Face-to-Face MeetingJust last fall, we wrote about the Eleventh Circuit’s decision in In re Failla, Case No., in our article, “The Eleventh Circuit has spoken: Debtors who surrender property must get out of the creditor’s way.” Now, it appears that the discharge of a debtor’s mortgage loan in bankruptcy has other implications as well, including eliminating a lender’s obligation to meet the HUD face-to-face requirements of 24 C.F.R. § 203.604.

In PNC Bank, N.A. v. Wilson, Case No. 12-CH-5282, 2017 Ill. App. (2d) 151189, –N.E.3d–, 2017 WL 818569 (March 2, 2017), the Appellate Court of Illinois for the Second District affirmed a summary judgment in favor of the lender, finding that the lender did not have to present evidence that it had complied with 24 C.F.R. § 203.604 because the borrowers’ debts had been discharged in bankruptcy.

Meaningless and futile

Specifically, the court stated that “because the Wilsons did not reaffirm the debt, there was no contract to remediate or ameliorate. [Thus], [s]ending the letter seeking a face-to-face meeting would be meaningless and futile. Futile acts are usually excused, especially when the equities lie in that direction. A proceeding to foreclose a mortgage is a proceeding in equity.” According to the court, and simply put, “[T]he Wilsons’ discharge in bankruptcy without reaffirmation means that they are no longer bound by the mortgage contract between the parties and should not be allowed to enjoy any benefits of the mortgage contract that their own volitional act has nullified.”

Interestingly, it does not appear that PNC argued futility as a basis for affirming the summary judgment. Instead, the bank argued summary judgment was proper because it presented evidence that it sent a certified letter to the borrower and that it made one visit to the mortgaged property, all that is required under the “reasonable effort” definition in 24 C.F.R. § 203.604(d).

The borrowers’ argument

The borrowers argued, on the other hand, that the evidence was insufficient. Specifically, the borrowers argued the bank did not provide “proof from the postal service that the letter was ‘certified as having been dispatched.’”

Although the court appeared to agree with the borrowers on that point, the court stated that such failure does not bar a foreclosure because “where a mortgagor alleges only a technical defect in notice and fails to allege any resulting prejudice, vacating the foreclosure to permit new notice would be futile.” That statement from the court is another good takeaway from this case – it evidences the court’s consideration of prejudice, a burden placed on the borrower in many states, such as Florida, in the context of a substantial compliance argument.

The borrowers also argued the bank’s failure to comply with the time requirements in 24 C.F.R. § 203.604 should have prevented summary judgment. The court, however, did not address that argument on its merits, finding instead that the borrowers had waived that argument at trial.

Futility beyond the bankruptcy context

Finally, although the court’s application of the futility argument here was limited to a bankruptcy discharge, the court made several statements that might be of benefit to the lender in arguing that futility applies beyond the bankruptcy context, such as where the borrower could not qualify for any mitigation or has expressly declined mitigation offers. For example, the court stated in its order that “the law does not require futile acts as prerequisites to the filing of legal proceedings.”

Moreover, the court stated that “where it appears that a demand would have been of no avail, then none is required, for the law never requires the doing of a useless thing.” As the court duly noted, the regulation should not be used by borrowers as both a shield and a sword.