Wrongful Foreclosure: Acting Offensively May Short-Circuit The Need For A Defense

In recent years, lenders have been forced to defend a record number of so-called "wrongful foreclosure" lawsuits. However, several Tennessee court rulings issued this year indicate that if lenders act quickly and offensively, they may prevent these challenges.

Typically, the story goes something like this: Borrowers fall behind on their payments and the lender notifies them that they may qualify for a loan modification (either through the lender's own program or through a government-sponsored program like the Home Affordable Modification Program). So, borrowers send in a portion of the required documentation and make a couple of the trial payments. But, the modification is denied either based on failure to submit a completed modification packet or failure to make all of the trial payments, and the lender forecloses.

Then, the borrowers may voluntarily move out after the foreclosure. If they refuse to move out, the purchaser at the foreclosure sale or its agent must ask the courts to evict the borrowers (by filing what's called an "unlawful detainer action"). Later, the borrowers then file a "wrongful foreclosure" lawsuit against the lender, the servicer, the investor, the substitute trustee—and anyone else they can identify. Typically, the borrowers seek rescission of the foreclosure, damages for not approving a loan modification, and maybe even stripping the mortgage lien itself.

Only a handful of Tennessee cases discuss the remedies available to borrowers for allegations of "wrongful foreclosure." Most of these cases address "wrongful foreclosure" as a defense available to borrowers when the purchaser at the foreclosure sale seeks to evict them.1 Other cases that mention recovery for "wrongful foreclosure" reveal the term "wrongful foreclosure" may be more of a description than an actual independent claim.2 For example, Tennessee courts address recovery for "wrongful foreclosure" in the context of breaches of contract,3 negligence and other torts,4 and alleged statutory causes of action.5

Regardless, according to the Tennessee Court of Appeals, there is "absolutely no doubt" that allegations of "wrongful foreclosure" can be raised as a defense by the borrowers in the eviction proceeding.6 This stems from the fact that the rights of a purchaser at foreclosure to evict the borrowers is dependent upon the passage of good title at foreclosure, and allegations of "wrongful foreclosure" will prevent an award of possession to the purchaser.7

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