In Parrish v. Federal National Mortgage Association, the Supreme Court of Virginia reversed the judgment of the Circuit Court (in an appeal from the General District Court), which granted possession in favor of Fannie Mae in an unlawful detainer case (i.e. an eviction case). Specifically, the Supreme Court held that, where a borrower raises a bona fide question as to the validity of title in a case originally filed in the General District Court (or subsequently appealed to the Circuit Court from the General District Court), the case must be dismissed without prejudice because the General District Court lacks original subject matter jurisdiction to adjudicate the validity of title.
The Court explained that in order to raise a bona fide dispute to title, a borrower is required to raise sufficient facts that would otherwise survive a Demurrer (Motion to Dismiss). The Court noted that the jurisdictional limitations at issue did not apply to unlawful detainer actions originally brought in the Circuit Court pursuant to Virginia Code § 8.01-124, nor does such holding impact prior cases where the homeowner failed to raise such issues.
A copy of the opinion can be found here.
Borrowers owned certain property secured by a deed of trust. Following a foreclosure sale of the property, the trustee conveyed the property to Fannie Mae. Fannie Mae sent the Borrowers a notice to vacate, and later filed a summons for unlawful detainer in the General District Court.
Borrowers filed a response to the Unlawful Detainer Action, which argued that the foreclosure was invalid because the deed of trust incorporated 12 C.F.R. § 1024.41(g), which prohibits foreclosure if a borrower submitted a completed loss mitigation application more than 37 days before the foreclosure sale. Borrowers claimed to have submitted a complete application within such timeframe. Because Fannie Mae (who, according to the Borrowers’ allegations, was also their lender) instigated the foreclosure despite their allegedly timely filed loss mitigation application, Borrowers alleged that Fannie Mae breached their deed of trust.
The General District Court awarded Fannie Mae possession, and the Borrowers filed a de novo appeal to the Circuit Court. In the Circuit Court (which was sitting as an appellate court), Fannie Mae filed a motion for summary judgment, arguing that its trustee’s deed was prima facia evidence of its right of possession. Fannie Mae also moved to exclude evidence of any defense contesting the validity of the trustee’s deed, arguing that the General District Court (and the circuit court sitting as an appellate court) lacked subject matter jurisdiction to adjudicate title in an unlawful detainer proceeding. The Circuit Court agreed, granted Fannie Mae’s motions, and awarded it possession. Borrowers thereafter filed this appeal to the Supreme Court of Virginia.
At the outset, the Supreme Court agreed that the General District Court (or in this case the Circuit Court which was hearing an appeal from the General District Court), lacked subject matter jurisdiction to adjudicate title.
In the context of an unlawful detainer case, “[t]he validity of the plaintiff’s right of possession is an issue that, when disputed, must be determined in the adjudication of the of the unlawful detainer action.” Op. at 4. Where a plaintiff (such as a foreclosure purchaser) claims a right of possession acquired after the defendant’s original, lawful entry, the plaintiff must show the validity of its right of possession. See Op. at 4. Consequently, “[w]hen the plaintiff’s after-acquired right of possession is based on a claim of title, the plaintiff may be required to establish the validity of that title.” Op. at 5.
According to the Court, “[i]n most foreclosure cases, a trustee’s deed will satisfy the foreclosure purchaser’s burden to establish that it acquired a right of possession after the homeowner’s original, lawful entry, and the homeowner will have no good-faith basis to contest it. However, in limited circumstances, the homeowner could allege facts sufficient to place the validity of the trustee’s deed in doubt. In such cases, the General District Court’s lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try unlawful detainer and the court must dismiss the case without prejudice.” Op. at 6.
The Court emphasized that “[t]he question of title raised by the homeowner’s allegations must be legitimate. . . . Because a court always has jurisdiction to determine whether it has subject matter jurisdiction, the court has the authority to explore the allegations to determine whether, if proven, they are sufficient to state a bona fide claim that the foreclosure sale and trustee’s deed could be set aside in equity. Stated differently, the allegations must be sufficient to survive a demurrer had the homeowner filed a complaint in circuit court seeking such relief.” Op. at 6 (citations and quotations omitted).
However, the Court noted that “[a] general allegation that the trustee breached the deed of trust is not sufficient. The homeowner’s allegations must (1) identify with specificity the precise requirements in the deed of trust that he or she asserts constitute conditions precedent to foreclosure, (2) allege facts indicating that the trustee failed to substantially comply with them so that the power to foreclose did not accrue, and (3) allege that the foreclosure purchaser knew or should have known of the defect.” Op. at 7, n. 5.
In this case, the Court determined that the Borrowers raised a bona fide question of title in the underlying unlawful detainer proceeding. The Court observed that the Borrowers alleged that 12 C.F.R. § 1024.41(g) was incorporated in their deed of trust as a condition precedent, that they submitted a complete loss mitigation application, and that none of the exceptions applied. Op. at 8-9. The Court also inferred that Fannie Mae, as foreclosure purchaser, was aware of the alleged violation of the deed of trust “because it was the lender that allegedly committed the violation.” Op. at 9. Consequently, the Supreme Court concluded that these allegations were sufficient, and if proved, could satisfy a court of equity to set aside the foreclosure.” The Court therefore vacated the judgment in favor of Fannie Mae, and dismissed the summons for unlawful retainer.