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Illinois: Payoff Statements

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Lee Perres & Nickolas Schad
Pierce & Associates, P.C. – USFN Member (Illinois)

Illinois law imposes a strict deadline on mortgagees when a mortgagor requests a loan payoff statement. The purpose of this requirement is to facilitate the quick resolution of foreclosure actions allowing both the mortgagee and mortgagor to benefit from a full payoff of the loan. While both parties can benefit from a payoff of the loan, if the strict provisions of Illinois law are not followed, the mortgagee can be sanctioned, including, but not limited to, monetary fines.

Within 10 business days of the receipt of a demand by the mortgagor or the mortgagor’s authorized agent, a mortgagee (or its agent) must prepare and deliver a payoff statement accurately reflecting the outstanding balance of the mortgagor’s loan, and which would satisfy the obligation as of the date the letter is prepared (the Payoff Statement). For the purpose of Illinois law, the Payoff Statement is deemed delivered when placed in the U.S. mail with postage prepaid addressed to the party whose name and address is in the payoff request. Additionally, delivery can also mean fax or electronic delivery if the payoff demand specifically requests delivery in such a way. The first Payoff Statement requested by the mortgagor must be created at no charge to the mortgagor; however, the cost for any additional Payoff Statements may be charged to the mortgagor.

The Payoff Statement must include:


i) information necessary to calculate the payoff amount on a per day basis for a period of 30 days or until the mortgage is scheduled for a judicial sale, whichever is less;
ii) estimated charges (specifically labeled “estimated charges”) reasonably believed to be incurred within 30 days from the date of the Payoff Statement; and
iii) the loan number, telephone number of the mortgagee and, if applicable, the department name, telephone number, and fax number of the department that would receive the payment.


In the event a mortgagee, or its agent, willfully fails to deliver an accurate Payoff Statement within 10 business days after the receipt of a written demand, the mortgagee (or its agent) is liable for actual damages for the failure to deliver the Payoff Statement. In the event there are no actual damages, the mortgagee (or its agent) is liable for damages in the amount of $500. Pursuant to this statute, “willfully” means without cause, excuse, or mitigating circumstances.

© Copyright 2014 USFN and Pierce & Associates, P.C. All rights reserved.
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Florida: Appellate Court Clarifies Statute of Limitations for Mortgage Foreclosures

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Roger D. Bear
Florida Foreclosure Attorneys, PLLC – USFN Member (Florida)

The past five years in Florida have seen an unprecedented volume of foreclosure actions. The courts have struggled to deal with the cases filed, and some law firms imploded under charges of robo-signing and other alleged improprieties. Many of the cases filed years ago have lingered, and the courts have been dismissing cases if the cases are not being pushed forward. Many of these dismissed cases have due dates of more than five years ago. The question then arises as to whether there is a statute of limitations impediment to filing a new foreclosure action on those dismissed cases carrying a due date of more than five years ago.

A Florida appellate court has recently issued a ruling on the statute of limitations governing mortgage foreclosure actions. The case is U.S. Bank Nat. Ass’n v. Bartram, 2014 WL 1632138 (Apr. 25, 2014).

As stated by the court: “The issue we must resolve is whether acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed for failure to appear at a case management conference triggers application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on payment defaults occurring subsequent to dismissal of the first foreclosure suit.”

The court concluded that the statute of limitations does not bar the subsequent foreclosure action. In arriving at this conclusion, the appellate court relied heavily on the Florida Supreme Court decision in Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004). That decision held that dismissal with prejudice in a mortgage foreclosure action does not necessarily bar, on res judicata grounds, a subsequent foreclosure action on the same mortgage even if the mortgagee accelerated the note in the first suit.

The court in Singleton reasoned that a subsequent, separate default creates a new and independent right to accelerate payment in a second foreclosure action even where the lender triggered acceleration of the debt in the prior, unsuccessful action that had been dismissed with prejudice. The court was clear that, regardless of the fact that acceleration was invoked in the first suit, the doctrine of res judicata does not necessarily bar subsequent foreclosure actions where the later suit alleged defaults other than those sued for in the first suit, because the subsequent and separate alleged default “created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action.”

Accordingly, the court in Bartram concluded that a foreclosure action for default in payments occurring after the order of dismissal in the first foreclosure action is not barred by the statute of limitations found in section 95.11(2)(c), Florida Statutes (which is five years), provided the subsequent foreclosure action on the subsequent defaults is brought within the five-year limitations period.

The Bartram court believed the legal issue resolved is a matter of great public importance, and it certified the following question to the Florida Supreme Court: “Does acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed pursuant to rule 1.420(b), Florida Rules of Civil Procedure, trigger application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on all payment defaults occurring subsequent to dismissal of the first foreclosure suit?”

The Florida Supreme Court is not obligated to answer or otherwise review the certified question. So unless the Bartram decision is reversed by the Florida Supreme Court, it provides clarity that there is not a statute of limitations barrier to prevent a subsequent foreclosure action by the mortgagee based on payment defaults occurring subsequent to dismissal for failure to appear at a case management conference of the first foreclosure suit.

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California: Standing re Validity of Assignment

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Kathy Shakibi
Northwest Trustee Services, Inc. – USFN Member (California)

Does a borrower have standing to challenge a foreclosure based on the validity of an assignment? Pursuant to Glaski v. Bank of America, 218 Cal. App.4th 1079 (2013), a borrower may challenge a nonjudicial foreclosure based on a void transfer of deed of trust. Glaski, however, remains a solitary ruling, and now a recent appellate court ruling signals the demise of Glaski. [Yvanova v. New Century Mortgage Corp., WL 2149797 (Apr. 25, 2014)].

Glaski: Solitary Precedent

In Glaski, the California Court of Appeal held that under New York trust law, a transfer of a deed of trust in contravention of the trust documents is void, not voidable, and under California law, a “borrower can challenge an assignment of his or her note and deed of trust if the defect asserted would void the assignment.” Glaski at 1095. The Glaski court held that New York law governed the operation of the trust because the subject securitized trust was formed under New York law. Glaski concluded that the borrower had standing to state a claim for quiet title, unfair business practices, and declaratory relief. Since the Glaski ruling on August 8, 2013, no less than 24 lower courts have declined to follow Glaski. Yvanova is the first published appellate ruling that rejects Glaski.

Yvanova: Background

In 2006, New Century Mortgage Corporation made a mortgage loan to the Yvanova borrower. In 2007, New Century filed for bankruptcy and subsequently the deed of trust was assigned by means of a pooling and servicing agreement to Deutsche Bank National Trust Company as trustee for the Morgan Stanley ABS Capital I Inc. Trust 2007-HE1 Mortgage Pass-Through Certificates, Series 2007-HE1. In January 2012, a notice of default was recorded, followed by a notice of sale, and the property went to sale on September 14, 2012. On May 14, 2012, the borrower filed a civil action naming several defendants. Ocwen Loan Servicing, LLC; Western Progressive, LLC; and Deutsche Bank National Trust Company, as Trustee (defendants) successfully demurred to the pleadings.

The borrower’s second amended complaint contained one cause of action for quiet title, and the borrower made three substantial allegations: “(1) The assignment of the deed of trust to Deutsche Bank was ante-dated, misrepresents material facts and entities, that render the instrument void, (2) the substitution of Western Progressive as trustee is void, due to ante-dating, violating procedural trust rules and using entities which do not have authority to act, and (3) Western Progressive conducted unlawful defective auction sale …” Yvanova *2. The defendants again demurred, on the ground that the borrower had failed to allege tender to cure her default. The trial court granted the defendants’ demurrer without leave to amend, and the borrower appealed. The borrower also filed two bankruptcy cases, and two related adversary actions, which are not the subject of this article.

Yvanova: Appellate Ruling

On appeal, the Yvanova ruling has two prongs. First, the court agreed that the borrower lacks standing to pursue a quiet title claim, absent an allegation of tender of funds. Next, the court held that even assuming the borrower’s allegations regarding transfer of the note and deed of trust are correct, “the relevant parties to such a transaction were the holders (transferors) of the promissory note and the third party acquirers (transferees) of the note. As an unrelated third party to the alleged securitization, and any other subsequent transfers of the beneficial interest under the promissory note, [plaintiff] lacks standing to enforce any agreements, including the investment trust’s pooling and servicing agreement, relating to such transactions.” Yvanova *4.

In its analysis the court cited from a 2013 case, Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497, holding that “An impropriety in the transfer of a promissory note would therefore affect only the parties to the transaction, not the borrower. The borrower thus lacks standing to enforce any agreements relating to such transactions.” The Jenkins ruling predated Glaski by approximately three months. The Yvanova court analyzed that an assignment substitutes one creditor for another. Even if there is an invalid transfer, a borrower would not be a victim of the transfer because the borrower’s obligations under the note remain unchanged. In language signaling the demise of Glaski, the court declined to follow Glaski, stating that no California court has followed Glaski on this point and many have rejected it.

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Sixth Circuit Ruling Regarding the Absolute Priority Rule in Chapter 11 Cases

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Melissa Byrd
Trott & Trott, P.C. – USFN Member (Michigan)

In an important decision affecting secured creditors that are the subject of cramdown in Chapter 11 cases, the Sixth Circuit Court of Appeals recently issued an opinion holding that “the absolute priority rule continues to apply to pre-petition property of individual debtors in Chapter 11 cases.” Ice House Am., LLC v. Cardin, 2014 U.S. App. LEXIS 8882 at *13 (6th Cir. 2014).

To confirm a Chapter 11 plan of reorganization, a debtor must meet the requirements of 11 U.S.C. § 1129(a). A Chapter 11 plan, however, may be confirmed even if it does not comply with § 1129(a)(8)(A), through the “cramdown” provision, “if the plan does not discriminate unfairly, and is fair and equitable” to creditors who have not accepted the plan. Section 1129(b)(2) sets out the requirements for a plan to be considered “fair and equitable,” which includes satisfaction of the “absolute priority rule” found in § 1129(b)(2)(B)(ii), that provides in relevant part:


For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

* * *
(B) with respect to a class of unsecured claims –

* * *

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section. [emphasis added].

 

The absolute priority rule requires that every unsecured creditor must be paid in full prior to the debtor retaining any property under the plan.

In the Ice House Am. case, the debtor and creditor agreed that the absolute priority rule was not satisfied under the proposed plan; however, the debtor argued that it does not apply to individual debtors. The creditor and the United States Trustee objected to the plan for violation of the absolute priority rule. The bankruptcy court overruled the objections and held that the absolute priority rule was abrogated in individual cases when the Bankruptcy Code was amended in 2005. On appeal, the district court certified the question for direct appeal to the Sixth Circuit, which was granted. Ice House Am. v. Cardin, at *5.

In deciding whether the absolute priority rule still applied to individual debtors, the Sixth Circuit focused on the word “included” in the italicized portion of the statute. The court found that by looking at the definition of the word ‘included,’ “… it is only that property — property acquired after the commencement of the case, rather than property acquired before then — that the ‘debtor may retain’ when his unsecured creditors are not fully paid,” and reversed and remanded the decision to the bankruptcy court for further proceedings. Ice House Am. v. Cardin at *10, 13, citing 11 U.S.C. § 1129(b)(2)(B)(ii).

The Sixth Circuit, in deciding that the absolute priority rule continues to apply to pre-petition property of the individual debtors in Chapter 11 cases, joins the Fourth Circuit (In re Maharaj, 681 F.3d 558, 565 (4th Cir. 2012)), Fifth Circuit (In re Lively, 717 F.3d 406, 410 (5th Cir. 2013)), and Tenth Circuit (In re Stephens, 704 F.3d. 1279, 1287 (10th Cir. 2013)) in reaching the same interpretation. Ice House Am. v. Cardin, at *13. (The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

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Tennessee: New Law Regarding Eviction Lockouts

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Signed into law in March is HB1409, which describes how plaintiffs are to handle personal property pursuant to lockouts in all eviction maters (filed pursuant to the unlawful detainer statute) in Tennessee, beginning July 1, 2014. The law also tolls the running of any local/municipal deadlines relating to the personal property, along with insulating the local municipality (and the plaintiff, in most cases) from any liability relating to damage to the personal property after it has been removed.

The law clarifies, and slightly alters, what had been the custom in Tennessee (although some local jurisdictions had their own formal and/or customary requirements), which was to remove the remaining personal property to the curb. The new law, which will be applicable in all jurisdictions statewide, provides that the plaintiff, or a designated representative, can remove the personal property from the interior of the residence, but that it must remain “[o]n the premises,” and be moved to “an appropriate area clear of the entrance to the premises,” and “[a]t a reasonable distance from any roadway.”

The plaintiff, or agent, cannot “disturb” the personal property for 48 hours after it has been removed pursuant to the procedure just described. The plaintiff, or designated representative, is authorized to discard any remaining personal property after the 48-hour period. The same 48-hour time period applies to the city, county, or other local government/municipality that has jurisdiction, meaning that any action it would normally otherwise be able to take, as to the personal property, is temporarily suspended during this time period.

As important as the process and procedure for lockouts, the law also provides that the local government body, including the sheriff’s department, will not be liable for any damages to the defendant’s personal property during or after the 48-hour period. The same insulation from liability will be provided to the plaintiff or designated representative of the plaintiff, provided that damages did not result from a malicious act, or omission, of the plaintiff or its representative.

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South Carolina Judges Rule on Vacant Property

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

Recently, several Equity Court judges (Horry, York, and Lexington counties) have ruled against mortgage lenders/servicers and their property preservation agents that secure properties pre- and post-sale without a recorded foreclosure deed and/or an eviction or other court order. In South Carolina, real property ownership is determined by recording the deed in the register of deeds office in the county where the real property is located. Until a foreclosure deed is executed and recorded, the homeowners/mortgages still own the real property.

In at least one case, an Equity Court judge awarded significant damages ($28,000) against the successful foreclosure sale purchaser where the foreclosure sale purchaser removed “abandoned property” from what appeared to be a vacant home. Even though it looked like the mortgagors/homeowners had vacated the home, the garage was full of the mortgagors/homeowners’ personal belongings.

Therefore, if you observe the homeowner/mortgagor vandalizing the property or believe that the property has been abandoned and is now vacant, do not take any action to secure the property unless you are the record title owner of the real property. If the Equity Court judge or selling officer has not executed and recorded the foreclosure deed, a separate legal action may be required in order for the Equity Judge to grant you (as a non-record title owner) the right to enter the property and to take all necessary actions to protect, preserve, and secure the home.

© Copyright 2014 USFN and Scott Law Firm. All rights reserved.
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Michigan: Appellate Court Review of Mortgage Lacking Spousal Signature

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by Jennifer Burnett
Trott & Trott, P.C. – USFN Member (Michigan)

On April 8, 2014, the Michigan Court of Appeals decided Federal Home Loan Mortgage Corporation v. Guntzviller (Docket No. 313323). This case involved a mortgage encumbering a property owned by a husband and wife. The proceeds of the mortgage were used to refinance two prior mortgages. The prior mortgages were executed by both spouses. The husband alone signed the refinance mortgage, though the lender was aware of the marriage, and the wife was present at the closing. Upon the husband’s death and subsequent default upon the mortgage, the plaintiff filed suit against the wife seeking equitable relief including a declaration that the mortgage was valid and encumbered her interest in the property.

In Michigan, unless expressly stated otherwise, a conveyance of real property to a husband and wife creates a tenancy in entireties. Generally, but with some exceptions, one tenant by the entireties has no separate interest from the other, and cannot convey, mortgage, or otherwise alienate the property without the other’s consent. Upon the death of one tenant, the other becomes the sole owner of the property through a right of survivorship.

The court of appeals found that because the husband could not unilaterally refinance the prior mortgages without the wife’s signature, the mortgage was void and entirely invalid. As the mortgage was invalid, it did not encumber the property at all, and the wife became the sole owner of the property free and clear of the mortgage upon her husband’s death. The court further declared that the plaintiff was not entitled to equitable remedies such as reformation, equitable mortgage, ratification, or an implied contract to prevent unjust enrichment to save it from what the court deemed to be the lender’s unilateral mistake in not obtaining the wife’s signature on this mortgage.

While the Guntzviller opinion is not published and is therefore not binding as legal precedent, this case and its reasoning may be cited to and considered by Michigan courts as persuasive authority. The conclusion that a refinance mortgage lacking the signature of a required spouse is invalid is not new, but the determination by the Michigan Court of Appeals as to what would entitle a party to equitable relief to correct the omission and validate the mortgage is unclear. The decision implies an elevated standard for a lender to successfully prevail on such a claim.

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Connecticut: Foreclosing Plaintiff's Right to Enforce an Instrument under UCC

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

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

With its decision in U.S. Bank, N.A., Trustee v. Ugrin, AC 35266, the Connecticut Appellate Court has further discounted the defense bar’s argument that a foreclosing plaintiff is required to be the owner of the underlying debt and, instead, has again held that a foreclosing plaintiff’s establishment of its right to enforce an instrument under the Uniform Commercial Code is sufficient to establish standing in Connecticut.

Prior to the institution of the action, the defendant requested validation of the debt, which the plaintiff provided. Along with the debt validation, the plaintiff also provided a copy of the note, which was endorsed in blank. After a judgment of foreclosure by sale had entered, the defendant filed a motion to dismiss attacking the plaintiff’s standing. The trial court conducted a hearing in which the original note was presented to the court for inspection. The defendant argued that the note was not endorsed in blank but was specially endorsed to the plaintiff, which amounted to an unauthorized alteration of the document. The defendant claimed the inconsistency between the document presented in response to the validation of debt request and the note being specially endorsed to the plaintiff as presented to the trial court as his basis to assert an “illegal” alteration of the note, thereby implicating the plaintiff’s standing.

In opposition to the defendant’s motion, the plaintiff presented an affidavit of the loan servicer averring that the note was specially endorsed to the plaintiff and that the plaintiff was the holder of the note prior to the commencement of the action. After supplemental briefing, the trial court denied the defendant’s motion, finding that the plaintiff demonstrated it was the holder of the note and, further, holding that the defendant failed to present evidence to contradict this finding. The defendant appealed, contending that the trial court erred in not holding a full evidentiary hearing and further failed to hold a second hearing to address the defendant’s claim that there was a material factual dispute regarding the plaintiff’s standing.

The appellate court held that “[t]he plaintiff’s possession of a note endorsed in blank is prima facie evidence that it is a holder and is entitled to enforce the note, thereby conferring standing to commence a foreclosure action.” The defendant claimed that the appearance of a special endorsement on the note to the plaintiff alone required that the trial court hold a second hearing. The appellate court interpreted a recent Connecticut Supreme Court decision (Equity One v. Shivers, 310 Conn. 127 (2013)) to stand for the proposition that a court is not required to order a full evidentiary hearing to determine standing if, after being presented with the original note, the court finds there is evidence that the plaintiff possessed the note at the time the action was commenced and the defendant has not offered any evidence to the contrary.

The appellate court determined that the trial court did not err when it concluded that the plaintiff possessed the note endorsed in blank prior to the commencement of the action and that the defendant’s claim that the note was altered when it was specifically endorsed to the plaintiff does not refute the plaintiff’s prima facie evidence. The appellate court further held that the addition of a special endorsement is not, on its own, an unauthorized alternation of the document purporting to modify an obligation of a party.

The defense bar has repeatedly attempted to advance the argument that a foreclosing plaintiff needs to be the owner of the debt, citing ambiguous language in several recent appellate court cases in Connecticut. This case clarifies again that so long as the plaintiff can establish that it was the holder of the note, or otherwise entitled to enforce the instrument pursuant to the UCC, there is no ownership requirement for a foreclosing plaintiff in a mortgage foreclosure action in Connecticut and illustrates the importance of being able to prove possession of the original note prior to the commencement of the action.

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Connecticut: Collection of both Default Interest and a Prepayment Premium in Commercial Loans

Posted By USFN, Wednesday, June 4, 2014
Updated: Tuesday, October 13, 2015

June 4, 2014

 

by Peter Ventre
Hunt Leibert – USFN Member (Connecticut)

In a decision released June 3, 2014, Connecticut’s Appellate Court sustained a judgment of the trial court, permitting in a commercial loan the inclusion in the debt of both default interest and a prepayment premium. Federal National Mortgage Association v. Bridgeport Portfolio LLC.

Facts and Law: On May 27, 2009, Bridgeport Portfolio LLC executed a multifamily, open-end mortgage in favor of Arbor Commercial Funding, LLC (Arbor), on four commercial properties in Bridgeport, Connecticut, to secure the payment of a promissory note in the amount of $7,780,000. The loan was allegedly guaranteed by a principal of Bridgeport Portfolio LLC. Arbor assigned the note, mortgage, and related loan documents to Fannie Mae.

In response to a multi-count foreclosure complaint filed in the trial court seeking foreclosure of the mortgage and a monetary judgment on the guaranty, the borrower and the guarantor filed a special defense. They claimed that the prepayment premium is precluded or void as against public policy as a forfeiture and/or penalty, which is repugnant to the law and is not a voluntary payment.

By agreement of the parties, the court granted summary judgment as to liability as to Count I of the complaint seeking foreclosure. Fannie Mae filed a motion for judgment of strict foreclosure and an affidavit of debt, which added default interest and a prepayment premium to the outstanding principal balance. The defendants filed an objection, contending that the inclusion of a prepayment premium and default interest in the judgment would penalize the defendant borrower for the contractual breach in violation of public policy. The defendants further alleged that the plaintiff was attempting to collect two amounts as liquidated damages for the same purported injury to Fannie Mae and that it was seeking an amount disproportionate to any anticipated loss.

The trial court scheduled a hearing. After listening to testimony from a senior risk manager employed by Arbor and reviewing the law, a judgment for Fannie Mae was entered, including in the debt both default interest and a prepayment premium upon finding that the loan documents provided for the payment of both. The trial court found this transaction was a sophisticated one where both parties were represented by counsel. The defendants appealed.

On Appeal: After reviewing the trial court proceedings, the appellate court affirmed. The appellate court specifically found that contracting parties may decide on a specified monetary remedy for failure to perform a contractual obligation. The appellate court also found that these provisions were liquidated damages, which can be used to fix a fair compensation to the injured party.

Finally, the appellate court held that it saw no reason to relieve the defendants from compliance with the terms of a contract that was entered into freely, particularly where the terms were clear and unambiguous. The appellate court opined that the certainty of the remedies provided by the default interest provision and prepayment premium provision affected the pricing of the loan. Furthermore, the appellate court determined that if it held that the provisions were unenforceable, the court would be providing the defendants with a better contract than they were able to negotiate for themselves. Lastly, the appellate court did not find that it is against the public policy of Connecticut to enforce both provisions of the promissory note where sophisticated parties, represented by counsel, entered into the agreement with knowledge of its terms.

Editor’s Note: The author’s firm represented Fannie Mae in the case discussed here.

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Kentucky: Recent Legislative Updates

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

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

The Kentucky Legislature wrapped up its legislative session on March 15, 2014. Topics that affect the mortgage industry include redemption rights, the statute of limitations, service of process, and loan modifications.

The Bills that Became Law
Senate Bill 36 amends KRS 426.530 to reduce to six months the time period for the right of redemption at foreclosure sale. The amendment allows the purchaser at sale to recoup expenses for taxes, insurance, and necessary repairs to bring the property up to code that were incurred during the redemption period. Signed by the governor on April 10, 2014. http://www.lrc.ky.gov/record/14RS/SB36.htm

House Bill 369 amends KRS 413.160 to reset the statute of limitations for actions on a written contract to ten years instead of the current 15-year period; amends KRS 413.090 to conform. Only affects contracts executed after the effective date of this act. Signed by the governor on April 25, 2014. http://www.lrc.ky.gov/record/14RS/HB369.htm

Senate Bill 138 amends KRS 454.210 to allow a court clerk to electronically transmit court process to the secretary of state when that office is responsible for service of process. This affects out of state corporations and defendants under Kentucky’s long-arm jurisdiction. Signed by the governor on April 9, 2014. http://www.lrc.ky.gov/record/14RS/SB138.htm

House Bill 206 amends the mortgage modification statute, KRS 382.520, to allow interest rate reduction agreements to be secured by the original mortgage without the need to record an amended mortgage or modification agreement. Signed by the governor on April 7, 2014. http://www.lrc.ky.gov/record/14RS/HB206.htm

Effect on the Mortgage Industry
The biggest change is the shortening of Kentucky’s foreclosure redemption statute to six months. The amendments also put to rest a debate over whether taxes and maintenance during the redemption period could be added to the redemption price. Redemptions were already rare in Kentucky, since a sale bid of at least two-thirds of the appraised value will cancel the redemption, but now the amendments allow for more predictability in this area.

The statute of limitations for enforcement of mortgages has been shortened to ten years, which is still longer than the six-year statute of limitations to enforce a note under Kentucky’s UCC. This limitation comes due in April 2024, since the ten years only applies to new mortgages executed after April 25, 2014.

The other two bills involved minor changes. Service of process upon the secretary of state has been expedited by the use of electronic summons, but this only affects service upon out-of-state corporations and defendants with no local agent in Kentucky. This may save a week of delay during the foreclosure. The loan modification amendment was technical in nature, as a reduction in interest rate does not change the secured balance of the loan. This prevents any challenges by other lienholders to the priority of a modified mortgage.

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Maine: Enforcing Lost, Destroyed, or Stolen Promissory Notes

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Paula R. Watson & Joshua Saucier
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

To enforce a promissory note, a creditor will ideally be in possession of the original instrument. That is, either the note endorsed to the order of the creditor or endorsed in blank. The Uniform Commercial Code (UCC), however, allows a “person” not in possession of a promissory note to enforce that note if certain conditions are met. UCC § 3-309 (2002).

Maine enacted a similar statute, but has not adopted the most recent revision of UCC § 3-309. Under 11 M.R.S.A. § 3-1309, subsection (1), a person who is not in possession of a promissory note may enforce that note if: (a) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred; (b) The loss of possession was not the result of a transfer by the person or a lawful seizure; and (c) The person [cannot] reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts [cannot] be determined or it is in the wrongful possession of an unknown person or a person that [cannot] be found or is not amenable to service of process. It is the creditor’s burden to prove that it meets the requirements of § 3-1309, subsection (1). See 11 M.R.S.A. § 3-1309, subsection (2).

Because Maine has not adopted the most recent UCC revisions, the right to enforce the lost promissory note should not be conveyed by the entity that lost the note. Under M.R.S.A. § 3-1309, only the person who was in possession of the note at the time that it was lost is entitled to enforce that note. Maine currently has no case law on the issue.

A person trying to enforce a lost note must also prove the terms of the promissory note and the person’s right to enforce the note. See R.C. Moore v. Les-Care Kitchens, No. CV-04-390, 2006 Me. Super. LEXIS 104, at *10 n.4 (May 5, 2006) (holding that Wachovia Bank, N.A. could enforce a line of credit, despite losing the promissory note underlying that line of credit, because it complied with § 3-1309). A court may not enter judgment against the borrower unless it finds that the borrower is adequately protected against a later claim on the same note by another party. 11 M.R.S.A. § 3-1309(2).

To enforce a lost promissory note, a creditor must demonstrate by affidavit or testimony that it meets the requirements of § 3-1309. For example, during a foreclosure action a creditor may file a summary judgment motion and include, in partial support thereof, a “lost note affidavit.” See M.R. Civ. P. 56(e).

Lost note affidavits should either be based upon personal knowledge of the missing promissory note and the circumstances surrounding that loss or be based upon a review of the mortgagee’s business records. See M.R. Civ. P. 56(e); M.R. Evid. 803(6); see also Beneficial Maine Inc. v. Carter, 2011 ME 77, ¶¶ 3, 7, 28 A.3d 1260. If a lost note affidavit is based upon a review of business records, then all records relied upon should be attached to the affidavit and the elements of the business records exception to hearsay should be sworn to for those records. See Minary, 2012 Me. Super. LEXIS 105, at *4; see also People’s United Bank v. Bermac Props., No. CV-13-0245, 2014 Me. Super. LEXIS 44, at **3-4 (Feb. 28, 2014). Likewise, a copy of the lost note should be attached to the affidavit. See R.C. Moore, 2006 Me. Super. LEXIS 104, at *10 n.4. By strict compliance with 11 M.R.S.A. § 3-1309 as well as the Maine Rules of Evidence, a creditor may preserve the value of an otherwise lost promissory note.

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Minnesota Supreme Court Allows State Law Remedy for Enforcing HAMP Directives

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Christina M. Snow & Eric D. Cook
Wilford Geske & Cook, P.A. – USFN Member (Minnesota)

The Minnesota Supreme Court continues providing the mortgage industry with a mixed bag of rulings, based in part on failing to fully understand mortgage servicing. Since 2009, this state’s Supreme Court has ruled favorably on MERS standing issues, favorably on GSE exemptions from taxation, but has imposed a “strict compliance” standard for some foreclosure procedures. Lower appellate courts in Minnesota have misconstrued the scope of the “strict compliance” standard and are expected to continue their trend of unpredictable rulings for the default servicing industry. In view of that, it is important to consider removing actions to Minnesota’s federal courts whenever possible on the basis of diversity or federal question. A consistent pattern of predictable, industry-friendly rulings has emerged from these federal courts.

Recently, the Minnesota Supreme Court ruled that a borrower may assert a private cause of action for damages against a mortgage servicer for failing to follow HAMP directives. Even though HAMP regulations, themselves, do not provide a borrower with standing to sue for damages, Chapter 58 of the Minnesota statutes, governing residential mortgage servicers, now provides a borrower with standing to sue a mortgage servicer for an alleged breach of “written agreements with borrowers, investors, licensees, or exempt persons.” Gretsch v. Vantium Capital, Inc., 2014 WL 1304990 (Minn. Apr. 2, 2014). The Supreme Court also held that HAMP did not impliedly preempt Minn. Stat. § 58.18, subd. 1, or violate other constitutional provisions. The court reasoned that the lack of a federal cause of action to enforce HAMP directives did not prohibit a state from providing a private cause of action.

The loan at issue in Gretsch was a non-GSE loan under a Servicer Participation Agreement (SPA) between the servicer and Fannie Mae. The U.S. Department of Treasury created HAMP and appointed Fannie Mae to administer the program for non-GSE loans. Erroneously, the Supreme Court reasoned that Fannie Mae is an “agency” of the federal government, which is at odds with Fannie Mae’s legal position and its status as a publicly traded corporation in conservatorship. The court’s mistaken belief about Fannie Mae led to its ruling that, “we cannot conclude, as a matter of law, that Fannie Mae is not an exempt person.” The appeal was before the court on a motion to dismiss, which also means that there has been no ruling on the merits finding that Fannie Mae is an agency of the federal government. In future cases, servicers must immediately seek competent legal advice to accurately portray Fannie Mae’s role and correctly identify the programs, guidelines, or contracts that are at issue to avoid the risk of bad case law or increasing litigation costs due to confusion or misinformation.

The Gretsch decision may lead to an increase in lawsuits against servicers for alleged breaches of pooling and servicing agreements and the servicing contracts and guides with the GSEs. The decision, however, was not a ruling on the merits, and should not mean that loan servicers automatically lose these challenges. The decision, however, may lead to more expensive and protracted litigation arising out of alleged breaches of a servicer’s contract with “borrowers, investors, other licensees, or exempt persons.” Minnesota courts have occasionally allowed challenges under HAMP based on state common law theories such as equitable estoppel, so the full impact of this ruling remains to be seen. At a minimum, a servicer’s litigation risk will be greater after Gretsch due to the statutory basis for a borrower to recover attorneys’ fees, court costs, statutory damages and even punitive damages, if appropriate, in a successful action.

On the bright side, Minnesota’s federal courts continue to rule favorably in the area of failed loan modifications, and recently relied on Minnesota’s Credit Agreement Statute to dismiss an action alleging an oral promise to postpone a foreclosure sale after the servicer proceeded with the sale. The Eighth Circuit Court of Appeals agreed with the Minnesota federal district court’s decision, and reaffirmed the longstanding principle that claims based upon oral promises are barred under Minnesota’s Credit Agreement Statute unless reduced to writing and signed by the creditor. Bracewell v. U.S. Bank National Association, No. 13-1164, WL 1356850 (8th Cir. Apr. 4, 2014). This issue has been litigated and won in dozens of cases in Minnesota courts. The Eighth Circuit’s holding, just two days after the Gretsch decision, provides another layer of protection for the industry in the context of assisting borrowers with loss mitigation.

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South Carolina: Appellate Court Outlines Standard of Care for a Real Estate Closing Attorney’s Reliance on a Title Search

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

In a recent South Carolina Court of Appeals decision, the court held that a real estate closing attorney could not be held liable, as a matter of law, simply because he relied on a title search performed by another attorney that failed to discover unpaid real estate taxes and a subsequent tax sale. [Johnson v. Alexander, App. Case No. 2011-196007 (S.C. Ct. App. Mar. 19, 2014)].

In the Johnson case, the purchaser hired Attorney A to close a purchase transaction. In turn, Attorney A hired Attorney B to perform a title search of the subject property. The court of appeals said that the standard of care for an attorney conducting a title search on property is different than the standard of care for a closing attorney who relies on the title search performed by another attorney. The court held that the past-due real estate taxes and the subsequent tax sale — all of which were available to the attorney searching title in the county records — would be the correct focus for determining the liability of the attorney who performed the title search. However, the court felt that in order for the closing attorney to be liable, his reliance on the second attorney’s title search results or his decision not to perform the title search himself must be shown to have been negligent.

In reversing the circuit court’s decision and remanding the case for trial, the appellate court specifically declined to address the issue of whether or not, and under what circumstances, an agency relationship exists, as a matter of law, between a real estate closing attorney and a person performing a title search under the real estate closing attorney’s direct supervision.

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Tennessee: Appellate Court Reviews Post-Foreclosure Deficiency

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Edward D. Russell
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Earlier this year, the Tennessee Court of Appeals confirmed that a borrower, in attempting to avoid liability for a post-foreclosure deficiency owed under the foreclosed deed of trust, has a high evidentiary threshold to overcome the rebuttable prima facie presumption that the sale price obtained through foreclosure is equal to the fair market value of the property at the time of the sale. [FirstBank v. Horizon Capital Partners, LLC, No. E2013-00686-COA-R3-CV (Tenn. Ct. App. Feb. 3, 2014)].

T.C.A. § 35-5-118, entitled “Deficiency judgment sufficient to fully satisfy indebtedness on real property after trustee’s or foreclosure sale,” is part of Tennessee’s nonjudicial foreclosure statutory scheme. Section 35-5-118(a) provides that, in an action brought by a creditor to recover a balance still owing on an indebtedness after a trustee’s or foreclosure sale of real property secured by a deed of trust or mortgage, the creditor shall be entitled to a deficiency judgment in an amount sufficient to satisfy fully the indebtedness.

Absent a showing of fraud, collusion, misconduct, or irregularity in the sale process, the deficiency judgment shall be for the total amount of indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale. The creditor shall be entitled to a rebuttable prima facie presumption that the sale price of the property is equal to the fair market value of the property at the time of the sale. See Section 35-5-118(b). To overcome the prima facie presumption, the debtor must prove by a preponderance of the evidence that the property sold for an amount materially less than the fair market value of property at the time of the foreclosure sale. See Section 35-5-118(c).

In the FirstBank case, FirstBank held a foreclosure sale on three separate notes, secured by three separate parcels of property. One of the parcels was developed with a home, and the other two parcels were undeveloped. Following the foreclosure sale, and the subsequent sale of each of the three lots, a deficiency remained owing to FirstBank. FirstBank filed a complaint seeking a deficiency judgment. In opposition, the defendants contended that the amount sought in deficiency should be reduced, asserting that the sale price obtained was materially less than the fair market value of the properties at the time of the foreclosure sale.

Following FirstBank’s motion for summary judgment and argument by the parties, the trial court found that the defendants failed to establish that the sale price of the property was materially less than the fair market value at the time of the foreclosure sale. The value of the property sold at a foreclosure sale is not looked to in a deficiency case unless there is a charge of fraud in the manner of sale or a charge that the sale price was grossly inadequate.

The appellate court upheld the trial court’s ruling, determining that the issue in deficiency actions is the fair market value of the property at the time it is sold. The court refused to presume that an appraisal price equaled the fair market value of the property at the time of the foreclosure sale. Further, it held that the defendants, not FirstBank, were tasked with establishing that the property sold for materially less than the fair market value at the time of the foreclosure sale, citing Duke v. Daniels, 660 S.W.2d 793, 794 (Tenn. Ct. App. 1983) (where foreclosure sale is properly held, the sale price is conclusively presumed to be the value of the property sold; unless, the sale price is so grossly inadequate to shock the conscience of the court). Gross inadequacy is merely a method by which one attempts to prove fraud. Without there being at least a charge of fraud in the pleadings it would be inadmissible because the required claim or defense (as the case may be) of fraud must be pleaded and must be pleaded with specificity, not generally. Duke, supra, at 795.

The appellate court’s opinion in FirstBank continues the high burden placed on defendants in opposing deficiency judgment cases. The court reaffirmed that there is no bright-line percentage, above or below which the statutory presumption is rebutted. Instead, a court determining a deficiency judgment dispute considers the percentage difference, the condition of the property, and any other factors that may provide information concerning the marketability of the property.

A foreclosure sale price will only be deemed materially less when the difference in price is significant. See GreenBank v. Sterling Ventures, LLC, No. M2012-01312-COA-R3-CV (Tenn. Ct. App. Dec. 7, 2012), cited with approval by the appellate court in FirstBank. “The term ‘materially less’ still represents a pretty substantial difference. It’s a very difficult burden for a debtor to overcome. The debtor has to show a strong difference, a material difference.” Id. (The determination of materially less regarding a foreclosure sale price is to be made on a case-by-case basis under the particular facts presented. Courts cannot establish a bright-line percentage, above or below which the statutory presumption is rebutted).

A defendant’s claim as to the fair market value at the time of the foreclosure must be corroborated, and there must be evidence regarding the development and the economic climate in the surrounding area. Mere assertions will not suffice. The FirstBank decision confirms the defendant’s burden to overcome with admissible evidence the validity of the foreclosure sale price by establishing a material difference in the price obtained compared to the fair market value.

Additionally, the court in FirstBank upheld the right of the party seeking deficiency to an award of attorneys’ fees, finding that such an award, where expressly contemplated in the loan documents, complies with the American Rule that a party is entitled to attorneys’ fees if provided by statute or agreement.

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Wisconsin: Affidavits Under Attack

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Patricia C. Lonzo
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Recently foreclosure defense attorneys have taken a new aim focusing their attack on the sufficiency of creditor affidavits. The specific target is whether the creditor’s affidavit lays a proper foundation for the business records hearsay exception. The creditor is unable to prove the default and win its case without laying the foundation for the business records hearsay exception. The attacks are frequently successful. In response to this success, the content of lender affidavits must become more detailed and do more than mirror the language of the business records hearsay exception.

The most significant upset to creditor affidavits occurred in Palisades Collection LLC v. Kalal, (Wis. Ct. App. 2010) 2010 Wis. App. 38, 324 Wis. 2d 180, 781 N.W.2d 503. In this case, a Wisconsin appeals court took a sharp deviation from the Federal Rules of Evidence by finding that a creditor who acquired defaulted credit card debt did not lay a sufficient business records foundation under Wis. Stat. § 908.03(6) to prove the amount of the debt owed. The basis for the finding in Palisades was that the plaintiff did not show that it had personal knowledge of how the prior credit card company created, kept, and maintained their business records. Initially, the case was narrowly applied. However, lately there has been a rash of decisions toughening the standards for personal knowledge of the affiant regarding the creditor’s own business records. The heightened scrutiny is no longer limited to records acquired from another creditor as in Palisades.

The latest in these decisions striking down creditor affidavits, and which cannot be viewed as an anomaly, is U.S. Bank, N.A. v. Nelson, 2013 AP755 (not recommended for publication). The affidavit at issue in Nelson is an affidavit of Allen, an employee of Wells Fargo Bank, N.A., the servicer of the loan for U.S. Bank. The Allen affidavit contained the following averment: “In the regular performance of my job functions, I am familiar with business records created and maintained by Plaintiff for the purpose of servicing mortgage loans. These records (which include data compilations, electronically imaged documents, and others) are made at or near the time by, or from information provided by, persons with knowledge of the activity and transactions reflected in such records, and are kept in the course of business activity conducted regularly by Plaintiff. It is the regular practice of Plaintiff’s mortgage servicing business to make these records. In connection with making this affidavit, I have acquired personal knowledge of the matters stated herein by personally examining these business records.”

The language used in the Allen affidavit is noticeably similar to the business records hearsay exception found in statutes around the country including Wisconsin’s Statute § 908.03(6). While the trial court found the language to be sufficient, the court of appeals dissected the language and found it to be deficient. The court of appeals relied on Palisades to hold that the affidavit lacked an averment to show that Allen had personal knowledge as to how the records were created or made by her employer.

In reaching this decision, the appellate court considered whether Allen’s position at Wells Fargo allowed the court to infer that she had knowledge of how the records were made. The court also contemplated whether it could infer that Allen had personal knowledge of how the records were made from Allen’s statement that she is “familiar” with the records. However, the court found that familiarity with the records themselves is not equivalent to having personal knowledge of how the records were made and, ultimately, concluded that it could not make that inference.

Conversely, there are recent examples in Wisconsin case law illustrating sufficient language that would establish the business records foundation. In Bank of America, NA v. Neis, 2013 Wis. App. 89, 349 Wis. 2d 461, 835 N.W.2d 527, general averments regarding personal knowledge in addition to language seeking to satisfy the elements of the business records exception were found to be sufficient. Central Prairie Financial, LLC v. Yang, 2013 Wis. App. 82, 348 Wis. 2d 583, 833 N.W.2d 866, is a case in which the plaintiff was able to prove the amount of credit card debt owed, even though the debt had been acquired from another lender, due to a detailed affidavit from the plaintiff along with affidavits from the prior servicer of the debt.

Although the bar has been raised in Wisconsin, it is not insurmountable. Affidavits are required to be made by a qualified witness. The qualified witness must be someone who can aver to very specific facts. Those facts are necessary to prove that the affiant has the essential personal knowledge to lay the foundation for the business records hearsay exception. This involves the affiant explaining the substance of his or her knowledge and, more importantly, how that knowledge was acquired. More than a mere parroting of the language found in the business records hearsay statute is necessary to overcome this line of attack in a foreclosure.

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2014 Utah Legislative Update

Posted By USFN, Tuesday, May 6, 2014
Updated: Monday, October 12, 2015

May 6, 2014

 

by Scott Lundberg
Lundberg & Associates – USFN Member (Utah)

The 2014 Utah legislative session resulted in five bills of interest to the default mortgage industry. Two of the bills, Senate Bill 20 and Senate Bill 130, have a direct impact on default mortgage servicers. The remaining three, Senate Bill 79, House Bill 16 and House Bill 315, have only limited, indirect impact. All five of the bills have been signed into law by the governor and are effective May 13, 2014 (except as noted in the discussion of Senate Bill 79, below).

Of the two bills having a direct impact, one, Senate Bill 130, requires prompt consideration by mortgage servicers and foreclosure trustees. It is discussed in detail below. The other four bills are also described briefly.

Senate Bill 130

Senate Bill 130 (Trust Deed Foreclosure Amendments) amends the provisions of Utah Code section 57-1-24.3. Senate Bill 130 clarifies some provisions in 57-1-24.3 and specifies that the single point of contact notice required by the statute must give the borrower at least 30 days in which to cure the loan default before foreclosure can be commenced. This change will require servicers whose single point of contact notice gives less than 30 days to change the notice to provide at least 30 days.

Senate Bill 130 also amends section 57-1-24.3 to require that the servicer provide the borrower with written notice of the servicer’s decision regarding foreclosure relief for which the borrower has applied. Previously, the statute did not specify that the servicer’s decision had to be in written notice form.

The most significant change brought about by Senate Bill 130 is a change in the language of subsection 57-1-24.3(12) which provides financial institution servicers an exemption from compliance with the requirements of the section. The statute’s requirement that the servicer designate and use a single point of contact was modified. A servicer which is a financial institution is now exempted from the pre-foreclosure single point of contact notice and other requirements of 57-1-24.3 if it makes use of “assigned personnel” in compliance with 12 C.F.R. 1024, Real Estate Settlement Procedures Act, “or other federal law, rules, regulations, guidance, or guidelines” governing the servicer and issued by the Fed, FDIC, OCC, NCUA, or CFPB.

This change, coupled with the implementation of the final servicing regulations by the CFPB in January 2014, qualify financial institutions (as defined in the bill) for complete exemption from the provisions of section 57-1-24.3. Financial institutions in compliance with the CFPB’s final servicing regulations are, therefore, exempt from compliance with section 57-1-24.3 in its entirety — effective May 13, 2014. Servicers should promptly analyze Senate Bill 130 and either (a) avail themselves of the exemption, or (b) take steps to ensure that their notices and procedures under section 57-1-24.3 comply with the changes enacted this year.

Other Bills
Senate Bill 20 extends the provisions of Utah Code section 57-1-25, subsections (1)(c), (3)(b), and (4) until December 31, 2016. Those subsections, which require that the foreclosure sale notice contain a specific notice to tenants regarding protections available under the federal Protecting Tenants at Foreclosure Act, were set to expire on December 31, 2014. This bill simply extends that sunset provision for an additional two years.

Senate Bill 79 enacts the Utah Uniform Real Property Electronic Recording Act (the Act). It provides for the immediate establishment of a commission to create electronic recording standards. It also provides for a phased implementation by class of county and authorizes the county recorder to collect an electronic recording surcharge to recover implementation costs. The focus of the Act is upon electronic recording of electronic documents. That part of the Act goes into effect July 1, 2015. Utah already has electronic recording of traditional paper documents in most counties.

House Bill 16 was enacted in an effort to cut down on the recording of nonconsensual “common law” liens against public officials. It requires anyone filing such a document for record to initiate a judicial proceeding to determine the enforceability of the lien and subjects anyone recording an unenforceable nonconsensual common law lien to liability for damages and criminal liability. If there is not a judicial determination of the enforceability of the lien within the time allowed by statute, the lien can be disregarded.

Finally, House Bill 315 requires parties asserting judgment liens against real property to file a separate information sheet with the county recorder.

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Arizona: Vacant Land Excluded from Anti-Deficiency Protection

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by David W. Cowles
Tiffany & Bosco, P.A. – USFN Member (Arizona, Nevada)

Earlier this year, the Arizona Court of Appeals shed a little bit of light on Arizona’s developing post-foreclosure anti-deficiency protection in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 234 Ariz. 100 (Ariz. Ct. App. 2014). Until late in 2011, Arizona’s anti-deficiency protection was relatively clear and stable. The anti-deficiency statute only applied to property of 2.5 acres or less that is “limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. § 33-814(G). As a consequence, if a borrower did not actually use the property as a dwelling, the protection did not apply. Borrowers would go to extremes to use the property as a dwelling — by camping out inside the barely framed, under-construction dwelling, for example.

In late 2011, the court of appeals issued its opinion in M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478 (Ariz. Ct. App. 2011), pet. rev. denied. Mueller changed the landscape by holding that if the borrower intended to use the property as a single one-family or a single two-family dwelling, that intention is dispositive. There was no need for the Muellers to camp out in their under-construction home to fall within the scope of anti-deficiency protection. What was a fairly easily applied bright-line rule was eliminated in favor of the elusive notion of intent.

The court of appeals in the recent Wildwood case cut back application of the new Mueller rule by holding that anti-deficiency protection does not apply where, as in Wildwood, the property was vacant and construction had not begun. Wildwood thus seems to restore some clarity, at least in cases where construction has unambiguously not begun. But the special concurrence in Wildwood notes that the “new” rule is not at all clear. If construction has begun, when does the Mueller rule of intent come into play? This is not at all clear. Similarly, it is not at all clear when construction does begin. Does construction begin when the plans are drawn, or when the grading begins, or when? Will borrowers now go to their vacant lots as soon as possible to put a two-by-four in the ground or to move some dirt? We will have to wait to see.

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Case Management of Foreclosure Matters in Philadelphia – An Organizational Shift

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Jill P. Jenkins
KML Law Group, P.C. – USFN Member (Pennsylvania)

Since 2008, the city of Philadelphia and the First Judicial District have seen significant changes in the way mortgage foreclosure matters are handled. Today, handling a foreclosure case in Philadelphia (for the lender and the borrower) can be a complex task, including tricky service issues, conciliation conferences, case management conferences and, more commonly in recent years, taking a case to a bench trial.

In years past, things in the mortgage foreclosure world were much different. With little court intervention, cases were often started and finished very quickly, with little delay or litigation involved at all. Very few cases actually became contested and, if they did, the parties controlled when a matter would be listed for trial if a resolution could not be reached. This gave all parties ample time to discuss resolution, serve discovery, prepare motions, and get ready for trial at their own pace, rather than in accordance with looming deadlines set by the court.

As we entered the 2000s, however, things began to shift towards more court-mandated appearances and court involvement in mortgage foreclosure cases. In 2004, the Mortgage Foreclosure Steering Committee formed in Philadelphia. The first of its kind in the city and still active today, it is a group of attorneys representing the lenders’ and the borrowers’ sides, led by The Honorable Annette Rizzo, a Common Pleas Court Judge. The committee meets regularly to discuss current issues in mortgage foreclosure and ways to improve the process in Philadelphia for both the lender and the borrower.

Formation of the group was only the beginning, however. In June 2008, the Philadelphia Mortgage Foreclosure Diversion Program began — now nearing its 6th anniversary. A court-ordered conciliation conference is scheduled for every owner-occupied mortgage foreclosure case. While the borrower is participating in the conciliation program, all proceedings are stayed. The program brings the borrower (or her representative) and a representative of the lender together to discuss how the mortgage foreclosure matter can be resolved amicably for both parties, through a number of possible options. Depending on the type of resolution that the borrower is seeking, this can involve a number of conferences over several months, where both sides meet to discuss how best to proceed towards achieving the chosen resolution.

Up until approximately one year ago, the court had continued the practice of not keeping mortgage foreclosure cases on a specific “track” for the purposes of discovery deadlines, dispositive motion deadlines, and an estimated trial date. This responsibility was left to the parties to determine when a case would be brought to trial, if a resolution could not be reached after the case was removed from conciliation.

Then, the world for mortgage foreclosure attorneys took a significant turn when the court started scheduling case management conferences. These conferences entailed a brief meeting of both parties and a “case management master” to discuss the case and set deadlines for discovery, dispositive motions, and to place the case into a trial pool, which would advise the parties as to the month the case would be called to trial. This conference also required both parties to prepare and present a “case management memorandum.” Moreover, many case management conferences would be scheduled at the same time, but would be called one at a time. This often caused a long period of waiting as more complex cases, such as personal injury or medical malpractice, completed their conferences so that a mortgage foreclosure case could be called, only to meet for a minute or two to be given a discovery deadline and trial date. It was difficult to see the benefit of attending these mandated conferences, sometimes spending hours at City Hall, when not a great deal of discussion regarding the discovery that was required and how long each party needed before a trial could be scheduled was needed for a mortgage foreclosure case.

More recently, it was noticed by the court that this method of case management may not be the right fit for mortgage foreclosure cases. Since December 2013, Philadelphia’s Court of Common Pleas began a new way of tracking its mortgage foreclosure cases. The court now is tracking the status of service of the complaint upon all defendants, and the status of the case after it is removed from the conciliation program, if a default judgment has not yet been entered against the defendants. Generally speaking, if proof of service is not on the docket within 90 days from the commencement of the action, a status conference will be scheduled in front of a judge who has taken ownership of mortgage foreclosure cases in recent months. At the status conference, the attorney is required to represent to the court why service has not yet been completed and when the attorney expects service will be completed.

Now fast forward four or five months, after service has been effectuated and the matter has run its course in conciliation or, in the alternative, the matter involves non-owner occupied property and never ventured into conciliation. The court will issue an order scheduling a case management conference. This may sound similar to what was done previously, but the court has now recognized that mortgage foreclosure matters in Philadelphia are unique, requiring different attention than a catastrophic injury case, business contract dispute, or asbestos lawsuit.

The Philadelphia Court is now holding a brief meeting of the parties with a court administrator, in a courtroom separate from the other case management conferences, so that appropriate deadlines can be quickly decided, and pro se litigants can address any questions they have with the court administrator and the lender’s attorney. Discovery and trial deadlines are still set and expected to be adhered to, but the case management conference itself is completed much more promptly. It appears, at least for now, that this style of case organization is here to stay in Philadelphia.

Not surprisingly, this latest method of tracking cases by the courts has forced firms to reorganize their tracking of cases as well. Firms now are required to calendar and attend court-ordered hearings and status conferences, keep strict calendars for discovery and trial dates (often in cases that are not contested), and confirm attorney coverage for all court appearances, among other new responsibilities. This has added another layer of complexity to the cases that has necessarily increased the costs of prosecuting the case.

It has yet to be seen whether this type of case management will be beneficial to either party or, ideally, to both parties. Given the fact that most mortgage foreclosure matters require similar deadlines for discovery and trial, could it be more efficient to simply issue a case management order with the same proposed deadlines for all mortgage foreclosure cases and allow parties with special, more complex cases to move for an exception? Is there a way to avoid having the court require a pro se litigant to take time off from his or her employment to come to City Hall for a conference to discuss the discovery deadline in a case where no discovery is required? Can another (possibly superfluous) court appearance in the already demanding schedule of the lender’s attorney be avoided? On the other hand, are these conferences providing another opportunity for both parties to be in the same room and discuss a resolution? These are all questions that will likely be addressed over the coming months.

The evolution of case management in Philadelphia has been interesting to observe. It is clear that the courts are open and willing to consider implementing a process that works best for everyone, including the lender, borrower, and court staff. There is still work to be done, but it appears that there is movement in that direction.

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Connecticut: Appellate Court Rules Defendant Cannot Use PSA to Challenge Standing

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Jeffrey M. Knickerbocker
Hunt Leibert – USFN Member (Connecticut)

On April 15, 2014, the Connecticut Appellate Court released an opinion that limited a defendant’s ability to examine a pooling and servicing agreement. Wells Fargo Bank, N.A., Trustee v. Strong, 149 Conn. App. 384 (2014). In Strong, the defendant actually raised two challenges. The first challenge was as to the plaintiff’s standing when, allegedly, the plaintiff had not complied with its own pooling and servicing agreement (PSA). The second challenge was that the court should have held an evidentiary hearing with respect to the plaintiff’s debt rather than accept the plaintiff’s affidavit of debt.

In order to obtain judgment in this matter, the plaintiff filed a motion for summary judgment. The defendant claimed that the motion for summary judgment should have been denied because there was a genuine issue of material fact. The material fact, argued the defendant, was that the note did not contain the full chain of endorsement. The defendant also asserted that the assignment of mortgage presented a genuine issue of fact because it was more than two years after the actual assignment, and the assignment was from the servicer rather than the depositor.

According to the defendant, the PSA required that: (1) all transfers to the trustee under the agreement are to be made by the depositor; (2) any mortgage note in the mortgage pool that is transferred and delivered to the plaintiff must contain a complete chain of endorsement from the originator to the last endorsee; (3) all of the mortgage loans to be conveyed to the plaintiff under the agreement must be transferred concurrently with the execution and delivery of the agreement; and (4) the plaintiff’s rights and responsibilities as trustee are strictly limited by New York trust law and the “policy and intention of the Trust to acquire only Mortgage Loans meeting the requirements set forth in th[e] [a]greement ...” Id. at 389.

The appellate court affirmed the lower court’s ruling and denied the appeal. In denying the appeal, the court ruled, “The issue of whether a mortgagor may challenge a foreclosing party’s standing on the basis of its noncompliance with a pooling and servicing agreement, to which the mortgagor is not a party and in which such mortgagor has no legal interest, is one of first impression for our appellate courts. Nonetheless, our law with respect to foreclosure actions and third party beneficiaries provides us with a sufficient basis to conclude that the court did not err in granting summary judgment in the present action.” Id. at 390.

The court went on to state, “Our appellate courts have not required a foreclosure plaintiff to produce evidence of ownership deriving from a pooling and servicing agreement in making its prima facie case on summary judgment.” Id. at 399. Further, the court said, “plaintiff’s alleged noncompliance with the agreement did not impede the plaintiff’s ability to meet its burden of proving that it was entitled to summary judgment as a matter of law.” Id. at 401. Thus, the appellate court found that the lower court had properly rendered judgment in the plaintiff’s favor.

Likewise, the appellate court was not swayed by the defendant’s argument that the trial court should have had an evidentiary ruling in order to find the plaintiff’s debt. Connecticut rules specifically authorized a plaintiff to establish its debt using an affidavit. Connecticut Practice Book § 23-18 provides, in pertinent part: “(a) In any action to foreclose a mortgage where no defense as to the amount of the mortgage debt is interposed, such debt may be proved by presenting to the judicial authority the original note and mortgage, together with the affidavit of the plaintiff or other person familiar with the indebtedness ...” The defendant had failed to raise a defense regarding the debt. As such, the court could take the affidavit and was not required to hold an evidentiary hearing.

This is an important case in Connecticut in that it strengthens lenders’ ability to prosecute foreclosure actions as it removes the issue of small errors concerning compliance with a PSA. Further, this decision serves as a reminder to judges that it is acceptable to follow the rules and decline borrowers’ attempts to make extra work for the court and plaintiffs.

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Connecticut: The PTFA Does Not Preempt Eviction Statutes

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Meghan E. Smith
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

The Connecticut Appellate Court recently issued a decision where it discussed the applicability of the federal Protecting Tenants at Foreclosure Act (PTFA) to Connecticut eviction laws. In the case of Customers Bank v. Boxer, 148 Conn. App. 479 (2014), the appellate court affirmed the judgment of the trial court, which found that the defendant had failed to meet his burden of proof to establish that he was a bona fide tenant under the PTFA, thereby triggering the 90-day notice required by that act. On appeal, it was determined that there was sufficient evidence to support the trial court’s conclusion that the defendant did not establish that the value of the repairs or improvements made to the property was commensurate with the fair market value rent of the property.

The PTFA does not define the term “receipt of rent,” so the appellate court turned to the Connecticut General Statutes for guidance. The court specifically stated that the “PTFA does not preempt state law with respect to the requirements of eviction proceedings.” The appellate court went on to cite federal cases that have stated that the PTFA “does not create a federal right of action, but indeed provides directives to the state courts” and “the PTFA is not a recognized area of complete preemption” (emphasis added). Therefore, Connecticut eviction statutes are not preempted by the PTFA.

This is important in regards to Connecticut General Statutes § 47-19. This statute provides in relevant part that a lease exceeding one year is not effectual against any persons other than the lessor and lessee unless it is in writing, executed, attested, acknowledged, and recorded in the same manner as a deed of land. Tenants in summary process actions where the landlord has been foreclosed often present leases ranging from two to four years in term that have not been attested, acknowledged, and recorded on the land records. Frequently they will obtain counsel who will try to argue that the PTFA “preempts” C.G.S. § 47-19 and the lease is enforceable against the new owner. This Connecticut Appellate Court decision will assist greatly in defending against those arguments.

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Eighth Circuit: BK Appellate Panel Rules re Ch. 13 Plan Default

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Kevin T. Dobie
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

The Eighth Circuit Court of Appeals Bankruptcy Appellate Panel recently confirmed that a default in the mortgage payments pursuant to a confirmed chapter 13 plan is “cause” for relief from the automatic stay under 11 U.S.C. § 362(d)(1), regardless of the amount of equity cushion. CitiMortgage, Inc. v. Borm (In re Borm), __ B.R. __, 2014 Bankr. LEXIS 1254 (8th Cir. B.A.P. April 2, 2014). (The Eighth Circuit is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)

CitiMortgage, the holder of a claim secured by the debtors’ residence, moved for relief from the automatic stay after the debtors failed to make post-petition payments pursuant to a confirmed plan. The plan provided that the debtors would make the post-petition payments directly to CitiMortgage. Without a response from the debtors, the bankruptcy court denied the motion sua sponte because the debtors had an equity cushion and the debtors were making some payments. The bankruptcy court suggested that CitiMortgage would have to wait until the mortgage debt exceeded the property value before it could obtain relief from the automatic stay.

CitiMortgage appealed the decision, and the Bankruptcy Appellate Panel (BAP) reversed the bankruptcy court. The BAP agreed with CitiMortgage and held that the amount of equity was irrelevant in light of the fact that the debtors defaulted on the required plan payments. Although not stated in the BAP’s decision, this author believes that the bankruptcy court used the “for cause” standard for relief in a pre-confirmation motion for relief from the automatic stay. Before confirmation, adequate protection and equity are certainly relevant under a § 362(d)(1) analysis (most often in a chapter 11 case), but once the plan is confirmed, the creditor and the debtor must live with the plan treatment.

While the standard for relief from stay upon a plan default is not uniform across the country, (e.g., at least one bankruptcy court in Colorado has held that a default in the mortgage payments under a confirmed plan is grounds for dismissal, not relief from stay), the standard in the Eighth Circuit is now clear. A failure to make the mortgage payments pursuant to a confirmed chapter 13 plan is “cause” for relief from stay under § 362(d)(1).

Editor’s Note: The author’s firm represented CitiMortgage, Inc. in the bankruptcy court and appellate proceedings summarized in this article.

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Georgia Bankruptcy Courts Review: Reopen Ch. 7 to Reaffirm a Mortgage?

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Brian Jordan
McCalla Raymer, LLC – USFN Member (Georgia)

On October 25, 2013, a bankruptcy court in the Southern District of Georgia (Savannah Division) held that a Chapter 7 case would not be reopened for the purpose of entering into a reaffirmation agreement where the agreement was not made prior to discharge. See In re Conner, 2013 WL 5781682 (Bankr. S.D. Ga. 2013).

Under Bankruptcy Code § 350(b), a case may be reopened to administer assets, to accord relief to the debtor, or for other cause. For a reaffirmation to be enforceable, Bankruptcy Code § 524(c) requires, among other things, that the agreement to reaffirm be made before the granting of a discharge. In Conner, the debtors motioned the court to reopen their Chapter 7 case for the purpose of filing a reaffirmation agreement so that they could pursue a loan modification with their mortgage lender. Although both debtors and the mortgage lender had agreed to reaffirmation terms as of the motion to reopen and no party had objected to the motion to reopen, debtors’ counsel stated that no reaffirmation agreement had been made prior to discharge.

The court held that, because no reaffirmation agreement had been made prior to discharge, it cannot be enforceable. Accordingly, as the reaffirmation agreement put forth by the debtors was unenforceable, the Chapter 7 case would not be reopened. This outcome echoes the Northern District of Georgia where a bankruptcy court there held that a Chapter 7 case may be reopened for the purpose of filing a reaffirmation agreement where the parties had agreed to all terms prior to discharge. See In re Farris, 2009 WL 6499264 (Bankr. N.D. Ga. 2009).

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Google Apps and MS Office 365

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Shawn J. Burke, Director, LoanSphere Sales Engineering
ServiceLink, A Black Knight Financial Services – USFN Associate Member
&
by Clifton D. Dillman, CIO
Firefly Legal – USFN Associate Member

From Shawn’s View

Is it obvious to you what Google Apps and Office 365 are? Furthermore, is it apparent that they are, in essence, competing technologies aimed at getting your back-office business? That Google Apps offers an alternative (even a free one) to buying Microsoft Office; or that Office 365 is trying to roll your Exchange Server, the money you pay for Microsoft Office, and some of your consumer desires (OneDrive cloud storage, etc.) into one package they hope you’ll pay for yearly? I was reminded recently during a USFN Technology Committee meeting that these subjects are not second nature to everyone — thus prompting this article.

First, what are Google and Microsoft each attempting? In a nutshell, they are trying to provide email and back-office services (Word, spreadsheets, access, database, email, documents, instant messaging, screen, etc.) to your organization.

Naturally when trying to decide options, look at your needs. For instance, I use both technologies in various businesses. When deciding which direction to go, generally consider whether you already have investments in Microsoft Office or Microsoft Exchange and whether you consider those critical to your business. If not critical or if you aren’t already invested, then return on investment will most quickly be achieved going down the Google Apps path. However, I would argue that if you’ve already made the investment, Office 365 might be worth your while.

For example, say that your operation uses Excel significantly — creating lots of charts, heavy on formatting, connecting to other data sources, and having lots of “sheets” powering your business — then making the switch is cumbersome. I don’t think anyone would contend that Excel has a ton of power and features in it; in fact many who tout Google Apps do so under the argument that it is more straightforward. If your team uses those Excel features, however, then giving them up has a cost. If that’s your company and you also use Word heavily and were integrated with Microsoft Exchange, then bringing all of those costs together into Office 365 might make sense. Remember that training your employees also has a soft cost, which goes beyond the licensing dollars.

I recognize that there will be people reading this who just want to shout “You’re wrong” at me. For them, the proliferation of Google Apps, their straightforward approach and extensive cloud storage integration, as well as the numerous “free resources” (templates, etc.), make any argument for Office 365 preposterous. Accordingly, I have asked a USFN Technology Committee colleague (and a proponent of Google Apps), Clifton Dillman of Firefly Legal to present a counterpoint to the Office 365 position.

From Clifton’s View

Thank you for the introduction Shawn. Let me say first that I am not completely against Office 365 and I fully understand your viewpoint. In fact, I agree with many, if not all, of your insights. My opinions must be prefaced with the simple fact that each one of us will have differing ideal scenarios dependent on our individual circumstances.

I think that Microsoft has made the transition to the cloud easier and easier through the years. Let’s look at the soft cost to transitioning to Office 365 first. During a recent Technology Committee meeting, a member mentioned that they still have users on Office 2003. I would argue that the transition to Office’s ribbon, introduced in Office 2007, would be just as difficult to overcome as beginning to use Google Apps — so the soft costs won’t really change in that scenario. I tend to agree that there could be a larger soft cost to transitioning to Google Apps, but note that the workforce is better equipped to learn new software and deal with the changes than they were ten or twenty years ago.

Shawn is absolutely right that Google’s features are not as robust as Office. Recently, I had a circumstance where I needed a document with a table of contents and associated page numbers. This is not possible in Google Apps. You can manually put them in, but who has the time for that? I went back to Office for this functionality. I have personally witnessed Google Apps really grow up in the short amount of time that it has been around (almost eight years). The great thing is that it will only get better.

In contrast, when Microsoft launched its “ribbon” — the very thing that hides even more of those functions no one uses — a Microsoft representative said that the ribbon removed the clutter. She stated that only a very small percentage of those advanced features were actually used by most people. Shawn may be an Office guru, who intimately knows and uses each and every ribbon function inside and out. I have to admit that I do not, but I also don’t need to, which makes Google Apps even more appealing.

I think that there are lots of options beyond the Google Apps and Office 365 debate, and that every circumstance has a different adoption path. I also believe that it’s healthy and worthwhile to discuss those options; bring them up with the third-party or internal IT staff that you are working with. The price point is a huge factor and Google continues to add more and more to its suite. One example: Google Draw is a great replacement for Microsoft Visio (expensive flowchart software) and it makes a lot of sense to look at it.

One of the challenges to this question is that there is no “right” answer. There might be answers that are more universally held; however, each organization needs to review both choices and ask questions. Not just questions about license costs, but also consider the soft costs of users who are used to a particular way of, or tool for, doing things. Final words: If you’re asking questions and thinking through what’s right for your operation, then you’re doing the smart thing. There’s no answer in a box here.

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Kansas: Appellate Court Bolsters Credit Agreement Statute

Posted By USFN, Tuesday, May 6, 2014
Updated: Tuesday, October 13, 2015

May 6, 2014

 

by Blair T. Gisi
South & Associates, P.C. – USFN Member (Kansas, Missouri)

A residential mortgage foreclosure case involved, among other issues, the effect of the borrowers’ failure to execute and to timely return a loan modification agreement. The bank had obtained summary judgment, relying on K.S.A. §§ 16-117 and 16-118. The Kansas Court of Appeals affirmed the trial court’s decision granting summary judgment to the bank on all issues. SunTrust Mortgage, Inc. v. Giardina, No. 109,840, 2014 WL 1193433 (Kan. Ct. App. Mar. 21, 2014), slip op.

The borrowers defaulted on a mortgage loan, but proceeded to work with the bank to modify their loan. The borrowers made all required loan modification trial payments and were approved for a loan modification. A proposed loan modification agreement was sent to the borrowers with explicit instructions to sign, notarize, and timely return the proposed agreement along with the first required payment. The borrowers did make the monthly payments for August and September 2011 as set forth in the proposed agreement, but failed to timely return the loan modification agreement itself and provided no proof at all that they ever executed the document.

SunTrust viewed the borrowers’ failure to both sign and timely return the loan modification agreement as a rejection of the offer to modify the loan. Accordingly, SunTrust advised the borrowers that they remained in default and that failure to cure the default would result in foreclosure proceedings. There was no cure, so SunTrust proceeded with a foreclosure suit, which ultimately resulted in the lower court granting judgment in favor of SunTrust, despite the borrowers’ raised defenses. The borrowers’ appeal followed.

The Kansas Court of Appeals held that the proposed loan modification agreement fit within the state statutory definition of “credit agreement” and, as such, that the material terms of the credit agreement must be in writing and signed by both the creditor and the debtor for it to be relied upon for any legal or equitable action. The appellate court found that the failure of the borrowers to come forward with a copy of the loan modification agreement signed by the parties precluded the defense of an implied agreement based on course of dealing or partial performance. In addition, the court concluded that under the plain language of the mortgage and the note that SunTrust’s acceptance of the borrowers’ payments did not waive the bank’s rights to file the foreclosure action.

In addition to the loan modification issue, the appellate court considered two other issues. The first was the oft-repeated argument that SunTrust holding the note and Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for SunTrust, holding the mortgage resulted in a splitting of the note and mortgage. The appellate court held that by the language of the mortgage, MERS acted as the express agent of SunTrust and, therefore, that the note and mortgage were never separated. Secondly, the appellate court found that a consent order entered into by SunTrust and the Federal Reserve was not a material issue to bar summary judgment because the borrowers were not a party to the consent order and the consent order did not have the force and effect of law.

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LEGAL ISSUES UPDATE -Foreclosure Process: “Debt Collection” Under FDCPA?

Posted By USFN, Wednesday, April 30, 2014
Updated: Monday, October 12, 2015

April 30, 2014

 

by Valerie Holder
RCO Legal, P.S.
USFN Member (Alaska, Oregon, Washington)

In 1977, the Federal Debt Collection Practices Act (FDCPA) was enacted to “eliminate abusive debt collection practices by debt collectors, [and] to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.” FDCPA § 1692(f)(6)802(e), 15 U.S.C. 1692(e). As the economy took a downward turn in recent years, more consumers were unable to repay their debts, and actions against “debt collectors” increased. Debt Collection (Regulation F); Advanced Notice of Proposed Rulemaking, Federal Register 78 (12 Nov. 2013): 67851. With consumers not making mortgage payments, uncertainty exists regarding whether an enforcer of a security instrument meets the definition of a “debt collector” under the FDCPA.

Courts have held that “enforcement of a security interest through a nonjudicial forfeiture does not constitute the collection of a debt for purposes of the FDCPA.” Baranti v. Quality Loan Service Corp., 2007 WL 26775 *3; Roman v. Nw. Tr. Services, Inc., C10-5585BHS, 2010 WL 5146593 *3 (W.D. Wash. Dec. 13, 2010); Hulse v. Ocwen Federal Bank, FSB, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002); Jordan v. Kent Recovery Services, 731 F. Supp. 652, 657-58 (D. Del. 1990). In some states the nonjudicial process eliminates the ability to obtain a deficiency judgment, while a judicial foreclosure allows for a monetary judgment and pursuit of deficiency; there is more uncertainty regarding whether judicial foreclosure is fairly characterized as debt collection.

Two recent opinions from two different courts held that enforcement of a security instrument in nonjudicial and judicial foreclosure is not debt collection.

Judicial Foreclosure on Deed of Trust

Doughty v. Holder addressed whether the judicial foreclosure of a deed of trust constitutes “debt collection,” as defined under the FDCPA. 2014 WL 220832 (E.D. Wash.). In Doughty, the author’s firm commenced an action for judicial foreclosure of a deed of trust on behalf of the beneficiary. The complaint sought judgment against defendants for monies due and specified that the plaintiff waived any right to a deficiency judgment. That is, the plaintiff sought nothing more than to foreclose on the deed of trust. One of the named defendants was Cheryl Doughty (Cheryl), daughter of the deceased borrower Raoul Doughty. Cheryl was named as a defendant to divest her of her interest in the property.

An individual named “Sheryl Doughty” was mistakenly served with the summons and complaint based upon the belief that she was the “Cheryl Doughty” named in the complaint. Sheryl Doughty (Sheryl) was dismissed from the judicial foreclosure action. Sheryl brought a separate action against the author and her firm for violation of the FDCPA, claiming that they were debt collectors who engaged in unfair and deceptive acts. Following a motion for summary judgment filed by the author and her firm, the court held that “[s]o long as the foreclosure proceedings, be they non-judicial or judicial, involve no more than mere enforcement of security interests, the FDCPA does not apply.” The court found that the plaintiffs were served with a lawsuit naming them as defendants and the lawsuit’s sole purpose was to foreclose potential interests in the subject real property. Even assuming the FDCPA applied here, the court further found that there were not any abusive collection practices. In summary, the court granted the motion for summary judgment filed by the author and her firm and judgment, without an award of attorney fees, was entered.

Nonjudicial Foreclosure
In Dillon v. Chase Home Finance, LLC, 2014 WL 466212 (E.D. Mo.), plaintiffs sued the foreclosing lender and its counsel, seeking to enjoin a foreclosure sale and alleging FDCPA violations. The court determined that the FDCPA did not apply because the lender’s counsel was acting as a trustee under a deed of trust and was therefore not acting as a debt collector. Further, the court held that foreclosing on a security interest is not debt collection activity for the purposes of § 1692g, as the FDCPA specifically says that a person in the business of enforcing security interests is not a debt collector for the purposes of § 1692(f)(6), which reasonably suggests that such a person is not a debt collector for purposes of the other sections of the FDCPA.

The court also cited a federal case in Mississippi, which held that a law firm that serves as trustee or represents a mortgagee in a nonjudicial foreclosure is not a debt collector. Fouche v. Shapiro & Massey, LLP, 575 F. Supp. 2d 776, 781 (S.D. Miss. 2008). Ultimately, the court in Dillon granted the motion to dismiss filed by the defendants.

Conclusion
The ambiguity present in the definition of “debt collector” under the FDCPA needs to be addressed and clarified. The two cases discussed here support the proposition that the foreclosure process is not debt collection. However, other states and circuits have held to the contrary. See Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006) (holding that the FDCPA applies to lawyers conducting a deed of trust foreclosure who inform the debtor of the amount required to reinstate the mortgage); Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006) (holding the FDCPA can apply to a party whose principal business is enforcing security interests); Glazer v. Chase Home Fin. LLC, 704 F.3d. 453 (6th Cir. 2013) (holding that mortgage foreclosure is debt collection under the FDCPA); Reese v. Ellis, Painter, Ratterree & Adams, LLP, 687 F.3d 1211 (11th Cir. 2012) (holding that a foreclosure firm qualified as a debt collector under the FDCPA because it regularly engaged in the business of collecting debts).

Congress could not have intended that a federal statute would be interpreted to provide inconsistent guidance to foreclosing attorneys and trustees. The FDCPA needs to be amended or the Supreme Court of the United States should provide clarification on the statute to rectify the discrepancy across the nation regarding who or what qualifies as a debt collector.

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Spring 2014 USFN Report

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