CARES Act

Texas Court Strikes Down Federal Eviction Moratorium

March 1, 2021 By Consumer Finance Team

A&B ABstract: On February 25, 2021, Judge J. Campbell Barker of the U.S. District Court for the Eastern District of Texas entered a declaratory judgment that the nationwide eviction moratorium ordered by the U.S. Centers for Disease Control and Prevention (“CDC”) in response to the COVID-19 pandemic is invalid under Article I of the U.S. Constitution.

The CARES ACT Moratorium

As we previously wrote, the CARES Act imposed a 120-day moratorium on certain residential evictions that elapsed on August 25, 2020. With this date impending, on August 8, President Trump directed executive agencies to “take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19.” He also ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether any measures “temporarily halting residential evictions” are “reasonably necessary to prevent further spread of COVID-19” between states.

The CDC Emergency Order

In response, on September 4, the CDC issued an emergency order imposing a nationwide moratorium on certain residential evictions through December 31, 2020 (“CDC Order”). In doing so, the CDC coordinated with HHS and the Department of Housing and Urban Development (“HUD”). The CDC Order prevents the eviction of any tenant who certifies that he or she: (1) is “using best efforts to obtain all governmental assistance for housing”; (2) earns no more than $99,000 per year in income; (3) cannot pay rent in full due to a substantial loss in income or extraordinary medical expenses; (4) is “using best efforts to make timely partial payments”; and (5) would likely become homeless, or be forced to live in a shared living setting, if evicted.

Significantly, the CDC Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants, nor does it establish any hearing process for challenges to a tenant’s Declaration. Conversely, the Order also does not exempt tenants from their legal obligation to pay outstanding rent they accumulate. The CDC has since extended the moratorium to March 31, 2021.

The Constitutional Challenge

One individual landlord and six property management companies operating in Texas filed suit to challenge the constitutionality of the CDC order. They claimed that it exceeds the federal government’s power to regulate “commerce” under Article I of the U.S. Constitution. Given that this was a purely legal issue, the plaintiffs requested – and the Court agreed – that the matter should be decided on summary judgment briefing without need for discovery.

The Court’s Decision

In his decision, Judge Barker acknowledged that eviction moratoriums may be lawful as part of state laws managing eviction procedures generally and under states’ broad “police powers” to promote “the lives, health, morals, comfort and general welfare” of their citizens. He contrasted such state-level actions to this federal moratorium, which he described as a significant expansion of federal power, stating (slip op. at 2):

The federal government cannot say that it has ever before invoked its power over interstate commerce to impose a residential eviction moratorium. It did not do so during the deadly Spanish Flu pandemic. Nor did it invoke such a power during the exigencies of the Great Depression. The federal government has not claimed such a power at any point during our Nation’s history until last year.

The court also analyzed Congress’s power under the Commerce Clause to regulate interstate commerce, as well as other constitutional provisions, and concluded that the moratorium exceeds the federal government’s authority. In large part, this is because Judge Barker determined that the decision to evict a tenant is not an “economic” act within Congress’s power to regulate.

Importantly, the court did not enter an injunction against enforcement of the moratorium, but left open that possibility if the federal government does not abide by the declaratory judgment. In the meantime, the government has already announced that it will appeal the decision to the U.S. Court of Appeals for the Fifth Circuit.

Takeaways

This decision contrasts with those of other courts in Louisiana (Chambless Enters. v. Redfield) and Georgia (Brown v. Azar) that struck down other constitutional challenges to the CDC moratorium. One might also argue that Judge Barker improperly disregarded several grounds cited in support of the CDC moratorium — for example, that a massive wave of evictions could drive up infections and further destabilize the economy. Given the conflicting precedents, and the public health circumstances of the COVID-19 pandemic, there appears to be a reasonable likelihood that the decision will be struck down even by the relatively conservative Fifth Circuit.

Further, because Judge Barker did not issue an injunction, and because the declaratory judgment was limited to the plaintiffs, the decision does not extend nationwide. As the Department of Justice noted in announcing its appeal, “[t]he decision . . . does not extend beyond the particular plaintiffs . . . and it does not prohibit the application of the CDC’s eviction moratorium to other parties. For other landlords who rent to covered persons, the CDC’s eviction moratorium remains in effect.” Absent a broad injunction, the decision has very limited effect. Nonetheless, the ultimate outcome of Terkel v. CDC could have important implications for other courts considering the scope of government action in response to the COVID-19 pandemic, particularly if it is upheld on appeal or ultimately heard by the U.S. Supreme Court.

Federal Court Dismisses Lawsuit Challenging Minnesota Eviction Moratorium

January 11, 2021 By Consumer Finance Team

A&B ABstract: A federal district court dismissed a lawsuit filed by two landlords who sought to invalidate the Governor of Minnesota’s moratorium on evicting residential tenants for failure to pay rent during the pandemic.

The Eviction Moratorium

In an Executive Order dated March 23, 2020, Minnesota Governor Timothy Walz suspended landlords’ ability to file eviction actions and prevented them from terminating residential leases except where a tenant took actions that “seriously endangered” other tenants or violated certain state criminal laws. The Executive Order did not relieve tenants of their obligation to pay rent. The moratorium was to stay in place until the statewide COVID-19 emergency declaration elapsed or the Executive Order was rescinded.

The Governor issued several later clarifications to the eviction moratorium, including Executive Order No. 20-79 on July 14, which is the version currently in effect. It expanded certain tenant protections, and additionally permitted eviction of tenants who “significantly damage” rental property or overstay beyond a prior notice to vacate. Landlords who violate the moratorium are subject to criminal fines and imprisonment of up to 90 days.

The Lawsuit

Two companies that own rental properties in Minnesota, Heights Apartments and Walnut Trails, claimed to have “troublesome” tenants that they would seek to evict but for the moratorium. They sued the Governor in federal district court in Minnesota, seeking to invalidate Executive Order No. 20-79 for several alleged violations of their constitutional rights. The landlords also claimed that the moratorium was an unauthorized action under state law. The complaint sought a preliminary injunction against enforcement of the moratorium, pending its invalidation. The Governor filed a motion to dismiss.

The Decision

On December 31, 2020, the court granted the Governor’s motion to dismiss and denied the landlord’s request for a preliminary injunction. Much of the court’s opinion addresses – and rejects – standing, jurisdictional, and immunity arguments raised by the Governor. On the merits, the court concluded that nothing in the moratorium interfered with the landlords’ ultimate right to collect rent pursuant to their lease agreements, and that the moratorium therefore did not “substantial impair” their contractual rights or infringe their constitutional rights.

As the court explained:

But the fundamental nature of a lease of a residential unit is that the landlord provides the tenant a place to live; the tenant, in turn, pays the landlord rent. The landlord’s end of the contractual bargain is receiving rent payments. Nothing in the [executive orders] interferes with that right, and each of the eviction moratoria clearly states that it does not affect a tenant’s obligation to pay rent. And although, under the [executive orders], a landlord cannot enforce its contractual right to rent through an eviction proceeding, it can still sue tenants for rent owed.

The court found further that the executive orders advance an important state interest – preventing the spread of COVID-19 – and the court determined they “appropriately and reasonably advance that interest.” The court also noted that the moratorium does not completely prohibit evictions, which the court believed would not reasonably advance the state’s interest in protecting public health. For example, evictions may still be allowed if a tenant poses a risk to other residents or engages in dangerous criminal activity. On these grounds, the court also made short order of the landlords’ First Amendment and Takings claims.

Takeaways

This decision is in line with others from across the country that have upheld statewide eviction moratoriums against legal challenges. As a consequence, a large volume of eviction proceedings will likely be filed nationwide once the moratoriums expire, assuming tenants are unable to pay rent. Real estate entities and landlords should prepare for a backlog of these cases, and for the potential that they will take longer to adjudicate as a result.

Maryland Issues Executive Order Restricting Foreclosure Actions and Prohibiting Evictions During COVID-19 Emergency

October 23, 2020 By Nanci Weissgold

A&B ABstract: Maryland’s Governor has issued an Executive Order providing that until the COVID-19 state of emergency is terminated: (1) foreclosure sales will only be valid if the servicer had notified the borrower of their rights to request a forbearance, and (2) residential and commercial evictions are prohibited if the tenant can show they suffered a “Substantial Loss of Income.” Similar to Section 4022 of the CARES Act, this Executive Order grants borrowers a right to request a forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Additionally, until January 4, 2021, the Maryland Commissioner of Financial Regulation must discontinue acceptance of Notices of Intent to Foreclose, which effectively prohibits new foreclosure initiations until that date. Moreover, effective January 4, 2021 and until the COVID-19 state of emergency is terminated, Notices of Foreclosure will only be accepted if the lender or servicer certifies that they notified the borrower of their right to request a forbearance.

On October 16, 2020, the Governor of Maryland issued an Executive Order (No. 20-10-16-01), which amends and restates a previous Executive Order providing certain relief to tenants and homeowners impacted by the COVID-19 pandemic. This Executive order imposes restrictions on servicers’ ability to conduct foreclosure proceedings, and prohibits evictions where the tenant can show a “substantial loss of income,” during the COVID-19 state of emergency.

Restrictions on Residential Foreclosures

The Executive Order provides that “until the state of emergency is terminated and the catastrophic health emergency is rescinded,” foreclosures sales of “Residential Property” (defined as “real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation”) under Maryland’s Real Property law will not be considered a valid transfer of title in the property unless certain requirements are met, depending on the type of loan secured by the property:

With respect to a property securing a Federal Mortgage Loan:

1. at least 30 days prior to sending a notice of intent to foreclose to a borrower, the servicer must send a written notice to the borrower stating the borrower’s right to request a forbearance on the loan under Section 4022(b) of the CARES Act; and
2. the servicer must comply with all of its obligations with respect to the loan owed to the borrower under the CARES Act or otherwise imposed by the federal government or a government sponsored enterprise.

With respect to a property securing a Non-Federal Mortgage Loan:

1. the servicer must have notified the borrower, in writing, that if the borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the borrower may request a forbearance on the loan, regardless of delinquency status, for a period up to 180 days, which may be extended for an additional period up to 180 days at the request of the borrower;
2. if the borrower did request a forbearance on the loan, the servicer must have provided such forbearance without requiring the borrower to provide additional documentation other than the borrower’s attestation to a financial hardship caused by COVID-19, and without requiring any additional fees, penalties, or interest; and
3. during the forbearance period, the servicer must not have accrued on the borrower’s account any fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan.

Notably, as discussed in the next section, these requirements appear applicable only to foreclosure proceedings already in progress prior to January 4, 2021 (because the Executive Order effectively prohibits the initiation of new foreclosure actions until that date), and to those initiated between January 4, 2021 and the termination of the COVID-19 state of emergency.

Directives to the Maryland Commissioner of Financial Regulation

The Executive Order also directs Maryland’s Commissioner of Financial Regulation to alter certain practices regarding its processing of residential foreclosures.

Specifically, as of the date of the Executive Order, and until January 4, 2021, the Commissioner is directed to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose. This effectively imposes a moratorium on the initiation of new foreclosure actions. Under Section 7-105.1(c) of the Real Property Article of the Maryland Code, as the first step in the foreclosure process, a Notice of Intent to Foreclose is required to be sent to the borrower at least 45 days before an action to foreclose a mortgage can be filed, and a copy of that notice must be submitted to the Commissioner within 5 business days thereafter via the Commissioner’s Notice of Intent to Foreclose Electronic System. (COMAR 09.03.12.02(E)). Citing the Executive Order, the Notice of Intent to Foreclose Electronic System website currently states that “no new [Notice of Intent] submissions will be accepted until January 4, 2021.” As such, this directive effectively prohibits the initiation of new foreclosure proceedings until December 28, 2020 (the earliest date a Notice of Intent can be mailed to the borrower and then submitted to the Commissioner within 5 business days).

Moreover, the Executive Order provides that effective January 4, 2021, and until the state of emergency is terminated and the catastrophic health emergency is rescinded, when a servicer submits to the Commissioner the Notice of Foreclosure required under Section 7-105.2(b) of the Real Property Article of the Maryland Code, the Commissioner must obtain a “certification” from the servicer or secured party that the servicer complied with the Executive Order’s requirement that the borrower be informed of their right to request a forbearance, as discussed above.

Prohibition on Residential and Commercial Evictions

The Executive Order provides that until the state of emergency is terminated and the catastrophic health emergency is rescinded, Maryland courts shall not effect any evictions by giving any judgment for possession or repossession on residential, commercial, or industrial real property, if the tenant can demonstrate to the court, through documentation or other objectively verifiable means, that the tenant suffered a “Substantial Loss of Income.”

The Executive Order defines “Substantial Loss of Income” as follows:

with respect to an individual, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to job loss, reduction in compensated hours of work, closure of place of employment, or the need to miss work to care for a home-bound school-age child; and
with respect to an entity, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to lost or reduced business, required closure, or temporary or permanent loss of employees.

This prohibition applies to evictions for failure to pay rent under Section 8-401 of the Real Property Article of the Maryland Code, as well as evictions based on a tenant’s breach of the lease under Section 8-402.1 of the Real Property Article of the Maryland Code.

Takeaways

Notably, the forbearances that servicers are required to offer with respect to non-federally backed loans under this Executive Order present forbearance terms and conditions that substantially parallel those offered for federally backed loans under the CARES Act. It is possible that other states will follow suit with Maryland and create similar state mandates effectively applying to non-federally backed mortgages the forbearance rights available for federally backed mortgages under the CARES Act, in addition to state-mandated foreclosure restrictions. We will continue to monitor for such state requirements.

Update: The Federal Moratorium On Residential Evictions Faces A New Class Action

October 7, 2020 By Consumer Finance Team

A&B ABstract: The National Apartment Association, along with several landlords, has challenged the order of the Centers for Disease Control and Prevention (“CDC”) that imposed a nationwide moratorium on certain residential evictions. This lawsuit follows one we previously covered, and could have a major impact on the scope of federal power during the pandemic.

Refresher on the Moratorium and CDC Emergency Order

As we previously discussed, the CARES Act imposed a temporary moratorium on certain residential evictions. On August 8, President Trump directed executive agencies to “take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19,” and he ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether “temporarily halting residential evictions” was “reasonably necessary to prevent further spread of COVID-19” between states.

In response, on September 4, the CDC issued an emergency order imposing a nationwide moratorium on certain residential evictions through December 31, 2020 (“CDC Order”). The CDC Order prevents the eviction of any tenant who certifies that he or she satisfies several financial hardship criteria. However, the Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants.

The New Class Action

Following on the Tiger Lily case (discussed in our September 23 post), on September 18, a group of landlords and the National Apartment Association filed Richard Lee Brown et al v. Alex Azar et al., No. 1:20-cv-03702 (N.D. Ga.), a purported class action lawsuit challenging the constitutionality of the CDC Order. Plaintiffs also seek a preliminary injunction against enforcement of the CDC Order.

The Claims

Plaintiffs’ key claims are very similar to those asserted in Tiger Lily. The Amended Complaint asserts that the CDC Order was promulgated in violation of the Administrative Procedure Act, violates landlords’ right to due process and access to courts, is unauthorized by the statute upon which it relies, and improperly seeks both to displace state eviction laws and to “commandeer” state resources to enforce its mandate. Unlike Tiger Lily, Plaintiffs do not assert a Takings claim.

Our prior analysis is largely applicable to this new class action, and it seems probable that the outcome will turn on the general question of whether the scope of the CDC Order is consistent with past practice and the intent underlying the federal statute on which it purports to be based. The CDC’s broad interpretation of its power would arguably give the Executive the power to restrict almost any type of activity, as applied to any “communicable” disease. And the eviction moratorium is very different than exemplary public health measures listed in the statute, perhaps exceeding its intended scope.

Takeaways

Brown v. Azar has the potential to be quite significant regardless of its outcome. It embodies the nationwide class action we previously predicted might flow from Tiger Lily, and may generate more class action tag-along cases, miring the CDC Order in a morass of litigation akin to that involving the Paycheck Protection Program “agent fee” litigation. The involvement of the National Apartment Association, which has nearly 83,000 members managing over 9.7 million rental homes in the United States, Canada, and the United Kingdom, credentializes and raises the profile of this matter as well.

As was true for Tiger Lily, success in this class action would result not just in restoration the ability for the plaintiff landlords to evict non-paying tenants, but it could yield important clarifications and limits on the regulatory power of the federal government in connection with the pandemic. If the CDC Order is struck down, this could spur Congress to consider addressing residential evictions directly again, either through another statutory moratorium on evictions, or more stimulus payments for struggling renters. For these reasons, Brown v. Azar is worth watching.

The Federal Moratorium On Residential Evictions Faces Constitutional Challenge

September 23, 2020 By Consumer Finance Team

A&B ABstract: Landlords in Tennessee have challenged the order of the Centers for Disease Control and Prevention (“CDC”) that imposed a nationwide moratorium on certain residential evictions. If sustained, the challenge could have a major impact on the scope of federal power during the pandemic.

Background of the Eviction Moratorium

The CARES Act imposed a 120-day moratorium on certain residential evictions that elapsed on August 25, 2020. With this date impending, on August 8, President Trump directed executive agencies to “take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19.” He also ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether any measures “temporarily halting residential evictions” are “reasonably necessary to prevent further spread of COVID-19” between states.

The CDC Emergency Order

Significantly, the CDC Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants, nor does it establish any hearing process for challenges to a tenant’s Declaration. Conversely, the Order also does not exempt tenants from their legal obligation to pay outstanding rent they accumulate. It further provides that the moratorium can also be extended beyond December 31.

The Constitutional Challenge

On September 16, a group of seven landlords – which together own and manage over 5,000 residential rental units in western Tennessee – filed a lawsuit in federal court that challenges the constitutionality of the CDC Order.

In Tiger Lily LLC et al. v. Dep’t of Housing & Urban Devel. et al., No. 2:20-2692 (W.D. Tenn.), the plaintiffs assert seven causes of action – spanning the Takings clause, to due process, to the improper displacement of state law – that all rest on the contention that the CDC Order was not authorized by law and exceeds federal authority. Plaintiffs seek an injunction against enforcement of the CDC Order, but not monetary damages.

The Claims

Plaintiffs’ key substantive contention is that the CDC Order is not authorized by the statute or regulations upon which it relies, rendering it unconstitutional. The Complaint’s specific claims in this respect appear questionable. For example, the Order is rooted in Section 361 of the Public Health Services Act, which Plaintiffs say gives the Surgeon General only limited authority to issue orders addressing specific incidents of contamination. But Section 361 empowers the Surgeon General to “make and enforce such regulations as in his judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases.” 42 U.S.C. § 264(a) (emphasis added). After listing several categories, Section 361 then repeats that the Surgeon General may enact “other measures, as in his judgment may be necessary.” Id.

The Complaint makes a similar argument about a federal CDC regulation the Order relies on, but it too vests the CDC Director with power to “take such measures to prevent [disease spread] as he/she deems reasonably necessary.” 42 C.F.R. § 70.2 (emphasis added). Plaintiffs also cite a “savings” clause in the Public Health Services Act, which provides that it cannot supersede state law. But there is an exception for state laws that “conflict” with an exercise of federal authority under the Act. 42 U.S.C. § 264(e). Such a conflict appears to be present here. In addition, “regulatory” Takings of the sort asserted by Plaintiffs are notoriously difficult to establish. A New York federal judge recently rejected such a claim made against that state’s eviction moratorium. Elmsford Apartment Assocs. LLC et al. v. Andrew Cuomo, No. 1:20-cv-04062 (S.D.N.Y. June 29, 2020).

The Deeper Roots of the Challenge

Given these issues, the constitutional challenge may instead turn on the general question of whether the scope of the CDC Order is consistent with past practice and the intent underlying Section 361. The CDC’s broad interpretation of its power would arguably give the Executive the power to restrict almost any type of activity, as applied to any “communicable” disease.

Further, the eviction moratorium is very different than exemplary public health measures listed in the statute, perhaps exceeding its intended scope. The moratorium also applies to purely intrastate evictions, which may not threaten interstate spread of COVID-19, as required for federal action. Further, if the court were to conclude that the broad CDC Order is not “necessary” (42 U.S.C. § 264(a)) or “reasonably necessary” (42 C.F.R. § 70.2) to prevent the interstate spread of COVID-19, the Order could be invalidated. This appears to be a matter of first impression, although statewide moratoriums have a long history and have been upheld by courts. E.g., Home Bldg. and Loan Assn. v. Blaisdell, 290 U.S. 398 (1934) (upholding Minnesota foreclosure moratorium).

Takeaways

The Tiger Lily case may be significant regardless of its outcome. As a procedural matter, it could spawn future lawsuits challenging the CDC Order in other courts, and potentially in the form of a nationwide class action. Litigation over the CDC Order could eventually rival the onslaught of lawsuits involving the CARES Act, such as the Paycheck Protection Program “agent fee” litigation.

Further, if successful, Tiger Lily would also result not just in restoration the ability for the plaintiff landlords to evict non-paying tenants, but it could yield important clarifications and limits on the regulatory power of the federal government in connection with the pandemic. Particularly if it is appealed to the Sixth Circuit (if not the U.S. Supreme Court), the Tiger Lily case could have meaningful ramifications for all future federal regulations related to COVID-19.

Moreover, if the CDC Order is struck down, this could spur Congress to consider addressing residential evictions directly again. For example, Congress could enact its own broad moratorium by statute or provide more stimulus payments to struggling renters, enabling them to pay rent on time – which, in turn, would help landlords, albeit at taxpayer expense. For these reasons, Tiger Lily and any subsequent related cases will be worth watching as they move through the courts.