Mathews v. PHH Mortg. Corp.

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