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Proposed National Chapter 13 Plan Plus Proposed Amendments to the Federal Rules of Bankruptcy Procedure

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, October 13, 2015

November 14, 2013

 

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

“There is nothing wrong with change, if it is in the right direction.” Winston Churchill

The committee that advises the U.S. Supreme Court on bankruptcy rules and forms has a plan for what a Chapter 13 bankruptcy debtor’s blueprint should look like in each case. Literally.

In all Chapter 13 bankruptcy cases, the debtor must file a repayment plan with the bankruptcy petition or within fourteen days after the petition is filed (Fed. R. Bankr. P. § 3015). A plan must be submitted for court approval and must provide for fixed payments to the trustee on a regular basis. The Chapter 13 trustee then distributes the funds to creditors according to the terms of the plan; which may offer creditors less than full payment on their claims, depending upon classification of the claim.

For the past two years, the Advisory Committee on Bankruptcy Rules, chaired by U.S. Bankruptcy Judge Wedoff (N.D. Ill.), has studied the creation of a national form plan for Chapter 13 cases. The examination has been driven with the primary purposes of bringing more uniformity to Chapter 13 practice, lowering costs, making bankruptcy education easier, and simplifying the review of Chapter 13 plans by debtors, courts, trustees, and creditors. Despite the Constitutional mandate that bankruptcy law is to be uniform, Chapter 13 plans are inconsistent and vary throughout the nation, although many local jurisdictions have created and implemented form Chapter 13 plans for years through localized general orders, rules, and practice.

Federal rules of procedure are adopted by the Supreme Court, subject to contrary Congressional legislation. In exercising its rulemaking authority, the Supreme Court acts through the Judicial Conference of the Unites States. In turn, the Judicial Conference delegates the responsibility for rules proposals to its Committee on Rules of Practice and Procedure, otherwise known as the Standing Committee. The Standing Committee is advised by five advisory committees. Each one deals with a particular set of federal rules: civil, criminal, evidence, appeals, and bankruptcy. Bankruptcy is governed under the United States Constitution, which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const., art. I, § 8, cl. 4.

On August 15, 2013, new bankruptcy rules and forms were unveiled that would mandate a form Chapter 13 plan to be used nationally. Bankruptcy rules, and the forms that implement them, begin in the Advisory Committee on Bankruptcy Rules. Rule amendments generally require at least three years from initial drafting to becoming effective, and forms require at least two years.

The latest proposals seek to press creditors with aggressive timelines and potential penalties and are in line with the sweeping bankruptcy rules and forms changes that were implemented in 2011. (Fed. R. Bankr. P. § 3002.1, effective December 1, 2011, requires mortgage creditors to file notices of payment changes; file notices of post-petition fees, expenses and charges; and to affirmatively respond to notices of final cure within 21 days, under the threat of being ordered to pay expenses and attorneys’ fees and being precluded from presenting any omitted information as evidence in any contested matter or adversary proceeding in the case for failing to comply.)

Why Now?
Historically, creditors, creditors’ counsel, and trustees have carried the burden of poring over scores of Chapter 13 plans — many as unique as a snowflake in content and structure — to determine how the creditor was to be treated. The lurking risk was always that something would be overlooked or that a creditor’s rights would be violated by ambush with illegal plan provisions that were deeply hidden.

Creditors often suggested that uniformity when it came to plan format would be useful and afford appropriate notice of treatment. However, the need for a national form plan became an urgent priority when the U.S. Supreme Court, in 2010, held that an order confirming a Chapter 13 plan, even which included illegal plan provisions, was nevertheless binding. United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010). The Supreme Court went on to hold that bankruptcy judges must independently review Chapter 13 plans for conformity with applicable law. It was this reminder to bankruptcy judges by the Supreme Court that shifted thinking to what many creditors have said all along: there has to be an easier and more uniform way to do this.

The proposed national Chapter 13 plan is the product of more than two years of study and consultation by the advisory committee. The form includes ten parts and two exhibits.

• Part 1: Check-the-box notices intended to highlight to interested parties when the plan includes nonstandard provisions, seeks to limit the amount of a secured claim, and/or requests the avoidance of a lien or security interest.
• Part 2: Amount, source, and duration of the debtor’s plan payments
• Part 3: Treatment of secured claims
• Part 4: Treatment of the trustee’s fees, administrative claims, and other priority claims
• Part 5: Treatment of unsecured claims not entitled to priority
• Part 6: Treatment of executory contracts and unexpired leases
• Part 7: Order of distribution of payments by the trustee under the plan
• Part 8: Defines when property of the estate will revest in the debtor. One choice must be selected: upon plan confirmation, upon closing the case, or upon some other specified event.
• Part 9: Gives the debtor the opportunity to propose provisions that are not in the form plan
• Part 10: Signature box, including certification by the debtor’s counsel that the plan is identical to the national form plan
• Exhibit A: Calculation of Lien Avoidance Exhibit
• Exhibit B: Estimated Amounts of Trustee Payments Exhibit

The ten-part plan, along with the proposed rule changes suggested to implement the national Chapter 13 plan, contains a number of significant changes impacting creditors. Most of them will require creditors and their counsel to sprint out of the gate whenever a bankruptcy is filed to meet the accelerated timeframes, mandatory participation, and higher stakes.

Secured Creditors Would Have to File POCs
According to the advisory committee, when they surveyed bankruptcy judges and trustees regarding Chapter 13 practice, dissatisfaction with the current proof of claim (POC) filing rules was frequently expressed. The existing Fed. R. Bankr. P. § 3002(a) provides: “Necessity for Filing. An unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed, except as provided in Rules 1019(3), 3003, 3004, and 3005.” This has caused debate about whether and when secured creditors must file proofs of claim in Chapter 13 cases. And for those that believe a secured creditor must file a POC, the 90-day deadline from the meeting of creditors has been viewed as far too much time, despite the increased complexity and itemization required by the current rules and forms governing proofs of claims. Fed. R. Bankr. P. § 3002(c) provides, in part: “Time for Filing. In a ... Chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code ... .”

The proposed amended Rule § 3002(a) would require a secured creditor to file a POC in order to have an allowed claim. However, the amendment also makes clear that the failure of a secured creditor to file a proof of claim does not render the creditor’s lien void.

Proposed POC Bar Date — According to the advisory committee, the consensus of the bench, debtors’ Bar, and trustees is that the Chapter 13 process would benefit from creditors filing POCs before plan confirmation. Accordingly, setting the claims bar date so that it is likely to fall before confirmation is a cornerstone of the suggested changes to the rules governing the claims bar deadline. The proposed rule change would amend the calculation of the claims bar date. Rather than 90 days from the meeting of creditors under Bankruptcy Code § 341, the bar date would be 60 days after the petition is filed in a Chapter 13 case.

Creditors could file a motion, if filed before the claims bar date, to extend the time to file a POC by up to 60 days from the date the motion is granted. Creditors would be afforded this safe harbor when the debtor fails to timely file the list of creditors’ names and addresses, if the notice was insufficient under the circumstances to give the creditor a reasonable time to file a POC, or notice of the time to file a proof of claim was mailed to the creditor at a foreign address.

Proposed POC Bar Date for Claims Secured by Debtor’s Principal Residence: A Two-Step Process — Early concerns to the new proposed rules were expressed by mortgage servicers regarding the difficulty of filing timely POCs within the proposed bar date of 60 days after the filing of the Chapter 13 petition. While 60 days might be sufficient time to determine certain information, such as the amount of the arrearage on a mortgage, it would not be sufficient time to produce all necessary supporting documents, such as a copy of the recorded mortgage.

In reaction to those concerns, the latest proposed rules carve out a concession where the claim is secured by the debtor’s principal residence. The current draft bifurcates the bar date in these circumstances. The proposed Rule § 3002(c)(2) provides that a POC is timely filed if it is filed within 60 days of the petition date and includes the mortgage proof of claim attachment form, which details the principal and interest due, a statement and itemization of prepetition fees, expenses, and charges, and a statement of the amount necessary to cure the default.

A creditor has 120 days after the petition date to file a copy of the writing upon which the claim is based and evidence that the creditor’s security interest has been perfected as a supplement supporting the POC. Simply put, creditors have 60 days to file the POC with the figures and 120 days to file the loan documents. Unfortunately, the 120-day limit does not apply to much more than the loan documents. If an escrow account has been established in connection with the claim, the deadline to file the required escrow account statement prepared as of the date the bankruptcy was filed, with the POC, will be 60 days from the bankruptcy filing.

Does the Plan or Proof of Claim Control?

Despite early versions of the proposed rule changes that allowed a debtor to establish the amount of a creditor’s claim with the figures listed in the plan, the current draft of the national Chapter 13 plan provides that the amounts listed on a POC as to the current payment amount and arrearage for secured claims will control over contrary amounts listed in the plan. The debtor will estimate the amounts of such claims, with proofs of claim controlling over the plan as to those amounts. The debtor will therefore have to object to the claim to contest those amounts if there is a dispute.

Plan Objections and Confirmation Hearings — The proposed amendments to the rules require a creditor to file objections to confirmation of a Chapter 13 plan at least seven days before the confirmation hearing [proposed Fed. R. Bankr. P. § 3015(f)]. The clerk is required to send out notices to creditors giving creditors at least 21 days’ notice by mail of the time fixed for filing objections to confirmation of a Chapter 13 plan and notices giving creditors at least 28 days’ notice by mail of the confirmation hearing date and time.

Cramdowns and Strip-offs
The current rules provide for the valuation of a secured claim by motion only, and do not address the determination of the amount of a priority claim [Fed. R. Bankr. P. § 3012]. The proposed rules allow for the determination of the amount of secured claims in a proposed plan, subject to objection and resolution at the confirmation hearing. Further, the proposed rules provide an exception to the need to file a POC objection if a determination with respect to that claim is made in connection with plan confirmation, which is necessary to make parts of the form plan operational. Because the proposed rule will permit the value of certain secured claims to be determined through a plan, the language of the proposed rules addresses the determination of the “amount” of a claim rather than its “allowance.” The proposed amendment to Fed. R. Bankr. P. § 4003(d) provides, in keeping with proposed amended Fed. R. Bankr. P. § 3012, that chapter 12 and Chapter 13 plans may seek the avoidance of liens encumbering exempt property pursuant to § 522(f) of the Bankruptcy Code.

Where a debtor proposes to avoid a lien in a Chapter 13 plan, the debtor must take prescribed steps to make sure certain creditors receive a copy of the plan. For example, unless the court has ordered otherwise, if the debtor proposes a plan seeking to avoid a lien held by an “insured depository institution,” the debtor must serve a copy of the plan by certified mail addressed to an officer of the institution unless the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail. The committee note to proposed Fed. R. Bankr. P. § 4003 provides: “A plan that proposes lien avoidance in accordance with this rule must be served as provided under Rule 7004 for service of a summons and complaint. Lien avoidance not governed by this rule requires an adversary proceeding.”

Order Declaring Lien Satisfied — The new rules provide for a procedure for the debtor to obtain an order confirming that a secured claim has been satisfied [proposed Fed. R. Bankr. P. § 5009]. This may be particularly important to debtors who need, for title purposes, documentation showing that an unsecured second mortgage or other lien has been eliminated.

Adversary Rules Changes — The adversary rules list a number of disputes that are required to be conducted by adversary proceeding, including a proceeding “to determine the validity, priority, or extent of a lien or other interest in property.” Fed. R. Bankr. P. § 7001. The proposed rules exclude certain proceedings already handled at the plan confirmation stage, such as determinations of the amount of a secured claim through confirmation of a chapter 12 or Chapter 13 plan.

Conclusion
Comments concerning the proposed amendments are due by February 15, 2014. After the public comment period, the advisory committee will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure and will likely publish a new version of the plan and rules with a new comment period ending August 15, 2014. The proposed amendments would then become effective on December 1, 2015, if they are approved, and if Congress does not act to defer, modify, or reject them.

©Copyright 2013. USFN. All rights reserved.
Autumn 2013 USFN Report

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The 1111(b) Election A Powerful Tool for an Undersecured Ch. 11 Creditor

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, October 13, 2015

November 14, 2013

 

Pite Duncan, LLP
USFN Member (California)

With the increase in real property values in recent months, undersecured creditors should consider the benefits of Bankruptcy Code § 1111(b) as an effective tool in defending against a “cramdown” of a claim in a Chapter 11 plan of reorganization. In general, an 1111(b) election prohibits a debtor from bifurcating a claim into secured and unsecured portions under § 506(a) and permits a creditor to retain its fully secured claim, including post-petition attorneys’ fees, escrow advances, and other costs recoverable under the applicable loan agreement, less any post-petition interest. In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009).

When to Make an 1111(b) Election
A creditor must make its election prior to the conclusion of the hearing on the disclosure statement or within such later time as the court may fix. Fed. R. Bankr. P. 3014. A secured creditor should consider making an 1111(b) election when the collateral securing its claim has substantially depreciated in value (50 percent is a suitable benchmark) and a debtor’s Chapter 11 plan proposes to cramdown the claim to the value of the property. An 1111(b) election protects a creditor against a quick sale of the property after a cramdown when the amount of the secured claim is determined at a time when the value of the property is temporarily depressed. By making the election, a creditor blocks the cramdown and guards against such an opportunistic sale because it retains a lien on the collateral equal to the full amount of its claim. In re Weinstein, 227 B.R. 284, 295 n. 12 (9th Cir. BAP 1998).

Treatment of an Electing Creditor
After a creditor has made the 1111(b) election, it must receive: (1) deferred payments equal to at least the full amount of its allowed claim; and (2) with a present value equal to at least the value of the subject property. § 1129(b)(2)(A)(i)(II); In re Brice Road Developments, LLC, 392 B.R. 274, 284-85 (6th Cir. BAP 2008). To more fully illustrate these requirements here’s an example:

  

 Assumptions     
 Present Property Value  $100,000
 Total Claim Amount  $160,000
 Fair and Equitable Discount Rate of Interest  5%
 Fair and Equitable Loan Term  30 Years

 

Based on the example, an electing creditor would be entitled to deferred payments that: (1) equal the total amount of its allowed claim of $160,000; and (2) when discounted, based on a fair market rate of interest (5%), equal at least the present value of the property ($100,000).

A total secured claim of $160,000 paid over 30 years at 0.00% interest results in 360 payments of approximately $444.45 and satisfies the first prong as the sum of the payments total the creditor’s secured claim of $160,000. However, this claim treatment fails to satisfy the second prong as the deferred payments have a present value of only $82,791.00 (based on a 30-year term and a discount rate of 5%), which is less than the present value of the property ($100,000).

Accordingly, the loan could be re-structured to provide the creditor with a nominal amount of interest on its secured claim such as an allowed claim of $160,000 amortized over 30 years at 1.30% interest per annum. This treatment results in 360 payments of $536.97 for a total payout of approximately $193,309.20 and satisfies the 1111(b) election because the sum of the payments totals at least the amount of the creditor’s $160,000 allowed claim and have a present value of $100,027.64 (approximately the value of the property). Put another way, a loan with a principal amount of $100,027.64 amortized over 30 years at 5% interest results in a monthly payment of $536.97, which provides this creditor with the present value of its collateral ($100,000). In light of the creditor’s 1111(b) election, the loan must be re-structured to provide it with a lien equal to the $160,000 secured claim amount while also providing for payments, when discounted, which provide the creditor with the present value of its collateral ($100,000). As explained, these requirements are met by re-structuring the loan with a face amount of $160,000 amortized over 30 years at 1.30% per annum.

Risks Associated with an 1111(b) Election
Notwithstanding the benefits of an 1111(b) election as discussed above, a creditor must consider the risks associated with the election. For instance, once an election is made, it is common for a debtor to surrender the collateral if the property fails to generate sufficient cash flow. If a creditor makes an election and the debtor surrenders the property, a creditor may realize less than its loan balance at a subsequent foreclosure sale. Additionally, a debtor may seek to satisfy a creditor’s 1111(b) election by proposing an extended loan term beyond 30 years or a balloon payment due at maturity. Accordingly, prior to making an election, a creditor should consider whether it would be amenable to those terms or, alternatively, whether it is willing to incur the litigation costs of disputing such terms. Finally, once an election is made, the creditor no longer has an unsecured claim. Consequently, it loses its right to vote on the debtor’s Chapter 11 plan on account of its unsecured claim as well as any defenses to confirmation available to an unsecured creditor, such as the absolute priority rule.

Conclusion
As the real estate market continues to recover, creditors should consider the benefits of the 1111(b) election when defending against Chapter 11 cramdowns. It can be an effective tool to limit principal reduction and even prevent confirmation of a plan. Additionally, the 1111(b) election may provide a creditor with significant leverage in negotiating the treatment of a claim in a plan. In many instances, once a creditor has timely made an election, a debtor may submit an amended proposal providing for a greater valuation or interest rate in an effort to persuade a creditor to withdraw its election. Accordingly, undersecured creditors should consult with their local bankruptcy attorney to determine whether an 1111(b) election is advisable in a specific case.

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BANKRUPTCY UPDATE: NACTT Annual Conference 2013

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, October 13, 2015

November 14, 2013

 

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

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in New York City this past August. There continued to be focus on mortgage issues at the conference with an emphasis on implementing and maintaining best practices in mortgage servicing in chapter 13 cases, supervision of bankruptcy case administration by the Office of the U.S. Trustee, and enforcement of the national consent judgments by the Office of Mortgage Settlement Oversight.

NACTT Presentations and Panels
The Director of the Administrative Office of the U.S. Trustee program, Cliff White, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. In this the 25th year of the UST program, Director White reported that chapter 13 bankruptcies are in a three-year decline with 310,000 filings in 2012 and a total of 970,000 open cases. Major initiatives of the UST continue to be mortgage servicer enforcement under the national mortgage servicing settlement programs (NMSS) by the settlement monitor, as well as enforcement apart from the NMSS, chapter 11 issues, and review of unsecured creditor practices, and proofs of claim. Director White reported that it appears servicers are making progress, but that some deficiencies had been found by the settlement monitor. Unlike in prior years, Director White’s comments did not focus primarily on enforcement efforts aimed at mortgage servicers.

National Monitor Joseph Smith followed with an update from the Office of Mortgage Settlement Oversight. Monitor Smith explained that since implementation of the NMSS in October 2012, testing of metrics by the five consenting servicers has been phased in with few reported failures (there are 304 servicing standards, 84 relate to bankruptcy; there are 29 metrics, 8 relate to bankruptcy). Any potential violation or failure of a standard must be disclosed to the NMSS committee by the failing servicer, along with a plan for remediation, which is subject to approval by the committee and then is to be implemented. If there is an additional failure, the NMSS committee can seek relief from a court of competent jurisdiction, including monetary damages and injunctive relief.

The conference included a presentation by members of the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, which published a national form plan and amendments to the Federal Rules of Bankruptcy and Civil Procedure on August 15, 2013. The comment period runs until February 15, 2014, with the earliest effective date of the amendments and national form plan being December 1, 2015. Citing the constitutional mandate for uniformity and the need for plan finality, the panelists reviewed the more important features of the proposed rules and plan, including the prohibition against local modification (proposed amendment to FRBP 9009), a uniform objection to confirmation deadline of at least seven days prior to the confirmation hearing (proposed amendment to FRBP 3015(f)), motions for strip-offs and cramdowns contained within the plan itself (proposed model plan), and shortening the bar date for filing proofs of claim to 60 days from the date of petition filing with an additional 60 days to supplement claims with supporting documentation (proposed amendment to FRBP 3002). The proposed amended rules and national model plan can be found at http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx.

Meeting of Trustees, Servicers, and Attorneys
Apart from the NACTT panels, a meeting of a group of trustees, mortgage servicers and their attorneys was held during the conference to discuss issues relating to mortgage servicing in chapter 13 cases. This meeting was a continuation of an effort by chapter 13 trustees, mortgage servicers, and attorneys to provide open communication on issues affecting mortgages in chapter 13 proceedings. Topics of discussion included implementation of the 2011 Federal Rules of Bankruptcy Procedure (FRBP) amendments, including FRBP 3002 (changing the requirements of proofs of claim) and FRBP 3002.1 (providing a regime for notification by servicers of payment changes and disclosure of post-petition fees, charges, etc., as well as a method to determine the status of residential mortgages at the end of chapter 13 cases), proof of claim issues, and the impending Consumer Financial Protection Bureau (CFPB) rules.

Regarding the implementation of the 2011 FRBP amendments, an issue for servicers was inconsistency in the treatment by chapter 13 trustees of notices filed by servicers as well as the form and procedure for the responses to notices of final cure. FRBP 3002.1(c) requires servicers to file and serve on debtors, debtor’s counsel, and chapter 13 trustees, a notice itemizing any post-petition fee or expense asserted to be recoverable against a debtor. The notice applies only to mortgages secured by a debtor’s principal residence and must be filed within 180 days after the fee is incurred. Although FRBP 3002.1(c) is a nationwide rule, chapter 13 trustees address the notices differently among themselves. Some trustees do not pay the amounts on these notices because they do not believe that they are authorized under a confirmed plan to pay them, while other trustees have local form plan provisions that allow payment of the amounts listed (absent an objection by the debtor). If post-petition amounts listed in the notices aren’t paid, problems may await debtors and servicers at, or after, the time of case completion.

Another area of inconsistency discussed was the lack of a standardized form for the FRBP 3002.1(f) Notice of Final Cure Payment (NOFC). Although the 2011 FRBP amendments provided for national forms for proofs of claim and attachments, notices of payment changes, and notices of fees, expenses and charges, a national form was not provided to file the NOFC at case completion. This notice is to be filed by chapter 13 trustees or debtors after the final payment under the plan is made and is to be responded to by servicers within 21 days to acknowledge if the servicer agrees or disagrees that the account is current. A small committee was formed to explore the drafting of a national form for the NOFC to submit to the larger group and to the Federal Rules Committee.

The group also discussed the impending CFPB final mortgage servicing rules that come into effect on January 10, 2014. Among other CFPB rules, servicers are required to send borrowers periodic disclosures of payment applications. The CFPB rules do not distinguish between borrowers who have filed Chapter 13 bankruptcy and those who have not. Opportunities for the consumer advocate bar could arise when servicers comply with CFPB disclosures and other requirements while their borrowers are protected by a bankruptcy stay and other bankruptcy-imposed restrictions. (Editor’s Note: In an effort to clarify, among other things, treatment of consumers who have filed for bankruptcy, on October 15, 2013, the CFPB issued Bulletin 2013-12 and Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), (“Interim Final Rule”) as this USFN Report went to press. See pages 26-32 of the Interim Final Rule.)

Conclusion
As in years past, the NACTT conference provided many informative educational panels, including panels on lien stripping, updates on case law around the nation in the past year, and other topics impacting chapter 13 practice. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers.

©Copyright 2013. USFN. All rights reserved.
Autumn 2013 USFN Report

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BANKRUPTCY UPDATE: NACTT Annual Conference 2013

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, November 24, 2015

October 4, 2013

 

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

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in New York City this past August. There continued to be focus on mortgage issues at the conference with an emphasis on implementing and maintaining best practices in mortgage servicing in chapter 13 cases, supervision of bankruptcy case administration by the Office of the U.S. Trustee, and enforcement of the national consent judgments by the Office of Mortgage Settlement Oversight.

NACTT Presentations and Panels
The Director of the Administrative Office of the U.S. Trustee program, Cliff White, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. In this the 25th year of the UST program, Director White reported that chapter 13 bankruptcies are in a three-year decline with 310,000 filings in 2012 and a total of 970,000 open cases. Major initiatives of the UST continue to be mortgage servicer enforcement under the national mortgage servicing settlement programs (NMSS) by the settlement monitor, as well as enforcement apart from the NMSS, chapter 11 issues, and review of unsecured creditor practices, and proofs of claim. Director White reported that it appears servicers are making progress, but that some deficiencies had been found by the settlement monitor. Unlike in prior years, Director White’s comments did not focus primarily on enforcement efforts aimed at mortgage servicers.

National Monitor Joseph Smith followed with an update from the Office of Mortgage Settlement Oversight. Monitor Smith explained that since implementation of the NMSS in October 2012, testing of metrics by the five consenting servicers has been phased in with few reported failures (there are 304 servicing standards, 84 relate to bankruptcy; there are 29 metrics, 8 relate to bankruptcy). Any potential violation or failure of a standard must be disclosed to the NMSS committee by the failing servicer, along with a plan for remediation, which is subject to approval by the committee and then is to be implemented. If there is an additional failure, the NMSS committee can seek relief from a court of competent jurisdiction, including monetary damages and injunctive relief.

The conference included a presentation by members of the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, which published a national form plan and amendments to the Federal Rules of Bankruptcy and Civil Procedure on August 15, 2013. The comment period runs until February 15, 2014, with the earliest effective date of the amendments and national form plan being December 1, 2015. Citing the constitutional mandate for uniformity and the need for plan finality, the panelists reviewed the more important features of the proposed rules and plan, including the prohibition against local modification (proposed amendment to FRBP 9009), a uniform objection to confirmation deadline of at least seven days prior to the confirmation hearing (proposed amendment to FRBP 3015(f)), motions for strip-offs and cramdowns contained within the plan itself (proposed model plan), and shortening the bar date for filing proofs of claim to 60 days from the date of petition filing with an additional 60 days to supplement claims with supporting documentation (proposed amendment to FRBP 3002). The proposed amended rules and national model plan can be found at http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx.

Meeting of Trustees, Servicers, and Attorneys

Apart from the NACTT panels, a meeting of a group of trustees, mortgage servicers and their attorneys was held during the conference to discuss issues relating to mortgage servicing in chapter 13 cases. This meeting was a continuation of an effort by chapter 13 trustees, mortgage servicers, and attorneys to provide open communication on issues affecting mortgages in chapter 13 proceedings. Topics of discussion included implementation of the 2011 Federal Rules of Bankruptcy Procedure (FRBP) amendments, including FRBP 3002 (changing the requirements of proofs of claim) and FRBP 3002.1 (providing a regime for notification by servicers of payment changes and disclosure of post-petition fees, charges, etc., as well as a method to determine the status of residential mortgages at the end of chapter 13 cases), proof of claim issues, and the impending Consumer Financial Protection Bureau (CFPB) rules.

Regarding the implementation of the 2011 FRBP amendments, an issue for servicers was inconsistency in the treatment by chapter 13 trustees of notices filed by servicers as well as the form and procedure for the responses to notices of final cure. FRBP 3002.1(c) requires servicers to file and serve on debtors, debtor’s counsel, and chapter 13 trustees, a notice itemizing any post-petition fee or expense asserted to be recoverable against a debtor. The notice applies only to mortgages secured by a debtor’s principal residence and must be filed within 180 days after the fee is incurred. Although FRBP 3002.1(c) is a nationwide rule, chapter 13 trustees address the notices differently among themselves. Some trustees do not pay the amounts on these notices because they do not believe that they are authorized under a confirmed plan to pay them, while other trustees have local form plan provisions that allow payment of the amounts listed (absent an objection by the debtor). If post-petition amounts listed in the notices aren’t paid, problems may await debtors and servicers at, or after, the time of case completion.

Another area of inconsistency discussed was the lack of a standardized form for the FRBP 3002.1(f) Notice of Final Cure Payment (NOFC). Although the 2011 FRBP amendments provided for national forms for proofs of claim and attachments, notices of payment changes, and notices of fees, expenses and charges, a national form was not provided to file the NOFC at case completion. This notice is to be filed by chapter 13 trustees or debtors after the final payment under the plan is made and is to be responded to by servicers within 21 days to acknowledge if the servicer agrees or disagrees that the account is current. A small committee was formed to explore the drafting of a national form for the NOFC to submit to the larger group and to the Federal Rules Committee.

The group also discussed the impending CFPB final mortgage servicing rules that come into effect on January 10, 2014. Among other CFPB rules, servicers are required to send borrowers periodic disclosures of payment applications. The CFPB rules do not distinguish between borrowers who have filed Chapter 13 bankruptcy and those who have not. Opportunities for the consumer advocate bar could arise when servicers comply with CFPB disclosures and other requirements while their borrowers are protected by a bankruptcy stay and other bankruptcy-imposed restrictions. (Editor’s Note: In an effort to clarify, among other things, treatment of consumers who have filed for bankruptcy, on October 15, 2013, the CFPB issued Bulletin 2013-12 and Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), (“Interim Final Rule”) as this USFN Report went to press. See pages 26-32 of the Interim Final Rule.)

Conclusion
As in years past, the NACTT conference provided many informative educational panels, including panels on lien stripping, updates on case law around the nation in the past year, and other topics impacting chapter 13 practice. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers.

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Autumn 2013 USFN Report

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Maine: Proving Authority to Enforce the Note

Posted By USFN, Friday, October 4, 2013
Updated: Monday, November 23, 2015

October 4, 2013

 

by Katie Hawkins & Lauren Thomas
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

Recently, the Law Court took steps towards settling the widely-discussed and often-litigated question of what proof is required for a plaintiff to prove “ownership” of the mortgage and mortgage note as required by 14 M.R.S.A. § 6321 and Chase Home Finance v. Higgins, 2009 Me. 136, 985 A.2d 508.

The Law Court interprets the requirement that a plaintiff “certify proof of ownership” to require only that a plaintiff identify the “owner or economic beneficiary of the note” and, where the plaintiff is not the owner, to “indicate the basis for the plaintiff’s authority to enforce the note” pursuant to 11 M.R.S.A. § 3-1301. [Bank of America v. Cloutier, 2013 Me. 17, 61 A.3d 1242]. This confirms the standing of a servicer to foreclose, so long as any investor is identified.

The court came to this conclusion by distinguishing two requirements of 14 M.R.S.A. § 6321: (1) the standing requirement found in paragraph one; and (2) the evidence requirement found in paragraph three. Earlier decisions by the Law Court have addressed the paragraph three requirements. Wells Fargo v. deBree, 2012 Me. 34, 38 A.3d 1257; HSBC Bank USA, N.A. v. Gabay, 2011 Me. 101, 28 A.3d 1158; Mortgage Electronic Registration Systems, Inc. v. Saunders, 2010 Me. 79, 2 A.3d 289. Cloutier addresses the paragraph one standing requirement and “harmonizes” it with Article 3-A of the UCC to define who may enforce a promissory note. With this reading, the court found that Bank of America, the servicer of the subject loan, can enforce the note and foreclose as a “holder.” However, the “owner or economic beneficiary” (here, Freddie Mac) must be identified in order to comply with the requirements of Section 6321. 2013 Me. 17, ¶ 13-14.

The Law Court has since applied Cloutier to vacate a judgment in favor of the homeowners in U.S. Bank, National Association as Trustee for the MLMI Surf Trust Series 2006-BC2 v. Thomes, 2013 Me. 60. At trial, the court required the foreclosing bank to establish that it owned the note and mortgage. On the appeal of Thomes, however, the Law Court clarified that under Cloutier, the bank is required to identify the owner or economic beneficiary of the note and demonstrate that it is entitled to enforce the note, not prove that the bank itself owns the note and mortgage. Because the bank provided evidence of a note, which had been specially endorsed to the bank, accompanied by an allonge endorsing the note in blank, an assignment of mortgage to the bank, and testimony that U.S. Bank was the holder of the note and had physical possession of the note, the Law Court determined that the bank had met its burden under Cloutier and vacated the judgment for the homeowners.

Practically speaking, the Cloutier case and the decisions that follow from it establish yet another element that a foreclosing plaintiff must establish before the court will issue a judgment of foreclosure and sale. Whether judgment is sought through a motion for summary judgment or at trial, the foreclosing plaintiff must identify the owner or economic beneficiary of the note and introduce into evidence business records supporting that identification. Frequently, the owner or economic beneficiary identified will be the investor or investors. It is expected that Maine courts will continue to address issues of ownership as the Law Court’s decisions in Cloutier and Thomes are applied and analyzed.

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Colorado Clarifies Notice Requirements After Sender v. Cygan

Posted By USFN, Friday, October 4, 2013
Updated: Monday, November 23, 2015

October 4, 2013

 

by Kimberly L. Martinez
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)

In June the Colorado Supreme Court issued an advisory opinion in Sender v. Cygan (In re Rivera) (11SA261, 2012 LEXIS 398 (Colo. June 4, 2012)), creating potentially wide-reaching implications for the title insurance industry and real estate practitioners with respect to the recording of real estate documents. The Cygan opinion arose from a request by the U.S. Bankruptcy Court for the District of Colorado to the Colorado Supreme Court to answer the following question: Does a recorded deed of trust provide sufficient notice of a party’s interest in real property if the deed of trust contains no legal description and identifies the property only by a street address?

In response, the Colorado Supreme Court held that a deed of trust recorded without a legal description is defectively recorded, or invalid, and does not provide constructive notice to a subsequent purchaser of another party’s security interest in real property. In its determination, the Colorado Supreme Court reviewed C.R.S. sections 38-35-122 and 38-35-109(1) and reasoned that under C.R.S. § 38-35-122, a validly recorded lien must contain a legal description of the property, and a legal description must be more than a property address for notice purposes. Consequently, the creditor’s deed of trust in Cygan was declared void and, thus, incapable of providing constructive notice of the encumbrance despite the fact that it was recorded in the grantor-grantee indices and contained the correct property address.

The majority opinion in Cygan distinguished prior cases that held a recorded instrument containing an erroneous or incomplete legal description provides sufficient notice of an encumbrance so long as the instrument describes the property with reasonable certainty. For example, in Hill v. Bayview Loan Servicing, LLC (In re Taylor) the Bankruptcy Court for the District of Colorado held that a deed of trust properly recorded in the grantor-grantee indices with a correct street address, but with a legal description identifying the incorrect block number for the parcel placed the bankruptcy trustee on inquiry/constructive notice of an encumbrance on the subject real property. In Cygan, the Colorado Supreme Court declined to extend the general rule set forth in Taylor to a deed of trust that completely omitted the legal description. The Colorado Supreme Court reasoned that the recording of the creditor’s deed of trust without a legal description materially fails to describe the recording party’s interest in the property and cannot be validly recorded. Therefore, the recording of the creditor’s deed of trust without a legal description was void and incapable of providing constructive notice of the encumbrance.

Subsequent to the Cygan opinion, the title industry expressed grave concerns regarding the implications of the decision and the status of recordings of real property documents in the public records of Colorado. Following lobbying efforts by the title industry, the Colorado General Assembly introduced House Bill 13-1307 in order to address the issues created by the Cygan decision. House Bill 13-1307 modifies C.R.S. § 38-35-122 by adding subsections (3.5), (4), and (5). These subsections clarify that notwithstanding the Cygan opinion, a failure to include a legal description on a document does not, by itself and without regard to the totality of the circumstances, necessarily render that document defective or invalid upon its recording.

The new legislation sustains a prior Colorado Court of Appeals unpublished opinion, which held that a deed of trust contained sufficient information to place another on inquiry notice despite the fact that it omitted the legal description and contained several other defects. In EMC Mortgage Corporation v. Getrado, a senior lienholder’s deed of trust was recorded with no legal description, an incorrect property address, a variation in the grantor’s name, and an incorrect name of the public trustee. The Colorado Court of Appeals held that the senior deed of trust contained sufficient information to place a subsequent lienholder on notice of the senior lienholder’s priority interest in the property. The court noted that even though the senior deed of trust did not contain a legal description, it contained the correct assessor’s parcel number, which upon further inquiry would have affirmatively disclosed the senior lienholder’s interest in the property.

Analogous to the holding in Getrado, House Bill 13-1307 clarifies that a deed of trust recorded without a legal description does not render the instrument defective if, under the circumstances, the recorded deed of trust includes other identifying information such as a street address and/or assessor information. Hence, House Bill 13-1307 in essence codified the Getrado holding by specifying that the absence of a legal description neither invalidates the document or its recording, nor determines the validity of the document as against a person obtaining rights in the property. Under the revised statute, for notice purposes, those with an interest in real property must also consider the totality of the circumstances when determining whether the document is defective, valid, or invalid against the person obtaining rights in the real property.

Following the legislation negating the Cygan opinion, on August 19, 2013, the Colorado Supreme Court withdrew its opinion, and denied the certified question. In withdrawing its opinion, the Colorado Supreme Court noted that it “improvidently” granted the certified question. Thus, it appears that the Colorado Supreme Court had not fully contemplated the broad implications of the Cygan decision.

House Bill 13-1307 clarifies and confirms the prior decisions by the Colorado Court of Appeals on this issue, while still leaving a substantial amount of discretion with the courts to look at the totality of the circumstances as it relates to a legal description. Although real estate practitioners may now have less reason for concern when faced with the same situation as in Cygan, additional issues should be anticipated as Colorado courts interpret and apply the new legislation to differing factual scenarios.

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Native American Notice of Claim on Properties in Certain Counties in Utah

Posted By USFN, Friday, October 4, 2013
Updated: Monday, November 23, 2015

October 4, 2013

 

by Scott Lundberg
Lundberg & Associates – USFN Member (Utah)

In January 2013, the Uinta Valley Shoshone Tribe (the Tribe) recorded a "Notice of Claim of Interest Real Property" (the Notice) with the Duchesne County Recorder’s office. In the Notice, the Tribe claims an interest in the real property (including all water, gas, oil, and mineral rights) in the Uinta Valley & Ouray Reservation in Utah.

Title underwriters in Utah have instructed their agents to identify this claim on title reports and policies issued for property within the area claimed — encompassing most of Duchesne and Uintah counties and parts of adjacent counties. Though recorded subsequently to the deeds of trust currently being foreclosed, the underwriters are treating this notice as senior in priority to those deeds of trust. They have advised that post-foreclosure title work will continue to reflect the notice of claim.

For all loans made prior to January 7, 2013, this notice is a post-closing item and is not covered by lenders’ policies of title insurance.

The Notice reflects a long-running legal battle by “Mixed Blood Uintas” against federal and state governments and private landowners based upon their claim that their tribal status and entitlement to the property was unlawfully terminated in the past. Further information can be found on the Tribe’s website: www.undeclaredutes.net.

Servicers with Utah loans secured by properties in the affected counties should make note that foreclosures of those loans will result in title subject to the Notice. Removal of reference to the Notice in post-foreclosure title policies, according to the major title insurance underwriters, will require a court order quieting title on the foreclosure property against the claim evidenced by the Notice. Such litigation, if contested by the Tribe, would be extensive, expensive (likely in excess of $100,000) and lengthy because it would entail litigating the ongoing dispute between the Tribe and the federal and state governments and private landowners.

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Pennsylvania: State Supreme Court Rules on Act 91 Notice

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Lisa A. Lee and Michael T. McKeever
KML Law Group, P.C. – USFN Member (Pennsylvania)

On September 25, the Supreme Court of Pennsylvania issued its opinion in the case of Beneficial Consumer Discount Company v. Vukman. The concurrence opinion is also provided for convenient reference.

The Superior Court opinion in the Vukman matter, affirming the order of the Court of Common Pleas of Allegheny County, held that the uniform Act 91 Notice prescribed by the Pennsylvania Housing Finance Agency, and in effect prior to September 8, 2008, was deficient and, as a result, the court lacked jurisdiction over the mortgage foreclosure action. This opinion had potentially wide-ranging effects because of the impact of the decision that the provision of the Act 91 Notice was a jurisdictional requirement.

The Pennsylvania Supreme Court has now laid this issue to rest, holding that the Act 91 Notice is not a jurisdictional requirement in a mortgage foreclosure action.

This means that, consistent with the Homeowner Assistance Settlement Act (Pa. Act 70), any challenge to an Act 91 Notice must be raised prior to the delivery of the sheriff’s deed in the foreclosure action. If it is raised, the homeowners must also prove that they were actually harmed by the defect (if any) in the notice. Once the sheriff’s deed is delivered to the lender or recorder of deeds, the right of the homeowners to object to lack of proper notice is theoretically terminated. Pa. Act 70 further provides that the failure of a lender to strictly comply with Act 91 does not necessarily result in the dismissal of the foreclosure action, and the court has jurisdiction over the matter even if the notice contains a defect. Additionally, in any completed cases where the notice was sent that may not have strictly complied with the law, this alone does not create a cloud on title, protecting title insurers who had relied on the state of the law prior to the Vukman decision. Pa. Act 70 covers all notices sent since June 5, 1999.

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New Jersey: New Legislation Regarding Eminent Domain

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Rosemarie Diamond
Phelan Hallinan & Diamond, P.C. – USFN Member (New Jersey, Pennsylvania)

On September 6, 2013, Governor Christie signed into law a bill intended to codify several court opinions relating to eminent domain and to limit the use of eminent domain for municipal redevelopment projects as permitted under New Jersey’s “Local Redevelopment and Housing Law.” It also created an alternative to condemnation by authorizing municipalities to negotiate directly with a property owner without being required to declare an area blighted, which is the constitutional standard in New Jersey for redevelopment condemnations.

The bill reflects the legislature’s recognition of heightened public concern about the use of eminent domain to support municipal redevelopment activities, as expressed by the U.S. Supreme Court in Kelo v. City of New London, 545 U.S. 469 (2005), and the New Jersey Supreme Court’s emphasis in Gallenthin Realty Development, Inc. v. Borough of Paulsboro, 191 N.J. 344 (2007), that the use of eminent domain cannot be justified to acquire property unless the property is truly blighted, rather than in a state where it is not being put to its optimal use. Now, the property must be in an “unproductive condition.” The bill outlines the steps for a planning committee to authorize an investigation for consideration of the use of eminent domain in areas zoned for redevelopment, the publication of the results of the investigation, and the time period to object to any conclusions. The bill also sets forth minimal requirements for an area to be considered for the exercise of eminent domain.

The bill was not a response to recent attempts throughout the country to use eminent domain as a mechanism to address underwater mortgages. Nevertheless, like all parties with an interest in real property, lenders are protected by the tighter restrictions should efforts to exercise eminent domain through municipal redevelopment gain traction at the local level.

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Standing in Mortgage Foreclosures

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

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

In the latest in a series of cases recently handed down by Connecticut’s high courts regarding standing in mortgage foreclosures, the Supreme Court (Connecticut’s highest appellate court), in Equity One v. Shivers, 301 Conn. 190, overturned the appellate court’s decision that required an evidentiary hearing be held every time a party attempts to challenge a foreclosing plaintiff’s standing. This author’s firm represented the plaintiff in the appeal.

The appellate court’s decision had wide implications in Connecticut practice, as some trial courts interpreted the case to require a full evidentiary hearing, replete with fact witnesses, anytime a defendant merely uttered the word “standing.” It was the plaintiff’s contention that the appellate court’s opinion also contradicted longstanding decisional law, which stated that the production of the note, endorsed in blank, created a presumption of standing requiring the opposing party to introduce and prove facts that would limit the right to enforce the note.

The plaintiff had obtained judgment previously, at which time the defendant did not object or attempt to challenge the plaintiff’s standing. Prior to the sale being held, the matter was stayed due to the defendant’s bankruptcy filing. The plaintiff moved to reset judgment after obtaining relief from the automatic stay. It was at this hearing that the defendant filed a motion to compel the production of the original documents and an objection to the plaintiff’s motion to re-set judgment, claiming that the plaintiff did not have standing to commence the action. The defendant’s objection was devoid of any documentary evidence. The defendant appealed, inter alia, the entry of judgment absent a hearing to determine whether the plaintiff had standing to commence the action. The appellate court held that the borrower’s oral challenges and written statements were sufficient to require the lower court to hold a “trial-like evidentiary hearing” on the issue of standing. The plaintiff appealed to the Connecticut Supreme Court.

The Supreme Court held that the defendant had failed to demonstrate, either at the time of the entry of judgment or on appeal, that the trial court’s finding that the plaintiff had standing was flawed or that the trial court’s procedure was inadequate. The defendant did not object to the authenticity of the note or mortgage and offered no evidence to the trial court or on appeal that the plaintiff was not in possession of the note when it commenced the action. The court also opined that it was proper for the trial court to rely on the representation of counsel, as an officer of the court, that the note presented to the court in connection with the entry of judgment was the same note that the plaintiff held at the time of commencement of the action.

Also, the Supreme Court looked to the date of execution of the assignment of mortgage and noted that it was executed 20 days prior to the commencement of the action. Although there is no firm requirement that the foreclosing plaintiff be assigned the mortgage prior to commencement, it is interesting to note that the court looked at that date as further proof of the plaintiff’s standing.

The Supreme Court’s opinion reduces the likelihood of meritless and dilatory challenges to a foreclosing plaintiff’s standing, and evidentiary hearings required as a result thereof.

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Connecticut: New Recording Fee Targets MERS

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Ken Pollock
Hunt Leibert – USFN Member (Connecticut)

Effective July 15, 2013, the state of Connecticut enacted new legislation that has dramatically increased the recording fees charged for documents where MERS (Mortgage Electronic Registering System) is acting in a capacity as nominee for a mortgage lender. Although the new laws do not mention MERS specifically, the charge applies to documents containing a nominee for the actual mortgage lender. Currently, MERS is the only such business entity operating in this fashion.

Presently, to record a mortgage that does not contain language indicating that MERS is acting as the nominee for the lender, the first page of the document costs $53 to record and $5 for each additional page. Under the new plan, if that exact same mortgage refers to MERS as the nominee for the lender, the cost of the first page more than doubles to $116 and there is an added surcharge of $43 per document regardless of the number of pages. The MERS mortgage is still charged the further $5 per additional page; that charge was not modified.

What this means is that any person who buys a home or refinances an existing mortgage runs the risk of paying substantially more in recording fees if MERS has a role in the new loan. A typical mortgage recorded in Connecticut contains anywhere from ten to fourteen pages. A ten-page mortgage without the presence of MERS would cost $98 to record ($53 for the first page and $45 for the nine additional pages). If that same ten-page mortgage were to list MERS as nominee for the lender, however, the recording cost now increases to $204 — more than double.

If the Connecticut legislature intended to derive new revenue directly from MERS, the initiative missed the mark. The recording fee is charged to the borrower as a closing cost on the HUD-1 for the closing. In the overall scheme of things, it is still a relatively small amount when compared to the loan amount, but the cost is borne by the borrower and it is something that is completely out of the borrower’s control. Borrowers do not decide whether or not MERS has a place in their mortgage transaction. That arrangement is made directly by the lender.

Until the passage of this measure, the presence of MERS on a mortgage deed was a benign, invisible presence that meant nothing to the borrower. Now the presence of MERS results in more money coming out of the borrowers’ pocket at closing. Against a typical $150,000 mortgage, the result is almost negligible as a percentage of the money involved. However, for the affected individuals, it does represent one more creative way that the state is reaching into the pocket of the borrower.

The measure has already survived one attack. MERS filed a complaint in the Superior Court of Connecticut, Judicial District of Hartford, challenging the constitutionality of §§ 97 and 98 of Public Act 13-184 and §§ 81 and 82 of Public Act 13-247. On July 11, 2013, MERS was denied a temporary restraining order in its lawsuit. The lawsuit remains pending.

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New Reverse Mortgage Law and Challenges Servicers Face When Foreclosing a Reverse Mortgage

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Elizabeth Loefgren
Sirote & Permutt, P.C. – USFN Member (Alabama)

On August 9, 2013, President Obama signed the Reverse Mortgage Stabilization Act (HR 2167) in an attempt to revitalize the FHA Home Equity Conversion Mortgage (HECM) Program. This Act amends 12 USCA § 1715z-20 of the National Housing Act (NHA) by giving the Secretary of Housing and Urban Development (HUD) the authority to make administrative and policy changes to the Federal Housing Administration’s (FHA) HECM program without the constraints of a lengthy, formal regulatory process.

Prior to this change, HUD followed a regulatory process, which typically took up to 18 months to make an administrative or policy change. During these 18 months, FHA could continue to lose money. The new bill allows HUD to bypass this time-consuming process and issue a notice or mortgagee letter when a change is “necessary to improve the fiscal safety and soundness of the program.” Any administrative or policy change will be effective upon issuance of the notice or mortgagee letter.

HUD plans to use the new procedures available to them in HR 2167 to add consumer safeguards and improve financial performance of the HECM insurance fund. HUD issued its first mortgagee letter pursuant to the new procedures on September 3, 2013. Effective September 30, 2013, seniors have more options at closing in order to preserve some of the equity in their homes to help pay taxes and insurance. Effective January 13, 2014, lenders must conduct financial assessments of potential HECM borrowers to determine whether a reverse mortgage is appropriate for their financial situation.

FHA’s HECM program provides reverse mortgages to those who are 62 years or older and allows elderly homeowners to obtain additional income by borrowing against the equity in their homes. The loan obligation is deferred until the death of the homeowner, the sale of the home, or the occurrence of other events. Under HUD mortgage insurance guidelines and the NHA, the term “homeowner” includes the spouse of the borrower. This results in displacement safeguards for the spouse of the borrower even if the spouse did not sign the note at the time of loan origination. Because of this, servicers face challenges when attempting to foreclose a reverse mortgage due to the death of the only party who signed the note when the surviving spouse still lives in the home. Servicers face similar challenges when a titleholder who occupies the property executes the mortgage and not the note, yet is defined as a “borrower” under the terms of the mortgage.

In order to prevent these challenges, the lender should identify all parties with an interest in the property at loan origination, including not only the spouse but also parties who have a title interest in the property. The lender should also consider requiring all parties with such an interest to execute the note. Otherwise, servicers will continue to face challenges when foreclosing reverse mortgages when the reason for default is due to the death of the borrower who signed the note and the property is still occupied by the surviving spouse or the party with a title interest in the property.

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Changes to Rhode Island Foreclosure Statute Require Mediation for Certain Foreclosures

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 30, 2015

September 9, 2013

 

by Patricia Antonelli, Brian P. Gallogly, & David J. Pellegrino
Partridge Snow & Hahn LLP – USFN Member (Massachusetts)

Changes to Rhode Island foreclosure law are set to become effective for certain mortgage foreclosures on September 12, 2013. New Section 34-27-3.2 entitled “Mediation Conference” has been added to Rhode Island General Laws, amending Chapter 34-27 entitled “Mortgage Foreclosure and Sale” (referred to here as the “Mediation Law”). Companion bills (House 5335, Sub B and Senate 0416 Sub A) were signed by the governor on July 15, 2013 and, according to their terms, the changes are effective 60 days after, on September 12, 2013. The Mediation Law will be in effect through July 1, 2018.

To provide guidance and forms for implementation of the Mediation Law, the Division of Banking of the Rhode Island Department of Business Regulation (DBR), has released proposed changes to Banking Regulation 5. The proposed changes were filed as an emergency regulation, which is effective for 120 days starting on August 14, 2013 until December 12, 2013, with the ability to renew Regulation 5 as amended for another 90 days. A hearing scheduled for September 16, 2013 regarding the Banking Regulation 5 changes has been postponed to September 23, 2013. Mortgagees and servicers can rely on the proposed changes and forms found in amended Banking Regulation 5 because those changes were proposed on an emergency basis.

The policy behind the state-wide Mediation Law seeks to address increasing residential mortgage foreclosure problems including the displacement of homeowners who want to live and work in Rhode Island and increasing numbers of unoccupied buildings. The state-wide Mediation Law should resolve the confusion in complying with local mediation ordinances that were previously enacted in Cranston, East Providence, Providence, Warren, and Warwick. The Mediation Law preempts any existing or future foreclosure mediation or conciliation ordinances, and it is expected that the cities and towns with local foreclosure mediation ordinances will not seek to enforce those ordinances once the Mediation Law becomes effective.

Mortgages on Non-Residential Property and Non-Owner-Occupied Residential 1- to 4-Family Property are Not Entitled to Mediation
Before getting into the nuts and bolts of the Mediation Law and the amendments to Banking Regulation 5, it will be helpful to review the mortgages that are NOT affected by the Mediation Law. Section 34-27-3.2(c)(6) defines “Mortgage” as “an individual consumer mortgage on any owner-occupied, 1- to 4-unit residential property that serves as the owner’s primary residence; and Section 34-27-3.2(l) provides that the Mediation Law applies only to foreclosure of owner-occupied, residential property with no more than 4 dwelling units which is the primary dwelling of the owner. Thus, no Mediation Notice (discussed later in this article) is required for a foreclosure where the collateral is purely commercial-purpose, and for those mortgage loans that encumber investment residential property, the mortgagee will have to be able to show that the property is NOT owner-occupied, residential 1- to 4-family property. Neither the Mediation Law, nor Banking Regulation 5, provide for a form of affidavit attesting to the fact that a particular mortgaged property is not eligible for mediation for reasons other than the exemptions stated below.

The Mediation Law provides that no foreclosure deed may be submitted to a land evidence recorder until the provisions of the Mediation Law have been met, and an affidavit of compliance with Section 34-27-3.2 must be provided with the foreclosure deed when submitted for recording. Failure to comply with the requirements of the Mediation Law renders a foreclosure “void.” Of concern is mortgaged property where the purpose of the mortgage loan was purely commercial and/or as investment property. In instances where the mortgage loan is a commercial-purpose or investment loan but where the property is owned by an individual, mortgagees and loan servicers should anticipate push-back from recorders and/or from title insurers who will be looking for compliance with the Mediation Law.

Exemptions from Mediation Law for Mortgages that are 120 Days or More Delinquent on September 12, 2013 or where Mortgagee Qualifies as a “Locally-Based Mortgagee”
The Mediation Law contains two exemptions that remove additional pools of otherwise applicable mortgage loans from the mediation requirement. One exemption provides that mediation is not necessary for mortgages on properties that are already seriously delinquent and that may or may not already be in foreclosure. For mortgage loans that are more than 120 days delinquent on or before September 12, 2013, the mortgage holder is exempt from complying with the Mediation Law. Amended Banking Regulation 5, Section 4, Paragraph C(i) provides that mortgagees may submit the form found in Appendix D 2 when recording the foreclosure deed. The form in Appendix D 2 includes a statement that the mortgage loan is more than 120 days delinquent.

The second exemption exists for entities that qualify as “Locally-based Mortgagees,” which are defined in Banking Regulation 5, Section 3, Paragraph G as “a Rhode Island-based Mortgagee with headquarters in Rhode Island or with a physical office or offices exclusively in Rhode Island from which is carried out full-service mortgage operations including acceptance and processing of mortgage payments and provision of local customer service and loss mitigation and where Rhode Island staff have the authority to approve loan restructuring and loss mitigation strategies.” Appendix D 1 of Banking Regulation 5 contains the form of affidavit for completion by the mortgagee who qualifies as a “Locally-based Mortgagee,” and it should be submitted with the foreclosure deed for recording and may be used as evidence for title insurers.

Mediation Notice and Procedures
The Mediation Law provides that foreclosure may not be initiated unless its provisions have been met. Thus, once a determination is made that a mortgage meets the definition of “Mortgage” in the Mediation Law, and that the two exemptions discussed above do not apply, a mortgagee or its servicer must take steps to comply with the Mediation Law. The Mediation Law provides that written notice of a foreclosure may not go forward without participation in a mediation conference, the notice must be sent by certified and first-class mail to the address of the mortgaged real estate and, if different, to the address designated by the mortgagor in writing. The DBR has released proposed forms of the required notice in Banking Regulation 5, Appendix B in English, Spanish, and Portuguese, which will be collectively referred to as the “Mediation Notice.”

The provisions of the Mediation Law setting forth the timing of when a Mediation Notice must be sent versus the timing requirement in amended Banking Regulation 5 may cause confusion for mortgagees and servicers. The Mediation Law states that the Mediation Notice must be sent out “When a mortgage is not more than 120 days delinquent ... .” On the same point, Banking Regulation 5 states that the Mediation Notice must be provided to all mortgagors and owners (if other than mortgagor) when a mortgage is not more than 90 days delinquent. We surmise that the change in timing for when the Mediation Notice must be sent could benefit both mortgagees and mortgagors because a mortgagor will be more likely to be able to come up with the funds to bring a mortgage current at the 90-day delinquency point as opposed to when the mortgage loan is 120 days delinquent. Nevertheless, the proposed regulation conflicts with the Mediation Law, and it is expected that this issue will be raised at the September 23, 2013 hearing on the proposed regulation.

Another issue raised by the delinquency timing point is this: One could interpret the Mediation Law to mean that if a mortgage loan is more than 120 days delinquent, the mortgagee does not have to send out a Mediation Notice, and no mediation is required. Some mortgagees and servicers may conclude that they can delay commencing foreclosure until the delinquency is more than 120 days, and thus avoid mediation altogether. The authors’ firm does not believe that the General Assembly and the DBR intended to provide for a mechanism to avoid mediation, and it is not advisable to engage in such a delay. We reiterate the fact that the Mediation Law provides that failure of a mortgagee to comply with its provisions renders the foreclosure “void,” and a “void” foreclosure will require the mortgagee to go back and follow the Mediation Law provisions and redo the entire foreclosure; steps which will be very costly for the mortgagee.

Still another issue that is not addressed in the Mediation Law or in the proposed changes to Banking Regulation 5 is what might happen if a mortgagee allows the mortgage to become more than 120 days delinquent and has not sent out a Mediation Notice. Can a Mediation Notice be sent out when a mortgage is 150 days delinquent, and what affect does that have on the validity of the foreclosure?

The Mediation Notice may be sent out by the mortgagee or its agent. This means the Mediation Notice can be sent out by the servicer or even the foreclosure attorney. Any mortgagee subject to regulation and supervision by the DBR must maintain a duplicate of the Mediation Notice, including information regarding delivery of the Mediation Notice, and a mortgagee may put the text of the Mediation Notice on its own letterhead (or on the letterhead of its servicer or foreclosure attorney). It contains a statement advising the mortgagor of his/her right to a free, in-person or telephone mediation conference with an independent mediation coordinator, and the mortgagee may not foreclose unless it provides the mortgagor with the opportunity to participate in mediation. The mediation conference must take place within 60 days of the mailing date of the Mediation Notice.


The Mediation Notice must be completed with the applicable loan number, the correct name of the mortgagee, the address of the mortgage and, importantly, the name of the mortgagee’s authorized representative along with accurate contact information for that person. The Mediation Notice also contains a statement directed at the mortgagor: “You will be contacted by a foreclosure mediation coordinator to schedule that mediation conference.” There is no direction in the Mediation Law or in the amendments to Banking Regulation 5 as to how the mediation coordinator is to be notified; however, it is safe to say that it is the mortgagee’s responsibility to notify the mediation coordinator at the same time that the Mediation Notice is mailed because the 60-day requirement must be met.

No mediation coordinator is named in the Mediation Law; the Law defines “Mediation Coordinator” as a person designated by a Rhode Island-based HUD-approved counseling agency to serve as the unbiased, impartial, and independent coordinator and facilitator of the mediation conference, with no authority to impose a solution or otherwise act as a consumer advocate, provided that such person possesses the experience and qualifications established by the DBR. Because the changes to Banking Regulation 5 were made on an emergency basis in order that the mediation process is ready on the effective date of the Mediation Law, the DBR has named Rhode Island Housing as the qualified mediation coordinator. Rhode Island Housing is well-prepared for the role because it has been in the same role in the cities and towns that have local foreclosure mediation ordinances. The DBR anticipates that there will be a hearing held in the future to establish qualification and experience requirements so that other mediation coordinators can be appointed.

The Mediation Law provides that the mediation conference shall take place in person or by phone. The mortgagor must participate in the mediation and cooperate in such a way so as to provide all necessary financial and employment information and by completing any and all loan resolutions and applications as deemed appropriate by the mediation coordinator. The mortgagee must designate an agent to participate in the mediation conference and respond to all requests from the mediation coordinator or the mortgagor within a reasonable period of time not to exceed 14 days. The mediation will be free to the mortgagor, and the mortgagee must pay Rhode Island Housing as the designated mediation coordinator $500 per engagement.

It is the job of the mediation coordinator (once notified by the mortgagee) to contact the mortgagor and set up a mediation session. After two attempts by the mediation coordinator to contact the mortgagor (where the mortgagor has failed to respond, cooperate, and/or participate), the mortgagee will be deemed to have complied with the Mediation Law upon verification by the mediation coordinator that the Mediation Notice was properly sent. The mediation coordinator shall issue a certificate of compliance, which shall be recorded with the foreclosure deed. Issuance of the certificate means that the mortgagee is free to proceed and foreclose. The form of “Certificate Authorizing Foreclosure Pursuant to R.I. Gen. Laws § 34-27-3.2” is found in Appendix C to amended Banking Regulation 5.

If a mediation conference does take place after a “good faith effort” is made by the mortgagee, and the parties cannot come to an agreement to renegotiate the mortgage loan so that foreclosure is avoided, the mediation coordinator must complete the certificate in Appendix C (including Attachment 1, which sets forth the factors of “good faith”). “Good Faith” is defined in the Mediation Law as the mortgagor and mortgagee dealing honestly and fairly with the mediation coordinator in an effort to determine whether or not an alternative to foreclosure is economically feasible for the mortgagor and the mortgagee. The Mediation Law provides that some or all of the following factors are evidence of good faith: (i) mortgagee provided the Mediation Notice; (ii) mortgagee designated an agent with authority to participate in the mediation conference on the mortgagee’s behalf; (iii) mortgagee made reasonable efforts to respond in a timely manner to requests from the parties; (iv) mortgagee declines to accept the mortgagor’s work-out proposal, if any, and the mortgagee provided a detailed written statement of its reasons for rejecting the proposal; (v) where mortgagee declines to accept the mortgagor’s work-out proposal, the mortgagee offered to enter into an alternative work-out/disposition resolution proposal that would result in net financial benefit to the mortgagor as compared to the terms of the mortgage. It is important to note that the Mediation Law does not require that all five good faith factors must exist to evidence the mortgagee has acted in good faith, but that “some or all” of the five factors may be checked off in Attachment 1 of the certificate to evidence good faith.

Limitation on How Many Times a Mortgagor is Entitled to Mediation
If the mortgagee and mortgagor are able to reach an agreement to renegotiate the terms of the mortgage so that foreclosure is avoided, the agreement must be reduced to writing and signed by both parties. If such a written agreement is entered, and if the mortgagor fails to comply with the terms of the agreement, the Mediation Law shall not apply to any foreclosure initiated within 12 months of the execution date of the written agreement. A foreclosing mortgagee must include these factors in the foreclosure affidavit that will be recorded with the foreclosure deed so that its right to proceed to foreclosure has been established.

Summary

A copy of the Mediation Law can be found here, while the proposed changes to Banking Regulation 5 can be found here. Parties can utilize the guidance and forms in proposed Banking Regulation 5 because it has been released as an “emergency” regulation, but they should be aware that the regulation and forms may change after the September 23, 2013 hearing. The forms that are needed for issuing Mediation Notices and completing the necessary certificates and affidavits of exemption can be found in the linked regulation document. Note that the proposed regulation contains mention of two different effective dates for the Mediation Law (September 12, 2013 and September 14, 2013). It is recommended that mortgagees utilize September 12, 2013 as the effective date until that discrepancy is resolved in the final changes to Banking Regulation 5.

© Copyright 2013 USFN and Partridge Snow & Hahn LLP. All rights reserved.
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Missouri: Notice Requirements for Unlawful Detainers Involving Foreclosed Properties

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 30, 2015

September 9, 2013

 

by Andrew Babitz
South & Associates, P.C. – USFN Member (Kansas, Missouri)

The Missouri Court of Appeals for the Eastern District recently handed down a decision that clarifies the notice required to bring an unlawful detainer matter following foreclosure. In Federal National Mortgage Association v. Wilson, 2013 WL 3943016 (Mo. Ct. App. 2013), the appellate court reversed and remanded the trial court’s decision in favor of the borrower.

The trial court had held, among other things, that the borrower did not default on the underlying note and, thus, never lost her right to possession of the property. The lower court reasoned that because the borrower’s right to possession predated Fannie Mae’s title to the property obtained after the foreclosure sale, the borrower’s right to possession was superior.

The trial court also determined that Fannie Mae failed to provide the former borrower with proper notice pursuant to Mo. Rev. Stat. § 534.030.1. The trial court’s order held that Fannie Mae did not provide proper notice because the GSE could not prove it sent a certified written letter demanding that the borrower vacate the property or that it had personally served the written demand letter upon the borrower. The trial court held that the written notice of foreclosure was not enough to satisfy Mo. Rev. Stat. § 534.030.1. Id. at *2.

The Court of Appeals reversed on all accounts and found that Fannie Mae successfully proved the three elements necessary to prevail in an unlawful detainer proceeding following foreclosure: (1) that the property was purchased at a foreclosure sale; (2) the defendant received notice of the foreclosure; and (3) the defendant refused to surrender possession of the property. Id. at *3; U.S. Bank v. Watson, 388 S.W. 233, 236 (Mo. Ct. App. 2012); JPMorgan Chase Bank v. Tate, 279 S.W.3d 236, 239 (Mo. Ct. App. 2009).

The court cited the longstanding statute, Mo. Rev. Stat. § 443.380, which states that recitals in a trustee’s deed after a foreclosure sale, “shall be received as prima facie evidence in all courts of the truth thereof.” The court held that the former borrower received notice of the foreclosure because the foreclosing law firm sent a certified written notice of the foreclosure sale to the former borrower pursuant to Mo. Rev. Stat. § 443.325.3. The court stated that the trustee’s deed contained the United States Post Office receipt showing that the certified notice of foreclosure was sent. Id. at *4.

Furthermore, the court held that the borrower, falling in the after-foreclosure class of unlawful detainer, was not entitled to written demand for the property described by the trial court in addition to the notice of the foreclosure. The court stated “since the nineteenth century, Missouri courts interpreting the unlawful detainer statute have unequivocally determined that written demand should apply only to the intruder class.” Id. at *6. This holding is extremely important to servicers because it clarifies the notice required in unlawful detainer cases post-foreclosure, and should reduce litigation on this point. The court has now clarified that the United States Post Office receipt proving that notice of the foreclosure was sent by certified mail satisfies the notice of the foreclosure requirement.

Wilson follows the recent Missouri Supreme Court decision, Wells Fargo Bank v. Smith, 392 S.W.3d 446 (Mo. 2013), which paved the way for Wilson by, among other things, providing an excellent summary of the legislative history regarding Missouri’s unlawful detainer statute. In Smith, the high court affirmed Missouri’s longstanding law that counterclaims and affirmative defenses may not be raised in unlawful detainer proceedings. Specifically, the court affirmed, Mo. Rev. Stat. § 534.210, which explicitly states that, “the merits of title shall in nowise be inquired into, on any complaint which shall be exhibited by virtue of the provisions of this chapter.” Id. at 460.

The court in Smith further held that homeowners who dispute a lender’s right or ability to foreclose upon their property have two options. They may either (1) sue to enjoin the foreclosure sale from occurring, or (2) if the sale has occurred and the buyer has sued for unlawful detainer, bring a separate action challenging the foreclosure purchaser’s title and seek a stay of the unlawful detainer action in that separate case. Id. at 461.

Author’s Note: The defendant Fiona Wilson filed a motion for rehearing/transfer to the Missouri Supreme Court on August 7, 2013. The motion was denied by the Court of Appeals on August 22, 2013. Defendant Wilson filed an Application for Transfer directly to the Missouri Supreme Court on September 6, 2013. The Application for Transfer had not been decided at press time of this article.

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Wisconsin: Appellate Court Reviews “Holder of the Note”

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 30, 2015

September 9, 2013

 

by Patricia C. Lonzo
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

A recent Wisconsin Court of Appeals decision gives insight as to what is necessary to prove possession of a note endorsed in blank and, ultimately, that a party is a holder of the subject note. [Dow Family v. PHH Mortgage Corporation, 2013AP221 (Wis. Ct. App. Aug 6, 2013)]. On the appeal of a summary judgment of foreclosure entered in favor of PHH, the court held that PHH did not authenticate the note nor prove possession and remanded the case for trial on the issue. The appellate court further held that “if PHH can show it is entitled to enforce the note, it is also entitled to enforce the mortgage under the doctrine of equitable assignment.” Equitable assignment continues to be a well-rooted legal doctrine.

In Dow Family, PHH was the note holder for a first mortgage on a property that was sold by PHH’s borrower to the Dow Family. The title commitment obtained during the sale process revealed a number of mortgages on title. The first mortgage on title was from 2001 and to MERS as nominee to US Bank. The title commitment did not reference MERS, only US Bank. This first mortgage to MERS was the mortgage of which PHH was the note holder. The mortgage was later assigned to PHH. There was a subsequent mortgage on title to US Bank from 2003. The Dow Family was persuaded to believe that the first mortgage from 2001 had been paid off but just had not been satisfied of record. The sale to the Dow Family went through without paying off the first mortgage on title. Thereafter, a declaratory judgment case was filed by the Dow Family and a foreclosure action was commenced by PHH. The two lawsuits were consolidated.

Consistent with the UCC, to establish that it was the note holder and entitled to enforce the note, PHH had to prove possession of the original note that was endorsed “in blank.” Two affidavits had been submitted to the circuit court relevant to the issue. First, an affidavit of PHH had been submitted, containing the averment that “PHH is the current holder of said note and mortgage.” The affidavit incorporated a copy of the note with the “in blank” endorsement and a copy of the Notice of Assignment, Sale or Transfer of Servicing Rights from MERS to PHH. Next, an affidavit of PHH’s attorney (who is also the author of this article) was submitted. It contained the averment that “what appear to be the original note and mortgage have been received by my office from the plaintiff for the purposes of proceeding in these actions.” The appellate court determined that these averments and copy of the note did not present a prima facie case to prove possession.

The appellate court’s conclusion, in part, was based upon a finding that the copy of the note was not authenticated. Authentication is a prerequisite for determining that a document is admissible evidence. The court also considered multiple factors leading to its rejection of the copy of the note and averments in lieu of the submission of the original note into evidence. These included inconsistencies in the copy of the note attached to the complaint (which did not bear any endorsements) and the endorsed copy attached to the affidavits.

Ultimately, when the facts of a case are such that they cast doubt upon whether the copy of the note is a true and correct copy of the original document, a copy may not suffice. Following the best evidence rule, the original note may be required to authenticate the note and prove possession.

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Illinois: New Statute on Tenant Rights

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 30, 2015

September 9, 2013

 

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

Illinois Senate Bill 56 (SB56), effective November 19, 2013, has passed and has been signed by the governor. This legislation changes how the law applies to tenants in foreclosed properties with “bona fide leases,” along with other changes to the Illinois Mortgage Foreclosure Law. A copy of the new law can be viewed here.

Impact on “Bona Fide Leases”
SB56 adds a new section to the Illinois Code of Civil Procedure Forcible Entry and Detainer Law to include 735 ILCS 5/9-207.5, entitled “Termination of Bona Fide Leases in Residential Real Estate in Foreclosure.” This new section is directed towards the purchaser of residential real estate at a judicial sale (including a mortgagee or holder of certificate of sale) who will not use the property as a primary residence. The purchaser at sale may only terminate a bona fide lease at the end of its term, with no less than 90 days written notice, or in the case of a month-to-month or week-to-week lease, by no less than 90 days notice.

The sole exception is that “an individual who assumes control of residential real estate in foreclosure pursuant to a judicial sale and who will occupy a dwelling unit of the residential real estate … as his or her primary residence may terminate the bona fide lease for the dwelling unit subject to the 90-day notice requirement ….” SB56 makes Section 9-207.5 the sole procedure for terminating a bona fide lease in residential real estate at a judicial foreclosure sale. This means that one can no longer name a tenant in a foreclosure to terminate the tenant’s interest.

SB 56 defines “residential real estate” as “real estate, except a single tract of agricultural real estate consisting of more than 40 acres, which is improved with a single family residence or residential condominium units or a multiple dwelling structure containing single family dwelling units for one or more families living independently of one another, for which an action to foreclose the real estate: (1) has commenced and is pending; (2) was pending when the bona fide lease was entered into or renewed; or (3) was commenced after the bona fide lease was entered into or renewed.” A “bona fide lease” is defined as the lease of a dwelling unit in residential real estate in which:

1. the tenant is not the “mortgagor or the child, spouse, or parent of the mortgagor”1;
2. “the lease was a result of an arms-length transaction”;
3. the lease requires the payment of rent that “is not substantially less than fair market rent for the property or the rent is reduced or subsidized pursuant to a federal, State, or local subsidy”; and
4. either:
a. the lease was entered into or renewed prior to the filing of the lis pendens in relation to the foreclosure, or
b. the lease was entered or renewed after the date of the lis pendens but before the date of the judicial sale and the period of the lease is for “one year or less.”

If a lease was entered into after the lis pendens (notice foreclosure), but before the judicial sale of the property, and the lease is for more than one year, assuming the lease is determined to be bona fide pursuant to Section 15-1224(a), the lease shall be “deemed to be a bona fide lease for a term of one year.” In the event the lease is an “oral lease” and it is entered into before the date of the judicial sale, and the tenant is determined to be a bona fide tenant the lease shall be “deemed to be a bona fide lease for a month-to-month term.” If, however, the lessee can prove by a preponderance of evidence that the lease was for more than a month-to-month period, the lease may be allowed to continue for a period of up to one year. If any lease, written or oral, is entered into after the judicial sale, but prior to the court confirming the sale, and the lease is considered a bona fide lease the lease shall be deemed a month-to-month lease.

As added protection to a tenant of a foreclosed property, no order of possession issued under the Illinois Mortgage Foreclosure Law, “shall be entered against a lessee with a bona fide lease of a dwelling unit in residential real estate in foreclosure, whether or not the lessee has been made a party in the foreclosure.”

SB56 expands what may be included in the statutory written notice already required to include “instruction on the method of payment of future rent, if applicable.” Property receivers and mortgagees in possession shall also provide notice to all known occupants providing “instructions on the method of payment of future rent, if applicable.”

Changes with Respect to Special Representatives

SB56 amends 735 ILCS 5/15-1501, which sets forth the necessary parties for a foreclosure action. Specifically, SB56 amends what is required when a mortgagor is deceased and the property is held by another, living individual. “The Court is not required to appoint a special representative for a deceased mortgagor for the purpose of defending the action, if there is a living person that holds a 100% interest in the property that is the subject of the action, by virtue of being the deceased mortgagor’s surviving joint tenant or surviving tenant by the entirety.” See 735 ILCS 5/15-1501(h). SB56 does not expand any contract liability to the living party that holds a 100% interest in the property, specifically stating that “no deficiency judgment [may] be sought or entered in the foreclosure case … against a deceased mortgagor.” See 735 ILCS 5/15-1501(h).

Changes with Respect to Sealing Eviction Orders
SB56 requires the sealing of court files when a forcible entry and detainer action (eviction) is brought under the forcible entry and detainer statute (735 ILCS 5/9-207.5) or Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1701).

© Copyright 2013 USFN. All rights reserved.
September e-Update

1 However, if the “child, spouse, or parent of the mortgagor” can prove that the “written or oral lease otherwise meets the requirements of Section 15-1224(a),” the lease will be determined to be a bona fide lease and the requirements of 735 ILCS 5/15-1224 will apply. See 735 ILCS 5/15-1224(e).

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California: No Circumventing the Anti-deficiency Protections

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 30, 2015

September 9, 2013

 

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

California has a tradition of anti-deficiency protections, but over the past few years these have edged beyond the traditional notions, swiftly and surely. Notably, new protections have been established to address short sales, and even old protections are newly interpreted to extend to short sales. One such ruling was issued on July 23, 2013, where the appellate court in Coker v. J.P. Morgan Chase Bank, 2013 Cal. App. LEXIS 573, held that the prohibition on collecting deficiency judgment on a purchase money loan, conventionally applied to foreclosure sales, extends to short sales as well.

Background
For a bird’s eye view of the anti-deficiency protections, it helps to separate them into two eras: the pre-2010 prohibitions and the post-2010 ones. All of the anti-deficiency protections are codified in the Code of Civil Procedure. There is no common law prohibition on collecting deficiency in California.

Since the pre-2010 era, collecting deficiency judgment following a sale on a purchase money loan has been prohibited (CCP § 580b). A purchase money loan is a non-recourse loan, meaning a borrower has no personal liability after a sale of a property. Sale was commonly thought of and interpreted as a foreclosure sale, either judicial or nonjudicial. In the case of a nonjudicial sale of a residential property, no deficiency judgment could be collected by the foreclosing entity (CCP § 580d). In the pre-2010 era, a foreclosure sale was needed to trigger the protections.

Starting in 2010, California enacted a series of new restrictions on collecting deficiencies. These newer prohibitions do not need a foreclosure sale as a trigger, and are not limited to obtaining a deficiency judgment. Since 2010, California has passed a new law each year broadening the prohibitions on collecting a deficiency:

  • 2010: SB 931 enacted a new code section specifically addressing short sales, and prohibiting collecting deficiency judgment on a first lien secured with residential property (CCP § 580e).
  • 2011: SB 458 swiftly amended the newly enacted CCP § 580e to extend its application to all liens, and to expand the prohibition on collecting any funds from a borrower, either before or after completing a short sale.
  • 2012: With the passage of SB 1069, CCP § 580b, which had traditionally prohibited collecting deficiency on a purchase money loan was amended to extend to subsequent refinances of a purchase money loan.
  • 2013: SB 426 was passed to clarify that the protections in CCP §§ 580b and 580d prohibit collecting any deficiency owed, not just a deficiency judgment.

In the midst of the new anti-deficiency legislation remain short sale agreements predating the effective date of CCP § 580e (January 1, 2011) and its subsequent amendment on July 11, 2011. The short sale agreements drafted prior to January 1 and July 11, 2011, sometimes conditioned the short sale approval on the borrower agreeing to contribute funds toward the short sale or agreeing to remain personally liable for any deficiency owed on the debt. The concept behind those provisions was to bridge the gap between the purchase price and the debt owed, and to facilitate obtaining approval from all parties. The short sale agreement reviewed by the Coker court contained such a provision and predated July 11, 2011.

The Coker Case
In Coker, the borrower was in default on her mortgage loan and had arranged for a short sale. The borrower entered into a written agreement with the lender where she agreed to remain personally liable for any deficiency (the difference between the purchase price and the outstanding balance of the debt). After the short sale transaction was completed, a demand letter was sent to the borrower to collect the unsatisfied portion of the loan. The borrower filed suit and invoked the protections of the anti-deficiency statutes, CCP § 580e and § 580b.

The protections of CCP §580e specific to short sales did not apply to this borrower because the statute is not retroactive, and the borrower’s agreement predated its effective date. However, the borrower’s loan was a purchase money loan. The novel question before the court was, Does the prohibition on collecting deficiency judgment on a purchase money loan, following a sale, extend to short sales? If yes, can a borrower agree to waive this protection?

Prior to Coker, no California court had considered this question because, conventionally, the anti-deficiency protections were triggered by a foreclosure sale, and collecting deficiency was thought of as pursuing a legal action for a judgment, post-foreclosure. The court in Coker dispensed with these notions, and expanded the protections of CCP § 580b, not previously applied to short sales, to cover short sales as well.

The court interpreted the existing statute broadly, as a matter of public policy, to shift the risk of falling property values onto the lender. The court believed the protection is needed to stabilize property sales, and keep from aggravating an economic downturn. (See Coker at *13, 14). Further, the court ruled that a borrower cannot agree to waive anti-deficiency protections. This ruling is a reflection of how liberally California’s anti-deficiency statutes are construed and how sweeping is their grasp.

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Minnesota: Class Action Against MERS for Failure to Pay Recording Fees Dismissed

Posted By USFN, Monday, September 9, 2013
Updated: Tuesday, November 24, 2015

September 9, 2013

 

Orin J. Kipp
Wilford, Geske & Cook, P.A. — USFN Member (Minnesota)

Minnesota’s two most populated counties recently brought a class action law suit against MERS, alleging a repeated failure to pay recording fees for each transfer of a mortgage within the MERS recording system. Failure to do so, as alleged by Hennepin and Ramsey counties, directly violates the Minnesota Recording Act by failing to pay the mandatory recording fees.

The counties based their claims on Minn. Stat. § 507.34, which states, in relevant part:


[e]very conveyance of real estate shall be recorded in the office of the county recorder of the county where such real estate is situated; and every such conveyance not so recorded shall be void as against any subsequent purchaser in good faith and for a valuable consideration of the same real estate, or any part thereof, whose conveyance is first duly recorded.


The counties sought a declaration that MERS violated § 507.34 by assigning mortgages within the MERS registry without recording the assignment with the county recorder where the property is located. MERS defended this claim by stating that the Recording Act is permissive and merely explains where a mortgage should be recorded if the mortgagee wants to avail itself of the protections of § 507.34.

Along with the motion to dismiss, MERS alleged that the counties lacked standing to bring the suit. The court found that the counties had adequately alleged that the failure to record mortgage transfers resulted in a loss in fees and inaccurate property records. As such, the counties had demonstrated standing and the court addressed the claims on the merits.

The court’s analysis turned upon statutory interpretation. The court agreed with MERS that the term “shall” could not be read in isolation and must be interpreted with the remainder of the statute. MERS argued that the “shall be recorded” language instructs where a mortgage should be recorded if the mortgagee wants to avoid the consequences — loss of priority — for not recording the conveyance. This, in the court’s opinion, was the only reasonable construction of the plain language of the statute. The court went further to state that the plain language of § 507.34 is unambiguous and does not establish a duty to record all conveyances; rather, it outlines where to record and explains the consequence of not doing so. The court also relied upon past decisions interpreting the purpose of the Recording Act. Minnesota courts agreed with this analysis, having explained that “[t]he purpose of [§ 507.34] is to protect those who purchase real estate in reliance upon the record.” Claflin v. Commercial State Bank of Two Harbors, 487 N.W.2d 242, 248 (Minn. Ct. App. 1992). See Citizens State Bank v. Raven Trading Partners, Inc., 786 N.W.2d 274, 278 (Minn. 2010) (“The purpose of the Minnesota Recording Act is to protect recorded titles against the gross negligence of those who fail to record their interest in real property”).

Based upon the plain language of the statute, the court concluded that § 507.34 does not create a mandatory recording obligation. The counties had also asserted claims of public nuisance and unjust enrichment. However, these claims were premised upon the argument that a mandatory obligation to record each conveyance existed. As such, these remaining claims were dismissed as well.

There has been no word on whether this decision will be appealed by the counties. This opinion is certainly a feather in the cap for MERS and the other defendants named in the class action. This may have been a Hail Mary play by the counties in hopes of drumming up additional mandatory fees. However, the opinion certainly exhibits a succinct recitation of the court’s position regarding interpretation of the Minnesota Recording Act.

Closing Note — This author’s firm recently wrote an article on an issue within the same vein. [See “Deed Transfer Tax: GSEs Exempt,” which appeared in the USFN e –Update (July/Aug. 2013 ed.)] While different in analysis, the cases are identical as to disposition. The federal district court dismissed an action brought by Hennepin County against Freddie Mac and Fannie Mae regarding their alleged failure to pay state deed transfer taxes. The complaint was dismissed based upon protections provided to the GSEs under 12 U.S.C. § 1723a (c)(2) and 12 U.S.C. § 1452 (e), as well as Minn. Stat. § 287.22 (6).

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Servicing VA Loans: The Foreclosure Process

Posted By USFN, Monday, September 9, 2013
Updated: Tuesday, November 24, 2015

September 9, 2013

 

by Terry Ross, Director, Regulatory Compliance
Barrett Daffin Frappier Turner & Engel, LLP – USFN Member (Texas)

The author thanks Cheryl Amitay, Rhonda Armitage, Terry Cere, Theresa Gonzalez, and Mary Ann Mills of the VA Central Office Loan Management staff for their valuable contributions to this article.

Once upon a time, servicing U.S. Department of Veterans Affairs (VA) loans going to foreclosure sale required the servicer to consider buying down the debt so that VA could issue a specified bid, which allowed the servicer the option to convey the property to VA after the foreclosure sale. With the introduction of VALERI (VA Loan Electronic Reporting Interface), VA made major changes in servicing these loans. One of the biggest changes was to eliminate the buy-down program and introduce the write-off.

The VA Servicer Guide explains in detail the necessary steps in the foreclosure process. The guide contains all of the information a servicer needs to service VA loans and is available at:
http://www.benefits.va.gov/HOMELOANS/documents/docs/va_servicer_guide.pdf.

Bidding Instructions
When a delinquent loan cannot be cured through a loss mitigation option, prompt termination of the loan is in the best interest of all parties. VA has delegated the foreclosure sale process to the servicer. The foreclosure sale process includes the scheduling, postponing, canceling, or completion of the sale, as well as the determination of the bid type and bid amount.

The necessary steps to determine the termination bid amount are: (1) Obtain a liquidation appraisal; (2) Determine net value; (3) Calculate total eligible indebtedness; and (4) Determine final bid amount.

Step 1: Obtain a Liquidation Appraisal — The servicer is required to order a VA appraisal of the property at least 30 days prior to completing a foreclosure sale. VA appraisals are ordered by accessing the Veterans Information Portal. A VA-approved appraiser then appraises the property. If a servicer participates in the Servicer Appraisal Process Program (SAPP), its designated SAPP Staff Appraisal Reviewer (SAR) reviews the appraisal and determines the reasonable value of the property. Next, the SAPP SAR issues a notice of value (NOV). If a servicer does not participate in SAPP, VA Construction and Valuation (C&V) issues the NOV. Any appraisal value can be viewed once the NOV is issued in WebLGY. VA will reimburse the servicer for an appraisal cost when the claim is filed, and the appraisal cost may be paid over and above the maximum guaranty amount. An appraisal should be ordered early in the process to avoid delays that may jeopardize the sale. An appraisal is valid for 180 days unless VA determines that rapidly changing market conditions warrant a shorter validity period. If property damage is learned of after obtaining the appraisal, but prior to the completion of the foreclosure sale, the appraiser must be contacted to obtain an updated appraisal report. If an updated appraisal report cannot be completed, a new appraisal may be required. Use the updated NOV and adjust the net value if necessary.

Step 2: Determine Net Value — Determine net value using the VA formula. The fair market value is received through the SAPP program or from VA. Net value is the fair market value minus the cost factor. The cost factor is a percentage of fair market value and represents the cost to VA for acquiring and disposing of properties. VA publishes the cost factor as necessary in the Federal Register, and it is available on the VA Loan Guaranty website at http://www.homeloans.va.gov. For convenient reference, Circular 26-13-15 (dated September 3, 2013), announcing the "New Percentage to Determine Net Value" and stating the percentage is increased from 11.87 percent to 14.95 percent effective October 8, 2013, is accessible here.

Pre-October 8, 2013 — Illustration of determining net value: If a property has a fair market value of $100,000 and the VA cost factor is 11.87%, the net value would be calculated as follows:

  • Fair Market Value $100,000
  • VA Cost Factor (11.87% of $100,000 = $11,870)
  • Net Value ($100,000 - $11,870 = $88,130)

Effective October 8, 2013 — Illustration of determining net value: If a property has a fair market value of $100,000 and the VA cost factor is 14.95%, the net value would be calculated as follows:

  • Fair Market Value $100,000
  • VA Cost Factor (14.95% of $100,000 = $14,950)
  • Net Value ($100,000 - $14,950 = $85,050)

Step 3: Calculate Total Eligible Indebtedness — Total eligible indebtedness is the amount of the borrower’s indebtedness that VA allows on a claim. The following calculations should be used when determining total eligible indebtedness:

  • Unpaid principal balance (UPB): The UPB as of the last payment date on the loan.
  • Interest: Accrued unpaid interest up to the termination date or the maximum allowable interest date, whichever is sooner. (To include 30 days prior to the payment due date of the loan.)
  • Liquidation expenses: All liquidation costs incurred up to the current date.
  • Advances: Taxes, insurance, and preservation costs advanced on the loan up to the current date.
  • Credits: Any credits on the borrower’s account that reduce the borrower’s total eligible indebtedness.

Step 4: Determine Bid Amount — To determine whether to bid total debt or net value, compare total eligible indebtedness to the net value. If net value of the property exceeds the total eligible indebtedness, bid total indebtedness (total debt bid). When the net value of the property is less than total eligible indebtedness, bid the net value of the property (net value bid). If the sale takes place in a state with statutory bid requirements, bid what is required by the state. VALERI will adjust the credit to indebtedness based on whether the property is conveyed, retained by the holder, or sold to a third party.

Eligibility to Transfer Custody and Title
Prior to initiating a transfer of custody, eligibility to transfer custody and title must be determined. A transfer of custody may be initiated if all of the following conditions are met:

The loan was terminated through a foreclosure or deed-in-lieu, the servicer writes off all indebtedness that will not be covered by the maximum claim payable and the acquisition payment, and sends a deficiency waiver notice to the borrower once the claim is paid if the net value of the property is less than the unguaranteed portion of the indebtedness (the total eligible indebtedness minus VA’s maximum claim payable under the guaranty). The deficiency waiver notice (letter) is only necessary in maximum guaranty cases.

The deficiency waiver notice must be sent to the debtor at his/her last-known address. In most cases, the last-known address will be the property address. If the debtor has given the U.S. Post Office a forwarding address, the letter will be sent to that address. A copy of the deficiency letter must be retained in the claims file for possible post-audit review. Further, if the deficiency waiver notice is returned by the post office, the envelope should be retained in the file.

For convenient reference, a sample deficiency waiver notice can be found here.

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New York: Commercial vs. Residential Foreclosure Settlement Negotiations

Posted By USFN, Monday, September 9, 2013
Updated: Tuesday, November 24, 2015

September 9, 2013

 

by Bruce J. Bergman
Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. – USFN Member (New York)

If there was ever a time that foreclosing lenders were under pressure to settle cases (at least those involving home loans), today is the time. Courts insist upon it; the government demands that it be done; and there is the lender’s and servicer’s own desire to achieve a performing loan. So it would seem that there could hardly be anything wrong in pursuing some settlement path — except that, in practice, danger lurks if the lender or servicer does not assiduously make clear its position. To immediately make the point: a foreclosure can be upset at any stage if the borrower comes forward and convinces a court that he thought settlement negotiations were proceeding and that he, therefore, was not obliged to defend the case. This is rarely an issue in a commercial foreclosure setting.

In the commercial foreclosure action and the typical magnitude of the case, the foreclosing plaintiff has both the wherewithal and the desire to assure that settlement negotiations do not lead to borrowers’ untoward claims that some concession had been made by the lender. This is accomplished by lenders’ insistence that borrowers sign a pre-negotiation letter before discussions can proceed. Among other things, the letter provides that no change in the mortgage document obligations is arrived at unless there is a new writing signed by the plaintiff and that the foreclosure proceeds during any settlement negotiations, all without waiver of any of the plaintiff’s rights. [Naturally, there is more to it than this; and for those who wish to explore it, attention is invited to 2 Bergman on New York Mortgage Foreclosures § 24.07, LexisNexis Matthew Bender (rev. 2012)]. This formality, however, is rarely pursued in the residential foreclosure case, which then leaves lenders and servicers open to a possible charge that a borrower believed settlement was in the offing.

In an illustrative case, a residential borrower had defaulted in the foreclosure action and later moved to vacate that default, claiming that his lawyer had failed to interpose an answer. For reasons not particularly relevant here, the court was unimpressed with that excuse. Additionally, though, the borrower stated that his attorney had assured him that the foreclosure action would not proceed while negotiations took place, and that his counsel had made five attempts to obtain a loan modification.

Although all of these contentions lacked any documentary support (upon which basis it could be opined that the court could have rejected them), the court found that the assertions were combined with the borrower’s claim that his failure to timely respond to the complaint was also due to his good faith belief in settlement negotiations. The court then ruled that such a good faith belief will supply a reasonable excuse for failure to timely answer.

While it appears that the borrower’s belief was based upon what his own attorney told him, rather than on any representations by the servicer, there was nevertheless some indication that the servicer was entertaining the possibility of a settlement; i.e., perhaps by way of mortgage modification.

The failure here — and which led to the court allowing the borrower to “open up” the action — was the absence of a lender-written declaration that the foreclosure action was proceeding apace, notwithstanding any possible negotiations or any consideration of a mortgage modification. Without that, the door was open for the court to do what it really wanted to do: give the borrower a chance to submit an answer. As a consequence, an answer would necessitate a motion for summary judgment and all of the expense and delay that portends. This is something that might have been avoided by a more dedicated approach to the settlement process.

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Rhode Island: MERS and the Recording of Mortgages and Assignments: Changes on the Horizon?

Posted By USFN, Monday, September 9, 2013
Updated: Tuesday, November 24, 2015

September 9, 2013

 

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

Since 2011, banks, mortgage companies, and mortgage servicers (MERS Members) doing business in Rhode Island have been under attack on all fronts. Already embroiled in Fryzel v. Mortgage Elec. Registration Sys., 2013 U.S. App. LEXIS 12068 (see accompanying USFN e-Update article here, Sept. 2013 ed.), a lengthy conflict with residential borrowers that has put over 800 foreclosures on hold since 2011, MERS Members were forced to fend off a suit brought by the town of Johnston, which alleged that the MERS Members1 owed Johnston thousands of dollars in recording fees for failing to record mortgages and subsequent assignments as required by Rhode Island law. Town of Johnston v. MERSCORP, Inc., 2013 U.S. Dist. LEXIS 87826. Although the MERS Members won the battle against Johnston, they may ultimately lose the war when a third, far more formidable foe enters the fray — the Rhode Island General Assembly.

Johnston alleged that Title 34 of the Rhode Island General Laws, the statutory scheme controlling real property, imposes a mandatory requirement that all mortgages and mortgage assignments be recorded. Johnston claimed that it “was damaged because it was entitled to a recording fee for each mortgage or mortgage assignment that should have been recorded.” Because Johnston brought suit on its own behalf and on behalf of similarly-situated cities and towns in Rhode Island, an adverse ruling would have forced the MERS Members to pay hundreds of thousands of dollars in past-due recording fees, as each city and town in Rhode Island could have claimed it was damaged.

The Case & The Court’s Analysis

On June 21, 2013, the U.S. District Court for the District of Rhode Island held that Rhode Island law does not require mortgages and mortgage assignments be recorded. The court rejected Johnston’s position based on a plain reading of the three applicable statutes, R.I.G.L. §§ 34-11-1, 34-11-4, and 34-13-1, noting: “none of the statutes [Johnston] relies on requires a party assigning a mortgage or receiving an assignment on a mortgage to record that assignment, but rather dictates the consequences of not recording.”

First, the court held that R.I.G.L. § 34-11-1 has never been interpreted as requiring mortgages and mortgage assignments be recorded. Additionally, that statute provides that unrecorded transfers of interests in land are binding and valid to parties having knowledge of the conveyance. Second, the court held that R.I.G.L. § 34-11-4 plainly supports the conclusion that mortgages and mortgage assignments need not be recorded to be valid. R.I.G.L. § 34-11-4 states: “[a]ny form of conveyance in writing, duly signed and delivered” is sufficient to convey title, and “if also duly acknowledged and recorded shall be operative as against third parties.” Accordingly, while the act of recording perfects a mortgagee’s or assignee’s interest as to claims made by third parties, recording is not required to make a mortgage or mortgage assignment valid.

Finally, the court noted that R.I.G.L. § 34-13-1, titled “Instruments eligible for recording,” only defines the documents a town clerk must accept for recording, and does not impose a recording requirement: “The ‘town clerk or recorder of deeds’ is required to record such instruments ‘on request of any person and on payment of the lawful fees therefor,’ but that is not tantamount to a mandate to mortgagees or assignees.”

Consequently, because there is no statutory duty to record, Johnston could not claim it was entitled to damages for previously unpaid recording fees.

The Footnote and the Future of Rhode Island Law
It was not a clean victory for the MERS Members, however. In a footnote, the court observed that there are identically-titled bills pending before the Rhode Island House of Representatives and Senate: “An Act Relating to Property — Forms and Effect of Conveyances” (Act). See H.B. 5512 SUB A, 2013 Gen. Assembly, Jan. Sess. (R.I. 2013); S.B. 547, 2013 Gen. Assembly, Jan. Sess. (R.I. 2013). The Act would require that all mortgages and mortgage assignments be recorded. The Act does not stop at imposing a recording requirement. It would make several other amendments and additions to Rhode Island law that appear designed to ultimately prevent MERS from servicing any loans in the state.

The Act provides that “[a] mortgage naming a third party as the mortgagee who is not the named payee or lender on the underlying promissory note ... shall be invalid for recording, and shall not be enforceable as a mortgage lien.” Accordingly, if the Act passes, lenders who participate in MERS would no longer be able to name MERS as their nominee, and freely sell promissory notes to fellow participants. The Act would therefore reverse current Rhode Island law, which recognizes MERS as a valid system for the sale and transfer of ownership of residential loans. Earlier this year, the Rhode Island Supreme Court held that “[i]t is only when a loan is transferred to a nonmember that an assignment of the mortgage must be executed and recorded.” Bucci v. Lehman Bros. Bank, FSB, No. 2010-146, 2013 R.I. LEXIS 52.

The Act further provides that “any transfer of the ownership of the beneficial interest in, or the right to enforce, a promissory note ... secured by a mortgage must be accompanied by an assignment of the mortgage that is presented for recording with the applicable recording fee within thirty (30) days of the transfer.” The Act imposes heavy penalties on any assignee that fails to comply with the recording requirements: “[t]he failure to present the mortgage assignment for recording within the time limits stated herein shall render the mortgage void, but shall not nullify the underlying indebtedness.” Therefore, an assignee that fails to record a mortgage assignment within 30 days could find itself the holder of an unsecured obligation.

© Copyright 2013 USFN. All rights reserved.
September e-Update

1 The defendants in this action were: MERSCORP, Inc.; Mortgage Electronic Registration Systems, Inc. (MERS); Bank of America, N.A.; Citibank, N.A.; CitiMortgage, Inc.; JP Morgan Chase Bank, N.A.; Wells Fargo Bank, N.A.; Deutsche Bank National Trust Company; Goldman Sachs Mortgage Company; GS Mortgage Securities Corp.; and U.S. Bank, N.A.

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Military Status Compliance Automation

Posted By USFN, Monday, September 9, 2013
Updated: Tuesday, November 24, 2015

September 9, 2013

 

by Harry Beisswenger, CEO
NetDirector – USFN Associate Member

In the mortgage banking industry, more and more regulatory changes continue to trickle down to loan servicers and their attorneys. A number of these regulations are creating more overhead and reducing margins for the various parties to stay in compliance. For instance, some servicers now require up to seven military status checks during the life of a foreclosure file.

This process requires staff going to the Department of Defense (DOD) website and manually entering the borrower’s social security number to access military status information along with downloading the proof of search documents (certificate/screenshot). The search results along with the documents are then manually entered into the attorney/servicer case management system (CMS). As many can attest, the DOD site is not always accessible and it can be very slow due to heavy traffic. An additional time-consuming challenge is obtaining a borrower SSN if it is not included in the referral.

There is another way, however — using privately-developed automated systems. Among those offering the service, NetDirector automates an array of person search-related tasks. Without leaving their CMS, users can obtain military status (with certificate/screenshot) and PACER bankruptcy status (both national and regional) within minutes. They can also find a borrower’s social security number, all names/addresses, and determine whether the borrower is deceased. NetDirector provides automation with various servicer platforms (i.e., LPS Desktop & VendorScape) for Servicemembers Civil Relief Act document uploads and SCRA-related task updates, offering full compliance.

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Full Authority: Countering the Next Challenge to the Sufficiency of Notice Requirements Under Georgia Foreclosure Law

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 23, 2015

September 9, 2013

 

by Dallas R. Ivey & Kimberly Rizzotti Weber
Aldridge Connors, LLP – USFN Member (Georgia)

The Georgia Supreme Court recently brought much needed clarity and guidance to lenders and servicers regarding notice requirements under Georgia foreclosure law in You v. JP Morgan Chase Bank, N.A., No. S13Q0040, 2013 WL 2152562 (May 20, 2013). In You, the court rejected the argument that O.C.G.A. § 44-14-162.2(a) requires foreclosure notices to identify the “secured creditor,” which is not defined by statute but has been uniformly considered to be the holder of the security deed. (See Reese v. Provident, 317 Ga. App. 353, 730 S.E.2d 551(2012); Stubbs v. Bank of America, 844 F. Supp. 2d 1267 (N.D. Ga. 2012)). Rather, the court held that the plain language of the statute requires only that the written notice identify “the name, address, and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.” You, 2013 WL at *6 (emphasis in original).

In the wake of You, borrowers have launched a new line of attack by challenging the scope of authority of the parties identified in foreclosure notices as having full authority to negotiate, amend, and modify the terms of the mortgage with the debtor (See Harris v. Chase Home Finance, LLC, 4:11-cv-00116-HLM (11th Cir., July 31, 2013); Fuentes v. JPMorgan Chase Bank, N.A., 1:13-cv-01649-CAP (N.D. Ga. 2013)). Specifically, borrowers contend that if an owner of a loan has servicing guidelines with its agent, then the agent has “limited authority” rather than “full authority” to negotiate with the debtor. Borrowers have made this argument concerning loans owned by Fannie Mae and Freddie Mac by asserting that these entities have retained the authority to modify terms and negotiate with borrowers by establishing such guidelines. By this logic, unless a servicer or agent has unlimited authority to unilaterally negotiate, amend, and modify the terms of a loan, then the owner/investor would have to be the entity required to be identified under the statute. This reasoning clearly fails to apply to the reality of the lending and servicing industry as owners/investors have internal policies, guidelines, and standards for loan modifications, and would therefore require that the owner/investor always be identified in foreclosure notices.

There are several ways to counter this interpretation of full authority including: (1) the clear language of the You holding and prior judicial decisions; and (2) authority and agency concepts. Notably, the Georgia Supreme Court held in You that the party with full authority can be the owner of the loan, the loan servicer, or even an attorney. See You, 2013 WL at *6.1 In addition, basic agency concepts suggest that “full authority” does not mean “unlimited authority.” By analogy, full settlement authority merely means that the individuals at a settlement conference must be authorized by the parties to both explore settlement options and to agree at that time to any settlement terms agreeable to the parties.

The clear intention of the notice requirements under Georgia’s foreclosure statutes is to provide a borrower seeking to modify the terms of a mortgage with sufficient contact information to enable such negotiations. Lenders and their agents can defend against attacks on foreclosure notices by: (a) being meticulous in preparing notices that clearly state the contact information of the servicing agent or other person with full authority to negotiate; and (b) familiarizing themselves with the holding and analysis of the Georgia Supreme Court in You.

© Copyright 2013 USFN. All rights reserved.
September e-Update

1Prior cases from the Georgia Court of Appeals held that notices that identified attorneys as having full authority were sufficient even where the attorneys lacked full authority to amend mortgage terms or had to consult with clients about modifications. See Stowers v. Branch Banking & Trust Company, 317 Ga. App. 893, 731 S.E.2d 367 (2012); TKW Partners, LLC v. Archer Capital Fund, L.P., 302 Ga. App. 443, 691 S.E.2d 300 (2010) (notice identified attorney without unlimited or plenary powers to negotiate loan terms). See also Carr v. U.S. Bank, NA, 2013 WL 4267640 (C.A. 11 (Ga.)).

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Connecticut: New Procedures for Opening FC Judgments

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 23, 2015

September 9, 2013

 

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

The Connecticut Rules of Practice together with one piece of appellate case law have combined to create what could be called a “perpetual motion machine.” This confluence of authority would allow a borrower to, in theory, continually file motions to open a foreclosure judgment and forestall vesting or a sale, ad infinitum.

The matter of First Connecticut Capital, LLC v. Homes of Westport, LLC, 112 Conn. App. 750, 762, 996 A.2d 239 (2009), held that no foreclosure sale could occur during the time for which a party is able to take an appeal after a hearing on a motion that would potentially affect the final judgment. Practically, and when taken in conjunction with Practice Book § 61-11, which provides for an automatic appellate stay upon the hearing of any motion that would affect a final judgment, this means that even if a defendant’s motion to open a judgment of foreclosure is denied, a court must not allow a sale or vesting to occur within 20 days of the denial of the motion. This would occur in order to account for the 20-day appeal period following the denial of such a motion — notwithstanding a motion’s lack of merit or the number of motions that had previously been heard or denied, unless extraordinary measures were taken by the plaintiff or the court.

The Rules Committee to the Superior Court, after input from the Bench-Bar standing Committee on Foreclosures, has adopted a change to Section 61-11 that will remedy this situation and is scheduled to take effect on October 1, 2013. The change adds two subsections that fundamentally alter the procedures for opening foreclosure judgment as well as the automatic appellate stays incident to the denial of any such motions.

Subsection G changes the procedures for motions related to judgments of strict foreclosure. (Strict foreclosure is a procedure in which title will vest in the plaintiff by operation of law without a sale.) The addition provides that if there have been two prior motions brought by the owner of the equity seeking to open or otherwise modify the underlying judgment that have been denied, the filing and hearing of a third motion does not trigger the aforementioned automatic appellate stay, unless an affidavit is filed simultaneously therewith averring that the motion is filed for good cause arising after the court’s ruling on the party’s most recent motion. The affidavit must recite specific supporting facts. If such an affidavit is filed, the automatic stay would be in effect. However, the opposing party will have an opportunity to contest it with a counter-affidavit and a motion to terminate the stay, a hearing of which will be held two weeks after filing. No further appellate stay will be triggered by a decision granting termination of the stay.

The changes regarding sales are far different. Subsection H provides that if a motion to open a judgment of foreclosure by sale has been denied sooner than 20 days from the scheduled sale date (which would otherwise have triggered the automatic stay and required a re-setting of the sale) the sale will continue as scheduled. However, no motion for approval of the sale is to be filed or acted on by the court until the 20-day appeal period has run. Sales in Connecticut are expensive and can cost a plaintiff $3,000-$6,000. In some situations, this new procedure would eliminate the need to have multiple, costly sales.

These amendments to the Connecticut Rules of Appellate Procedure are an important step toward preventing defendants from needlessly impeding a final resolution in foreclosure matters when there is no meritorious reason.

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California: Short Sale Deficiency Reviewed by Appellate Court

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 23, 2015

September 9, 2013

 

by Drew A. Callahan
Pite Duncan, LLP – USFN Member (California)

The California Court of Appeal for the Fifth Appellate District recently issued a decision holding that: (1) the anti-deficiency protections of California Code of Civil Procedure (C.C.P.) section 580e do not apply retroactively; and (2) a short sale of real property is not itself an “action” as defined by C.C.P. § 22 and, thus, does not trigger the provisions of C.C.P. § 726, California’s one-form-of-action rule.

In Bank of America v. Roberts, 2013 DJDAR 9358 (Cal. App. 5th, July 17, 2013), the borrower appealed from the Superior Court for the County of Tulare’s ruling granting Bank of America’s motion for summary judgment for the balance due on a home equity line of credit, which the borrower agreed to remain liable for pursuant to an agreement allowing for the short sale of the real property formerly securing the loan. The borrower argued, among others things, that Bank of America was barred from recovering a deficiency judgment based upon the subsequent enactment of C.C.P. § 580e, barring short sale deficiencies, and the provisions of C.C.P. § 726, asserting that foreclosure was the only form of action allowable for collecting the debt secured by real property.

Section 580e

The recent amendment of C.C.P. § 580e, extending its protections to junior liens, did not take effect until July 15, 2011, more than two years after the short sale took place. In analyzing the legislature’s intent in enacting C.C.P. § 580e the court found nothing to support the borrower’s argument for retroactivity. Instead, the appellate court ruled that the fairness rationale supporting the general rule for statutes to apply prospectively only was particularly compelling in this case as the short sale was part of a “contractual transaction agreed to under the law in effect at that time.” Accordingly, the appellate court concluded that the anti-deficiency protections of C.C.P. § 580e do not apply retroactively to short sales that were concluded prior to the effective date of the statute.

Section 726
The judicial application of C.C.P. § 726 is both as a “security-first” and “one action” rule, which compels a secured creditor to exhaust its security judicially before it may obtain a monetary deficiency judgment, in furtherance of the legislative objective of protecting borrowers from a multiplicity of lawsuits. In this case, the appellate court ruled that the short sale exhausted the security for the loan and the borrower had not been subjected to a multiplicity of actions as a short sale is not an “action” as defined by C.C.P. § 22. Additionally, the appellate court held that, because the borrower had sought and obtained Bank of America’s consent to the short sale, she could not successfully complain that the bank had failed to bring a foreclosure action against her, as she waived any protection she may have had under C.C.P. § 726.

Conclusion

While the scope of the issues within this ruling are narrow, the decision clears the way for lenders who entered into a short sale agreement prior to the enactment of C.C.P. § 580e to seek judgment for any remaining deficiency on those accounts. Accordingly, as the statute of limitations generally applicable to loan agreements is either: (1) four years of the date of default on a non-negotiable note/contract (See, C.C.P. § 337 and Com. C. § 2725); or (2) within six years of the accelerated due date on a negotiable promissory note (See, Com. C. § 3118), lenders should review their files in order to ensure that timely actions are filed to pursue recovery of any deficiency balance that is due following a short sale that preceded the enactment of C.C.P. § 580e.

Editor’s Note: The author’s firm represented Bank of America in the case summarized in this article.

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