Mastin v. Ditech Financial, LLC, 3:17-cv-00368

Background

In 2005 the Mastins executed a note and deed of trust for a Spotsylvania, VA home; they defaulted beginning in 2009.
Ditech (servicer) assumed servicing in 2013; Plaintiffs repeatedly sought loan-modification review, submitted applications and documents (including an Aug. 22, 2016 application and an Aug. 30, 2016 profit-and-loss).
Ditech scheduled a foreclosure; Plaintiffs were told a corrected profit-and-loss would stop the sale, they resubmitted the correction, but a foreclosure sale occurred on Nov. 9, 2016 and the purchaser was Bank of New York Mellon.
Plaintiffs sued under federal consumer-regulation provisions (Regulation Z/12 C.F.R. §1026.36 and Regulation X/12 C.F.R. §1024.38 and §1024.41), and sought rescission of the foreclosure sale.
The court treated the amended complaint under Rule 12(b)(6): it dismissed some claims with prejudice (no viable legal theory) and dismissed one claim without prejudice (insufficient factual detail) while granting limited leave to amend.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Ditech violated Reg. Z §1026.36(c)(1)(ii) by refusing partial payments/suspense account	Mastin: Ditech could have held partial payments in suspense and must have done so; refusal caused harm	Ditech: Regulation is permissive (may hold or return); Deed of Trust permits rejecting partial payments insufficient to bring loan current	Dismissed with prejudice — regulation is permissive and Deed of Trust allows rejecting partial payments; claim futile
Whether 12 C.F.R. §1024.38(a) (servicer policies) creates a private right of action	Mastin: §1024.38(a) creates enforceable duties and supports claim	Ditech: §1024.38 is a general servicing-policy rule enacted under CFPB authority that CFPB did not make privately enforceable	Dismissed with prejudice — §1024.38 does not create a private right of action; CFPB intended enforcement by regulators only
Whether Ditech violated §1024.41(g) by conducting foreclosure after receiving a complete loss-mitigation application >37 days before sale	Mastin: Submitted application (and later corrected doc) — Ditech should have postponed sale	Ditech: It reasonably deemed application incomplete; servicers have discretion to set required documents; plaintiffs failed to allege dates showing >37 days	Dismissed without prejudice as to §1024.41(g) — plaintiffs failed to plead the necessary dates; court grants leave to amend limited to this claim
Whether plaintiffs may obtain equitable rescission of the foreclosure sale as remedy for regulatory violations	Mastin: Rescission is appropriate to restore pre-sale position	Ditech: Relevant regulations either exclude mortgages (Reg Z rescission) or don’t create private claims/remedies; §1024.41 supplies statutory damages only; §1024.38 not privately enforceable	Denied — rescission not available under pleaded federal regulations; remedy limited to statutory damages under §1024.41; rescission theory fails

Key Cases Cited

Lynch v. Alworth-Stephens Co., 267 U.S. 364 (U.S. 1925) (plain meaning of statutory text preferred over strained constructions)
Alexander v. Sandoval, 532 U.S. 275 (U.S. 2001) (agencies cannot create private rights of action by regulation)
Touche Ross & Co. v. Redington, 442 U.S. 560 (U.S. 1979) (limitations on agency-created private rights)
Califano v. Yamasaki, 442 U.S. 682 (U.S. 1979) (federal courts retain equitable injunctive power absent clear congressional command)
Erie R.R. Co. v. Tompkins, 304 U.S. 64 (U.S. 1938) (federal courts apply state substantive law in diversity cases)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must be plausible, not speculative)
Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (legal conclusions not entitled to assumed truth at pleading stage)
Labor v. Harvey, 438 F.3d 404 (4th Cir. 2006) (leave to amend denied only for futility, bad faith, or prejudice)
Johnson v. Oroweat Foods Co., 785 F.2d 503 (4th Cir. 1986) (standard for denying leave to amend)