This story of foreclosure misbehavior raises a number ofquestions, including (1) how many people did this happen to who simply weren’trepresented? (2) How many consumer protection cases can we expect out of themortgage 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 hercare and her limited Social Security income, her guardian didn’t have the fundsto pay her mortgage. Getting permissionto sell the house to provide more funds for Halstien’s care was complicated—herdaughter was living there rent-free, and various agency approvals and noticesto hard-to-find family members, along with a cleanup of the property and removalof abandoned animals and vehicles, were also necessary. Still, the court-appointed guardianeventually got ready to sell the house, but not before Halstien defaulted.
Background: a deed of trust is a form of a mortgage, athree-party transaction in which a borrower conveys land to a trustee, whoholds title in trust for a lender as security for a loan to the borrower. If thedeed of trust contains a power of sale (which it will), the trustee can usuallyforeclose without judicial supervision. Quality was the trustee here.
Quality posted a notice of default on Halstien's home inOctober 2007, demanding $1,372.20 to bring the note current. Halstien’s account didn’t have enough moneyto pay; Puget Sound Guardians advanced this amount, but it was too late: theforeclosure was already in motion (although apparently Puget Sound Guardiansnever got its money back either).
So, shortly after the notice of default, a notice of trusteesale was executed by Seth Ott for Quality. The notice was dated and supposedlynotarized on November 26, 2007, but not actually signed that day. The sale wasset for February 29, 2008. This falsedocument was part of a policy of Quality robosigning. “There was considerableevidence that falsifying notarizations was a common practice, and one that Qualityemployees had been trained to do. … [D]ocuments were falsely dated andnotarized to expedite foreclosures and thereby keep their clients, the lenders,beneficiaries, and other participants in the secondary market for mortgage debthappy with their work.” Had the documentbeen properly dated, the foreclosure sale would have been postponed by at leastone week.
Through much of January and February, Halstien’s guardianworked to postpone the foreclosure sale. Indeed, the guardian had a signed purchase and sale agreement from abuyer willing to pay $235,000 for the house, closing at the end of March—after thescheduled foreclosure sale, but well within the statutory 120-day window for atrustee to hold a foreclosure sale. InWashington, the trustee has discretion to postpone sales, but here Qualitydeclined to consider exercising its discretion and allowed WaMu to make alldecisions. Indeed, it had a secret agreement with WaMu that it wouldn’tpostpone any foreclosures unless WaMu told it to do so. Its contract stated “Your office is notauthorized to postpone a sale without authorization from Fidelity [which playeda servicing role] or Washington Mutual.”” Its witness testified that he couldn’t recallQuality postponing a sale without WaMu’s permission. (The court noted that the secret agreementwith WaMu “is, at least, in tension with Quality’s fiduciary duty to both sidesand its duty to act impartially.”)
Only problem: WaMu wan’t making any decisions, just ignoringthe guardian’s numerous requests. In a depressinglystandard display of incompetence, WaMu told the guardian to send copies ofthe 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 inSeattle, Washington; southern California; and Miami, Florida. The guardianfaxed copies to various offices on five different days, and contacted Qualityor WaMu over 20 times trying to get the sale postponed. The bank never communicated any decision tothe guardian. However, given pastexperience and the purchase and sale agreement in hand, a witness for PugetSound Guardians testified that it was “very possible” that, with a week’s moretime, 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 $235,000shortly afterward. And the sale amount isn’t even challenged. The court doesn’t note this, but check outthe size of the “fees and costs” added to her debt, representing 10% of theamount despite the short time between default and foreclosure. The court does mention that, to date, Qualityhasn’t bothered to remit the $1 to her estate (since Halstien died during allthis).
Quality argued that any cause of action was barred by theguardian’s failure to seek an injunction to enjoin the sale, but the recordindicated 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 allowedothers to proceed. A jury found thatQuality was negligent, that it violated the Washington Concumer Protection Act,and that it breached its contractual obligations. The court of appeals reversed on the secondand third grounds; the state supreme court reinstated the WCPA verdict and didn’treach the contractual issue.
At trial, the heart of the plaintiff’s case was the theorythat Quality’s secret deference to the lender and falsification of notarizeddocuments were unfair and deceptive practices, and that the trustee wasnegligent in failing to delay the sale. An expert on Washington’s deed of trust act testified that it was commonfor trustees to postpone sales to allow debtors to pay off defaults, and thaton these facts the trustee should “absolutely” have postponed the sale. For Quality, Ott testified that he didn’ttake into account that the house was worth more than the debt when conducting aforeclosure. When asked why, he said “Myjob was to process the foreclosure ... according to the state statutes.” That is: he counted the days, prepared theforms, 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 readWashington’s deed of trust statutes. Ajuror, quite reasonably, asked, “If you never read the statute, how did youknow you were following it, following Washington law?” Ott responded that herelied on his training. He alsotestified that he wouldn’t postpone a sale unless the lender asked, but he knewhe had authority to do so.
While finding for Quality on claims of negligentmisrepresentation and failure to make an accommodation, the jury found for thetrustee on negligence, WCPA violations, and breach of contract. On negligence, it found both sides 50% atfault. The damages on all three claimswere 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. Shedeclined to issue an injunction against Quality in part because she believed(hope springs eternal?) that “the threat of endless litigation was sufficientto prevent Quality from continuing its unfair or deceptive practices.”
On appeal, the court of appeals found that the evidence wasinsufficient on the breach of contract and WCPA claims. It mostly argued that the guardian waived itsclaims by not seeking a presale injunction, but it abandoned that argument onappeal. The Supreme Court still wantedto 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 theguardian was unaware of the false notarization or the secret agreement withWaMu not to postpone foreclosure sales without WaMu’s permission, along withthe special delays under which guardians must operate in order to get judicialpermission to proceed.
Which brings us to the state supreme court and itsreinstatement of the WCPA claim. Theelements are an "(1) unfair or deceptive act or practice; (2) occurring intrade or commerce; (3) public interest impact; (4) injury to plaintiff in hisor her business or property; (5) causation." The guardian argued that Quality’sfalsification of notarized documents and practice of deferring to the lenderqualified as unfair/deceptive acts or practices.
Quality’s arguments on the merits were: (1) The falselydated and notarized notice of sale was harmless because Halstien got the full,albeit minimum, statutory period to avoid foreclosure. (2) The falselynotarized documents couldn’t harm anyone, and thus the public interestrequirement wasn’t met. (3) Deferring tothe lender was, as a matter of law, not deceptive or unfair.
The legislature need notspecifically identify unfair or deceptive acts or practices for them to beactionable, given the broad intent of the law and the infinite capacity ofhumans to harm one another. The first elementof a WCPA violation can be shown if an act or practice has the capacity todeceive a substantial portion of the public, or if it is a per se unfair tradepractice, which occurs when there’s a violation of a statute declared by thelegislature to regulate an unfair or deceptive act in trade or commerce. But unfairness also counts, along withdeceptiveness. Thus, the WCPA can beviolated by “an unfair or deceptive act or practice not regulated by statutebut in violation of public interest.” Though federal FTCA unfairness law provides a guide, this case didn’tprovide the court cause to explore in detail how unfairness should be definedfor WCPA purposes.
The trustee’s failure to exercise its independent discretionto postpone a sale violated the WCPA. Because nonjudicial foreclosures provide fewer protections, “Washingtoncourts have not shied away from protecting the rights of the parties.” The state supreme court has voided a foreclosurewhen the trustee was “well aware” of a pending legal action on the allegeddebt, precluding satisfaction of the statutory prerequisites for a trusteesale. And even had that not been so, thetrustee’s own actions consistently favoring the beneficiary and failing toinform the borrowers that their initial attempt to restrain the sale had failed,along with a grossly inadequate sale price, would have voided the sale. “Thepower to sell another person's property, often the family home itself, is a tremendous power to vest in anyone'shands.… [C]ommon law and equity requires that trustee to be evenhanded to bothsides and to strictly follow the law.” Indeed, the deed of trust act must be construed in favor of borrowersbecause of the power given to lenders and the lack of judicial oversight.
In practice, lenders and servicers appointtrustees and trustees have incentives to keep them happy and not much incentiveto treat homeowners well. But a trusteeisn’t just an agent for the lender; they have obligations to homeowners aswell. “[N]either due process nor equitywill countenance a system that permits the theft of a person's property by alender or its beneficiary under the guise of a statutory nonjudicialforeclosure.” A truste “owes a duty toact in good faith to exercise a fiduciary duty to act impartially to fairlyrespect the interests of both the lender and the debtor,” and if it fails, thesale may be voided, title quieted in the homeowner, and the trustee and thebeneficiary 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 constitutionalprohibition on deprivation of property without due process of law, which mightprotect against more than the federal 14th Amendment; otherself-help statutes for creditors are subject to constitutional limits. Another footnote noted that, if the trusteewas a mere agent of the beneficiary, the beneficiary might also be liable forthe trustee’s acts, though WaMu was in receivership and not a party to thisparticular lawsuit.
Quality argued that it wasn’t unfair or deceptive to honor abeneficiary’s instructions not to postpone a sale without seeking itsauthorization, or to tell a borrow to contact the lender. Not so. The recordsupported the conclusion that Quality “abdicated its duty to act impartiallytoward both sides.” With the “incredible power” of a trustee in a nonjudicialforeclosure comes “an obligation to both sides to do more than merely follow anunread statute and the beneficiary's directions. If the trustee acts only atthe direction ofthe beneficiary, then the trustee is a mere agent of thebeneficiary and a deed of trust no longer embodies a three party transaction.”Thus, the practice of deferring to the lender and failing to exerciseindependent discretion as an impartial third party with duties to both partiesis unfair or deceptive under the CPA. “Qualityfailed to act in good faith to exercise its fiduciary duty to both sides andmerely honored an agency relationship with one.”
Separately, robosigning was also unfair or deceptive. Atleast from 2004-2007, Quality notaries “regularly” falsified the date ofsigning. Quality argued that these wereimmaterial because the owner received the minimum legally required notice. “This no-harm, no-foul argument again revealsa misunderstanding of Washington law and the purpose and importance of thenotary's acknowledgment under the law.”
Notary lies are bad: “Local, interstate, and internationaltransactions involving individuals, banks, and corporations proceed smoothlybecause all may rely upon the sanctity of the notary's seal.” The legal systemdepends on the integrity of the seal. Though the legislature hasn’t calledfalse notarization a per se unfair or deceptive act, it’s a crime in bothWashington and California (where this one was signed, and over which aWashington court would have criminal jurisdiction when the harm occurred inWashington), “and allowing them to be deployed to validate false informationstrikes at the bedrock of our system.” Asanother case put it, title registration “hinges upon the integrity of thedocuments which comprise it…. [T]he corruption of that system may causesubstantial economic loss to the parties involved.” Thus, “the act of falsedating by a notary employee of the trustee in a nonjudicial foreclosure is anunfair or deceptive act or practice and satisfies the first three elements underthe Washington CPA.”
Quality argued that the falsely notarized documents didn’tcause harm. No. “[A] false notarization is a crime andundermines the integrity of our institutions upon which all must rely upon thefaithful fulfillment of the notary's oath.” However, the factual issue ofwhether the false notarization was a causeof the damages here was for the jury. Theplaintiff submitted evidence that the purposes of the false notarization was tohurry up the date of sale to please the beneficiary. It also submitted evidence that, had thedocuments 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 thattime, and it could also have gained more time to persuade WaMu to respond.
Hoewver, given the ruling on the trustee’s failure tofulfill its fiduciary duty to postpone the sale, there was sufficient evidenceto sustain the WCPA verdict on that, and the court didn’t reach whether therobosigning caused the harm.
The Supreme Court also ruled that the plaintiff was entitledto an injunction requiring Quality to follow Washington law relating toforeclosures and notarizing documents. The trial judge thought this was overlybroad and unenforceable, and accepted Quality’s assurance that its falsenotarization had ceased; she also noted that the deed of trust act had beenamended to impose further duties on trustees. The Supreme Court disagreed. Quality “has demonstrated little understanding or regard for Washingtonlaw,” but continued to operate in the state, so it remanded for an appropriateorder.
The plaintiff was also entitled to its attorneys’ fees.
Summarizing, the court stated that it was holding “that theright to enjoin a foreclosure sale is an equitable remedy and the failure toenjoin a sale does not operate to waive claims based on the foreclosure processwhere it would be inequitable to do so. Where applicable, waiver only appliesto actions to vacate the sale and not to damages actions.” (The firstconcurrence specifically calls this holding out as unnecessary, but as an explicitlydesignated holding it does send a message more general than the facts of thecase—especially given the other holdings on robosigning as unfair anddeceptive, 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 ordeceptive act or practice under the CPA for a trustee of a nonjudicialforeclosure to fail to exercise its authority to decide whether to delay asale,” as is the practice of falsely notarizing a notice of sale.
Two concurrences took the majority to task fordicta/deciding unnecessary things. ChiefJudge Madsen contended that Quality never argued that only an act or practicethe 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 practicethat has the capacity to deceive a substantial part of the public” isactionable. (What of that “capacity todeceive”? Is that an element ofunfairness under the concurrence’s view? In that case, the act or practice would seem deceptive, not unfair, andthere wouldn’t be a pure unfairness route to a cause of action absent alegislative determination thereof.) Theconcurrence continued that courts could determine unfair or deceptive acts orpractices, restating the “capacity to deceive” route, and objected to theaddition of “an unfair or deceptive act or practice not regulated by statutebut in violation of public interest” to the definitions of regulated acts. Rather, the concurrence seemed to say thatactual deception is not required, only capacity to deceive (perhaps indicatingthat “unfair” means “has a capacity to deceive,” though that’s usually how “deceptive”is interpreted in consumer protection statutes). The concurrence believed that the publicinterest element was separate, in that not every violation of a law was a perse unfair trade practice, only those that are identified by the legislature asunfair or deceptive. The legislatureintended that the WCPA “not be construed to prohibit acts or practices notinjurious to the public interest.” Thus it was problematic to base a violationon violation of “public policy.”
The legislature recently codified the public interestrequirement by specifying that claimants could establish injury to the publicinterest by showing that an act or practice (1) violates a statute that incorporatesthe WCPA; (2) violates a statute that contains a specific legislativedeclaration of public interest impact; or (3) injured other persons or has orhad the capacity to do so. Theconcurrence found it significant that capacity to injure isn’t the same thingas capacity to deceive; the former establishes the public interest element of aviolation, whereas capacity to deceive is relevant to establishing the “unfairor deceptive” element in the absence of a per se violation. Thus, there was no need to suggest anamorphous “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 in2009 with a “duty of good faith.” Themajority incongruously mashed “fiduciary” together with other standards, likethe duty of good faith. The concurrencealso didn’t agree with the “extensive dicta,” such as the discussion of whetherfailure to seek a presale injunction waives all claims and the majority’squestioning of the nonjudicial foreclosure act on state law due processgrounds. However, this was aconcurrence, because the Chief Justice believed that “Quality's failure toexercise its own judgment on the matter of whether the sale should be postponedand its deferral to the beneficiary on this matter was an unfair or deceptiveact or practice” (though why—how it had the capacity to deceive—wasn’telaborated).
Another concurrence specified that “the judiciary retainsthe power to determine that an act is unfairwithin the meaning of the Consumer Protection Act” (emphasis added), whileobjecting to the raising of constitutional issues by footnote.
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