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Maine: Supreme Court Requires Witness Testimony of Prior Servicer Practices for Integrated Business Records

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Eva M. Massimino
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In KeyBank National Association v. Estate of Eula W. Quint, 2017 ME 237 (Dec. 21, 2017), the Maine Supreme Court held that the District Court did not err in finding that plaintiff-bank failed to lay adequate foundation to admit the records of a prior servicer pursuant to the business records exception to the hearsay rule.

In Quint, the plaintiff brought a foreclosure action against the Estate of Eula Quint (Estate) as well as Vickie L. Kilton (Kilton). Despite having failed to defend against the foreclosure action, Kilton, through counsel, appeared on the day of trial. Counsel for plaintiff called a witness from the current servicer for plaintiff-bank to testify as to the business records kept in the regular course of that servicer’s business with regard to the loan subject to foreclosure. However, the outstanding principal balance on the loan could not be established without relying on records of a prior servicer, which had been incorporated into the business records of the current servicer. The witness from the current servicer was able to authenticate records created and maintained by the current servicer, but could not establish that he had any knowledge of the record-keeping practices of the prior servicer. Judgment was entered for Kilton and the Estate. The plaintiff appealed, resulting in the opinion discussed herein.

The Maine Supreme Court affirmed the decision of the lower court, holding that the plaintiff did not adequately establish the business records exception for integrated business records of the prior servicer. In doing so, the Quint Court relied on its decision in Beneficial Maine Inc. v. Carter, 2011 ME 77, which established that a “witness must demonstrate knowledge that


• the producer of the record at issue employed regular business practices for creating and maintaining the records that were sufficiently accepted by the receiving business to allow reliance on the records by the receiving business;
• the producer of the record at issue employed regular business practices for transmitting them to the receiving business;
• by manual or electronic processes, the receiving business integrated the records into its own records and maintained them through regular business processes;
• the record at issue was, in fact, among the receiving business’s own records; and
• the receiving business relied on these records in its day-to-day operations.”


In applying Carter to this case, the Maine Supreme Court held that “a witness may lay a proper foundation to admit integrated business records if the witness’s testimony satisfies the requirements of both [the business record exception] and Carter.” Since the current servicer witness was not able to present testimony to establish that the prior servicer’s business practices satisfied those requirements, a proper foundation was not laid for admitting the prior servicer’s loan records, and they were consequently inadmissible.

The Quint decision is significant for all Maine foreclosure actions that are reliant, in part, on records created by a prior servicer. In order to ensure that integrated business records are admissible, testimony should be presented of one or more witnesses with knowledge of the business practices of each prior servicer whose records are necessary to establish the essential elements of foreclosure. Other recent Maine case law has established that failing to prove any allegation in a foreclosure may result in the underlying note and mortgage being entirely unenforceable. See Pushard v. Bank of America, N.A., 2017 ME 230. Accordingly, it is of utmost importance that the proper witnesses appear and be ready to testify at trial.

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Changes to the California Homeowner Bill of Rights and Recording Fees (Eff. 1/1/18)

Posted By Rachel Ramirez, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Caren Castle and Kayo Manson-Tompkins
The Wolf Firm – USFN Member (California)

Changes to the California Homeowner Bill of Rights

In general, some sections of the original California Homeowner Bill of Rights (HOBR1) have been eliminated; several sections have been changed; and still other sections remain unchanged. The net effect is that servicers, under the revised California Homeowner Bill of Rights (HOBR2), need only comply with the less onerous provisions formerly applicable to small servicers under HOBR1.

The Good Changes (eff. 1/1/2018)

Pre-NOD Letter is Eliminated: Servicers no longer need to send a letter that describes the Servicemembers Civil Relief Act, as well as details that the borrower can request a copy of the note, the deed of trust, assignments, and payment history. This type of letter previously had to be sent by large servicers before recording the Notice of Default (NOD) [section 2923.55(b)(1)].
Five-Day Post-NOD Letter is Eliminated: Servicers no longer need to send a notice to the borrower that the borrower may be evaluated for loss mitigation alternatives and provide the method to apply for those alternatives. Large servicers were previously required to send these letters within five days after the recording of the NOD [section 2424.9].
Written Notice of Foreclosure Sale Postponement is Eliminated: The servicer’s foreclosure trustee no longer needs to send a written Notice of Foreclosure Sale Postponement that previously had to be sent under certain circumstances [section 2924(a)(6)].
Requirement to Acknowledge Receipt of Loss Mitigation Documents is Eliminated: Servicers no longer need to send to the borrower a letter (within five business days after receipt of any document sent as part of a loss mitigation application) acknowledging receipt of the document, and containing certain other detailed information [section 2924.10].
Appeal Process for a Loss Mitigation Denial is Eliminated: Servicers no longer need to provide an appeal of a denial of an application for loss mitigation. Previously, large servicers were required to allow an appeal following the denial of an application for loan modification and follow a very rigorous set of steps, all of which have now been eliminated [section 2923.6(e) and new section 2923.11].
Requirement to Provide Borrower a Copy of the Fully Executed Loss Mitigation Agreement is Eliminated: [old section 2924.11(c)].
Requirement to Rescind an NOD and Cancel a Foreclosure Sale upon Execution of a Permanent Loss Mitigation Agreement is Eliminated: [old section 2924.11(d)].
Prohibition against Charging Fees for the Loss Mitigation Process is Eliminated: [old section 2924.11(e)].
Prohibition against Charging Late Charges during the Loss Mitigation Process is Eliminated: [old section 2924.11(f)].
Requirement to Include the HUD Toll-Free Number in the Certified Letter is Eliminated: [old section 2923.55(f)(3) and new section 2923.5(e)(3)].
Prohibition against Dual Tracking when filing an NOD is Eliminated: Servicers no longer need to delay the filing of an NOD if there is a completed loan modification application.
$7,500 Civil Penalty for the Repeated Filing of Inaccurate Foreclosure Documents is Eliminated: Section 2924.17(c) includes a $7,500 civil penalty that could be assessed against a servicer by certain California governmental agencies for the repeated filing of inaccurate foreclosure documents; however, section 2924.17(c) expired by its statutory language on January 1, 2018. Accordingly, effective January 1, 2018, there is no longer a $7,500 civil penalty.


The Not-So-Good Changes (eff. 1/1/2018)

The Prohibition against Repeated Loss Mitigation Applications has been Eliminated: The old section 2923.6(g) provided that a servicer need not review a new loan modification application if the borrower had a prior application that was previously and fairly considered, and there was no material change since the borrower’s last application. That protection is not found in HOBR2 and, thus, multiple applications must theoretically be reviewed.
The Types of Completed Loss Mitigation Applications that Prohibit Dual Tracking have been Expanded: As noted above, HOBR2 eliminates the prohibition against dual tracking in relation to the filing of an NOD. However, whereas HOBR1 only precluded dual tracking upon a completed loan modification application, HOBR2 precludes dual tracking upon completion of any type of loss mitigation application. Accordingly, if there is any type of completed loss mitigation application, a servicer can proceed with its NOD but cannot proceed with its Notice of Sale or foreclosure sale.
Protection from Liability for Signatories of Bank of America, et al. Consent Judgment is Eliminated: Old section 2924.12 provides that those who had signed the Bank of America, et al. Consent Judgment, and complied with the requirements of that order, would have no liability for a violation of the HOBR1 provisions. New section 2924.12 deletes this protection from liability.
Purported Duty of Servicers to do Loss Mitigation Pertains to All Loans: Old section 2923.15 limited the application of certain sections of HOBR1 to owner-occupied residential real property containing no more than four dwelling units. Section 2923.6 (Purported Duty of Servicers to do Loss Mitigation) was among the sections listed in old section 2923.15, and, thus, old section 2923.6 was limited to only owner-occupied residential real property containing no more than four dwelling units. New section 2923.15 deletes any reference to section 2923.6, and thus all loans are now subject to the purported duty of services to do loss mitigation.


Immediate Action Needed
To record a Notice of Default, a servicer must sign a declaration indicating that it has complied with the provisions of old section 2923.55 (large servicers) or old section 2923.5 (small servicers). Since old section 2923.55 was repealed effective January 1, 2018, all servicers are now subject to new section 2923.5; therefore, the form declaration used by large servicers will have to be updated to reflect this change.

CFPB Servicing Rules
Although HOBR2 makes the California loss mitigation and foreclosure process significantly less burdensome, servicers remain subject to the CFPB Servicing Rules, which still require action similar to the provisions of HOBR1. In short, there is little relief.

Additionally, Senate Bill 818 (which was introduced in the California Senate on January 3, 2018) seeks to reinstate many of the provisions of HOBR1 that sunset. More specifically, it affects the large servicer, defined as those servicers conducting more than 175 foreclosures in a year. Progress of this bill will be watched. Look for a more detailed analysis if, and as, SB 818 works its way through the legislative process.

Changes to Recording Fees, (eff. 1/1/2018)
Despite substantial opposition from real estate industry groups (including the California Mortgage Bankers Association) on September 29, 2017, Senate Bill 2 Atkins, Chapter 2 of the Statues of 2017 (commonly referred to as “SB 2”), was signed into law in California. This bill provides that effective January 1, 2018, a $75 recording fee will be imposed for every transaction on each single parcel of real estate requiring a recording fee, in addition to any other local recording fee. There are some limited exemptions to this $75 fee. Further, the maximum total fee allowable in connection with SB 2 is not to exceed $225 per single transaction, per parcel. Ultimately, the additional fee will about double the recording costs of most mortgage-related documents recorded in California, including foreclosure costs.

Unless there is a specific exemption, the $75 fee is to be imposed on “every real estate instrument, paper, or notice required or permitted by law to be recorded,” which is defined as “a document relating to real property, including, but not limited to, the following: deed, grant deed, trustee’s deed, deed of trust, reconveyance, quit claim deed, fictitious deed of trust, assignment of deed of trust, request for notice of default, abstract of judgment, subordination agreement, declaration of homestead, abandonment of homestead, notice of default, release or discharge, easement, notice of trustee sale, notice of completion, UCC financing statement, mechanic’s lien, maps, and covenants, conditions, and restrictions.” [GC 27388.1(a)(1)]. Accordingly, and unless exempt, every mortgage document is subject to the new $75 fee.

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Minnesota: Is a Deadline Really a Deadline for Borrowers Challenging Foreclosures for Dual Tracking?

Posted By Rachel Ramirez, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

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

During the mortgage foreclosure crisis, Minnesota adopted its own borrower relief provisions through Minnesota Statutes Section 582.043, also known as the “Minnesota Dual Tracking Statute.” This statute imposes specific requirements for mortgage servicers with loss mitigation procedures and includes dual-tracking prohibitions. Minnesota’s version is even more expansive than the federal rules; it contains no explicit limitation on the number of loss mitigation applications that borrowers may submit, providing borrowers the ability to file applications up to seven days prior to foreclosure sales to stop foreclosures, and awarding attorneys’ fees for noncompliance, among other requirements. The statute did, however, provide borrowers with only a narrow time-window to bring actions asserting violations. Specifically, the statute provides:

Subd. 7. Relief.


(a) A mortgagor has a cause of action, based on a violation of this section, to enjoin or set aside a sale. A mortgagor who prevails in an action to set aside or enjoin a sale, or who successfully defends a foreclosure by action based on a violation of this section, is entitled to reasonable attorney fees and costs.

(b) A lis pendens must be recorded prior to the expiration of the mortgagor’s applicable redemption period under section 580.23 or 582.032 for an action taken under paragraph (a). The failure to record the lis pendens creates a conclusive presumption that the servicer has complied with this section. (emphasis added)


This subdivision was recently discussed by the Minnesota Supreme Court in Litterer v. Rushmore Loan Management Services, LLC, No. A17-0472 (Minn. Jan. 10, 2018). After defaulting on their note and mortgage, borrowers Thomas and Mary Litterer (Borrowers) applied unsuccessfully for a loan modification. In 2014 their home was sold in a foreclosure sale, subject to the usual six-month redemption period. Just prior to the expiration of the redemption period, Borrowers initiated suit without an attorney, alleging a number of violations of Section 582.043; they failed to record a notice of lis pendens (NLP) with the county. Upon retaining counsel, the delayed Notice of Pendency was recorded after the redemption period had already expired.

Background
After the Borrowers’ suit was removed to the U.S. District Court for the District of Minnesota, summary judgment was granted for the foreclosing lender based on the failure to record the NLP in a timely manner, without reaching the merits of Borrowers’ complaint. Upon appeal to the Court of Appeals for the Eighth Circuit, Borrowers asked for discretionary relief from the judgment based on excusable neglect under Rule 6.02 of the Minnesota Rules of Civil Procedure, seeking reversal in order to have their case heard on the merits. Prior to oral argument before the Eighth Circuit, Borrowers filed a Motion for Certification of Question to Minnesota Supreme Court. After the argument, the Eighth Circuit certified the following question to the Minnesota Supreme Court: “May the lis pendens deadline contained in Minn. Stat. § 582.043, subd. 7(b) be extended upon a showing of excusable neglect pursuant to Minn. R. Civ. P. 6.02?”

Rule 6.02 reads in relevant part, “[w]hen by statute, by these rules, by a notice given thereunder, or by order of court, an act is required or allowed to be done at or within a specified time, the court for cause shown may, at any time in its discretion, … upon motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.”

Borrowers asserted a litany of reasons for their failure to timely file the NLP, based mostly on their inexperience and pro se status when they first brought suit. The sole question before the Minnesota Supreme Court was whether the deadline to file the NLP was procedural (and Rule 6.02 might have afforded relief) or substantive in nature (in which case the action ends for failure to meet the deadline). The Minnesota Supreme Court decided the requirement was substantive and answered the certified question in the negative.

Supreme Court’s Review
In its analysis, the Minnesota Supreme Court rejected the Borrowers’ contention that procedural law applied, akin to the analysis in Stern v. Dill, 442 N.W.2d 322 (Minn. 1989), which found the expert witness deadlines in malpractice cases to be procedural, and thus subject to expansion at the discretion of the court. In noting that, unlike Stern which solely impacted the litigation between the parties and was filed in the trial court, failing to file the NLP in the appropriate county recorder’s office creates a “conclusive presumption” that the mortgage servicer complied with the section.

The Court determined that failure to follow the plain reading and unambiguous nature of the statute would affect the servicer’s substantive rights, as well as be misleading to third parties who rely on the document recording statute to alert them of pending litigation, which may interfere with their purchase or security interests sought post-foreclosure. The Court was sympathetic to the harsh result to Borrowers but was constrained by constitutional separation of power principles. While the judiciary has the power to regulate procedural rules, it has “no authority to intrude upon legislative declarations of substantive law.”

Conclusion
In sum, if borrowers fail to strictly meet the Minnesota procedural requirements for pursuing dual-tracking claims against foreclosing lenders in a timely manner, those dual-tracking claims will be lost, and mortgage servicers can proceed without this potential cloud on title affecting their ability to move forward with transitioning properties to new homeowners. Regardless, mortgage servicers should ensure diligent compliance with dual-tracking laws to help ensure that such claims are not pursued by borrowers in the first place.

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Dual Tracking: District Court Reviews Borrower’s Claim

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Ronald S. Deutsch and Michael J. McKeefery
Cohn, Goldberg & Deutsch – USFN Member (District of Columbia)

The U.S. District Court for the District of Maryland recently dealt with the issue of dual tracking in an unreported case, Weisheit v. Rosenberg & Associates, LLC, Civil No. JKB-17-0823 (Nov. 15, 2017).

Background
In Weisheit, the plaintiff’s mortgage became delinquent in 2009 and foreclosure proceedings began on April 26, 2016. The plaintiff-borrower then submitted a “complete” loan modification application to the servicer more than 37 days prior to a scheduled foreclosure sale.

Pursuant to the Real Estate Settlement Practices Act (RESPA) and its implementing regulations, if a “complete” loss mitigation application is submitted to a servicer more than 37 days prior to any scheduled foreclosure sale, a foreclosure servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale. See 12 C.F.R. § 1024.41 (g). If the servicer does so, the servicer is engaging in a prohibited practice known as dual tracking.

The plaintiff-borrower’s loss mitigation application was denied by the servicer via letter. Pursuant to 12 C.F.R. § 1024.41 (h), the plaintiff then timely appealed the servicer’s denial decision. On December 29, 2016 the servicer sent a letter to the plaintiff in response to her appeal (the Response Letter). In the Response Letter, the servicer asserted that the denial was based upon an investor restriction. In the Response Letter, however, the servicer did not name the investor, nor was the specific nature of the alleged investor restriction described. The plaintiff responded and advised the servicer and the foreclosure firm that she intended to appeal the denial. Nevertheless, the plaintiff’s home was rescheduled for sale. As a result, the plaintiff filed an emergency motion to stay the sale, which was granted by the Maryland Circuit Court.

The plaintiff then brought an action against the servicer and the foreclosure firm in federal court. In her lawsuit, the plaintiff primarily alleged that the servicer violated RESPA by proceeding towards a foreclosure sale during active loss mitigation. The servicer moved to dismiss the plaintiff’s complaint; the court denied the motion.

U.S. District Court’s Analysis
The court indicated that, under 12 C.F.R. § 1024.41 (d), a denial of a loan modification application must state the “specific reason or reasons for the servicer’s determination.” Furthermore, according to the Consumer Financial Protection Bureau’s official interpretation, if the denial is due to a restriction by the investor, then the explanation for the denial “must identify the owner or assignee of the mortgage loan and the requirement that is the basis of the denial.” Therefore, the court found that the denial contained in the servicer’s Response Letter was insufficient because the investor was not named, and the specific nature of the alleged investor restriction was not described. According to the court, an insufficient denial such as the Response Letter did not end the loss mitigation process; thus, the servicer was prohibited from moving towards a foreclosure sale.

Ultimately, the court ruled that the plaintiff alleged sufficient facts to state a claim for relief against the servicer for violating RESPA’s prohibition of dual tracking. As a result, the servicer’s motion to dismiss was denied, permitting the plaintiff’s lawsuit to continue.

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Arkansas Supreme Court Reviews Borrower Right to Jury Trial

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

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

The Arkansas Supreme Court recently issued an opinion in Tilley v. Malvern National Bank, 2017 Ark. 343 (Dec. 7, 2017), holding that a borrower has no right to a jury trial under Arkansas law on a judicial foreclosure claim brought against him by a bank. However, the ruling also recognizes the same borrower’s right to trial by jury on his counterclaims for money damages despite a pre-dispute jury waiver clause in the loan agreement. Accordingly, the Supreme Court affirmed the trial court’s decision denying the borrower’s request for a jury trial on the underlying foreclosure claim, but reversed the trial court’s holding that the pre-dispute jury waiver contained in the parties’ loan agreement was valid.

Background
Tilley borrowed $221,000 from Malvern National Bank in 2010. A loan agreement, promissory note, and mortgage were executed. The loan agreement included a jury-waiver clause. Tilley later defaulted and the Bank filed a foreclosure action against him. Tilley’s answer to the Bank’s complaint demanded a jury trial. His counterclaim asserted six separate claims for money damages — including breach of contract, tortious interference with a business expectancy, negligence, and fraud — plus included a demand for a jury trial.

State Supreme Court’s Analysis
The issue of a right to a trial by jury was before the Court in two different contexts. First, the Court addressed the right of a borrower to a jury trial in a foreclosure proceeding. Second, the Court looked at a borrower’s right to a jury trial on the legal issues raised in the counterclaims.

Bank’s Foreclosure Claim — With regard to the foreclosure claim, the Court followed established case law and held that a foreclosure proceeding, historically, is an equitable proceeding to which the constitutional right to a jury trial does not extend. The trial court’s denial of the borrower’s request for a jury trial on the Bank’s foreclosure claim was upheld by the Arkansas Supreme Court.

Borrower’s Counterclaims — The Court then turned to the Bank’s arguments against a jury trial on the counterclaims. The Bank contended that the “clean-up doctrine” required that Tilley’s counterclaims for damages be decided by the trial court, not a jury. In considering this point, it is important to know that prior to 2000, Arkansas maintained separate systems of trial courts. Circuit courts decided legal claims for money damages, such as cases for breach of contract, personal injury, or property damage. These legal claims generally were decided by juries. Chancery courts, on the other hand, determined equitable claims such as divorce actions and foreclosures. Historically, equitable claims were decided by the court, not by a jury. Some lawsuits, though, raise both legal and equitable claims. In order to avoid the time and expense involved in having one court decide the legal claims and another court the equitable claims, the so-called “clean-up doctrine” was developed, which allowed the chancery court to decide both types of claims.

In 2000 Arkansas’s circuit and chancery courts were merged, and their legal and equitable jurisdictions were combined into the circuit courts. The Bank contended that the trial court — a circuit court having both legal and equitable jurisdiction as a result of the merger — could decide not only the Bank’s equitable foreclosure claim without a jury but also the borrower’s legal counterclaims for damages under the clean-up doctrine. The Supreme Court rejected this argument by noting that after the merger of law and equity in Arkansas, that doctrine was abolished.

In place of applying the clean-up doctrine to decide right-to-jury-trial issues, trial courts (after the merger of law and equity) were to review the historical nature of the allegations, distinguishing legal from equitable, and then resolve the jury trial question by deciding equitable claims itself and having a jury decide the legal ones. The Supreme Court determined that the borrower’s counterclaims (such as breach of contract, tortious interference, and fraud) were legal, not equitable, and should have been decided by a jury.

After rejecting the Bank’s assertion that the trial court was correct in ruling on the merits of the borrower’s counterclaims itself, the Supreme Court took up the Bank’s argument that the borrower waived his right to a jury trial on the counterclaims in the jury-waiver clause of the loan agreement. The Supreme Court noted that the Arkansas Constitution allows that the right to a jury trial may be waived, but only in the manner prescribed by law. For example, a borrower’s waiver of a right to a jury trial in an arbitration agreement is a waiver made in the manner prescribed by law; that is, as prescribed by the Arkansas Arbitration Act. However, except for matters of arbitration, Arkansas law does not allow for waivers of the right to a jury trial before the onset of an actual dispute between parties; the Arkansas Rules of Civil Procedure provide for a waiver of a jury trial after litigation has begun, not before. Consequently, the trial court erred in holding that Tilley had effectively waived his right to a jury trial in the loan agreement he executed at the time the Bank made the loan.

Conclusion
Tilley may well result in more counterclaims being filed in Arkansas judicial foreclosure proceedings by borrowers. Lenders holding Arkansas mortgages will want to avoid the time and expense of defending against these claims in jury trials. One possible response to this risk would be to insert a provision in the loan agreement, or mortgage, requiring arbitration of such claims.

Arbitration provisions are enforceable under Arkansas law. However, if the lender plans on selling the mortgage to Fannie Mae, be aware that the Fannie Mae form mortgage for Arkansas does not contain a mandatory arbitration provision. Moreover, Part B8-3-02 of the Fannie Mae Servicing Guide states that “[m]ortgages that are subject to mandatory arbitration are ineligible for sale to, or securitization by, Fannie Mae unless the mandatory arbitration provision provides that, in the event of a transfer or sale of the mortgage or an interest in the mortgage to Fannie Mae, the mandatory arbitration clause immediately and automatically becomes null and void and cannot be reinstated.” Although this restriction against use of a mandatory arbitration provision applies only to mortgages purchased by Fannie Mae, and not to other investors, some of these other investors adopt the Fannie Mae guidelines as their own.

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Connecticut: Appellate Decision is another Step toward Reducing Litigation Based on Post-Default Actions of Lenders

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

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

The decision in the case of U.S. Bank National Association, Trustee v. Blowers, AC39219 (Conn. App. Ct. 2017), expanded on the holding in U.S. Bank National Association, Trustee v. Sorrentino, 158 Conn. App. 84, and supports the premises that:


(1) the actions of the mortgagee during mediation and other modification negotiations do not relate to the making, validity, or enforcement of the note and mortgage; and
(2) the transaction test as presented in Practice Book § 10-10 does not apply as to special defenses.


Practice Book § 10-10 provides, in relevant part, that “[i]n any action for legal or equitable relief, any defendant may file counterclaims against any plaintiff provided that each such counterclaim … arises out of the transaction or one of the transactions which is the subject of the plaintiff’s complaint ….” It has long been the view of the Connecticut courts in foreclosure matters that to satisfy this rule the counterclaim must relate to the making, validity, or enforcement of the note and/or mortgage. Further case law has also held that special defenses include such things as payments, discharge, release or satisfaction, among others. These defenses fall in line with the standard for counterclaims and must have some sort of nexus to the making, validity, or enforcement of the note and/or mortgage as well. See CitiMortgage, Inc. v. Rey, 150 Conn. App. 595, 603, 92 A.3d 278, cert. denied, 314 Conn. 905, 99 A.3d 635 (2014).

Defendant’s Claims against Plaintiff
In Blowers, the defendant presented allegations regarding the conduct of the plaintiff during the court’s foreclosure mediation program. The court held that if mediation or loan modification negotiations result in a final modification, which is subsequently breached, the conduct during that time can later be cited as being related to the making, validity, or enforcement of the note and/or mortgage. This holding should further assist lenders in defending litigation that is based solely on the post-default actions of lenders, particularly during participation in the court’s mediation program.

In addition, the defendant’s attempt to broaden Practice Book § 10-10 and the applicable case law to include not only counterclaims but special defenses as well, failed. The Practice Book is clear that § 10-10 applies specifically to counterclaims and makes no mention of special defenses. “The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action.” Fidelity Bank v. Krenisky, 72 Conn. App. 700, 705, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).

Closing Words
In Blowers, the court opines that it is not willing to wipe out years of precedent by applying the standards as asserted by the defendant. This is also a favorable decision for lenders as it further defines the special defenses and supports the equitable nature of the Connecticut courts.

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North Carolina: Question of Surviving Borrower Obligation — Take Note

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Jim Bonner and Devin Chidester
Brock & Scott, PLLC – USFN Member (North Carolina)

In a recent decision, the North Carolina Court of Appeals held that an individual is not a surviving borrower under a deed of trust if that individual was not obligated on the underlying promissory note. In re Clayton, 802 S.E.2d 920 (2017).

Background
In June 2008 Mrs. Jackie Clayton (Respondent) and Mr. Melvin Clayton executed a deed of trust for a reverse mortgage securing an obligation signed by Mr. Clayton. Mr. Clayton was identified as the “borrower” in all loan documents whereas Respondent was identified as “borrower” only in the deed of trust. Due to Mr. Clayton’s death, the holder initiated a foreclosure on the obligation.

At the foreclosure hearing, the clerk of court dismissed the matter because Respondent signed the deed of trust as a borrower, resided at the property, and was still alive. The dismissal was appealed and the superior court judge allowed the foreclosure to proceed, ruling that Mr. Clayton was the sole borrower under the note and his status alone controlled default and foreclosure provisions of the loan. Respondent appealed.

Appellate Court Review
The main issue in Clayton is whether a party that is not obligated under the terms of a promissory note can be considered a borrower for the purposes of default and foreclosure of the loan. The Court of Appeals reasoned that the deed of trust, the note, and other contemporaneously executed loan documents should be evaluated and construed as one document. Both the note and the deed of trust contained similar provisions allowing acceleration and foreclosure if “[a] Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” Id. at 925. Respondent contended that she was a “surviving borrower” since she executed the deed of trust as a “borrower” and the property remained her principal residence. Id.

The court disagreed. Although Respondent signed the deed of trust as a borrower, the note and corresponding loan documents were executed without her signature. The court found that Mr. Clayton was the only contemplated borrower, as he alone executed the underlying loan documents. Since Respondent neither executed, signed, nor was identified as a borrower to the note or other loan documents, she was not a borrower by simply executing the deed of trust as one. Further supporting the interpretation that Respondent was not intended to be a “surviving borrower,” the court pointed out that she did not qualify as a borrower under North Carolina law. Per N.C. Gen. Stat. § 53-257(2), a borrower for a reverse mortgage must be 62 years of age or older. Respondent was younger than 62 years of age at the time she signed the deed of trust. Due to her age and the lack of intent to be obligated under the note, Respondent’s residency and vital status did not control the right of the holder to foreclose. The court’s message in Clayton is simple: a borrower must be obligated under the promissory note.

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Servicemembers Civil Relief Act: Expanded Protections Continue

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by William D. Meagher
Trott Law, P.C. – USFN Member (Michigan)

President Trump signed the “National Defense Authorization Act for Fiscal Year 2018” (Public Law No. 115-91) on December 12, 2017. Section 557 of that Act amends, once again, section 701(d) of the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 (Public Law 112-154; 126 Stat.1165). This latest amendment extends (through December 31, 2019) the expanded provision of the Servicemembers Civil Relief Act (SCRA) that safeguards servicemembers against foreclosure for one year following the completion of their service. Absent further amendments, the protection from foreclosure time period under 50 U.S.C. § 3953 of the SCRA will revert back to the prior version (i.e., 90 days) on January 1, 2020.

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Connecticut: Court Rules that Plaintiff Need Not Plead it is the Owner of the Note

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

by Jeffrey M. Knickerbocker
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In CitiMortgage, Inc. v. Tanasi, 176 Conn. App. 829 (Oct. 3, 2017), the borrowers contended that the plaintiff committed fraud because it pled that it was the holder without disclosing to the court that another entity owned the note. In Connecticut, the holder of the note is presumed to be the owner of the debt. The defendants claimed that because of the presumption of ownership, the plaintiff was required to plead the identity of the owner of the note. The Connecticut appellate court did not agree and ruled in favor of the plaintiff, affirming the decision of the trial court.

Factual Background
The appellate court recited the following relevant facts:

“On August 2, 2007, the defendants executed and delivered a note in the principal amount of $656,250 to ABN AMRO Mortgage Group, Inc. (Mortgage Group), which was secured by a mortgage on real property . . . . In late August 2007, the plaintiff acquired Mortgage Group by merger. In November, 2007, the plaintiff entered into a ‘Master Mortgage Loan Purchase and Servicing Agreement’ (agreement) with Hudson City Savings Bank (Hudson). Under the agreement, Hudson purchased certain mortgage loans from the plaintiff, including the defendants’ loan. The agreement identifies Hudson as the ‘[i]nitial [p]urchaser’ and the plaintiff as the ‘[s]eller and [s]ervicer.’ The plaintiff possessed the original note, endorsed in blank, at the time of the commencement of the foreclosure action. When the defendants failed to make the required monthly payments on the loan, the plaintiff sent the defendants a notice of default. The defendants subsequently failed to cure their default, and the plaintiff accelerated the sums due under the note. The plaintiff commenced a foreclosure action in July, 2011, and alleged in its complaint that it ‘is the holder of [the defendants’] [n]ote and [m]ortgage.’

The parties proceeded to mediation. It is not disputed that, during mediation, the plaintiff provided the defendants with a copy of the agreement. After participating in fourteen court-annexed mediation sessions, the plaintiff filed a motion to terminate the mediation stay, which the court granted.” CitiMortgage, Inc. v. Tanasi, supra, 176 Conn. App. at 832.

From mediation, the borrowers were aware that the plaintiff was the holder of the note, but not the owner. Further, the borrowers knew that the plaintiff had authority from the owner to prosecute the foreclosure. Despite this, the borrowers attacked the foreclosure in three ways, claiming that the plaintiff “(1) lacked standing to commence foreclosure proceedings, (2) improperly relied on a document as a basis for standing, and (3) committed fraud warranting dismissal of the action with prejudice.” Id. at 832.

Court’s Review
The court found that the agreement between the owner of the note and the plaintiff stated that “the plaintiff ‘is hereby authorized and empowered by [Hudson] . . . when [the plaintiff] believes it is appropriate and reasonable in its judgment . . . to institute foreclosure proceedings . . . .’” Id., at 840. Thus, the court concluded that the plaintiff had standing.

The defendants next asserted that the plaintiff, by pleading it was the holder and not disclosing it did not own the loan, was precluded from obtaining foreclosure. The court pointed out that the defendant, not the plaintiff, had the burden to rebut the presumption once the plaintiff was afforded the presumption. Upon the presumption of ownership being rebutted, the plaintiff could then introduce the agreement between the owner and the plaintiff. While the defendant maintained that the introduction of the agreement was untimely, the court observed that the defendant had an opportunity to review the agreement at a prior hearing on a motion to dismiss, and at mediation three years earlier. Lastly, the court found that the plaintiff could plead that it was the holder without disclosing another owner, and that such a pleading was not fraud upon the court.

Conclusion
The Tanasi decision is confirmation that the longstanding method of pleading holder or entity entitled to enforce the note in Connecticut foreclosures may continue, despite creative arguments from borrowers that the plaintiff needs to plead ownership status of the loan. The case also underscores the importance of being transparent about the relationship between the owner of the note and holder of the note.

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Connecticut: Recording Fees on the Rise (eff. 12/1/2017)

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

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

The Connecticut governor has signed into law the state budget for 2017-2019. Buried in section 665 of the 900-page budget bill (June Special Session, Public Act No. 17-2) is a $7 increase for recording many documents on the Land Records. The increased recording fees took effect on December 1, 2017. Accordingly, this recording fee increase should be kept in mind for transactions where the documents are recorded on or after December 1.

Recording and Property Registration fees in Connecticut before and after the fee change are as follows:


  Before Fee Change  After Fee Change

All Documents (except MERS documents) 

$53 for first page plus

$5 for each additional

page

$60 for first page plus

$5 for each additional page

Deeds (except deeds for no consideration)

$2 additional fee Same $2 additional fee

Assignments of Mortgage by MERS,

and Releases of Mortgage by MERS

$159 flat fee for entire document

$159 flat fee for entire

document (no change)

MERS Mortgages and Assignments

to MERS, and all other documents

where MERS is the grantor or grantee

$159 for first page plus

$5 for each additional

page

$159 for first page plus

$5 for each additional

page (no change)

Foreclosed Property Registrations  $53  $60



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Missouri Court of Appeals Rules for Home Borrower in a Quitclaim Deed Case

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

by William H. Meyer
Martin Leigh, P.C. – USFN Member (Kansas)

The Missouri Court of Appeals recently reversed a trial court’s summary judgment decision and ruled for a home borrower and against the home lender. That case, styled Gacki v. Jeff Kelly Homes, Inc., No. ED 104983 (Mo. Ct. App. Oct. 17, 2017), involved a residential home loan that was secured by a quitclaim deed. Under the terms of the loan, if the home borrower was more than thirty days delinquent, then the lender was entitled to record the quitclaim deed and obtain ownership and possession of the home. This case is different from the normal Missouri nonjudicial foreclosure situation in that the lender is able to skip Missouri’s statutory foreclosure procedure to obtain title to a home in an expedited fashion after a borrower’s default.

Appellate Review
Payment Default Issue — In ruling for the borrower, the Court of Appeals first focused on the rigorous evidentiary standard that the lender was required to satisfy to obtain a summary judgment. In this case, there was no doubt that the borrower was two weeks behind in making payments. Nonetheless, the Court of Appeals concentrated on the loan documents (which did not define when a loan payment was “late”), conflicting default notices given by the lender, and the fact that the lender withdrew funds from the borrower’s account prematurely. Given these evidentiary issues, the appellate court held that the lender failed to present uncontroverted evidence to establish that the borrower was more than thirty days late in making her payments and, accordingly, found for the borrower on the payment default issue.

Property Abandonment Issue — The court also addressed the lender’s claim that the borrower had abandoned the home and that such abandonment also constituted a default under the home loan. In ruling for the borrower on this issue, the Court of Appeals found that the evidence, which the trial court had relied on for finding that the borrower abandoned the house, was controverted and, therefore, summary judgment was not appropriate. The appellate court also emphasized that when personal property is still in the home, this fact rebuts a presumption of abandonment.

Policy Concern — The Court of Appeals also articulated concern over home loans that are secured by quitclaim deeds. Although the court did not have to decide this issue (because it overruled the summary judgment on other grounds), the court was skeptical about the fairness of home loans that are secured by quitclaim deeds. In this case, had the trial court decision not been overturned, the home lender would have been allowed to recover a judgment for ownership of the home and a monetary award for the entire amount of the home loan debt. As noted by the Court of Appeals, such a judgment is troubling because the home borrower’s debt would not have been offset by the value of the home.

Closing
Although not addressed by the Court of Appeals, there is at least one significant advantage to using a deed of trust versus a quitclaim deed to secure a home loan. That advantage is that Missouri’s nonjudicial foreclosure process associated with foreclosing a deed of trust extinguishes most liens against a property. Simply recording a quitclaim deed after a borrower’s default, however, does not have the same effect over liens — and a lender in this situation will find its title clouded by the unresolved lien claims.

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New York: The 90-Day Notice and Proving it was Sent

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

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

Two recent cases in New York confirm that sending the 90-day notice is a condition precedent to initiate a home loan mortgage foreclosure action, and that failure to do so will defeat summary judgment and effectively defeat the case. [Citibank, N.A. v. Wood, 150 A.D.3d 813, 55 N.Y.S.3d 109 (2d Dept. May 10, 2017); Wells Fargo Bank, N.A. v. Trupia, 150 A.D.3d 1049, 55 N.Y.S.3d 134 (2d Dept. May 17, 2017).]

This is hardly welcome for lenders, but it is nothing new. What is perhaps significant is the more obscure issue of how to prove that the 90-day notice was sent. Each lender failed on that point in the cited cases.

In the Citibank case, the court held that the plaintiff had failed to submit an affidavit of service (or any other proof of mailing by the post office) showing that it properly served the borrower according to the statute. Rather, the affidavit of an officer simply referenced supposed tracking numbers stamped on the notice. This was held to be insufficient to show that the notice was sent in the manner required by the statute because the loan servicer did not provide proof of a standard office mailing procedure and offered no independent proof of the actual mailing.

In the Wells Fargo case, the plaintiff submitted an affidavit of an officer stating that she had reviewed the 90-day notice sent to the borrower on a certain date to the last known address by first-class and certified mail. Annexed to the affidavit was a copy of that notice, along with a copy of the certified mail receipt and the certified mail number; however, the receipt contained no language indicating that it was issued by the U.S. Postal Service. The court held that although mailing may be proved by documents meeting the requirements of the business records exception to the rule against hearsay, here, the officer did not claim that she was familiar with the plaintiff’s mailing practices and procedures. Consequently the plaintiff “did not establish proof of a standard office practice and procedure designed to ensure that items are properly addressed and mailed [citation omitted].” In the end, the plaintiff was simply unable to support the officer’s assertion that the notice was mailed to the borrower by first-class mail.

All of this readily suggests that foreclosing plaintiffs will need to have procedures in place to ensure that actual proof of a mailing, according to the statute, can be presented to a court when a borrower claims that the 90-day notice was not sent.

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Ohio: Cash-Strapped Counties Dig Deeper to Increase their Coffers

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

by Peter Mehler
Reimer Law Co. – USFN Member (Kentucky, Ohio)

In an effort to plug holes in their budgets, county auditors in Ohio have begun imposing fines on owners of residential properties who fail to register rental properties.

Residential rental properties are defined as properties located in counties with a population of more than 200,000, on which are located one or more dwelling units which are leased or otherwise rented to tenants. Ohio Revised Code §§ 5323.01, et seq. requires owners of these “residential rental properties” to register the property with the auditor of the county in which the property is located and provide basic information including the name, address, and telephone number of the owner. This information is then placed on the record by being filed with the tax duplicate. Registration is free and only required once. If information such as ownership changes, the new ownership entity or individual must provide their name and contact information to the auditor within 60 days of that change.

The law is not new; it was passed in 2006 as a way to root out blight and a diminution in property value to the surrounding communities caused by an inability to find and communicate with absentee landlords. It has been only in the past couple years, however, that some of the county auditors in Ohio have begun to enforce the law by imposing fines of between $50 and $150 for a failure to register rental properties. This has resulted in up to $3,000,000 a year in additional revenue to some of Ohio’s larger counties. The amount of the fine varies by county. Further, some of the counties that are not currently assessing fines are taking a hard look at doing so in the near future.

The effect on the servicing industry will be amplified by the significant number of assets many lenders have in their REO inventories. An additional factor will be that payment of taxes is often handled by third parties who may not be aware of the registration requirement, or may not get this information to the proper party to ensure compliance. Moreover, it is not always easy to find out how a property was used by a borrower or prior owner to determine whether registration is necessary. If fines are imposed against the property, these charges will be added to the tax bill and remain until paid in full.

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North Carolina: Amendment to the Substitute Trustee Statute

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 14, 2017

December 12, 2017

by Terry Hutchens
Hutchens Law Firm LLP – USFN Member (North Carolina, South Carolina)
and Jim Bonner
Brock & Scott, PLLC – USFN Member (North Carolina)

In response to questions concerning the recent amendment to N.C.G.S. § 45-10: Substitution of trustees in mortgages and deeds of trust, the following overview and guidance are provided.

North Carolina House Bill 770 (Session Law 2017-206) was passed on August 30, 2017, amending N.C.G.S. § 45-10 immediately. [View the tracked content in the House Bill here; scroll to Part VI, Section 6 for the specific amendment discussed in this article.]

The amendment’s purpose is to codify existing ethics opinions adopted by the North Carolina State Bar (the Bar), including 2004 Formal Ethics Opinion 3 adopted in 2004 (the Ethics Opinion).

Ethics Opinion — The opinion states that it would be a violation of the Rules of Professional Responsibility, and otherwise unethical, for an attorney to represent either the noteholder or the borrower in a foreclosure proceeding while also serving as the trustee (substitute trustee) in that foreclosure proceeding. The language of the new law tracks the operative part of this opinion.

Foreclosure Statute — Chapter 45 of the N.C. General Statutes sets forth the power of sale foreclosure procedure and provides that a trustee must be impartial, unbiased, and fair to all parties. The amendment makes it not only unethical but also unlawful for a lawyer to represent the foreclosing noteholder while serving as the trustee. Specifically, the new statute can be read to make it unlawful for a lawyer/law firm who has signed an agreement to provide legal services to a servicer (or Fannie Mae/Freddie Mac/HUD/VA) to also serve as the trustee in a Chapter 45 power of sale foreclosure proceeding in which that servicer/investor is the holder, owner, or agent for the holder or owner.

In Practice — For many years, in order to comply with the applicable ethics opinions of the Bar, these authors’ firms have contracted with third-party North Carolina corporations to serve as trustee in any power of sale foreclosure proceeding filed by their respective firms. It is not certain, however, what the proper procedure is for those lawyers/law firms who are currently serving as both the trustee and attorney for the noteholder (servicer/agent/owner) in a North Carolina power of sale foreclosure proceeding pending as of August 30, 2017, the effective date of the statutory amendment.

At a minimum, it is expected that debtors’ counsel will assert that these lawyers/law firms must be removed as either the trustee or the attorneys for the noteholder. It is possible that a clerk of court at the hearing, or a Superior Court judge on appeal, will hold that the foreclosure itself is sufficiently defective and will dismiss the proceeding with instructions to re-file with a proper substitute trustee. Without question, no lawyer should file a new foreclosure proceeding after August 30, 2017 in which the lawyer (or the law firm) is the substitute trustee and the lawyer (or the lawyer’s firm) represents the noteholder.

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Amendments to Bankruptcy Rules Effective December 1, 2017

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, November 21, 2017

December 12, 2017

 

by Crystal V. (Sava) Cáceres
Anselmo Lindberg & Associates LLC – USFN Member (Illinois)

The Advisory Committee on Bankruptcy Rules has been hard at work over the last five years amending and adding new rules to the Bankruptcy Code; major changes went into effect on December 1, 2017. Of the many modifications, the most noteworthy that particularly affect creditors are: (1) a new Chapter 13 Plan which can be used uniformly in all federal districts — subject to an opt-out that many districts chose; (2) changes to the proof of claim filing deadline and requirements that secured creditors must file proofs of claim; (3) new deadlines for plan objections and the confirmation hearing process; and (4) determinations of the amount/value of secured and priority claims.

1. Amended Rule 3015 and New Rule 3015.1 – Model Chapter 13 Plan. Rule 3015 has been amended to require the use of an Official Form Model Chapter 13 Plan (Form 113). Districts can opt-out of using Form 113, and a Local Form can be used as long as it is adopted consistently with the new Rule 3015.1 (which requires that a single Local Form be adopted and specifically delineates several formatting and disclosure requirements to promote consistency among local forms). Although districts have the ability to opt-out, the Local Form must retain the content and requirements of the Official Form.

With respect to the treatment of secured creditors, the new Official Form specifically states that any existing arrearage on a listed claim will be paid in full through disbursements by the trustee, with interest (if any) at the rate stated. Unless otherwise ordered by the court, the amounts listed in the timely-filed proof of claim control over the amounts listed in the plan. That is, the timely-filed claim controls in all districts, not the confirmed plan. This will put the burden on debtors to modify their plans to ensure that their case is properly funded to pay all timely-filed claims.

Amended Rule 3015 and Rule 3015.1 were created to promote uniformity and the goal of creating an Official Form was to aid all parties (debtors, creditors, trustees and judges alike) in carrying out their responsibilities and ensure that plan provisions comply with the Bankruptcy Code. Due to this uniformity, creditors will now more easily be able to identify a debtor’s treatment of their claims in the proposed plan, and will also be able to ascertain non-standard provisions within the plan. To date, more jurisdictions have opted to use a Local Form instead of the Official Form; accordingly, creditors should not rely solely on the model plan and should continue to seek the advice of their local counsel for the Local Form for any district that has opted-out.

2. Amended Rule 3002 - Proof of Claim Requirements and Timelines. Rule 3002 has been amended to specifically state that secured creditors must also file a proof of claim. Language was also added clarifying that failure to file a claim does not void a secured claim. Additionally, creditors are now required to file a claim 70 days after the bankruptcy case is filed (previously, a creditor had 90 days after the 341(a) meeting of creditors to file its claim). Creditors should review their claims filing process to ensure that they can meet and comply with the new deadlines.

Further, a creditor may request up to a 60-day extension to file its claim, but only if there was insufficient notice. That is, the debtor did not timely file the creditor’s name and address or the notice was mailed to a foreign address.

Effectively, there is now a two-stage deadline for secured creditors to file their mortgage proofs of claim on a debtor’s principal residence. While all secured creditors must file their secured claims within 70 days after the bankruptcy was filed (the filed claim must include the proof of claim attachment and escrow analysis, if applicable), subsection 7(B) was added to allow that required attachments can be filed within 120 days after the case is filed to supplement the claim (i.e., within 50 days after the filing of the proof of claim). The claim will be timely if additional documents evidencing the claim are filed, but best practice is to file the claim as a complete package with all required attachments when possible.

Although there is a tighter deadline to file claims, the new deadline ensures that claims are timely filed prior to plan confirmation hearings. This will streamline the confirmation process for debtors, creditors, trustees, and judges alike.

3. Amended Rule 2002 and Amended Rule 3015 – Notice Requirements for Plan Objection and Confirmation Hearing. Amended Rule 2002 provides that 21-day notice be mailed to advise of the deadline to objection to confirmation of a Chapter 13 plan, and that 28-day notice be mailed regarding confirmation hearings. Amended Rule 3015 now requires that an objection to confirmation must be filed and served at least 7 days before the confirmation hearing date, unless otherwise ordered. There had been little uniformity in the various districts regarding the plan confirmation process and important events that occur, and these amended rules should remove the unpredictability among districts.

4. Amended Rule 3012 – Determination of the Amount of Secured and Priority Claims. Amended Rule 3012 provides that a request to determine the amount of a secured claim (for lien-strips and/or cramdowns) can now be made in the plan, as well as by motion or claim objection. Previously, the rule required that a motion be filed, but many districts allowed the request through the plan; hence the amended rule conforms to local practices. Further, under amended Rule 3015(g), any determination about the amount of a secured claim under amended Rule 3012 is binding on the holder of the claim, regardless of whether a contrary claim is filed or how the debtor schedules the claim, and irrespective of whether a claim objection has been filed. A determination under amended Rule 3012 (unlike the amount of any current installment payments or arrearage) controls over a contrary proof of claim. For this reason, it is extremely important that creditors carefully review a debtor’s proposed plan to determine whether an objection to the plan is needed.

Although adapting to the tighter time constraints and practice requirements may be challenging at the outset, all parties should benefit from the modifications to the Federal Rules of Bankruptcy Procedure. One of the main purposes of the rule changes is to promote uniformity among all federal districts. Many creditors function on a multi-state basis, and the rule changes will allow them to be more efficient in their operations because they can predict what each federal district requires of them. As always, consulting with local counsel regarding plan or rule inquiries, as well as remaining vigilant in reviewing plan terms and complying with deadlines, will help ensure that a creditor’s rights are protected.

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Seventh Circuit finds that Collection on Time-Barred Debt Violates FDCPA

Posted By USFN, Tuesday, December 12, 2017
Updated: Wednesday, November 22, 2017

December 12, 2017

by William (Nick) Foshag
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Earlier this year, the Seventh Circuit Court of Appeals held that a debt collector’s attempts to collect on a debt that was time-barred by the statute of limitations violated the federal Fair Debt Collection Practices Act (FDCPA). [Pantoja v. Portfolio Recovery Associates, LLC, (7th Cir. Mar. 29, 2017). [See also McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. 2014).]

Background
The underlying debt in Pantoja was governed by Illinois law; the Seventh Circuit is comprised of Illinois, Indiana, and Wisconsin.

In Pantoja, the Seventh Circuit found the debt collector’s letter deceptive or misleading under 15 U.S.C. 1692e since it did not explicitly inform the consumer that the collector could not sue on the time‐barred debt. Further, the dunning letter did not explicitly inform the consumer that a partial payment on the debt could restart the clock on the expired statute of limitations.i 

Applicability to Wisconsin Foreclosure Actions
As in many states, the statute of limitations in Wisconsin to enforce a debt under a written contract is six years. [Wis. Stat. § 893.43.] Therefore a foreclosure action including a claim for deficiency, or a separate action upon the note for a money judgment, must be initiated within six years of the default upon which the action is based (the last missed payment). [CLL Assoc. Ltd. Partnership v. Arrowhead Pac. Corp., 174 Wis. 2d 604, 609 (1993).] A foreclosure action without a claim for a deficiency, on the other hand, could arguably be initiated in Wisconsin beyond the six-year period, as the Wisconsin Supreme Court has held that, “the extinguishment of an obligation by the running of the statute of limitations does not prevent the foreclosure of a mortgage given to secure the debt.” [First National Bank of Madison v. Kolbeck, 247 Wis. 462, 465, 19 N.W.2d 908, 909 (Wis. 1945).]

Despite the possibility of pursuing foreclosure without deficiency beyond the six-year period, it must be emphasized that foreclosure actions in Wisconsin (and elsewhere) are proceedings in equity and any action should therefore be initiated within a “reasonable time” after the default and notice of acceleration letter has expired.ii 

Closing Words
The Pantoja decision does not address the possibility or impact of advancing the due date and waiving the installments beyond limitations period. Rather, the decision more narrowly “concerns the practice of attempting to collect an old consumer debt that is clearly unenforceable under the applicable statute of limitations.” In this scenario, the best outcome is for a creditor to secure a payment agreement with the debtor that would reset the statute of limitations. In attempting to do so, it is imperative that a debt collector provide clear disclosures about the time-barred nature of the debt, or the possibility that the debt is time-barred, in order to avoid possible violations of the FDCPA. The Seventh Circuit did not provide draft language for this purpose; however, Pantoja states that such disclosures must be “clear, accessible, and unambiguous to the unsophisticated consumer.”

 


i If a partial payment is made before the expiration of the limitations period, that payment tolls the statute and sets it running from the date of the payment made. St. Mary’s Hosp. v. Tarkenton, 103 Wis. 2d 422 (Wis. Ct. App. 1981).
ii Laches is an equitable defense to an action based on an unreasonable delay in bringing suit under circumstances that prejudice the opposing party. Suburban Motors, Inc. v. Forester, 134 Wis. 2d 183, 187, 396 N.W.2d 351 (Ct. App. 1986).


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Oregon: 2017 Legislative Changes for the Upcoming Year

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, December 5, 2017

December 12, 2017

by Andreanna Smith
McCarthy Holthus LLP – USFN Member (Washington)

The Oregon 2017 legislative session resulted in significant changes for the industry for the upcoming year.

• HB 2359 removed the requirement for the beneficiary to send a copy of a notice to the Attorney General that the beneficiary has denied a grantor’s eligibility for a foreclosure avoidance measure.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2359/Enrolled


• SB 381 requires that all payoff statements, notices of sale and related notices to tenants, notices of determination of ineligibility, and notices of resolution conferences must be sent to all addresses on file with the applicable servicer, beneficiary, or trustee.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/SB0381/Enrolled


• SB 254 requires financial institutions to participate in a data match system established by the Department of Revenue to identify assets held at financial institutions by delinquent debtors.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/SB254/Enrolled


• SB 79 permits the Oregon Department of Veterans’ Affairs to file an affidavit that states the department is exempt from the resolution conference requirement in judicial or nonjudicial foreclosures, so long as the foreclosure proceeds in the name of Oregon Department of Veterans’ Affairs.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/SB79/Enrolled


• HB 2920 requires a judgment creditor to file a satisfaction document upon receipt of the proceeds of the execution sale of real property for the amount credited against any money award portion of a judgment.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2920/Enrolled


• HB 2855 provides a nonjudicial procedure for a buyer under a land sale contract to enforce the contract’s requirement for a fulfillment deed when the contract is paid and satisfied in full, but the seller fails to deliver the deed.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2855/Enrolled


• HB 2624 exempts out-of-state banks, extranational institutions, and foreign associations from the requirement to file notice before dealing in notes secured by mortgage or trust deeds, if they are authorized to conduct banking business in this state by certificate of the Department of Consumer and Business Services.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/hb2624/Enrolled


• HB 2562 requires lenders of reverse mortgages to send borrowers, or their agent who pays property taxes on the borrower’s behalf, a notice stating that title to property that is subject to a reverse mortgage remains with that person and that person is responsible for paying property taxes and related taxes on the property. The notice must be sent each year at least 60 days before property taxes are due.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2562/Enrolled


• HB 2356 established requirements under which a debt buyer, or debt collector that acts on a debt buyer’s behalf, may bring a legal action to collect a debt; specifies notice that a debt buyer must give to a debtor and documents that a debt buyer must give to a debtor at the debtor’s request; makes violation of these requirements an unlawful collection practice; requires a person that engages in debt buying in the state to obtain or renew a license from the Director of the Department of Consumer and Business Services; specifies requirements for applying for, issuing, and renewing license, as well as conditions under which the director may deny, suspend, revoke, or decline to renew a license; specifies duties and prohibited conduct for licensee; permits the director to order a licensee or person that engages in debt buying to cease and desist from violating the Act, impose a civil penalty for a violation, or take other action to remedy a violation.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2356/Enrolled


• SB 98 requires servicers to obtain a servicing license and send explanatory notices to borrowers.
https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/SB98/Enrolled

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Nevada: Mediation Program Update

Posted By USFN, Tuesday, December 12, 2017
Updated: Tuesday, December 5, 2017

December 12, 2017

by Matthew D. Dayton, Esq.; Michael F. Bosco, Esq.; and Olivia A. Todd, Executive Director
Tiffany & Bosco, P.A. – USFN Member (Arizona, Nevada)

Residential foreclosures in Nevada came to a standstill on June 12, 2017, when Senate Bill 490 (SB 490) was signed by the governor. SB490 permanently established a foreclosure mediation program for residential properties that included a number of procedural changes which led to an immediate halt in the Nevada foreclosure process.

Perhaps the most significant of the new changes was the implementation of Home Means Nevada, Inc. (HMN) as the entity that will administer the mediation program in conjunction with the Nevada District Courts. HMN is a non‐profit organization that was launched by the Director of the Department of Business and Industry pursuant to NRS 23.520(4); HMN was originally established in 2013 from the national mortgage settlement proceeds to assist underwater mortgages for Nevadans.

However, at the time SB490 was signed in June 2017, HMN did not have a program administrator, a staff, an office, an email address, or a phone number for the foreclosure mediation process. As a result, foreclosures in Nevada became stagnant. Under the new legislation, HMN is responsible for providing trustees with a mandatory mediation form that must be mailed with all notices of default (NOD), detailing the new mediation alternatives. In addition, HMN is responsible for issuing the certificates of foreclosure that are required prior to scheduling a foreclosure sale.

In the intervening days since the passage of SB490, HMN hired an operations manager, Michelle Crumby. Further, on September 19, HMN moved into offices located at 3300 West Sahara Avenue, Suite 480, Las Vegas, Nevada 89102.

What’s Next?
HMN’s website (NOT the portal) is now operational. The website (http://homemeansnevada.gov/) has all of the documents and forms that lenders, servicers, and trustees need to resume recording NODs in Nevada. Additionally, HMN is processing and issuing certificate of foreclosure requests, but only on new NODs that were recorded after September 28, 2017, when the new foreclosure mediation form was made available by HMN. A foreclosure mediation form will need to be submitted for each property (separately) by the trustee requesting the issuance of the certificate of foreclosure. HMN provided a letter stating that HMN will not issue certificates of foreclosure on NODs recorded between December 2, 2016 and June 11, 2017 (these loans are commonly referred to as the “GAP Loans”). The letter did not explain the rationale behind the decision; however, one possibility is that HMN believes that it does not have the authority to issue certificates of foreclosure for NODs that were recorded prior to the effective date of SB490.

Be aware that there is an issue regarding the effect that NRS 107.550(2) (specifically the tolling provisions related to NODs and Notices of Sale under the Nevada Homeowners Bill of Rights) will have on NODs, which has been lingering during the interruption created by HMN. The concern stems from whether the 100-day period for HMN to become operational will be considered a “tolling” event. Although it has been impossible for lenders and/or servicers to request a certificate of foreclosure in order to proceed with scheduling a sale, and thereby avoid a lapse in setting a sale or going to sale, it is unclear how Nevada courts will interpret the statute.

As recently as November 28, 2017, most Nevada underwriters have advised that they will REQUIRE a recorded Certificate of Mediation on all GAP Loans where the property qualifies as owner-occupied housing. If a certificate of mediation is not recorded on an owner-occupied property on a GAP Loan, an exception will be listed in the commitment and only be removed on a case-by-case basis. The exception may be removed if the property is non-owner occupied or vacant; however, the Nevada underwriters will require an affidavit founded on inspections as acceptable proof that the property was not owner-occupied housing. Based on this determination, lenders and/or servicers may choose to proceed with scheduling sales on these non-owner occupied or vacant properties.

With HMN operational, lenders and trustees must begin navigating the new rules and procedures. For example, in order to elect mediation, a homeowner must file a petition in the District Court where the property is located. The trustees are required to file an answer to the homeowner’s petition. If there are issues related to eligibility to participate in the program, limitations of the foreclosure alternatives, or other circumstances related to a loan, it would be prudent to know the information as early in the process as possible. Under the previous foreclosure mediation program, the District Court’s involvement in the foreclosure mediation process was limited to a post‐foreclosure mediation review. Under the new rules, the risk of sanctions for noncompliance will increase as the District Court is now involved throughout the foreclosure mediation process.

A particular area of concern is a new document requirement, which mandates that beneficiaries produce “any document created in connection with a loan modification,” (FMR 12(1)(a)). The rules do not, however, specify what documents satisfy the requirement. If a loan modification (temporary or permanent) was previously offered to, or accepted by, a property owner, lenders and/or servicers should produce the documents under the new rules.

At the conclusion of the foreclosure mediation, the parties have 10 days to submit a “request for appropriate relief.” The new rules do not require the District Court to hold a hearing. The District Court may enter its order without a hearing, and the only remedy available to the parties is to proceed with a costlier appeal to the Nevada Court of Appeals. (Under the previous rules, the parties had 30 days to consider their options after receiving the mediator’s statement.)

In order to most effectively navigate the potential pitfalls that will likely arise due to the complexity of these new rules, consult with Nevada-experienced counsel.

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CFPB Publishes Final Mortgage Servicing Rule

Posted By Rachel Ramirez, Tuesday, December 12, 2017
Updated: Thursday, December 14, 2017

December 12, 2017

by Ronald Scott and Reginald Corley
Scott & Corley, PA – USFN Member (South Carolina)

The recent update by the CFPB, in regards to mortgage servicing rules, aims at moving servicers to a higher level of compliance with fair lending laws, as well as targets problems most extensively found in the area of loss mitigation. A general overview of the major issues that are imposed by § 1024.41,1 which became effective on October 19, 2017, include updating acknowledgement notices; updating practices for reviewing and responding to borrowers’ loss mitigation applications in a timely manner; decreasing deceptive and misleading loss mitigation offers and related communications; adjusting loan modification denial notices; and setting guidelines for servicing transfers during the loss mitigation process.

In order for the servicer to initiate the foreclosure action, the loan must be greater than 120 days delinquent,3 or after the borrower submits a complete loss mitigation application which is subsequently denied for failure to perform, failure to accept, or ineligibility. If this requirement is not met, it directly violates Regulation X and RESPA and the foreclosure action must be immediately stopped. The servicer must exercise reasonable diligence in obtaining documents and information to complete loss mitigation, as well as properly audit the application for completeness and possible options available to the borrower.4 

A complete application means that the servicer has received all of the information that the servicer requires from a borrower necessary for evaluating applications for the loss mitigation options available. Additionally, servicers (aside from exercising reasonable diligence to obtain information needed for the completion of a loss mitigation application) must take reasonable efforts to obtain information not readily available to the borrower and in the control of a third-party. If the servicer is unable to gain the information from a third-party, the servicer must promptly provide a written notice to the borrower stating the information that was not able to be obtained. There is a 5-day notice standard for servicers to determine whether a loss mitigation application is complete or incomplete.5 

Complete Applications

If the application is complete, servicers must provide the date of completion and inform the applicant of certain information, including an explanation that the borrower is entitled to specific foreclosure protections and may be entitled to additional protections under state or federal law.

After a servicer receives the complete loss mitigation application, the servicer shall have 30 days to evaluate all loss mitigation options available to the borrower.6 Following this determination, the servicer must state which loss mitigation options (if any) it will offer; the amount of time the borrower has to accept or reject an offer of a loss mitigation program; and a notification (if applicable) that the borrower has the right to appeal the denial of any loan modification option, as well as the amount of time the borrower has to file such an appeal and any requirements for making an appeal.

When the servicer receives a complete loss mitigation package, it is precluded from completing the following: first foreclosure notice or filing, moving for foreclosure judgment, moving for an order of sale, or completing a foreclosure sale.7 This is in effect until the application is properly denied, withdrawn, or the borrower fails to perform on the loss mitigation agreement.

Incomplete Applications
If a loss mitigation application is incomplete, a notice must be submitted to the borrower specifying the additional documents and information that the borrower must submit to make the loss mitigation application complete, as well as the applicable date. (A statement that the borrower should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options is of use.)The regulation also provides that a servicer may offer a short-term payment forbearance program to a borrower based upon an evaluation of an incomplete loss mitigation application. A servicer shall not make the first notice or filing required by applicable law for any judicial or nonjudicial foreclosure process, and shall not move for foreclosure judgment or order of sale, or conduct a foreclosure sale if a borrower is performing pursuant to the terms of a short-term payment forbearance program offered pursuant to this section.9 

Loss Mitigation Denials
When a loss mitigation application is denied, the notice to the borrower must provide the specific reasons for the servicer’s determination that the borrower did not meet the requirements for accepting a trial loan modification plan.10 Additionally, a borrower who submits a complete loss mitigation application more than 90 days before a foreclosure sale may appeal the denial of a loan modification option, which must be reviewed 37 days prior to foreclosure, allotting the borrower 7 days prior to foreclosure to accept or reject the offer. Moreover, servicers must meet the loss mitigation requirements more than once in the life of a loan for borrowers who become current on payments at any time between the borrower’s prior complete loss mitigation application and a subsequent loss mitigation application.

Transfers
In regards to loans that are transferred between servicers during which a borrower’s loss mitigation application is outstanding, a transferee servicer (in compliance with § 1024.41) must obtain documents and information submitted by a borrower in connection with a loss mitigation application during the servicing transfer. A servicer that obtains the servicing of a mortgage loan, for which an evaluation of a complete loss mitigation option is in process, should continue the evaluation to the extent practicable. Documents and information transferred from a transferor servicer to a transferee servicer may constitute a loss mitigation application to the transferee servicer and may cause a transferee servicer to be required to comply with the requirements of § 1024.41, with respect to a borrower’s mortgage loan account. The transferee servicer must consider documents and information received from a transferring servicer (constituting a complete loss mitigation application for the transferee servicer) as though they were received as of the date such documents/info were provided to the transferring servicer.

 


Real Estate Settlement Procedures Act (Regulation X), 12 C.F.R. § 1024.41 (2017).
Deep Keel, LLC v. Atlantic Private Equity Group, LLC, 773 S.E.2d 607, 413 S.C. 58 (Ct. App. 2015) (stating business records exception was valid for offering evidence of past servicing record whereas current transferred servicer’s testimony was not able to be admitted as evidence).
12 C.F.R. § 1024.41(f)(1).
See id. § 1024.41(b)(1).
See id. § 1024.41(b)(2).
See id. § 1024.41(c)(1).
See id. § 1024.41(g).
See id. § 1024.41(c)(2).
See id. § 1024.41(c)(2)(iii) (offering a short-term forbearance or repayment plan to borrowers in light of incomplete loss mitigation applications if: repayment of no more than three months of past-due payments; plan is structured to bring the loan current in no more than six months; servicer gives prompt written notice after making an offer, with specific repayment terms and other disclosures).
10 See id. § 1024.41(d).


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New Federal Bankruptcy Rules Taking Effect 12/1/2017: Looking Ahead

Posted By USFN, Monday, November 6, 2017
Updated: Friday, October 20, 2017

November 6, 2017

by Jason A. Weber
Sirote & Permutt, PC
USFN Member (Alabama)

Finally, after several years of debate, major changes have been approved that will have a profound impact on consumer bankruptcy cases. On April 27, 2017, the Supreme Court of the United States, through Chief Justice Roberts, submitted amendments to the Federal Rules of Bankruptcy Procedure to Congress. The amendments set forth extensive changes pertaining to forms and the filing of claims. The proposed changes will take effect December 1, 2017 and will significantly change how creditors should approach consumer bankruptcy cases (Chapters 7, 12, and 13) and will require crucial adjustments to conform to the shortened timelines for creditors to take action, particularly in Chapter 13 cases. The most noteworthy changes are discussed below.

Rule 2002: Notice to Creditors — The amendments to this Rule now require that creditors are to be provided at least 21 days’ notice of the time fixed for filing an objection to confirmation of a Chapter 13 plan and be provided at least 28 days’ notice of the confirmation hearing in a Chapter 13 case. Neither of these notice provisions existed prior to the rule change, and each provides creditors with advance notice for the date of the scheduled confirmation hearing and the deadline for filing an objection.

Rule 3002: Filing of Proofs of Claim — The amendments to this Rule may have the biggest impact on creditors, largely due to the shortened deadlines for filing claims and the requirement that all creditors — including secured creditors — must file proofs of claim within 70 days of the filing date of a Chapter 7, 12, or 13 case (or within 70 days of the date of conversion to a Chapter 12 or 13) in order for the claim to be deemed allowed. The new Rule does add a provision that allows a creditor the opportunity for an extension of time of up to 60 days to file a proof of claim (POC) upon motion and order if the creditor can establish that it did not have a reasonable time to file a POC because the debtor failed to timely file the list of creditors and addresses, or because the notice was mailed to the creditor at a foreign address. Additionally, the Rule does clarify that a lien securing a claim is not void should the creditor fail to file a POC.

Moreover, the new Rule adds a two-stage deadline for filing proofs of claim secured by a security interest in the debtor’s principal residence. These claims must be filed with the Official Form 410, the Attachment (Official Form 410A), and an escrow account statement no later than 70 days of the petition filing date (or conversion date). Also, in order to be timely, all other loan documents evidencing the claim [e.g., the note (allonge), mortgage, assignment of mortgage] must be filed as supplements to the POC within 120 days of the filing date (or conversion date). For such a claim to be timely, both of these deadlines must be met.

The new 70/120-day time period is significantly shortened compared to the pre-12/1/2017 rules that permit a claim to be timely if it is filed within 90 days after the Section 341 meeting of creditors date, which, in practice, permits claims to be filed within an approximate 120-day to 140-day time period from the petition filing date or conversion date.

Rule 3007: Objection to Claims — This Rule requires at least 30 days’ notice to creditors of an objection to claim. The objection may be filed on “negative notice” and provides for service via first-class mail to the name and address most recently designated on the creditors’ original or amended POC, or in accordance with Rule 7004 for federally insured depository institutions. This is significant because it clarifies that Rule 7004 no longer applies to the service of most claim objections with the exception of insured depository institutions. Instead, service can be accomplished by first-class mail, meaning creditors must be cognizant of the name and address listed on their proofs of claim and may no longer rely on raising Rule 7004 as a defense to a claim objection.

Rule 3012: Determining the Amount of Secured Claims — This Rule sets forth numerous ways for the court to determine the amount of secured claims, including by motion, claim objection, or Chapter 12 or 13 plan. Most importantly, the new Rule, in combination with amended Rule 3015 (see below), provides that any determination made in a plan formed under Rule 3012 regarding the amount of a secured claim is binding on the holder of the claim even if the holder files a contrary proof of claim, and regardless of whether an objection to the claim has been filed. This is a significant change to the prior rules, particularly for creditors in Florida and similarly situated districts, which (effective 12/1/2017) will require creditors to file objections to confirmation of Chapter 12 and Chapter 13 plans, or be bound by the plan terms upon confirmation.

Rule 3015: Filing of Plan, Effect of Confirmation of Plan — Model Chapter 13 Plan — This Rule requires the use of an Official Form Model Chapter 13 Plan unless a Local Form is adopted and is in compliance with Rule 3015.1. For example, the Southern District of Florida has recently announced that it will “opt out” and adopt a Local Form and has solicited public comment prior to its implementation in December. It would not be a surprise to see many districts across the country announce similar opt-out plans enabling them to marry the content and notice provisions required under the Model Plan with the local customs and language incorporated into the Local Form. The Model Chapter 13 Plan is intended to streamline the plan review process for creditors. The new Rule also requires an objection to plan confirmation to be filed at least seven days before the confirmation hearing. As noted above, the proposed changes further provide that a determination of value or “valuation” of a secured claim done through the plan will become effective and binding upon confirmation despite the absence of a claim objection or a contrary POC.

Closing Words — Once again, these Rules will become effective December 1, 2017 and apply to all Chapter 7, 12, and 13 cases filed after that date, as well as all pending cases “insofar as just and practicable” — meaning they will likely apply to almost all consumer bankruptcy cases. Accordingly, it is important that creditors take immediate measures to ensure compliance under these Rules. Although the shortened deadlines and increased attention to plan treatment might be burdensome in some respects, the above rule changes may well provide some assistance to creditors by establishing predictable proof of claim deadlines, consistent plan content, and clear notice and objection deadlines across all districts — which should enable creditors to more efficiently process consumer bankruptcy cases.

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Bankruptcy Case Law Highlights: A Look Back at 2017

Posted By USFN, Monday, November 6, 2017
Updated: Friday, October 20, 2017

November 6, 2017

by Robert J. Shefferly
and Marcy J. Ford
Trott Law, P.C.
USFN Member (Michigan)

Proofs of Claim and Time-Barred Debt
The U.S. Supreme Court reversed the U.S. Court of Appeals for the Eleventh Circuit and issued an opinion in the case of Midland Funding, LLC v. Johnson, 581 U.S. __ (May 15, 2017). In Midland, the Supreme Court held that filing a time-barred proof of claim (POC) under Chapter 13 of the Bankruptcy Code is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692, et seq.). This is an important case that mortgage creditors should pay attention to (including the 11-page dissenting opinion, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan).

In Midland, the debtor filed a Chapter 13 petition in March 2014 (in Alabama). Midland Funding, LLC was the holder of a credit card debt and filed a POC in the amount of $1,879.71. The POC stated that the last charge on the account was over ten years prior to the debtor’s bankruptcy filing. The relevant statute of limitations in Alabama is six years. The debtor objected to the POC, which was sustained by the bankruptcy court and the claim was disallowed.

Subsequent to the bankruptcy court ruling, the debtor commenced a lawsuit claiming that Midland violated the FDCPA by filing the POC on time-barred debt. The district court found that the FDCPA did not apply and dismissed the action. The Court of Appeals for the Eleventh Circuit reversed the district court’s decision, and Midland filed a petition for certiorari, noting a division among the courts of appeals on the question of whether the filing of a time-barred POC is false, deceptive, misleading, unconscionable, or unfair under the meaning of the FDCPA. The Supreme Court accepted certiorari and reversed the Eleventh Circuit, holding that the FDCPA does not apply under the facts of this case.

In support of its reasoning, the Supreme Court points out that the word “unenforceable” does not appear in the Bankruptcy Code’s definition of “claim.” Section 502(b)(1) of the Code states that if a claim is unenforceable it will be disallowed; it does not say that an unenforceable claim is not a claim. Further, observed the Court, section 101(5)(A) clearly states that even an unenforceable claim is still a right to payment under the Code. Additionally, the Supreme Court emphasizes that other provisions of the Code show that the running of a limitations period constitutes an affirmative defense — a defense that the debtor is to assert after a creditor makes a claim. The Court states that there is nothing misleading or deceptive in the filing of a POC that follows the Code’s similar system.

Finally, the Supreme Court delineated a number of added protections for Chapter 13 debtors, which they would not otherwise have in a state court collections proceeding. First, the debtor initiates the Chapter 13 proceedings and is unlikely to pay a stale claim in order to avoid a court action. Second, the Chapter 13 trustee is available to review claims and object if necessary. Third, there are procedural rules in a Chapter 13 bankruptcy case that guide the evolution of claims. Fourth, the claims resolution process in a Chapter 13 case is generally more streamlined and a less unnerving prospect for a debtor than facing a collection lawsuit. The Court points out that these features of a Chapter 13 bankruptcy proceeding make it more likely that a POC filed on a stale claim will be met with objection or resistance from the debtor and/or the trustee.

This case is particularly important to creditors because the decision provides authority and direction to bankruptcy courts on addressing the applicability of the FDCPA to the filing of an initial proof of claim, in the context of a Chapter 13 bankruptcy proceeding.

Surrendered Property/Forced Vesting
The U.S. District Court for the District of Massachusetts issued an opinion for publication in In re Sagendorph, 562 B.R. 545 (Jan. 23, 2017). In this case, the district court held that the bankruptcy court could not confirm, over a secured creditor’s objection, a Chapter 13 plan that provided for forced vesting of collateral in the creditor in satisfaction of its claim. Forced vesting refers to when a Chapter 13 debtor uses the plan confirmation process to transfer ownership of property to a secured creditor without the creditor’s consent.

In Sagendorph, the debtor had an income-producing property that was secured by a mortgage held by Wells Fargo Bank (Bank). The debtor’s amended plan sought to surrender the real property and vest title to the property in Bank. Bank objected to this treatment but its objection was overruled, and the bankruptcy court confirmed the debtor’s plan. Bank appealed the confirmation order to the district court.

Bank contended that confirmation of a plan that allows forced vesting of real property is contrary to the plain language of section 1325(a)(5)(C) that deals with surrender of property. Further, Bank asserted that the “plain meaning” of the statutory language does not allow a debtor to simultaneously surrender property under section 1325(a)(5)(C) and vest title in a secured creditor under section 1322(b)(9).

The debtor countered that the “plain meaning” of section 1322(b)(9) does allow the vesting of property of the estate and, when read in combination with section 1325(a)(5)(C), allows vesting of real property over a creditor’s objection. The debtor specifically argued that there is ample case law providing that a court must confirm a plan over a creditor’s objection if the plan provides for surrender of the property, the surrender is a preliminary step in the transfer of title, and that sections 1325(a)(5)(C) and 1322(b)(9) are meant to work in tandem with each other.

The district court’s analysis looked at the plain meaning of the words “surrender” and “vest” as they are used in sections 1325(a)(5)(C) and 1322(b)(9). The district court found that “surrender” is defined as making property available to be taken and that “vesting” is the acceptance of an offer to transfer ownership. Therefore, a debtor cannot vest property in a creditor without the creditor consenting to that treatment. Thus, the district court held that the plain language of sections 1325(a)(5)(C) and 1322(b)(9) preclude forced vesting.

In a comparable case the following month, the U.S. District Court for the District of Massachusetts issued a similar opinion for publication in In re Brown, 563 B.R. 451 (Feb. 3, 2017). In Brown, the district court notes that the surrender of property in a Chapter 13 plan leaves the mortgagee free to exercise its rights in the collateral, while vesting threatens to impair those same rights. The court states that “by shifting the debtor’s interest to the mortgagee, vesting prevents the mortgagee from exercising its most important state-law right — foreclosure — as a method of eliminating junior liens.” Id at 457.

The court further observed that forced vesting in the plan confirmation process has consequences and compels a mortgagee to assume risks and obligations that the mortgagee did not bargain for. These risks and obligations include environmental remediation, maintenance, and taxes that they would not otherwise be required to bear absent the vesting of the property. Additionally, the court pointed out that the overwhelming run of recent cases has rejected forced vesting and that the debtor’s assertion of needing a fresh start must give way to “the Code’s obvious goal of preserving the well-settled property rights of secured lenders.” [Quoting HSBC Bank USA v. Zair, 550 B.R. 188 at 204 (E.D.N.Y. 2016).]

The Brown court concluded, as in Sagendorph, that the Chapter 13 plan (which forced vesting of property in the creditor) did not treat the mortgagee’s secured claim in a manner permitted by section 1325(a)(5). The confirmed plan was vacated, and the case was remanded back to the bankruptcy court for further proceedings.


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When FRBP Rule 3002.1 is Applicable, Secured Creditor’s Post-Petition Attorneys’ Fees Do Not Require a Fee Application: Maine BK Court Reviews: Official Bankruptcy Form 410S2 & Post-Petition Attorneys

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

Earlier this year, a Maine bankruptcy court held that post-petition attorneys’ fees incurred by a secured creditor in the context of a bankruptcy proceeding are not within the purview of Federal Rules of Bankruptcy Procedure (FRBP) Rule 2016, and the corresponding Maine Local Bankruptcy Rule 2016-1. The court also held that those attorneys’ fees do not need to be approved by the bankruptcy court in the context of a fee application in order to be recovered from the debtor when FRBP Rule 3002.1 is applicable. See In re Cotsis, Case Number 15-20588 (Bankr. Me. Feb. 24, 2017).

Background — In Cotsis, the debtors filed a Chapter 13 petition on August 20, 2015. Subsequently, the debtors obtained a modification of their loan from the secured creditor, which cured the pre-petition default; the debtors obtained bankruptcy court approval of the loan modification. The secured creditor’s plan objection was resolved by the loan modification, and the debtor confirmed a plan that provided for payment of the modified mortgage directly to the secured creditor.

Later, in compliance with FRBP Rule 3002.1, the loan servicer timely filed a notice of post-petition mortgage fees, expenses, and charges regarding the fees incurred for the plan review and plan objection (Notice) using Official Bankruptcy Form 410S2. The date that the fee was incurred and the total amount of that fee were appropriately set forth on line number 3, “Attorney Fees,” of the Notice. As an attachment to the Notice, two invoices were provided that further itemized and set forth a description of the fees listed in the Notice as “review of plan and notice of appearance ($400)” and for “objection to confirmation ($500).”

The debtors filed an objection on the basis that the Notice did not comply with FRBP Rule 2016 (requiring an application for compensation or reimbursement from the bankruptcy estate) and Maine Local Bankruptcy Rule 2016-1(a)(3) (collectively, Fee Application Rules). The Fee Application Rules require the submission of the professional’s time records and other documentation with the bankruptcy court to support fee applications of professionals retained by the debtor and/or the bankruptcy estate.

Court’s Analysis — In its memorandum of decision, the bankruptcy court determined that the Fee Application Rules are inapplicable to the Notice filed because the fees contained in the Notice are governed by the terms of the agreement between the parties, as set forth in the underlying security interest. Therefore, the servicer’s act of the filing of the Notice required by Rule 3002.1 was not to seek compensation for legal services rendered for the debtors or their bankruptcy estate but merely to explain the scope of the creditor’s post-petition fee claim. Additionally, the bankruptcy court found that Rule 3002.1 provides an adequate procedural mechanism of which debtors may avail themselves to contest the fees, expenses, and/or charges set forth in a notice filed pursuant to Rule 3002.1.

Pursuant to Rule 3002.1(e), a motion can be filed within one year of the filing of a notice and the court shall “determine whether payment of any claimed fee, expense, or charge is required by the underlying agreement and applicable nonbankruptcy law to cure a default or maintain payments in accordance with § 1322(b)(5) of the Code.” In the event that the debtors believe the description of the fees set forth in the Notice is inadequate to support the reasonableness of the fees, the Notice may be challenged in the manner prescribed by Rule 3002.1.

Tate Distinguished — The decision in Cotsis is a very important one for mortgage servicers. It distinguishes the holding in a 2000 North Carolina bankruptcy class action that creditors and their attorneys had to file FRBP Rule 2016 applications in order to seek compensation or reimbursement from the debtor, or his estate, and the failure to do so before charging the debtor could result in sanctions. See In re Tate, 253 B.R. 653 (Bankr. W.D.N.C. 2000). The Tate opinion states that “the Court recognizes that [Bankruptcy Code] § 506(b) and [Bankruptcy] Rule 2016 create rights and duties for creditors in bankruptcy cases. A creditor may be entitled to payment of professional fees under its contract with a debtor, but before those funds will be paid from the bankruptcy estate, the creditor must affirmatively demonstrate their reasonableness to the court after notice. If a creditor elects to ignore the law to obtain such fees, it is well within the Court’s authority under § 105 [the bankruptcy court’s equitable powers] to rectify that error.” Tate, at 668.

Cotsis expressly distinguished Tate and held that creditors only need to comply with Rule 3002.1; timesheets and other supporting documentation are not required.

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Bankruptcy Code Anti-Modification Statutes: Application to Principal Residence/Multi-Use Property

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

It is always fascinating to see bankruptcy courts read the “plain language” of the Bankruptcy Code in so many ways. This, in turn, results in differing opinions on common bankruptcy-related issues — such as the application of the anti-modification provisions.

Principal Residence: Multiple Uses?
From time to time, Chapter 11 and Chapter 13 debtors will use their principal residence for multiple purposes. Whether it be as a home office or renting out a room, debtors are permitted to use their home to derive income. Multi-use property creates a predicament under the application of Bankruptcy Code sections 1123(b)(5) and 1322(b)(2) (anti-modification statutes). In the context of a cramdown plan, debtors essentially argue that they have no principal residence and seek to cramdown the debt on the subject property. The best example is a principal residence containing rental units. Savvy debtors will attempt to describe this as income property, where they happen to also reside; this is a frequent scenario in Florida, particularly in Miami-Dade County.

Judicial construction of sections 1123(b)(5) and 1322(b)(2) generally fall along one of three views: (1) a bright-line test absolutely allowing modification of a lien where the collateral is not only the debtor’s primary residence but is also used to produce income; (2) a bright-line test absolutely prohibiting modification of a lien if the collateral is real property that is also the debtor’s primary residence, without regard to any other use of the property; and (3) a case-by-case approach that examines the totality of the circumstances. The various outcomes result from opposing statutory interpretations, and consideration of the legislative intent of the anti-modification provision by courts that deem the statute ambiguous.

As the law continues to evolve in this area, it is difficult to establish the majority or minority view. Therefore, references here will be made to “The Strict View,” “The Moderate View,” and “Something in the Middle.”

The Strict View
In reviewing bankruptcy court rulings, the First and Third Circuit Courts of Appeals have held that “a mortgage secured by property that includes, in addition to the debtor’s principal residence, other income-producing rental property is secured by real property other than the debtor’s principal residence and, thus, that modification of the mortgage is permitted” (emphasis added) In re Scarborough, 461 F.3d 406, 408 (3d Cir. 2006). Pursuant to this view, a creditor’s options are limited under the anti-modification provision of the Bankruptcy Code, and would only apply if the mortgage at issue is secured by the principal residence solely.

Proponents of this application contend that the result is supported by the plain language of sections 1123(b)(5) and 1322(b)(2), allowing such multi-use properties to be modified through a Chapter 11 or Chapter 13 proceeding. Additionally, proponents cite to the legislative history as further validation. In short, under this view, if any portion of the secured property derives income, the loan is subject to modification.

The Moderate View
Bankruptcy courts out of the Ninth Circuit Court of Appeals (and sporadic district courts) elect to take a bright-line approach to the anti-modification statutes. Under this method, the courts look at three elements: (1) the security interest must be in real property; (2) the real property must be the only security for the debt; and (3) the real property must be the debtor’s principal residence. In the end, “either a property is a debtor’s principal residence or it is not; the existence of other uses on the property does not change that.” In re Wages, 508 B.R. 161 (B.A.P. 9th Cir. 2014); see also In re Brooks, 550 B.R. 19 (Bankr. W.D.N.Y. 2016).

Not surprisingly, proponents also believe that the application is supported under the plain language of the Bankruptcy Code because it is not ambiguous. Particularly when reading sections 1123(b)(5) and 1322(b)(2) in connection with section 101(13A), the definition of principal residence, the application does have support.

Although debtors maintain that this perspective is a cold and callous analysis, it results in more consistent rulings. Under this view, the creditor’s interest in the property would be protected by section 1123(b)(5). This means the debtors would not be permitted to modify their principal residence based on the plain language of the statute.

Something in the Middle
The position uses a factual rationale. Under this application of the anti-modification statutes, the court and parties would be required to undertake a case-by-case analysis. The intent of the parties at the time the loan was originated, as well as the amount of time that the property has been used for other purposes, would be taken into consideration. This approach increases inconsistency in application, plus there is more confusion between the parties regarding their rights under the Bankruptcy Code.

Observations in Florida
Currently, there is no binding authority from the Eleventh Circuit Court of Appeals. The cases from Florida are not consistent in application of the anti-modification provision. Some courts would allow modification of a property that is a commercial duplex, but disallow modification for a property used for business purposes (i.e., home office). This application results in an inconsistent outcome across the courts, which could be eliminated under “The Strict View” articulated above. However, the few published opinions on the subject appear to make clear that, in the Southern and Middle Districts of Florida, the type of property is pertinent to the analysis. The former Chief Judge of the Southern District Court of Florida recently ruled in favor of a creditor on this issue, finding the fact that the debtor resided in the property prevented cramdown. [In re Hock, Case No. 14-32157-BCK-PGH.] In Hock, the court even noted that its decision conflicted with other cases within the district — namely, In re Zalidivar, 441 B.R. (Bankr. S.D. Fla. 2011), and In re Ramirez, Case No. 13-20891 (Bankr. S.D. Fla. 2014). Nonetheless, it is the first case in Florida to conduct a statutory analysis of the Bankruptcy Code.

The Takeaway
Creditors have options and are not limited to one position. They should be diligent in the prosecution of these cases and raise appropriate stances to the court. “The Strict View” requires creditors to actively conduct discovery on the debtors to fully present the facts to the court. This should be done in each case to help develop this area of the law, hopefully resulting in more judicial authority to guide creditors.

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Illinois: Payment of Post-Foreclosure Condominium Assessments

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

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

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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NACTT Annual Conference 2017

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

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

The National Association of Chapter Thirteen Trustees (NACTT) held its annual four-day conference in Seattle, Washington this past July. Mortgage issues continued to be a hot topic at the conference, with several interesting educational panels addressing them, as well as much useful dialogue between mortgage representatives, mortgage servicing attorneys, and Chapter 13 trustees. This article highlights a few of the educational offerings and events of interest to the mortgage servicing industry.

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

• Augmented claim codes and identifier information developed by the National Data Center (NDC) to aid mortgage servicers in compliance with the changes to the mortgage servicing rules under RESPA (i.e., modified periodic statements for borrowers in bankruptcy, beginning April 19, 2018). Development of the claim codes and identifier information changes are in their final stages and can be obtained by servicers through subscription to the NDC.
• CFPB Monthly Billing Statements — Several compliance issues were discussed, including the timing of when pre-petition claim information should be displayed on the statements (only after the proof of claim is filed or at some other time) and the information to include on statements for contested claims or contested lien strip-offs. On the latter issue, the consensus was that the best practice would be for local counsel to obtain specific language from the bankruptcy court in the order resolving the claim objection or lien strip-off action.
• Changes to Federal Rules of Bankruptcy Procedure (FRBP), Rule 3002.1 – This rule relates to post-petition bankruptcy notices for mortgages secured by borrowers’ principal residences in Chapter 13 cases. Servicers have had issues with compliance under the rule in filing timely notices of payment change for home equity lines of credit (HELOC) due to the fact that payments usually change every month. The current rule requires servicers to file a payment change notice for any and all changes, including HELOCs, even when the change may be for an amount less than one dollar. A proposal was approved by the committee (to be submitted to the Advisory Committee on Rules of Bankruptcy Procedure for consideration), which would provide for annual notices and reconciliation of HELOC accounts, rather than the monthly notices.
• A proposal to standardize the loan modification approval process in Chapter 13 bankruptcy.

NACTT Presentations and Panels
Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference, as is customary for the NACTT annual meeting. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees, including Chapter 13 trustees. Director White’s remarks, as we move further away in time from the “mortgage meltdown,” appeared not to be focused as much on enforcement actions against mortgage servicers as on other issues. On the heels of the U.S. Supreme Court’s decision earlier this year in Midland Funding, LLC v. Johnson, 581 U.S. __, 137 S. Ct. 1407 (May 15, 2017), that filing proofs of claim for debt time-barred under state law did not constitute a violation of the Fair Debt Collection Practices Act (FDCPA), Director White urged trustees to remain vigilant in policing such claims, and he said that the UST’s program would continue to view such claims as an abuse of the bankruptcy process that harms debtors and legitimate creditors.

Another recent development, the legalization of marijuana in some states, also drew comments from Director White. He made it clear that the UST would not allow marijuana assets to be administered under any chapter of the Bankruptcy Code. In this respect, according to current U.S. Justice Department thinking, state laws regarding legitimacy of the marijuana trade are immaterial as far as federal bankruptcy laws are concerned. Whether a bankruptcy judge will agree with the UST’s office on this point is an open question.

While mortgage servicers and servicing practices in bankruptcy still garner attention from the UST for compliance with bankruptcy rules, other areas for bankruptcy abuse prevention are gaining the UST’s attention. These include debtor fraud (about 60 percent of the UST actions over the prior year), poor debtor attorney performance in representing their clients, and abuses committed by multi-state debtor law firms practicing remotely in out-of-state jurisdictions.

The NACTT offered many topical and informative educational sessions of interest to mortgage servicers: the annual Chapter 13 case law update, as well as panels on FRBP Rule 3002.1, mortgage servicer proofs of claim, plan completions in Chapter 13, and other mortgage issues that included guidelines for mortgage proofs of claim Form 410A. Perhaps the most interesting panel for all attendees was on the new plan form and the upcoming changes to the FRBP.

As most are probably aware, on December 1, 2017, debtors’ attorneys will be required to file Chapter 13 plans on either the plan form adopted by their local district or on the National Form Plan, Form 113 (if no local plan has been adopted by the district). Of the 94 federal judicial districts, only seven districts (thus far) have chosen to not adopt a local plan; they will use Form 113 (with the exception of the Northern District of Indiana, where debtors’ attorneys may choose the plan form to use). The good news for servicers is that after December 1, 2017, there will be fewer national variations of Chapter 13 plans to review. Of more immediate impact on mortgage servicers, as discussed by the panel, is the shortened proof of claim bar date effective December 1, 2017. Claims will be due 70 days from the petition date, with an additional 50 days to supplement claims with supporting loan documents (see FRBP Rule 3002(c)(7)).

The panel also discussed other rule changes impacting mortgage servicers. These included the necessity for secured creditors to file proofs of claim to receive distributions under the plan (FRBP Rule 3002(a)), the valuation of property in Chapter 13 plans (rather than by a separate motion for valuation) (FRBP Rule 3012), the termination of the automatic stay and co-debtor stay upon confirmation of plans for properties that debtors propose to surrender to creditors (FRBP Rule 3015.1(d)(4)), and the proper service of a Chapter 13 plan (stricter requirements due to the binding effect of plan confirmation on cramdowns and lien strip-offs) (FRBP Rule 7004).

American Bankruptcy Institute (ABI) Public Hearing
An additional component of this year’s meeting was a public hearing held by the ABI’s Chapter 13 committee of the Commission on Consumer Bankruptcy. The committee (a 23-member group of law professors, retired bankruptcy judges, in-house corporate counsel, as well as creditor and debtor attorneys) is charged with recommending improvements to the consumer bankruptcy system that can be implemented within its existing structure. These changes might include amendments to the Bankruptcy Code, changes to the Federal Rules of Bankruptcy Procedure, administrative rules or actions, recommendations on proper interpretations of existing law, and other best practices that judges, trustees, and lawyers can implement.

The commission heard testimony from ten panelists who have various roles in the bankruptcy system, including Chapter 13 trustees, creditor and debtor attorneys, and a representative from an employer’s trade association. The matters presented were at the discretion of each panelist. Several panelists advocated raising or eliminating the debt limitation set forth in 11 U.S.C. § 109(e) that prevents individual debtors from filing Chapter 13 cases instead of Chapter 11 cases because they are above the thresholds (currently $394,725 for unsecured debt and $1,184,200 for secured debt). Other items raised included eliminating the home mortgage anti-modification protection in 11 U.S.C. § 1322(b)(2), plus changing the discharge provisions of the Bankruptcy Code to allow for the discharge of some student debt obligations. This initial public hearing will be followed by others, after which the committee will ultimately prepare a final report with recommendations for changes.

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

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