United States Court of Appeals For the First Circuit
No. 20-1321
KEVIN G. AUBEE; CARRIE A. AUBEE,
Plaintiffs, Appellants,
v.
SELENE FINANCE LP; WILMINGTON SAVINGS FUND SOCIETY, FSB, d/b/a Christiana Trust, not individually but as trustee for Pretium Mortgage Acquisition Trust,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND
[Hon. William E. Smith, U.S. District Judge]
Before
Kayatta, Howard, and Thompson, Circuit Judges.
Todd S. Dion for appellants. John T. Precobb, with Richard C. Demerle, Michael E. Swain, and Demerle Hoeger LLP on brief, for appellees.
December 21, 2022 KAYATTA, Circuit Judge. Kevin and Carrie Aubee appeal
from an order dismissing their complaint against defendants
Wilmington Savings Fund Society, FSB ("Wilmington Savings") and
Selene Finance LP. The Aubees contend that defendants' foreclosure
on their property is void because defendants failed to strictly
comply with the notice requirements in the Aubees' mortgage
contract before foreclosing. For the following reasons, we reverse
the dismissal of the Aubees' breach of contract claim against
Wilmington Savings and otherwise affirm.
I.
In 2005, the Aubees borrowed $359,650 from a bank,
granting a mortgage on their property in Smithfield, Rhode Island,
as security for the loan. Following a series of assignments,
Wilmington Savings was assigned both the note and the mortgage as
a trustee for Pretium Mortgage Acquisition Trust.
Paragraph 22 of the Aubees' mortgage contract allows the
mortgagee to accelerate the loan and invoke the statutory power of
sale if the Aubees default. But that same paragraph also imposes
certain notice requirements that the mortgagee must fulfill at
least 30 days before accelerating the loan. Most importantly for
our purposes, paragraph 22 states the following:
The notice shall further inform Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.
- 2 - On April 3, 2017, Selene Finance, acting on behalf of
Wilmington Savings, sent the Aubees a "Notice of Default and Intent
to Accelerate."1 The notice stated:
If you have not cured the default within thirty-five (35) days of this notice, Selene, at its option, may require immediate payment in full of all sums secured by your Security Instrument without further demand or notice, and foreclose the Security Instrument by judicial proceeding and sale of the property and/or invoke the power of sale or any other remedies permitted by applicable law, and/or as provided within your Security Instrument.
Farther down, the notice stated:
You have the right to reinstate after acceleration and the right to assert in the foreclosure proceeding the non-existence of a default and/or the right to bring a court action to assert the non-existence of a default or any other defense to acceleration, foreclosure and/or sale of the property.
Thus, the notice included verbatim the language from paragraph 22
of the mortgage contract regarding the Aubees' rights, but it also
inserted additional language that we underline in the following
reproduction:
You have the right to reinstate after acceleration and the right to assert in the foreclosure proceeding the non-existence of a default and/or the right to bring a court action to assert the non-existence of a default or any other defense to acceleration, foreclosure and/or sale of the property.
1 The complaint did not reference or attach this notice. But below, the Aubees conceded that Selene Finance sent the notice and that it is authentic, and the parties agreed that the court should consider the notice in adjudicating the motion to dismiss.
- 3 - The added language in the second through fourth lines
provides the object of the parties' dispute.2 The reason for that
added language appears to be that Rhode Island permits both
judicial foreclosures and non-judicial foreclosures. That is, a
mortgagee can elect to foreclose either through a judicial
proceeding or through the statutory power of foreclosure without
a judicial proceeding (if allowed by the contract). See R.I. Gen.
Laws § 34-27-1 (authorizing judicial foreclosure); R.I. Gen. Laws
§ 34-11-22 (authorizing non-judicial foreclosure). Defendants
aver that they "drafted the Notice to create a letter whose content
conforms to the version of paragraph 22 used in both non-judicial
foreclosure states as well as judicial foreclosure states, with
'and/or' conjoining the two (2) advisories." The phrase "the
foreclosure proceeding" in the underlined language was therefore
intended to refer only to a judicial foreclosure proceeding, at
which mortgagors would be able to assert the non-existence of a
default.
Defendants accelerated the loan and sold the property
through a non-judicial foreclosure on June 18, 2018. The Aubees
then filed a complaint in Rhode Island Superior Court. They
sought, among other relief, a declaratory judgment that the
foreclosure is void. They alleged that defendants breached the
2 The Aubees do not claim that the added language in the last line rendered the notice non-compliant.
- 4 - mortgage contract by foreclosing and conducting a sale without
providing adequate notice required by paragraph 22 of the mortgage
contract.3 Defendants removed the case to federal court in the
District of Rhode Island and moved to dismiss the complaint for
failure to state a claim.
Defendants' motion to dismiss was referred to a
magistrate judge, who issued a report and recommendation
recommending dismissal of all claims. The district court adopted
the report and recommendation in full and granted the motion to
dismiss. This appeal ensued.
II.
A.
We review de novo the district court's grant of
defendants' motion to dismiss for failure to state a claim. See
In re Celexa & Lexapro Mktg. & Sales Pracs. Litig., 779 F.3d 34,
39 (1st Cir. 2015). We accept as true the Aubees' factual
allegations and draw all reasonable inferences in their favor.
Id.
Sitting in diversity, we look to Rhode Island law to
supply the substantive rules of decision. Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938); Fithian v. Reed, 204 F.3d 306,
308 (1st Cir. 2000). Applying state law involves "interpreting
3 The Aubees also asserted a second count for violation of a Rhode Island statute, but they abandoned that claim below.
- 5 - and applying the rules of substantive law enunciated by the state's
highest judicial authority, or, on questions to which that tribunal
has not responded, making an informed prophecy of what the court
would do in the same situation." Blinzler v. Marriott Int'l, Inc.,
81 F.3d 1148, 1151 (1st Cir. 1996). In the latter scenario, "our
task is to ascertain the rule the state court would most likely
follow under the circumstances, even if our independent judgment
on the question might differ." Id. "[W]e seek guidance in
analogous state court decisions, persuasive adjudications by
courts of sister states, learned treatises, and public policy
considerations identified in state decisional law." Id.
B.
After the district court dismissed the complaint, while
this appeal was pending, the Supreme Court of Rhode Island decided
Woel v. Christiana Trust, 228 A.3d 339 (R.I. 2020). The Rhode
Island high court held that, "[a]s a matter of contract law, strict
compliance with the requirements contained in paragraph 22 is a
condition precedent to acceleration and a valid foreclosure sale."
Id. at 345. The court further held that a foreclosure sale
conducted without strict compliance with the notice provisions is
void. Id. at 348. The parties dispute whether Woel's holding
applies to a case such as this in which the district court entered
judgment before Woel was decided.
- 6 - In adopting the strict compliance standard, the Supreme
Court of Rhode Island acknowledged that "[o]ther states, including
Massachusetts, Alabama, and Minnesota, also require strict
compliance with paragraph 22 as a condition precedent to a valid
foreclosure," id. at 346 n.11, and that federal courts applying
Rhode Island law had "assumed that strict compliance with
paragraph 22 is a condition precedent to a valid foreclosure sale,"
id. at 344 n.9. But it viewed the case as addressing "a matter of
first impression" and creating a "new rule of law" in Rhode Island.
Id. at 344, 348. Because of "[t]he potential impact this new rule
of law could have on the finality of foreclosures," the Woel court
opted to give its new rule only prospective effect. Id. at 348.
Specifically, the court decreed that "the pronouncement in this
opinion applies to the case at bar and to cases pending in the
Superior Court in which this specific issue has been, or may be,
raised." Id.
We are bound to follow the Supreme Court of Rhode
Island's decisions regarding the prospective nature of its
rulings. See Great N. Ry. Co. v. Sunburst Oil & Refin. Co., 287
U.S. 358, 364–65 (1932); Butler v. Deutsche Bank Tr. Co. Ams., 748
F.3d 28, 39 n.10 (1st Cir. 2014).
The parties agree that the Rhode Island court's
statement that its holding shall apply "to the case at bar and to
cases pending in the Superior Court" does not preclude application
- 7 - of the holding to this case merely because this case is pending in
federal court, rather than in the Rhode Island court system.
The parties' disagreement trains, instead, on whether
the Supreme Court of Rhode Island intended Woel to apply to cases
(besides Woel itself) pending on appeal, rather than in a trial
court. Defendants' position rests on the court's description of
the pending cases to which Woel would apply, namely "the case at
bar and to cases pending in the Superior Court," with no mention
of cases pending on appeal. For three reasons, though, we think
that defendants place too much weight on this silence.
First, as best we can tell, there were no cases involving
paragraph 22 notice other than Woel that were on appeal to the
Rhode Island Supreme Court at the time Woel was decided, and
defendants do not contend otherwise. Rhode Island also has no
intermediate appellate court. Therefore, by applying the new rule
to Woel itself and to all cases then pending in the Rhode Island
Superior Court in which the issue has been or could be raised, the
Rhode Island Supreme Court covered the entire universe of pending
cases in the Rhode Island court system in which the adequacy of
paragraph 22 notice was or could be at issue. There was no reason
for the court to mention cases (besides Woel) pending on appeal,
because there were no such cases in the Rhode Island court system.
So we do not read into Woel's silence regarding cases pending on
appeal an implicit intent to exclude such cases. Rather, we see
- 8 - no good reason why the court would have wanted to exempt cases
pending on appeal from its universal inclusion of pending claims.
After all, Woel itself was a case pending on appeal.
Second, Rhode Island generally applies new rules of law
"in the manner best suited to serve the interests of justice and
to avoid hardship." Woel, 228 A.3d at 348 (quoting State v. Arpin,
410 A.2d 1340, 1347 (R.I. 1980)). It would not serve the interests
of justice to allow the litigants in Woel to benefit from the rule
while denying that benefit to other litigants who made similar
arguments in cases pending on appeal, merely because Woel happened
to be the case that set forth the rule. See, e.g., Fed. Nat'l
Mortg. Ass'n v. Marroquin, 74 N.E.3d 592, 596 (Mass. 2017)
("[W]here multiple cases await appellate review on precisely the
same question, it is inequitable for the case chosen as a vehicle
to announce the court's holding to be singled out as the 'chance
beneficiary' of an otherwise prospective rule." (quoting Galiastro
v. Mortg. Elec. Registration Sys., Inc., 4 N.E.3d 270, 277 (Mass.
2014))). And applying Woel to a pending, not-yet-final challenge
to a foreclosure creates no more hardship for the mortgagee than
does applying the rule to Woel itself.
Third, we find further support for our interpretation of
Rhode Island law in the Massachusetts Supreme Judicial Court's
treatment of the same issue. In Pinti v. Emigrant Mortg. Co., 33
N.E.3d 1213 (Mass. 2015) -- Massachusetts's analog to Woel -- the
- 9 - Massachusetts high court held that strict compliance with notice
requirements was a necessary condition precedent for foreclosure.
Id. at 1214, 1226. In Pinti, like in Woel, the court stated that
its decision would apply prospectively and to the case at bar due
to concerns about the finality of past foreclosures. Id. at 1227.
But it expressly did not reach the question whether its holding
should apply to other cases pending on appeal. Id. at 1227 n.25.
The Massachusetts high court later answered that question in
Marroquin, concluding that "the Pinti decision applies in any case
where the issue was timely and fairly asserted in the trial court
or on appeal before" Pinti was decided. 74 N.E.3d at 593.
We think that the Supreme Court of Rhode Island would
proceed in tandem with Massachusetts in this regard. The Rhode
Island high court found Pinti "instructive" in adopting the strict
compliance standard for Rhode Island. Woel, 228 A.3d at 346. And
it followed Massachusetts's lead in making the strict compliance
standard prospective. There is no reason to think it would not
similarly track Massachusetts in applying that standard to cases
pending on appeal. Indeed, the opinion in Woel cites Marroquin
favorably, and nowhere disagrees with its treatment of cases
pending on appeal. Id. at 347. It would be odd if the Supreme
Court of Rhode Island intended to implicitly depart from
Massachusetts case law on the specific issue of application to
- 10 - cases pending on appeal, while at the same time following
Massachusetts in all other respects.
For these reasons, we conclude that the rule in Woel
applies to this case and that a failure to strictly comply with
the notice requirements in paragraph 22 would render the
foreclosure void. We now turn to whether the Aubees have plausibly
alleged that the notice they received failed to satisfy the strict
compliance standard.
C.
At first blush, the notice sent to the Aubees might
appear to have complied with the paragraph 22 notice requirements.
Paragraph 22 required that the notice "inform Borrower of the right
to reinstate after acceleration and the right to bring a court
action to assert the non-existence of a default or any other
defense of Borrower to acceleration and sale." The notice, in
turn, included all of those words in describing the Aubees' rights.
The problem, say the Aubees, is that the notice informed them of
those rights in a misleading manner that could cause a reasonable
borrower to misunderstand how to assert them. This argument raises
two questions: Does a notice that informs a borrower of rights
fail to strictly comply if the notice can be reasonably read in a
manner that causes the borrower to misunderstand how to assert
those rights? And, if so, was this particular notice written in
a manner that could cause such a misunderstanding?
- 11 - The first question is easily answered. Interpreting the
Massachusetts Supreme Judicial Court's decision in Pinti, we have
stated that "Massachusetts law requires that the paragraph 22
notice given to the mortgagor be accurate and not deceptive --
note the possible difference between the two concepts -- and the
Supreme Judicial Court has made clear that inaccuracy or deceptive
character can be fatal." Thompson v. JPMorgan Chase Bank, N.A.,
982 F.3d 809, 812 (1st Cir. 2020). And the Massachusetts Supreme
Judicial Court "agree[d] with the First Circuit that Massachusetts
law under Pinti . . . requires that any notice given pursuant to
paragraph 22 of the GSE Uniform Mortgage, regardless of whether
hybrid, must be accurate and not deceptive." Thompson v. JPMorgan
Chase Bank, N.A., 158 N.E.3d 35, 41 (Mass. 2020). In Pinti, for
example, the notice failed to strictly comply because borrowers
"could be misled into thinking that they had no need to initiate
a preforeclosure action against the mortgagee but could wait to
advance a challenge or defense to foreclosure as a response to a
lawsuit initiated by the mortgagee -- even though, as a practical
matter, such a lawsuit would never be brought." 33 N.E.3d at 1222.
We think it likely that the Supreme Court of Rhode Island
would join Massachusetts in holding that notices fall short of
strict compliance when they inform borrowers of their rights but
do so in a manner likely to cause a reasonable borrower to
misunderstand how to assert those rights. An important rationale
- 12 - for Rhode Island's adoption of the strict compliance standard was
that "[s]trict compliance with paragraph 22 is essential to
ensuring that mortgagors are fully informed of their rights and
will not be misled by a default notice provided by a mortgagee."
Woel, 228 A.3d at 346. And, in adopting that standard, the court
found the Pinti decision "instructive," and that it "soundly
reasoned that mortgagors could be misled into thinking that they
had no need to initiate a lawsuit against the mortgagee and could
instead advance a claim or defense in response to a lawsuit
initiated by the mortgagee." Id. Moreover, the court found the
notice in Woel problematic because it was "misleading, inaccurate,
and, at best, incomplete." Id. Thus, we conclude that under Rhode
Island law, as under Massachusetts law, a default notice fails to
strictly comply with paragraph 22 if it is reasonably likely to
mislead borrowers about how to assert their rights, even as it
informs them of those rights.
That brings us to the question whether the notice given
to the Aubees is reasonably likely to be read in a manner that
would cause borrowers to misunderstand how to assert their rights.
We agree with the Aubees that it has this potential.
The use of "and/or" to connect the rights described in
the notice renders the notice easily susceptible to confusion.
See William Strunk Jr. & E.B. White, The Elements of Style 40 (3d
ed. 1979) (describing "and/or" as "[a] device, or shortcut, that
- 13 - damages a sentence and often leads to confusion or ambiguity").
We think it likely that many borrowers would read the notice, as
the Aubees do, to mean that they can choose to assert their
defenses in a foreclosure proceeding or, alternatively, in their
own court action. And the use of the word "the" preceding
"foreclosure proceeding" implies that there will in fact be a
foreclosure proceeding at which the borrowers will be able to
assert defenses in all circumstances. Naturally, many borrowers
would elect to skip the hassle of bringing a court action and opt
instead to assert their defenses "in the foreclosure proceeding."
This would work out fine for the borrowers whose mortgagees decide
to go the judicial foreclosure route. But borrowers whose
mortgagees utilize non-judicial foreclosures could be surprised to
learn that they cannot in fact assert defenses "in the foreclosure
proceeding," because a non-judicial foreclosure proceeding
provides no opportunity to assert defenses. The only opportunity
for those borrowers to assert their defenses would be in a court
action that they brought themselves. For these reasons, the notice
is misleading and fails to strictly comply with paragraph 22. See,
e.g., Pinti, 33 N.E.3d at 1222.
Defendants contend that "the additional language in the
Notice does not discourage the Appellants to assert their rights
but, rather, explains that they may have different avenues to do
so depending on what route Selene and Wilmington Savings took
- 14 - towards foreclosure." They point to language farther up in the
notice stating that "Selene, at its option, may . . . foreclose
the Security Instrument by judicial proceeding and sale of the
property and/or invoke the power of sale or any other remedies
permitted by applicable law, and/or as provided within your
Security Instrument." They argue that this language provides
context for the later sentence informing borrowers of their rights.
Defendants imply that because they described the mortgagee's
choice of foreclosure procedures, a borrower would understand the
relationship between the mortgagee's choice and the borrower's
rights as follows: If and only if the mortgagee brings a judicial
foreclosure action, the borrower will be able to assert defenses
in that proceeding; otherwise, the borrower will have to bring a
court action to assert defenses.
The problem with defendants' argument is that the notice
does not explain any of this. All the notice says is that "[y]ou
have . . . the right to assert in the foreclosure proceeding the
non-existence of a default and/or the right to bring a court action
to assert the non-existence of a default or any other defense."
It does not match up those rights with the mortgagee's election of
judicial foreclosure or non-judicial foreclosure in a manner that
makes clear that the right to assert defenses "in the foreclosure
proceeding" is unavailable in a non-judicial foreclosure. Said
differently, merely stating that the mortgagee can choose between
- 15 - judicial foreclosure and non-judicial foreclosure does not inform
borrowers how that decision affects their rights. And, as
described above, borrowers could easily be misled into thinking
that they have the option to choose between asserting their
defenses in a foreclosure proceeding initiated by the mortgagee or
asserting their defenses in their own court action, regardless of
which type of foreclosure the mortgagee chooses. Thus, the notice
is "misleading . . . and, at best, incomplete." Woel, 228 A.3d at
346.
Defendants' argument suffers from another defect. Their
argument necessarily depends on their interpretation that the
notice informs borrowers that they do not have the right to assert
defenses "in the foreclosure proceeding" in every circumstance.
But this same logic would apply to the right to bring a court
action, because the rights are connected by "and/or" without
further explanation. Said differently, defendants' reading of the
notice is that, depending on the circumstances, borrowers may have:
(1) only "the right to assert in the foreclosure proceeding the
non-existence of a default"; (2) only "the right to bring a court
defense to acceleration, foreclosure and/or sale of the property";
or (3) both of those rights. See H.W. Fowler, A Dictionary of
Modern English Usage 29, (Sir Ernest Growers ed., 2d ed. 1965)
(describing "[t]he ugly device of writing x and/or y to save the
- 16 - trouble of writing x or y or both of them"). Borrowers who read
the notice this way would understand that there may be some
circumstances (i.e., situation (1)) in which they do not have the
right to bring a court action. This is problematic because
paragraph 22 requires that the notice inform borrowers that they
have the right to bring a court action -- not that they might have
the right to bring a court action, depending on the circumstances.
See Marroquin, 74 N.E.3d at 594 (holding that a notice stating
"you may have the right to bring a court action to assert the non-
existence of a default or any other defense you may have to
acceleration and foreclosure" did not strictly comply with
paragraph 22 (emphasis added)). Thus, under either interpretation
of the notice, it is fatally defective.
In sum, the Aubees have stated a claim that the notice
of default failed to strictly comply with the requirements of
paragraph 22.4 Therefore, dismissal of their claim against
Wilmington Savings was improper.
4 The Aubees make an additional argument that the added language renders the notice inaccurate because it falsely suggests that the Aubees had to wait until the mortgagee initiated a foreclosure proceeding to bring a court action asserting the non- existence of a default. This is plainly incorrect. The notice describes "the right to assert in the foreclosure proceeding the non-existence of a default" and "the right to bring a court action to assert the non-existence of a default" as two separate rights. It does not suggest that the existence or timing of the right to bring a court action is contingent on the occurrence of a foreclosure proceeding.
- 17 - III.
The magistrate judge's report and recommendation
-- which the district court adopted in full -- recommended that
the case against Selene Finance be dismissed on the alternative
ground that Selene Finance was not a party to the mortgage contract
and therefore was not bound by its notice provisions. The Aubees
do not challenge this alternative ground on appeal. Accordingly,
we affirm the dismissal as to Selene Finance.
IV.
For the foregoing reasons, and with the benefit of Rhode
Island case law post-dating the district court's decision, we
reverse the dismissal of Count I of the Aubees' complaint (breach
of contract) against Wilmington Savings. We affirm the dismissal
of Count I against Selene Finance and the dismissal of Count II
(the abandoned statutory claim) against both defendants. Costs
are taxed in favor of appellants and against appellee Wilmington
Savings.
- 18 -