by It pays to read mortgage documents carefully to determine whether the bank or Servicer complied with contractual conditions precedent prior to bringing adverse action against the debtor upon default. In In re Demers, No. 13-11539 (Bankr. R.I. June 5, 2014), American Servicing Co. (ASC) failed to comply with such conditions and was denied recovery of nearly $2,000.00 in claimed fees and costs associated with initiation of foreclosure proceedings.
In that case, the Mortgage provided that in the event of the debtor’s default, prior to accelerating the Note, ASC “shall” give notice of “the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.” The actual notice sent by ASC stated: “If foreclosure is initiated, you have the right to argue that you did keep your promises and agreements under the Mortgage Note and Mortgage, and to present any other defenses that you may have.” ASC did not inform the debtor that she had a right to bring an action in court.
Applying Rhode Island law, the court sustained the debtor’s limited objection to ASC’s claim, finding that ASC’s failure to specifically state that the debtor could bring a court action precluded it from recovering the costs of acceleration and foreclosure that were permitted by separate provisions in the Note. Reading the Note and Mortgage as one agreement, the court found that the language in the mortgage created a condition precedent to application of the provisions in the Note. As “the more powerful and sophisticated party,” the contract should be construed against ASC and ASC must be held to a standard of good faith and fair dealing. The court rejected ASC’s argument that because, four years earlier, it had sent the debtor notices of default which did include the required language, the debtor had sufficient notice of her rights. Those notices did not relate to the current default and did not lead to acceleration and foreclosure.
The notice applicable to the default at issue did not comply with the clear and unambiguous requirement that ASC inform the debtor not only of her right to dispute the charge of default, but specifically of her right to bring a court action to do so. Unless and until ASC complied with the condition precedent, it had no right to accelerate and foreclose and, therefore, no right to recover the costs involved.
For discussion of a similar case in which the lender informed the debtor of the right to bring a court action but failed to inform of the right to raise defenses in an action brought by the bank, see Firm Wins Another Brevard Foreclosure Trial.