Chapter 39 WRONGFUL FORECLOSURE

• Jurisdiction: North Carolina

39 WRONGFUL FORECLOSURE

A. Definition

North Carolina recognizes a cause of action for "wrongful foreclosure."¹ It is a tort action. Courts say that a claim for wrongful foreclosure is based on fraud.² Very few cases discuss the action, although, in the wake of the financial crisis of 2009, a number of federal courts confronted claims for wrongful foreclosure.

B. Elements

The North Carolina Supreme Court has not explicitly listed the elements of a cause of action for wrongful foreclosure or, as a New York Bankruptcy court interpreting North Carolina law put it, "North Carolina courts have not set out a canonical list of the required elements of wrongful foreclosure."³ That court identified the elements as "an act of foreclosure" and an "element of 'wrongfulness.'" To that should be added "damages," as that is generally an element of any tort action. The most specific statement of the elements of wrongful foreclosure was asserted by a federal court citing a Georgia state court opinion. The federal court said that to state a common-law claim, a plaintiff has to allege:

(1) A legal duty owed to the plaintiff by the foreclosing party,
(2) A breach of that duty,
(3) A causal connection between that breach and the injury it sustained, and
(4) Damages.⁴

However, neither the North Carolina Supreme Court, nor any state court, has specifically adopted that set of elements.

C. Elements Defined

1. An Act of Foreclosure

A foreclosure, not merely an "attempted foreclosure," must have taken place.⁵ A claim for wrongful foreclosure accrues when the lender conveys the real property to a third party, and if the plaintiff does not allege in the complaint that the lender conveyed the plaintiff's property to anyone, the claim fails.⁶ Thus, when a hearing for foreclosure has been set, but has not taken place, an action for wrongful foreclosure will not lie.⁷

2. Wrongfulness

The plaintiff claiming wrongful foreclosure has the burden to show the defendant — and not some other party — acted improperly in connection with the foreclosure.⁸ In general, under North Carolina law, a fiduciary duty is imposed on the trustee of a deed of trust to "use diligence and fairness in conducting the sale and to receive and disburse the proceeds of the sale."⁹ Breach of that duty shows wrongfulness.

One basis on which a mortgagor may claim a foreclosure was wrongful is that he or she received no notice of it.¹⁰ Generally, absent a contractual obligation to provide notice, there is no requirement that a creditor give personal notice of a foreclosure by sale to a debtor who is in default.¹¹ However, there are statutory requirements for notice with which a mortgagee or trustee granted a power of sale under a mortgage or deed of trust who seeks to exercise that power of sale must comply.¹²

In one wrongful foreclosure action, the plaintiff alleged the lender that initiated foreclosure of a deed of trust for which mortgage payments were in arrears had been assigned all rents and income from the encumbered property as further security for that indebtedness and knew the property was being rented for an amount sufficient to cover the monthly mortgage payments. The court affirmed dismissal of the wrongful foreclosure action and said that under the deed of trust, the lender was under no obligation to collect the rents from the mortgaged property and apply them to the monthly payments on the note. While the terms of the deed of trust undertook to assign the rents as further security, they imposed no obligation on the lender to actually collect the rents and, therefore, there had been no violation of legal duty in failing to collect those rents. The allegations pertaining to collection of the rent failed to state a cause on which relief could be granted.¹³

In another case, any arrearages resulted from the defendant erroneously paying from plaintiffs' tax escrow fund administered by the defendant, taxes on a parcel of land owned by plaintiffs that was not included in the deed of trust. Nonetheless, the defendant foreclosed on the deed of trust and the plaintiffs brought a claim for wrongful foreclosure. The lower court granted summary judgment to the defendant. The appellate court reversed and remanded for trial.¹⁴

3. Damages

Evidently, nominal damages will suffice to meet the element. "As to evidence of damages, in a wrongful foreclosure action," explained one North Carolina court, "it is not necessary to prove damages to withstand a directed verdict, since, regardless of proof of any actual damages, plaintiffs would be entitled to at least nominal damages should the jury find there was a wrongful foreclosure."¹⁵

D. Defenses

The statute of limitations applicable to a claim for wrongful foreclosure is three years.¹⁶ A claim for wrongful foreclosure accrues when the mortgagee conveys the property to a third party and, thus, the statute of limitations is three years from the date of that transfer.¹⁷

If the plaintiff, by his or her actions, ratifies the foreclosure, a claim for wrongful foreclosure is defeated.¹⁸ If the plaintiff fails to take advantage of the statutory remedies available for challenging a foreclosure, the plaintiff may not, through an action for wrongful foreclosure, re-litigate the judicial determination to allow the foreclosure sale to go forward; the action is barred by res judicata.¹⁹

The plaintiff must have an interest in the property to be able to bring an action for wrongful foreclosure. For example, after an Order Allowing Foreclosure was entered, the mortgagor executed a quit claim deed purporting to convey her interest in the property to be foreclosed to her daughter. The mother brought a claim for wrongful foreclosure and the daughter sought to intervene. The court said that although the daughter may have been a witness to some of the occurrences relevant to the wrongful foreclosure action, she did not have an interest, economic or otherwise, because by the time the mother transferred the deed to her daughter, the Order of Foreclosure had become final. The court, therefore, denied intervention.²⁰

E. Remedies

Generally, when there has been a wrongful foreclosure, the injured mortgagor may elect to sue to set the sale aside or to permit the sale to stand and sue to recover damages.²¹ Typically, the damages would be based on the fair market value of the property on the date of the foreclosure sale.²²

In an early case, the North Carolina Supreme Court stated that if a foreclosure and sale were brought about through the wrongful action of the mortgagee, the mortgagor would ordinarily be entitled to redeem the land unless that had been rendered impossible through the conduct of the mortgagee, in which case the mortgagor would be entitled to the damages he or she may have sustained.²³ Where the trial court sets the sale aside and the mortgagor fails to assign error to that order, the mortgagor has elected to treat the sale as a nullity and is not entitled to damages.²⁴

It does not appear that any appellate court has discussed punitive damages, although, in a few...