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Connecticut: Appellate Court Provides Guidance on Amended Rule

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

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

The Connecticut Appellate court has provided guidance on an amended court rule. [See Citigroup Global Markets Realty Corporation v. Christiansen, 163 Conn. App. 635 (2016)]. The rule, Connecticut Practice Book § 61-11, limits the automatic stay provisions in a foreclosure matter where multiple motions to open the judgment have been filed.

Here in Connecticut an appeal is possible after a final foreclosure judgment. In a foreclosure, each time the court sets a law day (which triggers the day that title passes to the plaintiff) an appeal would be possible. Upon entry of judgment, an automatic stay occurs for the time period in which the defendant has to appeal. During that automatic stay period all actions to enforce a judgment are stayed. This includes the running of the law days and, accordingly, the plaintiff’s title vesting date.

As the court stated in Christiansen: “Prior to October, 2013, a court’s denial of a motion to open a judgment of strict foreclosure automatically stayed the running of the law days until the twenty-day period in which to file an appeal from that ruling had expired, and, if an appeal was filed, that initial appellate stay continued until there was a final determination of the appeal.” The court described the rule change as follows: “Practice Book § 61-11 was amended effective October 1, 2013, however, to address this problem by the addition of subsections (g) and (h). Practice Book § 61-11(g) applies in this appeal and provides in relevant part: ‘In any action for foreclosure in which the owner of the equity has filed, and the court has denied, 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, in an affidavit accompanying the motion, that the motion was filed for good cause arising after the court’s ruling on the party’s most recent motion ....’”

Two previous motions to open the judgment had been denied against the defendant in Christiansen. The third motion did not have an accompanying affidavit. As a result, the court found that the law days continued to run, and title vested in the plaintiff. Because title vested, the court found the appeal moot. Upon vesting, there was no longer any practicable relief that the court could afford the defendant.

Christiansen shows that the Connecticut Practice Book has been cured to prevent a borrower from endlessly extending the law day. It worked in this case, as title could vest since there was no appellate stay in effect.

Editor’s Note: The author’s firm represented the substituted plaintiff, Mid Pac Portfolio, LLC, in the case summarized in this article.

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California: Office of the Los Angeles City Attorney Receivership Program

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

by Kayo Manson-Tompkins
The Wolf Firm – USFN Member (California)

On August 12, 2015 Los Angeles City approved a receivership program in order to address the ongoing “blight” that has continued to exist with vacant properties (City of Los Angeles Report No. R15-0212). Under this program, if the efforts of Code Enforcement and Building & Safety have not resulted in a remedy or abatement of the violations or nuisances, contract attorneys will be hired to file a receivership action. Once a receiver is appointed, the receiver will take steps to remedy or abate the violations or nuisances; a secured loan can be obtained to do so.

This loan will have first lien priority over all existing liens secured by the property in order to recover full costs of abatement, as well as the costs associated with the receivership (including attorneys’ fees and costs). Under the program servicers and investors may encounter properties where the amount of recovery post-sale has been significantly reduced by the receiver’s first-priority lien. Another option for a receiver is to force a sale of the property so as to recover these costs.

As a reminder, Los Angeles has a foreclosure registration requirement whether the property is vacant or occupied. The city also has a vacant registration program regardless of whether the property is in foreclosure. Furthermore, once the property has gone to sale, there is a registration program for REOs.

To prevent incurring stiff penalties (and, if applicable, having a receiver appointed) it is imperative that servicers and investors review their Los Angeles, California portfolios. Go to Los Angeles Housing Department Foreclosure Registry Program at http://hcidla.lacity.org/ForeclosureInformation and have your property preservation company register the properties.

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Alaska Supreme Court Rules that Foreclosure is “Debt Collection” Under FDCPA, and Opens Back Door to Liability under Unfair Trade Practices Act

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

by Richard Ullstrom
RCO Legal – Alaska, Inc. – USFN Member (Alaska)

A divided Alaska Supreme Court has ruled that nonjudicial foreclosures constitute “debt collection” under the federal Fair Debt Collection Practices Act (FDCPA), making a foreclosure trustee a “debt collector” even if the trustee confined its activities to those required to process the foreclosure. The Court also held that an FDCPA violation was per se a violation of the Alaska Unfair Trade Practices and Consumer Protection Act (UTPA), departing from established case law holding that the UTPA did not apply to transactions involving real property, including nonjudicial foreclosures.

In Alaska Trustee, LLC v. Ambridge, the foreclosure trustee sent the Ambridges a statutorily-required Notice of Default (NOD) that complied with Alaska law but which did not state the total amount of the debt as required by the FDCPA. The Ambridges sued, claiming that this violated the FDCPA and UTPA, although they had not been deceived by the NOD in any way. The trial court ruled in favor of the Ambridges, and the Alaska Supreme Court affirmed.

On the FDCPA claim, the Supreme Court chose to follow the line of cases determining that foreclosure constituted “debt collection” even when no demand for payment of the debt was made and the actions of the foreclosure trustee were only those needed to enforce the creditor’s security interest in the collateral. The dissenting justice opined that this nullified the exclusion of enforcers of security interests from most of the FDCPA, but the majority reasoned that this exclusion applied only to auto repossession agencies and similar entities.

On the UTPA claim, the majority ruled that the FDCPA breach also violated the UTPA because the FDCPA provided that a violation was to be considered an unfair or deceptive act or practice in contravention of the Federal Trade Commission Act (FTCA). The Alaska UTPA, in turn, prohibits unfair or deceptive acts or practices and requires that the Alaska courts give consideration to interpretations of the FTCA in applying the UTPA. Thus, even though the NOD was not objectively unfair or deceptive, it was considered a UTPA violation simply because it violated the FDCPA. In reaching this result, the Supreme Court distinguished longstanding precedent that the UTPA did not apply to real property transactions, including foreclosures, by noting that “there are different avenues to coverage under the UTPA.”

The ruling in Ambridge is significant because the UTPA provides for an award of full attorney fees to a successful plaintiff, which will encourage borrowers’ attorneys to find violations of the FDCPA or federal laws with similar provisions, such as TILA.

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Washington: Proposed House Bill 2897 Expands “Criminal Trespass” Definition

Posted By USFN, Thursday, March 31, 2016
by Kimberly M. Raphaeli
RCO Legal, P.S. – USFN Member (AK, OR, WA)

 

Washington has traditionally been a squatter-friendly state. However, recent news stories about squatters taking over homes and refusing to leave, while property owners are helpless to stop them, have resulted in an outcry by concerned citizens. The law currently requires property owners to file an eviction action or, other civil lawsuit, to obtain a writ of restitution before the sheriff can step in and forcibly remove squatters from a home. This can be difficult when a property owner does not know the identity of the persons and may not have the financial ability to pursue a civil action. While a property owner wades through this difficult legal process, the home and neighborhood suffers. Illegal activity may be present; property damage may be ongoing — all while property values decline in the neighborhood.

 

Lawmakers have taken note and introduced House Bill 2897. The bill proposes to expand the definition of criminal trespass in the first degree to include an individual not listed as a tenant on a rental agreement or as a guest in an affidavit signed by the owner of the property, who refuses to leave immediately upon demand and surrender possession of the premises to the owner (a “tenant by sufferance”). This means a property owner, after written demand to the squatters, may contact law enforcement to report an active criminal trespass and receive assistance without needing to file a civil action.

 

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Chapter 13 Trustee Issues Position Statement Regarding Notices of Payment Changes under Bankruptcy Rule 3002.1

Posted By USFN, Thursday, March 31, 2016
by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA – USFN Member (OH & KY)

 

Faye English, one of two chapter 13 trustees in Columbus, Ohio in the Southern District of Ohio, has issued a Position Statement regarding her office’s treatment of late-filed Notices of Payment Changes.
 
Rule 3002.1 of the Federal Rules of Bankruptcy Procedure (FRBP), which became effective December 1, 2011, concerns chapter 13 claims that are: (1) secured by a security interest in the debtor’s principal residence; and (2) provided for under 11 U.S.C. §1322(b)(5).

 

While reserving the right to proceed in any manner that is appropriate based upon the facts of each case, Trustee English provided the following guidance:

 

“Conduit Trustee Pay-All” Cases
Late-Filed Notices of Payment Change — In cases where any mortgage on the principal residence is being paid via conduit, the trustee will object to any Notice of Payment Change (NOPC) that was not filed at least 21 days before the new payment amount is due, as required by FRBP 3002.1(b). During the time an objection to a late-filed NOPC is pending, the trustee will continue to pay the mortgage at the previously filed, and allowed, payment amount.

 

Where the new payment is a decrease from the prior payment, it would appear that the late-filed NOPC is harmless and would benefit the debtor in the eyes of Trustee English. Pursuant to FRBP 3002.1(i)(1), the trustee will generally request an order allowing the late-filed NOPC as of its effective date.

 

In the event that allowing the late-filed NOPC will result in an overpayment to the mortgage holder, the trustee will request an order finding that the pre-petition arrearage is reduced by the amount of the overpayment. If there is no balance remaining on the pre-petition arrearage, the trustee will request an order finding that the next conduit payment is reduced by the amount of the overpayment. If there is no balance remaining on the pre-petition arrears and there are no further conduit payments to be made, the trustee will request an order directing the mortgage holder to return the overpaid funds to the trustee.

 

Where the new payment is an increase from the prior payment, it would appear that the late-filed NOPC results in harm to the debtor in Trustee English’s view. Pursuant to FRBP 3002.1(i)(1), the trustee will request an order disallowing the late-filed NOPC and will further request a finding that precludes the mortgage holder from presenting the omitted information, in any form, as evidence in a contested matter.

 

Payment Changes in Proofs of Claim — Where a proof of claim includes payment changes beyond the initial post-petition payment amount, the trustee will not recognize the payment changes. The mortgage holder must file a separate NOPC in compliance with FRBP 3002.1(b).

 

“Direct Pay” Cases
In direct pay cases, the trustee will take no action with respect to Notices of Payment Changes.

 

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Connecticut Supreme Court Upholds Statute Affecting “Nominee” Recording Fees

Posted By USFN, Thursday, March 31, 2016
by Robert J. Wichowski
Bendett & McHugh, PC – USFN Member (CT, ME, VT)

 

In the case of MERSCORP Holdings, Inc. v. Malloy, 320 Conn. 26 (Feb. 23, 2016), the Connecticut Supreme Court upheld the validity of a statute that tripled the recording fees for any entity referring to itself as a “nominee.” The Connecticut State Legislature amended Connecticut General Statute § 7-34a (a) (2) and § 49-10 (h) in 2013 to greatly increase the cost of recording any documents related to a mortgage by the nominee of that mortgage. The legislation did not alter or affect the recording fees for filers not identified as a “nominee of a mortgagee.”

 

On July 2, 2013, facing the effective date of the legislation of July 15, 2013, MERSCORP Holdings, Inc. and Mortgage Electronic Registration Systems, Inc. (as joint plaintiffs) filed an action in Connecticut Superior Court against various officials of Connecticut. The lawsuit requested an order declaring the above-referenced statutes unconstitutional and, therefore, void and ineffective for any purpose. After the plaintiffs were unsuccessful in seeking a temporary injunction that would have exempt them from the legislation, the parties filed cross-motions for summary judgment. The trial court granted summary judgment in favor of the defendants; the plaintiffs appealed. The Connecticut Supreme Court transferred the matter from the Appellate Court docket to its own docket on its own motion, indicating a matter of public interest.

 

Non-parties to the case (amici) filed briefs in the appeal. After argument and consideration of each of the amici briefs, the Supreme Court issued an extensive opinion addressing, and denying,  each of the plaintiffs’ claimed grounds for unconstitutionality.

 

The parties had agreed that one of the reasons that the legislation was enacted was to generate revenue and balance the budget, which amounted to a legitimate purpose for the legislation. Accordingly since the legislation served a legitimate purpose, and because the plaintiffs did not discount every conceivable potential legitimate purpose for the legislation, the legislation did not violate the equal protection clauses of the United States or the Connecticut constitutions. The legislation was likewise not found to violate the dormant commerce clause of the U.S. Constitution, as the increase in fees does not inhibit interstate commerce.

 

Because the plaintiffs failed to meet the extremely weighty burden necessary to overturn a statute on constitutional grounds, the ruling of the trial court granting summary judgment for the defendants was affirmed, effectively ending the challenge of MERS to this statute.

 

Editor’s Note: Further coverage of the Malloy case summarized in this article will be published in the USFN Report (spring 2016 Ed.).


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Ninth Circuit: Holdover Foreclosed Borrower Filing for Bankruptcy after Eviction Judgment and Writ of Possession Has No Equitable Possessory Interest

Posted By USFN, Thursday, March 31, 2016
by Kathy Shakibi
McCarthy & Holthus LLP - USFN Member (WA)

 

An unlawful detainer action is designed as a summary process limited in scope to a determination of the right of possession of property; however, unlawful detainer actions do not always proceed within their anticipated scope and timeline. In the case of post-foreclosure evictions, challenges to the foreclosure may be raised in the incorrect court, notices of removal may be filed with courts lacking jurisdiction, and bankruptcy protections may be improperly sought.

 

Recently, the U.S. Court of Appeals for the Ninth Circuit addressed a scenario where unlawful detainer proceedings had resulted in a judgment and writ of possession in the state court, and the holdover foreclosed borrower filed a bankruptcy petition prior to the lockout. Eden Place, LLC v. Perl (In re Perl), 2016 U.S. App. Lexis 246 (9th Cir. Jan. 8, 2016). The Court of Appeals held that the lockout was not a violation of the bankruptcy stay because the debtor’s continued physical possession did not amount to an equitable possessory interest. (The Ninth Circuit is comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.)

 

In Perl, the debtor owned a duplex that was foreclosed upon and purchased by a third party. The third party timely recorded a trustee’s deed upon sale, which perfected and transferred title. The purchaser then commenced an unlawful detainer action. After the purchaser had obtained a judgment and writ of possession, but before the lockout occurred, Perl filed a skeletal chapter 13 petition with no schedules, financial affairs statement, or proposed plan. The sheriff subsequently completed the lockout pursuant to state law, and Perl filed an emergency motion to enforce the automatic stay — asserting that the lockout interfered with his equitable interest based on his continued physical possession of the property.

 

The bankruptcy court determined that Perl had a bare possessory interest, which was a protected interest subject to the automatic stay, and ruled that the purchaser had violated the bankruptcy stay by proceeding with the lockout. No further determination regarding sanctions or damages was made because Perl failed to appear at the creditors’ meeting, and the bankruptcy case was dismissed. The purchaser appealed to the Bankruptcy Appellate Panel (BAP), which upheld the lower bankruptcy court’s ruling. The purchaser then appealed to the Ninth Circuit.

 

The Ninth Circuit started its analysis with the premise that filing a bankruptcy petition accomplishes the: (1) creation of a bankruptcy estate, which includes all legal or equitable interests of the debtor in property as of the date of filing, 11 U.S.C. § 541, and (2) imposition of a stay applicable to a number of acts, including any act to obtain possession of property of the estate. 11 U.S.C. § 362(a)(3). The Court of Appeals then examined whether the debtor had any legal or equitable interest in the property. Under the state law, title to the property had transferred to the purchaser and was perfected. The unlawful detainer court had further adjudicated the issue of possession and, by entering a judgment and writ of possession, had extinguished Perl’s possessory interest in the property. Where the BAP had held that the continued physical possession had conferred on the debtor a protectable equitable possessory interest in the property, the Ninth Circuit disagreed.

 

The Court of Appeals reasoned that concluding that an occupying resident retains an equitable possessory interest is inconsistent with the state eviction laws (specifically California Code of Civil Procedure § 1161a), which contemplate a final and binding adjudication of rights of immediate possession. The unlawful detainer judgment and writ of possession divested Perl of all legal and equitable possessory rights. Accordingly, the sheriff’s lockout did not violate the automatic stay.

 

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Ninth Circuit: TILA’s Notice of Loan Transfer is Not Retroactive

Posted By USFN, Thursday, March 31, 2016

by Kathy Shakibi
McCarthy Holthus LLP – USFN Member (WA)
 
Federal law requires the sending of a written notice to a borrower when a loan is sold or transferred, in addition to when the servicing of the loan is transferred. While the latter notice requirement has existed since before the financial crisis of 2008, [Real Estate Settlement Procedures Act, Title 12 U.S.C. §2605(b)], the former notice provision is comparatively recent. It was enacted in 2009 as an amendment to the Truth in Lending Act (TILA), Title 15 U.S.C. § 1641(g). The U.S. Court of Appeals for the Ninth Circuit has held that TILA’s notice provision is not retroactive. [Talaie v. Wells Fargo Bank, NA, 808 F.3d 410 (9th Cir. Dec. 14, 2015)].
 
The Talaie plaintiffs had brought a putative class action against Wells Fargo and US Bank in connection with a loan modification on their residence. Various state and federal law claims were alleged, including that when their mortgage loan was transferred from Wells Fargo to US Bank in 2006, they were not provided written notice of the loan transfer under TILA. Since TILA’s notice provision was enacted in 2009, the requirement would apply to the Talaie loan only if the provision operated retroactively.
 
TILA’s notice provision requires that “not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer.” If the new creditor does not provide written notice, the statute authorizes a private right of action for actual damages, penalty, and attorney fees. The Ninth Circuit based its analysis on the U.S. Supreme Court decision in Landgraf v. USI Film Products, 511 U.S. 244 (1994), which considered four principles in determining whether to apply a statute retroactively. That is, if a new statute would (1) impair the rights that a party possessed when he or she acted, (2) increase a party’s liability for past conduct, or (3) impose new duties with respect to a completed transaction, then (4) courts should not give retroactive effect to the statute without clear congressional intent favoring retroactivity. Id at 280.
 
The concerns discussed in Langdorf were present in Talaie. At the time of the loan transfer, the defendants had a right to sell or transfer without notice, and retroactive application of the statute would increase the defendants’ liability for past conduct, as well as impose new duties on completed transactions. Next, the Ninth Circuit looked at the text and history of section 1641(g) and found no clear indication that Congress intended for the statute to apply to loans that had transferred prior to its enactment. The Court of Appeals reasoned that Congress would not have subjected creditors to liability and penalty without providing a way to comply with the statute (for loans predating its enactment). Accordingly, the Ninth Circuit held that section 1641(g) does not apply retroactively because Congress did not express a clear intent that it do so.
 
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Washington: House Bill 2954 Provides for Study of Consumer Protections for Manufactured Homes Buyers

Posted By USFN, Tuesday, February 23, 2016
Updated: Wednesday, February 24, 2016

February 23, 2016

 

by Susana Chambers
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)

In the wake of a series of articles published by The Seattle Times, critical of the lack of consumer protections for buyers of manufactured homes in Washington State, legislators recently passed House Bill 2954. The February 1 bill tasks the Washington Department of Commerce (Commerce) to study the sale and financing of manufactured homes, and to develop a comparison of consumer protections provided to buyers of manufactured homes contrasted to those available to the buyers of residential property under Washington’s Deed of Trust Act.

Owners of residential property in Washington currently enjoy greater consumer protections — including extended timelines to cure defaults, foreclosure mediation, and a prohibition against deficiency judgments for obligations secured by a deed of trust. Over the next year, Commerce will study manufactured home sale and financing methods, disclosure requirements and practices, repossession processes, and the status of manufactured homes under state law pertaining to real property.

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Washington: Proposed House Bill 2897 Expands “Criminal Trespass” Definition

Posted By USFN, Tuesday, February 23, 2016
Updated: Wednesday, February 24, 2016

February 23, 2016

 

by Kimberly M. Raphaeli
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)

Washington has traditionally been a squatter-friendly state. However, recent news stories about squatters taking over homes and refusing to leave, while property owners are helpless to stop them, have resulted in an outcry by concerned citizens. The law currently requires property owners to file an eviction action or, other civil lawsuit, to obtain a writ of restitution before the sheriff can step in and forcibly remove squatters from a home. This can be difficult when a property owner does not know the identity of the persons and may not have the financial ability to pursue a civil action. While a property owner wades through this difficult legal process, the home and neighborhood suffers. Illegal activity may be present; property damage may be ongoing — all while property values decline in the neighborhood.

Lawmakers have taken note and introduced House Bill 2897. The bill proposes to expand the definition of criminal trespass in the first degree to include an individual not listed as a tenant on a rental agreement or as a guest in an affidavit signed by the owner of the property, who refuses to leave immediately upon demand and surrender possession of the premises to the owner (a “tenant by sufferance”). This means a property owner, after written demand to the squatters, may contact law enforcement to report an active criminal trespass and receive assistance without needing to file a civil action.

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Ohio Supreme Court: Revised Code Closes Door on Mortgage Avoidance Actions

Posted By USFN, Monday, February 22, 2016
Updated: Wednesday, February 24, 2016

February 22, 2016

 

by Rick DeBlasis
Lerner, Sampson & Rothfuss – USFN Member (Kentucky, Ohio)

On February 16, 2016 the Ohio Supreme Court closed the door on mortgage avoidance actions based on a defect in execution where the mortgage has been recorded. See, In re Messer, Slip Opinion 2016-Ohio-510. Effectively reversing 200 years of Ohio jurisprudence, a unanimous Court held that R.C. 1301.401, a new provision of the Ohio Revised Code, (1) applies to all recorded mortgages in Ohio; and (2) acts to provide constructive notice to the world of the existence and contents of a recorded mortgage that was deficiently executed. Syllabus. Compare Johnston v. Haines, 2 Ohio 55 (1825) (“… the mere fact of recording a deed, without the legal requisites, gives it no validity.”); Citizens National Bank v. Denison, 165 Ohio St. 89, 133 N.E.2d 329 (1956) (“A mortgage by two persons is not properly executed in accordance with the provisions of R.C. 5301.01, and is not entitled to record under R.C. 5301.25, and the recording thereof does not constitute constructive notice to subsequent mortgagees, where there is a failure to follow the statutory requirements …”).

The Messer case began, as defective mortgage cases often do, in the bankruptcy court. Darren and Angela Messer are owners of a home located in Canal Winchester, Ohio, which they bought with the help of a first mortgage loan. The Messers initialed each page and signed the mortgage. It is recorded with the county recorder. However, there is no notary signature following the acknowledgement clause.

The Messers filed a chapter 13 bankruptcy petition. Their chapter 13 plan provides, in part, that the debtors will file an adversary complaint in the bankruptcy court, exercising the trustee’s “strong-arm power” whereby a bona fide purchaser may avoid a defective mortgage and treat its holder as an unsecured creditor to receive, with all other unsecured creditors, a fraction of its claim. The plan was confirmed, and the Messers instituted the adversary proceeding. The mortgagee moved to dismiss, asserting that R.C. 1301.401 enacts a change in Ohio law, such that an interest holder can no longer claim bona fide purchaser status and can no longer seek to avoid a defective, but recorded, mortgage. The bankruptcy court noted:

Upon reviewing the briefing of both Parties and the arguments made at the hearing on Defendant’s Motion to Dismiss, this Court determined that its interpretation of O.R.C. § 1301.401 would be dispositive of the case. Upon research, this Court found no interpretation of O.R.C. § 1301.401 by the Supreme Court of Ohio – or any other court. There is no dispute in this case that the Mortgage was improperly executed under O.R.C. § 5301.01, and there is no dispute that prior to the enactment of O.R.C. § 1301.401 the Plaintiffs could have avoided the mortgage. The questions concern whether the new statute changes the result.

The Supreme Court focused entirely on the language of R.C. 1301.401, which it found to be clear, broad, and unambiguous. If the mortgage is of record, defects in its execution will not render it subject to attack by an erstwhile “bona fide purchaser.”

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Proportionality Requirement in Revised Fed. R. Civ. P. 26(b)(1): U.S. District Court of Connecticut Interprets

Posted By USFN, Monday, February 22, 2016
Updated: Wednesday, February 24, 2016

February 22, 2016

 

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

Discovery under the Federal Rules has long been governed by the principles of proportionality; however, the revised Rule 26(b)(1) — effective December 1, 2015 — has put increased importance on the concept and made it a central term of the Rule, which now reads:


Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable. Rule 26(b)(1) (emphasis added).


The U.S. District Court of Connecticut is among the first to interpret the revised Rule in the context of a discovery dispute, and can be utilized to prohibit depositions of a party. In Williams v. Rushmore Loan Management Services LLC, 3:15-cv-00673 (RNC), an action concerning alleged violations of the Fair Debt Collection Practices Act (FDCPA), the plaintiff sought to depose two employees of the defendant loan servicer when, procedurally, he had already moved for summary judgment based on liability. The defendant loan servicer filed a motion for protective order, asserting that the FDCPA provides a maximum statutory penalty of $1,000 [15 U.S.C. § 1692K (a)(2)]; there is no provision for punitive damages, and the plaintiff was limited to actual damages [Gervais v. O’Connell, Harris & Associates, Inc., 297 F. Supp. 2d 435, 439-40 (D. Conn. 2003)], which he had described as “garden variety” emotional distress.

On February 16, 2016 the court granted the loan servicer’s motion for protective order, finding the requested depositions of the servicer’s employees to be of “marginal utility” in the case, and holding that the cost of preparing for (and taking) the out-of-state depositions was “disproportionate to the needs of the case and the plaintiff’s potential recovery.”

The court’s decision in Williams sets an important precedent and reinforces the parties’ obligations to consider proportionality when serving discovery. By requiring litigants to show a logical nexus between the claims and defenses in an action and the discovery sought, the court eliminates “unnecessary or wasteful discovery” (as U.S. Supreme Court Chief Justice Roberts instructed in his 2015 Year-End Report, which was cited by the Connecticut District Court in Williams).

Counsel for loan servicers can utilize this recent decision to limit or prohibit deposition practice in consumer claims under the FDCPA, RESPA, and other statutory claims in which the actual damages are relatively small.

Editor’s Note: The author’s firm represented Rushmore Loan Management Services, LLC in the summarized proceedings.

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Iowa Supreme Court: Interprets Foreclosure Judgment Statute of Limitation

Posted By USFN, Thursday, February 4, 2016
Updated: Friday, February 19, 2016

February 4, 2016

 

by Benjamin W. Hopkins
Petosa, Petosa & Boecker, L.L.P. – USFN Member (Iowa)

On January 29, 2016 the Iowa Supreme Court issued its decision in U.S. Bank National Association v. Callen, Iowa No. 14–1536, conclusively interpreting Iowa’s foreclosure judgment statute of limitation to bar enforcement of the judgment only, not the underlying mortgage.

The case involved a foreclosure judgment entered in February 2010. The mortgagee filed a notice of rescission in March of 2012, after the two-year limitation period set forth in Iowa Code Section 615.1.

Subsequently, the mortgagee filed a foreclosure action in October 2013. The mortgagor raised counterclaims for quiet title and wrongful foreclosure, contending that the notice of rescission was untimely and that the mortgagee’s right to foreclose the underlying mortgage was lost with the running of the two-year statute of limitation.

The case rested on the interpretation of the phrase “all liens” in Iowa Code Section 615.1, which provides that two years after entry of a foreclosure judgment, “all liens shall be extinguished.” The mortgagor urged the interpretation of “all liens” to include the underlying mortgage lien. However, the Supreme Court affirmed the lower courts’ rulings, concluding that when interpreted in light of the statute as a whole, “all liens” referred only to foreclosure judgment liens. Consequently the mortgagee retained the right to foreclose the mortgage.

Editor’s Note: The author’s firm represented the appellee U.S. Bank National Association in the case summarized in this article.

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Illinois: An Invalid and Unenforceable Mortgage May Be Saved Through a Reformation Action

Posted By USFN, Thursday, February 4, 2016
Updated: Friday, February 19, 2016

February 4, 2016

 

by Douglas A. Oliver
Anselmo Lindberg Oliver – USFN Member (Illinois)

The Illinois Court of Appeals for the Second District recently held a mortgage to be invalid because of the manner in which the borrowers signed it. At the same time, the appellate court left open the possibility that the mortgage could be judicially reformed, thus all hope was not lost. Improperly executed mortgages are not common, but they are also not rare. This case, and how a seemingly intractable problem can be approached by foreclosure counsel, is worth knowing about.

On January 22, 2016 the Illinois Appellate Court for the Second District released its opinion in CitiMortgage, Inc. v. Parille, 2016 Ill. App. 2d 150286, holding that the mortgage in question was unenforceable. Two basic factors led to this conclusion; first, the husband-and-wife borrowers held title as “tenants by the entirety.” This special type of joint tenancy is allowed by Illinois law and is available only to spouses and only with respect to their principal residence. When an Illinois married couple holds title as tenants by the entirety, neither spouse can encumber or sell the property without the participation of the other. In other words, if one spouse wants to mortgage his or her share of the marital residence and not the whole thing, the other spouse would also have to sign the mortgage — otherwise the encumbrance would be ineffective.

That is precisely what happened in the Parille case: after a series of financing and refinancing transactions in the short space of three years, the wife took out a fourth note and mortgage on the marital residence. This time, only the wife signed the note and mortgage as a “borrower.” The husband signed the mortgage but, for the reasons that follow, without legal effect.

The second factor that caused the mortgage to be invalid was the manner in which the husband signed it. The wife executed the mortgage in the “normal” manner — without any restrictive language accompanying her signature. The husband, however, signed “only to waive homestead rights.” This means that the husband’s signature signified he was only waiving certain bankruptcy and judgment protections that apply to homesteads in Illinois; he did not indicate that he was agreeing to encumber his share of the marital residence, or that he consented to his wife encumbering part or all of her share.

This scenario is not unheard of. Mortgages are sometimes executed incorrectly, such that not all title holders sign in the correct capacity or manner so as to encumber their full interest. The principal method of dealing with this situation is to include in the foreclosure complaint a count to reform the mortgage. In such a count, it is alleged that the lender, borrower, and other title holders intended to fully encumber the title holders’ interests because they would not otherwise have been able to get the loan. The essence of the claim is that the parties agreed to a full encumbrance but the documents signed at closing did not properly reflect their agreement and did not fully carry out their intent. The court is then requested to enter an order amending the documents to correctly reflect a full encumbrance.

In the Parille case, the plaintiff-lender asserted a count to reform the mortgage. In addition, the lender asserted claims including equitable lien, unjust enrichment, and fraud. The trial court dismissed all of these claims, including that the mortgage should be reformed. The lender appealed.

Because the note and mortgage reflected on their face that the wife was the only borrower and the husband signed the mortgage merely to waive homestead rights, the appellate court found that the lender could not plead facts to support any equitable claim except one: that the documents did not truly reflect the parties’ intent. The appellate court, therefore, affirmed the dismissal of all claims, except the claim to reform the mortgage. (The dismissal of borrower fraud claims was sustained as time-barred.)

The end result was that the case was remanded to the trial court for determination of whether or not the borrower and her spouse actually intended to encumber the entire property in order to get the loan proceeds. While a positive outcome for the lender is not assured, the lender at least has a means to attempt to fully enforce the note and mortgage.

This case illustrates how improper mortgage execution — a very serious problem — can potentially be solved. To pursue a count to reform, foreclosure counsel would start by gathering all of the closing documents, including the loan application, closing statements, disclosures, and other documents submitted by the borrowers or signed prior to or at the closing. Discovery would then be conducted based on those documents. The aim of that discovery would be to establish that the borrowers knew that the lender expected that all title holders would subordinate their interests to the mortgage loan, otherwise the loan would not close. Outcome is generally positive in the vast majority of cases, whether by trial or by settlement.

It should also be noted that a lender does not need to wait for a foreclosure scenario to seek to reform a mortgage. “Reformation of instruments” is a valid cause of action on its own; a case can be filed solely for that purpose.

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February e-Update

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Kentucky Supreme Court Enacts Changes to its Rules on Foreclosure Sales

Posted By USFN, Tuesday, February 2, 2016
Updated: Friday, February 19, 2016

February 2, 2016

 

by Richard M. Rothfuss and Bill L. Purtell
Lerner, Sampson & Rothfuss – USFN Member (Kentucky, Ohio)

The Kentucky Supreme Court amended its Rules of Administrative Procedures on December 31, 2015 to alter the way in which Master Commissioners handle foreclosure sales, amongst other duties. The full text of the rules for “Part IV: Master Commissioners of the Circuit Court” can be found at: http://courts.ky.gov/courts/supreme/Rules_Procedures/201525.pdf.

The first change was to renumber all sections of the rule. A new Section 1 was inserted to reference the authority and scope of the Supreme Court to institute these rules, which then changed the number for every subsequent section (i.e., new section 4 is old section 3, etc.). The Supreme Court then carved out a new Section 5 specifically for Judicial Sales, taking prior rules from other sections and consolidating them in Section 5. Below are the relevant changes to foreclosure practice:

New Section 4: Judicial Sales; Settlements; Receiverships

  • The new section now specifies the administrative form to be utilized when appointing a Master or appointing a Special Master. The fee to refer the case to the Master remains at $200.


New Section 5: General Provisions of Judicial Sales

  • The Master must sell a property within 90 days of the judgment. The Master can ask for a single 30-day extension for good cause.
  • Two appraisers are required to submit an appraisal before the sale, which will be filed with the Clerk’s office.
  • Advertisements for sale have been reduced from three publications to only a single publication. The timing of the advertisement must be 7 to 21 days before sale. The ad cannot list the legal description, but only the street address and parcel number of the property. This was designed to reduce the advertising costs of the sale.
  • Plaintiffs can credit their judgment amount against their bid at sale. This re-affirms long-standing practice in Kentucky. However, there is no mention of other creditors who may be defendants, so each court can continue to determine what other parties may be allowed to credit bid.
  • Third parties who bid at sales must produce 10 percent down on the day of sale and execute a bond in order to have 30 days to complete the bid. The bond carries interest at 12 percent. At least one Master Commissioner has applied this bond requirement to lenders who bid above the amount specified in the original judgment.
  • The Master must file his Report of Sale within three days after sale.
  • The Master’s deed must be issued within five days of the confirmation of sale or the full payment of the bid/costs, whichever occurs later.

These rules are designed to streamline sales and make them more efficient. Kentucky has 120 separate counties, each with its own Master Commissioner, so the hope is for uniformity across the state. In practicality, the majority of Masters will operate in a similar fashion, with special procedures existing mostly in Jefferson County (Louisville).

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U.S. Supreme Court: An Unaccepted Offer Of Judgment that Would Have Completely Satisfied a Plaintiff’s Claim Did Not Render the Case Moot

Posted By USFN, Tuesday, February 2, 2016
Updated: Friday, February 19, 2016

February 2, 2016

 

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

In a 6-3 decision, the U.S. Supreme Court put to rest the issue of whether an unaccepted offer of judgment pursuant to FRCP 68, in the full amount of a plaintiff’s claim, renders a case moot and ripe for dismissal under FRCP 12(b)(1). [Campbell-Ewald Company v. Gomez, 577 U.S. __, 2016 WL 228345 (Jan. 20, 2016)].

Adopting Justice Kagan’s rationale from her dissent in Genesis Health Care Corp. v. Symczyk, 133 S. Ct. 1523 (2013), the majority held that an unaccepted offer to completely satisfy a plaintiff’s claim does not render a case moot, depriving a federal court of jurisdiction. Gomez, at *6-7. The decision resolved a conflict amongst the federal circuits as to whether such unaccepted full judgment offers can operate to remove the “case or controversy” requirement for subject matter jurisdiction under Article III of the United States Constitution.

Background — The named plaintiff (Jose Gomez) alleged that the defendant (the Campbell-Ewald Company, a nationwide marketing and advertisement agency) violated the Telephone Consumer Protection Act (TCPA) by sending him solicitations via text message without prior express consent. Id. at *4. The defendant agency had been engaged by the United States Navy to develop a multimedia recruiting campaign targeting young adults, which included the utilization of text messaging. Id. at *3.

The TCPA prohibits the use of automated dialing systems to cellular numbers without the prior express consent of the call recipient. Violation of the TCPA entitles the aggrieved to statutory damages of $500 per violation or actual monetary loss, whichever is greater, and treble damages for willful violations. The plaintiff filed a class action suit in the district court, alleging that he and a nationwide class had received such texts without prior express consent, seeking treble damages, costs, attorneys’ fees, and an injunction against further unsolicited messages.

Prior to class certification, the defendant filed an offer of judgment under FRCP 68, agreeing to pay $1,503 (treble damages) for each text for which the plaintiff could show receipt, as well as consenting to the requested injunction; the offer did not stipulate to liability or that grounds for the injunction existed. Gomez did not accept the offer and allowed the 14-day time period for acceptance to expire. The defendant subsequently filed a motion to dismiss under FRCP 12(b)(1), alleging that a “case or controversy” no longer existed because the unaccepted offer to pay the plaintiff’s claims in full afforded complete relief — mooting the case — and depriving the district court of subject matter jurisdiction under Article III.

The defendant further alleged that because its unaccepted offer of judgment mooted the plaintiff’s individual claims before class certification, the putative class claims were also moot. The district court denied the motion to dismiss; the U.S. Court of Appeals for the Ninth Circuit affirmed the denial, holding that the unaccepted offer of judgment did not moot the case.

Majority Opinion — Justice Ginsberg, writing for the majority, opined that “[u]nder basic principles of contract law, Campbell’s settlement bid and Rule 68 offer of judgment, once rejected, had no continuing efficacy” and, further, “Rule 68, hardly supports the argument that an unaccepted settlement offer can moot a complaint.” Id. at *7. A “case or controversy” still existed in the opinion of the majority because “with no settlement offer still operative, the parties remained adverse; both retained the same stake in the litigation they had from the outset.” Id. In summation, the majority affirmed the denial of the defendant’s motion to dismiss, holding that “an unaccepted settlement offer or offer of judgment does not moot a plaintiff’s case, so the District Court retained jurisdiction to adjudicate Gomez’s complaint.” Id. at *8.

Concurring Opinion — Justice Thomas concurred in the opinion, disagreeing with Justice Ginsberg’s rationale that was based on principles of contract law and a dissent from a previous case. Instead, he relied upon the common law history leading to FRCP 68, which the Justice opined demonstrated a “mere offer of the sum owed is insufficient to eliminate a court’s jurisdiction to decide the case to which the offer is related.” Id. at *10.

Dissenting Opinion — Chief Justice Roberts dissented, joined by Justices Scalia and Alito. The dissent opined that an offer of judgment that would have completely satisfied the plaintiff’s claims eliminated any “case or controversy” and that “federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking .... If there is no actual case or controversy, the lawsuit is moot.” Id. at *14. Moreover, the dissent criticized the majority’s rationale, asserting that it effectually places the decision as to whether a “case or controversy” exists in the hands of a plaintiff rather than the federal court. Id. at *16. To this the majority retorted that the dissent’s position would achieve the opposite result, placing a defendant “in the driver’s seat.” Id. at *8.

Wrap-Up — The Supreme Court left open the door for a defendant’s full offer of judgment to possibly moot a case under certain circumstances. Justice Ginsberg specifically indicated that the ruling was limited to the fact pattern at hand, which was an unaccepted offer for judgment without more, and reserved consideration of whether a “case or controversy” still existed where a defendant also deposits the full amount of the claim in an account payable to the individual plaintiff. The Court reserved the latter question for a case where the facts were actual and not hypothetical. It is noteworthy that the majority opinion distinguished cases cited by the defendant, which were also cited by the dissent, based on this factual distinction, indicating that such cases did not concern a mere offer to pay. Id. at *7.

The implications of this Supreme Court decision for those in the default servicing industry is that a full offer of judgment (without more) in RESPA, TILA, FCRA, FDCPA, and other similar actions will not have the stopping power to unilaterally end litigation out of the gate. However, it should be noted that the use of an offer of judgment under FRCP 68 still remains a viable and important piece of defense strategy in federal litigation. The Supreme Court pointed out that the federal rule still maintains the “built-in-sanction” whereby if a plaintiff does not achieve a better result than offered, then “the offeree must pay the costs incurred after the offer was made.” Id.

Indeed, many consumer attorneys remain highly motivated by the specter of attorneys’ fee awards allowed to prevailing plaintiffs under the federal statutes governing mortgage servicing and debt collection. Nothing in the Gomez decision operates to temper the limiting affect of FRCP 68 offers of judgment on such attorneys’ fee awards to plaintiffs who dare risk proceeding where the potential to recover above the amount offered is questionable.

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Washington: Two Important Judicial Decisions

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

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

Notice of Default in Washington (Leahy v. Quality Loan Service Corp. of Washington)
Nonjudicial foreclosure in Washington is a two-notice process. The first notice, called the Notice of Default (NOD), provides a 30-day window for a borrower to payoff, reinstate, or elect mediation. If none of those three things happens, then the second notice (Notice of Trustee’s Sale) is issued to set an actual foreclosure sale. Since the creation of the NOD, beneficiaries foreclosing in Washington have often sought guidance on when, and whether, to issue a new NOD if a sale doesn’t occur.

With all of the state and federal loss mitigation programs, more foreclosures go on hold after the NOD issued — which results in this situation arising more often. The Washington Deed of Trust Act and amendments through the Foreclosure Fairness Act do not provide a clear answer to this question. The Division One Court of Appeals addressed this issue in a published opinion titled Leahy v. Quality Loan Service Corp. of Washington, 2015 Wash. App. LEXIS 1363 (2015).

In Leahy, the trustee had issued an NOD in April 2010, and three subsequent notices of trustee’s sale were issued: the first in 2010, the second in 2011, and the third in 2012. The Leahy property was finally sold under the third notice of trustee’s sale in January 2013, close to three years after the issuance of the original NOD. The court analyzed the statute and concluded that Washington law did not require a new NOD before each new Notice of Trustee’s Sale. The court looked at the legislative purpose of the NOD and concluded that it was to notify the debtor of the amount he owes, and that he is in default.

The Leahy court examined an earlier appellate ruling, Watson v. Northwest Trustee Services, Inc., 180 Wash. App. 8, 321 P.3d 262, review denied, 181 Wash. 2d 1007 (2014). There, the court held that the trustee was required to reissue an NOD when the Notice of Default was issued before the effective date of the Foreclosure Fairness Act (July 22, 2011) and the Notice of Trustee’s Sale had been issued after the Act, on November 8, 2011. The Court of Appeals confirmed that the ruling in Watson was only applicable to the facts of that “gap” foreclosure case because the Foreclosure Fairness Act changed the form of the NOD; therefore, a borrower with a foreclosure sale after the effectiveness of the Act should have the benefits of the additional language (including the invitation to mediation) in the new NOD. Furthermore, those additional protections in the NOD only apply for “owner-occupied residential real property.” The Leahys claimed that they lived in the property from February 2010 until May 2010 while they were renovating it to become a rental property, which was during the window of time that the Notice of Default was issued. However, the court did not find that the Leahys had provided enough evidence to the trial court to support their claim and, therefore, the Watson case was not analogous.

Actual Possession – What does it really mean? (Selkowitz v. Litton Loan Servicing)

Washington’s Nonjudicial Foreclosure statute requires the trustee to have proof that the beneficiary is the owner before it can foreclose a deed of trust. One way in which the trustee satisfies this burden is by having a declaration from the beneficiary that it is the “actual holder” of the note. The foreclosure statute does not define the phrase “actual holder,” nor does it define “owner.” The state Supreme Court, in Brown v. Dept. of Commerce, 2015 Wash. LEXIS 1191 (Oct. 22, 2015), held that the statute is superfluous, inharmonious, and ambiguous, but that the legislature intended to track Article 3 of the UCC in finding that the beneficiary is the holder. [See USFN e-Update Nov./Dec. 2015 Edition, Washington article, “Note Holder can Modify and Enforce the Note,” for a summary of the Brown opinion.]

Taking it a step further, the Division One Court of Appeals in Selkowitz v. Litton Loan Servicing, 2015 Wash. App. LEXIS 2882 (Nov. 23, 2015), analyzed a situation where beneficiary Litton had constructive possession of the note at the time of the execution of the beneficiary declaration. The note was being held by a document custodian and despite the plaintiff-borrower’s claim that constructive possession is not sufficient, the Selkowitz court cites to the Bain and Brown opinions and finds that nothing in these prior cases suggests “that the insertion of the word ‘actual’ was intended to create a departure from the UCC’s definition of ‘holder.’” This ruling is pending a motion to publish.

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Winter 2016 USFN Report

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State Statutes of Limitation: A Close Look at Florida

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Adam M. Silver
McCalla Raymer, LLC
USFN Member (Georgia)
Vice Chair, USFN Legal Issues Committee

On November 4, 2015 the Florida Supreme Court heard oral arguments in Bartram v. U.S. Bank, N.A. — an important case addressing that state’s statute of limitations for mortgage foreclosure. At issue is whether acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed triggers application of the statute of limitations (SOL). A determination that the SOL irrevocably accrues upon the initial acceleration could prevent a subsequent foreclosure action by the mortgagee.

The impact of the pending decision could affect “an untold number of contractual agreements between borrowers and lenders.” [Amicus Brief of MBA, 1-2 (Feb. 2, 2015)]. Although it may sound unusual that there would even be an issue with loans in default for more than five years, in Florida today this is not an uncommon situation. Delays have plagued Florida’s foreclosures for several years, starting in 2007 as the economic recession led to more loans going into default and foreclosure. The state’s court system was ill-equipped to handle the increased volume of foreclosures and cases that lingered for years. Additionally, unscrupulous “foreclosure defense” firms filed bogus pleadings and used other tactics to delay foreclosures.

On the lender side, various loss mitigation initiatives extended cases or caused them to be dismissed. Further, lenders relied on existing case law to determine mortgage servicing and default strategies. At times, this involved dismissing foreclosure cases (or allowing them to be dismissed) for loss mitigation or other compelling reasons with the knowledge that a separate foreclosure action could be filed if needed in the future, based on a subsequent default.

The Florida Supreme Court could also create precedent affecting interpretation of the uniform mortgage agreement language with its decision in Bartram. Both sides to the lawsuit contend that the relatively modern (to Florida case law) language of the now almost universally-used uniform mortgage agreement is of critical importance to their positions. More specifically, each side relies on paragraph nineteen, providing the mortgagor a right to reinstate the loan at any time prior to judgment.

Factual Background
In 2005, Lewis Bartram (Bartram) borrowed $650,000 from U.S. Bank’s predecessor, secured by a mortgage on his property located in The Plantation at Ponte Vedra. Bartram and his wife Patricia subsequently divorced. The divorce order resulted in Bartram executing a note and second mortgage on the same property to his wife. The Bank initiated a judicial foreclosure action against Bartram in May 2006 for failing to make payments to the Bank as of January 2006. With the Bank’s foreclosure action pending, in April 2011, Patricia filed a separate suit to foreclose her mortgage, naming the Bank as a defendant. In May 2011, the trial court dismissed the Bank’s 2006 foreclosure action for failure to appear at a case management conference.

One year after Patricia filed her foreclosure action, Bartram filed a crossclaim against the Bank seeking declaratory judgment, asserting: (1) the five-year mortgage foreclosure SOL had run based on the Bank’s dismissed foreclosure case and, therefore, the Bank could no longer enforce its obligations under the note and mortgage; and (2) that as a result, Bartram should have title quieted in his favor. Bartram filed a motion for summary judgment on his crossclaim, which the Bank contested. The trial court ruled in favor of Bartram on both counts and entered summary final judgment against the Bank. The Bank filed a motion for rehearing, which was denied, and the Bank appealed to the Fifth District Court of Appeals for the State of Florida (5th DCA).

The 5th DCA determined that the seminal decision of Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004), applied to this case. Under similar facts, in Singleton, the Florida Supreme Court determined whether the initial attempted acceleration and foreclosure action that was dismissed barred relief in a second foreclosure suit based on res judicata. The Singleton court held that the dismissal of the first suit served as a denial of the acceleration and foreclosure relief sought, effectively placing “[the parties] back in the same contractual relationship with the same continuing obligations.” Id. at 1007. Accordingly, “each subsequent and separate alleged default created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action.” Id. at 1008. The court concluded that to hold otherwise would be to unjustly enrich the mortgagor. Id. at 1007.

Accordingly, the 5th DCA in Bartram reasoned that if the Singleton analysis of acceleration and continuing obligations applies in the res judicata context, it applies equally so in the statute of limitations context. See generally U.S. Bank, N.A. v. Bartram, 140 So. 3d 1007 (Fla. 5th DCA 2014). In ruling that a subsequent foreclosure was not barred based on a prior attempted acceleration and foreclosure action that was dismissed, the 5th DCA reversed and remanded the trial court’s ruling, and certified the following question to the Florida Supreme Court as a matter of great public importance:

Does acceleration of payments due under a note and mortgage 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 all payment defaults occurring subsequent to dismissal of the first foreclosure suit?

Does Singleton apply?

At oral arguments, the Florida Supreme Court demonstrated a thorough understanding of the issues and asked thoughtful and penetrating questions. The Court’s questions ensured that both sides addressed the most important legal issues.

Bartram asserted that Singleton should not apply because it merely “deals with a bundle of judicial rules that you [the Court] administer” [referring to res judicata, while] “statutes of limitations are legislative processes.”

U.S. Bank rejected the notion that Singleton is a res judicata case, contending that “Singleton is better considered to be an acceleration case. When was there an acceleration? What was the effect? That’s why Singleton is so important here.”

The Court pressed U.S. Bank on this point. U.S. Bank said that the Singleton court did not “expressly” state that it was ruling on acceleration, yet “that’s what it was doing … [t]hat is what it had to do.” As U.S. Bank further explains, “[i]n the course of reaching its conclusion in Singleton, the Court set forth … holdings that control the outcome of this case.” [Respondent’s Answer Brief, 8 (Jan. 22, 2015)].

When is Florida’s SOL for mortgage foreclosure triggered?

The relevant statutes are: Fla. Stat. § 95.11(2)(b), which states that an action to foreclose a mortgage shall be commenced within five years; and Fla. Stat. § 95.031(1), which states that a cause of action accrues when the last element constituting the cause of action occurs.

Bartram raised the common precept that the SOL starts to run upon acceleration. Further, “acceleration is effective when notice is given to the borrower.” Upon U.S. Bank’s notice to Bartram in the first action, all payments were immediately due and payable. The loan remained in that accelerated state for five years, Bartram claimed, at which time the SOL forever barred the Bank’s right to foreclose the mortgage.

U.S. Bank offered a compelling argument on this important issue. Essentially, the express language of paragraph nineteen of the mortgage proves that there was no effective acceleration because there was no final judgment in this case. The mortgage provided Bartram a right to reinstate the loan at any time up until final judgment. Thus, without a final judgment, acceleration could not be completed because the entire indebtedness never became due.

Was the loan ever reinstated?

Bartram maintained that his contractual right to reinstate was never exercised, so the existence of that right is irrelevant. Further, because only the entire “accelerated” loan balance remained due even after the case was dismissed, Bartram could never have subsequently defaulted on a non-existent periodic payment.

Once a loan is accelerated, Bartram contended that the language of the uniform mortgage agreement does not allow a mortgagee to unilaterally reinstate the loan. Paragraph nineteen of the mortgage provides the borrower a right to reinstate yet is silent regarding the lender’s right to reinstate the terms of the loan. Without that language, the lender cannot unilaterally reinstate. [Petitioner’s Initial Brief, 35 (Nov. 7, 2014)]. Further, even if U.S. Bank could reinstate, said Bartram, it must have taken an affirmative action to do so.

Must a mortgagee take affirmative action to reinstate a loan?

At this point, Bartram asserted his main argument, that “the vast majority of states” require that the mortgagee take some affirmative action communicated to the borrower in order to reinstate the loan. The affirmative action requirement ensures that the lender communicates the reinstatement to the mortgagor. Otherwise, the mortgagor would not know that the accelerated amount is no longer due. Therefore, Bartram argued, the Florida Supreme Court should apply the same rule as the courts in other states.

U.S. Bank’s response is that “[o]ne need not ‘decelerate’ that which has not been accelerated.” [Respondent’s Answer Brief, 22]. Without a final judgment, the acceleration was not effective. Affirmative action is not needed to inform the borrower that the loan is reinstated because the dismissal of the case serves that purpose. U.S. Bank adds that the mortgage provides the lender with the unilateral right to accelerate the debt. Inherent in that right is the right to unilaterally cease such acceleration. Id. at 23.

Regarding other state decisions cited by Bartram as requiring affirmative action to reinstate, U.S. Bank confirmed to the Court that those decisions are “only persuasive if you look at those opinions and decide that there’s something persuasive about them.” U.S. Bank notes that many of the decisions cited come from nonjudicial trustee foreclosure states, whose legal framework for foreclosing is entirely different than that of Florida.

The Court acknowledged that Florida would be in the minority of jurisdictions in ruling that a mortgagee is not required to take affirmative action to reinstate the mortgage. The Court further explained that on this issue, the “appellate courts have taken signal from Singleton.” Indeed, U.S. Bank points out that Singleton has been followed in the SOL context by at least sixteen other Florida decisions from April 2014 through December 2014. [Respondent’s Answer Brief, 11-12].

What is the effect of dismissal with prejudice vs. dismissal without prejudice in this case?

The effect of dismissal with prejudice versus without prejudice may be significant to the Court for two reasons. First, the parties disagree as to how the Bartram trial court actually dismissed the case. While Bartram claimed that the trial court dismissed the case without prejudice, U.S. Bank pointed to evidence to the contrary.

Secondly, in Deutsche Bank Trust Co. Americas v. Beauvais, 2014 WL 7156961 (Fla. 3d DCA 2014), under similar facts to Bartram and Singleton, that appellate court ruled (based entirely on the trial court’s dismissal being without prejudice) that the SOL barred the subsequent foreclosure action. However, despite several subsequent decisions on point, no federal or state court has followed Beauvais.

For these reasons, the Court asked U.S. Bank what the effect of a dismissal without prejudice would be. The Court then posited, would the lender have “effectively given the borrower another lease on life by letting them continue to pay on the mortgage?” U.S. Bank concurred.

During the oral arguments, U.S. Bank repeatedly stated that the type of dismissal is immaterial. U.S. Bank elaborated, “there is no difference because if there was a dismissal, there was no effective acceleration and therefore the obligation to make installment payments continued.”

The Decision is Pending
It remains to be seen whether the Florida Supreme Court’s holding in Bartram will determine the outcomes of the other two appellate cases waiting in the wings, Beauvais and Evergrene Partners, Inc. v. Citibank, N.A., 143 So. 3d 954 (Fla. 4th DCA 2014). If the Court determines that the type of dismissal should not affect the outcome of the case, then any significant factual and procedural differences among the three cases are removed, such that the Bartram holding would likely apply to the other cases — thus restoring certainty to lenders and mortgagors alike regarding the effect of Florida’s statute of limitations on a lender’s right to foreclose.

Editor’s Note: On February 12, 2015 USFN filed an amicus brief with the Florida Supreme Court in the Bartram case that is discussed in the article presented here; that brief was prepared by the author’s firm.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

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Nevada: Federal Courts’ Application of HERA in the Context of HOA Foreclosures

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Laurel I. Handley
Aldridge Pite, LLP
USFN Member (California, Georgia)

In response to the flood of quiet title actions filed by entities/individuals that purchased homes at HOA super-priority foreclosure sales in Nevada, the Federal Housing Finance Agency (FHFA) has intervened, in appropriate cases, and asserted federal preemption to challenge an HOA’s ability to extinguish a first priority deed of trust owned by Fannie Mae or Freddie Mac (collectively the “GSEs”).

As most readers already know, the Housing and Economic Recovery Act of 2008 (HERA), codified at 12 U.S.C. §§ 4511, et seq., established FHFA for the purpose of regulating the GSEs, which were placed into conservatorship. See 12 U.S.C. § 4617(a)(2). The applicable provision of HERA, section 4617(j), provides in relevant part: “No property of the Agency [i.e., FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency, nor shall any involuntary lien attach to property of the agency.” Id. at 4617(j). Based on this provision, in March 2015 FHFA and the GSEs began filing motions for summary judgment in certain cases, asserting that section 4617(j) provides broad protection to the GSEs while under FHFA conservatorship, and that an HOA foreclosure conducted pursuant to Nevada Revised Statute Chapter 116 could not extinguish the GSEs’ deeds of trust on the relevant property.

On June 24, 2015 the first federal decision was issued addressing the application of HERA in the context of a Nevada HOA foreclosure. In Skylights LLC v. Byron, __ F. Supp. 3d __, 2015 WL 3887061 (2015), the relevant deed of trust was assigned of record to Fannie Mae as of March 7, 2014. The HOA had previously commenced foreclosure of its super-priority lien, and on September 17, 2014 a foreclosure sale was held; Skylights was the winning bidder. Skylights then filed an action seeking to quiet title. The case was removed to federal court, which granted a stipulation to allow FHFA to intervene. Two months after FHFA intervened, and prior to any party conducting discovery, Fannie Mae and FHFA filed a Joint Motion for Summary Judgment, asserting that HERA preempts the Nevada HOA foreclosure statute — such that any foreclosure conducted pursuant thereto could not extinguish Fannie Mae’s lien on the property, absent FHFA consent (and that since FHFA had not consented, the lien remained as an encumbrance after the HOA foreclosure).

Chief Judge Navarro (U.S. District Court for the District of Nevada) agreed, holding that “the HOA’s foreclosure sale of its super-priority interest on the Property did not extinguish Fannie Mae’s interest in the Property secured by the Deed of Trust or convey the Property free and [clear] to Skylights.” Id. at *11. This decision is currently on appeal to the Ninth Circuit Court of Appeals under case number 15-16904; Skylights’ opening brief was due January 4, 2016.

Shortly after the Skylights decision was entered, Chief Judge Navarro issued similar decisions in three additional cases: Elmer v. JPMorgan Chase Bank, N.A., 2015 WL 4393051 (July 13, 2015); Premier One Holdings, Inc. v. Federal National Mortgage Ass’n, 2015 WL 4276169 (July 13, 2015); and Williston Investments Group, LLC v. JPMorgan Chase Bank, N.A., 2015 WL 4276144 (July 13, 2015). The Elmer and Williston cases involved Freddie Mac loans and were factually distinct from Skylights in that after the HOA sales, foreclosures were completed as to Freddie Mac’s deeds of trust, and assignments of the deeds of trust to Freddie Mac were not recorded until after the HOAs’ foreclosures. See Elmer, supra at *1; Williston, supra at *1.

Chief Judge Navarro did not find the factual distinction relevant and instead found that Freddie Mac “held an interest” in the properties since the date it purchased the loans — not the date on which the deeds of trust had been assigned to it. See Elmer, supra at *3; Williston, supra at *3. Similarly, in the Premier One case, the chief judge determined that Fannie Mae held an interest in the property since the time it purchased the loan, which was years before the HOA foreclosure. Premier One, supra at *3. In all three cases, Chief Judge Navarro granted FHFA/GSEs’ motions for summary judgment and held that “12 U.S.C. § 4617(j) preempts Nevada Revised Statutes § 116.3116 to the extent that a homeowner association’s foreclosure of its super-priority lien cannot extinguish a property interest of Fannie Mae or Freddie Mac while those entities are under FHFA’s conservatorship.”

On July 27, 2015 Judge Jones adopted Chief Judge Navarro’s analysis in Skylights and granted FHFA and Fannie Mae’s motion for summary judgment in a “factually and legally indistinguishable case.” My Global Village, LLC v. Federal National Mortgage Ass’n, 2015 WL 4523501 at *4 (2015). Judge Jones thereafter issued a second decision on the issue in LN Management LLC Series 5664 Divot v. Dansker, 2015 WL 570799 (Sept. 29, 2015), wherein he denied FHFA and Fannie Mae’s motion based on a finding that there was a genuine issue of material fact as to whether Fannie Mae owned the note and deed of trust at the time of the HOA foreclosure. Id. at *3. Thus, although Judge Jones acknowledges that HERA preempts the state HOA foreclosure statute, in order to prevail in the Dansker litigation, Fannie Mae will need to prove its ownership interest in the note and deed of trust to establish a property interest within the scope of HERA.

Three other federal judges have issued rulings on the HERA federal preemption argument. Judge Dawson adopted the reasoning of Chief Judge Navarro in the Skylights matter and held that section 4617(j) preempts the state HOA foreclosure statute. Saticoy Bay, LLC v. Federal National Mortgage Ass’n., 2015 WL 5709484 (Sept. 29, 2015). Similarly, Judge Mahan granted FHFA’s motion for summary judgment in 1597 Ashfield Valley Trust v. Federal National Mortgage Ass’n., 2015 WL 4581220 (July 28, 2015). However, Judge Mahan’s decision indicates that Fannie Mae’s property interest did not arise when it obtained an ownership interest in the note, but instead when the deed of trust was assigned to it. Id. at *8.

This is because the deed of trust was originally in favor of MERS. In Nevada, “listing different entities as the note holder and beneficiary under the deed of trust ‘split[s]’ the note and deed of trust at inception.” Id. (citing Edelstein v. Bank of N.Y. Mellon, 286 P.3d 249, 260 (Nev. 2012). It was only when the note and deed of trust were reunited that Fannie Mae’s property interest arose. Since the assignment was executed, and Fannie Mae’s interest arose prior to the date of the HOA foreclosure sale, Judge Mahan held that Fannie Mae’s deed of trust could not have been extinguished by the HOA sale as a matter of law. Id.

Finally, Judge Dorsey has issued decisions on the federal preemption question in three cases: Federal National Mortgage Ass’n v. SFR Investments Pool 1, LLC, 2015 WL 5723647 (Sept. 28, 2015) (“adopt[ing] Chief Judge Navarro’s conclusions and the analysis she articulated in Skylights”); Nationstar Mortgage, LLC v. Eldorado Neighborhood Second Homeowners Ass’n, 2015 WL 5692081 (Sept. 28, 2015) (finding that section 4617(j) preempts the HOA foreclosure statute, but granting leave to amend after holding that the GSE and FHFA had not pled they were the beneficiary of the deed of trust, which had been assigned to Nationstar); and LN Management LLC Series 5271 Lindell v. Estate of Piacentini, 2015 WL 6445799 (Oct. 8, 2015) (finding that section 4317(j) preempts the state HOA foreclosure statute, but denying summary judgment as the GSE and FHFA had not demonstrated they were the beneficiary of the deed of trust, which had been assigned to CitiMortgage).

Notably, Judge Dorsey does not adopt Chief Judge Navarro’s conclusion that a property interest arises when a GSE obtains an ownership interest in a loan. Instead, Judge Dorsey held that a ‘split’ note and deed of trust must be reunited or that the requisite agency relationship must exist between the beneficiary of record and the owner of the note, such that the owner can require the beneficiary/agent to assign the deed of trust to it.

In summation — Each of the federal judges addressing the issue has found that 12 U.S.C. § 4617(j) preempts Nevada Revised Statute § 116.3116 to the extent that a homeowners association’s foreclosure of its super-priority lien cannot extinguish a property interest of a GSE while those entities are under FHFA’s conservatorship. The difference in the cases to date has been the requirements to establish the GSEs’ “property interest” at the time of the foreclosure, either through an assignment of the deed of trust or an agency relationship.

Because of the high number of affected properties (and to avoid inundating the Nevada courts with hundreds of individual lawsuits), the FHFA and GSEs filed a class action complaint in a case pending before Chief Judge Navarro under case number 2:15-cv-01338-GMN-CWH. The FHFA and GSEs filed a motion for certification of a defendant class which, as of this printing, has been fully briefed but not yet ruled upon.

It should be noted that section 12 U.S.C. § 4617(j) only applies when a GSE owns the loan at issue. Therefore, in state or federal cases involving a different investor, the recent federal decisions will have no application. Nevertheless, there are state law arguments being presented challenging HOA foreclosure sales and recent legislation (which took effect on October 1, 2015) that will alleviate some of the concerns over how future HOA sales are conducted in the state of Nevada.

Special Note: As this USFN Report went to press, an update was received from the author. On January 14, 2016 the Nevada Supreme Court issued a decision in Southern Highlands Community Ass’n v. San Florentine Avenue Trust, 132 Nev., Adv. Op. 3. The issue in that case: When multiple HOA liens (e.g., a master HOA and a sub-association) have equal priority and one is foreclosed, does the foreclosure extinguish the second equal-priority lien? Southern Highlands holds that an HOA sale extinguishes any other HOA lien of equal priority and that both equal-priority lienholders share the foreclosure sale proceeds. If those proceeds are insufficient to satisfy the equal-priority HOA liens, the sharing is on a pro-rata basis.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

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Municipalities and their Requirements affecting Residential Foreclosures: Massachusetts

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Francis J. Nolan
Harmon Law Offices, P.C.
USFN Member (Massachusetts, New Hampshire)

In the past seven years, over 25 Massachusetts cities and towns have enacted ordinances purporting to affect properties in foreclosure. Older ordinances typically focused on the establishment of property registration programs, requiring mortgagees to pay an annual fee ranging between $100 and $300 and to identify a local representative (typically, someone located within 20 miles of the property) who can be contacted in case of emergency. Although locating a representative within 20 miles of the property has sometimes posed logistical problems for servicers, these local property preservation programs have generally had minimal impact on the processing of foreclosures.

More recently, a number of municipalities that have been particularly hard-hit by the foreclosure crisis have sought to use local ordinances to effectuate changes to foreclosure practice that the Massachusetts legislature has been unwilling or unable to pass into law statewide. These more recent ordinances often included a revised property registration program, in which the annual fee is replaced by a cash bond between $5,000 and $10,000 for each property registered; a mandatory pre-foreclosure mediation program; and an expansion of the commonwealth’s post-foreclosure eviction protections for tenants to former owners.

At the end of 2014, the Massachusetts Supreme Judicial Court opined that both the cash bond element of the property preservation ordinances and the mediation ordinances generally were preempted by state law. In response to the court’s ruling, several of the municipalities that had enacted the more aggressive ordinances took steps to revise or repeal their ordinances. For example, Lynn simply repealed its mediation and property preservation ordinances, while Worcester replaced the $5,000 cash bond component of its property preservation program with a $3,000 “fee.” It remains to be seen whether the city’s fee will be challenged and, if so, whether the courts will deem the fee unconstitutional.

The element of the more recent municipal ordinances that has not been addressed by the Supreme Judicial Court (because it was not part of the ordinances in the city that was involved in the relevant litigation) pertains to the expansion of post-foreclosure eviction protections to former homeowners. These ordinances preclude mortgagees who were successful high bidders at auction from evicting their former borrowers unless: (a) they have “just cause” to do so; or (b) a mortgagee has a fully executed Purchase and Sale Agreement of the foreclosed property to an arm’s-length third-party purchaser for value. The cities of Lynn and Lawrence enacted ordinances with anti-eviction provisions in 2013, and Brockton followed suit in 2015. All three municipalities are major cities with particularly high levels of foreclosures and evictions.

While the constitutionality of the eviction ordinances is in question, insofar as the eviction ordinances appear to conflict with existing state eviction laws, lenders have been reluctant thus far to challenge the ordinances. Many lenders have chosen to refrain voluntarily from evicting a former owner in contravention of the municipal ordinances.

Proponents of the cash bond registration provision, the pre-foreclosure mediation requirement, and the expansion of eviction protections have introduced a number of bills in the Massachusetts legislature. These bills would allow cities such as Worcester and Lynn to reinstate their cash bond requirements, establish a statewide mediation program, and expand the existing statutory post-foreclosure eviction framework to include holdover former owners. Thus far, none of the bills has advanced to a vote; however, it seems likely that anti-foreclosure advocates will push hard for action when the legislature returns to formal session in the New Year.

Establishment of mandatory mediation would have a particularly significant effect on foreclosures: no framework currently exists in Massachusetts for the management of such a program, and the entire program — including staffing, training, and procedural rules — would need to be built from scratch, potentially triggering a de facto moratorium on Massachusetts foreclosures. Despite these logistical concerns, the legislature is likely to give serious consideration either to allowing cities and towns to implement more aggressive foreclosure ordinances or to applying these local initiatives statewide, particularly in light of pressure from municipalities and an increase in foreclosure activity throughout Massachusetts.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report


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Municipalities and their Requirements affecting Residential Foreclosures: Illinois

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Lee S. Perres,
Kimberly A. Stapleton,
and Benjamin Burstein
Pierce & Associates, P.C.
USFN Member (Illinois)

The city of Chicago adopted ordinances to address the negative impact of improperly maintained vacant buildings in its neighborhoods. These ordinances affect mortgagees and servicers. The ordinances are the Vacant Building Ordinance, the Red X Program and Chicago’s Protecting Tenants in Foreclosed Rental Property Ordinance (“Keep Chicago Renting Ordinance”). The ordinances provide for significant penalties for failure to comply, and the need for servicers to familiarize themselves and comply with these ordinances is critical.

Vacant Building Ordinance (Municipal Code of Chicago Sections 13-12-126 to 13-12-128)
— The mortgagee of any residential building that becomes vacant and is not registered by the owner must register the vacant building within 30 days after the building becomes vacant and unregistered, or 60 days after the mortgage is in default (whichever is later). The mortgagee must also secure the building and perform certain maintenance.

The mortgagee can register the building on the Department of Buildings website (http://ipiweb.cityofchicago.org/vbr/) and pay a registration fee of $500. The registration must be renewed every six months as long as the building remains vacant, and the mortgagee must notify the Department of Buildings within 20 days of any change in the registration information by filing an amended registration statement.

The mortgagee must maintain the property, including but not limited to maintaining and securing the exterior of the building, and maintaining the structural integrity of stairs leading to the main entrance. See Section 13-12-126 for the complete list of requirements. Beginning 45 days after the mortgage is in default, the mortgagee is required to inspect the property monthly to determine if the building is vacant. The penalty for failure to comply may result in a fine (minimum is $500; maximum is $1,000) for each offense. Every day in which a violation exists is a separate and distinct offense.

There are several affirmative defenses available to a mortgagee in a code violation case, including that the building is occupied — either lawfully or unlawfully (i.e., squatters) — as well as that violations were cured within 30 days of receiving notice of violations. See Section 13-12-126 for the complete list of affirmative defenses.

Red X Program (Municipal Code of Chicago Section 13-12-148)
— Vacant buildings pose many hazards to first responders. To protect the city’s personnel from potential dangers in unsafe buildings, Chicago passed the Red X ordinance. If a structure is deemed unsafe, the fire commissioner is authorized to place a clear and visible Red X warning placard on the vacant edifice. This is to alert anyone approaching the building of the existence of structural or interior peril.

Entry to a “Red X” building is strictly prohibited for any person, including owners and mortgagees in possession, unless the person notifies the Chicago Fire Commissioner in advance of his or her intent to enter the building. Red X buildings should only be entered to assess or repair damages; the structures are not to be entered for showings to sell the building. The penalty for a violation of the ordinance is a minimum fine of $500 (and maximum fine of $1,000) for each offense. Every day that a violation continues constitutes a separate and distinct offense.

Keep Chicago Renting Ordinance (Municipal Code of Chicago Sections 5-14-010 to 5-14-100)
— In an effort to preserve, protect, maintain, and improve rental property and prevent occupied buildings from becoming vacant after foreclosure, the city adopted the Keep Chicago Renting Ordinance. The ordinance applies to owners of foreclosed rental properties (redefined to be the purchaser at the foreclosure sale once the sale has been confirmed) and requires that,


“no later than 21 days after a person becomes the owner of a foreclosed rental property, the owner shall make a good faith effort to ascertain the identities and addresses of all tenants of the rental units in the foreclosed rental property and notify, in writing, all known tenants of such rental units that, under certain circumstances, the tenant may be eligible for relocation assistance.” See Section 5-14-040(a)(1).


The notice to tenants required under Section 5-14-040 must provide specific details and must offer a qualified tenant:


“relocation assistance in the amount of $10,600 unless the owner offers the tenant the option to renew or extend the tenant’s current written or oral lease with annual rent that: (1) for the first twelve months, does not exceed 102% of the tenant’s current annual rent; and (2) for any 12-month period thereafter, does not exceed 102% of the immediate prior 12-month period’s annual rent.” See Section 5-14-040(a)(1) for the specific language that must be contained in the notice to tenants to avoid liability.


Section 5-14-040(b) provides that a Tenant Information Disclosure Form (Form) must be provided with the notice required under Section 5-14-040. Within 21 days of receipt of the Form, the tenant shall complete and return the Form to the owner. However, the failure of the tenant to return the Form does not relieve the owner of either providing a new lease or replacement rental unit, or providing the relocation assistance fee.

Within 21 days “after the date upon which the tenant returns or should have returned” the Form, the owner shall provide notice to the qualified tenant that the owner is paying the required relocation fee, or offering to extend or renew the qualified tenant’s rental agreement, or providing a rental agreement for a replacement rental unit if the unit has been unlawfully converted or is an unlawful hazardous unit, whichever is applicable. See Section 5-14-050(a)(3).

If a qualified tenant “fails to accept the owner’s offer to extend or renew the tenant’s rental agreement, or to accept a rental agreement for a replacement unit, whichever is applicable, within 21 days of receipt of the offer [unless more time is provided by the commissioner of business affairs and consumer protection] the owner shall not be liable to such tenant for the extension or renewal of the tenant’s rental agreement; provided that a qualified tenant’s refusal to accept the owner’s offer for a replacement rental unit or to extend or renew the tenant’s current rental agreement for an unlawful hazardous unit does not affect the tenant’s right to receive a relocation fee.” See Keep Chicago Renting Rules for additional requirements: http://www.cityofchicago.org/city/en/depts/bacp/supp_info/rules_and_regulations.html.

If the Form is provided to the tenant, and no response is provided within 21 days, the owner must still make an offer to pay the one-time relocation fee, offer to extend or renew the lease, or provide a replacement rental unit within 21 days (and wait 21 days for a response). As such, within approximately 42 days (not accounting for time delays with mailing) of the tenant receiving the Form, the owner will know if a new lease will need to be offered, if a one-time payment must be provided, or if a forcible detainer and entry (eviction) can occur. The owner can always evict for cause, such as failing to pay rent or violating the terms of the rental agreement.

No later than 10 days after becoming the owner of a foreclosed rental property, the owner must register the foreclosed rental property with the commissioner. See Section 5-14-060(a) for the registration requirements. At the time of filing the registration, the owner must pay a registration fee of $250 for each foreclosed rental property registered. The city must be notified if the property is sold or transferred to a bona fide third-party purchaser within 10 days of the sale or transfer.

A violation of the ordinance carries a fine of $500 minimum (and $1,000 maximum) for each offense. Every day that a violation exists is a separate and distinct offense. Additionally, the city has begun prosecuting violations of the ordinance, specifically failures to comply with the requirement to register foreclosed rental properties. Furthermore, a tenant may bring a private cause of action for failure to comply with the notice requirements or with the requirement to offer relocation assistance, and may recover damages and attorneys’ fees.

See the Municipal Code of Chicago for full ordinances: http://library.amlegal.com/nxt/gateway.dll/Illinois/chicago_il/municipalcodeofchicago?f=templates$fn=default.htm$3.0$vid=amlegal:chicago_il.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

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Municipalities and their Requirements affecting Residential Foreclosures: California

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Kayo Manson-Tompkins
The Wolf Firm
USFN Member (California)

As a result of the high level of vacant properties in California, numerous cities throughout the state have enacted ordinances under the auspices of promoting the health, safety, and welfare of its residents, workers, visitors, and property owners, pursuant to the powers granted to them under CA Government Code Section 38771. Most, if not all, of the cities cite to the need to eliminate the blight caused in its neighborhoods as a result of vacancies. However, in the past few years, many cities have gone beyond vacancy registration and have added a foreclosure registration requirement — either independently or in conjunction with vacancy registration requirements. As of the writing of this article, there are approximately 124 cities with either one and/or the other requirement.

Many of the cities have implemented an online registration process. The key component of registering the property is to enable the cities to have a local primary contact who is reachable 24 hours a day, 7 days a week (24/7) and who can be contacted in an emergency such as a fire, criminal activity, or other incident that creates a hazard to the home and to the community. In addition, many cities require monthly inspections to be completed and various inspection reports to be uploaded to the city portal. Given these requirements, it makes sense that the person who serves as the primary contact should also be the individual responsible for registering these properties — regardless of whether the registration is for vacant property or for the commencement of a foreclosure proceeding.

There are several property inspection vendors that are capable of registering properties in those cities requiring registration, and it is advisable to utilize the services of a company that knows and understands the requirements of the cities. This is extremely important because the city ordinances can (and do) change on a regular basis and, therefore, must be constantly monitored. In addition, many of the cities have significant penalties for failing to comply with the registration ordinance.

In this author’s experience, property preservation companies have the best track record in registering properties and complying with the numerous other requirements imposed by California municipalities. Note that it is very important that the property preservation company be notified as soon as a notice of default has recorded. This event will trigger the necessity to register the property in a city with a foreclosure registration requirement. Furthermore, once the foreclosure of the property has been completed, the registration must be updated with appropriate information including a reference as to whether or not the property is vacant. An analysis below of two cities with recent changes to their ordinances is illustrative of what may transpire if a property is not properly and timely registered.

Los Angeles — This city passed Foreclosure Registry Ordinance 181185, which became effective on June 8, 2010. On November 12, 2014 it was amended to Ordinance 183281. The major changes to the foreclosure registry are proactive inspection requirements, uploading of the monthly inspection reports, and a requirement to de-register properties — all of which are to be completed online. The inspection reports must be uploaded every 30 days or there will be a penalty assessed. Registration is required for all properties where a notice of default has recorded, and when the property becomes an REO; the registration must be accomplished within 30 days of the event. The registration requirement applies for all properties, regardless of whether they are vacant or occupied. The registration fee is $155 and is valid for one calendar year. The property must be re-registered by January 1st of every year, and not later than January 31st. Los Angeles, like most cities, requires the contact information of a local agent that the city may reach 24/7. There is also a $356 proactive inspection fee when the property changes to an REO.

Under LAMC § 164.09, the city of Los Angeles will send out a 30-Day Notice of Non-Compliance for the failure to register, re-register, pay a proactive inspection fee when the property becomes an REO, or upload monthly inspection reports. If the notice is not complied with by the end of the 30 days, a penalty will be assessed at $250 per day until the property is in compliance. Within a few months of the amended ordinance, the city sent out a massive number of notices with penalties ranging from $24,000 to $48,000. In addition, the city has taken a staunch position of not negotiating a reduction of the penalties.

Moreno Valley
— The city enacted Foreclosure Registration Ordinance 887 on March 10, 2015, which became effective April 10, 2015. According to the ordinance, when a notice of default (NOD) is recorded, the property must be registered within 15 days of recording of the NOD. The registration fee is $400, which is valid for only one year, and must be re-registered annually on the anniversary of the original date that the property was first registered. If the property is not registered, the city will send a notice stating that if the property is not registered within 30 days of the notice, the first violation is $100; the second is $200, with the third (and all subsequent violations) $500 each.

The registration process may be completed online with the requisite information regarding the subject property. Furthermore, the ordinance requires the following:

“In the case of a corporation or Out of Area Beneficiary and/or Trustee, a direct contact staff member name and phone number with a Local property management company responsible for the security, maintenance and marketing of the Property in Foreclosure; such staff member must be empowered to (i) comply with code compliance orders issued by the City; (ii) provide a trespass authorization upon request of the local law enforcement authorities if the Property is unlawfully occupied; (iii) conduct weekly inspections of the Property; and (iv) accept rental payments from tenants of the Property if no management company is otherwise employed for such person[.]”

What is noteworthy about the city of Moreno Valley is that the registration requirement is retroactive, such that properties that were in foreclosure at the time the ordinance was enacted were required to be registered within 30 days after the effective date, or no later than May 10, 2015. In the event that any beneficiary has unregistered properties in foreclosure in Moreno Valley, it is highly recommended that the property preservation company be instructed to immediately register the properties and pay the outstanding registration fee and penalties.

The approximate 124 cities in California with some form of registration process are concerned with “blight.” As such, it behooves all beneficiaries and servicers to retain a property preservation company that stays abreast of the municipal ordinances and their constant updates and amendments, and to ensure that properties in their portfolios are being registered timely in order to avoid penalties.

A Vacant Property Registration (VPR) matrix is maintained by Safeguard Properties; it is publicly accessible at http://safeguardproperties.com/Resources/Vacant_Property_Registration/Default.aspx?filter=vpr.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

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Illinois — The 1010 Lake Shore Ass’n Case and the Need to Pay Post-Judicial Sale Condominium Assessments on Time (Part II)

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

by Michael Anselmo
Anselmo Lindberg Oliver, LLC
USFN Member (Illinois)

This article picks up where the Illinois HOA Talk column published in the Autumn 2015 USFN Report left off … awaiting a decision by the Illinois Supreme Court.

On December 3, 2015 in a unanimous decision, the Illinois Supreme Court affirmed the appellate court’s ruling in the case of 1010 Lake Shore Association v. Deutsche Bank National Trust Co., holding that a condominium assessment lien against foreclosed property survives the foreclosure where post-sale assessments go unpaid.

As discussed in the Autumn 2015 USFN Report, in August 2014 the Illinois Appellate Court held that the purchaser of a condominium unit at a foreclosure sale must pay the monthly assessments that come due beginning with the first month after the sale occurs. Otherwise, the lien for pre-foreclosure assessments (regular or special) survives the foreclosure. Specifically, the appellate court held that payment of regular post-foreclosure-sale assessments after the sale serves to “confirm the extinguishment” of any pre-foreclosure assessment lien held by the association.

In affirming the appellate court, the Illinois Supreme Court held that “The plain language of Section 9(g)(3) ... provides an additional step to confirm or formally approve the extinguishment [of pre-existing association assessment liens] by paying the post-foreclosure sale assessments.” The opinion further reasoned that, “mortgagees may be exempted from liability for the prior owner’s unpaid assessments, but only if the mortgagee pays the assessments coming due following its purchase of the unit at the foreclosure sale.”

Lenders should take notice of a few issues with this statute. First, while the Supreme Court opinion requires payment of regular monthly assessments that come due in the month following the foreclosure sale, the above-referenced statute does not require the association board of managers to supply any specific information. Condominium associations can be expected to take advantage of this and refuse to advise of the amount due for regular, ongoing monthly assessments and, instead, present a demand for all unpaid assessments. Second, the opinion says nothing about when dues must be paid in order to confirm extinguishment of pre-foreclosure association liens.

This judicial decision is sure to embolden condominium associations. They can be expected to rebuff requests to provide the information needed to make timely payment for post-sale assessments as those come due. Rather, they will present demands for all past-due assessments, or they will provide information late, and then claim that the buyer failed to make payment. The only certainty from the 1010 Lakeshore opinion is that there are many questions left open — such that its practical applications are far from certain.

Editor’s Note: The author’s prior article on this case, which was published in the Autumn 2015 USFN Report, may be viewed in USFN’s online Article Library.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

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Don’t Drink Expired Milk and be Wary of Stale Claims: You could be violating the FDCPA

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

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

The mortgage servicing industry is facing tough questions about how statutes of limitation impact mortgage foreclosures. Black’s Law Dictionary defines a statute of limitation (SOL) as “a statute establishing a time limit for suing in a civil case, based on the date when the claim accrued” to ensure the “diligent prosecution of known claims, thereby providing finality and predictability in legal affairs and ensuring that claims will be resolved while evidence is reasonably available and fresh.” The time limits for bringing a specific type of lawsuit under state law often vary from state to state. For example, in some states the clock is started requiring a foreclosure action to be brought within three years of a default, while another state allows the clock to tick for fifteen years from a default before a foreclosure action must be filed. The SOL for foreclosing on a mortgage is the same as for any written contract in many states, while in other states there is a separate law and time period applicable to foreclosures.

In the past, a state’s SOL on a mortgage foreclosure was rarely an issue as foreclosures were initiated quickly after a default. A common perception was that foreclosures were rushed and efforts surfaced nationally to slow down the process. As a result, it is not uncommon today for a mortgage to have been in default for years before a foreclosure is finally commenced. The same foreclosure defense attorneys attacking foreclosures as being rushed are now contending that foreclosure actions are too stale to be filed and are barred by a statute of limitations. Although raising the SOL is an affirmative defense, where a borrower asserts that a foreclosure should be dismissed, some courts are finding a violation of the Fair Debt Collection Practices Act where a creditor files a suit to enforce a time-barred debt.

Does Bankruptcy Stop the Clock?

When time is running out to file a foreclosure, does the filing of a bankruptcy petition by a borrower stop the statute of limitation? In most instances, yes; otherwise known as “tolling” the amount of time to bring the action. The automatic bankruptcy stay triggered upon the filing of a bankruptcy petition operates as a stay (applicable to all entities) of the commencement or continuation of an action or proceeding against a borrower in bankruptcy, such as foreclosure. Some state laws provide for the tolling of statutes of limitations during periods where a plaintiff is barred by law from filing suit. In many instances, these statutes would presumably apply when the automatic stay prevents commencing or continuing a foreclosure action. In addition, a number of state statutes specifically provide parties with additional time to act where a bankruptcy is involved.

There is also a Bankruptcy Code section titled “Extension of time.” It states that if a deadline fixed by nonbankruptcy law (i.e., state law) has not expired before the date of the filing of the bankruptcy petition, then such period does not expire until the later of the statute of limitations deadline or 30 days after the automatic stay is lifted.

To answer whether or not a foreclosure SOL is tolled by bankruptcy, the issue must be evaluated on a district-by-district basis. It likely will. And even where it is not tolled by the automatic stay, Section 108(c) provides 30 days after relief from stay or the bankruptcy case terminates, albeit that is not much time.

FDCPA and the Bankruptcy Code
Congress enacted the Fair Debt Collection Practices Act (FDCPA) in 1978 with the stated purposes of eliminating “abusive debt collection practices,” ensuring “that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged,” and promoting “consistent State action to protect consumers against debt collection abuses.” For years, debtors have argued that a creditor violates the FDCPA by filing an alleged inflated proof of claim (POC). However, a majority of courts have held that the effect of the FDCPA stops at the door to the bankruptcy court. These courts are steadfast that the remedies for improperly filed proofs of claim, which include contempt and claim disallowance, are fully addressed by the Bankruptcy Code. These courts have held that an inflated POC cannot serve as a basis for a claim under the FDCPA. As the Second Circuit has found, even an invalid claim was not the “sort of abusive debt collection practice proscribed by the FDCPA.”

Is Filing a POC on a Debt that is Time Barred by a State’s SOL a Violation of the FDCPA?
The Eleventh Circuit created a split of authority when it issued its first opinion finding that filing a POC based on a stale debt violated the FDCPA. Crawford v. LVNV Funding LLC, No. 13-12389, 2014 U.S. App. LEXIS 13221 (11th Cir. 2014). Not only are some courts finding that if a creditor files a state court lawsuit to enforce a time-barred debt to be a potential violation of the FDCPA, some courts are viewing the filing of POCs on debts that are stale under a state’s SOL as worthy of penalty. Although the filing of a foreclosure action and the filing of a POC in a bankruptcy case are significantly different, the Eleventh Circuit, in Crawford, held that it did not recognize a difference when it comes to analysis under the FDCPA. Crawford relied heavily on the Seventh Circuit’s decision in Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013), to conclude that if it violates the FDCPA to file a state court lawsuit to collect a time-barred debt, it equally violates the FDCPA to file a POC regarding a time-barred debt. Although a majority of bankruptcy courts had consistently found that the FDCPA is not violated by POCs on time-barred debts, the Eleventh Circuit has spawned attacks on so-called “Crawford claims” across the country.

Crawford Claims

In Crawford, the debtor owed $2,037.99 to a furniture company, which was charged off in 1999 and later sold to LVNV Funding LLC (a debt portfolio servicer). Under the applicable SOL in Alabama, where Crawford resided, LVNV was required to collect on the debt by October 2004.

In February 2008, Crawford filed for chapter 13 protection. Even though the SOL expired almost four years earlier, LVNV filed a POC. The chapter 13 trustee scheduled the claim and paid LVNV. Over four years into the bankruptcy case, the debtor objected to LVNV’s claim asserting that the debt was unenforceable, and filed an adversary complaint alleging that the creditor’s act of filing a POC for a debt on which the SOL had run violated the FDCPA. After the bankruptcy court (and then the District Court) dismissed Crawford’s allegations, the debtor turned to the Eleventh Circuit Court of Appeals.

The Eleventh Circuit subscribed to the debtor’s argument, reasoning that similar “to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt. The ‘least sophisticated’ chapter 13 debtor may be unaware that a claim is time-barred and unenforceable and thus fail to object to such a claim.” The appellate court ultimately held a debt collector’s filing of a POC on a time-barred debt to be a violation of the FDCPA. The court expressed its displeasure that “a deluge has swept through the U.S. Bankruptcy Courts of late” consisting of “consumer debt buyers — armed with hundreds of delinquent accounts purchased from creditors ... filing proofs of claim on debts deemed unenforceable under state statutes of limitations.”

Irreconcilable Conflict Between the FDCPA and the Bankruptcy Code?
Of significance, the Crawford court “decline[d] to weigh in” on whether there is an irreconcilable conflict between the FDCPA and the Bankruptcy Code, leaving the door open for creditors to raise the issue. In fact, in the Northern District of Alabama Bankruptcy Court, the creditor successfully asserted the precise argument left undecided in Crawford: that “an otherwise cognizable claim for FDCPA damages is precluded by the Code’s and Rule’s comprehensive and detailed protocols for the filing, and allowance or disallowance, of claims.” In re Jenkins, 538 B.R. 129 (Bankr. N.D. Ala. 2015). The Jenkins court agreed with the defendant creditor, noting the idea that the FDCPA penalizes the filing of a POC on a time-barred debt “loses traction” in light of the Bankruptcy Code’s procedural framework for allowing and disallowing claims.

Based upon the case law, the potential award of attorneys’ fees and costs to the debtor where a creditor files a stale claim is heightened in several states. Since the FDCPA is a “fee shifting” statute, expect debtors to continue to seek attorneys’ fees from defendant creditors in other states where a POC is filed on a stale debt. If the claim is stale, consult legal counsel as the likely remedy is disallowance of the claim. If there is some other conduct, however, the FDCPA still may be a threat if the conduct is considered false, deceptive, or unfair.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

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“Adoptive Business Records” Doctrine: Admitting a Prior Servicer’s Records into Evidence

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016

 

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

A growing body of case law supports the qualification of a prior servicer’s loan records as a business records exception to the hearsay rule under the “adoptive business records” doctrine. Perhaps not surprisingly, given the sheer volume of foreclosure activity and resulting litigation, Florida courts have led the way in allowing a servicer to rely on a prior servicer’s records.

Florida

In WAMCO XXVIII, Ltd. v. Integrated Electronic Environments, Inc., 903 So. 2d 230 (Fla. 2d DCA 2005), the servicer’s witness had personal knowledge of how his company kept its records and was personally involved in servicing loans. He was familiar with the computer record-keeping system of the prior servicer and the generally accepted policies and procedures of servicing companies. He reviewed the records being transferred and was involved in checking for errors and omissions when the records were transferred. His testimony, relying on information gathered and maintained by the transferor servicer, was found admissible under the business records exception.

A more recent case is Sas v. Federal National Mortgage Association, 165 So. 3d 849, 2015 WL 3609508 (Fla. 2d DCA, June 10, 2015). Seterus’s records custodian testified that he was familiar with its business practices in making and maintaining business records, with Fannie Mae’s record-keeping requirements for mortgage loan servicers, as well as with the servicer industry’s general practices in making and maintaining business records. He explained that the prior servicer, Chase, was bound by the same Fannie Mae requirements in maintaining mortgage loan records and that Seterus thoroughly reviewed Chase’s records at the time of transfer and found no discrepancies.

Another 2015 case is Nationstar Mortgage, LLC v. Berdecia, 2015 WL 3903568 (Fla. 5th DCA 2015). In Berdecia, the witness had not personally participated in the “boarding” process to ensure the accuracy of the records acquired from CitiMortgage (when Nationstar took over servicing the subject loan); however, she demonstrated a sufficient familiarity with the “boarding” process to testify about it. Her testimony not only satisfied the requirements for admitting the mortgage documents under the business records exception to the hearsay rule, her testimony also demonstrated knowledge of the accuracy of the records.

Conversely, a poor choice of witness — or a poorly prepared one — can lead to the exclusion of the testimony. This was the case in Holt v. Calchas, LLC, 155 So. 3d 499 (Fla. 4th DCA 2015). In Holt, the above-referenced WAMCO case was distinguished because the witness lacked sufficient detailed knowledge as to how the prior servicers kept their records. Also, see Burdeshaw v. Bank of New York Mellon, 148 So. 3d 819 (Fla. 1st DCA 2014) and Hunter v. Aurora Loan Services, LLC, 137 So. 3d 570 (Fla. 1st DCA 2014), review denied, 157 So. 3d 1040 (Fla. 2014). In both Holt and Burdeshaw, the servicer’s records custodian failed to testify that the successor loan servicer independently verified the accuracy of the payment histories received from the prior servicer, or to detail the procedures used for such verification.

Massachusetts
The Supreme Judicial Court of Massachusetts ruled favorably on the subject more than ten years ago: “Given the common practice of banks buying and selling loans, we conclude that it is normal business practice to maintain accurate business records regarding such loans and to provide them to those acquiring the loan. … Therefore, the bank need not provide testimony from a witness with personal knowledge regarding the maintenance of the predecessors’ business records. The bank’s reliance on this type of record keeping by others renders the records the equivalent of the bank’s own records. To hold otherwise would severely impair the ability of assignees of debt to collect the debt due because the assignee’s business records of the debt are necessarily premised on the payment records of its predecessors.” [Beal Bank, SSB v. Eurich, 444 Mass. 813, 831 N.E. 2d 909, 914 (Mass. 2005)].

North Carolina
While not overtly adopting the adoptive business records doctrine, a recent case suggests that the appellate courts would be receptive to the concept. In State v. Hamlin, 2015 WL 4429684 (N.C. App. July 21, 2015), the court ruled as admissible the testimony (and the computer printouts offered into evidence) from a grocery store security chief. The evidence was based on records of the store’s gift cards’ usage, where those records and the printouts from the computer system were created and maintained for the store by a third-party server company.

Missouri, Kansas, Nebraska
Unfortunately, as with many legal concepts, there is no uniformity across the states. In CACH, LLC v. Askew, 358 S.W.3d 58 (Mo. 2012), for example, the Supreme Court of Missouri reviewed that state’s judicial precedent relating to the foundation requirement for admissible business records. The court reviewed and cited to numerous cases; the quotation below, excerpted from the CACH decision, is consistent with the ultimate holding that reversed the circuit court’s judgment, which had been entered in favor of the plaintiff debt collector.

‘“The business records exception to the hearsay rule applies only to documents generated by the business itself. ... Where the status of the evidence indicates it was prepared elsewhere and was merely received and held in a file but was not made in the ordinary course of the holder’s business it is inadmissible and not within a business record exception to the hearsay rule under § 490.680, RSMo 1986.’ A custodian of records cannot meet the requirements of § 490.680 by simply serving as ‘conduit to the flow of records’ and not testifying to the mode of preparation of the records in question. C & W Asset, 136 S.W. 3d at 140.”

Courts in Kansas and Nebraska have also refused to follow the adoptive business records doctrine. See State of Kansas v. Guhl, 3 Kan. App. 2d 59 (1979), and State of Nebraska v. Hill, 2003 Neb. App. LEXIS 156 (2003).

Federal Circuit Decisions
Allowing a litigant to introduce records it relies on in its business operations, where those records were created by a third party, is not a new phenomenon. Indeed, several federal circuit courts have ruled favorably on the subject, including the following:

First Circuit — determined that the head of a bank’s consumer loan department was qualified to introduce a service bureau’s computer-generated “loan histories” as the bank’s business records, where the bank could and did retrieve information from the service bureau. [U.S. v. Moore, 923 F.2d 910, 914-15 (1st Cir. 1991)].

Eighth Circuit
— has expressly agreed with other courts that “a record created by a third party and integrated into another entity’s records is admissible as the record of the custodian entity, so long as the custodian entity relied upon the accuracy of the record and the other requirements of Rule 803(6) [of the Federal Rules of Evidence] are satisfied.” [Brawner v. Allstate Indemnity Co., 591 F.3d 984, 987 (8th Cir. 2010)].

Tenth Circuit — “Put simply, if it can be established that a given document was relied on by a business and incorporated into that business’s records in the ordinary course, it is irrelevant that the record was generated by a third party so long as Rule 803(6) [of the Federal Rules of Evidence] is otherwise satisfied.” [United States v. Irvin, 2011 U.S. App. LEXIS 18087 (10th Cir. 2011)].

D.C. Circuit — “[S]everal courts have found that a record of which a firm takes custody is thereby ‘made’ by the firm within the meaning of the rule [902(11) of the Federal Rules of Evidence, or under Rule 803(6), which Rule 902(11) extends by allowing a written foundation in lieu of an oral one] (and thus is admissible if all the other requirements are satisfied). We join those courts.” [United States v. Adefehinti, 510 F.3d 319 (D.C. Cir. 2007)]. The Adefehinti opinion discussed a series of other federal cases supporting its holding — from the Second, Fifth, Ninth, Tenth, and Eleventh Circuits.

Copyright © 2016 USFN. All rights reserved.
Winter 2016 USFN Report

 

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