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Mediation Updates from Four States: Nevada

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Olivia A. Todd & Mark S. Bosco
Tiffany & Bosco, P.A.
USFN Member (Arizona, Nevada)

July 1, 2013 marked exactly four years since the Nevada legislature enacted AB149, which brought mediations to the state of Nevada. What a four years it has been! During this time, the Nevada Supreme Court has enacted four rule changes; and the Nevada Legislature brought the program to a complete stop with the passage of AB284 back in October 2011, which required that an affidavit be completed and recorded with the notice of default. This bill produced a suspension of new foreclosures in Nevada for a period of more than nine months while lenders and servicers drafted their respective versions of the required affidavit, resulting in no mediations being elected and depleting funding for the mediation program. Not content with this major change, the 77th session of the Nevada legislature rocked our mediation world again with the passage of AB273 — changing the program from an “opt-in” program to an “opt-out” program, effective with notice of defaults that are recorded on or after October 1, 2013.

So many changes in so little time. This alone has proven to be a unique challenge in the mediation arena as servicers and lenders adjust their processes to the ever-changing rules and regulations in Nevada. However, the focus of this article is on the new rules adopted by the Nevada Supreme Court on December 6, 2012, effective January 1, 2013, and the impact that these rule changes has had on lenders.

State Supreme Court Changes
— The most significant change was the addition of a “pre-conference” meeting to exchange documents and provide an opportunity to inquire about the intentions of the borrower. This is critical for a servicer who now has only fifteen days to review documentation submitted by the borrower and determine whether additional documentation will be necessary in order to consider a loan modification or alternative plan. The time frame is reduced to five days for the servicer to request additional clarification or documentation once the borrower has submitted the initial documentation. The significance of this new rule cannot be emphasized enough, as the servicer cannot subsequently claim that it cannot consider a loan modification due to “lack of documents or information.” This will result in the certificate being denied and the servicer may be sanctioned by the court.

On a positive note, if the borrower advises the mediator and the servicer’s representative at the pre-conference meeting that he no longer wants to retain the property, this will allow the servicer to focus on the “short sale” option and the new rules that must be adhered to relating to a short sale. These new rules are stringent and include the servicer’s ability to negotiate the following: (1) the listing price; (2) the date by which the property will be listed; (3) the period of time in which the property will be marketed; (4) a specified time in which the servicer must accept or reject any offer; and (5) the maximum length of time the escrow may be open. Lastly, the short sale agreement must state whether the deficiency is waived or not.

The documentation that the servicer has been required to produce to the mediator prior to the mediation has always been burdensome; however, specificity was provided in the new rules. Servicers are now required to present a separate “certification” for each document, including the note and each note endorsement, the deed of trust, all assignments, and the merger documents if applicable. This certification must include an original signature and be notarized. If these certifications are not given to the mediator prior to the mediation, this will cause a denial of a certificate and could result in a “bad faith” finding of sanctions, leaving the servicer with only two options: (1) starting a new foreclosure action or (2) filing a petition for judicial review (PJR). However, it would not be prudent to file a PJR if a servicer failed to provide the required documentation.

The new rules require that a broker’s price opinion (BPO) be provided as part of the documentation for the mediator, and this BPO must be dated within 60 days of the mediation scheduled date. The BPO must be signed, dated, and performed by a third-party independent appraiser or broker.

A positive rule change was the clarification regarding dates when the homeowner is relinquishing the property. At the mediation, the mediator will now establish the “vacate date,” which is when the homeowner will move out, and the “certificate issuance date,” which is the date that the mediation program administrator will issue the certificate, allowing the servicer to continue with the foreclosure action and set a sale date.

The foreclosure mediation program is currently under a lot of pressure due to a lack of funding arising from limited foreclosures and insufficient staffing. These problems have resulted in the program forwarding mediator statements to the trustees, which in turn has delayed the ability to request a certificate from the program allowing a servicer to proceed with the foreclosure action. The lack of staffing has also resulted in delays in trustees being notified that borrowers have elected mediation and the subsequent assignment of cases to a mediator.

Hopefully there will not be any changes to the mediation rules for the time being, allowing lenders and servicers to proceed with the foreclosure process. However, stay tuned and we will provide you with any new updates to the Nevada mediation program.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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Connecticut: Defaulted Lender May Have Rights to Surplus Funds After COA Foreclosure Sale

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

A Connecticut superior court has held that the entry against a lender of a default in an action to foreclose a condominium lien does not preclude the lender from later participating in the proceeding to obtain satisfaction of its obligation from the proceeds of a foreclosure sale. Saddle Ridge Farm Association, Inc., v. Blessing-Palmer, No. 55 Conn. L. Rptr. No.17, 631 (2013). In Saddle Ridge, the plaintiff commenced a foreclosure action seeking to foreclose on unpaid condominium common charges. In addition to naming the unit owner as a defendant, the plaintiff named a lender by virtue of having a recorded mortgage. The lender was subsequently defaulted and the court entered a judgment of foreclosure by sale. The property was sold to a third-party bidder and the sale was subsequently approved by the court.

After the foreclosure sale, and without challenging the underlying foreclosure judgment, the lender filed a motion for supplemental judgment. At a hearing, the unit owner and lender claimed competing priority rights to the surplus funds from the foreclosure sale. The defendant unit owner objected to the disbursement of the surplus funds to the lender on equitable grounds and claimed that because a default judgment entered against the lender, it was precluded from participating in the supplemental judgment proceedings. Therefore, the common law doctrine of “first in time, first in right” did not apply. The defendant lender argued that a default judgment simply precludes a defendant from raising defenses to the underlying foreclosure action and does not preclude participation in the supplemental proceedings.

The court held that the lender was not prevented from participating in the supplemental judgment proceeding because of the default judgment. The court reasoned that the purpose of the judicial sale in a foreclosure action is to convert the property into money and, following the sale, a determination of the rights of the parties in the funds is made, and the money received from the sale takes the place of the property. A foreclosure by sale furnishes conflicting claimants an ideal forum for litigating their differences. Clearly, a resolution of such issues provides the very raison d’être of supplemental proceedings.

Naturally, lenders recognize the importance of promptly notifying their counsel of any pending lawsuits or default notices. However, all may not be lost if a default judgment does enter. A lender may still be able to participate in the supplemental proceedings to obtain surplus funds.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update

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Mediation Updates from Four States: Oregon

Posted By USFN, Thursday, August 1, 2013
Updated: Thursday, September 24, 2015

August 1, 2013 

 

by Janaya L. Carter
RCO Legal, P.C.
USFN Member (Arkansas, Oregon, Washington)

Beginning in early 2011, Oregon’s foreclosure processes were called into question by federal court judges in various cases. ORS 86.735 was reinterpreted, and thousands of nonjudicial foreclosures were at issue. Under ORS 86.735, the trustee in Oregon is permitted to foreclose a trust deed by advertisement and sale if the trust deed — and any assignments of the trust deed by the trustee or beneficiary — is recorded in the real property records.

The accepted interpretation of that statute had been that it was sufficient to record an assignment from the originating beneficiary, or any subsequent beneficiary of record, to the beneficiary initiating the foreclosure. In 2011, different judges in the state and federal system concluded the statute required that a recorded assignment accompany each and every transfer of the note if the beneficiary wants to utilize the nonjudicial statute. As case law began to develop, nonjudicial foreclosures began to stall as trustees started to look for the full chain of assignments.

Reforms — In April 2012, the Oregon legislature passed sweeping reform of nonjudicial foreclosure law in the form of SB 1552. This reform became effective in large part on July 11, 2012, and introduced new requirements and obstacles to nonjudicial foreclosure. Although the changes provided by SB 1552 did contain an exemption from the requirements to mediate, it was limited to financial institutions that had initiated less than 250 foreclosure actions in the preceding year. The new law compelled a mandatory mediation before a nonjudicial foreclosure could take place. It required the servicer to disclose certain documentation during the mediation, including a “full chain of title” for the property indicating all recorded assignments evidencing any transfer of the beneficial interest and a copy of any agreement that the beneficiary entered into with another person, or by which the beneficiary pledged as collateral the security, or sold all or a portion of the interest in the note or obligation.

As if new statutory interpretations and legislation were not enough, the Oregon Court of Appeals further complicated the matter with its ruling in Niday v. GMAC. In Niday, the court found that Mortgage Electronic Registration Systems, Inc. could not act as a beneficiary within the definition provided by ORS 86.705. The Niday case was then certified by the Oregon Supreme Court.

Beginning in the summer of 2012, for all of the reasons described above, most servicers elected to convert to a judicial foreclosure process, creating an instant backlog of many, many thousands of judicial foreclosures. Then, on June 4, 2013, the Oregon legislature again amended the foreclosure laws with the passage of SB 588, extending the mediation program to the judicial process, operative on August 4, 2013.

Under SB 558, before filing a complaint for judicial foreclosure, the servicer must engage in mediation and obtain a certificate of compliance. The law also modifies some of the document requirements during the mediation process. The mediation document requirements no longer compel a full chain of assignments and only require that the servicer turn over any portion of the pooling and servicing agreement that potentially impacts the party’s ability to modify the loan. The law, however, does mandate that the beneficiary provide certain documents or assurances during the mediation process, which will require process changes on the part of servicers. One such requirement is a provision that the mediating party must provide a certified copy of the promissory note. Servicers must also show evidence of the steps taken prior to the resolution conference to obtain consent from the investor to provide a mediation resolution beyond what is provided for in the investor guidelines.

Any failure to follow mediation guidelines will result in a certificate of noncompliance from the mediation service provider at the conclusion of the resolution conference. In order to initiate new judicial foreclosures after the effective date of the action, a law firm will be expected to attach a certificate of compliance as an exhibit to the judicial complaint at filing or an explanation as to why the certificate is not attached. Within the law is a provision that allows a judge to either stay or dismiss judicial proceedings due to a failure to obtain the certificate, the result of which may be an award of prevailing party fees to the borrower. Further provisions of the law treat the violation of certain sections of the statute by a beneficiary as an unlawful trade practice under ORS 646.607.

SB 558 did not resolve the chain of assignments issue highlighted by the court of appeals in Niday. However, on June 6, 2013, the Supreme Court of Oregon published rulings in Brandrup v. ReconTrust Company and Niday v. GMAC. The decisions addressed issues that had arisen in Oregon over the past two years as to interpretation of the Oregon Trust Deed Act (OTDA). Particularly at issue in those cases was the ability of MERS to act as a beneficiary in the state of Oregon and whether any transfer of the note must be accompanied by a recorded assignment prior to the initiation of the nonjudicial foreclosure.

The court has ruled that transfers of the promissory note, because they are not in writing or executed and acknowledged with the same formality as deeds, are not the type of transfers that are required under ORS 86.735(1). Therefore, a recorded assignment would not be required to accompany this type of transfer to initiate nonjudicial foreclosure. The court also ruled that although MERS could not act as a beneficiary under the OTDA unless it had succeeded to the lender’s right to repayment, MERS could hold and transfer legal title to the trust deed if it could be shown that the original lenders and their successors conferred sufficient authority on MERS to act on their behalf.

An obvious question with the passage of SB 558 and the rulings of the Supreme Court is whether this new legislation helps mitigate concerns over the nonjudicial foreclosure process and whether beneficiaries may now feel comfortable returning to that process. The answer to this question remains unclear at this time. One of the lingering questions for the servicers, where MERS is involved in the chain of title, is how they will establish a clear authority to act such that MERS can transfer interests in the trust deed. The court left open the question of whether MERS can transfer interests in the trust deed through a clean showing of an agency agreement that would be sufficient to show that MERS acted through the direction and approval of the originating beneficiary and each successor in interest.

However, it is clear that no matter which process a servicer elects in order to foreclose, it will be required to comply with the mediation program requirements first.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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Mediation Updates from Four States: Washington

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Susana Davila
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

In July 2011, the Washington State Legislative enacted the Foreclosure Fairness Act (FFA) as an amendment to the Washington Deed of Trust Act, RCW § 61.24, which provides statutory guidance for nonjudicial foreclosure in Washington State. Among other changes to the Deed of Trust Act, the FFA provides seriously delinquent borrowers the opportunity to opt-in to a state-supervised foreclosure mediation program with the beneficiary of their loan, so long as that loan was secured by the borrower’s principal residence. The Washington Department of Commerce (Commerce) was tasked with developing and administering the foreclosure mediation program (the Program).

Soon after implementation of the Program, it became clear that the FFA required further amendments to address ongoing concerns of mediators, borrower advocates, beneficiary advocates, and representatives from Commerce. In late 2011 and early 2012, these stakeholders attended several legislative working sessions to begin drafting the proposed amendments. The amendments to the FFA were enacted via House Bill 2614 on March 29, 2012, nearly one year after the enactment of the FFA.

Amendments to FFA — One important amendment to the FFA was to provide all foreclosure mediators immunity from suit in any civil action based on any proceeding or other official act performed in their capacity as a foreclosure mediator, except in cases of willful or wanton misconduct. Initially, the FFA only provided immunity to mediators who were employees of a dispute resolution center, which is a statewide network of non-profit centers dedicated to mediation activities. This left out a large class of private mediators and attorneys, who had been approved and trained by Commerce to serve as foreclosure mediators. This particular amendment to the FFA was of paramount concern to private mediators, as some beneficiaries and borrowers would not agree to sign separate mediation agreements providing mediator immunity since the same was not contemplated by the legislature when it enacted the FFA.

Another noteworthy amendment to the FFA was the alteration of mediation process timelines. The statute originally provided that the borrower and beneficiary were to mediate within 45 days of the mediation referral, each providing the statutorily outlined disclosures to the other just ten days prior to mediation. However, the beneficiary’s receipt of the borrower’s disclosures ten days before the mediation session proved to be problematic because loss mitigation reviews often take much longer. As a result, mediation sessions held within the 45-day benchmark were largely unproductive since the loss mitigation review was either in progress or the beneficiary had not received a complete financial package from the borrower.

The legislature further amended the statute to require that borrowers provide required disclosures to the beneficiary 23 days after the mediation referral. Then, 20 days after receipt of the borrower’s disclosures, the beneficiary provides its required disclosures to the mediation parties. The amendment also increased the mediation session date from 45 days from referral to 70 days from referral. In theory, the alteration to the disclosure exchange timeline was to ensure the beneficiary had sufficient time prior to the mediation session to review the borrower’s complete financial package for loss mitigation options.

Delays Observed
— Amendments to the FFA became effective on June 7, 2012. Quickly thereafter it became apparent that the borrower’s 23-day deadline to produce a complete financial package to the beneficiary was rarely met. It was more likely for the beneficiary to receive borrower disclosures anywhere from 30 to 60 days from the date of the mediation referral. Although the FFA was amended to include a provision that mediators may cancel a scheduled mediation session if they reasonably believe a borrower will not attend a mediation session based on the borrower’s conduct, mediators rarely cancel a mediation session for lack of borrower disclosures. Typically, mediators will allow the borrower an extended period of time in which to produce the documents, much longer than the 23 days intended by the legislature.

The delay in borrower disclosures often causes mediation sessions to be scheduled later than 70 days from the date of referral. Because the beneficiary requires 30 to 45 days to review a complete borrower financial package, most mediation sessions are not held within the 70-day mark, but closer to 120 days. Contributing further to delay of the mediation session is the somewhat cumbersome financial documentation requirements for a loss mitigation review and a recent surge in service-transfers of loans. Preparation for mediation can become a long stream of beneficiary document requests and borrower’s production of additional documentation.

The statute originally required the borrower to produce minimal documentation showing the borrower’s current and future income, debts and obligations, and tax returns for the past two years. However, nearly all loss mitigation programs require a comprehensive financial package from a borrower in order for the beneficiary to review the borrower for applicable programs. The amendment expanded the borrower’s responsibility to provide a Home Affordable Modification Program application or equivalent financial worksheet, debts and obligations, assets, expenses, tax returns for the previous two years, hardship information, and other data commonly required by a federal mortgage relief program. This allows the beneficiary to receive a current and complete financial package for loss mitigation review.

Under the amendments to the FFA, mediators were also given the authority to unilaterally schedule a second mediation session, without agreement of the parties in the mediation. As a result, nearly all mediation referrals result in at least two mediation sessions. This amendment has further elongated the mediation process, and results in both borrowers and beneficiaries paying more fees to the mediator, as authorized by Commerce. The borrower and beneficiary evenly split a mediation fee of $400 for the first mediation session. A second session requires another $400 fee, evenly split. Moreover, a request for postponement of a scheduled mediation session comes at an additional cost to the parties, ranging anywhere from $50 to $100 and is largely borne by the requesting party. The statute only dictates that a mediator may charge “reasonable” fees authorized by the statute and Commerce. The initial fee cannot exceed $400; however, additional fees incurred from second sessions and postponement fees are inconsistent amongst mediators, but are allowable because these fees have been determined “reasonable” by Commerce.

The average foreclosure mediation referral costs the beneficiary $500 for mediation fees alone. Additionally, the beneficiary incurs attorneys’ fees for in-person mediation representation, nonjudicial foreclosure costs, and a “foreclosure tax” implemented by the legislature of $250 for each notice of default issued by the beneficiary. Thus, once the borrower opts-in to foreclosure mediation, the nonjudicial foreclosure process is no longer an economical and expeditious route for foreclosure in Washington. Judicial foreclosure remains an option and would allow beneficiaries to avoid mediation altogether; however, Washington’s one-year redemption period is seen as an obstacle to beneficiaries choosing this path.

Commerce’s Annual Report to the Legislature — The statute tasks Commerce with preparation of an annual report to the legislature on the performance of the Program, the results of the Program, and recommendations for changes to the Program. In December 2012, Commerce published the first of these reports, chronicling the performance of foreclosure mediation from July 2011 to June 2012. As of June 30, 2012, a reported 1,655 mediation referrals were received by Commerce; of those, 579 cases had been closed and certified by a mediator. The remainder of them was either still pending at the time the report was published or was found to be ineligible for mediation.

It is difficult to quantify the success of the foreclosure mediation program. In many instances, the beneficiary and borrower reach an agreement prior to mediation. Of the 579 mediated cases reported by Commerce:

  • 113 resulted in agreements where the borrowers stayed in their home, through either modification of the loan, repayment of the arrears, or reinstatement of the loan;
  • 78 resulted in agreements reached where the borrowers did not keep their home — such as a pre-foreclosure sale, deed-in-lieu of foreclosure, or cash for keys;
  • 272 reached no agreement;
  • 116 mediations did not occur. The primary reasons for this include the parties reaching agreement prior to the scheduled mediation, voluntary withdrawal by the borrower from the mediation, or failure of one of the mediation parties to participate in the mediation process.

The data presented by Commerce indicates that the Program has resulted in a significant number of agreements reached in mediation, although it remains unclear if the agreements were reached as a result of the Program, or if they would have come to fruition without it.

Good Faith and Risk of Litigation — Another requirement of the Program is that mediators certify the result of the mediation itself, forcing mediators to determine if the parties mediated in good faith. The statute provides that a violation of the duty to mediate in good faith may include failure to timely participate in mediation without good cause; failure to provide the required disclosures before mediation or pursuant to the mediator’s instructions; failure of a party to designate a representative with adequate authority to fully settle, compromise, or otherwise reach resolution in mediation; or a request by the beneficiary that the borrower waive future claims he may have in connection with the deed of trust as a condition of agreeing to a modification.

The statute enumerates specific reasons a mediator may find that a party failed to mediate in good faith. However, Commerce has provided guidance to the mediators that they have “reasonable discretion” to find a party failed to mediate in good faith and the enumerated reasons are not an exclusive basis for the mediator to find a party failed to mediate in good faith. Important to note is that borrowers are largely not found in bad faith for failing to provide their financial package on time as required by statute. Out of 579 mediated cases, beneficiaries were found to have failed to mediate in good faith in 28 cases and borrowers were found to have failed to mediate in good faith in 53 cases. There is no statutory legal consequence to a finding that the borrower failed to mediate in good faith. Conversely, the failure of a beneficiary to mediate in good faith constitutes a defense to the nonjudicial foreclosure action and is a per se violation of the Washington Consumer Protection Act (CPA), RCW § 19.86. A violation of the CPA subjects the beneficiary to treble damages of an unknown sum to be determined at trial. However, it remains to be seen how a court would quantify damages from a beneficiary’s failure to mediate in good faith, especially because the statute protects the mediator from being called as a witness in a court proceeding arising out of a foreclosure mediation.

Conclusion — As Washington approaches the end of the second year of the Program, and the conclusion of the first year since the statute was amended, it is clear that foreclosure mediation successfully brings parties together to try to reach a mutually acceptable alternative to foreclosure. However, the Program is also not without significant cost and delay to the beneficiary. Further, to the extent that mediated cases result in a higher than average rate of litigation, beneficiaries must evaluate whether participation in the Program continues to be viable.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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Minnesota: GSEs Exempt from Deed Transfer Tax

Posted By USFN, Thursday, August 1, 2013
Updated: Tuesday, November 24, 2015

August 1, 2013

 

by Greta Burgett
Wilford, Geske & Cook – USFN Member (Minnesota)

Hennepin County, the highest populated county in the state of Minnesota, has jumped on the bandwagon led by other counties throughout the nation in filing suit against Fannie Mae and Freddie Mac for failing to pay Minnesota’s state deed transfer tax. Hennepin County filed the action in August of 2012, seeking a declaration from the federal district court that Fannie Mae and Freddie Mac are not exempt from payment of deed transfer taxes upon the sale or conveyance of real property. The county also sought to recoup millions of dollars in deed transfer taxes for past-transferred properties. Further, the suit requested an injunction prohibiting Fannie and Freddie from violating the deed transfer tax payment obligations in the future.

Minnesota law provides that when any real property is conveyed and the consideration for such is over $500, the deed transfer tax is .0033 percent of such amount. Minn. Stat. § 287.21 subd. 1 (2012). Hennepin County has some extra skin in the game due to a 1997 act by the Minnesota Legislature that allowed it (and neighboring Ramsey County) to collect an additional .0001 percent of the net consideration on a deed conveyance as a means to supply environmental response funds.

On March 27, 2013, the federal court in Minnesota granted Fannie Mae and Freddie Mac’s motion to dismiss. In the order, the court agreed that the GSEs are protected by 12 U.S.C. § 1723a (c)(2) and 12 U.S.C. § 1452 (e), respectively, which state that the entities are exempt from current or future taxation imposed by any state or municipal authority. The court held that Fannie Mae and Freddie Mac are further protected by a Minnesota statute, which creates an exception to the deed transfer tax when “the United States or any agency or instrumentality thereof is the grantor …” Minn. Stat. § 287.22 (6) (2012).

In applying a “plain language” interpretation of the federal statute, the court ruled that the wording of the statute includes the term “all taxation,” evidencing an intent to permit no unenunciated exceptions. Additionally, the court reasoned that the federal exemption statute contains a carve-out for property tax payments but declined to include a carve-out for the deed transfer tax. The court further stated that when Congress provides exceptions in a statute, it doesn’t follow that courts have authority to create others. Based on those precedential statements of the law and a “textual analysis” of the federal exemption statute, the court ruled that Fannie Mae and Freddie Mac are exempt from the local county deed transfer tax.

The district court’s ruling is parallel to the Sixth Circuit Court of Appeals’ decision in County of Oakland v. Fed. Housing Fin. Agency, Nos. 12-2135/2136, 2013 U.S. App. LEXIS 10032; 2013 Fed. App. 0142P (6th Cir. 2013). (The Sixth Circuit encompasses Kentucky, Michigan, Ohio, and Tennessee.) Despite the similar outcome, Hennepin County has noticed its appeal to the U.S. Court of Appeals for the Eighth Circuit.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update.

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Minnesota: New Foreclosure Legislation

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

Minnesota’s 2013 legislative session ended on May 20 with the passage of a new foreclosure bill that imposes mandatory loss mitigation obligations on servicers, prohibits dual tracking, and exposes the industry to significant litigation risk for failing to fully exhaust all available options.

The legislation was designed to create a cause of action under state law, allow a mortgagor to enjoin or set aside a foreclosure sale for violations of the new statute, and a prevailing borrower is entitled to recover attorney fees and costs. Minn. Stat. § 580.043 will likely delay some foreclosures, but the increased risk of lawsuits will stand out as the most significant change to Minnesota’s nonjudicial foreclosure process. A last-minute revision to the bill applied it to judicial foreclosures as well as nonjudicial proceedings.

Housing advocates will now gain a strong tool to penalize servicers for a failure to comply with the CFPB final mortgage servicing rules in Regulation X. The new statute has some differences from the CFPB regulations that will make compliance more challenging and uncertain in Minnesota. Legal Aid and other housing advocates pushed for the legislation after a version that included mandatory mediation failed earlier in the session. The loss mitigation requirements are effective August 1, 2013, and the dual-tracking prohibitions will be effective on October 1, 2013.

The law requires a servicer to notify a mortgagor in writing of available loss mitigation options, facilitate the submission and review of loss mitigation applications, offer loss mitigation options if the mortgagor is eligible, and comply with any appeal period applicable to the loss mitigation option. Minnesota courts will likely need to resolve the ambiguities created in § 580.043 and certain to arise in practice, including the extent to which a servicer must assist a borrower in completing a partial application. The new statute may prove challenging for the unwary servicer. The best practice for servicers may be to halt a foreclosure proceeding once a borrower speaks up to inquire about loss mitigation, even if the borrower fails to cooperate thereafter, or fails to provide a complete application. In limited instances, it might be appropriate for a servicer to postpone a scheduled foreclosure sale while exhausting loss mitigation alternatives.

The law also bans dual tracking, which means a servicer must not refer a matter to a foreclosure attorney, or must halt a commenced foreclosure, while negotiating a loan modification. Small servicers (5,000 or fewer mortgage loans) are exempt from most requirements.

On the positive side, a deadline is imposed for a mortgagor to commence litigation for violating the statute. A failure to record a lis pendens before the end of redemption creates a conclusive presumption that the servicer complied with loss mitigation obligations. However, certainty about litigation risks won’t be known until Minnesota’s six-month redemption period expires without the legal challenge.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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Mirror Mirror on the Wall Which Rules Offer the Greatest Consumer Protection of All?

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

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

The Spring 2013 issue of the USFN Report offered an overview of the Consumer Financial Protection Bureau’s Mortgage Servicing Rules (CFPB Rules), specifically Regulation X sections 1024.39 and 1024.40. This follow-up article will compare the loss mitigation portion of the rules in section 1024.41 with their California and Washington counterparts. Where the state laws offer greater consumer protection, the CFPB Rules do not preempt them. With so many layers of regulation governing loss mitigation, one almost wishes for a crystal ball or a magic mirror. Since no authority has determined which of the regulations — state or federal — offers greater consumer protection, the challenge lies in reconciling or aggregating the two.

Uniformity Absent Preemption Equals … Aggregation?

In the midst of myriad regulations, the CFPB aims to standardize loss mitigation procedures with its own rules. The concept of standardization evokes a sense of supremacy or preemption. After all, can uniformity be achieved without preemption? If the CFPB Rules preempted the field of loss mitigation, the world of regulatory compliance would be an easier one. That, however, is not the case. The rules do not preempt the field of loss mitigation if a state (or federal law) offers greater consumer protection.

Who decides which set of regulations offers broader consumer protection? Can the determination be made at a general level or must it be made at a detailed step-by-step level? Are the servicers and their counsel left to venture a guess? The practical result of the lack of absolute preemption appears to be an aggregation of the CFPB Rules and the state counterparts for compliance purposes.

Before Starting a Foreclosure

Perhaps the greatest impact of CFPB’s loss mitigation rules will be felt early in the default stage. CFPB makes it clear that a servicer subject to section 1024.41 is prohibited from making the first notice or filing required for a judicial or nonjudicial foreclosure process unless a borrower is more than 120 days delinquent. In addition to the 120-day prohibition, the CFPB Rules prohibit pre-foreclosure dual tracking. If a borrower submits a complete loss mitigation application (defined as an application in connection with which a servicer has received all of the information that the servicer requires from a borrower), before a servicer has made the first notice or filing, then a servicer is prohibited from making the first notice or filing unless:

  • Servicer has sent written notice that the borrower is not eligible for any loss mitigation option and the appeal process is not applicable; the borrower has not requested an appeal, or the borrower’s appeal is denied;
  • The borrower rejects all loss mitigation options offered by servicer; or
  • The borrower breaches a loss mitigation agreement.

During the Foreclosure Process
After a servicer has started the foreclosure process by making the first notice or filing, the CFPB Rules impose another set of timelines and prohibitions. A servicer’s obligations differ depending on when during the foreclosure process the borrower applies for loss mitigation. For this portion of the rules, a flow chart will prove a handy tool to track the various timelines and obligations.

If a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, the servicer shall review and determine whether the application is complete. Within five days of receipt, the servicer shall send a notice to the borrower acknowledging receipt, a determination of whether the application is complete and, if incomplete, list the additional material the borrower needs to submit. This notice has specific time requirements in that it must state the borrower should submit the documents and information necessary to complete the application by the earliest remaining date of:

  • The date by which the document or information already submitted will be considered stale;
  • The date that is the 120th day of the borrower’s delinquency; or
  • The date that is 38 days before a foreclosure sale.

“Complete Loss Mitigation Application” Review
Under CFPB Rules, if a servicer receives a “complete loss mitigation application” more than 37 days before a foreclosure sale, then within 30 days of receipt, a servicer shall evaluate a borrower for all loss mitigation options available, and provide the borrower with a written notice of determination.

If a borrower’s complete application is denied for a trial or permanent loan modification (only), a servicer shall send a written notice of denial, stating the specific reasons and offering an appeal period. Depending on how many days before the sale a complete application is received, a servicer may require that a borrower accept or reject an offer within a certain number of days (7 or 14 days). A borrower’s failure to timely accept may be deemed a rejection of the offer.

The Foreclosure Sale Itself

After the first notice or filing required to start the foreclosure process is made, if a borrower submits a complete loss mitigation package, the CFPB Rules do not impose a “hold” on the foreclosure, but merely prohibit conducting the sale, or moving for a foreclosure judgment or order of sale. In other words, once the foreclosure has started, application review and foreclosure can proceed concurrently, so long as the sale is not conducted or the foreclosure judgment or order of sale is not obtained.

If a borrower submits a complete loss mitigation application after foreclosure has started, but more than 37 days before a foreclosure sale, a servicer shall not move for foreclosure judgment or order of sale, or conduct a foreclosure sale, unless:

  • The servicer has sent a written notice that the borrower is not eligible for any loss mitigation option and the appeal process is not applicable; borrower has not requested an appeal, or the appeal has been denied;
  • The borrower rejects all loss mitigation options offered; or
  • The borrower breaches a loss mitigation agreement.

The CFPB Rules provide for an appeal process only for a denial of a loan modification and not for denial of a short sale or deed-in-lieu. Significantly, the rules only require a servicer to comply with Section 1024.41 for a single complete loss mitigation application.

Turning to California’s Homeowner Bill of Rights (HBOR)

Since the CFPB Rules do not absolutely preempt, compliance needs to occur somewhat within a framework of conjecture. No governing authority has determined as between the CA HBOR and the CFPB Rules: which one offers greater consumer protection? The challenge, therefore, lies in reconciling or combining the two layers of regulation. In a general sense, the CFPB Rules provide for wider coverage and greater clarity than HBOR for the following reasons:

  • The CFPB Rules govern both judicial and nonjudicial sales, while HBOR only applies to nonjudicial sales;
  • The CFPB Rules apply to “Loss Mitigation Application,” whether complete or incomplete. HBOR focuses on a “complete loan modification application;”
  • The CFPB Rules provide for definite timelines and a servicer’s obligations differ depending on when in the foreclosure process a loss mitigation application is received. HBOR does not provide for timelines except in case of an appeal, and does not contemplate proximity to a sale date and the different scenarios based on that proximity.

While the CFPB Rules have a more expansive coverage and provide for greater certainty and clarity, HBOR has a narrower scope, is on occasion more stringent and, more often that not, uncertain. HBOR is greatly focused on loan modification, as opposed to a short sale or deed-in-lieu (DIL). California Civil Code § 2923.6 and § 2924.10 specify in detail the protocol for processing a loan modification application, while short sales and deeds-in-lieu (DIL) are scarcely covered in Civil Code § 2924.11, and the coverage is ambiguous. For example, where a complete application for a loan modification triggers a hold on the foreclosure process, an incomplete application or an application for a short sale or DIL does not trigger a hold. The trigger for a hold in case of short sale is so vague as to require guesswork.

Under HBOR if a borrower submits a complete loan modification application, the foreclosure process has to go on-hold — meaning the next major step, such as recording a notice of default or notice of sale, cannot be taken pending review and any appeal. This prohibition on dual tracking is more stringent than the CFPB Rules, where once a foreclosure has started permit reviewing an application and concurrently proceeding with foreclosure, while merely prohibiting the conduct of the sale itself or obtaining a judgment or order of sale.

Additionally, HBOR is more stringent because, unlike the CFPB Rules, it permits duplicative requests and does not limit a servicer’s obligation to review a borrower for loss mitigation to only once. A borrower may submit multiple loan modification applications, and a servicer is obligated to evaluate them if there has been a material change in the borrower’s financial circumstance since the last evaluation.

Likewise, where the CFPB Rules streamline the evaluation process by requiring a servicer to evaluate a borrower for all available loss mitigation options at once, based on a single application received, HBOR has no such concept. In sum, since the CFPB Rules do not preempt, the two layers of regulation need to be aggregated.

A Look at Washington State’s Consumer Loan Act
Washington’s Department of Financial Institutions (DFI), the agency that regulates state-licensed mortgage servicers, promulgated rules based on the National Mortgage Settlement back in 2012. Due to imprecise drafting of the rules related to loss mitigation, for the purposes of this article, it will be assumed that DFI intends for its loss mitigation rules to apply, if a servicer isn’t otherwise required to follow HAMP or GSE program guidelines1. There are a few notable differences in Washington state regulation that are likely to cause dual compliance burdens on state-regulated servicers covered by the CFPB Rules.

The Washington rules prohibit a servicer from referring a loan to foreclosure if it has a complete loan modification application from the borrower. Under the CFPB Rules, there is no prohibition on when a loan may be referred to foreclosure, but rather those rules restrict the first notice or filing activity itself, not the referral or the engagement of foreclosure counsel.

In Washington, it isn’t clear whether the borrower can submit a complete loan modification application fewer than 15 days before the foreclosure sale and have that submission stop the foreclosure sale. Section 208-620-900(6)(a)(vi) seems to indicate an automatic restraint on sale no matter how close the loan is to the foreclosure. However, the section states “see (a)(viii) and (ix),” and subsections (viii) and (ix) provide the borrower a review if the loan modification application is received up to 15 days prior to sale. Subsection viii covers the cases referred prior to 37 days before the sale and subsection (ix) covers those receiving expedited review for loan modification application receipt between 37 and 15 days prior to sale. Do these two subsections restrict the right of the borrower to claim a sale restraint? To add to the confusion, the CFPB Rules only provide the borrower with the right to a sale restraint if the complete loan modification application is submitted within 37 days prior to the foreclosure sale.

Regardless of how servicers choose to adopt these competing interpretations, foreclosure counsel and trustees should prepare to ask servicers to confirm whether a completed loan modification application is pending before going to sale. Best practice might be to check at day 37 prior to sale, day 15 prior to sale, and again the day before sale.

CFPB’s Implementation Plan
While a much-needed magic mirror is currently unavailable for compliance purposes, The CFPB does offer an implementation plan designed to provide support in the months preceding the January 10, 2014 effective date. Servicers, trustees, and legal counsel can access CFPB’s resources for support at http://www.consumerfinance.gov/regulations/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-in-lending-act-regulation-z-mortgage-servicing-final-rules/.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

1 The Washington Consumer Loan Act rules distinguish between servicers who are obligated to follow HAMP and GSE mandates, and those who are not obligated to do so. If a regulated servicer is not using those programs, it isn’t clear what exactly they must do to comply with the Consumer Loan Act Rules. The provisions in WAC section 208-620-900(6)(a)(i)-(ix) outline requirements relating to the time frame for reviewing a complete loan modification application, the content of any denial notice, the time frame for allowing borrowers to correct application errors, and prohibitions on referring or proceeding to foreclosure while an application is pending. Sections 208-620-900(b)-(g) cover appeal procedures, documentation of any agreement, general provisions to require adequate staffing, and accessibility of short sale requirements. In the current format of the rules, subsections (6)(a)(i)-(ix) seem to only apply if there is no HAMP or GSE programs, and sections (6)(b)-(g) appear to apply to all state-regulated servicers, including those who have agreed to HAMP or service for the GSEs. It doesn’t appear to make sense to require servicers who have agreed to HAMP or to administer GSE programs to comply with half of the Consumer Loan Act rules regulating loss mitigation, especially when some of that portion are covered by those programs (appeal rights and documentation requirements for example).

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New York: Standing

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

Having been so regularly assaulted on this issue, lenders and servicers know that “standing” is perhaps the hot button issue in New York mortgage foreclosures. More than a few foreclosures have been dismissed where courts have determined that the foreclosing party did not hold the note and mortgage at the inception of the action, or for other infirmities leading to a finding of lack of standing. One issue on this point, though, has become well established: Under certain circumstances, the mortgage servicer can be the plaintiff in a foreclosure action even though it is not the holder of the mortgage.

Although this is recognized (albeit a bit obscure), consistent case law does not stop borrowers from trying to litigate the concept yet again, as confirmed by a recent case. [CW Capital Asset Management, LLC v. Great Neck Towers, LLC, 99 A.D.3d 850, 953 N.Y.S.2d 89 (2d Dept. 2012)].

Here, borrower executed and delivered a note and mortgage to CIBC, Inc. Various assignments and a pooling and servicing agreement (PSA) led the mortgage to Registered Holders J.P. Morgan Chase Commercial Mortgage Pass-Through Certificates, Series 2006 – CIBC 17 (the Trust), and Bank of America, N.A. (Bank of America) became the trustee for the Trust. The eventual plaintiff in the foreclosure (when the borrower defaulted) was CW Capital Asset Management, LLC (CW Capital) as the special servicer of the loan. Of course the borrower moved to dismiss the foreclosure on the ground that CW Capital as special servicer for Bank of America, as trustee for the Trust lacked standing.

The court denied the borrower’s motion because the required standards for a servicer to be a plaintiff were met. These were: (1) The complaint identified the Trust as the owner of the note and mortgage; (2) the action was maintained by CW Capital in its capacity as servicing agent and (3) in the PSA, Bank of America’s predecessor, the trustee for the Trust, had delegated to CW Capital the authority to act regarding the subject mortgage.

So, yes, when the noted requirements are complied with, the servicer can be the plaintiff in a mortgage foreclosure. This does not mean that defendants won’t cause servicers to incur time and money defending their ability to foreclose, but it does mean that the servicer will have been correct.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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New York: The Settlement Conference — What is Good Faith?

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

This has been an elusive and troublesome subject for mortgage servicers in New York, and so a new case that illuminates the definition is welcome. [Wells Fargo Bank, N.A. v. Van Dyke, 101 A.D.3d 638, 958 N.Y.S. 2d 331 (1st Dept. 2012)].

A settlement conference has been required for all home loan cases since 2010. While servicers are hardly opposed to finding a reasonable settlement path, these conferences are often delayed and add too many months to the already protracted foreclosure process. Borrowers’ defenders frequently blame servicers for not being ready for conferences. On the other side, however, servicers can attest to borrowers being unprepared or requesting numerous adjournments or suddenly needing counsel or new counsel, among a host of mishaps and other contributors to delay. In the meanwhile, the foreclosure simply cannot proceed to the next stage.

Compounding the delay aspect is the requirement [of CPLR § 3408(f)] that the parties conduct negotiations in good faith. But what precisely is that standard? Servicers are aware that those supervising the conferences are sometimes vociferous in demanding that servicers reduce the interest rate or forgive principal or extend the mortgage — or all of those aspects. Faced with possible penalties if a lack of good faith is found, servicers have sometimes been placed in an untenable position.

In the Van Dyke case, no less than ten legal services groups submitted friend of the court briefs, assaulting a servicer’s conduct at the settlement conference as a sham and supporting the borrower’s motion to dismiss the foreclosure for the asserted lack of good faith. Both the trial court and the appeals court disagreed, however, and the motion to dismiss was denied. One significant part of the ruling is that a foreclosing plaintiff is not required by the statute (CPLR § 3408) to offer a settlement.

While a mutually agreeable resolution to avoid the home being lost is a goal, the only requirement to meet that end is good faith, but sometimes the goal just is not financially feasible for either party. This is a very significant observation and verbalizes what foreclosing plaintiffs know to be true.

As to the facts in this particular case, the borrower contended that two-thirds of her income came from rental property. But she did not produce a lease, tenant affidavits, or bank statements to support her claim that rents had been collected for some years. Rather, the bank statements that were submitted covered a mere three months.

Therefore, the court held, it was not unreasonable for the servicer to decline to use the claimed rental income in a mortgage modification calculation. In any event, even if the rental income was includable, the borrower was still not eligible for the available modification.

Further as to defining “good faith,” the court ruled that contrary to the borrower’s contention, merely because the servicer declined to entertain a reduction in principal or interest rate does not establish a lack of good faith. The statute does not oblige the foreclosing plaintiff to make the exact offer the borrower wants. Failure to make that offer is not a lack of good faith.

Somewhat on the other side of the equation, the court also opined that compliance with the good faith mandate is not established simply by demonstrating the absence of fraud or malice on the lender’s part. Instead, good faith must be founded on the totality of the circumstances.

In the end, each case will remain fact intensive. Nevertheless, New York finally has some standards as guidance.

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July/August e-Update

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Ohio: Redemption at Tax Foreclosure

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Bill Purtell
Lerner, Sampson & Rothfuss, LPA
USFN Member (Kentucky, Ohio)

Ohio’s Fifth District Court of Appeals (Fifth District) has recently ruled that only a homeowner can stop a tax foreclosure once it is filed. [In re Foreclosure of Liens for Delinquent Taxes v. Parcels of Land Encumbered with Delinquent Tax Liens, 2013-Ohio-1400]. The county treasurer is under no duty to accept redemption of delinquent taxes from a lender or anyone other than the homeowner, even if the taxes are paid before a sale of the property occurs.

The case stems from an attempt by a lender to pay the delinquent taxes on a property being foreclosed by the county treasurer. The lender intervened in the foreclosure after a judgment was granted in favor of the treasurer, but before a sale of the property had occurred. The lender did not bid at the sale and the land was sold to a third party for $9,000. In an attempt to vacate the sale, the lender tendered funds to the treasurer in the amount of $6,000, representing the delinquent taxes and costs of the foreclosure. The treasurer rejected the funds and stated that the lender was not a “person entitled to redeem the land” under Ohio Revised Code 5721.25. The trial court overruled the treasurer’s objection and allowed the lender to redeem the property. The third-party purchaser of the property then intervened in the case and appealed the trial court’s decision that allowed the redemption.

The Fifth District reversed the decision of the trial court, holding that only the former owner of the property has the right of redemption. Further, this right is a nontransferable personal privilege. The lender argued that its mortgage allowed it to advance taxes on behalf of the homeowner, their borrower, and therefore it could stand in the shoes of the homeowner. The Fifth District found that the original owner had no desire to redeem the property, so the lender could not pay the taxes in order to cancel the sale. The Fifth District held that the only protection to a lender is to bid at the foreclosure sale to protect its interests.

Proper monitoring for a tax delinquency is more important than ever. The decision whether to advance funds to pay taxes must now be made before the tax foreclosure is filed, at least in the fifteen counties of the Fifth District. Most other counties will still allow a lender to pay the taxes to stop the foreclosure. It is critical that a lender file a timely answer to the tax foreclosure in order to preserve its lien, since there is no guarantee that the sale can be stopped by simply paying the taxes.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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Ohio: Two Recent State Supreme Court Rulings

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Rick DeBlasis & Amy L. Fogelman
Lerner, Sampson & Rothfuss – USFN Member (Kentucky, Ohio)

Summarized in this article are two recent decisions of the Ohio Supreme Court relevant to the mortgage servicing industry.

Anderson v. Barclay’s Capital Real Estate, Inc., 2013-Ohio-1933
In Anderson, two certified questions were before the Ohio Supreme Court:

1. Does the servicing of a borrower’s residential mortgage loan constitute a “consumer transaction,” as defined in the Ohio Consumer Sales Practices Act (OCSPA), R.C. 1345.01(A)?

2. Are entities that service residential mortgage loans “suppliers *** engaged in the business of effecting or soliciting consumer transactions,” within the meaning of the OCSPA, R.C. 1345.01(C)?

The court answered both questions in the negative. Specifically, the court decided that the “contractual relationship” in mortgage servicing is between the servicer and the financial institution that owns the loan. Even though the servicer may deal directly with the borrower, there is no “sale, lease, assignment, award by chance, or other transfer of a service to a customer,” as required under the Act.

The court also held that in order to be a “supplier” under the statute, one must “engage in the business of effecting or soliciting consumer transactions.” A mortgage transaction is between the borrower and the financial institution, not the mortgage servicer. The servicing relationship and activities didn’t cause the mortgage transaction to happen; therefore, the servicer did not qualify as a supplier.

Clark v. Lender Processing Services, Inc., 2013 U.S. Dist. LEXIS 80442
Clark was a class action brought in the Cleveland federal district court by plaintiffs-homeowners who were all subjected to foreclosures in Ohio state courts. The defendants were LPS Default Solutions; Lender Processing Services, Inc.; DOCX, LLC; and three Ohio law firms that conducted the foreclosures. The plaintiffs alleged that the defendants filed foreclosure suits against them, as well as a class of similarly-situated homeowners, on behalf of entities that lacked standing to initiate the foreclosures, whether because of allegedly forged or otherwise defective assignments or noncompliance with PSAs, in violation of the FDCPA and OCSPA. Resolving multiple motions to dismiss, the court rejected all of the plaintiffs’ claims, stating that because the plaintiffs were not parties to the contracts they sought to challenge, they lacked standing to attack them. Lack of standing to attack the transfer agreements equated with lacking claims under the FDCPA or OCSPA.

Further, in dismissing all OCSPA claims, the court: (1) joined a growing number of cases holding that when an attorney represents a financial institution that is exempt under the OCSPA, the attorney is also exempt from that statute; (2) recognized that the Ohio Supreme Court, in its Anderson decision (supra), ruled that transactions between mortgage service providers and homeowners are not “consumer transactions” under the OCSPA because there is no transfer of an item of goods, a service, a franchise, or an intangible, to an individual; and (3) agreed “with Defendants that nothing about the definition of ‘supplier’ under the OCSPA supports the conclusion that those who provide services to financial institutions in connection with foreclosure of delinquent mortgages are ‘suppliers’ for purposes of the statute.”

© Copyright 2013 USFN. All rights reserved.
July/August e-Update

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Rhode Island: Avoid Sanctions by Appropriately Preserving E-Stored Information

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Paul M. Kessimian, Christian R. Jenner, and Christopher M. Wildenhain
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

A 2013 ruling from the Rhode Island Superior Court illustrates the necessity of preserving potentially relevant information in the face of pending or threatened litigation, and the harsh consequences that can result from a party’s failure to comply with its preservation obligations.

In Berrios v. Jevic Transportation, Inc., No. PC-2004-2390, 2013 WL 300889 (R.I. Super. Jan. 18, 2013), the presiding justice considered multiple motions seeking sanctions against two of the defendants in the case for alleged “spoliation” (i.e., loss or destruction) of evidence. The court concluded that spoliation had, in fact, occurred and imposed sanctions on both defendants that had been accused of spoliation.

In Berrios, the plaintiff asserted claims arising out of the alleged wrongful death of her infant daughter, who was a passenger in a school bus when it collided with a tractor-trailer. The two defendants accused of spoliation were the owner of the tractor-trailer and the owner of the school bus, who had asserted cross-claims against each other for contribution. The court found that the tractor-trailer owner, despite being on notice of potential litigation almost immediately following the accident: (1) allowed its internal emails from the time of the accident to be deleted pursuant to its document retention policy; (2) failed to retain current litigation and anticipated litigation documents in violation of an order from a federal bankruptcy court; and (3) did not download electronic data from the tractor-trailer involved in the collision, despite a regular practice of doing so. The court also found that the school bus owner, which was on notice of potential litigation almost immediately following the accident, despoiled internal emails when its vice president of safety allowed his laptop to “crash” without backing up his email.

In reaching these conclusions, the presiding justice noted that the tractor-trailer owner had failed to implement a “litigation-hold” protocol (i.e., a notice issued in anticipation of a lawsuit), ordering employees to preserve documents and other materials relevant to the lawsuit. The court cited to federal precedents holding that once a party is on notice of potential litigation, it is under an affirmative duty to suspend its routine document retention policy and put in place a protocol to ensure the preservation of relevant documents and electronically stored information (ESI).

As the court noted, the failure to institute and implement such procedures upon receiving notice of possible litigation may result in sanctions against the offending party, which can seriously impede the party’s ability to defend itself. In this respect, the Berrios decision is consistent with prior decisions issued by the presiding justice regarding a party’s duty to preserve documents and ESI. See Brokaw v. Davol, Inc., Nos. PC 07-5058, PC 07-4048, PC 07-1706, 2011 WL 579039 (R.I. Super. Feb.15, 2011) (recognizing a “general preservation rule” of preserving ESI when a party receives knowledge of possible litigation).

In Berrios, the court concluded that the despoiled evidence was important to the case and that its destruction severely prejudiced other parties. Thus, the court found it appropriate to “levy heavy sanctions against” the tractor-trailer owner. She ordered that certain expert testimony be excluded at trial, and also that the jury be instructed that it may infer that the destroyed evidence was unfavorable to the spoliating party. The court also ordered a similar jury instruction as to the school bus owner. The court reserved the issue of costs and attorneys’ fees until after trial, leaving open the possibility of further sanctions.

Thus, the Berrios decision illustrates that severe consequences can befall litigants who fail to take steps to preserve materials potentially relevant to litigation. Although the Berrios court chose to exclude certain evidence and make adverse inference instructions, sanctions for spoliation can run the gamut from the ultimate penalty of dismissal of one’s action or claim to an award of attorneys’ fees.

To avoid sanctions, it is critical for potential litigants to take affirmative steps — including implementing litigation holds — to ensure that preservation occurs in a timely fashion, that the preservation protocols are communicated to employees and agents, and that potential custodians understand and comply with those protocols.

© Copyright 2013 USFN and Partridge Snow & Hahn, LLP. All rights reserved.
July/August e-Update

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Colorado 2013 Legislative Session

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Cynthia Lowery-Graber
The Castle Law Group, LLC
USFN Member (Colorado, Wyoming)

The 2013 Colorado legislative session proved to be busy and interesting, continuing the pattern of proposals in recent years to alter Colorado’s foreclosure process. The most monitored legislation for the lending industry was House Bill 13-1249, with the potential of significant impacts upon foreclosure practices in this state.

Colorado boasts a unique quasi-judicial public trustee system for foreclosures that avoids a lengthy and costly judicial proceeding. The public trustee system maintains neutrality by having a public official oversee the foreclosure process, in addition to affording due process to borrowers by providing an opportunity for a hearing in a limited court proceeding (the “Rule 120” proceeding) and requiring the lender to obtain a court order authorizing the foreclosure sale.

A foreclosure may be commenced by the holder of the original note or by a “qualified holder” as defined by statute. A qualified holder may commence a foreclosure with copies of the original loan documents in addition to a statement that the holder of the note is a qualified holder under Colorado statute. The ability of qualified holders to file a foreclosure with copies of loan documents has come under attack in Colorado’s last two legislative sessions. This year, HB 13-1249 proposed a requirement that the original note or copies of the note, including all indorsements or assignments, be required in every public trustee foreclosure in the state.

In addition, HB 13-1249 would have required legal oversight of loss mitigation and compelled all loan servicers to provide a “single point of contact” to any borrower who requests foreclosure prevention. The bill would have prohibited dual tracking by precluding the initiation of a foreclosure where a complete loss mitigation application is under review or, if the foreclosure was already commenced, that it be held in abeyance until a written denial of loss mitigation is provided. Current state law does not interfere with loss mitigation negotiations between a borrower and a lender or with existing federal regulatory or settlement guidelines.

Finally, HB 13-1249 sought to supplement the Rule 120 process by requiring the movant to affirmatively prove that it is the holder of the evidence of debt at the commencement of the case. Current law allows this issue to be raised by a response filed by the borrower at the Rule 120 hearing. In the event the court denied the movant’s request for an order authorizing sale, the bill prohibited the movant from filing a new Rule 120 case for at least six months and only with new and/or different evidence in support of a subsequent request for an order. Lastly, the bill precluded the movant from charging attorneys’ fees and costs in a subsequent judicial foreclosure if it was unsuccessful in obtaining a court order in the Rule 120 proceeding.

The hearing on HB 13-1249 lasted approximately three hours. Multiple borrowers and other supporters of the bill testified as well as representatives from the lending community and legal experts. While borrowers offered emotional testimony regarding their desires to avoid foreclosure, many other persons addressed the inconsistencies contained within the proposed legislation, in addition to the lack of necessity for a sweeping overhaul in a state that has a lower foreclosure rate than most. Ultimately, the bill was defeated soundly in committee by a bi-partisan vote. Despite this bill’s unsuccessful attempt to modify the public trustee process, many borrowers and advocates continue to attack the existing process as a means to challenge the foreclosure. Given the continued scrutiny of the process, the lending community should keep a watchful eye for future legislation and cases addressing these issues in Colorado.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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BANKRUPTCY UPDATE First Circuit BAP: A Hybrid Ch. 13 Plan is Not Confirmable

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

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

The term “hybrid plan” is used to describe a Chapter 13 plan that modifies the balance of a secured claim by reducing the secured portion to the fair market value of the collateral (less any senior encumbrances) pursuant to Bankruptcy Code § 1322(b)(2) (this is commonly referred to as a “cramdown”), while also using § 1322(b)(5) to cure the pre-petition arrearage and maintain the regular monthly contractual payments beyond the life of the plan until the modified balance is paid in full. Because traditionally any modified claim must be paid in full during the life of the plan, but to propose the same with a mortgage claim would result in a plan payment not feasible for the debtor, a hybrid plan attempts to provide the debtor with a feasible plan that serves to accomplish a cramdown of the secured claim.

The origins of this type of plan, which is permitted in a significant minority of jurisdictions, seem to be in rulings from the Bankruptcy Court for the District of Massachusetts in the 1990s. In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994); In re Brown, 175 B.R. 129 (Bankr. D. Mass. 1994); In re Murphy, 175 B.R. 134 (Bankr. D. Mass. 1994).

On July 24, 2012, a Massachusetts bankruptcy court decided In re Bullard, 475 B.R. 304 (Bankr. D. Mass. 2012) and held that a “hybrid” Chapter 13 plan is impermissible pursuant to the terms of the Bankruptcy Code. The basis for the decision was twofold. First, the court held that the combined code provisions contained in the plan violated the prohibition on plans exceeding five years in duration contained in § 1322(d). Second, the court held that the plan failed to comply with § 1325(a)(5)(B)(ii), which requires the plan to distribute the allowed amount of the secured claim as of the effective date of the plan.

The Bankruptcy Appellate Panel (BAP) for the First Circuit granted the debtor’s motion for leave to appeal from the bankruptcy court’s order denying plan confirmation and affirmed the bankruptcy court’s order. However, the BAP used a different rationale that was not based on the § 1322(d) prohibition on plans exceeding five years or the provisions of § 1325(a)(5)(B)(ii). Instead, the court held that the hybrid plan proposed by the debtor was impermissible because, based on the provisions of § 1328(a)(1) and § 1325(a)(5)(B)(i)(I), modification of a claim pursuant to § 1322(b)(2) and the cure and maintenance of payments beyond the life of the plan pursuant to § 1322(b)(5) are mutually exclusive. This is because § 1325(a)(5)(B)(i)(I) provides that the secured creditor retain its “lien securing such claim until the earlier of — (aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328.”

However, since claims treated pursuant to § 1322(b)(5) are not dischargeable pursuant to § 1328(a)(1), the creditor retains its lien until it is paid the full amount of the entire debt secured by its lien on the subject property as determined by state law. Consequently, if a Chapter 13 plan seeks to cure a pre-petition arrearage and maintains the regular contractual payment regarding a secured claim, the plan cannot also seek to reduce the balance owed on said claim as determined by applicable state law.

While the BAP’s ruling in Bullard is not binding precedent, it has already had an impact. The U.S. Bankruptcy Court for the District of Rhode Island has stated that it intends to follow the ruling and will no longer confirm a hybrid plan over a creditor’s objection.

The debtor filed a notice of intent to appeal to the U.S. Court of Appeals for the First Circuit on June 19, 2013.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

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Are Your Procedures in Compliance with the Updated UCC Article 9?

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by Christopher J. Currier & Ryan W. Sawyer
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

Despite the lack of fireworks and fanfare, July 1, 2013, ushered in new changes to the Uniform Commercial Code, which are important to bankers, lenders, and legal practitioners. The revisions to UCC Article 9 (Article 9) relating to security interests in personal property have been enacted at present by 41 states, including Massachusetts, Rhode Island, and Delaware.

Unlike the 1998 revisions to Article 9, which were considered to be a major overhaul, the current amendments were designed to address practical issues that have arisen since July 1, 2001. For example, the revisions provide greater guidance regarding the name of the individual/business/trust debtor to be provided on a financing statement.

Naming the Business Debtor

Prior to the current revisions, UCC financing statements were required to set forth the business debtor’s name as it appeared in a “public record.” The definition of a “public record” was perceived to be too broad, as documents such as tax good standing certificates were relied upon to establish the validity of a business debtor’s name. The revisions now require secured parties to rely on the name of a business debtor as set forth in the organizational documents filed with the state or U.S. office where the debtor was formed.

Naming the Individual Debtor

The revisions have also amended the filing requirements as they pertain to individuals. Prior to the current revisions, no specific guidance was provided as to the precise name to use for an individual. This led to confusion and the need to search various iterations of a person’s name to determine if a filing had been made against him/her. The revisions to Article 9 provide two alternatives to determine a person’s name. Alternative A is referred to as the “only if” rule. Under this option the financing statement must state the debtor’s name as it appears on a current unexpired driver’s license or state-issued identification card. If the person has such a state-issued license/card, the filing is valid “only if” the name as it appears on the license/card is used. Alternative B is known as the “safe harbor” rule. This option provides that the financing statement may contain the debtor’s driver’s license name, individual name, or surname and first personal name. Most states, including Rhode Island and Massachusetts have adopted Alternative A.

Naming the Trust Debtor
The names of trusts in the context of financing statements have also been addressed by the Article 9 revisions. If the trust is registered with a state (such as Massachusetts Business Trust), the name on the financing statement must correspond with the name of record in that jurisdiction. If the trust is being administered by the personal representative of a decedent, then the financing statement must name the decedent as the debtor. If the debtor is a trust that is not a registered organization, such as a common law trust, then the financing statement must provide the name of the trust as specified in the trust documents and, if no such name exists, then the name of the debtor must correspond to the name of the settlor or testator. In cases where there are multiple settlors or testators, a secured party must file financing statements in each jurisdiction where such parties are located.

Debtor Move or Merger
Another significant change set forth by the revisions relates to after-acquired collateral when a debtor moves or a new debtor located in a new jurisdiction assumes the obligations of a former debtor (such as when a debtor merges into a new entity located in a new jurisdiction). Under the pre-2013 changes, a secured party has four months (in the case of a move) and one year (in the case of a new debtor (i.e., merger)) to continue its perfection in existing collateral by filing a new financing statement. These existing rules relate only to collateral that existed at the time of the move or merger. They do not address issues relating to collateral acquired after the move or merger.

New sections 316(h) and 316(i) of Article 9 provide that a financing statement is effective to perfect a secured party’s security interests in after-acquired collateral (such as inventory) obtained within four months after the debtor has changed jurisdictions (by way of a move or merger). A secured party must file in the new jurisdiction within the four-month window to maintain its perfection in the after-acquired collateral.

New Forms

The amendments also require the use of newly revised forms of financing statements. The amendments contain transition rules similar to the transition rules implemented in 2001, which will allow most secured parties to implement changes over time. Secured parties, however, may have to act more quickly to make necessary changes to any filings that are continued after July 1, 2013. Continued filings must comply with the new rules. In order to remain properly perfected, such filings may need to be amended before they are continued.

While these latest revisions to Article 9 are not as far-reaching as the 1998 amendments, secured parties such as banks must be aware of the new changes and adopt policies and procedures to comply with the new rules.

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New York: The Incessant Issues of Standing

Posted By USFN, Friday, June 7, 2013
Updated: Monday, November 30, 2015

June 7, 2013

 

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

The subject of standing will not go away. All of the publicity and controversies of recent years have energized borrowers to claim, almost as a matter of course, that the foreclosing party did not really own or hold the note before the action was begun, upon which basis it is asserted that the plaintiff lacks standing. While most often this will be an unfounded defense, lender/servicer miscues can provide defaulting borrowers with a ready-made defense. A recent case jarringly instructs. [Deutsche Bank National Trust Company v. Haller, 100 A.D.3d 680, 954 N.Y.S.2d 551 (2d Dept. 2012)].

The end result of this case was that summary judgment was denied the foreclosing party because it could not demonstrate standing, although as icing on the cake, nor could it prove that it mailed the (Fannie-Freddie uniform instrument) mandated thirty-day notice.

Helpfully, the court recited some standing concept basics. They are worthy of recitation here, certainly as an aid to appreciate the decision:


• Where standing is made an issue by a defendant, the plaintiff must prove its standing to be entitled to relief.

• A foreclosing plaintiff has standing when it is the holder or assignee of both the note and the mortgage at the time the action is commenced.

• The mortgage obligation is transferred either by written assignment or physical delivery of the note before the action is begun.


As readers will recognize, an assignment of the mortgage is usually and most readily accomplished and established by a written assignment. There was an assignment in this case and it was to the plaintiff, but signed by “Ameriquest Mortgage Company: by CitiResidential Lending, Inc. as attorney in fact.” No evidence was produced, though, as to Citi’s authority to sign the assignment. A power of attorney would have been fine, the court said, but none was produced. With the court finding a question of fact on the legitimacy of the assignment, it could not grant summary judgment.

Endorsement of the note to plaintiff could solve the problem but, while the note was indeed endorsed, the endorsement was undated. Therefore the court could not determine whether that had occurred before the foreclosure was begun. Thus, the servicer could not be rescued by this.

Of course, as noted, physical delivery of the note puts all this to rest. But that could not be proven either. Plaintiff’s servicing agent submitted an affidavit in support of the delivery assertion but offered no factual details about the physical delivery. Therefore, this too was insufficient to establish physical possession of the note before the action was begun.

So the mortgage holder failed in all of its attempts to demonstrate standing. It was thus required to go through time-consuming and expensive discovery, or a trial, or at the very least, another attempt at summary judgment. Avoiding this scenario suggests care in the assignment process.

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New York: Attorney Affirmation

Posted By USFN, Friday, June 7, 2013
Updated: Monday, November 30, 2015

June 7, 2013

 

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

Lenders and servicers know about the attorney affirmation needed in New York home loan foreclosures. A foreclosure action cannot proceed unless an affirmation by plaintiff’s counsel is submitted attesting to the accuracy of the plaintiff’s documents. The purpose of the affirmation was to assure courts that all was truly in order and that goal seemed reachable if attorneys had to join in swearing to the bona fides of the plaintiff. But it was not designed to become a trap to avoid the ability to foreclose, which in some instances it has. [Aurora Loan Services v. Sobanke, 101 A.D.3d 1065, 957 N.Y.S.2d 379 (2d Dept. 2012)].

This began as an ordinary case. The foreclosure was instituted; no defendant answered. (Thus there were no defenses.) There being no answers, the plaintiff submitted an order to appoint a referee — the usual next step. The court responded, however, stating that the order could not be considered, and no referee would be appointed, unless within sixty days the plaintiff submitted the “attorney affirmation.” The court also decided that if the affirmation were not filed within sixty days, not only would the order of reference be denied, but the complaint would be dismissed as well.

Experience suggests that for many reasons, it can be time-consuming to get the information necessary and locate the proper parties to prepare the attorney affirmation. It can be surmised that such is what occurred in this case and, facing some delay in being able to prepare the attorney’s affirmation, the plaintiff’s counsel took the rational step, prior to expiration of the court-imposed deadline, to withdraw its order of reference, to then allow it to obtain the information required for the affirmation. Instead of responding to the request to withdraw the order of reference, however, and just after the sixty-day deadline had passed, the court on its own volition ordered that the complaint be dismissed — with prejudice — and that the notice of pendency be cancelled. This all meant that the mortgage holder could never foreclose the subject mortgage, even though it was undeniably in default and no one had assaulted the legitimacy of the mortgage or the actuality of the default.

Upon appeal, the offending court order was reversed. The appellate court cited the rule that a court’s power to dismiss a complaint on its own volition must be used sparingly and then only when extraordinary circumstances exist to warrant dismissal of a case. (Citing U.S. Bank, N.A. v. Emmanuel, 83 A.D.3d 1047, 1048, 921 N.Y.S.2d 320).

Mindful of that principle, and finding that there were no extraordinary circumstances supporting dismissal of the complaint with prejudice and cancellation of the notice of pendency, the appellate court found the trial court to be in error. There was, it found, no delinquent conduct on the part of the foreclosing party’s counsel, nor was there any evidence of a pattern of willful noncompliance with court-ordered deadlines. Instead, the attorneys had simply requested an opportunity to withdraw the proffered order of reference within the sixty-day deadline so that time could be garnered to respond to the request for the attorney’s affirmation.

As it turns out, the plaintiff prevailed in the end — but at the cost of facing a shocking order and then being constrained to incur the costs and the time of an appeal.

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Minnesota Supreme Court Speaks Again on Foreclosure Proceedings

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

The Minnesota Supreme Court has issued its second significant decision during the recent foreclosure crisis. On April 17, the court ruled that “strict compliance” is required for at least one more provision of Minnesota’s foreclosure statute. Specifically, a foreclosing lender must record all assignments of mortgage prior to the date of the first publication (“first legal” in Minnesota).

The court reasoned that “section 580.02(3) requires all assignments of the mortgage to be recorded before the mortgagee has the right to engage in the process of foreclosure by advertisement.” Ruiz v. 1st Fidelity Loan Servicing, LLC, A11-1081, 829 N.W.2d 53 (Minn. 2013). The statute doesn’t expressly mention the first publication date as a deadline for recording assignments and, in fact, does not have a timing component for recording assignments. Yet, the court reasoned that the plain meaning of the word “requisite” as used was the equivalent of “pre-requisite,” which then implied a timing element.

Minnesota’s 15-year statute of limitations does support the court’s decision, since it deems the commencement of a nonjudicial foreclosure to be the date of the first publication of the notice of sale. Minn. Stat. § 541.03, subd. 2 (2012). It was already a best practice in Minnesota to record all assignments prior to the first publication date to protect against the uncertainty of a decision like Ruiz. Additionally, it was a best practice to prepare the notice of pendency prior to the assignment, record it with the assignment, and make sure the recording was completed prior to the first date of publication.

Interestingly, there are federal court decisions in Minnesota that suggest a borrower has no right or standing to contest a recording delay, at least with respect to the notice of pendency, which is expressly required to be recorded prior to the first date of publication. The assignment of mortgage question is now resolved in Minnesota, but much uncertainty remains for other procedures.

The Supreme Court chose not to address the notice of pendency issue or the case law applying “substantial compliance” to most foreclosure procedures. Minnesota does have ancient case law authority that requires only substantial compliance for some procedures, which, if recognized by the court, would have meant that procedural defects could only be challenged by a borrower who can show prejudice from the noncompliance.

In 2009, the Minnesota Supreme Court decisively ruled in favor of the MERS system and meticulously described how Minnesota’s foreclosure process allows the note and mortgage to follow separate and independent paths without interfering with the foreclosure process. Jackson v. MERS, 770 N.W.2d 487 (Minn. 2009). A foreclosing lender does not need to be the owner, holder, or party with contract rights to enforce a promissory note at any time during a foreclosure proceeding. Id. In this state’s nonjudicial process, a foreclosing lender simply must be the mortgagee of record prior to the first date of publication.

Upon receiving executed documents from a servicer, Minnesota attorneys typically send them immediately for recording and attempt to schedule the first legal for the next calendar day in that county. If the county recorder’s office fails to process all of its recordings as expected, however, or if there is a delay in the mail or messenger delivery, foreclosure counsel may find themselves in the Ruiz situation of failing to record prior to the first legal date.

When the Ruiz case first arose early in 2012, there were literally hundreds of cases throughout Minnesota impacted by the decision; i.e., assignments and notices recorded exactly on the first publication date. Most or all have been resolved by now, partly due to the operation of a curative statute, so the state Supreme Court’s decision should have little remaining impact on Minnesota’s current foreclosure volume.

Going forward, it is best for Minnesota attorneys to have adequate safety features in place to halt a first legal from going forward when there is a recording delay (a tough thing to know considering that some counties have delays of over two months in making recording data public). Law firms need to be able to run reports from their case management systems and take special precautions to spot inevitable recording delays before proceeding with the first legal.

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

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Kansas: Recent Appellate Decisions Involving Mortgage Foreclosures

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Robert E. Lastelic
South & Associates, P.C. – USFN Member (Kansas, Missouri)

The Kansas Court of Appeals recently handed down three published decisions involving mortgage foreclosures.

Prime Lending II, LLC v. Trolley’s Real Estate Holdings

Here, the appellate court held that it lacked jurisdiction when the trial court failed to make a proper express determination, as required by statute, that a judgment of foreclosure was final and that there was no reason for delay in the entry of judgment on that claim when other claims remained pending. Accordingly, it dismissed the appeal. However, a judicial sale already had been held with the property having been sold to a third party and, subsequently, the lower court having retroactively certified the judgment as final.

The appellate court thus faced two issues: (1) Was the retroactive order sufficient to make the judgment final? (2) If not, what was the effect on the judicial sale of the property? Because Kansas appellate courts have adopted and follow Federal Rule 54(b), in the absence of the required express determination that the judgment was “final” and that there was reason for delay in entering judgment, the appellate court held that the grant of summary judgment was not final. Therefore, no appeal could be taken from that judgment. Furthermore, the court found that the trial court had no discretion to retroactively make its decision a final judgment, nor was it possible to amend the previous order to include the required findings. Also, the appellate court declined to determine whether certifying the judgment as final at the later hearing would have resolved the jurisdictional problem.

As a result of the appellate court’s ruling, the validity or invalidity of the sale and the consequences of it are in issue and left to be determined in the trial court. [Prime Lending II, LLC v. Trolley’s Real Estate Holdings, 2013 WL 1786022 (Kan. Ct. App. Apr. 26, 2013)].

Bank of Blue Valley v. Duggan Homes, Inc.
In this case, the appeals court held that only through a foreclosure action can a senior lienholder strip the real property of known or recorded junior liens. After taking a deed-in-lieu of foreclosure from its borrower, without merger of the mortgages held by the bank into the title, the bank sought to foreclose its mortgages against junior judgment lienholders so as to clear title to the properties. The trial court held that the bank “simply desires to quiet title to the property” and granted judgment in favor of the bank quieting its title, even though such relief was not requested by the bank.

The appeals court reversed and remanded, holding that the trial court did not have the authority to convert the bank’s foreclosure action into a quiet title action and, even if it did, title to the real properties would not have been cleared in any event as Kansas statute only “extends the right to the property owner to quiet title against ... liens which have ceased to exist or which have become barred.” Furthermore, because the bank had abandoned its foreclosure action, any foreclosure issue was not before the court. [Bank of Blue Valley v. Duggan Homes, Inc., 2013 WL 1786013 (Kan. Ct. App. Apr. 26, 2013)].

U.S. Bank v. McConnell
In the third decision summarized here, the appeals court ruled that the bank was the holder of the note and was entitled to enforce both the note and the mortgage; that the McConnells’ claims that the bank violated the Kansas Consumer Protection Act (KCPA) were not substantiated by anything of evidentiary value; and that the wife of the borrower, by signing the mortgage, consented to alienation of the homestead and, therefore, that the mortgage was enforceable against her as well.

In this case, the mortgage was not assigned until after suit was filed. However, the note was held by the bank well before the foreclosure action was initiated. Therefore, the appeals court, citing prior Kansas cases and the Restatement (Third) of Property (Mortgages) 5.4(a), and following a discussion of cases from other jurisdictions, found that the mortgage followed the note and, accordingly, that the bank had “standing” to pursue the foreclosure action. As to the KCPA violations, the appellate court held that the McConnells failed to present any evidence that would create an issue of material fact regarding their KCPA claims and bar summary judgment in favor of the bank.

The McConnells also raised issues about MERS, the chain of title of the note and mortgage, the negotiability of the note, and alleged abuse of discretion of the lower court in not allowing additional discovery, as well as concerning an affidavit submitted by the bank in support of the bank’s motion for summary judgment, all of which the appeals court found were without merit and failed to establish a genuine issue of material fact that would preclude summary judgment. In addition, the McConnells asserted that the note and mortgage had been severed when the bank held the note and MERS held the mortgage, thus making the mortgage unenforceable. The court responded by saying that even if the note and mortgage were separated, it saw no impediment if the mortgage was transferred to the bank after suit was filed so long as the transfer occurred before the bank filed for summary judgment. But, the McConnells contended, MERS had no rights in the mortgage to assign. However, the court disposed of that argument by stating that MERS as a “nominee” was an agent of the lender while the bank held the note and, thus, there was no split and that to hold otherwise would be to create an unwarranted windfall “inconsistent with principles of equity” and contrary to Restatement (Third) of Property 5.4(c), Comment (e).

Finally, the McConnells claimed that the wife of the maker of the note did not consent to the impairment of her homestead rights because she did not sign the note or loan modification agreement. She did sign the mortgage, however, and the rights described in the Kansas homestead statute do not apply when both spouses consent to the mortgage lien on the property. Having failed to create a disputed issue for trial, the court held that summary judgment in favor of the bank was proper and, accordingly, the trial court decision was affirmed. [U.S. Bank v. McConnell, 2013 WL 1850755 (Kan. Ct. App. May 3, 2013)].

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Georgia Supreme Court Decisions Resolve Foreclosure Requirements

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Adam Silver, Kimberly Wright, Steven Flynn
McCalla Raymer, LLC – USFN Member (Georgia)

On Monday, May 20, 2013, the Georgia Supreme Court issued two important decisions clarifying lingering questions regarding the nonjudicial foreclose process in the state of Georgia.

Background — The Reese Case
The nonjudicial foreclose process in Georgia garnered considerable interest after the Georgia Court of Appeals decided the case of Reese v. Provident Funding Associates, LLP, 317 Ga. App. 353, 730 S.E.2d 551 (2012), interpreting a 2008 amendment to the nonjudicial foreclosure statutes to include the requirement that the “secured creditor” be included in the notice of foreclosure sale letter to the debtor (the pre-foreclosure notice). The language added by the 2008 amendment required, among other items, that an assignment to the secured creditor must be filed prior to the foreclosure sale, that the secured creditor send the pre-foreclosure notice to the debtor, and that the pre-foreclosure notice contain the name and contact information of the individual or entity with full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.

The 2008 amendments to the Georgia foreclosure statutes were made by the Georgia General Assembly in order to provide more transparency in the foreclosure process for the benefit of the debtor. See, e.g., O.C.G.A. § 44-14-162.2. In Reese, the Georgia Court of Appeals, citing this legislative desire for additional transparency, read an additional requirement into the statute that the “secured creditor” must also be identified in the pre-foreclosure notice. Id. at 355, 730 S.E.2d at 552. However, despite the legislature’s use of the term “secured creditor” in multiple places within the Georgia foreclosure statutes, the term “secured creditor” is not defined in the relevant provisions of the Georgia Code.

In Reese, the court held that the “secured creditor” must be identified in the pre-foreclosure notice, in addition to the entity or individual with the full authority to negotiate, amend, or modify the terms of the mortgage with the debtor. Id. at 359, 730 S.E.2d at 555. In dicta, the Reese court deemed to equate the term “secured creditor” with the “owner” of the loan, which created a substantial question of who is authorized to foreclose under Georgia law. Id. at 355-56, 730 S.E.2d 553. A petition for certiorari to the Georgia Supreme Court was filed on August 20, 2012.

More Background — The You Case
That question from Reese of whether the secured creditor must be named in the pre-foreclosure notice was certified to the Georgia Supreme Court by the U.S. District Court for the Northern District of Georgia in You v. JP Morgan Chase Bank, N.A, No. 1:12-CV-00202-JEC, Doc. 16 (N.D. Ga. 2012).

In You, the foreclosing entity was alleged to hold the security deed, but not the note. Further, the pre-foreclosure notice did not identify the holder of the note or the owner of the loan alleged by the plaintiff to be the “secured creditor.” The pre-foreclosure notice referred to the security deed holder, but without directly identifying that entity as the secured creditor. The U.S. District Court for the Northern District of Georgia, citing a split in authority, as well as the Reese holding, issued an order on September 7, 2012, certifying three questions to the Georgia Supreme Court:


1) Can the holder of a security deed be considered to be a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?
2) Does O.C.G.A. § 44-14-162.2(a) require that the secured creditor be identified in the notice described by that statute?
3) If the answer to the preceding question is “yes,” (a) will substantial compliance with this requirement suffice, and (b) did defendant Chase substantially comply in the notice it provided in this case?


Supreme Court Decides You & Remands Reese
In a well-reasoned opinion, the Supreme Court of Georgia answered the first certified question in the affirmative and the second certified question in the negative, rendering the third certified question moot.

First, the court concluded that a party initiating a nonjudicial foreclosure sale may exercise the power of sale clause in a security deed by virtue of holding the security deed without also being required to hold the note or possess any interest in the underlying debt obligation. Contract law primarily governs nonjudicial foreclosure sales in the state of Georgia. Therefore, the terms of the security deed determine the method by which a nonjudicial foreclosure sale may occur. Because the security deed specifically allows for a nonjudicial foreclosure sale in the event of default of the underlying loan obligation, the security deed, even without the note or an interest in the underlying debt obligation, provides standing to foreclose. Further, the You court stated, this determination is not at odds with the Georgia Uniform Commercial Code because the security deed, unlike the note, is not a negotiable instrument. Id. at p. 12.

Second, in deciding whether the secured creditor needs to be named in the pre-foreclosure notice, the Georgia Supreme Court looked to the plain language of the statute. The court determined that the secured creditor need not be identified in the pre-foreclosure notice. Id. at p. 15. In its analysis, the court relied on the unambiguous language of the statute, which requires only that the pre-foreclosure notice identify the individual or entity with the full authority to negotiate, amend, and modify the terms of the mortgage with the debtor. The court concluded that the statute does not include an additional requirement to identify the “secured creditor” in the pre-foreclosure notice. This determination rendered the third question regarding substantial compliance with any requirement to identify the secured creditor in the pre-foreclosure notice moot.

On the same day that the Georgia Supreme Court issued its opinion in You, the court also issued an order granting certiorari in the Reese case. The court’s order vacated the decision of the Georgia Court of Appeals and remanded Reese to that court for consideration in light of the Supreme Court’s decision in You.

While the state Supreme Court appears to have resolved the most significant outstanding and unresolved issues of Georgia law related to the nonjudicial foreclosure process, affected members of the financial community should use caution before changing any foreclosure processes and procedures that may have been modified in light of the Georgia Court of Appeals’ decision in Reese last summer. Further consideration of the practical ramifications of these decisions should be undertaken prior to making any such changes. Banks, servicers, and investors may also choose to review pending foreclosure litigation cases to determine whether any of them are subject to dismissal for failure to state a claim due to these recent decisions of the Georgia Supreme Court.

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California Supreme Court Rules on a Trustee’s Authority to Rescind a Sale

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

For those tracking case law on a trustee’s authority to rescind a sale, the month of May was thrilling. On May 16, 2013, the California Supreme Court issued a ruling in Biancalana v. T.D. Service Co., 2013 Cal. Lexis 4007. The decision not only addressed a trustee’s role and authority to rescind a sale, but also followed two dueling appellate cases, offering some clarity in the mist of existing uncertainty. The Supreme Court ruled that where a trustee discovered it had mistakenly communicated to the auctioneer an incorrect opening bid, which was less than ten percent of the lender’s specified bid, and the trustee had not yet delivered the deed, the trustee had discretionary authority to rescind the sale.

Facts & Procedural History

The facts of Biancalana are straightforward. The trustee took a property to sale in September 2008. The beneficiary communicated the specified opening bid of $219,105 to the trustee. The trustee mistakenly communicated the opening bid of $21,894.17 to its auctioneer. A third party purchaser bought the property for two dollars more than the opening bid. Two days after the sale the trustee informed the purchaser of the error, the need to rescind, and returned the purchase funds. The trustee refused to issue the trustee’s deed. The purchaser sued for quiet title. The trial court ultimately ruled in favor of the trustee. The purchaser appealed and the appellate court reversed and remanded. The trustee petitioned the Supreme Court, and the Supreme Court reversed the judgment of the Court of Appeal.

Existing Law & Dueling Appellate Cases
Ask a trustee counsel about a trustee’s authority to rescind a sale, and they are quick to recite two appellate cases: 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc., 85 Cal. App.4th 1279 (2001), and Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal. App.4th 804 (2009). There has not been a lack of case law on the topic, but the two contemporary appellate cases have been difficult to reconcile.

Existing law has held that gross inadequacy in price, coupled with irregularity in the sale procedure, is a sufficient basis for setting a sale aside. (See cases cited on page 10 of Biancalana). Difficulty arose because 6 Angels and Millennium interpreted “irregularity in the sale procedure” differently, resulting in uncertainty about the type of error that triggers the authority to rescind.

In 6 Angels the beneficiary submitted an incorrect opening bid to the trustee. Due to clerical error, the beneficiary communicated the bid as $10,000 instead of $100,000. The property sold to a third party for one penny over the mistaken bid. The 6 Angels court ruled that the beneficiary’s error was under the beneficiary’s control and arose from the beneficiary’s own negligence, and for that reason fell outside of the procedural requirements for a trustee sale described in the statutory scheme. The 6 Angels court upheld the sale.

Eight years after 6 Angels, the Millennium ruling issued. In Millennium the auctioneer mixed up two properties. The trustee had submitted the correct opening bid to the auctioneer at $382,544.46. The auctioneer, however, read a script that called out the trustee sale number and legal description for one property and the physical address and opening bid for a different property. Hence the auctioneer announced the incorrect opening bid of $51,447.50, instead of $382,544.46. Upon discovering the error, the trustee promptly informed the purchaser of the need to rescind and refused to issue a deed.

The Millennium court held that, unlike the error in 6 Angels, the auctioneer’s error created a fatal ambiguity as to which property was auctioned since there was inconsistency in the legal description, physical address, and the opening bid that was cried out. The Millennium ruling permitted a sale rescission.

Two years after Millennium, in 2011, the Biancalana appellate ruling sided with 6 Angels. The amount of the mistaken opening bid in both cases was 10 percent of the specified bid, so gross inadequacy in price existed. However, the 6 Angels court did not find that the beneficiary’s mistaken bid instruction constituted “an irregularity in the sale procedure,” and the Biancalana appellate court followed 6 Angels, even though the mistake in Biancalana was made by the trustee, in discharge of its duties, not by the beneficiary. Considering that a trustee needs to conduct the sale fairly and openly, uncertainty arose as to the circumstances under which a trustee could exercise its authority to rescind a sale.

Supreme Court’s Reasoning in Biancalana
The California Supreme Court focused on whether the trustee’s mistake was part of the foreclosure sale process, and decided that it was. Processing a submitted bid pursuant to Civil Code § 2924h is a key function of a trustee within the statutory framework. The error resulted in the auctioneer announcing a mistaken bid, which the court reasoned qualified as an irregularity occurring within the statutory foreclosure sale process. The court refused to impute the trustee’s error to the beneficiary as a trustee is not a true agent and only acts in a limited sense. The court further reasoned that since the trustee’s deed had not issued, the statutory presumptions had not attached, and the purchaser had not been prejudiced in any meaningful way by the trustee’s mistake and prompt rescission of the sale.

While the Supreme Court ruling clarifies to some extent the type of error that falls within the foreclosure sale process, it also offers an incentive for trustees to exercise due diligence in reviewing the sale and identifying any possible irregularity before issuing the trustee’s deed.

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The Cloud: Can it be Compliant?

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Shawn J. Burke
ServiceLink, FNF’s National Lender Platform – USFN Associate Member

This article is the third in a series aimed at taking 2012’s hottest buzzword and determining what it means for your business in 2013. Specifically, this segment will address the question of how (and if) you can be compliant when putting your business in the cloud.

Let’s just get to the heart of the matter. Yes. You can be compliant in the cloud.

You’d probably feel much better if I could put some substance behind that statement and not just ask you to trust me. I can. The first consolation being that I am using the cloud. Colleagues in the USFN, like NetDirector, provide a cloud-based service. Your auditors are probably using the cloud and may not even realize it. However, let’s see about addressing some of the standard concerns and increase your confidence level.

Remember “The Cloud” is just a term. Recently at a USFN seminar, I had the pleasure of facilitating a session on the cloud. One of the participants, who was obviously trying to decide whether they could be compliant in the cloud, revealed the following: They use co-location. It’s not a cool term, but frankly that’s a cloud. Clearly they could be compliant as they had been audited and passed. One could argue it’s a private cloud, or that co-location doesn’t have the full support of a hosting company (co-location means your IT people manage the systems) but, regardless, it’s not hosted in your operation — it’s “in the cloud.”

What makes everyone think the auditor is always right? A USFN member related a story about auditors stating that an attorney is required to “own the hardware.” The easy answer is you could absolutely own the hardware and have it in the cloud. Let’s have fun though and suggest something crazy — “the auditor is wrong.” That’s right, I said it. I’m not trying to be difficult, but the idea that ownership makes things more secure is silly. Why would anyone want to own hardware when you could lease it and upgrade before end of life? How can owning one piece of hardware be more reliable than being on a farm of hardware providing redundancy and scalability at a moment’s notice? Talk with your auditor. Find out “why” they have the requirement and look to see if you are meeting it in other ways. Quite possibly, you might have a level of understanding that they may have not had the opportunity to see before.

Finally, the most important thing I can say is that most technology companies are working in the cloud. Not just the providers like Microsoft, Amazon, or Salesforce, but most hardware appliance providers and software providers. Everyone knows the cloud is important and they need solutions that are secure and capable “in the cloud.” They want your business. They are listening to your concerns. They are responding. You can be compliant.

© Copyright 2013 USFN. All rights reserved.
June e-Update

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Connecticut: State Case Law Regarding Applicability of the PTFA

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

by Renee Bishop
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

In a recent decision by the Housing Session of the Superior Court of Connecticut, the court determined that the federal Protecting Tenants at Foreclosure Act (PTFA) does not apply to tenancies made in exchange for performing services. [Customer’s Bank v. Boxer, 2013 WL 1010747 (Conn. Super. Ct. Feb. 2013)].

The summary process action was the result of the plaintiff’s foreclosure of a mortgage. The defendants claimed to be in occupancy of the premises pursuant to a lease between the defendants and the former owner of the premises. Further, the defendants asserted that they were protected from the underlying eviction proceeding and were entitled to receive a 90-day notice to vacate under the PTFA. The defendants testified that they occupied the premises pursuant to an oral agreement with the prior owner and that they never paid rent to the prior owner or to the plaintiff, but had made repairs to the property in lieu of rent payments. The defendants did not provide evidence supporting the dates or amounts for repairs or expenditures allegedly made.

The PTFA is a remedial statute that is intended to protect only those persons who meet the definition of a bona fide tenant. The plaintiff argued that the defendants cannot be qualified as bona fide tenants since the Act specifically requires “receipt of rent” by the landlord. The PTFA does not define the phrase “receipt of rent.”

The court turned to Connecticut General Statute 47a-1(h), which defines “rent” as all periodic payments to be made to the landlord under a rental agreement. The court also cited the case of City of Norwich v. Shelby-Possello, 2012 Conn. Super. Lexis 1925, which held in pertinent part that under the PTFA, a lease or tenancy shall be considered bona fide only if the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property.

In conclusion, the court determined that “quid pro quo” or barter arrangements do not constitute receipt of rent under the PTFA or Connecticut General Statute 47a-1(h). Since it was admitted by the defendants that rent was never paid, the defendants cannot qualify for the protections of the PTFA.

© Copyright 2013 USFN. All rights reserved.
June e-Update

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Sixth Circuit Looks at the Collection of Transfer Taxes from GSEs

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013

 

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

A recent decision from the Sixth Circuit Court of Appeals should have far-reaching effects vis-à-vis attempts of state and local taxing authorities to collect real estate transfer taxes from Fannie Mae, Freddie Mac, and the Federal Housing and Finance Agency (federal entities). The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.

The case is County of Oakland v. Fed. Housing Fin. Agency, Nos. 12-2135/2136, 2013 U.S. App. LEXIS 10032; 2013 FED App. 0142P (6th Cir. 2013). The judicial opinion involves cases brought by the Michigan counties of Oakland and Genesee and their respective treasurers. [Oakland Cnty. v. Fed. Hous. Fin. Agency, 871 F. Supp. 2d 662, 2012 U.S. Dist. LEXIS 40099 (E.D. Mich. 2012), and Genesee Cnty. v. Fed. Home Loan Mortgage Corp., No. 2:11-cv-14971 (E.D. Mich. 2012)]. The Sixth Circuit reversed and remanded to the U.S. District Court for the Eastern District of Michigan its decision granting summary judgment in favor of the county taxing authorities, with instructions to enter judgment in favor of the federal entities.

On June 20, 2011, Oakland County sued Fannie Mae and Freddie Mac, alleging that they failed to pay transfer taxes for transactions in which they were the grantors of real property. Oakland County later amended its complaint to add the FHFA, which had intervened in the Oakland County action, as a defendant. On November 10, 2011, in a separate action, Genesee County filed a class action lawsuit against the federal entities on behalf of itself and all Michigan counties similarly situated.

Specifically, the county taxing authorities alleged that while Congress expressly exempted all three defendants from “all [state and local] taxation” ( See, 12 U.S.C. § 1723a(c)(2) for Fannie Mae; 12 U.S.C. § 1452(e) for Freddie Mac; and 12 U.S.C. § 4617(j)(2) for FHFA.), it did not intend to exempt them from real estate transfer taxes. The Michigan State Real Estate Transfer Tax, MCL § 207.521, et seq., and the Michigan County Real Estate Transfer Tax, MCL § 207.501, et seq. impose a tax when a deed or other instrument of conveyance is recorded during the transfer of real property.

In making its ruling, the Sixth Circuit used a common sense interpretation of the “all taxation” language and held that the “all taxation” exemptions encompassed real estate transfer taxes. “… [A] straightforward reading of the statute leads to the unremarkable conclusion that when Congress said ‘all taxation,’ it meant all taxation.” Additionally, the Sixth Circuit noted, “In granting each of the defendants’ an exemption, Congress explicitly created a carve-out from the ‘all taxation’ language by permitting taxes on real property. But Congress did not provide a similar carve out for the type of transfer taxes … here.” Presently, it appears that Oakland County will try to petition the U.S. Supreme Court for a writ of certiorari.

© Copyright 2013 USFN. All rights reserved.
June e-Update

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Wisconsin: Standing Upheld on Appeal

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

by Steven E. Zablocki
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Recently, two favorable decisions have been issued by the Wisconsin Court of Appeals. The decisions are unpublished and, therefore, of limited precedential value. However, they do show a decided shift in favor of lenders. Discussed in this article is the case of Household Finance v. Kennedy, 2011AP2658 (Wis. Ct. App. Mar. 5, 2013). The other case, CitiMortgage v. Hobach, 2012AP1462-FT (Wis. Ct. App. Feb. 13, 2013), was summarized last month in the April USFN e–Update. If you missed that article, you can view it here.

In Household Finance v. Kennedy, the defendants appealed an order denying a motion to vacate a foreclosure judgment. The initial judgment was granted by stipulation. Later during the redemption period, the defendants reviewed their mortgage documents and noticed “irregularities” in the documents attached to the complaint. The defendants alleged that because of these “irregularities” the plaintiff, Household, was not the holder in due course or the real party in interest. The defendants moved to stay the sale. The court deferred the motion and indicated that the issue could be dealt with at the confirmation hearing. The defendant could conduct informal post-judgment discovery.

Prior to the confirmation hearing, the defendants viewed the original note. At the confirmation hearing the court confirmed the sale. The court indicated that the defendants had the opportunity to review the original note and there was nothing in the record to suggest the note was ever assigned to a third party.

Thereafter, the defendants moved to vacate the judgment, alleging that the documents were the result of “robo-signers” and concealment was undertaken to hide the true beneficial owner. After a hearing, the court determined that no new evidence was submitted and denied the motion. That decision was affirmed on appeal, where the court of appeals agreed that no new evidence was submitted and the defendants’ challenges were appropriately denied.

The court had little patience for a defense predicated on standing, but willfully ignorant of facts. The defendants reviewed the original note in possession of the plaintiff. It was duly endorsed. This decision underscores the need to sometimes produce the original note, even post-judgment. While an original document is not required in Wisconsin, a court when presented with original properly-endorsed documents will concede standing in the lender’s favor.

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May e-Update

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