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A recent decision by the Alabama Supreme Court requires a mortgage servicer’s strict compliance with the acceleration remedies notice provisions contained within a security instrument. Absent strict compliance, a foreclosure sale is potentially subject to being declared void, even if notice to the borrower satisfied key requirements by providing notice of a default under the mortgage, advises of the action required by the borrower to cure the default, provides a date not less than 30 days by which the default is to be cured, and further informs the borrower that the failure to cure the default may result in acceleration of all amounts due and sale of the property.

With regard to the underlying facts in the decision, the borrowers defaulted on their payment obligations under the security instrument. The security instrument contained standard language regarding notice and an opportunity to cure to be given by a lender before acceleration of the amounts due because of a breach. In that regard, Paragraph 22 of the security instrument contained language regarding “Acceleration Remedies.” In compliance with that Paragraph, the lender sent a letter to the borrowers notifying them of the intent to foreclose on the property and advising that the default could be cured by tendering funds in a specific amount to the lender. The letter further stated “[f]ailure to cure the delinquency within 30 days of the date of this letter may result in acceleration of the sums secured by the Deed of Trust or Mortgage and sale of the property.”

After the failure to cure, the lender sent the borrowers a notice of foreclosure sale, notifying them that the lender had elected to accelerate the debt and advising them of the foreclosure sale date. After publication of the scheduled foreclosure sale, the foreclosure sale took place. Because the borrowers failed to vacate the property, the lender filed an ejectment action. The borrowers filed an Answer to the ejectment claim and asserted certain defenses, including wrongful foreclosure and defective notice. The trial court entered summary judgment for the lender and the Alabama Court of Civil Appeals affirmed the entry of summary judgment.

The Alabama Supreme Court reversed the Court of Civil Appeals’ decision and, in doing so, held that the lender was required to strictly comply with the notice language contained in the Acceleration Remedies Paragraph (in contrast, the Alabama Court of Civil Appeals held that substantial compliance sufficed). While the lender had provided the borrowers with notice of their default, the opportunity to cure within 30 days, and, if not cured, advised that the lender may accelerate the sums due and sell the property, the borrowers focused on a claimed technical violation by the lender. In that regard, the notice from the lender advised the borrowers – “You have the right to reinstate your loan after legal action has begun. You also have the right to assert in foreclosure, the non-existence of a default or any other defense to acceleration and foreclosure.” The borrowers claimed, and the Alabama Supreme Court agreed, that the failure to use specific (essentially verbatim) language notifying the borrowers of “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” rendered the foreclosure void and ineffective to pass title to the purchaser. When compared against the language required by the Alabama Supreme Court, the only language missing from the lender’s notice was the term “court action.”

As a result, borrowers may now argue that a foreclosure sale is void if a lender fails to use “verbatim language” contained in a security instrument in providing notice of default and opportunity to cure. And, by doing so, one may wonder - does this outcome elevate form over substance – especially as it is undisputed that the security instrument itself notifies a borrower of the right to bring a court action to challenge any foreclosure? Regardless, for those operating in this area, a compliance audit of the language contained in a standard notice of intent to foreclose for strict compliance may be a worthwhile endeavor.

To read a copy of the Alabama Supreme Court’s decision, please click here.