Consumer Finance Litigation Alert – Virginia: A Judicial Foreclosure State?

    By , Bankruptcy, Creditors’ Rights & Business Restructuring

    Virginia: A Judicial Foreclosure State?
    New Virginia Supreme Court opinion strips general district courts of jurisdiction over foreclosure evictions if borrower raises affirmative defenses to foreclosure

    On June 16, 2016, the Virginia Supreme Court, in Parrish v. Federal National Mortgage Association (Record No. 150454), issued a significant opinion on the jurisdiction of Virginia general district courts to determine title issues in foreclosure-related unlawful detainer proceedings. By a 5-2 vote, the Court held that in foreclosure-related evictions, if the foreclosure is sufficiently challenged by the borrower, a general district courts lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try a suit for unlawful detainer and the court must dismiss the case without prejudice. Parrish therefore provides unlawful detainer defendants a method of delaying eviction based on defensive allegations alone. This places the burden of establishing the right to possession on lenders and third party buyersa right that must be vindicated affirmatively in circuit court when the borrower legitimately places the trustees deed in doubt de facto converting Virginias non-judicial foreclosure process into judicial foreclosure proceedings.

    In Parrish, the property was sold at foreclosure and the substitute trustee subsequently conveyed the borrowers property to Federal National Mortgage Association (Fannie Mae). Fannie Mae sent the borrowers a notice to vacate and later filed a summons for unlawful detainer in Hanover General District Court. The borrowers challenged the foreclosure, claiming that the lender violated the loss mitigation aspects of RESPAs Regulation X. The general district court nonetheless awarded possession to Fannie Mae, and the borrowers appealed to the Hanover Circuit Court for de novo review. The circuit court also found in favor of Fannie Mae. On appeal to the Supreme Court, the borrowers claimed that the circuit court erred in granting possession because the general district court had no jurisdiction to try title (based on their RESPA challenge), and, as the circuit courts jurisdiction on appeal was derivative of the district courts, the circuit court lacked jurisdiction as well.

    In reaching its holding that the general district court could be divested of jurisdiction, the Supreme Court of Virginia reasoned that a general district court does not have jurisdiction to try title to real property, though it has jurisdiction over unlawful detainer proceedings, which creates a conundrum when an eviction proceeding involves issues of title. While one dissent argued that title is not tried in unlawful detainer proceedings, only the right to possession, the majority found that a question of title could occur where the plaintiff acquired possession after the defendants lawful entry (e.g., a foreclosure), versus a scenario where the plaintiff had possession prior to the defendant (e.g., a lease). In turn, a question of title arises in foreclosure-related evictions where, in limited circumstances, the homeowner could allege facts sufficient to place the validity of the trustees deed in doubt. In this scenario, the general district court must dismiss based on lack of jurisdiction. The Parrish court then attempted to limit the scope of its ruling by noting that [t]he question of title raised by the homeowners allegations must be legitimate, and that the general district court itself would make this legitimacy determination. The standard to be applied by the general district court is whether a homeowners allegations are sufficient to survive a demurrer had the homeowner filed a complaint in circuit court seeking relief. Importantly, the court noted that should the general district court be forced to dismiss, the burden of establishing the right to evict would be on the foreclosure purchaser, who must seek appropriate remedies in the circuit court.

    The majority concluded by citing examples of what it deemed sufficient allegations to set aside a trustees deed, including fraud, collusion, grossly inadequate sale price, and a material breach of the deed of trust. Applying its holding to the facts at hand, the Supreme Court then found that the borrowers allegations regarding the RESPA violations, which were alleged to be incorporated into their deed of trust and a prerequisite to foreclosure, were sufficient that, if proved, . . . could satisfy a court of equity to set aside the foreclosure. The court then held that the borrowers raised a bona fide question of title in the unlawful detainer proceeding, the general district court thus had no jurisdiction to try the eviction action, and the circuit court likewise lacked jurisdiction on appeal (as again its jurisdiction was derivative of the lower courts).

    In sum, in the wake of Parrish, foreclosed borrowers may now possess a means to divest the general district court of jurisdiction in eviction cases assuming they can allege sufficient facts to raise a bona fide question of title. As noted in Justice Powells partial dissent, this opinion creates a unique jurisdictional wrinkle, as there exists no other class of cases where a court loses jurisdiction based on the nature of the defense raised. Justice McClanahans partial dissent noted that the majority has effectively eliminated the usefulness of this summary proceeding outside of the context of actions between landlords and tenants. Justice McClanahan also noted that the majoritys approach is premised upon a fundamental misunderstanding of real property and the nature of an unlawful detainer action. What the lower courts will ultimately determine constitutes a bona fide issue of title is yet to be seen. Nonetheless, it is clear that Parrish creates a significant new hurdle to evicting a defaulting homeowner.

    Importantly, the majority opinion recognizes that portions of the opinion and the dissents raise concerns about the practical implications of this holding, but concludes that any such practical concerns are properly addressed to the General Assembly. In contrast, in Justice McClanahans partial dissent, it is noted that the majoritys effort [is] to implement a policy in Virginia that effectively prevents a class of record property owners from obtaining possession of property via a summary proceeding that has been in place for centuries. Justice McClanahan stated that, if Virginia wanted this policy, then it must come from the General Assembly and not through judicial pronouncement. The fallout remains to be seen.

    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.