FIRREA Does Not Deprive Courts of Jurisdiction to Rule on Affirmative Defenses to Foreclosure Actions, Holds Pennsylvania’s Superior Court

By Stephen J. Shapiro

The Superior Court of Pennsylvania held last week that federal law does not prevent courts from considering affirmative defenses to foreclosure actions brought by mortgage holders that have acquired the assets of financial institutions placed into receivership. In Sass v. AmTrust Bank, a homeowner refinanced her mortgage through AmTrust and, when she defaulted on the mortgage, AmTrust filed a foreclosure action. In her answer to the foreclosure action, the homeowner alleged that an employee of the closing agent selected by AmTrust absconded with a large portion of the loan proceeds and that AmTrust had failed to include in her loan documents certain disclosures required by federal law. Therefore, the homeowner argued as an affirmative defense, she was entitled to rescission of the mortgage. The homeowner also brought a declaratory judgment action against AmTrust, seeking a declaration that her mortgage was void ab initio. While the cases were pending, the FDIC put AmTrust into receivership, and Nationstar Mortgage acquired the rights to the homeowner’s loan.

The homeowner moved for summary judgment in both actions and, when Nationstar failed to respond to her motions, the trial court granted them. On appeal, Nationstar argued that the trial court lacked jurisdiction to rule on the homeowner’s motions because the Financial Institutions Reformation, Recovery, and Enforcement Act (FIRREA) deprived the trial court of jurisdiction to hear any action relating to the pre-assignment conduct of a depositary institution that was placed in receivership. Specifically, FIRREA provides that “no court shall have jurisdiction over . . . any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver…”  12 U.S.C. 1821(d)(13)(D). The Superior Court characterized Nationstar’s position on appeal as follows:  “Nationstar appears to argue broadly that under FIRREA, a successor institution assumes only the assets of its failed predecessor and that, consequently, the purpose of FIRREA to assure economic stability in the wake of bank failures is met only if the successor is insulated from loss occasioned by any of its predecessor’s conduct.”

The Court rejected Nationstar’s broad reading of FIRREA. Rather than analyzing the policy considerations upon which Nationstar based its interpretation of FIRREA, the Court instead focused on the plain language of the statute, which on its face divests courts of jurisdiction only over “claims” or “actions.” Under that textual reading of FIRREA, the Court held that the homeowner’s declaratory judgment action was indeed a “claim” relating to the assets of a depository institution over which FIRREA had divested the trial court of jurisdiction. Therefore, the Court vacated the trial court’s grant of summary judgment on the homeowner’s declaratory judgment action.

On the foreclosure action, however, the Court held that the homeowner’s affirmative defense of rescission was neither a “claim” nor an “action” that FIRREA deprived the trial court of jurisdiction to hear, but rather was a “response” to Nationstar’s foreclosure action. Therefore, Superior Court held, the trial court did not lack jurisdiction to decide the homeowner’s motion for summary judgment on her affirmative defense of rescission. Superior Court held that Nationstar had waived its right to challenge the trial court’s ruling on the merits because it had failed to notice its appeal in a timely fashion. Therefore, Superior Court affirmed the trial court’s summary judgment ruling invalidating the mortgage and dismissing the foreclosure action.

In its opinion, Superior Court did acknowledge the potential mischief a homeowner could attempt to sow by pleading as affirmative defenses what are, in actuality, counterclaims in an attempt to avoid the FIRREA bar. It noted though that courts must look past the labels litigants place on their purported defenses and instead “must consider whether the disputed assertion of a party’s pleading stems from the desire to establish a right to payment and collect on the resulting debt, or from an explanation of why the debt is not valid or collectible.”

UPDATE:  On February 5, 2014, the Pennsylvania Supreme Court denied Nationstar’s Petition for Allowance of Appeal from the Superior Court’s ruling.