When can mortgage servicing and related debt-collection activities violate N.C. Gen. Stat. § 75-1.1? Two recent cases provide some answers.

PLS Investments v. Ocwen Loan Servicing

In PLS Investments, a 75-1.1 claim that attacked foreclosure efforts survived a motion to dismiss.

In that case, a homeowner alleged that a mortgage servicer falsely listed the homeowner’s property for sale—indeed, twice. The homeowner bought the property from a married couple. The couple also owned two adjacent lots that secured a bank loan. After the homeowner bought the house from the married couple, the lender foreclosed on the couple’s adjacent lots.

The lender’s mortgage servicer then caused the sheriff to post a notice of eviction on the plaintiff homeowner’s home, even though that property wasn’t subject to the foreclosure. The lender and the mortgage servicer also listed that home for sale on a website specializing in distressed properties, advertising the sale as a foreclosure sale.

The lender and mortgage servicer later removed the listing. In short order, though, the lender and mortgage servicer listed the home again for sale as a distressed property on multiple foreclosure websites.

The homeowner sued the lender and mortgage servicer, alleging a 75-1.1 violation. The lender and mortgage servicer moved to dismiss the 75-1.1 claim.

The U.S. District Court for the Western District of North Carolina denied the motion to dismiss. The court reasoned that the case might involve a qualifying injury: a drop in the fair market value of the property.

Turning to the merits, the court decided that the defendants’ alleged conduct could be called unfair. The court first stated that the original marketing of the home was inadvertent—implying that this episode, by itself, would not have shown a 75-1.1 violation. Even so, the court denied dismissal of the 75-1.1 claim. According to the court, the plaintiff deserved discovery on whether the defendants later took “appropriate cautionary steps” to protect the plaintiff after the first erroneous listing. The court also called for discovery on the reasons why the defendants erroneously re-listed the property less than a year after they took the sale listings down.

After the denial of the motion to dismiss, the defendants answered the complaint. The case remains pending.

Waggett v. Select Portfolio Servicing

In Waggett, a 75-1.1 claim over unduly persistent collection efforts likewise survived a motion to dismiss.

The plaintiffs, a married couple, were debtors in a chapter 11 reorganization proceeding in the Eastern District of North Carolina. The bankruptcy court confirmed a reorganization plan that the debtors had proposed.

Under the terms of the plan, the debtors had to convey a beach house to one of their lenders. In exchange, the lender was supposed to credit the debtor’s outstanding loan for the value of the beach house, with the remainder of the loan balance to be paid according to the confirmed reorganization plan. The confirmed plan also contained a broad injunction against collection actions inconsistent with the plan.

Shortly after the plan went into effect, a new lender bought the promissory note that the beach house secured. The new lender engaged a mortgage servicer to enforce the note. The mortgage servicer started calling the debtors and sending them monthly mortgage statements. Eventually, the mortgage servicer issued a notice of default and ultimately foreclosed on the beach house.

Even after the foreclosure, in fact, the mortgage servicer continued to make payment demands, even though the plan enjoined the mortgage servicer from collection activities. During these events, the debtors’ counsel sent repeated correspondence to the mortgage servicer, stating that its actions violated the debtors’ reorganization plan and the order confirming that plan.

The debtors eventually sued the mortgage servicer and the lender. Their lawsuit included a claim for violations of the North Carolina Debt Collection Act. The North Carolina Debt Collection Act has a close relationship with section 75-1.1. The Act lists several types of threatening, harassing, deceptive or unconscionable conduct that, according to the Act, are the exclusive modes of violating section 75-1.1 in the context of debt collection. The Act caps treble damages at $4,000, but it still allows aggrieved debtors to recover attorney fees.

In their claim under the North Carolina Debt Collection Act, the debtors alleged that the defendants used false, deceptive, or misleading representations when they tried to collect the loan balance. As injuries, the debtors cited adverse information on their credit reports.

The defendants moved to dismiss the North Carolina Debt Collection Act claim. The court, however, held that the debtors had stated a claim under that statute.

The court focused on what it called the “generalized requirements” of section 75-1.1—requirements that the North Carolina Debt Collection Act incorporates by reference: an unfair or deceptive act, in or affecting commerce, that proximately causes injury.

The defendants argued that the debtors could not state a claim because the debtors could not have been deceived based on any representations by the defendants. They argued that the debtors knew that the defendants’ actions violated the plan and the confirmation order.

The court rejected those arguments. It held that the defendants’ multiple communications to the debtors, including the monthly mortgage statements, the notices of default, the phone calls, and the requests for payments, had “the tendency [or] the capacity to mislead or create[d] the likelihood of deception.” The court also found it notable that “the defendants continued to actively pursue collection . . . after multiple requests by plaintiffs’ counsel to cease collection.”

The case remains pending as an adversary proceeding in the bankruptcy court.

The Bottom Line

In both PLS Investments and Waggett, the courts showed concern when the defendants allegedly took collection actions despite repeated statements from the borrowers’ counsel that these actions were improper.

One lesson to take from these cases is that a mortgage service or lender that promptly stops collection activity after receiving a contrary notice has a better chance of avoiding 75-1.1 liability than a more persistent creditor has. Stopping collection activity under these conditions might not be a safe harbor, but it might nonetheless have some defensive value for a creditor.