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U.S. Supreme Court Clarifies TILA Rescission Claims

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by Jessica L. Blanner
and Brian H. Liebo
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

For many years, it has been the practice within the Eighth Circuit (comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) that when a mortgage company was notified by a borrower that the borrower intended to rescind his mortgage, the borrower had to not only notice his intent within three years of the loan closing, but actually commence a lawsuit within the three-year time frame. Failure to do both actions within three years was tantamount to a waiver of the right to rescind, according to district court judges.

A recent decision by the U.S. Supreme Court has definitively established the law on this matter for all jurisdictions across the nation. The Supreme Court reversed the judgment of the Eighth Circuit Court of Appeals, and held that a borrower exercising his or her right to rescind a mortgage transaction under the Truth in Lending Act [hereinafter, TILA; see 15 U.S.C. § 1635(a), (f)] must only provide written notice to the lender within the three-year period, and need not commence an actual lawsuit within that three-year period. Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015).

This action originated in Minnesota, after the borrowers refinanced their home by borrowing $611,000 from Countrywide Home Loans, Inc. on February 23, 2007. Exactly three years later, on February 23, 2010, the borrowers mailed a letter of rescission to the lender, alleging TILA violations. The lender denied the rescission request, and the borrowers filed suit on February 24, 2011. The borrowers argued that their TILA claims were timely because they sent a notice of rescission on February 23, 2010.

The U.S. District Court for the District of Minnesota rejected the borrowers’ arguments and granted the lenders’ motion for judgment on the pleadings, holding that a suit for rescission filed more than three years after the loan’s consummation is time-barred, even if the borrowers mailed a notice of rescission within the three years. Jesinoski v. Countrywide Home Loans, Inc., 2012 WL 1365751, *3 (D. Minn., Apr. 19, 2012). The Eighth Circuit Court of Appeals affirmed the district court’s judgment on the pleadings in favor of the lenders. Jesinoski v. Countrywide Home Loans, Inc., 729 F. 3d 1092 (8th Cir. 2013).

In a unanimous opinion in Jesinoski, written by Justice Scalia, the U.S. Supreme Court reasoned that while Section 1635(f) “tells us when the right to rescind must be exercised, it says nothing about how that right is exercised.” The Supreme Court also explained that Section 1635(a) does not explicitly provide that a lawsuit is required for a rescission. In conclusion, the Supreme Court held that a borrower only needs to provide written notice to a lender in order to exercise the right to rescind within the three-year time frame. The Supreme Court’s decision settles a circuit split on this issue.

While the final Jesinoski decision appears borrower-friendly, the ruling is narrow in that it solely addresses a timing issue. Mailing a notice of rescission within three years of consummating a loan is sufficient to exercise the right to rescind, and a party seeking to rescind is not required to actually file a lawsuit within that three-year time period in order to preserve a rescission claim.

As a practice pointer, mortgage servicers are advised to carefully monitor all borrower correspondence for timely rescission claims and properly attend to such notices, even if the borrowers have not yet filed lawsuits to enforce mortgage rescission rights.

©Copyright 2015 USFN. All rights reserved.
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U.S. Supreme Court Allows for Written Notice to Rescind a Loan

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by T. Matthew Mashburn
Aldridge Connors, LLP – USFN Member (Georgia)

On January 13, 2015, in a unanimous opinion that will no doubt require some significant clarification, the U.S. Supreme Court held that where the lender fails to satisfy the Truth in Lending Act’s disclosure requirements, a consumer may rescind the loan within three years of the consummation of the loan by simple written notice, rather than filing a lawsuit and having a court declare the loan rescinded. Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015).

The potential confusion rests on the Supreme Court’s ruling that a loan can be rescinded without a pre-rescission tender of the loan payoff, but doesn’t mention that the result of the rescission is that the principal amount of the loan still has to be paid off.

By way of background, the Truth in Lending Act (TILA) gives the borrower (actually anyone who pledges a security interest in a principal place of residence for a non-exempt consumer loan) an absolute and unrestricted right to rescind the loan within three days of consummation by providing written notice to the lender. In addition, should the lender fail to provide certain disclosures required under TILA, the borrower has up to three years to rescind the loan.

At common law, rescission “traditionally required either that the rescinding party return what he received before a rescission could be effected (rescission at law), or else that a court affirmatively decree rescission (rescission in equity).” Id., citing 2 D. Dobbs, Law of Remedies § 9.3(3), pp. 585-586 (2d ed. 1993) [emphasis added].

The twist on the Jesinoski decision (and the part which could clog the courts with needless lawsuits until it is clarified) is that the Supreme Court failed to make it clear that the principal amount of the loan must still be repaid after the rescission. The rescission takes place by simple written notice based on Jesinoski, it is true; but, due to the rescission, the loan principal must be repaid after the rescission.

Indeed, courts have wrestled with the nature of the exact amount that must be paid back due to a rescission. This is especially true where the borrower finances the finance charges and lender fees, but no court has held that the entire principal balance is forgiven.

For example, in Moore v. Cycon Enterprises, Inc., 2007 WL 475202 (W.D. Mich., Feb. 9, 2007), the trial court ruled that a husband and wife, who rescinded a loan, were not required to repay lender fees and finance charges that were included in the principal. The lender contended that only finance charges were impacted by the borrower’s rescission. However, the court noted that TILA’s plain language states, “When an obligor exercises his right to rescind under subsection (a), he is not liable for any finance or other charge. …” 15 U.S.C. § 1635(b) [emphasis added]. The court ruled that the borrowers were not required to repay any of these fees and charges, which amounted to $25,237.85 out of the total $215,500 loan, but that the borrowers did have to repay the remainder of the principal balance.

Furthermore, prepayment penalties would seem to be at particular risk from the Jesinoski decision. Also, an imminent operational difficulty seems to be presented: how do lenders make sure that a responsible person or department actually receives the notice of rescission, so that the lender can call off a foreclosure, or other collection efforts, when warranted? Lenders will most likely have to include a notice in their billing (or other communications with borrowers), advising that any rescission has to be sent to a specific address. The lender will want to have a specific person or department assigned to receive and process rescissions, and make a determination as to whether the rescission was proper or not. Of course, any collection efforts will probably have to be suspended while the lender investigates whether there was a failure to satisfy TILA’s disclosure requirements.

Another dilemma will be in the case of assignments where the original lender has long since sold the loan and, thus, does not know (or cannot reasonably determine) whether there was a disclosure error in the first place.

The limitation on Jesinoski is that the Supreme Court’s holding only applies when the disclosures were defective at loan closing. Secondly, any loan that is over three years old is not impacted. However — and it’s a BIG however — it can be anticipated that every pro se with news of this judicial decision will attempt to rescind, regardless of having actual grounds to do so.

Accordingly, the immediate response of lenders to Jesinoski should be to make sure that a notice address is included in every communication to all persons with a right to rescind a loan, and to assign a specific person or department to respond to notices of rescission. The second step will be to set up a vetting system to determine whether or not the rescission is a legitimate one.

©Copyright 2015 USFN. All rights reserved.
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Rhode Island: Mediation Update

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

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

As you may be aware, Rhode Island enacted mediation legislation superseding several local ordinances. On July 8, 2014, the governor signed legislation amending the statute to clarify that process. It took effect on October 6, 2014, and any mediation notices that are not sent within 120 days of the default date are subject to penalties at a rate of $1,000 per month. These penalties are assessed to the servicer/mortgagee and must be paid in order to obtain a Certificate Authorizing Foreclosure.

On January 6, 2015, Rhode Island Housing held an open conference call to answer additional questions about the mediation process, and circulated a PowerPoint presentation. In that presentation, it was advised that mortgagees must pay any penalty or fees for loans with default dates of June 10, 2014 or earlier, by February 28, 2015; or the servicer will have to send new mediation notices and pay the penalty for additional days. This applies just to loans for which an invoice has already been sent to the mortgagee for penalties. Invoices are generated by Rhode Island Housing only after it has received a copy of the notice of mediation containing the default date, from which it determines the penalty to be paid.

Going forward, all penalties need to be paid within 90 days from the date Rhode Island Housing sends out the first invoice. If payment of penalties is not received from the servicer, no certificate will be issued, and a new mediation notice will be required. This will result in additional penalties accruing up to the date of the new notice.

Additionally, Certificates Authorizing Foreclosure are sent by Rhode Island Housing to the single point of contact provided on the notice. Should these certificates be lost, a duplicate certificate is needed, at a cost of $25. These certificates may only be requested by mail, and the $25 check must be included in order to obtain a certificate.

©Copyright 2015 USFN. All rights reserved.
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Massachusetts: Supreme Judicial Court Rules that Municipal Foreclosure Ordinances are Preempted by State Law

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by Katerina A. Pestova
Harmon Law Offices, PC – USFN Member (Massachusetts, New Hampshire)

On December 19, 2014, the Massachusetts Supreme Judicial Court (SJC) ruled on two critical questions regarding a pair of foreclosure ordinances passed by the City of Springfield. The SJC concluded in Easthampton Savings Bank v. City of Springfield (470 Mass. 284) that the ordinances were preempted by state law.

The case concerned two ordinances enacted by Springfield in 2011. The first ordinance regulated the maintenance of vacant properties, as well as properties undergoing foreclosure. The ordinance required lenders to register these properties and pay a $10,000 bond, which would be used by the city to maintain foreclosed properties if the bank failed to do so. The second ordinance required mortgagees that were attempting to foreclose on owner-occupied residential properties to participate in a city-approved pre-foreclosure mediation program.

Six local banks challenged the ordinances in state court; the city removed the case to federal court. Following the banks’ appeal from a District Court ruling in favor of the city, the First Circuit Court of Appeals asked the SJC to decide whether the local foreclosure laws were preempted by state laws, and whether the bond requirement constituted an illegal tax.

The SJC ruled that Springfield’s property registration ordinance was preempted to the extent that it conflicts with state laws. The court cited the ordinance’s surety bond and hazardous materials disclosure requirement as being in conflict with the state sanitary code, and the Massachusetts Oil and Hazardous Material Release Prevention Act, respectively. Regarding the mandatory mediation requirement, the court concluded that the ordinance as a whole conflicted with Massachusetts foreclosure statutes.

The federal case, which prompted the SJC’s ruling, has since been dismissed on technical grounds. The dismissal means that there is no formal order directly invalidating the city’s ordinances. However, in light of the SJC’s ruling, Springfield will likely amend its property registration ordinance. It is expected that the city will substitute a flat annual registration fee in place of the surety bond component, bringing Springfield in line with approximately 20 other municipalities that also have property registration ordinances with annual fees.

Four cities have ordinances substantially similar to Springfield’s, although only two of these cities have sought to enforce any portion of the ordinances. The Essex County Registry of Deeds has refused to record foreclosure deeds without a certificate of mediation from the City of Lynn, which remains a defendant in a federal lawsuit challenging its ordinances. The ruling in Easthampton Savings may also prompt local lawmakers to turn to the state legislature to implement mandatory mediation.

However, the Easthampton Savings ruling is critical for lenders because it halts — at least for the moment — the proliferation of differing pre-foreclosure requirements at the municipal level in Massachusetts.

©Copyright 2015 USFN. All rights reserved.
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Maryland: Do NOIs have a “Sell-by” Date?

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by Ronald S. Deutsch
Cohn, Goldberg & Deutsch, LLC – USFN Member (Washington, D.C.)

What is the difference between a loaf of bread with a sell-by date and a notice of intent to foreclose (NOI)? Answer: A loaf of bread has a definite sell-by date, while an NOI (a pre-foreclosure letter required by statute) has a potentially alternative smell test that it must pass. In a recent ruling, the Maryland Court of Special Appeals was presented with the issue of NOI staleness. [Granados v. Nadel, (Md. Ct. Spec. App. Dec. 16, 2014)].

Background: Maryland Law RP Section 7-105.1 provides that a foreclosure action generally may not be filed against a residential property until 45 days after the lender sends the borrower a notice of intent to foreclose. The purpose of this legislation is to aid borrowers in communicating with lenders in order to avoid foreclosure. In that vein, a notice is required to state the names and telephone numbers of the secured party, the loan servicer, and an agent of the secured party who is authorized to modify the terms of the mortgage loan.

The pertinent facts of the case: In 2009, the borrower defaulted on a loan secured by his principal residence. After making several late payments, a notice of intent to foreclose was sent on March 10, 2010, and a foreclosure case was thereafter commenced. Shortly after the foreclosure action was filed, the lender dismissed it without prejudice. Subsequently, the loan was transferred and a new servicer assumed responsibility for servicing the loan. The default was never cured. Almost a year later (on February 24, 2011), a second foreclosure action was filed.

In advancing the second foreclosure action, the foreclosing attorney relied on the original NOI that had been filed prior to the first foreclosure action. Further complicating the facts, the statute governing the notice requirement for residential foreclosures changed between the first foreclosure filing and the second one. The Maryland Commissioner of Financial Regulation, however, promulgated an advisory that foreclosing attorneys could rely on NOIs filed prior to July 1, 2010, without re-filing a new document.

The foreclosure attorneys asserted that the foreclosure was docketed using an NOI that complied with the law at the time that the NOI was issued. They maintained that the circuit court should read the new statutory provisions prospectively, permitting NOIs issued before the new law went into effect to serve as sufficient notice prior to filing an order to docket foreclosure. Finally, they contended that because the borrower did not cure his default, the original NOI remained valid.

In its ruling, the Court of Special Appeals noted that the borrower, in entering a HAMP workout after the first NOI, also received a form that advised that no new “notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will be necessary to continue the foreclosure action; all rights to such notices being hereby waived to the extent permitted by applicable law.” Further, the court noted the commissioner’s advisory. Nevertheless, the court determined that the NOI was stale, finding that there is no perpetual validity to NOIs. Once the trustees dismissed the first foreclosure action, the lender was obligated to send the borrower a new NOI containing the particularized information and documents prescribed by law, before filing the second foreclosure action. Notably, the court declined to set an explicit expiration date.

Consequently, where a lender institutes a foreclosure and then dismisses it, a new NOI should be utilized on any subsequent filing. This is true, especially where the dismissal of the first foreclosure action coincided with legislative changes providing new protections to borrowers. The court stated that an NOI is not a blank check that will allow a lender to initiate a foreclosure proceeding against a borrower at any point in the future. The NOI has a specific function to give borrowers notice of a potential foreclosure and allow them to pursue remediation of their default. It would be contrary to the spirit of the law for the NOI to operate as a document providing notice to a borrower of an impending foreclosure by an uncertain lender at some unpredictable time in the future. In short, an old, potentially stale and incorrect NOI flouts the requirement of giving borrowers an opportunity to avoid foreclosure. Accordingly, such an NOI should not be relied upon by lenders seeking to foreclose in Maryland.

©Copyright 2015 USFN. All rights reserved.
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Connecticut: Appellate Court Affirms Standing of Holder of Note Endorsed in Blank

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)


The Connecticut Appellate Court recently affirmed a trial court’s entry of judgment of strict foreclosure. The decision is noteworthy because, in the appeal, the defendant challenged the trial court’s jurisdiction to enter judgment, claiming that the plaintiff was not the actual owner or holder of the note and, therefore, lacked standing. [BAC Home Loans Servicing, LP v. Farina, 154 Conn. App. 265 (2014)].

When confronted with this type of jurisdictional challenge previously, Connecticut’s Supreme Court and Appellate Court relied on a rebuttable presumption that the holder of a promissory note, endorsed in blank, is presumed to be the owner of the note. This rebuttable presumption of ownership complicated the analysis of standing when a plaintiff in a foreclosure case relied only on being a holder of the note as evidence of its authority to collect the debt and, thus, its evidence of standing.

In Farina, the Appellate Court was able to dispose of the challenge to the plaintiff’s standing by finding that the “plaintiff’s possession of the note endorsed in blank was sufficient to establish standing.” The court held that, “[B]ecause the plaintiff possessed the note, endorsed in blank, it was entitled to enforce the note.” There was no reference to a rebuttable presumption of ownership, only that the plaintiff, as holder of the note, was entitled to enforce the note.

From a practitioner’s point of view, this divergence from the rebuttable presumption of ownership analysis may shed light on the Appellate Court’s interpretation of the law of standing in a foreclosure case. It may also indicate how the Appellate Court will rule in the future when a loan servicer’s standing is challenged because it is servicing a loan on behalf of an investor, relying on its status as a holder of the note as its evidence of standing, and not on any allegation of ownership.

©Copyright 2015 USFN. All rights reserved.
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Massachusetts: Changes Affecting Credit Union Branching

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by Patricia Antonelli
and Robert M. Tammero, Jr.
Partridge Snow & Hahn LLP – USFN Member (Massachusetts)

On January 7, 2015, former Governor Patrick signed legislation permitting Massachusetts credit unions to establish branches in the other five New England states and New York, subject to certain limitations and requirements. As of December 31, 2014, there were 76 Massachusetts credit unions.

The legislation, known as “An Act Relative to Credit Union Branching” (Act), amends Chapter 171 of the Massachusetts General Laws to authorize Massachusetts credit unions to establish one or more branches in these states, provided that the branch is located within 100 miles of the credit union’s main office in Massachusetts, and subject to the prior approval of the Massachusetts Commissioner of Banks. Under the Act, credit unions are limited to one out-of-state branch application to the Massachusetts Commissioner of Banks in any 12-month period.

Under current law and policy of the Massachusetts Commissioner of Banks, branches of a Massachusetts credit union must be located either in the county where the credit union’s main office is located, or within 50 miles of the credit union’s main office in a city or town in another county in Massachusetts.

The Act also contains provisions granting a credit union, having a principal place of business in one of the other five New England States (or New York), the right to establish branches in Massachusetts, if the laws under which the credit union was organized permit it, and the laws of the other state grant reciprocal rights to Massachusetts credit unions. The prior approval of the Massachusetts Commissioner of Banks is also required.

Rhode Island law, for example, contains a similar provision. It permits a credit union chartered in another state to do business in Rhode Island if: in the determination of the Director of the Rhode Island Department of Business Regulation, the laws of the other state provide reciprocal rights to Rhode Island credit unions.

These changes in Massachusetts law take effect on October 1, 2015. The Act requires the Massachusetts Commissioner of Banks to promulgate rules and regulations implementing the Act by July 1, 2015.

©Copyright 2015 USFN. All rights reserved.
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Mississippi: Mobile Home Title

Posted By USFN, Friday, February 6, 2015
Updated: Wednesday, September 23, 2015

February 6, 2015 

 

by Bradley P. Jones
Wilson Adams & Edens – USFN Member (Mississippi)

Until July 1, 1999, Mississippi law did not mandate that mobile homes be titled. That changed with the passage of MCA § 63-21-9 (1972), as amended, which requires that mobile homes manufactured or assembled after July 1, 1999 (or which are the subject of first sale for use after July 1, 1999) be titled. Under this statute, a certificate of title (COT) is to be issued for mobile homes just as though they were any other motor vehicle.

Although, prior to July 1999, Mississippi did not require certificates of titles for mobile homes, certificates were often issued on those manufactured outside the state. Prior to the passage of MCA § 63-21-9, a second statute, MCA § 63-21-30 (1972), as amended (and which was not abrogated by the passage of MCA § 63-21-9) provided for the “cancellation” or “retirement” of the certificate of title; provided, of course, the mobile home has been classified as real property under MCA § 27-53-15. The former practice being: where a mobile home was permanently affixed to the property and certified as real property, it was considered part and parcel of the real property, and ownership could be transferred by deed alone.

The Mississippi statute pertaining to the certification of mobile homes as “real property” (MCA § 27-53-15 (1972)), contains wording that significantly “muddied the water” as to exactly what actions would be required for a lender to perfect a security interest in a permanently attached mobile home. Specifically, § 27-53-15 states that “[r]egardless of whether a manufactured or mobile home for which a certificate of title was required or issued pursuant to the provisions of Chapter 21, Title 63, Mississippi Code of 1972, is classified as real property or is classified as personal property, the perfection of a security interest therein shall be governed by the provisions of Chapter 21, Title 63, Mississippi Code of 1972).”

In a nutshell, a fair reading of § 63-21-30 and § 27-53-15 establishes that, with regard to mobile homes made or sold after July 1, 1999, the perfection of a security interest is to be accomplished under Mississippi’s motor vehicles laws. Thus, a COT with the lender/lienholder listed on the face of the certificate is the proper method of perfecting a security interest in such a mobile home. This, however, appears to be in direct contradiction to the Mississippi Department of Revenue’s longstanding reading and interpretation of § 63-21-30, in that once the title is submitted for retirement or cancellation, that department would purge the mobile home from its system, and would then treat the mobile home as real property rather than personal property.

As a result of the confusion and impasse that arose over the facially apparent conflict with the referenced statute, a number of foreclosure firms and HUD representatives met with the Department of Revenue in 2008. They sought the development of a consistent and uniform process for ensuring that servicers, following foreclosure, could obtain clear and marketable title to the land and permanently-attached mobile home. The agreed-upon procedure involves the post-foreclosure filing of a complaint naming the former borrowers, the Mississippi Department of Revenue, and any and all interested parties as defendants, seeking a judgment requiring the Mississippi Department of Revenue to issue a new certificate of title in the name of the foreclosing entity.

Such a lawsuit would not be required in a situation where an original COT has actually been issued, where the foreclosing entity is listed as lienholder on the title, and the original or replacement title is available. Under these circumstances (following the foreclosure), submission of the appropriate documentation (i.e., the original title or an application for replacement title signed by power of attorney, the necessary assignment of lien document, the affidavit of repossessed mobile home, substituted trustee’s deed, etc.) to the Mississippi Department of Revenue will result in the issuance of a COT in the name of the foreclosing entity.

On the other hand, a post-foreclosure mobile home lawsuit will need to be filed post-sale in the following instances: (1) where there was no original title issued; (2) where a COT was issued, but the lienholder listed thereon is one other than the current holder of the note and deed of trust, and where the current holder does not have possession of, and/or cannot obtain, an assignment of lien from the entity listed on the COT; and (3) where the mobile home has never been certified as real property.

Such post-foreclosure mobile home actions have become routine and commonplace in Mississippi, with chancery courts regularly entering judgment throughout the state. The only negatives are the additional costs to servicers for attorneys’ fees and costs, as well as the further time added to the standard foreclosure timeline.

Unfortunately, a sizeable setback occurred in 2012, when the court refused to enter a default judgment in a routine post-foreclosure mobile home action because the mobile home in question was not described in the foreclosed deed of trust. The servicer appealed the chancery court’s ruling to the Mississippi Court of Appeals. See Deutsche Bank National Trust Company v. Brechtel, 81 So. 3d 277 (Miss. Ct. App. 2012). While the appeal was ultimately dismissed for lack of jurisdiction (and, therefore, had no precedential effect on the merits), the case was widely discussed among the state’s judiciary. The chancery court ruling has had the practical effect of establishing the need for pre-foreclosure reformation action, where the mobile home is not described or referenced in the underlying deed of trust.

Mobile home lien perfection issues can easily be addressed at loan origination. Unfortunately, if the issues are not properly addressed then, servicers will continue to experience difficulty in handling mobile home foreclosures in Mississippi. Under certain circumstances, it is extremely foreseeable that both pre-foreclosure and post-foreclosure mobile home judicial actions will be required.

©Copyright 2015 USFN. All rights reserved.
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Foreclosure Law: Uniformity in Our Future?

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Michael L. Zevitz
South & Associates, P.C.
USFN Member (Kansas, Missouri)
and Wendy Walter
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

You may not be familiar with the Uniform Law Commission (ULC, also known as the National Conference of Commissioners on Uniform State Laws), but you’ve probably had exposure to some of the laws it has helped to promulgate. For instance, there have been many uniform laws that have contributed substantially to the real estate industry over the years: the Uniform Commercial Code, the Consumer Credit Code, the Electronic Transactions Act, the Real Property Electronic Recording Act, the Rules of Evidence … and the list goes on. The ULC, now in its 123rd year, comprises more than 350 practicing lawyers, governmental lawyers, judges, law professors, and lawyer-legislators who have been appointed by state governments to research, draft, and promote enactment of uniform laws in areas of state law where uniformity is desirable and practical.

Pending before the ULC is the Home Foreclosure Procedures Act (HFPA or the Act). In 2012, just a few years after the outbreak of the worst financial crisis since the Great Depression, the ULC drafting committee embarked on a journey to bring some uniformity to the vagaries and variances that abound in foreclosure procedures across the county. The kick-off meeting welcomed 55 stakeholders representing 40 different organizations. Some of the attendees included FHFA, American Bankers Association, Fannie Mae, Freddie Mac, MERS, MBA, and the Federal Reserve Board. The ULC commission has gone to great lengths to involve as many stakeholders as possible, including those representing borrowers and consumer credit organizations.

Recognizing that the nationwide split between judicial and nonjudicial foreclosure is roughly 50-50, the ULC seeks to provide uniformity in select practices and procedures that have commonality in residential mortgage foreclosure actions. Realizing that foreclosure actions are governed by the law in the state in which the property is located, one of the high priorities of the ULC is to achieve “enactability.” In other words, there must be a reasonable probability that the Act (when approved) either will be accepted and enacted into law by a substantial number of states or, if not, will promote uniformity indirectly. It should be pointed out that the scope of the proposed act, as a policy matter, would continue as an overlay to existing state foreclosure laws and not as a replacement to those existing laws. As a consequence, unless expressly repealed or changed, states may continue judicial foreclosure, nonjudicial foreclosure, or a combination of the two.

The HFPA attempts to strike a balance between providing a foreclosure remedy that is undertaken with due care for homeowners and setting up a solid procedural guidepost for the mortgage servicer, bringing clarity and consistency to the forefront of the many hotbed issues that have been raised in the last several years. This article will give a brief summary of the more poignant sections of the model act, as of the latest draft of the Act that is dated November 2014.

Article 2 – Notice of Default and Right to Cure
This section would require a creditor to send, to an obligor, a notice of default and right to cure 30 days before initiating a foreclosure process. The contents of the notice closely mimic the Acceleration and Remedies paragraph found in the standard Fannie Mae/Freddie Mac Uniform Instrument. The notice can be sent by first-class mail, containing an “itemization of the amount due” as of the date of the notice. The notice must also contain a statement as to the creditor’s right to foreclose (proof of legal standing) and the name of the legal owner of the obligation, if the creditor is not the legal owner of the note and security instrument. The mortgage obligation may be accelerated by filing a complaint, scheduling a sale, or by separate notice of acceleration. The notice of intent to foreclose does not, by itself, accelerate the debt.

Article 3– Early Resolution
Yesterday’s mediation has become today’s “Early Resolution.” In the wake of the 2008 foreclosure crisis, 18 states have installed mediation programs aimed at preventing foreclosures. The CFPB has adopted regulations that will require mortgage servicers to notify homeowners of foreclosure alternatives prior to foreclosure sales. The HFPA would establish a uniform structure for mediation programs, leaving many details to a court or agency rulemaking process, and deferring to the CFPB the rules as to servicer duties to notify homeowners about foreclosure alternatives, and handling homeowner loss mitigation applications appropriately. Ideally, the HFPA would encourage mediation to occur between the notice of default (Article 2) and the first legal notice or filing. The draft Act establishes a framework outlining the contents of the notice, eligibility for the program, and proscribes conduct during the meeting. The HFPA leaves broad latitude to the responsible state agency in designing the program. The Act provides additional guidance by appending 30 rules that would help govern the Early Resolution process.

Article 4– Right to Foreclose and Sale Procedures
To address later possible challenges to legal standing or real party in interest, the HFPA proposes that only a person entitled to enforce the obligation secured by the mortgage may commence foreclosure. Here’s a potential game changer: if the obligation is registered in a “Mortgage Registry,” the only person who may commence a foreclosure is the person designated as owner or holder of the obligation by the registry, as of the time that foreclosure is commenced. A national mortgage registry does not presently exist, but there is substantial interest in its creation. The foreshadowed Mortgage Registry would exist if a number of federal agencies (including the Federal Reserve, FHFA, and Treasury) creates a new federally-mandated system for the electronic recording and tracking of promissory notes, mortgages, and other related mortgage documents.

The “Notice of Public Sale” must be mailed to the property address at least 30 days prior to the sale. The creditor must publish a commercially reasonable public advertisement of the sale, either by publishing in a newspaper once per week for three consecutive weeks, not more than 30 days prior to sale; or by posting on an internet website that is reasonably expected to be viewed by persons having an interest in purchasing the property, at least 21 days before the sale. This is an acknowledgment that traditional printing methods may no longer be the best means of generating the highest and best bids in a public auction, and that there may be more effective technology solutions available (the internet being the most obvious). Furthermore, the full legal description would no longer be required in the Act, and the drafters highlight the fact that legal descriptions are seldom of importance to a person who reads a foreclosure advertisement with an eye toward purchasing the property. The Act requires the creditor to send a copy of the advertisement (or internet posting) to the homeowner and to each obligor, no later than the date of the first publication.

The Act provides for the postponement of the sale for “any reason;” however, the committee dropped the “good faith” qualifier on this postponement section. The sale date does not need to be republished, unless the rescheduled sale is more than 30 days after the date from which it is postponed. What is not clear is whether this relates back to the original sale date, or if it only looks back to the previous sale date and the gap in time between those two dates. Notice of the postponement must be given to the homeowner and obligor, but if they are present at the sale, an oral notice of the new date would suffice. If there is not a subsequent date given, the Act defines this as a “cancellation,” and a notice of the cancellation must be provided to the homeowner and obligor.

Article 5 - Negotiated Transfer
A homeowner and a creditor may negotiate a transfer of mortgaged property to the creditor in full satisfaction of the obligation to the creditor secured by the mortgaged property if the homeowner and creditor agree to the transfer in writing. This section authorizes a transfer from the homeowner to the creditor in full satisfaction of the debt. There is a due process element to give notice and an opportunity for hearing to junior lienholders as well as other types of creditors. In so doing, it provides a framework for existing workout arrangements such as cash-for-keys and deeds-in-lieu of foreclosure transactions. This section provides for a safe harbor by specifying the effect of a transfer that meets certain requirements. The important innovations here are, first: to provide an expedited procedure to discharge junior liens on the property without the need for a foreclosure sale; and, second: to resolve a number of collateral issues that flow from the expedited procedure.

Article 6– Abandoned Property
The Act also addresses vacant and abandoned properties by authorizing an expedited foreclosure procedure for both judicial and nonjudicial foreclosures. An expedited procedure addresses the social impact that defaults bring to society. By providing for an expedited foreclosure procedure, this section seeks to return abandoned properties to the stock of occupied, well-maintained housing as soon as reasonably possible. The Act defines “abandonment” and outlines procedures for determining whether property is abandoned in both the judicial and nonjudicial foreclosure settings, and it provides a process for withdrawing those proceedings as well. If property is determined abandoned, the judicial foreclosure procedure would allow the court to order the sale of the property no later than 30 days after the entry of the judgment of foreclosure. For a nonjudicial foreclosure, the process contemplates having a governmental agency make the determination on abandonment, and the Act provides that the sale of the abandoned property may occur within 30 days (but not later than 60 days) after the determination. The determination process will allow for expedited foreclosure, but imposes a duty on the creditor to maintain the abandoned property up until the foreclosure sale, or release of the mortgage or security interest.

Article 7 - Remedies
In a judicial foreclosure proceeding, if a creditor is shown to have committed a material violation of the Act, the court may dismiss the action, stay the action on appropriate terms and conditions, or impose other appropriate sanctions until the violation is cured. In a nonjudicial foreclosure proceeding, a homeowner may initiate an action to enjoin or restrain the foreclosure on the grounds that a creditor committed a material violation of this Act. If the court finds that a material violation occurred, the court shall nevertheless allow foreclosure to continue after the violation is cured, unless the court determines that continuation of the foreclosure action would unfairly burden the homeowner. If a material violation is established, the creditor may not add to the amount of the obligation any attorneys’ fees or costs incurred as a result of the violation, before it cures the violation. A homeowner injured by a violation may bring an action for actual damages. In addition to actual damages, a homeowner may recover statutory damages not exceeding $15,000 in the case of a pattern or practice of noncompliance.

Conclusion
At each committee meeting, the ULC is engaging in debates that are also occurring in many legislatures, courts, and mediation hearings taking place in this country every day. The ULC continues to refine the HFPA and has plans to meet again in February 2015 to further discuss and revise the Act. Naturally, writing the rules of the game while it is being played is no easy task.

USFN plans to follow up with another article in the Spring USFN Report, diving further into the contemplated Mortgage Registry, as well as to provide an update on the political dialogue about this concept. There is little argument that uniform state and federal laws would be enormously helpful to the mortgage markets; uniform and clear standards would reduce the costs of tracking and complying with myriad state laws and could reduce the cost of housing finance for consumers. This proposed Act may turn out to be the panacea that has been so elusive in the past.

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Winter USFN Report

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Legal Issues Update: FDCPA: Split among the Circuits as to the Validation of Debts and Disputes

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Holly Smith
South & Associates, P.C.
USFN Member (Kansas, Missouri)

This article appeared in the USFN e-Update (Sept. 2014 ed.) and is reprinted here for those readers who missed it.

There is a split of authority among the circuits as to whether or not a debtor must articulate a dispute in writing under the validation of debts section of the Fair Debt Collection Practices Act (FDCPA), specifically 15 USC 1692g(a)(3). This is certainly a topic for servicers to monitor because of the strict liability penalties imposed by the FDCPA.

15 USC 1692g states:


(a) Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing —
 (1) the amount of the debt;
 (2) the name of the creditor to whom the debt is owed;
 (3) a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
 (4) a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of the judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
 (5) a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

Third Circuit— In 1991, the Third Circuit (comprised of Delaware, New Jersey, Pennsylvania, and the Virgin Islands) issued a decision that a consumer debtor must voice a dispute in writing that contests the validity of the debt, Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991). The Graziano opinion states: “that reading 1692g(a)(3) not to impose a writing requirement would result in an incoherent system in light of the explicit writing requirements stated in sections 1692g(a)(4)-(5) and 1692g(b).” Id. The court also concluded that written statements create a record of the dispute.

Ninth Circuit — Several years later, in 2005, the Ninth Circuit (comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and Northern Mariana Islands) issued an opinion regarding 15 USC 1692g(a)(3) that the dispute need not be expressed in writing. Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005). The court recited four main reasons in its decision: (1) there are explicit contrasting writing requirements in the statute; (2) the statute provides for other protections in an instance of dispute that only depend on a dispute, and not whether there was a prior writing; (3) the legislative purpose of allowing debtors to challenge the initial communication is furthered by permitting oral objections; and (4) from a reading of the statute, to conclude that some rights are triggered by oral disputes while others require a written statement, would not mislead consumers.

Second Circuit
— In May 2013, the Second Circuit (comprised of Connecticut, New York, and Vermont) decided a case, also based on 15 USC 1692g, with similar facts to the two cases referenced above. The Second Circuit decision agreed with the reasoning of the Ninth Circuit, holding that a dispute brought under 15 USC 1692g(a)(3) need not be in writing. Stating in relevant part, “the right to dispute a debt is the most fundamental of those set forth in 1692g(a) and it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge.” Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282 (2d Cir. 2013).

Conclusion

Consumer disputes are becoming increasingly common and although the cases cited here pertain to a very specific portion of the FDCPA, it is a part of the FDCPA that should never be ignored. Most importantly, because of the current split among the circuits, these decisions should be watched closely in all jurisdictions.

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Winter USFN Report

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HOA Talk: Florida: Post-Judgment Determination of Association Assessments

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Robert Schneider
Ronald R. Wolfe & Associates, P.L.
USFN Member (Florida)

Litigation between foreclosing lenders and condominium (and homeowners) associations over past-due assessments is nothing new in Florida. The methods by which lenders may seek recourse for improper assessments, however, have been clarified — and limited — by the recent Third District Court of Appeal decision in Central Mortgage Company v. Callahan, 2014 WL 3455485 (Fla. 3d DCA).

In Callahan, Central obtained final judgment of foreclosure, was the successful bidder at the foreclosure sale, and ultimately took title to the foreclosed property. Central’s final judgment included language stating that Central’s lien was superior to all other interests in the property, with the exception of condominium and homeowners association assessments (which are greatly limited by statute in Florida when the foreclosing lender takes title to the property through the foreclosure sale).

In a scenario that has become all too common in Florida, the associations that oversaw the subject property sought past-due assessments from Central for amounts much greater than what were owed to them. Central filed a post-judgment motion in its foreclosure case, seeking a judicial determination of the amounts due to the associations. The trial court denied the motion, based on a lack of jurisdiction, and Central appealed.

On appeal, Central contended that since the court had inherent jurisdiction to enforce the judgment, it necessarily had the authority to determine statutory assessments after the time had run to amend Central’s judgment. The appellate court disagreed. Because Central included in its judgment only a general reservation of jurisdiction to enforce writs of possession and deficiency judgments, and because the issue of past-due assessments had never been litigated or adjudicated, the court ruled that it was without power to determine Central’s motion.

The takeaway from Callahan, much like that of a similar reforeclosure opinion in Florida [Ross v. Wells Fargo Bank, 114 So. 3d 256 (Fla. 3d DCA 2013)], is that if post-judgment litigation is possible, the foreclosure judgment must specifically reserve jurisdiction over the anticipated type of litigation. The practical solution to the instant situation (and one which has been previously implemented by this author’s firm) is to include language in all final judgments of foreclosure reserving the right to determine the amounts owed to any condominium or homeowners association. Without the inclusion of the necessary reservation language in the final judgment, lenders may be forced to file separate suits to fight improper assessments, or be prepared to give in to the associations’ improper demands.

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Winter USFN Report

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HOA Talk: Missouri: Condo Lien Priority Law Changes

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Kara Elgin
and Clayton Volker
South & Associates, P.C
USFN Member (Kansas, Missouri)

During and after the foreclosure process, the issue of priority between home/condominium associations and deeds of trust arises frequently. Both a lien recorded prior to the deed of trust that is to be foreclosed, and a lien against a former owner, would take priority and need to be cleared from title.

Home association liens and assessments are not controlled by a Missouri statute, and thus, are governed by individual covenants and declarations. These liens and assessments typically, but not always, subordinate to a first lien or purchase-money deed of trust. Condominium association assessments are governed by Missouri statute.

In August 2014, Missouri enacted House Bill 1218, impacting the lien priority of condominium association liens in relation to deeds of trust under Mo. Rev. Stat. § 448.3-116.

Under the prior wording of Mo. Rev. Stat § 448.3-116.2, a purchase-money deed of trust (a deed of trust that was taken out for the purpose of purchasing a condominium, rather than a refinance mortgage) had priority and any pre-foreclosure assessments would be extinguished through foreclosure. This meant that the lender was liable for any assessments due after the foreclosure sale. Under the prior statute, the condo association could place liens, or even foreclose, on the condo nonjudicially — in like manner as a mortgage on real estate, or power of sale, pursuant to Mo. Rev. Stat. § 443 — and the deed of trust would be left intact with a priority position. Following a foreclosure sale on a purchase-money deed of trust, the new owner would only be subject to liens or assessments incurred after the foreclosure sale date.

While the above is still good law for purchase-money deeds of trust that were taken out and recorded prior to August 28, 2014, for those deeds of trust taken out after that date, the amended statute has added a new subsection that addresses priority of assessments over deeds of trust. Mo. Rev. Stat. § 448.3-116.2(3) states that, generally, condominium liens will be subordinate to any deed of trust, purchase-money or refinance, recorded prior to the date that a condominium assessment becomes due.

The remainder of subsection three discusses common expense assessments for a six-month period. An assessment tied specifically to a unit is subordinate to a deed of trust recorded prior to the date the assessment comes due, but the condominium association will be able to collect a portion of up to six months’ worth of common expense assessments. Section seven of the statute has been revised to allow for collection of costs and reasonable attorneys’ fees, incurred in connection with the collection of assessments.

As the amended statute is relatively new, the effect is not yet completely known, nor are the practical consequences of it. As such, this changing area of law will continue to be monitored.

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Winter USFN Report

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HOA Talk: Nevada: HOA Lien Priority?

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by David W. Cowles
Tiffany & Bosco P.A.
USFN Member (Arizona, Nevada)

by: Laurel I. Handley
Pite Duncan, LLP
USFN Member (California, Nevada)

The priority and amount of a homeowners association (HOA) lien has been heavily contested in Nevada for the past several years. The current statute governing HOA lien priority and foreclosure was enacted in Nevada in 1991. The statute provides that an HOA lien has priority over a prior recorded first deed of trust, only “to the extent of the assessments for common expenses based on the periodic budget adopted by the association … which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien.” NRS § 116.3116(2).

Until recently, HOAs, lenders, title companies, and most courts interpreted the statute to mean that an HOA lien foreclosure did not extinguish a first priority deed of trust. As the value of homes in foreclosure declined and was no longer sufficient to pay all outstanding liens, HOAs, their collection agents, and investors began to assert that an HOA foreclosure sale extinguishes a first priority deed of trust.

SFR Investments Pool 1, LLC v. U.S. Bank
On September 18, 2014, the Nevada Supreme Court issued a significant decision interpreting the statute. In SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 130 Nev. __, Advance Opinion 75 (Nev. 2014), the court held that a properly noticed nonjudicial (or judicial) foreclosure under an HOA’s super-priority lien under N.R.S.§ 116.3116(2) can extinguish a first priority deed of trust. Prior to this decision, the Nevada Supreme Court had not ruled on the issue, and the majority of Nevada courts had held that an HOA foreclosure did not extinguish a first deed of trust. Some courts had also held that an HOA must pursue judicial foreclosure in order to assert a super-priority lien.

The dispute in SFR Investments began when the homeowners became delinquent in their HOA assessment dues. Due to the delinquency, the HOA obtained a lien against the property and subsequently foreclosed, selling the property to SFR Investments Pool 1, LLC. Later, the beneficiary under a first priority deed of trust encumbering the property (U.S. Bank) attempted to foreclose on its deed of trust. Seeking to enjoin the sale, and contending that U.S. Bank’s deed of trust was extinguished by the HOA foreclosure sale, SFR filed a complaint seeking to quiet title. U.S. Bank filed a motion to dismiss, which the court granted, holding that an HOA’s super-priority lien must be foreclosed judicially. SFR appealed this decision to the Nevada Supreme Court. (Nevada does not have an intermediate appellate court.)

The Nevada Supreme Court ruled in favor of SFR, holding that an HOA lien has a “superpriority piece” that has true priority over other liens, including first priority deeds of trust recorded prior to the HOA lien. The Nevada Supreme Court also held that either nonjudicial or judicial foreclosure of the super-priority lien is sufficient to extinguish a first deed of trust and all other subordinate liens. In other words, judicial foreclosure by an HOA is not required to extinguish a first deed of trust.

The Nevada Supreme Court did not, however, reach issues as to the due process rights of a first deed of trust holder. At the “motion to dismiss” stage, the Nevada Supreme Court was constrained by the allegations in the complaint, which included allegations that U.S. Bank received sufficient notice of the HOA foreclosure. Similarly, the court could not consider the question as to whether U.S. Bank had attempted to tender funds to pay off the super-priority piece of the lien. Instead, the court merely commented that U.S. Bank could have determined the precise super-priority amount, or paid the entire lien and then sought a refund from the HOA.

Unfortunately, the court provided no specific instruction as to whether the super-priority piece of the lien is limited to nine months of monthly assessments, or whether it includes all charges associated with lien enforcement (as asserted by many HOAs). Thus, despite ruling that foreclosure of the super-priority lien terminates all other liens, calculation of the super-priority lien amount remains unclear. Moreover, the Nevada Supreme Court did not address whether the HOA foreclosure sale was conducted in a commercially reasonable manner, or whether U.S. Bank may have other defenses to challenge the validity of the foreclosure. These issues will need to be addressed by the parties on remand to the trial court.

Washington & Sandhill Homeowners Association v. Bank of America, N.A.
One week after SFR Investments was issued, the U.S. District Court for the District of Nevada issued an order in Washington & Sandhill Homeowners Association v. Bank of America, N.A.; 2:13-cv-01845-GMN-GWF, Doc. No. 24. The district court held that the HOA foreclosure sale at issue did not extinguish the first deed of trust because it was insured by the FHA insurance program — and, thus, was protected by the U.S. Constitution’s Property and Supremacy Clauses. To date, this argument has not been extended to loans other than those insured by the FHA. It has, however, opened the door for other potential claims to challenge the authority of an HOA to extinguish a first priority deed of trust.

Since SFR Investments and Washington & Sandhill were issued, disputes have continued as to the amount of the super-priority piece of an HOA lien. Lenders, seeking to protect their secured interest in a property, have attempted to pay off the super-priority piece. However, obtaining a payoff amount is often difficult. For example, some HOAs have taken the position that only the total lien payoff can be provided because “the mechanism for [an HOA] foreclosure does not provide for a distinction in the amount of the lien which is recorded.” Moreover, when a super-priority payoff is provided, it invariably includes amounts for attorneys’ fees and collection costs, which lenders contend are not authorized by statute. Thus, while everyone has been instructed that an HOA super-priority lien can extinguish a first deed of trust, no one agrees as to how that super-priority lien is calculated (or how it can be paid off), so that an HOA foreclosure sale does not extinguish a first deed of trust.

What’s Next?
Fortunately, the Nevada Supreme Court is likely to provide guidance on these issues in the near future. On October 6, 2014, the court heard oral argument in a case involving a dispute over the amount of the super-priority piece of the lien. Shadow Wood Homeowner’s Association, Inc. v. New York Community Bancorp, Inc., Nev. Supreme Court Docket No. 63180. In addition, on November 13, 2014, the court accepted the following certified question from the U.S. District Court for the District of Nevada:

What effect, if any, is there upon a foreclosure sale conducted pursuant to Nev. Rev. Stat. § 116.3116(2) when the association refuses to provide the holder of a first security interest under a deed of trust secured by the unit with the specific amount due under the portion of the association’s delinquent assessments lien that has been made prior to the deed of trust by Nev. Rev. Stat. § 116.3116(2)(c)?

GMAC Mortgage, LLC v. Nevada Association Services, Inc. Nev. Supreme Court Docket No. 65260.

Briefing with regard to this certified question has not yet been completed. However, the ultimate decision in these two cases, and in many others that are also pending, should assist both lenders and HOAs in determining not only the amount of the super-priority lien, but also the HOAs’ duties in advising lenders of the amount required to pay off the super-priority piece of the lien. This guidance is needed to ensure that everyone has a clear direction on the rules of law.

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Winter USFN Report

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BANKRUPTCY UPDATE: U.S. Supreme Court Set to Rule on Chapter 7 Lien Stripping

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Michael G. Clifford
Wilson & Associates, PLLC
USFN Member (Arkansas, Tennessee)

This article appeared in the USFN e-Update (Jan. 2015 ed.) and is reprinted here for those readers who missed it.

It appears that the U.S. Supreme Court will finally determine whether the Bankruptcy Code permits Chapter 7 debtors to “strip-off” wholly under-secured junior mortgage liens. Certiorari was granted on November 17, 2014 in two consolidated cases out of Florida. See Bank of America, N.A. v. Caulkett (Dkt. 13-1421) and Bank of America, N.A. v. Toledo (Dkt. 14-163). This appeal is set to resolve a 3-1 circuit split, in which only the Eleventh Circuit has held that strip-offs are permissible. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)

In 1992, the U.S. Supreme Court held that a Chapter 7 debtor was not permitted to “strip down” a creditor’s allowed secured claim, where the debtor was attempting to void the portion of a first mortgagee’s lien to the extent that the debt exceeded the underlying collateral’s value. Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773 (1992). The debtor’s argument in Dewsnup hinged upon two subsections of 11 U.S.C § 506.

Section 506(a) states that “an allowed claim of a creditor secured by a lien on property … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property … and is an unsecured claim to the extent that the value of such creditor’s interest … is less than the amount of such allowed claim.” Section 506(d) then states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

The debtor argued that Section 506(a) defines what constitutes an allowed secured claim, and that Section 506(d) permits the debtor to void any lien (or portion of it) that does not satisfy the definition. The Supreme Court disagreed with that interpretation, and ultimately held that it was “not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.”

In the consolidated case, the Supreme Court will likely determine the related issue of whether Section 506(d) permits a Chapter 7 debtor to strip-off a junior mortgage lien in its entirety, where the outstanding senior lien exceeds the current value of the collateral. When this issue came before the Fourth, Sixth, and Seventh circuits, they all relied upon Dewsnup, concluding that its holding was equally relevant in circumstances in which a debtor attempts to strip-off (rather than strip-down) an allowed, but underwater, lien. See Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 34 F.3d 555 (6th Cir. 2003); Palomar v. First American Bank, 722 F.3d 992 (7th Cir. 2013).

In 2012, the Eleventh Circuit departed from the majority in McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012). The McNeal court concluded that Dewsnup was not clearly on point because it only disallowed the strip-down of a partially secured mortgage lien, and did not address the strip-off of a wholly unsecured junior lien. Determining that the Dewsnup opinion was not analogous, the Eleventh Circuit held that its pre-Dewsnup precedent (permitting the stripping of a wholly unsecured lien) was still binding. See Folendore v. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989).

Currently, the Eleventh Circuit’s interpretation of Section 506 allows Chapter 7 debtors in Alabama, Florida, and Georgia to strip the liens of wholly under-secured junior mortgages. Consequently, the debtor (or perhaps other unsecured creditors) receive the benefit of any appreciation in the property, not the former lienholder. In all other states, the debtor’s discharge simply absolves the debtor of personal liability on the loan, but does not void the lienholder’s right to foreclose. The Supreme Court’s grant of certiorari should resolve the circuit split, with a decision expected in the latter half of 2015.

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Winter USFN Report

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BANKRUPTCY UPDATE: Overview of Comments to the Proposed Amendments to the FRBP and Official Forms

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by David McAllister
Pite Duncan, LLP
USFN Member (California, Nevada)
Chair, USFN Bankruptcy Committee

The Judicial Conference Advisory Committee on Bankruptcy Rules (Committee) proposed amendments to the Federal Rules of Bankruptcy Procedure (FRBP) and Official Forms. The deadline for public comment is February 17, 2015. Below is a brief summary of the primary issues that should be considered for comments.

Proofs of Claim
The proposed changes to FRBP 3002 shorten the time for filing proofs of claim (POC) to 60 days after the petition date, and require the filing of a new Mortgage Proof of Claim Attachment that includes a detailed loan transaction history from the first date of the default, on a loan secured by a debtor’s principal residence in Chapter 13 proceedings, to be filed with the claim. FRBP 3002 then provides an additional 60 days for filing required loan documentation. The signer of the POC must verify under penalty of perjury that the information provided in the claim is accurate. However, filing a claim without a review of supporting documentation raises the issue of whether the signer is committing perjury and/or violating FRBP 9011. While an alternative time for filing a POC to 90 days post-petition with no bifurcation would appear reasonable, the Committee ignored the previous comments on this proposed rule change, and it is likely that this amendment, as proposed, will be adopted.

Proposed FRBP 3002 also requires creditors who seek allowance of their proofs of claim in all voluntary Chapter 7 cases to file the claim within the above time frame. However, the Chapter 7 trustee does not typically determine whether there are assets to administer within this period. Furthermore, FRBP 3002(c)(2)(C) requires a Mortgage Proof of Claim Attachment and escrow account statement in individual Chapter 7 cases, if a security interest is claimed in the debtor’s principal residence. Finally, the failure for a creditor to timely file a POC in a Chapter 7 case will preclude the exercise of credit-bidding rights at a sale of property that is subject to the creditor’s lien. See, Title 11 U.S.C § 363(k). Accordingly, proposed FRBP 3002 should be revised to only require Chapter 7 proofs of claim in asset cases, within the time frame of the Notice of Claims Bar Deadline issued by the court.

National Form Plan
The Committee drafted the form and FRBP amendments as complementary parts of a project to improve the Chapter 13 process. It has been the understanding of many creditors that the proposed amended FRBPs, which weaken certain existing protections and due process, are in exchange for one consistent national Chapter 13 plan. Thus, the adoption of proposed amended FRBPs 2002, 3002, 3007, 3012, 3015, 4003, 5009, 7001, and 9009 should be contingent on the simultaneous adoption of a uniform plan. However, the Committee of Concerned Bankruptcy Judges submitted comments opposing a mandatory national Chapter 13 plan, and there is a significant possibility that the above-referenced amended FRBPs will be approved without the benefit of the uniform plan.

Section 3.5 of the proposed uniform Chapter 13 plan addresses the surrender of collateral securing a creditor’s claim, and merely provides for “consent to termination of the stay.” In several jurisdictions, the existing practice provides for relief from the automatic and/or co-debtor stays upon entry of the plan confirmation order. Accordingly, the Committee should consider revising Section 3.5 to provide for termination of the automatic and co-debtor stays, with respect to creditors’ exercise of their rights against the collateral, to be effective upon entry of the confirmation order.

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Winter USFN Report

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Proposed Changes to the CFPB Mortgage Servicing Rules: Two Points that Could Impact Loans in Bankruptcy and Foreclosure

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Wendy Walter
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)


 On November 20, 2014, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a 492-page proposal to further amend the servicing rules that went into effect on January 10, 2014. This action was designed by the CFPB to revisit known issues that arose prior to the effective date of the servicing rules, but for which more study was necessary (bankruptcy revisions). Further, the action addresses concerns that have arisen as the CFPB engaged in post-implementation outreach with the industry and with consumer advocacy groups (foreclosure revisions). The proposal has a comment period of 90 days, as of the date of the proposal’s publication in the Federal Register. [As of date of this article in early December 2014, the proposal was not yet published.] It is anticipated that comments will be due sometime in mid-March 2015, which means the changes would not be effective until sometime later in 2015.

Some Background

In late 2013, debates were waged regarding the then-proposed servicing rules that would have required servicers to send the new periodic payment statement to borrowers in bankruptcy. It was clear that Chapter 13 trustees, bankruptcy creditor lawyers, and consumer advocates all needed to educate the CFPB on the real costs and confusion that would be introduced by requiring periodic payment statements while a loan was in a Chapter 7 or Chapter 13 proceeding.

After several meetings and input, the CFPB has proposed to peel back the bankruptcy exemption given in the periodic payment statement rule, which was provided in the Interim Final Rule on October 15, 2013 under 78 FR 62993. The exemption would be allowed to apply to those bankruptcy consumers who are surrendering the property (in the Chapter 13 plan with lack of payment provision to the servicer or in the Statement of Intention), who are avoiding the lien securing the mortgage, or who have requested that the servicer stop sending periodic statements. The proposal would require the servicer to resume sending statements upon request from the consumer in writing, or when the bankruptcy case is dismissed, closed, or the borrower reaffirms the mortgage — to the extent that the remaining debt is not otherwise discharged in the bankruptcy. The proposal also intends to repeal the payment statement exemption for a non-debtor joint obligor in a Chapter 7.

Loss Mitigation Concerns
 An important foreclosure provision covered in the CFPB’s proposal is related to the loss mitigation section, 12 CFR 1024.41, which contains the prohibition on obtaining a judgment or order of sale, or actually conducting the sale, when the borrower has a complete loss mitigation application pending. In the proposed revision to the official commentary in section 12 CFR 1024.41(g), when a servicer or its counsel fails to take reasonable steps to avoid the ruling on a dispositive motion or issuance of an order of sale, the CFPB would like to force the servicer to dismiss the foreclosure proceeding (if necessary) to avoid the sale.

In the proposed amendment titled “interaction with foreclosure counsel,” the CFPB intends to clarify that a servicer is liable for violation of the rules, if the “foreclosure counsel’s actions or inaction caused a violation.” It goes on to require that the servicer “must properly instruct counsel not to make a dispositive motion for foreclosure judgment or order of sale; [and] to take reasonable steps where such a motion is pending to avoid a ruling on the motion or issuance of the order of sale.” Examples given of reasonable instructions include: asking counsel to move for a continuance for the deadline to file a dispositive motion; to move or request that the sale be stayed, otherwise delayed, or removed from the docket; or that the foreclosure proceeding be placed in any administrative status that stays the sale.

In the proposed amendment titled “conducting a sale,” the CFPB identifies reasonable steps for the servicer (or its counsel) to take, including: requesting that a court (or the official conducting the sale) reschedule or delay the sale, remove the sale from the docket, or place the foreclosure proceeding in any administrative status that stays the sale. Again, if the servicer or counsel fails to take reasonable steps to delay the sale, or if the servicer fails to instruct counsel to take reasonable steps, the servicer must dismiss the foreclosure proceeding.

The CFPB is doing this because it has learned in its evaluations of mortgage servicer practices that some servicers did not properly structure and manage third-party vendor relationships, which resulted in harm to borrowers, and imposed “unwarranted fees on borrowers” related to dual tracking. It cites that one of the clearest harms of servicers pursuing loss mitigation and foreclosure procedures concurrently is the loss of the borrower’s house when a complete application review is pending.

The Bureau has received reports that foreclosure counsel does not always have accurate information about the completion of the borrower’s loss mitigation application and, “in extreme cases,” foreclosure counsel may not accurately represent the status of the loss mitigation application to the court. It goes on to suggest that foreclosure counsel fails to impress upon the courts the significance of 1024.41(g)’s prohibition when counsel is taking steps to avoid a judgment or sale. The CFPB thinks that a lack of express commentary requiring the servicers to take affirmative steps has caused servicers to fail to instruct foreclosure counsel appropriately, and has resulted in courts discounting servicer obligations under the rule, which has harmed borrowers and deprived them of important protections in 12 CFR 1024.41.

There are several concerns with the underlying premise outlined in the background leading up to the proposals. The CFPB seems to imply that the servicer is the party causing the dual-tracking issues. By demanding and providing a borrower with a right to a post-foreclosure referral loss mitigation review in 12 CFR 1024.41, the Bureau has intensified the issue by placing obligations on parties outside of the CFPB’s scope of authority to regulate.

The real-life scenario seems to be this: servicer’s counsel is confronted with an underfunded court system and has been dealing with a borrower and a case for many months (possibly years). In the final stretches before the case is finally going to judgment and the sale might be moving forward, a borrower surfaces with a loss mitigation application; the servicer is scrambling to carry on with that process, and to keep its foreclosure counsel in the loop. It is no wonder that a last-minute plea to stop the process in its tracks is denied by the court. In the early days of the loss mitigation rules, there were reports of judges (after extensive briefing on the issue of the importance of the rules) declaring that they are not bound by the CFPB rules and, accordingly, determining that the matter will proceed.

Attorney-Client Privilege & Other Potential Issues
 Concerns about the interaction with the foreclosure section raise significant issues, including whether requiring this type of communication would compromise the attorney-client relationship between foreclosure attorneys and their servicing clients. To prove that there was a violation for which the servicer would be liable under 1024.41 (and for which there is a private right of action for a borrower to enforce against a servicer), the borrower would need access to communications that would be protected by the attorney-client privilege. The rule does not consider the impact of this likely possibility on the relationship between servicers and their counsel.

Additionally, the proposal discusses the Bureau’s concern with courts that are trying to clear overloaded dockets and, in the process, might not be acting judiciously with regards to borrowers’ rights. Through this proposal and commentary, the CFPB is hoping to “educate” the judiciary on the consumer impact of the courts’ actions. In the process, however, it appears that the servicer and its counsel are being sandwiched between state court justice systems that are dealing with their own practical realities and the Bureau. The CFPB appears to take the position that a servicer in a foreclosure case — in civil procedure terminology: a plaintiff in a lawsuit — has ultimate control over the court, the case (and whether it can be dismissed), and the sale (and whether it can be called off).

Finally, there could be an issue if the proposal is enacted, and the revision to the comments regarding “interactions with counsel” goes into effect. It is a concern that foreclosure counsel is more likely to be sued when the borrower believes he or she has not been afforded proper treatment under the rules. The CFPB is demanding a certain outcome in the court systems, where servicers and their counsel have little say as to how the courts control their own dockets.

Conclusion
 For all of the concerns raised here, though, there is a ray of hope in that the proposal contains a requirement that the servicer must send a letter to a consumer informing when a loss mitigation application is determined to be complete. Assuming this proposal is adopted in its current form, the letter confirming when a loss mitigation application is complete could be a touchstone for counsel to look to when deciding how to proceed before filing a dispositive motion, obtaining an order of sale, or conducting the sale.

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New York: New Regulations to Amend N.Y.C.R.R

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

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

On December 3, 2014, the New York State Department of Financial Services (DFS) adopted new regulations applicable to the debt collection industry.

The majority of the regulations go into effect on March 3, 2015. A prior USFN e–Update (Sept. 2014 ed.) article by this author addressed these regulations in their proposal stage. The adopted regulations amend the New York Code of Rules and Regulations (N.Y.C.R.R), adding a new section published in the New York State Register found at 23 N.Y.C.R.R 1.

Important provisions require debt collectors to ensure that they have processes to determine whether the statute of limitations on the debt may have expired, and to send a specific notice if the debt collector knows (or has reason to know) the statute expired on that debt. The debt collector must also provide disclosures to consumers after making initial contact with them. Further, the regulations require debt validation/substantiation processes, and provide rules as to when (and under what circumstances) debt collectors can contact and communicate with consumers by email.

Under the New York Financial Services Law, after proper notice and hearing, penalties for violations of these regulations can amount up to $1,000 for each violation. Also, there is a possibility that DFS could institute a lawsuit to obtain an injunction to prevent future violations.

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Michigan: Implications of the “Neal Case Fix Bills”

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Jennifer Sayegh
Trott Law, P.C. – USFN Member (Michigan)

On October 15, 2014, the Michigan Legislature enacted three bills (HB 4638, HB 4639, & HB 4640), effective October 17, 2014, known as the Neal Case Fix Bills. These bills were introduced as a direct response to the U.S. Bankruptcy Court decision In re Neal, 2009 Bankr. LEXIS 2027 (Bankr. E.D. Mich. June 18, 2009). That case held that an affidavit accompanying a copy of an original instrument does not satisfy the requirements for recording a real estate conveyance, since it does not contain an original signature.

In the Neal opinion, the bankruptcy court concluded that: (1) the affidavit attached to a copy of the mortgage did not, in and of itself, convey an interest in property; (2) MCL 565.451 does not allow the filing of an affidavit of lost mortgage as a substitute for the original mortgage; and (3) if the Michigan Legislature had intended the filing of an affidavit of lost mortgage to act as a substitute for the original mortgage, the language would have specifically stated that provision.

House Bill 4638 clarifies the conditions necessary for the execution and recording of instruments with the register of deeds, by amending MCL 565.201(1)(a). Specifically, (6) states “If a mortgage meets all requirements for recording under this act and a copy of the mortgage is affixed to an affidavit that is recordable under section 1a(g) of 1915 PA 123, MCL 565.451a, then the affidavit with the accompanying copy of the mortgage shall be received for record by the register of deeds, and the mortgage is duly recorded under this act and under section 29 of 1846 RS 65, MCL 565.29, as of the date of recording of the affidavit.” More importantly, (6) directly responds to the court’s opinion in Neal, that if the Michigan Legislature had intended the filing of an affidavit of lost mortgage to act as a substitute for the original mortgage, the language would have specifically stated as much. The statutory text of MCL 565.201(6) now includes: “To the extent that the mortgage validly creates a lien, the lien is perfected as of the date of recording of the affidavit.” Finally, the language is retroactive and applies to all copies of mortgages verified by an affidavit.

House Bill 4640 amends MCL 565.451a by addressing the use and recording of affidavits affecting real property. The bankruptcy court in Neal concluded that “the language of M.C.L.A. § 565.451a simply does not allow a party to file an affidavit of lost mortgage as a substitute for the original,” and that “[n]othing in the language expressly permits the filing of an affidavit of lost mortgage.” Id at 5. In response, MCL 565.451a(g) specifically provides that an affidavit stating facts relating to matters affecting title to real property may be recorded by a person with knowledge of the unrecorded mortgage, “if the affidavit recites the names of the parties to the unrecorded mortgage and is accompanied by a copy of the unrecorded mortgage.”

Conclusion
The passing of the Neal Case Fix Bills now allows for the recording and perfecting of a mortgage lien, via an affidavit executed by a person with knowledge to the unrecorded mortgage, when accompanied by a copy of the original mortgage, and if the affidavit is in compliance with Michigan’s recording requirements.

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Connecticut: Supreme Court Decision re Assignee Liability

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

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

Prior to the recent Connecticut Supreme Court decision of Hartford v. McKeever, 314 Conn. 255, 101 A.3d 229 (2014), Superior Court judges were split on the issue of liability of mortgage assignees for defendants’ counterclaims, when based on allegations of assignor misconduct before assignment.

The McKeever decision affirmed the appellate court’s ruling that, while a mortgagor-defendant could aver special defenses that arose during the life of the mortgage, he could not assert affirmative claims against the assignee-plaintiff for alleged overpayments made to the assignor prior to the assignment, absent an express assumption in the assignment.

The undisputed facts reveal that the assignee, and holder of a promissory note and mortgage, commenced a foreclosure action against the defendant, Brian McKeever, alleging failure to pay. The mortgagor subsequently filed a five-count counterclaim, sounding in breach of contract and unjust enrichment, seeking compensation for monies he allegedly overpaid to the assignee and prior holders of his mortgage. The plaintiff withdrew its foreclosure complaint, but the defendant pursued his counterclaims against the assignee-plaintiff. The defendant was ultimately awarded the total amount of his overpayments by the trial court.

On appeal, the plaintiff alleged that it was inequitable for the assignee to be liable for any overpayment made to its assignor. The appellate court reversed the trial court’s decision, and concluded that the assignee could only be held liable for monies overpaid by the mortgagor after the assignment of the mortgage (the position of many Superior Court judges; see, e.g., OneWest Bank, FSB v. Reinoso, Superior Court, judicial district of Fairfield, Docket No. CV-10-6006307-S (May 10, 2012)).

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Debt Collector Awarded Attorneys’ Fees and Costs in Unique FDCPA Case

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Courtney McGahhey Miller
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Eighth Circuit Court of Appeals recently upheld a district court ruling that a defendant collection agency was entitled to over $30,000 in attorneys’ fees and costs for an FDCPA case that was found to have been brought in bad faith and for the purpose of harassment. (The Eighth Circuit is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)

In Scroggin v. Credit Bureau of Jonesboro, Inc., 973 F. Supp. 2d 961 (E.D. Ark 2013), Brandon Scroggin sued the Credit Bureau of Jonesboro (CBJ) for violations of the Fair Debt Collection Practices Act (FDCPA) and the Arkansas Fair Debt Collection Practices Act (AFDCPA). In his complaint, Scroggin accused CBJ of contacting him in relation to a delinquent medical bill after receipt of a cease and desist letter, as well as for leaving a voicemail that was heard by a guest in his home.

After a jury trial in the Eastern District of Arkansas, it was found that CBJ violated the FDCPA and AFDCPA twice. However, the jury did not award Scroggin any actual or statutory damages for the violations. CBJ filed a motion for attorneys’ fees and costs, alleging that the lawsuit had been brought in bad faith and to harass.

The FDCPA provides that a court may award to the defendant attorneys’ fees and costs “on a finding by the court that an action … was brought in bad faith and for the purpose of harassment ...” [emphasis added] 15 USC 1692k(a)(3). The AFDCPA allows the same when there is a finding that an action was brought in bad faith or for the purpose of harassment. Ark. Code Ann. § 17-24-512(a)(3)(B). In Scroggin, the District Court found bad faith and an intent to harass, ultimately awarding the fees and costs to CBJ.

Throughout the District Court case, Scroggin posted thousands of comments on websites and message boards expressing his hatred of CBJ and discussing his attempt to bait them with a vague cease and desist letter that simply stated, “I refuse to pay this debt because I don’t think I owe that because I was only there [at St. Bernard’s Medical Center] for an hour and then left after I started feeling better.” CBJ filed a motion for dismissal and an order of civility based on the numerous online comments. The motion was denied for First Amendment reasons, but the plaintiff was warned that any future posts would be allowed as evidence.

Scroggin’s many online posts and comments continued, making it clear that the cease and desist letter he sent was purposefully ambiguous, and was intended to prompt CBJ to make contact with him to explain why he owed the debt. His online comments also advised other forum members on how to solicit a violation from a debt collector. His posts included: statements acknowledging that his claims for actual and statutory damages were insincere, as well as offered advice on how to manipulate a claim for damages. His posts went on to discuss his intent to force the defendant to trial, notwithstanding its impact on his damages. He also boasted that the FDCPA essentially allowed him to continue his action for his own entertainment, and to harass CBJ and its counsel. Additionally, Scroggin sent several emails directly to CBJ’s counsel that were in bad faith and harassing in nature.

The District Court determined that the plaintiff’s behavior and comments — as a whole —demonstrated dishonesty, hatred, ill will, and a spirit of revenge. The court stated that Scroggin’s intent was to annoy CBJ persistently, with no legitimate purpose, and found that the lawsuit “was never about the plaintiff seeking legitimate redress for what he perceived to be violations of statutes meant to protect consumers but was a vehicle for Scroggin to pursue a vendetta against CBJ and for his own entertainment ...” Id. at 977.

A debt collector who violates the FDCPA and AFDCPA is liable to the prevailing plaintiff for the costs of the action, together with reasonable attorneys’ fees. 15 USC 1692k(a)(3) and Ark. Code Ann. 17-24-512 (a)(3)(A). However, attorney fees may be denied for bad faith conduct on the part of the plaintiff. The court looked to one of the purposes of 15 USC 1692k(a)(3), which is “to thwart efforts of a consumer to abuse the statute.”

In its ruling, the court stated that “it would be a legal mockery to conclude that although Scroggin flagrantly manipulated and abused the judicial process and the FDCPA and AFDCPA in his vendetta against CBJ, thereby wasting valuable judicial resources, he is nevertheless shielded from liability for attorneys’ fees and costs under 15 U.S.C. § 1692k(a)(3) and Ark. Code Ann. § 17-24-512(a)(3)(B) simply because of CBJ’s two technical violations of the FDCPA and AFDCPA that resulted in no harm and only occurred because of Scroggin’s trickery.” Id. at 980.

In reliance upon 15 USC 1692k(a)(3), as well as its own inherent power, the District Court awarded attorneys’ fees and costs to CBJ. The decision was affirmed in August 2014 by the Eighth Circuit Court of Appeals in an unpublished opinion.

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U.S. Supreme Court Set to Rule on Chapter 7 Lien Stripping

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Michael G. Clifford
Wilson & Associates, PLLC
USFN Member (Arkansas, Tennessee)

It appears that the U.S. Supreme Court will finally determine whether the Bankruptcy Code permits Chapter 7 debtors to “strip-off” wholly under-secured junior mortgage liens. Certiorari was granted on November 17, 2014 in two consolidated cases out of Florida. See Bank of America, N.A. v. Caulkett (Dkt. 13-1421) and Bank of America, N.A. v. Toledo (Dkt. 14-163). This appeal is set to resolve a 3-1 circuit split, in which only the Eleventh Circuit has held that strip-offs are permissible. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)

In 1992, the U.S. Supreme Court held that a Chapter 7 debtor was not permitted to “strip down” a creditor’s allowed secured claim, where the debtor was attempting to void the portion of a first mortgagee’s lien to the extent that the debt exceeded the underlying collateral’s value. Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773 (1992). The debtor’s argument in Dewsnup hinged upon two subsections of 11 U.S.C § 506.

Section 506(a) states that “an allowed claim of a creditor secured by a lien on property … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property … and is an unsecured claim to the extent that the value of such creditor’s interest … is less than the amount of such allowed claim.” Section 506(d) then states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

The debtor argued that Section 506(a) defines what constitutes an allowed secured claim, and that Section 506(d) permits the debtor to void any lien (or portion of it) that does not satisfy the definition. The Supreme Court disagreed with that interpretation, and ultimately held that it was “not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.”

In the consolidated case, the Supreme Court will likely determine the related issue of whether Section 506(d) permits a Chapter 7 debtor to strip-off a junior mortgage lien in its entirety, where the outstanding senior lien exceeds the current value of the collateral. When this issue came before the Fourth, Sixth, and Seventh circuits, they all relied upon Dewsnup, concluding that its holding was equally relevant in circumstances in which a debtor attempts to strip-off (rather than strip-down) an allowed, but underwater, lien. See Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 34 F.3d 555 (6th Cir. 2003); Palomar v. First American Bank, 722 F.3d 992 (7th Cir. 2013).

In 2012, the Eleventh Circuit departed from the majority in McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012). The McNeal court concluded that Dewsnup was not clearly on point because it only disallowed the strip-down of a partially secured mortgage lien, and did not address the strip-off of a wholly unsecured junior lien. Determining that the Dewsnup opinion was not analogous, the Eleventh Circuit held that its pre-Dewsnup precedent (permitting the stripping of a wholly unsecured lien) was still binding. See Folendore v. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989).

Currently, the Eleventh Circuit’s interpretation of Section 506 allows Chapter 7 debtors in Alabama, Florida, and Georgia to strip the liens of wholly under-secured junior mortgages. Consequently, the debtor (or perhaps other unsecured creditors) receive the benefit of any appreciation in the property, not the former lienholder. In all other states, the debtor’s discharge simply absolves the debtor of personal liability on the loan, but does not void the lienholder’s right to foreclose. The Supreme Court’s grant of certiorari should resolve the circuit split, with a decision expected in the latter half of 2015.

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District Court of Connecticut Rules for Lender on Predatory Lending Defense

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Geoffrey K. Milne
Hunt Leibert – USFN Member (Connecticut)

Lenders in hotly contested disputes with borrowers should consider prosecuting mortgage foreclosures in federal court, particularly if any question of federal law may be involved in the litigation. In Bank of NY Mellon as Trustee for BS Alt A 2005-9 v. Bell, 2014 U.S. Dist Lexis 174716, the District Court of Connecticut ruled in favor of the lender and entered a judgment of strict foreclosure after a five-day trial. The case involved a predatory lending defense and numerous other challenges to the loan documents and the transaction. The action was filed on diversity jurisdiction grounds, and the plaintiff satisfied the requirements of being an active trustee capable of suing in its own right.

The borrower in Bell contended that the original lender made a predatory loan, and alleged that the assignee of the loan was barred from foreclosing due to origination and securitization misconduct. The borrower also challenged the authenticity of servicing records and asserted fraud.

Because the original lender was a federally chartered savings bank, the lender argued that any state-law predatory lending defense was subject to federal preemption. The District Court agreed, citing Second Circuit precedent involving federal preemption. The court found no evidence to support the borrower’s challenges to the authenticity of servicer business records, nor was there evidence to support a defense of fraud.

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SCRA: One-Year Protection Time Frame after Military Service Remains Applicable to Mortgage Enforcement Through 2015

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

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

The Servicemembers Civil Relief Act (50 U.S.C. Appx. §§ 501, et seq.), often simply referred to as the “SCRA,” has undergone numerous changes over the past several years. Of particular importance to the mortgage servicing industry are the various acts that amend Section 533 of the SCRA.

Section 533 applies to a secured obligation on real or personal property owned by a servicemember, originating before the period of the military service, and for which the servicemember is still obligated. Section 533 sets forth the time frame after military service in which certain foreclosure proceedings may be stayed, or obligations adjusted. It also provides the time frame after military service in which certain foreclosure sales would not be valid.

Through a series of legislative acts beginning in 2008, the time period for protections provided under Section 533 was extended from the original 90 days to 9 months, and then ultimately to one year after military service. The one-year time period was to revert back to the original 90-day time frame on January 1, 2015. However, on December 18, 2014, President Obama signed the Foreclosure Relief and Extension of Servicemembers Act of 2014. This Act extends the one-year protection time frame another year, through December 2015.

Absent further amendments, the protections period under Section 533 of the SCRA will revert back to the original version (i.e., 90 days) on January 1, 2016.

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Michigan: Post-Foreclosure Challenges

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Brian P. Dowgiallo
Orlans Associates, PC – USFN Member (Michigan)

On October 16, 2014, the Michigan Court of Appeals affirmed a trial court’s ruling, dismissing a borrower’s post-foreclosure challenge. In Diem v. Sallie Mae Home Loans, Inc. f/k/a Pioneer Mortgage, Inc., Docket Number 317499, the Court of Appeals reaffirmed the elements set out by the Michigan Supreme Court in Kim v. JPMorgan Chase Bank, NA, 493 Mich. 98. 115-116; 825 NW2d 329 (2012).

Kim requires that a borrower seeking to set aside a foreclosure by advertisement allege facts of: (1) fraud or irregularity in the foreclosure procedure; (2) prejudice to the borrower; and (3) a causal relationship between the alleged fraud or irregularity and the alleged prejudice (i.e., that the borrower would have been in a better position to preserve the property interest absent the fraud or irregularity). The Court of Appeals concluded in Diem that the borrower failed to allege a causal connection between the alleged fraud or irregularity in the foreclosure procedure and any ability the borrower had to preserve his property interest. Accordingly, the trial court’s dismissal of the borrower’s challenge was affirmed.

While not a landmark opinion in the Michigan foreclosure community, Diem is still a significant published judicial decision. It reaffirms the high standard that the borrower must meet in attempting to challenge the foreclosure. That the Court of Appeals has chosen to publish the decision is noteworthy, perhaps evidencing that the court is growing tired of the boilerplate arguments used in challenging foreclosures over the past few years. Furthermore, the court continues to stress that regardless of whether or not there was an actual foreclosure violation, if the borrower fails to show any harm or prejudice as specified in the above-cited Kim decision, those matters must be dismissed. The Diem opinion certainly seems to support the belief that the law in Michigan is settled when it comes to post-foreclosure challenges.

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Michigan: Enhanced Rights to Retake Possession from Squatters

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Matthew B. Theunick
Trott & Trott, PC – USFN Member (Michigan)

On June 21, 2014, the Michigan Legislature enacted two bills (Act No. 223 and Act No. 224), effective September 24, 2014. These bills address, in part, the issue of squatting in residential property, providing “self-help” remedies to an owner, lessor, or licensor (or one of their agents) to re-take possession of property that was unlawfully obtained.

Act No. 223
Act No. 223 was enacted to amend 1961 PA 236, by adding sections 2918, 5711, and 5714 (MCL 600.2918, 600.5711, and 600.5714) to the Revised Judicature Act. The RJA establishes the rights and liabilities of parties, with respect to the possession (or ownership) of property or leased premises. Specifically, Sec. 5711(1) notes that, “A person shall not make any entry into or upon premises unless the entry is permitted by law.” Sec. 5711(2) notes that, “Subject to subsection (3), if entry is permitted by law, the person shall not enter with force but only in a peaceable manner.” However, the “peaceable manner” caveat of subsection 2 does not apply in the context of an unlawful or illegal entry into the property. Sec. 5711(3) notes that, “If the occupant took possession of the premises by means of a forcible entry, holds possession of the premises by force, or came into possession of the premises by trespass without color of title or other possessory interest, the owner, lessor, or licensor or agent thereof may enter the premises and subsection (2) does not apply to the entry” (emphasis added).

As such, Act No. 223 exempts an owner from the prohibition on forcible entry, and now allows entry into a dwelling to retake possession in circumstances where the occupant may have taken possession by squatting. However, any forcible entry under Sec. 5711(3) shall not include conduct proscribed by Chapter XI of the Michigan Penal Code, entitled “Assaults” (see MCL 750.81 to 750.90h), which includes standard proscribed assault and battery offenses.

Act No. 224
Act No. 224 was enacted to amend 1931 PA 328, by adding section 553 (MCL 750.553) to the Michigan Penal Code to make it a criminal offense for an individual to occupy a residential dwelling without the owner’s consent for an agreed-upon consideration. For a first offense, the individual may be convicted of a misdemeanor, punishable by a fine of not more than $5,000 per dwelling unit occupied or by imprisonment for not more than 180 days, or both. For a second (or subsequent offense), the individual may be convicted of a felony punishable by a fine of not more than $10,000 per dwelling unit occupied or by imprisonment for not more than 2 years, or both.

Conclusion
According to the Legislative Analysis of House Bills 5069, 5070, & 5071, the Michigan Legislature enacted Acts No. 223 and 224 under the belief that squatting in residential buildings was on the rise, and was a menace to real estate ownership by: preventing properties from being sold; by allowing persons time to strip the homes of anything of value; or by depriving the lawful owners of their right to lease payments, etc. Additionally, there was the belief that lawful owners were experiencing difficulty in getting police agencies to remove squatters under the current trespass laws. With the changes to the Michigan Penal Code and the RJA, the Michigan Legislature has now removed the prohibition against the use of (non-assaultive) force in the reclaiming of unlawfully seized or occupied real property.

These enhanced remedies may prove to be helpful for the industry’s portfolios of real estate-owned properties, and may have the intended effect of prompting certain municipalities and courts to respond to these issues more seriously. For example, it is sometimes difficult to obtain police investigations or arrests of squatters unlawfully residing in property. Additionally, some Michigan courts are loathe to grant more than one or two orders of eviction, issued in the same case, even in the face of multiple squatting entries into the property.

Still, for the practitioners counseling clients, the enhanced remedies available in these enactments are not without some need for pause. Any self-help remedy is arguably less effective and fraught with greater liability than simply resorting to the steps available in the summary proceedings process available through the courts.

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