Residential foreclosures have been thoroughly covered in the media. However, commercial property owners can also face foreclosure. In a commercial foreclosure, just like with residential foreclosures, there are many potential defenses available to a property owner that can be used to fight the foreclosure.
Each state has its own procedures for foreclosures (see State Foreclosure Laws). The foreclosure will be nonjudicial or judicial, and there are certain requirements, such as notice timelines, that must be strictly adhered to. If the lender bypasses a requirement, such as neglecting to provide notice of the foreclosure to the borrower or failing to comply with the timeline as dictated in the state statutes, then that failure to follow the relevant state procedural requirement can provide a defense to the foreclosure.
Many states require that the lender provide an affidavit attesting to the amounts due on the debt, including the amount of the unpaid principal balance, unpaid interest due, late fees, attorney fees, etc. The affidavit is filed in support of the complaint for foreclosure or judgment in judicial foreclosure states. The affidavit must be accurate and signed by a person with personal knowledge of the contents therein. It is a defense to foreclosure if the affidavit is false, inaccurate, or “robo-signed” (which means the the signing party had no knowledge of whether or not the information contained in the document was correct).
Most mortgages and deeds of trust contain a provision that requires the lender to provide notice, usually in the form of a letter, to the borrower of the default prior to accelerating (or “calling due”) the outstanding balance of the loan. The amount of notice required varies, but it is usually ten or 30 days. If the loan documents require a notice, but lender fails to provide such notice, this can be raised as a defense to the foreclosure.
Loan servicers sometimes make errors when servicing a loan. Mistakes may include misapplying a payment, charging non-recoverable fees, or overstating the amount needed to pay off or reinstate a loan.
Lenders must actually own the mortgage, by way of a proper assignment of mortgage, and promissory note, by way of a note endorsement, prior to initiating foreclosure for the foreclosure action to be valid. It is a defense to foreclosure if the lender cannot prove they owned the loan at the time the lawsuit was filed or the date that the nonjudicial foreclosure was initiated.
Equitable estoppel is a defense that, if successful, precludes the lender from being granted a foreclosure judgment because the lender acted unfairly. For example, if the lender made false representations to the borrower or concealed material facts during the foreclosure, it may be barred from judgment by reason of equitable estoppel.
Laches is when the party that filed the lawsuit unreasonably delayed the filing and, as a result, caused prejudice to the other party by such delay. This is different from a statute of limitation; with laches, if the lender waits an unreasonable amount of time before starting the foreclosure, the court will not allow the lender to foreclose, even though the statute of limitations may not have expired.
If a lender is unethical, makes misrepresentations, acts illegally, or there is evidence of fraudulent conduct, then the equitable doctrine of “unclean hands” may apply and the lender would not be allowed to foreclose.
It is important to note that defenses based on the Fair Debt Collection Practices Act (FDCPA) are not applicable in commercial foreclosures. The FDCPA does not apply to commercial loans. 15 U.S.C. § 1692a.
This article is by no means an all-inclusive list of the defenses available in a commercial foreclosure. Moreover, depending on state law, the lender may be able to pursue a deficiency judgment based on the promissory note or any personal guaranty. If you are a commercial property owner facing foreclosure, please speak to a qualified attorney who can advise you what defenses are available in your particular situation, as well as provide options such as reorganizing through bankruptcy or negotiating a settlement with the lender.