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Record No. 141080.

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Summary of Opinion — Edwin M. Ramos, et al. v. Wells Fargo Bank, N.A., et al. (Record No. 141080)

Factual and Procedural Background

Appellants Edwin M. Ramos and Evelyn S. Gill brought suit challenging the foreclosure sale of their residence. Their loan to purchase the residence was insured by the Federal Housing Administration, and the purchase-money deed of trust incorporated certain HUD regulations, including 24 C.F.R. § 203.604. Appellants alleged that, after Wells Fargo received assignment of their loan, Wells Fargo failed to comply with 24 C.F.R. § 203.604 by not having, or attempting to have, a required "face-to-face meeting" following appellants' payment default. Appellants contended that because the face-to-face meeting was a condition precedent to foreclosure, Wells Fargo's authority to call a default had not accrued and the foreclosure it initiated was unlawful.

Procedurally, appellants' original and first amended complaints were dismissed on demurrers with leave to amend. They then filed a second amended complaint asserting a single claim for breach of contract and seeking compensatory damages and rescission of the foreclosure sale. Wells Fargo filed a demurrer to the second amended complaint, asserting that appellants failed to state a cause of action for breach of contract for several reasons (discussed below). The circuit court sustained the demurrer and dismissed the second amended complaint with prejudice. Appellants appealed, arguing the circuit court erred. The appellate court affirmed the circuit court's judgment.

Legal Issues Presented

Whether the second amended complaint sufficiently pleaded a breach of contract claim based on an alleged failure to comply with 24 C.F.R. § 203.604 (i.e., whether appellants alleged the elements of breach, including causation and injury).
Whether appellants adequately pleaded damages (including compliance with the Rule 3:2(c)(ii) ad damnum requirement) to support a claim for money relief.
Whether rescission of the foreclosure sale is available where the foreclosure sale was completed (auctioneer cried the property to the highest bidder) but settlement/closing had not yet occurred at the time suit was filed, absent allegations of fraud, collusion, or gross inadequacy of the sale price.
Whether the circuit court erred in sustaining a demurrer to the second amended complaint and dismissing it with prejudice.

Arguments of the Parties

Appellants' Arguments

They relied on HUD regulation 24 C.F.R. § 203.604, incorporated into their deed of trust, and asserted that this regulation creates a condition precedent to foreclosure requiring a face-to-face meeting after default; Wells Fargo's failure to hold such a meeting meant it lacked authority to call the default and thus the foreclosure was unlawful.
They sought both compensatory damages and rescission of the foreclosure sale.
On appeal, they contended the circuit court erred in sustaining the demurrer to their second amended complaint.
They cited prior Virginia cases (notably Squire and Mathews) holding that 24 C.F.R. § 203.604 can create a condition precedent to foreclosure under deeds of trust that incorporate the regulation.

Appellees' Arguments (Wells Fargo's Demurrer Grounds)

Appellants failed to identify the injury caused by any contractual breach.
Appellants failed to allege any specific damages incurred and failed to include an ad damnum clause stating the amount of damages sought, in violation of Rule 3:2(c)(ii).
Appellants failed to allege facts indicating the foreclosure sale was unconscionable, a product of fraud, or otherwise voidable, and thus rescission was not a proper equitable remedy.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Assurance Data, Inc. v. Malyevac, 286 Va. 137, 747 S.E.2d 804 (2013)	Standard of review on demurrer: accept as true all properly pleaded facts and reasonable inferences; review de novo.	Used to state the applicable demurrer review standards and to support de novo review of the circuit court's sustaining of the demurrer.
Dunn, McCormack & MacPherson v. Connolly, 281 Va. 553, 708 S.E.2d 867 (2011)	Demurrer review principles (cited with Assurance Data for de novo review).	Reinforced the standard for reviewing a demurrer and acceptance of pleaded facts for purposes of review.
Murayama 1997 Trust v. NISC Holdings, LLC, 284 Va. 234, 727 S.E.2d 80 (2012)	Clarification that a demurrer does not admit the pleader's legal conclusions.	Applied to explain limitations on what is accepted when reviewing facts on demurrer.
Arogas, Inc. v. Frederick Cnty. Bd. of Zoning Appeals, 280 Va. 221, 698 S.E.2d 908 (2010)	Demurrer does not admit legal conclusions (same principle as Murayama).	Cited to support that legal conclusions are not treated as admitted when evaluating sufficiency of pleadings.
Concerned Taxpayers v. County of Brunswick, 249 Va. 320, 455 S.E.2d 712 (1995)	Acceptance of properly pleaded facts and reasonable inferences at demurrer stage.	Used to support the court's approach to facts and inferences in demurrer review.
Filak v. George, 267 Va. 612, 594 S.E.2d 610 (2004)	Elements of a breach of contract claim (legally enforceable obligation, breach, and injury/damage caused by breach).	Provided the elements the court required appellants to plead and helped frame the insufficiency analysis (lack of alleged injury/damage).
Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014)	Held that 24 C.F.R. § 203.604 can create a condition precedent to foreclosure when incorporated into a deed of trust; potential exceptions to rescission's inapplicability discussed.	Appellants relied on Squire to support that the HUD regulation created a condition precedent; the court referenced Squire for both the condition-precedent proposition and the list of exceptions (fraud, collusion, gross inadequacy) to rescission's inapplicability.
Mathews v. PHH Mortgage Corp., 283 Va. 723, 724 S.E.2d 196 (2012)	Also held that 24 C.F.R. § 203.604 created a condition precedent to foreclosure when incorporated into the deed of trust.	Appellants relied on Mathews along with Squire to support their breach theory based on the HUD regulation.
Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 671 S.E.2d 132 (2009)	Reinforces that a breach plaintiff must allege injury or damage caused by the breach.	Used to support the proposition that appellants must plead facts showing damages caused by the alleged breach.
Feldman v. Rucker, 201 Va. 11, 109 S.E.2d 379 (1959)	Principle that a foreclosure sale contract is consummated when the auctioneer cries the property to the highest bidder; trustee's remaining power is to collect purchase money and convey deed.	Applied to conclude that the foreclosure sale to Potomac was consummated at auction and thus rescission was not available.
Powell v. Adams, 179 Va. 170, 18 S.E.2d 261 (1942)	Quoted in Feldman for the same sale-consummation principle.	Relied on via Feldman to support the court's conclusion that the sale was consummated at the auctioneer's call.
Jones v. Jones, 249 Va. 565, 457 S.E.2d 365 (1995)	Example precedent cited in Squire concerning potential exceptions to relief by rescission (e.g., fraud, collusion).	Referenced in the opinion's discussion of exceptions that could permit rescission; noted that such allegations were not present here.
Musgrove v. Glasgow, 212 Va. 852, 188 S.E.2d 94 (1972)	Cited with other cases as illustrating exceptions that might permit rescission.	Referenced in the list of potential exceptions to rescission's inapplicability; no relevant allegations were pleaded.
Cromer v. De Jarnette, 188 Va. 680, 51 S.E.2d 201 (1949)	Cited among authorities discussing grounds that may permit equitable relief from a foreclosure sale.	Included in the opinion's recitation of exceptions; the court noted appellants did not plead such facts.
Schweitzer v. Stroh, 182 Va. 842, 30 S.E.2d 689 (1944)	Cited regarding circumstances where relief from a foreclosure sale might be granted.	Part of the Squire-cited body of cases describing exceptions to the general rule against rescission after sale consummation; not shown to be pleaded here.
Dunn v. Silk, 155 Va. 504, 155 S.E. 694 (1930)	Cited as another example of cases addressing circumstances warranting equitable relief from foreclosure.	Included in the list of potential exceptions; appellants did not allege such grounds.
Dean v. Dearing, 263 Va. 485, 561 S.E.2d 686 (2002)	Statement that a complaint failing to allege facts upon which relief can be granted is insufficient to withstand a demurrer.	Quoted to summarize that appellants' second amended complaint did not satisfy pleading requirements and was insufficient to withstand demurrer.

Court's Reasoning and Analysis

The court followed the standard demurrer review rules: accept as true all properly pleaded facts and reasonable inferences but not legal conclusions, and review the circuit court's sustaining of a demurrer de novo. The court identified the elements of a breach of contract claim (enforceable obligation, breach, and injury/damage caused by the breach) and applied those elements to the pleadings.

The court recognized appellants' reliance on 24 C.F.R. § 203.604 (and on Squire and Mathews), which the court acknowledged can create a condition precedent to foreclosure when incorporated into a deed of trust. The court assumed, without deciding, that appellants had alleged sufficient causation (i.e., that Wells Fargo's breach could be a cause of foreclosure). Even so, the court concluded appellants failed to plead the required allegations supporting the forms of relief they sought:

Money damages: The second amended complaint contained no factual allegations of any injury or damage sustained because of Wells Fargo's alleged breach, and it lacked the ad damnum clause stating the amount of damages sought as required by Rule 3:2(c)(ii). The court therefore found pleading for monetary relief insufficient.
Rescission: Although appellants alleged the property was sold at foreclosure to Potomac as the highest bidder and that no closing had occurred by the time the suit was filed, the court held under Virginia law that the contract of sale is consummated when the auctioneer cries the property to the highest bidder (citing Feldman and Powell). Once the sale was consummated at auction, rescission was not available. The court noted that recognized exceptions to this rule—allegations of fraud, collusion with the purchaser, or gross inadequacy of sale price shocking the conscience—were not pleaded in this case.

Because appellants' complaint did not allege facts showing injury or damage or allege the exceptional circumstances that might permit rescission, the court concluded the pleading failed to state a cause of action on which the requested relief could be granted, and the demurrer was properly sustained.

Holding and Implications

Holding: The Court affirmed the judgment of the circuit court sustaining the demurrer to appellants' second amended complaint and dismissing it with prejudice. In the opinion's terminology, the circuit court did not err in sustaining the demurrer and the appellate court affirmed.

Direct consequences and procedural outcomes:

The second amended complaint was dismissed with prejudice.
The appellants were ordered to pay two hundred fifty dollars ($250) in damages to the appellees.
The order was to be certified to the circuit court and published in the Virginia Reports.

Broader implications: The opinion applied existing Virginia precedent concerning demurrer standards, the elements of breach of contract, the effect of HUD regulation 24 C.F.R. § 203.604 when incorporated into deeds of trust (as recognized in Squire and Mathews), and Virginia law concerning the consummation of foreclosure sales (Feldman and Powell). The court did not state that it was establishing a new rule of law; rather, it applied existing precedent to conclude the pleading was insufficient. No new precedent was announced by this opinion beyond its application of established authorities.

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Edwin M. RAMOS, et al., Appellants, v. WELLS FARGO BANK, NA, et al., Appellees.

Opinion

Upon consideration of the record, briefs, and argument of counsel, the Court is of the opinion that the circuit court did not err in sustaining a demurrer to the second amended complaint of appellants, Edwin M. Ramos and Evelyn S. Gill, against appellees, Wells Fargo Bank, N.A. (“Wells Fargo”), ALG Trustee, LLC (“ALG”) and Potomac Relocation Services, LLC (“Potomac”). Therefore, the Court will affirm the judgment of the circuit court.

Appellants filed this action challenging the foreclosure sale of their residence. They claimed that Wells Fargo wrongfully initiated the foreclosure under the deed of trust securing the promissory note for their loan to purchase the property. After their original and first amended complaints were dismissed on demurrers, with leave to amend, appellants filed the second amended complaint asserting a single claim for breach of contract.

Appellants allege in the second amended complaint as follows: The loan to purchase their residence was insured by the Federal Housing Administration. Certain federal Department of Housing and Urban Development (“HUD”) regulations were incorporated into the accompanying purchase money deed of trust, including 24 C.F.R. § 203.604. This regulation sets forth requirements for the acceleration of a loan and subsequent foreclosure in the event of a borrower's payment default. According to the appellants, after it received the assignment of appellants' loan, Wells Fargo failed to comply with this regulation by not having, or attempting to have, a “face-to-face meeting” with appellants following their payment default. Because this meeting was a condition precedent to foreclosing on their property, appellants theorized that Wells Fargo's “authority to call a default had not accrued” and thus the foreclosure it initiated was unlawful. Furthermore, while Potomac was the highest bidder at the foreclosure sale, settlement on the sale had not yet taken place. ALG, as the substitute trustee, could therefore refund Potomac's security deposit and release Potomac from its purchase. Based on these allegations of a breach of contract, appellants asked for compensatory damages and rescission of the foreclosure sale.

Wells Fargo filed a demurrer to the second amended complaint, asserting that appellants did not state a cause of action for breach of contract because, among other things, they (i) failed to identify the injury caused by any contractual breach; (ii) failed to allege any specific damages incurred and to include an ad damnum clause stating the amount of damages sought; and (iii) failed to allege facts indicating that the foreclosure sale was unconscionable, a product of fraud, or otherwise voidable, thus negating rescission as an equitable remedy. The circuit court sustained the demurrer and dismissed the second amended complaint with prejudice. On appeal, appellants argue that the circuit court erred in this ruling.

In reviewing a circuit court's decision sustaining a demurrer, we address the same issue that the circuit court addressed: whether the facts alleged in a complaint are legally sufficient to state a cause of action upon which the requested relief may be granted. Assurance Data, Inc. v. Malyevac, 286 Va. 137, 143, 747 S.E.2d 804, 807 (2013) ; Dunn, McCormack & MacPherson v. Connolly, 281 Va. 553, 557, 708 S.E.2d 867, 869 (2011). Like the circuit court, we accept as true all facts properly pleaded and all reasonable inferences that may be drawn from those facts. Assurance Data, 286 Va. at 143, 747 S.E.2d at 807 ; Concerned Taxpayers v. County of Brunswick, 249 Va. 320, 323, 455 S.E.2d 712, 713 (1995). A demurrer, however, does not admit the correctness of the pleader's legal conclusions. Murayama 1997 Trust v. NISC Holdings, LLC, 284 Va. 234, 245, 727 S.E.2d 80, 86 (2012) ; Arogas, Inc. v. Frederick Cnty. Bd. of Zoning Appeals, 280 Va. 221, 224, 698 S.E.2d 908, 910 (2010). Because this presents an issue of law, we review the circuit court's decision de novo. Assurance Data, 286 Va. at 143, 747 S.E.2d at 808 ; Dunn, McCormack & MacPherson, 281 Va. at 557, 708 S.E.2d at 869.

“The elements of a breach of contract action are (1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation.” Filak v. George, 267 Va. 612, 619, 594 S.E.2d 610, 614 (2004).

Here, appellants rely upon Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014), and Mathews v. PHH Mortgage Corp., 283 Va. 723, 724 S.E.2d 196 (2012), in asserting their breach of contract action. In those cases, we held that the subject HUD regulation, 24 C.F.R. § 203.604, created a condition precedent to foreclosure under the respective Virginia deeds of trust at issue, both of which incorporated the regulation. Appellants allege that Wells Fargo breached the present deed of trust, which likewise incorporated the regulation, by failing to conduct a face-to-face meeting with appellants, as the regulation requires, before initiating foreclosure on their property.

We assume without deciding that appellants have made sufficient allegations of causation for their breach of contract action. Nonetheless, we conclude that appellants have failed to set forth allegations supporting their requests for relief in the form of both money damages and rescission of the foreclosure sale.

As indicated above, an essential element in a breach of contract action is that the defendant's breach of a contractual obligation caused injury or damage to the plaintiff. Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 154, 671 S.E.2d 132, 135 (2009) ; Filak, 267 Va. at 619, 594 S.E.2d at 614. Accordingly, the plaintiff must allege facts setting forth the injury or damage incurred as a result of defendant's breach. See Squire, 287 Va. at 518, 758 S.E.2d at 61 (holding plaintiff sufficiently alleged damages resulting from foreclosure sale conducted in breach of deed of trust based on lender's failure to conduct face-to-face meeting required by HUD regulation).

In the second amended complaint, appellants fail to set forth a single factual allegation of any injury or damage they incurred as a result of Wells Fargo's alleged breach. And their second amended complaint contains no ad damnum clause stating the amount of any damages claimed, in violation of Rule 3:2(c)(ii) (“Every complaint requesting an award of money damages shall contain an ad damnum clause stating the amount of damages sought.”).

As to rescission, appellants allege that after defaulting on their loan Wells Fargo and ALG initiated the foreclosure sale in breach of the deed of trust, and that their property was then sold at the foreclosure sale to Potomac as the highest bidder. However, as appellants further allege, no closing on the sale had occurred at the time they filed the present action. Appellants point to this allegation to argue that, absent the closing, the foreclosure sale can still be “unwound,” i.e., rescinded, by this action. That is not so under Virginia law.

Upon foreclosure under a Virginia deed of trust, “ ‘[t]he contract of sale [is] consummated when the auctioneer crie[s] the property out to the person making the highest and last bid. The only power remaining in the trustees, so far as the purchaser [is] concerned, [is] to collect the purchase money and execute a proper deed conveying such property and title as had been conveyed to [the purchaser].’ ” Feldman v. Rucker, 201 Va. 11, 21, 109 S.E.2d 379, 386 (1959) (quoting Powell v. Adams, 179 Va. 170, 174–75, 18 S.E.2d 261, 263 (1942) ). Therefore, because the sale of the property to Potomac was so consummated, appellants are not entitled to rescission of the foreclosure sale.

As we addressed in Squire, potential exceptions to the inapplicability of rescission as a remedy in the present context would include cases involving fraud, collusion with the purchaser, and a foreclosure sale price of such “gross inadequacy” that it “shock[s] the conscience” of the court. 287 Va. at 519, 758 S.E.2d at 61–62 (citing Jones v. Jones, 249 Va. 565, 573, 457 S.E.2d 365, 370 (1995) Musgrove v. Glasgow, 212 Va. 852, 854, 188 S.E.2d 94, 96 (1972); Cromer v. De Jarnette, 188 Va. 680, 687–88, 51 S.E.2d 201, 204 (1949); Schweitzer v. Stroh, 182 Va. 842, 848, 30 S.E.2d 689, 692 (1944); Dunn v. Silk, 155 Va. 504, 509, 155 S.E. 694, 695 (1930)). In this case, no such allegations have been made.

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In sum, appellants' second amended complaint “does not satisfy the pleading requirement of alleging facts upon which relief can be granted” and is thus “insufficient to withstand a demurrer.” Dean v. Dearing, 263 Va. 485, 490, 561 S.E.2d 686, 690 (2002).

For these reasons, we affirm the judgment of the circuit court sustaining Wells Fargo's demurrer to the second amended complaint and dismissing it with prejudice. The appellants shall pay to the appellees two hundred fifty dollars damages.This order shall be certified to the said circuit court and shall be published in the Virginia Reports.

Ramos v. Wells Fargo Bank, NA