November 21, 2014
Among the controversies of the mortgage foreclosure crisis is that of “Robo-Signing.” A homeowner may receive notice that the original mortgage lender assigned their rights under the loan documents to another financial institution. When a representative of a lender signs paperwork to foreclose on a property, how does the borrower (or anyone else) know whether that company has authority from the originating lender to foreclose?
Janis O’Connor owned real estate near the Appomattox-Buckingham Virginia State Forest. On March 31, 2011, Deutsche Bank foreclosed on her property for nonpayment. After the foreclosure sale, Ms. O’Connor filed suit, alleging that the foreclosure was not valid because the bank lacked the authority of a proper successor to the mortgage company that originated her loan. O’Connor filed suit on her own, without an attorney representing her.
Can a Borrower Sue for “Wrongful Foreclosure?”
Janis O’Connor sued her lender (and others) on a number of legal theories, including “Wrongful Foreclosure.” She alleges that unknown persons forged assignments of her mortgage in a fraudulent scheme to foreclose on her home. She writes that this robo-signing was exposed on the television program, “60 Minutes.” The bank brought a Motion to Dismiss. On October 6, 2014, the U.S. District Court for the Western District of Virginia found that Virginia law does not recognize a claim called “Wrongful Foreclosure.” Judge Moon observed that the borrower must be able to allege a claim for breach of loan documents, fraud, or some other recognized legal theory. Judge Moon expressed a concern that Ms. O’Connor inadequately alleged any causal relationship between the “robo-signing” and her losses.
On May 14, 2014, I posted an article to this blog about legal challenges to the validity of foreclosures on the grounds that the lender committed technical errors in navigating the loan default through the trustee’s auction. Courts are reluctant to set aside a completed foreclosure sale. The technical breaches must have a strong connection to the relief requested by the borrower.
“Show Me the Note”
The Code of Virginia addresses situations where the lender struggles to come up with documents evidencing its authority to proceed with the foreclosure. Va. Code § 55-59.1(B) requires the lender to submit to the trustee what’s called a Lost Note Affidavit. These provisions also require the lender to notify the borrower in writing that the promissory note is lost and that it will request the trustee to proceed after 14 days. The lender must include language notifying the borrower that if she believes that some other party is the true holder of the note, she must file a lawsuit asking the local circuit court to order the foreclosing bank to post bond or make some other protection against any conflicting claims. That Court would then decide whether a bond or some other security must be posted to protect the borrower. The mere absence of the original note cannot serve as a basis to reverse a foreclosure: “If the trustee proceeds to sale, the fact that the instrument is lost or cannot be produced shall not affect the authority of the trustee to sell or the validity of the sale.” Va. Code § 55-59.1(B). These provisions require borrowers to file suit before the foreclosure takes place in order to litigate over “show me the note” issues. Ms. O’Connor did not file suit until almost two years after the foreclosure sale. From the borrower’s perspective, she hasn’t been damaged until the foreclosure is complete. From the Court’s perspective, it is sometimes easier to evaluate matters prospectively than to undo the completed transaction.
Judge Moon remarks that this statute does not actually require the lender to provide the borrower with the lost note affidavit itself. The failure to provide this item cannot serve as the legal basis to reverse a bank foreclosure. Technical breaches of the notice requirements cannot, on their own, serve as a basis to invalidate a completed foreclosure sale.
Judge Moon dismissed Ms. O’Connor’s complaint, giving her leave to amend her claims for Breach of Contract and Fraud. Ms. O’Connor has filed an Amended Complaint, and the sufficiency of the amended lawsuit has not been decided by the court as of this blog post. Regardless as to how Ms. O’Connor’s case is resolved, it provides some important reminders about foreclosure contests:
- Timing of Foreclosure Contest: If a borrower wants to challenge the validity of a foreclosure, their best interests may be served in filing suit after the foreclosure notice is submitted and before the auction occurs. This does not guarantee that the “show me the note” allegation will provide a remedy for the borrower, but it does preserve the issue.
- Value of Title Insurance: Investors who desire to purchase a property in foreclosure without obtaining title insurance run the risk of being made a party to a lawsuit like Ms. O’Connor’s which may go on for months or years.
- Duties of Foreclosure Trustees: An attorney acting in the capacity as a foreclosure trustee under the loan documents may owe duties to parties other than the bank. I discuss this issue in a related May 21, 2014 blog post. However, he doesn’t have an attorney-client relationship with non-clients.
Lenders and borrowers are not the only parties that may have a property interest challenged by title problems from a past, present or future foreclosure. The purchaser in the foreclosure sale, the spouse of the borrower or purchaser, an investor in a real estate company, or a tenant may have rights at stake in foreclosure title litigation. If your property rights are threatened by such an action, contact a qualified attorney.