Johnson v. Federal Home Loan Mortgage Corporation

As previously noted on this blog, homeowners who are in default sometimes file lawsuits against the noteholder or servicer of their mortgage in order to delay or prevent foreclosure.  I have handled a number of these types of cases, on behalf of banking clients.  In July, the Western District of Virginia (Judge Wilson) dismissed one such claim on a motion to dismiss.  See Johnson v. Federal Loan Mortgage Corporation, Case No. 7:12cv00507 (W.D.Va. 2013).

The facts of the case are as follows.  The homeowner alleged that the bank's notice of acceleration was deficient because it failed to include language required by her deed of trust.  The deed of trust said that that the notice of acceleration shall, among other things, "inform Borrower of the right to reinstate after acceleration and 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."  According to the homeowner, the notice that she received failed to track this language from the Deed of Trust because it did not notify her of her right to bring a court action.  Therefore, the homeowner alleged that notice of acceleration constituted a breach of contract.

In analyzing this claim, the Court noted that a deed of trust was a contract and that a deficient notice of acceleration could constitute a breach of contract.  Recognizing the difference between a material and nonmaterial breach of contract, however, the Court noted that "immaterial differences in language will not nullify a substantially conforming notice of acceleration."  The Court then ruled that although the notice of acceleration contained different language than what was required in the deed of trust, the notice was in effect the "functional equivalent."  Accordingly, the Court dismissed the breach of contract claim.

This certainly seems like the right result to me.  One of the important distinctions between a material and immaterial breach of contract is that a material breach excuses performance, whereas an immaterial breach does not excuse performance, but only gives rise to a cause of action for damages.  The homeowner did not appear to allege any damages as a result of the different language in the notice of acceleration.  For example, it does not appear that the homeowner alleged that she had a valid defense to foreclosure which she would have asserted in a court action had the notice of acceleration informed her of the right to bring a lawsuit.  Moreover, it appears that the notice of acceleration that was delivered conformed with all of the requirements of Virginia law.