Protecting Tenants At Foreclosure Act: Updates


The Protecting Tenants at Foreclosure Act provides protections to bona fide tenants who take possession of a dwelling prior to notice of a foreclosure.  A dwelling is a single family home, a duplex, triplex or four-plex, a mobile home, a condo or a co-op apartment. The law was passed in 2009, and then amended in 2010.  You can download a copy of the Act and read it for yourself.  It is short—only one page, with 720 words.

Prior to the amendment, it was unclear when “notice of a foreclosure” happened. For judicial foreclosure states, people thought it was probably when the lender filed the foreclosure lawsuit. In Alabama, it might mean when the first notice ran in the newspaper. Congress clarified this in 2010, and said “notice of the foreclosure” meant the date on which title changed hands into the new owner.  So, in Alabama any lease before the actual foreclosure deed is signed and delivered to the buyer comes under the Protecting Tenants at Foreclosure Act.  In other states, it might be when the judge enters an order transferring title.  Check with local attorneys on this subject.

The amendment also extended the Act through December 31, 2014.

It is still unclear whether the law applies to all residential properties, or just those with “federally related mortgages.”  The statute says it applies to all residential mortgages.  HUD says it applies to all residential mortgages.  One New York court has ruled that can’t possibly be what Congress intended, because it would make the statute unconstitutional. That court (discussed in more detail below) went through some fancy mental gymnastics to decide Congress meant to say only properties with federally related mortgages on residential properties.  I think, for the time being, we need to assume it applies to all residential properties, from single family homes up to four-plexes.

There is also some controversy about whether it applies to the first buyer at the foreclosure auction, or everyone else afterwards, including ORE purchasers. HUD says it applies to everyone who takes title after a foreclosure.  I think we need to assume that is the case, until a court rules otherwise.

In a nutshell, if someone enters into a lease on residential property before a foreclosure, then the new owner takes the property subject to the rights of the tenant.  If the written lease is for a specific term, the tenant gets to stay for that term, with one exception. If the new owner at the foreclosure auction intends to use the property as their principal residence, then the lease can be terminated on 90 days notice.  When there is no written lease, or when the tenancy is at-will, the tenant gets to stay at least 90 days.  The tenant cannot be the borrower, or his/her child, parent or spouse. The rent cannot be substantially less than market rent.  That’s it, folks.  We have to rely on court decisions for further guidance.

Here is a survey of all cases I could find interpreting the Act.  I’ve been able to find a grand total of 54 reported decisions.

The vast majority of decisions concern whether eviction lawsuits with PTFA issues can be filed in, or removed to, federal court. The lawyers in favor of federal jurisdiction argue that because the law is a federal law, federal courts have jurisdiction to interpret the law.  The courts disagree with them. Without exception, every single case to address this issue has held there is no federal jurisdiction.  This is true even when Fannie Mae is the new owner after the foreclosure.  Federal National Mortgage Association v. Hammond, 2011 U.S.  Dist. LEXIS 67321 (C.D. Cal., June 22, 2011)

Strangely, the Eleventh Circuit (which is the appellate court over the federal courts in Alabama, Florida and Georgia) ruled on a Protecting Tenants at Foreclosure Act case without ever mentioning whether or not it had jurisdiction. I suspect the reason is because it was not the normal eviction lawsuit.  Instead, the tenant filed a declaratory relief action against the out-of-state defendant/new owner, which would ordinarily involve federal jurisdiction.  That case was Joel v. HSBC Bank, USA, ___ F.3d ____, 2011 U.S. App. LEXIS 6707 (11th Cir. 2011)

The remaining cases deal with a variety of issues.

Bank of America v. Owens, 28 Misc. 3d 328, 903 NYS2d 677 (City Court of New York, 2010) involved a bank-owned property. The bank sent notices to vacate to the tenants, along with a questionnaire. Answers to the questions would help the bank decide if they were bona fide tenants or not.  If a tenant failed to provide the requested information, the bank assumed they were NOT bona fide, and started eviction proceedings. The court held that was not allowed.  It held that under the PTFA, the new owner has the burden of proving a tenant is not bona fide.  It’s a little like “innocent until proven guilty,”  except, the rule is “bona fide until proven otherwise.” When Bank of America sent out a questionnaire and said if tenants did not respond in five days, it would assume they were not bona fide, then BofA illegally tried to shift the “burden of proof” to the tenant. In other words, BofA was doing the equivalent of trying to change the rules to “guilty until proven innocent.” That is not allowed. As a result, the eviction was illegal.

A Georgia court has ruled that rent 30% less than market was “substantially less than fair market rent” and so was not a bona fide lease under the Act.  Harper v. J.P. Morgan Chase Bank National Association, 305 Ga. App. 536, 699 S.E.2d 854 (2010)

The case of Aurora Loan Services v. John Doe, 2010 Conn. Super. LEXIS 2283 (September 22, 2010) involved some pretty sneaky stuff.  In Connecticut, a landlord must supply the tenant with an “unequivocal” notice to quit before it can file a lawsuit.  Aurora became the property owner after the foreclosure. It sent the tenant a package of documents. The first one was the PTFA notice. The second was the Notice to Quit. The third was the PTFA Qualifications.  The court held that you can’t just “shoe-horn” the Notice to Quit in between two other documents, which is likely to be overlooked or cause confusion. As a result, the Notice to Quit was defective, and the lawsuit should have been thrown out. Of course, Aurora was allowed to start all over again with the process, but it lost a lot of valuable time and legal fees by trying to be sneaky. Although that was a Connecticut case, an Alabama court has held that “While no particular form of notice to quit, to terminate the tenancy, is provided by statute here, yet we are clear to the point that such a notice should at least be unequivocal in its expression of an intention to terminate the relation at the end of one of the periods whereby the rental is measured.”  Ross v. Gray, 155 Ala. 250, 46 So. 564 (1908)

In another case, a bank in Arizona tried to bluff a tenant into leaving.  Bank of New York Mellon v. de Meo, 607 Ariz.  Adv. Rep. 33 (May 3, 2011). In that state, you must give a tenant a 5-day notice to vacate if they are no longer entitled to possession. If the tenant does not leave, the landlord can then file eviction proceedings.  Bank of New York became the owner of the property after a foreclosure.  The tenant was on a month-to-month lease, and so was entitled to 90 days notice to vacate under the PTFA.  The exact wording of the Act is real important.  It says the notice to the tenant must be given “at least 90 days before the effective date of such notice.”  So, in effect, PTFA says your notice must say something along the lines of “This is your 90 days notice. You must vacate in 90 days or we are going to sue your fanny for possession.”  Bank of New York’s bluff was to send a notice that said, basically, “This is your five days notice. You must vacate in five days.”  THEN, Bank of New York waited slightly more than 90 days before suing. It said that was the same thing as giving 90 days notice. I’m paraphrasing, but the court said, “NO siree! You gave five days notice and then waited 90 days. That’s not the same thing as giving 90 days notice.”  As a result, the court ruled against the owner/bank.  The notice had to say the tenant had 90 days to vacate.

One case raised a constitutional issue that survived long enough to be discussed by the court. That was Collado v. Boklari, 892 N.Y.S.2d 731, 2009 N.Y. Misc. LEXIS 3023 (November 9, 2009).  Collado, the new owner after a foreclosure, did not want to be stuck with a tenant.  He argued that the PTFA was unconstitutional. He reasoning was because the law says it applies “In the case of any foreclosure on a federally related mortgage loan or on any dwelling or residential real property.”  The word “or” is not bolded or underlined in the statute. I added that, to point out how important it is.

I’m paraphrasing here, but Collado said, “That’s preposterous that the federal government gets to dictate what happens when there is a foreclosure on any dwelling or residential real property.  Those things have nothing to do with the federal government. I understand that if the mortgage is a “federally related mortgage” loan, then the feds have all sorts of powers. But, NOOOOOOOO, they weren’t content to stick their fingers into their own mortgages, they wanted to mess things up for everybody. That’s not legal, and it’s unconstitutional.  As a result, the entire statute should be struck down and nobody should have to comply with it.

Well, the court did some fancy footwork to get around that argument, because it was a good one.  The court said, (again, I’m paraphrasing) “Well, we have to assume that Congress does not do stupid things. [I say: “HAH! That’s pretty funny!”]  If Congress meant to pass a law worded like the PTFA, it would definitely be unconstitutional, so that would be stupid to pass such as law. Let’s see if we can figure out what Congress meant to do, so the statute won’t be unconstitutional.  Oh, we know!  Maybe that word “or” is just a typo. Maybe they didn’t mean to put it in there at all! Yep, that’s right. If we just take out the “or” then the statute would be constitutional.  Let’s do that, for the sake of argument.  Now, the statute will read that it applies ‘In the case of any foreclosure on a federally related mortgage loan on any dwelling or residential real property.’ That’s perfectly legal for Congress to pass a law that says that.  So, we’ll assume that’s what they meant to do, and we therefore find the statute is constitutional and applies in this situation.”

I see where the court is coming from, but we just can’t go around assuming nobody in Congress is stupid and Congress never passes stupid laws. The courts have to deal with what Congress passes, and can’t just tidy things up for them. I think the law is unconstitutional.

That’s the roundup of court decisions on the PTFA.  If you hear of other decisions, or arguments, please let me know.