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Rhode Island: District Court Lifts its Stay of Foreclosures Involving MERS

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

September 9, 2013

 

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

In an opinion issued September 3, 2013, the U.S. District Court for the District of Rhode Island ordered the stay that had been preventing 825 foreclosures from proceeding be dissolved. [In re Mortgage Foreclosure Cases Misc., 2013 U.S. Dist. LEXIS 125474 (D. R.I. Sept. 3, 2013)]. The order was a victory for members of MERS, which included many national banks, mortgage companies, and mortgage servicers (MERS Members). The MERS Members had vehemently opposed the stay — filing 22 motions to dismiss since June 2013.

In its recent decision, the district court found that the borrowers had no likelihood of success on their claims based upon Rhode Island law. The borrowers had asserted that the assignments of their mortgages are invalid for three primary reasons: (1) the disconnect between the holder of the mortgage and the holder of the note rendered the mortgage invalid; (2) MERS’s “robo-signing” rendered the assignments of the mortgage invalid; and (3) the MERS practice of assigning mortgages was invalid under Rhode Island law. The district court noted that the Rhode Island Supreme Court had already considered these arguments in Bucci v. Lehman Brothers Bank, FSB, 68 A.3d 1069 (R.I. 2013), and that the court had decisively ruled in favor of the MERS Members on each of the three claims. Because the borrowers had no likelihood of success on these claims, Judge McConnell ordered the stay dissolved.

Some Background

The U.S. Court of Appeals for the First Circuit had issued a decision scolding the U.S. District Court for the District of Rhode Island for issuing a stay that prevented MERS Members from excercising their nonjudicial rights to foreclose upon a mortgage in default in Rhode Island. [Fryzel v. Mortgage Elec. Registration Sys., 2013 U.S. App. LEXIS 12068, 2013 WL 2896794 (1st Cir. R.I. June 14, 2013)]. That decision was a victory for the lenders, who appealed to the First Circuit after the Rhode Island District Court refused to lift the stay.

In the wake of the burst in the U.S. housing bubble, numerous Rhode Island borrowers who defaulted on their mortgage obligations brought suit in the district court to prevent foreclosure or eviction. These borrowers maintain that the assignments of their mortgages are invalid, leaving the assignees without the right to foreclose. Many of the mortgages at issue were assigned by MERS to various loan servicers and lending institutions. The lenders argued that Rhode Island law provides that homeowners lack standing to challenge the validity of mortgage assignments and the effect those assignments have on the underlying obligation.

When a motion to dismiss the first of these cases was heard by a magistrate in June 2011, the magistrate recommended that the case be dismissed, agreeing with the lenders that Rhode Island law clearly provided that borrowers have no standing to contest the validity of the assignment of their mortgage. On March 29, 2012, the district court ignored the magistrate’s recommendation and issued a stay preventing the lenders from exercising their rights to nonjudicial foreclosure and requiring the lenders to enter into mediation with the borrowers. Since the stay was issued, the number of cases filed and affected by it has swelled to almost 800. After the district court denied the lenders’ attempt to lift the stay, the lenders appealed to the First Circuit.

In an opinion authored by retired U.S. Supreme Court Justice David Souter, the First Circuit found that the stay was effectively a preliminary injunction, noting the “nature of an order is the product of its operative terms and effect, not its vocabulary and label.” The stay forbids the mortgagees from exercising their rights to nonjudicial foreclosure, and threatens court-imposed sanctions for any lender that violates the stay. The First Circuit concluded that the stay’s “character as an injunction is unmistakable.”

Because the district court took the position that the stay was merely administrative and not a preliminary injunction, the district court had failed to comply with Rule 65 Federal Rules of Civil Procedure. Rule 65 requires that the lenders receive “notice” of the preliminary injunction before it issued, including a hearing “followed by findings that the party to be favored has a substantial likelihood of success in the pending action, would otherwise suffer irreparable harm and can claim the greater hardship in the absence of an order, which will not disserve the public interest if imposed.”

The First Circuit ordered the district court to conduct a proper preliminary injunction hearing as soon as possible and to make written findings on the hearing, “especially on the critical requirement of the mortgagors’ likelihood of success in challenging foreclosure.” The First Circuit noted that “the injunction has so far had no point except to keep mediation alive while allegedly defaulting borrowers remain in their mortgaged houses.” The First Circuit also admonished the district court for imposing a stay of indefinite time and with no cost limitations. The First Circuit ordered that, in the event the stay remains in effect for any of the cases, the district court impose time and cost restrictions upon the stay.

The District Court heard arguments on the preliminary injunction on July 10, 2013.

Conclusion

While the stay has now been dissolved, the district court expressed the hope that the MERS Members would “continue to forego their right to foreclosure and evict,” noting: “It is in all parties’ and the Court’s best interest to have the parties talk to each other in a meaningful way and to attempt to amicably resolve these matters, without the threat and/or negative consequences of having Plaintiffs’ homes taken away from them due to foreclosure or eviction.”

Whether the MERS Members will ultimately choose to proceed with foreclosures or continue negotiations is unknown at this time. What is certain, however, is that there is now no impediment to the MERS Members proceeding with foreclosures if they so choose.

© Copyright 2013 USFN and Brennan, Recupero, Cascione, Scungio & McAllister, LLP. All rights reserved.
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Connecticut: Mediation Legislation Brings Changes

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Richard M. Leibert
Hunt Leibert, P.C. – USFN Member (Connecticut)

The regular session of Connecticut’s Legislature for 2013 ended at midnight on June 5, 2013. It was a very active session with many proposed bills. The following is a summary of Public Act 13-136 - An Act Concerning Homeowner Protection Rights. This bill changes Connecticut’s mediation program. The highlights are:

Eligibility for the mediation program is limited to: (1) owner-occupant; (2) 1-4 family residential real property; (3) who is a borrower under a mortgage encumbering the property; and (4) which is the primary residence of such owner-occupant, except an heir or occupying non-owner of a property encumbered by a reverse mortgage.

The objectives are to determine if the parties can reach agreement on either avoiding a foreclosure or expediting the process and reaching this determination with “reasonable speed” and efficiency by participating in the mediation “in good faith.”

Pre-Mediation

Effective October 1, 2013, once the borrower files for mediation the borrower must receive from the servicer or its counsel by the 35th day after the return date:

1. 12-month account history with plain language explanation;
2. Forms to complete and list of documents to submit to evaluate the borrower for any foreclosure alternatives offered by the servicer;
3. Copy of note and mortgage;
4. Summary of any pending foreclosure avoidance efforts;
5. Copy of the executed Connecticut Loss Mitigation Affidavit used when foreclosure commenced;
6. At the servicer’s election a summary of prior foreclosure avoidance efforts, plus condition of the mortgage property, plus anything else the servicer deems relevant to meet the objective;
7. Contact information at the servicer as to who can answer questions of the mediator.

Before the first mediation after October 1, 2013, the borrower will meet with the mediator by the 49th day following the return date or approximately 2 weeks after receiving the package from the servicer.

At the meeting, the mediator will assist to ensure the forms are completed, documents gathered, and will “facilitate and confirm” that everything is submitted to the mortgagee. The borrower may meet multiple times with the mediator, who has until the 84th day following the return date to decide whether to hold mediation. The mediator must file a report at the end of the pre-mediation period indicating whether a mediation shall be scheduled, whether the borrower attended the scheduled meetings, whether the borrower fully or substantially completed the forms furnished by the servicer, the date on which the servicer supplied the forms, along with any other relevant information the mediator feels germane.

Mediation
The servicer has 35 days to evaluate the borrower’s submitted package, which time period can be extended. Any additional information must be requested within a “reasonable period.” The goal is that the mediation will conclude seven months from the return date or at the end of the third mediation session. Mediations can be extended by the court upon written request.

Mediator Reports

Effective July 15, 2013, mediators must file a report after each session. The report will set forth each party’s obligation prior to the next mediation session and state whether the parties engaged in conduct to meet the objective. Parties can file a supplement to the mediator’s report within five business days of the mediator’s filing.

Ability to Mediate

The servicer’s mediation representative must be able to respond to questions and specify or estimate when a decision shall be made and must be reasonably familiar with the loan and loss mitigation options.

If the parties do not mediate in good faith, the court can terminate mediation, require the servicer to send a representative in person to the mediation, impose fines, and award attorneys’ fees to the borrower’s counsel.

© Copyright 2013 USFN. All rights reserved.
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Connecticut: New Foreclosure Legislation

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Richard M. Leibert
Hunt Leibert
USFN Member (Connecticut)

The regular session of Connecticut’s Legislature for 2013 ended at midnight June 5, 2013. It was a very active session with many proposed bills. The following addresses some bills that will have an effect on servicing defaulted loans. Note, however, that the new legislation regarding mediation is addressed separately in a feature in the USFN Report (Summer Ed. 2013).

Public Act 13-156 — Revisions to the Common Interest Ownership and Condominium Act. The super lien that a homeowners association had was 6 months, which effective upon passage, was increased to 9 months. Further, as of October 1, 2013, if an association makes a demand for payment it must provide a copy of the notice it provides to the unit holder to the holders of any mortgages secured by the condo unit. If the association decides to foreclose, it must provide not less than 60 days’ notice by first-class mail to the holders of all liens secured by the unit with an ability to cure. The notice need only be sent to the last recorded holder of the security interest unless there is a foreclosure pending, which in that case the notice must be sent to the attorney for the foreclosing lienholder. The penalty for failing to provide the notice is that the court shall not include any attorneys’ fees or costs as part of the association’s priority lien.

Public Act 13-174 — Abatement of a Public Nuisance, effective October 1, 2013. This bill broadens the circumstances in which the nuisance law applies. It adds certain municipal ordinance violations to these statutes and makes a corresponding change by allowing the state to file nuisance abatement suits when three or more citations for such violations are issued at a property within a year. By law, courts may not issue a public nuisance abatement order against a financial institution that owns the property or claims an interest of record in it (under a mortgage, assignment of lease or rent, lien, or security interest) and is not found to be a principal or accomplice to the conduct constituting the nuisance. The bill requires the state to prove by a preponderance of the evidence, rather than by the stricter clear and convincing evidentiary standard, that a financial institution claiming an interest of record in the property as specified above was a principal or accomplice to the alleged conduct. It specifies that they can offer the same affirmative defenses as other defendants (i.e., that they have taken reasonable steps to abate the nuisance but were unable to do so).

Public Act 13-136 — Homeowner Protection Rights
, effective July 15, 2013, with a provision for unoccupied property. This permits, under certain circumstances, the filing of a motion for judgment of foreclosure simultaneously with a motion for default for failure to appear. Current law prohibits the filing of a motion for default for failure to appear until 15 days following the return date (Conn. Practice Book Section 17-20) and a motion for judgment of foreclosure until 30 days following the return date (Conn. Practice Book Section 17-33A). Under the new law for unoccupied properties, both the motion for judgment of foreclosure and a motion for default for failure to appear can be filed together. Thus, there is a gain of 15 days. In order to take advantage of this new process for unoccupied real property, a mortgagee must prove (by clear and convincing evidence and the use of a proper affidavit) that the real property that is the subject of the foreclosure action is not occupied by a mortgagor, tenant, or other occupant and not less than three of the following conditions exist: (1) Statements of neighbors, delivery persons, or government employees indicating that the property is vacant and abandoned; (2) Windows or entrances to the property that are boarded up or closed off or multiple window panes that are damaged, broken, or unrepaired; (3) Doors to the property are smashed through, broken off, unhinged, or continuously unlocked; (4) Risk to the health, safety, or welfare of the public or any adjoining or adjacent property owners that exists due to acts of vandalism, loitering, criminal conduct, or the physical destruction of the property; (5) An order by municipal authorities declaring the property to be unfit for occupancy and to remain vacant and unoccupied; (6) The mortgagee secured or winterized the property due to the property being deemed vacant and unprotected or in danger of freezing; or (7) A written statement issued by any mortgagor or tenant expressing the clear intent of all occupants to abandon the property.

A foreclosure action shall not proceed under the expedited procedures if there is on the property: (1) an unoccupied building undergoing construction, renovation, or rehabilitation that is (A) proceeding diligently toward completion, and (B) in compliance with all applicable ordinances, codes, regulations, and statutes; (2) a secure building occupied on a seasonal basis; or (3) a secure building that is the subject of a probate action to quiet title or other ownership dispute.

Public Act 13-87 — Requires Inclusion of the Grantee’s Mailing Address in Document Conveying Land, effective October 1, 2013 (P.A. 13-87 repealed C.G.S. § 47-5). In Section 1 Subsection (b), the new law requires that a document conveying land shall also include the mailing address of the grantee. Interestingly, the new law in Section 2 Subsection (b) (9) provides that failing to include the current grantee’s mailing address does not make the instrument invalid.

Public Act 13-184 — Expenditures and Revenue, effective July 15, 2013. This amended Connecticut’s statutory recording fees, increasing the amount a nominee of a mortgage must pay to record any document, including deeds, mortgages, mortgage assignments, and releases. In any document where MERS is a nominee the new recording fees apply. With these fee increases, the basic recording fees for “MERS” documents are: For the first page of the document (except mortgage assignments in which a nominee appears as the assignor), $159 (representing $116 for the first page, and $43 for recording surcharges), and $5 for each additional page. For an assignment of mortgage in which the nominee of a mortgagee appears as assignor, and for a release of mortgage by a nominee of a mortgagee, $159 for the entire assignment or release, regardless of the number of pages. (MERS has 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.)

House Bill 6160 — Smoke And Carbon Monoxide Detectors. This bill, with exceptions, requires a seller, before transferring title on a one- or two-family dwelling for which a new occupancy building permit was issued before October 1, 2005, to give the buyer an affidavit certifying that the: (1) permit was issued on or after October 1, 1985; or (2) dwelling is equipped with smoke detection and warning equipment (smoke detectors) complying with the bill. The affidavit must also certify that the building: (1) is equipped with carbon monoxide (CO) detection and warning equipment (CO detector) complying with the bill; or (2) does not pose a risk of CO poisoning because the building does not have a fuel-burning appliance, fireplace, or attached garage. A transferor who fails to provide the affidavit must credit the transferee with $250 at closing. A list of exemptions from affidavit requirements can be found in the bill and include the following:

Exemptions from the affidavit requirement and penalty provision transfers: (1) from one co-owner to another; (2) to the transferor’s spouse, mother, father, brother, sister, child, grandparent, or grandchild where no consideration is paid; (3) under a court order; (4) by the federal government or any of its political subdivisions; (5) by deed instead of foreclosure; (6) when an existing debt secured by a mortgage is refinanced; (7) by mortgage deed or other instrument to secure a debt where the transferor’s title to the real property being transferred is subject to a preexisting debt secured by a mortgage; and (8) by executors, administrators, trustees, or conservators.

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

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Connecticut: State Supreme Court Rules on Standing

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Richard M. Leibert
Hunt Leibert, P.C. – USFN Member (Connecticut)

For the first time, the Connecticut Supreme Court has ruled that a servicer who had the authority by virtue of the language in a pooling and servicing agreement and by virtue of Connecticut General Statutes §§ 42a-3-203 and 42a-3-301 (codified UCC) to foreclose a defaulted note and mortgage could initiate a foreclosure in its own name on behalf of the owner and holder of the note, even though the servicer was not the owner of the note nor had the mortgage assigned to it. [J.E. Robert Company, Inc. v. Signature Properties, LLC].

Background — On April 13, 2005, the defendant, Signature Properties, executed a promissory note in the amount of $8.5 million payable to the order of JP Morgan Chase Bank, N.A., secured by a mortgage on commercial property in New London, Connecticut. The note was guaranteed by defendants Andrew J. Julian and Michael Murray. On July 20, 2005, JP Morgan assigned the note and mortgage to LaSalle Bank National Association. A pooling and servicing agreement also executed on July 20, 2005, established a mortgage-backed security wherein JP Morgan Chase Commercial Mortgage Securities Corporation was identified as depositor, LaSalle as trustee and paying agent, and J.E. Robert Company, Inc. as special servicer for the loans in the security.

On August 15, 2007, following a default in payment, J. E. Robert commenced a foreclosure action against Signature. On October 17, 2007, LaSalle assigned the note and mortgage to Shaw’s New London LLC. On October 18, 2007, LaSalle filed a motion to substitute Shaw’s as the plaintiff in the foreclosure, which was granted by the trial court. The trial court also, at another date, entered a judgment of strict foreclosure. The defendants then moved to dismiss the case, claiming that J.E. Robert as a mere servicer of the loan, rather than the owner or holder of the note and mortgage, lacked standing to bring the foreclosure in its name. The trial court denied the motion to dismiss and all defendants appealed.

In the appeal, the defendants claimed that only the owner and holder of the note and mortgage (which at the time of the commencement of the case was LaSalle) has standing to bring the foreclosure. Because LaSalle neither endorsed the note to J.E. Robert nor assigned the note and mortgage to it, the defendants asserted that J.E. Robert lacked standing.

Ruling — The Connecticut Supreme Court disagreed, finding that through the language in the pooling and servicing agreement J.E. Robert had standing as a transferee of LaSalle’s right to enforce the note and mortgage in accordance with Connecticut General Statutes §§ 42a-3-203 and 42a-3-301.

Although the foreclosure in this case involved a commercial note and mortgage, the ruling clarifies standing in Connecticut regardless of the type of mortgage. Thus resolving the issue for the trial courts.

© Copyright 2013 USFN. All rights reserved.
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e-Recording Hits Yet Another Milestone

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Michael Zevitz
South & Associates, P.C. – USFN Member (Kansas, Missouri)

Electronic recording was made a government priority starting with the passage of the federal ESIGN law in 2000 and with the subsequent adoption of the Uniform Electronic Transactions Act by 47 states. These laws established the legal basis for secure, electronic recording. As such, title underwriters, lending institutions and their legal counsel now fully embrace e-recording.

With a few years of history behind us, we can now state with confidence that e-recording has its benefits:


• Reduces document errors and rejections
• Eliminates mailing and other document delivery costs
• Reduces delivery delays
• Reduces document turn-around time
• Reduces redundancy
• Improves office efficiencies
• Enhances document security
• Enhances efficiency of staff
• Improved audit controls


However, the biggest advantage is TIME! The chart below1 indicates the estimated time for paper recording versus e-recording:

  

 Action Step
Paper
 Electronic
 Prepare documents
5 to 10 minutes
5 to 10 minutes
 execute/sign/notarize 10 minutes
10 minutes
 Calculate fees
5 minutes

5 minutes

 Delivery 1/2 day to 5 days
30 seconds
 Recorder processing
1/2 day to 21 days
60 seconds
 Return Delivery
1/2 day to 5 days
30 seconds
 Update title files
1/2 day to 21 days
15 seconds
 TOTAL TIME  2 to 52 days ≤25 minutes


 

 

 

 

 

 

 

 

 

 

 

 

 

According to the Property Records Industry Association (PRIA), the national standard-setting body for the land records industry, there are more than 3,600 recording jurisdictions nationwide. PRIA maintains a listing of counties that have implemented e-recording technology and posts the list on the association’s website (www.pria.us). Almost 15 months ago I reported to you that there were 739 jurisdictions accepting e-recording. At the time of publication of this article, the number has grown to over 900, an increase of nearly 22 percent. Most importantly, a significant milestone has been reached with more than 1/4 of all counties in the United States accepting e-recording. I’ll report back to you in a year to see if we have reached the half-way mark!

Copyright 2013 USFN. All rights reserved.
July/August e-Update

1 Source: PRIA, e-Recording 101 (2009)

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Florida: Changes to Foreclosure Laws

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

On June 7, 2013, Florida’s governor signed into law legislation that makes numerous changes to Florida’s laws relating to mortgage foreclosures. Among the changes are these:

1. Statute of limitations for deficiency judgments
— The law revised Florida Statute 95.11, to reduce from five years to one year the statute of limitations for an action to enforce a claim of a deficiency related to a note secured by a mortgage against residential property that is a one-family to four-family dwelling unit. The limitations period begins on the eleventh day after a foreclosure sale or the day after the mortgagee accepts a deed-in-lieu of foreclosure.

2. Allegations in mortgage foreclosure complaint as to original note or lost note
— The law created a new Florida Statute 702.015. It provides that every complaint in a foreclosure proceeding on residential real property designed principally for one to four families must contain affirmative allegations expressly made by the plaintiff that the plaintiff is the holder of the original note or must allege with specificity the factual basis by which the plaintiff is a person entitled to enforce the note. If the plaintiff is not the holder of the note, the complaint must describe the authority of the plaintiff and identify the document that grants the plaintiff the authority to file the complaint on behalf of the holder of the note.

If the plaintiff is in possession of the original note, it must file a certification with the court with the filing of the complaint, under penalty of perjury. The certification must set forth the location of the note, the name and title of the individual giving the certification, the name of the person who personally verified such possession, and the time and date on which the possession was verified. Correct copies of the note and all allonges to the note must be attached to the certification. The original note and the allonges must be filed with the court before the entry of any judgment of foreclosure or judgment on the note.

If the plaintiff claims that the note is lost, destroyed, or stolen, the complaint must contain an affidavit. The affidavit must: (a) Detail a clear chain of all endorsements, transfers, or assignments of the promissory note that is the subject of the action; (b) Set forth facts showing that the plaintiff is entitled to enforce a lost, destroyed, or stolen instrument pursuant to s. 673.3091. Adequate protection as required under s. 673.3091(2) shall be provided before the entry of final judgment; and (c) Include as exhibits to the affidavit such copies of the note and the allonges to the note, audit reports showing receipt of the original note, or other evidence of the acquisition, ownership, and possession of the note as may be available to the plaintiff.

3. Finality of foreclosure judgment — The law created a new Florida Statute 702.036, which provides for finality of mortgage foreclosure judgments. This provision protects bona fide purchasers of a property at a foreclosure sale and ensures the validity of the title where a party seeks to set aside, invalidate, or challenge the validity of a final judgment or to establish or reestablish a lien. Under this statute, as long as the party seeking relief was properly served, final judgment was entered, and the appeal period has run as to the final judgment with no appeal having been filed, and the purchaser was not affiliated with the foreclosing lender or owner, the party may recover monetary damages, but may not disturb the title, thus protecting the innocent purchaser and providing security in title. The law does not limit the right to other forms of relief that do not adversely affect the ownership of title.

The new law also provides that after foreclosure of a mortgage based on a lost, destroyed, or stolen note, a person who was not a party to the foreclosure action but claims to be the actual holder of the note has no claim against the property after it is conveyed to a bona fide purchaser for valuable consideration who is not affiliated with the foreclosing lender or owner. However, the actual holder may pursue recovery from any adequate protection as required by the UCC. The actual holder may also pursue damages from the party who wrongfully claimed to be the owner or holder of the promissory note, from the maker of the note, or any other person against whom the actual holder may have a claim.

4. Adequate protection required for enforcement of lost note
— The law created a new Florida Statute 702.11. It establishes a means of providing adequate protection under Florida Statute 673.3091, which is the statutory provision relating to the enforcement of a lost, destroyed, or stolen instrument. As it relates to a mortgage foreclosure, adequate protection would include: (1) a written indemnification agreement by a person reasonably believed to be sufficiently solvent to honor such an obligation; (2) a surety bond; (3) a letter of credit issued by a financial institution; (4) a deposit of cash collateral with the clerk of the court; or (5) such other security as the court may deem appropriate under the circumstances.

Any security given must be on terms and in amounts set by the court and must run through the applicable statute of limitations for enforcement of the note. The security also must indemnify the maker of the note against any loss or damage that might occur by reason of a claim by another person to enforce the note. Recovery of damages and costs and attorneys’ fees may be sought against the person who wrongly claims to be the holder of a lost, stolen, or destroyed note or against the adequate protections described above. The actual holder of the note need not pursue recovery against the maker of the note or any guarantor.

5. “Show cause” order on non-owner occupied residential real estate for payments to be made during the pendency of foreclosure proceedings or an order to vacate the premises
— Florida Statute 702.10 was revised to provide that if the property is not owner-occupied residential real estate, the plaintiff may request a court order directing the defendant to show cause why an order to make payments during the pendency of the proceedings or an order to vacate the premises should not be entered. The statute specifies:


1. The order must set a date and time for the hearing, not sooner than 20 days after the service of the order, or 30 days if service is obtained by publication.
2. The defendant can file defenses by a motion or by sworn or verified answer or appear at the hearing, which prevents entry of a final judgment.
3. The court may enter an order requiring payment or an order to vacate if the defendant has waived the right to be heard.
4. If the court finds that the defendant has not waived the right to be heard, after reviewing affidavits and evidence, the court can determine if the plaintiff is likely to prevail in the foreclosure action, and enter an order requiring the defendant to make the payments or provide another remedy.
5. The court order must be stayed pending final adjudication of the claims if the defendant posts a bond with the court in the amount equal to the unpaid balance of the mortgage.


6. “Show cause” order to speed up the foreclosure process in uncontested cases or cases where there is no legitimate defense — Florida Statute 702.10 was revised to create an alternative procedure that is designed to speed up the foreclosure process in uncontested cases or cases where there is no legitimate defense. This is the basic process:


1. After a complaint has been filed, the plaintiff may request an order to show cause for the entry of final judgment and the court must immediately review the complaint.
2. If the court finds that the complaint is verified, and alleges a proper cause of action, the court must issue an order directing the defendant to show cause why a final judgment should not be entered.
3. The order must set a date and time for the hearing, not sooner than 20 days after the service of the order, or 30 days if service is obtained by publication, and no later than 60 days after the date of service.
4. The defendant can file defenses by a motion or by sworn or verified answer or appear at the hearing. A defense filed as a response to an order to show cause pleading must raise a genuine issue of material fact that would preclude the entry of a summary judgment or otherwise constitute a valid legal defense to foreclosure.
5. The court need not hold a hearing for determination of reasonable attorneys’ fees if the requested fees do not exceed 3 percent of the principal owed on the note at the time of filing.
6. The court may enter a final judgment if the defendant has waived the right to be heard or has not shown cause why a final judgment should not be entered.


At the time of the enactment of this legislation, Florida had the third longest average foreclosure timeline in the nation — trailing only New York and New Jersey — at 853 days. Although some of the legislative changes may delay the initial filing of new cases, it is hoped that this legislation will substantially shorten the time required to complete an average Florida foreclosure action.

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

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Florida: Supreme Court Rules on City’s “Superpriority”

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

In May of this year, the Florida Supreme Court issued a decision in the case of City of Palm Bay v. Wells Fargo Bank, 2013 WL 2096257. The issue addressed by the court was the priority between a recorded city code enforcement lien with “superpriority” and a prior recorded mortgage.

Florida’s recording statutes normally give priority to a recorded lien like a mortgage against a later recorded lien such as a city code enforcement lien (however, all such liens are inferior to state, county, district, and municipal taxes). The City of Palm Bay attempted to change this priority by enacting in 1997 a municipal ordinance, which specified that recorded code enforcement liens would have priority coequal with the liens of all state, county, district, and municipal taxes, superior in dignity to all other liens, titles, and claims until paid.

In 2007, Wells Fargo filed an action to foreclose its mortgage, recorded in 2004, on residential property located in the city of Palm Bay. Palm Bay was named a defendant in the foreclosure suit due to two code enforcement liens it recorded after the mortgage. In answering the complaint, Palm Bay asserted its code enforcement liens had priority pursuant to the 1997 municipal ordinance. At the hearing on Wells Fargo’s motion for summary judgment, the trial court rejected Palm Bay’s claims of lien superpriority. The trial court reasoned that the legislature’s failure to bestow code enforcement liens priority over a prior recorded mortgage or judgment lien indicated its intent that these liens not have priority and, thus, the common law principle of first in time, first in right applied.

In reviewing the case, the Florida Supreme Court declared that municipal ordinances are inferior to laws enacted by the Florida Legislature and must not conflict with any controlling provision of a state statute. It was undisputed that the Palm Bay ordinance provision establishes a priority that is inconsistent with the priority established by the pertinent provisions of the Florida Statutes.

The court went on to state: “In those statutory provisions, the Legislature has created a general scheme for priority of rights with respect to interest in real property. Giving effect to the ordinance superpriority provision would allow a municipality to displace the policy judgment reflected in the Legislature’s enactment of the statutory provisions. And it would allow the municipality to destroy rights that the Legislature established by state law. A more direct conflict with a statute is hard to imagine. Nothing in the constitutional or statutory provisions relating to municipal home rule or in the Local Government Code Enforcement Boards Act provides any basis for such a municipal abrogation of a state statute. The conflict between the Palm Bay ordinance and state law is a sufficient ground for concluding that the ordinance superpriority provision is invalid.” Therefore, the court concluded that the city’s lien did not have priority over the previously recorded mortgage lien.

This ruling assures mortgage lenders in Florida that they will have priority over later recorded municipal code enforcement liens.

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HOA Talk Vermont: Priority of HOA Dues

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by David R. Edwards
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

There is a storm brewing in the Vermont lower courts over the extent to which homeowners association dues are allowed super-priority status over a foreclosing mortgagee’s lien. These issues are governed by 27 V.S.A. § 3-116(c), which provides that a homeowners association is afforded super-priority status for association dues for “the six months immediately preceding the institution of an action to enforce the lien.” While this has historically been viewed as a simple calculation of the dues that came due in the six months immediately preceding a foreclosure action, some of the lower courts have begun to accept homeowners association arguments that the extended period of time that the mortgage lien is in foreclosure should be added to their super-priority status.

The score is now 3-2, with the majority of courts holding the six months means six months plus the amounts that accrue while a mortgage is in foreclosure. The minority view holds that the statute is not ambiguous and must be enforced as written; six months means six months. The slim majority have found that the increasingly long time that judicial foreclosures take to get to sale have left HOAs with increasing losses. The majority view is that the priority lien held by the HOA is limited by statute to six months when viewed retroactively from the date of the foreclosure, but the priority can also run past the foreclosure date to the time of sale. Their rationale is that increasing delays are often caused by the lender and the value of the ongoing common area upkeep inures to the mortgagee’s benefit by maintaining resale values.

Thus far, all of the court decisions arise in foreclosure cases initiated by mortgagees. However, mortgagees should consider whether, in foreclosures initiated by an HOA, the priority condominium lien should be limited to the six months prior to the foreclosure. In such cases, there can be no argument that the mortgagee is causing delay in the foreclosure proceeding. Further, a limitation to six months’ dues in such cases would deter unscrupulous associations from jumping quickly into foreclosure proceedings and relying on the mortgagee to pay post-filing assessments, rather than engaging in workouts with homeowners. Finally, mortgagees should look into mortgagor delays that occur during loss mitigation and bankruptcy to limit their exposure to excessive priority claims of associations that accrue post-foreclosure.

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HUD’s “Face to Face” Requirements: Cook County, IL Court Rules

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

Pursuant to a court order issued on June 14, 2013, a trial court within Cook County, Illinois has held that a mortgagee must comply with HUD regulations relating to a face-to-face interview with a mortgagor, “or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid” if the mortgagee or its servicer has any branch office located within 200 miles of the property being foreclosed.

Counsel argued that the HUD face-to-face requirement only applied if a “servicing branch office” was located within 200 miles of the property. While this has been the accepted practice and the HUD interpretation, the court disagreed, specifically stating that the term branch office “is not ambiguous” and applies “to all branch offices of the mortgagee or its servicer, not just those offices regularly performing servicing functions.” The trial court referenced that HUD may have only intended to enforce the requirements within 200 miles of a “servicing branch;” however, without an amendment of the language within HUD’s provisions, the court will not grant HUD’s interpretation of “branch office” any deference.

While this is only the decision of one trial judge in Cook County, other judges have indicated that they will follow this ruling. The statute in question is § 203.604 Contact with the mortgagor and the relevant text has been bolded and underlined below:

(a) [Reserved]
(b) The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced, or at least 30 days before assignment is requested if the mortgage is insured on Hawaiian home land pursuant to section 247 or Indian land pursuant to section 248 or if assignment is requested under § 203.350(d) for mortgages authorized by section 203(q) of the National Housing Act.
(c) A face-to-face meeting is not required if: (1) The mortgagor does not reside in the mortgaged property, (2) The mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either, (3) The mortgagor has clearly indicated that he will not cooperate in the interview, (4) A repayment plan consistent with the mortgagor’s circumstances is entered into to bring the mortgagor’s account current thus making a meeting unnecessary, and payments thereunder are current, or (5) A reasonable effort to arrange a meeting is unsuccessful.
(d) A reasonable effort to arrange a face-to-face meeting with the mortgagor shall consist at a minimum of one letter sent to the mortgagor certified by the Postal Service as having been dispatched. Such a reasonable effort to arrange a face-to-face meeting shall also include at least one trip to see the mortgagor at the mortgaged property, unless the mortgaged property is more than 200 miles from the mortgagee, its servicer, or a branch office of either, or it is known that the mortgagor is not residing in the mortgaged property.

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Idaho: Community Property Protection & Lien Priority Issues

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Jeffrey R. Christenson
Ringert Law Chartered – USFN Member (Idaho)

Idaho Community Property Law (which includes Idaho Code Sec. 32-912) requires that both spouses sign an encumbrance of the community property. The case summarized here involved a judicial foreclosure action brought by a second creditor.

In New Phase Investments, LLC v. Jarvis, 153 Idaho 207, 280 P.3d 710 (Idaho 2012), the first creditor claimed priority even though the borrower’s wife did not join in the execution of a first-recorded deed of trust in favor of the first creditor. The second creditor filed a foreclosure action on a subsequent deed of trust that secured the property. Summary judgment was granted to the second creditor at the trial court level.

The Idaho Supreme Court reversed, holding summary judgment should not have been granted to the second creditor because Idaho Code § 32-912 was enacted for the protection of the community, not a third-party creditor of the community. The benefit of § 32-912 was only intended to flow to the non-signing spouse, and it was only that spouse who could ask a court to declare an attempted transfer void under § 32-912. Therefore, the first creditor’s deed of trust was valid, and it had priority under Idaho law.

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Illinois: Chicago Passes Ordinance Establishing Rights for Tenants in Foreclosure Properties and Creating Registration Requirements for Foreclosure Properties Occupied by Tenants

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

The City Council of Chicago passed the Keep Chicago Renting Ordinance on June 5, 2013; it was published on June 26, 2013 and becomes effective 90 days thereafter (September 24, 2013). This ordinance is officially called the Protecting Tenants in Foreclosed Rental Property Ordinance (Chapter 5-14) and provides as follows:


Tenant Relocation Assistance (5-14-050)
The owner (the purchaser of a foreclosed rental property after the sale has been confirmed by the court and any special right to redeem has expired, or a mortgagee who has accepted a deed-in-lieu of foreclosure or consent foreclosure on a foreclosed rental property) of a foreclosed rental property (defined below) shall pay a one-time relocation assistance fee of $10,600 (per unit, not per occupant) to a qualified tenant (see definition below) unless the owner offers such tenant the option to renew or extend the tenant’s current rental agreement with an annual rental rate that: (1) for the first twelve months of the renewed or extended lease, does not exceed 102 percent of the qualified tenant’s current annual rental rate; and (2) for any twelve-month period thereafter, does not exceed 102 percent of the immediate prior year’s annual rental rate.

This provision does not apply to an owner who became an owner prior to the effective date of this act, a bona fide third-party purchaser, or an owner who will occupy the rental unit as the person’s principal residence.

“Foreclosed rental property” means: (1) a building containing one or more dwelling units that are used as rental units, including a single-family house; or a dwelling unit that is subject to either the Condominium Property Act or the Common Interest Community Association Act that is used as a rental unit; (2) for which legal and equitable interests in the building or dwelling unit were terminated by a foreclosure action pursuant to the Illinois Mortgage Foreclosure Law; and (3) one or more of the units are occupied on the date a person becomes the owner.

“Qualified Tenant” means a person who: (1) is a tenant in a foreclosed rental property on the day that a person becomes the owner of that property; and (2) has a bona fide rental agreement to occupy the rental unit as the tenant’s principal residence. For the purpose of the definition, a lease shall be considered bona fide only if:

  • The mortgagor or the child, spouse, or parent of the mortgagor is not the tenant;
  • The lease was a result of an arms-length transaction;
  • The lease requires the receipt of rent that is not substantially less than fair market rent for the property, or the rental unit’s rent is reduced or subsidized due to the government subsidy.

Any relocation fee must be paid no later than 7 days after the day of complete vacation of the rental unit by the qualified tenant by certified or cashier’s check. The owner may deduct from the relocation fee all rent due and payable for the rental unit occupied by the qualified tenant prior to the date on which the rental unit is vacated, unless such rent has been validly withheld or deducted pursuant to state, federal, or local law.

An owner is not liable to pay the relocation fee to any qualified tenant who: (1) does not enter into a rental agreement after being offered a renewal or extension of the tenant’s rental agreement with a rent in an amount that complies with this ordinance; or (2) against whom the owner has obtained a judgment for possession of the rental unit.

If an owner fails to comply with this section the qualified tenant shall be awarded damages in an amount equal to two times the relocation assistance fee and other damages to which they may be entitled.

The owner shall comply with this section of the ordinance until the property is sold or transferred to a bona fide third-party purchaser.

If a qualified tenant is evicted for cause the owner is not liable for any relocation assistance provided under this section.

Written Notice to Tenants (5-14-040)
No later than 21 days after a person becomes the owner (the date of sale confirmation or execution of a deed-in-lieu or entry of consent judgment of foreclosure) of a foreclosed rental property, the owner shall make a good faith effort to ascertain the identities and addresses of all tenants of the rental units in the foreclosed rental property and notify, in writing, all known tenants of such rental units that, under certain circumstances, the tenant may be eligible for relocation assistance. The notice shall be given in English, Spanish, Polish, and Chinese and be as follows:


“THIS IS NOT A NOTICE TO VACATE THE PREMISES. You may wish to contact a lawyer or your local legal aid or housing counseling agency to discuss any right that you may have.

Pursuant to the City of Chicago’s Protecting Tenants in Foreclosed Rental Property Ordinance, if you are a qualified tenant you may be eligible for relocation assistance in the amount of $10,600 unless the owner offers you the option to renew or extend your current written or oral rental agreement with an annual rent that: (1) for the first twelve months, does not exceed 102% of the immediate prior year’s annual rental rate; and (2) for any twelve-month period thereafter, does not exceed 102% of the immediate prior twelve-month period’s annual rent. The option to renew or extend your lease shall continue until the property is sold to a bona fide third-party purchaser.

If you are eligible as a qualified tenant and the owner fails to pay you the relocation assistance that is due, you may bring a private cause of action in a court of competent jurisdiction seeking compliance with the Protecting Tenants in Foreclosure Rental Property Ordinance, Chapter 5-14 of the Municipal Code of Chicago, and the prevailing plaintiff shall be entitled to recover, in addition to any other remedy available, his damages and reasonable attorneys’ fees.”


The notice shall also include the name, address, and telephone number of the owner, property manager, or owner’s agent who is responsible for the foreclosed rental property.

If the owner ascertains the identity of a tenant more than 21 days after becoming the owner, the owner shall provide the notice within seven days of ascertaining the identity of the tenant.

The notice must be served by:

  • Delivering a copy of the notice to the known tenant;
  • Leaving a copy of the notice with some person of the age of 13 years or older who is residing in the tenant’s rental unit; or
  • Sending a copy of the notice by first-class or certified mail, return receipt requested, to each known tenant, addressed to the tenant.

The notice must also be posted on the primary entrance of each foreclosed rental property no later than 21 days after a person becomes the owner (the date of sale confirmation or execution of a deed-in-lieu or entry of consent judgment of foreclosure).

An owner may not collect rent from any tenant until the written notice is served and posted.

Registration of Foreclosed Rental Property (5-14-060)
No later than 10 days after becoming the owner of a foreclosed rental property, the owner shall register such property with the commissioner.

The registration shall be in a form and manner prescribed by the commissioner and shall contain the following information:

  • Name, address and telephone number of owner;
  • Address of foreclosed rental property;
  • If more than one unit is located in the property, the number of rental units in the property and whether each rental unit was occupied by a known tenant at the time the person became the owner. If occupied, the name and address of each known tenant;
  • If the foreclosed rental property consists of only one rental unit, the name of the known tenant at the time the person became the owner;
  • Name, address, and telephone number of the owner’s agent for the purpose of managing, controlling, or collecting rents and any other person not an owner who is controlling such property, if any;
  • Name, address, and telephone number of a natural person 21 years of age or older, designated by the owner as the authorized agent for receiving notices of code violations and for receiving process, in any court proceeding or administrative enforcement proceeding, on behalf of such owner in connection with the enforcement of this Code. This person must maintain an office or actually reside, in Cook County, Illinois. An owner who is a natural person and who meets the requirements of this subsection as to location of residence or office may designate himself as agent;
  • An affidavit signed by the owner which lists, by rental unit, all the qualified tenants at the time the person became the owner; and
  • Any other pertinent information reasonably required by the commissioner.

Any owner who fails to register under this section shall be deemed to consent to receive, by posting at the foreclosed rental property, any and all notices of code violations and all process in an administrative proceeding brought to enforce code provisions concerning the property.

The owner shall pay a $250 fee at the time of registration.

If any of the pertinent information changes, the owner shall file a statement indicating the nature and effective date of the change within 10 days after the change takes effect. If the property is sold to a bona fide third-party purchaser the owner shall, within 10 days of such sale or transfer, notify the commissioner in writing in a form and manner prescribed by the commissioner. If the property becomes vacant after registration pursuant to this section, the owner shall comply with the vacant building registration requirement of chapter 13-12, if applicable.

Remedies (5-14-070)

A tenant may bring a private cause of action seeking compliance with section 040 and 050 and the prevailing plaintiff shall be entitled to recover, in addition to any other remedy available, his damages and reasonable attorneys’ fees.

Waiver of Rights Not Allowed (5-14-080)

No rental agreement offered or entered into by an owner after the effective date of this chapter may provide that a tenant agrees to waive or forego the rights and remedies provided under this chapter and any such provision in a rental agreement is unenforceable.

Violation-Penalties-Liability (5-14-100)

Any person found guilty of violating this Chapter, or any rule or regulation promulgated hereunder, shall be fined not less than $500 or more than $1,000. Each failure to comply with respect to each person shall be considered a separate offense and each day that a violation exists shall constitute a separate and distinct offense.

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Kansas: Court of Appeals Continues Rulings on Standing and Note Enforcement

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Stephanie Mendenhall
South & Associates, P.C. – USFN Member (Kansas, Missouri)

In recent months, the Kansas Court of Appeals has heard an increased number of mortgage foreclosure cases, leading to definitive decisions on the issues of standing and note and mortgage enforcement. See, e.g., U.S. Bank, N.A. v. Howie, 47 Kan. App. 2d 690 (2012), MetLife Home Loans v. Hansen, 48 Kan. App. 2d 213 (2012), Bank of America, N.A. v. Inda, 2013 WL 856468 (Kan. Ct. App. March 8, 2013), and U.S. Bank, N.A. v. McConnell, 2013 WL 1850755 (Kan. Ct. App. May 3, 2013). In its latest opinion (unpublished), FV-I, Inc. v. Kallevig, 2013 WL 2321198108 (Kan. Ct. App. May 17, 2013), the court of appeals reversed a grant of summary judgment to a defendant/junior lienholder, finding that an issue of material fact existed regarding the plaintiff/senior lienholder’s standing and, specifically, possession of the promissory note at the time the foreclosure petition was filed.

In the underlying foreclosure action filed by FV-I, Inc. (FVI), defendant Bank of the Prairie (BOP) challenged the validity of FVI’s note and mortgage (on a splitting theory) and FVI’s standing to enforce the note (based on a lack of possession). The district court granted summary judgment to BOP, holding that the note and mortgage were split by express agreement and that FVI lacked standing to bring the foreclosure action because it did not possess the original note. As a result, the district court elevated BOP’s liens to a senior priority status and entered a judgment of foreclosure. On appeal, the court of appeals reversed the district court’s grant of summary judgment and remanded the case.

The appellate court first determined that the note and mortgage sought to be enforced by FVI were not split. This was based on its holdings in Howie and Hansen that a mortgage follows a note, and that the converse is also true. The court further relied on those decisions for the general rule that a mortgage may be unenforceable if not held by the same entity that holds the note, but that an agency exception exists. Additionally, the court of appeals held that there was no evidence of an express agreement to split the note and mortgage in this case.

Distinguishing the facts of Hansen, and being mindful of its opinion in McConnell, the appellate court then determined that a genuine issue of material fact existed regarding FVI’s standing to enforce the note. In Hansen and McConnell, the court of appeals found that the plaintiffs possessed the note at the time of filing their foreclosure petitions and, therefore, had standing to foreclose. Here, the appeals court determined there were gaps in the record regarding FVI’s possession of the note. FVI created an issue of fact regarding possession at the time of filing, and BOP failed to undisputedly prove a lack of possession or standing. Thus, the court held neither party was entitled to judgment and remanded the case to district court for FVI to prove possession of the note at the time of filing the foreclosure petition.

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

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Mediation Updates from Four States: Connecticut

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by James A. Pocklington
Hunt Leibert, P.C.
USFN Member (Connecticut)

On May 31, 2103, the Connecticut Legislature passed “An Act Concerning Homeowner Protection Rights,” Public Act No 13-136. It was signed by the governor on June 18, effective July 15, 2013. The act fundamentally changes the foreclosure mediation program in Connecticut.

First, it lays out a mission statement for mandatory settlement discussions by quantifying the “Objectives of the Mediation Program” and then defining the “ability to mediate” in a manner consistent with those objectives. This change requires individual servicer representatives taking part in the mediation process to be aware of both the program’s statutory requirements and the specifics of any given file’s history in the program. It goes into detail as to how such file-specific familiarity may be obtained.

Next, it alters who may be present during a session and the role of counsel in that regard. Currently, all mortgagors must be physically present for the first meeting, which is critical to obtaining proper intentions, given the significant percentage of separating/separated mortgagors and thereafter at least one mortgagor must be physically present at each session unless waived by the court. A niche is carved out for the mortgagee to appear telephonically with counsel to be physically present. The act changes this, requiring physical attendance at only the first session and permitting telephonic participation with physically-present counsel for all parties. Further, the act explicitly permits the attendance of a non-mortgagor spouse, who may not even be a party to the foreclosure action. The act does not apply the same exception to any other relationship.

Third, it shifts a significant portion of the document collection process from mutual meetings between the mortgagee and mortgagor to meetings between the mortgagor and/or their legal counsel and the court’s foreclosure mediation specialists, with limited direct involvement of the mortgagee or counsel. The act requires the mortgagor to meet with the court’s mediator and for them to work together to provide the necessary documents for any foreclosure alternative. It gives the mortgagor and mediator significant time — up to 84 days from the initiation of the lawsuit — to compile the documentation and submit it to the servicer and/or counsel.

Fourth, it imposes a much stricter timeline on all participating parties. The mortgagee is expected to have a substantive response within 35 days of receipt of a complete financial package for review for any foreclosure alternative, including those options that historically require third-party involvement. The statutory mediation period concludes after the third session between the mortgagee and mortgagor, and any further sessions may be granted by the court on an individual basis only on a showing that it is “highly probable the parties will reach an agreement through mediation” or on a showing that there has been “conduct that is contrary to the objectives of the mediation program.” Any such findings must be articulated on the record.

Lastly, and perhaps most significantly, the act eviscerates the confidentiality of the parties’ settlement negotiations and creates statutory permission for the court to consider anything that takes place in the mediation context. In addition to requiring exhaustively detailed reports by the court’s mediators after each session, which become part of the public record, the court is explicitly permitted to “consider all matters that have arisen in the mediation” as part of its review. This is particularly noteworthy given Connecticut’s motion hearing practice, where the judges sitting on mediation-related issues are currently the same judges who handle any other aspects of a pending foreclosure, up to and including entry of judgment.

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Mediation Updates from Four States: Nevada

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Olivia A. Todd & Mark S. Bosco
Tiffany & Bosco, P.A.
USFN Member (Arizona, Nevada)

July 1, 2013 marked exactly four years since the Nevada legislature enacted AB149, which brought mediations to the state of Nevada. What a four years it has been! During this time, the Nevada Supreme Court has enacted four rule changes; and the Nevada Legislature brought the program to a complete stop with the passage of AB284 back in October 2011, which required that an affidavit be completed and recorded with the notice of default. This bill produced a suspension of new foreclosures in Nevada for a period of more than nine months while lenders and servicers drafted their respective versions of the required affidavit, resulting in no mediations being elected and depleting funding for the mediation program. Not content with this major change, the 77th session of the Nevada legislature rocked our mediation world again with the passage of AB273 — changing the program from an “opt-in” program to an “opt-out” program, effective with notice of defaults that are recorded on or after October 1, 2013.

So many changes in so little time. This alone has proven to be a unique challenge in the mediation arena as servicers and lenders adjust their processes to the ever-changing rules and regulations in Nevada. However, the focus of this article is on the new rules adopted by the Nevada Supreme Court on December 6, 2012, effective January 1, 2013, and the impact that these rule changes has had on lenders.

State Supreme Court Changes
— The most significant change was the addition of a “pre-conference” meeting to exchange documents and provide an opportunity to inquire about the intentions of the borrower. This is critical for a servicer who now has only fifteen days to review documentation submitted by the borrower and determine whether additional documentation will be necessary in order to consider a loan modification or alternative plan. The time frame is reduced to five days for the servicer to request additional clarification or documentation once the borrower has submitted the initial documentation. The significance of this new rule cannot be emphasized enough, as the servicer cannot subsequently claim that it cannot consider a loan modification due to “lack of documents or information.” This will result in the certificate being denied and the servicer may be sanctioned by the court.

On a positive note, if the borrower advises the mediator and the servicer’s representative at the pre-conference meeting that he no longer wants to retain the property, this will allow the servicer to focus on the “short sale” option and the new rules that must be adhered to relating to a short sale. These new rules are stringent and include the servicer’s ability to negotiate the following: (1) the listing price; (2) the date by which the property will be listed; (3) the period of time in which the property will be marketed; (4) a specified time in which the servicer must accept or reject any offer; and (5) the maximum length of time the escrow may be open. Lastly, the short sale agreement must state whether the deficiency is waived or not.

The documentation that the servicer has been required to produce to the mediator prior to the mediation has always been burdensome; however, specificity was provided in the new rules. Servicers are now required to present a separate “certification” for each document, including the note and each note endorsement, the deed of trust, all assignments, and the merger documents if applicable. This certification must include an original signature and be notarized. If these certifications are not given to the mediator prior to the mediation, this will cause a denial of a certificate and could result in a “bad faith” finding of sanctions, leaving the servicer with only two options: (1) starting a new foreclosure action or (2) filing a petition for judicial review (PJR). However, it would not be prudent to file a PJR if a servicer failed to provide the required documentation.

The new rules require that a broker’s price opinion (BPO) be provided as part of the documentation for the mediator, and this BPO must be dated within 60 days of the mediation scheduled date. The BPO must be signed, dated, and performed by a third-party independent appraiser or broker.

A positive rule change was the clarification regarding dates when the homeowner is relinquishing the property. At the mediation, the mediator will now establish the “vacate date,” which is when the homeowner will move out, and the “certificate issuance date,” which is the date that the mediation program administrator will issue the certificate, allowing the servicer to continue with the foreclosure action and set a sale date.

The foreclosure mediation program is currently under a lot of pressure due to a lack of funding arising from limited foreclosures and insufficient staffing. These problems have resulted in the program forwarding mediator statements to the trustees, which in turn has delayed the ability to request a certificate from the program allowing a servicer to proceed with the foreclosure action. The lack of staffing has also resulted in delays in trustees being notified that borrowers have elected mediation and the subsequent assignment of cases to a mediator.

Hopefully there will not be any changes to the mediation rules for the time being, allowing lenders and servicers to proceed with the foreclosure process. However, stay tuned and we will provide you with any new updates to the Nevada mediation program.

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Connecticut: Defaulted Lender May Have Rights to Surplus Funds After COA Foreclosure Sale

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

A Connecticut superior court has held that the entry against a lender of a default in an action to foreclose a condominium lien does not preclude the lender from later participating in the proceeding to obtain satisfaction of its obligation from the proceeds of a foreclosure sale. Saddle Ridge Farm Association, Inc., v. Blessing-Palmer, No. 55 Conn. L. Rptr. No.17, 631 (2013). In Saddle Ridge, the plaintiff commenced a foreclosure action seeking to foreclose on unpaid condominium common charges. In addition to naming the unit owner as a defendant, the plaintiff named a lender by virtue of having a recorded mortgage. The lender was subsequently defaulted and the court entered a judgment of foreclosure by sale. The property was sold to a third-party bidder and the sale was subsequently approved by the court.

After the foreclosure sale, and without challenging the underlying foreclosure judgment, the lender filed a motion for supplemental judgment. At a hearing, the unit owner and lender claimed competing priority rights to the surplus funds from the foreclosure sale. The defendant unit owner objected to the disbursement of the surplus funds to the lender on equitable grounds and claimed that because a default judgment entered against the lender, it was precluded from participating in the supplemental judgment proceedings. Therefore, the common law doctrine of “first in time, first in right” did not apply. The defendant lender argued that a default judgment simply precludes a defendant from raising defenses to the underlying foreclosure action and does not preclude participation in the supplemental proceedings.

The court held that the lender was not prevented from participating in the supplemental judgment proceeding because of the default judgment. The court reasoned that the purpose of the judicial sale in a foreclosure action is to convert the property into money and, following the sale, a determination of the rights of the parties in the funds is made, and the money received from the sale takes the place of the property. A foreclosure by sale furnishes conflicting claimants an ideal forum for litigating their differences. Clearly, a resolution of such issues provides the very raison d’être of supplemental proceedings.

Naturally, lenders recognize the importance of promptly notifying their counsel of any pending lawsuits or default notices. However, all may not be lost if a default judgment does enter. A lender may still be able to participate in the supplemental proceedings to obtain surplus funds.

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Mediation Updates from Four States: Oregon

Posted By USFN, Thursday, August 1, 2013
Updated: Thursday, September 24, 2015

August 1, 2013 

 

by Janaya L. Carter
RCO Legal, P.C.
USFN Member (Arkansas, Oregon, Washington)

Beginning in early 2011, Oregon’s foreclosure processes were called into question by federal court judges in various cases. ORS 86.735 was reinterpreted, and thousands of nonjudicial foreclosures were at issue. Under ORS 86.735, the trustee in Oregon is permitted to foreclose a trust deed by advertisement and sale if the trust deed — and any assignments of the trust deed by the trustee or beneficiary — is recorded in the real property records.

The accepted interpretation of that statute had been that it was sufficient to record an assignment from the originating beneficiary, or any subsequent beneficiary of record, to the beneficiary initiating the foreclosure. In 2011, different judges in the state and federal system concluded the statute required that a recorded assignment accompany each and every transfer of the note if the beneficiary wants to utilize the nonjudicial statute. As case law began to develop, nonjudicial foreclosures began to stall as trustees started to look for the full chain of assignments.

Reforms — In April 2012, the Oregon legislature passed sweeping reform of nonjudicial foreclosure law in the form of SB 1552. This reform became effective in large part on July 11, 2012, and introduced new requirements and obstacles to nonjudicial foreclosure. Although the changes provided by SB 1552 did contain an exemption from the requirements to mediate, it was limited to financial institutions that had initiated less than 250 foreclosure actions in the preceding year. The new law compelled a mandatory mediation before a nonjudicial foreclosure could take place. It required the servicer to disclose certain documentation during the mediation, including a “full chain of title” for the property indicating all recorded assignments evidencing any transfer of the beneficial interest and a copy of any agreement that the beneficiary entered into with another person, or by which the beneficiary pledged as collateral the security, or sold all or a portion of the interest in the note or obligation.

As if new statutory interpretations and legislation were not enough, the Oregon Court of Appeals further complicated the matter with its ruling in Niday v. GMAC. In Niday, the court found that Mortgage Electronic Registration Systems, Inc. could not act as a beneficiary within the definition provided by ORS 86.705. The Niday case was then certified by the Oregon Supreme Court.

Beginning in the summer of 2012, for all of the reasons described above, most servicers elected to convert to a judicial foreclosure process, creating an instant backlog of many, many thousands of judicial foreclosures. Then, on June 4, 2013, the Oregon legislature again amended the foreclosure laws with the passage of SB 588, extending the mediation program to the judicial process, operative on August 4, 2013.

Under SB 558, before filing a complaint for judicial foreclosure, the servicer must engage in mediation and obtain a certificate of compliance. The law also modifies some of the document requirements during the mediation process. The mediation document requirements no longer compel a full chain of assignments and only require that the servicer turn over any portion of the pooling and servicing agreement that potentially impacts the party’s ability to modify the loan. The law, however, does mandate that the beneficiary provide certain documents or assurances during the mediation process, which will require process changes on the part of servicers. One such requirement is a provision that the mediating party must provide a certified copy of the promissory note. Servicers must also show evidence of the steps taken prior to the resolution conference to obtain consent from the investor to provide a mediation resolution beyond what is provided for in the investor guidelines.

Any failure to follow mediation guidelines will result in a certificate of noncompliance from the mediation service provider at the conclusion of the resolution conference. In order to initiate new judicial foreclosures after the effective date of the action, a law firm will be expected to attach a certificate of compliance as an exhibit to the judicial complaint at filing or an explanation as to why the certificate is not attached. Within the law is a provision that allows a judge to either stay or dismiss judicial proceedings due to a failure to obtain the certificate, the result of which may be an award of prevailing party fees to the borrower. Further provisions of the law treat the violation of certain sections of the statute by a beneficiary as an unlawful trade practice under ORS 646.607.

SB 558 did not resolve the chain of assignments issue highlighted by the court of appeals in Niday. However, on June 6, 2013, the Supreme Court of Oregon published rulings in Brandrup v. ReconTrust Company and Niday v. GMAC. The decisions addressed issues that had arisen in Oregon over the past two years as to interpretation of the Oregon Trust Deed Act (OTDA). Particularly at issue in those cases was the ability of MERS to act as a beneficiary in the state of Oregon and whether any transfer of the note must be accompanied by a recorded assignment prior to the initiation of the nonjudicial foreclosure.

The court has ruled that transfers of the promissory note, because they are not in writing or executed and acknowledged with the same formality as deeds, are not the type of transfers that are required under ORS 86.735(1). Therefore, a recorded assignment would not be required to accompany this type of transfer to initiate nonjudicial foreclosure. The court also ruled that although MERS could not act as a beneficiary under the OTDA unless it had succeeded to the lender’s right to repayment, MERS could hold and transfer legal title to the trust deed if it could be shown that the original lenders and their successors conferred sufficient authority on MERS to act on their behalf.

An obvious question with the passage of SB 558 and the rulings of the Supreme Court is whether this new legislation helps mitigate concerns over the nonjudicial foreclosure process and whether beneficiaries may now feel comfortable returning to that process. The answer to this question remains unclear at this time. One of the lingering questions for the servicers, where MERS is involved in the chain of title, is how they will establish a clear authority to act such that MERS can transfer interests in the trust deed. The court left open the question of whether MERS can transfer interests in the trust deed through a clean showing of an agency agreement that would be sufficient to show that MERS acted through the direction and approval of the originating beneficiary and each successor in interest.

However, it is clear that no matter which process a servicer elects in order to foreclose, it will be required to comply with the mediation program requirements first.

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

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Mediation Updates from Four States: Washington

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Susana Davila
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

In July 2011, the Washington State Legislative enacted the Foreclosure Fairness Act (FFA) as an amendment to the Washington Deed of Trust Act, RCW § 61.24, which provides statutory guidance for nonjudicial foreclosure in Washington State. Among other changes to the Deed of Trust Act, the FFA provides seriously delinquent borrowers the opportunity to opt-in to a state-supervised foreclosure mediation program with the beneficiary of their loan, so long as that loan was secured by the borrower’s principal residence. The Washington Department of Commerce (Commerce) was tasked with developing and administering the foreclosure mediation program (the Program).

Soon after implementation of the Program, it became clear that the FFA required further amendments to address ongoing concerns of mediators, borrower advocates, beneficiary advocates, and representatives from Commerce. In late 2011 and early 2012, these stakeholders attended several legislative working sessions to begin drafting the proposed amendments. The amendments to the FFA were enacted via House Bill 2614 on March 29, 2012, nearly one year after the enactment of the FFA.

Amendments to FFA — One important amendment to the FFA was to provide all foreclosure mediators immunity from suit in any civil action based on any proceeding or other official act performed in their capacity as a foreclosure mediator, except in cases of willful or wanton misconduct. Initially, the FFA only provided immunity to mediators who were employees of a dispute resolution center, which is a statewide network of non-profit centers dedicated to mediation activities. This left out a large class of private mediators and attorneys, who had been approved and trained by Commerce to serve as foreclosure mediators. This particular amendment to the FFA was of paramount concern to private mediators, as some beneficiaries and borrowers would not agree to sign separate mediation agreements providing mediator immunity since the same was not contemplated by the legislature when it enacted the FFA.

Another noteworthy amendment to the FFA was the alteration of mediation process timelines. The statute originally provided that the borrower and beneficiary were to mediate within 45 days of the mediation referral, each providing the statutorily outlined disclosures to the other just ten days prior to mediation. However, the beneficiary’s receipt of the borrower’s disclosures ten days before the mediation session proved to be problematic because loss mitigation reviews often take much longer. As a result, mediation sessions held within the 45-day benchmark were largely unproductive since the loss mitigation review was either in progress or the beneficiary had not received a complete financial package from the borrower.

The legislature further amended the statute to require that borrowers provide required disclosures to the beneficiary 23 days after the mediation referral. Then, 20 days after receipt of the borrower’s disclosures, the beneficiary provides its required disclosures to the mediation parties. The amendment also increased the mediation session date from 45 days from referral to 70 days from referral. In theory, the alteration to the disclosure exchange timeline was to ensure the beneficiary had sufficient time prior to the mediation session to review the borrower’s complete financial package for loss mitigation options.

Delays Observed
— Amendments to the FFA became effective on June 7, 2012. Quickly thereafter it became apparent that the borrower’s 23-day deadline to produce a complete financial package to the beneficiary was rarely met. It was more likely for the beneficiary to receive borrower disclosures anywhere from 30 to 60 days from the date of the mediation referral. Although the FFA was amended to include a provision that mediators may cancel a scheduled mediation session if they reasonably believe a borrower will not attend a mediation session based on the borrower’s conduct, mediators rarely cancel a mediation session for lack of borrower disclosures. Typically, mediators will allow the borrower an extended period of time in which to produce the documents, much longer than the 23 days intended by the legislature.

The delay in borrower disclosures often causes mediation sessions to be scheduled later than 70 days from the date of referral. Because the beneficiary requires 30 to 45 days to review a complete borrower financial package, most mediation sessions are not held within the 70-day mark, but closer to 120 days. Contributing further to delay of the mediation session is the somewhat cumbersome financial documentation requirements for a loss mitigation review and a recent surge in service-transfers of loans. Preparation for mediation can become a long stream of beneficiary document requests and borrower’s production of additional documentation.

The statute originally required the borrower to produce minimal documentation showing the borrower’s current and future income, debts and obligations, and tax returns for the past two years. However, nearly all loss mitigation programs require a comprehensive financial package from a borrower in order for the beneficiary to review the borrower for applicable programs. The amendment expanded the borrower’s responsibility to provide a Home Affordable Modification Program application or equivalent financial worksheet, debts and obligations, assets, expenses, tax returns for the previous two years, hardship information, and other data commonly required by a federal mortgage relief program. This allows the beneficiary to receive a current and complete financial package for loss mitigation review.

Under the amendments to the FFA, mediators were also given the authority to unilaterally schedule a second mediation session, without agreement of the parties in the mediation. As a result, nearly all mediation referrals result in at least two mediation sessions. This amendment has further elongated the mediation process, and results in both borrowers and beneficiaries paying more fees to the mediator, as authorized by Commerce. The borrower and beneficiary evenly split a mediation fee of $400 for the first mediation session. A second session requires another $400 fee, evenly split. Moreover, a request for postponement of a scheduled mediation session comes at an additional cost to the parties, ranging anywhere from $50 to $100 and is largely borne by the requesting party. The statute only dictates that a mediator may charge “reasonable” fees authorized by the statute and Commerce. The initial fee cannot exceed $400; however, additional fees incurred from second sessions and postponement fees are inconsistent amongst mediators, but are allowable because these fees have been determined “reasonable” by Commerce.

The average foreclosure mediation referral costs the beneficiary $500 for mediation fees alone. Additionally, the beneficiary incurs attorneys’ fees for in-person mediation representation, nonjudicial foreclosure costs, and a “foreclosure tax” implemented by the legislature of $250 for each notice of default issued by the beneficiary. Thus, once the borrower opts-in to foreclosure mediation, the nonjudicial foreclosure process is no longer an economical and expeditious route for foreclosure in Washington. Judicial foreclosure remains an option and would allow beneficiaries to avoid mediation altogether; however, Washington’s one-year redemption period is seen as an obstacle to beneficiaries choosing this path.

Commerce’s Annual Report to the Legislature — The statute tasks Commerce with preparation of an annual report to the legislature on the performance of the Program, the results of the Program, and recommendations for changes to the Program. In December 2012, Commerce published the first of these reports, chronicling the performance of foreclosure mediation from July 2011 to June 2012. As of June 30, 2012, a reported 1,655 mediation referrals were received by Commerce; of those, 579 cases had been closed and certified by a mediator. The remainder of them was either still pending at the time the report was published or was found to be ineligible for mediation.

It is difficult to quantify the success of the foreclosure mediation program. In many instances, the beneficiary and borrower reach an agreement prior to mediation. Of the 579 mediated cases reported by Commerce:

  • 113 resulted in agreements where the borrowers stayed in their home, through either modification of the loan, repayment of the arrears, or reinstatement of the loan;
  • 78 resulted in agreements reached where the borrowers did not keep their home — such as a pre-foreclosure sale, deed-in-lieu of foreclosure, or cash for keys;
  • 272 reached no agreement;
  • 116 mediations did not occur. The primary reasons for this include the parties reaching agreement prior to the scheduled mediation, voluntary withdrawal by the borrower from the mediation, or failure of one of the mediation parties to participate in the mediation process.

The data presented by Commerce indicates that the Program has resulted in a significant number of agreements reached in mediation, although it remains unclear if the agreements were reached as a result of the Program, or if they would have come to fruition without it.

Good Faith and Risk of Litigation — Another requirement of the Program is that mediators certify the result of the mediation itself, forcing mediators to determine if the parties mediated in good faith. The statute provides that a violation of the duty to mediate in good faith may include failure to timely participate in mediation without good cause; failure to provide the required disclosures before mediation or pursuant to the mediator’s instructions; failure of a party to designate a representative with adequate authority to fully settle, compromise, or otherwise reach resolution in mediation; or a request by the beneficiary that the borrower waive future claims he may have in connection with the deed of trust as a condition of agreeing to a modification.

The statute enumerates specific reasons a mediator may find that a party failed to mediate in good faith. However, Commerce has provided guidance to the mediators that they have “reasonable discretion” to find a party failed to mediate in good faith and the enumerated reasons are not an exclusive basis for the mediator to find a party failed to mediate in good faith. Important to note is that borrowers are largely not found in bad faith for failing to provide their financial package on time as required by statute. Out of 579 mediated cases, beneficiaries were found to have failed to mediate in good faith in 28 cases and borrowers were found to have failed to mediate in good faith in 53 cases. There is no statutory legal consequence to a finding that the borrower failed to mediate in good faith. Conversely, the failure of a beneficiary to mediate in good faith constitutes a defense to the nonjudicial foreclosure action and is a per se violation of the Washington Consumer Protection Act (CPA), RCW § 19.86. A violation of the CPA subjects the beneficiary to treble damages of an unknown sum to be determined at trial. However, it remains to be seen how a court would quantify damages from a beneficiary’s failure to mediate in good faith, especially because the statute protects the mediator from being called as a witness in a court proceeding arising out of a foreclosure mediation.

Conclusion — As Washington approaches the end of the second year of the Program, and the conclusion of the first year since the statute was amended, it is clear that foreclosure mediation successfully brings parties together to try to reach a mutually acceptable alternative to foreclosure. However, the Program is also not without significant cost and delay to the beneficiary. Further, to the extent that mediated cases result in a higher than average rate of litigation, beneficiaries must evaluate whether participation in the Program continues to be viable.

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

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Minnesota: GSEs Exempt from Deed Transfer Tax

Posted By USFN, Thursday, August 1, 2013
Updated: Tuesday, November 24, 2015

August 1, 2013

 

by Greta Burgett
Wilford, Geske & Cook – USFN Member (Minnesota)

Hennepin County, the highest populated county in the state of Minnesota, has jumped on the bandwagon led by other counties throughout the nation in filing suit against Fannie Mae and Freddie Mac for failing to pay Minnesota’s state deed transfer tax. Hennepin County filed the action in August of 2012, seeking a declaration from the federal district court that Fannie Mae and Freddie Mac are not exempt from payment of deed transfer taxes upon the sale or conveyance of real property. The county also sought to recoup millions of dollars in deed transfer taxes for past-transferred properties. Further, the suit requested an injunction prohibiting Fannie and Freddie from violating the deed transfer tax payment obligations in the future.

Minnesota law provides that when any real property is conveyed and the consideration for such is over $500, the deed transfer tax is .0033 percent of such amount. Minn. Stat. § 287.21 subd. 1 (2012). Hennepin County has some extra skin in the game due to a 1997 act by the Minnesota Legislature that allowed it (and neighboring Ramsey County) to collect an additional .0001 percent of the net consideration on a deed conveyance as a means to supply environmental response funds.

On March 27, 2013, the federal court in Minnesota granted Fannie Mae and Freddie Mac’s motion to dismiss. In the order, the court agreed that the GSEs are protected by 12 U.S.C. § 1723a (c)(2) and 12 U.S.C. § 1452 (e), respectively, which state that the entities are exempt from current or future taxation imposed by any state or municipal authority. The court held that Fannie Mae and Freddie Mac are further protected by a Minnesota statute, which creates an exception to the deed transfer tax when “the United States or any agency or instrumentality thereof is the grantor …” Minn. Stat. § 287.22 (6) (2012).

In applying a “plain language” interpretation of the federal statute, the court ruled that the wording of the statute includes the term “all taxation,” evidencing an intent to permit no unenunciated exceptions. Additionally, the court reasoned that the federal exemption statute contains a carve-out for property tax payments but declined to include a carve-out for the deed transfer tax. The court further stated that when Congress provides exceptions in a statute, it doesn’t follow that courts have authority to create others. Based on those precedential statements of the law and a “textual analysis” of the federal exemption statute, the court ruled that Fannie Mae and Freddie Mac are exempt from the local county deed transfer tax.

The district court’s ruling is parallel to the Sixth Circuit Court of Appeals’ decision in County of Oakland v. Fed. Housing Fin. Agency, Nos. 12-2135/2136, 2013 U.S. App. LEXIS 10032; 2013 Fed. App. 0142P (6th Cir. 2013). (The Sixth Circuit encompasses Kentucky, Michigan, Ohio, and Tennessee.) Despite the similar outcome, Hennepin County has noticed its appeal to the U.S. Court of Appeals for the Eighth Circuit.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update.

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Minnesota: New Foreclosure Legislation

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

Minnesota’s 2013 legislative session ended on May 20 with the passage of a new foreclosure bill that imposes mandatory loss mitigation obligations on servicers, prohibits dual tracking, and exposes the industry to significant litigation risk for failing to fully exhaust all available options.

The legislation was designed to create a cause of action under state law, allow a mortgagor to enjoin or set aside a foreclosure sale for violations of the new statute, and a prevailing borrower is entitled to recover attorney fees and costs. Minn. Stat. § 580.043 will likely delay some foreclosures, but the increased risk of lawsuits will stand out as the most significant change to Minnesota’s nonjudicial foreclosure process. A last-minute revision to the bill applied it to judicial foreclosures as well as nonjudicial proceedings.

Housing advocates will now gain a strong tool to penalize servicers for a failure to comply with the CFPB final mortgage servicing rules in Regulation X. The new statute has some differences from the CFPB regulations that will make compliance more challenging and uncertain in Minnesota. Legal Aid and other housing advocates pushed for the legislation after a version that included mandatory mediation failed earlier in the session. The loss mitigation requirements are effective August 1, 2013, and the dual-tracking prohibitions will be effective on October 1, 2013.

The law requires a servicer to notify a mortgagor in writing of available loss mitigation options, facilitate the submission and review of loss mitigation applications, offer loss mitigation options if the mortgagor is eligible, and comply with any appeal period applicable to the loss mitigation option. Minnesota courts will likely need to resolve the ambiguities created in § 580.043 and certain to arise in practice, including the extent to which a servicer must assist a borrower in completing a partial application. The new statute may prove challenging for the unwary servicer. The best practice for servicers may be to halt a foreclosure proceeding once a borrower speaks up to inquire about loss mitigation, even if the borrower fails to cooperate thereafter, or fails to provide a complete application. In limited instances, it might be appropriate for a servicer to postpone a scheduled foreclosure sale while exhausting loss mitigation alternatives.

The law also bans dual tracking, which means a servicer must not refer a matter to a foreclosure attorney, or must halt a commenced foreclosure, while negotiating a loan modification. Small servicers (5,000 or fewer mortgage loans) are exempt from most requirements.

On the positive side, a deadline is imposed for a mortgagor to commence litigation for violating the statute. A failure to record a lis pendens before the end of redemption creates a conclusive presumption that the servicer complied with loss mitigation obligations. However, certainty about litigation risks won’t be known until Minnesota’s six-month redemption period expires without the legal challenge.

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

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Mirror Mirror on the Wall Which Rules Offer the Greatest Consumer Protection of All?

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

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

The Spring 2013 issue of the USFN Report offered an overview of the Consumer Financial Protection Bureau’s Mortgage Servicing Rules (CFPB Rules), specifically Regulation X sections 1024.39 and 1024.40. This follow-up article will compare the loss mitigation portion of the rules in section 1024.41 with their California and Washington counterparts. Where the state laws offer greater consumer protection, the CFPB Rules do not preempt them. With so many layers of regulation governing loss mitigation, one almost wishes for a crystal ball or a magic mirror. Since no authority has determined which of the regulations — state or federal — offers greater consumer protection, the challenge lies in reconciling or aggregating the two.

Uniformity Absent Preemption Equals … Aggregation?

In the midst of myriad regulations, the CFPB aims to standardize loss mitigation procedures with its own rules. The concept of standardization evokes a sense of supremacy or preemption. After all, can uniformity be achieved without preemption? If the CFPB Rules preempted the field of loss mitigation, the world of regulatory compliance would be an easier one. That, however, is not the case. The rules do not preempt the field of loss mitigation if a state (or federal law) offers greater consumer protection.

Who decides which set of regulations offers broader consumer protection? Can the determination be made at a general level or must it be made at a detailed step-by-step level? Are the servicers and their counsel left to venture a guess? The practical result of the lack of absolute preemption appears to be an aggregation of the CFPB Rules and the state counterparts for compliance purposes.

Before Starting a Foreclosure

Perhaps the greatest impact of CFPB’s loss mitigation rules will be felt early in the default stage. CFPB makes it clear that a servicer subject to section 1024.41 is prohibited from making the first notice or filing required for a judicial or nonjudicial foreclosure process unless a borrower is more than 120 days delinquent. In addition to the 120-day prohibition, the CFPB Rules prohibit pre-foreclosure dual tracking. If a borrower submits a complete loss mitigation application (defined as an application in connection with which a servicer has received all of the information that the servicer requires from a borrower), before a servicer has made the first notice or filing, then a servicer is prohibited from making the first notice or filing unless:

  • Servicer has sent written notice that the borrower is not eligible for any loss mitigation option and the appeal process is not applicable; the borrower has not requested an appeal, or the borrower’s appeal is denied;
  • The borrower rejects all loss mitigation options offered by servicer; or
  • The borrower breaches a loss mitigation agreement.

During the Foreclosure Process
After a servicer has started the foreclosure process by making the first notice or filing, the CFPB Rules impose another set of timelines and prohibitions. A servicer’s obligations differ depending on when during the foreclosure process the borrower applies for loss mitigation. For this portion of the rules, a flow chart will prove a handy tool to track the various timelines and obligations.

If a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, the servicer shall review and determine whether the application is complete. Within five days of receipt, the servicer shall send a notice to the borrower acknowledging receipt, a determination of whether the application is complete and, if incomplete, list the additional material the borrower needs to submit. This notice has specific time requirements in that it must state the borrower should submit the documents and information necessary to complete the application by the earliest remaining date of:

  • The date by which the document or information already submitted will be considered stale;
  • The date that is the 120th day of the borrower’s delinquency; or
  • The date that is 38 days before a foreclosure sale.

“Complete Loss Mitigation Application” Review
Under CFPB Rules, if a servicer receives a “complete loss mitigation application” more than 37 days before a foreclosure sale, then within 30 days of receipt, a servicer shall evaluate a borrower for all loss mitigation options available, and provide the borrower with a written notice of determination.

If a borrower’s complete application is denied for a trial or permanent loan modification (only), a servicer shall send a written notice of denial, stating the specific reasons and offering an appeal period. Depending on how many days before the sale a complete application is received, a servicer may require that a borrower accept or reject an offer within a certain number of days (7 or 14 days). A borrower’s failure to timely accept may be deemed a rejection of the offer.

The Foreclosure Sale Itself

After the first notice or filing required to start the foreclosure process is made, if a borrower submits a complete loss mitigation package, the CFPB Rules do not impose a “hold” on the foreclosure, but merely prohibit conducting the sale, or moving for a foreclosure judgment or order of sale. In other words, once the foreclosure has started, application review and foreclosure can proceed concurrently, so long as the sale is not conducted or the foreclosure judgment or order of sale is not obtained.

If a borrower submits a complete loss mitigation application after foreclosure has started, but more than 37 days before a foreclosure sale, a servicer shall not move for foreclosure judgment or order of sale, or conduct a foreclosure sale, unless:

  • The servicer has sent a written notice that the borrower is not eligible for any loss mitigation option and the appeal process is not applicable; borrower has not requested an appeal, or the appeal has been denied;
  • The borrower rejects all loss mitigation options offered; or
  • The borrower breaches a loss mitigation agreement.

The CFPB Rules provide for an appeal process only for a denial of a loan modification and not for denial of a short sale or deed-in-lieu. Significantly, the rules only require a servicer to comply with Section 1024.41 for a single complete loss mitigation application.

Turning to California’s Homeowner Bill of Rights (HBOR)

Since the CFPB Rules do not absolutely preempt, compliance needs to occur somewhat within a framework of conjecture. No governing authority has determined as between the CA HBOR and the CFPB Rules: which one offers greater consumer protection? The challenge, therefore, lies in reconciling or combining the two layers of regulation. In a general sense, the CFPB Rules provide for wider coverage and greater clarity than HBOR for the following reasons:

  • The CFPB Rules govern both judicial and nonjudicial sales, while HBOR only applies to nonjudicial sales;
  • The CFPB Rules apply to “Loss Mitigation Application,” whether complete or incomplete. HBOR focuses on a “complete loan modification application;”
  • The CFPB Rules provide for definite timelines and a servicer’s obligations differ depending on when in the foreclosure process a loss mitigation application is received. HBOR does not provide for timelines except in case of an appeal, and does not contemplate proximity to a sale date and the different scenarios based on that proximity.

While the CFPB Rules have a more expansive coverage and provide for greater certainty and clarity, HBOR has a narrower scope, is on occasion more stringent and, more often that not, uncertain. HBOR is greatly focused on loan modification, as opposed to a short sale or deed-in-lieu (DIL). California Civil Code § 2923.6 and § 2924.10 specify in detail the protocol for processing a loan modification application, while short sales and deeds-in-lieu (DIL) are scarcely covered in Civil Code § 2924.11, and the coverage is ambiguous. For example, where a complete application for a loan modification triggers a hold on the foreclosure process, an incomplete application or an application for a short sale or DIL does not trigger a hold. The trigger for a hold in case of short sale is so vague as to require guesswork.

Under HBOR if a borrower submits a complete loan modification application, the foreclosure process has to go on-hold — meaning the next major step, such as recording a notice of default or notice of sale, cannot be taken pending review and any appeal. This prohibition on dual tracking is more stringent than the CFPB Rules, where once a foreclosure has started permit reviewing an application and concurrently proceeding with foreclosure, while merely prohibiting the conduct of the sale itself or obtaining a judgment or order of sale.

Additionally, HBOR is more stringent because, unlike the CFPB Rules, it permits duplicative requests and does not limit a servicer’s obligation to review a borrower for loss mitigation to only once. A borrower may submit multiple loan modification applications, and a servicer is obligated to evaluate them if there has been a material change in the borrower’s financial circumstance since the last evaluation.

Likewise, where the CFPB Rules streamline the evaluation process by requiring a servicer to evaluate a borrower for all available loss mitigation options at once, based on a single application received, HBOR has no such concept. In sum, since the CFPB Rules do not preempt, the two layers of regulation need to be aggregated.

A Look at Washington State’s Consumer Loan Act
Washington’s Department of Financial Institutions (DFI), the agency that regulates state-licensed mortgage servicers, promulgated rules based on the National Mortgage Settlement back in 2012. Due to imprecise drafting of the rules related to loss mitigation, for the purposes of this article, it will be assumed that DFI intends for its loss mitigation rules to apply, if a servicer isn’t otherwise required to follow HAMP or GSE program guidelines1. There are a few notable differences in Washington state regulation that are likely to cause dual compliance burdens on state-regulated servicers covered by the CFPB Rules.

The Washington rules prohibit a servicer from referring a loan to foreclosure if it has a complete loan modification application from the borrower. Under the CFPB Rules, there is no prohibition on when a loan may be referred to foreclosure, but rather those rules restrict the first notice or filing activity itself, not the referral or the engagement of foreclosure counsel.

In Washington, it isn’t clear whether the borrower can submit a complete loan modification application fewer than 15 days before the foreclosure sale and have that submission stop the foreclosure sale. Section 208-620-900(6)(a)(vi) seems to indicate an automatic restraint on sale no matter how close the loan is to the foreclosure. However, the section states “see (a)(viii) and (ix),” and subsections (viii) and (ix) provide the borrower a review if the loan modification application is received up to 15 days prior to sale. Subsection viii covers the cases referred prior to 37 days before the sale and subsection (ix) covers those receiving expedited review for loan modification application receipt between 37 and 15 days prior to sale. Do these two subsections restrict the right of the borrower to claim a sale restraint? To add to the confusion, the CFPB Rules only provide the borrower with the right to a sale restraint if the complete loan modification application is submitted within 37 days prior to the foreclosure sale.

Regardless of how servicers choose to adopt these competing interpretations, foreclosure counsel and trustees should prepare to ask servicers to confirm whether a completed loan modification application is pending before going to sale. Best practice might be to check at day 37 prior to sale, day 15 prior to sale, and again the day before sale.

CFPB’s Implementation Plan
While a much-needed magic mirror is currently unavailable for compliance purposes, The CFPB does offer an implementation plan designed to provide support in the months preceding the January 10, 2014 effective date. Servicers, trustees, and legal counsel can access CFPB’s resources for support at http://www.consumerfinance.gov/regulations/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-in-lending-act-regulation-z-mortgage-servicing-final-rules/.

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

1 The Washington Consumer Loan Act rules distinguish between servicers who are obligated to follow HAMP and GSE mandates, and those who are not obligated to do so. If a regulated servicer is not using those programs, it isn’t clear what exactly they must do to comply with the Consumer Loan Act Rules. The provisions in WAC section 208-620-900(6)(a)(i)-(ix) outline requirements relating to the time frame for reviewing a complete loan modification application, the content of any denial notice, the time frame for allowing borrowers to correct application errors, and prohibitions on referring or proceeding to foreclosure while an application is pending. Sections 208-620-900(b)-(g) cover appeal procedures, documentation of any agreement, general provisions to require adequate staffing, and accessibility of short sale requirements. In the current format of the rules, subsections (6)(a)(i)-(ix) seem to only apply if there is no HAMP or GSE programs, and sections (6)(b)-(g) appear to apply to all state-regulated servicers, including those who have agreed to HAMP or service for the GSEs. It doesn’t appear to make sense to require servicers who have agreed to HAMP or to administer GSE programs to comply with half of the Consumer Loan Act rules regulating loss mitigation, especially when some of that portion are covered by those programs (appeal rights and documentation requirements for example).

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New York: Standing

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

Having been so regularly assaulted on this issue, lenders and servicers know that “standing” is perhaps the hot button issue in New York mortgage foreclosures. More than a few foreclosures have been dismissed where courts have determined that the foreclosing party did not hold the note and mortgage at the inception of the action, or for other infirmities leading to a finding of lack of standing. One issue on this point, though, has become well established: Under certain circumstances, the mortgage servicer can be the plaintiff in a foreclosure action even though it is not the holder of the mortgage.

Although this is recognized (albeit a bit obscure), consistent case law does not stop borrowers from trying to litigate the concept yet again, as confirmed by a recent case. [CW Capital Asset Management, LLC v. Great Neck Towers, LLC, 99 A.D.3d 850, 953 N.Y.S.2d 89 (2d Dept. 2012)].

Here, borrower executed and delivered a note and mortgage to CIBC, Inc. Various assignments and a pooling and servicing agreement (PSA) led the mortgage to Registered Holders J.P. Morgan Chase Commercial Mortgage Pass-Through Certificates, Series 2006 – CIBC 17 (the Trust), and Bank of America, N.A. (Bank of America) became the trustee for the Trust. The eventual plaintiff in the foreclosure (when the borrower defaulted) was CW Capital Asset Management, LLC (CW Capital) as the special servicer of the loan. Of course the borrower moved to dismiss the foreclosure on the ground that CW Capital as special servicer for Bank of America, as trustee for the Trust lacked standing.

The court denied the borrower’s motion because the required standards for a servicer to be a plaintiff were met. These were: (1) The complaint identified the Trust as the owner of the note and mortgage; (2) the action was maintained by CW Capital in its capacity as servicing agent and (3) in the PSA, Bank of America’s predecessor, the trustee for the Trust, had delegated to CW Capital the authority to act regarding the subject mortgage.

So, yes, when the noted requirements are complied with, the servicer can be the plaintiff in a mortgage foreclosure. This does not mean that defendants won’t cause servicers to incur time and money defending their ability to foreclose, but it does mean that the servicer will have been correct.

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

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New York: The Settlement Conference — What is Good Faith?

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

This has been an elusive and troublesome subject for mortgage servicers in New York, and so a new case that illuminates the definition is welcome. [Wells Fargo Bank, N.A. v. Van Dyke, 101 A.D.3d 638, 958 N.Y.S. 2d 331 (1st Dept. 2012)].

A settlement conference has been required for all home loan cases since 2010. While servicers are hardly opposed to finding a reasonable settlement path, these conferences are often delayed and add too many months to the already protracted foreclosure process. Borrowers’ defenders frequently blame servicers for not being ready for conferences. On the other side, however, servicers can attest to borrowers being unprepared or requesting numerous adjournments or suddenly needing counsel or new counsel, among a host of mishaps and other contributors to delay. In the meanwhile, the foreclosure simply cannot proceed to the next stage.

Compounding the delay aspect is the requirement [of CPLR § 3408(f)] that the parties conduct negotiations in good faith. But what precisely is that standard? Servicers are aware that those supervising the conferences are sometimes vociferous in demanding that servicers reduce the interest rate or forgive principal or extend the mortgage — or all of those aspects. Faced with possible penalties if a lack of good faith is found, servicers have sometimes been placed in an untenable position.

In the Van Dyke case, no less than ten legal services groups submitted friend of the court briefs, assaulting a servicer’s conduct at the settlement conference as a sham and supporting the borrower’s motion to dismiss the foreclosure for the asserted lack of good faith. Both the trial court and the appeals court disagreed, however, and the motion to dismiss was denied. One significant part of the ruling is that a foreclosing plaintiff is not required by the statute (CPLR § 3408) to offer a settlement.

While a mutually agreeable resolution to avoid the home being lost is a goal, the only requirement to meet that end is good faith, but sometimes the goal just is not financially feasible for either party. This is a very significant observation and verbalizes what foreclosing plaintiffs know to be true.

As to the facts in this particular case, the borrower contended that two-thirds of her income came from rental property. But she did not produce a lease, tenant affidavits, or bank statements to support her claim that rents had been collected for some years. Rather, the bank statements that were submitted covered a mere three months.

Therefore, the court held, it was not unreasonable for the servicer to decline to use the claimed rental income in a mortgage modification calculation. In any event, even if the rental income was includable, the borrower was still not eligible for the available modification.

Further as to defining “good faith,” the court ruled that contrary to the borrower’s contention, merely because the servicer declined to entertain a reduction in principal or interest rate does not establish a lack of good faith. The statute does not oblige the foreclosing plaintiff to make the exact offer the borrower wants. Failure to make that offer is not a lack of good faith.

Somewhat on the other side of the equation, the court also opined that compliance with the good faith mandate is not established simply by demonstrating the absence of fraud or malice on the lender’s part. Instead, good faith must be founded on the totality of the circumstances.

In the end, each case will remain fact intensive. Nevertheless, New York finally has some standards as guidance.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update

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Ohio: Redemption at Tax Foreclosure

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

Ohio’s Fifth District Court of Appeals (Fifth District) has recently ruled that only a homeowner can stop a tax foreclosure once it is filed. [In re Foreclosure of Liens for Delinquent Taxes v. Parcels of Land Encumbered with Delinquent Tax Liens, 2013-Ohio-1400]. The county treasurer is under no duty to accept redemption of delinquent taxes from a lender or anyone other than the homeowner, even if the taxes are paid before a sale of the property occurs.

The case stems from an attempt by a lender to pay the delinquent taxes on a property being foreclosed by the county treasurer. The lender intervened in the foreclosure after a judgment was granted in favor of the treasurer, but before a sale of the property had occurred. The lender did not bid at the sale and the land was sold to a third party for $9,000. In an attempt to vacate the sale, the lender tendered funds to the treasurer in the amount of $6,000, representing the delinquent taxes and costs of the foreclosure. The treasurer rejected the funds and stated that the lender was not a “person entitled to redeem the land” under Ohio Revised Code 5721.25. The trial court overruled the treasurer’s objection and allowed the lender to redeem the property. The third-party purchaser of the property then intervened in the case and appealed the trial court’s decision that allowed the redemption.

The Fifth District reversed the decision of the trial court, holding that only the former owner of the property has the right of redemption. Further, this right is a nontransferable personal privilege. The lender argued that its mortgage allowed it to advance taxes on behalf of the homeowner, their borrower, and therefore it could stand in the shoes of the homeowner. The Fifth District found that the original owner had no desire to redeem the property, so the lender could not pay the taxes in order to cancel the sale. The Fifth District held that the only protection to a lender is to bid at the foreclosure sale to protect its interests.

Proper monitoring for a tax delinquency is more important than ever. The decision whether to advance funds to pay taxes must now be made before the tax foreclosure is filed, at least in the fifteen counties of the Fifth District. Most other counties will still allow a lender to pay the taxes to stop the foreclosure. It is critical that a lender file a timely answer to the tax foreclosure in order to preserve its lien, since there is no guarantee that the sale can be stopped by simply paying the taxes.

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

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Ohio: Two Recent State Supreme Court Rulings

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Rick DeBlasis & Amy L. Fogelman
Lerner, Sampson & Rothfuss – USFN Member (Kentucky, Ohio)

Summarized in this article are two recent decisions of the Ohio Supreme Court relevant to the mortgage servicing industry.

Anderson v. Barclay’s Capital Real Estate, Inc., 2013-Ohio-1933
In Anderson, two certified questions were before the Ohio Supreme Court:

1. Does the servicing of a borrower’s residential mortgage loan constitute a “consumer transaction,” as defined in the Ohio Consumer Sales Practices Act (OCSPA), R.C. 1345.01(A)?

2. Are entities that service residential mortgage loans “suppliers *** engaged in the business of effecting or soliciting consumer transactions,” within the meaning of the OCSPA, R.C. 1345.01(C)?

The court answered both questions in the negative. Specifically, the court decided that the “contractual relationship” in mortgage servicing is between the servicer and the financial institution that owns the loan. Even though the servicer may deal directly with the borrower, there is no “sale, lease, assignment, award by chance, or other transfer of a service to a customer,” as required under the Act.

The court also held that in order to be a “supplier” under the statute, one must “engage in the business of effecting or soliciting consumer transactions.” A mortgage transaction is between the borrower and the financial institution, not the mortgage servicer. The servicing relationship and activities didn’t cause the mortgage transaction to happen; therefore, the servicer did not qualify as a supplier.

Clark v. Lender Processing Services, Inc., 2013 U.S. Dist. LEXIS 80442
Clark was a class action brought in the Cleveland federal district court by plaintiffs-homeowners who were all subjected to foreclosures in Ohio state courts. The defendants were LPS Default Solutions; Lender Processing Services, Inc.; DOCX, LLC; and three Ohio law firms that conducted the foreclosures. The plaintiffs alleged that the defendants filed foreclosure suits against them, as well as a class of similarly-situated homeowners, on behalf of entities that lacked standing to initiate the foreclosures, whether because of allegedly forged or otherwise defective assignments or noncompliance with PSAs, in violation of the FDCPA and OCSPA. Resolving multiple motions to dismiss, the court rejected all of the plaintiffs’ claims, stating that because the plaintiffs were not parties to the contracts they sought to challenge, they lacked standing to attack them. Lack of standing to attack the transfer agreements equated with lacking claims under the FDCPA or OCSPA.

Further, in dismissing all OCSPA claims, the court: (1) joined a growing number of cases holding that when an attorney represents a financial institution that is exempt under the OCSPA, the attorney is also exempt from that statute; (2) recognized that the Ohio Supreme Court, in its Anderson decision (supra), ruled that transactions between mortgage service providers and homeowners are not “consumer transactions” under the OCSPA because there is no transfer of an item of goods, a service, a franchise, or an intangible, to an individual; and (3) agreed “with Defendants that nothing about the definition of ‘supplier’ under the OCSPA supports the conclusion that those who provide services to financial institutions in connection with foreclosure of delinquent mortgages are ‘suppliers’ for purposes of the statute.”

© Copyright 2013 USFN. All rights reserved.
July/August e-Update

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Rhode Island: Avoid Sanctions by Appropriately Preserving E-Stored Information

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Paul M. Kessimian, Christian R. Jenner, and Christopher M. Wildenhain
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

A 2013 ruling from the Rhode Island Superior Court illustrates the necessity of preserving potentially relevant information in the face of pending or threatened litigation, and the harsh consequences that can result from a party’s failure to comply with its preservation obligations.

In Berrios v. Jevic Transportation, Inc., No. PC-2004-2390, 2013 WL 300889 (R.I. Super. Jan. 18, 2013), the presiding justice considered multiple motions seeking sanctions against two of the defendants in the case for alleged “spoliation” (i.e., loss or destruction) of evidence. The court concluded that spoliation had, in fact, occurred and imposed sanctions on both defendants that had been accused of spoliation.

In Berrios, the plaintiff asserted claims arising out of the alleged wrongful death of her infant daughter, who was a passenger in a school bus when it collided with a tractor-trailer. The two defendants accused of spoliation were the owner of the tractor-trailer and the owner of the school bus, who had asserted cross-claims against each other for contribution. The court found that the tractor-trailer owner, despite being on notice of potential litigation almost immediately following the accident: (1) allowed its internal emails from the time of the accident to be deleted pursuant to its document retention policy; (2) failed to retain current litigation and anticipated litigation documents in violation of an order from a federal bankruptcy court; and (3) did not download electronic data from the tractor-trailer involved in the collision, despite a regular practice of doing so. The court also found that the school bus owner, which was on notice of potential litigation almost immediately following the accident, despoiled internal emails when its vice president of safety allowed his laptop to “crash” without backing up his email.

In reaching these conclusions, the presiding justice noted that the tractor-trailer owner had failed to implement a “litigation-hold” protocol (i.e., a notice issued in anticipation of a lawsuit), ordering employees to preserve documents and other materials relevant to the lawsuit. The court cited to federal precedents holding that once a party is on notice of potential litigation, it is under an affirmative duty to suspend its routine document retention policy and put in place a protocol to ensure the preservation of relevant documents and electronically stored information (ESI).

As the court noted, the failure to institute and implement such procedures upon receiving notice of possible litigation may result in sanctions against the offending party, which can seriously impede the party’s ability to defend itself. In this respect, the Berrios decision is consistent with prior decisions issued by the presiding justice regarding a party’s duty to preserve documents and ESI. See Brokaw v. Davol, Inc., Nos. PC 07-5058, PC 07-4048, PC 07-1706, 2011 WL 579039 (R.I. Super. Feb.15, 2011) (recognizing a “general preservation rule” of preserving ESI when a party receives knowledge of possible litigation).

In Berrios, the court concluded that the despoiled evidence was important to the case and that its destruction severely prejudiced other parties. Thus, the court found it appropriate to “levy heavy sanctions against” the tractor-trailer owner. She ordered that certain expert testimony be excluded at trial, and also that the jury be instructed that it may infer that the destroyed evidence was unfavorable to the spoliating party. The court also ordered a similar jury instruction as to the school bus owner. The court reserved the issue of costs and attorneys’ fees until after trial, leaving open the possibility of further sanctions.

Thus, the Berrios decision illustrates that severe consequences can befall litigants who fail to take steps to preserve materials potentially relevant to litigation. Although the Berrios court chose to exclude certain evidence and make adverse inference instructions, sanctions for spoliation can run the gamut from the ultimate penalty of dismissal of one’s action or claim to an award of attorneys’ fees.

To avoid sanctions, it is critical for potential litigants to take affirmative steps — including implementing litigation holds — to ensure that preservation occurs in a timely fashion, that the preservation protocols are communicated to employees and agents, and that potential custodians understand and comply with those protocols.

© Copyright 2013 USFN and Partridge Snow & Hahn, LLP. All rights reserved.
July/August e-Update

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