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Federal Courts May Decide Motion Intended to Fix Mistake by Foreclosing Bank - National City Mortgage Co. v. Stephen

July 28, 2011

Our San Bernardino County foreclosure defense attorneys were interested to see a court decision coming out of the increasingly common practice of bringing judicial foreclosures in federal courts. This practice has been driven by the increased number of foreclosures; those with parties in more than one state, but the property in a judicial foreclosure state, may end up in federal court. That was how National City Mortgage Company v. Stephen wound up before the Third U.S. Circuit Court of Appeals. National City foreclosed on Brian and Elaine K. Stephen of Pennsylvania, but did not give the notice required by law to a junior lien holder on the property, Chase Manhattan Bank. Ultimately, the Third Circuit ruled that federal courts may rule on issues arising from such errors.

The Stephens had a first mortgage with NCM and a second mortgage with Chase. They defaulted in 2007, and in November of that year, NCM brought a foreclosure action in federal court for diversity reasons. NCM failed to notify Chase of the foreclosure, and to complicate matters further, Chase's loan servicer reassigned the loan to another servicer during this time. In the end, NCM sold the home to itself at auction in May of 2008, without Chase or either of its servicers getting notice from NCM. After the sale, Chase still had the lien on the property.

In a move the Third Circuit described as full of chutzpah, NCM asked the court to divest Chase's lien so NCM would own the property outright. The court declined, saying the case was closed and Chase's rights were an independent question of state law. NCM next moved to set aside the foreclosure sale, which was granted without comment. Chase then moved to vacate the set-aside order (possibly so it could enforce its lien against NCM), which was also granted. In that ruling, the federal court repeated that the case was closed and the issues it was being asked to decide belonged in state court. NCM appealed.

The Third did not agree that the set-aside motion or divestiture motions belonged only in state court. It ruled that a district court is free to decide issues that arise from errors made during the pendency of a foreclosure sale it ordered. Federal courts may abstain from deciding on such issues when they involve complex interpretations of state law bearing on important public issues, the court wrote, or when a ruling would disrupt state courts' efforts. That was not the case here, however. Furthermore, the federal district court had ancillary jurisdiction over all parts of the foreclosure sale, including this post-sale controversy. Its authority did not end when the sale order was made because the new proceedings arise out of a problem with the old ones. In fact, Pennsylvania law explicitly gives courts the right to set aside a sale. The Third declined to make the ruling on whether there should be another sale; it simply remanded the case to the district court for a decision on this.

As Costa Mesa foreclosure defense lawyers, we see a lot of cases in the media arising from mistakes like this by mortgage companies. These cases generally end up in the media because they involve serious, substantial mistakes that create an unfair foreclosure or inadvertently compromise the lender's own rights. In fact, mistakes by lenders are the fundamental reason for the robo-signing scandal, whose fallout is still not completely cleared. In this case, the party most affected by NCM's mistake is NCM itself, as it now owns a property subject to a lien that Chase knows it can collect (whereas Chase would likely have had no luck with the Stephens). Given that numerous courts have declined to protect homeowners from their own mistakes or mistakes by banks, it's pleasing that the Third Circuit declined to protect NCM from its own mistakes. As San Diego County foreclosure defense attorneys, we hope it puts the bank on notice to pay more attention to other people's property rights.

If you're facing foreclosure or default and you believe your bank is intentionally not helping, you should call Howard Law PC to discuss your legal options. For a free, confidential case evaluation, send us an email or call 1-800-872-5925.

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