Mathews v. PHH Mortg. Corp.

• Decision Date: 20 April 2012
• Docket Number: Record No. 110967.
• Court: Virginia Supreme Court
• Parties: Richard MATHEWS, et al. v. PHH MORTGAGE CORPORATION.

724 S.E.2d 196

Richard MATHEWS, et al.

v.PHH MORTGAGE CORPORATION.

Record No. 110967.

Supreme Court of Virginia.

April 20, 2012.

Henry W. McLaughlin, Richmond, (Drew D. Sarrett; Law Office of Henry McLaughlin on briefs), for appellants.

Jason W. McElroy (Weiner Brodsky Sidman Kider, on brief), for appellee.

Present: All the Justices.

OPINION BY Justice WILLIAM C. MIMS.

In this appeal, we consider whether a landowner who has breached a deed of trust by failing to make payments as required under the associated note may nevertheless enforce its conditions precedent. We also consider the prerequisites to foreclosure set forth in 24 C.F.R. § 203.604 and whether they are incorporated as conditions precedent in a deed of trust.

I. BACKGROUND AND MATERIAL PROCEEDINGS BELOW

Richard M. and Karin L. Mathews owned a parcel of land in Nelson County (“the Parcel”), which they conveyed by deed of trust (“the Deed of Trust”) on June 28, 2002, to Wendall L. Winn, Jr., trustee, for the benefit of University of Virginia Community Credit Union to secure a note in the principal amount of $118,505.00, plus interest (“the Note”). The indebtedness secured by the Deed of Trust was insured by the Federal Housing Authority under regulations promulgated by the Secretary of Housing and Urban Development (“HUD”) under the National Housing Act, 12 U.S.C. §§ 1701–1750jj, and codified in Part 203 of Title 24 of the Code of Federal Regulations. PHH Mortgage Corporation (“PHH”) subsequently became the holder of the Note and the beneficiary of the Deed of Trust.

The Mathewses fell into arrears on the payments due under the Note. Consequently, PHH appointed Professional Foreclosure Corporation of Virginia (“PFC”) as substitute trustee under the Deed of Trust to commence foreclosure proceedings on the Parcel. PFC scheduled a foreclosure sale for November 11, 2009.

On November 10, 2009, the Mathewses filed a complaint in the circuit court seeking a declaratory judgment that the foreclosure sale would be void because PHH had not satisfied conditions precedent to foreclosure set forth in the Deed of Trust. Specifically, they alleged that 24 C.F.R. § 203.604 (“the Regulation”) required PHH to have a face-to-face meeting with them at least 30 days before the commencement of foreclosure proceedings. They asserted that the Regulation was incorporated into the Deed of Trust as a condition precedent to foreclosure. No such meeting had occurred before PFC commenced foreclosure proceedings.

PHH removed the action to the United States District Court for the Western District of Virginia, which remanded it to the circuit court for lack of subject-matter jurisdiction. PHH then filed a demurrer in which it argued that the Mathewses could not sue to enforce the Regulation because (a) it conferred no private right of action and (b) they had committed the first breach of the Deed of Trust by failing to pay as required under the Note. PHH also argued that, even if the Mathewses could sue to enforce the Regulation, it did not apply to them because, under HUD's interpretation, a face-to-face meeting is only required if the mortgagee has a “servicing office” within 200 miles of the mortgaged property. PHH did not have such an office within that distance from the Parcel.

The circuit court ruled that the Regulation was incorporated into the Deed of Trust as a condition precedent to foreclosure. However, the court also determined that under Virginia common law, the party who breaches a contract first cannot sue to enforce it. The court therefore ruled that the Mathewses could not sue to enforce the conditions precedent in the Deed of Trust because they had breached it first through non-payment. The court also ruled that the Regulation did not apply to them because PHH did not have a “servicing office” within 200 miles of the Parcel. Accordingly, the court sustained PHH's demurrer and dismissed the complaint. We awarded the Mathewses this appeal.

II. ANALYSIS

A. ENFORCEMENT OF CONDITIONS PRECEDENT TO FORECLOSURE IN A DEED OF TRUST BY A BORROWER IN DEFAULT

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 nonpayment 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...