REQUIRED READING: As both the nation and the mortgage servicing industry continue to adapt and evolve in the wake of a challenging period of economic turmoil, new legislation and emerging regulatory realities have changed the contours of the mortgage servicing landscape.
From landlords and lenders to tenants and servicing professionals, sorting through the legal, logistical and financial implications of these new and evolving statutes is an ongoing process. Some significant changes have come in the form of new eviction requirements, perhaps none more significant than the Protecting Tenants at Foreclosure Act of 2009 (PTFA).
Intended to provide reasonable protections for renters residing in a foreclosed property, the PTFA instituted a series of regulatory and procedural safeguards to prevent non-owner-occupants of foreclosed properties from getting ‘caught up’ in the foreclosure process and suffering undue hardship as a result of a default that was not their own.
The act set forth a series of notice requirements, most notably mandating that tenants (including tenants living in a property post-lease and tenants with undocumented leasing arrangements) be entitled to a 90-day notice before eviction proceedings can begin. Under the terms of the law, tenants with a valid pre-existing lease are permitted to occupy the residence for the duration of their lease.
When the PTFA became law in spring 2009, the intent of the legislation was generally considered to be sensible, but many – both inside and outside of the default servicing industry – felt that the lawmakers' execution of the act left something to be desired. One of the most common criticisms was the limited amount of information and lack of specificity and detail written into the act itself.
In a complex industry where legal context and foreclosure proceedings differ across state- and even county – lines, vague and overly broad statements are a recipe for confusion and uncertainty. Even the portions of the PTFA specifying who does and does not qualify for protections under the act were disconcertingly unclear. Even when the Dodd-Frank Act amended the PTFA in summer 2010 – answering one of the biggest questions by clarifying that the term "notice of foreclosure" is intended to convey the point at which a title transfers – additional questions remained.
The combination of unanswered questions and imprecise language regarding issues such as eligibility, timing, legal remedies and other critical details has created a set of circumstances that was (and still is) ripe for debate and dispute. Not only have there been understandable inconsistencies in the way that mortgage servicers and legal professionals have interpreted the PTFA guidelines, but all parties involved in the foreclosure process have sought legal remedies and judicial clarifications on a range of issues.
In this environment, it is perhaps no surprise that the current state of post-foreclosure tenant evictions is still evolving.
Emerging case law is playing an integral role in refining the parameters of the PTFA and clarifying some of the law's remaining complexities. Some courts are ruling on defendants' attempts to remove cases from state court to federal court because of the PTFA, and others are ruling on the issue of whether the lack of receipt of a 90-day notice is a valid defense that occupants can raise. In particular, there have been a number of cases in California and Arizona in recent months that have addressed some of these hot-button issues.
What follows is a broad overview of some recent rulings that relate specifically to the PTFA.
BDA Investment Properties v. Sosa
In this case, the plaintiff/purchaser, BDA Investment Properties, filed suit against tenant Diocelina A. Sosa under California's unlawful detainer laws. Sosa attempted removal to federal court on the basis that the PTFA preempts the state eviction laws. Sosa further claimed that the PTFA created substantial federal question jurisdiction. Lastly, Sosa claimed that removal to federal court was appropriate because of "protective jurisdiction."
The federal court remanded the case back to state court for further proceeding on the unlawful detainer. Regarding complete preemption, the court noted that there are only three areas that are recognized as areas of complete preemption and that the PTFA did not fall into any of those three categories.
With regard to substantial federal question, the court noted that Sosa was attempting to raise the PTFA as a federal defense and further noted that a federal defense to a state law claim does not create federal jurisdiction. Lastly, the court rejected Sosa's protective jurisdiction argument because protective jurisdiction has not been adopted by the U.S. Supreme Court.
It should be noted that the federal court could have remanded the case to state court based on timeliness alone: Sosa applied for removal outside of the 30-day time frame allowed for removal. In fact, Sosa had applied for removal once before. As a result of her second attempt, the court awarded the plaintiff attorney's fees.
Wells Fargo Bank v. Lapeen
Here, Wells Fargo also filed suit under California's unlawful detainer laws against a defendant (former owner Edmond J. Lapeen) under California's unlawful detainer laws. The property's tenant and eventual co-defendant, Raymond Branchflower, intervened in the action and then requested removal to federal court.
The defendants' basis for removal was that the PTFA preempted California's state unlawful detainer laws. The defendants also argued that the PTFA creates a federal ejectment cause of action and that the plaintiff's action should have been brought in that manner in federal court rather than attempting the unlawful detainer in state court.
The defendants' argument in favor of federal ejectment was that the additional protections provided by the PTFA – in this case, requiring a 90-day notice rather than the California state requirement of a 60-day notice – made it impossible to evict a bona fide tenant under California state law.
The federal court remanded Wells Fargo Bank v. Lapeen back to state court for further proceeding on the unlawful detainer. In this case, the federal court followed the logic of the BDA Investment case with regard to complete preemption. Because the PTFA does not fall into one of the three areas of complete preemption, removal was not proper under that theory.
The federal court's ruling is further consistent with the BDA Investment case in that it states that a federal defense to the state action exists for a tenant who does not receive a 90-day notice pursuant to the PTFA, and further confirms that a federal defense does not create federal question jurisdiction.
Lastly, the court rejected the defendants' federal ejectment argument, citing Western Credit Union v. Dudley and Nativi v. Deutsche Bank National Trust Co. The court held that the PTFA does not create a federal claim for evictions and further does not even imply a private right of enforcement and that the law was only intended to "provid[e] additional or supplemental protections to state or local laws."
Bank of New York Mellon v. De Meo
In this case, purchaser/appellee Bank of New York Mellon (BONY) filed a state forcible entry and detainer action against appellant/tenant Patricia De Meo. Prior to the initiation of the suit on Aug. 19, 2009, BONY issued a notice to vacate as required by Arizona state law. Said notice instructed the occupant to vacate the premises within five days of the date of the letter and further advised that, if the property was not vacated within five days, an action for possession would be filed.
Thereafter, on Nov. 24, 2009, BONY filed its suit for possession. De Meo raised the defense that she was not served a PTFA 90-day notice. BONY countered that the suit was filed 97 days after issuance of its five-day notice and, therefore, believed it had complied.
The state court entered a judgment in favor of BONY, and De Meo appealed. On appeal, De Meo argued that BONY's failure to issue a 90-day notice precluded judgment for BONY and that the trial court erred in entering judgment against her. BONY argued that the PTFA only required that it issue a notice and that the notice it had issued was sufficient.
The appellate court reversed the trial court's decision. It ruled that the notice must comply with the PTFA; therefore, it must be a 90-day notice. The court called BONY's five-day notice, followed by a 90-day delay, misleading. The court cited the Nativi case for the rule that the tenant is entitled to a notice that is provided 90 days before the notice's effective date.
The court also cited a ruling in a Bank of America case that found "the PTFA's advanced notice provisions cannot be construed to permit owners to take measures to circumvent or "short circuit' the 90-day notice requirement." The court further stated that a tenant who receives a five-day notice could reasonably conclude that he or she must move within the five-day period, which is not consistent with the PTFA.
While, to date, courts are uniformly remanding cases from federal court and sending them back down to state court, it seems unlikely that the fundamental judicial dynamics at play here will change in the near future. With a range of different state specific policies and procedures surrounding the foreclosure and eviction processes, there are abundant opportunities for jurisdictional challenges.
With regard to PTFA issues surrounding timing, notification and the act's mandated 90-day notification period, it is possible that servicers will institute more rigorous proof of delivery and/or notification policies, but the current compliance standard of meeting state court requirements for service is generally considered sufficient.
What is certain is that, going forward, courts will continue to play an important role in resolving and clarifying these and other fundamental issues raised by the PTFA, and servicers will need to continue to pay close attention to this evolving regulatory environment.
Benjamin C. Struby is an associate attorney at Millsap & Singer LLC, a law firm that provides default servicing representation throughout the states of Missouri and Kansas. Struby can be reached at (636) 537-0110 or firstname.lastname@example.org.