser could be released from its purchase because settlement had not occurred.  See id.  The Borrowers sought compensatory damages and rescission of the sale.

Upon consideration of the Bank’s demurrer (motion to dismiss), the trial court dismissed the second amended complaint with prejudice, and Borrowers appealed.

On appeal, the Supreme Court explained, “[i]n [Squire and Mathews] we held that the subject HUD regulation, 24 C.F.R § 203.604, created a condition precedent to foreclosure under the respective Virginia deeds of trust at issue, both of which incorporated the regulation.”  Slip Op. at p. 4.  Assuming without deciding that borrowers made “sufficient allegations of causation,” the Court nonetheless affirmed the dismissal, concluding that the Borrowers failed to plead factual matters supporting their claim for either money damages or rescission of the foreclosure sale.  Id. at p. 4.  Indeed, an essential element of a breach of contract action is that a defendant’s breach “caused injury or damage” to the plaintiff.  Id. (citing Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 154, 671 S.E.2d 132, 135 (2009)).

The Court observed that the Borrowers “fail to set forth a single factual allegation of any injury or damage they incurred as a result of [the Bank’s] alleged breach.”  Slip Op. at p. 5.  Additionally, the Court observed that the second amended complaint was insufficient inasmuch as it contained no ad damnum clause stating the amount of any damages sought.  Slip Op. at p. 5 (citing Va. Rule 3:2(c)(ii) (“Every complaint requesting an award of money damages shall contain an ad damnum clause stating the amount of damages sought.”).

The Court also rejected the Borrowers argument that “absent the closing [of the foreclosure sale], the sale can still be ‘unwound,’ i.e., rescinded” by court action.  Slip. Op. at p. 5 (“That is not so under Virginia law.”).  The court found the rescission right was extinguished upon foreclosure under a deed of trust in Virginia because “‘[t]he contract of sale [is] consummated when the auctioneer crie[s] the property out to the person making the highest and last bid.”  Id. (quoting Feldman v. Rucker, 201 Va. 11, 21, 109 S.E.2d 379, 386 (1959).  And where the Borrowers failed to allege any exceptional circumstances to permit rescission the Borrowers were not entitled to the relief sought.  See Slip Op. at p. 6 note (observing that no allegation of fraud or collusion with the purchaser or “gross inadequacy” in the foreclosure sale price was alleged) (citing Squire, 287 Va. at 519, 758 S.E.2d at 61-62),

Accordingly, the Supreme Court of Virginia affirmed the trial court’s order sustaining the Bank’s demurrer and dismissed the Borrowers’ action with prejudice.