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.

4th Cir Affirms Dismissal of Debtor’s FDCPA Claims Where Debt Collector Sought Estimated Attorneys’ Fees Within Contractual Limits

In Elyazidi v. SunTrust Bank, et al., the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a debtor’s alleged violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. (FDCPA), which attempted to challenge debt collectors seeking estimated attorneys’ fees in its initial pleading.  Observing that the debt collectors sought no more than what applicable law allowed, and that they explained that the amount requested for attorneys’ fees was estimated, the Court held that this conduct was not misleading in violation of 15 U.S.C. § 1692e(2).  Nor was it unconscionable in violation of under 15 U.S.C. § 1692f(1), as it was proper for the debt collector to estimate an appropriate fee within the limits of its contract with the debtor.

 A copy of the opinion is available here.

Background

In opening a checking account with her banking institution (the “Bank”), Appellant (“Debtor”), agreed to be bound by the Bank’s rules and regulations, which included a provision on overdraft liability allowing for the Bank to recover an “attorney’s fee up to 25% . . . of the amount owed.”  In September of 2010, although the account held no more than a few hundred dollars, Debtor cut herself a check for $9,800.  After its own attempts to collect the overdraft were unsuccessful, the Bank hired a Maryland law firm (“Law Firm”) to bring a debt collection action.

 Thereafter, the Law Firm filed a warrant in debt in general district court in Virginia.  The warrant (a simple, standardized pleading available to creditors) indicated that the Debtor owed $9,490.82, plus 6 percent interest; $58 in costs; and $2,372.71 in attorneys’ fees.  In two supporting affidavits submitted to the court, an employee with the Bank affirmed that the amount for attorney’s fees represented 25% of the amount owed; while, an attorney with the Law Firm explained that the fees represent “a just and reasonable fee, which is equal to or less than the actual arrangement with client in this case.”

 Eventually, the general district court entered judgment “in the sum demanded for the plaintiff on the evidence.”  At a separate hearing, the Bank’s attorney submitted an updated affidavit supporting a claim for attorneys’ fees in the amount of $4,025 based on the amount of billable hours spent on the case.  In reducing the award to $2,372.71 (the amount originally sought), the court stated that such amount was “minimally more than that was spent in this entire matter.”

 Following the judgment in favor of the Bank in the collection suit, Debtor filed a separate lawsuit against the Bank and Law Firm in Maryland state court.  Challenging their efforts to recover allegedly unearned attorneys’ fees in the collection suit, Debtor brought two counts under Maryland state consumer protection laws, as well as two counts under Sections 1692e(2) and 1692f(1) of the FDCPA.  Additionally, Debtor sued the Law Firm under Section 1692f of the FDCPA for failing to redact Debtor’s social security number from bank statements filed with the Virginia general district court.

 After removing the case to federal court, the Bank and Law Firm filed separate motions to dismiss.  The district court dismissed the case, and this appeal followed.

 Discussion

 As a preliminary matter, the U.S. Court of Appeals for the Fourth Circuit rejected the Bank’s and Law Firm’s (collectively, the “Appellees”) argument that the district court lacked subject matter jurisdiction due to the Rooker-Feldman doctrine.  Although the doctrine prohibits federal courts from reviewing state court decisions, the Fourth Circuit explained that “a federal court is not stripped of its jurisdiction simply because the claim challenges conduct that was previously examined in a state court action.”  Op. at p. 9.  As the federal suit posed “no challenge to the Virginia Court’s judgment,” the district court was not barred from hearing it.  Id. at p. 10.

 As to the alleged FDCPA violations related to the claimed attorneys’ fees, the Fourth Circuit affirmed the district court’s dismissal of the Section 1692e count.  Pursuant to 15 U.S.C. § 1692e, a debt collector may not “use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e.  Such prohibited conduct includes any “false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.”  15 U.S.C. § 1692e(2).

 Noting that the representations must be viewed in context, the Court held that “where the debt collector sought no more than applicable law allowed and explained via affidavit that the figure was merely an estimate of an amount counsel expected to earn in the course of the representations cannot be considered misleading under 15 U.S.C. § 1692e(2).”  Op. at pp. 13-14.  According to the Court, under these circumstances, “any consumer – no matter how sophisticated – should have understood the nature of the Appellees’ request [for attorneys’ fees].”  Id. at p. 15.

 Likewise, the Court also affirmed the dismissal of the alleged Section 1692f(1) violation.  Under 15 U.S.C. § 1692f, a debt collector may not use “unfair or unconscionable means to collect or attempt to collect any debt.”  15 U.S.C. § 1692f.  As an example of such prohibited conduct, Subsection (1) condemns “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  15 U.S.C. § 1692f(1).

 In the complaint, Debtor alleged that the attorneys’ fee request was “unauthorized” because “neither the agreement nor applicable law permit recovery of attorney’s fees for services not performed.”  Op. at p. 16.  However, the Fourth Circuit determined that this argument had no merit, explaining that “it was entirely proper for [the Bank] to estimate an appropriate fee within the limits prescribed in the September 2010 agreement.”  Id.  Although it drew all reasonable inferences in the Debtor’s favor, “the only reasonable inference here is that Appellees sought to enforce their contractual rights in compliance with state court procedure.”  Id. at p. 17.

 Addressing the alleged FDCPA violation related to the disclosure of the Debtor’s social security number, the Fourth Circuit again affirmed the dismissal.  Notably, the Court observed that the enumerated activities prohibited under 15 U.S.C. § 1692f all have “the capacity to harass the debtor or to pressure her to pay the debt.”  Op. at p. 18.  Although “alarming,” Appellees never threatened to disclose the social security number, and the Debtor was not “cowed into paying the debt.”  Id. at pp. 18-19.  Rather, the Court held that “the lapse occurred in the course of litigation and was easily remedied,” and therefore, “the disclosure cannot be considered unfair or unconscionable.”  Id. at p. 18.

 Finally, the Fourth Circuit affirmed the dismissal of the Debtor’s Maryland consumer protection claims, including counts under the Maryland Consumer Debt Collection Act (MCDCA) and Maryland Consumer Protection Act (MCPA).  Although the Debtor attempted to frame the challenged activities as having occurred in Maryland, the Court noted “[t]he critical point, however, is not whether Appellees conduct business in Maryland, but whether some significant portion of the challenged activity occurred there.”  Op. at p. 21.  Indeed, “[t]he act of sitting in a Maryland office and drafting court documents, or taking phone calls, is not the activity that [the Debtor] seeks to condemn in the case.”  As the challenged representations occurred in Virginia, and as any harm to the Debtor occurred in Virginia, these Maryland statutes had “no application here.”  Id. at 22; see also Consumer Prot. Div. v. Outdoor World Corp., 603 A.2d 1376, 1382 (Md. App. 1992) (holding that regulatory statutes are “generally construed as not having extra-territorial effect unless a contrary legislative intent is expressly stated”).

 Accordingly, the Fourth Circuit affirmed the district court’s dismissal of the Debtor’s claims in their entirety.