Va. Supreme Court Rejects Borrowers’ Damages and Rescission Claims premised upon alleged failure to Hold Face-to-Face Meeting provided for FHA-Insured Loans

The Supreme Court of Virginia, in Ramos v. Wells Fargo, affirmed the dismissal with prejudice of borrowers’ breach of contract action against their lender.  The borrowers complained, inter alia, that the lender failed to attempt a “face-to-face” interview prior to foreclosing under a deed of trust incorporating certain HUD regulations.  The Court held that the borrowers failed to state a claim because they failed to sufficiently plead damages in their second amended complaint, which failed to include an ad damnum clause.  The Court also rejected the Borrower’s attempt to rescind the sale to a third-party purchaser, even though settlement on the foreclosure sale had not yet occurred.

In doing so, the court clarified the reach of Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014) and Mathews v. PHH Mort’g Corp., 283 Va. 723, 724 S.E.2d 196 (2012) by reinforcing that a borrower still must provide factual allegations of compensable injury or damages, even where conditions precedent to foreclosure were not satisfied.  The court also clarified that rescission of a foreclosure is only permitted in exceptional circumstances.  A copy of the reported order can be found here.

Following the foreclosure of their home, Borrowers filed suit against the Bank, claiming that it “wrongfully initiated” foreclosure.  After their original and first amended complaints were dismissed on demurrer, the Borrowers’ second amended complaint alleged that their Federal Housing Administration (“FHA”) insured mortgage loan documents incorporated certain regulations promulgated by the Department of Housing and Urban Development (“HUD”).  They specifically cited 24 C.F.R. § 203.604, concerning the “requirements for the acceleration of a loan and subsequent foreclosure in the event of a borrower's payment default.”  Slip Op. at p. 2.

The Borrowers alleged that the Bank failed to comply with this regulation “by not having, or attempting to have, a ‘face-to-face meeting’ with appellants following their payment default.”  Id.  Borrowers claimed such a meeting was a “condition precedent to foreclosing on the property,” without which the Bank’s “authority to call a default had not accrued” thereby rendering the foreclosure unlawful.  Id.  They further asserted that the third-party purchaser could be released from its purchase because settlement had not occurred.  See id.  The Borrowers sought compensatory damages and rescission of the sale.

Upon consideration of the Bank’s demurrer (motion to dismiss), the trial court dismissed the second amended complaint with prejudice, and Borrowers appealed.

On appeal, the Supreme Court explained, “[i]n [Squire and Mathews] we held that the subject HUD regulation, 24 C.F.R § 203.604, created a condition precedent to foreclosure under the respective Virginia deeds of trust at issue, both of which incorporated the regulation.”  Slip Op. at p. 4.  Assuming without deciding that borrowers made “sufficient allegations of causation,” the Court nonetheless affirmed the dismissal, concluding that the Borrowers failed to plead factual matters supporting their claim for either money damages or rescission of the foreclosure sale.  Id. at p. 4.  Indeed, an essential element of a breach of contract action is that a defendant’s breach “caused injury or damage” to the plaintiff.  Id. (citing Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 154, 671 S.E.2d 132, 135 (2009)).

The Court observed that the Borrowers “fail to set forth a single factual allegation of any injury or damage they incurred as a result of [the Bank’s] alleged breach.”  Slip Op. at p. 5.  Additionally, the Court observed that the second amended complaint was insufficient inasmuch as it contained no ad damnum clause stating the amount of any damages sought.  Slip Op. at p. 5 (citing Va. Rule 3:2(c)(ii) (“Every complaint requesting an award of money damages shall contain an ad damnum clause stating the amount of damages sought.”).

The Court also rejected the Borrowers argument that “absent the closing [of the foreclosure sale], the sale can still be ‘unwound,’ i.e., rescinded” by court action.  Slip. Op. at p. 5 (“That is not so under Virginia law.”).  The court found the rescission right was extinguished upon foreclosure under a deed of trust in Virginia because “‘[t]he contract of sale [is] consummated when the auctioneer crie[s] the property out to the person making the highest and last bid.”  Id. (quoting Feldman v. Rucker, 201 Va. 11, 21, 109 S.E.2d 379, 386 (1959).  And where the Borrowers failed to allege any exceptional circumstances to permit rescission the Borrowers were not entitled to the relief sought.  See Slip Op. at p. 6 note (observing that no allegation of fraud or collusion with the purchaser or “gross inadequacy” in the foreclosure sale price was alleged) (citing Squire, 287 Va. at 519, 758 S.E.2d at 61-62),

Accordingly, the Supreme Court of Virginia affirmed the trial court’s order sustaining the Bank’s demurrer and dismissed the Borrowers’ action with prejudice.