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October 2019 Member Moves + News

Posted By USFN, Monday, November 4, 2019


Bendett & McHugh, P.C.
(USFN Member – CT, MA, ME, NH, RI, VT) held its 9th Annual Miles for Miracles 5k and Family Fun Walk/Run to benefit Connecticut Children’s Medical Center (CCMC) on September 21, 2019. This year the firm was able to raise $15,000 for the hospital! The firm has raised over $60,000 for CCMC since their first race back in 2010. The firm has also named two new partners: Eva M. Massimino and Sonja J. Bowser.



Lerner, Sampson & Rothfuss
(USFN Member – KY, OH) had a fundraiser for October Breast Cancer Awareness and raised $1300 to benefit the Cris Collinsworth ProScan Fund.



Martin Leigh PC
(USFN Member – KS, MO) proudly announces the addition of two new shareholders, Amy Ryan and Greg Todd. Amy is Martin Leigh’s partner in its St. Louis/Clayton office and has been with the firm since 2007. Amy manages the St. Louis office and staff while maintaining her litigation practice for Martin Leigh’s clients. Greg, a partner in the Kansas City office, has been with the firm since 2014 and manages the Missouri creditor’s rights practice and the firm’s bank transactional work. Amy and Greg have consistently exceeded the expectations of clients, the firm and its employees, exhibiting the leadership, business acumen, dedication, and legal expertise that is critical in delivering Martin Leigh’s exceptional legal services to its clients. Greg Todd and Amy Ryan join shareholders Steven M. Leigh, Thomas J. Fritzlen, Jr., and Beverly M. Weber in the executive leadership of Martin Leigh PC.

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Pretty Penny to Pay for Violating Rule 3002.1(c)

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Nisha B. Parikh, Esq. and Steven Lindberg, Esq.
Anselmo Lindberg & Associates
USFN Member (IL)

The United States Bankruptcy Court for the District of Vermont recently imposed sanctions against a mortgage servicer for violations of Rule 3002.1(c) of the Federal Rules of Bankruptcy Procedure in three consolidated cases: In Re Gravel, In Re Beaulieu and In Re Knisley, 2019 WL 2710197 (D. Vt. June 27, 2019). Rule 3002.1(c) requires that a notice be filed itemizing all recoverable fees, expenses or charges advanced post-petition by a creditor. The notice shall be filed within 180 days of the fees being incurred and shall be served on a debtor, debtor’s counsel and the trustee. 

In the consolidated cases, which all involved violations of Rule 3002.1(c), the U.S. District Court remanded the matter back to the bankruptcy court solely to focus on the court’s authority to impose punitive sanctions for violations of the bankruptcy code, ultimately levying a $300,000.00 sanction to the mortgage servicer. In its opinion, the court held the imposition of sanctions was warranted because the mortgage servicer violated Rule 3002.1(c) by failing to file Notices of Post-petition Mortgage Fees, Expenses and Charges (PPFNs).

Further, the mortgage servicer sent the debtors approximately 25 incorrect mortgage statements listing fees and costs incurred during the bankruptcy which showed the loan to be in default, post-discharge, when the loans were already determined to be current. As a result, the Chapter 13 trustee filed a motion in each case requesting that the court impose sanctions against the servicer.

In Gravel, the court entered a Debtor Current Order on May 20, 2016, determining the debtors cured all prepetition mortgage defaults and were current on their post-petition mortgage payments and any other charges or amounts due under their mortgage. Five days after the Order was entered, the Gravels received a mortgage statement from the servicer which listed outstanding property inspection fees in the amount of $258.75, even though the servicer failed to file a PPFN for those fees during the bankruptcy.

Similar to Gravel, in Beaulieu, the debtors received a mortgage statement less than three weeks after the court entered a Debtor Current Order which included a $30.00 fee for Non-sufficient funds  and another $56.25 fee for a property inspection. Again, the servicer did not file PPFNs regarding those fees during the bankruptcy.

Finally, the Knisley case mirrors the first two. In Knisley, although a Debtor Current Order was not yet entered, the servicer sent the debtors mortgage statements that included charges of $246.50 for property inspection fees and $124.50 in late charges. These charges were over 180 days old and, similar to the other consolidated cases, the servicer again failed to file PPFNs in the bankruptcy case.

By including charges on the debtors’ mortgage statements without filing PPFNs, the servicer was found to be in direct violation of Rule 3002.1(c) in all three cases. Although the fees were technically recoverable against these debtors pursuant to their respective loan documents, the servicer did not comply with the requirements of the Bankruptcy Code. These relatively small charges ultimately cost the servicer hundreds of thousands of dollars because it did not file PPFNs, which would have allowed the fees to survive a discharge and be recoverable against the debtors.

In all Chapter 13 bankruptcy cases, a mortgage creditor has 180 days from the date charges are incurred to file a PPFN. It is best practices for PPFNs be filed every 180 days to protect a creditor’s ability to collect fees, expenses, and/or other charges incurred during the course of a bankruptcy.

Outstanding and unpaid PPFNs should also be included in a creditor’s response to the trustee’s Notice of Final Cure. This will ensure that the court, debtor(s), and trustee are fully advised of the amounts due and owing to a creditor at the time the trustee filed the notice. To avoid sanctions, it is imperative that creditors consult with their local counsel to determine what fees, expenses, and/or charges are recoverable over the course of a Chapter 13 bankruptcy and can be collected post-discharge.

The servicer is currently appealing the decision, and updates will be provided through e-Update as they become available.

 

Copyright © 2019 USFN. All rights reserved.

 

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Accepting Differences in Order to Advocate for Others

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019

Introduction by
Sally Garrison, Esq.
The Mortgage Law Firm, PLLC
USFN Member (AZ, CA, HI, OK, OR, WA)

Interview by
Jorge Rios-Jimenez
BDF Law Group
USFN Member (TX, GA, CO, CA, NV and AZ)

Diversity and inclusion are the watchwords of modern business. In addition to being equitable and just, there are compelling business reasons for promoting diversity and inclusion. In a rapidly changing and increasingly challenging environment, businesses must be adaptable. A diverse and inclusive workforce reduces turnover, provides stability, and fosters innovative problem solving through different perspectives to see opportunities and pitfalls that could otherwise be overlooked. USFN has established a new Diversity and Inclusion Committee dedicated to providing education and programming on this critical, and often misunderstood, area.

The first program sponsored by this committee was featured at the USFNdustry Forum in Nashville, Tennessee in June. Jessica Pettitt, M.Ed., CSP, author, comedian, and nationally recognized speaker, spoke to the attendees about being “Good Enough Now,” pushing everyone to start having the difficult conversations. In taking those risks, leaders establish a corporate mindset of learning and the habit of building diversity and inclusion over time. She challenges business leaders to take an honest inventory and move from abstract aspirations to action-based leadership. Jessica made her case in her signature voice: insight wrapped in humor. The audience was inspired, energized, and ready to start the conversation.

For those who were not able to be there, Diversity and Inclusion Committee member Jorge Rios-Jimenez interviewed Jessica to give our readers a sample of what we learned at the Forum.

How do you effectively gain buy-in from participants/employers to educate them on building welcoming and productive teams?
You can't. This is a hard answer to give and it is a typical question I get asked. I, nor you, nor anybody can make anyone do anything. You just have to work with those that are interested, even if that means doing this important work all alone as you can. These small gestures set an example for others that this work matters and is your best recruitment tool. There is a TON of research about increasing profits, talent retention, diverse recruitment, and the like and the positive effects (and affects) of diversity work that builds welcoming and productive teams and none of this is motivation for everyone to buy in. More research isn't the answer. Trying to try to set an example for work matters is all that is left to be effective. Along the way, others will feel more welcomed and become more productive.

Diversity and inclusion has been a hot topic for some time, but as of recently there seems to be more traction in expanding our awareness. Inevitably, some organizations have tried to work on this but have missed the mark. What would you recommend as something to avoid in starting these efforts?
I would avoid several things. First - a lot of organizations create metrics, like "increase diversity by 10%," without knowing what the current diversity is or even the organization's definition of diversity. There also isn't a functional timeline associated with this goal so it can never fail, nor can it ever be done. Second - trying to do diversity and inclusion work without any form of measurements. Painting a mural and having a "mandatory fun" potluck won’t solve problems without a measured plan to note current status, progress, as well as a process to respond to issues gathered. Organizations often ask for input and then do nothing with it. This feels even worse than never being asked in the first place. Third - don't set someone or a small group of interested people up to fail. Organizations often respond to the need for Diversity, Equity, and Inclusion (DEI) work by creating a committee or an affinity group, or maybe even hiring a staff position and then give these tapped resources the responsibility to do DEI work with no resources, budgets, or institutionalized support. The organization leaders can check a box and it looks like these folks just aren't successful. Lastly - thinking that Diversity, Equity, and Inclusion work has a finish line. This work is never done. It can't be boiled down into a worksheet and is about a holistic cultural shift.

In your experience, what is the biggest challenge in implementing diversity and inclusion in an organization?
The biggest challenge is all players recognizing that a problem doesn't have to be experience for it to matter to someone else. We all have VERY different lived experiences and we must accept these differences without getting defensive and accept them as truth and do something about them until we find ourselves advocating for others before we are even told of a concern.

What would you say has been your greatest accomplishment in guiding others to stand up and take action?
Laughter is the best community builder as well as an equalizer so that we can work together with one another, heal wounds, decrease ignorance, and increase the connections with one another both in and outside of the office.

What are common misunderstandings people have with regards to diversity and inclusion?
That the work needs to be done by someone else. This work must be a part of every person's life in as many ways as possible from all of our privileged and marginalized identities and experiences. There will always be more elements to learn about ourselves and that is our responsibility and not that of those targeted, excluded, or feeling left out.

What advice do you offer to avoid unconscious bias?
There is no way to avoid unconscious bias. We can only work to become more conscious of our unconscious positive and negative bias.

 

Copyright © 2019 USFN. All rights reserved.

 

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Attorney Development: Building the Best of the Best

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Jeremy B. Wilkins, Esq.

Brock & Scott, PLLC
USFN Member (AL, CT, FL, GA, MA, ME, MD, MI, NC, NH, OH, RI, SC, TN, VA, VT)

Capable and thoughtful attorneys are the cornerstone of any law firm or corporate legal department, and this is particularly true in today’s heavily regulated mortgage default servicing industry.  To maximize attorney competency, it is incumbent upon leadership to guarantee both a platform and the opportunity for an attorney to grow and develop during their tenure with the organization.  Therefore, a concrete plan must be set forth within each firm or corporate legal department to attain this goal.

The starting point for attorney development are the laden principles outlined with the American Bar Association’s Rules of Professional Conduct (“RPC”), specifically the conduct  governing the responsibilities of managing and supervisory attorneys (“managing” attorney).[1]  Pursuant to Rule 5.1,managing attorneys are responsible for ensuring that the conduct of those they supervise conforms to the Rules of Professional Conduct.  This duty of oversight is a considerable obligation because requirements under the rules are often broadly defined, far reaching in scope, and juxtaposed against obligations of other individuals., For instance, all attorneys are bound to professionalism individually, but in some circumstances, liability is imputed to a managing attorney for ethical shortcomings of a subordinate attorney[2].  Therefore, a managing attorney has every motivation to facilitate development of subordinate attorneys.  With these two ethical provisions working synergistically, attorney development becomes an essential aim for any organization.

Attorney Mentoring (Phase 1) – Striking the Right Baseline
With the oversight framework of Rule 5.1 set forth as guidance, the managing attorney must make reasonable assurances that all lawyers within the organization are abiding by the RPC. The best measure for meeting the reasonable assurances standard is a total investment in the development of the attorney. 

The first step of attorney development is a robust mentoring program commencing on their first day with the law firm.  Each attorney should be assigned a mentor that will immediately start assisting the newly hired mentee attorney with navigating through the basics, thereby cultivating an atmosphere of progressive growth through measured and strategic exposure to legal matters (including courtroom appearances), client development, and comprehension of an organization’s operations. 

When it comes to exposure to legal matters, there should be a broad-based approach to different aspects of the industry to generate maximum exposure for the attorney enhancing the attorney’s learning curve.  Diversity of legal work is paramount to long-term development.  As such, a mentoring program requires a framework that ensures valuable experiences for the mentee.  For instance, a mentor should ensure the mentee has necessary resources available to achieve early success within appointed legal work.  Essentially, this means that a mentor should help early accomplishments while developing confidence through performance.  This program must be documented to track the progress of the attorney and allow for a layering of increased legal exposure based upon the mentee attorney’s success at each stage.  This also includes the documenting of coachable moments for the mentee attorney.  This is the most effective way to learn to experience a degree of learnable remediation early on for the mentee attorney. 

Balancing training, oversight, and on-the-job performance are cornerstones of a successful mentoring program, without this equilibrium the program will be fruitless long term.  In many ways, the mentoring program is predicated upon having a successful mentor in place as this, in turn, will bolster the success of the mentee attorney’s development.  Moreover, a strong mentor will create an example for the mentee attorney, consequently establishing the foundation for a healthy cycle of the mentee attorney subsequently becoming a mentor down the road.  If the mentor does not do his or her part of the mentee attorney development, it will create a roadblock in the cycle of development, which may negatively impact organizational culture. 

The mentoring program should also emphasize the importance of client development and overall relationship development.  In the mortgage default servicing industry, long-term relationship building is a key component of an organization’s long-term success.  Law firms and corporate legal departments should embrace the view that a fundamental part of a mentee attorney’s development is learning how to cultivate relationships within the industry.  This comes with calculated exposure to industry conferences and events, as well as placing the mentee attorney in situations whereby they are interacting with clients and vendors concerning legal matters at an early stage of their development.  If the mentor fails to strike a balance with the relationship aspect of the mentee attorney’s development and maintains a protection of the old guard in the industry, any desires to build a generational organization will be impeded.  It is vital for a mentee attorney to get exposure on a calculated basis with industry clients and colleagues at a level commensurate with their demonstrated developmental proficiency.

Lastly, with respect to the mentoring platform, mentee attorneys should receive training and development in operational matters.  The mortgage default servicing industry is a unique blend of legal and operational functions.  While it is likely preferable that attorneys focus on legal issues with non-attorney staff handling operational matters, it is also important in the industry that every attorney possess a basic acumen of the operational principles, duties, and functions within the organization.  By gaining this operational understanding and appreciation, the mentee attorney will increase their overall effectiveness as an attorney and a leader within the organization.  Furthermore, it creates an environment of cohesion within the organization as the mentee attorney will effectively and naturally start adhering to oversight principles as dictated by the Rules of Professional Conduct with respect to responsibility over non-attorneys.[3]  Producing a well-rounded attorney with a wide range of experiences early on via a strong mentoring program will bolster the organization’s attorney developmental profile in the mortgage default servicing industry.

Attorney Mentoring (Phase 2) - Continual Learning, Continued Growth, and Continued Advancement
Mentoring does not stop at the intersections of work performance and involvement in organization operations.  An attorney should never stop learning and their development is predicated upon that premise.  In addition to state mandated continual education requirements, learning must continue in practice as well.  Learning and education come in varying degrees of importance and may have varying degrees of results.  However, a mentor that encourages regular education and learning opportunities ensures the mentee attorney develops alongside changes within the mortgage default industry.  In addition to state specific organizations geared to promote educational opportunities for attorneys, there are innovative member-based institutions, such as USFN, within the industry offering a litany of educational opportunities through conferences, publications, and webinars among other services.  Recognition, awareness and exploitation of opportunities for continual learning will place a natural emphasis on successful attorney development.

As the mentee attorney matures through the mentoring platform, the growth curve should be accelerated.  The best way to heighten expectations is through additional challenges and duties.  The mentee attorney should look to engage in the training of staff and the training of industrywide partners.  This will increase the mentee attorney’s visibility inside and outside the organization.  In turn, the mentee attorney’s confidence will grow, thereby enhancing the quality and image of the organization. 

Further growth paths should include exposure to industry conferences and events as means to reward the mentee attorney, by investing in their growth acceleration.  There is no substitute for imputing confidence and faith in an attorney as means to recognize their efforts.  Moreover, such exposure can also enhance organizational strength by creating the ability to be adaptable to the everchanging industry perspectives. 

Lastly, the mentee attorney should understand that with their development comes the potential for advancement within the organization.  Mentee attorneys must see the ability to move up within the organization if their actions and performance dictate such merit.  A clear and concise attorney advancement path that comports culturally and organizationally, will further bolster attorney development as it goes hand in hand with an attorney mentoring platform. 

In conclusion, to be the best, develop the best.  In the mortgage default servicing industry, law firms and corporate legal departments should strive to have the best attorneys serving their organization.

 

[1] ABA Model Rules of Professional Conduct (Rules of Professional Conduct) Rule 5.1., or applicable state specific rule, for example North Carolina Rules of Professional Conduct Rule 5.1 – Responsibilities of Principals, Managers and Supervisory Attorneys.  

[2] See Rule 5.1(c) of the Rules of Professional Conduct

[3]  ABA Model Rules of Professional Conduct (Rules of Professional Conduct) Rule 5.3 – Responsibilities of Principals, Managers and Supervisory Attorneys.  

 

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Crumbling Foundation in Connecticut and Appraiser Liability

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Peter A. Ventre, Esq. 
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

In Renewal Capital, LLC v. Joshua Martin, et al., Superior Court, Judicial District of Hartford at Hartford, Docket No. HHD-CV18-6088271-S, a lender, RCN Capital Funding, LLC (“RCN”), brought an action claiming the appraiser was negligent in failing to discover, and disclose in his appraisal report the presence of pyrrhotite which causes crumbling foundation in homes, and therefore the foundation of the property appraised was defective requiring replacement. RCN claimed that if such defect was provided in the appraisal, it would not have made the loan to the borrower, Renewal (an original party to the case which had been withdrawn).  RCN also alleged First American Staff Appraisals, Inc. was vicariously liable for the negligence of its appraiser. The court granted defendants’ motion for summary judgment, issuing a Memorandum of Decision (8/16/2019).

The initial argument addressed whether Connecticut General Statutes §36a-755(b) applied, which provides an appraiser is not liable to a third party unless there is an intentional misrepresentation in the appraisal.  Though the appraiser was retained under contract with a third party to conduct the appraisal, the court held the appraiser had a “functional relationship” with the plaintiff identified as the “intended user” of the appraisal, which the court held rendered the statute inapplicable; the court noted the plaintiff did not allege in the complaint any intentional misrepresentation. 

The defendants argued, and the court found, that the appraisal contained limiting language with regard the duties and responsibilities of the appraiser in conducting an appraisal. RCN attempted to attack the appraisal language as exculpatory language for the appraiser to use to escape their own negligence, which is disfavored by courts.  The court, however, found the appraisal language instead limited the scope of the appraiser’s duties and responsibilities, and insulated the appraiser from liability for failing to detect problems that would be discernable only with additional engineering or testing.  To support their position, the defendants submitted two affidavits, from its expert (a certified residential real estate appraiser) and the actual appraiser.  The appraiser testified it was not communicated to him, or brought to his attention, that there was a concern with the foundation. The appraiser testified that he is not qualified to conduct testing to discern the existence of crumbling foundation as an appraiser because he lacked the requisite skill, training, knowledge, and qualifications of a licensed home inspector or professional structural engineer to conduct such testing.  The expert testified in her affidavit that the duty of discerning crumbling foundation belongs to a qualified licensed home inspector or a professional structural engineer and is not the responsibility of an appraiser under the Uniform Standards of Professional Appraisal Practice.  The court found the plaintiff failed to proffer any admissible evidence to rebut defendants’ contention that based on the limiting language in the appraisal, they did not have a duty, or the ability, to discover the foundation was defective and would need to be replaced. 

The court held the plaintiff attempted to introduce a new theory of liability, “geographical incompetence,” for the first time in its opposition to the motion for summary judgment to circumvent the legal effect of the limiting conditions in the appraisal.  RCN alleged in their complaint that the defendants negligently failed to discover and disclose the actual presence of pyrrhotite resulting in the defective crumbling foundation.  However, the plaintiff failed to allege in the complaint a geographical competence theory claiming that the appraiser should have known, based on publicly available information, that there was a risk or generalized risk, that pyrrhotite was present.  The Judge notes in a footnote (#8) that RCN abandoned its actual claim of negligence as plead in its complaint.  The court held that at this stage of the case it would be fundamentally unfair and prejudicial for RCN to interject a new theory for the first time in opposition to a motion for summary judgment.

The court noted the defendants raised several evidentiary issues as to the information submitted by the plaintiff in favor of its objection to the motion for summary judgment, including as to Plaintiff’s expert report. The court found the articles in the report which served as the basis for and were incorporated into that report were unsubstantiated and inadmissible hearsay. This is the first case in Connecticut in which a lender attempted to seek recovery from an appraiser as a result of having made a loan on a property with a crumbling foundation.  

For more information regarding Connecticut’s crumbling foundation crisis, please see the e-Update Archives at https://www.usfn.org/page/USFNeUpdate


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California Eviction Timelines Changing

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Mark S. Bosco, Esq., Leonard J. McDonald, Esq. and Megan E. Lees, Esq.
Tiffany & Bosco, P.A.
USFN Member (AZ, CA, NM and NV)

California Assembly Bill 2343, Cal. Civ. P. §§1161 and 1167 were amended and effective September 1, 2019, the Notice Period and Response Deadline in an eviction action will exclude weekends and judicial holidays. Accordingly, in counting a three-day notice to pay rent or quit, or a three-day notice to perform covenant or quit, or in responding to a complaint for unlawful detainer, Saturdays, Sundays and judicial holidays are excluded. See Cal. Civ. P. §§1161 and 1167.

Currently, weekends and judicial holidays are included in calculating the notice period and response deadline in an eviction proceeding. It is critical that all internal notice and service timelines for California evictions now excludes weekends and judicial holidays, effective September 1, 2019.

 

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Trial Court Decision on Standing, Laches, Unclean Hands Upheld on Appeal

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Jeffrey M. Knickerbocker
Bendett & McHugh, P.C.
USFN Member (CT, MA, NE, NH, RI, VT)

In U.S. Bank v. Fitzpatrick, 190 Conn. App. 773 (2019), the Connecticut Appellate Court upheld the decision of a trial court which entered a judgment of strict foreclosure[1] in favor of plaintiff.  This was, in fact, the second foreclosure against this particular defendant involving the same mortgage.  The first action was not resolved through foreclosure mediation, and the plaintiff had thereafter prevailed in establishing liability of the defendant on a motion for summary judgment, defeating the defendant’s defenses which challenged plaintiff’s standing to foreclose. However, before the plaintiff secured a final foreclosure judgment in this initial foreclosure, the case was dismissed pursuant to the court’s docket management program, and the court declined to open that dismissal, which necessitated the restarted, second foreclosure action.   The borrower then attempted to challenge the second foreclosure action by claiming that the length of time (six years) from the time of the default to the commencement of the action, precluded the mortgagee and holder of the note from enforcing the note and mortgage. In addition, the defendant again claimed that the plaintiff lacked standing.  The trial court rejected the borrower’s arguments the mortgagee could not enforce the mortgage, and the appellate court affirmed that decision.  Fitzpatrick v. U.S. Bank, 173 Conn. App. 686, cert denied 327 Conn. 902 (2017).      

As far as the standing argument, the defendant claimed that the two specific endorsements on the note, neither to the plaintiff, required the court to find that the plaintiff was not the holder of the note and therefore the plaintiff lacked the standing to foreclose. The trial court rejected these arguments and found that the note was endorsed in blank, making same bearer paper.  Further, the appellate court had found “…(t)he defendant did not address the blank endorsement contained on page three of the note in his memorandum of law in support of his motion to dismiss or in his supplemental objection to the plaintiff's motion for summary judgment.” U.S. Bank, Nat'l Ass'n v. Fitzpatrick, supra, 190 Conn. App. at 781, n.9.  Defendant argued that a voided endorsement somehow invalidated the other endorsements.  Neither the trial court nor the appellate court were swayed by this argument.

The defendant also claimed that the trial court erred in entering a judgment of foreclosure because of defendant’s laches and unclean hands argument.  Laches is a defense that alleges that there has been inexcusable delay which prejudices the defendant.  The defense of unclean hands alleges that the defendant should be granted equitable relief in this foreclosure case because plaintiff had acted unfairly.  Defendant claimed that summary judgment, which can only be granted when there is no genuine issue of fact and when plaintiff is entitled to judgment as a matter of law, was inappropriate because issues existed as to whether (1) the plaintiff's delay in commencing this action caused the debt to become greater than his equity in the property, (2) the value of the property declined as a result of the plaintiff's delay, and (3) the plaintiff's delay had been fair, equitable and honest.  The trial court had observed from the record of the first foreclosure that delays were caused by the defendant during the first action by his efforts to extend foreclosure mediation.  The appellate court pointed out that defendant failed to provide any evidence to support his assertions.  Accordingly, the appellate court found that bald assertions of the defendant were insufficient to satisfy his burden to preclude the entry of judgment in plaintiff’s favor.

This case underscores the importance of avoiding unnecessary delays in foreclosure actions. An unnecessary delay can be used, unsuccessfully in this case, as an equitable means, known as laches, to defend a foreclosure action in Connecticut, where there is no specific statute of limitations on foreclosures.


[1] The rare form of judicial foreclosure in Connecticut and Vermont that permits a lender to take title without a sale.

 

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Oklahoma Recognizes Priority of Mortgage Over HOA Liens

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Kim Pogue Jenkins, Esq.
Baer & Timberlake, P.C.
USFN Member (OK)

 

In a case of first impression, the Oklahoma Court of Civil Appeals held that a prior recorded mortgage held priority over a homeowners association lien, as the homeowners association lien was inchoate and unenforceable until the homeowners failed to pay assessments due. At issue in CIT Bank, N.A. v. Heirs, Personal Representatives, Devisees, Trustees, Successors and Assigns of McGee, 444 P.3d 496, 2019 OK CIV APP 36, was when a homeowners association lien becomes effective.

The real property involved is located on a residential and golf course development in Love County, Oklahoma. The Dedication of Restrictions, Conditions, Easements, Covenants, Agreements, Liens and Charges, Falconhead, Phase 1 (“Dedication”) was properly recorded on March 15, 1971. The Dedication provided that each purchaser of a lot in the subdivision would, by accepting a deed to the lot, agree to pay all assessments determined by the Falconhead Property Owners Association, Inc. (“HOA”) and that the obligation to pay would constitute a lien upon the property running with the land. Edward and Laura McGee (“homeowners”) purchased a lot in Falconhead in 1996 subject to this Dedication.  In 2005, the homeowners executed a Home Equity Conversion Mortgage in favor of Financial Freedom Senior Funding Corporation, which was recorded on November 14, 2005, and was subsequently assigned to CIT Bank, N.A. (“CIT”).  CIT filed a suit for foreclosure of its mortgage on May 13, 2016. The HOA recorded a Lien Statement on May 20, 2016, after the homeowners failed to pay assessments, and CIT amended its complaint to join the HOA in its foreclosure.

CIT moved for summary judgment, and the HOA responded with a counter-motion for summary judgment in which it claimed priority over the mortgage. The HOA asserted that its lien “came into being and existed” from the time the homeowners accepted a deed in 1996. In support of its assertion, the HOA claimed that the mortgage holder was on notice of the lien and the contents of the Dedication. The HOA cited Grindstaff v. Oaks Owners Association Inc., 386 P.3d 1035, 2016 OK CIV APP 73, to say that adhering to the terms of the Dedication is a contract between the HOA and the homeowners, and cited to First National Bank v. Melton & Holmes, 9 P.2d 703, 1932 OK 149, to say that “a legal contract which creates a lien, does so upon the date of execution of the contract where language creating the lien is in praesenti.”  The HOA interpreted the language quoted above from the Dedication to mean that the lien was created at the time of recording the Dedication, and that the duty to pay assessments constituted an actual lien on the land, not the potential to become a lien. The HOA further noted that it is irrelevant when payment of assessments or payments on a promissory note are paid or not paid; time of creation of the lien is what is relevant. (See 42 O.S. §9 “A lien may be created by contract, to take immediate effect, as security for the performance of obligations not then in existence.”)  Finally, the HOA argued that language in the Dedication provided that HOA liens thereunder would be subordinate to construction mortgages, and that the HOA could voluntarily subordinate its lien to other mortgages if it so chose. The CIT mortgage was not a construction mortgage, and the HOA did not subordinate its lien to the mortgage.

The District Court of Love County granted summary judgment in favor of CIT, finding that its mortgage lien had priority over the lien of the HOA, and the Oklahoma Court of Civil Appeals affirmed, stating that the Dedication only gave the HOA a future right to make assessments and create a lien.

In its analysis, the Court of Civil Appeals looked at case law regarding the nature and priority of other liens. Quoting First Nat’l Bank of Tulsa v. Scott, 249 P. 282, 1925 OK 986, the Court compared the HOA lien to that of an ad valorem tax lien, wherein “the lien securing payment of those taxes does not attach until the amount of the assessment is subsequently determined and the tax becomes due and delinquent.” The Court determined that any lien created by the Dedication was inchoate, as one could not determine amounts due or how to discharge the lien. The Court went on to find that a lien may become choate and attach, but it cannot take priority over a previously perfected lien. U.S. v. Home Fed. Sav. & Loan Ass’n of Tulsa, 418 P.2d 319, 1966 OK 135.

The Court also compared the HOA lien to that of a mechanics and materialmen’s lien as provided by 42 O.S. §141. A “prior recorded mortgage takes precedence over a materialmen’s lien accruing after the recording of such mortgage, even to the extent of attaching to the improvements placed upon the mortgaged premises afterwards by the materialman.” Thompson v. Smith, 420 P.2d 526, 1966 OK 214. The Court reasoned that since a portion of the HOA assessments were used for maintaining common areas in the development, the lien was analogous to a materialmen’s lien and was not entitled to priority over the prior recorded mortgage. The Court did not consider the fact that the mortgage was a reverse mortgage to be relevant to the argument. The Court concluded by finding that the HOA lien was “inchoate and did not mature into an enforceable lien until December 2015” and that the HOA “perfected its lien on May 20, 2018, well after the Bank’s mortgage had been recorded.” In holding that CIT’s mortgage lien was first in time and prior to the HOA lien, the judgment of the District Court was affirmed.

While it will remain necessary to include homeowners association lien holders in foreclosure actions in Oklahoma, mortgagees may rely on this decision and this Court’s analysis to establish priority of the prior recorded mortgage over subsequently perfected HOA liens.

 

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South Carolina House Bill 3243 Streamlines Filing Fees for Real Estate Documents

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Reggie Corley
Scott & Corley, P.A.

USFN Member (SC)

 

On May 16, 2019, South Carolina House Bill 3243 (S.C. Code Section 8-21-310), the Predictable Recording Fee Act, was signed into law by Governor Henry McMaster. In doing so, South Carolina joined the ranks of 18 other states that determine real estate document recording fees based on a “predictable fee” basis. Currently, Georgia, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Mexico, North Carolina, North Dakota, South Carolina, South Dakota, Utah, Wisconsin, and Wyoming all calculate their recording fees using a predictable fee method.

The new South Carolina bill, which took effect with all county Register of Deeds/Clerk of Court offices on August 1, 2019, aims to streamline the filing of real estate documents statewide. The Predictable Recording Fee Act accomplished this by creating foreseeable fees for many commonly recorded real estate documents. The Act outlines numerous types of documents followed by a corresponding flat fee, due upon recordation. Prior to this Act, to calculate the amount owed for recording a document, most documents had a flat recording fee plus an additional variable fee. The additional variable fee was determined by the document’s total page count. When a document was submitted, the pages had to be counted for filing by the submitter. The document’s pages were then counted again, a second time, by county employees to ultimately calculate the total cost to file the document. This method was more time consuming than the new flat filing fee method.  House Bill 3243 ultimately eliminated the page counting method in favor of a predictable flat fee, based on the document type. Some examples of how real estate documents are classified and charged under the new bill are as follows: Deed to Real-Estate - $15.00; Mortgage - $25.00; Assignment of Mortgage - $10.00; Satisfaction/Release of Mortgage - $10.00; and a plat or survey not part of or attached to another document to be recorded - $25.00.

Ultimately, the benefit of the predictable fee method is to reduce the chances of penalties or documents being rejected, which can cause delays in completing real estate transactions. The predictable fee structure can save time and money for the recorder, submitter, and ultimately the consumer. Lenders, settlement agents, and lawyers filing documents on behalf of clients are just a few examples of who will benefit from this newer method of calculating recording fees.

 

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Could Your Loan be at Risk?

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Janaya L. Carter, Esq.

The Wolf Firm
USFN Member (CA, ID, OR, WA)

 

Although the Northwest traditionally trails behind the rest of the country on many legal issues, statute of limitations defenses (and for that matter offenses) have firmly arrived in the State of Washington. It is becoming more common to see borrowers in Washington seek quiet title judgments under RCW 7.28.300 based on a statute of limitations argument.

Promissory Notes, as written contracts, are subject to a six-year statute of limitations under Washington’s RCW 4.16.040.  The statute requires action upon a written contract to be commenced within six years of one of several events depending on the type of note and the conduct of the parties.   Washington courts have ruled the limitations period begins to run on an installment note when each installment becomes due. Herzog v. Herzog, 23 Wash.2d 382, 388, 161 P.2d 142 (1945). “But if an obligation that is to be paid in installments is accelerated, the entire remaining balance becomes due and the statute of limitations is triggered for all installments that had not previously become due.” 4518 S. 256th, LLC v. Gibbon, 195 Wash. App. 423, 434-35, 382 P.3d 1 (2016). The courts have clarified that in order for note acceleration to occur, the holder of the note must act “in a clear and unequivocal manner which effectively apprises the maker that the holder has exercised his right to accelerate the payment date.” Glassmaker v. Ricard, 23 Wash. App. 35, 38, 593 P.2d 179 (1979). Thus, “[s]ome affirmative action is required; some action by which the holder of the note makes known to the payors that he intends to declare the whole debt due.” Weinberg v. Naher, 51 Wash. 591, 594, 99 P. 736 (1909).

Traditionally, challenges by borrowers have focused on whether acceleration has occurred or whether the lender was attempting to collect installment payments falling outside of the statute of limitations.  At least initially, the pathway to successfully defending a statute of limitations case for the client seemed clear as a question of establishing readily discernable facts.  Even in circumstances where a question arose as to whether the statute of limitations had run, lenders could make arguments in favor of tolling, for abandonment of the acceleration through dismissal of the action or discontinuance, or for de-acceleration of the debt. 

Recently the well-worn trail has become overgrown and less discernable as Washington trial and appellate courts, as well as the 9th Circuit Court of Appeals, have changed the landscape with respect to statute of limitations arguments.  In cases where the borrower has received a bankruptcy discharge and failed to submit installment payments to the lender following that discharge within the following six years, there is a chance that a court will bar the enforcement of the lender’s deed of trust or expunge it from the title record as time-barred.

Of particular note and concern are the cases of Edmundson v. Bank of America, NA, 194 Wash.App. 920, 931, 378 P3d 272 (2016), Silvers v. U.S. Bank Nat. Ass’n, 2015 WL 5024173 (W.D. Wash. Aug. 25, 2015),  and most recently Hernandez v. Franklin Credit Mgmt. Corp., No. C19-0207-JCC, 2019 U.S. Dist. LEXIS 136543 (W.D. Wash. Aug. 13, 2019), U.S. Bank NA v. Kendall, 2019 Wash. App. LEXIS 1704, at *4, 2019 WL 2750171 (Wash. Ct. App. 2019) (noting that although a deed of trust's lien is not discharged in bankruptcy, the limitations period for an enforcement action "accrues and begins to run when the last payment was due" prior to discharge), and Jarvis v. Fannie Mae, Case No. C16-5194-RBL, 2017 U.S. Dist. LEXIS 62102 at *6 (W.D. Wash. 2017), aff'd mem., 726 Fed. App'x. 666 (9th Cir. 2018) ("The final six-year period to foreclose runs from the time the final installment becomes due . . . [which] may occur upon the last installment due before discharge of the borrower's personal liability on the associated note").

In Edmundson, the Court of Appeals held that the borrowers’ bankruptcy discharge, which terminated their personal liability under the promissory note, triggered the statute of limitations within which the lender was entitled to foreclose.   The Court reasoned that since the borrowers no longer owed payments after the discharge order released their personal liability, the statute of limitations was triggered by the payment before the discharge.  Id.  This ruling was reinforced by Courts in Silvers and Jarvis. In Silvers, the Court ruled that the right to enforce the Deed of Trust began to run from the last time any payment on the Note was due and the borrowers remained personally liable.   The borrowers were liable through the payment just before their January 25, 2010 discharge, causing the statute of limitations to begin running on January 1, 2010. In Jarvis, brought as a quiet title action by the borrowers, the Court entered summary judgment in favor of the borrowers, ruling that under RCW 7.28.300, the borrowers were entitled to quiet title because their discharge triggered the statute of limitations.  The Court noted that “[t]he [bankruptcy] discharge … alert[s] the lender that the limitations period to foreclose on a property held as security has commenced” and that “[t]he last payment owed commences the final six-year period to enforce a deed of trust securing a loan.”

In each of the above cases, borrowers had ceased to make regular payments prior to their bankruptcy discharge and made no payments to the lender thereafter.  Under common understanding, lenders could foreclose on the security instrument, but would be precluded from obtaining any personal judgment against the borrowers. 

But what of the scenarios in which a borrower continues to make installment payments after their bankruptcy discharge, and the loan is never escalated into a default status by the lender or its servicing agent.  Recent changes to RCW 4.16.270 provide some measurable comfort concerning loans in this scenario by codifying the common law.  The statute reads:

 

when payment has been or shall be made upon any existing contract prior to its applicable limitation period having expired, whether the contract is a bill of exchange, promissory note, bond, or other evidence of indebtedness, if the payment is made after it is due, the limitation period shall restart from the time the most recent payment was made. Any payment on the contract made after the limitation period has expired shall not restart, revive, or extend the limitation period.

 

RCW 4.16.270.  As this change to the law is very recent, there is no published case at this time interpreting the result of payment post-discharge by a borrower and its relative effect in resetting or restarting the statute of limitations clock. The question of whether a statute of limitations has run continues to be complex and fact intensive.  Each loan scenario is unique, and courts may take a hard line on the discharge and statute of limitations questions set forth above. 

To ameliorate their risk, it is critical for lenders to institute a process identifying loans that have been in bankruptcy to determine if a discharge was granted.  Once identified, lenders should work with local counsel to determine if possible tolling events have occurred, identify a deadline, and develop strategies for initiating foreclosure.  Certain events in the history of a loan, such as loss mitigation efforts may be helpful in defeating a challenge to the loan on a statute of limitations basis.  For example, in Thacker v. Bank of N.Y. Mellon, No. 18-5562 RJB, 2019 U.S. Dist. LEXIS 40734 (W.D. Wash. Mar. 13, 2019), the court ruled that the borrower’s certification in connection with his applications for loan modification was a written acknowledgement of the debt, did not evidence an intent to not pay it, and effectively restarted the statute of limitations, avoiding a loss on the loan.  Lastly, there may be additional western states besides Washington where the statute of limitations is similarly codified and possibly more restrictively interpreted by the courts. Lenders will want to consider identifying those States and assessing post-discharge loans to identify risk associated with the 9th Circuit’s ruling in Jarvis.

 

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Oklahoma Amends Statute Regarding Sheriff’s Appraisals

Posted By USFN, Tuesday, October 15, 2019

by Kim Pogue Jenkins, Esq.
Baer & Timberlake, P.C.
USFN Member (OK)

Foreclosure attorneys in Oklahoma may see a change in the method Sheriffs employ for appraisal of real property prior to Sheriff’s Sale. The Oklahoma Legislature amended 12 O.S. §759, effective November 1, 2019.

Prior to the amendment, a Sheriff was directed to appoint three disinterested persons who have taken an oath of impartiality to make an appraisal upon actual view of the real property. While retaining this provision, the amended statute provides an alternate option for the Sheriff to appoint a “legal entity” to make the appraisal. The legal entity must also provide an affidavit of impartiality and make its appraisal upon actual view. However, the appraisal of the legal entity “shall be developed by the legal entity using at least three independent, credible sources, each of which has estimated the real value of the subject property independently.” All other provisions of §759 remain unchanged.

Effects of the new statute are uncertain. It is possible that the appraisal by a legal entity could be less expensive. Should a Sheriff choose to appoint a legal entity instead of the three disinterested persons, foreclosure attorneys might be required to amend their appraisal forms provided to the Sheriff. Additionally, the requirement that the legal entity base its appraisal on “credible sources” could provide a means for defense counsel to challenge the validity of the appraisal.

While it remains undetermined at this time which Sheriffs may be considering the alternative “legal entity” appraisal, the Sheriff of one major county in Oklahoma is examining implementation of the new option.

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Connecticut Appellate Enforced Mortgage Where Witness Not Present at Closing

Posted By USFN, Tuesday, October 15, 2019

by Jeffrey M. Knickerbocker, Esq.
Bendett & McHugh, P.C.
USFN Member (CT, MA, NE, NH, RI, VT)

The borrower in Wells Fargo Bank, N.A. v. Fratarcangeli, 192 Conn.App. 159 (2019), argued that her mortgage was unenforceable because only one witness was present when she executed and delivered the mortgage to lender.  Requirement to convey land are found in Conn. Gen. Stat. § 47-5, which states in part, “(a) All conveyances of land shall be: (1) In writing; (2) if the grantor is a natural person, subscribed, with or without a seal, by the grantor with his own hand ... and (4) attested to by two witnesses with their own hands.”

The borrower alleged that at the closing there was a notary, and the notary supplied a false witness in an effort to validate the mortgage.  The borrower further alleged that such conduct constituted fraud and rendered the mortgage unenforceable.

The trial court granted the Plaintiff’s motion to strike the borrower’s claims with regard to the witnesses at the execution of the mortgage deed.  In Connecticut, a motion to strike is similar to a motion to dismiss under Fed.R.Civ.P. 12(b)(6).  Like the federal motion to dismiss, the motion to strike is based solely on pleadings with no consideration to the evidence. 

The trial court, and the appellate court in upholding the trial court’s decision, relied on Connecticut’s validating statute.  That statute, which is found at Conn. Gen. Stat. § 47-36aa, provides, in part, ‘“(a) Conveyancing defects. Any deed, mortgage ... or other instrument made for the purpose of conveying, leasing, mortgaging or affecting any interest in real property in this state recorded after January 1, 1997, which instrument contains any one or more of the following defects or omissions is as valid as if it had been executed without the defect or omission unless an action challenging the validity of that instrument is commenced and a notice of lis pendens is recorded in the land records of the town or towns where the instrument is recorded within two years after the instrument is recorded ... (2) The instrument is attested by one witness only or by no witnesses ....”  The appellate court found that the language of the statute was “plain and unambiguous.”  The appellate court found that other statutes had an exception for fraud, but the validating statute had no such exception.  Based on the fact that the statute does not have an exception to fraud, the court found that the validating statute applied to this action. The appellate court further upheld the trial court’s granting of the Plaintiff’s motion to strike the allegations concerning the execution of the mortgage.

This is an important case in Connecticut because some trial courts had refused to strike similar defenses based on allegations of fraud.  This appellate court decision establishes that having a witness added after the loan closing does not automatically invalidate the mortgage deed.  While the appellate court has applied the validating statute to this case, at closing a mortgagee would be well served by having two witnesses at a closing for a new mortgage. 

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USFN Briefing Follow-up: Bankruptcy

Posted By USFN, Monday, October 14, 2019
Updated: Thursday, October 10, 2019

by Lesley Bohleber, Esq.

Aldridge Pite, LLP

USFN Member (WA)


During the September USFN Briefing, there was a statement from an audience member that couldn’t be addressed due to time constraints (“I thought we couldn't send out statements on HELOC, without authorization from Bankruptcy Attorney”). Lesley Bohleber from Aldridge Pite, LLP provides an answer below. Downloads from past USFN Briefings and a schedule of upcoming topics may be found on the USFN Briefings webpage.

Mortgage servicers typically have a firm understanding of the required procedures for servicing a conventional loan secured by a mortgage or deed of trust when a borrower files a bankruptcy petition. Conversely, home equity line of credit agreements (“HELOCs”) often pose a host of challenges in bankruptcy proceedings. HELOCs are commonly charged off by the servicer or the lien securing the HELOCs is avoided in the bankruptcy case, if there is a lack of equity to secure the claim.

As of recently, some bankruptcy courts are considering issuing General Orders regarding HELOC payment change notices which would alleviate the servicing burden on these accounts. Federal Rule of Bankruptcy Procedure 3002.1(b) requires a mortgage servicer to file a Notice of Payment Change for a loan secured by a debtor’s principal residence, if the Chapter 13 Plan provides for either the debtor or trustee to remit payment on the loan. However, Rule 3002.1 also allows for a court ordered modification of this payment change notification requirement on claims arising from a HELOC. Proposed General Orders from the Southern District of California and District of Utah would require an annual or biannual notice, respectively, that includes a post-petition payment history. If the proposed General Orders are adopted, it may still be advisable for servicers to send monthly statements to the debtor to keep the debtor apprised of any changes in the monthly payment.

Regulations currently exist regarding periodic mortgage statements for closed-end loans (See 12 CFR § 1026.41), but there is no similar guidance for open-end loans such as HELOCs. However, HELOC servicers may use Section 1026.41 and case law as a guide for determining if they should send a periodic statement to a borrower in bankruptcy.

Unless the debtor or their attorney request a servicer cease sending monthly statements, providing a statement that is purely informational in nature and not coercive or demanding payment is unlikely to be deemed a violation of the automatic stay, regardless of whether the debtor provides a servicer with written authorization to send monthly statements. The same remains true post-discharge. Recently, the United States Court of Appeals for the 11th Circuit affirmed the Bankruptcy Court’s decision finding a post-discharge informational statement on a loan secured by a property surrendered in the Chapter 13 plan did not violate the discharge injunction. See Roth v Nationstar Mortgage., LLC (In re Roth), 935 F3d 1270 (11th Cir 2019).

(Click here for an additional story on the 11th Circuit Court of Appeals’ decision on Roth v Nationstar Mortgage).

In the case of Chapter 13 debtors, whether to send a statement and the contents of the statement on a HELOC should depend on how the claim is treated in the plan. If the plan provides for post-petition payments to be made directly to the servicer by the debtor, informational statements that include the monthly payment amount and due date should be sent to inform the debtor of the monthly payment amount so long as it does not demand payment. If the HELOC claim is paid through the plan with payments disbursed by the Chapter 13 Trustee, servicers should include a disclaimer advising the debtor the statement is for informational purposes only and directing the debtor to tender payments to the trustee rather than the servicer.

If a servicer elects to continue sending statements where a statement of intention or the plan provides for the surrender of the property secured by the HELOC loan, the statement should include a disclaimer instructing the debtor to ignore the statement if they intend to surrender the property securing the loan. In a case where the plan provides for the avoidance of a lien, any statement sent should clearly advise the statement is for informational purposes only and the debtor can ignore the statement if the lien has been avoided. Finally, all mortgage statements for HELOCs in bankruptcy should include instructions for the debtor to opt out of receiving mortgage statements and a toll-free number or address to which the debtor can send a written request. Additional disclosures required by 12 CFR § 1026.41(f) for closed-end loans may be used for HELOCs for further clarification.

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Total Debt Bids in Kansas

Posted By USFN, Monday, October 14, 2019
Updated: Thursday, October 10, 2019

by Blair Gisi, Esq. 
SouthLaw, P.C.
USFN Member (IA, KS, MO, NE)

A persistent borrower who has appealed her foreclosure several times has forced the Kansas Court of Appeals to clarify its position on total debt bids.

Upon the third review of this case by the Court of Appeals (as noted in the outset of the opinion), the appellant in JPMorgan Chase Bank, Nat'l Ass'n v. Taylor, 2019 Kan. App. Unpub. LEXIS 575 (Ct. App. Aug. 30, 2019) sought reconsideration of the confirmation of sale arguing it was “manifestly unjust.”

The basis for appellant’s claim was that even though JPMorgan Chase had successfully bid its total debt, the fair market value of the property was $50,000 to $60,000 higher and, therefore, her equity was being “stolen” by JPMorgan Chase.

The appellant’s Motion for Reconsideration was denied by the District Court which found that the bid was adequate since it was for the full amount of the in rem foreclosure amount and pursuant to K.S.A. §60-2415, a sale for the full amount of the judgment, taxes, and interest and costs of sale shall be deemed adequate.  The court went on to further recognize that, “The district court is generally only required to consider the fair market value of the foreclosed property if the bid is ‘less than the full judgment, taxes, interest, and costs.’” Taylor at 8 citing Olathe Bank v. Mann, 252 Kan. 351, 362, 845 P.2d 639 (1993).

Based on the foregoing and the fact that there was no actual evidence presented to rebut the presumption that a full debt bid is confirmable, the Court of Appeals found no abuse of discretion by the district court in denying the Motion for Reconsideration.

It was also pointed out that while the appellant was arguing her equity was being “stolen”, even if the bid was for less than the fair market value, the appellant is entitled to redeem the property for that amount, so it is ultimately to her benefit since she could pay the lesser amount and retain her equity.

While this case does not drastically affect the foreclosure landscape in Kansas, it does serve as an important reminder of the utility in bidding total debt or waiving the personal deficiency in precarious or prolonged foreclosure cases.

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Eleventh Circuit Court of Appeals Maintains Mortgage Statements Don't Violate Bankruptcy Code

Posted By USFN, Monday, October 14, 2019
Updated: Thursday, October 10, 2019

by Louise Johnson, Esq.
Scott & Corley, P.A.
USFN Member (SC)

In Roth v. Nationstar Mortgage, LLC No. 17-11444 (11th Cir. 2019), the 11th Circuit Court of Appeals held that a mortgage statement sent for “informational purposes only” and with appropriate disclaimers on a discharged mortgage debt was not a violation of § 524 of the Bankruptcy Code.

The underlying facts of the case are not unusual nor uncommon.  The defendant’s Chapter 13 Plan provided that secured creditors would retain their liens.  Nationstar was the servicer (“servicer”) for one of those secured creditors whose mortgage lien “survived” the bankruptcy discharge.

The Bankruptcy Court entered the discharge order which effectively prohibited creditors from attempting to collect the discharged debt.  After the entry of the discharge order, the servicer sent Roth certain mortgage statements (“statements”) containing express disclaimers that the statements were for informational purposes only, and that the statements were not an attempt to collect a discharged debt. The statements included an “amount due,” “due date,” and that statements about the negative escrow balance does not diminish the effect of the prominent, clear, and broadly worded disclaimer.  The servicer continued to send such statements even after Roth’s attorney sent the Servicer a cease and desist letter. On appeal Roth raised the issue of whether the servicer’s statements, after the discharge, was an improper attempt to collect a debt in violation of 11 U.S.C. § 524, justifying sanctions against the Servicer.

Roth argued that the FDCPA standard of “debt collection” should apply, rather than the bankruptcy court standard of what constitutes “debt collection.”[1] The FDCPA standard for determining if a communication is a debt collection is whether the statement would “mislead the least sophisticated consumer regarding the nature of her rights.”  Section 524(a)(2) of the bankruptcy code provides that a discharge of debt in a bankruptcy proceeding “operates as an injunction against the commencement or continuation of...an act...to collect...any such [discharged] debt.” 11 U.S.C. § 524(a)(2). The court in Roth applied the Bankruptcy standard, finding that when determining if the Informational Statement was an unlawful debt collection in violation of §524 “the objective effect” must be used, looking specifically to see if the informational Statement was used “to pressure the defendant to repay the discharged debt.” The Court emphasized that what counts as “debt collection” under one statutory scheme is not necessarily “debt collection” under the other; finding here that no debt collection attempt was present.

The 11th Circuit affirmed the lower Court’s ruling that the Statements did not violate § 524, as said Statements, with the appropriate disclosures, did not constitute an attempt to collect a debt.  Of special importance, the Roth Court declined to apply the FDCPA’s “least sophisticated consumer” standard when evaluating the Statements under § 524 of the bankruptcy code.  Rather, the Roth Court utilized a more objective standard of whether there was more than a “fair ground of doubt” as to whether the discharge order barred the servicer’s conduct.

 

[1] The FDCPA creates a civil cause of action based on certain prohibited debt collection methods, specifically a “false, deceptive, or misleading representation or means in connection with the collection of any debt” or an “unfair or unconscionable means” of debt collection. 15 U.S.C. § 1692e–f.


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August 2019 Member Moves + News

Posted By USFN, Wednesday, September 4, 2019


Rosenberg and Associates, LLC (USFN Member - DC) is excited to announce that Bradley M. Harris has joined the Firm.

Harris joins the firm as an Associate Attorney in its Bethesda, Maryland office where he will practice real estate law, with a focus on Maryland foreclosures, litigation, mediations and status hearings.  Bradley earned his undergraduate Bachelor of Arts Degree from University of Colorado and his Juris Doctor (cum laude) from Maryland Francis King Carey School of Law.  During law school, he served as an Articles Editor for Maryland’s Journal of Business and Technology Law.   He previously worked as a Law Clerk for the General Magistrates’ Office of Baltimore City Circuit Court and as an Associate Attorney for default law firms.  Brad was born and raised in Overland Park, Kansas, moved to Maryland for law school and currently resides in Laurel, Maryland. 

Firm Owner and Managing Partner, Diane Rosenberg adds, “We are thrilled to add Bradley to our default team.  His prior work experiences within the default industry will benefit our performance levels and services to our clients.”  



Columbia Business Monthly has named two attorneys from Scott & Corley, P.A. (USFN Member - SC) as part of a group comprising the Legal Elite of the Midlands for 2019. The magazine’s award highlights attorneys within the Midlands of South Carolina who are viewed by their peers as among the most highly esteemed in their fields. Legal Elite is the only awards program in the region that gives every active attorney the opportunity to participate and vote on their peers. The Legal Elite of the Midlands for 2019 is listed in the August issue of Columbia Business Monthly.
 
The selected attorneys of Scott & Corley, P.A. and their areas of practice are as follows:

Reginald "Reggie" P. Corley - Banking & Finance
Matthew E. Rupert - Residential Real Estate / Commercial Real Estate

Corley and Firm Chairman, Ronald “Ron” C. Scott have also been recognized in the 2020 edition of BEST LAWYERS in AMERICA® (Woodard-White Inc.) for the State of South Carolina. This year marks Ron Scott's 11th consecutive year as a selection for Mortgage Banking Foreclosure Law, as well as Reggie Corley's third consecutive year as a selection in the same category, which was created by BEST LAWYERS in 2010.


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July 2019 USFN Briefing Follow-up: REO/Eviction

Posted By USFN, Monday, August 12, 2019

Below is a roundup of legislation and case law from July’s REO/Evictions USFN Briefing. Post-webinar downloads and a schedule of upcoming topics may be found on the USFN Briefings webpage.

 

Legislative Updates


California
by Kayo Manson-Tompkins, Esq.

The Wolf Firm

USFN Member (CA, ID, OR, WA)

California AB 1482 –Bill to Establish a Statewide Rent Control

i. If passed, Section1946.2 and Section 1947.12 will be added to the Civil Code

  • Would prohibit terminating a lease of a tenant who has occupied the property for at least 12 months without “just cause.”
  • Notice of violation and an opportunity to cure must be sent prior to the notice of termination
  • No fault “just cause” terminations require relocation of at least one month’s rent
  • If no relocation is offered, the notice of termination is void
  • Would not prevent local rules or ordinances that provide a higher level of tenant protections
  • Voids any waiver of rights provisions
  • Limits annual rent increase to 7% plus change in cost of living or 10%, whichever is lower
  • Largest impact on cities that do not already have rent control laws
  • Would include all homes built in Los Angeles between 1978 and 2009, which currently are not covered by Los Angeles rent control laws

ii. Repealed as of January 1, 2023

 

Connecticut
by Renee Bishop, Esq.

Bendett & McHugh, PC

USFN Member (CT, MA, ME, NH, RI, VT)

House Bill 6996 – An Act Extending the Foreclosure Mediation Program

i. This bill extends the judicial foreclosure mediation program four (4) years to July 1, 2023

 

House Bill 7179 – An Act Concerning Crumbling Concrete Foundations

 i. This bill makes comprehensive change to various statutes regarding crumbling concrete foundations. The most pertinent of those changes is that it requires the seller of residential property acquired by a judgment of strict foreclosure, foreclosure by sale or by deed in lieu of foreclosure to complete a newly created form regarding the foundation of the property and the potential existence of the chemical pyrrhotite. Completion of the form is only required for those properties located in municipalities that have been identified by the Capitol Region Council Governments as being affected or have potential to be affected by crumbling foundations.

 

ii. Included in the form is whether the seller has any knowledge related to the presence of pyrrhotite in any concrete foundation on the subject property; if the Seller is aware of any damage or deterioration in any concrete foundation on the subject property; and if the Seller is aware of any repairs or remediation to any concrete foundation on the subject property.

 

Senate Bill 320 –An Act Concerning Real Estate Closings and Attorneys and Law Firms Preferred by Mortgage Lenders

i. This bill provides that no person shall conduct a real estate closing unless such person is admitted as an attorney in this state. A real estate closing is defined as mortgage loan transaction secured by property in Connecticut, other than a home equity line of credit transaction or any other transaction that does not involve the issuance of mortgagee title insurance policy; or a transaction where consideration is paid to effectuate the change in ownership to real property in Connecticut.

 

Senate Bill 833 – An Act Concerning Validation of Conveyance Defects Association with an Instrument that was Executed Pursuant to a Power of Attorney.

i. This bill validates deeds, mortgages, assignments and releases recorded after January 1, 1997 executed pursuant to a power of attorney, where the power of attorney was not recorded in the applicable land records. This will happen so long as the deed has been of record for fifteen (15) years and no action to set aside the deed has been commenced. The only exemptions to validation will be (1) if the fiduciary in the deed is also the grantee (self-dealing), or (2) the deed fails to state that the consideration reflecting fair market value.

 

Senate Bill 1070 – An Act Concerning Abandoned and Blighted Property Stewardship

i. This bill establishes a very detailed legal process for the rehabilitation of abandoned properties in municipalities with populations of at least 35,000 by providing that if an owner of a residential, commercial, or industrial building fails to maintain it in accordance with applicable municipal codes, the Superior Court, upon petition of a party in interest, and after holding a hearing on the same, may appoint a receiver to make the necessary improvements, who may obtain court approved financing to accomplish the same.


ii. Notably, a receiver will not be appointed if the building is subject to a pending foreclosure action by an individual or a nongovernmental entity (which does not appear to be defined).


Georgia
by Stuart Gordan, Esq.

McCalla Raymer Leibert Pierce, LLC

USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

House Bill 492 – Writ Application Deadline

i. Requires applications for execution of a writ of possession to be made within 30 days of the issuance of the writ, unless a writ is accompanied by an affidavit showing good cause for the delay in applying for the writ.

 

House Bill 346 – Dispossessories Could be Retaliatory

i. Prohibits retaliation by a landlord against a tenant for taking specified actions, and provides for a defense when a dispossessory action is filed within 3 months after the certain action is taken by the tenant. This appears to have broader applicability to the traditional landlord/tenant relationship, but the bill does not contain a clear exception for post-foreclosure dispossessories. Still this applies to situations where there is a lease agreement and therefore does not apply to post-foreclosure evictions, but this is uncertain until there is a court opinion.

 

Illinois
by Michael Anselmo, Esq.

Anselmo Lindberg & Associates

USFN Member (IL)

Senate Bill 169 – Aldermanic Notification

i. Amends the Code of Civil Procedure. Replaces everything after the enacting clause with the provisions of the introduced bill and makes the following changes: Deletes language providing that the failure to send a copy of the notice to the alderman or to file an affidavit as required results in a fine of $500 payable to the ward in which the property is located. Provides instead that the failure to send a copy of the notice to the alderman or to file an affidavit as required shall result in a stay of the foreclosure action on a motion of a party or the court; if the foreclosure action has been stayed by an order of the court, the plaintiff shall send the notice by certified mail or by private carrier that provides proof of delivery; and after proof of delivery is tendered to the court, the court shall lift the stay of the foreclosure action.

 

Public Act 101-97 – Release of Mortgage Request

i. Adds a person authorized by the mortgagor, grantor, heir, legal representative, or assign to the list of those who may request that the mortgagee of real property execute and deliver a release of a mortgage or deed of trust. If any mortgagee or trustee does not, within 30 days (rather than "one month") after the payment of the debt secured by the mortgage or trust deed complies with specific requirements, then it is liable for the sum of $200 to the aggrieved party. The successor in interest to the mortgagee or trustee is not liable for the $200 penalty if it complies with specific requirements within 30 days (rather than "one month") after succeeding to the interest. Effective January 1, 2020.

 

Case Law Updates

Illinois
by Michael Anselmo, Esq.

Anselmo Lindberg & Associates

USFN Member (IL)

Santiago v. Deutsche Bank– 1st Dist. No 1-17-3170 (Pending) - UPDATE

1. Keep Chicago Renting Ordinance (KCRO) requires that a lender who purchases property at foreclosure sale with a bona fide tenant residing in it must either 1) pay that tenant $10,600 in relocation expenses, or 2) provide them with a lease for no more than 102% of the prior year’s rental rate.

 

2. Rent Control Preemption Act (RCPA)states that “A unit of local government, as defined in Section 1 of Article VII of the Illinois Constitution, shall not enact, maintain, or enforce an ordinance or resolution that would have the effect of controlling the amount of rent charged for leasing private residential or commercial property.” (emphasis added) 50 ILCS 825/5

 

3. Argued that requiring a lender to cap the rental rate at 102% of the tenants’ prior lease is an ordinance that controls rent in violation of the Rent Control Preemption Act.

 

4. UPDATE –This case is dismissed, due to settlement on behalf of the parties. No further pending appeals at this time.

 

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Connecticut Supreme Court Reversal Will Affect Foreclosure Disputes

Posted By USFN, Monday, August 12, 2019

by Robert J. Wichowski, Esq.
Bendett & McHugh, P.C.
USFN Member (CT, MA, ME, NH, RI, VT)

In United States Bank National Assn. v Blowers, Supreme Court Docket No. 20067, 2019 WL 3558862, 2019 Conn. LEXIS 213, at *5 (Aug. 1, 2019), the Supreme Court of Connecticut reversed the decision of the Appellate Court upholding the trial court’s granting of the Plaintiff’s Motion to Strike Special Defenses and Counterclaims, Motion for Judgment on Counterclaims, Motion for Summary Judgment as to liability, and Motion for Strict Foreclosure, and in so doing eliminated the most common legal theory used by plaintiffs' attorneys to dispose of contests to foreclosures in the State of Connecticut—that any defenses to foreclosure that do not go to the “making, validity or enforcement” of the note and mortgage are not defenses to a foreclosure action.

Plaintiff brought this action to foreclose a residential mortgage in 2014.  During the course of the case, the Defendant, in response, made the following allegations as defenses and counterclaims:

Defendant applied for and the Plaintiff offered and allegedly reneged on at least four modification offers after accepting the required number of trial payments from the Defendant. The Plaintiff later increased the payments from an initial $1950 to $3445 a month. In April of 2012, the Defendant contacted the State’s Department of Banking, which intervened on the Defendant’s behalf, resulting in an immediate modification being received. Within months of that modification, Defendant alleged that the Plaintiff notified the Defendant that his monthly payments were increasing nearly twenty percent from the modified payment. The Defendant was unable to afford these payments, but continued to make the monthly payments set by the April 2012 Modification until October of 2012 when the Plaintiff rejected them as “partial” payments.  The Defendant further alleged that the Plaintiff erroneously informed the Defendant’s insurance company that the property was no longer being used as the Defendant’s residence. As a result, the Defendant’s insurance policy was cancelled and the Defendant was forced to replace coverage and his rate increased from $900 to $4000 per year.

After the commencement of the foreclosure action in 2014, and after participation in the Court supervised foreclosure mediation program, the Defendant further alleged that during the course of said mediation, the Plaintiff regularly ignored agreed upon deadlines, arrived late to mediations sessions, made duplicative, exhaustive, and ever changing requests, or did not provide Defendant with complete information. This resulted in an increase of the Defendant’s debt, fees and costs due to Plaintiff.

The Defendant claimed that the Plaintiff should be equitably estopped from collecting the damages it caused by its own misconduct and that the Plaintiff’s attempt to foreclose should be barred by the doctrine of unclean hands as alleged by his counterclaims and special defenses. The Defendant also sought compensatory and punitive damages, injunctive relief, and attorney’s fees.

The Plaintiff moved to strike[1] all of the defenses and counter claims contending that they were insufficient as a matter of law because the defenses and counterclaims did not relate to the making, validity, or enforcement of the note or mortgage, and also failed to state a claim upon which relief may be granted. Plaintiff was successful at the Trial Court and the Defendant appealed. The Appellate Court (with one judge dissenting) affirmed the Trial Court’s decision of granting the Plaintiff’s Motion to Strike reasoning that "automatically allowing counterclaims and special defenses in foreclosure actions that are based on conduct of the mortgagee arising during mediation and loan modification negotiations would serve to deter mortgagees from participating in these crucial mitigating processes.” U.S. Bank National Assn. Trustee v. Blowers, 177 Conn. App. 622, 634, 172 A.3d 837 (2017). The Defendant again appealed, the Connecticut Supreme Court certified the appeal, and reversed the opinion of the Appellate Court. 

In reversing the opinion of the Appellate Court, the Supreme Court eliminated perhaps the most successful argument utilized by mortgage servicers in Connecticut to defeat contests to foreclosures. Connecticut Superior Courts (trial court) and Appellate Courts have long held in foreclosure proceedings that defenses that did not go to the making, validity or enforcement of the note or mortgage were not defenses to a foreclosure action.  In this case the Defendant contended that, due to the equitable nature of a foreclosure action, a mortgagee’s misconduct that hinders the mortgagor’s attempts at curing the default and adds to the mortgagor’s debt while the mortgagor is making good faith efforts, is a proper basis for special defenses or counterclaims, even if that conduct occurs after the mortgagor’s default, or even after judgment.

In making its ruling the Supreme Court initially observed “…that the ’making, validity, or enforcement test’ is a legal creation of uncertain origin, but it has taken root as the accepted general rule in Superior and Appellate Courts over the past two decades.” After examining the facts and related case law, the court ultimately ruled: “These equitable and practical considerations inexorably lead to the conclusion that allegations that the mortgagee has engaged in conduct that wrongly and substantially increased the mortgagor’s overall indebtedness, caused the mortgagor to incur costs that impeded the mortgagor from curing the default, or reneged upon modifications are the types of misconduct  that are ‘directly and inseparably connected’ (citation omitted) to enforcement of the note and mortgage.”   Accordingly, the court held that the Defendant’s allegations provided a legally sufficient basis for special defenses in the foreclosure action.  In remanding the case to the Appellate Court, the Supreme Court was very clear to point out that it was not opining as to whether or not the defenses and claims were legally sufficient, or whether foreclosure should be withheld even if Defendant was successful in proving his case, and it reminded the trial court that its equitable powers do have limits. 

This case signifies a sea of change in how foreclosure and litigation firms will be dealing with challenges to foreclosures in the State of Connecticut going forward.  As most defenses to foreclosures in Connecticut were previously resolved by relying upon the making, validity or enforcement test, without that standard, additional motion practice and discovery will likely be required to resolve contested foreclosures.  It will also likely lead to more cases going to trial, rather than being resolved by Motions to Strike and/or Motions for Summary Judgment.

This case also underscores the importance of proper documentation and procedures in relation to loss mitigation reviews.  Even though the conduct that occurred in this case took place prior to the CFPB’s amendments to the mortgage servicing rules, the lesson here is that any unfounded delay due to “wrongful conduct” by the mortgagee in loss mitigation may result in a curtailment, sanction or withholding of a foreclosure. 

 

[1] A motion to Strike in Connecticut is allowed by Connecticut Practice Book §10-39 and challenges the legal or factual sufficiency of a complaint or defense and is similar, though not identical to a F.R.C.P 12(b)(6) or F.R.C.P 12(f). motion
 

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Tips for Oregon REO Property Owners in Navigating the New Landlord-Tenant Terrain

Posted By USFN, Monday, August 12, 2019

by Randall Szabo, Esq.
The Wolf Firm
USFN Member (CA, ID, OR, WA)

In February, Oregon Governor Kate Brown signed into law sweeping amendments to the Residential Landlord-Tenant Act (ORS Chapter 90) (“RLTA”), imposing the nation’s first statewide rent control. As a result of an emergency declaration, Senate Bill 608 (which overturns a more than 30 year-old-rent control prohibition) took effect upon passage.  At its core, the new law imposes a cap on most rental increases and a prohibition on most no-cause evictions.  While the law constitutes a massive sea of change in the world of landlord-tenant law, it may appear at first glance of little consequence to owners of REO properties, as they are generally exempt from the complex requirements of the RLTA.  However, one wrong move can bring these onerous requirements front and center.  With a good understanding of both the new law and existing foreclosure law, these results can be mitigated if not avoided altogether.

While the fanfare of SB 608 mostly surrounds its rent control provisions, more consequential, in the context of REO properties, are the substantial obstacles the law imposes on terminating tenancies. The law provides different treatment for month-to- month and fixed-term tenancies.  A landlord may terminate a month-to-month tenancy during the first year of occupancy (the tenant’s first year—not the first year the new owner takes title) without stated cause.  After the first year a month-to-month tenancy may only be terminated for a “tenant cause” or a “qualifying landlord reason.”  Similarly, a fixed-term tenancy may be terminated without cause at the end of the term if the term expires within the first year of occupancy.  However, if the term expires after the first year of occupancy, the fixed-term tenancy converts to a month-to-month tenancy unless:

 

a)    the landlord and tenant agree to a new fixed term;

b)    the tenant leaves voluntarily; or

c)    the landlord has a qualifying reason for termination.

 

“Tenant causes” for eviction include material violations of the rental agreement and other specific causes as set out in ORS Chapters 86 and 90. The “qualifying landlord” reasons for eviction are:

 

 a) converting the premises to a non-residential use;

 b) initiating repairs (if the premises is or will be unsafe or unfit for occupancy); and

 c) having accepted an offer to purchase the property.

 

 A landlord who terminates a tenancy in violation of the above could face liability of three times the monthly rent plus actual damages, and the tenant may have a defense in an action for possession.

The rent control aspect of the law is relatively straight forward. A landlord may not raise a tenant’s rent during the first year of occupancy, and after the first year may raise the rent no more than seven percent plus the consumer price index during any 12-month period.  Exceptions are listed for newer constructions (less than 15 years old at the time of the rent increase), and landlords who provide decreased rent as part of a government subsidy or program. Penalties for violating the statute are set at three times the monthly rent plus actual damages.

The issue is, are these protections applicable to REO property owners?  The answer is, perhaps. A landlord-tenant relationship may be created involuntarily.  In the context of non-judicial foreclosure, the purchaser at a trustee’s sale may inadvertently form a landlord-tenant relationship by failing to terminate the tenancy within 30 days from the date of sale.  See ORS 86.782(9)(a)(C).  While failure to timely terminate the tenancy has always had some issues, this omission now creates the more problematic tenancy which may only be terminated by following the new law’s onerous requirements.

A new owner can also run into trouble by accepting rent from the existing tenant. ORS 86.782(9)(a)(A) explicitly provides that a purchaser after a trustee’s sale becomes a landlord if the purchaser accepts rent from an existing tenant.  While it may be tempting to accept rental payments from an existing tenant, particularly one who has the ability to remain in the premises for the remainder of a lease pursuant to the Federal Protecting Tenants in Foreclosure Act, local counsel should be consulted before accepting any form of payments from an existing occupant.

Although the purchaser at a sheriff’s sale following a judicial foreclosure is generally exempt from the requirements of ORS Chapter 90, we anticipate an argument to be made to extend these prescriptive landlord-tenant relationships into the post-judicial context.  We would expect this in the situation in which a new owner follows ORS 18.946(2), which allows a tenant with an unexpired lease to remain in occupancy until the end of the lease or until the expiration of redemption “if the lessee makes the lease payments to the purchaser or redemptioner, or pays to the purchaser or redemptioner a monthly payment equal to the value of the use and occupancy of the property, whichever amount is greater”.  SB 608 provides that a trustee’s sale constitutes cause for terminating a tenancy, See e.g. SB 608 §1(3)(c)(A), however, no such provision is specified in the context of a judicial sale.   It is unknown if the legislature simply found it unnecessary given a long history of not applying landlord-tenant law in the judicial-foreclosure context.  Nonetheless, we do anticipate the issue to be raised. Thus, it is important to consult with local counsel before accepting funds from an occupant.

In the event that a landlord-tenant relationship is created, there may be no simple way to terminate the tenancy, but the new landlord does have options. As stated above, the tenancy can be terminated if the property is sold or in need of repairs, but certain conditions must be met and specific procedures followed in order to terminate the tenancy for either of these reasons. Therefore, consultation with local counsel is strongly advised. Fortunately, the creation of a tenancy to which the RLTA applies can be avoided by following these procedures:

 

a) within 30 days of a trustee’s sale, provide written notice of intent to terminate the tenancy; 

b) do not have communications with occupants that could be construed as agreeing to a new or continued tenancy; and

c) do not accept any payments from occupants without first consulting with counsel.
 

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I Can Name That Tune in One (Lost) Note

Posted By USFN, Monday, August 12, 2019

by Ronald S. Deutsch, Esq. and Richard Solomon, Esq.
Cohn, Goldberg & Deutsch, LLC
USFN Member (DC, MD)

Somewhere out there, lost notes occupy a forgotten drawer and outnumber the inventory of songs.   What effect does this have on the foreclosure process?

Rule 14-207(b)(3) of the Maryland Rules of Procedure provides that in an action to foreclose, the complaint or order to docket shall … be accompanied by … “a copy of any separate note or other debt instrument….”   If the note was transferred from the original payee, as a matter of court practice, the note must additionally be properly endorsed to establish the transfer of the right to enforce it, in a foreclosure proceeding.  

Many notes are endorsed in “blank,” or alternatively, name a specific payee.   These endorsements are typically found on the back of the note or contained on an “Allonge.”  Endorsements are often scrutinized by courts, and borrowers in attacks on the right to enforce. 

How does one handle the situation where all assignments of the security instrument have been recorded but an endorsement is missing on the Note?  A conclusive presumption exists under Md. Ann. Code, Real Property Section 7-103(a) that the title to any promissory note is vested in the person holding the record title to the “mortgage.”  Will this conclusive presumption cited above cure the missing endorsement situation?  The answer may possibly be found in Le Brun v Prosise, 197 Md. 466, 79 A.2d 543 (1951), which held that a deed of trust “need not, and properly speaking cannot, be assigned like a mortgage.”  If so, does the conclusive presumption in Section 7-103(a) apply to Deeds of Trust?   As this is unclear, the conclusive presumption may therefore, provide very limited comfort to a party relying on the recorded assignment to cure a missing endorsement.  It should be noted that, likely, more than 95% of all security instruments in Maryland are deeds of trusts, and mortgages are generally only used, as a matter of local practice in Baltimore City.

What if the original note is lost but the noteholder has a copy that can be filed in the foreclosure action?   Under Maryland law, the courts may accept a lost note affidavit from the party who lost the note if the affidavit 1) identifies the owner of the debt and it states from whom and the date on which the owner acquired ownership; 2) states why a copy of the debt instrument cannot be produced and 3) describes the good faith efforts made to produce a copy of the debt instrument.  In general, a person claiming to be a holder of a note must 1) establish a foundation for the admission of the evidence of the note and, if so established, 2) provide proof of the execution and contents of the instrument and 3) satisfy the court that the maker of the note is adequately protected against loss that might occur by reason of a claim by another person.  Adequate protection may be provided by any reasonable means e.g. the posting of a bond. 

The more difficult scenario is where a note has been lost and the Assignee purchases it from the Assignor or someone else in the chain who lost it.  In most states, including Maryland, the version of Section 3-309 of the Uniform Commercial Code (UCC) adopted provides that persons seeking to establish a lost, destroyed, or stolen instrument by secondary evidence must first show that:

 

(i) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred; (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

 

 What is problematic in the statutory language is that if a creditor was NOT in possession of the note when it was lost, then the creditor cannot enforce it.   


One lead case was decided in the District of Columbia.   In Dennis Joslin Company, LLC v. Robinson Broadcasting Corp.  977 F. Supp. 491 (D.C. Cir. 1997) the federal court held that under the DC version of 3-309, in effect at the time, the assignee of the prior creditor could not enforce a note, since the note was lost by the prior creditor and not by the party seeking to enforce the note.   This had the unfortunate result that the assignee could not collect a note with a balance of more than one million dollars.

The former version of Section 3-309, as interpreted by Joslin, was adopted by the District of Columbia when it originally adopted Article 3 of the Uniform Commercial Code.  Prior to the adoption of Article 3, the section governing lost instruments provided that the “the owner of an instrument which is lost, whether by theft or otherwise, may maintain an action in his own name, and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms.”    The decision in Joslin caused a split in many state and federal courts over the interpretation of the provision.   Some courts followed the literal holding in Joslin.  (WV, CT, FL).  Other courts disagreed with Joslin’s holding (5th Cir., TX, MN, NJ, NH, and PA).  These courts held that the right to enforce could be assigned along with the assignment of the note.  

To resolve this dispute section 3-309 of the Uniform Commercial Code was subsequently amended to omit the possession requirement, and to require only an entitlement to enforce the instrument when the instrument was lost, or the acquisition of ownership from a person who was so entitled, either directly or indirectly.  The 2002 revision of section 3-309 states in part:

 

a)  A person not in possession of an instrument is entitled to enforce the instrument if:  (1) The person seeking to enforce the instrument (a) was entitled to enforce the instrument when loss of possession occurred, or (b) had directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;

 

 At least eighteen states and the District of Columbia (but not Maryland) have substantially adopted the 2002 amendment to the UCC, thereby eliminating the possession requirement under Section 3-309.  Those states include Alabama, Arkansas, Florida, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Tennessee and Texas.  In doing so, those states have explicitly rejected the reasoning of the Joslin holding.  Additionally, despite not adopting the 2002 amendment, New Jersey recently held the right to enforce a note can be transferred by the party who lost the note to the assignee who was not in possession. Investor’s Bank v. Torres, 197 A. 3d 686, 457 N.J. Super. 53 (N.J. Super. Ct. App. Div 2018).   To allow otherwise, the court reasoned, would violate the equitable principal of unjust enrichment.    The District of Columbia, in response to the Joslin case, adopted the 2002 amendment and rejected the reasoning of the court.  Many states, however, including Maryland, which adopted the original version of Section 3-309 have failed to either adopt the amended version or interpret the original version in accord with Torres, so the landmine remains.


Because of the complexity in the law for enforcing a note, it is critical that lenders and servicers maintain adequate controls of loan documentation.  Moreover, when purchasing loans, the purchase agreements should provide for the seller’s repurchase of any loan that cannot be enforced due to lost notes of missing endorsements.
 

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Reverse Mortgage Redemption in Kansas

Posted By USFN, Monday, August 12, 2019

by Aaron M. Othmer, Esq.
Martin Leigh PC
USFN Member (KS, MO)

In Kansas mortgage foreclosure actions, and as in most judicial foreclosure states, the borrower is afforded an opportunity to redeem a foreclosed property after the foreclosure sale has occurred. Redemption of a foreclosed property is controlled in Kansas by K.S.A. § 60-2414. K.S.A § 60-2414 sets forth, amongst other things, how the property is redeemed, who can redeem, and how long a party has to redeem a foreclosed property. K.S.A. § 60-2414 provides “the defendant owner may redeem any real property sold under execution, special execution or order of sale, at any time within 12 months from the day of the sale, for the amount paid by the current holder of the certificate of purchase.”  See K.S.A. K.S.A. § 60-2414(a). However, under certain circumstances, the redemption period is shortened to three months. “In the event a default occurs in the conditions of the mortgage or instrument of the most senior lien foreclosed before one-third of the original indebtedness secured by the mortgage or lien has been paid, the court shall order a redemption period of three months. K.S.A. § 60-2414(m)(emphasis added).

A key to determining the appropriate redemption period length is determining what the “original indebtedness” is. For a traditional mortgage, after the mortgage has been executed, all funds are taken out at once to pay for the property, thereby making the “original indebtedness” the “total indebtedness” for purposes of the Kansas redemption statute. Therefore, calculating the redemption period for traditional mortgages is straight-forward. At the time of default, the lender’s attorney can simply divide the unpaid principal balance by the total indebtedness of the mortgage to determine whether the redemption period is three months or 12 months. Using the formula above, if the ending percentage is greater than two-thirds or 66.67%, then the redemption period is three months. If the percentage is less than 66.67%, the redemption period is 12 months.

For reverse mortgages, the same redemption rules apply, but calculating the redemption period is not as straight forward. In a reverse mortgage transaction, the borrower mortgages their property to the lender for a total mortgage amount, like a traditional mortgage. However, instead of the lender paying all funds at once to the buy the property, the lender will either provide a lump sum amount to the borrower for the borrower to use how they see fit, or the borrower will draw funds from the lender over time not to exceed the total mortgage amount. Stated another way, a typical reverse mortgage borrower mortgages their property to the lender in exchange for the lender providing advances to the borrower, allowing the borrower to “live off the equity in their home while continuing to live there.” Reverse Mortg. Sols., Inc. v. Goldwyn, 56 Kan. App. 2d 129, 130, 425 P.3d 617, 619, 2018 WL 3320933 (Kan. Ct. App. July 6, 2018). Typically, the lender will continue to provide monthly advances or allow monthly draws by the borrower until the total mortgage amount is reached or until the borrower defaults. For most reverse mortgages, a borrower defaults if the borrower fails to pay taxes/insurance or if the borrower dies. In most reverse mortgage situations, the reverse mortgage borrower will continue receiving equity advances or continue making monthly draws without repayment of the indebtedness, thereby essentially guaranteeing a three-month redemption period. However, if the reverse mortgage borrower does repay some of the indebtedness, the question remains how the “original indebtedness” is determined for purposes of calculating the redemption period.

The Kansas Court of Appeals recently clarified the “original indebtedness” issue in Reverse Mortg. Sols., Inc. v. Goldwyn, 56 Kan. App. 2d 129, 425 P.3d 617, 2018 WL 3320933. In Goldwyn, the reverse mortgage borrower took out a mortgage with a total indebtedness of $262,500.00. Goldwyn, 56 Kan. App. 2d at 130, 425 P.3d at 619. When the borrower died, Goldwyn became the property owner, and shortly thereafter, the lender declared the entire sum of all advances due. Id.  To determine the redemption period, the court examined the language provided in K.S.A. § 60-2414(m).  Instead of looking at the amount repaid on “total indebtedness” of the mortgage ($262,500.00), the court looked at the amount repaid of the first advance amount. As stated by the Court of Appeals, the “mortgage amount…does not determine the ‘original indebtedness’: a mortgage secures the loan but there's no indebtedness until some money is taken under the loan.” Goldwyn, 56 Kan. App. 2d at 136, 425 P.3d at 622. The Court of Appeals further clarified that while “[the borrower] took additional advances from October 2007 through November 2010, those amounts would represent part of her total indebtedness but not her ‘original indebtedness.’” Id. As shown by the facts of the case, the borrower did not repay any of the sums she received from the lender. Id. Therefore, the Court of Appeals determined that the redemption period was three months under K.S.A. § 60-2414(m). Id.  

In Goldwyn, The Kansas Court of Appeals goes on to suggest that the Kansas legislature may want to consider a different approach regarding redemption periods and reverse mortgage transactions, and it’s hard not to agree with the Kansas Court of Appeals. The Kansas legislature may want to consider providing a permanent 12-month redemption period for reverse mortgages considering all reverse mortgage borrowers are elderly as required by federal law (“the youngest borrower shall be 62 years of age or older at the time of loan closing. 24 CFR 206.33.”).  As the redemption statute currently stands, the shortened redemption period puts a tremendous amount of pressure for borrowers to obtain funds to payoff or reinstate the loan, and if that cannot occur, then the borrowers are forced to find new accommodations. If the Kansas legislature does not address the issue of redemption periods for reverse mortgages, lenders may want to consider agreeing to, or providing, extensions of the redemption period on their own.
 

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Important Changes to the Enforceability of Maryland Tax Liens

Posted By USFN, Monday, August 12, 2019

by Angie Nasuta, Esq.
Alba Law Group, P.A.
USFN Member (DE, MD)

 

On April 30, 2019, Maryland’s Governor signed into law Senate Bill 484 establishing automatic termination time frames for certain state liens.  This legislation, which took effect July 1, 2019, most notably adds provisions to Md. Tax - Prop. Art. § 14–804 for the automatic termination of state tax liens 20 years after the date the lien attaches to the property.  

The new law resolves an issue that has plagued Maryland title reviewers for three decades. While virtually all other lien types have a set expiration period - generally 12 years from the date of entry for judgment liens - the Court of Special Appeals, Maryland’s intermediate appellate court, held there was no such limitations period on the enforcement of liens entered in favor of the State of Maryland.  Rossville Vending Machine Corp v. Comptroller of the Treasury, 114 Md. App. 346 (1997).

This holding launched a significant issue with the marketability of title for some properties, particularly for titles with open state liens filed against prior property owners who had no connection with a property for many years or were even deceased.  Title agents were also faced with a struggle of trying to obtain payoff information and/or lien releases from the state for older liens where the related records would be more difficult to locate.

For those working in the mortgage default arena, the rising trend of mortgage investors and servicers refusing to accept letters of indemnity intensified the problem of resolving unexpired tax liens.

For the last several sessions, title industry representatives have lobbied the Maryland General Assembly in a concerted effort for the passage of legislation to impose a limitations period for state tax liens.  This year, they finally succeeded. 

Although the new 20-year termination period exceeds that of other standard judgment liens, and there are other state lien types not affected, this seminal piece of legislation is still a huge step in the right direction. It will provide some much-needed relief from the problems that the title and default industries in Maryland have been facing in recent years.

 

Copyright © 2019 USFN. All rights reserved.

August e-Update

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Chase v Thompson Prior Holding Vacated by First Circuit Court of Appeals

Posted By Administration, Wednesday, July 31, 2019

by Robert Wichowski, Esq.
Bendett & McHugh, PC
USFN Member (CT, MA, ME, NH, RI, VT)

 



The First Circuit Court of Appeals has vacated their prior holding in the case of Thompson v JP Morgan Chase (915 F.3d 801.)  In vacating the prior order, the Court held that due to the precise language contained in the relevant state banking regulation (209 C.M.R. §56.04) which the notices were required to contain, together with the widespread industry support received by Chase in subsequent filings in support for Chase’s petition for rehearing, the matter should be directly certified to the Massachusetts Supreme Judicial Court and in fact certified this question to said court:

 

“Did the statement in the August 12, 2016, default and acceleration notice that ‘you can still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place’ render the notice inaccurate or deceptive in a manner that renders the subsequent foreclosure sale void under Massachusetts law?”

 

As a result, the court’s ruling as outlined here is no longer operative.  The matter will be taken up and decided by the Massachusetts Supreme Judicial Court.

 

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July 2019 Member Moves + News

Posted By USFN, Wednesday, July 31, 2019
Updated: Friday, July 26, 2019

 

Bruce J. Bergman, a member of Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. (USFN Member – NY) is the author of the four volume treatise “Bergman on New York Mortgage Foreclosures”, Lexis Nexis Matthew Bender, which is not only a guide to practitioners, but is cited by courts throughout New York at the trial level, in the Appellate Divisions and by the Court of Appeals.  It has also been cited by the highest courts of California and Connecticut, and most recently, in September 2018, it was cited as authority by the Supreme Court of Virginia in Kerns v. Wells Fargo Bank, N.A., 296 Va. 146.  The volumes were cited as authority for the principle that a cause of action accrues upon acceleration as is explained in the books.



Lerner, Sampson & Rothfuss (“LSR”) (USFN Member – KY, OH) is pleased to welcome Emily Hubbard and Brison Wammes to the ranks of our veteran team of lawyers whose combined professional experience spans over 400 years.  With a concentration on default and complex litigation resolution in Ohio, Kentucky and West Virginia, LSR's attorneys and staff personify the firm's strong business acumen and commitment to superior customer service. Through the highest quality legal work and efficient production, LSR continues to adapt to the ever-changing industry. We look forward to the many contributions our newest associate will make to the LSR tradition of excellence. 


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Why Companies Can’t Wait on Implementing Cybersecurity Measures

Posted By USFN, Wednesday, July 17, 2019
Updated: Tuesday, July 16, 2019

by Kim Bilderback-GSEC, CISSP

Senior Director, National Business Markets East

AT&T Cybersecurity

 



American self-help author Napoleon Hill is credited with saying, “Do not wait: the time will never be ‘just right.’ Start where you stand, and work with whatever tool you may have at your command and better tools will be found as you go along.”

This advice is appropriate when thinking about corpo­rate cybersecurity programs. Too many times, a client has described to me what they’re going to do. Too many times, that same client called seeking assistance with a breach.


One reason for the procrastination is cost, which organiza­tions mistakenly classify as an IT expense. Cybersecurity is actually an important component of a business risk man­agement program. The consequences of a cybersecurity breach are not just something intangible, like loss of brand trust or theft of intellectual property. They’re cold, hard cash out of a firm’s pockets due to individual lawsuits, class action lawsuits, contractual violations, or regulatory fines.

Court ruling after court ruling has made it clear that the time for action is now. Businesses of all sizes are responsible for cybersecurity and accountable for damages when they fail that responsibility. Regulators and governments are increasingly tight­ening the cybersecurity requirements and the penalties for noncompliance.

It’s becoming clearer that custom­ers and business partners, even if they cannot demonstrate monetary impact from a breach, have basis for filing lawsuits for breach damages.

In a May 2019 ruling in United States ex rel. Markus v. Aerojet Rocketdyne Holdings, Inc., et. al, a U.S. District Court ruled that a defense contrac­tor had violated the False Claims Act when it entered into, and invoiced under, U.S. government contracts despite failing to fully satisfy (or oth­erwise disclose the scope of its gaps with) its contracts’ requisite cyberse­curity controls.

Essentially making cybersecurity an even larger business risk, a recent U.S. Supreme Court ruling in Zappos. com v. Stevens confirms customers can sue companies when their data is stolen, even if that data is not used for things like identity theft or making fraudulent charges. The Zappos case will go a long way toward deciding how much liability corporations will have if customer data is exposed, regardless of how it is used.

Think cyber insurance will amelio­rate this risk? Think again. Recently, executives for the snack company Mondelez took some solace in their huge cyber breach knowing that cy­ber insurance would help cover their costs. Or, so they thought.

Mondelez, the victim of a crippling NotPetya malware attack in 2017, learned its insurer, Zurich Insurance, would not cover the attack. Zurich declared Mondelez’s losses collateral damage in a cyberwar and invoked the policy’s “war exclusion” clause. Since the U.S. government assigned responsibility for NotPetya to Rus­sia, all cyber insurers were provided justification to invoke “war exclusion” clauses to not pay claims. The issue is still in the courts.

Consider this analysis by attorneys Karen K. Karabinos, Esq. and Eric R. Mull, Esq. on the implications of Columbia Casualty v. Cottage Health System:


“While the issues surrounding a cyberattack may be complex, com­pliance with the terms and condi­tions of a cyber policy may be as simple as determining if an insured has in place and is following the practices and procedures required under the terms of the policy. As cyber liability and coverage continue to be a growing and ever-changing concern, more and more companies will turn to their insurance carriers for protection. Insureds should be mindful that their failure to answer application questions accurately, their failure to comply with certain practices relating to computer and data security, or their failure to maintain security policies, practices, and procedures may result in the forfeiture of coverage, and in turn, exposure to substantial costs and liability.”


Finally, there is the obligation to prevent risk from insiders. In a re­cent ruling, the UK Court of Appeal upheld a lower court’s decision that the supermarket giant Morrisons is liable for its employees’ misuse of data. In 2015, a former Morrisons employee was convicted of criminal charges for leaking employee pay­roll records. The Court of Appeal’s landmark ruling confirms that Mor­risons is “vicariously liable” for their employee’s criminal misuse of the leaked data.

Morrisons now faces a potential­ly massive payout. The Court of Appeal’s decision paves the way for compensation claims by 5,518 former and current staff members whose personal details were posted on the internet.

What to do? Implementing at least five security essentials is key to cy­bersecurity risk management.

Security Essential 1: IT Asset Dis­covery & Inventory
Think about it. How can you report something stolen if you don’t know what you’ve got in the first place?

Security Essential 2: Vulnerability Scanning
Having inventoried your IT and data assets with asset discovery, you now need to make sure the doors and windows to the assets are shut and locked. That’s what vulnerability scanning does. It scours the perime­ter to make sure all is secure – that known vulnerabilities are patched against.

Security Essential 3: Log Manage­ment & Threat Detection
Log management in cybersecurity is similar to a video camera trained on the front door of a convenience store.

The video camera records the image, date and time of everyone coming into and going out of the store. If the video is monitored indicators of po­tential crime (system compromise) can be detected, an alert sounded, and possible crime averted. Some­one coming through the door, wear­ing a mask, and brandishing a gun could be interpreted as an indicator of potential compromise yielding an alert and proactive crime prevention action taken.

The saved video recordings are a treasure trove of forensic data for the police seeking to investigate after a crime is committed. The video recordings are referenced to identify when a crime occurred, what was stolen and to identify the perpetrator. Absent the video recordings the po­lice would have little hard evidence for investigation. This is exactly what log management and threat detec­tion do for cybersecurity.

Security Essential 4: Security Awareness Training
If the budget allows to manage one cyber risk, this is it. In a 2018 article, cybersecurity expert Michelle Drolet wrote, “The sad truth is that employees are the weakest link in cyber defenses. They are vul­nerable to phishing scams and ran­somware. They also make mistakes. Sometimes they don’t fully under­stand compliance requirements and sensitive data is mishandled.”

“81% of hacking-related breaches over the last year leveraged stolen or weak passwords and 1 in 14 users admitted being tricked into following a link or opening an attachment they shouldn’t have,” said Drolet.

Security Essential 5: Email/Web Filtering
Email alone is the top cybersecurity threat vector. Deploying inexpen­sive technologies that scan emails and monitor web browsing actively detecting and preventing access by known viruses or malicious websites delivers an effective risk manage­ment ROI.

When thinking about implementing cybersecurity measures, it’s import­ant to repeat Napoleon Hill’s warning: “Do not wait.” It may not be a conve­nient moment to implement cyber­security security essentials, but the time is right. Legislation, regulations, and court rulings all show that the consequences of not doing so can have profound risk implications to your business.


Copyright © 2019 USFN. All rights reserved.

 

Summer USFN Report

 

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