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Illinois: New Statute regarding Arrearage Payments

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

by Steven Lindberg
Anselmo Lindberg & Associates, LLC – USFN Member (Illinois)


New Law
Illinois has enacted statute 205 ILCS 635/5-8.5, which will become effective on January 1, 2018. The statute states:

Arrearage payments. When a mortgagor is in arrears more than one month, no licensee shall refuse to accept any payments offered by the mortgagor in whole month payment amounts. Such payments shall be applied to the unpaid balance in the manner provided in the licensee’s mortgage with that mortgagor.

Nothing in this Section shall be construed to otherwise impair the ability of the licensee to enforce its rights under the mortgage with that mortgagor; nothing in this Section shall be construed to otherwise impair the obligations of the mortgagor under the mortgage with the licensee.

According to the statute, the mortgagee cannot refuse whole month payments when the mortgage is more than one month in arrears, meaning that regardless of the length of delinquency, the mortgagee must accept the complete monthly payment. One might ask, “Regardless of how delinquent the consumer is, are lenders/servicers expected to take a payment if it equals a whole monthly payment?” The answer is “yes.”

Background
This statute was enacted because a constituent of one of the bill’s sponsors said that she attempted to make a payment on her delinquent loan. The loan was two months overdue and the mortgagor had the amount for just one of the monthly payments. The servicer rejected the partial payment, stating that only the two months in payment would be accepted. The legislator thought that this was wrong, and then proposed the subject legislation. At the hearing on the bill, the Representative stated that this is a “simple bill.” This bill “does not stop a foreclosure when one is pending and it does not stop a mortgagee from filing a foreclosure action.” Therefore, unless the loan is properly reinstated, the mortgage is still in default and the mortgagee can move forward with foreclosure.

Questions Remain, Unfortunately
There are some unanswered questions that arise from this new law. For example, what if the loan is in arrears and a foreclosure action is instituted, but at some point in the foreclosure action the mortgagor tenders all of the arrearage? This tender would represent the “whole monthly payment amounts” since it is a cure. Does the mortgagee have to accept these payments and dismiss the action? It would appear that the simple answer is yes. However, this would seem to conflict with another statute; that is, 735 ILCS 5/15-1602. This is the reinstatement section in the foreclosure act.

Section 735 ILCS 5/15-1602 specifically limits reinstatement to a period prior to the expiration of 90 days from the date of service. Admittedly, not many mortgagees are enforcing this section, yet it still remains. As such, a mortgagor could tender all of the arrears after the 90-day period and, under the new law, the mortgagee would have to accept the funds. However, because the new statute also says that mortgage licensees retain their ability to enforce their rights under the mortgage, the foreclosure action may continue until the borrower also pays all other outstanding amounts necessary to fully reinstate the mortgage. For instance, if the borrower is 12 months in arrears, and the borrower tenders 12 months of payments, the servicer must accept and apply those payments. Even after those payments are applied, the loan will remain in default unless all of the foreclosure-related expenses and advances, such as attorneys’ fees and costs, are also tendered to the servicer.

Another question is presented in light of the new legislation: What happens when a loan is in default and a breach letter is sent? Then, subsequent to the breach letter and prior to the filing of a foreclosure, the mortgagor tenders only one payment, not the entire arrearage. Does a new breach letter have to be sent? It would seem from the language of the statute — which is vague — and the testimony at the hearing on the bill, that another breach letter would be unnecessary because the default has not been cured. Nevertheless, it is foreseeable that courts could rule that a new breach letter would be necessary in this scenario. Because this issue likely depends on the individual viewpoint of each particular judge, this is not a question with a definitive answer.

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South Carolina: Appellate Decision may Increase Jury Trial Demands by Borrowers

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

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

A case from the South Carolina Court of Appeals may lead to a dramatic increase of jury trial demands by borrowers in foreclosure cases. [South Carolina Community Bank v. Salon Proz, LLC (S.C. Ct. App. Apr. 26, 2017)]. The issue presented by the appellant, Salon Proz, LLC (Salon), was whether the master-in-equity judge was correct in denying Salon’s motion to transfer the case to the general jury trial docket.

Salon contended that: (1) it did not waive its demand for a jury trial; (2) the clerk of court lacked the authority to refer the case to the master-in-equity judge; (3) if the clerk of court had the authority to refer the case, the clerk of court erred in doing so; and (4) a return to the circuit court jury docket is required.

Background
On October 26, 2011, South Carolina Community Bank (Bank) filed a foreclosure complaint against Salon. On November 23, 2011, Salon answered the complaint, raising several counterclaims and demanding a jury trial. In January 2012, Bank filed a motion to dismiss Salon’s counterclaims (pursuant to Rule 12(b)(6), SCRCP); and, in February 2012, Bank moved to refer the case to the master-in-equity judge pursuant to Rule 53, SCRCP. Per the order of reference, the master-in-equity judge was duly authorized to determine the issues, report the findings of fact, and thereafter enter a final judgment. Salon did not initially appeal the order of reference.

In August 2012, Salon filed a motion to transfer the case back to the general jury docket from the equity court. Salon asserted that it did not waive its right to a jury trial by failing to initially appeal the order of reference. Salon argued that it did not receive notice of the order of reference, whereby Bank countered that the court would have mailed such an order and Salon’s counsel took no action to object to the order. Salon attempted to file a motion to transfer the case back to the general jury trial docket which, like its motion to reconsider, failed.

Appellate Review
The Court of Appeals determined that Salon did not waive its right to a jury trial by failing to appeal the order of reference because the record did not reflect that Salon received notice of the order of reference’s entry, and the record did not reflect that Salon otherwise voluntarily relinquished the right to a jury trial. The court found that the right to a jury trial is highly favored and waiver of such a right cannot be lightly inferred. “In the absence of an express agreement or consent, a waiver of the right to a jury trial will not be presumed.” Given the lack of evidence indicating that Salon’s counsel received the order of reference, the court found that the right to a jury trial had not been waived by Salon.

The court also agreed with Salon’s second argument that the clerk of court lacked the authority to refer the case to the master-in-equity judge. Since Salon had already made a valid jury trial demand, the clerk of court was incorrect to refer the case to the master-in-equity judge under Rule 53(b), SCRCP.

As for Salon’s counterclaims, the court looked to supreme court precedent [Carolina First Bank v. BADD, LLC, 414 S.C. 289, 295 (2015)]: “In a foreclosure action, a counterclaim arises out of the same transaction or occurrence and is thus compulsory, when there is a ‘logical relationship’ between the counterclaim and the enforceability of the guaranty agreement” and should therefore be heard and decided by a jury.

Closing
This case was reversed by the Court of Appeals and remanded with instructions that it be returned to the general jury trial docket for further proceedings. These include a hearing before the circuit court to determine the nature and proceedings of any remaining counterclaims and any request for an order of reference to the master-in-equity judge for the other equitable matters.

As stated above, it is possible that this case may lead to an increase in jury trial demands by borrowers in foreclosure matters in South Carolina.

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Maine: State Supreme Court Ruling will Bar Many Future Foreclosure Restarts

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

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

The Maine Supreme Court has ruled that a second foreclosure action was barred by the doctrine of res judicata after an earlier foreclosure action was dismissed with prejudice. In Federal National Mortgage Association v. Deschaine, 2017 Me. 190 (Sept. 7, 2017), Fannie Mae sought to foreclose after the trial court had dismissed the earlier action brought on the same note and mortgage with prejudice as a sanction after both parties failed to comply with a court scheduling order. In the second action, the defendant-borrowers moved for summary judgment, contending that the action was barred by the trial court’s prior dismissal with prejudice. The trial court agreed and entered judgment in favor of the defendants.

Fannie Mae appealed and the Maine Supreme Court affirmed, holding that when Fannie Mae exercised its right to accelerate the loan in the first foreclosure action, the promissory note became “indivisible” and the borrowers’ obligation to make the monthly payments of principal and interest called for in the note “merged into a unitary obligation” to pay the entire debt. The Court further held that once this occurred, the borrowers had no continuing obligation to make the monthly installment payments, and there could be no new breaches or defaults under the note. The Court found that when Fannie Mae accelerated the debt in the first action, it placed the entire outstanding balance due on the note at issue; and, because Fannie Mae did not prevail in that action, it was precluded from bringing any future separate action to recover based on the same debt. As for the impact on the mortgage, the Court made it clear that:


Additionally, because Fannie Mae is precluded from seeking to recover on the underlying debt on the note, the [trial] court did not err by concluding . . . that the [borrowers] were, as a matter of law, entitled to a judgment declaring that they hold title to the . . . property unencumbered by the mortgage in favor of Fannie Mae.

 

The Supreme Court’s sweeping holdings in Deschaine will clearly present significant challenges to lenders and servicers seeking to enforce notes and mortgages in Maine. Going forward, Maine foreclosure plaintiffs and their representatives will have to be especially diligent when preparing all aspects of their cases to ensure that they can demonstrate the requisite “strict compliance” with the Maine demand letter and foreclosure statutes, as after the Deschaine case, it is clear that failure to do so can effectively result in the loss of the asset.

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Borrower Starts Separate Fraud Suit against Lender – and Loses

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

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

Some disgruntled borrowers are not satisfied with defending and delaying foreclosures. Rather, they carry it further and separately sue lenders in other actions brought, for example, in federal court. Among these approaches, exposed by a recent case [MAA-Sharda, Inc. v. First Citizens Bank & Trust Co., 149 A.D.3d 1484, 54 N.Y.S.3d 785 (4th Dept. April 28, 2017)] the issue arises where a lender obtained a judgment of foreclosure and sale, and the borrower — contending that the lender had foisted a fraud claim upon the court — initiates a separate action founded upon such a cause of action. Case law confirms that this will not work.

Where the complaint of the borrower in the new case alleges fraud, misrepresentation, or other misconduct of an adverse party committed during earlier litigation, the new plaintiff (here the borrower) is confined solely to the remedy of a motion to vacate the court’s prior order pursuant to New York practice [CPLR § 5105(a)(3)]. Accordingly, the remedy for the asserted fraud during a legal action is limited exclusively to that lawsuit itself; i.e., by moving [under CPLR § 5105] to vacate the judgment based upon its supposed fraudulent procurement, but not through a second plenary action collaterally assailing the judgment.

In the noted case, while the court confirmed that there is an exception to the rule, it only applies when the asserted fraud or perjury is simply a means to facilitate a larger fraudulent scheme that is greater in breadth than the one in the prior proceeding complained of. In MAA-Sharda, though, the assertion was found to be manufactured just to try to fit within that exception. It wasn’t real; the general rule prevailed and the borrower lost.

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Widespread Land Records Fraud Scheme Targets Distressed Properties and Borrowers

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

by Sara Tussey and Brett Beehler
Rosenberg and Associates, LLC – USFN Member (District of Columbia)

Over the past summer, title insurers uncovered a large-scale fraudulent scheme targeting distressed properties and borrowers, which has been identified in at least twenty states. The scam involves fraudulent recorded instruments that can cause a cloud on title, thus complicating or preventing loss mitigation efforts and foreclosure.

The perpetrators obtain information about a loan that is in default or already in foreclosure, sometimes offering loss mitigation assistance to induce cooperation from borrowers. The wrongdoers then create and record fraudulent instruments related to the loan in the land records. These may include assignments, deeds, deeds of trust, appointments of substitute trustees, mortgages, and releases — among others. The fraudulent instruments may vest title into the perpetrators, thereby allowing them to attempt a refinance or sale of the property. Alternatively, the fraudulent instruments might name the perpetrators as beneficiaries of a deed of trust, so that they can enforce the instrument, obtain proceeds of a sale, or sell the loan to an unsuspecting investor.

The best way to avoid loss related to this scheme is to be able to spot fraudulent instruments — and protect the original documents related to each loan. Consider providing additional staff training to recognize fraudulent documents. Red flags include assignments or appointments signed by entities that your staff does not recognize, especially where the executing entity is also the grantee. In addition, consider naming a formal point person for escalated, fraud-related issues.

Assess further training options for your loss mitigation teams to better identify scams targeting borrowers. Have a formal, written action plan for when borrowers are victimized by a fraud scheme. Consider creating a watermark on original loan documents or using other clearly identifiable markings on copies before sending them to borrowers, in response to debt disputes or qualified written requests.

This newly identified racket has potentially serious implications for the mortgage industry and more variations are likely to follow. It is essential to enhance your staff’s knowledge and improve overall internal procedures to protect your company from loss. Discuss this matter with local foreclosure counsel for advice as to how the fraud scheme may affect foreclosures in particular jurisdictions and to request specific training for your teams.

© Copyright 2017 USFN and Rosenberg and Associates, LLC. All rights reserved.
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Connecticut: Statutory Authority to Discharge a Mortgage is based on the Deed and Not Acceleration

Posted By USFN, Tuesday, October 10, 2017
Updated: Friday, October 6, 2017

October 10, 2017

by Jeffrey M. Knickerbocker
Bendett and McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

Conn. Gen. Stat. § 49-13 provides that when a “mortgagor or those owning the mortgagor’s interest therein have been in undisturbed possession of the property for at least six years after the expiration of the time limited in the mortgage for the full performance of the conditions thereof . . . the person owning the property, or the equity in the property, may bring a petition to the superior court for the judicial district in which the property is situated, setting forth the facts and claiming a judgment as provided in this section.”

In a recent case, the plaintiff-borrower argued to the trial court that, as the loan had been accelerated for more than six years, the borrower could obtain a judgment finding the mortgage was no longer enforceable pursuant to Conn. Gen. Stat. § 49-13. [Fitzpatrick v. U.S. Bank National Association, Trustee, 173 Conn. App. 686, 164 A.3d 832 (June 6, 2017)].

Background
The mortgage in Fitzpatrick has a maturity date of September 1, 2037. The Bank moved to strike the complaint based on prior appellate case law and the wording of the statute. According to the Bank, the statute could not be invoked until six years after September 1, 2037. The trial court agreed and struck the complaint. [Fitzpatrick v. U.S. Bank National Association as Trustee, Super. Ct., Docket No. FBT CV15–6050335 (Nov.23, 2015), 2015 WL 9242410, 51 Conn. L. Rptr. 287 (“Under the plaintiff’s interpretation of § 49-13(a), a defendant who elects the remedy of acceleration to cure a plaintiff’s default under a mortgage contract would cause the time limited in a mortgage for its full performance to change from the date of final payment to the acceleration date as a matter of law. Such an interpretation would flout the well-recognized principle that ‘[t]he terms of [a] mortgage determine [a bank’s] right to foreclose the mortgage’ and, by extension, to elect remedies in the event of a borrower’s default”)].

Appellate Review
In reviewing the trial court’s decision, the appellate court observed that “no appellate authority has addressed this precise issue.” On appeal, it concluded “that the phrase ‘time limited in the mortgage for the full performance of the conditions thereof’ clearly and unambiguously refers to the maturity date specified in the mortgage, which the defendants argue is the appropriate date, and not the acceleration date, which the plaintiff argues is the appropriate date.” In an order dated September 20, 2017, the Connecticut Supreme Court (the state’s highest appellate court) has refused to consider the appellate court’s decision.

Foreclosure Case
In an action bearing docket number FBT-CV-16-6056902-S (Foreclosure Action), the Bank sought to foreclose on the very same mortgage that was the subject of the case discussed above. The Bank commenced the Foreclosure Action before the appellate decision in that case.

In the Foreclosure Action, the borrower filed a counterclaim in which he made the identical claims as raised in the case that he brought as a plaintiff against the Bank. In response, the Bank filed another motion to strike. On the day that the appellate case decision was made available to the public, the court in the Foreclosure Action had oral argument on the motion to strike the counterclaim. In a memorandum of decision dated September 21, 2017, the trial court found that the appellate court had already decided the issue in the previous case, which was binding precedent on the counterclaim.

Closing Words
These cases show that while there is no requirement to immediately commence a foreclosure after default and acceleration of the debt, a prompt foreclosure can often avoid unnecessary litigation.

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SCRA: Fourth Circuit Affirms District Court’s Ruling re SCRA and the Effect of Military Re-Entry by Borrower who Originated Loan during a Previous Active Duty Period

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

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

The Court of Appeals for the Fourth Circuit, in Sibert v. Wells Fargo Bank, N.A., No. 16-1568 (4th Cir. July 17, 2017), affirmed the ruling of the District Court for the Eastern District of Virginia.

Background
In Sibert, a servicemember had brought an action against the mortgagee, alleging that the mortgagee improperly foreclosed on his property by violating the rights afforded to him under the Servicemembers Civil Relief Act (SCRA). [The SCRA formerly appeared as 50 U.S.C. Appx. §§ 501, et seq. In 2015, the statute was transferred and is now located at 50 U.S.C.S. §§ 3901, et seq.]

The plaintiff-appellant, Richard Sibert, a sergeant in the U.S. Army, alleged that the foreclosure of his mortgage violated the SCRA, which prohibits foreclosure on a servicemember’s property during a period of military service without a court order. Briefly, the facts are that Sibert entered the U.S. Navy on July 9, 2004. On May 15, 2008, while on active duty, Sibert obtained a loan on his property secured by a promissory note. Sibert was honorably discharged from the Navy on July 8, 2008. In March 2009, eight months after Sibert’s naval discharge, Wells Fargo commenced a foreclosure proceeding on his home. In April 2009, Sibert re-enlisted in the military, joining the U.S. Army, where he remained on active duty. In May 2009, Siebert’s home was sold at public auction.

Court’s Analysis
The overarching issue resolved by the court is whether or not Sibert’s mortgage home loan qualifies under 50 U.S.C. § 3953(a), such that Wells Fargo was prohibited by 50 U.S.C. § 3953(c) from foreclosing on it without a court order. Section § 3953(c) states that a foreclosure is invalid if it is made during the period of the servicemember’s military service, except by court order which is only applicable if it complies with the protections of § 3953(a).

The interpretation of § 3953(a) is the turning point of the case: “This section applies only to an obligation on real or personal property owned by a servicemember that — (1) originated before the period of the servicemember’s military service and for which the servicemember is still obligated …” (emphasis added) [50 U.S.C.S. § 3953(a)].

Sibert contended that the SCRA is applicable to his mortgage home loan. Wells Fargo disagreed, asserting that the SCRA does not apply to his mortgage loan and, alternatively, that even if § 3953(a) did apply, Sibert voluntarily waived his rights under the SCRA in a “Servicemembers’ Civil Relief Act Addendum to Move Out Agreement.” Wells Fargo correctly maintained that “the period of ... service” described in § 3953(a) covers any period of military service, not individual periods as Sibert claimed, and because Sibert’s mortgage loan originated while he was serving in the military, the SCRA is inapplicable and the foreclosure was proper.

As a whole, § 3953(a) indicates that the SCRA does not apply to obligations that originate while the servicemember is already in the military. Due to the fact that Sibert’s mortgage originated while he was in the military, he cannot claim the remedy provided in § 3953(c).

Conclusion
The court ultimately decided that the SCRA’s protections did not apply to the mortgagor in this case where the mortgage originated during the servicemember’s first term of military service.

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Vacant Property in Foreclosure: Some Thoughts on the Process

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Robert Klein, Founder and Chairman 

Safeguard Properties (and Community Blight Solutions) – USFN Associate Member

Foreclosure is a necessity that scares the homeowner and gives the bank a headache. The mortgage counseling, incentives, and pre-screenings that are available in today’s homebuyer market can be helpful; ultimately, though, some foreclosures are bound to happen. When a foreclosure occurs, it can spell trouble for a neighborhood and trigger a demand for action.

For several years, states have grappled with the prospect of streamlining the foreclosure process, while ensuring protections are in place so that foreclosure is a last-ditch measure. This was to keep the social contract of home ownership solvent. Yet, once the decision has been made to foreclose, steps should be taken promptly to close out the property and allow it to re-enter the housing stock. At the end of 2016, states like Ohio, Michigan, and Florida led the country in vacated housing — with more than 80,000 vacant or abandoned homes and condominiums, each. Today, millions of homes are wallowing in the foreclosure process.

The longer a property sits vacant on the market during foreclosure, the more opportunity there is for its condition to worsen. Many community advocates and researchers have shown that buildings (particularly those boarded up) become beacons for crime. All the more reason that the burgeoning clearboarding movement is important as the “foreclosure/security” bandage, with the fast-tracking of a foreclosure to be the follow-up procedure. That’s why fast-track foreclosure laws like Ohio HB 390 and Maryland HB 702 came into being to swiftly address only vacant and abandoned homes.

The housing and mortgage service community relies heavily on one person to shepherd the process: its attorney. In Nevada, it can take more than 500 days to foreclose on a home following a 90-day delinquency, and that’s before any restoration or preservation can happen. The existing system calculates to an automatic six percent loss in value to the banks. This is a perfect example of the benefit brought by the lawyer who can quickly restore that property to saleable condition. With the combination of enhanced enforcement and efficiencies in technology to monitor and protect properties, it is the legal process that can ultimately determine whether an abandoned property drags an entire neighborhood down with it.

“Some of the mortgage companies today want these [properties] to be turnkey and are doing complete rehabs,” says Bob Hoobler, of RE/MAX 1st Advantage. “Once they foreclose, they want them to sell fast. They don’t want to have to sit on that asset.” As mortgage companies deploy assets to maintain and preserve properties, they want to protect their assets with quick, decisive legal turnaround to sale.

 

When a foreclosure happens, the home needs to be secured; the lawn needs to be cut, and the utilities need to be shut off. Neighborhoods suffer because homes are vacant; there is a loss to the local tax base. Municipalities whose schools rely on real estate taxes suffer. Maine’s foreclosure crisis recovery, for example, lags 10 percent behind national averages — with the typical foreclosure taking nearly two years. With the advent of fast-track foreclosure legislation, coupled with attorneys who can process it, Maine has the potential to catch up to the rest of the recovering national trend.

Foreclosures in the day-to-day life of the mortgage industry should be few; but if the fabric of America’s homeownership is to remain intact, foreclosures that do occur need to be quick, clean, and mistake-free. The front-line soldiers in the effort to maintain a balanced and fair housing market are foreclosure attorneys, and an efficient tool can be the fast-tracking process. Through fast-tracking and a solid understanding of efficient protocol, the legal processes help communities recover from the consequences of “zombie” properties — or better yet, avoid them altogether. After all, the goal for any responsible community should be going from foreclosure to property protection and re-sale as seamlessly as possible.

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Georgia: New Mortgage Servicing Rules

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Nicholas A. Rolader and Tomiya S. Lewis

McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

Many states have shown an inclination to adopt rules either mirroring or sometimes even eclipsing those promulgated by the federal Consumer Financial Protection Bureau (CFPB), and Georgia is now jumping on the bandwagon. Effective July 19, 2017, Mortgage Servicing Standards (MSS) (GA Reg. 80-11-6, et seq.) adopted by the Georgia Department of Banking and Finance implement new standards that servicers must follow when handling delinquent accounts.

The new standards apply to any person or company that services loans within the state of Georgia, except, significantly to any bank or credit union “authorized to engage in business … under the laws of the United States” (O.C.G.A. § 7-1-1001(a)(1)). National banks and federal credit unions are therefore entirely exempt from the purview of the new standards, while those entities meeting the CFPB definition of a “small servicer” are also relieved from certain obligations.

Similarities to CFPB Rules
Generally, the standards require that servicers act with “reasonable skill, care, and diligence.” Though there is at present no precedent to further clarify this requirement, the majority of rules are far more specific and in line with CFPB rules. No fees may be charged for handling borrower disputes; facilitating routine collections; arranging repayment or forbearance plans; sending notice of non-payment; or updating records to reinstate a mortgage loan. (Note: The Georgia Department of Banking and Finance clarified in subsequent informal communications that servicer fees for updating internal systems or administrative tasks are prohibited; they confirmed that transactional costs such as recording costs and title costs are not prohibited.) All borrowers must be entitled to an error resolution process, which includes acknowledgment for receipt of notices of error within five business days of receipt, reasonable investigations, and a correction of error or determination of no error within 45 days.

The new MSS also closely mimic CFPB rules regarding loss mitigation, with two important exceptions. The standards, as currently written, prohibit conducting a foreclosure sale before evaluating complete loss mitigation applications when a complete application is received after the foreclosure process has commenced. However, the Georgia Department of Banking and Finance has advised that its intention was to track the cutoff period prescribed by the CFPB, whereby receipt of a complete loss mitigation package need not halt a foreclosure process if received 37 days or fewer before a scheduled sale. The department further intimated an intention to enforce the rule in accordance with the CFPB stipulations and to later clarify the language of the rule. Formal clarification of the rule has not been published to date. Secondly, this standard requires an appeal process for all forms of loss mitigation applications. While the CFPB rule governs review of loan modifications upon appeal, Georgia will require that any form of loss mitigation dispute be reviewed by personnel different than those who provided previous evaluations.

Other familiar CFPB regulations can also be found within the new MSS. Servicers may not “dual-track,” meaning commence foreclosure while a complete loss mitigation application is under evaluation; nor may servicers apply payments to anything other than principal and interest first, or impose force-placed insurance unless necessary and of a reasonable charge. Still, two final distinctions from the CFPB rules merit attention.

Differences from CFPB Rules
While the CFPB and the Georgia MSS both require a servicer acquiring rights to servicing a mortgage loan to provide contact information in its standard “welcome letter,” the Georgia rules depart from the CFPB rules in also mandating inclusion of a complete and current schedule of servicing fees and a statement setting forth the servicer standards described in this article. This disclosure must specifically include a description of the servicer’s process for appeal of loss mitigation denials. As best practice, it may be easiest for a servicer’s disclosures to specify its own policies and practices, but otherwise mirror the exact standards as set forth in Paragraph 2 of GA Reg. 80-11-6-.02.

Finally, where the CFPB has thus far been nebulous in describing requirements for self-reporting and remediating violations, the Georgia Department of Banking and Finance has attempted to define its expectations more clearly. The standards require that a servicer generally mitigate harm to the borrower when any violation is discovered while also maintaining a record of such violation. Where the violation, at the time of discovery, could result in aggregate financial harm to the borrower in excess of $1,000, the violation must be reported to the Department of Banking and Finance within ten days of discovery. After discussions with the department, it is the view of these authors’ firm that adequate compliance could consist of an internal audit system for quality control processes that would lead to reporting of any applicable violations discovered via periodic random sampling.

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Illinois: Payment of Post-Foreclosure Condominium Assessments; Confusion Abounds

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Douglas Oliver
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

There are effective, practical steps that mortgage loan servicers can take to prevent problems regarding condominium/homeowners associations (COA/HOA). For two years now, confusion has prevailed in Illinois over whether (and when) COA/HOA pre-foreclosure assessment liens are extinguished following completion of a foreclosure. In May of this year, a panel of the Illinois Appellate Court for the First District (which covers Chicago and Cook County) appeared to resolve the confusion with a bright-line rule. On August 8, 2017, however, a separate panel of the same appellate court issued a ruling that largely restored the previous uncertainty. The issue will now have to be resolved by the Illinois Supreme Court or the Illinois Legislature. Nonetheless, observation of best practices should prevent the issue from arising at REO closing tables.

Background
Almost two years ago, the Illinois Supreme Court held that a COA assessment lien against foreclosed property survives the foreclosure unless, and until, the winning sale bidder pays the ongoing, regular assessments that accrue following the sale. The case was 1010 Lake Shore Drive Ass’n v. Deutsche Bank National Trust Co., 43 N.E.3d 1005 (Ill. 2015). Ever since then, litigants have wrestled over exactly when such post-sale assessments must be paid in order to extinguish the lien for pre-foreclosure, unpaid assessments. Is there a “due date;” and, if so, what is it?

The question centers around section 9(g)(3) of the Illinois Condominium Property Act (the Act) (765 ILCS 605(9)(g)). That code section states that a buyer who takes title from a foreclosure sale, consent foreclosure, or deed-in-lieu of foreclosure must pay the regular assessments that accrue on the unit from the first day of the month that follows the sale or transfer. Section 9(g)(1) creates an automatic lien in favor of the COA for unpaid assessments, plus any associated costs or legal fees, but acknowledges that this lien is subordinate to most prior-recorded liens. Section 9(g)(3) acknowledges that the foreclosure of a prior mortgage wipes out the automatic lien, but states that payment of post-foreclosure assessments “confirms extinguishment” of the automatic lien. The 1010 Lake Shore Drive case held, in essence, that if post-foreclosure assessments go unpaid, then the extinguishment of any lien for pre-foreclosure assessments is never confirmed and, thus, still encumbers the condo unit.

After the 1010 Lake Shore Drive case came down, COAs and HOAs took the position that unless payment for post-foreclosure assessments was tendered on the first of the month following the judicial sale or soon thereafter, extinguishment of the lien for pre-foreclosure assessments was permanently and irrevocably waived. The associations would then assert extortive payment demands for clearance of pre-foreclosure assessment liens, which would frequently include substantial attorneys’ fees and other costs. These demands would occasionally reach into six figures. In many cases, COA/HOAs would make these claims after refusing to supply the information necessary to make timely payments in the correct amount.

The demands were typically presented to a foreclosing lender as a hurdle to a paid assessment letter — a necessary document for closing most residential COA/HOA REO transactions. The COA/HOA, aware of the lender’s vulnerability, took full advantage. Yet, section 9(g)(3) does not set forth a date by which post-foreclosure assessments must be paid. Instead, it merely sets the time from which they accrue to the new owner. Debate (and litigation) therefore raged over whether or not section 9(g)(3) implied a due date for payment.

2017 Judicial Rulings
In March, the Illinois Appellate Court for the First District appeared to decisively resolve this issue in favor of no due date. The decision in 5510 Sheridan Road Condominium Ass’n v. U.S. Bank, 2017 Ill. App. (1st) 160279 (Mar. 31, 2017), held that section 9(g)(3) of the Act did not include a timing deadline for tender of payment. Instead, statutory language requiring that assessments be paid “from and after the first day of the month” following the sale was simply a demarcation of time from which the obligation to pay actually begins. Under the 5510 Sheridan Road holding, with no deadline for payment, the liens were simply considered “confirmed as extinguished” as soon as post-sale assessment payments were tendered. Under this ruling, COA/HOAs were unable to argue that the timing of payment justified a demand for pre-foreclosure assessments, fees, or costs. This appellate court decision had the merit of creating a bright-line rule that everyone could easily observe.

Be that as it may, in August a separate panel of the First District Appellate Court handed down Country Club Estates Condominium Ass’n. v. Bayview Loan Servicing LLC, Ill. App. (1st) 162459 (Aug. 8, 2017). This case holds that section 9(g)(3) of the Act does contain a timing requirement — an indeterminate one that can always be debated and litigated: such payment is due “promptly.” In Country Club Estates the appellate court ruled that payment could be substantially delayed but still be prompt under extenuating circumstances, such as when an association unreasonably refuses payment or if court confirmation of the judicial sale takes an unexpectedly long time. Absent such circumstances, however, the opinion states that post-sale assessments are generally expected to be tendered in the month after purchase to be considered “prompt.”

Country Club Estates is a highly unfavorable decision for lenders because “prompt” payment is not sufficiently definite. Under the vagaries of this holding, COA/HOAs will almost certainly push the envelope in asserting claims that lender payments were not tendered “promptly.” This is likely because Illinois COA/HOAs have an established history of knowingly asserting weak claims with an expectation that lenders will pay, rather than fight, simply to get REO deals closed.

Practical Methodology
Nevertheless, observation of some wise procedures can prevent most problems of this nature. As the issue has unfolded over the past two years, best practices have remained the same. Lenders who wish to prevent this issue from arising at REO closing tables should do the following:

1. In all foreclosure cases where a condominium association is a party, issue a subpoena to the association seeking disclosure of both the amount due and the amount of regular assessments. The subpoena process is recommended because condo associations frequently file no appearance in foreclosure cases and also because subpoenas are easier to enforce than discovery requests. Despite that, in this author’s experience, issuance of discovery has also worked well.
2. Serve a demand for a statement of balance due to the condominium association board of managers, as provided by section 9(j) of the Act, while the foreclosure case is pending. If the association does not respond, its lien will be subordinate.
3. Make sure to tender a payment to the condominium association as soon as possible after the first day of the month following the foreclosure sale. Even where there is a dispute as to the amount due, it is always advantageous to make the best possible good-faith tender of payment in the first month following sale.
4. Make sure that communications with the association or its attorneys regarding assessment issues are in writing, whenever possible. Where such communications are not in writing, they should be fully documented in case a legal dispute later arises.

If the foregoing practices are implemented, demands for pre-foreclosure liens can be dealt with (or prevented) in a straightforward and expeditious manner.

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New York: No Jury Trial in a Foreclosure Action

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Bruce J. Bergman

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

The proposition that a borrower in a mortgage foreclosure action is not entitled to a jury trial is a reasonably well known one, although a new case underscores how encompassing the principle can be. [Security Pacific National Bank v. Evans, 148 A.D.3d 465, 49 N.Y.S.3d 122 (1st Dept. 2017)].

The underlying maxim is that mortgage foreclosure is an equitable action and, consequently, there is no right to a trial by jury. This is so — even if the complaint includes a request for money damages or a deficiency judgment — because such relief is incidental to the mortgage foreclosure process. The deficiency remedy is primarily equitable in nature and the money judgment is merely ancillary to the case. Thus, no right to a trial by jury is afforded, and that extends to guarantors on the note. Moreover, a borrower’s assertions of defenses of fraud or usury do not create an ability for a jury to decide the issue. Likewise, interposition of a counterclaim (for what might not otherwise be equitable relief) does not give rise to a jury demand.

The prohibition against the availability of a jury extended yet further in Evans. There, parties to a foreclosure sought specific performance of their settlement agreement as well as injunctive relief. Equitable relief was being pursued and no entitlement to a jury remained. Even were the borrower-defendant to have suddenly asserted a money damage claim — while at the same time withdrawing equitable claims — that could not revive or create a right to a jury trial that had been waived through equitable claims applying to the same transaction. The conclusion is meaningful and certainly a welcome one for lenders.

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North Carolina: Lender’s Affidavits Upheld

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Jeffrey A. Bunda

Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In a published decision, the North Carolina Court of Appeals rejected a debtor’s challenge to a foreclosing lender’s affidavit. The case is In re Foreclosure of Collins, No. COA16-655 (N.C. Ct. App. Feb. 7, 2017). This opinion offers guidance on the best practices of affidavit preparation and execution for North Carolina foreclosures under power of sale.

In Collins, the debtors’ sole challenge to the lender’s foreclosure action rested on a critique of the evidence offered at hearing. The facts are straightforward: In 2006, the debtors executed a note in favor of Beneficial Mortgage Company of North Carolina and secured repayment of the note with a deed of trust. Beneficial Mortgage Company of North Carolina merged with Beneficial Mortgage Company of Virginia in 2009, and that successor company ultimately merged into Beneficial Financial I, Inc. The debtors defaulted in 2013, and the penultimate Beneficial initiated foreclosure. The clerk of superior court entered an order authorizing foreclosure on October 17, 2013, from which the debtors exercised their right to a hearing de novo before a superior court judge.

Appellate Court’s Review
At that de novo hearing (held in early 2016), the debtors offered no evidence regarding payment or that another entity sought to foreclose. Instead, the debtors rested their case on a three-pronged challenge of the lender’s affidavit. First, the debtors complained that the affidavit before the court was executed in 2013 and that “the possibility exists that the Note had been negotiated at some point” between 2013 and the 2016 hearing. Second, the debtors asserted that the affiant had no personal knowledge of the facts contained in the affidavit and that the affidavit failed to meet the business record exception to the rule of evidence on hearsay. Finally, the debtors suggested that since lender’s counsel did not present the original note for inspection to the court, the foreclosure must fail.

The appellate court rejected all three arguments. In dismissing the debtors’ first argument, the court chastised the debtors’ “speculation” that the note had been negotiated and found that the trial judge properly admitted into evidence the 2013 affidavit, given that there was no evidence to support the debtors’ theory. The court then addressed the debtors’ critique regarding the business record exception to the hearsay rule and found that the trial judge did not abuse his discretion in admitting the affidavit. The court noted that the lender’s affidavit aptly set forth facts to establish that the affiant had knowledge of Beneficial’s servicing of the loan as the affiant testified that she was well-versed in Beneficial’s servicing practices. The court further noted that it was irrelevant whether the affiant had personal knowledge of the various mergers leading up to the final Beneficial entity because the court had independent evidence of these various mergers stemming from the public record.

The court then dispensed with the debtors’ final argument and opined that, although the lender’s attorney did not present the original note, a copy of said instrument was attached to the lender’s affidavit. Further, that affidavit stated that Beneficial possessed the note. Given that the debtors offered no evidence to contravene Beneficial’s status as holder of the note, the court could only infer that Beneficial is the holder and allowed the foreclosure to proceed. Accordingly, the trial court’s order was affirmed by the Court of Appeals.

Conclusion
Collins is instructive for servicers, and their counsel, as to how to tailor an affidavit that will pass muster — even in the face of speculative opposition from debtors. The appellate court’s holding ratifies the mortgage servicing industry’s best practices regarding affidavit preparation and execution, and rejects the speculation often offered by borrowers in defense. The opinion also demonstrates a court’s willingness to authorize foreclosure without the original note’s presentation at trial. While the original note’s presentation remains helpful for lender’s counsel, mortgage holders may rest easier on the fact that, so long as they are in possession of the note, North Carolina courts should authorize foreclosure.

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North Carolina: Appellate Ruling on the Lost Note Affidavit as Evidence

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by John A. Mandulak

Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Creditors had been losing sleep over lost or misplaced promissory notes and how to go about enforcing their rights to collect on the underlying debt. Such a scenario puts the creditor in the awkward position of figuratively having a ticket to the show, but no way of getting to the theater. Questions about enforcement of the secured debt abound: Will I be able to foreclose? Will the action have to be in front of a judge? What do I have to prove to entitle me to an order for sale? Until early 2017, there wasn’t much direction from the courts as to how to collect on accounts that lacked a promissory note; however, the opinion in the In re Iannucci, No. COA16-738 (N.C. Ct. App. Feb. 7, 2017), case allows creditors to rest a little easier. While unpublished, Iannucci demonstrates that certain creditors may use lost note affidavits as evidence in foreclosure hearings, so long as the affidavit complies with North Carolina law.

Background
In the subject case, a creditor acquired the payment rights in a promissory note and, shortly thereafter, lost the original note. After default, this creditor sought to foreclose before the clerk of court using an affidavit traditionally used in place of lost instruments. Initially the clerk of court refused to issue an order for sale, reasoning that the provisions of N.C. Gen. Stat. § 45-21.16(d)(i) taken in their most literal context require her to determine whether there is a “valid debt of which the party seeking to foreclose is the holder” and that the use of a lost note affidavit defeated this finding. While the creditor lost at that point, it timely appealed the matter to the superior court.

The trial court considered the lost note affidavit and ruled in favor of the creditor. The borrower appealed that ruling to the Court of Appeals, alleging that the superior court judge erroneously admitted the lost note affidavit because it contained a legal conclusion and, further, that the information within the affidavit was inadmissible hearsay.

The Court of Appeals was not persuaded, however, reasoning that any conclusions of law within an affidavit could be disregarded by the trial court and, moreover, that the lost note affidavit offered into evidence tracked the language of Rule 803(6) of the Rules of Evidence to fall within the business records exception. Specifically, the affiant stated that the information averred in the affidavit was based on a review of records kept in the ordinary course of business, and that the entries were made by employees of the creditor at or near the time of the occurrence.

The borrower then made the technical argument initially made before the clerk of court: that a lost note affidavit could not satisfy the provisions of N.C. Gen. Stat. § 45-21.16(d)(i) because it would be impossible to prove that there is a “valid debt of which the party seeking to foreclose is the holder.” The appellate court disregarded this contention, taking the position that the provisions of North Carolina’s Uniform Commercial Code (N.C. Gen. Stat. § 25-3-309) allow a creditor to enforce an instrument if it is able to show the following: (1) that the creditor was in possession of and entitled to enforce the instrument at the time it was lost; (2) that the loss of possession was not due to a transfer of the party entitled to enforce the instrument; and (3) that the creditor cannot reasonably obtain possession of the instrument due to its loss or destruction.

The Takeaway
The real utility of the Iannucci ruling comes with the court’s application of the Uniform Commercial Code (UCC) to a power of sale foreclosure. Until this ruling, some clerks of court in North Carolina took a literal interpretation of N.C. Gen. Stat.§ 45-21.16(d)(i), similar to the clerk of court in this case, insisting that a creditor offering a lost note affidavit could not foreclose in the traditional power of sale proceeding. The Iannucci ruling served to bridge the gap between North Carolina’s foreclosure laws and its UCC, allowing a creditor to use a lost note affidavit to stand in the place of the promissory note in a power of sale foreclosure.

Creditors should be careful to not lose sight of the forest for the trees, however — as the content and allegations in any lost note affidavit are of principal importance. In the Iannucci case, the creditor seeking foreclosure was the creditor that lost the instrument. The provisions of N.C. Gen. Stat. § 25-3-309 allow that creditor to enforce its instrument, but the protections of the UCC fail to apply to subsequent creditors.

Namely, if a creditor loses its promissory note and thereafter sells its payment rights to a third-party creditor, the third-party creditor’s collection efforts before the clerk of court will fail. The distinguishing reason for this is that the affidavit submitted to the clerk will either be executed by the prior creditor, defeating subsection (2) of N.C. Gen. Stat. § 25-3-309, or the third-party creditor’s affidavit will be unable to aver that the creditor owned the note at the time it was lost. In either instance, the creditor may not proceed in a power of sale foreclosure, and must instead make a choice of either establishing its authority to collect before a superior court judge, or alternatively force the prior creditor to repurchase the debt.

Prior to filing a collection action, a prudent creditor should confirm both the form and the content of a lost note affidavit with its collection attorney — thus maximizing the likelihood of gaining the collateral.

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South Carolina: Amended Chamber Guidelines for Senior BK Judge

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Louise “Ceasie” Johnson, Tasha Thompson, Ronald Scott, and Reginald Corley

Scott & Corley, P.A. – USFN Member (South Carolina)

Over the past year, there have been many changes to bankruptcy practices and procedures implemented by the U.S. Bankruptcy Court for the District of South Carolina. Most recently, senior bankruptcy judge, the Honorable John Waites, amended his chamber guidelines effective April 10, 2017 (Amended Guidelines). Although the Amended Guidelines impose new requirements for various types of bankruptcy matters, they have the greatest impact on mortgage creditors’ established practices regarding 11 U.S.C. § 362 settlement orders and loss mitigation and mortgage modification (LM/MM). [Click here to access Judge Waites’ Local Forms webpage.]

Generally, the Amended Guidelines provide for procedural and substantive changes with respect to the following: (1) Chapter 13 attorneys’ fees; (2) LM/MM; (3) numerous new, standard 11 U.S.C. § 362 settlement orders; (4) procedures for valuation mediations; and (5) the deadline for filing joint statements of dispute in Chapter 13 cases.


I. Amended Guidelines regarding timelines for LM/MM through the DMM Portal (Portal) are as follows, with Creditor’s/Servicer’s (Creditor) requirements in bold:


a. Immediately upon entry of the LM/MM Order, Debtor’s Counsel must register on the Portal;
b. Within 7 days of Debtor’s Counsel’s registration on the Portal, Creditor must sign up for the Portal, ensure that all necessary forms are uploaded on the Portal, and assign counsel to case in Portal*;
c. On or before Day 14, Debtor’s Counsel must submit loss mitigation application and any additional, necessary forms through the Portal and pay the Portal fee;
d. On or before Day 21, Creditor must acknowledge receipt of application and documents in Portal, provide Creditor’s representative’s contact information in Portal, and notify Debtor’s Counsel of any missing documentation through the Portal;
e. Initial Mediation Session must be held before the expiration of Day 30; and
f. By Day 90, Creditor must report its decision on the loss mitigation review to the Court.


*At the time that Creditor assigns counsel to a case in the Portal, it should send legal referral or notification of the Portal matter to its local bankruptcy counsel and approve the standard legal fee for representing the Creditor throughout the LM/MM process in the Portal.


II. Amended Guidelines regarding 11 U.S.C. § 362 Settlement Orders (Settlement Orders) are as follows:


a. Judge Waites now has seven different, fact-driven, and fact-specific, form Settlement Orders; and
b. Standard Cure Periods now are required for Settlement Orders, pursuant to the new uniform standards set forth in the following chart:

 

Number of Missed Post-Petition Payments 

Length of Cure Period

 0-6 Months  12-Month Cure
 7-12 Months  24-Month Cure

 More than 12 Months 

 To be determined at a hearing

 

 

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South Carolina: State Supreme Court Analyzes “Unauthorized Practice of Law”

Posted By USFN, Tuesday, September 12, 2017
Updated: Monday, August 28, 2017

September 12, 2017

 

by Ronald Scott and Reginald Corley 

Scott & Corley, P.A. – USFN Member (South Carolina)

Following a long line of cases where the state’s high court has analyzed and interpreted the unauthorized practice of law in real estate-related transactions, the South Carolina Supreme Court recently decided Boone v. Quicken Loans, Inc. (S.C. July 19, 2017).

In Boone, the petitioners (a group of homeowners) alleged that Quicken Loans engaged in the unauthorized practice of law (UPL) in mortgage refinance transactions throughout South Carolina. The Court found that Quicken did not engage in UPL and that South Carolina-licensed attorneys were involved in every critical step of the mortgage loan transactions as required by state law: (1) preparation/review of legal instruments relating to real estate transactions; (2) supervision of title searches; (3) supervision of real estate closings and disbursement of funds; and (4) supervision of the recording of the legal instruments. [See State v. Buyers Service Company, 292 S.C. 426, 430, 357 S.E.2d 15, 17 (1987); Matrix Financial Services Corporation v. Frazer, 394 S.C. 134, 714 S.E.2d 532 (2011).]

Petitioners contended that Quicken engaged in UPL in all four of the above-referenced steps. In each instance, the Court determined that there had been sufficient supervision by a South Carolina-licensed attorney throughout the real estate transaction. Although the title search and certification were not completed by an attorney, the title work and the assembled documents (in their entirety) were reviewed by a South Carolina-licensed attorney prior to issuance of a title commitment or moving forward with the real estate transaction. At the closing, all documents relevant to the refinance mortgage closing were reviewed by an attorney who also stated that he or she had reviewed and explained the documents to the borrowers; answered any questions asked by the borrowers; and supervised the borrowers’ execution of the documents. Finally, with regards to the disbursement of the closing funds, an attorney was involved to ensure that the proper disbursement of the loan proceeds occurred and that the necessary real estate documents were recorded in the correct county’s register of deeds office.

Court’s Analysis and Conclusion
While the Supreme Court could have set a bright-line rule in Boone to say that a South Carolina-licensed attorney is needed at the center of each closing that takes place, carefully overseeing each step, it deliberately did not. The Court continues to recognize that while ‘“South Carolina, like other jurisdictions, limits the practice of law to licensed attorneys’ [quoting Brown v. Coe, 365 S.C. 137, 139, 616 S.E.2d 705, 706 (2005)] … “what constitutes the practice of law must be decided on the facts and in the context of each individual case. [Citations omitted].”

The Court expressly distinguished Boone from Buyers Service (cited above), where there had been a complete lack of attorney involvement throughout the real estate closing process, thus constituting UPL. In the Boone case, the Court said that “… we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers. See, e.g., Crawford, 404 S.C. at 45, 744 S.E.2d at 541 (‘The unauthorized practice of law jurisprudence in South Carolina is driven by the public policy of protecting consumers.’).” The Court continued: “In this context, where there is already ‘a robust regulatory regime and competent non-attorney professionals,’ [citing Crawford at 47] we do not believe requiring more attorney involvement would appreciably benefit the public or justify the concomitant increase in costs and reduction in consumer choice or access to affordable legal services.”

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Tennessee: Nonjudicial Foreclosure is NOT Barred by Compulsory Counterclaim Rules

Posted By USFN, Tuesday, September 12, 2017
Updated: Tuesday, August 29, 2017

September 12, 2017 and November 6, 2017

 

by Jerry Morgan

Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

This article appeared in the USFN e-Update (Sept. 2017 ed.) and is reprinted here for those readers who missed it.

In Threadgill v. Wells Fargo Bank, N.A., No. E2016-02339-COA-R3-CV (Aug. 1, 2017), the Tennessee Court of Appeals has confirmed that a lender does not lose its rights to conduct a nonjudicial foreclosure if it declines to file a foreclosure action as a compulsory counterclaim.

Borrower’s Lawsuit #1
In a 2011 case, a pro se borrower brought an action against Wells Fargo in order to stop a foreclosure of the property. The borrower filed the action in his capacity as trustee of the trust that owned the property. The borrower alleged breach of contract, misrepresentations, and violations of the Tennessee Consumer Protection Act, the Home Loan Protection Act, and the federal Truth in Lending Act. The circuit court granted summary judgment in favor of Wells Fargo, ruling that Wells Fargo had complied with the deed of trust, as well as the foreclosure statutes, and had committed no deceptive or unfair act.

The borrower appealed, and the Court of Appeals determined that it lacked jurisdiction, holding that a non-attorney trustee may not represent a purportedly pro se trust and, therefore, the notice of appeal signed by the non-attorney trustee was insufficient to initiate an appeal. [ELM Children’s Educational Trust v. Wells Fargo Bank, N.A., 468 S.W.3d 529 (Tenn. Ct. App. 2014).] The Tennessee Supreme Court denied permission to appeal.

Borrower’s Lawsuit #2
Two weeks after the Supreme Court’s denial, the borrower filed a new pro se action, this time in his individual capacity, alleging virtually the same claims against Wells Fargo. In his amended complaint, he asserted that if res judicata barred his second complaint, then the court must also find (by declaratory judgment) that any note or debt that Wells Fargo sought to enforce by foreclosure or otherwise is null, void, and unenforceable pursuant to Tenn. R. Civ. P. 13.01, which sets forth Tennessee’s compulsory counterclaims procedure.

The trial court disagreed. The court held that the parties and the issues alleged by the borrower were the same, meaning the borrower’s new claims were barred by res judicata. However, the trial court further held that a nonjudicial foreclosure is, by definition, nonjudicial, and therefore is not required to be raised in the lower court as a counterclaim.

Appellate Court’s Review
On appeal, the borrower interestingly conceded that res judicata barred his claims. Nonetheless, he contended that Wells Fargo, in response to the first lawsuit, was required by Rule 13.01 to bring a foreclosure action as a compulsory counterclaim. The Court of Appeals agreed with the trial court that such a compulsory counterclaim was not required.

The Court of Appeals noted that Rule 13.01 requires a party to state as a counterclaim “any claim, other than a tort claim, which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim …” As the appellate court recognized, the purpose of the second lawsuit “is to persuade the trial court to declare that the note and deed of trust are invalid under [Rule 13.01].”

The Court of Appeals observed that the Tennessee “legislature has determined that the public policy of the state is to allow foreclosures through non-judicial sale [citing CitiMortgage, Inc. v. Drake, 410 S.W.3d 797, 808 (Tenn. Ct. App. 2013)]” and further remarked that nonjudicial foreclosure was the “almost exclusive means of foreclosure in the [s]tate,” [citing Dickerson v. Regions Bank, No. M2012-01415-COA-R3-CV (Tenn. Ct. App. 2014)]. As a result, so long as the lender complies with the applicable statutes and the terms of the deed of trust, it does not have to resort to a judicial forum to foreclose.

The court next recognized that no Tennessee appellate court had yet addressed the precise issue of whether a nonjudicial foreclosure must be brought as a compulsory counterclaim. However, the Court of Appeals found that numerous jurisdictions had addressed the situation and had decided that similar rules of procedure regarding compulsory counterclaims do not bar subsequent nonjudicial, or power of sale, foreclosure proceedings.

Conclusion
The Court of Appeals agreed with the reasoning of these other jurisdictions and held that, in Tennessee, the compulsory counterclaim rule does not prohibit a lender from pursuing a subsequent nonjudicial foreclosure. The court noted that “to hold otherwise would be to allow a defaulting borrower to force a lender into court, and severely curtail if not eliminate its ability to pursue non-judicial foreclosure as otherwise permitted by Tennessee law.”

While not expressly addressed in this case, it is certainly arguable that allowing a borrower to compel a lender to forego its remedy of nonjudicial foreclosure (through the compulsory counterclaim rules) would be to unilaterally alter the terms of the deed of trust, which specifically permit nonjudicial foreclosures. At any rate, the Threadgill decision confirms that a lender’s ability to pursue a subsequent nonjudicial foreclosure in Tennessee is not defeated by compulsory counterclaim rules.

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New Jersey: State Supreme Court Finds that Lenders Participating in the Foreclosure Mediation Program may not Unilaterally Modify the Terms of a Mediated Settlement

Posted By USFN, Tuesday, September 12, 2017
Updated: Thursday, August 31, 2017

September 12, 2017

 

by Edward W. Kirn III

Powers Kirn, LLC – USFN Member (New Jersey)

After finding that the lender and the borrower entered into an enforceable settlement agreement through the Foreclosure Mediation Program, the New Jersey Supreme Court reversed the appellate division. The case was remanded to the trial court to craft an appropriate remedy. [GMAC Mortgage, LLC v. Willoughby, __ A.3d __ (N.J. July 31, 2017)].

Background
The borrower and the lender’s attorney participated in two mediation sessions; at the second session in May 2010 the parties entered into an agreement, which was memorialized in a “Foreclosure Mediation Settlement Memorandum,” a form provided by the judiciary. Pre-printed at the top of the settlement memorandum is a preamble stating, “The parties agree that the foreclosure action is resolved upon the following terms, conditions, and covenants.” The lender’s attorney then handwrote the settlement terms in the blank section.

The lender’s attorney wrote that the borrower was being offered a “trial to permanent modification plan contingent on signed modification documents and an initial down payment.” The lender’s attorney also noted the amount of the initial down payment and the date upon which it was due; the amount of the modified principal balance; the length of the modified term; the modified interest rate; and the amount of a non-interest bearing balloon payable upon maturity, refinance, or sale.

Additionally, the settlement memorandum contains a pre-printed statement at the bottom that states, “The parties agree that when executed this mediation settlement memorandum shall be final, binding and enforceable upon all parties.” Both the lender’s attorney and the borrower signed the agreement at the mediation session. The borrower went on to make the initial down payment timely, as well as trial payments for a year.

At the end of the year, the lender sent the borrower a permanent loan modification, which contained different terms than those set forth in the Foreclosure Mediation Settlement Memorandum. The borrower did not sign and return the permanent loan modification but did start making the higher monthly payments. After the borrower’s monthly payment was returned due to her failure to sign and return the permanent loan modification agreement, she filed a pro se motion to enforce the May 2010 settlement. The chancery court denied the borrower’s motion to enforce the May 2010 loan modification agreement, finding that it was a “provisional settlement.” The appellate division affirmed the chancery court’s determination that the May 2010 agreement was provisional.

Supreme Court’s Analysis and Conclusion
The Supreme Court observed that the Foreclosure Mediation Program’s goals “can only be met if our chancery courts enforce mediated settlements,” and that the state’s public policy favors the settlement of disputes through mediation, citing Willingboro Mall, Ltd. V. 240/242 Franklin Ave., L.L.C., 215 N.J. 242, 253-54, 71 A.3d 888 (2013).

A valid settlement agreement requires “offer and acceptance” by the parties, and the terms must be sufficiently definite so that the parties can perform under the contract with reasonable certainty. Weichert Co. Realtors v. Ryan, 128 N.J. 427, 435, 608 A.2d 280 (1992) (quoting West Caldwell v. Caldwell, 26 N.J. 9, 24-25, 138 A.2d 402 (1958)). The Court found it significant that the lender’s attorney handwrote the key provisions on the settlement memorandum. See In re Estate of Miller, 90 N.J. 210, 221, 447 A.2d 549 (1982) (“Where an ambiguity appears in a written agreement, the writing must be strictly construed against the draftsman.”).

The Court then concluded that the settlement memorandum in this case “has all of the indicia of a permanent and binding agreement.” Further, the Court found that the borrower was reasonable in making the payments as set forth in the agreement to save her home. In reversing the appellate court, the New Jersey Supreme Court found that the chancery court, which is sitting as a court of equity, erred by not enforcing the agreement as a permanent modification of the loan.

While the mediation program is currently about to change in New Jersey, the takeaway from this case is that proposed terms should not be disclosed at a mediation session unless they are definite.

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Florida: Lender Not Liable for Attorneys’ Fees if Case Dismissed for Lack Of Standing

Posted By USFN, Tuesday, August 8, 2017
Updated: Friday, July 28, 2017

August 8, 2017

by Roy Diaz
SHD Legal Group, P.A. – USFN Member (Florida)

The Fourth District Court of Appeal (DCA) recently held that a borrower was not entitled to attorneys’ fees pursuant to the Florida statute that permits a prevailing party attorneys’ fees; the borrower had successfully defended a foreclosure action based on the bank’s lack of standing. Nationstar Mortgage LLC v. Glass, 42 Fla. L. Weekly D815 (Fla. 4th DCA Apr. 12, 2017). The rule in Florida is that a court can only award attorneys’ fees to a prevailing party “when authorized by contract or statute.” In Florida, notes and mortgages typically include standard attorney fee provisions entitling a prevailing party to collect attorneys’ fees if a lawsuit is filed to enforce the terms of the note and/or mortgage.

In Glass, the bank filed a foreclosure action against the borrower. The borrower successfully moved to dismiss the bank’s amended complaint based on alleged lack of standing. The bank initially appealed the order of dismissal and, for unstated reasons, voluntarily dismissed its appeal. The borrower moved for appellate attorneys’ fees and costs as the prevailing party based on the attorneys’ fee provisions in the note and mortgage and Florida Statute 57.105(7), which reads: “If a contract contains a provision allowing attorney’s fees to a party when he or she is required to take any action to enforce the contract, the court may also allow reasonable attorney’s fees to the other party when that party prevails in any action, whether as plaintiff or defendant, with respect to the contract. […]”

Notwithstanding the fact that the borrower clearly was the prevailing party in Glass and despite the reciprocal fee provisions contained in the note and mortgage, the Fourth DCA denied the borrower an award of attorneys’ fees. On the issue of entitlement to attorney fees, the court found: (i) the movant must be the prevailing party; and (ii) a party seeking fees must prove that both they and the party against whom they are seeking fees are parties to the contract containing the fee provision — here, the note and mortgage. By accepting the borrower’s argument that the bank lacked standing, the court concluded that the borrower could not satisfy the second requirement.

The court succinctly explained: “Simply put, to be entitled to fees pursuant to the reciprocity provision of section 57.105(7), the movant must establish that the parties to the suit are also parties to the contract containing the fee provision. A party that prevails on its argument that dismissal is required because the plaintiff lacks standing pursuant to the contract sued upon cannot satisfy that requirement.”

By establishing that the bank lacked standing to bring the lawsuit, the borrower established that the bank was not a proper party to the action. This holding regarding attorneys’ fees is obviously favorable to the bank; however, it only applies if the bank’s foreclosure was unsuccessful due to lack of standing — which, under Florida law, can generally be cured in a subsequent action.

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Minnesota Court Allows One Foreclosure Bid for Multiple Parcels

Posted By USFN, Tuesday, August 8, 2017
Updated: Friday, July 28, 2017

August 8, 2017

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

Some Minnesota sheriffs are challenging single-bid foreclosure sales of real estate consisting of multiple tax parcels each assigned with a different tax parcel ID. The servicing industry universally prefers placing a single bid at sale. In the instance of unrelated or non-adjoining parcels, Minnesota has long required separate foreclosure sales of “separate and distinct farms or tracts.” Minn. Stat. § 580.08 (2016).

Earlier Case Law
In 2013, the Minnesota Court of Appeals created uncertainty by “voiding” a foreclosure sale of two non-adjoining parcels (two residential homes located in different counties) where the lender submitted one bid for both parcels. Hunter v. Anchor Bank, N.A., 842 N.W.2d 10 (Minn. Ct. App. 2013). The court ruled that “[i]f separate parcels of mortgaged property are not sold separately at a foreclosure sale, the foreclosure sale is void …” Id. at 17. Historically, Minnesota attorneys relied on a “voidable” standard where an interested party was required to raise an objection to the single bid at the time of sale. Willard v. Finnegan, 44 N.W. 985, 986 (Minn. 1890).

Since Hunter, title examiners/insurers are closely scrutinizing multiple parcel foreclosures, and some sheriffs have refused to hold the sale unless the lender submits multiple bids where the mortgage property consists of land assigned with two or more tax parcel IDs. Longstanding case law resolves the “separate and distinct” determination on a case-by-case basis and generally allows single bids where the parcels are adjoining, contiguous, or the manner of use is as a single parcel. The Hunter decision ignored Minnesota Supreme Court decisions on the void vs. voidable determination. Thus, real estate practitioners now take a cautious view of the multiple parcel issue in the absence of any direction from the Minnesota Supreme Court.

Recent Appellate Decision
The Minnesota Court of Appeals recently ruled in favor of a lender on a separate parcels case under § 580.08 that more closely follows the historical approach of looking to the manner of the use of multiple parcels and whether the parcels are adjoining and contiguous. Leeco, Inc. v. Cornerstone Bank, No. A16-1875, 2017 WL 2836097 (Minn. Ct. App. July 3, 2017).

The subject real estate in Leeco was a lakeshore property consisting of four separate tax parcels. A lake cabin straddled the line separating two of the parcels, and three of the four parcels would have been considered unbuildable if owned separately due to applicable zoning ordinances. The four tax parcels had been treated as a single tract of land by both parties in the past, and were sold together with one bid, over the objection of the mortgagor at the sale. The trial court and the appellate court reasoned that the parcels did NOT constitute separate and distinct parcels, and therefore one bid at foreclosure sale was appropriate and proper under Minn. Stat. § 580.08.

Conclusion
The takeaway for the industry is to be aware that local counsel will spot the potential challenge created by multiple tax parcel IDs early in the process, and provide the servicer with information to make an informed decision prior to sale. In most instances, local counsel will recommend proceeding to sale with a single bid, depending on the county and circumstances. For servicers wishing to take a more conservative approach (or for a close-call), seeking a court order requiring the sheriff to accept one bid for multiple parcels is an available option — through either a quick declaratory judgment action or judicial foreclosure. In Sherburne and Washington counties, the sheriff and county attorney will informally make a determination upon request of local counsel, and likely without the need for a court order.

 

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New Jersey: Appellate Court Finds a Mortgagee that Merely Secures and Winterizes an Abandoned Property is Not a “Mortgagee in Possession”

Posted By USFN, Tuesday, August 8, 2017
Updated: Friday, July 28, 2017

August 8, 2017

by Michael B. McNeil
Powers Kirn, L.L.C. – USFN Member (New Jersey)

In Woodlands Community Association, Inc. v. Mitchell, __ A.3d __ (App. Div. June 6, 2017), the appellate division of the New Jersey Superior Court recently clarified a point of ambiguity in the law by holding that a mortgagee that merely winterizes and secures an abandoned property by changing the locks is not a mortgagee in possession responsible for payment of condominium fees and assessments. In overturning a grant of summary judgment, the appellate court rejected the trial court’s reasoning (which has become popular among courts hearing these types of cases) that the mortgagee was in exclusive control of the property — such that it acquired the status of a mortgagee in possession — because it held the only known set of keys to the property.

The court also provided useful guidance by distinguishing the facts of two cases that are controlling on this subject. In Scott v. Hoboken Bank for Sav., 126 N.J.L. 294 (Sup. Ct. 1941), the mortgagee was found to be a mortgagee in possession where it had assumed control over the collection of rents from tenants and made repairs to the building. Similarly, the mortgagee in Woodview Condo. Ass’n, Inc. v. Shanahan, 391 N.J. Super. Ct. 170 (App. Div. 2007), was found to be a mortgagee in possession because it took it upon itself to rent out the mortgaged units and collected the rents.

By contrast, the court found that the mortgagee in the Mitchell case, who merely changed the locks and winterized the property, did not exercise sufficient control and management over the property to deem it a mortgagee in possession. The court went on to explain that the use of the word “possession” in “mortgagee in possession” is misleading, as the concepts of dominion and control over the property — e.g. operation, maintenance, use, repair, paying utility bills, and collecting rents — are more important in determining whether a mortgagee should be considered a mortgagee in possession than is the concept of possession of the property alone.

Finally, the court rejected the argument that the mortgagee should be responsible for the condominium fees and assessments under the equitable doctrines of unjust enrichment and quantum meruit. The court observed that the mortgagee was not a member of the condominium association and that the parties did not have an express contract for the provision of services by the association. The court also observed that the services furnished by the association were for the benefit of the entire condominium complex and the association members. Absent a determination that the mortgagee was a mortgagee in possession, the court saw no basis to find an implied contract to satisfy the equitable doctrines.

Following the Mitchell decision, a mortgagee must do more than merely winterize and secure an abandoned property by changing the locks to be considered a mortgagee in possession in the state of New Jersey. However, it remains to be seen how this decision will interplay with N.J.S.A. 46:10B-51 and similar municipal ordinances, which require mortgagees to abate local housing and building code violations for vacant and abandoned properties. At least for now, though, the court has provided some much needed clarity on a previously murky concept in the law.

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New York: Effect of Lack of Proof of Pre-Acceleration Notice when a Condition Precedent

Posted By USFN, Tuesday, August 8, 2017
Updated: Monday, July 31, 2017

August 8, 2017

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

A new case reveals, perhaps confirms, that if notice is required as a condition precedent to declaring the full mortgage balance due (acceleration), failure to prove compliance with the notice provision will defeat the foreclosure. [U.S. Bank National Association v. Singh, 147 A.D.3d 1007, 47 N.Y.S.3d 437 (2d Dept. 2017)].

Procedurally, a summary judgment was reviewed in the cited case — with the appellate court determining that “the [trial court] should have denied the plaintiff’s motion for summary judgment.” Although the decision did not say so, unless the foreclosing plaintiff is able to be more precise with proof at a trial on the issue, the entire action would be dismissed.

As an overview, there are three versions of pre-acceleration notice that might be required:
1. the 90-day notice mandated by statute (RPAPL § 1304) in a home loan foreclosure;
2. the 30-day notice imposed by the Fannie Mae/Freddie Mac form of mortgage (typically employed for the residential situation); or
3. a notice provision as part of a particular mortgage, possibly applicable to commercial loans.

In the instant case, it happened to be a situation of number 3 — the negotiated mortgage provision. The mortgage necessitated the sending of a notice before the balance could be accelerated. On appeal, the ruling was that “[t]he evidence did not establish that the required notice was mailed by first-class mail or actually delivered to the [borrower’s] ‘notice address’ if sent by other means, as required by the terms of the mortgage agreement. [Citations omitted.] The plaintiff’s failure to make a prima facie showing required the denial of its [summary judgment] motion...”

Had the notice been sent? It is not possible to tell. It may have been. Records must be maintained enabling the proving of the point.

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New York: Monthly Bank Statements Defeat the Foreclosure

Posted By USFN, Tuesday, August 8, 2017
Updated: Monday, July 31, 2017

August 8, 2017

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

Lenders are, of course, aware of their own computer-generated statements that go to borrowers (usually) monthly. What sometimes can happen is that these statements reflect different sums due or some other interest rate. If this occurs, borrowers would want to use such a discrepancy to defend against a foreclosure. While (traditionally) New York case law was comforting to lenders on this point, a recent decision ruled the other way and presents a sobering lesson. [See 2390 Creston Holdings LLC v. Bivins, 149 A.D.3d 415, 51 N.Y.S.3d 61 (1st Dept. Apr. 4, 2017).] The fact pattern here presented must be avoided.

Background — A mortgage loan was seriously in default with considerable default interest due. An acceleration letter was sent, which particularly emphasized that acceptance of any lesser sums would not be a waiver and that any changes had to be in writing. When the borrower submitted all the principal in arrears, but with interest at the note rate, the bank inexplicably generated a statement showing an “adjustment” to the account with a credit for the difference between default interest and the note rate of interest. Thereafter, the bank sent the borrower twenty consecutive invoices consistent with the original loan terms; that is, reflecting note rate interest.

The loan was assigned and the assignee, after making a demand, began a foreclosure based upon the continuing arrears in default interest. In granting summary judgment to the borrower, the court determined that the “adjustment” in the bank’s statement and the twenty consecutive invoices were inconsistent with demand for full payment of principal and interest — namely, counter to an acceleration. Moreover, even if the waiver asserted by the borrower was to be deemed a loan modification, and therefore required to be in writing, the bank was found to have expressly reversed the default interest rate and the default interest charges.

Conclusion — In sum, the bank was held to have intentionally waived its right to acceleration with interest at the default rate and the foreclosure was dismissed.

Editor’s Note: The author’s firm represented the appellants in the summarized case.

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Washington: State Supreme Court holds that a Successor-in-Interest to the Trustee’s Sale Purchaser can pursue an Unlawful Detainer Action

Posted By Rachel Ramirez, Thursday, August 3, 2017
Updated: Thursday, August 3, 2017

August 8, 2017

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

The Supreme Court of the State of Washington recently decided the case of Selene RMOF II REO Acquisitions II, LLC v. Ward (Wash. Aug. 3, 2017).

Facts: Ward originally purchased a residence with a secured loan in 1999, but in 2001 she deeded the property to an individual named Dorsey. Ward claimed that, in 2004, Dorsey transferred title back to her via quitclaim deed (QCD) for one dollar in consideration. However, the QCD lacked a full notarization and it was not recorded.

In 2005, Dorsey deeded the property to a couple and recorded that conveyance. In 2007, the couple transferred title to an individual named Dreier; he obtained a refinance of Ward’s loan and encumbered the property with a new deed of trust. Ward continuously occupied the property and continued to make mortgage payments even after the refinance.

After a default occurred in 2008, nonjudicial foreclosure commenced. Ward filed suit, but she failed to restrain the sale, and her claims were ultimately dismissed. In 2009, the property sold at auction to LaSalle Bank, who received a trustee’s deed. In 2012, LaSalle Bank sought to evict Ward through an unlawful detainer action (UD), but discontinued that attempt once it became contested. Later in 2012, LaSalle Bank conveyed the property to Selene via a recorded special warranty deed.

Eviction Hearing and Appeal: In 2014, Selene filed its UD against Ward. For the first time, Ward disclosed the unrecorded QCD in response to Selene’s request for a writ of restitution. The trial court issued the writ.

In 2016, Ward successfully appealed. [See Selene RMOF II REO Acquisitions II, LLC v. Ward, Wash. Ct. App., Div. 1 (Feb. 29, 2016).] The Court of Appeals held that state law only gives a trustee’s sale purchaser the automatic right to prosecute a UD, and Selene was merely a later owner of the property. Further, Selene could not invoke a different provision of the UD statute to evict Ward because Ward had “color of title” through the QCD. The Washington Supreme Court subsequently granted Selene’s Petition for Review.

Final Result: In a 5-4 opinion, the Supreme Court agreed with Selene’s contention that the UD process is not strictly limited to a trustee’s sale purchaser, and statutory rights are transferrable to a successor-in-interest. The Court adopted Selene’s citation to a California case, Evans v. Superior Court, 67 Cal.App.3d 162 (1977), which is on-point. Secondly, the Court also sided with Selene by ruling that a UD action is not the proper forum for litigating title issues; Ward should have either restrained the nonjudicial foreclosure sale or brought a separate civil action to adjudicate her claim. Finally, the Court observed that Ward’s QCD was not properly notarized or recorded, and she therefore lacked “color of title.”

This outcome is a significant industry victory as it protects the rights of REO assignees.

Editor’s Note: The author’s firm represented the appellant Selene before the Washington Supreme Court in the Selene RMOF II REO Acquisitions II, LLC v. Ward case discussed here. Earlier articles on this case have been published in the USFN Report (spring 2017 Ed.) and in the USFN e-Update (Apr. 2016 Ed.), which can be viewed in the Article Library at www.usfn.org.

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Are the Carolinas Moving? NC and SC Border Change: Effects on Affected Properties

Posted By USFN, Tuesday, August 1, 2017
Updated: Monday, August 14, 2017

August 1, 2017

by Lanée Borsman, John Kay, and Alan Stewart
Hutchens Law Firm LLP
USFN Member (North Carolina, South Carolina)

Although we may have thought that the border between North and South Carolina was firmly established when the Province of Carolina was divided in 1729, the truth is that the line once thought of as the border between the two then-colonies contained numerous and substantial errors in its measurements. These discrepancies in the border have now been resolved through cooperation of the two states by a comprehensive re-survey of the North Carolina/South Carolina boundary line.

Re-surveyed
The boundary line between North and South Carolina has not actually moved. The ground, at least, is just where it has always been. However, the natural monuments that marked the respective territories have shifted or disappeared over the years. So, those who staked claims along those boundaries and thought that they were in one state (or the other) have left their heirs and assignees scratching their heads.

The line has been re-surveyed, not re-drawn. The Carolinas did not swap any properties or buy out tracts from one another. Instead, the true historical boundary line has been identified by the new survey and … well … some folks aren’t in the state that they thought they were in.

The two states cooperated in the re-survey and enacted sister legislation to deal with the practical effects of the “new” line. The North Carolina General Assembly enacted Session Law 2016-23, and the South Carolina General Assembly enacted Senate Bill 667. Each clarified the location of the boundary between the two states. Both laws took effect on January 1, 2017 and are expected to impact approximately 1,400 parcels of real property.

Judicial or Nonjudicial?
As a result of the boundary re-survey, certain properties previously believed to be in one state are in fact wholly or partially within the other state. Generally, North Carolina is nonjudicial, or quasi-judicial, when it comes to foreclosure. South Carolina, on the other hand, uses a judicial foreclosure process. So, how does the foreclosing entity proceed when it’s discovered that the ground they’ve put the lien on is actually in the other state?

First, it is not necessary, nor is it recommended, that copies of documents from one state be re-recorded in the other. The “official title” is found in that state in which the property has been taxed and where it was considered to lie prior to January 1, 2017. From the effective date of the boundary certification (January 1, 2017), North Carolina will extend full faith and credit to all conveyances and instruments of title made in accordance with South Carolina law prior to the boundary certification with respect to parcels of property that are now wholly or partially within the boundary of North Carolina. Any liens recorded with any register of deeds or clerk of superior court prior to the boundary certification shall attach to the affected parcels as of the date of the boundary certification. This class of liens will have priority with respect to other liens as of the date of boundary certification, but will retain the same priority among them as they had before certification, and the same is true for property that — prior to the boundary certification — was located in North Carolina but is now located in South Carolina.

Second, the title examination must be undertaken in the correct state(s) and be carefully reviewed by foreclosure counsel. Pursuant to the new laws, a “Notice of Affected Parcel” is recorded in each North Carolina county, and a “Notice of Boundary Clarification” is recorded in each South Carolina county. These documents are indexed so that they appear in the chain of title for the borrower/landowner. There will be occasions where a search in both states is warranted and a dual state foreclosure may be necessary.

Additionally, any South Carolina foreclosure proceedings filed with respect to an affected parcel must comply with S.C. Code § 29. As of January 1, 2017, when a mortgagee initiates a foreclosure proceeding with respect to “affected land” (defined as “real property of an owner whose perceived location has been clarified pursuant to the boundary clarification legislation”), the mortgagee’s attorney of record must file, with the court, a copy of the Notice of Boundary Clarification (together with the attorney’s certification) that title to the real property has been searched in the affected counties — in both South Carolina and North Carolina — and that all parties having an interest in the real property have been served with notice of the foreclosure action.

The foreclosure proceedings are stayed until the attorney has filed the certification. The mortgagee’s attorney of record must also serve, along with the summons and complaint, a copy of the recorded Notice of Boundary Clarification on all parties identified in the notice or known to have an interest in the affected land.

With respect to foreclosure actions already pending as of January 1, 2017, before any hearing on the merits (or if an order for sale has already been entered, then before sale), the mortgagee’s attorney of record must serve (by certified mail or overnight delivery) a copy of the Notice of Boundary Clarification and all filed pleadings on any party identified in the notice — or known to have an interest in the affected land — who is not already a party to the action. These additional parties shall have 30 days from the date when the mortgagee’s attorney mails the notice to file an answer or other response to the foreclosure complaint.

If any party who is served with the Notice of Boundary Clarification in connection with a foreclosure proceeding does not file a response within 30 days of service, the mortgagee’s attorney shall certify that fact to the court. The case will proceed as with any other foreclosure case; however, the mortgagee must continue to serve all parties with notice of any hearing and of the sale.

Moving Forward

These are unchartered waters, so it is critical to proceed on a case-by-case basis. When a Notice of Affected Parcel or Notice of Boundary Clarification, as applicable, is discovered in the title search, foreclosure counsel needs to carefully review the title and also examine the security instrument to determine whether it can be foreclosed using the respective Carolina’s usual process. This will help to ensure that the foreclosure process moves smoothly forward, while the ground stays in place.

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National Chapter 13 Plan Project

Posted By USFN, Tuesday, August 1, 2017
Updated: Monday, August 14, 2017

August 1, 2017

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

The genesis of the National Chapter 13 Plan Project was approximately five years ago. Originally proposed by now-retired U.S. Bankruptcy Judge Eugene Wedoff (N.D. Ill.), the main idea behind the project was to make Chapter 13 more uniform and efficient, especially for national creditors or attorneys practicing in more than one jurisdiction (i.e., having to deal with more than one plan version).

The project is coming to a conclusion, and after several iterations and rounds of public comment, there have been less than optimal results for creditors. This less-than-ideal situation is the result of large-scale opposition to a nationwide plan by judges and other stakeholders, which was mostly unforeseen when the Advisory Committee on Rules of Bankruptcy Procedure embarked on this mission years ago.

Unfortunately for proponents of Official Form 113, it became clear that the idea of a national plan was not going to be adopted without some form of a compromise, which is now contained in newly-adopted Federal Rules of Bankruptcy Procedure Rule 3015.1.

The U.S. Supreme Court recently authorized a number of significant changes to the procedural rules applicable to bankruptcy proceedings, including the adoption of Official Form 113. Unless Congress intervenes, the new rules will take effect on December 1, 2017.

Under amended Rule 3015(c), debtors will need to use Official Form 113 for their plan unless their jurisdiction has adopted its own local form (i.e., a conforming plan), which must itself include the information outlined in Rule 3015.1. Among other things, Rule 3015.1 will compel conforming plans to include a paragraph requiring the debtor to highlight any nonstandard plan terms, specifications limiting any secured creditor’s claim to the value of its collateral, or provisions seeking to avoid a lien on the debtor’s real or personal property.

Between now and December 1, districts should be deciding whether to use Form 113 or adopt a conforming plan. Some districts are much further along in the process, having already determined which plan to adopt and holding seminars to educate practitioners about the changes. Other districts have only recently sent out emails soliciting public comment and, unfortunately, there is still a third group of districts that appear to have done little and may not be able to formally adopt one plan or another prior to the looming December 1 date. The result in such situations is that Form 113 becomes the new plan in those districts.

It is anticipated that not all debtor attorneys will receive word of the change and some jurisdictions will be more forgiving than others about accepting outdated plans in cases filed after December 1.

The USFN Bankruptcy Committee is working to compile a table showing which plan each district intends to adopt. As this USFN Report is being finalized for print, it appears that only seven districts have thus far adopted the national Chapter 13 plan (Form 113), effective on December 1, 2017: Alaska; Illinois (Northern District); Indiana (Northern District); Iowa; New York (Western District); Ohio (Northern District); and Utah.

Accordingly, at the moment, it seems that the majority of districts are choosing to opt out pursuant to new Rule 3015.1 and adopt their own conforming plan. Stay tuned …

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