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Connecticut: Appellate Court Holds that Failure to Schedule an Asset on Bankruptcy Schedules Strips Debtor of Standing to Prosecute

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Linda J. St. Pierre
McCalla Raymer Leibert Pierce LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

A decision was rendered in Beck and Beck, LLC v. Costello, AC 39034 (Conn. App. Ct. 2017), which held that the debtor in a Chapter 7 case lacked standing to bring amended counterclaims and cross claims against the plaintiff because of a failure to properly list the counterclaims and cross claims on his bankruptcy petition.

Background
This decision stems from an action brought in the state superior court against the debtor seeking unpaid legal fees. During the pendency of that case, the debtor filed an answer, a special defense, and a four-count counterclaim alleging breach of contract, breach of the implied covenant of good faith and fair dealing, professional malpractice, and violation of the Connecticut Unfair Trade Practices Act. The plaintiff in that action then filed a motion to strike (due to legal insufficiency), which was granted. The debtor proceeded to file amended counterclaims and cross claims that were essentially identical to the original ones. These were also stricken at the request of the plaintiff, on the same grounds. The debtor appealed that decision.

Bankruptcy Court
During the pendency of the state court appeal, the debtor filed a voluntary Chapter 7 petition. He checked “none” on Schedule B where the form asked for a description of “[o]ther contingent and unliquidated claims of every nature, including counterclaims of the debtor.” The bankruptcy trustee issued a report of no distribution, determining that there was no property available for distribution, and the bankruptcy case was subsequently closed.

State Superior Court
Prior to oral argument on the appeal, the plaintiff filed a motion to dismiss the debtor’s counterclaims on the basis that the claims had not been abandoned by the Chapter 7 trustee and, therefore, remained property of the estate — the real party in interest as to the claims. The appellate court remanded that issue back to the superior court for a decision on standing. The trial court, upon the filing of a motion to dismiss by the plaintiff on the same standing arguments, granted the motion to dismiss, determining that the debtor did not have standing because the bankruptcy trustee had not abandoned the counterclaims and cross claims. This appeal followed.

State Appellate Review
During his appeal, the debtor contended that the bankruptcy trustee abandoned the counterclaims and cross claims when she filed her report of no distribution. The plaintiff countered that the trustee never abandoned those claims because the bankruptcy trustee was not made aware of the counterclaims and cross claims that the defendant had pending against the plaintiff.

The appellate court held in favor of the plaintiff, stating “that upon the filing of a bankruptcy petition, all prepetition causes of action become the property of the bankruptcy estate [citation omitted]; and that in order to revest in the debtor through abandonment, the assets must be properly scheduled. … Because the defendant failed to include the counterclaims and cross claims on his schedule B—personal property form, we conclude that the bankruptcy estate owns the defendant’s amended counterclaims and cross claims. … Accordingly, the [trial] court correctly determined that the defendant lacks the requisite standing to bring the amended counterclaims and cross claims against the plaintiff and counterclaim defendant. The judgment is affirmed.”

Closing
This decision provides a powerful argument to creditors who face post-bankruptcy dilatory and costly litigation.

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Kansas: Court of Appeals Reaffirms Need to Prove Standing at “First Legal Filing”

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Blair Gisi
SouthLaw, P.C – USFN Member (Iowa, Kansas, Missouri)

Kallevig Decision (April 2017)
In April 2017 the Kansas Supreme Court made a significant and dramatic ruling that the plaintiff in a foreclosure action must prove its standing at the filing of any petition to foreclose mortgage (also referred to as a “first legal filing”). See FV-I, Inc. v. Kallevig, 306 Kan. 204 (2017).

In summation, Kallevig found: (1) under the Uniform Commercial Code, as “the holder of the instrument,” a plaintiff 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; and (2) “either in the pleadings, upon motion for summary judgment, or at trial [the plaintiff must demonstrate] that it was in possession of the 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.

Dixon Decision (September 2017)
More recently, in Deutsche Bank National Trust Co. (as Indenture Trustee) v. Dixon, 2017 Kan. App. Unpub. LEXIS 834 (Kan. Ct. App. 2017), the Kansas Court of Appeals bolstered the notion that it is in a foreclosing plaintiff’s best interest to prove standing prior to the initiation of a foreclosure action via a properly endorsed note.

Dixon involved an assertion from the borrower that the plaintiff lacked standing to bring a 2012 foreclosure action. The borrower’s argument was “that the allonge to the note was not attached to the note when the endorsement was executed, rendering the endorsement ineffective in creating a bearer instrument in the hands of [Deutsche Bank National Trust Company].”

The complex procedural background involves a first foreclosure action that was filed in 2007 by a predecessor in interest to the plaintiff in the second foreclosure action. (Standing in this subsequent foreclosure action is at the center of the 2017 Dixon decision discussed in this article.) After a transfer of the loan, and issues regarding inconsistencies as to the actual owner of the note, the first foreclosure action was ultimately dismissed by the district court. In any event, when the second foreclosure action was filed in 2012, the petition to foreclose attached a copy of the promissory note with an allonge endorsed in blank.

In this second foreclosure action, the borrower relied on several cases in support of his argument that there was no evidence that the allonge was actually affixed to the note, specifically:


In re Shapoval, 441 B.R. 392 (Bankr. D. Mass. 2010), involving a Massachusetts bankruptcy court requiring additional evidence as to the bank’s standing to file a claim in the debtor’s bankruptcy case where the bank submitted a copy of the note without any endorsement and, later, an unattached allonge that contained an endorsement in blank.

Guzman v. Deutsche Bank National Trust Co., 179 So. 3d 543 (Fla. Dist. App. 2015), in which the Florida District Court of Appeals held that the bank lacked standing because it did not provide any evidence that the endorsements predated the filing of the initial petition, and standing could not be established by presenting an undated allonge after the proceeding commenced.

U.S. Bank Natl. v. George, 50 N.E.3d 1049 (Ohio App. 2015), where the copy of the note attached to an affidavit (intended to cure a break in the chain of endorsements giving U.S. Bank standing) did not actually contain any endorsement to U.S. Bank. Thus, because there was no unbroken chain of endorsements from the original lender to U.S. Bank, U.S. Bank was not entitled to a summary judgment of foreclosure.


In Dixon, the appellate court distinguished the matter before it from these three cases due to the fact that the plaintiff attached a copy of the note with an attached allonge, endorsed in blank, at the time it filed the subject foreclosure action, as well as with its summary judgment motion. In further support of its decision, the court went on to explain that the rationale for requiring an endorsement or allonge attached to the note is to avoid fraud and to promote the general “policy of providing a traceable chain of title, thereby promoting the free and unimpeded negotiability of instruments.”

Assertions that the plaintiff in Dixon had “unclean hands” and that dismissal of a number of the borrower’s counterclaims was improper were also rejected by the appellate court, but are outside the scope of this article. The district court’s decision granting summary judgment in favor of the plaintiff-bank was affirmed.

Conclusion
The takeaway from the Dixon decision is that, in Kansas, the best practice for establishing standing to bring a foreclosure action is to be able to demonstrate that the plaintiff was in possession of the properly endorsed note (whether special or in blank) and that the plaintiff is the of-record assignee of the mortgage — as of the date of filing the foreclosure petition.

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Florida: State Court Ruling that Standing is Not Transferable (After Suit is Filed) is Reversed by Appellate Court

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Roy A. Diaz
SHD Legal Group, P.A. – USFN Member (Florida)

A Florida appellate court reversed a final judgment, which had been entered in favor of a borrower in a foreclosure action based on the bank’s alleged lack of standing. [US Bank, NA as Legal Title Trustee for Truman 2012 SC2 Title Trust v. Glicken, 2017 Fla. App. LEXIS 15541 (Fla. 5th DCA Oct. 27, 2017).]

Background
The original plaintiff (Wells Fargo) filed a one-count foreclosure complaint against the borrower; copies of the note, allonge, and mortgage were attached to the complaint. The allonge attached to the note (and the complaint) contained a blank indorsement from the original lender. While the foreclosure was pending, Wells Fargo “assigned the mortgage and transferred possession of the note to US Bank.” The lower court entered an order substituting US Bank as the party plaintiff. US Bank filed the original note, allonge, and mortgage with the trial court. The note and allonge were identical to the copies attached to the complaint. The case proceeded to trial and, at the close of evidence, the borrower sought an involuntary dismissal of the case, asserting that US Bank lacked standing.

The defendant contended that US Bank lacked standing at the time of trial because no evidence had been admitted showing that Wells Fargo assigned the note, not just the mortgage, to US Bank. The lower court agreed (to the extent that it found US Bank lacked standing) and dismissed the bank’s foreclosure, holding:


“Standing is not transferrable and US Bank was not the holder of the note as of the date of the filing. It wasn’t the attorney enact [sic] of the—Wells Fargo. It wasn’t a successor in interest, it wasn’t purchased by, there was no way in which the two entities became one entity. There are a number of ways in which this happens, it evolves [sic] in a variety of lawsuits we see. In this case, you cannot transfer by selling the note. You cannot transfer standing. My ruling here is for the defendant.”


The lower court entered a final judgment in favor of the borrower, and an appeal on behalf of US Bank was filed in the Fifth District Court of Appeals (Fifth DCA).

Appellate Review
The Fifth DCA reversed the ruling, explaining that the lower court erred in its findings regarding standing. The appellate court pointed out that the note is a negotiable instrument and, once indorsed in blank, it can be transferred by possession alone; neither an assignment of the note nor evidence of an assignment is necessary if a party has actual possession of the original, endorsed note. The Fifth DCA concluded that US Bank presented sufficient evidence of its standing to foreclose when it attached the note and allonge with a blank indorsement to the foreclosure complaint, and then proffered the identical note and allonge at trial.

As stated in the appellate court’s decision, “When the note with an undated blank indorsement has been attached to the original complaint, this is sufficient to prove standing provided that the plaintiff produces the original note at trial or files it with the trial court with the same indorsement and there are no subsequent contradictory indorsements.”

Editor’s Note: The author’s firm represented the appellant, US Bank, NA as Legal Title Trustee for Truman 2012 SC2 Title Trust, in the subject case.

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Connecticut: Appellate Court Affirms Trial Court’s Order for Borrowers to Reimburse Future Tax & Insurance Advances by Lender

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

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

The Connecticut appellate decision in JPMorgan Chase Bank, N.A. v. Essaghof, 177 Conn. App. 144 (Oct. 10, 2017), as well as the strong language used in that decision, is extremely positive for foreclosing lenders — and may have application in other equitable judicial foreclosure jurisdictions. The Essaghof foreclosure action began in early 2009 and was heavily litigated through trial, concluding in July 2015, during which time the lender expended in excess of $330,000 for real estate taxes and homeowner’s insurance.

Trial Court Grants Equitable Relief
After losing at trial and in their attempts for a reversal at the trial court level, the borrowers took an appeal in December 2015. In response to the mounting costs caused by the borrowers’ delays, the lender brought a motion for equitable relief, requesting that the trial court order the borrowers to reimburse the lender for all future tax and insurance advances. In February 2016 the trial court granted that motion, ruling that the obligation to maintain taxes and insurance is not an issue of the foreclosure, and that it would not be affected by the trial court and appellate litigation. The borrowers amended their appeal to challenge the trial court’s authority to enter the equitable order.

Appellate Analysis
After a review of the authority granted trial courts to “examine all relevant factors to ensure that complete justice is done,” the appellate court upheld both the trial court’s authority to make the ruling and the ruling itself. In one of the strongest statements in recent years, the appellate court eviscerated the borrower’s claims and explicitly confirmed for other trial courts that they, too, are empowered to take such actions when they believe it is warranted. Specifically, the court stated:


“We cannot conceive of any abuse of discretion on the part of the trial court. The court understandably was concerned that, absent an order requiring the defendants to pay for their own property taxes and homeowner’s insurance, they would experience a windfall because they would be allowed to live on their property for free at the plaintiff’s expense until the conclusion of the foreclosure proceedings. Such a result is plainly within the realm of issues that the court’s equitable powers were designed to address. … The court did not abuse its discretion in determining that a balancing of the equities justified ordering the defendants to pay for expenses that they would have been required to pay no matter the outcome of this case.” Id. at 162.


The Takeaway
One of the larger concerns faced by foreclosing lenders during lengthy litigation is the expense incurred through continued advances. The Connecticut Appellate Court confirmed that a trial court may require that those costs be borne by a borrower. The borrowers have petitioned the Connecticut Supreme Court for certification.

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Circuit Split Deepens: Tenth Circuit Opines that Colorado Nonjudicial Foreclosure Activity is Not Debt Collection under the FDCPA

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Holly Shilliday and Andrew Boylan
McCarthy & Holthus LLP – USFN Member (Washington)

In a published opinion — and adding to the current split among the circuits — the Tenth Circuit Court of Appeals has ruled that the Fair Debt Collection Practices Act (FDCPA), set forth in 15 U.S.C. §§ 1692 – 1692p, does not apply to nonjudicial foreclosure proceedings in the state of Colorado. Obduskey v. Wells Fargo Bank, 2018 U.S. App. Lexis 1275 (10th Cir., Jan. 19, 2018). In a win for the industry, the court ultimately sided with the Bank (and these authors’ law firm McCarthy & Holthus) in ruling that the enforcement of a security interest, by way of a nonjudicial foreclosure proceeding, does not constitute debt collection under the FDCPA.

Background
The borrower in Obduskey defaulted on a loan secured by his personal residence. Beginning in 2009, the Bank initiated several nonjudicial foreclosures, none of which was completed. The Bank retained the Law Firm in 2014 to pursue a nonjudicial foreclosure. The Law Firm sent a debt validation letter to the borrower pursuant to 15 U.S.C. § 1692g, wherein it represented that it was retained to initiate foreclosure, stated that it “may be a debt collector,” and referenced the content under 15 U.S.C. § 1692g, including the amount owed to the current creditor, Wells Fargo. The borrower disputed the validity of the debt and alleged that the Law Firm initiated foreclosure before verifying the debt as required under the FDCPA.

The borrower’s complaint included several claims against the Bank and the Law Firm, including one for violation of the FDCPA. The district court dismissed the claims, with prejudice, upon separate motions filed by the Bank and the Law Firm. Regarding the FDCPA claim, the district court ruled that Wells Fargo was not liable because it began servicing the loan prior to default. The district court further concluded that the Law Firm was not a “debt collector” under the FDCPA because “foreclosure proceedings are not the collection of a debt.” The borrower appealed the trial court’s dismissal order.

After the parties fully briefed the case, the Tenth Circuit asked for supplemental briefing regarding whether the FDCPA applies to nonjudicial foreclosure activity. The Tenth Circuit had previously declined to address this issue due to pleading deficiencies in the complaint. [See Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231, 1239 (10th Cir. 2013); Maynard v. Cannon, 401 F. App’x 389, 395 (10th Cir. 2010).] Despite similar issues with the borrower’s complaint in this case, the court recognized the need for clarity on the issue and agreed to hear the case.

Legal Analysis
The Tenth Circuit affirmed the lower court’s dismissal order. Obduskey at *14. First, since Wells Fargo began servicing the loan before it went into default, the court agreed that the Bank was not a debt collector under 15 U.S.C. § 1692(a)(6)(F). Id. at *4-5. Next, the court examined the circuit split on whether the FDCPA applies to nonjudicial foreclosures. Obduskey at *6. Courts across the country have long been divided on this contentious issue.

The Fourth, Fifth, and Sixth Circuits (as well as the Colorado Supreme Court) have found that nonjudicial foreclosures do constitute debt collection under the FDCPA. [Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006); Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006); Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013); Shapiro & Meinhold v. Zartman, 823 P.2d 120 (Colo. 1992) (en banc).]

The Ninth Circuit reached the opposite conclusion in Ho v. ReconTrust Co., 858 F.3d 568 (9th Cir. 2016). The Ho case was closely watched, highly publicized, and saw amicus briefs from both sides of the industry (including the CFPB). Ultimately, the Ninth Circuit found that nonjudicial foreclosures do not qualify as debt collection under the federal act. In Ho, the appellate court affirmed a leading district court case in its jurisdiction, which held that “foreclosing on a trust deed is an entirely different path” than “collecting funds from a debtor.” [Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002)]. The Ninth Circuit further reasoned, in Ho, that “Following a trustee’s sale, the trustee collects money from the home’s purchaser, not from the original borrower. Because the money collected from a trustee’s sale is not money owed by a consumer, it isn’t ‘debt’ as defined by the FDCPA.”

Relying on Ho and the plain language of the statute, the Tenth Circuit concluded that the FDCPA applies to the collection of debt (i.e., money) and not to the enforcement of a security interest. Obduskey at *7-8. A nonjudicial foreclosure is the enforcement of a security interest and is not an attempt to collect money from a debtor. Id., citing Ho at 572 (quoting 15 U.S.C. § 1692a(5)).

The Tenth Circuit’s ruling hinged on the “critical differences” between nonjudicial and judicial foreclosures, including whether a deficiency action is being pursued. Obduskey at *8. Pursuant to Colorado law, a separate lawsuit must be filed in order to obtain a deficiency judgment. Id., citing C.R.S. § 38-38-106(6) (2017) and Bank of America v. Kosovich, 878 P.2d 65, 66 (Colo. App. 1994). The court also agreed with the policy considerations raised by Wells Fargo and the Law Firm, including potential conflicts between state and federal law. Obduskey at * 10-11. To avoid casting too wide of a net, the court did limit its holding to nonjudicial foreclosure proceedings and to the facts of the case at hand, finding that “[the Law Firm] did not demand payment nor use foreclosure as a threat to elicit payment.” Id. at *12-13. “It sent only one letter notifying [the borrower] that it was hired to commence foreclosure proceedings.”

Conclusion
Given the split among the circuits, the issue of the applicability of the FDCPA to nonjudicial foreclosures may be ripe for consideration by the U.S. Supreme Court.

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District Court Reverses Bankruptcy Court’s Sanction of Mortgage Servicer for Including Fees on Monthly Statements without First Filing Required Notices

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Joel W. Giddens
Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

On December 19, 2017 the U.S. District Court for Vermont reversed a $375,000 sanction. The sanction had been imposed by the chief bankruptcy judge for the District of Vermont on a mortgage servicer for billing fees to debtors without first filing the required notices under Federal Rule of Bankruptcy Procedure (FRBP) 3002.1(c) and for violation of bankruptcy court orders. The bankruptcy court imposed sanctions following a finding of contempt in three Chapter 13 bankruptcy cases on motions filed by the standing Chapter 13 trustee against the servicer. The request by the trustee asking the bankruptcy court to find the servicer in contempt was based on FRBP 3002.1(i)’s “failure to notify” section and for violation of “deem current” orders entered at the completion of two of the Chapter 13 cases.

Background in Bankruptcy Court
FRBP 3002.1, effective December 1, 2011, requires the holder of a claim secured by the debtor’s principal residence to file a detailed notice setting forth fees, expenses, or charges it seeks to recover from the debtor within 180 days after the expenditure is incurred. FRBP 3002.1(i) provides a bankruptcy judge with the authority to take certain actions if the holder fails to disclose a fee or charge, including: precluding the holder from presenting the omitted information — in any form — as evidence in any contested matter or adversary proceeding in the case (unless the failure was substantially justified or harmless); or awarding “other appropriate relief,” including reasonable expenses and attorney fees caused by the failure.

The bankruptcy court imposed a $75,000 sanction ($25,000 in each of the three cases) pursuant to FRBP 3002.1(i) for the servicer’s inclusion of property inspection fees, NSF fees, and late charges on monthly billing statements sent to the debtors over a 25-month period during their bankruptcy plans that had not been included on a FRBP 3002.1(c) notice, and were more than 180 days old. The fees included on the billing statements were fairly minimal (a total of $258.75 in one case; $86.25 in the second case; and $317.00 in the third case); the servicer admitted that they had been included in violation of the bankruptcy rule. In one of the cases, the servicer had already been sanctioned for not applying post-petition payments pursuant to the confirmed plan and had agreed to remediate its practices to comply with local Vermont bankruptcy rules. The imposition of the $300,000 sanction related to the same fees and late charges on the monthly statements and were on statements sent out to the debtors within days after the entry of the “deem current“ orders.

District Court’s Review
The bankruptcy court imposed the sanctions not only pursuant to FRBP 3002.1(i) but also pursuant to 11 U.S.C § 105(a) that provides bankruptcy judges with the authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the bankruptcy code, and pursuant to its “inherent authority.” The district court analyzed each basis used by the bankruptcy court to impose sanctions and concluded that the bankruptcy court had extended its authority beyond the bounds of the bankruptcy rules, the bankruptcy code, procedural due process, and constitutional protections in contempt proceedings.

First, the district court looked at whether FRBP 3002.1(i) authorized the imposition of punitive damages. The Chapter 13 trustee argued that the “plain language” of the rule embodies a grant of broad authority to craft appropriate remedies and that the sanction imposed by the bankruptcy court fell within the scope of that authority. The trustee pointed out that the power to impose monetary sanctions is necessary to deter mortgage creditors from attempting to collect unauthorized fees and charges, and to avoid the “absurd” result of mortgage creditors facing no negative consequences for violating the rule. The mortgage servicer contended that the history of FRBP 3002.1 (as reflected in meeting minutes of the Advisory Committee on Bankruptcy Rules) demonstrated that, in addition to attorney fees and costs, the rules’ drafters intended the scope of “other appropriate relief” to be limited to discretionary exclusion of information that should have been disclosed and did not indicate an intent to provide a basis, by itself, for disallowance of a claim entirely. The total amount of the sanction, the servicer pointed out, was more than the cumulative amount of its claims, which would be tantamount to their disallowance. That the sanction was ordered by the bankruptcy court to be paid to a non-profit legal service provider in Vermont, and that the debtors were not harmed by the servicer’s actions, was additional proof that the sanction was punitive in nature.

The district court found that the analysis of the extent of the bankruptcy court’s authority to impose sanctions under FRBP 3002.1(i) turned on this principle: “that, however broadly the language of [FRBP] 3002.1(i) sweeps, the powers it bestows cannot be without limit. At the absolute minimum, these powers cannot extend beyond the outer bounds of the Bankruptcy Court, as delineated by statute and precedent.” Because the bankruptcy court exceeded the outer bound of its authority under § 105 (as discussed later in the opinion), the district court concluded that the bankruptcy court also went beyond the scope of FRBP 3002.1.

The district court then turned to the sanction imposed by the bankruptcy court pursuant to 11 U.S.C § 105(a) and the bankruptcy court’s inherent authority. The court acknowledged that there was no debate that bankruptcy courts, like district courts, are vested with inherent authority to craft orders necessary to carry out their mission and may exercise inherent authority to respond to violations of its orders. The court further acknowledged that there was a broad consensus among circuit courts that § 105 empowered bankruptcy courts to adjudicate civil contempt and impose compensatory sanctions in a wide variety of factual and procedural contexts. The court noted, however, that there was a deep division among the appellate courts as to whether bankruptcy courts have the power to punish criminal contempt or impose punitive sanctions. There was no controlling authority in the Second Circuit. (Connecticut, New York, and Vermont comprise the Second Circuit.)

A Look to Other Circuits
After a review of the evolution of the contempt authority of bankruptcy courts and decisions in other circuits, the district court was most persuaded by the decisions that restrict the authority of bankruptcy courts to impose punitive damages. In the case of In re Dyer, 322 F.3d 1178 (9th Cir. 2003), the Ninth Circuit held that neither § 105 nor the bankruptcy court’s inherent authority were proper authority for imposition of “serious” punitive damages — specifically pointing out that § 105 contains no explicit authority to award such damages; rather, only those remedies “necessary” to enforce the bankruptcy code. Civil contempt sanctions (i.e., compensatory damages) are adequate to meet that goal, rendering serious punitive damages unnecessary. While the Dyer court declined to set an amount that rose to “serious” punitive damages, the $50,000 award at issue in that case was sufficient to fall outside of the authority conferred by § 105. The Dyer court further noted that bankruptcy courts are ill-equipped to provide the procedural protections that due process of law requires before the imposition of punishment, and that the administration of punishment by an Article I bankruptcy judge raises constitutional concerns.

In the same vein, the district court found persuasive the Fifth Circuit’s holding in In re Hipp, 895 F.2d 1503 (5th 1990). There, due to the lack of tenure and compensation protections afforded Article III judges, it was constitutionally impermissible for bankruptcy courts to exercise criminal contempt powers.

Finally, the district court found that the narrower construction of the bankruptcy court’s statutory and inherent punitive sanction was consistent with the direction of Second Circuit precedent addressing the scope of bankruptcy contempt authority in other contexts.

Another Appeal: Awaiting Second Circuit’s Ruling
In the end, the district court suggested that 11 U.S.C. § 105 makes it permissible for a bankruptcy court to enter a preliminary finding of criminal contempt with the preparation of proposed findings of fact and conclusions of law. This would allow the offending party an opportunity to make a record of objections but leave the adjudication of the objections, and entry of a final order of contempt, to the district court. Whether bankruptcy courts will follow this suggested procedure remains to be seen. While persuasive authority, the district court’s opinion is not binding precedent and is now on appeal to the Second Circuit Court of Appeals.

The district court’s opinion can be found at PHH Mortgage Corporation v. Sensenich, 2017 U.S. Dist. LEXUS 207801 (D. Vt. 2017).

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New Hampshire: Bill Proposes Change in Foreclosure Process from Nonjudicial to Judicial

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

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

On January 11, 2018 the New Hampshire House of Representatives introduced House Bill 1682-FN, “An Act relative to procedures for foreclosure.” A public hearing was held on January 24, 2018.

The bill provides that foreclosure of a mortgage would be by a civil action in the superior court in the county in which the mortgaged premises, or any part of it, is located. The bill would also repeal the provisions for nonjudicial power of sale mortgages pursuant to RSA 479:25 and reenact the statute to require commencement of foreclosure by civil action.

Proposed Process
Specifically, the bill sets forth the process for a judicial foreclosure wherein all parties having an interest appearing of record at the registry of deeds, up through the time of recording the complaint or clerk’s certificate, must be joined — except a party in interest having a superior priority to the foreclosing mortgage whose interest will not be affected by the proceedings. Parties with a superior interest must be notified of the action by the sending of a copy of the complaint by certified mail. Parties without a recorded interest may intervene in the action for purposes of being added as a party in interest any time prior to the entry of judgment.

The action shall be commenced pursuant to superior court rules; and the mortgagee shall, within 60 days of commencing the action, record a copy of the complaint or clerk’s certificate in each registry of deeds where the mortgaged property lies. Furthermore, the mortgagee will have to certify and offer evidence that all steps mandated by law to provide notice to the mortgagor have been strictly performed. The complaint shall also contain a certification of proof of ownership of the mortgage note, as well as produce evidence of the mortgage note, mortgage, and all assignments and endorsements of the mortgage note and mortgage.

Other requirements include that the complaint contain the street address of the mortgage property; state the book and page number of the mortgage; state the existence of any public utility easements recorded after the mortgage but before the commencement of the action; state the amount due and what condition of the mortgage was broken; and, by reason of such breach, demand a foreclosure and sale.

Within ten days after the filing of the complaint, the mortgagee shall provide a copy of the complaint or clerk’s certificate (as submitted to the court) to the municipal tax assessor of the municipality in which the property is located — and if the property is manufactured housing as defined in RSA 674:31, to the owner of any land leased by the mortgagor.

Redemption
A 90-day right of redemption is also being proposed, wherein the property “may be redeemed by the mortgagor, after the condition thereof is broken, by the payment of all demands and the performance of all things secured by the mortgage and the payment of all damages and costs sustained and incurred by reason of the nonperformance of its condition, or by a legal tender thereof, within 90 days after the court’s order of foreclosure.”

Waiver of the Foreclosure
Most alarming is the clause that acceptance — before the expiration of the right of redemption, and after the commencement of foreclosure proceedings — of anything of value to be applied on or to the mortgage indebtedness constitutes a waiver of the foreclosure, unless an agreement to the contrary in writing is signed by the person from whom the payment is accepted; or, unless the bank returns the payment to the mortgagor within ten days of receipt. The receipt of income from the mortgaged premises by the mortgagee or the mortgagee’s assigns (while in possession of the premises) does not constitute a waiver of the foreclosure proceedings of the mortgage on the premises.

The mortgagee and the mortgagor may enter into an agreement to allow the mortgagor to bring the mortgage payments up-to-date with the foreclosure process being stayed as long as the mortgagor makes payments according to the agreement. If the mortgagor does not make payments according to the agreement, the mortgagee may, after notice to the mortgagor, resume the foreclosure process at the point at which it was stayed.

Conclusion
As such, all mortgage foreclosures would take place following a civil action in superior court. A mortgage foreclosure would be treated as a routine equity case, estimated to have a filing fee of approximately $250.

The impact to servicers will be such that what was once a streamlined process, taking approximately 90-120 days, would be significantly extended to the same time frame that exists in other judicial states such as Maine, Vermont, and Connecticut. This would also require careful scrutiny of demands to determine how to comply with the historical nonjudicial paragraph 22 language in light of the new judicial process. Servicers can also expect a spike in contested matters by virtue of borrowers filing answers, affirmative defenses, counterclaims, and engaging in discovery, as well in increased time for the preparation of witnesses to testify at trial.

Two aspects of the judicial process that are not mentioned in the bill are: (1) the mediation process; and (2) a nonjudicial notice and publication requirement for the sale. Nonetheless, either could be added to the proposed bill at a later date. In conclusion, if this proposed bill is passed, it would make foreclosing in the Granite State much more difficult, time-consuming, and expensive; and there is no doubt that all of the issues that have surfaced in the traditional judicial states will have to be similarly addressed and litigated in New Hampshire. Further updates will be provided when they are available.

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FDCPA Case Law: 2017 in Review

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Andy Saag
Sirote & Permutt, P.C.
USFN Member (Alabama)

and William H. Meyer
Martin Leigh PC
USFN Member (Kansas)

The Fair Debt Collection Practices Act (FDCPA) continues to be actively argued and litigated around the country. This article highlights case law from 2017 (and some from late 2016) related to the scope of the FDCPA, standing, overshadowing, and collection of time-barred debt.

Who Is A Debt Collector?
The FDCPA defines a “debt collector” as one who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C. § 1692a(6).

In Henson v. Santander Consumer USA Inc., the U.S. Supreme Court analyzed the exceptions under §1692a(6)(F), recognizing that, “under the definition at issue before us you have to attempt to collect debts owed another before you can ever qualify as a debt collector.” 137 S. Ct. 1718, 1721-22 (2017) (emphasis in original). The Court held that “a debt purchaser ... may indeed collect debts for its own account without triggering the [FDCPA].”

Additionally, the definition of “debt collector” excludes any person “collecting ... a debt which was not in default at the time it was obtained.” 15 U.S.C. § 1692a(6)(F)(iii); see also Kurtzman v. Nationstar Mortgage LLC, 2017 WL 4511361, *3 (11th Cir. Oct. 10, 2017), quoting Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309, 1316 (11th Cir. 2015) (“a non-originating debt holder [does not qualify as] a ‘debt collector’ for purposes of the FDCPA solely because the debt was in default at the time it was acquired”).

The Fourth Circuit and Ninth Circuit have adopted divergent views as to whether foreclosure-related activities constitute “debt collection.” In McCray v. Federal Home Loan Mortgage Corp., 839 F.3d 354 (4th Cir. 2016), the Fourth Circuit observed that “[t]he FDCPA’s definition of debt collector … does not include any requirement that a debt collector be engaged in an activity by which it makes a ‘demand for payment.’” Thus, “to be actionable under the FDCPA, a debt collector needs only to have used a prohibited practice ‘in connection with the collection of any debt’ or in an ‘attempt to collect any debt’” (emphasis added). Id., citing Powell v. Palisades Acquisition XVI, LLC, 782 F.3d 119, 123 (4th Cir. 2014). In McCray, the Court found “all of the defendants’ activities were taken in connection with the collection of a debt or in an attempt to collect a debt” (emphasis added).

By contrast, the Ninth Circuit has decided that “[a]n entity does not become a general ‘debt collector’ if its ‘only role in the debt collection process is the enforcement of a security interest.’” Ho v. ReconTrust Co., N.A., 858 F.3d 568, 573 (9th Cir. 2016). Nonetheless, the Ninth Circuit identified a limited definition of “debt collector” in the foreclosure context to include security interest enforcers, who are regulated only through §1692f(6).

In Dowers v. Nationstar Mortgage, 852 F.3d 964 (9th Cir. 2017), the Ninth Circuit cited to Ho and affirmed the dismissal of claims against a loan servicer in all respects except as to an alleged violation of § 1692f(6). The Ninth Circuit then reached the same conclusion in Mashiri v. Epsten Grinnell & Howell, 845 F.3d 984 (9th Cir. 2017). Relying on Ho, Mashiri states, “where an entity is engaged solely in the enforcement of a security interest and not in debt collection, like the trustee and unlike Epsten, it is subject only to § 1692f(6) rather than the full scope of the FDCPA.” Id. at 990.

The analyses in both Dowers and Mashiri, however, overlook the parties’ posture in the Ho litigation. Ho “affirms the leading case of Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002), which held that ‘foreclosing on a trust deed is an entirely different path’ than ‘collecting funds from a debtor.’” See Ho, 858 F.3d at 572; see also id. at note 3 (“… Hulse is indeed the leading case for what other courts have recognized as the majority position”).

Notably, the defendants in Mashiri made the same concession as the parties in Ho; i.e., that the foreclosure trustee defendant was a “debt collector.” Mashiri, 845 F.3d at 989 (“For the first time in its answering brief, Epsten argues that it is subject only to § 1692f(6)”); Ho, 858 F.3d at 573 (“All parties agree that ReconTrust is a debt collector under the narrow definition [that would implicate § 1692f(6)]”). Moreover, in Ho, the trustee was not even accused of a § 1692f(6) violation. 858 F.3d at 573; see also Park v. Lehman Brothers Bank, FSB, 694 Fed. Appx. 602 (9th Cir. Aug. 3, 2017), citing Ho at 572-573 (“Quality [Loan Service Corporation] … may be a debt collector for the limited purpose of section 1692f(6), but [the plaintiffs] didn’t allege that Quality violated this section”).

As the Ninth Circuit observed in Ho, to impose debt collection liability in connection with state foreclosure law would produce an impermissible conflict. Ho, supra at 576; see also Tyson v. TD Services Co., 690 Fed. Appx. 530, 531 (9th Cir. 2017) (“the practices that T.D. Service engaged in were strictly in accordance with the law of California regarding the nonjudicial foreclosure duties of a trustee under a deed of trust”). Consequently, it is important to take a nuanced view of what factors led to the Ho, Dowers, and Mashiri appellate rulings.

In sum, although Santander is clear that collecting one’s own debts does not trigger FDCPA liability, with the Ho decision denied a certiorari petition on December 4, 2017, the law among circuit courts remains unclear on the subject of whether foreclosure activities bring lenders and trustees under the scope of § 1692a(6).

Standing
The U.S. Supreme Court established in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), that a plaintiff must show an injury-in-fact in order to establish standing. Further, the Spokeo case stated that an injury-in-fact is present if the borrower can show an invasion of a legally protected interest that is concrete and particularized. Below are a few cases dealing with “Spokeo Standing” over the past year. As you will see, there is very little consistency as to what does or does not constitute an injury-in-fact.

In Estate of Caruso v. Financial Recoveries, 2017 WL 2704088 (D.N.J. June 22, 2017), a debt collector mailed a collection letter to the debtor’s estate in an envelope with a visible barcode and nine-digit number, which the plaintiff alleged was a violation of the FDCPA. The debt collector moved for summary judgment and asserted that the estate lacked standing. The court agreed, noting that the estate failed to provide evidence that the barcode and nine-digit number disclosed any private information on its face or when read by a barcode scanner. Accordingly, the Court held that the estate did not prove it suffered an injury sufficient for Article III standing and granted the motion in favor of the debt collector.

In Yeager v. Ocwen Loan Servicing, 2017 WL 701387 (M.D. Ala. Feb. 22, 2017), a borrower sued for violations of the FDCPA after the servicer allegedly failed to send the validation notice within five days of its initial communication to them. The court found that the borrowers were unable to show that they “suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” Therefore, the court held that the borrowers were unable to show actual harm and lacked standing.

In Ben-Davies v. Blibaum & Associates, P.A., 2017 WL 2378920 (4th Cir. (D. Md.) June 1, 2017), a borrower filed suit against her debt collector under the FDCPA for allegedly demanding payment of an incorrect sum based on the calculation of an interest rate not authorized by law. The trial court dismissed the borrower’s claims and held that she failed to sufficiently allege an injury-in-fact to establish standing. However, on appeal, the Fourth Circuit reasoned that since the borrower alleged that she suffered actual, existing, intangible harm (i.e., “emotional distress, anger, and frustration”) as a “direct consequence” of the alleged violations, she met the requirements set out in Spokeo. Accordingly, the court remanded the case for further proceedings.

In May v. Consumer Adjustment Company, Inc., 2017 WL 227964 (E.D. Mo. Jan. 19, 2017), a borrower filed suit against a debt collector under the FDCPA because its collection letter included the amount of the debt without informing her that the amount owed included interest that would continue to accrue. In considering the debt collector’s motion to dismiss for lack of standing, the district court noted that a debt collector’s violation of the FDCPA disclosure requirements may result in concrete injury. However, in this case, the court ruled that the borrower failed to allege any actual harm from the collection letter’s lack of disclosure regarding accruing interest. Thus, without proof of any actual or imminent concrete harm, the court found that the allegations did not amount to an injury-in-fact, and the complaint was dismissed.

In Benali v. AFNI, Inc., 2017 WL 39558 (D.N.J. Jan. 4, 2017), a debt collector sent collection letters on behalf of a lender to the plaintiff, charging a processing fee for payments that were made electronically. It was undisputed that the plaintiff never had an account with the lender and that the applicable state law neither expressly permits nor prohibits a processing fee for credit card payments. The district court concluded that the plaintiff alleged bare statutory violations but did not establish a concrete harm sufficient to support standing. The court held that merely receiving the collection letter, without more, was not sufficient to confer standing because the alleged debt did not belong to the plaintiff. Additionally, there was no risk that the plaintiff would pay the processing fee because he immediately realized that he did not have an account with the lender. Because the plaintiff failed to show any actual or threatened harm, the court held that he lacked standing and granted summary judgment in the debt collector’s favor.

In Carney and Gumpper v. Russell P. Goldman, P.C., 2016 WL 7408849 (D.N.J. Dec. 22, 2016), the plaintiffs filed a putative class action against a law firm engaged to collect defaulted student loan debts for purported violations of the FDCPA. The law firm filed a motion to dismiss, contending the debtors lacked Article III standing to bring this case. The district court denied the law firm’s motion and found that the debtors did allege a clear injury-in-fact harm for purposes of Article III standing. The purported injury was that the law firm made false, misleading, and deceptive representations to debtors by listing (in its collection letters) attorneys’ fees and costs that had not yet been incurred. The debtors claimed that because of these alleged misrepresentations, they suffered informational and economic injury. Following the ruling in Spokeo, the court held that the alleged injury was particularized and the harm was concrete enough to satisfy Article III standing requirements. Accordingly, the motion to dismiss was denied.

Finally, in Kaymark v. Udren Law Offices, P.C., 2016 WL 7187840 (W.D. Pa. Dec. 12, 2016), the plaintiff filed a class action lawsuit against a law firm, alleging violations of the FDCPA because a pre-foreclosure letter included an itemized list of the debt and stated that the figures were calculated as of July 12, 2012, when in fact some of the charges had not yet been incurred. The district court, in considering the U.S. Supreme Court’s decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), concluded that the borrower had established standing by alleging a concrete injury-in-fact. The district court found that the foreclosure complaint’s demand for alleged estimated or anticipated fees was material and thus actionable under the FDCPA. The district court noted that a statement under the FDCPA is “material” if it is capable of influencing the decision of the least sophisticated debtor. Accordingly, the court did not dismiss the FDCPA claims.

Overshadowing
In a February 2017 order, the U.S. District Court of the District of Colorado addressed a debtor’s claim that the creditor’s communications violated the FDCPA’s prohibition against overshadowing (i.e., a notice containing information that contradicts the notice of a debtor’s rights such as the right to dispute the debt within 30 days). In that case, styled Hamilton v. Capio Partners, LLC, 237 F. Supp. 3d 1109 (D. Colo. 2017), the District Court interpreted the FDCPA’s requirement that “a debt collector must inform a consumer that she has the right to dispute the validity of a debt claim within thirty days of receiving notice of a debt collection action . . . [that the notice] ‘may not overshadow or be inconsistent with the disclosure of the consumer’s right to dispute the debt or request the name and address of the original creditor’ . . . [and] ‘[a] notice is overshadowing or contradictory if it would make the least sophisticated consumer uncertain as to her rights.’” Id. at 1113.

The operative language from the notice at issue in Hamilton stated: “We have been authorized to extend to you a special offer of settlement for $180.00. This offer will save you 40%. If you choose to accept this offer, payment must be received in this office on or before 05/21/2015. This settlement offer and the deadline for accepting it do not in any way affect your right to dispute this debt and request validation of this debt during the 30 days following your receipt of this letter as described on the reverse side. If you do not accept this settlement offer you are not giving up any of your rights regarding this debt.” Id. at 1111-12.

In resolving the overshadowing issue, the District Court first addressed the debtor’s claim that overshadowing is a fact issue for the jury, and therefore not appropriate for a determination at summary judgment. The District Court disagreed and cited to supporting opinions from the Sixth, Seventh, and Ninth Circuits, noting that the Tenth Circuit has not yet addressed this issue.

The District Court next addressed the debtor’s argument that a notice that contains both a settlement offer and a notice of the debtor’s rights results in the notice of the debtor’s rights being overshadowed. The District Court disagreed, citing a number of supporting decisions. The District Court explained further that overshadowing has been found in those cases where creditors have stated an intent to take action within 30 days of sending the notice to the creditor and making claims such as “the debt collector would hold the consumer’s account ‘for 10 days ... to give [her] the opportunity to settle this obligation;’” or “if the debt was not paid within ten days then the debt collector would pursue legal action;” and “‘THIS IS A DEMAND FOR IMMEDIATE FULL PAYMENT’ and ‘PHONE US TODAY. IF NOT PAY US—NOW.’” The District Court explained that notices with this type of language “flatly contradicted the [FDCPA’s] thirty-day validation requirement.” Id. at 1114. In short, an overshadowing claim presents a narrow legal issue that can be determined through a dispositive motion.

In an October 2016 order, the U.S. District Court for the Eastern District of Missouri addressed a debtor’s claim that the creditor’s communication violated the FDCPA’s overshadowing provision. In that case, styled Tilatitsky v. Medicredit, Inc., 2016 WL 5906819 (E.D. Mo. 2016), the debtor asserted that the creditor’s 30-day debt validation notice was overshadowed because it was set forth in the letter’s fourth paragraph and after the notice had requested that the debtor pay the debt in full and provided the creditor’s contact information along with various payment options (phone payment, express mail, MoneyGram, check, or credit card).

In considering the overshadowing claim, the district court noted that although it must utilize the “unsophisticated-consumer standard” it must maintain “an objective element of reasonableness to protect debt collectors from liability for peculiar interpretations of collection letters.” “[S]tatements that are merely susceptible of an ingenious misreading do not violate the FDCPA.” Id. at 3-4. “[W]hen the letter itself does not plainly reveal that it would be confusing to a significant fraction of the population, the plaintiff must come forward with evidence beyond the letter and his own self-serving assertions that the letter is confusing in order to create a genuine issue of material fact for trial.”

The debtor in Tilatitsky intended to use an expert witness to explain why the creditor’s notice was confusing and overshadowing. However, the debtor failed to disclose the expert witness and the district court excluded the expert’s testimony.

The district court then granted summary judgment in favor of the creditor because the debtor could not rely on his self-serving claims that the creditor’s notice “confused him, and he has failed to timely present extrinsic evidence showing that the Collection Letter would reasonably confuse or deceive an ‘unsophisticated consumer’ as to his or her dispute, validation, and verification rights.”

Time-Barred Debt

In a May 2017 opinion, the U.S. Supreme Court ruled that a creditor did not violate the FDCPA in the context of a Chapter 13 bankruptcy proceeding when the creditor filed a proof of claim on a facially time-barred debt. The FDCPA claim from that case, styled Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 1412 (2017), was asserted in a lawsuit filed by the debtor after the creditor’s proof of claim was disallowed in the bankruptcy proceeding. The Court’s opinion in Johnson is factually limited and could be considered to only apply in the context of bankruptcy proofs of claim. In short, the decision should not be viewed as a safe harbor regarding any attempts to collect time-barred debts.

In an October 2017 order, the U.S. District Court for the Eastern District of Missouri addressed the FDCPA on a time-barred debt issue and ruled for the tenant/debtor and against the landlord/creditor and its attorneys. That case, styled Morgan v. Vogler Law Firm, P.C., 2017 WL 4387351 (E.D. Mo. 2017), evolved from the creditor evicting the debtor, a subsequent collection lawsuit filed by the creditor’s attorneys, the debtor’s bankruptcy, and a violation of the automatic stay by the creditor’s attorneys. Of several FDCPA issues raised in the case, one was the debtor’s claim that the debt was time-barred. The district court’s order, without hesitation, found for the debtor on the time-barred debt issue — ruling that “[Missouri’s] five-year statute of limitations applied to plaintiff’s landlord’s claim for unpaid rent. [#38 at 9 (citing § 516.120 RSMo).] Thus, plaintiff’s landlord could not recover for payments that had been due more than five years before the lawsuit was initiated. (Id.) Because § 1692e prohibits debt collectors from filing a time-barred lawsuit to collect a debt, defendants violated § 1692e.”

In a December 2016 order, the U.S. District Court for the District of Kansas addressed the FDCPA time-barred debt issue in the context of a notice sent by the creditor to the debtor. That case, styled Boedicker v. Midland Credit Management, Inc. (D. Kan. 2016), addressed whether a notice sent by the creditor (which was modeled on a FTC-approved safe harbor example) violated the FDCPA. The creditor’s notice stated, in part, that the “law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it.” The debtor contended that this notice failed to satisfy the FDCPA because the notice did not also warn the debtor of a potential revival of a time-barred claim. The district court rejected that argument and ruled for the creditor, noting that the creditor’s notice exactly matched the FTC-approved language, and because no case has ruled that a debt collector must warn the debtor of the risk of reviving a time-barred claim.

In a September 2016 order, the U.S. District Court for the Eastern District of Missouri addressed the FDCPA time-barred debt issue based upon a creditor’s notice to a debtor. That case, styled Young v. Ditech Financial, LLC, 2016 WL 4944102 (E.D. Mo. 2016), was filed by a debtor seeking relief from an old derogatory credit report. The debtor alleged that the creditor violated the FDCPA by failing to disclose that it was a debt collector and by attempting to collect a time-barred debt.

The district court rejected the FDCPA claim based upon the creditor’s alleged failure to disclose its status as a debt collector because the creditor’s billing statements specifically disclosed that the creditor was a debt collector. Further, the district court rejected the FDCPA claim based on the creditor’s attempt to collect on a time-barred debt because in “the Eighth Circuit, ‘no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid’” without “a threat of litigation or actual litigation.” Id. citing Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767, 771 (8th Cir. 2001) (“[A] statute of limitations does not eliminate the debt; it merely limits the judicial remedies available”). Because the debtor did not allege that the creditor threatened to bring suit, or actually sued, in order to collect on the debt, the district court dismissed this FDCPA claim.

Editor’s Note: A special thank you to Joshua Schaer, formerly with RCO Legal (and now with Perkins Coie, LLP), who contributed greatly to this article.

 

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CFPB: Mortgage Servicing Rules Update: Stay the Course. Be Vigilant. Relief may be on the Way.

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Wendy Walter
McCarthy Holthus LLP
USFN Member (Washington)

October 19, 2017 arrived and the first segment of the Consumer Financial Protection Bureau’s (CFPB) promulgated servicing regulations went into effect without much ceremony. The CFPB has other concerns, and a massive leadership change could mark the pivotal point for this controversial agency. For almost a year, the agency had been the subject of speculation regarding the political ambitions of its former director, Richard Cordray, who was rumored to be interested in running for governor of Ohio in the 2018 election. Cordray, after failing to launch the controversial arbitration rule, resigned on November 24, 2017 — cutting short his five-year term by approximately six months.

Acting Director Appointment x 2
In his wake, the former director took a parting shot to the Republican administration and attempted to appoint his chief of staff, Leandra English, to the acting director position. In a November 27th piece in the National Review, author Ronald Rubin indicated that this appointment was an attempt to cover up evidence of employee misconduct related to the arbitration rule, as well as alleged indiscretions against CFPB senior managers. Rubin is a former enforcement attorney at the CFPB; he was also a keynote speaker at the USFN Legal Issues seminar in July 2017.

President Trump, using his authority under the Vacancy Act, appointed Mick Mulvaney to the acting director position. It was quite a controversy when it came to light that two acting directors appointed to the same position were each likely to show up to work on the Monday following Thanksgiving. The president’s appointment was challenged, with English filing a lawsuit seeking a temporary restraining order. Heard on November 27th, Judge Timothy Kelly (a Trump nominee) denied the TRO — as well as a preliminary injunction on January 10th. This legal reasoning was further supported by the CFPB’s general counsel in a memo dated November 25, 2017, in which she concluded “that the President possesses the authority to designate an Acting Director for the Bureau under the [Federal Vacancies Reform Act], notwithstanding [12 U.S.C.] § 5491(b)(5).”

Mulvaney Takes Charge
The president’s appointee hit the ground running — “kicking the tires” on the organization. After assuming the position, Mulvaney imposed a hiring freeze and a regulatory freeze. The civil penalties fund was frozen for 30 days. He promised to review all pending lawsuits and made it clear that things will be different in all areas: enforcement, investigations, and rulemaking. Under President Trump’s directive, Mulvaney will try to protect “people without trampling on capitalism.” He also commented at how frightening the scope of his powers as acting director might be. The legal challenges presented speak volumes on how powerful and impactful this agency has become.

What’s Next?

So where does this leave the regulations effective in April 2018? They are on the books and will take effect unless there is rulemaking to invalidate their effectiveness. In light of the fact that there needs to be a permanent director appointment, plus given the hundreds of lawsuits at issue — not to mention the three proposed rules open for comment — there is certainly a lot to sift through. Broad structural issues might be the focus, rather than the “surgical precision” necessary to fix the regulations that have been promulgated in mortgage servicing. Other industries including payday lending, debt collection, and student lending may be breathing a sigh of relief as the proposed regulations and regulatory agenda will be scrapped.

The acting directorship is valid for 200 days, or indefinitely if there isn’t an appointment by the Senate. Even if the Democrats can muster enough votes to block appointment of the next director, it will not help them: Acting Director Mulvaney and his team are Republicans, have a completely different agenda than former Director Cordray, and are not fans of the Bureau and the massive amount of power that is held by its director. Mortgage servicers should keep a close eye as this 1,500-person agency fundamentally changes and an air of transparency blows through.

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Get Ready for CFPB Periodic Statements

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Marcy J. Ford
Trott Law, P.C.
USFN Member (Michigan)

and Daniel A. West
SouthLaw, P.C.
USFN Member (Iowa, Kansas, Missouri)

Servicers, sharpen your pencils: now is the time to gather resources for development and deployment with regard to bankruptcy periodic statements. While compliance with the Consumer Financial Protection Bureau (CFPB or Bureau) mandate is not required until April 19, 2018, the reality is that rollout should occur well before that deadline. There are still many unanswered questions and further CFPB clarification is unlikely. The industry will have to rely on logic and reason, as well as prior holdings to formulate statements and implement policies and procedures that will (hopefully) ensure the highest likelihood of consistent compliance.

A small contingent of mortgage creditor representatives met with the CFPB last October, with a goal of obtaining clarity on significant statement requirements. Several questions were presented to the CFPB in advance of the meeting. While the Bureau representatives were careful not to engage in any prohibited ex parte communication, they were also prepared and willing to provide guidance by pointing to alternative Rule provisions. They also indicated that the Bureau would further consider possible unintended negative consequences of the Rules, and whether additional commentary was warranted. Below is a summary of the questions and responses from that meeting.

A request that statement requirements be suspended for up to 90 days following a servicing transfer of loans in bankruptcy. This would permit servicer system and payment reconciliation, and allow trailing trustee funds to hit the new servicer account (as transfer of claims are generally not filed with the court until after the actual transfer date).
CFPB Response: The Bureau representatives indicated that they did not intend to make a change to the requirement at this time. It was suggested that Section 1026.31(d)(2) allows for an estimate based on the best information available. Servicers must note on the statement that the data is an estimate. It was also suggested that leaving fields blank is not considered to be in the spirit of compliance. There was no definitive response from the CFPB as to whether use of estimates was a possible FDCPA violation, but they indicated this would be under further review for commentary.

A request for comment on whether servicers could or should use the Chapter 12/13 model format in a Chapter 11 case where the debtor proposes to cure a default over time.
CFPB Response: The Bureau representatives indicated that no official comment was anticipated; however, parties should look to section 41(f); and, if additional information does not violate 41(c) comment 2, then servicers could include additional loan level details normally reserved for Chapter 12 and Chapter 13 statements. Moreover, it was stressed that all loan level detail called for in the Chapter 11 model form must still be provided.

A request for clarification as to whether it is permissible to continue to send the Chapter 11 bankruptcy statement during the period where a Chapter 11 case has been “administratively closed,” but no final decree or discharge has been entered.
CFPB Response: The Bureau representatives referenced 41(f) comment 4, which provides that a periodic statement can be modified to comply with bankruptcy rules. Further, the it was suggested that if a case is still considered “active,” despite an administrative close, then servicers should be sending the required modified statement.

A request for Rule amendment for a statement exemption in Chapter 12 and 13 cases until after case confirmation. The request was based on FDCPA concerns, lack of finalized case information, and the likelihood of consumer confusion.
CFPB Response: The Bureau representatives again referenced section 1026.31(d)(2), which allows for the disclosed use of estimated data; i.e., where “information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided, and shall state clearly that the disclosure is an estimate.”

A request for clarification as to whether the exemption to sending periodic statements in a “property surrender” situation is similarly applicable to early intervention notice requirements in surrender situations.
CFPB Response: No. The Bureau representatives made it clear that the difference in treatment between periodic statements and early intervention notices was intentional. They believe that sending an early intervention notice to a discharged debtor would not be a violation of the discharge injunction as only one notice is required, and there is nothing in the Rule that would require the inclusion of a demand for payment. It was further pointed out that section 1024.39 of Regulation X provides servicers with the flexibility to adjust the notice, so as to not violate the discharge injunction.

A request for confirmation of applicability of successors-in-interest (SII) rules to bankruptcy cases.
CFPB Response: The Bureau representatives indicated that confirmed SII who filed bankruptcy would trigger the bankruptcy rule requirements. Thus, confirmed SII should be added to bankruptcy (and SCRA) search requirements. The CFPB further reminded the attendees that where there is a surviving borrower or an estate of the deceased borrower, there is no requirement to send information/notices to the SII; however, this may fly in the face of bankruptcy requirements to file a claim and/or participate in a bankruptcy case.

A request for additional clarification of the ability to add disclaimers and other language to charge-off final statements to avoid an unintended violation of the automatic stay or discharge injunction.
CFPB Response: The Bureau representatives indicated that this provision would be revisited to determine whether additional commentary is necessary. In the interim, however, they indicated that they believed servicers would use the modified discharge statement and add the charge-off disclosures. Thus, the bankruptcy disclaimers already set forth within the underlying modified periodic statement would/should protect the servicer from potential stay violation and discharge injunction risk.

A request for additional clarification on the transitional single-billing-cycle exemption.
CFPB Response: The Proposed Interim Rule for a single-statement exemption, as published in the Federal Register on October 16, 2017 (and released the same day as the industry’s face-to-face meeting with CFPB), addressed this request. Under the proposed change, servicers receive a one-month waiver/exemption on sending any statement when a transition event occurs. Transition events include (but are not limited to) the initial filing, surrender, stay termination, and case dismissal. There will likely be several transition trigger events in a case, which may lead to multiple (and even successive) exemption periods. If a statement has already been sent prior to the transition event, there is no need to correct the already-issued statement, and the exemption will roll to the following month.

Note: the Public Comment period closed on November 17, 2017. Comments can be found on the CFPB website. Servicers will need to implement system and procedure enhancements to effectively track the multiple transition trigger events so as to accurately manage statement production.

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New Round of Federal Bankruptcy Rule and Form Changes Expected in 12/2019

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

 

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA
USFN Member (Kentucky, Ohio)

The mortgage industry now has two months under its belt adapting to the big changes to the Federal Rules of Bankruptcy Procedure (FRBP) that took effect in December 2017. These rule changes ushered in accelerated proof of claim filing deadlines and changes to Chapter 13 plans, nationally. But get ready, more changes are likely to come, and the USFN Bankruptcy Committee is already analyzing them.

In late 2017, further amendments to the FRBP and forms suggested by the Advisory Committee on Bankruptcy Rules (Advisory Committee) were unveiled for comment. The new proposed rules, if adopted, would impact how notice of filings in bankruptcy cases is received; how abandonments are secured; and how personal information inadvertently filed with the court is redacted.

Notice: Email Instead of Paper Mail
The Advisory Committee has been looking at the ongoing electronic filing, notice, and service cost-saving initiatives of other federal courts for ways to reduce the expense and burden of noticing in bankruptcy courts. Out of the nearly 150 FRBP that address noticing or service issues, the Advisory Committee decided to test the waters and phase in electronic noticing and service, using the proof of claim form (Official Form 410) to allow parties to opt into electronic notice and service. Specifically, a revised proof of claim form, which includes a box to check allowing the creditor to opt into electronic notice and service, is being proposed.

Uniform Abandonment Process
The FRBP provide that “the trustee or debtor in possession” shall give notice of a proposed abandonment or disposition of property. It is common practice in the industry to file a “motion to abandon” or a “motion to compel abandonment.” In considering the motions, some courts struggle with the view that only the trustee or debtor in possession can abandon the property. The Advisory Committee pointed out that differences have been observed “in how courts proceed once a motion to compel abandonment is granted — e.g., whether the trustee must file a notice to abandon property or, rather, the abandonment process is complete upon entry of the order granting the motion to compel.” The proposed rule amendment clarifies that no further action is necessary to notice or effect the abandonment of property ordered by the court in connection with a motion to abandon or compel abandonment.

Uniform Redaction Process
Section 205(c)(3) of the E-Government Act of 2002 required the U.S. Supreme Court to prescribe rules “to protect privacy and security concerns relating to electronic filing of documents and the public availability . . . of documents filed electronically.” To satisfy this requirement, bankruptcy courts adopted Rule 9037, which restricts the filing of documents in bankruptcy cases containing certain types of personally identifiable information (PII), such as social security numbers, financial account numbers, birth dates, and names of minor children. Rule 9037 became effective on December 1, 2007.

In reaction to the need for a uniform national procedure for belatedly redacting PII that is mistakenly filed with the bankruptcy court, a proposed change to Rule 9037 and a new motion procedure for redacting PII have been recommended. The attachment to the motion must be identical to the offending document previously filed, but should not include the unredacted information itself. Instead, the attachment must show the proposed redactions. The moving party may be, but is not limited to, the original filer of the document; still, the filer of the unredacted document will need to be served.

A single motion may relate to more than one unredacted document and the rules authorize the court to alter the prescribed procedure, which as the Committee Note to the proposed amendment provides: “might be appropriate, for example, when the movant seeks to redact a large number of documents. In that situation the court by order or local rule might require the movant to file an omnibus motion, initiate a miscellaneous proceeding, or proceed in another manner directed by the court.”

Importantly, because the filing of the motion to redact could raise a red flag and call attention to the existence of filed PII, courts are to take immediate steps to protect the motion and the document from public access. Cautioning, the Committee Note also points out that “[t]his procedure does not affect the availability of any remedies that an individual whose personal identifiers are exposed may have against the entity that filed the unredacted document.”

Public Comment Period
The comment period opened in August 2017 and closes on February 15, 2018. The Advisory Committee scheduled hearings on the proposed Bankruptcy Rule amendments in Washington, D.C. on January 17, 2018, and in Pasadena, California on January 30, 2018. After the public comment period, the Advisory Committee will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure for approval in accordance with the Rules Enabling Act. If approved — with or without revision — by the relevant Advisory Committee, the Committee on Rules of Practice and Procedure, the Judicial Conference, and the Supreme Court, the proposed amendments would become effective on December 1, 2019 — if Congress does not act to defer, modify, or reject them.

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Winter USFN Report

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Evolving Widespread Fraud Scheme Targets Distressed Properties and Borrowers

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Sara Tussey
and Brett Beehler
Rosenberg and Associates, LLC
USFN Member (District of Columbia)

In the summer of 2017, title insurers uncovered a large-scale fraud scheme targeting distressed properties and borrowers. To date, the scheme, which involves fraudulent recorded instruments, has been identified in at least twenty states. Indeed, multiple instances where fraudulent documents appear in the land records relating to properties in foreclosure have been identified. Further investigation of these occurrences has shed additional light on the breadth and complexity of the arrangement, as well as divulged the constantly evolving nature of the scheme. In this article, the original scheme is outlined and information is shared regarding the evolutions that have been observed by these authors’ firm — all for the readers’ consideration in determining how to both recognize and react to this and other fraud schemes.

The Scheme
Generally, the fraud proceeds as follows: the perpetrators obtain information about a loan that is in default or already in foreclosure, sometimes offering loss mitigation assistance to induce cooperation from borrowers. The wrongdoers then create and record fraudulent instruments related to the loan in the land records. These may include assignments, deeds, deeds of trust, appointments of substitute trustees, mortgages, and releases — among others. The fraudulent instruments may vest title into the perpetrator, which can allow the perpetrator to sell or refinance the property. Alternatively, the fraudulent instruments may name the perpetrator as beneficiary of a deed of trust, allowing them to demand monthly payments from borrowers, with the potential to foreclose on the deed of trust if payments are not made. These fraudulent recorded documents create a cloud on title that can complicate or prevent loss mitigation efforts, hinder foreclosure and eviction proceedings, and derail timely REO out-sales.

Fraud Identified
Shortly after becoming aware of the scheme, these authors’ firm identified a fraudulent assignment of a deed of trust for a recently foreclosed property. The fraudulent assignment varied in subtle but significant ways from a proper assignment. The most obvious difference was that the entity executing the assignment was also the assignee. The assignment also included, as an exhibit, a copy of a fraudulent allonge to the promissory note; an allonge is not ordinarily recorded in the land records as an exhibit to any document. Upon inspection, it was discovered that the fraudulent allonge was nearly identical to the real allonge attached to the promissory note, which was endorsed-in-blank. This suggested that the perpetrators had obtained copies of authentic loan documents and used them to create the fraudulent documents.

After further scrutiny, it appears that the borrower had executed a letter of authorization for an out-of-state legal company a year earlier and had submitted at least one debt dispute letter written on the legal company’s letterhead. The debt dispute letter directed the respondent to send copies of loan documents to the borrower “care of” the legal company. While the response to the borrower was sent directly to the property address, the borrower may have provided copies of the loan documents to the legal company. The legal company’s name was very similar to the entity that executed the fraudulent assignment and was named on the fraudulent allonge, suggesting that the legal company and the perpetrator of the fraud may be connected.

Evolution of Scheme
A month later, these authors’ firm encountered similar fraudulent documents in a different matter at a hearing in an eviction proceeding. Specifically, a borrower asserted in open court that the bank that had foreclosed on the deed of trust against the property was not the correct beneficiary and that her loan payments were current. She provided documentation to the court and allowed an inspection of the documents. These documents included a fraudulent assignment, with an allonge as an exhibit, transferring the interest in the deed of trust to the same entity as in the alerts from the title insurers and the previously identified assignment and allonge. The borrower stated that she had recorded the documents in the land records as instructed by a legal company. It was the same legal company that was seen on the previous debt dispute letter. These documents were much newer and had some differences from those previously discovered, suggesting that the fraud scheme had evolved.

In the new assignment, instead of being executed by the assignee, the signature line indicated that it was executed by the original beneficiary of the deed of trust, which is more in line with how a real assignment would appear. There were, however, still several red flags. First, the document appeared to be executed by the original beneficiary, but the actual signature line stated that it was being executed by the beneficiary (and its successors and assigns) by its “substitute-trustee-in-fact.” Assignments are ordinarily executed by the most recent beneficiary only. Also, assignments are not ordinarily executed by a substitute trustee, and the term “substitute-trustee-in-fact” is incorrect. Finally, the original beneficiary for the loan is no longer in business, so they would not have been executing any documents or appointing anyone to execute documents. This new assignment was otherwise similar to the one previously identified in form and was made to the same assignee.

In the first encounter with these documents, these authors’ firm was able to discover written correspondence to show the possible connections among the borrower, the legal company claiming to assist them with loss mitigation, and the entity named on the fraudulent assignment. On this second occasion, there was opportunity to get information directly from the borrower in open court. The borrower stated that the foreclosure of the deed of trust was invalid because the foreclosing entity no longer owned the deed of trust. Instead, she claimed that the entity named in the assignment was the holder of her loan and that she was current on her payments. Based on her statements, it is possible that the perpetrators of this scheme are collecting monthly payments from distressed borrowers under the guise of stopping their foreclosures. They also may be providing purported “legal advice” to borrowers in multiple jurisdictions to delay and prolong foreclosure and eviction proceedings. Currently, these authors’ firm is in the midst of necessary title litigation to resolve a cloud on title caused by the fraudulently recorded documents.

Staff Training
As illustrated in these two examples, the importance of understanding the scheme and developing the knowledge to identify fraudulent instruments is critical to prevent loss. Despite active state and federal law enforcement investigations, in-house efforts at all levels of the default servicing industry are essential to combat this fraudulent activity.

Specific tools for combating fraud include ongoing staff training to identify unorthodox recorded instruments, especially for staff members who handle title reviews or assignments. Consider providing additional training to aid staff in recognizing non-recorded fraudulent documents or other evidence suggesting that a potential scheme may be afoot. When an assignment or appointment of substitute trustee is signed by an entity that loan servicing staff does not recognize, particularly one executed by the grantee instead of the grantor, the document can be flagged and escalated for review. A typographical error, an abnormal signature, or an unknown term may also be a red flag. Consider creating a formal escalation point, most likely in your Fraud Department. If there isn’t a Fraud Department in your organization, identify a point person for fraud-related issues.

Assess additional training options for loss mitigation teams to aid in better identifying scams targeting borrowers, and create an action plan for situations where a borrower may be the victim of a fraud scheme. While it is not unusual to see companies from other states assist borrowers with loss mitigation, it is usually a concern if the attorney is located more than one state away from the property. Borrowers also often obtain form debt dispute letters from the internet without reading them fully. Consider a policy of confirming with borrowers by telephone before changing an address or sending documents to a third party where there is no explicit letter of authorization requesting the address change or where the authorization is buried inside a multi-page document. Creating a watermark on any original loan documents, or otherwise marking copies clearly as such, before sending them in response to debt disputes or “qualified written requests (QWRs)” are other important considerations. Additionally, give thought to effecting a policy and procedure for escalating to local or federal law enforcement if it is believed that a borrower may be a victim of fraud.

The fraud scheme discussed here has serious implications for the mortgage industry and more variations are likely to follow. It is essential to enhance servicing staff’s knowledge and improve overall internal procedures to protect companies from loss. Discuss this matter with local foreclosure counsel for advice on how the fraud scheme may affect foreclosures in particular jurisdictions and to request specific training for your teams. Even when these perpetrators are caught, there will always be new schemes, so maintaining a heightened alert for possible fraud may help prevent the success of future schemes.

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Winter USFN Report

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North Carolina: The Lucks Case and NC Foreclosure Law – 1 year later

Posted By Rachel Ramirez, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Jim Bonner,
Jeremy B. Wilkins,
and Devin Chidester
Brock & Scott, PLLC
USFN Member (North Carolina)

At the end of 2016, the Supreme Court of North Carolina sent a pragmatically powerful message regarding North Carolina Chapter 45 power of sale foreclosures: the contract is in control. Consequently, the opinion, In re Lucks, 369 N.C. 222, 794 S.E.2d 501 (2016), simplified legislatively created procedures for power of sale foreclosures while also limiting the potential for protracted litigation. How did Lucks put the power back into contractual obligations while restraining judicial interference? What impact has been observed because of Lucks? What effect will Lucks have on future power of sale foreclosures in North Carolina?

Facts/Procedural History — The facts of In re Lucks are as follows: In July 2006, Gordon Lucks executed a promissory note and deed of trust encumbering his property. By 2010, Mr. Lucks had defaulted on the debt by failing to make loan payments. In September 2013, the Ford Firm (acting as substitute trustee) initiated a special proceeding for a nonjudicial foreclosure under N.C.G.S. § 45-21.16. The foreclosure was “dismissed” for failure to provide evidence that the Ford Firm was properly substituted as counsel. In June 2014, Cornish Law, PLLC (acting as substitute trustee for the same deed of trust) initiated a new nonjudicial foreclosure for the debt owed by Mr. Lucks. This matter was also “dismissed” because the clerk discovered evidence that the Ford Firm had actually been appointed substitute trustee in the prior hearing, and due to the principles of res judicata Cornish Law could not proceed.

Deutsche Bank, holder of the note, appealed the second dismissal and presented evidence demonstrating the right of Cornish Law to proceed with a nonjudicial foreclosure. At trial, Deutsche Bank provided a power of attorney (referred to in the opinion as “Exhibit 4”) allowing its mortgage servicing company to appoint trustee on behalf of Deutsche Bank, which would have properly appointed the Ford Firm. However, the copy of Exhibit 4 presented was deemed “internally inconsistent” and the court ultimately “dismissed” the foreclosure based on an objection by Mr. Lucks. The dismissal was appealed and the Court of Appeals reversed the trial court, holding that the Rules of Evidence are relaxed for nonjudicial foreclosures. Mr. Lucks appealed to the Supreme Court of North Carolina.

Court’s Analysis — The Supreme Court addressed two issues: (1) whether the principle of res judicata applies in a nonjudicial foreclosure; and (2) whether the trial court abused its discretion by finding that Deutsche Bank failed to establish the appointment of the substitute trustee. [Id. at 228.] The Court starts its analysis by establishing that the Rules of Civil Procedure do not apply in a nonjudicial foreclosure “unless explicitly engrafted into the statute.” [Id. at 226.] The General Assembly intentionally crafted Chapter 45 to be a “comprehensive and exclusive statutory framework” for nonjudicial foreclosures — and nonjudicial foreclosures are not a judicial action. [Id. at 222.] As a result, Chapter 45 requires a creditor to prove “its right to proceed” to the court, and the court is charged with whether or not to allow the foreclosure. [Id. at 226.]

The Court reasoned that a nonjudicial foreclosure is a special proceeding used to enforce a contractual obligation and the court’s authority is limited to the elements of foreclosure found in Chapter 45. Further, the Court recognized the role of “gatekeeper” created by Chapter 45, and accepted that the Rules of Evidence are relaxed for a nonjudicial foreclosure. Allowing a foreclosure to proceed requires review of the evidence presented (or objected to) for “competency, admissibility and sufficiency” and this authority vests solely with the clerk or trial court. This review is only conducted at the foreclosure hearing since a nonjudicial foreclosure is not within the Rules of Civil Procedure (i.e., no “answer” is required to be filed and cross claims are not allowed). The court is charged with review of the borrower’s objections; and, if the evidence is insufficient, the court may prohibit the foreclosure from proceeding. A denial by the court, however, does not implicate res judicata in the traditional sense; because, as the Court states, “the Rules of Civil Procedure and traditional doctrines of res judicata and collateral estoppel applicable to judicial actions do not apply.” [Id. at 229.]

Court’s Holding — The Supreme Court’s conclusion has implications outside of the instant case. It impacts the entirety of nonjudicial foreclosure law in North Carolina because a standard now exists that the Rules of Civil Procedure do not strictly apply to nonjudicial foreclosures unless expressly provided by statute. The legislature in crafting Chapter 45 seemed to understand that a contractual relationship exists between creditor and borrower. Since creditors are motivated to cease a foreclosure if the debtor reinstates, performs other loss mitigation, or lacks sufficient evidence to proceed, the judicial role should be limited. This premise supports the contractual relationship between the creditor and the borrower, and the ability to govern themselves as private entities. As such, the legislature intentionally relaxed the Rules of Evidence and the Rules of Civil Procedure for nonjudicial foreclosures. Essentially, the opinion in Lucks places the power back into the contract and its enforcement mechanisms (i.e., the terms of the deed of trust and Chapter 45 of the North Carolina General Statutes). The Court effectively summarized its position in the following two sentences: “Non-judicial foreclosure is not a judicial action; the Rules of Civil Procedure and traditional doctrines of res judicata and collateral estoppel applicable to judicial actions do not apply. To the extent that prior case law implies otherwise, such cases are hereby overruled.” [Id. at 229.]

Current Impact/Future Impact — The immediate result of Lucks is a change in power of sale foreclosure process before the court. A Chapter 45 power of sale foreclosure sale is now withdrawn by the trustee instead of voluntarily dismissed by either the trustee or the court. As evidenced in the facts of Lucks, a “dismissal” was a judicial tool to cease a foreclosure, and power vested in either the clerk or the trustee. As a result of the holding in Lucks, the power is solely vested in the trustee to withdraw the notice of hearing for foreclosure. Although Lucks clearly identifies that the clerk’s role is to allow or deny a foreclosure from proceeding, it also limited traditional judicial tools in the clerk’s repertoire. Additionally, the Lucks’ opinion has added a proverbial wall against borrower’s counsel seeking to bind the attorney/trustee/lender’s counsel at the foreclosure hearing with discovery attempts and/or procedural attacks on the foreclosure that are outside the boundaries set forth by Chapter 45 of the North Carolina General Statutes. It allows an argument rooted in simplicity and pragmatism.

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Ohio: Developments re SOLs in Foreclosure Actions

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Michael L. Wiery
Reimer Law Co.
USFN Member (Kentucky, Ohio)

State Supreme Court Decision in Holden — In 2016 the Ohio Supreme Court held that “[a]n action at law on a promissory note to collect a mortgage debt is separate and distinct from an action in equity to enforce the mortgage lien on the property.” Deutsche Bank National Trust Company, Trustee v. Holden, 147 Ohio St. 3d 85, 2016-Ohio-4603, 60 N.E.3d 1243, ¶ 35 (2016) (emphasis added), reconsideration denied, 146 Ohio St. 3d 1493, 2016-Ohio-5585, 57 N.E.3d 1172, ¶ 35 (2016).

The Court stated that courts “have previously recognized that upon a mortgagor’s default, the mortgagee may elect among separate and independent remedies to collect the debt secured by a mortgage.” Id. at ¶ 21 (emphasis added). Specifically applicable to foreclosures, the mortgagee may seek: (1) “a personal judgment against the mortgagor to recover the amount due on the promissory note, without resort to the mortgaged property;” (2) “a foreclosure action to cut off the mortgagor’s right of redemption, determine the existence and extent of the mortgage lien, and have the mortgaged property sold for its satisfaction;” or (3) an action for ejectment [an older legal remedy, pre-dating modern foreclosure laws, which is still available yet presents some practical challenges to recovery]. Id. at ¶¶ 22-24.

The Court noted that a party seeking to enforce only the mortgage is still obligated to present evidence concerning their interest in the note, stating “[e]ven in a case in which the personal liability of the debtor has been discharged in bankruptcy, however, the creditor seeking to foreclose on the mortgage must prove that it was the person or entity entitled to enforce the note secured by the mortgage.” Id. at ¶ 26.

With this platform laid by the Ohio Supreme Court, Ohio’s Courts of Appeal have applied these concepts to determine the proper statute of limitations in Ohio foreclosure actions. In those foreclosure actions, the note most commonly qualifies as a negotiable instrument under R.C. 1303.16(A) [UCC 3-118], which sets the statute of limitations at six years after the note’s natural maturity date(s) or, if the note is accelerated, within six years after the date on which the note was accelerated. Actions on a mortgage in Ohio would be subject to an eight-year (or possibly fifteen-year, depending on date of mortgage) statute of limitations under R.C. 2305.06. In addition, actions for ejectment are subject to a twenty-one year statute of limitations under RC. 2305.04.

Post-Holden
— Recent Ohio decisions examining these concepts have permitted plaintiffs to proceed in foreclosures being brought as actions to enforce the mortgage, stating that “[w]hen a statute of limitations is properly applied, the debtor’s obligations on the note are not extinguished but instead the remedies for enforcement are limited.” U.S. Bank National Association v. Robinson, (Ohio Ct. App. 8th Dist. Cuyahoga) No. 105067, 2017-Ohio-5585, ¶ 10. “As a matter of law, R.C. 1303.16(A) does not apply to actions to enforce the mortgage lien on the property after the payment on the note becomes unenforceable through the running of the statute of limitations.” Id. at ¶ 11 (emphasis added). “R.C. 1303.16(A) only applies to prohibit a party from enforcing obligations to pay on the note … R.C. 1303.16(A) does not affect the mortgagee’s mortgage right created by virtue of the failure to pay the note; the statute only precludes the remedy of a money judgment upon the unsatisfied note.” Id. (emphasis added).

Other recent cases have acknowledged the availability in Ohio of the longstanding remedy of ejectment under RC 2305.04. “The mortgagee may bring an action in ejectment that is governed by a 21-year limitations period as set forth in R.C. 2305.04.” Bank of New York Mellon v. Walker, (Ohio Ct. App. 8th Dist. Cuyahoga) No. 104430, 2017-Ohio-535, 78 N.E.3d 930, ¶ 19 (citations omitted). An action in ejectment allows a mortgagee to “take possession of the mortgaged property, receive the income from it, and apply the proceeds to the debt, restoring the property to the mortgagor when the debt is satisfied.” While this age-old action provides a longer statute of limitations, practical considerations (such as potentially renting the property and returning it to the borrower when the debt is satisfied) present modern-day challenges to effective use of this alternative.

These developments in Ohio case law concerning the statute of limitations and the clarifications provided therein are proving to be beneficial in overcoming certain statute of limitations defenses raised in foreclosure actions. The law will continue to be developed and interpreted in the state’s jurisdictions. In the meantime, a lender or servicer considering a foreclosure action, and believing that it might be barred due to statutes of limitation, may find additional paths for proceeding based on recent decisions in the Ohio courts.

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Winter USFN Report

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Maine: Supreme Court Requires Witness Testimony of Prior Servicer Practices for Integrated Business Records

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

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

In KeyBank National Association v. Estate of Eula W. Quint, 2017 ME 237 (Dec. 21, 2017), the Maine Supreme Court held that the District Court did not err in finding that plaintiff-bank failed to lay adequate foundation to admit the records of a prior servicer pursuant to the business records exception to the hearsay rule.

In Quint, the plaintiff brought a foreclosure action against the Estate of Eula Quint (Estate) as well as Vickie L. Kilton (Kilton). Despite having failed to defend against the foreclosure action, Kilton, through counsel, appeared on the day of trial. Counsel for plaintiff called a witness from the current servicer for plaintiff-bank to testify as to the business records kept in the regular course of that servicer’s business with regard to the loan subject to foreclosure. However, the outstanding principal balance on the loan could not be established without relying on records of a prior servicer, which had been incorporated into the business records of the current servicer. The witness from the current servicer was able to authenticate records created and maintained by the current servicer, but could not establish that he had any knowledge of the record-keeping practices of the prior servicer. Judgment was entered for Kilton and the Estate. The plaintiff appealed, resulting in the opinion discussed herein.

The Maine Supreme Court affirmed the decision of the lower court, holding that the plaintiff did not adequately establish the business records exception for integrated business records of the prior servicer. In doing so, the Quint Court relied on its decision in Beneficial Maine Inc. v. Carter, 2011 ME 77, which established that a “witness must demonstrate knowledge that


• the producer of the record at issue employed regular business practices for creating and maintaining the records that were sufficiently accepted by the receiving business to allow reliance on the records by the receiving business;
• the producer of the record at issue employed regular business practices for transmitting them to the receiving business;
• by manual or electronic processes, the receiving business integrated the records into its own records and maintained them through regular business processes;
• the record at issue was, in fact, among the receiving business’s own records; and
• the receiving business relied on these records in its day-to-day operations.”


In applying Carter to this case, the Maine Supreme Court held that “a witness may lay a proper foundation to admit integrated business records if the witness’s testimony satisfies the requirements of both [the business record exception] and Carter.” Since the current servicer witness was not able to present testimony to establish that the prior servicer’s business practices satisfied those requirements, a proper foundation was not laid for admitting the prior servicer’s loan records, and they were consequently inadmissible.

The Quint decision is significant for all Maine foreclosure actions that are reliant, in part, on records created by a prior servicer. In order to ensure that integrated business records are admissible, testimony should be presented of one or more witnesses with knowledge of the business practices of each prior servicer whose records are necessary to establish the essential elements of foreclosure. Other recent Maine case law has established that failing to prove any allegation in a foreclosure may result in the underlying note and mortgage being entirely unenforceable. See Pushard v. Bank of America, N.A., 2017 ME 230. Accordingly, it is of utmost importance that the proper witnesses appear and be ready to testify at trial.

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Changes to the California Homeowner Bill of Rights and Recording Fees (Eff. 1/1/18)

Posted By Rachel Ramirez, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Caren Castle and Kayo Manson-Tompkins
The Wolf Firm – USFN Member (California)

Changes to the California Homeowner Bill of Rights

In general, some sections of the original California Homeowner Bill of Rights (HOBR1) have been eliminated; several sections have been changed; and still other sections remain unchanged. The net effect is that servicers, under the revised California Homeowner Bill of Rights (HOBR2), need only comply with the less onerous provisions formerly applicable to small servicers under HOBR1.

The Good Changes (eff. 1/1/2018)

Pre-NOD Letter is Eliminated: Servicers no longer need to send a letter that describes the Servicemembers Civil Relief Act, as well as details that the borrower can request a copy of the note, the deed of trust, assignments, and payment history. This type of letter previously had to be sent by large servicers before recording the Notice of Default (NOD) [section 2923.55(b)(1)].
Five-Day Post-NOD Letter is Eliminated: Servicers no longer need to send a notice to the borrower that the borrower may be evaluated for loss mitigation alternatives and provide the method to apply for those alternatives. Large servicers were previously required to send these letters within five days after the recording of the NOD [section 2424.9].
Written Notice of Foreclosure Sale Postponement is Eliminated: The servicer’s foreclosure trustee no longer needs to send a written Notice of Foreclosure Sale Postponement that previously had to be sent under certain circumstances [section 2924(a)(6)].
Requirement to Acknowledge Receipt of Loss Mitigation Documents is Eliminated: Servicers no longer need to send to the borrower a letter (within five business days after receipt of any document sent as part of a loss mitigation application) acknowledging receipt of the document, and containing certain other detailed information [section 2924.10].
Appeal Process for a Loss Mitigation Denial is Eliminated: Servicers no longer need to provide an appeal of a denial of an application for loss mitigation. Previously, large servicers were required to allow an appeal following the denial of an application for loan modification and follow a very rigorous set of steps, all of which have now been eliminated [section 2923.6(e) and new section 2923.11].
Requirement to Provide Borrower a Copy of the Fully Executed Loss Mitigation Agreement is Eliminated: [old section 2924.11(c)].
Requirement to Rescind an NOD and Cancel a Foreclosure Sale upon Execution of a Permanent Loss Mitigation Agreement is Eliminated: [old section 2924.11(d)].
Prohibition against Charging Fees for the Loss Mitigation Process is Eliminated: [old section 2924.11(e)].
Prohibition against Charging Late Charges during the Loss Mitigation Process is Eliminated: [old section 2924.11(f)].
Requirement to Include the HUD Toll-Free Number in the Certified Letter is Eliminated: [old section 2923.55(f)(3) and new section 2923.5(e)(3)].
Prohibition against Dual Tracking when filing an NOD is Eliminated: Servicers no longer need to delay the filing of an NOD if there is a completed loan modification application.
$7,500 Civil Penalty for the Repeated Filing of Inaccurate Foreclosure Documents is Eliminated: Section 2924.17(c) includes a $7,500 civil penalty that could be assessed against a servicer by certain California governmental agencies for the repeated filing of inaccurate foreclosure documents; however, section 2924.17(c) expired by its statutory language on January 1, 2018. Accordingly, effective January 1, 2018, there is no longer a $7,500 civil penalty.


The Not-So-Good Changes (eff. 1/1/2018)

The Prohibition against Repeated Loss Mitigation Applications has been Eliminated: The old section 2923.6(g) provided that a servicer need not review a new loan modification application if the borrower had a prior application that was previously and fairly considered, and there was no material change since the borrower’s last application. That protection is not found in HOBR2 and, thus, multiple applications must theoretically be reviewed.
The Types of Completed Loss Mitigation Applications that Prohibit Dual Tracking have been Expanded: As noted above, HOBR2 eliminates the prohibition against dual tracking in relation to the filing of an NOD. However, whereas HOBR1 only precluded dual tracking upon a completed loan modification application, HOBR2 precludes dual tracking upon completion of any type of loss mitigation application. Accordingly, if there is any type of completed loss mitigation application, a servicer can proceed with its NOD but cannot proceed with its Notice of Sale or foreclosure sale.
Protection from Liability for Signatories of Bank of America, et al. Consent Judgment is Eliminated: Old section 2924.12 provides that those who had signed the Bank of America, et al. Consent Judgment, and complied with the requirements of that order, would have no liability for a violation of the HOBR1 provisions. New section 2924.12 deletes this protection from liability.
Purported Duty of Servicers to do Loss Mitigation Pertains to All Loans: Old section 2923.15 limited the application of certain sections of HOBR1 to owner-occupied residential real property containing no more than four dwelling units. Section 2923.6 (Purported Duty of Servicers to do Loss Mitigation) was among the sections listed in old section 2923.15, and, thus, old section 2923.6 was limited to only owner-occupied residential real property containing no more than four dwelling units. New section 2923.15 deletes any reference to section 2923.6, and thus all loans are now subject to the purported duty of services to do loss mitigation.


Immediate Action Needed
To record a Notice of Default, a servicer must sign a declaration indicating that it has complied with the provisions of old section 2923.55 (large servicers) or old section 2923.5 (small servicers). Since old section 2923.55 was repealed effective January 1, 2018, all servicers are now subject to new section 2923.5; therefore, the form declaration used by large servicers will have to be updated to reflect this change.

CFPB Servicing Rules
Although HOBR2 makes the California loss mitigation and foreclosure process significantly less burdensome, servicers remain subject to the CFPB Servicing Rules, which still require action similar to the provisions of HOBR1. In short, there is little relief.

Additionally, Senate Bill 818 (which was introduced in the California Senate on January 3, 2018) seeks to reinstate many of the provisions of HOBR1 that sunset. More specifically, it affects the large servicer, defined as those servicers conducting more than 175 foreclosures in a year. Progress of this bill will be watched. Look for a more detailed analysis if, and as, SB 818 works its way through the legislative process.

Changes to Recording Fees, (eff. 1/1/2018)
Despite substantial opposition from real estate industry groups (including the California Mortgage Bankers Association) on September 29, 2017, Senate Bill 2 Atkins, Chapter 2 of the Statues of 2017 (commonly referred to as “SB 2”), was signed into law in California. This bill provides that effective January 1, 2018, a $75 recording fee will be imposed for every transaction on each single parcel of real estate requiring a recording fee, in addition to any other local recording fee. There are some limited exemptions to this $75 fee. Further, the maximum total fee allowable in connection with SB 2 is not to exceed $225 per single transaction, per parcel. Ultimately, the additional fee will about double the recording costs of most mortgage-related documents recorded in California, including foreclosure costs.

Unless there is a specific exemption, the $75 fee is to be imposed on “every real estate instrument, paper, or notice required or permitted by law to be recorded,” which is defined as “a document relating to real property, including, but not limited to, the following: deed, grant deed, trustee’s deed, deed of trust, reconveyance, quit claim deed, fictitious deed of trust, assignment of deed of trust, request for notice of default, abstract of judgment, subordination agreement, declaration of homestead, abandonment of homestead, notice of default, release or discharge, easement, notice of trustee sale, notice of completion, UCC financing statement, mechanic’s lien, maps, and covenants, conditions, and restrictions.” [GC 27388.1(a)(1)]. Accordingly, and unless exempt, every mortgage document is subject to the new $75 fee.

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Minnesota: Is a Deadline Really a Deadline for Borrowers Challenging Foreclosures for Dual Tracking?

Posted By Rachel Ramirez, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Paul Weingarden and Brian Liebo
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

During the mortgage foreclosure crisis, Minnesota adopted its own borrower relief provisions through Minnesota Statutes Section 582.043, also known as the “Minnesota Dual Tracking Statute.” This statute imposes specific requirements for mortgage servicers with loss mitigation procedures and includes dual-tracking prohibitions. Minnesota’s version is even more expansive than the federal rules; it contains no explicit limitation on the number of loss mitigation applications that borrowers may submit, providing borrowers the ability to file applications up to seven days prior to foreclosure sales to stop foreclosures, and awarding attorneys’ fees for noncompliance, among other requirements. The statute did, however, provide borrowers with only a narrow time-window to bring actions asserting violations. Specifically, the statute provides:

Subd. 7. Relief.


(a) A mortgagor has a cause of action, based on a violation of this section, to enjoin or set aside a sale. A mortgagor who prevails in an action to set aside or enjoin a sale, or who successfully defends a foreclosure by action based on a violation of this section, is entitled to reasonable attorney fees and costs.

(b) A lis pendens must be recorded prior to the expiration of the mortgagor’s applicable redemption period under section 580.23 or 582.032 for an action taken under paragraph (a). The failure to record the lis pendens creates a conclusive presumption that the servicer has complied with this section. (emphasis added)


This subdivision was recently discussed by the Minnesota Supreme Court in Litterer v. Rushmore Loan Management Services, LLC, No. A17-0472 (Minn. Jan. 10, 2018). After defaulting on their note and mortgage, borrowers Thomas and Mary Litterer (Borrowers) applied unsuccessfully for a loan modification. In 2014 their home was sold in a foreclosure sale, subject to the usual six-month redemption period. Just prior to the expiration of the redemption period, Borrowers initiated suit without an attorney, alleging a number of violations of Section 582.043; they failed to record a notice of lis pendens (NLP) with the county. Upon retaining counsel, the delayed Notice of Pendency was recorded after the redemption period had already expired.

Background
After the Borrowers’ suit was removed to the U.S. District Court for the District of Minnesota, summary judgment was granted for the foreclosing lender based on the failure to record the NLP in a timely manner, without reaching the merits of Borrowers’ complaint. Upon appeal to the Court of Appeals for the Eighth Circuit, Borrowers asked for discretionary relief from the judgment based on excusable neglect under Rule 6.02 of the Minnesota Rules of Civil Procedure, seeking reversal in order to have their case heard on the merits. Prior to oral argument before the Eighth Circuit, Borrowers filed a Motion for Certification of Question to Minnesota Supreme Court. After the argument, the Eighth Circuit certified the following question to the Minnesota Supreme Court: “May the lis pendens deadline contained in Minn. Stat. § 582.043, subd. 7(b) be extended upon a showing of excusable neglect pursuant to Minn. R. Civ. P. 6.02?”

Rule 6.02 reads in relevant part, “[w]hen by statute, by these rules, by a notice given thereunder, or by order of court, an act is required or allowed to be done at or within a specified time, the court for cause shown may, at any time in its discretion, … upon motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.”

Borrowers asserted a litany of reasons for their failure to timely file the NLP, based mostly on their inexperience and pro se status when they first brought suit. The sole question before the Minnesota Supreme Court was whether the deadline to file the NLP was procedural (and Rule 6.02 might have afforded relief) or substantive in nature (in which case the action ends for failure to meet the deadline). The Minnesota Supreme Court decided the requirement was substantive and answered the certified question in the negative.

Supreme Court’s Review
In its analysis, the Minnesota Supreme Court rejected the Borrowers’ contention that procedural law applied, akin to the analysis in Stern v. Dill, 442 N.W.2d 322 (Minn. 1989), which found the expert witness deadlines in malpractice cases to be procedural, and thus subject to expansion at the discretion of the court. In noting that, unlike Stern which solely impacted the litigation between the parties and was filed in the trial court, failing to file the NLP in the appropriate county recorder’s office creates a “conclusive presumption” that the mortgage servicer complied with the section.

The Court determined that failure to follow the plain reading and unambiguous nature of the statute would affect the servicer’s substantive rights, as well as be misleading to third parties who rely on the document recording statute to alert them of pending litigation, which may interfere with their purchase or security interests sought post-foreclosure. The Court was sympathetic to the harsh result to Borrowers but was constrained by constitutional separation of power principles. While the judiciary has the power to regulate procedural rules, it has “no authority to intrude upon legislative declarations of substantive law.”

Conclusion
In sum, if borrowers fail to strictly meet the Minnesota procedural requirements for pursuing dual-tracking claims against foreclosing lenders in a timely manner, those dual-tracking claims will be lost, and mortgage servicers can proceed without this potential cloud on title affecting their ability to move forward with transitioning properties to new homeowners. Regardless, mortgage servicers should ensure diligent compliance with dual-tracking laws to help ensure that such claims are not pursued by borrowers in the first place.

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Dual Tracking: District Court Reviews Borrower’s Claim

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Ronald S. Deutsch and Michael J. McKeefery
Cohn, Goldberg & Deutsch – USFN Member (District of Columbia)

The U.S. District Court for the District of Maryland recently dealt with the issue of dual tracking in an unreported case, Weisheit v. Rosenberg & Associates, LLC, Civil No. JKB-17-0823 (Nov. 15, 2017).

Background
In Weisheit, the plaintiff’s mortgage became delinquent in 2009 and foreclosure proceedings began on April 26, 2016. The plaintiff-borrower then submitted a “complete” loan modification application to the servicer more than 37 days prior to a scheduled foreclosure sale.

Pursuant to the Real Estate Settlement Practices Act (RESPA) and its implementing regulations, if a “complete” loss mitigation application is submitted to a servicer more than 37 days prior to any scheduled foreclosure sale, a foreclosure servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale. See 12 C.F.R. § 1024.41 (g). If the servicer does so, the servicer is engaging in a prohibited practice known as dual tracking.

The plaintiff-borrower’s loss mitigation application was denied by the servicer via letter. Pursuant to 12 C.F.R. § 1024.41 (h), the plaintiff then timely appealed the servicer’s denial decision. On December 29, 2016 the servicer sent a letter to the plaintiff in response to her appeal (the Response Letter). In the Response Letter, the servicer asserted that the denial was based upon an investor restriction. In the Response Letter, however, the servicer did not name the investor, nor was the specific nature of the alleged investor restriction described. The plaintiff responded and advised the servicer and the foreclosure firm that she intended to appeal the denial. Nevertheless, the plaintiff’s home was rescheduled for sale. As a result, the plaintiff filed an emergency motion to stay the sale, which was granted by the Maryland Circuit Court.

The plaintiff then brought an action against the servicer and the foreclosure firm in federal court. In her lawsuit, the plaintiff primarily alleged that the servicer violated RESPA by proceeding towards a foreclosure sale during active loss mitigation. The servicer moved to dismiss the plaintiff’s complaint; the court denied the motion.

U.S. District Court’s Analysis
The court indicated that, under 12 C.F.R. § 1024.41 (d), a denial of a loan modification application must state the “specific reason or reasons for the servicer’s determination.” Furthermore, according to the Consumer Financial Protection Bureau’s official interpretation, if the denial is due to a restriction by the investor, then the explanation for the denial “must identify the owner or assignee of the mortgage loan and the requirement that is the basis of the denial.” Therefore, the court found that the denial contained in the servicer’s Response Letter was insufficient because the investor was not named, and the specific nature of the alleged investor restriction was not described. According to the court, an insufficient denial such as the Response Letter did not end the loss mitigation process; thus, the servicer was prohibited from moving towards a foreclosure sale.

Ultimately, the court ruled that the plaintiff alleged sufficient facts to state a claim for relief against the servicer for violating RESPA’s prohibition of dual tracking. As a result, the servicer’s motion to dismiss was denied, permitting the plaintiff’s lawsuit to continue.

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Arkansas Supreme Court Reviews Borrower Right to Jury Trial

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Charles Ward
Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

The Arkansas Supreme Court recently issued an opinion in Tilley v. Malvern National Bank, 2017 Ark. 343 (Dec. 7, 2017), holding that a borrower has no right to a jury trial under Arkansas law on a judicial foreclosure claim brought against him by a bank. However, the ruling also recognizes the same borrower’s right to trial by jury on his counterclaims for money damages despite a pre-dispute jury waiver clause in the loan agreement. Accordingly, the Supreme Court affirmed the trial court’s decision denying the borrower’s request for a jury trial on the underlying foreclosure claim, but reversed the trial court’s holding that the pre-dispute jury waiver contained in the parties’ loan agreement was valid.

Background
Tilley borrowed $221,000 from Malvern National Bank in 2010. A loan agreement, promissory note, and mortgage were executed. The loan agreement included a jury-waiver clause. Tilley later defaulted and the Bank filed a foreclosure action against him. Tilley’s answer to the Bank’s complaint demanded a jury trial. His counterclaim asserted six separate claims for money damages — including breach of contract, tortious interference with a business expectancy, negligence, and fraud — plus included a demand for a jury trial.

State Supreme Court’s Analysis
The issue of a right to a trial by jury was before the Court in two different contexts. First, the Court addressed the right of a borrower to a jury trial in a foreclosure proceeding. Second, the Court looked at a borrower’s right to a jury trial on the legal issues raised in the counterclaims.

Bank’s Foreclosure Claim — With regard to the foreclosure claim, the Court followed established case law and held that a foreclosure proceeding, historically, is an equitable proceeding to which the constitutional right to a jury trial does not extend. The trial court’s denial of the borrower’s request for a jury trial on the Bank’s foreclosure claim was upheld by the Arkansas Supreme Court.

Borrower’s Counterclaims — The Court then turned to the Bank’s arguments against a jury trial on the counterclaims. The Bank contended that the “clean-up doctrine” required that Tilley’s counterclaims for damages be decided by the trial court, not a jury. In considering this point, it is important to know that prior to 2000, Arkansas maintained separate systems of trial courts. Circuit courts decided legal claims for money damages, such as cases for breach of contract, personal injury, or property damage. These legal claims generally were decided by juries. Chancery courts, on the other hand, determined equitable claims such as divorce actions and foreclosures. Historically, equitable claims were decided by the court, not by a jury. Some lawsuits, though, raise both legal and equitable claims. In order to avoid the time and expense involved in having one court decide the legal claims and another court the equitable claims, the so-called “clean-up doctrine” was developed, which allowed the chancery court to decide both types of claims.

In 2000 Arkansas’s circuit and chancery courts were merged, and their legal and equitable jurisdictions were combined into the circuit courts. The Bank contended that the trial court — a circuit court having both legal and equitable jurisdiction as a result of the merger — could decide not only the Bank’s equitable foreclosure claim without a jury but also the borrower’s legal counterclaims for damages under the clean-up doctrine. The Supreme Court rejected this argument by noting that after the merger of law and equity in Arkansas, that doctrine was abolished.

In place of applying the clean-up doctrine to decide right-to-jury-trial issues, trial courts (after the merger of law and equity) were to review the historical nature of the allegations, distinguishing legal from equitable, and then resolve the jury trial question by deciding equitable claims itself and having a jury decide the legal ones. The Supreme Court determined that the borrower’s counterclaims (such as breach of contract, tortious interference, and fraud) were legal, not equitable, and should have been decided by a jury.

After rejecting the Bank’s assertion that the trial court was correct in ruling on the merits of the borrower’s counterclaims itself, the Supreme Court took up the Bank’s argument that the borrower waived his right to a jury trial on the counterclaims in the jury-waiver clause of the loan agreement. The Supreme Court noted that the Arkansas Constitution allows that the right to a jury trial may be waived, but only in the manner prescribed by law. For example, a borrower’s waiver of a right to a jury trial in an arbitration agreement is a waiver made in the manner prescribed by law; that is, as prescribed by the Arkansas Arbitration Act. However, except for matters of arbitration, Arkansas law does not allow for waivers of the right to a jury trial before the onset of an actual dispute between parties; the Arkansas Rules of Civil Procedure provide for a waiver of a jury trial after litigation has begun, not before. Consequently, the trial court erred in holding that Tilley had effectively waived his right to a jury trial in the loan agreement he executed at the time the Bank made the loan.

Conclusion
Tilley may well result in more counterclaims being filed in Arkansas judicial foreclosure proceedings by borrowers. Lenders holding Arkansas mortgages will want to avoid the time and expense of defending against these claims in jury trials. One possible response to this risk would be to insert a provision in the loan agreement, or mortgage, requiring arbitration of such claims.

Arbitration provisions are enforceable under Arkansas law. However, if the lender plans on selling the mortgage to Fannie Mae, be aware that the Fannie Mae form mortgage for Arkansas does not contain a mandatory arbitration provision. Moreover, Part B8-3-02 of the Fannie Mae Servicing Guide states that “[m]ortgages that are subject to mandatory arbitration are ineligible for sale to, or securitization by, Fannie Mae unless the mandatory arbitration provision provides that, in the event of a transfer or sale of the mortgage or an interest in the mortgage to Fannie Mae, the mandatory arbitration clause immediately and automatically becomes null and void and cannot be reinstated.” Although this restriction against use of a mandatory arbitration provision applies only to mortgages purchased by Fannie Mae, and not to other investors, some of these other investors adopt the Fannie Mae guidelines as their own.

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Connecticut: Appellate Decision is another Step toward Reducing Litigation Based on Post-Default Actions of Lenders

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

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

The decision in the case of U.S. Bank National Association, Trustee v. Blowers, AC39219 (Conn. App. Ct. 2017), expanded on the holding in U.S. Bank National Association, Trustee v. Sorrentino, 158 Conn. App. 84, and supports the premises that:


(1) the actions of the mortgagee during mediation and other modification negotiations do not relate to the making, validity, or enforcement of the note and mortgage; and
(2) the transaction test as presented in Practice Book § 10-10 does not apply as to special defenses.


Practice Book § 10-10 provides, in relevant part, that “[i]n any action for legal or equitable relief, any defendant may file counterclaims against any plaintiff provided that each such counterclaim … arises out of the transaction or one of the transactions which is the subject of the plaintiff’s complaint ….” It has long been the view of the Connecticut courts in foreclosure matters that to satisfy this rule the counterclaim must relate to the making, validity, or enforcement of the note and/or mortgage. Further case law has also held that special defenses include such things as payments, discharge, release or satisfaction, among others. These defenses fall in line with the standard for counterclaims and must have some sort of nexus to the making, validity, or enforcement of the note and/or mortgage as well. See CitiMortgage, Inc. v. Rey, 150 Conn. App. 595, 603, 92 A.3d 278, cert. denied, 314 Conn. 905, 99 A.3d 635 (2014).

Defendant’s Claims against Plaintiff
In Blowers, the defendant presented allegations regarding the conduct of the plaintiff during the court’s foreclosure mediation program. The court held that if mediation or loan modification negotiations result in a final modification, which is subsequently breached, the conduct during that time can later be cited as being related to the making, validity, or enforcement of the note and/or mortgage. This holding should further assist lenders in defending litigation that is based solely on the post-default actions of lenders, particularly during participation in the court’s mediation program.

In addition, the defendant’s attempt to broaden Practice Book § 10-10 and the applicable case law to include not only counterclaims but special defenses as well, failed. The Practice Book is clear that § 10-10 applies specifically to counterclaims and makes no mention of special defenses. “The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action.” Fidelity Bank v. Krenisky, 72 Conn. App. 700, 705, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).

Closing Words
In Blowers, the court opines that it is not willing to wipe out years of precedent by applying the standards as asserted by the defendant. This is also a favorable decision for lenders as it further defines the special defenses and supports the equitable nature of the Connecticut courts.

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North Carolina: Question of Surviving Borrower Obligation — Take Note

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Jim Bonner and Devin Chidester
Brock & Scott, PLLC – USFN Member (North Carolina)

In a recent decision, the North Carolina Court of Appeals held that an individual is not a surviving borrower under a deed of trust if that individual was not obligated on the underlying promissory note. In re Clayton, 802 S.E.2d 920 (2017).

Background
In June 2008 Mrs. Jackie Clayton (Respondent) and Mr. Melvin Clayton executed a deed of trust for a reverse mortgage securing an obligation signed by Mr. Clayton. Mr. Clayton was identified as the “borrower” in all loan documents whereas Respondent was identified as “borrower” only in the deed of trust. Due to Mr. Clayton’s death, the holder initiated a foreclosure on the obligation.

At the foreclosure hearing, the clerk of court dismissed the matter because Respondent signed the deed of trust as a borrower, resided at the property, and was still alive. The dismissal was appealed and the superior court judge allowed the foreclosure to proceed, ruling that Mr. Clayton was the sole borrower under the note and his status alone controlled default and foreclosure provisions of the loan. Respondent appealed.

Appellate Court Review
The main issue in Clayton is whether a party that is not obligated under the terms of a promissory note can be considered a borrower for the purposes of default and foreclosure of the loan. The Court of Appeals reasoned that the deed of trust, the note, and other contemporaneously executed loan documents should be evaluated and construed as one document. Both the note and the deed of trust contained similar provisions allowing acceleration and foreclosure if “[a] Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” Id. at 925. Respondent contended that she was a “surviving borrower” since she executed the deed of trust as a “borrower” and the property remained her principal residence. Id.

The court disagreed. Although Respondent signed the deed of trust as a borrower, the note and corresponding loan documents were executed without her signature. The court found that Mr. Clayton was the only contemplated borrower, as he alone executed the underlying loan documents. Since Respondent neither executed, signed, nor was identified as a borrower to the note or other loan documents, she was not a borrower by simply executing the deed of trust as one. Further supporting the interpretation that Respondent was not intended to be a “surviving borrower,” the court pointed out that she did not qualify as a borrower under North Carolina law. Per N.C. Gen. Stat. § 53-257(2), a borrower for a reverse mortgage must be 62 years of age or older. Respondent was younger than 62 years of age at the time she signed the deed of trust. Due to her age and the lack of intent to be obligated under the note, Respondent’s residency and vital status did not control the right of the holder to foreclose. The court’s message in Clayton is simple: a borrower must be obligated under the promissory note.

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Servicemembers Civil Relief Act: Expanded Protections Continue

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by William D. Meagher
Trott Law, P.C. – USFN Member (Michigan)

President Trump signed the “National Defense Authorization Act for Fiscal Year 2018” (Public Law No. 115-91) on December 12, 2017. Section 557 of that Act amends, once again, section 701(d) of the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 (Public Law 112-154; 126 Stat.1165). This latest amendment extends (through December 31, 2019) the expanded provision of the Servicemembers Civil Relief Act (SCRA) that safeguards servicemembers against foreclosure for one year following the completion of their service. Absent further amendments, the protection from foreclosure time period under 50 U.S.C. § 3953 of the SCRA will revert back to the prior version (i.e., 90 days) on January 1, 2020.

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Connecticut: Court Rules that Plaintiff Need Not Plead it is the Owner of the Note

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

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

In CitiMortgage, Inc. v. Tanasi, 176 Conn. App. 829 (Oct. 3, 2017), the borrowers contended that the plaintiff committed fraud because it pled that it was the holder without disclosing to the court that another entity owned the note. In Connecticut, the holder of the note is presumed to be the owner of the debt. The defendants claimed that because of the presumption of ownership, the plaintiff was required to plead the identity of the owner of the note. The Connecticut appellate court did not agree and ruled in favor of the plaintiff, affirming the decision of the trial court.

Factual Background
The appellate court recited the following relevant facts:

“On August 2, 2007, the defendants executed and delivered a note in the principal amount of $656,250 to ABN AMRO Mortgage Group, Inc. (Mortgage Group), which was secured by a mortgage on real property . . . . In late August 2007, the plaintiff acquired Mortgage Group by merger. In November, 2007, the plaintiff entered into a ‘Master Mortgage Loan Purchase and Servicing Agreement’ (agreement) with Hudson City Savings Bank (Hudson). Under the agreement, Hudson purchased certain mortgage loans from the plaintiff, including the defendants’ loan. The agreement identifies Hudson as the ‘[i]nitial [p]urchaser’ and the plaintiff as the ‘[s]eller and [s]ervicer.’ The plaintiff possessed the original note, endorsed in blank, at the time of the commencement of the foreclosure action. When the defendants failed to make the required monthly payments on the loan, the plaintiff sent the defendants a notice of default. The defendants subsequently failed to cure their default, and the plaintiff accelerated the sums due under the note. The plaintiff commenced a foreclosure action in July, 2011, and alleged in its complaint that it ‘is the holder of [the defendants’] [n]ote and [m]ortgage.’

The parties proceeded to mediation. It is not disputed that, during mediation, the plaintiff provided the defendants with a copy of the agreement. After participating in fourteen court-annexed mediation sessions, the plaintiff filed a motion to terminate the mediation stay, which the court granted.” CitiMortgage, Inc. v. Tanasi, supra, 176 Conn. App. at 832.

From mediation, the borrowers were aware that the plaintiff was the holder of the note, but not the owner. Further, the borrowers knew that the plaintiff had authority from the owner to prosecute the foreclosure. Despite this, the borrowers attacked the foreclosure in three ways, claiming that the plaintiff “(1) lacked standing to commence foreclosure proceedings, (2) improperly relied on a document as a basis for standing, and (3) committed fraud warranting dismissal of the action with prejudice.” Id. at 832.

Court’s Review
The court found that the agreement between the owner of the note and the plaintiff stated that “the plaintiff ‘is hereby authorized and empowered by [Hudson] . . . when [the plaintiff] believes it is appropriate and reasonable in its judgment . . . to institute foreclosure proceedings . . . .’” Id., at 840. Thus, the court concluded that the plaintiff had standing.

The defendants next asserted that the plaintiff, by pleading it was the holder and not disclosing it did not own the loan, was precluded from obtaining foreclosure. The court pointed out that the defendant, not the plaintiff, had the burden to rebut the presumption once the plaintiff was afforded the presumption. Upon the presumption of ownership being rebutted, the plaintiff could then introduce the agreement between the owner and the plaintiff. While the defendant maintained that the introduction of the agreement was untimely, the court observed that the defendant had an opportunity to review the agreement at a prior hearing on a motion to dismiss, and at mediation three years earlier. Lastly, the court found that the plaintiff could plead that it was the holder without disclosing another owner, and that such a pleading was not fraud upon the court.

Conclusion
The Tanasi decision is confirmation that the longstanding method of pleading holder or entity entitled to enforce the note in Connecticut foreclosures may continue, despite creative arguments from borrowers that the plaintiff needs to plead ownership status of the loan. The case also underscores the importance of being transparent about the relationship between the owner of the note and holder of the note.

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Connecticut: Recording Fees on the Rise (eff. 12/1/2017)

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

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

The Connecticut governor has signed into law the state budget for 2017-2019. Buried in section 665 of the 900-page budget bill (June Special Session, Public Act No. 17-2) is a $7 increase for recording many documents on the Land Records. The increased recording fees took effect on December 1, 2017. Accordingly, this recording fee increase should be kept in mind for transactions where the documents are recorded on or after December 1.

Recording and Property Registration fees in Connecticut before and after the fee change are as follows:


  Before Fee Change  After Fee Change

All Documents (except MERS documents) 

$53 for first page plus

$5 for each additional

page

$60 for first page plus

$5 for each additional page

Deeds (except deeds for no consideration)

$2 additional fee Same $2 additional fee

Assignments of Mortgage by MERS,

and Releases of Mortgage by MERS

$159 flat fee for entire document

$159 flat fee for entire

document (no change)

MERS Mortgages and Assignments

to MERS, and all other documents

where MERS is the grantor or grantee

$159 for first page plus

$5 for each additional

page

$159 for first page plus

$5 for each additional

page (no change)

Foreclosed Property Registrations  $53  $60



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Missouri Court of Appeals Rules for Home Borrower in a Quitclaim Deed Case

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

by William H. Meyer
Martin Leigh, P.C. – USFN Member (Kansas)

The Missouri Court of Appeals recently reversed a trial court’s summary judgment decision and ruled for a home borrower and against the home lender. That case, styled Gacki v. Jeff Kelly Homes, Inc., No. ED 104983 (Mo. Ct. App. Oct. 17, 2017), involved a residential home loan that was secured by a quitclaim deed. Under the terms of the loan, if the home borrower was more than thirty days delinquent, then the lender was entitled to record the quitclaim deed and obtain ownership and possession of the home. This case is different from the normal Missouri nonjudicial foreclosure situation in that the lender is able to skip Missouri’s statutory foreclosure procedure to obtain title to a home in an expedited fashion after a borrower’s default.

Appellate Review
Payment Default Issue — In ruling for the borrower, the Court of Appeals first focused on the rigorous evidentiary standard that the lender was required to satisfy to obtain a summary judgment. In this case, there was no doubt that the borrower was two weeks behind in making payments. Nonetheless, the Court of Appeals concentrated on the loan documents (which did not define when a loan payment was “late”), conflicting default notices given by the lender, and the fact that the lender withdrew funds from the borrower’s account prematurely. Given these evidentiary issues, the appellate court held that the lender failed to present uncontroverted evidence to establish that the borrower was more than thirty days late in making her payments and, accordingly, found for the borrower on the payment default issue.

Property Abandonment Issue — The court also addressed the lender’s claim that the borrower had abandoned the home and that such abandonment also constituted a default under the home loan. In ruling for the borrower on this issue, the Court of Appeals found that the evidence, which the trial court had relied on for finding that the borrower abandoned the house, was controverted and, therefore, summary judgment was not appropriate. The appellate court also emphasized that when personal property is still in the home, this fact rebuts a presumption of abandonment.

Policy Concern — The Court of Appeals also articulated concern over home loans that are secured by quitclaim deeds. Although the court did not have to decide this issue (because it overruled the summary judgment on other grounds), the court was skeptical about the fairness of home loans that are secured by quitclaim deeds. In this case, had the trial court decision not been overturned, the home lender would have been allowed to recover a judgment for ownership of the home and a monetary award for the entire amount of the home loan debt. As noted by the Court of Appeals, such a judgment is troubling because the home borrower’s debt would not have been offset by the value of the home.

Closing
Although not addressed by the Court of Appeals, there is at least one significant advantage to using a deed of trust versus a quitclaim deed to secure a home loan. That advantage is that Missouri’s nonjudicial foreclosure process associated with foreclosing a deed of trust extinguishes most liens against a property. Simply recording a quitclaim deed after a borrower’s default, however, does not have the same effect over liens — and a lender in this situation will find its title clouded by the unresolved lien claims.

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November/December e-Update

Note for consideration of the USFN Award of Excellence: This article is not a "Feature."

 

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