This piece originally appeared in the July 2023 edition of MortgagePoint magazine, online now [1].
On July 15, 2022, the U.S. Court of Appeals for the Ninth Circuit issued an unpublished opinion in the case Santoro v. Ocwen Loan Servicing, LLC [2], 2022 U.S. App. LEXIS 19667, 2022 WL 2764751, in which the Court held that a borrower can sustain a claim for damages against a mortgage loan servicer for violation of Oregon’s Unlawful Trade Practices Act (UTPA) [3] where the servicer takes possession of occupied property before completing foreclosure where the borrower still occupies the subject property.
The Court found that Paragraph 9(a) of the subject Deed of Trust, which purported to grant a right of entry to the property in the event of a default, conflicted with Oregon Statute (ORS) 86.010 [4], which precludes a mortgagee or its agent from taking possession of mortgaged property without completing a foreclosure sale; accordingly, Paragraph 9(a) was void. Because the entry provision of the DOT was void, it did not protect the servicer against a claim for damages under UTPA when the servicer took action to secure the property after sending a single letter to the property to determine whether it was still occupied. The Court held that a jury could reasonably find that the servicer should have known that additional investigation was needed before the property was abandoned, and based on this, reversed the lower court’s grant of summary judgment in favor of the servicer.
In reaching this conclusion, the Court found guidance in a Washington case, Jordan v. Nationstar Mortg., LLC [5], 185 Wash. 2d 876, 374 P.3d 1195 (2016), which concerned a similar factual and statutory context. In Jordan [5], the Supreme Court of Washington held that provisions of a Deed of Trust that purported to allow a servicer to take possession of vacant property conflicted with Washington Statute RCW 7.28.230(1) [6]; therefore, the entry provisions of the Deed of Trust were void. Because ORS 86.010 is substantially similar to RCW 7.28.230, the Court reasoned that an Oregon court would likely reach a similar conclusion to that reached in Jordan.
Following the Jordan ruling, the State of Washington enacted RCW 7.100.030 [7], which now provides a mechanism by which a servicer may enter and secure the property if the property is abandoned and in foreclosure if certain requirements are met. Before Washington enacted the new statute, creditors’ firms sought, often successfully, to protect the value of their collateral and themselves from liability by seeking injunctive relief from courts. The petitions sought to allow servicers to enter and take possession of real property, supported by inspections showing abandonment and deteriorating property condition, to show likelihood of irreparable harm. State courts frequently granted these orders when a proper showing was made, which provided servicers with additional level of protection against civil liability under the CPA.
Santoro is an unpublished option; moreover, it is a federal court construing state law, so it would not be mandatory authority in Oregon state court even if it were published. Additionally, the holding is not identical to Jordan; the Ninth Circuit appears have left open the possibility that the servicer can still take possession to secure the property if it is abandoned; of note, the Court did not consider the abandonment argument under Paragraph 9(c) of the DOT.
Following remand, the servicer has moved for summary judgment of dismissal on an agency theory, arguing that the contractor who secured the non-abandoned property was not the servicer’s “agent” for purposes of vicarious liability, and that there was therefore no “willful” violation by the servicer; the motion is pending a ruling as of this date.
However, as the Ninth Circuit noted, both cases involve similar facts and statutory schemes, so an Oregon state court in the future may well find a servicer liable under UTPA if it takes possession of property before completing foreclosure.
Unless and until Oregon passes a statute similar to RCW 7.100.030, servicers should consider taking a similar approach to what was used in Washington before the statute was passed: obtain multiple inspections showing that property is abandoned and in deteriorating condition constituting a health hazard or nuisance, and file a complaint for
injunctive relief to allow entry onto the property. Additionally, if the servicer’s agency theory does not prevail in the district court, then this could indicate that servicers can still be liable for the torts of property preservation contractors even if the contractors are not acting in accordance with the servicer’s directives.
Whether an Oregon court will deem an abandonment provision of a Deed of Trust to be unenforceable is an open question. The immediate takeaway from Santoro, however, is that if a lender seeks to secure a property before completing foreclosure in Oregon, the safest approach is to exercise greater diligence than sending a single letter; multiple inspections should be performed, preferably over a period of several weeks, before making that determination. Additionally, obtaining a court order as cover may be the best practice for avoiding liability in similar circumstances.
Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.