South Carolina rules foreclosure is not a mandatory counterclaim
In a decision that will provide guidance on when lenders should counterclaim for foreclosure in a lawsuit against a borrower, the South Carolina Court of Appeals at Deutsche Bank National Trust Company v. Estate of Patricia Ann Owens Houck ruled that the foreclosure was not a mandatory counterclaim in a borrower lawsuit alleging origination errors.
In 2013, the mortgagors sued Deutsche Bank and the loan manager, alleging errors in the origination of their loan, including the allegation that no lawyer had closed the loan as required by law of the Caroline from the south. The lawsuit did not specifically request that the loan be declared unenforceable, although it does include a legal claim under which it was one of many potential remedies. The loan matured and went into default for non-payment shortly after the mortgagors filed a lawsuit. Deutsche Bank successfully defended the lawsuit, winning a defense verdict in a jury trial in 2015.
Following the lender’s victory in the lawsuit, the mortgagors sought to wrest victory from the clutches of defeat by arguing that Deutsche Bank was forced to file its foreclosure as a binding counterclaim in the 2013 lawsuit, and that failing to do so, the mortgage was now unenforceable. . Mortgageors demanded that Deutsche Bank register a satisfaction of its mortgage, which it refused to do. Deutsche Bank then filed a foreclosure action, and the mortgagors filed counterclaims to declare the mortgage unenforceable and legal penalties for breach of the mortgage. The trial court issued a split decision on these claims, ruling that foreclosure was prohibited by res judicata but refusing to award penalties to the lender for the previous failure to meet the mortgage. Both parties appealed the decision.
On appeal, the South Carolina Court of Appeals concurred with the lender’s argument that the foreclosure was not “logically related” to the borrower’s claims in the 2013 lawsuit because those claims arose solely from the granting of the loan, while the foreclosure resulted from the borrowers defaulting on the loan. The court further agreed that foreclosure, if proven, would not have been a defense against the borrower’s claims. As such, the foreclosure was not a mandatory counterclaim, and the court overturned the trial court’s ruling that it was prohibited by res judicata.
This decision can be expected to give lenders more leeway in deciding whether or not to suspend foreclosure activity when sued by borrowers in Palmetto State. Nevertheless, the decision is not a general exemption from the risks of not filing a mandatory counterclaim. Lenders should continue to review borrower complaints to determine when a counterclaim is necessary to preserve their right to enforce the loan. In some cases, lenders may be able to agree to a consent order with the mortgagor at the start of the lawsuit that the foreclosure will not be considered binding and there is no need to file. a counterclaim.
© 2021 Bradley Arant Boult Cummings LLPRevue nationale de droit, volume XI, number 236