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New York: Settlement Conferences

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

November 7, 2014

 

by Andrew Morganstern
Rosicki, Rosicki & Associates, P.C.
USFN Member (New York)

Court-mediated settlement conferences are mandatory in New York State in residential foreclosure actions involving a “home loan.” Pursuant to statute, CPLR 3408, the parties “shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.” The statute does not define “good faith,” nor does it specify the penalties that may be imposed in the event a party fails to negotiate in good faith. A recent appellate decision, US Bank National Association v. Sarmiento, 2014 WL 3732457 (2d Dept. 2014), helps to fill in the details.

What is good faith? Many of the judges and referees who conduct the conferences expect the servicer to offer a settlement of some form in order to satisfy the good faith requirement. However, in 2012, an appellate court held that the servicer’s failure to make a settlement offer did not establish a lack of good faith, considering the borrower’s financial circumstances. Wells Fargo Bank, N.A. v. Van Dyke, 101 A.D.3d 638 (1st Dept. 2012).

In the recent Sarmiento decision, the court explained the basis for finding that the servicer did not negotiate in good faith. The court held that the totality of the circumstances must be examined to ascertain whether the “party’s conduct did not constitute a meaningful effort at reaching a resolution.” The court further stated that a finding of “lack of good faith” is appropriate “where a plaintiff failed to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds.”

What penalty may be imposed? Without statutory guidance, courts have imposed various penalties upon servicers that fail to negotiate in good faith. Many of these penalties have been deemed inappropriate and stricken upon appeal. Appellate courts have ruled that even if the servicer did not act in good faith, a court cannot cancel a mortgage, reduce the mortgage payments, or compel a mortgagee to permanently abide by the terms of a trial loan modification.

In Sarmiento, the borrower requested that the court bar the plaintiff from collecting interest or fees that accrued from the date that the borrower submitted his complete HAMP application, bar attorneys’ fees, and require a new review for a HAMP modification excluding all interest and charges that accrued from the submission of the HAMP application. The lower court granted the borrower’s motion. The appellate court affirmed, noting that the plaintiff did not contend that these particular sanctions were excessive or improvident. However, the decision creates some uncertainty as to the type of penalty that may be imposed, by stating that courts may not rewrite the contract or impose contractual terms which were not agreed by the parties.

Conclusion — Sarmiento clarified the meaning of “good faith.” It also made clear that the lack of good faith allows imposition of appropriate penalties, yet the type of penalty that may be imposed is still uncertain.

Copyright © 2014 USFN. All rights reserved.
Autumn 2014 USFN Report

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Indiana: Dual Tracking

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

November 7, 2014

by Bryan K. Redmond
Feiwell & Hannoy, P. C.
USFN Member (Indiana)

In August of this year, the Indiana Court of Appeals looked at a case with allegations of “dual tracking” in a mortgage foreclosure action [Kretschmer v. Bank of America, NA., 2014 WL 3970507 (Ind. Ct. App. 2014)]. While it has been a fairly common practice for Indiana courts to find that allegations of dual tracking, or a lender/servicer failing to respond to a short sale offer, could state a claim for relief from a default judgment under Indiana Trial Rules 60(B)(1) and 60(B)(3), the courts have always required an additional meritorious defense. In a case of first impression, the Kretschmer court found that those same allegations can simultaneously state a meritorious defense, as required by the rule.

In Kretschmer, the appellate court heard an appeal of the trial court’s denial of a borrower’s TR 60(1) and 60(B)(3) motion for relief from a default. In support of the motion, Kretschmer alleged that: (1) after being served with a copy of the complaint, but prior to the entry of a default, he contacted lender’s counsel to notify them that he was working on a short sale. The borrower further alleged that he was, in turn, notified by counsel’s office “not to worry about anything and to continue with the short sale;” and (2) after the entry of default, the lender failed to timely respond to two short sale offers, causing the potential buyers to rescind their offers. Kretschmer contended that under these facts, it was excusable neglect that he failed to timely respond to the complaint. Further, the borrower maintained that the communications of the lender and its counsel constituted misrepresentations or fraud, upon which he reasonably relied to his detriment, and induced him to allow a default to be entered in the matter.

The lender countered that even if those alleged facts constituted excusable neglect, or even a misrepresentation, that Kretschmer had wholly failed to allege a meritorious defense — as required by the rule — when he failed to challenge any of the underlying contract elements including: the validity of the promissory note or mortgage, standing to enforce the note or mortgage, breach/default under the agreements, or accrued damages. The lender further argued that it was under no obligation to accept less than it was owed, and that any acceptance was purely discretionary.

Applying an abuse of discretion standard, the Kretschmer court held that the trial court did abuse its discretion when it denied Kretschmer’s motion for relief. After emphasizing that default judgments are an extreme remedy, and are generally disfavored, the court found that the borrower’s failure to timely respond to the complaint was due to his own excusable neglect, as well as the alleged fraud or misrepresentations of the lender and its counsel. The court further held that the very same allegations, without more, also constituted two meritorious defenses; namely, (1) estoppel; and (2) contractual sabotage under the Hamlin doctrine. The Hamlin doctrine prevents a party from committing contractual sabotage by acting in bad faith to cause the failure of a contractual provision to the detriment of another contracting party. In Kretschmer, the court found that once the lender promised to provide the borrower additional time to obtain an acceptable short sale offer, it was incumbent upon the lender to give due consideration to any offers that the borrower presented. To do otherwise was acting in bad faith and violated the Hamlin doctrine. Lastly, the court noted that the lender might be liable for additional damages pursuant to Ind. Code § 24-4.4-2-201 and 12 U.S.C. 2605(f) (RESPA), if the borrower’s allegations were proven.

One is left to wonder how the Kretschmer court would have interpreted similar facts in the context of a motion for a summary judgment, instead of a default. Is the court’s ruling truly intended as an expansion of TR 60(B), or simply another admonishment — in the many recent ones —from the appellate court that it takes a dim view of default judgments (particularly in equity cases), and that relief should be liberally granted?

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Autumn 2014 USFN Report






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Georgia: Substantial Compliance

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

November 7, 2014

 

by Susan Reid and Kent Altom
McCalla Raymer, LLC
USFN Member (Georgia)

For 16 months, since the Georgia Supreme Court’s decision in You v. JP Morgan Chase Bank, N.A., 743 S.E.2d 428, 293 Ga. 67 (May 20, 2013), default services attorneys in Georgia have been holding their collective breath wondering if, and when, the Georgia Supreme Court or the Georgia Court of Appeals would adopt the Eleventh Circuit’s unpublished decision in Carr v. U.S. Bank, NA, 534 Fed. Appx. 878 (2013). (Carr was aligned with two previous opinions of the Georgia Court of Appeals: In both TKW Partners v. Archer Capital Fund, 302 Ga. App. 443, 445-446(1), 691 S.E.2d 300 (2010); and Stowers v. Branch Banking & Trust Co., 317 Ga. App. 893, 896(1), 731 S.E.2d 367 (2012), the appellate court held that a lender’s foreclosure notice to its borrower need only substantially comply with Georgia’s foreclosure statute.)

Specifically, regarding lenders’ foreclosure notices sent to borrowers, the Eleventh Circuit in Carr cited TKW and stated that, in order to satisfy the contact information requirement of OCGA § 44-14-162.2(a), “… the notice only needs to inform the debtor of the contact information if he wishes to pursue a modification of the security deed.” In so doing, the Eleventh Circuit in Carr implicitly — if not directly — adopted the “substantial compliance” standard for providing contact information in foreclosure notices, which had been set forth by the Georgia Court of Appeals in TKW and Stowers.

For the most part, the wait ended in early September. In Peters v. CertusBank National Association, A14A1274 (Ga. App., Sept. 8, 2014), the Georgia Court of Appeals has indicated its likely concurrence with the standard articulated by the Eleventh Circuit in Carr, albeit without expressly stating as much. Notably, in Peters, the foreclosing lender’s mistake was that its foreclosure notice was sent by regular mail rather than by certified mail — an error too critical, according to the court, to overcome even under the “substantial compliance” standard. The court observed that: “… It is true that we have permitted substantial compliance with OCGA § 44-14-162.2(a) in a limited circumstance involving the requirement to provide certain contact information. See TKW Partners v. Archer Capital Fund, [citations omitted] (permitting substantial compliance where notice listed contact information for an individual — the lender’s attorney — who had “as much authority as any individual to negotiate a loan modification on [the lender’s] behalf, [in circumstances where] there was no individual at [the lender] with full authority to modify the loan because [that] would be a group decision”) (punctuation omitted); see also Stowers v. Branch Banking & Trust Co., [citations omitted] (noting that holding in TKW Partners stands for the principle “that substantial compliance with the contact information requirement of OCGA § 44-14-162.2(a) is sufficient.”) We decline to extend that holding [to the foreclosing lender in this instance]” Peters, at 6.

For Georgia default services attorneys, the real question has been: what impact, if any, did the Georgia Supreme Court’s You decision have on the Georgia Court of Appeals’ earlier holdings requiring mere “substantial compliance” in Stowers and TKW? That question seems to have been answered in Peters, even if the appellate court did not reference Carr by name or adopt its holding outright. With a strong degree of certainty, foreclosing lenders and their Georgia counsel can anticipate that the “substantial compliance” standard articulated by the Eleventh Circuit in Carr will be applied by Georgia courts post-You. That said, while “substantial compliance” will cure certain mistakes in a foreclosure notice, foreclosing lenders and their Georgia counsel should not assume that it will cure all mistakes. Lastly, it should be noted that because one of the three judges in Peters concurred in the judgment only, the appellate decision is considered physical, not binding, precedent. Ga. Ct. App. R. 33(a).

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Autumn 2014 USFN Report

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Protecting Your Secured Claim

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

November 7, 2014

 

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

One of the biggest challenges faced by secured creditors is how to protect their secured claims in Chapter 11 and 13 bankruptcy cases. Motions to determine secured status under Bankruptcy Code § 506 continue to be filed on a frequent basis. This is largely due to the fact that any recent increase in property value has not been significant enough to impede the filing of these motions.

Pursuant to § 506(a), a borrower may modify the rights of a secured claimant by seeking to bifurcate the claim into secured and unsecured portions, based upon the current fair market value of the property. Junior liens can be deemed wholly unsecured and lien-stripped entirely. According to the anti-modification provisions under § 1123(b)(5) and § 1322(b)(2), if the property is a single-family residence that is the debtor’s principal residence, a first mortgage claim cannot be modified if the claim is secured by that property alone. Further, any junior mortgage claim can only be modified upon the showing of zero equity.

Secured creditors are consistently faced with the potential for a claim modification. Nonetheless, servicers should be aware that there are many opportunities available to them in both Chapter 11 and 13 cases that can potentially limit a debtor’s ability to modify a secured claim. These options can protect a secured claim in its entirety — or close to it.

Chapter 11: The Absolute Priority Rule
The absolute priority rule bars junior claimants, including debtors, from retaining any interest in property when a dissenting senior class of creditors has not been paid in full. Under this rule, a creditor holding a potentially unsecured claim can effectively block plan confirmation if its claim is not to be paid in full before the reorganized debtor retains pre-petition property. This rule clearly applies to business debtors; however, courts across the country continue to be divided on whether it applies to individual debtors since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect.

The overwhelming weight of circuit court authority and bankruptcy court decisions support application to Chapter 11 individual debtors. The Sixth Circuit recently joined the Fourth, Fifth, and Tenth U.S. Courts of Appeals (and numerous bankruptcy courts) in holding that the rule applies to individual Chapter 11 debtors. See Ice House Am., LLC. v. Cardin, 2014 U.S. App. LEXIS 8882 (6th Cir. 2014); In re Stephens, 704 F.3d 1279 (10th Cir. 2013); In re Lively, 717 F.3d 406 (5th Cir. 2013); In re Maharaj, 681 F.3d 558 (4th Cir. 2012). If applicable, the absolute priority rule can be a very powerful tool for any secured creditor seeking to protect its secured claim.

Chapter 11: 1111(b) Election

An 1111(b) election prohibits a debtor from bifurcating a claim into secured and unsecured portions. Effectively, this election will protect a secured creditor’s claim in full. This election must be made prior to approval of the disclosure statement unless the court fixes a different date. When this election is taken, a secured creditor will retain its lien for the full amount of its claim. Creditors should be aware that once made, the election cannot be withdrawn, and the creditor will lose its right to vote on the plan as an unsecured creditor.

Although a debtor must propose deferred payments that are equal to at least the full amount of the secured creditor’s claim, and with a present value that is equal to at least the value of the property, the debtor can propose other terms (i.e., extended amortization, balloon payments) that are unfavorable to a secured creditor. Both debtors and creditors may prefer to avoid an 1111(b) election and, thus, choose to reach an agreement to repayment terms that are more valuable to both parties than would be the case if the election were taken. Consequently, wielding the ability to make an 1111(b) election can be a persuasive negotiation technique for a secured creditor.

Chapter 11: Voting Block
A creditor’s right to vote can also be powerful in a Chapter 11 case. Pursuant to 11 U.S.C. § 1126(a), a holder of a claim or interest allowed under § 502 is permitted to accept or reject a proposed plan of reorganization. A class of creditors has accepted the plan if at least two-thirds in amount, and more than one-half in number, of the allowed claims of the class that are voted are cast in favor of the plan. If a creditor is the only secured creditor and potentially will be the largest unsecured creditor, that creditor can effectively block confirmation of the plan. Similarly, multiple creditors in the same case can work together to oppose confirmation. A calculated block may force the debtor to propose repayment terms that are acceptable to the creditors, or otherwise face dismissal or conversion of the case.

Chapters 11 and 13: Residential Status of Property
As mentioned earlier, if the property is a single-family residence and the anti-modification provisions under § 1322(b)(2) are present, a first mortgage claim cannot be modified. (§ 1123(b)(5) is the anti-modification provision applicable in Chapter 11 cases.) Further, a junior mortgage claim can only be modified upon the showing of zero equity. To date, the majority of courts are following an objective standard (“bright line rule”) in looking at whether or not a property is the debtor’s principal residence.

Issues arise when the property is also being used for commercial purposes or has become income property. For example, where the debtor’s former residence is now being rented out. To quote the majority opinion in a recent decision, “… there is nothing in the bankruptcy code indicating that, once a commercial use of a property becomes sufficiently ‘significant,’ that property ceases being the debtor’s principal residence — either a property is a debtor’s principal residence or it is not” [In re Wages, 2014 DJDAR 3648 (9th Cir. BAP Mar. 7, 2014)].

On the other hand, the dissent in Wages sided with the reasoning and holding of Scarborough v. Chase Manhattan Mortgage Corporation, (In re Scarborough), 461 F.3d 406, 410-13 (3d Cir. 2006). In Wages, the dissenting opinion stated that “Scarborough effectively construed the anti-modification provisions to apply only to mortgaged real property the debtor uses exclusively as his or her principal residence.” Also resulting in conflicting judicial opinions on this topic is whether the relevant date for considering the property’s status should be the petition date or the loan transaction date.

Courts have reviewed additional facts, including the timing of the property conversion, as well as whether bad faith on the part of the debtor exists. See In re Smart, 214 B.R. 63 (Bankr. D. Conn. 1997); In re Kelly, 486 B.R. 882 (Bankr. E.D. Mich. 2013); In re Christopherson, 446 B.R. 831 (Bankr. N.D. Ohio 2011); In re Larios, 259 B.R. 675 (Bankr. N.D. Ill. 2011). Accordingly, servicers should review whether the property is multi-family, whether the executed mortgage contained a “Second Home Rider” or “Occupancy Rider,” the conversion timing, and proof of rental income. Further, pre-petition loan modification applications and utility bills can provide servicers with helpful evidence. All of these factors can definitely play a part during plan negotiations.

Chapter 11 and 13: Due-on-Sale Clauses

Due-on-sale provisions are contained in many mortgages. In pertinent part, these provide that the lender may, at its option, require immediate payment in full of all sums secured by the mortgage if all or any part of the property, or if any right in the property, is sold or transferred without the lender’s written permission. Application of this clause can arise when a borrower quitclaims property to a third party who, thereafter, files for bankruptcy. That debtor then seeks to cramdown the secured creditor’s claim.

Whether or not these Chapter 13 plans are confirmable under § 1325(a)(1) and § 1322(b)(2) has been subject to much litigation. Although courts to date have been divided on whether a debtor in default under a due-on-sale clause can modify a creditor’s rights, many decisions have ruled against plan confirmation in these circumstances. See In re Espanol, 509 B.R. 422 (Bankr. D. Conn. 2014); In re Martin, 176 B.R. 675 (Bankr. D. Conn. 1995); In re Tewell, 355 B.R. 674 (Bankr. N.D. Ill. 2006). Using this line of cases, servicers may be able to effectively block plan confirmation.

Chapter 13: Exceeding the Debt Limitations
Pursuant to 11 U.S.C. § 109(e), only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under Chapter 13.

This article began with reference to motions to determine secured status under Bankruptcy Code § 506. Indeed, application of § 506(a) may turn out to be a deciding factor when determining eligibility for relief under Chapter 13. A debtor seeking to bifurcate a secured claim will effectively increase unsecured debt by the amount of the secured claim that is deemed unsecured. See In re Miller v. United States, 907 F.2d 80 (8th Cir. S.D. 1990). Accordingly, a debtor who proposes a bifurcation that increases the debtor’s unsecured debt over the § 109(e) debt limitations may prove to be ineligible for Chapter 13 relief in those jurisdictions that take these facts into consideration.

Conclusion
As touched on in this article, secured creditors have many options when objecting to a claim modification in both Chapter 11 and 13 cases. Servicers should consult with their local bankruptcy counsel to implement the best course of action, based upon local practice and law in that jurisdiction.

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Autumn 2014 USFN Report

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Rhode Island: Statutory Amendments to Post-Foreclosure Eviction Process

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

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

On July 8, 2014, the governor of Rhode Island signed legislation that amended Chapter 34-18 of the General Laws, entitled “Residential Landlord and Tenant Act.” Specifically, the Act revised § 34-18-20/§ 34-18-23 and added § 34-18-38.1 as well as § 34-18-38.2, which took effect upon passage and applies to premises containing four or fewer dwelling units. The legislation is silent as to whether it is to be applied prospectively on properties foreclosed after July 8, 2014, or retroactively. The new law dramatically changes the process of evicting “bona fide” tenants who occupy foreclosed properties, and extends the notice-to-quit period for former mortgagors who “hold-over” after the foreclosure.

The new section requires foreclosing owners to post a notice to the tenants advising of the change of ownership, and providing the contact information for the new owner or its property manager within 30 days of the foreclosure. The notice must advise the tenants where rent can be sent, and that a “request for occupancy form” must be submitted to the property manager to remain on the premises. The form shall be provided as part of the notice and be “substantially similar” to the HUD occupancy request form. The notice shall be posted at a prominent location of the building, slid under the door of each unit, and mailed via first-class mail.

Unlike the prior law, § 34-18-38.2 limits a foreclosing owner’s right to possession in a bona fide tenant eviction to the following reasons: (1) where a tenant failed to submit the “request for occupancy form” within 30 days; (2) where the owner has “just cause” [including, but not limited to, the tenant’s failure to pay rent, refusal to grant access, and material violation of the lease]; (3) where there is a binding purchase and sales agreement with a third party for the property; and (4) where HUD has denied the occupants’ request for an occupied conveyance, if the case involved a FHA-insured mortgage.

The new law also impacts the procedure for evicting former mortgagors, and non-bona fide tenants who occupy the property after a foreclosure sale. The new law dictates that non-bona fide tenant evictions must be brought under the Residential Landlord and Tenant Act, specifically § 34-18-37, which grants former mortgagors the right to a “full rental period” notice to quit.

In addition to the changes to the post-foreclosure eviction process, the new law also requires the mortgagee to provide each bona fide tenant with notice that the property is subject to a foreclosure, with the date, time, and place of the sale; the address and telephone number of the Rhode Island Housing Help and United Way 2-1-1 center; include a reminder to pay rent and a statement that it is not an eviction notice. The notice may be addressed to “Occupant,” and mailed to each dwelling unit. The notice is to be mailed first-class mail at least one business day prior to first publication of the notice. A form meeting these requirements was promulgated by the Department of Business Regulation; see Appendix A (Form 34-27-7) within Banking Regulation 5. Failure to provide the notice does not affect the validity of the foreclosure, but it may be a defense to the ability to evict a bona fide tenant, post-foreclosure.

© Copyright 2014 USFN. All rights reserved.
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New York: When a Lender is Sued (or not) for Injury at the Mortgaged Premises

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Bruce J. Bergman
Berkman, Henoch, Peterson & Peddy, P.C. – USFN Member (New York)

The title suggests what seems to be an odd notion, but mortgage lenders and servicers can confirm that they are sued on occasion by someone claiming: either to have been injured at the mortgaged property, or to have suffered damage to adjoining property resulting from conditions at the mortgaged property. That the lender or servicer, typically, need not worry about losing such a claim is tangentially confirmed by a new case, Koch v. Drayer Marine Corporation, 118 A.D.3d 1300, 988 N.Y.S.2d 233 (4th Dept. 2014). Nonetheless, there might yet be cause for concern — so perhaps a dual lesson here.

It should be observed that if a lender has become a mortgagee-in-possession (although that is a right rarely invoked), it might then indeed be liable for injuries at the property. That aside, the law has always been clear (albeit somewhat obscure) that a lender would need to have exercised some degree of care, custody, and control over the property to be liable for torts. This is generally not applicable to a mere mortgage holder. [For a more expansive review of this concept with case citations, attention is invited to 1 Bergman on New York Mortgage Foreclosures, § 2.24[9], LexisNexis Matthew Bender (rev. 2014.)]

While the Koch case isn’t the precise fact pattern, it does aptly underscore the critical point. In the case, the property involved was a marina. A man sued the borrower/owner of the property, claiming he was injured with a plank that collapsed while he was fishing from the dock. The owner, who was in foreclosure, contended that the “Judgment of Foreclosure and Sale” in the foreclosure action extinguished ownership so that it could not be liable.

The court disagreed: a judgment does not divest title; only the foreclosure sale does. However, the borrower/owner showed that shortly after the foreclosure was begun, she and her staff put the boats in storage, and thereafter never had any further contact with the premises. In addition, the foreclosing bank denied access to the owner to remove the boats from storage for the summer season, barred the owner from sending rental renewals to customers, and hired another marina operator to take over. This established that the borrower/owner no longer possessed, maintained, or controlled the marina.

The applicable principle of law is that “an out-of-possession title holder lacking control over the property is not liable for injuries occurring thereon.” It is this maxim that protects a lender who is merely the holder of a mortgage, and not in possession. I will leave you with these two points: (1) A lender or servicer without care, custody, and control of mortgaged premises is not liable for injuries occurring there; (2) Watch out for the consequences if the lender or servicer does exercise that care, custody, and control — and, at the very least, insurance will be needed to protect against injury claims.

© Copyright 2014 USFN. All rights reserved.
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iPhone6 is Here

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

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

The iPhone 6 launch event happened on September 19, 2014. Are you upgrading? During a USFN Technology Committee meeting, the question was debated: whether or not to upgrade?

For the first time, the iPhone is available in two models with two different screen sizes. The new models, measured diagonally, are the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus. It looks like Apple is getting into the “Phablet” game (phablet: a phone so big it’s almost a tablet). Therein lies an initial concern: could 5.5 inches, or even 4.7 inches (.7 larger than 5s) be too big for the average phone user?

Here are some facts and comparisons from the iPhone 6 launch event:

  • Retina HD display, ion-strengthened glass, ultra-thin backlight
  • 8MP Camera, faster autofocus, extended Lens, optical stabilization (i6 Plus)
  • 64-bit support, 50% better energy efficiency, 25% faster, 13% smaller over A7 processor
  • Increased LTE speeds (on the go) and WiFi (wireless at home or fixed location)
  • Apple Pay to replace classic credit cards and transactions
  • Apple Watch accessory for iPhone 6
  • iPhone 6 available in 16GB/64GB/128GB models for $199/$299/$399
  • iPhone 6 Plus available in 16GB/64GB/128GB models for $299/$399/$499
  • iOS 8, launched September 17 (expected release date for iOS 8.1 is Oct. 20)


Upgrading doesn’t seem like a requirement for everyone. In the Technology Committee’s roundtable discussion, there was one user with a 4s who was ready to upgrade, while another member is choosing to wait-and-see. These two views are probably representative of the split among the public. Some must have the latest and greatest; while for others, it’s a matter of getting value.

Next question: do you use a screen protector or a case? An armored case? With the more durable glass and casing of the new phones, you might like going au naturel.

Watch out for that data though. Arieso reports that between the iPhone 3 and iPhone 4s, users’ data consumption doubles. If trends continue, re-evaluating data plans might have to be a necessity. Those with “grandfathered” unlimited plans will be very happy, indeed!

Finally, if you do decide to upgrade, don’t forget to wipe your current phone. Don’t rely on the store or anyone else to protect you. Both Android and iPhone offer a factory data reset option. Third-party providers also have utilities that can rid your phone of personal information, and protect it with a security level matching the Department of Defense.

© Copyright 2014 USFN. All rights reserved.
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Iowa: Statute of Limitation Clarification

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Benjamin W. Hopkins
Petosa, Petosa & Boecker, L.L.P. – USFN Member (Iowa)

On September 17, 2014, the Iowa Court of Appeals released a decision resolving a long, simmering issue concerning the state’s foreclosure judgment statute of limitation. In Kobal v. Wells Fargo Bank, N.A., Iowa Ct. App. No. 13-1926, the court unequivocally concluded that the two-year statute of limitation in Iowa Code Section 615.1 applies only to the foreclosure judgment, not the underlying mortgage.

The case involved a foreclosure judgment entered in 2008. An execution sale was not held within the two-year limitation period and, thereafter, the mortgagor filed an action to quiet title. The mortgagor contended the provision in section 615.1 that “After the expiration of … two years from … entry of judgment … all liens shall be extinguished,” rendered both the judgment and the underlying mortgage unenforceable. The court disagreed, finding such an interpretation wholly inconsistent with the language and context of Iowa Chapter 615.

The mortgagor has filed a petition for rehearing and, in any case, the issue will not be fully resolved until the Iowa Supreme Court weighs in on the matter. In the meantime, Kobal offers some comfort that engaging in loss mitigation efforts, after entry of a foreclosure judgment, will not expose the investor to risk that — should two years pass — its collateral will be lost.

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Florida: Statute of Limitations and Statute of Repose

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Robert Schneider
Ronald R. Wolfe & Associates, P.L. – USFN Member (Florida)

As has been detailed recently, Florida courts have made clear that when a bank dismisses its first foreclosure case, a subsequent foreclosure case filed more than five years after the initial acceleration of the loan is not necessarily time-barred (See, e.g., Florida: Appellate Court Clarifies Statute of Limitations for Mortgage Foreclosures, by Roger Bear in the June 2014 USFN e-Update, highlighting U.S. Bank Nat. Ass’n v. Bartram, 2014 WL 1632138 (Apr. 25, 2014)). A recent decision out of the Middle District of Florida (Matos v. Bank of New York, 2014 WL 3734578 July 25, 2014) goes one step further in explaining what is considered a new, actionable default, and in clarifying when a mortgage foreclosure will be forever time-barred.

Matos involved a quiet title claim brought by the borrower against Bank of New York. In Matos, the subject mortgage lien was first accelerated for failure to make an October 1, 2007 payment, resulting in a foreclosure action being filed. The foreclosure case concerning the October 1, 2007 default was ultimately dismissed in 2010. By January 2014, the borrower claimed that the plaintiff no longer had an existing mortgage lien, asserting that the five-year statute of limitations effectively eliminated the lien.

As the court in Matos explained, however, the five-year statute of limitations in Florida Statutes § 95.11(2)(c) is no more than a “shield” to be used as an affirmative defense, should a lender try to collect on a debt greater than five years old (e.g., trying to collect past-due payments for the years 2007 and 2008 when filing an action for foreclosure in 2014, more than five years after those payments were due). The court emphasized that the statute of repose, as set forth in Florida Statute § 95.281(1)(b), is the “sword” and the applicable reference for determining the extinguishment of a mortgage lien altogether, such that no foreclosure action could be brought again against the borrower (e.g., in Matos, the 30-year mortgage that originated in 2006 would be a valid lien until 2041 — five years from the maturity date).

While Matos does not create new law, it does provide further guidance, along the lines of that contained in Bartram, to banks in accelerating loans where the initial default date is older than five years. The Matos court held that where “it is undisputed that a borrower has failed to make any payments in the last five years,” a bank can “sue for those defaults and accelerate the note and mortgage again.” From a practical perspective, though, lenders should consider sending notices of intent to accelerate for default dates that are not already five years old (perhaps four and one-half years old), allowing for the thirty-day cure period to expire and, ultimately, for the foreclosure action on the new default to be filed by a date that is less than five years from the date of default. Otherwise, defenses will undoubtedly be raised that by the time the second foreclosure action is filed, the default date is more than five years old and, thus, time-barred.

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Eighth Circuit Joins Majority of Circuits in Lien-Strip Ruling

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Orin J. Kipp
Wilford, Geske & Cook, P.A. – USFN Member (Michigan)

While many circuits have previously ruled on the ability of a Chapter 13 debtor to strip the lien of a wholly unsecured junior creditor, the Eighth Circuit had yet to officially join the majority. It had come close, in In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011), when the Minnesota trustee appealed a BAP ruling allowing such treatment. However, the Eighth Circuit did not rule on the lien-strip issue in Fisette due to procedural deficiencies in the matter. As such, the Circuit remained in limbo regarding this hot topic because of the non-binding nature of the BAP decision in Fisette. More recently, the issue has been adjudicated with finality, as In re Schmidt was decided in late August (No. 13-2447).

Case Background: In 2012, the Schmidts filed a Chapter 13 bankruptcy petition. In November 2012, they filed a motion to value seeking: (1) a determination that there was no equity in their home to support a third priority mortgage; (2) that the mortgagee’s lien be reclassified as a non-priority unsecured claim; and (3) that the lien be avoided upon successful completion of their Chapter 13 plan. The bankruptcy court, relying on Fisette, ruled in favor of the debtors. The mortgagee appealed to the District Court, which affirmed. An appeal to the Eighth Circuit followed.

The Eighth Circuit focused on the interplay between 11 U.S.C. 506(a)(1) and 11 U.S.C. 1322(b)(2), ruling that under Bankruptcy Code section 506(a)(1), a creditor’s under-secured claim is treated as a secured claim up to the value of the creditor’s interest in the collateral. The excess debt is treated as an unsecured claim. Moving then to section 1322(b)(2), the court opined that the dividing line drawn by this section runs between the lienholder whose security interest in the homestead property has some “value,” and the lienholder whose security interest is valueless. The Circuit distinguished the Supreme Court’s decision in Nobleman v. American Savings Bank, 508 U.S. 324 (1993), in that the creditor’s claim in Nobleman was partially secured, and the focus was based on whether section 1322 allows bifurcation of a partially secured claim and stripping the lien from the unsecured portion of that claim. In Schmidt, however, the creditor’s claim was wholly unsecured. As such, the Eighth Circuit held that, based upon the wholly unsecured nature of the creditor’s claim, the anti-modification language contained in section 1322 did not apply and the lien could be stripped upon successful completion of the Chapter 13 plan.

While this decision is not entirely a surprise, as each circuit that has addressed the issue has reached the same conclusion, it nonetheless provides yet another hurdle for lenders and servicers to overcome in bankruptcy proceedings. It is important for lienholders to vigilantly monitor bankruptcy cases in order to be prepared to timely oppose such a motion if there is a question as to the value of the property and the amount of equity, if any. (The Eighth Circuit is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)

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Connecticut: Subsequent Lienholders

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Jane Torcia
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

Recently, the Connecticut Appellate Court reversed a superior court’s ruling that had been entered in favor of the plaintiff-mortgagee. Bombero v. Trumbull on the Green, LLC , Case No. AC 35690 (Aug. 19, 2014). The appellate court based its decision on the defendant’s contention that the plaintiff’s mortgage interest had been extinguished by a previous foreclosure of a prior mortgage, which had been brought by a mortgagee with a first position mortgage interest.

It was undisputed at the superior court level that the plaintiff’s mortgage had no value at the time of the prior foreclosure action — and that said mortgage would have been foreclosed out. Nonetheless, the superior court reasoned that the plaintiff should be permitted to foreclose, in light of the prior mortgagee’s failure to name the plaintiff as a defendant (by virtue of the plaintiff’s subsequent lien) in the prior foreclosure action.

Indeed, as contemplated by Connecticut law, the prior mortgagee was afforded the opportunity to initiate an “omitted party action” under Connecticut General Statutes §49-301, which would have cured the previous omission of the plaintiff mortgagee from the prior mortgage foreclosure. Moreover, the superior court found that the prior mortgagee had actual knowledge of the plaintiff’s lien at the time it took title to the property. However, the appellate court found that the plaintiff-mortgagee should not be permitted to foreclose, despite omission of the plaintiff from the prior mortgage foreclosure, and in spite of the prior mortgagee’s failure to initiate an omitted party action. In so holding, the appellate court relied upon several Connecticut appellate and supreme court decisions, basing its opinion almost exclusively upon the notion of balancing the equities of the parties, as well as principles of logic and common sense in stating that “[i]t is also a basic principle of law that common sense is not to be left at the courtroom door.” Id. at 370.

Accordingly, if a prior mortgagee fails to name a subsequent mortgagee or lienholder in its foreclosure action, the subsequent mortgagee or lienholder cannot receive a windfall by commencing its own foreclosure action, provided that no equity would have existed for said party.


1 Connecticut General Statutes § 49-30 allows a plaintiff to bring a separate foreclosure action against any party or parties “owning any interest in or holding an encumbrance on such real estate subsequent or subordinate to such mortgage or lien [which] has been omitted or has not been foreclosed of such interest … Such omission or failure to properly foreclose such party or parties may be completely cured and cleared by deed or foreclosure or other proper legal proceedings to which only the necessary parties shall be the party acquiring such foreclosure title…and the party or parties thus not foreclosed, or their respective successors in title.”

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Connecticut: BAPCPA and the Absolute Priority Rule in Ch. 11 Cases

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

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

The U.S. Bankruptcy Court for the District of Connecticut has ruled on an issue of first impression that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) did not eliminate the absolute priority rule in individual Chapter 11 cases. The recent decision stems from a contested confirmation of a single Chapter 11 plan of reorganization in two separate, but jointly-administered, Chapter 11 bankruptcy cases: In re Lucarelli, Case No. 13-30350, and In re Lucarelli’s Executive Answering Service, LLC, (LEAS), Case No. 13-30443.

In the individual case, the debtors sought to retain ownership interests in LEAS, while unsecured creditors would not be paid in full. Confirmation of the individual case was met with an objection by one of the unsecured creditors who was not being paid in full under the plan, asserting a violation of the absolute priority rule. Unless unsecured creditors were paid in full, the absolute priority rule would effectively prevent confirmation of the individual case.

The court followed the analysis taken in In re Maharaj, 681 F.3d at 560, and said that it “must determine the meaning of the Congressional language ‘property included in the estate under section 1115’ found in § 1129(b)(2)(B)(ii) and ‘property of the estate includes, in addition to the property specified in section 541’ found in 1115.” The court’s review wavered on whether the court should adopt, what has otherwise become known as, the “narrow view” or, alternatively, opt for the “broad view.”

Having determined that the statutes held ambiguous, competing interpretations, and having further noted that the canon of statutory construction is a presumption against implied repeal, the court chose to take the narrow view (given adoption of the broad view would amount to an implied repeal of the absolute priority rule in individual Chapter 11 cases). The court stated that “the ambiguity of the statutes, the established canon disfavoring implied repeal, and the lack of any useful legislative history” left no alternative but to adopt the narrow view. Effectively, this view holds that the absolute priority rule applies in individual Chapter 11 cases. Consequently, an individual debtor whose liabilities exceed the Chapter 13 debt limits, and whose creditors will not consent to less than full payment of their claims, is required to undergo the functional equivalent of a liquidation.

In its final remarks, the court in Lucarelli noted that the adoption of the narrow view would serve to make Chapter 11 reorganization far less attractive to individual debtors and would make confirmation of a nonconsensual plan virtually impossible.

The Lucarelli decision provides a powerful tool to many creditors in individual Chapter 11 cases. Servicers should consult with their local counsel to determine whether a plan objection based upon an absolute priority rule violation is viable.

Editor’s Note: The author’s firm was appearing counsel in the Lucarelli case.

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Pennsylvania: Good Faith and Fair Dealing

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Louis P. Vitti
Vitti & Vitti & Associates, P.C. – USFN Member (Pennsylvania)

Earlier in 2014, this author submitted a case update regarding Hirsch v. Citimortgage, 2:13-cv-1344. That case dealt with breach of contract and Unfair Trade Practices and Consumer Protection Law (TPCPL) claims, which were dismissed by the court. The court had ruled in favor of Citimortgage; however, it was noted that breach of an implied covenant was not pled properly by the plaintiff. Accordingly, the prior case note cautioned lenders when dealing with borrowers, to be certain to evaluate the actions to be taken in light of reliance and/or good faith and fair dealing. That warning has come to fruition.

In the case of Rearick v. Eldterton State Bank, 2014 PA Super. 157, 2014 WL 3798512 (Pa. Super. July 23, 2014), the superior court reviewed a trial court’s decision. The lower court held that the bank’s preliminary objections, based on res judicata grounds, were valid and that the borrower could not proceed because all causes of action were determined in the foreclosure.

The superior court concluded that Rearick’s claims “are best addressed as permissive counterclaims.” Consequently, it reversed the trial court’s order sustaining the bank’s preliminary objection on the basis of res judicata, with the appellate court stating, “Neither in word nor in substance do Rearick’s claims in the instant action call into question the legal effect of the earlier foreclosure action. They do not contest the foreclosures as such, nor do they directly contest the debt itself … Rather, Rearick seeks damages from [the bank] for alleged misconduct and breaches of implied terms of the parties’ contract(s) and/or other non-contractual obligations, primarily for actions that occurred after the creditor-debtor relationship already had been established.”

The superior court’s ruling, however, did contain one limited caveat: The plaintiff “may not seek damages for [the bank’s] allegedly commercially unreasonable method of liquidating the properties surrendered by the plaintiff in foreclosure. ... that claim was litigated and disposed of in the prior action. … Moreover, were [the plaintiff] to secure damages specifically on that matter, it would undermine the foreclosure judgment: implicit in that judgment was the trial court’s blessing of all matters pertaining to the foreclosure, including [the bank’s] disposition of the properties at issue.”

Ultimately, the superior court affirmed the trial court’s order in part, reversed the order in part, and remanded the case back to the lower court — with the opportunity for the borrower to amend his complaint to include the causes of action deemed permissible by the appellate court.

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Maine: Greenleaf Revolutionizes Foreclosure Practice

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Santo Longo
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

On July 3, 2014, the Maine Supreme Judicial Court issued its opinion in Bank of America v. Greenleaf, 2014 ME 89. In its decision, the court clarified the standing requirements in Maine. In addition to being the one entitled to enforce the note, the plaintiff also must be the “owner” of the mortgage. This ownership requirement is not described in, or required by, the state statutes. However, in reading the line of Supreme Judicial Court decisions leading up to Greenleaf, it can be discerned that one becomes an “owner” of a mortgage either by being the original mortgagee or by receiving a valid assignment of mortgage from the original mortgagee.

The trial court in Greenleaf had entered a foreclosure judgment on behalf of Bank of America. The borrowers appealed, claiming, among other things, that Bank of America did not have standing to foreclose because the only assignment introduced into evidence was from Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Residential Mortgage Services, Inc. (RMS), to BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP — which thereafter merged into Bank of America. There was no assignment of mortgage from RMS. The mortgage also contained the following language in bold and all capitals “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.”

The court, seemingly attracted to the bolded language, seized on that language to find that MERS only had the right to record and was never a mortgagee under Maine law. The court referenced, but summarily disregarded, other persuasive provisions of the mortgage that would have bolstered claims that MERS did have the rights of a traditional mortgagee1. The court found that “the mortgage conveyed to MERS only the right to record the mortgage as nominee for the lender, RMS” and “when MERS then assigned its interest in the mortgage to BAC, it granted to BAC only what MERS possessed — the right to record the mortgage.” The court also noted that there was “no evidence in the record purporting to demonstrate that MERS acquired any authority with respect to Greenleaf’s mortgage by any means other than that defined in the mortgage itself.” As a result, the court concluded that since BAC only acquired the right to record the mortgage, it never became the “owner” of the mortgage, and Bank of America, as successor to BAC, did not have standing to foreclose.

Since Greenleaf, foreclosures in Maine on MERS mortgages have largely halted. MERS has issued a directive to its members not to obtain assignments from the original lender. Fidelity National Financial group of title companies has issued underwriting guidelines that require an assignment from the lender before a title policy will be issued without an exception. First American’s underwriting guidelines also require an assignment of mortgage from MERS and an assignment of mortgage from the original lender or other evidence (satisfactory to First American) that MERS had the authority to assign the mortgage and not just the right to record the mortgage. Obtaining the assignments from the original lenders will be impossible in many instances because many of the lenders are out of business. However, there are some that are still in business, and some servicers have powers of attorney from their correspondent lenders and could therefore execute assignments on the lenders’ behalf.

Other than obtaining assignments from the lenders, there have been discussions regarding introducing into evidence the MERS® System Rules of Membership and the current servicer’s MERS® Membership Application. These two documents, together with the MERS® Procedures, constitute the MERS® Membership Agreement as defined in the glossary of the current MERS® System Rules of Membership. The problem with this proposal is that the current servicer’s membership application is not relevant to the original lender’s application, and the current servicer cannot use its application to prove to the court what the original lender’s application stated. Also, the servicer may not know what version of the MERS® System Rules of Membership was in effect at the time the mortgage originated, and the court would likely preclude any of this testimony from the servicer.

Another proposal is to bring a quiet title or declaratory judgment action against the original lender before commencing the foreclosure action. There is Maine precedent that if the note holder and the mortgagee are not the same person, the note holder holds equitable title and the mortgagee holds legal title and further holds the mortgage in trust for the note holder. In equity, therefore, the note holder has the better title. Once a quiet title or declaratory judgment action results in a judgment in favor of the note holder, and that judgment has been recorded, the foreclosure could then be commenced.

As if the ruling concerning the MERS assignment was not bad enough, the court in Greenleaf also interpreted the Maine demand letter statute in a way that contradicted Maine practice. The court stated that the amount needed to cure the default must be fixed for the entire cure period, despite the fact that one or two additional monthly payments will come due if the borrower tenders the cure at the end of the 35-day cure period. Thus, in such an instance, the borrower will have “cured” the default but may still be one or two payments in arrears. Because most servicers’ demand letters were non-compliant with this new statutory interpretation, and since the foreclosure judges are, by rule, precluded from entering judgment unless they determine that the statutory demand letter requirements have been “strictly performed,” it is anticipated that many pending cases will be dismissed. In such a situation, the loan will need to be re-demanded, and after the new demand expires, the foreclosure will need to be recommenced.

Lastly, the Supreme Judicial Court raised the bar for the qualifications of a witness used to introduce business records. The court required that the witness be “intimately involved in the daily operation of the business” and that witness testimony show the first-hand nature of his or her knowledge of the servicer’s records. The court also established that the witness would need to testify as to how the servicer’s payment records are created, checked for accuracy, and accessed, and that the witness’s review of the records showed that the proper processes for creating, checking for accuracy, and accessing the records were followed for the loan in question. Thus, in order to obtain judgment (by motion or by trial), the proper foundation will need to be laid or the court may either dismiss the case (with or without prejudice) or enter judgment, with costs, for the defendant.

Conclusion
While the Greenleaf case has certainly revolutionized Maine foreclosure practice, significant questions remain open regarding how best to proceed to foreclosure, particularly in cases involving MERS and MERS assignments.

© Copyright 2014 USFN. All rights reserved.
September e-Update


1For example, the court referenced the following language: “[Borrowers] mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns), with mortgage covenants, subject to the terms of this Security Instrument, to have and to hold all of the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to its successors and assigns, forever … [Borrowers] understand and agree that MERS holds only legal title to the rights granted by [Borrowers] in this Security instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: (A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument ... [Borrowers grant and mortgage to MERS (solely as nominee for Lender and Lender’s successors in interest) the property described [below

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Michigan: Mergers and Foreclosures by Advertisement

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Amy Neumann
Trott & Trott, P.C. – USFN Member (Michigan)

In the opinion of Federal Home Loan Mortgage Assn (sic) v. Kelley, Docket Number 315082 (June 24, 2014), the court dispensed with a due process challenge to foreclosures by advertisement in Michigan. The Michigan Court of Appeals held that the Federal Housing Finance Agency’s conservatorship of Federal Home Loan Mortgage Corporation (Freddie Mac) did not transform Freddie Mac into a federal entity for constitutional purposes. As a result, constitutional protections were not implicated and the due process challenge failed as a matter of law. This ruling is consistent with previous federal opinions within Michigan and across the country. See Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.C. Cir. 2012); see also Mik v. Federal Home Loan Mortgage Corporation, 743 F.3d 149 (6th Cir. 2014).

Of equal significance is the court’s decision on the requirement for recorded mortgage assignments in the merger context. At issue was whether CitiMortgage, Inc. was required to record its interest in the defendants’ mortgage prior to foreclosure, under MCL § 600.3204(3), when the mortgage interest was obtained pursuant to a merger. Prior to foreclosure, the Kelleys’ mortgage was assigned to ABN-AMRO Mortgage Group, Inc., which later merged into CitiMortgage. No assignment of mortgage was recorded from ABN-AMRO to CitiMortgage, due to the transfer of the mortgage by way of corporate merger.

The Court of Appeals opined that the foreclosure was voidable for failure to record an assignment of mortgage from ABN-AMRO to CitiMortgage. The court stated that an assignment of mortgage was required in order to provide a chain of title under MCL § 600.3204(3), which states “[i]f the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale under section 3216 evidencing the assignment of the mortgage to the party foreclosing the mortgage.” The court held that while the mortgage may have transferred to CitiMortgage through the merger, a recorded assignment was still necessary for purposes of the Michigan foreclosure statute.

The court of appeals went on to state that “defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio.” Because the Kelleys failed to demonstrate prejudice resulting from the lack of a recorded assignment, they ultimately were not entitled to relief and the foreclosure was deemed valid.

The initial Kelley ruling, being contrary to industry standard practices, caused significant turmoil in the processing of foreclosures in Michigan where there was a merger in the chain of title. Given the significant impact of this decision, a motion for reconsideration was submitted in late July. An amicus curiae brief was also submitted by the Michigan Bankers Association in support of the reconsideration motion.

On August 26, the court vacated its prior decision of June 24, 2014, and issued a new one. In the new Order, the court determined that it did not need to address the assignment issue at all because the mortgagors did not allege that they were prejudiced by the lack of an assignment into the foreclosing entity. The due process ruling remained unchanged.

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New Mexico: Establishing Standing to Foreclose

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Sandra A. Brown
Little, Bradley & Nesbitt, P.A. – USFN Member (New Mexico)

On February 13, 2014, the New Mexico Supreme Court changed the landscape of the foreclosure map in New Mexico, by specifying when and how lenders need to establish standing to foreclose, and by providing further guidance on the New Mexico Home Loan Protection Act. [Bank of New York as Trustee for Popular Financial Services Mortgage/Pass Through Certificate Series # 2006 v. Romero, 2014-NMSC-007, 320 P.3d 1].

Romero presented the court with an intriguing and rare set of facts. The borrowers had signed a promissory note to refinance their home with Equity One, Inc. Two years later, Bank of New York proceeded to foreclosure, with a note attached to its complaint lacking any indorsements. The original note admitted into evidence at trial contained two indorsements: an indorsement to bearer from Equity One, and a special indorsement from Equity One to JPMorgan Chase. A witness for the current servicer of the loan testified at trial that his records indicated that the note had been transferred to the Bank of New York based upon a pooling and servicing agreement (which was not entered into evidence at trial).

The Supreme Court held that the lack of standing is a potential jurisdictional defect, which may not be waived, and may be raised at any time, even for the first time by the Supreme Court. The court further held that a lender is required to demonstrate, under the New Mexico Uniform Commercial Code, that it has standing to bring a foreclosure action at the time it files suit.

In Romero, the court determined that the explanation provided by the lender as to the indorsements contained on the original note was not sufficient to establish standing, as the indorsements were conflicting. The court found that without dates establishing when the conflicting indorsements were executed, it could not determine whether the indorsement to bearer or the special indorsement should control. The court further opined that Bank of New York could not establish itself as the holder of the note simply by possession of it, and that the court would not consider the fact that no one else was attempting to claim possession of the note as supporting Bank of New York’s status as note holder. Since this decision, the New Mexico Court of Appeals has issued subsequent decisions supporting the Supreme Court’s ruling, recognizing that a lender must be able to establish its standing at the time of the filing of its complaint. See Deutsche Bank National Trust Co. v. Beneficial N.M., 2014-NMCA-__, No. 31,503, 2014 WL 1819300; Bank of New York Mellon v. Lopes, 2014-NMCA-__, No. 32,310, 2014 WL 3670094.

Even though it noted that this issue was moot in the present case, the court also held that the New Mexico Home Loan Protection Act is not preempted by federal law, and that the ability of a borrower to have a reasonable chance of repaying a mortgage loan must be a factor in determining whether a “reasonable, tangible net benefit” was conveyed to the borrower, so as not to violate the anti-flipping provisions of the statute. See NMSA 58-21A-4(B) 2003. In Romero, the court found that such a benefit was not conveyed, despite the $43,000 that the borrowers received from the refinance, because the lender did not adequately consider the borrowers’ ability to repay the loan and relied on their self-reported income.

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New York: Delaying the Settlement Conference – Severe Penalty to Lender

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Bruce J. Bergman
Berkman, Henoch, Peterson & Peddy, P.C. – USFN Member (New York)

New York’s settlement conference mandate for home loan foreclosures visits much time and expense upon the action, as well as peril if there are assertions that the mortgage holder was not negotiating in good faith. A new case advises of yet further danger: elimination of interest otherwise due upon the mortgage for a lender’s delay in pursuing the settlement conference. [US Bank Nat’l Association v. Gioia, 42 Misc.3d 947, 982 N.Y.S.2d 699 (Sup. Ct. 2013)].

The case seemed to be benign. A foreclosure was begun on November 9, 2011, and the borrower answered on November 21st. However, the foreclosing plaintiff took no steps to proceed with the conference until April 2013. The plaintiff’s methodology during the conference process was a lesson in how not to do it — including not responding to a loan modification request — resulting ultimately in the plaintiff moving on August 8, 2013, to discontinue the action. That is the portion that seems innocuous; presumably a borrower would be pleased that the foreclosure action was about to evaporate.

In this case, however, the borrower cross-moved for an order compelling the tolling of interest on the obligation from commencement of the action and, further, halting interest accrual until a diligent review of the borrower’s eligibility for a permanent loan modification was completed. The borrower also sought an injunction against the plaintiff collecting legal fees from the beginning of the case.

Moreover, the borrower contended, were there to be a discontinuance, he would have to wait for a new action before the court could become involved anew in the settlement process. In addition, during discontinuance and the initiation of a new action, mortgage arrears, interest, and other costs mount, thereby decreasing the chance for a loan modification to come to fruition. In sum, a discontinuance would be prejudicial.

While the plaintiff’s counsel had some thoughtful responsive arguments, the court ruled that discontinuing the action would be prejudicial to the borrower and that the borrower was entitled to a conclusion of settlement negotiations before the action could be authorized for discontinuance.

Turning to the penalty aspect: Based upon the plaintiff’s delay, tolling of interest was declared retroactive to the beginning of the action until the case would be settled or removed from the settlement part. It would not be fair, the court found, to charge interest and penalties to the defendant during the period of the lender’s “unreasonable and unexcused delay.”

While new procedures in New York to some extent remove the ability of a foreclosing plaintiff to impede the settlement process, there is still room for delay. If that might be attributable to willful acts on the part of the plaintiff, this case is confirmation that meaningful monetary penalties can be imposed.

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FDCPA: Split Among the Circuits Regarding the Validation of Debts and Disputes

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Holly Smith
South & Associates, P.C. – USFN Member (Kansas, Missouri)

There is a split of authority among the circuits as to whether or not a debtor must articulate a dispute in writing under the validation of debts section of the Fair Debt Collection Practices Act (FDCPA), specifically 15 USC 1692g(a)(3). This is certainly a topic for servicers to monitor because of the strict liability penalties imposed by the FDCPA.

15 USC 1692g states:

(a) Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing —

 

(1) the amount of the debt;
(2) the name of the creditor to whom the debt is owed;
(3) a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
(4) a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of the judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
(5) a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

 

 

Third Circuit — In 1991, the Third Circuit (comprised of Delaware, New Jersey, Pennsylvania, and the Virgin Islands) issued a decision that a consumer debtor must voice a dispute in writing that contests the validity of the debt, Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991). The Graziano opinion states: “that reading 1692g(a)(3) not to impose a writing requirement would result in an incoherent system in light of the explicit writing requirements stated in sections 1692g(a)(4)-(5) and 1692g(b).” Id. The court also concluded that written statements create a record of the dispute.

Ninth Circuit — Several years later, in 2005, the Ninth Circuit (comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and Northern Mariana Islands) issued an opinion regarding 15 USC 1692g(a)(3) that the dispute need not be expressed in writing. Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005). The court recited four main reasons in its decision: (1) there are explicit contrasting writing requirements in the statute; (2) the statute provides for other protections in event of dispute that only depend on a dispute and not whether there was a prior writing; (3) the legislative purpose of allowing debtors to challenge the initial communication is furthered by permitting oral objections; and (4) reading the statute to conclude that some rights are triggered by oral disputes and others require a written statement would not mislead consumers.

Second Circuit — In May 2013, the Second Circuit (comprised of Connecticut, New York, and Vermont) decided a case, also based on 15 USC 1692g, with similar facts to the two cases referenced above. The Second Circuit decision agreed with the reasoning of the Ninth Circuit, holding that a dispute brought under 15 USC 1692g(a)(3) need not be in writing. Stating in relevant part, “the right to dispute a debt is the most fundamental of those set forth in 1692g(a) and it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge.” Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282 (2d Cir. 2013).

Conclusion

Consumer disputes are becoming increasingly common and although the cases cited here pertain to a very specific portion of the FDCPA, it is a part of the FDCPA that should never be ignored. Most importantly, because of the current split among the circuits, these decisions should be watched closely in all jurisdictions.

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New York: Level of Proof re the Sending of Pre-Foreclosure Notices

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Lijue Philip
Rosicki, Rosicki & Associates, P.C. – USFN Member (New York)

Increasingly, trial courts have been imposing a higher standard of proof on plaintiffs seeking to proceed with their foreclosure action. Recently, the appellate division ruled that a conclusory statement that a pre-foreclosure notice of default was sent is insufficient to establish that this contractual condition precedent was complied with. [Wells Fargo Bank, N.A. v. Eisler, 118 A.D.3d 982 (2d Dept. 2014)].

Eisler involved a contested residential foreclosure in which the borrowers interposed an answer, alleging among other things that the plaintiff had not sent a notice of default prior to commencing the action. The plaintiff moved for summary judgment to strike the answer and the borrowers cross-moved for dismissal, particularly alleging that the plaintiff had not sent a notice of default.

The trial court found that the plaintiff had submitted an unsubstantiated and conclusory affidavit stating that the notice of default had been sent in accordance with the terms of the mortgage, along with a copy of the notice of default. The court found that this was insufficient to establish that the notice of default was actually sent to the mortgagors by first-class mail to the address it was alleged to have been sent to. Therefore, the court granted the borrower’s cross-motion and dismissed the action. This dismissal was appealed.

The appellate division affirmed the dismissal. Echoing the trial court’s decision almost verbatim, the appellate division found that a simple declaration that the notice of default was sent “in accordance with the terms of the mortgage” is too vague and conclusory a statement to establish that the notice was in fact sent.

Mindful of the Eisler decision, in order to establish that such notice was sent, a plaintiff will likely have to attest to whom the notices were sent, when and where they were sent, and in what manner they were sent. Recommended practices would be to ensure that affidavits regarding the sending of a pre-foreclosure notice specify this information.

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New York’s Proposed Debt Collection Regulations

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

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

While we postulate about the debt collection rules from the federal Consumer Financial Protection Bureau (CFPB), on the state level, the New York State Department of Financial Services (DFS) closed the comment period for its revised proposed regulations on the debt collection industry, targeting non-originating debt collectors which includes servicers. This is the DFS’s second set of proposed rules to regulate the debt collection and servicing industry since July 2013.

Original creditors and their subsidiaries, affiliates, and employees are exempt. Attorneys acting in connection with a pending legal action to collect debt on behalf of a client, and organizations that provide non-profit credit counseling and debt liquidation, are exempt as well.

Statute of Limitations
— Of particular interest for servicers operating in the New York area is a provision relating to loans that may be close to reaching the statute of limitations. The new rule will require a servicer to develop reasonable procedures for determining if the loan is subject to an expiring statute of limitations. If the servicer knows or has reason to know the statute of limitations may have expired, the servicer would be required to send a notice to the borrower disclosing information warning the borrower about re-affirmation of the debt before they make a payment. The notice must also include a statement informing the borrower that a lawsuit commenced on expired debt violates the Fair Debt Collection Practices Act, 15 U.S.C.§ 1692, in addition to other specific disclosures. An acceptable form of the notice can be found within the body of the regulations.

In addition, the revised proposed rules set forth debt validation requirements and procedures, or what the DFS calls requests for substantiation. Under the proposed rule, whenever the borrower makes an initial oral or written request to validate the debt, the servicer must provide information as to how to request substantiation of the debt; there are deadlines for providing responses to those requests. If the debt was charged-off, meaning “… the accounting action taken by an original creditor to remove a financial obligation from its financial statements by treating it as a loss or expense …” the servicer must respond to the request within 60 days of receipt and must stop collection activities until validation is complete.

Rounding out the rules are requirements that will apply to situations when a debt payment schedule or other agreement to settle the debt is agreed upon, arguably including loan modification agreements. In those situations, the servicer is required to send written confirmation of the new payment schedule or agreement to settle the debt, and include the material terms, conditions, and a prescribed notice that the borrowers are liable for the new debt along with a list of income not subject to further collection. Further, the proposed rules impose a restriction on contacting borrowers by electronic mail without first obtaining the borrower’s consent to communicate in that manner.

Tellingly, the proposed rules fail to give any statement of statutory authority for DFS to promulgate these rules and enforcement provisions and penalties for non-compliance are not addressed. Servicers will need to institute processes to assess their New York portfolios to comply with these regulations, as well as to reconcile those processes with developing federal and state laws.

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Delaware: Standing to Foreclose

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by James E. Clarke
Atlantic Law Group, LLC – USFN Member (Delaware)

Delaware Superior Court in E*Trade Bank v. Sanders (decided August 07, 2014) affirms the position that under Delaware contract law, a mortgage debtor lacks standing to challenge the assignment of mortgage, provided the assignment is properly executed. Under Delaware law, assignments of mortgage are effective upon proper execution, attested by one credible witness.

 

Last year in Citimortgage, Inc. v. Bishop (decided March 4, 2013), the superior court held similarly. E*Trade involved a series of assignments, including a MERS assignment. The court held that the assignments were properly executed and that the borrower debtor was without standing to challenge.

While many courts look to the note to determine standing, Delaware’s primary method of foreclosure, scire facias on mortgage, is a summary proceeding based on the recorded mortgage and/or assignments. The default is presumed by the complaint allegations and the burden of proof is upon the defendant to demonstrate under oath to the court why judgment of foreclosure should not be entered. Standing to foreclose is demonstrated by either an enforceable mortgage attached to the complaint or an enforceable mortgage along with a properly executed assignment.

Unlike other judicial actions, only the mortgagor, record owners if different, and persons with a legal or equitable interest are necessary defendants. Lienholders and tenants, however, are not necessary parties but receive mailed notice of the pending action as in many nonjudicial states. Likewise, a defendant’s permitted defenses are limited. Those defenses are payment or satisfaction of the debt, or avoidance. An avoidance defense must relate to the validity or illegality of the mortgage documents. Scire facias on mortgage derived from English Common Law and was originally codified by the Delaware Code of 1852.

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Connecticut: Judicial Foreclosure Sale Frustrations Caused by New Interpretation of Bankruptcy Stay

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

Connecticut is a judicial foreclosure state with two forms of foreclosure. While the majority of foreclosures in the state go through the strict foreclosure process, when there is either equity in the property or the United States is a party, the court will order a judicial sale. Connecticut’s judicial sales are conducted by a “Committee for Sale,” an attorney appointed by the court to act as the agent of the court. Committees are bound be a number of standing orders affecting their responsibilities, expectations, timelines, and even permissible reimbursement.

In the recent judicial decision, Equity One, Inc. v. Shivers (150 Conn. App. 745l, 2014 Conn. App. LEXIS 254), which may be familiar to readers through prior decisions on standing, Connecticut’s Appellate Court reversed a lower court ruling that had awarded fees and costs to a committee awarded during a bankruptcy stay. This has created a substantial delay in court-agent reimbursement and a public policy concern.

As the reader is no doubt aware, the automatic stay provision in 11 U.S.C. § 362(a) prevents a judicial sale from proceeding. Historically, committees would bring a motion for approval of their interim fees and costs to be reimbursed for their expenditures as an agent of the court. Until Shivers, these fees and costs would be approved as, pursuant to Conn. Gen. Stat. 49-25, fees and costs for the cancelled sale are to be borne by the foreclosing plaintiff.

In Shivers, the court interpreted 49-25’s provision that says expenses “be taxed with the costs of the case” as the type of indemnification discussed in In re Metal Center, 31 B.R. 462, and determined that awarding interim fees for a cancelled sale, even if they are statutorily required to be paid by the plaintiff, to be action against the debtor in violation of the stay.

The impact of Shivers is still being felt. Connecticut’s committees for sale are volunteer appointment agents of the court, not dissimilar from guardians ad litem, and are now being forced to wait extended periods before being reimbursed for expenses incurred. While it is unclear if there will be a judicial or legislative response to this new interpretation, it may also impact the willingness of qualified applicants to volunteer, if they may not see a repayment of their expenses for significant time.

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Pennsylvania: Fees & Costs Case Update

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Louis P. Vitti
Vitti, Vitti & Associates, P.C. – USFN Member (Pennsylvania)

A recent Pennsylvania case, Glover v. Udren Law Offices, P.C., 92 A.3d 24 (Apr. 23, 2014), deals with alleged violations of the Loan Interest and Protection Act (Act 6), 41 P.S. §§ 101, et seq., as well as the Uniform Trade Practices and Consumer Protection Law (UTPCPL), 73 P.S. §§ 201-1, et seq. The court focused on the borrower’s claim that the statutes barred the collection of certain costs and fees by the defendant.

In an exhaustive examination of the relevant laws impacting this claim, the appellate court recapped the borrower’s argument thusly: “Because [41 P.S. § 502] provides a remedy against a person who collects excess fees and charges, and person is defined broadly to ‘include but not be limited to residential mortgage lenders,’ Glover [contends that he] can maintain a cause of action against the residential mortgage lender’s foreclosure attorney for collecting fees in excess of those described in [41 P.S. § 406]. Applying the principles of statutory interpretation, the court rejected Glover’s argument. “To do otherwise would require [the court] to rewrite § 406 and the conduct proscribed by it.”

The court concluded that, “As Udren is not a residential mortgage lender, it cannot violate § 406.” Further, the court affirmed the trial court’s dismissal of the UTPCPL claims, finding “that the UTPCPL does not apply to claims of attorney misconduct in the context of practicing law.” Since “all of Glover’s UTPCPL claims are based explicitly upon allegations regarding actions taken by Udren in connection with the filing of a foreclosure complaint,” they are not viable under the UTPCPL.

Of possibly greater import than the majority opinion described above is the lengthy dissent, which concurs (subject to a caveat) with the majority’s determination that no relief may be granted under the UTPCPL. The dissenting opinion, however, disagrees that the plaintiff failed to plead a claim upon which relief could be granted under Pennsylvania Act 6. The dissent suggests that “§ 406 prohibits the receipt of improper charges and interest, while § 502 prohibits the collection of such charges. This distinction further reinforces the inference that collection activity in violation of § 406, i.e., collection activity affiliated with [a residential mortgage lender’s] ultimate receipt of such charges, is prohibited, not just collection activity undertaken by the residential mortgage lender (RML), itself. What it is improper for an RML to receive, it is improper for an RML’s proxy to collect.”

Note that this is a Pennsylvania Superior Court case, and it may be considered by the Pennsylvania Supreme Court upon appeal. (Glover’s claims under Pennsylvania’s Fair Credit Extension Uniformity Act, 73 P.S. §§ 2270.1, et seq., and the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq., were dismissed by the federal district court prior to the commencement of the state action. See Glover v. Udren, 2011 WL 1496785 (W.D. Pa. 2011)).

Because of the extent of the thoughtful dissenting opinion, one may expect that a review of fees charged in accord with the instructions of Act 6 will be pursued and revisited by mortgagors in some future case.

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Rhode Island: Recent Changes to Mediation Statute

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

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

The foreclosure crisis has led many states to adopt mediation programs to improve communications between borrowers and lenders and achieve alternatives to foreclosure while stabilizing communities. Previously, Rhode Island enacted mediation legislation superseding several local ordinances. On July 8, 2014, the governor signed legislation amending the statute to clarify that process. It takes effect October 6, 2014, and Banking Regulation 5 will also be amended to incorporate these changes.

The new amendments provide significant changes to the 2013 statute. Specifically, the new law will mandate that mortgagees provide mediation notices to mortgagors prior to initiating foreclosure (subject to the exemptions), regardless of whether the date of delinquency is less than 120 days prior to September 13, 2013. Also, the previous exemptions from compliance were expanded to include reverse mortgages and non-first mortgages.

Furthermore, certain statutory definitions were clarified. Of particular significance is the definition of “mortgagor,” which was amended to eliminate non-borrower owners except to the extent they hold record title as an heir or devisee of a borrower and live in the property as their principal residence. This includes a representative of the estate appointed with authority to participate in a mediation conference. Additionally, “mortgage” was amended to mean a first-lien mortgage. Finally, “mortgagee” was amended to include agents or employees of a mortgagee, including a mortgage servicer acting on its behalf.

Previously, notice had to be sent by both certified and first-class mail. The new amendments change that requirement by simply providing that written notice to the mortgagor must be sent. The new amendments also eliminate the requirement for the plat and lot number to be included on the mediation notice.

One of the most significant changes is that R.I.G.L. 34-27-3.1 was repealed in its entirety, eliminating the 45-day notice of intent “NOI” requirement.

Another substantial change is the penalty provision for non-compliance with the statute. As the current statute reads, a mortgagee failing to send mediation notices within 120 days of delinquency must foreclose judicially under R.I.G.L. 34-27-1, et seq. Because, the Rhode Island judicial foreclosure process is somewhat undefined, title companies have been reluctant to opine as to what would be an insurable judicial foreclosure. This left many loans where the mediation notices were not sent within 120 days of delinquency, stalled as servicers wait for further direction. Under the new law, a mortgagee may now alternatively still proceed with mediation and nonjudicial foreclosure by paying a penalty of $1,000 per month until the notice is sent. These penalties will be paid directly to the mediation coordinator prior to completion of the mediation process. The aggregate penalty for violation has been capped for any servicer between the enactment of the original law (September 13, 2013) and the effective date of the amendment (October 6, 2014) to an amount of $125,000. Thus servicers should commence sending out notices for older loans fitting this description as soon as possible.

The amendment resolves many of the questions and issues that remained after the 2013 statute went into effect. In the months to come, it will be interesting to see the title insurance companies’ response as well as the penalty calculation methodology. Ultimately, the unified process and clarifications discussed above should facilitate compliance with the statute going forward.

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South Carolina: Bankruptcy Court Addresses Fees for Plan Review and Proof of Claim Preparation and Filing

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

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

Three cases were brought before the bankruptcy court regarding the attorney fees incurred for “Proof of Claim Preparation & Plan Review.” The fees in all three cases were $425, based on the Fannie Mae guidelines. The mortgage creditor did not respond to the debtor’s objection in the third case, so the court had insufficient facts to determine if the fee was reasonable. Here are some highlights of the court’s Order in the other two cases:

  • Bankruptcy Code Section 506(b) does not apply because the debtors are proposing to cure defaults through the plan. See Bankruptcy Code Section 1322(e); Deutsche Bank National Trust Co. v. Tucker, 621 F.3d 460, 464 (6th Circuit 2010).
  • Paragraph 9 of most standard Fannie Mae uniform mortgage instruments provides that such fees are secured by the mortgage and fall within the scope of doing what is reasonable to protect the creditor’s interest. (See page 11, footnote 2 of the Order.)
  • The court relies upon United Student Aid Funds, Inc. v. Espinosa, 559 U.S. __, 130 S. Ct. 1367 (Mar. 23, 2010), when determining that the services of an attorney are not unnecessary, due to the binding effect of a plan’s confirmation, even if treatment is improper.
  • In South Carolina, attorneys’ fees are recoverable only when authorized by contract or statute. See Baron Data Systems, Inc. v. Loter, 377 S.E.2d 296, 297 (S.C. 1989)
  • Where the contract provides for reasonable fees, the court considers the six factors in Dedes v. Strickland, 414 S.E.2d 134, 137 (S.C. 1992). All six factors weighed in favor of reasonableness. (The court does not express an opinion about the current Fannie Mae fee of $650.)
  • The fee of $425 was found reasonable in the two cases. However, the court observes in a footnote that the issue of whether or not the fees were earned at the time the notice was filed was not raised and could be an issue if challenged in the future.

Therefore, the payment (by the debtor) of the $425 fee noticed pursuant to Federal Rules of Bankruptcy, Rule 3002.1 is required by the underlying agreement and applicable non-bankruptcy law to cure a default or maintain payments in accordance with section 1322(b)(5) of the Bankruptcy Code.

The court did warn, however, that future 3002.1 notices must have a more detailed description of the services performed in order to satisfy Rule 3002.1(e).

Although this Order does not reach the subject of whether Rule 3002.1 would apply if the debtor is current at the time of filing, it does provide guidance as to the reasonableness of fees included in Rule 3002.1 Notices.

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