Big Banking vs. the City of Providence: The Fight over Mandatory Mediation in Foreclosure Proceedings

By: Kristen W. Sherman, Attorney, Adler, Pollock & Sheehan, P.C. and Amy Goins, Roger Williams University Law Student

As the tide of foreclosures continues to swell in Rhode Island, cities and towns have turned to using local ordinances as a means to mitigate the harsh effects of foreclosures on struggling borrowers. According to Realty Trac, Inc., a real estate tracking firm, the number of foreclosure notices in April rose 55% over April of last year. Rhode Island’s foreclosure rate positioned the State in 19th place out of the 50 states. In the midst of this foreclosure crisis, cities and towns such as Providence, Warwick and Cranston have passed ordinances designed to prevent or slow the foreclosure process and its devastating impacts to borrowers.

Beginning last year, the City of Providence enacted a series of local ordinances that, among other things, require lenders to give both the City and the borrower notice of the impending foreclosure and participate in mediation in the hopes that the parties might renegotiate the loan. The ordinance prohibits the Recorder of Deeds from accepting and recording a foreclosure deed unless the lender has made a good faith effort to mediate with the borrower. Recording a deed is a necessary step in the foreclosure process and violating the ordinance subjects the bank to a $2,000 fine if it fails to meet the procedural requirements of the ordinance.

In recent months, Wells Fargo & Co., Bank of New York Mellon Corp. and Deutsche Bank, filed multiple lawsuits suit against the City of Providence seeking to prevent the City from enforcing the mediation aspects of the foreclosure ordinance. The lawsuits arose when the Providence Recorder of Deeds refused to record a foreclosure deed based on non-compliance with the local ordinance. At least one of the lawsuits alleges that the City’s refusal to accept the deeds for recording violates state foreclosure laws and has slandered the title to the properties at issue. One or more of the banks also complained that the City’s conduct was negligent and created a nuisance. In addition to seeking an injunction to prevent enforcement of the ordinance, at least one of the banks sought money damages.

At the crux of the dispute is the question of whether state law pre-empts more restrictive local law such as the Providence foreclosure ordinance. Under Rhode Island law, a local ordinance may be preempted if it contradicts a state statute or if it is clear that the Legislature intended state law to “occupy the field” on a particular subject matter such that there is no room for local regulation. In the pending cases, the banks argue that state law applies and controls. State foreclosure laws do not require mediation and, in fact, purport to require the town clerk or recorder of deeds to record deeds that are presented. According to the banks, local clerks and recorders of deeds do not have any discretion to reject an instrument for recording.

In a 16-page decision issued in the Deutsche Bank case on May 17, 2010, Judge Lanphear of the Superior Court adopted the pre-emption argument and invalidated the portions of the Providence ordinance that allow the Recorder of Deeds to reject a foreclosure deed. The Court relied, in part, on the fact that state law sets forth specific requirements and limitations on the recording system as evidence that the Legislature intended to occupy the field. It found uniformity in the recording laws throughout the State to be an important goal. Therefore, the City of Providence’s attempt to regulate this “statewide matter” by empowering the Recorder of Deeds to reject a foreclosure deed was held to be impermissible. Notably, the Court made clear that its decision did not invalidate the remainder of the ordinance such as the provision requiring mediation and allowing the City to impose fines for non-compliance. It remains to be seen whether Deutsche Bank will appeal the decision or consider trying to amend state foreclosure laws to eliminate such local provisions.

While the Court’s decision is limited to the Deutsche Bank case and the Providence ordinance, it will likely lead to similar decisions in the cases filed by the other banks. It is also reasonable to assume that the decision could be used as precedent for challenges to the other local ordinances with similar provisions.

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