Northwest Trustee SCRA Settlement: Up to $750,000 From a Receivership

What happened

The United States sued Northwest Trustee Services, Inc. in the Western District of Washington on November 9, 2017 and amended the complaint on January 8, 2018. The Bellevue company was a trustee that, until it ceased active operations on or about December 12, 2017, conducted foreclosures without court orders, known as non-judicial foreclosures, for mortgage lenders in Alaska, California, Idaho, Montana, Nevada, Oregon and Washington. DOJ's 2018 release called it the Department's first SCRA lawsuit against a foreclosure trustee company.

The amended complaint alleges that since January 1, 2010 the company completed at least 28 such foreclosures on homes of servicemembers whose mortgages predated their service, each borrower being in military service, under reserve orders to report, or within a year of leaving service (nine months for sales before February 2, 2013). Before suing, the United States identified to the company 28 specific sales from 2010 to 2014, most in Washington and the rest in Arizona, California, Idaho, Montana and Oregon.

The case started with one Marine veteran in Vancouver, Washington. He refinanced with PHH Mortgage in December 2006 and was called to active service on May 18, 2009 for a fourth tour, in Iraq. Acting as trustee for PHH, the company had begun foreclosure in January 2009; the proceedings were put on hold that November for a loss mitigation attempt, and the company restarted them on May 20, 2010 while he was serving. He was released on June 21, 2010, and the company completed the sale on August 20, 2010 without a court order, although its own notes, in an entry dated August 19, 2010, recorded a status search showing an active duty end date of June 21, 2010. A court dismissed his 2016 lawsuit on statute of limitations grounds, but DOJ says it launched its investigation after the complaint he submitted to its Servicemembers and Veterans Initiative on May 6, 2016, and it notified the company on February 2, 2017.

By the time of the settlement the company was in a general receivership opened March 28, 2018 in King County Superior Court under Chapter 7.60 of the Revised Code of Washington, with Elliott Bay Asset Solutions, LLC as receiver. The agreement was signed for the United States on September 24, 2018 and by the receiver on September 26, 2018, the date the DOJ case page gives, and it takes effect on the last signature (paragraph 35). It covers non-judicial foreclosures from January 1, 2010 through July 31, 2017 and is not an admission of liability (agreement paragraphs 5 to 7).

The law behind this: 50 U.S.C. § 3953

Mortgages and trust deeds: read the statute , or read § 3953 in plain English, with its enforcement record .

We hope this case sends a strong message to foreclosure trustee companies and others that all foreclosures must comply with the Servicemembers Civil Relief Act.

Northwest Trustee may have shuttered its foreclosure business, but that does not end its obligation to do right by servicemembers.

Who was covered

Servicemembers the United States determines were aggrieved by the company's foreclosures in the covered period. The United States had 210 days from the effective date to name them and set each person's percentage of the money (agreement paragraph 14). The complaint counts at least 28 homes. If the company ever re-enters the foreclosure business it must give 60 days' notice and adopt SCRA policies, procedures and training first (paragraph 11).

What the settlement paid

• No fixed fund. After court-approved administrative expenses and an operating reserve, the receiver pays from the company's accounts receivable as collected, on a sliding scale: 100 percent, up to $250,000, of the first $250,000 to be distributed to creditors; 30 percent, up to $300,000, of creditor distributions after that first $250,000, up to $1,250,000; and 20 percent, up to $200,000, of distributions after the first $1,250,000, up to $2,250,000 (agreement paragraph 12).
• The agreement refers to the full $750,000 (paragraph 13), and DOJ's release describes a total payout to servicemembers of up to $750,000. No aggrieved person may receive more than $125,000 (paragraph 14). Each check is the money available for servicemembers at that point times the person's percentage (paragraph 15), the agreement contemplates more than one check per person (paragraph 17), and timing is left to the receiver's discretion, reviewable by the receivership court for abuse of discretion (paragraph 12).
• A signed release comes before the first check, and checks must be cashed within 180 days (paragraphs 16 to 18). The disbursement plan needed King County Superior Court approval, and within 14 days of that approval the parties were to move to dismiss the federal case and the United States was to move to terminate its writs of garnishment against the company (paragraphs 27, 28 and 44).
• The company represents that it did not report to credit bureaus as a trustee; if the receiver discovers a negative entry the company made for an aggrieved servicemember, the company must notify the United States and take steps to remove it (paragraph 20). The agreement contains no civil penalty.

Why this case matters

The trustee that runs a sale can be liable, not only the lender. In the lead example the mortgage servicer was PHH, and the United States sued the separate company that conducted the sale. The case also shows what a settlement with a company that has shut down is worth: the money depends on what a state receiver collects, comes as percentage shares of collections rather than a lump sum, and is capped at $125,000 a person, where PHH's own 2019 settlement in this ledger set $125,000 per servicemember and Saxon's carried a minimum of $130,555.56. The veteran whose complaint prompted the investigation was less than two months out of service when his house was sold, inside the nine-month window the statute then set.