In a split decision, the United States Court of Appeals for the Ninth Circuit recently determined that the Bank of New York Mellon (the “Bank”), as first deed of trust lienholder, could challenge a homeowner’s association’s (“HOA”) sale of a property as a violation of an automatic bankruptcy stay, giving the Bank superior title. See Bank of New York Mellon as Tr. for Certificateholders of CWALT, Inc., Alternative Loan Tr. 2005-54CB, Mortg. Pass-Through Certificates Series 2005-54CB v. Enchantment at Sunset Bay Condo. Ass’n, 2 F.4th 1229 (9th Cir. 2021). In the case, Harold Hill (“Hill”) purchased property at 732 Hardy Way, Mesquite, Nevada. The Bank was a first deed of trust lienholder. In January 2014, Hill fell behind in his HOA dues, and the HOA recorded a notice of delinquent assessment lien in February 2014. In April 2014, Hill filed for Chapter 13 bankruptcy, and an automatic stay went into effect. On July 15, 2014, while Hill's bankruptcy case was pending, the HOA recorded a notice of foreclosure sale, and sold the property to the 732 Hardy Way Trust (the “Trust”).  The Bank sued to quiet title and for declaratory relief on the basis that the foreclosure sale was void because it violated the bankruptcy stay, among other relief.

The Bank and the Trust each moved for summary judgment. The Trust argued it had superior title because the HOA foreclosure sale extinguished the Bank’s deed of trust. The Bank argued that the HOA foreclosure sale did not extinguish its lien because the sale violated the automatic bankruptcy stay and thus was void under Nevada and Ninth Circuit precedent, or alternatively, Nevada's HOA foreclosure statute violated due process. The District Court granted summary judgment in favor of the Trust and dismissed the remaining claims against the HOA, holding that  “the foreclosure sale extinguished the [Bank’s] deed of trust on the [P]roperty and that [the Trust] purchased the property free and clear of the deed of trust.” The Bank appealed.

The Ninth Circuit reversed.  First, it held that the Bank, as a creditor, had standing to make the argument that the HOA foreclosure sale occurred in violation of the automatic stay and was void.  Second, the Court found that, under Nevada precedent, an HOA foreclosure sale “conducted during an automatic stay in bankruptcy proceedings is invalid.”  The Court then concluded that the Bank’s interest was superior to the Trust’s interest because Hill listed the property in his bankruptcy schedules in March 2014 and the property was auctioned off on September 19, 2014, while the stay was in effect.  Thus, the sale was void, and not merely voidable, under Nevada law.

In dissent, Judge Forrest argued that the Bank did not have standing to challenge the sale under the Bankruptcy Code, because “[t]he Bank wants the foreclosure sale declared void to preserve its lien interest in the subject property . . . [and] does not advance or preserve the bankruptcy estate[.]”  Thus, because the Bank was only pursuing its own interest, rather than that of the estate, she argued it should not have standing to seek to void the sale.  “Whereas the Bank’s quiet-title claim is unrelated to its role as a ‘creditor’ and the purposes for which the automatic stay was enacted, I would reject the Bank’s ‘disingenuous attempt to use the Bankruptcy Code [for its own] advantage.’”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

The United States Court of Appeals for the Second Circuit recently vacated and remanded a decision by a lower court that found that a defendant bank’s de-acceleration of a mortgage was invalid because it was motivated solely by a desire to avoid the expiration of a statute of limitations. See 53rd St., LLC v. U.S. Bank Nat’l Ass’n, 8 F.4th 74 (2d Cir. 2021). In 2006, a borrower executed a note and mortgage in favor of Downey Savings and Loan Association (“Downey”). Downey sued to foreclose the mortgage on June 30, 2008, and while it was pending, assigned the note and mortgage to U.S. Bank. The foreclosure was dismissed.  In June 2014, within six years of Downey’s suit to foreclose, U.S. Bank sent letters to the borrower stating that the loan, which had previously been accelerated by the filing of foreclosure, was de-accelerated and reinstituted as an installment loan. However, a few weeks later, U.S. Bank notified the borrower by letter that the mortgage could be re-accelerated for non-payment. In 2018, a junior mortgagee sued for foreclosing on the subject property, and 53rd St, LLC (“53rd Street”) purchased the property at the foreclosure sale.  53^rd Street then filed this action to cancel and discharge U.S. Bank’s mortgage because the statute of limitations to foreclose expired on June 30, 2014. Relying on a statement in Milone v. U.S. Bank, N.A., 164 A.D.3d 145 (2d Dep’t 2018), the District Court ruled that, because the bank’s purported de-acceleration of the mortgage was motivated only by intent to avoid expiration of the statute of limitations, the bank did not succeed in deaccelerating the mortgage and ruled that the six-year limitations period had expired and discharged the mortgage.

On appeal, the Court observed that under New York law, when acceleration of a mortgage is made optional in a mortgage agreement, the debt may be accelerated by the mortgagee’s taking of “some affirmative action . . . evidencing the holder’s election to take advantage of the accelerating provision, including commencing a foreclosure action.” The Court further noted that in Milone, on which the District Court relied, the court observed that “[c]ourts must be mindful of the circumstance where a bank may issue a de-acceleration letter as a pretext to avoid the onerous effect of an approaching statute of limitations” and interpreted this to mean that, if a de-acceleration was motivated by desire to avoid expiration of the limitations period, it would fail to take effect. In 2021, however, the New York Court of Appeals in Freedom Mortgage Corp. v. Engel, 37 N.Y.3d 1 (N.Y. Feb. 18, 2021) (“Engel”) expressly “reject[ed] the theory . . . that a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt,” and that instead, a court must simply ask whether the mortgagee took an unambiguous affirmative act to de-accelerate the mortgage within the six-year limitations period. The Court rejected 53rd Street’s argument that Engel means that a voluntary discontinuance of a foreclosure is the only way to de-accelerate an accelerated mortgage, and that instead, Engel expressly contemplated other “affirmative acts” that would suffice. Since the District Court’s finding for 53rd Street was based primarily on Milone’s now-abrogated intent rationale, the Court vacated the judgment and remand for further consideration of U.S. Bank’s “affirmative acts” in light of Engel.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

The United States District Court for the District of Hawaii recently dismissed claims against defendants HomeStreet Bank and Penny Mac in a case that accused them of violations of the Truth In Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). See Mathias v. HomeStreet Bank, Inc., 2021 WL 4484549 (D. Haw. 2021). In 2009, plaintiff took out a mortgage with HomeStreet to purchase a home. In November 2017, plaintiff met with a HomeStreet employee intending to pay off the amount due on his mortgage, but the employee convinced plaintiff to refinance his loan instead, and plaintiff signed a 30-year mortgage and note for $361,857 with HomeStreet in March 2018. Although the loan was initially signed on March 1, 2018, the “date of closing” for that loan was later updated to March 2, 2018, the date on which the mortgage was notarized. On May 3, 2019, HomeStreet informed plaintiff that his loan had been transferred to Penny Mac. Plaintiff filed this lawsuit on March 22, 2021 alleging that the defendant lenders violated TILA and RESPA by failing to provide him with the required material disclosures, including notice of his right to rescind, and seeking rescission of his loan under TILA and statutory damages under both TILA and RESPA. Defendants filed motions to dismiss arguing, among other things, that plaintiff’s claims were barred by the statutes of limitations of both TILA and RESPA. The Court had previously dismissed plaintiff’s initial complaint but granted him leave to amend to prove that his claims were within the statutes of limitations. Plaintiff’s amended complaint pleaded the same facts as his initial complaint, but added facts concerning his neurological condition, claiming it was an “extraordinary circumstance” justifying equitable tolling.

Regarding the TILA rescission claim, the Court noted that TILA requires that, when a creditor fails to disclose the information required by subsection (a) of TILA, the borrower must assert his right to rescind within “three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first,” either by instituting a lawsuit or by simply providing notice. The Court held that the “consummation date” was at latest March 2, 2018, and that plaintiff had not shown that he provided notice to defendant of his intent to seek rescission before his right to rescind expired. As to the plaintiff’s claim for statutory damages under TILA and RESPA, the Court noted that both statutes imposed a one-year limit on damages claims, and that again, violations occurred at latest on March 2, 2018, and were thus time-barred.

As to equitable tolling, the Court evaluated plaintiff’s claims under the standard that “a court may pause the running of a limitations statute in private litigation when a party ‘has pursued his rights diligently but some extraordinary circumstance’ prevents him from meeting a deadline.” The Court acknowledged that a mental impairment may qualify as an “extraordinary circumstance,” but rejected plaintiff’s conclusory contention regarding his condition.  It found that the complaint lacked specificity concerning the effects of plaintiff’s impairment and the timing of that impairment, and that plaintiff was unable to demonstrate he “was unable rationally or factually to personally understand the need to timely file,” or was “unable personally to prepare a [complaint] and effectuate its filing,” and therefore found that equitable tolling was not adequately pled.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.