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Property Owners’ Complaint Dismissed for Insufficient Facts Showing Date of Foreclosure Loss Mitigation Application Banner Image

Property Owners’ Complaint Dismissed for Insufficient Facts Showing Date of Foreclosure Loss Mitigation Application

Month: April 2025

Property Owners’ Complaint Dismissed for Insufficient Facts Showing Date of Foreclosure Loss Mitigation Application

Posted on by Christie Bowness

What You Need to Know

  • The United States District Court for the Eastern District of Virginia recently dismissed RESPA claims because plaintiffs could not prove when they submitted their loss mitigation application
  • Court emphasized that "dual tracking" claims require complete loss mitigation applications submitted at least 37 days before foreclosure
  • Trustees and law firms acting as trustee’s agents are exempt from RESPA liability
  • Courts require specific timeline documentation for RESPA claims - verbal assurances from servicers about postponing foreclosure are insufficient protection
  • Heflin v. PHH Mortgage Corp. (March 2025) reinforces that courts strictly interpret technical requirements of RESPA's loss mitigation procedures

Introduction

In a recent case from the Eastern District of Virginia, property owners sued the loan servicer PHH Mortgage Services (“PHH” or the “Servicer”) and McCabe Weiberg and Conway (“MWC”), counsel for the Trustee of the Loan Pool after attempting to submit a loan modification application to stop the foreclosure of their home. Ultimately, the Court found that Plaintiffs failed to state a claim against the Servicer because they did not allege sufficient facts as to when and how they submitted their application to the extent it could be determined to be complete and timely submitted.  Thus, the United States District Court could not determine if PHH impermissibly dual tracked the loan modification negotiations and foreclosure in violation of the loss mitigation procedures or regulation X, 12 C.F.R. 1024 of the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601, et seq. (“RESPA”).  The Court then dismissed the claim against MWC because the firm acted on behalf of the Trustee and trustees are not subject to the statute upon which the Plaintiffs sought relief. Heflin v. PHH Mortg. Corp., Civil Action No. 3:24CV232 (RCY), 2025 U.S. Dist. LEXIS 40988 (E.D. Va. Mar. 6, 2025).

Facts

Jerry and April Robertson Heflin (the “Plaintiffs”) owned a home in Fredericksburg, Virginia (the “Property”) that was subject to a mortgage serviced by PHH. Plaintiffs submitted an application to prevent the foreclosure of the Property, and on November 16, 2023, they received a “letter of under review” from PHH. On November 23, 2023, Plaintiffs called and spoke with a PHH representative who stated that she would extend the foreclosure until January 1, 2024. That said, the November 30, 2023 foreclosure sale date was not moved. According to Plaintiffs, they called the lenders’ office and the trustee’s office, but no one could tell them what to do. As a result, the foreclosure sale moved forward, and on December 1, 2023, MWC, on behalf of the Trustee, completed the Sheriff sale of the Property.

Proceeding pro se, Plaintiffs subsequently filed suit against PHH and MWC, alleging that Defendants failed to comply with the RESPA loss mitigation procedures. Specifically, they alleged that Defendants moved forward with the foreclosure auction on their Property despite PHH’s assurances that the foreclosure would be rescheduled, and that their application was “under review,” in violation of the “dual tracking” provision of 12 C.F.R. § 1024.41, which prohibits the foreclosure of a house while a loss mitigation application is pending. Plaintiffs sought recission of the foreclosure, reinstatement of their loan, and damages based on loss of income, storage rental unit costs, and emotional distress. In defense, Defendants moved to dismiss, arguing that Plaintiffs failed to submit, or failed to timely file, their loss mitigation application, and failed to allege actual damages.

Decision

The Court determined that Plaintiffs failed to allege enough facts to state a claim that is plausible on its face.

Specifically, under 12 C.F.R. § 1024.41(g), “dual tracking” is prohibited when:

a borrower submits a complete loss mitigation application after a servicer has made the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process but more than 37 days before a foreclosure sale, a servicer shall not move for foreclosure judgment or order of sale, or conduct a foreclosure sale, unless:

(1) The servicer has sent the borrower a notice pursuant to paragraph (c)(1)(ii) of this section that the borrower is not eligible for any loss mitigation option and the appeal process in paragraph (h) of this section is not applicable, the borrower has not requested an appeal within the applicable time period for requesting an appeal, or the borrower's appeal has been denied;

(2) The borrower rejects all loss mitigation options offered by the servicer; or

(3) The borrower fails to perform under an agreement on a loss mitigation option.

The Court noted the statutory distinctions between complete, incomplete, and facially complete loss mitigation applications as defined in 12 C.F.R. § 1024.41. A complete application is defined as “an application in connection with which a servicer has received all the information that the servicer requires from a borrower in evaluating applications for the loss mitigation options available to the borrower,” whereas a facially complete application is defined as an application where the servicer determines additional information is needed, and treats the application as facially complete until the borrower is given a reasonable opportunity to respond to the additional request for information.

In order to state a plausible claim under this statute, Plaintiffs were required to allege that they submitted a complete loss mitigation application, that the application was submitted at least thirty-seven days before the foreclosure sale, and that none of the above three exceptions apply.

Given the statutory timeline to submit the complete application, Plaintiffs were required to submit to PHH by October 25, 2023, for their scheduled foreclosure date on December 1, 2023. However, Plaintiffs’ complaint did not indicate when they submitted their application. Plaintiffs attached letters from PHH, dated November 6 and November 16, 2023, confirming the receipt of their application, but the letters contained no indication of when Plaintiffs sent in their application. As such, the Court held that the complaint did not plead facts necessary to support a claim against Defendants under 12 C.F.R. § 1024.41(g).

Further, the Court also found that Plaintiffs failed to state a claim against MWC, because the statute only permits actions against a servicer of a loan, which is defined as the person responsible for servicing the federally related mortgage loan, 12 C.F.R. § 1024. Here, Plaintiffs only alleged that MWC sold their home and failed to honor the extension of the foreclosure deadline. However, MWC was acting as a trustee, not a servicer, and Plaintiffs alleged no other independent basis for liability. As a result, the Court granted MWC’s motion to dismiss with prejudice, because no amendment to the complaint would change MWC’s status as a non-servicer of Plaintiffs’ loan.

Plaintiffs’ claims were therefore dismissed with prejudice as against MWC, but dismissed without prejudice, and with leave to amend, as against PHH, out of deference to Plaintiffs’ pro se status.

Takeaways

This case underscores that as to RESPA claims,  courts will require specific and detailed factual pleadings as to all elements of the claim and particularly timeliness.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.

Right of First Refusal Removed by Amendment: Court Dismisses Claims in Centennial Plaza

Posted on by Christie Bowness

What You Need to Know

  • In analyzing whether a right of first refusal in a Master Deed survived two subsequent amendments, the Court found that the plain language of the amendments clearly displaced the original Article of the Master Deed, including the right of first refusal provision, as both amendments stated that the Article was "amended and restated in its entirety."
  • The Court dismissed the Plaintiffs' claims (breach of contract, specific performance, and declaratory judgment) because there was no right of first refusal in the controlling version of the Master Deed after the amendments.
  • The Court also rejected the Plaintiffs' breach of implied covenant claim, finding that the covenant could not be used to add terms that had been explicitly removed from the contract.
  • This case highlights the importance of analyzing all relevant documents, including amendments, when determining if real property is encumbered by restrictions such as rights of first refusal.

Introduction

In a recent decision from the United States District Court for the District of New Jersey, the Court undertook a methodical contractual analysis of the controlling provisions relating to a deed affecting various units in a condominium. Specifically, the District Court considered whether a right of first refusal existing in a master lease survived two subsequent amendments and continued to encumber a unit owner’s right to sell its unit to an outsider. Centennial Plaza Prop., LLC v. Trane U.S. Inc., No. 22-cv-01262, 2025 U.S. Dist. LEXIS 47803 (D.N.J. Mar. 17, 2025).

Background

Two limited liability companies (Centennial Plaza Prop, LLC and IMARC Properties, LLC) (collectively, the “Plaintiffs”) jointly owned two out of four units in a four-unit condominium. A 1985 master deed (the “1985 Master Deed”) originally imposed certain restrictions on the owners of the four units, including a right of first refusal provision in Article 17, which stated in relevant part:

17(d) No Owner shall sell, convey or otherwise transfer its Unit without the prior written consent of the Board of Managers unless:
. . .

17(d)(2) Before executing any such sale, conveyance or transfer, the Owner who proposes to do so . . . gives written notice of all of the material terms of the proposed sale, conveyance or transfer to each of the other Unit Owners and allows them a period of 30 days within which to tender a binding written commitment to purchase the Offeror's Unit for the same or a higher price and on the same other terms . . . .

Thus, Article 17 required a unit owner to elect between seeking permission from the Condominium’s Board of Managers (the “Board”), or giving the other unit owners a right of first refusal before selling a unit. The 1985 Master Deed also provided that the Board’s consent was needed to sell a unit if no 30-day right of first refusal had been provided to other unit owners.

The 1985 Master Deed was amended in 2001 and 2002. The 2001 amended Article 17 stated that the original Article 17 was “hereby amended and restated in its entirety, as follows,” and identified various instances where an owner would be required to obtain the Board’s consent. The right of first refusal issue at controversy in this case was not part of that amendment. The 2002 amendment, like the prior amendment, identified specific instances requiring the Board’s consent; however, the right of first refusal was also not included therein.

Ultimately, the corporation that owned the remaining two units (the “Defendant”) sold them to another limited liability company without offering a right of first refusal to the other unit owners. The Plaintiffs sued the corporation for allegedly violating the right-of-first-refusal provision. This issue came before the District Court on the Defendant’s motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).

The Decision

As an initial procedural matter, the District Court identified the typical motion to dismiss standard that, for purposes of the motion, it must generally take the plaintiffs’ allegations as true. However, it also noted that where a disparity exists between a written instrument annexed to a pleading and an allegation in that pleading, that the written instrument controls. On this issue, the Court found that there was a disparity between the Plaintiffs’ allegation (that the 1985 Master Deed contained a right of first refusal), and the 1985 Master Deed which, as after the amendments, did not include a right of first refusal. Thus, the District Court determined that the language of the 1985 Master Deed would control over Plaintiffs’ allegation.

In interpreting the 1985 Master Deed and two amendments, the District Court found that the plain language of the amendments clearly entirely displaced the original language of Article 17 of the 1985 Master Deed, including the right of first refusal language. The District Court found that such an interpretation would be most in-line with applicable contract maxims, such as reading a contract and amendments as a whole, avoiding redundancies, and avoiding the creation of internal contradictions.

Based on its contractual interpretation, the District Court found that Plaintiffs could not sustain their breach of contract, and specific performance and declaratory judgment claims since there simply was no right of first refusal in the latest controlling version of the Master Deed. The amendments did not supplement the 1985 Master Deed as to whether the unit owner could sell without the Board’s permission if it had not offered a right of first refusal; rather, it removed that obligation when it stated that the applicable contract section (Article 17) was  replaced in its entirety and then did not list not offering a right of first refusal as an instance where the Board’s permission was required to sell.  Regarding Plaintiffs’ remaining breach of implied covenant claim, the Court found that (i) since the Master Deed was amended to remove the right of first refusal, the covenant could not be used to supplement additional terms; (ii) there was no suggestion of unfair surprise or unreasonableness; (iii) since there were no case-specific reasons for the reading of a right of first refusal into the transaction, Plaintiffs were essentially seeking a reading of a right of first refusal to all New Jersey real property covenants, which the Court declined to do. Therefore, the District Court granted Defendant’s motion to dismiss.

Takeaways

This case highlights the importance of being mindful of basic contract principles when considering whether real property is encumbered in some fashion, and that all key documents must be analyzed including any amendments thereto. That is, as analyzed by the District Court, the amendments to the previously controlling master deed eliminated the prior encumbrance (the right of first refusal) on the corporate owner’s right to freely sell the unit to its preferred buyer.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.

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