Tag: foreclosure purchaser

Supreme Court of Virginia Limits Ability to Challenge Foreclosures

Posted on by Brigitte Flores

One of the risks involved with purchasing property at a foreclosure sale is that the prior owner may attempt to challenge the validity of the sale. Often, the challenge to the foreclosure sale is an attempt to avoid or delay eviction after the foreclosure, as the Supreme Court reviewed at length in its ruling in Parrish v. Fannie Mae, 292 Va. 44 (2016). These challenges may also result in a claim on the new owner’s title insurance policy.

On April 2, 2020, the Supreme Court of Virginia issued an opinion that clarifies and further limits the ability of a foreclosed property owner to rescind a completed foreclosure sale. In Young-Allen v. Bank of Am., N.A., 839 S.E.2d 897 (Va. 2020), a property owner in the City of Alexandria facing foreclosure requested a reinstatement quote from the lender prior to foreclosure. The lender did not respond to that request and, despite the property owner’s request that the lender postpone the sale to give her time to reinstate the loan, proceeded with the foreclosure.

On the day before the foreclosure, the property owner filed a suit in the Circuit Court of Alexandria alleging that: (i) the lender breached the terms of the deed of trust by failing to provide the requested reinstatement figures, (ii) the foreclosure trustee breached its fiduciary when it refused to cancel or postpone the scheduled foreclosure sale despite request, (iii) the lender did not have the authority to conduct the foreclosure sale, and (iv) requesting that the Circuit Court rescind any foreclosure sale that might occur during the pending litigation. The property owner also filed a memorandum of lis pendens in the land records of the City of Alexandria on the same day. The following day the trustee performed the foreclosure sale and the property was sold to a third-party bidder.

Following the foreclosure sale, the property owner amended her Complaint. In the Amended Complaint the property owner continued to ask the Court to rescind the sale, among other relief requested. The lender and foreclosure trustee filed demurrers to the Amended Complaint, arguing that the Amended Complaint failed to state a cause of action upon which the Circuit Court could provide relief. The Circuit Court for the City of Alexandria sustained the demurrers and dismissed the Amended Complaint with prejudice. The property owner appealed to the Supreme Court of Virginia.

On appeal, the Supreme Court of Virginia affirmed the circuit court’s decision. The Court noted that rescinding a foreclosure sale “is a remedy which calls for the highest and most drastic exercise of the power of a court of chancery—to annul and set at naught the solemn contracts of parties.” The Court also stated that “[g]enerally, a court will not rescind a completed foreclosure sale”.

The Court did note that there are “potential exceptions” to the rule that a foreclosure sale cannot be rescinded. These exceptions include: (a) the failure to properly advertise under Everette v. Woodward, 162 Va. 419 (1934), (b) the sale of the property after the secured debt has been satisfied under Smith v. Woodward, 122 Va. 356, (1918), or (c) when the underlying debt was procured through fraud under Wasserman v. Metzger, 105 Va. 744 (1906). The Court also cited collusion between the foreclosure trustee and the purchaser, along with a foreclosure sale price of such gross inadequacy that it shocks the conscience of the court as grounds for rescission. However, it should be noted that absent any evidence of fraud, a foreclosure sale will not be set aside for an inadequate price alone. Squire v. Va. Hous. Dev. Auth., 287 Va. 507, 519, (2014).

In addition to limiting and clarifying the circumstances under which a foreclosed property owner can seek to rescind the foreclosure sale, the Court also commented upon the liability of foreclosure trustees, thus further clarifying a ruling the Court had recently made in Crosby v. ALG Tr., LLC, 296 Va. 561 (2018). In Crosby, the Court ruled that it may be possible for a deed of trust obligor to file a suit against a trustee of a deed of trust for breach of fiduciary duties not specifically identified in the deed of trust. However, in Young-Allen, the Court ruled that as a baseline premise to any claim against a trustee, the property owner must allege that she suffered actual damages and could have reinstated the loan in order to satisfactorily set out a claim against a deed of trust trustee for breach of fiduciary duty.

Finally, the Court noted that filing a memorandum of lis pendens is not sufficient to cause a trustee to forestall a foreclosure. The Court confirmed that a memorandum of lis pendens is merely a notice to the world of the pendency of a judicial proceedings and that, in and of itself, is not sufficient to prevent the trustee from foreclosing.

The Supreme Court of Virginia has, in recent years, addressed a number of issued related to foreclosure. Young-Allen v. Bank of Am., N.A. may prove to be a valuable tool for foreclosure purchasers facing a challenge to the validity of the foreclosure sale.

 

 If you have any questions about foreclosures or foreclosure sales, please contact John Rinaldi.

Recent Residential Foreclosure Cases Bring About Changes in the Law

Posted on by John Rinaldi


The increased number of residential foreclosures in the recent past has also led to a rise in the number of lawsuits from borrowers challenging the validity of some of those foreclosures. As a result, a number of recent Virginia cases have shed some light on the foreclosure process and helped to clarify the rights of the parties involved.

When faced with foreclosure, property owners will sometimes call into question the conduct of the lender prior to the foreclosure sale. Sometimes the foreclosed owner will seek to rescind the sale of the property after the foreclosure sale has taken place.   In two recent cases, Ramos v. Wells Fargo Bank, (2015), and Mathews v. PHH Mortgage Corp., (2012), the Supreme Court of Virginia confirmed that any challenge to a foreclosure based on the pre-foreclosure conduct of the lender must be filed before the foreclosure sale has taken place, if the borrower wants to avoid a foreclosure sale.  Once the foreclosure has taken place, a property owner can sue the lender for damages based on the claim of a wrongful foreclosure, but cannot bring an action to rescind the sale.

Once the sale has taken place, a property owner can still challenge a foreclosure based on a defect in the conduct of the sale itself.  In order to overturn a defective foreclosure sale, the property owner must be able to allege the following: a defect in the conduct of the sale, a grossly inadequate sales price, and that any third-party purchaser had notice of the defect in the conduct of the sale.  In Squire v. Virginia Housing Development Authority, (2012), the Supreme Court of Virginia held that unless the property owner can prove that the trustee was guilty of fraud, or demonstrated any partiality toward or was in collusion with the purchaser, even an inadequate price would not necessitate that the sale be set aside.

Perhaps one of the most surprising of the recent decisions following a foreclosure has come in the context of an action to take possession of foreclosed property. Prior to 2016, many practitioners believed that any issues with respect to a foreclosure were not relevant in an action seeking possession. The General District Courts, which do not have subject matter jurisdiction over title claims, usually hear actions with respect to possession in the form of an action for unlawful detainer. A Trustee’s Deed was sufficient evidence of the right to possession of the property, and any challenge to the validity of a Trustee’s Deed would have to come in the form of a separate action by the former property owner in the Circuit Court. The foreclosure purchaser would be entitled to possession until the Circuit Court had ruled on any action related to the validity of the Trustee’s Deed.

This past year, the Virginia Supreme Court ruled in Parrish v. Federal National Mortgage Association, that issues of title can be presented to the General District Court as a part of a proceeding for unlawful detainer. If the General District Court finds that the former property owner’s allegations of a defective sale have merit, it must immediately dismiss the action, without prejudice, to allow the parties to address the issues in the Circuit Court.  However, if the General District Court finds that the former property owner’s allegations of a defective foreclosure sale do not have merit, then the General District Court can proceed with the unlawful detainer and grant possession of the property to the foreclosure purchaser.  As has always been the case, the former property owner would have an appeal by right to the Circuit Court. It will be interesting to see the extent of the impact that Parrish v. Federal National Mortgage Association will have on unlawful detainer actions in the future.