A federal court in Texas has ruled that the federal government has no constitutional power to prohibit real estate foreclosures and evictions pursuant to coronavirus legislation and regulation, calling into question whether banks, mortgage lenders and property owners must continue to abide by federal agency orders prohibiting them from reclaiming the property that secures their loans.

The issue arose in the context of the CARES Act, the anti-foreclosure provisions of which expired on June 27, 2020, and a September 2020 order from the Centers for Disease Control and Prevention (CDC), an arm of the U.S. Department of Health and Human Services, which picked up the eviction moratorium and extended it through December 31, 2020, whereupon additional federal legislation was inserted into an appropriations act, extending the moratorium until January 31, 2021. Another CDC order then extended the moratorium through March 31, 2021.

The CDC order makes it a crime to evict a “covered person” from a residence. A “covered person” is one who meets several criteria including loss of income due to job loss or reduction of hours, or the encountering of “extraordinary out-of-pocket medical expenses.”

The court noted that the federal government’s only possible justification for the moratorium would be under the “Commerce Clause” of the federal constitution, a provision that has been interpreted in the past to reach all economic activity that “substantially affects” interstate commerce. But the court found that the evictions (and foreclosures) did not involve “the production or use of a commodity that is traded in an interstate market.  Rather, the challenged order regulates property rights in buildings – specifically, whether an owner may regain possession of property from an inhabitant.”

Noting that “real estate is inherently local” and “[r]esidential buildings do not move across state lines,” the court went on to observe that the eviction/foreclosure moratorium does not include rent or loan payment forgiveness and does not alter the tenant or home-owner’s financial obligations and thus the moratorium is not a purely “economic” regulation.

The court also observed that the CDC order does not purport to be an economic regulation, but rather one designed “to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the State or possessions, or from one State or possession into any other State or possession” and that this purpose does not constitute an interstate “jurisdictional” justification for the order.

The court went on to reject several other potential “interstate” aspects of the law argued by the government, finding with regard to each that the effects of the order are purely local and that there was no stated purpose to protect or affect any aspect of interstate commerce.

The federal government’s “commerce clause” power has been expansively interpreted for over a century. This decision marks a rare instance of finding that there is no connection between a federal regulation and interstate commerce. This ruling presently affects only the parties to the case, but if upheld on appeal would become precedent in the states comprising the Fifth Circuit of the United States Court of Appeals, where an appeal by the Government as the losing party would be made. Because the case is decided on purely Constitutional grounds, it would be a strong candidate for ultimate treatment by the Supreme Court of the United States. The case also provides a template for mortgage lenders and landlords in other jurisdictions to challenge the prohibition on their exercise of their mortgage and ownership rights.

The case is Terkel v. Centers for Disease Control and Prevention, No. 6:20-cv-00564, United States District Court for the Eastern District of Texas, and the court’s opinion is dated February 25, 2021.