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U.S. Supreme Court Finds that the City of Miami Can Sue Mortgage Lenders for Predatory Lending Practices under the Fair Housing Act

Posted By USFN, Tuesday, June 27, 2017
Updated: Monday, June 12, 2017

June 27, 2017

by Jennifer K. Cruseturner
McCarthy & Holthus, LLP – USFN Member (Washington)

On May 1, 2017, the U.S. Supreme Court decided (5-3) in Bank of America Corp. v. City of Miami, Florida, together with Wells Fargo & Co. v. City of Miami, Florida, that the City of Miami is an “aggrieved person” under the Fair Housing Act of 1968 (FHA or Act). As an “aggrieved person,” the city can sue under the Act for claims of financial injury, allegedly resulting from discriminatory lending practices of financial institutions. The Supreme Court also held that the Eleventh Circuit erred in determining Miami’s complaints against the banks met the FHA’s proximate-cause requirement based solely on the finding that Miami’s alleged financial injuries were the foreseeable result of the banks’ purported misconduct.

District Court — This recent Supreme Court opinion stemmed from the 2013 lawsuits filed by the City of Miami in the U.S. District Court for the Southern District of Florida against Bank of America and Wells Fargo. Miami alleged that the lenders discriminatorily imposed more onerous conditions on loans made to minority borrowers than to similarly situated non-minority borrowers, and that the claimed discriminatory practices led to higher rates of loan default and foreclosure among minority borrowers as compared to otherwise similarly situated non-minority borrowers. The suits further alleged that the discriminatory practices of the banks adversely affected the racial composition of the city and caused higher rates of foreclosure in minority neighborhoods, which led to lower property values, diminished tax revenues, and an increased demand for municipal services.

The district court dismissed Miami’s complaints, finding: (1) that Miami could not sue under the FHA, as their harms were economic and not discriminatory; and (2) that Miami had failed to show sufficient causal connection between the injuries suffered and the banks’ conduct. Miami appealed the district court’s ruling to the Court of Appeals for the Eleventh Circuit.

Eleventh Circuit — The appellate court reversed the district court’s ruling of dismissal, determining that Miami could sue the banks under the FHA, and that Miami had plausibly alleged that its financial injuries were the foreseeable result of the banks’ alleged misconduct. The banks petitioned the Supreme Court to review the findings of the Court of Appeals. The Supreme Court granted the request for review, bringing us to the case at hand.

U.S. Supreme Court — In the opinion of the Court, authored by Justice Breyer, the Supreme Court held that Miami could sue under the FHA as an “aggrieved person” because the city’s injuries fell within the realm of injuries that the FHA was designed to avoid; nonetheless, the Court vacated the decision of the Court of Appeals — finding that foreseeability of the injury alone is not sufficient to establish proximate cause under the FHA. While the Supreme Court held that proximate cause under the FHA requires some direct relation between the injury asserted and the discriminatory conduct alleged, it declined to specifically set forth the precise boundaries of proximate cause under the FHA. The case was remanded to the lower court for it to decide how the standards of proximate cause apply to Miami’s claims against the banks.

In an opinion authored by Justice Thomas (which concurred in part and dissented in part), three justices disagreed that Miami could sue the banks under the FHA — stating that Miami’s injuries were so marginally related to the purposes of the FHA that they fell outside of the zone of interest that the Act was designed to protect. The dissent further stated that Miami had failed to demonstrate proximate cause under the FHA. The dissenting justices would have reversed the Court of Appeals’ decision outright, noting that there was nothing in the FHA to suggest that “[c]ongress was concerned about decreased property values, foreclosures and urban blight, much less about strains on municipal budgets that might follow.”

Conclusion
The Supreme Court’s ruling is not an outright victory for either side. Municipalities can bring suit against banks under the FHA, but this opinion by no means guarantees a victory for the municipality. Still, the Court’s ruling should be viewed cautiously by financial institutions with a high volume of stagnant REO properties. Litigation of this nature can present a strong reputational risk, even if the bank is ultimately successful in defending the claims.

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Chicago: Proposed Amendment to Vacant Property Registration Ordinance

Posted By USFN, Tuesday, June 27, 2017
Updated: Monday, June 12, 2017

June 27, 2017

by Lee Perres
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

An amendment to the Vacant Property Registration Ordinance has been proposed by Alderman Cardenas (12th Ward). It would have the effect of dramatically raising the registration fees for loan servicers pertaining to vacant properties. The proposed ordinance can be accessed at this webpage.

The proposed ordinance would raise the fee for registering vacant properties from $250 to a sliding scale fee based on the number of years the property has been vacant from the original registration date. Sliding scale fees are:
• $1,000 for properties that are vacant for at least one year but less than two years;
• $1,500 for properties that are vacant for at least two years but less than three years;
• $2,500 for properties that are vacant for at least three years but less than five years;
• $4,500 for properties that are vacant for at least five years but less than ten years;
• $6,000 for properties that are vacant for at least ten years, plus an additional $500 for each year in excess of ten years.

As noted above, this ordinance is in the proposal stage at this time, with a number of groups fighting its passage. This author’s firm will keep you posted on future developments.

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Mandatory e-Filing in Illinois

Posted By USFN, Tuesday, June 27, 2017
Updated: Tuesday, June 13, 2017

June 27, 2017

by Lee Perres and Elisabeth Mohr
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

On January 22, 2016, the Illinois Supreme Court entered Order M.R. 18368 announcing mandatory electronic filing (e-filing) for civil cases in Illinois. All cases filed in the Illinois Supreme Court and the Illinois Appellate Court require mandatory e-filing effective July 1, 2017.

Trial Courts

The order also mandates that, effective January 1, 2018, all civil cases shall be e-filed in the trial courts of all counties. Several counties have established mandatory e-filing prior to the January 1, 2018 deadline. Attorneys and self-represented litigants will be required to electronically file all documents in civil cases, except documents exempted by the Illinois Rules. The court will be barred from accepting any filings in paper form except in the event of an emergency.


As of June 1, 2017 the following mandatory e-filing start dates confirmed in the counties thus far are:

• DuPage County: January 1, 2016
• Jackson County: June 1, 2017
• Peoria County: July 15, 2017

Closing

The Supreme Court will be adopting rules governing e-filing and electronic service in accordance with the order. Please also note that Section 735 ILCS 5/5-127 of the Illinois Code of Civil Procedure provides that all charges related to electronic filing of documents and cases are taxable as court costs.

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Michigan: Court of Appeals Confirms Priority Interest of Mortgagee in Surplus Proceeds

Posted By USFN, Tuesday, June 27, 2017
Updated: Tuesday, June 13, 2017

June 27, 2017

by Matthew D. Levine
Trott Law, P.C. – USFN Member (Michigan)

The Michigan Court of Appeals recently issued an opinion (for publication), confirming what has been the general interpretation of distribution of surplus proceeds. The case, In re $55,336.17 Surplus Funds, Case No. 331880 (May 9, 2017), involved a dispute between the junior mortgage holder (PNC Bank, N.A.) and the estate of the mortgagor (the Estate of Kathryn Kroth) over the surplus funds created following the foreclosure of the senior mortgage.

Background
The facts were not different than many standard surplus proceeds matters. PNC held an unsatisfied junior mortgage and claimed entitlement to the surplus funds under MCL § 600.3252. Although agreeing with the facts, the Estate contended that the statute does not specifically, or automatically, grant junior lienholders the right to proceeds.

MCL § 600.3252 states, in relevant part:

“If after any sale of real estate, made as herein prescribed, there shall remain in the hands of the officer or other person making the sale, any surplus money […] the surplus shall be paid over by the officer or other person on demand, to the mortgagor, his legal representatives or assigns, unless at the time of the sale, or before the surplus shall be so paid over, some claimant or claimants, shall file with the person so making the sale, a claim or claims, […] and file the written claim with the clerk of the circuit court […]; and thereupon any person or persons interested in the surplus, may apply to the court for an order to take proofs of the facts and circumstances contained in the claim or claims so filed. Thereafter, the court shall summon the claimant or claimants, party, or parties interested in the surplus, to appear before him at a time and place to be by him named, and attend the taking of the proof, […] and the court shall thereupon make an order in the premises directing the disposition of the surplus moneys or payment thereof in accordance with the rights of the claimant or claimants or persons interested.”

In practice, courts have generally awarded surplus proceeds to subsequent lienholders in the order of their priority and then, if there are additional proceeds, to the mortgagor. This concept, however, is not explicitly stated. The Estate did not rest on practice; instead, it challenged the trial and appellate courts to address the lack of specific language. In part, the Estate argued that a foreclosure sale extinguishes junior mortgages. If the junior mortgage is extinguished, there is no junior mortgage as referenced by the statute. The Estate also asserted that “neither the statute itself nor relevant case law explicitly guides the trial court in its determination of priority ….” [COA Opinion, p. 3.]

Appellate Analysis
The Court of Appeals accepted the case as a matter of first impression. The appellate court addressed the standing argument and discussed whether a junior mortgagee held a secured interest during the redemption period. The court did not rule on this issue though, since it determined that such a ruling was unnecessary to the rights of the parties. As was maintained by PNC, the statute refers to the status of the parties at the time of the sale — not during the redemption period. Specifically, the court found that:

“[T]he language of MCL 600.3252’s final clause is unambiguous and clear in its direction. The statute plainly provides that the court shall enter an order [‘]directing the disposition of the surplus moneys or payment thereof in accordance with the rights of the claimant or claimant of persons interested.[’] MCL 600.3252 (emphasis added). As previously discussed, the Legislature clearly intended to limit application of the surplus statute to situations wherein a junior mortgage or lienholder held an interest in the foreclosed property at the time of the foreclosure sale. The rights of any subsequent mortgagees or lienholders are therefore coincidental to their interests in the property on foreclosure.” [COA Opinion, pp. 5-6.]

Further, the Court of Appeals noted that MCL 565.29 and supporting case law provide guidance for a court’s determination of priority. Specifically, MCL 565.29 (Michigan’s race-notice statute) provides a determination of lien interests; i.e., a conveyance of real estate that is not recorded “shall be void as against any subsequent purchaser in good faith and for a valuable consideration, of the same real estate or any portion thereof, whose conveyance shall be first duly recorded.”

PNC held an interest that was subsequent to the foreclosing party and superior to that held by the mortgagor. The Estate argued that the trial court failed to conduct a hearing on the facts; but, as noted by the Court of Appeals, the Estate did not challenge the facts. The Court of Appeals summed up its position with the following:

“[A] reading of MCL 600.3252 leads us to conclude that a court must distribute foreclosure sale surplus funds claimed under that statute according to the priority of interests in the foreclosed property. Here, PNC filed its claim for the surplus funds in accordance with MCL 600.3252, and the circuit court properly entered an order distributing the surplus funds to PNC after determining that PNC’s interest had priority.” [COA Opinion, p. 7.]

Conclusion
The holding in this case should put to rest any arguments concerning the lack of specificity in the statute. The Court of Appeals confirmed general practice and application. The outcome also lays to rest any concerns regarding priority and standing to obtain surplus proceeds between a junior lienholder and the foreclosed borrower, and provides a specific method for trial courts to render a decision as to the rights of these parties.

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Idaho: Supreme Court Clarifies the Statute of Limitations for Foreclosure

Posted By USFN, Tuesday, June 27, 2017
Updated: Friday, June 23, 2017

June 27, 2017

by Lewis Stoddard
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)

Recently, the Idaho Supreme Court clarified when the foreclosure statute of limitations begins to run: note maturity plus five years. Idaho borrowers and their counsel have been challenging foreclosures by claiming that the five-year foreclosure statute of limitations begins to run from the date of acceleration or the date that a notice of default is recorded (whichever is sooner), not maturity. Specifically, in the case of Baughman v. Wells Fargo Bank, N.A. (Idaho, May 26, 2017), the Court held that where a note expressly states a maturity date and contains no provisions providing for a change in maturity date, “if the amounts owing under the note were declared to be immediately due and payable because of a default,” the five-year statute of limitations for foreclosure begins to run after maturity, even if the loan is accelerated through the issuance and recording of a notice of default or other method.

By way of background, Baughman (the borrower) refinanced real property with a $1.2 million promissory note secured by a deed of trust. The promissory note required monthly payments and stated a maturity date of March 1, 2047. The borrower defaulted in December 2007. In January 2008, the beneficiary sent the borrower a letter advising her that failure to cure the default by the following month “[…] shall result in the acceleration (immediately becoming due and payable in full) of the entire sum secured by the loan security instrument […]” and foreclosure. By January 29, 2009 the default was still not cured, so a “Notice of Default and Election to Sell under Deed of Trust” was recorded, which is the first formal step to start an Idaho nonjudicial foreclosure. The notice of default provided that the beneficiary under the subject deed of trust “[…] has declared and does hereby declare all sums secured thereby immediately due and payable […]”. The property was ultimately sold at a nonjudicial foreclosure sale in January 2010 and a trustee’s deed was issued; however, an erroneous assignment ultimately caused the trustee’s deed to be rescinded.

District Court
In July 2013, before the nonjudicial foreclosure could be restarted, the borrower filed an action seeking to quiet title and requesting an injunction to stop further foreclosure attempts. The borrower claimed that any foreclosure was time-barred by the five-year statute of limitations found in Idaho Code § 5-214A, made applicable to deeds of trust pursuant to I.C. § 45-1515. The beneficiary responded and counterclaimed for judicial foreclosure. The district court granted summary judgment in favor of the beneficiary, but in so doing held that the five-year statute of limitations began to run from the date that the notice of default was recorded, which made the counterclaim for judicial foreclosure timely by four days. In so ruling, the district court found that “acceleration occurs once a notice of default is recorded” under I.C. § 45-1506(12).

Supreme Court
On appeal, the borrower argued that the loan was accelerated on February 22, 2008, not with the January 29, 2009 recording of the notice of default. The borrower relied on two Idaho Supreme Court cases from 1937 and 1979 for the proposition that the statute of limitations runs when the note holder accelerates the debt. The Idaho Supreme Court disagreed and found that the language of Idaho Code § 5-214A is clear and sets the maturity date, not the acceleration date, as the critical date for statute of limitations purposes:

"An action for foreclosure of a mortgage on real property must be commenced within five (5) years from the maturity date of the obligation or indebtedness secured by such mortgage. If the obligation or indebtedness secured by such mortgage does not state a maturity date, then the date of the accrual of the cause of action giving rise to the right to foreclose shall be deemed the date of maturity of such obligation or indebtedness."

Since the subject promissory note stated a maturity date of March 1, 2047 and did not contain any provisions modifying the maturity date upon acceleration, the five-year statute of limitations could not begin to run until March 1, 2047.

Prior to this judicial decision, best practice for avoiding statute of limitation challenges required rescinding a recorded notice of default if the related nonjudicial foreclosure were stopped, or put on hold for any extended period of time. Absent specific language in a particular promissory note modifying the maturity date upon acceleration, the Baughman case indicates that this step is no longer required.

The Idaho Supreme Court also commented on permitted bases to rescind a trustee’s deed, interpreting the statute governing rescission (Idaho Code § 45-1510) to only permit “rescission when the sale is invalid for one of three reasons: (1) by reason of automatic stay provisions of the U.S. bankruptcy code, (2) by reason of a stay order issued by any court of competent jurisdiction (3) or is otherwise invalid.” The Court’s interpretation is notable because it clarifies that rescission is only permitted when the sale is legally invalid, not merely flawed but otherwise valid.

Before this decision, beneficiaries could arguably rescind for reinstatement or other workout option. While rescission of a trustee’s deed for reasons beneficial to the borrower are likely to go unchallenged, the Idaho Supreme Court does not appear to envision the use of I.C. § 45-1510 for such purposes. Beneficiaries and trustees may need counsel to advise regarding situations where rescission is legally compelling.

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Maryland: Foreign Statutory Trust (which acquired a Loan Post-Default) is a “Collection Agency” and Prohibited from Foreclosing without a Debt Collection License

Posted By USFN, Tuesday, June 27, 2017
Updated: Tuesday, June 27, 2017

June 27, 2017

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

In Blackstone v. Sharma, __ A.3d __, 2017 WL 2438485, Nos. 1524 and 1525 (Md. Ct. Spec. App., June 6, 2017), the Maryland Court of Special Appeals affirmed dismissal of two foreclosure actions, holding Ventures Trust 2013-I-H-R (Ventures) — as a statutory trust — was required to be licensed under the Maryland Collection Agency Licensing Act (the MCALA). The central questions considered by the Maryland intermediate appellate court were whether, under the MCALA, “a party who authorizes a trustee to initiate a foreclosure action needs to be licensed as a collection agency before filing suit;” and, if so, “does the licensing requirement apply to foreign statutory trusts such as Ventures Trust?” Id. at *1. The court answered both questions in the affirmative.

In pertinent part, the MCALA requires an entity (unless otherwise exempted under the statute) to be licensed as a “collection agency” where it is “collecting a consumer claim the person owns, if the claim was in default when the person acquired it[.]” Md. Code, B.R. § 7-101(c)(1)(ii). (emphasis added). Ventures’ post-default acquisition of the loans was uncontested. The MCALA provides licensure exceptions for banks, federal or state credit unions, mortgage lenders, savings and loan associations, and “trust companies.” The court rejected Ventures’ arguments that foreclosing deeds of trust was not “doing business” under the MCALA, and that it qualified for the “trust company” exception.

Firstly, Ventures contended that because foreclosure of deeds of trust and mortgages by a foreign trust is expressly excluded from the definition of “doing business” under the Corporations and Associations Article — governing registration with the State Department of Assessments and Taxation — it did not have to be licensed. The court, however, pointed out that the Corporations and Associations Article specifically states the foreign trust “doing business” exception is limited solely to that section: “In other words, the foreign trust exception does not apply to the MCALA.” Id. at *4. The court went on to opine that the foreclosure of deeds of trusts and mortgages is indeed a debt collection activity governed by the MCALA.

Furthermore, the court held that Ventures did not qualify as a “trust company” under the MCALA’s exceptions. The MCALA does not define the term “trust company.” In constructing the meaning, the court looked to Black’s Law Dictionary (10th ed. 2014), which defines the term as “[a] company that acts as a trustee for people and entities and that sometimes also operates as a commercial bank.” Id. at *6. The court opined that Ventures did not satisfy this definition because “[it] does not act as a bank. Moreover, other entities act as trustees for it.” Id. In sum, the court considered Ventures to be a debt purchaser attempting to collect a consumer debt through foreclosure, rather than a “trust company” within the meanings provided by Black’s Law Dictionary and other Maryland statutes.

In conclusion, before commencing foreclosure in Maryland, due consideration will need to be given to the default status at loan acquisition where a statutory trust is the noteholder. It should also be noted that, where the trustee may be a bank, it will not exempt the trust from the licensing requirements. The court was only concerned with the status of the actual trust in its analysis. As the Maryland Court of Special Appeals is the intermediate appellate court in Maryland, an appeal of the ruling to the Maryland Court of Appeals is still a possibility — once the mandate is issued.

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Informal Proof of Claim Allowed by Connecticut Bankruptcy Court

Posted By USFN, Tuesday, May 23, 2017
Updated: Thursday, May 18, 2017

May 23, 2017

by Randall S. McHugh
Bendett & McHugh, P.C. — USFN Member (Connecticut, Maine, Vermont)

What do you do when the proof of claim bar date is approaching and you are not ready to file an official proof of claim? File an informal proof of claim (POC).

Unlike Bankruptcy Official Form 410, an informal proof of claim does not need to comply with all the requirements of Federal Rule of Bankruptcy Procedure 3001. An official POC secured by property that is the individual debtor’s principal residence requires the claimant to itemize its claim, attach the writing evidencing the claim, attach evidence of a perfected security interest, attach Official Form 410A setting forth a loan payment history from the first date of default1, and attach an escrow analysis performed as of the date of the bankruptcy filing. A pleading can constitute an informal POC while only setting forth the estimated amount of the claim and the estimated amount of the arrears. The facts of a recent case are illustrative of this point.

Bankruptcy Court Decision
In Deutsche Bank National Trust Company, as Trustee for Fremont Home Loan Trust 2006-2, Asset-Backed Certificates, Series 2006-2 v. Cintron, Case Number 16-20109, 2017 WL 521502 (Bankr. D. Conn. Feb. 8, 2017), the proof of claim bar date was June 9, 2016. The debtor’s plan included payment of a pre-petition arrearage to the secured creditor in the amount of $43,000. On February 1, 2016 the secured creditor filed an objection to the plan and asserted an estimated pre-petition arrearage of $48,182.19 and an estimated total debt of $205,357.55, plus stated its intention to file its proof of claim before the bar date. However, the bar date passed without a formal POC being filed. Thereafter, the chapter 13 trustee filed a POC on behalf of the secured creditor asserting a total pre-petition arrearage of $43,000. Subsequently, the secured creditor filed its official POC on September 27, 2016, claiming a pre-petition arrearage of $49,057.88 and a total secured claim of $205,404.42.

The bankruptcy court ultimately determined that the objection to confirmation that was filed before the bar date constituted an informal proof of claim, and the creditor was allowed to amend said informal proof of claim through the filing of a post-bar date official POC that set forth the actual pre-petition arrears and total debt owed. In reaching its conclusion, the court applied the following four-part test, which it adopted from other courts in the Second Circuit.

The court held that in order to be considered an informal proof of claim, the following must be true: “The document must (1) be timely filed with the bankruptcy court and become part of the judicial record; (2) state the existence and nature of the debt; (3) state the amount of the claim against the estate; and (4) evidence the creditor’s intent to hold the debtor liable with the debt.”

The Cintron case is a big victory for mortgage servicers and investors. With the proposed rule change (which will shorten the POC bar date considerably), whenever the bar date is likely to be missed, consideration should be given to filing pleadings that constitute an informal proof of claim when possible — assuming that it is not prohibited in the applicable jurisdiction.

______________________________________________

1The “first date of default” is defined as the first date on which the borrower failed to make a payment in accordance with the terms of the note and mortgage, unless the note was subsequently brought current with no principal, interest, fees, escrow payments, or other charges immediately due and payable.


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Kansas Supreme Court Clarifies Standing Issues

Posted By USFN, Tuesday, May 23, 2017
Updated: Thursday, May 18, 2017

May 23, 2017

by David L. Boman
SouthLaw, P.C. – USFN Member (Iowa, Kansas, Missouri)

The Kansas Supreme Court recently clarified a number of issues concerning judicial foreclosure actions [FV-I, Inc. v. Kallevig, 2017 Kan. LEXIS 135 (Kan. Apr. 21, 2017) (motion for modification or rehearing pending)].

The history of Kallevig is beyond the scope of this article. A thorough understanding requires a review of both FV-I, Inc. v. Kallevig, 2013 Kan. App. Unpub. LEXIS 426, 301 P.3d 789 (Kan. Ct. App. May 17, 2013) and FV-I, Inc. v. Kallevig, 2015 Kan. App. Unpub. LEXIS 86, 342 P.3d 970 (Kan. Ct. App. Feb. 6, 2015).

The principal issues addressed in Kallevig are:

1. Under the Uniform Commercial Code (UCC), what must a plaintiff plead and prove to establish standing to enforce a note?
2. Whether a plaintiff must prove standing at the time of filing?
3. Whether a plaintiff can cure an initial lack of standing?
4. Whether the business records exception to the hearsay rule applies to endorsements on a note?
5. Whether possession of the mortgage alone is sufficient to establish standing?

Standing
Speaking to the first issue, the Court concluded that a plaintiff claiming enforcement rights under the UCC “as the holder of the instrument” must show that the note was made payable to the plaintiff or was endorsed in blank and that the plaintiff was in possession of the note. 2017 Kan. LEXIS 135, *16-20.

The Court next considered whether standing must be proved at the time of filing the foreclosure petition. 2017 Kan. LEXIS 135, *21. In the context of addressing when a plaintiff must prove standing, the Court also addressed whether a plaintiff can cure a lack of standing post-petition. Reviewing case law from a number of jurisdictions, the Court concluded that “— either in the pleadings, upon motion for summary judgment, or at trial — [the plaintiff must demonstrate] that it was in possession of the promissory note with enforcement rights at the time it filed the foreclosure action” and that a lack of standing cannot be cured by a post-petition assignment granting enforcement rights in the note. 2017 Kan. LEXIS 135, *29-30.

Endorsements
During trial following the first remand, the trial court excluded two endorsements on the original note because the appellant [FV-I, Inc., In Trust for Morgan Stanley Mortgage Capital Holdings, LLC] didn’t lay the foundation under K.S.A. § 60-460(m) (business records exception to the hearsay rule). 2017 Kan. LEXIS 135, *30. In Kallevig, the Court concluded that this evidentiary ruling was erroneous because “the signatures were not being admitted to prove the truth of the matter asserted, i.e., the authenticity of the signatures.” 2017 Kan. LEXIS 135, *31.

The Court went on to rule that, under the UCC, endorsements on a note are presumed authentic and this presumption extends to stamp signatures. To overcome this presumption: “A defendant has the burden to present sufficient evidence denying an endorsement’s validity before a plaintiff is required to introduce evidence to the contrary.” In order to shift the burden, a defendant’s evidence must go beyond “[m]ere speculation.” 2017 Kan. LEXIS 135, *30-34. Because the trial court improperly excluded the endorsements, the Court remanded the case to allow the appellant the opportunity to demonstrate that “FV-I possessed the original note with the improperly excluded endorsements when the petition to foreclose was filed.” 2017 Kan. LEXIS 135, *48.

Enforcement Rights in the Note must be Established
Relying in part on K.S.A. § 58-2323, the appellant maintained that it had standing to foreclose because it possessed the mortgage when it filed the petition. 2017 Kan. LEXIS 135, *37. Following an analysis of the “interplay between the common law idea that the mortgage follows the note and statutory language suggesting the debt follows the mortgage”, the Court concluded that “possession of the mortgage alone without demonstrating enforcement rights in the note is insufficient to establish standing in a mortgage foreclosure proceeding.” 2017 Kan. LEXIS 135, *37-47.

Editor’s Note: The author’s firm represented the appellant in the case summarized in this article.

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Class Action Filed in the District Court of Puerto Rico against Numerous Defendants, including Government Agencies, GSEs, and Servicers

Posted By USFN, Tuesday, May 23, 2017
Updated: Thursday, May 18, 2017

May 23, 2017

by Marisol Morales
Millennium Partners – USFN Member (Puerto Rico)

On April 5, 2017, a 36-page complaint for “Truth in Lending, Real Estate Settlement Procedure Act, Regulation X, HARP, HAMP, Sup[p]lemental Jurisdicction (sic)” and Demand for Jury Trial was filed in the U.S. District Court for the District of Puerto Rico.

Claimants allege that they were subject to illegal foreclosure processes while in loss mitigation review in violation of the “Principal Residence Protection and Mandatory Mediation in Foreclosure Proceedings Act,” HAMP, HARP, and other loan modification programs. Claims for damages exceed $400 million.

The class action is captioned Camacho v. United States of America (Farm Service Agency), et al., Civil No. 17-1448.

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Delaware: Legislation Extends Office of Foreclosure Prevention and Mediation Program

Posted By USFN, Tuesday, May 23, 2017
Updated: Friday, May 19, 2017

May 23, 2017

by James Clarke
Orlans PC – USFN Member (Delaware, Massachusetts, Michigan)

House Bill 76 (which passed the House on 3/30/17 and the Senate on 5/10/17) extends the Office of Foreclosure Prevention and the Automatic Residential Foreclosure Mediation Program until January 18, 2020. Originally scheduled to end on January 18, 2014 (two years after the initial enactment), the sunset date was extended to January 18, 2018 in 2013. The latest bill will now extend the office and the program for two additional years until January 18, 2020; the legislation is expected to be signed into law by the governor.

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Maryland: Legislative Updates Affecting the Residential Foreclosure Process

Posted By USFN, Tuesday, May 23, 2017
Updated: Friday, May 19, 2017

May 23, 2017

by Angie Nasuta
The Alba Law Group, P.A. – USFN Member (Maryland)

The Maryland legislature has once again been active in regulating the local residential foreclosure process.

New Foreclosure Registration — The first bills of particular interest are House Bill 1048 and cross-filed Senate Bill 875, which have been approved by the governor but are not effective until October 1, 2018. This legislation requires that within seven days of filing an action to foreclose residential property, the substituted trustees must provide a notice of foreclosure to the Maryland Department of Labor, Licensing and Regulation (DLLR). The notice of foreclosure must contain certain specified information about the property and about the substituted trustees; it must be in the form that the department requires — which has not yet been established. This author’s firm will be closely monitoring DLLR’s activity for its regulations on this new notice/registration, which will hopefully be adopted well in advance of the delayed effective date.

New Foreclosure Notices — Legislation has been enacted to require additional notices in the foreclosure process beginning October 1, 2017. HB26/SB247, which have been approved by the governor, add to Maryland Real Property § 7-105.2(b) that notice of a proposed foreclosure sale under this article must also be sent to a condominium or homeowners association that has recorded a statement of lien against the property at least 30 days before the sale date. Procedurally, though, this change doesn’t really impose anything new upon foreclosure counsel, as Real Property § 7-105.3 (which has been law in one form or another since 1957) already requires notice of foreclosure sale to all holders of subordinate interests of record.

The key addition made by HB26/SB247, however, is the new requirement concerning postponed or canceled foreclosure sales. Within 14 days of sale postponement/cancellation, the substituted trustees must now send notice of the postponement/cancellation to the record owner of the property and any condominium/homeowners association that was sent notice of the proposed sale.

Vacant and Abandoned Properties – As with many states across the country, another Maryland focus in recent years has been to address concerns about vacant and blighted properties through so-called “fast-track” foreclosure options. The underlying mechanics and potential for challenges with these options, however, have limited the interest of mortgage servicers in pursuing what has been made available so far.

House Bill 702 and cross-filed Senate Bill 1033, which are still pending approval by the governor, provide a new expedited foreclosure process for vacant and abandoned properties — under certain circumstances. HB702/SB1033 authorizes a secured party to petition the court to immediately commence foreclosure of its lien instrument if the property meets all of the following criteria:

• the loan has been in default for 120 days or more;
• no mortgagor has filed a challenge to the foreclosure “setting forth a defense or objection that, if proven, would preclude the entry of a final judgment and a decree of foreclosure”;
• no mortgagor has filed a statement with the court that the property is not vacant or abandoned; and
at least three out of a list of eleven specific circumstances regarding the property exist; e.g., status of utilities, condition of windows and doors, vandalism and criminal conduct, junk and hazardous materials, citations, condemnation, vacancy, written statement of intent to abandon, and a catch-all for other “reasonable indicia of abandonment”.

If approved by the governor, HB702/SB1033 will certainly be Maryland’s strongest attempt thus far at denting the local vacant and blighted properties issue. Unfortunately, the degree of limitations written into even this most recent piece of legislation suggests that there will continue to be limited interest from servicers in actually pursuing this newest option.

 

On a local note: In April, the County Council for Montgomery County approved Bill No. 38-16 (effective July 24, 2017) concerning “Housing and Building Maintenance Standards – Foreclosed Property Registration Penalty.”

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Fast-Track Foreclosure Legislation: A Proactive Solution to Address the Problem of Community Blight

Posted By USFN, Tuesday, May 23, 2017
Updated: Friday, May 19, 2017

May 23, 2017

by Robert Klein, Founder and Chairman
Safeguard Properties (and Community Blight Solutions) – USFN Associate Member

While the economic recovery has brought a slowdown to residential mortgage foreclosures, there remains a plethora of vacant and unoccupied properties dotting urban landscapes. Unfortunately, outdated foreclosure laws can leave these homes vacant and vulnerable for years, fostering the spread of community blight.

Unlike a good bottle of wine, a vacant property does not get better with age. For the past several years, many in the industry (including this author) have been advocating for state legislators across the country to consider legislation that will reduce the time it takes to foreclose on vacant and abandoned properties. As long as these properties remain vacant, they contribute to a self-perpetuating cycle of blight and instability in the community. Houses that stand empty suffer structural damage from weather and climate. Further, vacant properties are hubs for crime, drug activity, and fires, as well as becoming havens for squatters.

Fast-track legislation can reduce the number of “zombie properties” and reverse the problems that destroy neighborhoods. Several states have put themselves ahead of the national curve in the fight against blight by enacting fast-track legislation. Recently, Ohio and Maryland have passed fast-track legislation, with other states considering similar legislation as an important step in addressing neighborhood blight.

These new fast-track laws accelerate the foreclosure process to as little as six months in certain situations, enabling the mortgage servicer in many cases to get possession of the property before it deteriorates — increasing the likelihood that it can be rehabilitated and sold. Specifically, fast-track legislation permits the holder of a note of a defaulted residential mortgage loan (secured by a residential property that appears to be vacant and abandoned) to bring a summary action in court to foreclose the loan in an expedited manner.

It is important to mention that compliance with consumer protection laws and a proper balance of property rights for both the mortgage servicer and the property owner are at the core of any fast-track legislation. The language in the Ohio and Maryland legislation provides a summary of actions by residential mortgage servicers and revises procedures and timelines for foreclosure action, while still providing property owners with necessary protections. These protections help to ensure that a property is, indeed, vacant and abandoned before the expedited foreclosure process is instituted. To be clear, no one will be forced out of their home.

Both the Ohio and Maryland laws provide for this balance of protection for all parties. For example, the new Maryland law requires secured parties to serve a petition for expedited foreclosure on the mortgagor and to post a notice on the property, allowing the record owner of the property to challenge any finding that the property is vacant and abandoned. The two states’ legislation also authorizes a secured party to expedite the foreclosure process, provided that the party can demonstrate to a court that the property is vacant and abandoned by satisfying at least three of eleven specific criteria listed in the legislation (e.g., utilities disconnected, windows and entrances boarded up).

Other states need to take action to change their laws and target zombie properties. Several states (including New York, Pennsylvania, and New Jersey) have introduced fast-track legislation and, hopefully, these proposals will be enacted by their respective general assemblies. On the other hand, some states have passed recent laws that seem to miss the point, imposing a pre-foreclosure duty on mortgagees to maintain vacant and abandoned properties or prohibiting lenders from taking possession of a property prior to foreclosure.

As these new fast-track laws go into effect, one of the biggest challenges will be enforcement. Mortgagees, code enforcement, and the courts will need to work together to ensure that fast-track legislation accomplishes its purpose to eradicate the blight that is plaguing our communities.

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11th Circuit Rules on Bankruptcy Surrender

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Michael J. McCormick
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

David and Donna Failla owned a house in Boca Raton, Florida. They defaulted on their mortgage in 2009. Citibank filed a foreclosure action in a Florida court. The Faillas commenced a Chapter 7 bankruptcy proceeding in 2011 and filed a statement of intention to surrender the house. Because the home had a negative value, the Chapter 7 trustee “abandoned” it back to the Faillas.

After their Chapter 7 discharge, the Faillas continued to live in the house while they contested the foreclosure action. Citibank filed a motion to compel surrender in the bankruptcy court. Citibank asserted that the Faillas’ opposition to the foreclosure action contradicted their statement of intention to surrender the property.

The bankruptcy court granted Citibank’s motion to compel surrender and ordered the Faillas to cease opposing the foreclosure action. The bankruptcy court explained that if the Faillas did not comply with its order, it might “enter an order vacating [their] discharge.” The district court affirmed on appeal.

The Faillas then appealed to the Eleventh Circuit Court of Appeals, where the appellate court made two rulings:

1. Bankruptcy Code section 521(a)(2) prevents debtors who surrender their property from opposing a foreclosure action in state court.
2. The bankruptcy court had the authority to order the Faillas to stop opposing the bank’s foreclosure action.

Section 521(a)(2) requires a debtor to file a statement of intention regarding the retention or surrender of property securing various debts. This section of the Bankruptcy Code also requires the debtor, within 30 days after the first setting of the 341 hearing, to perform his intention with respect to such property.

The court of appeals went on to say that the Bankruptcy Code “requires debtors who file a [‘]statement of intent to surrender[’] to surrender the property both to the trustee and to the creditor. Even if the trustee abandons the property, debtors’ duty to surrender the property to the creditor remains.” [In re Failla, 838 F.3d 1170 (11th Cir. 2016)].

The Eleventh Circuit also agreed with the bankruptcy court and the district court that “surrender” requires debtors to drop their opposition to a foreclosure action. The Bankruptcy Code does not define the word “surrender,” so the court gave the word its “contextually appropriate ordinary meaning.”

Because one meaning of “surrender” is the “giving up of a right or claim,” debtors who surrender their property can no longer contest a foreclosure action. “When the debtors act to preserve their rights to the property ‘by way of adversarial litigation,’ they have not ‘relinquish[ed] ... all of their legal rights to the property, including the rights to possess and use it.’” [Citing In re White, 487 F.3d 199, 206 (4th Cir. 2006) (emphasis omitted)].

The court of appeals was also concerned with notions of fairness, quoting In re Guerra, 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016): “The concern here is that the Debtor is making a mockery of the legal system by taking inconsistent positions. In an effort to obtain her chapter 7 discharge, the Debtor swears — under the penalty of perjury — an intention to ‘surrender’ her property. In other words, the Debtor is representing to the Court that she will make her property available to the Bank by refraining from taking any overt act that impedes the Bank’s ability to foreclose its interest in the property. Yet, once she receives her discharge, the Debtor in fact impedes the Bank’s ability to foreclose its mortgage.”

On the second question, whether the bankruptcy court had authority to stop the debtors from opposing the foreclosure sale, the Eleventh Circuit said: “… bankruptcy courts are not limited to lifting the automatic stay. Bankruptcy courts have broad powers to remedy violations of the mandatory duties section 521(a)(2) imposes on debtors.” Moreover, the court continued, under Section 105 of the Bankruptcy Code, bankruptcy judges have “broad authority ... to take any action that is necessary or appropriate ‘to prevent an abuse of process.’ … A debtor who promises to surrender property in bankruptcy court and then, once his debts are discharged, breaks that promise by opposing a foreclosure action in state court has abused the bankruptcy process.”

Legislative Note: House Bill 471 was introduced in the Florida State Senate in January 2017. The bill would allow a lienholder to submit any document from a mortgagee’s bankruptcy case that suffices as an “admission by the defendant” that he or she intended to surrender the property. Provided the document in question isn’t withdrawn, it can (when combined with a discharged bankruptcy) serve as a “rebuttable presumption” that the defendant has surrendered interest in the property and waived any defense to the foreclosure.

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Defenses Raised to a Foreclosure Action and an Unlawful Detainer Action: Case Law Updates from: Illinois

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Robert J. Deisinger
Anselmo Lindberg Oliver LLC
USFN Member (Illinois)

TILA Rescission and Damages Claims as Counterclaims to Foreclosure — Defenses predicated on the Truth in Lending Act (TILA or Act), 15 U.S.C. §§ 1601, et seq., and Regulation Z, 12 C.F.R. part 226, can sometimes be troublesome for mortgagees to defend because a borrower may assert a right to rescission (or damages) years after the loan closing. A recent appellate decision gives lenders a powerful new argument to defeat certain TILA damage claims. [Beneficial Illinois, Inc. v. Parker, 2016 Ill. App. Ct. (1st) 160186 (Dec. 12, 2016)].

In response to a foreclosure complaint brought by Beneficial, Randall Parker filed a counterclaim in which he alleged that he had timely exercised the right to rescind the mortgage loan as permitted by section 1635 of TILA. Under the Act, if a borrower does not receive the information and disclosures required by TILA and Regulation Z, a borrower may exercise a right to rescind the mortgage transaction up to three years after the consummation of the transaction. Parker’s countersuit claimed that he did not receive the information and disclosures required by law when his mortgage loan was originated. Parker also alleged that he exercised his right to rescind the mortgage transaction when his attorney mailed a letter to Beneficial within three years of the loan closing, but that Beneficial had failed to honor his rescission.

Parker’s counterclaims sought an order declaring the rescission to be proper, damages for failure to make proper material and required disclosures, and damages for failure to honor his election to rescind the transaction. The trial court dismissed the counterclaims as untimely, ruling that even if the notice of rescission had been tendered within three years of the loan closing, the counterclaim itself was untimely because it was brought more than three years after the closing.

Several months after the trial court dismissed Parker’s counterclaims, the U.S. Supreme Court held that “a borrower need only provide written notice to a lender in order to exercise his right to rescind.” Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __, 135 S. Ct. 790, 793 (2015). When Beneficial voluntarily dismissed its foreclosure case, Parker filed an appeal of the involuntary dismissal of his counterclaims, asserting that Jesinoski demonstrated that his claims were not untimely. In light of the U.S. Supreme Court’s unambiguous ruling in Jesinoski, the Illinois Appellate Court in Beneficial v. Parker ruled that if Parker had mailed his notice of rescission to Beneficial, then he would have a plausible claim for rescission. However, the Appellate Court also ruled that neither Jesinoski nor TILA is so broad as to save all of Parker’s claims.

Among the claims asserted by Parker was a direct claim for damages arising from the purported failure to provide proper TILA disclosures in connection with the loan closing. The Act ordinarily requires those claims to be brought within one year of the closing. 15 U.S.C. § 1640(e). Conversely, the Act also contains another provision which states that “[t]his subsection does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.”

Parker maintained that this exception to the general limitations provision permitted him to revive his stale damages claim because it was asserted in defense of a foreclosure action. Because TILA permits the claims “except as otherwise provided by State law,” the Appellate Court looked to Illinois law to determine whether Parker’s claim was timely. Illinois law is clear that stale counterclaims may only be brought if viable when the cause of action forming the basis of the plaintiff’s primary claim arises. (See 735 ILCS 5/13-207.) Accordingly, because Parker’s damages claim would not be permitted under Illinois State law, as it was time-barred before the foreclosure action accrued, the Appellate Court ruled that this claim for damages was properly dismissed.

In sum, if the limitations period on a TILA damages claim for improper disclosures runs out before the borrower defaults on his or her mortgage, the borrower may not assert that damage claim as a counterclaim to the foreclosure action. Once that claim is barred by the statute of limitations, it cannot be revived.

Editor’s Note: The author’s firm represented the plaintiff-appellee Beneficial Illinois, Inc. in the Beneficial v. Parker case summarized here.

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Defenses Raised to a Foreclosure Action and an Unlawful Detainer Action: Case Law Updates from: Washington

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Joshua Schaer
RCO Legal, P.S.
USFN Member (Oregon, Washington)

Is Trustee Sale Purchaser’s Successor-in-Interest able to Pursue Unlawful Detainer (or Must an Ejectment Action be Brought)?
On February 14, 2017 the Washington State Supreme Court heard oral argument in the case of Selene RMOF II REO Acquisitions II, LLC v. Ward.

History of the Subject Property — Vanessa Ward originally purchased a residence with a secured loan in 1999; in 2001, she deeded the property to an individual (Dorsey). Ward claimed that, in 2004, Dorsey transferred title back to her via quitclaim deed (QCD) for one dollar in consideration. The QCD was not recorded.

In 2005, Dorsey deeded the property to a couple and recorded the deed. In 2007, the couple transferred title to an individual (Dreier). Dreier obtained a refinance of Ward’s loan and encumbered the property with a new deed of trust. Ward continuously occupied the property and made mortgage payments, even after the refinance.

After a default in 2008, nonjudicial foreclosure commenced. Ward filed suit but failed to restrain the sale and, ultimately, her claims were dismissed. In 2009, the property sold at auction to LaSalle Bank, which received a trustee’s deed. In 2012, LaSalle Bank sought to evict Ward through an unlawful detainer (UD) action, but discontinued that attempt once it became contested.

Later in 2012, LaSalle Bank conveyed the property to Selene via a recorded special warranty deed. Selene filed its UD against Ward in 2014. For the first time, Ward disclosed the unrecorded QCD in response to Selene’s request for a writ of restitution; the trial court issued the writ.

Appellate Court Review — In 2016, Ward successfully appealed. [See 2016 WL 785097 (WA Div. 1, 2016).] The Court of Appeals held that state law only gives a trustee’s sale purchaser the automatic right to prosecute a UD, and Selene was merely a later owner. Further, Selene could not invoke a different provision of the unlawful detainer statute to evict Ward because she had “color of title” through the unrecorded quitclaim deed. Subsequently, the Washington Supreme Court granted Selene’s petition for review.

State Supreme Court Decision is Pending — In the Supreme Court Selene contended, firstly, that the UD process is not strictly limited to a trustee’s sale purchaser, and statutory rights are transferrable to a successor-in-interest. Selene relied on the reasoning of a California decision, Evans v. Superior Court, 67 Cal. App. 3d 162 (1977). Secondly, Selene asserted that a UD proceeding is not the proper forum for litigating title issues; Ward should have either restrained the sale or brought a separate civil action to adjudicate her title claim. Finally, Selene noted that case law requires good faith to show “color of title,” and Ward’s hidden QCD while still making payments on the refinanced loan did not amount to good faith.

A ruling from the Washington Supreme Court is expected later in 2017. The oral argument is online at http://www.tvw.org/watch/?eventID=2017021193.

Editor’s Note: The author’s firm represented the appellant Selene before the Washington Supreme Court in the Selene RMOF II REO Acquisitions II, LLC v. Ward case summarized here. [An earlier article on this case was published in the USFN e-Update (Apr. 2016 Ed.), which can be viewed in the Article Library at www.usfn.org.]

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Legislative Updates: Nebraska

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Camille R. Hawk
Walentine O’Toole, LLP
USFN Member (Nebraska)

Joining the VPR Ranks in a bigger way? In 2014, Lincoln enacted its Vacant and Abandoned Property Ordinance (VPRO) under the “Registration of Neglected Buildings” ordinance [see Ordinance No. 20058, Sec. 21.09.010 through 21.09.170]. Omaha followed in late 2015, with its own VPRO [see Ordinance No. 40565, Sec. 48-141 through 48-162]. The state legislature took notice and, in January 2017, LB256 was introduced to specifically and statutorily authorize communities to enact VPROs within certain guidelines. LB256 has been amended by AM452, and the Urban Affairs Committee has placed it on General File. While not yet law, it is worth reviewing.

If passed, this legislation would not apply to cities of the metropolitan class (population 300,000+; i.e., Omaha) or cities of the primary class (100,000-299,999; i.e., Lincoln). It would allow the covered municipalities — namely cities of the first class (5,001-100,000), second class (801-5,000), and villages (100-800) — to enact these ordinances to register vacant properties, collect fees to offset the public expense, monitor the rehabilitation progress, and promote occupancy. The legislation applies to both residential and commercial properties, and the property must be vacant or show evidence of vacancy.

Evidence of vacancy means “any condition or circumstance that on its own or in combination with other conditions or circumstances would lead a reasonable person to believe that a residential building or commercial building is vacant.” Nebraska Legislative Amendment AM452, LB256 sec. 4(1). The conditions and circumstances include overgrown or dead vegetation, accumulated personal property/trash, visible deterioration/lack of maintenance, defacement, or conditions that would reasonably lead someone to suspect the property is not being used for lawful purposes.

A city-wide database is to be created and a program administrator must be designated. Once the property has been vacant for 180 days or more, the owner of the property must register it — providing the name, street address, mailing address, phone number, facsimile, and email address of the owner or the owner’s agent. The registration must also include the street address of the property and the parcel number, as well as the date that the owner took title to the property and the date on which the property became vacant.

Payment may be required 180 days after the registration or 360 days from vacancy, whichever is sooner. Supplemental fees may be required every six months thereafter if the property remains on the database. The initial registration fee is limited at $250 (residential) and $1,000 (commercial). These fees can quickly increase as the fees with each registration may double the previous fee amount, with a maximum amount to be ten times the initial fee.

Exemptions have been carved out. Properties owned by the federal government, the state of Nebraska, or any political subdivision thereof are exempt from this legislation. The VPRO shall not be applied to properties that are advertised, in good faith, for sale or lease. The VPRO may be excluded from vacant properties that: are intended to be a seasonal residence only; have been damaged by fire, weather, an act of God or vandalism; or are under construction or renovation. Further exempt properties would be those where there is a temporary absence of the owner (if he or she demonstrates an intent to return), or those where the property’s ownership is subject to divorce, probate, or estate proceedings.

The ordinance and the obligations run with the land. Moreover, the property must be removed from the database when it becomes occupied; and, while on the database, the owner must supply a plan for occupancy. The VPRO shall also provide property owners with the right to appeal adverse decisions of the municipality or the program administrator (with notice sent by certified mail to the registered owner at the owner’s address identified in the county assessor’s office at least ten days prior to an adverse decision).

The VPRO may allow for inspections of the property at the time of registration and each year thereafter. Fines may be imposed for a failure to comply, and the municipality may sue civilly for the fees that should have been collected. These fines and the fees for the registration become a lien on the property “upon the recording of a notice of such lien in the office of the register of deeds of the county in which the property is located. The lien created under this section shall be subordinate to all liens on the applicable property recorded prior to the time the notice of such lien under this section is recorded.” Nebraska Legislative Amendment AM452, LB256 sec. 7(2).

As stated, Omaha and its VPRO are not subject to the state’s VPRO regulations; neither is Lincoln. If LB256 is passed, a watchful eye for impending new ordinances by municipalities is strongly suggested.

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Legislative Updates: Rhode Island

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Joseph A. Camillo, Jr.
Shechtman Halperin Savage, LLP
USFN Member (Rhode Island)

Foreclosure Deeds — On February 3, 2017 House Bill 5397, entitled “An Act Relating to Property – Mortgage Foreclosure and Sale” (Act) was introduced in the Rhode Island General Assembly. The Act was introduced by Representatives Morin, Messier, Phillips, Casey, and Johnston. The legislation seeks to amend R.I. Gen. Laws Section 34-27-6 in two substantial ways: first, it would impose a penalty of $2,000 upon financial institutions for failing to promptly record foreclosure deeds and to pay outstanding taxes; and, second, it would require that foreclosure deeds be recorded within 30 days after the date of the foreclosure sale.

Currently, the penalty for failing to promptly record the foreclosure deed or to pay outstanding taxes is $40/month. The law also currently provides 45 days for the foreclosure deed to be recorded following the date of the sale, prior to any penalty being assessed. Thus, this bill is proposing substantial changes to the recording time period as well as to the amount of the fine.

The Act would take effect upon passage. As of March 1, 2017 the House Judiciary Committee had recommended that the measure be held for further study, where it remained pending as this USFN Report went to print in April. Status of this legislation will continue to be monitored.

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Legislative Updates: Virginia

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C.
USFN Member (Virginia)

This article was published in the USFN e-Update (Mar. 2017 Ed.) and is reprinted here for those readers who missed it.

Clarification of the Rights of Foreclosed Tenants — In the 2017 regular legislative session, the Virginia General Assembly passed several bills addressing the rights of foreclosed tenants. After the expiration of the federal Protecting Tenants at Foreclosure Act (PTFA) on December 31, 2014, conventional thought was that treatment of foreclosed tenants had reverted to the Virginia common law. However, this was recently challenged by Wiendieck v. Wells Fargo Bank, N.A., WL 4444916 (2016). In Wiendieck, the U.S. District Court for the Western District of Virginia held that Virginia Code § 55-225.10(C)’s specific reference to Section 702 and the PTFA (without also referencing the sunset provision in Section 704) meant that the expired federal law still governed foreclosed tenants in Virginia. The new legislation, which becomes effective on July 1, 2017, settles this conflict and addresses several other issues stemming from pre-existing lease agreements. [The Wiendieck case was discussed in the USFN e-Update (Jan. 2017 Ed.), which can be viewed in the Article Library at www.usfn.org.]

House Bill 1623 and Senate Bill 991 — These bills address the effect of foreclosure on existing lease agreements, rental responsibility, and termination of tenancy. It is uncertain whether Wiendieck influenced this legislative action, but reference to the PTFA has been eliminated completely from Virginia Code § 55-225.10(C). The amended version now adds “[i]f there is in effect at the date of the foreclosure sale a tenant in a residential dwelling unit foreclosed upon, the foreclosure shall act as a termination of the rental agreement by the owner.” The foreclosed tenant’s terminated lease is converted to a month-to-month tenancy and the other lease terms remain in effect until properly terminated via written notification. In Virginia, the termination of a month-to-month tenancy requires a 30-day written notice prior to the next due date, unless the lease requires additional notice.


Virginia Code § 55-225.10(D) has been added, outlining the tenant’s responsibility to pay rent post-foreclosure. Until the month-to-month lease has been terminated, the tenant is obligated to pay rent to the successor owner, to the owner or successor owner’s “managing agent,” or into escrow with the General District Court, which is not mandatory. The tenant is obligated to pay rent, whether or not a rental responsibility notice has been sent, but cannot be held in delinquent status or assessed late fees until the name, address, and telephone number of the party designated to collect rent has been provided in writing. Virginia Code § 55-225.10(E) has been created as well, acknowledging that the successor owner may enter into a new lease agreement with the foreclosed tenant and that will serve to terminate the existing month-to-month tenancy.


House Bill 2281 and Senate Bill 966 — These bills deal with the effect of foreclosure on existing property management agreements, funds held in escrow, and the right of a foreclosed tenant to file a tenant assertion. In these identical bills, the legislature addressed the effect of foreclosure on a pre-existing property management agreement entered into by the foreclosed owner and a licensed real estate broker. Virginia Code § 54.1-2108.1(A)(4) has been added and indicates that if a property management agreement exists at the time of the foreclosure sale, rent may be collected by the real estate broker acting as a property manager and the sums shall be placed “into an escrow account by the end of the fifth business banking day following receipt.” Virginia Code § 54.1-2108.1(A)(5), another new provision, converts an existing property management agreement to a month-to-month agreement. The terms of the agreement between the real estate broker and prior landlord are effective against the new owner. Either party may terminate the agreement by providing a 30-day written termination notice. Funds held in escrow by the property manager must be disbursed under the terms of the agreement or applicable law. The property manager is prohibited from transferring funds to the foreclosed former owner/landlord by the newly created Virginia Code § 54.1-2108.1(B)(5). Virginia Code § 55-225.12(A) has been amended to allow a foreclosed tenant to file a “tenant assertion” in the General District Court, paying rent into escrow until an alleged non-compliance with the lease or law (constituting a fire hazard or serious threat to the life, health, or safety of the occupants) has been adjudicated.


Impact on the Virginia Eviction Process and Timelines — While the newly passed legislation may be more burdensome than the common law, it is much more favorable than the former PTFA. For example, the lease must exist prior to the foreclosure sale. This eliminates the issue of post-foreclosure lease agreements entered into by the foreclosed borrower and the need to litigate when “complete title to a property is transferred to a successor entity,” as was the case under the PTFA. The amended statutes also render irrelevant whether a tenant is “bona fide” and the resulting rights that were granted to such occupants. Accordingly, sending a 90-day notice to vacate (or an obligation to honor an even longer lease term) has been eliminated in favor of the ability to terminate the existing lease with a simple 30-day written notice, regardless of length. Moreover, there are no special protections for Section 8 tenants.


The new legislation will, however, require greater efforts to identify tenant occupants, obtain copies of lease agreements, and to identify the property manager, if applicable. Whereas common law rendered foreclosed tenants mere tenants-at-sufferance with no legal right to occupancy (like their foreclosed landlords), the new legislation now establishes an occupancy right in the way of a month-to-month tenancy. Without a proper termination notice, foreclosed tenants will have a bona fide defense to unlawful detainer actions. The legislation further makes clear that the foreclosure purchaser is bound to the terms of the lease, until terminated. This essentially renders a foreclosure purchaser a “landlord” from the outset. Likewise, the foreclosure purchaser may find themselves bound to a property management agreement with a real estate broker whom they have not selected, until the agreement is properly terminated. All of these issues will merit added consideration regarding post-foreclosure property preservation efforts and eviction procedures, as the legislation presumes knowledge of information that may exceed the level of detail currently sought.


Standard 5-day notices to vacate may need to include additional 30-day lease termination language, addressing “any occupants” who may be tenants. Such action could proactively and preemptively terminate existing lease agreements. If a tenant has been specifically identified as an occupant, a 30-day termination notice should be expressly addressed to that occupant and the unlawful detainer should not be filed until the notice period has expired. These termination notices should be sent by regular and certified mail to preserve a sufficient “proof of mailing” required by the Virginia landlord and tenant statutes. If the foreclosure purchaser wishes to collect rent under the new statute, an agent should gather the pertinent lease information to facilitate the appropriate notice of rental responsibility being mailed to the tenant. The information obtained should include identification of any property manager so that an existing agreement may be terminated, if desired, by sending proper notification. Such notice should also direct the existing property manager to turn over all rental sums held in escrow to the foreclosure purchaser’s rental agent.


Conclusion — The legislative changes discussed in this article (effective on July 1, 2017) will likely extend current Virginia eviction timelines where the property is occupied by a tenant. In addition, more tenants may appear at unlawful detainer hearings, both pro se and represented, asserting rights to occupy the property. Nevertheless, the Virginia unlawful detainer process still remains a relatively efficient one, so that these delays should not be substantial in contrast to jurisdictions like Maryland and the District of Columbia with more stringent foreclosure tenant laws. At the very least, the recent question presented by Wiendieck as to the PTFA’s viability in Virginia has been clarified; and the new legislation presents a framework for implementation of processes and procedures to address foreclosed tenants.


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Property Preservation from Coast to Coast: Perspectives from Massachusetts and Washington State

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Julie Moran
Orlans PC
USFN Member (Delaware, Massachusetts, Michigan)

and Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)

In nearly every state in the country, the number of loans in foreclosure continues to decrease. According to data collected by ATTOM Solutions, RealtyTrac’s parent company, there were almost 1.4 million vacant properties (over 18,000 of which were at some stage of foreclosure, with an additional 46,604 bank-owned vacant properties) as of the third quarter of 2016. These numbers represent a reduction in all categories from the same period in 2015. The only exception is bank-owned properties, which saw a nine percent increase, likely attributable to the historic foreclosure backlog in some states that is now moving forward to sale.

These declining numbers can be small solace for municipalities, particularly those in economically depressed cities and towns dealing with vacant and abandoned residential properties in their neighborhoods. In recent years, state and local governments across the nation have used a variety of strategies to address neighborhood blight, relying on long-established laws as well as more recent legislation specifically targeting vacant properties — both in the foreclosure process and at the REO stage.

In this article, the strategies employed by two states (the Commonwealth of Massachusetts and the State of Washington) in addressing their property preservation issues will be contrasted and compared.

Massachusetts
When a property owner (or, in some cases, a foreclosing mortgagee) has repeatedly ignored notices of building or sanitary code violations, Massachusetts officials have a variety of tools available to them — which they don’t hesitate to deploy. MA. G. L. Ch. 143 § 51 allows the municipality to file a criminal complaint against an owner who has failed to make the cited repairs within 30 days of the notice. Municipal ordinances in a number of communities require foreclosing servicers or owners of REO to register vacant (and in some cases, occupied) properties in foreclosure. Depending on the ordinance, the servicer/REO owner may have to pay an annual fee, certify that the property has been inspected, appoint a local property manager to monitor the property, and post a “cash” bond of up to $10,000 per property to ensure the property is maintained.

However, for the mortgagee, or an owner of a bank-owned property, an even more serious risk lies in the provisions of MA. G. L. Ch. 111 § 127F: the so-called receivership statute. Under the law, elected officials may file a motion with the state court to appoint a receiver who takes over the process of placing the property in good repair. Once appointed by the court, the powers of the receiver are extraordinary. He or she does not have to comply with public bidding laws, enjoys little judicial scrutiny in either their selection of construction professionals, property managers and legal counsel, or their budget. Additionally, all costs and expenses incurred are given super-priority lien status. Couple this with a comparatively fast-track priority lien foreclosure process and the interest of the mortgagee or REO owner can swiftly evaporate.

Attorney General Enforcement — In addition to the foregoing, surely the most problematic tool Massachusetts has for combatting blighted properties is the Abandoned Housing Initiative of the Office of the Attorney General (AG). This program — launched more than four years ago by the AG who was unhappy with the pace of resolution of blighted properties — uses the receivership statute and the AG’s civil investigatory powers to target vacant properties being foreclosed upon or bank-owned. The referral to the AG of a property can originate from a complaint posted on the AG’s website, by a telephone call from a neighbor or tenant, or from Legal Aid or another consumer group. Municipal officials can also refer properties that they would prefer the AG to handle.

Once a complaint is logged, the AG promptly identifies the owner (and foreclosing mortgagee) and files a motion to appoint a receiver. The AG will use the prospect of the possible appointment to press the owner to make the repairs. The AG staff have become very knowledgeable about repairs and maintenance, and use their power to micromanage the entire process. To avoid appointment of a receiver, they will insist on an aggressively comprehensive repair plan with deadlines for completion. They tend to set status hearings for every two weeks to ensure that the work is being completed; extensions to repair cannot be taken for granted. They conduct their own inspections and are quick to cite any repairs not made to their satisfaction. If the owner is not proceeding fast enough, they will move to appoint a receiver to finish the work. Upon completion of the work — whether performed by the owner, mortgagee, or receiver — they will present the court with their own bill for attorneys’ fees and all other expenses that they have incurred during the process, which is also given priority status.

So how does a servicer and its counsel effectively navigate the property preservation process in Massachusetts? Working relationships with the AG’s and municipalities’ staff are fostered in order to effectively address property issues; excessive fees and costs are challenged, and it is made clear that upgrades disguised as repairs that seem excessive will be questioned. When threatened with a receivership, approval can be sought to complete only emergency (rather than all) repairs on a fast-track basis; motions for access and documentation of inspections can be used to rebut serial repair issues raised by tenants.

A servicer faced with an abandoned property in disrepair will have to: carefully balance the cost of repairs against the equity in the property, as well as the risk of making repairs on a property in foreclosure against being deemed a mortgagee in possession with the inherent obligations and exposure associated with that status; and, in all cases, adopt an effective oversight and escalation process to avoid garnering the attention of the AG.


Washington
Since the decision of the Washington Supreme Court in Jordan v. Nationstar (Wash. July 2016), property preservation has been one of the big issues to be addressed in the current legislative session in Washington State. So big, in fact that the Federal Housing Finance Agency (in communication with several Washington State Senators) recently wrote: “… Washington is the only state that has a major court ruling that adversely impacts the ability of servicers to carry out the maintenance standards that Fannie Mae and Freddie Mac require on a national level.”

The cities and the government agencies have been involved in trying to protect the local codes’ registration laws designed to prevent blight, and to hold foreclosing lenders responsible for the maintenance of property. Nonetheless, as the mortgage loan servicing industry knows, even well-intentioned legislation seldom provides immediate relief to the issues that sparked the process.

So what is a servicer to do with current loans securing potentially abandoned and vacant properties in Washington State, during one of the most interesting winters we’ve had in the Pacific Northwest? The Supreme Court didn’t provide much guidance except to conclude that appointing a receiver is not the exclusive method for lenders to gain access to properties. Unlike in Massachusetts, Washington’s attorney general is more focused on immigration bans and standing up against the new policies announced by the Trump Administration; receiverships and dealing with blighted properties haven’t been on the Top 10 list. Consequently, servicers aren’t seeing the same activism and receivership undertakings outside of Spokane County, which was most involved with the Jordan decision. That said, “Doing nothing” is not an option. There is too much at stake and the risks are too great.

As practitioners in an area so ripe with specific legislation and regulation, it is a career highlight to have the opportunity to craft a tailor-made solution utilizing creativity and the legal process to solve real, practical problems facing our clients and our communities. We are doing just that in property preservation. These cases are being handled in a very efficient, yet customized, fashion by tracking foreclosure (once the foreclosure sale occurs the right of possession and an ability to enter and maintain the property is more clear), reaching out to consumers to obtain their consents; and, if that doesn’t work, filing civil cases seeking an order allowing entry onto the property for the purpose of repairing and maintaining during the pendency of the foreclosure sale. Designated property preservation departments are then communicated with to ensure that the legal rights available are understood so that action can be taken within the boundaries of the unique Washington law, as well as within the court orders that are obtained.

This author’s firm has had cases involving deceased borrowers with no clear successor stepping in to claim possession and ownership of the property; real estate investors with multiple properties who haven’t been able to sell and gave up on marketing efforts; active military duty borrowers who have moved away and weren’t sure how to give the property back to the bank; borrowers who surrendered the property in a bankruptcy proceeding and were represented by counsel who were more than willing to sign the consent; and emergency situations with health/fire/police department engagement.

The response from the superior (trial) courts has been very positive. The judges understand the problem; they live in the neighborhoods where these vacant properties threaten safety and property values. Although a legislative solution might not provide a prompt path toward efficient resolution, in many matters a court order has been obtained within a few weeks to allow the servicer (and its agent) to enter onto the property to do what is necessary to protect the asset. This solution is more efficient than the receivership route, waiting for the foreclosure, or awaiting a legislative fix.

Some folks question whether maintenance and repairs are necessary for structures where the obvious solution is going to be a teardown. The takeaway is that servicers should be aware and consider partnering real estate agent/brokers with the property preservation departments to come up with better long-term strategies for investment in maintenance and repair. Naturally, the risk there is that if the property is sold via foreclosure, there might not be an asset to maintain. However, the likelihood of a third-party sale could be increased by certain repairs and maintenance work.

Closing Words: Property Preservation is Local
In looking at the different ways in which Massachusetts and Washington address the same concern, what’s clear is that property preservation is a very local affair. Servicers with large national portfolios need to approach each state in a proactive (and customized) manner in order to protect the value of the property, the interests of the investor, and — above all else — the interests of the community.

Strong vendor relationships with local counsel, brokers and real estate agents, as well as with preservation vendors are vital. Allowing these professionals to connect and collaborate is the key towards implementing sound, efficient legal and practical strategies. USFN firms are focused on this important issue and will continue to keep the industry informed.

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Illinois: Appellate Court Hands Down a Key Win to Lenders

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Douglas A. Oliver
Anselmo Lindberg Oliver LLC
USFN Member (Illinois)

Since December 3, 2015, one of the most challenging issues in Illinois foreclosure law has been condominium association (COA) demands that lenders satisfy unpaid, pre-foreclosure assessments, where the lender was the successful bidder at the judicial sale. On that date, a unanimous Illinois Supreme Court held that a condominium assessment lien against foreclosed property survives the foreclosure where post-sale assessments go unpaid. This was decided in a case known as 1010 Lake Shore Association v. Deutsche Bank National Trust Co., 43 N.E.3d 1005, 2015 IL 118372; and it dealt with Section 9(g) of the Illinois Condominium Property Act (Act) (765 ILCS 605/9(g)).

Under Section 9(g) of the Act, unpaid assessments become an automatic lien on condo property. This lien is subordinate to purchase money mortgages and is wiped out as a junior lien in a foreclosure — if the winning bidder at the foreclosure sale pays the assessments that come due from the first day of the next month following the sale.

The 1010 Lake Shore decision held that, pursuant to Section 9(g)(3) of the Act, the lien for pre-foreclosure unpaid assessments remains in place and enforceable until post-sale assessments are paid. Specifically, the Illinois Supreme Court ruled that it is the payment of post-sale assessments that “confirms extinguishment” of the lien for unpaid pre-foreclosure assessments. However, 1010 Lake Shore left open a key question: when must such payments be made to accomplish extinguishment of that pre-foreclosure lien? A lack of guidance on this issue created many disputes as to whether pre-foreclosure assessment liens were extinguished, despite lender payments of post-sale assessments.

Condominium associations in Illinois took the position that post-sale assessments had to be paid on the first of the month following the sale, or very soon thereafter. Otherwise, the COA contended, the lien for pre-foreclosure assessments could not be wiped out by later payment of post-sale assessments. In other words, the “late” payment of post-foreclosure assessments waived extinguishment of pre-foreclosure assessment liens. Under this view, the associations could demand all unpaid assessments, including pre-foreclosure assessments, in many — if not most — cases.

COAs would aggressively assert this course of action by holding REO closings hostage or filing lawsuits to evict lenders from possession of condo property. None of this was supported by the language of Section 9(g)(3) of the Act or the 1010 Lake Shore opinion. However, condo associations successfully pressed the issue because the foreclosing lender’s only alternative to payment was to litigate the association’s right to payment — an unacceptable choice to many.


In the recent case of 5510 Sheridan Road Condominium Association v. U.S. Bank, 2017 IL App (1st) 160279 (Mar. 31, 2017), the Illinois Appellate Court for the First Judicial District (which covers Cook County and the City of Chicago) held that Section 9(g)(3) sets forth no payment due date. The appellate court determined that Section 9(g)(3) only demarks the point at which the successful bidder at sale becomes liable for ongoing assessments, which is the first day of the month following the judicial sale. This highly consequential holding means that, regardless of the timing of payment of post-sale assessments, the lien for pre-foreclosure assessments is wiped out as soon as the successful sale bidder (often the foreclosing lender) pays post-sale assessments.

Recommended Practices
Despite the ruling in 5510 Sheridan Road, it is clearly still a best practice to begin paying post-sale assessments as soon as possible. The prior 1010 Lake Shore case implied that it was the duty of the successful bidder at the foreclosure sale to request payment information for ongoing assessments from the COA. Yet, associations vary widely in their ability and willingness to provide useful payment information. As a result, the following practical steps should prove helpful to circumvent problems:

1. Tender a payment to the COA as soon as possible after the first day of the month following the foreclosure sale, using the best available information to calculate the amount. Even where there is a dispute as to the amount due, it is always advantageous to make the best possible good-faith tender of payment.

2. In all foreclosure cases where a COA is a party, issue a subpoena to the association, seeking disclosure of both the amount due and the amount of regular assessments. Alternatively, discovery requests might be used to solicit this information.

3. Serve a demand for a statement of balance due to the COA board of managers, as provided by Section 9(j) of the Illinois Condominium Property Act, while the foreclosure case is pending. If the association does not respond, its lien will be subordinate.

4. Make sure that all communications with the association or its attorneys are either in writing or otherwise documented.

The 5510 Sheridan Road decision is a major victory for lenders. If the foregoing practices are observed, it should be much easier to deal with — or prevent — unwarranted COA demands for payment of pre-foreclosure liens. The case could be further appealed, but this author’s firm regards the appellate opinion as well-reasoned and believes that it will stand.

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HOAs Taking Advantage of Minnesota Lenders?

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Kevin Dobie
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

Following a foreclosure, lenders and servicers are routinely asked to foot the bill for the unpaid homeowners association (HOA) dues. In addition to the regular monthly dues, often the bill comes riddled with line items for unit repairs, special assessments, attorneys’ fees, late charges, and more. When the bill threatens to delay an REO closing, the lender must decide quickly whether to pay the bill or challenge the association. Fortunately, Minnesota law provides a clear outline of what charges must be paid — with one significant caveat.

In Minnesota, a lender foreclosing a first mortgage must pay the unpaid dues for common expenses which became due, without acceleration, during the six months immediately preceding the end of the owner’s period of redemption. Unfortunately, a few unscrupulous or ill-informed HOAs add all of the unpaid association dues, late charges, and attorneys’ fees to their bills regardless of their timing. The lender is not responsible for any assessments that became due prior to the six-month lookback period.

While most HOAs charge only for the dues incurred during the six-month lookback period, these associations almost always include late charges and attorneys’ fees. The lender is not responsible for late charges and attorneys’ fees incurred during the six-month lookback period; the statute specifically omits these amounts in the list of allowed charges. Often, these unlawful charges are paid by servicers who are too busy to challenge every line item. Paying the unlawful charges is a mistake, and although they are usually small amounts, eliminating the unlawful charges can add up to significant savings.

Moreover, a very small number of associations will even wait to levy a special assessment until the six-month lookback period commences. The significant caveat to the otherwise clearly written statute is whether the lender is responsible for special assessment charges that were incurred prior to the six-month lookback period. This ambiguity is a result of the statutory language “which became due.”

HOA counsel contend that a lender is in a better position to pay these assessments, but these attorneys forget that their clients have recourse beyond lenders to recover the amounts. The association has every right to pursue collection against the unit owner; that is, the homeowner who was responsible for the dues and assessments at the time that the HOA incurred the charges for services/materials/repairs provided by third-party vendors (specifically, at the time that the invoice from the vendor to the HOA became due). Challenging these assessments may require examining the HOA meeting minutes, but this research can also result in significant savings.

Most of the time these disputes with an HOA can be resolved with a single letter from the lender’s attorney and a redlined association invoice. On occasion, a lawsuit may be required. If the matter requires litigation, the good news is that a court can award reasonable attorneys’ fees to the prevailing party, and if the association willfully refused to remove an unlawful charge, the court may award punitive damages.

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Ninth Circuit Court of Appeals holds that 15 U.S.C. § 1692(f)(6) FDCPA Claim can be Brought against Loan Servicers Even in Nonjudicial Foreclosure

Posted By USFN, Tuesday, April 25, 2017
Updated: Wednesday, April 19, 2017

April 25, 2017

by Joshua Schaer
RCO Legal, P.S. – USFN Member (Oregon, Washington)

On March 31, 2017, the Ninth Circuit Court of Appeals issued a published opinion in Dowers v. Nationstar Mortgage, LLC, which was on appeal from the U.S. District Court for Nevada [_F.3d __, 2017 WL 1192207 (9th Cir. 2017)].

The plaintiff-borrowers sued loan servicer Nationstar and investor Wells Fargo Bank Minnesota for FDCPA violations, intentional infliction of emotional distress, and violations under the Nevada Deceptive Trade Practices Act. The district court dismissed all claims pursuant to Fed. R. Civ. P. 12(b)(6).

On appeal, the decision was affirmed in all respects except as to one claim; i.e., an alleged violation of 15 U.S.C. § 1692f(6). The Ninth Circuit cited Ho v. ReconTrust, 840 F.3d 618 (9th Cir. 2016) for the proposition that § 1692a(6)’s definition of “debt collector” includes security interest enforcers, who are regulated only through § 1692f(6). The remainder of the FDCPA does not govern nonjudicial foreclosure activity, which is not considered “debt collection.”

The Ninth Circuit’s reasoning in Dowers, however, appears to overlook the parties’ posture in the Ho litigation. Ho specifically “affirms the leading case” of Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188 (D. Or. 2002), which held that “foreclosing on a trust deed is an entirely different path” than “collecting funds from a debtor.” See Ho, at 621.

Contrasting Pre-Ho Case Law
In Hulse, the borrowers pled violations based on the entire FDCPA, which necessarily encompassed § 1692f(6). (Hulse, at 1202: “Plaintiffs allege that OFB violated the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692o ….”). Critically, Hulse particularly referenced the “narrow definition” in § 1692a(6) when holding that foreclosing on property pursuant to a deed of trust is not “within the terms of the FDCPA.” Hulse at 1204, citing Heinemann v. Jim Walter Homes, Inc., 47 F. Supp. 2d 716 (D.W.Va. 1998), aff’d, 173 F.3d 850 (4th Cir. 1999) (which cited to the same “narrow definition”).

By contrast, the parties in Ho explicitly conceded that the foreclosure trustee defendant was “a debt collector under the narrow definition” (in 15 U.S.C. § 1692a(6)) that would otherwise prohibit conduct under § 1692f(6). Ho, at 622: “All parties agree that ReconTrust is a debt collector under the narrow definition.” Moreover, in Ho, ReconTrust was not even accused of a § 1692f(6) violation. Consequently, it appears that except for the parties’ agreement to the applicability of § 1692a(6) — and §1692f(6) by extension — the clear adoption of Hulse’s and Heinemann’s reasoning would prohibit any FDCPA claim related to nonjudicial foreclosure activity.

In fact, this is precisely what numerous district court judges within the Ninth Circuit have held over the past few years. See, e.g., Wear v. Sierra Pacific Mortgage Company, Inc., 2013 WL 6008498, *5 (W.D. Wash. Nov. 12, 2013) (“Courts have routinely held that foreclosure does not constitute ‘debt collection’ under the FDCPA.”); Bostrom v. PNC Bank, N.A., 2012 WL 3904379, *6 (D. Idaho Aug. 17, 2012), report and recommendation adopted, 2012 WL 3905872 (D. Idaho Sept. 7, 2012) (“[C]ases interpreting the FDCPA have held that loan servicers, lenders, mortgage companies, and trustees appointed pursuant to a deed of trust are not ‘debt collectors,’ a prerequisite for application of Section 1692f(6).”); Roman v. Northwest Trustee Services, Inc., 2010 WL 5146593 (Dec. 13, 2010) (“Foreclosing on a trust deed is distinct from the collection of the obligation to pay money”). The Roman plaintiff specifically pled a § 1692f(6) violation against the trustee. See Case No. 10-05585-BHS (W.D. Wash.), Dkt. No. 1 at 5, 19. These cases were all either silently overruled by Ho, or else there is something more nuanced that led to the Ho decision — such as the parties’ agreement to the application of § 1692a(6) and/or the borrower’s failure to plead a § 1692(f)(6) violation in the underlying action.

Closing
In sum, while federal courts within the Ninth Circuit will likely take it as a foregone conclusion that § 1692f(6) applies to nonjudicial foreclosure after Dowers, it may be worth reminding judges of the above-referenced facts. Perhaps one or more courts will recognize that Ho cannot be intellectually reconciled with Hulse’s reasoning absent the Ho parties’ stipulation concerning § 1692a(6) being given effect.

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Connecticut Appellate Court Rules Modified Note is Still Negotiable under the UCC

Posted By USFN, Tuesday, April 25, 2017
Updated: Thursday, April 20, 2017

April 25, 2017

by Jeffrey M. Knickerbocker
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In Deutsche Bank National Trust Company v. Pardo, 170 Conn. App. 642 (Feb. 14, 2017), the borrower appealed the trial court’s denial of his motion to dismiss and motion to open the judgment of strict foreclosure granted the plaintiff-foreclosing trust. The borrower claimed that the trial court improperly: (1) denied his motion to dismiss for lack of subject matter jurisdiction; and (2) dismissed, pursuant to Connecticut General Statutes § 49-15, his motion to open the judgment of strict foreclosure as moot. The borrower’s sole contention on appeal was that the plaintiff lacked standing because the note that was the subject of the foreclosure was no longer a negotiable instrument following the borrower’s default on a loan modification. The Connecticut appellate court affirmed the judgment of the trial court.

Background
On April 9, 2007, the borrower executed the note. On May 4, 2010 and October 3, 2012, the borrower executed two separate loan modification agreements (both of which increased the principal balance due on the loan). The borrower then defaulted on the modifications.

Under Conn. Gen. Stat. § 42a-3-104 [which is Connecticut’s adoption of 3-104 of the Uniform Commercial Code (UCC)], in order to be a negotiable instrument, the note must be an unconditional promise to pay. The borrower contended that once the loan was modified, the note was no longer an unconditional promise to pay and, therefore, lost its status as a negotiable instrument as contemplated by Connecticut statute and the UCC — as the terms of the note were “subject to or governed by” other writings and thus rendered the note “conditional.” According to the borrower, because the note was no longer a negotiable instrument under § 42a-3-104, the plaintiff could not prove standing to foreclose by virtue of being a holder of the note. The borrower relied upon Conn. Gen. Stat. § 42a-3-106, which says that “… a promise or order is unconditional unless it states … 2) that the promise or order is subject to or governed by another writing.”

Review on Appeal
Standing — The appellate court pointed out that in order to have standing, the plaintiff must be entitled to enforce the promissory note secured by the property. A plaintiff may evidence that it is entitled to enforce the note by being a holder of the note or someone with the rights of a holder. The appellate court held that the plaintiff presented prima facie evidence that it is the holder with standing to commence the action by the mere allegation in the complaint that it was the holder of the note with a copy of the note attached to the complaint.

The appellate court rejected the borrower’s argument that the note was no longer a negotiable instrument as a result of the subsequent modifications. In finding that the note was a negotiable instrument, the appellate court upheld the trial court’s findings that the plaintiff was the holder of the note, and had established a prima facie case for foreclosure. Further, the court found that the plaintiff’s case was not rebutted merely because of the borrower’s argument (which the appellate court did reference as “novel”); the borrower’s contention was rejected outright. A later modification of the note did not strip the note of its status as a negotiable instrument in looking at the terms of the note. As the note itself did not reference or contemplate a separate document or agreement, and as the note was merely modified by a different agreement well after the execution of the document, § 42a-3-106 did not apply.

Vesting of Title — Connecticut utilizes both foreclosures by sale and strict foreclosures. In a strict foreclosure, title to the property vests in the plaintiff by operation of law absent redemption of the judgment debt by either the borrower or any other subsequent encumbrancer. In Pardo, the borrower also made the argument that merely filing a motion to open the judgment stopped the vesting of title with the plaintiff. The court disagreed. The trial court entered judgment on February 2, 2015 with the law days set to commence on May 19, 2015.

The law days are judicially-determined days in which the defendants have to redeem. If they fail to redeem, title passes to the plaintiff. The borrower filed the motion to open the judgment on May 12, 2015. The trial court did not hear the motion until May 26, 2015, which was after title vested with the plaintiff. Because title had passed to the plaintiff, despite the pending motion, there was no relief that the court could provide to the borrower.

Also worth noting is the court’s holding that the mere filing of a motion to dismiss purporting to challenge standing, and therefore subject matter jurisdiction, does not toll or stay the running of the law days. Generally, courts have held that when an issue of subject matter jurisdiction is raised, there can be no further movement on the case until the issue is decided. Some trial courts have taken the position that an issue of subject matter jurisdiction is raised upon the mere filing of a motion to dismiss. In deciding against that precept, the court in Pardo cited the need for an orderly foreclosure procedure that must, at some point, conclude. To adopt the defendant’s position, the court reasoned, would produce unnecessary delay and interrupt the orderly disposition of foreclosure proceedings.

Closing Words … for Now
Still, this matter is not over. There is another avenue of appeal: specifically, the Connecticut Supreme Court and the borrower has petitioned for review there. As of now, lenders should feel safe that entering a loan modification will not render a note and mortgage unenforceable in Connecticut.

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Illinois Appellate Court Clarifies Timing Requirement to “Confirm” Extinguishment of Association Lien

Posted By Administration, Tuesday, April 25, 2017
Updated: Thursday, April 20, 2017

April 25, 2017

by Brian Merfeld and Marcos Posada
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

In 5510 Sheridan Road Condominium Association v. U.S. Bank, 2017 IL App (1st) 160279 (Mar. 31, 2017), the Appellate Court of Illinois (First Judicial District) found that there is no deadline for a post-foreclosure sale purchaser to “confirm” extinguishment of the association’s lien for the prior unit owner’s pre-sale unpaid common expenses. Specifically, the court rejected the association’s argument that the payment to confirm extinguishment of the association’s lien must be paid on the first day of the first month following judicial sale.

The court held that the association’s interpretation could not be reconciled with Pembrook Condominium Association-One v. North Shore Trust and Savings, 2013 IL App (2d) 130288 (2013) (payment of full post-sale amount — two months of post-sale assessments — confirmed extinguishment). The court further found that in 1010 Lake Shore Association v. Deutsche Bank National Trust Co., 2015 IL 118372 (Dec. 3, 2015), the Illinois Supreme Court did not say when the payment to extinguish the lien had to be made. Rather, in 5510 Sheridan Road, the appellate court said that the language of the statute was designed to incentivize “prompt payment of those post[-]foreclosure sale assessments.”

With respect to when the post-foreclosure sale payment must be made, the appellate court found the absence of an express requirement in 765 ILCS 605/9(g)(3) telling. The court determined that if the General Assembly intended for section 9(g)(3) to contain a strict timing deadline, it would have included a deadline in the statute and that the absence of a deadline is strong evidence the legislature did not intend for section 9(g)(3) to have a deadline, as asserted by the association. Further, the court rejected the additional and alternative argument offered by the association asking the court to read section 9(f) into 9(g).

The appellate court found that the undisputed post-foreclosure sale payment (which included the nine months of regular assessments due after judicial sale) fully paid the amount owed for the unit’s post-sale common expenses and confirmed extinguishment of the lien.

Conclusion
The 5510 Sheridan Road ruling could provide relief to a mortgagee who brings current the post-judicial foreclosure sale account balance. Such payment would confirm that any prior balance is extinguished. Thus, this judicial decision may effectively negate an association’s ability to compel mortgagees to pay off unpaid common expenses, which include assessments and other charges.

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D.C.: New Condominium Lien Foreclosure Statute Opens Door for Challenging Completed Condominium Lien Foreclosure Sales?

Posted By USFN, Tuesday, April 25, 2017
Updated: Monday, April 24, 2017

April 25, 2017

by Kenneth Savitz and Tracy Buck
Rosenberg & Associates, LLC - USFN Member (District of Columbia)

In the USFN Report (Winter 2017 Ed.), we advised deed of trust holders and servicers to keep an eye out for possible changes to the D.C. condominium lien foreclosure laws, especially in light of the holding in Bourne Valley Court Trust v. Wells Fargo Bank, NA, 832 F.3d 1154 (9th Cir. 2016).

One such change came sooner than expected when, on February 9, 2017, the D.C. Mayor signed D.C. Act 21-657, known as the “Condominium Owner Bill of Rights and Responsibilities Amendment Act of 2016” (Act). Several draft versions of the Act had been considered in late 2015, but none survived committee review. The Act, enacted on April 7, 2017, contains two important amendments to D.C. Code § 42-1903.13 regarding D.C. condominium lien foreclosure law that heavily impact deed of trust holders and servicers.

Firstly, the Act now requires that condominiums expressly state on their notices of sale that the foreclosure is either for the “6-month [super] priority lien” or for “[m]ore than the 6-month [super] priority lien … and subject to the first deed of trust.” Before the Act, condominiums issued the D.C. Recorder of Deeds’ prescribed Notice of Foreclosure Sale of Condominium Unit for Assessments Due, which contained no such differentiation as to which lien the condominium was foreclosing. This omission created uncertainty for deed of trust holders and servicers regarding the assessments, charges, and fees that were included in the unspecified lien amount. Deed of trust holders and servicers were often forced to pay non-priority condominium lien amounts — and increased attorneys’ fees in negotiating the correct super-priority lien amount — to ensure that their first-priority deed of trust position was preserved. It is anticipated that this clarification on the notice of sale will foster communication among all lienholders affected by condominium foreclosure sales.

Secondly, and more directly related to the Bourne Valley decision, the Act now requires that condominiums provide their notices of sale to “[a]ny and all junior lien holders of record” and to “[a]ny holder of a first deed of trust or first mortgage of record, their successors and assigns, including assignees, trustees, substitute trustees, and MERS.” This is a drastic change from the previous version of the statute, which required that the notice be sent only to the Mayor (i.e., recorded with the D.C. Recorder of Deeds) and to the “unit owner at the mailing address of the unit and at any other address designated by the unit owner.” The pre-Act notices did not have to be sent to the first deed of trust holders or servicers, who were left to scour the D.C. public records for notices of sale.

As noted previously of the Bourne Valley decision, the Ninth Circuit Court of Appeals ultimately viewed the absence of required notice in the Nevada statute as unconstitutional. In addition though, the Ninth Circuit cited to Nevada’s 2015 legislative amendments (which added a notice provision) as “further evidence that the version of the Statute applicable in this action did not require notice unless it was requested. If the Statute already required [ ] associations affirmatively to provide notice, there would have been no need for the amendment.” Bourne Valley, n.4.

The Mayor and D.C. Council’s recent decision to add provisions explicitly requiring notice to lienholders only bolsters any arguments that the prior version of D.C. Code § 42-1903.13 lacked such due process protections and was facially unconstitutional. Deed of trust holders and servicers would be wise to re-review any deeds of trust purportedly extinguished by super-priority condominium lien foreclosures as a result of the pre-Act statute.

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