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Twisted Foreclosure Lawsuit

Twisted Foreclosure LawsuitWaMu to settle case lost on appeal

December 14, 2006

By LISA D. BURDEN
WASHINGTON correspondent for MortgageDaily.com

Washington Mutual has reportedly agreed to settle with a couple who claimed to suffer emotional distress when their home was foreclosed on after they had filed for bankruptcy. But whether the husband or his now deceased wife actually ever owned the property was not clear.“The reality is that the [Washington Mutual Bank successor to Great Western Bank] had no defense and never did and cost themselves a lot of money by refusing to settle with us at a reasonable price,” observed Charles Dell’Ario, the attorney for the couple, George and Barbara Dawson.

In a case that wound through the court system for eight years and spawned numerous appeals, the U.S. Bankruptcy Court for the Northern District eventually awarded Barbara Dawson $20,000 in emotional distress damages, $1,440 for special damages for physical therapy that Mr. Dawson said was needed because of muscle tension; $600 for the services of the attorney who handled their bankruptcy; special damages of $5,400 for rent; and $156,818 for attorney’s fees. Dawson was, however, unsuccessful in her quest for punitive damages.

Dawson died during the appellate phase of the lawsuit. The court also held that a claim for emotional distress damages survives the death of the claimant.

And, in deciding to award damages for emotional distress, the United States Court of Appeals for the Ninth Circuit did something that Dell’Ario said he has not seen in 32 years of practicing law.

Upon his request to the court to reconsider its decision not to give the couple damages for emotional distress, the court withdrew its earlier opinion denying the damages and issued another one in favor of the Dawsons.

“It’s probably the best 15 pages I ever wrote,” he said about his petition asking the court to reconsider. He explained that, in denying damages for distress, the court had relied upon cases from the areas of securities and copyright law that had no bearing. Dell’Ario pointed out in his court petition that cases dealing with the Fair Debt Collection Act had more bearing upon the Dawson’s request.

In a telephone interview with MortgageDaily.com, Dell’Ario said he and Washington Mutual’s attorney, William G. Malcolm, have an agreement on terms but that a draft of the settlement agreement or consideration has not yet been forwarded to him.

Both of the attorneys declined to disclose the settlement amount but Dell’Ario said he offered only a modest discount to the court’s damages determination.

When a debtor files bankruptcy, an automatic stay is created. After notice of the filing, creditors by law can not contact the debtor nor attempt to seize any secured property unless they have obtained the bankruptcy’s court permission. The stay creates a “breathing spell” for the debtor and provides for an orderly disposition of the debtor’s property. Courts and bankruptcy law professors often describe the automatic stay as one of the cornerstones of the bankruptcy process.

Dell’Ario described Washington Mutual’s legal defense as “no harm, no foul.” The bank rescinded its foreclosure sale in August, a little over five months after Mr. Dawson’s Feb. 6, 1996 bankruptcy filing. The bank noted in part, that emotional distress damages should not be awarded because there was no causal connection between the alleged damages and the stay violation as required. The bank also noted that Dawsons’ defaults on the deeds of trust and numerous bankruptcies showed serious and longstanding financial problems.

And there was a question of whether or not the Dawsons were on the title to the house because of numerous defaults, bankruptcy filings and changes to the title of the Richmond, Calif. residence. Indeed, at one point during the legal proceedings, the question before the court was whether or not the Dawsons had an interest in the house.

According to court documents, Great Western Bank gave a mortgage loan to Bill Hayes Jr. in 1987. Later that year, Hayes deeded the home to Dawsons. Although the Dawsons did not assume the loan, they moved into the house and made payments on the loan which were accepted by the bank. Two years later, the Dawsons executed a deed of trust to another couple, the Dixons, to secure a loan of $40,000. Later on, the Dawsons persuaded some relatives, the Jamesons, to acquire the house from the Dixons and to sell it to the Dawsons within 30 working days. The Jameson agreement was not recorded.

Court documents state that Mr. Dawson filed a Chapter 7 bankruptcy on Feb. 6, 1996. On Feb. 27, 1996, the bank filed an unlawful detainer action against the Dawsons. It rescinded the foreclosure sale on August 8, 1996.

On June 2, 1998, the Dawsons filed a chapter 13 bankruptcy and started proceedings against the bank, seeking damages for willful violation of the automatic stay.

As described in the opinion, Dawson claimed that Mr. Dawson first learned that the bank had foreclosed when a handful of Realtors showed up to inspect the home. She said he suffered acute fear during that period that his family would be homeless. She said that because of this fear her husband started physical therapy to relieve muscle tension and that his high blood pressure medication dosage was increased. She also claimed that because of the stress, he started drinking heavily and later required treatment from the Veteran’s Administration and Alcoholics Anonymous.

The court originally found that the foreclosure sale did not violate the automatic stay because Mr. Dawson did not have an interest in the home on the day of the sale. That determination was later reversed.

The bankruptcy court noted in a footnote that “it may seem unfair to hold the bank liable for damages for a willful stay under these circumstances. However, the bank could have protected itself from this liability by seeking a court determination of the issue.”


Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: burdenlisa@yahoo.com

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