An important appellate court ruling has rejected what it termed a "crafty" argument, which has been advanced by many attorneys in the past several years on behalf of defaulted mortgagors seeking to avoid foreclosure. The United States Court of Appeals for the First Circuit has held that delinquency advances made by servicers to mortgage securitization trusts were not made on behalf of the defaulted borrowers, and therefore foreclosures on the subject properties could proceed.
In Ouch et al v. Federal National Mortgage Association et al (13-1209) and Hana et al v BAC Home Loans Servicing, LP et al (13-1651), appellants-borrowers sought to represent a putative class of borrowers who were delinquent in making their mortgage loan payments. Appellants-borrowers argued that their loan servicers' "contractually-mandated advances of funds to the holders of the notes... constituted payments on the borrowers' debts" (Opinion at p. 3). As such, appellants-borrowers claimed that they were not in default and the mortgage holders lacked power to foreclose.
The First Circuit rejected borrowers' argument, which relied on the Massachusetts Uniform Commercial Code, claiming that their loan servicers' delinquency advances constituted a payment of their mortgage loan. The analysis, under controlling United States Supreme Court precedent, turned on the servicers' intent when making the advances—were they made to relieve the borrowers' debts?
The Court reasoned that the plain language of the trust agreements "belie any plausible inference that the payments were done with an intent to pay the borrowers' debt" and that, according to the express language of the trust agreements, a borrower's non-payment constitutes a default. The First Circuit's rejection of appellants-borrowers' meritless argument based on a loan servicers' advances of funds, led to the Court affirming the federal district court's decision, denying an amendment to Appellant Ouch's complaint, and dismissing appellant Hanna's complaint with prejudice.
This decision by a highly-respected federal appellate court should help to quash an argument used in a large number of putative class actions and so-called "mass actions." While borrowers' attorneys surely will continue to make creative arguments to avoid foreclosures, this particular theory has now taken a serious hit.
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