This past June, in Barnes v. U.S. National Bank, No. 2180699, the Alabama Court of Civil Appeals held that a mortgagee's notice of acceleration failed to strictly comply with the notice provisions contained in Paragraph 22 (“Paragraph 22”) of the Fannie Mae/Freddie Mac Uniform Mortgage. As a result, the Court held that the foreclosure sale was void.
Specifically, Paragraph 22 of the Uniform Mortgage requires a mortgagee accelerating a mortgage debt to provide the mortgagor with an acceleration notice that “inform[s] the Borrower of . . . the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.” The acceleration notice in Barnes informed the mortgagor only that she “may” have the right to assert defenses against foreclosure, rather than affirmatively apprising her that she did have a right to bring an action against the mortgagee. The foreclosure sale was found to be void on this basis.
At the time, it seemed possible that Barnes was simply an outlier decision. Last month, however, the Court made clear in Rosser v. Federal National Mortgage Association, No. 2180917, that Barnes was the new line in the sand.
At the time, it seemed possible that Barnes was simply an outlier decision. Last month, however, the Court made clear in Rosser v. Federal National Mortgage Association, No. 2180917, that Barnes was the new line in the sand. In Rosser, the Court again held that a mortgagee did not strictly comply with Paragraph 22 because the mortgagee issued an acceleration notice that merely informed the mortgagor that she “may” have a right to bring an action to assert defenses to default, rather than affirmatively apprising her of her independent, non-contingent right to do so. The result in Rosser, again, was an invalidated foreclosure sale.
In both Barnes and Rosser, the Court's reasoning turned on two key findings. First, the Court reasoned that the acceleration notice risked misleading the mortgagor into believing that she could not file an action against the mortgagee prior to the commencement of foreclosure proceedings to challenge the existence of a default under the mortgage (i.e., that she could not directly attack the pending foreclosure). The court found this significant because, if the mortgagor waited until after the foreclosure sale took place to raise a collateral attack on the foreclosure sale, then the mortgagor would have more limited defenses to the foreclosure sale.
Second, the Court found that use of the term “may” suggests that a mortgagee's unconditional right to bring an action against a mortgagor to assert defenses to default is subject “to some unknown and unspecified condition.” In both opinions the Court expressed concern that a notice using the term “may” could lead a mortgagee to believe that they must wait for a lawsuit to be filed against them before they could raise defenses to default. The Court found this concerning because, in a non-judicial foreclosure state like Alabama, such a lawsuit may never be filed. Indeed, both Rosser and Barnes involved non-judicial foreclosure sales, and the litigation arose only in the context of the purchaser's ejectment action against the mortgagor.
In essence, the Alabama Court of Civil Appeals in Barnes and Rosser has interpreted Paragraph 22 to require a mortgagee to apprise a mortgagor of their unconditional right to bring a lawsuit to contest foreclosure
In essence, the Alabama Court of Civil Appeals in Barnes and Rosser has interpreted Paragraph 22 to require a mortgagee to apprise a mortgagor of their unconditional right to bring a lawsuit to contest foreclosure – not merely to remind a mortgagor of their conditional ability to prevail in such a suit, should the suit be meritorious. While this issue has not yet been addressed by the Alabama Supreme Court, at this time there is little reason to believe the Alabama Supreme Court's analysis would be different.
Alabama is not the only state to interpret Paragraph 22 in this way. Both Rosser and Barnes cited approvingly to a Massachusetts decision concluding that a mortgagee's acceleration notice, providing only that a mortgagor had the right “to assert in any lawsuit for foreclosure and sale the nonexistence of a default,” did not comply with Paragraph 22. See Pinti v. Emigrant Mortgage Co., 472 Mass. 226, 33 N.E. 3d 1213 (2015). It's possible that these cases signal a new national trend in the interpretation of the notice requirements of Paragraph 22 under the Uniform Mortgage.
Considering the harsh consequences for issuing a faulty notice of acceleration, lenders and mortgage servicers should be taking a hard look at their notice practices. The Court in Barnes insisted that its opinion did not require an acceleration notice to copy the language of Paragraph 22 verbatim, stating that it was “confident that a mortgagee, a loan servicer, or another party tasked with sending a notice of default to mortgagors . . . has considerable latitude in the means to be employed to comply with such notice requirements.” But had the acceleration notices in Rosser and Barnes copied the language of Paragraph 22 word-for-word, it is tempting to conclude that the outcomes of these cases would have been different. As such, parties preparing to send notice under the Uniform Mortgage should really be asking themselves: Is there any downside to issuing an acceleration notice that tracks Paragraph 22 exactly?
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