Sibert v. Wells Fargo Bank, N.A.: Timing Is Everything Under the Servicemembers Civil Relief Act

As the old saying goes, “Timing is everything.”  Borrower Richard Sibert certainly found that out in the United States Court of Appeals for the Fourth Circuit’s July 17, 2017 opinion in Sibert v. Wells Fargo Bank, N.A.

In May of 2008, while Mr. Sibert was serving in the United States Navy, he and his wife obtained a loan from Advance Mortgage to purchase a Virginia residence.  Advance Mortgage later sold the loan the Wells Fargo.

In 2009, after Mr. Sibert was discharged from the Navy, he and his wife defaulted in their loan payments.  Wells Fargo notified them that it intended to sell their home at a non-judicial foreclosure sale as permitted under Virginia law.  Before the sale occurred, Mr. Sibert enlisted in the United States Army.  While Mr. Sibert was serving in the Army, Wells Fargo proceeded with the foreclosure sale as scheduled.

After the foreclosure sale, Mr. Sibert filed suit to have the foreclosure sale declared invalid.  Mr. Sibert alleged that Wells Fargo had violated the Servicemembers Civil Relief Act (the “SCRA”).  The SCRA prohibits a foreclosure sale of property owned by a borrower “during, or within one year after, the period of the servicemember’s military service” without a court order if the obligation being enforced by foreclosure “originated before the period of the servicemember’s military service.”  Since Wells Fargo had sold his property without a court order while he was in military service to enforce an obligation incurred before he enlisted in the Army, Mr. Sibert thought that he had an open and shut case.

The United States District Court disagreed with Sibert and granted summary judgment to Wells Fargo.  On appeal, a divided Fourth Circuit agreed with the District Court.

The two judges who ruled against Mr. Sibert said that the purpose of the SCRA was “shielding servicemembers whose income changes as a result of their being called to active duty, and who therefore can no longer keep up with obligations negotiated on the basis of prior levels of income.”  According to the two judge majority, enforcement of obligations incurred during military service is not restricted by the SCRA because “both the servicemembers and lenders would be aware of the servicemember’s income and military status” when a servicemember obtained a loan while serving in the military   By use of the word “before,” the judges said, Congress showed that it intended to afford “protection to obligations incurred outside of military service.”  Since Mr. Sibert was serving in the Navy when he and his wife obtained their loan, they did not face a reduction in income as a result of military service and their obligation was not incurred outside of military service.

In a dissenting opinion, Judge King said, “Put simply, my good colleagues are wrong.”  In Judge King’s view, “the plain language of [the SCRA] prohibits a non-judicial home foreclosure sale against Sibert, as an active duty soldier, on an obligation he incurred prior to his Army service — notwithstanding Sibert’s earlier period of military service in the United States Navy.”  According to Judge King, “My colleagues have nevertheless narrowly construed SCRA’s limitations against Sibert — and thus all his fellow American servicemembers — by effectively treating his separate periods of military service as a single period of such service.”  Noting that the SCRA refers to enforcement of an obligation incurred before “the” period of military service, not “the initial or first period of military service,” Judge King asserted that “my friends have rewritten [the SCRA] to protect servicemembers with respect to only those financial “obligations incurred outside of military service.”

Conspicuously absent from the Sibert opinion is any discussion of whether Wells Fargo knew that Sibert was serving in the military when it sold his home.  Although most Maryland foreclosure sales are conducted without a court order under a power of sale included in the lien instrument, had Wells Fargo been foreclosing in Maryland, it would have been required to file “an affidavit in compliance with § 521 of the Servicemembers Civil Relief Act” before it could hold a sale and thus would have discovered Sibert’s second stint in the military.  In jurisdictions like Virginia and West Virginia where there is normally no court involvement in the foreclosure process, however, Wells Fargo was not required to file such an affidavit and may have been entirely unaware that Silbert had returned to military service.  Given how narrowly Wells Fargo avoided having its sale set aside after litigation in two courts, lenders foreclosing on property in non-judicial foreclosure jurisdictions would be well advised to check for military service before proceeding.