PA Supreme Court Addresses Recovery of Costs and Fees Under Act 6

By Stephen J. Shapiro

Under a Pennsylvania statute commonly referred to as “Act 6,” a lender must give a residential borrower at least thirty days’ notice before it may commence foreclosure proceedings.  If a lender violates Act 6 and the borrower brings and “prevails in an action arising under” Act 6, the borrower may recover his costs, expenses and attorneys’ fees.  The Pennsylvania Supreme Court recently held that a borrower who prevails on an affirmative defense alleging a violation of Act 6 is not entitled to recover costs and attorneys’ fees because such an affirmative defense is not an “action arising under” Act 6.  The Court’s ruling likely will encourage borrowers to pursue alleged violations of Act 6 in separate lawsuits and/or as counterclaims in foreclosure actions.

In Bayview Loan Servicing, LLC v. Lindsay, a borrower defaulted on his mortgage and his lender commenced a mortgage foreclosure action.  The borrower alleged, as an affirmative defense, that the lender violated Act 6 by failing to provide him with thirty days’ advance notice of its intent to commence the foreclosure action.  After the trial court denied the lender’s motion for summary judgment, the lender discontinued the foreclosure action without prejudice.  Alleging that he had prevailed on his affirmative defense under Act 6, the borrower requested that the trial court award him costs and attorneys’ fees.   The trial court denied the request and the Superior Court affirmed.

On appeal, the Pennsylvania Supreme Court also affirmed the trial court’s refusal to award the borrower costs and attorneys’ fees.   The Court first noted that the lender’s “foreclosure action did not ‘arise under [Act 6].’”  The Court then explained that “[t]he term ‘action’ in [Act 6] clearly refers to the filing of a civil action in a court of competent jurisdiction seeking one or more of the designated forms of relief.”  As such, the Court concluded, “the assertion of an affirmative defense . . . in a residential foreclosure action does not constitute ‘an action arising under [Act 6].’”

The Court stated that a “counterclaim would undoubtedly qualify as an action arising under Act 6,” but noted that existing case law may have left it “unclear as to whether an Act 6 violation may be raised as a counterclaim in a mortgage foreclosure action.”  Because the borrower in Bayview did not pursue a counterclaim, the Court was “not presented with the opportunity to determine the propriety of such a counterclaim.”  It is likely that the Bayview decision will lead borrowers to initiate separate actions and/or plead counterclaims in foreclosure actions to pursue alleged violations of Act 6.


Deficient Act 91 notices do not divest Pennsylvania courts of subject matter jurisdiction to hear mortgage foreclosure actions

By Stephen J. Shapiro

Pennsylvania’s Homeowner’s Emergency Mortgage Act (Act 91) requires a mortgagee that intends to foreclose on a residential mortgage to send a notice advising the delinquent homeowner that he has “thirty (30) days to have a face-to-face meeting with the mortgagee who sent the notice or a consumer credit counseling agency to attempt to resolve the delinquency.”  In Beneficial Consumer Discount Company v. Vukman, the Pennsylvania Supreme Court held that a mortgagee’s failure to include the entirety of this “face-to-face meeting” language in an Act 91 notice does not divest Pennsylvania’s trial courts of subject matter jurisdiction to hear a foreclosure action by the mortgagee.

In Beneficial, the mortgagor, Pamela Vukman, defaulted on her mortgage and Beneficial, her mortgagee, sent her an Act 91 notice.  The notice informed Vukman of her right to a face-to-face meeting with a counseling agency, but did not say that she also had the option to meet face-to-face with Beneficial.  Beneficial later filed a foreclosure action and, ultimately, obtained a judgment against Vukman and acquired her property through a sheriff’s sale.

Vukman filed a motion to set aside both the judgment and sale.  In that motion, she argued for the first time that Beneficial’s Act 91 notice was deficient and, therefore, that the trial court lacked subject matter jurisdiction to hear Beneficial’s foreclosure action.  The trial court agreed and, because lack of subject matter jurisdiction is a defense that cannot be waived, set aside the sheriff’s sale and the judgment against Vukman.  The Superior Court affirmed.

On appeal, the Pennsylvania Supreme Court first confirmed that Beneficial’s Act 91 notice was deficient because it did not offer Vukman the option of meeting face-to-face with Beneficial (in a concurring opinion, two Justices opined that Beneficial’s notice was sufficient).  However, the Court concluded that “defective Act 91 notice does not implicate the jurisdiction of the court.”  Rather, the Court held that Act 91 imposes procedural requirements that mortgagees must follow before bringing a foreclosure action.  Unlike lack of subject matter jurisdiction, failure to comply with procedural requirements, the Court held, is a defense that can be waived.  Therefore, the Court rejected the trial court’s finding that it lacked subject matter jurisdiction, reversed the trial court’s order, and remanded the case.

It is unclear whether the trial court on remand will simply reenter the judgment against Vukman and reinstate the sheriff’s sale, or entertain further proceedings on the issue of whether Vukman waived her objection to the defect in Beneficial’s Act 91 notice.  The case does, however, send a clear message to mortgagees:  In Act 91 notices, offer mortgagors the choice of meeting face-to-face with either the mortgagee or a counseling agency, or risk litigating the sufficiency of the notice.

FIRREA Does Not Deprive Courts of Jurisdiction to Rule on Affirmative Defenses to Foreclosure Actions, Holds Pennsylvania’s Superior Court

By Stephen J. Shapiro

The Superior Court of Pennsylvania held last week that federal law does not prevent courts from considering affirmative defenses to foreclosure actions brought by mortgage holders that have acquired the assets of financial institutions placed into receivership. In Sass v. AmTrust Bank, a homeowner refinanced her mortgage through AmTrust and, when she defaulted on the mortgage, AmTrust filed a foreclosure action. In her answer to the foreclosure action, the homeowner alleged that an employee of the closing agent selected by AmTrust absconded with a large portion of the loan proceeds and that AmTrust had failed to include in her loan documents certain disclosures required by federal law. Therefore, the homeowner argued as an affirmative defense, she was entitled to rescission of the mortgage. The homeowner also brought a declaratory judgment action against AmTrust, seeking a declaration that her mortgage was void ab initio. While the cases were pending, the FDIC put AmTrust into receivership, and Nationstar Mortgage acquired the rights to the homeowner’s loan.

The homeowner moved for summary judgment in both actions and, when Nationstar failed to respond to her motions, the trial court granted them. On appeal, Nationstar argued that the trial court lacked jurisdiction to rule on the homeowner’s motions because the Financial Institutions Reformation, Recovery, and Enforcement Act (FIRREA) deprived the trial court of jurisdiction to hear any action relating to the pre-assignment conduct of a depositary institution that was placed in receivership. Specifically, FIRREA provides that “no court shall have jurisdiction over . . . any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver…”  12 U.S.C. 1821(d)(13)(D). The Superior Court characterized Nationstar’s position on appeal as follows:  “Nationstar appears to argue broadly that under FIRREA, a successor institution assumes only the assets of its failed predecessor and that, consequently, the purpose of FIRREA to assure economic stability in the wake of bank failures is met only if the successor is insulated from loss occasioned by any of its predecessor’s conduct.”

The Court rejected Nationstar’s broad reading of FIRREA. Rather than analyzing the policy considerations upon which Nationstar based its interpretation of FIRREA, the Court instead focused on the plain language of the statute, which on its face divests courts of jurisdiction only over “claims” or “actions.” Under that textual reading of FIRREA, the Court held that the homeowner’s declaratory judgment action was indeed a “claim” relating to the assets of a depository institution over which FIRREA had divested the trial court of jurisdiction. Therefore, the Court vacated the trial court’s grant of summary judgment on the homeowner’s declaratory judgment action.

On the foreclosure action, however, the Court held that the homeowner’s affirmative defense of rescission was neither a “claim” nor an “action” that FIRREA deprived the trial court of jurisdiction to hear, but rather was a “response” to Nationstar’s foreclosure action. Therefore, Superior Court held, the trial court did not lack jurisdiction to decide the homeowner’s motion for summary judgment on her affirmative defense of rescission. Superior Court held that Nationstar had waived its right to challenge the trial court’s ruling on the merits because it had failed to notice its appeal in a timely fashion. Therefore, Superior Court affirmed the trial court’s summary judgment ruling invalidating the mortgage and dismissing the foreclosure action.

In its opinion, Superior Court did acknowledge the potential mischief a homeowner could attempt to sow by pleading as affirmative defenses what are, in actuality, counterclaims in an attempt to avoid the FIRREA bar. It noted though that courts must look past the labels litigants place on their purported defenses and instead “must consider whether the disputed assertion of a party’s pleading stems from the desire to establish a right to payment and collect on the resulting debt, or from an explanation of why the debt is not valid or collectible.”

UPDATE:  On February 5, 2014, the Pennsylvania Supreme Court denied Nationstar’s Petition for Allowance of Appeal from the Superior Court’s ruling.

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