Foreclosure Notice Was in Compliance

Plaintiffs seek to rescind the 2013 foreclosure sale of their home based on lender’s alleged breaches of its obligations to provide notice before foreclosing on the property and to comply with applicable law throughout the foreclosure process. Defendants have moved to dismiss the amended complaint.  Because the plaintiffs have failed to allege facts establishing that the foreclosure was illegal, a Norfolk U.S. District Court grants defendants’ motion to dismiss.

In 2006, plaintiffs obtained a $317,200 loan secured by their primary residence.  They executed a promissory note and deed of trust naming Samuel I. White P.C. as trustee. Plaintiffs fell behind on payments.  The trustee was required to ensure that the lender had fulfilled certain conditions prior to the sale, including providing adequate notice of the default and complying with applicable law.

Notice of Default

Lender sent a notice of default to plaintiffs stating that they were in default and required to pay $3,534.15 by Aug. 22 to avoid acceleration of their indebtedness and foreclosure under the deed of trust.  The demanded sum included the amount past due and a future installment payment not yet due, that would be due on Aug. 1, before the specified payment due date. The notice advised the plaintiffs of this fact. Plaintiffs claim that the notice of default stated the amount necessary to cure the default inaccurately by including the future payment due, rendering the notice a nullity and the foreclosure illegal. The court, relying on Shala, states that the notice informed the plaintiffs correctly that they needed to pay a specific sum by Aug. 22, 30 days from the notice date, to bring their loan current. This correctly stated the amount due by the payment date. Therefore, the plaintiffs fail to allege facts constituting a breach.

Lender’s Compliance With Applicable Law

Plaintiffs allege that lender failed to comply with the deed of trust’s requirement that the foreclosure comply with “applicable law,” specifically federal administrative rules and orders that have the effect of law. Because plaintiffs’ claims rely on infirm legal theories, they have failed to state any claim for relief and therefore their suit is dismissed.

This court’s cases applying Virginia law have held consistently that a deed of trust provision requiring the lender to comply with “applicable law” when foreclosing on a property provision does not incorporate later promulgated federal regulations. However, the Virginia Supreme Court has held recently in Parrish, Busch and Squire, that allegations that a foreclosure violated federal regulations promulgated after a deed of trust’s execution were sufficient to state a claim. These federal and state holdings are in conflict.  The court applies an Erie analysis, deciding that it is charged with guessing how the Virginia Supreme Court would decide the issue at hand.  Thus, the court determines that it is required to consider Parrish when resolving the instant question of state law, despite Lender’s bald contention that it has no application to this case.

The court first finds that when interpreting deeds of trust, the Virginia Supreme Court has applied contract doctrine flexibly where rote application would defy common sense, and that contractual rights and duties are controlled by the law in effect at the time the contract was executed.  The discussion then turns to the notion of freezing a deed of trust’s applicable law requirements at the time of execution and the fact that under that rule, a foreclosure in 2017 could be governed by the regulations in place in 1987, and so on.  That would require real estate attorneys to consult outdated rules and regulations when foreclosing.  The court states that when instituting a foreclosure, a lender must comply with the rules in effect at that time or run the risk of being penalized by federal regulators.  Therefore, incorporating prospective changes does not impose additional obligations on lenders—it harmonizes lenders’ existing obligations to both federal regulators and plaintiffs.  Alternatively, freezing applicable law at the time of execution would subject each foreclosure to two sets of regulations, potentially exposing lenders to inconsistent obligations.

Because of lingering uncertainty regarding the scope and application of the Parrish decision, the weighty state interests involved, an insufficient briefing by counsel, the court declines to “Erie guess” at this time how the Virginia Supreme Court would ultimately decide the issue of what year’s regulations are incorporated into a deed of trust.

Plaintiffs contend that lender’s duty to comply with applicable law meant it had to comply with a consent order, interpretive rules, and HAMP regulations. This court finds that all lack the effect of law.

Therefore, plaintiffs fail to allege a duty or breach and fail to state a claim for breach of the deed of trust.  Defendants’ motions to dismiss are granted.

The trustee raised a novel argument against plaintiff’s claim and cited Khan V. Commonwealth Trs., LLC to support its argument.  Despite the fact that the Trustee styled this as a case citation, suggesting that this “authority” is an opinion of this court supporting the Trustee’s position, the document is merely a brief filed by the lender seeking dismissal of that case. The court warned that the “overt dishonesty” of this practice, along with other “troubling briefing practices” will be dealt with in a separately issued Order to Show Cause.

Simon et al., v. PNC Bank, National Association, et al., (Allen), No. 2:16cv388, August 28, 2017; USDC at Norfolk, Va. (VLW 017-3-441).