Preview:

PRESENT:    All the Justices
RICHARD MATHEWS, ET AL.
                                                                      OPINION BY
v.    Record No.  110967                                              JUSTICE WILLIAM C. MIMS
April  20,  2012
PHH MORTGAGE CORPORATION
FROM THE CIRCUIT COURT OF NELSON COUNTY
J. Michael Gamble, Judge
In this appeal, we consider whether a landowner who has
breached a deed of trust by failing to make payments as
required under the associated note may nevertheless enforce its
conditions precedent.    We also consider the prerequisites to
foreclosure set forth in  24 C.F.R.  §  203.604 and whether they
are incorporated as conditions precedent in a deed of trust.
I.    BACKGROUND AND MATERIAL PROCEEDINGS BELOW
Richard M. and Karin L. Mathews owned a parcel of land in
Nelson County  (“the Parcel”), which they conveyed by deed of
trust  (“the Deed of Trust”) on June  28,  2002, to Wendall L.
Winn, Jr., trustee, for the benefit of University of Virginia
Community Credit Union to secure a note in the principal amount
of  $118,505.00, plus interest  (“the Note”).    The indebtedness
secured by the Deed of Trust was insured by the Federal Housing
Authority under regulations promulgated by the Secretary of
Housing and Urban Development  (“HUD”) under the National
Housing Act,  12 U.S.C.  §§  1701-1750jj, and codified in Part  203
of Title  24 of the Code of Federal Regulations.    PHH Mortgage
1




Corporation  (“PHH”) subsequently became the holder of the Note
and the beneficiary of the Deed of Trust.
The Mathewses fell into arrears on the payments due under
the Note.    Consequently, PHH appointed Professional Foreclosure
Corporation of Virginia  (“PFC”) as substitute trustee under the
Deed of Trust to commence foreclosure proceedings on the
Parcel.    PFC scheduled a foreclosure sale for November  11,
2009.
On November  10,  2009, the Mathewses filed a complaint in
the circuit court seeking a declaratory judgment that the
foreclosure sale would be void because PHH had not satisfied
conditions precedent to foreclosure set forth in the Deed of
Trust.    Specifically, they alleged that  24 C.F.R.  §  203.604
(“the Regulation”) required PHH to have a face-to-face meeting
with them at least  30 days before the commencement of
foreclosure proceedings.    They asserted that the Regulation was
incorporated into the Deed of Trust as a condition precedent to
foreclosure.    No such meeting had occurred before PFC commenced
foreclosure proceedings.
PHH removed the action to the United States District Court
for the Western District of Virginia, which remanded it to the
circuit court for lack of subject-matter jurisdiction.    PHH
then filed a demurrer in which it argued that the Mathewses
could not sue to enforce the Regulation because  (a) it
2




conferred no private right of action and  (b) they had committed
the first breach of the Deed of Trust by failing to pay as
required under the Note.    PHH also argued that, even if the
Mathewses could sue to enforce the Regulation, it did not apply
to them because, under HUD’s interpretation, a face-to-face
meeting is only required if the mortgagee has a  “servicing
office” within  200 miles of the mortgaged property.    PHH did
not have such an office within that distance from the Parcel.
The circuit court ruled that the Regulation was
incorporated into the Deed of Trust as a condition precedent to
foreclosure.    However, the court also determined that under
Virginia common law, the party who breaches a contract first
cannot sue to enforce it.    The court therefore ruled that the
Mathewses could not sue to enforce the conditions precedent in
the Deed of Trust because they had breached it first through
non-payment.    The court also ruled that the Regulation did not
apply to them because PHH did not have a  “servicing office”
within  200 miles of the Parcel.    Accordingly, the court
sustained PHH’s demurrer and dismissed the complaint.    We
awarded the Mathewses this appeal.
II. ANALYSIS
A.    ENFORCEMENT OF CONDITIONS PRECEDENT TO FORECLOSURE
IN A DEED OF TRUST BY A BORROWER IN DEFAULT
The threshold question is whether the Mathewses’ failure
to pay under the Note precludes them from enforcing the
3




conditions precedent to foreclosure in the Deed of Trust.    If
so, the questions of whether the Regulation applies and whether
it is incorporated into the Deed of Trust are moot.
In Horton v. Horton,  254 Va.  111,  115-16,  487 S.E.2d  200,
203-04  (1997), we acknowledged that as a matter of Virginia
common law,
a party who commits the first breach of a
contract is not entitled to enforce the
contract.    An exception to this rule arises when
the breach did not go to the  “root of the
contract” but only to a minor part of the
consideration.
If the first breaching party committed a
material breach, however, that party cannot
enforce the contract.    A material breach is a
failure to do something that is so fundamental
to the contract that the failure to perform that
obligation defeats an essential purpose of the
contract.    If the initial breach is material,
the other party to the contract is excused from
performing his contractual obligations.
(Internal citations omitted.)    We echoed this statement in
Countryside Orthopaedics, P.C. v. Peyton,  261 Va.  142,  154,  541
S.E.2d  279,  285  (2001), and reiterated that  “the first party to
commit a material breach  [of a contract cannot] maintain an
action on it.”    Id. at  156,  541 S.E.2d at  287  (citing Hurley v.
Bennett,  163 Va.  241,  253,  176 S.E.  171,  175  (1934)).
Nevertheless, the Mathewses argue that under Bayview Loan
Servicing, LLC v. Simmons,  275 Va.  114,  654 S.E.2d  898  (2008),
a lender must comply with all conditions precedent to
4




foreclosure in a deed of trust even if the borrowers are in
arrears.    We agree.
In Bayview, the borrower was in arrears.    Consequently,
the lender accelerated repayment under the note and directed
the trustee under the deed of trust to begin foreclosure
proceedings.    Thereafter, the parcel was sold at a foreclosure
auction and the borrower filed a suit for damages alleging
breach of the deed of trust.    Id. at  117-18,  654 S.E.2d at  899.
We determined that the sale was improper because Bayview had
failed to provide a pre-acceleration notice, which was a
condition precedent to acceleration under the deed of trust.
By failing to provide the notice, Bayview breached the deed of
trust by accelerating repayment and foreclosing:
Because Bayview did not comply with the specific
condition precedent under the Deed of Trust,
prior to the notice of foreclosure sale by  [the
trustee], Bayview had not acquired the right to
accelerate payment under the terms of the Deed
of Trust.    Thus,  [the trustee] could exercise no
right of acceleration because no such right had
then accrued to Bayview.  .  .
While Code  §  55-59.1(A) does allow a proper
notice of foreclosure sale to exercise an
accrued right of acceleration, Bayview failed to
fulfill the contractual condition precedent that
would have given it such a right.
Id. at  121-22,  654 S.E.2d at  901  (emphasis added).
Accordingly, we affirmed the circuit court’s judgment in favor
of the borrower.    Id. at  122,  654 S.E.2d at  902.
5




A trustee’s power to foreclose is conferred by the deed of
trust.    Fairfax County Redevelopment & Hous. Auth. v. Riekse,
281 Va.  441,  445-46,  707 S.E.2d  826,  829  (2011).    That power
does not accrue until its conditions precedent have been
fulfilled.    See Bayview,  275 Va. at  121,  654 S.E.2d at  901. The
fact that a borrower is in arrears does not allow the trustee
to circumvent the conditions precedent.    However, if the
general rule of contract enforcement enunciated in Horton and
Countryside Orthopaedics applied to deeds of trust, a trustee
could not be held accountable for exercising his latent power
to foreclose before it actually had accrued, for two reasons.
First, the borrower is the only party with standing to bring an
action, whether for damages after the fact of the improper sale
or to bar the improper sale in equity before it occurs.1
Second, the paramount prerequisite to foreclosure is some
breach of the deed of trust by the borrower  - a trustee under a
deed of trust cannot commence foreclosure proceedings on the
parcel of a borrower who has not first breached the deed of
1 Bayview illustrates the principle that damages may be
awarded at law after a foreclosure sale has been conducted
improperly because the power of foreclosure has not accrued.
Equitable relief is available to enjoin the improper sale
before it occurs as well.    See Rossett v. Fisher,  52 Va.  (11
Gratt.)  492,  499  (1854)  (stating that a debtor may resort to
equity to ensure that a trustee under a deed of trust fulfills
his duties under the deed of trust); see also  19 Michie’s
Jurisprudence, Trusts and Trustees  §  120  (“Equity  .  .  . could
interfere by injunction to restrain  [a trustee] from improperly
exercising his powers.”).
6




trust in some way.    The conditions precedent in the deed of
trust which govern the accrual of his latent power to foreclose
are irrelevant before such a breach.
Therefore, prohibiting the borrower who has breached from
bringing an action to enforce the conditions precedent in a
deed of trust would nullify such conditions.    The mere fact of
the borrower’s breach alone would become, de facto, the only
condition precedent to foreclosure.
Addressing this concern at oral argument, PHH contended
that failure to pay under the note was only one of several
possible breaches of a deed of trust.    Because other breaches
might  “not go to the  ‘root of the contract’ but only to a minor
part of the consideration,” PHH continued, they would fall into
the exception recognized in Horton.                                 254 Va. at  115,  487 S.E.2d
at  203.    Therefore, according to PHH, such a borrower could
still sue to enforce the deed of trust and its conditions
precedent to foreclosure would not be nullified.
We accept the validity of PHH’s premise and recognize that
a deed of trust may anticipate breaches other than by non-
payment that could enable the trustee to commence foreclosure
proceedings.    Yet non-payment under the note is the principal
reason for foreclosure.    Regardless of whether a deed of trust
may permit foreclosure when the borrower breaches other than by
non-payment, and acknowledging that such breaches may not be
7




material and therefore may not bar the borrower’s suit to
enforce the deed of trust under Horton, we observe that deeds
of trust universally anticipate breach by non-payment.    Thus,
to accept PHH’s argument, we would have to rule that conditions
precedent to foreclosure in deeds of trusts are nullities when
the breach is by non-payment  - the vast majority of cases  - but
that such conditions are fully enforceable in the rare cases
when the breach is not by non-payment.    Such a ruling would
defy common sense.
The solution lies in the definition of material breach.
In Horton and Countryside Orthopaedics, we defined material
breach as  “a failure to do something that is so fundamental to
the contract that the failure to perform that obligation
defeats an essential purpose of the contract.”    Countryside
Orthopaedics,  261 Va. at  154,  541 S.E.2d at  285  (quoting
Horton,  254 Va. at  115,  487 S.E.2d at  204).    The essential
purposes of a deed of trust are two-fold:    to secure the
lender-beneficiary’s interest in the parcel it conveys and to
protect the borrower from acceleration of the debt and
foreclosure on the securing property prior to the fulfillment
of the conditions precedent it imposes.    Because a deed of
trust permits the trustee to sell the parcel to protect the
interest of the lender-beneficiary upon the borrower’s breach
by non-payment, the fact of non-payment of the note does not
8




“defeat[] an essential purpose of the contract.”    Id.    To the
contrary, lenders require deeds of trust precisely because they
contemplate the possibility of non-payment.    In other words, by
its nature, the deed of trust is a contract in which the
parties have agreed that material breach of the note by non-
payment will not deprive borrowers of their rights to enforce
the conditions precedent.    Accordingly, non-payment of a note
is not a material breach of a deed of trust within the meaning
of Horton and Countryside Orthopaedics.2
We therefore reject PHH’s argument.    Borrowers may sue to
enforce conditions precedent to foreclosure even if they were
the first party to breach the note secured by a deed of trust
through non-payment.
B. INCORPORATION OF THE REGULATION AS A CONDITION
PRECEDENT TO FORECLOSURE UNDER THE DEED OF TRUST
We now turn to the question of whether the Regulation is
incorporated into the Deed of Trust as a condition precedent to
foreclosure.    The circuit court determined that the Regulation
was incorporated and PHH has assigned cross-error to this
ruling.    PHH first argues that terms may be incorporated into a
contract by reference only if the intent to incorporate is
clear.    PHH asserts that the language of the Deed of Trust does
2 While the Note is not in the record of this case and this
precise issue is not presently before us, we observe that non-
payment may be a material breach of a note, which may enable a
lender to bring an action on it independent of the deed of
trust.
9




not clearly express intent to incorporate HUD’s regulations.
We disagree.
A deed of trust is construed as a contract under Virginia
law, see, e.g., Virginia Hous. Dev. Auth. v. Fox Run Ltd.
P’shp.,  255 Va.  356,  365,  497 S.E.2d  747,  753  (1998), and we
“consider the words of  [a] contract within the four corners of
the instrument itself.”    Uniwest Constr., Inc. v. Amtech
Elevator Servs.,  280 Va.  428,  440,  699 S.E.2d  223,  229  (2010)
(quoting Eure v. Norfolk Shipbuilding & Drydock Corp.,  263 Va.
624,  631,  561 S.E.2d  663,  667  (2002)).    It
is construed as written, without adding terms
that were not included by the parties.    When the
terms in a contract are clear and unambiguous,
the contract is construed according to its plain
meaning.    Words that the parties used are
normally given their usual, ordinary, and
popular meaning.    No word or clause in the
contract will be treated as meaningless if a
reasonable meaning can be given to it, and there
is a presumption that the parties have not used
words needlessly.
Id.  (quoting PMA Capital Ins. Co. v. US Airways, Inc.,  271 Va.
352,  358,  626 S.E.2d  369,  372-73  (2006)).
Paragraph  18 of the Deed of Trust sets forth the procedure
for foreclosure.    It states in relevant part that the power of
sale may be invoked only after the lender  “requires immediate
payment in full under paragraph  9.”    In other words,
acceleration of repayment is a condition precedent to
10




foreclosure.    Paragraph  9 sets forth the  “Grounds for
Acceleration of Debt,” which includes payment default:
(a) Default.    Lender may, except as limited by
regulations issued by the Secretary, in the case
of payment defaults, require immediate payment
in full of all sums secured by this Security
Instrument if:
(i) Borrower defaults by failing to pay in
full any monthly payment required by this
Security Instrument prior to or on the due
date of the next monthly payment  .  .  .
(Emphasis added.)    Paragraph  9 also includes the following
subparagraph:
(d) Regulations of HUD Secretary.    In many
circumstances regulations issued by the
Secretary will limit  [the l]ender’s rights, in
the case of payment defaults, to require
immediate payment in full and foreclose if not
paid.    This Security Instrument does not
authorize acceleration or foreclosure if not
permitted by the regulations of the Secretary.
(Emphasis added.)
These words  “are clear and unambiguous” and we will
construe them according to their plain meaning.    Uniwest
Constr.,  280 Va. at  440,  699 S.E.2d at  229.    They express the
intent of the parties that the rights of acceleration and
foreclosure do not accrue under the Deed of Trust unless
permitted by HUD’s regulations.    We cannot conceive of any
other purpose for which they would have been included.
Therefore, the Deed of Trust expressly withholds authorization
to accelerate or foreclose if the Regulation does not permit
PHH to do so.    Any other interpretation would render these
11




provisions meaningless.    We will not adopt such an
interpretation.    Id.
Accordingly, the references to HUD’s regulations in the
Deed of Trust are sufficient to incorporate them insofar as
they prevent the borrower from accelerating or foreclosing.
Cf. High Knob Assocs. v. Douglas,  249 Va.  478,  488,  457 S.E.2d
349,  354-55  (1995)  (ruling that language by which a party
merely acknowledges that he has received, read, and understands
an otherwise extrinsic document prior to executing a contract
is sufficient to incorporate the document into the contract);
Marriott v. Harris,  235 Va.  199,  214,  368 S.E.2d  225,  232
(1988)  (same).
PHH next argues that terms may be incorporated into a
contract by reference only if it is clear which terms are to be
incorporated.    PHH asserts that any language in the Deed of
Trust appearing to incorporate HUD’s regulations fails to state
explicitly which regulations are intended to be incorporated.
Part  203 of Title  24 of the Code of Federal Regulations
contains  681 regulations, PHH observes, and the Deed of Trust
fails to identify which of them are incorporated.    We again
disagree.
Only those regulations that prevent a lender from
accelerating or foreclosing are incorporated by the cited
language in the Deed of Trust.    Whether every regulation
12




included in Part  203 of Title  24 does so is not before us.    We
must determine only whether the Regulation invoked in this case
prevents a lender from accelerating or foreclosing.    For two
reasons, we conclude that it does, and therefore that it is
incorporated into the Deed of Trust as a condition precedent.
First,  24 C.F.R.  §  203.606(a) requires that  “[b]efore
initiating foreclosure, the mortgagee must ensure that all
servicing requirements of this subpart have been met.”
(Emphasis added.)                                                    24 C.F.R.  §  203.606(a) is codified in
Subpart C of Part  203, which is captioned  “Servicing
Responsibilities.”    The first section in Subpart C is  24 C.F.R.
§  203.500, which further states that  “[i]t is the intent of the
Department that no mortgagee shall commence foreclosure or
acquire title to a property until the requirements of this
subpart have been followed.”                                         (Emphasis added.)
Second,  24 C.F.R.  §  203.606(a) directs that  “[t]he
mortgagee may not commence foreclosure for a monetary default
unless at least three full monthly installments due under the
mortgage are unpaid after application of any partial payments
that may have been accepted but not yet applied to the mortgage
account.”    Id.3    Therefore, while none of the pleadings set
forth the amount or duration of the Mathewses’ arrearage at the
3                                                                    24 C.F.R.  §  203.606(b) provides exceptions to the delay
in commencing foreclosure imposed by subsection  (a) but PHH
does not assert that any of them apply.
13




time PHH instructed PFC to commence foreclosure proceedings on
the Parcel, PHH could not have instructed PFC to do so unless
they were in arrears for at least three full monthly
installments.
In addition, the Regulation itself provides that  “[t]he
mortgagee must have a face-to-face interview with the
mortgagor, or make a reasonable effort to arrange such a
meeting, before three full monthly installments due on the
mortgage are unpaid.”                                               24 C.F.R.  §  203.604(b)  (emphasis added).4
The Regulation is codified in Subpart C and therefore is a
servicing requirement that PHH must meet  “[b]efore initiating
foreclosure.”                                                       24 C.F.R.  §  203.606(a)  (emphasis added).
Accordingly, the face-to-face meeting requirement is a
condition precedent to the accrual of the rights of
acceleration and foreclosure incorporated into the Deed of
Trust.    Cf. Manufacturers Hanover Mortgage Corp. v. Snell,  370
N.W.2d  401,  404  (Mich. Ct. App.  1985)  (suggesting that HUD’s
servicing requirement regulations may be a defense to
foreclosure if they are made terms of a mortgage contract).
PHH also argues that the language in the Deed of Trust
should not be construed to incorporate the Regulation because
the language was not bargained for by the parties; rather, it
4 Certain exceptions set forth in  24 C.F.R.  §  203.604(c)
apply to this requirement and we will consider them below.
14




is language imposed by HUD, which requires the use of a
standardized form deed of trust.    We again disagree.
As noted above, the lender-beneficiary and trustee under a
deed of trust have only those powers that it confers upon them.
Riekse,  281 Va. at  445-46,  707 S.E.2d at  829  (2011).    As a
matter of Virginia law, when a deed of trust expressly states
on its face that it  “does not authorize acceleration or
foreclosure if not permitted by” some external set of
conditions identified within the deed of trust, those
conditions are fully incorporated as conditions precedent to
acceleration and foreclosure.    HUD requires this language to be
incorporated into deeds of trust which secure its federally
insured loans.                                                      24 C.F.R.  §  203.17(a).    Doing so makes its
regulations enforceable by borrowers as conditions precedent to
acceleration and foreclosure as through a state-law action for
breach of contract.    This is entirely consistent with the
intention expressed in  24 C.F.R.  §§  203.500 and  203.606(a).
Conversely, PHH offers no explanation for HUD’s decision
to require this language in deeds of trust which secure its
insured loans if, as PHH contends, the regulations govern only
the relationship between the lender and the government, rather
than the lender and the borrower.    The regulations themselves
govern the relationship between the lender and the government;
there is no reason to refer to them in the deed of trust other
15




than to affect the duties of the parties to it.    If, as PHH
asserts, HUD has a contrary intention, it may either  (a) cease
to require or allow language that incorporates its regulations
as conditions precedent to acceleration or foreclosure in the
deeds of trust or  (b) require or allow language that expressly
states its intent that its regulations are not conditions
precedent.    It has done neither.
In conclusion, the terms used in Paragraphs  9 and  18 of
the Deed of Trust clearly state that the rights of acceleration
and foreclosure accrue only if permitted by HUD’s regulations.
24 C.F.R.  §§  203.500 and  203.606(a) clearly express HUD’s
intent that foreclosure proceedings are not permitted unless
the lender has complied with the Regulation.    The Regulation
therefore is incorporated as a condition precedent in the Deed
of Trust.
C.    APPLICABILITY OF  24 C.F.R.  §  203.604
The final issue is whether the Regulation applies in this
case.    As noted above, the Regulation requires the lender to
“have a face-to-face interview” with the borrower,  “or make a
reasonable effort to arrange such a meeting.”                       24 C.F.R.
§  203.604(b).    However, it also states that  “[a] face-to-face
meeting is not required if  .  .  .  [t]he mortgaged property is
not within  200 miles of the mortgagee, its servicer, or a
branch office of either.”                                           24 C.F.R.  §  203.604(c).
16




In its demurrer, PHH cited a frequently-asked-questions
webpage  (“the FAQ”) on the HUD website in which HUD purportedly
interpreted the term  “branch office” as used in  24 C.F.R.
§  203.604(c) to mean only a  “servicing office.”    The relevant
portion of the webpage responds to the question,  “Please clarify
HUD’s requirement to conduct a face-to-face meeting with a
delinquent mortgagor.    This is often impossible as many
mortgagees maintain only one centralized servicing office.”
U.S. Department of Housing and Urban Development, General
Servicing Frequently Asked Questions,
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing
/sfh/nsc/faqgnsrv  (last visited Mar.  12,  2012).    HUD replied,
The Department is aware that many Mortgagees
maintain  “branch offices” that deal only with
loan origination and some of these offices may
only be staffed part-time.    For the most part,
individuals that staff an origination office are
not familiar with servicing issues and are not
trained in debt collection or HUD’s Loss
Mitigation Program.
The Department has always considered that
the face-to-face meeting must be conducted by
staff that is adequately trained to discuss the
delinquency and the appropriate loss mitigation
options with the mortgagor.    Therefore, for the
purpose of this discussion, the face-to-face
meeting requirement referenced in  [the
Regulation] relates only to those mortgagors
living within a  200-mile radius of a servicing
office.
Id.
PHH asserted that it did not have a  “servicing office”
within  200 miles of the Parcel and that the face-to-face
17




meeting requirement therefore did not apply.    The circuit court
accepted this argument and the Mathewses assign error to its
ruling.
The Mathewses argue the term  “branch office” is
unambiguous and that the plain language of the Regulation
supersedes HUD’s response in the FAQ.    They assert that the
common and popular meaning of a  “branch office” is  “a place for
the regular transaction of business or performance of a
particular service located at a different location from the
business’s main office or headquarters.”    Moreover, HUD
expressly acknowledged in the FAQ that the term  “branch office”
encompasses not only a  “servicing office” but a loan
origination office as well.    We agree.
When interpreting a federal administrative regulation,  “a
court must necessarily look to the administrative construction
of the regulation if the meaning of the words used is in
doubt.”    Bowles v. Seminole Rock & Sand Co.,  325 U.S.  410,  414
(1945).    While the Constitution and federal statutes also must
be considered,  “the ultimate criterion is the administrative
interpretation, which becomes of controlling weight unless it
is plainly erroneous or inconsistent with the regulation.”
Id.; accord Long Island Care at Home, Ltd. v. Coke,  551 U.S.
158,  171  (2007)  (“[A]n agency's interpretation of its own
regulations is controlling unless plainly erroneous or
18




inconsistent with the regulations being interpreted.”  (internal
quotation marks omitted)); Auer v. Robbins,  519 U.S.  452,  461
(1997)  (The Secretary’s interpretation of his own regulation is
“controlling unless plainly erroneous or inconsistent with the
regulation.”  (internal quotation marks omitted)).
However,  “[i]f the regulation is unambiguous, then what is
known as Seminole Rock deference does not apply, and the
regulation's plain language, not the agency's interpretation,
controls.”    United States v. Deaton,  332 F.3d  698,  709  (4th
Cir.  2003); accord Christensen v. Harris County,  529 U.S.  576,
588  (2000)  (“Auer deference is warranted only when the language
of the regulation is ambiguous.”).    To defer to an agency’s
interpretation when the regulation itself is unambiguous  “would
be to permit the agency, under the guise of interpreting a
regulation, to create de facto a new regulation.”    Christensen,
529 U.S. at  588.
The term  “branch office” in the Regulation is unambiguous.
“Branch” is defined as, among other things,  “a part of a
complex body: as  .  .  . a section, department, or division of an
organization,” or  “a subordinate or dependent part of a central
system or organization,” e.g.,  “a neighborhood branch of a city
library” or  “a branch bank in a suburb.”    Webster’s Third New
International Dictionary  267  (1993)  (emphasis added).             “Office”
is defined as, among other things,  “a place where a particular
19




kind of business is transacted or a service is supplied.”    Id.
at  1567.    Because the Regulation applies if the mortgaged
property is within  200 miles  “of the mortgagee, its servicer,
or a branch office of either,” the particular type of business
or service supplied by an office within the contemplation of
the Regulation is not limited to servicing.    Rather, every type
of business and service supplied by the mortgagee, including
loan origination, is within its scope.5
This conclusion is underscored by the language of the FAQ
itself, which states that  “[t]he Department is aware that many
Mortgagees maintain  ‘branch offices’ that deal only with loan
origination.”    HUD therefore acknowledges that offices that
deal only with loan origination are  “branch offices” within the
meaning of the Regulation but purports to limit the unambiguous
regulatory term to include only  “servicing offices.”    The
Regulation itself does not support this limitation.    To accept
HUD’s interpretation would amount to allowing it to create a
5 HUD considered limiting the scope of  “branch office” only
to  “servicing offices” in the course of substantive rulemaking
by amending  24 C.F.R.  §  203.604(c)(2) to remove references to
mortgagees.    Revisions to the Single Family Mortgage Insurance
Program; Proposed Rule,  69 Fed. Reg.  65,325  (Nov.  10,  2004)  (to
be codified at  24 C.F.R. pt.  203).    Under the proposed
amendment, the face-to-face meeting would not apply if  “[t]he
mortgaged property is not within  200 miles of the servicer, or
a branch office of the servicer.”    Id. at  65,327.    However, the
amendment was not included in the final rule.    Revisions to the
Single Family Mortgage Insurance Program; Final Rule,  72 Fed.
Reg.  56,156,  56,157  (Oct.  2,  2007)  (to be codified at  24 C.F.R.
pt.  203)  (“[T]his final rule does not effectuate the revisions
to  §  203.604(c)(2) that were contained in the proposed rule.”).
20




new regulation or tacitly amend  24 C.F.R.  §  203.604(c)(2)
without following the proper statutory procedure.    We are not
permitted to do so.    Christensen,  529 U.S. at  588.
Alternatively, even if we were to conclude that  “branch
office” is ambiguous, HUD’s interpretation as supplied in the
FAQ would not control because it was not promulgated under the
procedures for substantive rulemaking required by the
Administrative Procedure Act,  5 U.S.C.  §§  551-559.    It
therefore does not have the force of law.    Shalala v. Guernsey
Mem’l Hosp.,  514 U.S.  87,  99  (1995); Chrysler Corp. v. Brown,
441 U.S.  281,  301-02 &  302 n.31  (1979).    Rather, it is at most
“an interpretive rule issued by an agency to advise the public
of the agency's construction of the statutes and rules which it
administers.”    Shalala,  514 U.S. at  99  (internal quotation
marks omitted); Chrysler Corp.,  441 U.S. at  302 n.31  (internal
quotation marks omitted); see also Reno v. Koray,  515 U.S.  50,
61  (1995)  (distinguishing between the deference accorded
substantive rules adopted pursuant to the Administrative
Procedure Act and that accorded mere interpretive rules).
We acknowledge that mere interpretive rules are entitled
to some measure of judicial deference.    Reno,  515 U.S. at  61;
Martin v. Occupational Health and Safety Review Commission,  499
U.S.  144,  157  (1991); see also United States v. Mead Corp.,  533
U.S.  218,  234  (2001)  (“[A]n agency's interpretation may merit
21




some deference whatever its form, given the specialized
experience and broader investigations and information available
to the agency, and given the value of uniformity in its
administrative and judicial understandings of what a national
law requires.”  (internal citations and quotation marks
omitted)).    However,  “[s]ome indicia of reliability and
reasonableness must exist in order for us to defer to the
agency's interpretation.”    Shipbuilders Council of Am., Inc. v.
United States Coast Guard,  578 F.3d  234,  245  (4th Cir.  2009).
According to the FAQ, the purpose of interpreting  “branch
office” to mean only  “servicing office” is to ensure that the
face-to-face meeting takes place between the borrower and
“staff that is adequately trained to discuss the delinquency
and the appropriate loss mitigation options.”    Because
“individuals that staff an origination office are not familiar
with servicing issues and are not trained in debt collection or
HUD’s Loss Mitigation Program,” the FAQ’s interpretation
excludes such offices from the term  “branch office.”    But we do
not consider this exclusion to be reasonable.    If an
originating office within the  200-mile radius lacks staff with
the appropriate training, appropriately-trained staff could
participate in a face-to-face meeting between the borrower and
the staff of the originating office by tele- or video-
conference, for example, thereby imposing a minimal burden on
22




the lender while furthering the loss mitigation purpose of the
Regulation and its underlying statutory authority.6    Because the
stated rationale for the interpretation is not reasonable, we
would not defer to it even if the term  “branch office” were
ambiguous.
Accordingly, we reject PHH’s argument that the Regulation
does not apply because it does not have a  “servicing office”
within the  200-mile radius set forth in  24 C.F.R.
§  203.604(c)(2).    Because the Mathewses alleged in their
complaint that PHH has branch offices within the  200-mile
radius, they have pled sufficient facts for the Regulation to
apply.
III.    CONCLUSION
For the foregoing reasons, we will affirm the judgment in
part, reverse it in part, and remand for further proceedings
consistent with this opinion.
Affirmed in part,
reversed in part,
and remanded.
CHIEF JUSTICE KINSER, concurring.
6 The Regulation is authorized by  12 U.S.C  §  1715b, which
enables HUD to promulgate regulations necessary to carry out
the insured loan program, and  12 U.S.C.  §  1715u(a), which
requires lenders to  “engage in loss mitigation actions.”    In
May  2009, Congress amended  12 U.S.C.  §  1715u(a) to expressly
include  “support for borrower housing counseling” within such
actions.    The Helping Families Save Their Homes Act of  2009,
Pub. L. No.  111-22,  §  203(d)(1)(C),  123 Stat.  1631,  1645.
23




I agree with the majority's conclusion that  24 C.F.R.
§§  203.500 and  203.606(a) express the intent of the Secretary
of Housing and Urban Development  ("HUD") that a mortgagee
cannot commence foreclosure proceedings until it has complied
with the requirements of certain regulations and that  24 C.F.R.
§  203.604 is incorporated as a condition precedent in the deed
of trust executed by Richard M. Mathews and Karin L. Mathews
("the Mathewses").    I write separately, however, to clarify the
actual requirements set forth in  24 C.F.R.  §  203.604 because
the Mathewses distort the  30-day face-to-face meeting
requirement at issue in this appeal.
Subpart C  ("Servicing Responsibilities"), of Part  203
("Single Family Mortgage Insurance"), in Title  24  ("Housing and
Urban Development"), of the Code of Federal Regulations
provides, in relevant part:
This subpart identifies servicing practices
of lending institutions that HUD considers
acceptable for mortgages insured by HUD.  .  .
It is the intent of  [HUD] that no mortgagee
shall commence foreclosure or acquire title to a
property until the requirements of this subpart
have been followed.
24 C.F.R.  §  203.500.    Continuing,  24 C.F.R.  §  203.606(a)
states:
Before initiating foreclosure, the
mortgagee must ensure that all servicing
requirements of this subpart have been met.    The
24




mortgagee may not commence foreclosure for a
monetary default unless at least three full
monthly installments due under the mortgage are
unpaid after application of any partial payments
that may have been accepted but not yet applied
to the mortgage account.    In addition, prior to
initiating any action required by law to
foreclose the mortgage, the mortgagee shall
notify the mortgagor in a format prescribed by
the Secretary that the mortgagor is in default
and the mortgagee intends to foreclose unless
the mortgagor cures the default.
The  30-day face-to-face meeting requirement at issue in
this appeal is found in  24 C.F.R.  §  203.604(b).    In relevant
part, the subsection requires that
[t]he mortgagee must have a face-to-face
interview with the mortgagor, or make a
reasonable effort to arrange such a meeting,
before three full monthly installments due on
the mortgage are unpaid. If default occurs in a
repayment plan arranged other than during a
personal interview, the mortgagee must have a
face-to-face meeting with the mortgagor, or make
a reasonable attempt to arrange such a meeting
within  30 days after such default and at least
30 days before foreclosure is commenced  .  .  .
Pursuant to this subsection, the mortgagee is required to
conduct a face-to-face interview with the mortgagor before
three full monthly installments are unpaid.    A face-to-face
meeting at least  30 days before commencement of foreclosure
proceedings is required "[i]f default occurs in a repayment
plan arranged other than during a personal interview."    Id.
(emphasis added).    Thus, the face-to-face interview
requirements are triggered by two separate events.    The one at
25




issue in this appeal, a face-to-face meeting at least  30 days
before foreclosure is commenced, as I have already pointed out,
becomes necessary "[i]f default occurs in a repayment plan
arranged other than during a personal interview."    Id.
However, in their complaint, the Mathewses quoted only
part of the language in  24 C.F.R.  §  203.604(b) and thereby
distorted what is actually required.    In one paragraph, the
Mathewses alleged that
the holder of the note can foreclose on the home
in the event of arrearage on payment of the
note, but only if the holder of the note has
complied with  .  .  . regulations, including inter
alia,  24 C.F.R.  §  203.604, whereby 'The
mortgagee must have a face-to-face interview
with the mortgagor  .  .  . or make a reasonable
attempt to arrange such a meeting within  30 days
after such default or at least  30 days before
foreclosure is commenced  .  .  .                                  .'∗
24 C.F.R.  §  203.604(b).    The Mathewses then alleged that "no
creditor entity ever had a face[-]to[-]face meeting with  [them]
or made any attempt to arrange for any such face-to-face
meeting."    Later in the complaint, the Mathewses asserted that
"[a]t no time has  [the mortgagee] complied with  24 C.F.R.
[§]  203.604, a federal regulation whereby 'The mortgagee must
have a fac[e]-to-face interview with the mortgagor  [  ] or make
∗ The majority also states that  24 C.F.R.  §  203.604
"requires the lender to 'have a face-to-face interview' with
the borrower, 'or make a reasonable effort to arrange such a
meeting' " without reciting the events that trigger such
requirements.
26




a reasonable attempt to arrange such a meeting within  30 days
after such default or at least  30 days before foreclosure is
commenced  .  .  .                                                    .' "
Notably, the Mathewses did not allege that the mortgagee
failed to have a face-to-face interview with them before three
full monthly installments were unpaid.    Likewise, the Mathewses
did not allege that the mortgagee failed to have a face-to-face
meeting with them within  30 days after default and at least  30
days before foreclosure was commenced upon their default on "a
repayment plan arranged other than during a personal
interview."                                                           24 C.F.R.  §  203.604(b).    Although the Mathewses
admitted in their complaint that they "fell into arrears on the
note," they did not allege that they ever defaulted on "a
repayment plan arranged other than during a personal
interview."                                                           24 C.F.R.  §  203.604(b).    Instead, by omitting
relevant portions of  24 C.F.R.  §  203.604(b), the Mathewses were
able to allege that the mortgagee failed to conduct a face-to-
face meeting with them  30 days before commencing foreclosure, a
requirement not set forth in the plain terms of that
subsection.    Thus, in my view, the Mathewses failed to state a
cause of action upon which relief could be granted.    See
Kaltman v. All American Pest Control,  281 Va.  483,  489,  706
S.E.2d  864,  867  (2011)  (demurrer tests the legal sufficiency of
facts alleged in a pleading); Glazebrook v. Board of
27




Supervisors,  266 Va.  550,  554,  587 S.E.2d  589,  591  (2003)
(same).
In this case, however, when PHH Mortgage Corporation filed
its demurrer to the Mathewses' complaint seeking declaratory
judgment, it did not assert as a basis for its demurrer the
issue I have identified.    In ruling on a demurrer, a trial
court cannot consider any "grounds other than those stated
specifically in the demurrer."    Code  §  8.01-273(A); see also TC
MidAtlantic Dev., Inc. v. Commonwealth,  280 Va.  204,  214,  695
S.E.2d  543,  549  (2010); Chippenham Manor, Inc. v. Dervishian,
214 Va.  448,  451,  201 S.E.2d  794,  796  (1974).    Nor can this
Court on appeal.
For these reasons, I respectfully concur and, like the
majority, would affirm in part and reverse in part the circuit
court's judgment and remand for further proceedings.
JUSTICE McCLANAHAN, concurring.
I agree with the majority's holdings in this case.
However, in my opinion, the first material breach doctrine, as
applied in Horton v. Horton,  254 Va.  111,  115-16,  487 S.E.2d
200,  203-04  (1997), and Countryside Orthopaedics, P.C. v.
Peyton,  261 Va.  142,  154,  541 S.E.2d  279,  285  (2001), is
28




inapplicable here for reasons not specifically addressed by
the majority.
The Mathewses' failure to pay under the terms of the note
and deed of trust at issue  - of which defendant PHH became the
holder and beneficiary, respectively, as the successor in
interest  - was clearly a material breach of both the note and
the deed of trust.1    Following this default, PHH sought to
foreclose on the Mathewses' residence pursuant to PHH's
remedies set forth in paragraph eighteen of the non-uniform
covenants of the deed of trust.2
The Mathewses, in turn, sought by the instant declaratory
judgment action to stop PHH from going forward with its remedy
of foreclosure based on their claim that PHH failed to first
comply with a condition precedent to its right to enforce this
1 As stated in paragraph one of the uniform covenants of
the deed of trust: "Borrower shall pay when due the principal
of, and interest on, the debt evidenced by the Note and late
charges due under the Note."    Then in paragraph nine of these
covenants, the deed of trust states, in relevant part: "Lender
may, except as limited by regulations issued by the Secretary
[of Housing and Urban Development], in the case of payment
defaults, require immediate payment in full of all sums
secured by this Security Instrument if  .  .  . Borrower defaults
by failing to pay in full any monthly payment required by this
Security Instrument prior to or on the due date of the next
monthly payment  .  .  .                                            ."
2 The deed of trust there provides in relevant part, under
the heading "Foreclosure Procedure": "If Lender requires
immediate payment in full under paragraph  9, Lender may invoke
the power of sale and any other remedies permitted by
applicable law.    Lender shall be entitled to collect all
expenses incurred in pursuing the remedies provided in this
paragraph  18  .  .  .                                              ."   (Emphasis added.)
29




remedy  - i.e., the "face-to-face interview" requirement under
24 C.F.R.  §  203.604 as incorporated into the deed of trust.
Citing Horton and Countryside, PHH asserted below in support
of its demurrer to this action, as it does on appeal, that the
Mathewses were precluded from making this claim by virtue of
the first material breach doctrine.    That is, under this
doctrine, because the Mathewses first materially breached the
deed of trust by their payment defaults, they could not
require PHH to comply with the terms of the deed of trust.    As
the doctrine has been applied under Virginia law, however, it
is inapplicable here.    The doctrine has functioned as an
affirmative defense to the first breaching party's action
against a defendant who purportedly failed to perform a
contractual obligation unrelated to the defendant's own
remedies against the plaintiff for the plaintiff's breach of
the parties' contract.    See SunTrust Mortg., Inc. v. United
Guar. Residential Ins. Co.,  806 F.Supp.2d  872,  887  (E.D. Va.
2011)  ("[T]he first material breach doctrine operates not as
remedy requested by a party in its capacity as a plaintiff,
but as an affirmative defense pled by a party in its capacity
as a defendant."); cf. Bayview Loan Servicing, LLC v. Simmons,
275 Va.  114,  121-22,  654 S.E.2d  898,  901  (2008)  (holding that
borrower was entitled to damages based on lender's violation
of the terms of its remedies under its deed of trust).
30




In this case, the original lender, PHH's predecessor in
interest, performed its primary obligation at the inception of
the subject transaction between it and the Mathewses when it
made the loan to them under the terms of the note and deed of
trust.    And the Mathewses' instant action, of course, has
nothing to do with them seeking damages or specific
performance in regard to any non-performance of that
contractual obligation.    Rather, this action was instituted in
the context of their defense to PHH's enforcement of its
remedy of foreclosure against them.
Unlike the Mathewses, the breaching party in both Horton
and Countryside sought damages based on the defendant's
failure to perform one of the defendant's contractual
obligations that was unrelated to any remedy of the defendant
for the plaintiff's breach of the parties' contract.3
3 In Horton, a former wife sought damages from her former
husband due to his failure to make supplemental payments to an
escrow account established for her benefit pursuant to the
terms of a joint venture dissolution agreement entered into by
the parties.                                                       254 Va. at  112-14,  487 S.E.2d at  202-03.    We
held that because the former wife first committed a material
breach of the agreement, which "defeated an essential purpose
of the contract," the former husband's nonperformance was
excused.    Id. at  116,  487 S.E.  2d at  204.    Similarly, in
Countryside, we held that, based on the first material breach
doctrine, the plaintiff employee/stockholder was not entitled
to contract damages in the form of severance pay, as provided
for in his employment agreement with the defendant
professional corporation.                                          261 Va. at  154-56,  541 S.E.2d at
285-87.    We reached that conclusion because the plaintiff,
before resigning from the corporation, first materially
31




For these reasons, I agree with the majority that the
circuit court erred in holding that, because the Mathewses
first materially breached the deed of trust, they were not
entitled to enforce the terms of the deed of trust against PHH
in regard to its remedy of foreclosure.
breached his related stock purchase agreement in which he
acquired an ownership interest in the corporation.    Id.
32

Download 1110967.pdf

Virginia Law