Reversing the lower court’s dismissal, the U.S. Court of Appeals for the Ninth Circuit recently held that, for purposes of the federal Servicemembers Civil Relief Act (“SCRA”), the term “foreclosure” is broadly defined and encompasses more than just a formal foreclosure proceeding seeking the transfer of ownership or the sale of property.
The Court then concluded that a loan servicer’s failure to remove fees relating to a notice of default rescinded by a previous loan servicer, while the borrower was on active duty, constituted a violation of the SCRA.
A copy of the opinion is available at:http://cdn.ca9.uscourts.gov/datastore/opinions/2014/02/07/12-56560.pdf
The case involves a consumer who was a member of the United States Marine Corps Reserve who obtained a mortgage loan on a property located in California before he was called to active duty. He was called up to active duty on three occasions between 2008 and 2011, including an overseas deployment from October of 2010 to March of 2011.
During that time, he failed to make full payments on the mortgage. The initial loan servicer started foreclosure proceedings in December 2009 by recording a notice of default, which included various fees associated with the initiation of the foreclosure. The loan servicer rescinded the notice of default in August 2010 but did not remove the associated fees from his account.
In November of 2010, the original servicer transferred the servicing to a different servicer. The second loan servicer did not remove the fees, and attempted to recover the fees during a five month period while the plaintiff was on active duty, including three and a half months while he was deployed overseas.
The servicemember filed suit against both loan servicers, alleging a violation § 533 of the SCRA when they charged and maintained the fees related to the rescinded notice of default on his account while he was on active duty . The second loan servicer filed a motion to dismiss, asserting that the term “foreclosure” under the SCRA should be read to only apply to the proceedings that were terminated before it acquired the rights to service the loan. The lower court agreed with the second servicer, and dismissed the SCRA claim. This appeal followed.
The Ninth Circuit noted that the issue to be decided on appeal was the scope of the term “foreclosure” for purposes of the SCRA.
As you may recall, the SCRA provides that “[a] sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) [a mortgage that originated before the servicemember’s military service] shall not be valid if made during, or within one year after, the period of the servicemember’s military service” unless the foreclosure is approved by a court. See 50 U.S.C. app. § 533(c).
The Ninth Circuit provided a brief analysis of the SCRA, noting that the statute imposed limitations on proceedings that could take place while a member of the armed forces is on active duty, including insurance, taxation, loans, contract enforcement and other civil actions. The Ninth Circuit then recognized that the limitations are “always to be liberally construed to protect those who have been obliged to drop their own affairs to take up the burdens of the nation.”
In attempting to determine the scope of the term “foreclosure” under the SCRA, the Ninth Circuit first looked at the statute’s plain language and concluded that the plain language suggests two reasons the term encompasses more than just the formal foreclosure proceeding seeking the transfer of ownership or the sale of property. First, according to the Court, the SCRA refers to foreclosure “proceedings,” implying that it involved a process rather than single act. The second reason for the broad interpretation was that the statute specifically barred a “sale, foreclosure, or seizure of property,” which, to the Court, suggested that foreclosure meant more than just a sale or seizure.
The Court then looked beyond the statute’s explicit terms to determine what the term “foreclosure” encompassed. In doing so, the Court turned its attention to California Civil Code § 2924, which describes the steps that make up a foreclosure proceeding in California. Among other things, that statute includes numerous requirements relating to fees, establishing when fees can be imposed, creating time limits on the imposition of fees and requiring the fees to be in a reasonable amount. Based on this language, the Ninth Circuit concluded that the statutory definition of foreclosure included proceedings related to fees, and because the U.S. Supreme Court has “unambiguously required courts to give a broad construction to the language of the SCRA to effectuate the Congressional purpose of granting active-duty members of the armed forces repose from some of the trials and tribulations of civilian life,” the Ninth Circuit concluded that attempting to collect on fees related to a notice of default on California property constitutes a violation of § 533 of the SCRA.
The Ninth Circuit also rejected the second servicer’s argument that it never actually collected the fees and removed them after the consumer filed the lawsuit. According to the Court, the fact that the servicer never actually collected the fees goes to the amount of the consumer’s damages, but it does not impact the analysis of whether the SCRA was violated. The Ninth Circuit held that the attempted collection of the fees incident to a notice of default was itself part of the foreclosure proceedings barred by § 533.
Finally, the Ninth Circuit made it clear that it did not matter that the second servicer did not issue the notice of default that began the foreclosure proceedings. According to the Court, the failure to remove the fees incidental to that notice of default was a continuation of the proceedings and constituted a violation of § 533.
Accordingly, the Ninth Circuit reversed district court’s dismissal of the consumer’s lawsuit and remanded the matter to the district court for proceedings consistent with its opinion.
Eric Tsai
McGinnis Wutscher Beiramee LLP
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