Ninth Circuit Holds Attempted Collection of Foreclosure Related Fees Violates SCRA


The United States Court of Appeals for the Ninth Circuit reversed a district court decision granting defendant’s motion to dismiss plaintiff’s claim that defendant violated section 533 of the Servicemembers Civil Relief Act by charging certain fees related to a rescinded notice of default while plaintiff was on active duty. Section 533 of SCRA requires a court order prior to proceeding with a foreclosure against a servicemember under certain conditions. The initial loan servicer initiated foreclosure proceedings against plaintiff, an active duty servicemember, by sending the statutorily required notice of default. The notice of default was rescinded and the servicing rights were transferred to defendant, the successor servicer. Although the notice of default was rescinded, the fees related to the foreclosure were not removed. Defendant attempted to collect upon foreclosure. Plaintiff filed suit alleging that defendant violated the SCRA when it did not remove the foreclosure fees. Defendant moved to dismiss the complaint for failure to state a claim for which relief could be granted, which the district court granted.

In rejecting defendant’s argument that the foreclosure proceedings were terminated prior to it assuming servicing rights, the Ninth Circuit started with the plain language of the statute. The Ninth Circuit first noted that the statute uses the term “‘proceedings,’ a term which generally means a process rather than a single act.” In addition, the statute barred a sale, foreclosure, or seizure of property, “thereby suggesting that foreclosure meant more than a sale or seizure.” The Ninth Circuit also looked to state law governing foreclosures noting that state definition of foreclosure “contemplate[d] the inclusion of specified fees as part of the foreclosure proceeding.” As such, the Ninth Circuit found that the attempted collection of the fees related to the foreclosure proceeding was a continuation of the foreclosure proceeding and a violation of the SCRA.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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