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BANKRUPTCY UPDATE: U.S. Supreme Court Set to Rule on Chapter 7 Lien Stripping

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Michael G. Clifford
Wilson & Associates, PLLC
USFN Member (Arkansas, Tennessee)

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

It appears that the U.S. Supreme Court will finally determine whether the Bankruptcy Code permits Chapter 7 debtors to “strip-off” wholly under-secured junior mortgage liens. Certiorari was granted on November 17, 2014 in two consolidated cases out of Florida. See Bank of America, N.A. v. Caulkett (Dkt. 13-1421) and Bank of America, N.A. v. Toledo (Dkt. 14-163). This appeal is set to resolve a 3-1 circuit split, in which only the Eleventh Circuit has held that strip-offs are permissible. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)

In 1992, the U.S. Supreme Court held that a Chapter 7 debtor was not permitted to “strip down” a creditor’s allowed secured claim, where the debtor was attempting to void the portion of a first mortgagee’s lien to the extent that the debt exceeded the underlying collateral’s value. Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773 (1992). The debtor’s argument in Dewsnup hinged upon two subsections of 11 U.S.C § 506.

Section 506(a) states that “an allowed claim of a creditor secured by a lien on property … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property … and is an unsecured claim to the extent that the value of such creditor’s interest … is less than the amount of such allowed claim.” Section 506(d) then states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

The debtor argued that Section 506(a) defines what constitutes an allowed secured claim, and that Section 506(d) permits the debtor to void any lien (or portion of it) that does not satisfy the definition. The Supreme Court disagreed with that interpretation, and ultimately held that it was “not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.”

In the consolidated case, the Supreme Court will likely determine the related issue of whether Section 506(d) permits a Chapter 7 debtor to strip-off a junior mortgage lien in its entirety, where the outstanding senior lien exceeds the current value of the collateral. When this issue came before the Fourth, Sixth, and Seventh circuits, they all relied upon Dewsnup, concluding that its holding was equally relevant in circumstances in which a debtor attempts to strip-off (rather than strip-down) an allowed, but underwater, lien. See Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 34 F.3d 555 (6th Cir. 2003); Palomar v. First American Bank, 722 F.3d 992 (7th Cir. 2013).

In 2012, the Eleventh Circuit departed from the majority in McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012). The McNeal court concluded that Dewsnup was not clearly on point because it only disallowed the strip-down of a partially secured mortgage lien, and did not address the strip-off of a wholly unsecured junior lien. Determining that the Dewsnup opinion was not analogous, the Eleventh Circuit held that its pre-Dewsnup precedent (permitting the stripping of a wholly unsecured lien) was still binding. See Folendore v. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989).

Currently, the Eleventh Circuit’s interpretation of Section 506 allows Chapter 7 debtors in Alabama, Florida, and Georgia to strip the liens of wholly under-secured junior mortgages. Consequently, the debtor (or perhaps other unsecured creditors) receive the benefit of any appreciation in the property, not the former lienholder. In all other states, the debtor’s discharge simply absolves the debtor of personal liability on the loan, but does not void the lienholder’s right to foreclose. The Supreme Court’s grant of certiorari should resolve the circuit split, with a decision expected in the latter half of 2015.

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BANKRUPTCY UPDATE: Overview of Comments to the Proposed Amendments to the FRBP and Official Forms

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by David McAllister
Pite Duncan, LLP
USFN Member (California, Nevada)
Chair, USFN Bankruptcy Committee

The Judicial Conference Advisory Committee on Bankruptcy Rules (Committee) proposed amendments to the Federal Rules of Bankruptcy Procedure (FRBP) and Official Forms. The deadline for public comment is February 17, 2015. Below is a brief summary of the primary issues that should be considered for comments.

Proofs of Claim
The proposed changes to FRBP 3002 shorten the time for filing proofs of claim (POC) to 60 days after the petition date, and require the filing of a new Mortgage Proof of Claim Attachment that includes a detailed loan transaction history from the first date of the default, on a loan secured by a debtor’s principal residence in Chapter 13 proceedings, to be filed with the claim. FRBP 3002 then provides an additional 60 days for filing required loan documentation. The signer of the POC must verify under penalty of perjury that the information provided in the claim is accurate. However, filing a claim without a review of supporting documentation raises the issue of whether the signer is committing perjury and/or violating FRBP 9011. While an alternative time for filing a POC to 90 days post-petition with no bifurcation would appear reasonable, the Committee ignored the previous comments on this proposed rule change, and it is likely that this amendment, as proposed, will be adopted.

Proposed FRBP 3002 also requires creditors who seek allowance of their proofs of claim in all voluntary Chapter 7 cases to file the claim within the above time frame. However, the Chapter 7 trustee does not typically determine whether there are assets to administer within this period. Furthermore, FRBP 3002(c)(2)(C) requires a Mortgage Proof of Claim Attachment and escrow account statement in individual Chapter 7 cases, if a security interest is claimed in the debtor’s principal residence. Finally, the failure for a creditor to timely file a POC in a Chapter 7 case will preclude the exercise of credit-bidding rights at a sale of property that is subject to the creditor’s lien. See, Title 11 U.S.C § 363(k). Accordingly, proposed FRBP 3002 should be revised to only require Chapter 7 proofs of claim in asset cases, within the time frame of the Notice of Claims Bar Deadline issued by the court.

National Form Plan
The Committee drafted the form and FRBP amendments as complementary parts of a project to improve the Chapter 13 process. It has been the understanding of many creditors that the proposed amended FRBPs, which weaken certain existing protections and due process, are in exchange for one consistent national Chapter 13 plan. Thus, the adoption of proposed amended FRBPs 2002, 3002, 3007, 3012, 3015, 4003, 5009, 7001, and 9009 should be contingent on the simultaneous adoption of a uniform plan. However, the Committee of Concerned Bankruptcy Judges submitted comments opposing a mandatory national Chapter 13 plan, and there is a significant possibility that the above-referenced amended FRBPs will be approved without the benefit of the uniform plan.

Section 3.5 of the proposed uniform Chapter 13 plan addresses the surrender of collateral securing a creditor’s claim, and merely provides for “consent to termination of the stay.” In several jurisdictions, the existing practice provides for relief from the automatic and/or co-debtor stays upon entry of the plan confirmation order. Accordingly, the Committee should consider revising Section 3.5 to provide for termination of the automatic and co-debtor stays, with respect to creditors’ exercise of their rights against the collateral, to be effective upon entry of the confirmation order.

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Proposed Changes to the CFPB Mortgage Servicing Rules: Two Points that Could Impact Loans in Bankruptcy and Foreclosure

Posted By USFN, Thursday, February 5, 2015
Updated: Wednesday, September 23, 2015

February 5, 2015 

 

by Wendy Walter
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)


 On November 20, 2014, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a 492-page proposal to further amend the servicing rules that went into effect on January 10, 2014. This action was designed by the CFPB to revisit known issues that arose prior to the effective date of the servicing rules, but for which more study was necessary (bankruptcy revisions). Further, the action addresses concerns that have arisen as the CFPB engaged in post-implementation outreach with the industry and with consumer advocacy groups (foreclosure revisions). The proposal has a comment period of 90 days, as of the date of the proposal’s publication in the Federal Register. [As of date of this article in early December 2014, the proposal was not yet published.] It is anticipated that comments will be due sometime in mid-March 2015, which means the changes would not be effective until sometime later in 2015.

Some Background

In late 2013, debates were waged regarding the then-proposed servicing rules that would have required servicers to send the new periodic payment statement to borrowers in bankruptcy. It was clear that Chapter 13 trustees, bankruptcy creditor lawyers, and consumer advocates all needed to educate the CFPB on the real costs and confusion that would be introduced by requiring periodic payment statements while a loan was in a Chapter 7 or Chapter 13 proceeding.

After several meetings and input, the CFPB has proposed to peel back the bankruptcy exemption given in the periodic payment statement rule, which was provided in the Interim Final Rule on October 15, 2013 under 78 FR 62993. The exemption would be allowed to apply to those bankruptcy consumers who are surrendering the property (in the Chapter 13 plan with lack of payment provision to the servicer or in the Statement of Intention), who are avoiding the lien securing the mortgage, or who have requested that the servicer stop sending periodic statements. The proposal would require the servicer to resume sending statements upon request from the consumer in writing, or when the bankruptcy case is dismissed, closed, or the borrower reaffirms the mortgage — to the extent that the remaining debt is not otherwise discharged in the bankruptcy. The proposal also intends to repeal the payment statement exemption for a non-debtor joint obligor in a Chapter 7.

Loss Mitigation Concerns
 An important foreclosure provision covered in the CFPB’s proposal is related to the loss mitigation section, 12 CFR 1024.41, which contains the prohibition on obtaining a judgment or order of sale, or actually conducting the sale, when the borrower has a complete loss mitigation application pending. In the proposed revision to the official commentary in section 12 CFR 1024.41(g), when a servicer or its counsel fails to take reasonable steps to avoid the ruling on a dispositive motion or issuance of an order of sale, the CFPB would like to force the servicer to dismiss the foreclosure proceeding (if necessary) to avoid the sale.

In the proposed amendment titled “interaction with foreclosure counsel,” the CFPB intends to clarify that a servicer is liable for violation of the rules, if the “foreclosure counsel’s actions or inaction caused a violation.” It goes on to require that the servicer “must properly instruct counsel not to make a dispositive motion for foreclosure judgment or order of sale; [and] to take reasonable steps where such a motion is pending to avoid a ruling on the motion or issuance of the order of sale.” Examples given of reasonable instructions include: asking counsel to move for a continuance for the deadline to file a dispositive motion; to move or request that the sale be stayed, otherwise delayed, or removed from the docket; or that the foreclosure proceeding be placed in any administrative status that stays the sale.

In the proposed amendment titled “conducting a sale,” the CFPB identifies reasonable steps for the servicer (or its counsel) to take, including: requesting that a court (or the official conducting the sale) reschedule or delay the sale, remove the sale from the docket, or place the foreclosure proceeding in any administrative status that stays the sale. Again, if the servicer or counsel fails to take reasonable steps to delay the sale, or if the servicer fails to instruct counsel to take reasonable steps, the servicer must dismiss the foreclosure proceeding.

The CFPB is doing this because it has learned in its evaluations of mortgage servicer practices that some servicers did not properly structure and manage third-party vendor relationships, which resulted in harm to borrowers, and imposed “unwarranted fees on borrowers” related to dual tracking. It cites that one of the clearest harms of servicers pursuing loss mitigation and foreclosure procedures concurrently is the loss of the borrower’s house when a complete application review is pending.

The Bureau has received reports that foreclosure counsel does not always have accurate information about the completion of the borrower’s loss mitigation application and, “in extreme cases,” foreclosure counsel may not accurately represent the status of the loss mitigation application to the court. It goes on to suggest that foreclosure counsel fails to impress upon the courts the significance of 1024.41(g)’s prohibition when counsel is taking steps to avoid a judgment or sale. The CFPB thinks that a lack of express commentary requiring the servicers to take affirmative steps has caused servicers to fail to instruct foreclosure counsel appropriately, and has resulted in courts discounting servicer obligations under the rule, which has harmed borrowers and deprived them of important protections in 12 CFR 1024.41.

There are several concerns with the underlying premise outlined in the background leading up to the proposals. The CFPB seems to imply that the servicer is the party causing the dual-tracking issues. By demanding and providing a borrower with a right to a post-foreclosure referral loss mitigation review in 12 CFR 1024.41, the Bureau has intensified the issue by placing obligations on parties outside of the CFPB’s scope of authority to regulate.

The real-life scenario seems to be this: servicer’s counsel is confronted with an underfunded court system and has been dealing with a borrower and a case for many months (possibly years). In the final stretches before the case is finally going to judgment and the sale might be moving forward, a borrower surfaces with a loss mitigation application; the servicer is scrambling to carry on with that process, and to keep its foreclosure counsel in the loop. It is no wonder that a last-minute plea to stop the process in its tracks is denied by the court. In the early days of the loss mitigation rules, there were reports of judges (after extensive briefing on the issue of the importance of the rules) declaring that they are not bound by the CFPB rules and, accordingly, determining that the matter will proceed.

Attorney-Client Privilege & Other Potential Issues
 Concerns about the interaction with the foreclosure section raise significant issues, including whether requiring this type of communication would compromise the attorney-client relationship between foreclosure attorneys and their servicing clients. To prove that there was a violation for which the servicer would be liable under 1024.41 (and for which there is a private right of action for a borrower to enforce against a servicer), the borrower would need access to communications that would be protected by the attorney-client privilege. The rule does not consider the impact of this likely possibility on the relationship between servicers and their counsel.

Additionally, the proposal discusses the Bureau’s concern with courts that are trying to clear overloaded dockets and, in the process, might not be acting judiciously with regards to borrowers’ rights. Through this proposal and commentary, the CFPB is hoping to “educate” the judiciary on the consumer impact of the courts’ actions. In the process, however, it appears that the servicer and its counsel are being sandwiched between state court justice systems that are dealing with their own practical realities and the Bureau. The CFPB appears to take the position that a servicer in a foreclosure case — in civil procedure terminology: a plaintiff in a lawsuit — has ultimate control over the court, the case (and whether it can be dismissed), and the sale (and whether it can be called off).

Finally, there could be an issue if the proposal is enacted, and the revision to the comments regarding “interactions with counsel” goes into effect. It is a concern that foreclosure counsel is more likely to be sued when the borrower believes he or she has not been afforded proper treatment under the rules. The CFPB is demanding a certain outcome in the court systems, where servicers and their counsel have little say as to how the courts control their own dockets.

Conclusion
 For all of the concerns raised here, though, there is a ray of hope in that the proposal contains a requirement that the servicer must send a letter to a consumer informing when a loss mitigation application is determined to be complete. Assuming this proposal is adopted in its current form, the letter confirming when a loss mitigation application is complete could be a touchstone for counsel to look to when deciding how to proceed before filing a dispositive motion, obtaining an order of sale, or conducting the sale.

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New York: New Regulations to Amend N.Y.C.R.R

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Robert H. King
Rosicki, Rosicki & Associates, P.C. – USFN Member (New York)

On December 3, 2014, the New York State Department of Financial Services (DFS) adopted new regulations applicable to the debt collection industry.

The majority of the regulations go into effect on March 3, 2015. A prior USFN e–Update (Sept. 2014 ed.) article by this author addressed these regulations in their proposal stage. The adopted regulations amend the New York Code of Rules and Regulations (N.Y.C.R.R), adding a new section published in the New York State Register found at 23 N.Y.C.R.R 1.

Important provisions require debt collectors to ensure that they have processes to determine whether the statute of limitations on the debt may have expired, and to send a specific notice if the debt collector knows (or has reason to know) the statute expired on that debt. The debt collector must also provide disclosures to consumers after making initial contact with them. Further, the regulations require debt validation/substantiation processes, and provide rules as to when (and under what circumstances) debt collectors can contact and communicate with consumers by email.

Under the New York Financial Services Law, after proper notice and hearing, penalties for violations of these regulations can amount up to $1,000 for each violation. Also, there is a possibility that DFS could institute a lawsuit to obtain an injunction to prevent future violations.

©Copyright 2015 USFN. All rights reserved.
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Michigan: Implications of the “Neal Case Fix Bills”

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Jennifer Sayegh
Trott Law, P.C. – USFN Member (Michigan)

On October 15, 2014, the Michigan Legislature enacted three bills (HB 4638, HB 4639, & HB 4640), effective October 17, 2014, known as the Neal Case Fix Bills. These bills were introduced as a direct response to the U.S. Bankruptcy Court decision In re Neal, 2009 Bankr. LEXIS 2027 (Bankr. E.D. Mich. June 18, 2009). That case held that an affidavit accompanying a copy of an original instrument does not satisfy the requirements for recording a real estate conveyance, since it does not contain an original signature.

In the Neal opinion, the bankruptcy court concluded that: (1) the affidavit attached to a copy of the mortgage did not, in and of itself, convey an interest in property; (2) MCL 565.451 does not allow the filing of an affidavit of lost mortgage as a substitute for the original mortgage; and (3) if the Michigan Legislature had intended the filing of an affidavit of lost mortgage to act as a substitute for the original mortgage, the language would have specifically stated that provision.

House Bill 4638 clarifies the conditions necessary for the execution and recording of instruments with the register of deeds, by amending MCL 565.201(1)(a). Specifically, (6) states “If a mortgage meets all requirements for recording under this act and a copy of the mortgage is affixed to an affidavit that is recordable under section 1a(g) of 1915 PA 123, MCL 565.451a, then the affidavit with the accompanying copy of the mortgage shall be received for record by the register of deeds, and the mortgage is duly recorded under this act and under section 29 of 1846 RS 65, MCL 565.29, as of the date of recording of the affidavit.” More importantly, (6) directly responds to the court’s opinion in Neal, that if the Michigan Legislature had intended the filing of an affidavit of lost mortgage to act as a substitute for the original mortgage, the language would have specifically stated as much. The statutory text of MCL 565.201(6) now includes: “To the extent that the mortgage validly creates a lien, the lien is perfected as of the date of recording of the affidavit.” Finally, the language is retroactive and applies to all copies of mortgages verified by an affidavit.

House Bill 4640 amends MCL 565.451a by addressing the use and recording of affidavits affecting real property. The bankruptcy court in Neal concluded that “the language of M.C.L.A. § 565.451a simply does not allow a party to file an affidavit of lost mortgage as a substitute for the original,” and that “[n]othing in the language expressly permits the filing of an affidavit of lost mortgage.” Id at 5. In response, MCL 565.451a(g) specifically provides that an affidavit stating facts relating to matters affecting title to real property may be recorded by a person with knowledge of the unrecorded mortgage, “if the affidavit recites the names of the parties to the unrecorded mortgage and is accompanied by a copy of the unrecorded mortgage.”

Conclusion
The passing of the Neal Case Fix Bills now allows for the recording and perfecting of a mortgage lien, via an affidavit executed by a person with knowledge to the unrecorded mortgage, when accompanied by a copy of the original mortgage, and if the affidavit is in compliance with Michigan’s recording requirements.

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Connecticut: Supreme Court Decision re Assignee Liability

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Sonja J. Bowser
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

Prior to the recent Connecticut Supreme Court decision of Hartford v. McKeever, 314 Conn. 255, 101 A.3d 229 (2014), Superior Court judges were split on the issue of liability of mortgage assignees for defendants’ counterclaims, when based on allegations of assignor misconduct before assignment.

The McKeever decision affirmed the appellate court’s ruling that, while a mortgagor-defendant could aver special defenses that arose during the life of the mortgage, he could not assert affirmative claims against the assignee-plaintiff for alleged overpayments made to the assignor prior to the assignment, absent an express assumption in the assignment.

The undisputed facts reveal that the assignee, and holder of a promissory note and mortgage, commenced a foreclosure action against the defendant, Brian McKeever, alleging failure to pay. The mortgagor subsequently filed a five-count counterclaim, sounding in breach of contract and unjust enrichment, seeking compensation for monies he allegedly overpaid to the assignee and prior holders of his mortgage. The plaintiff withdrew its foreclosure complaint, but the defendant pursued his counterclaims against the assignee-plaintiff. The defendant was ultimately awarded the total amount of his overpayments by the trial court.

On appeal, the plaintiff alleged that it was inequitable for the assignee to be liable for any overpayment made to its assignor. The appellate court reversed the trial court’s decision, and concluded that the assignee could only be held liable for monies overpaid by the mortgagor after the assignment of the mortgage (the position of many Superior Court judges; see, e.g., OneWest Bank, FSB v. Reinoso, Superior Court, judicial district of Fairfield, Docket No. CV-10-6006307-S (May 10, 2012)).

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Debt Collector Awarded Attorneys’ Fees and Costs in Unique FDCPA Case

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Courtney McGahhey Miller
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Eighth Circuit Court of Appeals recently upheld a district court ruling that a defendant collection agency was entitled to over $30,000 in attorneys’ fees and costs for an FDCPA case that was found to have been brought in bad faith and for the purpose of harassment. (The Eighth Circuit is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)

In Scroggin v. Credit Bureau of Jonesboro, Inc., 973 F. Supp. 2d 961 (E.D. Ark 2013), Brandon Scroggin sued the Credit Bureau of Jonesboro (CBJ) for violations of the Fair Debt Collection Practices Act (FDCPA) and the Arkansas Fair Debt Collection Practices Act (AFDCPA). In his complaint, Scroggin accused CBJ of contacting him in relation to a delinquent medical bill after receipt of a cease and desist letter, as well as for leaving a voicemail that was heard by a guest in his home.

After a jury trial in the Eastern District of Arkansas, it was found that CBJ violated the FDCPA and AFDCPA twice. However, the jury did not award Scroggin any actual or statutory damages for the violations. CBJ filed a motion for attorneys’ fees and costs, alleging that the lawsuit had been brought in bad faith and to harass.

The FDCPA provides that a court may award to the defendant attorneys’ fees and costs “on a finding by the court that an action … was brought in bad faith and for the purpose of harassment ...” [emphasis added] 15 USC 1692k(a)(3). The AFDCPA allows the same when there is a finding that an action was brought in bad faith or for the purpose of harassment. Ark. Code Ann. § 17-24-512(a)(3)(B). In Scroggin, the District Court found bad faith and an intent to harass, ultimately awarding the fees and costs to CBJ.

Throughout the District Court case, Scroggin posted thousands of comments on websites and message boards expressing his hatred of CBJ and discussing his attempt to bait them with a vague cease and desist letter that simply stated, “I refuse to pay this debt because I don’t think I owe that because I was only there [at St. Bernard’s Medical Center] for an hour and then left after I started feeling better.” CBJ filed a motion for dismissal and an order of civility based on the numerous online comments. The motion was denied for First Amendment reasons, but the plaintiff was warned that any future posts would be allowed as evidence.

Scroggin’s many online posts and comments continued, making it clear that the cease and desist letter he sent was purposefully ambiguous, and was intended to prompt CBJ to make contact with him to explain why he owed the debt. His online comments also advised other forum members on how to solicit a violation from a debt collector. His posts included: statements acknowledging that his claims for actual and statutory damages were insincere, as well as offered advice on how to manipulate a claim for damages. His posts went on to discuss his intent to force the defendant to trial, notwithstanding its impact on his damages. He also boasted that the FDCPA essentially allowed him to continue his action for his own entertainment, and to harass CBJ and its counsel. Additionally, Scroggin sent several emails directly to CBJ’s counsel that were in bad faith and harassing in nature.

The District Court determined that the plaintiff’s behavior and comments — as a whole —demonstrated dishonesty, hatred, ill will, and a spirit of revenge. The court stated that Scroggin’s intent was to annoy CBJ persistently, with no legitimate purpose, and found that the lawsuit “was never about the plaintiff seeking legitimate redress for what he perceived to be violations of statutes meant to protect consumers but was a vehicle for Scroggin to pursue a vendetta against CBJ and for his own entertainment ...” Id. at 977.

A debt collector who violates the FDCPA and AFDCPA is liable to the prevailing plaintiff for the costs of the action, together with reasonable attorneys’ fees. 15 USC 1692k(a)(3) and Ark. Code Ann. 17-24-512 (a)(3)(A). However, attorney fees may be denied for bad faith conduct on the part of the plaintiff. The court looked to one of the purposes of 15 USC 1692k(a)(3), which is “to thwart efforts of a consumer to abuse the statute.”

In its ruling, the court stated that “it would be a legal mockery to conclude that although Scroggin flagrantly manipulated and abused the judicial process and the FDCPA and AFDCPA in his vendetta against CBJ, thereby wasting valuable judicial resources, he is nevertheless shielded from liability for attorneys’ fees and costs under 15 U.S.C. § 1692k(a)(3) and Ark. Code Ann. § 17-24-512(a)(3)(B) simply because of CBJ’s two technical violations of the FDCPA and AFDCPA that resulted in no harm and only occurred because of Scroggin’s trickery.” Id. at 980.

In reliance upon 15 USC 1692k(a)(3), as well as its own inherent power, the District Court awarded attorneys’ fees and costs to CBJ. The decision was affirmed in August 2014 by the Eighth Circuit Court of Appeals in an unpublished opinion.

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U.S. Supreme Court Set to Rule on Chapter 7 Lien Stripping

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Michael G. Clifford
Wilson & Associates, PLLC
USFN Member (Arkansas, Tennessee)

It appears that the U.S. Supreme Court will finally determine whether the Bankruptcy Code permits Chapter 7 debtors to “strip-off” wholly under-secured junior mortgage liens. Certiorari was granted on November 17, 2014 in two consolidated cases out of Florida. See Bank of America, N.A. v. Caulkett (Dkt. 13-1421) and Bank of America, N.A. v. Toledo (Dkt. 14-163). This appeal is set to resolve a 3-1 circuit split, in which only the Eleventh Circuit has held that strip-offs are permissible. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)

In 1992, the U.S. Supreme Court held that a Chapter 7 debtor was not permitted to “strip down” a creditor’s allowed secured claim, where the debtor was attempting to void the portion of a first mortgagee’s lien to the extent that the debt exceeded the underlying collateral’s value. Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773 (1992). The debtor’s argument in Dewsnup hinged upon two subsections of 11 U.S.C § 506.

Section 506(a) states that “an allowed claim of a creditor secured by a lien on property … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property … and is an unsecured claim to the extent that the value of such creditor’s interest … is less than the amount of such allowed claim.” Section 506(d) then states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

The debtor argued that Section 506(a) defines what constitutes an allowed secured claim, and that Section 506(d) permits the debtor to void any lien (or portion of it) that does not satisfy the definition. The Supreme Court disagreed with that interpretation, and ultimately held that it was “not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.”

In the consolidated case, the Supreme Court will likely determine the related issue of whether Section 506(d) permits a Chapter 7 debtor to strip-off a junior mortgage lien in its entirety, where the outstanding senior lien exceeds the current value of the collateral. When this issue came before the Fourth, Sixth, and Seventh circuits, they all relied upon Dewsnup, concluding that its holding was equally relevant in circumstances in which a debtor attempts to strip-off (rather than strip-down) an allowed, but underwater, lien. See Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 34 F.3d 555 (6th Cir. 2003); Palomar v. First American Bank, 722 F.3d 992 (7th Cir. 2013).

In 2012, the Eleventh Circuit departed from the majority in McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012). The McNeal court concluded that Dewsnup was not clearly on point because it only disallowed the strip-down of a partially secured mortgage lien, and did not address the strip-off of a wholly unsecured junior lien. Determining that the Dewsnup opinion was not analogous, the Eleventh Circuit held that its pre-Dewsnup precedent (permitting the stripping of a wholly unsecured lien) was still binding. See Folendore v. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989).

Currently, the Eleventh Circuit’s interpretation of Section 506 allows Chapter 7 debtors in Alabama, Florida, and Georgia to strip the liens of wholly under-secured junior mortgages. Consequently, the debtor (or perhaps other unsecured creditors) receive the benefit of any appreciation in the property, not the former lienholder. In all other states, the debtor’s discharge simply absolves the debtor of personal liability on the loan, but does not void the lienholder’s right to foreclose. The Supreme Court’s grant of certiorari should resolve the circuit split, with a decision expected in the latter half of 2015.

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District Court of Connecticut Rules for Lender on Predatory Lending Defense

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by Geoffrey K. Milne
Hunt Leibert – USFN Member (Connecticut)

Lenders in hotly contested disputes with borrowers should consider prosecuting mortgage foreclosures in federal court, particularly if any question of federal law may be involved in the litigation. In Bank of NY Mellon as Trustee for BS Alt A 2005-9 v. Bell, 2014 U.S. Dist Lexis 174716, the District Court of Connecticut ruled in favor of the lender and entered a judgment of strict foreclosure after a five-day trial. The case involved a predatory lending defense and numerous other challenges to the loan documents and the transaction. The action was filed on diversity jurisdiction grounds, and the plaintiff satisfied the requirements of being an active trustee capable of suing in its own right.

The borrower in Bell contended that the original lender made a predatory loan, and alleged that the assignee of the loan was barred from foreclosing due to origination and securitization misconduct. The borrower also challenged the authenticity of servicing records and asserted fraud.

Because the original lender was a federally chartered savings bank, the lender argued that any state-law predatory lending defense was subject to federal preemption. The District Court agreed, citing Second Circuit precedent involving federal preemption. The court found no evidence to support the borrower’s challenges to the authenticity of servicer business records, nor was there evidence to support a defense of fraud.

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SCRA: One-Year Protection Time Frame after Military Service Remains Applicable to Mortgage Enforcement Through 2015

Posted By USFN, Friday, January 9, 2015
Updated: Wednesday, September 23, 2015

January 9, 2015 

 

by William D. Meagher
Trott Law, P.C. – USFN Member (Michigan)

The Servicemembers Civil Relief Act (50 U.S.C. Appx. §§ 501, et seq.), often simply referred to as the “SCRA,” has undergone numerous changes over the past several years. Of particular importance to the mortgage servicing industry are the various acts that amend Section 533 of the SCRA.

Section 533 applies to a secured obligation on real or personal property owned by a servicemember, originating before the period of the military service, and for which the servicemember is still obligated. Section 533 sets forth the time frame after military service in which certain foreclosure proceedings may be stayed, or obligations adjusted. It also provides the time frame after military service in which certain foreclosure sales would not be valid.

Through a series of legislative acts beginning in 2008, the time period for protections provided under Section 533 was extended from the original 90 days to 9 months, and then ultimately to one year after military service. The one-year time period was to revert back to the original 90-day time frame on January 1, 2015. However, on December 18, 2014, President Obama signed the Foreclosure Relief and Extension of Servicemembers Act of 2014. This Act extends the one-year protection time frame another year, through December 2015.

Absent further amendments, the protections period under Section 533 of the SCRA will revert back to the original version (i.e., 90 days) on January 1, 2016.

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Michigan: Post-Foreclosure Challenges

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Brian P. Dowgiallo
Orlans Associates, PC – USFN Member (Michigan)

On October 16, 2014, the Michigan Court of Appeals affirmed a trial court’s ruling, dismissing a borrower’s post-foreclosure challenge. In Diem v. Sallie Mae Home Loans, Inc. f/k/a Pioneer Mortgage, Inc., Docket Number 317499, the Court of Appeals reaffirmed the elements set out by the Michigan Supreme Court in Kim v. JPMorgan Chase Bank, NA, 493 Mich. 98. 115-116; 825 NW2d 329 (2012).

Kim requires that a borrower seeking to set aside a foreclosure by advertisement allege facts of: (1) fraud or irregularity in the foreclosure procedure; (2) prejudice to the borrower; and (3) a causal relationship between the alleged fraud or irregularity and the alleged prejudice (i.e., that the borrower would have been in a better position to preserve the property interest absent the fraud or irregularity). The Court of Appeals concluded in Diem that the borrower failed to allege a causal connection between the alleged fraud or irregularity in the foreclosure procedure and any ability the borrower had to preserve his property interest. Accordingly, the trial court’s dismissal of the borrower’s challenge was affirmed.

While not a landmark opinion in the Michigan foreclosure community, Diem is still a significant published judicial decision. It reaffirms the high standard that the borrower must meet in attempting to challenge the foreclosure. That the Court of Appeals has chosen to publish the decision is noteworthy, perhaps evidencing that the court is growing tired of the boilerplate arguments used in challenging foreclosures over the past few years. Furthermore, the court continues to stress that regardless of whether or not there was an actual foreclosure violation, if the borrower fails to show any harm or prejudice as specified in the above-cited Kim decision, those matters must be dismissed. The Diem opinion certainly seems to support the belief that the law in Michigan is settled when it comes to post-foreclosure challenges.

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Michigan: Enhanced Rights to Retake Possession from Squatters

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Matthew B. Theunick
Trott & Trott, PC – USFN Member (Michigan)

On June 21, 2014, the Michigan Legislature enacted two bills (Act No. 223 and Act No. 224), effective September 24, 2014. These bills address, in part, the issue of squatting in residential property, providing “self-help” remedies to an owner, lessor, or licensor (or one of their agents) to re-take possession of property that was unlawfully obtained.

Act No. 223
Act No. 223 was enacted to amend 1961 PA 236, by adding sections 2918, 5711, and 5714 (MCL 600.2918, 600.5711, and 600.5714) to the Revised Judicature Act. The RJA establishes the rights and liabilities of parties, with respect to the possession (or ownership) of property or leased premises. Specifically, Sec. 5711(1) notes that, “A person shall not make any entry into or upon premises unless the entry is permitted by law.” Sec. 5711(2) notes that, “Subject to subsection (3), if entry is permitted by law, the person shall not enter with force but only in a peaceable manner.” However, the “peaceable manner” caveat of subsection 2 does not apply in the context of an unlawful or illegal entry into the property. Sec. 5711(3) notes that, “If the occupant took possession of the premises by means of a forcible entry, holds possession of the premises by force, or came into possession of the premises by trespass without color of title or other possessory interest, the owner, lessor, or licensor or agent thereof may enter the premises and subsection (2) does not apply to the entry” (emphasis added).

As such, Act No. 223 exempts an owner from the prohibition on forcible entry, and now allows entry into a dwelling to retake possession in circumstances where the occupant may have taken possession by squatting. However, any forcible entry under Sec. 5711(3) shall not include conduct proscribed by Chapter XI of the Michigan Penal Code, entitled “Assaults” (see MCL 750.81 to 750.90h), which includes standard proscribed assault and battery offenses.

Act No. 224
Act No. 224 was enacted to amend 1931 PA 328, by adding section 553 (MCL 750.553) to the Michigan Penal Code to make it a criminal offense for an individual to occupy a residential dwelling without the owner’s consent for an agreed-upon consideration. For a first offense, the individual may be convicted of a misdemeanor, punishable by a fine of not more than $5,000 per dwelling unit occupied or by imprisonment for not more than 180 days, or both. For a second (or subsequent offense), the individual may be convicted of a felony punishable by a fine of not more than $10,000 per dwelling unit occupied or by imprisonment for not more than 2 years, or both.

Conclusion
According to the Legislative Analysis of House Bills 5069, 5070, & 5071, the Michigan Legislature enacted Acts No. 223 and 224 under the belief that squatting in residential buildings was on the rise, and was a menace to real estate ownership by: preventing properties from being sold; by allowing persons time to strip the homes of anything of value; or by depriving the lawful owners of their right to lease payments, etc. Additionally, there was the belief that lawful owners were experiencing difficulty in getting police agencies to remove squatters under the current trespass laws. With the changes to the Michigan Penal Code and the RJA, the Michigan Legislature has now removed the prohibition against the use of (non-assaultive) force in the reclaiming of unlawfully seized or occupied real property.

These enhanced remedies may prove to be helpful for the industry’s portfolios of real estate-owned properties, and may have the intended effect of prompting certain municipalities and courts to respond to these issues more seriously. For example, it is sometimes difficult to obtain police investigations or arrests of squatters unlawfully residing in property. Additionally, some Michigan courts are loathe to grant more than one or two orders of eviction, issued in the same case, even in the face of multiple squatting entries into the property.

Still, for the practitioners counseling clients, the enhanced remedies available in these enactments are not without some need for pause. Any self-help remedy is arguably less effective and fraught with greater liability than simply resorting to the steps available in the summary proceedings process available through the courts.

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Michigan: State Codification of Trespass Liability

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Matthew B. Theunick
Trott & Trott, P.C. – USFN Member (Michigan)

On June 26, 2014, the Michigan legislature enacted the Trespass Liability Act, Public Acts of 2014, Act. No. 226, to codify the liability of possessors of land for injuries to trespassers. Whereas, state statutes criminalize the unlawful entry on another person’s property without permission, civil liability for injuries to trespassers — like other premises liability claims — was governed by common law in Michigan.

The impetus for Michigan’s codification of civil liability for injuries to trespassers was owing to the desire to preserve the status quo, and not increase the liability of landowners vis-à-vis trespassers. The Act notes in Sec. 3.(3) that, “This section does not increase the liability of a possessor of land and does not affect any immunity from or defenses to civil liability established or available under the statutes or common law of this state to which a possessor of land is entitled.” Thus, through the codification process, property owners would obtain greater certainty of what is expected of them in relation to trespassers, and future changes would be done legislatively, as opposed to judicially.

As noted in the Legislative Analysis of House Bill 5335, Michigan’s codification process was also prompted, in part, as a reaction to the treatment of premises liability in the latest edition of the influential, but not precedential, Restatement of Torts (3rd) released in 2012. It departed from the 1965 Restatement (2nd) by vastly expanding the duty of landowners to exercise reasonable care in making the premises safe to all persons entering upon the land, even trespassers. Michigan’s efforts to codify trespass liability appears to be a trend, as the Michigan House’s Legislative Analysis notes that “at least 13 states have passed legislation … to prevent their states from adopting the expanded philosophy of the Restatement (3rd).”

Accordingly, the Michigan Act broadly notes that the possessor of a fee, reversionary, or easement interest in land (i.e., an owner, lessee, or other lawful occupant) owes no duty of care and is not liable to a trespasser for physical harm caused by the possessor’s failure to exercise reasonable care to put the land in a condition reasonably safe for the trespasser, or to carry on activities on the land so as not to endanger the trespasser.

On the other hand, however, a possessor of land may be subject to liability for physical injury, or death to a trespasser, if any of the following apply:
• The possessor injured the trespasser by willful and wanton misconduct.
• The possessor was aware of the trespasser’s presence on the land (or should have known in the exercise of ordinary care) and failed to use ordinary care to prevent injury arising from active negligence.
• The possessor knew (or should have known from facts within his or her knowledge) that trespassers constantly intrude on a limited area of the land, and the trespasser was harmed because the possessor failed to use reasonable care for the trespasser’s safety when engaging in an activity involving a risk of death or serious bodily harm.
• The trespasser is a child injured by an artificial condition on the land and all of the following apply:

o The possessor knew (or had reason to know) that a child would be likely to trespass on the place where the condition existed.
o The possessor knew (or had reason to know) of the condition and realized (or should have realized) that the condition would involve an unreasonable risk of death or serious bodily harm to the child.
o Because of the child’s youth, the child did not discover the condition or realize the risk involved in trespassing in the area of that dangerous condition.
o The utility (or benefit) to the possessor of maintaining the condition, and the burden of eliminating the danger, were slight as compared with the risk to the child.
o The possessor failed to exercise reasonable care to eliminate the danger, or otherwise, to protect the child.

 

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Maine: Greenleaf Falls in Bankruptcy Court

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Andrew S. Cannella
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

The Bankruptcy Court in the District of Maine has concluded that the Maine Supreme Judicial Court’s ruling in Bank of America v. Greenleaf, 2014 ME 89, 96 A.3d 700 (Me. 2014), does not impact a creditor’s standing in a bankruptcy proceeding to seek an order granting relief from the automatic stay of 11 U.S.C. § 362(a).

Based on the evidence in the record, the court in Greenleaf was unable to conclude that at the time of the origination of the mortgage loan, Mortgage Electronic Registration Systems, Inc. (MERS) received anything but the right to record the mortgage. As a result the court held that the subsequent assignment of mortgage executed by MERS only conveyed the right to record the mortgage and did not convey any other rights in, and to, the mortgage. As Maine’s foreclosure statute (14 M.R.S. § 6321) requires the plaintiff in a foreclosure case to be the mortgagee, the plaintiff in Greenleaf did not prove that it had the requisite standing to foreclose the mortgage. The plaintiff only received its assignment from MERS and not from the lender referenced in the MERS mortgage.

On September 4, 2014, the bankruptcy judge in the bankruptcy court’s Portland Division entered an order granting a creditor’s motion for relief from stay, and overruled the Chapter 7 trustee’s objection to said motion (which was based on an alleged lack of standing because the security instrument at issue was a MERS-originated mortgage and the creditor/movant was not the original lender). In re Woodman, No. 14-20483 (Bankr. D. Me. 2014). The bankruptcy court properly concluded that standing to foreclose a mortgage is irrelevant to the matter of standing to bring a motion for relief from stay.

Standing to foreclose is an issue that needs to be litigated in a state court foreclosure proceeding, not in bankruptcy court. A colorable claim is all that is required for a creditor to have standing to prosecute a motion for relief from stay in bankruptcy court. The UCC “adopts the traditional view that the mortgage follows the note; i.e., the transferee of the note acquires, as a matter of law, the beneficial interests in the mortgage, as well.” [11 M.R.S. § 9-1308 cmt. 6].

As the creditor/movant was the holder of the note, it met the requisite standing requirement to pursue a motion for relief from stay. Subsequently, in the bankruptcy court’s Bangor Division, in a Chapter 13 case in which the debtor’s counsel interposed a similar objection to a creditor’s motion for relief from stay (based on Greenleaf), the court advised the parties of its agreement with the ruling in Woodman. This occurred at a status conference on October 2, 2014. In re Mooney, No. 10-11651 (Bankr. D. Me. 2014).

Editor’s Note: In a prior article, this author’s firm addressed Bank of America v. Greenleaf, 2014 ME 89, 96 A.3d 700 (Me. 2014) [USFN e-Update, Sept. 2014 Ed.]

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Georgia: Settling the Law re Notices of Foreclosure

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by T. Matthew Mashburn
Aldridge Connors, LLP – USFN Member (Georgia)

In a recent decision, Peters v. CertusBank National Association, A14A1274 (Sept. 8, 2014), the Georgia Court of Appeals ended two years of confusion in Georgia foreclosure law. The uncertainty began on July 12, 2012, with the appellate court’s decision in Reese v. Provident Funding Associates, LLP, 317 Ga. App. 353, 730 S.E.2d 551 (2012).

Reese
In light of Georgia foreclosure practice at the time, the facts in Reese were completely unremarkable. It may be that the majority in Reese believed that their decision would be as unremarkable. “No one disputes that a bank must be able to foreclose on its properties for non-payment of the mortgage per the contract, and our conclusion today does not impede this process.” Reese, 317 Ga. App. at 355, 730 S.E.2d at 559. However, the results were anything but unremarkable.

The basis of the Reese decision was that in 2008, the Georgia General Assembly had required that the secured creditor be identified in the 30-day Notice of Foreclosure (Notice), even though there was no such requirement in the statute. The Reeses successfully argued that the originating lender, and current servicer, was no longer the “secured creditor” because ownership of the note or the deed to secure debt (or both) had been transferred.

As to whether O.C.G.A. § 44-14-162.2 required the Notice to reflect both the identity of the secured creditor, as well as the person or entity with the full authority to negotiate, amend, and modify the mortgage, the appellate court’s majority was persuaded that the legislature considered it material that the secured creditor be identified during the foreclosure process. However, the Georgia General Assembly had already required that the secured creditor be identified by compelling that the document vesting title in the secured creditor be of record prior to the foreclosure.

Some History
The direct ideological parent of Reese was the opinion in Stubbs v. Bank of America, 844 F. Supp. 2d 1267, 1271, 2012 U.S. Dist. LEXIS 19846, at *1, 13, 2012 WL 516972, at *1, 5 (N. D. Ga. 2012). The Reese majority stated as much: “The Northern District’s analysis in Stubbs is compelling and, although not controlling, is persuasive authority in analyzing the very same Georgia statute that we interpret in this case.” Reese, 317 Ga. App. at 358, 730 S.E.2d at 554.

As a result of the decisions in Stubbs and Reese requiring that the Notice state the name of the secured creditor, Georgia foreclosure law was now required to directly address questions that had previously been largely ignored. (Among those questions: Who exactly is the secured creditor? Is the secured creditor the holder of the note? Is the secured creditor the holder of the deed to secure debt? What if the holder of the note and the deed to secure debt are different? Indeed, is it possible for those holders to be different?)

The Georgia Supreme Court provided the final answer to the “secured creditor” question in a unanimous opinion, which vacated the Georgia Court of Appeals. See, You v. JP Morgan Chase Bank, 293 Ga. 67, 743 S.E.2d 428 (2013).

Recognizing that the district courts were splitting on whether the secured creditor was required to be named in the Notice, the federal District Court chief judge requested that the Georgia Supreme Court provide an interpretation of Georgia law to resolve the split. This request came in the form of three certified questions to the Georgia Supreme Court in You. The Georgia Supreme Court answered that the holder of the deed to secure debt (according to the public records) is the secured creditor and is therefore authorized to conduct the foreclosure, regardless of whether the note has been assigned (beneficially or otherwise). Further, the Supreme Court responded that there was no requirement in the statute that the secured creditor be specifically identified in the Notice.

While Reese and You were dealing with the “secured creditor” issue, another thread of cases grappled with the requirement that the Notice identify the “individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.”

Second Thread of Cases
In TKW Partners, LLC v. Archer Capital Fund, L.P. Crossing Park Properties, LLC, 302 Ga. App. 443, 691 S.E.2d 300 (2010), the Court of Appeals was thought to have settled this second question by holding that “OCGA Section 44-14-162.2 does not require the individual or entity to be expressly identified as having ‘full authority to negotiate, amend, and modify all terms of the mortgage,’ and we cannot conclude that ... [the] … notice was legally deficient for failure to do so.”

In TKW, the lender’s attorney sent the Notice and provided her contact information, but did not state that she or any other person had “full authority to negotiate, amend, and modify all terms of the mortgage.” The Court of Appeals ruled that this was of no consequence because the lender was identified, and the trial court found that “a person of reasonable intelligence would have construed that … [the lender’s attorney] … was the proper agent for … [the lender] … in this case.” The Court of Appeals found that substantial compliance was all that was needed.

The next case in the series, Stowers v. Branch Banking & Trust Co., 317 Ga. App. 893 (2012), was based on an unusual set of facts. In Stowers, the Notice was sent by the lender’s attorney and listed the lender’s attorney as the person with full authority to negotiate, amend, and modify all terms of the mortgage. The undisputed evidence, however, was that the attorney only was authorized to receive communications from the debtor, to convey them to the bank, to make recommendations, and to convey the bank’s position to the debtor. Accordingly, while the correct words were used, in fact, there was no authority to negotiate or modify — and, certainly, full authority was absent.

While TKW was being litigated, the lender in Stowers became worried that substantial compliance might not be sufficient (since that was the exact issue being litigated in TKW). The lender then sought to rescind its own foreclosure sale, so as to avoid the risk that substantial compliance would be insufficient. In Stowers, the plaintiff was the purchaser at the foreclosure sale and sought to prevent the lender from setting aside its own foreclosure sale.

In the meantime, Reese v. Provident Funding Associates (cited above) was decided. There, the Court of Appeals rejected a trial court’s ruling that substantial compliance was sufficient, and found that OCGA Section 44-14-162.2 required that the secured creditor with the authority to foreclose be identified in the Notice. In essence, the Court of Appeals appeared to be taking mutually exclusive positions. In TKW, the Court of Appeals found that substantial compliance was sufficient as to the full authority question. In Reese, the Court of Appeals determined that substantial compliance was not sufficient as to the secured creditor question.

Specifically, in Stowers, the Court of Appeals ruled that: (1) the Notice did not fully comply with the statute (so the notice was bad); however, (2) the notice did not have to fully comply with the statute, in that substantial compliance was sufficient (so the notice was fine). Ultimately, the appellate court found that the bank was justified in rescinding the foreclosure, based on doubts as to whether strict compliance or substantial compliance with the statute was required (TKW decided that substantial compliance was sufficient three weeks after the foreclosure rescission in Stowers).

Conclusion
Following Stowers and Reese, lenders in Georgia wondered whether TKW had been overruled by either of those cases. On the other hand, debtors’ counsel contended that TKW had been obliterated by both of the cases.

In Peters v. CertusBank National Association (cited above), the Georgia Court of Appeals has affirmed its prior rulings in TKW and Stowers.

Georgia law has now been clarified. The secured creditor need not be identified in the Notice, and substantial compliance is all that is required in identifying the person (or entity) with full authority to negotiate the loan terms.

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Connecticut: Foreclosure Challenges to Standing

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Christopher R. Thompson
Bendett & McHugh, P.C. – USFN Member (Connecticut)

A recent Connecticut Appellate Court opinion addressed the frequently litigated matter of a mortgagee’s standing to foreclose a mortgage, in light of an alleged issue regarding the authenticity of the underlying promissory note. The court ultimately concluded that the defendant failed to meet his burden of establishing a genuine issue of fact that required a full evidentiary hearing and, therefore, affirmed the trial court’s foreclosure judgment. [Mengwall v. Rutkowski, 152 Conn. App. 459].

Pertinent facts: The defendant contested foreclosure. Throughout the course of litigation, the plaintiff entered into evidence two different versions of the note: first a copy, and then the original document (the record explains that the plaintiff initially believed the original document to be lost, but it was subsequently located). Significantly, the copy of the note, which was originally entered into evidence, contained a signature in one corner of the document, but that signature was not present on the original note.

The plaintiff eventually obtained a foreclosure judgment, and the defendant appealed. The Appellate Court briefly surveyed the applicable case law regarding standing, as follows: Production of an original note by a plaintiff creates a presumption that the party producing the note has standing to enforce it. [RMS Residential Properties, LLC v. Miller, 303 Conn. 224, 231-32, 32 A.3d 307 (2011)]. Further, a full evidentiary hearing on the alleged standing issue is only warranted if a defendant can establish the existence of a genuine issue of jurisdictional fact. [Equity One, Inc. v. Shivers, 310 Conn. 119, 135, 74 A.3d 1225 (2013)].

On appeal, the defendant argued that the discrepancy between the two documents created a “genuine issue of jurisdictional fact” regarding the authenticity of the original note and, therefore, the plaintiff’s standing to enforce it. Thus, the defendant claimed that the trial court’s failure to conduct a full evidentiary hearing on the alleged standing issue constituted reversible error.

The Appellate Court disagreed, finding that the discrepancy between the two notes did not constitute a “genuine issue of jurisdictional fact” that would have warranted the full evidentiary hearing sought by the defendant. The court noted, “[t]he additional signature on the copy of the note admitted into evidence during the summary judgment proceeding does nothing to vitiate the authenticity of the original note admitted into evidence during the motion to dismiss proceeding.” The court then affirmed the trial court’s foreclosure judgment.

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California: New Law re Notices of Acknowledgement (Proofs of Execution and Jurats)

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Sonia A. Plesset
The Wolf Firm, A Law Corporation – USFN Member (California)

On August 15, 2014, the California legislature passed SB 1050, which creates new requirements for statutory notices of acknowledgment, proofs of execution, and jurat forms used by the state’s notaries public.

The bill amends existing California Civil Code Sections 1189 and 1195, as well as Government Section 8202, which govern the form and content of these notices. The new law, effective January 1, 2015, requires that the forms include the following language in a box directly above the notary’s seal: “A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document.”

While there is no font requirement, the notice must be “legible.” There is also some flexibility with regards to the format of the boxed notice, which is incorporated into each statute for “illustration purposes only.”

The purpose of the new law is to reduce opportunities for fraud, based on the representation by unscrupulous individuals that a notary’s stamp constitutes proof of the validity or enforceability of the underlying instrument. By adding the prescribed statement, the legislature hopes to dispel the notion that a notary stamp is anything more than the verification of one’s identity. While the current wording of the notary seal does provide that it is merely an attestation of the identity of the one signing, the legislature felt that a stronger statement was needed in order to protect the general public.

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FDCPA: Attorney’s Debt Collection Letter Overshadows Consumer’s Rights

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Lindsay Allen
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In a September 2014 opinion, Pollard v. Law Office of Mandy Spaulding1, the U.S. First Circuit Court of Appeals found that a Massachusetts attorney violated the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692-1692p. The violation stemmed from a debt collection letter that did not convey the borrower’s debt validation and dispute rights under the FDCPA in a non-confusing manner. The court further determined that the burden is on the debt collector to advise consumers of their FDCPA rights in a way that a typical “unsophisticated borrower” would understand. Lastly, the court held that, while the statute is silent on the distinction, attorney debt collection letters in the First Circuit are subject to a greater degree of scrutiny than letters sent by other debt collectors. (The First Circuit is comprised of Maine, Massachusetts, New Hampshire, and Rhode Island.)

In finding that the debt collection letter sent by the defendant law firm overshadowed and contradicted the borrower’s debt validation and dispute rights under the FDCPA, the court focused on the fact that the letter was both confusing and unclear about the debtor’s right to dispute the debt. In the court’s words: “at [the] bottom, the letter seems to threaten immediate litigation. We think that, implicit in this threat, is the idea that litigation can be avoided only if payment is made forthwith.” Additionally, because of a typographical error contained within the debt validation rights notice, the court reasoned that a consumer could conclude that her right to dispute the debt would be trumped by the attorney debt collector’s intent to litigate. This, the court held, runs afoul of FDCPA § 1692g, which requires that a debt collector’s communications are not “inconsistent with the disclosure of the consumer’s right to dispute the debt or request the name and address of the original creditor.”

While reaching its decision, the court adopted the hypothetical “unsophisticated consumer” standard when reviewing the adequacy of debt collection letters under the FDCPA. Applying this standard to the subject letter, the court found that a typo in the second to last paragraph was enough to make an important provision unintelligible and, as a result, the debtor had not been adequately apprised of his FDCPA rights. The court further stated that this determination is not based upon the debt collector’s intent but, instead, “it is the unsophisticated consumer’s perception of the letter . . . that controls a determination of whether a collection letter overshadows or contradicts a validation notice.”

The court rounded out its decision by making a distinction between attorney debt collectors and non-attorney debt collectors, stating that debt collection letters sent by attorneys “warrant closer scrutiny because their abusive collection practices are more egregious than those of lay collectors.” The Pollard case certainly reinforces the importance of clearly communicating the notice requirements of FDCPA § 1692g (a), and taking care that those rights are not overshadowed. However, the decision offers little specific guidance to debt collectors going forward.



1 Pollard v. Law Office of Mandy L. Spaulding, No. 13-2478, 2014 U.S. App. LEXIS 17345 (1st Cir. Sept. 8, 2014).

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Simple Technology Tips & Shortcuts

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Shawn J. Burke, Director, LoanSphere Sales Engineering
ServiceLink, A Black Knight Financial Services Company – USFN Associate Member
Chair, USFN Technology Committee

We all have shortcuts we use throughout the day, almost done without conscious thought, to aid in handling such things as e-mail. In this article, let’s take a moment to discuss some of them.

When to put someone on the “CC:” line of an e-mail? Taken from a college class, I offer this to my new employees or to someone who needs coaching: If you want someone to take action, put them on the “TO:” line; if you want them to be aware, then put them on the “CC:” line.

Want a shortcut to reformatting Word documents? Between RFPs, training materials, and other demonstration collateral, I find myself authoring lots of documents. I tend to add formatting to a document (such as highlighting instructions with italics). It is a nuisance when I have to format, or reformat, various pieces of the document in the same way. Here’s what I’ve learned to do: select the “format painter,” an icon that looks like a paint brush (Word 2013: Home tab, left-hand side of ribbon near the copy, cut, and paste commands). Begin by highlighting the text with the formatting that you want to copy. Click the icon. Then, highlight more of the text that you want formatted in the same way. If you want to format several sections, click the format painter twice to “lock” it on (and once to turn it off when finished). Easy!

When I “reply all” to an e-mail, I get nervous that I’ll click send before I’m ready. However, I don’t want to have to delete and then re-add the names when ready. Therefore, I put a fake name in the “CC:” line. Specifically, I type the words “donotsendyet.” If I accidentally try to send the message, a window will pop up, stating that “donotsendyet” isn’t a valid email. Once it is removed, the message sends normally, and an embarrassing blunder is avoided.

I like fillable PDF forms — the kind where you can type in all of the information in the form and then print. However, that means that the person preparing the PDF document has to have done so in a special way. Recently, someone pointed out to me that when the form isn’t “fillable,” you can go to Tools, select the Typewriter menu and then the “typewriter” option. To be able to type, first click in the desired area, then click “typewriter.” (You must repeat this step each time you want to fill in another section). This allows you to fill in information anywhere on the form. Even if the box isn’t fillable, you can click on it, and complete it as if it were.

With Office Applications, do you highlight text, right-click, and choose copy?
Or, do you highlight the text, go to the menu bar, and click the “copy” icon? Did you know that simultaneously depressing the keyboard keys Ctrl (Control) and C (the letter c, either case) is the equivalent? Ctrl+C will act as if you chose the copy icon or the option from the right-click. Furthermore, you can then use Ctrl+V to paste. Best part yet, anything that can be copied and pasted (not just text) will respond to these keyboard shortcuts.

Sending the same basic e-mail to lots of people? Maybe only changing one thing like an invoice number? While a mail merge provides a sophisticated solution, try the following for a quick alternative: Author the first email. Place your cursor on the “TO:” line. Then, click Ctrl+F simultaneously. The system will forward the message, which basically creates a copy of the first email. Change the pertinent details and send out the next email in a snap.

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Regulation X: Borrower Requests for Loan Servicing File

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Matthew B. Theunick
Trott & Trott, P.C. – USFN Member (Michigan)

Pursuant to the CFPB’s final rule modifications to Regulation X, which implements the Real Estate Settlement Procedures Act of 1974, “To the extent that a borrower requests a servicing file, the servicer shall provide the borrower with a copy of the information contained in the file subject to the limitations set forth in § 1024.36(f).” See, 12 CFR Part 1024, Docket No. CFPB-2012-0034, p. 216.

Section 1024.36 of the CFR deals with borrower requests for information, and § 1024.36(f) sets forth the specific circumstances where a servicer is not required to comply with a borrower’s request, after the servicer “reasonably determines” that any of the following apply:

• Duplicative information: The information requested is substantially the same as information previously requested by the borrower, for which the servicer has previously complied with its obligation to respond.

• Confidential, proprietary, or privileged information: The information requested is confidential, proprietary, or privileged.

• Irrelevant information: The information requested is not directly related to the borrower’s mortgage loan account.

• Overbroad or unduly burdensome information requested: The information request is overbroad or unduly burdensome. An information request is overbroad if a borrower requests that the servicer provide an unreasonable volume of documents or information to a borrower. An information request is unduly burdensome if a diligent servicer could not respond to the information request without either: exceeding the maximum time limit permitted for responding to a qualified written request [i.e., 30 days, excluding legal public holidays, Saturdays, and Sundays, pursuant to § 1024.36(d)(2)(1)(B), which may be further extended by an additional 15 days]; or incurring costs (or dedicating resources) that would be unreasonable in light of the circumstances. To the extent that a servicer can reasonably identify a valid information request within a submission that is otherwise overbroad or unduly burdensome, the servicer shall comply with the obligations of § 1024.36(c) and (d) to timely acknowledge and respond to the request.

As such, while the CFPB’s modifications to Regulation X broadly allow for borrower requests for loan servicing files, loan servicers are allowed useful carve-outs to either: refrain from providing information that is duplicative, irrelevant, or overbroad/unduly burdensome; or to redact confidential, proprietary, or privileged information. Thus, care should be taken when reviewing, responding to, and turning over loan servicing files to borrowers.

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Mortgage Loans: GSE, HUD, VA Record Retention Requirements

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Terry Ross, Director Regulatory Compliance
Barrett Daffin Frappier Turner & Engel, LLP– USFN Member (Texas)

We have all experienced the file from Hades. This is the file that never seems to go away, and then just as quickly as you inherited the file, it finalizes. Now you have to file your claim for reimbursement and, again, you retain the file — but for how long?

Retaining documentation related to the loan servicing, bankruptcy, foreclosure, eviction, and claims is an important aspect of mortgage banking. Audit teams usually request documentation weeks in advance of an audit to determine the authenticity of the claims for reimbursement. The Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, and the government agencies (HUD and VA), have published guidelines outlining the documents to retain and the duration for the retention. The Consumer Financial Protection Bureau (CFPB) record retention policy mimics the retention policies.

Here is a convenient chart about the GSE and agency requirements for current and delinquent loans. This is only a quick reference tool; be sure to review the GSE and agency policies in full before making a decision on record retention.

 Holder Status Years Remarks
 Fannie Mae  Current  5   Date loan or pool is paid in full
 Fannie Mae  Delinquent  4  Date loan paid in full or claim proceeds rec'd
 Freddie Mac  Current  7  Date Freddie's interest is satisfied
 Freddie Mac  Delinquent  7  Date of the foreclosure sale
 HUD  Current  7  After the life of the mortgage loan
 HUD  Delinquent  7  Date of all claim proceeds received
 VA  Current  3  After the VA ceases to be liable
 VA  Delinquent  3  Date of all claim proceeds received


Excerpted below are snippets of bulletins, regulations, and letters. Remember to review all of the related documentation prior to deciding on record retention.

Fannie Mae — Bulletin SVC 2014-04 (February 26, 2014)

 

• Fannie Mae is clarifying its requirements for retaining mortgage loan servicing records. The servicer must retain, in the mortgage loan servicing file, all supporting documentation for all expense reimbursement claims, in addition to other servicing and liquidation information such as: property inspection reports; copies of delinquency repayment plans; copies of disclosures of ARM interest rate and payment changes; documents related to insurance loss settlements; and foreclosure records, as stated in the Servicing Guide (Part I, Section 405.01: Individual Mortgage Loan Files).


• Servicers are reminded that after a mortgage loan is liquidated, the servicer must keep the mortgage loan servicing file for at least four years (measured from the date of payoff or the date that any applicable claim proceeds are received), unless the local jurisdiction requires longer retention or Fannie Mae specifies that the records must be retained for a longer period.


• For loans that are not delinquent, you should review Requirements for Document Custodians Version 10.0, Section 7, Paragraph 7.3: Electronic Document Retention.


• Document custodians are required to retain electronic documents for five years after a loan and/or pool has been paid in full.

Freddie Mac — Single-Family Seller/Servicer Guide, Volume 2, Chapter 52, Mortgage File Retention, Paragraph 52.3 Maintenance stipulates that: 

 

• Regardless of the form in which mortgage files and records are kept, the servicer must have control and identification features in place to:

 

o Permit ready identification of the Freddie Mac loan number assigned to each mortgage serviced for Freddie Mac and Freddie Mac’s percentage of participation in each such mortgage

o Permit ready identification of which mortgages are MERS-registered and of those that are closed with MERS as original mortgagee of record

o Prevent the pledge or sale to a third party of any mortgage in which Freddie Mac has a percentage of participation

o Permit prompt retrieval and, if applicable, delivery to Freddie Mac of a file or individual components of a file by Freddie Mac loan number

o Permit prompt preparation and delivery to Freddie Mac of scheduled and unscheduled reports that Freddie Mac may require by Freddie Mac loan number and/or percentage of participation


• If, for any reason, Freddie Mac changes a loan number and had so advised the servicer, the servicer must promptly make the necessary changes to the applicable mortgage file and records to reflect the new Freddie Mac loan number and instruct its document custodian, if applicable, to take similar action.

• The servicer must maintain the mortgage file while Freddie Mac retains an interest in the applicable mortgage and for at least seven years from the date Freddie Mac’s interest in the mortgage is satisfied.

• If the mortgage was paid in full, the file must contain a copy of the canceled note. If the mortgage was repurchased by the servicer to allow a transfer of ownership that is not allowed by Freddie Mac or does not meet Freddie Mac’s requirements, the file must contain a copy of the executed transfer of ownership or assumption/release of liability instrument.

Freddie Mac — Single-Family Seller/Servicer Guide, Volume 2, Chapter 66, Foreclosure, Paragraph 66.55 File Retention (1/14/11) further stipulates that:

• The servicer must maintain accurate and complete records of the foreclosure proceedings for mortgages in the mortgage file. The servicer must maintain the mortgage file for at least seven years from the date of the foreclosure sale.

Department of Housing and Urban Development (HUD) — Mortgagee Letter 2014-16 (July 23, 2014)

• Purpose: The purpose of this mortgagee letter is to provide guidance on the retention of foreclosure-related documents in servicing files (stored electronically), and to extend the record retention period to at least seven years after the life of the FHA-insured mortgage.

• Effective Date: This mortgagee letter is effective for all foreclosures, associated with FHA-insured mortgages, occurring on or after October 1, 2014. The affected policy is located in HUD Handbook 4330.1, sections 1-4 and 7-12. [4330.1. Rev 5 Chapter 1 paragraph 1-4 E. Retention of Record. All servicing files must be retained for a minimum of the life of the mortgage, plus three years. (See Paragraphs 10-17 and 10-34 for Section 235 mortgages, and see Paragraph 9-16 for cases resulting in a claim filed with HUD.) This is changed with this mortgagee letter.]

• Electronic retention of foreclosure documents in servicing files: In addition to any requirements for retaining hard copies or originals of foreclosure-related documents, documents related to loss mitigation review must also be retained in electronic format. These documents include, but are not limited to: (1) evidence of the servicer’s foreclosure committee recommendation; (2) the servicer’s referral notice to a foreclosure attorney, if applicable; and (3) a copy of the document evidencing the first legal action necessary to initiate foreclosure and all supporting documentation, if applicable (See Mortgagee Letter 2013-38). Mortgagees have the option of using electronic storage methods for all other serving-related documents required in accordance with HUD regulations, handbooks, mortgagee letters, and notices where retention of a hard copy or original document is not required.

• Electronic retention of the mortgage note: A copy of the mortgage, mortgage note, or deed of trust, must be also retained in electronic format.


o The electronic copy of the mortgage, mortgage note, or deed of trust must be marked “copy.”

o The original mortgage, mortgage note, or deed of trust must be preserved in accordance with requirements for retaining hard copies.

o If the note has been lost, a lost note affidavit, acceptable under state law, must be retained in both hard copy and electronic format.


• Length of Retention: All servicing files must be retained for a minimum of the life of the mortgage loan, plus seven years. Pursuant to 24 CFR 203.365 for mortgages, where FHA insurance has been terminated and a claim has been filed, the claim file must be retained for at least seven years after:


o The final settlement date, which is the date of the last acknowledgement or check received by the mortgagee in response to submission of a claim or

o The final settlement date, which is the date of the last acknowledgement or check received by the mortgagee in response to submission of a claim or

o The latest supplemental settlement date, which is the date of the final payment or acknowledgement of such supplemental claim.


• Requests for Individual Account/Loan Information: Pursuant to 24 CFR 203.508, mortgagees are required to respond to HUD requests for information concerning an individual account. Within 24 hours of an oral or written request, mortgagees must make legible documents available to HUD staff in the specific electronic or hard copy format that is requested. This requirement includes all servicing information and related data, as well as the entire loan origination file.

Department of Veterans Affairs (VA) — Regulation 36.4333, Maintenance of Records


• (a)(1) The holder shall maintain a record of the amounts of payments received on the obligation and disbursements chargeable thereto and the dates thereof, including copies of bills and receipts for such disbursements. These records shall be maintained until the VA Secretary ceases to be liable as guarantor or insurer of the loan, or, if the VA Secretary has paid a claim on the guaranty, until three years after such claim was paid. For the purpose of any accounting with the VA Secretary or computation of a claim, any holder who fails to maintain such record and, upon request, make it available to the VA Secretary for review shall be presumed to have received on the dates due all sums which by the terms of the contract are payable prior to date of claim for default, or to have not made the disbursement for which reimbursement is claimed, and the burden of going forward with evidence and of ultimate proof of the contrary shall be on such holder.


o (2) The holder shall maintain records supporting their decision to approve any loss mitigation option for which an incentive is paid in accordance with § 36.4819(a). Such records shall be retained a minimum of three years from the date of such incentive payment and shall include, but not be limited to, credit reports, verifications of income, employment, assets, liabilities, and other factors affecting the obligor’s credit worthiness, work sheets, and other documents supporting the holder’s decision.

o (3) For any loan where the claim on the guaranty was paid on or after February 1, 2008, or action described in paragraph (a)(2) of this section was taken after February 1, 2008, holders shall submit any documents described in paragraph (a)(1) or (a)(2) of this section to the VA Secretary in electronic form; i.e., an image of the original document in .jpg, .gif, .pdf, or a similar widely accepted format.


• (b) The lender shall retain copies of all loan origination records on a VA-guaranteed loan for at least two years from the date of loan closing. Loan origination records include the loan application, including any preliminary application, verifications of employment and deposit, all credit reports, including preliminary credit reports, copies of each sales contract and addenda, letters of explanation for adverse credit items, discrepancies and the like, direct references from creditors, correspondence with employers, appraisal and compliance inspection reports, reports on termite and other inspections of the property, builder change orders, and all closing papers and documents. [Authority: 38 U.S.C. 501, 3703 (c)(1)]


• (c) The VA Secretary has the right to inspect, examine, or audit, at a reasonable time and place, the records or accounts of a lender or holder pertaining to loans guaranteed or insured by the VA Secretary.

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Post-Petition Transfers and the Applicability of the Automatic Stay

Posted By USFN, Tuesday, November 25, 2014
Updated: Tuesday, October 13, 2015

November 25, 2014

 

by Joseph C. Delmotte
Pite Duncan, LLP – USFN Member (California, Nevada)

A recent published decision by the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the BAP) in the matter of Cruz v. Stein Strauss Trust #1361, PDQ Investments, LLC, 2014 WL 4258990 (9th Cir. BAP 2014), indicates that the protections of the automatic stay may apply to property of the debtor pursuant to Bankruptcy Code Section 362(a)(5), even if that property is not property of the bankruptcy estate. [11 U.S.C. § 362(a)(5)]. The Cruz decision appears to carve out an exception to the view that the protections of the automatic stay do not extend to property that is not property of the estate. [Atighi v. DLJ Mortgage Capital, Inc., 2011 WL 3303454 (9th Cir. BAP 2011)].

Section 541 of the Bankruptcy Code defines property of the bankruptcy estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” [11 U.S.C. § 541(a)(1) (emphasis added)]. Thus, in contrast to Chapter 12 and 13 cases where sections 1207 and 1306 expand the definition of property of the estate to include property acquired post-petition, a debtor’s post-petition acquisition of property in a Chapter 7 or 11 case is not property of the estate [11 U.S.C. §§ 1207, 1306]. However, as the BAP indicates in Cruz, this does not mean that the property is not subject to the protections of the automatic stay.

In Cruz, the wife of the original borrower of a loan securing real property executed a grant deed whereby she purported to transfer a fractionalized interest in the property to the debtor, Guido Cruz, several weeks after he filed a skeletal Chapter 7 bankruptcy petition. Three hours after the purported transfer, the property was sold to a third-party purchaser at a trustee’s sale. The bankruptcy court reasoned that because the property was acquired post-petition, it was not property of the estate and, therefore, not subject to the protections of the automatic stay. While the BAP agreed that the property was not property of the estate, it stated that the property was arguably property of the debtor and, thus, still protected by the automatic stay under 11 U.S.C. Section 362(a)(5).

Cruz reaffirms the necessity for creditors to file motions for relief from the automatic stay in cases where there is a post-petition transfer of property to a debtor. Creditors should also seek retroactive annulment of the automatic stay where there is a stay violation, regardless of whether or not the property is property of the bankruptcy estate. To the extent that there is any question regarding the applicability of the automatic stay, legal counsel should be consulted for a more detailed analysis and recommendation to avoid liability for automatic stay violations.

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HOA Talk: South Carolina: Two Categories of HOAs

Posted By USFN, Friday, November 7, 2014
Updated: Tuesday, October 13, 2015

November 7, 2014

 

by Harrison Rushton and Reggie Corley
Scott Law Firm, PA
USFN Member (South Carolina)

There are two different areas to consider when examining Homeowners Associations (HOA) in South Carolina: one is governed by the Horizontal Property Regime Act [S.C. Code Ann. § 27-31-10, et seq. (HPR)], and the other is the “Wild West” of uncodified and unregulated HOAs.

Those HOAs governed by the HPR are subject to clear statutory guidelines regarding the priority of HOA liens and mortgage liens that encumber the subject units. However, despite numerous attempts to codify the regulations of the vast majority of HOAs in South Carolina — those not governed by the HPR — another year has come and gone with a proposed bill that died in committee. Although the proposed legislation had more emphasis on bringing HOAs under the watchful eye of the South Carolina Office of Consumer Affairs than protecting a mortgagee’s priority over any subsequent liens, it did have the potential to shed some light on this nebulous area of real estate law.

Timeshare properties is another area in which associations are governed by statute. However, because timeshare foreclosures are handled differently than mortgage foreclosures in South Carolina, HOA issues in mortgage foreclosure actions will be the focus of this article. There is virtually no case law regarding HOAs, but the one published opinion from the South Carolina Supreme Court [Battery Homeowners Association v. Lincoln Financial Resources, Inc., 309 S.C. 247, 422 S.E.2d 93 (1992)] discusses whether a townhouse development was covered under the HPR when the master deed for the townhouse development did not expressly state that it was to be covered by the HPR. The clear implication from Battery HOA is that if the master deed does not state an intent to be covered by the HPR, then the townhouse development is not subject to the HPR and, thus, not subject to the statutory guidelines regarding lien priority. However, if the master deed grants the association the right to enforce restrictions and assessments over the lots or units, then the association has the right to do so, regardless of its lack of governance by the HPR.

As a practical matter and from an REO perspective, virtually all HOAs understand that they will not be entitled to dues that accrue during the course of a foreclosure. It is important to note that by most accounts, an HOA lien is a continuing, perpetual lien subject to the covenants, conditions, and restrictions of the HOA. In an HPR situation, the statutory language clearly addresses priority: “Where the mortgagee of any mortgage of record or other purchaser of an apartment obtains title at the foreclosure sale of such a mortgage, such acquirer of title, … shall not be liable for the share of the common expenses or assessments … accruing after the date of recording such mortgage but prior to the acquisition of title to such apartment by such acquirer. Such unpaid share of common expenses or assessments shall be deemed to be common expenses collectible from all of the apartment owners…” [S.C. Code Ann. § 27-31-210(b)].

Inasmuch as the HPR makes a distinction between those liens accruing prior to a mortgage being recorded and those accruing afterwards, this distinction seems to have carried over as a rule of thumb to the other HOA arena. As a general practice, default counsel in the judicial state of South Carolina will want to name the HOA as a defendant in the foreclosure action and add language to address any outstanding or prior liens, as well as those dues and liens that may accrue after the filing of the mortgage or during the course of the foreclosure action. Naming the HOA as a defendant in this manner will ensure that the lien of the HOA is released from the subject property by virtue of the foreclosure sale. [S.C. Code Ann. § 15-39-880].


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Legal Issues Update: Standing Challenges v. Judicial Estoppel

Posted By USFN, Friday, November 7, 2014
Updated: Tuesday, October 13, 2015

November 7, 2014

 

by Charles Pullium and William Holmes
Millsap & Singer, LLC
USFN Member (Missouri)

The legal concept of standing has been much litigated and much studied in the past few years. “Standing to sue” means a party has sufficient stake in an otherwise justiciable controversy to obtain judicial resolution on that controversy. In the context of a borrower who has previously filed a bankruptcy petition and, thus, transferred that borrower’s assets to the bankruptcy estate, the question is: Does the borrower later have standing to assert claims post-bankruptcy? The answer requires a tiered factual analysis, which may result in the borrower being barred from asserting particular claims.

Similarly, the related concept of “judicial estoppel” may bar a party from making certain claims. Under this doctrine, a party is bound by his judicial declarations and may not contradict them in a subsequent proceeding involving the same issues and parties. That is, a party who — by its pleadings, statements, or contentions, under oath — has assumed a particular position in a judicial proceeding is estopped from assuming an inconsistent position in a subsequent action. Although the concepts are related and are often discussed interchangeably, the two theories are distinctly separate. Each requires a different analysis.

Standing to sue — The U.S. Court of Appeals for the Second Circuit recently held that a borrower, who failed to disclose claims in bankruptcy, was not barred from bringing those claims at a later date in a separate action, because her bankruptcy petition was dismissed; the debtor had not been discharged. Dismissal or discharge is important: a borrower/debtor who does not schedule a claim in the bankruptcy schedules is barred from later asserting that claim after discharge and the closing of the case, because the claim is not abandoned to the debtor, but instead remains part of the estate. If a claim remains part of the estate after discharge and closure of the case, the borrower/debtor has no standing to assert the claim, [Crawford v. Franklin Credit Mgmt., 2014 U.S. App. LEXIS 13179 (2d Cir. N.Y. July 11, 2014)].

The analysis: the first question that must be asked is, was the claim that the borrower is now asserting scheduled in the prior bankruptcy proceeding? If yes, then the borrower’s claim is not barred by the doctrine of standing with regard to the earlier bankruptcy. If the claim was not scheduled, then it must be asked whether the bankruptcy case was dismissed prior to discharge, or whether the case resulted in a discharge and was then closed. If the case was dismissed prior to discharge, then the unscheduled claim would revert back to the borrower from the estate, and the claim would not likely be barred by the doctrine of standing with regard to the earlier bankruptcy. If the bankruptcy case resulted in a discharge and the case was then closed (as is a frequent bankruptcy case scenario), then the unscheduled claim does NOT revert back to the borrower, and the borrower lacks standing to later assert the claim. See 11 U.S.C. § 349. In that situation, the claim that was property of the estate was neither administered, nor abandoned; therefore, it remains property of the estate under 11 U.S.C. § 554(d).

Judicial estoppel — On the other hand, this is a doctrine that generally prevents a party from prevailing in a phase of a case on one argument, and then relying on a contradictory argument to prevail in another phase, [Pegram v. Herdrich, 530 U.S. 211, 227, n.8; 120 S. Ct. 2143 (2000)]. In deciding whether to invoke judicial estoppel, a court looks at whether “a party’s later position … [is] clearly inconsistent with its earlier position,” and whether the court in the first proceeding adopted the party’s position, [New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001)].

The goal is to protect the integrity of the judicial system and to not allow parties to play fast and loose with the facts, the law, and the courts. Accordingly, investigating and reviewing the positions that the borrower has taken in earlier bankruptcy proceedings and prior litigation is critical. Then, examine whether those positions were to the borrower’s advantage, as well as whether it would be fundamentally inconsistent to allow the borrower to take a different position at a later date.

Under either a standing or judicial estoppel analysis, a prudent attorney will investigate all prior proceedings involving the borrower before litigating the case at hand.

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Washington: Appellate Court Defines “Beneficiary”

Posted By USFN, Friday, November 7, 2014
Updated: Tuesday, October 13, 2015

November 7, 2014

 

by Joshua Schaer & Lance Olsen
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

On June 2, 2014, Division One of the Washington Court of Appeals affirmed a trial court ruling dismissing all claims against NW Trustee Services, Inc. (NWTS) for alleged violations of state law. [Trujillo v. NW Trustee Services, Inc., 326 P.3d 768].

The appellant/borrower, Trujillo, had obtained a loan in 2006, and secured repayment with a deed of trust. Shortly thereafter, the loan was sold to Wells Fargo, and then to Fannie Mae. Wells Fargo retained servicing rights. In November 2011, Trujillo defaulted on the loan.

As part of nonjudicial foreclosure proceedings, Wells Fargo executed a beneficiary declaration and delivered it to NWTS. That declaration stated, “Wells Fargo is the actual holder of the promissory note ... evidencing the loan or has requisite authority under RCW 62A.3–301 to enforce said obligation.” The court analyzed the beneficiary declaration statute, which requires that: “[b]efore the notice of trustee’s sale is recorded, transmitted, or served, the trustee shall have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. A declaration by the beneficiary made under the penalty of perjury stating that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust shall be sufficient proof as required under this subsection.”

According to the statute, unless the trustee has violated its statutory duty of good faith, the trustee is entitled to rely on this declaration. The court held that, because no evidence contradicted the declaration’s validity or truthfulness, it “should be taken as true,” and Wells Fargo provided the necessary proof for purposes of the statute.

The court also concluded that a “beneficiary” is defined under Washington law as the note holder, and that it “need not show that it is the owner of the note.” Accordingly, the question of a note’s ownership is “irrelevant” in a Washington nonjudicial foreclosure.

Further, the borrower’s arguments concerning the applicability of various cases and codes were all rejected. The court found: (1) UCC § 9-313 “has no bearing” on the foreclosure; (2) UCC § 3-301 is “dispositive on the question of who is entitled to enforce the note,” as supported by the Washington Supreme Court decision of Bain v. Metropolitan Mtg. Grp., Inc.; and (3) the limited federal district court case law suggesting that a beneficiary must also be the note owner is “not persuasive.” Lastly, the court affirmed that no violation of NWTS’s good faith duty occurred, and the trustee was fully able to rely on Wells Fargo’s beneficiary declaration.

The Trujillo case is the first Washington appellate decision that specifically addresses the beneficiary declaration, and confirms that the “beneficiary” in the deed of trust act is the “note holder,” and not the “owner.” For these reasons, the court decided to publish the Trujillo decision. Therefore, it is controlling authority in Washington and may be relied upon to defeat similar pending and future claims.

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