Article Library
Blog Home All Blogs
Search all posts for:   

 

In re Mayer – A New Limitation on Dewsnup v. Timm

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

January 5, 2016

 

by Caitlin L. Stayduhar
Martin Leigh PC – USFN Member (Kansas)

The U.S. Supreme Court’s opinion in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992), held that Bankruptcy Code § 506(d) does not allow a debtor to avoid a consensual mortgage lien when the value of the collateral is less than the amount of the claim secured by the lien. Dewsnup has been questioned by a number of opinions and publications since its issuance in 1992. On November 20, 2015 the U.S. Bankruptcy Court for the Eastern District of Louisiana further limited the applicability of Dewsnup by holding that a nonconsensual lien is avoidable when insufficient equity exists to secure its debt. [In re Mayer, 2015 Westlaw 7424327 (Bankr. E.D. La. 2015)].

In Mayer the debtor sought to avoid the lien of a writ of execution arising from a money judgment taken against the debtor in state court, basing her argument upon Dewsnup. The bankruptcy court disagreed with the Supreme Court’s analysis, finding that the Supreme Court incorrectly conflated the concept of a “consensual lien” with an “allowed claim.” The bankruptcy court took further issue with Dewsnup’s interpretation of § 506(d), which the bankruptcy court stated would effectively eliminate the application of § 506(d) under any chapter, and prevent the use of § 506(d) for its stated purpose of reducing undersecured claims to the value of the property. In reaching its ultimate decision to limit Dewsnup’s holding to the avoidance of only consensual mortgage liens, the bankruptcy court reiterated the Supreme Court’s directive to apply Dewsnup narrowly, stating that a restricted application was “both warranted and preferable.”

The Mayer decision impacts the holders of an entire class of liens by providing debtors with an argument for avoiding nonconsensual liens that are undersecured. The bankruptcy court’s focus on challenging the Supreme Court’s analysis emphasizes the reluctance of many courts to extend Dewsnup to situations beyond the exact factual scenario of that case, and suggests that courts will continue to limit Dewsnup’s application in the future. As a result, Mayer may bolster the positions of debtors seeking to avoid other types of liens or support an eventual challenge to the Dewsnup holding itself.

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

This post has not been tagged.

Share |
Permalink
 

Tennessee: Supreme Court Holds MERS is Not Entitled to Independent Notice of Tax Sale

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

January 5, 2016

 

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

Tennessee has now joined a list of states whose highest courts have held that the failure to provide MERS with independent notice of sales that might eliminate its interest in real property is not a violation of due process. In the recent case, the context was a tax sale. [Mortgage Electronic Registration Systems, Inc. v. Ditto, 2015 Tenn. LEXIS 100 (Tenn. Dec. 11, 2015)].

Background

MERS brought suit to set aside a 2010 tax sale of real property. MERS contended that the county’s failure to provide it with notice of the tax sale violated its rights under the Due Process Clause of the U.S. Constitution.

The purchaser of the property at the tax sale moved for judgment on the pleadings based on two arguments. The first theory was a procedural hurdle, in that MERS did not tender payment of the sale price plus accrued taxes before filing suit. The Supreme Court rejected that argument. The second assertion (and the one at issue for purposes of this article) is that MERS did not have an interest in the property that was subject to protection under the Due Process Clause. The trial court granted judgment for the purchaser, determining that MERS did not have an independent interest in the property entitled to protection. The Court of Appeals affirmed, based on MERS’s lack of standing to file suit.

The Supreme Court rejected the lack of standing basis, holding that where a plaintiff claiming a protected interest in real property files suit to have a tax sale declared void for lack of notice, he is not required to tender payment of the sale price plus taxes prior to filing suit. Nonetheless, the Supreme Court affirmed the Court of Appeals, opining that MERS had acquired no protected interest in the subject property either through the deed of trust designation of MERS as “beneficiary solely as nominee for the lender …” or its reference to MERS having “legal title” to the subject property for the purpose of enforcing the lender’s rights. Without a protected interest in the subject property, the Supreme Court held that MERS’s due process rights were not violated by the county’s failure to provide it with notice of the tax sale.

The Supreme Court spent a great deal of time discussing the history and purpose of MERS. The Court observed that MERS “performs a service for lenders by purporting to function as the mortgagee of record and nominee for the beneficial owner of the mortgage loan.” The Court also noted that “no mortgage rights are transferred on the MERS® system. The MERS® system only tracks the changes in servicing rights and beneficial ownership interests.”

While the Supreme Court recognized that the MERS system of registering and tracking mortgages over the life of the loans “sought to address problems that arose from mortgage securitization,” the Court nevertheless was troubled by the language in deeds of trust whereby MERS is appointed “beneficiary” while at the same time it “acts solely as the nominee for the lender and its successors or assigns.” The Court found such language “opaque” and “notable in its lack of clarity.”

Conflicting Decisions Reviewed

The Supreme Court of Tennessee specifically found that the issue in the case “is better framed as whether MERS has a property interest that is protected under the Due Process Clause. This is an issue of first impression in this Court.”

After discussing general principles regarding the Due Process Clause, the Court looked to other states for guidance. The majority of cases involving MERS have addressed MERS’s appointment as beneficiary “solely as nominee” for the lender. Many cases have upheld such appointment. Thompson v. Bank of America, N.A., 773 F.3d 741 (6th Cir. 2014). Thus, according to those courts, MERS has the authority to act on behalf of a valid note holder, so MERS is able to validly assign a deed of trust or enforce a note on behalf of the lender.

Other courts, however, have held that MERS’s designation as beneficiary as nominee for the lender does not give it the power to assign a deed of trust. The typical reasoning is that because the note and security instrument cannot be “split,” and MERS never held authority to assign the promissory note that evidences the actual debt, MERS would likewise have no authority to assign the deed of trust. Summers v. PennyMac Corp., 2012 WL 5944943, at *5 (N.D. Tex. Nov. 28, 2012); McCarthy v. Bank of America, NA, No. 4:11-CV-356-A, 2011 WL 6754064, at *4 (N.D. Tex. 2011); Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623-24 (Mo. Ct. App. 2009).

The Court noted in Ditto that most of the cited cases did address whether MERS has the power to assign a note and deed of trust, foreclose on a note, or to otherwise exercise the interests of the lender. However, they did not address the specific issue presented in Ditto, namely whether or not MERS itself had an interest in the relevant property that would be subject to protection under the Due Process Clause.

While addressing that specific question in Ditto, the Court found the relevant decisions divided. Some of the decisions have held that the appointment of MERS as beneficiary nominee for the lender did not grant MERS a protected interest in the property. Ditto relied heavily on Landmark National Bank v. Kesler, 216 P.3d 158 (Kan. 2009) to explain those decisions. In Landmark, the borrower had two loans on the same property. The first mortgage was with Landmark National Bank and the second was with Millenia Mortgage Corporation. The second mortgage utilized MERS as a “nominee” and “beneficiary,” and MERS thereafter assigned the second mortgage to Sovereign Bank. When Landmark filed a foreclosure petition, it named the mortgagor and Millenia; it did not notify Sovereign or MERS, even though the documents identifying MERS as the mortgagee as nominee for Millenia and Millenia’s successors were available. Because no answer was filed, the court entered a default judgment, and the property was sold.

Sovereign, the assignee to the second mortgage, moved to set aside the default judgment and objected to the confirmation of the sale. Sovereign asserted that MERS was a “contingent necessary party,” and because they were not named, Sovereign did not receive proper notice of the foreclosure proceedings. MERS also filed a motion to intervene and a motion to join Sovereign’s motion to set aside the default. The trial court denied those motions, finding that MERS was not a real party in interest and that Landmark therefore was not required to name MERS as a party in the foreclosure action.

The Supreme Court of Kansas looked to the language of MERS being appointed a “nominee,” and stated that the relationship that MERS had with Sovereign “is more akin to that of a straw man than to a party possessing all the rights given a buyer ….” The Kansas Court ultimately held that “[t]he Due Process Clause does not protect entitlements where the identity of the alleged entitlement is vague. A protected property right must have some ascertainable monetary value.” The Court concluded that MERS did not demonstrate “that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgag[ee]. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation.”

In Ditto, the Court also looked to Weingartner v. Chase Home Finance, LLC, 702 F. Supp. 2d 1276 (D. Nev. 2010), for a discussion of MERS’s role and usage of the term “beneficiary.” Weingartner found that MERS was not a true beneficiary “in any ordinary sense of the word. Calling MERS a beneficiary is what cause[d] much of the confusion. To a large extent, defendants in these actions have brought this mass of litigation upon themselves by this confusing, unorthodox, and usually unnecessary use of the word ‘beneficiary’….”

Summarizing the decisions consistent with Landmark and Weingartner, Ditto states: “[t]hese courts held that MERS was not the beneficiary under the deed of trust and, as nominee, was simply an agent or ‘straw man’ for the lender. As a result, these courts held that MERS did not have its own protected interest in the subject property.”

Other courts, however, have held that MERS’s status as beneficiary as nominee constitutes a protected property right. For example, in Mortgage Electronic Registration Systems, Inc. v. Bellistri, No. 4:09-CV-731, 2010 WL 2720802 (E.D. Mo. 2010), a county failed to give MERS notice of a tax sale, while the Missouri statute required notice to any person “who holds a publicly recorded deed of trust, mortgage, lease, lien or claim upon that real estate.” Bellistri, 2010 WL 2720802, at *10. The court held that a “publicly recorded” claim in the property included MERS’s appointment as beneficiary as nominee. Thus, it had a due process right to notice.

Having looked at the conflicting decisions, Ditto squarely addressed whether the simple appointment of MERS as nominee as beneficiary on behalf of the lender was sufficient to trigger Due Process Clause protections.

Conclusion

On the one hand, MERS argued that various Tennessee courts had upheld its role as nominee and its ability to foreclose on secured property. Ditto did not question MERS’s authority to act as agent for the lender or successor lenders; “[h]owever, the lender’s agreement to appoint MERS as its agent does not endow MERS with the lender’s property interest or for that matter any independent property interest whatsoever. The note owner is the actual beneficiary, i.e., the party that benefits from the security instrument by its entitlement to payments on the promissory note, secured by the deed of trust.”

In Ditto, the Court agreed with those courts holding that despite the label of “beneficiary” in the deed of trust, MERS is not a true beneficiary. The Court noted that MERS “receives nothing from the [deed of trust] itself.” As the language in the deed of trust specifically qualified the term “beneficiary” by noting that MERS was a beneficiary “solely as nominee” for the lender, MERS was able to act only as an agent for the lender, not for its own interests.

Finally, the Court observed in Ditto that the notice provisions in the deed of trust itself only addressed required notices between the borrower and the lender. The deed of trust did not require any notice to be given to MERS in connection with the obligations between the borrower and the lender.

Because MERS was never given an independent interest in the property, the Court held that MERS had no interest in the property that is protected under the Due Process Clause. Accordingly, the county was not required to provide MERS with notice of the tax sale, and MERS was unable to set it aside.

The practical effect of the Ditto case within Tennessee will likely be minimal. As Ditto itself stated, the Tennessee statute requiring notice of tax sales to “interested persons” was revised effective July 1, 2015. Tenn. Code Ann. § 67-5-2502(c)(1)(B) now defines “interested persons” to include “a person or entity named as nominee or agent of the owner of the obligation that is secured by the deed or a deed of trust and that is identifiable from information provided in the deed or a deed of trust ….” Thus, the Tennessee legislature has already acted to provide MERS a specific protection without the need to resort to Due Process arguments.

Even so, the findings of Ditto may be far-reaching, as it is likely that other courts struggling to define the role of MERS and its true interest in mortgages or real property will find Ditto’s logic compelling.

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

This post has not been tagged.

Share |
Permalink
 

Eleventh Circuit Issues Stern Warning Against Inclusion of Estimated Fees and Costs in Reinstatement Quotes

Posted By USFN, Monday, January 4, 2016
Updated: Tuesday, January 19, 2016

January 4, 2016

 

by Steven J. Flynn
McCalla Raymer, LLC – USFN Member (Georgia)

The Eleventh Circuit Court of Appeals has held, in an unpublished decision, that a loan servicer violated the Fair Debt Collection Practices Act (FDCPA) by including the “estimated” future attorneys’ fees of the law firm retained by the loan servicer to conduct foreclosure proceedings in a letter to the borrower, setting forth the amounts necessary to reinstate the borrower’s loan under the terms of his security instrument. [Prescott v. Seterus, Inc., No. 15-10038 (11th Cir. Dec. 3, 2015)]. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)

Factual Background

On August 1, 2012 the borrower Prescott defaulted on his residential mortgage loan. Seterus began servicing the mortgage on October 1, 2012. Following the borrower’s default, Seterus prepared to initiate foreclosure proceedings against the borrower and retained a law firm “to provide legal services associated with the foreclosure.” The borrower asked Seterus to reinstate his mortgage in August 2013. Under the terms of the borrower’s mortgage, the borrower could reinstate his mortgage under “certain conditions,” including, in pertinent part, by “pay[ing] all expenses incurred in enforcing [the borrower’s] Security Instrument, including, but not limited to, reasonable attorneys’ fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender’s interest in the Property and rights under this Security Instrument ….”

On September 4, 2013 Seterus sent the borrower a letter setting forth a reinstatement balance of $15,569.64 (an amount stated to be good through September 27, 2013), which included the amount of $15 in “estimated” property inspection fees and $3,175 in “estimated” attorneys’ fees. The borrower paid the full reinstatement balance on September 26, 2013 and Seterus reinstated the borrower’s loan. On November 14, 2013 Seterus refunded the $3,175 in estimated legal fees “because those fees were not incurred before Seterus reinstated the mortgage.” Seterus did not refund the $15 in estimated property inspection fees because those fees were incurred by Seterus before the borrower reinstated the mortgage.

Procedural History

The borrower filed suit against Seterus in Florida state court about a week after his loan was reinstated, alleging that the inclusion by Seterus of estimated attorneys’ fees in the September 4, 2013 letter violated 15 U.S.C. § 1692e(2) and 15 U.S.C. § 1692f(1) of the FDCPA and § 559.72(9) of the Florida Consumer Collections Practices Act (FCCPA). Seterus removed the case to the U.S. District Court for the Southern District of Florida; the district court granted summary judgment to Seterus on each of the borrower’s claims for relief.

Holdings
On appeal, the Eleventh Circuit held that the inclusion by Seterus of $3,175 in estimated attorneys’ fees in the reinstatement balance provided to the borrower violated 15 U.S.C. § 1692f(1), which prohibits a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt,” including “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” The appellate court further held that, under the “least sophisticated consumer” standard utilized to review claims under the FDCPA, the least sophisticated consumer would not have believed that he was obligated to pay the estimated legal fees in order to reinstate the borrower’s mortgage under the terms of the borrower’s security instrument.

The Eleventh Circuit also held that the inclusion of estimated attorneys’ fees and costs in the reinstatement balance provided to the borrower constituted a violation of 15 U.S.C. § 1692e, which provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” including “[t]he false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.” The court reasoned that Seterus could not “lawfully receive” the estimated fees and costs from the borrower under the terms of the borrower’s security instrument because these costs had not yet actually been incurred. Further, the court held that Seterus was not entitled to escape liability under the FDCPA based upon a “bona fide error” defense, as Seterus’s inclusion of the estimated attorneys’ fees in the reinstatement balance was not the result of a factual or clerical error. (The Eleventh Circuit also reversed the district court’s grant of summary judgment to Seterus on the borrower’s FCCPA claim.)

Implications
The Prescott decision should cause any lender, loan servicer, or law firm that provides reinstatement quotes and/or figures to borrowers to examine its practices and procedures in order to determine whether or not information being provided to borrowers in reinstatement situations could potentially constitute a FDCPA violation (or a violation of any state consumer protection law, such as the FCCPA). The Eleventh Circuit has sent a clear message to the financial services industry that only those fees and costs that are expressly authorized under the terms of the applicable loan documents, and/or applicable law, are to be included in reinstatement quotations.

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

This post has not been tagged.

Share |
Permalink
 

South Carolina: “Written” Notice of Order Entry Expands into E-mail

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

In an appeal arising out of a foreclosure action, the South Carolina Court of Appeals found that an e-mail from the Master in Equity Court, with an attachment containing the order denying the petition for appraisal following a foreclosure sale, constituted written notice of entry of the order, in compliance with South Carolina Appellate Court Rule 203(b)(1). That rule provides that, a party wishing to appeal an order from the Court of Common Pleas must serve a notice of appeal on the other party within 30 days after receipt of written notice of entry of the order. [Wells Fargo Bank, N.A. v. Fallon Properties South Carolina, LLC, No. 2015-000157 (S.C. Ct. App. Aug. 26, 2015)].

After the foreclosure sale, appellants filed a petition for an order of appraisal pursuant to Section 29-3-680 of the South Carolina Code (2007). On December 15, 2014 the master in equity filed an order denying the petition, and sent attorneys (for both sides) an e-mail stating, “Please see attached copy of signed and clocked Form 4 and Order. I have also mailed a copy to all listed on the Form 4.” The “signed and clocked” copies of the Form 4 and Order were attached to the e-mail. The Master in Equity sent the parties a printed copy of the order through the U.S. Postal Service, which appellants received on December 18, 2014. On January 15, 2015 appellants served the respondent with the notice of appeal from the December 15th order. The notice was served 31 days after appellants received the e-mail, but only 28 days after they received the printed copy of the order. The respondent moved to dismiss the appeal as untimely for failure to file the notice of appeal within 30 days after receipt of written notice of entry of the order.

Pursuant to the above-referenced Rule 203(b)(1), a party wishing to appeal an order from the Court of Common Pleas must serve the notice of appeal on the respondents “within thirty ... days after receipt of written notice of entry of the order.” The only limitation ever expressed on how notice must be received is that it must be “written notice.” The court found that the e-mail constituted “written notice” under the rule.

In its reasoning the court discussed Canal Insurance Company v. Caldwell, where a fax was held to constitute “written notice.” 338 S.C. 1, 5–6, 524 S.E.2d 416, 418 (Ct. App. 1999). The court found that there was an even stronger argument for the e-mail in this case to constitute written notice: the e-mail “was sent from the Court itself, rather than an opposing party;” “the e-mail included a copy of the signed and clocked order;” and the “e-mail has actually been contemplated by the rules,” citing Rule 410(e), SCACR.

©Copyright 2015 USFN and Scott & Corley, P.A. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

Recoverable Attorneys’ Fees: FDCPA and State Statute Conflict?

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Michael B. Stein
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

North Carolina General Statute § 6-21.2 generally provides that obligations to pay attorneys’ fees upon a promissory note “shall be valid and enforceable and collectible” as part of the debt. In short, a borrower who defaults on a promissory note that contains a provision obligating him to pay the lender’s attorneys’ fees is liable for those fees. There are conditions, of course.

The lender or its attorney must first mail a written notice to the borrower that he has five days to pay the outstanding balance of the debt in full without being obligated to also pay the lender’s attorneys’ fees. There is also a fee cap. Specifically, the statute limits the amount of the lender’s attorneys’ fees that can be assessed against the borrower to 15 percent of the outstanding balance, which is defined as the sum of principal and interest owing at the time the lawsuit is filed. If the promissory note provides for attorneys’ fees in a specific percentage of the outstanding balance, then the borrower is liable for the lender’s attorneys’ fees up to, but not in excess of, 15 percent of the outstanding balance. If, however, the promissory note merely provides for the payment of “reasonable” attorneys’ fees, without specifying any specific percentage, then such provision “shall be construed to mean” 15 percent of the outstanding balance.

The North Carolina Court of Appeals has held that even if 15 percent of the outstanding balance exceeded the actual attorneys’ fees incurred by a bank in its efforts to collect on a promissory note, the attorneys’ fee award based on that statutory percentage could not be avoided as a “windfall” to the bank, since the promissory note provided for “reasonable attorneys’ fees.” The court held that, in such a scenario, N.C. Gen. Stat. § 6-21.2 predetermines 15 percent to be a reasonable amount of attorneys’ fees no matter what the actual attorneys’ fees are. Trull v. Central Carolina Bank Trust, 124 N.C. App. 486, 478 S.E.2d 39 (N.C. Ct. App. 1996) review allowed 345 N.C. 646, 483 S.E.2d 719, affirmed in part, review dismissed in part 347 N.C. 262, 490 S.E.2d 238.

In theory then, determining the amount of attorneys’ fees that can be awarded against a borrower under N.C. Gen. Stat. § 6-21.2 is often a simple exercise in mathematics. Consider this example:

James Debtor has defaulted on a promissory note to Bank and owes Bank $10,000. The note contains a provision obligating James to pay Bank’s “reasonable attorneys’ fees” if he defaults. The Bank gives James notice that he can pay the $10,000 in five days without incurring an additional award of attorneys’ fees; but James does not pay it. The Bank can enforce the attorneys’ fees provision and collect as part of the debt the $10,000 outstanding balance plus $1,500 in attorneys’ fees. On behalf of the Bank, the Bank’s lawyers — as is typical in North Carolina lawsuits — file suit against James to recover the $10,000 outstanding balance plus $1,500 in attorneys’ fees as allowed by N.C. Gen. Stat. § 6-21.2.

That seems okay, right? Well, not so fast. Enter the Fair Debt Collection Practices Act (FDCPA) codified in 15 U.S. Code §§ 1692, et seq. Among other things, the FDCPA prohibits a debt collector (lawyers can be debt collectors) from making false or misleading representations (15 U.S.C. § 1692e) and from using unfair and unconscionable means to collect a debt (15 U.S.C. § 1692f). How does this affect what we just learned about attorneys’ fees? Consider the case of Elyazidi v. SunTrust Bank, 780 F.3d 227 (4th Cir. Mar. 5, 2015). Note, while this was a case brought in federal court in Virginia, and involved questions of Maryland law as well as the FDCPA, North Carolina is within the jurisdiction of the U.S. Fourth Circuit Court of Appeals. (The Fourth Circuit is comprised of Maryland, North Carolina, South Carolina, Virginia, and West Virginia.)

The facts of Elyazidi are pretty straightforward. Plaintiff Elyazidi opened a checking account with SunTrust Bank in September 2010. That same month, when she only had about $300 in her account, she wrote herself a check for $9,800 and cashed it. In short, Elyazidi overdrew her account by $9,490.82. The checking account was governed by an agreement that obligated Elyazidi to pay “attorney’s fees up to 25 percent . . . of the amount owed” if the Bank took court action to collect an overdraft. The Bank’s lawyers filed a debt collection lawsuit against Elyazidi in Virginia. In the lawsuit, the Bank sought to recover the $9,490.82 overdraft amount, plus 25 percent of that amount (or $2,372.71) in attorneys’ fees, as provided for in the agreement. To justify the request for an award of attorneys’ fees of $2,372.71, the Bank’s attorneys filed an affidavit: (1) attesting to their billable rate of $250 per hour, (2) declaring that they had only spent one hour on the matter up to that point, and (3) anticipating — based on similar cases that they had handled — they would likely spend an additional 23 hours on the case before the judgment was satisfied.

Elyazidi then sued the Bank and the Bank’s lawyers, alleging violations of the FDCPA. Specifically, the plaintiff alleged that the Bank’s lawyers — by seeking an award of attorneys’ fees of $2,372.71 at the outset of the lawsuit at which point the attorneys admittedly had only spent one hour on the case — used false, deceptive, or misleading representations or means in connection with the collection of the debt in violation of 15 U.S.C. § 1692e and “unfair and unconscionable means” to collect the debt in violation of 15 U.S.C. § 1692f.

Ultimately, the district court dismissed Elyazidi’s lawsuit. The Fourth Circuit affirmed, holding that “where the debt collector sought no more than applicable law allowed and explained via affidavit that the figure was merely an estimate of an amount counsel expected to earn in the course of the litigation, the representations cannot be considered misleading under 15 U.S.C. § 1692e(2)” [emphasis added].

Although the Fourth Circuit ultimately got this decision right, the holding in Elyazidi still leaves unresolved the question of what would have happened if the Bank’s lawyers did not submit an affidavit estimating the amount they expected to earn in the course of the litigation. Consider again the case of James Debtor. But this time assume that he owes the Bank a much greater amount — say $1,000,000, and that the Bank’s lawyers therefore seek $150,000 (15 percent of the outstanding balance of the loan) as their “reasonable attorneys’ fees” as allowed by N.C. Gen. Stat. § 6-21.2.

Even though N.C. Gen. Stat. § 6-21.2 (and the opinion in Trull) would seem to allow the Bank’s lawyers to recover 15 percent of the outstanding balance for their attorneys’ fees, would it violate the FDCPA for the Bank’s lawyers to include an attorneys’ fee award request in a lawsuit against James Debtor for $150,000 when they had only spent an hour on the case up to that point? Does it matter if the lawyers do not, or in good faith could not, submit an affidavit attesting that the $150,000 is merely an estimate of the amount they expected to earn in the course of the litigation? What if the Bank’s lawyers would readily admit that their estimated actual attorneys’ fees would likely be no greater than $5,000? Could they still claim entitlement to a $150,000 attorneys’ fees award under N.C. Gen. Stat. § 6-21.2 without violating the FDCPA?

Although the North Carolina Court of Appeals in Trull and the Fourth Circuit in Elyazidi both decided in favor of the creditors’ attorneys, there still appears to be a possible conflict between N.C. Gen. Stat. § 6-21.2 and the FDCPA. Until that potential conflict is ultimately resolved by a higher court, perhaps the safest course for North Carolina lawyers seeking an award of attorneys’ fees under N.C. Gen. Stat. § 6-21.2 is to stand ready to justify the reasonableness of their fees, despite that statute’s “predetermination” that 15 percent is reasonable no matter the amount of actual attorneys’ fees; or perhaps include a demand only for “reasonable attorneys’ fees” as permitted by N.C. Gen. Stat. § 6-21.2 without identifying a specific amount.

©Copyright 2015 USFN and Hutchens Law Firm. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

South Carolina: Listing Stale Debt in Bankruptcy Schedules Did Not Revive It

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

In a recent decision, the bankruptcy court disallowed a creditor’s claim of a stale debt listed on a debtor’s bankruptcy schedule because South Carolina law would not support the revival of the claim, and even if it did, federal interests would require that the claim be disallowed. [In re Vaughn, No. 15-02896-DD (Bankr. S.C. Sept. 2, 2015)].

The debtor filed for protection under chapter 13 of the Bankruptcy Code. On Schedule F, she listed a debt to LVNV Funding, LLC opened March 1, 2010 for $2,043. The debt was not marked as contingent, unliquidated, or disputed. The chapter 13 plan proposed to pay unsecured creditors with allowed claims approximately a 10 percent dividend. The debt was well past South Carolina’s three-year debt collection statute of limitations.

LVNV Funding, LLC filed a timely proof of claim, to which the debtor filed an objection. The debtor asserted that the claim is unenforceable under South Carolina law because enforcement of the debt is barred by the state’s three-year statute of limitations. The debtor amended her schedules, listing the debt in question as disputed. At the hearing, LVNV Funding, LLC contended that South Carolina law requires only a minimal acknowledgement of the debt to revive it, which it asserted included the listing of the debt on bankruptcy schedules without noting the debt as disputed.

The bankruptcy court said that when analyzing an objection to a proof of claim, the court must consider both the claimant’s rights under state law and whether those interests comport with federal interests within the Bankruptcy Code.

First, the court determined that even if South Carolina law revives a stale debt simply by its notation in the statements and schedules filed in connection with a bankruptcy petition, federal principle supplants the state law rule. The court based its decision on the federal principles within the Bankruptcy Code of harsh penalties for debtors who do not fully disclose their financial affairs; that the very broad definition of “claim” could lead to creditors that slept on their enforcement rights being able to recover to the detriment of creditors that did not sleep on their rights; and that 11 U.S.C. § 558 of the Bankruptcy Code provides that statutes of limitations protect both the debtor personally and the bankruptcy estate.

Second, the court discussed South Carolina debt revival law and concluded that state law does not support revival of the debt, conceding that recent case law in South Carolina is sparse. Citing and quoting nineteenth century cases, the court stated that for a debt to be revived the debtor must unequivocally admit that there is a debt and must make a new promise to pay that debt. The admission of a debt along with a statement that the debtor will not pay the debt does not revive a debt. The bankruptcy court compared the instant case to Black v. White, 13 S.C. 37 (S.C. 1880). In that case, the South Carolina Supreme Court ruled that while probating an estate, the listing of a stale debt on the estate’s inventory did not revive the debt. The bankruptcy court in Vaughn determined that the listing of the debt on the bankruptcy schedule was comparable.

Finally, the bankruptcy court disposed of LVNV Funding, LLC’s contention that because the debtor did not initially mark the debt as disputed, there was a new promise to pay the debt. The court said that debtors may freely amend their schedules and that marking a debt as disputed has no effect on a chapter 13 case.

The court concluded that neither federal principles nor South Carolina state law support the revival of the debt.

©Copyright 2015 USFN and Scott & Corley, P.A. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

Washington: Note Holder can Modify and Enforce the Note

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Joshua Schaer
RCO Legal, P.S. – USFN Member (Oregon, Washington)

On October 22, 2015 the Supreme Court of the State of Washington issued its decision in Brown v. Washington State Department of Commerce, unanimously concluding that a note holder is legally entitled to modify and enforce the obligation under state law. The court rejected Brown’s claim that only a note “owner” could be a proper beneficiary.

Brown demanded statutory mediation with M&T Bank. In response to a notice from the Washington Department of Commerce (Commerce), which oversees the mediation program, M&T produced a declaration stating that it was the actual holder of Brown’s note. M&T also asserted a mediation exemption based on a statute excluding beneficiaries with a low volume of secured mortgage loans in the state. Brown’s lawsuit arose after Commerce denied her an opportunity to mediate with M&T.

Brown contended that Freddie Mac (the owner of the loan) should be compelled to mediate because the Washington Deed of Trust Act (DTA) requires a beneficiary to also be the note’s owner, and Freddie Mac would not qualify for the same exemption as M&T.

The Supreme Court analyzed a statute that allows “[a] declaration by the beneficiary made under the penalty of perjury stating that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust” to establish sufficient proof of the note’s “ownership.” The court decided that the legislature intended for the party holding authority to modify a loan to act as the beneficiary under the mediation law. The court also reaffirmed its holding in Bain v. Metropolitan Mortgage Company — i.e., that a beneficiary is strictly defined in Washington as the note holder.

The court limited the recent decisions of Lyons v. US Bank and Trujillo v. NW Trustee Services to situations where a beneficiary’s declaration contains alternative language concerning non-holder authority under the state law equivalent to UCC 3-301 (which governs a “Person Entitled to Enforce” negotiable instruments).

In summation, the court found that “a party satisfies the proof of beneficiary provisions” in the DTA when “it submits an undisputed declaration under penalty of perjury that it is the actual holder of the promissory note.” Thus, Commerce acted properly to deny Brown’s request for mediation.

The Brown case resolves a longstanding question concerning authority to foreclose in light of the “proof of ownership” requirement. The law is now clear in Washington that loan owners such as Freddie Mac or Fannie Mae need not initiate nonjudicial foreclosures in their own names or directly participate in mediation, and loan servicers can execute declarations of note holder status in order to satisfy the DTA. Brown is a significant victory that supports the legal position of servicers, investors, and trustees.

©Copyright 2015 USFN. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

North Carolina: Failure to Raise Defenses at Hearing to Authorize Foreclosure Sale Resulted in Waiver

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

In an unpublished opinion, the North Carolina Court of Appeals affirmed the order of the superior court authorizing a foreclosure sale on the basis that the respondent (borrower) failed to raise the arguments he sought to assert on appeal at the trial level. [In re Foreclosure of Herring, No. COA14-1159 (N.C. Ct. App. Sept. 1, 2015)].

The borrower argued on appeal: (1) that the foreclosure proceeding was not brought by the actual trustee as the only real party in interest, as required by Rule 17 of the Rules of Civil Procedure; and; (2) that he received inadequate notice of the foreclosure hearing. As is the usual practice, the creditor had substituted the original trustee, and it was the substitute trustees who had initiated the foreclosure proceedings. The borrower had attended and participated in the foreclosure hearing before the clerk, following which the clerk of court entered an order permitting a foreclosure by power of sale. The borrower appealed that order to the superior court, where the trial court overruled all of the borrower’s objections and entered an order allowing a foreclosure by power of sale to proceed.

In rejecting the first ground for appeal the appellate court noted “[a]lthough Rule 17 requires that an action be brought by the real party in interest, ‘the real party in interest provisions of Rule 17 are for the parties’ benefit and may be waived if no objection is raised[.]’ J & B Slurry Seal Co. v. Mid-South Aviation, Inc., 88 N.C. App. 1, 16, 362 S.E.2d 812, 822 (1987).” The court observed that the borrower failed to mention the issue before the superior court.

In rejecting the second ground, the appellate court again observed that the borrower failed to present the issue before the superior court, and the court of appeals would not consider the argument for the first time on appeal, citing Westminster Homes, Inc. v. Town of Cary Zoning Bd. of Adjustment, 354 N.C. 298, 309, 554 S.E.2d 634, 641 (2001). Moreover, the appellate court noted that even if the issue was properly raised ‘“[i]t is well-settled that a party entitled to notice may waive notice ...,’ by being ‘present at the hearing and participat[ing] in it.’” In re Foreclosure of Norton, 41 N.C. App. 529, 531, 255 S.E.2d 287, 289 (1979).

While not breaking any new ground in the jurisprudence of foreclosure law, the opinion in Herring serves two valuable purposes. Firstly, it affirms that foreclosure proceedings (even though not full-blown civil actions) are still accorded the same degree of solemnity as other actions and all appropriate procedural rules will be applied with equal force. Somewhat ironically, an observed trend with the Court of Appeals has been its treatment of foreclosure special proceedings as akin to other civil actions, and applying the Rules of Civil Procedure to them. In this instance, that reasoning favored the creditor, punishing the respondent-borrower for his failure to follow the Rules. Cause for concern remains, however, in the event that the appellate court were to decide that all of the Rules apply to a special proceeding foreclosure. That would open the door to application of the discovery rules, the rules governing dismissal and summary judgment, and the rules concerning trial by jury. Secondly, the Herring case is a reminder to every litigant of the need to raise all legitimate claims and defenses at the trial stage of legal proceedings; otherwise the Court of Appeals will not entertain the argument for the first time on appeal.

©Copyright 2015 USFN and Hutchens Law Firm. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

Connecticut Appellate Court Upholds Application of Equitable Subrogation

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Richard M. Leibert
Hunt Leibert – USFN Member (Connecticut)

In an important ruling, the Connecticut Appellate Court has affirmed the trial court’s application of the doctrine of equitable subrogation in reordering the priority of interests, despite the defendant bank having had constructive notice of the plaintiff’s recorded mortgage. [AJJ Enterprises, LLP v. Herns Jean-Charles, AC 36838 (Conn. App. Ct. Oct. 13, 2015)].

Facts — As sellers, Pascarelli and Bartolo, dba AJJ Enterprises LLP (AJJ), entered into a purchase and sale agreement with Jean-Charles (J-C) to sell 18 Monroe Street, Norwalk, Connecticut for a price of $675,000, with a first mortgage of $500,000 provided by First County Bank. The balance of the price (as well as closing costs advanced by the sellers) was paid through a secured promissory note in the amount of $195,000 to AJJ. The AJJ note was to be secured by a “blanket mortgage on properties that [J-C] owns.” At the time, J-C owned his residence at 10 Carlin Street, Norwalk.

On May 24, 2002 the transaction closed, and the AJJ mortgage was recorded on 18 Monroe and 10 Carlin that same day. AJJ had not done a title search on 10 Carlin; AJJ believed that its mortgage was a second mortgage, as reflected in the promissory note from J-C — ‘“secured by a second mortgage on real property known as 18 Monroe … and 10 Carlin …’” (In fact, at the time the mortgage from J-C to AJJ was recorded, it was subsequent to two mortgages that encumbered 10 Carlin: a first mortgage in the face amount of $288,000 and a second mortgage in the face amount of $30,300.)

At the time of closing with AJJ, J-C had undertaken to refinance his mortgage on 10 Carlin. There were two mortgages being paid off through this 10 Carlin refinance, requiring $314,156.49. Aegis Mortgage Corporation (Aegis) provided the refinancing funds in the amount of $348,000. Aegis intended to hold a first mortgage position. The initial title search carried out by Aegis on May 16, 2002 could not have discovered the AJJ blanket mortgage recorded on May 24, 2002. Aegis closed the loan and its refinancing mortgage was recorded on June 11, 2002 — subsequent to the recording of the AJJ mortgage. The Aegis loan paid off the first and second mortgages, enabling the AJJ mortgage to move into first lien position. This was not discovered until J-C defaulted and a foreclosure was commenced.

Foreclosure as to 18 Monroe
— First County commenced a foreclosure on 18 Monroe, with a sale date set for August 16, 2008. Pascarelli and Bartolo, who had personally guaranteed payment, formed JP Asset Management LLC to purchase the First County note and mortgage. JP Asset obtained a judgment of strict foreclosure on 18 Monroe August 2, 2010 (two years later).

Foreclosure as to 10 Carlin — AJJ brought a foreclosure action on 10 Carlin, claiming first position. Aegis (which had assigned its mortgage to Bank of New York Mellon, as trustee for the Amortizing Residential Collateral Trust, mortgage pass-through certificates, series 2002-BC7) defended, claiming by the theory of equitable subrogation that it had a first mortgage. AJJ contended that Aegis had constructive knowledge of the AJJ mortgage when Aegis recorded its mortgage on June 11, 2002 and that Bank of New York Mellon, Trustee (substitute defendant bank in the case), was precluded from obtaining the benefit of equitable subrogation.

The trial court ruled in favor of Bank of New York Mellon, Trustee, and placed its mortgage in first position; AJJ appealed. The appellate court found that the trial court did not abuse its discretion in applying the doctrine of equitable subrogation despite the defendant bank’s constructive knowledge of the plaintiff’s lien. The Connecticut Appellate Court specifically cited to the Restatement (Third), Property, Mortgages § 7.6, comments (e) and (f), (1997):

“‘Under [the] Restatement … subrogation can be granted even if the payor had actual knowledge of the intervening interest; the payor’s notice, actual or constructive, is not necessarily relevant. The question in such cases is whether the payor reasonably expected to get security with a priority equal to the mortgage being paid. Ordinarily, lenders who provide refinancing desire and expect precisely that, even if they are aware of an intervening lien … A refinancing mortgagee should be found to lack such an expectation only where there is affirmative proof that the mortgagee intended to subordinate its mortgage to the intervening interest.’ … “The Restatement is careful to emphasize that the court considering equitable subrogation must be convinced that no injustice will result to the intervening lienholder before applying the doctrine[.] … ‘In virtually all cases in which injustice is found, it flows from a delay by the payor in recording his or her new mortgage … The delay may lead the holder of an intervening interest to take detrimental action in the belief that that interest now has priority.’”

There were no circumstances reflecting that AJJ changed its position in detrimental reliance; moreover AJJ did not bargain for first mortgage position, while Aegis did. The fact that AJJ found itself in first position was due to windfall and not anything for which it negotiated.

The significance of this holding is its effective restatement of three Connecticut Supreme Court holdings, reversing a trend that had occurred at the appellate court level, which — in a series of decisions — appeared to claim that constructive notice of an intervening interest in property served as a per se bar to the application of the doctrine of equitable subrogation.

Editor’s Note: The author’s firm represented the Bank of New York Mellon, as trustee for the Amortizing Residential Collateral Trust, mortgage pass-through certificates, series 2002-BC7 (substitute defendant bank) at the trial and appellate levels in the case summarized in this article.

©Copyright 2015 USFN. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

CFPB Continues its Practice of Regulation through Enforcement: Consent Order Entered

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

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

On July 30, 2015 the CFPB entered into a consent order with Residential Credit Solutions. The consent order requires RCS to pay borrowers $1,500,000 in redress for, inter alia, allegedly failing to honor HAMP and proprietary loan modifications negotiated by transferor servicers, as well as allegedly requiring borrowers to relinquish all legal defenses in pending, and threatened, litigation in return for agreeing to allow borrowers to pay off delinquent payments in installments.

As with most — if not all — CFPB administrative proceeding consent orders, the respondent did not admit any of the allegations. Of particular concern to both servicers and their attorneys should be the allegations concerning the coerced waiver of legal rights as a condition for a payment plan. While the consent order is light on facts, it appears from the wording of the order that with respect to some borrowers, foreclosure proceedings were in progress when RCS and the borrowers negotiated payment plans. The plans included agreements that “[i]n the event of the cancellation of this Payment Plan and the continuation of foreclosure proceedings, you agree to waive any and all defenses, jurisdictional and otherwise, associated with the continuation of the foreclosure proceedings and possible subsequent public auction of your property.” The borrowers also agreed “‘not to file any opposition to a motion for relief from the automatic stay filed on behalf of RCS’ in any bankruptcy.” [Consent Order, ¶39].

The CFPB labelled these conditions as unfair under 12 U.S.C. § 5536(a)(1)(B). According to the CFPB “[a]n act or practice is unfair if it causes or is likely to cause consumers substantial injury that is not reasonably avoidable and if the substantial injury is not outweighed by countervailing benefits to consumers or to competition.” [Consent Order, ¶24].

The reader is left to speculate, among other things, about exactly what litigation was pending or threatened; whether the “legal defenses” the borrowers gave up had any substance; or whether the borrowers were represented by counsel. Particularly unhelpful is the absence of any explanation about why the waiver of “legal defenses” by these borrowers caused “substantial injury” when the agreements reached presumably provided the borrowers with the opportunity to save their homes from foreclosure, and why such an outcome would not qualify as a “countervailing benefit to consumers” so as to outweigh the alleged injury.

Assuming that a servicer (or the investor it serves) has no legal obligation to offer a payment plan to a borrower in foreclosure status, what incentive does a servicer have to provide a foreclosure avoidance option for the borrower if it cannot at the same time obtain some satisfaction that the borrower will not try to place roadblocks in the path of foreclosure proceedings in the event the payment plan fails? Why should one of the core principles of dispute resolution — the settling of actual or perceived claims between the parties — be abrogated in the context of mortgage servicing?

To be clear, the consent order does not prohibit RCS from requiring borrowers to waive legal defenses in future payment plans, or other loss mitigation agreements. However, in order to pass the “fairness” test, RCS (and presumably all other servicers) must meet certain conditions. The consent order regulates future conduct by providing that RCS would be violating 12 U.S.C. §§ 5531 and 5536 by: “Requiring consumers to waive legal defenses as a condition of receiving any form of loss mitigation, except in the context of the resolution of a pending or threatened legal action, where RCS provides clear and conspicuous disclosure of the legal defenses the consumer is waiving and an opportunity for the consumer to review such disclosures[.]”

While this provision appears to provide a safe harbor to RCS (and other servicers), the devil is in the details. Reading this provision in the light most favorable to the borrower, as the CFPB would most likely do, requires careful note of the following:

1. It makes no difference if the consumer is represented by counsel or not.
2. There must be a pending or threatened legal action. This statement raises a number of questions.

a. Must the “pending or threatened legal action” be the one prosecuted by the servicer (e.g., the foreclosure action), or does it include a legal action brought or threatened by the borrower?
b. Is a waiver permissible in a nonjudicial foreclosure state, where there is normally no legal action “pending or threatened” by the servicer?
c. What does CFPB consider to be included within the phrase “legal defenses”? Is the phrase intended to exclude equitable defenses?
d. Does CFPB consider affirmative causes of action or claims a borrower could assert in his own lawsuit, or counterclaim to a foreclosure complaint, to be “legal defenses”?
e. However ill-defined, it seems a servicer (and its counsel) would have to identify every legal defense — either actually raised or that could be raised — and then include these in the “clear and conspicuous disclosure of the legal defenses the consumer is waiving.” This is likely to be very difficult, especially where litigation is simply threatened.
f. Catch-all waiver clauses may be unfair, even if there is also a detailed list of defenses clearly and conspicuously disclosed in the agreement.
g. A servicer would be acting unfairly by obtaining a waiver of defenses that it believes may be raised in a future action, if that action is not pending or threatened at the time of the waiver.

3. Does the “clear and conspicuous” requirement mean describing the legal defenses in larger or bolder font, or separate from the rest of the loss mitigation agreement?
4. If the consumer does not understand English, would the servicer have to provide the disclosure in the borrower’s native tongue in order for it to be “clear and conspicuous” to someone without an adequate command of English? Would this be at the servicer’s expense? And upon whom would the risk for translation errors fall?
5. There would have to be some waiting period while the borrower has the opportunity to contemplate the effect of the waiver. Given the sometimes tight foreclosure deadlines and last-minute negotiations, time is not always in abundance.

.
What appears on its face to be a bright-line prohibition, in fact, leaves a lot of room for interpretation. This is unfortunate given that many contested foreclosures are resolved by each party compromising its position, recognizing that a foreclosure sale may be the least desired outcome for all. Servicers may now be left with this unpalatable choice: negotiate a settlement that cuts off a borrower’s opportunities to challenge subsequent foreclosure action if the settlement fails, but risk the wrath of the CFPB for overreaching in the breadth and clarity of the waiver language; or, limit the scope of the litigation waiver to avoid CFPB sanctions, while leaving the borrower with plenty of options to disrupt and delay subsequent foreclosure efforts.

©Copyright 2015 USFN and Hutchens Law Firm. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

California: New Procedural Requirements for Demurrers, Including a Meet-and-Confer Process

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015

 

by Christine E. Howson
The Wolf Firm – USFN Member (California)

Demurrers are often the first line of defense for lenders, servicers, and foreclosure trustees sued by borrowers in California state courts. Similar in many respects to motions to dismiss filed in federal court cases, demurrers challenge the pleading of the complaint (or cross-complaint or answer) — such as whether the allegations sufficiently plead a cause of action.

On October 1, 2015 the governor of California signed into law SB 383 which, among other things, adds Section 430.41 to the California Code of Civil Procedure. Effective January 1, 2016, Section 430.41 imposes a number of new requirements in connection with the filing of demurrers. These requirements apply to all demurrers filed in civil actions in California state courts with the exception of proceedings for forcible entry, forcible detainer or unlawful detainer, or actions in which a party not represented by counsel is incarcerated.

The most notable provision in the new statute is the requirement that the demurring party and the party that filed the objectionable pleading meet and confer at least five days before the demurrer is filed. The statutory purpose of the meet-and-confer requirement is to determine whether an agreement can be reached resolving the objections (challenges) to the pleading that would be raised in the demurrer. If no agreement is reached as to all of the objections to the pleading, a declaration by the demurring party regarding the outcome of that process is required to be filed at the time of the filing of the demurrer.

Moreover, this new law also provides that if the parties are not able to meet and confer at least five days prior to the due date of the responsive pleading, the demurring party will have an automatic 30-day extension of time within which to file a responsive pleading by filing and serving (on or before the date on which a demurrer would be due) a declaration stating under penalty of perjury that a good-faith attempt to meet and confer was made, and explaining the reasons why the parties could not meet and confer. The statute also states that “[a]ny further extensions shall be obtained by court order upon a showing of good cause.”

Despite the mandatory language of this new statute pertaining to the meet-and-confer process in connection with the filing of demurrers, subdivision (a)(4) of Section 430.41 provides that even if the court determines “that the meet and confer process was insufficient, that determination shall not be grounds to overrule or sustain a demurrer.” Thus, Section 430.41 lacks any mechanism to hold the parties or their attorneys accountable for failing to comply in good faith with the meet-and-confer process. It remains to be seen whether the new requirement will significantly reduce the maintenance of frivolous and insufficiently pled complaints seeking to delay the foreclosure process.

©Copyright 2015 USFN. All rights reserved.
November/December e-Update

This post has not been tagged.

Share |
Permalink
 

United States Supreme Court Case: Wellness International Network, Limited v. Sharif: An Interplay between Separation of Powers and Consent

Posted By USFN, Monday, November 9, 2015
Updated: Tuesday, November 24, 2015

November 9, 2015

 

by Eddie R. Jimenez
Aldridge Pite, LLP
USFN Member (California, Georgia, Nevada)

In Wellness International Network, Limited v. Sharif, 575 U.S. __ (May 26, 2015), the U.S. Supreme Court issued its much-anticipated decision, addressing two issues regarding the bankruptcy court’s power to enter final judgments. Specifically, the Supreme Court decided: (1) whether an Article I bankruptcy judge has constitutional authority to enter a final judgment to determine whether an asset is property of the debtor’s bankruptcy estate when the decision requires reference to state alter-ego law; and (2) whether a party may expressly or impliedly consent to a final decision by a bankruptcy court when the court would otherwise lack authority to render such a ruling.

In 2009, Richard Sharif filed a chapter 7 bankruptcy petition in the Northern District of Illinois. Wellness International Network, Ltd. subsequently filed an adversary complaint against Sharif, objecting to his discharge and requesting a declaration that the trust which owned certain assets was Sharif’s “alter ego” and, therefore, the assets belonged to Sharif’s bankruptcy estate. Ultimately, the bankruptcy court entered judgment against Sharif, denying his discharge and declaring that the assets held in the trust were property of the bankruptcy estate.

Sharif appealed the bankruptcy court’s decision to the U.S. District Court and asserted, for the first time and after all briefing was completed, that the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 2; 131 S. Ct. 2594 (2011), rendered the bankruptcy court’s judgment unconstitutional because it lacked authority to enter a final judgment on the Stern (alter-ego) claim. The district court affirmed the bankruptcy court’s judgment, but the Seventh Circuit Court of Appeals reversed the district court, holding that the bankruptcy court lacked constitutional authority to enter judgment on Wellness’s state law alter-ego claim and that the bankruptcy court’s lack of constitutional authority cannot be waived.

The Supreme Court reversed the Seventh Circuit decision and held that the entitlement to an Article III adjudicator is a personal right that can be waived, and waiver of this right need not be express, and may be implied so long as the consent is knowing and voluntary. Based upon its holding, the Supreme Court remanded the case back to the Seventh Circuit to decide whether Sharif’s actions constituted knowing and voluntary consent, and whether Sharif forfeited his Stern argument on appeal.

In light of the Wellness decision, litigants need to make an early determination regarding whether to consent to the bankruptcy court adjudicating their dispute or, alternatively, to request a final judgment from the U.S. District Court and/or state court. As a party’s consent may be implied, if knowing and voluntary, it is advisable for parties to specifically indicate in the complaint or response to the complaint whether the party consents or objects to the bankruptcy court entering a final judgment regarding any Stern claims and/or file a “Motion to Withdraw the Reference to U.S. District Court.” Many bankruptcy courts have already attempted to remove the guesswork regarding the consent issue by adopting local bankruptcy rules, which provide procedures for parties to indicate whether they consent to the bankruptcy court issuing a final judgment on Stern claims.

Accordingly, after Wellness, parties must be mindful of not only the constitutional issues involved in their case but also of any local bankruptcy rules and/or procedures related to consent and Stern claims in bankruptcy litigation. Additionally, if a party chooses to have a final judgment issued by the U.S. District Court and/or state court, they must timely and repeatedly pursue an objection to a bankruptcy court issuing a final decision on any Stern claims in their case.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

United States Supreme Court Case: Bank of America, N.A. v. Caulkett + Bank of America, N.A. v. Toledo-Cardona: Chapter 7 Debtor Cannot “Strip-Off” or Void a Wholly Unsecured Junior Mortgage under Bank

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Linda J. St. Pierre
Hunt Leibert
USFN Member (Connecticut)

and

by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)

On Writs of Certiorari to the U.S. Court of Appeals for the Eleventh Circuit, the United States Supreme Court rendered a decision in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona, 575 U.S. ___ (June 1, 2015). The Supreme Court held that a debtor in a chapter 7 case cannot “strip-off” or void a wholly unsecured junior mortgage under section 506(d) of the Bankruptcy Code.

This decision stems from the cases of In re Caulkett, 566 Fed. Appx. 879 (2014), and In re Toledo-Cardona, 556 Fed. Appx. 911 (2014), where the debtors moved to strip-off or void the junior mortgages of Bank of America in their chapter 7 cases. In each of these cases, the bankruptcy court granted the debtors’ motions, which were upheld by both the District Court and the Court of Appeals for the Eleventh Circuit. After granting Bank of America’s Writ of Certiorari, the U.S. Supreme Court reversed the judgments of the Court of Appeals.

In its analysis, the Supreme Court stated that a debtor may strip-off a junior mortgage only if the bank’s claim is “not an allowed secured claim,” and that a claim filed by a creditor is deemed “allowed” under § 502 if no interested party objects; or if, in the case of an objection, the bankruptcy court determines that the claim should be allowed under the Bankruptcy Code. In this case, the parties agreed that the claims were allowed claims but disagreed on whether the claims were secured.

In upholding its prior decision in Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court stated that Dewsnup defined the term “secured claim” in § 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. Under this definition, § 506(d)’s function is reduced to “voiding a lien whenever a claim secured by a lien itself has not been allowed.” The Supreme Court rejected the debtors’ argument that Dewsnup should be limited to partially unsecured liens.

The Supreme Court held that a “secured claim” does not depend on whether a lien is partially or wholly underwater. Additionally, the Supreme Court rejected the debtors’ argument that § 506(d) could be redefined as any claim that is backed by collateral with some value. The Supreme Court reasoned that embracing that reading would give a different meaning to “secured claim” under § 506(a) and § 506(d). Lastly, the Supreme Court rejected the debtors’ argument that Nobelman v. American Savings Bank, 508 U.S. 324 (1993), controlled.

The Supreme Court observed that Nobelman involved the interaction between § 506(a) and § 1322(b)(2), which was an entirely separate provision. Further, the Supreme Court determined that to limit Dewsnup to that case would effectively give the term “secured claim” different definitions depending on the value of the collateral, and that doing so would effectively leave an odd statutory framework in place. If a court valued the collateral at one dollar more than the amount of the senior lien, the debtor could not strip the lien; but if it valued the property at one dollar less, the debtor could strip the lien.

As of the effective date of the Caulkett decision, debtors in chapter 7 cases will no longer be able to strip-off or void a wholly unsecured junior mortgage under § 506(d) of the Bankruptcy Code. Unfortunately, for those creditors who have had orders entered stripping their junior liens in chapter 7 cases since the Eleventh Circuit first decided In re McNeal, 735 F.3d 1263 (11th Cir. 2012), there is likely little remedy.

For cases involving statutory interpretation, the Supreme Court has long recognized the importance of being able to rely on prior decisions and the “equitable consequences of retroactive application.” See Chevron Oil Co. v. Huson, 404 U.S. 97, 107 (S. Ct. 1971). Although the Supreme Court did not eliminate the possibility of retroactive application by specifically stating its decision only applied to future cases [a technique called “sunbursting;” see Great N. Ry. v. Sunburst Oil & Ref. Co., 287 U.S. 358, 364 (1932)], the Supreme Court’s decision in Caulkett did establish a new principle of law by overruling the Eleventh Circuit case law allowing lien-strips in chapter 7 cases. See Huson, 404 U.S. at 106-07 [quoting Linkletter v. Walker, 381 U.S. 618, 629 (S. Ct. 1965)].

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

The Great "Relief from Stay" Myth

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Alan S. Wolf
The Wolf Firm
USFN Member (California)

A servicer sends a motion for relief from stay referral to its local counsel. Counsel prepares the motion, files it with the court, and eventually obtains relief from stay. The entered order is sent to the servicer; the file is closed in the bankruptcy workstation and sent to foreclosure. Sound familiar? It’s a process that the industry has largely followed for over 30 years. Unfortunately, the process is fraught with danger. It is based on the wrongful premise — passed down from one servicing generation to the next — that once the stay has terminated, the property is no longer subject to the bankruptcy. The truth is that despite the stay termination, the real property continues to be property of the bankruptcy estate, and bad bankruptcy things can (and do) happen. Servicers should not close their files when the stay has terminated but rather, and quite distinctly, should only close their files when the property is no longer property of the bankruptcy estate.

Generally, when a bankruptcy petition is filed, all property of the debtor becomes property of the bankruptcy estate. While property is property of the estate, the bankruptcy court has jurisdiction over that property. This means that absent bankruptcy court approval, a debtor cannot sell or encumber the property and cannot enter into loss mitigation agreements regarding the property, nor can the debtor use any rents generated from the property. Additionally, this means that the property can be affected by plans (such as a chapter 13 cure-and-maintain plan or a chapter 11 or 13 cramdown), as well as by adverse motions (such as motions to sell free and clear of liens). In short, during the time that the property is property of the estate, the property can be adversely affected by the bankruptcy.

There are ways that the property is removed from the estate but, as noted above, an order terminating the stay is not one of those ways. The three most common manners in which property is removed from the estate are as follows: (1) when the case is dismissed; (2) when the case is closed; or (3) when the property is sold and the debtor no longer retains an interest in the property [such as a voluntary sale from the debtor to a third party or a foreclosure sale without redemption rights].

The property can also be removed from the estate in a variety of other less common ways including: (1) an order abandoning the property; (2) an order confirming a bankruptcy plan, unless the plan states otherwise [for tactical reasons most debtors state otherwise in their plans and specifically provide that the property does not revest in the debtor until the discharge at the end of the plan]; (3) an order merely closing the estate [as opposed to an order closing the entire case]; and (4) possibly where the property is wholly exempt [such as states that have homestead exemptions, which exempt the property regardless of value]. In addition, some courts have local court rules that close the estate at various other times.

Understanding that property continues to be property of the estate after stay termination also helps to decipher a number of additional issues that can confuse servicers. For example, the reason that payment change notices must continue to be sent after stay termination is because despite the stay termination, the property is still property of the bankruptcy estate. Absent a court order or local court rule specifically waiving the requirement, the notices need to be sent until the property is removed from the estate under one of the methods described above. Similarly, costs and fees need to be updated even after stay termination and until removal of the property from the estate.

The process of closing a bankruptcy file once the stay has terminated is misplaced and dangerous. Servicers should have in place a policy that the bankruptcy rules are to be followed, and the bankruptcy case is to continue to be monitored until the property is no longer property of the estate.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

National Chapter 13 Form Plan Project

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)

Just when all of the issues and ambiguities arising from the 2011 federal bankruptcy rule changes have been resolved (pardon the wishful thinking of this author), a chapter 13 form plan (referred to here as the Official Form Plan or OFP) has completed two rounds of public comment. In addition, effective implementation of the form plan will require conforming amendments to Federal Bankruptcy Rules 2002, 3002, 3007, 3012, 3015, 4003, 5009, 7001, and 9009.

According to U.S. Bankruptcy Judge Eugene Wedoff (N. Dist. Ill.), the lack of a national form makes it difficult for lawyers who practice in several districts, adding transactional costs that are passed on to debtors. Moreover, a recent survey of the bankruptcy bench established that a majority of chief bankruptcy judges support developing a national form plan and simultaneous amendments to the bankruptcy rules to harmonize practice among the courts and to clarify certain procedures.

The Official Form Plan is divided into ten parts. In addition, there are two exhibits: one for lien avoidance, and one for showing feasibility of the plan. Some of the parts relevant to mortgage servicers are:

 

  • Part 1 – Notice to Interested Parties
  • Part 2 – Plan Payments and Length of Plan
  • Part 3 – Treatment of Secured Claims, along with subsections 3.1: Mortgage Arrears; 3.2: Treatment of Secured Claims (only effective if warning box in Part 1 is checked); 3.3: Hanging Paragraph Claims; 3.4: Lien Avoidance (only effective if warning box in Part 1 is checked); and 3.5: Surrender of Collateral
  • Part 7 – Order of Distribution of Trustee Payments, along with subsection a: Trustee’s Fee
  • Part 9 – Nonstandard Plan Provisions
  • Part 10 – Signatures

 

Fortunately, the OFP and rule changes in their present form take into consideration input from creditors and their attorneys after meetings, mini-conferences, and conference calls. For instance, the early draft of the plan and rules provided that in the event of a conflict between the plan and the proof of claim, the plan would control. Putting aside for a moment the fact that 11 U.S.C. 502(a) provides that a claim is deemed allowed unless a party in interest objects, and the fact that a bankruptcy rule cannot trump a section of the Bankruptcy Code, consider that a debtor rarely knows the correct amount of the mortgage arrears. Of course, one of the consequences of a provision that the plan controls would be a significant increase in the number of objections to confirmation that would need to be filed. The latest draft of the plan provides that the amounts listed on a proof of claim with respect to the monthly payment and the amount of arrears will control over contrary amounts listed in the plan. Therefore, a debtor will need to object to the claim to contest those amounts, consistent with Section 502(a) of the Bankruptcy Code. On the other hand, the current draft of Rule 3015(g) provides that the plan will control other aspects of the claim’s treatment.

Rule 3001(c)
There is a perception that the chapter 13 process would improve if proofs of claim were filed before plan confirmation. But mortgage servicers participating in the rulemaking process expressed concern with the proposal by the Chapter 13 Form Plan Working Group (Working Group) to change the bar date to sixty days after the filing of the petition. Specifically, while servicers felt sixty days may be sufficient time to determine the amount of arrears, it might not be an adequate period within which to produce other supporting documentation required under Rule 3001.

The latest draft of Rule 3001(c) provides that for a claim secured by the debtor’s principal residence, the bar date is bifurcated. So a proof of claim will be considered timely if it is filed within sixty days of the petition date and includes the mortgage proof of claim attachment required by Rule 3001(c)(2)(C). The documentation required by Rule 3001(c)(1) and (d) may be filed as a supplement not later than 120 days after the petition.

Several questions and issues are created by this latest amendment. First, does the provision now cap the amount of time for amending or supplementing the proof of claim? Second, when a creditor supplements its original claim to add documents, is it allowed to add documents only, or can it also amend the amounts listed in the original claim? A reasonable argument can be made based on the current draft of Rule 3002(c) that a creditor can only add documents when supplementing the original claim. Consider further that this bifurcated process means that both the servicer and its law firm will have to touch the file at least twice to complete the proof of claim process.

Many of the comments submitted during the public comment periods have been highly critical of having a bifurcated or dual bar date and have instead suggested that the Rules Committee adopt a bar date of ninety days after the filing of the petition.

Adequate Protection
With regard to adequate protection, the Working Group is currently discussing a separate form, as opposed to including a provision in the plan for adequate protection payments. The Official Form Plan allows for nonstandard provisions under Part 9. However, any nonstandard provisions will only be effective if the appropriate box on the first page of the OFP (see Part 1) is checked, indicating the presence of nonstandard provisions. Moreover, Part 10 of the OFP, the signature box, includes language so that the debtor’s attorney (or the debtor, if appearing pro se) can certify that the plan is identical to the OFP except for any nonstandard provisions contained in Part 9.

Termination of Stay
Section 3.1 of the proposed OFP, read together with the Committee Notes for Section 3.1, indicates that upon termination of the stay, the provisions of Rule 3002.1 will no longer apply, as the plan doesn’t provide for the treatment of the claims under 11 U.S.C. § 1322(b)(5) (curing arrears and maintaining current payments).

The latest version of the OFP provides that along with surrender of the collateral, the debtor consents to termination of the automatic stay and co-debtor stay at confirmation. This is an improvement over previous versions of the OFP where these provisions appeared in the Committee Notes. Moreover, previous versions of the OFP did not mention the co-debtor stay under Section 1301 of the Bankruptcy Code, which was also a major omission of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Nevertheless, it is still not clear how the debtor consents to termination of the co-debtor stay, especially when the co-debtor is not participating in the case, or may not be represented by counsel. Further, does consenting to relief mean that the stay is lifted upon confirmation?

The NACTT Mortgage Committee has suggested the following language to the Working Group to help clarify that the stay is indeed lifted: “Upon confirmation of the Plan, any stay created by the filing of the petition pursuant to 11 U.S.C. §§ 362 and 1301 shall be deemed modified to allow in rem disposition of the collateral to effect the surrender without further order of the bankruptcy court.”

Unfortunately, the Advisory Committee was unwilling to alter the language in the OFP regarding the co-debtor stay.

Other Rule Amendments
Rules 2002 & 3015(f) — The Working Group has proposed an amendment to Rule 3015(f) that would require chapter 13 confirmation objections to be filed at least seven days prior to the confirmation hearing. Rule 2002 currently requires twenty-eight days’ notice of the time to file an objection to confirmation. Therefore, Rules 2002 and 3015(f) together would impose a thirty-five-day notice period before the confirmation hearing, which the Working Group considered to be excessive, especially for a pre-confirmation modification. Thus, to keep the notice period at twenty-eight days, in light of the new time period delineated in Rule 3015(f), Rule 2002 is being amended to require twenty-one days’ notice of the time to file objections to confirmation.

Rule 3002 — This rule has been amended to clarify that creditors must file a proof of claim to have a secured claim and receive distributions. As previously discussed, Rule 3002(c)’s proposed sixty-day bar date has been adjusted to provide additional time to file supporting documentation for mortgage claims when the subject property is the debtor’s principal residence. Furthermore, additional language now clarifies that the bar date runs from the time of conversion of a case to chapter 12 or chapter 13. Finally, the language providing for an explicit exception to the bar date when the debtor fails to timely file a list of creditors’ names and addresses under Rule 1007(a)(1) has been refined.

Rules 3012 & 4003(d) — Rule 3012 is amended to provide that the amount of secured claims may be determined in a plan, subject to objection, thus removing the need for a motion as required by the present Rule 3012. However, as previously stated, with respect to the amount of mortgage arrears, a proof of claim will control over a contrary amount in the plan. Further, the plan will not control the amount of a priority claim, or a contrary claim filed by a governmental unit.

At the September 2012 meeting of the Advisory Committee on Bankruptcy Rules (Advisory Committee) in Portland, Oregon, the committee discussed drafts of the OFP and rule amendments prepared by the Working Group. One amendment was a proposed amendment to Rule 4003(d) providing that — consistent with amended Rule 3012 — chapter 12 and chapter 13 plans could seek the avoidance of liens encumbering exempt property pursuant to Section 522(f) of the U.S. Bankruptcy Code, provided the plan was served pursuant to Rule 7004. This is one proposed amendment where the draft version has not changed since the Portland meeting.

Rule 9009 — This rule will be amended to ensure use of the OFP (and other Official documents) without alteration, except as otherwise provided in the rules or in a particular Official Form.

The Next Step
The latest meeting of the Advisory Committee was held on April 20, 2015 in Pasadena, California. Among other things, the committee discussed the adoption of Form 113, the national form chapter 13 plan.

The Advisory Committee took into consideration the number of comments against the adoption of a mandatory plan that were received during the latest round of public comments that ended in February 2015, including a comment submitted by 144 judges (approximately forty percent of the bankruptcy bench), along with a compromise proposal (Compromise) with an opt-out provision endorsed by nine individuals, including several creditor attorneys, judges, and trustees. The Advisory Committee voted almost unanimously in favor of a form of compromise. One feature of the Compromise is that instead of an initial sixty-day deadline to file a proof of claim, and then an additional sixty days to supplement for documents for claims involving the debtor’s principal residence, there would just be one uniform seventy-day deadline. In addition, the Compromise provides for clearer and stronger language that terminates the co-debtor stay at confirmation when the debtor’s plan provides for surrender of the collateral.

The Working Group spent the summer reviewing and refining the Compromise. By the time that this article is published, the Advisory Committee will have met on October 1-2 in Washington, D.C., to consider and vote on a refined compromise, along with a recommendation from the Working Group as to whether there is a need for re-publication. If there is no need for re-publication [i.e., because the Compromise (as refined) represents a lesser-inclusive change and a comment than the original proposal], this will still allow the entire package of the plan and rule changes to go into effect in December 2016.

Additionally, when the rule changes go into effect in 2016, Fed. R. Bankr. P. 3002.1 will be modified to provide that compliance with that rule is not required after termination of the automatic stay.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

How the Default Servicing Industry can Leverage Technology to Maintain Compliance

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Adam Hansen
COO and CIO
assure360
USFN Associate Member

In our transitioning industry, a rapidly evolving regulatory environment is exerting intense pressure on mortgage servicing companies to satisfy existing and emerging compliance requirements. Some organizations have been reluctant to implement much-needed technology solutions, for fear that such a move will increase exposure to data breach. The reality, however, is that technology is an asset, not a liability, and leveraging technology solutions can efficiently and effectively maintain provable compliance, while enhancing information security and increasing productivity and efficiency.

Still, integrating new technologies into an existing operation should be a strategic and deliberate process. Decision makers should be familiar with the basic principles of vetting a third party technology provider, and should have a basic understanding of the ways in which technology solutions can enhance efficiency, flexibility, and accessibility. They should also have a working knowledge of the accepted best practices and policies to keep data secure, including data storage requirements and change management processes.

Mostly Cloudy

While cloud-based technology solutions can provide a significant boost in terms of workflow, efficiency, and compliance, not all clouds are the same. Default servicing decision makers should recognize the differences between public, private, and hybrid cloud solutions. Although public cloud providers (such as Amazon, Microsoft, or Google) are generally more affordable, they tend to lack the customization options, greater flexibility, and enhanced security profile of private cloud options. And while private cloud platforms are almost always going to come in at a higher price point than public options, the overall cost will still be significantly less than funding a full in-house IT department.

Nuts and Bolts
When evaluating comprehensive technology solutions, default servicing firms need to carefully weigh their need for systems and software that are sufficiently flexible, adaptive, and responsive to keep up with regulatory changes — alongside their need for tools that provide appropriately robust security and compliance functionality. Details matter here. Operational and structural dynamics such as file change protocols and procedures; documentation and dating requirements; built-in access limitations; step-dependent processing; and other security measures, as well as data management and reporting functionality, should all be thoughtfully reviewed.

Costs and Consequences
Even the most powerful technologies have to make sense from a budgetary standpoint. One factor that should play a key role in that analysis is the flexibility of the system/tool under consideration. Because of the ambiguity, uncertainty, and differing interpretations of new regulatory mandates (an unfortunate part of today’s professional landscape), default servicers should be wary of adopting new technologies that do not provide sufficient customization options. With customization, meeting the differing requirements of clients and professional partners with respect to auditing and reporting can be less costly and time consuming, as compared to adopting multiple separate systems to accommodate individual clients.

Secure and Transparent

In a compliance-minded industry, technology solutions that deliver strong reporting functionality, optimum transparency, and provable compliance are preferred. Tech tools should minimize downtime and drastically reduce the resources dedicated to audits and other compliance functions. Customized reporting is a big part of that: automated reports that can be generated based on a wide range of parameters — all at the push of a button. Step-driven processes that make a system more secure are also important, as they can reduce or eliminate avoidable errors and minimize delays. The best technology solutions also excel at change management. In an evolving regulatory landscape, the ability to test and evaluate potential process and workflow changes in a secure environment is vital.

Transition Oversight
Risk management is always a priority when it comes to managing technology tools, and that priority looms especially large during periods of transition. While integrating new technology platforms and case management systems may lead to some short-term challenges, the long-term security and compliance benefits will almost always reduce exposure relative to a traditional IT infrastructure.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

Alternative Objections to Chapter 13 Cramdowns

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by Craig Rule and Ryan Byrd
Orlans Associates, P.C.
USFN Member (Michigan)

When faced with a proposed cramdown in a chapter 13 case, many mortgage servicers and their attorneys focus primarily on value and interest rate when objecting to confirmation of the plan. There exist, however, a number of other potential objections to confirmation which, depending on the facts of the case, could result in more favorable cramdown terms, or even the complete abandonment of the cramdown attempt by a debtor. This article looks at two of these other possible objections to cramdowns that may not always be on the radar of servicers and their attorneys.

Bait And Switch: A Debtor’s Principal Residence

Beyond value and interest rate, it is important for a mortgage creditor facing a cramdown to investigate whether the claim is protected by 11 U.S.C. § 1322(b)(2), which prohibits cramdowns and other modifications of a debtor’s principal residence. Among the most crucial questions is timing: at what point must a property be a debtor’s principal residence to qualify for the protections of 11 U.S.C. § 1322(b)(2)? Bankruptcy courts have generally adopted a bright-line test, with a majority of courts finding that the relevant date is the bankruptcy petition filing date. A minority of courts reach back to the date that the loan was originated. See In re Baker, 398 B.R. 198, 202 (Bankr. N.D. Ohio 2008).

In recent years, however, it has become common for debtors in jurisdictions that have not adopted the loan origination standard to move out of their residences shortly before or after the petition date in attempts to avoid the application of 11 U.S.C. § 1322(b)(2). Often, these debtors fully intend to move back into the properties after confirmation or plan completion, and bide their time by renting the property, usually to a relative or close acquaintance. On its face, this scheme appears to fly in the face of 11 U.S.C. § 1322(b)(2), which is intended to protect the mortgage market from principal residence cramdowns. See Nobleman v. American Savings Bank, 508 U.S. 324, 332 (1993) (J. Stevens, concurring). A strict adherence to a bright-line standard of the petition date (or even the confirmation hearing date) to determine principal residence results in a debtor, nevertheless, being able to cramdown in the situations mentioned above.

To avoid this apparent loophole, some bankruptcy courts have loosened the bright-line petition date standard to adopt one that looks more to the totality of the circumstances. Confronted with debtors who moved out of their residence and into a previous rental property two months after filing a chapter 13 case, the bankruptcy court in In re Kelly, 486 B.R. 882 (Bankr. E.D. Mich. 2013), found that the latter property was the debtors’ principal residence under 11 U.S.C. § 1322(b)(2). In reaching this conclusion, the Kelly court opined that relying solely on a single date, such as the petition date, to determine principal residence would be “subject to manipulation” and would do “a disservice to 11 U.S.C. § 1322(b)(2)”. Id. at 886. Accordingly, the Kelly court fashioned a six-part test that not only considered where the debtors lived on the petition date but also where the debtors intended to live during and after their bankruptcy case.

At least one other court, the bankruptcy court in In re Baker, 398 B.R. 198 (Bankr. N.D. Ohio 2008), has exclusively employed a hybrid approach to this question. Although the Baker court was not faced with the specter of debtor manipulation of the circumstances to evade application of 11 U.S.C. § 1322(b)(2), it determined that changing circumstances between the time of loan origination, and that of the bankruptcy petition date, required something more nuanced than a bright-line test and adopted a hybrid method that looks to the facts on both dates. Id. at 203. Applying this approach, the court determined that 11 U.S.C. § 1322(b)(2) prevented modification because the inclusion of a second parcel of real property into the mortgage at loan inception was intended to only be a temporary attribute of the agreement and, at the time that the bankruptcy case was filed, the loan was actually only secured by the debtors’ residence. Id. at 204.

Anytime a cramdown is proposed, mortgage creditors and their attorneys should carefully review the schedules and statement of financial affairs to determine if the debtor has recently moved. Question 15 of the statement of financial affairs (Official Form 7), for example, requires a debtor to list all addresses in the past three years. The answer to this question can be compared to the certificate of credit counseling to determine whether the move happened after meeting with a bankruptcy attorney. If this initial inquiry indicates that a debtor may have moved in contemplation of bankruptcy, an objection should be filed and relevant information (including rental agreements, rent payment receipts, municipal rental registrations, and utility bills for the property) should be requested from the debtor’s counsel. Further informal discovery can be obtained through attendance at the meeting of creditors, and an objecting creditor can request formal discovery and an evidentiary hearing from the bankruptcy court. Even if a judge has previously adopted one of the bright-line standards, it might be possible to change his or her mind if presented with facts that strongly infer that a debtor has manipulated the circumstances to avoid 11 U.S.C. § 1322(b)(2).

A Bad Faith Cramdown

A cramdown also may be successfully challenged if a debtor’s plan has not been proposed in good faith. Among other requirements, the Bankruptcy Code mandates that a debtor’s plan be proposed in good faith in order to qualify for confirmation. 11 U.S.C. § 1325(a)(3). If a debtor or a debtor’s dependent does not reside at the property, a cramdown may have been proposed in bad faith if the property does not deliver a net benefit to the bankruptcy estate. In re Brinkley, 505 B.R. 207 (Bankr. E.D. Mich. 2013); In re Jordan, 330 B.R. 857 (Bankr. M.D. Ga. 2005). To make this determination, the court will look at the monthly income that the property generates (most likely from rent) and then subtract the monthly payment by the chapter 13 trustee on the secured portion of the debt, any monthly homeowners or condominium association fees, and the monthly pro-rata taxes and insurance. Brinkley, 505 B.R. at 215-216. If the result is not a positive number, and the debtor cannot provide any other good faith justification for retention of the property, then the debtor will not be permitted to retain the property. Id. at 216.

When reviewing a proposed cramdown, mortgage servicers and their attorneys should have most of the information on hand necessary to make a rough version of the calculation on which the Brinkley court relied. The proposed monthly payment on the secured portion of the claim may be set forth in the plan or be easily calculated. If a debtor’s schedules are complete, the remainder of the information can be obtained in Schedule G (Executory Contracts and Unexpired Leases), Schedule I (Income), and Schedule J (Expenses).

In a very significant number of cases, this calculation results in a negative number. Even if there is a net benefit to the bankruptcy estate based on initial numbers, those can change as a consequence of a higher valuation, interest rate, or pro-rata monthly expense, or a decrease in rent. Consequently, it is recommended to preserve this bad faith objection by filing it timely and then requesting documentary verification of expenses and rent from the debtor’s attorney. While a successful challenge to a cramdown using bad faith will often compel a debtor to surrender the collateral, it could potentially result in the claim being treated as a 11 U.S.C. § 1322(b)(5) claim (maintain post-petition payments and cure pre-petition arrearage), if the total monthly payment is not excessive, or some other arrangement that allows a portion of the debt to extend beyond the length of the chapter 13 plan.

Conclusion

When reviewing a plan that proposes a cramdown, objecting to a “bait and switch” scheme and “bad faith” are options that creditors and their attorneys should always consider if the facts point toward either scenario. Keeping these two potential objections in mind when faced with a proposed cramdown could lead to much more favorable results at confirmation.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

STATE-BY-STATE: Kentucky: Note Transfers & the Assignment Recording Statute

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

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

The federal Sixth Circuit Court of Appeals has ruled that a transfer of the note amongst MERS members does not trigger the requirement under Kentucky law to record an assignment of the mortgage. In a 3-0 decision, the Sixth Circuit analyzed Kentucky’s mandatory assignment recording statute, KRS 382.365, and determined that it only applies to written transfers of the mortgage and not to transfers of equitable interests held by a noteholder. A class action suit had been filed against MERS asking for damages of $500 for each assignment of mortgage that was not filed within thirty days of the transfer of the note. This would have resulted in millions of dollars of damages to MERS, and a dismantling of the MERS system in Kentucky.

The Facts — The case, Higgins v. BAC Home Loans Servicing, LP, 2015 U.S. App. LEXIS 12275, 2015 FED App. 0153P (6th Cir. Ky. 2015), stems from a putative class action filed by a homeowner (Higgins) seeking damages because his mortgage was with MERS, but his note was sold to various MERS members. KRS 382.365(2) requires an assignee of a mortgage to record the assignment within thirty days of the assignment. The law authorized Higgins to seek monetary penalties against a mortgagee who fails to comply with this statute.

Higgins asserted that the “mortgage follows the note,” creating an equitable transfer of rights in the mortgage every time a note is sold. Higgins contended that this transfer triggers the requirement to record an assignment. MERS moved to dismiss the case, maintaining that the legislature only intended for written assignments of the mortgage to be recorded, not the transfer of equitable rights that occurs when a note is transferred. The Eastern District of Kentucky sided with Higgins and determined that MERS had a duty to record an assignment every time a note was transferred.

The Sixth Circuit reversed the district court and held that the Kentucky legislature only intended that written assignments of mortgage be recorded with the county clerk. Notes and mortgages are treated differently under Kentucky law, so that the recording statute for mortgages did not apply to transfers of the note under Kentucky’s Uniform Commercial Code. If case law created an equitable transfer of the mortgage, this was not sufficient to trigger the recording statute for mortgages.

Key Points — The Sixth Circuit reiterated Kentucky law: the holder of a note has the power to enforce the mortgage, even in the absence of a written assignment of mortgage. The Sixth Circuit also gave a major victory to MERS and its system by making it unnecessary to record an assignment whenever a note is transferred amongst MERS members.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

STATE-BY-STATE: Kentucky: Nonjudicial Foreclosure Option under Consideration

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

by David E. Johnson
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)

During its 2015 regular session, the Kentucky General Assembly introduced House Bill 470 to add nonjudicial foreclosure as an option in Kentucky. Although the bill was subsequently withdrawn, it is expected to be reintroduced in 2016 and represents a marked departure from this state’s historical approach to mortgage enforcement. Kentucky long ago abolished the practice of “strict foreclosure” and requires a judicial process to foreclose a mortgage lien while protecting the homeowner’s equitable right of redemption.

The proposed new regime would add a nonjudicial foreclosure option by recrafting new mortgage originations as deeds of trust with a power of sale. This would not affect already-existing mortgages, and it would not eliminate current judicial foreclosure procedures. Rather, upon a default under a deed of trust, the beneficiary would have the option to pursue either judicial or nonjudicial recourse against the borrower. If it chooses the nonjudicial option, the borrower can still demand that the judicial process be used instead, and other parties objecting to the nonjudicial process can file suit to enjoin a trustee’s sale under certain conditions. Thus, the two systems are not mutually exclusive and appear likely to overlap. Interestingly, unlike existing judicial foreclosure statutes, the proposed law would provide for no right of redemption when a property is sold nonjudicially by a trustee.

This bill enjoys significant support from the Kentucky Bankers Association, whose members seek to reduce the expenses of foreclosure and to expedite the lien enforcement process. The streamlined notice procedures outlined in the new bill would enable a beneficiary to get to a sale date faster, while preserving the parties’ rights to resort to the courts, if necessary, to protect their interests. Certain other aspects of the process, such as distribution of surplus proceeds, appear to be reserved specifically for the courts, although there are some unanswered questions in the draft bill about exactly how this would work. In other words, there is some degree of hybridization contemplated between the new and old systems. The ability to pursue loss mitigation would remain, but the shorter timelines can be expected to put more onus on the borrower to pursue a resolution sooner before the abbreviated nonjudicial process can run its course.

For firms practicing foreclosure law in Kentucky, the proposed legislation can be expected to require substantial changes in existing procedures, forms, policies, and training of both attorneys and support staff. The notice requirements and procedural steps to complete a nonjudicial foreclosure will be very exacting and create ample pitfalls for the unwary. Also, the nonjudicial method will require a mechanism to coordinate with the judicial side of a practice when a party to an otherwise nonjudicial case invokes the jurisdiction of the courts. After enactment of the final version of the bill, firms should have a window of opportunity to make the necessary adjustments before seeing the first defaults under the newly-minted deeds of trust.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

HOA Talk: Illinois — The 1010 Lake Shore Ass’n Case and the Need to Pay Post-Judicial Sale Condominium Assessments on Time

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

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

The Appellate Court of Illinois, First District, Second Division, decided a case [1010 Lake Shore Association v. Deutsche Bank National Trust Co., No. 1-13-0962 (Ill. App. Ct. Aug. 12, 2014)] that compels servicers to reevaluate the way they view unpaid condominium assessments that became due prior to the foreclosure sale.

Under the Condominium Property Act [765 ILCS 605/9(g)(3)], a lender (or any other party) that purchases a condominium at a judicial foreclosure sale is responsible for payment of the unit’s proportionate share of common expenses assessed from the first day of the month following the sale. The question then becomes “what happens to those unpaid assessments that became due prior to the sale?” It has commonly been presumed, and common sense dictates, that having named the condominium association in the foreclosure extinguished this lien with no further action. The First District, however, disagreed. [Justice Liu, in a well-written dissent, also takes the position that naming the association extinguishes their lien and bars them from any further claims.]

In 1010 Lake Shore, the foreclosing mortgagee was the highest bidder at the foreclosure sale. After the sale, they were disputing the assessments on the property that were due prior to the completion of the foreclosure action. As a result, the mortgagee withheld payment of assessments — including those due after the sale occurred. The appellate court held that the duty to pay the current assessments exists independently of the prior assessments, and then stated that failing to pay the current assessments would revive the previously extinguished pre-sale assessments, leaving the mortgagee liable to pay those as well.

This is a significant win for the condominium associations, who have been stretching this opinion as far as they can to obtain all past-due assessments. In creating this duty to pay, the decision in 1010 Lake Shore does not confer a legally cognizable right in the property (the winning bidder must still obtain an order approving sale), but ominously punishes bidders as if it did. This has led to nightmarish situations for lenders because the holding does not set parameters as to when a payment actually extinguishes the lien.

After discovery of an association, new steps must be taken to ensure the extinguishment of their lien. Including them in the foreclosure no longer guarantees an extinguishment.

Servicers should obtain the amount of the current monthly assessments at, or about, the time of the foreclosure sale. At this point, under 1010 Lake Shore, the purchaser of the unit at the foreclosure sale must focus on the payment due on the first day of the month after the sale took place. Failure to make that payment risks allowing the previously extinguished pre-sale assessments to be revived. Any disagreement with prior assessments must be handled independently of the post-sale assessments in order to avoid the risk of being responsible for all assessments.

Often associations will not disclose any information until a deed is recorded. This occurs well after the first day of the month following the foreclosure sale — and does not stop the same association from suing the lender for the full amount of the condominium lien after confirmation, contending that the lender failed to tender timely payments. The same problem exists in the form of overcharging. If a lender takes the time to contest an overcharge, the association may acquiesce on the initial demand, but will then argue that the pre-foreclosure condominium liens are revived due to the lapse in time.

For that reason, proactive steps must be taken to demonstrate compliance with the Condominium Act — and adherence to 1010 Lake Shore. The certificate of sale should entitle the purchaser to obtain the information. If the association refuses to provide the purchaser with the necessary information after having requested it in writing, argument can be made that the association’s refusal to provide the necessary information estops them from a 1010 Lake Shore argument.

On January 27, 2015, the Illinois Supreme Court granted certiorari and will review the First District’s decision in 1010 Lake Shore. At the time of the writing of this article, oral argument was heard on September 24 and a decision from the Court is expected within the next few months. While it is hoped that the Supreme Court will take a more reasonable approach, it is best to avoid becoming involved in the predicament that the First District’s decision presents.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

BANKRUPTCY UPDATE: NACTT Annual Conference 2015

Posted By USFN, Monday, November 9, 2015
Updated: Wednesday, November 11, 2015

November 9, 2015

 

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

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in scenic Salt Lake City, Utah this past July. While there continued to be focus on mortgage issues, other topics (including recent U.S. Supreme Court decisions affecting chapter 13 practice and broader bankruptcy issues) took center stage at the event. This article is intended to highlight a few of the educational offerings and events of interest to the mortgage servicing industry.

Opened by U.S. Trustee

As in recent years, the Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. Director White began with a rather ominous statement of looking forward to the day when he opened the conference without comments directed at the mortgage servicing industry. Unfortunately, he went on, this was not that day, and compliance by mortgage servicers was still an issue three years after the national mortgage servicing settlement (NMSS) had been in effect.

Director White commented that all of the regional offices of the UST were monitoring compliance of servicer proofs of claim and the Federal Rule of Bankruptcy Procedure (FRBP) 3002.1 notices. There was a particular focus in the past year by the UST offices with regard to FRBP 3002.1(b) Notice of Payment Changes (NPC). Highlighted in the director’s remarks was a case in the Eastern District of Michigan in which the UST’s office intervened to investigate a servicer that had filed an NPC that tripled the ongoing mortgage payment. After the servicer could not substantiate the change, the UST’s office and the servicer entered into a $50 million settlement agreement in which the servicer agreed to remediate its practices, subject to independent review. With the vast number of NPCs required nationally, UST scrutiny on servicer practices in this area is likely to continue. Despite these adverse remarks, Director White did comment that he is seeing some improvement in servicer practices in general and, especially, in regards to cooperation.

Apart from mortgage servicer practices, the UST’s office has recently focused on buyers of credit card and other unsecured debt (and their collection practices) in chapter 13 cases. Director White commented that debtors’ fresh starts were being interfered with by this practice and that his office was closely scrutinizing it. The problem occurs when debt purchasers do not review accounts to determine whether collection is barred by a statute of limitation and then file a proof of claim for the debt. This problem, along with suspected robo-signing of the claims, will continue to be a focus of the UST program.

Educational Program
Highlights of the educational program were a session on recent U.S. Supreme Court decisions impacting bankruptcy court jurisdiction and other areas of bankruptcy practice; a panel addressing current mortgage servicing issues, including the impending changes to the proof of claim form and attachment; bankruptcy judges Brown’s and Lundin’s and chapter 13 Trustee Hildebrand’s entertaining and informative chapter 13 case update; as well as a session on how the Consumer Financial Protection Bureau (CFPB) affects chapter 13 practice.

Attorney G. Eric Brunstadt, Jr. surveyed the history of jurisdiction of bankruptcy courts leading up to the recent Supreme Court’s decision in Wellness International Network v. Sharif, 575 U.S. __, 135 S. Ct. 1932 (May 26, 2015). Following the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 2, 131 S. Ct. 2594 (2011), bankruptcy court jurisdiction was somewhat unsettled, leading to uncertainty about the extent to which parties could rely on bankruptcy courts to adjudicate certain claims.

In Stern, the Supreme Court held that while bankruptcy courts had the statutory authority under 28 U.S.C.S. § 157(b)(2)(C) to enter a judgment on a debtor’s core state law counterclaim (a counterclaim for an alleged tortious interference with a gift was involved in Stern), they lacked constitutional authority under Article III of the United States Constitution to enter a judgment. The Supreme Court said that this was because Article I bankruptcy courts were not subject to constitutional assurances of independence (i.e., life tenure of judges and non-diminishment of salaries) which would allow adjudication of such claims.

Left open by Stern was the question of whether parties in bankruptcy could cure the lack of constitutional authority by consenting to the entry of a final order by a bankruptcy court. If not, a party would be faced with the decision of either requesting that the district court withdraw the reference so that it could try the matter instead of the bankruptcy court, or having the bankruptcy court hear the matter and make proposed findings of fact and conclusions of law to be submitted to the district court. In Wellness, the Supreme Court calmed the unsettled state of bankruptcy jurisdiction by finding that parties could indeed consent to a bankruptcy court entering a final order on so-called “Stern claims.”

In so holding, the Supreme Court found that the constitutional right to have an Article III judge hear such claims is a personal right that can be waived by either express or implied consent of the parties. In Wellness, the Court appears to have limited the effect that the Stern decision had on bankruptcy court jurisdiction.

A panel of interest to the industry included a presentation on mortgage servicing issues by Russell Simon, standing chapter 13 trustee for the Southern District of Illinois; attorney Michael Bates (formerly Senior Legal Counsel for Wells Fargo Bank, N.A.); attorney John Crane; and Eduardo Rodriguez, Judicial Appointee for the Southern District of Texas. With the sunset of the NMSS on October 5, 2015, the group posed the question of whether the industry had learned anything from the NMSS requirements. The consensus of the panel was that, at least with the five servicers who were parties to the NMSS, mortgage servicing had significantly improved. Areas of improvement could be seen in a renewed emphasis in accuracy, increased transparency, robust internal compliance programs with multiple testing criteria, and in greater cooperation with compliance monitors.

In bankruptcy, the NMSS shifted the focus to getting documents (motions for relief from stay, proofs of claim) right at the time of filing, instead of in the speed of getting them filed. The NMSS also has had positive effects in industry practices outside of the consenting servicers, as other servicers have voluntarily complied with the NMSS standards. The panel was of the opinion, that as an industry standard for “best practices,” NMSS quality controls would continue into the future to maintain the improvements seen in the servicing industry.

Trustees, Servicers, and Attorneys

Apart from the NACTT panels, a meeting of a group of trustees, mortgage servicers and their attorneys was held during the conference to discuss issues relating to mortgage servicing in chapter 13 cases. This meeting was a continuation of an effort initiated in Little Rock, Arkansas in January 2004 by this author’s firm and its founder, the late Robert Wilson, Jr., to bring together chapter 13 trustees, mortgage servicers, and attorneys to provide open communication on issues affecting mortgages in chapter 13 proceedings. Since 2004, the group has met by teleconference and at the annual NACTT conference. Over the past two years, the group has also held an interim meeting for planning and issue discussion.

During this year’s meeting, the focus of the group was narrowed to three specific areas: (1) bankruptcy compliance with CFPB regulations, particularly with monthly billing statements; (2) implementation of the new proof of claim Form 410 and proof of claim attachment Form 410A by the mortgage servicing industry; and (3) the national model chapter 13 plan. The committee felt that narrowing its focus to these three areas over the next year would help the group channel its efforts to ease any transition to come with new compliance standards and forms. In the wake of the NACTT conference, subcommittees were formed by the group to address each topic and prepare for the changes in the coming months.

Conclusion

As in years past, the NACTT conference provided many informative educational panels impacting chapter 13 practice and mortgage servicing. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers; a place to come together to discuss the issues impacting our world.

Copyright © 2015 USFN. All rights reserved.
Autumn USFN Report

This post has not been tagged.

Share |
Permalink
 

Pending Changes to Bankruptcy Forms

Posted By USFN, Friday, October 9, 2015
Updated: Wednesday, November 11, 2015

October 9, 2015

 

by USFN Publications Staff


For information concerning pending changes in the bankruptcy forms, see:

http://www.uscourts.gov/rules-policies/pending-rules-amendments/pending-changes-bankruptcy-forms

USFN will be hosting a one-day workshop on November 19 in Atlantic Beach, Florida (close to the Jacksonville airport). The morning will be devoted to bankruptcy, including a discussion and review of the newly adopted Federal Rules of Bankruptcy Procedure and form changes. Compliance, litigation trends, and current issues will be covered in the afternoon sessions. Access the program schedule here — and visit the event page for more details.

©Copyright 2015 USFN. All rights reserved.
October e-Update

This post has not been tagged.

Share |
Permalink
 

North Carolina: Production of Original Note Indorsed in Blank is Alone Sufficient to Prove Petitioner is Holder of Valid Debt under Special Proceeding Foreclosure Statute

Posted By USFN, Thursday, October 8, 2015
Updated: Wednesday, November 11, 2015

October 8, 2015

 

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

The purchaser at a judgment execution sale of the secured property (subsequently identified as a respondent in the later foreclosure proceedings) challenged the right of the petitioner mortgage company to foreclose the title to the property, arguing that the petitioner’s production of the original note indorsed in blank at the hearing de novo before the superior court did not establish that the petitioner possessed the note. Following the statutory procedure for power-of-sale special proceeding foreclosures in North Carolina, the respondent had appealed from the order of the Clerk of Superior Court authorizing the foreclosure sale, and appealed again from the order of the superior court that also authorized foreclosure.

In the case of In Re: Rawls, No. COA15-248 (N.C. Ct. App., Oct. 6, 2015), North Carolina’s Court of Appeals took the opportunity to provide a concise explanation of the process in which negotiable instruments may be transferred under North Carolina’s Uniform Commercial Code. In its decision, the appellate court rejected the respondent’s contentions. Respondent’s position was that the production of the original note indorsed in blank at the foreclosure hearing was insufficient to establish petitioner as holder based on a partial quote from an earlier appellate decision in which the court stated that “[p]roduction of an original note at trial does not, in itself, establish that the note was transferred to the party presenting the note with the purpose of giving that party the right to enforce the instrument[.]” Rawls at 9, quoting In re Simpson, 211 N.C. App. 483, 491, 711 S.E.2d 165, 171 (2011). The respondent also contended that the petitioner’s affidavits contained hearsay that should not have been considered by the superior court. Rejecting this contention, the court noted that Simpson, “which did not hold that production of an original note could never be adequate to establish a petitioner’s right to enforce a note, is factually distinguishable from the instant case.” Rawls, at 9-10 (emphasis in original).

Simpson involved a note that had been specially indorsed to an entity that was “‘not the party asserting a security interest in Respondent’s property.’ at 493, 711 S.E.2d at 172. Significantly, Simpson specified that it was ‘[b]ecause the indorsement does not identify Petitioner and is not indorsed in blank or to bearer, [that] it cannot be competent evidence that Petitioner is the holder of the Note.’ [Simpson] at 493, 711 S.E.2d at 173 (emphasis added).” Rawls at 10.

Looking to N.C. Gen. Stat. § 25-3-205(b), as well as case law rationale, the court in Rawls held: “that a petitioner’s production of an original note indorsed in blank establishes that the petitioner is the holder of the note. In this case it is undisputed that petitioner produced the original note indorsed in blank, and we hold that this was sufficient to support the trial court’s conclusion that petitioner was the holder of the note.” Rawls at 9. Given its holding, the appellate court found it “unnecessary to reach respondent’s arguments concerning the admissibility of the affidavits proffered at the hearing.” Rawls at 10.

Borrowers and their counsel will often seek to delay foreclosure proceedings even though they lack any valid basis to do so, providing them with more time in the property without having to repay the loan. In Rawls, the foreclosure process was delayed for at least eighteen months, not by the borrowers but by someone who had taken title from them and had no obligation to pay the loan — allowing him to either reside in, or rent out, the property without making mortgage payments. There was, arguably, no good faith basis to file this appeal, which could provide grounds to the successful party to seek sanctions including the recovery of legal fees.

It is not the general practice to produce the original promissory note at a residential property foreclosure hearing in North Carolina. Instead, the substitute trustee usually relies on an affidavit from a competent witness at the creditor bank or mortgage company testifying that the affiant’s employer is the holder of the note, and attaching a copy of the fully endorsed note to the affidavit. There are times, however, when the production of the original note is a wise move, so as to avoid incurring the expense of a postponement, a contested hearing, or an appeal. With this reported Rawls decision, which has precedential effect across the state, appeals of orders authorizing foreclosure on the basis that the creditor bank or mortgage company producing the original note at the foreclosure hearing is not entitled to enforce it should be rare indeed.

©Copyright 2015 USFN. All rights reserved.
October e-Update

This post has not been tagged.

Share |
Permalink
 

Washington Supreme Court Allows Consumer Protection Claim Based on Information Provided to a Trustee during Foreclosure

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by Joshua Schaer
RCO Legal, P.S. – USFN Member (Oregon, Washington)

In Trujillo v. Northwest Trustee Services, Inc., the Supreme Court of Washington ruled that a trustee cannot rely on an “ambiguous” declaration from the beneficiary that contains language referencing UCC § 3-301 as adopted by state statute. [Trujillo v. Northwest Trustee Services, Inc., 2015 WL 4943982 (Aug. 20, 2015)].

Trujillo, who remained in default on her loan since 2011, sued foreclosure trustee Northwest Trustee Services, Inc. (NWTS). She alleged several claims related to the Washington Deed of Trust Act; her principal allegation being that NWTS could only foreclose in the name of the loan’s “owner,” not just its holder. The plaintiff’s argument was based on a statutory requirement that a trustee cannot record a sale notice without “proof that the beneficiary [note holder] is the owner of any promissory note … secured by the deed of trust.” One form of such proof is “a declaration by the beneficiary … stating that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust.” NWTS privately received a declaration from the loan servicer stating that it was “the actual holder of the promissory note or has requisite authority under RCW 62A.3-301 to enforce [the note].”

The trial court dismissed Trujillo’s claims, and the Court of Appeals affirmed in a published opinion. The Supreme Court of Washington accepted review, and following its recent ruling in Lyons v. U.S. Bank, N.A., 181 Wash. 2d 775 (2014), reversed and remanded only Trujillo’s Consumer Protection Act claim due to the ostensibly ambiguous “or requisite authority” language of the unrecorded declaration.

The Washington Supreme Court did not address Trujillo’s position that a loan’s “owner” must be deemed its investor, or NWTS’s counter-argument that the common definition of “owner” instead refers to a possessory right. Consequently, it remains uncertain what form of “proof” establishing “ownership” a trustee must obtain in the absence of a valid beneficiary declaration.

Although the Trujillo decision resulted in further proceedings, and an expansive view of Consumer Protection Act liability, the form of declaration at issue in the case is no longer being utilized in Washington. Another pending case (Brown v. Department of Commerce) may address whether a trustee can rely on an “unambiguous” declaration where the loan’s investor and holder are different. In the event the court in Brown rules that an investor must also hold the note, then nonjudicial foreclosure in Washington would be effectively limited to a small subset of loans. In the interim, it is anticipated that borrowers’ counsel will be more aggressive in raising challenges to foreclosure documentation and the ability of servicers to proceed nonjudicially in their own names.

Editor’s Note: The author’s firm represented Northwest Trustee Services, Inc. in Trujillo v. Northwest Trustee Services, Inc.

©Copyright 2015 USFN. All rights reserved.
October e-Update

This post has not been tagged.

Share |
Permalink
 

Michigan: Securing and Winterizing Foreclosed Properties during the Redemption Period

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015

 

by Jessica Rice
Trott Law, P.C. – USFN Member (Michigan)

Michigan law provides a mortgagor with the right to use and possess the property during the redemption period, which is typically six months following the foreclosure sale. However, the mortgage instrument usually contains a provision that allows the mortgagee to protect its interest in the property when the property is in jeopardy. As such, it may be necessary for mortgagees to consider taking some measures to protect their interest in the property during the redemption period by securing and winterizing the property.

When faced with the possibility of a property being damaged during the redemption period, always begin by reading the terms of the mortgage and ensure that there is a provision that allows for the mortgagee to protect its interest in the property. It is best to do as little as possible to interfere with the mortgagor’s redemption rights while, at the same time, doing what is necessary to protect the mortgagee’s interest in the property. This means mitigating the risks that may be encountered in securing and winterizing by keeping detailed records and notes, taking pictures of the property, and posting — in a conspicuous place — a sign with information as to whom the mortgagor can contact in order to obtain access, if necessary. If contacted by a mortgagor to gain access to the property after it has been secured and/or winterized, access should immediately be granted in order to avoid wrongful lockout claims or other similar issues.

It is also important to keep in mind state-specific foreclosure statutes. In Michigan, the foreclosure statute provides foreclosing lenders with the right to shorten the redemption period if a property is deemed abandoned via a specific process outlined in the statute. Bear in mind, there is a distinct difference between a property being vacant and a property being abandoned. If the property is truly abandoned, there is a legal process that can be implemented and, if successful, will result in a shortened redemption period. This is a very useful tool — especially in the winter months — as it may enable the foreclosing lender to take title to the property sooner than the statutorily-set redemption expiration date and, therefore, allow for measures to be taken to secure and winterize the property without the risk of claims that the mortgagor’s rights have been violated during the redemption period.

©Copyright 2015 USFN and Trott Law, P.C. All rights reserved.
October e-Update

This post has not been tagged.

Share |
Permalink
 
Page 13 of 29
 |<   <<   <  8  |  9  |  10  |  11  |  12  |  13  |  14  |  15  |  16  |  17  |  18  >   >>   >| 
Membership Software Powered by YourMembership  ::  Legal