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A State’s Legislature Overrules Key Anti-Deficiency Case

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

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

Arizona’s post-foreclosure anti-deficiency protection has enjoyed quite a bit of attention recently from the Arizona Court of Appeals and the Arizona legislature. To understand where Arizona now stands, some context is in order. Until late in 2011, Arizona’s anti-deficiency protection was relatively clear and stable. The anti-deficiency statute only applied to property of 2.5 acres or less that is “limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. § 33-814(G). As a consequence, if a borrower did not actually use the property as a dwelling, the protection did not apply. That there was some clarity and stability did not mean that there were not Herculean efforts made by borrowers who wanted anti-deficiency protection. For example, borrowers would camp inside a barely framed, under-construction dwelling, while holding a copy of the newspaper to indicate the date, thus hoping to demonstrate that the property was “utilized for a ... dwelling.”

This all changed when, in late 2011, the court of appeals issued its opinion in M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478 (Ct. App. 2011) (pet. rev. denied). The Mueller court held that if the borrower intended to use the property as a single one-family or a single two-family dwelling, that intention is dispositive. There was no need for borrowers to camp out in their under-construction homes to fall within the scope of anti-deficiency protection. What was a fairly easily applied bright-line rule was eliminated in favor of the elusive notion of intent.

Earlier this year, the court of appeals carved vacant land out of the Mueller rule in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 234 Ariz. 100 (Ct. App. 2014). In Wildwood, the court of appeals held that anti-deficiency protection does not apply where, as in Wildwood, the property was vacant and construction had not begun. Wildwood thus seems to restore some clarity, at least in cases where construction has unambiguously not begun. But the special concurrence in Wildwood notes that the “new” rule is not as clear as it might look. If construction has begun, when does the Mueller rule of intent come into play? When does construction begin — is it when the plans are drawn or when the grading begins or when else? Will borrowers now go to their vacant lots as soon as possible to put a two-by-four in the ground or to move some dirt?

In April, the Arizona legislature and the governor seem to have answered many of these questions by enacting House Bill 2018, which the governor signed on April 22, 2014. House Bill 2018 essentially overrules Mueller for deeds of trust originated after December 31, 2014. (Mueller’s rule still applies to deeds of trust originated earlier, subject to Wildwood’s carve-out.) Specifically, HB 2018 exempts from anti-deficiency protection trust property “that contains a dwelling that was never substantially completed,” and trust property “that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.” The phrase “substantially completed” is defined disjunctively: either the final inspection, if required by the body that issued the building permit, has taken place, or, if no such final inspection is required, “the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit.”

House Bill 2018 also exempts from anti-deficiency protection trust property owned by one who constructs and sells dwellings, if acquired in the course of that business and is subject to a deed of trust securing a construction loan for sale to another.

These developments — Wildwood and House Bill 2018 — provide some much-needed clarity to Arizona’s anti-deficiency protection. They do not seem to clear everything up, though, and we can expect further development in the case law and perhaps even more from the Arizona legislature in the months and years to come.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report

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Tennessee: Dismissal of Borrower Litigation Now More Difficult?

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Tennessee Court of Appeals issued an opinion late last year that will make it harder for mortgage lenders/servicers to win dismissal of borrower litigation alleging MERS related irregularities. Although the case, Berry v. Mortgage Electronic Registration Systems, Inc., 2013 Tenn. App. LEXIS 682, 2013 WL 5634472 (Tenn. Ct. App. Oct. 15, 2013), should not affect the ultimate outcome of lawsuits against lenders and servicers, it has given the debtors’ bar boilerplate language that guarantees survival of a motion to dismiss in Tennessee state courts.1 Lenders will still win the lawsuits that they would have won before, but litigation fees and costs incurred by mortgage lenders will be substantially higher.

In Berry, a borrower filed a complaint in Chancery Court to stop the foreclosure of her home. Her complaint alleged that she had attempted to negotiate a loan modification and/or refinancing and that the servicer wrongfully failed to modify/restructure her loan in violation of the Tennessee Consumer Protection Act (TCPA), the Home Affordable Modification Program (HAMP), and the duty of good faith and fair dealing.

The complaint also alleged various fraud claims relating to MERS’s involvement with the loan. Ms. Berry alleged that the lender and servicer had intentionally misrepresented MERS as a beneficiary of the deed of trust; that they had intentionally recorded documents in which employees of companies other than MERS falsely identified themselves as officers of MERS; and that they (MERS and the loan servicer) had engaged in a pattern and practice of fraudulent conduct. According to the court, these allegations implied that the servicer did not have the authority to foreclose due to the falsely identified MERS officers being involved with the transfer of the mortgage and, as a consequence, no legal/beneficial interest was transferred.

The servicer and MERS filed a motion for judgment on the pleadings, which the chancellor granted after hearing. The order stated that “many of the allegations ... [are] overly generalized and non-specific, while in other areas, the Amended Complaint is simply devoid of facts which could entitle Plaintiff to relief.” The Tennessee Court of Appeals, for the most part, agreed with the Chancery Court, but not entirely.

On appeal, the court affirmed the trial court’s ruling as to Ms. Berry’s TCPA, HAMP, and breach of duty of good faith and fair dealing claims. The court also addressed the issue of the alleged breach of the implied covenant of good faith and fair dealing and affirmed the trial court’s ruling on that issue as well. The court, however, reversed the trial court’s dismissal of the fraud claims.

In Tennessee, the plaintiff must demonstrate six elements for a cause of action for fraudulent or intentional misrepresentation. These six elements include: (1) the defendant made a representation of an existing or past fact; (2) the representation was false when made; (3) the representation was in regard to a material fact; (4) the false representation was made knowingly, recklessly, or without belief in its truth; (5) it was reasonable for the plaintiff to have relied on the misrepresented fact; and (6) the misrepresentation resulted in harm to the plaintiff.

The mechanism in place to prevent litigants from merely reciting these six elements in their complaint is Rule 9.02 of the Tennessee Rules of Civil Procedure. Rule 9.02 requires that when alleging fraud, the circumstances constituting the fraud must be stated with particularity. This is a heightened requirement when alleging fraud (as opposed to other causes of action), which is common in many states and that requires specific facts be alleged to support the fraud allegation.

In its decision, the appellate court re-printed the allegations from Ms. Berry’s amended complaint that it considered to be related to the claimed fraud. These allegations are included at the conclusion of this article, labeled Exhibit A.

Surprisingly, the court found that the allegations were “pled with sufficient particularity to survive a motion for judgment on the pleadings.”2 The court pointed to paragraphs six and seven of the amended complaint. According to the court, Ms. Berry alleged that the lender recorded her deed of trust knowing that it contained falsely-represented signatures.3 Regardless of the reasoning, the court of appeals held that her allegations regarding fraud were sufficiently pled.

The court’s ruling is very unfortunate for the mortgage servicing industry. As most who are familiar with the industry will be aware, the allegations from the amended complaint cited by the court are so broad that they could arguably be attributed to any mortgage loan wherein MERS was involved in the process. It’s not that they could be made as to any loan because they are always true, but because of how generic and non-specific they actually are. The allegations weren’t actually claim-specific to her loan, as they were the same old attacks on MERS’s involvement with the mortgage industry in general that have been made at length. Furthermore, neither Ms. Berry’s complaint nor her amended complaint specifically identified the documents that she was alleging had been “robo-signed.” Moreover, the complaint and amended complaint failed to attach any exhibits.

Regardless of whether one shares the opinion that Ms. Berry’s allegations rise to the level of particularity required by Rule 9.02, the fact is that the Tennessee Court of Appeals has ruled specifically that they do. Accordingly, there is direct precedent on the issue for the debtors’ bar to rely upon. In fact, it could arguably be malpractice for a borrower’s attorney to not include the language (or language substantially similar) in a complaint being filed for the purpose of setting aside or stopping a foreclosure of a loan in which MERS was involved.

© Copyright 2014 USFN. All rights reserved.
July/August e-Update

1 In Tennessee this would be a motion to dismiss pursuant to Rule 12.02 of the Tennessee Rules of Civil Procedure, which would be referred to as a 12(b)(6) motion to dismiss in many other jurisdictions. Even though the Berry case involves a motion for judgment on the pleadings, the logical assumption is that its holding would also allow survival of a motion to dismiss, since, in Tennessee, it is more difficult for a defendant to obtain dismissal via a 12.02 [12(b)(6)] motion than by a motion for judgment on the pleadings.
2 Again, if the allegations, according to the court of appeals, are sufficient to survive a motion for judgment on the pleadings, it is a logical assumption that they would survive a motion to dismiss. In Tennessee, a defendant has a higher burden to meet to obtain dismissal via a motion to dismiss, as opposed to prevailing on a motion for judgment on the pleadings. In other words, if the court finds that allegations are of such sufficiency that they will survive a motion for judgment on the pleadings, it is difficult to envision a scenario where the same pleadings would be dismissed via a motion to dismiss.
3 The court’s reference here is confusing. The only specific document referenced in paragraphs six and seven of the amended complaint was in fact a deed of trust. However, it apparently worked in Ms. Berry’s favor to not attach any exhibits to her complaint or amended complaint. A review of the actual deed of trust recorded in the Shelby County property records has revealed that it only contained signatures of Ms. Berry and the notary who acknowledged her signature. It did not contain any signatures of individuals purporting to be MERS employees or officers.


Exhibit A


2. Defendants . . . claim to be holders of the deed of trust on this property and have started foreclosure proceedings against the Plaintiff [].

3. MERS acted as nominee on behalf of Mortgage Lenders Network USA.

4. Defendants through the actions of MERS purported to hold title to the property.

5. Defendants intentionally recorded, and continue to record documents wherein employees of companies other than MERS falsely identify themselves as being “officers and/or vice presidents” of MERS, or in some instances, of the Federal Deposit Insurance Corporation or other entity which has no knowledge of the actions of these supposed authorized signatories or certifying officers. These so-called certifying “officers and/or vice presidents” have no employment relationship with MERS and are not, in fact, officers or vice presidents of MERS.

6. The designation of MERS as a beneficiary or nominee of the lender on a deed of trust was an intentional and knowing false designation by MERS in numerous ways, namely: 1) neither MERS nor the “lender” so designated was the true lender; 2) MERS was not the nominee of the true lender of the funds for which the promissory note was executed; 3) MERS did not collect or distribute payments, pay escrow items, hold client funds on deposit, pay insurance for clients or borrowers, or pay taxes; 4) MERS had no right to collect money on the note or to receive any proceeds or value from any foreclosure.

7. Plaintiff further alleges that Defendants engaged in a pattern and practice of fraudulent conduct including but not limited to: (a) underwriting fraudulent mortgages; (b) shuffling mortgages and deeds of trust through the mortgage securitization chain without following proper legal procedures like the simple act of passing along paperwork; (c) concealing or doctoring basic facts when securitizing the mortgages and selling them to investors, large lenders and their partners on Wall Street causing them to lose billions of dollars in losses by being forced to buy back faulty mortgages, some of which have already defaulted; (d) misleading investors who purchased mortgage-linked securities with the promise that the underlying mortgages conformed to basic underwriting standards, and that proper procedures were followed in the chain of securitization and a tax-exempt status.

8. Plaintiff submits that robo signers are illegal because fraud cannot be the basis of clear title, and foreclosures following robo signed deeds of trust purporting to transfer the mortgage and note are void as a matter of law. Clear title may not arise from a fraud (including a bona fide purchaser for value). In the case of a fraudulent transaction the law is well settled. It is well established that an instrument wholly void, such as an undelivered deed, a forged instrument, or a deed in blank, cannot serve as the basis for good title, even under the equitable doctrine of bona fide purchase. Consequently, the fact that purchaser acted in good faith in dealing with persons who apparently held legal title, is not in itself sufficient basis for relief. As a general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties.

9. Plaintiff submits that robo signed documents are void — without any legal effect.

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Tennessee: A Claim for Wrongful Acceleration of Note in Default Not Recognized

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Gerald Morgan
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Court of Appeals of Tennessee has ruled that Tennessee does not recognize a claim for “wrongful acceleration of a note in default.”

In Snyder v. First Tennessee Bank, N.A., No. E2013-01524-COA-R3 (June 24, 2014), Janet Snyder was a beneficiary of a trust (Trust) from her deceased father. She was entitled to certain income from the Trust. First Tennessee Bank (Bank) was appointed the trustee of the Trust. Snyder signed a note and deed of trust with the Bank secured by her home. When she got into financial trouble, she asked the Bank to help with her payments by using funds from the Trust. The Bank declined. She then asked that the Trust be terminated and the proceeds paid out to the beneficiaries, which included her. The Bank announced that it would resign as trustee, but did not join the beneficiaries in dissolving the Trust.

Later, Snyder asked the Bank for a hardship advance pending the Trust’s dissolution so that she could make her mortgage payments. The Bank declined to do that. Snyder hired counsel to seek dissolution of the Trust. The Bank filed a petition seeking the appointment of a successor trustee, and Snyder filed a counterclaim. Then the Bank threatened foreclosure and served a notice of acceleration on Snyder. Thereafter, the Trust was dissolved by agreed order. The Bank, which up to that point had been trustee, wrote itself a check from the Trust to cover the default.

Snyder filed an action seeking compensatory and punitive damages for breach of contract. She alleged that the Bank acted in bad faith and forced her to incur needless attorneys’ fees in dissolving the Trust. The Bank filed a motion to dismiss for failure to state a claim, and Snyder filed a reply, clarifying that her complaint was based on breach of the deed of trust. The trial court granted the Bank’s motion to dismiss, holding that no foreclosure occurred and any wrongful foreclosure claim therefore failed, and there was no breach of contract claim (because it was time barred and the Bank did not breach the contract).

The sole issue for the court of appeals was the dismissal of the claim for breach of contract. Snyder relied on the acceleration clause, which was a standard clause found in most deeds of trust. She asserted that the Bank “abused its discretion” in accelerating the debt. Primarily, the plaintiff alleged that the Bank was well aware of the fact that the Trust had sufficient funds to cover the default, and thus accelerating the debt was an “unconscionable enforcement” of the acceleration clause in the deed of trust. A further allegation was that such an unconscionable enforcement was a “clear abuse of discretion;” she was asking the court to recognize a claim of wrongful acceleration of a note in default.
The court of appeals declined to recognize such a claim. It stated that in the absence of mistake or fraud, the courts will not create or rewrite a contract simply because its terms are harsh or because one of the parties was unwise in agreeing to them. Snyder had clearly defaulted, a fact that was undisputed. The court stated: “The Bank was under no obligation, contractual or otherwise, to forbear on its right to accelerate. In accelerating Snyder’s debt, the Bank did no more than what it was allowed to do under the contract. Whether the Bank knew it held other of Snyder’s funds in the Trust that could cover the debt eventually is irrelevant to the terms of the contract. Performance of a contract according to its terms cannot be characterized as bad faith.”

This case provides strong indications that Tennessee courts will not hesitate to dismiss claims where the lender simply acts upon a contract according to its terms.

© Copyright 2014 USFN. All rights reserved.
July/August e-Update

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South Carolina: Bidding Issues in Deficiency Judgment Cases

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

Over the last year, several issues with bidding instructions have been observed for cases where deficiency judgment is demanded.

Background — In South Carolina, a demand for deficiency judgment must be affirmatively pleaded in the complaint (e.g., “first legal”). If a deficiency judgment is demanded, the first sale date is not the final sale date, and the bidding must remain open for an additional thirty (30) days for additional, upset bidding. On the thirtieth (30th) day, the final sale is reopened at 11:00 AM EST for additional bidding until the property is ultimately sold to the highest bidder.

The plaintiff/mortgage company may bid competitively at a non-deficiency sale, but if a deficiency judgment is demanded, the plaintiff/mortgage company must enter one bid only — at least the appraised value of the property — at the initial sale.

Recently, these authors have been receiving a large number of bidding instructions for sales where deficiency judgment is demanded that state either: (1) enter a bid of total debt plus fees and costs; or (2) begin bidding at 80 percent of total debt plus fees and costs; and in the event of competitive bidding, bid up to total debt plus fees and costs.

The problem is that the plaintiff/mortgage company is only entitled to one bid in a case where a deficiency judgment was demanded in the original summons and complaint. Accordingly, and in order to fully comply with the bidding instructions, the one bid entered at the foreclosure sale is entered for total debt plus fees and costs. Bidding total debt plus fees and costs as the one and only bid in a deficiency judgment-demanded case causes several unintended issues: (1) It eliminates any deficiency judgment as a result of the foreclosure sale; (2) If no third-party outbids the one total debt plus fees and costs bid, it ensures that the plaintiff/mortgage company is the successful purchaser for significantly more than the original judgment amount; and (3) It requires that a higher commission on sale be paid to the court. Pursuant to South Carolina statute, when a deficiency judgment is demanded, the successful purchaser at the foreclosure sale must pay to the court a 1 percent commission of the final sale price with the minimum amount being twenty-five dollars ($25) and the maximum amount being two thousand five hundred dollars ($2,500; e.g., the property is sold for $250,000 or more).

If Item 2 occurs, many courts have recently ordered that the overage (e.g., the difference between the judgment and final bid amounts) be paid into the court by the plaintiff/mortgage company. In order to attempt to recover this overage, the plaintiff/mortgage company must then file a claim for surplus funds with the court pursuant to Rule 71(c) of the South Carolina Rules of Civil Procedure and attend the surplus funds hearing before the court. If the plaintiff/mortgage company can adequately support in itemized detail the reason for the overage, the court may award it the surplus funds. Otherwise, the court will order the surplus funds to be disbursed to the other defendants/lienholders according to their lien priority.

Lastly, if there is a case where a deficiency judgment is demanded and these authors’ law firm receives bidding instructions that contemplate a bid of total debt plus fees and costs, we may waive the deficiency judgment to allow the plaintiff/mortgage company to begin bidding at a nominal amount and bid up to total debt plus fees and costs, if competitive bidding occurs. However, the bidding instructions must be received in a timely manner so that they can be reviewed and the court notified (in writing) of the waiver of deficiency judgment. Most judges require that the deficiency judgment be waived (in writing) at least ten (10) days prior to the date of the foreclosure sale.

© Copyright 2014 USFN and Scott Law Firm, P.A. All rights reserved.
July/August e-Update

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South Carolina Supreme Court Upholds Mortgage’s Jury Trial Waiver Language

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

As a judicial foreclosure state, mortgage foreclosure actions in South Carolina are matters in equity and neither the mortgagor nor the mortgagee is entitled, as a matter of right, to a trial by jury. However, counterclaims — including those raised in foreclosure actions — may at times be entitled to a jury trial.

In the South Carolina Supreme Court’s February 26, 2014, decision in Wachovia Bank v. Blackburn, the court reaffirmed a framework for determining which counterclaims by mortgagors are entitled to a jury trial.

The court held as follows: “To the extent any of [the mortgagors’] counterclaims were equitable in nature, they did not have a right to a jury trial on those claims. To the extent any of [the mortgagors’] counterclaims were legal — regardless of whether the claims were permissive or compulsory — [the mortgagors] waived their right to a jury trial, either through the waiver provisions or because they raised their permissive claims in an equitable action. [The mortgagors] may only avoid this result if the contractual jury trial waivers executed in connection with the loan documents are invalid and unenforceable.”

Specifically, in the present case, the Supreme Court upheld the jury trial waiver language in the loan documents as being enforceable because the loan documents were knowingly and voluntarily executed by the mortgagors. The court held that if the mortgagors waive their right to a jury trial within the loan documents, no jury trial can be compelled for counterclaims that are legal and compulsory.

© Copyright 2014 USFN and Scott Law Firm, P.A. All rights reserved.
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Missouri: Effects of H.B. 1410 on Landlord-Tenant Actions

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Danielle E. Marler
South & Associates, P.C. – USFN Member (Kansas, Missouri)

On July 9, 2014, the Missouri governor signed House Bill 1410 into law. The most significant change the new law will bring is removing the right to a trial de novo in unlawful detainer and landlord-tenant actions. H.B. 1410’s proponents advocated that the bill would reduce court costs and end a “wasteful process” of forestalling the eviction process.

Currently, after judgment has been entered against the defendant, the defendant has 10 days in which to file an application for a trial de novo. Essentially, a trial de novo is a new trial giving the losing party another bite at the apple. After the trial de novo hearing is held in circuit court, either party may appeal the judgment of the circuit court to the Missouri Court of Appeals. Mo. Rev. Stat. §§ 512, et seq. The defendant must post a bond in the full amount of the judgment to stay the execution of the judgment for restitution and proceed with the trial de novo. If the application is not filed and the bond is not posted within that time frame, the plaintiff can proceed to lockout by filing a writ of execution with the court.

Once H.B. 1410 goes into effect on August 28, 2014, parties will no longer be able to file an application for a trial de novo. Instead, the losing party must file a notice of appeal with the clerk of the trial court. As with the trial de novo, to stay execution of judgment for restitution, the filing party must also post a bond in the full amount of the judgment. The notice of appeal must be filed within 10 days of final judgment. Id.

Unlike a trial de novo, however, the appeal will not be a re-trial of the issues. Rather, the appellate court will affirm the trial court’s judgment “unless there is no substantial evidence to support it, it is against the manifest weight of the evidence, it erroneously declares the law, or it erroneously applies the law.” Colt Investments, L.L.C. v. Boyd, 419 S.W.3d 194, 196 (Mo. App. E.D. 2013). The deference given to the prevailing party could dissuade defendants from appealing. Although the filing fee for a notice of appeal is only nominally higher than the filing fee for a trial de novo in most jurisdictions, the increased formality of the Court of Appeals could in and of itself be a deterrent. Regardless, eliminating the right to a trial de novo should be effective at reducing court costs and facilitating the eviction process.

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July/August e-Update

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Florida: Subordinate Mortgage Lienors’ and Foreclosure Sale Surplus

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Roger Bear
Florida Foreclosure Attorneys, PLLC – USFN Member (Florida)

Florida is a judicial foreclosure state. A first mortgage holder must name as defendants in the complaint all subordinate lienholders including subordinate mortgagees. When a foreclosure judgment is entered on the first mortgage, Florida Statute 45.031(1)(a) requires that the final judgment shall contain the following statement in conspicuous type:

IF THIS PROPERTY IS SOLD AT PUBLIC AUCTION, THERE MAY BE ADDITIONAL MONEY FROM THE SALE AFTER PAYMENT OF PERSONS WHO ARE ENTITLED TO BE PAID FROM THE SALE PROCEEDS PURSUANT TO THIS FINAL JUDGMENT.
IF YOU ARE A SUBORDINATE LIENHOLDER CLAIMING A RIGHT TO FUNDS REMAINING AFTER THE SALE, YOU MUST FILE A CLAIM WITH THE CLERK NO LATER THAN 60 DAYS AFTER THE SALE. IF YOU FAIL TO FILE A CLAIM, YOU WILL NOT BE ENTITLED TO ANY REMAINING FUNDS.

After the foreclosure sale is held, the clerk of the court is required to file a certificate of disbursements, which must contain this statement:

IF YOU ARE A PERSON CLAIMING A RIGHT TO FUNDS REMAINING AFTER THE SALE, YOU MUST FILE A CLAIM WITH THE CLERK NO LATER THAN 60 DAYS AFTER THE SALE. IF YOU FAIL TO FILE A CLAIM, YOU WILL NOT BE ENTITLED TO ANY REMAINING FUNDS. AFTER 60 DAYS, ONLY THE OWNER OF RECORD AS OF THE DATE OF THE LIS PENDENS MAY CLAIM THE SURPLUS.

In the recent Florida appellate decision of Mathews v. Branch Banking & Trust Co., 2014 WL 2536831 (June 6, 2014), the court was called upon to resolve competing claims to surplus funds resulting from a mortgage foreclosure sale held after entry of a foreclosure judgment on a first mortgage. At the foreclosure sale the second mortgagee was the high bidder for over $135,000 in excess of the amount due under the foreclosure judgment. Although it promptly obtained a certificate of title to the property, it waited over 10 months to file a claim to the surplus. In the interim, the mortgagor also filed a claim to the surplus.

The trial court awarded the surplus funds to the second mortgagee, but this was reversed by the appellate court. The appellate court found that the second mortgagee’s assertion of a claim to surplus funds in its answer and affirmative defenses to the first mortgagee’s foreclosure complaint did not satisfy the statutory requirement that a party file a claim with the clerk of court within 60 days after the foreclosure sale of property. Since the second mortgagee failed to file a claim to the surplus within 60 days of the foreclosure sale, it was not entitled to the surplus.

The Mathews case makes it clear that subordinate lienors such as second mortgagees must file a claim to foreclosure sale surplus within 60 days after the foreclosure sale of property. Failure to do so will prevent them from receiving any of the surplus.

© Copyright 2014 USFN. All rights reserved.
July/August e-Update

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Does Your Company Have an Information Security Program? Is Up to Date?

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by John E. Ottaviani
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

The data breaches that Target, Michael’s, Neiman Marcus, and other large companies have suffered gained a great deal of attention in the media. These public and costly embarrassments serve as reminders that all businesses should have a comprehensive information security policy and should closely monitor their servers and third-party data interfaces for potential breaches.

Since 2010, Massachusetts has had one of the country’s strictest data security laws. What many companies fail to realize, however, is that the Massachusetts rules apply to businesses located outside of Massachusetts. Any business (wherever located) that has one or more employees or customers who live in Massachusetts is most likely subject to the Massachusetts data security requirements and must have an information security program. If pending federal legislation is passed, even more businesses will be required to adopt similar information security programs.

Currently, any person or business that owns, stores, or maintains personal information about a Massachusetts resident is required to: (a) develop, implement, and maintain a comprehensive, written information security program; (b) implement physical, administrative, and extensive technical security controls, including the use of encryption; and (c) verify that any third-party service providers that have access to this personal information can protect the information. “Personal information” can be as little as a first name, last name, and the last four digits of a social security number, credit card number, or bank account number of a Massachusetts resident.

There are several reasons why it is important that all businesses — even those not specifically covered by the Massachusetts data security requirements — prepare and update an information security policy:

• Information security policies help to reduce the risk of liability and adverse publicity should a data breach occur. The Massachusetts attorney general has pursued and obtained six-figure civil judgments for violations of the requirements.

• As mentioned above, any federal legislation that is passed is likely to be modeled after the Massachusetts requirements. Businesses not covered presently by the Massachusetts requirements should get a jump on their compliance obligations.

• Information security programs subject to the Massachusetts requirements must be reviewed at least annually — a reminder to companies that initially prepared information security policies but have not reviewed or updated those policies since 2010.

© Copyright 2014 USFN and Partridge Snow & Hahn, LLP. All rights reserved.
July/August e-Update

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Colorado Passes House Bill 1130

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Caren Castle
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)

Colorado passed House Bill 1130 “Concerning the Disposition of Moneys Charged to Borrowers for Costs to be Paid in Connection with Foreclosure” effective for all foreclosures filed on or after May 9, 2014. Colorado law now requires that the cure statement from the public trustee must include the statutory specific language notifying the requesting party that they are entitled to receive copies of receipts or other credible evidence to support the costs claimed on the cure statement. The request may be sent only after payment to the public trustee of the amount shown on the cure statement.

If an “inaccuracy” in the cure statement is identified by the servicer for the holder, the holder or the attorney must immediately give notice to the public trustee, identifying the inaccuracy and providing an updated cure statement. The updated cure statement must be provided at least ten days prior to the effective date of the cure statement (good-thru date); the public trustee may postpone the sale for one week. Estimates continue to be allowed under Colorado law and must be identified as such on the cure statement to the public trustee. Estimates do not constitute an “inaccurate” statement in accordance with HB 1130.

Within seven business days after the public trustee notifies the firm that cure funds have been received, the firm must provide to the public trustee a “final cure statement” reconciling all estimated amounts so that the cure statement only includes actual amounts incurred to the date that the funds were received. The firm must also include receipts or invoices for all Rule 120 docket costs and all statutorily mandated posting costs claimed on the cure statement. The public trustee will only remit the amount to the holder as set forth in the final cure statement; any remaining balance will be refunded to the party that paid the cure amount. The funds will not be released by the public trustee until the final cure statement and required receipts/invoices have been received by the public trustee.

The servicer/holder/attorney are responsible for retaining receipts or other credible evidence to support all costs claimed. The person paying the cure will be entitled to copies of the evidence if requested within 90 days of the cure. The firm or servicer will have 30 days from the date of the request to provide evidence in support of such costs. The supporting evidence may be provided by electronic means or otherwise.

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California: Another Appellate Ruling re Challenging Authority to Foreclose

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Kathy Shakibi
Northwest Trustee Services, Inc. – USFN Member (California)

California courts sound weary of meritless challenges to transfers of notes. Not long ago, in Yvanova v. New Century Mortgage Corp., WL 2149797, an appellate court held that a borrower lacks standing to challenge a transfer of the note and deed of trust; i.e., a transfer pursuant to a pooling and servicing agreement. On June 9, 2014, another division of the appellate court held, additionally, that there is no pre-foreclosure cause of action to challenge the authority of the person initiating foreclosure. Keshtgar v. U.S. Bank, N.A., 2014 WL 2567927.

Challenges Have Morphed

The theory underlying challenges to note transfers has morphed over the years, but the common thread remains: an allegation of lack of authority to foreclose in connection with a transfer of a note or an assignment of a deed of trust. In the 2008 to 2010 years, the rampant theory was lack of authority to foreclose absent possession of the original note. California courts ruled that possession of the note is not a prerequisite to a nonjudicial foreclosure. Then came MERS challenges, alleging that MERS lacks authority to initiate foreclosures. The Gomes ruling in 2011 put that theory to rest by holding that there is no judicial action to determine whether the person initiating the foreclosure process is authorized, and MERS is authorized to initiate a foreclosure pursuant to the deed of trust. Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011).

Next, there were challenges to transfers pursuant to securitization or pooling and servicing agreements. Plaintiffs alleged the trustee of a securitized trust has no authority to initiate a foreclosure either because the note was not transferred with a complete chain of endorsements or transfer occurred in contravention of the securitized trust documents. The former theory was decided in Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497 (2013), holding that a borrower lacks standing to enforce an agreement relating to note transfer. The latter was ruled upon in Glaski v. Bank of America, 218 Cal. App. 4th 1079 (2013), deciding that a borrower may challenge an assignment of a deed of trust, if the defect would void the assignment. In its ruling, the Glaski court relied on New York trust formation laws.

Now, the 2014 decisions signal an unequivocal disagreement with Glaski. Challenges to note transfers in reliance on Glaski have resulted in the two recent rulings referenced in this article — Yvanova and Keshtgar.

Keshtgar Ruling
The Keshtgar ruling is short and to the point. There is no pre-foreclosure cause of action to challenge the authority of the person initiating foreclosure. And even if there were a pre-foreclosure cause of action, a borrower would lack standing to challenge a transfer and assignment. The court does not enter into an extensive analysis of the note transfer issue. Instead, the court points to its rulings in Gomes, Jenkins, and Yvanova, and seems to say, we have ruled on this issue before, why is it before us again? One can almost hear the court sigh when it ponders: “One would think, indeed hope, that Gomes would put an end to cases like the instant one.” Keshtgar, * 1. One can hope so, indeed.

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Arkansas: Foreclosing Lenders Responsible for Unpaid Condo Association Dues

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Arkansas Supreme Court considered an issue of first impression in the case of First State Bank v. Metro District Condominiums Property Owners’ Association, Inc., 2014 Ark. 48 (Feb. 6, 2014), interpreting a section of the Arkansas Horizontal Property Act (Act). The issue being reviewed dealt with the responsibility for unpaid assessments due a property owners’ association after foreclosure of a first mortgage. The court, in interpreting A.C.A. § 18-13-116, held that the purchaser of the condominium at the foreclosure sale of the first mortgage, was personally liable for previously unpaid assessments of the Metro District Condominiums Property Owners’ Association (Metro).

First State Bank (Bank) was relying on subsection (c) of A.C.A. § 18-13-116, which provides for an exception to the Act’s requirement that when a condo unit subject to the Act is sold, unpaid assessments receive priority when distributing the funds for the purchase price. The exception in subsection (c) states that this priority does not apply to payments due under duly recorded prior mortgage instruments. The Bank asserted that this exception gave priority to its mortgage, over any lien of the association for unpaid assessments.1 Despite this language, the court relied solely on the plain language of subsection (d), which reads: “[t]he purchaser of an apartment shall be jointly and severally liable with the seller for the amounts owing by the latter under subsection (a) of this section up to the time of the conveyance ...” Thus, the court held that the purchaser of a condo via a foreclosure sale will be liable for previous assessments that the individual who was foreclosed upon did not pay.

This ruling is a departure from what has been custom in the vast majority of the state. Normally, a foreclosure sale purchaser (which is often the lender/loan servicer) is only expected to pay for dues/assessments from the foreclosure sale date forward. This is usually the situation, whether the property be part of a traditional homeowners’/property owners’ association (HOA/POA), or a condo owners’ association (COA), as in the Metro case. This is due, in large part, to most owners’ associations’ governing documents2 containing a provision that provides for the association’s lien to be subordinate to that of a prior first mortgage. The associations normally include this provision because of their awareness that many, if not most, lenders will not be willing to loan money for the purchase of a house or condo if the lender’s lien will not have priority over a lien for the dues/assessments of a property owners’ association.

In fact, Metro’s master deed contained just such a provision3, which is what makes the decision so potentially troubling for lenders and loan servicers. The question is whether the Metro ruling will only be applied to condominium owners’ associations going forward. The judicial opinion seems to clearly be confined to interpreting the Act, and the Act deals specifically with condominiums (the Act uses the term “apartments”). However, as previously mentioned, Metro’s master deed contained language that is similar to, if not exactly like, language often found in most bills of assurance and CCRs in Arkansas, which provides for priority of a first mortgage over the lien for assessments of a POA/HOA.

It does not seem beyond the realm of possibility that a traditional POA/HOA would seek to use the Metro case as the starting point for attempting to begin collecting unpaid dues/assessments, which became due prior to the foreclosure sale. Even if the state legislature were to address the issue, it would be a year or longer before a law could be enacted. If a lender is concerned with being responsible for months of unpaid dues/assessments pre-dating a foreclosure sale, it needs to be mindful on the front end of how an owners’ association’s BOA/CCR/master deed addresses priority of its lien for unpaid dues, in relation to that of a first mortgage lien.

Even if Metro will only affect condo units going forward, fallout from the decision is already being seen. At least one major title insurance underwriter has decided to no longer issue the ALTA 4.06 Endorsement in Arkansas. The 4.06 is an endorsement to a loan policy of title insurance, which provides lenders with additional coverage when the insured mortgagee’s collateral is a condominium unit. That an endorsement previously offered on nearly all condo units is no longer available will no doubt raise a red flag with originators. The likely result: at best, it will slow down the process for a buyer to obtain a loan for a condo purchase and, at worst, lead to some lenders being unwilling to make a loan on a condo unit at all.

While the COA won its battle with the Bank in this case, the next time one of its individual owners attempts to sell his or her unit, that homeowner may not be as supportive of this court ruling. In fact, if traditional POA/HOAs attempt to rely on this judicial decision as well, the seller of any residential property that is part of an owners’ association may end up being negatively affected by the holding in Metro.

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1 Although not discussed in the court’s opinion, the actual bylaws contained in Metro’s master deed provided that the unpaid assessments become a lien on the unit upon recording a Notice of Delinquent Assessment. As of the filing of the Bank’s judicial foreclosure action, Metro had not filed such a notice. It is unclear whether the Bank raised this point at trial; i.e. the lack of Metro having recorded the Notice of Delinquent Assessment in order to perfect its lien.
2 In Arkansas, these governing documents are often referred to as the association’s Bill of Assurance (BOA) for traditional homes, which is the same as what are often referred to in other jurisdictions as Covenants, Conditions, & Restrictions (CCRs), etc.; or a master deed or horizontal property regime for condominiums.
3 The pertinent language in Metro’s bylaws reads, “[t]he liens created hereunder upon any Unit shall be subject and subordinate to, and shall not affect the rights of the holder of the indebtedness secured by any recorded prior mortgage or similar encumbrance . . .” Perhaps the fact that Metro did not record a lien prior to the Bank’s foreclosure action being filed led the Bank’s counsel and the trial court to find this language inapplicable to the fact scenario involved in Metro.

 

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Answering Audits

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Shawn J. Burke, Director, LoanSphere Sales Engineering
ServiceLink, A Black Knight Financial Services Company – USFN Associate Member
Chair, USFN Technology Committee

The USFN Technology Committee has repeatedly discussed the subject of answering audits. The goal: just make it easier. From our perspective, we look at whether or not everyone is having the same issues; do we need larger industry action or standardization? Let me start with three challenges — consistency, volume, and submission.

Consistency comes up in the wording of the questions. First, consider the year-to-year recurrence of an audit. Questions worded differently from one year to the next reduce efficient validation of last year’s response. Consistent wording would permit review and pasting into the new spreadsheet, after making appropriate revisions of course. Another manifestation of the “consistency” challenge is repetition of a question within one audit. While one may assert that this gives the opportunity to confirm an answer, the patterns of repetition do not indicate that that is the intent. It seems, instead, that someone else is writing this year’s questionnaire without leveraging (or possibly not even being aware of) last year’s version.

Beyond consistency, there is a volume issue. The steadily increasing audit volume literally creates the need for a full-time job position. In fact, consistency joins volume here. That is, if there were more consistency between audits from different parties, answering the volume would be more manageable. As it stands right now, answering questions about “how security is ensured” across five audits probably yields 25 distinct answers.

Finally, there is the problem with audit response submission. Again, consistency applies. Many responses are completed in a spreadsheet format and submitted by email. Some are entered using online portals. Those formats where one has to “leave it open while answering” without the ability to save and return later can be problematic. Days of work must be re-entered whenever a power outage or computer glitch occurs while in the “leave it open” mode. In addition, some audits may offer “offline” functionality, such as via spreadsheet. Here, though, the frustration can come when the spreadsheet is locked down. That is, features like color coding, adding a column of comments, or other methods to share and coordinate with one’s team are not possible.

Certainly these aren’t challenges that can be solved overnight. However, it is hoped that discussion and agreement on the issues is a first step in moving forward to some type of solution. The USFN Technology Committee is interested in your thoughts and experiences; send them to shawn.burke@bkfs.com.

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Maine: New Law to Expedite the Foreclosure Process

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

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

On April 5, 2014, the governor of Maine signed into law L.D. 1389, “An Act to Expedite the Foreclosure Process.” There are several parts of the Act, some of which have nothing to do with expediting the foreclosure process. The effective date of the Act is August 1, 2014.

Part A – Conveyance Taxes

Under Part A, Section A-2, Maine transfer taxes will now be due on assignments of bid and assignments of judgment in addition to the transfer tax that is already due on foreclosure deeds. The person assigning the bid or assigning the judgment shall report the assignment to the register of deeds within 30 days of the assignment. A form affidavit will be furnished by the state tax assessor for this purpose. The return must be signed by both the transferor and transferee and be accompanied by payment of the tax due.

Section A-3 further clarifies the transfer tax liability associated with foreclosure deeds and deeds-in-lieu of foreclosure (DIL). In a DIL conveyance, only the mortgagor is exempt from the tax, which results in half the tax remaining due by the DIL grantee. In a foreclosure sale where a third party is the successful bidder, the grantor’s (this is usually the foreclosing plaintiff) portion of the tax on the foreclosure deed is calculated on the portion of the proceeds of the sale that exceeds the sum required to satisfy the mortgage and all other junior claimants secured by the property. The grantor’s portion of the tax must be deducted from these excess proceeds, if any. The grantee would still pay its full share of the conveyance taxes based on the purchase price. In the event of a foreclosure deed or an assignment of judgment or bid from the mortgagee or its servicer to the mortgagee or its servicer or to the owner of the mortgage debt, the mortgagee or servicer (if the servicer is the selling entity) is considered to be both the grantor and grantee for conveyance tax purposes. Therefore, under the circumstances where the conveyance is to the investor, the investor is no longer required to sign the return.

Part B – Foreclosure of Abandoned Properties

Part B of the Act concerns expediting the foreclosure of residential properties through an order of abandonment.


(I) Uncontested Foreclosure. Only an uncontested foreclosure action or an uncontested foreclosure judgment is eligible. An action or judgment is uncontested if all of the following are true: (1) The mortgagor has not appeared in the action to defend against foreclosure; (2) There has been no communication from or on behalf of mortgagor to the plaintiff for at least 90 days showing any intent of the mortgagor to continue to occupy the premises, or there is a document of conveyance or other written statement signed by the mortgagor that indicates a clear intent to abandon the premises; and (3) Either all mortgagees with interests that are junior to the interests of the plaintiff have waived any right of redemption or the plaintiff has obtained or has moved for default judgment against such junior mortgagees.

(II) Proof of Abandonment. After a foreclosure case is determined to be uncontested, abandonment still needs to be proven by clear and convincing evidence. The statute lists some items that may constitute abandonment. For example, evidence of broken or boarded-up doors and windows; rubbish, trash or debris accumulations; the lack of furnishings and personal property at the mortgaged premises; excessive deterioration so as to constitute a threat to public health or safety; and reports of vandalism or other illegal acts being committed on the mortgaged premises have been made to local law enforcement authority. Once the evidence of abandonment has been gathered, the plaintiff may at any time after the commencement of the foreclosure action file a motion with the court to determine that the mortgaged premises have been abandoned. If the court finds by clear and convincing evidence based on testimony or reliable hearsay (such as affidavits) that the mortgaged premises have been abandoned, the court may issue an order granting the motion and determining that the premises have been abandoned.

(III) Effect of Abandonment. If the court determines that the property is abandoned, the foreclosure proceedings will be affected as follows: (1) The foreclosure action may be advanced on the docket so judgment may enter more quickly; (2) The post judgment- presale redemption period may be shortened from 90 days to 45 days from the later of the issuance of the judgment of foreclosure and the order of abandonment; (3) If the mortgaged premises include dwelling units occupied by tenants as their primary residence, then the plaintiff assumes the duties of landlord upon the later of the issuance of the judgment of foreclosure and the order of abandonment; and (4) The plaintiff must notify the municipality of the abandonment and must also record the order of abandonment in the appropriate registry of deeds within 30 days from the later of the issuance of the judgment of foreclosure and the order of abandonment.

Part C – Sale Postponements and Abandoned Properties

Currently, under Maine law, a sale can be postponed for any time not exceeding seven days and from time to time until the sale is eventually made. However, if a property has been determined by the court to be abandoned, the public sale may only be adjourned once for any time not exceeding seven days, except that the court may permit one additional adjournment for good cause shown. Notwithstanding the foregoing, additional adjournments may be made as required by Dodd-Frank.

Part D – Statute of Limitations for Challenging Tax Takings
The Act now limits the time allowed to commence an action challenging a governmental taking of real estate for nonpayment of property taxes to a five-year period following the expiration of the period of redemption for those tax liens recorded after October 13, 2014. The Act also amends the time limit for tax liens recorded prior to October 13, 2014.

Part E – Repossession Companies and Property Preservation Providers Now Considered Debt Collectors under Maine Law
Repossession companies and residential real estate property preservation providers are now considered debt collectors under Maine law. The Act defines a residential real estate property preservation provider as a person who regularly provides residential real estate property preservation services, but the definition does not include a supervised financial organization, a supervised lender, or other persons licensed by certain Maine examining boards. Residential real property preservation services are defined under the Act as those undertaken at the direction of a person holding or enforcing a mortgage on residential real estate that is in default or in which the property is presumed abandoned in entering or arranging for entry into the building to perform services of winterizing the residence, changing the door locks, or removing unsecured items from the residence.

The Act also allows a residential real estate property preservation provider to enter a dwelling only if authorized by the terms of the note, contract, or mortgage. The provider may not use force or create a breach of the peace against any person. The provider shall inventory any unsecured items removed from the dwelling and immediately notify the appropriate consumer that the unsecured items will be made available in a manner convenient to the consumer. The provider shall make a permanent record of all steps taken to preserve and secure the dwelling and shall make that record and the inventory of removed unsecured items available to the consumer upon written request.

Because residential real estate property preservation providers are debt collectors, they will now have to also comply with the Maine Fair Debt Collection Practices Act and will be required to be licensed and regulated by the Maine Department of Professional and Financial Regulation, Bureau of Consumer Credit Protection.

Part F – Miscellaneous Foreclosure Mediator Requirements

The last part of the Act applies more stringent requirements on the qualifications to be a foreclosure mediator. It also requires additional information to be included in mediator’s reports.

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Illinois: Payoff Statements

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Lee Perres & Nickolas Schad
Pierce & Associates, P.C. – USFN Member (Illinois)

Illinois law imposes a strict deadline on mortgagees when a mortgagor requests a loan payoff statement. The purpose of this requirement is to facilitate the quick resolution of foreclosure actions allowing both the mortgagee and mortgagor to benefit from a full payoff of the loan. While both parties can benefit from a payoff of the loan, if the strict provisions of Illinois law are not followed, the mortgagee can be sanctioned, including, but not limited to, monetary fines.

Within 10 business days of the receipt of a demand by the mortgagor or the mortgagor’s authorized agent, a mortgagee (or its agent) must prepare and deliver a payoff statement accurately reflecting the outstanding balance of the mortgagor’s loan, and which would satisfy the obligation as of the date the letter is prepared (the Payoff Statement). For the purpose of Illinois law, the Payoff Statement is deemed delivered when placed in the U.S. mail with postage prepaid addressed to the party whose name and address is in the payoff request. Additionally, delivery can also mean fax or electronic delivery if the payoff demand specifically requests delivery in such a way. The first Payoff Statement requested by the mortgagor must be created at no charge to the mortgagor; however, the cost for any additional Payoff Statements may be charged to the mortgagor.

The Payoff Statement must include:


i) information necessary to calculate the payoff amount on a per day basis for a period of 30 days or until the mortgage is scheduled for a judicial sale, whichever is less;
ii) estimated charges (specifically labeled “estimated charges”) reasonably believed to be incurred within 30 days from the date of the Payoff Statement; and
iii) the loan number, telephone number of the mortgagee and, if applicable, the department name, telephone number, and fax number of the department that would receive the payment.


In the event a mortgagee, or its agent, willfully fails to deliver an accurate Payoff Statement within 10 business days after the receipt of a written demand, the mortgagee (or its agent) is liable for actual damages for the failure to deliver the Payoff Statement. In the event there are no actual damages, the mortgagee (or its agent) is liable for damages in the amount of $500. Pursuant to this statute, “willfully” means without cause, excuse, or mitigating circumstances.

© Copyright 2014 USFN and Pierce & Associates, P.C. All rights reserved.
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Florida: Appellate Court Clarifies Statute of Limitations for Mortgage Foreclosures

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Roger D. Bear
Florida Foreclosure Attorneys, PLLC – USFN Member (Florida)

The past five years in Florida have seen an unprecedented volume of foreclosure actions. The courts have struggled to deal with the cases filed, and some law firms imploded under charges of robo-signing and other alleged improprieties. Many of the cases filed years ago have lingered, and the courts have been dismissing cases if the cases are not being pushed forward. Many of these dismissed cases have due dates of more than five years ago. The question then arises as to whether there is a statute of limitations impediment to filing a new foreclosure action on those dismissed cases carrying a due date of more than five years ago.

A Florida appellate court has recently issued a ruling on the statute of limitations governing mortgage foreclosure actions. The case is U.S. Bank Nat. Ass’n v. Bartram, 2014 WL 1632138 (Apr. 25, 2014).

As stated by the court: “The issue we must resolve is whether acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed for failure to appear at a case management conference triggers application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on payment defaults occurring subsequent to dismissal of the first foreclosure suit.”

The court concluded that the statute of limitations does not bar the subsequent foreclosure action. In arriving at this conclusion, the appellate court relied heavily on the Florida Supreme Court decision in Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004). That decision held that dismissal with prejudice in a mortgage foreclosure action does not necessarily bar, on res judicata grounds, a subsequent foreclosure action on the same mortgage even if the mortgagee accelerated the note in the first suit.

The court in Singleton reasoned that a subsequent, separate default creates a new and independent right to accelerate payment in a second foreclosure action even where the lender triggered acceleration of the debt in the prior, unsuccessful action that had been dismissed with prejudice. The court was clear that, regardless of the fact that acceleration was invoked in the first suit, the doctrine of res judicata does not necessarily bar subsequent foreclosure actions where the later suit alleged defaults other than those sued for in the first suit, because the subsequent and separate alleged default “created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action.”

Accordingly, the court in Bartram concluded that a foreclosure action for default in payments occurring after the order of dismissal in the first foreclosure action is not barred by the statute of limitations found in section 95.11(2)(c), Florida Statutes (which is five years), provided the subsequent foreclosure action on the subsequent defaults is brought within the five-year limitations period.

The Bartram court believed the legal issue resolved is a matter of great public importance, and it certified the following question to the Florida Supreme Court: “Does acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed pursuant to rule 1.420(b), Florida Rules of Civil Procedure, trigger application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on all payment defaults occurring subsequent to dismissal of the first foreclosure suit?”

The Florida Supreme Court is not obligated to answer or otherwise review the certified question. So unless the Bartram decision is reversed by the Florida Supreme Court, it provides clarity that there is not a statute of limitations barrier to prevent a subsequent foreclosure action by the mortgagee based on payment defaults occurring subsequent to dismissal for failure to appear at a case management conference of the first foreclosure suit.

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California: Standing re Validity of Assignment

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Kathy Shakibi
Northwest Trustee Services, Inc. – USFN Member (California)

Does a borrower have standing to challenge a foreclosure based on the validity of an assignment? Pursuant to Glaski v. Bank of America, 218 Cal. App.4th 1079 (2013), a borrower may challenge a nonjudicial foreclosure based on a void transfer of deed of trust. Glaski, however, remains a solitary ruling, and now a recent appellate court ruling signals the demise of Glaski. [Yvanova v. New Century Mortgage Corp., WL 2149797 (Apr. 25, 2014)].

Glaski: Solitary Precedent

In Glaski, the California Court of Appeal held that under New York trust law, a transfer of a deed of trust in contravention of the trust documents is void, not voidable, and under California law, a “borrower can challenge an assignment of his or her note and deed of trust if the defect asserted would void the assignment.” Glaski at 1095. The Glaski court held that New York law governed the operation of the trust because the subject securitized trust was formed under New York law. Glaski concluded that the borrower had standing to state a claim for quiet title, unfair business practices, and declaratory relief. Since the Glaski ruling on August 8, 2013, no less than 24 lower courts have declined to follow Glaski. Yvanova is the first published appellate ruling that rejects Glaski.

Yvanova: Background

In 2006, New Century Mortgage Corporation made a mortgage loan to the Yvanova borrower. In 2007, New Century filed for bankruptcy and subsequently the deed of trust was assigned by means of a pooling and servicing agreement to Deutsche Bank National Trust Company as trustee for the Morgan Stanley ABS Capital I Inc. Trust 2007-HE1 Mortgage Pass-Through Certificates, Series 2007-HE1. In January 2012, a notice of default was recorded, followed by a notice of sale, and the property went to sale on September 14, 2012. On May 14, 2012, the borrower filed a civil action naming several defendants. Ocwen Loan Servicing, LLC; Western Progressive, LLC; and Deutsche Bank National Trust Company, as Trustee (defendants) successfully demurred to the pleadings.

The borrower’s second amended complaint contained one cause of action for quiet title, and the borrower made three substantial allegations: “(1) The assignment of the deed of trust to Deutsche Bank was ante-dated, misrepresents material facts and entities, that render the instrument void, (2) the substitution of Western Progressive as trustee is void, due to ante-dating, violating procedural trust rules and using entities which do not have authority to act, and (3) Western Progressive conducted unlawful defective auction sale …” Yvanova *2. The defendants again demurred, on the ground that the borrower had failed to allege tender to cure her default. The trial court granted the defendants’ demurrer without leave to amend, and the borrower appealed. The borrower also filed two bankruptcy cases, and two related adversary actions, which are not the subject of this article.

Yvanova: Appellate Ruling

On appeal, the Yvanova ruling has two prongs. First, the court agreed that the borrower lacks standing to pursue a quiet title claim, absent an allegation of tender of funds. Next, the court held that even assuming the borrower’s allegations regarding transfer of the note and deed of trust are correct, “the relevant parties to such a transaction were the holders (transferors) of the promissory note and the third party acquirers (transferees) of the note. As an unrelated third party to the alleged securitization, and any other subsequent transfers of the beneficial interest under the promissory note, [plaintiff] lacks standing to enforce any agreements, including the investment trust’s pooling and servicing agreement, relating to such transactions.” Yvanova *4.

In its analysis the court cited from a 2013 case, Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497, holding that “An impropriety in the transfer of a promissory note would therefore affect only the parties to the transaction, not the borrower. The borrower thus lacks standing to enforce any agreements relating to such transactions.” The Jenkins ruling predated Glaski by approximately three months. The Yvanova court analyzed that an assignment substitutes one creditor for another. Even if there is an invalid transfer, a borrower would not be a victim of the transfer because the borrower’s obligations under the note remain unchanged. In language signaling the demise of Glaski, the court declined to follow Glaski, stating that no California court has followed Glaski on this point and many have rejected it.

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Sixth Circuit Ruling Regarding the Absolute Priority Rule in Chapter 11 Cases

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Melissa Byrd
Trott & Trott, P.C. – USFN Member (Michigan)

In an important decision affecting secured creditors that are the subject of cramdown in Chapter 11 cases, the Sixth Circuit Court of Appeals recently issued an opinion holding that “the absolute priority rule continues to apply to pre-petition property of individual debtors in Chapter 11 cases.” Ice House Am., LLC v. Cardin, 2014 U.S. App. LEXIS 8882 at *13 (6th Cir. 2014).

To confirm a Chapter 11 plan of reorganization, a debtor must meet the requirements of 11 U.S.C. § 1129(a). A Chapter 11 plan, however, may be confirmed even if it does not comply with § 1129(a)(8)(A), through the “cramdown” provision, “if the plan does not discriminate unfairly, and is fair and equitable” to creditors who have not accepted the plan. Section 1129(b)(2) sets out the requirements for a plan to be considered “fair and equitable,” which includes satisfaction of the “absolute priority rule” found in § 1129(b)(2)(B)(ii), that provides in relevant part:


For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

* * *
(B) with respect to a class of unsecured claims –

* * *

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section. [emphasis added].

 

The absolute priority rule requires that every unsecured creditor must be paid in full prior to the debtor retaining any property under the plan.

In the Ice House Am. case, the debtor and creditor agreed that the absolute priority rule was not satisfied under the proposed plan; however, the debtor argued that it does not apply to individual debtors. The creditor and the United States Trustee objected to the plan for violation of the absolute priority rule. The bankruptcy court overruled the objections and held that the absolute priority rule was abrogated in individual cases when the Bankruptcy Code was amended in 2005. On appeal, the district court certified the question for direct appeal to the Sixth Circuit, which was granted. Ice House Am. v. Cardin, at *5.

In deciding whether the absolute priority rule still applied to individual debtors, the Sixth Circuit focused on the word “included” in the italicized portion of the statute. The court found that by looking at the definition of the word ‘included,’ “… it is only that property — property acquired after the commencement of the case, rather than property acquired before then — that the ‘debtor may retain’ when his unsecured creditors are not fully paid,” and reversed and remanded the decision to the bankruptcy court for further proceedings. Ice House Am. v. Cardin at *10, 13, citing 11 U.S.C. § 1129(b)(2)(B)(ii).

The Sixth Circuit, in deciding that the absolute priority rule continues to apply to pre-petition property of the individual debtors in Chapter 11 cases, joins the Fourth Circuit (In re Maharaj, 681 F.3d 558, 565 (4th Cir. 2012)), Fifth Circuit (In re Lively, 717 F.3d 406, 410 (5th Cir. 2013)), and Tenth Circuit (In re Stephens, 704 F.3d. 1279, 1287 (10th Cir. 2013)) in reaching the same interpretation. Ice House Am. v. Cardin, at *13. (The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

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Tennessee: New Law Regarding Eviction Lockouts

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Signed into law in March is HB1409, which describes how plaintiffs are to handle personal property pursuant to lockouts in all eviction maters (filed pursuant to the unlawful detainer statute) in Tennessee, beginning July 1, 2014. The law also tolls the running of any local/municipal deadlines relating to the personal property, along with insulating the local municipality (and the plaintiff, in most cases) from any liability relating to damage to the personal property after it has been removed.

The law clarifies, and slightly alters, what had been the custom in Tennessee (although some local jurisdictions had their own formal and/or customary requirements), which was to remove the remaining personal property to the curb. The new law, which will be applicable in all jurisdictions statewide, provides that the plaintiff, or a designated representative, can remove the personal property from the interior of the residence, but that it must remain “[o]n the premises,” and be moved to “an appropriate area clear of the entrance to the premises,” and “[a]t a reasonable distance from any roadway.”

The plaintiff, or agent, cannot “disturb” the personal property for 48 hours after it has been removed pursuant to the procedure just described. The plaintiff, or designated representative, is authorized to discard any remaining personal property after the 48-hour period. The same 48-hour time period applies to the city, county, or other local government/municipality that has jurisdiction, meaning that any action it would normally otherwise be able to take, as to the personal property, is temporarily suspended during this time period.

As important as the process and procedure for lockouts, the law also provides that the local government body, including the sheriff’s department, will not be liable for any damages to the defendant’s personal property during or after the 48-hour period. The same insulation from liability will be provided to the plaintiff or designated representative of the plaintiff, provided that damages did not result from a malicious act, or omission, of the plaintiff or its representative.

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South Carolina Judges Rule on Vacant Property

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

Recently, several Equity Court judges (Horry, York, and Lexington counties) have ruled against mortgage lenders/servicers and their property preservation agents that secure properties pre- and post-sale without a recorded foreclosure deed and/or an eviction or other court order. In South Carolina, real property ownership is determined by recording the deed in the register of deeds office in the county where the real property is located. Until a foreclosure deed is executed and recorded, the homeowners/mortgages still own the real property.

In at least one case, an Equity Court judge awarded significant damages ($28,000) against the successful foreclosure sale purchaser where the foreclosure sale purchaser removed “abandoned property” from what appeared to be a vacant home. Even though it looked like the mortgagors/homeowners had vacated the home, the garage was full of the mortgagors/homeowners’ personal belongings.

Therefore, if you observe the homeowner/mortgagor vandalizing the property or believe that the property has been abandoned and is now vacant, do not take any action to secure the property unless you are the record title owner of the real property. If the Equity Court judge or selling officer has not executed and recorded the foreclosure deed, a separate legal action may be required in order for the Equity Judge to grant you (as a non-record title owner) the right to enter the property and to take all necessary actions to protect, preserve, and secure the home.

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Michigan: Appellate Court Review of Mortgage Lacking Spousal Signature

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by Jennifer Burnett
Trott & Trott, P.C. – USFN Member (Michigan)

On April 8, 2014, the Michigan Court of Appeals decided Federal Home Loan Mortgage Corporation v. Guntzviller (Docket No. 313323). This case involved a mortgage encumbering a property owned by a husband and wife. The proceeds of the mortgage were used to refinance two prior mortgages. The prior mortgages were executed by both spouses. The husband alone signed the refinance mortgage, though the lender was aware of the marriage, and the wife was present at the closing. Upon the husband’s death and subsequent default upon the mortgage, the plaintiff filed suit against the wife seeking equitable relief including a declaration that the mortgage was valid and encumbered her interest in the property.

In Michigan, unless expressly stated otherwise, a conveyance of real property to a husband and wife creates a tenancy in entireties. Generally, but with some exceptions, one tenant by the entireties has no separate interest from the other, and cannot convey, mortgage, or otherwise alienate the property without the other’s consent. Upon the death of one tenant, the other becomes the sole owner of the property through a right of survivorship.

The court of appeals found that because the husband could not unilaterally refinance the prior mortgages without the wife’s signature, the mortgage was void and entirely invalid. As the mortgage was invalid, it did not encumber the property at all, and the wife became the sole owner of the property free and clear of the mortgage upon her husband’s death. The court further declared that the plaintiff was not entitled to equitable remedies such as reformation, equitable mortgage, ratification, or an implied contract to prevent unjust enrichment to save it from what the court deemed to be the lender’s unilateral mistake in not obtaining the wife’s signature on this mortgage.

While the Guntzviller opinion is not published and is therefore not binding as legal precedent, this case and its reasoning may be cited to and considered by Michigan courts as persuasive authority. The conclusion that a refinance mortgage lacking the signature of a required spouse is invalid is not new, but the determination by the Michigan Court of Appeals as to what would entitle a party to equitable relief to correct the omission and validate the mortgage is unclear. The decision implies an elevated standard for a lender to successfully prevail on such a claim.

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Connecticut: Foreclosing Plaintiff's Right to Enforce an Instrument under UCC

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

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

With its decision in U.S. Bank, N.A., Trustee v. Ugrin, AC 35266, the Connecticut Appellate Court has further discounted the defense bar’s argument that a foreclosing plaintiff is required to be the owner of the underlying debt and, instead, has again held that a foreclosing plaintiff’s establishment of its right to enforce an instrument under the Uniform Commercial Code is sufficient to establish standing in Connecticut.

Prior to the institution of the action, the defendant requested validation of the debt, which the plaintiff provided. Along with the debt validation, the plaintiff also provided a copy of the note, which was endorsed in blank. After a judgment of foreclosure by sale had entered, the defendant filed a motion to dismiss attacking the plaintiff’s standing. The trial court conducted a hearing in which the original note was presented to the court for inspection. The defendant argued that the note was not endorsed in blank but was specially endorsed to the plaintiff, which amounted to an unauthorized alteration of the document. The defendant claimed the inconsistency between the document presented in response to the validation of debt request and the note being specially endorsed to the plaintiff as presented to the trial court as his basis to assert an “illegal” alteration of the note, thereby implicating the plaintiff’s standing.

In opposition to the defendant’s motion, the plaintiff presented an affidavit of the loan servicer averring that the note was specially endorsed to the plaintiff and that the plaintiff was the holder of the note prior to the commencement of the action. After supplemental briefing, the trial court denied the defendant’s motion, finding that the plaintiff demonstrated it was the holder of the note and, further, holding that the defendant failed to present evidence to contradict this finding. The defendant appealed, contending that the trial court erred in not holding a full evidentiary hearing and further failed to hold a second hearing to address the defendant’s claim that there was a material factual dispute regarding the plaintiff’s standing.

The appellate court held that “[t]he plaintiff’s possession of a note endorsed in blank is prima facie evidence that it is a holder and is entitled to enforce the note, thereby conferring standing to commence a foreclosure action.” The defendant claimed that the appearance of a special endorsement on the note to the plaintiff alone required that the trial court hold a second hearing. The appellate court interpreted a recent Connecticut Supreme Court decision (Equity One v. Shivers, 310 Conn. 127 (2013)) to stand for the proposition that a court is not required to order a full evidentiary hearing to determine standing if, after being presented with the original note, the court finds there is evidence that the plaintiff possessed the note at the time the action was commenced and the defendant has not offered any evidence to the contrary.

The appellate court determined that the trial court did not err when it concluded that the plaintiff possessed the note endorsed in blank prior to the commencement of the action and that the defendant’s claim that the note was altered when it was specifically endorsed to the plaintiff does not refute the plaintiff’s prima facie evidence. The appellate court further held that the addition of a special endorsement is not, on its own, an unauthorized alternation of the document purporting to modify an obligation of a party.

The defense bar has repeatedly attempted to advance the argument that a foreclosing plaintiff needs to be the owner of the debt, citing ambiguous language in several recent appellate court cases in Connecticut. This case clarifies again that so long as the plaintiff can establish that it was the holder of the note, or otherwise entitled to enforce the instrument pursuant to the UCC, there is no ownership requirement for a foreclosing plaintiff in a mortgage foreclosure action in Connecticut and illustrates the importance of being able to prove possession of the original note prior to the commencement of the action.

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Connecticut: Collection of both Default Interest and a Prepayment Premium in Commercial Loans

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by Peter Ventre
Hunt Leibert – USFN Member (Connecticut)

In a decision released June 3, 2014, Connecticut’s Appellate Court sustained a judgment of the trial court, permitting in a commercial loan the inclusion in the debt of both default interest and a prepayment premium. Federal National Mortgage Association v. Bridgeport Portfolio LLC.

Facts and Law: On May 27, 2009, Bridgeport Portfolio LLC executed a multifamily, open-end mortgage in favor of Arbor Commercial Funding, LLC (Arbor), on four commercial properties in Bridgeport, Connecticut, to secure the payment of a promissory note in the amount of $7,780,000. The loan was allegedly guaranteed by a principal of Bridgeport Portfolio LLC. Arbor assigned the note, mortgage, and related loan documents to Fannie Mae.

In response to a multi-count foreclosure complaint filed in the trial court seeking foreclosure of the mortgage and a monetary judgment on the guaranty, the borrower and the guarantor filed a special defense. They claimed that the prepayment premium is precluded or void as against public policy as a forfeiture and/or penalty, which is repugnant to the law and is not a voluntary payment.

By agreement of the parties, the court granted summary judgment as to liability as to Count I of the complaint seeking foreclosure. Fannie Mae filed a motion for judgment of strict foreclosure and an affidavit of debt, which added default interest and a prepayment premium to the outstanding principal balance. The defendants filed an objection, contending that the inclusion of a prepayment premium and default interest in the judgment would penalize the defendant borrower for the contractual breach in violation of public policy. The defendants further alleged that the plaintiff was attempting to collect two amounts as liquidated damages for the same purported injury to Fannie Mae and that it was seeking an amount disproportionate to any anticipated loss.

The trial court scheduled a hearing. After listening to testimony from a senior risk manager employed by Arbor and reviewing the law, a judgment for Fannie Mae was entered, including in the debt both default interest and a prepayment premium upon finding that the loan documents provided for the payment of both. The trial court found this transaction was a sophisticated one where both parties were represented by counsel. The defendants appealed.

On Appeal: After reviewing the trial court proceedings, the appellate court affirmed. The appellate court specifically found that contracting parties may decide on a specified monetary remedy for failure to perform a contractual obligation. The appellate court also found that these provisions were liquidated damages, which can be used to fix a fair compensation to the injured party.

Finally, the appellate court held that it saw no reason to relieve the defendants from compliance with the terms of a contract that was entered into freely, particularly where the terms were clear and unambiguous. The appellate court opined that the certainty of the remedies provided by the default interest provision and prepayment premium provision affected the pricing of the loan. Furthermore, the appellate court determined that if it held that the provisions were unenforceable, the court would be providing the defendants with a better contract than they were able to negotiate for themselves. Lastly, the appellate court did not find that it is against the public policy of Connecticut to enforce both provisions of the promissory note where sophisticated parties, represented by counsel, entered into the agreement with knowledge of its terms.

Editor’s Note: The author’s firm represented Fannie Mae in the case discussed here.

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Kentucky: Recent Legislative Updates

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

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

The Kentucky Legislature wrapped up its legislative session on March 15, 2014. Topics that affect the mortgage industry include redemption rights, the statute of limitations, service of process, and loan modifications.

The Bills that Became Law
Senate Bill 36 amends KRS 426.530 to reduce to six months the time period for the right of redemption at foreclosure sale. The amendment allows the purchaser at sale to recoup expenses for taxes, insurance, and necessary repairs to bring the property up to code that were incurred during the redemption period. Signed by the governor on April 10, 2014. http://www.lrc.ky.gov/record/14RS/SB36.htm

House Bill 369 amends KRS 413.160 to reset the statute of limitations for actions on a written contract to ten years instead of the current 15-year period; amends KRS 413.090 to conform. Only affects contracts executed after the effective date of this act. Signed by the governor on April 25, 2014. http://www.lrc.ky.gov/record/14RS/HB369.htm

Senate Bill 138 amends KRS 454.210 to allow a court clerk to electronically transmit court process to the secretary of state when that office is responsible for service of process. This affects out of state corporations and defendants under Kentucky’s long-arm jurisdiction. Signed by the governor on April 9, 2014. http://www.lrc.ky.gov/record/14RS/SB138.htm

House Bill 206 amends the mortgage modification statute, KRS 382.520, to allow interest rate reduction agreements to be secured by the original mortgage without the need to record an amended mortgage or modification agreement. Signed by the governor on April 7, 2014. http://www.lrc.ky.gov/record/14RS/HB206.htm

Effect on the Mortgage Industry
The biggest change is the shortening of Kentucky’s foreclosure redemption statute to six months. The amendments also put to rest a debate over whether taxes and maintenance during the redemption period could be added to the redemption price. Redemptions were already rare in Kentucky, since a sale bid of at least two-thirds of the appraised value will cancel the redemption, but now the amendments allow for more predictability in this area.

The statute of limitations for enforcement of mortgages has been shortened to ten years, which is still longer than the six-year statute of limitations to enforce a note under Kentucky’s UCC. This limitation comes due in April 2024, since the ten years only applies to new mortgages executed after April 25, 2014.

The other two bills involved minor changes. Service of process upon the secretary of state has been expedited by the use of electronic summons, but this only affects service upon out-of-state corporations and defendants with no local agent in Kentucky. This may save a week of delay during the foreclosure. The loan modification amendment was technical in nature, as a reduction in interest rate does not change the secured balance of the loan. This prevents any challenges by other lienholders to the priority of a modified mortgage.

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Maine: Enforcing Lost, Destroyed, or Stolen Promissory Notes

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Paula R. Watson & Joshua Saucier
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

To enforce a promissory note, a creditor will ideally be in possession of the original instrument. That is, either the note endorsed to the order of the creditor or endorsed in blank. The Uniform Commercial Code (UCC), however, allows a “person” not in possession of a promissory note to enforce that note if certain conditions are met. UCC § 3-309 (2002).

Maine enacted a similar statute, but has not adopted the most recent revision of UCC § 3-309. Under 11 M.R.S.A. § 3-1309, subsection (1), a person who is not in possession of a promissory note may enforce that note if: (a) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred; (b) The loss of possession was not the result of a transfer by the person or a lawful seizure; and (c) The person [cannot] reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts [cannot] be determined or it is in the wrongful possession of an unknown person or a person that [cannot] be found or is not amenable to service of process. It is the creditor’s burden to prove that it meets the requirements of § 3-1309, subsection (1). See 11 M.R.S.A. § 3-1309, subsection (2).

Because Maine has not adopted the most recent UCC revisions, the right to enforce the lost promissory note should not be conveyed by the entity that lost the note. Under M.R.S.A. § 3-1309, only the person who was in possession of the note at the time that it was lost is entitled to enforce that note. Maine currently has no case law on the issue.

A person trying to enforce a lost note must also prove the terms of the promissory note and the person’s right to enforce the note. See R.C. Moore v. Les-Care Kitchens, No. CV-04-390, 2006 Me. Super. LEXIS 104, at *10 n.4 (May 5, 2006) (holding that Wachovia Bank, N.A. could enforce a line of credit, despite losing the promissory note underlying that line of credit, because it complied with § 3-1309). A court may not enter judgment against the borrower unless it finds that the borrower is adequately protected against a later claim on the same note by another party. 11 M.R.S.A. § 3-1309(2).

To enforce a lost promissory note, a creditor must demonstrate by affidavit or testimony that it meets the requirements of § 3-1309. For example, during a foreclosure action a creditor may file a summary judgment motion and include, in partial support thereof, a “lost note affidavit.” See M.R. Civ. P. 56(e).

Lost note affidavits should either be based upon personal knowledge of the missing promissory note and the circumstances surrounding that loss or be based upon a review of the mortgagee’s business records. See M.R. Civ. P. 56(e); M.R. Evid. 803(6); see also Beneficial Maine Inc. v. Carter, 2011 ME 77, ¶¶ 3, 7, 28 A.3d 1260. If a lost note affidavit is based upon a review of business records, then all records relied upon should be attached to the affidavit and the elements of the business records exception to hearsay should be sworn to for those records. See Minary, 2012 Me. Super. LEXIS 105, at *4; see also People’s United Bank v. Bermac Props., No. CV-13-0245, 2014 Me. Super. LEXIS 44, at **3-4 (Feb. 28, 2014). Likewise, a copy of the lost note should be attached to the affidavit. See R.C. Moore, 2006 Me. Super. LEXIS 104, at *10 n.4. By strict compliance with 11 M.R.S.A. § 3-1309 as well as the Maine Rules of Evidence, a creditor may preserve the value of an otherwise lost promissory note.

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Minnesota Supreme Court Allows State Law Remedy for Enforcing HAMP Directives

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Christina M. Snow & Eric D. Cook
Wilford Geske & Cook, P.A. – USFN Member (Minnesota)

The Minnesota Supreme Court continues providing the mortgage industry with a mixed bag of rulings, based in part on failing to fully understand mortgage servicing. Since 2009, this state’s Supreme Court has ruled favorably on MERS standing issues, favorably on GSE exemptions from taxation, but has imposed a “strict compliance” standard for some foreclosure procedures. Lower appellate courts in Minnesota have misconstrued the scope of the “strict compliance” standard and are expected to continue their trend of unpredictable rulings for the default servicing industry. In view of that, it is important to consider removing actions to Minnesota’s federal courts whenever possible on the basis of diversity or federal question. A consistent pattern of predictable, industry-friendly rulings has emerged from these federal courts.

Recently, the Minnesota Supreme Court ruled that a borrower may assert a private cause of action for damages against a mortgage servicer for failing to follow HAMP directives. Even though HAMP regulations, themselves, do not provide a borrower with standing to sue for damages, Chapter 58 of the Minnesota statutes, governing residential mortgage servicers, now provides a borrower with standing to sue a mortgage servicer for an alleged breach of “written agreements with borrowers, investors, licensees, or exempt persons.” Gretsch v. Vantium Capital, Inc., 2014 WL 1304990 (Minn. Apr. 2, 2014). The Supreme Court also held that HAMP did not impliedly preempt Minn. Stat. § 58.18, subd. 1, or violate other constitutional provisions. The court reasoned that the lack of a federal cause of action to enforce HAMP directives did not prohibit a state from providing a private cause of action.

The loan at issue in Gretsch was a non-GSE loan under a Servicer Participation Agreement (SPA) between the servicer and Fannie Mae. The U.S. Department of Treasury created HAMP and appointed Fannie Mae to administer the program for non-GSE loans. Erroneously, the Supreme Court reasoned that Fannie Mae is an “agency” of the federal government, which is at odds with Fannie Mae’s legal position and its status as a publicly traded corporation in conservatorship. The court’s mistaken belief about Fannie Mae led to its ruling that, “we cannot conclude, as a matter of law, that Fannie Mae is not an exempt person.” The appeal was before the court on a motion to dismiss, which also means that there has been no ruling on the merits finding that Fannie Mae is an agency of the federal government. In future cases, servicers must immediately seek competent legal advice to accurately portray Fannie Mae’s role and correctly identify the programs, guidelines, or contracts that are at issue to avoid the risk of bad case law or increasing litigation costs due to confusion or misinformation.

The Gretsch decision may lead to an increase in lawsuits against servicers for alleged breaches of pooling and servicing agreements and the servicing contracts and guides with the GSEs. The decision, however, was not a ruling on the merits, and should not mean that loan servicers automatically lose these challenges. The decision, however, may lead to more expensive and protracted litigation arising out of alleged breaches of a servicer’s contract with “borrowers, investors, other licensees, or exempt persons.” Minnesota courts have occasionally allowed challenges under HAMP based on state common law theories such as equitable estoppel, so the full impact of this ruling remains to be seen. At a minimum, a servicer’s litigation risk will be greater after Gretsch due to the statutory basis for a borrower to recover attorneys’ fees, court costs, statutory damages and even punitive damages, if appropriate, in a successful action.

On the bright side, Minnesota’s federal courts continue to rule favorably in the area of failed loan modifications, and recently relied on Minnesota’s Credit Agreement Statute to dismiss an action alleging an oral promise to postpone a foreclosure sale after the servicer proceeded with the sale. The Eighth Circuit Court of Appeals agreed with the Minnesota federal district court’s decision, and reaffirmed the longstanding principle that claims based upon oral promises are barred under Minnesota’s Credit Agreement Statute unless reduced to writing and signed by the creditor. Bracewell v. U.S. Bank National Association, No. 13-1164, WL 1356850 (8th Cir. Apr. 4, 2014). This issue has been litigated and won in dozens of cases in Minnesota courts. The Eighth Circuit’s holding, just two days after the Gretsch decision, provides another layer of protection for the industry in the context of assisting borrowers with loss mitigation.

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