Consumer Finance Client Alert – December 2018

    By , Benjamin A. Wills, Consumer Finance

    The Supreme Court of Virginia Affirms Finding That Borrower’s Foreclosure Challenge Is Barred Under the Statute of Limitations

    The Supreme Court of Virginia recently affirmed a City of Richmond Circuit Court decision finding that a borrower’s breach of contract claims against his lender were barred under the statute of limitations because they accrued prior to a foreclosure. Kaufman & Canoles attorneys Terry C. Frank and Benjamin A. Wills handled proceedings in the lower and appellate courts on behalf of the lender.

    In Kerns v. Wells Fargo Bank, N.A., No. 171068, 2018 Va. LEXIS 120 (Sept. 27, 2018), a borrower challenged a foreclosure sale on his property based on claims that his lender failed to provide a sufficient pre-acceleration notice. A pre-acceleration notice or “30-day notice” typically provides that unless a borrower can cure his default within 30 days, the lender may accelerate the outstanding balance on the loan (i.e., the entire outstanding balance of the loan can become due). In his complaint, the borrower alleged that the notice he received, which was dated June 20, 2010, was actually sent on June 21, 2010 (or was “back-dated” by a single day), thereby failing to provide the full 30 days of notice required under his deed of trust. Despite receipt of the notice, the borrower did not allege he made any further payments and a foreclosure occurred on August 23, 2011.

    Under Virginia law, the statute of limitations for a breach of a written contract is five years. Mr. Kerns waited exactly five years after foreclosure before filing an action (based on the deficient notice claims) on August 23, 2016. The Kerns court therefore was tasked with deciding whether the borrower’s notice claim accrued on the date of the foreclosure, in which case the suit was timely, or before, in which case it was barred. The Circuit Court found the latter in favor of the lender.

    On appeal, the Supreme Court of Virginia began its analysis by noting that under Virginia law, any amount of damages, however slight, triggers the accrual of the cause of action, even if the damages could not be ascertained with specificity at the time of the breach. Applying this principle to the borrower’s allegations, the court agreed with the lower court’s determination that the limitations period began when the lender accelerated the debt and made the entire outstanding balance immediately due. Even though no foreclosure had yet occurred, the borrower was in a worse position after the acceleration and therefore was “damaged.”

    In reaching this decision, the Supreme Court of Virginia rejected the borrower’s counter that no accrual occurred because the lender had no right to accelerate, noting that under such a theory no right of action would ever accrue because the transgressor had no right to breach. Further, the court rejected the borrower’s argument that if he had filed his claim after acceleration but before foreclosure, he could not establish a cause of action because he had not yet lost his property. The Supreme Court of Virginia responded that even in the unlikely scenario that a foreclosure did not occur in the five-year period, a borrower could have filed a breach of contract and sought nominal damages based on the acceleration.

    The Supreme Court of Virginia concluded that because the borrower did not file his suit against the lender within five years of this date of accrual, the statute of limitations barred his breach of contract claims.

    Fourth Circuit Affirms Western District of Virginia’s Rejection of Mortgage Borrower’s “Strict Compliance” Theory, Upholding the Standard of “Substantial Compliance.”

    The Fourth Circuit Court of Appeals affirmed a U.S. District Court for the Western District of Virginia (“District Court”) decision dismissing a borrower’s claims that a lender should be held to a standard of “strict compliance” with deeds of trust, rejecting the borrower’s interpretation of several recent Supreme Court of Virginia opinions. Kaufman & Canoles attorneys Terry C. Frank and Benjamin A. Wills handled proceedings in the lower and appellate courts on behalf of the lender.

    In Stansbury v. Federal Home Loan Mortgage Corp., No. 7:16-cv-00516, 2017 U.S. Dist. LEXIS 140399 (W.D. Va. Aug. 31, 2017), a mortgage borrower alleged that Wells Fargo breached her loan documents by failing to provide a proper pre-foreclosure notice, and that her deed of trust’s “applicable law” provision incorporated a consent order entered into after the deed of trust was executed. The borrower sought a rescission of the foreclosure sale and alternatively compensatory damages against the lender.

    In support of her claims, the borrower asserted that her lender was required to be in “strict compliance” with the terms of her loan documents. The borrower supported this theory by citing several recent Supreme Court of Virginia opinions for the proposition that it has departed from the traditional standard of “substantial compliance.” See Parrish v. Fannie Mae, 292 Va. 44, 787 S.E.2d 116 (2016); Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014); Newport News Shipbuilding EmplesCredit Union v. Busch, No. 150678, 2016 Va. Unpub. LEXIS 18 (Va. June 16, 2016) (unpublished). Conversely, the lender argued that it fully complied with all applicable requirements. The District Court was thus tasked with determining the appropriate standard.

    Judge Dillon of the Western District of Virginia rejected the borrower’s position, finding no support in any of the opinions cited by the borrower for the proposition that the Supreme Court of Virginia departed from the “substantial compliance” standard. She noted that in each of the opinions referenced, the lender clearly failed to do something required as a precondition to foreclosure, which in turn amounted to breaches of the deeds of trust under the “substantial compliance” standard. Judge Dillon then went on to find that the Stansbury lender substantially complied with the borrower’s loan documents in sending the required pre-foreclosure notice, and dismissed the borrower’s claims without leave to amend.

    In addition, the District Court also rejected the borrower’s claim that her deed of trust’s “applicable law” provision incorporated a consent order entered into by her lender and the Office of the Comptroller of Currency well after the date of the deed of trust’s formation. The borrower relied on the Parrish v. Fannie Mae opinion and argued that it overruled a number of cases holding that a contract’s use of the phrase “applicable law” typically excludes laws that are not already in effect at the time of the contract’s formation.

    In Parrish, the Supreme Court of Virginia held allegations that a lender violated certain federal regulations, which were enacted after the loan documents at issue, would be sufficient to survive a demurrer if filed in a Virginia circuit court. The Stansbury borrower argued that because the Supreme Court of Virginia made this finding, it implicitly held that “applicable law” provisions could incorporate later-enacted law. Judge Dillon disagreed, finding that the issue was simply not put before the court in Parrish and further that the court merely accepted the incorporation as true for its analysis. The Stansbury court then held definitively that the definition of “applicable law” in the borrower’s deed of trust did not include language incorporating future changes in the law.

    The borrower appealed the District Court’s decision to the Fourth Circuit, asking it to certify the question of the reach of the Parrish decision to the Supreme Court of Virginia. In an unpublished per curiam opinion, the Fourth Circuit affirmed the lower court’s ruling for the reasons stated in the Western District of Virginia’s opinion. See Stansbury v. Fed. Home Loan Mortg. Corp., 732 F. App’x 216, 216 (4th Cir. 2018). The borrower then filed a Petition for Re-Hearing En Banc, again asking the Court to certify the issues raised in the proceeding to the Supreme Court of Virginia to determine the scope of Parrish. The Fourth Circuit denied the borrower’s request after circulating her petition to the full court.

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