Opinion ID: 1057892
Heading Depth: 2
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Heading: enforcement of conditions precedent to foreclosure in a deed of trust by a borrower in default

Text: The threshold question is whether the Mathewses' failure to pay under the Note precludes them from enforcing the conditions precedent to foreclosure in the Deed of Trust. If so, the questions of whether the Regulation applies and whether it is incorporated into the Deed of Trust are moot. In Horton v. Horton, 254 Va. 111, 115-16, 487 S.E.2d 200, 203-04 (1997), we acknowledged that as a matter of Virginia common law, a party who commits the first breach of a contract is not entitled to enforce the contract. An exception to this rule arises when the breach did not go to the root of the contract but only to a minor part of the consideration. If the first breaching party committed a material breach, however, that party cannot enforce the contract. A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract. If the initial breach is material, the other party to the contract is excused from performing his contractual obligations. (Internal citations omitted.) We echoed this statement in Countryside Orthopaedics, P.C. v. Peyton, 261 Va. 142, 154, 541 S.E.2d 279, 285 (2001), and reiterated that the first party to commit a material breach [of a contract cannot] maintain an action on it. Id. at 156, 541 S.E.2d at 287 (citing Hurley v. Bennett, 163 Va. 241, 253, 176 S.E. 171, 175 (1934)). Nevertheless, the Mathewses argue that under Bayview Loan Servicing, LLC v. Simmons, 275 Va. 114, 654 S.E.2d 898 (2008), a lender must comply with all conditions precedent to foreclosure in a deed of trust even if the borrowers are in arrears. We agree. In Bayview, the borrower was in arrears. Consequently, the lender accelerated repayment under the note and directed the trustee under the deed of trust to begin foreclosure proceedings. Thereafter, the parcel was sold at a foreclosure auction and the borrower filed a suit for damages alleging breach of the deed of trust. Id. at 117-18, 654 S.E.2d at 899. We determined that the sale was improper because Bayview had failed to provide a pre-acceleration notice, which was a condition precedent to acceleration under the deed of trust. By failing to provide the notice, Bayview breached the deed of trust by accelerating repayment and foreclosing: Because Bayview did not comply with the specific condition precedent under the Deed of Trust, prior to the notice of foreclosure sale by [the trustee], Bayview had not acquired the right to accelerate payment under the terms of the Deed of Trust. Thus, [the trustee] could exercise no right of acceleration because no such right had then accrued to Bayview.... While Code § 55-59.1(A) does allow a proper notice of foreclosure sale to exercise an accrued right of acceleration, Bayview failed to fulfill the contractual condition precedent that would have given it such a right. Id. at 121-22, 654 S.E.2d at 901 (emphasis added). Accordingly, we affirmed the circuit court's judgment in favor of the borrower. Id. at 122, 654 S.E.2d at 902. A trustee's power to foreclose is conferred by the deed of trust. Fairfax County Redevelopment & Hous. Auth. v. Riekse, 281 Va. 441, 445-46, 707 S.E.2d 826, 829 (2011). That power does not accrue until its conditions precedent have been fulfilled. See Bayview, 275 Va. at 121, 654 S.E.2d at 901. The fact that a borrower is in arrears does not allow the trustee to circumvent the conditions precedent. However, if the general rule of contract enforcement enunciated in Horton and Countryside Orthopaedics applied to deeds of trust, a trustee could not be held accountable for exercising his latent power to foreclose before it actually had accrued, for two reasons. First, the borrower is the only party with standing to bring an action, whether for damages after the fact of the improper sale or to bar the improper sale in equity before it occurs. [1] Second, the paramount prerequisite to foreclosure is some breach of the deed of trust by the borrowera trustee under a deed of trust cannot commence foreclosure proceedings on the parcel of a borrower who has not first breached the deed of trust in some way. The conditions precedent in the deed of trust which govern the accrual of his latent power to foreclose are irrelevant before such a breach. Therefore, prohibiting the borrower who has breached from bringing an action to enforce the conditions precedent in a deed of trust would nullify such conditions. The mere fact of the borrower's breach alone would become, de facto, the only condition precedent to foreclosure. Addressing this concern at oral argument, PHH contended that failure to pay under the note was only one of several possible breaches of a deed of trust. Because other breaches might not go to the `root of the contract' but only to a minor part of the consideration, PHH continued, they would fall into the exception recognized in Horton, 254 Va. at 115, 487 S.E.2d at 203. Therefore, according to PHH, such a borrower could still sue to enforce the deed of trust and its conditions precedent to foreclosure would not be nullified. We accept the validity of PHH's premise and recognize that a deed of trust may anticipate breaches other than by non-payment that could enable the trustee to commence foreclosure proceedings. Yet non-payment under the note is the principal reason for foreclosure. Regardless of whether a deed of trust may permit foreclosure when the borrower breaches other than by non-payment, and acknowledging that such breaches may not be material and therefore may not bar the borrower's suit to enforce the deed of trust under Horton, we observe that deeds of trust universally anticipate breach by non-payment. Thus, to accept PHH's argument, we would have to rule that conditions precedent to foreclosure in deeds of trusts are nullities when the breach is by non-paymentthe vast majority of casesbut that such conditions are fully enforceable in the rare cases when the breach is not by non-payment. Such a ruling would defy common sense. The solution lies in the definition of material breach. In Horton and Countryside Orthopaedics, we defined material breach as a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract. Countryside Orthopaedics, 261 Va. at 154, 541 S.E.2d at 285 (quoting Horton, 254 Va. at 115, 487 S.E.2d at 204). The essential purposes of a deed of trust are two-fold: to secure the lender-beneficiary's interest in the parcel it conveys and to protect the borrower from acceleration of the debt and foreclosure on the securing property prior to the fulfillment of the conditions precedent it imposes. Because a deed of trust permits the trustee to sell the parcel to protect the interest of the lender-beneficiary upon the borrower's breach by non-payment, the fact of non-payment of the note does not defeat[] an essential purpose of the contract. Id. To the contrary, lenders require deeds of trust precisely because they contemplate the possibility of non-payment. In other words, by its nature, the deed of trust is a contract in which the parties have agreed that material breach of the note by non-payment will not deprive borrowers of their rights to enforce the conditions precedent. Accordingly, non-payment of a note is not a material breach of a deed of trust within the meaning of Horton and Countryside Orthopaedics. [2] We therefore reject PHH's argument. Borrowers may sue to enforce conditions precedent to foreclosure even if they were the first party to breach the note secured by a deed of trust through non-payment.