As Chief Judge Steele in the Southern District of Alabama recently put it, “a veritable avalanche” of recent federal cases has found that Alabama law does not recognize a cause of action for negligence or wantonness in the servicing of a mortgage account. Borrowers’ claims for negligence and wantonness against mortgage servicers have been routinely dismissed under the weight of this precedent, but borrowers continue to assert these claims. Until now, the Alabama Supreme Court had not spoken definitively on the subject. In U.S. Bank National Association v. Shepherd, No. 1140376, — So. 3d — (Ala. Nov. 20, 2015), the Alabama Supreme Court squarely addressed the issue, holding that negligent and wanton mortgage servicing claims are not cognizable claims under Alabama law.
The underlying facts in Shepard are somewhat convoluted. Emily and Chester Shepherd owned three parcels of real property. In 2003, the Shepherds executed a mortgage with H&R Block with the intent to secure the mortgage with Parcel 1. The mortgage mistakenly indicated that the loan was secured by Parcel 2, but both the Shepherds and H&R Block agreed to proceed with the mortgage and correct the description later. The description was not corrected when H&R Block later assigned the mortgage to LaSalle Bank, who filed a substitute mortgage with a new description of the encumbered property—this time mistakenly describing Parcel 3. The Shepherds failed to make their mortgage payments, and LaSalle filed a notice of foreclosure on Parcel 2. Parcel 2 was sold in September 2007, and a deed was transferred to LaSalle describing Parcel 3. In the same month, H&R Block took possession of Parcel 1, installed new locks, and attempted to sell the property on multiple occasions between 2007 and 2011. In 2011, U.S. Bank National Association—who had succeeded LaSalle in interest to the 2003 mortgage—filed an action seeking a reformation and a declaration that U.S. Bank held proper title to Parcel 1. The Shepherds filed several counterclaims, including claims of wantonness and trespass. The trial court conducted a bench trial and found for the Shepherds on their claims, and declined to reform the 2003 mortgage on the purported basis that there can be no mutual mistake of contract when both parties are aware of the error. U.S. Bank appealed to the Alabama Supreme Court, which reversed and remanded.
The Court noted that both H&R Block and the Shepherds testified that they intended to encumber Parcel 1 with the 2003 mortgage, and that any statement in the mortgage to the contrary was clearly a mistake. Thus, the Court held that—under the unusual circumstances presented—reformation of the contract was appropriate even though all parties were aware of the mistake when the mortgage was executed. Similarly, because the intent of the parties was to encumber Parcel 1, H&R Block and its successors had a legal right to take possession of Parcel 1 when the Shepherds defaulted, so the Shepherds’ trespass claim failed.
Perhaps of most import to mortgage servicing litigation in Alabama, the Court held that the Shepherds’ wantonness claim failed because, among other reasons, Alabama law does not recognize a claim for wanton mortgage servicing. The Court noted that the relationship between a borrower and a lender with regard to the servicing and handling of mortgages is based on contract and that disputes arising from that relationship are more appropriately addressed through a breach of contract claim. The Court quoted Chief Judge Steele’s opinion in James v. Nationstar Mortgage, LLC, 92 F. Supp. 3d 1190, 1198–1200 (S.D. Ala. 2015), holding that James correctly stated Alabama law as it applies to claims alleging that lenders have acted wantonly with regard to servicing and handling mortgages. See id. (“The mortgage servicing obligations at issue here are a creature of contract, not of tort, and stem from the underlying mortgage and promissory note executed by the parties, rather than a duty of reasonable care generally owed to the public.”) Because the Shepherds agreed to dismiss their negligence claims, the Court did not specifically address Alabama law with respect to claims for negligent mortgage servicing, though the Court’s approval of the rationale set forth in James and related federal cases indicates that the Court would treat mortgage servicing claims rooted in negligence the same way as those rooted in wantonness.
Too often, borrowers needlessly amplify the scope of litigation by asserting wantonness claims in an attempt to turn a dispute based on the application of a simple mortgage provision into a vehicle for additional, punitive damages. Federal courts applying Alabama law have done much to curb this money grab in recent years; now, the weight of the Alabama Supreme Court has dealt an even larger blow to borrowers seeking to assert these types of claims.