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South Carolina: Default Mitigation Management Portal

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

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

Previously, we wrote of the loss mitigation requirements of Judge Waites, the senior bankruptcy judge for the District of South Carolina. Earlier this year Judge Waites mandated that, for cases assigned to him, all loss mitigation reviews must occur on the Default Mitigation Management (DMM) portal. Additionally, this bankruptcy judge required that any loss mitigation activity occurring outside the portal must be reported to the court by the creditor. The judge’s rules also mandate that reviews outside the portal may only occur if the court enters an order allowing a non-portal review. [For further background, see South Carolina: Default Mitigation Management Portal (USFN e-Update, April 2015 Ed.)].

Judge Waites has reached out to the bankruptcy bar to advise that he is still being asked to approve loan modifications where the loss mitigation review was not in the DMM portal, and the court was not contacted by the creditor regarding loss mitigation activity outside of the portal. The judge has indicated that he may hold hearings to approve these loan modifications and require a representative from the creditor to appear at the hearing to explain why the creditor did not comply with the court’s requirements. Additionally, if a creditor does not comply with the requirements in the future, it is probable that the creditor will be sanctioned by the court for this conduct.

Because of the strict requirements and the possible consequences of non-compliance, it is suggested that when a borrower whose bankruptcy case is assigned to Judge Waites contacts his lender/servicer about loss mitigation, the lender/servicer should communicate with local counsel to report the loss mitigation discussions to the court. Additionally, if a loss mitigation application is sent to the borrower or if one is received from the borrower, it is advisable that the lender/servicer have local counsel file a motion for loss mitigation review outside of the DMM portal. Finally, if the lender/servicer has any current loss mitigation reviews pending outside of the portal involving borrowers in a bankruptcy case assigned to Judge Waites, best practice strongly suggests that the lender/servicer should take action to report this review to the court as soon as possible.

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Federal Drug Law Violation: Impacts Bankruptcy Code Relief?

Posted By USFN, Thursday, July 23, 2015
Updated: Wednesday, September 9, 2015

July 23, 2015 

 

by John Kapitan
Trott Law, P.C. – USFN Member (Michigan)

The Michigan Medical Marijuana Act (MMMA) authorizes a Michigan resident to cultivate, possess, and even distribute some amount of marijuana, or its products, without offending the laws of Michigan. Federal law, in contrast, criminalizes possession and distribution of the plant with exceptions only for federally-approved research activities.

The question of whether the business of a chapter 13 debtor (legitimate under the state laws in Michigan, but criminal under federal law) precludes a court from granting relief available under the Bankruptcy Code was recently decided in the case of In re Johnson, 2015 Bankr. LEXIS 1983 (Bankr. W.D. Mich. 2015).

In Johnson, the debtor sought relief under chapter 13 of the Bankruptcy Code to save his residence, prevent the termination of utility services, and avoid repossession of his vehicle. The United States Trustee moved to dismiss the case because the debtor was engaging in the marijuana industry and believed that the court should not enforce the protections of the Bankruptcy Code to aid violations of federal law.

According to the debtor’s Schedules, Statement of Financial Affairs, and testimony during an evidentiary hearing, the debtor’s income was derived from Social Security benefits and through the cultivation and sale of marijuana to three patients through a regulated dispensary pursuant to the MMMA. A review of the debtor’s proposed plan indicated that the monthly payment was well below his monthly Social Security benefit, and the debtor testified that none of the proceeds from his activities under the MMMA would be used to fund the plan.

Cognizant of the debtor’s dire need of bankruptcy relief, the court refrained from dismissing the case, but enjoined the debtor from conducting his medical marijuana business while the case was pending in order to provide him with limited additional time to decide whether to continue his business activity or to dismiss the case.

In reaching this decision, the court did not believe it mattered that the plan was funded solely from Social Security benefits because, as a statutory matter, the same reasons that preclude the Standing Trustee from holding contraband (or using proceeds or instrumentalities of federal criminal activity) apply to the debtor. As such, the debtor could not conduct an enterprise that admittedly violates federal criminal law while enjoying the federal benefits which the Bankruptcy Code affords him, as there is no constitutional right to obtain a discharge of one’s debts in bankruptcy. Additionally, the court noted that it is not asking too much of debtors to obey federal laws, including criminal laws, as a condition of obtaining relief under the Bankruptcy Code.

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Connecticut: Recourse to Foreclose Under Theory of Ratification and Unjust Enrichment

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

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

On May 21, 2015 the Stamford Superior Court issued a decision favorable to foreclosing lenders when only one of the record owners of the property signs the mortgage [HSBC Bank USA, National Association, as Trustee v. D’Agostino, FST CV-09-6002754-S].

While Deutsche Bank National Trust Company, Trustee v. Perez, 146 Conn. App. 833 (2013), held that “the record did not support a finding by clear, substantial and convincing evidence that the missing signatory participated in the mortgagor’s efforts to obtain the loan or execute the mortgage and therefore the court lacked the authority to reform the mortgage by adding her signature, (emphasis added)” the court in D’Agostino found that the plaintiff bank had recourse to foreclose against the omitted mortgagor under a theory of ratification and unjust enrichment.

Ratification, unlike reformation, is defined as “the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account.” Ratification requires “acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances.” In D’Agostino, the court found that the omitted mortgagor ratified the mortgage because he had “knowledge of all of the circumstances which attended the mortgage loan transaction and intended to, did and still does accept the benefits of the transaction.”

In order for the plaintiff to obtain a recourse under the ratification theory, the court further found that the equitable cause of action of unjust enrichment was satisfied, and imposed a constructive trust as the vehicle to allow a judgment of foreclosure to be entered against the omitted mortgagor. A constructive trust arises “where a person who holds title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it.” The D’Agostino case, although only a trial court decision, is encouraging for foreclosing lenders in the wake of the Perez decision.

Editor’s Note: The author’s firm represented the plaintiff in the D’Agostino case, which is summarized here.

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Connecticut: Allegations Involving Conduct in Mediation

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

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

The Connecticut Court of Appeals recently rendered a decision in U.S. Bank v. Sorrentino, upholding a lower court’s dismissal of claims made by a borrower regarding the plaintiff’s conduct in mediation. The appellate court examined a motion for summary judgment decided in favor of the plaintiff bank in the trial court. [U.S. Bank v. Sorrentino, 2015 Conn. App. LEXIS 235 (June 1, 2015)].

Connecticut has a mandatory mediation program. The statute authorizing mediation has a provision mandating that the parties act in “good faith” during the mediation. In Sorrentino, among the allegations presented as affirmative defenses and a counterclaim were the following: “The plaintiff conducted the mediation process in a manner calculated effectively to ensure that the subject loan would not qualify for modification. During this process, plaintiff continually requested documents which had already been provided; regularly claimed to have lost or misplaced documents; professed to not understand the sources and amounts of income despite repeated, good faith, efforts on the part of defendants to provide this information to plaintiff. Plaintiff, on a regular basis, assured defendants that ... they would qualify for a modification, and that ‘we want you to stay in your home and keep your home’ when, in fact, plaintiff knew that the chances for a modification were negligible.”

In Sorrentino, the appellate court considered the defenses and counterclaims that are proper in a foreclosure matter, and stated: “This court previously has held that, ‘[i]n a foreclosure action, a counterclaim must relate to the making, validity or enforcement of the mortgage note in order properly to be joined with the complaint.’” JP Morgan Chase Bank, Trustee v. Rodrigues, 109 Conn. App. 125, 133, 952 A.2d 56 (2008); see also New Haven Savings Bank v. LaPlace, 66 Conn. App. 1, 9-11, 783 A.2d 1174 (affirming summary judgment for plaintiff on counterclaims not related to making, validity or enforcement of mortgage note), cert. denied, 258 Conn. 942, 786 A.2d 426 (2001). Thus, “[c]onduct on the part of the [foreclosing party] that occurred after the loan documents were executed and not necessarily directly related solely to enforcement of the note ... properly has been found not to arise out of the same transaction as the complaint.” JP Morgan Chase Bank, Trustee v. Rodrigues, supra, 134-35, citing Southbridge Associates, LLC v. Garofalo, 53 Conn. App. 11, 16-21, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999). [U.S. Bank v. Sorrentino, supra, 2015 Conn. App. LEXIS 235, *20-21 (June 1, 2015)].

Accordingly, actions that occur after the commencement of the action are not properly brought before the court in a foreclosure action as a counterclaim.

This judicial holding seemed to be in conflict with an earlier decision with similar facts. The Sorrentino court explained that in CitiMortgage, Inc. v. Rey, 150 Conn. App. 595, 605-606, 92 A.3d 278, cert. denied, 314 Conn. 905, 99 A.3d 635 (2014), there was a reasonable nexus between the interposed counterclaims and the making, validity, or enforcement of the note or mortgage — and ruled that such a nexus was not presented in the Sorrentino case. It concluded that the plaintiff was not required to produce evidence of its conduct during the mediation because the defendants’ claims failed, as a matter of law. Further, the appellate court held that the counterclaim could not be cured by re-pleading because the counterclaim did not attack the making, validity, or enforcement of the note.

Based on Sorrentino, claims relating to Connecticut mediation — at least in most cases — cannot be used as counterclaims against lenders in the foreclosure action.

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Connecticut Legislature Amends Mediation Law

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

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

Connecticut’s Mediation Law as Amended by the Legislature in HB 6752 was changed effective July 1, 2015.

The changes are as follows:


1. The Mediation Program was scheduled to terminate on July 1, 2016. That termination date has been extended to July 1, 2019.

2. The definition of “mortgagor” was amended to ensure that the mortgaged property is the primary residence of the owner-occupant.

3. Any foreclosure complaints filed after October 1, 2015 may allow the following foreclosure defendants, which the legislature has designated “permitted successors-in-interest” to participate in mediation:


a. the former spouse of a decedent-mortgagor who acquired sole title to the residential real property by virtue of a transfer from his or her spouse’s estate or by virtue of the death of the mortgagor where title was held as joint tenants in the entirety; OR

b. the spouse or former spouse of a mortgagor or former mortgagor who acquired title to the residential real property by virtue of a transfer from such mortgagor or former mortgagor where such transfer resulted from a court decree dissolving the marriage, a legal separation agreement, or a property settlement agreement.

 

4. To qualify as a permitted successor-in-interest, the spouse or former spouse must ensure that the mortgagee has received all consents under law to the disclosure of the spouse’s or former spouse’s nonpublic personal financial information.

 

a. The court is required to confirm that the foreclosure mediation certificate submitted by the spouse or former spouse provides the above consent to full disclosure; AND

b. Any other person who is a mortgagor provides consent to the full disclosure by the mortgagee of such person’s nonpublic personal financial information to such spouse or former spouse to the extent that the mortgagee has such information.

If a foreclosure mediation certificate is not submitted by a mortgagor, other than a spouse or former spouse claiming to be a permitted successor-in-interest, the spouse or former spouse signing the mediation certificate can include a certification that all persons obligated on the note have consented to the mortgagee’s full disclosure of their nonpublic personal information to the spouse or former spouse.

Such mediation certificate can be rebutted conclusively by the mortgagee if the mortgagee submits a written statement to the court in which the mortgagee certifies that, based upon reasonable belief, the mortgagee does not possess such documentation allowing the full disclosure.



5. Additional Documents Mortgagee Must Send: Under current law, the mortgagee or its counsel, upon receiving notice of a case assignment to the mediation program and within 35 days of the return date of the foreclosure case, shall send an account history and related information via email to the mediator and via first-class, priority, or overnight mail to the mortgagor. The related information includes all necessary forms needed for the mortgagee to evaluate the mortgagor for common foreclosure alternatives that are available through the mortgagee, if any. The amendment requires the mortgagee to send the most current version of these forms. The amendment also requires the mortgagee to send, in addition to a copy of the note and mortgage, any agreements modifying the note and mortgage.

6. Pre-mediation Extension: Under current law, the court must: (1) assign a foreclosure mediator, and (2) schedule a meeting with the mediator and the mortgagor. Current law requires the scheduling of a pre-mediation meeting within 49 days following the return date of the foreclosure complaint.

Under current law, the mediator must facilitate and confirm submission of the forms and documentation by the mortgagor: (1) to the mortgagee’s counsel electronically, and (2) at the mortgagee’s election, directly to the mortgagee per the mortgagee’s instruction. Current law requires the mediator to do so as soon as practicable within 84 days following the return date.

The new law extends this deadline to: (1) the end of any pre-mediation period extension granted by the court (see below); or (2) three days after the court rules to deny a motion for such an extension. The new law allows the court, for good cause, to grant a mediator’s motion to extend the pre-mediation period beyond the 84th day, following the return date.

The mediator must file such motion, with a copy simultaneously sent to the mortgagee, and as soon as practicable to the mortgagor, not later than the 84th day following the return date. The mortgagee and mortgagor must file an objection or supplemental papers within five business days after the day that the motion for extension was filed. The court must issue its ruling, without a hearing, by 10 business days after the date that the motion was filed. If the court determines that good cause exists for an extension, it must establish an extended deadline so that the pre-mediation period ends as soon as practicable, but not later than 35 days after the ruling.

The court must consider the complexity of the mortgagor’s financial circumstances, the mortgagee’s documentation requirements, and the timeliness of the mortgagee’s and mortgagor’s compliance with their respective pre-mediation obligations. If the court denies the mediator’s motion, the extended deadline shall be three days after the court rules on the motion.

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Challenge to Michigan’s Non-recourse Mortgage Loan Act Fails

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

by Scott W. Neal
Orlans Associates, P.C. – USFN Member (Michigan)

The Borman, LLC v. 18718 Borman, LLC case, decided on February 3, 2015 by the Sixth Circuit Court of Appeals, upheld Michigan’s 2012 Non-recourse Mortgage Loan Act (NMLA). That law prevents lenders from holding guarantors of non-recourse, commercial mortgage-backed securities (CMBS) pooled loans liable for post-closing borrower insolvency.

The NMLA was enacted after the Michigan Court of Appeals’ decision in Wells Fargo Bank, NA v. Cherryland Mall Ltd. P’ship, 812 N.W.2d 799 (Mich. Ct. App. 2011), which upheld a solvency covenant in a non-recourse CMBS loan. The NMLA applies retroactively to render solvency covenants in non-recourse loans unenforceable. The Michigan Legislature reasoned that such covenants are inconsistent with the nature of non-recourse loans, are an unfair and deceptive business practice, and are against public policy.

In Borman, defendant 18718 Borman, LLC defaulted on a non-recourse secured loan, so the lender foreclosed. Plaintiff Borman, LLC, an unrelated company, purchased the property. Standing in the lender’s shoes afterwards, the plaintiff sued the defendant and its guarantor to collect an approximately $6 million deficiency. The lower court granted summary judgment in favor of the defendant, and the Sixth Circuit affirmed.

In the CMBS loan that the defendant agreed to, there was a solvency covenant that the plaintiff contended allowed it to sue not only the defendant, but also the guarantor, to obtain the deficiency. The court ruled that the NMLA made the solvency covenant in the defendant’s CMBS loan unenforceable as a matter of law, thereby preventing the plaintiff’s deficiency suit. The court also rejected the plaintiff’s various state and federal constitutional challenges to the validity of the NMLA.

This ruling should put commercial lenders and purchasers on notice that the NMLA is in full effect, the Cherryland Mall case law is no longer binding, and they will not be able to rely on suits against guarantors to collect deficiencies on CMBS loans. In other words, lender and buyer beware.

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Freddie Mac is Not Liable for the Loan Servicer’s Failure to Use Escrow Funds to Maintain Property Insurance

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

by Steven K. Linkon
RCO Legal, P.S. – USFN Member (Oregon, Washington)

A panel of the Ninth Circuit Court of Appeals affirmed the district court’s Rule 12(b)(6) dismissal of a homeowner’s claims for breach of contract and breach of fiduciary duty brought against the Federal Home Loan Mortgage Corporation (Freddie Mac). The claims arose after Freddie Mac had purchased the homeowner’s mortgage from Taylor, Bean & Whitaker Mortgage Co., the loan originator. Taylor Bean, which had continued to service the loan after selling it to Freddie Mac, failed to pay the insurance premium from an escrow account and caused the homeowner’s insurance to be cancelled. The home was destroyed by an accidental fire. Safeco denied the homeowners insurance claim because the policy had been cancelled before the fire.

The appellate panel held that the homeowner failed to allege facts that would establish that Freddie Mac had a contractual duty to service the loan: Freddie Mac never agreed to assume the servicing obligations when it purchased the loan from Taylor Bean; the deed of trust provided that the servicing obligations would remain with Taylor Bean, and Washington law did not prohibit the arrangement.

Additionally, the Ninth Circuit held that Freddie Mac did not assume the fiduciary duty of an escrow because under the deed of trust, the duty to hold money for the insurance premiums in escrow remained with the loan servicer, Taylor Bean. [Johnson v. Federal Home Loan Mortgage Corporation (9th Cir. July 14, 2015)].

Editor’s Note: The author’s firm represented Freddie Mac in the case summarized in this article.

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Massachusetts: Default Notices Must Comply Strictly with Mortgage Forms

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

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

The Massachusetts Supreme Judicial Court (SJC) has issued its long-awaited ruling in Pinti v. Emigrant Mortgage Company, Inc. [Supreme Judicial Court No. SJC-11742, slip op. (July 17, 2015)]. In a 4-3 decision, the SJC held that a foreclosing mortgagee must send borrowers a default notice that complies strictly with the requirements of the mortgage.

Paragraph 22 of the Fannie Mae/Freddie Mac Uniform Mortgage Instrument (the mortgage form used in Pinti) requires, among other things, that a lender send a default notice informing the borrower of the right to bring an action to challenge the foreclosure based on the lack of a default. However, the notice sent in Pinti stated only that the borrower had the right to assert non-default as a defense in any judicial foreclosure proceeding.

The SJC reasoned that the statutory power of sale requires strict compliance with the mortgage terms and certain specific statutory requirements, particularly in light of the fact that Massachusetts foreclosures are typically nonjudicial. [Massachusetts is also known as a quasi-judicial foreclosure state. The first part of the foreclosure is a judicial SCRA action. The second part is a nonjudicial foreclosure sale. In its decisions, the court considers the “foreclosure process” in Massachusetts nonjudicial because it characterizes the required judicial process (a SCRA action) as not being part of the mortgage foreclosure proceedings.] Failing to comply strictly with the power of sale renders any attempted foreclosure void.

Because the default notice in Pinti did not comply with paragraph 22 — it did not affirmatively state that the borrower had the right to bring an action to challenge the foreclosure — the resulting foreclosure was void. The SJC applied its decision prospectively to cases where lenders send default notices after July 17, 2015. Despite its prospective ruling, the court left open the possibility of extending its decision to similar cases on appeal or (less likely) to cases before the trial courts. The SJC also suggested that mortgagees should record an affidavit as evidence of compliance with paragraph 22.

As a result of Pinti, servicers should review their Massachusetts default notices very carefully to ensure that they comply verbatim with the mortgage terms (note: language in either a contractual breach notice or a statutory 150-day default notice may comply with the requirements of the mortgage contract). It remains to be seen: (1) how courts will analyze default notices sent prior to July 17, 2015; (2) how title insurers will treat foreclosures relying upon default notices sent prior to July 17, 2015; or (3) what “Pinti affidavits” must contain.

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Rhode Island & Mediation: Legislative Bill Partially Overrules May 2015 Court Case

Posted By USFN, Thursday, July 23, 2015
Updated: Friday, September 25, 2015

July 23, 2015

 

by Lisa Kresge
Brennan Recupero Cascione Scungio & McAllister, LLP – USFN Member (Rhode Island)

In July 2013, Rhode Island enacted a statute that required holders of individual consumer first-lien mortgages on owner-occupied properties to send written notice to mortgagors of the right to mediation prior to the initiation of foreclosure proceedings and within 120 days of the date of default. Failure to comply with the statute results in a $1,000 a month penalty and voids the foreclosure. Under the 2013 version of the statute, mortgages that were more than 120 days delinquent as of September 13, 2013 (in other words with a date of default on or before May 16, 2013) were exempt from compliance.

As of October 6, 2014, the 2013 Statute was amended. Among other things, the 2014 amendment removed the September 13, 2013 exemption language. However, the Rhode Island Division of Banks issued regulations that kept the exemption in place. Since that time, lenders moved forward with foreclosures in reliance upon that exemption.

On May 15, 2015, the Rhode Island Superior Court issued a decision in the case entitled Fontaine v. US Bank National Association, ruling that the removal of the exemption language from the 2014 Statute mandated compliance with the 2014 Statute’s mediation requirements for all mortgages, regardless of the date of default for any foreclosures initiated on or after October 6, 2014. Thus, the Fontaine ruling forced lenders to pay stiff penalties to foreclose on properties that previously fell under the exemption and voided foreclosures that had taken place since October 6, 2014 in reliance upon the exemption.

In July, the Rhode Island legislature passed a bill to reinstate the exemption. The bill went into effect on July 2, 2015. Accordingly, lenders can proceed with Rhode Island foreclosures with a date of default on or before May 16, 2013 without having to comply with the mediation rules, including payment of the resulting penalties.

However, the amended statute is not retroactive. Accordingly, foreclosures that were initiated on or after October 6, 2014 and before July 2, 2015 (“Gap Period”) in reliance upon the exemption may be void. Lenders are well-advised to review their Rhode Island portfolios to determine if any of their foreclosures fall within this Gap Period and need to be re-foreclosed.

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Legislative Updates: Minnesota

Posted By USFN, Tuesday, June 30, 2015
Updated: Friday, September 25, 2015

June 30, 2015

 

by Brian H. Liebo
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

In two separate articles, the MN information presented here first appeared in a slightly modified fashion in the USFN e-Update (May 2015 ed.). The information is republished here for those readers who missed it.


The regular 2015 legislative session concluded on May 18.

Additions to Mortgage Reinstatement Requirements — The Minnesota legislature, working with the Minnesota Bankers Association and interested parties (including this author’s firm) was able to craft and pass legislation that would have otherwise created large difficulties and delays for mortgage servicers seeking to foreclose mortgages in Minnesota.

In a recent case, the federal district court in Minnesota held that a mortgage servicer must provide a reinstatement quote to a requesting borrower within twenty-four hours of the request under Minnesota Statutes Section 580.30. That statute was silent on the deadline for providing reinstatement figures to requesting borrowers. In this legislative session, the Minnesota legislature introduced a bill to amend the statute (in response to the federal case) to provide a longer response time than twenty-four hours.

However, the original bill introduced in the legislature still only gave mortgage servicers a total of three days to provide reinstatement figures following a borrower’s request. Further, this original bill did not address which alternatives would be available if a mortgage servicer needed more than three days’ time to respond to a reinstatement inquiry, including the scenario of a borrower faxing a request late on a Friday night. As a result, the original bill would have effectively required that the mortgage servicer completely stop pending foreclosures altogether in situations where they were unable to provide borrowers with reinstatement quotes within three days of the request.

Additionally, the original bill did not contain any language allowing mortgage servicers to postpone foreclosures in order to provide reinstatement figures if they were unable to meet the three-day deadline. Moreover, the original bill did not restrict the amount of times that a borrower could submit reinstatement quote requests. Thus, borrowers seeking to disrupt and delay foreclosure proceedings could repeatedly submit reinstatement requests under the original bill.

Recognizing the troublesome implications of the original bill language, “safe harbor” language was submitted to the legislature: “If the amount necessary to reinstate the mortgage was not mailed to the mortgagor within three days of receipt of the request, no liability shall accrue to the party foreclosing the mortgage or the party’s attorney and the foreclosure shall not be invalidated if the mortgage reinstatement amount was mailed by first class mail to the mortgagor at least three days prior to the date of the completed sheriff’s sale.” This wording was carried into the final bill version passed into law.

Based on this new language, mortgage servicers will have far more breathing room in complying with borrower requests for reinstatement figures, and will also have the option to postpone sheriff’s sales — where necessary — to give this information, without having the entire foreclosure invalidated for doing so. Requesting borrowers will also still be assured of getting reinstatement figures prior to the sheriff’s sale. Mortgage servicers can now provide reinstatement quotes within three days of a request, or ensure that they convey a reinstatement quote at least three days before the date of the final sheriff’s sale as an alternative (and can postpone the original sale to accomplish this). The reinstatement quotes must be effective for seven days or until the foreclosure sale, whichever occurs first.

In a related development, the legislature also adopted into these bills new language that will be an additional curative statute provision under Minnesota Statutes Section 582.25. These provisions cause various errors to automatically “cure” with the passing of time, so that the issues can no longer be raised to overturn a completed foreclosure. In this particular situation, any errors made by a foreclosing party in connection with publishing or mailing notices for postponements of sheriff’s sales will automatically “cure” after one year has passed from the date of the expiration of the redemption period.

Finally, these bills contain a provision simply clarifying that if a borrower postpones a sheriff’s sale under Minnesota Statutes Section 580.07, subdivision 2 (for five or eleven months, whichever is applicable, in exchange for a five-week redemption period), and the related foreclosure is stopped and then restarted, the new redemption period is not permanently five weeks for any future foreclosures, unless the bankruptcy stay provision of the statute applies.

Clarification of Foreclosure Publication Statutes — In a growing area of litigation challenging foreclosures in Minnesota, the Minnesota Bar Association, the Minnesota Bankers Association, and interested parties (including this author’s firm) advocated for a necessary change to the legal publications statutes. These efforts were fruitful, and the Minnesota legislature passed a clarifying law this session under bills HF953 and SF1147.

Governed by a provision under Chapter 580 of Minnesota’s Foreclosure by Advertisement statutes, notices of sheriff’s sales must be published for six weeks prior to sheriff’s sales in qualified newspapers. For over a century, it has been the accepted custom and practice in Minnesota to publish those notices in any qualified newspapers located in the same county as the mortgaged property. Using a county-wide standard, the newspaper selection could be made based on the best quality and pricing among a larger pool of newspapers. Consistent with this practice, the Minnesota Secretary of State maintains a list of qualified legal publishers in Minnesota, which is arranged by county as the first category on the list.

Borrowers seeking to challenge foreclosures have been arguing that the newspaper selection standard should be closer to a city-based standard — rather than a county-based one — even if that would reduce competition by narrowing the selection of available legal publishers and, therefore, increase pricing that mortgage servicers and reinstating borrowers would have to pay. Under the narrower standard, if a small city only has one qualified newspaper, the publisher could charge whatever price it wanted for publishing legal notices because it would have a captive market. There is no Minnesota statute capping what newspapers can charge for such publications.

In the past few years, borrowers’ attorneys have been bringing court actions challenging foreclosures to promote the use of a narrower standard for selecting newspapers. They have been taking advantage of vague and undefined terms in related publication statutes to tie up properties in litigation. For example, one applicable statute, Minnesota Statutes Section 331A.03, requires that public notices be published in newspapers likely to give notice in the “affected area” or “to whom it is directed.” Unfortunately, neither of these terms is defined in any Minnesota statute or case law. The “affected area” for a foreclosure notice could be just the mortgaged parcel, its neighborhood, the city in which the mortgaged parcel is located, or its county. Also the “persons to whom foreclosure notices are directed” could be construed as just the borrowers, potential bidders, sheriffs conducting the sales, etc.

After persuasive prompting, bills were introduced in the Minnesota legislature to address the growing problem with the publication statutes. This new law, to be codified as Minnesota Statutes Section 580.033, now explicitly provides that a county-based standard for selecting newspapers for publishing foreclosure notices is proper. The new statute clearly provides that “publication of the notice of sale shall be sufficient if it occurs in a qualified newspaper having its known office of issue located in the county where the mortgaged premises, or some part thereof, are located.” This new statute also allows a foreclosing party to publish in a qualified newspaper having its known office of issue located in an adjoining county. However, the foreclosing party then has a higher standard to meet because the newspaper must also establish that a “substantial portion of the newspaper’s circulation is in the county where the mortgage premises, or some part thereof, are located.”

This clarifying new statute allows foreclosing parties to avoid having to contend with the vague standards of Section 331A.03 and provides greater certainty and predictability in selecting appropriate newspapers to publish foreclosure notices. It should also help in avoiding the litigation that resulted from the past applicability of an unclear statutory section to mortgage foreclosure.

The new laws are effective for all cases where the Notice of Pendency for Foreclosure is recorded on or after July 1, 2015. These notices of pendency are recorded prior to the time of the commencement of the foreclosure proceedings, which is the date of first publication.

The new publications statute will benefit parties seeking to foreclose mortgages by advertisement, as well as title companies insuring the transactions, since it creates more certainty in the laws governing these proceedings. By assuring a broader standard for selecting qualified newspapers, the new publication statute also helps to ensure that newspapers publishing legal notices will operate in a competitive environment, so that foreclosing parties can select qualified newspapers not only by location but also by factoring in pricing and quality of product among a larger pool of qualified newspapers.

Editor’s Note: The “safe harbor” provision now a part of Minn. Statutes Section 580.30, as well as the new language added to Minn. Statutes Section 582.25, was proposed and drafted by the author’s firm.

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Legislative Updates: Texas

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by David Seybold
Barrett Daffin Frappier Turner & Engel, LLP
USFN Member (Texas)

Texas legislators may only be in regular session for 140 days every two years, but in this year’s session that ended on June 1, 2015, they passed a slew of new bills affecting residential real property and streamlining foreclosure processes. This is a far cry from the past several legislative sessions where only the Texas Home Equity Lien loans’ quasi-judicial foreclosure process was addressed.

Many lobbying efforts were focused in the 84th Legislature not just on passing new laws to make the nonjudicial foreclosure process more transparent and efficient, but also to defeat rogue legislation that attempted to end nonjudicial foreclosure in Texas replacing such with a quasi-judicial foreclosure process similar to that used for Texas Home Equity Lien loans — greatly increasing servicers’ foreclosure expenses and timelines.

There are three centerpiece legislative initiatives, all of which passed the legislature unanimously. These are discussed below, along with some additional bills that may be of interest to mortgage servicers.

HB 2063: Recording and Effect of Notices of Sale to act as the Appointment of Substitute Trustee — Chapter 12, Texas Property Code, is amended by adding Section 12.0012. When servicers elect to implement the process authorized by this newly amended provision, it will allow the Notice of Sale to serve as the appointment of substitute trustee and would eliminate the need, as a matter of state law, to do a separate written appointment. Chapter 51, Property Code, is amended by adding Section 51.0076 to provide that the appointment of substitute trustee in the Notice of Sale is effective as of the day it is served on the debtor, and allows the document to be recorded in the deed records after the foreclosure sale occurs as an attachment to the substitute trustee’s deed.

One of the benefits of this bill is that the Notice of Sale in the requisite form need not be notarized when attached to the substitute trustee’s deed. An additional benefit accrues to those mortgage servicers who have granted their law firms a written authorization to execute appointment documents on behalf of the mortgagee/mortgage servicer that will allow the law firm to prepare and sign the Notice of Sale acting as the appointment of the substitute trustee, thus curbing much of the litigation over the timing of appointments. This will have the salutary benefits of reducing recording costs, limiting confusion in official public records by eliminating recorded appointments that don’t relate to the completed foreclosure sale, and limiting the “first legal document execution” fire drill that we go through in Texas. On June 17, 2015 the governor filed this bill without signature (which enacts the legislation) so that the effective date of the legislation will be September 1, 2015.

HB 2066: Rescission of Sale Deed Under Mistake — Chapter 51, Property Code, is amended by adding Section 51.016 to allow the mortgagee, trustee, or substitute trustee a limited 15-calendar day window from the foreclosure sale date for rescission of the foreclosure deed by unilateral notice that includes the recording information of the foreclosure deed, and describes the rescission reason if a sale was made subject to certain conditions that have historically been the subject of litigation in Texas. The bill lists six affected conditions: (1) the statutory requirements for the sale were not satisfied; (2) the default leading to the sale was cured before the sale; (3) a receivership or dependent probate administration involving the property was pending at the time of sale; (4) a condition specified in the conditions of sale prescribed by the trustee or substitute trustee before the sale and made available in writing to prospective bidders at the sale was not met; (5) the mortgagee or mortgage servicer and the debtor agreed before the sale to cancel the sale based on an enforceable written agreement by the debtor to cure the default; or (6) at the time of the sale, a court-ordered or automatic stay of the sale, imposed in a bankruptcy case filed by a person with an interest in the property, was in effect.

The written notice is served upon the purchaser if the mortgagee is not the purchaser, and each debtor who (according to the records of the mortgage servicer of the debt) is obligated to pay the debt; each notice is filed for recording in the real property records of the county in which all or a part of the property is located.

HB 2066 specifies and limits the third party purchaser’s remedy to a return of the purchase price plus interest at the rate of 10 percent per year. It also provides that a person who wants to challenge a rescission of a foreclosure deed under this bill must do so within 30 days of the rescission, or be barred by repose.

Notably, the bill also preserves — and does not replace — traditional methods of rescission of foreclosure deeds utilized in Texas.

The governor signed this into law on June 16, 2015, so that the effective date of the legislation will be September 1, 2015; and it will only affect a foreclosure sale that occurs on or after the effective date.

For errors that are promptly discovered, this bill should eliminate the need for lawsuits to cure title as well as discourage “ransom” lawsuits by third-party purchasers who don’t want to unwind a sale without additional remuneration, even where the putative sale is clearly void. This should also help get properties back to REO sooner.

HB 2067: Rescission of Acceleration – Solving the Statute of Limitations Challenge — This bill amends Chapter 16, Texas Civil Practice and Remedies Code, by adding Section 16.038 to allow a lender for any reason or no reason to rescind an acceleration by simply sending a notice of rescission by first-class or certified mail to each debtor’s last-known address before the limitations period expires. The rescission of acceleration is effective when served, and is served when deposited in the mail. The new statute applies with respect to a maturity date accelerated before, on, or after the effective date of the legislation. The governor signed this bill, and the effective date of the legislation was immediate on June 17, 2015.

The power of rescission is unilaterally exercised by the mortgagee, servicers, or their attorneys in Texas. A rescission of acceleration effectively puts the loan back on an installment basis without waiving any default, which means that the installment loan will simply be once again an unmatured debt on which limitations do not begin to run until the last installment becomes due.

This should help in the Texas home equity area where there have been long delays, historically, which servicers do not have a lot of ability to control. It should also help to facilitate workout discussions under loss mitigation programs that have many times resulted in protracted delay resulting in necessary, but unfortunate, decisions to file a suit to avoid statute of limitations issues, even where another borrower assistance option might be available. This should be a great aid to servicers and borrowers alike, although it cuts out the plaintiff bar’s arguments concerning expiration of the Statute of Limitations.

HB 831: Disclosure of Mortgage Information to Surviving Spouse — Subchapter B, Chapter 343, Texas Finance Code, is amended by adding Section 343.103 to allow a non-obligor surviving spouse to obtain documentation regarding the promissory note for a home loan, balance information, and other information from the mortgage servicer.

The request must include a death certificate, an affidavit of heirship (including language that the survivor was married to the mortgagor at the time of the mortgagor’s death), and an affidavit of the surviving spouse that he or she is currently residing in the mortgaged property as a principal residence. Further, the request must also include a notice to the mortgage servicer that states in bold-faced, capital, or underlined letters: “THIS REQUEST IS MADE PURSUANT TO TEXAS FINANCE CODE SECTION 343.103. SUBSEQUENT DISCLOSURE OF INFORMATION IS NOT IN CONFLICT WITH THE GRAMM-LEACH-BLILEY ACT UNDER 15 U.S.C. SECTION 6802(e)(8).”

A mortgage servicer that provides the information as required under this section is not liable to the estate of the mortgagor, or any heir or beneficiary of the mortgagor, as a result of providing this information to the surviving spouse. The bill will take effect on September 1, 2015.

HB 2207: Foreclosure Sale of Property Subject to an Oil or Gas Lease — This bill was first passed by the 2013 legislature but vetoed by then-Governor Perry at the request of large oil and gas companies. Texas is a “first in time; first in right” state. This fundamental rule of real property rights is such that a property interest occurring first in time is superior to any right that is created after. Thus, if a mortgage is filed before an oil and gas lease, the mortgage is superior to the rights of the oil and gas lessee. If the mortgage is foreclosed, the oil and gas lease is terminated by the foreclosure. Under HB 2207, Subtitle B, Title 5, Property Code, is amended by adding Chapter 66 to provide that the oil and gas lease always survives, no matter when it is created if the oil or gas lease has not terminated or expired on its own terms, and was executed and recorded in the real property records of the county before the foreclosure sale. The 2015 version of the bill added protections for the interest of mortgage lenders by providing that the foreclosure of a preexisting mortgage terminates the rights under a later oil and gas lease to use the surface of the mortgaged property. An agreement (including a subordination agreement) between a lessee of an oil or gas lease and a mortgagee of real property, or the lessee of an oil or gas lease and the purchaser of foreclosed real property, controls over any conflicting provision of this section. An agreement between a mortgagor and mortgagee may not modify the application of this section unless the affected lessee agrees to the modification. Signed by the governor on June 15, 2015, the bill is prospective only and will take effect on January 1, 2016.

HB 3316: Time for Recording a Durable Power of Attorney for Certain Real Property Transactions
— Section 751.151, Estates Code, is amended to make any real property transaction carried out under a power of attorney voidable, if the power of attorney is not filed with the county clerk in the county where the real property is located within 30 days of the filing of the associated real property transaction. The bill is prospective only and will take effect on September 1, 2015.

SB 462: Transfer on Death (TOD) Deed — Subtitle C, Title 2, Estates Code, is amended by adding Chapter 114 to enact the Texas Real Property Transfer on Death Act based upon a 2009 uniform act, which has been described as providing a simple process for the non-probate transfer of real estate by allowing an owner of real property to designate a beneficiary of a TOD deed to automatically receive the property upon the owner’s death without necessity of any probate action. During the owner’s lifetime, the beneficiary of a TOD deed has no interest in the property, and the owner retains full power to transfer or encumber the property.

In addition, a TOD deed is a revocable, non-testamentary instrument and must be recorded in the deed records of the county where the property is located. A TOD deed does not affect a transferor’s interest or rights in the property during the owner’s lifetime, and is void if the owner otherwise conveys the property during his or her lifetime. A power of attorney may not be used to create a TOD deed. The bill is prospective only and will take effect on September 1, 2015.

HCR 101: Texas Legislature’s Official Mixed Drink — One cannot leave out of the legislature’s accomplishments mention of a House Concurrent Resolution, which designates the combination of Texas vodka and “a splash of” [author commentary here] Texas red grapefruit juice as the official mixed drink of the 84th Legislative Session. Cheers to the end of another Texas legislative session!

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Legislative Updates: Oregon

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by John Thomas
RCO Legal, P.S.
USFN Member (Oregon, Washington)

Oregon Senate Bill 368 was recently signed into law by the state’s governor and became effective on June 8, 2015. Generally, the bill is a positive legal development, making the completion and entry of judicial foreclosure judgments more streamlined and uniform throughout Oregon.

As background, the increase in Oregon judicial foreclosure actions in the recent past has revealed a technical flaw with Oregon foreclosure statute ORS § 88.010 (1). Some Oregon state court trial-level judges have interpreted this statute to require that a money award against the borrower be included in a judgment of foreclosure, regardless of whether the lender/servicer desires that form of relief in addition to the customary in rem foreclosure relief against only the collateral property involved. However, some Oregon judges have not interpreted the foreclosure judgment statute that way, resulting in inconsistent foreclosure judgment standards within Oregon.

There are several situations where imposing a money award against a borrower would be problematic or troublesome, for example: (a) bankruptcy discharges; (b) deceased borrowers; (c) transfers of the property to non-obligors; (d) certain purchase money loans; and (e) expired statute of limitations on the underlying debt. Moreover, a money judgment can inappropriately adversely affect the debtor’s credit and cloud title (as a judgment lien) to other property owned by the debtor by operation of law. Furthermore, the servicer may wish to enter into a compromise or other non-retention agreement with the borrower that prohibits, directly or indirectly, a money award against him.

By enacting SB 368, inconsistent rulings in this area will hopefully be avoided. The bill amends ORS § 88.010 and a number of related statutes, and eliminates the need to include a money award in a foreclosure action when taking a money judgment is inappropriate, contrary to law, or simply not desired by the lender. It is a way to address some courts’ refusals to grant in rem judgments, which have been forcing lenders and their counsel to go through additional, unnecessary procedural steps. That is the most important aspect of this bill for lenders — it smooths out the uneven, county-by-county, judge-by-judge treatment of judicial foreclosures and should streamline the process to allow judgments to enter more readily.

To summarize, the legislative change is viewed as positive and it is not anticipated that there will be significant process changes for servicers. Compliance will generally rest with a servicer’s counsel in formulating the form of foreclosure judgment.

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Legislative Updates: Georgia

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by Melody R. Jones
and Scott Lofranco
McCalla Raymer, LLC
USFN Member (Georgia)

The Georgia General Assembly concluded its annual 40-day legislative session under the Gold Dome in Atlanta on April 2. The 2015 legislative session included the passage of several major pieces of legislation affecting our industry.

House Bill 322 (HB 322) was signed into law on May 6, 2015 by the governor, effective July 1, 2015. There are two provisions of HB 322 relevant to our industry and practice. First, HB 322 amends O.C.G.A. § 44-14-160. The previous version of O.C.G.A. § 44-14-160 stated that a deed under power shall be recorded within 90 days of the foreclosure sale date. As amended, the statute now requires that deeds under power be “filed” within 90 days of the foreclosure sale date, which takes into account county recording delays that are out of the clients’ control. HB 322 also creates a $500 penalty (in addition to the filing fee) to be paid to the Clerk of Court for failing to file a deed under power within 120 days of a foreclosure sale. This penalty will be due at the time of filing along with the regular recording fees. The legislative purpose for introducing a $500 penalty is to encourage mortgage servicers to execute foreclosure deeds in a timely fashion so that counties and municipalities will have notice of the transfer of ownership. In order to ensure compliance and avoid any penalty, mortgage servicers should exercise diligence in moving deeds through their document execution departments and returning them to the law firms to record. Law firms should also follow up regularly with their clients on outstanding deeds.

HB 322 also amends O.C.G.A. §§ 44-5-30, 44-14-33, 44-14-34, 44-14-61, 44-14-62, and 44-14-63 relating to the witnessing requirements for deeds, mortgages, and deeds to secure debt. Proper execution of these instruments will now require the signatures of the maker, an unofficial witness, and an attesting officer (notary public). Further, O.C.G.A. § 44-14-63 has been amended to state that unrecorded deeds to secure debt remain valid against the persons executing them. The passage of HB 322 will help reduce the likelihood of secured debt being stripped of secured status due to gray areas in the law relating to execution or recording requirements. It appears that the unintentional effect of HB 322 on deed and assignment execution (as well as security deeds/mortgages) is that notary acknowledgements alone will no longer meet recording requirements in Georgia. As stated above, for all security deeds/mortgages, assignments, and deeds, the requirement now is that the maker/signor must sign in the presence of one attesting witness AND one attesting officer as defined by O.C.G.A. § 44-2-15. An “officer” is defined as a notary public, judge, magistrate, or deputy clerk/clerk of the superior court. What attestation means, in layman’s terms, is that the witness and notary are in the presence of the signor of the document, and personally view the signor’s signing of the document. An acknowledgment typically certifies that the signor acknowledged to the notary that she/he signed the document, and it is her/his signature. To ensure compliance, mortgage servicers should review their document templates immediately and work with their local law firms to revise them if needed.

Another major piece of legislation to pass this year, affecting residential real estate closings in Georgia, was House Bill 153 (HB 153). Sponsored by Representative Weldon with the support of the Real Property Law Section of the Georgia Bar Association, the bill was introduced in response to a 2014 Formal Advisory Opinion issued by the Supreme Court of Georgia regarding witness-only closings. The new law, effective July 1, 2015, allows any consumer involved in a one-to-four family residential real estate transaction (or a consumer debtor or trustee of a consumer debtor in a bankruptcy case involving a one-to-four family residential property) to file a civil action for damages stemming from a violation of the Georgia Supreme Court’s rules relating to the unlicensed practice of the law.

As for legislation that did not pass in 2015: SB 117 (which would have given condominium owners associations a super-priority lien for 6 months’ worth of unpaid assessments prior to a foreclosure sale, even as to the holder of a first-priority security deed) failed to make it out of the Senate Judiciary Committee. HB 115, which provided a borrower facing foreclosure with a statutory right to cure, passed out of the House Judiciary Committee but did not make it out of the House Rules Committee.

As a final note, the Georgia General Assembly operates on a biennial legislative term. Any bills that do not pass both chambers by Day 40, or cross over to the other chamber by Day 30 in the first year, will typically remain in the most recent committee to which they are assigned and be available for consideration the following year. If a bill does not pass in the second term, it is dead and will have to be reintroduced. This means that in addition to the new bills introduced in 2016, many of the bills from 2015 will still be in play next year.

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Legislative Updates: Connecticut

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by Mark Piech
and Adam Bendett
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

On June 1, 2015 the Connecticut Legislature passed Substitute House Bill 6752, An Act Extending the Foreclosure Mediation Program (the Amendment). The Amendment makes one substantive and a few minor changes to the Foreclosure Mediation Program. A summary of some of the Amendment’s changed provisions are set forth below.

The effective date of the provisions of the Amendment is July 1, 2015. The Amendment extends the sunset provision of the Foreclosure Mediation Program through June 30, 2019. The original expiration date was June 30, 2016. Please note, any mediation application submitted prior to the expiration date will be subject to the Foreclosure Mediation Program.

Expanded Eligibility of Parties
— The mediation program has been expanded to cover non-borrowers that are permitted successors-in-interest. A “permitted successor-in-interest” is defined in the Amendment as a person who is a defendant in a foreclosure action with a return date on or after October 1, 2015, and is either: (A) the former spouse of a decedent-mortgagor, who acquired sole title to the residential real property by virtue of a transfer from the decedent-mortgagor’s estate or by virtue of the death of the decedent-mortgagor where title was held as joint tenants or tenants in the entirety; or (B) the spouse or former spouse of a mortgagor or former mortgagor who: (i) acquired title to the residential real property by virtue of a transfer from the mortgagor or former mortgagor where the transfer resulted from a court decree dissolving the marriage, a legal separation agreement, or a property settlement agreement incidental to such a decree or separation agreement, and (ii) ensures that all necessary consents to the disclosure of nonpublic personal financial information have been provided to the mortgagee in accordance with the Amendment. These parties may now participate in the Foreclosure Mediation Program. Please note, however, that some judges were typically referring such parties into the Foreclosure Mediation Program, either upon motion or sua sponte, so this statutory change does not practically alter successor-in-interest eligibility in many cases.

Mortgagee Requirement
— In addition to the other documents that a mortgagee must produce to the borrower and mediator within 35 days of the return date, all past agreements modifying the note or mortgage and current versions of all reasonably necessary loss mitigation forms must now be provided.

Pre-mediation Period — The Amendment also provides leeway to the court system in scheduling and providing the borrower’s financial documents to the mortgagee or its counsel. Prior to the passage of the Amendment, the mediator had 84 days from the return date to provide the borrower’s financial package to the plaintiff’s counsel. The Amendment now allows this 84-day deadline to be extended upon motion of the mediator for good cause shown. Because the court rarely enforced the previous deadline, this change has a limited practical impact.

Reporting from Court to Legislature — The Amendment continues the Chief Court Administrator’s obligation to submit a summary of the mediation program, and specified data collected by the mediators’ reports, to the legislature by March 1, 2016 and each year thereafter until March 1, 2019.

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Legislative Updates: Colorado

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by Larry Castle
The Castle Law Group
USFN Member (Colorado)

This CO article appeared in the USFN e-Update (May 2015 ed.) and is reprinted here for those readers who missed it.

On April 21, 2015 the Colorado State Legislature passed House Bill 15-1142. The bill offers the opportunity to have electronic public trustee nonjudicial foreclosure sales through either the internet or other electronic medium. The law becomes effective on September 1, 2015. There are very few particulars contained within the new statute.

What we do know is that there is an additional fee of no more than $60, authorized by the statute to be added to the total public trustee fees for the use of the electronic sale process. This further fee must be paid by the foreclosing party prior to the sale.

We also know that the only requirements outlined in the bill are that the combined notice of sale and rights to cure and redeem sent by the public trustee to all interested parties, must identify: the electronic address for the sale; the location of computer workstations that will be available to the public; and how the public is to obtain instructions on accessing the sale and submitting bids. Furthermore, combined notice must provide a statement that the bidding rules will be posted on the internet, or other electronic medium used to conduct the sale, at least two weeks prior to the sale date.

For electronic sales only, the statute is amended to allow the holder of the evidence of debt, through its attorney, to submit both a minimum and maximum bid. Neither the holder nor its attorney needs to physically attend the sale in order to competitively bid. By statute, the electronic bid will be increased in increments incorporated into the electronic program used by the public trustee. The foreclosing party will not be able to set the incremental increases of the bid. It is important to note that Colorado statute also requires that the foreclosing party bid based upon the fair market value of the property, less reasonable costs of sale. Additionally, there will continue to be a post-sale right of redemption for junior lienholders. The redemption amount is the bid amount, plus allowable expenses from the sale date to the redemption date.

It is important to note that the new statute specifically states that the county, the officer, as well as employees of the county or officer acting in their official capacity in preparing, conducting, and executing an electronic sale are not liable for the failure of any device that would prevent a person from participating in the electronic sale process.

The legislature did not provide any guidance regarding the rules for the electronic sales, leaving that to the public trustees. This may create the possibility for each county public trustee (who may choose to have electronic sales) to design different rules and methodologies, as well as use different technologies.

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Legal Issues Update: Municipality Actions in Property Preservation: Detroit as an Example

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by Matthew B. Theunick
Formerly with Trott Law, P.C.
USFN Member (Michigan)

On July 15, 2009 the Detroit Land Bank Authority (DLBA) held its first meeting. The DLBA was empowered through a seven-member board, appointed by the Mayor of Detroit and the Detroit City Council, with the authority to manage tax-reverted properties, to clear titles, and to buy, sell, demolish, and/or rehabilitate properties in the City of Detroit. From its initial genesis in mid-2009 to its current status as an institution with more than 56 full-time and 34 part-time employees, the DLBA has recently seen the scope of its work — and its reach — increase dramatically under the stewardship of Mayor Duggan (who came into office in 2013 in the wake of Detroit’s historic Chapter 9 bankruptcy.)

In its designated role to help clean up blight and abandonment in the City of Detroit, the DLBA has sold more than 125 homes in online auctions (via www.buildingdetroit.org) since May 5, 2015, collecting in excess of $2 million in sales. The home prices typically range from $1,000 to $100,000 in the auction sales, providing prospective buyers with unique opportunities to obtain bargain prices and the City with new owners who will hopefully become worthy stewards of these properties now, and into the future. (Estimates vary, but there are up to 78,000 vacant homes and/or abandoned buildings in the City, along with 90,000 vacant lots.)

While no one has seriously questioned the imprimatur of the DLBA’s mission and much of the good work that the DLBA has accomplished, the DLBA is, nonetheless, not without some compelling criticism. By way of illustration, in its efforts to ameliorate blight and abandonment in Detroit, one of the key weapons in the DLBA’s arsenal has been for the mayor and the DLBA to file a more-or-less, one-size-fits-all form complaint. Named as defendants in an in rem cause of action are twenty to thirty separate property addresses, with claims of common law public nuisance and statutory public nuisance, alleged in an effort to obtain agreements for the repair of the properties; to effectuate transfer of title to the properties; to possibly abate the alleged nuisance through demolition actions; along with seeking money judgments for the costs, fees, and expenses incurred by the City in abating the nuisance.

Problematic with the City’s form complaint is that it is typically assigned to the same judge to oversee the City’s claims for relief from the defendants. Additionally, the mayor & the DLBA immediately request an Ex Parte Order for Alternate Service, along with an Ex Parte Order to restrict the transfer or encumbrance of the properties, both of which are typically granted as a matter of course. Additionally, the form complaint seeks “equitable relief and/or compensatory relief from Defendants, and any and all owners and interest holders of record...”. The City then goes on to list a number of purported statutory and/or ordinance/code violations and alleges that, “The owners and interest holders of the Defendant properties have violated one or more of the following state laws and/or ordinances...”.

An obvious concern with the City’s form complaint is that it conflates the rights of mortgagors with that of mortgagees, as if they were one and the same. Typically, a bank or mortgage lender has simply provided the necessary funding to the property owner for the purchase of the subject property, and has had no direct involvement or control in the circumstances that led to the property’s current state. Also, in cases where the lender has not taken the property to a foreclosure sale, it generally lacks the power to effectuate change or rehabilitation of a property — short of filing its own action for waste, which only further adds to the overall cost of servicing the mortgage loan.

As such, while the City’s efforts to combat blight and abandonment in the City of Detroit are certainly laudable, the City’s endeavors to take outright title to the properties; to extract settlement agreements from the mortgagors and/or mortgagees for the rehabilitation of the properties; and/or to demolish the properties is often undertaken at a high cost to innocent parties — ones who have had no hand in the circumstances leading to the City’s current status. Thus, when presented with a complaint similar to that of the DLBA, care should be taken in timely responding to, and defending it. There are potentially high stakes involved, which could include losing the entire lien interest in the subject property, along with damages.

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HOA Talk: North Carolina: HOA Dues Following Foreclosure —Purchaser at Risk?

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by Lanée Borsman
Hutchens Law Firm
USFN Member (North Carolina)

Chapter 47 of the North Carolina General Statutes, which deals with the lien of homeowner and condominium association (HOA and COA) dues, was amended in 2013. [House Bill 331/Session Law 2013-202.]

North Carolina is not a “super lien” state. When the holder of a first mortgage forecloses, the purchaser at the foreclosure sale has, historically, been liable only for dues incurred from the date of the “acquisition of title” to the property. Until this legislative amendment, the recording date of the trustee’s deed has been used to determine the date of “acquisition of title.” This was true even on an FHA loan where the assignment of the bid to HUD could mean a delay in the recording of the trustee’s foreclosure deed for a long period of time. The purchaser at the foreclosure sale was not liable for any dues until the trustee’s deed was recorded, and the liability for any past-due amount prior to that date was pro-rated among all of the property owners.

Homeowners associations across the state rallied against the burdens being placed on the rest of the property owners as a result of delays in recording the trustee’s deed. The change came via clarification of the definition of “acquisition of title.” The amendment provides that the date used to determine this is the day the “rights of the parties become fixed,” otherwise known as the end of the upset-bid period, or confirmation of the sale, which is typically 10 days after the sale date. So, whether or not a trustee’s deed is immediately recorded, the liability for dues shifts to the purchaser at confirmation.

North Carolina is a one-deed state, so an assignment of the bid is all that is needed to record the foreclosure deed directly into HUD. The dilemma for servicers of FHA loans is whether to elect to move to a two-deed process rather than wait for conveyance instructions to record a deed. If record title is vested in the servicer, notification of delinquent HOA dues or any foreclosure of those dues would be required. Without a recorded deed, it is unclear whether the purchaser at foreclosure would be entitled to such notice. While more expensive, recording a pre-HUD-conveyance deed may be the best protection for servicers (who don’t want to risk losing the property to unpaid HOA dues) after they have gone through the process of completing a foreclosure.

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Legislative Updates: Utah

Posted By USFN, Friday, June 26, 2015
Updated: Friday, September 25, 2015

June 26, 2015

 

by Scott Lundberg
Lundberg & Associates
USFN Member (Utah)

This article appeared in the USFN e-Update (May 2015 ed.); it has been revised and is republished here.


2015 was a fairly quiet legislative year in Utah, as it relates to legislation with an impact on mortgage servicers. Senate Bill 0120 (Regulation of Reverse Mortgages) will be of special interest to default servicers. House Bill 0227 (Real Estate Amendments), also discussed briefly below, addresses only origination. Both bills took effect on May 12, 2015.

Senate Bill 0120 (Regulation of Reverse Mortgages) — enacted the Utah Reverse Mortgage Act, Utah Code sections 57-28-101, et seq. It sets forth requirements for reverse mortgages in Utah and addresses the treatment of reverse mortgage loan proceeds, priority, foreclosure, and lender default. It contains a safe harbor for lenders making reverse mortgages insured by the U.S. Department of Housing and Urban Development, if they comply with the requirements found in 12 U.S.C. Section 1715z-20 and 24 C.F.R. Part 206.

The safe harbor does not apply to foreclosure. For defaulted reverse mortgages, the bill requires that, before commencing foreclosure, the servicer must give the borrower written notice of the default and provide at least 30 days after the day on which the borrower receives the notice to cure the borrower’s default. This requirement will necessitate a change in the breach or demand letters for servicers that currently allow 30 days from the day that the letter or notice is sent.

This change poses several challenges for servicers. First, the servicer will need to use some form of return receipt request with the notices in order to be able to determine when the borrower receives the notice. Even that, however, won’t eliminate the fact that some notices may go unclaimed or undeliverable. Since most defaults under reverse mortgages are the result of the borrower’s death, this is likely to be a commonplace occurrence. The statute is not clear on what happens in that event.

Corrective legislation is anticipated in the 2016 session. Until that occurs, servicers of reverse mortgages will have to give careful consideration to this issue.

House Bill 0227 (Real Estate Amendments) — amended a number of provisions relating to real estate. The principal areas of interest (to mortgage servicers) in the bill are: (a) modification of licensing requirements; (b) affirmative disclosure requirements associated with the lending process; and (c) prohibited conduct for those engaged in the business of residential mortgage loans.

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U.S. Supreme Court Holds that Parties May Consent to Adjudication by Bankruptcy Court of “Stern-Type” Claims

Posted By USFN, Monday, June 8, 2015
Updated: Thursday, August 27, 2015

June 8, 2015 

 

by Christopher J. Panos

Partridge Snow & Hahn LLP – USFN Member (Massachusetts)

 

The United States Supreme Court in Wellness International Network, Limited v. Sharif, 575 U.S. __ (May 26, 2015), answered one of the foremost questions left open after its decision in Stern v. Marshall, 564 U.S. 2 (2011) — is it permissible for litigants in a bankruptcy court to consent to a final adjudication of claims that are “‘core’ under the statute but yet prohibited from proceeding in that way as a Constitutional matter”? In Stern, the Supreme Court ruled that bankruptcy courts lack authority under the Constitution to adjudicate such claims because bankruptcy judges are not “Article III” judges.

 

Four years after deciding Stern, the Supreme Court has ruled that parties can consent to the bankruptcy court entering a final order on a “Stern-type claim” and that implied consent may be found as long as consent is “knowing and voluntary.” As the law develops regarding the authority of the bankruptcy courts, it is important for litigants to make an assessment of these issues when litigation is commenced in the bankruptcy court.

 

Sharif was an individual debtor in a chapter 7 proceeding. A creditor objected to Sharif’s discharge and sought a declaratory judgment that certain assets, held in trust by Sharif, were actually property of the bankruptcy estate. The creditor claimed that the trust was the alter ego of Sharif. After discovery violations by Sharif, the bankruptcy court entered default judgment against him. Sharif appealed. While the appeal was pending, the Supreme Court issued its opinion in Stern. Sharif then argued that the judgment entered by the bankruptcy court was unconstitutional because that court lacked authority over the alter ego claims. The district court upheld the judgment, but the Seventh Circuit Court of Appeals held that the parties could not consent to have the bankruptcy court enter final orders with respect to Stern-type claims. The Supreme Court reversed the Circuit Court, holding that parties can consent to have their disputes decided by a non-Article III judge. The case was remanded for a finding as to whether Sharif had, by his actions, consented to adjudication by the bankruptcy court. The Supreme Court advised in a footnote that the better practice would be for a court to rely on express consent and that may be required in some cases.

 

The majority opinion appeared to recognize the practicality of permitting bankruptcy courts to determine claims where the parties consent to such adjudication and the judicial efficiency that can be realized by that result. Chief Justice Roberts vigorously dissented, however, arguing that the majority had placed practicality over the separation of powers mandated by Article III of the Constitution.

 

While issues remain in the wake of Stern, the decision in Wellness International Network, Limited v. Sharif is a significant development in the evolving view of bankruptcy court authority and related practice. Litigants will be forced to make strategic decisions early in any case regarding whether to litigate claims in the bankruptcy court, or to seek final adjudication in the district court. In practice, even where consent is not given by all parties, many cases involving Stern-like claims will remain with the bankruptcy court to conduct some or all of the litigation, and either report and recommend findings and rulings to the district court or hand-off the case at the time of trial.

 

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U.S. Supreme Court Holds that a Chapter 7 Debtor Cannot Strip-Off a Wholly-Undersecured Lien

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

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

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. __, 2015 WL 2464049, 2015 U.S. Lexis 3579 (Nos. 13-1421 and 14-163, June 1, 2015). The 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.

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Rhode Island: Court Reviews Applicability of Foreclosure Mediation Statute

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

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

On May 15, 2015 a decision was issued by the Providence Superior Court for the State of Rhode Island and Providence Plantations, Fontaine v. U.S. Bank National Association. The case, which included several consolidated foreclosure matters, revisited the applicability of R.I.G.L. § 34-27-3.2 to loans that were over 120 days delinquent as of September 13, 2013, the date that the statute went into effect.

The 2013 version of the statute stated that “when a mortgage is not more than one hundred twenty (120) days delinquent, the mortgagee … shall provide to the mortgagor written notice … that the mortgagee may not foreclose on the mortgaged property without first participating in a mediation conference.” Under this version of the statute, any loan that was over 120 days delinquent as of September 13, 2013 was exempt from the requirement of sending the notice of mediation.

The statute was further amended on October 6, 2014, eliminating the language that limited its applicability to only those mortgages that were over 120 days delinquent as of September 12, 2013. The 2014 version of the statute, subsection (d), states that “The mortgagee shall, prior to initiation of foreclosure of real estate pursuant to 34-27-4(b), provide to the mortgagor written notice … that the mortgagee may not foreclose on the mortgaged property without first participating in a mediation conference.”

The Fontaine decision states that mediation notices are required to be sent on all loans, regardless of the date of default. In reaching its conclusion, the court looked at the plain meaning of the statute, and determined that since the exemption for loans over 120 days delinquent was left out of the final version of the statute, the intent of the General Assembly was to require notice of mediation to be sent to all mortgagors. In relevant part, subsection (m) of R.I.G.L. § 34-27-3.2 states that “Failure of the mortgagee to comply with the requirements of this section shall render the foreclosure void.” Therefore, looking to the plain meaning of the statute, it is likely that any foreclosure where mediation would have applied (but was exempt due to the date of delinquency) will ultimately be deemed invalid if the mediation notice was not sent.

In line with this judicial decision, it should be noted that the Rhode Island Department of Business Regulation has scheduled a public hearing (June 17, 2015 at 10:00 a.m., at the Department of Business Regulation: 1511 Pontiac Avenue, Cranston, Rhode Island 02920), at which they plan to discuss a proposed amendment to Banking Regulation 5, Section 5(B), which would exclude any exemption from the mediation requirements for loans that were over 120 days delinquent as of September 13, 2013. (The proposed amended regulation and a summary of proposed non-technical amendments are available for review here.)

What It Means for Servicing
As recently as Friday, May 22, 2015, several major title insurance companies issued an alert that for foreclosures initiated (meaning the notice of sale is sent) on or after September 13, 2013 and before October 6, 2014, the mortgagee may prove its exemption from compliance with the mediation requirements of R.I.G.L. § 34-27-3.2 by using the Affidavit of Exemption provided by the Rhode Island Department of Business Regulation in Banking Regulation 5, and checking off paragraph 3(B) of the affidavit (i.e., that the mortgagor was more than one hundred twenty days delinquent on or before September 12, 2013). For foreclosures initiated on or after October 6, 2014, the mortgagee must prove compliance with the mediation requirements of R.I.G.L. § 34-27-3.2 and the Affidavit of Exemption created by the Department of Business Regulation in Banking Regulation 5 will NOT be accepted as a substitute for compliance if paragraph 3(B) of the affidavit is checked off as the reason for the exemption.

Servicers will need to review any set sale that did not comply with the statute to determine whether to proceed to sale, or cancel in order to send the mediation notices. Furthermore, any sale that has proceeded, but the deed has yet to be recorded, also needs review. This is because not all of the major national title insurance companies have taken a position as to the insurability of title in such a scenario. Should these sales be deemed uninsurable, the sales will need to be rescinded to allow for mediation notices to be provided. If the deed has been recorded, court action would be necessary to rescind the sale.

Due to the above factors, many servicers are cancelling sales and re-starting the foreclosure to comply with the mediation statute.

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Foreclosure Procedures and Satisfaction of Due Process Rights

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

by Matthew Theunick
Formerly with Trott Law, P.C. – USFN Member (Michigan)

In Garcia v. Fannie Mae, the Sixth Circuit Court of Appeals was presented with one issue on appeal: whether or not the district court erred in dismissing the plaintiffs’ due process claim because it found that Fannie Mae was not a state actor for constitutional purposes when it foreclosed upon the plaintiff’s home? [2015 U.S. App. LEXIS 5532; 2015 FED App. 0064P (6th Cir. Apr. 7, 2015)]. The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.

With respect to the Due Process Clause of the U.S. Constitution, the Fifth and Fourteenth Amendments prohibit the deprivation of property by a state actor without due process of law. In Garcia, the borrowers alleged that there were violations of their Fifth and Fourteenth Amendment Due Process Rights. Ultimately, the borrowers’ challenge to government-sponsored enterprise (GSE) Fannie Mae was predicated upon the notion that Fannie Mae was a state actor for constitutional purposes, and that the borrowers’ due process rights were violated in the foreclosure by advertisement that occurred.

One of the traditional defenses brought by the Federal Housing Finance Agency (FHFA) as conservator of Fannie Mae and Freddie Mac against due process challenges was based upon the argument raised in Lebron v. National Railroad Passenger Corp., 513 U.S. 374, 115 S. Ct. 961, 130 L. Ed. 2d 902 (1995). That is, that Fannie Mae and Freddie Mac are not governmental actors who can be held liable for due process clause violations, as the federal government does not have permanent authority to appoint a majority of the directors of the GSEs. This argument has proven successful in defending a number of due process challenges. Additionally, the FHFA contended in Syriani v. Freddie Mac Multiclass Certificates, 2012 U.S. Dist. LEXIS 179863, * 11-12 (C.D. Cal. 2012), that the temporary nature of the FHFA’s conservatorship also supports the conclusion that the GSEs have not been transformed into a governmental actor. See also Herron v. Fannie Mae, 857 F. Supp. 2d 87, 93 (D.D.C. 2012) (holding that because the FHFA’s conservatorship “is by nature temporary, the government has not acceded to permanent control over the entity and Fannie Mae remains a private corporation.”)

However, in Garcia, the Sixth Circuit affirmed the district court’s judgment, dismissing the due process challenges as without merit, on the grounds that the FHFA’s compliance with Michigan’s foreclosure by advertisement procedures satisfied the requirements of the Due Process Clause. In elaborating upon this compliance, the Sixth Circuit stated that the “notice requirements are not at odds with notions of due process under both common law and Supreme Court precedent.” Garcia at 12. The Sixth Circuit noted that the statute requires notice and opportunities to cure the default or redeem the property at several points before the borrower’s rights are fully extinguished. Id. Additionally, the Sixth Circuit pointed out that a foreclosed borrower’s ability to bring an action before expiration of the statutory redemption period satisfies the requirement that there be a hearing “at a meaningful time and in a meaningful manner.” Id. at 10. Thus, the Sixth Circuit’s opinion in Garcia provides further support to the FHFA against due process challenges to foreclosures by advertisement in Michigan, and arguably beyond.

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“Surrendered” Properties: Forced Vesting of Title in the Lender? Bankruptcy Courts Not Uniform

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

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

Since the financial crisis, debtors have tried several methods to transfer the title to surrendered properties back to the mortgage company in an effort to avoid having to pay property taxes or homeowners association (HOA) fees. Bankruptcy courts across the country have approached this issue in a less than uniform fashion.

Georgia
In In re Arsenault, 456 B.R. 627 (Bankr. S.D. Ga. 2011), the bankruptcy court determined that a mortgage servicer cannot be compelled to take affirmative steps to accept surrendered collateral. Moreover, the servicer’s failure to do so was not a violation of the automatic stay or confirmation order. Id., at 631.

Hawaii
In In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013), in addition to a plan provision surrendering the property in full satisfaction of the debt, the debtor’s plan provided that “the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.” Although the trustee objected to the nonstandard plan provision, the mortgage company did not object or make an appearance. Accordingly, the bankruptcy court confirmed the debtor’s plan. Id., at 524 (citing In re Szostek, 886 F.2d 1405, 1413) (3d Cir. 1989) (“The general rule is that the acceptance of the plan by a secured creditor can be inferred by the absence of a timely objection”). See also In re Rose, 512 B.R. 790, 795 (Bankr. W.D.N.C. 2014) (Since a transfer of real property is not effective unless the deed is delivered and the grantee accepts it, Section 105(a) of the Code does not allow a bankruptcy court to permit a debtor to transfer property to his mortgage lender by fiat).

Tennessee
On the other hand, the U.S. Bankruptcy Court for the Middle District of Tennessee stated that equity required the court to fashion a remedy that would prevent eradication of the debtor’s fresh start in chapter 7, due to the nondischargeability of HOA fees. In re Pigg, 453 B.R. 728 (Bankr. M.D. Tenn. 2011). Here, the debtor had attempted to deliver a deed-in-lieu of foreclosure after parts of Nashville were flooded and her home was damaged. Although the bank had taken steps to physically possess the property, the bank took no steps to foreclose even though there was interest by a third-party investor. The court eventually determined that the bank and the HOA had consented to the trustee’s sale of the property by their inaction, and the debtor would be relieved of any interest in the property.

Oregon
A recent ruling has come from the U.S. District Court in Oregon — in the case of Bank of New York Mellon v. Watt (In re Watt), 2015 WL 1879680 (D. Or.).

In November 2006, Nicholas and Patricia Watt (debtors) took out a loan in the amount of $296,940 to purchase a second residence in Newport, Oregon (Property). The Property was a townhouse in a planned community subject to covenants and restrictions (CCRs) enforced by Meritage Homeowners Association (Meritage HOA). Pursuant to this transaction, the debtors executed a note and deed of trust that were eventually transferred to Bank of New York Mellon, as Trustee for Certificate Holders of the CWALT, Inc., Alternative Loan Trust 2006-OA21, Mortgage Pass Through Certificates Series 2006-0A21 (BNYM). The deed of trust held by BNYM created a secured first-position lien against the Property. Watt, at *1.

In 2012 the debtors stopped making their loan payments, thus materially defaulting under the note and deed of trust, resulting in BNYM commencing foreclosure proceedings. At the same time, the debtors incurred a significant amount of assessments as a result of failing to make repairs and by failing to pay HOA fees. These assessments created a lien that was subordinate to BNYM’s deed of trust pursuant to Or. Rev. Stat. § 94.709(1)(b). In addition, Bank of America held a junior consensual lien in the amount of $34,000, and Meritage HOA held a judgment lien against the Property in the amount of $225,000.

On March 12, 2014 the debtors filed for relief under chapter 13 of the Bankruptcy Code, thus halting BNYM’s foreclosure proceedings. The debtors scheduled the Property with a value of $271,220, and more than $346,000 was owed on BNYM’s note. Accordingly, there was no equity in the Property.

The debtors filed more than one plan; both of which received objections from Meritage HOA. On June 30, 2014 the debtors filed their second amended plan. Of significance was the provision in Paragraph 10 stating that “[u]pon entry of an Order Confirming this Chapter 13 Plan, the property at 56 B NW 33rd Place in Newport, Oregon shall be vested in” BNYM but that the vesting “shall not merge or otherwise affect the extent, validity, or priority of any liens on the property.” On the same day, the debtors responded to a previously-filed motion for relief from stay by BNYM by stating that the “Property is subject to homeowners association dues which continue to accrue so long as Debtor is on title so any delay on the part of Movant to foreclose causes damage to Debtor” and that the “Amended Plan filed by Debtors seeks to vest title to the property in the name of Movant pursuant to 11 U.S.C. 1322(b)(9).” The following day, Meritage HOA filed a response to the stay relief motion in support of the Second Amended Plan, requesting the court to address confirmation prior to granting BNYM’s motion. Id., at *1-2.

BNYM objected to the Second Amended Plan, arguing that confirmation thereof would force it to take title to the Property, subject to junior liens, and with the obligation to pay HOA dues and assessments. BNYM asserted that Section 1325(a)(5) was an exclusive statutory provision regarding confirmation of a chapter 13 plan and that no other provision, including Section 1322(b)(9), could enlarge these requirements. Id., at *2.

On October 15, 2014 the bankruptcy court issued its memorandum opinion granting BNYM’s motion for relief from stay and confirming the debtors’ second amended plan. In re Watt, 520 B.R. 834 (Bankr. D. Or. 2014). In making its decision, the bankruptcy court noted that debtors may find themselves in a situation where mortgage lenders are reluctant to foreclose, and because to “surrender” through bankruptcy does not divest the debtor of title, the debtor remains liable for post-petition HOA assessments. Even after acknowledging the Rosa and Rose cases (see supra, which held that a secured party could not be required against its will to take title to property surrendered in a bankruptcy proceeding), the court held that “[s]ection 1322(b)(9) permits confirmation of a plan that provides for vesting of property in a third party, such as a lien holder, without that party’s consent.” Moreover, “the Debtors carefully drafted paragraph 10 to make sure that Debtors were not altering the extent, priority, or validity of existing liens. This non merger language is important to preserve [BNYM]’s ability to complete a foreclosure post confirmation.” Watt, 2015 WL 1879680, at *2-3.

On October 31, 2014 BNYM filed its notice of appeal. BNYM asserted that the bankruptcy court erred as a matter of law in confirming the debtors’ chapter 13 plan because it did not meet any of the three requisite criteria listed in Section 1325(a)(5) of the Bankruptcy Code. On the other hand, the debtors contended that the substantive rights given to them by Congress under Section 1322(b) “are balanced with and not supplanted by the substantive obligations imposed on them by Section 1325(a),” such that they should be read together to allow vesting of property in a secured creditor, even without its consent. Id., at *3.

As expected, the district court explained that the debtors had the burden of establishing that their plan satisfied the requirements of the Bankruptcy Code for confirmation and, further, that Section 1322 of the Bankruptcy Code regulates the contents of a plan. Specifically, Section 1322(a) dictates what a plan “shall provide” while Section 1322(b) includes a list of terms that “may” be included. The relevant provision for this case was Section 1322(b)(9), which specifies that “the plan may ... provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or any other entity.” It was undisputed by the parties that this provision does not require consent. Id., at *3.

Confirmation of a chapter 13 plan is governed by Section 1325. Id., at *4 [citing In re Andrews, 49 F.3d 1404, 1407 (9th Cir. 1995)]. Bankruptcy Code Section 1325. Confirmation of plan expressly states: “(a) Except as provided in subsection (b) the court shall confirm a plan if – … (5) with respect to each allowed secured claim provided for by the plan – (A) the holder of such claim has accepted the plan; (B)(i) the plan provides that – (I) the holder of such claim retain the lien securing such claim until the earlier of – (aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328; and (II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and (iii) if – (I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and (II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or (C) the debtor surrenders the property securing such claim to such holder[.]”

The Bankruptcy Code does not define the terms “surrender” or “vesting” for purposes of chapter 13. However, “surrender” has been interpreted as the debtor’s relinquishment of his or her right to the property at issue, and then the creditor is free to accept or reject the collateral. Id., at *4 [citing Arsenault, 456 B.R. at 629-30 (“surrender of encumbered property leaves the secured creditor in control of the exercise of its remedies”)]. Conversely, “vesting” includes a present transfer of ownership. Id., at *4 (citing Rosa, 495 B.R. at 524). Thus in the context of real property, vesting is the mechanism that transfers title and terminates the debtor’s liability for post-petition HOA assessments.

The question presented for the district court was whether a chapter 13 plan is confirmable when the debtor proposes to surrender and inserts a nonstandard plan provision such as vesting, and the secured creditor opposes the inclusion of the nonstandard term. Id., at *5.

The district court ruled that confirmation under these circumstances was erroneous and that, essentially, the bankruptcy court had interpreted Section 1322(b)(9) as creating a fourth option under Section 1325(a)(5). Section 1325(a)(5) “unambiguously” states that a plan is confirmable “solely” where surrender is proposed. However, the debtors’ second amended plan not only proposed to surrender the Property, it forcibly transferred that interest and the liabilities to BNYM. This would necessarily open the door for “unintended and injurious” consequences: the lender assumes the burdens of ownership for which it did not contract, including personal liability. Id., at *5 (citing Rose, 512 B.R. at 795-96).

By confirming a plan that included non-consensual vesting in conjunction with surrender, the bankruptcy court read language into the Bankruptcy Code that is not there, and “frustrated the purpose” of the statute, which is to provide protection to creditors holding allowed secured claims. See McDaniel v. Wells Fargo Invs., LLC, 717 F.3d 668, 677 (9th Cir. 2013). The bankruptcy court’s interpretation transforms the secured creditor’s right into an obligation, thereby rewriting both the Bankruptcy Code and the underlying loan documents. Id., at *6.

On April 22, 2015 the district court vacated the bankruptcy court’s order of confirmation and remanded the case for further proceedings. Id., at *7. The debtors have filed a motion for reconsideration before the district court.

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Alabama: Redemption Period Shortened & New Notice Requirement

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

by Rebecca Redmond
Sirote & Permutt, P.C. – USFN Member (Alabama)

The Alabama governor signed Senate Bill 124 (Act No. 2015-79) into law on April 23, 2015. The new legislation, which becomes effective on January 1, 2016, amends Sections 6-5-248, 6-5-252, and 8-1-172 of Ala. Code (1975), and provides for partial prospective operation. The key text of the new law effectively shortens the redemption period from one year to 180 days for “residential property on which a homestead exemption was claimed in the tax year during which the sale occurred.” For all non-homestead residential property, the redemption period remains one year. This includes all commercial property, as well as residential property where no homestead exemption exists. Since foreclosed properties in Alabama can be marketed and sold during the redemption period, the shortened redemption period should not have any material impact on the foreclosure and REO process.

The new legislation also adds a notice provision to Ala. Code § 6-5-248. It requires, for the first time, a direct notice of foreclosure to be sent to the mortgagors(s), advising that he/she/they has/have a right under Alabama law to redeem his/her/their property. This notification must be provided along with the publication notification that runs in newspapers, and must also be provided to the mortgagor(s) via certified mail to the property address at least 30 days prior to the foreclosure sale. This new notice requirement is found in § 6-5-248(h)(emphasis added). It provides as follows: “(h) The mortgagee who forecloses residential property on which a homestead exemption was claimed in the tax year during which the sale occurred shall give notice to the mortgagor who signed the mortgage in substance as follows: ‘Alabama law gives some persons who have an interest in property the right to redeem the property under certain circumstances. Programs may also exist that help persons avoid or delay the foreclosure process. An attorney should be consulted to help you understand these rights and programs as a part of the foreclosure process.’ This notice shall be mailed to the mortgagor at the address of the property subject to foreclosure at least 30 days prior to the foreclosure date by certified mail with proof of mailing. This notice also shall be included in the notice required pursuant to Section 35-10-13. For foreclosed residential property on which a homestead exemption was claimed in the tax year during which the sale occurred, the period of time during which a right of redemption may be exercised shall not begin until notice is given in accordance with this subsection. A defective notice, or the failure to give notice, will not affect the validity of the foreclosure, including the transfer of title to the property. All actions related to the notice requirement must be brought within two years after the date of foreclosure, or the action shall be barred.” Ala. Code (1975) § 6-5-248(h).

As noted above, this new legislation does not become effective until January 1, 2016.

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Connecticut: Mailing Notices of Default Requires Affirmative Evidence of Delivery

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

by Adam L. Avallone
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

A discretionary statement in a note secured by a mortgage that the note holder “may” send notice before accelerating payment, accompanied by a statement in the mortgage that notice of default “shall” be given, imposes an obligation to provide notice of a default in payment of the note as a condition precedent to acceleration of the debt. Provident Funding Associates, L.P. v. Sohn, 2015 Conn. Super. LEXIS 54 (Conn. Super. Ct. Jan. 12, 2015). The trial court’s opinion further holds that a failure to comply with giving proper notice of default is a valid affirmative defense to foreclosure, even though the defense does not meet the traditional requirements of defenses to foreclosure in Connecticut, in that it does not implicate the making, validity, or enforcement of the note or mortgage. A simple denial of receipt of the notice of default is sufficient to defeat a plaintiff’s summary judgment motion by creating a genuine issue of material fact. As a result, in order to obtain judgment, the plaintiff must present its evidence in a full court trial.

While the general holding in the case is fairly well-settled in Connecticut, the court’s analysis of the plaintiff’s evidence in support of summary judgment concludes that a mere statement that a notice was sent in compliance with the mortgage is insufficient in the face of a general denial. In other words, the court ruled that the pleadings alone created a genuine issue of material fact that is sufficient to defeat summary judgment.

The court noted that Section 15 of the Mortgage (which was a Uniform FNMA/FHLMC Instrument) provides in relevant part: “Any notice to Borrower in connection with this Security Instrument shall be deemed to have been given to Borrower when mailed by first class mail or when actually delivered to Borrower’s notice address if sent by other means.” (Emphasis added.) In this case, the plaintiff relied on an affidavit stating that the defendant “was duly notified in writing by the Plaintiff in accordance with the terms of the Note and Mortgage of the default and that failure to cure the default may result in acceleration of the debt.” A copy of the December 15, 2011 letter was attached as “a true and accurate copy of the default letter.”

The court concluded, “For all that the affidavit says, the letter could have been mailed or it could have been faxed or emailed or hand delivered or sent by courier. There is simply no evidence supportive of a finding that it was posted with the U.S. Postal Service. The purported default letter bears no legend or marking of any kind indicative of the manner of its transmission, nor is any such documentation separately provided.”

The decision in Sohn makes clear that in the face of a denial of receipt, affirmative evidence of the actual sending of the notice is required, demonstrating compliance under the note and mortgage. A plain reading of the mortgage reveals that mailing is sufficient, so long as sent by first-class mail. If sent by other means, proof of delivery is required. The court’s decision leaves open the question of what constitutes sufficient evidence of mailing or receipt.

This case illustrates the importance of maintaining and providing to counsel business records and documents evidencing policies and procedures of the mailing of notices. As the mailing of these notices is often a condition precedent to the institution of a foreclosure action, a foreclosing plaintiff can easily find themselves with a dismissed action, requiring restart.

©Copyright 2015 USFN. All rights reserved.
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