By Lisa Hudson Kim, Consumer Finance

Borrowers Warned in Foreclosure Challenges to “Show Me the Money,” Alleging Reinstatement Capacity or Risk Suit Dismissal and Inability to Set Foreclosure Aside

Jerry Maguire’s famous tagline, “Show me the money!” resonates throughout the Supreme Court of Virginia’s Young-Allen v. Bank of America, N.A., Record No. 181313, 2020 Va. LEXIS 32 (Va. Apr. 2, 2020) opinion. The Court unanimously affirmed the Alexandria Circuit Court’s dismissal of a borrower’s foreclosure challenges, sustaining the lender’s and the trustee’s demurrers to two claims: one for rescission of the foreclosure sale and one for breach of fiduciary duty against the trustee. The case marks a win for those seeking to squelch protests on the eve of foreclosure or defend foreclosures that have already occurred when the borrower’s suit centers on technical defects by asking a commonsense question to the borrower: what are your damages?

The Court ultimately reasoned, if the borrower did not sufficiently allege a material or substantial breach of the deed of trust, then the extraordinary equitable remedy of rescinding a completed third-party sale was outside of borrower’s grasp. If the borrower could not plead ability to “show me the money” to reinstate, then the lender’s alleged failure to supply a reinstatement quote or cure notice did not amount to sufficient, substantial cause to unwind a completed foreclosure sale. The Court noted that “[g]enerally, a court will not rescind a completed foreclosure sale.” Id., at *6. And, importantly, “[r]escission based upon a breach of contract is not a cause of action in itself, but rather a remedy.” Id.

Here, the facts were fairly typical. The borrower fell behind, and the mortgage lender appointed a substitute trustee to conduct the foreclosure sale. The borrower wrote the bank asking for a reinstatement figure to bring the loan current. Complaining the bank ignored her request, the borrower asked the trustee to cancel the pending foreclosure sale. The borrower, by counsel, then filed suit for declaratory judgment (sans an injunction request) the day before sale, alleging breach of contract and seeking rescission of any future sale. The trustee declined to cancel the sale, proceeded to foreclose, and a corporate investor made the winning high bid. The lender filed a demurrer, claiming the complaint failed to state a sufficient claim for lack of alleged damages. The trial court sustained the demurrer, allowing amendment. The borrower filed an amended complaint, by counsel, seeking rescission of the foreclosure sale and alleging a breach of fiduciary duty claim against the trustee for failing to cancel the sale despite her notice of disputes with the lender over the reinstatement quote and cure notice. Defendants filed demurrers, both of which the Circuit Court sustained with prejudice.

The borrower appealed, and the Supreme Court of Virginia affirmed, holding that the borrower must affirmatively allege harm or damages, such as by claiming that she could actually cure the default. The Court held that her amended complaint was missing this critical element required for a viable breach of contract claim. The Virginia Supreme Court further found that, “[the borrower]’s amended complaint failed to allege facts establishing that the breach of the deed of trust caused her any harm.” Id. at *8. The Court recognized that while the amended complaint alleged the lender’s failure to send notices and the date required for reinstatement, it did not allege the borrower “had the ability to cure her default.” Id. (emphasis added). “Without such an allegation, the complaint did not establish that the alleged breach caused any harm.” Id. at *9. The Court also then examined the overall futility of her claim: if the borrower could not cure her default, then the lender’s failure to send notices to her did not cause her any injury. Id. & n.1.

Similarly, because the borrower failed to allege any actual harm or damages, she also failed to sufficiently allege a breach of fiduciary duty claim against the trustee. Moreover, the Court held the borrower’s lis pendens did not require the trustee to postpone the sale. “[N]otice of lis pendens . . . is not an injunction.” Id., at *9. The Court further highlighted the conspicuous absence of the filing of any injunction by the borrower, by counsel.

On a micro level, creditors likely have a new tool in their toolkits to stave off foreclosure contests based upon technical challenges to sale prerequisites when causation and damage elements are inadequately pled by borrowers and they fail to establish the ability to reinstate. A borrower must plead she would have been able to pay funds sufficient to reinstate the loan if the lender had provided the reinstatement figure, to establish damages in her breach of contract claim and entitlement to the extraordinary remedy of rescission for such a breach of contract claim. In sum, plaintiffs, be duly warned: Virginia courts say “show me the money!”

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.