Opinion ID: 2074369
Heading Depth: 3
Heading Rank: 3

Heading: Asserting a Defense to Foreclosure via Injunction

Text: Although we conclude that a mortgagor may not wield as a sword the HUD regulations alluded to in a mandatory FHA form deed of trust, there is ample support that aggrieved mortgagors may assert an allegation of regulatory noncompliance as a shield against unauthorized foreclosure actions. The statutory law is clear on the mortgagee's duty to pursue loss mitigation efforts. The NHA requires that, in the event of a mortgagor default, [8] a mortgagee shall engage in loss mitigation actions for the purpose of providing an alternative to foreclosure. 12 U.S.C. § 1715u(a) (2000). The HUD regulation effectuating this mandate states that [m]ortgagees must consider the comparative effects of their elective servicing actions, and must take those appropriate actions which can reasonably be expected to generate the smallest financial loss to the Department. Such actions include, but are not limited to, deeds in lieu of foreclosure under § 203.357, pre-foreclosure sales under § 203.370, partial claims under § 203.414, assumptions under § 203.512, special forbearance under §§ 203.471 and 203.614, and recasting of mortgages under § 203.616. [9] 24 C.F.R. § 203.501. The statutory and regulatory language frames participation in loss mitigation activities as a mandatory endeavor by the use of the terms shall and must, respectively. State v. Green, 367 Md. 61, 82, 785 A.2d 1275, 1287 (2001) (When the Legislature commands that something be done, using words such as `shall' or `must' rather than `may' or `should,' the obligation to comply with the statute or rule is mandatory.); accord Alabama v. Bozeman, 533 U.S. 146, 153, 121 S.Ct. 2079, 2085, 150 L.Ed.2d 188 (2001) (The word `shall' is ordinarily `the language of command.') (quoting Anderson v. Yungkau, 329 U.S. 482, 485, 67 S.Ct. 428, 91 L.Ed. 436 (1947), in turn quoting Escoe v. Zerbst, 295 U.S. 490, 493, 55 S.Ct. 818, 79 L.Ed. 1566 (1935)). A letter from HUD to the mortgagees participating in the FHA mortgage insurance program, in no uncertain terms, reiterates the compulsory nature of engaging in loss mitigation activities: Though lenders have great latitude in selecting the loss mitigation strategy appropriate for each borrower, it is critical to understand that PARTICIPATION IN THE LOSS MITIGATION PROGRAM IS NOT OPTIONAL. HUD Mortgagee Letter 00-05 at 6 (emphasis in original). In fact, echoing the NHA's command, the letter states that [l]enders may not initiate foreclosure until all loss mitigation options have been considered. HUD Mortgagee Letter 00-05 at 12. Against this backdrop, we consider the viability of mounting as a defense an allegation of a violation of these regulations. Neal directs our attention to certain recent HUD policy initiatives with respect to the loss mitigation requirements in the FHA-insured loan program as support for his theory that HUD contemplated that individual borrowers be empowered to initiate private lawsuits against noncompliant lenders. Not only has HUD taken positions in other litigation contrary to Neal's theory, [10] language contained in the sources cited by Neal further convince us that HUD envisioned that borrowers might invoke only defensively the NHA and associated HUD regulations. Neal cites first to language contained in a Notice of Policy statement published by HUD in the Federal Register addressing the creation of mortgage instruments for use in the FHA mortgage insurance program. We reproduce the relevant portion of the Notice with emphasis on the language Neal believes to be an indication that mortgagors may sue mortgagees for regulatory noncompliance: A commenter made specific suggestions to eliminate language referring to regulations issued by the Secretary in the default section of the mortgage instrument as well as other similar references. The commenter noted that such language would create foreclosure proceedings that would be more time consuming and expensive. The borrower's attorneys could commence exhaustive discovery to determine whether the lender met all of the servicing requirements. We rejected the commenter's suggestions that the references to regulations by the Secretary will impair the lender's ability to successfully defend a suit. HUD does not intend to create a conflict between the mortgage language and regulations, and there should be no adverse impact of informing the borrower that some regulations procedures exist which limit a lender's rights to foreclose. Requirements for Single Family Mortgage Instruments, 54 Fed.Reg. 27,599 (June 29, 1989). While the highlighted language, standing alone, appears to support Neal's contention, the context belies his argument. The Notice's remarks regarding the defense of a suit were tied to a commenter's suggestions that the inclusion in FHA mortgage instruments of references to certain HUD regulations would complicate foreclosure proceedings because it would allow borrowers to delay the foreclosure by raising the issue of regulatory compliance. This persuades us that the defense of a suit mentioned in the Notice was a reference to the lender's ability to proceed with the foreclosure despite a borrower's knowledge that HUD regulations limit a lender's ability to accelerate or foreclose on a mortgage. Further, we note that the Notice frames the inclusion of the regulations in the mortgage instrument as a means to inform [ ] the borrower of the proper procedures, but does not mention anything about empowering mortgagors to maintain a private cause of action against noncomplying mortgagees. More pointedly, the paragraph following the one containing the language cited by Neal twice states that mortgagors may assert a violation of the HUD regulations as a defense, presumably to a foreclosure action by the mortgagee. We recite below the Notice language: We note that the proposed mortgage language does not incorporate all of HUD's servicing requirements into the mortgage, but simply prevents acceleration and foreclosure on the basis of the mortgage language when foreclosure would not be permitted by HUD regulations. For example, 24 C.F.R. § 203.606 specifically prohibits a mortgagee from foreclosing unless three full monthly payments due on the mortgage are unpaid. As long as this requirement remains in the regulations, we do not expect mortgagees to violate it even though the mortgage fails to repeat the requirement, and we believe that a borrower could appropriately raise the regulatory violation in his or her defense. If a mortgagee has violated parts of the servicing regulations which do not specifically state prerequisites to acceleration or foreclosure, however, the reference to regulations in the mortgage would not be applicable. HUD retains the general position recited in 24 C.F.R. § 203.500, that whether a mortgagee's refusal or failure to comply with servicing regulations is a legal defense is a matter to be determined by the courts. Requirements for Single Family Mortgage Instruments, 54 Fed.Reg. 27,599 (June 29, 1989) (emphasis added). This language is in accord with several court decisions holding that a mortgagor may invoke a mortgagee's noncompliance with the HUD regulations as an affirmative defense in a foreclosure proceeding. See, e.g., Williams v. Nat'l Sch. of Health Tech., Inc., 836 F.Supp. 273, 283 (E.D.Pa.1993) (Pennsylvania courts have recognized a mortgagee's failure to comply with HUD forbearance regulations as an equitable defense to foreclosure), aff'd, 37 F.3d 1491 (3d Cir.1994); Fed. Land Bank of St. Paul v. Overboe, 404 N.W.2d 445, 449 (N.D. 1987) (stating that various courts have held that the failure of a lender to follow HUD regulations governing mortgage servicing constitutes a valid defense sufficient to deny the lender the relief it seeks in a foreclosure action and cataloguing cases); Fed. Nat'l Mortgage Ass'n v. Moore, 609 F.Supp. 194, 196 (N.D.Ill.1985) (In Illinois, a mortgagee's failure to comply with the mortgage servicing regulations can be raised in a foreclosure proceeding as an affirmative defense.). Neal, however, counters that Maryland law renders ineffective the possibility of asserting regulatory noncompliance as a defense to a foreclosure action. He claims that the prominent cases recognizing the noncompliance argument are effective only as an equitable defense in jurisdictions utilizing judicial foreclosure. See, e.g., Fleet Real Estate Funding Corp., 530 A.2d at 923; Fed. Land Bank of St. Paul, 404 N.W.2d at 449; Heritage Bank, N.A. v. Ruh, 191 N.J.Super. 53, 465 A.2d 547, 557-58 (1983). He submits that this route, effectively, may not be pursued in Maryland where judicial foreclosures are rare and most foreclosures are accomplished through the filing of an order to docket, which does not involve any hearings prior to, or meaningful judicial supervision of, the sale. Maryland Rule 14-204; ALEXANDER GORDON IV, GORDON ON MARYLAND FORECLOSURES § 5.01, at 223 (3d ed.1994) (hereinafter GORDON). This power of sale foreclosure is intended to be a summary, in rem proceeding which carries out the policy of Maryland law to expedite mortgage foreclosures. G.E. Capital Mortgage. Servs., Inc. v. Levenson, 338 Md. 227, 245, 657 A.2d 1170, 1178 (1995). We, however, do not construe the Rule governing power of sale foreclosures to prohibit mortgagors from raising viable defenses to a foreclosure to which the mortgagee is not entitled. See Bachrach v. Washington United Coop., 181 Md. 315, 319, 29 A.2d 822, 825 (1943) (The purpose of this legislation was to provide a more expeditious, and less expensive, method of enforcing mortgages than the former proceeding by formal bill in equity, but not, by any means, to impair or defeat the right of the mortgagor to be heard in defense of his property.) (quoting Albert v. Hamilton, 76 Md. 304, 308, 25 A. 341, 342 (1892)). To the contrary, mortgagors are possessed of three means of challenging a foreclosure: obtaining a pre-sale injunction pursuant to Maryland Rule 14-209(b)(1), filing post-sale exceptions to the ratification of the sale under Maryland Rule 14-305(d), and the filing of post-sale ratification exceptions to the auditor's statement of account pursuant to Maryland Rule 2-543(g), (h). GORDON § 21.01, at 655; see generally Greenbriar Condo., Phase I Council of Unit Owners, Inc. v. Brooks, 387 Md. 683, 740-46, 878 A.2d 528, 563-66 (2005) (Greenbriar Condo) . Specifically, Neal asserts that our holding in Greenbriar Condo vitiates any defensive utility of the pre-sale injunction procedure in situations such as are alleged in the present case. He states that Greenbriar Condo limits to the pre-sale injunction procedure a mortgagor's opportunity to present issues relating to the mortgagee's entitlement to seek foreclosure, including matters of whether a debt is delinquent or amenable to acceleration. 387 Md. at 737-38 & n. 29, 878 A.2d at 560-61 & n. 29. Accordingly, Neal would be required to assert, in a pre-sale injunction petition, his theory that no debt is owed as alleged at the time of foreclosure because of Wells Fargo's noncompliance with the HUD regulations limiting the circumstances in which mortgagees may obtain a foreclosure. In order to obtain the injunction, however, Maryland Rule 14-209(b)(1) requires that the defaulting mortgagor pay into the court an amount representing the debt and all interest due. This, argues Neal, defeats the entire purpose of the defense to the claim that a debt is due; a mortgagor who fundamentally disputes his indebtedness is still required by the Rule to pay the debt in order to assert his defense that he does not owe the amount claimed as delinquent or accelerated. Notwithstanding Neal's protestations, we are of the opinion that the violations of the HUD mortgage servicing regulations alleged of Wells Fargo by Neal may be asserted effectively as an affirmative defense within the injunctive relief apparatus provided in Rule 14-209(b)(1). [11] As the Rule states, a movant must (1) either admit or deny that an amount of debt is due and payable, (2) if an amount is admitted, state that the amount has been paid into the court, and (3) provide a detailed statement of facts, demonstrating one of the following: (a) the debt and interest has been paid fully, (b) there is no default, or (c) the mortgage was obtained by the mortgagee through fraud. Both the Rule and our cases establish firmly the principle that if a default is admitted, the mortgagor must post a bond with, or otherwise pay into, the court for the full amount of the mortgage and any applicable interest. Goldsborough v. County Trust Co. of Md., 180 Md. 59, 62, 22 A.2d 920, 921 (1941); Talbott v. Laurel Bldg. Ass'n, 140 Md. 565, 569, 118 A. 63, 65 (1922) (It is well settled upon all the authorities that the mortgagor must pay the amount admitted to be due into court before the court will grant an injunction to restrain the sale upon a default in the mortgage.) (quoting Buckner v. Cronhardt, 132 Md. 612, 616, 104 A. 169, 170 (1918)); see also GORDON § 21.02, at 656. A mortgagor seeking to raise a violation of the HUD loss mitigation regulations as a defense to foreclosure, however, is not required to pay his or her debt in full in order to be granted an injunction under Rule 14-209. This is because, under principles of equity, a mortgagee's commencement of a foreclosure proceeding on an FHA-insured mortgage, without first having adhered to the mandatory HUD loss mitigation regulations, may invalidate the mortgagee's declaration of default. Therefore, a mortgagor subject to an allegedly invalid declared default is permitted, under the Rule, to deny that a delinquent amount is due and payable and further claim that there is no default. A trial court then must exercise its discretion in granting or denying the requested injunction based on the evidence relevant to the mortgagor's asserted defense. State Comm'n on Human Relations v. Talbot County Det. Ctr., 370 Md. 115, 129, 803 A.2d 527, 535 (2002); Dep't of Health and Mental Hygiene v. Baltimore County, 281 Md. 548, 554, 383 A.2d 51, 55 (1977); McKeever v. Washington Heights Realty Corp., 183 Md. 216, 223, 37 A.2d 305, 310 (1944). Because, based on a review of the case file, it appears that the foreclosure sale has not been held yet, Neal is still able to assert this affirmative defense in the pending foreclosure action. The foreclosure procedure in Maryland is equitable in nature. Plaza Corp. v. Alban Tractor Co., 219 Md. 570, 577-78, 151 A.2d 170, 174 (1959) (Foreclosure of mortgages after default has long been peculiarly within a court of equity's jurisdictional powers. . . .) see also Village Green Mut. Homes, Inc. v. Randolph, 361 Md. 179, 181 n. 1, 760 A.2d 716, 717 n. 1 (2000); Fairfax Sav., F.S.B. v. Kris Jen Ltd. P'ship, 338 Md. 1, 21, 655 A.2d 1265, 1275 (1995); Ver Brycke v. Ver Brycke, 150 Md.App. 623, 649 n. 16, 822 A.2d 1226, 1241 n. 16 (2003) (citing DAN. B. DOBBS, LAW OF REMEDIES § 2.6(3), at 111-12 (2d ed.1993)), rev'd on other grounds, 379 Md. 669, 843 A.2d 758 (2004); Voge v. Olin, 69 Md.App. 508, 514-15, 518 A.2d 474, 477 (1986); Billingsley v. Lawson, 43 Md.App. 713, 723, 406 A.2d 946, 953 (1979) (quoting Fisher v. Fed. Nat'l Mortgage Ass'n, 360 F.Supp. 207, 210-11 (D.Md.1973)). Similarly, an injunction under Rule 14-209 to enjoin the foreclosure of a deed of trust entreats a trial court to exercise its equitable powers. Greenbriar Condo., 387 Md. at 740-41, 878 A.2d at 563 (identifying the defenses of injunctive relief and exceptions to a foreclosure as equitable in nature); see also Ver Brycke, 379 Md. at 693-94, 843 A.2d at 772 ( First, a claim could be deemed equitable if it sought a coercive remedy like injunction. . . .) (quoting DAN. B. DOBBS, LAW OF REMEDIES § 2.1(2) (2d ed.1993)); Talbot County Det. Ctr., 370 Md. at 139, 803 A.2d at 541 (An injunction is a writ framed according to the circumstances of the case . . . restraining an act which it esteems contrary to equity and good conscience.) (quoting El Bey v. Moorish Science Temple of Am., Inc., 362 Md. 339, 353, 765 A.2d 132, 139 (2001)) (internal quotations and citations omitted); Colandrea v. Wilde Lake Cmty. Ass'n, Inc., 361 Md. 371, 394, 761 A.2d 899, 911 (2000) (The trial court ordinarily has the discretion to grant or deny a request for injunctive relief in general equity matters. . . .); Dundalk Holding Co. v. Easter, 215 Md. 549, 554, 137 A.2d 667, 669-70 (1958) (stating that [i]njunction is historically and fundamentally a process of equity, and discussing the origin and application of injunctions in courts of both equity and law). Thus, the venerated equity doctrine of clean hands which requires that he who comes into equity must come with clean hands, Hlista v. Altevogt, 239 Md. 43, 48, 210 A.2d 153, 156 (1965), is applicable in foreclosure proceedings such as the one implicated in the present case. The clean hands doctrine states that courts of equity will not lend their aid to anyone seeking their active interposition, who has been guilty of fraudulent, illegal, or inequitable conduct in the matter with relation to which he seeks assistance. Hlista, 239 Md. at 48, 210 A.2d at 156; see also Hicks v. Gilbert, 135 Md.App. 394, 400, 762 A.2d 986, 989-90 (2000). The doctrine does not mandate that those seeking equitable relief must have exhibited unblemished conduct in every transaction to which they have ever been a party, but rather that the particular matter for which a litigant seeks equitable relief must not be marred by any fraudulent, illegal, or inequitable conduct. Hlista, 239 Md. at 48, 210 A.2d at 156; Hicks, 135 Md.App. at 400-01, 762 A.2d at 990 (There must be a nexus between the misconduct and the transaction, because `[w]hat is material is not that the plaintiff's hands are dirty, but that he dirties them in acquiring the right he now asserts.') (quoting Adams v. Manown, 328 Md. 463, 476, 615 A.2d 611, 617 (1992)). As we have stated previously, the NHA and its implementing regulations compel FHA mortgagees to pursue loss mitigation strategies before initiating foreclosure. In the present case, if Neal's contentions regarding Wells Fargo's failure to comply with the loss mitigation directives are proven to the satisfaction of the trial court, such a failure may constitute improper and/or inequitable conduct, depending on the proven circumstances. Thus, under the doctrine of clean hands, while Neal technically may be said to be in default, the legal fiction that no default exists may be maintainable until such time as Wells Fargo complies with the statutory and regulatory imperative to pursue loss mitigation prior to foreclosure. [12] The invocation and application of equity principles produces not only a process that is fundamentally fair to the parties and prevents the Court from rewarding inequitable conduct, Adams, 328 Md. at 474-75, 615 A.2d at 616, but also reflects the effectiveness of loss mitigation efforts in avoiding foreclosure. U.S. DEP'T OF HOUS. & URBAN DEV., HUD STRATEGIC PLAN FY 2006  FY 2011, at 9 (2006) (Because HUD requires participating lenders to employ loss mitigation techniques, over 59 percent of families who defaulted on FHA-insured mortgages in FY 2005 were able to work out their delinquencies and remain in their homes.). The effectiveness of loss mitigation options demonstrate the reality that if mortgagees who pursue foreclosures without carrying out their loss mitigation obligations had done so, it is highly conceivable that many defaulting mortgagors, in time, may be able to remedy their delinquencies and avoid foreclosure. JUDGMENT OF THE COURT OF SPECIAL APPEALS REVERSED; CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO REMAND THE CASE TO THE CIRCUIT COURT FOR FREDERICK COUNTY TO CONSOLIDATE RESPONDENT'S ACTION FOR INJUNCTIVE RELIEF WITH THE FORECLOSURE PROCEEDING, DISMISS RESPONDENT'S CLAIM FOR BREACH OF CONTRACT, AND FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS OPINION; COSTS IN THIS COURT TO BE DIVIDED EQUALLY BY THE PARTIES.