Virginia Appellate Court Allows Borrower to Assert Fraud Defense Against VA in Unlawful Detainer Action

The Court of Appeals of Virginia recently held that constructive fraud can be raised as an affirmative defense in an unlawful detainer action where the validity of the title is disputed and the purported titleholder’s right of possession derives from the allegedly defective title. 

The defendant borrower initially obtained a VA loan but later entered into a loan modification, when she alleges a VA representative told her that she no longer had a VA loan and thus no longer needed to adhere to certain VA regulations.  The borrower later defaulted on her modified loan, and the VA obtained a foreclosure deed for her property and filed an unlawful detainer action when she refused to vacate the property. 

In the unlawful detainer action, the borrower admitted she was in default on her loan but asserted that, had the VA representative not made the material misrepresentation that she no longer had a VA loan after the loan modification, she would have availed herself of certain protections in the VA regulations to help her avoid foreclosure.  As a result, she alleged, the foreclosure deed obtained by the VA was defective and void due to the VA’s constructive fraud.

The VA moved for summary judgment, arguing that the borrower could not seek to void the foreclosure deed in an affirmative defense to the VA’s unlawful detainer action.  The circuit court agreed and granted summary judgment to the VA. 

The Court of Appeals reversed, holding that the VA’s asserted right of possession depended on the validity of the title received at the foreclosure sale.  The borrower’s affirmative defense of constructive fraud created a genuine dispute of material facts as to the VA’s superior right of possession to that of the borrower.  The Court of Appeals noted, however, that the trial court would be limited to determining whether the VA proved a superior right of possession only with respect to the unlawful detainer suit.  It would have no preclusive effect on any future litigation, such as any potential invalidation of the deed as part of a counterclaim or any affirmative lawsuit.