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North Carolina: Appellate Court Decides Note Holder Issue

Posted By USFN, Monday, March 31, 2014
Updated: Monday, October 12, 2015

March 31, 2014

 

by Natasha Barone
Hutchens Law Firm – USFN Member (North Carolina)

For years, the issue as to what constitutes competent evidence to prove that the lender seeking to foreclose is in fact the holder of the note at issue has been a hotly contested one in North Carolina. The North Carolina Court of Appeals and North Carolina Supreme Court have issued several opinions within the last several years, both published and unpublished, addressing the question of what is competent evidence to prove note holder status. Two such seminal cases are In re Adams, 204 N.C. App. 318 (2010), and In re Bass, 366 N.C. 464 (2013).

In recent years, and more frequently since Adams and Bass, the debtor’s bar has contended that blank endorsements are a particular cause for concern because “no one can tell who holds the note.” Typically debtor’s counsel will cite to cases holding that “mere possession” alone is insufficient to prove that a party is the holder of a note. In re Adams, at 323. Generally, this argument is unsuccessful as long as lender’s counsel provides an affidavit stating that the party seeking to foreclose is in possession of the original note.

Until earlier this year, the North Carolina Court of Appeals had not addressed the specific issue of proving the holder of a note endorsed in blank. In an unpublished opinion filed by that court in February, the appellate court held for the first time with specificity that an original note, or a copy of the original note with a blank endorsement coupled with an affidavit by the party seeking to foreclose averring that it is in possession of the original note endorsed in blank, constitutes sufficient evidence that the party seeking to foreclose is in fact the holder of the note. In re Cornish, No. COA 13-513, 2014 WL 636969 (N.C. Ct. App. Feb. 18, 2014). Although unpublished opinions are not binding authority, the Cornish case should have sufficient persuasive authority on lower courts throughout the state to resolve the “blank endorsement” dispute with finality.

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Massachusetts: Supreme Judicial Court Decides re Strict Compliance as to Pre-FC Right to Cure Statute

Posted By USFN, Monday, March 31, 2014
Updated: Monday, October 12, 2015

March 31, 2014

 

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

On March 12, 2014, the Massachusetts Supreme Judicial Court (SJC) issued its long-awaited decision in the case of U.S. Bank, N.A. as Trustee v. Schumacher, __ N.E.3d __, 467 Mass. 421. At issue in the case was whether a mortgagee’s failure to comply strictly with the Massachusetts pre-foreclosure right to cure statute, Gen. Laws ch. 244, § 35A (§ 35A), renders a foreclosure sale void. Former owners frequently plead lack of strict compliance with § 35A as a defense to post-foreclosure summary process (eviction) cases. The trial courts in Massachusetts have issued myriad conflicting decisions concerning this issue, making it impossible to predict the outcome of cases where a borrower called a § 35A notice into question.

In Schumacher, the SJC held that the pre-foreclosure right to cure statute did not regulate the foreclosure process itself, but instead sought to permit borrowers an opportunity to cure a default prior to the commencement of a foreclosure. The SJC found that, because § 35A regulates pre-foreclosure conduct, it is not part of the statutory power of sale demanding strict compliance. As such, minor technical inaccuracies in the notice do not render the resulting foreclosure sale void as a matter of law.

In a concurring opinion, Justice Gants noted that, although violations of § 35A do not render a foreclosure void, they may present courts with equitable grounds to set aside foreclosures in cases where a notice is “fundamentally unfair.” Accordingly, borrowers may still petition the superior court, or assert defenses or counterclaims in eviction cases, challenging a foreclosure due to an inadequate § 35A notice. Borrowers will face more difficulty prevailing upon these claims under a “fundamentally unfair” standard rather than the “strict compliance” standard adopted by several trial courts prior to Schumacher.

Schumacher brings much-needed clarity to a very hotly contested and controversial area of Massachusetts foreclosure law.

Editor’s Note: The author’s firm represented U.S. Bank in the lower court through the trial of the Schumacher case.

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Connecticut: Appellate Court Rules on Standing

Posted By USFN, Monday, March 31, 2014
Updated: Monday, October 12, 2015

March 31, 2014

 

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

In the case of Deutsche Bank National Trust Company, Trustee v. Torres, (AC 35838), decided on March 25, 2014, the Connecticut Appellate Court reversed the Superior Court’s ruling granting a motion to dismiss filed by the self-represented borrower. The basis of the motion was an allegation that the plaintiff lacked standing to commence the foreclosure action. The appellate court concluded that the plaintiff bank had standing to foreclose because it was in possession of the original note endorsed in blank, which was provided to the trial court at the hearing on the motion.

The appellate court relied upon several recent Connecticut Appellate and Supreme Court decisions regarding standing to foreclose, specifically referring to the Uniform Commercial Code’s (C.G.S. § 42a-1-201(b)(21)(A)) definition of a holder of a note in conjunction with Connecticut General Statutes § 49-17, which “allows the holder of a note to foreclose on real property even if the mortgage has not been assigned to him.” The recent cases supporting the Torres decision were Chase Home Finance, LLC v. Fequiere, 119 Conn. App. 570 (2010); RMS Residential Properties, LLC v. Miller, 303 Conn. 224 (2011); J.E. Roberts Co. v. Signature Properties, LLC, 309 Conn. 307 (2013); and Equity One, Inc. v. Shivers, 310 Conn. 119 (2013). All of these decisions comprised the legal authority for reversing the trial court’s ruling.

Most importantly, the appellate court held that because the plaintiff had alleged itself to be the holder of the note payable to bearer and had presented the note to the judicial authority and defendant for review, the plaintiff had raised the presumption of standing, to which the defendant failed to rebut. Once a plaintiff alleges in its complaint the right to foreclose, the burden then shifts to the defendant to rebut that presumption with concrete evidence.

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Tennessee Appellate Court: Recorded Access Easement is Notice to the World

Posted By USFN, Monday, March 31, 2014
Updated: Monday, October 12, 2015

March 31, 2014

 

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

The Tennessee Court of Appeals recently released an opinion regarding the issue of interference with an access easement, one which should provide some comfort to lenders dealing with rural properties in this state. The case, Riegel v. Wilkerson, 2014 Tenn. App. LEXIS 62 (Tenn. Ct. App. Feb. 11, 2014), involved a landowner (Wilkerson) who had erected a gate blocking a road utilized by an adjoining landowner (Riegel) to access his property. An easement, which provides for ingress/egress to the property now owned by Riegel, had been executed by previous landowners in the chain of title; however, the deed to Wilkerson, did not contain a reference to the easement. She took the position that because her deed failed to include a reference to the easement, the easement was not enforceable against her. The trial court did not rule in her favor, however, and enjoined her from further interference with use of the easement. The Court of Appeals affirmed that ruling.

As referenced in the court’s opinion, an easement has been defined in Tennessee common law as “an interest in property that confers on its holder a legally enforceable right to use another’s property for a specific purpose.” The easement that was at issue in this case is legally defined as an express easement appurtenant. It is referred to as an express easement because it was in writing. It was an easement appurtenant because it involves two tracts of land, the dominant tenement and the servient tenement. The dominant tenement is the one that is receiving the benefit of the easement, while the servient tenement is the property over which the easement travels, thus serving a benefit upon the dominant tenement. In the subject case, Riegel was the dominant estate owner, as he received the benefit of the easement, allowing him to travel on a road physically situated on Wilkerson’s property (the servient estate).

Neither Riegel nor Wilkerson was party to the original easement. The easement was consummated by individuals who owned the respective properties prior to Mr. Riegel and Ms. Wilkerson obtaining ownership. The easement was recorded in the property records and was granted to the then-property owners, and “their heirs and assigns forever.” This meant that the easement was perpetual, or what is often referred to as “running with the land.” In other words, the easement did not terminate when those who were party to it ceased to own their respective interests in the property. The rights or, in this case, the responsibilities incurred pursuant to the easement pass down to subsequent owners.

The court devoted a large portion of its opinion towards addressing alternative reasons that the easement was enforceable against Ms. Wilkerson. However, its primary holding was that the easement was of record prior to her obtaining ownership of her property and, thus, the fact that it was of record was notice to the world of the existence of the easement. As the court stated, “the ‘grantee of a servient tenement takes the property subject to all duly recorded prior easements whether such easements are mentioned in the grantee’s deed or not ...’” 28A C.J.S. Easements § 134; Tenn. Code Ann. § 66-26-102.

This holding can be an important one for lenders in Tennessee, especially where the collateral consists of rural property. As was the situation in Riegel, easements can become important when the landowner of a large tract of land begins to sell off smaller portions, which often do not abut a publicly maintained road, street, or highway. When a property owner conveys a smaller piece (or parcel) of land to a new owner, the deed will often contain language establishing an easement over the seller’s other, adjoining, property so that the purchaser will be able to access his or her new parcel.

As was the case in Riegel, if the seller later conveys further portions of the original, larger tract, over which the easement for access to other parcels exists, it’s possible that this subsequent purchaser’s deed will not contain a reference to the property being encumbered by an easement. It is reassuring for lenders to know that should they have to foreclose on a property that is accessed via such an easement, that a later purchaser of the servient property cannot block use of the easement simply because he wasn’t aware of its existence and/or his deed failed to contain a reference to it.

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Arkansas: Rescinded Homeowner Policy — Mortgagee Insured?

Posted By USFN, Friday, March 28, 2014
Updated: Monday, October 12, 2015

March 28, 2014

 

by Kathryn A. Lachowsky
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Nationwide Mutual Fire Insurance Co. v. Citizens Bank & Trust Co., 2014 Ark. 20, arose out of a fire that occurred in December 2009 and an insurance company denying the claim of both the insured homeowner and the mortgagee. The homeowner, Danny Ludwick, applied for insurance coverage from Nationwide Mutual Fire Insurance Co. (Nationwide) on his home located in Van Buren, Arkansas. Nationwide relied upon the information supplied in his application and supplemental application, and issued a policy insuring the home and its contents for the period of May 6, 2009, through May 6, 2010. The policy at issue contained a standard mortgage clause.

The home was later destroyed by a fire in December 2009, and Citizens Bank & Trust Co. (Citizens) had a valid mortgage on the home at the time of the application and at the time of the fire. During Nationwide’s investigation of the fire, Nationwide learned of two previous fire losses sustained by the homeowners that had not been disclosed in their application and supplemental application for insurance. According to Nationwide’s underwriting guidelines, Nationwide would not have issued the policy if the prior undisclosed fire losses had been disclosed at the time of the application. Based on this material misrepresentation, Nationwide voided the policy back to its inception and refunded the premiums paid by the homeowners.

Mortgagee Citizens submitted a timely claim to Nationwide, but Nationwide denied the claim — not on the basis of a policy exclusion, but rather on the basis that the policy was void back to its inception. At trial, Nationwide argued that its rescission of the policy voided the policy ab initio and thereby extinguished not only the homeowner’s interest, but also Citizens’ interest as mortgagee. The Crawford County Circuit Court entered its order, without explanation, granting Citizens’ motion for summary judgment and denying Nationwide’s motion. Nationwide appealed and the Arkansas Court of Appeals certified this case to the supreme court as one of first impression that is of significant public interest. The Arkansas Supreme Court affirmed the decision.

On appeal, Nationwide contended that the circuit court erred in its decision because when Nationwide rescinded the policy, the policy was void ab initio and, therefore, there was no policy in which Citizens had an interest. According to Black’s Law Dictionary, the definition of “void ab initio” is: “null from the beginning, as from the moment when a contract is entered into.” Nationwide’s position was simple: If the policy is void and a legal nullity, the mortgagee can have no interest in it. Nationwide further argued that rescission of a contract and cancellation of a contract are two distinctly different remedies based on different grounds. Cancellation takes effect only prospectively, while rescission voids the contract ab initio. Nationwide, 2014 Ark. 20, citing Ferrell v. Columbia Mut. Cas. Ins. Co., 306 Ark. 533, 537, 816 S.W.2d 593, 595 (1991).

Citizens’ argument is based on the parties’ unambiguous stipulation that the mortgage clause in the policy is a standard mortgage clause. Under Arkansas law, a standard mortgage clause serves as a separate contract between the mortgagee and the insurer, as if the mortgagee had independently applied for insurance. Nationwide, 2014 Ark. 20, see, e.g., Farmers Home Mut. Fire Ins. Co. v. Bank of Pocahontas, 355 Ark. 19, 129 S.W.3d 832 (2003). Thus, the rights of a named mortgagee in an insurance policy are not affected by any act of the insured, including improper and negligent acts. The words “any acts” as used in a standard mortgage clause do not refer merely to acts prohibited by the contract or to a failure to comply with the terms of the contract, but literally embrace any act of the mortgagor. Nationwide, 2014 Ark. 20, citing 4 Couch on Insurance § 65:48 (3rd ed.).

In its review, the supreme court acknowledged Nationwide’s argument in reply that rescission voids a policy regardless of whether the policy’s mortgage clause is a standard mortgage clause. Nationwide’s position, however, overlooks the effect of Arkansas law treating the mortgagee as having an independent contract unaffected by the acts of the insured. The justice concluded in his opinion that under Arkansas law, the standard mortgage clause serves as a separate contract between Nationwide and Citizens as if Citizens had independently applied for insurance. As such, Nationwide’s rescission of the homeowner’s policy based on the acts of the homeowner does not affect Citizens’ independent contract with Nationwide. It is important to note that this independent contract with the mortgagee cannot be defeated by any act of the insured. Farmers Home Mut. Fire Ins. Co., 355 Ark. 19, 129 S.W.3d 832. Fraudulent acts by the insured and the rescission of the policy have no affect whatsoever on the independent contract with the mortgagee.

While this issue is one of first impression in Arkansas, the conclusion is consistent with the long-settled law of Oklahoma. In 1958, the Oklahoma Supreme Court similarly held that “a mortgagee’s contract was completely independent of the insured’s rights and would be valid even though the insurance policy was void ab initio.” Nationwide, 2014 Ark. 20, citing Okla. State Union of Farmers’ Educ. & Coop. Union of Am. v. Folsom, 325 P.2d 1053, 1056 (Okla. 1958) (citing Western Assur. Co. v. Hughes, 179 Okla. 254, 66 P.2d 1056) (Okla. 1936)).

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Digital Audio Recordings of Bankruptcy Courtroom Proceedings

Posted By USFN, Friday, March 28, 2014
Updated: Monday, October 12, 2015

March 28, 2014

 

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA – USFN Member (Kentucky, Ohio)

The pilot program to make digital audio recordings of courtroom proceedings publicly available online that began with two federal courts in the fall of 2007 has gradually been adopted by an increasing number of district and bankruptcy courts. In February 2014, U.S. Bankruptcy Judge Humphrey (Dayton, Ohio) implemented a program making digital audio recordings of court proceedings available on the internet through PACER. These recordings are available on a case-by-case basis, at the judge’s discretion, or upon specific request of a party in interest. Attorneys in a case or adversary proceeding may access the audio file one time with no charge via the notice of electronic filing email that is sent when an audio file is docketed in the case or adversary proceeding, and may also download the audio file for future access. Any other party wishing to download a copy of the audio file from PACER will be charged a fee of $2.40 per file. Previously, a party wishing to obtain a digital audio recording (CD) had to pay a $26 fee.

Digital audio recording has been an authorized method of making an official record of court proceedings since 1999, when it was approved by the policy-making Judicial Conference of the United States. However, in accordance with 28 U.S.C. § 735(b), “[n]o transcripts of the proceedings of the court shall be considered as official except those made from the records certified by the reporter or other individual designated [by the court] to produce the record.” Official transcripts must be prepared by a court-approved transcriptionist from a copy of the audio file maintained by the clerk. Often times you can contact the courtroom deputy to make arrangements to obtain an official copy of any court proceeding transcript. Counsel will not be permitted to present transcripts prepared from audio files taken off PACER as evidence in court proceedings. However, counsel who do not need an official transcript may download a copy of the audio file and have it transcribed for their own use.

The judiciary’s privacy policy restricts the publication of certain personal data, including limiting the disclosure of Social Security and financial account numbers to the last four digits, using only initials for the names of minor children, and limiting dates of birth to the year. If information subject to the judiciary’s privacy policy is stated on the record, it will nonetheless be available in the audio files over the internet.

Counsel and witnesses are cautioned to avoid introducing personal data and other sensitive information into the record, unless necessary to prove an element of the case. If private information is mentioned during a conference or hearing, counsel may move the court to seal, restrict, or otherwise prohibit placement of the digital audio file of the conference or hearing on the internet through the PACER system. It is the responsibility of counsel to notify the judge of their desire to restrict audio from the internet.

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Bankruptcy Appellate Panel Overturns New Hampshire Beeman Decision

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by Deirdre Keady
Harmon Law Offices, P.C. – USFN Member (Massachusetts, New Hampshire)

The Bankruptcy Appellate Panel (BAP) recently issued an opinion that essentially overturned a longstanding practice in New Hampshire bankruptcy courts recognizing a debtor’s ability to include foreclosed property in a Chapter 13 reorganization, provided the foreclosure deed had not been recorded prior to the Chapter 13 filing. [TD Bank v. LaPointe (In re LaPointe), BAP No. NH 13-029 (B.A.P. 1st Cir. Feb. 24, 2014)].

Since the Beeman opinion was issued in 2009 (ruling that a debtor could file a Chapter 13 reorganization and include foreclosed property as long as the foreclosure deed was not recorded), it had become commonplace for debtors to file Chapter 13 cases post-foreclosure auction, which would then require the sales to be rescinded. Beeman was not appealed.

In the LaPointe case, the bankruptcy court denied TD Bank relief from stay to record the foreclosure deed. The facts in LaPointe were essentially the same as in Beeman. TD Bank appealed to the BAP, which ruled that the New Hampshire Bankruptcy Court erred in failing to grant the bank relief from stay and remanded the case back to the bankruptcy court to enter an order granting relief from stay. The BAP held that NH state law does not recognize a mortgagor’s right of redemption after the gavel has fallen and the memorandum of sale is signed; therefore, the bankruptcy court could not give the debtor any more rights than state law allowed.

The LaPointe case is likely to be appealed so, for now, it is still advisable to seek relief from the automatic stay prior to recording a foreclosure deed when a post-auction bankruptcy has been filed.

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Kansas: Appeals Court Upholds Denial of Lender Liability Claims

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

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

In Tang v. Bank of Blue Valley, 2014 WL 702404 (Kan. Ct. App. Feb. 21, 2014), Kim Tang and Tong Bui not only sued the bank seeking to be relieved of their liability to the bank for a loan originally made to their contractor, but also for substantial money damages allegedly sustained. The bank filed a counterclaim requesting recovery on the loan represented by a note secured by a mortgage or for any deficiency that might result. The Kansas Court of Appeals affirmed the trial court’s decision that granted summary judgment to the bank on all issues.

The bank originally had made a loan to a contractor to acquire the land and to build a house for Tang and Bui. The record disclosed that Tang and Bui were aware that the contractor had used all of the loan proceeds, yet the house was not complete. With the loan coming due and the contractor out of money, Tang and Bui signed on to the loan at a reduced interest rate and the maturity date was extended. After several extensions, Tang and Bui stopped paying interest on the loan and filed suit against the contractor and the bank, asserting several legal theories. The bank counterclaimed seeking a money judgment on the note and foreclosure of the mortgage. The lower court granted judgment in favor of the bank; Tang and Bui appealed.

Tang and Bui contended that the district court erred in holding that: (1) their agreement to become obligors on the loan was supported by legally sufficient consideration; (2) the bank owed them no fiduciary duty; and (3) the bank did not breach any implied duty of good faith and fair dealing.

The appellate court held that the reduction in the interest rate was legally sufficient consideration. However, the court declined to consider the sufficiency of the bank’s additional claimed consideration of the exercise of forbearance in not proceeding to exercise its right to enforce the note at maturity and proceed with suit, if necessary, to recover on the note and to foreclose the mortgage securing the loan, thus allowing Tang and Bui the chance to be able to complete construction of the house and to acquire the property, while benefiting from the funds they personally had put into the transaction.

As to the bank’s alleged breach of fiduciary duty, the appellate court, citing prior Kansas case law, held that the bank did not occupy a fiduciary position in making a construction loan and had no legal duty to police the progress or quality of the builder’s work. The court also stated that there was nothing in the record to demonstrate special circumstances to convert a typical lender-borrower relationship into a fiduciary one. Furthermore, the appellate court held that the bank did not violate its implied duty of good faith and fair dealing governing the loan agreement. In summary, the court stated that the bank did nothing to interfere with Tang’s and Bui’s rights under the loan agreement. Lastly, the court of appeals ruled that no disputed issue of material fact nor legal theories were presented which would allow Tang and Bui to go forward with their claims against the bank or preclude the bank from enforcing its rights under the loan agreement. As a result, the judgment of the lower court in favor of the bank was affirmed.

In conclusion, this case confirms three legal principles: (1) Legal sufficiency of consideration does not rest on the comparative economic value of the consideration and of what is promised in return; (2) Absent special circumstances, the lender-borrower relationship creates a creditor-debtor relationship, not a fiduciary relationship; and (3) The implied duty of good faith and fair dealing governing a loan agreement requires that the parties refrain from intentionally doing anything to prevent the other party from carrying out the agreement or which would have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.

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Connecticut: False Certification re Notice gives Court Authority to Open Foreclosure Judgment

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by Jennifer M. Jason
Hunt Leibert – USFN Member (Connecticut)

In Wells Fargo Bank, N.A., Trustee v. Melahn, (AC 34726), the defendant appealed the trial court’s denial of his motion to open the judgment of strict foreclosure, which had entered in favor of the plaintiff Wells Fargo. The appellate court concluded that in “rare and exceptional circumstances” the trial court has the jurisdiction and authority to open a judgment of strict foreclosure even though title has already vested with another party. The appellate court thereby reversed the trial court’s denial and remanded the case for further proceedings.

Case Summary — On September 9, 2010, the plaintiff commenced a foreclosure action against the defendant. A judgment of strict foreclosure entered against the defendant (who had not appeared in the matter) on November 22, 2010, with a law day of January 11, 2011. Pursuant to the uniform foreclosure standing orders (form JD-CV-104), a letter must be sent to all non-appearing defendants who have an ownership interest in the property. The letter must be sent within ten days of the judgment, state that a judgment of strict foreclosure has been entered, and advise the defendant that he may lose the property on the law day if he fails to take any steps to protect his interest. The letter must be sent by regular and by certified mail, and proof of such must be filed with the court. A certificate of foreclosure cannot be filed on the land records until proof of the mailing has been filed with the court.

The plaintiff did not send the notice of judgment until January 7, 2011, some 46 days after the entry of judgment and only four days before the law day. The certified copy of the notice was not received by the defendant until January 11, 2011, his actual law day. Even though the letter was sent late and failed to provide all of the information as outlined by the standing orders, the plaintiff certified to the court that the notice had been mailed in accordance with those orders.

The defendant retained legal counsel, who filed an appearance on February 22, 2011, and a motion to dismiss was filed on March 31, 2011. Both the appearance and motion were filed after the plaintiff had taken title to the property. The court opened the judgment of strict foreclosure and granted the defendant’s motion to dismiss on July 14, 2011, some six months after title passed, based on the plaintiff’s failure to comply with the notice requirement of the standing orders. However, the plaintiff filed a motion to reargue on August 24, 2011, citing Falls Mill of Vernon Condominium Assn., Inc. v. Sudsbury, 128 Conn. App. 314, 320-21, 15 A.3d 1210 (2011), and contended that the court did not have the authority to open the judgment or dismiss the action because the law day had passed and title had already vested with the plaintiff. The defendant argued that the opening and dismissal of the judgment were a proper sanction against the plaintiff for its false certification of compliance with a court order. The trial court vacated its prior order and then denied the defendant’s motion to dismiss.

Upon appellate review, the court reiterated that “a trial court has broad discretion to make whole any party who has suffered as a result of another party’s failure to comply with a court order.” AvalonBay Communities, Inc. v. Plan & Zoning Commission, 260 Conn. 243, citing Nelson v. Nelson, 13 Conn. App. 355, 367, 536 A.2d 985 (1988) and Clement v. Clement, 34 Conn. App. 641, 647, 643 A.2d 874 (1994). The court distinguished the facts of this case from Falls Mill of Vernon Condominium Assn., Inc. v. Sudsbury, because the defendant there was not a non-appearing owner and there were no allegations that the plaintiff falsely certified compliance with a court order. The appellate court was silent on whether dismissing an action is a proper sanction for non-compliance or for a false certification, stating that the “appropriate sanction, if any, is discretionary and may be reconsidered by the court on remand.” It also was not clear if the defendant in the present matter received notice from the court advising of the judgment and law day and what impact that may have had on the court’s decision (Melahn, fn. 5).

The appellate court further addressed Conn. General Statutes § 49-15, which states that a judgment of strict foreclosure cannot be opened “after the title has become absolute in any encumbrancer.” It concluded that foreclosure is an equitable action and the trial court has continuing jurisdiction over equitable matters, particularly when a party is denied the opportunity to present a defense because of fraud, accident, mistake, or surprise. In this case, the defendant was not provided with requisite notice prior to his law day and the plaintiff misrepresented to the court its compliance with the standing orders regarding that notice. These unusual circumstances are sufficient for the trial court to retain jurisdiction in order to provide an adequate remedy.

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Exclusion of Gain in Sale of “Main Home”

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

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

IRS provision 26 U.S.C. § 121 discusses the issue of exclusion of gain from the sale of a principal residence. Specifically, the section states that, “Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”

For the tax practitioner or layman, IRS Publication 523 tracks and clarifies 26 U.S.C. § 121 with respect to “Selling Your Home” for use in preparing 2013 tax returns. As Publication 523 notes, “If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases).”

To qualify for this maximum exclusion of up to $250,000 for a single filer and $500,000 for a joint filer, it is necessary that this exclusion is on a “main home.” Typically, one’s main home would include the home lived in most of the time, whether this is a house, houseboat, mobile home, cooperative apartment, or condominium. Factors relevant in determining which home is one’s main home include: (1) your place of employment; (2) the location of your family members’ main home; (3) your mailing address for bills and correspondence; (4) the address listed on your: (a) federal and state tax returns; (b) driver’s license; (c) car registration; and (d) voter registration card; (5) the location of the bank you use; and/or (6) the location of recreational clubs and religious organizations in which you are a member.

Having met the “main home” requirement, it is then necessary to meet an (1) ownership test and (2) use test during the prescribed period of time, as indicated in the statute. This means that during the 5-year period ending on the date of the sale, one must have:

  • Owned the home for at least two years (the ownership test), and
  • Lived in the home as your main home for at least two years (the use test).


The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. For example, you meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 x 2) during the five-year period ending on the date of sale.

Generally speaking, if you can exclude all the gain, you do not need to report it on your tax return. However, if you have a gain that cannot be excluded, you generally must report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses.

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Minnesota: Post-Foreclosure Evictions

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by Kevin T. Dobie
Usset, Weingarden & Liebo, PLLP - USFN Member (Minnesota)

In a helpful case for those wishing to evict occupants following a mortgage foreclosure, the Minnesota Court of Appeals determined in Deutsche Bank National Trust Company v. Hanson, __ N.W.2d __, 2014 WL 30389 (Minn. App. Jan. 6, 2014), that a district court can enter an eviction judgment in favor of a foreclosing lender without addressing the defendant’s claim that the lender’s title is flawed. A pending lawsuit regarding the validity of the mortgage does not require a stay of the eviction proceedings.

The pertinent eviction statute and prior decisions from the Minnesota Court of Appeals provide that to evict a holdover occupant a foreclosing lender need only show that (1) a foreclosure occurred, (2) the redemption period expired, (3) the eviction plaintiff is the holder of the sheriff’s certificate of sale, a successor, or assignee, and (4) the defendant is holding over. Evictions are summary proceedings and lawsuits contesting title must be filed in a separate action.

Following a mortgage foreclosure and expiration of the statutory redemption period, former owners and eviction defendants seeking to challenge the eviction in Minnesota often claim that a lender’s foreclosure is defective and, therefore, the lender cannot proceed with the eviction. These eviction defendants often start a lawsuit quickly after the eviction complaint is filed or have already filed a separate lawsuit disputing the lender’s title.

The eviction defendants frequently claim that Bjorklund v. Bjorklund Trucking Co., 753 N.W.2d 312 (Minn. App. 2008), requires the eviction court to stay the eviction pending the outcome of a separate lawsuit because, in Bjorklund, the Minnesota Court of Appeals held that a district court abused its discretion where it refused to stay an eviction action when defenses or counterclaims that are essential in the eviction are also at issue in a previously-filed lawsuit.

The Hansons argued that Bjorklund required the district court to stay the eviction until Deutsche Bank could establish the validity of the foreclosed mortgage. The Hansons did not dispute that they executed a mortgage. Instead, they claimed it was invalid because they had rescinded the loan transaction under the Truth in Lending Act. The holding in Hanson concluded that Bjorklund did not govern the foreclosure-related eviction, with the court determining that the most significant distinction was that in Bjorklund the occupant’s defense hinged on an alleged agreement to transfer the real estate to the occupant and the district court in Bjorklund found that some of the claims in the previously-filed lawsuit were essential to the transfer agreement defense. Also of note, the Bjorklund plaintiff sought to evict based on an alleged oral lease and a lease termination notice.

The Hanson court ruled that because eviction proceedings adjudicate only the right to present possession, a dispute over the validity of the mortgage [or likely the foreclosure] did not trigger the Bjorklund stay requirement. The Hansons’ claim that the lender’s title was flawed was not an issue central to the eviction proceeding and “the district court correctly concluded that it could proceed without addressing [the Hansons’ title claims].”

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Pennsylvania: Two Important Judicial Rulings for Lenders

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by Louis P. Vitti
Vitti & Vitti & Associates. P.C. – USFN Member (Pennsylvania)

A recent Pennsylvania case, Hirsch v. Citimortgage, 2:13-cv-1344, involved allegations of breach of contract and the Unfair Trade Practices and Consumer Protection Law (UTPCPL) against Citimortgage. The lender raised res judicata as a defense, asserting that the claims could no longer be made by virtue of the judgment entered in the foreclosure action.

As background in Hirsch, the borrowers had been in a Chapter 7 proceeding, were discharged from the bankruptcy, and were making their monthly mortgage payments continuously. After determining that there were tax liens on the property, the lender required satisfaction of those items and refused to accept payments until such liens were removed.

In a rather lengthy, well-thought opinion, the court indicated that since defenses to mortgage foreclosure in Pennsylvania may only arise at the time of the loan being made and counterclaims are otherwise not permitted, the prior judgment in a foreclosure could not act as a bar to the claims made in the instant case for bad faith and breach of contract. (Pennsylvania Rules of Civil Procedure provide that a party in foreclosure may plead a counterclaim only when the cause of action is part of, or incident to, the creation of the mortgage itself.)

The borrowers were unable to identify a specific contractual provision that was breached. The court looked to whether there was a breach of the implied covenant of good faith and fair dealing, holding that there is such an implied covenant in every Pennsylvania contract. The implied covenant breach was not properly pled, and the court dismissed the claim. In its final ruling, however, the court permitted an amendment of the complaint to cure the deficiency.

Additionally, the court reviewed the UTPCPL claim, holding that in accordance with Pennsylvania law the borrower-plaintiffs must establish that they “justifiably relied on the information (or misinformation) presented by” the lender, “that they engaged in some detrimental activity based on the Defendant’s conduct. Moreover, they must show that they suffered damages as a proximate result of such reliance.” The court ruled that the complaint failed to sufficiently allege the violation because the borrowers did not sufficiently plead all of the elements of the violation of the UTPCPL-catchall provision. This second count of the borrowers’ complaint was dismissed as well, with the court also granting leave to amend.

Act 91 Notice & Assignment Recording
Another case in Pennsylvania, Citimortgage v. Smiler, 61 Chester County Law Reporter 433, clears up a procedural matter facing lenders in foreclosure proceedings and allows some positive relief. The required Act 91 notice sent to borrowers before initiating foreclosure may be sent to the borrowers prior to the recording of the assignment of mortgage to the plaintiff-lender; such recording of assignment after issuance of the Act 91 notice to the borrowers does not invalidate the notice.

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Illinois: St. Clair County Mediation

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by Andrew Nelson
Pierce & Associates, P.C. – USFN Member (Illinois)

One of the advantages of mediation is that when conducted appropriately, it creates an open forum for the parties to freely communicate to reach a mutually-beneficial alternative to foreclosure when possible. The goals and structure of mediation vastly differ from the objectives and procedures of litigation. Therefore, the two courses of action should remain separate. However, the St. Clair County mediation rules attempt to merge the two processes together to the detriment of fairness and efficacy.

Pursuant to the St. Clair County foreclosure mediation program (FMP) rules, “unless ordered by the court, no discovery shall take place until after the mediation is complete.” However Section 4 of the rules violates the aforementioned aspect of the program by essentially commanding unilateral discovery requests of the plaintiffs, imposing an onerous and undue burden on plaintiffs to produce documentation that contravenes the purpose of mediation and rises to the level of litigation.

Section 4 of the FMP rules requires lender representatives to provide the following extensive list of documents at the first pre-mediation conference:

  1. Proof of the plaintiff’s standing to file the foreclosure
  2. Proof of the mortgage holder’s standing and status as the real party in interest
  3. Any pooling and servicing agreement
  4. Loan origination documents
  5. The appraisal at the time of the loan origination and any subsequent appraisal
  6. Payment history records with respect to the mortgage, including all fees and costs incurred
  7. An itemization of the amounts needed to cure and payoff the mortgage
  8. The lender’s current loan modification packet


This author’s firm suggests that an objection is appropriate to several of the aforementioned documentation requirements because the requisites are unreasonable and burdensome within the context of a mediation program.

Proof of the Plaintiff’s Standing to File the Foreclosure Complaint

The St. Clair County foreclosure mediation program is an opt-in one. Defendants receive a mediation program notice and a foreclosure mediation request form along with their summons. Defendants must execute the mediation request form if they wish to participate in mediation. Therefore, the defendants cannot challenge the plaintiff’s standing to foreclose while simultaneously seeking mediation with the same plaintiff.

Proof of the Mortgage Holder’s Standing & Status; PSAs; Loan Origination Docs; Appraisals
The concern with the above-listed items 2, 3, 4, and 5 is that they constitute discovery requests. Court rules and Illinois Rules of Evidence govern the discovery procedure, which would be circumvented by the demands of this foreclosure mediation program. Requiring plaintiffs to produce these documents without adhering to the formality of discovery requests and without the plaintiffs’ ability to object, overextends the scope and function of the mediation program. Moreover, a plaintiff’s failure to provide these items exposes it to undue liability for failing to participate in good faith. Accordingly, this author’s firm recommends considering an objection to the production of these items as a violation of the foreclosure stay, which is to remain in effect throughout mediation.

Any challenges to the mortgage holder’s standing or to the terms of a pooling and servicing agreement are not appropriate for a mediation setting, as there is no decision maker present to resolve the dispute. Mediators must remain neutral and impartial. Therefore, these types of issues are to be addressed within the established framework of litigation in compliance with the Illinois Rules of Civil Procedure.

Conclusion
Notwithstanding that Section 4 of these FMP rules is excessively broad and obfuscates the role of the mediation process, this author’s firm remains committed to mediating in good faith. However, appropriate objections should be considered in each case.

© Copyright 2014 USFN and Pierce & Associates, P.C. All rights reserved.
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Wisconsin: Abandoned Properties in Foreclosure

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by William (Nick) Foshag
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Under Chapter 846, Wis. Stats., the foreclosure process in Wisconsin after judgment but before sale has traditionally been driven by the creditor. A recent interpretation of Wis. Stat. § 846.102 by the Wisconsin Court of Appeals appears to put the debtor, or the city, in the driver’s seat as well, at least in relation to abandoned properties. The Bank of New York v. Carson, Appeal No. 2013AP544 (Wis. Ct. App. Dist 1, Nov. 26, 2013).

Wis. Stat. § 846.102 was revised in 2011. The language at issue provides in part that, “the sale of such mortgaged premises shall be made upon the expiration of 5 weeks from the date when such judgment is entered.” Similar language is found throughout Chapter 846 but has never before been interpreted to mean that a sale is mandatory after a judgment of foreclosure is entered, and has never before been interpreted to mean that a sale must be held within a certain period of time.

In April 2011, the creditor in Carson obtained a default foreclosure judgment with a waiver of any deficiency under Wis. Stat. § 846.103(2), allowing for a three-month redemption period. In November 2012, Carson filed a motion relying upon § 846.102, asking that the judgment be amended to indicate that the property had been abandoned, and asking the circuit court to order the creditor to schedule a sheriff’s sale. The circuit court agreed with the creditor that it did not have the authority to order a sale, and Carson appealed.

The Court of Appeals interpreted § 846.102 to allow any party to the case (not just the creditor) and the city to support a request for finding the property to be abandoned. Next, it interpreted the word “shall” of § 846.102 to mandate that the creditor schedule a sheriff’s sale upon the expiration of the five-week redemption period.

The Carson decision raises more questions than it answers; e.g., must the creditor enter a bid at the sale? Must the creditor then move to confirm the sale; and, if so, when? Wis. Stat. § 846.18 addresses “tardy confirmation of sale,” allowing the purchaser at a sheriff’s sale who has taken possession to move the court to confirm the sale.

The Bank of New York has petitioned the Wisconsin Supreme Court for review; however, if the petition is denied, or if the Carson holding is not overturned, foreclosing creditors must seriously consider the impact of their decision to obtain a judgment of foreclosure.

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Arizona: “Show Me the Note” — Again?

Posted By USFN, Tuesday, March 4, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

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

Arizona may be facing a “show me the note” redux. The Arizona Court of Appeals issued its opinion in Steinberger v. McVey ex rel. Cnty. of Maricopa, __ P.3d __, 2014 WL 333575 (Ariz. Ct. App. Jan. 30, 2014), and the opinion seems to rejuvenate the “show me the note” defense to foreclosure. This is especially surprising in light of the fact that the Arizona Supreme Court shut down the “show me the note” defense in its opinion in Hogan v. Washington Mutual Bank, N.A., 230 Ariz. 584, 277 P.3d 781 (2012).

In Hogan, a “show me the note” case, the Supreme Court wrote: “[w]e hold that Arizona’s non-judicial foreclosure statutes do not require the beneficiary to prove its authority or ‘show the note’ before the trustee may commence a non-judicial foreclosure.” The court based its holding on a careful review of the relevant statutes and on policy considerations. On the policy side, the court stated: “The legislature balanced the concerns of trustors, trustees, and beneficiaries in arriving at the current statutory process. Requiring the beneficiary to prove ownership of the note to defaulting trustors before instituting non-judicial foreclosure proceedings might again make the mortgage foreclosure process ... time-consuming and expensive, and re-inject litigation, with its attendant cost and delay, into the process.”

Arizona’s state and federal courts had already concluded that the “show me the note” argument was meritless and, with Hogan, Arizona’s highest court seemed to settle the matter once and for all. At least until late January, when the Arizona Court of Appeals issued Steinberger.

Steinberger is a lengthy opinion that deals with a number of different causes of action, but it is its treatment of the “show me the note” argument and of Hogan that stands out. In Steinberger, the court of appeals holds that the plaintiff did state a cause of action based on allegations that the beneficiary lacked authority to foreclose; i.e., based on a “show me the note” argument. The court of appeals attempts to distinguish Hogan on the basis that in that case, the borrower did not “affirmatively allege” that the entity pursuing foreclosure lacked authority to do so, whereas Steinberger did so allege. And although the Steinberger opinion acknowledges that the holding in Hogan was premised partly on the idea that non-judicial foreclosure sales are intended “to operate quickly and efficiently ... and that litigation inevitably slows down the foreclosure process,” Steinberger nevertheless appears to have re-injected litigation into the non-judicial foreclosure process, at least in cases where the borrower alleges that the wrong entity is pursuing foreclosure, which is in nearly all of the “show me the note” cases.

Steinberger is likely to be appealed and, if the Arizona Supreme Court grants review, Arizona may again have clarity on this important issue.

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Tennessee: Appellate Court Reviews Whether Borrower has Right to Mortgage Modification

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

  

by Edward D. Russell
Wilson & Associate, PLLC – USFN Member (Arkansas, Tennessee)

The Tennessee Court of Appeals has confirmed that a lender is not obligated to modify and restructure a mortgage loan under the Home Affordable Modification Program (HAMP) unless the borrower under the mortgage loan alleges the existence of a contract requiring the lender to restructure the mortgage in the event of a default. [Berry v. Mortgage Electronic Registration Systems, No. W2013-00474-COA-R3-CV (Tenn. Ct. App. Oct. 15, 2013)].

In 2012, after the plaintiff defaulted on her 2004 mortgage, the lender informed her that foreclosure would commence. The plaintiff filed a complaint in Shelby County Chancery Court seeking declaratory judgment and obtained a temporary restraining order. After the plaintiff filed an amended complaint, defendants MERS and Wells Fargo Bank filed an answer and a motion for judgment on the pleadings. The chancery court entered an order granting the motion. The plaintiff then appealed that order.

On appeal, the plaintiff initially argued that the amended complaint was sufficient to survive the motion because the amended complaint was sufficient to obtain a temporary restraining order. The appellate court rejected this argument, properly acknowledging that the TRO was entered ex parte the day before the scheduled foreclosure sale and was granted merely to preserve the status quo pending resolution of the underlying dispute. The appellate court noted that the standards governing a TRO and motions to dismiss are different.

The appellate court reiterated Tennessee law that “parties to a contract owe each other a duty of good faith and fair dealing as it pertains to the performance of a contract.” However, the appellate court also confirmed that in Tennessee that duty does not create new contractual rights or obligations and cannot be used to circumvent or alter specific terms of the parties’ agreement. In noting that the duty is not an independent basis for relief, but merely an element or circumstance of recognized torts or breaches of contract, absent a valid claim for breach of contract, there is no cause of action for breach of the implied covenant of good faith and fair dealing.

In Berry, the appellate court determined that the plaintiff’s cause of action for breach of the implied covenant was properly dismissed, as the plaintiff’s claim that defendants breached the implied covenant in failing to agree to a loan modification and failing to comply with the HAMP program did not allege a contract between herself and the defendants that required the restructuring of her mortgage loan in the event of default, and the plaintiff failed to even allege a breach of contract by defendants.

The appellate court determined that the plaintiff’s cause of action for intentional misrepresentation or fraud should not have been dismissed as the plaintiff asserted sufficiently-specific allegations of falsely-represented signatures on the deed of trust at the time of the recording of the trust deed, leading to the defendants not having the right to foreclose as they held no interest in the property. Additionally, the appellate court determined that it was at least plausible that the plaintiff could not have discovered the allegations until foreclosure were commenced, thus tolling the statute of limitations under Tennessee’s “discovery rule.”

To be clear, the plaintiff’s allegations of falsely-represented signatures on the deed of trust at the time of recording are the basis of the appellate court’s remand of the fraud action. The plaintiff’s assertion that the defendants engaged in a pattern and practice of fraudulent conduct, including underwriting fraudulent mortgages, not following unstated requisite legal procedures, concealing unstated facts and somehow misleading investors, were all deemed by the appellate court as insufficient to overturn the chancery court’s order.

The matter was remanded back to the Shelby County Chancery Court for further proceedings as to the remaining claim of fraud based on intentional representation.

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Rhode Island: Regulator to Seek Legislation re Licensing Mortgage Loan Servicers

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Patricia Antonelli
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

At the January 28, 2014 meeting of the Rhode Island governor’s insurance council, the Deputy Director and Superintendent of Banking for the RI Department of Business Regulation (DBR) stated that the DBR will seek legislation that will require the licensing of mortgage loan servicers. It is expected this legislation will include RI requirements for servicers that parallel or expand upon the new requirements for mortgage loan servicers implemented at the federal level in January 2014.

The federal Consumer Financial Protection Bureau (CFPB) implemented new mortgage loan servicing regulations effective January 10, 2014. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the new regulations amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), and they amend Regulation Z, which implements the Truth in Lending Act (TILA).

The amendments to Regulation X address servicers’ error resolution obligations, changes to the “Qualified Written Request” rules, and new protections for borrowers in connection with lender-placed insurance. The amendments also address loss mitigation rules for delinquent borrowers. The amendments to Regulation Z affect servicers’ disclosure obligations regarding transfers of servicing, periodic billing statements, payment crediting and payoff statements, interest rate adjustment notices, and management of escrow accounts.

As more develops on these topics, look for future alerts regarding Rhode Island licensing requirements for mortgage loan servicers and on the changes to federal RESPA and TILA laws and regulations that affect mortgage loan servicing.

© Copyright 2014 USFN and Partridge Snow & Hahn, LLP. All rights reserved.
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Rhode Island: Supreme Court Rules re Standing

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Nikolaus S. Schuttauf
Brennan, Recupero, Cascione, Scungio & McAllister, LLP – USFN Member (Rhode Island)

Late last year, the Rhode Island Supreme Court held that “homeowners in Rhode Island have standing to challenge the assignment of mortgages on their homes as being void to the extent necessary to contest the foreclosing entity’s authority to foreclose.” Mruk v. Mortgage Electronic Registration Systems, Inc., 2013 R.I. LEXIS 163, 20 (R.I. Dec. 19, 2013). By giving homeowners standing, the Supreme Court carved out an exception to the general law in Rhode Island that “strangers to a contract lack standing to either assert rights under that contract or to challenge its validity.” Prior to the Supreme Court’s decision, the Rhode Island Superior Court had uniformly applied the general law in Rhode Island, finding that homeowners do not have standing to contest the assignment of a mortgage on their home.

The Supreme Court based its decision on the following grounds:

  1. “a homeowner whose home is foreclosed has suffered a concrete and particularized injury that gives the homeowner a personal stake in the outcome of litigation challenging the foreclosure”;
  2. “there is a causal connection between the injury (the foreclosure) and the challenged action” because “the assignment of the mortgage is the basis of the right to foreclose being asserted by the foreclosing entity”; and
  3. “the injury would be redressed by a decision in the plaintiff’s favor; if we hold that the assignment of a mortgage was, in fact, invalid, then a foreclosure sale conducted pursuant to the invalid assignment would be unlawful and therefore void.”


The Supreme Court noted the exception to the general rule is narrow, however. The exception is “confined to the circumstances of a mortgagor challenging an ‘invalid, ineffective, or void’ assignment of the mortgage. … We further reiterate that this exception is confined to private residential mortgagors challenging the foreclosure of their homes.” Mruk, p. 19.

Although Rhode Island homeowners now have the right to challenge the assignment of the mortgage on their homes, the Supreme Court made it clear that homeowners must have some concrete grounds for seeking to invalidate the assignment of their mortgage. In fact, the Supreme Court rejected every argument the homeowner made as to why the assignment of the mortgage on his home was invalid:

  1. The Supreme Court reaffirmed its decision in Bucci that MERS may act as the nominee for the owner of the note, be named as the mortgagee in the mortgage, and exercise the statutory power of sale.
  2. The Supreme Court also reaffirmed its holding that the note and the mortgage did not need to be held by one entity.
  3. The Supreme Court rejected the homeowner’s arguments challenging the validity of:
  • the endorsement of the note in blank, which is a valid signature for negotiating a note under Article 3 of the Rhode Island Uniform Commercial Code,
  • the signature on the mortgage assignment, noting the homeowner’s conclusionary allegations were devoid of fact and insufficient to raise a triable issue, and
  • the affidavit of an IndyMac employee regarding the records and documents at issue in the case, as the homeowner failed to submit any evidence that the employee did not have personal knowledge of the business records in question.


For banks, mortgage companies, and mortgage servicers (MERS Members), there are important lessons to take from the Mruk decision.

  1. First and foremost, MERS Members will no longer be able to use the third-party standing defense to compensate for any errors in negotiations of the note or assignments of the mortgage.
  2. Mruk underscores the critical importance of properly executing assignments of mortgages and negotiations of notes. Homeowners, armed with standing, may now use any error in the execution of an assignment or a note as a ground for invalidating a foreclosure.
  3. MERS Members must provide court-sufficient documentation regarding the authority of the individuals signing assignments and notes. The “robo-signing” argument, which questions the signing authority of the individual who executed an assignment, has been a favorite of homeowners to assert against defendant MERS Members. MERS Members should be prepared for homeowners, armed with standing, to press the “robo-signing” assertion with new vigor.


In the big picture, Mruk is neither a magic elixir to make a default disappear nor an escape hatch to dodge an otherwise valid foreclosure. As with the defendants in Mruk, MERS Members can win on the merits so long as each foreclosure is handled with attention to detail and proper documentation. There is no denying that Mruk turns up the heat on MERS Members, however, as homeowners now can, and will, use their standing rights to scrutinize every aspect of the assignments of mortgage and the negotiation of notes.

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North Carolina: Statutory Changes re HOA/COA Assessments Following Mortgage Foreclosure

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Lanèe Borsman
Hutchens Law Firm – USFN Member (North Carolina)

House Bill 331/Session Law 2013-202

The North Carolina legislature has amended the provisions of Chapter 47 of the North Carolina General Statutes dealing with the lien of homeowners and condominium association dues. North Carolina is not a “super lien” state. When the holder of a first mortgage forecloses, the purchaser at the foreclosure sale has historically been liable only for HOA/COA dues incurred from the date of the “acquisition of title” to the property. Until now, the “acquisition of title” date was generally regarded as the date the trustee’s foreclosure deed was recorded. This was true even on an FHA loan where the assignment of the bid to HUD could mean a delay in the recording of that deed for long periods of time. The past-due HOA/COA amounts that had accrued against the borrower are pro-rated among all of the property owners, so the longer the delay in the recording of the foreclosure deed, the more concerned the homeowners shouldering the burden became, and they let their legislature know it.

The change comes via clarification of the definition of “acquisition of title.” Going forward, the determinative date is the day the “rights of the parties become fixed,” otherwise known as the end of the upset bid period, which is typically 10 days after the sale date. The result of this change is that upon the foreclosure of a first lien, any homeowners/condominium association dues will start accruing against the purchaser on the day of confirmation of the foreclosure sale, no matter when the foreclosure deed is actually recorded. FHA conveyances will have to be watched very closely now, because if the dues are not paid, HUD and the servicer risk losing the property to an HOA/COA foreclosure before the conveyance even goes on record.

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Minnesota: New Judicial Ruling on Right to Reinstatement

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014 

 

by Paul Weingarden
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

Following last year’s decision in Ruiz v. First Fidelity, 829 N.W.2d 53 (Minn. 2013), where the Minnesota Supreme Court declared that strict compliance was necessary in the foreclosure process to prevent a void foreclosure, a U.S. District Court in Minnesota has now interpreted the Minnesota reinstatement statute to require a 24-hour turnaround time in responding to a borrower’s request for reinstatement or else the sale is void, unless there is proof that the homeowner did not have access to funds sufficient to reinstate.

In Nelson v. Saxon Mortgage and FNMA, the federal district court issued an order denying the lender’s request for summary judgment where the owner requested reinstatement seven days before the sale but asserted he did not receive it until the day before. Although there was evidence the lender called three days after the owner’s request, the court thought that the lender response did not meet the requirements of the statute.

Reinstatement is governed by Minn. Stat. § 580.30, which mandates the right to reinstatement AT ANY TIME prior to the foreclosure sale (emphasis added). There is no case law interpreting this provision. This author’s firm has generally believed that so long as the amount is communicated prior to sale, the statutory requirements have been met; or, if the reinstatement figure was supplied right before sale, so that the right to reinstate might arguably be frustrated, we would recommend postponing the sale.

In Nelson, the court was not interested in the timeline presented, nor did it consider whether the phone call three days hence was sufficient. In a discussion on the right to reinstate, the court established a “bright line” rule that the reinstatement figure must be tendered within 24 hours of request. Moreover, unless it could be found that the borrower did not have access to the necessary funds to reinstate, the foreclosure would be voided. The case was remanded for trial on the issue of the homeowner’s access to funds, an “after-the-fact” analysis that may ultimately result in an adverse decision given the limited amounts in controversy.

While this decision is NOT binding precedent (such as a published Minnesota Supreme Court or Minnesota Court of Appeals decision, or an Eighth Circuit federal opinion), it is troubling nonetheless. The judge is a respected jurist and a possible flood of cases pointing to this strict compliance standard may be anticipated. At trial, it is possible that the court will alter its stance, or that the case may be appealed on the timeliness issue. However, until then, this serves as a cautionary word on the right to reinstatement as interpreted by a sitting judge in the absence of a legislatively-imposed requirement.

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Massachusetts: Post-Foreclosure Evictions

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

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

In Bank of America v. Rosa, 466 Mass. 613 (2013), the Massachusetts Supreme Judicial Court (SJC) expanded the rights of former mortgagors to challenge foreclosures and to seek monetary damages in post-foreclosure eviction cases. Massachusetts law governing eviction cases permits counterclaims, but limits those claims to cases involving properties “rented or leased for dwelling purposes.” Mass. G.L. c. 239, § 8A. In Rosa, the SJC declined to apply this limitation to post-foreclosure eviction cases. As a result, eviction courts may consider foreclosure-related counterclaims, including claims that would overturn the nonjudicial foreclosure. The courts may also award damages for these claims.

Before Rosa, parties seeking to have a foreclosure set aside on grounds other than a challenge to title based on a failure to strictly comply with the power of sale provided in the mortgage had to bring a separate lawsuit in a court of general equity jurisdiction. In Rosa, the SJC reasoned that, as a result of legislative changes to the jurisdiction of the trial courts, courts hearing post-foreclosure eviction cases may set aside foreclosures and entertain challenges to title for reasons other than for strict compliance with the statutory power of sale. The SJC cited considerations of judicial economy as the basis for its opinion — i.e., avoiding the need for multiple lawsuits to adjudicate title to, and possession of, a foreclosed property.

Rosa adds further delay, expense, and risk to an already slow and unpredictable eviction process. As a result of Rosa, the preferred forum for former owners to litigate foreclosures will likely shift from the Superior and Land Courts to the much busier District and Housing Courts. Substantive issues concerning loan servicing and loss mitigation may need to be addressed in the eviction case. It is also expected that these cases will include state consumer protection claims, which allow for the doubling or trebling of damages in certain cases and permit trial courts to award attorneys’ fees to a prevailing consumer.

In addition to the inability to obtain possession, the consequences of losing an eviction action to a former owner now include the possibility of significant monetary damages and/or an order setting aside the foreclosure. To mitigate against the inherent delays, risks, and costs of eviction litigation, servicers may want to consider other options such as more aggressive relocation assistance, programs to rent to former owners, and selling REO properties in an occupied status. Servicers may also want to take a proactive approach by foreclosing judicially in Superior Court to address borrower challenges at the beginning of the foreclosure process, rather than wait and face identical claims in Housing Court or District Court at the eviction stage after the foreclosure documents have been recorded.

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Closing Protection Letter Lacking “Successors and Assigns” Language Does Not Lead to Dismissal of Complaint

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Jennifer McGrath
Hunt Leibert – USFN Member (Connecticut)

In JP Morgan Chase Bank N.A. v. Old Republic National Title Insurance Company, Bridgeport Superior Court, CV12-6029085 S (May 6, 2013), defendant Old Republic filed a motion to dismiss the plaintiff’s claim for indemnification under a closing protection letter. Old Republic contended that the absence of “successors and assigns” language prevented assignment.

The originating lender, Washington Mutual, had transferred the note and closing papers to WaMu Trust with LaSalle Bank as Trustee. JP Morgan Chase was the servicer and note holder.

The bank’s complaint alleged:

  • Old Republic issued a letter of protection naming an approved attorney to induce the refinancing lender to advance its monies;
  • The letter of protection promised indemnification for actual losses arising out of either the approved attorney’s failure to follow instructions, or his fraud;
  • The lender advanced its monies conditioned upon obtaining a first mortgage;
  • The approved attorney provided a title binder and policy identifying that the loan would be recorded in a first mortgage position;
  • The approved attorney failed to pay off the prior encumbrances, misappropriated the lender’s monies, and did not record the loan in a first mortgage position.


In objecting to the motion to dismiss, the plaintiff cited JP Morgan Chase Bank and FDIC v. FATIC, 795 F. Supp. 624, 628 (E.D. Mich. 2010), for the title company custom of issuing “a closing protection letter to verify the [approved attorney’s] authority to issue title policies and to make the financial resources of the national title insurance underwriter available to indemnify lenders for the local agent’s errors or dishonesty with escrow funds.”

The plaintiff also pointed to Rumbin v. Utica Mutual Ins. Co., 254 Conn. 259 (2000) and David Caron Chrysler Motors LLC v. Goodhall’s Inc., 304 Conn. 738, 748-9 (2012), as having pronounced a general rule recognizing the necessity of permitting transfer of contractual rights to an assignee and viewing with disfavor attempted restraints on alienation of contractual rights.

In conclusion, Chase noted that Old Republic’s letter of protection had no “anti-assignment” language in it and, instead, provided assurance that the breadth of indemnification language expressly embraced a “lender secured by a mortgage (including any other security instrument) of an interest in land.” What could an assignment of mortgage be “but another security instrument”?

The judge ruled from the bench, sustaining the plaintiff’s objection and denying Old Republic’s motion to dismiss.

Editor’s Note: The author’s firm represented the plaintiff in the proceedings summarized in this article.

© Copyright 2014 USFN. All rights reserved.
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Arkansas Tenancy in Common: Co-Tenants’ Fiduciary Duties Clarified

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Heather Martin-Herron
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Arkansas Supreme Court has clarified a co-tenant’s fiduciary duties that are owed to other co-tenants in a tenancy in common. Skalla v. Canepari, 2013 Ark. 415. Virginia Skalla, Albert McCreary, and Charles McCreary each owned an undivided one-third interest in two tracts of farmland as tenants in common.

In 2004, Joseph Canepari purchased Albert’s one-third interest. A year later, Canepari purchased Charles’s one-third interest. In 2006, Skalla offered to sell her interest to Canepari. Skalla informed Canepari that she intended to make improvements if he did not purchase her interest. No improvements were made to the property, and Canepari declined to purchase the remaining one-third interest. Skalla sued Canepari in 2007 for breach of fiduciary duty and requested a partition of the property.

Skalla contended that when Canepari became a co-tenant with her and Charles in 2004, Canepari owed her a fiduciary duty. Skalla maintained that Canepari breached that duty by acting adversely when he purchased the second one-third interest from Charles. Skalla cited Clement v. Cates, 49 Ark. 242, 4 S.W. 776 (1887) as support for her argument. In Clement, one co-tenant attempted to oust his co-tenant siblings by claiming superior title. It is well-settled law that a co-tenant cannot assert adverse title against his other co-tenants in a tenancy in common.

In a tenancy in common, each co-tenant has the right to occupy the entire property and no co-tenant can lawfully exclude any other co-tenant. If a co-tenant acts in a way that interferes with the other co-tenants’ interests, the interfering co-tenant is in breach of his fiduciary duty. Co-tenants have the right to make improvements on the property, but the improving co-tenant must be indemnified by the remaining co-tenants.

The Clement case did not apply to the situation at hand, as Canepari was not asserting adverse title against Skalla nor was he attempting to oust her. A co-tenant may treat property in any way he or she sees fit, so long as it does not interfere with the rights of the other co-tenants. Canepari had no obligations to contribute to Skalla’s long-term improvement plans and never interfered with Skalla’s rights as a co-tenant. The evidence showed that Skalla was able to lease her interest in the property, collected the rent from those leases, and was never denied access to the property. Although Canepari obtained his two-thirds interest in the property through two separate transactions, Canepari did not act adversely to Skalla when he purchased his second one-third interest. Therefore, because Canepari did not interfere with Skalla’s rights and obligations as a co-tenant, the Supreme Court affirmed the circuit court’s granting of summary judgment in favor of Canepari.

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Response to Notice of Final Cure: Grounds for Case Dismissal?

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Deanna Lee Westfall
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)

In a recent Colorado opinion, the bankruptcy court held that the debtors’ failure to make mortgage payments directly to their mortgage creditor is grounds for denial of a Chapter 13 discharge and dismissal or conversion of a case. See, In re Daggs, BK Case No. 10-16518-HRT.

Chapter 13 plans in the District of Colorado, a non-conduit jurisdiction, indicate the amount of payments to be made to cure the arrears to each secured creditor and separately list post-petition payments to be made directly to the secured creditors throughout the plan term. Historically, debtors would receive their discharge if they made all payments to the trustee, regardless of the status of post-petition direct payments.

Pursuant to Federal Rules of Bankruptcy Procedure Rule 3002.1, mortgage creditors respond to the bankruptcy trustee’s notice of final cure with the status of post-petition direct payments, often indicating that the debtors are significantly behind in their post-petition mortgage payments. The failure to make post-petition mortgage payments as part of the obligations set forth in the plan led the Chapter 13 trustee to move for dismissal of the case immediately prior to discharge. Debtors’ counsel responded with a request for entry of discharge or, in the alternative, a conversion and possible Chapter 7 discharge.

On January 7, 2014, the Chief Judge of the Bankruptcy Court for the District of Colorado held that the failure to timely make payments directly to the debtors’ mortgage creditor, as provided in the plan, constitutes a material default with respect to the confirmed plan. As such, it is grounds for conversion or dismissal under 11 U.S.C. § 1307(c)(6). The court determined that the default (nine months of missed payments for a total of over $11,000) was material.

With regard to the debtors’ request for entry of their discharge, the court found that the failure to make the payments described in the plan to the mortgage creditor prevented the entry of a Chapter 13 discharge.

This case could have wide-reaching ramifications. In addition to eliminating the argument that the debtor is fully current when they clearly are not, converting a case or dismissing it eliminates lien-strips or cramdowns under Section 506. Moreover, the decision effectively reverses any consequences of not filing a proof of claim or errors in the proof of claim.

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The National Mortgage Settlement’s Impact on Vacant Properties

Posted By USFN, Wednesday, February 5, 2014
Updated: Monday, October 12, 2015

February 5, 2014

 

by Stephanie Schilling
RCO Legal, P.C. – USFN Member (Alaska, Oregon, Washington)

Judicial foreclosure can be a lengthy process. There are often numerous attempts at loss mitigation before a home is referred for foreclosure, which means that it may be years from the date of default to commencement of a judicial foreclosure action. While a judicial foreclosure itself should not take longer than six months, this time is usually extended by circumstances beyond the mortgagee’s control, such as bankruptcy filings and difficulty in locating defendants.

The extended period of time it takes to judicially foreclose a property plays one small part in a much larger issue for communities. This larger issue is vacant properties. Outlined below are those circumstances in which vacancy becomes an issue during the course of a judicial foreclosure, and the actions being taken by attorneys general throughout the United States in order to prevent the negative ramifications arising as a result of property abandonment.

Upon referral of a mortgage (or deed of trust) for foreclosure, the mortgagee has usually been made aware as to whether or not the property is owner-occupied or vacant. At the time of referral, a determination as to whether the property must be registered as vacant with the local sheriff must be made. Many communities now require not only the defaulting owner, but potentially the mortgagee, to register the property as vacant in order to notify the sheriff to be watchful for criminal activity such as trespassing and drug abuse. The second point at which vacancy becomes an issue in a judicial foreclosure is during service of process. All parties with a possessory interest in the property must be made aware of the judicial foreclosure action. Finally, if judgment is obtained and the mortgagee becomes the successful bidder at the judicial foreclosure sale, the vacancy of the property will determine whether a post-sale eviction matter must be commenced.

Using National Mortgage Settlement Proceeds

Any delays prior to, or during, a judicial foreclosure can lead to the subject property remaining vacant for months to years. The negative impact of this vacancy and abandonment can result in destructive acts, including the removal of fixtures, metal pipes, and wiring. Once the foreclosure is complete, the foreclosed property may be simply a shell left as a blight to the neighborhood and community. For this very reason, a number of state attorneys general (including Illinois, Ohio, Kentucky, and New York) have begun measures to use the proceeds of the National Mortgage Settlement to raze the properties and restore communities. The hope is that demolishing abandoned properties will restore the community to its former level of neighborhood involvement and open up cities to new development opportunities.

Many cities do not have sufficient resources to accomplish this recovery on their own. The process of foreclosure does not exist within a vacuum, but effects communities — requiring expedited foreclosure of properties that have been abandoned by the owners who promised to pay for them. The solution brokered by several state attorneys general allows the use of National Mortgage Settlement funds to commence a recovery on Main Street that will have a direct economic impact on Wall Street.

For information regarding whether vacant property registration is required in a particular area, a helpful resource is: http://www.safeguardproperties.com/Resources/Vacant_Property_Registration/Default.aspx?filter=vpr.

Additionally, for information regarding the National Mortgage Settlement, please see http://www.nationalmortgagesettlement.com/.

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