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Alabama: Failure to Strictly Comply with the Requirements of the Mortgage Invalidates a Foreclosure Sale

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

by Andrew W. Saag
Sirote & Permutt, PC – USFN Member (Alabama)

Alabama has adopted strict liability with respect to breach letter compliance. The Supreme Court of Alabama found that failure to strictly comply with the requirements of the mortgage invalidates a foreclosure sale. [See Ex parte Turner, __ Ala__ (Sept. 1, 2017)].

Background
After the borrowers defaulted on their loan, the loan servicer sent a letter notifying them of its intent to foreclose on the property (the Default Letter). The mortgage required the Default Letter to include certain information, including that the borrower had 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.” The Default Letter instead stated “[y]ou have the right to reinstate your loan after legal action has begun. You also have the right to assert in foreclosure, the non-existence of a default or any other defense to acceleration and foreclosure.” The borrowers ultimately filed suit against the servicer, alleging that the foreclosure was void because the notice they received did not explicitly inform them of their right to bring a court action challenging the foreclosure.

Appellate Court Affirmed
The Court of Civil Appeals upheld the foreclosure sale — determining that the notice to the borrowers, which undisputedly did not inform them of their right to initiate legal action, nevertheless substantially complied with the notice requirement set forth in the mortgage. The borrowers appealed, contending that Alabama law required strict compliance with the terms of the mortgage rather than mere substantial compliance.

Supreme Court Reverses
In its analysis, the Supreme Court of Alabama expressly noted the “instructive decision” from the Supreme Judicial Court of Massachusetts, Pinti v. Emigrant Mortgage Co., 472 Mass. 226 (2015), which held that a nonjudicial foreclosure was void because the default letter failed to inform the mortgagors of their right and need to initiate legal action to challenge the validity of the foreclosure. In following this logic, the Supreme Court of Alabama reversed the appellate court’s decision, holding that a failure to strictly comply with the requirements of the mortgage — specifically failing to notify the borrowers of their right to initiate legal action — invalidated a foreclosure sale.

The dissenting opinion in Turner observed that the law merely required substantial compliance, and that the Default Letter substantially complied with the mortgage because it put the borrowers on notice of their responsibility to cure their default and, if they did not, the debt would be accelerated and the mortgage foreclosed upon.

Take Heed
Servicers should be extra careful in their breach letter review process to ensure full and complete accuracy. Alabama law does not require breach letters; however, the standard GSE mortgage does require that a breach letter be sent. The requisite contents of the letter and notice requirements will be set forth in the mortgage. An intricate understanding of the local laws and best practices is crucial so that servicers can successfully navigate around this potential liability.

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