1st Circuit Holds “Potentially Deceptive” Language in Default Notice May Invalidate Foreclosure Sale

The U.S. Court of Appeals for the First Circuit recently reversed a Massachusetts district court’s granting of a lender’s motion to dismiss in a foreclosure case where terms in the lender’s default notice arguably conflicted with relevant provisions in the mortgage.  The First Circuit held that the lender’s failure to strictly comply with the acceleration paragraph of the mortgage invalided the foreclosure.

This case focused on the provisions in the mortgage governing the borrower’s right to reinstate and acceleration.  The acceleration provision of the mortgage required that prior to accelerating payment, the lender had to provide the borrowers with a preforeclosure default notice specifying certain elements.  The mortgage’s right to reinstate provision only allowed a reinstatement payment up to five days before the sale of the property.  After the borrowers’ mortgage loan went into default, the lender sent default and acceleration notices to the borrowers.  The default notice stated that the borrowers “could still avoid foreclosure by paying the total past-due amount before a foreclosure sale took place” but failed to qualify that the payment must be tendered at least five days before the foreclosure date.  On appeal, the First Circuit noted that accuracy and avoidance of potential deception are both conditions of a valid foreclosure sale.  The court held that the lender’s omission of the information that the payment must be made at least five days before the foreclosure date rendered the notice potentially deceptive.  According to the First Circuit, Massachusetts courts demand strict compliance with respect to mortgage terms, including terms governing acceleration (which require and prescribe the preforeclosure default notice).  Because the default letter omitted certain information that rendered the notice potentially deceptive, the lender violated this strict compliance requirement and invalided the foreclosure.

Finally, the First Circuit held that the borrowers did not have to show that they were harmed in any way by the allegedly non-compliant default notice because prejudice to the borrower is not a requirement to invalidate the foreclosure.

Note that on February 14, 2019, the First Circuit granted the lender’s motion to extend the time to file a petition for rehearing/rehearing en banc to March 25, 2019.