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Appellate Court Rules Originating Lender Not Liable for Alleged Bad Acts by Mortgage Broker

Posted By USFN, Monday, April 15, 2019

by Jeffrey M. Knickerbocker, Esq.

Bendett & McHugh, PC
USFN Member (CT, MA, ME, NH, RI, VT)

 

In Bank of America v. Gonzalez, 187 Conn.App. 511 (2019), the Connecticut Appellate Court upheld a decision by the trial court whereby the trial court found the originating lender was not liable for the alleged bad actions of the mortgage broker.  The complaint stated that on or about March 20, 2006, the defendant executed a note (the “note”) in favor of Mortgage Capital Group, LLC (“Mortgage Capital”).  On the same day, to secure the Note, defendant executed a mortgage (the “mortgage”) on the property that was the subject of the foreclosure. 

The defendant filed an answer and special defenses and pleaded that the note and mortgage were unenforceable because of alleged fraudulent inducement, negligent misrepresentation, equitable estoppel, unconscionability, duress and unclean hands.  Each of the special defenses alleged misconduct by David J. Bigley, an alleged employee and/or agent of the original lender and mortgagee, Mortgage Capital.  Bigley was actually a mortgage broker for a company named Main Street Mortgage, LLC.  Bigley, and the closing attorney, Thomas Battaglia, are cousins, which is a fact that was not disclosed to defendant.  Further, Bigley held a mortgage on the property that would be paid off by the sale of the property to defendant, another fact not disclosed to defendant.  In order to prevail on these special defenses, the defendant was required to prove that Bigley was an agent or employee of Mortgage Capital. See CitiMortgage, Inc. v. Coolbeth, 147 Conn. App. 183, 192, 81 A.3d 1189 (2013), cert. denied, 311 Conn. 925, 86 A.3d 469 (2014).

The matter went to trial and the court found that the plaintiff had presented prima facie evidence to support the judgment of strict foreclosure. The court rejected the defendant’s special defenses, finding that the defendant had not satisfied his burden of proving that Bigley was an agent or employee of Mortgage Capital.  The appellate court reviewed the evidence presented in the trial court to determine if the evidence supported the trial court’s decision.  The appellate court considered the mortgage loan origination agreement, signed by the defendant on January 30, 2006, which identified Main Street Mortgage, LLC, as an independent contractor and licensed mortgage broker under the laws of the state of Connecticut. This document provided in relevant part: “In connection with this mortgage loan we are acting as an independent contractor and not as your agent. We will enter into separate independent contractor agreements with various lenders.”

Similarly, the mortgage broker fee disclosure, signed by the defendant on January 30, 2006, provided in relevant part: “The mortgage broker will submit your application for a residential mortgage loan to a participating lender with which it from time to time contracts upon such terms and conditions as you may request or a lender may require.... The mortgage broker may be acting as an independent contractor and not as your agent.”

Finally, the mortgage broker fee disclosure also provided: “You may work with the mortgage broker to select the method [by] which it receives its compensation depending on your financial needs, subject to the lender’s program requirements and credit underwriting guidelines.” The “Good Faith Estimate,” also signed by the defendant on January 30, 2006, provided that it was “being provided by Main Street Mortgage, LLC, a mortgage broker, and no lender has yet been obtained.”

On cross examination, the defendant testified he had no evidence that Mortgage Capital set Bigley’s hours or supplied any office supplies to Bigley. He further testified that he had no evidence that Mortgage Capital provided or told Bigley who to get as customers.  In short, there was no evidence that the mortgage broker and originating lender had anything other than an independent contractor relationship.

This case shows the importance of maintaining the origination file.  The origination documents were instrumental in establishing the relationship between the originating broker and the lender.

 

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Federal Court Clarifies Mortgage Servicer Responsibilities after Loan Transfers

Posted By USFN, Monday, April 15, 2019

by Paul Weingarden, Esq. & Brian Liebo, Esq.
Usset, Weingarden & Liebo, PLLP
USFN Member (MN)


In Hrebal v. Seterus, Inc. (D. Minn., 2019), a Federal District Court situated in the 8th Circuit issued an order which presents a cautionary warning to loan servicers.  The case illustrates the potential perils when servicing loans following a service transfer, and specifically in reporting delinquencies under the Fair Credit Reporting Act (“FCRA”). 

In October 2007, Minnesota resident Charles Hrebal entered into a mortgage with the originating lender. When Hrebal ran into financial problems, he filed a Chapter 13 Bankruptcy listing four delinquent payments on his mortgage.  For unknown reasons, the original lender filed a proof of claim (“POC”) for only two out of the four payments, and in response Hrebal filed an amended plan reflecting that lender’s lower claimed delinquency.  The plan was approved without objection.  As in most such plans in the district, the trustee paid the lender past due amounts during the plan period to pay the pre-petition arrears in full, and Hrebal directly maintained his ongoing payments post-petition.  During the bankruptcy, the original lender recognized its POC filing error, but did not file an amended POC despite numerous notes found in its servicing records concerning the discrepancy.

The loan was subsequently service transferred to Seterus, Inc.  Seterus continued to receive monthly post-petition payments during the bankruptcy proceedings and did not raise the missing prepetition payments issue during the pendency of the bankruptcy case.  Also, when Hrebal called to inquire about his mortgage’s status, Seterus appeared to inform him that he was “current on all payments.”  In 2015, Hrebal completed his plan and was granted a discharge.

Unfortunately, the issue of the missed prepetition payments reared its ugly head when Seterus raised for the first time that two payments were still due post-petition in response to a Trustee’s Notice of Final Cure.  Seterus’ corporate witness later asserted that, even though Hrebal made every monthly payment after entering bankruptcy, the erroneous POC filed by the original lender resulted in Hrebal “walking out of bankruptcy still two payments behind.”

Thereafter, Hrebal discovered that Seterus reported the loan delinquent to the three major credit reporting agencies (“CRAs”) after Hrebal wrote Seterus and the CRAs to dispute the reported delinquency.  According to the court’s findings, Seterus refused to notify the CRAs that the debt was disputed, never reviewed the prior servicer’s notes, nor changed its internal records concerning the dates of the alleged delinquency. 

Hrebal sued Seterus for violating the FCRA, claiming damages to reputation and emotional distress, and both parties moved for summary judgment.  The parties primarily disputed whether Seterus provided “inaccurate” or “materially misleading”  information to the CRAs when Seterus reported Hrebal as delinquent on his mortgage shortly after successfully completing a Chapter 13 bankruptcy plan, as well as whether Seterus’s alleged FCRA violations were willful.

The first issue facing the court was whether the two missing payments from the original lender’s POC survived the bankruptcy discharge, in which case the credit reporting by Seterus of Hrebal being “two payments behind as he exited bankruptcy” might have been “technically accurate.”   However, the district court judge refrained from analyzing the bankruptcy issues due to split authority, and believed that the court could resolve the FCRA claims without opining on that “complex” bankruptcy law question.  

Turning to the FCRA claims, the court recognized that the FCRA requires furnishers of credit information to provide accurate information to CRAs, and if informed by a CRA that a consumer is disputing any information appearing on their credit report, the furnisher must conduct a reasonable investigation of records to determine whether disputed information can be verified.  See, 15 U.S.C. § 1681s.  Courts across the country have generally held that “a fairly searching inquiry, or at least something more than a mere cursory review” is required under the FCRA for such an investigation to be reasonable.  Also, multiple circuit courts have held that “even if credit information is technically correct, it may nonetheless be inaccurate if, through omission, it creates a materially misleading impression.” 

During an exhaustive factual review, the court found a number of servicing errors starting with the initial, mistaken POC.  These purported errors included servicing records Seterus never reviewed when responding to the CRAs which easily should have been found per the court.  This caused inadequate responses by Seterus resulting in possibly "misleading and inaccurate reporting” which triggered the right for the borrower to claim damages. 

Citing the record, the court noted:  “…perhaps most importantly, [Seterus employees] could have marked Hrebal’s delinquency as ‘disputed’, but never did….”, noting testimony that it was a Seterus blanket policy to never do so which in the court’s opinion may have evidenced a "willful or reckless disregard for compliance with the FCRA.” 

The district court denied Seterus’s request to be dismissed from the litigation and the judge set the matter for trial.  The court found a jury could reasonably find that Seterus breached its FCRA duties by simply reaffirming Hrebal’s delinquency without any mention of a dispute.  That response rendered Seterus’s credit reporting inaccurate because, through omission, it created a materially misleading impression that Hrebal was more financially irresponsible than he actually was, according to the court.  The court further explained that a reasonable juror might find Seterus’s omission especially misleading because Hrebal had just successfully completed a long Chapter 13 bankruptcy plan, received a discharge, and had not missed a mortgage payment in over five years.

It is important to note that this is just an order denying Seterus summary judgment motion, not a final order assessing liability. It is unknown if the case will be settled, won at trial or appealed.   But it should be read as a cautionary lesson by noting that if the original lender had acted on the improper information it found on its POC; or if Seterus had read the prior servicing notes and records; or followed guidelines noting that the debt was disputed for purposes of credit reporting, then this case perhaps might never have been filed.

As an important practice pointer for mortgage servicers, it is always prudent to carefully review prior servicing notes when receiving loans, especially whenever a servicing dispute is raised, to ensure responses to inquiries and records are entirely accurate and appropriate. 


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South Carolina Legislature Authorizes Department of Revenue to File Tax Liens Statewide with an Online Database System

Posted By USFN, Monday, April 15, 2019

by John S. Kay, Esq. 
Hutchens Law Firm
USFN Member (SC)


The South Carolina Legislature has passed a new law that has far-reaching implications for those searching land records in the state of South Carolina. Traditionally, the South Carolina Department of Revenue (“SCDOR “) has filed tax liens against individual taxpayers for nonpayment of state taxes by filing a lien with the county recorder in the county where the taxpayer resides. The tax lien would then become a lien against any real property owned by the taxpayer in that particular county for a period of ten years. However, the recorded lien would not affect property owned by the taxpayer located in counties other than the one where the lien is filed. This traditional system of recording may change drastically with the passage of Senate Bill 160, which was signed into law by the governor on March 28, 2019 and will go into effect on July 1, 2019.

The new law supplements Section 12-54-122(G) of the South Carolina Code by allowing the South Carolina Department of Revenue to “implement a statewide system of filing and indexing liens which must to be accessible by the public over the Internet”.  The new lien would have a permanent date and time stamp, the name of the taxpayer, and the amount of tax and penalties. The most important aspect of the new law is that a lien filed with any new system implemented by the SCDOR would be effective statewide from the date and time it is recorded and available to the public over the internet. This means that a lien filed by the SCDOR will automatically become a lien against any property owned by the defaulting taxpayer in South Carolina.  The lien becomes effective statewide upon one filing without transcribing the lien to all of the different counties in the state.  It is important to note that the new law does not extend the current ten-year life span of a recorded tax lien.

Once a new online system is implemented by the SCDOR, Clerks of Court and Registers of Deeds, the current county officials charged with recording tax liens in individual counties in South Carolina, are relieved of any statutory obligations for filing and maintaining newly filed tax liens. This does not absolve the county offices from maintaining tax liens already recorded in their offices.  Assuming that the SCDOR will only list new tax liens on their system of record, title abstractors and attorneys must continue to check tax liens in the county where a parcel of real property is located until the ten-year statute of limitations period expires for those liens.  Once the system has been in effect for ten years, title examiners may then stop searching the individual county tax records and use only the statewide database for a title search for tax liens.

While the new law does not require the SCDOR to implement a new system, the law was created in anticipation of the SCDOR implementing such a system and we expect that they will do so. Once the system goes into effect, persons searching titles in South Carolina must check both the new system for tax liens and continue to check the individual county tax lien index for older tax liens recorded prior to the start date for a new SCDOR system. Since numerous mortgage servicers utilize nationwide title companies to perform title searches for their loans in default, these servicers and title companies must be aware of the implementation of a new tax lien filing system by the SCDOR so that they make certain they are able to adequately search titles in South Carolina.

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Rhode Island Federal Court Ruling Could Change GSE Nonjudicial Foreclosure Process Across the Country

Posted By USFN, Monday, April 15, 2019

by Joseph A. Camillo, Jr., Esq.                                    

Brock and Scott, PLLC

USFN Member (AL, CT, FL, GA, MA, MD, ME, MI, NC, NH, OH, RI, SC, TN, VA, VT)

In August of this year, the United States District Court for the District of Rhode Island was presented two cases seeking a ruling that Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”) are government actors, and thus, violated Fifth Amendment due process rights by conducting non-judicial foreclosures. See Sisti v. Federal Housing Finance Agency (“FHFA”), 2018 WL 3655578 (D.R.I. Aug. 2018).  FHFA, FNMA and FHLMC moved for judgment on the pleadings, which was denied by Judge McConnell as “…it is not ‘beyond doubt’ that plaintiffs cannot prove their claims against the agency.”  Based on the denial, FHFA, FNMA and FHLMC filed a motion to amend the August 2, 2018 order to include the certification necessary to allow defendants to petition the U.S. Court of Appeals for the First Circuit for interlocutory review under 28 U.S.C. §1292(b).  On October 15, 2018, McConnell denied the motion allowing the case to proceed.

The case stems from two unrelated foreclosures: a 2012 foreclosure sale of Sisti’s home by FHLMC and a 2014 foreclosure sale of Boss’ home by FNMA.   In both instances, the properties sold back to the respective government-sponsored enterprises (“GSEs”) and state court actions to evict commenced.  Both borrowers seeking to defend the evictions sued FNMA, FHLMC and FHFA in separate Federal Court actions, alleging that the entities are government actors and violated the borrowers’ Fifth Amendment due process rights by conducting non-judicial foreclosures. The defendants moved for judgment on the pleadings, and the cases were consolidated for oral argument as they presented the same legal issues

In denying defendants (FHFA, FNMA and FHLMC) the motion for judgment on the pleadings, the court found that the plaintiffs could prove that FNMA and FHLMC are government actors for the purposes of constitutional claims and thus the case could proceed.  This was based on the court’s application of the three-part test articulated by the Supreme Court in
Lebron v. National Railroad Passenger Corp. 513 U.S. 374 (1995) which asked: 1) whether the government created the entity by special law; 2) whether the entity furthers governmental objectives; and 3) whether the government retains for itself “permanent authority” to appoint a majority of the directors of that entity. 

In dispute amongst the parties was the third prong of this test, namely whether the government has retained permanent authority to appoint a majority of the directors of that entity.  Many courts in the past have found, and
FNMA, FHLMC and FHFA argued, that FHFA’s conservatorship of the GSEs is temporary under the Housing and Economic Recovery Act (“HERA”).  This court however rejected this argument, concluding that FHFA “…effectively controls Fannie Mae and Freddie Mac permanently” because of its control over the duration of the conservatorship, which Judge McConnell described as “in perpetuity.

This recent ruling allows the case to move forward and is not a decision on the merits.  If GSEs are found to be government actors, then constitutional protections may apply which could trigger changes to the GSE non-judicial foreclosure process across the country.  This could range from foreclosing in the servicer’s name to protections found in judicial foreclosures, such as the opportunity to have an evidentiary hearing, to be represented by counsel, or to have a neutral hearing officer adjudicate the matter.

 

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Obduskey v. McCarthy & Holthus LLP Supreme Court Decision a Win for the Industry

Posted By USFN, Wednesday, March 27, 2019

by Richard P. Haber, Esq.

McCalla Raymer Leibert Pierce, LLC

USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

In a great win for the industry, the United States Supreme Court decided last week that default firms and trustees specializing in nonjudicial foreclosures are not “debt collectors” and therefore not subject to the majority of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., (the “FDCPA” or the “Act”). In a unanimous decision issued on March 20, 2019 in the matter of Obduskey v. McCarthy & Holthus LLP, the Court considered whether the actions taken by McCarthy & Holthus LLP (“McCarthy”) in connection with a nonjudicial foreclosure in the State of Colorado rendered it a “debt collector” pursuant to the Act.

The question arose from the FDCPA’s statutory definition of “debt collector” which, in relevant part, is:

[A]ny person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, either directly or indirectly, debts owed or due or asserted to be owed or due another.

*             *             *

For the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.

15 U.S.C. § 1692a(6).

The Court has characterized the first section as the “primary definition” and the second section as the “limited-purpose definition.” A party included in the primary definition is subject to the full extent of the FDCPA, including its main requirements that a debt validation notice be sent by the debt collector; that, upon receiving a consumer dispute as to the validity or amount of a debt, the debt collector cease collection activity until it verifies the debt; and the prohibition on making false, deceptive or misleading representations in connection with a debt, such as misstating a debt’s “character, amount, or legal status.”

However, a party subject only to the limited-purpose definition is merely subject to the FDCPA’s requirement that it not “tak[e] or threaten[ ] to take any nonjudicial action to effect dispossession or disablement of property if: (A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from dispossession or disablement.” 15 U.S.C. § 1692f(6).

Relying on (1) the Act’s text itself; (2) a determination that Congress wanted “to avoid conflicts with state nonjudicial foreclosure schemes”; and (3) the legislative history of the FDCPA, the Court concluded that McCarthy is only subject to the limited-purpose definition of “debt collector” and not the primary definition. Accordingly, default firms and trustees who specialize in nonjudicial foreclosures are no longer subject to the vast majority of FDCPA requirements. 

While the Court made sure “not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls,” default firms and trustee companies whose primary business is the pursuit of nonjudicial foreclosures, can now rest a little easier from the standpoint of compliance and litigation risk in connection with the FDCPA. With respect to judicial foreclosures, the Court specifically stated “whether those who judicially enforce mortgages fall within the scope of the primary definition is a question we can leave for another day,” but it seems that there would be a strong argument that the holding in Obduskey extends to firms specializing in judicial foreclosures that result only in in rem judgments, without an in personam deficiency component.

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A Resolution for 2019: Speak with Substance*

Posted By USFN, Monday, March 25, 2019

by Lisa Lee, Esq.
KML Law Group, P.C.
USFN Member (NJ, PA)



Do meetings that you lead ever look like this? Maybe they do, but you just don’t realize it? Could it be that the people on the other end of calls that you run look like the ones seated at this table? No one wants that! Here’s a way to avoid it: Resolve to speak with substance.


One common complaint about lawyers is that they use a lot of words to say essentially nothing. A lot of other types of business leaders are accused of the same thing. A big part of this phenomenon is the use of “Corporate Speak.”

When I think of “corporate speak,” I think of any phrase or saying that sounds super fancy, but actually means nothing. In fact, it’s almost always worse than that. Often these bits of jargon beg another question.  And, if that question is not one that you provide a meaningful answer to right away, it leaves the listener very annoyed when they realize that you have attempted to dazzle them with completely empty words. 

Consider how you would feel after reading this description of a law firm in our space:

“Our firm leverages vertically integrated synergies to affect a paradigm shift and to move the needle in a way that is scalable and utilizes every best practice known to the industry. Let us do your heavy lifting using our robust, game changing core competencies. If you want to raise the bar, the bottom line is you should hire us – we will give you 110 percent!”

Okay, that is an exaggeration and is NOT a real example of a description of a firm in our space.  But sometimes a sales pitch comes off this way. It doesn’t say anything of substance.  As a matter of fact, it ends with a lie. No one can give 110% ever, because there is no such thing.

I consider myself to be hypersensitive to all things corporate speak. That said, I still sometimes catch myself telling someone I’ll “circle back” with them or will start with “the low hanging fruit.” I annoy myself when I hear these types of things come out of my mouth. So, I resolve for 2019 to speak with substance.

When a difficult problem arises, I promise not to drill down, take a deep dive, open the kimono (really?), peel back the onion, consider all the moving parts, reinvent the wheel or go back to the drawing board. No longer will I say that I will take it to the next level, run it up the flagpole, take it offline, run the numbers, ballpark it, think outside the box or hit the ground running when describing my approach to such a task. Instead, I will clearly and specifically detail the next steps I will take and when and how I will provide updates and results.

When scheduling conflicts happen, I will not go on about having a hard stop, being out of pocket, not having the bandwidth or needing to loop someone in, reach out down the road or touch base later. To cut through all of that, I will just plainly provide my availability and not go on about how very busy and important I think I am (isn’t that what one means when they say they “don’t have the bandwidth”).

When speaking to our team, I won’t blather on about pushing the envelope, creating a win-win situation, having skin in the game, playing hardball, creating buy-in, hitting the nail on the head, making hay or the elephant in the room. What people want to hear is factual information about why we are doing what we’re doing, what exactly is expected and when, and the results we are looking to achieve. That is what I resolve to deliver, and it will require that I speak with substance. 

How about you?  Are you with me?  Will you resolve to give it 110%?

(Oh, wait…)

* At our Annual Retreat in November, we conducted an informal survey of the members in attendance, tasking them with listing the most annoying words or phrases they hear continually in meetings or conference calls.  The results inspired us to provide this follow up, which incorporates the “corporate speak” examples our members most often cited.

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In re George: Innocence Won

Posted By USFN, Monday, March 25, 2019

by Devin Chidester, Esq. 

Brock and Scott, PLLS

USFN Member (AL, CT, FL, GA, MA, ME, MD, MI, NC, NH, OH, RI, SC, TN, VA, VT)

In re George[1] handed down by the North Carolina Court of Appeals on February 19, 2019 examines the balance between improper foreclosure and ownership rights of a third-party purchaser of the foreclosed property.  In George, owners of a property[2] in Mecklenburg County, NC were foreclosed upon by their community’s HOA for failure to pay unpaid dues totaling $204.75.  During the foreclosure, service was attempted by sending certified and first-class mailings to all known addresses[3] as well as having the county sheriff attempt to personally serve respondents at the subject property.  The foreclosure was granted and a foreclosure sale was conducted on January 12, 2017.  The property was purchased by a third-party (KPC Holdings) and transferred to National Indemnity (“NI”) shortly thereafter.  The property owners filed a motion to set under Rule 60(c), citing lack of personal service.  The superior court ruled in favor of the property owners and voided the foreclosure while also setting aside any subsequent deed chains.

 

Upon appeal, two issues were raised: 1) whether improper service voids an entire foreclosure (first legal through deed recording) and 2) a good faith third-party purchaser’s title will be impacted by the voided foreclosure.  On the issue of service, the Court of Appeals examined whether the property owners were deprived of constitutionally protected due process rights and/or the procedural requirements of North Carolina’s Rules of Civil Procedure.  The Court of Appeals held that as long as the intended notice was reasonably calculated to reach the intended person then that person is not deprived of due process simply because they did not receive actual notice.  The foreclosing party sent notice via multiple mailings and in-person service by the sheriff.  This satisfied the reasonableness requirement because the methods required under law were used to attempt service, thus the property owners were not deprived of property without notice and opportunity to be heard. 

As for the issue of personal service, North Carolina allows personal service by leaving notice with an individual or with a person of suitable age at the individual’s dwelling house or usual place of abode.  The subject property was occupied by the owner’s children, and the owners infrequently visited the property, nor did they claim it to be their residence.  Furthermore, when the county sheriff attempted personal service he unintentionally served one of the property owners’ children who signed the sheriff’s notice using her mother’s name.  Thus, the property owners were not properly served pursuant to North Carolina law and the foreclosure was void as a result.  However, the majority opinion from the Court of Appeals differed from the trial court’s conclusion.  Although the trial court correctly identified the legal flaw in personal service and correctly voided the foreclosure, it incorrectly set aside the deeds to the third-party purchasers. 

Pursuant to N.C.G.S. § 1-108, title to property sold to a good faith purchaser for value is not affected by the set aside of a foreclosure.  KPC was a purchaser for good faith due to the lack of knowledge or reason to believe in any defects in the foreclosure.  KPC did not have reason to believe anything in the record or foreclosure was invalid, so the deed chain was not impacted by the voided foreclosure. 

 

The property owners are victims of improper foreclosure, but the statutory authority is clear that innocent, good faith purchasers for value shall retain title regardless of the voided foreclosure.  In re George should be a reminder of the importance of quality legal work.  An innocent third-party purchaser may prevent the need to redo the foreclosure, but poor legal work opens unwanted and expensive doors of restitution.

[1] -- S.E.2d --, 2019 WL 660956 (2019)

[2] Clamore and Hygiena George owned the property in Mecklenburg County but did not live there.

[3] The Georges lived in the Virgin Islands.  Their children lived at the home.


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United States District Court for the District of Arizona Rules a Notice of Intent to Accelerate May Decelerate the Loan

Posted By USFN, Monday, March 25, 2019

by Julie Molteni, Esq.                                   

Quality Loan Service Corp.

USFN Member (CA)

Kristin McDonald, Esq.

McCarthy & Holthus LLP
USFN Member (AZ, CA, CO, ID, NM, NV, OR, TX, WA)

The United States District Court for the District of Arizona ruled that, in certain circumstances, the notice of intent to accelerate may constitute a deceleration of the loan when evaluating a statute of limitations claim.  Hummel v. Rushmore Loan Mgmt. LLC, 2018 U.S. Dist. LEXIS 132358 (D. Ariz. Aug. 7, 2018). 

 

In Hummel, borrowers sought to quiet title and enjoin a non-judicial foreclosure of the property.  They alleged that Arizona’s six year statute of limitation barred the foreclosure from proceeding.  The borrowers defaulted on their loan in 2009 and in February of that same year, the servicer issued a notice of intent to accelerate the loan.  In February 2011, the servicer sent a second notice of intent to accelerate.  A Notice of Trustee’s Sale was recorded in February 2013, but the sale was cancelled the following month.  While other foreclosure notices and notices of intent to accelerate were issued, the court focused on the 2009 and 2011 notices of intent to accelerate when evaluating the statute of limitations claim.

 

Despite noting that there was a question of fact as to whether or not the loan accelerated in 2009, the court ruled that the statute of limitations defense was not available to the borrower because the 2011 notice of intent to accelerate actually decelerated the loan.  In making this conclusion, the court noted that the 2011 notice of intent to accelerate that was sent to the borrower contained the necessary language to revoke the acceleration.  Specifically, the notice contained statements conveying that (1) the borrower is in default, (2) the borrower has a right to cure the default by paying less than the full debt, and (3) the creditor might accelerate the debt if the borrower does not cure the default.   Since the 2011 notice was transmitted to the borrower and contained the requisite statements, the court held that for the purposes of evaluating the statute of limitations, the 2011 notice of intent to accelerate actually decelerated the loan.  It granted summary judgment on the issue in favor of the servicer and beneficiary.

 

This ruling provides post-Andra R Miller Designs LLC v. U.S. Bank NA[1] clarity for processing non judicial foreclosures with aged defaults. 


[1] The case of Andra R Miller Designs LLC v. U.S. Bank NA, 244 Ariz. 265 (Ct. App. 2018), held that the Notice of Sale accelerates the loan.

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California State Military and Veterans Code Updated

Posted By USFN, Monday, March 25, 2019

by Caren Castle, Esq. and Kayo Manson-Tompkins, Esq. 

The Wolf Firm

USFN Member (CA, ID, OR, WA)

 

Effective January 1, 2019, Section 408 of the California Military and Veterans Code was amended.  The amendment, albeit slight, has a major effect on the foreclosure process as it applies to active duty service members in California. 

Prior to January 1, 2019, the statute followed the Federal Service members Civil Relief Act and read:


“This section shall apply only to obligations secured by mortgage, trust deed, or other security in the nature of a mortgage upon real or personal property owned by a service member at the commencement of the period of the military service and still so owned by the service member whose obligations originated prior to the person’s period of military service”


Accordingly, it only applied to service members who entered active military service after the loan originated.

As of January 1, 2019, California increased the protections of active duty service members by amending the section to read:


“This section shall apply only to obligations secured by mortgage, trust deed, or other security in the nature of a mortgage upon real or personal property owned by a service member.”


Thus, the protections afforded under California law have now been expanded to every active duty service member, even if the loan was originated prior to the time that person entered active military service.

Moreover, California now requires a court order in order to proceed to foreclosure sale where the borrower is a service member currently on active duty, and up to one year after the service member has left active duty.  The court order is required to proceed regardless of whether or not the lender is pursuing judicial or non-judicial foreclosure.  The penalty for proceeding to sale without a court order is imprisonment not to exceed one year or a fine not to exceed $1,000.


Therefore, upon identification of a borrower on active duty, or on inactive status within one year of active status, our office will be proceeding with the filing of a judicial foreclosure combined with a request for the appointment of a guardian ad litem.  Upon receipt of an order of the court authorizing the foreclosure sale, we will then proceed with a non-judicial foreclosure.  The non-judicial foreclosure will result in a much faster and less expensive process than continuing with the judicial foreclosure.

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Supreme Court Grants Certiorari in FDCPA Statute of Limitation Case

Posted By USFN, Monday, March 25, 2019

By Damon Ellis
Brock and Scott, PLLS
USFN Member (AL, CT, FL, GA, MA, ME, MD, MI, NC, NH, OH, RI, SC, TN, VA, VT)

 

On February 25, 2019, the Supreme Court of the United States agreed to consider arguments in Rotkiske v. Klemm, --- S.Ct. ---, 2019 WL 886893 (Mem), 19 Cal. Daily Op. Serv. 1639.  This case is on appeal from the Third Circuit, which held, that the Fair Debt Collection Practices Act’s (“FDCPA”) “one-year limitations period begins to run when a would-be defendant violates the FDCPA, not when a potential plaintiff discovers or should have discovered the violation.”  Rotkiske v. Klemm, 890 F.3d 422, 425 (3d Cir. 2018).

 

Petitioner, Kevin Rotkiske (“Rotkiske”), accumulated credit card debt between 2003 and 2005.  In 2008, the debt was referred by Rotkiske’s lender to Respondent, Klemm & Associates (“Klemm”), for collection.  Klemm sued for payment in March 2008 in Philadelphia Municipal Court, attempting service at an address where Rotkiske no longer resided.  The suit was thereafter withdrawn, when Rotkiske could not be located.  Klemm refiled in January 2009, again attempting service at the same address.  Unbeknownst to Rotkiske, an individual at that address accepted service on his behalf, and Klemm obtained a default judgment.  Rotkiske discovered the judgment when applying for a mortgage in September 2014.

 

On June 29, 2015, Rotkiske sued Klemm, and related individuals and entities, in the United States District Court for the Eastern District of Pennsylvania, averring that the above-referenced conduct violated the FDCPA.  Klemm moved to dismiss, arguing that Rotkiske filed after the expiration of the FDCPA’s one-year limitation period.  See 15 U.S.C. § 1692k(d) (“An action to enforce any liability created by this subchapter may be brought . . . within one year from the date on which the violation occurs”).  Rotkiske countered that his suit was timely, notwithstanding the one-year limitation period, because the “discovery rule” delays the beginning of some statutory limitation periods until plaintiff knew or should have known of the violation.  The district court rejected this argument, finding that the plain language of § 1692k(d) controls and denied a parallel argument that the limitation period should be equitably tolled, in the absence of active misleading by Klemm.  See Rotkiske v. Klemm, 2016 WL 1021140 (E.D. Pa. 2016).

 

Only the rejection of the “discovery rule” argument by the district court was appealed to the Third Circuit, Rotkiske did not challenge the district court’s finding that he had failed to allege active concealment by Klemm in denying his equitable tolling claim.  On appeal, the Third Circuit agreed with Klemm, holding, “[c]ivil actions alleging violations of the Fair Debt Collection Practices Act must be filed within one year from the date of the violation.”  Rotkiske v. Klemm, 890 F.3d at 429.  In so doing, the Third Circuit declined Rotkiske’s invitation to follow opinions of the Ninth (Mangum v. Action Collection Service, Inc., 575 F.3d 935 (9th Cir. 2009)) and Fourth Circuits (Lembach v. Bierman, 528 Fed.Appx. 297 (3d Cir. 2013)) that have previously applied the “discovery rule” to the FDCPA.  The Third Circuit opted instead to rely on guidance from the United States Supreme Court in a Fair Credit Reporting Act case, TRW Inc. v. Andrews, 534 U.S. 19, 28, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001), where the Court held that Congress had “implicitly excluded a general discovery rule by explicitly including a more limited one.”  534 U.S. at 28, 122 S.Ct. 441.  The Third Circuit, parsing the express language of 15 U.S.C. § 1692k(d), concluded that, “[t]he same natural reading applies to the FDCPA in this appeal: Congress’s explicit choice of an occurrence rule implicitly excludes a discovery rule.”  Rotkiske v. Klemm, 890 F.3d at 426.

 

By granting certiorari and agreeing to hear arguments, the Supreme Court may provide some much-needed clarity on the applicability of the “discovery rule” to the FDCPA, thereby eliminating the existing inter-district conflict.  In the interim, debt collectors should be mindful of the Third Circuit’s holding, now on appeal, and be prepared to utilize the same in response to arguments that the “discovery rule” applies to the FDCPA’s statute of limitations in 15 U.S.C. § 1692k(d).

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Northern District of Ohio Bankruptcy Court Holds that it Lacks Discretion to Allow Late-Filed Proof of Claim pursuant to the “Excusable Neglect” Standard

Posted By USFN, Tuesday, December 4, 2018
Updated: Friday, November 30, 2018

December 4, 2018

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA – USFN Member (Kentucky, Ohio)

On October 17, 2018 U.S. Bankruptcy Judge Koschik (N.D. Ohio) held that a creditor cannot use “excusable neglect” as a basis to file a proof of claim (POC) after the bar date in a Chapter 7 or Chapter 13 case. Six months after the claims bar date, non-mortgage creditor individuals filed a “motion for leave to file late proof of claim,” seeking 30 more days to file a claim. The creditors asserted that they did not receive notice of the bankruptcy case and, therefore, did not timely file a POC. The creditors also argued that even if they received sufficient notice, their failure to file a timely proof of claim was due to “excusable neglect.” They sought to invoke Bankruptcy Rule 9006(b)(1) to enlarge the time. That rule provides, in part:


“Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules . . . the court for cause shown may at any time in its discretion . . . on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of
excusable neglect.” Fed. R. Bankr. P. § 9006(b)(1).


The court ultimately denied the creditors’ motion on the basis that Bankruptcy Rule 3002(c) established the exclusive grounds for allowing claims to be filed by a creditor after the bar date in a Chapter 13 case. Therefore, the court lacked discretion to permit a late-filed proof of claim by creditors pursuant to the excusable neglect standard in Rule 9006(b)(1).

The case citation is In re Rady, 2018 Bankr. LEXIS 3208 (Bankr. N.D. Ohio (Akron), Oct. 17, 2018).

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Impact of an Assignment during a Pending Foreclosure

Posted By USFN, Tuesday, December 4, 2018
Updated: Friday, November 30, 2018

December 4, 2018

by Blair Gisi
SouthLaw, P.C. – USFN Member (Iowa, Kansas, Missouri)

In a recent case, Fannie Mae v. Sharp, 2018 Kan. App. Unpub. LEXIS 876 (Ct. App. Nov. 9, 2018), the court analyzed the impact of an assignment of mortgage during a pending foreclosure, resulting in a favorable ruling for servicers.

Background in District Court
With Fannie Mae’s motion for summary judgment pending, Fannie Mae assigned the subject mortgage to Wilmington Savings Fund Society (Wilmington) and moved for an order substituting it as the party plaintiff. The mortgage was assigned on June 2, 2016; the actual assignment of mortgage was recorded on June 15, 2016.

Within minutes of Fannie Mae moving for the substitution of party plaintiff, the borrower filed a motion to dismiss, contending that the mortgage was assigned two months prior and, therefore, the motion to substitute was not filed in a reasonable time. The borrower also asserted that the extensive discovery completed in the case would be futile if Wilmington were allowed to be substituted into the case.

After hearing arguments on both the motion to dismiss and the motion for summary judgment, the district court granted dismissal (and denied summary judgment) based on four reasons, specifically:


“1. No motion was filed to substitute for nearly two months after an assignment was made. Nothing was done and more than a reasonable time has elapsed since the assignment occurred.
“2. The Defendant has engaged in extensive discovery and will be prejudiced if forced to proceed against a new Plaintiff.
“3. The discovery sought from Fannie Mae will not apply to Wilmington, which will result in further delays and expense in litigation.
“4. The Response to the Motion for Summary Judgment will have to be modified and rewritten, causing more delay and expense for Defendant.”


Appellate Court’s Analysis & Ruling
The Court of Appeals agreed with Fannie Mae’s position that the district court erred in finding that Fannie Mae had to move to substitute within a reasonable time.

As clarified by the Court of Appeals, K.S.A. 2017 Supp. 60-225(c) governs the substitution of parties and states very clearly, “If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party.” (Emphasis is the appellate court’s.)

Relying on the legislative intent and plain language of the statute, the appellate court ruled that there is no requirement for a motion to substitute to be filed within a “reasonable time” after the assignment. If the legislature’s intent was to include a reasonable time requirement, it would set that out, as K.S.A. 2017 Supp. 60-225(a) does after the death of a party.

Furthermore, even if there were a reasonable time standard, Fannie Mae would have met it as the motion to substitute party plaintiff was filed on June 22, 2016 (20 days after the actual assignment and seven days after recording the assignment of mortgage).

Regarding the remaining reasons for the district court’s rulings, the Court of Appeals found that there was no prejudice to the borrower because Fannie Mae’s discovery responses were admissible against Wilmington. The appellate court recognized the “time-honored rule of law” that the assignee stands in the shoes of the assignor; therefore, Wilmington was bound by the admissions and interrogatories that Fannie Mae had provided. Finally, the motion for summary judgment was denied, so there was no need for a response (or modified response) to a denied motion.

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

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Illinois: New Supreme Court Case Affirms Limits on Refiled Cases

Posted By USFN, Tuesday, December 4, 2018
Updated: Friday, November 30, 2018

December 4, 2018

by Robert J. Deisinger
Anselmo Lindberg & Associates – USFN Member (Illinois)

Illinois law allows for only one refiling of a lawsuit if the plaintiff voluntarily dismisses its case. In practice, this means the plaintiff gets no more than two bites at the apple. In a unanimous opinion issued in the case of First Midwest Bank v. Cobo, 2018 IL 123038 (Nov. 29, 2018), the Illinois Supreme Court ruled that foreclosure plaintiffs cannot avoid the application of this rule by spinning one of its suits as a different kind of apple.

Background
In Cobo the plaintiff brought a 2011 foreclosure action, alleging that the mortgagors had defaulted by failing to make the monthly payments as of July 2011 due under the note secured by the mortgage. The Illinois Mortgage Foreclosure law permits creditors to seek a personal deficiency if a deficiency exists after the property is sold at the foreclosure sale, and the foreclosure complaint requested that a deficiency judgment be awarded if sought after the foreclosure sale.

The plaintiff voluntarily dismissed this foreclosure case and filed a new action less than two weeks later. This second action did not seek to foreclose the mortgage, but rather only sought a judgment for breach of the borrower’s promise to repay the money owed under the note. This case, too, was eventually voluntarily dismissed by the plaintiff. The plaintiff then filed a third action, which like the first, but unlike the second, sought foreclosure of the mortgage and a deficiency judgment. Ultimately, the trial court found that the case could proceed, but the Illinois Appellate Court overruled that decision and ordered that the case be dismissed as a barred refiling. At the lender’s request, the Illinois Supreme Court agreed to hear the case.

Supreme Court’s Review
Unfortunately for the lender, the Supreme Court sided with the defendants. Technically speaking, Illinois follows a transactional test to determine whether a lawsuit is the same or nearly the same as a prior suit. When each case arises from an identical set of facts, they are considered to be the same case, even if they seek different types of judgment. In this instance, the basis of each case was the defendants’ alleged July 2011 failure to make payments due under the note.

Notably relevant to lenders, the Supreme Court stated that if a case is voluntarily dismissed by the plaintiff because the parties entered into a loan modification while a foreclosure case was pending, the single refiling rule would not apply because the modification changes the operative facts of any later suit (i.e., the date of default). Though not explicitly stated by the court, it seems that the same reasoning should apply to reinstatements as well. However, whether a lender could avoid the application of the rule by voluntarily advancing the due-date absent a modification or a reinstatement remains an open question, but that seeming loophole might be too small of a needle to thread.

Conclusion
In most foreclosure circumstances, the single refiling rule will not apply. Still, if a case was previously filed twice without a change of circumstances (such as application of payments, modification, or reinstatement), lenders must be aware that the single refiling rule might bar any future case. It is therefore important that lenders consult with their attorneys regarding the application of this rule prior to voluntarily dismissing any foreclosure lawsuit that they intend to later refile.

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FDCPA: Is CO Nonjudicial Foreclosure Activity Debt Collection under the Act? U.S. Supreme Court to Hear Case in January 2019

Posted By Rachel Ramirez, Monday, December 3, 2018
Updated: Wednesday, December 5, 2018

December 4, 2018

by USFN Legal Issues Committee

Background
The question of whether or not nonjudicial foreclosure activity constitutes “debt collection” under the federal Fair Debt Collection Practices Act (FDCPA) is presented in Obduskey v. Wells Fargo Bank, 2018 U.S. App. Lexis 1275 (10th Cir., Jan. 19, 2018). In Obduskey, the Tenth Circuit Court of Appeals ruled that the FDCPA, set forth in 15 U.S.C. §§ 1692 – 1692p, does not apply to nonjudicial foreclosure proceedings in the state of Colorado. An article about the case was published in the USFN e-Update in February 2018; that article may be viewed here. On June 28, 2018, the U.S. Supreme Court granted Certiorari.

 

Status
Briefs have been filed, including industry and government amicus briefs. On November 14, 2018, USFN filed a brief of amicus curiae in support of respondent McCarthy & Holthus LLP, et al. On November 28, 2018, oral argument before the U.S. Supreme Court was scheduled for January 7, 2019. The Court’s calendar may be viewed here.

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Filing Proofs of Claim in Bankruptcy Court: May One be Fashionably Late? It Depends.

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA
USFN Member (Kentucky, Ohio)

Effective December 1, 2017, the deadline for filing a proof of claim in Chapter 13 cases was shortened to 70 days after a petition is filed or a case is converted to Chapter 13. This deadline is significantly earlier than under the previous rule, which set a deadline of 90 days after the first meeting of creditors. For the most part, the industry has once again risen to the challenge and proofs of claim are being timely filed. However, for reasons ranging from lack of notice about a bankruptcy filing to a servicing transfer (or simply dropping the ball), what happens if a proof of claim (POC) is late? Read on.

Not Enough Notice?
If a creditor receives insufficient notice, additional changes to the bankruptcy rules that began on December 1, 2017 allow creditors to seek permission to file a late proof of claim by motion. Prior to December 1, 2017, Bankruptcy Rule 3002(c)(6) allowed a creditor to move the court for an extension of time to file a POC by up to 60 days — but only if the notice of bankruptcy was mailed to the creditor at a foreign address in Chapter 7 cases. Incredibly, bankruptcy courts were split on whether a creditor who received no notice in a Chapter 13 case should be entitled to file a late POC, notwithstanding the provisions of Bankruptcy Rules 3002(c). Some courts found that its discretion to enlarge the time for filing a proof of claim in a Chapter 13 case is limited to the specific “foreign address” exception and would not allow a late-filed claim for any other reason. See, e.g., In re Lovo, 584 B.R. 79 (Bankr. S.D. Fla. Mar. 27, 2018).

In December 2017, as explained by the Committee Notes to the rules, the rules were amended to expand the exception to the bar date for cases in which a creditor received insufficient notice of the time to file a proof of claim. The amendment provides that the court may extend the time to file a POC if the debtor fails to file a timely list of names and addresses of creditors. The amendment also clarifies that if a court grants a creditor’s motion under the rule to extend the time to file a POC, the extension runs from the date of the court’s decision on the motion.

Accordingly, if a claims bar deadline is missed, the first thing a creditor should review is whether the debtor failed to file the list of creditors’ names and addresses with the petition, which is required in order to be timely. Although the court still has discretion to extend the time for filing a proof of claim for a creditor who received notice at a “foreign address,” the Committee Notes for prior rule amendments reveal that the “foreign address” exception is designed to provide notice to foreign creditors of a case filed under Chapter 15 of the Bankruptcy Code.

Just Go Ahead and File the POC?
Even where a debtor timely lists the names and addresses of creditors, a proof of claim might not be filed in time. Many jurisdictions are allowing Chapter 13 trustees to adopt a “business as usual” approach of scheduling late-filed claims where the plan provides for cure of the arrearage. Some trustees insist that the plan arrearage figure controls, and creditors are filing the POC to match exactly what is listed in the plan to avoid objections.

Other trustees schedule the arrearage claim provided for in the proof of claim in full. These trustees are taking a practical attitude toward the situation and making every effort to pay on a claim that both the debtor and creditor want paid, and creating an environment where a debtor will in fact receive a fresh start if the plan concludes.

Several trustees are taking an extra step of filing a notice of intent to pay a claim filed over 70 days into a case. The following excerpt from such a notice shows the rationale and practicality of this:


Fed. R. Bankr. P. 3002(a) provides as follows:
(a) Necessity of Filing. A secured creditor, unsecured creditor, or equity security holder must file a proof of claim or interest for the claim or interest to be allowed, except as provided in Rules 1019(3), 3003, 3004, and 3005. A lien that secures a claim against a debtor is not void due only to the failure of any entity to file a proof of claim.


Fed. R. Bankr. P. 3002(c) provides for the filing of a proof of claim 70 days after the order for relief.


11 U.S.C. Section 502(a) provides that a claim is deemed allowed unless a party in interest objects.


11 U.S.C. Section 704(a)(5) provides that if a purpose would be served, [Trustee shall] examine proofs of claim and object to the allowance of any claim that is improper.


Creditor filed a claim after its due date.


The Trustee does not believe a purpose would be served by objecting to the claim.
In the future – Creditor should file its claim by the 70-day deadline of Fed. R. Bankr. P. 3002(a).


Trustee will pay this claim unless an objection is filed by Debtor(s)’ Counsel or other creditor within 21 days.

 

It is important to recognize, even in situations where a trustee subscribes to a practice of scheduling a late proof of claim, that a bankruptcy court may still disallow the claim — even where an objection has not been filed. See, e.g., In re Benner, Case No. 15-31477 HCD (Bankr. N.D. Ind., Jul. 18, 2018) (claim filed one day after the claims bar deadline disallowed as “[a] provision for payment to a secured creditor in a confirmed plan does not obviate the requirement for that secured creditor to have an allowed claim”). Note, however, that the July 18, 2018 order in Benner was vacated on September 4, 2018 upon consideration of motions for reconsideration filed by the Chapter 13 trustee and the creditor; and the late-filed claim was allowed.


Encourage the Debtor or Trustee to File POC; Amend Later?
If a creditor does not file a timely proof of claim, a debtor (or trustee) is permitted to file a POC on the creditor’s behalf for an additional 30 days. See Fed. R. Bankr. P. 3004. As such, there may be an opportunity for the debtor or trustee to file a proof of claim, only to have the creditor amend it later. Be mindful that some courts have held that if one waits too long, the right to amend is lost. See In re Lee, Case No. 16-30416 (Bankr. N.D. Ohio, May 8, 2018).

In Lee, the creditor did not file a POC by the bar date, and the debtors filed one on its behalf. Fourteen months later, the creditor filed an amended proof of claim. The court pointed out that neither the Bankruptcy Code nor Rules specifically address whether a creditor can amend a claim filed on its behalf by a debtor pursuant to Rule 3004. The Advisory Committee Notes to Rule 3004 explain: “Since the debtor and trustee cannot file a proof of claim until after the creditor’s time to file has expired, the rule no longer permits the creditor to file a proof of claim that will supersede the claim filed by the debtor or trustee. The rule leaves to the courts the issue of whether to permit subsequent amendment of such proof of claim.”

A majority of courts have held that they have the discretion to allow a creditor to amend a claim that a debtor has filed on the creditor’s behalf. However, the Lee court criticized the creditor’s 14-month delay in amending the claim: “this court will not reward Creditor’s dilatory method of proceeding in this Chapter 13 bankruptcy case by allowing it to now amend the proof of claim filed by Debtors. Moreover … the exercise of the court’s discretion is further limited by the preclusive effect of Debtors’ confirmed plan ….”

Some Trustees want the Judge to Decide
Certain trustees are taking a hard stance on the bar date by opposing motions for late claims and objecting to claims. One such trustee recently wrote to this author: “So I really don’t see what you can suggest that will change our minds. I think this was the whole point of the rule change so the mortgage industry would tighten it up and debtor’s counsel has to be on the ball to file claims if the secured creditor does not. In this case the only solution I have is for debtor to voluntarily dismiss and then refile.”

In situations where creditors must convince the court to allow the late claim, many of the same arguments offered prior to the December 2017 amendments will be made, such as the “informal proof of claim” doctrine and the existence of “excusable neglect” for missing the daunting deadline. Hopefully, the bankruptcy judge will be persuaded by the fact that disallowance of a late claim is the least likely path for a debtor to obtain a fresh start in bankruptcy.

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Confirmed Plans of Reorganization: Recovering Escrow Advances Unaddressed in the Plan

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Christopher M. McDermott
and Jonathan C. Cahill
Aldridge Pite, LLP
USFN Member (California, Georgia)

Recovering post-petition escrow advances for a loan modified in a confirmed plan of reorganization has become an increasingly challenging issue facing mortgage servicers. Frequently, a plan will not address a debtor’s post-petition obligation to maintain taxes and insurance on real property. When a loan is escrowed for pre-petition taxes and/or insurance, a plan’s failure to address these items often leaves servicers struggling to determine the best means to recover escrow advances.

Pre-confirmation
When a creditor seeks to recover post-petition escrow advances, it is important to first consider the procedural status of the case. In a pre-confirmation scenario, a creditor should seek to recover escrow advances and clarify the debtor’s future post-confirmation escrow obligations in the plan and/or stipulated agreement. If this is not feasible, a creditor should consider filing a motion for administrative expense treatment for post-petition escrow advances pursuant to 11 U.S.C. §§ 503(b)(1)(B) & 503(b)(3)(D).

Many courts, however, have held that 11 U.S.C. § 506(b) governs an oversecured creditor’s right to recover fees, costs, or charges up until plan confirmation. See Countrywide Home Loans, Inc. v. Hoopai, 581 F.3d 1090, 1099 (9th Cir. 2009). Accordingly, a court may rule that pre-confirmation escrow advances for an undersecured claim are either non-recoverable under § 506(b) or only recoverable as part of the creditor’s unsecured claim resulting from the cramdown. See SNTL Corp. v. Centre Insurance Co., 571 F.3d 826, 842 (9th Cir. 2009). For these reasons, a secured creditor encountering a potential cramdown should consider seeking a court order authorizing escrow advances and deeming them recoverable from the debtor prior to making the advances.

Post-confirmation
When a creditor is seeking to recover escrow advances for a crammed-down loan following plan confirmation, the analysis shifts to whether the plan addressed the escrow requirements of the loan. While a plan confirmation order generally acts as a final order that binds debtors and creditors alike, an ambiguous material term in a plan is subject to judicial interpretation. Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004). Confirmed plans are similar to consent decrees and are interpreted pursuant to rules governing the interpretation of contracts. See Hillis Motors v. Hawaii Automobile Dealers’ Ass’n (In re Hillis Motors), 997 F.2d 581, 588 (9th Cir. 1993).

Court decisions vary as to the issue of whether silence in a plan can be interpreted as modifying a creditor’s rights. Some courts interpret confirmed plans as modifying only a creditor’s rights specifically mentioned in the plan. See Eickerman v. La Jolla Group, II, 592 F. App’x 614, 615 (9th Cir. 2015) (creditor’s contractual right to recover fees and costs not limited as plan was silent on this issue). Under this view, the plan’s failure to address the escrow status of a loan would leave those rights unmodified. Conversely, other courts have held that the plan completely replaces any pre-confirmation rights. See, e.g., Salt Creek Valley Bank v. Wellman (In re Wellman), 322 B.R. 298, 301 (B.A.P. 6th Cir. 2004) (confirmed plan exclusively governs the relationship between debtor and creditor). As a consequence, the failure of a confirmed plan to address a creditor’s escrow rights may eliminate a creditor’s rights to tender and recover escrow advances.

In the event the terms of a confirmed plan or applicable bankruptcy law do not limit a creditor’s ability to recover post-confirmation escrow advances, a creditor should ensure compliance with applicable non-bankruptcy law to safeguard those rights. Specifically, a creditor may waive its right to recover escrow advances by failing to provide notices to the debtor of the escrow payment and/or escrow shortage required by non-bankruptcy law. See In re Dominique, 368 B.R. 913 (Bankr. S.D. Fla. 2007) (escrow shortage waived due to noncompliance with RESPA and Fla. Stat. section 501.137(2)); Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D. Fla. 2001).

Assuming a creditor is not prohibited from recovering post-confirmation escrow advances based on the terms of a confirmed plan and/or applicable legal authority, it is advisable to engage debtor’s counsel to reach an agreement regarding the recovery of those advances and any future escrow advances. In the event an agreement is not possible, a debtor’s failure to pay taxes and/or insurance on a property generally constitutes a default under the security agreement and provides grounds for a motion for relief from the automatic stay. Likewise, to the extent a debtor’s failure to pay taxes and insurance constitutes a default under a confirmed plan, a motion to dismiss the debtor’s bankruptcy case may be warranted.

Closing Words
In sum, servicers should consult their local bankruptcy counsel to determine whether escrow advances are recoverable prior to making or waiving any escrow advances from a loan that is modified within a confirmed plan; and, if so, to determine the appropriate mechanism for seeking their recovery.

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Significant Bankruptcy Case Law: 2018 in Review

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Michael J. McCormick
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

and Adam A. Diaz
SHD Legal Group, P.A.
USFN Member (Florida)

Alabama
Post-petition Mortgage Fees and Expenses — The opinion in In re England, Case No. 17-10197 (Bankr. M.D. Ala. Mar. 30, 2018), pertained to several Chapter 13 cases. It considered the question of whether a debtor is required by an underlying agreement and applicable nonbankruptcy law to pay post-petition mortgage fees and expenses (filed pursuant to Bankruptcy Rule 3002.1) to a creditor holding a note and mortgage on the debtor’s primary residence as provided in 11 U.S.C. § 1322(b)(5). The debtors in each case filed a motion to determine the extent to which post-petition fees and expenses claimed by creditors pursuant to Bankruptcy Rule 3002.1 must be paid.

As required under § 1322(b)(5), the debtors’ Chapter 13 plans provided for maintenance of the current mortgage payments as well as payment of all arrears to cure default over the life of the plan. Subsequent to filing proofs of claim on loans secured by the debtors’ primary residences, each creditor filed a Notice of Post-petition Fees, Expenses, and Charges as permitted under Rule 3002.1(c) for fees and expenses incurred within 180 days before service of the notice on the debtors. In response, the debtors filed motions to determine fees, pursuant to Bankruptcy Rule 3002.1(e), arguing that the court should disallow the post-petition fees and expenses.

When faced with a motion to determine mortgage fees and expenses pursuant to § 1322(e), the court must look to the underlying agreement and applicable nonbankruptcy law to determine if the amounts are permissible. Since § 1322(e) explicitly excepts § 506 from consideration, the “reasonableness standard” ordinarily used under § 506(b) does not apply to post-petition fees, expenses, or charges necessary to cure a default.

Relying in part on a case from 2006 (prior to the 2011 amendments to Bankruptcy Rule 3001, as well as the changes to the proof of claim forms in 2011 and 2015), the court also concluded that performing a plan review and preparing a proof of claim were simple matters, in part because the proof of claim forms are available online (as are the forms for completing the schedules).

Since entry of this decision, the court has been giving creditor firms the opportunity to amend or supplement their PPFNs with timesheets, invoices, and other evidence to support the claims. It should be kept in mind that since the presumption of prima facie validity applicable to proofs of claim does not pertain to the notices filed under Bankruptcy Rule 3002.1, the burden of proof lies with the creditor to substantiate the fees being sought.

Florida
Chapter 13 Plans and Balloon Payments — The decision in In re Benedicto, Case No. 15-28671-BKC-RAM (Bankr. S.D. Fla. June 29, 2018), was interestingly co-authored by Chief Judge Isicoff and Judge Mark. It focused on whether a Chapter 13 plan could be confirmed under Bankruptcy Code § 1325 when it includes provision for a balloon payment. The decision involved two Chapter 13 plans where the debtors sought to modify the underlying debt by cramming down the value of the loan and making a balloon payment at the end of the plan.

The creditors objected to the treatment due to the inclusion of the balloon payments, contending that the inclusion of the balloon payments violated § 1325, which requires the payments in a Chapter 13 plan to be “equal monthly payments.” The court noted that there was no precedent in Florida on this issue, and therefore looked to Georgia for assistance — specifically to the In re Cochran case. Ultimately, the court held that balloon payments are not period payments under § 1325, and the inclusion would result in a non-confirmable plan. However, the court cautioned that this ruling is limited in application.

Chief Judge Isicoff previously has ruled that the “equal monthly payment” requirement begins no earlier than the first payment after confirmation of a plan, rejecting the assertion that § 1325(a)(5)(B)(iii)(I) compels a debtor to make equal payments starting with the first pre-confirmation payment made after the petition is filed. The rule compelling equal monthly payments is not required any earlier than the first payment after confirmation. Additionally, “[i]f a modified plan is approved, the payments to secured creditors must be in equal amounts after the modified plan takes effect, but need not be in the same amount as the payments already made under the prior plan. This will protect debtors who confirm plans before mediation under the MMM Program is completed and later must modify the monthly payment to the mortgagee if the mediated payment amount is higher or mediation fails.”

Creditors’ Claims and the Statute of LimitationsIn re BCML Holding LLC, Case No. 18-11600-EPK, Adv. Proc. No. 18-01129-EPK (Bankr. S.D. Fla. May 24, 2018), involved an adversary proceeding where the debtor, who was a third-party purchaser of the property, sought to limit the creditor’s claim and rights based on the statute of limitations in Florida. Specifically, the debtor sought to reduce the creditor’s claim by all amounts that accrued more than five years from the petition date. The debtor obtained a default against the creditor in the adversary proceeding and sought a judgment in its favor.

The bankruptcy court determined that although the debtor obtained a default, the court could not grant the relief sought because the debtor failed to state a cause of action. The court went through a thorough analysis of the statute of limitations law in Florida and held that the creditor’s claim was not limited to only amounts accruing within five years from the filing of the petition. The court was critical of cases that held to the contrary in Florida — including Velden v. Nationstar Mortgage, LLC, 234 So. 3d 850 (Fla. 5th DCA Jan. 12, 2018) — finding that they were not well-supported by the law. Based on this bankruptcy holding, creditors would not need to limit their claims pursuant to the statute of limitations in Florida.

Mississippi
Nonstandard Plan Provisions — In In re Parkman, Case No. 188-50032-KMS (Bankr. S.D. Miss. Aug. 13, 2018), the Chapter 13 trustee filed an objection to confirmation, contending that the nonstandard plan provisions were “either unnecessary restatements of the law or impermissible infringements on the rights of creditors; unduly burdensome to the Trustee, creditors, and the bankruptcy process.”

As background: both districts in Mississippi opted out of the national plan (i.e., Form 113) and, as of December 1, 2017, all debtors in Mississippi are required to use the form plan authorized by Bankruptcy Rule 3015.1 and Miss. Bankr. L.R. 3015.1-1. The Mississippi Form Plan includes a final paragraph for “nonstandard provisions.” See Fed. R. Bankr. P. 3015.1(e)(1) (requiring final paragraph for nonstandard provisions). Under the Local Rules, only the judges are authorized to change the Mississippi Form Plan. Miss. Bankr. L.R. 3015.1-1. If the change is substantive, it will be advertised for public comment before final approval by the Fifth Circuit Judicial Council as an amendment to the Local Rules.

Shortly after December 1, 2017, counsel for the debtor in Parkman filed a plan — with twenty-three (including subparts) nonstandard provisions in it, formatted within the limitations of the online form as ninety-three single-spaced lines of text without bolding, italics, or underlines. The trustee argued that if the nonstandard plan provisions were approved, then the Southern District of Mississippi did not have a uniform Chapter 13 plan as required by the federal bankruptcy rules and local bankruptcy rules.

The court determined that the intent of debtor’s counsel to substitute his own plan for the Mississippi Form Plan is evident in the first nonstandard provision: “To the extent that the plan language and any nonstandard plan provisions listed here differ or contradict each other, the nonstandard plan provisions will control.” Furthermore, it was not reasonable to expect creditors to scrutinize ninety-three single-spaced lines of visually identical typeface in search of a nonstandard provision that might apply to them. Further, many of the nonstandard provisions were so poorly drafted that their intended meaning and application are indiscernible. With respect to the nonstandard plan provisions dealing with mortgages, several included incorrect statements of the law, and others were unnecessary (given the passage of Bankruptcy Rule 3002.1).

As to all but one of the nonstandard provisions, the trustee’s contentions were well-taken by the court. Accordingly, the objection to confirmation was sustained, and confirmation was denied.

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Student Loan Debt Discharge: Changes Ahead? American Bankruptcy Institute Commissioned Study

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

 

by Marcy Ford
Trott Law, P.C.
USFN Member (Michigan)

It is the rare and fortunate individual who graduates from a trade school, a public or private university, or a professional school and does not have student loan debt. Student loans are a benefit to those of us who need them to fund our education; but, often, they are incurred without a realistic understanding of the upcoming cost to pay those loans or the impact the debt will have in the future — both on the individual student borrower and on society as a whole. Various commentaries suggest that student loan debt is associated with decreased levels of homeownership, lower numbers of automobile purchases, increased household distress, and a variety of other detrimental financial and psychological conditions.

Commission Formed

In December 2016 the American Bankruptcy Institute (ABI) established a Commission on Consumer Bankruptcy with the goal of “researching and recommending improvements to the consumer bankruptcy system that can be implemented within its existing structure.” This included recommending improvements to deal with the growing problem of student loan debt. On May 21, 2018 the Commission released some findings and recommendations ahead of schedule, as a result of the U.S. Department of Education’s request for information on this same issue. (The Commission’s final report will be released in the coming year.)

The Commission’s comments suggest several changes to both the interpretation of 11 U.S.C. § 523(a)(8) and the Brunner test. [See Brunner v. New York State Higher Education Services, 831 F.2d 395, 396 (2d Cir. 1987).] These comments can be read in their entirety at https://s3.amazonaws.com/abi-consumercommission/statements/DOE_Comments_and_Letter_from_Commission.pdf.

Under the current interpretation of Brunner a student loan may only be discharged if undue hardship is established by a three-factor test:


1. The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
2. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3. The debtor has made good faith efforts to repay the loans.


Commission Suggestions
The Commission suggests a “best interpretation” of the Brunner test, which still complies with the Bankruptcy Code, should require the debtor to establish simply that:


1. The debtor cannot pay the student loan sought to be discharged according to its standard ten-year contractual schedule while maintaining a reasonable standard of living;
2. The debtor will not be able to pay the loan in full within its initial contractual payment period (10 years is the standard repayment period) during the balance of the contractual term, while maintaining a reasonable standard of living; and
3. The debtor has not acted in bad faith in failing to pay the loan prior to the bankruptcy filing.


The Commission also made specific recommendations for regulation or interpretive guidance for the Department of Education with regard to evaluating hardship claims in adversary actions in bankruptcy. Those suggestions include:


• Bright-line Rules. Creditors should not oppose discharge proceedings where the borrower meets federally-established guidelines that indicate household financial distress and undue hardship for either disability-based or poverty-based guidelines.
• Avoiding Unnecessary Costs. Creditors should accept borrower proof of undue hardship based on the established criteria and avoid formal discovery.
• Alternative Payment Plans. Payment of the student loans in bankruptcy should be effective to (i) satisfy any period of forgiveness or cancellation of the loans under an income-driven repayment plan, (ii) rehabilitate a loan in default, and (iii) in Chapter 13 cases, prevent the imposition of collection costs and penalties.


Possible Consequences
A change in interpretation and application of the Brunner test would have significant and wide-ranging effect. While many current and past debtors with student loan debt have filed bankruptcy, very few seek to discharge their student loan debt. An adjustment in that alone would have a substantial impact on Chapter 13 plan formulation, discharge rates, and the financial shape of those who are successful in their confirmed plans.

Improved post-discharge fiscal health may lead to an increase in home and auto purchases, as well as other benefits associated with general financial stability. An additional impact may be a noteworthy increase in the number of bankruptcy cases not currently commenced, but that could (and likely would) be filed under a more liberal student loan discharge standard. Because the price of bankruptcy participation has increased considerably for all creditors, a rise in filings would also result in an increase in bankruptcy servicing costs for all creditors — not just for student loan creditors/servicers.

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The New Bankruptcy Periodic Statements: A Look at What the CFPB’s 2016 Study Can Tell Us

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Neil Jonas
Brock & Scott, PLLC
USFN Member (North Carolina)

Regulation Z § 1026.41(e)(5), as amended by the 2016 Mortgage Servicing Final Rule, became effective April 19, 2018. Doubtless, upon the implementation of the new statement requirements, there were — and continue to be — questions and confusion about the statements themselves; how they should be read; what they mean; and how they will impact the default industry.

Foretelling the Issues?
In February 2016, the CFPB issued the results of a study entitled “Testing of Bankruptcy Periodic Statement Forms for Mortgage Servicing” (2016 Study). A review of this study is useful in (1) forecasting possible sources of confusion; and (2) helping to develop responses to future questions and challenges regarding the periodic statements.

The 2016 Study clearly declared at the outset that its purpose was to explore consumers’ perceptions and comprehension of bankruptcy-specific disclosures. This was assessed through three rounds of consumer interviews. The forms were revised between rounds of testing to address issues revealed by the testing. (For a full text of the study, visit https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Bankruptcy_Report_FINAL_2_29_16.pdf.)

The bulk of the CFPB’s study was directed toward understanding a hypothetical bankruptcy debtor’s understanding of the proposed statements, particularly, the correct ongoing payment amount, the status of post-petition versus pre-petition balances, and the consequences of non-payment. The “Conclusions of the Study” (featured on pp. 57-59) found that: (1) participants preferred receiving the statements; (2) participants preferred the use of non-technical language; (3) statements that payments were “voluntary” did not facilitate comprehension; (4) participants looked at the “Payment Amount” box, the payment coupon, and the “Explanation of Payment Amount” boxes to understand how much to pay; (5) information about the consequences of non-payment was considered threatening but helped participants’ understanding; (6) distinction between post- and pre-petition payments was not immediately clear; (7) participants’ understanding of information that would only appear in a bankruptcy context was lower than their understanding of information that would appear on a statement outside of bankruptcy.

The 2016 Study anticipated two major potential debtor complaints regarding the periodic statements and offers possible avenues for servicers to consider in rebutting those objections. The first likely contention is that the statements are threatening or constitute an invalid attempt to collect a debt. The second expected criticism is that the statements cause confusion about the allocation of pre-petition versus post-petition payments.

Using the 2016 Study in Mortgage Servicing?
For a discussion of how the CFPB’s research might be used by mortgage servicers as a defensive tool against charges of bankruptcy stay violations and confusion by a debtor-borrower, read on.

Responding to “The Statements are an attempt to collect a debt” — It seems inevitable that debtors will assert that the periodic statements constitute an attempt to collect a debt, possibly giving rise to claims of stay violations under 11 U.S.C. § 362. As particularly relevant to mortgage servicer creditors, Section 362 of the Bankruptcy Code expressly prohibits:


(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.


In the past, periodic statements sent to borrowers during (or after) bankruptcy have been found — under some circumstances — to be violations of the stay. See In re Draper, 237 B.R. 502 (Bankr. M.D. Fla.1999) (“The only credible reason to send such invoices on a monthly basis is to try to collect payments from debtors protected by the automatic stay.”); In re Connor, 366 B.R. 133, 138 (Bankr. D. Haw. 2007) (“The only purpose for sending the monthly statements after [debtor expressed intent to surrender in a Chapter 7 case] was to induce [Debtor] to make payments on a prepetition debt which was dischargeable and has now been discharged.”)

Further, “Outstanding amounts to be paid to prevent foreclosure should generally be described as voluntary, rather than as ‘due,’ and the communication must omit language that demands payment. … A statement lacks a valid informational purpose, and is an enjoined act to collect a discharged debt as personal liability, if it is identical to the statement a discharged debtor received prior to filing for bankruptcy. Such statements inescapably convey the message that the creditor sending them seeks to collect a discharged debt as a personal liability.” In re Biery, 543 B.R. 267, 287–88 (Bankr. E.D. Ky. 2015).

It is possible that the new CFPB statements will receive similar challenges. The statements tested did contain language regarding payments being due:
Round 1 Forms (p. 61), Account History references: “Total $4,339.13 unpaid amounts.”

The statements tested also included various sets of bankruptcy disclaimer language, with each having slightly alternative wording through the three rounds of testing. One sample is below:

 

Bankruptcy Notice (an example tested)
Our records reflect that you are presently a debtor in an active bankruptcy case or you previously received a discharge in bankruptcy. This statement is being sent to you for informational and compliance purposes only. It should not be construed as an attempt to collect a debt against you personally.


Generally, participants understood disclaimer language of this nature. “Almost all participants in the first round of testing said the form was for informational purposes rather than attempting to collect a debt, and they could correctly identify that the borrower was in bankruptcy.” See 2016 Study (p. 13) at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Bankruptcy_Report_FINAL_2_29_16.pdf. Still, some participants did express confusion, with one commenting, “If this is for information only, then why are they sending you a bill that is terrifying?” Id. at 13-14.

Another observed that the statement says “’This is for your informational purposes only,’ and ‘This is a debt,’ so I don’t understand that part. Language is kind of confusing ....” Nevertheless, the study concluded that “Clear information about consequences of non-payment — although this information can appear somewhat threatening — helped participants understand their various courses of action and what would happen if they did not take action. In fact, some participants wanted even clearer, more direct language about these consequences.” Id. at 58.

Based upon the study’s findings, a mortgage creditor facing a challenge that the periodic statements constitute an attempt to collect a debt could respond that: (1) the statements are expressly required by applicable regulations; (2) that the statements contain bankruptcy disclaimer language; and (3) that although the language may “appear threatening” to some, the results of extensive research conducted by the CFPB prior to finalization of the statement rule were that — on the whole — this language aided potential recipients in understanding the consequences of non-payment.

Responding to Confusion about Post-Petition vs. Pre-Petition Arrearage
— A thornier issue exists for mortgage creditors whose claims are provided for in a Chapter 13 plan. In addition to concerns about the bankruptcy disclaimer language, Chapter 13 presents the possibility for confusion about the allocation of payments between pre-petition arrearage amounts and ongoing post-petition contractual payments. The 2016 Study revealed significant cause for unease on this point. Chapter 13 participants noted that “there were many different subtotals on the form that could be interpreted as how much they owe …” Id. at 36. In the second round, in particular, the study notes that “[c]omprehension for all pre-petition arrearage information was low across versions of the Chapter 13 forms …” Id. at 38.

Ability in distinguishing between pre- and post-petition payments varied through the rounds and the study concluded that “[o]verall, participants in Rounds 1 and 3 generally understood the pre-petition arrearage disclosures and that these disclosures represented a separate stream of payments from the post-petition payments …” Id. at 58. It seems that the study concluded that context was key and that individuals “undergoing bankruptcy might know whether they are behind on their payments before filing for bankruptcy and, as such, might be able to identify this information …” Id.

Based upon these conclusions, the 2016 Study does give some clues as to how a servicer may rebut a debtor’s charge that the statements are confusing or misleading:


1. The statements are an acceptable explanation of issues that are, by their nature, confusing. However, the third-round form (which is similar to the version that was implemented) generally gave participants an understanding that pre-petition arrearage disclosures “represented a separate stream of payments from the post-petition payments.” Id. Therefore, the statements provide a proven adequate explanation of the account status.

2. The 2016 Study determined that Chapter 13 debtors should know whether they are behind on their mortgage payments when they file a bankruptcy petition.

3. Despite the potential for confusion, the 2016 Study still resolved that participants preferred receiving these statements and that the statements assisted in understanding the debtor’s accounts.


Closing
The CFPB’s 2016 Study is a comprehensive analysis of the understanding and usefulness of the new bankruptcy statements. It details specific testing of the statements themselves among participants similar to the target audience. Most importantly for mortgage servicers, this study presents robust research that explains the servicers’ obligations in sending periodic statements in bankruptcy. The 2016 Study also shows, based upon empirical evidence, that the language in the statements cannot be reasonably construed as an inappropriate attempt to collect a debt. The statements also contain adequate information to allow debtors to distinguish between pre- and post-petition payments.

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NACTT Annual Conference 2018

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

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

The National Association of Chapter Thirteen Trustees (NACTT) held its annual four-day conference in Miami, Florida from June 27-30. The NACTT administers Chapter 13 bankruptcy cases in the 94 federal judicial districts. Mortgage issues continued to be an important topic at the conference, with several interesting educational panels addressing mortgage subjects; plus there was useful dialogue among mortgage representatives, mortgage servicing attorneys, and Chapter 13 trustees. This article highlights a few of the educational offerings and events of interest to the mortgage servicing industry.

Meeting of Trustees, Servicers, and Attorneys
As in past years, the conference began with the NACTT Mortgage Committee meeting. This group is composed of Chapter 13 trustees, servicer representatives, and their attorneys; it is a continuation of the efforts begun in 2004 to improve mortgage servicing in Chapter 13 bankruptcy cases. Participation is through monthly teleconferences, subcommittees on specific issues, and biannual in-person meetings. The group is open to any interested mortgage servicer representative, bankruptcy attorney, or Chapter 13 trustee (contact the USFN Bankruptcy Committee for information about joining). Topics that the mortgage committee addressed in Miami included:

 

Consumer Financial Protection Bureau Periodic Statement Rules — Required for borrowers in bankruptcy since April 19, 2018, the group discussed “pain points” that servicers are feeling since the rolling out of bankruptcy periodic statements. These include how to comply with the periodic statement rules for accounts to be paid in full in a bankruptcy case, Chapter 13 plans that “cramdown” or “strip-off” mortgage claims, and how to deal with Chapter 13 plans that require “gap payments” to be included in the pre-petition arrearage claim. Servicers are still navigating their way around how to best comply with the periodic statement rules in these circumstances.

 

Federal Rule of Bankruptcy Procedure (FRBP) 3002.1 relating to Payment Change Notices — FRBP 3002.1(b) requires mortgage servicers to file notices with the court at least 21 days prior to the effective date of a monthly payment increase or decrease for mortgages secured by borrowers’ principal residences in Chapter 13 cases. The mortgage committee approved proposals for changes to FRBP 3002.1(b) — to be presented jointly with the American Bankruptcy Institute’s (ABI) Chapter 13 Committee of the Commission on Consumer Bankruptcy — for submittal to the Advisory Committee on Rules of Bankruptcy Procedure for consideration later this year. If adopted by the advisory committee, they could amend the payment change rules after a comment period and approval by the U.S. Supreme Court. The proposed changes are in two areas:

 

o The current rule does not provide guidance for what happens if a notice is filed less than 21 days prior to the effective date. The proposed change provides that if the payment increases and the notice is not filed timely, then the effective date for the increased payment would be the due date that is at least 21 days from the filing of the notice. Under the proposed rule, a servicer would have to waive any increase in the payment amount for non-compliance with the rule. If the monthly payment decreases, the proposed rule provides that the effective date would be the effective date set out in the notice. For decreased payments, the new rule would give Chapter 13 trustees flexibility in implementing payment decreases that may not be in technical compliance with the rule, but that would be to the benefit of debtors.

 

o Home Equity Lines of Credit (HELOC) notices of payment change are problematic for servicers because changes may occur monthly, making compliance with the rule difficult. The proposed change would provide an exception to filing notices of payment change for any increased or decreased payment of $10 or less. Instead, servicers of HELOC accounts would be required to file an annual notice in which the servicer would have to provide a reconciliation of the account for any over- (or under-) payment received during the prior year, which would be accounted for by the trustee in the first payment to the servicer in the month after the annual notice.

 

Loan Modification Agreements — The mortgage committee and the ABI will also present to the rules committee a proposal to change the process by which loan modification agreements are approved in Chapter 13 cases. The proposal would allow a servicer to initiate the approval process through motion practice that would temporarily forebear payment of its pre-petition claim in bankruptcy while a trial period plan is in effect. If the modification becomes permanent, then a final order approving it would be entered.


NACTT Presentations and Panels

Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference, as is customary for the NACTT annual meeting. The Office of the U.S. Trustee (UST), in its 30th year of existence, falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees (including Chapter 13 trustees), as well as enforcement of bankruptcy compliance rules. Over the previous year, the UST has focused its efforts in policing the system for instances of inadequate debtor representation in bankruptcy cases, seeking to punish incompetent and unethical attorneys. Of particular interest to the UST has been multi-jurisdictional debtor firms, national firms that solicit business over the internet and then partner with local counsel attorneys to file bankruptcy cases. In some instances, the UST has found questionable practices that have led to sanctions and bans from filing cases by these firms. See, e.g., In re Williams, 2018 Bankr. LEXIS 382 (Chicago-based law firm and principals fined $250,000 and banned for five years from filing cases in Western District of Virginia).

Director White did not completely omit mention of mortgage servicer bankruptcy compliance in his comments. Continued servicer adherence to best practices in bankruptcy should remain the ongoing objective.

The NACTT offered many topical and informative educational sessions of interest to mortgage servicers, including the annual Chapter 13 case law update, a panel addressing remedies when proof of claim compliance fails, and one discussing the impact of the changes to the Federal Rules of Bankruptcy Procedure that became effective on December 1, 2017.

The Chapter 13 case law update covered cases impacting all aspects of Chapter 13 practice, including cases that were of interest to mortgage servicers. Contained in the discussion was a case from California involving a real estate “hijacking” scheme. In re Vazquez, 580 B.R. 526 (Bankr. C.D. Cal. 2017). In Vazquez, the borrower retained a “foreclosure prevention” specialist who claimed to be able to stop a foreclosure by legitimate means through negotiations with the lender, but who then forged the borrower’s signature on a deed to a random debtor. The deed was subsequently sent to the foreclosing mortgage holder with a demand to halt the foreclosure sale. This practice was repeated multiple times to thwart the lender’s foreclosure efforts. The bankruptcy court held that, even though the borrower may not have known or authorized the agent’s actions, the court was authorized to grant the servicer in rem relief from the automatic stay for all future bankruptcy filings. Of note in this case: the court did not limit the in rem relief period to two years as provided in 11 U.S.C. § 362(d)(4) but extended it indefinitely, pursuant to the court’s inherent powers to enforce its orders under 11 U.S.C. § 105(a).

The proof of claim compliance panel discussed practical remedies available to creditors for missed bar dates, given that the bar date was shortened with the rule changes last year. Several options were discussed that have been used in different jurisdictions, including filing a motion to allow a late claim, amending a timely filed debtor proof of claim, filing a late claim and matching it with the amount in the confirmed plan, and a trustee notice of intention to allow a late claim. The last mentioned remedy is a trustee form used by the Chapter 13 trustee in the southern district of Ohio that gives notice to debtors and creditors regarding a late-filed claim and an opportunity to object to it. As with many bankruptcy matters, late-filed proof of claim remedies are specific to each jurisdiction, and local bankruptcy counsel should be consulted to determine the fix (if any) for a missed bar date.

Conclusion
The NACTT conference continues to provide opportunities for mortgage servicers and their attorneys to interact with Chapter 13 trustees, judges, and debtors’ counsel in an informal setting, with many informative educational panels impacting Chapter 13 practice and mortgage servicing. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers — a place to come together to discuss the issues impacting our world.

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South Carolina: Federal Court finds Law Firm Violated FDCPA Provisions in Demand Letter to Homeowners

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

by John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

It seems that law firms in the default servicing or debt collection industry have always had a target on their backs when it comes to the Fair Debt Collection Practices Act (FDCPA). Still, a recent decision may at least provide some guidance on avoiding certain FDCPA issues. In the case of Park v. McCabe Trotter & Beverly, P.C., No. 2:17-cv-657-RMG (D.S.C. Aug. 14, 2018), the U.S. District Court for the District of South Carolina issued an order and opinion with implications for mortgage servicers and their counsel. In Park, the court found that a debt collector law firm (McCabe) violated provisions of the FDCPA while attempting to collect past-due homeowners’ association (HOA) dues and assessments.

Background
The plaintiffs were homeowners in a housing development with a homeowners’ association. The HOA had previously retained the law firm to represent it in the collection of dues and assessments pursuant to the covenants and restrictions established for the development. The plaintiffs ceased paying assessments in 2006. In 2012, the HOA began imposing additional fines for numerous alleged violations, which included some daily fines. In 2015, the HOA requested that the law firm collect the unpaid dues and assessments from the plaintiffs.

The plaintiffs alleged that the law firm’s attempts to collect attorneys’ fees, in demand letters sent to the plaintiffs, were in violation of the FDCPA as those fees were not authorized by the development’s covenants and restrictions. The court agreed with the plaintiffs and found that attorneys’ fees were not authorized by the covenants and restrictions, unless they were part of the amount entered as a judgment in a legal action. The lesson is clear here — do not attempt to collect attorneys’ fees, or any other fees, until authorized by the contract in question.

Court’s Analysis
A more troubling aspect of the case, as far as law firms are concerned, deals with the way the debt was listed in a letter sent by the law firm to the plaintiffs. In the letter, the law firm stated that the plaintiffs’ “balance including attorneys’ fees is $19,965.76.” The court found the letter to be in violation of the FDCPA by failing to explain the lump-sum debt that the plaintiffs allegedly owed. The court attached significance to the fact that the letter simply indicated a total amount of debt (without further explanation or breakdown) and found that in doing so, the law firm “hid the true character of the debt.” As the letter only provided a lump-sum amount claimed to be due, the plaintiffs had no way to determine which parts of that figure constituted their unpaid fines, assessments, attorneys’ fees, or costs; and, therefore, could not assess the validity of the debt. The court found this to be a violation of sections 1692(e) and 1692(f) of the FDCPA and granted the plaintiffs’ motion for summary judgment.

In reaching its decision, the district court cited the Seventh Circuit case of Fields v. Wilber Law Firm, P.C., 383 F.3d. 562 (7th Cir. 2004), which also dealt with a lump-sum debt amount listed in a collection letter. The court’s opinion in Fields indicated that a possible, and easy, solution to compliance with sections 1692(e) and section 1692(f) would be to itemize the individual charges that comprise the total lump sum provided in the letter. In his decision in the Park case, Judge Gergel emphasized this language in his order granting summary judgment to the plaintiffs, making it clear that the law firm’s letter should have had an itemized breakdown of the lump-sum amount listed as due and owing by the plaintiffs.

Closing Words
Demand letters in South Carolina must contain a breakdown of any lump-sum debt totals in order to not run afoul of the FDCPA. Debt collectors can no longer list only a total debt figure in their collection or validation letters to borrowers without FDCPA implications. The question remains as to the detail required to avoid hiding “the true character of the debt.” For example, would a further breakdown be required for any items listed as “corporate advances” or “recoverable balance”? Since the district court in South Carolina relied on a Seventh Circuit opinion in the Park case, a review of that circuit’s opinions would seem to be in order for future guidance.

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Utilization of Land Reports for Real Estate Located within Federal Indian Reservations

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

by Blair Gisi
SouthLaw, P.C. – USFN Member (Iowa, Kansas, Missouri)

If you have ever reviewed title work for real estate located on a federal Indian reservation, you have likely encountered some additional requirements stemming from the tribal sovereignty recognized by the United States government. Contacting the Bureau of Indian Affairs (BIA) to request a land report to ensure that the real estate is, in fact, tribal land is warranted before taking on these requirements.

The BIA states that there are approximately 56.2 million acres of land held in trust by the United States for various Indian tribes and individuals.1 While there are various forms of “tribal land” (allotted lands, restricted status lands, or state Indian reservations), the key consideration here is whether the United States actually holds title in trust for an Indian Tribe or individual Native American. In other words, simply because the real estate is located on an Indian reservation does not necessarily mean that it is tribal land.

In one particular matter, a recently reviewed foreclosure title report included an additional requirement due to the real estate being located on the Prairie Band Potawatomi Indian Reservation in Northeastern Kansas. While potentially necessary, this further requisite would have likely added time and costs to the foreclosure action from additional steps, including the need to register to practice in tribal court and/or the need to register the state court judgment as a foreign judgment with the controlling tribal court. While researching this issue, it was discovered that the BIA Division of Land Titles and Records (and its 18 Land Titles and Records Offices) could expedite this process. This, ultimately, saved time and costs.

After contacting the regional Southern Plains Land Titles and Records Office (which covers Kansas),2 it was learned that a land report could be obtained for no charge — and within two weeks of the request. Receipt of the land report revealed that, while the subject real estate was located on the Prairie Band Potawatomi Indian Reservation, the United States government did own or hold the real estate in trust and, therefore, the real estate was not tribal land. Providing the land report to the title company resulted in a removal of the requirement at issue. Consequently, the foreclosure commenced without the need to involve the reservation or tribal council.

It should also be noted that prior to contacting the BIA Land Titles and Records office, this author’s firm reached out to the Kansas Native American Affairs office (the KNAA). The KNAA assisted in pointing out that the subject real estate could not have been tribal land based on a review of the chain of title and lack of involvement of the BIA in mortgaging this property to the current borrowers. The KNAA, however, was unable to generate the report necessary to remove the requirement at issue.


https://www.bia.gov/frequently-asked-questions
For a list of Land Titles and Records Offices as well as a map of the regions, visit: https://www.bia.gov/bia/ots/dltr.


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Connecticut: Distinction between “Special Defense” and “Counterclaim” affects Restoration of a Withdrawn Case to the Court’s Docket

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

by Peter A. Ventre
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut)

In Sovereign Bank v. Harrison, 184 Conn. App. 436 (Aug. 28, 2018), the trial court had restored a withdrawn foreclosure action to the court docket based on the defendant’s contention that she had a pending counterclaim, even though none had been pled at the time of the withdrawal. Rather, the defendant pointed to a special defense, which she then asserted was meant as a counterclaim. The appellate court reversed and remanded the case for the motion to restore to be denied.

Background
Prior to the scheduled trial date, the plaintiff withdrew its foreclosure action (subsequently commencing a foreclosure action in federal court). At that time the defendant had filed special defenses only, not any counterclaim. After the withdrawal, the defendant filed a motion to amend her answer to include a counterclaim; the trial court ruled that it had no jurisdiction until the matter was restored to its docket. The defendant thereafter filed a motion to restore, claiming that the third special defense was more properly construed as a counterclaim. The court granted the defendant’s motion, and the plaintiff appealed.

Analysis on Appeal
In its review, the appellate court noted that a defendant with a pending, effective counterclaim should not need to move to restore a plaintiff’s withdrawn case to the docket. Such a determination in the subject case turned on whether the defendant’s third special defense, if it was to stand as a counterclaim, asserted an independent cause of action — with a special defense which does not seek affirmative relief being purely defensive, and not an effective counterclaim. In overturning the lower court’s ruling, the appellate court found there was a failure to make that determination.

Specifically, the trial court’s reliance on the special defense allegation arising from the same transaction as that described in the plaintiff’s complaint was misplaced, with the appellate court stating: “Evaluating the defendant’s answer against the correct standard, it is clear that the allegation in the defendant’s third special defense cannot properly be constructed as a counterclaim.” The third special defense allegations merely challenged the amount of the debt owed to the plaintiff, which may be raised by way of special defense or by objecting to the plaintiff’s attempted introduction of the affidavit of debt in court. Nothing in the defendant’s pleadings “can reasonably be interpreted as a claim of entitlement to affirmative relief.” On the other hand, the court noted that if the defendant had pleaded payments in excess of the debt, then she would be entitled to affirmative relief and, therefore, the special defense could be considered a counterclaim.

In closing, the appellate court cautioned that while construing pleadings “broadly and realistically,” a trial court should not read into them “factual allegations that simply are not there” or “substitute a cognizable legal theory that the facts, as pleaded, might conceivably support for the noncognizable theory that was actually pleaded.”

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

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District of Columbia: Address Confidentiality Act of 2018

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018

by John Ansell
Rosenberg & Associates, LLC – USFN Member (District of Columbia)

The District of Columbia recently passed legislation that may affect the ability of servicers and lenders to adequately assess title on certain properties in the District. The new statute (the Address Confidentiality Act of 2018) became effective October 1, 2018; it is designed to protect victims of domestic violence.

According to the terms of the Act, if an individual applies for the program and is certified as a victim of stalking, domestic violence, human trafficking, or a range of sexual offenses, the individual will be issued an identification card with a substitute address. The substitute address will be a mailbox to which mail will be sent, and from which the office that administers the program will forward mail to the program participant’s actual address.

From a real property title perspective, a participant in the program can submit a request to any D.C. government office or agency to remove all publicly accessible references to their actual address. This means that a participant may have their name removed from all publicly available land records, tax records, and court records. This can present challenges for the title industry, as well as loan originators and servicers. Thus far, D.C. has not provided crucial details. Namely, there is no indication yet of whether the redacted information will simply be absent, or whether mention will be made that the information is being withheld pursuant to this program. Consequently, a title search may come back with documents simply missing; e.g., a deed or deed of trust just not showing up in a title search, or the lack of a tax record appearing when performing an escrow analysis. Alternatively, the search results may reflect some notice that the information is being omitted, with or without explanation.

A further complication is that, as currently written, the statute does not allow program participants to selectively direct the release of information. Their only choice appears to be to remove themselves entirely from the program, hardly the route that persons fearing for their safety would choose. Overall, the potential implications of this statute upon title searches are significant, and until D.C. provides more information as to how such matters will be handled, the state of title in the District will remain uncertain.

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District of Columbia: Another Court of Appeals Decision affecting Foreclosures of Condominium Liens

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018 and November 13, 2018

by Tracy Buck and Sara Tussey
Rosenberg and Associates, LLC — USFN Member (District of Columbia)

On September 13, 2018 the District of Columbia Court of Appeals rendered a decision in 4700 Conn 305 Trust v. Capital One, N.A. in relation to foreclosures of condominium liens. The court considered the issue as to whether a condominium lien covering a period in excess of six months’ worth of outstanding assessments is entitled to super-priority status.

Under D.C. Code § 42-1903.13, condominium associations have a “super-priority lien” over first mortgage lienholders to the extent of six months of the unpaid condominium assessments immediately preceding acceleration. A super-priority lien is superior to all liens, including a first mortgage or deed of trust. Any unpaid condominium assessments beyond a super-priority lien are lower in priority to a first mortgage or deed of trust (the “junior condo lien”).

Some Appellate and Statutory History
In 2014, in Chase Plaza Condo. Ass’n, Inc. v. JPMorgan Chase Bank, N.A., the D.C. Court of Appeals held that an association’s foreclosure of its super-priority lien extinguishes a first deed of trust. This decision was based on the common law principle that foreclosure of a senior lien extinguishes all junior liens where the proceeds from a foreclosure sale are insufficient to satisfy a junior lien. The effect of Chase Plaza was that lenders were henceforth recommended to satisfy an association’s super-priority lien in advance of a condominium foreclosure sale to ensure that the lender’s first mortgage’s lien priority was preserved. If a super-priority lien was satisfied, the association could proceed with its sale; however, its sale would be subject to the lender’s first deed of trust.

In 2017 the D.C. condominium law was amended to require that Notice of a Condominium Foreclosure had to be sent to all junior lienholders of record (including lenders holding a first deed of trust) and that the notice must expressly state whether the association was foreclosing on its super-priority lien or junior condo lien. In March 2018, in Liu v. U.S. Bank N.A., the D.C. Court of Appeals held that an association could not waive its super-priority lien status. In doing so, the court held that an association could not foreclose on its super-priority lien plus advertise and hold the sale out to be subject to a first deed of trust. As such, lenders were thereafter recommended to not rely on advertisements or notices of sale stating that a condominium foreclosure would be subject to any first deed of trust. If the association stated that a condominium foreclosure was to be subject to a first deed of trust, lenders were still advised to satisfy the super-priority lien. Yet, in the Liu decision, the only outstanding assessments were for the most recent six months, and accordingly, the association could only foreclose on its super-priority lien because that was all it had.

More Recently from the Appellate Court
The D.C. Court of Appeals rendered yet another decision regarding condominium foreclosures. In 4700 Conn 305 Trust v. Capital One, N.A. (Sept. 13, 2018), the court held that where an association was foreclosing on a condominium lien for an amount greater than six months of assessments owed, the super-priority lien was included. The court did not consider the impact that this decision might have on condominium foreclosures that occurred prior to the 2017 amendment to the D.C. condominium law. Before the amendment, associations were not required by statute to send a Notice of Foreclosure Sale to any junior lienholders or holders of a first mortgage or deed of trust. Moreover, associations were not required to state within its notice the specific split condominium lien that the association was foreclosing on.

Prior to the 2017 statutory amendment, associations often foreclosed on the entire condominium lien without providing notice to junior lienholders. Based on 4700 Conn 305 Trust, those foreclosures of entire condominium liens included the association’s super-priority lien, effectively extinguishing first mortgages without any notice to its lienholders. While the potential impact of this holding is unsettling, the court left open the possibility for allegations to be raised by lenders based on equitable or contractual principles. For example, 4700 Conn 305 Trust has left lenders with recourse in claiming that those prior foreclosure sales of super-priority liens could be deemed: (1) invalid due to unconscionable sale prices; and (2) invalid due to the unconstitutionality of the District’s condominium law at that time due to the lack of notice requirement to lenders. The appellate court has left these arguments untouched as of yet; and, thus, that is what lenders are left with to defend their mortgage’s existence in these instances.


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