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Colorado 2013 Legislative Session

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

August 1, 2013

 

by Cynthia Lowery-Graber
The Castle Law Group, LLC
USFN Member (Colorado, Wyoming)

The 2013 Colorado legislative session proved to be busy and interesting, continuing the pattern of proposals in recent years to alter Colorado’s foreclosure process. The most monitored legislation for the lending industry was House Bill 13-1249, with the potential of significant impacts upon foreclosure practices in this state.

Colorado boasts a unique quasi-judicial public trustee system for foreclosures that avoids a lengthy and costly judicial proceeding. The public trustee system maintains neutrality by having a public official oversee the foreclosure process, in addition to affording due process to borrowers by providing an opportunity for a hearing in a limited court proceeding (the “Rule 120” proceeding) and requiring the lender to obtain a court order authorizing the foreclosure sale.

A foreclosure may be commenced by the holder of the original note or by a “qualified holder” as defined by statute. A qualified holder may commence a foreclosure with copies of the original loan documents in addition to a statement that the holder of the note is a qualified holder under Colorado statute. The ability of qualified holders to file a foreclosure with copies of loan documents has come under attack in Colorado’s last two legislative sessions. This year, HB 13-1249 proposed a requirement that the original note or copies of the note, including all indorsements or assignments, be required in every public trustee foreclosure in the state.

In addition, HB 13-1249 would have required legal oversight of loss mitigation and compelled all loan servicers to provide a “single point of contact” to any borrower who requests foreclosure prevention. The bill would have prohibited dual tracking by precluding the initiation of a foreclosure where a complete loss mitigation application is under review or, if the foreclosure was already commenced, that it be held in abeyance until a written denial of loss mitigation is provided. Current state law does not interfere with loss mitigation negotiations between a borrower and a lender or with existing federal regulatory or settlement guidelines.

Finally, HB 13-1249 sought to supplement the Rule 120 process by requiring the movant to affirmatively prove that it is the holder of the evidence of debt at the commencement of the case. Current law allows this issue to be raised by a response filed by the borrower at the Rule 120 hearing. In the event the court denied the movant’s request for an order authorizing sale, the bill prohibited the movant from filing a new Rule 120 case for at least six months and only with new and/or different evidence in support of a subsequent request for an order. Lastly, the bill precluded the movant from charging attorneys’ fees and costs in a subsequent judicial foreclosure if it was unsuccessful in obtaining a court order in the Rule 120 proceeding.

The hearing on HB 13-1249 lasted approximately three hours. Multiple borrowers and other supporters of the bill testified as well as representatives from the lending community and legal experts. While borrowers offered emotional testimony regarding their desires to avoid foreclosure, many other persons addressed the inconsistencies contained within the proposed legislation, in addition to the lack of necessity for a sweeping overhaul in a state that has a lower foreclosure rate than most. Ultimately, the bill was defeated soundly in committee by a bi-partisan vote. Despite this bill’s unsuccessful attempt to modify the public trustee process, many borrowers and advocates continue to attack the existing process as a means to challenge the foreclosure. Given the continued scrutiny of the process, the lending community should keep a watchful eye for future legislation and cases addressing these issues in Colorado.

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

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BANKRUPTCY UPDATE First Circuit BAP: A Hybrid Ch. 13 Plan is Not Confirmable

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

August 1, 2013

 

by Andrew S. Cannella
Bendett & McHugh, P.C
USFN Member (Connecticut, Maine, Vermont)

The term “hybrid plan” is used to describe a Chapter 13 plan that modifies the balance of a secured claim by reducing the secured portion to the fair market value of the collateral (less any senior encumbrances) pursuant to Bankruptcy Code § 1322(b)(2) (this is commonly referred to as a “cramdown”), while also using § 1322(b)(5) to cure the pre-petition arrearage and maintain the regular monthly contractual payments beyond the life of the plan until the modified balance is paid in full. Because traditionally any modified claim must be paid in full during the life of the plan, but to propose the same with a mortgage claim would result in a plan payment not feasible for the debtor, a hybrid plan attempts to provide the debtor with a feasible plan that serves to accomplish a cramdown of the secured claim.

The origins of this type of plan, which is permitted in a significant minority of jurisdictions, seem to be in rulings from the Bankruptcy Court for the District of Massachusetts in the 1990s. In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994); In re Brown, 175 B.R. 129 (Bankr. D. Mass. 1994); In re Murphy, 175 B.R. 134 (Bankr. D. Mass. 1994).

On July 24, 2012, a Massachusetts bankruptcy court decided In re Bullard, 475 B.R. 304 (Bankr. D. Mass. 2012) and held that a “hybrid” Chapter 13 plan is impermissible pursuant to the terms of the Bankruptcy Code. The basis for the decision was twofold. First, the court held that the combined code provisions contained in the plan violated the prohibition on plans exceeding five years in duration contained in § 1322(d). Second, the court held that the plan failed to comply with § 1325(a)(5)(B)(ii), which requires the plan to distribute the allowed amount of the secured claim as of the effective date of the plan.

The Bankruptcy Appellate Panel (BAP) for the First Circuit granted the debtor’s motion for leave to appeal from the bankruptcy court’s order denying plan confirmation and affirmed the bankruptcy court’s order. However, the BAP used a different rationale that was not based on the § 1322(d) prohibition on plans exceeding five years or the provisions of § 1325(a)(5)(B)(ii). Instead, the court held that the hybrid plan proposed by the debtor was impermissible because, based on the provisions of § 1328(a)(1) and § 1325(a)(5)(B)(i)(I), modification of a claim pursuant to § 1322(b)(2) and the cure and maintenance of payments beyond the life of the plan pursuant to § 1322(b)(5) are mutually exclusive. This is because § 1325(a)(5)(B)(i)(I) provides that the secured creditor retain its “lien securing such claim until the earlier of — (aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328.”

However, since claims treated pursuant to § 1322(b)(5) are not dischargeable pursuant to § 1328(a)(1), the creditor retains its lien until it is paid the full amount of the entire debt secured by its lien on the subject property as determined by state law. Consequently, if a Chapter 13 plan seeks to cure a pre-petition arrearage and maintains the regular contractual payment regarding a secured claim, the plan cannot also seek to reduce the balance owed on said claim as determined by applicable state law.

While the BAP’s ruling in Bullard is not binding precedent, it has already had an impact. The U.S. Bankruptcy Court for the District of Rhode Island has stated that it intends to follow the ruling and will no longer confirm a hybrid plan over a creditor’s objection.

The debtor filed a notice of intent to appeal to the U.S. Court of Appeals for the First Circuit on June 19, 2013.

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Summer USFN Report.

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Are Your Procedures in Compliance with the Updated UCC Article 9?

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

August 1, 2013

 

by Christopher J. Currier & Ryan W. Sawyer
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

Despite the lack of fireworks and fanfare, July 1, 2013, ushered in new changes to the Uniform Commercial Code, which are important to bankers, lenders, and legal practitioners. The revisions to UCC Article 9 (Article 9) relating to security interests in personal property have been enacted at present by 41 states, including Massachusetts, Rhode Island, and Delaware.

Unlike the 1998 revisions to Article 9, which were considered to be a major overhaul, the current amendments were designed to address practical issues that have arisen since July 1, 2001. For example, the revisions provide greater guidance regarding the name of the individual/business/trust debtor to be provided on a financing statement.

Naming the Business Debtor

Prior to the current revisions, UCC financing statements were required to set forth the business debtor’s name as it appeared in a “public record.” The definition of a “public record” was perceived to be too broad, as documents such as tax good standing certificates were relied upon to establish the validity of a business debtor’s name. The revisions now require secured parties to rely on the name of a business debtor as set forth in the organizational documents filed with the state or U.S. office where the debtor was formed.

Naming the Individual Debtor

The revisions have also amended the filing requirements as they pertain to individuals. Prior to the current revisions, no specific guidance was provided as to the precise name to use for an individual. This led to confusion and the need to search various iterations of a person’s name to determine if a filing had been made against him/her. The revisions to Article 9 provide two alternatives to determine a person’s name. Alternative A is referred to as the “only if” rule. Under this option the financing statement must state the debtor’s name as it appears on a current unexpired driver’s license or state-issued identification card. If the person has such a state-issued license/card, the filing is valid “only if” the name as it appears on the license/card is used. Alternative B is known as the “safe harbor” rule. This option provides that the financing statement may contain the debtor’s driver’s license name, individual name, or surname and first personal name. Most states, including Rhode Island and Massachusetts have adopted Alternative A.

Naming the Trust Debtor
The names of trusts in the context of financing statements have also been addressed by the Article 9 revisions. If the trust is registered with a state (such as Massachusetts Business Trust), the name on the financing statement must correspond with the name of record in that jurisdiction. If the trust is being administered by the personal representative of a decedent, then the financing statement must name the decedent as the debtor. If the debtor is a trust that is not a registered organization, such as a common law trust, then the financing statement must provide the name of the trust as specified in the trust documents and, if no such name exists, then the name of the debtor must correspond to the name of the settlor or testator. In cases where there are multiple settlors or testators, a secured party must file financing statements in each jurisdiction where such parties are located.

Debtor Move or Merger
Another significant change set forth by the revisions relates to after-acquired collateral when a debtor moves or a new debtor located in a new jurisdiction assumes the obligations of a former debtor (such as when a debtor merges into a new entity located in a new jurisdiction). Under the pre-2013 changes, a secured party has four months (in the case of a move) and one year (in the case of a new debtor (i.e., merger)) to continue its perfection in existing collateral by filing a new financing statement. These existing rules relate only to collateral that existed at the time of the move or merger. They do not address issues relating to collateral acquired after the move or merger.

New sections 316(h) and 316(i) of Article 9 provide that a financing statement is effective to perfect a secured party’s security interests in after-acquired collateral (such as inventory) obtained within four months after the debtor has changed jurisdictions (by way of a move or merger). A secured party must file in the new jurisdiction within the four-month window to maintain its perfection in the after-acquired collateral.

New Forms

The amendments also require the use of newly revised forms of financing statements. The amendments contain transition rules similar to the transition rules implemented in 2001, which will allow most secured parties to implement changes over time. Secured parties, however, may have to act more quickly to make necessary changes to any filings that are continued after July 1, 2013. Continued filings must comply with the new rules. In order to remain properly perfected, such filings may need to be amended before they are continued.

While these latest revisions to Article 9 are not as far-reaching as the 1998 amendments, secured parties such as banks must be aware of the new changes and adopt policies and procedures to comply with the new rules.

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July/August e-Update.

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New York: The Incessant Issues of Standing

Posted By USFN, Friday, June 7, 2013
Updated: Monday, November 30, 2015

June 7, 2013

 

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

The subject of standing will not go away. All of the publicity and controversies of recent years have energized borrowers to claim, almost as a matter of course, that the foreclosing party did not really own or hold the note before the action was begun, upon which basis it is asserted that the plaintiff lacks standing. While most often this will be an unfounded defense, lender/servicer miscues can provide defaulting borrowers with a ready-made defense. A recent case jarringly instructs. [Deutsche Bank National Trust Company v. Haller, 100 A.D.3d 680, 954 N.Y.S.2d 551 (2d Dept. 2012)].

The end result of this case was that summary judgment was denied the foreclosing party because it could not demonstrate standing, although as icing on the cake, nor could it prove that it mailed the (Fannie-Freddie uniform instrument) mandated thirty-day notice.

Helpfully, the court recited some standing concept basics. They are worthy of recitation here, certainly as an aid to appreciate the decision:


• Where standing is made an issue by a defendant, the plaintiff must prove its standing to be entitled to relief.

• A foreclosing plaintiff has standing when it is the holder or assignee of both the note and the mortgage at the time the action is commenced.

• The mortgage obligation is transferred either by written assignment or physical delivery of the note before the action is begun.


As readers will recognize, an assignment of the mortgage is usually and most readily accomplished and established by a written assignment. There was an assignment in this case and it was to the plaintiff, but signed by “Ameriquest Mortgage Company: by CitiResidential Lending, Inc. as attorney in fact.” No evidence was produced, though, as to Citi’s authority to sign the assignment. A power of attorney would have been fine, the court said, but none was produced. With the court finding a question of fact on the legitimacy of the assignment, it could not grant summary judgment.

Endorsement of the note to plaintiff could solve the problem but, while the note was indeed endorsed, the endorsement was undated. Therefore the court could not determine whether that had occurred before the foreclosure was begun. Thus, the servicer could not be rescued by this.

Of course, as noted, physical delivery of the note puts all this to rest. But that could not be proven either. Plaintiff’s servicing agent submitted an affidavit in support of the delivery assertion but offered no factual details about the physical delivery. Therefore, this too was insufficient to establish physical possession of the note before the action was begun.

So the mortgage holder failed in all of its attempts to demonstrate standing. It was thus required to go through time-consuming and expensive discovery, or a trial, or at the very least, another attempt at summary judgment. Avoiding this scenario suggests care in the assignment process.

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June e-Update

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New York: Attorney Affirmation

Posted By USFN, Friday, June 7, 2013
Updated: Monday, November 30, 2015

June 7, 2013

 

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

Lenders and servicers know about the attorney affirmation needed in New York home loan foreclosures. A foreclosure action cannot proceed unless an affirmation by plaintiff’s counsel is submitted attesting to the accuracy of the plaintiff’s documents. The purpose of the affirmation was to assure courts that all was truly in order and that goal seemed reachable if attorneys had to join in swearing to the bona fides of the plaintiff. But it was not designed to become a trap to avoid the ability to foreclose, which in some instances it has. [Aurora Loan Services v. Sobanke, 101 A.D.3d 1065, 957 N.Y.S.2d 379 (2d Dept. 2012)].

This began as an ordinary case. The foreclosure was instituted; no defendant answered. (Thus there were no defenses.) There being no answers, the plaintiff submitted an order to appoint a referee — the usual next step. The court responded, however, stating that the order could not be considered, and no referee would be appointed, unless within sixty days the plaintiff submitted the “attorney affirmation.” The court also decided that if the affirmation were not filed within sixty days, not only would the order of reference be denied, but the complaint would be dismissed as well.

Experience suggests that for many reasons, it can be time-consuming to get the information necessary and locate the proper parties to prepare the attorney affirmation. It can be surmised that such is what occurred in this case and, facing some delay in being able to prepare the attorney’s affirmation, the plaintiff’s counsel took the rational step, prior to expiration of the court-imposed deadline, to withdraw its order of reference, to then allow it to obtain the information required for the affirmation. Instead of responding to the request to withdraw the order of reference, however, and just after the sixty-day deadline had passed, the court on its own volition ordered that the complaint be dismissed — with prejudice — and that the notice of pendency be cancelled. This all meant that the mortgage holder could never foreclose the subject mortgage, even though it was undeniably in default and no one had assaulted the legitimacy of the mortgage or the actuality of the default.

Upon appeal, the offending court order was reversed. The appellate court cited the rule that a court’s power to dismiss a complaint on its own volition must be used sparingly and then only when extraordinary circumstances exist to warrant dismissal of a case. (Citing U.S. Bank, N.A. v. Emmanuel, 83 A.D.3d 1047, 1048, 921 N.Y.S.2d 320).

Mindful of that principle, and finding that there were no extraordinary circumstances supporting dismissal of the complaint with prejudice and cancellation of the notice of pendency, the appellate court found the trial court to be in error. There was, it found, no delinquent conduct on the part of the foreclosing party’s counsel, nor was there any evidence of a pattern of willful noncompliance with court-ordered deadlines. Instead, the attorneys had simply requested an opportunity to withdraw the proffered order of reference within the sixty-day deadline so that time could be garnered to respond to the request for the attorney’s affirmation.

As it turns out, the plaintiff prevailed in the end — but at the cost of facing a shocking order and then being constrained to incur the costs and the time of an appeal.

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June e-Update

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Minnesota Supreme Court Speaks Again on Foreclosure Proceedings

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

The Minnesota Supreme Court has issued its second significant decision during the recent foreclosure crisis. On April 17, the court ruled that “strict compliance” is required for at least one more provision of Minnesota’s foreclosure statute. Specifically, a foreclosing lender must record all assignments of mortgage prior to the date of the first publication (“first legal” in Minnesota).

The court reasoned that “section 580.02(3) requires all assignments of the mortgage to be recorded before the mortgagee has the right to engage in the process of foreclosure by advertisement.” Ruiz v. 1st Fidelity Loan Servicing, LLC, A11-1081, 829 N.W.2d 53 (Minn. 2013). The statute doesn’t expressly mention the first publication date as a deadline for recording assignments and, in fact, does not have a timing component for recording assignments. Yet, the court reasoned that the plain meaning of the word “requisite” as used was the equivalent of “pre-requisite,” which then implied a timing element.

Minnesota’s 15-year statute of limitations does support the court’s decision, since it deems the commencement of a nonjudicial foreclosure to be the date of the first publication of the notice of sale. Minn. Stat. § 541.03, subd. 2 (2012). It was already a best practice in Minnesota to record all assignments prior to the first publication date to protect against the uncertainty of a decision like Ruiz. Additionally, it was a best practice to prepare the notice of pendency prior to the assignment, record it with the assignment, and make sure the recording was completed prior to the first date of publication.

Interestingly, there are federal court decisions in Minnesota that suggest a borrower has no right or standing to contest a recording delay, at least with respect to the notice of pendency, which is expressly required to be recorded prior to the first date of publication. The assignment of mortgage question is now resolved in Minnesota, but much uncertainty remains for other procedures.

The Supreme Court chose not to address the notice of pendency issue or the case law applying “substantial compliance” to most foreclosure procedures. Minnesota does have ancient case law authority that requires only substantial compliance for some procedures, which, if recognized by the court, would have meant that procedural defects could only be challenged by a borrower who can show prejudice from the noncompliance.

In 2009, the Minnesota Supreme Court decisively ruled in favor of the MERS system and meticulously described how Minnesota’s foreclosure process allows the note and mortgage to follow separate and independent paths without interfering with the foreclosure process. Jackson v. MERS, 770 N.W.2d 487 (Minn. 2009). A foreclosing lender does not need to be the owner, holder, or party with contract rights to enforce a promissory note at any time during a foreclosure proceeding. Id. In this state’s nonjudicial process, a foreclosing lender simply must be the mortgagee of record prior to the first date of publication.

Upon receiving executed documents from a servicer, Minnesota attorneys typically send them immediately for recording and attempt to schedule the first legal for the next calendar day in that county. If the county recorder’s office fails to process all of its recordings as expected, however, or if there is a delay in the mail or messenger delivery, foreclosure counsel may find themselves in the Ruiz situation of failing to record prior to the first legal date.

When the Ruiz case first arose early in 2012, there were literally hundreds of cases throughout Minnesota impacted by the decision; i.e., assignments and notices recorded exactly on the first publication date. Most or all have been resolved by now, partly due to the operation of a curative statute, so the state Supreme Court’s decision should have little remaining impact on Minnesota’s current foreclosure volume.

Going forward, it is best for Minnesota attorneys to have adequate safety features in place to halt a first legal from going forward when there is a recording delay (a tough thing to know considering that some counties have delays of over two months in making recording data public). Law firms need to be able to run reports from their case management systems and take special precautions to spot inevitable recording delays before proceeding with the first legal.

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

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Kansas: Recent Appellate Decisions Involving Mortgage Foreclosures

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

The Kansas Court of Appeals recently handed down three published decisions involving mortgage foreclosures.

Prime Lending II, LLC v. Trolley’s Real Estate Holdings

Here, the appellate court held that it lacked jurisdiction when the trial court failed to make a proper express determination, as required by statute, that a judgment of foreclosure was final and that there was no reason for delay in the entry of judgment on that claim when other claims remained pending. Accordingly, it dismissed the appeal. However, a judicial sale already had been held with the property having been sold to a third party and, subsequently, the lower court having retroactively certified the judgment as final.

The appellate court thus faced two issues: (1) Was the retroactive order sufficient to make the judgment final? (2) If not, what was the effect on the judicial sale of the property? Because Kansas appellate courts have adopted and follow Federal Rule 54(b), in the absence of the required express determination that the judgment was “final” and that there was reason for delay in entering judgment, the appellate court held that the grant of summary judgment was not final. Therefore, no appeal could be taken from that judgment. Furthermore, the court found that the trial court had no discretion to retroactively make its decision a final judgment, nor was it possible to amend the previous order to include the required findings. Also, the appellate court declined to determine whether certifying the judgment as final at the later hearing would have resolved the jurisdictional problem.

As a result of the appellate court’s ruling, the validity or invalidity of the sale and the consequences of it are in issue and left to be determined in the trial court. [Prime Lending II, LLC v. Trolley’s Real Estate Holdings, 2013 WL 1786022 (Kan. Ct. App. Apr. 26, 2013)].

Bank of Blue Valley v. Duggan Homes, Inc.
In this case, the appeals court held that only through a foreclosure action can a senior lienholder strip the real property of known or recorded junior liens. After taking a deed-in-lieu of foreclosure from its borrower, without merger of the mortgages held by the bank into the title, the bank sought to foreclose its mortgages against junior judgment lienholders so as to clear title to the properties. The trial court held that the bank “simply desires to quiet title to the property” and granted judgment in favor of the bank quieting its title, even though such relief was not requested by the bank.

The appeals court reversed and remanded, holding that the trial court did not have the authority to convert the bank’s foreclosure action into a quiet title action and, even if it did, title to the real properties would not have been cleared in any event as Kansas statute only “extends the right to the property owner to quiet title against ... liens which have ceased to exist or which have become barred.” Furthermore, because the bank had abandoned its foreclosure action, any foreclosure issue was not before the court. [Bank of Blue Valley v. Duggan Homes, Inc., 2013 WL 1786013 (Kan. Ct. App. Apr. 26, 2013)].

U.S. Bank v. McConnell
In the third decision summarized here, the appeals court ruled that the bank was the holder of the note and was entitled to enforce both the note and the mortgage; that the McConnells’ claims that the bank violated the Kansas Consumer Protection Act (KCPA) were not substantiated by anything of evidentiary value; and that the wife of the borrower, by signing the mortgage, consented to alienation of the homestead and, therefore, that the mortgage was enforceable against her as well.

In this case, the mortgage was not assigned until after suit was filed. However, the note was held by the bank well before the foreclosure action was initiated. Therefore, the appeals court, citing prior Kansas cases and the Restatement (Third) of Property (Mortgages) 5.4(a), and following a discussion of cases from other jurisdictions, found that the mortgage followed the note and, accordingly, that the bank had “standing” to pursue the foreclosure action. As to the KCPA violations, the appellate court held that the McConnells failed to present any evidence that would create an issue of material fact regarding their KCPA claims and bar summary judgment in favor of the bank.

The McConnells also raised issues about MERS, the chain of title of the note and mortgage, the negotiability of the note, and alleged abuse of discretion of the lower court in not allowing additional discovery, as well as concerning an affidavit submitted by the bank in support of the bank’s motion for summary judgment, all of which the appeals court found were without merit and failed to establish a genuine issue of material fact that would preclude summary judgment. In addition, the McConnells asserted that the note and mortgage had been severed when the bank held the note and MERS held the mortgage, thus making the mortgage unenforceable. The court responded by saying that even if the note and mortgage were separated, it saw no impediment if the mortgage was transferred to the bank after suit was filed so long as the transfer occurred before the bank filed for summary judgment. But, the McConnells contended, MERS had no rights in the mortgage to assign. However, the court disposed of that argument by stating that MERS as a “nominee” was an agent of the lender while the bank held the note and, thus, there was no split and that to hold otherwise would be to create an unwarranted windfall “inconsistent with principles of equity” and contrary to Restatement (Third) of Property 5.4(c), Comment (e).

Finally, the McConnells claimed that the wife of the maker of the note did not consent to the impairment of her homestead rights because she did not sign the note or loan modification agreement. She did sign the mortgage, however, and the rights described in the Kansas homestead statute do not apply when both spouses consent to the mortgage lien on the property. Having failed to create a disputed issue for trial, the court held that summary judgment in favor of the bank was proper and, accordingly, the trial court decision was affirmed. [U.S. Bank v. McConnell, 2013 WL 1850755 (Kan. Ct. App. May 3, 2013)].

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Georgia Supreme Court Decisions Resolve Foreclosure Requirements

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Adam Silver, Kimberly Wright, Steven Flynn
McCalla Raymer, LLC – USFN Member (Georgia)

On Monday, May 20, 2013, the Georgia Supreme Court issued two important decisions clarifying lingering questions regarding the nonjudicial foreclose process in the state of Georgia.

Background — The Reese Case
The nonjudicial foreclose process in Georgia garnered considerable interest after the Georgia Court of Appeals decided the case of Reese v. Provident Funding Associates, LLP, 317 Ga. App. 353, 730 S.E.2d 551 (2012), interpreting a 2008 amendment to the nonjudicial foreclosure statutes to include the requirement that the “secured creditor” be included in the notice of foreclosure sale letter to the debtor (the pre-foreclosure notice). The language added by the 2008 amendment required, among other items, that an assignment to the secured creditor must be filed prior to the foreclosure sale, that the secured creditor send the pre-foreclosure notice to the debtor, and that the pre-foreclosure notice contain the name and contact information of the individual or entity with full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.

The 2008 amendments to the Georgia foreclosure statutes were made by the Georgia General Assembly in order to provide more transparency in the foreclosure process for the benefit of the debtor. See, e.g., O.C.G.A. § 44-14-162.2. In Reese, the Georgia Court of Appeals, citing this legislative desire for additional transparency, read an additional requirement into the statute that the “secured creditor” must also be identified in the pre-foreclosure notice. Id. at 355, 730 S.E.2d at 552. However, despite the legislature’s use of the term “secured creditor” in multiple places within the Georgia foreclosure statutes, the term “secured creditor” is not defined in the relevant provisions of the Georgia Code.

In Reese, the court held that the “secured creditor” must be identified in the pre-foreclosure notice, in addition to the entity or individual with the full authority to negotiate, amend, or modify the terms of the mortgage with the debtor. Id. at 359, 730 S.E.2d at 555. In dicta, the Reese court deemed to equate the term “secured creditor” with the “owner” of the loan, which created a substantial question of who is authorized to foreclose under Georgia law. Id. at 355-56, 730 S.E.2d 553. A petition for certiorari to the Georgia Supreme Court was filed on August 20, 2012.

More Background — The You Case
That question from Reese of whether the secured creditor must be named in the pre-foreclosure notice was certified to the Georgia Supreme Court by the U.S. District Court for the Northern District of Georgia in You v. JP Morgan Chase Bank, N.A, No. 1:12-CV-00202-JEC, Doc. 16 (N.D. Ga. 2012).

In You, the foreclosing entity was alleged to hold the security deed, but not the note. Further, the pre-foreclosure notice did not identify the holder of the note or the owner of the loan alleged by the plaintiff to be the “secured creditor.” The pre-foreclosure notice referred to the security deed holder, but without directly identifying that entity as the secured creditor. The U.S. District Court for the Northern District of Georgia, citing a split in authority, as well as the Reese holding, issued an order on September 7, 2012, certifying three questions to the Georgia Supreme Court:


1) Can the holder of a security deed be considered to be a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?
2) Does O.C.G.A. § 44-14-162.2(a) require that the secured creditor be identified in the notice described by that statute?
3) If the answer to the preceding question is “yes,” (a) will substantial compliance with this requirement suffice, and (b) did defendant Chase substantially comply in the notice it provided in this case?


Supreme Court Decides You & Remands Reese
In a well-reasoned opinion, the Supreme Court of Georgia answered the first certified question in the affirmative and the second certified question in the negative, rendering the third certified question moot.

First, the court concluded that a party initiating a nonjudicial foreclosure sale may exercise the power of sale clause in a security deed by virtue of holding the security deed without also being required to hold the note or possess any interest in the underlying debt obligation. Contract law primarily governs nonjudicial foreclosure sales in the state of Georgia. Therefore, the terms of the security deed determine the method by which a nonjudicial foreclosure sale may occur. Because the security deed specifically allows for a nonjudicial foreclosure sale in the event of default of the underlying loan obligation, the security deed, even without the note or an interest in the underlying debt obligation, provides standing to foreclose. Further, the You court stated, this determination is not at odds with the Georgia Uniform Commercial Code because the security deed, unlike the note, is not a negotiable instrument. Id. at p. 12.

Second, in deciding whether the secured creditor needs to be named in the pre-foreclosure notice, the Georgia Supreme Court looked to the plain language of the statute. The court determined that the secured creditor need not be identified in the pre-foreclosure notice. Id. at p. 15. In its analysis, the court relied on the unambiguous language of the statute, which requires only that the pre-foreclosure notice identify the individual or entity with the full authority to negotiate, amend, and modify the terms of the mortgage with the debtor. The court concluded that the statute does not include an additional requirement to identify the “secured creditor” in the pre-foreclosure notice. This determination rendered the third question regarding substantial compliance with any requirement to identify the secured creditor in the pre-foreclosure notice moot.

On the same day that the Georgia Supreme Court issued its opinion in You, the court also issued an order granting certiorari in the Reese case. The court’s order vacated the decision of the Georgia Court of Appeals and remanded Reese to that court for consideration in light of the Supreme Court’s decision in You.

While the state Supreme Court appears to have resolved the most significant outstanding and unresolved issues of Georgia law related to the nonjudicial foreclosure process, affected members of the financial community should use caution before changing any foreclosure processes and procedures that may have been modified in light of the Georgia Court of Appeals’ decision in Reese last summer. Further consideration of the practical ramifications of these decisions should be undertaken prior to making any such changes. Banks, servicers, and investors may also choose to review pending foreclosure litigation cases to determine whether any of them are subject to dismissal for failure to state a claim due to these recent decisions of the Georgia Supreme Court.

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California Supreme Court Rules on a Trustee’s Authority to Rescind a Sale

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

For those tracking case law on a trustee’s authority to rescind a sale, the month of May was thrilling. On May 16, 2013, the California Supreme Court issued a ruling in Biancalana v. T.D. Service Co., 2013 Cal. Lexis 4007. The decision not only addressed a trustee’s role and authority to rescind a sale, but also followed two dueling appellate cases, offering some clarity in the mist of existing uncertainty. The Supreme Court ruled that where a trustee discovered it had mistakenly communicated to the auctioneer an incorrect opening bid, which was less than ten percent of the lender’s specified bid, and the trustee had not yet delivered the deed, the trustee had discretionary authority to rescind the sale.

Facts & Procedural History

The facts of Biancalana are straightforward. The trustee took a property to sale in September 2008. The beneficiary communicated the specified opening bid of $219,105 to the trustee. The trustee mistakenly communicated the opening bid of $21,894.17 to its auctioneer. A third party purchaser bought the property for two dollars more than the opening bid. Two days after the sale the trustee informed the purchaser of the error, the need to rescind, and returned the purchase funds. The trustee refused to issue the trustee’s deed. The purchaser sued for quiet title. The trial court ultimately ruled in favor of the trustee. The purchaser appealed and the appellate court reversed and remanded. The trustee petitioned the Supreme Court, and the Supreme Court reversed the judgment of the Court of Appeal.

Existing Law & Dueling Appellate Cases
Ask a trustee counsel about a trustee’s authority to rescind a sale, and they are quick to recite two appellate cases: 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc., 85 Cal. App.4th 1279 (2001), and Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal. App.4th 804 (2009). There has not been a lack of case law on the topic, but the two contemporary appellate cases have been difficult to reconcile.

Existing law has held that gross inadequacy in price, coupled with irregularity in the sale procedure, is a sufficient basis for setting a sale aside. (See cases cited on page 10 of Biancalana). Difficulty arose because 6 Angels and Millennium interpreted “irregularity in the sale procedure” differently, resulting in uncertainty about the type of error that triggers the authority to rescind.

In 6 Angels the beneficiary submitted an incorrect opening bid to the trustee. Due to clerical error, the beneficiary communicated the bid as $10,000 instead of $100,000. The property sold to a third party for one penny over the mistaken bid. The 6 Angels court ruled that the beneficiary’s error was under the beneficiary’s control and arose from the beneficiary’s own negligence, and for that reason fell outside of the procedural requirements for a trustee sale described in the statutory scheme. The 6 Angels court upheld the sale.

Eight years after 6 Angels, the Millennium ruling issued. In Millennium the auctioneer mixed up two properties. The trustee had submitted the correct opening bid to the auctioneer at $382,544.46. The auctioneer, however, read a script that called out the trustee sale number and legal description for one property and the physical address and opening bid for a different property. Hence the auctioneer announced the incorrect opening bid of $51,447.50, instead of $382,544.46. Upon discovering the error, the trustee promptly informed the purchaser of the need to rescind and refused to issue a deed.

The Millennium court held that, unlike the error in 6 Angels, the auctioneer’s error created a fatal ambiguity as to which property was auctioned since there was inconsistency in the legal description, physical address, and the opening bid that was cried out. The Millennium ruling permitted a sale rescission.

Two years after Millennium, in 2011, the Biancalana appellate ruling sided with 6 Angels. The amount of the mistaken opening bid in both cases was 10 percent of the specified bid, so gross inadequacy in price existed. However, the 6 Angels court did not find that the beneficiary’s mistaken bid instruction constituted “an irregularity in the sale procedure,” and the Biancalana appellate court followed 6 Angels, even though the mistake in Biancalana was made by the trustee, in discharge of its duties, not by the beneficiary. Considering that a trustee needs to conduct the sale fairly and openly, uncertainty arose as to the circumstances under which a trustee could exercise its authority to rescind a sale.

Supreme Court’s Reasoning in Biancalana
The California Supreme Court focused on whether the trustee’s mistake was part of the foreclosure sale process, and decided that it was. Processing a submitted bid pursuant to Civil Code § 2924h is a key function of a trustee within the statutory framework. The error resulted in the auctioneer announcing a mistaken bid, which the court reasoned qualified as an irregularity occurring within the statutory foreclosure sale process. The court refused to impute the trustee’s error to the beneficiary as a trustee is not a true agent and only acts in a limited sense. The court further reasoned that since the trustee’s deed had not issued, the statutory presumptions had not attached, and the purchaser had not been prejudiced in any meaningful way by the trustee’s mistake and prompt rescission of the sale.

While the Supreme Court ruling clarifies to some extent the type of error that falls within the foreclosure sale process, it also offers an incentive for trustees to exercise due diligence in reviewing the sale and identifying any possible irregularity before issuing the trustee’s deed.

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The Cloud: Can it be Compliant?

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Shawn J. Burke
ServiceLink, FNF’s National Lender Platform – USFN Associate Member

This article is the third in a series aimed at taking 2012’s hottest buzzword and determining what it means for your business in 2013. Specifically, this segment will address the question of how (and if) you can be compliant when putting your business in the cloud.

Let’s just get to the heart of the matter. Yes. You can be compliant in the cloud.

You’d probably feel much better if I could put some substance behind that statement and not just ask you to trust me. I can. The first consolation being that I am using the cloud. Colleagues in the USFN, like NetDirector, provide a cloud-based service. Your auditors are probably using the cloud and may not even realize it. However, let’s see about addressing some of the standard concerns and increase your confidence level.

Remember “The Cloud” is just a term. Recently at a USFN seminar, I had the pleasure of facilitating a session on the cloud. One of the participants, who was obviously trying to decide whether they could be compliant in the cloud, revealed the following: They use co-location. It’s not a cool term, but frankly that’s a cloud. Clearly they could be compliant as they had been audited and passed. One could argue it’s a private cloud, or that co-location doesn’t have the full support of a hosting company (co-location means your IT people manage the systems) but, regardless, it’s not hosted in your operation — it’s “in the cloud.”

What makes everyone think the auditor is always right? A USFN member related a story about auditors stating that an attorney is required to “own the hardware.” The easy answer is you could absolutely own the hardware and have it in the cloud. Let’s have fun though and suggest something crazy — “the auditor is wrong.” That’s right, I said it. I’m not trying to be difficult, but the idea that ownership makes things more secure is silly. Why would anyone want to own hardware when you could lease it and upgrade before end of life? How can owning one piece of hardware be more reliable than being on a farm of hardware providing redundancy and scalability at a moment’s notice? Talk with your auditor. Find out “why” they have the requirement and look to see if you are meeting it in other ways. Quite possibly, you might have a level of understanding that they may have not had the opportunity to see before.

Finally, the most important thing I can say is that most technology companies are working in the cloud. Not just the providers like Microsoft, Amazon, or Salesforce, but most hardware appliance providers and software providers. Everyone knows the cloud is important and they need solutions that are secure and capable “in the cloud.” They want your business. They are listening to your concerns. They are responding. You can be compliant.

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Connecticut: State Case Law Regarding Applicability of the PTFA

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Renee Bishop
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

In a recent decision by the Housing Session of the Superior Court of Connecticut, the court determined that the federal Protecting Tenants at Foreclosure Act (PTFA) does not apply to tenancies made in exchange for performing services. [Customer’s Bank v. Boxer, 2013 WL 1010747 (Conn. Super. Ct. Feb. 2013)].

The summary process action was the result of the plaintiff’s foreclosure of a mortgage. The defendants claimed to be in occupancy of the premises pursuant to a lease between the defendants and the former owner of the premises. Further, the defendants asserted that they were protected from the underlying eviction proceeding and were entitled to receive a 90-day notice to vacate under the PTFA. The defendants testified that they occupied the premises pursuant to an oral agreement with the prior owner and that they never paid rent to the prior owner or to the plaintiff, but had made repairs to the property in lieu of rent payments. The defendants did not provide evidence supporting the dates or amounts for repairs or expenditures allegedly made.

The PTFA is a remedial statute that is intended to protect only those persons who meet the definition of a bona fide tenant. The plaintiff argued that the defendants cannot be qualified as bona fide tenants since the Act specifically requires “receipt of rent” by the landlord. The PTFA does not define the phrase “receipt of rent.”

The court turned to Connecticut General Statute 47a-1(h), which defines “rent” as all periodic payments to be made to the landlord under a rental agreement. The court also cited the case of City of Norwich v. Shelby-Possello, 2012 Conn. Super. Lexis 1925, which held in pertinent part that under the PTFA, a lease or tenancy shall be considered bona fide only if the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property.

In conclusion, the court determined that “quid pro quo” or barter arrangements do not constitute receipt of rent under the PTFA or Connecticut General Statute 47a-1(h). Since it was admitted by the defendants that rent was never paid, the defendants cannot qualify for the protections of the PTFA.

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Sixth Circuit Looks at the Collection of Transfer Taxes from GSEs

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

A recent decision from the Sixth Circuit Court of Appeals should have far-reaching effects vis-à-vis attempts of state and local taxing authorities to collect real estate transfer taxes from Fannie Mae, Freddie Mac, and the Federal Housing and Finance Agency (federal entities). The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.

The case is 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 judicial opinion involves cases brought by the Michigan counties of Oakland and Genesee and their respective treasurers. [Oakland Cnty. v. Fed. Hous. Fin. Agency, 871 F. Supp. 2d 662, 2012 U.S. Dist. LEXIS 40099 (E.D. Mich. 2012), and Genesee Cnty. v. Fed. Home Loan Mortgage Corp., No. 2:11-cv-14971 (E.D. Mich. 2012)]. The Sixth Circuit reversed and remanded to the U.S. District Court for the Eastern District of Michigan its decision granting summary judgment in favor of the county taxing authorities, with instructions to enter judgment in favor of the federal entities.

On June 20, 2011, Oakland County sued Fannie Mae and Freddie Mac, alleging that they failed to pay transfer taxes for transactions in which they were the grantors of real property. Oakland County later amended its complaint to add the FHFA, which had intervened in the Oakland County action, as a defendant. On November 10, 2011, in a separate action, Genesee County filed a class action lawsuit against the federal entities on behalf of itself and all Michigan counties similarly situated.

Specifically, the county taxing authorities alleged that while Congress expressly exempted all three defendants from “all [state and local] taxation” ( See, 12 U.S.C. § 1723a(c)(2) for Fannie Mae; 12 U.S.C. § 1452(e) for Freddie Mac; and 12 U.S.C. § 4617(j)(2) for FHFA.), it did not intend to exempt them from real estate transfer taxes. The Michigan State Real Estate Transfer Tax, MCL § 207.521, et seq., and the Michigan County Real Estate Transfer Tax, MCL § 207.501, et seq. impose a tax when a deed or other instrument of conveyance is recorded during the transfer of real property.

In making its ruling, the Sixth Circuit used a common sense interpretation of the “all taxation” language and held that the “all taxation” exemptions encompassed real estate transfer taxes. “… [A] straightforward reading of the statute leads to the unremarkable conclusion that when Congress said ‘all taxation,’ it meant all taxation.” Additionally, the Sixth Circuit noted, “In granting each of the defendants’ an exemption, Congress explicitly created a carve-out from the ‘all taxation’ language by permitting taxes on real property. But Congress did not provide a similar carve out for the type of transfer taxes … here.” Presently, it appears that Oakland County will try to petition the U.S. Supreme Court for a writ of certiorari.

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Wisconsin: Standing Upheld on Appeal

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Steven E. Zablocki
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Recently, two favorable decisions have been issued by the Wisconsin Court of Appeals. The decisions are unpublished and, therefore, of limited precedential value. However, they do show a decided shift in favor of lenders. Discussed in this article is the case of Household Finance v. Kennedy, 2011AP2658 (Wis. Ct. App. Mar. 5, 2013). The other case, CitiMortgage v. Hobach, 2012AP1462-FT (Wis. Ct. App. Feb. 13, 2013), was summarized last month in the April USFN e–Update. If you missed that article, you can view it here.

In Household Finance v. Kennedy, the defendants appealed an order denying a motion to vacate a foreclosure judgment. The initial judgment was granted by stipulation. Later during the redemption period, the defendants reviewed their mortgage documents and noticed “irregularities” in the documents attached to the complaint. The defendants alleged that because of these “irregularities” the plaintiff, Household, was not the holder in due course or the real party in interest. The defendants moved to stay the sale. The court deferred the motion and indicated that the issue could be dealt with at the confirmation hearing. The defendant could conduct informal post-judgment discovery.

Prior to the confirmation hearing, the defendants viewed the original note. At the confirmation hearing the court confirmed the sale. The court indicated that the defendants had the opportunity to review the original note and there was nothing in the record to suggest the note was ever assigned to a third party.

Thereafter, the defendants moved to vacate the judgment, alleging that the documents were the result of “robo-signers” and concealment was undertaken to hide the true beneficial owner. After a hearing, the court determined that no new evidence was submitted and denied the motion. That decision was affirmed on appeal, where the court of appeals agreed that no new evidence was submitted and the defendants’ challenges were appropriately denied.

The court had little patience for a defense predicated on standing, but willfully ignorant of facts. The defendants reviewed the original note in possession of the plaintiff. It was duly endorsed. This decision underscores the need to sometimes produce the original note, even post-judgment. While an original document is not required in Wisconsin, a court when presented with original properly-endorsed documents will concede standing in the lender’s favor.

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Washington: COA Super-Liens & Redemption after Sheriff Sale

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Brian Sommer
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)

On April 23, 2013, Washington State Governor Inslee signed into law Senate Bill 5541. The bill — a one-word amendment — clarifies who qualifies as a redemptioner. The redemption statute enacted in 1899 (codified under RCW 6.23.010) states that only a lien holder “subsequent in time” qualified as a redemptioner. The bill clarifies that a lien holder “subsequent in priority” can redeem. The reason for the bill stems from a 2012 published decision by the Washington Court of Appeals. [Summerhill Village Homeowners Ass’n v. Roughley, 166 Wash. App. 625 (Feb. 21, 2012)].

In Summerhill, the mortgage was recorded in 2006. The unit owner defaulted on her condominium association assessments in 2008. Washington law provides a condominium association (COA) with a super-priority lien senior to each mortgage for an amount equal to six months of assessments. The mortgagee did not defend the COA collection lawsuit or pay the six-month super-priority lien prior to the sheriff sale. A third party purchased the condominium for $10,302 at the sheriff sale, and the $191,800 mortgage was foreclosed.

The mortgagee then attempted triage by exercising the one-year right of redemption. The sheriff sale purchaser successfully argued that the mortgagee did not qualify as a redemptioner under RCW 6.23.010 because the 2006 mortgage was not subsequent in time to the 2008 COA super-priority lien. The purchaser asserted that the plain meaning of the word “time” controls, and the 2006 mortgage was not “subsequent in time” to the 2008 COA delinquency; therefore, the mortgagee did not qualify as a redemptioner under RCW 6.23.010(1)(b).

In response to Summerhill, the legislature amended and clarified RCW 6.23.010 to ensure that a mortgagee foreclosed by a COA super-priority lien qualifies as a redemptioner.

Once SB 5541 goes into effect on July 28, 2013, it supersedes the Summerhill opinion. A pending appeal of Summerhill will decide whether SB 5541 should be retroactively applied. The appeal also challenges the reasoning in the judicial decision.

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The On-going Rhode Island Saga: Act I Closes in Favor of MERS

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Charles A. Lovell & David J. Pellegrino
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

Act I, Scene I
Since early 2009, Rhode Island courts have been overrun with hundreds of cases challenging Mortgage Electronic Registration Systems, Inc. (MERS). The MERS system was analyzed and definitively upheld by the Rhode Island Superior Court in late 2009 in Bucci v. Lehman Bros. Bank, 2009 R.I. Super. LEXIS 110, C.A. No. PC 09-3888 (R.I. Super. Ct. Aug. 25, 2009), joining the majority of jurisdictions throughout the country. In Bucci, the superior court found that MERS, as mortgagee and nominee for the lender, had the contractual and statutory authority to foreclose in Rhode Island. Although Rhode Island courts were silent through 2010, in 2011 and into 2012, decisions began to roll out of the Rhode Island superior courts following Bucci, beginning with Porter v. First NLC Financial Services, LLC, 2011 WL 1251246, C.A. No. PC10-2526 (R.I. Super. Ct. Mar. 31, 2011).

Act I, Scene II

But with the Rhode Island Supreme Court having yet to speak on the “MERS issue,” new arguments arose from the consumer bar challenging, among other things, MERS’s authority to assign mortgages. With the change in argument, so too came a change in setting as the venue shifted from state court to federal court. In federal court, the new arguments were initially found to be a distinction without a difference. A U.S. District Court Magistrate for the District of Rhode Island issued a Report and Recommendations in two cases, Cosajay v. Mortgage Electronic Registration Systems, Inc., C.A. No. 10-442-M (D.R.I. June 23, 2011) and Fryzel v. Mortgage Electronic Registration Systems, Inc., C.A. No. 10-352M (D.R.I. June 10, 2011), finding that, under Rhode Island law, a mortgagor lacks standing to challenge assignments of mortgages because the mortgagors are not parties to the underlying contract and their obligations under the mortgage are not affected by the transfer.

Soon thereafter, the Rhode Island Superior Court began to follow suit. Citing to the magistrate’s reports and recommendations, supra, the Rhode Island Superior Court found that borrowers do not have standing to challenge assignments of mortgage because “an assignment generally requires neither the knowledge nor the assent of the obligor[.]” Id. (citing 6 Am. Jur. 2d Assignments § 2); also citing, Brough v. Foley, 525 A.2d 919 (R.I. 1987); Fryzel, supra, (holding that property owner lacked standing to challenge assignment of his mortgage to a subsequent entity); Livonia Prop. Holdings, LLC v. 12840 Farmington Rd. Holdings LLC, 717 F. Supp. 2d 724 (E.D. Mich. 2010) (holding that property owner lacked standing to challenge assignment of his mortgage to a subsequent entity).

The U.S. District Court for the District of Rhode Island took the referenced reports and recommendations under full review and, concurrently, consolidated and “stayed” the few dozen mortgage foreclosure cases it had before it at the time in In re Mortgage Foreclosure Cases, Misc. No. 11-mc-88-M-LDA. Then, on January 5, 2012, rather than approving its own magistrate judge’s reports and recommendations, or looking to Rhode Island state law and deciding the issue accordingly, the U.S. District Court issued an order appointing a special master, instructing her to oversee “all possibilities for the potential settlement of these claims[.]” The special master then created a massive mandatory mediation program in which she issued directives “highly encouraging” (by way of sanctions threats) write-downs of mortgages to no more than 120 percent of value.

Also included in the district court’s order was a bar to the filing of any and all pleadings in these cases, except for entries of appearance. In other words, once a complaint is filed, defendants are barred from answering the complaint or otherwise responding thereto. Certain of the defendants appealed to the First Circuit Court of Appeals, what is in essence an injunction of the defendants’ abilities to enforce their contractual rights against defaulted borrowers, and a denial of due process to allow litigation of their claims. On February 5, 2013, oral argument took place before the First Circuit panel, which included former U.S. Supreme Court Justice Souter, and its decision is pending. Two days later, oral argument was heard on the appeal of Bucci in the Rhode Island Supreme Court.

Act I, Scene III

Despite Rhode Island statutory and common law on the “MERS issue,” certain stakeholders, such as the special master and the consumer bar, seemingly began to take misplaced comfort in rulings specific to other states, such as Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282, 293 (1st Cir. 2013) (“MERS had the authority twice over to assign the mortgage to Aurora. This authority derived both from MERS’s status as equitable trustee and from the terms of the mortgage contract.”). In expressly limiting its decision to the law of Massachusetts, the Culhane court determined that in Massachusetts a mortgagor has standing to contest an assignment of mortgage in narrow circumstances. Misconstruing the holding of Culhane, the consumer bar took satisfaction that, if a Massachusetts mortgagor has standing to challenge an assignment of mortgage, so must a Rhode Island mortgagor. However, on April 12, 2013, the Rhode Island Supreme Court took center stage.

Tracking the analysis of the Bucci trial court, the Rhode Island Supreme Court conclusively decided that MERS had the statutory and contractual authority as mortgagee and agent for the beneficial owner of the note to enforce the statutory power of sale in the mortgage. More specifically, in answering the question as to “whether MERS, acting in a nominee capacity for the owner of the note, can be a mortgagee” under Rhode Island statute, the Supreme Court irrefutably answered “in the affirmative.”

The court held that “the right to exercise the power of sale in the mortgage is derived from contract, not statute.” Id. (citing Thurber v. Carpenter, 18 R.I. 782, 784, 31 A. 5, 6 (1895)). As such, “competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts unless a violation of the law or public policy is clear and certain.” Id. (quoting Gorman v. St. Raphael Academy, 853 A.2d 28, 38 (R.I. 2004)) (quoting Wechsler v. Hunt Health Systems, Ltd., 216 F. Supp. 2d 347, 354-55 (S.D.N.Y. 2002)). Accordingly, there being no clear and certain violation of Rhode Island statute, “MERS’s designation as nominee under the mortgage, albeit as the holder of legal title only, does not proscribe its authority to exercise the power of sale under the provisions” of the Rhode Island statute. Id.

The court went on to analyze whether the mortgagee and the note owner must be the same entity. Outright rejecting plaintiffs’ contentions otherwise and following cases in which plaintiffs mistakenly sought refuge (e.g., Eaton v. Federal Nat’l Mortg. Association, 462 Mass. 569 (2012) (the court found that one who acts as the authorized agent of the note holder may stand ‘in the shoes’ of the mortgagee, but the case was remanded for further factual findings as to whether the foreclosing entity was acting on the note holder’s behalf) and Culhane, supra), the Rhode Island Supreme Court found that “[b]ecause the lender retained equitable title to the mortgage and passed that equitable title to each of its successors and assigns, including the current owner, the mortgage and note have never been separated as plaintiffs contend” and, therefore, the mortgage followed the note. Id.

Interlude
The Rhode Island Supreme Court has clarified Rhode Island MERS law and has kept the state from becoming an outlier among the other states. However, with now well over 800 borrower cases “stayed” in the U.S. District Court of Rhode Island, the First Circuit is poised to speak on the propriety of the district court’s stay. With other MERS challenges moving through the Rhode Island state courts and anti-MERS legislation being prepared in the General Assembly, the saga is far from over.

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Massachusetts: Standing and the Servicemembers Civil Relief Act

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Mark S. Adelman
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

The Massachusetts Supreme Judicial Court, in HSBC Bank USA v. Matt, No. 11101 (Jan. 14, 2013), has clarified the issue of standing for both plaintiffs and defendants in actions under the Servicemembers Civil Relief Act (SCRA). A series of Massachusetts Supreme Court decisions — e.g., Bevilacqua v. Rodriquez, 460 Mass. 762 (2011); Eaton v. Federal Nat’l Mtge. Ass’n, 462 Mass. 569 (2012); and US Bank Nat’l Assoc. v. Ibanez, 458 Mass. 637 (2011) — have put bank foreclosures under a microscope. The Matt decision, however, can help mortgagees overcome SCRA challenges by borrowers who are not entitled to the protections of the SCRA. But Matt is only helpful if a lender itself has standing to bring the SCRA action.

In Massachusetts, mortgagees file SCRA actions, which are independent of the actual foreclosure, for the sole purpose of determining whether a borrower is entitled to the protections of the SCRA. Despite the limited scope of those proceedings, borrowers who are not entitled to the protections of the SCRA have attempted to challenge the SCRA action in an effort to challenge the foreclosure itself. This was the case in Matt, where the borrower, who conceded that she was not entitled to the protections of the SCRA, nonetheless challenged HSBC’s standing to bring the SCRA complaint. The borrower alleged that HSBC failed to show that it was the holder of the mortgage or the note. In its decision, the Supreme Judicial Court found that the borrower did not have standing because she did not assert in her responsive pleading that she was entitled to SCRA protections. Accordingly, the court found that the lower court erred in both accepting the borrower’s filings and allowing the borrower to appear and be heard.

The Supreme Judicial Court, in its de novo review, then turned its attention to the standing of the plaintiff-mortgagee, HSBC. The lower court had previously determined that while it was not clear from the record that HSBC was the current holder of either the note or the mortgage, standing was found to exist because HSBC had a contractual right to purchase the mortgage. The Supreme Judicial Court disagreed with the lower court’s conclusion. Instead of the “contractual right gives standing” analysis undertaken by the lower court, the court utilized an “area of concern” analysis and determined that the “area of concern” protected by the SCRA was two-fold: it provides protections to servicemembers and affords relief to mortgagees by not requiring them to await the end of military service before exercising the power of sale. From this, the Supreme Judicial Court reasoned that any injury to a non-mortgagee is not within the area of concern protected by the SCRA. The court, therefore, concluded that “only mortgagees or those acting on behalf of mortgagees have standing” to bring SCRA actions. In a footnote (specifically fn. 13), the court commented that since the SCRA adopts principles of agency with regard to mortgagors, the same would apply to mortgagees. This suggests that the courts would deem servicers acting on behalf of mortgagees as meeting the “area of concern” standing analysis.

In complaints brought under the SCRA, plaintiffs must be prepared to prove their status as mortgagee. It is recommended that upon the filing of an SCRA action, mortgagees or their servicers include the mortgage or assignment of mortgage and/or an affidavit or other servicing document that will show the plaintiff is the mortgagee or acting on behalf of the mortgagee. The Supreme Judicial Court expressly requires that “[g]oing forward, to establish standing in servicemember proceedings, plaintiff must present such evidence as may be necessary in the circumstances reasonably to satisfy the judge as to their status as mortgagees or agents thereof.”

Also, mortgagees should be prepared to immediately raise the standing issue against borrowers who are not entitled to the protections of the SCRA but file responsive pleadings. Finally, lenders should understand that the Matt decision will not preclude a borrower from bringing a wrongful foreclosure claim alleging that the foreclosing entity is not the mortgagee. The Supreme Judicial Court effectively removed a mortgagee’s res judicata defense in such a separate action when it stated: “the fact that the purported mortgagee was determined to have standing to maintain a servicemember proceeding does not itself in any way establish the purported mortgagee’s status as such in that separate [mortgage foreclosure] action.” Accordingly, mortgagees will be required to defend any wrongful foreclosure with no benefit of issue preclusion from the SCRA action.

© Copyright 2013 USFN and Partridge Snow & Hahn, LLP. All rights reserved.
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Georgia: Court of Appeals Decision Validates Role of MERS

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Steven J. Flynn
McCalla Raymer, LLC – USFN Member (Georgia)

The Georgia Court of Appeals took a major step towards resolving some of the legal uncertainty and confusion that has plagued Georgia’s nonjudicial foreclosure process in recent months. [Montgomery v. Bank of America, No. A12A0514, __ S.E.2d __, 2013 WL 1277830 (Ga. Ct. App. Mar. 29, 2013)].

Decisions out of the U.S. District Court for the Northern District of Georgia have resulted in a split of authority in that court on the question of whether Georgia law requires the holder of a security deed containing a power of sale provision to also possess the borrower’s underlying promissory note in order to carry out a nonjudicial foreclosure sale. Compare, e.g., Stubbs v. Bank of America, 844 F. Supp. 2d 1267 (N.D. Ga. 2012) with LaCosta v. McCalla Raymer, LLC, No. 1:10–CV–1171–RWS, 2011 WL 166902 (N.D. Ga. Jan. 18, 2011).

In Montgomery, the plaintiff-borrower obtained a loan from the National Bank of Kansas City and, in connection therewith, executed a promissory note and security deed. The security deed named Mortgage Electronic Registration Systems, Inc. (MERS) as the nominee of the lender and grantee under the terms of the security instrument. The security deed conveyed to MERS, and its successors and assigns, inter alia, the right to foreclose and sell the property in the event the borrower defaulted on the loan. MERS assigned all of its rights, title, and interests in the security deed to BAC Home Loans Servicing, LP (BACHLS) in 2010 and this assignment was thereafter filed of record.

After the borrower defaulted on his loan, BACHLS retained the law firm of McCalla Raymer, LLC (McCalla) to assist in the initiation of nonjudicial foreclosure proceedings. After nonjudicial foreclosure proceedings were started, the borrower filed suit against BACHLS, Bank of America, N.A., MERS, McCalla, and McCalla’s third-party document-processor, Prommis Solutions, LLC. The plaintiff-borrower contended that: (1) MERS had no legal interest in the underlying promissory note or the security deed and, therefore, had no interests to assign to BACHLS; and (2) the McCalla attorney who executed the assignment of the security deed from MERS to BACHLS did so improperly or without the appropriate authority. The trial court granted the defendants’ motion for judgment on the pleadings and the plaintiff appealed.

On appeal, the Georgia Court of Appeals concluded: (1) that “the security deed expressly conveyed title to the interests in the security deed to MERS, gave MERS the right to invoke the power of sale, and authorized MERS to assign its rights and interests in the security deed to BAC[HLS];” (2) that “[t]here is no statutory authority or case law from Georgia courts” to support the proposition that “one must possess both the promissory note and the security deed in order to carry out a non-judicial foreclosure;” and (3) that the plaintiff, as a non-party to the assignment of the security deed from MERS to BACHLS, had “no basis to contest the validity of the assignment.”

In dissent, the presiding judge stated her belief that the Georgia Court of Appeals should withhold deciding the issue of whether a party seeking to foreclose pursuant to a power of sale contained in a security deed must also possess the promissory note until such time as the Georgia Supreme Court issued its decision in You v. JPMorgan Chase Bank, N.A., No. 1:12-cv-202-JEC-AJB, 2012 U.S. Dist. LEXIS 127461, at *17 (III)(C) (N.D. Ga. Sept. 7, 2012), wherein the U.S. District Court for the Northern District of Georgia had previously certified that very question to the Georgia Supreme Court.

The Montgomery decision marks a major step by the Georgia Court of Appeals in clarifying some of the legal issues surrounding the nonjudicial foreclosure process in Georgia that have arisen lately. While the Georgia Supreme Court’s decision in You will ultimately decide these issues, the decision of the Georgia Court of Appeals in Montgomery is a positive development for all lenders and servicers pursuing foreclosures in Georgia.

© Copyright 2013 USFN and McCall Raymer, LLC. All rights reserved.
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CT: Appellate Decision addresses “Chapter 20” Lien Stripping

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Linda J. St. Pierre
Hunt Leibert – USFN Member (Connecticut)

Editor’s Note: For additional background on the Rogers and Sadowski cases discussed in this article, see the author’s two prior articles, which appeared in the USFN Report (Summer 2012 ed.), here, as well as the USFN e-Update ( Nov/Dec. 2011 ed.) here.

The U.S. District Court of Connecticut has recently said, in dicta, that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) does not prohibit application of Bankruptcy Code section 1322(b)(2) in a no-discharge Chapter 13 case. The district court’s analysis is presented in its determination of an appeal from a bankruptcy court’s decision (New Haven Division). [In re Rogers; Rogers v. Eastern Savings Bank, No. 3:12 CV 818 (JCH) (D. Conn. Mar. 28, 2013)].

In the Rogers case, the bankruptcy court, relying on In re Sadowski, held that a debtor could not strip off an unsecured lien in a “Chapter 20” case (a reference often used where the Chapter 13 debtor is discharge-ineligible because of a recent Chapter 7 discharge). In its analysis, the bankruptcy court took judicial notice of a previous decision entered in the Division of Hartford in In re Sadowski (appeal pending), which held that a borrower cannot strip off a wholly unsecured junior lien in a “Chapter 20” case as such does not satisfy the lien retention requirements of section 1325(a)(5)(B)(i). While the district court upheld the bankruptcy court’s decision in Rogers on other grounds, the district court did take the time to present an analysis of the Sadowski decision and, ultimately, concluded that Sadowski was incorrectly decided.

In Sadowski, the bankruptcy court held that debtors in a no-discharge Chapter 13 case could not avail themselves of section 1322(b)(2) because their ineligibility for a discharge renders their Chapter 13 petition and plan as, per se, lacking “good faith.” In the appeal of Rogers, the district court disagreed with that conclusion, stating that “[t]he plain language of the applicable Bankruptcy Code sections, even where amended by BAPCPA, does not categorically prohibit the filing of a Chapter 13 petition and plan simply because the debtor has obtained a Chapter 7 discharge within the preceding four years and is discharge-ineligible in the later Chapter 13. Moreover, such later, no-discharge Chapter 13 cases are neither successive nor do they circumvent relevant case law in a way that per se violates the good faith requirements of Chapter 13.” The district court also declared that there was “no support for the conclusion that BAPCPA implicitly prohibits application of section 1322(b)(2) in a no-discharge Chapter 13 case as a consequence of preventing successive Chapter 13 debtors from circumventing Dewsnup’s supposed lien-stripping prohibition in Chapter 7” [referring to Dewsnup v. Timm, 502 U.S. 410 (1992)].

The district court continues: “Consequently, modification of an in rem lien pursuant to section 1322(b)(2) in a later, no-discharge Chapter 13 case does not per se amount to a “second bite at the apple” (a successive petition that per se lacks “good faith”) because the later Chapter 13 case is directed at modifying a separate obligation; i.e., the in rem lien on the property, that was not and could not have been part of the prior Chapter 7 case, which only dealt with the debtor’s in personam liability.” The district court said that doing such does not amount to the kind of “abusive and manipulative practices” that Congress sought to address under BAPCPA.

In its final remarks, the district court stated that “the prohibition on lien stripping that Sadowski attempts to evoke from Dewsnup is irrelevant to the issue of whether section 1322(b)(2) may be applied in the case of a no-discharge Chapter 13 petition.”

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Connecticut: Discovery Sanctions against Lender Reversed on Appeal

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Geoffrey Milne
Hunt Leibert – USFN Member (Connecticut)

Lenders facing a barrage of discovery from borrower’s counsel may find some comfort in Bank of NY as Trustee v. Bell. This Connecticut Appellate Court decision was officially released on April 23, 2013. It addresses the role of permissible discovery in a mortgage-backed securitization.

In Bell, the trial court ordered the foreclosing lender, the Bank of NY as Trustee for BS Alt A 2005-9, to produce voluminous records regarding other mortgage trusts beyond that which contained the subject loan. Borrowers’ counsel argued that this discovery was necessary to meet the “all or substantially all” test to be a successor trustee under the pooling and servicing agreement. Upon motion, the trial court then found the lender in contempt for failing to produce the discovery. The lender appealed, and the Connecticut Appellate Court reversed the trial court and vacated the contempt order. In reversing the trial court and finding an abuse of discretion, the appellate court stated:


“The plaintiff and Bank of New York, however, are separate entities. See 90 C.J.S. 131, Trusts § 2 (2010) (“[a] fiduciary acting in a representative capacity is a different person for judicial purposes from the same person acting in an individual capacity”). The interrogatories and requests for production to which the court ordered the plaintiff to respond were not limited to the trust assets. Furthermore, Bank of New York was never a party to this action. … Despite Bank of New York’s nonparty status, the court broadened the scope of interrogatories and requests for production to include the entire transaction between JP Morgan Chase and Bank of New York, a nonparty. … [T]he court had no authority to order the plaintiff to turn over documents that belonged to Bank of New York, a separate nonparty entity, nor did it have any authority in the circumstances of this case to order the plaintiff as trustee for BS Alt A 2005-9 to turn over documents from other trusts.”


This ruling by the Connecticut Appellate Court shows that some trial courts have difficulty understanding the securitization process and the role of a trustee. Bell illustrates the need for filing appeals of trial court orders that are an abuse of discretion.

Editor’s Note: The author’s firm represented the appellant (plaintiff) in the case summarized here.

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The Cloud: Is it Secure?

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Shawn J. Burke
ServiceLink, FNF’s National Lender Platform – USFN Associate Member

Security is a hobby of mine. I run into all sorts of technology and configurations and all of them have impacts on security. Understanding and examining security is something I enjoy. That build-up is to introduce my personal security mantra: Nothing in and of itself is secure or insecure; it’s all about how something is used and configured. People are often frustrated by this viewpoint. They look for the magic piece of software or the hardware configuration that will — for now and till the end of time — keep them secure. That just isn’t possible.

Software, for instance, is only as good as the configuration and use. It’s analogous to putting all of the best locks on your front door; if you fail to lock them on leaving, they are useless. Security configurations are similar in that as soon as a good one is made, a world of people are trying to break it. Liken this to the use of very complicated P@$$w0^d strings, which now are considered relatively insecure in and of themselves. “To be secure” is an active process, requiring knowledge and consistent review of what is in place. Sorry, I know it would be easier to spend money once upfront and just be done with it. The good news, however, is that “The Cloud” can be secure if done correctly.

Some folks think that “when data is on my local computer and servers, people can’t get to it like in the cloud.” If that is your thinking, I hope you’ll reconsider. In an internet-connected world with spyware, malware, and unhappy employees you can’t know that this is true. Even in this scenario, one must be actively monitoring and working to ensure safety. This raises the question: can you afford to do that monitoring yourself? Or will you be better protected with a major company, which has many dedicated staff working to address these concerns, doing the hosting and managing?

Another frequent thought, which fortunately is no longer true, is this one: “Hosting in the cloud means all of our servers can be seen by other people hosting in the cloud. We cannot afford that with our auditing requirements.” Service companies have been working feverishly to improve on early security concerns about “The Cloud.” There are now a number of options available in cloud hosting that allow your servers to be safe in the cloud. This is an example of security as an ongoing process.

Before wrapping this up, let me provide you with a quick “cheat sheet.”

  1. If security is your concern, choose reputable companies. Savvis, Latisys, or Rackspace are some companies I have worked with, providing various secure options, and they are current Gartner leaders in their space.
  2. Do you need your servers to be firewalled away from anyone else’s servers? Then stay away from public cloud offerings that don’t offer firewall configurations. Most major vendors offer configurations that provide firewalls to your servers in the cloud.
  3. Do you have a large company with sophisticated needs that just can’t commingle with “everyone else?” Then what you need is a private cloud. In this context, you are really getting your own hardware for “The Cloud” dedicated to your company. The advantage over managing this in your own data center is the dedication of specialists who do nothing but hosting. Sure you, too, can hire good people. However, your business will never be focused on hosting; their’s is. Similar to how no one comes to me to ask, for example, the legal ramifications of judicial foreclosures in New York. Instead, they go to USFN attorneys because that’s their specialty and expertise.

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Michigan: Bankruptcy Court Reviews Payment Change Notices & HELOCs

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Michael J. McCormick
McCalla Raymer, LLC – USFN Member (Georgia)

Editor's Note: In the USFN e-Update (distributed May 14, 2013), the bankruptcy court decision in Pillow was incorrectly referenced as being a Georgia (rather than a Michigan) one. That headline and the citation have been corrected, and a link to the actual Pillow court decision has been added for convenient reference.

As mortgage servicers are aware, effective December 1, 2011, notice of payment changes during the course of a Chapter 13 case (if the property is the debtor’s principal residence) must be provided to the debtor, the debtor’s attorney, and the trustee at least 21 days before the new payment amount is due. In addition, the notice shall be filed as a supplemental claim using the new official Form B10 (Supplement 1) instead of on the docket. There is no accommodation or exception for home equity lines of credit (HELOCs) or other types of loans where the payment changes on a monthly basis (or otherwise frequently) despite vociferous objection and comments by servicers, attorneys, and scholars during the public comment period for the bankruptcy rules changes that ran between August 2009 and February 2010.

In In re Pillow, Case No. 11-11688 (Bankr. W.D. Mich. 2013), Fifth Third Bank filed a motion to relax the reporting requirements under Rule 3002.1. The bank’s claim arose from a HELOC that was a revolving or “open end” credit arrangement secured by residential real estate. The loan documents provided that the interest rate on the HELOC changed every month, therefore resulting in a change in the debtor’s payment obligation on a monthly basis.

In its motion, the bank cited the “unique burden” that Rule 3002.1 placed on the holder of a HELOC loan with frequent payment adjustments. In lieu of having to file a payment change notice each month, the bank proposed a six-month reporting interval, and asserted that the court had the authority to enlarge deadlines under Rule 9006. The court entered an order granting the bank’s motion without objection and then the U.S. Trustee (UST) filed a motion for reconsideration pursuant to Rule 9024.

In its motion for reconsideration, the UST argued that it did not receive notice of the bank’s motion and, more importantly, that the court did not have the authority to modify the reporting requirements under Rule 3002.1. The bank and the UST stipulated that the bank held a claim falling under Rule 3002.1 because the claim was secured by the debtor’s principal residence and the debtor provided for the claim under 11 USC § 1322(b)(5). Therefore, the parties also agreed that absent the court’s order, the bank would be required to file a notice of payment change every month, no later than 21 days before the payment change takes place. Under the circumstances, that would mean the bank would have a small window of nine days each month to calculate and communicate the payment change in time for counsel to prepare and timely file the payment change notice with the court.

At the time of the hearing on the UST’s motion for reconsideration, the bank had filed two notices of payment change in the case. The first notice showed a payment change of $2.68 and the bank’s counsel stated that in some months the payment had changed by as little as 32 cents. The court agreed that the purpose of Rule 3002.1 (i.e., to permit debtors to “cure and maintain” under 11 USC § 1322(b)(5) and avoid surprises) would not be advanced by requiring the bank to give monthly notice of these small changes.

The court was further swayed by the fact that the clerical and legal expenses associated with the preparation, filing, and serving of monthly payment change notices for “nominal or negative adjustments” supported the bank’s position that the notice requirements imposed a unique burden. Furthermore, although initially concurring in the UST’s motion for reconsideration, counsel for the Chapter 13 trustee stated that the filing of monthly payment change notices by the bank would impose a burden on the trustee.

Interestingly, the court stated that “it seems safe to assume” that the lender will pass on the costs of complying with Rule 3002.1 onto the borrower, resulting in the lender having to file a notice for fees, charges, and expenses under Rule 3002.1. Therefore, over a five-year period, “a debtor could be required to pay substantial additional collection costs to compensate her HELOC lender for giving notice of payment changes in the range of $1.00-$3.00 per month, all in the name of transparency.”

In reaching its decision in favor of the bank, the court noted that Rule 9006 was “inescapably broad and flexible,” containing phrases such as “at any time,” “in its discretion,” “with or without a motion,” and “for cause.” Moreover, Rule 3002.1 was not a rule listed in the exceptions under Rule 9006(b)(2) or Rule 9006(b)(3). Furthermore, the bank had filed its motion and as “cause” had articulated the “unique burden” associated with the twenty-one day deadline given the nature of HELOC loans. Finally, after no objection by the debtor, trustee, or UST, the court entered its order relaxing the reporting requirements, concluding the bank’s motion established cause to modify the 21-day period in this case under Rule 9006(b).

While denying the UST’s motion, to the extent the motion sought relief beyond reconsideration the bankruptcy court did make a few minor changes to its earlier order. To ensure the debtor has ample opportunity to address the impact of minor payment changes before she concludes her Chapter 13 case, the bank will be required to file payment change notices on a quarterly basis during the final year of the debtor’s plan. In addition, if developments arise in the case to persuade either the debtor or trustee that cause exists to revisit the reporting interval, the court indicated it would consider readjusting the period.

© Copyright 2013 USFN and McCalla Raymer, LLC. All rights reserved.
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A Look at Overlapping Servicing Regs: Regulation X vs. WA & CA’s Requirements

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

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

by Wendy Walter
Routh Crabtree Olsen, P.S.
USFN Member (Alaska, Oregon, Washington)

The Consumer Financial Protection Bureau’s Regulation X establishes uniform national servicing standards, effective January 10, 2014, but does not routinely preempt state laws. Compliance with national regulations that overlap and intertwine with, as well as veer off from, state obligations presents a challenge for servicers and their vendors.

Comparison with WA and CA
The focus of recently enacted relevant state regulations and laws in Washington and California is on default servicing and foreclosures. Local counsel can help servicers reconcile and prepare for the differences between the national and state level regulations. This article will offer a comparison of Regulation X sections 1024.39 (Early Intervention) and 1024.40 (Continuity of Contact) with Washington and California’s default servicing and foreclosure requirements.

Borrower Contact Requirements
In recent years, servicers have been required to establish contact with delinquent borrowers in Washington and California. The state requirements have been a prerequisite to nonjudicial foreclosure referrals, but have not extended to judicial sales. Regulation X requires borrower contact as a prerequisite to foreclosure referral for both nonjudicial and judicial sales.

Regulation X, Section 1024.39 — The purpose of borrower contact listed in section 1024.39 is to encourage delinquent borrowers to work with their servicer to identify foreclosure prevention alternatives early in the delinquency. Live contact or good faith attempts need to occur no later than the 36th day of delinquency, followed by written contact no later than the 45th day of delinquency. Both the live and written contacts have content requirements although discretion is provided for live contact, while the written contact is scripted.

Washington Law — In this state’s nonjudicial foreclosure statute, a servicer is required to make written contact with the borrower of a loan secured by a principal residence by providing a notice of pre-foreclosure options. For the live contact, a servicer must attempt to call the borrower three times on three different dates to provide the borrower with options for loss mitigation. The nonjudicial foreclosure statute does not specify how far into default the loan must be before these contacts can begin. Servicers of loans secured by property in Washington have approached these requirements differently.

Some have sent out the notice of pre-foreclosure options when the loan was in the 15th day of delinquency, and others have waited until running through investor required loss mitigation programs and begin the Washington process before commencing the foreclosure. Furthermore, after this outreach process, the borrower has the opportunity to request a face-to-face meeting with its lender/servicer in Washington. For those servicers that wait until they have completed their investor required loss mitigation programs, this might result in a borrower having two opportunities for live contact. Borrower may be confused at the stream of mailings, phone calls, and outreach attempts, especially in those cases where they are not interested in retaining the property.

In addition to the prerequisites for the nonjudicial foreclosure process in Washington (which apply to all servicers of loans secured by a borrower’s principal residence), the Department of Financial Institutions, the agency that regulates state-licensed mortgage servicers, promulgated a rule, effective April 1, 2013, that applies to both judicial and nonjudicial foreclosures and requires its regulated servicers to have an electronic system that allows borrowers the ability to “check the status of their loan modification, at no cost.” The system must also be accessible to housing counselors and allow communication from them. Finally “the system must be updated every 10 days.” There is an exception to this requirement if the servicer is “using a HAMP or GSE loan modification program.”

Although this requirement, found in Washington Administrative Code (WAC) section 208-620-900(6), does prescribe a specific method in which Washington licensed servicers will need to be communicating with borrowers in loss mitigation, it was not a requirement adopted by the CFPB while promulgating the final Regulation X rules on borrower contact. The bureau states in the preamble to the rules that it needs more time to study the benefits of electronic portals and that despite the fact that the national servicing standards in the Attorney General/Department of Justice settlement agreement impose such a requirement, there are “other reasonable means to track and maintain borrower-submitted loss mitigation documents.”

California Law
— Similar to section 1024.39, California requires the servicer to make borrower contact prior to a nonjudicial foreclosure referral (Civil Code § 2923.55 or § 2923.5). While Regulation X relates the time of contact to the date of delinquency, California counts backwards from the date of first legal action for a nonjudicial foreclosure, which is the notice of default. Live contact needs to be made at least 30 days prior to recording a notice of default. If successful, a servicer need not make written contact, although as a matter of business practice written contact is routine. A certain exchange of information needs to take place if the servicer is successful at making live contact. If unable to make live contact, the servicer needs to perform due diligence, consisting of written contact, followed by three attempted telephone calls, followed by a second written contact, with prescribed timing, content, and method of delivery. Due diligence needs to be completed at least 30 days before recording a notice of default. Once the contact requirement is performed, a compliance declaration is attached to the notice of default.

The national and state level regulations require live and/or written contact with a borrower; both require certain timing and content, and both provide for a private right of action in case of violation. Servicers need to compare the timing, content, sequence and method of delivery to determine whether some contact requirements can be combined or need to be performed in a certain sequence. Keep in mind the restriction in the CFPB rules on foreclosure referral, which provides that a servicer shall not make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower’s mortgage loan obligation is more than 120 days delinquent.

The “first notice or filing” has been defined in the official commentary to be “any document required to be … provided to a borrower as a requirement for proceeding with a judicial or nonjudicial foreclosure process … including any notice that is required by applicable law in order to pursue acceleration of a mortgage loan obligation or sale of a property securing a mortgage loan obligation.” The timing and sequence of these requirements may turn, in part, on whether the state-required notices would fall within this definition. It is important to note that this is an area where the CFPB has expressly stated that federal regulation will preempt state law.

Continuity of Contact Requirements
Washington and California have also recently enacted point of contact requirements. The state law requirements in California are limited to nonjudicial foreclosures, while Regulation X and Washington requirements extend to judicial sales as well. Rather than calling it a single point of contact or SPOC, the bureau adopted the phrase “continuity of contact.” The difference in terminology appears to be a non-issue, however, as the divergence lies in the substance of the requirements.

Regulation X, Section 1024.40 — To further assist borrowers with exploring foreclosure prevention alternatives, section 1024.40 requires a servicer to assign personnel to a delinquent borrower with the written notice described in section 1024.39, sent no later than the 45th day of delinquency. The personnel must be available via telephone to assist a borrower with loss mitigation options until the borrower has made two consecutive mortgage payments under a permanent loss mitigation agreement. This section does not require providing a borrower with identifying information about the contact personnel. A telephone number and address for the servicer personnel appears sufficient. The assigned personnel may be single- or multi-purpose, meaning their primary responsibility might not be responding to a delinquent borrower. Nonetheless, the personnel do have enumerated functions. Section 1024.40 does not provide a private right of action.

Washington Law — WAC 208-620-900(5), effective January 1, 2013, requires that a state-licensed servicer must respond to a borrower’s request for information and, at a minimum, provide the telephone number and mailing address of an individual servicer representative with the information and authority to answer questions and resolve disputes and to act as a “single point of contact for the homeowner.” The Washington SPOC must have the authority and ability to: explain loss mitigation options and requirements, track documents provided by the borrower, inform the borrower of the status of his loss mitigation process, and ensure the borrower has been considered for all loss mitigation options, as well as have access to individuals who can delay or stop the foreclosure proceedings. The trigger for these requirements is a borrower’s “request for information.” The servicing rules in Washington do not appear to have a private right of action, but the Department of Financial Institutions can enforce them and will likely audit accordingly when conducting examinations of Washington-licensed servicers.

California Law — California’s SPOC requirement is triggered if and when a borrower requests a “foreclosure prevention alternative” (Civil Code § 2923.7). The SPOC may be an individual or a team of personnel, each of whom needs to have the ability and authority to perform specified functions. There is no requirement that the SPOC be available via telephone, but one or more direct means of communication needs to be provided.

A SPOC shall remain assigned to a borrower until the servicer determines that all loss mitigation options are exhausted, or the borrower’s account becomes current. The difference between assigned personnel versus SPOC seems to be that section 1024.40 does not require providing identifying information about the contact personnel. For practical purposes that difference might be negligible, as a SPOC can be a team of personnel. California law does provide a private right of action.

While, in essence, there is similarity in SPOC or “continuity of contact” functions under the three regulations compared here, the functions are not identical. Servicers need to be aware of the differences in trigger point, means of communication, categorized functions, and borrower’s private right of action.

Conclusion
The borrower contact requirements and single point or continuity of contact rules are significant. However, a greater challenge is presented when one analyzes loss mitigation procedures under state laws and Regulation X. Evaluating borrowers for loss mitigation options is not new for servicers, but the complexities of navigating the multifarious covenants and restrictions — each with different scripts, timelines, and penalties — are unprecedented. Planned for the summer USFN Report is an article comparing the loss mitigation measures of Washington and California with Regulation X, section 1024.41. Look for that in August.

© Copyright 2013 USFN. All rights reserved.
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Revisiting the Mortgage Forgiveness Debt Relief Act of 2007

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

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

Pursuant to § 61(a) of the Internal Revenue Code (26 U.S.C.S. § 61(a)), for income tax purposes, “gross income” is defined as “all income from whatever source derived.” As noted in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments: “Generally, if you owe a debt to someone else and they cancel or forgive that debt, you are treated for income tax purposes as having income and may have to pay tax on this income.” Accordingly, gross income consists of canceled debt, unless an applicable exclusion applies.

In the wake of the real estate market readjustment of 2006 and 2007, the federal government enacted such an exclusion in the form of the Mortgage Forgiveness Debt Relief Act of 2007, 110 P.L. 142, the purpose of which was to amend the Internal Revenue Code to exclude discharges of indebtedness on principal residences from gross income, by providing relief to underwater homeowners on foreclosures, short sales, deeds-in-lieu of foreclosure, mortgage refinances, loan modifications, abandoned properties, et cetera.

This relief was provided by amending § 108(a)(1)(E) of the Internal Revenue Code to note that an exclusion from gross income would include “qualified principal residence indebtedness which is discharged before January 1, 2010.” This governmental action allowed distressed homeowners the ability to exclude up to $2 million of certain debt forgiven on a principal residence or $1 million for a married person filing a separate return.

As noted in IRS Publication 4705, Tax Benefits, Credits, and Other Information, qualified principal residence indebtedness is debt “… used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.”

For the distressed homeowner, a key provision of the Debt Relief Act is that debt reduced through mortgage restructuring as well as debt forgiven in connection with a foreclosure may qualify. If the homeowner qualifies for this debt relief, the homeowner can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to his or her tax return for the year in which the qualified debt was forgiven. Additionally, if debt is reduced or eliminated, the homeowner can expect to receive a year-end statement Form 1099-C, Cancellation of Debt, from the mortgage lender.

The Debt Relief Act of 2007 was amended in section 303 of the Emergency Economic Stabilization Act of 2008, P.L. 110-343, by striking “January 1, 2010” and inserting “January 1, 2013” in Subparagraph (E) of section 108(a)(1) of the Internal Revenue Code and was again amended in section 202 of the American Taxpayer Relief Act of 2012, 112 P.L. 240, enacted January 2, 2013, to extend the exclusion to “January 1, 2014.” Whether relief beyond 2013 will be provided will no doubt depend on the state of the economy in relation to the benefit gained, as opposed to the taxable revenue lost by providing this relief.

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

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HOA Talk Texas: A Focus on the Newest Law Changes

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Devin Buckland
Director of Closing Services and Compliance
Barrett Daffin Frappier Turner & Engel, LLP
USFN Member (Texas)

The Texas legislature passed a law that focuses on the homeowners associations’ (HOA) management of communities, as well as provides new payment alternatives for homeowners with delinquent HOA assessments. That new law, which became effective last year on January 1, 2012, focuses its attention on four different sections: payment plans for delinquent homeowners, priority of payments, utilization of third party collections, and new foreclosure requirements under Texas Rule of Civil Procedure 736, if the HOA dedicatory instruments, more commonly known as declarations, contain an express power of sale. The alternative payment plan and foreclosure requirements pose potential risk and priority issues for mortgage servicers.

Payment Plans (Texas Residential Property Owners Protection Act, Sec. 209.0062)

Any HOA with 14 or more lots must adopt alternative payment plan guidelines for every delinquent homeowner. The homeowner is able to make partial payments without accruing any additional monetary interest or penalties, with a minimum term of three months up to a maximum of 18 months from the date of the homeowner’s initial request. The payment plan is filed in the real property records. The issues that exist are determined by the declarations of the HOA.

 

  • If the HOA assessments are subordinate, the lender’s lien will not be in jeopardy.
  • If the declarations state that the assessments are superior, the lender’s lien would be subordinate and have the potential risk of being extinguished. If the homeowner stops paying on the alternative payment plan, judicial foreclosure actions will put the lender at an even more immediate risk.

Priority of Payments (Sec. 209.0063)
Payments received by the HOA from the homeowner must be applied in the following order: delinquent assessments, current assessments, attorneys’ fees or third party collection costs associated with collection of assessments or any other charges relating to the order of foreclosure, fines, and any other amounts owed to the association. If the homeowner has entered into an alternative payment plan and is in default of that agreement, the association is not required to follow the priority rules. In the event that the homeowner defaults, the HOA could then pursue foreclosure action and ultimately take back the property. The funds received from the homeowners could then be applied for any costs incurred by the association in its collection efforts and foreclosure costs.

Third Party Collections (Sec. 209.0064)

The homeowner is not liable for the fees of a collection agency retained by the HOA, unless the HOA has provided written notice to the homeowner by certified mail. The notice must specify all delinquency and total reinstatement amounts, describe options to the homeowner to avoid having the account turned over to a collection agency, and provide at least 30 days for the owner to cure the delinquency before any further collection activity is taken. The HOA is prohibited from selling or transferring any interest in its accounts receivable for a purpose other than as collateral for a loan.

Judicial Foreclosure Required (Sec. 209.0092)

An HOA is unable to foreclose on a property under an assessment lien unless it first obtains a court order under Texas Rule of Civil Procedure 736 if its dedicatory instrument contains a power of sale; otherwise, the HOA must judicially foreclose under Texas Rule of Civil Procedure 309. Expedited foreclosure is not required if the owner of the property that is subject to foreclosure agrees in writing at the time the foreclosure is sought to waive expedited foreclosure. A waiver may not be required as a condition of the transfer of title to real property.

If an HOA with a power of sale seeks to foreclose a superior HOA lien by obtaining a Rule 736 order and then nonjudicially forecloses its assessment lien, the HOA is not required to make any holder of an inferior lien of record a party to a Rule 736 proceeding. However, the HOA must send a notice of the foreclosure sale as required by Tex. Property Code § 51.002(b) to any inferior lienholder at the lienholder’s address contained in the deed records. The inferior lienholder then has 61 days after it receives the foreclosure sale notice to cure the HOA lender default. (Tex. Prop. Code § 209.0091)

If the HOA assessment lien is subordinate to a superior lien that is recorded in the land title records and the HOA forecloses, the lender’s lien will remain intact; however, the borrower would no longer be the owner of the property. That circumstance would constitute a non-monetary default under most Texas deeds of trust. If the mortgage is in default and the HOA is pursuing foreclosure, lenders should be cautious before engaging in loss mitigation activities with the borrower who may no longer be the owner of the property. NOTE: Texas Property Code § 209.010 requires the HOA to provide written notice of the date and time an HOA foreclosure took place to all lienholders of record, who can then redeem the property under Texas Property Code § 209.011.

Conclusion

Over time, the relationship between HOAs and mortgage servicers should improve with the changes through HUD on Clarification Regarding Title Approval at Conveyance, to be issued later this year. If the mortgage servicer is faced with subordinate or superior HOA foreclosure actions, the remedies can vary from monetary losses to costly litigation. Mortgage servicers will continue to be faced with the difficulties inherent in identifying HOAs and their management companies and the lengthy and costly task of protecting their lien priority and ownership interests.

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Spring USFN Report

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Vacant Property Ordinances Updates from Four States: Ohio

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Adam R. Fogelman
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)

USFN reported on two new Ohio vacant property ordinances in the Spring 2012 USFN Report. Since then, the popularity of vacant property ordinances has increased in the state. That 2012 article focused on two (then-) new vacant property ordinances in the city of Cleveland (Ordinances 1519-11 and 1520-11). The two ordinances were enacted in November 2011 and targeted foreclosed properties in the city. The ordinances addressed the recoupment of demolition costs and required entities buying, owning, selling, or transferring properties in Cleveland to be registered with the Ohio secretary of state.

Today, many other communities — both large and small — are turning to vacant property ordinances. These locally-enacted pieces of legislation take one of two forms, either a vacant property registration ordinance or a foreclosure filing notice ordinance.

A vacant property registration ordinance oftentimes requires that a first mortgage holder complete a form and tender a fee to the municipality upon receiving notice that the property is abandoned or vacant. The ordinances usually require action within a relatively short period of time after receiving notice (generally between 10 and 90 days after notice) and continued action during the property’s vacant period. These ordinances are often focused on obtaining a point of contact at the mortgagee’s office for local government use if issues arise with the property.

A foreclosure filing notice ordinance requires a foreclosing litigant to file a form with a copy of the complaint and tender a fee to the municipality in which the property under foreclosure is sited. The form and fee are required simultaneously with the filing of the foreclosure complaint or within a very short time period thereafter. These ordinances act to notify local governments that a property within their boundaries is in foreclosure and to provide those local governments with a point of contact for the property.

A survey of Ohio law finds that there are more than 70 local community ordinances. A look at these ordinances shows that slightly less than half are foreclosure filing notice ordinances and slightly more than half are vacant property registration ordinances.

It is important that foreclosing lenders work closely with their legal counsel to comply with local foreclosure filing notice ordinances. Similarly, lenders should work with property preservation companies, local brokers, or a property management company to comply with vacant property registration ordinances. The failure to abide by these local laws can result in substantial penalties that include fines, fees, and liens on the property for work the city does in maintaining the property.

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