Shepherd v. Burson

McDonald, j. Among the issues that surfaced during the recent foreclosure crisis was a concern that some homeowners received insufficient warning of an impending foreclosure and, as a result, lacked time to prepare a defense or to pursue loan modification. In response, the General Assembly enacted a statute in 2008 to require that a foreclosing lender provide advance written notice to the borrower of its intention to foreclose. Among the information to be provided in that notice is the identity of “the secured party,” although the statute does not specifically define that phrase.

In many ⁵⁴⁴ instances there will be one secured party with respect to the particular deed of trust. In some instances, as in the present case, there may be more than one entity that qualifies as a “secured party” under the commonly understood meaning of the phrase. In this case, we must decide whether, in such a situation, a foreclosing party is obligated to identify all secured parties in the advance written notice to the borrower, and the consequences if the notice fails to do so. We hold that a foreclosing party should ordinarily identify, in the Notice of Intent to Foreclose, each entity that is a “secured party” with respect to the deed of trust in question.

However, a failure to disclose every secured party is not a basis for dismissing a foreclosure action when the notice identifies a secured party, the notice contains the other information required by the statute that allows the borrower to pursue a loan modification, the identity of the other secured party is elsewhere disclosed to the borrower well in advance of the foreclosure sale, and the borrower does not move to dismiss the foreclosure action on the grounds of defective notice for more than a year after such disclosure. Notice of Intent to Foreclose Prior to 2008, most foreclosure actions were commenced in Maryland when the foreclosing party filed an Order to Docket in the appropriate circuit court together with the instrument that provided authority to foreclose and a statement of the debt. Maryland Rule 14-204 (2007). Then, as now, the authority to foreclose through an Order to Docket derived from the power-of-sale provision in the deed of trust or other security instrument.

Maryland Code, Real Property Article (“RP”), § 7-105(a) (2003 RepLVol. & 2007 Cum.Supp.). Notice to the homeowner was required, but could be given after the foreclosure proceeding was docketed. RP § 7-105(a-l) (2003 RepLVol. & 2007 Cum.Supp.). In 2007, in response to rising loan default and foreclosure rates in Maryland, the Governor created the Maryland Home-ownership Preservation Task Force (the “Task Force”). ⁵⁴⁵ Among other things, the Task Force was charged with reviewing the laws governing the foreclosure process and recommending changes.

Maryland Homeownership Preservation Task Force Report (November 29, 2007) (“Task Force Report”). The Task Force found that the foreclosure process in Maryland was designed to operate expeditiously and, in theory, could result in a sale as soon as 15 days after the filing of the Order to Docket, with relatively little notice to the borrower. Task Force Report at 35-36. The Task Force also concluded that existing notice requirements “generally fail to capture the attention of the homeowner in crisis to alert them to a pending foreclosure action, and the process does not afford homeowners adequate time to mitigate their loss or present defenses to the foreclosure action.” Task Force Report at 36.

To address those issues, the Task Force recommended legislation that would preclude the filing of an Order to Docket until at least 90 days after the borrower’s default and at least 45 days after a notice of intent to foreclose had been sent to the borrower. Task Force Report at 36-37. The proposed notice requirement was apparently derived from similar legislation proposed in Massachusetts. Id. at 37.

While the Task Force did not agree on the precise content of the notice, it did agree that it should be in a standardized format and that the lender or mortgage note holder should send a copy of the notice to the Commissioner of Financial Regulation, as well as the borrower. Id. The General Assembly adopted those recommendations in emergency legislation enacted in 2008. Chapters 1, 2, Laws of Maryland 2008.

The legislation provided that a foreclosure action generally may not be filed against a residential property until at least 90 days after the borrower defaults on the loan. RP § 7-105.1(b)(l)(i). In regards to notice, the statute required written advance notice to the borrower at least 45 days before the initiation of foreclosure proceedings. Among other things, that notice is to contain the names and telephone numbers of the following: the secured party; the mortgage ⁵⁴⁶ servicer, if applicable; and an agent of the secured party who is authorized to modify the terms of the mortgage loan.

RP § 7-105.1(c)(4)(ii)(l). “Secured party” is not defined in the statute. This case concerns the appropriate definition of the “secured party” that must be identified in the Notice of Intent to Foreclose required by RP § 7-105.1(c), and the fulfillment of that notice requirement. The Shepherd Loan and Foreclosure 2007-2008: Loan and Default On April 27, 2007, Camille Shepherd, an attorney residing in Greenbelt, obtained a loan of $416,900 from the Independent National Mortgage Corporation, FSB (“IndyMac Bank”), secured by a deed of trust on her home. Shortly thereafter, IndyMac Bank went into receivership and its assets, including Ms. Shepherd’s debt, were transferred to a newly created bridge bank, IndyMac Federal Bank, FSB (“IndyMac Federal”).

On August 18, 2008, Ms. Shepherd entered into a loan modification agreement with IndyMac Bank 1 that lowered the interest rate on her loan and, as a result, reduced the monthly payment. Ms. Shepherd failed to make the monthly payment due in November 2008 and defaulted on the loan. The bank took no immediate action with respect to the default. 2009: Notice of Intent to Foreclose — Stay by First Bankruptcy Petition On March 19, 2009, IndyMac Federal transferred its assets, including Ms. Shepherd’s loan, to another newly created bank, OneWest Bank FSB. On June 5, 2009, the substitute trustees, 2 ⁵⁴⁷ on behalf of OneWest, sent Ms. Shepherd a Notice of Intent to Foreclose pursuant to RP § 7-105.1.

The Notice, on stationery of the substitute trustees, was in a standard format established by the State Commissioner of Financial Regulation. Among other things, it listed the borrower, the mortgage loan number, the dates of the most recent loan payment and of the default, and the extent to which loan payments were past due. It identified the “secured party” on the loan as OneWest and provided the name and phone number of a person with authority to modify the terms of the loan. On June 26, 2009, Ms. Shepherd filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code, 3 which automatically stayed the foreclosure proceeding.

In a schedule attached to that petition she identified OneWest as a secured creditor as a result of the assignment from IndyMac Federal. On August 4, the Bankruptcy Court lifted the stay as to OneWest “so as to enable it to exercise its rights under state law[.]” In October 2009, Ms. Shepherd received a discharge from other debts in the Chapter 7 proceeding. 2009-2010: Filing of Foreclosure Action — Stays by Second and Third Bankruptcy Petitions After the bankruptcy stay was lifted, the substitute trustees initiated the instant foreclosure action on October 28, 2009, in the Circuit Court for Prince George’s County. Among the various documents filed to commence the action was a copy of the Notice of Intent to Foreclose which, as indicated above, identified OneWest as “the secured party,” and an Affidavit Certifying Ownership of Debt Instrument, which identified the Federal Home Loan Mortgage Corporation (“Freddie Mac”) ⁵⁴⁸ as the owner of the loan and OneWest as the holder of the note secured by a deed of trust. 4 Ms. Shepherd was served with the documents the following day. This was apparently the first time that Freddie Mac’s involvement was disclosed to Ms. Shepherd, as it had not been listed as a secured party in the Notice of Intent to Foreclose.

The foreclosure sale was scheduled for February 9, 2010. On February 8, 2010, one day prior to the scheduled sale, Ms. Shepherd filed a second bankruptcy petition, this time under Chapter 13 of the Bankruptcy Code, 5 which again stayed the foreclosure proceeding. A schedule attached to that petition, like the schedule accompanying her earlier petition, identified OneWest as a secured creditor, although the documents filed three months earlier in the foreclosure proceeding had notified her that Freddie Mac now owned the loan and that OneWest was the holder of her promissory note. The second bankruptcy action was dismissed in June 2010.

The foreclosure sale was then rescheduled for September 14, 2010. On September 13, however, Ms. Shepherd filed another Chapter 13 bankruptcy petition; on the schedules in that proceeding, she again identified OneWest as a secured creditor. That petition was also dismissed, and the foreclosure sale was rescheduled for January 2011. 2010-2011: Motion to Dismiss Foreclosure Action On December 15, 2010, Ms. Shepherd moved to dismiss the foreclosure sale pursuant to Maryland Rule 14-207.1, based on ⁵⁴⁹ irregularities in the Notice of Intent to Foreclose. 6 Specifically, citing the documents the substitute trustees had filed in the foreclosure action and served on her more than a year earlier that identified Freddie Mac as the owner of her loan, she contended that the failure to identify Freddie Mac as the secured party in the notice violated RP § 7-105.1(c)(4)(ii)(l)(A). The circuit court canceled the foreclosure sale to afford review of the motion.

The circuit court ultimately denied the motion on January 3, 2011. It noted that RP § 7-105.1 did not provide a remedy for the alleged violation and indicated that it would exercise its discretion under Maryland Rule l-201(a) 7 to decide what remedy, if any, was appropriate. Reasoning that any deficiency in the notice had not prejudiced Ms. Shepherd or infringed her substantive rights, the circuit court concluded that the foreclosure action should not be dismissed. Ms. Shepherd moved for reconsideration, arguing that the court’s reliance on Maryland Rule 1-201 was an unconstitutional use of a court rule to negate the requirements of a statute.

Adopting the reasoning offered by the substitute trustees in their response to that motion, the circuit court on March 7, 2011, denied the motion on the additional basis that the Notice of Intent to Foreclose had not violated RP § 7-105.1(c). 2011-2012: Foreclosure Sale — Exceptions—Appeal Following denial of the motion to reconsider, the foreclosure sale was held on March 8, 2011. Freddie Mac purchased the ⁵⁵⁰ property for $287,276. Ms. Shepherd filed exceptions reiterating her allegation that the notice was defective. Those exceptions were denied and the circuit court ratified the sale.

Ms. Shepherd noted a timely appeal to the Court of Special Appeals. Prior to briefing or a decision in that court, she petitioned this Court for a writ of certiorari, which we granted. Discussion Ms. Shepherd argues that “the secured party” mentioned in RP § 7-105.1(c) is necessarily the owner of the loan, and that a mortgage servicer — even if a holder of the promissory note — cannot also be “the secured party.” As Freddie Mac is the owner of her loan, 8 she asserts that it, and not OneWest, is “the secured party” that should have been identified in the Notice of Intent to Foreclose that the substitute trustees sent to her prior to the foreclosure action. In addition, she argues that the failure to identify Freddie Mac in that Notice meant that the Notice was “bogus” and deceptive and therefore ineffective.

She also reiterates her contention that the circuit court improperly used Maryland Rule 1-201 to “trump” the statutory requirement. For those reasons, she asserts that the foreclosure action should be dismissed. The Secured Party An initial question is the meaning of “the secured party” for purposes of the notice requirement in RP § 7-105.1(c). As noted above, the statute itself does not define that phrase.

In the absence of a statutory definition or cross-reference, it is reasonable to conclude that the Legislature contemplated a meaning consistent with the commonly understood meanings of the phrase in connection with residential mortgages and deeds of trust at the time it enacted the statute. See Board of Education v. Lendo, 295 Md. 55, 63 , 453 A.2d 1185 (1982). Informative in this regard are the statutes ⁵⁵¹ that determine the rights of secured parties and the court rales that govern foreclosure proceedings. A deed of trust secures a promissory note that embodies the promise to repay a loan.

The promissory note and related security interests are subject to the Maryland Uniform Commercial Code (“Maryland UCC”), Maryland Code, Commercial Law Article (“CL”), § 1-101 et seq. See, e.g., Anderson v. Burson, 424 Md. 232, 246 , 35 A.3d 452 (2011) (“[tjhe ... Commercial Law Article governs a negotiable promissory note that is secured by a deed of trust”). In the Maryland UCC, “secured party” is defined as: (A) A person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding; (B) A person that holds an agricultural lien; (C) A consignor; (D) A person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold; or (E) A trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a security interest or agricultural lien is created or provided for, or (F) A person that holds a security interest arising under § 2-401, § 2-505, § 2-711(3), § 2A-508(5), § 4-210, or § 5-118 of [the Maryland UCC].

CL § 9-102(a)(73) (emphasis added). Under this definition Freddie Mac is certainly a secured party with respect to Ms. Shepherd’s promissory note, as an entity to which the promissory note has been sold. However, that does not mean that OneWest does not also qualify as a secured party, as the definition can encompass trustees and agents in some instances. The court rales yield a similar conclusion. 9 At the time the Legislature enacted RP § 7-105.1 in 2008, the court rules ⁵⁵² governing foreclosure defined “secured party” for purposes of a foreclosure action as follows: “Secured party” means a mortgagee, the holder of note secured by a deed of trust, a vendor holding a vendor’s lien, a condominium council of unit owners, a homeowners’ association, a property owners’ or community association, and any other party secured by a lien. “Secured party ” includes an assignee or successor in interest of a secured party.

Maryland Rule 14-201(b)(10) (2008) (emphasis added). 10 Again, Freddie Mac is a secured party under this definition as an assignee or successor in interest of the prior owner of the note. OneWest is also a “secured party,” as the holder of Ms. Shepherd’s note, 11 under that definition. ⁵⁵³ Finally, it is notable that the Commissioner of Financial Regulation, in carrying out a legislative directive to devise forms and adopt regulations implementing the 2008 revisions of the foreclosure process, 12 has cross-referenced the definition of “secured party” in the foreclosure rules. COMAR 09.03.12.01B(23). 13 The Commissioner’s adoption of the definition in the court rules is entitled to some deference, given the specific legislative delegation to that official to adopt regulations with respect to the notice requirement. Cf.

Sec’y Dep’t of Pub. Safety & Corr. Servs. v. Demby, 390 Md. 580, 604-5 , 890 A.2d 310, 325 (2006). Fulfillment of Requirement to Identify Secured Party in Notice The determination that OneWest is a secured party for the purposes of RP § 7-105.1(c) does not resolve this appeal.

Ms. Shepherd is correct that Freddie Mac is also a secured party with respect to her loan. Under the broad definition of “secured party” in both the Maryland UCC and the foreclosure rules, there may — as in this case — be more than one secured party. Yet the statute requires that a Notice of Intent to Foreclose contain the name and telephone number of “the secured party.” RP § 7 — 105.1 (c)(4)(ii)( 1 )(A) (emphasis added). This provokes the question whether a Notice of Intent to Foreclose may name any secured party, must name ⁵⁵⁴ one particular secured party, or must name every secured party.

In other words, in the present case, was it sufficient for the Notice of Intent to Foreclose to identify one secured party — OneWest—or should it have identified Freddie Mac as well as (or instead of) OneWest? It is useful to consider the purpose of the notice. The notice requirement was designed to provide homeowner/borrowers at risk of foreclosure with additional time and information to avoid foreclosure. Maddox v. Cohn, 424 Md. 379, 387 , 36 A.3d 426 (2012).

A clear identification of a party with whom the homeowner could negotiate a possible alternative to foreclosure was a preeminent purpose. 14 The Task Force’s recommendation of advance written notice “was based on proposed legislation in Massachusetts that requires as a prerequisite to filing foreclosure the sending of a Notice of Intent to Foreclose ... [and] requires that the Notice be uniform and include fact of default and that foreclosure can be filed after the period, the contact information of all involved (servicer, assignee, mortgage company, etc.) and resources for assistance.” Task Force Report at 37 (emphasis added). However, the Task Force was apparently unable to reach a consensus on the precise content of a notice form. When it enacted the legislation based on the Task Force recommendation, the Legislature specified the following content for the notice: 1. The name and telephone number of: A. The secured party; ⁵⁵⁵ B. The mortgage servicer, if applicable; and C. An agent of the secured party who is authorized to modify the terms of the mortgage loan; 2.

The name and license number of the Maryland mortgage lender and mortgage originator, if applicable; 8. The amount required to cure the default and reinstate the loan, including all past due payments, penalties and fees [•] RP § 7-105(e)(4)(ii)l.-3. The Legislature