Foreclosure Defense: Failure To Mitigate Damages

What Is This Foreclosure Defense As A General Concept?

It is the duty of someone who has been wronged to make reasonable efforts to limit the resulting harm. When a person fails to make loan payments, the loan servicer must work to mitigate their damages. In the case of a foreclosure, loan servicers and borrowers must work together to avoid foreclosure, or to minimize loss as much as possible. If there is a failure to mitigate damages, the plaintiff cannot be compensated for the damages that could have been avoided by such efforts.

What Is The Specific Rule For It From The Caselaw For The Foreclosure Defense Called Failure To Mitigate Damages?

According to Restatement (Second) of Contracts § 350, “damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.”

How Would Someone Spot Failure To Mitigate Damages In Their Own Situation?

Loan servicers have a duty to mitigate damages by considering applications for a loan modification. These applications must be presented to borrowers. Additional loss mitigation options include forbearance agreements and repayment plans. If any of these things have not been offered or considered, failure to mitigate damages may be present.

Additionally, the loan servicer must contact a client by phone no later than 36 days after missed payment to discuss loss mitigation options. After 45 days, the servicer must also contact the client in writing about loss mitigation options. If this does not occur, the failure to mitigate damages could be present.

Practice Pointer In Applying Failure To Mitigate Damages

When presenting an offer to the other side, try to keep it as clean as possible and specific to money.  For example, if presenting a short sale to the bank, present the offer you received from the potential buyer and ask the bank to accept it.  Don’t add a request to waive a deficiency or to do anything extra for you.  The buyer could still have financing and appraisal contingencies in the contract with you, but your efforts directly to the bank should be limited and specific to the dollar amount.  In this way, you can go to court and say, “This sale would have gone through with the buyer meeting all contingencies if the bank just accepted it.”  Your case will be harder to make if the bank could turn around and say, “Yes, but you also wanted a waiver of deficiency and $5,000 to move, so that is why we passed.”

Another thing to keep in mind is that the bank cannot condition its obligations to mitigate its damages by requiring you to do something first.  For example, it cannot require you first complete a loss mitigation application or give it all your financials before it considers your mitigation offer.  The law places no requirement on you to do any of those things.

The concept of mitigate of damages goes to the plaintiff taking action to limit the defendant’s exposure to financial liability.  If you present the bank with an offer for a $95,000 sale on a $100,000 note, whether or not you give the bank financials is irrelevant to the bank’s obligation to accept the mitigation.  It may sue you later for the $5,000, but that is its remedy at law – not for you to jump through paperwork hoops.

The bank may refuse to consider your mitigation offer unless you give it financials, but that is the bank’s problem in front of the judge – not yours.  If anything, the bank’s refusal to mitigate its damages unless you give it financial hardship documentation goes to prove your case.

Finally, if you are set on asking the bank to waive any potential deficiency (a wise move), as the bank for that after you submit your short sale offer.  If the bank refuses the offer, then you have established your mitigation defense.  If the bank accepts your offer, there is no harm in then also asking for a deficiency waiver.

How Has It Been Applied To Foreclosures In Cases Where The Consumer Successfully Used The Foreclosure Defense Called Failure To Mitigate Damages?

In United Central Bank (plaintiff) v. Bhavani Fruit and Vegetable LLC (Bhavani Fruit) (defendant), Bhavani fruit defaulted on two notes, causing United Central Bank to file a complaint for foreclosure. However, during the foreclosure action, it was claimed that the plaintiff failed to use a rent receiver to claim rent owed, which had a monthly value of $18,000. The final judgment in foreclosure was $5,145,464 to the plaintiff, but the judge granted only $195,309, based on the plaintiff’s failure to mitigate damages by not using or trying to appoint a rent receiver to collect rent, among other factors. The plaintiff was not entitled to the money it could have received if it chose to use a rent receiver. The judge’s basis of this decision was there was an obligation of the plaintiff to use a rent receiver, which was provided by a section of an executed assignment of rents and leases for one of the defendant’s properties. However, the appeal court ruled that the judge erred in making this judgment and the assignment made no such obligation to the plaintiff. Additionally, on appeal, the judges stated “the record must be more fully developed on the issue of whether the plaintiff failed to mitigate its damages by not timely filing suit or for any other reasonable basis.”

Frenchtown Square Partnership v Lemstone, Inc – Frenchtown leased a storage space to Lemstone for a 10-year period. 6 months prior to the expiration of the lease Lemstone stopped making rent payments and vacated the property. Lemstone argued that it’s reasoning for vacating was due to competition that inhibited its ability to make the rent payments under the lease. Frenchtown sued Lemstone for rent due, as well as fees and taxes. Lemstone argued that Frenchtown failed to mitigate its damages by not reletting the property once Lemstone vacated. Initially, the trial court ruled in favor of Frenchtown; however, the appeal court determined that Frenchtown did have a duty to mitigate damages. The case then went to the Supreme Court of Ohio, which affirmed the appellate court’s decision. It determined that Frenchtown did indeed have a duty to make reasonable efforts to mitigate damages. The court uses Dennis v. Morgan as reasoning, which states “landlords have a duty, as all parties to contracts do, to mitigate their damages caused by a breach…Their efforts to do so must be reasonable, and the reasonableness should be determined at the trial level.” Real property leases adhere to the contract-law principle of mitigation. Unless there is a specific provision in a contract contrary to a mitigation duty, the duty to mitigate damages applies to all leases.