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From Banking and Finance Law Daily, February 7, 2014

Tenants have no right to enforce federal law enacted to protect tenants in foreclosure

By Richard A. Roth, J.D.

There is no private right of action allowing tenants to enforce the Protecting Tenants in Foreclosure Act (PTFA), according to the U.S. Court of Appeals for the Sixth Circuit. However, the federal law preempts state laws that provide tenants with less protection and provides a standard that can be asserted by the tenants in a suit claiming wrongful eviction under state law (Mik v. Freddie Mac, Feb. 7, 2014, Gibbons, Circuit Judge).

The PTFA gives legitimate tenants a right to remain in a residence after a mortgage foreclosure under certain conditions. According to the court, tenants are entitled to 90 days’ notice to vacate and, in some cases, tenants with a lease are allowed to retain possession until the end of the lease term (12 U.S.C. §5220 note).

According to the tenants, they had a lease with a right to purchase the residence. However, the owner fell behind in her mortgage payments, and the lender moved to foreclose. The tenants were not named in the foreclosure suit, and the lender might not have known of the lease until after the foreclosure sale. The lender was the successful bidder at the sale and subsequently assigned its interest in the property to the Federal Home Loan Mortgage Corporation.

Despite considerable back-and-forth between the tenants and Freddie Mac’s law firm, during which the tenants tried to arrange a delay so they could buy the home, Freddie Mac proceeded to have them evicted. Sheriff’s deputies removed the tenants’ personal property from the home over the tenants’ objections and left it in the front yard. The tenants claimed that they suffered more than $38,000 in losses when the property was damaged by rain.

Consumers’ claims. After later completing their purchase of the home, the tenants sued Freddie Mac, claiming wrongful eviction, denial of due process, and outrageous infliction of emotional distress in violation of Kentucky law. The consumers cited the provisions of PTFA in support of their state law claims but did not request enforcement of the act or claim damages under it.

Nevertheless, the federal district court dismissed the suit after deciding that PTFA does not provide a private right of action for violations and was the only basis for the tenant’s claims. The tenants appealed.

PTFA enforcement. The fact that a federal law has been violated in a way that harms someone does not necessarily mean the injured person can sue to enforce that law, the appellate court began. Congress must create a private right of enforcement. There is nothing in PTFA that expressly creates a private right of action for tenants, the court said.

While there are several factors that are relevant when considering whether Congress implied a private right of action, the most important is whether an intent to do so is apparent, the court continued. No such intent is present in PTFA.

According to the court, one indication that Congress did not intend to permit private enforcement is that PTFA focuses on the conduct of those who acquire foreclosed properties, not on the tenants. The act says that a buyer takes the property subject to a tenant’s rights, and limits the buyer’s rights in the process.

PTFA is part of the Emergency Economic Stabilization Act, the court then pointed out, which was intended to stabilize the nation’s financial system. There was no indication that PTFA had any different purpose. The court also noted that EESA explicitly created a private right of action for persons harmed by actions of the Treasury Secretary, which implied that the absence of such a provision in PTFA was intentional.

Preemption. However, the appellate court did not leave the tenants with no possible remedy, allowing them to proceed with their wrongful eviction claims.

First, the court rejected Freddie Mac’s assertion that the foreclosure terminated the tenants’ lease under Kentucky law. Under Kentucky common law, Freddie Mac apparently did have the right to evict the tenants, the court conceded. However, PTFA preempted that common law, the court decided.

The purpose of PTFA is to ensure that tenants are given notice of foreclosures and are not inappropriately evicted, the court noted. That purpose could not be accomplished if state laws permit evictions that do not comply with the federal law’s standards. As a result, state laws, such as those in Kentucky, that give consumers less protection are in conflict with the federal law and are preempted.

State law claims. Freddie Mac’s argument that PTFA could be used as a defense in an eviction suit but could not be used offensively also failed. The fact that the act does not create a private right of action does not mean that it eliminates state causes of action. If state law claims for wrongful eviction were not permitted due to the effects of PTFA, landlords could ignore the federal law with impunity, the court said.

The facts described by the tenants outlined a wrongful eviction under Kentucky law, the court then said. The tenants claimed that they were in possession of the home under a valid lease and that Freddie Mac evicted them in violation of their rights under the lease and PTFA. That was sufficient to state a claim.

The court affirmed the dismissal of the other two state causes of action. Even if the tenants could sue for a violation of Kentucky’s civil procedure rules—which was not clear—Freddie Mac was not a party to the eviction suit and would not be responsible for the violation. Neither was Freddie Mac a government actor that could be liable for violations of the tenants’ due process rights, the court said

The claim for outrageous infliction of emotional distress failed because Freddie Mac’s actions, while “unfortunate,” generally complied with Kentucky law and were not “atrocious,” the court concluded.

The case is No. 12-6051.

Attorneys: Alan W. Roles (Coleman, Roles & Associates) for Paul F. Mik, Lee Ann Mik, and PALS Enterprises, LLC. Rick D. DeBlasis (Lerner, Sampson & Rothfuss) for the Federal Home Loan Mortgage Corporation.

Companies: CITI Mortgage, Inc.; Federal Home Loan Mortgage Corporation; PALS Enterprises, LLC

MainStory: TopStory GovernmentSponsoredEnterprises Mortgages Preemption KentuckyNews MichiganNews OhioNews TennesseeNews

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