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New Federal Bankruptcy Rules Taking Effect 12/1/2017: Looking Ahead

Posted By USFN, Monday, November 6, 2017
Updated: Friday, October 20, 2017

November 6, 2017

by Jason A. Weber
Sirote & Permutt, PC
USFN Member (Alabama)

Finally, after several years of debate, major changes have been approved that will have a profound impact on consumer bankruptcy cases. On April 27, 2017, the Supreme Court of the United States, through Chief Justice Roberts, submitted amendments to the Federal Rules of Bankruptcy Procedure to Congress. The amendments set forth extensive changes pertaining to forms and the filing of claims. The proposed changes will take effect December 1, 2017 and will significantly change how creditors should approach consumer bankruptcy cases (Chapters 7, 12, and 13) and will require crucial adjustments to conform to the shortened timelines for creditors to take action, particularly in Chapter 13 cases. The most noteworthy changes are discussed below.

Rule 2002: Notice to Creditors — The amendments to this Rule now require that creditors are to be provided at least 21 days’ notice of the time fixed for filing an objection to confirmation of a Chapter 13 plan and be provided at least 28 days’ notice of the confirmation hearing in a Chapter 13 case. Neither of these notice provisions existed prior to the rule change, and each provides creditors with advance notice for the date of the scheduled confirmation hearing and the deadline for filing an objection.

Rule 3002: Filing of Proofs of Claim — The amendments to this Rule may have the biggest impact on creditors, largely due to the shortened deadlines for filing claims and the requirement that all creditors — including secured creditors — must file proofs of claim within 70 days of the filing date of a Chapter 7, 12, or 13 case (or within 70 days of the date of conversion to a Chapter 12 or 13) in order for the claim to be deemed allowed. The new Rule does add a provision that allows a creditor the opportunity for an extension of time of up to 60 days to file a proof of claim (POC) upon motion and order if the creditor can establish that it did not have a reasonable time to file a POC because the debtor failed to timely file the list of creditors and addresses, or because the notice was mailed to the creditor at a foreign address. Additionally, the Rule does clarify that a lien securing a claim is not void should the creditor fail to file a POC.

Moreover, the new Rule adds a two-stage deadline for filing proofs of claim secured by a security interest in the debtor’s principal residence. These claims must be filed with the Official Form 410, the Attachment (Official Form 410A), and an escrow account statement no later than 70 days of the petition filing date (or conversion date). Also, in order to be timely, all other loan documents evidencing the claim [e.g., the note (allonge), mortgage, assignment of mortgage] must be filed as supplements to the POC within 120 days of the filing date (or conversion date). For such a claim to be timely, both of these deadlines must be met.

The new 70/120-day time period is significantly shortened compared to the pre-12/1/2017 rules that permit a claim to be timely if it is filed within 90 days after the Section 341 meeting of creditors date, which, in practice, permits claims to be filed within an approximate 120-day to 140-day time period from the petition filing date or conversion date.

Rule 3007: Objection to Claims — This Rule requires at least 30 days’ notice to creditors of an objection to claim. The objection may be filed on “negative notice” and provides for service via first-class mail to the name and address most recently designated on the creditors’ original or amended POC, or in accordance with Rule 7004 for federally insured depository institutions. This is significant because it clarifies that Rule 7004 no longer applies to the service of most claim objections with the exception of insured depository institutions. Instead, service can be accomplished by first-class mail, meaning creditors must be cognizant of the name and address listed on their proofs of claim and may no longer rely on raising Rule 7004 as a defense to a claim objection.

Rule 3012: Determining the Amount of Secured Claims — This Rule sets forth numerous ways for the court to determine the amount of secured claims, including by motion, claim objection, or Chapter 12 or 13 plan. Most importantly, the new Rule, in combination with amended Rule 3015 (see below), provides that any determination made in a plan formed under Rule 3012 regarding the amount of a secured claim is binding on the holder of the claim even if the holder files a contrary proof of claim, and regardless of whether an objection to the claim has been filed. This is a significant change to the prior rules, particularly for creditors in Florida and similarly situated districts, which (effective 12/1/2017) will require creditors to file objections to confirmation of Chapter 12 and Chapter 13 plans, or be bound by the plan terms upon confirmation.

Rule 3015: Filing of Plan, Effect of Confirmation of Plan — Model Chapter 13 Plan — This Rule requires the use of an Official Form Model Chapter 13 Plan unless a Local Form is adopted and is in compliance with Rule 3015.1. For example, the Southern District of Florida has recently announced that it will “opt out” and adopt a Local Form and has solicited public comment prior to its implementation in December. It would not be a surprise to see many districts across the country announce similar opt-out plans enabling them to marry the content and notice provisions required under the Model Plan with the local customs and language incorporated into the Local Form. The Model Chapter 13 Plan is intended to streamline the plan review process for creditors. The new Rule also requires an objection to plan confirmation to be filed at least seven days before the confirmation hearing. As noted above, the proposed changes further provide that a determination of value or “valuation” of a secured claim done through the plan will become effective and binding upon confirmation despite the absence of a claim objection or a contrary POC.

Closing Words — Once again, these Rules will become effective December 1, 2017 and apply to all Chapter 7, 12, and 13 cases filed after that date, as well as all pending cases “insofar as just and practicable” — meaning they will likely apply to almost all consumer bankruptcy cases. Accordingly, it is important that creditors take immediate measures to ensure compliance under these Rules. Although the shortened deadlines and increased attention to plan treatment might be burdensome in some respects, the above rule changes may well provide some assistance to creditors by establishing predictable proof of claim deadlines, consistent plan content, and clear notice and objection deadlines across all districts — which should enable creditors to more efficiently process consumer bankruptcy cases.

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Bankruptcy Case Law Highlights: A Look Back at 2017

Posted By USFN, Monday, November 6, 2017
Updated: Friday, October 20, 2017

November 6, 2017

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

Proofs of Claim and Time-Barred Debt
The U.S. Supreme Court reversed the U.S. Court of Appeals for the Eleventh Circuit and issued an opinion in the case of Midland Funding, LLC v. Johnson, 581 U.S. __ (May 15, 2017). In Midland, the Supreme Court held that filing a time-barred proof of claim (POC) under Chapter 13 of the Bankruptcy Code is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692, et seq.). This is an important case that mortgage creditors should pay attention to (including the 11-page dissenting opinion, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan).

In Midland, the debtor filed a Chapter 13 petition in March 2014 (in Alabama). Midland Funding, LLC was the holder of a credit card debt and filed a POC in the amount of $1,879.71. The POC stated that the last charge on the account was over ten years prior to the debtor’s bankruptcy filing. The relevant statute of limitations in Alabama is six years. The debtor objected to the POC, which was sustained by the bankruptcy court and the claim was disallowed.

Subsequent to the bankruptcy court ruling, the debtor commenced a lawsuit claiming that Midland violated the FDCPA by filing the POC on time-barred debt. The district court found that the FDCPA did not apply and dismissed the action. The Court of Appeals for the Eleventh Circuit reversed the district court’s decision, and Midland filed a petition for certiorari, noting a division among the courts of appeals on the question of whether the filing of a time-barred POC is false, deceptive, misleading, unconscionable, or unfair under the meaning of the FDCPA. The Supreme Court accepted certiorari and reversed the Eleventh Circuit, holding that the FDCPA does not apply under the facts of this case.

In support of its reasoning, the Supreme Court points out that the word “unenforceable” does not appear in the Bankruptcy Code’s definition of “claim.” Section 502(b)(1) of the Code states that if a claim is unenforceable it will be disallowed; it does not say that an unenforceable claim is not a claim. Further, observed the Court, section 101(5)(A) clearly states that even an unenforceable claim is still a right to payment under the Code. Additionally, the Supreme Court emphasizes that other provisions of the Code show that the running of a limitations period constitutes an affirmative defense — a defense that the debtor is to assert after a creditor makes a claim. The Court states that there is nothing misleading or deceptive in the filing of a POC that follows the Code’s similar system.

Finally, the Supreme Court delineated a number of added protections for Chapter 13 debtors, which they would not otherwise have in a state court collections proceeding. First, the debtor initiates the Chapter 13 proceedings and is unlikely to pay a stale claim in order to avoid a court action. Second, the Chapter 13 trustee is available to review claims and object if necessary. Third, there are procedural rules in a Chapter 13 bankruptcy case that guide the evolution of claims. Fourth, the claims resolution process in a Chapter 13 case is generally more streamlined and a less unnerving prospect for a debtor than facing a collection lawsuit. The Court points out that these features of a Chapter 13 bankruptcy proceeding make it more likely that a POC filed on a stale claim will be met with objection or resistance from the debtor and/or the trustee.

This case is particularly important to creditors because the decision provides authority and direction to bankruptcy courts on addressing the applicability of the FDCPA to the filing of an initial proof of claim, in the context of a Chapter 13 bankruptcy proceeding.

Surrendered Property/Forced Vesting
The U.S. District Court for the District of Massachusetts issued an opinion for publication in In re Sagendorph, 562 B.R. 545 (Jan. 23, 2017). In this case, the district court held that the bankruptcy court could not confirm, over a secured creditor’s objection, a Chapter 13 plan that provided for forced vesting of collateral in the creditor in satisfaction of its claim. Forced vesting refers to when a Chapter 13 debtor uses the plan confirmation process to transfer ownership of property to a secured creditor without the creditor’s consent.

In Sagendorph, the debtor had an income-producing property that was secured by a mortgage held by Wells Fargo Bank (Bank). The debtor’s amended plan sought to surrender the real property and vest title to the property in Bank. Bank objected to this treatment but its objection was overruled, and the bankruptcy court confirmed the debtor’s plan. Bank appealed the confirmation order to the district court.

Bank contended that confirmation of a plan that allows forced vesting of real property is contrary to the plain language of section 1325(a)(5)(C) that deals with surrender of property. Further, Bank asserted that the “plain meaning” of the statutory language does not allow a debtor to simultaneously surrender property under section 1325(a)(5)(C) and vest title in a secured creditor under section 1322(b)(9).

The debtor countered that the “plain meaning” of section 1322(b)(9) does allow the vesting of property of the estate and, when read in combination with section 1325(a)(5)(C), allows vesting of real property over a creditor’s objection. The debtor specifically argued that there is ample case law providing that a court must confirm a plan over a creditor’s objection if the plan provides for surrender of the property, the surrender is a preliminary step in the transfer of title, and that sections 1325(a)(5)(C) and 1322(b)(9) are meant to work in tandem with each other.

The district court’s analysis looked at the plain meaning of the words “surrender” and “vest” as they are used in sections 1325(a)(5)(C) and 1322(b)(9). The district court found that “surrender” is defined as making property available to be taken and that “vesting” is the acceptance of an offer to transfer ownership. Therefore, a debtor cannot vest property in a creditor without the creditor consenting to that treatment. Thus, the district court held that the plain language of sections 1325(a)(5)(C) and 1322(b)(9) preclude forced vesting.

In a comparable case the following month, the U.S. District Court for the District of Massachusetts issued a similar opinion for publication in In re Brown, 563 B.R. 451 (Feb. 3, 2017). In Brown, the district court notes that the surrender of property in a Chapter 13 plan leaves the mortgagee free to exercise its rights in the collateral, while vesting threatens to impair those same rights. The court states that “by shifting the debtor’s interest to the mortgagee, vesting prevents the mortgagee from exercising its most important state-law right — foreclosure — as a method of eliminating junior liens.” Id at 457.

The court further observed that forced vesting in the plan confirmation process has consequences and compels a mortgagee to assume risks and obligations that the mortgagee did not bargain for. These risks and obligations include environmental remediation, maintenance, and taxes that they would not otherwise be required to bear absent the vesting of the property. Additionally, the court pointed out that the overwhelming run of recent cases has rejected forced vesting and that the debtor’s assertion of needing a fresh start must give way to “the Code’s obvious goal of preserving the well-settled property rights of secured lenders.” [Quoting HSBC Bank USA v. Zair, 550 B.R. 188 at 204 (E.D.N.Y. 2016).]

The Brown court concluded, as in Sagendorph, that the Chapter 13 plan (which forced vesting of property in the creditor) did not treat the mortgagee’s secured claim in a manner permitted by section 1325(a)(5). The confirmed plan was vacated, and the case was remanded back to the bankruptcy court for further proceedings.


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When FRBP Rule 3002.1 is Applicable, Secured Creditor’s Post-Petition Attorneys’ Fees Do Not Require a Fee Application: Maine BK Court Reviews: Official Bankruptcy Form 410S2 & Post-Petition Attorneys

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

Earlier this year, a Maine bankruptcy court held that post-petition attorneys’ fees incurred by a secured creditor in the context of a bankruptcy proceeding are not within the purview of Federal Rules of Bankruptcy Procedure (FRBP) Rule 2016, and the corresponding Maine Local Bankruptcy Rule 2016-1. The court also held that those attorneys’ fees do not need to be approved by the bankruptcy court in the context of a fee application in order to be recovered from the debtor when FRBP Rule 3002.1 is applicable. See In re Cotsis, Case Number 15-20588 (Bankr. Me. Feb. 24, 2017).

Background — In Cotsis, the debtors filed a Chapter 13 petition on August 20, 2015. Subsequently, the debtors obtained a modification of their loan from the secured creditor, which cured the pre-petition default; the debtors obtained bankruptcy court approval of the loan modification. The secured creditor’s plan objection was resolved by the loan modification, and the debtor confirmed a plan that provided for payment of the modified mortgage directly to the secured creditor.

Later, in compliance with FRBP Rule 3002.1, the loan servicer timely filed a notice of post-petition mortgage fees, expenses, and charges regarding the fees incurred for the plan review and plan objection (Notice) using Official Bankruptcy Form 410S2. The date that the fee was incurred and the total amount of that fee were appropriately set forth on line number 3, “Attorney Fees,” of the Notice. As an attachment to the Notice, two invoices were provided that further itemized and set forth a description of the fees listed in the Notice as “review of plan and notice of appearance ($400)” and for “objection to confirmation ($500).”

The debtors filed an objection on the basis that the Notice did not comply with FRBP Rule 2016 (requiring an application for compensation or reimbursement from the bankruptcy estate) and Maine Local Bankruptcy Rule 2016-1(a)(3) (collectively, Fee Application Rules). The Fee Application Rules require the submission of the professional’s time records and other documentation with the bankruptcy court to support fee applications of professionals retained by the debtor and/or the bankruptcy estate.

Court’s Analysis — In its memorandum of decision, the bankruptcy court determined that the Fee Application Rules are inapplicable to the Notice filed because the fees contained in the Notice are governed by the terms of the agreement between the parties, as set forth in the underlying security interest. Therefore, the servicer’s act of the filing of the Notice required by Rule 3002.1 was not to seek compensation for legal services rendered for the debtors or their bankruptcy estate but merely to explain the scope of the creditor’s post-petition fee claim. Additionally, the bankruptcy court found that Rule 3002.1 provides an adequate procedural mechanism of which debtors may avail themselves to contest the fees, expenses, and/or charges set forth in a notice filed pursuant to Rule 3002.1.

Pursuant to Rule 3002.1(e), a motion can be filed within one year of the filing of a notice and the court shall “determine whether payment of any claimed fee, expense, or charge is required by the underlying agreement and applicable nonbankruptcy law to cure a default or maintain payments in accordance with § 1322(b)(5) of the Code.” In the event that the debtors believe the description of the fees set forth in the Notice is inadequate to support the reasonableness of the fees, the Notice may be challenged in the manner prescribed by Rule 3002.1.

Tate Distinguished — The decision in Cotsis is a very important one for mortgage servicers. It distinguishes the holding in a 2000 North Carolina bankruptcy class action that creditors and their attorneys had to file FRBP Rule 2016 applications in order to seek compensation or reimbursement from the debtor, or his estate, and the failure to do so before charging the debtor could result in sanctions. See In re Tate, 253 B.R. 653 (Bankr. W.D.N.C. 2000). The Tate opinion states that “the Court recognizes that [Bankruptcy Code] § 506(b) and [Bankruptcy] Rule 2016 create rights and duties for creditors in bankruptcy cases. A creditor may be entitled to payment of professional fees under its contract with a debtor, but before those funds will be paid from the bankruptcy estate, the creditor must affirmatively demonstrate their reasonableness to the court after notice. If a creditor elects to ignore the law to obtain such fees, it is well within the Court’s authority under § 105 [the bankruptcy court’s equitable powers] to rectify that error.” Tate, at 668.

Cotsis expressly distinguished Tate and held that creditors only need to comply with Rule 3002.1; timesheets and other supporting documentation are not required.

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Bankruptcy Code Anti-Modification Statutes: Application to Principal Residence/Multi-Use Property

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

It is always fascinating to see bankruptcy courts read the “plain language” of the Bankruptcy Code in so many ways. This, in turn, results in differing opinions on common bankruptcy-related issues — such as the application of the anti-modification provisions.

Principal Residence: Multiple Uses?
From time to time, Chapter 11 and Chapter 13 debtors will use their principal residence for multiple purposes. Whether it be as a home office or renting out a room, debtors are permitted to use their home to derive income. Multi-use property creates a predicament under the application of Bankruptcy Code sections 1123(b)(5) and 1322(b)(2) (anti-modification statutes). In the context of a cramdown plan, debtors essentially argue that they have no principal residence and seek to cramdown the debt on the subject property. The best example is a principal residence containing rental units. Savvy debtors will attempt to describe this as income property, where they happen to also reside; this is a frequent scenario in Florida, particularly in Miami-Dade County.

Judicial construction of sections 1123(b)(5) and 1322(b)(2) generally fall along one of three views: (1) a bright-line test absolutely allowing modification of a lien where the collateral is not only the debtor’s primary residence but is also used to produce income; (2) a bright-line test absolutely prohibiting modification of a lien if the collateral is real property that is also the debtor’s primary residence, without regard to any other use of the property; and (3) a case-by-case approach that examines the totality of the circumstances. The various outcomes result from opposing statutory interpretations, and consideration of the legislative intent of the anti-modification provision by courts that deem the statute ambiguous.

As the law continues to evolve in this area, it is difficult to establish the majority or minority view. Therefore, references here will be made to “The Strict View,” “The Moderate View,” and “Something in the Middle.”

The Strict View
In reviewing bankruptcy court rulings, the First and Third Circuit Courts of Appeals have held that “a mortgage secured by property that includes, in addition to the debtor’s principal residence, other income-producing rental property is secured by real property other than the debtor’s principal residence and, thus, that modification of the mortgage is permitted” (emphasis added) In re Scarborough, 461 F.3d 406, 408 (3d Cir. 2006). Pursuant to this view, a creditor’s options are limited under the anti-modification provision of the Bankruptcy Code, and would only apply if the mortgage at issue is secured by the principal residence solely.

Proponents of this application contend that the result is supported by the plain language of sections 1123(b)(5) and 1322(b)(2), allowing such multi-use properties to be modified through a Chapter 11 or Chapter 13 proceeding. Additionally, proponents cite to the legislative history as further validation. In short, under this view, if any portion of the secured property derives income, the loan is subject to modification.

The Moderate View
Bankruptcy courts out of the Ninth Circuit Court of Appeals (and sporadic district courts) elect to take a bright-line approach to the anti-modification statutes. Under this method, the courts look at three elements: (1) the security interest must be in real property; (2) the real property must be the only security for the debt; and (3) the real property must be the debtor’s principal residence. In the end, “either a property is a debtor’s principal residence or it is not; the existence of other uses on the property does not change that.” In re Wages, 508 B.R. 161 (B.A.P. 9th Cir. 2014); see also In re Brooks, 550 B.R. 19 (Bankr. W.D.N.Y. 2016).

Not surprisingly, proponents also believe that the application is supported under the plain language of the Bankruptcy Code because it is not ambiguous. Particularly when reading sections 1123(b)(5) and 1322(b)(2) in connection with section 101(13A), the definition of principal residence, the application does have support.

Although debtors maintain that this perspective is a cold and callous analysis, it results in more consistent rulings. Under this view, the creditor’s interest in the property would be protected by section 1123(b)(5). This means the debtors would not be permitted to modify their principal residence based on the plain language of the statute.

Something in the Middle
The position uses a factual rationale. Under this application of the anti-modification statutes, the court and parties would be required to undertake a case-by-case analysis. The intent of the parties at the time the loan was originated, as well as the amount of time that the property has been used for other purposes, would be taken into consideration. This approach increases inconsistency in application, plus there is more confusion between the parties regarding their rights under the Bankruptcy Code.

Observations in Florida
Currently, there is no binding authority from the Eleventh Circuit Court of Appeals. The cases from Florida are not consistent in application of the anti-modification provision. Some courts would allow modification of a property that is a commercial duplex, but disallow modification for a property used for business purposes (i.e., home office). This application results in an inconsistent outcome across the courts, which could be eliminated under “The Strict View” articulated above. However, the few published opinions on the subject appear to make clear that, in the Southern and Middle Districts of Florida, the type of property is pertinent to the analysis. The former Chief Judge of the Southern District Court of Florida recently ruled in favor of a creditor on this issue, finding the fact that the debtor resided in the property prevented cramdown. [In re Hock, Case No. 14-32157-BCK-PGH.] In Hock, the court even noted that its decision conflicted with other cases within the district — namely, In re Zalidivar, 441 B.R. (Bankr. S.D. Fla. 2011), and In re Ramirez, Case No. 13-20891 (Bankr. S.D. Fla. 2014). Nonetheless, it is the first case in Florida to conduct a statutory analysis of the Bankruptcy Code.

The Takeaway
Creditors have options and are not limited to one position. They should be diligent in the prosecution of these cases and raise appropriate stances to the court. “The Strict View” requires creditors to actively conduct discovery on the debtors to fully present the facts to the court. This should be done in each case to help develop this area of the law, hopefully resulting in more judicial authority to guide creditors.

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Illinois: Payment of Post-Foreclosure Condominium Assessments

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

by Douglas Oliver
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

This article appeared in the USFN e-Update (Sept. 2017 ed.) and is reprinted here for those readers who missed it.

There are effective, practical steps that mortgage loan servicers can take to prevent problems regarding condominium/homeowners associations (COA/HOA). For two years now, confusion has prevailed in Illinois over whether (and when) COA/HOA pre-foreclosure assessment liens are extinguished following completion of a foreclosure. In May of this year, a panel of the Illinois Appellate Court for the First District (which covers Chicago and Cook County) appeared to resolve the confusion with a bright-line rule. On August 8, 2017, however, a separate panel of the same appellate court issued a ruling that largely restored the previous uncertainty. The issue will now have to be resolved by the Illinois Supreme Court or the Illinois Legislature. Nonetheless, observation of best practices should prevent the issue from arising at REO closing tables.

Background
Almost two years ago, the Illinois Supreme Court held that a COA assessment lien against foreclosed property survives the foreclosure unless, and until, the winning sale bidder pays the ongoing, regular assessments that accrue following the sale. The case was 1010 Lake Shore Drive Ass’n v. Deutsche Bank National Trust Co., 43 N.E.3d 1005 (Ill. 2015). Ever since then, litigants have wrestled over exactly when such post-sale assessments must be paid in order to extinguish the lien for pre-foreclosure, unpaid assessments. Is there a “due date;” and, if so, what is it?

The question centers around section 9(g)(3) of the Illinois Condominium Property Act (the Act) (765 ILCS 605(9)(g)). That code section states that a buyer who takes title from a foreclosure sale, consent foreclosure, or deed-in-lieu of foreclosure must pay the regular assessments that accrue on the unit from the first day of the month that follows the sale or transfer. Section 9(g)(1) creates an automatic lien in favor of the COA for unpaid assessments, plus any associated costs or legal fees, but acknowledges that this lien is subordinate to most prior-recorded liens. Section 9(g)(3) acknowledges that the foreclosure of a prior mortgage wipes out the automatic lien, but states that payment of post-foreclosure assessments “confirms extinguishment” of the automatic lien. The 1010 Lake Shore Drive case held, in essence, that if post-foreclosure assessments go unpaid, then the extinguishment of any lien for pre-foreclosure assessments is never confirmed and, thus, still encumbers the condo unit.

After the 1010 Lake Shore Drive case came down, COAs and HOAs took the position that unless payment for post-foreclosure assessments was tendered on the first of the month following the judicial sale or soon thereafter, extinguishment of the lien for pre-foreclosure assessments was permanently and irrevocably waived. The associations would then assert extortive payment demands for clearance of pre-foreclosure assessment liens, which would frequently include substantial attorneys’ fees and other costs. These demands would occasionally reach into six figures. In many cases, COA/HOAs would make these claims after refusing to supply the information necessary to make timely payments in the correct amount.

The demands were typically presented to a foreclosing lender as a hurdle to a paid assessment letter — a necessary document for closing most residential COA/HOA REO transactions. The COA/HOA, aware of the lender’s vulnerability, took full advantage. Yet, section 9(g)(3) does not set forth a date by which post-foreclosure assessments must be paid. Instead, it merely sets the time from which they accrue to the new owner. Debate (and litigation) therefore raged over whether or not section 9(g)(3) implied a due date for payment.

2017 Judicial Rulings
In March, the Illinois Appellate Court for the First District appeared to decisively resolve this issue in favor of no due date. The decision in 5510 Sheridan Road Condominium Ass’n v. U.S. Bank, 2017 Ill. App. (1st) 160279 (Mar. 31, 2017), held that section 9(g)(3) of the Act did not include a timing deadline for tender of payment. Instead, statutory language requiring that assessments be paid “from and after the first day of the month” following the sale was simply a demarcation of time from which the obligation to pay actually begins. Under the 5510 Sheridan Road holding, with no deadline for payment, the liens were simply considered “confirmed as extinguished” as soon as post-sale assessment payments were tendered. Under this ruling, COA/HOAs were unable to argue that the timing of payment justified a demand for pre-foreclosure assessments, fees, or costs. This appellate court decision had the merit of creating a bright-line rule that everyone could easily observe.

Be that as it may, in August a separate panel of the First District Appellate Court handed down Country Club Estates Condominium Ass’n. v. Bayview Loan Servicing LLC, Ill. App. (1st) 162459 (Aug. 8, 2017). This case holds that section 9(g)(3) of the Act does contain a timing requirement — an indeterminate one that can always be debated and litigated: such payment is due “promptly.” In Country Club Estates the appellate court ruled that payment could be substantially delayed but still be prompt under extenuating circumstances, such as when an association unreasonably refuses payment or if court confirmation of the judicial sale takes an unexpectedly long time. Absent such circumstances, however, the opinion states that post-sale assessments are generally expected to be tendered in the month after purchase to be considered “prompt.”

Country Club Estates is a highly unfavorable decision for lenders because “prompt” payment is not sufficiently definite. Under the vagaries of this holding, COA/HOAs will almost certainly push the envelope in asserting claims that lender payments were not tendered “promptly.” This is likely because Illinois COA/HOAs have an established history of knowingly asserting weak claims with an expectation that lenders will pay, rather than fight, simply to get REO deals closed.

Practical Methodology
Nevertheless, observation of some wise procedures can prevent most problems of this nature. As the issue has unfolded over the past two years, best practices have remained the same. Lenders who wish to prevent this issue from arising at REO closing tables should do the following:


1. In all foreclosure cases where a condominium association is a party, issue a subpoena to the association seeking disclosure of both the amount due and the amount of regular assessments. The subpoena process is recommended because condo associations frequently file no appearance in foreclosure cases and also because subpoenas are easier to enforce than discovery requests. Despite that, in this author’s experience, issuance of discovery has also worked well.
2. Serve a demand for a statement of balance due to the condominium association board of managers, as provided by section 9(j) of the Act, while the foreclosure case is pending. If the association does not respond, its lien will be subordinate.
3. Make sure to tender a payment to the condominium association as soon as possible after the first day of the month following the foreclosure sale. Even where there is a dispute as to the amount due, it is always advantageous to make the best possible good-faith tender of payment in the first month following sale.
4. Make sure that communications with the association or its attorneys regarding assessment issues are in writing, whenever possible. Where such communications are not in writing, they should be fully documented in case a legal dispute later arises.


If the foregoing practices are implemented, demands for pre-foreclosure liens can be dealt with (or prevented) in a straightforward and expeditious manner.

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NACTT Annual Conference 2017

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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 four-day conference in Seattle, Washington this past July. Mortgage issues continued to be a hot topic at the conference, with several interesting educational panels addressing them, as well as much useful dialogue between mortgage representatives, mortgage servicing attorneys, and Chapter 13 trustees. This article highlights a few of the educational offerings and events of interest to the mortgage servicing industry.

Meeting of Trustees, Servicers, and Attorneys
The conference began with the NACTT Mortgage Committee meeting. This group is comprised of several Chapter 13 trustees, servicer representatives, and their attorneys; it is a continuation of the efforts begun in 2004 to improve mortgage servicing in Chapter 13 bankruptcy cases. Participation is through monthly teleconferences, subcommittees on specific issues, and biannual in-person meetings — and is open to any interested mortgage servicer representative, bankruptcy attorney, or Chapter 13 trustee. (Contact the USFN Bankruptcy Committee for information about joining.) Topics that the mortgage committee addressed in Seattle included:

• Augmented claim codes and identifier information developed by the National Data Center (NDC) to aid mortgage servicers in compliance with the changes to the mortgage servicing rules under RESPA (i.e., modified periodic statements for borrowers in bankruptcy, beginning April 19, 2018). Development of the claim codes and identifier information changes are in their final stages and can be obtained by servicers through subscription to the NDC.
• CFPB Monthly Billing Statements — Several compliance issues were discussed, including the timing of when pre-petition claim information should be displayed on the statements (only after the proof of claim is filed or at some other time) and the information to include on statements for contested claims or contested lien strip-offs. On the latter issue, the consensus was that the best practice would be for local counsel to obtain specific language from the bankruptcy court in the order resolving the claim objection or lien strip-off action.
• Changes to Federal Rules of Bankruptcy Procedure (FRBP), Rule 3002.1 – This rule relates to post-petition bankruptcy notices for mortgages secured by borrowers’ principal residences in Chapter 13 cases. Servicers have had issues with compliance under the rule in filing timely notices of payment change for home equity lines of credit (HELOC) due to the fact that payments usually change every month. The current rule requires servicers to file a payment change notice for any and all changes, including HELOCs, even when the change may be for an amount less than one dollar. A proposal was approved by the committee (to be submitted to the Advisory Committee on Rules of Bankruptcy Procedure for consideration), which would provide for annual notices and reconciliation of HELOC accounts, rather than the monthly notices.
• A proposal to standardize the loan modification approval process in Chapter 13 bankruptcy.

NACTT Presentations and Panels
Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference, as is customary for the NACTT annual meeting. 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, including Chapter 13 trustees. Director White’s remarks, as we move further away in time from the “mortgage meltdown,” appeared not to be focused as much on enforcement actions against mortgage servicers as on other issues. On the heels of the U.S. Supreme Court’s decision earlier this year in Midland Funding, LLC v. Johnson, 581 U.S. __, 137 S. Ct. 1407 (May 15, 2017), that filing proofs of claim for debt time-barred under state law did not constitute a violation of the Fair Debt Collection Practices Act (FDCPA), Director White urged trustees to remain vigilant in policing such claims, and he said that the UST’s program would continue to view such claims as an abuse of the bankruptcy process that harms debtors and legitimate creditors.

Another recent development, the legalization of marijuana in some states, also drew comments from Director White. He made it clear that the UST would not allow marijuana assets to be administered under any chapter of the Bankruptcy Code. In this respect, according to current U.S. Justice Department thinking, state laws regarding legitimacy of the marijuana trade are immaterial as far as federal bankruptcy laws are concerned. Whether a bankruptcy judge will agree with the UST’s office on this point is an open question.

While mortgage servicers and servicing practices in bankruptcy still garner attention from the UST for compliance with bankruptcy rules, other areas for bankruptcy abuse prevention are gaining the UST’s attention. These include debtor fraud (about 60 percent of the UST actions over the prior year), poor debtor attorney performance in representing their clients, and abuses committed by multi-state debtor law firms practicing remotely in out-of-state jurisdictions.

The NACTT offered many topical and informative educational sessions of interest to mortgage servicers: the annual Chapter 13 case law update, as well as panels on FRBP Rule 3002.1, mortgage servicer proofs of claim, plan completions in Chapter 13, and other mortgage issues that included guidelines for mortgage proofs of claim Form 410A. Perhaps the most interesting panel for all attendees was on the new plan form and the upcoming changes to the FRBP.

As most are probably aware, on December 1, 2017, debtors’ attorneys will be required to file Chapter 13 plans on either the plan form adopted by their local district or on the National Form Plan, Form 113 (if no local plan has been adopted by the district). Of the 94 federal judicial districts, only seven districts (thus far) have chosen to not adopt a local plan; they will use Form 113 (with the exception of the Northern District of Indiana, where debtors’ attorneys may choose the plan form to use). The good news for servicers is that after December 1, 2017, there will be fewer national variations of Chapter 13 plans to review. Of more immediate impact on mortgage servicers, as discussed by the panel, is the shortened proof of claim bar date effective December 1, 2017. Claims will be due 70 days from the petition date, with an additional 50 days to supplement claims with supporting loan documents (see FRBP Rule 3002(c)(7)).

The panel also discussed other rule changes impacting mortgage servicers. These included the necessity for secured creditors to file proofs of claim to receive distributions under the plan (FRBP Rule 3002(a)), the valuation of property in Chapter 13 plans (rather than by a separate motion for valuation) (FRBP Rule 3012), the termination of the automatic stay and co-debtor stay upon confirmation of plans for properties that debtors propose to surrender to creditors (FRBP Rule 3015.1(d)(4)), and the proper service of a Chapter 13 plan (stricter requirements due to the binding effect of plan confirmation on cramdowns and lien strip-offs) (FRBP Rule 7004).

American Bankruptcy Institute (ABI) Public Hearing
An additional component of this year’s meeting was a public hearing held by the ABI’s Chapter 13 committee of the Commission on Consumer Bankruptcy. The committee (a 23-member group of law professors, retired bankruptcy judges, in-house corporate counsel, as well as creditor and debtor attorneys) is charged with recommending improvements to the consumer bankruptcy system that can be implemented within its existing structure. These changes might include amendments to the Bankruptcy Code, changes to the Federal Rules of Bankruptcy Procedure, administrative rules or actions, recommendations on proper interpretations of existing law, and other best practices that judges, trustees, and lawyers can implement.

The commission heard testimony from ten panelists who have various roles in the bankruptcy system, including Chapter 13 trustees, creditor and debtor attorneys, and a representative from an employer’s trade association. The matters presented were at the discretion of each panelist. Several panelists advocated raising or eliminating the debt limitation set forth in 11 U.S.C. § 109(e) that prevents individual debtors from filing Chapter 13 cases instead of Chapter 11 cases because they are above the thresholds (currently $394,725 for unsecured debt and $1,184,200 for secured debt). Other items raised included eliminating the home mortgage anti-modification protection in 11 U.S.C. § 1322(b)(2), plus changing the discharge provisions of the Bankruptcy Code to allow for the discharge of some student debt obligations. This initial public hearing will be followed by others, after which the committee will ultimately prepare a final report with recommendations for changes.

Conclusion
The NACTT conference continues to provide opportunities for mortgage servicers and their attorneys to interact with Chapter 13 trustees, bankruptcy judges, and debtors’ counsel in an informal setting, along with many informative educational panels impacting Chapter 13 practice and mortgage servicing. 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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Statutes of Limitation: More from Florida

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

Late last year, the Supreme Court of Florida published its much-anticipated opinion in Bartram v. U.S. Bank, N.A., 211 So. 3d. 1009 (Fla. Nov. 3, 2016). Judges and litigants analyzed every word of the opinion hoping for the Supreme Court to provide much needed clarity to the longstanding issue of the application of the statute of limitations, which has plagued the foreclosure industry in Florida. The outcome was bittersweet, as parties still had questions. Many parties, including judges, disagreed with the interpretation of Bartram. This was not unexpected to some. After all, Bartram was a quiet title action rather than a foreclosure, and the certified question was very specifically tailored to the facts.

The result caused the state’s circuit courts to enter conflicting opinions, which slowly worked their way through the Florida appellate system. The First, Second, Third, and Fourth District Courts of Appeal ruled consistently and allowed lenders to continue their foreclosure actions based on allegations of a continuing state of default, even if the default date pleaded was outside five years. Not so with the Fifth District Court of Appeal (DCA), however.

The Fifth DCA — and the counties controlled by it — continued to follow its pre-Bartram holding in Hicks v. Wells Fargo Bank, N.A., 178 So. 3d. 957 (Fla. 5th DCA 2015), where the court dismissed an action due to the breach date being outside of five years. Thereafter, the Fifth DCA released its decision in Ventures Trust 2013-I-NH v. Johnson, 5D16-1020 (Fla. 5th DCA May 19, 2017), where it followed Hicks and dismissed a complaint solely for alleging a default date outside of five years. It appeared that the Fifth DCA would follow a very narrow reading of Bartram, essentially requiring lenders to dismiss their actions and re-file new actions with an alleged default date within five years. The Fifth DCA would not allow a lender to proceed to trial and limit the amount of damages in the case based on a default date within five years.

These rulings had an immediate effect on the circuit courts. The judges in the counties governed by the Fifth DCA saw an influx of defendants’ summary judgment motions and felt compelled to grant them, following Hicks and Johnson. Lenders were placed in a particularly difficult situation as they asserted contradicting case law from the other DCAs, but continued to lose, leaving an appeal as the only other option. The Supreme Court of Florida already had several statutes of limitation cases pending before it — even after Bartram.

Most notably was Bollettieri v. Resort Villas Condominium Association, Inc. v. Bank of New York Mellon, 198 So. 3d. 1140 (Fla. 2d DCA 2016). In Bollettieri, the Second DCA provided that as long as the foreclosure complaint alleges a continuing state of default, the case would not be dismissed for alleging a default date outside of five years. Lenders would be provided the opportunity to limit the damage amount at trial and the case would survive an involuntary dismissal. Bollettieri was also consistent with the remaining First, Third, and Fourth DCAs.

The Second DCA realized potential conflict with Hicks and certified conflict. Consequently, Bollettieri is now pending with the Supreme Court — perhaps not for too much longer though. The Fifth DCA (remaining the odd one out) rendered a decision in Klebanoff v. Bank of New York Mellon, Case No. 5D16-1637, 42 Fla. L. Weekly D. 1480 (Fla. 5th DCA June 30, 2017). The opinion, written by Justice Evander, cleared the air on the application of Hicks.

In Klebanoff, the Fifth DCA held that Hicks is distinguishable because the parties “stipulated to the facts” regarding the default date, and although the complaint pled a continuing state of default, the parties limited themselves to the later default date as part of the “stipulation.” This controlled the Fifth DCA’s review on appeal and required that it dismiss the action in Hicks, as the lender was seeking amounts outside of five years from the filing of the complaint. The Fifth DCA went further to say that Hicks is consistent with the Third DCA’s ruling in Collazo v. HSBC Bank USA, N.A., 213 So. 3d. 1012 (Fla. 3rd DCA 2016), which also dismissed a case where the plaintiff would not budge from seeking amounts due from a default date outside of five years from the filing of the complaint. The Fifth DCA then elected to follow Bollettieri and (in a footnote) observed that, although Bollettieri certified conflict with Hicks, the Fifth DCA does not believe that they are in conflict. The Fifth DCA affirmed the judgment due to the allegations of a continuing default.

Shortly thereafter, the Supreme Court of Florida issued an order to show cause in Bollettieri (based on Klebanoff), stating there is no conflict between the DCAs. The Supreme Court of Florida then canceled the oral argument set in Bollettieri. The remaining cases with the Supreme Court of Florida, based on statutes of limitation in foreclosures, are stayed pending Bollettieri. Although the Supreme Court has not formally dismissed Bollettieri, the writing appears to be on the wall that lenders will no longer have to wait for a current change in the law.

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South Carolina: Appellate Court Upholds Judicial Foreclosure Sale

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

October 10, 2017

 

by Ronald Scott and Reginald Corley
Scott & Corley, PA – USFN Member (South Carolina)

In Wachesaw Plantation East Community Services Association, Inc. v. Alexander (S.C. Ct. App. June 28, 2017), the lower court’s decision to uphold the judicial foreclosure sale of a parcel of property was affirmed. Todd Alexander, the homeowner, contended that the judicial sale should be vacated because the sale price was inadequate. Moreover, due to his health problems, he asserted that he lacked knowledge regarding the scheduled judicial sale. The homeowner further argued that because the sale price of the property was $135,000 less than the tax valuation, and his inability to attend the judicial sale, the winning bidder was unjustly enriched.

Sale Price & Notice of Judicial Sale
Regarding the first issue surrounding the allegedly inadequate sale price, the court found that a judicial sale can be set aside if, “(1) the sales price ‘is so gross as to shock the conscience[;]’ or (2) the sale ‘is accompanied by other circumstances warranting the interference of the court’” [citing Wells Fargo Bank, NA v. Turner, 378 S.C. 147, 150 (S.C. Ct. App. 2008), which quotes Poole v. Jefferson Standard Life Ins. Co., 174 S.C. 150, 157 (1934)]. As stated in Turner, “the determination of whether a judicial sale should be set aside is a matter left to the sound discretion of the trial court,” citing Investors Sav. Bank v. Phelps, 303 S.C. 15, 17 (S.C. Ct. App. 1990). Moreover, in the event that a party seeks “to set aside a judicial sale on the ground that the price” is merely inadequate (as opposed to shocking the conscience), the moving party “must show excusable neglect.” (See Turner, note 1.)

In Wachesaw Plantation, the homeowner did not contend that the sale price “shocked the conscience,” stating rather that it was simply inadequate. The homeowner claimed that his health problems (which included periodic hospitalization) prevented him from responding to, or having knowledge of, the judicial sale. The court found that not only was public notice (advertisement in a newspaper of general circulation) properly given, but the foreclosure judgment and notice of sale were among the uncollected mail items in the homeowner’s post office box (and brought to the homeowner’s hospital room prior to the judicial sale). Given these circumstances, the homeowner failed to demonstrate excusable neglect. The court determined that proper notice was given and furthermore — despite being hospitalized and unable to personally attend the judicial sale — the homeowner could have sent an agent to the judicial sale. Based on these reasons, the master in equity judge did not abuse her discretion in declining to set aside the judicial sale of the property.

Redemption
A second issue raised by the homeowner was whether he had an equitable right to redeem the property up to the time that the bidder complied with the bid and received the foreclosure deed. The appellate court cites to the state statute protecting a bona fide purchaser at a judicial sale who does not have notice of any irregularities. [See S.C. Code § 15-39-870 (2016).] South Carolina has long protected the rights of good faith purchasers at judicial foreclosure sales. Robinson v. Estate of Harris, 378 S.C. 140, 144-45 (S.C. Ct. App. 2008). Additionally, S.C. Code § 15-39-830 (2015) states: “Upon a judicial sale being made and the terms complied with the officer making the sale must execute a conveyance to the purchaser which shall be effectual to pass the rights and interests adjudged to be sold.”

Conclusion
In the present case, no deficiency judgment was sought against the homeowner; therefore, the bidding did not need to remain open for an additional 30 days post-sale (as required by statute) and, again, no claim was made that the sale price “shocked the conscience.” The court found no irregularities with the judicial sale in Wachesaw Plantation.

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Alabama: Failure to Strictly Comply with the Requirements of the Mortgage Invalidates a Foreclosure Sale

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

October 10, 2017

by Andrew W. Saag
Sirote & Permutt, PC – USFN Member (Alabama)

Alabama has adopted strict liability with respect to breach letter compliance. The Supreme Court of Alabama found that failure to strictly comply with the requirements of the mortgage invalidates a foreclosure sale. [See Ex parte Turner, __ Ala__ (Sept. 1, 2017)].

Background
After the borrowers defaulted on their loan, the loan servicer sent a letter notifying them of its intent to foreclose on the property (the Default Letter). The mortgage required the Default Letter to include certain information, including that the borrower had the “right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.” The Default Letter instead stated “[y]ou have the right to reinstate your loan after legal action has begun. You also have the right to assert in foreclosure, the non-existence of a default or any other defense to acceleration and foreclosure.” The borrowers ultimately filed suit against the servicer, alleging that the foreclosure was void because the notice they received did not explicitly inform them of their right to bring a court action challenging the foreclosure.

Appellate Court Affirmed
The Court of Civil Appeals upheld the foreclosure sale — determining that the notice to the borrowers, which undisputedly did not inform them of their right to initiate legal action, nevertheless substantially complied with the notice requirement set forth in the mortgage. The borrowers appealed, contending that Alabama law required strict compliance with the terms of the mortgage rather than mere substantial compliance.

Supreme Court Reverses
In its analysis, the Supreme Court of Alabama expressly noted the “instructive decision” from the Supreme Judicial Court of Massachusetts, Pinti v. Emigrant Mortgage Co., 472 Mass. 226 (2015), which held that a nonjudicial foreclosure was void because the default letter failed to inform the mortgagors of their right and need to initiate legal action to challenge the validity of the foreclosure. In following this logic, the Supreme Court of Alabama reversed the appellate court’s decision, holding that a failure to strictly comply with the requirements of the mortgage — specifically failing to notify the borrowers of their right to initiate legal action — invalidated a foreclosure sale.

The dissenting opinion in Turner observed that the law merely required substantial compliance, and that the Default Letter substantially complied with the mortgage because it put the borrowers on notice of their responsibility to cure their default and, if they did not, the debt would be accelerated and the mortgage foreclosed upon.

Take Heed
Servicers should be extra careful in their breach letter review process to ensure full and complete accuracy. Alabama law does not require breach letters; however, the standard GSE mortgage does require that a breach letter be sent. The requisite contents of the letter and notice requirements will be set forth in the mortgage. An intricate understanding of the local laws and best practices is crucial so that servicers can successfully navigate around this potential liability.

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Illinois: New Statute regarding Arrearage Payments

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

October 10, 2017

by Steven Lindberg
Anselmo Lindberg & Associates, LLC – USFN Member (Illinois)


New Law
Illinois has enacted statute 205 ILCS 635/5-8.5, which will become effective on January 1, 2018. The statute states:

Arrearage payments. When a mortgagor is in arrears more than one month, no licensee shall refuse to accept any payments offered by the mortgagor in whole month payment amounts. Such payments shall be applied to the unpaid balance in the manner provided in the licensee’s mortgage with that mortgagor.

Nothing in this Section shall be construed to otherwise impair the ability of the licensee to enforce its rights under the mortgage with that mortgagor; nothing in this Section shall be construed to otherwise impair the obligations of the mortgagor under the mortgage with the licensee.

According to the statute, the mortgagee cannot refuse whole month payments when the mortgage is more than one month in arrears, meaning that regardless of the length of delinquency, the mortgagee must accept the complete monthly payment. One might ask, “Regardless of how delinquent the consumer is, are lenders/servicers expected to take a payment if it equals a whole monthly payment?” The answer is “yes.”

Background
This statute was enacted because a constituent of one of the bill’s sponsors said that she attempted to make a payment on her delinquent loan. The loan was two months overdue and the mortgagor had the amount for just one of the monthly payments. The servicer rejected the partial payment, stating that only the two months in payment would be accepted. The legislator thought that this was wrong, and then proposed the subject legislation. At the hearing on the bill, the Representative stated that this is a “simple bill.” This bill “does not stop a foreclosure when one is pending and it does not stop a mortgagee from filing a foreclosure action.” Therefore, unless the loan is properly reinstated, the mortgage is still in default and the mortgagee can move forward with foreclosure.

Questions Remain, Unfortunately
There are some unanswered questions that arise from this new law. For example, what if the loan is in arrears and a foreclosure action is instituted, but at some point in the foreclosure action the mortgagor tenders all of the arrearage? This tender would represent the “whole monthly payment amounts” since it is a cure. Does the mortgagee have to accept these payments and dismiss the action? It would appear that the simple answer is yes. However, this would seem to conflict with another statute; that is, 735 ILCS 5/15-1602. This is the reinstatement section in the foreclosure act.

Section 735 ILCS 5/15-1602 specifically limits reinstatement to a period prior to the expiration of 90 days from the date of service. Admittedly, not many mortgagees are enforcing this section, yet it still remains. As such, a mortgagor could tender all of the arrears after the 90-day period and, under the new law, the mortgagee would have to accept the funds. However, because the new statute also says that mortgage licensees retain their ability to enforce their rights under the mortgage, the foreclosure action may continue until the borrower also pays all other outstanding amounts necessary to fully reinstate the mortgage. For instance, if the borrower is 12 months in arrears, and the borrower tenders 12 months of payments, the servicer must accept and apply those payments. Even after those payments are applied, the loan will remain in default unless all of the foreclosure-related expenses and advances, such as attorneys’ fees and costs, are also tendered to the servicer.

Another question is presented in light of the new legislation: What happens when a loan is in default and a breach letter is sent? Then, subsequent to the breach letter and prior to the filing of a foreclosure, the mortgagor tenders only one payment, not the entire arrearage. Does a new breach letter have to be sent? It would seem from the language of the statute — which is vague — and the testimony at the hearing on the bill, that another breach letter would be unnecessary because the default has not been cured. Nevertheless, it is foreseeable that courts could rule that a new breach letter would be necessary in this scenario. Because this issue likely depends on the individual viewpoint of each particular judge, this is not a question with a definitive answer.

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South Carolina: Appellate Decision may Increase Jury Trial Demands by Borrowers

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

October 10, 2017

by Ronald Scott and Reginald Corley
Scott & Corley, P.A. – USFN Member (South Carolina)

A case from the South Carolina Court of Appeals may lead to a dramatic increase of jury trial demands by borrowers in foreclosure cases. [South Carolina Community Bank v. Salon Proz, LLC (S.C. Ct. App. Apr. 26, 2017)]. The issue presented by the appellant, Salon Proz, LLC (Salon), was whether the master-in-equity judge was correct in denying Salon’s motion to transfer the case to the general jury trial docket.

Salon contended that: (1) it did not waive its demand for a jury trial; (2) the clerk of court lacked the authority to refer the case to the master-in-equity judge; (3) if the clerk of court had the authority to refer the case, the clerk of court erred in doing so; and (4) a return to the circuit court jury docket is required.

Background
On October 26, 2011, South Carolina Community Bank (Bank) filed a foreclosure complaint against Salon. On November 23, 2011, Salon answered the complaint, raising several counterclaims and demanding a jury trial. In January 2012, Bank filed a motion to dismiss Salon’s counterclaims (pursuant to Rule 12(b)(6), SCRCP); and, in February 2012, Bank moved to refer the case to the master-in-equity judge pursuant to Rule 53, SCRCP. Per the order of reference, the master-in-equity judge was duly authorized to determine the issues, report the findings of fact, and thereafter enter a final judgment. Salon did not initially appeal the order of reference.

In August 2012, Salon filed a motion to transfer the case back to the general jury docket from the equity court. Salon asserted that it did not waive its right to a jury trial by failing to initially appeal the order of reference. Salon argued that it did not receive notice of the order of reference, whereby Bank countered that the court would have mailed such an order and Salon’s counsel took no action to object to the order. Salon attempted to file a motion to transfer the case back to the general jury trial docket which, like its motion to reconsider, failed.

Appellate Review
The Court of Appeals determined that Salon did not waive its right to a jury trial by failing to appeal the order of reference because the record did not reflect that Salon received notice of the order of reference’s entry, and the record did not reflect that Salon otherwise voluntarily relinquished the right to a jury trial. The court found that the right to a jury trial is highly favored and waiver of such a right cannot be lightly inferred. “In the absence of an express agreement or consent, a waiver of the right to a jury trial will not be presumed.” Given the lack of evidence indicating that Salon’s counsel received the order of reference, the court found that the right to a jury trial had not been waived by Salon.

The court also agreed with Salon’s second argument that the clerk of court lacked the authority to refer the case to the master-in-equity judge. Since Salon had already made a valid jury trial demand, the clerk of court was incorrect to refer the case to the master-in-equity judge under Rule 53(b), SCRCP.

As for Salon’s counterclaims, the court looked to supreme court precedent [Carolina First Bank v. BADD, LLC, 414 S.C. 289, 295 (2015)]: “In a foreclosure action, a counterclaim arises out of the same transaction or occurrence and is thus compulsory, when there is a ‘logical relationship’ between the counterclaim and the enforceability of the guaranty agreement” and should therefore be heard and decided by a jury.

Closing
This case was reversed by the Court of Appeals and remanded with instructions that it be returned to the general jury trial docket for further proceedings. These include a hearing before the circuit court to determine the nature and proceedings of any remaining counterclaims and any request for an order of reference to the master-in-equity judge for the other equitable matters.

As stated above, it is possible that this case may lead to an increase in jury trial demands by borrowers in foreclosure matters in South Carolina.

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Maine: State Supreme Court Ruling will Bar Many Future Foreclosure Restarts

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

October 10, 2017

by Santo Longo
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

The Maine Supreme Court has ruled that a second foreclosure action was barred by the doctrine of res judicata after an earlier foreclosure action was dismissed with prejudice. In Federal National Mortgage Association v. Deschaine, 2017 Me. 190 (Sept. 7, 2017), Fannie Mae sought to foreclose after the trial court had dismissed the earlier action brought on the same note and mortgage with prejudice as a sanction after both parties failed to comply with a court scheduling order. In the second action, the defendant-borrowers moved for summary judgment, contending that the action was barred by the trial court’s prior dismissal with prejudice. The trial court agreed and entered judgment in favor of the defendants.

Fannie Mae appealed and the Maine Supreme Court affirmed, holding that when Fannie Mae exercised its right to accelerate the loan in the first foreclosure action, the promissory note became “indivisible” and the borrowers’ obligation to make the monthly payments of principal and interest called for in the note “merged into a unitary obligation” to pay the entire debt. The Court further held that once this occurred, the borrowers had no continuing obligation to make the monthly installment payments, and there could be no new breaches or defaults under the note. The Court found that when Fannie Mae accelerated the debt in the first action, it placed the entire outstanding balance due on the note at issue; and, because Fannie Mae did not prevail in that action, it was precluded from bringing any future separate action to recover based on the same debt. As for the impact on the mortgage, the Court made it clear that:


Additionally, because Fannie Mae is precluded from seeking to recover on the underlying debt on the note, the [trial] court did not err by concluding . . . that the [borrowers] were, as a matter of law, entitled to a judgment declaring that they hold title to the . . . property unencumbered by the mortgage in favor of Fannie Mae.

 

The Supreme Court’s sweeping holdings in Deschaine will clearly present significant challenges to lenders and servicers seeking to enforce notes and mortgages in Maine. Going forward, Maine foreclosure plaintiffs and their representatives will have to be especially diligent when preparing all aspects of their cases to ensure that they can demonstrate the requisite “strict compliance” with the Maine demand letter and foreclosure statutes, as after the Deschaine case, it is clear that failure to do so can effectively result in the loss of the asset.

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Borrower Starts Separate Fraud Suit against Lender – and Loses

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

October 10, 2017

by Bruce J. Bergman
Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. – USFN Member (New York)

Some disgruntled borrowers are not satisfied with defending and delaying foreclosures. Rather, they carry it further and separately sue lenders in other actions brought, for example, in federal court. Among these approaches, exposed by a recent case [MAA-Sharda, Inc. v. First Citizens Bank & Trust Co., 149 A.D.3d 1484, 54 N.Y.S.3d 785 (4th Dept. April 28, 2017)] the issue arises where a lender obtained a judgment of foreclosure and sale, and the borrower — contending that the lender had foisted a fraud claim upon the court — initiates a separate action founded upon such a cause of action. Case law confirms that this will not work.

Where the complaint of the borrower in the new case alleges fraud, misrepresentation, or other misconduct of an adverse party committed during earlier litigation, the new plaintiff (here the borrower) is confined solely to the remedy of a motion to vacate the court’s prior order pursuant to New York practice [CPLR § 5105(a)(3)]. Accordingly, the remedy for the asserted fraud during a legal action is limited exclusively to that lawsuit itself; i.e., by moving [under CPLR § 5105] to vacate the judgment based upon its supposed fraudulent procurement, but not through a second plenary action collaterally assailing the judgment.

In the noted case, while the court confirmed that there is an exception to the rule, it only applies when the asserted fraud or perjury is simply a means to facilitate a larger fraudulent scheme that is greater in breadth than the one in the prior proceeding complained of. In MAA-Sharda, though, the assertion was found to be manufactured just to try to fit within that exception. It wasn’t real; the general rule prevailed and the borrower lost.

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Widespread Land Records Fraud Scheme Targets Distressed Properties and Borrowers

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

October 10, 2017

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

Over the past summer, title insurers uncovered a large-scale fraudulent scheme targeting distressed properties and borrowers, which has been identified in at least twenty states. The scam involves fraudulent recorded instruments that can cause a cloud on title, thus complicating or preventing loss mitigation efforts and foreclosure.

The perpetrators obtain information about a loan that is in default or already in foreclosure, sometimes offering loss mitigation assistance to induce cooperation from borrowers. The wrongdoers then create and record fraudulent instruments related to the loan in the land records. These may include assignments, deeds, deeds of trust, appointments of substitute trustees, mortgages, and releases — among others. The fraudulent instruments may vest title into the perpetrators, thereby allowing them to attempt a refinance or sale of the property. Alternatively, the fraudulent instruments might name the perpetrators as beneficiaries of a deed of trust, so that they can enforce the instrument, obtain proceeds of a sale, or sell the loan to an unsuspecting investor.

The best way to avoid loss related to this scheme is to be able to spot fraudulent instruments — and protect the original documents related to each loan. Consider providing additional staff training to recognize fraudulent documents. Red flags include assignments or appointments signed by entities that your staff does not recognize, especially where the executing entity is also the grantee. In addition, consider naming a formal point person for escalated, fraud-related issues.

Assess further training options for your loss mitigation teams to better identify scams targeting borrowers. Have a formal, written action plan for when borrowers are victimized by a fraud scheme. Consider creating a watermark on original loan documents or using other clearly identifiable markings on copies before sending them to borrowers, in response to debt disputes or qualified written requests.

This newly identified racket has potentially serious implications for the mortgage industry and more variations are likely to follow. It is essential to enhance your staff’s knowledge and improve overall internal procedures to protect your company from loss. Discuss this matter with local foreclosure counsel for advice as to how the fraud scheme may affect foreclosures in particular jurisdictions and to request specific training for your teams.

© Copyright 2017 USFN and Rosenberg and Associates, LLC. All rights reserved.
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Connecticut: Statutory Authority to Discharge a Mortgage is based on the Deed and Not Acceleration

Posted By USFN, Tuesday, October 10, 2017
Updated: Friday, October 6, 2017

October 10, 2017

by Jeffrey M. Knickerbocker
Bendett and McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

Conn. Gen. Stat. § 49-13 provides that when a “mortgagor or those owning the mortgagor’s interest therein have been in undisturbed possession of the property for at least six years after the expiration of the time limited in the mortgage for the full performance of the conditions thereof . . . the person owning the property, or the equity in the property, may bring a petition to the superior court for the judicial district in which the property is situated, setting forth the facts and claiming a judgment as provided in this section.”

In a recent case, the plaintiff-borrower argued to the trial court that, as the loan had been accelerated for more than six years, the borrower could obtain a judgment finding the mortgage was no longer enforceable pursuant to Conn. Gen. Stat. § 49-13. [Fitzpatrick v. U.S. Bank National Association, Trustee, 173 Conn. App. 686, 164 A.3d 832 (June 6, 2017)].

Background
The mortgage in Fitzpatrick has a maturity date of September 1, 2037. The Bank moved to strike the complaint based on prior appellate case law and the wording of the statute. According to the Bank, the statute could not be invoked until six years after September 1, 2037. The trial court agreed and struck the complaint. [Fitzpatrick v. U.S. Bank National Association as Trustee, Super. Ct., Docket No. FBT CV15–6050335 (Nov.23, 2015), 2015 WL 9242410, 51 Conn. L. Rptr. 287 (“Under the plaintiff’s interpretation of § 49-13(a), a defendant who elects the remedy of acceleration to cure a plaintiff’s default under a mortgage contract would cause the time limited in a mortgage for its full performance to change from the date of final payment to the acceleration date as a matter of law. Such an interpretation would flout the well-recognized principle that ‘[t]he terms of [a] mortgage determine [a bank’s] right to foreclose the mortgage’ and, by extension, to elect remedies in the event of a borrower’s default”)].

Appellate Review
In reviewing the trial court’s decision, the appellate court observed that “no appellate authority has addressed this precise issue.” On appeal, it concluded “that the phrase ‘time limited in the mortgage for the full performance of the conditions thereof’ clearly and unambiguously refers to the maturity date specified in the mortgage, which the defendants argue is the appropriate date, and not the acceleration date, which the plaintiff argues is the appropriate date.” In an order dated September 20, 2017, the Connecticut Supreme Court (the state’s highest appellate court) has refused to consider the appellate court’s decision.

Foreclosure Case
In an action bearing docket number FBT-CV-16-6056902-S (Foreclosure Action), the Bank sought to foreclose on the very same mortgage that was the subject of the case discussed above. The Bank commenced the Foreclosure Action before the appellate decision in that case.

In the Foreclosure Action, the borrower filed a counterclaim in which he made the identical claims as raised in the case that he brought as a plaintiff against the Bank. In response, the Bank filed another motion to strike. On the day that the appellate case decision was made available to the public, the court in the Foreclosure Action had oral argument on the motion to strike the counterclaim. In a memorandum of decision dated September 21, 2017, the trial court found that the appellate court had already decided the issue in the previous case, which was binding precedent on the counterclaim.

Closing Words
These cases show that while there is no requirement to immediately commence a foreclosure after default and acceleration of the debt, a prompt foreclosure can often avoid unnecessary litigation.

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SCRA: Fourth Circuit Affirms District Court’s Ruling re SCRA and the Effect of Military Re-Entry by Borrower who Originated Loan during a Previous Active Duty Period

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Ronald Scott and Reginald Corley
Scott & Corley, P.A. – USFN Member (South Carolina)

The Court of Appeals for the Fourth Circuit, in Sibert v. Wells Fargo Bank, N.A., No. 16-1568 (4th Cir. July 17, 2017), affirmed the ruling of the District Court for the Eastern District of Virginia.

Background
In Sibert, a servicemember had brought an action against the mortgagee, alleging that the mortgagee improperly foreclosed on his property by violating the rights afforded to him under the Servicemembers Civil Relief Act (SCRA). [The SCRA formerly appeared as 50 U.S.C. Appx. §§ 501, et seq. In 2015, the statute was transferred and is now located at 50 U.S.C.S. §§ 3901, et seq.]

The plaintiff-appellant, Richard Sibert, a sergeant in the U.S. Army, alleged that the foreclosure of his mortgage violated the SCRA, which prohibits foreclosure on a servicemember’s property during a period of military service without a court order. Briefly, the facts are that Sibert entered the U.S. Navy on July 9, 2004. On May 15, 2008, while on active duty, Sibert obtained a loan on his property secured by a promissory note. Sibert was honorably discharged from the Navy on July 8, 2008. In March 2009, eight months after Sibert’s naval discharge, Wells Fargo commenced a foreclosure proceeding on his home. In April 2009, Sibert re-enlisted in the military, joining the U.S. Army, where he remained on active duty. In May 2009, Siebert’s home was sold at public auction.

Court’s Analysis
The overarching issue resolved by the court is whether or not Sibert’s mortgage home loan qualifies under 50 U.S.C. § 3953(a), such that Wells Fargo was prohibited by 50 U.S.C. § 3953(c) from foreclosing on it without a court order. Section § 3953(c) states that a foreclosure is invalid if it is made during the period of the servicemember’s military service, except by court order which is only applicable if it complies with the protections of § 3953(a).

The interpretation of § 3953(a) is the turning point of the case: “This section applies only to an obligation on real or personal property owned by a servicemember that — (1) originated before the period of the servicemember’s military service and for which the servicemember is still obligated …” (emphasis added) [50 U.S.C.S. § 3953(a)].

Sibert contended that the SCRA is applicable to his mortgage home loan. Wells Fargo disagreed, asserting that the SCRA does not apply to his mortgage loan and, alternatively, that even if § 3953(a) did apply, Sibert voluntarily waived his rights under the SCRA in a “Servicemembers’ Civil Relief Act Addendum to Move Out Agreement.” Wells Fargo correctly maintained that “the period of ... service” described in § 3953(a) covers any period of military service, not individual periods as Sibert claimed, and because Sibert’s mortgage loan originated while he was serving in the military, the SCRA is inapplicable and the foreclosure was proper.

As a whole, § 3953(a) indicates that the SCRA does not apply to obligations that originate while the servicemember is already in the military. Due to the fact that Sibert’s mortgage originated while he was in the military, he cannot claim the remedy provided in § 3953(c).

Conclusion
The court ultimately decided that the SCRA’s protections did not apply to the mortgagor in this case where the mortgage originated during the servicemember’s first term of military service.

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Vacant Property in Foreclosure: Some Thoughts on the Process

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Robert Klein, Founder and Chairman 

Safeguard Properties (and Community Blight Solutions) – USFN Associate Member

Foreclosure is a necessity that scares the homeowner and gives the bank a headache. The mortgage counseling, incentives, and pre-screenings that are available in today’s homebuyer market can be helpful; ultimately, though, some foreclosures are bound to happen. When a foreclosure occurs, it can spell trouble for a neighborhood and trigger a demand for action.

For several years, states have grappled with the prospect of streamlining the foreclosure process, while ensuring protections are in place so that foreclosure is a last-ditch measure. This was to keep the social contract of home ownership solvent. Yet, once the decision has been made to foreclose, steps should be taken promptly to close out the property and allow it to re-enter the housing stock. At the end of 2016, states like Ohio, Michigan, and Florida led the country in vacated housing — with more than 80,000 vacant or abandoned homes and condominiums, each. Today, millions of homes are wallowing in the foreclosure process.

The longer a property sits vacant on the market during foreclosure, the more opportunity there is for its condition to worsen. Many community advocates and researchers have shown that buildings (particularly those boarded up) become beacons for crime. All the more reason that the burgeoning clearboarding movement is important as the “foreclosure/security” bandage, with the fast-tracking of a foreclosure to be the follow-up procedure. That’s why fast-track foreclosure laws like Ohio HB 390 and Maryland HB 702 came into being to swiftly address only vacant and abandoned homes.

The housing and mortgage service community relies heavily on one person to shepherd the process: its attorney. In Nevada, it can take more than 500 days to foreclose on a home following a 90-day delinquency, and that’s before any restoration or preservation can happen. The existing system calculates to an automatic six percent loss in value to the banks. This is a perfect example of the benefit brought by the lawyer who can quickly restore that property to saleable condition. With the combination of enhanced enforcement and efficiencies in technology to monitor and protect properties, it is the legal process that can ultimately determine whether an abandoned property drags an entire neighborhood down with it.

“Some of the mortgage companies today want these [properties] to be turnkey and are doing complete rehabs,” says Bob Hoobler, of RE/MAX 1st Advantage. “Once they foreclose, they want them to sell fast. They don’t want to have to sit on that asset.” As mortgage companies deploy assets to maintain and preserve properties, they want to protect their assets with quick, decisive legal turnaround to sale.

 

When a foreclosure happens, the home needs to be secured; the lawn needs to be cut, and the utilities need to be shut off. Neighborhoods suffer because homes are vacant; there is a loss to the local tax base. Municipalities whose schools rely on real estate taxes suffer. Maine’s foreclosure crisis recovery, for example, lags 10 percent behind national averages — with the typical foreclosure taking nearly two years. With the advent of fast-track foreclosure legislation, coupled with attorneys who can process it, Maine has the potential to catch up to the rest of the recovering national trend.

Foreclosures in the day-to-day life of the mortgage industry should be few; but if the fabric of America’s homeownership is to remain intact, foreclosures that do occur need to be quick, clean, and mistake-free. The front-line soldiers in the effort to maintain a balanced and fair housing market are foreclosure attorneys, and an efficient tool can be the fast-tracking process. Through fast-tracking and a solid understanding of efficient protocol, the legal processes help communities recover from the consequences of “zombie” properties — or better yet, avoid them altogether. After all, the goal for any responsible community should be going from foreclosure to property protection and re-sale as seamlessly as possible.

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Georgia: New Mortgage Servicing Rules

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Nicholas A. Rolader and Tomiya S. Lewis

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

Many states have shown an inclination to adopt rules either mirroring or sometimes even eclipsing those promulgated by the federal Consumer Financial Protection Bureau (CFPB), and Georgia is now jumping on the bandwagon. Effective July 19, 2017, Mortgage Servicing Standards (MSS) (GA Reg. 80-11-6, et seq.) adopted by the Georgia Department of Banking and Finance implement new standards that servicers must follow when handling delinquent accounts.

The new standards apply to any person or company that services loans within the state of Georgia, except, significantly to any bank or credit union “authorized to engage in business … under the laws of the United States” (O.C.G.A. § 7-1-1001(a)(1)). National banks and federal credit unions are therefore entirely exempt from the purview of the new standards, while those entities meeting the CFPB definition of a “small servicer” are also relieved from certain obligations.

Similarities to CFPB Rules
Generally, the standards require that servicers act with “reasonable skill, care, and diligence.” Though there is at present no precedent to further clarify this requirement, the majority of rules are far more specific and in line with CFPB rules. No fees may be charged for handling borrower disputes; facilitating routine collections; arranging repayment or forbearance plans; sending notice of non-payment; or updating records to reinstate a mortgage loan. (Note: The Georgia Department of Banking and Finance clarified in subsequent informal communications that servicer fees for updating internal systems or administrative tasks are prohibited; they confirmed that transactional costs such as recording costs and title costs are not prohibited.) All borrowers must be entitled to an error resolution process, which includes acknowledgment for receipt of notices of error within five business days of receipt, reasonable investigations, and a correction of error or determination of no error within 45 days.

The new MSS also closely mimic CFPB rules regarding loss mitigation, with two important exceptions. The standards, as currently written, prohibit conducting a foreclosure sale before evaluating complete loss mitigation applications when a complete application is received after the foreclosure process has commenced. However, the Georgia Department of Banking and Finance has advised that its intention was to track the cutoff period prescribed by the CFPB, whereby receipt of a complete loss mitigation package need not halt a foreclosure process if received 37 days or fewer before a scheduled sale. The department further intimated an intention to enforce the rule in accordance with the CFPB stipulations and to later clarify the language of the rule. Formal clarification of the rule has not been published to date. Secondly, this standard requires an appeal process for all forms of loss mitigation applications. While the CFPB rule governs review of loan modifications upon appeal, Georgia will require that any form of loss mitigation dispute be reviewed by personnel different than those who provided previous evaluations.

Other familiar CFPB regulations can also be found within the new MSS. Servicers may not “dual-track,” meaning commence foreclosure while a complete loss mitigation application is under evaluation; nor may servicers apply payments to anything other than principal and interest first, or impose force-placed insurance unless necessary and of a reasonable charge. Still, two final distinctions from the CFPB rules merit attention.

Differences from CFPB Rules
While the CFPB and the Georgia MSS both require a servicer acquiring rights to servicing a mortgage loan to provide contact information in its standard “welcome letter,” the Georgia rules depart from the CFPB rules in also mandating inclusion of a complete and current schedule of servicing fees and a statement setting forth the servicer standards described in this article. This disclosure must specifically include a description of the servicer’s process for appeal of loss mitigation denials. As best practice, it may be easiest for a servicer’s disclosures to specify its own policies and practices, but otherwise mirror the exact standards as set forth in Paragraph 2 of GA Reg. 80-11-6-.02.

Finally, where the CFPB has thus far been nebulous in describing requirements for self-reporting and remediating violations, the Georgia Department of Banking and Finance has attempted to define its expectations more clearly. The standards require that a servicer generally mitigate harm to the borrower when any violation is discovered while also maintaining a record of such violation. Where the violation, at the time of discovery, could result in aggregate financial harm to the borrower in excess of $1,000, the violation must be reported to the Department of Banking and Finance within ten days of discovery. After discussions with the department, it is the view of these authors’ firm that adequate compliance could consist of an internal audit system for quality control processes that would lead to reporting of any applicable violations discovered via periodic random sampling.

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Illinois: Payment of Post-Foreclosure Condominium Assessments; Confusion Abounds

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

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

There are effective, practical steps that mortgage loan servicers can take to prevent problems regarding condominium/homeowners associations (COA/HOA). For two years now, confusion has prevailed in Illinois over whether (and when) COA/HOA pre-foreclosure assessment liens are extinguished following completion of a foreclosure. In May of this year, a panel of the Illinois Appellate Court for the First District (which covers Chicago and Cook County) appeared to resolve the confusion with a bright-line rule. On August 8, 2017, however, a separate panel of the same appellate court issued a ruling that largely restored the previous uncertainty. The issue will now have to be resolved by the Illinois Supreme Court or the Illinois Legislature. Nonetheless, observation of best practices should prevent the issue from arising at REO closing tables.

Background
Almost two years ago, the Illinois Supreme Court held that a COA assessment lien against foreclosed property survives the foreclosure unless, and until, the winning sale bidder pays the ongoing, regular assessments that accrue following the sale. The case was 1010 Lake Shore Drive Ass’n v. Deutsche Bank National Trust Co., 43 N.E.3d 1005 (Ill. 2015). Ever since then, litigants have wrestled over exactly when such post-sale assessments must be paid in order to extinguish the lien for pre-foreclosure, unpaid assessments. Is there a “due date;” and, if so, what is it?

The question centers around section 9(g)(3) of the Illinois Condominium Property Act (the Act) (765 ILCS 605(9)(g)). That code section states that a buyer who takes title from a foreclosure sale, consent foreclosure, or deed-in-lieu of foreclosure must pay the regular assessments that accrue on the unit from the first day of the month that follows the sale or transfer. Section 9(g)(1) creates an automatic lien in favor of the COA for unpaid assessments, plus any associated costs or legal fees, but acknowledges that this lien is subordinate to most prior-recorded liens. Section 9(g)(3) acknowledges that the foreclosure of a prior mortgage wipes out the automatic lien, but states that payment of post-foreclosure assessments “confirms extinguishment” of the automatic lien. The 1010 Lake Shore Drive case held, in essence, that if post-foreclosure assessments go unpaid, then the extinguishment of any lien for pre-foreclosure assessments is never confirmed and, thus, still encumbers the condo unit.

After the 1010 Lake Shore Drive case came down, COAs and HOAs took the position that unless payment for post-foreclosure assessments was tendered on the first of the month following the judicial sale or soon thereafter, extinguishment of the lien for pre-foreclosure assessments was permanently and irrevocably waived. The associations would then assert extortive payment demands for clearance of pre-foreclosure assessment liens, which would frequently include substantial attorneys’ fees and other costs. These demands would occasionally reach into six figures. In many cases, COA/HOAs would make these claims after refusing to supply the information necessary to make timely payments in the correct amount.

The demands were typically presented to a foreclosing lender as a hurdle to a paid assessment letter — a necessary document for closing most residential COA/HOA REO transactions. The COA/HOA, aware of the lender’s vulnerability, took full advantage. Yet, section 9(g)(3) does not set forth a date by which post-foreclosure assessments must be paid. Instead, it merely sets the time from which they accrue to the new owner. Debate (and litigation) therefore raged over whether or not section 9(g)(3) implied a due date for payment.

2017 Judicial Rulings
In March, the Illinois Appellate Court for the First District appeared to decisively resolve this issue in favor of no due date. The decision in 5510 Sheridan Road Condominium Ass’n v. U.S. Bank, 2017 Ill. App. (1st) 160279 (Mar. 31, 2017), held that section 9(g)(3) of the Act did not include a timing deadline for tender of payment. Instead, statutory language requiring that assessments be paid “from and after the first day of the month” following the sale was simply a demarcation of time from which the obligation to pay actually begins. Under the 5510 Sheridan Road holding, with no deadline for payment, the liens were simply considered “confirmed as extinguished” as soon as post-sale assessment payments were tendered. Under this ruling, COA/HOAs were unable to argue that the timing of payment justified a demand for pre-foreclosure assessments, fees, or costs. This appellate court decision had the merit of creating a bright-line rule that everyone could easily observe.

Be that as it may, in August a separate panel of the First District Appellate Court handed down Country Club Estates Condominium Ass’n. v. Bayview Loan Servicing LLC, Ill. App. (1st) 162459 (Aug. 8, 2017). This case holds that section 9(g)(3) of the Act does contain a timing requirement — an indeterminate one that can always be debated and litigated: such payment is due “promptly.” In Country Club Estates the appellate court ruled that payment could be substantially delayed but still be prompt under extenuating circumstances, such as when an association unreasonably refuses payment or if court confirmation of the judicial sale takes an unexpectedly long time. Absent such circumstances, however, the opinion states that post-sale assessments are generally expected to be tendered in the month after purchase to be considered “prompt.”

Country Club Estates is a highly unfavorable decision for lenders because “prompt” payment is not sufficiently definite. Under the vagaries of this holding, COA/HOAs will almost certainly push the envelope in asserting claims that lender payments were not tendered “promptly.” This is likely because Illinois COA/HOAs have an established history of knowingly asserting weak claims with an expectation that lenders will pay, rather than fight, simply to get REO deals closed.

Practical Methodology
Nevertheless, observation of some wise procedures can prevent most problems of this nature. As the issue has unfolded over the past two years, best practices have remained the same. Lenders who wish to prevent this issue from arising at REO closing tables should do the following:

1. In all foreclosure cases where a condominium association is a party, issue a subpoena to the association seeking disclosure of both the amount due and the amount of regular assessments. The subpoena process is recommended because condo associations frequently file no appearance in foreclosure cases and also because subpoenas are easier to enforce than discovery requests. Despite that, in this author’s experience, issuance of discovery has also worked well.
2. Serve a demand for a statement of balance due to the condominium association board of managers, as provided by section 9(j) of the Act, while the foreclosure case is pending. If the association does not respond, its lien will be subordinate.
3. Make sure to tender a payment to the condominium association as soon as possible after the first day of the month following the foreclosure sale. Even where there is a dispute as to the amount due, it is always advantageous to make the best possible good-faith tender of payment in the first month following sale.
4. Make sure that communications with the association or its attorneys regarding assessment issues are in writing, whenever possible. Where such communications are not in writing, they should be fully documented in case a legal dispute later arises.

If the foregoing practices are implemented, demands for pre-foreclosure liens can be dealt with (or prevented) in a straightforward and expeditious manner.

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New York: No Jury Trial in a Foreclosure Action

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Bruce J. Bergman

Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. – USFN Member (New York)

The proposition that a borrower in a mortgage foreclosure action is not entitled to a jury trial is a reasonably well known one, although a new case underscores how encompassing the principle can be. [Security Pacific National Bank v. Evans, 148 A.D.3d 465, 49 N.Y.S.3d 122 (1st Dept. 2017)].

The underlying maxim is that mortgage foreclosure is an equitable action and, consequently, there is no right to a trial by jury. This is so — even if the complaint includes a request for money damages or a deficiency judgment — because such relief is incidental to the mortgage foreclosure process. The deficiency remedy is primarily equitable in nature and the money judgment is merely ancillary to the case. Thus, no right to a trial by jury is afforded, and that extends to guarantors on the note. Moreover, a borrower’s assertions of defenses of fraud or usury do not create an ability for a jury to decide the issue. Likewise, interposition of a counterclaim (for what might not otherwise be equitable relief) does not give rise to a jury demand.

The prohibition against the availability of a jury extended yet further in Evans. There, parties to a foreclosure sought specific performance of their settlement agreement as well as injunctive relief. Equitable relief was being pursued and no entitlement to a jury remained. Even were the borrower-defendant to have suddenly asserted a money damage claim — while at the same time withdrawing equitable claims — that could not revive or create a right to a jury trial that had been waived through equitable claims applying to the same transaction. The conclusion is meaningful and certainly a welcome one for lenders.

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North Carolina: Lender’s Affidavits Upheld

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Jeffrey A. Bunda

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

In a published decision, the North Carolina Court of Appeals rejected a debtor’s challenge to a foreclosing lender’s affidavit. The case is In re Foreclosure of Collins, No. COA16-655 (N.C. Ct. App. Feb. 7, 2017). This opinion offers guidance on the best practices of affidavit preparation and execution for North Carolina foreclosures under power of sale.

In Collins, the debtors’ sole challenge to the lender’s foreclosure action rested on a critique of the evidence offered at hearing. The facts are straightforward: In 2006, the debtors executed a note in favor of Beneficial Mortgage Company of North Carolina and secured repayment of the note with a deed of trust. Beneficial Mortgage Company of North Carolina merged with Beneficial Mortgage Company of Virginia in 2009, and that successor company ultimately merged into Beneficial Financial I, Inc. The debtors defaulted in 2013, and the penultimate Beneficial initiated foreclosure. The clerk of superior court entered an order authorizing foreclosure on October 17, 2013, from which the debtors exercised their right to a hearing de novo before a superior court judge.

Appellate Court’s Review
At that de novo hearing (held in early 2016), the debtors offered no evidence regarding payment or that another entity sought to foreclose. Instead, the debtors rested their case on a three-pronged challenge of the lender’s affidavit. First, the debtors complained that the affidavit before the court was executed in 2013 and that “the possibility exists that the Note had been negotiated at some point” between 2013 and the 2016 hearing. Second, the debtors asserted that the affiant had no personal knowledge of the facts contained in the affidavit and that the affidavit failed to meet the business record exception to the rule of evidence on hearsay. Finally, the debtors suggested that since lender’s counsel did not present the original note for inspection to the court, the foreclosure must fail.

The appellate court rejected all three arguments. In dismissing the debtors’ first argument, the court chastised the debtors’ “speculation” that the note had been negotiated and found that the trial judge properly admitted into evidence the 2013 affidavit, given that there was no evidence to support the debtors’ theory. The court then addressed the debtors’ critique regarding the business record exception to the hearsay rule and found that the trial judge did not abuse his discretion in admitting the affidavit. The court noted that the lender’s affidavit aptly set forth facts to establish that the affiant had knowledge of Beneficial’s servicing of the loan as the affiant testified that she was well-versed in Beneficial’s servicing practices. The court further noted that it was irrelevant whether the affiant had personal knowledge of the various mergers leading up to the final Beneficial entity because the court had independent evidence of these various mergers stemming from the public record.

The court then dispensed with the debtors’ final argument and opined that, although the lender’s attorney did not present the original note, a copy of said instrument was attached to the lender’s affidavit. Further, that affidavit stated that Beneficial possessed the note. Given that the debtors offered no evidence to contravene Beneficial’s status as holder of the note, the court could only infer that Beneficial is the holder and allowed the foreclosure to proceed. Accordingly, the trial court’s order was affirmed by the Court of Appeals.

Conclusion
Collins is instructive for servicers, and their counsel, as to how to tailor an affidavit that will pass muster — even in the face of speculative opposition from debtors. The appellate court’s holding ratifies the mortgage servicing industry’s best practices regarding affidavit preparation and execution, and rejects the speculation often offered by borrowers in defense. The opinion also demonstrates a court’s willingness to authorize foreclosure without the original note’s presentation at trial. While the original note’s presentation remains helpful for lender’s counsel, mortgage holders may rest easier on the fact that, so long as they are in possession of the note, North Carolina courts should authorize foreclosure.

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North Carolina: Appellate Ruling on the Lost Note Affidavit as Evidence

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by John A. Mandulak

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

Creditors had been losing sleep over lost or misplaced promissory notes and how to go about enforcing their rights to collect on the underlying debt. Such a scenario puts the creditor in the awkward position of figuratively having a ticket to the show, but no way of getting to the theater. Questions about enforcement of the secured debt abound: Will I be able to foreclose? Will the action have to be in front of a judge? What do I have to prove to entitle me to an order for sale? Until early 2017, there wasn’t much direction from the courts as to how to collect on accounts that lacked a promissory note; however, the opinion in the In re Iannucci, No. COA16-738 (N.C. Ct. App. Feb. 7, 2017), case allows creditors to rest a little easier. While unpublished, Iannucci demonstrates that certain creditors may use lost note affidavits as evidence in foreclosure hearings, so long as the affidavit complies with North Carolina law.

Background
In the subject case, a creditor acquired the payment rights in a promissory note and, shortly thereafter, lost the original note. After default, this creditor sought to foreclose before the clerk of court using an affidavit traditionally used in place of lost instruments. Initially the clerk of court refused to issue an order for sale, reasoning that the provisions of N.C. Gen. Stat. § 45-21.16(d)(i) taken in their most literal context require her to determine whether there is a “valid debt of which the party seeking to foreclose is the holder” and that the use of a lost note affidavit defeated this finding. While the creditor lost at that point, it timely appealed the matter to the superior court.

The trial court considered the lost note affidavit and ruled in favor of the creditor. The borrower appealed that ruling to the Court of Appeals, alleging that the superior court judge erroneously admitted the lost note affidavit because it contained a legal conclusion and, further, that the information within the affidavit was inadmissible hearsay.

The Court of Appeals was not persuaded, however, reasoning that any conclusions of law within an affidavit could be disregarded by the trial court and, moreover, that the lost note affidavit offered into evidence tracked the language of Rule 803(6) of the Rules of Evidence to fall within the business records exception. Specifically, the affiant stated that the information averred in the affidavit was based on a review of records kept in the ordinary course of business, and that the entries were made by employees of the creditor at or near the time of the occurrence.

The borrower then made the technical argument initially made before the clerk of court: that a lost note affidavit could not satisfy the provisions of N.C. Gen. Stat. § 45-21.16(d)(i) because it would be impossible to prove that there is a “valid debt of which the party seeking to foreclose is the holder.” The appellate court disregarded this contention, taking the position that the provisions of North Carolina’s Uniform Commercial Code (N.C. Gen. Stat. § 25-3-309) allow a creditor to enforce an instrument if it is able to show the following: (1) that the creditor was in possession of and entitled to enforce the instrument at the time it was lost; (2) that the loss of possession was not due to a transfer of the party entitled to enforce the instrument; and (3) that the creditor cannot reasonably obtain possession of the instrument due to its loss or destruction.

The Takeaway
The real utility of the Iannucci ruling comes with the court’s application of the Uniform Commercial Code (UCC) to a power of sale foreclosure. Until this ruling, some clerks of court in North Carolina took a literal interpretation of N.C. Gen. Stat.§ 45-21.16(d)(i), similar to the clerk of court in this case, insisting that a creditor offering a lost note affidavit could not foreclose in the traditional power of sale proceeding. The Iannucci ruling served to bridge the gap between North Carolina’s foreclosure laws and its UCC, allowing a creditor to use a lost note affidavit to stand in the place of the promissory note in a power of sale foreclosure.

Creditors should be careful to not lose sight of the forest for the trees, however — as the content and allegations in any lost note affidavit are of principal importance. In the Iannucci case, the creditor seeking foreclosure was the creditor that lost the instrument. The provisions of N.C. Gen. Stat. § 25-3-309 allow that creditor to enforce its instrument, but the protections of the UCC fail to apply to subsequent creditors.

Namely, if a creditor loses its promissory note and thereafter sells its payment rights to a third-party creditor, the third-party creditor’s collection efforts before the clerk of court will fail. The distinguishing reason for this is that the affidavit submitted to the clerk will either be executed by the prior creditor, defeating subsection (2) of N.C. Gen. Stat. § 25-3-309, or the third-party creditor’s affidavit will be unable to aver that the creditor owned the note at the time it was lost. In either instance, the creditor may not proceed in a power of sale foreclosure, and must instead make a choice of either establishing its authority to collect before a superior court judge, or alternatively force the prior creditor to repurchase the debt.

Prior to filing a collection action, a prudent creditor should confirm both the form and the content of a lost note affidavit with its collection attorney — thus maximizing the likelihood of gaining the collateral.

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South Carolina: Amended Chamber Guidelines for Senior BK Judge

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Louise “Ceasie” Johnson, Tasha Thompson, Ronald Scott, and Reginald Corley

Scott & Corley, P.A. – USFN Member (South Carolina)

Over the past year, there have been many changes to bankruptcy practices and procedures implemented by the U.S. Bankruptcy Court for the District of South Carolina. Most recently, senior bankruptcy judge, the Honorable John Waites, amended his chamber guidelines effective April 10, 2017 (Amended Guidelines). Although the Amended Guidelines impose new requirements for various types of bankruptcy matters, they have the greatest impact on mortgage creditors’ established practices regarding 11 U.S.C. § 362 settlement orders and loss mitigation and mortgage modification (LM/MM). [Click here to access Judge Waites’ Local Forms webpage.]

Generally, the Amended Guidelines provide for procedural and substantive changes with respect to the following: (1) Chapter 13 attorneys’ fees; (2) LM/MM; (3) numerous new, standard 11 U.S.C. § 362 settlement orders; (4) procedures for valuation mediations; and (5) the deadline for filing joint statements of dispute in Chapter 13 cases.


I. Amended Guidelines regarding timelines for LM/MM through the DMM Portal (Portal) are as follows, with Creditor’s/Servicer’s (Creditor) requirements in bold:


a. Immediately upon entry of the LM/MM Order, Debtor’s Counsel must register on the Portal;
b. Within 7 days of Debtor’s Counsel’s registration on the Portal, Creditor must sign up for the Portal, ensure that all necessary forms are uploaded on the Portal, and assign counsel to case in Portal*;
c. On or before Day 14, Debtor’s Counsel must submit loss mitigation application and any additional, necessary forms through the Portal and pay the Portal fee;
d. On or before Day 21, Creditor must acknowledge receipt of application and documents in Portal, provide Creditor’s representative’s contact information in Portal, and notify Debtor’s Counsel of any missing documentation through the Portal;
e. Initial Mediation Session must be held before the expiration of Day 30; and
f. By Day 90, Creditor must report its decision on the loss mitigation review to the Court.


*At the time that Creditor assigns counsel to a case in the Portal, it should send legal referral or notification of the Portal matter to its local bankruptcy counsel and approve the standard legal fee for representing the Creditor throughout the LM/MM process in the Portal.


II. Amended Guidelines regarding 11 U.S.C. § 362 Settlement Orders (Settlement Orders) are as follows:


a. Judge Waites now has seven different, fact-driven, and fact-specific, form Settlement Orders; and
b. Standard Cure Periods now are required for Settlement Orders, pursuant to the new uniform standards set forth in the following chart:

 

Number of Missed Post-Petition Payments 

Length of Cure Period

 0-6 Months  12-Month Cure
 7-12 Months  24-Month Cure

 More than 12 Months 

 To be determined at a hearing

 

 

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South Carolina: State Supreme Court Analyzes “Unauthorized Practice of Law”

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Ronald Scott and Reginald Corley 

Scott & Corley, P.A. – USFN Member (South Carolina)

Following a long line of cases where the state’s high court has analyzed and interpreted the unauthorized practice of law in real estate-related transactions, the South Carolina Supreme Court recently decided Boone v. Quicken Loans, Inc. (S.C. July 19, 2017).

In Boone, the petitioners (a group of homeowners) alleged that Quicken Loans engaged in the unauthorized practice of law (UPL) in mortgage refinance transactions throughout South Carolina. The Court found that Quicken did not engage in UPL and that South Carolina-licensed attorneys were involved in every critical step of the mortgage loan transactions as required by state law: (1) preparation/review of legal instruments relating to real estate transactions; (2) supervision of title searches; (3) supervision of real estate closings and disbursement of funds; and (4) supervision of the recording of the legal instruments. [See State v. Buyers Service Company, 292 S.C. 426, 430, 357 S.E.2d 15, 17 (1987); Matrix Financial Services Corporation v. Frazer, 394 S.C. 134, 714 S.E.2d 532 (2011).]

Petitioners contended that Quicken engaged in UPL in all four of the above-referenced steps. In each instance, the Court determined that there had been sufficient supervision by a South Carolina-licensed attorney throughout the real estate transaction. Although the title search and certification were not completed by an attorney, the title work and the assembled documents (in their entirety) were reviewed by a South Carolina-licensed attorney prior to issuance of a title commitment or moving forward with the real estate transaction. At the closing, all documents relevant to the refinance mortgage closing were reviewed by an attorney who also stated that he or she had reviewed and explained the documents to the borrowers; answered any questions asked by the borrowers; and supervised the borrowers’ execution of the documents. Finally, with regards to the disbursement of the closing funds, an attorney was involved to ensure that the proper disbursement of the loan proceeds occurred and that the necessary real estate documents were recorded in the correct county’s register of deeds office.

Court’s Analysis and Conclusion
While the Supreme Court could have set a bright-line rule in Boone to say that a South Carolina-licensed attorney is needed at the center of each closing that takes place, carefully overseeing each step, it deliberately did not. The Court continues to recognize that while ‘“South Carolina, like other jurisdictions, limits the practice of law to licensed attorneys’ [quoting Brown v. Coe, 365 S.C. 137, 139, 616 S.E.2d 705, 706 (2005)] … “what constitutes the practice of law must be decided on the facts and in the context of each individual case. [Citations omitted].”

The Court expressly distinguished Boone from Buyers Service (cited above), where there had been a complete lack of attorney involvement throughout the real estate closing process, thus constituting UPL. In the Boone case, the Court said that “… we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers. See, e.g., Crawford, 404 S.C. at 45, 744 S.E.2d at 541 (‘The unauthorized practice of law jurisprudence in South Carolina is driven by the public policy of protecting consumers.’).” The Court continued: “In this context, where there is already ‘a robust regulatory regime and competent non-attorney professionals,’ [citing Crawford at 47] we do not believe requiring more attorney involvement would appreciably benefit the public or justify the concomitant increase in costs and reduction in consumer choice or access to affordable legal services.”

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Tennessee: Nonjudicial Foreclosure is NOT Barred by Compulsory Counterclaim Rules

Posted By USFN, Tuesday, September 12, 2017
Updated: Tuesday, August 29, 2017

September 12, 2017 and November 6, 2017

 

by Jerry Morgan

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

This article appeared in the USFN e-Update (Sept. 2017 ed.) and is reprinted here for those readers who missed it.

In Threadgill v. Wells Fargo Bank, N.A., No. E2016-02339-COA-R3-CV (Aug. 1, 2017), the Tennessee Court of Appeals has confirmed that a lender does not lose its rights to conduct a nonjudicial foreclosure if it declines to file a foreclosure action as a compulsory counterclaim.

Borrower’s Lawsuit #1
In a 2011 case, a pro se borrower brought an action against Wells Fargo in order to stop a foreclosure of the property. The borrower filed the action in his capacity as trustee of the trust that owned the property. The borrower alleged breach of contract, misrepresentations, and violations of the Tennessee Consumer Protection Act, the Home Loan Protection Act, and the federal Truth in Lending Act. The circuit court granted summary judgment in favor of Wells Fargo, ruling that Wells Fargo had complied with the deed of trust, as well as the foreclosure statutes, and had committed no deceptive or unfair act.

The borrower appealed, and the Court of Appeals determined that it lacked jurisdiction, holding that a non-attorney trustee may not represent a purportedly pro se trust and, therefore, the notice of appeal signed by the non-attorney trustee was insufficient to initiate an appeal. [ELM Children’s Educational Trust v. Wells Fargo Bank, N.A., 468 S.W.3d 529 (Tenn. Ct. App. 2014).] The Tennessee Supreme Court denied permission to appeal.

Borrower’s Lawsuit #2
Two weeks after the Supreme Court’s denial, the borrower filed a new pro se action, this time in his individual capacity, alleging virtually the same claims against Wells Fargo. In his amended complaint, he asserted that if res judicata barred his second complaint, then the court must also find (by declaratory judgment) that any note or debt that Wells Fargo sought to enforce by foreclosure or otherwise is null, void, and unenforceable pursuant to Tenn. R. Civ. P. 13.01, which sets forth Tennessee’s compulsory counterclaims procedure.

The trial court disagreed. The court held that the parties and the issues alleged by the borrower were the same, meaning the borrower’s new claims were barred by res judicata. However, the trial court further held that a nonjudicial foreclosure is, by definition, nonjudicial, and therefore is not required to be raised in the lower court as a counterclaim.

Appellate Court’s Review
On appeal, the borrower interestingly conceded that res judicata barred his claims. Nonetheless, he contended that Wells Fargo, in response to the first lawsuit, was required by Rule 13.01 to bring a foreclosure action as a compulsory counterclaim. The Court of Appeals agreed with the trial court that such a compulsory counterclaim was not required.

The Court of Appeals noted that Rule 13.01 requires a party to state as a counterclaim “any claim, other than a tort claim, which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim …” As the appellate court recognized, the purpose of the second lawsuit “is to persuade the trial court to declare that the note and deed of trust are invalid under [Rule 13.01].”

The Court of Appeals observed that the Tennessee “legislature has determined that the public policy of the state is to allow foreclosures through non-judicial sale [citing CitiMortgage, Inc. v. Drake, 410 S.W.3d 797, 808 (Tenn. Ct. App. 2013)]” and further remarked that nonjudicial foreclosure was the “almost exclusive means of foreclosure in the [s]tate,” [citing Dickerson v. Regions Bank, No. M2012-01415-COA-R3-CV (Tenn. Ct. App. 2014)]. As a result, so long as the lender complies with the applicable statutes and the terms of the deed of trust, it does not have to resort to a judicial forum to foreclose.

The court next recognized that no Tennessee appellate court had yet addressed the precise issue of whether a nonjudicial foreclosure must be brought as a compulsory counterclaim. However, the Court of Appeals found that numerous jurisdictions had addressed the situation and had decided that similar rules of procedure regarding compulsory counterclaims do not bar subsequent nonjudicial, or power of sale, foreclosure proceedings.

Conclusion
The Court of Appeals agreed with the reasoning of these other jurisdictions and held that, in Tennessee, the compulsory counterclaim rule does not prohibit a lender from pursuing a subsequent nonjudicial foreclosure. The court noted that “to hold otherwise would be to allow a defaulting borrower to force a lender into court, and severely curtail if not eliminate its ability to pursue non-judicial foreclosure as otherwise permitted by Tennessee law.”

While not expressly addressed in this case, it is certainly arguable that allowing a borrower to compel a lender to forego its remedy of nonjudicial foreclosure (through the compulsory counterclaim rules) would be to unilaterally alter the terms of the deed of trust, which specifically permit nonjudicial foreclosures. At any rate, the Threadgill decision confirms that a lender’s ability to pursue a subsequent nonjudicial foreclosure in Tennessee is not defeated by compulsory counterclaim rules.

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