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Maryland: Protection of Tenancy by the Entirety not applicable to Federal Restitution Judgments

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Ruhi F. Mirza
Rosenberg & Associates, LLC – USFN Member (Washington, D.C.)

In a recent decision, the U.S. Bankruptcy Court for the District of Maryland held that a debtor’s interest as a tenant by the entirety in real property is not exempt from process against a federal restitution judgment entered solely against the debtor. In re Conrad, 2016 Bankr. LEXIS 10 (Bankr. D. Md. Jan. 4, 2016).

The debtor filed her individual petition under chapter 7. Prior to her bankruptcy filing, the debtor pled guilty to a count of conspiracy and agreed to the entry of a restitution order whereby she would pay $838,004.60. Her bankruptcy petition stated that she held an interest in real property as a tenant by the entirety with her husband. The debtor also listed the full amount of the restitution judgment on her schedules and claimed an exemption under 11 U.S.C. § 522(b)(3)(B), asserting that under Maryland law a debtor’s individual creditors “cannot levy upon nor sell a debtor’s undivided interest in entireties property to satisfy debts owed solely by the debtor.” In re Bell-Breslin, 283 B.R. 834, 837 (Bankr. D. Md. 2002). The chapter 7 trustee objected to the debtor’s claim of exemption, contending that federal law, not state law, determines whether an interest is protected based on tenancy and, pursuant to federal law, the debtor cannot claim an exemption.

The trustee relied upon the U.S. Supreme Court’s rationale in United States v. Craft, where the Court concluded that a husband’s property interest held as tenants by the entireties is subject to attachment of a federal tax lien levied for the husband’s sole tax obligation. [United States v. Craft, 535 U.S. 274, 122 S. Ct. 1414, 152 L. Ed. 2d 437 (2002)]. The Court reasoned that “[t]he statutory language authorizing the tax lien is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” Id. at 283.

In Conrad, the bankruptcy court reviewed the enforcement statute for restitution orders, which provides that the United States may enforce a restitution judgment against “all property or rights to property of the person fined” and found a clear Congressional intent to treat the enforcement of restitution judgments and unpaid taxes equally. 18 U.S.C. § 3616(a). The bankruptcy court concluded that, given the broad description of the property interests that are subject to the United States’ enforcement rights in the enforcement statute and the clear Congressional intention to treat those rights on par with the government’s right to collect taxes, the rationale of Craft applies to the collection of a restitution judgment against an individual tenant by the entirety. Accordingly, the bankruptcy court sustained the trustee’s objection.

© Copyright 2016 USFN. All rights reserved.
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Second Circuit: The Value of Accurately Reporting Bankruptcy Discharge

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Nathan C. Favreau
Hunt Leibert – USFN Member (Connecticut)

Creditors and servicers use credit reports maintained by the major American credit reporting agencies to estimate the level of risk associated with lending decisions. The value of credit reports depends on the accuracy of information contained in them, which is provided by banks, mortgage servicers, and other finance companies. It is vital that furnishers of credit data supply updated and accurate information, including whether a debt has been discharged in a bankruptcy proceeding.

Furnishers of credit information in the Second Circuit face the possibility of a lawsuit being filed by a borrower for failing to accurately report the entry of a bankruptcy discharge under at least two legal theories of liability:

  1. Fair Debt Collection Practices Act – 15 U.S.C § 1692e(8) prevents debt collectors from using false, deceptive, or misleading representations in connection with the collection of a debt. This includes communicating credit information that is known, or should be known, to be false. The Court of Appeals for the Second Circuit recently reversed a case that had dismissed claims brought under the FDCPA for — among other things — improperly reporting that the plaintiff owed money on the discharged debt. Garfield v. Ocwen Loan Servicing, LLC, 2016 U.S. App. LEXIS 3 (2d. Cir. Jan. 4, 2016). [The Second Circuit is comprised of Connecticut, New York, and Vermont.]

  2. Violation of the Discharge Injunction – To prove a claim under 15 U.S.C. § 524, a plaintiff needs to show that a defendant attempted to collect debts by not informing credit reporting agencies that those debts had been discharged. Haynes v. Chase Bank USA, N.A., 2015 U.S. Dist. LEXIS 27400 (S.D.N.Y. Mar. 5, 2015); Torres v. Chase Bank USA, N.A. 367 B.R. 478, 489 (S.D.N.Y. 2007) (court discussed low threshold for determining that failure to report bankruptcy discharge was coercive activity by the creditor).


Mitigating the Risk of a Lawsuit

To promote the value of credit reports, as well as to mitigate the exposure to lawsuits from borrowers, it should be a priority for creditors and servicers to accurately and timely report any bankruptcy-discharged loans within their portfolio. Free-flowing communication among various departments within an organization provides the key to lowering the risks associated with failing to update credit reporting information to reflect a bankruptcy discharge. Policies and procedures should be in place allowing those units that are responsible for processing notices of bankruptcy petition filings to communicate with the department responsible for furnishing information to the credit bureaus.

© Copyright 2016 USFN. All rights reserved.
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Law Firm Liability under FDCPA: U.S. District Court of New Jersey Decides Case

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Aaron L. Squyres
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The United States District Court of New Jersey recently issued an opinion that will have an immediate impact on mortgage default law firms in New Jersey — and which could ultimately have a far-reaching impact on the mortgage default legal industry. In the case of Psaros v. Green Tree Servicing, LLC, and Stern Lavinthal & Frankenburg LLC, Case No. 15-4277 (D.N.J. Dec. 21, 2015), the court denied Stern Lavinthal’s motion for judgment on the pleadings, and found that the firm was liable on a claim under the Fair Debt Collection Practices Act based on the firm’s reliance on a client’s debt figures.

The underlying facts are that Psaros defaulted on his non-escrowed mortgage loan, and Bank of America (by way of its counsel Stern Lavinthal) filed a foreclosure complaint. The loan was subsequently transferred to Green Tree, and Green Tree requested proof of property insurance. Psaros alleged that he tendered proof of the insurance in the manner requested. Green Tree later advised Psaros that force-placed insurance had been secured on the property.

Stern Lavinthal moved for entry of judgment and, as part of that motion, it filed a “Certification of Proof of Amount Due,” which included the sum of $10,974.37 for “Home Owners Insurance Premiums.” The Stern Lavinthal attorney submitted a “Certification of Diligent Inquiry,” in which she stated that she had been advised by a Green Tree representative that the representative had personally reviewed the affidavit of amount due and confirmed the accuracy of that document. The Stern Lavinthal attorney then executed the certification based on her communication with the Green Tree representative, as well as her own inspection of the documents and other diligent inquiry.

Psaros filed suit against Green Tree and Stern Lavinthal two months later. He alleged a violation of the Fair Debt Collection Practices Act, 15 USC § 1692e, based upon a false, deceptive, and/or misleading representation about the amount of debt. Specifically, a demand for payment of insurance premiums that were not actually owed under his loan agreement. Stern Lavinthal subsequently filed its motion for judgment on the pleadings.

The court denied the motion, finding that “[a] plain reading of the statute leads to the conclusion that a violation has occurred.” The court went to state that “[b]ecause the statute’s language is plain, the Court’s function is ‘to enforce it according to its terms’ so long as the disposition required by that [text] is not absurd.’” The court then added that its finding of a violation “is not absurd; rather, it is consistent with the Third Circuit’s recent decisions in McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240, 248 (3d Cir.) cert. denied, 135 S.Ct. 487 (2014) and Kaymark v. Bank of America, N.A., 783 F.3d 168 (3d Cir. 2015).”

In McLaughlin, the court found liability on the part of the law firm for including not-yet-incurred fees in a demand letter. In Kaymark, the court extended this not-yet-incurred rationale to a formal pleading. It is important to note that the Psaros decision can be distinguished from the McLaughlin and Kaymark cases, in that the law firm in Psaros was found liable due to alleged false representations relating to the client’s figures — not its own fees.

© Copyright 2016 USFN. All rights reserved.
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Massachusetts: Post-Foreclosure Title Clearing Law Enacted

Posted By USFN, Monday, January 25, 2016
Updated: Friday, February 19, 2016

January 25, 2016

 

by Francis J. Nolan
Harmon Law Offices, P.C. – USFN Member (Massachusetts, New Hampshire)

Massachusetts has enacted long-awaited legislation intended to resolve title defects resulting from a 2011 Supreme Judicial Court decision (U.S. Bank, N.A. v. Ibanez, 458 Mass. 637), which retroactively invalidated a significant number of foreclosures already on title. The bill, now known as Chapter 141 of the Acts of 2015, provides that the standard post-foreclosure affidavit of sale required by G.L. c. 244, s. 15 becomes conclusive evidence in favor of arm’s-length purchasers for value that the foreclosure was conducted in accordance with Massachusetts foreclosure laws, once the affidavit has been on record for three years and the borrower has vacated the premises.

The bill’s effective date was December 31, 2015, but because the bill provides a one-year period for borrowers whose foreclosure affidavits were recorded more than three years ago to come forward and sue, no affidavits will be considered conclusive evidence until 2017 at the earliest.

The bill has already survived one challenge since it was signed by the governor in December. A group of foreclosure activists who had bitterly opposed the passage of the law, and had successfully lobbied the previous governor to block a similar bill from being passed a year earlier, submitted a petition to the Secretary of the Commonwealth seeking to place a referendum on the November 2016 ballot for voters to decide whether to repeal the law. However, the state attorney general issued an opinion letter (dated January 19, 2016), concluding that the petition was constitutionally impermissible because the bill, in part, expanded the housing courts’ jurisdiction to hear counterclaims in post-foreclosure eviction actions, and thus fell under the “powers of the courts” exception to the constitutional petition process.

Activists have vowed to challenge the constitutionality of the new law in court at the earliest opportunity, which may come later this year or early next year. For the time being, the curative law remains in effect, and absent judicial pronouncements to the contrary, Massachusetts homeowners who have found themselves unable to sell or refinance their property because of old Ibanez problems may finally have their titles settled.

© Copyright 2016 USFN. All rights reserved.
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South Carolina: Issuance of a Foreclosure Deed Does Not Prevent an Appeal of the Foreclosure Action’s Merits

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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


A decision has been issued by the South Carolina Supreme Court in Wachesaw Plantation East Community Services Association v. Alexander, 2015 WL 6735746 (S.C. Nov. 4, 2015). The underlying case arose out of the foreclosure of a lien for delinquent homeowners association fees against Alexander, who had purchased a home for his elderly father. After a hospitalization, Alexander’s father did not return to the home. Alexander did not pay the regime fees, and the homeowners association commenced an action to foreclose the lien.

Alexander was served process, but never responded to the summons and complaint. He also failed to make any appearance in the case until after the property was sold to a third-party purchaser at judicial sale. Two months after the judicial sale Alexander tendered, in full, the homeowners association fees. However, the homeowners association would not accept payment because of potential liability to the third-party purchaser.

The foreclosure was not appealed by Alexander, although he moved to vacate the underlying judicial sale. The master-in-equity denied the motion because Alexander failed to allege improper service, lack of notice, lack of jurisdiction, or excusable neglect; offered no reason for not sending a check to pay the homeowners association fees in full once he received the summons and complaint; and failed to appeal the foreclosure judgment. After denying Alexander’s motion, the master-in-equity issued a foreclosure deed to the third-party purchaser. Alexander appealed the denial of his motion.

The third-party purchaser moved to dismiss the appeal on the ground that the issue appealed is moot because the foreclosure sale was finalized before Alexander filed and served his appeal. The Court of Appeals agreed, concluding that the appellant did not comply with South Carolina Code Section 18-9-170, which requires the posting of a bond and a written undertaking making assurances to not commit waste to the property and to pay rent if the foreclosure judgment is affirmed.

The South Carolina Supreme Court granted certiorari to review the appellate decision and to address the question of whether the subsequent issuance of a foreclosure deed mooted a timely filed appeal of an order denying a motion to vacate the sale of a foreclosed property. The Supreme Court’s opinion begins with a discussion of mootness and the exceptions to the general rule that a court will not render a decision when the controversy is moot. In its analysis, the court quickly concludes that South Carolina has established precedent that the issuance of a foreclosure deed does not moot an appeal. The court cites numerous decisions reaching the merits of the appeal despite a master-in-equity having already issued a foreclosure deed, as well as case law where the merits were decided despite the appellant failing to post a bond.

The Supreme Court did not offer an opinion on the merits of Alexander’s appeal, but did say that the issuance of a foreclosure deed clearly does not moot the appeal of a foreclosure sale, and that an appellate court may reach the merits of the underlying foreclosure case.

© Copyright 2016 USFN. All rights reserved.
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South Carolina: Twenty-Year Statute of Limitations Applies to Title Insurance Policy with a Corporate Seal

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by John S. Kay and John B. Kelchner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

One of the most important hurdles facing a lender or servicer who is contemplating filing a claim against a policy for title insurance, is whether or not the time frame for filing the claim under the applicable statute of limitations (SOL) has expired. South Carolina Code section 15-3-530(1) provides for a three-year statute of limitations for actions based upon a contract. As such, the general consensus in South Carolina has been that this three-year time frame is the applicable SOL for claims on title insurance policies. A recent judicial decision indicates that this may no longer be the situation.

In an appeal rising out of a title insurance policy claim, the South Carolina Court of Appeals found that the affixation of a corporate seal to the title policy evidenced an intent to create a sealed instrument, thus allowing the insured to take advantage of the twenty-year statute of limitations for sealed instruments rather than the three-year statute of limitations allowed under general contract law in South Carolina. Lyons v. Fidelity National Title Insurance Company as successor by merger to Lawyers Title Insurance Corporation, No. 2013-002137 (S.C. Ct. App. Dec. 2, 2015).

South Carolina statute provides for a twenty-year SOL for “an action upon a sealed instrument, other than a sealed note and personal bond for the payment of money only whereon the period of limitation is the same as prescribed in Section 15-3-530.” S.C. Code Ann. section 15-3-520(b) (2005).

In Lyons, the insured homeowners brought their claim and action on their title policy more than three years after they knew of, or should have discovered, the title defect in question. The seal that appeared on the title policy was a corporate seal of the title company placed next to the signature of the president of the company. The title company asserted that the purpose of the seal was to show that the company’s agent was authorized to issue the policy. The court rejected this argument and found that the title polices in question were sealed instruments and the twenty-year statute of limitations afforded under section 15-3-520(b) applied.

This is a significant case in South Carolina because the standard title policy form in use in the state usually contains a corporate seal, ostensibly allowing for a twenty-year statute of limitations for insureds to bring claims for most policies in the state.

© Copyright 2016 USFN. All rights reserved.
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North Carolina: Legal Description Errors in Deeds of Trust

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

The Court of Appeals of North Carolina issued an unpublished opinion that should reassure mortgage lenders that drafting errors in deeds of trust (ones that are clearly the result of a “mutual mistake” by both the lender and the borrower) can be corrected through court proceedings.

In Ocwen Loan Services, LLC v. Hemphill, 2015 WL 5432666 (N.C. Ct. App., Sept. 15, 2015), the deed of trust securing the loan to Ocwen contained a legal description covering only the driveway to the property, omitting the larger lot containing the borrower’s home. The borrower had first acquired title to the lot upon which his home was located, and then later purchased the driveway lot. When the loan was closed, only the driveway lot was described in the deed of trust. Ocwen obtained an order for summary judgment, allowing reformation of the deed of trust to include the legal description of the lot containing the borrower’s home. The Court of Appeals affirmed the judgment.

The evidence, which included the appraisal, demonstrated that: (i) the property address was included in the deed of trust; (ii) the borrower understood the address to refer to the lot containing the house; and (iii) the borrower acknowledged that Ocwen would expect the full legal description to be included in the deed of trust. All of this led the court to conclude that there was a mutual mistake of fact in that both parties fully intended the loan to be secured by the entire property. Additionally, the court noted that the deed of trust — which formed a contract between the parties — required the borrower to occupy the secured property as his principal residence. This would make sense only if the legal description included the lot containing the house.

The borrower’s defense, which the court briefly considered and then rejected, was that Ocwen may have intended to secure only the driveway lot because of a number of judgment liens against the lot containing the home. However, as the court made clear: In defending against a motion for summary judgment, a party must “produce a forecast of evidence demonstrating specific facts, as opposed to allegations, showing that he can at least establish a prima facie case at trial” in order to withstand a motion for summary judgment. Id at 4, citing Van Keuren v. Little, 165 N.C. App. 244, 246, 598 S.E.2d 168, 170 (2004).

The lesson to be learned, of course, is that lenders and their closing agents should employ quality control procedures to ensure that settlement documents are complete and accurate. Drafting errors such as this usually occur when real property is parceled out into different lots, or where lots are combined or divided. Special care should be taken in these situations to carefully review the final draft deed and deed of trust to ensure that the correct property description is provided.

©Copyright 2016 USFN and Hutchens Law Firm. All rights reserved.
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Kansas: To Vest or Not to Vest Mortgaged Property in Secured Creditor — Another Bankruptcy Court Weighs In

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Carrie D. Mermis
Martin Leigh PC – USFN Member (Kansas)

In a recent decision, the bankruptcy court held that a chapter 13 plan that provides for the vesting of mortgaged property in the secured creditor may not be confirmed over the creditor’s objection. [In re Williams, 2015 WL 7776552 (Bankr. Kan. Dec. 2, 2015)].

After the debtor’s original plan (which retained homestead property) was confirmed, the debtor filed a motion to amend the plan to surrender the property. Upon no foreclosure, the debtor filed a subsequent motion to amend the plan that not only provided for surrender of the property but also to vest title to the property in the secured creditor pursuant to 11 U.S.C. §§ 1322(b)(8) and (9). The plan further provided that an order on the modification would constitute a deed of conveyance to the property when recorded with the county Register of Deeds, and that all claims secured by the property would be paid by surrender of the collateral and foreclosure of the security interests.

The split of authority around the country on this issue was recognized in Williams. Some courts have held that vesting is allowed when the secured creditor does not object. Other courts have approved vesting provisions over the objection of the secured creditor, including one case in Kansas. The bankruptcy court in Williams, however, agreed with the courts that have held that a secured creditor cannot be compelled to accept ownership of collateral.

The court relied on the plain meaning of the statute and determined that although § 1322(b)(9) allows vesting the title to property in a secured creditor, § 1325(b)(5) does not permit confirmation of a plan vesting title to collateral in the secured creditor over that creditor’s objection. It was noted that vesting property in the secured creditor would impair the creditor’s rights under state law where the Bankruptcy Code does not provide it a basis to do so. Allowing the property to be vested to the secured creditor over its objection “would force it to accept the title and impose unbargained-for obligations on it to pay taxes and other costs associated with the [p]roperty.” The property at issue in this case also was subject to a junior mortgage lien.

Admittedly, the court found it “tempting” to allow such a provision because it would remove the burdens of property ownership from the debtor and promote the debtor’s fresh start. However, the court went on to say that to confirm the vesting provision, “… [the] results would, in effect, be judicial legislating that usurps the role of Congress.”

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Illinois: Pre-Judgment Post-Affidavit Expenditures are Not Recoverable Absent Subsequent Amendment to Judgment … Expanded to Cook County and Spreading

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Lee S. Perres and Kimberly A. Stapleton
Pierce & Associates, P.C. – USFN Member (Illinois)

The Second District Court of Appeals for Illinois found that a plaintiff was not entitled to recover a $470,340 real estate tax payment where the bank could have, but did not, amend the judgment of foreclosure prior to the sale to include a prejudgment tax payment. About one month prior to the hearing on the bank’s motion for summary judgment, the bank had made the prejudgment tax payment. See BMO Harris Bank, N.A. v. Wolverine Properties, LLC, 2015 Ill. App. (2d) 140921 (Aug. 20, 2015). Until recently, this requirement was limited to the Second District; that is, the counties of Boone, Carroll, DeKalb, DuPage, Jo Daviess, Kane, Kendall, Lake, Lee, McHenry, Ogle, Stephenson, and Winnebago.

Following the Second District Court of Appeals, Judge Brennan in Cook County ruled that absent a subsequent amendment to the judgment of foreclosure order fees, costs, advances, and disbursements expended by the plaintiff between the date of execution of the affidavit of indebtedness and the entry of the judgment of foreclosure cannot be recouped at confirmation of sale. The court based its ruling on a strict reading of 735 ILCS 5/15-1508(b)(1), allowing the collection of fees and costs arising between the entry of judgment of foreclosure and the confirmation hearing, in conjunction with 735 ILCS 5/15-1506(a)(2), which states that the affidavit of indebtedness contemplates the amount due the mortgagee at judgment.

The general rule in Illinois is that, excluding a conflict among districts, a judicial decision is not confined to any particular district — unless and until another district appellate court finds differently. The ruling in Wolverine appears to be spreading across the state as defense counsel becomes aware of its effect. To stay ahead of the trend, servicers and lenders should apply the Wolverine principle statewide.

To reiterate — During the time between execution of the affidavit of indebtedness and the entry of judgment substantial fees, costs, advances, and disbursements may be expended (i.e., taxes, property preservation, hazard insurance, etc.). In order to include these expenditures in a sales bid and to subsequently collect them at confirmation of sale, a supplemental affidavit of indebtedness is now required to be submitted to the court with a motion to amend the judgment. The court must amend the judgment to include any additional pre-judgment expenditures prior to the date of sale. If amendment does not occur prior to the sale, the plaintiff will need to set aside the sale, amend the judgment, and conduct a new sale. Alternatively, if it is not cost-effective to seek recovery of these expenditures, the expenditures can be excluded from the sales bid and the plaintiff may forgo amending its judgment.

©Copyright 2016 USFN and Pierce & Associates, P.C. All rights reserved.
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Illinois Supreme Court Affirms 1010 Lake Shore Association

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Lee S. Perres and Kimberly A. Stapleton
Pierce & Associates, P.C. – USFN Member (Illinois)

The Illinois Supreme Court has affirmed the appellate court in 1010 Lake Shore Association v. Deutsche Bank National Trust Company (Ill. Dec. 3, 2015), holding that a lien created for unpaid assessments by a previous owner is not fully extinguished following a judicial foreclosure sale until the purchaser at the foreclosure sale makes a payment for current assessments incurred after the sale.

As a result of the appellate ruling, condominium associations became much more aggressive about collecting past-due assessments from the purchaser at sale when the purchaser did not promptly pay the current assessment. The Illinois Supreme Court ruling has given condominium associations carte blanche to seek payment of the prior owner’s unpaid assessments — if the purchaser of the condominium unit following a foreclosure does not pay the assessments for which they are liable (i.e., from the first day of the month following the foreclosure sale).

Unfortunately, the Supreme Court did not recognize that a foreclosure sale is not final until the order approving sale is confirmed. As the law currently stands, the failure to make timely condominium assessment payments the month following the foreclosure sale can be very costly to servicers. As a result, servicers and lenders are urged to pay condominium assessment payments as soon as possible beginning the first day of the month following the date of the foreclosure sale.

A party who becomes the owner of a condominium unit following a foreclosure should immediately pay the assessments for which they are liable; i.e., from the first day of the month after the sale. Although a foreclosure sale in Illinois does not become final until after the sale is approved by the court, the foreclosing party should still pay the assessments after becoming the successful purchaser. If the sale is approved, the payment of these assessments will confirm that any lien by the condominium association for past-due assessments is extinguished. If the sale is not approved, the payment can be charged to the borrower as a cost necessary to protect the plaintiff’s interest in the foreclosed property upon a resale, payoff, or reinstatement.

The only guidance provided in 1010 Lake Shore Association by the Illinois Supreme Court is in ¶ 34 of its decision, which states as follows: “Additionally, the Act allows an encumbrancer ‘from time to time [to] request in writing a written statement *** setting forth the unpaid common expenses with respect to the unit covered by his encumbrance.’ 765 ILCS 605/9(j) (West 2008).” Thus, a mortgagee may protect its interest by requesting notice of unpaid assessments, joining the association as a party to a foreclosure action, and paying assessments that accrue following its purchase of a property at a foreclosure sale.

Servicers and lenders should request, after judgment but prior to sale, “a written statement” setting forth the unpaid assessments with respect to the unit being foreclosed on and to document all activities taken to that end. This way, the amount of the assessment will be known and the payment can be made promptly after the sale to avoid the possibility of being liable for all past-due assessments. In the event that an association is not cooperative and refuses to provide that information, servicers and lenders will have an opportunity to seek relief from the court.

Hopefully, future case law will clarify when these payments have to be made in a manner that comports with Illinois law.

©Copyright 2016 USFN and Pierce & Associates, P.C. All rights reserved.
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Connecticut: Solicitation for Loan Modification Brings Litigation

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

The borrowers have sued a servicer for sending a solicitation that indicated the borrowers could be eligible for a modification. The borrowers allege that they should not have been solicited for another loan modification when a previous loan modification precluded any further modifications on their loan. In the case of Hansen v. Wells Fargo Bank, N.A., Docket No. FBT-CV-14-6042087, 2015 Conn. Super. LEXIS 1940 (Aug. 10, 2015), the court struck several of the servicer’s defenses. The case remains pending and is scheduled for trial on September 13, 2016.

In this matter, the borrowers had entered a loan modification in 2010. They were unable to meet the payment obligations of the loan modification and the servicer started a second foreclosure action. The borrowers elected to participate in the court mediation program. During the mediation program, the borrowers allege that the servicer repeatedly asked for new and different financial documents, and that these requests for documents went on for almost three years. The borrowers further assert that after three years of mediation the servicer revealed, for the first time, that the borrowers were ineligible for a loan modification because they had a previous loan modification. The borrowers claim that they suffered damages as a result of the delay. Moreover, they allege that soliciting them for a modification that would never occur constituted negligent misrepresentation, negligence, an unfair trade practice, and unjust enrichment.

The servicer contended that it was required by various settlement agreements, federal guidelines, and federal regulations to make the solicitation. The court disagreed. The servicer first raised that the terms of the National Mortgage Settlement (NMS) required solicitation regardless of whether the loan qualified for a loan modification. The court disagreed that this could be a defense when the solicitation misrepresented that a loan modification was possible. The court further found that the NMS specifically states that it is subject to “federal, state, and local laws, rules and regulations.”

The servicer also maintained that under the federal guidelines for the Home Affordable Modification Program (HAMP), the servicer was required to solicit the borrowers. The court pointed to Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 555 (7th Cir. 2012), to find that HAMP guidelines do not preempt state law. As the statements in the solicitation that the loan could be eligible for a modification were not accurate, the court found that HAMP guidelines did not shield the servicer from liability.

The servicer also asserted that the Consumer Finance Protection Bureau regulations and the National Banking Act preempted state law. However, the court looked at both the statute and the regulations and found that the borrowers’ allegations were not preempted. Therefore, the court struck this defense.

It appears that the situation in Hansen may have been avoided by alerting the borrowers at the outset that their loan was not eligible for a modification. This case highlights the importance of providing as many facts as possible to the borrowers concerning their loan.

© Copyright 2016 USFN. All rights reserved.
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Connecticut Legislature Enacts Probate Fee Lien

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Matthew J. Cholewa
Hunt Leibert – USFN Member (Connecticut)

The Connecticut legislature has enacted a lien on real property that runs in favor of the state of Connecticut for probate fees payable in decedent’s estates.

Those doing business in Connecticut are likely aware of the existing estate tax lien — an inchoate lien in favor of the state of Connecticut, which arises upon the death of an owner of Connecticut real property. Even though there is no recorded lien, anyone purchasing or financing real estate where an owner in the chain of title is deceased must be sure that the estate tax lien is cleared.

In section 454 of Public Act 15-05 (June Special Session) the Connecticut legislature created the probate fee lien, another inchoate lien that arises in connection with the death of a property owner. The probate fee lien relates to estates that were open on or after July 1, 2015.

The probate court shall issue a certificate of release of lien for any affected real property after receipt of payment in full, or if the court finds that payment is adequately assured. The certificate of release of lien may be recorded in the land records where the property is located.

For properties that are in foreclosure, if there is a deceased person in the chain of title and the probate fees have not been paid in full or the lien released, the state of Connecticut should be named as an additional defendant in the foreclosure action. It is important to note that the probate fee lien (like the estate tax lien) does not have priority over previously recorded mortgages. Thus, a recorded mortgage will hold priority over both the estate tax lien and the probate fee lien if a borrower dies after granting the mortgage, and a foreclosure of the mortgage can wipe out the probate fee lien (as well as the estate tax lien) as long as the state is named as a defendant.

The probate fee legislation can be found in section 454 of Public Act 15-05 (June Special Session), the “budget implementer” bill. It was enacted without the benefit of a public hearing. In the same legislation, Connecticut increased probate fees as a means of funding the probate court system. Unlike most states, Connecticut includes property passing outside probate in calculating its probate fees. The fees are, in effect, a tax on a person’s estate regardless of whether the property comprising the estate passes through — or outside of — probate.

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Post-Foreclosure Sale: New Statute re Abandoned Personal Property

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Samuel Jackson
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Last year the Arkansas General Assembly passed Act 1139/A.C.A. 18-27-103, a bill that offers guidance on the treatment of personal property after a foreclosure sale. Act 1139 is a welcome regulation for the mortgage foreclosure industry because it shields purchasers from liability for disposing of property without having first completed a full eviction. Before the bill’s passage, a purchaser at foreclosure sale was required to make a judgment call: proceed with the expense of a full lawsuit, or take a risk and dispose of personal property with the hope that it was, in fact, abandoned. Purchasers can now rest more easily when removing personal property from the vacant premises.

As stated above, Act 1139 classifies some personal property as abandoned, relieving the purchaser from liability for disposing of it. The Act provides guidelines for disposing of personal property on vacant foreclosed property, and shields the purchaser from liability when either of the two avenues provided in the text are fulfilled. A.C.A. 18-27-103 states that “all personal property remaining on the land or in a structure on the land shall be considered abandoned if the owner of the personal property has received notice of the sale of the land.” The personal property is considered abandoned and liability will not attach if the owner has not removed the personal property within thirty days of the recording of the deed commemorating the sale.

The other leg of the statute classifies personal property as abandoned if the purchaser mails notice of the sale to the last-known mailing address of all previous occupants, and posts notice of the sale of the land. The personal property is abandoned if the owner has not removed the items or notified the purchaser in writing of the owner’s claim to the personal property within thirty days. So long as the notice is mailed and posted in accordance with this requirement, the property will be considered abandoned after thirty days regardless of whether the occupants actually received notice. The notice must be dated, mailed by certified mail, and posted conspicuously on the land; plus it has to contain a statement that the personal property must be removed or claimed within thirty days.

18-27-103(c) states that “[a] purchaser of land that disposes of personal property that is considered abandoned under this section is not subject to liability or suit.” If either of these requirements is met, the property is considered abandoned and may be disposed of as needed. This relieves the purchaser from liability for disposing of the personal property as well as the expense of proceeding with the full eviction lawsuit to ensure that a property is vacant.

However, in the event that the owner of the personal property wants the personal property, the Act provides further guidance. If the owner does not remove the personal property within thirty days, but gives the purchaser written notice of his or her claim, the purchaser may remove the personal property and store it at the owner’s expense for up to thirty days. The owner must remove the personal property from storage and pay the reasonable expense of storage within thirty days; otherwise the personal property is considered abandoned. There are also some limitations to the Act, in that mobile homes and/or abandoned personal property on which a creditor holds a lien or security interest may not be considered abandoned under the section.

This statute is very new and has yet to be debated in the courts, but it offers clear guidance for purchasers at foreclosure sale to obtain possession of property more cheaply and efficiently. The practice should provide significantly faster turnover of possession post-foreclosure, easing the costs of managing properties and reducing the risks and costs of upkeep on a property that is not yet available for marketing and sale.

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In re Mayer – A New Limitation on Dewsnup v. Timm

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Caitlin L. Stayduhar
Martin Leigh PC – USFN Member (Kansas)

The U.S. Supreme Court’s opinion in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992), held that Bankruptcy Code § 506(d) does not allow a debtor to avoid a consensual mortgage lien when the value of the collateral is less than the amount of the claim secured by the lien. Dewsnup has been questioned by a number of opinions and publications since its issuance in 1992. On November 20, 2015 the U.S. Bankruptcy Court for the Eastern District of Louisiana further limited the applicability of Dewsnup by holding that a nonconsensual lien is avoidable when insufficient equity exists to secure its debt. [In re Mayer, 2015 Westlaw 7424327 (Bankr. E.D. La. 2015)].

In Mayer the debtor sought to avoid the lien of a writ of execution arising from a money judgment taken against the debtor in state court, basing her argument upon Dewsnup. The bankruptcy court disagreed with the Supreme Court’s analysis, finding that the Supreme Court incorrectly conflated the concept of a “consensual lien” with an “allowed claim.” The bankruptcy court took further issue with Dewsnup’s interpretation of § 506(d), which the bankruptcy court stated would effectively eliminate the application of § 506(d) under any chapter, and prevent the use of § 506(d) for its stated purpose of reducing undersecured claims to the value of the property. In reaching its ultimate decision to limit Dewsnup’s holding to the avoidance of only consensual mortgage liens, the bankruptcy court reiterated the Supreme Court’s directive to apply Dewsnup narrowly, stating that a restricted application was “both warranted and preferable.”

The Mayer decision impacts the holders of an entire class of liens by providing debtors with an argument for avoiding nonconsensual liens that are undersecured. The bankruptcy court’s focus on challenging the Supreme Court’s analysis emphasizes the reluctance of many courts to extend Dewsnup to situations beyond the exact factual scenario of that case, and suggests that courts will continue to limit Dewsnup’s application in the future. As a result, Mayer may bolster the positions of debtors seeking to avoid other types of liens or support an eventual challenge to the Dewsnup holding itself.

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Tennessee: Supreme Court Holds MERS is Not Entitled to Independent Notice of Tax Sale

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

Tennessee has now joined a list of states whose highest courts have held that the failure to provide MERS with independent notice of sales that might eliminate its interest in real property is not a violation of due process. In the recent case, the context was a tax sale. [Mortgage Electronic Registration Systems, Inc. v. Ditto, 2015 Tenn. LEXIS 100 (Tenn. Dec. 11, 2015)].

Background

MERS brought suit to set aside a 2010 tax sale of real property. MERS contended that the county’s failure to provide it with notice of the tax sale violated its rights under the Due Process Clause of the U.S. Constitution.

The purchaser of the property at the tax sale moved for judgment on the pleadings based on two arguments. The first theory was a procedural hurdle, in that MERS did not tender payment of the sale price plus accrued taxes before filing suit. The Supreme Court rejected that argument. The second assertion (and the one at issue for purposes of this article) is that MERS did not have an interest in the property that was subject to protection under the Due Process Clause. The trial court granted judgment for the purchaser, determining that MERS did not have an independent interest in the property entitled to protection. The Court of Appeals affirmed, based on MERS’s lack of standing to file suit.

The Supreme Court rejected the lack of standing basis, holding that where a plaintiff claiming a protected interest in real property files suit to have a tax sale declared void for lack of notice, he is not required to tender payment of the sale price plus taxes prior to filing suit. Nonetheless, the Supreme Court affirmed the Court of Appeals, opining that MERS had acquired no protected interest in the subject property either through the deed of trust designation of MERS as “beneficiary solely as nominee for the lender …” or its reference to MERS having “legal title” to the subject property for the purpose of enforcing the lender’s rights. Without a protected interest in the subject property, the Supreme Court held that MERS’s due process rights were not violated by the county’s failure to provide it with notice of the tax sale.

The Supreme Court spent a great deal of time discussing the history and purpose of MERS. The Court observed that MERS “performs a service for lenders by purporting to function as the mortgagee of record and nominee for the beneficial owner of the mortgage loan.” The Court also noted that “no mortgage rights are transferred on the MERS® system. The MERS® system only tracks the changes in servicing rights and beneficial ownership interests.”

While the Supreme Court recognized that the MERS system of registering and tracking mortgages over the life of the loans “sought to address problems that arose from mortgage securitization,” the Court nevertheless was troubled by the language in deeds of trust whereby MERS is appointed “beneficiary” while at the same time it “acts solely as the nominee for the lender and its successors or assigns.” The Court found such language “opaque” and “notable in its lack of clarity.”

Conflicting Decisions Reviewed

The Supreme Court of Tennessee specifically found that the issue in the case “is better framed as whether MERS has a property interest that is protected under the Due Process Clause. This is an issue of first impression in this Court.”

After discussing general principles regarding the Due Process Clause, the Court looked to other states for guidance. The majority of cases involving MERS have addressed MERS’s appointment as beneficiary “solely as nominee” for the lender. Many cases have upheld such appointment. Thompson v. Bank of America, N.A., 773 F.3d 741 (6th Cir. 2014). Thus, according to those courts, MERS has the authority to act on behalf of a valid note holder, so MERS is able to validly assign a deed of trust or enforce a note on behalf of the lender.

Other courts, however, have held that MERS’s designation as beneficiary as nominee for the lender does not give it the power to assign a deed of trust. The typical reasoning is that because the note and security instrument cannot be “split,” and MERS never held authority to assign the promissory note that evidences the actual debt, MERS would likewise have no authority to assign the deed of trust. Summers v. PennyMac Corp., 2012 WL 5944943, at *5 (N.D. Tex. Nov. 28, 2012); McCarthy v. Bank of America, NA, No. 4:11-CV-356-A, 2011 WL 6754064, at *4 (N.D. Tex. 2011); Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623-24 (Mo. Ct. App. 2009).

The Court noted in Ditto that most of the cited cases did address whether MERS has the power to assign a note and deed of trust, foreclose on a note, or to otherwise exercise the interests of the lender. However, they did not address the specific issue presented in Ditto, namely whether or not MERS itself had an interest in the relevant property that would be subject to protection under the Due Process Clause.

While addressing that specific question in Ditto, the Court found the relevant decisions divided. Some of the decisions have held that the appointment of MERS as beneficiary nominee for the lender did not grant MERS a protected interest in the property. Ditto relied heavily on Landmark National Bank v. Kesler, 216 P.3d 158 (Kan. 2009) to explain those decisions. In Landmark, the borrower had two loans on the same property. The first mortgage was with Landmark National Bank and the second was with Millenia Mortgage Corporation. The second mortgage utilized MERS as a “nominee” and “beneficiary,” and MERS thereafter assigned the second mortgage to Sovereign Bank. When Landmark filed a foreclosure petition, it named the mortgagor and Millenia; it did not notify Sovereign or MERS, even though the documents identifying MERS as the mortgagee as nominee for Millenia and Millenia’s successors were available. Because no answer was filed, the court entered a default judgment, and the property was sold.

Sovereign, the assignee to the second mortgage, moved to set aside the default judgment and objected to the confirmation of the sale. Sovereign asserted that MERS was a “contingent necessary party,” and because they were not named, Sovereign did not receive proper notice of the foreclosure proceedings. MERS also filed a motion to intervene and a motion to join Sovereign’s motion to set aside the default. The trial court denied those motions, finding that MERS was not a real party in interest and that Landmark therefore was not required to name MERS as a party in the foreclosure action.

The Supreme Court of Kansas looked to the language of MERS being appointed a “nominee,” and stated that the relationship that MERS had with Sovereign “is more akin to that of a straw man than to a party possessing all the rights given a buyer ….” The Kansas Court ultimately held that “[t]he Due Process Clause does not protect entitlements where the identity of the alleged entitlement is vague. A protected property right must have some ascertainable monetary value.” The Court concluded that MERS did not demonstrate “that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgag[ee]. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation.”

In Ditto, the Court also looked to Weingartner v. Chase Home Finance, LLC, 702 F. Supp. 2d 1276 (D. Nev. 2010), for a discussion of MERS’s role and usage of the term “beneficiary.” Weingartner found that MERS was not a true beneficiary “in any ordinary sense of the word. Calling MERS a beneficiary is what cause[d] much of the confusion. To a large extent, defendants in these actions have brought this mass of litigation upon themselves by this confusing, unorthodox, and usually unnecessary use of the word ‘beneficiary’….”

Summarizing the decisions consistent with Landmark and Weingartner, Ditto states: “[t]hese courts held that MERS was not the beneficiary under the deed of trust and, as nominee, was simply an agent or ‘straw man’ for the lender. As a result, these courts held that MERS did not have its own protected interest in the subject property.”

Other courts, however, have held that MERS’s status as beneficiary as nominee constitutes a protected property right. For example, in Mortgage Electronic Registration Systems, Inc. v. Bellistri, No. 4:09-CV-731, 2010 WL 2720802 (E.D. Mo. 2010), a county failed to give MERS notice of a tax sale, while the Missouri statute required notice to any person “who holds a publicly recorded deed of trust, mortgage, lease, lien or claim upon that real estate.” Bellistri, 2010 WL 2720802, at *10. The court held that a “publicly recorded” claim in the property included MERS’s appointment as beneficiary as nominee. Thus, it had a due process right to notice.

Having looked at the conflicting decisions, Ditto squarely addressed whether the simple appointment of MERS as nominee as beneficiary on behalf of the lender was sufficient to trigger Due Process Clause protections.

Conclusion

On the one hand, MERS argued that various Tennessee courts had upheld its role as nominee and its ability to foreclose on secured property. Ditto did not question MERS’s authority to act as agent for the lender or successor lenders; “[h]owever, the lender’s agreement to appoint MERS as its agent does not endow MERS with the lender’s property interest or for that matter any independent property interest whatsoever. The note owner is the actual beneficiary, i.e., the party that benefits from the security instrument by its entitlement to payments on the promissory note, secured by the deed of trust.”

In Ditto, the Court agreed with those courts holding that despite the label of “beneficiary” in the deed of trust, MERS is not a true beneficiary. The Court noted that MERS “receives nothing from the [deed of trust] itself.” As the language in the deed of trust specifically qualified the term “beneficiary” by noting that MERS was a beneficiary “solely as nominee” for the lender, MERS was able to act only as an agent for the lender, not for its own interests.

Finally, the Court observed in Ditto that the notice provisions in the deed of trust itself only addressed required notices between the borrower and the lender. The deed of trust did not require any notice to be given to MERS in connection with the obligations between the borrower and the lender.

Because MERS was never given an independent interest in the property, the Court held that MERS had no interest in the property that is protected under the Due Process Clause. Accordingly, the county was not required to provide MERS with notice of the tax sale, and MERS was unable to set it aside.

The practical effect of the Ditto case within Tennessee will likely be minimal. As Ditto itself stated, the Tennessee statute requiring notice of tax sales to “interested persons” was revised effective July 1, 2015. Tenn. Code Ann. § 67-5-2502(c)(1)(B) now defines “interested persons” to include “a person or entity named as nominee or agent of the owner of the obligation that is secured by the deed or a deed of trust and that is identifiable from information provided in the deed or a deed of trust ….” Thus, the Tennessee legislature has already acted to provide MERS a specific protection without the need to resort to Due Process arguments.

Even so, the findings of Ditto may be far-reaching, as it is likely that other courts struggling to define the role of MERS and its true interest in mortgages or real property will find Ditto’s logic compelling.

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Eleventh Circuit Issues Stern Warning Against Inclusion of Estimated Fees and Costs in Reinstatement Quotes

Posted By USFN, Monday, January 4, 2016
Updated: Tuesday, January 19, 2016

January 4, 2016

 

by Steven J. Flynn
McCalla Raymer, LLC – USFN Member (Georgia)

The Eleventh Circuit Court of Appeals has held, in an unpublished decision, that a loan servicer violated the Fair Debt Collection Practices Act (FDCPA) by including the “estimated” future attorneys’ fees of the law firm retained by the loan servicer to conduct foreclosure proceedings in a letter to the borrower, setting forth the amounts necessary to reinstate the borrower’s loan under the terms of his security instrument. [Prescott v. Seterus, Inc., No. 15-10038 (11th Cir. Dec. 3, 2015)]. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)

Factual Background

On August 1, 2012 the borrower Prescott defaulted on his residential mortgage loan. Seterus began servicing the mortgage on October 1, 2012. Following the borrower’s default, Seterus prepared to initiate foreclosure proceedings against the borrower and retained a law firm “to provide legal services associated with the foreclosure.” The borrower asked Seterus to reinstate his mortgage in August 2013. Under the terms of the borrower’s mortgage, the borrower could reinstate his mortgage under “certain conditions,” including, in pertinent part, by “pay[ing] all expenses incurred in enforcing [the borrower’s] Security Instrument, including, but not limited to, reasonable attorneys’ fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender’s interest in the Property and rights under this Security Instrument ….”

On September 4, 2013 Seterus sent the borrower a letter setting forth a reinstatement balance of $15,569.64 (an amount stated to be good through September 27, 2013), which included the amount of $15 in “estimated” property inspection fees and $3,175 in “estimated” attorneys’ fees. The borrower paid the full reinstatement balance on September 26, 2013 and Seterus reinstated the borrower’s loan. On November 14, 2013 Seterus refunded the $3,175 in estimated legal fees “because those fees were not incurred before Seterus reinstated the mortgage.” Seterus did not refund the $15 in estimated property inspection fees because those fees were incurred by Seterus before the borrower reinstated the mortgage.

Procedural History

The borrower filed suit against Seterus in Florida state court about a week after his loan was reinstated, alleging that the inclusion by Seterus of estimated attorneys’ fees in the September 4, 2013 letter violated 15 U.S.C. § 1692e(2) and 15 U.S.C. § 1692f(1) of the FDCPA and § 559.72(9) of the Florida Consumer Collections Practices Act (FCCPA). Seterus removed the case to the U.S. District Court for the Southern District of Florida; the district court granted summary judgment to Seterus on each of the borrower’s claims for relief.

Holdings
On appeal, the Eleventh Circuit held that the inclusion by Seterus of $3,175 in estimated attorneys’ fees in the reinstatement balance provided to the borrower violated 15 U.S.C. § 1692f(1), which prohibits a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt,” including “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” The appellate court further held that, under the “least sophisticated consumer” standard utilized to review claims under the FDCPA, the least sophisticated consumer would not have believed that he was obligated to pay the estimated legal fees in order to reinstate the borrower’s mortgage under the terms of the borrower’s security instrument.

The Eleventh Circuit also held that the inclusion of estimated attorneys’ fees and costs in the reinstatement balance provided to the borrower constituted a violation of 15 U.S.C. § 1692e, which provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” including “[t]he false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.” The court reasoned that Seterus could not “lawfully receive” the estimated fees and costs from the borrower under the terms of the borrower’s security instrument because these costs had not yet actually been incurred. Further, the court held that Seterus was not entitled to escape liability under the FDCPA based upon a “bona fide error” defense, as Seterus’s inclusion of the estimated attorneys’ fees in the reinstatement balance was not the result of a factual or clerical error. (The Eleventh Circuit also reversed the district court’s grant of summary judgment to Seterus on the borrower’s FCCPA claim.)

Implications
The Prescott decision should cause any lender, loan servicer, or law firm that provides reinstatement quotes and/or figures to borrowers to examine its practices and procedures in order to determine whether or not information being provided to borrowers in reinstatement situations could potentially constitute a FDCPA violation (or a violation of any state consumer protection law, such as the FCCPA). The Eleventh Circuit has sent a clear message to the financial services industry that only those fees and costs that are expressly authorized under the terms of the applicable loan documents, and/or applicable law, are to be included in reinstatement quotations.

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South Carolina: “Written” Notice of Order Entry Expands into E-mail

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

In an appeal arising out of a foreclosure action, the South Carolina Court of Appeals found that an e-mail from the Master in Equity Court, with an attachment containing the order denying the petition for appraisal following a foreclosure sale, constituted written notice of entry of the order, in compliance with South Carolina Appellate Court Rule 203(b)(1). That rule provides that, a party wishing to appeal an order from the Court of Common Pleas must serve a notice of appeal on the other party within 30 days after receipt of written notice of entry of the order. [Wells Fargo Bank, N.A. v. Fallon Properties South Carolina, LLC, No. 2015-000157 (S.C. Ct. App. Aug. 26, 2015)].

After the foreclosure sale, appellants filed a petition for an order of appraisal pursuant to Section 29-3-680 of the South Carolina Code (2007). On December 15, 2014 the master in equity filed an order denying the petition, and sent attorneys (for both sides) an e-mail stating, “Please see attached copy of signed and clocked Form 4 and Order. I have also mailed a copy to all listed on the Form 4.” The “signed and clocked” copies of the Form 4 and Order were attached to the e-mail. The Master in Equity sent the parties a printed copy of the order through the U.S. Postal Service, which appellants received on December 18, 2014. On January 15, 2015 appellants served the respondent with the notice of appeal from the December 15th order. The notice was served 31 days after appellants received the e-mail, but only 28 days after they received the printed copy of the order. The respondent moved to dismiss the appeal as untimely for failure to file the notice of appeal within 30 days after receipt of written notice of entry of the order.

Pursuant to the above-referenced Rule 203(b)(1), a party wishing to appeal an order from the Court of Common Pleas must serve the notice of appeal on the respondents “within thirty ... days after receipt of written notice of entry of the order.” The only limitation ever expressed on how notice must be received is that it must be “written notice.” The court found that the e-mail constituted “written notice” under the rule.

In its reasoning the court discussed Canal Insurance Company v. Caldwell, where a fax was held to constitute “written notice.” 338 S.C. 1, 5–6, 524 S.E.2d 416, 418 (Ct. App. 1999). The court found that there was an even stronger argument for the e-mail in this case to constitute written notice: the e-mail “was sent from the Court itself, rather than an opposing party;” “the e-mail included a copy of the signed and clocked order;” and the “e-mail has actually been contemplated by the rules,” citing Rule 410(e), SCACR.

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Recoverable Attorneys’ Fees: FDCPA and State Statute Conflict?

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Michael B. Stein
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

North Carolina General Statute § 6-21.2 generally provides that obligations to pay attorneys’ fees upon a promissory note “shall be valid and enforceable and collectible” as part of the debt. In short, a borrower who defaults on a promissory note that contains a provision obligating him to pay the lender’s attorneys’ fees is liable for those fees. There are conditions, of course.

The lender or its attorney must first mail a written notice to the borrower that he has five days to pay the outstanding balance of the debt in full without being obligated to also pay the lender’s attorneys’ fees. There is also a fee cap. Specifically, the statute limits the amount of the lender’s attorneys’ fees that can be assessed against the borrower to 15 percent of the outstanding balance, which is defined as the sum of principal and interest owing at the time the lawsuit is filed. If the promissory note provides for attorneys’ fees in a specific percentage of the outstanding balance, then the borrower is liable for the lender’s attorneys’ fees up to, but not in excess of, 15 percent of the outstanding balance. If, however, the promissory note merely provides for the payment of “reasonable” attorneys’ fees, without specifying any specific percentage, then such provision “shall be construed to mean” 15 percent of the outstanding balance.

The North Carolina Court of Appeals has held that even if 15 percent of the outstanding balance exceeded the actual attorneys’ fees incurred by a bank in its efforts to collect on a promissory note, the attorneys’ fee award based on that statutory percentage could not be avoided as a “windfall” to the bank, since the promissory note provided for “reasonable attorneys’ fees.” The court held that, in such a scenario, N.C. Gen. Stat. § 6-21.2 predetermines 15 percent to be a reasonable amount of attorneys’ fees no matter what the actual attorneys’ fees are. Trull v. Central Carolina Bank Trust, 124 N.C. App. 486, 478 S.E.2d 39 (N.C. Ct. App. 1996) review allowed 345 N.C. 646, 483 S.E.2d 719, affirmed in part, review dismissed in part 347 N.C. 262, 490 S.E.2d 238.

In theory then, determining the amount of attorneys’ fees that can be awarded against a borrower under N.C. Gen. Stat. § 6-21.2 is often a simple exercise in mathematics. Consider this example:

James Debtor has defaulted on a promissory note to Bank and owes Bank $10,000. The note contains a provision obligating James to pay Bank’s “reasonable attorneys’ fees” if he defaults. The Bank gives James notice that he can pay the $10,000 in five days without incurring an additional award of attorneys’ fees; but James does not pay it. The Bank can enforce the attorneys’ fees provision and collect as part of the debt the $10,000 outstanding balance plus $1,500 in attorneys’ fees. On behalf of the Bank, the Bank’s lawyers — as is typical in North Carolina lawsuits — file suit against James to recover the $10,000 outstanding balance plus $1,500 in attorneys’ fees as allowed by N.C. Gen. Stat. § 6-21.2.

That seems okay, right? Well, not so fast. Enter the Fair Debt Collection Practices Act (FDCPA) codified in 15 U.S. Code §§ 1692, et seq. Among other things, the FDCPA prohibits a debt collector (lawyers can be debt collectors) from making false or misleading representations (15 U.S.C. § 1692e) and from using unfair and unconscionable means to collect a debt (15 U.S.C. § 1692f). How does this affect what we just learned about attorneys’ fees? Consider the case of Elyazidi v. SunTrust Bank, 780 F.3d 227 (4th Cir. Mar. 5, 2015). Note, while this was a case brought in federal court in Virginia, and involved questions of Maryland law as well as the FDCPA, North Carolina is within the jurisdiction of the U.S. Fourth Circuit Court of Appeals. (The Fourth Circuit is comprised of Maryland, North Carolina, South Carolina, Virginia, and West Virginia.)

The facts of Elyazidi are pretty straightforward. Plaintiff Elyazidi opened a checking account with SunTrust Bank in September 2010. That same month, when she only had about $300 in her account, she wrote herself a check for $9,800 and cashed it. In short, Elyazidi overdrew her account by $9,490.82. The checking account was governed by an agreement that obligated Elyazidi to pay “attorney’s fees up to 25 percent . . . of the amount owed” if the Bank took court action to collect an overdraft. The Bank’s lawyers filed a debt collection lawsuit against Elyazidi in Virginia. In the lawsuit, the Bank sought to recover the $9,490.82 overdraft amount, plus 25 percent of that amount (or $2,372.71) in attorneys’ fees, as provided for in the agreement. To justify the request for an award of attorneys’ fees of $2,372.71, the Bank’s attorneys filed an affidavit: (1) attesting to their billable rate of $250 per hour, (2) declaring that they had only spent one hour on the matter up to that point, and (3) anticipating — based on similar cases that they had handled — they would likely spend an additional 23 hours on the case before the judgment was satisfied.

Elyazidi then sued the Bank and the Bank’s lawyers, alleging violations of the FDCPA. Specifically, the plaintiff alleged that the Bank’s lawyers — by seeking an award of attorneys’ fees of $2,372.71 at the outset of the lawsuit at which point the attorneys admittedly had only spent one hour on the case — used false, deceptive, or misleading representations or means in connection with the collection of the debt in violation of 15 U.S.C. § 1692e and “unfair and unconscionable means” to collect the debt in violation of 15 U.S.C. § 1692f.

Ultimately, the district court dismissed Elyazidi’s lawsuit. The Fourth Circuit affirmed, holding that “where the debt collector sought no more than applicable law allowed and explained via affidavit that the figure was merely an estimate of an amount counsel expected to earn in the course of the litigation, the representations cannot be considered misleading under 15 U.S.C. § 1692e(2)” [emphasis added].

Although the Fourth Circuit ultimately got this decision right, the holding in Elyazidi still leaves unresolved the question of what would have happened if the Bank’s lawyers did not submit an affidavit estimating the amount they expected to earn in the course of the litigation. Consider again the case of James Debtor. But this time assume that he owes the Bank a much greater amount — say $1,000,000, and that the Bank’s lawyers therefore seek $150,000 (15 percent of the outstanding balance of the loan) as their “reasonable attorneys’ fees” as allowed by N.C. Gen. Stat. § 6-21.2.

Even though N.C. Gen. Stat. § 6-21.2 (and the opinion in Trull) would seem to allow the Bank’s lawyers to recover 15 percent of the outstanding balance for their attorneys’ fees, would it violate the FDCPA for the Bank’s lawyers to include an attorneys’ fee award request in a lawsuit against James Debtor for $150,000 when they had only spent an hour on the case up to that point? Does it matter if the lawyers do not, or in good faith could not, submit an affidavit attesting that the $150,000 is merely an estimate of the amount they expected to earn in the course of the litigation? What if the Bank’s lawyers would readily admit that their estimated actual attorneys’ fees would likely be no greater than $5,000? Could they still claim entitlement to a $150,000 attorneys’ fees award under N.C. Gen. Stat. § 6-21.2 without violating the FDCPA?

Although the North Carolina Court of Appeals in Trull and the Fourth Circuit in Elyazidi both decided in favor of the creditors’ attorneys, there still appears to be a possible conflict between N.C. Gen. Stat. § 6-21.2 and the FDCPA. Until that potential conflict is ultimately resolved by a higher court, perhaps the safest course for North Carolina lawyers seeking an award of attorneys’ fees under N.C. Gen. Stat. § 6-21.2 is to stand ready to justify the reasonableness of their fees, despite that statute’s “predetermination” that 15 percent is reasonable no matter the amount of actual attorneys’ fees; or perhaps include a demand only for “reasonable attorneys’ fees” as permitted by N.C. Gen. Stat. § 6-21.2 without identifying a specific amount.

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South Carolina: Listing Stale Debt in Bankruptcy Schedules Did Not Revive It

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

In a recent decision, the bankruptcy court disallowed a creditor’s claim of a stale debt listed on a debtor’s bankruptcy schedule because South Carolina law would not support the revival of the claim, and even if it did, federal interests would require that the claim be disallowed. [In re Vaughn, No. 15-02896-DD (Bankr. S.C. Sept. 2, 2015)].

The debtor filed for protection under chapter 13 of the Bankruptcy Code. On Schedule F, she listed a debt to LVNV Funding, LLC opened March 1, 2010 for $2,043. The debt was not marked as contingent, unliquidated, or disputed. The chapter 13 plan proposed to pay unsecured creditors with allowed claims approximately a 10 percent dividend. The debt was well past South Carolina’s three-year debt collection statute of limitations.

LVNV Funding, LLC filed a timely proof of claim, to which the debtor filed an objection. The debtor asserted that the claim is unenforceable under South Carolina law because enforcement of the debt is barred by the state’s three-year statute of limitations. The debtor amended her schedules, listing the debt in question as disputed. At the hearing, LVNV Funding, LLC contended that South Carolina law requires only a minimal acknowledgement of the debt to revive it, which it asserted included the listing of the debt on bankruptcy schedules without noting the debt as disputed.

The bankruptcy court said that when analyzing an objection to a proof of claim, the court must consider both the claimant’s rights under state law and whether those interests comport with federal interests within the Bankruptcy Code.

First, the court determined that even if South Carolina law revives a stale debt simply by its notation in the statements and schedules filed in connection with a bankruptcy petition, federal principle supplants the state law rule. The court based its decision on the federal principles within the Bankruptcy Code of harsh penalties for debtors who do not fully disclose their financial affairs; that the very broad definition of “claim” could lead to creditors that slept on their enforcement rights being able to recover to the detriment of creditors that did not sleep on their rights; and that 11 U.S.C. § 558 of the Bankruptcy Code provides that statutes of limitations protect both the debtor personally and the bankruptcy estate.

Second, the court discussed South Carolina debt revival law and concluded that state law does not support revival of the debt, conceding that recent case law in South Carolina is sparse. Citing and quoting nineteenth century cases, the court stated that for a debt to be revived the debtor must unequivocally admit that there is a debt and must make a new promise to pay that debt. The admission of a debt along with a statement that the debtor will not pay the debt does not revive a debt. The bankruptcy court compared the instant case to Black v. White, 13 S.C. 37 (S.C. 1880). In that case, the South Carolina Supreme Court ruled that while probating an estate, the listing of a stale debt on the estate’s inventory did not revive the debt. The bankruptcy court in Vaughn determined that the listing of the debt on the bankruptcy schedule was comparable.

Finally, the bankruptcy court disposed of LVNV Funding, LLC’s contention that because the debtor did not initially mark the debt as disputed, there was a new promise to pay the debt. The court said that debtors may freely amend their schedules and that marking a debt as disputed has no effect on a chapter 13 case.

The court concluded that neither federal principles nor South Carolina state law support the revival of the debt.

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Washington: Note Holder can Modify and Enforce the Note

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

On October 22, 2015 the Supreme Court of the State of Washington issued its decision in Brown v. Washington State Department of Commerce, unanimously concluding that a note holder is legally entitled to modify and enforce the obligation under state law. The court rejected Brown’s claim that only a note “owner” could be a proper beneficiary.

Brown demanded statutory mediation with M&T Bank. In response to a notice from the Washington Department of Commerce (Commerce), which oversees the mediation program, M&T produced a declaration stating that it was the actual holder of Brown’s note. M&T also asserted a mediation exemption based on a statute excluding beneficiaries with a low volume of secured mortgage loans in the state. Brown’s lawsuit arose after Commerce denied her an opportunity to mediate with M&T.

Brown contended that Freddie Mac (the owner of the loan) should be compelled to mediate because the Washington Deed of Trust Act (DTA) requires a beneficiary to also be the note’s owner, and Freddie Mac would not qualify for the same exemption as M&T.

The Supreme Court analyzed a statute that allows “[a] declaration by the beneficiary made under the penalty of perjury stating that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust” to establish sufficient proof of the note’s “ownership.” The court decided that the legislature intended for the party holding authority to modify a loan to act as the beneficiary under the mediation law. The court also reaffirmed its holding in Bain v. Metropolitan Mortgage Company — i.e., that a beneficiary is strictly defined in Washington as the note holder.

The court limited the recent decisions of Lyons v. US Bank and Trujillo v. NW Trustee Services to situations where a beneficiary’s declaration contains alternative language concerning non-holder authority under the state law equivalent to UCC 3-301 (which governs a “Person Entitled to Enforce” negotiable instruments).

In summation, the court found that “a party satisfies the proof of beneficiary provisions” in the DTA when “it submits an undisputed declaration under penalty of perjury that it is the actual holder of the promissory note.” Thus, Commerce acted properly to deny Brown’s request for mediation.

The Brown case resolves a longstanding question concerning authority to foreclose in light of the “proof of ownership” requirement. The law is now clear in Washington that loan owners such as Freddie Mac or Fannie Mae need not initiate nonjudicial foreclosures in their own names or directly participate in mediation, and loan servicers can execute declarations of note holder status in order to satisfy the DTA. Brown is a significant victory that supports the legal position of servicers, investors, and trustees.

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North Carolina: Failure to Raise Defenses at Hearing to Authorize Foreclosure Sale Resulted in Waiver

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In an unpublished opinion, the North Carolina Court of Appeals affirmed the order of the superior court authorizing a foreclosure sale on the basis that the respondent (borrower) failed to raise the arguments he sought to assert on appeal at the trial level. [In re Foreclosure of Herring, No. COA14-1159 (N.C. Ct. App. Sept. 1, 2015)].

The borrower argued on appeal: (1) that the foreclosure proceeding was not brought by the actual trustee as the only real party in interest, as required by Rule 17 of the Rules of Civil Procedure; and; (2) that he received inadequate notice of the foreclosure hearing. As is the usual practice, the creditor had substituted the original trustee, and it was the substitute trustees who had initiated the foreclosure proceedings. The borrower had attended and participated in the foreclosure hearing before the clerk, following which the clerk of court entered an order permitting a foreclosure by power of sale. The borrower appealed that order to the superior court, where the trial court overruled all of the borrower’s objections and entered an order allowing a foreclosure by power of sale to proceed.

In rejecting the first ground for appeal the appellate court noted “[a]lthough Rule 17 requires that an action be brought by the real party in interest, ‘the real party in interest provisions of Rule 17 are for the parties’ benefit and may be waived if no objection is raised[.]’ J & B Slurry Seal Co. v. Mid-South Aviation, Inc., 88 N.C. App. 1, 16, 362 S.E.2d 812, 822 (1987).” The court observed that the borrower failed to mention the issue before the superior court.

In rejecting the second ground, the appellate court again observed that the borrower failed to present the issue before the superior court, and the court of appeals would not consider the argument for the first time on appeal, citing Westminster Homes, Inc. v. Town of Cary Zoning Bd. of Adjustment, 354 N.C. 298, 309, 554 S.E.2d 634, 641 (2001). Moreover, the appellate court noted that even if the issue was properly raised ‘“[i]t is well-settled that a party entitled to notice may waive notice ...,’ by being ‘present at the hearing and participat[ing] in it.’” In re Foreclosure of Norton, 41 N.C. App. 529, 531, 255 S.E.2d 287, 289 (1979).

While not breaking any new ground in the jurisprudence of foreclosure law, the opinion in Herring serves two valuable purposes. Firstly, it affirms that foreclosure proceedings (even though not full-blown civil actions) are still accorded the same degree of solemnity as other actions and all appropriate procedural rules will be applied with equal force. Somewhat ironically, an observed trend with the Court of Appeals has been its treatment of foreclosure special proceedings as akin to other civil actions, and applying the Rules of Civil Procedure to them. In this instance, that reasoning favored the creditor, punishing the respondent-borrower for his failure to follow the Rules. Cause for concern remains, however, in the event that the appellate court were to decide that all of the Rules apply to a special proceeding foreclosure. That would open the door to application of the discovery rules, the rules governing dismissal and summary judgment, and the rules concerning trial by jury. Secondly, the Herring case is a reminder to every litigant of the need to raise all legitimate claims and defenses at the trial stage of legal proceedings; otherwise the Court of Appeals will not entertain the argument for the first time on appeal.

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Connecticut Appellate Court Upholds Application of Equitable Subrogation

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Richard M. Leibert
Hunt Leibert – USFN Member (Connecticut)

In an important ruling, the Connecticut Appellate Court has affirmed the trial court’s application of the doctrine of equitable subrogation in reordering the priority of interests, despite the defendant bank having had constructive notice of the plaintiff’s recorded mortgage. [AJJ Enterprises, LLP v. Herns Jean-Charles, AC 36838 (Conn. App. Ct. Oct. 13, 2015)].

Facts — As sellers, Pascarelli and Bartolo, dba AJJ Enterprises LLP (AJJ), entered into a purchase and sale agreement with Jean-Charles (J-C) to sell 18 Monroe Street, Norwalk, Connecticut for a price of $675,000, with a first mortgage of $500,000 provided by First County Bank. The balance of the price (as well as closing costs advanced by the sellers) was paid through a secured promissory note in the amount of $195,000 to AJJ. The AJJ note was to be secured by a “blanket mortgage on properties that [J-C] owns.” At the time, J-C owned his residence at 10 Carlin Street, Norwalk.

On May 24, 2002 the transaction closed, and the AJJ mortgage was recorded on 18 Monroe and 10 Carlin that same day. AJJ had not done a title search on 10 Carlin; AJJ believed that its mortgage was a second mortgage, as reflected in the promissory note from J-C — ‘“secured by a second mortgage on real property known as 18 Monroe … and 10 Carlin …’” (In fact, at the time the mortgage from J-C to AJJ was recorded, it was subsequent to two mortgages that encumbered 10 Carlin: a first mortgage in the face amount of $288,000 and a second mortgage in the face amount of $30,300.)

At the time of closing with AJJ, J-C had undertaken to refinance his mortgage on 10 Carlin. There were two mortgages being paid off through this 10 Carlin refinance, requiring $314,156.49. Aegis Mortgage Corporation (Aegis) provided the refinancing funds in the amount of $348,000. Aegis intended to hold a first mortgage position. The initial title search carried out by Aegis on May 16, 2002 could not have discovered the AJJ blanket mortgage recorded on May 24, 2002. Aegis closed the loan and its refinancing mortgage was recorded on June 11, 2002 — subsequent to the recording of the AJJ mortgage. The Aegis loan paid off the first and second mortgages, enabling the AJJ mortgage to move into first lien position. This was not discovered until J-C defaulted and a foreclosure was commenced.

Foreclosure as to 18 Monroe
— First County commenced a foreclosure on 18 Monroe, with a sale date set for August 16, 2008. Pascarelli and Bartolo, who had personally guaranteed payment, formed JP Asset Management LLC to purchase the First County note and mortgage. JP Asset obtained a judgment of strict foreclosure on 18 Monroe August 2, 2010 (two years later).

Foreclosure as to 10 Carlin — AJJ brought a foreclosure action on 10 Carlin, claiming first position. Aegis (which had assigned its mortgage to Bank of New York Mellon, as trustee for the Amortizing Residential Collateral Trust, mortgage pass-through certificates, series 2002-BC7) defended, claiming by the theory of equitable subrogation that it had a first mortgage. AJJ contended that Aegis had constructive knowledge of the AJJ mortgage when Aegis recorded its mortgage on June 11, 2002 and that Bank of New York Mellon, Trustee (substitute defendant bank in the case), was precluded from obtaining the benefit of equitable subrogation.

The trial court ruled in favor of Bank of New York Mellon, Trustee, and placed its mortgage in first position; AJJ appealed. The appellate court found that the trial court did not abuse its discretion in applying the doctrine of equitable subrogation despite the defendant bank’s constructive knowledge of the plaintiff’s lien. The Connecticut Appellate Court specifically cited to the Restatement (Third), Property, Mortgages § 7.6, comments (e) and (f), (1997):

“‘Under [the] Restatement … subrogation can be granted even if the payor had actual knowledge of the intervening interest; the payor’s notice, actual or constructive, is not necessarily relevant. The question in such cases is whether the payor reasonably expected to get security with a priority equal to the mortgage being paid. Ordinarily, lenders who provide refinancing desire and expect precisely that, even if they are aware of an intervening lien … A refinancing mortgagee should be found to lack such an expectation only where there is affirmative proof that the mortgagee intended to subordinate its mortgage to the intervening interest.’ … “The Restatement is careful to emphasize that the court considering equitable subrogation must be convinced that no injustice will result to the intervening lienholder before applying the doctrine[.] … ‘In virtually all cases in which injustice is found, it flows from a delay by the payor in recording his or her new mortgage … The delay may lead the holder of an intervening interest to take detrimental action in the belief that that interest now has priority.’”

There were no circumstances reflecting that AJJ changed its position in detrimental reliance; moreover AJJ did not bargain for first mortgage position, while Aegis did. The fact that AJJ found itself in first position was due to windfall and not anything for which it negotiated.

The significance of this holding is its effective restatement of three Connecticut Supreme Court holdings, reversing a trend that had occurred at the appellate court level, which — in a series of decisions — appeared to claim that constructive notice of an intervening interest in property served as a per se bar to the application of the doctrine of equitable subrogation.

Editor’s Note: The author’s firm represented the Bank of New York Mellon, as trustee for the Amortizing Residential Collateral Trust, mortgage pass-through certificates, series 2002-BC7 (substitute defendant bank) at the trial and appellate levels in the case summarized in this article.

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CFPB Continues its Practice of Regulation through Enforcement: Consent Order Entered

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

On July 30, 2015 the CFPB entered into a consent order with Residential Credit Solutions. The consent order requires RCS to pay borrowers $1,500,000 in redress for, inter alia, allegedly failing to honor HAMP and proprietary loan modifications negotiated by transferor servicers, as well as allegedly requiring borrowers to relinquish all legal defenses in pending, and threatened, litigation in return for agreeing to allow borrowers to pay off delinquent payments in installments.

As with most — if not all — CFPB administrative proceeding consent orders, the respondent did not admit any of the allegations. Of particular concern to both servicers and their attorneys should be the allegations concerning the coerced waiver of legal rights as a condition for a payment plan. While the consent order is light on facts, it appears from the wording of the order that with respect to some borrowers, foreclosure proceedings were in progress when RCS and the borrowers negotiated payment plans. The plans included agreements that “[i]n the event of the cancellation of this Payment Plan and the continuation of foreclosure proceedings, you agree to waive any and all defenses, jurisdictional and otherwise, associated with the continuation of the foreclosure proceedings and possible subsequent public auction of your property.” The borrowers also agreed “‘not to file any opposition to a motion for relief from the automatic stay filed on behalf of RCS’ in any bankruptcy.” [Consent Order, ¶39].

The CFPB labelled these conditions as unfair under 12 U.S.C. § 5536(a)(1)(B). According to the CFPB “[a]n act or practice is unfair if it causes or is likely to cause consumers substantial injury that is not reasonably avoidable and if the substantial injury is not outweighed by countervailing benefits to consumers or to competition.” [Consent Order, ¶24].

The reader is left to speculate, among other things, about exactly what litigation was pending or threatened; whether the “legal defenses” the borrowers gave up had any substance; or whether the borrowers were represented by counsel. Particularly unhelpful is the absence of any explanation about why the waiver of “legal defenses” by these borrowers caused “substantial injury” when the agreements reached presumably provided the borrowers with the opportunity to save their homes from foreclosure, and why such an outcome would not qualify as a “countervailing benefit to consumers” so as to outweigh the alleged injury.

Assuming that a servicer (or the investor it serves) has no legal obligation to offer a payment plan to a borrower in foreclosure status, what incentive does a servicer have to provide a foreclosure avoidance option for the borrower if it cannot at the same time obtain some satisfaction that the borrower will not try to place roadblocks in the path of foreclosure proceedings in the event the payment plan fails? Why should one of the core principles of dispute resolution — the settling of actual or perceived claims between the parties — be abrogated in the context of mortgage servicing?

To be clear, the consent order does not prohibit RCS from requiring borrowers to waive legal defenses in future payment plans, or other loss mitigation agreements. However, in order to pass the “fairness” test, RCS (and presumably all other servicers) must meet certain conditions. The consent order regulates future conduct by providing that RCS would be violating 12 U.S.C. §§ 5531 and 5536 by: “Requiring consumers to waive legal defenses as a condition of receiving any form of loss mitigation, except in the context of the resolution of a pending or threatened legal action, where RCS provides clear and conspicuous disclosure of the legal defenses the consumer is waiving and an opportunity for the consumer to review such disclosures[.]”

While this provision appears to provide a safe harbor to RCS (and other servicers), the devil is in the details. Reading this provision in the light most favorable to the borrower, as the CFPB would most likely do, requires careful note of the following:

1. It makes no difference if the consumer is represented by counsel or not.
2. There must be a pending or threatened legal action. This statement raises a number of questions.

a. Must the “pending or threatened legal action” be the one prosecuted by the servicer (e.g., the foreclosure action), or does it include a legal action brought or threatened by the borrower?
b. Is a waiver permissible in a nonjudicial foreclosure state, where there is normally no legal action “pending or threatened” by the servicer?
c. What does CFPB consider to be included within the phrase “legal defenses”? Is the phrase intended to exclude equitable defenses?
d. Does CFPB consider affirmative causes of action or claims a borrower could assert in his own lawsuit, or counterclaim to a foreclosure complaint, to be “legal defenses”?
e. However ill-defined, it seems a servicer (and its counsel) would have to identify every legal defense — either actually raised or that could be raised — and then include these in the “clear and conspicuous disclosure of the legal defenses the consumer is waiving.” This is likely to be very difficult, especially where litigation is simply threatened.
f. Catch-all waiver clauses may be unfair, even if there is also a detailed list of defenses clearly and conspicuously disclosed in the agreement.
g. A servicer would be acting unfairly by obtaining a waiver of defenses that it believes may be raised in a future action, if that action is not pending or threatened at the time of the waiver.

3. Does the “clear and conspicuous” requirement mean describing the legal defenses in larger or bolder font, or separate from the rest of the loss mitigation agreement?
4. If the consumer does not understand English, would the servicer have to provide the disclosure in the borrower’s native tongue in order for it to be “clear and conspicuous” to someone without an adequate command of English? Would this be at the servicer’s expense? And upon whom would the risk for translation errors fall?
5. There would have to be some waiting period while the borrower has the opportunity to contemplate the effect of the waiver. Given the sometimes tight foreclosure deadlines and last-minute negotiations, time is not always in abundance.

.
What appears on its face to be a bright-line prohibition, in fact, leaves a lot of room for interpretation. This is unfortunate given that many contested foreclosures are resolved by each party compromising its position, recognizing that a foreclosure sale may be the least desired outcome for all. Servicers may now be left with this unpalatable choice: negotiate a settlement that cuts off a borrower’s opportunities to challenge subsequent foreclosure action if the settlement fails, but risk the wrath of the CFPB for overreaching in the breadth and clarity of the waiver language; or, limit the scope of the litigation waiver to avoid CFPB sanctions, while leaving the borrower with plenty of options to disrupt and delay subsequent foreclosure efforts.

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California: New Procedural Requirements for Demurrers, Including a Meet-and-Confer Process

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Christine E. Howson
The Wolf Firm – USFN Member (California)

Demurrers are often the first line of defense for lenders, servicers, and foreclosure trustees sued by borrowers in California state courts. Similar in many respects to motions to dismiss filed in federal court cases, demurrers challenge the pleading of the complaint (or cross-complaint or answer) — such as whether the allegations sufficiently plead a cause of action.

On October 1, 2015 the governor of California signed into law SB 383 which, among other things, adds Section 430.41 to the California Code of Civil Procedure. Effective January 1, 2016, Section 430.41 imposes a number of new requirements in connection with the filing of demurrers. These requirements apply to all demurrers filed in civil actions in California state courts with the exception of proceedings for forcible entry, forcible detainer or unlawful detainer, or actions in which a party not represented by counsel is incarcerated.

The most notable provision in the new statute is the requirement that the demurring party and the party that filed the objectionable pleading meet and confer at least five days before the demurrer is filed. The statutory purpose of the meet-and-confer requirement is to determine whether an agreement can be reached resolving the objections (challenges) to the pleading that would be raised in the demurrer. If no agreement is reached as to all of the objections to the pleading, a declaration by the demurring party regarding the outcome of that process is required to be filed at the time of the filing of the demurrer.

Moreover, this new law also provides that if the parties are not able to meet and confer at least five days prior to the due date of the responsive pleading, the demurring party will have an automatic 30-day extension of time within which to file a responsive pleading by filing and serving (on or before the date on which a demurrer would be due) a declaration stating under penalty of perjury that a good-faith attempt to meet and confer was made, and explaining the reasons why the parties could not meet and confer. The statute also states that “[a]ny further extensions shall be obtained by court order upon a showing of good cause.”

Despite the mandatory language of this new statute pertaining to the meet-and-confer process in connection with the filing of demurrers, subdivision (a)(4) of Section 430.41 provides that even if the court determines “that the meet and confer process was insufficient, that determination shall not be grounds to overrule or sustain a demurrer.” Thus, Section 430.41 lacks any mechanism to hold the parties or their attorneys accountable for failing to comply in good faith with the meet-and-confer process. It remains to be seen whether the new requirement will significantly reduce the maintenance of frivolous and insufficiently pled complaints seeking to delay the foreclosure process.

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United States Supreme Court Case: Wellness International Network, Limited v. Sharif: An Interplay between Separation of Powers and Consent

Posted By USFN, Monday, November 9, 2015
Updated: Tuesday, November 24, 2015

November 9, 2015

 

by Eddie R. Jimenez
Aldridge Pite, LLP
USFN Member (California, Georgia, Nevada)

In Wellness International Network, Limited v. Sharif, 575 U.S. __ (May 26, 2015), the U.S. Supreme Court issued its much-anticipated decision, addressing two issues regarding the bankruptcy court’s power to enter final judgments. Specifically, the Supreme Court decided: (1) whether an Article I bankruptcy judge has constitutional authority to enter a final judgment to determine whether an asset is property of the debtor’s bankruptcy estate when the decision requires reference to state alter-ego law; and (2) whether a party may expressly or impliedly consent to a final decision by a bankruptcy court when the court would otherwise lack authority to render such a ruling.

In 2009, Richard Sharif filed a chapter 7 bankruptcy petition in the Northern District of Illinois. Wellness International Network, Ltd. subsequently filed an adversary complaint against Sharif, objecting to his discharge and requesting a declaration that the trust which owned certain assets was Sharif’s “alter ego” and, therefore, the assets belonged to Sharif’s bankruptcy estate. Ultimately, the bankruptcy court entered judgment against Sharif, denying his discharge and declaring that the assets held in the trust were property of the bankruptcy estate.

Sharif appealed the bankruptcy court’s decision to the U.S. District Court and asserted, for the first time and after all briefing was completed, that the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 2; 131 S. Ct. 2594 (2011), rendered the bankruptcy court’s judgment unconstitutional because it lacked authority to enter a final judgment on the Stern (alter-ego) claim. The district court affirmed the bankruptcy court’s judgment, but the Seventh Circuit Court of Appeals reversed the district court, holding that the bankruptcy court lacked constitutional authority to enter judgment on Wellness’s state law alter-ego claim and that the bankruptcy court’s lack of constitutional authority cannot be waived.

The Supreme Court reversed the Seventh Circuit decision and held that the entitlement to an Article III adjudicator is a personal right that can be waived, and waiver of this right need not be express, and may be implied so long as the consent is knowing and voluntary. Based upon its holding, the Supreme Court remanded the case back to the Seventh Circuit to decide whether Sharif’s actions constituted knowing and voluntary consent, and whether Sharif forfeited his Stern argument on appeal.

In light of the Wellness decision, litigants need to make an early determination regarding whether to consent to the bankruptcy court adjudicating their dispute or, alternatively, to request a final judgment from the U.S. District Court and/or state court. As a party’s consent may be implied, if knowing and voluntary, it is advisable for parties to specifically indicate in the complaint or response to the complaint whether the party consents or objects to the bankruptcy court entering a final judgment regarding any Stern claims and/or file a “Motion to Withdraw the Reference to U.S. District Court.” Many bankruptcy courts have already attempted to remove the guesswork regarding the consent issue by adopting local bankruptcy rules, which provide procedures for parties to indicate whether they consent to the bankruptcy court issuing a final judgment on Stern claims.

Accordingly, after Wellness, parties must be mindful of not only the constitutional issues involved in their case but also of any local bankruptcy rules and/or procedures related to consent and Stern claims in bankruptcy litigation. Additionally, if a party chooses to have a final judgment issued by the U.S. District Court and/or state court, they must timely and repeatedly pursue an objection to a bankruptcy court issuing a final decision on any Stern claims in their case.

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