A recent decision from the U.S. District Court for the Northern District of Alabama may provide borrowers who rent portions of their property to tenants with an avenue for challenging a foreclosure. The court's analysis suggests that borrowers alleging invalid mortgage assignments could raise claims of wrongful interference with the business relationship between the borrower and tenant, and such claims could withstand a motion to dismiss.
In ECP Financial II LLC v. Ivey, an assignee of a commercial mortgage loan filed claims against the loan guarantor for amounts due under the loan. The guarantor, in turn, filed counterclaims for wrongful interference with business relations, wrongful foreclosure, and breach of contract. The guarantor alleged that the assignee lender had sent representatives to the premises and advised the tenants to begin making payments to a person or entity other than the borrower. In addition, the assignee published foreclosure notices and notified the debtor that it intended to foreclose, according to the counterclaims.
The plaintiff moved to dismiss the counterclaims. The district court dismissed the wrongful foreclosure counterclaim because no foreclosure sale had occurred. But the court denied the motion to dismiss the counterclaims for wrongful interference with business relations and breach of contract.
The court noted that the counterclaims alleged, among other things, that the loans were not properly assigned to the plaintiff and therefore the plaintiff had no right to publish foreclosure notices. According to the counterclaims, this amounted to improper interference with the existing business relationship between the borrower and its tenants. While the court noted that it might be "unlikely" that the guarantor could ultimately prove that the assignment was invalid, the court found that the guarantor pleaded sufficient facts to survive the motion to dismiss.
While the decision in ECP concerned a nonresidential loan, it provides a potential avenue for residential mortgage loan borrowers with tenants to delay foreclosure. If a borrower alleges that an assignment of the mortgage to a subsequent servicer is invalid, under ECP, the borrower could assert a claim for wrongful interference with the business relationship between the borrower and his tenant. Courts applying the reasoning in ECP could hold that such a claim was sufficient to survive a motion to dismiss, thereby potentially increasing litigation and other related costs for lenders and servicers.