On September 27, 2018, by a vote of 5-2, the Supreme Court of Ohio dismissed Wells Fargo Bank, N.A. v. Burd, 2018-Ohio-3891 as improvidently accepted. Sitting for Justice O’Donnell on the case was  Judge Robin N. Piper III of the Twelfth District Court of Appeals. Sitting for Justice DeGenaro was Judge Charles Miller of the First District Court of Appeals. Justice Kennedy dissented from the dismissal, with an opinion that was joined by Judge Piper. The case was argued April 24, 2018.

Case Background

Christopher Burd got a loan from Centennial Home Mortgage LLC in September of 2006, and signed a note promising to repay the loan. The note was secured by a mortgage in favor of Centennial. The mortgage stated that the loan was insured by the Federal Housing Administration (“FHA”). Centennial later endorsed the note and assigned the mortgage to Wells Fargo.

In April of 2009, Wells Fargo filed for judgment on the note and foreclosure of the mortgage, but that complaint was dismissed when Wells Fargo and Burd entered into a loan-modification agreement.

Wells Fargo filed for judgment on the note and foreclosure of the mortgage again in February of 2012, alleging the date of default to be October 1, 2011. In August of 2012, the parties participated in a court-sponsored mediation, which failed. The trial court then granted summary judgment in favor of Burd on this second complaint, holding Wells Fargo had failed to comply with 24 C.F.R. 203.604, because it had not conducted or attempted to conduct a face-to-face meeting with Burd within three months of Burd’s first missed payment. Regulation 604 requires such a meeting.

In August of 2014, Wells Fargo filed a third complaint, again seeking judgment on the note and foreclosure on the mortgage, again alleging the date of default to be October 1, 2011. The trial court again granted summary judgment in favor of Burd, holding that Wells Fargo failed to comply with the face-to-face meeting requirement in 24 C.F.R. 203.604. The trial court also found that requirement was a condition precedent to foreclosure of an FHA-insured loan. Wells Fargo appealed, arguing that the court-sponsored mediation fulfilled the face-to-face meeting requirement of 24 C.F.R. 203.604.

The Appeal

The Tenth Appellate District unanimously affirmed the decision of the trial court as to the mortgage. The appeals court assumed for the sake of analysis that the court-sponsored mediation counted as a face-to-face meeting for the purposes of Regulation 604. But the appeals court held that the face-to-face meeting took place after the second foreclosure had been filed, and not before the three full monthly installments due on the mortgage were unpaid, which is what 24 C.F.R. 203.604(b) requires. The fact that this mediation meeting took place before the third foreclosure proceeding was filed did not change the result, because the third foreclosure was based on the same alleged default date as the second one.

What The Supreme Court Agreed to Hear

These are the two proposed propositions of law that were advanced by Wells Fargo:

In interpreting an administrative regulation, a court should adopt an interpretation that is consistent with the overall regulatory scheme in which the individual regulation is included.

A mortgagee’s failure to comply with the timelines provided in 24 C.F.R. § 203.604 does not bar an action to foreclose a mortgage insured by the Federal Housing Administration as long as the mortgagee holds or makes a reasonable effort to hold a face-to-face meeting prior to initiating foreclosure.

Read the oral argument preview in this case here and an analysis of the argument here.

Justice Kennedy’s Position in Dissent

Justice Kennedy notes that an FHA-insured mortgage requires the mortgagee to meet certain obligations before it can file a foreclosure action, one of which is to have a face-to-face meeting with the borrower, or make a reasonable effort to do so, before three full monthly installments due on the mortgage are unpaid.  She then observes that there is a split among the appellate courts as to whether the face-to-face meeting requirement in the regulation constitutes a condition precedent or is an affirmative defense.  This, says Kennedy, affects “the decision as to what actions a mortgagee must take, and when, in order to satisfy 24 C.F.R. 203.604’s face-to-face meeting requirement.” She chides her colleagues for not deciding issues that “personify the concept of “public or great general interest.”” Subbing Judge Piper joined this dissent.

Condition Precedent or Affirmative Defense: Further Elucidation

So, wanting to be clearer on this, I looked up one of the cases holding that the HUD regulation at issue here creates a condition precedent.  This is from the Seventh District, PNC Mtge.v. Garland 2014-Ohio-1173, written by then-Judge DeGenaro:

“The distinction (condition precedent or affirmative defense) is important because each carries with it a different burden for pleading and summary judgment practice. For example, if compliance with the above HUD regulations (604 and 605) is a condition precedent, the bank must generally aver in its complaint that it has complied with all conditions precedent, the borrower then has a reciprocal burden to allege with specificity and particularity how the bank failed to comply. Civ.R. 9(C). In a motion for summary judgment, the bank would then bear the burden of establishing the absence of any issue of material fact on the issue of whether it complied with the specific HUD regulation.

“Alternatively, if compliance is deemed an affirmative defense, the bank has no pleading burden in its complaint; the borrower must generally allege non-compliance as an affirmative defense in its answer. And on summary judgment, the bank has no burden to discuss compliance with HUD regulations in its motion, whereas the borrower bears the burden of proving its affirmative defense via the brief in opposition to summary judgment.”

In analyzing the overall regulatory scheme established by HUD, the Seventh District concluded that “banks must comply with the face-to-face interview and loss mitigation evaluation requirements before commencing foreclosure actions. In other words, a bank’s foreclosure action is contingent upon satisfaction of these regulations and is therefore a condition precedent.”

According to Justice Kennedy’s dissent, only the Second District, in Wells Fargo Bank N.A. v. Goebel,  2014-Ohio-1220 has held that the regulation creates an affirmative defense on which the borrower has the burden of proof.  That case was argued by attorney Scott King, who also argued the Burd case for Wells Fargo at the Supreme Court of Ohio.

How pertinent is this condition precedent/affirmative defense dichotomy to this appeal?  In footnote two of its brief before the Supreme Court, the Appellant, Wells Fargo, wrote “Some courts view this “defense” (failure to comply with the face-to-face meeting timeline requirement in the regulations) as a “condition precedent” (citing Wells Fargo Bank N.A. v. Awadalla, 2015-Ohio-3753 (9^th Dist), while others view it as an affirmative defense (citing Goebel, supra). The differences involve both pleading requirements and burden of proof (Goebel, ¶¶ 17-21). This distinction is not relevant for the purposes of this appeal.” (emphasis added).

In his brief on this issue, borrower Burd wrote, “although the courts of appeals have differed as to whether non-compliance is an affirmative defense or a failure of a condition precedent, that distinction affects only pleading standards and burdens of proof and does not detract from the fundamental ability of borrowers to raise the issue.”

Although there appears to be a conflict on this issue, this case wasn’t accepted on conflict certification. So I’m not sure what exactly Justice Kennedy is chastising her colleagues about not deciding.

I accurately predicted after argument that the case was so messy it was likely to get kicked.  And it was. Dismissing the case means the appellate decision in favor of the borrower stands. But what now happens to the property at issue isn’t clear.