Mathews v. PHH Mortg. Corp.Mathews v. PHH Mortg. Corp.
*1 PRESENT: All the Justices
RICHARD MATHEWS, ET AL.
OPINION BY v. Record No. 110967 JUSTICE WILLIAM C. MIMS
April 20, 2012 PHH MORTGAGE CORPORATION
FROM THE CIRCUIT COURT OF NELSON COUNTY
J. Michael Gamble, Judge
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
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,
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
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 *3 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 *4 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,
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,
Nevertheless, the Mathewses argue that under Bayview Loan
Servicing, LLC v. Simmons,
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,
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,
Accordingly, we affirmed the circuit court’s judgment in favor
of the borrower. Id. at 122,
A trustee’s power to foreclose is conferred by the deed of
trust. Fairfax County Redevelopment & Hous. Auth. v. Riekse,
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.
We accept the validity of PHH’s premise and recognize that a deed of trust may anticipate breaches other than by non- payment 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 *8 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 – but that such conditions are fully enforceable in the rare cases when the breach is not by non-payment. Such a ruling would defy common sense.
The solution lies in the definition of material breach.
In Horton and Countryside Orthopaedics, we defined material
breach as “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.” Countryside
Orthopaedics,
We therefore reject PHH’s argument. Borrowers may sue to enforce conditions precedent to foreclosure even if they were the first party to breach the note secured by a deed of trust through non-payment.
B. INCORPORATION OF THE REGULATION AS A CONDITION PRECEDENT TO FORECLOSURE UNDER THE DEED OF TRUST We now turn to the question of whether the Regulation is incorporated into the Deed of Trust as a condition precedent to foreclosure. The circuit court determined that the Regulation was incorporated and PHH has assigned cross-error to this ruling. PHH first argues that terms may be incorporated into a contract by reference only if the intent to incorporate is clear. PHH asserts that the language of the Deed of Trust does *10 not clearly express intent to incorporate HUD’s regulations. We disagree.
A deed of trust is construed as a contract under Virginia
law, see, e.g., Virginia Hous. Dev. Auth. v. Fox Run Ltd.
P’shp.,
is construed as written, without adding terms that were not included by the parties. When the terms in a contract are clear and unambiguous, the contract is construed according to its plain meaning. Words that the parties used are normally given their usual, ordinary, and popular meaning. No word or clause in the contract will be treated as meaningless if a reasonable meaning can be given to it, and there is a presumption that the parties have not used words needlessly.
Id. (quoting PMA Capital Ins. Co. v. US Airways, Inc., 271 Va.
352, 358,
Paragraph 18 of the Deed of Trust sets forth the procedure for foreclosure. It states in relevant part that the power of sale may be invoked only after the lender “requires immediate payment in full under paragraph 9.” In other words, acceleration of repayment is a condition precedent to *11 foreclosure. Paragraph 9 sets forth the “Grounds for Acceleration of Debt,” which includes payment default: (a) Default. Lender may, except as limited by
regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument if:
(i) Borrower defaults by failing to pay in full any monthly payment required by this Security Instrument prior to or on the due date of the next monthly payment . . . . (Emphasis added.) Paragraph 9 also includes the following subparagraph:
(d) Regulations of HUD Secretary. In many circumstances regulations issued by the Secretary will limit [the l]ender’s rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by the regulations of the Secretary.
(Emphasis added.)
These words “are clear and unambiguous” and we will
construe them according to their plain meaning. Uniwest
Constr.,
Accordingly, the references to HUD’s regulations in the
Deed of Trust are sufficient to incorporate them insofar as
they prevent the borrower from accelerating or foreclosing.
Cf. High Knob Assocs. v. Douglas,
PHH next argues that terms may be incorporated into a contract by reference only if it is clear which terms are to be incorporated. PHH asserts that any language in the Deed of Trust appearing to incorporate HUD’s regulations fails to state explicitly which regulations are intended to be incorporated. Part 203 of Title 24 of the Code of Federal Regulations contains 681 regulations, PHH observes, and the Deed of Trust fails to identify which of them are incorporated. We again disagree.
Only those regulations that prevent a lender from accelerating or foreclosing are incorporated by the cited language in the Deed of Trust. Whether every regulation *13 included in Part 203 of Title 24 does so is not before us. We must determine only whether the Regulation invoked in this case prevents a lender from accelerating or foreclosing. For two reasons, we conclude that it does, and therefore that it is incorporated into the Deed of Trust as a condition precedent.
First,
Second,
In addition, the Regulation itself provides that “[t]he
mortgagee must have a face-to-face interview with the
mortgagor, or make a reasonable effort to arrange such a
meeting, before three full monthly installments due on the
mortgage are unpaid.”
Accordingly, the face-to-face meeting requirement is a condition precedent to the accrual of the rights of acceleration and foreclosure incorporated into the Deed of Trust. Cf. Manufacturers Hanover Mortgage Corp. v. Snell, 370 N.W.2d 401, 404 (Mich. Ct. App. 1985) (suggesting that HUD’s servicing requirement regulations may be a defense to foreclosure if they are made terms of a mortgage contract).
PHH also argues that the language in the Deed of Trust should not be construed to incorporate the Regulation because the language was not bargained for by the parties; rather, it *15 is language imposed by HUD, which requires the use of a standardized form deed of trust. We again disagree.
As noted above, the lender-beneficiary and trustee under a
deed of trust have only those powers that it confers upon them.
Riekse,
Conversely, PHH offers no explanation for HUD’s decision to require this language in deeds of trust which secure its insured loans if, as PHH contends, the regulations govern only the relationship between the lender and the government, rather than the lender and the borrower. The regulations themselves govern the relationship between the lender and the government; there is no reason to refer to them in the deed of trust other *16 than to affect the duties of the parties to it. If, as PHH asserts, HUD has a contrary intention, it may either (a) cease to require or allow language that incorporates its regulations as conditions precedent to acceleration or foreclosure in the deeds of trust or (b) require or allow language that expressly states its intent that its regulations are not conditions precedent. It has done neither.
In conclusion, the terms used in Paragraphs 9 and 18 of
the Deed of Trust clearly state that the rights of acceleration
and foreclosure accrue only if permitted by HUD’s regulations.
C. APPLICABILITY OF
The final issue is whether the Regulation applies in this
case. As noted above, the Regulation requires the lender to
“have a face-to-face interview” with the borrower, “or make a
reasonable effort to arrange such a meeting.”
In its demurrer, PHH cited a frequently-asked-questions
webpage (“the FAQ”) on the HUD website in which HUD purportedly
interpreted the term “branch office” as used in
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing /sfh/nsc/faqgnsrv (last visited Mar. 12, 2012). HUD replied,
The Department is aware that many Mortgagees maintain “branch offices” that deal only with loan origination and some of these offices may only be staffed part-time. For the most part, individuals that staff an origination office are not familiar with servicing issues and are not trained in debt collection or HUD’s Loss Mitigation Program.
The Department has always considered that the face-to-face meeting must be conducted by staff that is adequately trained to discuss the delinquency and the appropriate loss mitigation options with the mortgagor. Therefore, for the purpose of this discussion, the face-to-face meeting requirement referenced in [the Regulation] relates only to those mortgagors living within a 200-mile radius of a servicing office.
Id.
PHH asserted that it did not have a “servicing office” within 200 miles of the Parcel and that the face-to-face *18 meeting requirement therefore did not apply. The circuit court accepted this argument and the Mathewses assign error to its ruling.
The Mathewses argue the term “branch office” is unambiguous and that the plain language of the Regulation supersedes HUD’s response in the FAQ. They assert that the common and popular meaning of a “branch office” is “a place for the regular transaction of business or performance of a particular service located at a different location from the business’s main office or headquarters.” Moreover, HUD expressly acknowledged in the FAQ that the term “branch office” encompasses not only a “servicing office” but a loan origination office as well. We agree.
When interpreting a federal administrative regulation, “a
court must necessarily look to the administrative construction
of the regulation if the meaning of the words used is in
doubt.” Bowles v. Seminole Rock & Sand Co.,
However, “[i]f the regulation is unambiguous, then what is
known as Seminole Rock deference does not apply, and the
regulation's plain language, not the agency's interpretation,
controls.” United States v. Deaton,
The term “branch office” in the Regulation is unambiguous. “Branch” is defined as, among other things, “a part of a complex body: as . . . a section, department, or division of an organization,” or “a subordinate or dependent part of a central system or organization,” e.g., “a neighborhood branch of a city library” or “a branch bank in a suburb.” Webster’s Third New International Dictionary 267 (1993) (emphasis added). “Office” is defined as, among other things, “a place where a particular *20 kind of business is transacted or a service is supplied.” Id. at 1567. Because the Regulation applies if the mortgaged property is within 200 miles “of the mortgagee, its servicer, or a branch office of either,” the particular type of business or service supplied by an office within the contemplation of the Regulation is not limited to servicing. Rather, every type of business and service supplied by the mortgagee, including loan origination, is within its scope. [5]
This conclusion is underscored by the language of the FAQ
itself, which states that “[t]he Department is aware that many
Mortgagees maintain ‘branch offices’ that deal only with loan
origination.” HUD therefore acknowledges that offices that
deal only with loan origination are “branch offices” within the
meaning of the Regulation but purports to limit the unambiguous
regulatory term to include only “servicing offices.” The
Regulation itself does not support this limitation. To accept
HUD’s interpretation would amount to allowing it to create a
*21
new regulation or tacitly amend
Alternatively, even if we were to conclude that “branch
office” is ambiguous, HUD’s interpretation as supplied in the
FAQ would not control because it was not promulgated under the
procedures for substantive rulemaking required by the
Administrative Procedure Act,
We acknowledge that mere interpretive rules are entitled
to some measure of judicial deference. Reno,
According to the FAQ, the purpose of interpreting “branch office” to mean only “servicing office” is to ensure that the face-to-face meeting takes place between the borrower and “staff that is adequately trained to discuss the delinquency and the appropriate loss mitigation options.” Because “individuals that staff an origination office are not familiar with servicing issues and are not trained in debt collection or HUD’s Loss Mitigation Program,” the FAQ’s interpretation excludes such offices from the term “branch office.” But we do not consider this exclusion to be reasonable. If an originating office within the 200-mile radius lacks staff with the appropriate training, appropriately-trained staff could participate in a face-to-face meeting between the borrower and the staff of the originating office by tele- or video- conference, for example, thereby imposing a minimal burden on *23 the lender while furthering the loss mitigation purpose of the Regulation and its underlying statutory authority. [6] Because the stated rationale for the interpretation is not reasonable, we would not defer to it even if the term “branch office” were ambiguous.
Accordingly, we reject PHH’s argument that the Regulation
does not apply because it does not have a “servicing office”
within the 200-mile radius set forth in
III. CONCLUSION
For the foregoing reasons, we will affirm the judgment in part, reverse it in part, and remand for further proceedings consistent with this opinion.
Affirmed in part, reversed in part, and remanded. CHIEF JUSTICE KINSER, concurring.
I agree with the majority's conclusion that
Subpart C ("Servicing Responsibilities"), of Part 203 ("Single Family Mortgage Insurance"), in Title 24 ("Housing and Urban Development"), of the Code of Federal Regulations provides, in relevant part:
This subpart identifies servicing practices of lending institutions that HUD considers acceptable for mortgages insured by HUD. . . . It is the intent of [HUD] that no mortgagee shall commence foreclosure or acquire title to a property until the requirements of this subpart have been followed.
Before initiating foreclosure, the mortgagee must ensure that all servicing requirements of this subpart have been met. The *25 mortgagee may not commence foreclosure for a monetary default unless at least three full monthly installments due under the mortgage are unpaid after application of any partial payments that may have been accepted but not yet applied to the mortgage account. In addition, prior to initiating any action required by law to foreclose the mortgage, the mortgagee shall notify the mortgagor in a format prescribed by the Secretary that the mortgagor is in default and the mortgagee intends to foreclose unless the mortgagor cures the default.
The 30-day face-to-face meeting requirement at issue in
this appeal is found in
[t]he mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced . . . . Pursuant to this subsection, the mortgagee is required to conduct a face-to-face interview with the mortgagor before three full monthly installments are unpaid. A face-to-face meeting at least 30 days before commencement of foreclosure proceedings is required "[i]f default occurs in a repayment plan arranged other than during a personal interview." Id. (emphasis added). Thus, the face-to-face interview requirements are triggered by two separate events. The one at *26 issue in this appeal, a face-to-face meeting at least 30 days before foreclosure is commenced, as I have already pointed out, becomes necessary "[i]f default occurs in a repayment plan arranged other than during a personal interview." Id.
However, in their complaint, the Mathewses quoted only
part of the language in
the holder of the note can foreclose on the home in the event of arrearage on payment of the note, but only if the holder of the note has complied with . . . regulations, including inter alia,24 C.F.R. § 203.604 , whereby 'The mortgagee must have a face-to-face interview with the mortgagor . . . or make a reasonable attempt to arrange such a meeting within 30 days after such default or at least 30 days before ∗ foreclosure is commenced . . . .'
a reasonable attempt to arrange such a meeting within 30 days after such default or at least 30 days before foreclosure is commenced . . . .' "
Notably, the Mathewses did not allege that the mortgagee
failed to have a face-to-face interview with them before three
full monthly installments were unpaid. Likewise, the Mathewses
did not allege that the mortgagee failed to have a face-to-face
meeting with them within 30 days after default and at least 30
days before foreclosure was commenced upon their default on "a
repayment plan arranged other than during a personal
interview."
In this case, however, when PHH Mortgage Corporation filed
its demurrer to the Mathewses' complaint seeking declaratory
judgment, it did not assert as a basis for its demurrer the
issue I have identified. In ruling on a demurrer, a trial
court cannot consider any "grounds other than those stated
specifically in the demurrer." Code § 8.01-273(A); see also TC
MidAtlantic Dev., Inc. v. Commonwealth,
For these reasons, I respectfully concur and, like the majority, would affirm in part and reverse in part the circuit court's judgment and remand for further proceedings.
JUSTICE McCLANAHAN, concurring.
I agree with the majority's holdings in this case.
However, in my opinion, the first material breach doctrine, as
applied in Horton v. Horton,
The Mathewses' failure to pay under the terms of the note and deed of trust at issue – of which defendant PHH became the holder and beneficiary, respectively, as the successor in interest – was clearly a material breach of both the note and the deed of trust. [1] Following this default, PHH sought to foreclose on the Mathewses' residence pursuant to PHH's remedies set forth in paragraph eighteen of the non-uniform covenants of the deed of trust. [2]
The Mathewses, in turn, sought by the instant declaratory
judgment action to stop PHH from going forward with its remedy
of foreclosure based on their claim that PHH failed to first
comply with a condition precedent to its right to enforce this
*30
remedy – i.e., the "face-to-face interview" requirement under
In this case, the original lender, PHH's predecessor in interest, performed its primary obligation at the inception of the subject transaction between it and the Mathewses when it made the loan to them under the terms of the note and deed of trust. And the Mathewses' instant action, of course, has nothing to do with them seeking damages or specific performance in regard to any non-performance of that contractual obligation. Rather, this action was instituted in the context of their defense to PHH's enforcement of its remedy of foreclosure against them.
Unlike the Mathewses, the breaching party in both Horton and Countryside sought damages based on the defendant's failure to perform one of the defendant's contractual obligations that was unrelated to any remedy of the defendant for the plaintiff's breach of the parties' contract. [3]
For these reasons, I agree with the majority that the circuit court erred in holding that, because the Mathewses first materially breached the deed of trust, they were not entitled to enforce the terms of the deed of trust against PHH in regard to its remedy of foreclosure.
breached his related stock purchase agreement in which he acquired an ownership interest in the corporation. Id.
Notes
[1] Bayview illustrates the principle that damages may be awarded at law after a foreclosure sale has been conducted improperly because the power of foreclosure has not accrued. Equitable relief is available to enjoin the improper sale before it occurs as well. See Rossett v. Fisher, 52 Va. (11 Gratt.) 492, 499 (1854) (stating that a debtor may resort to equity to ensure that a trustee under a deed of trust fulfills his duties under the deed of trust); see also 19 Michie’s Jurisprudence, Trusts and Trustees § 120 (“Equity . . . could interfere by injunction to restrain [a trustee] from improperly exercising his powers.”).
[2] While the Note is not in the record of this case and this precise issue is not presently before us, we observe that non- payment may be a material breach of a note, which may enable a lender to bring an action on it independent of the deed of trust.
[3]
[4] Certain exceptions set forth in
[5] HUD considered limiting the scope of “branch office” only
to “servicing offices” in the course of substantive rulemaking
by amending
[6] The Regulation is authorized by 12 U.S.C § 1715b, which
enables HUD to promulgate regulations necessary to carry out
the insured loan program, and
[1] As stated in paragraph one of the uniform covenants of the deed of trust: "Borrower shall pay when due the principal of, and interest on, the debt evidenced by the Note and late charges due under the Note." Then in paragraph nine of these covenants, the deed of trust states, in relevant part: "Lender may, except as limited by regulations issued by the Secretary [of Housing and Urban Development], in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument if . . . Borrower defaults by failing to pay in full any monthly payment required by this Security Instrument prior to or on the due date of the next monthly payment . . . ."
[2] The deed of trust there provides in relevant part, under the heading "Foreclosure Procedure": "If Lender requires immediate payment in full under paragraph 9, Lender may invoke the power of sale and any other remedies permitted by applicable law. Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this paragraph 18 . . . ." (Emphasis added.)
[3] In Horton, a former wife sought damages from her former
husband due to his failure to make supplemental payments to an
escrow account established for her benefit pursuant to the
terms of a joint venture dissolution agreement entered into by
the parties.