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Cleveland Bankruptcy Judges Issue Memo Clarifying that Lien Stripping is by Motion, Not Through Special Chapter 13 Plan Provisions

Posted By USFN, Tuesday, January 10, 2017
Updated: Tuesday, January 3, 2017

January 10, 2017

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

In an effort to establish uniform procedures in chapter 13 cases, the three bankruptcy judges in Cleveland clarified on December 1, 2016 that debtors seeking to avoid unsecured liens under the authority of In re Lane, 280 F.3d 663 (6th Cir. 2002), or liens impairing exemptions under § 522(f), must do so by motion — not through special chapter 13 plan provisions. Absent intervening precedent, the bankruptcy judges in Cleveland intend to adhere to this procedure at least until the effective date of any national chapter 13 plan form and related rules amendments, which would be no earlier than December 1, 2017.

Bankruptcy Rule 3012 currently provides for the valuation of a secured claim by motion. In addition, Bankruptcy Rule 4003(d) provides that “[a] proceeding by the debtor to avoid a lien or other transfer of property exempt under § 522(f) of the [Bankruptcy] Code shall be by motion in accordance with Rule 9014.” While the proposed national chapter 13 plan form and related rules amendments currently under consideration would provide for the avoidance of these liens through a chapter 13 plan (as well as by motion), they have yet to take effect and, at this point, are simply a proposed form and proposed rule amendments.

Chapter 13 debtors are free to include special plan provisions indicating that they intend to file a separate motion to avoid a totally unsecured lien under the authority of In re Lane or § 522(f); however, the bankruptcy judges in Cleveland will not accept special plan provisions that purport to accomplish such lien avoidance without filing a separate motion.

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Service of Process & Warning Orders: Importance of Recent Arkansas Case Law

Posted By USFN, Tuesday, January 10, 2017
Updated: Wednesday, January 4, 2017

January 10, 2017

by Jillian Wilson
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Tennessee)

Arkansas courts have recently reviewed cases regarding the sufficiency of constructive service by warning order. Service by warning order is governed by Arkansas Rule of Civil Procedure 4(f), which states: “If it appears by the affidavit of a party seeking judgment ..., after diligent inquiry, the identity or whereabouts of a defendant remains unknown ..., service shall be by warning order issued by the clerk.”

Examined in recent Arkansas case law is the issue of what constitutes “diligent inquiry,” and to what extent must the “diligent efforts” be described within the affidavit submitted to the court? The Supreme Court of Arkansas held that “A mere recitation in an affidavit that a diligent inquiry was made is not sufficient.” Smith v. Edwards, 279 Ark.79, 648 S.W.2d 482 (1983). Rule 4(f) requires the party seeking constructive service by warning order to show that he or she did, indeed, attempt to locate the defendant. So, what is a sufficient description of “diligent inquiry” to withstand a challenge to validity of service? An analysis of recent Arkansas precedent provides some insight.

Billings v. U.S. Bank National Association
In this case, the court held that the bank (which had been the plaintiff in an underlying foreclosure action) did not properly serve the “unknown heirs of Doann Billings” (defendants in that foreclosure action) by warning order because the “diligent inquiry” requirement was not satisfied. Billings v. U.S. Bank National Association, 2016 Ark. App. 134, 484 S.W.3d 715 (Ark. Ct. App. 2016).

The bank had submitted an affidavit for warning order a few weeks after filing its complaint in 2012. The affidavit stated that counsel “made diligent inquiry” into the whereabouts of the “Unknown Heir(s) of the borrower”, but that “Defendant(s)’ present address(es) are unknown.” Through counsel, the bank received a fax regarding the petition of the deceased borrower’s son to be appointed the personal representative of the borrower’s estate. The petition included the son’s address as the subject property address. The bank published the warning order for the Unknown Heir(s) but subsequently amended its complaint to include the borrower’s son and two sisters as defendants. The bank then filed an affidavit for warning order against the borrower’s son/personal representative, Montrevel Billings, claiming that pursuant to diligent inquiry, it discovered that the property address was no longer his address and that his current address was unknown. Ultimately, the circuit court granted a default judgment in which it dismissed Montrevel Billings, declared the property to be in foreclosure, and ordered the home to be sold in a commissioner’s sale. Notice of the commissioner’s sale was done by warning order.

Prior to the commissioner’s sale, Montrevel Billings filed a motion to vacate the foreclosure decree, and the court suspended the sale of the home until the matter could be resolved. A hearing was held in 2015, at which time the court found that service was proper and denied Montrevel’s motion. Montrevel filed a motion for reconsideration, which was also denied; he appealed.

On appeal, the court in Billings stated that the bank had “presented no facts in either … affidavit to support its statement that it made a diligent inquiry.” Though the bank later tried to prove the service attempts made prior to the warning order, the appellate court held that these attempts were irrelevant because they were not initially described in the affidavits for warning order. The bank “was required to show what efforts it made, if any, to locate Montrevel before it sought constructive service by a warning order. U.S. Bank did not include any facts in its affidavits for a warning order to show any efforts it may have taken to diligently inquire into Montrevel’s location; therefore, service by warning order was not properly executed.”

Morgan v. Big Creek Farms of Hickory Flat, Inc.
Conversely, in Morgan, the Arkansas Court of Appeals held that Big Creek Farms properly utilized a warning order to complete service upon the defendants in an underlying lawsuit brought by Big Creek. [Morgan v. Big Creek Farms of Hickory Flat, Inc., 2016 Ark. App. 121, 488 S.W.3d 535 (Ark. Ct. App. 2016).] The parties had entered into a construction contract in 2008. Construction was completed in 2009, and Big Creek attempted multiple times to collect payment pursuant to the contract.

Big Creek filed suit in late 2011 to recover the amount owed. On four occasions Big Creek attempted personal service by sheriff at the Morgans’ address without success. During these attempts, the sheriff’s department identified another address where the property’s utility bills were being mailed. Big Creek hired a private investigator who confirmed this new address as a possible address. Personal service was again attempted three times on the Morgans at the new-found address; these attempts were unsuccessful. Further, after two unsuccessful service attempts by certified and first-class mail at the first address, Big Creek filed and was granted an extension of time. Subsequently, Big Creek filed an affidavit for warning order, detailing these attempts. Service by warning order was conducted. Big Creek was eventually granted a default judgment against the Morgans in 2012, which the Morgans learned of the next year.

In 2014 the Morgans filed a motion to set aside the default judgment. Their motion was denied and they appealed the decision, which the Court of Appeals of Arkansas denied as well. The appellate court’s reasoning was that the affidavit for warning order clearly demonstrated “diligent inquiry” through the inclusion of process server and private investigator affidavits, as well as an explanation of those efforts.

Conclusion
These two cases provide some guidelines as to what Arkansas courts consider valid constructive service. A blanket statement that diligent inquiry was made but was unsuccessful — as described in the Billings decision — is not sufficient. Additionally, attempting to prove diligent inquiry after the fact is insufficient. It is common practice that warning orders are utilized as a last resort for service upon defendants, and the language of Rule 4(f) dictates this. Only after diligent inquiry has been conducted may a warning order be issued.

However, suppose affidavits and receipts of attempted service are attached as exhibits to the warning order affidavit, but not described within the body of the affidavit. In theory, incorporating exhibits makes whatever is contained in the exhibits a part of the pleadings. To some, this seems to be sufficient for it to “appear” that diligent inquiry was conducted by the party seeking the warning order. However, the Court of Appeals of Arkansas has not yet ruled on this.

Rule 4(f) is not clear in describing the extent to which a party must prove its diligent inquiry. The most instruction provided by the rule indicates that it must “appear by the affidavit” that diligent inquiries were made. As summarized in this article, the Court of Appeals has held in two starkly different cases what it will (and will not) consider diligent inquiry for purposes of a warning order. The policy consideration at issue in these cases is clear: one should not be able to constructively notify a defendant of a pending lawsuit without first deliberately attempting to give the defendant actual notice. Any other determination would cause an increase in unnecessary default judgments — those situations where a defendant may have been able to, and desired to, defend his or her interest. The challenge now will be to analyze and predict how Arkansas courts will handle constructive service with facts that fall somewhere between the scenarios reviewed in Billings and in Morgan.

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Florida: Appellate Court Decision Addresses HUD Face-to-Face Meeting Requirement

Posted By USFN, Tuesday, January 10, 2017
Updated: Wednesday, January 4, 2017

January 10, 2017

by Matthew L. Kahl
Aldridge Pite, LLP – USFN Member (California, Georgia)

The Fifth District Court of Appeals of Florida recently ruled that where the note and mortgage specifically incorporate Housing and Urban Development (HUD) regulations, compliance with these regulations is a condition precedent to foreclosure. [Palma v. JPMorgan Chase Bank, National Association, Case No. 5D15-3358 (Fla. 5th D.C.A. Dec. 2, 2016).]

Brief History
In 2013, JPMorgan Chase Bank initiated a foreclosure action against a borrower (Palma). The borrower filed an answer to the complaint wherein she denied the bank’s allegation that all conditions precedent to foreclosure had been met, specifically: “Plaintiff failed to comply with the regulations of the Secretary of Housing and Urban Development including but not limited to the obligation to provide face-to-face counseling in 24 CFR 203.604(b).” The lower court entered judgment in favor of JPMorgan Chase, finding that the borrower’s allegations should have been pled as an affirmative defense.

The Fifth District reversed the lower court’s entry of judgment, determining that the borrower’s specific denial of the general condition precedent allegation shifted the burden to JPMorgan Chase to prove its compliance with HUD’s face-to-face meeting requirements, and the bank “wholly failed” to meet this burden.

Closing
As a result of the decision in Palma, it is important for lenders whose servicing portfolios include FHA loans to thoroughly and accurately notate its servicing records to explain all actions or inactions relating to the face-to-face interview. This includes, but is not limited to, results of the face-to-face interview, the reasonable efforts taken to arrange the interview (including copies of all correspondence sent to the borrower and evidence of at least one trip to the subject property), and explanations as to why such interview was not required if it did not occur. This information should be provided and/or available to counsel upon referral and should be incorporated into the servicer’s document execution procedures for the verification of foreclosure complaints.

Please note that this Palma opinion is not final until the time expires for rehearing and, if a motion for rehearing is filed, then upon the determination of that rehearing.

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Is the Protecting Tenants at Foreclosure Act Still Effective in Virginia?

Posted By USFN, Tuesday, January 10, 2017
Updated: Wednesday, January 4, 2017

January 10, 2017

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

When the federal Protecting Tenants at Foreclosure Act (PTFA) expired on December 31, 2014 — after being extended by Congress beyond the initial sunset date of December 31, 2012 — conventional wisdom was that it had vanished from the Virginia foreclosure landscape. Unlike its neighbor state Maryland, Virginia had not enacted a statutory scheme mirroring the PTFA, unequivocally enabling its survival post-sunset. As a result, it seemed Virginia tenants had no recourse in the event their landlord was foreclosed. Recently, however, a decision by the U.S. District Court for the Western District of Virginia has raised the specter that the PTFA may be alive and well in the Old Dominion.

The case of Wiendieck v. Wells Fargo Bank, N.A., WL 4444916 (W.D. Va. 2016), involved a tenant who had actually once owned the foreclosed property. As part of the sales transaction wherein Wiendieck sold the property to the foreclosed borrowers (giving rise to the subject deed of trust), the parties entered into a written, unrecorded “lifetime, rent-free lease.” After the foreclosure sale, Wells Fargo (the successful bidder) filed an eviction action in the county general district court. Wiendieck, in response, filed a suit in the county circuit court seeking specific performance and a permanent injunction to prevent interference with her rights as a tenant. The eviction case was non-suited and the circuit court case removed to federal court.

Contending that the PTFA was still effective in Virginia, Wiendieck relied upon Virginia Code § 55-225.10(C), which states: “If the dwelling unit is foreclosed upon and there is a tenant lawfully residing in the dwelling unit on the date of foreclosure, the tenant may remain in such dwelling unit as a tenant only pursuant to the Protecting Tenants at Foreclosure Act, P.L. No. 111-22, § 702 . . . provided the tenant remains in compliance with all of the terms and conditions of the lease agreement, including payment of rent [emphasis added].”

Wells Fargo argued that § 55-225.10(C) incorporates a now defunct PTFA, and Virginia law provides no protection under an expired statute. The court opined that while § 55-225.10(C) specifically references § 702 of the PTFA (the tenant protections), it failed to specifically reference § 704, the sunset provision. As a result, the court held that the PTFA was still effective in Virginia because § 55-225.10(C) incorporated the protections but not the expiration.

Notwithstanding ruling the PTFA was still effective, the court determined that Wiendieck did not qualify as a bona fide tenant. Since her lease expressly required no rental payment, the court held that Wiendieck could not state a claim for protection under § 55-225.10(C) because the PTFA mandates a lease payment that is not substantially below fair rental value. The court further opined that allowing Wiendieck to enforce her lifetime, rent-free lease would offend the balance Congress intended in protecting tenants who are victims of foreclosure, while also ensuring that a foreclosure purchaser would receive some return on its investment in the interim.

While this federal opinion in Wiendieck is not binding authority, it does present a possible argument that could be levied by counsel representing foreclosed tenants. Courts who are persuaded by the opinion may require PTFA notices to vacate and/or the honoring of a written lease term before awarding possession. Many servicers have continued to treat foreclosed tenants under PTFA standards regardless, so this case would have little or no impact in those instances. Wiendieck has noted her appeal with the U.S. Court of Appeals for the Fourth Circuit.

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Jurisdiction of Federal Claims: When is the Rooker-Feldman Doctrine a Bar?

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

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

Can the Rooker-Feldman doctrine bar jurisdiction of federal claims? Like any good and interesting legal question, the answer is: “it depends.” To begin, a brief description of the Rooker-Feldman doctrine is in order.

Background
The Rooker-Feldman doctrine arose from two cases: Rooker v. Fidelity Trust Co., 263 U.S. 413 (1983) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). The original purpose of the doctrine was to protect against the federal courts becoming de facto appellate courts for state-court losers. It was codified as 28 USCS § 1257. However, the idea behind Rooker-Feldman began to preclude jurisdiction in a larger scope than intended; so, in 2005, the doctrine was reined in and refined.

In Exxon Mobil Corporation v. Saudi Basic Industries Corporation, 544 U.S. 280 (2005), the U.S. Supreme Court confined the Rooker-Feldman doctrine only to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” This ruling stands for the general proposition that the doctrine does not apply to challenges of the legal conclusions found in the state court action if there is no challenge to the state court judgment. Moreover, prior litigation and even a prior related judgment do not necessarily prompt application of the Rooker-Feldman doctrine.

In the mortgage servicing industry, the doctrine is often seen in the context of alleged violations of the numerous federal regulations. It can come up where there is a question as to the manner and effect of service, as well as in the context of required affidavits for different purposes, or to obtain default judgment. Review of the relevant case law suggests that the nature of the alleged regulation violation is a good indicator as to whether Rooker-Feldman can, and should, bar federal jurisdiction.

Federal Regulation Violations
Clear violations of federal regulations lend themselves to attacks on legal conclusions found by a state court without attacking the underlying judgment itself. In other words, if the well-pled complaint alleges blatant violations of federal regulations, the federal court is unlikely to find that Rooker-Feldman bars jurisdiction.

Shortly after the Exxon case, the Sixth Circuit found that a plaintiff’s injuries that were suffered from a debt collector’s use and reliance on a false affidavit in garnishing a bank account (related to exempt versus non-exempt funds) were injuries suffered by the plaintiff independent of the state court judgment. See Todd v. Weltman, Weinberg & Reis Co., L.P.A., 434 F.3d 432 (6th Cir. 2006). The court in Todd relied on the fraudulent nature of the affidavit to find that Rooker-Feldman did not bar jurisdiction.

A recent Eighth Circuit case, Hageman v. Barton, 817 F.3d 611 (2016), involved collection of a medical debt that had been assigned from a medical center to an individual (Roger Weiss) or his collection agency. Weiss and his collection agency, in turn, hired attorney Dennis Barton. The lawyer named the medical center as the creditor and obtained a default judgment and garnished wages without expressly indicating by pleadings, or correspondence with the debtor, the real party in interest — although Barton did attach the medical center’s assignment document to the complaint filed in state court. The Eighth Circuit, in deciding Hageman, used the following standard in finding that Rooker-Feldman did not bar jurisdiction: “If a federal plaintiff asserts as a legal wrong an allegedly erroneous decision by a state court, and seeks relief from a state court judgment based on that decision, Rooker-Feldman bars [subject matter] jurisdiction [in federal district court]. If, on the other hand, a [federal] plaintiff asserts [as a legal wrong] an allegedly illegal act or omission by an adverse party, Rooker-Feldman does not bar jurisdiction.” [citing Riehm v. Engelking, 538 F.3d 952, 965 (8th Cir. 2008), which quoted the Ninth Circuit’s language in Noel v. Hall, 341 F.3d 1148, 1164 (2003) (cited favorably in Exxon, 544 U.S. at 293)].

As alluded to, where there is no clear violation of federal regulation, a court may be more inclined to bar jurisdiction under this doctrine. For example, in Crutchfield v. Countrywide Home Loans, 389 F.3d 1144 (10th Cir. 2004), the plaintiff challenged notice of the state court action as well as requested a declaratory judgment that he rescinded the subject mortgage under the Truth in Lending Act (TILA). Because the state court had previously ruled that service was appropriate, the Crutchfield court was prevented from hearing an appeal on an issue which the state court had actually decided. Additionally, the Crutchfield court found the TILA claims were so “inextricably intertwined” with the state court judgment that granting the plaintiff its requested relief would “do precisely what Rooker-Feldman prohibits: to undo the effect of the state court judgment.”

Conclusion
When in doubt (and as suggested by the Crutchfield court), look to the actual relief sought by the plaintiff. If it is unclear whether the alleged federal violation will be viewed as an independent claim, assess whether the requested relief seeks to overturn — or even review — the state court decision. If it does, the Rooker-Feldman doctrine likely applies to bar jurisdiction.

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Tenth Circuit Cautions Against National Banks Acting as Utah Foreclosure Trustee

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by Brigham J. Lundberg
Lundberg & Associates, PC – USFN Member (Utah)


Under Utah law, the trustee of a deed of trust must be: (i) an active member of the Utah State Bar; (ii) a depository institution or insurance company authorized to do business and actually doing business in Utah; (iii) a corporation authorized to conduct a trust business and actually conducting a trust business in Utah; or (iv) a title insurance company licensed to conduct insurance business in the state. [Utah Code § 57-1-21(1)(a).] However, of the above-named possible trustees, only an active member of the Utah State Bar and a Utah-licensed title insurance company may exercise the power of sale and actually carry out a nonjudicial foreclosure sale in Utah. [Utah Code § 57-1-21(3).]

The issue of the qualification of nonjudicial foreclosure trustees has been contested in Utah over the past five years, and recently came to a head with the opinion by the U.S. Court of Appeals for the Tenth Circuit in Dutcher v. Matheson, 840 F.3d 1183 (10th Cir. Nov. 2, 2016).

In Dutcher, the borrowers brought a putative class action on behalf of similarly situated homeowners who had experienced nonjudicial foreclosure at the hands of ReconTrust Company, N.A. as foreclosure trustee. These plaintiffs challenged the authority of ReconTrust to conduct nonjudicial foreclosures in the state of Utah. The borrowers alleged that, as a federally-chartered national bank with offices in Richardson, Texas, ReconTrust was prohibited from conducting nonjudicial foreclosure sales in Utah because it was not a qualified trustee under Utah Code section 57-1-21(1)(a) and (3). In response, ReconTrust asserted that it was permitted to conduct the foreclosures under federal law — specifically, 12 U.S.C. § 92a(a), as interpreted by the Office of the Comptroller of the Currency (OCC) in 12 C.F.R. § 9.7, which states that the OCC is authorized to grant national banks a special permit to act as a trustee when not in contravention of State or local law or to act in any other fiduciary capacity in which national banks’ competitors are permitted to act under the laws of the State in which the national bank is located. See 12 U.S.C. § 92a(a) [emphasis added].

The dispute turned on the question of which state’s law is incorporated by 12 U.S.C. § 92a(a) — Utah or Texas. More specifically, the identification of the state where ReconTrust is “located” for purposes of section 92a(a) is the main contention. The federal district court granted ReconTrust’s motion to dismiss the borrowers’ claims. However, shortly after that decision, another federal district court in Utah issued an order ruling on the same question, and found that the challenged foreclosures were not lawful. See Bell v. Countrywide Bank, N.A., 860 F. Supp.2d 1290 (D. Utah 2012). The Bell ruling prompted the Dutcher plaintiffs to file a motion for reconsideration, which was denied by the district court. An appeal to the Tenth Circuit followed.

On appeal, the Tenth Circuit panel rejected the borrowers’ arguments and affirmed the ruling of the federal district court in favor of ReconTrust. In doing so, however, both the Tenth Circuit majority opinion and one of the concurring opinions pointed out that it was not able to consider certain arguments raised by the borrowers on appeal because those arguments were not properly preserved below and, thus, had been waived. In fact, one of the concurring opinions went so far as to state that but for the waiver of those arguments, the judge would have ruled in favor of the borrowers and held that ReconTrust “does not have the power to conduct non-judicial foreclosure of trust deeds in Utah.”

Unfortunately, the majority and concurring opinions in Dutcher have done little to clear the muddied waters with respect to foreclosures conducted by ReconTrust in the state of Utah. As a practical matter, local title companies and national underwriters remain hesitant to insure any property that was foreclosed by ReconTrust. While the title industry in Utah may come around and, in time, agree to insure properties previously foreclosed by ReconTrust, they are unanimous in their agreement that it would be ill-advised for ReconTrust or other similarly-situated entities to conduct any future foreclosures in Utah.

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South Carolina: Consequences for Failing to Comply with Bankruptcy Court Orders Requiring Loan Modification

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by John Kelchner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Over the last two years, the Bankruptcy Court in the District of South Carolina has seen a proliferation of post-confirmation, mortgage loan modifications in Chapter 13 cases. To address this issue, the judges in this District have taken steps to clarify the process of obtaining court approval for these modifications to varying degrees. The most comprehensive process has been outlined by Judge Waites in his Chambers Guidelines regarding Loss Mitigation/Mortgage Modification (LM/MM). His preferred method of debtors obtaining a loan modification is by applying through the Default Mitigation Management LLC (DMM) Portal. This allows the bankruptcy court, as well as counsel for debtors and the creditor, to view the correspondence and documentation submitted between the parties during the loan modification process, thereby enhancing the efficiency of loan modification reviews.

Judge Waites has set forth provisions to enforce compliance with his guidelines, including a requirement that all parties are required to act in good faith throughout the LM/MM process. A recent case, In re Davis, C/A No. 15-05030-JW, slip op. (Bankr. D.S.C. Sept. 6, 2016), provides an example of the ramifications of failing to abide by Judge Waites’ Guidelines. In that case, the debtors moved for an Order Requiring Loss Mitigation/Mortgage Modification, which was entered on November 20, 2015.

On December 4, 2015 the debtors initiated the process by submitting their application through the DMM Portal. The mortgage creditor failed to timely respond to the application by notifying the debtors whether the application was complete or that additional documentation was needed. In the ensuing months, despite the bankruptcy court holding a status hearing in March 2016, the creditor continually delayed in filing responses, which led to earlier provided documents becoming stale, and the debtors having to send multiple applications for review. Ultimately, the creditor denied the debtors’ application on the basis that the investor did not give the contractual authority to the creditor to provide a loan modification offer, rendering the debtors’ efforts over the preceding months to be futile.

The debtors filed a Motion to Enforce the LM/MM Order, asserting that the mortgage creditor failed to act in good faith. The bankruptcy court ruled in favor of the debtors, awarded the debtors attorneys’ fees, and issued a civil contempt sanction. In his opinion, Judge Waites found that the creditor failed to acknowledge receipt of documentation or to timely notify the debtors of further information needed to complete their application. The multiple requests for additional documents led to “unnecessary work and expense for both Debtors and their counsel as most of the documentation was ripe for review when it was originally submitted,” but subsequently expired. Davis, at 13.

More significantly, the bankruptcy court found that the creditor failed to act in good faith by not disclosing that the debtors would not be eligible for any loan modification programs at the beginning of the LM/MM process. This lack of disclosure led the court to maintain that “[t]his case is a prototypical example of the conduct and communication issues which have plagued LM/MM reviews and [has] motivated this and other courts to implement a court-supervised Loss Mitigation and Mortgage Modification Program as a means to encourage transparent and efficient LM/MM reviews.” Davis, at 14-15. Had the creditor disclosed that the debtors would not be eligible for modification at the outset of the process, the debtors would have had more options at that time to cure their contractual arrearage.

This case highlights the urgency with which creditors must address loan modification applications in South Carolina and honor the LM/MM guidelines, specifically the disclosure of the eligibility of the debtors at the initiation of the LM/MM process.

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Are Borrowers Prohibited from Waiving Redemption Periods In Minnesota?

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

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

Minnesota is a redemption state, where the borrower’s redemption period following a foreclosure sale is most commonly six months and can be as long as twelve months. Given the “underwater” or disrepair status of many foreclosed properties, various mortgage companies and borrowers may want to shorten the lengthy foreclosure process. These parties may agree to “cash for redemptions” where the mortgage company pays the defaulting borrowers relocation funds to waive the redemption period by written agreement or providing a deed to the mortgage company shortly after the foreclosure sale occurs. However, a recent Court of Appeals decision appears to have removed that option in Minnesota. [U.S. Bank National Association v. RBP Realty, LLC, 2016 Minn. App. LEXIS 94 (Minn. Ct. App. Dec. 27, 2016).]

In RBP Realty, the court held that a borrower’s written waiver of the right of redemption following a nonjudicial foreclosure sale was unenforceable. Specifically, after the borrower defaulted on a $7.5 million (commercial) loan from the lender, the borrower and lender reached a written agreement where the borrower waived its statutory right to redeem the mortgaged property in the event of a foreclosure sale. The lender foreclosed the mortgage due to a continuing default, and at the nonjudicial foreclosure sale successfully bid a reduced amount of $4.25 million, despite the total debt balance approaching $9 million. The borrower subsequently contacted the sheriff and tendered sufficient funds to redeem from the foreclosure sale based on the lowered bid amount. The lender challenged the redemption in court, claiming that the borrower previously waived all redemption rights. The district court ruled as a matter of law that the borrower’s purported waiver was unenforceable. The Court of Appeals affirmed.

In its decision, the appellate court reviewed the language of the redemption statute at issue (Minn. Stat. § 580.23) and found no statutory language or case law permitting waiver of the borrower’s right to redemption. The Minnesota Foreclosure by Advertisement Statute (Chapter 580) is silent on the issue of waiving redemption rights. However, the court observed that the borrower’s statutory right to redeem a foreclosed property after a foreclosure sale is expressly permitted in Section 580.23. Also, the court identified that Chapter 580 contains a limited number of exceptions to the general rule that a borrower may redeem a foreclosed property within six months of a foreclosure sale (e.g., other redemption period lengths may apply, including twelve months and five weeks), but a private agreement between a lender and borrower is not among the listed exceptions to the general rule.

As a result of this recent judicial decision, mortgage servicers should consider immediately halting all cash for redemption-type programs that ask borrowers to waive redemption periods for Minnesota foreclosures, or that involve seeking post-sale deeds from borrowers for the purpose of avoiding redemption periods. It is possible that the courts involved with this case could have held differently if the foreclosure was conducted judicially instead of by advertisement (and the court approved the written waiver as a settlement agreement prior to enforcement), or if the borrower provided a deed with non-merger language to the lender instead of a waiver agreement. Nonetheless, either approach appears risky in light of the strong opinion by the court looking to fully preserve a borrower’s right to redeem a property following foreclosure. Until the Minnesota Supreme Court reverses course, redemption periods appear unwaivable in Minnesota.

It is important to note, however, that this development does not mean that borrowers and lenders are always stuck with lengthy redemption periods in Minnesota. Under Minnesota Statutes Section 582.032, a foreclosing party can reduce a redemption period for a qualifying property to just five weeks where the borrower abandons the property. The reduced redemption period can be obtained by the foreclosing party through an accelerated court process and judicial order.

There is an additional point to glean from the RBP Realty case. In Minnesota, competitive bidding at sheriff’s sales is relatively uncommon given the lengthy redemption periods that often apply (as well as low interest rates in the current environment). As a result, reduced or specified bids should be carefully considered in Minnesota and used with hesitation. If the lender in the case summarized here had bid full debt instead of a low, specified bid, the likelihood of any redemption by the borrower or resulting litigation would have been vastly reduced. Instead, it is far more likely that the lender would have kept the property with a full debt bid as ultimately intended or have been happy with receiving redemption funds in the amount of a full debt balance.

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Foreclosure Sale Postponement & Loss Mitigation Consideration: 11th Circuit Weighs In

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Stephen Collins
Sirote & Permutt, P.C. – USFN Member (Alabama)

On October 7, 2016 the Eleventh Circuit Court of Appeals analyzed a mortgage servicer’s duty to review a complete loss mitigation application received more than thirty-seven days prior to a postponed foreclosure sale. [Lage v. Ocwen Loan Servicing, LLC].

In Lage, the borrowers defaulted on a mortgage secured by property in Florida. As a result, the servicer filed a complaint for foreclosure. The state court subsequently entered a final judgement of foreclosure and Ocwen scheduled the foreclosure sale for January 29, 2014.

Factual Background & Timeline — On January 8, 2014 (three weeks before the sale) the borrowers faxed Ocwen a loss mitigation application. On January 24 (at a mediation) Ocwen told the borrowers that once they submitted one additional paystub Ocwen would evaluate their application. The borrowers submitted the requested paystub on January 27, 2014.

On January 28, the foreclosure sale scheduled for the 29th was canceled and re-scheduled for March 14, 2014. Over the next few weeks, Ocwen notified the borrowers that it needed additional information to review their application. On March 7, Ocwen informed the borrowers that it had received all of the necessary information and on March 9, Ocwen denied the application as untimely because the complete application was received just seven days prior to the sale. Ocwen went forward with the March 14, 2014 foreclosure sale.

The borrowers remained in the home for several months after the foreclosure sale and sent Ocwen a Notice of Error (NOE) alleging that Ocwen violated Reg. X in reviewing their application. Ultimately, the borrowers sued Ocwen in federal court under RESPA for failing to review its application within thirty days as required by Reg. X, Section 1024.41(c)(1), and for an inadequate response to the borrowers’ NOE.

Trial Court — The trial court granted summary judgment in favor of Ocwen and held that Ocwen had no duty to review the application because the borrowers submitted their application on January 8, 2014 and the regulation did not become effective until two days after that (January 10, 2014). With respect to the inadequate response to the NOE claim, the trial court concluded that the borrowers failed to show — as required by RESPA — that they suffered actual damages or were entitled to statutory damages. The borrowers appealed.

On Appeal — The Eleventh Circuit found that it was unnecessary to evaluate whether the regulation’s January 10, 2014 effective date applied to the borrowers’ January 8, 2014 faxed application since the application was not submitted timely at the outset. Specifically, the borrowers completed their application too late to trigger Ocwen’s duty to evaluate. The court reasoned that Section 1024.41 does require a servicer to review an application within thirty days of receiving a complete application; however, Section 1024.41(c)(1) provides that a servicer’s duty to evaluate an application is only triggered if the servicer receives the complete application more than thirty-seven days before the foreclosure sale.

For the sake of argument, the court accepted the borrowers’ claim that they delivered a complete application to Ocwen on January 27, 2014, which is the date they provided the additional paystub as instructed by Ocwen at the mediation. Since Ocwen received the complete application just two days before the originally scheduled sale date, Ocwen’s duty to review the application was not triggered.

Because Ocwen’s obligation to review was never triggered, it is irrelevant whether Ocwen completed its review within thirty days as required by Section 1024.41(c). The borrowers claimed that since subsection 1024.41(b)(3) discusses (in the context of determining borrower protections) when a foreclosure sale occurs, the appropriate method for counting the thirty-seven days for purposes of a servicer’s receipt of a complete application is when the foreclosure sale is actually conducted.

In considering this argument, the court reviewed the Consumer Financial Protection Bureau’s (CFPB) published Commentary and found that the CFPB rejected a proposal submitted during the comment period that would have afforded borrower protections (and expanded servicer obligations) if a foreclosure sale was postponed after a complete application was received. The CFPB recognized that if a borrower’s late application could become timely due to a sale postponement, a servicer may be less willing to postpone a sale.

A postponement of the foreclosure sale is, of course, extremely beneficial to a borrower. The CFPB did not want the burdensome evaluation requirements to entice servicers to move forward with a foreclosure sale in lieu of delaying a sale and assisting the borrower with foreclosure alternatives. For this reason, the court held that the final rule published by the CFPB does not mandate that a servicer review a complete application that is received within thirty-seven days of a foreclosure sale, even if that sale is postponed.

The borrowers’ claim that Ocwen’s response to the NOE was inadequate was also rejected. The court found that to recover under RESPA, a borrower must prove either actual or statutory damages. Because the court ruled that Ocwen had no duty to review the loss mitigation application, the borrowers were precluded from recovering damages from a breach of a duty that did not exist. To recover statutory damages, the court determined that RESPA required a borrower to show a pattern and practice of noncompliance. Since the borrowers only submitted evidence of one violation, their claim for statutory damages also failed.

Conclusion — In those states comprising the Eleventh Circuit (Alabama, Georgia, and Florida), a servicer is not legally required to review a loss mitigation application received within thirty-seven days of a foreclosure sale — even if the foreclosure sale is postponed to a later date.

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Rhode Island Federal District Court Decision with Pinti Implications

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

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

On October 11, 2016 the District Court of Rhode Island issued a decision in Martins v. Federal Housing Finance Agency, C.A. No. 15-235-M-LDA, relating to compliance with the contractual terms of a mortgage. Specifically, plaintiff Martins filed suit alleging that the defendants Federal Housing Financing Agency, Fannie Mae, and Green Tree Servicing LLC violated her due process rights by failing to provide her with proper notice pursuant to paragraph 22 of her mortgage, and thus conducted an invalid foreclosure. Fannie Mae voluntarily rescinded their nonjudicial foreclosure but filed a counterclaim for judicial foreclosure.

While the nonjudicial foreclosure sale was rescinded — and any claims premised on the nonjudicial foreclosure were rendered moot — the court noted that Martins raised serious issues about the constitutionality of Fannie Mae’s procedures in a nonjudicial proceeding, and that “someone with skin in the game should litigate the issue.” This, no doubt, will open the door to borrowers alleging a constitutionally defective foreclosure under section 22, if not followed.

More importantly, the court in Martins reasoned that the change in process of foreclosure (from nonjudicial to judicial) does not alleviate compliance with the paragraph 22 notice requirements in the mortgage. Despite the fact that the judicial foreclosure statute (R.I. Gen. Laws § 34-11-22) does not expressly require compliance with the mortgage document, if a mortgagee agrees to give a certain notice before a foreclosure (judicial or nonjudicial) then the mortgagee must do that which it agreed, and comply with paragraph 22 of the mortgage as a matter of contract law.

In conclusion, just as the Massachusetts Supreme Court ruled in Pinti v. Emigrant Mortgage Company, Inc., SJC-11742 (July 17, 2015), that a foreclosing mortgagee must send borrowers a default notice that complies strictly with the requirements of the mortgage, the Martins decision (although a federal district court case) serves notice in Rhode Island that lenders seeking to foreclose in Rhode Island (judicially or nonjudicially) must strictly comply with section 22 of the Fannie Mae/Freddie Mac uniform instrument. Servicers should review their Rhode Island default notices carefully to ensure compliance verbatim with the mortgage terms for all nonjudicial and judicial foreclosures.

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New South Carolina Code Impacts Foreclosures for Border Counties of North Carolina

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Gregory D. Spink
The Hunoval Law Firm – USFN Member (North Carolina)

As many are aware, the Carolinas have been in a border war for 20 years. The issues relate to surveys created during the Colonial era using landmarks that no longer exist: rocks, trees, and even fence posts. Both legislatures have worked out a compromise regarding the boundary dispute, but now both states must look to the legal implications of new property lines.

South Carolina took the first step — enacting S.C. Code § 30-5-270, regarding real property recordings and filings for counties bordering North Carolina, with an effective date of January 1, 2017. The specific counties impacted by this code are Cherokee, Chesterfield, Dillon, Greenville, Horry, Lancaster, Marlboro, Oconee, Pickens, Spartanburg, and York. The register of deeds is required to index and record a “Notice of State Boundary Clarification” to provide notice to anyone checking title to real property for the affected lands. This notice will identify the land, the parties who are the owners, and corresponding recorded instruments. [S.C. Code § 30-5-270(C)(2)].

How Does this New Law Impact Foreclosures?
In addition to the above-cited code, the legislature enacted S.C. Code § 29-3-800 dealing with the foreclosure of real estate liens for counties bordering North Carolina. When a foreclosure is initiated in an affected county, the mortgagee (through its attorney of record) shall file a copy of the recorded Notice of Boundary Clarification and attorney certification regarding title to the real property contained in the affected county. The attorney must also serve the certifications with the summons and complaint.

This new law focuses on property that was believed to have been in North Carolina but is now determined to be wholly (or in part) in South Carolina due to the boundary clarification. [S.C. Code § 30-5-270]. The attorney of record is required to serve the Notice of Boundary Clarification and filed pleadings “upon any party identified on the Notice of Boundary Clarification or known to have an interest in the subject affected lands, not already a party to the action ...” [S.C. Code § 29-3-800(B)(2)].

The practical impact could involve additional judgment lienholders, amending complaints, re-serving pleadings, and the obvious costs of ordering updated title for all property within the affected counties. The new boundary lines will not impact title or casualty insurance issued prior to January 1, 2017, regardless of whether the insured property is determined to be in another state. [Click here to see map from North Carolina Public Records, as cited by the Washington Times.]

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New York’s Vacant and Abandoned Property Law and Regulations (Effective 12/20/2016)

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Robert H. King
Rosicki, Rosicki, & Associates, P.C. – USFN Member (New York)

New York’s vacant and abandoned property law goes into effect on December 20, 2016. The law affects various aspects of New York’s foreclosure law. Servicers should be aware of each of the provisions of the new law; the provisions include:

Vacant and Abandoned Properties
• Real Property Actions and Proceedings Law (RPAPL) § 1308 requires servicers to maintain vacant and abandoned properties at the 90th day delinquency.

• RPAPL § 1309 creates an expedited process for obtaining judgments for uncontested actions involving vacant and abandoned properties.

• RPAPL § 1310 requires servicers to register vacant and abandoned properties with the New York Department of Financial Services.

The New York State Department of Financial Services (DFS) released their proposed rules for comment, seeking to compel servicers to report such information as the date of inspections, when notices were posted, and the actions taken to maintain the property. The DFS will require quarterly reporting of vacant and abandoned properties.

RPAPL § 1304 – New York’s Pre-Foreclosure 90-Day Notice
In order to continue to comply with the 90-day pre-foreclosure notices and to prevent delays in commencement of New York foreclosure actions, it is important for servicers to review the amendments to the 90-day pre-foreclosure notice required by RPAPL § 1304. The language of the 90-day pre-foreclosure notice was amended to include:

• A disclaimer to borrowers that they have the right to remain in the property until a court orders the borrowers to leave the premises; the 90-day notice also informs of the borrower’s ongoing ownership of the property and of responsibilities as owner.

• The New York State Attorney General Homeowner Protection Program toll-free consumer hotline.

The statute makes clear that the 90-day notice is required to be sent for all residential loans regardless of whether the borrower occupies the property or files for bankruptcy.

The new statute clarifies that a new 90-day notice must be sent if the borrower cures the delinquency but then re-defaults.

90-Day Notice and Limited English Proficiency
In order to comply with the new amended provisions in RPAPL § 1304, servicers should consider this question: Does the person preparing the 90-day notice have access to communication logs to determine if the borrower is non-native English proficient?

If the servicer knows that the borrower has limited English proficiency, then the RPAPL §1304 notice must be drafted in the native non-English language, provided that the language is one of the six most common non-English languages spoken by individuals with limited English proficiency in the state of New York. The New York State Department of Financial Services will provide a list of these six most common non-English languages based on the United States Census data. Further, the DFS will post the 90-day notice in the six most common non-English languages on its website (www.dfs.ny.gov).

Housing Counseling Agencies
The list of housing counseling agencies attached to the 90-day notice must include at least five current housing counseling agencies serving the county where the property is located.

RPAPL § 1303 – Help for Homeowners in Foreclose Notice
The content of the notice was amended to include a “rights and obligations” provision to borrowers that they have the right to remain in the property until a court orders the borrowers to leave the property. This notice is delivered to all parties in the foreclosure action at service of the summons and complaint.

CPLR 3408 – Settlement Conferences and Mediations
The amendments define good faith in negotiations, require detailed loan modification denial letters, and require the court to provide borrowers with a Consumer Bill of Rights. (DFS has been tasked with publishing a Consumer Bill of Rights.) The amendments also allow borrowers to interpose an answer/contested pleading 30 days after the first settlement conference date.

Conclusion
Servicers should be aware of the changes made to New York foreclosure law, and ensure that they have processes in place to comply.

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D.C. Circuit Rejects Structure of CFPB and Retroactive Enforcement Action against PHH

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 1, 2016

November 29, 2016

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

On October 11, 2016 the D.C. Circuit Court of Appeals issued its ruling on an appeal by PHH Mortgage (PHH), which challenged the Consumer Financial Protection Bureau’s (CFPB) enforcement action under Section 8 of the Real Estate Settlement Procedures Act (RESPA). The CFPB had imposed a $109 million penalty on PHH for its captive reinsurance arrangements; however, the court vacated the penalty and remanded the case back to the CFPB for further agency consideration.

Constitutional Problem with the CFPB’s Structure
PHH first contended that the CFPB violates Article II of the U.S. Constitution because it is an independent agency headed by a single director.

The court observed that the heads of both executive and independent agencies have historically been subject to a check on their authority — either through the president, fellow commissioners, or other board members. The CFPB was originally proposed to operate in that manner, but Congress vested all of the agency’s power in a single director instead. The court found that this outcome fails to prevent arbitrary decision making and protect individual liberty; therefore, the CFPB’s structure is unconstitutional.

As a remedy, the court severed the unconstitutional portion of the Dodd-Frank Act; this result allows the president to supervise, direct, or remove the CFPB director. Consequently, the CFPB can still perform its duties, but as an executive agency.

PHH’s Captive Reinsurance Arrangements
PHH next asserted that the CFPB erred in determining that Section 8 of RESPA completely prohibits captive reinsurance arrangements. These arrangements involve referring borrowers to an insurer who purchases reinsurance from an entity affiliated with, or owned by, the lender.

Prior to the CFPB’s creation, the Department of Housing and Urban Development (HUD) interpreted Section 8 of RESPA to permit captive reinsurance arrangements if the amount paid for reinsurance does not exceed its reasonable market value. However, if the amount paid was in excess of market value, a presumption would arise that the payment was for the referral and, therefore, prohibited under Section 8. PHH and other lenders relied on this interpretation.

Nonetheless, in 2015 the CFPB expressed its own contrary interpretation and penalized PHH for captive reinsurance arrangements that had occurred as far back as 2008 — before the CFPB was even founded. The court agreed with HUD’s guidance that engaging in these arrangements is not per se improper, and also found that the CFPB violated due process when it retroactively applied the opposite interpretation to PHH’s conduct.

The court then analyzed the appropriate statute of limitations for enforcement actions under Section 8 of RESPA. The CFPB argued that there is no limitation period for administrative proceedings under the Dodd-Frank Act. The court disagreed, holding that RESPA’s three-year statute of limitations covers both administrative and court actions to enforce Section 8.

On remand, the court’s ruling allows for the CFPB to allege if any insurers paid more than reasonable market value to PHH’s subsidiary, but only within the proper three-year statute of limitations.

Conclusion
The court’s decision is a significant victory for lenders because it reins in the CFPB’s power to take unilateral enforcement actions based on new interpretations of law. The CFPB, like traditional government agencies, is subject to checks on its authority. Thus, other actions taken based solely on the director’s judgment may now also be challenged as unconstitutional. Additionally, the CFPB is constrained to imposing penalties only within a defined limitations period based on the relevant statute.

The 101-page majority opinion in PHH Corporation v. Consumer Financial Protection Bureau (along with concurring and partial dissenting opinions) can be found at: https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf.

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Michigan: When a Surplus is Not a Surplus

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 8, 2016

November 29, 2016

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

The Michigan Court of Appeals recently issued an unpublished opinion that could, potentially, resolve what has been a non-uniform statewide policy concerning surplus proceeds following foreclosure. At issue was the difference between funds used to purchase a foreclosed property and the amount bid by a mortgagee. Some counties view funds in excess of a mortgagee’s bid as surplus proceeds. Others, like Macomb County, do not see a surplus unless the successful bid exceeds the mortgage debt. Distribution of surplus proceeds is controlled by MCL § 600.3252, which states, in part:

If after any sale of real estate, made as herein prescribed, there shall remain in the hands of the officer or other person making the sale, any surplus money after satisfying the mortgage on which the real estate was sold, and payment of the costs and expenses of the foreclosure and sale, the surplus shall be paid over by the officer or other person on demand, to the mortgagor, his legal representatives or assigns, unless at the time of the sale, or before the surplus shall be so paid over, some claimant or claimants, shall file with the person so making the sale, a claim or claims, in writing … [emphasis added].

The question presented in In re Surplus Proceeds from Sheriff Sale: Trademark Properties of Michigan, LLC v. County of Macomb and Civil Staffing Resources, LLC (No. 327426, Oct. 11, 2016) was: What constitutes satisfaction of the mortgage?

Typical Scenario
Often when a mortgage is foreclosed under the Michigan Foreclosure by Advertisement Statute, MCL §§ 600.3201, et seq., a mortgagee will bid the total debt owed on the mortgage, and there are no other bidders. In this situation, the mortgagee generally need only submit a credit bid, and there is no issue. In other situations, a mortgagee will submit a credit bid in the entire amount of the mortgage debt, and a third party will submit a successful bid in an amount above the mortgage debt. The difference between the mortgage debt and the successful bid would then become a surplus. MCL § 600.3252 dictates that any surplus belongs to the mortgagor, and shall be submitted to the mortgagor unless another claimant submits a claim. In the event of a claim, or claims, the proceeds will then be subject to a court action.

Trademark Case: Untypical Scenario
The Trademark facts presented a different scenario. In Trademark, the mortgagee CitiMortgage (respondent) made a credit bid of $20,572.80, though the total debt on the mortgage was $55,030.58, resulting in a difference of $34,347.78. CitiMortgage did not, however, present the successful bid. A third party successfully bid $31,572.80 ($11,000 more than the mortgagee bid but less than the total debt).

The Macomb County forwarded the entire amount to the attorneys for CitiMortgage, the former mortgagee. Trademark (petitioner and assignee of the former mortgagor) filed a Petition for Return and/or Payment of Overbid Funds, claiming that the $11,000 above CitiMortgage’s bid constituted a surplus. Macomb, on the other hand, maintained that a surplus only arises when the purchase amount is over the amount owed on the mortgage loan. Thus, a dispute was formed. The Macomb County Circuit Court found in favor of Macomb; Trademark appealed to the Michigan Court of Appeals.

Trademark primarily asserted that the difference between the successful bid and the mortgagee bid resulted in a surplus. In support of its position, Trademark relied upon the statutory language “satisfying the mortgage.” Trademark offered the definition of “surplus” as ‘“[a]n amount or quantity in excess of what is needed,’” citing American Heritage Dictionary of the English Language, 5th Ed. 2011. Notably, argued Trademark, the statute does not state “satisfying the mortgage debt.” Trademark additionally relied on the fact that, upon foreclosure sale, the mortgage is extinguished (Trademark cited Dunitz v. Woodford Apartments Co., 236 Mich. 45 (1926); Wood v. Button, 205 Mich. 692 (1919); New Freedom Mtg. Corp. v. Globe Mtg. Corp., 281 Mich. App. 63 (2008); New York Life Ins. Co v. Erb, 276 Mich. 610, 268 NW 754, “[a] mortgage is not extinguished by foreclosure until the sale”). In other words, regardless of the amount bid at the sale, once a foreclosure takes place the mortgage is extinguished.

Trademark contended that while a mortgage secures the debt owed on a note, the debt is not owed on the mortgage. Should a foreclosure result in an amount less than the amount owed on the note, the security may cease to exist; however, a note holder may still collect upon the note. MCL § 600.3252 does not mention the words “note” or “debt;” thus, according to Trademark, the note and the debt are not relevant in determining satisfaction of the mortgage.

Under Trademark’s theory, it appears that the mortgagee, in submitting a bid, decided and conveyed the amount necessary to “satisfy” the mortgage. Had there been no other bidder, the mortgage would have been satisfied with the specified bid; therefore, so Trademark’s theory suggests, the mortgagee could not claim that the mortgage was not satisfied.

Appellate Court’s Analysis
The Michigan Court of Appeals, however, found in favor of Macomb County. Acknowledging that the statute lacks a definition for “surplus,” the court referred to Merriam-Webster’s Collegiate Dictionary (11th ed.) and found that the term is defined as “the amount that remains when use or need is satisfied.” The definition is very similar to that used by Trademark. The court additionally noted that the term “satisfy” is also not defined by statute. Using the same source, the court observed that “satisfy” means ‘“to carry out the terms of (as a contract): DISCHARGE,’ and to meet a financial obligation to.’” The Court of Appeals used the definitions to read the statute to necessarily refer to the debt secured by the mortgage; i.e., the amount owed on the note.

Moreover, the appellate court mentioned that MCL § 600.3252 does not reference the difference between a mortgagee’s initial credit bid and the final purchase amount. The court noted that “[a]lthough petitioner [Trademark] contends that this Court should consider CitiMortgage’s initial bid in determining the surplus amount, MCL § 600.3252 does not refer to the difference between the mortgagee’s initial credit bid and the final bid …. Further, petitioner does not support its contention that the initial credit bid was the amount CitiMortgage needed to satisfy the mortgage ….”

In addressing Trademark’s assertion concerning the difference between the mortgage and the note, the court stated: “[a]lthough the statute refers to the amount of the ‘mortgage’ rather than the underlying note, the statute does not differentiate between the mortgage and the note. Instead, the statute refers to ‘satisfying the mortgage,’ which indicates the payment must first go toward carrying out the terms of the mortgage and meeting the financial obligation underlying the mortgage,” Opinion, p. 4. The court referenced Powers v. Golden Lumber Co., 43 Mich. 468, 471 (1880), which was also cited by Trademark.

Trademark mentioned Powers for the proposition that the foreclosure extinguishes the mortgage, but only extinguishes the note “to the extent of the proceeds of the mortgage sale.” The court, on the other hand, found that Powers actually supports its own opinion: “While the Powers Court acknowledged a distinction between a mortgage and the underlying note, the Powers decision supports respondent’s position because the Court acknowledged that the foreclosure sale only satisfied the debt to the extent of the sale proceeds. Thus, in this case, the foreclosure sale only satisfied the debt to the extent of the sale proceeds, which were less than the amount due on the mortgage note. Accordingly, Powers supports respondent’s contention that there was a deficiency, rather than a surplus.” Opinion, p. 4.

Finally, the Court of Appeals adopted the respondent’s position that Trademark’s argument would render an “absurd” result. Barrow v. Detroit Election Comm., 301 Mich. App. 404 (2013), as cited by the Court of Appeals, provides ‘“[u]nder the absurd-results rule, ‘a statute should be construed to avoid absurd results that are manifestly inconsistent with legislative intent ….’” Opinion, p. 4. The appellate court inferred that it would be absurd to allow a surplus resulting from a foreclosure sale when money was still owed on the mortgage that was the subject of the foreclosure.

Conclusion
The court’s opinion in Trademark stands for the position that purchase funds in a foreclosure sale must be used first to satisfy the foreclosed mortgage, regardless of the mortgagee’s bid. While Macomb County did not view funds above the mortgagee’s credit bit to be surplus, other counties do. At present, counties have differing procedures for addressing funds above the mortgagee bid. While the opinion is not binding, it is indicative of how the Michigan Court of Appeals would address future matters and will influence the decisions of bidders as well as post-foreclosure county policies.

Editor’s Note: While the appellate court’s decision discussed in this article was pending, an article was published on this topic in the May 2016 USFN e-Update. Click here to access the previous article.

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Illinois: City of Chicago Passes Amendment to its Vacant Building Ordinance

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 15, 2016

November 29, 2016

by Michael Anselmo
Anselmo Lindberg Oliver LLC – USFN Member (Illinois)

In July the City of Chicago passed a few minor — but noteworthy — changes to its vacant building ordinance (13-12-126). The changes, which were published on September 13, 2016, are effective 90 days later (December 12, 2016). They concern the types of vacant buildings that a mortgagee must register as vacant with the City, the deadlines for filing, and the registration fee.

The ordinance previously required that a mortgagee file a registration statement with the department of buildings for all residential buildings within the later of: 30 days after the building is vacant or 60 days after a borrower default.

The ordinance is no longer limited to residential buildings. The City Council has now expanded the requirements to all vacant buildings. Further, the timeline has been changed to 30 days after the building is vacant or 10 days after a borrower defaults.

Formerly, the mortgagee was required to pay a $500 registration fee. Now that fee is conditioned upon which timeline the registration is filed within. If the mortgagee filed within the 30-day timeline outlined above, the fee is $700. If the mortgagee files within the 10 days of default deadline, the fee is cut to $400. Further, the validity of the registration has been extended from six to twelve months from the date of registration. Unfortunately, whereas renewal was previously at no charge to the mortgagee, the ordinance now requires that a renewal fee of $700 be paid upon expiration.

Outside of those few, yet significant, changes, the ordinance remains intact. The mortgagee is still required to implement routine maintenance on these properties (such as boarding and securing entrances, cutting grass, shoveling snow, winterizing the building, posting signs, and responding to complaints relating to the building). The fine for failing to do so remains between $500 and $1,000 for each offense.

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Filing Fee of a Motion for Relief from Stay Increases on December 1, 2016

Posted By USFN, Tuesday, November 29, 2016
Updated: Wednesday, November 16, 2016

November 29, 2016

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

The Judicial Conference approved inflationary adjustments to certain fees on the appellate, district, and bankruptcy court miscellaneous fee schedules, which are effective in December 2016.

The filing fee increases from $176 to $181 (effective 12/1/16) for these bankruptcy motions:

• To terminate, annul, modify or condition the automatic stay;
• To compel abandonment of property of the estate pursuant to Rule 6007(b) of the Federal Rules of Bankruptcy Procedure;
• To withdraw the reference of a case or proceeding under 28 U.S.C. § 157(d); or
• To sell property of the estate free and clear of liens under 11 U.S.C. § 363(f).

In most jurisdictions, this fee is not required in the following situations:

• For a motion for relief from the co-debtor stay; or
• For a stipulation for court approval of an agreement for relief from a stay.

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Foreclosure Trustees are Not Debt Collectors despite the CFPB’s Legal Opinion

Posted By USFN, Tuesday, November 29, 2016
Updated: Thursday, November 17, 2016

November 29, 2016

by Wendy Walter
McCarthy Holthus, LLP – USFN Member (Washington)

On October 19, 2016 the Ninth Circuit Court of Appeals published its opinion in Ho v. ReconTrust Company, N.A. The decision affirmed the dismissal of a Fair Debt Collection Practices Act (FDCPA) claim brought against ReconTrust, a nonjudicial foreclosure trustee. In doing so, the opinion clarified that a trustee of a California deed of trust is not a “debt collector.” The holding affirmed Hulse v. Ocwen Federal Bank, a 2002 case decided by the District Court of Oregon (195 F. Supp. 2d 1188). In other circuits (including the Third, Fourth, Fifth, and Sixth) a nonjudicial foreclosure trustee is a debt collector.

In coming to its conclusion, the majority in Ho analyzed the notices in the nonjudicial process and found that the act of issuing such notices doesn’t constitute debt collection as defined by the FDCPA. The opinion analogizes the nonjudicial trustee to the tow truck driver in that the repossession of the car isn’t the act of collecting on the unpaid parking ticket debt, even though the threat of such action can motivate a debtor to pay on a debt.

The majority makes some valuable points related to the interplay of state foreclosure law and federal debt collection law, discussing the “friction” that exists in requiring trustees to comply with both. The FDCPA contains broadly interpreted concepts like “unfair,” “misleading,” as well as “deceptive,” and — to the average person — state foreclosure notice requirements might appear to be unfair, misleading, or deceptive. State legislatures aren’t often doing consumer testing before enacting or modifying statutory foreclosure notices, making it quite possible that the trustee, while trying to comply with state law, might run afoul of the FDCPA in this context. The majority opinion states that the FDCPA wasn’t intended to displace state law, and the U.S. Supreme Court’s recent opinion in Sheriff v. Gillie, 578 U.S. __ (2016), is cited as authority on this point.

In Gillie, the plaintiffs claimed that contracted debt collectors using state letterhead was confusing and deceiving. The Supreme Court unanimously disagreed — finding that a debtor’s impression that a letter from the contractor might be confusing, and cause a consumer to think that the action was being taken by the attorney general, is unconvincing. By reading Justice Ginsburg’s short and pithy opinion, one could conclude that the Supreme Court is weary of FDCPA litigation.

CFPB
With all of the efforts of the Consumer Finance Protection Bureau (CFPB or Bureau) on regulation of mortgage servicing and the FDCPA, foreclosure law is being stepped on a bit. For example, the CFPB in its servicing rules wants to dictate when a foreclosure must stop or proceed based on certain loss mitigation activity under RESPA. In many cases, state courts are refusing to allow these federal protections to affect the state judicial foreclosure cases. The Ninth Circuit’s take on the presumption against preemption when it comes to state foreclosure laws is very timely and sets the stage for continued friction in the upcoming months as we learn more about the CFPB’s FDCPA rulemaking.

The CFPB filed an amicus brief in support of the plaintiffs in Ho v. ReconTrust and claimed that the FDCPA’s consumer protection purposes would be significantly undermined if trustees were exempt. The Bureau concludes that consumers would be subject to much of the conduct that Congress sought to prohibit under the FDCPA if trustees were exempt. By making this assertion, the CFPB ignores the many states that have consumer protection laws that were designed to cover the state foreclosure process. Ho sends a signal to the industry that the courts might not always agree with how the CFPB views debt collection.

Case Status
The case is ongoing, and the appellant is seeking a petition for panel rehearing before the Ninth Circuit. It wouldn’t be surprising to see this issue before the U.S. Supreme Court in the future.

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Florida Supreme Court Rules on Statute of Limitations: Bartram v. U.S. Bank

Posted By USFN, Tuesday, November 29, 2016
Updated: Friday, November 18, 2016

November 29, 2016

by Jane Bond and Robyn Katz
McCalla Raymer Pierce, LLC – USFN Member (Florida, Georgia, Illinois)

The Florida Supreme Court issued its much anticipated opinion in Bartram v. U.S. Bank, N.A on November 3, 2016, providing long awaited guidance as to the statute of limitations on successive mortgage foreclosure actions, post-dismissal. The Court answered a very narrow certified question, which limited the scope of their opinion.

Essentially affirming the decision of the Fifth District Court of Appeal, the Florida Supreme Court held that a lender is not barred from filing a subsequent foreclosure action based on a default after a first foreclosure action is involuntarily dismissed, provided the subsequent default occurred within five years of the new foreclosure action. This was a victory for the mortgage servicing industry and will result in the movement of foreclosure cases having otherwise been stalled while awaiting the Court’s ruling.

What can be determined from the Florida Supreme Court’s opinion?

(1) A dismissed foreclosure case does not prevent suit on a separate and subsequent default.
The Bartram panel affirms the consistent findings of the Florida District Courts of Appeals that dismissal of a foreclosure case does not bar the refiling of a foreclosure on the same mortgage based upon a different date of default. The Florida Supreme Court found that when foreclosure actions are dismissed, lenders and borrowers are returned to their pre-foreclosure complaint status with the same continuing obligations. One exception: if the default is within five years and the prior dismissal was without prejudice, a suit may be brought on the same default date.

(2) The type of prior dismissal, with or without prejudice, is immaterial for re-filing.
Bartram follows the prevailing opinion that whether a previous foreclosure was dismissed with or without prejudice, it does not affect the lender’s rights to a new foreclosure. This is because, as Bartram points out, the new foreclosure is a new cause of action, completely independent of the previous suit, as long as it is based on a subsequent default date. However, the Court limited its holding to cases that were involuntarily dismissed and where the subject mortgage contains language granting the borrower the right to reinstate post-acceleration. The Court does make the distinction between involuntary dismissals, with and without prejudice.

(3) Deceleration of the debt is not necessary.
In a handful of previous Florida District Court opinions, there was discussion that the bank should be required to perform an overt act of deceleration in order to allow acceleration of a new default after dismissal. The Bartram panel held that, “the dismissal itself — for any reason — ‘decelerates’ the mortgage and restores the parties to their positions prior to the acceleration.” Therefore, it is not necessary to provide a notice of deceleration.

(4) Where there is a new default (post-dismissal), the default date must be within five years of the new foreclosure.
The opinion states that, “the mortgagee, also referred to as the lender, was not precluded by the statute of limitations from filing a subsequent foreclosure action based on payment defaults occurring subsequent to the dismissal of the first foreclosure action, as long as the alleged subsequent default occurred within five years of the subsequent foreclosure action [emphasis added].”

(5) What questions still remain about the statute of limitations as to mortgage foreclosures in Florida following this opinion?
The opinion only answers the question raised and leaves many questions unanswered. Foreclosures that are voluntarily dismissed by the mortgagee may not be covered by this holding. However, the Florida Supreme Court recently accepted jurisdiction of a Second District case wherein the prior foreclosure was voluntarily dismissed, Bollettieri Resort Villas Condominium Association, Inc. v. Bank of New York Mellon. This case will hopefully provide some guidance on this remaining issue. Undoubtedly, there will be several new arguments and continued litigation regarding the proper application of the Florida Supreme Court’s decision in Bartram.

(6) How should mortgage servicers proceed in cases where there is a potential statute of limitations issue?
Servicers should solicit opinion from their legal counsel as to the applicability of the Bartram ruling to the facts at issue. Counsel will review: whether the prior foreclosure was involuntarily or voluntarily dismissed, with or without prejudice, the previous default date that was used, and the filing date of the prior action. Additionally, the mortgage will be reviewed to determine whether there is a right to reinstate.


Default dates should generally be advanced so that the default date is within five years of the new foreclosure action. As always, each case will need to be carefully and specifically reviewed before re-filing.

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Oregon: Borrower Cannot Bring a Post-Sale Challenge that the Trustee’s Notice of Sale Did Not Correctly Identify the Beneficiary

Posted By USFN, Tuesday, November 29, 2016
Updated: Friday, November 18, 2016

November 29, 2016

by John Thomas
RCO Legal, P.S. – USFN Member (Oregon, Washington)

The Oregon Court of Appeals recently held that a borrower cannot challenge a completed nonjudicial foreclosure based on an allegation that the trustee’s foreclosure notice did not correctly identify the beneficiary. DiGregorio v. Bayview Loan Servicing, LLC, 281 Or. App. 484 (Oct. 12, 2016).

Background
The borrower defaulted on her mortgage (trust deed) in 2010. There were two assignments of the mortgage recorded. First, from MERS to the original lender First Horizon; and, second, from First Horizon to Bayview Loan Servicing LLC (the holder and servicer of the promissory note). Bayview appointed a successor trustee, Quality Loan Service Corporation (QLS), who conducted a nonjudicial foreclosure at Bayview’s direction. The borrower received QLS’s notice of sale, which identified the beneficiary as it was described in the mortgage; i.e., MERS as nominee for First Horizon.

The property reverted to Bayview at the trustee’s sale in 2012. Following the sale, in 2013, Bayview filed an eviction action against the borrower. The borrower separately filed an action for declaratory relief against Bayview claiming that the foreclosure notice was invalid because it did not reflect the current beneficiary. Both actions were consolidated.

ORS 86.771 (1) requires that a trustee’s notice of sale list the beneficiary “in the trust deed.” The trial court did not reach the issue of whether the trustee’s notice of sale identified the correct beneficiary but, instead, granted summary judgment in Bayview’s favor on the basis that the borrower received the foreclosure notice and did not bring suit until after the sale. ORS 86.797 (1) specifies that a borrower’s interest is terminated by a trustee’s sale provided that the borrower had notice, among other requirements.

Appellate Review
The Oregon Court of Appeals affirmed the trial court’s decision, opining that a borrower cannot undermine a completed trustee’s sale based on a single asserted defect in the content of the trustee’s notice of sale under ORS 86.771, which the borrower received (and did not challenge) prior to the sale. The court of appeals harmonized its ruling with its prior holding in Wolf v. GMAC Mortgage, LLC, 276 Or. App. 541, 546, 370 P.3d 1254 (Feb. 18, 2016) (declining to resolve whether ORS 86.797 “requires strict compliance with every provision of the OTDA before a person’s property interests will be terminated by a trustee’s sale”).


As of this writing, the borrower could still petition the Oregon Supreme Court for review, so the recent outcome on appeal may change.

Conclusion
DiGregorio further defines the contours of emerging foreclosure law in Oregon following the Wolf decision, which had permitted a post-sale challenge based on the borrower’s assertion that the foreclosure trustee was not validly appointed and did not meet the statutory definition of a trustee. DiGregorio is positive for the industry and should promote greater certainty and finality of nonjudicial foreclosures.

Editor’s Note: The author’s firm represented the respondent Bayview Loan Servicing, LLC in the summarized case.

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TN: Appellate Review Relating to Purchase at Foreclosure Sale while Short Sale Discussions are Ongoing

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, November 21, 2016

November 29, 2016

by Kate Lachowsky
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Mississippi, Tennessee)

A recent opinion of the Tennessee Court of Appeals holds that once a mortgagor defaults, absent an agreement between the mortgagor and mortgagee to delay foreclosure to permit a short sale, the mortgagee has the right to proceed with foreclosure. Further, knowledge of ongoing short sale discussions between the mortgagor and mortgagee does not prevent a third-party purchaser from bidding and purchasing real property at a foreclosure sale.

Background
In 2013 Jorge and Madelyn Alfonso (plaintiffs) owned real property in Sevier County, Tennessee. They experienced difficulty in making their mortgage payments owed to CitiMortgage, Inc. (Citi), resulting in default. In hopes of avoiding foreclosure on their property, the plaintiffs worked with Citi to pursue a short sale. According to their complaint, the plaintiffs had buyers for the short sale ready to close on the sale of their property and Citi “slow-dragged talks on a prospective short sale.” Alfonso v. Bailey, 2016 Tenn. App. LEXIS 569 (Tenn. Ct. App. Aug. 9, 2016). The plaintiffs alleged that Citi made excuses as to why the short sale could not be completed, including the need for an “internal document” that was allegedly never generated or acknowledged by Citi.

During these short sale discussions, the foreclosure action progressed and one of the defendants was informed by the plaintiffs’ agent that a short sale was pending and that it was expected that the foreclosure sale would be postponed. On October 1, 2013, the plaintiffs’ property was sold to three investors (defendants) who attended the foreclosure sale and were the highest bidders.

In February 2014 the plaintiffs sued Citi and the investor-defendants in the Chancery Court for Sevier County (trial court) seeking declaratory relief and damages arising from the following ten claims: (1) violation of the Tennessee Consumer Protection Act; (2) fraudulent misrepresentation; (3) fraud; (4) unjust enrichment; (5) civil conspiracy; (6) inducement of breach of contract; (7) breach of contract; (8) tortious interference with contract rights; (9) intentional interference with contract rights; and (10) fraudulent concealment.

Citi filed a motion to dismiss in April 2014, which the trial court granted. In its June 2014 order, the trial court found that the plaintiffs failed to state any of their ten claims and dismissed all of them with prejudice. Further, the trial court found that the plaintiffs did not identify any wrongful activity on the part of Citi and that even though the plaintiffs were engaged in short sale discussions with Citi, the bank had the right to pursue foreclosure under the terms of the security instrument executed by the plaintiffs. Ultimately, the trial court held that “Citi had no legal duty to complete a short sale, or to even discuss the same.”

The plaintiffs filed a motion to alter or amend judgment as to the trial court’s June 2014 order, which was denied by an order entered on September 18, 2014. The plaintiffs did not appeal this final order and Citi was not a party on appeal; rather, the plaintiffs pursued the case against the third-party purchasers. The defendants filed a motion to dismiss and the trial court granted their motion, holding that the plaintiffs’ complaint “failed to state a claim against the Defendants upon which relief could be granted.” The plaintiffs timely appealed this order to the Court of Appeals of Tennessee at Knoxville and raised the following issue on appeal: whether the trial court erred in granting the defendants’ motion to dismiss.

Appellate Review
The Court of Appeals reviewed the trial court’s legal conclusions regarding the adequacy of the complaint de novo without a presumption of correctness (citing Lind v. Beaman Dodge, Inc., 356 S.W.3d 889, 895 (Tenn. 2011); Highwoods Props., Inc. v. City of Memphis, 297 S.W.3d 695, 700 (Tenn. 2009)).

On appeal, the plaintiffs asserted that their complaint alleged facts sufficient to withstand a motion to dismiss for failure to state a claim upon which relief may be granted. In the Court of Appeals’ opinion, the court explained that in the plaintiffs’ brief on appeal, “Plaintiffs summarize their argument as follows: ‘Plaintiffs, facing foreclosure, had entered into a contract for a short sale … [Defendants] … were made aware that Plaintiffs believed the foreclosure was postponed, and proceeded to purchase the property at foreclosure, inducing the contract for short sale to be breached resulting in a higher deficiency, damages, incurred by Plaintiffs.’” As the appellate court noted, “Merely reciting claims or the elements of claims does not suffice in order to withstand a motion to dismiss. A party must allege facts in support of the claims that if taken as true would sustain those claims. Conclusory recitations of the elements of claims are inadequate.” In response, the defendants correctly contended that they had no duty to refrain from purchasing the property at the foreclosure auction.

The appellate court pointed to a June 2014 order in which the trial court explicitly held: “‘Absent such an agreement or contractual obligation, Citi had no legal duty to complete a short sale, or to even discuss the same.’ That order was made final pursuant to Rule 54.02 of the Tennessee Rules of Civil Procedure and has not been appealed. It therefore represents the law of the case ….” Because the plaintiffs did not have a written contract with Citi concerning a short sale, Citi had the right to proceed with foreclosure under the terms of the security instrument and the defendants were free to bid and purchase the subject property. Accordingly, the Court of Appeals affirmed the judgment of the trial court.

Conclusion
From a practical standpoint, requiring mortgagees to provide time for short sales may be overly burdensome, costly, and can result in lengthy delays to foreclose. Often times, mortgagees are amenable in working with mortgagors when it comes to short sales; however, mortgagees frequently require proof of funds and a copy of a signed contract before agreeing to the postponement of a foreclosure sale.

The Alfonso case is not unusual because most standard security instruments are silent as to short sales, which renders the plaintiffs’ claims of breach of contract, fraud, and intentional interference with contract rights to be far-reaching. Similarly, knowledge of short sale discussions or other types of loss mitigation negotiations between the mortgagor and mortgagee should not bar interested parties from bidding and purchasing real property. The Court of Appeals pointed out that the plaintiffs cited no law suggesting otherwise.

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Illinois: “Keep Chicago Renting Ordinance” Ruled Invalid by Cook County Circuit Judge

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 22, 2016

November 29, 2016

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

A Cook County Circuit Court recently ruled the “Keep Chicago Renting Ordinance” (frequently referred to as KCRO) to be invalid. The court found the ordinance to violate Illinois’ state-wide legislative ban on local rent control laws.

In 2013 the Chicago City Council enacted the KCRO to enhance the rights of tenants living in foreclosed rental properties. The ordinance requires those acquiring title to residential rental property through deed-in-lieu of foreclosure, consent foreclosure, or foreclosure sale to: pay a one-time relocation assistance fee of $10,600 to a qualified tenant unless the owner offers such tenant the option to renew or extend the tenant’s current rental agreement. [Chicago Municipal Code § 5-15-050(a)(1).]

Critically, the ordinance further requires that if the owner chooses to renew or extend an existing lease rather than pay the $10,600 relocation fee, the annual rental payment under the resulting lease may not exceed 102 percent of the existing rental payment, nor exceed 102 percent of the previous year’s rent in any subsequent annual renewal. Thus, the ordinance limits rental payment increases to 2 percent per year, regardless of market rents. This rental increase limitation continues in perpetuity or until the property is sold to a third party, post-foreclosure. [Chicago Municipal Code § 5-15-050(a)(1).]

When an owner fails to meet its obligations under the ordinance to timely offer either a relocation fee payment of $10,600 or a renewal or extension of the lease for no more than 102 percent of the previous rent, the owner is subject to a fine and is also liable to the tenant for $21,200 (double the $10,600 fee) plus attorney fees and court costs.

On November 8, 2016, Cook County Circuit Judge Mitchell held in a written ruling that the KCRO violates a state-wide legislative ban on rent control laws and is therefore invalid. In its opinion, the court noted that the KCRO limits the amount of rent that can be charged to a tenant covered by its terms, regardless of market rental rates. This, he observed, ran afoul of the Illinois Rent Control Preemption Act of 1997.

In 1997 the Illinois Legislature enacted the Illinois Rent Control Preemption Act as a state-wide ban on rent control laws. The statute withdrew from home-rule local governments (such as the City of Chicago) any authority to regulate or control rents. Its language specifically prohibits any “ordinance or resolution that would have the effect of controlling the amount of rent charged for leasing private residential or commercial property.” [50 ILCS 825/5.]


The court opined that the Illinois Rent Control Preemption Act prohibited any rent control, and the limitation of rental increases to 102 percent under the KCRO was clearly a control on rental rates. Further, the circuit court held that the rent control provision found within the KCRO was not severable from the rest of the ordinance since the ordinance, absent the rental limitation, could not serve its intended purpose of forcing a choice between offering cheap rent or paying the $10,600 relocation fee.

Currently, Judge Mitchell’s ruling holding the KCRO to be invalid is part of a circuit court order; it has no precedential authority. At this time, it would be inadvisable to ignore the KCRO or adopt a lax approach to compliance as the ruling will most likely be appealed. However, this ruling will provide leverage in resolving questionable claims that are brought in an effort to exploit the KCRO to extract unwarranted concessions.

Ultimately, there is reason to anticipate a successful outcome on appeal, as Judge Mitchell’s ruling is based upon a strongly-worded, clear statutory mandate.

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NACTT Annual Conference 2016

Posted By USFN, Monday, November 7, 2016
Updated: Thursday, October 20, 2016

November 7, 2016

by Joel W. Giddens
Wilson & Associates, P.L.L.C.
USFN Member (Arkansas, Mississippi, Tennessee)

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in Philadelphia this past July. Mortgage issues continued to be a hot topic at the conference, with several educational panels addressing them. There was also much useful dialogue among mortgage industry representatives, mortgage servicing attorneys, and Chapter 13 trustees. Highlighted here are a few events of interest to the mortgage servicing industry.

NACTT Presentations and Educational Panels
Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. In a departure from previous years, Director White’s remarks seemed somewhat softened toward the mortgage servicing industry. He was gratified by servicer responses to UST initiatives toward improved servicing in bankruptcy over the prior year, with self-reporting a welcome outgrowth of prior enforcement actions.

Instead of centering on mortgage servicers, his remarks addressed other issues that the UST is focusing on — starting with security for trustees’ meetings of creditors (perhaps due to recent terrorist violence). Security for the meetings is a challenging task because of the numerous sites (more than 400) in which the meetings are held. The UST’s budget has earmarked an additional $2.2 million to enhance security, including providing a list of “secure sites” in federal locations, authorizing the use of U.S. Marshalls for security in “emergency situations” (instead of the usual private security), and establishing a “call threat center” phone number to allow for identification of any threat to security.

In addition to the security concern, another current focus of the UST is underperforming consumer bankruptcy practitioners, in particular (but not limited to) large consumer debtor law firms operating across judicial district lines. Director White said that the UST would be targeting attorneys for substandard performance, unauthorized practice of law, fee sharing in violation of state professional conduct rules, and any other unethical attorney practices. He asked the trustees to help the UST in policing such conduct by informing his office of any questionable attorney practices observed in their day-to-day practice. Finally, the UST will be increasing scrutiny on the practices of unsecured creditors, including the robo-signing of proofs of claim (POCs) by debt buyers and the practice of filing POCs for unsecured debt that is unenforceable under state law due to the statute of limitations (“stale” claims).

Educational sessions included: the annual Chapter 13 case update; the aftermath of the National Mortgage Servicing Settlement, plus the winding down of the Home Affordable Mortgage Program; the treatment of long-term mortgage claims and discharge issues; as well as an overview of the Consumer Financial Protection Bureau and how it interfaces with bankruptcy.

Chapter 13 Case Update — The panel highlighted reported and unreported decisions in Chapter 13 cases handed down since the prior year’s conference. Included were cases of interest to the mortgage servicing industry. Among them, the continuing debate over whether a debtor may surrender a property in her bankruptcy plan and, at the same time, vest the property in the mortgagee upon confirmation of the plan. While it appears that the majority of courts have decided that this is impermissible, some courts have allowed this plan treatment. The court in HSBC Bank, N.A. v. Zair, 2016 WL 1448647 (E.D.N.Y. Apr. 12, 2016), sided with the majority view and held that such treatment was not permitted, while the court in In re Brown, 14-12357, slip op. (Bankr. D. Mass. Mar. 4, 2016), held that a plan can satisfy the requirements for confirmation in surrendering the property coupled with vesting the property in the mortgagee. This continued debate warrants monitoring and proactive responses if mortgage servicers wish to avoid unwanted consequences of creative Chapter 13 plans.

A reminder to servicers on the importance of observing bankruptcy deadlines came from In re Wells, 536 B.R. 264 (Bankr. E.D. Ark. Aug. 2015). In Wells, the mortgagee had completed a foreclosure sale on the property prior to the filing of the debtor’s Chapter 13 petition. Notwithstanding the completion of the sale, the debtor scheduled payments to the mortgagee under the plan, which was confirmed without the mortgagee’s objection. The court held that the debtor’s possession of the property at the time he filed his petition, coupled with the confirmed plan that paid rent, gave rise to a tenancy at sufferance that was property of the estate and, as a result, the mortgagee was bound to accept payments for the duration of the plan.

Another notable case was HSBC Bank USA, NA v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir. Oct. 1, 2015), in which the Ninth Circuit Court of Appeals held that a Chapter 13 petition filed after discharge but before the closing of the prior Chapter 7 case was not per se prohibited by the Bankruptcy Code. The Blendheim court also held that a mortgage servicer who actually files a claim, and has that claim disallowed, may have its lien avoided under 11 U.S.C. § 506(d). The servicer in Blendheim filed a timely proof of claim in the Chapter 13 case reflecting its first-lien position on the debtors’ residence. The debtors objected to the claim on the basis that the servicer had not produced a copy of the promissory note and that a prior copy of the note appeared to bear a forged signature. The servicer did not respond and an order disallowing the claim was entered. In a subsequent adversary proceeding, the bankruptcy court held that the lien was void and cancelled upon completion of the Chapter 13 plan.

The Ninth Circuit, on appeal, held that under a “plain reading” of § 506(d), the bankruptcy court properly voided the lien because the secured claim was disallowed. Under general principles of bankruptcy, a secured creditor may choose to not participate in a bankruptcy case and its lien will ride through the bankruptcy unaffected. Blendheim illustrates that mortgage servicers should carefully consider whether filing a POC in a Chapter 13 case may be the wrong strategy in the cases in which there may be issues with proving the claim. These were but a few of the noteworthy cases covered by the distinguished panel.

“Life after the National Mortgage Servicing Settlement” — Discussed by the panel was the state of mortgage servicing in bankruptcy since the sunset of the National Mortgage Servicing Settlement (NMSS) and during this period of the wind-down of the Home Affordable Mortgage Program (HAMP) and Home Affordable Refinance Program (HARP).

Regarding servicing standards post-NMSS, the panel pointed out that while the five servicers subject to the NMSS are no longer bound by the consent judgments, other servicers have entered consent judgments with the Department of Justice and the states’ attorneys general that are still in effect. The NMSS had a substantial spillover impact on non-covered servicers who voluntarily followed the NMSS standards and continue to do so.

The substantial investment in compliance by servicers and the improvement of the quality of servicing loans in default have led most servicers to leave most, if not all, levels of review in place. To a large degree, multiple levels of quality control review (regarding proofs of claim and motions for relief from stay) continue because of the benefits to servicers in making sure that they get their claims right. While time will tell how stringently the NMSS standards will carry on, it appears that those standards will continue for the foreseeable future.

As for HAMP and HARP, regulators will continue to urge servicers, investors, and housing finance agencies to maintain affordable and sustainable loss mitigating programs, including loan modification programs. On August 25, 2016 the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to extend HARP through September 30, 2017 (in light of a new refinance offering that will not be available to borrowers until October 2017). On the same day, the Federal Housing Authority announced new procedures to streamline the process that servicers use to evaluate borrowers for FHA-HAMP.

Meeting of Trustees, Servicers, and Attorneys
In a continuation of the “Gateways to Communication” Chapter 13 Roundtable (started in Little Rock, Arkansas in 2004), trustees, mortgage servicer representatives, and mortgage servicer attorneys met to share ideas to improve mortgage servicing in Chapter 13 cases. During this meeting the trustees were asked to convey their top issues related to current mortgage servicing practices in bankruptcy. While the trustees generally said that those practices have improved, their biggest concern relates to being able to effectively communicate with servicers about loan-level issues. In particular, incorrect servicer contact information on mortgage POCs hampers trustee staff in trying to address mortgage issues with servicers. An effort is being made by this group to maintain a list of servicer contact information through the National Data Center (NDC), an adjunct to the NACTT, so that trustees know who to contact. Servicers who want to be added to the list may contact the NDC (www.ndc.org) or this author (jgiddens@wilson-assoc.com).

In addition to communication matters, trustees said that their main concerns were: transfers of loan servicing without providing new servicer information; untimely or incomplete POCs, or the failure to file one; as well as the withdrawal, or improper amendment, of POCs after loan modification agreements. The trustees added that the next area of bankruptcy litigation may be over incorrect notices of payment change (NOPC). Specifically, the trustees are targeting those first post-petition NOPCs that include an escrow shortage as a component of the payment because these are viewed as a practice of “double-dipping.” Servicers should be mindful that trustees and the UST are scrutinizing NOPCs closely, and they need to make sure that the NOPCs are being completed accurately and with sufficient oversight.

Conclusion
Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers — a place to come together to discuss the issues impacting our world.

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Amendment to FRBP Rule 3002.1: Notice Relating to Claims Secured by Security Interest in the Debtor’s Principal Residence

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by David McAllister
Aldridge Pite, LLP
USFN Member (California, Georgia)

On December 1, 2016, amended Federal Rules of Bankruptcy Procedure (FRBP) Rule 3002.1 will become effective. Presently, FRBP Rule 3002.1 applies in Chapter 13 bankruptcy cases to claims that are secured by a debtor’s principal residence and which are provided for under the debtor’s plan in a manner where the pre-petition arrears are being cured and the post-petition payments are maintained on a loan that matures after plan completion. Creditors whose claims fall within the scope of FRBP Rule 3002.1 are required to continue to timely file and serve payment change notices (PCNs) and notices of post-petition mortgage fees, expenses and charges (PPFNs), and to also timely respond to Notices of Final Cure (NOFCs) unless the court specifically waives these requirements. As discussed more fully below, the amendment to FRBP Rule 3002.1 will both broaden the scope of the rule regarding secured claims in a Chapter 13 plan and also limit the applicability of the rule following entry of an order terminating or annulling the automatic stay.

First: The requirement that the debtor’s plan specifies a cure of arrears has been eliminated. Instead, FRBP Rule 3002.1 simply requires that the Chapter 13 plan provide for either the trustee or the debtor to make the contractual installment payments. As a result, creditors will be required to comply with FRBP Rule 3002.1 even if there are no pre-petition arrears being cured under the plan, and regardless of whether the post-petition payments on their claims are being made by the Chapter 13 trustee or the debtor.

Second: Amended FRBP Rule 3002.1 provides that “[u]nless the court orders otherwise, the notice requirements of this rule cease to apply when an order terminating or annulling the automatic stay becomes effective with respect to the residence that secures the claim.” Therefore, once a creditor obtains an entered order for relief from and/or annulment of the automatic stay that is effective, the creditor will no longer be required to file and serve any PCNs and/or PPFNs, and the Chapter 13 trustee and/or debtor should not be filing and serving any NOFCs that would require the creditor’s response.

However, the effective date of the entered order for relief from and/or annulment of the automatic stay may be stayed and creditors must comply with the supplemental notice requirements of FRBP Rule 3002.1: (1) unless and until the 14-day stay of FRBP Rule 4001(a)(3) is either waived or terminates; (2) if the order specifically provides that its effectiveness is stayed until a future date; and/or (3) if an interested party obtains a stay on the effectiveness of the order (e.g., a stay pending an appeal of the order). Finally, a bankruptcy court may still expressly require creditors to comply with the notice requirements of FRBP Rule 3002.1 when it terminates or annuls the automatic stay.

In conclusion, creditors should carefully review the particular provisions of a debtor’s Chapter 13 plan and any orders terminating or annulling the automatic stay regarding their claims secured by a debtor’s principal residence in a Chapter 13 bankruptcy proceeding — and the bankruptcy court docket — to determine whether the supplemental notice requirements of FRBP Rule 3002.1 are no longer applicable prior to making any adjustments to their account records regarding the same.

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CFPB’S New Final Rules: Periodic Statements during Bankruptcy

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Alan S. Wolf
The Wolf Firm
USFN Member (California)

On December 15, 2014, the Consumer Financial Protection Bureau (CFPB or Bureau) published its proposed rules amending and clarifying the 2013 Mortgage Servicing Rules and allowed the industry until March 16, 2015 to comment (2014 Proposed Rules). The CFPB received an onslaught of comments from the mortgage industry that were highly critical of the proposed rules. Then, on April 26, 2016, the CFPB released the results of its consumer testing of periodic statement forms which, it claimed, could safely be used during a pending bankruptcy. The Bureau reopened the comment period until May 26, 2016 to seek comment specifically on the report summarizing that consumer testing; the industry provided numerous comments as to why the sample forms were problematic.

On August 4, 2016, well after the expected release date of early summer, the final CFPB mortgage servicing rules were released (2016 Mortgage Servicing Rules or 2016 Rules). While the mortgage servicing industry dodged some bullets contained in the 2014 Proposed Rules and the April 2016 proposals, the 901 pages of 2016 Mortgage Servicing Rules are still dire.

This article covers the most onerous of the new rules: when and what types of periodic statements must be sent during and after bankruptcy.

Most of the 2016 Rules will be effective 12 months after publication of the rules in the Federal Register. However, because they are so complex and require systemic changes within the servicing industry, the rules pertaining to successors in interest and periodic statements in bankruptcy will not be effective until 18 months after that same publication date. At this writing, the Federal Register publication is to occur on October 19. Accordingly, the rules pertaining to successors in interest and periodic statements would be effective April 19, 2018. There is much that the mortgage servicing industry must do to prepare.

Background
The history of the Bureau’s treatment of periodic statements in bankruptcy is an important factor in understanding the requirements of the 2016 Mortgage Servicing Rules. It all starts with the Dodd-Frank Act, which in 2010 established Truth in Lending Act (TILA) section 128(f) requiring periodic statements for mortgage loans. Until Dodd-Frank there was no real federal requirement to provide periodic mortgage statements. Then, on January 17, 2013, the CFPB issued the 2013 TILA Servicing Final Rule implementing the periodic statement requirements and exemptions in § 1026.41.

In the preamble to the 2013 TILA Servicing Final Rule, the CFPB acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy but, nevertheless, stated that it did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan, and that servicers could make changes to the periodic statement to ensure compliance. Since most servicers do not send periodic statements during bankruptcy precisely because it is nearly impossible to send statements that comply with the Bankruptcy Code, this proposed rule caused great concern in the mortgage industry and a scramble to develop periodic statement formatting that would be acceptable to the constraints of individual bankruptcy judges.

After an outcry from the mortgage industry (including USFN and other industry leaders, as well as support of the mortgage industry’s position from the National Association of Chapter Thirteen Trustees) the CFPB changed course. In its interim final rule published October 23, 2013, the Bureau added new § 1026.41(e)(5) exempting a servicer from the periodic statement requirements in § 1026.41 for a mortgage loan while the consumer is a debtor in bankruptcy. Hence, under the currently effective CFPB Rules, a periodic statement does not need to be sent to a borrower when the borrower is in bankruptcy (Comment 41(e)(5)-1 to § 1026.41(e)(5)). Moreover, if there are multiple obligors on the mortgage loan, the exemption applies if any of the obligors is in bankruptcy (Comment 41(e)(5)-3).

Finally, there is no obligation to resume providing periodic statements with respect to any portion of the mortgage debt that is discharged in bankruptcy (Comment 41(e)(5)-2.ii). That was the good news and the industry rejoiced, passing over the CFPB’s comments that it was still studying the bankruptcy issues and would likely issue new rules regarding periodic statements during bankruptcy. True to its word, the CFPB issued proposed new rules on December 15, 2014 directly addressing — and limiting the exemption applicable to — periodic statements and bankruptcy. Those proposed rules were, to say the least, not good news. [See the accompanying text box below for the CFPB’s explanation of that portion of the 2014 Proposed Rules.]

 

Exactly what did the 2014 Proposed Rules pertaining to periodic statements in bankruptcy mean? No one quite knew. What was clear is that they were convoluted; the mortgage industry had no ability to make the nuanced decisions demanded by the rules nor the technology to implement the various requirements of the rules; and, even if the rules could somehow be followed, there was no protection from automatic stay or discharge injunction violations. As expected, the mortgage industry was very vocal in pointing out the numerous problems with the 2014 Proposed Rules and shared its comments with the Bureau.

 

 Excerpted from CFPB’s 2014 Proposed Rules
“Specifically, proposed § 1026.41(e)(5)(i) limits the exemption to when two conditions are satisfied. First, the consumer must be a debtor in a bankruptcy case, must have discharged personal liability for the mortgage loan through bankruptcy, or must be a primary obligor on a mortgage loan for which another primary obligor is a debtor in a Chapter 12 or Chapter 13 bankruptcy case. Second, one of the following circumstances must apply: (1) The consumer requests in writing that the servicer cease providing periodic statements or coupon books; (2) the consumer’s confirmed plan of reorganization provides that the consumer will surrender the property securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearages or the maintenance of payments due under the mortgage loan; (3) a court enters an order in the consumer’s bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with respect to the property securing the mortgage loan, or requiring the servicer to cease providing periodic statements or coupon books; or (4) the consumer files with the bankruptcy court a Statement of Intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the property securing the mortgage loan. The proposal also provides that the exemption terminates and a servicer must resume providing periodic statements or coupon books in two general circumstances. First, notwithstanding meeting the above conditions for an exemption, the proposal requires servicers to provide periodic statements or coupon books if the consumer requests them in writing (unless a court has entered an order requiring otherwise). Second, with respect to any portion of the mortgage debt that is not discharged through bankruptcy, a servicer must resume providing periodic statements or coupon books within a reasonably prompt time after the next payment due date that follows the earliest of the following outcomes in either the consumer’s or the joint obligor’s bankruptcy case, as applicable: the case is dismissed, the case is closed, the consumer reaffirms the mortgage loan under 11 U.S.C. 524, or the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or 1328.”

 

CFPB: August 2016
Based upon its review of the comments received, and its study of the intersection of the periodic statement requirements and bankruptcy law, the Bureau once more changed the rules. [See the accompanying text box below for the relevant excerpt of the CFPB’s August 4, 2016 Final Rules release (New Rule).]

 

The New Rule removes some, but not all, of the troubling provisions of the 2014 Proposed Rules. For example, the 2014 version required a borrower-level, as well as a bankruptcy chapter-level, analysis. If one borrower was involved in a bankruptcy proceeding and a second was not, each was independently analyzed as to whether or not a periodic statement should be sent. Further, depending on the chapter, it could be required that each of the borrowers receives a periodic statement, with each statement needing a unique format.

How would a servicer do that? Fortunately, the New Rule employs loan-level and all-bankruptcy-chapters analyses — making it much easier to implement. The 2014 Proposed Rules also mandated certain provisions in a confirmed bankruptcy plan to prove that the borrower did not intend to keep the property before exempting the requirement of sending a periodic statement. The New Rule only insists that a proposed plan contain those provisions.

However, the New Rule also makes things more difficult by limiting the exemption in ways not restrained by the 2014 Proposed Rules. For example, despite the filing of a Statement of Intention to surrender the property (which alone was sufficient to invoke the exemption under the 2014 Proposed Rules) if the borrower makes any payments, the exemption no longer applies and periodic statements must be sent under the New Rule.

 Excerpted from CFPB’s 2016 Final Rules (New Rule)
“Except as provided in paragraph (e)(5)(ii) of this section [the consumer’s reaffirmation of the loan or a consumer’s written request to get periodic statements during bankruptcy], a servicer is exempt from the requirements of this section [sending periodic statements to borrowers involved in a bankruptcy] with regard to a mortgage loan if:
(A) Any consumer on the mortgage loan is a debtor in bankruptcy under title 11 of the United States Code or has discharged personal liability for the mortgage loan pursuant to 11 U.S.C. 727, 1141, 1228, or 1328; and
(B) With regard to any consumer on the mortgage loan: (1) The consumer requests in writing that the servicer cease providing a periodic statement or coupon book; (2) The consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan; (3) A court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or (4) The consumer files with the court overseeing the bankruptcy case a statement of intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the consumer’s bankruptcy case.
* * *
(ii) Reaffirmation or consumer request to receive statement or coupon book. A servicer ceases to qualify for an exemption pursuant to paragraph (e)(5)(i) of this section with respect to a mortgage loan if the consumer reaffirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.”


The best way to make sense of this is by understanding that the CFPB believes that there is no stay violation, and no violation of the discharge injunction, if statements are sent during a bankruptcy, or after a discharge, where either the bankruptcy court or the debtor evidences an intent that the property and loan be kept. The CFPB reasons that since the debtor wants to keep the property and loan, sending properly fashioned informational statements simply aids the debtor and does not violate the stay or discharge injunction. In other words, the Bureau believes that the benefit of sending a properly drafted statement to the debtor outweighs the risk of violating the stay. Of course, it’s not the CFPB at risk here — it’s the loan servicer.

Conversely, if the bankruptcy court or the debtor evidences that the property or loan will not be kept, the CFPB reasons that there is no point in providing information to the debtor and risking a stay or discharge violation. Accordingly, in these limited cases a servicer is exempt from sending a periodic statement during a bankruptcy.

How to determine that the property or loan will not be kept? A bankruptcy court typically evidences its intent that the property or loan will not be kept by the debtor through an order lifting the stay or an order avoiding the lien.

Turning to the debtor, a borrower in bankruptcy normally evidences that he does not intend to keep the property or the loan by any of the following: (1) requesting in writing that the servicer cease providing periodic statements or coupon books; (2) filing a bankruptcy plan (or filing a Chapter 7 Statement of Intention) that provides for the surrender of the property; (3) providing for the avoidance of the lien in the plan; or (4) not providing for the loan in the plan.

Furthermore, any indicia that the borrower does not intend to keep the property or the loan can be overturned by later actions. For example, if the borrower files a notice of intent to surrender the property, but then makes payments, the payments indicate that the debtor intends to keep the property. Consequently, the exemption no longer applies and statements must be sent. Similarly, if the debtor reaffirms a debt subject to discharge, this evidences the debtor’s intent to keep the property; the exemption is not applicable and statements must be sent. And, of course, if the debtor simply requests that statements be sent, this evidences that the debtor intends to keep the property and statements must be sent.

Final Words
It is important to remember that any debtor action can be preempted by the bankruptcy court. In other words, a court order trumps the intent of the debtor. For example, even if a debtor states clearly that he wants periodic statements, a court order that provides that no periodic statements be sent is superior and must be followed.

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Chapter 13 Trustee Pay-All/Conduit Jurisdictions: Some Issues, Challenges, and Pointers

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Craig Rule
and Heather McGivern
Orlans Associates, P.C.
USFN Member (Michigan)

Chapter 13 trustees who permit or require post-petition mortgage payments to be disbursed through their offices constitute a small — but growing — majority and present a number of unique challenges to mortgage servicers. Based on the authors’ analysis of the most recent disbursement numbers set forth on the webpage of the Executive Office for the U.S. Trustee, it is estimated that ninety-three Chapter 13 trustees are conduit trustees, while eighty-four are not. See https://www.justice.gov/ust/file/ch13ar15-aarpt.xlsx/download.

These “conduit” jurisdictions and trustees impact the way a mortgage servicer should handle many of the fundamental actions that secured creditors take to protect their interests during a Chapter 13 case. This article discusses how conduit claims affect decisions to file a proof of claim or a motion for relief from the automatic stay, change how to approach loan modifications, and amplify the adverse consequences of failing to file a transfer of claim.

Readers should note that not all secured claims in conduit jurisdictions must be wholly paid through the Chapter 13 trustee under all circumstances. For example, Local Rule 3070-1 (Bankr. E.D. Mich. 2016) creates a presumption of trustee payment that must be rebutted if a claim is to be paid directly. In practice, this means that a debtor must be contractually current on the petition date to continue to make post-petition payments directly to a mortgage creditor.

No Proof of Claim = No Payment?
Although the Bankruptcy Code and Federal Rules of Bankruptcy Procedure (FRBP) do not presently require secured creditors to file a proof of claim (POC), there are several possible adverse results of failing to do so on conduit claims. See 11 U.S.C. § 501(a) and FRBP Rule 3002(a). Even if there is little or no pre-petition arrearage, the lack of a filed proof of claim can prevent a mortgage servicer from receiving any payments during the course of a Chapter 13 plan. Though the absence of a filed POC on an unmodified mortgage claim may not result in a full (or even partial) discharge of the obligation, the loss of a potential stream of payments for up to five years makes filing a proof of claim highly advisable. See Matteson v. Bank of America, 535 B.R. 156 (6th Cir. B.A.P. 2015).

While a trustee or debtor is permitted to file a POC on behalf of a creditor, it is by no means certain that either party will do so — or, if filed, that the claim will be accurate in terms of the arrears and ongoing post-petition payments. See 11 U.S.C. § 501(c) and FRBP Rule 3004. Furthermore, if the incorrect servicer is identified or the wrong payment address is noted in the debtor- or trustee-filed POC, it could create an administrative quagmire that causes the trustee to object to, or stop payment on, the proof of claim. If an objection is granted, there is a risk that some or all of the expected payments during the pendency of the bankruptcy case could be subject to discharge at plan completion.

No Post-Petition Payments? MFR Considerations
For mortgage servicers, perhaps the most significant difference between conduit and non-conduit claims is the determination of whether a referral should be made to local bankruptcy counsel to bring a motion for relief from the automatic stay (MFR). This divergence begins when the bankruptcy case is filed. If the proposed Chapter 13 plan intends to have the trustee disburse the post-petition payments, the trustee will generally not begin to make those payments until the plan is confirmed unless directed otherwise by a local rule or court order. As a result, mortgage servicers and their attorneys should carefully examine the proposed plan treatment before filing what could be an impractical MFR. Even if a debtor initially intends to pay a mortgage claim directly, a MFR at the pre-confirmation stage can be a costly alternative to filing an objection to plan confirmation since, in many instances, the debtor may amend the plan to convert the claim to a trustee-paid one.

The discrepancies between conduit and non-conduit claims continue at the post-confirmation stage. Due to other claims that may have priority in distribution under the confirmed plan (such as debtor attorneys’ fees and equal monthly payment secured claims), it is often the case that a debtor is fully performing under a plan even though the post-petition mortgage payments are not current. To avoid filing unfeasible MFRs on conduit claims, servicers and their attorneys should always examine the trustee’s payment histories, which are available online and without cost to creditors. There are several different platforms that Chapter 13 trustees around the country use to provide access to their records. The most frequently-used platform is the 13 Network, which can be accessed at www.13network.com.

Loan Modification Pitfalls
While effective and timely communication among a servicer’s bankruptcy department, loss mitigation department, and local counsel is always of the utmost importance, the failure to do so has even more negative implications for all parties to a Chapter 13 case if post-petition payments are made through the trustee’s office. The troubles often begin at the trial loan modification stage because the disbursements from the trustee must be modified to match the monthly trial payments.

Prompt action by a servicer once the trial modification is offered is necessary to ensure that the Chapter 13 trustee will make the correct payments in the right time frame. In some jurisdictions this simply means that the servicer must notify the trustee (either through direct contact or a filed payment change notice) to adjust the post-petition payment amount for a fixed period. In other courts, which put the entire loan modification burden on the debtor, the debtor’s attorney should be promptly notified so that he or she can take the required action to cause the trustee to effectuate the correct trial payments. In still additional jurisdictions, however, servicers may be held to account if they do not ensure that a trial loan modification receives court approval. In this instance, it is crucial that local counsel be alerted of the trial modification in enough time to obtain bankruptcy court approval either through a motion or through a stipulated order.

Once a debtor is approved for a permanent loan modification, there are a number of pitfalls to avoid. The consequences to all parties in a Chapter 13 case for failing to have permanent loan modifications quickly and accurately effectuated are even more heightened for conduit loans. In conduit jurisdictions, if a permanent loan modification is not approved by the court or brought to the trustee’s attention, not only will the trustee continue to pay any pre-petition arrearage but he or she will also pay the post-petition monthly payments at the pre-modification amount. In many instances, this could result in a significant overpayment to the mortgage creditor, to the detriment of other creditors; the mortgage servicer could face sanctions or a U.S. Trustee investigation. Regardless of whether the post-petition payments are made through the trustee or directly by the debtor, servicers should contact their local bankruptcy counsel to determine whether the bankruptcy court must approve the permanent loan modification before it is tendered to a debtor for signature.

File Transfers of Claim
The consequences of the failure to file a timely transfer of claim are even more pronounced if the post-petition mortgage payments are being disbursed through the Chapter 13 trustee. FRBP Rule 3001(e)(2) requires a transferee to file a transfer of claim when the transfer takes place after the proof of claim is filed. On a non-conduit claim, a delay in filing a transfer of claim will only affect disbursements on the pre-petition arrearage; however, the impact on conduit claims is amplified since the post-petition payments from the trustee will also not make it to the new servicer. In some instances, after the return of checks from the previous servicer, the trustee may seek to disallow the claim in its entirety if a transfer of claim is not filed. Not surprisingly, based on the authors’ experience, the failure of creditors to file transfers of claim and payment address changes constitute one of the biggest frustrations for Chapter 13 trustees and their staff. In order to prevent a potentially significant delay and/or financial loss, mortgage servicers should promptly file a transfer of claim after acquiring servicing rights.

Conclusion
Although not exhaustive, the issues peculiar to conduit jurisdictions discussed in this article represent some of the most common and costly obstacles facing mortgage servicers. As always, mortgage servicers should reach out to their local counsel to discuss other potential pitfalls that may be unique to each jurisdiction.

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