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Northern District of Ohio Bankruptcy Court Holds that it Lacks Discretion to Allow Late-Filed Proof of Claim pursuant to the “Excusable Neglect” Standard

Posted By USFN, Tuesday, December 4, 2018
Updated: Friday, November 30, 2018

December 4, 2018

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

On October 17, 2018 U.S. Bankruptcy Judge Koschik (N.D. Ohio) held that a creditor cannot use “excusable neglect” as a basis to file a proof of claim (POC) after the bar date in a Chapter 7 or Chapter 13 case. Six months after the claims bar date, non-mortgage creditor individuals filed a “motion for leave to file late proof of claim,” seeking 30 more days to file a claim. The creditors asserted that they did not receive notice of the bankruptcy case and, therefore, did not timely file a POC. The creditors also argued that even if they received sufficient notice, their failure to file a timely proof of claim was due to “excusable neglect.” They sought to invoke Bankruptcy Rule 9006(b)(1) to enlarge the time. That rule provides, in part:


“Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules . . . the court for cause shown may at any time in its discretion . . . on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of
excusable neglect.” Fed. R. Bankr. P. § 9006(b)(1).


The court ultimately denied the creditors’ motion on the basis that Bankruptcy Rule 3002(c) established the exclusive grounds for allowing claims to be filed by a creditor after the bar date in a Chapter 13 case. Therefore, the court lacked discretion to permit a late-filed proof of claim by creditors pursuant to the excusable neglect standard in Rule 9006(b)(1).

The case citation is In re Rady, 2018 Bankr. LEXIS 3208 (Bankr. N.D. Ohio (Akron), Oct. 17, 2018).

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Impact of an Assignment during a Pending Foreclosure

Posted By USFN, Tuesday, December 4, 2018
Updated: Friday, November 30, 2018

December 4, 2018

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

In a recent case, Fannie Mae v. Sharp, 2018 Kan. App. Unpub. LEXIS 876 (Ct. App. Nov. 9, 2018), the court analyzed the impact of an assignment of mortgage during a pending foreclosure, resulting in a favorable ruling for servicers.

Background in District Court
With Fannie Mae’s motion for summary judgment pending, Fannie Mae assigned the subject mortgage to Wilmington Savings Fund Society (Wilmington) and moved for an order substituting it as the party plaintiff. The mortgage was assigned on June 2, 2016; the actual assignment of mortgage was recorded on June 15, 2016.

Within minutes of Fannie Mae moving for the substitution of party plaintiff, the borrower filed a motion to dismiss, contending that the mortgage was assigned two months prior and, therefore, the motion to substitute was not filed in a reasonable time. The borrower also asserted that the extensive discovery completed in the case would be futile if Wilmington were allowed to be substituted into the case.

After hearing arguments on both the motion to dismiss and the motion for summary judgment, the district court granted dismissal (and denied summary judgment) based on four reasons, specifically:


“1. No motion was filed to substitute for nearly two months after an assignment was made. Nothing was done and more than a reasonable time has elapsed since the assignment occurred.
“2. The Defendant has engaged in extensive discovery and will be prejudiced if forced to proceed against a new Plaintiff.
“3. The discovery sought from Fannie Mae will not apply to Wilmington, which will result in further delays and expense in litigation.
“4. The Response to the Motion for Summary Judgment will have to be modified and rewritten, causing more delay and expense for Defendant.”


Appellate Court’s Analysis & Ruling
The Court of Appeals agreed with Fannie Mae’s position that the district court erred in finding that Fannie Mae had to move to substitute within a reasonable time.

As clarified by the Court of Appeals, K.S.A. 2017 Supp. 60-225(c) governs the substitution of parties and states very clearly, “If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party.” (Emphasis is the appellate court’s.)

Relying on the legislative intent and plain language of the statute, the appellate court ruled that there is no requirement for a motion to substitute to be filed within a “reasonable time” after the assignment. If the legislature’s intent was to include a reasonable time requirement, it would set that out, as K.S.A. 2017 Supp. 60-225(a) does after the death of a party.

Furthermore, even if there were a reasonable time standard, Fannie Mae would have met it as the motion to substitute party plaintiff was filed on June 22, 2016 (20 days after the actual assignment and seven days after recording the assignment of mortgage).

Regarding the remaining reasons for the district court’s rulings, the Court of Appeals found that there was no prejudice to the borrower because Fannie Mae’s discovery responses were admissible against Wilmington. The appellate court recognized the “time-honored rule of law” that the assignee stands in the shoes of the assignor; therefore, Wilmington was bound by the admissions and interrogatories that Fannie Mae had provided. Finally, the motion for summary judgment was denied, so there was no need for a response (or modified response) to a denied motion.

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

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Illinois: New Supreme Court Case Affirms Limits on Refiled Cases

Posted By USFN, Tuesday, December 4, 2018
Updated: Friday, November 30, 2018

December 4, 2018

by Robert J. Deisinger
Anselmo Lindberg & Associates – USFN Member (Illinois)

Illinois law allows for only one refiling of a lawsuit if the plaintiff voluntarily dismisses its case. In practice, this means the plaintiff gets no more than two bites at the apple. In a unanimous opinion issued in the case of First Midwest Bank v. Cobo, 2018 IL 123038 (Nov. 29, 2018), the Illinois Supreme Court ruled that foreclosure plaintiffs cannot avoid the application of this rule by spinning one of its suits as a different kind of apple.

Background
In Cobo the plaintiff brought a 2011 foreclosure action, alleging that the mortgagors had defaulted by failing to make the monthly payments as of July 2011 due under the note secured by the mortgage. The Illinois Mortgage Foreclosure law permits creditors to seek a personal deficiency if a deficiency exists after the property is sold at the foreclosure sale, and the foreclosure complaint requested that a deficiency judgment be awarded if sought after the foreclosure sale.

The plaintiff voluntarily dismissed this foreclosure case and filed a new action less than two weeks later. This second action did not seek to foreclose the mortgage, but rather only sought a judgment for breach of the borrower’s promise to repay the money owed under the note. This case, too, was eventually voluntarily dismissed by the plaintiff. The plaintiff then filed a third action, which like the first, but unlike the second, sought foreclosure of the mortgage and a deficiency judgment. Ultimately, the trial court found that the case could proceed, but the Illinois Appellate Court overruled that decision and ordered that the case be dismissed as a barred refiling. At the lender’s request, the Illinois Supreme Court agreed to hear the case.

Supreme Court’s Review
Unfortunately for the lender, the Supreme Court sided with the defendants. Technically speaking, Illinois follows a transactional test to determine whether a lawsuit is the same or nearly the same as a prior suit. When each case arises from an identical set of facts, they are considered to be the same case, even if they seek different types of judgment. In this instance, the basis of each case was the defendants’ alleged July 2011 failure to make payments due under the note.

Notably relevant to lenders, the Supreme Court stated that if a case is voluntarily dismissed by the plaintiff because the parties entered into a loan modification while a foreclosure case was pending, the single refiling rule would not apply because the modification changes the operative facts of any later suit (i.e., the date of default). Though not explicitly stated by the court, it seems that the same reasoning should apply to reinstatements as well. However, whether a lender could avoid the application of the rule by voluntarily advancing the due-date absent a modification or a reinstatement remains an open question, but that seeming loophole might be too small of a needle to thread.

Conclusion
In most foreclosure circumstances, the single refiling rule will not apply. Still, if a case was previously filed twice without a change of circumstances (such as application of payments, modification, or reinstatement), lenders must be aware that the single refiling rule might bar any future case. It is therefore important that lenders consult with their attorneys regarding the application of this rule prior to voluntarily dismissing any foreclosure lawsuit that they intend to later refile.

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FDCPA: Is CO Nonjudicial Foreclosure Activity Debt Collection under the Act? U.S. Supreme Court to Hear Case in January 2019

Posted By Rachel Ramirez, Monday, December 3, 2018
Updated: Wednesday, December 5, 2018

December 4, 2018

by USFN Legal Issues Committee

Background
The question of whether or not nonjudicial foreclosure activity constitutes “debt collection” under the federal Fair Debt Collection Practices Act (FDCPA) is presented in Obduskey v. Wells Fargo Bank, 2018 U.S. App. Lexis 1275 (10th Cir., Jan. 19, 2018). In Obduskey, the Tenth Circuit Court of Appeals ruled that the FDCPA, set forth in 15 U.S.C. §§ 1692 – 1692p, does not apply to nonjudicial foreclosure proceedings in the state of Colorado. An article about the case was published in the USFN e-Update in February 2018; that article may be viewed here. On June 28, 2018, the U.S. Supreme Court granted Certiorari.

 

Status
Briefs have been filed, including industry and government amicus briefs. On November 14, 2018, USFN filed a brief of amicus curiae in support of respondent McCarthy & Holthus LLP, et al. On November 28, 2018, oral argument before the U.S. Supreme Court was scheduled for January 7, 2019. The Court’s calendar may be viewed here.

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Filing Proofs of Claim in Bankruptcy Court: May One be Fashionably Late? It Depends.

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

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

Effective December 1, 2017, the deadline for filing a proof of claim in Chapter 13 cases was shortened to 70 days after a petition is filed or a case is converted to Chapter 13. This deadline is significantly earlier than under the previous rule, which set a deadline of 90 days after the first meeting of creditors. For the most part, the industry has once again risen to the challenge and proofs of claim are being timely filed. However, for reasons ranging from lack of notice about a bankruptcy filing to a servicing transfer (or simply dropping the ball), what happens if a proof of claim (POC) is late? Read on.

Not Enough Notice?
If a creditor receives insufficient notice, additional changes to the bankruptcy rules that began on December 1, 2017 allow creditors to seek permission to file a late proof of claim by motion. Prior to December 1, 2017, Bankruptcy Rule 3002(c)(6) allowed a creditor to move the court for an extension of time to file a POC by up to 60 days — but only if the notice of bankruptcy was mailed to the creditor at a foreign address in Chapter 7 cases. Incredibly, bankruptcy courts were split on whether a creditor who received no notice in a Chapter 13 case should be entitled to file a late POC, notwithstanding the provisions of Bankruptcy Rules 3002(c). Some courts found that its discretion to enlarge the time for filing a proof of claim in a Chapter 13 case is limited to the specific “foreign address” exception and would not allow a late-filed claim for any other reason. See, e.g., In re Lovo, 584 B.R. 79 (Bankr. S.D. Fla. Mar. 27, 2018).

In December 2017, as explained by the Committee Notes to the rules, the rules were amended to expand the exception to the bar date for cases in which a creditor received insufficient notice of the time to file a proof of claim. The amendment provides that the court may extend the time to file a POC if the debtor fails to file a timely list of names and addresses of creditors. The amendment also clarifies that if a court grants a creditor’s motion under the rule to extend the time to file a POC, the extension runs from the date of the court’s decision on the motion.

Accordingly, if a claims bar deadline is missed, the first thing a creditor should review is whether the debtor failed to file the list of creditors’ names and addresses with the petition, which is required in order to be timely. Although the court still has discretion to extend the time for filing a proof of claim for a creditor who received notice at a “foreign address,” the Committee Notes for prior rule amendments reveal that the “foreign address” exception is designed to provide notice to foreign creditors of a case filed under Chapter 15 of the Bankruptcy Code.

Just Go Ahead and File the POC?
Even where a debtor timely lists the names and addresses of creditors, a proof of claim might not be filed in time. Many jurisdictions are allowing Chapter 13 trustees to adopt a “business as usual” approach of scheduling late-filed claims where the plan provides for cure of the arrearage. Some trustees insist that the plan arrearage figure controls, and creditors are filing the POC to match exactly what is listed in the plan to avoid objections.

Other trustees schedule the arrearage claim provided for in the proof of claim in full. These trustees are taking a practical attitude toward the situation and making every effort to pay on a claim that both the debtor and creditor want paid, and creating an environment where a debtor will in fact receive a fresh start if the plan concludes.

Several trustees are taking an extra step of filing a notice of intent to pay a claim filed over 70 days into a case. The following excerpt from such a notice shows the rationale and practicality of this:


Fed. R. Bankr. P. 3002(a) provides as follows:
(a) Necessity of Filing. A secured creditor, unsecured creditor, or equity security holder must file a proof of claim or interest for the claim or interest to be allowed, except as provided in Rules 1019(3), 3003, 3004, and 3005. A lien that secures a claim against a debtor is not void due only to the failure of any entity to file a proof of claim.


Fed. R. Bankr. P. 3002(c) provides for the filing of a proof of claim 70 days after the order for relief.


11 U.S.C. Section 502(a) provides that a claim is deemed allowed unless a party in interest objects.


11 U.S.C. Section 704(a)(5) provides that if a purpose would be served, [Trustee shall] examine proofs of claim and object to the allowance of any claim that is improper.


Creditor filed a claim after its due date.


The Trustee does not believe a purpose would be served by objecting to the claim.
In the future – Creditor should file its claim by the 70-day deadline of Fed. R. Bankr. P. 3002(a).


Trustee will pay this claim unless an objection is filed by Debtor(s)’ Counsel or other creditor within 21 days.

 

It is important to recognize, even in situations where a trustee subscribes to a practice of scheduling a late proof of claim, that a bankruptcy court may still disallow the claim — even where an objection has not been filed. See, e.g., In re Benner, Case No. 15-31477 HCD (Bankr. N.D. Ind., Jul. 18, 2018) (claim filed one day after the claims bar deadline disallowed as “[a] provision for payment to a secured creditor in a confirmed plan does not obviate the requirement for that secured creditor to have an allowed claim”). Note, however, that the July 18, 2018 order in Benner was vacated on September 4, 2018 upon consideration of motions for reconsideration filed by the Chapter 13 trustee and the creditor; and the late-filed claim was allowed.


Encourage the Debtor or Trustee to File POC; Amend Later?
If a creditor does not file a timely proof of claim, a debtor (or trustee) is permitted to file a POC on the creditor’s behalf for an additional 30 days. See Fed. R. Bankr. P. 3004. As such, there may be an opportunity for the debtor or trustee to file a proof of claim, only to have the creditor amend it later. Be mindful that some courts have held that if one waits too long, the right to amend is lost. See In re Lee, Case No. 16-30416 (Bankr. N.D. Ohio, May 8, 2018).

In Lee, the creditor did not file a POC by the bar date, and the debtors filed one on its behalf. Fourteen months later, the creditor filed an amended proof of claim. The court pointed out that neither the Bankruptcy Code nor Rules specifically address whether a creditor can amend a claim filed on its behalf by a debtor pursuant to Rule 3004. The Advisory Committee Notes to Rule 3004 explain: “Since the debtor and trustee cannot file a proof of claim until after the creditor’s time to file has expired, the rule no longer permits the creditor to file a proof of claim that will supersede the claim filed by the debtor or trustee. The rule leaves to the courts the issue of whether to permit subsequent amendment of such proof of claim.”

A majority of courts have held that they have the discretion to allow a creditor to amend a claim that a debtor has filed on the creditor’s behalf. However, the Lee court criticized the creditor’s 14-month delay in amending the claim: “this court will not reward Creditor’s dilatory method of proceeding in this Chapter 13 bankruptcy case by allowing it to now amend the proof of claim filed by Debtors. Moreover … the exercise of the court’s discretion is further limited by the preclusive effect of Debtors’ confirmed plan ….”

Some Trustees want the Judge to Decide
Certain trustees are taking a hard stance on the bar date by opposing motions for late claims and objecting to claims. One such trustee recently wrote to this author: “So I really don’t see what you can suggest that will change our minds. I think this was the whole point of the rule change so the mortgage industry would tighten it up and debtor’s counsel has to be on the ball to file claims if the secured creditor does not. In this case the only solution I have is for debtor to voluntarily dismiss and then refile.”

In situations where creditors must convince the court to allow the late claim, many of the same arguments offered prior to the December 2017 amendments will be made, such as the “informal proof of claim” doctrine and the existence of “excusable neglect” for missing the daunting deadline. Hopefully, the bankruptcy judge will be persuaded by the fact that disallowance of a late claim is the least likely path for a debtor to obtain a fresh start in bankruptcy.

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Confirmed Plans of Reorganization: Recovering Escrow Advances Unaddressed in the Plan

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Christopher M. McDermott
and Jonathan C. Cahill
Aldridge Pite, LLP
USFN Member (California, Georgia)

Recovering post-petition escrow advances for a loan modified in a confirmed plan of reorganization has become an increasingly challenging issue facing mortgage servicers. Frequently, a plan will not address a debtor’s post-petition obligation to maintain taxes and insurance on real property. When a loan is escrowed for pre-petition taxes and/or insurance, a plan’s failure to address these items often leaves servicers struggling to determine the best means to recover escrow advances.

Pre-confirmation
When a creditor seeks to recover post-petition escrow advances, it is important to first consider the procedural status of the case. In a pre-confirmation scenario, a creditor should seek to recover escrow advances and clarify the debtor’s future post-confirmation escrow obligations in the plan and/or stipulated agreement. If this is not feasible, a creditor should consider filing a motion for administrative expense treatment for post-petition escrow advances pursuant to 11 U.S.C. §§ 503(b)(1)(B) & 503(b)(3)(D).

Many courts, however, have held that 11 U.S.C. § 506(b) governs an oversecured creditor’s right to recover fees, costs, or charges up until plan confirmation. See Countrywide Home Loans, Inc. v. Hoopai, 581 F.3d 1090, 1099 (9th Cir. 2009). Accordingly, a court may rule that pre-confirmation escrow advances for an undersecured claim are either non-recoverable under § 506(b) or only recoverable as part of the creditor’s unsecured claim resulting from the cramdown. See SNTL Corp. v. Centre Insurance Co., 571 F.3d 826, 842 (9th Cir. 2009). For these reasons, a secured creditor encountering a potential cramdown should consider seeking a court order authorizing escrow advances and deeming them recoverable from the debtor prior to making the advances.

Post-confirmation
When a creditor is seeking to recover escrow advances for a crammed-down loan following plan confirmation, the analysis shifts to whether the plan addressed the escrow requirements of the loan. While a plan confirmation order generally acts as a final order that binds debtors and creditors alike, an ambiguous material term in a plan is subject to judicial interpretation. Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004). Confirmed plans are similar to consent decrees and are interpreted pursuant to rules governing the interpretation of contracts. See Hillis Motors v. Hawaii Automobile Dealers’ Ass’n (In re Hillis Motors), 997 F.2d 581, 588 (9th Cir. 1993).

Court decisions vary as to the issue of whether silence in a plan can be interpreted as modifying a creditor’s rights. Some courts interpret confirmed plans as modifying only a creditor’s rights specifically mentioned in the plan. See Eickerman v. La Jolla Group, II, 592 F. App’x 614, 615 (9th Cir. 2015) (creditor’s contractual right to recover fees and costs not limited as plan was silent on this issue). Under this view, the plan’s failure to address the escrow status of a loan would leave those rights unmodified. Conversely, other courts have held that the plan completely replaces any pre-confirmation rights. See, e.g., Salt Creek Valley Bank v. Wellman (In re Wellman), 322 B.R. 298, 301 (B.A.P. 6th Cir. 2004) (confirmed plan exclusively governs the relationship between debtor and creditor). As a consequence, the failure of a confirmed plan to address a creditor’s escrow rights may eliminate a creditor’s rights to tender and recover escrow advances.

In the event the terms of a confirmed plan or applicable bankruptcy law do not limit a creditor’s ability to recover post-confirmation escrow advances, a creditor should ensure compliance with applicable non-bankruptcy law to safeguard those rights. Specifically, a creditor may waive its right to recover escrow advances by failing to provide notices to the debtor of the escrow payment and/or escrow shortage required by non-bankruptcy law. See In re Dominique, 368 B.R. 913 (Bankr. S.D. Fla. 2007) (escrow shortage waived due to noncompliance with RESPA and Fla. Stat. section 501.137(2)); Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D. Fla. 2001).

Assuming a creditor is not prohibited from recovering post-confirmation escrow advances based on the terms of a confirmed plan and/or applicable legal authority, it is advisable to engage debtor’s counsel to reach an agreement regarding the recovery of those advances and any future escrow advances. In the event an agreement is not possible, a debtor’s failure to pay taxes and/or insurance on a property generally constitutes a default under the security agreement and provides grounds for a motion for relief from the automatic stay. Likewise, to the extent a debtor’s failure to pay taxes and insurance constitutes a default under a confirmed plan, a motion to dismiss the debtor’s bankruptcy case may be warranted.

Closing Words
In sum, servicers should consult their local bankruptcy counsel to determine whether escrow advances are recoverable prior to making or waiving any escrow advances from a loan that is modified within a confirmed plan; and, if so, to determine the appropriate mechanism for seeking their recovery.

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Significant Bankruptcy Case Law: 2018 in Review

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Michael J. McCormick
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

and Adam A. Diaz
SHD Legal Group, P.A.
USFN Member (Florida)

Alabama
Post-petition Mortgage Fees and Expenses — The opinion in In re England, Case No. 17-10197 (Bankr. M.D. Ala. Mar. 30, 2018), pertained to several Chapter 13 cases. It considered the question of whether a debtor is required by an underlying agreement and applicable nonbankruptcy law to pay post-petition mortgage fees and expenses (filed pursuant to Bankruptcy Rule 3002.1) to a creditor holding a note and mortgage on the debtor’s primary residence as provided in 11 U.S.C. § 1322(b)(5). The debtors in each case filed a motion to determine the extent to which post-petition fees and expenses claimed by creditors pursuant to Bankruptcy Rule 3002.1 must be paid.

As required under § 1322(b)(5), the debtors’ Chapter 13 plans provided for maintenance of the current mortgage payments as well as payment of all arrears to cure default over the life of the plan. Subsequent to filing proofs of claim on loans secured by the debtors’ primary residences, each creditor filed a Notice of Post-petition Fees, Expenses, and Charges as permitted under Rule 3002.1(c) for fees and expenses incurred within 180 days before service of the notice on the debtors. In response, the debtors filed motions to determine fees, pursuant to Bankruptcy Rule 3002.1(e), arguing that the court should disallow the post-petition fees and expenses.

When faced with a motion to determine mortgage fees and expenses pursuant to § 1322(e), the court must look to the underlying agreement and applicable nonbankruptcy law to determine if the amounts are permissible. Since § 1322(e) explicitly excepts § 506 from consideration, the “reasonableness standard” ordinarily used under § 506(b) does not apply to post-petition fees, expenses, or charges necessary to cure a default.

Relying in part on a case from 2006 (prior to the 2011 amendments to Bankruptcy Rule 3001, as well as the changes to the proof of claim forms in 2011 and 2015), the court also concluded that performing a plan review and preparing a proof of claim were simple matters, in part because the proof of claim forms are available online (as are the forms for completing the schedules).

Since entry of this decision, the court has been giving creditor firms the opportunity to amend or supplement their PPFNs with timesheets, invoices, and other evidence to support the claims. It should be kept in mind that since the presumption of prima facie validity applicable to proofs of claim does not pertain to the notices filed under Bankruptcy Rule 3002.1, the burden of proof lies with the creditor to substantiate the fees being sought.

Florida
Chapter 13 Plans and Balloon Payments — The decision in In re Benedicto, Case No. 15-28671-BKC-RAM (Bankr. S.D. Fla. June 29, 2018), was interestingly co-authored by Chief Judge Isicoff and Judge Mark. It focused on whether a Chapter 13 plan could be confirmed under Bankruptcy Code § 1325 when it includes provision for a balloon payment. The decision involved two Chapter 13 plans where the debtors sought to modify the underlying debt by cramming down the value of the loan and making a balloon payment at the end of the plan.

The creditors objected to the treatment due to the inclusion of the balloon payments, contending that the inclusion of the balloon payments violated § 1325, which requires the payments in a Chapter 13 plan to be “equal monthly payments.” The court noted that there was no precedent in Florida on this issue, and therefore looked to Georgia for assistance — specifically to the In re Cochran case. Ultimately, the court held that balloon payments are not period payments under § 1325, and the inclusion would result in a non-confirmable plan. However, the court cautioned that this ruling is limited in application.

Chief Judge Isicoff previously has ruled that the “equal monthly payment” requirement begins no earlier than the first payment after confirmation of a plan, rejecting the assertion that § 1325(a)(5)(B)(iii)(I) compels a debtor to make equal payments starting with the first pre-confirmation payment made after the petition is filed. The rule compelling equal monthly payments is not required any earlier than the first payment after confirmation. Additionally, “[i]f a modified plan is approved, the payments to secured creditors must be in equal amounts after the modified plan takes effect, but need not be in the same amount as the payments already made under the prior plan. This will protect debtors who confirm plans before mediation under the MMM Program is completed and later must modify the monthly payment to the mortgagee if the mediated payment amount is higher or mediation fails.”

Creditors’ Claims and the Statute of LimitationsIn re BCML Holding LLC, Case No. 18-11600-EPK, Adv. Proc. No. 18-01129-EPK (Bankr. S.D. Fla. May 24, 2018), involved an adversary proceeding where the debtor, who was a third-party purchaser of the property, sought to limit the creditor’s claim and rights based on the statute of limitations in Florida. Specifically, the debtor sought to reduce the creditor’s claim by all amounts that accrued more than five years from the petition date. The debtor obtained a default against the creditor in the adversary proceeding and sought a judgment in its favor.

The bankruptcy court determined that although the debtor obtained a default, the court could not grant the relief sought because the debtor failed to state a cause of action. The court went through a thorough analysis of the statute of limitations law in Florida and held that the creditor’s claim was not limited to only amounts accruing within five years from the filing of the petition. The court was critical of cases that held to the contrary in Florida — including Velden v. Nationstar Mortgage, LLC, 234 So. 3d 850 (Fla. 5th DCA Jan. 12, 2018) — finding that they were not well-supported by the law. Based on this bankruptcy holding, creditors would not need to limit their claims pursuant to the statute of limitations in Florida.

Mississippi
Nonstandard Plan Provisions — In In re Parkman, Case No. 188-50032-KMS (Bankr. S.D. Miss. Aug. 13, 2018), the Chapter 13 trustee filed an objection to confirmation, contending that the nonstandard plan provisions were “either unnecessary restatements of the law or impermissible infringements on the rights of creditors; unduly burdensome to the Trustee, creditors, and the bankruptcy process.”

As background: both districts in Mississippi opted out of the national plan (i.e., Form 113) and, as of December 1, 2017, all debtors in Mississippi are required to use the form plan authorized by Bankruptcy Rule 3015.1 and Miss. Bankr. L.R. 3015.1-1. The Mississippi Form Plan includes a final paragraph for “nonstandard provisions.” See Fed. R. Bankr. P. 3015.1(e)(1) (requiring final paragraph for nonstandard provisions). Under the Local Rules, only the judges are authorized to change the Mississippi Form Plan. Miss. Bankr. L.R. 3015.1-1. If the change is substantive, it will be advertised for public comment before final approval by the Fifth Circuit Judicial Council as an amendment to the Local Rules.

Shortly after December 1, 2017, counsel for the debtor in Parkman filed a plan — with twenty-three (including subparts) nonstandard provisions in it, formatted within the limitations of the online form as ninety-three single-spaced lines of text without bolding, italics, or underlines. The trustee argued that if the nonstandard plan provisions were approved, then the Southern District of Mississippi did not have a uniform Chapter 13 plan as required by the federal bankruptcy rules and local bankruptcy rules.

The court determined that the intent of debtor’s counsel to substitute his own plan for the Mississippi Form Plan is evident in the first nonstandard provision: “To the extent that the plan language and any nonstandard plan provisions listed here differ or contradict each other, the nonstandard plan provisions will control.” Furthermore, it was not reasonable to expect creditors to scrutinize ninety-three single-spaced lines of visually identical typeface in search of a nonstandard provision that might apply to them. Further, many of the nonstandard provisions were so poorly drafted that their intended meaning and application are indiscernible. With respect to the nonstandard plan provisions dealing with mortgages, several included incorrect statements of the law, and others were unnecessary (given the passage of Bankruptcy Rule 3002.1).

As to all but one of the nonstandard provisions, the trustee’s contentions were well-taken by the court. Accordingly, the objection to confirmation was sustained, and confirmation was denied.

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Student Loan Debt Discharge: Changes Ahead? American Bankruptcy Institute Commissioned Study

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

 

by Marcy Ford
Trott Law, P.C.
USFN Member (Michigan)

It is the rare and fortunate individual who graduates from a trade school, a public or private university, or a professional school and does not have student loan debt. Student loans are a benefit to those of us who need them to fund our education; but, often, they are incurred without a realistic understanding of the upcoming cost to pay those loans or the impact the debt will have in the future — both on the individual student borrower and on society as a whole. Various commentaries suggest that student loan debt is associated with decreased levels of homeownership, lower numbers of automobile purchases, increased household distress, and a variety of other detrimental financial and psychological conditions.

Commission Formed

In December 2016 the American Bankruptcy Institute (ABI) established a Commission on Consumer Bankruptcy with the goal of “researching and recommending improvements to the consumer bankruptcy system that can be implemented within its existing structure.” This included recommending improvements to deal with the growing problem of student loan debt. On May 21, 2018 the Commission released some findings and recommendations ahead of schedule, as a result of the U.S. Department of Education’s request for information on this same issue. (The Commission’s final report will be released in the coming year.)

The Commission’s comments suggest several changes to both the interpretation of 11 U.S.C. § 523(a)(8) and the Brunner test. [See Brunner v. New York State Higher Education Services, 831 F.2d 395, 396 (2d Cir. 1987).] These comments can be read in their entirety at https://s3.amazonaws.com/abi-consumercommission/statements/DOE_Comments_and_Letter_from_Commission.pdf.

Under the current interpretation of Brunner a student loan may only be discharged if undue hardship is established by a three-factor test:


1. The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
2. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3. The debtor has made good faith efforts to repay the loans.


Commission Suggestions
The Commission suggests a “best interpretation” of the Brunner test, which still complies with the Bankruptcy Code, should require the debtor to establish simply that:


1. The debtor cannot pay the student loan sought to be discharged according to its standard ten-year contractual schedule while maintaining a reasonable standard of living;
2. The debtor will not be able to pay the loan in full within its initial contractual payment period (10 years is the standard repayment period) during the balance of the contractual term, while maintaining a reasonable standard of living; and
3. The debtor has not acted in bad faith in failing to pay the loan prior to the bankruptcy filing.


The Commission also made specific recommendations for regulation or interpretive guidance for the Department of Education with regard to evaluating hardship claims in adversary actions in bankruptcy. Those suggestions include:


• Bright-line Rules. Creditors should not oppose discharge proceedings where the borrower meets federally-established guidelines that indicate household financial distress and undue hardship for either disability-based or poverty-based guidelines.
• Avoiding Unnecessary Costs. Creditors should accept borrower proof of undue hardship based on the established criteria and avoid formal discovery.
• Alternative Payment Plans. Payment of the student loans in bankruptcy should be effective to (i) satisfy any period of forgiveness or cancellation of the loans under an income-driven repayment plan, (ii) rehabilitate a loan in default, and (iii) in Chapter 13 cases, prevent the imposition of collection costs and penalties.


Possible Consequences
A change in interpretation and application of the Brunner test would have significant and wide-ranging effect. While many current and past debtors with student loan debt have filed bankruptcy, very few seek to discharge their student loan debt. An adjustment in that alone would have a substantial impact on Chapter 13 plan formulation, discharge rates, and the financial shape of those who are successful in their confirmed plans.

Improved post-discharge fiscal health may lead to an increase in home and auto purchases, as well as other benefits associated with general financial stability. An additional impact may be a noteworthy increase in the number of bankruptcy cases not currently commenced, but that could (and likely would) be filed under a more liberal student loan discharge standard. Because the price of bankruptcy participation has increased considerably for all creditors, a rise in filings would also result in an increase in bankruptcy servicing costs for all creditors — not just for student loan creditors/servicers.

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The New Bankruptcy Periodic Statements: A Look at What the CFPB’s 2016 Study Can Tell Us

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Neil Jonas
Brock & Scott, PLLC
USFN Member (North Carolina)

Regulation Z § 1026.41(e)(5), as amended by the 2016 Mortgage Servicing Final Rule, became effective April 19, 2018. Doubtless, upon the implementation of the new statement requirements, there were — and continue to be — questions and confusion about the statements themselves; how they should be read; what they mean; and how they will impact the default industry.

Foretelling the Issues?
In February 2016, the CFPB issued the results of a study entitled “Testing of Bankruptcy Periodic Statement Forms for Mortgage Servicing” (2016 Study). A review of this study is useful in (1) forecasting possible sources of confusion; and (2) helping to develop responses to future questions and challenges regarding the periodic statements.

The 2016 Study clearly declared at the outset that its purpose was to explore consumers’ perceptions and comprehension of bankruptcy-specific disclosures. This was assessed through three rounds of consumer interviews. The forms were revised between rounds of testing to address issues revealed by the testing. (For a full text of the study, visit https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Bankruptcy_Report_FINAL_2_29_16.pdf.)

The bulk of the CFPB’s study was directed toward understanding a hypothetical bankruptcy debtor’s understanding of the proposed statements, particularly, the correct ongoing payment amount, the status of post-petition versus pre-petition balances, and the consequences of non-payment. The “Conclusions of the Study” (featured on pp. 57-59) found that: (1) participants preferred receiving the statements; (2) participants preferred the use of non-technical language; (3) statements that payments were “voluntary” did not facilitate comprehension; (4) participants looked at the “Payment Amount” box, the payment coupon, and the “Explanation of Payment Amount” boxes to understand how much to pay; (5) information about the consequences of non-payment was considered threatening but helped participants’ understanding; (6) distinction between post- and pre-petition payments was not immediately clear; (7) participants’ understanding of information that would only appear in a bankruptcy context was lower than their understanding of information that would appear on a statement outside of bankruptcy.

The 2016 Study anticipated two major potential debtor complaints regarding the periodic statements and offers possible avenues for servicers to consider in rebutting those objections. The first likely contention is that the statements are threatening or constitute an invalid attempt to collect a debt. The second expected criticism is that the statements cause confusion about the allocation of pre-petition versus post-petition payments.

Using the 2016 Study in Mortgage Servicing?
For a discussion of how the CFPB’s research might be used by mortgage servicers as a defensive tool against charges of bankruptcy stay violations and confusion by a debtor-borrower, read on.

Responding to “The Statements are an attempt to collect a debt” — It seems inevitable that debtors will assert that the periodic statements constitute an attempt to collect a debt, possibly giving rise to claims of stay violations under 11 U.S.C. § 362. As particularly relevant to mortgage servicer creditors, Section 362 of the Bankruptcy Code expressly prohibits:


(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.


In the past, periodic statements sent to borrowers during (or after) bankruptcy have been found — under some circumstances — to be violations of the stay. See In re Draper, 237 B.R. 502 (Bankr. M.D. Fla.1999) (“The only credible reason to send such invoices on a monthly basis is to try to collect payments from debtors protected by the automatic stay.”); In re Connor, 366 B.R. 133, 138 (Bankr. D. Haw. 2007) (“The only purpose for sending the monthly statements after [debtor expressed intent to surrender in a Chapter 7 case] was to induce [Debtor] to make payments on a prepetition debt which was dischargeable and has now been discharged.”)

Further, “Outstanding amounts to be paid to prevent foreclosure should generally be described as voluntary, rather than as ‘due,’ and the communication must omit language that demands payment. … A statement lacks a valid informational purpose, and is an enjoined act to collect a discharged debt as personal liability, if it is identical to the statement a discharged debtor received prior to filing for bankruptcy. Such statements inescapably convey the message that the creditor sending them seeks to collect a discharged debt as a personal liability.” In re Biery, 543 B.R. 267, 287–88 (Bankr. E.D. Ky. 2015).

It is possible that the new CFPB statements will receive similar challenges. The statements tested did contain language regarding payments being due:
Round 1 Forms (p. 61), Account History references: “Total $4,339.13 unpaid amounts.”

The statements tested also included various sets of bankruptcy disclaimer language, with each having slightly alternative wording through the three rounds of testing. One sample is below:

 

Bankruptcy Notice (an example tested)
Our records reflect that you are presently a debtor in an active bankruptcy case or you previously received a discharge in bankruptcy. This statement is being sent to you for informational and compliance purposes only. It should not be construed as an attempt to collect a debt against you personally.


Generally, participants understood disclaimer language of this nature. “Almost all participants in the first round of testing said the form was for informational purposes rather than attempting to collect a debt, and they could correctly identify that the borrower was in bankruptcy.” See 2016 Study (p. 13) at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Bankruptcy_Report_FINAL_2_29_16.pdf. Still, some participants did express confusion, with one commenting, “If this is for information only, then why are they sending you a bill that is terrifying?” Id. at 13-14.

Another observed that the statement says “’This is for your informational purposes only,’ and ‘This is a debt,’ so I don’t understand that part. Language is kind of confusing ....” Nevertheless, the study concluded that “Clear information about consequences of non-payment — although this information can appear somewhat threatening — helped participants understand their various courses of action and what would happen if they did not take action. In fact, some participants wanted even clearer, more direct language about these consequences.” Id. at 58.

Based upon the study’s findings, a mortgage creditor facing a challenge that the periodic statements constitute an attempt to collect a debt could respond that: (1) the statements are expressly required by applicable regulations; (2) that the statements contain bankruptcy disclaimer language; and (3) that although the language may “appear threatening” to some, the results of extensive research conducted by the CFPB prior to finalization of the statement rule were that — on the whole — this language aided potential recipients in understanding the consequences of non-payment.

Responding to Confusion about Post-Petition vs. Pre-Petition Arrearage
— A thornier issue exists for mortgage creditors whose claims are provided for in a Chapter 13 plan. In addition to concerns about the bankruptcy disclaimer language, Chapter 13 presents the possibility for confusion about the allocation of payments between pre-petition arrearage amounts and ongoing post-petition contractual payments. The 2016 Study revealed significant cause for unease on this point. Chapter 13 participants noted that “there were many different subtotals on the form that could be interpreted as how much they owe …” Id. at 36. In the second round, in particular, the study notes that “[c]omprehension for all pre-petition arrearage information was low across versions of the Chapter 13 forms …” Id. at 38.

Ability in distinguishing between pre- and post-petition payments varied through the rounds and the study concluded that “[o]verall, participants in Rounds 1 and 3 generally understood the pre-petition arrearage disclosures and that these disclosures represented a separate stream of payments from the post-petition payments …” Id. at 58. It seems that the study concluded that context was key and that individuals “undergoing bankruptcy might know whether they are behind on their payments before filing for bankruptcy and, as such, might be able to identify this information …” Id.

Based upon these conclusions, the 2016 Study does give some clues as to how a servicer may rebut a debtor’s charge that the statements are confusing or misleading:


1. The statements are an acceptable explanation of issues that are, by their nature, confusing. However, the third-round form (which is similar to the version that was implemented) generally gave participants an understanding that pre-petition arrearage disclosures “represented a separate stream of payments from the post-petition payments.” Id. Therefore, the statements provide a proven adequate explanation of the account status.

2. The 2016 Study determined that Chapter 13 debtors should know whether they are behind on their mortgage payments when they file a bankruptcy petition.

3. Despite the potential for confusion, the 2016 Study still resolved that participants preferred receiving these statements and that the statements assisted in understanding the debtor’s accounts.


Closing
The CFPB’s 2016 Study is a comprehensive analysis of the understanding and usefulness of the new bankruptcy statements. It details specific testing of the statements themselves among participants similar to the target audience. Most importantly for mortgage servicers, this study presents robust research that explains the servicers’ obligations in sending periodic statements in bankruptcy. The 2016 Study also shows, based upon empirical evidence, that the language in the statements cannot be reasonably construed as an inappropriate attempt to collect a debt. The statements also contain adequate information to allow debtors to distinguish between pre- and post-petition payments.

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NACTT Annual Conference 2018

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Joel W. Giddens
Wilson & Associates, P.L.L.C.
USFN Member (Arkansas, Mississippi, Tennessee)

The National Association of Chapter Thirteen Trustees (NACTT) held its annual four-day conference in Miami, Florida from June 27-30. The NACTT administers Chapter 13 bankruptcy cases in the 94 federal judicial districts. Mortgage issues continued to be an important topic at the conference, with several interesting educational panels addressing mortgage subjects; plus there was useful dialogue among mortgage representatives, mortgage servicing attorneys, and Chapter 13 trustees. This article highlights a few of the educational offerings and events of interest to the mortgage servicing industry.

Meeting of Trustees, Servicers, and Attorneys
As in past years, the conference began with the NACTT Mortgage Committee meeting. This group is composed of Chapter 13 trustees, servicer representatives, and their attorneys; it is a continuation of the efforts begun in 2004 to improve mortgage servicing in Chapter 13 bankruptcy cases. Participation is through monthly teleconferences, subcommittees on specific issues, and biannual in-person meetings. The group is open to any interested mortgage servicer representative, bankruptcy attorney, or Chapter 13 trustee (contact the USFN Bankruptcy Committee for information about joining). Topics that the mortgage committee addressed in Miami included:

 

Consumer Financial Protection Bureau Periodic Statement Rules — Required for borrowers in bankruptcy since April 19, 2018, the group discussed “pain points” that servicers are feeling since the rolling out of bankruptcy periodic statements. These include how to comply with the periodic statement rules for accounts to be paid in full in a bankruptcy case, Chapter 13 plans that “cramdown” or “strip-off” mortgage claims, and how to deal with Chapter 13 plans that require “gap payments” to be included in the pre-petition arrearage claim. Servicers are still navigating their way around how to best comply with the periodic statement rules in these circumstances.

 

Federal Rule of Bankruptcy Procedure (FRBP) 3002.1 relating to Payment Change Notices — FRBP 3002.1(b) requires mortgage servicers to file notices with the court at least 21 days prior to the effective date of a monthly payment increase or decrease for mortgages secured by borrowers’ principal residences in Chapter 13 cases. The mortgage committee approved proposals for changes to FRBP 3002.1(b) — to be presented jointly with the American Bankruptcy Institute’s (ABI) Chapter 13 Committee of the Commission on Consumer Bankruptcy — for submittal to the Advisory Committee on Rules of Bankruptcy Procedure for consideration later this year. If adopted by the advisory committee, they could amend the payment change rules after a comment period and approval by the U.S. Supreme Court. The proposed changes are in two areas:

 

o The current rule does not provide guidance for what happens if a notice is filed less than 21 days prior to the effective date. The proposed change provides that if the payment increases and the notice is not filed timely, then the effective date for the increased payment would be the due date that is at least 21 days from the filing of the notice. Under the proposed rule, a servicer would have to waive any increase in the payment amount for non-compliance with the rule. If the monthly payment decreases, the proposed rule provides that the effective date would be the effective date set out in the notice. For decreased payments, the new rule would give Chapter 13 trustees flexibility in implementing payment decreases that may not be in technical compliance with the rule, but that would be to the benefit of debtors.

 

o Home Equity Lines of Credit (HELOC) notices of payment change are problematic for servicers because changes may occur monthly, making compliance with the rule difficult. The proposed change would provide an exception to filing notices of payment change for any increased or decreased payment of $10 or less. Instead, servicers of HELOC accounts would be required to file an annual notice in which the servicer would have to provide a reconciliation of the account for any over- (or under-) payment received during the prior year, which would be accounted for by the trustee in the first payment to the servicer in the month after the annual notice.

 

Loan Modification Agreements — The mortgage committee and the ABI will also present to the rules committee a proposal to change the process by which loan modification agreements are approved in Chapter 13 cases. The proposal would allow a servicer to initiate the approval process through motion practice that would temporarily forebear payment of its pre-petition claim in bankruptcy while a trial period plan is in effect. If the modification becomes permanent, then a final order approving it would be entered.


NACTT Presentations and Panels

Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference, as is customary for the NACTT annual meeting. The Office of the U.S. Trustee (UST), in its 30th year of existence, falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees (including Chapter 13 trustees), as well as enforcement of bankruptcy compliance rules. Over the previous year, the UST has focused its efforts in policing the system for instances of inadequate debtor representation in bankruptcy cases, seeking to punish incompetent and unethical attorneys. Of particular interest to the UST has been multi-jurisdictional debtor firms, national firms that solicit business over the internet and then partner with local counsel attorneys to file bankruptcy cases. In some instances, the UST has found questionable practices that have led to sanctions and bans from filing cases by these firms. See, e.g., In re Williams, 2018 Bankr. LEXIS 382 (Chicago-based law firm and principals fined $250,000 and banned for five years from filing cases in Western District of Virginia).

Director White did not completely omit mention of mortgage servicer bankruptcy compliance in his comments. Continued servicer adherence to best practices in bankruptcy should remain the ongoing objective.

The NACTT offered many topical and informative educational sessions of interest to mortgage servicers, including the annual Chapter 13 case law update, a panel addressing remedies when proof of claim compliance fails, and one discussing the impact of the changes to the Federal Rules of Bankruptcy Procedure that became effective on December 1, 2017.

The Chapter 13 case law update covered cases impacting all aspects of Chapter 13 practice, including cases that were of interest to mortgage servicers. Contained in the discussion was a case from California involving a real estate “hijacking” scheme. In re Vazquez, 580 B.R. 526 (Bankr. C.D. Cal. 2017). In Vazquez, the borrower retained a “foreclosure prevention” specialist who claimed to be able to stop a foreclosure by legitimate means through negotiations with the lender, but who then forged the borrower’s signature on a deed to a random debtor. The deed was subsequently sent to the foreclosing mortgage holder with a demand to halt the foreclosure sale. This practice was repeated multiple times to thwart the lender’s foreclosure efforts. The bankruptcy court held that, even though the borrower may not have known or authorized the agent’s actions, the court was authorized to grant the servicer in rem relief from the automatic stay for all future bankruptcy filings. Of note in this case: the court did not limit the in rem relief period to two years as provided in 11 U.S.C. § 362(d)(4) but extended it indefinitely, pursuant to the court’s inherent powers to enforce its orders under 11 U.S.C. § 105(a).

The proof of claim compliance panel discussed practical remedies available to creditors for missed bar dates, given that the bar date was shortened with the rule changes last year. Several options were discussed that have been used in different jurisdictions, including filing a motion to allow a late claim, amending a timely filed debtor proof of claim, filing a late claim and matching it with the amount in the confirmed plan, and a trustee notice of intention to allow a late claim. The last mentioned remedy is a trustee form used by the Chapter 13 trustee in the southern district of Ohio that gives notice to debtors and creditors regarding a late-filed claim and an opportunity to object to it. As with many bankruptcy matters, late-filed proof of claim remedies are specific to each jurisdiction, and local bankruptcy counsel should be consulted to determine the fix (if any) for a missed bar date.

Conclusion
The NACTT conference continues to provide opportunities for mortgage servicers and their attorneys to interact with Chapter 13 trustees, judges, and debtors’ counsel in an informal setting, with many informative educational panels impacting Chapter 13 practice and mortgage servicing. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers — a place to come together to discuss the issues impacting our world.

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South Carolina: Federal Court finds Law Firm Violated FDCPA Provisions in Demand Letter to Homeowners

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

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

It seems that law firms in the default servicing or debt collection industry have always had a target on their backs when it comes to the Fair Debt Collection Practices Act (FDCPA). Still, a recent decision may at least provide some guidance on avoiding certain FDCPA issues. In the case of Park v. McCabe Trotter & Beverly, P.C., No. 2:17-cv-657-RMG (D.S.C. Aug. 14, 2018), the U.S. District Court for the District of South Carolina issued an order and opinion with implications for mortgage servicers and their counsel. In Park, the court found that a debt collector law firm (McCabe) violated provisions of the FDCPA while attempting to collect past-due homeowners’ association (HOA) dues and assessments.

Background
The plaintiffs were homeowners in a housing development with a homeowners’ association. The HOA had previously retained the law firm to represent it in the collection of dues and assessments pursuant to the covenants and restrictions established for the development. The plaintiffs ceased paying assessments in 2006. In 2012, the HOA began imposing additional fines for numerous alleged violations, which included some daily fines. In 2015, the HOA requested that the law firm collect the unpaid dues and assessments from the plaintiffs.

The plaintiffs alleged that the law firm’s attempts to collect attorneys’ fees, in demand letters sent to the plaintiffs, were in violation of the FDCPA as those fees were not authorized by the development’s covenants and restrictions. The court agreed with the plaintiffs and found that attorneys’ fees were not authorized by the covenants and restrictions, unless they were part of the amount entered as a judgment in a legal action. The lesson is clear here — do not attempt to collect attorneys’ fees, or any other fees, until authorized by the contract in question.

Court’s Analysis
A more troubling aspect of the case, as far as law firms are concerned, deals with the way the debt was listed in a letter sent by the law firm to the plaintiffs. In the letter, the law firm stated that the plaintiffs’ “balance including attorneys’ fees is $19,965.76.” The court found the letter to be in violation of the FDCPA by failing to explain the lump-sum debt that the plaintiffs allegedly owed. The court attached significance to the fact that the letter simply indicated a total amount of debt (without further explanation or breakdown) and found that in doing so, the law firm “hid the true character of the debt.” As the letter only provided a lump-sum amount claimed to be due, the plaintiffs had no way to determine which parts of that figure constituted their unpaid fines, assessments, attorneys’ fees, or costs; and, therefore, could not assess the validity of the debt. The court found this to be a violation of sections 1692(e) and 1692(f) of the FDCPA and granted the plaintiffs’ motion for summary judgment.

In reaching its decision, the district court cited the Seventh Circuit case of Fields v. Wilber Law Firm, P.C., 383 F.3d. 562 (7th Cir. 2004), which also dealt with a lump-sum debt amount listed in a collection letter. The court’s opinion in Fields indicated that a possible, and easy, solution to compliance with sections 1692(e) and section 1692(f) would be to itemize the individual charges that comprise the total lump sum provided in the letter. In his decision in the Park case, Judge Gergel emphasized this language in his order granting summary judgment to the plaintiffs, making it clear that the law firm’s letter should have had an itemized breakdown of the lump-sum amount listed as due and owing by the plaintiffs.

Closing Words
Demand letters in South Carolina must contain a breakdown of any lump-sum debt totals in order to not run afoul of the FDCPA. Debt collectors can no longer list only a total debt figure in their collection or validation letters to borrowers without FDCPA implications. The question remains as to the detail required to avoid hiding “the true character of the debt.” For example, would a further breakdown be required for any items listed as “corporate advances” or “recoverable balance”? Since the district court in South Carolina relied on a Seventh Circuit opinion in the Park case, a review of that circuit’s opinions would seem to be in order for future guidance.

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Utilization of Land Reports for Real Estate Located within Federal Indian Reservations

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

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

If you have ever reviewed title work for real estate located on a federal Indian reservation, you have likely encountered some additional requirements stemming from the tribal sovereignty recognized by the United States government. Contacting the Bureau of Indian Affairs (BIA) to request a land report to ensure that the real estate is, in fact, tribal land is warranted before taking on these requirements.

The BIA states that there are approximately 56.2 million acres of land held in trust by the United States for various Indian tribes and individuals.1 While there are various forms of “tribal land” (allotted lands, restricted status lands, or state Indian reservations), the key consideration here is whether the United States actually holds title in trust for an Indian Tribe or individual Native American. In other words, simply because the real estate is located on an Indian reservation does not necessarily mean that it is tribal land.

In one particular matter, a recently reviewed foreclosure title report included an additional requirement due to the real estate being located on the Prairie Band Potawatomi Indian Reservation in Northeastern Kansas. While potentially necessary, this further requisite would have likely added time and costs to the foreclosure action from additional steps, including the need to register to practice in tribal court and/or the need to register the state court judgment as a foreign judgment with the controlling tribal court. While researching this issue, it was discovered that the BIA Division of Land Titles and Records (and its 18 Land Titles and Records Offices) could expedite this process. This, ultimately, saved time and costs.

After contacting the regional Southern Plains Land Titles and Records Office (which covers Kansas),2 it was learned that a land report could be obtained for no charge — and within two weeks of the request. Receipt of the land report revealed that, while the subject real estate was located on the Prairie Band Potawatomi Indian Reservation, the United States government did own or hold the real estate in trust and, therefore, the real estate was not tribal land. Providing the land report to the title company resulted in a removal of the requirement at issue. Consequently, the foreclosure commenced without the need to involve the reservation or tribal council.

It should also be noted that prior to contacting the BIA Land Titles and Records office, this author’s firm reached out to the Kansas Native American Affairs office (the KNAA). The KNAA assisted in pointing out that the subject real estate could not have been tribal land based on a review of the chain of title and lack of involvement of the BIA in mortgaging this property to the current borrowers. The KNAA, however, was unable to generate the report necessary to remove the requirement at issue.


https://www.bia.gov/frequently-asked-questions
For a list of Land Titles and Records Offices as well as a map of the regions, visit: https://www.bia.gov/bia/ots/dltr.


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Connecticut: Distinction between “Special Defense” and “Counterclaim” affects Restoration of a Withdrawn Case to the Court’s Docket

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

by Peter A. Ventre
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut)

In Sovereign Bank v. Harrison, 184 Conn. App. 436 (Aug. 28, 2018), the trial court had restored a withdrawn foreclosure action to the court docket based on the defendant’s contention that she had a pending counterclaim, even though none had been pled at the time of the withdrawal. Rather, the defendant pointed to a special defense, which she then asserted was meant as a counterclaim. The appellate court reversed and remanded the case for the motion to restore to be denied.

Background
Prior to the scheduled trial date, the plaintiff withdrew its foreclosure action (subsequently commencing a foreclosure action in federal court). At that time the defendant had filed special defenses only, not any counterclaim. After the withdrawal, the defendant filed a motion to amend her answer to include a counterclaim; the trial court ruled that it had no jurisdiction until the matter was restored to its docket. The defendant thereafter filed a motion to restore, claiming that the third special defense was more properly construed as a counterclaim. The court granted the defendant’s motion, and the plaintiff appealed.

Analysis on Appeal
In its review, the appellate court noted that a defendant with a pending, effective counterclaim should not need to move to restore a plaintiff’s withdrawn case to the docket. Such a determination in the subject case turned on whether the defendant’s third special defense, if it was to stand as a counterclaim, asserted an independent cause of action — with a special defense which does not seek affirmative relief being purely defensive, and not an effective counterclaim. In overturning the lower court’s ruling, the appellate court found there was a failure to make that determination.

Specifically, the trial court’s reliance on the special defense allegation arising from the same transaction as that described in the plaintiff’s complaint was misplaced, with the appellate court stating: “Evaluating the defendant’s answer against the correct standard, it is clear that the allegation in the defendant’s third special defense cannot properly be constructed as a counterclaim.” The third special defense allegations merely challenged the amount of the debt owed to the plaintiff, which may be raised by way of special defense or by objecting to the plaintiff’s attempted introduction of the affidavit of debt in court. Nothing in the defendant’s pleadings “can reasonably be interpreted as a claim of entitlement to affirmative relief.” On the other hand, the court noted that if the defendant had pleaded payments in excess of the debt, then she would be entitled to affirmative relief and, therefore, the special defense could be considered a counterclaim.

In closing, the appellate court cautioned that while construing pleadings “broadly and realistically,” a trial court should not read into them “factual allegations that simply are not there” or “substitute a cognizable legal theory that the facts, as pleaded, might conceivably support for the noncognizable theory that was actually pleaded.”

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

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District of Columbia: Address Confidentiality Act of 2018

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

by John Ansell
Rosenberg & Associates, LLC – USFN Member (District of Columbia)

The District of Columbia recently passed legislation that may affect the ability of servicers and lenders to adequately assess title on certain properties in the District. The new statute (the Address Confidentiality Act of 2018) became effective October 1, 2018; it is designed to protect victims of domestic violence.

According to the terms of the Act, if an individual applies for the program and is certified as a victim of stalking, domestic violence, human trafficking, or a range of sexual offenses, the individual will be issued an identification card with a substitute address. The substitute address will be a mailbox to which mail will be sent, and from which the office that administers the program will forward mail to the program participant’s actual address.

From a real property title perspective, a participant in the program can submit a request to any D.C. government office or agency to remove all publicly accessible references to their actual address. This means that a participant may have their name removed from all publicly available land records, tax records, and court records. This can present challenges for the title industry, as well as loan originators and servicers. Thus far, D.C. has not provided crucial details. Namely, there is no indication yet of whether the redacted information will simply be absent, or whether mention will be made that the information is being withheld pursuant to this program. Consequently, a title search may come back with documents simply missing; e.g., a deed or deed of trust just not showing up in a title search, or the lack of a tax record appearing when performing an escrow analysis. Alternatively, the search results may reflect some notice that the information is being omitted, with or without explanation.

A further complication is that, as currently written, the statute does not allow program participants to selectively direct the release of information. Their only choice appears to be to remove themselves entirely from the program, hardly the route that persons fearing for their safety would choose. Overall, the potential implications of this statute upon title searches are significant, and until D.C. provides more information as to how such matters will be handled, the state of title in the District will remain uncertain.

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District of Columbia: Another Court of Appeals Decision affecting Foreclosures of Condominium Liens

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018 and November 13, 2018

by Tracy Buck and Sara Tussey
Rosenberg and Associates, LLC — USFN Member (District of Columbia)

On September 13, 2018 the District of Columbia Court of Appeals rendered a decision in 4700 Conn 305 Trust v. Capital One, N.A. in relation to foreclosures of condominium liens. The court considered the issue as to whether a condominium lien covering a period in excess of six months’ worth of outstanding assessments is entitled to super-priority status.

Under D.C. Code § 42-1903.13, condominium associations have a “super-priority lien” over first mortgage lienholders to the extent of six months of the unpaid condominium assessments immediately preceding acceleration. A super-priority lien is superior to all liens, including a first mortgage or deed of trust. Any unpaid condominium assessments beyond a super-priority lien are lower in priority to a first mortgage or deed of trust (the “junior condo lien”).

Some Appellate and Statutory History
In 2014, in Chase Plaza Condo. Ass’n, Inc. v. JPMorgan Chase Bank, N.A., the D.C. Court of Appeals held that an association’s foreclosure of its super-priority lien extinguishes a first deed of trust. This decision was based on the common law principle that foreclosure of a senior lien extinguishes all junior liens where the proceeds from a foreclosure sale are insufficient to satisfy a junior lien. The effect of Chase Plaza was that lenders were henceforth recommended to satisfy an association’s super-priority lien in advance of a condominium foreclosure sale to ensure that the lender’s first mortgage’s lien priority was preserved. If a super-priority lien was satisfied, the association could proceed with its sale; however, its sale would be subject to the lender’s first deed of trust.

In 2017 the D.C. condominium law was amended to require that Notice of a Condominium Foreclosure had to be sent to all junior lienholders of record (including lenders holding a first deed of trust) and that the notice must expressly state whether the association was foreclosing on its super-priority lien or junior condo lien. In March 2018, in Liu v. U.S. Bank N.A., the D.C. Court of Appeals held that an association could not waive its super-priority lien status. In doing so, the court held that an association could not foreclose on its super-priority lien plus advertise and hold the sale out to be subject to a first deed of trust. As such, lenders were thereafter recommended to not rely on advertisements or notices of sale stating that a condominium foreclosure would be subject to any first deed of trust. If the association stated that a condominium foreclosure was to be subject to a first deed of trust, lenders were still advised to satisfy the super-priority lien. Yet, in the Liu decision, the only outstanding assessments were for the most recent six months, and accordingly, the association could only foreclose on its super-priority lien because that was all it had.

More Recently from the Appellate Court
The D.C. Court of Appeals rendered yet another decision regarding condominium foreclosures. In 4700 Conn 305 Trust v. Capital One, N.A. (Sept. 13, 2018), the court held that where an association was foreclosing on a condominium lien for an amount greater than six months of assessments owed, the super-priority lien was included. The court did not consider the impact that this decision might have on condominium foreclosures that occurred prior to the 2017 amendment to the D.C. condominium law. Before the amendment, associations were not required by statute to send a Notice of Foreclosure Sale to any junior lienholders or holders of a first mortgage or deed of trust. Moreover, associations were not required to state within its notice the specific split condominium lien that the association was foreclosing on.

Prior to the 2017 statutory amendment, associations often foreclosed on the entire condominium lien without providing notice to junior lienholders. Based on 4700 Conn 305 Trust, those foreclosures of entire condominium liens included the association’s super-priority lien, effectively extinguishing first mortgages without any notice to its lienholders. While the potential impact of this holding is unsettling, the court left open the possibility for allegations to be raised by lenders based on equitable or contractual principles. For example, 4700 Conn 305 Trust has left lenders with recourse in claiming that those prior foreclosure sales of super-priority liens could be deemed: (1) invalid due to unconscionable sale prices; and (2) invalid due to the unconstitutionality of the District’s condominium law at that time due to the lack of notice requirement to lenders. The appellate court has left these arguments untouched as of yet; and, thus, that is what lenders are left with to defend their mortgage’s existence in these instances.


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Connecticut: Appellate Court Clarifies Redemption Period

Posted By USFN, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

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

The Connecticut Appellate Court has clarified the exact time that a defendant’s right to redeem expires pursuant to a judgment of strict foreclosure. In the case of Real Estate Mortgage Network, Inc. v. Squillante, AC 39229 (Aug. 28, 2018), the appellate court had to determine whether a defendant’s law day was valid when it was scheduled on the same day that an appeal period expired.

Background
In Squillante, the trial court had entered a judgment of strict foreclosure and a law day was scheduled for June 8, 2015. On June 8, the trial court denied the defendant’s motion to open, but extended the law day until June 29, 2015 to allow the appeal period to expire. The 20-day appeal period would have normally expired on June 28, 2015; but, because June 28 was a Sunday, the expiration date was continued to the next business day of June 29, 2015 — the same day as the first scheduled law day. The defendant never filed an appeal and did not redeem on her law day.

Nine months later, the defendant filed another motion to open, claiming that title had not vested to the plaintiff because the appeal period expired on the same date as the first law day; therefore, it was ineffective. The trial court disagreed, finding that title had vested to the plaintiff. The defendant appealed.

Appellate Review
The appellate court ultimately determined that the law day was effective, despite being scheduled on the last day of the appeal period. Under Practice Book Section 7-17, a document must be filed before 5:00 P.M., otherwise the document will be deemed filed on the next business day. Therefore, the defendant’s appeal period expired at 5:00 P.M. on June 29, 2015. However, the court held that the defendant’s law day and right to redeem did not end until midnight on June 30, 2015.

The appellate court relied upon First Federal Savings and Loan Association of Rochester v. Pellechia, 37 Conn. App. 423 (1995), a case that determined how to count the time period to file a motion for deficiency judgment after title vests to a plaintiff. Accordingly, in Squillante, because the defendant’s appeal period expired 7 hours before the defendant’s law day expired (and did not otherwise shorten the appeal period), the law day was not ineffective and title vested to the plaintiff.

Conclusion
Squillante affirmatively determines the exact time when the law day and right of redemption expires. In effect, Squillante validates the frequent practice of some trial courts to extend a law day only 21 days when denying a motion to open judgment, despite the appeal period expiring on the same date. Of course, this requires that either all parties receive notice of the new law day in open court or that the clerk sends the notice timely. Given the delays in some courthouses, a foreclosing plaintiff should be diligent in reviewing the notices and ensuring when the appeal period expires.

In addition, Squillante does have some broader implications. Under federal rules of practice, a debtor can electronically file a bankruptcy petition at 11:59 P.M. and it will be deemed filed that day. Under Squillante, a foreclosing plaintiff is provided guidance in determining whether a filed bankruptcy petition does or does not prevent the vesting of title. Moreover, under Squillante, the appellate court has given its imprimatur to the ability of a defendant to redeem by tendering payment after 5:00 P.M., while recognizing the practical difficulties that may arise in accepting payment.

Editor’s Note: The author’s law firm represented the appellee (plaintiff) in the case summarized in this article.

 

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District of Columbia: Eviction Law Changes

Posted By Rachel Ramirez, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

by Matthew Fischer
Cohn, Goldberg & Deutsch, LLC – USFN Member (District of Columbia)

U.S. Marshal Service Changes (see https://www.usmarshals.gov/district/dc-sc/general/evictions.htm)

An eviction in the District can only occur in the presence of the U.S. Marshal Service (USMS). The USMS has recently made some significant changes to the way it handles the scheduling and execution of evictions. The new process began on August 13, 2018. Changes to note include the following items:


• Evictions will now be scheduled in advance. Previously, landlords were given approximately 24 hours’ notice and were required to appear with a large crew to handle the eviction.

• Tenants (and landlords) will receive notice of an eviction date at least two weeks in advance.

• The personal property of tenants will not be removed and can instead remain in the residential unit.

• Given that personal property does not have to be removed, landlords no longer need to arrange large crews to appear. Instead, the locks will be changed under the observation of the USMS.

• The USMS will still not allow the conduct of evictions on days when precipitation is falling or when below-freezing temperatures within the next 24 hours are forecasted.


Be aware that the above-referenced changes are associated with the USMS — as opposed to changes with the processes of the superior court (which are outlined below).

Legislative Changes

Eviction Procedure Reform Emergency Amendment Act of 2018 (see http://lims.dccouncil.us/Download/40653/B22-0895-Enrollment.pdf) — Recently, the D.C. City Council passed legislation to address perceived deficiencies in the eviction process. This legislation imposed additional requirements on landlords as a part of the eviction process:


• A housing provider (Landlords) must send notice, not fewer than fourteen days before the eviction, to the tenant by first-class mail to the rental unit; telephone or electronic communication (phone, text, or email); and by posting at the unit stating the date of the eviction. The notice must contain (1) the tenant’s name and address of the unit; (2) state the date of the scheduled eviction; (3) information that the eviction will be executed on that date unless the tenant vacates the unit and returns control to the owner; (4) a warning that any personal property left in the unit will be considered abandoned seven days after the time of eviction, excluding Sundays and federal holidays; (5) the phone numbers of the U.S. Marshal Service, Office of the Chief Tenant Advocate, and the D.C. Landlord Tenant Court; and (6) information that this constitutes the final notice prior to the eviction, even if the date is postponed by the court or USMS.

• Landlords must now address the issue of storage of personal property. Previously, the property would have been placed outside the unit as a part of the eviction process. With this legislation, property has to be held for seven days (“excluding Sunday and federal holidays”).

• At the time of the eviction, the landlord must post an additional notice (and send a copy of said notice by first-class mail to the address) of an emergency contact, which states the following: (1) the name and phone number of at least one representative whom the tenant may contact who can grant access to the rental unit; (2) the phone number of the Office of the Chief Tenant Advocate; (3) the phone number of the USMS; (4) the phone number of the D.C. Landlord Tenant Court; and (5) the text of the subsection of the emergency legislation.

• The Landlord must exercise “reasonable care” in the storage of personal property while it remains in the rental unit as required.

• The Landlord must grant the evicted tenant access to the unit to remove personal property, and such access must be for at least eight continuous hours at a time agreed upon by the parties without requiring the payment of rent or service fees.

• The Landlord may dispose of personal property that is abandoned (i.e., which has not been collected after the time periods stated above). Disposal of the property must be handled in a manner that is otherwise lawful (i.e., it should not be left outside).


Eviction Procedure Reform Temporary Amendment Act of 2018 (see http://lims.dccouncil.us/Download/40654/B22-0896-Engrossment.pdf) — Besides the bill listed above, there is additional legislation that has yet to go into force regarding the eviction process. Practitioners should note that amendments to the legislation may still be made and that additional legislation will likely be introduced and passed on this subject. An examination of this legislation will reveal that the substantive provisions generally remain unchanged from the above — however, with this legislation being considered “temporary” rather than “emergency” legislation. Thus, the real effect of the new statute as it stands is to extend the effect of the statute above until permanent legislation addressing the issue can be enacted.

 

For an explanation of the differences between “temporary” and “emergency” legislation, please see: http://dccouncil.us/pages/how-a-bill-becomes-a-law.

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Appellate Court Reviews Redemption Period on Reverse Mortgages

Posted By USFN, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

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

The Kansas Court of Appeals recently offered a clear and unequivocal opinion regarding the proper redemption period on home equity conversion or reverse mortgages.

In Kansas, a defendant owner of a property may redeem any real property sold under execution within twelve months from the date of sale [K.S.A. §60-2414(a)]. However, lenders and servicers are often allowed to shorten that redemption period to three months under K.S.A. § 60-2414(m), which provides that if a default occurs “before 1/3 of the original indebtedness secured by the mortgage or lien has been paid, the court shall order a redemption period of three months.” In other words, if the unpaid principal balance is 2/3 or more of the original principal balance at the time the Petition to Foreclose is filed, the redemption period is three months.

Prior to the decision in Reverse Mortgage Solutions, Inc. v. Goldwyn, 2018 Kan. App. LEXIS 36 (Kan. Ct. App. July 6, 2018), the question often arose as to where reverse mortgages fell within the redemption period context. On the one hand (and without delving into the nature of a reverse mortgage as the court did in Goldwyn), borrowers are generally not making payments to reduce the principal balance, such that the three-month redemption period will nearly always apply. On the other hand, given the lack of clarity on the matter, the equitable nature of foreclosures in Kansas, a propensity for borrower-friendly courts, and the potential public relations or similar concerns, lenders and servicers often elected to forego asserting that the appropriate redemption period is three months — settling for the initial twelve-month redemption period.

In deciding Goldwyn, which involved the foreclosure of a reverse mortgage, the court took into account the various considerations mentioned above and flatly sided with the letter of the law. It addressed these concerns regarding how to assess the redemption period by very clearly stating, “since [the borrower] had paid back less than one-third of the original indebtedness, the redemption period was properly set at three months.” Goldwyn at 14. This ruling provides the basis to assert a shorter redemption period and to expedite the foreclosure process in the majority of foreclosures of reverse mortgages.

Of note, the court in Goldwyn made a less-than-subtle suggestion to the Kansas legislature that this issue may need to be re-evaluated with attention paid to the redemption period on reverse mortgages, given the equities involved. While this recent judicial clarification will prove to be useful for the time being, it will be interesting to see whether legislative action follows.

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Washington State Court of Appeals Defines Acceleration and Reviews Statute of Limitations

Posted By USFN, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

by Wendy Walter
McCarthy Holthus LLP — USFN Member (Washington)

In a recent published decision, the Washington State Court of Appeals assisted creditors by more clearly defining acceleration in the context of a foreclosure of residential property in a nonjudicial case [Merceri v. The Bank of New York Mellon, No. 76706-2-1, 2018 Wash. App. LEXIS 1923 (Aug. 13, 2018)].

Background
The trial court had granted summary judgment to a borrower who was seeking to quiet title to her real property by claiming that the creditor had exceeded the six-year statute of limitations (SOL) on enforcement of her deed of trust. The borrower’s argument was that the notice of default and intent to accelerate, apparently issued to comply with the uniform instrument requirements to deliver a 30-day notice, and using the language “if the default is not cured … the mortgage payments will be accelerated with the full amount … becoming due and payable …” had triggered acceleration on March 18, 2010 (the date by which the 30-day notice of default was expired).

Following that notice, the loan had been transferred and the subsequent beneficiary and servicer issued several monthly payment statements (indicating the amount to reinstate the loan), and the successor nonjudicial foreclosure trustee had issued a notice of trustee’s sale on June 1, 2016. The borrower sued shortly after the notice of trustee’s sale, contending that more than six years had elapsed from the March 18, 2010 date and the date of the notice of trustee’s sale. The notice of trustee’s sale indicates the full amount required to pay off the debt.

Appellate Review
While reversing the trial court, the appellate justices analyzed the installment contract theory of default in Washington State; the accruing of the statute based on each missed payment; and whether the creditor must take affirmative action (known to the payor) that it intends to declare the whole debt due. The court in Merceri cites a 1909 Washington Supreme Court case, which holds that “[A] provision hastening the date of maturity of the whole debt is for the benefit of the payee, and if he does not manifest any intention to claim it, before tender is actually made, there is in law no default such as will cause the maturity of the debt before the regular time provided in the agreement.” Coman v. Peters, 52 Wash. 574, 578, 100 P. 1002 (1909).

The court applied this precedent to the facts at hand and found that the notice of default didn’t accelerate the loan. Additionally, neither were the monthly statements the affirmative act needed to fully accelerate the debt because they didn’t show the fully accelerated balance.

Conclusion
Creditors, beneficiaries, and servicers who are seeing challenges in Washington State relating to statute of limitations defenses and quiet title actions should analyze their cases to determine whether a payment statement — all required now since 2014 under the RESPA rules promulgated by the Bureau of Consumer Financial Protection — might help to limit an SOL defense or prove useful in a quiet title action. Merceri is a positive and much needed ruling in Washington.

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2018 Utah Legislative Changes affecting Default Mortgage Servicing

Posted By USFN, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

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

The 2018 Utah legislature passed a few bills affecting Utah mortgage servicing, liens, and evictions. The effective date for these bills was May 8, 2018. House Bill 108, SAFE Act Exemptions, amended the Utah Residential Mortgage Practices and Licensing Act (RMPLA). House Bill 168, Political Subdivision Lien Authority, made minor changes and clarifications regarding the lien rights and priority of municipalities for recurring and non-recurring charges. Senate Bill 159, Forcible Entry and Detainer, made important changes to Utah eviction actions, personal property evictions, and the rights of the respective parties therein. Senate Bill 188, Uniform Unsworn Declarations Act, codified the Act detailing the limits and addressing the validity of the use of unsworn declarations in certain situations. Finally, while not passed in this legislative session, two potentially impactful bills (regarding statutory notice via publication, and the statute of limitations for foreclosures) were introduced, and defeated, which may be indicative of future legislation to be brought.

SAFE Act Exemptions
House Bill 108 amends the Utah RMPLA, primarily to define terms and to exempt certain nonprofit corporations from the RMPLA’s provisions. The amended version of the RMPLA now includes a definition for “balloon payment,” which is defined as a required payment in a mortgage transaction that: (i) results in a greater reduction in the principal of the mortgage than a regular installment payment; and (ii) is made during, or at the end, of the loan’s term.

Additionally, the amended RMPLA now exempts from its provisions a nonprofit corporation that, in addition to the other criteria already set forth in the RMPLA, (i) is exempt from paying federal income taxes; (ii) has as the nonprofit corporation’s primary purpose serving the public by helping low-income individuals and families build, repair, or purchase housing; (iii) does not require, under the terms of the mortgage, a balloon payment; and (iv) to perform loan originator activities, uses only unpaid volunteers or employees whose compensation is not based on the number or size of the mortgage transactions that the employees originate. Similarly, an employee or volunteer for a nonprofit corporation is exempt from the RMPLA’s provisions while working within the scope of the nonprofit corporation’s business, provided that such nonprofit corporation either meets the criteria above, or is a community development financial institution.

Political Subdivision Lien Authority
House Bill 168 clarifies that no lien rights exist for direct recurring (i.e., monthly) charges for goods and services (e.g., garbage collection) provided by local political subdivisions (municipalities). That is, these types of liens are provided no lien status or priority at all. Additionally, this bill grants lien rights to municipalities for some non-recurring charges, but the municipality must file actual liens for those amounts, and such liens will have priority based on filing date. Generally speaking, these liens should not cause any priority issues with foreclosures as they follow the rule of “first in time, first in right” and will be recorded and appear as actual liens on a foreclosure title report.

Finally, House Bill 168 clarifies that if charges levied by a municipality are statutorily authorized to be on the tax notice, then they are allowed to be certified and become part of the property taxes. Such charges would take priority over consensual liens, just as property taxes do now. There is no requirement for a separate notice of lien for these items, as they simply show up on the property tax notice after being certified to the treasurer. Please note that, in the 2018 legislative session, no categories of charges were added to the “statutorily authorized” category that did not already have statutory authorization. (The legislature could make future changes, but did not do so with this bill.)

Ultimately, House Bill 168 should not cause any changes to a trustee’s previous approach to nonjudicial foreclosures and lien priority in the state of Utah.

Forcible Entry and Detainer
Senate Bill 159 modifies the Utah statute governing forcible entry and detainer, which is relied upon in prosecuting post-foreclosure eviction actions. The bill expands the options for providing service of a notice to quit, specifically for situations in which a tenant “controls” a property but may not actually reside or work there. The bill also permits the court to schedule an initial occupancy hearing before a substitute judge, instead of the assigned judge, to expedite the eviction process.

While previously the judge had discretion to award costs and reasonable attorney fees to the prevailing party, this bill makes the award of such fees and costs mandatory. Finally, with respect to personal property evictions, this bill defines the term “abandonment,” and amends the statutory notification process for abandoned personal property. Of note, where it previously expressly authorized the removal of only the eviction defendant’s abandoned personal property, this bill amends the statute to state that any abandoned personal property remaining in or on the premises may be removed pursuant to the statutory removal process.

Uniform Unsworn Declarations Act
Senate Bill 188 enacts the Uniform Unsworn Declarations Act, including defining its relevant terms, providing the applicability of the act, addressing the validity of unsworn declarations, addressing a declaration’s required medium, and outlining the form of an unsworn declaration. The bill also repeals provisions related to unsworn declaration in lieu of affidavit and the Utah Uniform Unsworn Foreign Declarations Act. The provisions of this act do not apply to documents that are recorded pursuant to Utah’s nonjudicial foreclosure statute, but will most likely affect the ability of process servers, sheriffs, constables, and private investigators to utilize unsworn declarations in lieu of sworn affidavits, in some situations.

Defeated Legislation
Two pieces of proposed legislation pertaining to the mortgage default industry that were not enacted, but may return in future legislative sessions, include: House Bill 301, Legal Notice Amendments; and House Bill 384, Trust Deeds and Statute of Limitations. Both bills garnered some support among legislators but, ultimately, could not muster enough votes to be enacted. However, these bills should be viewed as informative as to potential future legislative efforts.

House Bill 301 sought to exempt certain entities (principally, municipal governments) from requirements to provide legal notice via publication when such notice could be given in another suitable manner (e.g., personal service). The bill, meant to save municipalities on high publication costs, was ultimately too controversial — as the vague language in the bill left the determination of adequate notice to the sender — and some legislators feared it would lead to increased litigation and a lack of transparency on the part of municipal governments. Others feared it might erode notice by publication provisions in the nonjudicial foreclosure statute. As some point in the future, it is anticipated that a challenge will be made to the necessity of continuing to use newspaper publications as a required form of notice in Utah nonjudicial foreclosure actions.

House Bill 384 was an effort by plaintiffs’ attorneys to legislatively undo the precedent of statute of limitations case law in Utah. Currently, the case law in Utah is favorable to lenders and servicers in allowing some leeway with respect to avoiding statute of limitations issues and completing foreclosure actions. It is unclear whether such legislation should be expected in future years as the legislation’s sponsor (and really its only ardent supporter) retired from the House at the conclusion of the 2018 legislative session.

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FDCPA: Eighth Circuit Reviews “Ceasing Communication” in Context

Posted By USFN, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

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

Background
In the decision rendered in Scheffler v. Gurstel Chargo, P.A. (8th Cir. Aug. 27, 2018), the court notes that the plaintiff Scheffler “is a former debt collector who has litigated a number of FDCPA claims against other debt collectors. Gurstel is a law firm engaged in debt collection.”

The case involves a credit card debt for which Gurstel obtained judgment against Scheffler in 2009, and later communications between Scheffler and Gurstel. Specifically, Scheffler sent the defendant law firm a “cease further communications letter” under the FDCPA. Thereafter, the law firm served a garnishment summons upon Scheffler’s bank in an attempt to collect the judgment and sent Scheffler a copy of the summons with a statement advising him to contact a collection representative with any questions.

In response, Scheffler did call a Gurstel collection representative. When the conversation turned to the underlying debt, Scheffler asked “OK, so what am I gonna do about that?” When the representative suggested a settlement, Scheffler warned that he had sent the law firm a cease communications letter and that the firm violated the letter’s directive. Scheffler then sued the law firm, alleging various violations of the FDCPA, including provision 15 U.S.C § 1692c(c), entitled “Ceasing communication.” After the dismissal of his case at the U.S. District Court level, with prejudice, this appeal followed.

Appellate Review
The “Ceasing communication” provision of the FDCPA reads in part: “If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt . . .” However, the FDCPA expressly exempts certain communications, including those made “to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor.” Id. at § 1692c(c)(2).

In reviewing Scheffler’s claims, the appellate court first disposed of the garnishment summons issue by noting that prior precedent held that sending a garnishment notice following a cease of communications demand is not a violation. See Scheffler v. Messerli & Kramer P.A., 791 F.3d 847, 848 (8th Cir. 2015). Further, the court concurred that the law firm’s inclusion of an invitation for the consumer to call with questions was not in itself a violation, nor was the language deceptive to an unsophisticated consumer since it was clear, concise, accurate, and fell within the ceasing communication exception of the FDCPA.

Scheffler contended that there should be liability under the FDCPA’s “unsophisticated consumer standard” and that the law firm’s communication was deceptive. The court described the “unsophisticated consumer standard” of the FDCPA as “designed to protect consumers of below average sophistication or intelligence without having the standard tied to ‘the very last rung of the sophistication ladder.’” Id. The court further reasoned that “[t]his standard protects the uninformed or naive consumer, yet also contains an objective element of reasonableness to protect debt collectors from liability for peculiar interpretations of collection letters.”

Perhaps the best news for the default industry involves the court’s review of the FDCPA claims surrounding the phone call between Scheffler and the law firm. The Eighth Circuit agreed with the Ninth Circuit that the FDCPA does not prevent a debt collector from responding to a debtor’s post-cease letter inquiry regarding a debt. See Clark v. Capital Credit and Collection Services, Inc., 460 F.3d 1162 (9th Cir. 2006) at 1170. “Indeed, to hold that a debt collector may not respond to a debtor’s telephone call regarding his or her debt would, in many cases, ‘force honest debt collectors seeking a peaceful resolution of the debt to file suit in order to resolve the debt — something that is clearly at odds with the language and purpose of the FDCPA.’” Id. (quoting Lewis v. ACB Business Services, Inc., 135 F.3d 389, 399 (6th Cir. 1998)).

In Scheffler, the appellate court agreed with the district court’s finding that Scheffler’s call to the law firm to discuss his debt was “an unsubtle and ultimately unsuccessful attempt to provoke [the law firm] into committing an FDCPA violation.” The appellate court further noted that “[e]ven if [the law firm’s] communication can be construed as an effort to collect on the debt in violation of the cease letter, it occurred after Scheffler called and asked a question about the underlying debt. An unsophisticated consumer would know that by behaving like Scheffler, he was waiving his rights under § 1692c(c) so as to allow the debt collector to answer his question. We hold Scheffler voluntarily and knowingly waived his cease letter for purposes of allowing [the law firm] to answer his question, and therefore [the law firm] did not violate Scheffler’s rights under § 1692c(c) by briefly discussing a possible resolution of the debt during the phone call.” The Eighth Circuit then affirmed the district court’s summary judgment order granted Gurstel in its entirety.

Closing Words
As a practice pointer, this case suggests that within the Eighth Circuit, if a debtor actually initiates the call, the creditor should be free to answer questions about the debt even when there has been a cease and desist letter, so long as there is no pressure or threatening language during the call to collect the debt. These calls should be closely monitored for FDCPA compliance and recorded, but it is a significant step in the right direction to deny FDCPA claims when it is the debtor who actively seeks out communication with the creditor.

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USDA Proposed Rule - Streamlining the Loss Claims Process

Posted By Rachel Ramirez, Tuesday, September 11, 2018
Updated: Friday, September 7, 2018

September 11, 2018

from USDA Rural Development SFHGLP

On August 23, 2018, a Proposed Rule was published in the Federal Register seeking comments on proposed changes to streamline the loss claim process for lenders who have acquired title to property through voluntary liquidation or foreclosure; clarify that lenders must comply with applicable laws, including those within the purview of the Consumer Financial Protection Bureau; and better align loss mitigation policies with those in the mortgage industry. Instructions for providing comments are included in the Federal Register Notice. [Note that written or email comments on the proposed rule must be received on or before October 22, 2018 to be assured for consideration.]

Questions regarding this announcement may be directed to Single Family Housing Guaranteed Loan Program in the Rural Housing National Office at 202-720-1452.

 

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Application of the Maryland Collection Agency Licensing Act to Residential Foreclosure Actions (Blackstone v. Sharma Decision, 8/2/2018)

Posted By USFN, Tuesday, August 14, 2018
Updated: Wednesday, August 8, 2018

August 14, 2018

by Andrew J. Brenner
BWW Law Group, LLC – USFN Member (Maryland)

On August 2, 2018 the Court of Appeals of Maryland (the Court), the highest appellate court in the state, reversed the June 6, 2017 controversial decision of the Court of Special Appeals of Maryland in Blackstone v. Sharma,1 and held that the Maryland Collection Agency Licensing Act (MCALA)2 is not applicable to foreign statutory trusts. As a result, many Maryland foreclosure proceedings, previously suspended due to non-compliance with MCALA, may now proceed in their normal course.

The legal question presented in the consolidated cases was whether the Maryland General Assembly intended for a foreign statutory trust, as owner of a delinquent mortgage loan, to obtain a license as a collection agency under MCALA before substitute trustees instituted a foreclosure action against a homeowner who defaulted on his or her mortgage.3 The Court of Appeals ultimately concluded that the legislative history, subsequent legislation, and related statutes make clear that the 2007 amendment did not expand the scope of MCALA to include mortgage industry players initiating foreclosure actions.

Analysis of the Court of Appeals of Maryland
In Blackstone v. Sharma, the Court concluded that the plain language of MCALA is ambiguous as to whether the Maryland General Assembly intended foreign statutory trusts, acting as special purpose vehicles in the mortgage industry, to obtain a license as a collection agency. Md. Code (1992, 2015 Rep. Vol.), Bus. Reg. (BR) §§ 7-301, et seq. The Court, therefore, analyzed the legislative history, subsequent legislation, and related statutes in order to determine the legislative intent in enacting the original version of MCALA in 1977 as well as the reason the Department of Labor, Licensing, and Regulation (DLLR or Department) requested a departmental bill to revise MCALA in 2007.

Original MCALA Legislation — With respect to the 1977 MCALA legislation (Original Legislation), the Court emphasized that the legislature grouped together a subsection of exempted actors including banks, trust companies, savings and loan associations, and mortgage bankers. The Court of Appeals interpreted the plain language of the Original Legislation to support the idea that the General Assembly intended to exempt all of the aforesaid groups based on the similar consideration that they were all part of the mortgage industry. Overall, the Court concluded that the language of the original collection agency statute and the pertinent legislative history indicated that the scope of the initial licensing requirement was limited to an industry of collection agencies, which largely consisted of small businesses collecting medical and retail accounts by contacting debtors via telephone.

2007 Amendment to MCALA — In 2007, the DLLR requested Maryland House Bill 1324, which changed the definition of “collection agency” to include “a person who: (1) engages directly or indirectly in the business of: … collecting a consumer claim the person owns, if the claim was in default when the person acquired it[.]” The Court of Appeals determined that the language of House Bill 1324 does not unambiguously indicate whether DLLR requested the bill in order to expand the scope of MCALA to industries beyond the ordinary understanding of collection agencies.

When a department requests legislation, that department is required to submit a bill request directly to the governor’s office for review and approval. The Court of Appeals reviewed the DLLR’s “Proposal for Legislation 2007 Session” and determined that the DLLR did not intend to regulate or license any actors outside the scope of the collection agency industry. Instead, the DLLR requested the 2007 department bill in order to ensure that all actors within the collection agency industry were complying with the licensing requirements. More particularly, in the “Proposal for Legislation 2007 Session” the DLLR requested the 2007 bill to specifically regulate actors in the “collection industry” that employed a loophole in MCALA’s licensing requirement by purchasing the delinquent consumer debt for “goods and services,” via a purchase contract that “may closely resemble the terms of a collection agency agreement[.]”4 

The Court of Appeals also reviewed several other documents evidencing the legislative history of the 2007 amendment including, but not limited to, the:


1. Floor Report, House Bill 1324, Collection Agencies – Licensing, Economic Matters Committee of the House of Delegates, 2007 Leg., 423th Sess. (Md. 2007);
2. The written testimony of the Commissioner of Financial Regulation and Chairman of the Collection Agency Licensing Board, Charles W. Turnbaugh;5 
3. The written testimony of consumer member of the Collection Agency Licensing Board, Susan Hayes;6 and
4. The written testimony of member of the Collection Agency Licensing Board, Eileen Brandenberg.7 


After review of the legislative history documentation, the Court of Appeals concluded that the General Assembly did not intend to significantly enlarge the scope of MCALA to entities outside of the collection agency industry. Instead, the 2007 legislation merely served as a way to regulate those collection agencies that exploited a loophole that occurred when an agency would enter into an agreement with their client in which the agency agreed to collect the debt they bought, rather than acting as an agent for the original creditor. These types of agreements put the collection agencies outside of the Collection Agency Licensing Board’s authority.

MCALA’s Relationship with Subsequent and Related Legislation — The Maryland General Assembly enacted foreclosure policy bills during the 2008, 2009, and 2010 legislative sessions that: (1) amended the recordation requirements of mortgages; (2) added requirements to the foreclosure process; (3) created a comprehensive mortgage fraud statute to protect homeowners in foreclosure; (4) altered the mortgage lender and mortgage originator licensing requirements; and (5) extended legal protections for homeowners in foreclosure and mortgage default.8 In addition, the Court of Appeals accepted the proposals of the Standing Committee on Rules of Practice and Procedure to amend the Maryland Rules in 2009 and 2010 in order to strengthen the requirements in foreclosure proceeding filings.9 These changes to the Maryland Code and Maryland Rules created a comprehensive scheme, which regulates the actors in the mortgage industry for the purpose of protecting homeowners10 (hereinafter referred to as “Mortgage Foreclosure Law Reform”).

When comparing the legislative history of MCALA against the (almost contemporaneous) Maryland Mortgage Foreclosure Law Reform, the Court of Appeals concluded that the General Assembly consciously separated the consumer debt collection agency industry under MCALA from the mortgage industry.11 The General Assembly did not intend MCALA to regulate mortgage industry actors involved in foreclosure proceedings because the legislature addressed the exact issue in subsequent legislative sessions.

After a majority of the Maryland Mortgage Foreclosure Law Reform legislation was passed in 2008 and 2009, the General Assembly enacted the Maryland Statutory Trust Act in 2010.12 The Maryland Statutory Trust Act requires foreign statutory trusts to “register with the State Department of Assessments and Taxation prior to conducting business …” in Maryland.13 A “statutory trust” constitutes any unincorporated business, trust, or association that filed an initial certificate of trust in Maryland and is governed by a governing instrument.”14 The Maryland Statutory Trust Act stated that “[i]n addition to any other activities which may not constitute doing business in this State, for the purposes of this subtitle, the following activities of a foreign statutory trust do not constitute doing business in this State … (5) Foreclosing mortgages and deeds of trust on property in this State[.]”15 The defaulting homeowners in the consolidated cases asserted that the language of the Maryland Statutory Trust Act does not limit the scope of MCALA, because the act specifically states that the Maryland Statutory Trust Act language excluding foreclosure actions is only “for purposes of [that] subtitle …” and not to be applied to MCALA.16 

In reconciling MCALA with the Maryland Statutory Trust Act, the Court of Appeals held that when viewing MCALA, the Maryland Mortgage Foreclosure Law Reform legislation, and the Maryland Statutory Trust Act together, it becomes clear that the General Assembly sought to regulate and license a separate collection agency industry that assists creditors in obtaining consumer debt (or buys that debt, whether at a discounted price or contingently, to pursue on its own account) when it enacted and revised MCALA. In 2008 and 2009, the legislature enacted specific procedures and requirements for any person, party, or entity seeking an in rem foreclosure proceeding. Then in 2010, the General Assembly enacted a registration statute for statutory trusts and foreign statutory trusts under the Maryland Statutory Trust Act. When enacting the Maryland Statutory Trust Act, the legislature specifically exempted the trusts from obtaining registration when simply seeking a foreclosure, recognizing that the previous Mortgage Foreclosure Law Reform would provide the required procedures and protections. The Court of Appeals felt that this reading prevents any direct conflict and gives effect to all of the General Assembly’s individual policy goals.17

Conclusion
The Court ultimately held that the General Assembly did not intend for foreign statutory trusts to obtain a collection agency license under MCALA before its servicer or substitute trustees filed foreclosure actions in various circuit courts. As such, the Court held that the circuit courts improperly dismissed the consolidated cases solely on the basis that the two foreign statutory trusts,18 which owned the mortgage loans in each of the cases, were not licensed as a collection agency under MCALA before the substitute trustees instituted the foreclosure proceedings.

There is nothing in the DLLR’s 2007 Maryland House Bill request form, the fiscal and policy note, or the written testimonies that suggest DLLR was proposing to license and regulate the mortgage industry by revising the definition of “collection agency” under MCALA. Overall, the legislative history of the 2007 departmental bill reveals that the changes did not intend to expand the scope of MCALA beyond the collection agency industry. Similarly, there is nothing in the legislative history of the Maryland Mortgage Foreclosure Law Reform suggesting that the General Assembly considered MCALA to be licensing the mortgage industry actors. The Statutory Trust Act of 2010 decided that statutory trusts were not doing business in Maryland when foreclosing on deeds of trust, recognizing that previous Maryland foreclosure law reform would dictate the requirements for the in rem proceeding. Consequently, the Court of Appeals held that the General Assembly did not intend for foreign statutory trusts to obtain a collection agency license under MCALA before its substitute trustees filed a foreclosure action in the circuit court, and that foreign statutory trusts are outside the scope of the collection agency industry that is regulated and licensed under MCALA.


On June 6, 2017 the Court of Special Appeals reported its opinion in the combined cases of Blackstone v. Sharma, Sept. 2015 No. 1524, and Shanahan v. Marvastian, Sept. 2015, 1525. The Court of Special Appeals upheld the dismissal of two foreclosure actions initiated on behalf of a Delaware Statutory Trust (DST) because the DST was not a licensed collection agency pursuant to the Maryland Collection Agency Licensing Act, Bus Md. Code. Reg. §§ 7-101, et seq. It also held that any judgment entered as a result of the foreclosure actions would be void. The Blackstone v. Sharma, opinion of the Court of Appeals constitutes the aforesaid two cases consolidated before the Court of Special Appeals as well as two additional actions appealed to the Court of Appeals directly from the circuit court proceedings. (also referred to as the “consolidated cases”). Said cases are known as Blackstone v. Sharma; O’Sullivan v. Altenburg, No. 45, Sept. Term 2017; Shanahan v. Marvastian, No. 40, Sept. Term 2017; and Goldberg v. Neviaser, No. 47, Sept. Term 2017.
Maryland Code Ann., Business Regulation, §§ 7-301, et seq.
The Court of Appeals declined to address the question of whether the Court of Special Appeals’ previous ruling in Finch v. LVNV Funding, LLC, 212 Md. App. 748, 759 (2013), should apply to mortgage foreclosure judgments. More specifically, the Court stated that the question of whether a judgment entered in favor of an unlicensed debt collection agency is void did not need to be addressed because the application of the Finch holding to the mortgage foreclosure industry incorrectly assumes that the MCALA licensing requirement applies to foreign statutory trusts.
Proposal for Legislation 2007 Session, Department of Labor, Licensing, and Regulation (Md. 2007).
Charles W. Turnbaugh, Testimony in Support of HB 1324, Hearing on House Bill 1324 before the Economic Matter Committee of the H.D., 2007 Leg., 423th Sess. (Md. 2007).
Susan Hayes, Statement on House Bill 1324, Hearing on House Bill 1324 before the Economic Matter Committee of the H.D., 2007 Leg., 423th Sess. (Md. 2007).
Eileen Brandenberg, Testimony in Support of House Bill 1324, Hearing on House Bill 1324 before the Economic Matter Committee of the H.D., 2007 Leg., 423th Sess. (Md. 2007).
See e.g., 2008 Md. Laws, ch. 1; 2008 Md. Laws, ch. 2; 2008 Md. Laws, ch. 3; 2008 Md. Laws, ch. 4; 2008 Md. Laws, ch. 5; 2008 Md. Laws, ch. 6; 2008 Md. Laws, ch. 7; 2008 Md. Laws, ch. 8; 2009 Md. Laws, ch. 4; 2009 Md. Laws, ch. 615; 2010 Md. Laws, ch. 485; 2010 Md. Laws, ch. 323;
See One Hundred Sixtieth Report of the Standing Committee on Rules of Practice and Procedure (2009); One Hundred Sixty-Sixth Report of the Standing Committee on Rules of Practice and Procedure (2010).
10 See Maryland Code Annotated, Real Property, §§ 7-101, et seq.; MD Rules 14-201, et seq.; MD Code Regs. 09.03.12.01, et seq.
11 See Rose v. Fox Pool Corp., 35 Md. 351, 360 (1994).
12 See Maryland Code Ann. Corps & Assoc., §§ 12-901, et seq.
13 Dep’t Legis. Servs., Fiscal and Policy Note, Senate Bill 787, at 3 (2010 Session).
14 See Maryland Code Ann. Corps & Assoc., §§ 12-101(d).
15 See Maryland Code Ann. Corps & Assoc., §§ 12-908(a)(5).
16 See Maryland Code Ann. Corps & Assoc., §§ 12-908(a).
17 See Immanuel, 339 Md. At 87.
18 The foreign statutory trusts identified in the consolidated cases were Ventures Trust 2013 -I-H-R and LSF9 Master Participation Trust.


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Rhode Island: Recent Amendment to Mediation Statute Revives 45-Day Notice of Intent to Foreclose

Posted By USFN, Tuesday, August 14, 2018
Updated: Wednesday, August 8, 2018

August 14, 2018

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

There has been a significant change in Rhode Island law that will impact pending foreclosure sales. Specifically, last month Governor Raimondo signed legislation making changes to section 34-27-3.2, which deals with requirements for foreclosure mediation conferences (the Act). The legislation makes the following changes to the Act:


1. Extends the sunset date of the Act from July 1, 2018 to July 1, 2023.
2. Limits the initial fee charged for mediation to $100 from $150, while increasing the mediation conference fee from $350 to $400.


The issue that impacts pending sales is that the legislators inadvertently amended an older 2013 version of RIGL 34-27-3.2 rather than the 2014 version. The 2014 version of the statute repealed RIGL 34-27-3.1, the section requiring the 45-Day Notice of Intent to Foreclose/Credit Counseling Notice (NOI). Because they amended the 2013 version of the statute, it did not contain the repeal of the 45-Day NOI requirement (RIGL 34-27-3.1). Consequently, the 2014 version of 34-27-3.2 that repealed 34-27-3.1 sunset at the end of June 2018. The ramification is that foreclosures for the time being are again subject to the 45-Day NOI requirement (34-27-3.1).

This author’s firm has discussed this subject with the title insurance companies, and they have confirmed that 34-27-3.1 notices are again required for any foreclosure that was initiated on or after July 1, 2018 (meaning the sending of the 30-Day notice of sale). Any foreclosure auction where notices were sent after July 1, 2018 will have to be cancelled so that the 45-Day NOI can be sent. There is some discussion (and hope) that the legislature will reconvene in an emergency session to correct the error, but there is no confirmation at this time that this will happen.

If servicers/banks are unsure as to how this impacts their pending sales in Rhode Island, they should reach out to their counsel for an update of which sales need to be cancelled to allow the 45-Day NOI to be sent.

The Department of Business Regulation (Banking Division) has provided a template that is required to be used when the notices are sent; view here. Please note that there must be a valid assignment of mortgage in existence (at the time that the credit counseling notice is sent) into the “mortgagee” referenced in the NOI, and in whose name the nonjudicial foreclosure will be pursued.

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Iowa: Probate Estate Not Needed to Complete In Rem Foreclosure

Posted By USFN, Tuesday, August 14, 2018
Updated: Wednesday, August 8, 2018

August 14, 2018

by Ryan C. Holtgraves
Petosa Law LLP – USFN Member (Iowa)

The Iowa Court of Appeals recently held that when pursuing an in rem foreclosure against a deceased mortgagor’s real estate, a probate estate need not be opened if known and unknown heirs are served in accordance with Iowa’s Land Title Standards. U.S. Bank v. Parrott, No. 17-0513 (Iowa Ct. App. July 18, 2018).

Background
In Parrot, the mortgagor died and the loan fell into default. U.S. Bank commenced an in rem foreclosure action, and the pre-foreclosure title work indicated that a probate estate had not been opened for the deceased mortgagor. The bank proceeded to name the decedent’s sons, as well as unknown heirs and unknown parties claiming any interest in the decedent’s real estate, as defendants.

U.S. Bank followed longstanding practice and served the unknown parties by publication in accordance with Iowa Rules of Civil Procedure 1.311 and 1.312. No party answered the petition, and U.S. Bank filed an application for default judgment.

Following a recent trend in Iowa’s Seventh Judicial District, the district court denied the motion, ruling that a probate estate must be opened to identify the unknown heirs and interested parties in order for the court to have jurisdiction over the unknown parties.

Appellate Analysis
The Iowa Court of Appeals, after reviewing Title Standards 7.8(1) & (4) and Iowa Code Sections 654A(5) and 654.5(1)(c), determined that the district court abused its discretion in denying default judgment against the unknown parties.

Standard 7.8(1) states that there is no need to open an estate when completing an in rem foreclosure on real estate owned by a deceased mortgagor. Additionally, Standard 7.8(4) states that if no probate estate has been opened, the foreclosure should name all unknown parties with an interest in the estate.

The appellate court, giving deference to the Iowa Land Title Standards, concluded that the district court could exercise jurisdiction over unknown parties served by publication. Further, the Court of Appeals observed that even if a probate estate were opened, the method of service on unknown parties would be the same under Iowa’s Probate Code.

Conclusion
The Parrot decision follows Iowa’s Title Standards and upholds the longstanding practice in this state of naming and serving unknown interested parties (serving them by publication) when foreclosing in rem.

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