Attorneys representing a homeowners’ association in foreclosure proceedings filed as a result of the homeowner’s failure to pay monthly assessments may not rely on the completed foreclosure proceedings in their motion to dismiss a federal complaint filed by the former homeowner alleging violations of the FDCPA and NCDCA (North Carolina’s version of the federal FDCPA), even where the District Court may make findings of fact in direct contradiction to the findings made in the foreclosure proceedings.

In Foh v. Chase, 2015 WL 5254312 (M.D.N.C., September 9, 2015), after foreclosure proceedings were completed and the plaintiff homeowner’s residential property was sold, plaintiff filed suit in federal court against the association and the attorneys who had represented the association in the foreclosure.  The allegations in plaintiff’s complaint included: (i) statements made in the association’s foreclosure affidavit concerning service were made in bad faith because defendants knew plaintiff had relocated; (ii) despite knowing she was represented by counsel, defendants continued to mail notices directly to plaintiff; and, (iii) defendants misled plaintiff that the foreclosure sale would be postponed to allow for negotiations.

Defendants moved to dismiss the complaint on the grounds that the federal court lacked subject matter jurisdiction or, alternatively, the complaint failed to state a claim.  Defendants’ assertion that the federal court lacked subject matter jurisdiction was based on the Rooker-Feldman doctrine, which “provides that courts do not have subject matter jurisdiction to hear “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005).”  Foh, at 3.  In particular, defendants contended that in order to find in favor of plaintiff homeowner on her claims that defendants violated the FDCPA or the NCDCA, the Court would have to make certain factual findings in direct contradiction to the findings made by the state court in the foreclosure proceedings. Specifically, whether defendants provided plaintiff with adequate notice of the foreclosure proceedings and whether the amount claimed by the association was a valid debt.  In denying the motion the Court pointed out that reliance on Rooker-Feldman is limited to the question whether the plaintiff is seeking redress for an injury caused by the state court decision itself.  Here, the Court ruled, plaintiff was not challenging the foreclosure order itself, but rather was alleging her rights had been violated under federal and state consumer protection statutes as a result of the defendants’ actions before and during the foreclosure proceedings and in their communications with plaintiff.

In denying the defendants’ motion to dismiss the complaint for failure to state a claim, the Court noted the motion was based on defendants’ affirmative defenses of res judicata (claim preclusion) and collateral estoppel (issue preclusion).  The Court found that there was not a sufficient identity between the cause of action for foreclosure and the causes of action in the federal case, and the consumer protection claims were not litigated in the state case.  Additionally, the Court found there was an insufficient factual record before it at this time for it to properly address these defenses.

The lesson to be learned here is that the completion of the foreclosure proceedings does not eliminate the possibility that the aggrieved former homeowner will seek to recover from the foreclosing creditor – and its legal representatives – for the manner in which the foreclosure proceedings were conducted, and for the behavior of the creditor and its attorneys in the run up to the foreclosure sale.  A power of sale foreclosure conducted pursuant to Chapter 45 of the North Carolina General Statutes (the predominant method in use in North Carolina) is an “in rem” proceeding, requiring a very limited factual inquiry into whether the creditor is entitled to enforce its rights to foreclose the secured property.  However, even where facts fundamental to the outcome of the foreclosure are challenged in the subsequent legal action, if plaintiff homeowner relies on her version of those facts to support a cause of action unrelated to the foreclosure proceeding itself and not litigated in the foreclosure proceeding, a court may permit that case to proceed in the face of a motion to dismiss.