This story of foreclosure misbehavior raises a number of questions, including (1) how many people did this happen to who simply weren’t represented? (2) How many consumer protection cases can we expect out of the mortgage debacle?
Dorothy Halstien owned a home worth somewhere between $235,000 and $320,000 (WaMu’s assessment). She developed dementia while owing about $75,000 to WaMu from an initial $73,000 mortgage. Given the cost of her care and her limited Social Security income, her guardian didn’t have the funds to pay her mortgage. Getting permission to sell the house to provide more funds for Halstien’s care was complicated—her daughter was living there rent-free, and various agency approvals and notices to hard-to-find family members, along with a cleanup of the property and removal of abandoned animals and vehicles, were also necessary. Still, the court-appointed guardian eventually got ready to sell the house, but not before Halstien defaulted.
Background: a deed of trust is a form of a mortgage, a three-party transaction in which a borrower conveys land to a trustee, who holds title in trust for a lender as security for a loan to the borrower. If the deed of trust contains a power of sale (which it will), the trustee can usually foreclose without judicial supervision. Quality was the trustee here.
Quality posted a notice of default on Halstien's home in October 2007, demanding $1,372.20 to bring the note current. Halstien’s account didn’t have enough money to pay; Puget Sound Guardians advanced this amount, but it was too late: the foreclosure was already in motion (although apparently Puget Sound Guardians never got its money back either).
So, shortly after the notice of default, a notice of trustee sale was executed by Seth Ott for Quality. The notice was dated and supposedly notarized on November 26, 2007, but not actually signed that day. The sale was set for February 29, 2008. This false document was part of a policy of Quality robosigning. “There was considerable evidence that falsifying notarizations was a common practice, and one that Quality employees had been trained to do. … [D]ocuments were falsely dated and notarized to expedite foreclosures and thereby keep their clients, the lenders, beneficiaries, and other participants in the secondary market for mortgage debt happy with their work.” Had the document been properly dated, the foreclosure sale would have been postponed by at least one week.
Through much of January and February, Halstien’s guardian worked to postpone the foreclosure sale. Indeed, the guardian had a signed purchase and sale agreement from a buyer willing to pay $235,000 for the house, closing at the end of March—after the scheduled foreclosure sale, but well within the statutory 120-day window for a trustee to hold a foreclosure sale. In Washington, the trustee has discretion to postpone sales, but here Quality declined to consider exercising its discretion and allowed WaMu to make all decisions. Indeed, it had a secret agreement with WaMu that it wouldn’t postpone any foreclosures unless WaMu told it to do so. Its contract stated “Your office is not authorized to postpone a sale without authorization from Fidelity [which played a servicing role] or Washington Mutual.”” Its witness testified that he couldn’t recall Quality postponing a sale without WaMu’s permission. (The court noted that the secret agreement with WaMu “is, at least, in tension with Quality’s fiduciary duty to both sides and its duty to act impartially.”)
Only problem: WaMu wan’t making any decisions, just ignoring the guardian’s numerous requests. In a depressingly standard display of incompetence, WaMu told the guardian to send copies of the guardianship documents and a completed purchase and sale agreement—then, over the next few days, told them to send the same documents to WaMu offices in Seattle, Washington; southern California; and Miami, Florida. The guardian faxed copies to various offices on five different days, and contacted Quality or WaMu over 20 times trying to get the sale postponed. The bank never communicated any decision to the guardian. However, given past experience and the purchase and sale agreement in hand, a witness for Puget Sound Guardians testified that it was “very possible” that, with a week’s more time, it could have made the sale happen.
But instead, on the first day it could legally do so, Quality sold Halstien’s home for $83,087.67, one dollar more than she owed, including fees and costs. The buyers resold the house for $235,000 shortly afterward. And the sale amount isn’t even challenged. The court doesn’t note this, but check out the size of the “fees and costs” added to her debt, representing 10% of the amount despite the short time between default and foreclosure. The court does mention that, to date, Quality hasn’t bothered to remit the $1 to her estate (since Halstien died during all this).
Quality argued that any cause of action was barred by the guardian’s failure to seek an injunction to enjoin the sale, but the record indicated that it would have been impossible to do so “due to the time frame, the need for court approval, and the lack of assets in the guardianship estate.” The trial judge nonetheless dismissed some claims on that ground, but allowed others to proceed. A jury found that Quality was negligent, that it violated the Washington Concumer Protection Act, and that it breached its contractual obligations. The court of appeals reversed on the second and third grounds; the state supreme court reinstated the WCPA verdict and didn’t reach the contractual issue.
At trial, the heart of the plaintiff’s case was the theory that Quality’s secret deference to the lender and falsification of notarized documents were unfair and deceptive practices, and that the trustee was negligent in failing to delay the sale. An expert on Washington’s deed of trust act testified that it was common for trustees to postpone sales to allow debtors to pay off defaults, and that on these facts the trustee should “absolutely” have postponed the sale. For Quality, Ott testified that he didn’t take into account that the house was worth more than the debt when conducting a foreclosure. When asked why, he said “My job was to process the foreclosure ... according to the state statutes.” That is: he counted the days, prepared the forms, saw that they were filed, and nothing more. Also, before 2009, he would “sometimes” “incorrectly” date documents, and testified that he’d been trained to do that. He also testified that he’d never read Washington’s deed of trust statutes. A juror, quite reasonably, asked, “If you never read the statute, how did you know you were following it, following Washington law?” Ott responded that he relied on his training. He also testified that he wouldn’t postpone a sale unless the lender asked, but he knew he had authority to do so.
While finding for Quality on claims of negligent misrepresentation and failure to make an accommodation, the jury found for the trustee on negligence, WCPA violations, and breach of contract. On negligence, it found both sides 50% at fault. The damages on all three claims were the same: the difference between the foreclosure sale price and $235,000. The judge entered judgment for the full $151,912, since the 50% reduction only applied to the negligence claim. She declined to issue an injunction against Quality in part because she believed (hope springs eternal?) that “the threat of endless litigation was sufficient to prevent Quality from continuing its unfair or deceptive practices.”
On appeal, the court of appeals found that the evidence was insufficient on the breach of contract and WCPA claims. It mostly argued that the guardian waived its claims by not seeking a presale injunction, but it abandoned that argument on appeal. The Supreme Court still wanted to make clear that the argument was a loser: waiver is an equitable doctrine, and there were many reasons why it was unavailable here, among them that the guardian was unaware of the false notarization or the secret agreement with WaMu not to postpone foreclosure sales without WaMu’s permission, along with the special delays under which guardians must operate in order to get judicial permission to proceed.
Which brings us to the state supreme court and its reinstatement of the WCPA claim. The elements are an "(1) unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; (5) causation." The guardian argued that Quality’s falsification of notarized documents and practice of deferring to the lender qualified as unfair/deceptive acts or practices.
Quality’s arguments on the merits were: (1) The falsely dated and notarized notice of sale was harmless because Halstien got the full, albeit minimum, statutory period to avoid foreclosure. (2) The falsely notarized documents couldn’t harm anyone, and thus the public interest requirement wasn’t met. (3) Deferring to the lender was, as a matter of law, not deceptive or unfair.
The legislature need not specifically identify unfair or deceptive acts or practices for them to be actionable, given the broad intent of the law and the infinite capacity of humans to harm one another. The first element of a WCPA violation can be shown if an act or practice has the capacity to deceive a substantial portion of the public, or if it is a per se unfair trade practice, which occurs when there’s a violation of a statute declared by the legislature to regulate an unfair or deceptive act in trade or commerce. But unfairness also counts, along with deceptiveness. Thus, the WCPA can be violated by “an unfair or deceptive act or practice not regulated by statute but in violation of public interest.” Though federal FTCA unfairness law provides a guide, this case didn’t provide the court cause to explore in detail how unfairness should be defined for WCPA purposes.
The trustee’s failure to exercise its independent discretion to postpone a sale violated the WCPA. Because nonjudicial foreclosures provide fewer protections, “Washington courts have not shied away from protecting the rights of the parties.” The state supreme court has voided a foreclosure when the trustee was “well aware” of a pending legal action on the alleged debt, precluding satisfaction of the statutory prerequisites for a trustee sale. And even had that not been so, the trustee’s own actions consistently favoring the beneficiary and failing to inform the borrowers that their initial attempt to restrain the sale had failed, along with a grossly inadequate sale price, would have voided the sale. “The power to sell another person's property, often the family home itself, is a tremendous power to vest in anyone's hands.… [C]ommon law and equity requires that trustee to be evenhanded to both sides and to strictly follow the law.” Indeed, the deed of trust act must be construed in favor of borrowers because of the power given to lenders and the lack of judicial oversight.
In practice, lenders and servicers appoint trustees and trustees have incentives to keep them happy and not much incentive to treat homeowners well. But a trustee isn’t just an agent for the lender; they have obligations to homeowners as well. “[N]either due process nor equity will countenance a system that permits the theft of a person's property by a lender or its beneficiary under the guise of a statutory nonjudicial foreclosure.” A truste “owes a duty to act in good faith to exercise a fiduciary duty to act impartially to fairly respect the interests of both the lender and the debtor,” and if it fails, the sale may be voided, title quieted in the homeowner, and the trustee and the beneficiary may risk a WCPA claim.
Further, the court suggested in a footnote, absent strong protections for borrowers, the nonjudicial foreclosure act could run afoul of the state constitutional prohibition on deprivation of property without due process of law, which might protect against more than the federal 14th Amendment; other self-help statutes for creditors are subject to constitutional limits. Another footnote noted that, if the trustee was a mere agent of the beneficiary, the beneficiary might also be liable for the trustee’s acts, though WaMu was in receivership and not a party to this particular lawsuit.
Quality argued that it wasn’t unfair or deceptive to honor a beneficiary’s instructions not to postpone a sale without seeking its authorization, or to tell a borrow to contact the lender. Not so. The record supported the conclusion that Quality “abdicated its duty to act impartially toward both sides.” With the “incredible power” of a trustee in a nonjudicial foreclosure comes “an obligation to both sides to do more than merely follow an unread statute and the beneficiary's directions. If the trustee acts only at the direction ofthe beneficiary, then the trustee is a mere agent of the beneficiary and a deed of trust no longer embodies a three party transaction.” Thus, the practice of deferring to the lender and failing to exercise independent discretion as an impartial third party with duties to both parties is unfair or deceptive under the CPA. “Quality failed to act in good faith to exercise its fiduciary duty to both sides and merely honored an agency relationship with one.”
Separately, robosigning was also unfair or deceptive. At least from 2004-2007, Quality notaries “regularly” falsified the date of signing. Quality argued that these were immaterial because the owner received the minimum legally required notice. “This no-harm, no-foul argument again reveals a misunderstanding of Washington law and the purpose and importance of the notary's acknowledgment under the law.”
Notary lies are bad: “Local, interstate, and international transactions involving individuals, banks, and corporations proceed smoothly because all may rely upon the sanctity of the notary's seal.” The legal system depends on the integrity of the seal. Though the legislature hasn’t called false notarization a per se unfair or deceptive act, it’s a crime in both Washington and California (where this one was signed, and over which a Washington court would have criminal jurisdiction when the harm occurred in Washington), “and allowing them to be deployed to validate false information strikes at the bedrock of our system.” As another case put it, title registration “hinges upon the integrity of the documents which comprise it…. [T]he corruption of that system may cause substantial economic loss to the parties involved.” Thus, “the act of false dating by a notary employee of the trustee in a nonjudicial foreclosure is an unfair or deceptive act or practice and satisfies the first three elements under the Washington CPA.”
Quality argued that the falsely notarized documents didn’t cause harm. No. “[A] false notarization is a crime and undermines the integrity of our institutions upon which all must rely upon the faithful fulfillment of the notary's oath.” However, the factual issue of whether the false notarization was a cause of the damages here was for the jury. The plaintiff submitted evidence that the purposes of the false notarization was to hurry up the date of sale to please the beneficiary. It also submitted evidence that, had the documents been accurate, the sale would have been delayed by at least one week, and that it was “very possible” that it could have closed its own sale in that time, and it could also have gained more time to persuade WaMu to respond.
Hoewver, given the ruling on the trustee’s failure to fulfill its fiduciary duty to postpone the sale, there was sufficient evidence to sustain the WCPA verdict on that, and the court didn’t reach whether the robosigning caused the harm.
The Supreme Court also ruled that the plaintiff was entitled to an injunction requiring Quality to follow Washington law relating to foreclosures and notarizing documents. The trial judge thought this was overly broad and unenforceable, and accepted Quality’s assurance that its false notarization had ceased; she also noted that the deed of trust act had been amended to impose further duties on trustees. The Supreme Court disagreed. Quality “has demonstrated little understanding or regard for Washington law,” but continued to operate in the state, so it remanded for an appropriate order.
The plaintiff was also entitled to its attorneys’ fees.
Summarizing, the court stated that it was holding “that the right to enjoin a foreclosure sale is an equitable remedy and the failure to enjoin a sale does not operate to waive claims based on the foreclosure process where it would be inequitable to do so. Where applicable, waiver only applies to actions to vacate the sale and not to damages actions.” (The first concurrence specifically calls this holding out as unnecessary, but as an explicitly designated holding it does send a message more general than the facts of the case—especially given the other holdings on robosigning as unfair and deceptive, and inherently harmful to the judicial process. Of course, expect servicers etc. to claim that no one was really harmed by these acts, even if they were per se unfair and deceptive; here there was unusually specific evidence of likely harm.)
In addition, the court held “that it is an unfair or deceptive act or practice under the CPA for a trustee of a nonjudicial foreclosure to fail to exercise its authority to decide whether to delay a sale,” as is the practice of falsely notarizing a notice of sale.
Two concurrences took the majority to task for dicta/deciding unnecessary things. Chief Judge Madsen contended that Quality never argued that only an act or practice the legislature has declared to be unfair is unfair for purposes of the CPA; instead, either a per se violation or “an unfair or deceptive act or practice that has the capacity to deceive a substantial part of the public” is actionable. (What of that “capacity to deceive”? Is that an element of unfairness under the concurrence’s view? In that case, the act or practice would seem deceptive, not unfair, and there wouldn’t be a pure unfairness route to a cause of action absent a legislative determination thereof.) The concurrence continued that courts could determine unfair or deceptive acts or practices, restating the “capacity to deceive” route, and objected to the addition of “an unfair or deceptive act or practice not regulated by statute but in violation of public interest” to the definitions of regulated acts. Rather, the concurrence seemed to say that actual deception is not required, only capacity to deceive (perhaps indicating that “unfair” means “has a capacity to deceive,” though that’s usually how “deceptive” is interpreted in consumer protection statutes). The concurrence believed that the public interest element was separate, in that not every violation of a law was a per se unfair trade practice, only those that are identified by the legislature as unfair or deceptive. The legislature intended that the WCPA “not be construed to prohibit acts or practices not injurious to the public interest.” Thus it was problematic to base a violation on violation of “public policy.”
The legislature recently codified the public interest requirement by specifying that claimants could establish injury to the public interest by showing that an act or practice (1) violates a statute that incorporates the WCPA; (2) violates a statute that contains a specific legislative declaration of public interest impact; or (3) injured other persons or has or had the capacity to do so. The concurrence found it significant that capacity to injure isn’t the same thing as capacity to deceive; the former establishes the public interest element of a violation, whereas capacity to deceive is relevant to establishing the “unfair or deceptive” element in the absence of a per se violation. Thus, there was no need to suggest an amorphous “public interest” basis for a claim.
The concurrence then challenged whether a trustee had a “fiduciary” duty, given that a 2008 amendment to the governing law rejected a “fiduciary” duty in the trustee but retained a duty to act impartially, replacing that in 2009 with a “duty of good faith.” The majority incongruously mashed “fiduciary” together with other standards, like the duty of good faith. The concurrence also didn’t agree with the “extensive dicta,” such as the discussion of whether failure to seek a presale injunction waives all claims and the majority’s questioning of the nonjudicial foreclosure act on state law due process grounds. However, this was a concurrence, because the Chief Justice believed that “Quality's failure to exercise its own judgment on the matter of whether the sale should be postponed and its deferral to the beneficiary on this matter was an unfair or deceptive act or practice” (though why—how it had the capacity to deceive—wasn’t elaborated).
Another concurrence specified that “the judiciary retains the power to determine that an act is unfair within the meaning of the Consumer Protection Act” (emphasis added), while objecting to the raising of constitutional issues by footnote.