By Robert J. Wichowski, Esq.

Bendett & McHugh, PC *

USFN Member (CT, ME, MA, NH, RI, VT)

On Friday, December 3, 2021, the Connecticut Supreme Court in Wells Fargo Bank v. Eric Lorson, et.al., 340 Conn. 444 (2021), issued an opinion which created separate pleading, proof, and discovery standards for loans insured or guaranteed by the FHA.  The Slip Opinion, which was effective from publication, reversed the opinion of the Appellate Court and remanded the matter back to the trial court for a new trial limited to the issue of whether the plaintiff complied with pre-foreclosure HUD regulations prior to acceleration and foreclosure.

Plaintiff brought this foreclosure action on August 30, 2011, for Defendants’ failure to pay under the note starting in October 2010. The complaint alleged Defendants had executed and delivered the note on December 1, 2008. After a two-day trial, the court entered judgment in favor of the Plaintiff holding that Plaintiff met its burden of proof and that Defendants did not meet theirs as to their defenses.  During and just prior to the trial, Defendants attempted to amend their defenses to include an additional defense that prior to acceleration Plaintiff did not comply with HUD regulations.  Notwithstanding that allegation, Plaintiff’s witness testified that HUD regulations were complied with, and the Court disallowed the additional defenses on procedural grounds.

On appeal, Defendants claimed that the entry of judgment was clearly erroneous because compliance with HUD regulations is a condition precedent to acceleration and institution of foreclosure.  Defendants further argued that Plaintiff was required to plead and prove compliance, which it had not done.  Plaintiff argued, among other things, that Defendants’ challenge was related to the legal sufficiency of its complaint, which was waived by Connecticut procedure after an answer was filed.  The Appellate Court affirmed the judgment of the trial court holding that the burden was on the Defendant to plead and prove noncompliance with HUD regulations as a defense.

Defendants appealed to the Supreme Court.  The Supreme Court reversed the judgment of the Appellate Court.  In so doing, they relied upon the language of the HUD loan documents which stated that the lender may require immediate payment of the sums under the loan documents in the case of nonpayment, except as limited by regulations of the Secretary of HUD. 

After an extensive discussion holding that the purpose of the HUD regulations are to help ensure that the vulnerable set of borrowers who have taken FHA loans have every opportunity to retain their homes, and despite the fact that the Plaintiff in its complaint alleged that it was entitled to collect the debt, enforce the mortgage, and had elected to accelerate the note, the Supreme Court held that, in loans guaranteed or insured by the FHA, compliance with HUD regulations is a condition precedent that must be pled in Plaintiff’s complaint.  Additionally, once compliance has been pled, the burden will shift to the Defendants to specifically plead which regulations Plaintiff has allegedly not complied.  Thereafter, the burden shifts back to the Plaintiff to prove specific compliance with the disputed regulations. 

Moreover, and perhaps more troubling, the Court held that since Plaintiffs will be in a better position to know whether or not HUD regulations have been complied with than homeowners, and that homeowners would not know if there was noncompliance, once a lender pleads compliance, “a defendant borrower will have access to discovery to determine whether the plaintiff actually complied with the various regulations.” 

Since the Court has held that compliance with HUD regulations is a condition precedent to acceleration and institution of a foreclosure of a mortgage insured or guaranteed by HUD, a challenge of this sort may be raised by way of a motion to dismiss attacking subject matter jurisdiction, which, in Connecticut, may be raised at any time, even on appeal. 

This may be a fundamental shift in Connecticut foreclosure jurisprudence in that it creates a new pleading standard for the foreclosure of FHA loans, creates a new shifting burden of proof regarding compliance with HUD pre-foreclosure regulations, and it might be construed by borrowers and some trial courts to allow discovery “fishing expeditions” regarding compliance with HUD pre-foreclosure regulations.  This decision will likely dramatically increase the time and expense it takes to foreclose on those FHA loans in Connecticut that become contested.    

Copyright @2022

USFN Report - Winter 2022