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

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

February 4, 2016

 

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

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

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

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

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

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

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

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

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

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

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

© Copyright 2016 USFN. All rights reserved.
February e-Update

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Kentucky Supreme Court Enacts Changes to its Rules on Foreclosure Sales

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

February 2, 2016

 

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

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

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

New Section 4: Judicial Sales; Settlements; Receiverships

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


New Section 5: General Provisions of Judicial Sales

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

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

© Copyright 2016 USFN. All rights reserved.
February e-Update


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

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

February 2, 2016

 

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

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

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

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

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

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

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

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

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

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

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

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

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

© Copyright 2016 USFN. All rights reserved.
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Washington: Two Important Judicial Decisions

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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

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State Statutes of Limitation: A Close Look at Florida

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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

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

Does Singleton apply?

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

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

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

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

When is Florida’s SOL for mortgage foreclosure triggered?

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

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

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

Was the loan ever reinstated?

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

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

Must a mortgagee take affirmative action to reinstate a loan?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Winter 2016 USFN Report

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Municipalities and their Requirements affecting Residential Foreclosures: Massachusetts

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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


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Municipalities and their Requirements affecting Residential Foreclosures: Illinois

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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


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


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


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


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

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

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

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

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

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

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

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

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Municipalities and their Requirements affecting Residential Foreclosures: California

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 29, 2016

 

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

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

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

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

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

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

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

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

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

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

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

January 29, 2016

 

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

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

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

Does Bankruptcy Stop the Clock?

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

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

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

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

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

Crawford Claims

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

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

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

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

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

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Winter 2016 USFN Report

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

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

January 29, 2016

 

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

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

Florida

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Winter 2016 USFN Report

 

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Maryland: Protection of Tenancy by the Entirety not applicable to Federal Restitution Judgments

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

January 29, 2016

 

by Ruhi F. Mirza
Rosenberg & Associates, LLC – USFN Member (Washington, D.C.)

In a recent decision, the U.S. Bankruptcy Court for the District of Maryland held that a debtor’s interest as a tenant by the entirety in real property is not exempt from process against a federal restitution judgment entered solely against the debtor. In re Conrad, 2016 Bankr. LEXIS 10 (Bankr. D. Md. Jan. 4, 2016).

The debtor filed her individual petition under chapter 7. Prior to her bankruptcy filing, the debtor pled guilty to a count of conspiracy and agreed to the entry of a restitution order whereby she would pay $838,004.60. Her bankruptcy petition stated that she held an interest in real property as a tenant by the entirety with her husband. The debtor also listed the full amount of the restitution judgment on her schedules and claimed an exemption under 11 U.S.C. § 522(b)(3)(B), asserting that under Maryland law a debtor’s individual creditors “cannot levy upon nor sell a debtor’s undivided interest in entireties property to satisfy debts owed solely by the debtor.” In re Bell-Breslin, 283 B.R. 834, 837 (Bankr. D. Md. 2002). The chapter 7 trustee objected to the debtor’s claim of exemption, contending that federal law, not state law, determines whether an interest is protected based on tenancy and, pursuant to federal law, the debtor cannot claim an exemption.

The trustee relied upon the U.S. Supreme Court’s rationale in United States v. Craft, where the Court concluded that a husband’s property interest held as tenants by the entireties is subject to attachment of a federal tax lien levied for the husband’s sole tax obligation. [United States v. Craft, 535 U.S. 274, 122 S. Ct. 1414, 152 L. Ed. 2d 437 (2002)]. The Court reasoned that “[t]he statutory language authorizing the tax lien is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” Id. at 283.

In Conrad, the bankruptcy court reviewed the enforcement statute for restitution orders, which provides that the United States may enforce a restitution judgment against “all property or rights to property of the person fined” and found a clear Congressional intent to treat the enforcement of restitution judgments and unpaid taxes equally. 18 U.S.C. § 3616(a). The bankruptcy court concluded that, given the broad description of the property interests that are subject to the United States’ enforcement rights in the enforcement statute and the clear Congressional intention to treat those rights on par with the government’s right to collect taxes, the rationale of Craft applies to the collection of a restitution judgment against an individual tenant by the entirety. Accordingly, the bankruptcy court sustained the trustee’s objection.

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Second Circuit: The Value of Accurately Reporting Bankruptcy Discharge

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

January 29, 2016

 

by Nathan C. Favreau
Hunt Leibert – USFN Member (Connecticut)

Creditors and servicers use credit reports maintained by the major American credit reporting agencies to estimate the level of risk associated with lending decisions. The value of credit reports depends on the accuracy of information contained in them, which is provided by banks, mortgage servicers, and other finance companies. It is vital that furnishers of credit data supply updated and accurate information, including whether a debt has been discharged in a bankruptcy proceeding.

Furnishers of credit information in the Second Circuit face the possibility of a lawsuit being filed by a borrower for failing to accurately report the entry of a bankruptcy discharge under at least two legal theories of liability:

  1. Fair Debt Collection Practices Act – 15 U.S.C § 1692e(8) prevents debt collectors from using false, deceptive, or misleading representations in connection with the collection of a debt. This includes communicating credit information that is known, or should be known, to be false. The Court of Appeals for the Second Circuit recently reversed a case that had dismissed claims brought under the FDCPA for — among other things — improperly reporting that the plaintiff owed money on the discharged debt. Garfield v. Ocwen Loan Servicing, LLC, 2016 U.S. App. LEXIS 3 (2d. Cir. Jan. 4, 2016). [The Second Circuit is comprised of Connecticut, New York, and Vermont.]

  2. Violation of the Discharge Injunction – To prove a claim under 15 U.S.C. § 524, a plaintiff needs to show that a defendant attempted to collect debts by not informing credit reporting agencies that those debts had been discharged. Haynes v. Chase Bank USA, N.A., 2015 U.S. Dist. LEXIS 27400 (S.D.N.Y. Mar. 5, 2015); Torres v. Chase Bank USA, N.A. 367 B.R. 478, 489 (S.D.N.Y. 2007) (court discussed low threshold for determining that failure to report bankruptcy discharge was coercive activity by the creditor).


Mitigating the Risk of a Lawsuit

To promote the value of credit reports, as well as to mitigate the exposure to lawsuits from borrowers, it should be a priority for creditors and servicers to accurately and timely report any bankruptcy-discharged loans within their portfolio. Free-flowing communication among various departments within an organization provides the key to lowering the risks associated with failing to update credit reporting information to reflect a bankruptcy discharge. Policies and procedures should be in place allowing those units that are responsible for processing notices of bankruptcy petition filings to communicate with the department responsible for furnishing information to the credit bureaus.

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February e-Update


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Law Firm Liability under FDCPA: U.S. District Court of New Jersey Decides Case

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

January 29, 2016

 

by Aaron L. Squyres
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The United States District Court of New Jersey recently issued an opinion that will have an immediate impact on mortgage default law firms in New Jersey — and which could ultimately have a far-reaching impact on the mortgage default legal industry. In the case of Psaros v. Green Tree Servicing, LLC, and Stern Lavinthal & Frankenburg LLC, Case No. 15-4277 (D.N.J. Dec. 21, 2015), the court denied Stern Lavinthal’s motion for judgment on the pleadings, and found that the firm was liable on a claim under the Fair Debt Collection Practices Act based on the firm’s reliance on a client’s debt figures.

The underlying facts are that Psaros defaulted on his non-escrowed mortgage loan, and Bank of America (by way of its counsel Stern Lavinthal) filed a foreclosure complaint. The loan was subsequently transferred to Green Tree, and Green Tree requested proof of property insurance. Psaros alleged that he tendered proof of the insurance in the manner requested. Green Tree later advised Psaros that force-placed insurance had been secured on the property.

Stern Lavinthal moved for entry of judgment and, as part of that motion, it filed a “Certification of Proof of Amount Due,” which included the sum of $10,974.37 for “Home Owners Insurance Premiums.” The Stern Lavinthal attorney submitted a “Certification of Diligent Inquiry,” in which she stated that she had been advised by a Green Tree representative that the representative had personally reviewed the affidavit of amount due and confirmed the accuracy of that document. The Stern Lavinthal attorney then executed the certification based on her communication with the Green Tree representative, as well as her own inspection of the documents and other diligent inquiry.

Psaros filed suit against Green Tree and Stern Lavinthal two months later. He alleged a violation of the Fair Debt Collection Practices Act, 15 USC § 1692e, based upon a false, deceptive, and/or misleading representation about the amount of debt. Specifically, a demand for payment of insurance premiums that were not actually owed under his loan agreement. Stern Lavinthal subsequently filed its motion for judgment on the pleadings.

The court denied the motion, finding that “[a] plain reading of the statute leads to the conclusion that a violation has occurred.” The court went to state that “[b]ecause the statute’s language is plain, the Court’s function is ‘to enforce it according to its terms’ so long as the disposition required by that [text] is not absurd.’” The court then added that its finding of a violation “is not absurd; rather, it is consistent with the Third Circuit’s recent decisions in McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240, 248 (3d Cir.) cert. denied, 135 S.Ct. 487 (2014) and Kaymark v. Bank of America, N.A., 783 F.3d 168 (3d Cir. 2015).”

In McLaughlin, the court found liability on the part of the law firm for including not-yet-incurred fees in a demand letter. In Kaymark, the court extended this not-yet-incurred rationale to a formal pleading. It is important to note that the Psaros decision can be distinguished from the McLaughlin and Kaymark cases, in that the law firm in Psaros was found liable due to alleged false representations relating to the client’s figures — not its own fees.

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Massachusetts: Post-Foreclosure Title Clearing Law Enacted

Posted By USFN, Monday, January 25, 2016
Updated: Friday, February 19, 2016

January 25, 2016

 

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

Massachusetts has enacted long-awaited legislation intended to resolve title defects resulting from a 2011 Supreme Judicial Court decision (U.S. Bank, N.A. v. Ibanez, 458 Mass. 637), which retroactively invalidated a significant number of foreclosures already on title. The bill, now known as Chapter 141 of the Acts of 2015, provides that the standard post-foreclosure affidavit of sale required by G.L. c. 244, s. 15 becomes conclusive evidence in favor of arm’s-length purchasers for value that the foreclosure was conducted in accordance with Massachusetts foreclosure laws, once the affidavit has been on record for three years and the borrower has vacated the premises.

The bill’s effective date was December 31, 2015, but because the bill provides a one-year period for borrowers whose foreclosure affidavits were recorded more than three years ago to come forward and sue, no affidavits will be considered conclusive evidence until 2017 at the earliest.

The bill has already survived one challenge since it was signed by the governor in December. A group of foreclosure activists who had bitterly opposed the passage of the law, and had successfully lobbied the previous governor to block a similar bill from being passed a year earlier, submitted a petition to the Secretary of the Commonwealth seeking to place a referendum on the November 2016 ballot for voters to decide whether to repeal the law. However, the state attorney general issued an opinion letter (dated January 19, 2016), concluding that the petition was constitutionally impermissible because the bill, in part, expanded the housing courts’ jurisdiction to hear counterclaims in post-foreclosure eviction actions, and thus fell under the “powers of the courts” exception to the constitutional petition process.

Activists have vowed to challenge the constitutionality of the new law in court at the earliest opportunity, which may come later this year or early next year. For the time being, the curative law remains in effect, and absent judicial pronouncements to the contrary, Massachusetts homeowners who have found themselves unable to sell or refinance their property because of old Ibanez problems may finally have their titles settled.

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South Carolina: Issuance of a Foreclosure Deed Does Not Prevent an Appeal of the Foreclosure Action’s Merits

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Ronald C. Scott and Reginald P. Corley
Scott & Corley, P.A. – USFN Member (South Carolina)


A decision has been issued by the South Carolina Supreme Court in Wachesaw Plantation East Community Services Association v. Alexander, 2015 WL 6735746 (S.C. Nov. 4, 2015). The underlying case arose out of the foreclosure of a lien for delinquent homeowners association fees against Alexander, who had purchased a home for his elderly father. After a hospitalization, Alexander’s father did not return to the home. Alexander did not pay the regime fees, and the homeowners association commenced an action to foreclose the lien.

Alexander was served process, but never responded to the summons and complaint. He also failed to make any appearance in the case until after the property was sold to a third-party purchaser at judicial sale. Two months after the judicial sale Alexander tendered, in full, the homeowners association fees. However, the homeowners association would not accept payment because of potential liability to the third-party purchaser.

The foreclosure was not appealed by Alexander, although he moved to vacate the underlying judicial sale. The master-in-equity denied the motion because Alexander failed to allege improper service, lack of notice, lack of jurisdiction, or excusable neglect; offered no reason for not sending a check to pay the homeowners association fees in full once he received the summons and complaint; and failed to appeal the foreclosure judgment. After denying Alexander’s motion, the master-in-equity issued a foreclosure deed to the third-party purchaser. Alexander appealed the denial of his motion.

The third-party purchaser moved to dismiss the appeal on the ground that the issue appealed is moot because the foreclosure sale was finalized before Alexander filed and served his appeal. The Court of Appeals agreed, concluding that the appellant did not comply with South Carolina Code Section 18-9-170, which requires the posting of a bond and a written undertaking making assurances to not commit waste to the property and to pay rent if the foreclosure judgment is affirmed.

The South Carolina Supreme Court granted certiorari to review the appellate decision and to address the question of whether the subsequent issuance of a foreclosure deed mooted a timely filed appeal of an order denying a motion to vacate the sale of a foreclosed property. The Supreme Court’s opinion begins with a discussion of mootness and the exceptions to the general rule that a court will not render a decision when the controversy is moot. In its analysis, the court quickly concludes that South Carolina has established precedent that the issuance of a foreclosure deed does not moot an appeal. The court cites numerous decisions reaching the merits of the appeal despite a master-in-equity having already issued a foreclosure deed, as well as case law where the merits were decided despite the appellant failing to post a bond.

The Supreme Court did not offer an opinion on the merits of Alexander’s appeal, but did say that the issuance of a foreclosure deed clearly does not moot the appeal of a foreclosure sale, and that an appellate court may reach the merits of the underlying foreclosure case.

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South Carolina: Twenty-Year Statute of Limitations Applies to Title Insurance Policy with a Corporate Seal

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

One of the most important hurdles facing a lender or servicer who is contemplating filing a claim against a policy for title insurance, is whether or not the time frame for filing the claim under the applicable statute of limitations (SOL) has expired. South Carolina Code section 15-3-530(1) provides for a three-year statute of limitations for actions based upon a contract. As such, the general consensus in South Carolina has been that this three-year time frame is the applicable SOL for claims on title insurance policies. A recent judicial decision indicates that this may no longer be the situation.

In an appeal rising out of a title insurance policy claim, the South Carolina Court of Appeals found that the affixation of a corporate seal to the title policy evidenced an intent to create a sealed instrument, thus allowing the insured to take advantage of the twenty-year statute of limitations for sealed instruments rather than the three-year statute of limitations allowed under general contract law in South Carolina. Lyons v. Fidelity National Title Insurance Company as successor by merger to Lawyers Title Insurance Corporation, No. 2013-002137 (S.C. Ct. App. Dec. 2, 2015).

South Carolina statute provides for a twenty-year SOL for “an action upon a sealed instrument, other than a sealed note and personal bond for the payment of money only whereon the period of limitation is the same as prescribed in Section 15-3-530.” S.C. Code Ann. section 15-3-520(b) (2005).

In Lyons, the insured homeowners brought their claim and action on their title policy more than three years after they knew of, or should have discovered, the title defect in question. The seal that appeared on the title policy was a corporate seal of the title company placed next to the signature of the president of the company. The title company asserted that the purpose of the seal was to show that the company’s agent was authorized to issue the policy. The court rejected this argument and found that the title polices in question were sealed instruments and the twenty-year statute of limitations afforded under section 15-3-520(b) applied.

This is a significant case in South Carolina because the standard title policy form in use in the state usually contains a corporate seal, ostensibly allowing for a twenty-year statute of limitations for insureds to bring claims for most policies in the state.

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North Carolina: Legal Description Errors in Deeds of Trust

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

The Court of Appeals of North Carolina issued an unpublished opinion that should reassure mortgage lenders that drafting errors in deeds of trust (ones that are clearly the result of a “mutual mistake” by both the lender and the borrower) can be corrected through court proceedings.

In Ocwen Loan Services, LLC v. Hemphill, 2015 WL 5432666 (N.C. Ct. App., Sept. 15, 2015), the deed of trust securing the loan to Ocwen contained a legal description covering only the driveway to the property, omitting the larger lot containing the borrower’s home. The borrower had first acquired title to the lot upon which his home was located, and then later purchased the driveway lot. When the loan was closed, only the driveway lot was described in the deed of trust. Ocwen obtained an order for summary judgment, allowing reformation of the deed of trust to include the legal description of the lot containing the borrower’s home. The Court of Appeals affirmed the judgment.

The evidence, which included the appraisal, demonstrated that: (i) the property address was included in the deed of trust; (ii) the borrower understood the address to refer to the lot containing the house; and (iii) the borrower acknowledged that Ocwen would expect the full legal description to be included in the deed of trust. All of this led the court to conclude that there was a mutual mistake of fact in that both parties fully intended the loan to be secured by the entire property. Additionally, the court noted that the deed of trust — which formed a contract between the parties — required the borrower to occupy the secured property as his principal residence. This would make sense only if the legal description included the lot containing the house.

The borrower’s defense, which the court briefly considered and then rejected, was that Ocwen may have intended to secure only the driveway lot because of a number of judgment liens against the lot containing the home. However, as the court made clear: In defending against a motion for summary judgment, a party must “produce a forecast of evidence demonstrating specific facts, as opposed to allegations, showing that he can at least establish a prima facie case at trial” in order to withstand a motion for summary judgment. Id at 4, citing Van Keuren v. Little, 165 N.C. App. 244, 246, 598 S.E.2d 168, 170 (2004).

The lesson to be learned, of course, is that lenders and their closing agents should employ quality control procedures to ensure that settlement documents are complete and accurate. Drafting errors such as this usually occur when real property is parceled out into different lots, or where lots are combined or divided. Special care should be taken in these situations to carefully review the final draft deed and deed of trust to ensure that the correct property description is provided.

©Copyright 2016 USFN and Hutchens Law Firm. All rights reserved.
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Kansas: To Vest or Not to Vest Mortgaged Property in Secured Creditor — Another Bankruptcy Court Weighs In

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Carrie D. Mermis
Martin Leigh PC – USFN Member (Kansas)

In a recent decision, the bankruptcy court held that a chapter 13 plan that provides for the vesting of mortgaged property in the secured creditor may not be confirmed over the creditor’s objection. [In re Williams, 2015 WL 7776552 (Bankr. Kan. Dec. 2, 2015)].

After the debtor’s original plan (which retained homestead property) was confirmed, the debtor filed a motion to amend the plan to surrender the property. Upon no foreclosure, the debtor filed a subsequent motion to amend the plan that not only provided for surrender of the property but also to vest title to the property in the secured creditor pursuant to 11 U.S.C. §§ 1322(b)(8) and (9). The plan further provided that an order on the modification would constitute a deed of conveyance to the property when recorded with the county Register of Deeds, and that all claims secured by the property would be paid by surrender of the collateral and foreclosure of the security interests.

The split of authority around the country on this issue was recognized in Williams. Some courts have held that vesting is allowed when the secured creditor does not object. Other courts have approved vesting provisions over the objection of the secured creditor, including one case in Kansas. The bankruptcy court in Williams, however, agreed with the courts that have held that a secured creditor cannot be compelled to accept ownership of collateral.

The court relied on the plain meaning of the statute and determined that although § 1322(b)(9) allows vesting the title to property in a secured creditor, § 1325(b)(5) does not permit confirmation of a plan vesting title to collateral in the secured creditor over that creditor’s objection. It was noted that vesting property in the secured creditor would impair the creditor’s rights under state law where the Bankruptcy Code does not provide it a basis to do so. Allowing the property to be vested to the secured creditor over its objection “would force it to accept the title and impose unbargained-for obligations on it to pay taxes and other costs associated with the [p]roperty.” The property at issue in this case also was subject to a junior mortgage lien.

Admittedly, the court found it “tempting” to allow such a provision because it would remove the burdens of property ownership from the debtor and promote the debtor’s fresh start. However, the court went on to say that to confirm the vesting provision, “… [the] results would, in effect, be judicial legislating that usurps the role of Congress.”

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Illinois: Pre-Judgment Post-Affidavit Expenditures are Not Recoverable Absent Subsequent Amendment to Judgment … Expanded to Cook County and Spreading

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

The Second District Court of Appeals for Illinois found that a plaintiff was not entitled to recover a $470,340 real estate tax payment where the bank could have, but did not, amend the judgment of foreclosure prior to the sale to include a prejudgment tax payment. About one month prior to the hearing on the bank’s motion for summary judgment, the bank had made the prejudgment tax payment. See BMO Harris Bank, N.A. v. Wolverine Properties, LLC, 2015 Ill. App. (2d) 140921 (Aug. 20, 2015). Until recently, this requirement was limited to the Second District; that is, the counties of Boone, Carroll, DeKalb, DuPage, Jo Daviess, Kane, Kendall, Lake, Lee, McHenry, Ogle, Stephenson, and Winnebago.

Following the Second District Court of Appeals, Judge Brennan in Cook County ruled that absent a subsequent amendment to the judgment of foreclosure order fees, costs, advances, and disbursements expended by the plaintiff between the date of execution of the affidavit of indebtedness and the entry of the judgment of foreclosure cannot be recouped at confirmation of sale. The court based its ruling on a strict reading of 735 ILCS 5/15-1508(b)(1), allowing the collection of fees and costs arising between the entry of judgment of foreclosure and the confirmation hearing, in conjunction with 735 ILCS 5/15-1506(a)(2), which states that the affidavit of indebtedness contemplates the amount due the mortgagee at judgment.

The general rule in Illinois is that, excluding a conflict among districts, a judicial decision is not confined to any particular district — unless and until another district appellate court finds differently. The ruling in Wolverine appears to be spreading across the state as defense counsel becomes aware of its effect. To stay ahead of the trend, servicers and lenders should apply the Wolverine principle statewide.

To reiterate — During the time between execution of the affidavit of indebtedness and the entry of judgment substantial fees, costs, advances, and disbursements may be expended (i.e., taxes, property preservation, hazard insurance, etc.). In order to include these expenditures in a sales bid and to subsequently collect them at confirmation of sale, a supplemental affidavit of indebtedness is now required to be submitted to the court with a motion to amend the judgment. The court must amend the judgment to include any additional pre-judgment expenditures prior to the date of sale. If amendment does not occur prior to the sale, the plaintiff will need to set aside the sale, amend the judgment, and conduct a new sale. Alternatively, if it is not cost-effective to seek recovery of these expenditures, the expenditures can be excluded from the sales bid and the plaintiff may forgo amending its judgment.

©Copyright 2016 USFN and Pierce & Associates, P.C. All rights reserved.
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Illinois Supreme Court Affirms 1010 Lake Shore Association

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

The Illinois Supreme Court has affirmed the appellate court in 1010 Lake Shore Association v. Deutsche Bank National Trust Company (Ill. Dec. 3, 2015), holding that a lien created for unpaid assessments by a previous owner is not fully extinguished following a judicial foreclosure sale until the purchaser at the foreclosure sale makes a payment for current assessments incurred after the sale.

As a result of the appellate ruling, condominium associations became much more aggressive about collecting past-due assessments from the purchaser at sale when the purchaser did not promptly pay the current assessment. The Illinois Supreme Court ruling has given condominium associations carte blanche to seek payment of the prior owner’s unpaid assessments — if the purchaser of the condominium unit following a foreclosure does not pay the assessments for which they are liable (i.e., from the first day of the month following the foreclosure sale).

Unfortunately, the Supreme Court did not recognize that a foreclosure sale is not final until the order approving sale is confirmed. As the law currently stands, the failure to make timely condominium assessment payments the month following the foreclosure sale can be very costly to servicers. As a result, servicers and lenders are urged to pay condominium assessment payments as soon as possible beginning the first day of the month following the date of the foreclosure sale.

A party who becomes the owner of a condominium unit following a foreclosure should immediately pay the assessments for which they are liable; i.e., from the first day of the month after the sale. Although a foreclosure sale in Illinois does not become final until after the sale is approved by the court, the foreclosing party should still pay the assessments after becoming the successful purchaser. If the sale is approved, the payment of these assessments will confirm that any lien by the condominium association for past-due assessments is extinguished. If the sale is not approved, the payment can be charged to the borrower as a cost necessary to protect the plaintiff’s interest in the foreclosed property upon a resale, payoff, or reinstatement.

The only guidance provided in 1010 Lake Shore Association by the Illinois Supreme Court is in ¶ 34 of its decision, which states as follows: “Additionally, the Act allows an encumbrancer ‘from time to time [to] request in writing a written statement *** setting forth the unpaid common expenses with respect to the unit covered by his encumbrance.’ 765 ILCS 605/9(j) (West 2008).” Thus, a mortgagee may protect its interest by requesting notice of unpaid assessments, joining the association as a party to a foreclosure action, and paying assessments that accrue following its purchase of a property at a foreclosure sale.

Servicers and lenders should request, after judgment but prior to sale, “a written statement” setting forth the unpaid assessments with respect to the unit being foreclosed on and to document all activities taken to that end. This way, the amount of the assessment will be known and the payment can be made promptly after the sale to avoid the possibility of being liable for all past-due assessments. In the event that an association is not cooperative and refuses to provide that information, servicers and lenders will have an opportunity to seek relief from the court.

Hopefully, future case law will clarify when these payments have to be made in a manner that comports with Illinois law.

©Copyright 2016 USFN and Pierce & Associates, P.C. All rights reserved.
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Connecticut: Solicitation for Loan Modification Brings Litigation

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

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

The borrowers have sued a servicer for sending a solicitation that indicated the borrowers could be eligible for a modification. The borrowers allege that they should not have been solicited for another loan modification when a previous loan modification precluded any further modifications on their loan. In the case of Hansen v. Wells Fargo Bank, N.A., Docket No. FBT-CV-14-6042087, 2015 Conn. Super. LEXIS 1940 (Aug. 10, 2015), the court struck several of the servicer’s defenses. The case remains pending and is scheduled for trial on September 13, 2016.

In this matter, the borrowers had entered a loan modification in 2010. They were unable to meet the payment obligations of the loan modification and the servicer started a second foreclosure action. The borrowers elected to participate in the court mediation program. During the mediation program, the borrowers allege that the servicer repeatedly asked for new and different financial documents, and that these requests for documents went on for almost three years. The borrowers further assert that after three years of mediation the servicer revealed, for the first time, that the borrowers were ineligible for a loan modification because they had a previous loan modification. The borrowers claim that they suffered damages as a result of the delay. Moreover, they allege that soliciting them for a modification that would never occur constituted negligent misrepresentation, negligence, an unfair trade practice, and unjust enrichment.

The servicer contended that it was required by various settlement agreements, federal guidelines, and federal regulations to make the solicitation. The court disagreed. The servicer first raised that the terms of the National Mortgage Settlement (NMS) required solicitation regardless of whether the loan qualified for a loan modification. The court disagreed that this could be a defense when the solicitation misrepresented that a loan modification was possible. The court further found that the NMS specifically states that it is subject to “federal, state, and local laws, rules and regulations.”

The servicer also maintained that under the federal guidelines for the Home Affordable Modification Program (HAMP), the servicer was required to solicit the borrowers. The court pointed to Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 555 (7th Cir. 2012), to find that HAMP guidelines do not preempt state law. As the statements in the solicitation that the loan could be eligible for a modification were not accurate, the court found that HAMP guidelines did not shield the servicer from liability.

The servicer also asserted that the Consumer Finance Protection Bureau regulations and the National Banking Act preempted state law. However, the court looked at both the statute and the regulations and found that the borrowers’ allegations were not preempted. Therefore, the court struck this defense.

It appears that the situation in Hansen may have been avoided by alerting the borrowers at the outset that their loan was not eligible for a modification. This case highlights the importance of providing as many facts as possible to the borrowers concerning their loan.

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Connecticut Legislature Enacts Probate Fee Lien

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Matthew J. Cholewa
Hunt Leibert – USFN Member (Connecticut)

The Connecticut legislature has enacted a lien on real property that runs in favor of the state of Connecticut for probate fees payable in decedent’s estates.

Those doing business in Connecticut are likely aware of the existing estate tax lien — an inchoate lien in favor of the state of Connecticut, which arises upon the death of an owner of Connecticut real property. Even though there is no recorded lien, anyone purchasing or financing real estate where an owner in the chain of title is deceased must be sure that the estate tax lien is cleared.

In section 454 of Public Act 15-05 (June Special Session) the Connecticut legislature created the probate fee lien, another inchoate lien that arises in connection with the death of a property owner. The probate fee lien relates to estates that were open on or after July 1, 2015.

The probate court shall issue a certificate of release of lien for any affected real property after receipt of payment in full, or if the court finds that payment is adequately assured. The certificate of release of lien may be recorded in the land records where the property is located.

For properties that are in foreclosure, if there is a deceased person in the chain of title and the probate fees have not been paid in full or the lien released, the state of Connecticut should be named as an additional defendant in the foreclosure action. It is important to note that the probate fee lien (like the estate tax lien) does not have priority over previously recorded mortgages. Thus, a recorded mortgage will hold priority over both the estate tax lien and the probate fee lien if a borrower dies after granting the mortgage, and a foreclosure of the mortgage can wipe out the probate fee lien (as well as the estate tax lien) as long as the state is named as a defendant.

The probate fee legislation can be found in section 454 of Public Act 15-05 (June Special Session), the “budget implementer” bill. It was enacted without the benefit of a public hearing. In the same legislation, Connecticut increased probate fees as a means of funding the probate court system. Unlike most states, Connecticut includes property passing outside probate in calculating its probate fees. The fees are, in effect, a tax on a person’s estate regardless of whether the property comprising the estate passes through — or outside of — probate.

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Post-Foreclosure Sale: New Statute re Abandoned Personal Property

Posted By USFN, Tuesday, January 5, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Samuel Jackson
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Last year the Arkansas General Assembly passed Act 1139/A.C.A. 18-27-103, a bill that offers guidance on the treatment of personal property after a foreclosure sale. Act 1139 is a welcome regulation for the mortgage foreclosure industry because it shields purchasers from liability for disposing of property without having first completed a full eviction. Before the bill’s passage, a purchaser at foreclosure sale was required to make a judgment call: proceed with the expense of a full lawsuit, or take a risk and dispose of personal property with the hope that it was, in fact, abandoned. Purchasers can now rest more easily when removing personal property from the vacant premises.

As stated above, Act 1139 classifies some personal property as abandoned, relieving the purchaser from liability for disposing of it. The Act provides guidelines for disposing of personal property on vacant foreclosed property, and shields the purchaser from liability when either of the two avenues provided in the text are fulfilled. A.C.A. 18-27-103 states that “all personal property remaining on the land or in a structure on the land shall be considered abandoned if the owner of the personal property has received notice of the sale of the land.” The personal property is considered abandoned and liability will not attach if the owner has not removed the personal property within thirty days of the recording of the deed commemorating the sale.

The other leg of the statute classifies personal property as abandoned if the purchaser mails notice of the sale to the last-known mailing address of all previous occupants, and posts notice of the sale of the land. The personal property is abandoned if the owner has not removed the items or notified the purchaser in writing of the owner’s claim to the personal property within thirty days. So long as the notice is mailed and posted in accordance with this requirement, the property will be considered abandoned after thirty days regardless of whether the occupants actually received notice. The notice must be dated, mailed by certified mail, and posted conspicuously on the land; plus it has to contain a statement that the personal property must be removed or claimed within thirty days.

18-27-103(c) states that “[a] purchaser of land that disposes of personal property that is considered abandoned under this section is not subject to liability or suit.” If either of these requirements is met, the property is considered abandoned and may be disposed of as needed. This relieves the purchaser from liability for disposing of the personal property as well as the expense of proceeding with the full eviction lawsuit to ensure that a property is vacant.

However, in the event that the owner of the personal property wants the personal property, the Act provides further guidance. If the owner does not remove the personal property within thirty days, but gives the purchaser written notice of his or her claim, the purchaser may remove the personal property and store it at the owner’s expense for up to thirty days. The owner must remove the personal property from storage and pay the reasonable expense of storage within thirty days; otherwise the personal property is considered abandoned. There are also some limitations to the Act, in that mobile homes and/or abandoned personal property on which a creditor holds a lien or security interest may not be considered abandoned under the section.

This statute is very new and has yet to be debated in the courts, but it offers clear guidance for purchasers at foreclosure sale to obtain possession of property more cheaply and efficiently. The practice should provide significantly faster turnover of possession post-foreclosure, easing the costs of managing properties and reducing the risks and costs of upkeep on a property that is not yet available for marketing and sale.

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