Simon et al v. PNC Bank, National Association et al
MEMORANDUM OPINION AND ORDER re: 28 Motion to Dismiss for Failure to State a Claim; 30 Motion to Dismiss for Failure to State a Claim. The Defendants' Motions to Dismiss (ECF Nos. 28, 30) are GRANTED, By separate Order, Defendants' counsel will be ordered to show cause why sanctions should not be imposed. IT IS SO ORDERED. Signed by District Judge Arenda L. Wright Allen on 8/28/17 and filed 8/29/17. Copies distributed to all parties 8/29/17. (ldab, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
EMETERIO H. SIMON, et ai,
PNC BANK, NATIONAL ASSOCIATION,
MEMORANDUM OPINION AND ORDER
Like too many homeowners affected by the great recession, Plaintiffs Emeterio Simon
and Diana Simon ("the Homeowners" or "the Simons") fell behind on their mortgage payments.
As a result. Defendant PNC Bank National Association ("the Lender") foreclosed on their
Virginia Beach home in 2013. The Simons have remained in the home while the parties to this
case have litigated the foreclosure's legality in the state and federal courts. This suit is the latest
iteration of that ongoing legal dispute.
The Simons seek to rescind the foreclosure sale based on the Lender's alleged breaches
of its obligations to provide notice before foreclosing on the property and to comply with
applicable law throughout the foreclosure process. At this juncture, the Defendants—various
parties to the loan and foreclosure—have moved to dismiss the Amended Complaint. Because
the Homeowners have failed to allege facts establishing that the foreclosure was illegal, the
motions to dismiss are granted.
When ruling on a motion to dismiss for failure to state a claim, courts accept a
complaint's well-pled factual allegations as true, and draw any reasonable inferences in favor of
the plaintiff. See Wag More Dogs, LLC v. Cozart, 680 F.3d 359, 365 (4th Cir. 2012).
Accordingly, the Court recites the facts as alleged by Plaintiff See Am. Compl. (ECF No. 27).
In 2006, the Simons obtained a $317,200 loan, provided by the Lender and partially
guaranteed by Defendant Federal Home Loan Mortgage Corporation ("the Backer").' See Am.
8, 22. To secure the loan, the Simons used their Virginia Beach home as collateral.
They executed a promissory note ("the Note") reflecting this encumbrance on the
property and the corresponding debt. See id
8, 12. To further secure this arrangement, the
Simons placed the title to their home in trust. See id. ^ 8. The terms of that trust were set forth in
an agreement among the parties, the "Deed of Trust."^ See Deed of Trust (ECF No. 27-1). This
arrangement is known commonly as a mortgage.
The Deed of Trust provided that if the Homeowners defaulted on the loan by failing to
make monthly payments Defendant Samuel I. White P.C. ("the Trustee")^ could foreclose, atthe
Lender's behest. See Am. Compl. ^110, 65. Before selling the home, the Trustee was required to
ensure that the Lender had fulfilled certain conditions. See id. Two of these conditions included
providing adequate notice of the default and complying with applicable law. See id.
' Originally, the Note was executed in favor of National City Bank, but it was assigned subsequently to
PNC—the current Note holder. See Am. Compl. HI 8, II.
• As noted, the loan was backed by the Federal Home Loan Mortgage Corporation—commonly known as
Freddie Mac. Both the Note and the Deed of Trust are state-specific form instruments, provided by Freddie Mac
and required for all loans it backs. See Uniform Notes and Note Addenda, FREDDIE Mac, http://www.fTeddiemac.
com/uniform/unifnotes.html (last accessed Aug. 24, 2017); see also Uniform Security Instruments, FREDDIE Mac,
http://www.freddiemac.com/uniform/unifsecurity.html (last accessed Aug. 24,2017).
' Samuel 1. White, PC was appointed as substitute trustee and tasked with foreclosing on the home. See
Am. Compl 122. For ease of reference, he is referred to as "the Trustee."
The Noticc Requirement
Both the Note and the Deed of Trust contained clauses governing how the Lender would
notify the Simons if they were in default.
9, 10. The Note's notice of default
provision, Paragraph 6(c) provided in pertinent part:
If I am in default, the Note Holder may send me a written notice telling me that if
I do not pay the overdue amount by a certain date, the Note Holder may require
me to pay immediately the full amount of principal that has not been paid and all
the interest that I owe on that amount. That date must be at least 30 days after the
date on which the notice is delivered or mailed to me.
Id. ^ 9. The Deed of Trust's notice of default provision, Paragraph 22, provided in pertinent part:
Lender shall give notice to Borrower . . . following Borrower's breach of any
covenant or agreement in this Security Instrument....
The notice shall specify (a) the default; (b) the action required to cure the default;
(c) a date, not less than 30 days from the date of notice is given to the Borrower,
by which the default must be cured; and (d) that failure to cure the default on or
before the date specified in the notice may result in acceleration of the sums
secured by this Security Instrument and sale of the Property.
Id. H 10; see also Deed of Trust H22. If the thirty-day deadline for curing the default elapsed
without payment, the Deed of Trust entitled to Lender to invoke its power to sell the home. See
id 11 65.
The "Applicable Law" Requirement
The Deed of Trust also required that the foreclosure comply with applicable law. See id.
^ 66. Specifically, Paragraph 16 stated that "[a]ll rights ... contained in this Security Instrument
are subject to any requirements and limitations of Applicable Law." Deed of Trust H 16. In its
"Definitions" section, the Deed of Trust defined "Applicable Law" as "all controlling applicable
federal, state and local statutes, regulations, ordinances and administrative rules and orders (that
have the effect of law) as well as all applicable final, non-appealable judicial opinions." Id. at 3.
In early 2012, the Homeowners began missing mortgage payments. See Am. Compl. ^
13. The Lender responded by sending them a notice of default, dated July 23,2012 ("the Notice
of Default" or "the Notice"). See Notice at 1 (ECF No. 27-2). That letter informed the Simons
of their default and stated that they were required to pay $3,534.15 by August 22, to avoid
acceleration of their payments and foreclosure under the Deed of Trust. See id.
The listed sum included the amount past due on the Simons' mortgage and a future
installment payment that was not yet due, but would be due on August 1, before the specified
payment date. See id.
13-14. The Notice of Default advised the Homeowners of this fact.
See Notice at 1 ("This amount includes the 8/1/2012 payment and applicable late charges,
property inspection fees and non-sufficient funds fees.").
Although not pled, the Simons' failure to cure the outstanding arrearage at that time or
afterwards appears undisputed. On May 13, 2013, they sought to resolve their default by
applying for a loan modification from the Lender. See Am. Compl. at ^ 73.
The Foreclosure Sale
On May 29,2013, the Trustee, acting on behalf of the Lender, sold the Simons' home at a
foreclosure auction. See id.
22-23, 29. The Simons allege that the Lender did not issue a
written response to their loan-modification application before the sale. See id. at ^ 74.
The winning bid of $253,623 was submitted by the Lender itself, but subsequently was
assigned to the Backer, who had guaranteed the loan. See id.
31-32, 38-39. The Trustee then
executed a trustee's deed conveying the property to the Backer. See id. 40.
Shortly thereafter, the Backer filed an unlawful detainer summons in Virginia Beach
General District Court, which entered an order awarding possession to the Backer. See id. Tf 44-
45. The legal wrangling continued for some time in state court, and appears to remain ongoing
today. See id
Proceedings Before This Court
The Simons have filed this suit, challenging the foreclosure and seeking to rescind the
sale of their home.
All Defendants have moved to dismiss the Amended Complaint. See
Lender's Mot. & Mem. (ECF Nos. 28, 29); see also Trustee's Mot. & Mem. (ECF Nos. 30, 31);
Pis.' Lender 0pp. (ECF No. 34); Pis.' Trustee 0pp. (ECF No. 35).
The Court deferred
resolution of these motions pending supplemental briefing from the Lender and the
Homeowners.'' See Supp. Brief Min. Order (ECF No. 39). Both have submitted supplemental
briefs, and the motions are now ripe for resolution by the Court. See Lender's Supp. Brief (ECF
No. 41); see also PL's Supp. Brief (ECF No. 42).
A motion to dismiss under Rule 12(b)(6) tests the sufficiency of a complaint.
survive a Rule 12(b)(6) motion to dismiss, a complaint must 'state a claim to relief that is
plausible on its face.'" United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d
451, 455 (4th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). "A claim has
facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at
678. "The plausibility standard is not akin to a 'probability requirement,' but it asks for more
than a sheer possibility that a defendant has acted unlawfully." Id. "Facts that are 'merely
consistent with' liability do not establish a plausible claim to relief." Takeda Pharm., 707 F.3d
Specifically, the Court's Order asked: "(I) to what extent does the Virginia Supreme Court's decision in
Parrish v. Fed. Nat'I Mortg. Ass'n, 787 S.E.2d 116 (Va. 2016) apply to this case in light of the Erie doctrine's
requirement that federal courts resolve questions of state law by determining how the state's highest court would
decide the issue? (2) Under the Erie doctrine, is the Deed of Trust phrase 'federal administrative rules with the force
of law,' interpreted under state law, federal law, or some combination of state and federal law?" Min. Order (ECF
at 455. Rather, the "'[f]actual allegations must be enough to raise a right to relief above the
speculative level,' thereby 'nudg[ing] [plaintiffs] claims across the line from conceivable to
plausible.'" Vitol, S.A. v. Primerose Shipping Co., 708 F.3d 527, 543 (4th Cir. 2013) (quoting
Bell All. Corp. v. Twombly, 550 U.S. 544,555 (2007)) (first and second alteration in original).
At this stage, "(1) the complaint is construed in the light most favorable to the plaintiff,
(2) its allegations are taken as true, and (3) all reasonable inferences that can be drawn from the
pleading are drawn in favor of the pleader." 5B Charles A. Wright et al., Federal Practice
& Procedure § 1357 & n.ll (3d ed.) (collecting cases); accord Wag More Dogs, LLC v.
Cozart, 680 F.3d 359, 365 (4th Cir. 2012). However, courts "will not accept 'legal conclusions
couched as facts or unwarranted inferences, unreasonable conclusions, or arguments.'" Takeda
Pharm., 707 F.3d at 455 (quoting Wag More Dogs, 680 F.3d at 365).
Because the claims against the Trustee and the Backer are derivative of the claims against
the Lender, they present the same core issue—whether the foreclosure sale was lawful.
Therefore, the Court addresses the merits ofthe pending motions to dismiss jointly.^
The Simons do not dispute that they defaulted on their mortgage. However, they allege
that their home's 2013 sale is void or voidable because the preceding foreclosure was unlawful
in two ways. First, they allege that the Lender failed to fulfill its obligation to provide sufficient
notice when instituting the foreclosure proceedings, as required by the Note and Deed of Trust.
' The Trustee also raises a novel argument against the Simons' claims, contending that '"the availability of
post-foreclosure rescission under Virginia law is questionable at best.'" Trustee's Mem. at 6 (ECF No. 41). In
support of this argument, the Trustee quotes and extensively cites Khan v. Commonwealth Trs., LLC, No.
1:14cv00870,2014 WL 7640363 (E.D. Va. 2014). Despite the fact that the Trustee has styled this as a case citation,
suggesting that this "authority" is an opinion of this Court supporting the Trustee's position, the document is merely
a brief filed by the lender seeking dismissal of that case. See Def.'s Dismissal Mem. at 13 n.8, Khan v.
Commonwealth Trs., LLC, No. I:14cv0087 (E.D. Va. July 18, 2014). The overt dishonesty of this practice along
with other troubling briefing practices that arose in this matter, will be dealt with in a separately issued Order to
Second, they allege that the Lender failed to comply with the Deed of Trust's requirement that
the foreclosure comply with "applicable law," specifically federal administrative rules and orders
that have the effect of law. Because the Homeowners' claims rely on infirm legal theories, they
have failed to state any claim for relief. Accordingly, their suit must be dismissed.
Under Virginia law, '"[a] trustee's power to foreclose is conferred by the deed of trust.
That power does not accrue until its conditions precedent have been fulfilled. The fact that a
borrower is in arrears does not allow the trustee to circumvent the conditions precedent.'" Squire
V. Va. Hous. Dev. Auth, 758 S.E.2d 55, 60 (Va. 2014) (quoting Mathews v. PHH Mortgage
Corp., 724 S.E.2d 196, 199 (Va. 2012)). "A deed of trust is construed as a contract . . . and
[Virginia courts] 'consider the words of a contract within the four comers of the instrument
itself.'" Squire, 758 S.E.2d at 60 (quoting Mathews, 724 S.E.2d at 200-01). "The elements of a
breach of contract action are (1) a legally enforceable obligation of a defendant to a plaintiff; (2)
the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff
caused by the breach of obligation." Squire, 758 S.E.2d at 60 (quoting Filak v. George, 594
The Lender's Alleged Breach of the Deed of Trust's Requirement to Provide
Notice of Default Before Foreclosing
The Homeowners first allege that the Notice of Default stated the amount necessary to
cure the default inaccurately, rendering the Notice a nullity and the foreclosure illegal. See Am.
Compl. Kl 13-12. The July 23, 2012 Notice informed the Simons that to cure their default they
were required to pay $3,534.15 by August 22. They contend that this improperly included an
upcoming August 1 installment payment—an amount not yet overdue. See Am. Compl. TI^] 14,
16, 17. The Simons observe that they could have avoided imminent foreclosure by paying the
overdue amount and forgoing the August 1 payment. See id. UK 15-21. This would have cured
the existing defauh while creating another, entitling them to another Notice of Default regarding
the missed August 1 payment. See id
15-21. The issue before the Court is whether the
Lender breached its notice obligations, thereby rendering the foreclosure sale illegal.
The United States Court of Appeals for the Fourth Circuit recently considered a dispute
involving similar notice of default language. Whala v. PNC Bank Nat 7 Ass 'n, 642 F. App'x 221,
221-23 (4th Cir. Mar. 22, 2016). The Fourth Circuit rejected the plaintiffs' claims, explaining
This notice made clear that, because the [plaintiffs] had until June 3, 2010, to cure
the default—a date that fell beyond the due date for the June 1 installment—the
amount required to cure as of June 3 would also have to include the June 1
installment. Any reasonable person would also conclude that, if the [plaintiffs]
had chosen to cure before June 1, 2010, they could have simply withheld the June
1 installment until June 1 and made that payment then. Accordingly, we conclude
that PNC Bank did not, as alleged, breach the loan documents—^the note and the
deed of trust.
Id. at 223 (citation omitted). This unpublished opinion—although not binding—is persuasive
Here, as in Whala, the Notice of Default informed the Homeowners correctly that they
needed to pay $3,534.15 by August 22, 2017, thirty days from the notice date, to bring their loan
current. This correctly stated the amount due by the payment date. Therefore, the Simons fail to
allege facts constituting a breach, and fail to state a claim for breach of the Deed of Trust. See
Squire, 758 S.E.2d at 60 (listing duty, breach, and damages as the elements of a breach of
contract under Virginia law).
The Lender*s Alleged Breaches of the Deed of Trust's Requirement That It
Comply with "Annlicable Law" When Foreclosing
The Simons also allege that they are entitled to rescission based on the Lender's alleged
failure to comply with federal law when foreclosing on the property, as required by the Deed of
Trust. Specifically, they challenge the Lender's alleged failure to comply both with federal rules
implementing the Housing Affordability Modification Program ("HAMP"), and with an April
13, 2011 Consent Order between the Lender and the Treasury Department. See Am. Compl. 11^
68-79. This issue is decidedly more complex.
Whether Later-Enacted Federal Administrative Rules Constitute
Both the federal rules and the Consent Order post-date the Simons' deed of trust, but pre
date the foreclosure. This Court's cases applying Virginia law have held consistently that a deed
of trust provision requiring the lender to comply with "applicable law" when foreclosing on a
property provision does not incorporate later promulgated federal regulations.® However, the
Virginia Supreme Court has held recently that allegations that a foreclosure violated federal
regulations promulgated after a deed oftrust's execution were sufficient to state a claim.' These
federal and state holdings are in conflict.
Under the Erie doctrine, which imposes a constitutionally mandated limit on this Court's
powers, federal courts are bound to faithfully apply state substantive law where it governs. See
Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); see also Hanna v. Plumer, 380 U.S. 460, 471-72
(1965).* This requires federal courts "to apply the operative state law as would the highest court
of the state." Liberty Miit. Ins. Co. v. Triangle Indus., Inc., 957 F.2d 1153, 1156 (4th Cir. 1992).
"The best evidence to this effect would be, of course, a decision by the [state's] highest court...
which addresses the [pertinent legal] issues." Id. Therefore, this Court first looks to the Virginia
' See. e.g.. Reamer v. Deulsche Bank Nafl Tr. Am., No. 3:l5cv0060l, 2016 WL 1259557, at *5 (E.D. Va.
Mar. 28, 2016); Simon v. PNC Bank Nat'l Ass'n, No. 2:14cv523, 2015 WL 1802659 (Apr. 16, 2015); Condel v.
Bank ofAm.. N.A., No. 3:12cv2!2, 2012 WL 2673167, at *6-8 (E.D. Va. July 5, 2012).
' See, e.g., Parrish v. Fed. Nat'l Mortg. Ass'n, 787 S.E.2d 116, 123 (Va. 2016) (holding that these facts
state a claim sufncient to overcome a demurrer); Newport News Shipbuilding Emp. Credit Union v. Busch, Record
No. 150678 (Va. June 16, 2016) (unpublished); see also Squire, 758 S.E.2d at 59 (explaining that when ruling on
demurrer Virginia courts must "determine whether the factual allegations pled and the reasonable inferences drawn
therefrom are sufficient to state a cause of action.").
' In Hannav. Plumer the Supreme Court explained that"[w]eare reminded by the Erie opinion thatneither
Congress nor the federal courts can, under the guise of formulating rules of decisions for federal courts, fashion
rules which are not supported by a grant of federal authority contained in Article 1 or some other section of the
Constitution; in such areas state law must govern because there can be no other law." 380 U.S. at 471-72.
Supreme Court's binding constructions of Virginia law. Wells v. Liddy, 186 F.3d 505, 527 (4th
The Erie doctrine requires that questions of state law be resolved not only as the state's
supreme court haSy but also as that court would today. See id. at 527-28. In absence of an onpoint state high court decision, federal courts do not have carte blanche to craft state substantive
law when the law is unclear. See Triangle Indus., Inc., 957 F.2d at 1156. Rather, courts "must
make an Erie guess and determine as best [they] can what the [state's high court] would decide."
Hays V. HCA Holdings, Inc., 838 F.3d 605, 611 (5th Cir. 2016); accord Wells, 186 F.3d at 527-
"To forecast [the] decision of the state's highest court," federal courts consider
circumstantial evidence, including 'Hnter alia: canons of construction, restatements of the law,
treatises, recent pronouncements of general rules or policies by the state's highest court, well
considered dicta, and the state's trial court decisions." Wells, 186 F.3d at 528.'
The question before the Court is how, not whether, Parrish v. Fed. Nat 7 Mortg. Ass'n,
787 S.E.2d 116 (Va. 2016) impacts the Court's prior "Erie guess" on this issue. The Lender
declined to undertake the required Erie analysis to show the effect of Parrish on previous federal
cases. See Lender's Supp. Br. at 1-8. Instead, it argued that the Simons' proposed reading of
Parrish expands the ruling "beyond the four comers of the opinion." Id. at 5. This Court knows
of no canon suggesting that Virginia Supreme Court opinions should be read only within their
four comers, and, tellingly, the Lender cited no precedent in support of that proposition. See id.
' This is a well-established rule of federal law. E.g., Wolfe v. Alistale Property & Cas. Ins. Co., 790 F.3d
487, 492 (3d Cir. 2015); Avakian v. Citibank, N.A., 773 F.3d 647 (5th Cir. 2014); Lee-Thomas v. Prince George's
Cty. Pub. Sck, 666 F.3d 244, 254 n.lO (4th Cir. 2012); Triangle Indus.. Inc., 957 F.2d at 1156; Sherby v. Weather
Bros. Transfer Co., 421 F.2d 1243, 1244 (4th Cir. 1970); Integrated Direct Mktg.. LLC v. May, 143 F. Supp. 3d 418,
421 (E.D. Va. 2015); Blanch v. Chubb & Sons. Inc., 124 F. Supp. 3d 622, 630-34 (D. Md. 2015); 19 CHARLES A.
Wright et al., Federal Practice & Procedure § 4507 & n.50 (3d ed.); Richard H. Fallon et al., Hart and
Wechsler's Federal Courts and the Federal System 597 (7th ed. 2015).
The Lender also asserted that Parrish is distinguishable from this case, and deals with the
instant issue only indirectly. These observations are accurate, but not determinative. Even if
Parrish does not constitute direct evidence of the Virginia Supreme Court's opinion on the issue,
it is circumstantial evidence of how that court would hold. When the Virginia Supreme Court
speaks on an issue only indirectly, federal courts are not free to ignore it. See Sherby, 421 F.2d
1244. Therefore, this Court is required to consider Parrish when resolving the instant
question of state law, despite the Lender's bald contention that it has "no application to this
case." Lender's Supp. Br. at 1.
Although Parrish clearly impacts the required Erie analysis, the scope of that impact still
must be ascertained. When considering an unresolved issue of state law, a federal judge need not
act as a "ventriloquist's dummy" for state decisions of questionable controlling and probative
force. 20 Charles A. Wright & Mary Kay Kane, Federal Practice Deskbook § 61 (2d
ed.). "Instead he or she is free, just as state judges are, to consider all the data the highest court
of the state would use in an effort to determine how the highest court of the state would decide."
Id. Here, consideration of available "data" fails to readily resolve the issue.
As explained above, "[a] deed of trust is construed as a contract... and [Virginia courts]
'consider the words of a contract within the four comers of the instrument itself.'" Squire, 758
S.E.2d at 60 (quoting Mathews, 724 S.E.2d at 200-01). However, when interpreting deeds of
trust, the Virginia Supreme Court has applied contract doctrine flexibly where rote application
would "defy common sense." Matthews, 724 S.E.2d at 200.
Ordinarily "contractual rights and duties are controlled by the law in effect at the time the
contract was executed." Gazale v. Gazale, 250 S.E.2d 365, 366 (Va. 1979).
This rule makes
sense when incorporating future changes in the law would impose additional unforeseen
obligations on a party to the agreement. See Gazale, 250 S.E.2d at 366 (holding that when a
contract provides for payments until a child reaches "the age of majority" subsequent increases
in the age of majority would not be incorporated into the contract to extend the obligation); see
also 11 WiLLisTON ON Contracts § 30:2 (4th ed.).
However, freezing a deed of trust's applicable law requirements at the time of execution
results in a rule that defies common sense.
Under this rule, a foreclosure in 2017 could be
governed by the regulations in place in 1987; and a foreclosure in 2047 could be governed by
regulations in place today that are abandoned, clarified, or supplemented in the future. This
would require real estate attorneys to achieve outdated editions of the Code of Federal
Regulations, to be prepared to determine the applicable procedures when instituting or defending
against a foreclosure.
In addition, this rule makes little sense in context because the incorporated foreclosure
regulations already govern lenders' conduct, independent of any duties imposed by agreement.
See Mathews, 724 S.E.2d at 201-02 (emphasizing that only regulations requiring a lender to act
before foreclosing are incorporated into a deed of trust). When instituting a foreclosure, a lender
must comply with the rules in effect at that time; otherwise, the lender risks being penalized by
federal regulators. Therefore, incorporating prospective changes does not impose additional
obligations on lenders—it harmonizes lenders' existing obligations to both federal regulators and
homeowners. Alternatively, freezing applicable law at the time of execution would subject each
foreclosure to two sets of regulations, potentially exposing lenders to inconsistent obligations.
Without additional information, the Court is reluctant to guess at how the Virginia
Supreme Court might resolve these policy issues, and the Parrish decision is of limited probative
force as circumstantial evidence of how the Virginia Supreme Court would rule. As another
Court in this District explained recently:
[T]he Virginia Supreme Court in Pairish was primarily focused on a discrete
issue of civil procedure. Its ultimate ruling had nothing to do with [the substance
of the federal regulation at issue], but instead centered on the subject matter
jurisdiction of the Commonwealth's general district courts .... To emphasize
this point, Parrish was not a contractual dispute at all; it was instead a statutory
unlawful detainer action .... Moreover, the opinion in Parrish did not directly
confront the issue of whether the deed of trust had properly incorporated future
regulations. Indeed, the Court does not mention the execution date of the deed of
trust in its entire opinion.
Combs V. U.S. Bank Nat'l Ass'n. No. l;17-cv-545, 2017 WL 2805494, at *5 (E.D. Va. June 28,
2017).'° Because of this lingering uncertainty, the weighty state interests involved, and in the
wake of counsel's insufficient briefing, the Court declines to resolve the issue of what year's
regulations are incorporated into a deed of trust at this time.
Whether the Deed of Trust's Incorporation of Applicable Law
Required the Lender to Comply with the Consent Order
The Simons allege that an April 2011 Consent Order between the Lender and the Office
of the Comptroller of Currency is incorporated into the Deed of Trust as applicable law.
68-72. They allege that this federal administrative order prohibited the Lender
from foreclosing on any borrower with a pending loan modification application. See id.
72. The Court need not accept the Simons' allegations regarding the substance and legal effect
of this Consent Order's terms. See Takeda Pharm., 707 F.3d at 455. The Lender could not have
breached the Consent Order in the course of the foreclosure because, by its very terms, that
document does not govern foreclosure procedures.
Because the parties offered contradictory descriptions, the Court reviewed the Consent
Order. "In reviewing a Rule 12(b)(6) dismissal, [courts] may properly [consider] matters of
" TheCourt in Combs did not consider the Erie issues presented by thisconflict because the parties did not
brief the issue and that Court did not otherwise raise it.
public record." Philips
Pilt Cty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir. 2009); see also
Papasan v. Allain, 478 U.S. 265, 268 n.l (1986)) ("Although this case comes to us on a motion
to dismiss ... we are not precluded in our review of the complaint from taking notice of items in
the public record.").
Unlike contracts among private parties, the Consent Order is a federal
administrative order, which constitutes a public record. See Consent Order at 3 (stating that the
order is issued pursuant to 12 U.S.C. § 1818(b)); see also 12 U.S.C. § § 1818(b) (authorizing
federal banking agencies to issue orders resolving investigations of federally insured depository
institutions and governing such orders).
The Consent Order requires the Lender to create and submit a plan for handling its preforeclosure activities. See Consent Order at 20-21, !n the Matter ofPNC Bank, N.A., AA-EC-11-
17 (OCC Apr. 13, 2011). The Consent Order itself imposes no requirements on those preforeclosure activities. See id No obligations to the Homeowners can be derived from the Order,
and it is not applicable law. Cf. Mathews, 724 S.E.2d at 201-02 (emphasizing that only
regulations requiring a lender to act before foreclosing are incorporated into a deed of trust).
Therefore, the Simons fail to allege a cognizable duty to comply with the Consent Order, and fail
to state a claim for breach of the Deed of Trust. See Squire, 758 S.E.2d at 60 (listing duty,
breach, and damages as the elements of a breach of contract under Virginia law).
Whether the Deed of Trust's Incorporation of Federal Administrative
Rules with the Effect of Law Required the Lender to Comply with
The Homeowners also argue that the Deed of Trust incorporated a federal administrative
rule prohibiting "dual track foreclosures," which occur while a loan modification is pending. See
75-76. " The Homeowners contend that the Lender's dual-track foreclosure
" Despite alleging that the Lender violated this prohibition, the Amended Complaint fails to identify the
particular rule allegedly violated. The Simons need not plead the law—only facts, so this omission is not fatal to
violated a Treasury Department guidance document known as Supplemental Directive 09-10.
See Pis.' Lender 0pp. at 15-17. The Deed of Trust incorporates only those federal administrative
rules and orders that have the effect of law. Because Supplemental Directive 09-10 lacks the
effect of law, it is not incorporated into the Deed of Trust as applicable law and imposed no duty
on the Lender.
Whether Federal Laws Lacking a Private Right of Action Are
Incorporated into the Deed of Trust
The Virginia Supreme Court has already determined that although HAMP regulations
lack private rights of action, their violation can support a breach-of-contract action under
Virginia law. See Mathews v. PHH Mortgage Corp., 724 S.E.2d 196, 198,202 (Va. 2012).
The Mathews Court explained that although "[t]he regulations themselves govern the
relationship between the lender and the government; there is no reason to refer to them in [a]
deed of trust other than to affect the duties of the parties to it." Mathews, 724 S.E.2d at 202.
Therefore, a clause requiring that the lender comply with applicable law "makes [federal]
regulations enforceable by borrowers as conditions precedent to acceleration and foreclosure as
through a state-law action for breach of contract." Id.
This Court is not free to re-visit the Virginia Supreme Court's binding construction of
Virginia contract law. See Wainwright v. Goode, 464 U.S. 78, 84 (1983) (per curiam) (holding
their claim. Johnson v. City ofShelby, 135 S. Ct. 346, 346 (2014) ("Federal pleading rules call for 'a short and plain
statement of the claim showing that the pleader is entitled to relief,' they do not countenance dismissal of a
complaint for imperfect statement of the legal theory supporting the claim asserted.").
See also Covarmbias v. CitiMorigage, Inc., 623 F. App'x 592, 593 (4th Cir. 2015) (applying a regulation
that lacks a private right of action as an enforceable deed-of-trust condition); Wigod v. Wells Fargo Bank, N.A., 673
F.3d 547, 581-82 (7th Cir. 2012) (holding that, the "absence of a private right of action from [the HAMP rules]
provides no reason to dismiss a claim under a state law just because it refers to or incorporates some element" of the
HAMP rule); Condel v. Bank ofAmerica. N.A., 3:12cv212-HEH, 2012 WL 2673167, at *6-8 (E.D. Va. July 5,2012)
(holding that Mathews forecloses the no-private-right-of-action argument). But see Reamer v. Deutsche Bank Nat'I
Tr. Co. Aim., 3:15cv601-HEH, 2016 WL 1259557 (E.D. Va. March 28, 2016) (holding that regulations lacking a
private right of action are not incorporated into a Deed of Trust, without mentioning Mathews).
that "the views of the State's highest court with respect to state law are binding on the federal
Whether Federal Agencies' Interpretive
Incorporated into a Deed of Trust
The legal effect of a particular federal administrative rule is determined by federal law.
See Mathews 724 S.E. 2d at 204-205; see also Chen Zhou Chai v. Carroll, 48 F.3d 1331, 1340
(4th Cir. 1995). Not all such rules carry the effect of law. See Chen Zhou Chai, 48 F.3d at 1340.
To promulgate a rule with the effect of law, federal administrative agencies generally must act
pursuant to authority delegated by Congress and employ the notice and comment procedures
specified by the Administrative Procedure Act. Id. (citing Am. Mining Cong. v. Mine Safety &
Health Admin., 995 F.2d 1106, 1109 (D.C. Cir. 1993)). This produces a so-called "legislative
rule," which by definition has the effect of law. See id.
Alternatively, "interpretive rules" and other guidance documents are crafted without
notice and comment rulemaking procedures. Id. at 1340-41. Interpretive rules lack the effect of
law, and "simply state what the administrative agency thinks a statute means."
"[I]nterpretive rules are not binding on courts or on members of the public ... [a] court may
choose to give binding effect to the position taken by an agency in an interpretive rule, but it is
the court that provides the binding effect of law." 1 Richard J. Pierce, Jr. Administrative
Law Treatise § 6.4 at 432-33 (5th ed. 2010).
At most, Supplemental Directive No. 09-01 is an interpretive rule, lacking the effect of
law. The document is limited to providing mortgage servicers with additional guidance on their
existing obligations for participating in HAMP, and was not subject to notice and comment
procedures. Supp. Directive No. 09-01, at 1-2. Moreover, this particular directive applied only
to "mortgage loans that are not.. . guaranteed by ... Freddie Mac." Id. The Simons' loan was
guaranteed by Freddie Mac. See Am. Compl H35. Because the cited rules lacked the effect of
law and, in any event, are inapplicable to the Simon's loan. Supplemental Directive No. 09-01
fails to qualify as "applicable law" incorporated into the Deed ofTrust.'^
Therefore, the Simons fail to allege either duty or breach under this theory, and fail to
state a claim for breach of the Deed of Trust. See Squire, 758 S.E.2d at 60 (listing duty, breach,
and damages as the elements of a breach of contract under Virginia law).
For the foregoing reasons, the Defendants' Motions to Dismiss (EOF Nos. 28, 30) are
GRANTED, By separate Order, Defendants' counsel will be ordered to show cause why
sanctions should not be imposed.
The Clerk is REQUESTED to forward copies of this Memorandum Opinion and Order
to all counsel.
IT IS SO ORDERED.
Aren?ia-K Wright Allen
United States District Judge
" Currently, a similar restriction is found in a federal regulation that constitutes a legislative rule carrying
the force of law, .SVe Loss Mitigation Procedures Rule, 12 C,F,R, § 1024,41(g) (2016). However, the Loss
Mitigation Procedures Rule took effect on January 10, 2014—over seven months after the foreclosure on the
Simon's home, 5c't' CFPB Mortgage Servicing Rules (Regulation X), 78 Fed, Reg, 10,696, 10,842 (Feb. 14, 2013);
sen also Am, Compl. 74, Tlierefore, the Loss Mitigation Procedures Rule was not in effect either when the Deed
of Trust was executed or when the foreclosure took place and did not regulate the Lender's conduct in this case,
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