Claims by borrowers related to alleged "robo-signing" in mortgage foreclosures must be raised in the original foreclosure action and not in a subsequent lawsuit for damages, the U.S. District Court for the District of Maryland has ruled.

In Smalley v. Shapiro & Burson, the court held that borrower claims for alleged common law fraud, violations of the Fair Debt Collection Practices Act, and other statutes were barred by res judicata because the borrowers had failed to raise the claims in the underlying foreclosure case. Robert A. Scott and Glenn A. Cline of Ballard Spahr's Baltimore office represented the defendants in the case.

The class action plaintiffs, two Maryland homeowners, sued over alleged improprieties in the foreclosure process, including the alleged use of affidavits that were "robo-signed" by lawyers and paralegals who allegedly had failed to verify that the foreclosing lender was entitled to foreclose. The plaintiffs also claimed that non-lawyers signed attorneys’ names to certain documents used in the foreclosures.

After the state-court foreclosure cases were litigated to final judgments, plaintiffs filed a separate class action lawsuit in the federal court, seeking damages under the FDCPA, the Maryland Consumer Protection Act, and other statutes. Plaintiffs argued that attorneys fees assessed against them in the state-court foreclosure cases were improper because of the alleged "robo-signing" activities.

The court dismissed the case in its entirety, ruling that plaintiffs could have raised their claims in the state-court foreclosure proceedings. Because those proceedings were litigated to final judgments, the court ruled that res judicata barred the plaintiffs from bringing a new lawsuit for damages allegedly incurred in the foreclosure case.

The court rejected plaintiffs' argument that res judicata did not apply because plaintiffs did not become aware of the alleged "robo-signing" until after foreclosure cases were fully litigated. The court ruled: "The fact that plaintiffs may not have been aware of the existence of their claims during the litigation of the previous action does not render the doctrine of claims preclusion from being applicable."

Given the increasing prevalence of claims based on "robo-signing" and other alleged irregularities, this decision is good news for mortgage lenders and servicers.

Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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