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United States Supreme Court Case: Bank of America, N.A. v. Caulkett + Bank of America, N.A. v. Toledo-Cardona: Chapter 7 Debtor Cannot “Strip-Off” or Void a Wholly Unsecured Junior Mortgage under Bank

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Linda J. St. Pierre
Hunt Leibert
USFN Member (Connecticut)

and

by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)

On Writs of Certiorari to the U.S. Court of Appeals for the Eleventh Circuit, the United States Supreme Court rendered a decision in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona, 575 U.S. ___ (June 1, 2015). The Supreme Court held that a debtor in a chapter 7 case cannot “strip-off” or void a wholly unsecured junior mortgage under section 506(d) of the Bankruptcy Code.

This decision stems from the cases of In re Caulkett, 566 Fed. Appx. 879 (2014), and In re Toledo-Cardona, 556 Fed. Appx. 911 (2014), where the debtors moved to strip-off or void the junior mortgages of Bank of America in their chapter 7 cases. In each of these cases, the bankruptcy court granted the debtors’ motions, which were upheld by both the District Court and the Court of Appeals for the Eleventh Circuit. After granting Bank of America’s Writ of Certiorari, the U.S. Supreme Court reversed the judgments of the Court of Appeals.

In its analysis, the Supreme Court stated that a debtor may strip-off a junior mortgage only if the bank’s claim is “not an allowed secured claim,” and that a claim filed by a creditor is deemed “allowed” under § 502 if no interested party objects; or if, in the case of an objection, the bankruptcy court determines that the claim should be allowed under the Bankruptcy Code. In this case, the parties agreed that the claims were allowed claims but disagreed on whether the claims were secured.

In upholding its prior decision in Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court stated that Dewsnup defined the term “secured claim” in § 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. Under this definition, § 506(d)’s function is reduced to “voiding a lien whenever a claim secured by a lien itself has not been allowed.” The Supreme Court rejected the debtors’ argument that Dewsnup should be limited to partially unsecured liens.

The Supreme Court held that a “secured claim” does not depend on whether a lien is partially or wholly underwater. Additionally, the Supreme Court rejected the debtors’ argument that § 506(d) could be redefined as any claim that is backed by collateral with some value. The Supreme Court reasoned that embracing that reading would give a different meaning to “secured claim” under § 506(a) and § 506(d). Lastly, the Supreme Court rejected the debtors’ argument that Nobelman v. American Savings Bank, 508 U.S. 324 (1993), controlled.

The Supreme Court observed that Nobelman involved the interaction between § 506(a) and § 1322(b)(2), which was an entirely separate provision. Further, the Supreme Court determined that to limit Dewsnup to that case would effectively give the term “secured claim” different definitions depending on the value of the collateral, and that doing so would effectively leave an odd statutory framework in place. If a court valued the collateral at one dollar more than the amount of the senior lien, the debtor could not strip the lien; but if it valued the property at one dollar less, the debtor could strip the lien.

As of the effective date of the Caulkett decision, debtors in chapter 7 cases will no longer be able to strip-off or void a wholly unsecured junior mortgage under § 506(d) of the Bankruptcy Code. Unfortunately, for those creditors who have had orders entered stripping their junior liens in chapter 7 cases since the Eleventh Circuit first decided In re McNeal, 735 F.3d 1263 (11th Cir. 2012), there is likely little remedy.

For cases involving statutory interpretation, the Supreme Court has long recognized the importance of being able to rely on prior decisions and the “equitable consequences of retroactive application.” See Chevron Oil Co. v. Huson, 404 U.S. 97, 107 (S. Ct. 1971). Although the Supreme Court did not eliminate the possibility of retroactive application by specifically stating its decision only applied to future cases [a technique called “sunbursting;” see Great N. Ry. v. Sunburst Oil & Ref. Co., 287 U.S. 358, 364 (1932)], the Supreme Court’s decision in Caulkett did establish a new principle of law by overruling the Eleventh Circuit case law allowing lien-strips in chapter 7 cases. See Huson, 404 U.S. at 106-07 [quoting Linkletter v. Walker, 381 U.S. 618, 629 (S. Ct. 1965)].

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The Great "Relief from Stay" Myth

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

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

A servicer sends a motion for relief from stay referral to its local counsel. Counsel prepares the motion, files it with the court, and eventually obtains relief from stay. The entered order is sent to the servicer; the file is closed in the bankruptcy workstation and sent to foreclosure. Sound familiar? It’s a process that the industry has largely followed for over 30 years. Unfortunately, the process is fraught with danger. It is based on the wrongful premise — passed down from one servicing generation to the next — that once the stay has terminated, the property is no longer subject to the bankruptcy. The truth is that despite the stay termination, the real property continues to be property of the bankruptcy estate, and bad bankruptcy things can (and do) happen. Servicers should not close their files when the stay has terminated but rather, and quite distinctly, should only close their files when the property is no longer property of the bankruptcy estate.

Generally, when a bankruptcy petition is filed, all property of the debtor becomes property of the bankruptcy estate. While property is property of the estate, the bankruptcy court has jurisdiction over that property. This means that absent bankruptcy court approval, a debtor cannot sell or encumber the property and cannot enter into loss mitigation agreements regarding the property, nor can the debtor use any rents generated from the property. Additionally, this means that the property can be affected by plans (such as a chapter 13 cure-and-maintain plan or a chapter 11 or 13 cramdown), as well as by adverse motions (such as motions to sell free and clear of liens). In short, during the time that the property is property of the estate, the property can be adversely affected by the bankruptcy.

There are ways that the property is removed from the estate but, as noted above, an order terminating the stay is not one of those ways. The three most common manners in which property is removed from the estate are as follows: (1) when the case is dismissed; (2) when the case is closed; or (3) when the property is sold and the debtor no longer retains an interest in the property [such as a voluntary sale from the debtor to a third party or a foreclosure sale without redemption rights].

The property can also be removed from the estate in a variety of other less common ways including: (1) an order abandoning the property; (2) an order confirming a bankruptcy plan, unless the plan states otherwise [for tactical reasons most debtors state otherwise in their plans and specifically provide that the property does not revest in the debtor until the discharge at the end of the plan]; (3) an order merely closing the estate [as opposed to an order closing the entire case]; and (4) possibly where the property is wholly exempt [such as states that have homestead exemptions, which exempt the property regardless of value]. In addition, some courts have local court rules that close the estate at various other times.

Understanding that property continues to be property of the estate after stay termination also helps to decipher a number of additional issues that can confuse servicers. For example, the reason that payment change notices must continue to be sent after stay termination is because despite the stay termination, the property is still property of the bankruptcy estate. Absent a court order or local court rule specifically waiving the requirement, the notices need to be sent until the property is removed from the estate under one of the methods described above. Similarly, costs and fees need to be updated even after stay termination and until removal of the property from the estate.

The process of closing a bankruptcy file once the stay has terminated is misplaced and dangerous. Servicers should have in place a policy that the bankruptcy rules are to be followed, and the bankruptcy case is to continue to be monitored until the property is no longer property of the estate.

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National Chapter 13 Form Plan Project

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)

Just when all of the issues and ambiguities arising from the 2011 federal bankruptcy rule changes have been resolved (pardon the wishful thinking of this author), a chapter 13 form plan (referred to here as the Official Form Plan or OFP) has completed two rounds of public comment. In addition, effective implementation of the form plan will require conforming amendments to Federal Bankruptcy Rules 2002, 3002, 3007, 3012, 3015, 4003, 5009, 7001, and 9009.

According to U.S. Bankruptcy Judge Eugene Wedoff (N. Dist. Ill.), the lack of a national form makes it difficult for lawyers who practice in several districts, adding transactional costs that are passed on to debtors. Moreover, a recent survey of the bankruptcy bench established that a majority of chief bankruptcy judges support developing a national form plan and simultaneous amendments to the bankruptcy rules to harmonize practice among the courts and to clarify certain procedures.

The Official Form Plan is divided into ten parts. In addition, there are two exhibits: one for lien avoidance, and one for showing feasibility of the plan. Some of the parts relevant to mortgage servicers are:

 

  • Part 1 – Notice to Interested Parties
  • Part 2 – Plan Payments and Length of Plan
  • Part 3 – Treatment of Secured Claims, along with subsections 3.1: Mortgage Arrears; 3.2: Treatment of Secured Claims (only effective if warning box in Part 1 is checked); 3.3: Hanging Paragraph Claims; 3.4: Lien Avoidance (only effective if warning box in Part 1 is checked); and 3.5: Surrender of Collateral
  • Part 7 – Order of Distribution of Trustee Payments, along with subsection a: Trustee’s Fee
  • Part 9 – Nonstandard Plan Provisions
  • Part 10 – Signatures

 

Fortunately, the OFP and rule changes in their present form take into consideration input from creditors and their attorneys after meetings, mini-conferences, and conference calls. For instance, the early draft of the plan and rules provided that in the event of a conflict between the plan and the proof of claim, the plan would control. Putting aside for a moment the fact that 11 U.S.C. 502(a) provides that a claim is deemed allowed unless a party in interest objects, and the fact that a bankruptcy rule cannot trump a section of the Bankruptcy Code, consider that a debtor rarely knows the correct amount of the mortgage arrears. Of course, one of the consequences of a provision that the plan controls would be a significant increase in the number of objections to confirmation that would need to be filed. The latest draft of the plan provides that the amounts listed on a proof of claim with respect to the monthly payment and the amount of arrears will control over contrary amounts listed in the plan. Therefore, a debtor will need to object to the claim to contest those amounts, consistent with Section 502(a) of the Bankruptcy Code. On the other hand, the current draft of Rule 3015(g) provides that the plan will control other aspects of the claim’s treatment.

Rule 3001(c)
There is a perception that the chapter 13 process would improve if proofs of claim were filed before plan confirmation. But mortgage servicers participating in the rulemaking process expressed concern with the proposal by the Chapter 13 Form Plan Working Group (Working Group) to change the bar date to sixty days after the filing of the petition. Specifically, while servicers felt sixty days may be sufficient time to determine the amount of arrears, it might not be an adequate period within which to produce other supporting documentation required under Rule 3001.

The latest draft of Rule 3001(c) provides that for a claim secured by the debtor’s principal residence, the bar date is bifurcated. So a proof of claim will be considered timely if it is filed within sixty days of the petition date and includes the mortgage proof of claim attachment required by Rule 3001(c)(2)(C). The documentation required by Rule 3001(c)(1) and (d) may be filed as a supplement not later than 120 days after the petition.

Several questions and issues are created by this latest amendment. First, does the provision now cap the amount of time for amending or supplementing the proof of claim? Second, when a creditor supplements its original claim to add documents, is it allowed to add documents only, or can it also amend the amounts listed in the original claim? A reasonable argument can be made based on the current draft of Rule 3002(c) that a creditor can only add documents when supplementing the original claim. Consider further that this bifurcated process means that both the servicer and its law firm will have to touch the file at least twice to complete the proof of claim process.

Many of the comments submitted during the public comment periods have been highly critical of having a bifurcated or dual bar date and have instead suggested that the Rules Committee adopt a bar date of ninety days after the filing of the petition.

Adequate Protection
With regard to adequate protection, the Working Group is currently discussing a separate form, as opposed to including a provision in the plan for adequate protection payments. The Official Form Plan allows for nonstandard provisions under Part 9. However, any nonstandard provisions will only be effective if the appropriate box on the first page of the OFP (see Part 1) is checked, indicating the presence of nonstandard provisions. Moreover, Part 10 of the OFP, the signature box, includes language so that the debtor’s attorney (or the debtor, if appearing pro se) can certify that the plan is identical to the OFP except for any nonstandard provisions contained in Part 9.

Termination of Stay
Section 3.1 of the proposed OFP, read together with the Committee Notes for Section 3.1, indicates that upon termination of the stay, the provisions of Rule 3002.1 will no longer apply, as the plan doesn’t provide for the treatment of the claims under 11 U.S.C. § 1322(b)(5) (curing arrears and maintaining current payments).

The latest version of the OFP provides that along with surrender of the collateral, the debtor consents to termination of the automatic stay and co-debtor stay at confirmation. This is an improvement over previous versions of the OFP where these provisions appeared in the Committee Notes. Moreover, previous versions of the OFP did not mention the co-debtor stay under Section 1301 of the Bankruptcy Code, which was also a major omission of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Nevertheless, it is still not clear how the debtor consents to termination of the co-debtor stay, especially when the co-debtor is not participating in the case, or may not be represented by counsel. Further, does consenting to relief mean that the stay is lifted upon confirmation?

The NACTT Mortgage Committee has suggested the following language to the Working Group to help clarify that the stay is indeed lifted: “Upon confirmation of the Plan, any stay created by the filing of the petition pursuant to 11 U.S.C. §§ 362 and 1301 shall be deemed modified to allow in rem disposition of the collateral to effect the surrender without further order of the bankruptcy court.”

Unfortunately, the Advisory Committee was unwilling to alter the language in the OFP regarding the co-debtor stay.

Other Rule Amendments
Rules 2002 & 3015(f) — The Working Group has proposed an amendment to Rule 3015(f) that would require chapter 13 confirmation objections to be filed at least seven days prior to the confirmation hearing. Rule 2002 currently requires twenty-eight days’ notice of the time to file an objection to confirmation. Therefore, Rules 2002 and 3015(f) together would impose a thirty-five-day notice period before the confirmation hearing, which the Working Group considered to be excessive, especially for a pre-confirmation modification. Thus, to keep the notice period at twenty-eight days, in light of the new time period delineated in Rule 3015(f), Rule 2002 is being amended to require twenty-one days’ notice of the time to file objections to confirmation.

Rule 3002 — This rule has been amended to clarify that creditors must file a proof of claim to have a secured claim and receive distributions. As previously discussed, Rule 3002(c)’s proposed sixty-day bar date has been adjusted to provide additional time to file supporting documentation for mortgage claims when the subject property is the debtor’s principal residence. Furthermore, additional language now clarifies that the bar date runs from the time of conversion of a case to chapter 12 or chapter 13. Finally, the language providing for an explicit exception to the bar date when the debtor fails to timely file a list of creditors’ names and addresses under Rule 1007(a)(1) has been refined.

Rules 3012 & 4003(d) — Rule 3012 is amended to provide that the amount of secured claims may be determined in a plan, subject to objection, thus removing the need for a motion as required by the present Rule 3012. However, as previously stated, with respect to the amount of mortgage arrears, a proof of claim will control over a contrary amount in the plan. Further, the plan will not control the amount of a priority claim, or a contrary claim filed by a governmental unit.

At the September 2012 meeting of the Advisory Committee on Bankruptcy Rules (Advisory Committee) in Portland, Oregon, the committee discussed drafts of the OFP and rule amendments prepared by the Working Group. One amendment was a proposed amendment to Rule 4003(d) providing that — consistent with amended Rule 3012 — chapter 12 and chapter 13 plans could seek the avoidance of liens encumbering exempt property pursuant to Section 522(f) of the U.S. Bankruptcy Code, provided the plan was served pursuant to Rule 7004. This is one proposed amendment where the draft version has not changed since the Portland meeting.

Rule 9009 — This rule will be amended to ensure use of the OFP (and other Official documents) without alteration, except as otherwise provided in the rules or in a particular Official Form.

The Next Step
The latest meeting of the Advisory Committee was held on April 20, 2015 in Pasadena, California. Among other things, the committee discussed the adoption of Form 113, the national form chapter 13 plan.

The Advisory Committee took into consideration the number of comments against the adoption of a mandatory plan that were received during the latest round of public comments that ended in February 2015, including a comment submitted by 144 judges (approximately forty percent of the bankruptcy bench), along with a compromise proposal (Compromise) with an opt-out provision endorsed by nine individuals, including several creditor attorneys, judges, and trustees. The Advisory Committee voted almost unanimously in favor of a form of compromise. One feature of the Compromise is that instead of an initial sixty-day deadline to file a proof of claim, and then an additional sixty days to supplement for documents for claims involving the debtor’s principal residence, there would just be one uniform seventy-day deadline. In addition, the Compromise provides for clearer and stronger language that terminates the co-debtor stay at confirmation when the debtor’s plan provides for surrender of the collateral.

The Working Group spent the summer reviewing and refining the Compromise. By the time that this article is published, the Advisory Committee will have met on October 1-2 in Washington, D.C., to consider and vote on a refined compromise, along with a recommendation from the Working Group as to whether there is a need for re-publication. If there is no need for re-publication [i.e., because the Compromise (as refined) represents a lesser-inclusive change and a comment than the original proposal], this will still allow the entire package of the plan and rule changes to go into effect in December 2016.

Additionally, when the rule changes go into effect in 2016, Fed. R. Bankr. P. 3002.1 will be modified to provide that compliance with that rule is not required after termination of the automatic stay.

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How the Default Servicing Industry can Leverage Technology to Maintain Compliance

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Adam Hansen
COO and CIO
assure360
USFN Associate Member

In our transitioning industry, a rapidly evolving regulatory environment is exerting intense pressure on mortgage servicing companies to satisfy existing and emerging compliance requirements. Some organizations have been reluctant to implement much-needed technology solutions, for fear that such a move will increase exposure to data breach. The reality, however, is that technology is an asset, not a liability, and leveraging technology solutions can efficiently and effectively maintain provable compliance, while enhancing information security and increasing productivity and efficiency.

Still, integrating new technologies into an existing operation should be a strategic and deliberate process. Decision makers should be familiar with the basic principles of vetting a third party technology provider, and should have a basic understanding of the ways in which technology solutions can enhance efficiency, flexibility, and accessibility. They should also have a working knowledge of the accepted best practices and policies to keep data secure, including data storage requirements and change management processes.

Mostly Cloudy

While cloud-based technology solutions can provide a significant boost in terms of workflow, efficiency, and compliance, not all clouds are the same. Default servicing decision makers should recognize the differences between public, private, and hybrid cloud solutions. Although public cloud providers (such as Amazon, Microsoft, or Google) are generally more affordable, they tend to lack the customization options, greater flexibility, and enhanced security profile of private cloud options. And while private cloud platforms are almost always going to come in at a higher price point than public options, the overall cost will still be significantly less than funding a full in-house IT department.

Nuts and Bolts
When evaluating comprehensive technology solutions, default servicing firms need to carefully weigh their need for systems and software that are sufficiently flexible, adaptive, and responsive to keep up with regulatory changes — alongside their need for tools that provide appropriately robust security and compliance functionality. Details matter here. Operational and structural dynamics such as file change protocols and procedures; documentation and dating requirements; built-in access limitations; step-dependent processing; and other security measures, as well as data management and reporting functionality, should all be thoughtfully reviewed.

Costs and Consequences
Even the most powerful technologies have to make sense from a budgetary standpoint. One factor that should play a key role in that analysis is the flexibility of the system/tool under consideration. Because of the ambiguity, uncertainty, and differing interpretations of new regulatory mandates (an unfortunate part of today’s professional landscape), default servicers should be wary of adopting new technologies that do not provide sufficient customization options. With customization, meeting the differing requirements of clients and professional partners with respect to auditing and reporting can be less costly and time consuming, as compared to adopting multiple separate systems to accommodate individual clients.

Secure and Transparent

In a compliance-minded industry, technology solutions that deliver strong reporting functionality, optimum transparency, and provable compliance are preferred. Tech tools should minimize downtime and drastically reduce the resources dedicated to audits and other compliance functions. Customized reporting is a big part of that: automated reports that can be generated based on a wide range of parameters — all at the push of a button. Step-driven processes that make a system more secure are also important, as they can reduce or eliminate avoidable errors and minimize delays. The best technology solutions also excel at change management. In an evolving regulatory landscape, the ability to test and evaluate potential process and workflow changes in a secure environment is vital.

Transition Oversight
Risk management is always a priority when it comes to managing technology tools, and that priority looms especially large during periods of transition. While integrating new technology platforms and case management systems may lead to some short-term challenges, the long-term security and compliance benefits will almost always reduce exposure relative to a traditional IT infrastructure.

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Alternative Objections to Chapter 13 Cramdowns

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Craig Rule and Ryan Byrd
Orlans Associates, P.C.
USFN Member (Michigan)

When faced with a proposed cramdown in a chapter 13 case, many mortgage servicers and their attorneys focus primarily on value and interest rate when objecting to confirmation of the plan. There exist, however, a number of other potential objections to confirmation which, depending on the facts of the case, could result in more favorable cramdown terms, or even the complete abandonment of the cramdown attempt by a debtor. This article looks at two of these other possible objections to cramdowns that may not always be on the radar of servicers and their attorneys.

Bait And Switch: A Debtor’s Principal Residence

Beyond value and interest rate, it is important for a mortgage creditor facing a cramdown to investigate whether the claim is protected by 11 U.S.C. § 1322(b)(2), which prohibits cramdowns and other modifications of a debtor’s principal residence. Among the most crucial questions is timing: at what point must a property be a debtor’s principal residence to qualify for the protections of 11 U.S.C. § 1322(b)(2)? Bankruptcy courts have generally adopted a bright-line test, with a majority of courts finding that the relevant date is the bankruptcy petition filing date. A minority of courts reach back to the date that the loan was originated. See In re Baker, 398 B.R. 198, 202 (Bankr. N.D. Ohio 2008).

In recent years, however, it has become common for debtors in jurisdictions that have not adopted the loan origination standard to move out of their residences shortly before or after the petition date in attempts to avoid the application of 11 U.S.C. § 1322(b)(2). Often, these debtors fully intend to move back into the properties after confirmation or plan completion, and bide their time by renting the property, usually to a relative or close acquaintance. On its face, this scheme appears to fly in the face of 11 U.S.C. § 1322(b)(2), which is intended to protect the mortgage market from principal residence cramdowns. See Nobleman v. American Savings Bank, 508 U.S. 324, 332 (1993) (J. Stevens, concurring). A strict adherence to a bright-line standard of the petition date (or even the confirmation hearing date) to determine principal residence results in a debtor, nevertheless, being able to cramdown in the situations mentioned above.

To avoid this apparent loophole, some bankruptcy courts have loosened the bright-line petition date standard to adopt one that looks more to the totality of the circumstances. Confronted with debtors who moved out of their residence and into a previous rental property two months after filing a chapter 13 case, the bankruptcy court in In re Kelly, 486 B.R. 882 (Bankr. E.D. Mich. 2013), found that the latter property was the debtors’ principal residence under 11 U.S.C. § 1322(b)(2). In reaching this conclusion, the Kelly court opined that relying solely on a single date, such as the petition date, to determine principal residence would be “subject to manipulation” and would do “a disservice to 11 U.S.C. § 1322(b)(2)”. Id. at 886. Accordingly, the Kelly court fashioned a six-part test that not only considered where the debtors lived on the petition date but also where the debtors intended to live during and after their bankruptcy case.

At least one other court, the bankruptcy court in In re Baker, 398 B.R. 198 (Bankr. N.D. Ohio 2008), has exclusively employed a hybrid approach to this question. Although the Baker court was not faced with the specter of debtor manipulation of the circumstances to evade application of 11 U.S.C. § 1322(b)(2), it determined that changing circumstances between the time of loan origination, and that of the bankruptcy petition date, required something more nuanced than a bright-line test and adopted a hybrid method that looks to the facts on both dates. Id. at 203. Applying this approach, the court determined that 11 U.S.C. § 1322(b)(2) prevented modification because the inclusion of a second parcel of real property into the mortgage at loan inception was intended to only be a temporary attribute of the agreement and, at the time that the bankruptcy case was filed, the loan was actually only secured by the debtors’ residence. Id. at 204.

Anytime a cramdown is proposed, mortgage creditors and their attorneys should carefully review the schedules and statement of financial affairs to determine if the debtor has recently moved. Question 15 of the statement of financial affairs (Official Form 7), for example, requires a debtor to list all addresses in the past three years. The answer to this question can be compared to the certificate of credit counseling to determine whether the move happened after meeting with a bankruptcy attorney. If this initial inquiry indicates that a debtor may have moved in contemplation of bankruptcy, an objection should be filed and relevant information (including rental agreements, rent payment receipts, municipal rental registrations, and utility bills for the property) should be requested from the debtor’s counsel. Further informal discovery can be obtained through attendance at the meeting of creditors, and an objecting creditor can request formal discovery and an evidentiary hearing from the bankruptcy court. Even if a judge has previously adopted one of the bright-line standards, it might be possible to change his or her mind if presented with facts that strongly infer that a debtor has manipulated the circumstances to avoid 11 U.S.C. § 1322(b)(2).

A Bad Faith Cramdown

A cramdown also may be successfully challenged if a debtor’s plan has not been proposed in good faith. Among other requirements, the Bankruptcy Code mandates that a debtor’s plan be proposed in good faith in order to qualify for confirmation. 11 U.S.C. § 1325(a)(3). If a debtor or a debtor’s dependent does not reside at the property, a cramdown may have been proposed in bad faith if the property does not deliver a net benefit to the bankruptcy estate. In re Brinkley, 505 B.R. 207 (Bankr. E.D. Mich. 2013); In re Jordan, 330 B.R. 857 (Bankr. M.D. Ga. 2005). To make this determination, the court will look at the monthly income that the property generates (most likely from rent) and then subtract the monthly payment by the chapter 13 trustee on the secured portion of the debt, any monthly homeowners or condominium association fees, and the monthly pro-rata taxes and insurance. Brinkley, 505 B.R. at 215-216. If the result is not a positive number, and the debtor cannot provide any other good faith justification for retention of the property, then the debtor will not be permitted to retain the property. Id. at 216.

When reviewing a proposed cramdown, mortgage servicers and their attorneys should have most of the information on hand necessary to make a rough version of the calculation on which the Brinkley court relied. The proposed monthly payment on the secured portion of the claim may be set forth in the plan or be easily calculated. If a debtor’s schedules are complete, the remainder of the information can be obtained in Schedule G (Executory Contracts and Unexpired Leases), Schedule I (Income), and Schedule J (Expenses).

In a very significant number of cases, this calculation results in a negative number. Even if there is a net benefit to the bankruptcy estate based on initial numbers, those can change as a consequence of a higher valuation, interest rate, or pro-rata monthly expense, or a decrease in rent. Consequently, it is recommended to preserve this bad faith objection by filing it timely and then requesting documentary verification of expenses and rent from the debtor’s attorney. While a successful challenge to a cramdown using bad faith will often compel a debtor to surrender the collateral, it could potentially result in the claim being treated as a 11 U.S.C. § 1322(b)(5) claim (maintain post-petition payments and cure pre-petition arrearage), if the total monthly payment is not excessive, or some other arrangement that allows a portion of the debt to extend beyond the length of the chapter 13 plan.

Conclusion

When reviewing a plan that proposes a cramdown, objecting to a “bait and switch” scheme and “bad faith” are options that creditors and their attorneys should always consider if the facts point toward either scenario. Keeping these two potential objections in mind when faced with a proposed cramdown could lead to much more favorable results at confirmation.

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STATE-BY-STATE: Kentucky: Note Transfers & the Assignment Recording Statute

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Bill L. Purtell
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)

The federal Sixth Circuit Court of Appeals has ruled that a transfer of the note amongst MERS members does not trigger the requirement under Kentucky law to record an assignment of the mortgage. In a 3-0 decision, the Sixth Circuit analyzed Kentucky’s mandatory assignment recording statute, KRS 382.365, and determined that it only applies to written transfers of the mortgage and not to transfers of equitable interests held by a noteholder. A class action suit had been filed against MERS asking for damages of $500 for each assignment of mortgage that was not filed within thirty days of the transfer of the note. This would have resulted in millions of dollars of damages to MERS, and a dismantling of the MERS system in Kentucky.

The Facts — The case, Higgins v. BAC Home Loans Servicing, LP, 2015 U.S. App. LEXIS 12275, 2015 FED App. 0153P (6th Cir. Ky. 2015), stems from a putative class action filed by a homeowner (Higgins) seeking damages because his mortgage was with MERS, but his note was sold to various MERS members. KRS 382.365(2) requires an assignee of a mortgage to record the assignment within thirty days of the assignment. The law authorized Higgins to seek monetary penalties against a mortgagee who fails to comply with this statute.

Higgins asserted that the “mortgage follows the note,” creating an equitable transfer of rights in the mortgage every time a note is sold. Higgins contended that this transfer triggers the requirement to record an assignment. MERS moved to dismiss the case, maintaining that the legislature only intended for written assignments of the mortgage to be recorded, not the transfer of equitable rights that occurs when a note is transferred. The Eastern District of Kentucky sided with Higgins and determined that MERS had a duty to record an assignment every time a note was transferred.

The Sixth Circuit reversed the district court and held that the Kentucky legislature only intended that written assignments of mortgage be recorded with the county clerk. Notes and mortgages are treated differently under Kentucky law, so that the recording statute for mortgages did not apply to transfers of the note under Kentucky’s Uniform Commercial Code. If case law created an equitable transfer of the mortgage, this was not sufficient to trigger the recording statute for mortgages.

Key Points — The Sixth Circuit reiterated Kentucky law: the holder of a note has the power to enforce the mortgage, even in the absence of a written assignment of mortgage. The Sixth Circuit also gave a major victory to MERS and its system by making it unnecessary to record an assignment whenever a note is transferred amongst MERS members.

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STATE-BY-STATE: Kentucky: Nonjudicial Foreclosure Option under Consideration

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by David E. Johnson
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)

During its 2015 regular session, the Kentucky General Assembly introduced House Bill 470 to add nonjudicial foreclosure as an option in Kentucky. Although the bill was subsequently withdrawn, it is expected to be reintroduced in 2016 and represents a marked departure from this state’s historical approach to mortgage enforcement. Kentucky long ago abolished the practice of “strict foreclosure” and requires a judicial process to foreclose a mortgage lien while protecting the homeowner’s equitable right of redemption.

The proposed new regime would add a nonjudicial foreclosure option by recrafting new mortgage originations as deeds of trust with a power of sale. This would not affect already-existing mortgages, and it would not eliminate current judicial foreclosure procedures. Rather, upon a default under a deed of trust, the beneficiary would have the option to pursue either judicial or nonjudicial recourse against the borrower. If it chooses the nonjudicial option, the borrower can still demand that the judicial process be used instead, and other parties objecting to the nonjudicial process can file suit to enjoin a trustee’s sale under certain conditions. Thus, the two systems are not mutually exclusive and appear likely to overlap. Interestingly, unlike existing judicial foreclosure statutes, the proposed law would provide for no right of redemption when a property is sold nonjudicially by a trustee.

This bill enjoys significant support from the Kentucky Bankers Association, whose members seek to reduce the expenses of foreclosure and to expedite the lien enforcement process. The streamlined notice procedures outlined in the new bill would enable a beneficiary to get to a sale date faster, while preserving the parties’ rights to resort to the courts, if necessary, to protect their interests. Certain other aspects of the process, such as distribution of surplus proceeds, appear to be reserved specifically for the courts, although there are some unanswered questions in the draft bill about exactly how this would work. In other words, there is some degree of hybridization contemplated between the new and old systems. The ability to pursue loss mitigation would remain, but the shorter timelines can be expected to put more onus on the borrower to pursue a resolution sooner before the abbreviated nonjudicial process can run its course.

For firms practicing foreclosure law in Kentucky, the proposed legislation can be expected to require substantial changes in existing procedures, forms, policies, and training of both attorneys and support staff. The notice requirements and procedural steps to complete a nonjudicial foreclosure will be very exacting and create ample pitfalls for the unwary. Also, the nonjudicial method will require a mechanism to coordinate with the judicial side of a practice when a party to an otherwise nonjudicial case invokes the jurisdiction of the courts. After enactment of the final version of the bill, firms should have a window of opportunity to make the necessary adjustments before seeing the first defaults under the newly-minted deeds of trust.

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HOA Talk: Illinois — The 1010 Lake Shore Ass’n Case and the Need to Pay Post-Judicial Sale Condominium Assessments on Time

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Michael Anselmo and Thomas Anselmo
Anselmo Lindberg Oliver, LLC
USFN Member (Illinois)

The Appellate Court of Illinois, First District, Second Division, decided a case [1010 Lake Shore Association v. Deutsche Bank National Trust Co., No. 1-13-0962 (Ill. App. Ct. Aug. 12, 2014)] that compels servicers to reevaluate the way they view unpaid condominium assessments that became due prior to the foreclosure sale.

Under the Condominium Property Act [765 ILCS 605/9(g)(3)], a lender (or any other party) that purchases a condominium at a judicial foreclosure sale is responsible for payment of the unit’s proportionate share of common expenses assessed from the first day of the month following the sale. The question then becomes “what happens to those unpaid assessments that became due prior to the sale?” It has commonly been presumed, and common sense dictates, that having named the condominium association in the foreclosure extinguished this lien with no further action. The First District, however, disagreed. [Justice Liu, in a well-written dissent, also takes the position that naming the association extinguishes their lien and bars them from any further claims.]

In 1010 Lake Shore, the foreclosing mortgagee was the highest bidder at the foreclosure sale. After the sale, they were disputing the assessments on the property that were due prior to the completion of the foreclosure action. As a result, the mortgagee withheld payment of assessments — including those due after the sale occurred. The appellate court held that the duty to pay the current assessments exists independently of the prior assessments, and then stated that failing to pay the current assessments would revive the previously extinguished pre-sale assessments, leaving the mortgagee liable to pay those as well.

This is a significant win for the condominium associations, who have been stretching this opinion as far as they can to obtain all past-due assessments. In creating this duty to pay, the decision in 1010 Lake Shore does not confer a legally cognizable right in the property (the winning bidder must still obtain an order approving sale), but ominously punishes bidders as if it did. This has led to nightmarish situations for lenders because the holding does not set parameters as to when a payment actually extinguishes the lien.

After discovery of an association, new steps must be taken to ensure the extinguishment of their lien. Including them in the foreclosure no longer guarantees an extinguishment.

Servicers should obtain the amount of the current monthly assessments at, or about, the time of the foreclosure sale. At this point, under 1010 Lake Shore, the purchaser of the unit at the foreclosure sale must focus on the payment due on the first day of the month after the sale took place. Failure to make that payment risks allowing the previously extinguished pre-sale assessments to be revived. Any disagreement with prior assessments must be handled independently of the post-sale assessments in order to avoid the risk of being responsible for all assessments.

Often associations will not disclose any information until a deed is recorded. This occurs well after the first day of the month following the foreclosure sale — and does not stop the same association from suing the lender for the full amount of the condominium lien after confirmation, contending that the lender failed to tender timely payments. The same problem exists in the form of overcharging. If a lender takes the time to contest an overcharge, the association may acquiesce on the initial demand, but will then argue that the pre-foreclosure condominium liens are revived due to the lapse in time.

For that reason, proactive steps must be taken to demonstrate compliance with the Condominium Act — and adherence to 1010 Lake Shore. The certificate of sale should entitle the purchaser to obtain the information. If the association refuses to provide the purchaser with the necessary information after having requested it in writing, argument can be made that the association’s refusal to provide the necessary information estops them from a 1010 Lake Shore argument.

On January 27, 2015, the Illinois Supreme Court granted certiorari and will review the First District’s decision in 1010 Lake Shore. At the time of the writing of this article, oral argument was heard on September 24 and a decision from the Court is expected within the next few months. While it is hoped that the Supreme Court will take a more reasonable approach, it is best to avoid becoming involved in the predicament that the First District’s decision presents.

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BANKRUPTCY UPDATE: NACTT Annual Conference 2015

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

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

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in scenic Salt Lake City, Utah this past July. While there continued to be focus on mortgage issues, other topics (including recent U.S. Supreme Court decisions affecting chapter 13 practice and broader bankruptcy issues) took center stage at the event. This article is intended to highlight a few of the educational offerings and events of interest to the mortgage servicing industry.

Opened by U.S. Trustee

As in recent years, the Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. Director White began with a rather ominous statement of looking forward to the day when he opened the conference without comments directed at the mortgage servicing industry. Unfortunately, he went on, this was not that day, and compliance by mortgage servicers was still an issue three years after the national mortgage servicing settlement (NMSS) had been in effect.

Director White commented that all of the regional offices of the UST were monitoring compliance of servicer proofs of claim and the Federal Rule of Bankruptcy Procedure (FRBP) 3002.1 notices. There was a particular focus in the past year by the UST offices with regard to FRBP 3002.1(b) Notice of Payment Changes (NPC). Highlighted in the director’s remarks was a case in the Eastern District of Michigan in which the UST’s office intervened to investigate a servicer that had filed an NPC that tripled the ongoing mortgage payment. After the servicer could not substantiate the change, the UST’s office and the servicer entered into a $50 million settlement agreement in which the servicer agreed to remediate its practices, subject to independent review. With the vast number of NPCs required nationally, UST scrutiny on servicer practices in this area is likely to continue. Despite these adverse remarks, Director White did comment that he is seeing some improvement in servicer practices in general and, especially, in regards to cooperation.

Apart from mortgage servicer practices, the UST’s office has recently focused on buyers of credit card and other unsecured debt (and their collection practices) in chapter 13 cases. Director White commented that debtors’ fresh starts were being interfered with by this practice and that his office was closely scrutinizing it. The problem occurs when debt purchasers do not review accounts to determine whether collection is barred by a statute of limitation and then file a proof of claim for the debt. This problem, along with suspected robo-signing of the claims, will continue to be a focus of the UST program.

Educational Program
Highlights of the educational program were a session on recent U.S. Supreme Court decisions impacting bankruptcy court jurisdiction and other areas of bankruptcy practice; a panel addressing current mortgage servicing issues, including the impending changes to the proof of claim form and attachment; bankruptcy judges Brown’s and Lundin’s and chapter 13 Trustee Hildebrand’s entertaining and informative chapter 13 case update; as well as a session on how the Consumer Financial Protection Bureau (CFPB) affects chapter 13 practice.

Attorney G. Eric Brunstadt, Jr. surveyed the history of jurisdiction of bankruptcy courts leading up to the recent Supreme Court’s decision in Wellness International Network v. Sharif, 575 U.S. __, 135 S. Ct. 1932 (May 26, 2015). Following the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 2, 131 S. Ct. 2594 (2011), bankruptcy court jurisdiction was somewhat unsettled, leading to uncertainty about the extent to which parties could rely on bankruptcy courts to adjudicate certain claims.

In Stern, the Supreme Court held that while bankruptcy courts had the statutory authority under 28 U.S.C.S. § 157(b)(2)(C) to enter a judgment on a debtor’s core state law counterclaim (a counterclaim for an alleged tortious interference with a gift was involved in Stern), they lacked constitutional authority under Article III of the United States Constitution to enter a judgment. The Supreme Court said that this was because Article I bankruptcy courts were not subject to constitutional assurances of independence (i.e., life tenure of judges and non-diminishment of salaries) which would allow adjudication of such claims.

Left open by Stern was the question of whether parties in bankruptcy could cure the lack of constitutional authority by consenting to the entry of a final order by a bankruptcy court. If not, a party would be faced with the decision of either requesting that the district court withdraw the reference so that it could try the matter instead of the bankruptcy court, or having the bankruptcy court hear the matter and make proposed findings of fact and conclusions of law to be submitted to the district court. In Wellness, the Supreme Court calmed the unsettled state of bankruptcy jurisdiction by finding that parties could indeed consent to a bankruptcy court entering a final order on so-called “Stern claims.”

In so holding, the Supreme Court found that the constitutional right to have an Article III judge hear such claims is a personal right that can be waived by either express or implied consent of the parties. In Wellness, the Court appears to have limited the effect that the Stern decision had on bankruptcy court jurisdiction.

A panel of interest to the industry included a presentation on mortgage servicing issues by Russell Simon, standing chapter 13 trustee for the Southern District of Illinois; attorney Michael Bates (formerly Senior Legal Counsel for Wells Fargo Bank, N.A.); attorney John Crane; and Eduardo Rodriguez, Judicial Appointee for the Southern District of Texas. With the sunset of the NMSS on October 5, 2015, the group posed the question of whether the industry had learned anything from the NMSS requirements. The consensus of the panel was that, at least with the five servicers who were parties to the NMSS, mortgage servicing had significantly improved. Areas of improvement could be seen in a renewed emphasis in accuracy, increased transparency, robust internal compliance programs with multiple testing criteria, and in greater cooperation with compliance monitors.

In bankruptcy, the NMSS shifted the focus to getting documents (motions for relief from stay, proofs of claim) right at the time of filing, instead of in the speed of getting them filed. The NMSS also has had positive effects in industry practices outside of the consenting servicers, as other servicers have voluntarily complied with the NMSS standards. The panel was of the opinion, that as an industry standard for “best practices,” NMSS quality controls would continue into the future to maintain the improvements seen in the servicing industry.

Trustees, Servicers, and Attorneys

Apart from the NACTT panels, a meeting of a group of trustees, mortgage servicers and their attorneys was held during the conference to discuss issues relating to mortgage servicing in chapter 13 cases. This meeting was a continuation of an effort initiated in Little Rock, Arkansas in January 2004 by this author’s firm and its founder, the late Robert Wilson, Jr., to bring together chapter 13 trustees, mortgage servicers, and attorneys to provide open communication on issues affecting mortgages in chapter 13 proceedings. Since 2004, the group has met by teleconference and at the annual NACTT conference. Over the past two years, the group has also held an interim meeting for planning and issue discussion.

During this year’s meeting, the focus of the group was narrowed to three specific areas: (1) bankruptcy compliance with CFPB regulations, particularly with monthly billing statements; (2) implementation of the new proof of claim Form 410 and proof of claim attachment Form 410A by the mortgage servicing industry; and (3) the national model chapter 13 plan. The committee felt that narrowing its focus to these three areas over the next year would help the group channel its efforts to ease any transition to come with new compliance standards and forms. In the wake of the NACTT conference, subcommittees were formed by the group to address each topic and prepare for the changes in the coming months.

Conclusion

As in years past, the NACTT conference provided many informative educational panels impacting chapter 13 practice and mortgage servicing. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers; a place to come together to discuss the issues impacting our world.

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Pending Changes to Bankruptcy Forms

Posted By USFN, Friday, October 9, 2015
Updated: Wednesday, November 11, 2015

October 9, 2015

 

by USFN Publications Staff


For information concerning pending changes in the bankruptcy forms, see:

http://www.uscourts.gov/rules-policies/pending-rules-amendments/pending-changes-bankruptcy-forms

USFN will be hosting a one-day workshop on November 19 in Atlantic Beach, Florida (close to the Jacksonville airport). The morning will be devoted to bankruptcy, including a discussion and review of the newly adopted Federal Rules of Bankruptcy Procedure and form changes. Compliance, litigation trends, and current issues will be covered in the afternoon sessions. Access the program schedule here — and visit the event page for more details.

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North Carolina: Production of Original Note Indorsed in Blank is Alone Sufficient to Prove Petitioner is Holder of Valid Debt under Special Proceeding Foreclosure Statute

Posted By USFN, Thursday, October 8, 2015
Updated: Wednesday, November 11, 2015

October 8, 2015

 

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

The purchaser at a judgment execution sale of the secured property (subsequently identified as a respondent in the later foreclosure proceedings) challenged the right of the petitioner mortgage company to foreclose the title to the property, arguing that the petitioner’s production of the original note indorsed in blank at the hearing de novo before the superior court did not establish that the petitioner possessed the note. Following the statutory procedure for power-of-sale special proceeding foreclosures in North Carolina, the respondent had appealed from the order of the Clerk of Superior Court authorizing the foreclosure sale, and appealed again from the order of the superior court that also authorized foreclosure.

In the case of In Re: Rawls, No. COA15-248 (N.C. Ct. App., Oct. 6, 2015), North Carolina’s Court of Appeals took the opportunity to provide a concise explanation of the process in which negotiable instruments may be transferred under North Carolina’s Uniform Commercial Code. In its decision, the appellate court rejected the respondent’s contentions. Respondent’s position was that the production of the original note indorsed in blank at the foreclosure hearing was insufficient to establish petitioner as holder based on a partial quote from an earlier appellate decision in which the court stated that “[p]roduction of an original note at trial does not, in itself, establish that the note was transferred to the party presenting the note with the purpose of giving that party the right to enforce the instrument[.]” Rawls at 9, quoting In re Simpson, 211 N.C. App. 483, 491, 711 S.E.2d 165, 171 (2011). The respondent also contended that the petitioner’s affidavits contained hearsay that should not have been considered by the superior court. Rejecting this contention, the court noted that Simpson, “which did not hold that production of an original note could never be adequate to establish a petitioner’s right to enforce a note, is factually distinguishable from the instant case.” Rawls, at 9-10 (emphasis in original).

Simpson involved a note that had been specially indorsed to an entity that was “‘not the party asserting a security interest in Respondent’s property.’ at 493, 711 S.E.2d at 172. Significantly, Simpson specified that it was ‘[b]ecause the indorsement does not identify Petitioner and is not indorsed in blank or to bearer, [that] it cannot be competent evidence that Petitioner is the holder of the Note.’ [Simpson] at 493, 711 S.E.2d at 173 (emphasis added).” Rawls at 10.

Looking to N.C. Gen. Stat. § 25-3-205(b), as well as case law rationale, the court in Rawls held: “that a petitioner’s production of an original note indorsed in blank establishes that the petitioner is the holder of the note. In this case it is undisputed that petitioner produced the original note indorsed in blank, and we hold that this was sufficient to support the trial court’s conclusion that petitioner was the holder of the note.” Rawls at 9. Given its holding, the appellate court found it “unnecessary to reach respondent’s arguments concerning the admissibility of the affidavits proffered at the hearing.” Rawls at 10.

Borrowers and their counsel will often seek to delay foreclosure proceedings even though they lack any valid basis to do so, providing them with more time in the property without having to repay the loan. In Rawls, the foreclosure process was delayed for at least eighteen months, not by the borrowers but by someone who had taken title from them and had no obligation to pay the loan — allowing him to either reside in, or rent out, the property without making mortgage payments. There was, arguably, no good faith basis to file this appeal, which could provide grounds to the successful party to seek sanctions including the recovery of legal fees.

It is not the general practice to produce the original promissory note at a residential property foreclosure hearing in North Carolina. Instead, the substitute trustee usually relies on an affidavit from a competent witness at the creditor bank or mortgage company testifying that the affiant’s employer is the holder of the note, and attaching a copy of the fully endorsed note to the affidavit. There are times, however, when the production of the original note is a wise move, so as to avoid incurring the expense of a postponement, a contested hearing, or an appeal. With this reported Rawls decision, which has precedential effect across the state, appeals of orders authorizing foreclosure on the basis that the creditor bank or mortgage company producing the original note at the foreclosure hearing is not entitled to enforce it should be rare indeed.

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Washington Supreme Court Allows Consumer Protection Claim Based on Information Provided to a Trustee during Foreclosure

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

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

In Trujillo v. Northwest Trustee Services, Inc., the Supreme Court of Washington ruled that a trustee cannot rely on an “ambiguous” declaration from the beneficiary that contains language referencing UCC § 3-301 as adopted by state statute. [Trujillo v. Northwest Trustee Services, Inc., 2015 WL 4943982 (Aug. 20, 2015)].

Trujillo, who remained in default on her loan since 2011, sued foreclosure trustee Northwest Trustee Services, Inc. (NWTS). She alleged several claims related to the Washington Deed of Trust Act; her principal allegation being that NWTS could only foreclose in the name of the loan’s “owner,” not just its holder. The plaintiff’s argument was based on a statutory requirement that a trustee cannot record a sale notice without “proof that the beneficiary [note holder] is the owner of any promissory note … secured by the deed of trust.” One form of such proof is “a declaration by the beneficiary … stating that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust.” NWTS privately received a declaration from the loan servicer stating that it was “the actual holder of the promissory note or has requisite authority under RCW 62A.3-301 to enforce [the note].”

The trial court dismissed Trujillo’s claims, and the Court of Appeals affirmed in a published opinion. The Supreme Court of Washington accepted review, and following its recent ruling in Lyons v. U.S. Bank, N.A., 181 Wash. 2d 775 (2014), reversed and remanded only Trujillo’s Consumer Protection Act claim due to the ostensibly ambiguous “or requisite authority” language of the unrecorded declaration.

The Washington Supreme Court did not address Trujillo’s position that a loan’s “owner” must be deemed its investor, or NWTS’s counter-argument that the common definition of “owner” instead refers to a possessory right. Consequently, it remains uncertain what form of “proof” establishing “ownership” a trustee must obtain in the absence of a valid beneficiary declaration.

Although the Trujillo decision resulted in further proceedings, and an expansive view of Consumer Protection Act liability, the form of declaration at issue in the case is no longer being utilized in Washington. Another pending case (Brown v. Department of Commerce) may address whether a trustee can rely on an “unambiguous” declaration where the loan’s investor and holder are different. In the event the court in Brown rules that an investor must also hold the note, then nonjudicial foreclosure in Washington would be effectively limited to a small subset of loans. In the interim, it is anticipated that borrowers’ counsel will be more aggressive in raising challenges to foreclosure documentation and the ability of servicers to proceed nonjudicially in their own names.

Editor’s Note: The author’s firm represented Northwest Trustee Services, Inc. in Trujillo v. Northwest Trustee Services, Inc.

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Michigan: Securing and Winterizing Foreclosed Properties during the Redemption Period

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by Jessica Rice
Trott Law, P.C. – USFN Member (Michigan)

Michigan law provides a mortgagor with the right to use and possess the property during the redemption period, which is typically six months following the foreclosure sale. However, the mortgage instrument usually contains a provision that allows the mortgagee to protect its interest in the property when the property is in jeopardy. As such, it may be necessary for mortgagees to consider taking some measures to protect their interest in the property during the redemption period by securing and winterizing the property.

When faced with the possibility of a property being damaged during the redemption period, always begin by reading the terms of the mortgage and ensure that there is a provision that allows for the mortgagee to protect its interest in the property. It is best to do as little as possible to interfere with the mortgagor’s redemption rights while, at the same time, doing what is necessary to protect the mortgagee’s interest in the property. This means mitigating the risks that may be encountered in securing and winterizing by keeping detailed records and notes, taking pictures of the property, and posting — in a conspicuous place — a sign with information as to whom the mortgagor can contact in order to obtain access, if necessary. If contacted by a mortgagor to gain access to the property after it has been secured and/or winterized, access should immediately be granted in order to avoid wrongful lockout claims or other similar issues.

It is also important to keep in mind state-specific foreclosure statutes. In Michigan, the foreclosure statute provides foreclosing lenders with the right to shorten the redemption period if a property is deemed abandoned via a specific process outlined in the statute. Bear in mind, there is a distinct difference between a property being vacant and a property being abandoned. If the property is truly abandoned, there is a legal process that can be implemented and, if successful, will result in a shortened redemption period. This is a very useful tool — especially in the winter months — as it may enable the foreclosing lender to take title to the property sooner than the statutorily-set redemption expiration date and, therefore, allow for measures to be taken to secure and winterize the property without the risk of claims that the mortgagor’s rights have been violated during the redemption period.

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Michigan: Clarifications and Changes to Sheriff’s Deed Statute Recommended

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by Scott W. Neal
Orlans Associates, P.C. – USFN Member (Michigan)

The Michigan Association of Registers of Deeds (MARD) recently had a meeting where it reviewed the current Michigan sheriff’s deed requirements, covered by an assortment of statutes under both the Revised Judicature Act of 1961 (Act 236 of 1961) and the State Housing Development Authority Act of 1966 (Act 346 of 1966). MARD requested clarification on various parts of the law and made recommendations for changes to other portions of the law.

Clarifications — MARD has asked for clarification on how the days in the redemption period are calculated, since the statute uses the terminology “6 months” as opposed to “180 days.” It is not unknown for there to be disputes as to when the time expires. MARD also desires a determination on the word “commissioner’s” in 600.3145 of the Revised Judicature Act of 1961 because it is not defined, nor does the statute make clear to whom this actually refers.

Changes — Among recommendations for changes, MARD does not want the words “deposit” or “file” to be used when describing documents to be recorded with the Register of Deeds. Both words should be replaced by “recorded.” As MARD noted in its analysis, “MARD does not want anything filed that is not recorded.” MARD also asks that the fee referenced in section 600.3240, which requires $5 to be paid to the Register of Deeds by anyone redeeming property for “the care and custody of the redemption money,” to be eliminated.

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Michigan May Adopt Flat Recording Fee in Near Future

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

 by Scott W. Neal
Orlans Associates, P.C. – USFN Member (Michigan)

The numerous Michigan Register of Deeds offices currently charge per page when recording documents. Traditionally, the first page costs $14, while all following pages cost $3. This creates uncertainty when providing consumers with a closing statement. It is difficult to predict actual figures for the cost of recording mortgages, notes, and other related documents at closing.

The number of pages will vary depending upon the length of the legal description (which those of us in the industry know can be as short as a sentence or as long as a story), the size of the paper that is used, the number of people who must sign the document, the quantity of notary blocks required, and so on. Mortgages tend to be about sixteen pages in length, but this can change if there are riders (such as a condominium rider) or lengthy legal descriptions. These variations often cause closing statements to need amendment and, occasionally, for refunds to be given.

Moreover, effective August 1, 2015, new CFPB regulations require that consumers are provided with certain exact recording charges as part of the “Closing Disclosure” document. With the laws in Michigan currently as they stand, this will present a potential area of conflict unless change happens. It seems that the rational adjustment would be for Michigan to adopt a fixed, flat fee for recording documents with the Register of Deeds. Many states have already implemented flat fees successfully. Michigan will likely follow suit in light of these new CFPB regulations as well as the needs of lenders and borrowers.

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Illinois: Trustee Mortgagor of Reverse Mortgage is a “Consumer” Entitled to TILA Disclosures

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

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

In the case of Financial Freedom Acquisition, LLC (OneWest Bank N.A., Appellee) v. Standard Bank and Trust Company, 2015 IL 117950 (Sept. 24, 2015), the Supreme Court of Illinois ruled that a trustee, as a mortgagor of a reverse mortgage, was a consumer entitled to receive TILA disclosures, despite the fact that a reverse mortgage creates no financial obligation on the part of the mortgagor.

In the underlying case, Mary Jane Muraida and Standard Bank entered into a reverse mortgage with plaintiff’s predecessor, Marquette National Bank. Standard, as trustee, was listed as the mortgagor and borrower, and both Muraida and Standard signed the note. The mortgage contained an exculpatory clause that Standard had no liability on the obligation.

Muraida died in May 2010. In October 2010, the plaintiff filed a complaint against Standard to foreclose the mortgage. In June 2011, the trustee sent a notice of rescission under TILA, to which the plaintiff did not respond. In response to a counterclaim filed by Standard, the plaintiff filed a motion to dismiss, asserting that the trustee was not an “obligor” under TILA due to the exculpatory clause and was not entitled to TILA disclosures and, therefore, the trustee could not rescind. The circuit court ordered the dismissal of Standard’s counterclaim with prejudice, which was affirmed by the appellate court.

Reversing the appellate court’s decision, which relied heavily on the exculpatory clause in connection to a narrow definition of the otherwise undefined term “obligor” in TILA, the Illinois Supreme Court highlighted the unique features of a reverse mortgage, namely that a mortgagor under a reverse mortgage is never personally liable, nor is any obligation undertaken “because the only recourse in a reverse mortgage is against the property itself.” Following a discussion of the rule that supports TILA (known as Regulation Z) and the Official Staff Commentary, the court concluded that “Congress did not intend to limit rescission rights to only obligors, as that term is generally defined,” [Id. ¶ 23] and held that the “right to rescind extends to ‘each consumer whose ownership interest is or will be subject to the security interest’ or ‘is subject to the risk of loss,’” [Id. ¶ 30] including a trustee.

Under Illinois law, the trustee possesses the “ownership interest” that is subject to the mortgage. The treatment of land trusts under Regulation Z specifically states that “[c]redit extended to a land trust is credit extended to a natural person.” [Id. ¶ 37] The court, therefore, concluded that the trustee is a consumer entitled to TILA disclosures and has the right to rescind.

Having found that Standard, as trustee, possessed the right to rescind, the court concluded that Standard, in fact, timely exercised that right prior to the subsequent sale of the property, such that the sale did not terminate its right to rescind.

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Fourth Circuit Court of Appeals Reviews HUD Face-to-Face Requirements

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

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

In Covarrubias v. CitiMortgage, Inc., No. 14-2420 (4th Cir. Va. Sept. 1, 2015)(unpublished), the U.S. Court of Appeals for the Fourth Circuit authored a chapter in the ongoing Virginia HUD face-to-face saga that began in 2012 with Mathews v. PHH Mortgage Corporation, 283 Va. 723, 724 S.E.2d 196 (2012). Mathews was a very favorable Virginia Supreme Court decision for borrowers seeking to challenge foreclosure sales based on allegations of failure to satisfy all conditions precedent to foreclosure. Indeed, the decision garnered national attention and has been cited in many jurisdictions outside of Virginia.

By way of background, the court in Mathews held that the right to foreclose does not accrue until all conditions precedent contained in the deed of trust have been satisfied. The relevant deed of trust specifically incorporated the HUD regulations, and indicated that foreclosure was not authorized if not permitted by the regulations. At issue was the face-to-face meeting requirement contained in 24 C.F.R. § 203.604. This regulation requires that prior to initiating foreclosure the servicer must have, or must make a reasonable attempt to arrange, a face-to-face meeting with the borrower before the loan is three months in default. The court in Mathews rejected the mortgage servicer’s defenses that the borrower’s default in payment excused performance, that the servicer was excused from performance because the term “branch office” (as it pertains to the 200-mile exception) only included loan servicing offices, and the deed of trust did not incorporate the HUD regulations. Accordingly, the lower court’s sustaining of the mortgage servicer’s demurrer (motion to dismiss) was reversed. In 2014, the Virginia Supreme Court reinforced the Mathews holding in Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014).

Mathews and Squire concerned whether a borrower’s pleadings were sufficient to overcome initial demurrer. However, it remained to be seen whether the borrower might survive a motion for summary judgment, if discovery did not support the proposition that failure to conduct the face-to-face meeting caused the borrower’s alleged damages (particularly where the borrower was admittedly in default). The lower court’s decision in Covarrubias had given mortgage servicers hope for prevailing on summary judgment. [Covarrubias v. CitiMortgage, Inc., 2014 WL 6968035 (E.D. Va. 2014)]. Specifically, the U.S. District Court for the Eastern District of Virginia granted summary judgment in favor of the mortgage servicer, holding that “[t]he failure to follow the regulations, however, had no role in any losses suffered by the plaintiff. Rather, Covarrubias’s own actions caused the foreclosure and any resulting damages.” The District Court went on to opine that no reasonable jury could find that failure to satisfy the HUD regulations proximately caused the borrower’s damages. This victory was short-lived, as the Fourth Circuit Court of Appeals reversed the District Court’s decision and remanded the case for further proceedings.

In an unpublished opinion, the Fourth Circuit held that the record demonstrated that the mortgage servicer failed to hold, or reasonably attempted to arrange, a face-to-face meeting. Moreover, the plaintiff had produced prima facie evidence of causation and her ability to bring the loan current, had the meeting been arranged. Specifically, the appellate court held that “we conclude that a rational jury could reasonably conclude that a face-to-face meeting, as required, may have resulted in an outcome other than foreclosure and the consequent loss of Covarrubias’ equity.”

There has been significant litigation on this issue in the last few years at the Virginia Supreme Court level, and now in the U.S. Court of Appeals for the Fourth Circuit. While unpublished opinions are not binding authority in this circuit, Covarrubias — along with the other cases — seems to strongly indicate that breach of contract claims for failure to satisfy the HUD face-to-face requirements, where such regulations are specifically incorporated into the deed of trust, will likely go to trial. These cases also have implications for claims that other conditions precedent were not satisfied before proceeding to foreclosure. Accordingly, it would be prudent for the foreclosure trustee and mortgage servicer to both ensure that any conditions precedent expressly included, or incorporated by reference, in the deed of trust are satisfied before proceeding to foreclosure. More oversight on the front end of the file can likely eliminate costly and time-consuming litigation after the sale. This is particularly true in nonjudicial foreclosure states like Virginia, where there is no judicial sale ratification process requiring the borrower to raise such claims during a ratification period. As a result, in nonjudicial foreclosure states, these claims are often raised several months – if not well over a year – after the foreclosure sale.

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Illinois: New Consumer Hotline Number for the Grace Period Notice

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

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

Without public notice, the consumer hotline number for the Grace Period Notice was changed on July 17, 2015 to 1-844-768-1713. There were reports to the Illinois Department of Financial and Professional Regulation that the former 800-532-8785 number was a faulty line and callers received a busy signal when calling.

Accordingly, servicers should make sure that they include the new 1-844-768-1713 hotline number on the Grace Period Notice.

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Illinois: An Action to Enforce the Same Default on a Mortgage Can Only Be Refiled Once

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by Jill Rein and Lee Perres
Pierce & Associates, P.C. – USFN Member (Illinois)

The case of United Central Bank (UCB) v. KMWC 845, LLC (KMWC), No. 14-1491 (7th Cir. Aug. 28, 2015), involved a foreclosure action commenced in federal district court that asserted three counts of mortgage foreclosure. With respect to Count I, UCB sought review of the district court’s ruling that pursuant to the Illinois “single refiling” rule (735 ILCS 5/13-217), UCB was barred from enforcing the promissory note secured by the mortgage.

In KMWC’s motion for summary judgment filed with the district court, KMWC contended that UCB was prevented from foreclosing on the mortgages because it was barred from enforcing the promissory notes that the mortgages secured. Specifically, KMWC asserted that pursuant to the Illinois single refiling rule, UCB was prohibited from enforcing the promissory notes secured by the mortgages since UCB had twice filed actions against KMWC to recover on the notes, and had voluntarily dismissed both prior actions. Summary judgment was granted in favor of KMWC for Count I; UCB filed a motion for reconsideration, which was denied by the district court.

The Seventh Circuit Court of Appeals affirmed the district court’s decision, citing to the Illinois single refiling rule that provides that a plaintiff who dismisses a lawsuit “may commence a new action within one year or within the remaining period of limitation, whichever is greater.” This language has been interpreted to mean that a plaintiff who voluntarily dismisses a lawsuit may commence only one new action within the statutorily imposed time limit. The district court found that UCB had formerly filed and voluntarily dismissed two actions in Illinois against KMWC for breach of the promissory note which the mortgage secured and determined that, pursuant to the Illinois single refiling rule, UCB was statutorily barred from enforcing the note underlying the mortgage.

UCB did not dispute the single refiling rule but maintained that the previous action, which was dismissed, was based upon the underlying note. The Court of Appeals cited longstanding precedent in Illinois, stating that the mortgage is merely an incident of the underlying debt, and when an action on an underlying debt is barred by the statute of limitations or another procedural rule, the action on the mortgage is barred as well. In other words, if the plaintiff is barred from proceeding on an action based upon the underlying note, it may not proceed on an action based upon the mortgage.

Under the Illinois single refiling rule, an action to enforce the same default on a mortgage can only be refiled once. Servicers and the firms representing servicers should make sure that they do not dismiss an Illinois action to enforce the same default on a mortgage more than once. However, a new default on the same loan is considered a new cause of action under Illinois law.

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Connecticut: Standing to Foreclose

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by Robert J. Wichowski
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In Deutsche Bank National Trust Co. v. Bliss, the Connecticut Appellate Court affirmed a trial court’s decision rejecting a defendant’s arguments that: (1) the plaintiff lacked standing to bring the present action because it failed to demonstrate that it possessed the blank endorsement at the time it commenced the action; and (2) the mortgage at issue was unenforceable because the initial lender had surrendered its Connecticut license as a mortgage lender before it processed her mortgage loan application. [Deutsche Bank Nat. Trust Co. v. Bliss, 159 Conn. App. 483 (Sept. 1, 2015)].

At trial, the witness (an employee of the mortgage loan servicer) testified that the note contained an undated endorsement in blank. The witness testified further that the note is tracked by a “doc-line report” when it gets physically moved. Notably, the witness testified that there was nothing that indicated when the endorsement was added to the note, but that “the bank owns the note.” The defendant did not dispute that the plaintiff possessed the note at the commencement of the action, but rather claimed that the plaintiff failed to demonstrate that it had possession of the note endorsed in blank at the time that the action was commenced.

The court found the defendant’s reliance upon the lack of knowledge of the witness unpersuasive, especially as to when the undated endorsement was made or added to the note, and his unfamiliarity with the persons who signed it. Neither argument was sufficient to set up and prove facts that limited or changed the plaintiff’s rights, as holder of the note, to commence the action. Further, based upon Connecticut General Statutes § 49-17 (which allows the owner of a note to foreclose on real property regardless of whether the mortgage has been assigned to him), the appellate court rejected the defendant’s argument that the plaintiff lacked standing because an assignment of mortgage occurred two months after commencement of the action.

The defendant next claimed that the mortgage was unenforceable because the initial lender had surrendered its Connecticut license as mortgage lender, notwithstanding that the originating lender was a subsidiary of a bank operating under federal banking laws. The appellate court narrowed the issue “to the determination of whether federal banking regulations preempt state banking laws and especially those relating to licenses for organizations in the mortgage loan business.” The trial court, in disposing of the defendant’s claim, relied upon Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir.2005), which concluded that regulations adopted under the National Bank Act preempted state banking laws intended to apply to operating subsidiaries of nationally-chartered banks.

For the first time on appeal, and contradicting the defendant’s position at trial, the defendant also asserted that Wachovia v. Burke had been legislatively overruled by the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The appellate court readily rejected the defendant’s argument, as several courts have already held that Dodd-Frank does not have retroactive application and that a court must consider the federal regulations in effect when the parties entered into the transaction.

Bliss shows that any witness appearing at trial must have a firm understanding of the policies and procedures of a servicer’s original document custodian in order to establish the plaintiff’s standing at the commencement of the foreclosure action when it possesses the original note endorsed in blank — as well as the importance for servicers and counsel to be familiar with not just current regulations but also with the regulations that existed when the loan originated.

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Connecticut: Appellate Court Provides Guidance re Establishing a Note’s Chain of Title

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

In a pair of recent opinions, Connecticut’s Appellate Court provided some guidance regarding the length to which a foreclosing plaintiff must be able to document the note’s history through business records. A critical point in this analysis is the manner in which the plaintiff is entitled to enforce the instrument under the Uniform Commercial Code (holder, non-holder in possession with the rights of a holder, etc.).

Berkshire Bank v. The Hartford Club (AC 36711, released July 28, 2015)
In this case, the court addressed a successor in interest by merger where the holder of the note merged into the foreclosing plaintiff under the plaintiff’s charter, without the note being endorsed to the plaintiff or in blank. The defendant challenged the plaintiff’s affidavits in support of summary judgment on the basis of not properly “chronicl[ing] the chain of title of the note,” and raised issues that the original holder may not have been the owner at the time of merger.

Relying on New England Savings Bank v. Bedford Realty Corp., 246 Conn. 594, 604-605; 717 A.2d 713 (1998), the court in Hartford Club rejected the defendant’s claim that a proponent must provide a chain of custody in order to authenticate a business record. Indeed, in deciding Hartford Club, the appellate court quoted the policy reason expressed by the Connecticut Supreme Court in Bedford: “To require testimony regarding the chain of custody to such documents, from the time of their creation to their introduction at trial, would create a nearly insurmountable hurdle for successor creditors attempting to collect loans originated by failed institutions.”

American Home Mortgage Servicing, Inc. v. Reilly (AC 35584, released May 12, 2015)
While not dispositive to the actual ruling in this case, the appellate court discussed – and rejected – a claim that “a full history of any and all transfers of the note” be provided. In footnote 10 of the decision, the court differentiated the matter at hand from one where a non-holder transferee sought to enforce the note. [J.E. Robert Co. v. Signature Properties, 309 Conn. 307, 325 n.18 (2013)]. Distinguishing the plaintiff in Reilly, who was both the current holder and servicer, the court was not persuaded that a plaintiff under those circumstances was obligated to produce documentation showing the full history of the note. While J.E. Robert would still control for non-holder loan servicers, Reilly effectively limits the necessary disclosure to those circumstances.

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North Carolina: Borrowers Estopped from Relitigating Foreclosure Challenges

Posted By USFN, Thursday, September 3, 2015
Updated: Monday, September 21, 2015

September 3, 2015 

 

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

A foreclosure sale was authorized by the clerk, and the order authorizing sale was appealed to the superior court. On de novo review, the superior court judge entered an order authorizing the substitute trustee to proceed with the foreclosure sale. The borrowers did not appeal that order to the Court of Appeals. Instead, they proceeded with their separate civil action against the bank, alleging various causes of action — each of which was contingent upon there being no default under the terms of the promissory note, as well as under a subsequent agreement that had settled an earlier foreclosure proceeding. The trial court dismissed the complaint for failure to state a claim pursuant to N.C.R. Civ. P. 12(b)(6).

On appeal, the Court of Appeals observed that in Phil Mechanic Constr. Co. v. Haywood, 72 N.C. App. 318, 325 S.E.2d 1 (1985), it had held:


[T]hat when a mortgagee or trustee elects to proceed under [N.C. Gen. Stat. §§] 45-21.1, et seq., issues decided thereunder as to the validity of the debt and the trustee’s right to foreclose are res judicata and cannot be relitigated in an action for strict judicial foreclosure.” Id. at 322, 325 S.E.2d at 3. For that reason, “[s]ince [the] plaintiffs did not perfect an appeal of the order of the Clerk of Superior Court, the clerk’s order is binding and [the] plaintiffs [were] estopped from arguing those same issues in [a subsequent] case.”


Further, the appellate court noted that it had addressed “the preclusive effect of orders authorizing foreclosures on subsequent suits in a number of cases within the past year and a half, albeit in unpublished decisions [citations omitted]. In each of those cases, this Court affirmed the lower court’s dismissal pursuant to Rule 12(b)(6) upon determining [that] the plaintiffs were collaterally estopped from relitigating an issue decided in a prior foreclosure action that barred recovery in the plaintiffs’ subsequent cases.” [Funderburk v. JPMorgan Chase Bank, N.A., 2015 WL 3777353 (N.C. Ct. App., June 16, 2015).]

The Funderburk opinion makes clear that the borrower has a limited window of opportunity to challenge foreclosure efforts; and if a subsequent civil action relies on facts that were necessary components of one or more of the findings made in the foreclosure proceeding, the borrower does not get another occasion to argue about those facts. Important, too, the Funderburk opinion is published — meaning that it has precedential value and can be freely cited in state court proceedings. Finally of note, the Court of Appeals found that in a borrower’s post-foreclosure lawsuit against a lender, the court can, without converting the Rule 12(b)(6) motion into a summary judgment motion: (i) take judicial notice of pleadings filed in the foreclosure proceeding; and (ii) review the promissory note and deed of trust even if they were not attached to the borrower’s complaint, so long as they are the subject of (and referred to in) the borrower’s complaint.

 

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South Carolina: Supreme Court Reviews Real Estate Closing Attorney’s Scope of Duty

Posted By USFN, Tuesday, September 1, 2015
Updated: Tuesday, September 22, 2015

September 1, 2015 

 

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

The scope of the duty that a real estate closing attorney has towards a buyer’s-side client has veered into strict liability territory under a recent South Carolina Supreme Court decision.

On July 29, 2015 the opinion in Johnson v. Alexander, Appellate Case No. 2014-001167, was entered. It holds that a buyer’s attorney has a duty to ensure that good title passes to the buyer as a result of the purchase of real estate and that a breach of that duty as a result of relying on another attorney’s erroneous title search is, as a matter of law, malpractice.

Background: Amber Johnson hired attorney Stanley Alexander to perform a closing for the purchase of residential real estate. Johnson had previously hired attorney Mario Inglese for the closing. Inglese had hired Charles Feeley, also an attorney, to perform the title search. Johnson, as the client, was aware that attorney Alexander would be using attorney Feeley’s title exam during his representation of her.

Prior to the title examination and closing, the property was sold at a Charleston County delinquent tax sale on October 3, 2005. Johnson purchased the property on September 14, 2006 from the previous (tax-delinquent) owner, making transfer of title to Johnson useless. Johnson filed suit against Alexander for negligence. The trial court granted Johnson summary judgment on the basis that attorney Alexander’s pleadings and deposition exhibited that attorney Alexander singularly had a duty to ensure that Johnson, as his client, received clear and marketable title (which she did not), even though Johnson had consented to attorney Alexander using the title search product of Attorney Feeley.

The Court of Appeals overturned the trial court, stating that the question at issue was whether attorney Alexander acted reasonably in relying on attorney Feeley’s title exam — a triable factual question. The Supreme Court reversed the Court of Appeals, agreeing completely with the trial court.

The Supreme Court found that all evidence in the case indicated that attorney Alexander singularly owed a duty to ensure that Johnson received clear and marketable title as a result of her purchase, and Johnson did not. The Supreme Court suggested that the only way a real estate attorney could be relieved of not providing clear and marketable title to a buyer when retained for a closing, is if the client previously agreed to waive malpractice causes of action [which, the Supreme Court was quick to note, requires outside counsel review before such an agreement will be enforced under Rule 1.8(h) of the Rules of Professional Conduct and Rule 407 of the South Carolina Appellate Court Rules].

Accordingly and in a landmark opinion, the Supreme Court’s ruling in Johnson has now created a strict liability standard for buyer’s-side closing attorneys. It asks the question: Did clear legal title pass? If it did not, then under this decision, no matter the circumstances, the attorney has committed malpractice. The Supreme Court did not include any analysis regarding the degree of skill, care, knowledge, and judgment usually exercised by members of the profession given the situation presented to the attorney at the time, stating that the Court of Appeals “erroneously equated delegation of a task with delegation of liability.” The Supreme Court reasoned that “attorney Alexander owed Johnson [as his client] a duty and absent her agreement otherwise, he was liable for that responsibility regardless of how he chose to have it carried out.”

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South Carolina: Appellate Court Reviews the "Business Records” Exception to the Hearsay Rule

Posted By USFN, Tuesday, September 1, 2015
Updated: Wednesday, September 23, 2015

September 1, 2015 

 

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

The South Carolina Court of Appeals recently held that the “business records” exception to the evidentiary rules on hearsay does not apply to testimony that relies solely upon the inspection of documents maintained by a third party. The court further ruled that when this testimony is the only source of evidence for determining the amount owed on a promissory note, the admission of such testimony is prejudicial error — requiring reversal if used to solely determine the amount of the foreclosure debt and of the underlying deficiency judgment.

In Deep Keel, LLC v. Atlantic Private Equity Group, LLC, Appellate Case No. 2013-002281, Opinion No. 5320 (June 17, 2015), Atlantic defaulted on a promissory note originally executed to Community First Bank (CFB) for a commercial loan of $2,000,000. The promissory note was secured by two parcels of land in Beaufort County. Atlantic defaulted on the note after two loan modifications, and CFB filed for foreclosure. (CFB later merged with Crescent Bank to become CresCom Bank, and the promissory note was eventually sold and assigned to Deep Keel.)

Prior to the sale and assignment, Deep Keel’s sole member, Scott Bynum, had reviewed CresCom Bank’s records, including a payment history. Bynum testified about the amounts owed by Atlantic based on this review; however, these documents were not introduced as evidence at the foreclosure hearing. In fact, Bynum’s testimony was the only evidence of the amount remaining due on the loan. Atlantic objected to Bynum’s testimony regarding the amounts owed on the basis that Bynum’s statements amounted to hearsay. Deep Keel maintained that the testimony should be admitted under the business records exception. The master in equity admitted the evidence and ordered the foreclosure, as well as a deficiency judgment against the two personal guarantors, based on Bynum’s testimony. Atlantic appealed.

The Court of Appeals agreed with Atlantic. First, the appellate court found that Bynum’s statements amounted to hearsay because his only basis for knowledge about amounts owed by Atlantic were the out-of-court statements reflected on the documents held and maintained by CresCom Bank, which he had reviewed prior to purchasing the note and mortgage. Next, the court determined that the business records exception does not protect his testimony from the evidentiary rule prohibiting hearsay. On appeal, the court reasoned that “[t]he plain language of Rule 803(6) allows for the admission of ‘[a] memorandum, report, record, or data compilation,’ not testimony describing such a document. We hold Rule 803(6) does not apply to admit live testimony offered to prove the contents of a record containing hearsay when that record is not offered in evidence.”

The appellate court also determined that the testimony was prejudicial to Atlantic, and that the deficiency judgment against the two personal guarantors must be reversed because “[w]ithout Bynum’s hearsay testimony concerning the unpaid balance, Deep Keel could not prove the amount remaining due on the debt, and the master had no basis for calculating the amount of the deficiency.”

The Deep Keel decision makes it clear that a mortgagee/assignee’s testimony alone concerning amounts owed on a loan will not be sufficient to establish the debt in a foreclosure action and to obtain a deficiency judgment against the personal guarantors. Assignees should demand and review copies of payment histories and other loan accounting information documentation in the files they purchase and be mindful to ensure that these documents remain available for litigation.

Note that this decision simultaneously upheld the master in equity’s order of foreclosure on the secured properties, as the court held that Deep Keel had properly authenticated the promissory note and mortgage, and Atlantic had admitted that payments had been untimely. Therefore, the appellate holding is limited to barring testimony, which solely relies on the review of documents maintained and under the control of a third party, as the lone source of evidence to determine the amount of the foreclosure debt and underlying deficiency judgment.

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North Carolina: Deficiency Actions

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

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

Following a foreclosure sale, the general rule is that the amount of the debt is reduced by the net proceeds realized from the sale, setting the deficiency amount a foreclosing creditor may seek to recover. N.C.G.S. § 45-21.31(a)(4). However, when the foreclosing creditor is the successful high bidder at the foreclosure sale, this general rule is abrogated by N.C.G.S. § 45-21.36, which provides a borrower with two alternative defenses. [See Branch Banking & Trust Co. v. Smith, 769 S.E.2d 638, 640 (Feb. 17, 2015)]. Either the deficiency is eliminated if it is shown “that the collateral was fairly worth the amount of the entire debt,” or the deficiency may be reduced “by way of offset” where it is shown that the creditor’s high bid was “substantially less” than the actual value of the collateral. Id.

In reversing summary judgment for the creditor, the North Carolina Court of Appeals recently observed that in opposing the motion for summary judgment, the borrowers “relied on their own joint affidavit, stating that it was “made on [Defendants’] personal knowledge” and that Defendants “verily believe[ ] that the [property] was at the time of the [foreclosure] sale fairly worth the amount of the debt it secured.” United Community Bank v. Wolfe, 2015 WL 4081940 (July 7, 2015).

The value of the collateral, in a deficiency action, is generally a material fact. Id., at 2, citing Raleigh Fed. Sav. Bank v. Godwin, 99 N.C. App. 761, 763; 394 S.E.2d 294, 296 (1990). Since the “[North Carolina] Supreme Court has repeatedly held that the owner’s opinion of value is competent to prove the property’s value,” Wolfe, citing Department of Transp. v. M.M. Fowler, Inc., 361 N.C. 1, 6; 637 S.E.2d 885, 890 (2006), and the owner is presumed competent to give his opinion of the value of his property, Id., at 2, citing North Carolina State Highway Comm’n v. Helderman, 285 N.C. 645, 652; 207 S.E.2d 720, 725 (1974), the affidavit raises a genuine issue of material fact so as to prevent the entry of summary judgment.

The lesson here is that a foreclosing creditor contemplating a post-foreclosure deficiency action against a solvent borrower may want to make additional efforts to encourage a third-party sale. For example: by broadening the advertising of the sale or, where permissible, adjusting its sale bid. This may avoid the uncertainty and expense of a trial in the deficiency action.

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