The United States District Court for the District of Rhode Island recently decided that a mortgagee must strictly comply with paragraph 22 of the mortgage in order to obtain a valid foreclosure in Rhode Island. Martins v. Fed. Hous. Fin. Agency, No. CV 15-235-M-LDA, -- F. Supp. 3d -- , 2016 WL 5921770 (D.R.I. Oct. 11, 2016). Paragraph 22 provides that, following any breach by a borrower but before acceleration of a loan, the mortgagee is required to, among other things, notify the borrower of the default, the action required to cure the default, the date the default must be cured, that failure to cure the default could result in acceleration, and that the borrower has the right to bring a court action to contest the default and defend against acceleration and sale.
In Martins, the borrower originally alleged that the mortgagee had violated her Due Process rights by failing to provide her with adequate notice of the non-judicial foreclosure as well as proper notice under the terms of her mortgage contract. The parties agreed that the non-judicial foreclosure would be rescinded and thereafter the mortgagee moved to dismiss the borrower’s complaint for mootness. The mortgagee also counterclaimed seeking a judicial foreclosure, which the borrower moved to dismiss for failure to comply with the subject mortgage’s notice requirements.
The Court agreed that rescission of the non-judicial foreclosure rendered the borrower’s original claims moot, but took pains to note that the borrower had raised very serious questions about the constitutionality of the mortgagee’s procedures in non-judicial foreclosures. Nevertheless, the Court opted to defer those questions given the lack of an actual case and controversy before it in light of the rescission.
More significantly, the Court granted the borrower’s motion to dismiss the counterclaim for judicial foreclosure because the mortgagee failed to strictly comply with paragraph 22 of the mortgage. The Court ruled that, despite the fact that the applicable Rhode Island statute does not expressly require compliance with the mortgage document, the mortgagee must “do that which it agreed” to in the mortgage, both in judicial and non-judicial foreclosures as a matter of contract law. Further, the Court found that, under Rhode Island law, any contract containing a notice requirement must be construed as a condition precedent, requiring strict compliance.
Turning to the specific issues raised by the parties, the Court found that notice to the borrower was defective because it: (1) failed to state the exact date by which the borrower was required to pay in order to avoid foreclosure; (2) failed to notify the borrower of her right to reinstate the loan before acceleration; and (3) did not explicitly inform the borrower that she had a right “to [independently] bring court action to assert the non-existence of default or any other defense . . . .” The Court further found that these deficiencies were fatal regardless of whether the borrower had actually been misled. The sole question was whether there has been compliance with the mortgage agreement. Accordingly, the Court dismissed the mortgagee’s counterclaim for judicial foreclosure.
Although it did not refer to the Massachusetts Supreme Judicial Court’s decision in Pinti v. Emigrant Mortg., 472 Mass. 226 (2015), the Court in Martins applied the same reasoning in reaching the same result. Pinti, however, contained a clear pronouncement that it only applied prospectively to foreclosure sales with default notices sent after the date of the opinion in order to mitigate the upheaval that might have resulted by retroactive application. Id. at 243. Martins contains no such limitation on its applicability. While this federal decision does not bind Rhode Island courts, borrowers’ counsel will likely press in state court claims that the notices their clients received were defective under paragraph 22 in both a pre- and post-foreclosure setting. The Supreme Court of Rhode Island, and, potentially, the Rhode Island General Assembly, will eventually need to definitively address the issues raised by Martins, including whether it should apply prospectively only.
It is also noteworthy that title insurers are aware of the Martins decision and at least one major insurer is now requiring that the lender produce and record an affidavit of compliance confirming that all acceleration and default notices were strictly compiled with as set forth in the mortgage in order to issue a title policy. Going forward, Rhode Island default notices should be reviewed to ensure that they comply with the mortgage’s notice provisions for all non-judicial and judicial foreclosures.