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Comprehensive Judgeship Legislation Requested

Posted By USFN, Wednesday, March 22, 2017
Updated: Monday, March 20, 2017

March 22, 2017

announced by Judicial Conference of the United States

On March 14, 2017 the 26-member Judicial Conference of the United States (the policy-making body for the federal court system) announced its decision to recommend to Congress the creation of 57 new Article III judgeships in the courts of appeals and district courts. If an omnibus judgeship bill is enacted into law, it would be the first new comprehensive judgeship legislation to take effect in more than 26 years. Read more about it here.

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Hawaii Supreme Court Decision Impacts Pre-June 2011 Nonjudicial Foreclosures

Posted By USFN, Wednesday, March 22, 2017
Updated: Monday, March 20, 2017

March 22, 2017

by Justin Moyer
Aldridge Pite, LLP – USFN Member (California, Georgia)

A recent Hawaii Supreme Court case [Hungate v. The Law Office of David B. Rosen (Haw. Feb. 27, 2017)] significantly impacts Hawaii properties that were foreclosed upon via a nonjudicial foreclosure prior to the May 2011 repeal of the statutory scheme governing nonjudicial foreclosures in Hawaii. After May 2011, mortgagees were then compelled to only foreclose judicially on their mortgages. More specifically, the Supreme Court held in Hungate that:

i. when calculating the four-week publication requirement for nonjudicial foreclosures, the four-week period is counted from the day after the first publication and if the original publication did not meet this requirement, publication needed to be repeated (see Hungate at pp. 12-15);
ii. if the power of sale clause in a mortgage required that a notice of sale be published, then any postponed nonjudicial foreclosure sale also needed to be published; however, the Supreme Court does not indicate how many times or how far in advance (see Hungate at pp. 15-18); and
iii. a mortgagee has a duty to use “fair and reasonable means” to conduct a nonjudicial foreclosure sale that is “conducive to obtaining the best price under the circumstances,” and a mortgagee who purchases the property at its own nonjudicial foreclosure sale has the burden to establish that the sale was “regularly and fairly conducted” and that “an adequate price” was paid under the circumstances (see Hungate at pp. 29-32).

As a result of Hungate, it is likely that the filing of wrongful foreclosure actions against mortgagees who previously nonjudicially foreclosed on their mortgages will increase in Hawaii. A more detailed discussion follows.

Analysis of Hungate
The borrower commenced an action against the mortgagee’s attorney and the mortgagee who previously foreclosed upon its mortgage via a nonjudicial foreclosure. The borrower asserted that the nonjudicial foreclosure was defective and wrongful because: (1) the proposed sale date was only 28 days after the date the notice of sale was first published when it was required that the sale date be at least 29 days after the first published notice; (2) the postponed nonjudicial foreclosure sale date, time, and location were never published as allegedly required by the power of sale clause contained in the mortgage; and (3) the mortgagee breached its duty to obtain the best possible price for the property.

With respect to holding (i) referenced above, the statutory scheme previously governing nonjudicial foreclosures in Hawaii provided that a nonjudicial foreclosure sale could not be held until “after the expiration of four weeks from the date when [the notice of sale was] first advertised.” [Hungate, p. 12.] When analyzing how the four-week period should be calculated, the Supreme Court determined that the day that the notice of sale appeared in the newspaper should not be counted when calculating the four-week period; i.e., the first day of the 28-day period should be counted from the day after the publication. This determination overruled a prior Hawaii Supreme Court decision on the exact issue [Silva v. Lopez, 5 Haw. 262, 270 (Haw. Kingdom 1884)]. As a result, it was not uncommon for mortgagees to treat the first day of publication as the starting point to count days toward the four-week period. Hungate establishes that this calculation method was incorrect.

As for holding (ii) referenced above, the Supreme Court determined that the power of sale clause requiring that a “Lender shall publish a notice of sale and shall sell the Property at the time and place under the terms specified in the notice of sale” should be interpreted as requiring that the date, time, and location of any postponed nonjudicial foreclosure sale also be published. Hungate does not indicate how many times and how far in advance of any new auction date a postponement notice needed to be published. While it was the common practice for a mortgagee to publicly announce a postponement of a nonjudicial foreclosure sale at the date, time, and location of the initially scheduled sale, it was not the common practice for a mortgagee to publish the new postponed foreclosure sale date, time, and location. In fact, numerous Hawaii judicial decisions prior to Hungate recognized that an oral announcement was adequate to postpone an auction. Additionally, Hungate establishes that this was not the correct means to postpone a nonjudicial foreclosure sale.

Lastly, as for holding (iii) referenced above, the Supreme Court reaffirmed and further clarified its previous decisions finding that a foreclosing mortgagee: (i) has a duty to use fair and reasonable means to obtain the best price for the property; and (ii) who acquires the property at its own foreclosure sale has the burden of establishing that the sale was fairly conducted and that the price paid for the property was adequate. However, the Supreme Court also provided some very useful discussion explaining what a fair and reasonable price is in a nonjudicial foreclosure: “We further clarify that the mortgagee’s duty to seek the best price under the circumstances does not require the mortgagee to obtain the fair market value of the property.” (Hungate, p. 30.) “[F]inal bids on foreclosed property need not equate to fair market values.” (Hungate, p. 31.) Thus, once a foreclosing mortgagee establishes that a sale “resulted in an adequate price under the circumstances” [Hungate, p. 32 (emphasis added)], the burden of establishing an injury would appear to shift to the former owner. In many instances, establishing such an injury would appear to be very difficult for the former owner.

Recent Wrongful Foreclosure Cases
Since early 2016, there have been close to one hundred wrongful foreclosure cases filed in Hawaii. These cases have been commenced by a group of attorneys led by James Bickerton, Esq. who are representing borrowers whose homes were previously foreclosed upon by a mortgagee via a nonjudicial foreclosure. The cases were commenced, in part, in anticipation of the Supreme Court’s decision in Hungate. The allegations in these cases are all similar and they all relate to nonjudicial foreclosures that were completed in Hawaii, in May 2011 or earlier.


The common theme in all of the Bickerton wrongful foreclosure cases is that they involve a postponed nonjudicial foreclosure sale (almost all nonjudicial foreclosures were postponed at least once) and an unpublished notice of postponement. As mentioned above, Hungate establishes that a failure to publish a postponed sale renders the nonjudicial foreclosure defective when the mortgage includes a power of sale clause requiring publication of a notice of sale.

Bickerton also alleges in some of his wrongful foreclosure cases (where the facts are applicable) that the nonjudicial foreclosure sale was wrongful because it was not held at the location identified in the publication; i.e., the publication indicated that the foreclosure sale would be held on the steps of the public courthouse, but the foreclosure sale was actually held on the sidewalk in front of the steps of the public courthouse. Depending on the facts of each case, Bickerton has alleged other nonjudicial foreclosure defects in his wrongful foreclosure actions.

There have been successful defenses against some of Bickerton’s wrongful foreclosure cases by asserting that the wrongful foreclosure actions are barred by either a two- or six-year statute of limitations period. Unfortunately, depending on which circuit court the case is in and which judge the case is before, the Hawaii circuit courts have been inconsistent in deciding these cases. Some courts have found that wrongful foreclosure claims are subject to a 20-year statute of limitations period.

Certainly, the unwinding of a nonjudicial foreclosure sale in these situations would be very problematic for the current owners of the property and the mortgagee who completed the nonjudicial foreclosure sale. The dramatic effect that the mere commencement of these wrongful foreclosure cases has had on the title insurance industry in Hawaii is discussed more fully in an article published in November 2016 by West Hawaii Today; view that article here. For those named as a defendant in a wrongful foreclosure action, legal counsel should be contacted promptly.

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Hawaii Supreme Court Decision Sets Forth New Requirement for Judicial Foreclosures

Posted By USFN, Wednesday, March 22, 2017
Updated: Monday, March 20, 2017

March 22, 2017

by Lloyd Workman
Aldridge Pite, LLP – USFN Member (California, Georgia)

A recent Hawaii Supreme Court decision significantly impacts judicial foreclosure actions in the state. More specifically, the Supreme Court held that in order for summary judgment to be granted in favor of a foreclosing mortgagee in a Hawaii judicial foreclosure action, the foreclosing mortgagee must prove that the plaintiff who initiated the action (which might be different than the current foreclosing mortgagee) had standing to foreclose at the time the foreclosure complaint was filed. [Bank of America, N.A. v. Reyes-Toledo (Haw. Feb. 28, 2017)]. The Supreme Court found that the plaintiff was not entitled to summary judgment because it failed to establish that it was the note holder pursuant to Hawaii Revised Statutes § 490:3-308 (UCC Art. 3-308) at the time the foreclosure complaint was filed.

This author’s firm analyzed the pleadings filed in the foreclosure action upon which the Reyes-Toledo decision was based. The foreclosure complaint was not verified and no exhibits were attached thereto. As a result, there was no documentary evidence on the record evidencing that the plaintiff was the note holder when the foreclosure complaint was filed. Additionally, the declaration of indebtedness filed in support of the plaintiff’s motion for summary judgment (MSJ) did not explain when the plaintiff became the note holder and did not specify when the note indorsements were executed. However, prior to the Supreme Court’s decision, there was no requirement to establish standing at the time a foreclosure complaint was filed and defects in standing could be cured at the MSJ stage. [See IndyMac Bank v. Miguel, 117 Haw. 506, 184 P.3d 821 (Haw. Ct. App. 2008), as corrected (July 17, 2008); see also Rule 17(a) of the Hawaii Rules of Civil Procedure.] As explained more fully below, foreclosing mortgagees have several options to prove note holder status at the time that the foreclosure complaint was filed.

Foreclosure Complaint Already Filed
If the foreclosure complaint has already been filed, it is recommended that the current foreclosing mortgagee execute and file a declaration in support of the MSJ, whereby the declarant attests that the foreclosing mortgagee was the original plaintiff and was in possession of the note at the time the foreclosure complaint was filed. If this is not possible [e.g., because the loan has been transferred between one or more investors/servicers and the current plaintiff (real party in interest) is unable to attest to note holder status at the time of the filing of the foreclosure complaint] then a declaration may need to be sought from the original plaintiff. If this is not possible, it might be advisable to voluntarily dismiss and re-file the foreclosure action anew depending upon the circumstances of the case. It may also be possible for the current foreclosing mortgagee to file an amended complaint, which may cure this issue. Still, this strategy bears some risk given that the Reyes-Toledo decision does not address whether it is possible to cure a defect in standing.

It is conceivable that the trial court might not raise this new requirement as an issue. If so, then the foreclosure action may proceed so long as the MSJ is granted. On the other hand, the trial court judges handling foreclosure cases are becoming aware of the Supreme Court’s decision and can, sua sponte, require a foreclosing mortgagee moving for summary judgment to provide evidence that the plaintiff held the note when the case was filed. While a trial judge could also raise this standing issue later in the case (i.e., at confirmation) there is prior Supreme Court precedent that a foreclosure judgment is final and must be timely appealed. Thus, if this standing issue has not been raised at summary judgment, prior precedent dictates that it has been waived. See MERS v. Wise, 130 Haw. 11, 17, 304 P.3d 1192, 1198 (Haw. 2013). Irrespective of Wise, some title insurers could refuse to provide title insurance, citing a failure to comply with the Reyes-Toledo decision as a basis for a title defect after the foreclosure sale is completed. Also, the foreclosing mortgagee runs the risk that the foreclosure judgment may be vacated because standing is an issue that may be raised at any time during the foreclosure action. Further, it is anticipated that various borrowers’ counsel will be citing Reyes-Toledo to oppose foreclosure actions through the sale confirmation stage.

For cases in the First Circuit (Oahu – approximately 60 percent of all Hawaii judicial foreclosure actions) the presiding foreclosure judge (Hon. Castagnetti) continued all MSJs filed on the Island of Oahu until moved upon and is requiring that foreclosing creditors file further briefing and an additional declaration, if necessary, to ensure that the new requirement set forth in the Supreme Court’s decision is met before granting a foreclosing mortgagee’s MSJ. The best course of action on these MSJs will depend upon the circumstances in each case. If a verified complaint was filed, the creditor can reference the filed verification to prove that it was the holder of the note when the complaint was filed. If a verified complaint was not filed and there is no evidence on the record to establish that the creditor was the note holder at the time of the filing of the complaint, then execution of a declaration attesting to possession of the note at the time the foreclosure complaint was filed will likely be necessary to obtain a judgment. Regardless of how a foreclosing mortgagee elects to proceed, substantial delay in the prosecution of all First Circuit cases at MSJ stage should be expected.

It is worth noting that in the event a loan has been transferred since a complaint was filed, the original servicer can help the current servicer by executing a declaration (on behalf of the original plaintiff) attesting to note possession at the time the foreclosure complaint was filed. If a prior loan servicer finds itself in this situation, then — to the extent possible — it is recommended that the prior servicer work with the current servicer to execute the appropriate declaration, as this is an issue that affects all loan servicers currently conducting business in the state of Hawaii. The cooperation of prior and current loan servicers will help the current note holders satisfy this heightened evidentiary necessity established by Reyes-Toledo.

Foreclosure Complaint Has Not Been Filed
For cases where the foreclosure complaint has not yet been filed, filing a verified complaint wherein the verification includes an attestation as to note possession (as of the filing of the complaint) is recommended. Alternatively, a separate declaration attesting to possession of the original note at the time the complaint is filed should be executed and filed contemporaneously with the filing of the complaint, or as soon thereafter as possible.

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Eastern District of VA Affirms Bankruptcy Court Decision: Chapter 13 Discharge Denied due to Missed Post-Petition Mortgage Payments

Posted By USFN, Wednesday, February 22, 2017
Updated: Wednesday, February 15, 2017

February 22, 2017

by Nisha R. Patel and Michael T. Freeman
Samuel I. White, P.C. – USFN Member (Virginia)

In the recent ruling in Evans v. Stackhouse, WL 150247 (E.D. Va. Jan. 13, 2017), the Newport News Division of the Eastern District of Virginia addressed whether a debtor must remain current on mortgage payments during the Chapter 13 Plan. The district court affirmed the bankruptcy court’s decision to deny the debtor her discharge and subsequently dismiss her case.

Background
Evans filed a petition under Chapter 13 of the Bankruptcy Code on June 11, 2010, and Stackhouse was appointed to serve as the Chapter 13 trustee. On August 26, 2015 the trustee filed and served upon Evans, her counsel, and her mortgage company (CitiFinancial) a Notice of Final Cure Payment pursuant to Fed. R. Bankr. P. 3002.1(f). CitiFinancial’s response reflected that although Evans had successfully brought current the pre-petition arrears owed on her mortgage, she was approximately nine months past due on her post-petition mortgage payments. The trustee subsequently filed a Motion to Close Case without Entry of Discharge, asserting that Evans failed to make “all of the payments due under the Plan,” and that her case should therefore be closed without discharge or be converted to Chapter 7.

Evans filed an answer, contending that post-petition mortgage payments are not included “under the Plan” per the plain language of 11 U.S.C. § 1322(b)(5), § 1322(d), as well as Evans’ confirmed Chapter 13 Plan. The debtor further argued that denying her discharge would “severely disrupt the premise behind most chapter 13 filings and … the process in general.”

The bankruptcy court disagreed. In an opinion issued on January 5, 2016, Chief Judge St. John referenced several decisions throughout the country before concluding that 11 U.S.C. § 1328 plainly requires debtors to complete all payments under the plan — whether to the trustee or directly to the creditor — in order to receive a Chapter 13 discharge. Judge St. John explicitly rejected Evans’ argument that denying her discharge would produce either an absurd result contrary to Congressional intent or an excessively harsh outcome.

On Appeal
In March 2016, Evans appealed. The district court affirmed, holding that “all payments under the plan” in § 1328(a) clearly incorporates both plan payments made by the debtor to the Chapter 13 trustee as well as direct payments made by the debtor to her creditors. The court also echoed Judge St. John’s opinion that providing Evans with a discharge after she failed to maintain post-petition mortgage payments would actually contravene the Bankruptcy Code. Evans’ ineligibility for discharge left the bankruptcy court with only two options: to dismiss her case or convert it to Chapter 7. Since Evans did not request a conversion to Chapter 7, the court concluded that dismissal was in the best interests of the debtor’s estate and of all creditors.

Conclusion
Through the end of 2016, neither the Alexandria nor the Richmond divisions of the Eastern District were denying discharges to debtors who failed to maintain post-petition direct payments. Because the district court’s ruling in Evans is binding on all divisions, however, debtors will need to find another way to ensure that they do not make 36-60 months of plan payments for nothing. Otherwise, debtors may find themselves in another Chapter 13 proceeding only months after the closing of their previous case — and may have difficulty obtaining an extension of the automatic stay as to all creditors the second time around.

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Northern District of Ohio Bankruptcy Court Holds that the Deadline for Filing a Proof of Claim Applies to Secured Mortgage Creditors in Chapter 13 Cases

Posted By USFN, Wednesday, February 22, 2017
Updated: Thursday, February 16, 2017

February 22, 2017

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

On February 6, 2017, Northern District of Ohio Bankruptcy Judge Whipple held that the deadline for filing a proof of claim within 90 days after the 341 meeting of creditors applies to secured creditors in Chapter 13 cases, even though secured creditors are not required to file claims.

After extending the deadline for the mortgage creditor on the debtors’ residence to file a proof of claim (POC) by an additional three months, the creditor’s POC was filed six months after the extended deadline and more than a year after the case was commenced. The debtors filed an objection to the creditor’s proof of claim on the basis that the POC was late. (The debtors had filed a POC for the creditor earlier in the case, which underestimated the creditor’s claim by approximately $20,000.)

The bankruptcy court pointed out that the Bankruptcy Rules provide that a secured creditor in a Chapter 13 case may, but is not required to, file a proof of claim. Instead, a secured creditor may choose to not participate in the bankruptcy case and, after the bankruptcy case is concluded, look to its lien for satisfaction of the debt to the extent of its in rem rights.

If a secured creditor wishes to participate and receive distributions in a Chapter 13 case, however, the court held that a POC must be filed. If filed, the court pondered the disagreement among courts as to whether the filing deadline applies to the POC. Judge Whipple conceded that some courts have concluded that the claims bar date does not apply since secured creditors are not mentioned in the Bankruptcy Rule establishing the POC bar date.

Ultimately, the court agreed with the determination of other courts that the claims bar date Bankruptcy Rule applies to all creditors (including secured creditors), noting that the rule makes no distinction between secured and unsecured creditors. The court held that the creditor’s proof of claim was not timely filed and was, therefore, disallowed.

The case citation is In re Dumbuya, Case No. 15-33176 (Bankr. N.D. Ohio, Western Division (Toledo), Feb. 6, 2017).

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Connecticut Supreme Court Clarifies Appellate Stays

Posted By USFN, Wednesday, February 22, 2017
Updated: Friday, February 17, 2017

February 22, 2017

by Jeffrey M. Knickerbocker
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In a foreclosure case dating back to 1989, the Connecticut Supreme Court has ruled that a trial court must reset law days if an appeal is filed within twenty days of the granting of a motion that would alter or affect a final judgment. [A “Law Day” in Connecticut is a day which the owner of the equity of redemption would have to redeem the property by paying the judgment debt. If the owner does not redeem, title to the property will pass to the foreclosing plaintiff by operation of law at the conclusion of court business on the last law day.]

In Connecticut National Mortgage Company v. Knudsen, 323 Conn 684, __ A.3d __ (Dec. 13, 2016), a judgment of foreclosure had been granted the bank in 1994. The judgment was subsequently opened and modified several times over the years. On June 8, 2015 the trial court rendered a new judgment of strict foreclosure and set a new law day of August 4, 2015.

On June 17, 2015, the borrower sought to reopen the new judgment and to then be allowed to file a motion to vacate that judgment; this was denied by the trial court on June 18, 2015. On June 26, 2015, the borrower appealed (within the requisite appeal periods triggered by both the new judgment and the denial of the borrower’s subsequent motion).

Automatic Stay of Execution
In Connecticut there exists an automatic stay of execution of any final judgment to allow for a twenty-day appeal period. On January 13, 2016 the appellate court had dismissed the appeal with no further action — but both the bank and the borrower argued (and agreed) that the matter should have been sent back to the trial court to reset law days as the vesting of title was stayed due to the appeal period. The Connecticut Supreme Court agreed with the parties, finding that the appellate court erred in dismissing the appeal and not directing the matter back to the trial court for a resetting of law days.

The Connecticut Supreme Court determined that the June 8, 2016 decision (in which the court granted, rather than denied, the bank’s motion to reset the law days) started a new appeal period, which differed from the prior expired appeal periods in the case. Notably, when a motion is granted — as occurred here — instead of denied, the provisions of Practice Book § 61-11 do not apply. Practice Book § 61-11(g) states, in relevant part: “In any action for foreclosure in which the owner of the equity has filed, and the court has denied [emphasis added], at least two prior motions to open or other similar motion, no automatic stay shall arise upon the court’s denial of any subsequent contested motion by that party, unless the party certifies under oath … that the motion was filed for good cause arising after the court’s ruling on the party’s most recent motion. ... There shall be no automatic appellate stay in the event that the court grants the motion to terminate the stay and, if necessary, sets new law dates. There shall be no automatic stay pending a motion for review of an order terminating a stay under this subsection.”

Accordingly, when the borrower timely appealed the judgment, and the dates set for the commencement of the law day passed before the appellate court dismissed the appeal, the vesting of title was stayed pursuant to Practice Book § 61-4. Specifically, the Connecticut Supreme Court found, “The June 8, 2015 judgment triggered an automatic stay because it was an appealable final judgment, and the defendant’s filing of this appeal within twenty days of that judgment continued the stay ‘until the final determination of [this appeal].’ Practice Book § 61-11 (a).” Knudsen, at 689.

As noted in Knudsen, “Prior to [the effective date of Practice Book § 61-11 (g)], a defendant in a foreclosure action could employ consecutive motions to open the judgment in tandem with Practice Book §§ 61-11 and 61-4 “‘to create almost the perfect perpetual motion machine.”’ Citigroup Global Markets Realty Corp. v. Christiansen, 163 Conn. App. 635, 639, 137 A.3d 76 (Mar. 8, 2016).” Knudsen serves to clarify the Christiansen decision, stating that Connecticut Practice Book § 61-11 (g) “was enacted to put a stop to the ‘perpetual motion machine’ and accompanying appellate litigation generated when a defendant files serial motions to open a judgment of strict foreclosure and, each time a motion to open is denied, files a new appeal from the judgment denying the motion to open.”

The difference in Knudsen is that the borrower had a new appeal period when the court granted, and did not deny, the bank’s motion to open judgment and reset the law days on June 8, 2015. As a result, upon dismissal of the appeal on January 13, 2016, the appellate court was obligated to remand the case to the trial court to reset the law day that had passed, because the vesting of title was precluded due to the appellate stay for the applicable appeal period.

The Take-Away
The Knudsen decision illustrates how fact-specific each case can be. Without a careful review of the timeline in this case, a plaintiff could have put the property in real-estate owned (REO), only later to find that the property was not marketable because title had not properly vested in the plaintiff.

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Florida: Appellate Court Reviews the Lis Pendens Statute

Posted By Rachel Ramirez, Wednesday, February 22, 2017
Updated: Wednesday, June 7, 2017

February 22, 2017

by Robyn Katz
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

Background (First Decision)
Last summer, the Fourth District Court of Appeal issued a controversial decision centering on the application of Florida’s lis pendens statute (F.S. section 48.23) to liens placed on property between the time of a final judgment of foreclosure and the judicial sale. [Ober v. Town of Lauderdale by the Sea (Aug. 24, 2016)]. The court has since reversed course.

Rehearing (New Opinion Issued)
On a motion for rehearing, the court withdrew and replaced its August 2016 decision. In the new opinion published in January 2017, the court ruled that the recording of the lis pendens operates as a bar to the enforcement of all interests and liens, regardless of whether the unrecorded interest existed prior to or after the date of the final judgment, all the way up until the foreclosure sale of the property occurs. Accordingly, liens placed on a property between the final judgment of foreclosure and the judicial sale are indeed discharged by section 48.23(1)(d), unless the lienor timely intervenes in the action (within 30 days after the recording of the lis pendens). Ober v. Town of Lauderdale by the Sea, No. 4D14-4597 (Jan. 25, 2017).

The Fourth District Court of Appeal ultimately concluded that the practical problem in the case is the long lag time between the foreclosure judgment and the foreclosure sale and that the resolution of the competing interests is in the province of the legislature. As a consequence, the Florida legislature may choose to amend the lis pendens statute.

In the meantime, the judicial opinion rendered January 25, 2017 restores the lis pendens statute to its interpretation prior to the issuance of the August 24, 2016 decision. Be aware, however, that the Town of Lauderdale by the Sea might seek review from the Florida Supreme Court given that this may be considered a matter of public importance.

As future developments occur, look for further updates on this significant issue.

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Massachusetts: Supreme Judicial Court Clarifies Foreclosure Compliance Standard

Posted By USFN, Wednesday, February 22, 2017
Updated: Friday, February 17, 2017

February 22, 2017

by Julie Moran
Orlans Moran, PLLC – USFN Member (Massachusetts)

Judges in Massachusetts have devoted considerable energy in determining the validity of a nonjudicial foreclosure by assessing the extent to which the form of notice or procedure at issue complies with the provisions of the power of sale statute. The power of sale statute in these decisions has been broadly referenced to include sections 11-17C of Mass. G. L. c. 244. In the long line of cases stretching over a number of years, the validity of a foreclosure has largely turned on whether the targeted requirement is considered part of the foreclosure process, with strict compliance with these provisions required.

In the now famous case U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011), the fact that the mortgagee was not the holder of mortgage at the time of the sale (or in Eaton v. Federal Nat’l Mtge. Ass’n., 462 Mass. 569 (2012), did not hold the note) rendered the sale invalid. The court followed a similar theory in Pinti v. Emigrant Mtge. Co., 472 Mass. 226 (2015), in that the failure of the default notice to strictly comply with paragraph 22 of the mortgage (considered part of the foreclosure process) invalidated the sale. By contrast, the court in U.S. Bank Nat’l Ass’n v. Schumacher, 467 Mass. 421 (2014), determined that the right to cure notice under G. L. c. 244, § 35A, which is sent prior to the initiation of the foreclosure process, was not part of the power of sale foreclosure process and, thus, the notice’s substantial compliance with the statute was sufficient to validate the foreclosure.

In the wake of the above-mentioned judicial opinions, there were conflicting decisions in federal and state courts as to whether the strict compliance standard would also apply to certain notices required to be sent to tenants and municipal officials after the foreclosure sale, pursuant to section 15A of G. L. c. 244, one of the so-called power of sale provisions. Recently, in a case it had transferred on its own motion from the appeals court, the Massachusetts Supreme Judicial Court (SJC) declined to extend this standard to these notices. [Turra v. Deutsche Bank Trust Company Americas, No. SJC -12075 (Jan. 30, 2017)].

The appeals court determined in Turra that the acknowledged failure by the mortgagee to send these notices did not invalidate the foreclosure. In its decision, the SJC acknowledges that in earlier cases it may have unintentionally suggested that failure to strictly comply with all provisions of G. L. c. 244, §§ 11-17C rendered the foreclosure void. The SJC stated that, instead, its intention was to focus on the actions taken by the foreclosing party during the actual foreclosure process. It pointed out that in the prior line of cases (referenced above) the statutory provisions at issue related to the relationship between the mortgagor and mortgagee, with the failure to strictly comply with the applicable statute creating potential harm to the mortgagor.

 

In affirming the appeals court’s decision in Turra, the SJC held that the post-foreclosure notices were not part of the actual foreclosure process, were directed to a third party (not the mortgagor), and the failure to send them did not create potential harm to the mortgagor.

Turra will hopefully reduce — at least by one — the type of successful challenges to foreclosures in Massachusetts.

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South Carolina: Court of Appeals Reviews Service by Publication Statute

Posted By USFN, Wednesday, February 22, 2017
Updated: Friday, February 17, 2017

February 22, 2017

by John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

The South Carolina Court of Appeals has issued another decision emphasizing the importance of following the service by publication statutes in order to obtain jurisdiction over the party being served. A previous opinion, Caldwell v. Wiquist, 402 S.C. 565, 741 S.E.2d 583 (Ct. App. 2013), established that affidavits requesting service by publication that are defective, and do not meet the requirements of the publication statute, will not be sustained even in the absence of fraud or collusion. This marks the second time that the appellate court has addressed the need for strict compliance with the state’s publication statute; it also marks the second time that this issue has arisen in connection with a foreclosure case.

In this recent opinion, the court confirmed the requirements set forth in Caldwell that a foreclosing plaintiff must meet to obtain an order authorizing service by publication. [Belle Hall Plantation Homeowner’s Association v. Keys, Op. No. 5467 (S.C. Ct. App., Feb. 8, 2017)]. The court found that the publication order obtained by the plaintiff in Belle Hall was based upon an affidavit that was defective on its face; the defendant referenced in the affidavit was not the same defendant listed in the order.

As the affidavit supporting the publication order was flawed, the appellate court affirmed the trial court’s decision to vacate the foreclosure sale because the court lacked personal jurisdiction over the defendant in question. Although its decision was based primarily upon the defect in the service by publication process, the court also took the opportunity to discuss the bona fide purchaser argument raised by the appellants (who had purchased the property in question at the foreclosure sale).

Section 15-39-870 of the South Carolina Code provides that when a property is sold at a judicial sale under a court decree, the proceedings upon which the sale is based are res judicata as to any bona fide purchaser for value without notice. To meet the requirements to be a bona fide purchaser, a party must show “(1) actual payment of the purchase price of the property, (2) acquisition of legal title to the property, or the best right to it, and (3) a bona fide purchase — ‘i.e., in good faith and with integrity of dealing, without notice of a lien or defect.’” (quoting Robinson v. Estate of Harris, 378 S.C. 140, 146, 662 S.E. 2d 420, 423 (Ct. App. 2008).

The purchasers in Belle Hall met all of the requirements except for actual payment. Here, the purchasers had paid the 5 percent deposit on sale day as required by the terms of the court sale. Before paying the balance due on the deposit, however, the purchasers obtained actual notice of the defective service by publication when the defendant filed motions to set aside the sale.

The Court of Appeals is sending the message to foreclosure counsel that the statutory requirements of the civil procedure rules in South Carolina must be strictly followed in order to produce a valid sale result at the end of the foreclosure process.

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Mortgage Servicer Sanctioned for Including Fees on Monthly Billing Statements without First Filing Required Notices with BK Court

Posted By USFN, Wednesday, February 1, 2017
Updated: Thursday, January 26, 2017

February 1, 2017

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

The chief bankruptcy judge for the District of Vermont imposed $375,000 in sanctions on a mortgage servicer for billing debtors for fees without first filing the required notices under Bankruptcy Rule 3002.1(c). The court’s ruling was based on the motions of a Chapter 13 trustee in three different cases. The trustee asked the court to make a finding of contempt, to disallow certain post-petition fees, and to impose sanctions based upon the creditor’s failure to comply with Bankruptcy Rule 3002.1 and for the violation of court orders.

The court evaluated the goals of Bankruptcy Rule 3002.1, which requires the holder of a claim secured by a Chapter 13 debtor’s principal residence to file a detailed notice setting forth all post-petition charges it seeks to recover from the debtor within 180 days after the expenditure is incurred. Empowered by the rule’s inclusion of a penalty for violations, the court held a consolidated hearing on the three trustee motions to consider whether the creditor had fulfilled requisite transparency.

In the first case, the court had entered an order determining that the debtors had cured all pre-petition mortgage defaults and were current on all post-petition mortgage payments. Five days later, the mortgage company sent the debtors a mortgage statement which, contrary to the recently entered “order deeming current,” asserted that property inspection fees of $258.75 were due.

In the second case, the court had entered an order determining that the debtors had cured all pre-petition mortgage defaults and were current on all post-petition mortgage payments. Less than three weeks later, the mortgage company sent the debtors a mortgage statement that included one NSF fee of $30 and a property inspection fee of $56.25 — charges for which it had never filed a Rule 3002.1 notice.

In the third case, the mortgage company sent the debtor a monthly mortgage statement that included $246.50 in property inspection fees as well as $124.50 in late charges — all of which were more than 180 days old, and without the servicer filing corresponding Rule 3002.1 notices.

Although the court could not find “any case in which a court imposed sanctions under Rule 3002.1(i) or explained how sanctions arising under that rule should be computed,” it drew from several cases sanctioning mortgage creditors for inaccurate post-petition account statements or the assessment of charges without notice. The court honed in on three factors:

(1) whether the creditor had notice of the need to comply with Rule 3002.1;
(2) whether the creditor managed mortgage accounts in dereliction of its bankruptcy rule duties or had previously been sanctioned for similar misconduct; and
(3) whether the creditor was given an opportunity to rectify processes leading to or causing the defalcations; and, if so, whether it fulfilled its commitment to do so.

After finding that the creditor had notice of its obligation to comply with the bankruptcy rule notice requirements, was not a first-time offender and breached its pledge to correct its processes, the court imposed $75,000 in sanctions for the failure to comply with Rule 3002.1 and $300,000 in sanctions for violating the court’s orders declaring the debtors current. Although the court and trustee agreed that no party suffered any direct financial harm, the judge directed that the sanctions be paid to the state’s lead provider of pro bono bankruptcy legal services. The court reasoned “this way, [the mortgage company] suffers a substantial financial penalty purposefully formulated to motivate [it] to bring its procedures into compliance” without unjustly enriching the debtors.

The case, which is now on appeal, bears the citation In re Gravel, 556 B.R. 561 (Bankr. D. Vt. Sept. 12, 2016).

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CFPB Mortgage Servicing Rule Amendments: Focus on Successors in Interest

Posted By USFN, Wednesday, February 1, 2017
Updated: Thursday, January 26, 2017

February 1, 2017

 

by Caren Castle
The Wolf Firm
USFN Member (California)

and Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)

Anyone who has practiced in the mortgage loan servicing area for more than a few years has likely encountered an unfortunate situation: a borrower has passed away or has been divorced and the questions as to who has the right to communicate with the mortgage lender, to apply for loss mitigation, and to receive a notice of foreclosure needed to be answered.

With the upcoming Consumer Financial Protection Bureau’s (CFPB or Bureau) mortgage servicing rule amendments, starting in April 2018 servicers will be bound by new regulations governing how lots of these questions should be answered. Servicers should not delay, however, in considering changes to their processes in order to comply. Further, the California legislature has enacted a state version of the successors in interest law (SB 1150) — effective January 1, 2017.

In this article, the potential differences in these federal and California State laws are discussed to assist with servicing compliance. [For a primer on the California bill, please see the USFN e-Update article written by Caren Castle and published October 11, 2016; it is archived in the Article Library at www.usfn.org.]

Definition Differences: CFPB Rules have Broader Definitions
In designing and implementing procedures to track the California process, servicers should make sure that they have flexibility so that when the April 2018 federal regulations are effective, they are able to expand the scope of who qualifies as a successor in interest. The California law identifies specific categories of successors — including spouses, domestic partners, parents, grandparents, adult children, adult grandchildren, adult siblings, or joint tenants; these successors can only obtain status after the death of the borrower.

The CFPB rule is broader and defines potential successors as relatives of the borrower, spouse, children, and ex-spouse. Rather than concentrating on the relationship to the borrower, the Bureau instead focused on how the transfer occurred, and it includes transfers that arise through divorce and amongst family members when the borrower is still living. Thus, compliance implementation will be greater when the federal regulation takes over, as the field of potential successors in interest is broader.

California further limits successors to those who occupied the subject property for the six months preceding the death of the borrower, and they must have occupied the property at the time of the borrower’s death. Establishing proof of this qualification will be a bit tricky, and it is important to note that the federal rules do not have an occupancy requirement. So, in April 2018, California successors will not be bound by this restriction because the Real Estate Settlement Procedures Act (RESPA) will provide the floor in terms of rights for the successors. This takes us back to the earlier point that servicer compliance processes must be flexible in order to adjust next year to the increase in successor rights under the federal law.

Determination Differences
CA SB 1150 is specific in providing time frames for the completion of the determination process. The potential successor is given 30 days from the time he communicates the death of the borrower to provide evidence of the death in the form of a death certificate. After that is provided, the potential successor then has 90 days to provide documentation of his relationship with the deceased debtor and of his occupation of the property for the six months preceding the borrower’s death.

Under RESPA the triggering event is not limited to the death of the borrower; it includes notice that the property has transferred to any third party or that there might have been a divorce of the borrower. The federal regulations are very vague about how much time the potential successor has to deliver the documents. The regulations use terms like “prompt” and “reasonable” to describe the process, acknowledging that each of these situations is different and that context matters when determining how long something should take. That said, the servicer has five days to acknowledge a request from a potential successor (the acknowledgment must be in writing) and the servicer has 30 days to provide a list of the documents that are “reasonably” required to confirm the successor in interest.

Default Differences: CA Law has more Foreclosure-related Protection
If a loan is in default, the federal successor in interest rules do not operate independently to compel the servicer to stop any pending foreclosure action. Federal regulation operates to allow a process to confirm a successor and provides any confirmed successor in interest with the right to submit a loss mitigation application and, therefore, obtain a hold on proceeding to first legal, judgment, order of sale, or sale. Still, the rule itself doesn’t provide a pause to a foreclosure while a successor is being confirmed.

Contrast this to the California law, which requires that a foreclosure may not commence or proceed until the successor in interest status is confirmed, if the borrower dies prior to recordation of the notice of default. SB 1150 confers 120 days for this process to conclude (30 days for the successor to provide the death certificate plus 90 days for the successor to provide all the documentation of heirship).

Differences in Rights of Confirmed Successors: Mixed Bag
Under California law, the servicer must confirm (or deny) the successor and has ten days to provide a letter with basic information about the loan, including balance, interest rate (and reset rates/dates if applicable), default information, delinquency information, monthly payment amounts, and the total amount required to pay off the loan. All successors in California have a right to apply for an assumption of the loan, as long as it is assumable. An important right held by California homeowners is to privately sue the servicer or beneficiary if there is a violation of the successor in interest law, similar to the private right found in the state’s Homeowner Bill of Rights.

The federal regulations, like the California law, require disclosure of certain information to successors. The amount of information that must be disclosed will depend on whether the confirmed successor sends the newly created acknowledgment notice. This notice can be returned to the servicer at any time after confirmation, but it provides notice to the successor that it has been confirmed, that the successor is not liable for the debt unless it specifically assumed the debt, and that the successor may obtain periodic payment statements, as well as transfer notices if the acknowledgment is returned to the servicer. However, if a servicer fails to follow the successor in interest provisions, the rights to sue a servicer are less clear, since many of the rights arise under the General Servicing Policies and Procedures section of RESPA (12 C.F.R. 1024.38), which doesn’t have a private right of action. If a potential successor is denied the right to be confirmed and then the right to obtain loss mitigation, there might be a way to pursue a servicer through the private right of action that arises under the loss mitigation sections of RESPA (12 C.F.R. 1024.41).

CA SB 1150 Section 1 (g) states, “It is the intent of the Legislature that this act work in conjunction with federal Consumer Financial Protection Bureau servicing guidelines.” SB 1150 also provides the following in Section 2:

(4) … (k) (1) Any mortgage servicer, mortgagee, or beneficiary of the deed of trust, or an authorized agent thereof, who, with respect to the successor in interest or person claiming to be a successor in interest, complies with the relevant provisions regarding successors in interest of Part 1024 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1024), known as Regulation X, and Part 1026 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1026), known as Regulation Z, including any revisions to those regulations, shall be deemed to be in compliance with this section.

(2) The provisions of paragraph (1) shall only become operative on the effective date of any revisions to the relevant provisions regarding successors in interest of Part 1024 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1024), known as Regulation X, and Part 1026 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1026), known as Regulation Z, issued by the federal Consumer Financial Protection Bureau that revise the Final Servicing Rules in 78 Federal Register 10696, of February 14th, 2013.

When comparing various provisions of these laws — including the scope of potential successors, the amount of protection when a loan is in foreclosure, and the specific rights given to confirmed successors — it is unclear whether a servicer would be safe in complying solely with federal law. For example, if a California successor has a right to not have a notice of default recorded during the 120-day confirmation process, yet the federal regulations don’t halt foreclosures during the confirmation process, will Section 2 of SB 1150 protect a servicer who complied with the federal law when the state law provided more protections covering a loan in foreclosure? Would this provision be ripe for a Bureau determination on whether the federal rules are inconsistent with state law under 12 C.F.R. 1024.5(c)(3)?

Conclusion
There is truly a remarkable granting of rights with these amendments, provided that they stand the test of time given the current political shakeup in the United States. Never before has a group of individuals, who were not parties to the original mortgage contract, been given the protections that are provided in California — and will, in April 2018, apply to all qualified individuals covered under the CFPB rules.

As the regulations become effective and operative, there will be many challenges in implementation and proper application. Litigation will likely result, and the courts will weigh in on this new area of law.

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FDCPA Case Law: 2016 in Review

Posted By USFN, Wednesday, February 1, 2017
Updated: Thursday, January 26, 2017

February 1, 2017

by Graham H. Kidner
Formerly with Hutchens Law Firm
USFN Member (North Carolina, South Carolina)

After almost 40 years since its enactment, the Fair Debt Collection Practices Act (FDCPA) remains a fruitful source of litigation. Here are some of the main case highlights from the past year or so. All sections cited refer to Title 15 of the United States Code.

Communicating Correct Debt Amount
The holding in Prescott v. Seterus, Inc., 2015 WL 7769235 (11th Cir. Dec. 3, 2015), generated servicer directives that firms must not include in payoff and reinstatement letters fees and costs that had not been actually incurred. Prescott held that the standard GSE mortgage used in Florida did not permit a lender to seek or collect estimated fees or costs in a reinstatement context, resulting in a violation of § 1692e(2) (“false representation of … the character, amount, or legal status of any debt”) and § 1692f(1) (“collection of any amount … [not] expressly authorized by the agreement …”), despite the fact that the debt collector clearly identified the fees as estimates.

Opinions from the Third Circuit, beginning with McLaughlin v. Phelan Hallinan & Shmieg, LLP, 756 F.3d 240 (3d Cir. 2014), were likely predictors of Prescott, although the appellate court (and federal district courts in that circuit) exhibited a clear intent to not penalize debt collectors who made a clear effort to distinguish estimated or anticipated charges. The pertinent facts in Prescott (the reinstatement letter was sent on September 26, 2013) also pre-dated the Consumer Financial Protection Bureau’s change to the RESPA regulation 12 C.F.R. § 1026.36, which (since January 10, 2014) arguably now requires the servicer (whether or not a debt collector) to include estimated charges through the good-through date of a payoff statement. Prescott also poses problems to servicers with respect to compliance with many state laws, or state judicial practices, which appear to require the inclusion of estimated or anticipated charges in payoff and/or reinstatement quotes.

Avila v. Riexinger, 817 F.3d 72 (2d Cir. Mar. 22, 2016), held that a debt collector’s dunning letter informing the consumer of the current balance of the loan (but failing to disclose that the balance may increase due to interest and fees) violated § 1692e, on the basis that the debtor would understand (incorrectly) that payment of the specified amount would satisfy the debt whenever payment was remitted. Apparently, even the least sophisticated consumer is deemed to have forgotten that the loan which he obtained carries interest and that late payments generate fees. One bright spot: no such warning is necessary in the Eastern District of Virginia. Kelley v. Nationstar, 2013 WL 5874704 (E.D. Va. Oct. 31, 2013); Davis v. Segan, 2016 WL 254388 (E.D. Va. Jan. 19, 2016).

Time-Barred Debt
It is hoped that the U.S. Supreme Court will establish certainty on the related issues of whether the Bankruptcy Code preempts the application of the FDCPA, and (if not) whether filing a proof of claim on a time-barred debt protects the debt collector from an adversary action under the FDCPA, provided the proof of claim adequately discloses the legal status of the debt. Johnson v. Midland Funding, 823 F.3d 1334 (11th Cir. 2016), cert. granted, 2016 WL 4944674 (U.S. Oct. 11, 2016). Several circuits are split on these issues, with the Fourth Circuit most recently entering the fray. Dubois v. Atlas Acquisitions LLC (In re Dubois), 834 F.3d 522 (4th Cir. Aug. 25, 2016) (filing proof of claim for time-barred debt, where claim did not disguise fact that debt may be time-barred, neither violates FDCPA nor acts as a fraud upon the court).

In the non-bankruptcy context, the Fifth Circuit has deepened the split, holding that offering to settle debt without disclosing that it is time-barred violates § 1692e. Daugherty v. Convergent Outsourcing, Inc., 836 F.3d 507 (5th Cir. Sept. 8, 2016).

Debt Validation
In the first published opinion from any circuit on the question, the Ninth Circuit held that successor debt collectors of the same debt are each responsible for sending a separate debt validation notice. Acknowledging the statute’s ambiguity, the court found that the broader structure of the FDCPA mandated the holding because frequent transfers of debt during the prior validation period could adversely affect the consumer’s right to seek and receive validation. Also, transferee debt collectors often do not obtain accurate debt figures from their transferors, resulting in conflicting debt collection claims. Hernandez v. Williams, Zinman, & Parham, PC, 829 F.3d 1068 (9th Cir. July 20, 2016).

Simple errors, such as the failure to disclose the correct identity of the creditor, can prove costly. Janetos v. Fulton Friedman & Gullace, LLP, 825 F.3d 317 (7th Cir. Apr. 7, 2016). The Janetos case is also instructive for the proposition that one debt collector may be vicariously liable for the conduct of another. Additionally, getting the timing of debtor communications wrong can hurt. The safest approach is to send out the validation notice as a stand-alone letter, if feasible. When it must be combined or sent with other communications, beware of the risk of misstatement and overshadowing — as was the fate of the defendant in Marquez v. Weinstein, Pinson & Riley, P.S., 836 F.3d 808 (7th Cir. Sept. 7, 2016). There, the court found that response requirements and deadlines in the validation notice set forth in the debt collection complaint confused the consumer as to the timing and manner of responding to the complaint.

Third Party Communications
Following three other circuits, the Eleventh Circuit held that when a debt collector sends a consumer’s attorney a communication in connection with the collection of a debt, this qualifies as a communication with a consumer so as to trigger the requirement to send a debt validation notice as required under 15 U.S.C. § 1692g. Bishop v. Ross Earle & Bonan, P.A., 817 F.3d 1268 (11th Cir. Mar. 25, 2016). The court reasoned that the attorney is a mere conduit for the intended recipient of the collection letter.

Calling the borrower on the telephone continues to pose risk. If someone other than the borrower answers, or if the call is directed to a message service, what (if anything) may the debt collector say? Courts have consistently rejected the argument that the FDCPA presents an irreconcilable conflict between the risks of improperly communicating with a third party versus the failure to disclose that the call is from a debt collector. Leaving a message with a third party, seeking to induce the consumer to return the call — without disclosing the nature of the call — violates § 1692e(11) (the mini-Miranda warning). Halberstam v. Global Credit and Collection Corp., 2016 WL 154090 (E.D.N.Y. Jan. 12, 2016).

Foreclosure as Debt Collection
Another circuit split concerns whether foreclosure of the security interest alone, without an express demand to pay the underlying debt, qualifies as debt collection. This action by a trustee in California is not debt collection, according to a plain reading of § 1692a. Ho v. ReconTrust Company, NA, 840 F.3d 618 (9th Cir. Oct. 19, 2016). The foreclosure obligates only the purchaser at sale to pay money; moreover, California’s anti-deficiency statute insulates the borrower from any personal liability.

Twelve days earlier, the Fourth Circuit affirmed that a trustee engages in debt collection by initiating foreclosure because even if the trustee makes no express demand for payment, the purpose behind the proceeding is to collect the debt. The court found it particularly relevant that the debt remained a debt even after proceedings were initiated. McCray v. Federal Home Loan Mortgage Corporation, 839 F.3d 354 (4th Cir. Oct. 7, 2016).

CFPB’s Interpretation of FDCPA
While the constitutional structure of the Bureau is uncertain following the decision in PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. Oct. 11, 2016), the Bureau has already made its mark on FDCPA enforcement. In consent orders established with major debt collection law firms, the Bureau’s position is that inadequate involvement by an attorney in debt collection activity violates § 1692e(3) and (10), as well as § 1692f. [See CFPB v. Frederick J. Hanna & Associates, P.C., No. 1:14-cv-02211-AT (N.D. Ga. Dec. 28, 2015) and In the Matter of: Pressler & Pressler, LLP, File No. 2016-CFPB-0009 (Admin. Proc. Apr. 25, 2016).] These orders set a minimum standard for other volume debt collector law firms to look to.

Not all Doom and Gloom
In conclusion, difficult though it may be to believe when looking at much of the case law, the courts do draw the line on consumers’ complaints. Two notable decisions in 2016 include Henson v. Santander Consumer USA, Inc., 817 F.3d 131 (4th Cir. Mar. 23, 2016) and Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC, 825 F.3d 788, reh’g en banc granted (7th Cir. June 14, 2016).

In Henson the Fourth Circuit held that the default status of debt, at the time the transferee acquires it, has no bearing on whether the transferee qualifies as a debt collector under § 1692a(6). If the transferee purchases that debt, then its subsequent attempts to collect are not efforts made on behalf of another but for its own account.

In Oliva, the Seventh Circuit held that if a debt collector engages in conduct that is expressly permitted under the controlling law at the time of the alleged conduct (in this case, filing collection cases in a certain judicial district in accordance with binding precedent interpreting the FDCPA’s venue section, § 1692i(a)2), and if there is then a retroactive change to the law that now prohibits such conduct, the debt collector cannot be held liable for conduct preceding the change.

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Borrower HAMP-Based RICO Claims: Tenth Circuit Overturns Dismissal of Lawsuit

Posted By USFN, Wednesday, February 1, 2017
Updated: Friday, January 27, 2017

February 1, 2017

by William H. Meyer
Martin Leigh PC
USFN Member (Kansas)

In a published, 38-page opinion, the U.S. Court of Appeals for the Tenth Circuit held that a first amended complaint filed by borrowers against Bank of America (Bank) and Urban Settlement Services (Servicer) stated a “facially plausible” claim under the Racketeer Influenced and Corrupt Organizations Act (RICO). The lawsuit was remanded by the Tenth Circuit back to the U.S. District Court for the District of Colorado for further proceedings after the lawsuit was initially dismissed by the district court [George v. Urban Settlement Services, __ F.3d __ (10th Cir. 2016)].

Background
The underlying lawsuit alleges that Bank and Servicer violated RICO relating to Bank’s and Servicer’s administration of the borrowers’ Home Affordable Modification Program (HAMP) loan modification requests. RICO is significant in this context (and brings with it considerable leverage) because RICO enables plaintiff-borrowers to recover treble damages in addition to attorneys’ fees. At the risk of oversimplifying the RICO statute, RICO is a federalized fraud cause of action combining with it elements of conspiracy. Passed in 1970, RICO was crafted as a tool to fight organized crime and the Mafia. Since then, the scope of litigants subject to RICO’s reach has grown and efforts to curb RICO’s application to business litigation have been unsuccessful.

In the George lawsuit, the borrowers contended that Bank and Servicer violated RICO by forming an unlawful enterprise with the goal of wrongfully denying HAMP loan modifications to qualified applicants. The borrowers alleged that Bank and Servicer accomplished this by denying receipt of loan modification requests and by misleading borrowers regarding the status of loan modification requests. The borrowers claimed that they were damaged by this conduct because of allegedly bigger principal balances, lengthier loan terms, larger interest obligations, and late fees. The borrowers further maintained that they suffered damaged credit reports. (There is no mention in the George opinion of the considerable expense incurred by Bank as the result of the borrowers’ defaults and the organic damage done to a credit report by virtue of defaulting on a home mortgage loan in the first place.)

Appellate Review
To raise a facially plausible RICO claim, the borrowers had to allege that there was more than one participant in the purportedly illegal enterprise. The Tenth Circuit ruled that the borrowers met this initial burden by pleading that Bank and Servicer were separate entities with a common purpose of limiting the number of successful HAMP loan modifications. This element of the Tenth Circuit’s ruling suggests that the exact same conduct would not have provided a basis for a RICO claim if Bank had serviced the loans in-house.

Next, the Tenth Circuit found that the borrowers sufficiently alleged that Servicer knowingly participated in Bank’s supposed scheme to limit the number of successful HAMP loan modifications. In making this determination, the Tenth Circuit rejected Servicer’s assertion that it was merely doing what loan servicers do in the normal course of the loan servicing business; and it had no choice as to the directions it followed when servicing a particular lender’s loans. However, such an argument may be successful later in the litigation and when based upon a more developed record. Given the procedural posture of this lawsuit (the motion to dismiss stage), all of the borrowers’ factual allegations were required to be taken as true by the trial court.

The Tenth Circuit then found that the borrowers sufficiently alleged that Bank and Servicer engaged in a pattern of racketeering activity. The borrowers asserted that Bank and Servicer made numerous false representations to the borrowers in that the defendants, purportedly, falsely stated the status of the HAMP loan modification applications; falsely represented that documents necessary for completing the HAMP process had not been received; and improperly allowed Servicer’s employees to use Bank titles and Bank addresses when communicating with the borrowers. In reaching its conclusion, the Tenth Circuit noted that the pleading rules at this preliminary stage of litigation are relaxed because the borrowers have not yet had the benefit of conducting discovery.

Closing
The lawsuit remains pending. There has not been a final decision of the applicability of RICO to Bank or Servicer. However, the Tenth Circuit’s opinion demonstrates how borrowers can use RICO in lender liability lawsuits and can avoid having such claims dismissed at an early phase of the litigation.

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More on Statutes of Limitations: Bartram v. U.S. Bank Affirmed

Posted By Rachel Ramirez, Wednesday, February 1, 2017
Updated: Wednesday, June 7, 2017

February 1, 2017

by Jane Bond
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

Editor’s Note: This content was expanded from the version that was printed in the USFN Report (winter 2017 Ed.), which was mailed on February 1, 2017. Updated material was added to the “Proceeding Post-Bartram” and “Conclusion” sections of this article on February 6, 2017.

 

The landmark case on the Florida statute of limitations was affirmed by the Florida Supreme Court in Bartram v. U.S. Bank National Association, SC14-1265 (Fla. Nov. 3, 2016). That decision, upholding the Fifth District Court of Appeal, was unanimous in result and is a significant victory for the mortgage lending industry — potentially leading to the refiling of thousands of stalled cases on delinquent loans in the state.

Bartram resolves a highly litigated issue. It allows lenders to file successive foreclosure actions, even after there has been a previous acceleration of the loan and a prior involuntary dismissal of the foreclosure action, provided the subsequent default was post-dismissal and within five years of the newly-filed action.

Why is the Bartram Case Important?
Florida is a judicial state with a relatively short statute of limitations period of five years. Due to the number of foreclosure cases since the financial crisis began, and the delays in many judicial states, the statute of limitations has come to the forefront more frequently as many defaults/accelerations are more than five years old. Based on the running of the statute of limitations, borrowers are attempting to avoid all (or a portion) of the residential debt owed under their note, and eliminate the mortgage lien.

While this article focuses on the application of the statute of limitations in Florida courts, it should be noted that the case law and policies being discussed will have an impact beyond Florida. Every state has its own version of the statute of limitations; and, as the foreclosure epidemic affected each of them to a varying extent over the past decade, the question of how the statute of limitations impacts mortgage transactions is one of importance across the country.

The Certified Question to the Florida Supreme Court
In Bartram, the Florida Supreme Court answered the following certified question:

Does acceleration of payments due under a residential note and mortgage with a reinstatement provision in a foreclosure action that was dismissed pursuant to Rule 1.420(b), Florida Rules of Civil Procedure, trigger application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on payment defaults occurring subsequent to dismissal of the first foreclosure suit?

The Supreme Court responded to the question in the negative. The answer was limited to the specific question asked, which narrowed the scope of the opinion to cases in which: (1) the mortgage includes the right to reinstate; (2) the previous case was involuntarily dismissed; and (3) the borrower has a post-dismissal default.

The Supreme Court discusses the arguments of the parties before the Fifth District Court of Appeal and specifically points to the fact that “[t]he Bank acknowledged, however, that it could not seek to foreclose the Mortgage based on Bartram’s defaults prior to the first foreclosure action, but could seek foreclosure based on defaults occurring subsequent to the dismissal of the first foreclosure action.” Many attorneys in Florida would contend that any dismissal of a case decelerates the loan and puts the parties back into their pre-foreclosure status — and all subsequent defaults are again at issue, not only the post-dismissal defaults. The holding as to post-dismissal defaults may be due to the Bank’s concession before the Fifth District and the specific question posed to the Supreme Court.

Important Attributes in Bartram
To start, a foreclosure can be refiled after previous acceleration and dismissal. In Bartram the justices began their analysis by reviewing other federal and state court decisions, along with their own previous decision in Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004), which was decided on res judicata grounds and then extended in Bartram to successive mortgage foreclosure actions in a statute of limitations context. The panel renewed their position stating, “Consistent with the reasoning of Singleton, the statute of limitations on the balance under the note and mortgage would not continue to run after an involuntary dismissal, and thus the mortgagee would not be barred by the statute of limitations from filing a successive foreclosure action premised on a ‘separate and distinct’ default. Rather, after the dismissal, the parties are simply placed back in the same contractual relationship as before, where the residential mortgage remained an installment loan, and the acceleration of the residential mortgage declared in the unsuccessful foreclosure action is revoked.”

Secondly, whether the prior case is dismissed with or without prejudice is immaterial for statute of limitation purposes for re-filing. The Supreme Court clearly states, for statute of limitations purposes, that a case being dismissed with or without prejudice has no bearing on a case being time-barred. In Deutsche Bank Trust Co. Americas v. Beauvais, 188 So. 3d 938, 947 (Fla. 3d DCA 2016), the Third District Court of Appeal, on rehearing, withdrew its prior opinion making this distinction. There are exceptions. Whether a case is dismissed with or without prejudice must be analyzed to ensure that the proper default date is used. If a case is dismissed with prejudice, then a new subsequent default date is needed that is post-dismissal and within five years of the new filing. If a case is dismissed without prejudice and the default date is within five years of the new case, the previous default date can be used.

Furthermore, the Supreme Court found that if there is a new default (post-involuntary dismissal) the default date must be within five years of the new foreclosure. The opinion states, “the mortgagee, also referred to as the lender, was not precluded by the statute of limitations from filing a subsequent foreclosure action based on payment defaults occurring subsequent to the dismissal of the first foreclosure action, as long as the alleged subsequent default occurred within five years of the subsequent foreclosure action” [emphasis added].

Finally, the bank is not required to decelerate the loan by an overt act. The dismissal of the case returns the parties to their pre-acceleration status. Bartram decided that “the dismissal itself — for any reason — ‘decelerates’ the mortgage and restores the parties to their positions prior to the acceleration ….” Therefore, it is not necessary to provide a notice of deceleration in Florida.

Proceeding Post-Bartram
For new cases and cases currently pending before the circuit courts in Florida, each of them will need individual review by counsel to determine the proper course of action. Many cases may already fall within the requirements of Bartram, having used a default date post (involuntary) dismissal and within five years of the new foreclosure. Some servicers are taking a very conservative position in applying Bartram to all potential statute of limitations cases, regardless of whether the previous case was voluntarily or involuntarily dismissed. In addition, servicers may be advancing the default date to a post-dismissal date and waiving the underlying pre-dismissal payments. As this can be very costly, evaluating all factors and obtaining the opinion of counsel are imperative.

Based on Florida case law and language within Bartram, proceeding on default dates within five years of the new filing is a reasonable course of action even if the default dates are pre-dismissal. Due to the specific certified question posed, Bartram included the discussion on post-dismissal defaults. From a reading of the Bartram case in its entirety, as well as surrounding case law, it does not make legal or logical sense for a post-dismissal default date to be significant as to refiling a subsequent case.

Bartram specifically states “after the dismissal, the parties are simply placed back in the same contractual relationship as before, where the residential mortgage remained an installment loan” and “the mortgagee still has the right to file subsequent foreclosure actions — and to seek acceleration of the entire debt — so long as they are based on separate defaults [emphasis is the Court’s at 20].” “Therefore, with each subsequent default, the statute of limitations runs from the date of each new default providing the mortgagee the right, but not the obligation, to accelerate all sums then due under the note and mortgage [emphasis added].” Concluding, “[t]herefore, the Bank’s attempted prior acceleration in a foreclosure action that was involuntarily dismissed did not trigger the statute of limitations to bar future foreclosure actions based on separate defaults.” This express language does not mention a requirement of a post-dismissal default and leads to the logical conclusion that any subsequent default within five years of the new filing will be within the Florida statute of limitations.

 

For both pending and new filings, a determination should be made as to whether a particular situation falls within the certified question that was posed in Bartram. In most cases the uniform residential mortgage is used, which includes the paragraph 19 reinstatement provision covering the first prong of the certified question. Next, the prior case must be reviewed to determine if it was dismissed pursuant to Rule 1.420(b) of the Florida Rules of Civil Procedure, which is specifically for involuntary dismissals. [Whether Bartram applies to the other dismissals listed in Rule 1.420 — such as voluntary dismissals found in subsection (a) and lack of prosecution dismissals found in subsection (e) — is debatable.] Lastly, review the current complaint to determine whether or not the default alleged in the complaint is subsequent to the dismissal of the previous foreclosure suit. If not, there may be an argument of a continuing default under Beauvais and Bollettieri Resort Villas Condominium Association, Inc. v. The Bank of New York Mellon, 198 So. 3d 1140 (Fla. 2d DCA 2016), review granted, SC16-1680 (Fla. Nov. 2, 2016), indicating that if a continuing default was pleaded in the complaint (“all subsequent payments”), then all defaults are placed at issue. Using this reasoning, all of the post-dismissal defaults were properly pleaded and there may be a default falling within Bartram’s requirements.

Along with these factors, additional examination will be needed to determine whether: (1) the statute of limitations was raised as an affirmative defense; (2) the previous case was dismissed with or without prejudice; and (3) the attorney/party raising the statute of limitations defense would be entitled to attorney fees upon dismissal.

Many times it may be in the best interests of all parties to settle the matter rather than continue the litigation. A legal analysis can be done to determine the best manner of proceeding, whether that is continuing the current case or dismissing it and refiling a new complaint. Courts may also entertain motions to stay the case pending the Supreme Court’s review of the Bollettieri case. Where Bartram discusses a refiling after an involuntary dismissal, Bollettieri involves a refiling after a voluntary dismissal. Accordingly, if a prior case involves one that was voluntarily dismissed, then the circuit court may decide to stay a current case until the Supreme Court’s decision is issued in Bollettieri.

Servicers and law firms are now receiving reinstatement and payoff requests post-Bartram, demanding quotes based only on post-dismissal defaults. Many cases filed before Bartram include default dates that are not post-dismissal. Servicers will need to confer with their counsel to determine how to handle this point. The Bartram decision states more than once that the lenders have a right to collect the full debt, as the lender may accelerate the “entire amount due under the note and mortgage” in a re-filed action.

Still, in other dicta, Bartram says “[w]hether the dismissal of the initial foreclosure action by the court was with or without prejudice may be relevant to the mortgagee’s ability to collect on past defaults.” In any potential conflict regarding amounts due, opposing counsel may be questioning the inclusion of pre-dismissal amounts in reinstatement and payoff quotes. This same contention will be raised in relation to amounts set forth in breach letters.

Conclusion
Even with the new issues, the long-awaited Bartram decision allowing successive foreclosure actions paves the way for many new filings in Florida and provides guidance on the narrow question posed to the Supreme Court. Servicers should solicit legal opinions from their counsel as to the applicability of the Bartram ruling to the facts of particular cases, as the judicial decision does not address everything and is conflicting in places.

The Florida statutes of limitations in a mortgage foreclosure context will continue to be closely monitored by other states, which are also wrestling with the law and equities involved in this complex area.

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District of Columbia: Ninth Circuit’s Bourne Valley Ruling to Spark Changes in D.C. Condominium Laws?

Posted By USFN, Wednesday, February 1, 2017
Updated: Friday, January 27, 2017

February 1, 2017

by Kenneth Savitz and Tracy Buck
Rosenberg & Associates, LLC
USFN Member (District of Columbia)

Pre-2010
Prior to 2010, mortgage foreclosure proceedings in the District of Columbia were rarely interrupted by competing enforcement of condominium assessments. D.C. Code § 42-1903.13 stated that condominium assessments were subordinate to a “[first] deed of trust”, except for “the [six] months immediately preceding instruction of an action to enforce the lien.”

Local real estate practitioners unequivocally interpreted “an action to enforce the lien” to be the “[first] deed of trust” holder’s foreclosure sale. Upon completing a foreclosure sale, the first deed of trust holder would tender funds to the condominium association to satisfy assessments owed for the six months prior to the sale. The deed of trust holder would then apply remaining proceeds from the sale to the underlying debt, and any surplus would flow in order of priority to junior lienholders — including the condominium association for remaining assessments owed.

Condominium associations rarely initiated foreclosure because the successful bidder would take ownership subject to a first deed of trust. Only under unique circumstances would condominium associations take action otherwise (i.e., sufficient equity for full recovery or recalcitrant owners). As a result, condominiums simply awaited first deed of trust foreclosures to recover outstanding assessments.

2010-2016
Unexpectedly, in January 2010 the condominium foreclosure landscape shifted when Chase Plaza Condominium Association, Inc. (Chase Plaza) applied a new reading to D.C. Code § 42-1903.13, whereby it interpreted “the lien” to be the condominium association’s assessment lien. According to Chase Plaza’s interpretation, a condominium association held a “super-priority” lien for the most recent six months of assessments and could institute its own “action to enforce the lien.” Following notice of a proposed sale, in which Chase Plaza stated unequivocally that it intended to sell the unit unencumbered, Chase Plaza sold the unit for $10,000. At the time of the sale, the unit was assessed for taxation purposes at $287,800.

In August 2010 Chase Bank (the first deed of trust holder) filed suit in the D.C. Superior Court to have its first deed of trust interest declared continuing and enforceable. Following partial summary judgment in the Bank’s favor, Chase Plaza timely appealed. On August 28, 2014, relying heavily on similar rulings in Nevada and Washington State, the D.C. Court of Appeals issued its opinion declaring that D.C. Code § 42-1903.13 established a “split-priority” lien for condominium assessments, with “super-priority” status given to the most recent six months of assessments owed, and holding that the condominium association may foreclose solely the “super-priority” lien — thereby extinguishing all lower-priority liens, including the first deed of trust. Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., 98 A.3d 166 (D.C. Cir. 2014). Despite upholding Chase Plaza’s sale, the Court of Appeals noted an interesting question: whether “the lack of a notice requirement renders D.C. Code § 42-1903.13 [ ] unconstitutional either facially or as applied to JPMorgan in this case.” Id. at n.7. As the Bank had not raised the argument, the Court of Appeals did not have reason to fully address it.

Since that ruling, D.C. condominium associations have scheduled “super-priority” lien sales with regularity. To protect its interest, the deed of trust holder is required to pay the most recent six months of assessments, plus all associated attorneys’ fees and costs. However, if the deed of trust holder fails to maintain the ongoing monthly assessments, a new “super-priority” lien will arise six months later. In an effort to prevent future sales (and the accumulation of sometimes exorbitant attorneys’ fees), many lenders seek the assistance of the D.C. Superior Court, although there had been few, if any, challenges to the constitutionality of D.C. Code § 42-1903.13.

Summer 2016 and Onward
The U.S. Court of Appeals for the Ninth Circuit issued its opinion in Bourne Valley Court Trust v. Wells Fargo Bank, NA, 832 F.3d 1154 (Aug. 12, 2016). The court held that Nevada’s opt-in notice statute was facially unconstitutional for violating the holder’s due process rights. While Nevada’s statute at least considered notice to a deed of trust holder, D.C. Code § 42-1903.13 only requires notice to the homeowner and to the mayor. The statute is devoid of any notice requirement for the deed of trust holder, regardless of its status on record.

Following the Bourne Valley ruling, numerous lenders have sought to challenge condominium association sales as unconstitutional. At least one such case (Bayview Loan Servicing, LLC v. 1390 Kenyon St. Corp., No. 16-CV-600) is currently pending before the D.C. Court of Appeals, and the parties are briefing the issue in anticipation of a ruling in spring 2017. Deed of trust holders and servicers should remain alert for upcoming rulings, as the application of D.C. Code § 42-1903.13 could shift dramatically.

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Cleveland Bankruptcy Judges Issue Memo Clarifying that Lien Stripping is by Motion, Not Through Special Chapter 13 Plan Provisions

Posted By USFN, Tuesday, January 10, 2017
Updated: Tuesday, January 3, 2017

January 10, 2017

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

In an effort to establish uniform procedures in chapter 13 cases, the three bankruptcy judges in Cleveland clarified on December 1, 2016 that debtors seeking to avoid unsecured liens under the authority of In re Lane, 280 F.3d 663 (6th Cir. 2002), or liens impairing exemptions under § 522(f), must do so by motion — not through special chapter 13 plan provisions. Absent intervening precedent, the bankruptcy judges in Cleveland intend to adhere to this procedure at least until the effective date of any national chapter 13 plan form and related rules amendments, which would be no earlier than December 1, 2017.

Bankruptcy Rule 3012 currently provides for the valuation of a secured claim by motion. In addition, Bankruptcy Rule 4003(d) provides that “[a] proceeding by the debtor to avoid a lien or other transfer of property exempt under § 522(f) of the [Bankruptcy] Code shall be by motion in accordance with Rule 9014.” While the proposed national chapter 13 plan form and related rules amendments currently under consideration would provide for the avoidance of these liens through a chapter 13 plan (as well as by motion), they have yet to take effect and, at this point, are simply a proposed form and proposed rule amendments.

Chapter 13 debtors are free to include special plan provisions indicating that they intend to file a separate motion to avoid a totally unsecured lien under the authority of In re Lane or § 522(f); however, the bankruptcy judges in Cleveland will not accept special plan provisions that purport to accomplish such lien avoidance without filing a separate motion.

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Service of Process & Warning Orders: Importance of Recent Arkansas Case Law

Posted By USFN, Tuesday, January 10, 2017
Updated: Wednesday, January 4, 2017

January 10, 2017

by Jillian Wilson
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Tennessee)

Arkansas courts have recently reviewed cases regarding the sufficiency of constructive service by warning order. Service by warning order is governed by Arkansas Rule of Civil Procedure 4(f), which states: “If it appears by the affidavit of a party seeking judgment ..., after diligent inquiry, the identity or whereabouts of a defendant remains unknown ..., service shall be by warning order issued by the clerk.”

Examined in recent Arkansas case law is the issue of what constitutes “diligent inquiry,” and to what extent must the “diligent efforts” be described within the affidavit submitted to the court? The Supreme Court of Arkansas held that “A mere recitation in an affidavit that a diligent inquiry was made is not sufficient.” Smith v. Edwards, 279 Ark.79, 648 S.W.2d 482 (1983). Rule 4(f) requires the party seeking constructive service by warning order to show that he or she did, indeed, attempt to locate the defendant. So, what is a sufficient description of “diligent inquiry” to withstand a challenge to validity of service? An analysis of recent Arkansas precedent provides some insight.

Billings v. U.S. Bank National Association
In this case, the court held that the bank (which had been the plaintiff in an underlying foreclosure action) did not properly serve the “unknown heirs of Doann Billings” (defendants in that foreclosure action) by warning order because the “diligent inquiry” requirement was not satisfied. Billings v. U.S. Bank National Association, 2016 Ark. App. 134, 484 S.W.3d 715 (Ark. Ct. App. 2016).

The bank had submitted an affidavit for warning order a few weeks after filing its complaint in 2012. The affidavit stated that counsel “made diligent inquiry” into the whereabouts of the “Unknown Heir(s) of the borrower”, but that “Defendant(s)’ present address(es) are unknown.” Through counsel, the bank received a fax regarding the petition of the deceased borrower’s son to be appointed the personal representative of the borrower’s estate. The petition included the son’s address as the subject property address. The bank published the warning order for the Unknown Heir(s) but subsequently amended its complaint to include the borrower’s son and two sisters as defendants. The bank then filed an affidavit for warning order against the borrower’s son/personal representative, Montrevel Billings, claiming that pursuant to diligent inquiry, it discovered that the property address was no longer his address and that his current address was unknown. Ultimately, the circuit court granted a default judgment in which it dismissed Montrevel Billings, declared the property to be in foreclosure, and ordered the home to be sold in a commissioner’s sale. Notice of the commissioner’s sale was done by warning order.

Prior to the commissioner’s sale, Montrevel Billings filed a motion to vacate the foreclosure decree, and the court suspended the sale of the home until the matter could be resolved. A hearing was held in 2015, at which time the court found that service was proper and denied Montrevel’s motion. Montrevel filed a motion for reconsideration, which was also denied; he appealed.

On appeal, the court in Billings stated that the bank had “presented no facts in either … affidavit to support its statement that it made a diligent inquiry.” Though the bank later tried to prove the service attempts made prior to the warning order, the appellate court held that these attempts were irrelevant because they were not initially described in the affidavits for warning order. The bank “was required to show what efforts it made, if any, to locate Montrevel before it sought constructive service by a warning order. U.S. Bank did not include any facts in its affidavits for a warning order to show any efforts it may have taken to diligently inquire into Montrevel’s location; therefore, service by warning order was not properly executed.”

Morgan v. Big Creek Farms of Hickory Flat, Inc.
Conversely, in Morgan, the Arkansas Court of Appeals held that Big Creek Farms properly utilized a warning order to complete service upon the defendants in an underlying lawsuit brought by Big Creek. [Morgan v. Big Creek Farms of Hickory Flat, Inc., 2016 Ark. App. 121, 488 S.W.3d 535 (Ark. Ct. App. 2016).] The parties had entered into a construction contract in 2008. Construction was completed in 2009, and Big Creek attempted multiple times to collect payment pursuant to the contract.

Big Creek filed suit in late 2011 to recover the amount owed. On four occasions Big Creek attempted personal service by sheriff at the Morgans’ address without success. During these attempts, the sheriff’s department identified another address where the property’s utility bills were being mailed. Big Creek hired a private investigator who confirmed this new address as a possible address. Personal service was again attempted three times on the Morgans at the new-found address; these attempts were unsuccessful. Further, after two unsuccessful service attempts by certified and first-class mail at the first address, Big Creek filed and was granted an extension of time. Subsequently, Big Creek filed an affidavit for warning order, detailing these attempts. Service by warning order was conducted. Big Creek was eventually granted a default judgment against the Morgans in 2012, which the Morgans learned of the next year.

In 2014 the Morgans filed a motion to set aside the default judgment. Their motion was denied and they appealed the decision, which the Court of Appeals of Arkansas denied as well. The appellate court’s reasoning was that the affidavit for warning order clearly demonstrated “diligent inquiry” through the inclusion of process server and private investigator affidavits, as well as an explanation of those efforts.

Conclusion
These two cases provide some guidelines as to what Arkansas courts consider valid constructive service. A blanket statement that diligent inquiry was made but was unsuccessful — as described in the Billings decision — is not sufficient. Additionally, attempting to prove diligent inquiry after the fact is insufficient. It is common practice that warning orders are utilized as a last resort for service upon defendants, and the language of Rule 4(f) dictates this. Only after diligent inquiry has been conducted may a warning order be issued.

However, suppose affidavits and receipts of attempted service are attached as exhibits to the warning order affidavit, but not described within the body of the affidavit. In theory, incorporating exhibits makes whatever is contained in the exhibits a part of the pleadings. To some, this seems to be sufficient for it to “appear” that diligent inquiry was conducted by the party seeking the warning order. However, the Court of Appeals of Arkansas has not yet ruled on this.

Rule 4(f) is not clear in describing the extent to which a party must prove its diligent inquiry. The most instruction provided by the rule indicates that it must “appear by the affidavit” that diligent inquiries were made. As summarized in this article, the Court of Appeals has held in two starkly different cases what it will (and will not) consider diligent inquiry for purposes of a warning order. The policy consideration at issue in these cases is clear: one should not be able to constructively notify a defendant of a pending lawsuit without first deliberately attempting to give the defendant actual notice. Any other determination would cause an increase in unnecessary default judgments — those situations where a defendant may have been able to, and desired to, defend his or her interest. The challenge now will be to analyze and predict how Arkansas courts will handle constructive service with facts that fall somewhere between the scenarios reviewed in Billings and in Morgan.

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Florida: Appellate Court Decision Addresses HUD Face-to-Face Meeting Requirement

Posted By USFN, Tuesday, January 10, 2017
Updated: Wednesday, January 4, 2017

January 10, 2017

by Matthew L. Kahl
Aldridge Pite, LLP – USFN Member (California, Georgia)

The Fifth District Court of Appeals of Florida recently ruled that where the note and mortgage specifically incorporate Housing and Urban Development (HUD) regulations, compliance with these regulations is a condition precedent to foreclosure. [Palma v. JPMorgan Chase Bank, National Association, Case No. 5D15-3358 (Fla. 5th D.C.A. Dec. 2, 2016).]

Brief History
In 2013, JPMorgan Chase Bank initiated a foreclosure action against a borrower (Palma). The borrower filed an answer to the complaint wherein she denied the bank’s allegation that all conditions precedent to foreclosure had been met, specifically: “Plaintiff failed to comply with the regulations of the Secretary of Housing and Urban Development including but not limited to the obligation to provide face-to-face counseling in 24 CFR 203.604(b).” The lower court entered judgment in favor of JPMorgan Chase, finding that the borrower’s allegations should have been pled as an affirmative defense.

The Fifth District reversed the lower court’s entry of judgment, determining that the borrower’s specific denial of the general condition precedent allegation shifted the burden to JPMorgan Chase to prove its compliance with HUD’s face-to-face meeting requirements, and the bank “wholly failed” to meet this burden.

Closing
As a result of the decision in Palma, it is important for lenders whose servicing portfolios include FHA loans to thoroughly and accurately notate its servicing records to explain all actions or inactions relating to the face-to-face interview. This includes, but is not limited to, results of the face-to-face interview, the reasonable efforts taken to arrange the interview (including copies of all correspondence sent to the borrower and evidence of at least one trip to the subject property), and explanations as to why such interview was not required if it did not occur. This information should be provided and/or available to counsel upon referral and should be incorporated into the servicer’s document execution procedures for the verification of foreclosure complaints.

Please note that this Palma opinion is not final until the time expires for rehearing and, if a motion for rehearing is filed, then upon the determination of that rehearing.

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Is the Protecting Tenants at Foreclosure Act Still Effective in Virginia?

Posted By USFN, Tuesday, January 10, 2017
Updated: Wednesday, January 4, 2017

January 10, 2017

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

When the federal Protecting Tenants at Foreclosure Act (PTFA) expired on December 31, 2014 — after being extended by Congress beyond the initial sunset date of December 31, 2012 — conventional wisdom was that it had vanished from the Virginia foreclosure landscape. Unlike its neighbor state Maryland, Virginia had not enacted a statutory scheme mirroring the PTFA, unequivocally enabling its survival post-sunset. As a result, it seemed Virginia tenants had no recourse in the event their landlord was foreclosed. Recently, however, a decision by the U.S. District Court for the Western District of Virginia has raised the specter that the PTFA may be alive and well in the Old Dominion.

The case of Wiendieck v. Wells Fargo Bank, N.A., WL 4444916 (W.D. Va. 2016), involved a tenant who had actually once owned the foreclosed property. As part of the sales transaction wherein Wiendieck sold the property to the foreclosed borrowers (giving rise to the subject deed of trust), the parties entered into a written, unrecorded “lifetime, rent-free lease.” After the foreclosure sale, Wells Fargo (the successful bidder) filed an eviction action in the county general district court. Wiendieck, in response, filed a suit in the county circuit court seeking specific performance and a permanent injunction to prevent interference with her rights as a tenant. The eviction case was non-suited and the circuit court case removed to federal court.

Contending that the PTFA was still effective in Virginia, Wiendieck relied upon Virginia Code § 55-225.10(C), which states: “If the dwelling unit is foreclosed upon and there is a tenant lawfully residing in the dwelling unit on the date of foreclosure, the tenant may remain in such dwelling unit as a tenant only pursuant to the Protecting Tenants at Foreclosure Act, P.L. No. 111-22, § 702 . . . provided the tenant remains in compliance with all of the terms and conditions of the lease agreement, including payment of rent [emphasis added].”

Wells Fargo argued that § 55-225.10(C) incorporates a now defunct PTFA, and Virginia law provides no protection under an expired statute. The court opined that while § 55-225.10(C) specifically references § 702 of the PTFA (the tenant protections), it failed to specifically reference § 704, the sunset provision. As a result, the court held that the PTFA was still effective in Virginia because § 55-225.10(C) incorporated the protections but not the expiration.

Notwithstanding ruling the PTFA was still effective, the court determined that Wiendieck did not qualify as a bona fide tenant. Since her lease expressly required no rental payment, the court held that Wiendieck could not state a claim for protection under § 55-225.10(C) because the PTFA mandates a lease payment that is not substantially below fair rental value. The court further opined that allowing Wiendieck to enforce her lifetime, rent-free lease would offend the balance Congress intended in protecting tenants who are victims of foreclosure, while also ensuring that a foreclosure purchaser would receive some return on its investment in the interim.

While this federal opinion in Wiendieck is not binding authority, it does present a possible argument that could be levied by counsel representing foreclosed tenants. Courts who are persuaded by the opinion may require PTFA notices to vacate and/or the honoring of a written lease term before awarding possession. Many servicers have continued to treat foreclosed tenants under PTFA standards regardless, so this case would have little or no impact in those instances. Wiendieck has noted her appeal with the U.S. Court of Appeals for the Fourth Circuit.

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Jurisdiction of Federal Claims: When is the Rooker-Feldman Doctrine a Bar?

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by Blair Gisi
SouthLaw, P.C. – USFN Member (Iowa, Kansas, Missouri)

Can the Rooker-Feldman doctrine bar jurisdiction of federal claims? Like any good and interesting legal question, the answer is: “it depends.” To begin, a brief description of the Rooker-Feldman doctrine is in order.

Background
The Rooker-Feldman doctrine arose from two cases: Rooker v. Fidelity Trust Co., 263 U.S. 413 (1983) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). The original purpose of the doctrine was to protect against the federal courts becoming de facto appellate courts for state-court losers. It was codified as 28 USCS § 1257. However, the idea behind Rooker-Feldman began to preclude jurisdiction in a larger scope than intended; so, in 2005, the doctrine was reined in and refined.

In Exxon Mobil Corporation v. Saudi Basic Industries Corporation, 544 U.S. 280 (2005), the U.S. Supreme Court confined the Rooker-Feldman doctrine only to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” This ruling stands for the general proposition that the doctrine does not apply to challenges of the legal conclusions found in the state court action if there is no challenge to the state court judgment. Moreover, prior litigation and even a prior related judgment do not necessarily prompt application of the Rooker-Feldman doctrine.

In the mortgage servicing industry, the doctrine is often seen in the context of alleged violations of the numerous federal regulations. It can come up where there is a question as to the manner and effect of service, as well as in the context of required affidavits for different purposes, or to obtain default judgment. Review of the relevant case law suggests that the nature of the alleged regulation violation is a good indicator as to whether Rooker-Feldman can, and should, bar federal jurisdiction.

Federal Regulation Violations
Clear violations of federal regulations lend themselves to attacks on legal conclusions found by a state court without attacking the underlying judgment itself. In other words, if the well-pled complaint alleges blatant violations of federal regulations, the federal court is unlikely to find that Rooker-Feldman bars jurisdiction.

Shortly after the Exxon case, the Sixth Circuit found that a plaintiff’s injuries that were suffered from a debt collector’s use and reliance on a false affidavit in garnishing a bank account (related to exempt versus non-exempt funds) were injuries suffered by the plaintiff independent of the state court judgment. See Todd v. Weltman, Weinberg & Reis Co., L.P.A., 434 F.3d 432 (6th Cir. 2006). The court in Todd relied on the fraudulent nature of the affidavit to find that Rooker-Feldman did not bar jurisdiction.

A recent Eighth Circuit case, Hageman v. Barton, 817 F.3d 611 (2016), involved collection of a medical debt that had been assigned from a medical center to an individual (Roger Weiss) or his collection agency. Weiss and his collection agency, in turn, hired attorney Dennis Barton. The lawyer named the medical center as the creditor and obtained a default judgment and garnished wages without expressly indicating by pleadings, or correspondence with the debtor, the real party in interest — although Barton did attach the medical center’s assignment document to the complaint filed in state court. The Eighth Circuit, in deciding Hageman, used the following standard in finding that Rooker-Feldman did not bar jurisdiction: “If a federal plaintiff asserts as a legal wrong an allegedly erroneous decision by a state court, and seeks relief from a state court judgment based on that decision, Rooker-Feldman bars [subject matter] jurisdiction [in federal district court]. If, on the other hand, a [federal] plaintiff asserts [as a legal wrong] an allegedly illegal act or omission by an adverse party, Rooker-Feldman does not bar jurisdiction.” [citing Riehm v. Engelking, 538 F.3d 952, 965 (8th Cir. 2008), which quoted the Ninth Circuit’s language in Noel v. Hall, 341 F.3d 1148, 1164 (2003) (cited favorably in Exxon, 544 U.S. at 293)].

As alluded to, where there is no clear violation of federal regulation, a court may be more inclined to bar jurisdiction under this doctrine. For example, in Crutchfield v. Countrywide Home Loans, 389 F.3d 1144 (10th Cir. 2004), the plaintiff challenged notice of the state court action as well as requested a declaratory judgment that he rescinded the subject mortgage under the Truth in Lending Act (TILA). Because the state court had previously ruled that service was appropriate, the Crutchfield court was prevented from hearing an appeal on an issue which the state court had actually decided. Additionally, the Crutchfield court found the TILA claims were so “inextricably intertwined” with the state court judgment that granting the plaintiff its requested relief would “do precisely what Rooker-Feldman prohibits: to undo the effect of the state court judgment.”

Conclusion
When in doubt (and as suggested by the Crutchfield court), look to the actual relief sought by the plaintiff. If it is unclear whether the alleged federal violation will be viewed as an independent claim, assess whether the requested relief seeks to overturn — or even review — the state court decision. If it does, the Rooker-Feldman doctrine likely applies to bar jurisdiction.

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Tenth Circuit Cautions Against National Banks Acting as Utah Foreclosure Trustee

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by Brigham J. Lundberg
Lundberg & Associates, PC – USFN Member (Utah)


Under Utah law, the trustee of a deed of trust must be: (i) an active member of the Utah State Bar; (ii) a depository institution or insurance company authorized to do business and actually doing business in Utah; (iii) a corporation authorized to conduct a trust business and actually conducting a trust business in Utah; or (iv) a title insurance company licensed to conduct insurance business in the state. [Utah Code § 57-1-21(1)(a).] However, of the above-named possible trustees, only an active member of the Utah State Bar and a Utah-licensed title insurance company may exercise the power of sale and actually carry out a nonjudicial foreclosure sale in Utah. [Utah Code § 57-1-21(3).]

The issue of the qualification of nonjudicial foreclosure trustees has been contested in Utah over the past five years, and recently came to a head with the opinion by the U.S. Court of Appeals for the Tenth Circuit in Dutcher v. Matheson, 840 F.3d 1183 (10th Cir. Nov. 2, 2016).

In Dutcher, the borrowers brought a putative class action on behalf of similarly situated homeowners who had experienced nonjudicial foreclosure at the hands of ReconTrust Company, N.A. as foreclosure trustee. These plaintiffs challenged the authority of ReconTrust to conduct nonjudicial foreclosures in the state of Utah. The borrowers alleged that, as a federally-chartered national bank with offices in Richardson, Texas, ReconTrust was prohibited from conducting nonjudicial foreclosure sales in Utah because it was not a qualified trustee under Utah Code section 57-1-21(1)(a) and (3). In response, ReconTrust asserted that it was permitted to conduct the foreclosures under federal law — specifically, 12 U.S.C. § 92a(a), as interpreted by the Office of the Comptroller of the Currency (OCC) in 12 C.F.R. § 9.7, which states that the OCC is authorized to grant national banks a special permit to act as a trustee when not in contravention of State or local law or to act in any other fiduciary capacity in which national banks’ competitors are permitted to act under the laws of the State in which the national bank is located. See 12 U.S.C. § 92a(a) [emphasis added].

The dispute turned on the question of which state’s law is incorporated by 12 U.S.C. § 92a(a) — Utah or Texas. More specifically, the identification of the state where ReconTrust is “located” for purposes of section 92a(a) is the main contention. The federal district court granted ReconTrust’s motion to dismiss the borrowers’ claims. However, shortly after that decision, another federal district court in Utah issued an order ruling on the same question, and found that the challenged foreclosures were not lawful. See Bell v. Countrywide Bank, N.A., 860 F. Supp.2d 1290 (D. Utah 2012). The Bell ruling prompted the Dutcher plaintiffs to file a motion for reconsideration, which was denied by the district court. An appeal to the Tenth Circuit followed.

On appeal, the Tenth Circuit panel rejected the borrowers’ arguments and affirmed the ruling of the federal district court in favor of ReconTrust. In doing so, however, both the Tenth Circuit majority opinion and one of the concurring opinions pointed out that it was not able to consider certain arguments raised by the borrowers on appeal because those arguments were not properly preserved below and, thus, had been waived. In fact, one of the concurring opinions went so far as to state that but for the waiver of those arguments, the judge would have ruled in favor of the borrowers and held that ReconTrust “does not have the power to conduct non-judicial foreclosure of trust deeds in Utah.”

Unfortunately, the majority and concurring opinions in Dutcher have done little to clear the muddied waters with respect to foreclosures conducted by ReconTrust in the state of Utah. As a practical matter, local title companies and national underwriters remain hesitant to insure any property that was foreclosed by ReconTrust. While the title industry in Utah may come around and, in time, agree to insure properties previously foreclosed by ReconTrust, they are unanimous in their agreement that it would be ill-advised for ReconTrust or other similarly-situated entities to conduct any future foreclosures in Utah.

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South Carolina: Consequences for Failing to Comply with Bankruptcy Court Orders Requiring Loan Modification

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by John Kelchner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Over the last two years, the Bankruptcy Court in the District of South Carolina has seen a proliferation of post-confirmation, mortgage loan modifications in Chapter 13 cases. To address this issue, the judges in this District have taken steps to clarify the process of obtaining court approval for these modifications to varying degrees. The most comprehensive process has been outlined by Judge Waites in his Chambers Guidelines regarding Loss Mitigation/Mortgage Modification (LM/MM). His preferred method of debtors obtaining a loan modification is by applying through the Default Mitigation Management LLC (DMM) Portal. This allows the bankruptcy court, as well as counsel for debtors and the creditor, to view the correspondence and documentation submitted between the parties during the loan modification process, thereby enhancing the efficiency of loan modification reviews.

Judge Waites has set forth provisions to enforce compliance with his guidelines, including a requirement that all parties are required to act in good faith throughout the LM/MM process. A recent case, In re Davis, C/A No. 15-05030-JW, slip op. (Bankr. D.S.C. Sept. 6, 2016), provides an example of the ramifications of failing to abide by Judge Waites’ Guidelines. In that case, the debtors moved for an Order Requiring Loss Mitigation/Mortgage Modification, which was entered on November 20, 2015.

On December 4, 2015 the debtors initiated the process by submitting their application through the DMM Portal. The mortgage creditor failed to timely respond to the application by notifying the debtors whether the application was complete or that additional documentation was needed. In the ensuing months, despite the bankruptcy court holding a status hearing in March 2016, the creditor continually delayed in filing responses, which led to earlier provided documents becoming stale, and the debtors having to send multiple applications for review. Ultimately, the creditor denied the debtors’ application on the basis that the investor did not give the contractual authority to the creditor to provide a loan modification offer, rendering the debtors’ efforts over the preceding months to be futile.

The debtors filed a Motion to Enforce the LM/MM Order, asserting that the mortgage creditor failed to act in good faith. The bankruptcy court ruled in favor of the debtors, awarded the debtors attorneys’ fees, and issued a civil contempt sanction. In his opinion, Judge Waites found that the creditor failed to acknowledge receipt of documentation or to timely notify the debtors of further information needed to complete their application. The multiple requests for additional documents led to “unnecessary work and expense for both Debtors and their counsel as most of the documentation was ripe for review when it was originally submitted,” but subsequently expired. Davis, at 13.

More significantly, the bankruptcy court found that the creditor failed to act in good faith by not disclosing that the debtors would not be eligible for any loan modification programs at the beginning of the LM/MM process. This lack of disclosure led the court to maintain that “[t]his case is a prototypical example of the conduct and communication issues which have plagued LM/MM reviews and [has] motivated this and other courts to implement a court-supervised Loss Mitigation and Mortgage Modification Program as a means to encourage transparent and efficient LM/MM reviews.” Davis, at 14-15. Had the creditor disclosed that the debtors would not be eligible for modification at the outset of the process, the debtors would have had more options at that time to cure their contractual arrearage.

This case highlights the urgency with which creditors must address loan modification applications in South Carolina and honor the LM/MM guidelines, specifically the disclosure of the eligibility of the debtors at the initiation of the LM/MM process.

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Are Borrowers Prohibited from Waiving Redemption Periods In Minnesota?

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

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

Minnesota is a redemption state, where the borrower’s redemption period following a foreclosure sale is most commonly six months and can be as long as twelve months. Given the “underwater” or disrepair status of many foreclosed properties, various mortgage companies and borrowers may want to shorten the lengthy foreclosure process. These parties may agree to “cash for redemptions” where the mortgage company pays the defaulting borrowers relocation funds to waive the redemption period by written agreement or providing a deed to the mortgage company shortly after the foreclosure sale occurs. However, a recent Court of Appeals decision appears to have removed that option in Minnesota. [U.S. Bank National Association v. RBP Realty, LLC, 2016 Minn. App. LEXIS 94 (Minn. Ct. App. Dec. 27, 2016).]

In RBP Realty, the court held that a borrower’s written waiver of the right of redemption following a nonjudicial foreclosure sale was unenforceable. Specifically, after the borrower defaulted on a $7.5 million (commercial) loan from the lender, the borrower and lender reached a written agreement where the borrower waived its statutory right to redeem the mortgaged property in the event of a foreclosure sale. The lender foreclosed the mortgage due to a continuing default, and at the nonjudicial foreclosure sale successfully bid a reduced amount of $4.25 million, despite the total debt balance approaching $9 million. The borrower subsequently contacted the sheriff and tendered sufficient funds to redeem from the foreclosure sale based on the lowered bid amount. The lender challenged the redemption in court, claiming that the borrower previously waived all redemption rights. The district court ruled as a matter of law that the borrower’s purported waiver was unenforceable. The Court of Appeals affirmed.

In its decision, the appellate court reviewed the language of the redemption statute at issue (Minn. Stat. § 580.23) and found no statutory language or case law permitting waiver of the borrower’s right to redemption. The Minnesota Foreclosure by Advertisement Statute (Chapter 580) is silent on the issue of waiving redemption rights. However, the court observed that the borrower’s statutory right to redeem a foreclosed property after a foreclosure sale is expressly permitted in Section 580.23. Also, the court identified that Chapter 580 contains a limited number of exceptions to the general rule that a borrower may redeem a foreclosed property within six months of a foreclosure sale (e.g., other redemption period lengths may apply, including twelve months and five weeks), but a private agreement between a lender and borrower is not among the listed exceptions to the general rule.

As a result of this recent judicial decision, mortgage servicers should consider immediately halting all cash for redemption-type programs that ask borrowers to waive redemption periods for Minnesota foreclosures, or that involve seeking post-sale deeds from borrowers for the purpose of avoiding redemption periods. It is possible that the courts involved with this case could have held differently if the foreclosure was conducted judicially instead of by advertisement (and the court approved the written waiver as a settlement agreement prior to enforcement), or if the borrower provided a deed with non-merger language to the lender instead of a waiver agreement. Nonetheless, either approach appears risky in light of the strong opinion by the court looking to fully preserve a borrower’s right to redeem a property following foreclosure. Until the Minnesota Supreme Court reverses course, redemption periods appear unwaivable in Minnesota.

It is important to note, however, that this development does not mean that borrowers and lenders are always stuck with lengthy redemption periods in Minnesota. Under Minnesota Statutes Section 582.032, a foreclosing party can reduce a redemption period for a qualifying property to just five weeks where the borrower abandons the property. The reduced redemption period can be obtained by the foreclosing party through an accelerated court process and judicial order.

There is an additional point to glean from the RBP Realty case. In Minnesota, competitive bidding at sheriff’s sales is relatively uncommon given the lengthy redemption periods that often apply (as well as low interest rates in the current environment). As a result, reduced or specified bids should be carefully considered in Minnesota and used with hesitation. If the lender in the case summarized here had bid full debt instead of a low, specified bid, the likelihood of any redemption by the borrower or resulting litigation would have been vastly reduced. Instead, it is far more likely that the lender would have kept the property with a full debt bid as ultimately intended or have been happy with receiving redemption funds in the amount of a full debt balance.

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Foreclosure Sale Postponement & Loss Mitigation Consideration: 11th Circuit Weighs In

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Stephen Collins
Sirote & Permutt, P.C. – USFN Member (Alabama)

On October 7, 2016 the Eleventh Circuit Court of Appeals analyzed a mortgage servicer’s duty to review a complete loss mitigation application received more than thirty-seven days prior to a postponed foreclosure sale. [Lage v. Ocwen Loan Servicing, LLC].

In Lage, the borrowers defaulted on a mortgage secured by property in Florida. As a result, the servicer filed a complaint for foreclosure. The state court subsequently entered a final judgement of foreclosure and Ocwen scheduled the foreclosure sale for January 29, 2014.

Factual Background & Timeline — On January 8, 2014 (three weeks before the sale) the borrowers faxed Ocwen a loss mitigation application. On January 24 (at a mediation) Ocwen told the borrowers that once they submitted one additional paystub Ocwen would evaluate their application. The borrowers submitted the requested paystub on January 27, 2014.

On January 28, the foreclosure sale scheduled for the 29th was canceled and re-scheduled for March 14, 2014. Over the next few weeks, Ocwen notified the borrowers that it needed additional information to review their application. On March 7, Ocwen informed the borrowers that it had received all of the necessary information and on March 9, Ocwen denied the application as untimely because the complete application was received just seven days prior to the sale. Ocwen went forward with the March 14, 2014 foreclosure sale.

The borrowers remained in the home for several months after the foreclosure sale and sent Ocwen a Notice of Error (NOE) alleging that Ocwen violated Reg. X in reviewing their application. Ultimately, the borrowers sued Ocwen in federal court under RESPA for failing to review its application within thirty days as required by Reg. X, Section 1024.41(c)(1), and for an inadequate response to the borrowers’ NOE.

Trial Court — The trial court granted summary judgment in favor of Ocwen and held that Ocwen had no duty to review the application because the borrowers submitted their application on January 8, 2014 and the regulation did not become effective until two days after that (January 10, 2014). With respect to the inadequate response to the NOE claim, the trial court concluded that the borrowers failed to show — as required by RESPA — that they suffered actual damages or were entitled to statutory damages. The borrowers appealed.

On Appeal — The Eleventh Circuit found that it was unnecessary to evaluate whether the regulation’s January 10, 2014 effective date applied to the borrowers’ January 8, 2014 faxed application since the application was not submitted timely at the outset. Specifically, the borrowers completed their application too late to trigger Ocwen’s duty to evaluate. The court reasoned that Section 1024.41 does require a servicer to review an application within thirty days of receiving a complete application; however, Section 1024.41(c)(1) provides that a servicer’s duty to evaluate an application is only triggered if the servicer receives the complete application more than thirty-seven days before the foreclosure sale.

For the sake of argument, the court accepted the borrowers’ claim that they delivered a complete application to Ocwen on January 27, 2014, which is the date they provided the additional paystub as instructed by Ocwen at the mediation. Since Ocwen received the complete application just two days before the originally scheduled sale date, Ocwen’s duty to review the application was not triggered.

Because Ocwen’s obligation to review was never triggered, it is irrelevant whether Ocwen completed its review within thirty days as required by Section 1024.41(c). The borrowers claimed that since subsection 1024.41(b)(3) discusses (in the context of determining borrower protections) when a foreclosure sale occurs, the appropriate method for counting the thirty-seven days for purposes of a servicer’s receipt of a complete application is when the foreclosure sale is actually conducted.

In considering this argument, the court reviewed the Consumer Financial Protection Bureau’s (CFPB) published Commentary and found that the CFPB rejected a proposal submitted during the comment period that would have afforded borrower protections (and expanded servicer obligations) if a foreclosure sale was postponed after a complete application was received. The CFPB recognized that if a borrower’s late application could become timely due to a sale postponement, a servicer may be less willing to postpone a sale.

A postponement of the foreclosure sale is, of course, extremely beneficial to a borrower. The CFPB did not want the burdensome evaluation requirements to entice servicers to move forward with a foreclosure sale in lieu of delaying a sale and assisting the borrower with foreclosure alternatives. For this reason, the court held that the final rule published by the CFPB does not mandate that a servicer review a complete application that is received within thirty-seven days of a foreclosure sale, even if that sale is postponed.

The borrowers’ claim that Ocwen’s response to the NOE was inadequate was also rejected. The court found that to recover under RESPA, a borrower must prove either actual or statutory damages. Because the court ruled that Ocwen had no duty to review the loss mitigation application, the borrowers were precluded from recovering damages from a breach of a duty that did not exist. To recover statutory damages, the court determined that RESPA required a borrower to show a pattern and practice of noncompliance. Since the borrowers only submitted evidence of one violation, their claim for statutory damages also failed.

Conclusion — In those states comprising the Eleventh Circuit (Alabama, Georgia, and Florida), a servicer is not legally required to review a loss mitigation application received within thirty-seven days of a foreclosure sale — even if the foreclosure sale is postponed to a later date.

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Rhode Island Federal District Court Decision with Pinti Implications

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Joseph A. Camillo, Jr. and Amy N. Azza
Shechtman Halperin Savage, LLP – USFN Member (Rhode Island)

On October 11, 2016 the District Court of Rhode Island issued a decision in Martins v. Federal Housing Finance Agency, C.A. No. 15-235-M-LDA, relating to compliance with the contractual terms of a mortgage. Specifically, plaintiff Martins filed suit alleging that the defendants Federal Housing Financing Agency, Fannie Mae, and Green Tree Servicing LLC violated her due process rights by failing to provide her with proper notice pursuant to paragraph 22 of her mortgage, and thus conducted an invalid foreclosure. Fannie Mae voluntarily rescinded their nonjudicial foreclosure but filed a counterclaim for judicial foreclosure.

While the nonjudicial foreclosure sale was rescinded — and any claims premised on the nonjudicial foreclosure were rendered moot — the court noted that Martins raised serious issues about the constitutionality of Fannie Mae’s procedures in a nonjudicial proceeding, and that “someone with skin in the game should litigate the issue.” This, no doubt, will open the door to borrowers alleging a constitutionally defective foreclosure under section 22, if not followed.

More importantly, the court in Martins reasoned that the change in process of foreclosure (from nonjudicial to judicial) does not alleviate compliance with the paragraph 22 notice requirements in the mortgage. Despite the fact that the judicial foreclosure statute (R.I. Gen. Laws § 34-11-22) does not expressly require compliance with the mortgage document, if a mortgagee agrees to give a certain notice before a foreclosure (judicial or nonjudicial) then the mortgagee must do that which it agreed, and comply with paragraph 22 of the mortgage as a matter of contract law.

In conclusion, just as the Massachusetts Supreme Court ruled in Pinti v. Emigrant Mortgage Company, Inc., SJC-11742 (July 17, 2015), that a foreclosing mortgagee must send borrowers a default notice that complies strictly with the requirements of the mortgage, the Martins decision (although a federal district court case) serves notice in Rhode Island that lenders seeking to foreclose in Rhode Island (judicially or nonjudicially) must strictly comply with section 22 of the Fannie Mae/Freddie Mac uniform instrument. Servicers should review their Rhode Island default notices carefully to ensure compliance verbatim with the mortgage terms for all nonjudicial and judicial foreclosures.

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