D.C. Court Of Appeals Holds Complaint For Judicial Foreclosure is Not Subject to Foreclosure Mediation, and Does Not Require A “Mediation Certificate”

In Advance Bank v. Matthews, the D.C. Court of Appeals determined that the trial court properly granted summary judgment in favor of the Bank on its complaint for breach of contract, judicial foreclosure and/or judicial sale of a residential mortgage, without first requiring the parties participate in mediation pursuant to D.C. Code § 42-815(b), which it determined was only applicable to non-judicial foreclosures.

According to the Court, judicial sales under D.C. Code §42-816 are “wholly different from non-judicial foreclosures because of the court’s involvement in the process, which reduces the risk of error and predatory foreclosure practices.  Therefore, § 42-816 authorizes the court to order a judicial sale and there is no mediation requirement.”  Op. at 10.

A copy of the opinion is at: http://www.dccourts.gov/internet/documents/13-CV-1473.pdf

In Matthews, an action against the Borrower for loan fraud, the Bank ultimately amended its lawsuit adding a breach contract claim, judicial foreclosure and/or judicial sale claim in the alternative, and thereafter moved for summary judgment.  

After court-ordered mediation was unsuccessful, the trial court granted summary judgment on the breach of contract claims finding undisputed that the Borrower had defaulted on his residential loan and his promissory note.  The trial also granted summary judgment on the judicial sale claim pursuant to D.C. Code §42-816.  That statute provides in pertinent part:

 In all cases of application to said court to foreclose any mortgage or deed of trust, the equity court shall have authority, instead of decreeing that the mortgagor be foreclosed and barred from redeeming the mortgaged property, to order and decree that said property be sold and the proceeds be brought into court to be applied to the payment of the debt secured by said mortgage . . . .

D.C. Code §42-816; accord Op. at n. 2 (“Section 42-816 authorizes the court to order a judicial sale instead of a judicial foreclosure. ‘A suit for judicial foreclosure to enforce a lien on real property is historically an equitable action, . . which involves an adjudication of the parties’ rights and obligations before any property is sold.’” (citations omitted)).

According to the trial court, although there existed a power of sale provision in the deed of trust, which the Bank could have used to initiate non-judicial foreclosure proceedings under § 42-815, the court found that a judicial sale was appropriate in light of Borrower’s opportunity to fully litigate the case; opportunity to participate in a mediation session; and knowledge that foreclosure would eventually occur.

The Borrower appealed, claiming that he was entitled to foreclosure mediation pursuant to D.C. Code § 42-815.02.  He asserted that court-ordered mediation was insufficient, as it did not comply with the statutory mediation requirements of § 42-815.02 “because it was not geared toward loss mitigation, which provides the homeowner with alternative options for curing the mortgage default in lieu of foreclosure. . . . ” Op. at 4 n. 5, including “renegotiation of the terms of a borrower’s residential mortgage, loan modification, refinancing, short sale, deed in lieu of foreclosure, and any other options that may be available.” Op. at 5 (quoting D.C. Code § 42-815.02(a)(5)).  According the Borrower, the Bank’s summary judgment motion requesting judicial foreclosure under § 42-816 circumvented the requirements in § 42-815 (b) and § 42-815.02, and further claimed that § 42-816 did not apply to residential mortgages.

Rejecting the Borrower’s arguments, the Court of Appeals observed that, although § 42-815 was amended in 2011 to require lenders and home owners to participate in mediation and obtain a “mediation certificate” prior to foreclosure, “[t]his amending act did not cause any changes to the law of judicial sales and judicial foreclosures under § 42-816.6.”  Op. 8.  Rather, “§ 42-815 controls when dealing with ‘power of sale’ [non-judicial] foreclosures under an instrument such as a deed of trust and § 42-816 refers to judicial sales, where the sale is requested by a lender then ordered by the court or an officer acting under court order.” Op. at 9.  

Consequently, the Court determined that the amendment to § 42-815 providing for mediation “intended to protect District residents from predatory practices by mortgagees because of the lack of oversight during the non-judicial foreclosure process.” Op. at 9-10. 

“Although mediation is not required for a judicial sale, there exists judicial oversight, which embodies the [City] Council’s intent in amending § 42-815 (b) to include the mediation requirement.”  Op. at 10-11.  In any event, the Court noted that Borrower “was provided with the same protections of § 42-815 because the parties participated in a court-ordered mediation in addition to the protections provided by § 42-816.”  Thus, the Court concluded that “judicial sales pursuant to § 42-816 are not a means for bypassing the requirements in § 42-815, but are only alternative procedures for lenders seeking action with the court for a defaulted mortgage loan.” Op. at 11.

Finally, the Court rejected the Borrowers assertion that judicial sales under § 42-816 only apply to commercial mortgages, noting that the Borrower cited no authority for such proposition, and “that there is no basis, in the statute itself or in the legislative history, for concluding that the Council intended any such limitation on judicial sales.”  Rather, the Court held that judicial sales under § 42-816 are applicable to residential mortgages.  Op. at 11.

Accordingly, the D.C. Court of Appeals affirmed the trial court’s grant of summary judgment in favor of the Bank.

Md. App. Ct. holds that evidentiary hearing under Rule 14-211 not required where valid defense to foreclosure is not stated with particularity

In Buckingham v. Fisher, the Court of Special Appeals of Maryland affirmed the trial court’s denial of a motion to stay or dismiss a foreclosure proceeding pursuant to Maryland Rule 14-211 without an evidentiary hearing, where the challengers failed to state with particularity the basis for their claims of forgery or that the notice of sale was deficient. 

In doing so, the Court elaborated that “bare assertions of a broad defense to the validity of a lien instrument will not be sufficient,” because “the pleading standard is more exacting than the pleading standard for an initial complaint.[,]” and that “under Rule 14-211, a party must plead all elements of a valid defense with particularity.”  Op. at 9.

A copy of the opinion is available at: http://www.mdcourts.gov/opinions/cosa/2015/2416s13.pdf

In Buckingham, the personal representatives of the estate of the borrower (“Buckingham”) filed a motion to stay or dismiss the foreclosure sale on two grounds.  First, Buckingham claimed that one of the signatures of a deceased co-borrower was not authentic, according to the opinion of a handwriting expert, whose affidavit opined that “there is a strong possibility that the co-borrower did not sign” the deed of trust.   Second, Buckingham claimed the notice of foreclosure sale was insufficient to inform the interested parties of the details of the foreclosure sale because (i) in identifying the lien instrument, it referenced a 1997 modification to the original deed of trust, rather than the 2006 modification that was attached to the initial filings; (ii) the notice incorrectly indicated that the lien instrument was signed by the borrower with reference to his legal guardian, although such guardianship was not established until after the document had been executed; and (iii) the notice was not served on counsel of record.

On the day Buckingham filed the motion, the trial court held an initial hearing, and following argument, denied the motion without scheduling an evidentiary hearing on the merits of the defenses.  However, the trial court ordered that the foreclosure sale be rescheduled, to accommodate service on Buckingham’s counsel.  Thereafter, the property was sold, and Buckingham appealed, asserting an entitlement to an evidentiary hearing before the motion could be denied.

On appeal, the Court affirmed that the trial court was not required to hold an evidentiary hearing, holding that Rule 14-211 required “that the factual and legal basis of a defense must be stated ‘with particularity’ and that any available supporting documents must be provided.”  Op. 7.  

Maryland Rule 14-211 provides the mechanism for an interested party to challenge a foreclosure pre-sale by filing a motion to stay or dismiss the foreclosure proceeding.  Under Rule 14-211(a)(3) such motion must “(A) be under oath or supported by an affidavit; (B) state with particularity the factual and legal basis of each defense that the moving party has to the validity of the lien or the lien instrument or to the right of the plaintiff to foreclose in the pending action; [and] (C) be accompanied by any supporting documents or other documents or other material in the possession or control of the moving party[.]”  Op. at 6 (emphasis in opinion).

Further, Maryland Rule 14-211(b)(1) provides the trial court with the discretion to deny such motion before holding a hearing on the merits, where the motion does not substantially comply with the requirements of the Rule, or does not state on its face a valid defense to the validity of the lien, lien instrument, or the right to foreclose.  See Op. at 8 (citing Rule 14-211(b)(1)).  In contrast, under Rule 14-211(b)(2), “[i]f the [trial] court finds that the motion was timely, complies with the requirements of the Rule, and states a valid defense, then an evidentiary hearing on the merits is required before the [trial] court makes a final determination on whether to grant or deny the motion.”  Op. at 8.

In addressing the particularity requirement of Rule 14-211(a)(3), the Court held that “particularity means that each element of a defense must be accompanied by some level of factual and legal support.  General allegations will not be sufficient to raise a valid defense requiring an evidentiary hearing on the merits.”  Op. at 10.

Applying that standard, Court determined that Buckingham’s forgery allegations were insufficient.  Notably, the definition of forgery is “[1] false making or material alteration, [2] with intend to defraud, [3] of any writing which, if genuine, might be of legal efficacy or the foundation of legal liability.”  Op. at 12 (quotations omitted).  According to the Court, Buckingham’s allegations met the first and third elements, but failed to assert “with particularity or without” that there was an intent to defraud.  Id.  “In the absence of any allegation and some evidentiary support for the existence of an intent to defraud, they have failed to sufficiently allege the grounds for their motion, and as a result, it was property denied without an evidentiary hearing.”  Id.

As to the notice of sale, the Court determined that, although Buckingham identified inconsistencies in the notice regarding identification of the lien instrument, Buckingham failed to allege with particularity the legal grounds pursuant to which the trial courts could determine that the notice would prohibit the foreclosure trustees from proceeding with the sale.  The Court explained that Rule 14-210(a) requires a foreclosing party to publish prior notice of the time, place and terms of sale, and that “the notice must contain a description or the property that is sufficient to enable an ordinary person to identify the property and seek further information.”  Op. at 13.  Observing that the notice at issue was, in fact, sufficient to enable the Buckingham to protect their interest in the property by filing the Rule 14-211 motion, the Court further noted that “[t]he rule does not require that the notice perfectly identify the lien instrument upon which the sale is proceeding.”  Op. at 14 n.5.  Finally, as to Buckingham’s claim that  counsel was not notified of the sale, the Court determined that no error was manifest, as the original sale date was delayed to enable copies of all filings to be furnished to Buckingham’s counsel.

Accordingly, the appellate court affirmed the trial court’s denial of Buckingham’s motion to stay and dismiss, determining that no evidentiary hearing on the merits was required prior to denial under Rule 14-211.

U.S. Supreme Court holds Chapter 7 Bankruptcy Debtor Cannot Strip Down a Wholly Underwater Lien

In Bank of America, N.A. v. Caulkett, the U.S. Supreme Court reversed an Eleventh Circuit decision that permitted a junior lien to be “stripped down” or voided under Section 506(d) of the Bankruptcy Code because it was wholly underwater.  In doing, so, the Court reaffirmed its holding in Dewsnup v. Timm, 502 U.S. 410 (1992), which defined the term ‘secured claim’ in §506(d) to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”  Slip Op at 4.

Consequently, the Court held that, so long as a claim is supported by a security interest in property, then it is not subject to being “stripped down” or voided under Section 506(d) of the Bankruptcy Code “regardless of whether the value of that property would be sufficient to cover the claim.”  Slip Op at 4.

A copy of the opinion is available here.

In Caulkett, the Court considered two consolidated cases on appeal, each of which involved debtors (“Debtors”) who had a primary and secondary mortgage lien on their respective homes.  The Bank held the junior mortgage lien on each house.  The Debtors each filed for Chapter 7 bankruptcy.  By that time, however, the amount owed under the senior mortgage was greater than each home’s current market value, meaning that the Bank would receive nothing under the junior mortgage lien if the respective property were sold at foreclosure.

The Debtors each moved to “strip off” or void the junior mortgage lien under Section 506(d) of the Bankruptcy Code.  That statute provides that a lien is void “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim.”  Slip Op. at 2 (citing 11 U. S. C. § 506(d)).  The bankruptcy court granted the Debtors respective motions, and both the District Court and the Court of Appeals for the Eleventh Circuit agreed.  Granting certiorari, the U.S. Supreme Court reversed.

The Court noted that, although the parties agreed that BANA’s claim is “allowed” as defined under 11 U. S. C. § 502(a)-(b), at issue was whether BANA’s allowed claims were “secured.”  See Op. at 3.  The Court acknowledged that a strict reading of the applicable statutes “suggests” that BANA’s lien is not “secured.”  Notably, under Section 506(a)(1), “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”  Op. at 3 (citing 11 U. S. C. § 506(a)(1)).

However, the Court determined that its interpretation of the term “secured claim” in Dewsnup v. Timm, 502 U.S. 410 (1992), was controlling, which would include BANA’s junior mortgage liens.  In Dewsnup, the Court defined the term ‘secured claim’ in §506(d) to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”  Slip Op at 4.

Thus, in Dewsnup, the Court had rejected a Chapter 7 debtor’s argument seeking to “strip down” (or reduce) a partially underwater lien to the value of the collateral under Section 506(d).  Notably, in Dewsnup, the debtor asserted that the creditor’s claim was “secured only to the extent of the judicially determined value of the real property on which the lien [wa]s fixed.”  Op. at 3-4 (citing Dewsnup, 502 U.S. at 414).  In rejecting such argument, the Dewsnup Court determined that if a claim “has been ‘allowed’ pursuant to § 502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of § 506(d).”  Op. at 4 (citing Dewsnup, 502 U.S. at 415).  Consequently, under Dewsnup’s interpretation of an “allowed secured claim,” the Court concluded that BANA’s liens could not be voided.

Although Debtors sought to limit the Dewsnup interpretation to apply only to partially underwater liens, rather than wholly underwater liens, the Supreme Court refused to adopt such a distinction.  See Op. at 5.  The Court explained that such proposition would leave an “odd statutory framework . . . [where] if a court valued the collateral at one dollar more than the amount of a senior lien, the debtor could not strip down a junior lien under Dewsnup, but if it valued the property at one dollar less, the debtor could strip off the entire junior lien.”  Slip Op. at 6-7.

Accordingly, the U.S. Supreme Court reversed the judgment of the Eleventh Circuit, and remanded the cases for further proceedings.