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

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

November 9, 2015

 

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

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 Although the bill was subsequently withdrawn, it is expected to be reintroduced in 2016 and represents a marked departure from this state’s historical approach to mortgage enforcement.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

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

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

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

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

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

November 9, 2015

 

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

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

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

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

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

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

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

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

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

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

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BANKRUPTCY UPDATE: NACTT Annual Conference 2015

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

November 9, 2015

 

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

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

Opened by U.S. Trustee

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

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

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

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

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

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

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

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

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

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

Trustees, Servicers, and Attorneys

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

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

Conclusion

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

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Pending Changes to Bankruptcy Forms

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

October 9, 2015

 

by USFN Publications Staff


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

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

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

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

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

October 8, 2015

 

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

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

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

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

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

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

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

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

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

October 7, 2015

 

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

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

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

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

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

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

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

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Michigan: Securing and Winterizing Foreclosed Properties during the Redemption Period

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

October 7, 2015

 

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

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

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

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

©Copyright 2015 USFN and Trott Law, P.C. All rights reserved.
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Michigan: Clarifications and Changes to Sheriff’s Deed Statute Recommended

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

October 7, 2015

 

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

The Michigan Association of Registers of Deeds (MARD) recently had a meeting where it reviewed the current Michigan sheriff’s deed requirements, covered by an assortment of statutes under both the Revised Judicature Act of 1961 (Act 236 of 1961) and the State Housing Development Authority Act of 1966 (Act 346 of 1966). MARD requested clarification on various parts of the law and made recommendations for changes to other portions of the law.

Clarifications — MARD has asked for clarification on how the days in the redemption period are calculated, since the statute uses the terminology “6 months” as opposed to “180 days.” It is not unknown for there to be disputes as to when the time expires. MARD also desires a determination on the word “commissioner’s” in 600.3145 of the Revised Judicature Act of 1961 because it is not defined, nor does the statute make clear to whom this actually refers.

Changes — Among recommendations for changes, MARD does not want the words “deposit” or “file” to be used when describing documents to be recorded with the Register of Deeds. Both words should be replaced by “recorded.” As MARD noted in its analysis, “MARD does not want anything filed that is not recorded.” MARD also asks that the fee referenced in section 600.3240, which requires $5 to be paid to the Register of Deeds by anyone redeeming property for “the care and custody of the redemption money,” to be eliminated.

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Michigan May Adopt Flat Recording Fee in Near Future

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

October 7, 2015

 

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

The numerous Michigan Register of Deeds offices currently charge per page when recording documents. Traditionally, the first page costs $14, while all following pages cost $3. This creates uncertainty when providing consumers with a closing statement. It is difficult to predict actual figures for the cost of recording mortgages, notes, and other related documents at closing.

The number of pages will vary depending upon the length of the legal description (which those of us in the industry know can be as short as a sentence or as long as a story), the size of the paper that is used, the number of people who must sign the document, the quantity of notary blocks required, and so on. Mortgages tend to be about sixteen pages in length, but this can change if there are riders (such as a condominium rider) or lengthy legal descriptions. These variations often cause closing statements to need amendment and, occasionally, for refunds to be given.

Moreover, effective August 1, 2015, new CFPB regulations require that consumers are provided with certain exact recording charges as part of the “Closing Disclosure” document. With the laws in Michigan currently as they stand, this will present a potential area of conflict unless change happens. It seems that the rational adjustment would be for Michigan to adopt a fixed, flat fee for recording documents with the Register of Deeds. Many states have already implemented flat fees successfully. Michigan will likely follow suit in light of these new CFPB regulations as well as the needs of lenders and borrowers.

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Illinois: Trustee Mortgagor of Reverse Mortgage is a “Consumer” Entitled to TILA Disclosures

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

October 7, 2015

 

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

In the case of Financial Freedom Acquisition, LLC (OneWest Bank N.A., Appellee) v. Standard Bank and Trust Company, 2015 IL 117950 (Sept. 24, 2015), the Supreme Court of Illinois ruled that a trustee, as a mortgagor of a reverse mortgage, was a consumer entitled to receive TILA disclosures, despite the fact that a reverse mortgage creates no financial obligation on the part of the mortgagor.

In the underlying case, Mary Jane Muraida and Standard Bank entered into a reverse mortgage with plaintiff’s predecessor, Marquette National Bank. Standard, as trustee, was listed as the mortgagor and borrower, and both Muraida and Standard signed the note. The mortgage contained an exculpatory clause that Standard had no liability on the obligation.

Muraida died in May 2010. In October 2010, the plaintiff filed a complaint against Standard to foreclose the mortgage. In June 2011, the trustee sent a notice of rescission under TILA, to which the plaintiff did not respond. In response to a counterclaim filed by Standard, the plaintiff filed a motion to dismiss, asserting that the trustee was not an “obligor” under TILA due to the exculpatory clause and was not entitled to TILA disclosures and, therefore, the trustee could not rescind. The circuit court ordered the dismissal of Standard’s counterclaim with prejudice, which was affirmed by the appellate court.

Reversing the appellate court’s decision, which relied heavily on the exculpatory clause in connection to a narrow definition of the otherwise undefined term “obligor” in TILA, the Illinois Supreme Court highlighted the unique features of a reverse mortgage, namely that a mortgagor under a reverse mortgage is never personally liable, nor is any obligation undertaken “because the only recourse in a reverse mortgage is against the property itself.” Following a discussion of the rule that supports TILA (known as Regulation Z) and the Official Staff Commentary, the court concluded that “Congress did not intend to limit rescission rights to only obligors, as that term is generally defined,” [Id. ¶ 23] and held that the “right to rescind extends to ‘each consumer whose ownership interest is or will be subject to the security interest’ or ‘is subject to the risk of loss,’” [Id. ¶ 30] including a trustee.

Under Illinois law, the trustee possesses the “ownership interest” that is subject to the mortgage. The treatment of land trusts under Regulation Z specifically states that “[c]redit extended to a land trust is credit extended to a natural person.” [Id. ¶ 37] The court, therefore, concluded that the trustee is a consumer entitled to TILA disclosures and has the right to rescind.

Having found that Standard, as trustee, possessed the right to rescind, the court concluded that Standard, in fact, timely exercised that right prior to the subsequent sale of the property, such that the sale did not terminate its right to rescind.

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Fourth Circuit Court of Appeals Reviews HUD Face-to-Face Requirements

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

October 7, 2015

 

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

In Covarrubias v. CitiMortgage, Inc., No. 14-2420 (4th Cir. Va. Sept. 1, 2015)(unpublished), the U.S. Court of Appeals for the Fourth Circuit authored a chapter in the ongoing Virginia HUD face-to-face saga that began in 2012 with Mathews v. PHH Mortgage Corporation, 283 Va. 723, 724 S.E.2d 196 (2012). Mathews was a very favorable Virginia Supreme Court decision for borrowers seeking to challenge foreclosure sales based on allegations of failure to satisfy all conditions precedent to foreclosure. Indeed, the decision garnered national attention and has been cited in many jurisdictions outside of Virginia.

By way of background, the court in Mathews held that the right to foreclose does not accrue until all conditions precedent contained in the deed of trust have been satisfied. The relevant deed of trust specifically incorporated the HUD regulations, and indicated that foreclosure was not authorized if not permitted by the regulations. At issue was the face-to-face meeting requirement contained in 24 C.F.R. § 203.604. This regulation requires that prior to initiating foreclosure the servicer must have, or must make a reasonable attempt to arrange, a face-to-face meeting with the borrower before the loan is three months in default. The court in Mathews rejected the mortgage servicer’s defenses that the borrower’s default in payment excused performance, that the servicer was excused from performance because the term “branch office” (as it pertains to the 200-mile exception) only included loan servicing offices, and the deed of trust did not incorporate the HUD regulations. Accordingly, the lower court’s sustaining of the mortgage servicer’s demurrer (motion to dismiss) was reversed. In 2014, the Virginia Supreme Court reinforced the Mathews holding in Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014).

Mathews and Squire concerned whether a borrower’s pleadings were sufficient to overcome initial demurrer. However, it remained to be seen whether the borrower might survive a motion for summary judgment, if discovery did not support the proposition that failure to conduct the face-to-face meeting caused the borrower’s alleged damages (particularly where the borrower was admittedly in default). The lower court’s decision in Covarrubias had given mortgage servicers hope for prevailing on summary judgment. [Covarrubias v. CitiMortgage, Inc., 2014 WL 6968035 (E.D. Va. 2014)]. Specifically, the U.S. District Court for the Eastern District of Virginia granted summary judgment in favor of the mortgage servicer, holding that “[t]he failure to follow the regulations, however, had no role in any losses suffered by the plaintiff. Rather, Covarrubias’s own actions caused the foreclosure and any resulting damages.” The District Court went on to opine that no reasonable jury could find that failure to satisfy the HUD regulations proximately caused the borrower’s damages. This victory was short-lived, as the Fourth Circuit Court of Appeals reversed the District Court’s decision and remanded the case for further proceedings.

In an unpublished opinion, the Fourth Circuit held that the record demonstrated that the mortgage servicer failed to hold, or reasonably attempted to arrange, a face-to-face meeting. Moreover, the plaintiff had produced prima facie evidence of causation and her ability to bring the loan current, had the meeting been arranged. Specifically, the appellate court held that “we conclude that a rational jury could reasonably conclude that a face-to-face meeting, as required, may have resulted in an outcome other than foreclosure and the consequent loss of Covarrubias’ equity.”

There has been significant litigation on this issue in the last few years at the Virginia Supreme Court level, and now in the U.S. Court of Appeals for the Fourth Circuit. While unpublished opinions are not binding authority in this circuit, Covarrubias — along with the other cases — seems to strongly indicate that breach of contract claims for failure to satisfy the HUD face-to-face requirements, where such regulations are specifically incorporated into the deed of trust, will likely go to trial. These cases also have implications for claims that other conditions precedent were not satisfied before proceeding to foreclosure. Accordingly, it would be prudent for the foreclosure trustee and mortgage servicer to both ensure that any conditions precedent expressly included, or incorporated by reference, in the deed of trust are satisfied before proceeding to foreclosure. More oversight on the front end of the file can likely eliminate costly and time-consuming litigation after the sale. This is particularly true in nonjudicial foreclosure states like Virginia, where there is no judicial sale ratification process requiring the borrower to raise such claims during a ratification period. As a result, in nonjudicial foreclosure states, these claims are often raised several months – if not well over a year – after the foreclosure sale.

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Illinois: New Consumer Hotline Number for the Grace Period Notice

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

October 7, 2015

 

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

Without public notice, the consumer hotline number for the Grace Period Notice was changed on July 17, 2015 to 1-844-768-1713. There were reports to the Illinois Department of Financial and Professional Regulation that the former 800-532-8785 number was a faulty line and callers received a busy signal when calling.

Accordingly, servicers should make sure that they include the new 1-844-768-1713 hotline number on the Grace Period Notice.

©Copyright 2015 USFN and Pierce & Associates, P.C. All rights reserved.
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Illinois: An Action to Enforce the Same Default on a Mortgage Can Only Be Refiled Once

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

October 7, 2015

 

by Jill Rein and Lee Perres
Pierce & Associates, P.C. – USFN Member (Illinois)

The case of United Central Bank (UCB) v. KMWC 845, LLC (KMWC), No. 14-1491 (7th Cir. Aug. 28, 2015), involved a foreclosure action commenced in federal district court that asserted three counts of mortgage foreclosure. With respect to Count I, UCB sought review of the district court’s ruling that pursuant to the Illinois “single refiling” rule (735 ILCS 5/13-217), UCB was barred from enforcing the promissory note secured by the mortgage.

In KMWC’s motion for summary judgment filed with the district court, KMWC contended that UCB was prevented from foreclosing on the mortgages because it was barred from enforcing the promissory notes that the mortgages secured. Specifically, KMWC asserted that pursuant to the Illinois single refiling rule, UCB was prohibited from enforcing the promissory notes secured by the mortgages since UCB had twice filed actions against KMWC to recover on the notes, and had voluntarily dismissed both prior actions. Summary judgment was granted in favor of KMWC for Count I; UCB filed a motion for reconsideration, which was denied by the district court.

The Seventh Circuit Court of Appeals affirmed the district court’s decision, citing to the Illinois single refiling rule that provides that a plaintiff who dismisses a lawsuit “may commence a new action within one year or within the remaining period of limitation, whichever is greater.” This language has been interpreted to mean that a plaintiff who voluntarily dismisses a lawsuit may commence only one new action within the statutorily imposed time limit. The district court found that UCB had formerly filed and voluntarily dismissed two actions in Illinois against KMWC for breach of the promissory note which the mortgage secured and determined that, pursuant to the Illinois single refiling rule, UCB was statutorily barred from enforcing the note underlying the mortgage.

UCB did not dispute the single refiling rule but maintained that the previous action, which was dismissed, was based upon the underlying note. The Court of Appeals cited longstanding precedent in Illinois, stating that the mortgage is merely an incident of the underlying debt, and when an action on an underlying debt is barred by the statute of limitations or another procedural rule, the action on the mortgage is barred as well. In other words, if the plaintiff is barred from proceeding on an action based upon the underlying note, it may not proceed on an action based upon the mortgage.

Under the Illinois single refiling rule, an action to enforce the same default on a mortgage can only be refiled once. Servicers and the firms representing servicers should make sure that they do not dismiss an Illinois action to enforce the same default on a mortgage more than once. However, a new default on the same loan is considered a new cause of action under Illinois law.

©Copyright 2015 USFN and Pierce & Associates, P.C. All rights reserved.
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Connecticut: Standing to Foreclose

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

October 7, 2015

 

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

In Deutsche Bank National Trust Co. v. Bliss, the Connecticut Appellate Court affirmed a trial court’s decision rejecting a defendant’s arguments that: (1) the plaintiff lacked standing to bring the present action because it failed to demonstrate that it possessed the blank endorsement at the time it commenced the action; and (2) the mortgage at issue was unenforceable because the initial lender had surrendered its Connecticut license as a mortgage lender before it processed her mortgage loan application. [Deutsche Bank Nat. Trust Co. v. Bliss, 159 Conn. App. 483 (Sept. 1, 2015)].

At trial, the witness (an employee of the mortgage loan servicer) testified that the note contained an undated endorsement in blank. The witness testified further that the note is tracked by a “doc-line report” when it gets physically moved. Notably, the witness testified that there was nothing that indicated when the endorsement was added to the note, but that “the bank owns the note.” The defendant did not dispute that the plaintiff possessed the note at the commencement of the action, but rather claimed that the plaintiff failed to demonstrate that it had possession of the note endorsed in blank at the time that the action was commenced.

The court found the defendant’s reliance upon the lack of knowledge of the witness unpersuasive, especially as to when the undated endorsement was made or added to the note, and his unfamiliarity with the persons who signed it. Neither argument was sufficient to set up and prove facts that limited or changed the plaintiff’s rights, as holder of the note, to commence the action. Further, based upon Connecticut General Statutes § 49-17 (which allows the owner of a note to foreclose on real property regardless of whether the mortgage has been assigned to him), the appellate court rejected the defendant’s argument that the plaintiff lacked standing because an assignment of mortgage occurred two months after commencement of the action.

The defendant next claimed that the mortgage was unenforceable because the initial lender had surrendered its Connecticut license as mortgage lender, notwithstanding that the originating lender was a subsidiary of a bank operating under federal banking laws. The appellate court narrowed the issue “to the determination of whether federal banking regulations preempt state banking laws and especially those relating to licenses for organizations in the mortgage loan business.” The trial court, in disposing of the defendant’s claim, relied upon Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir.2005), which concluded that regulations adopted under the National Bank Act preempted state banking laws intended to apply to operating subsidiaries of nationally-chartered banks.

For the first time on appeal, and contradicting the defendant’s position at trial, the defendant also asserted that Wachovia v. Burke had been legislatively overruled by the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The appellate court readily rejected the defendant’s argument, as several courts have already held that Dodd-Frank does not have retroactive application and that a court must consider the federal regulations in effect when the parties entered into the transaction.

Bliss shows that any witness appearing at trial must have a firm understanding of the policies and procedures of a servicer’s original document custodian in order to establish the plaintiff’s standing at the commencement of the foreclosure action when it possesses the original note endorsed in blank — as well as the importance for servicers and counsel to be familiar with not just current regulations but also with the regulations that existed when the loan originated.

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Connecticut: Appellate Court Provides Guidance re Establishing a Note’s Chain of Title

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

October 7, 2015

 

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

In a pair of recent opinions, Connecticut’s Appellate Court provided some guidance regarding the length to which a foreclosing plaintiff must be able to document the note’s history through business records. A critical point in this analysis is the manner in which the plaintiff is entitled to enforce the instrument under the Uniform Commercial Code (holder, non-holder in possession with the rights of a holder, etc.).

Berkshire Bank v. The Hartford Club (AC 36711, released July 28, 2015)
In this case, the court addressed a successor in interest by merger where the holder of the note merged into the foreclosing plaintiff under the plaintiff’s charter, without the note being endorsed to the plaintiff or in blank. The defendant challenged the plaintiff’s affidavits in support of summary judgment on the basis of not properly “chronicl[ing] the chain of title of the note,” and raised issues that the original holder may not have been the owner at the time of merger.

Relying on New England Savings Bank v. Bedford Realty Corp., 246 Conn. 594, 604-605; 717 A.2d 713 (1998), the court in Hartford Club rejected the defendant’s claim that a proponent must provide a chain of custody in order to authenticate a business record. Indeed, in deciding Hartford Club, the appellate court quoted the policy reason expressed by the Connecticut Supreme Court in Bedford: “To require testimony regarding the chain of custody to such documents, from the time of their creation to their introduction at trial, would create a nearly insurmountable hurdle for successor creditors attempting to collect loans originated by failed institutions.”

American Home Mortgage Servicing, Inc. v. Reilly (AC 35584, released May 12, 2015)
While not dispositive to the actual ruling in this case, the appellate court discussed – and rejected – a claim that “a full history of any and all transfers of the note” be provided. In footnote 10 of the decision, the court differentiated the matter at hand from one where a non-holder transferee sought to enforce the note. [J.E. Robert Co. v. Signature Properties, 309 Conn. 307, 325 n.18 (2013)]. Distinguishing the plaintiff in Reilly, who was both the current holder and servicer, the court was not persuaded that a plaintiff under those circumstances was obligated to produce documentation showing the full history of the note. While J.E. Robert would still control for non-holder loan servicers, Reilly effectively limits the necessary disclosure to those circumstances.

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North Carolina: Borrowers Estopped from Relitigating Foreclosure Challenges

Posted By USFN, Thursday, September 3, 2015
Updated: Monday, September 21, 2015

September 3, 2015 

 

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

A foreclosure sale was authorized by the clerk, and the order authorizing sale was appealed to the superior court. On de novo review, the superior court judge entered an order authorizing the substitute trustee to proceed with the foreclosure sale. The borrowers did not appeal that order to the Court of Appeals. Instead, they proceeded with their separate civil action against the bank, alleging various causes of action — each of which was contingent upon there being no default under the terms of the promissory note, as well as under a subsequent agreement that had settled an earlier foreclosure proceeding. The trial court dismissed the complaint for failure to state a claim pursuant to N.C.R. Civ. P. 12(b)(6).

On appeal, the Court of Appeals observed that in Phil Mechanic Constr. Co. v. Haywood, 72 N.C. App. 318, 325 S.E.2d 1 (1985), it had held:


[T]hat when a mortgagee or trustee elects to proceed under [N.C. Gen. Stat. §§] 45-21.1, et seq., issues decided thereunder as to the validity of the debt and the trustee’s right to foreclose are res judicata and cannot be relitigated in an action for strict judicial foreclosure.” Id. at 322, 325 S.E.2d at 3. For that reason, “[s]ince [the] plaintiffs did not perfect an appeal of the order of the Clerk of Superior Court, the clerk’s order is binding and [the] plaintiffs [were] estopped from arguing those same issues in [a subsequent] case.”


Further, the appellate court noted that it had addressed “the preclusive effect of orders authorizing foreclosures on subsequent suits in a number of cases within the past year and a half, albeit in unpublished decisions [citations omitted]. In each of those cases, this Court affirmed the lower court’s dismissal pursuant to Rule 12(b)(6) upon determining [that] the plaintiffs were collaterally estopped from relitigating an issue decided in a prior foreclosure action that barred recovery in the plaintiffs’ subsequent cases.” [Funderburk v. JPMorgan Chase Bank, N.A., 2015 WL 3777353 (N.C. Ct. App., June 16, 2015).]

The Funderburk opinion makes clear that the borrower has a limited window of opportunity to challenge foreclosure efforts; and if a subsequent civil action relies on facts that were necessary components of one or more of the findings made in the foreclosure proceeding, the borrower does not get another occasion to argue about those facts. Important, too, the Funderburk opinion is published — meaning that it has precedential value and can be freely cited in state court proceedings. Finally of note, the Court of Appeals found that in a borrower’s post-foreclosure lawsuit against a lender, the court can, without converting the Rule 12(b)(6) motion into a summary judgment motion: (i) take judicial notice of pleadings filed in the foreclosure proceeding; and (ii) review the promissory note and deed of trust even if they were not attached to the borrower’s complaint, so long as they are the subject of (and referred to in) the borrower’s complaint.

 

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South Carolina: Supreme Court Reviews Real Estate Closing Attorney’s Scope of Duty

Posted By USFN, Tuesday, September 1, 2015
Updated: Tuesday, September 22, 2015

September 1, 2015 

 

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

The scope of the duty that a real estate closing attorney has towards a buyer’s-side client has veered into strict liability territory under a recent South Carolina Supreme Court decision.

On July 29, 2015 the opinion in Johnson v. Alexander, Appellate Case No. 2014-001167, was entered. It holds that a buyer’s attorney has a duty to ensure that good title passes to the buyer as a result of the purchase of real estate and that a breach of that duty as a result of relying on another attorney’s erroneous title search is, as a matter of law, malpractice.

Background: Amber Johnson hired attorney Stanley Alexander to perform a closing for the purchase of residential real estate. Johnson had previously hired attorney Mario Inglese for the closing. Inglese had hired Charles Feeley, also an attorney, to perform the title search. Johnson, as the client, was aware that attorney Alexander would be using attorney Feeley’s title exam during his representation of her.

Prior to the title examination and closing, the property was sold at a Charleston County delinquent tax sale on October 3, 2005. Johnson purchased the property on September 14, 2006 from the previous (tax-delinquent) owner, making transfer of title to Johnson useless. Johnson filed suit against Alexander for negligence. The trial court granted Johnson summary judgment on the basis that attorney Alexander’s pleadings and deposition exhibited that attorney Alexander singularly had a duty to ensure that Johnson, as his client, received clear and marketable title (which she did not), even though Johnson had consented to attorney Alexander using the title search product of Attorney Feeley.

The Court of Appeals overturned the trial court, stating that the question at issue was whether attorney Alexander acted reasonably in relying on attorney Feeley’s title exam — a triable factual question. The Supreme Court reversed the Court of Appeals, agreeing completely with the trial court.

The Supreme Court found that all evidence in the case indicated that attorney Alexander singularly owed a duty to ensure that Johnson received clear and marketable title as a result of her purchase, and Johnson did not. The Supreme Court suggested that the only way a real estate attorney could be relieved of not providing clear and marketable title to a buyer when retained for a closing, is if the client previously agreed to waive malpractice causes of action [which, the Supreme Court was quick to note, requires outside counsel review before such an agreement will be enforced under Rule 1.8(h) of the Rules of Professional Conduct and Rule 407 of the South Carolina Appellate Court Rules].

Accordingly and in a landmark opinion, the Supreme Court’s ruling in Johnson has now created a strict liability standard for buyer’s-side closing attorneys. It asks the question: Did clear legal title pass? If it did not, then under this decision, no matter the circumstances, the attorney has committed malpractice. The Supreme Court did not include any analysis regarding the degree of skill, care, knowledge, and judgment usually exercised by members of the profession given the situation presented to the attorney at the time, stating that the Court of Appeals “erroneously equated delegation of a task with delegation of liability.” The Supreme Court reasoned that “attorney Alexander owed Johnson [as his client] a duty and absent her agreement otherwise, he was liable for that responsibility regardless of how he chose to have it carried out.”

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South Carolina: Appellate Court Reviews the "Business Records” Exception to the Hearsay Rule

Posted By USFN, Tuesday, September 1, 2015
Updated: Wednesday, September 23, 2015

September 1, 2015 

 

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

The South Carolina Court of Appeals recently held that the “business records” exception to the evidentiary rules on hearsay does not apply to testimony that relies solely upon the inspection of documents maintained by a third party. The court further ruled that when this testimony is the only source of evidence for determining the amount owed on a promissory note, the admission of such testimony is prejudicial error — requiring reversal if used to solely determine the amount of the foreclosure debt and of the underlying deficiency judgment.

In Deep Keel, LLC v. Atlantic Private Equity Group, LLC, Appellate Case No. 2013-002281, Opinion No. 5320 (June 17, 2015), Atlantic defaulted on a promissory note originally executed to Community First Bank (CFB) for a commercial loan of $2,000,000. The promissory note was secured by two parcels of land in Beaufort County. Atlantic defaulted on the note after two loan modifications, and CFB filed for foreclosure. (CFB later merged with Crescent Bank to become CresCom Bank, and the promissory note was eventually sold and assigned to Deep Keel.)

Prior to the sale and assignment, Deep Keel’s sole member, Scott Bynum, had reviewed CresCom Bank’s records, including a payment history. Bynum testified about the amounts owed by Atlantic based on this review; however, these documents were not introduced as evidence at the foreclosure hearing. In fact, Bynum’s testimony was the only evidence of the amount remaining due on the loan. Atlantic objected to Bynum’s testimony regarding the amounts owed on the basis that Bynum’s statements amounted to hearsay. Deep Keel maintained that the testimony should be admitted under the business records exception. The master in equity admitted the evidence and ordered the foreclosure, as well as a deficiency judgment against the two personal guarantors, based on Bynum’s testimony. Atlantic appealed.

The Court of Appeals agreed with Atlantic. First, the appellate court found that Bynum’s statements amounted to hearsay because his only basis for knowledge about amounts owed by Atlantic were the out-of-court statements reflected on the documents held and maintained by CresCom Bank, which he had reviewed prior to purchasing the note and mortgage. Next, the court determined that the business records exception does not protect his testimony from the evidentiary rule prohibiting hearsay. On appeal, the court reasoned that “[t]he plain language of Rule 803(6) allows for the admission of ‘[a] memorandum, report, record, or data compilation,’ not testimony describing such a document. We hold Rule 803(6) does not apply to admit live testimony offered to prove the contents of a record containing hearsay when that record is not offered in evidence.”

The appellate court also determined that the testimony was prejudicial to Atlantic, and that the deficiency judgment against the two personal guarantors must be reversed because “[w]ithout Bynum’s hearsay testimony concerning the unpaid balance, Deep Keel could not prove the amount remaining due on the debt, and the master had no basis for calculating the amount of the deficiency.”

The Deep Keel decision makes it clear that a mortgagee/assignee’s testimony alone concerning amounts owed on a loan will not be sufficient to establish the debt in a foreclosure action and to obtain a deficiency judgment against the personal guarantors. Assignees should demand and review copies of payment histories and other loan accounting information documentation in the files they purchase and be mindful to ensure that these documents remain available for litigation.

Note that this decision simultaneously upheld the master in equity’s order of foreclosure on the secured properties, as the court held that Deep Keel had properly authenticated the promissory note and mortgage, and Atlantic had admitted that payments had been untimely. Therefore, the appellate holding is limited to barring testimony, which solely relies on the review of documents maintained and under the control of a third party, as the lone source of evidence to determine the amount of the foreclosure debt and underlying deficiency judgment.

©Copyright 2015 USFN and Scott & Corley, P.A. All rights reserved.
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North Carolina: Deficiency Actions

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

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

Following a foreclosure sale, the general rule is that the amount of the debt is reduced by the net proceeds realized from the sale, setting the deficiency amount a foreclosing creditor may seek to recover. N.C.G.S. § 45-21.31(a)(4). However, when the foreclosing creditor is the successful high bidder at the foreclosure sale, this general rule is abrogated by N.C.G.S. § 45-21.36, which provides a borrower with two alternative defenses. [See Branch Banking & Trust Co. v. Smith, 769 S.E.2d 638, 640 (Feb. 17, 2015)]. Either the deficiency is eliminated if it is shown “that the collateral was fairly worth the amount of the entire debt,” or the deficiency may be reduced “by way of offset” where it is shown that the creditor’s high bid was “substantially less” than the actual value of the collateral. Id.

In reversing summary judgment for the creditor, the North Carolina Court of Appeals recently observed that in opposing the motion for summary judgment, the borrowers “relied on their own joint affidavit, stating that it was “made on [Defendants’] personal knowledge” and that Defendants “verily believe[ ] that the [property] was at the time of the [foreclosure] sale fairly worth the amount of the debt it secured.” United Community Bank v. Wolfe, 2015 WL 4081940 (July 7, 2015).

The value of the collateral, in a deficiency action, is generally a material fact. Id., at 2, citing Raleigh Fed. Sav. Bank v. Godwin, 99 N.C. App. 761, 763; 394 S.E.2d 294, 296 (1990). Since the “[North Carolina] Supreme Court has repeatedly held that the owner’s opinion of value is competent to prove the property’s value,” Wolfe, citing Department of Transp. v. M.M. Fowler, Inc., 361 N.C. 1, 6; 637 S.E.2d 885, 890 (2006), and the owner is presumed competent to give his opinion of the value of his property, Id., at 2, citing North Carolina State Highway Comm’n v. Helderman, 285 N.C. 645, 652; 207 S.E.2d 720, 725 (1974), the affidavit raises a genuine issue of material fact so as to prevent the entry of summary judgment.

The lesson here is that a foreclosing creditor contemplating a post-foreclosure deficiency action against a solvent borrower may want to make additional efforts to encourage a third-party sale. For example: by broadening the advertising of the sale or, where permissible, adjusting its sale bid. This may avoid the uncertainty and expense of a trial in the deficiency action.

©Copyright 2015 USFN and Hutchens Law Firm. All rights reserved.
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New Hampshire: Statutory Amendment re Notice of Sale Requirements

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

by Adam F. Faria
Harmon Law Offices, P.C. – USFN Member (Massachusetts, New Hampshire)

On June 26, 2015 New Hampshire Governor Hassan signed into law SB 50, an act “relative to the notice required prior to foreclosure of residential property.” The provisions of the law go into effect on January 1, 2016. SB 50 serves to amend NH RSA 479:25 by distinguishing and expanding the foreclosure notice of sale period for “residential mortgages” from the notice of sale requirements for all other mortgages not defined as “residential mortgages.” The Act also provides for additional disclosures in the notice of sale where the property is an owner-occupied dwelling of four or fewer units without regard to the type of mortgage.

A “residential mortgage” as defined in RSA 397-A:1, VI-c. is, “any loan, including a first or second mortgage loan, primarily for personal, family, or household use which is secured in whole or in part by a mortgage, deed of trust, or other equivalent consensual security interest upon a dwelling or any interest in real property or in residential real estate.” In the case of “residential mortgages,” SB 50 extends the notice requirement to mortgagors under NH RSA 479:25, II. Under the current language of RSA 479:25, notice of sale must be sent to mortgagors at least twenty-five days before the sale. SB 50 increases the notice period to at least forty-five days before the sale. Additionally, while the Act maintains the existing twenty-one day notice requirement to persons having a lien of record, it extends the period under which a record lienholder is entitled to notice. The current RSA 479:25 requires notice be sent to a person having a lien of record at least thirty days before the sale. SB 50 requires notice be sent to a person having a lien of record at least fifty days prior to sale.

In the case of mortgages that do not fall under the definition of “residential mortgages,” the notice period remains unchanged. Notice to the mortgagor shall be sent twenty-five days prior to the sale; notice to a person having a lien of record shall be sent at least twenty-one days before the sale; and any person having a lien of record at least thirty days prior to the sale is entitled to notice.

Moreover, SB 50 requires the following additional disclosures be included in the notice of sale for all owner-occupied dwellings of four or fewer dwelling units: “1. The address of the mortgagee for service of process and the name of the mortgagee’s agent for service of process; and 2. Contact information for the New Hampshire Banking department, along with the statement ‘for information on getting help with housing and foreclosure issues, please call the foreclosure information hotline at [ ]. The hotline is a service of the New Hampshire banking department. There is no charge for this call.’” The Act further requires the banking department to provide a toll-free telephone number. As of the time of this writing, the banking department has not provided a toll-free telephone number.

It is unclear whether the new notice requirements contained in SB 50 are required only for notices of sale sent on or after January 1, 2016, or whether they are required for any sale that occurs on or after January 1, 2016. An additional complicating factor arises for any foreclosure sale scheduled to take place in 2015 and whose notices are compliant only with the current provisions of RSA 479:25. If that sale is postponed into 2016 when the provisions of SB 50 are in effect, it is unclear whether the sale would be a valid sale. For these reasons it behooves the prudent practitioner to begin compliance with the provisions of SB 50 at the earliest opportunity.

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Foreclosure Defense Attorney in Minnesota Has Been Suspended

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

by Paul Weingarden and Kevin Dobie
Usset, Weingarden & Liebo PLLP – USFN Member (Minnesota)

Attorney William Bernard Butler’s war against the mortgage industry, which began in 2010 when his own home went into foreclosure (and continued even after his right to practice in the federal courts ceased in 2013), has come to a halt in state court as well. On August 12, 2015 the Minnesota Supreme Court issued an order suspending Butler for a minimum of two years, with conditions of reinstatement.

Before Butler’s formal suspension, he had litigated over 300 cases against mortgage lenders, servicers, GSEs, and their counsel. He asserted various frivolous theories, which were routinely dismissed after lengthy stalls, delays, and appeals — only to be repackaged and renewed by refiling the actions and asserting the identical facts and theories, with usually the same plaintiffs. Despite never winning a single case with these theories, Butler kept on suing, resulting in millions of dollars in lost interest and attorneys’ fees, all for the purpose of allowing his clients to remain in their homes without paying their mortgage obligations.

In late 2013, the Eighth Circuit Court of Appeals suspended Butler’s right to practice in the Eighth Circuit, and shortly thereafter the Minnesota U.S. District Court followed suit. Undaunted, Butler shifted his attention to the state courts where he asserted the same arguments in over sixty new cases, all of which had been rejected hundreds of times. Whether it was fighting evictions for “wrongful foreclosures” or starting a Torrens proceeding with the intent of re-litigating the foreclosure with old, rejected contentions, Butler pressed on — ignoring further monetary sanctions.

In CitiMortgage v. Kraus, 2015 Minn. App. Unpub. LEXIS 47 (Minn. App. 2015), after unsuccessfully asserting claims on behalf of the Krauses (whom had already litigated the validity of the foreclosure and lost at the Eighth Circuit), Butler continued to press identical theories in the post-foreclosure eviction. On January 12, 2015 the Minnesota Court of Appeals called the Krauses’ defense “one of the most frivolous that has ever been presented to this court,” and the court sanctioned Butler and the Krauses. Incredibly, Butler and the Krauses litigated the same issues yet again; and, on August 24, 2015 the Minnesota Court of Appeals once more determined that the claims had no merit. [Editor’s note: The authors’ firm represented CitiMortgage in these actions.]

For the foreseeable future, the litigation is over — and perhaps longer if Butler does not pay, or make a good faith effort to pay, court-imposed sanctions of $125,000 as well as attorneys’ fees of approximately $175,000.

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Maine: New Foreclosure Laws Enacted

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

by Shannon Merrill and Santo Longo
Bendett & McHugh, P.C. - USFN Member (Connecticut, Maine, Vermont)

The 127th Maine Legislative Session adjourned July 16, 2015. Several default- and foreclosure-related measures were enacted. What follows is a summary of the new laws, all of which are effective October 15, 2015.

Notice to Cure Requirements — New provisions in Maine’s notice of default statute (14 M.R.S.A. § 6111) require that default notices specifically state the total amount due to cure the default, and notices must also state that the amount needed to cure does not include any amounts that will become due after the date of the notice itself.

Certification of Proof of Ownership Required — Beginning October 15, 2015 foreclosure complaints must contain a certification of proof of ownership of the loan. This change does not require the owner of the loan to be the named plaintiff in the action, but it does require that the loan owner is specifically identified in the complaint. Although the statutory language is not entirely clear, it appears that this requirement can be met by the drafting attorney including appropriate language in the complaint, and that a separate certification document executed by another party will not be required.

Municipal Action regarding Abandoned Properties — A new law authorizes Maine municipalities to issue a finding that real property, or a mobile home, is “abandoned,” and then order the property owner to address identified conditions at the property. If the property owner fails to comply, the municipality can perform the work itself and seek reimbursement from the owner. The Act requires a mortgagee, when initiating a foreclosure action, to provide the municipality with the contact information of an in-state representative for the purposes of receiving communications from the municipality regarding property abandonment issues. Under the new law, when title to real property in Maine is transferred pursuant to a foreclosure judgment, the new owner becomes subject to orders to correct property conditions, as well as potential liability and enforcement. This includes foreclosing lenders who take title at foreclosure sales and hold properties in REO portfolios.

Expedited Final Hearing Process — New legislation will permit foreclosing plaintiffs to request an expedited final hearing in cases where either: (1) efforts to mediate did not result in settlement or dismissal of the action, and any party that has appeared in the action consents to the request; or (2) the defendant did not answer the complaint and any appearing party consents to the request. Once the court receives the request, the expedited final hearing will, “as the interests of justice require,” be scheduled not less than forty-five days from the date the request is filed. The burden of proof and statutory requirements for entry of judgment remain the same.

Because of the limitations contained in the statute, it appears that use of the new expedited hearing process will largely be limited to default cases with no parties in interest actively contesting the foreclosure.

Standing to Foreclose and MERS — In an effort to address property title issues created by the Maine Supreme Court’s 2014 decision in Bank of America v. Greenleaf, 2014 ME 89, the Maine legislature has passed a law that creates a presumption that a mortgage assignment, partial release, or discharge executed by a party acting as nominee for another party is valid. This includes mortgage-related instruments executed by Mortgage Electronic Registration Systems, Inc. when acting as nominee for lenders. Importantly, in regard to assignments of mortgage specifically, the presumption of validity only applies in the context of foreclosure actions if the judgment of foreclosure is obtained and the applicable appeal period has run without an appeal being filed as of October 15, 2015 (the effective date of the Act).

Power of Sale Foreclosure — New legislation modifies Maine’s nonjudicial foreclosure process. This process allows mortgagees to proceed directly to sale in certain cases where specific statutory requirements are met, and is generally only available in cases involving commercial properties. The changes are largely procedural, not substantive. Specifically, the archaic requirement that notices must be sent by “registered mail” has been updated to a more commercially-reasonable “certified mail” requirement. The bill also eliminates the requirement that (post-sale) a petition must be filed with the Maine Superior Court to correct a purely typographical error/omission in the final vesting documents.

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Another Maine Court Decision Addresses Notices of Default

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

by Tristan Birkenmeier and Santo Longo
Bendett & McHugh, P.C. - USFN Member (Connecticut, Maine, Vermont)

On August 18, 2015 the Maine Supreme Judicial Court issued its decision in Wells Fargo Bank, N.A. v. Girouard, 2015 ME 116. Girouard provides clear direction to the trial courts that entry of judgment for the defendant is required if the trial court finds that the notice of default sent to the borrower failed to strictly comply with the requirements of Maine’s notice of default statute, 14 M.R.S. § 6111.

After the Supreme Judicial Court issued its seminal decision in Bank of America v. Greenleaf, 2014 ME 89 (2014), which clarified the state statutory requirements with respect to notices of default, the Girouards filed a motion for summary judgment, contending that the notice sent by Wells Fargo failed to comply with 14 M.R.S. § 6111. Wells Fargo did not dispute the deficiencies of the notice, but asserted that because sending an adequate notice of default is a statutory prerequisite to commencing a foreclosure action, the case should be dismissed without prejudice. [There was prior Maine case law in support of this proposition. See Dutil v. Burns, 1997 ME 1, 674 A. 2d 910 (1996).] The trial court agreed, granted the defendants’ motion for summary judgment, and entered an order of dismissal without prejudice. On appeal, Maine’s high court vacated the dismissal without prejudice and remanded the case for entry of judgment for the defendants.

Prior to Girouard, there was uncertainty in the trial courts as to the proper disposition of a case after a finding that the notice of default did not strictly comply with the statutory requirements. The results varied from court to court, with some courts dismissing without prejudice, as the trial court did in Girouard. Other courts dismissed with prejudice or entered judgment for the defendants. In a few rare cases, judgment was entered for the defendants; however, the court also expressly reserved to the parties the right to re-litigate the merits of the case in a future action. Girouard leaves the trial courts with only one option: entry of judgment for the defendants.

What remains unclear after Girouard is the effect such a judgment for the defendant will have on a mortgagee’s ability to institute a second foreclosure action on the same default. In fact, the Supreme Judicial Court expressly declined to address this issue. Depending on how relevant law develops in Maine, such judgments could potentially bar re-filing. Therefore, in the wake of Girouard, it is especially important that the adequacy of the notice of default is considered before a new foreclosure action is instituted, or a pending case is brought to trial.

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Illinois: Kane County’s Requirements about Recovery of Pre-Judgment Fees, Costs, Advances, and Disbursements

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

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

Editor’s Note: Supplemental information has been provided since this article was published on September 8, 2015 in the USFN e-Update (Sept. 2015 Ed.) That information, received on September 23, 2015, has been added in a separate section at the conclusion of the original article. Scroll down to view it.

In January 2015, Judge Downs replaced Judge Wojtecki as the sitting judge who hears mortgage foreclosure cases in Kane County, Illinois. Shortly thereafter, Judge Downs clarified her interpretation of the Illinois Mortgage Foreclosure Law as it relates to a plaintiff’s recovery of fees, costs, advances, and disbursements that are expended subsequent to the execution of the affidavit of indebtedness supporting the judgment of foreclosure and the entry of the judgment of foreclosure itself.

The court’s ruling: Absent a subsequent amendment to the judgment of foreclosure order, the fees, costs, advances, and disbursements expended by the plaintiff between the date of execution of the affidavit of indebtedness and the entry of the judgment of foreclosure cannot be recouped at confirmation of sale, This ruling is based on a strict reading of 735 ILCS 5/15-1508(b)(1), allowing for the collection of fees and costs arising between the entry of judgment of foreclosure and the confirmation hearing, in conjunction with 735 ILCS 5/15-1506(a)(2), which states that the affidavit of indebtedness contemplates the amount due to the mortgagee at judgment.

Inevitably there exists a gap in time — sometimes significant in scope — between the execution of the affidavit of indebtedness and the entry of judgment. During this time substantial fees, costs, advances, and disbursements may be expended for, among other things, tax payments, property preservation, hazard insurance, etc. Thus, to be able to include in a sales bid and subsequently collect these expenditures at confirmation of sale, a supplemental affidavit of indebtedness is now required to be submitted to the court. Alternatively, these expenditures (if insignificant in sum) can be excluded from the sales bid and the plaintiff can forgo amending its judgment.

Regardless of whether an amendment to judgment is sought, the court’s examination of the dates when expenditures were made requires that satisfactory detail be provided in the calculation of sales bids.

UPDATE — Subsequent Amendment to Judgment Expanded to Second District in Illinois
(information received September 23, 2015)


Recently this author’s firm advised that the judge hearing mortgage foreclosure cases in Kane County, Illinois (Judge Downs) clarified her interpretation of the Illinois Mortgage Foreclosure Law (IMFL) as it relates to the plaintiff’s recoverability of fees, costs, advances, and disbursements that are expended subsequent to the execution of the affidavit of indebtedness that supports the judgment of foreclosure and the entry of the judgment of foreclosure itself. In January 2015 Judge Downs ruled, absent a subsequent amendment to the judgment of foreclosure order, fees, costs, advances, and disbursements (expended by the plaintiff between the date of execution of the affidavit of indebtedness and the entry of the judgment of foreclosure) cannot be recouped at confirmation of sale.

The court based its ruling on a strict reading of 735 ILCS 5/15-1508(b)(1), which allows for the collection of fees and costs arising between the entry of judgment of foreclosure and the confirmation hearing, in conjunction with 735 ILCS 5/15-1506(a)(2), which states that the affidavit of indebtedness contemplates the amount due to the mortgagee at judgment.

On August 20, 2015 the Second District Appellate Court for Illinois found that the bank was not entitled to recover a $470,340 real estate tax payment where the bank could have, but did not, amend the judgment of foreclosure prior to the sale to include the prejudgment tax payment that the bank made about one month prior to the hearing on the bank’s motion for summary judgment. See BMO Harris Bank, N.A. v. Wolverine Properties, LLC, 2015 Ill. App. (2d) 140921 (Aug. 20, 2015). The general rule in Illinois is that but for conflict among districts, a decision is not confined to any particular district unless another district appellate court finds differently.

During the time between execution of the affidavit of indebtedness and the entry of judgment, substantial fees, costs, advances, and disbursements may be expended (i.e., tax payments, property preservation, hazard insurance, etc.). In order to include these expenditures in a sales bid and to subsequently collect these expenditures at confirmation of sale, a supplemental affidavit of indebtedness is now required to be submitted to the court with a motion to amend the judgment. The court must amend the judgment to include any additional pre-judgment expenditures prior to the date of sale. If amendment does not occur prior to the sale, the plaintiff will need to set aside the sale, amend the judgment, and conduct a new sale. Id. at ¶23. Alternatively, if it is not cost-effective to seek recovery of these expenditures, they can be excluded from the sales bid and the plaintiff can forgo amending its judgment.

©Copyright 2015 USFN and Pierce & Associates, P.C. All rights reserved.
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Illinois: Right to Personal Deficiency Judgment and Res Judicata.

Posted By USFN, Tuesday, September 1, 2015
Updated: Saturday, September 26, 2015

September 1, 2015

 

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

On June 5, 2015, an important appellate decision was issued in the First Judicial District of Illinois about personal deficiencies. It is significant with respect to the mortgage foreclosure practice in Illinois because it directly impacts a lender’s options in pursuing a personal deficiency judgment, an option often sought after a judicial foreclosure sale on foreclosed properties. [LSREF2 Nova Investments III, LLC v. Coleman, 2015 Ill. App. (1st) 140184].

Background
The underlying suit was brought on the note for the balance due after an in rem judgment in a foreclosure suit was obtained. The appellant, LSREF2, sought review of the trial court’s ruling that LSREF2’s complaint seeking relief under a promissory note post-foreclosure was barred under the doctrine of res judicata.

According to the appellate court, where the circuit court had personal jurisdiction over a defendant to enter a personal deficiency judgment against the defendant pursuant to 735 ILCS 5/15-1508(e) in the foreclosure suit, the plaintiff’s subsequent suit for the amount of the personal deficiency as determined in the foreclosure suit was barred by the doctrine of res judicata.

Note, however, that LSREF2’s Petition for Leave to Appeal has been accepted for filing by the Illinois Supreme Court. A decision on whether or not the Illinois Supreme Court will accept the case is expected no earlier than the last week of September 2015.

Discussion
In August 2010, LSREF2 filed a single-count complaint to foreclose mortgage pursuant to the Illinois Mortgage Foreclosure Law (IMFL). In its prayer for relief, LSREF2 sought a judgment of foreclosure, in addition to a personal judgment for deficiency. The complaint alleged that the defendant Michelle Coleman was “personally liable for any deficiency.” On November 22, 2010 a judgment of foreclosure was entered, awarding LSREF2 judgment in the amount of $322,668.35 and ruling that the defendant would be personally liable for a deficiency judgment as provided by law.

A judicial sale was held and LSREF2 purchased the property. On February 28, 2011 the court entered an order approving sale, which stated that “[t]here shall be an IN REM deficiency judgment entered in the sum of $227,416.32 with interest thereon as by statute provided against the subject property.”

On May 15, 2012 LSREF2 filed a new complaint seeking to enforce the promissory note against the defendant. The defendant filed a motion to dismiss, asserting that LSREF2’s breach of promissory note action was barred by the doctrine of res judicata where the circuit court had already ruled on the defendant’s liability pursuant to the promissory note. The circuit court initially denied the defendant’s motion, but that court reconsidered its order. On December 19, 2013 LSREF2’s complaint was dismissed with prejudice based on res judicata.

In Illinois, the doctrine of res judicata bars recovery in matters that have been previously adjudicated. The Illinois Supreme Court has provided the test for application of res judicata:



“For the doctrine of res judicata to apply, three requirements must be met: (1) there was a final judgment on the merits rendered by a court of competent jurisdiction; (2) there was an identity of cause of action; and (3) there was an identity of parties or their privies.” Rein v. Noyes, 172 Ill. 2d 325; 665 N.E.2d 1199, 1206; 216 Ill. Dec. 642 (1996).


“A cause of action is defined by the facts that give a plaintiff a right to relief.” Rein, 172 Ill. 2d 325, 338.



“ ‘While one group of facts may give rise to a number of different theories of recovery, there remains only a single cause of action. “If the same facts are essential to the maintenance of both proceedings or the same evidence is needed to sustain both, then there is identity between the allegedly different causes of action asserted and res judicata bars the latter action.” ’ ” Rein, 172 Ill. 2d at 338, quoting Progressive Land, 151 Ill. 2d 285 at 295 (1992), quoting Morris v. Union Oil Co., 96 Ill. App. 3d 148, 157 (1981).


The doctrine of res judicata extends not only to what is actually decided in the original action but also to matters that could have been decided in that prior suit. Progressive Land at 294. Accordingly, a mortgage foreclosure based on a breach of the terms of the note (and mortgage), and a suit on the note, arise from an identity of a cause of action; and as a mortgage foreclosure allows for recovery under both the note and mortgage, a suit on the note meets the requirements of res judicata.

In the foreclosure action, LSREF2 explicitly sought a personal deficiency judgment against the defendant based on the defendant’s obligations under the promissory note and the mortgage. Pursuant to 735 ILCS 5/15-1508(e), with “any order confirming a sale pursuant to the judgment of foreclosure, the court shall also enter a personal judgment for deficiency against any party (i) if otherwise authorized and (ii) to the extent requested in the complaint and proven upon presentation of the report of sale in accordance with Section 15-1508.” Therefore, Section 15-1508 allowed a personal money judgment to be entered against the defendant in the foreclosure action and allowed the plaintiff to enforce and collect it to the same extent and manner applicable to any money judgment.

In addition, the judgment of foreclosure order stated that the plaintiff would be entitled to a deficiency judgment after the sale of the property, and be allowed to execute upon such judgment in the event that a deficiency amount was due. Following the judicial sale, there was a deficiency amount due. The order approving sale did not provide for an in personam deficiency judgment, only an in rem deficiency judgment, but the fact that the plaintiff did not obtain an in personam deficiency judgment as requested in its complaint to foreclose mortgage did not preclude the application of res judicata principles.

The First District Appellate Court affirmed the circuit court’s decision. The appellate court held that where the circuit court had personal jurisdiction over the defendant to enter a personal deficiency against the defendant pursuant to section 15-1508(e) based on the plaintiff’s request for a personal deficiency judgment in its complaint to foreclose mortgage, the plaintiff’s subsequent claim for the amount of the deficiency, as determined in the foreclosure suit as a result of the sale of the property, is barred by the doctrine of res judicata.

The LSREF2 case is clear that a party is barred from seeking a remedy in a subsequent case if it was previously available in a prior one. As a matter of public policy, plaintiffs are generally not permitted to split their causes of action by suing for part of a claim in one action, and then suing for the remainder in another action. Rein at 1206. Illinois courts refer to this as “claim-splitting.” Accordingly, filing a two-count complaint for both a mortgage foreclosure and a suit on note only complicates matters, without solving the problem, as a personal deficiency could be sought in a mortgage foreclosure alone.

However, the court in Rein discusses exceptions to the rule against claim-splitting, citing to section 26(1) of the Restatement (Second) of Judgments. The exception relevant here is where “the court in the first action expressly reserved the plaintiff’s right to maintain the second action.” Thus, if a plaintiff is granted leave to adjudicate the issue of personal deficiency by the chancery court, a motion to dismiss on res judicata grounds may be defeated.

Conclusion
Looking ahead, in cases where there is a possible deficiency that one would not want to pursue at the order approving sale, it may be best to file, concurrently, a motion seeking to preserve the issue of deficiency for a subsequent action. Since this is a wholly novel approach, it is uncertain whether a court would grant such a motion, and whether a second court would find that it is sufficient to prevent a motion to dismiss on res judicata grounds. There is a lack of case law on court-sanctioned subsequent actions. However, in cases where an in personam deficiency is unavailable at the entry of the order approving sale, then seeking an order preserving the right to proceed in a separate suit regarding the personal deficiency may be the only means by which a judgment creditor may recover.

As drawn from the LSREF2 case, potential concern arises moving forward if foreclosing mortgagees file a complaint to foreclose mortgage, which includes language seeking a personal deficiency judgment provided for under 735 ILCS 5/15-1508(e), because of the res judicata application.

©Copyright 2015 USFN and Pierce & Associates, P.C. All rights reserved.
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