In a significant decision for servicers and owners of
residential mortgage loans in Rhode Island, the U.S. Court of
Appeals for the First Circuit (in an opinion written by David H.
Souter, Associate Justice (Ret.) of the Supreme Court of the United
States) has ordered the U.S. District Court for the District of
Rhode Island to make a determination of whether its stay of
activity relating to foreclosure cases meets the standards required
for an injunction and, if so, "to establish specific limits of
time and expense if the reference for mediation is to remain in
effect."
In Fryzel v. Mortgage Electronic Registration Systems, Inc., et
al., No. 12-1526, the First Circuit considered the district
court's November 2011 imposition of a stay of all activities
(including eviction and foreclosure activities) relating to nearly
all residential foreclosure cases pending before the court and its
subsequent appointment of a special master to mediate such cases.
The district court imposed the stay after a magistrate judge
recommended dismissal of two actions brought by borrowers
challenging the foreclosures of their mortgage loans, on the basis
that the borrowers lacked standing to challenge the assignments of
the original mortgagees' interests. Rather than act on the
magistrate's recommendation, the district court imposed the
stay, after which (the First Circuit noted) the "trickle"
of foreclosure cases into the district court became a
"deluge." At the time of the briefing of the case to the
First Circuit, nearly 700 cases were pending in the district court
subject to the stay.
The First Circuit rejected the argument advanced by borrowers that
the stay was not an "injunction," finding the stay order
"can only be read as forbidding mortgagees to foreclose,"
accompanied by "threatened sanctions for violations." The
First Circuit held, for the injunction to be continued, the
district court would have to make "findings that the party to
be favored has a substantial likelihood of success in the pending
action, would otherwise suffer irreparable harm and can claim the
greater hardship in the absence of an order, which will not
disserve the public interest if imposed." The First Circuit
noted that, in making such an inquiry, the court would "reach
the subject of the magistrate's year-old recommendation to
dismiss the specific case for the mortgagor's lack of standing
to object to the assignment to the named foreclosing party"
and that the burden for proving the standards required for an
injunction would fall on the borrowers.
The court did not immediately vacate the stay order because it
"fear[ed] that the practical effect...would be chaos" and
decided to "tolerate the status quo long enough to give the
parties time to plan for contingencies." Significantly, the
court also found that the district court's "omission"
of safeguards "against unreasonable delay and expense"
resulting from the stay "was error" and required that, if
the stay were to be continued, "time and cost limits should be
set," followed by "formal, periodic reconsideration if
any further mediation is not concluded within them."
In compliance with the First Circuit's ruling, the district
court has set a hearing on the question of whether the stay met the
requirements for the issuance of an injunction and has invited
suggestions from the parties as to time and expense limitations for
the mediation process in the event the stay is continued.
The First Circuit's ruling represents a significant victory
for mortgage lenders and servicers seeking to enforce their rights
in Rhode Island.
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