Case Law Newsletter

Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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March 2010

FHA does not apply to a mortgagee’s decision to demand payment or commence foreclosure.

In Davis v. Wells Fargo Bank, 07 C 2881, (N.D. Ill. Feb. 5, 2010) the Plaintiff plead that the Defendants discriminated against her by continuing to demand payment on the mortgage despite their knowledge that the initial mortgagee defrauded her. This conduct, she asserted, violated Sections 3604 and 3605 of the Fair Housing Act (“FHA”). Section 3604(a) makes it illegal, among other things, to “refuse to sell or rent … or to otherwise make unavailable or deny, a dwelling to any person” on the basis of race. Id. § 3604(a). Section 3604(b) more broadly bans discrimination “against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith” because of race. 42 U.S.C. § 3604(b). Section 3605(a) makes it “unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms of conditions of such a transaction, because of race….” 42 U.S.C. § 3605(a). The Defendants argued that the claim does not implicate either section of the FHA because the Defendants did not enter into-or refuse to enter into-any loan with the Plaintiff. The court agreed. It concluded that Section 3605 applies only to transactions involving the “making or purchasing of loans” which the complained of conduct did not involve. Further, her assertion that Defendants’ efforts to foreclose on her home, along with their “deplorable practice” of assuming or servicing “loans that are designed to fail,” violates § 3604 could not be countenanced either. The court agreed with the Defendant that § 3604 “does not protect … intangible interests in the already-owned property.” Heeding recent Seventh Circuit authority, (Bloch v. Frischholz, 587 F.3d 771 (7th Cir.2009)) which left open the possibility that § 3604 “may reach post-acquisition discriminatory conduct that makes a dwelling unavailable to the owner or tenant, somewhat like a constructive eviction”, the court doubted that a mortgage holder with an apparent right to demand payment or pursue foreclosure could be liable under § 3604 for engaging in such conduct.

HOLA did not apply to preempt state law claims against a mortgage-assignee who was a federally chartered thrift because the originator of the loans was not also federally chartered.

In Vang v. Home Loan Funding, Inc., CV F 07-1454 AWI GSA, (E.D. Cal. Feb. 22, 2010) the mortgage-assignee, a federally chartered thrift, moved to dismiss a class claim for fraudulent omission brought under California common law and under California’s Business and Professional Code § 17200 on the ground that both claims were preempted by the Home Owners’ Loan Act of 1933, 12 U.S.C. § 1464 (“HOLA”). The Plaintiffs argued that HOLA did not apply to preempt the state law claims because the originator of the loans was not a federally chartered institution and did not, therefore, come within the preemptive reach of HOLA. Because the loans were ultimately transferred to the Defendant by means of assignment, they remain subject to the same state law claims and defenses regardless of the fact the loans were assigned to an institution that is subject to federal regulation under HOLA. The court agreed. It started its analysis by stating that under the law of assignments the loans would be subject to the same claims and defenses after assignment to the Defendant, absent countervailing authority. It found no countervailing authority. In fact, the applicable authority sets forth the scope of activities that state law may not regulate. These include “Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations [ … ] or other credit-related documents ….” § 560.2(b)(9), as well as state laws relating to “[p]rocessing, origination, servicing, sale or purchase of, or investment or participation in, mortgages” are preempted. § 560.2(b)(10). The Plaintiffs were not suing for Defendant’s conduct with respect to any of the listed activities. They were not thus attempting to regulate the conduct of the federally chartered institution. Rather, they sued because Defendant is the holder in due course of loans that were subject to claims and defenses under state law at the time of their origination.

Servicer’s error in foreclosing on a previously satisfied mortgage justifies vacating default and foreclosure sale

Described by the Indiana Court of Appeals as “Kafkaesque” the facts in Elliott v. JPMorgan Chase Bank, 920 N.E.2d 793, 794 (Ind. Ct. App. Feb. 3, 2010) involved a “uniquely bizarre” situation where a mortgage had been paid and released by the mortgagee but, unbeknownst to the mortgagee, its servicer commenced foreclosure proceedings. The owners later learned that a default judgment had been entered against them and their home had been sold at a sheriff’s sale to the mortgagee. Once the mortgagee learned of the case it filed a satisfaction and release of the mortgage but the servicer continued to prosecute the case in the mortgagee’s name. Finding this situation untenable, the Court of Appeals reversed and remanded the case for trial. The Court found that both elements of Indiana Trial Rule 60(B) had been shown. First, the submission of evidence that the mortgage was paid in full and released justified relief from the judgment and also constituted a meritorious defense to the foreclosure. As for the requirement that the motion for relief from judgment be filed “within a reasonable time,” the court noted that as soon as the owners learned of the foreclosure and sheriff’s sale, they contacted the Indiana Attorney General who reviewed their complaint and referred them to the State Comptroller, who eventually concluded that it had no jurisdiction over the servicer. Within one week of that finding the owners filed the motion for relief from judgment. The Court concluded that their reliance on the advice of professionals from the Attorney General’s and Comptroller’s offices, and the fact that they were never advised to hire an attorney and challenge the default judgment, was sufficient to show they acted diligently.