Nick Hurston//November 20, 2023
Nick Hurston//November 20, 2023//
A circuit court improperly granted a writ of possession to the U.S. Secretary of the Department of Veterans’ Affairs despite the defaulted borrower’s challenge to valid title based on her allegations of constructive fraud, the Court of Appeals of Virginia has held.
The borrower claimed she was misled by the VA when modifying her loan to think she was no longer subject to VA regulatory protections in default. The circuit court found that her affirmative defense was improper to challenge title and granted possession to the VA.
But the Court of Appeals said that affirmative defenses were allowed where the plaintiff’s right of possession was derived from an allegedly defective title.
“Although a court will generally not rescind a completed foreclosure sale, our Supreme Court has noted that a ‘foreclosure sale may be set aside in cases ‘involving fraud,”’ Judge Robert J. Humphreys wrote for the court.
Senior Judge Rosemarie Annunziata and Judge Daniel E. Ortiz joined Humphreys in reversing and remanding Neal v. Secretary of the Dep’t of Veterans Affairs (VLW 023-7-419).
Gloria Neal owned a home in Haymarket, subject to a deed of trust securing a loan from Wells Fargo and guaranteed by the VA. Per Neal’s answer, the deed of trust contained a “rider” that allegedly required compliance with all VA regulations then in effect.
In 2016, Neal obtained what she understood to be a loan modification. She later fell into default. Following a non-judicial foreclosure sale, the VA bid highest, recorded a foreclosure deed and sent Neal a notice to quit and vacate.
When Neal refused to vacate, the trustee filed an unlawful detainer action in Prince William County Circuit Court.
Although she admitted default, Neal claimed the VA made a material misrepresentation when it told her that her modified 2016 loan wasn’t a “VA loan” subject to its regulations. That was incorrect and, had she known, Neal would have availed herself of certain protections.
Specifically, Neal maintained that the VA regulations required the lender to comply with all accepted national lending practices, act quickly in case of default to seek to find ways to avoid foreclosure, send a notice to the borrower that she could lose her opportunity for another VA loan if there was a foreclosure and, if having trouble reaching the borrower, seek a face-to-face meeting with her.
Neal’s affirmative defense was that the foreclosure deed was defective and void, alternatively voidable due to the VA’s constructive fraud.
The VA moved for summary judgment. Even if Neal’s defense was true, the VA argued that the only methods available to void a foreclosure deed were a counterclaim, third-party claim or affirmative complaint challenging the foreclosure’s validity and requesting that the circuit court set aside the foreclosure deed.
Because a court can’t declare a deed void as part of an affirmative defense, the VA said Neal wasn’t entitled to avoid eviction.
Neal pointed out that the VA hadn’t responded to her affirmative defense; those facts were in dispute and her fraud defense, if proved, would defeat the VA’s claim of title.
The circuit court granted possession to the VA.
Neal’s appeal followed.
“The sole issue to be determined by a court in an unlawful detainer action is whether the plaintiff, who is presently out of possession, has a superior right of possession to the defendant,” Humphreys began.
A plaintiff must prove either “prior actual possession” yielded under a now terminated estate or a right of possession acquired after the defendant’s entry, which is typically required in a foreclosure action.
The judge cited 2016’s Parrish v. Fed. Nat’l Mortg. Ass’n, in which the Supreme Court of Virginia held that a plaintiff may be required to establish valid title when their claim depends on after-acquired right of possession based on claim of title.
The Parrish court noted that a “foreclosure sale could be set aside in equity when it was conducted in material breach of the deed of trust,” and claims sufficient to require adjudication of title included those involving fraud.
“Although the Supreme Court did not expressly articulate what specific mechanism a defendant must use to raise the issue of title in an unlawful detainer action, we hold that the nature of the unlawful detainer proceeding permits the use of an affirmative defense to contest the validity of the plaintiff’s title if the plaintiff’s right of possession is derivative of the allegedly defective title,” Humphreys said.
The VA maintained that Neal could only challenge the validity of its deed with a counterclaim or other offensive action.
Humphreys, however, said the VA fundamentally misunderstood the nature of unlawful detainers and failed to give proper weight to Parrish.
“[W]hile in some cases … the plaintiff may not need to prove title, where the plaintiff’s right of possession is derived wholly from the title, the plaintiff may be required to prove the validity of the title,” he wrote.
Cases cited by the VA to argue that its title was valid at law until set aside missed the point, the judge added.
“Nothing in Neal’s affirmative defense requires the circuit court to ‘set aside’ the title,” Humphreys explained. “In other words, if the circuit court ultimately determines that Neal proved that the VA’s asserted title is invalid, the circuit court could not set aside the title nor would such a determination amount to adjudicating the ‘question of complete title.’”
A circuit court holding the title invalid would only apply to the instant matter for the limited purpose of establishing Neal’s superior right of possession, the judge pointed out.
“In other words, the fact that Neal has not sought to invalidate the deed as part of a counterclaim, or some other affirmative lawsuit, is of no moment in the VA’s action for unlawful detainer,” Humphreys wrote.
Neal argued that her affirmative defense of constructive fraud created a genuine dispute of material facts that precluded summary judgment.
While Neal’s answer wasn’t a “model of clarity,” Humphreys said it was sufficient.
Courts normally don’t rescind a completed foreclosure sale, but Supreme Court holdings have said that a foreclosure sale may be set aside in cases involving fraud.
Here, Neal claimed the VA’s foreclosure deed was invalid as the product of constructive fraud — specifically that a VA representative incorrectly and negligently informed her that she was no longer protected by VA regulations related to the servicing of her loan.
Further, she asserted reliance on the VA’s statement and that, had she not been misled, she would have availed herself of regulatory remedies to avoid foreclosure.
“Neal’s pleaded assertions sufficiently articulate the elements of constructive fraud, which, if proven, could be sufficient to satisfy a court to rescind the foreclosure sale,” Humphreys said. “As such, Neal’s answer created a genuine dispute of material facts and the circuit court erred by granting the VA’s motion for summary judgment.”