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Illinois: Appellate Court Offers Guidance on the Diligence Requirement for Service by Publication

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

An Illinois appellate court recently found that service of process via publication pursuant to 735 ILCS 5/2-206(a) was proper and upheld the trial court’s order denying the defendant’s motion to quash service. [Neighborhood Lending Services v. Griffin, 2018 IL App (1st) 162855 (Mar. 15, 2018)]. In Griffin, the process server made one attempt to serve the defendant — at the only address found for the defendant, where he was told by the defendant’s spouse that the defendant did not live at the property. Thereafter, the plaintiff served the defendant via publication pursuant to Illinois law.

The defendant argued that the plaintiff failed to exercise due inquiry into his whereabouts and, therefore, did not comply with Section 2-206. Contrary to the defendant’s contentions, the plaintiff submitted the requisite affidavits establishing the inquiry into the defendant’s whereabouts. Of note, the appellate court in Griffin cited to precedent regarding statutory prerequisites, specifically quoting Bank of New York v. Unknown Heirs & Legatees, 369 Ill. App. 3d 472, 476 (2006): “Our courts have determined that these statutory prerequisites [of due inquiry and due diligence] are not intended as pro forma or useless phrases requiring mere perfunctory performance but, on the contrary, require an honest and well-directed effort to ascertain the whereabouts of a defendant by inquiry as full as circumstances permit.”

The appellate court then affirmed that because the defendant could not be located at any address other than the property in which service was attempted and the process server was told by the defendant’s spouse that he did not live there and refused to provide additional information, the trial court did not err in permitting service by publication. Moreover, there was no showing as to any requirement for a process server to repeatedly engage in knowingly futile visits before serving via an alternate method of service.

As service via publication is a frequently challenged matter in Illinois with respect to defendants seeking to quash service, Griffin presents additional stability for parties serving via publication, especially when spouses seemingly go out of their way to conceal the whereabouts of the party one is trying to serve. With timelines in Illinois always a challenge, it is imperative to efficiently prosecute cases in compliance with statutory requirements, yet recognize instances (such as in the case described here) to minimize delays.

Editor’s Note: The author’s firm was counsel for the plaintiff at both the trial and appellate levels in the Neighborhood Lending Services v. Griffin case summarized in this article.

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North Carolina: Appellate Reviews of Due Diligence Requisites for Service by Publication or Posting

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

In North Carolina, if personal service on a defendant is unavailable, the plaintiff may satisfy service of process alternatively through publication or posting at the subject property. However, for these alternative measures, a plaintiff must complete the requisite due diligence required by the Rules of Civil Procedure.1 Recently, two North Carolina Court of Appeals decisions added further layers to the “due diligence” interpretation.

In re Ackah

First, In re Ackah2 dealt with lack of actual notice by a homeowners association (HOA). In Ackah, the homeowner moved out of the country (leasing her home during her absence) and had her mail forwarded to a relative’s home. The defendant fell behind in HOA dues and, accordingly, the HOA commenced foreclosure. Delinquency and foreclosure notices sent to the defendant were returned “unclaimed” and the HOA posted notice at the subject property.3 Defendant Ackah successfully set aside the sale for improper service.

Upon appeal by the third-party purchaser at the sale, the Court of Appeals held that the HOA failed to meet the due diligence standard required, prior to posting notice to the subject property. Specifically, the court pointed to the fact that the HOA chose not to attempt contact through a known email address. The court reasoned that the HOA should have known that Ackah did not reside at the property after sending letters to an out-of-state address, and since all other notices were returned as either unclaimed or undeliverable. According to the court, due diligence required the HOA to at least attempt notice through a known form of contact information, such as the defendant’s email address.

Watauga County v. Beal

Next, the Court of Appeals examined whether due diligence was satisfied in the context of a tax foreclosure. In Watauga County v. Beal,4 the county attempted to collect delinquent taxes from the defendant for two years. The defendant provided only a fax number and post office box address as contact information. The county sent delinquency and foreclosure notices to the fax number, post office box, and subject property. All notices were returned as “unclaimed” or “undeliverable,” resulting in the county publishing notice. Defendant Beal appealed the foreclosure, asserting improper service because the plaintiff allegedly did not satisfy due diligence prior to publishing notice. The Court of Appeals held that the county had, in fact, satisfied necessary due diligence, because — in addition to efforts undertaken by the county to effectuate service — the county also had an extensive prior history of non-contact by Beal.

Conclusion

The standard for due diligence, cited by both Ackah and Beal, requires a plaintiff to use “all resources reasonably available … in attempting to locate defendant.”5 Neither case diverges from this standard, but both may have further muddied the already unclear waters.


1 See N.C.G.S. § 1A-1, Rule 4(j1), (k); N.C.G.S. § 45-21.16; N.C.G.S. § 47F-3-116(c), (f).
2 In re Ackah, __ N.C. App. __, 803 S.E.2d 794 (2017).
3 Associations are allowed to post a notice of hearing to the subject property when service by publication would be allowed under Rule 4 of Rules of Civil Procedure. See N.C.G.S. § 47F-3-116(c), (f) and N.C.G.S. § 1A-1, Rule 4(j1), (k).
4 Watauga County v. Beal, 806 S.E.2d 338 (2017).
5 See Jones v. Wallis, 211 N.C. App. 353, 712 S.E.2d 180 (2011).

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South Carolina: Email Constitutes Written Notice to Trigger Time to Appeal

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018
April 17, 2018

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

In the South Carolina Supreme Court case of Wells Fargo Bank v. Fallon Properties,1 the issue was raised as to whether an email that provides an entry of an order or a judgment triggers the commencement of the time required to provide written notice for serving a notice of appeal for purposes of Rule 203(b)(1), South Carolina Appellate Court Rules (SCACR). The Supreme Court determined that an email sent from the court, an attorney of record, or a party triggers the time to serve a notice of appeal.

Briefly, the facts are that, on December 15, 2014, the master-in-equity judge filed an order denying Fallon Properties’ petition for an order of appraisal pursuant to the post-foreclosure sale, deficiency judgment statute. Later that same day, the master’s office emailed a signed and stamped copy of the order to both parties of record. The email stated that a copy of the documents had also been mailed. Fallon Properties (the petitioner) served its notice of appeal on January 15, 2015 — 31 days after receiving the email, and 28 days after receiving the documents by mail. The respondent filed a motion to dismiss, asserting that the notice of appeal was untimely.

The Supreme Court applied the pertinent rule from Rule 203(b)(1), SCACR which states, “A notice of appeal shall be served on all respondents within thirty (30) days after receipt of written notice of entry of the order or judgment” (emphasis added). The petitioner conceded that an email does constitute written notice of entry of an order or judgment, although it contended that the written notice that an email provides can only be triggered under the rule if it is received by mail or hand delivery. In support of this argument, the petitioner looked to Rule 5, South Carolina Rules of Civil Procedure (SCRCP). The Supreme Court found, however, that because the service of a notice of appeal is an appellate procedure, the SCRCP are inapplicable.2

The case law surrounding this issue has not been in agreement. The Supreme Court found that the Court of Appeals properly relied on Canal Insurance Company v. Caldwell3 where it was determined that a fax sent from one of the party’s counsel to another’s was sufficient to commence the notice period. On the other hand, the Supreme Court distinguished this case from White v. South Carolina Department of Health and Environmental Control4 where that court incorrectly determined that an email received from opposing counsel, containing a signed and filed copy of an order [of the Administrative Law Court], did not trigger the time to appeal under Rule 203(b)(6), SCACR.

Given that the case law was inconsistent in the application of Rule 203, SCACR, and the novelty of the question, the Supreme Court held that fairness required that the ruling on this issue be applied prospectively. Furthermore, the Supreme Court affirmed the Court of Appeals’ decision as modified and allowed the appeal to proceed on its merits. To reiterate, the prospective standard that this case establishes is that an email sent from the court, an attorney of record, or a party triggers the time to serve a notice of appeal.

1 Wells Fargo Bank v. Fallon Properties, Op. No. 27773 (S.C. Feb. 28, 2018).
2 See Rule 101(a), SCACR (mandating that the appellate court rules govern the practice and procedure in appeals before the Supreme Court or Court of Appeals); Rule 73, SCRCP (providing the procedure on appeal to the South Carolina Supreme Court or the South Carolina Court of Appeals must be in accordance with the appellate court rules).
3 Canal Insurance Company v. Caldwell, 338 S.C. 1, 524 S.E.2d 416 (S.C. Ct. App. 1999).
4 White v. South Carolina Department of Health and Environmental Control, 392 S.C. 247, 708 S.E.2d 812 (S. C. Ct. App. 2011).

 

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Fourth Circuit Permits Lien Stripping in Chapter 13 Cases Regardless of Whether a Proof of Claim is Filed

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by Nathan Greyard
Rosenberg and Associates, LLC – USFN Member (District of Columbia)

In Burkhart v. Grigsby, 2018 U.S. App. LEXIS 7928 (4th Cir. Mar. 29, 2018), the Fourth Circuit held that the bankruptcy court can strip an unsecured claim from the debtor’s principal residence in a Chapter 13 case regardless of whether the claimant filed a proof of claim. This result may require secured creditors to be extra vigilant about filing proofs of claim (and, when necessary, objecting to plan confirmation in Chapter 13 bankruptcies) in order to protect their liens.

Background
In 2012, the Burkharts filed a Chapter 13 bankruptcy, at which time four liens encumbered their principal residence, which was worth $435,000. Chase Bank’s first-priority lien was over $600,000 — making it the only secured creditor. Tri-County Bank held unsecured second- and third-priority liens. PNC Bank was unsecured in fourth position. Only Chase and PNC filed proofs of claim with the bankruptcy court.

The debtors initiated an adversary proceeding to strip the unsecured liens, which the trustee opposed. The bankruptcy court stripped PNC’s lien but denied to strip the Tri-County liens, holding that Bankruptcy Code § 506(d)(2) prohibits lien avoidance where no proofs of claim are filed. On appeal, the district court agreed that § 506(d)(2) barred the Tri-County liens from being voided due, simply, to the failure to file a proof of claim.

Appellate Analysis
The Fourth Circuit Court of Appeals disagreed with the lower courts, noting that the trustee’s focus on claim allowance created a system where the secured creditor has no incentive to file a proof of claim if the property is underwater. PNC filed a proof of claim and had its lien stripped, but Tri-County did nothing and its liens survived. This made no sense.

The Fourth Circuit did not adopt a hardline view of § 506. It determined that authority for a Chapter 13 debtor to strip underwater liens actually stems from § 1322(b)(2), where a plan may modify the rights of holders’ secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence. A creditor’s rights thus turns on whether there is any value in the collateral. The junior liens had no value because Chase’s lien swallowed the value of the property. As a result, the junior lienholders are unsecured and their liens may be stripped under § 1322(b), regardless of whether or not they filed proofs of claim.

Conclusion
Moving forward, creditors must be cognizant concerning whether to file proofs of claim and ensure that they are filed timely. A debtor can now strip a lien on his or her principal residence through the plan without filing anything else. If the debtor fails to complete his or her plan, then the lien will remain. However, if a creditor does not file a proof of claim on an unsecured lien, and the debtor does receive a discharge, that creditor could walk away with nothing. Moreover, valuation of the property is important.

If a creditor is in a junior position and there may be any value left after the senior lien, that junior lien is secured and cannot be stripped in Chapter 13. Even if it just a dollar, the lien will survive the bankruptcy. In these close calls, a creditor will need to object to plan confirmation to protect its lien. Consult with local counsel as to how the Burkhart v. Grigsby opinion may affect specific liens on properties in bankruptcy.

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Handling RESPA Qualified Written Requests — Eighth Circuit Reverses Damages Award for Violation

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

In a recent case decided by the Eighth Circuit Court of Appeal, a borrower sued his mortgage servicer claiming servicing violations on his Minnesota loan under the Real Estate Settlement Procedures Act (RESPA). Ultimately, the district court’s damages award to the borrower was reversed and remanded for further proceedings in the district court. Essentially, the appellate court found no harm, no foul. [Wirtz v. Specialized Loan Servicing, LLC, No. 16-4069 (8th Cir. Apr. 3, 2018].

Background
The facts of the case are fairly straightforward. Borrower Wirtz made a series of Qualified Written Request (QWR) demands to his current loan servicer, arising from an alleged misapplication of funds for their servicer-transferred loan after the servicer claimed that Wirtz was delinquent on his loan. Through one QWR, the borrower demanded a payment history from “origination to present.”

The current servicer may have received only a partial loan history from the prior servicer at the time of the service transfer. When the current servicer responded in a fashion deemed objectionable, Wirtz sued for damages under RESPA (and the piggyback provisions of the Minnesota Mortgage Originator and Servicer Licensing Act, which also proscribes lenders from violating federal laws regulating mortgage loan).

The district court found the responses to Wirtz were improper, concluding that the servicer did not conduct an adequate investigation into the QWRs submitted by Wirtz. The district court held (and later the appellate court also agreed) that the servicer violated RESPA when it did not “obtain, review, or provide the full payment history as Wirtz requested.” The district court awarded the borrower damages (and costs) in an amount less than $5,000 — plus attorneys’ fees in excess of $45,000.

Appellate Review
The servicer appealed to the Eighth Circuit Court of Appeals. There, the appellate judges carefully analyzed the wording of the statutes in question, and disagreed with the rationale for the ultimate damages award by the district court, noting that Wirtz had no actual damages to trigger the penalties in the statute. The court held that proof of actual damages is an essential element of a claim under RESPA, and that Wirtz had suffered no actual damages to trigger the statutory provisions. In coming to this conclusion, the appellate court stated the following:

“We agree with Specialized that Wirtz failed to prove actual damages, because Specialized’s failure to comply with RESPA did not cause Wirtz’s alleged harm. When a loan servicer fails to comply with § 2605(e), the borrower is entitled to ‘any actual damages to the borrower as a result of the failure.’. . . Congress’s use of the phrase ‘as a result of’ dictates that there must be a ‘causal link’ between the alleged violation and the damages.”

Once disposing of the actual damage issue, the appellate court then vacated the award for statutory damages on the basis that without actual damages, the trigger to impose additional statutory damages failed as a matter of law. The court reversed and remanded to the district court to enter judgment for Specialized on the RESPA claim. The appellate court, however, did mention the possibility for a further examination under the corresponding Minnesota statute, which remains unknown as of this writing.

Conclusion
An important lesson from this case is for servicers to adequately investigate and respond to borrowers’ qualified written requests. If a borrower submits a QWR that includes a demand for a complete loan history (or a loan history covering specific dates), then the servicer should provide the matching loan history to satisfy RESPA requirements.

Hopefully, the result of this case will deter all but the most determined borrowers from litigation if they suffer no actual damages under RESPA. The prospect of a substantial attorneys’ fees award in favor of a borrower remains an issue whenever litigating RESPA matters, so extreme caution is always prudent for servicers around this topic. Nonetheless, it is encouraging to see the reversal of a large damages award when there is no actual loss caused to a borrower.

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The 2016 American Land Title Association Title Insurance Commitment

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

In June 2016, in an effort to become more streamlined and comprehensive, the Board of Governors of the American Land Title Association (ALTA) approved revision recommendations to the 2016 ALTA Title Insurance Commitment. These took effect on August 1, 2016. The 2016 Commitment form combines two 2006 versions of the form and became generally put into use nationwide in 2017. Not only did the board seek to promote a better understanding and uniformity of the commitment provisions and formatting, it sought to define the scope and purpose of a title commitment itself. The most significant revisions to the commitment are five-fold:


1. Of greatest importance to mortgagees and lenders, the 2016 ALTA commitment now limits underwriter liability solely to contract claims. Previously, lenders often attempted to sue title companies under tort theories and, in some courts, were successful (U.S. Bank, N.A. v. Integrity Land Title Corp., 929 N.E.2d 742, 2010 Ind. LEXIS 396). Many lenders inferred a title commitment to be an abstract of title and/or legal opinion of the state of the title provided for the benefit of the lender. In actuality, any information concerning the state of the title included in a title commitment is for the benefit of the title company in making its determination of coverage. The 2016 ALTA forms clearly mirrors Illinois case law when stating in no uncertain terms that liability is therefore limited to matters of contract only (First Midwest Bank, N.A. v. Stewart Title Guar. Co., 218 Ill. 2d 326, 843 N.E.2d 327, 2006 Ill. LEXIS 14, 300 Ill. Dec. 69). This limitation is boldly stated in a “Notice” on the first page of the commitment form, and also in Condition 3(a). The notice states that the “commitment is not an abstract of title, report of the condition of title, legal opinion, opinion of title, or other representation of the status of title.”

2. Liability is further limited by the 2016 ALTA commitment to exclude claims against the insurer that arise from settlement or closing defects. It is common practice for an agent of the insurer to conduct the settlement or closing; however, the agent at the closing is not acting on behalf of the underwriter for purposes of the closing. Misperceptions of the agent’s scope of representation have also led to tort claims against the insurer. Therefore, the 2016 ATLA commitment sets forth that the closing agent is not the title company’s agent for purposes of the closing.

3. The 2016 ALTA commitment now requires that a specific length of time limiting the validity of the commitment be inserted into the commitment itself. This is commonly six months.

4. The 2016 ALTA commitment promotes uniformity amongst all underwriters by requiring the inclusion of specific sections:

a. NOTICE: Defines the scope and purpose of the commitment and limits liability;
b. Commitment to Issue Policy;
c. Commitment Conditions: Includes a definitions section and, again, limits liability;
d. Schedule A: Now requires the inclusion of a specific dollar amount of coverage;
e. Schedule B, Part 1: Sets forth the requirements that must be met to issue the policy;
f. Schedule B, Part 2: Includes both general and specific exceptions to coverage.


5. Finally, the new form requires a written or electronic signature by the company or its agent.


In addition to title commitments, title companies in Illinois offer two other relevant products. A Tract Search (also called a property report) is a collection of information obtained from the county records about a particular person and property. Much of the information accumulated may not actually attach to the property in question or be relevant to a foreclosure. Furthermore, this product does not offer any insurance to the lender. Minutes of Foreclosure, on the other hand, specify only title information and liens that do attach to a specific foreclosed property. Minutes of Foreclosure include “necessary and permissible parties” to a foreclosure action before the action is filed. This specialized search offers protection to a lender throughout the foreclosure process and in post-sale transactions as well.

The Tract Search or property report is equivalent in the states of Illinois, Ohio, and Kentucky. Again, this product searches for a large amount of data, including transfers of ownership, judgments, and liens against the property. These searches are taken from the public record, typically extend back 40 to 60 years, and offer a basic level of protection — but no insurance.

A Title Abstract is similar to the Tract Search but is not limited to a certain amount of time. It is more expensive and time-consuming, but covers the entire history of the property to its point of origin, or as far back as public record allows. Again, this is not insurance. Insurance will require a Title Commitment and Policy, which will indemnify against any loss due to a defect or encumbrance on property not specifically excepted in the policy.

The states of Ohio and Kentucky do not offer Minutes of Foreclosure; however, Ohio Revised Code § 2329.191 requires a Preliminary Judicial Report to be filed in every action demanding the judicial sale of real property. The Preliminary Judicial Report must include, among other items, the name and address of every recorded lienholder on the real property. The Preliminary Judicial Report is prepared by a title company and requires that a title search be conducted.

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Clarification on Alabama Redemption Law

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by Andy Saag
Sirote & Permutt, P.C. – USFN Member (Alabama)

On April 23, 2015 Alabama changed its redemption law to allow for a shortened right of redemption period from one year to 180 days for certain residential properties on which a homestead exemption was claimed in the tax year during which the sale occurred. The new law also required the mortgagee to mail a notice of a mortgagor’s right to redeem residential property at least 30 days prior to the foreclosure date by certified mail with proof of mailing. However, many questions remained unanswered after that new law became effective, including:


• How long was the right of redemption if notice was not provided?
• Was production of the proof of mailing sufficient to satisfy the legal requirement that notice was provided?
• What was the statute of limitation for bringing an action related to sending the notice?


These questions were answered by the Alabama legislature when, in February 2018, it amended Alabama Code Section 6-5-248(h). The new law clarifies that a right of redemption cannot be exercised later than one year after the date of foreclosure even if the required notice was not sent. The new law also provides that possession or production of the proof of mailing of the notice would constitute an affirmative defense to any action related to the notice requirement. Finally, the law specifically limited the time frame in which actions related to the notice requirement can be brought to one year after the date of the foreclosure sale.

The Alabama legislature should be commended for passing this legislation as it will help to avoid piecemeal, and likely conflicting, rulings from courts across the state. Court filings and any judicial rulings from around the state regarding the right of redemption will continue to be monitored by this author’s firm.

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Florida: Borrower’s Property Surrender in Bankruptcy Creates a Rebuttable Presumption in Foreclosure Action

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

Florida Senate Bill 220 passed both houses of the legislature unanimously and was signed by the governor on March 19, 2018. This act relates to bankruptcy matters in foreclosure proceedings. It authorizes lienholders to use certain documents filed under penalty of perjury in the defendant’s bankruptcy case as an admission in the mortgage foreclosure case. SB 220 applies to foreclosure cases filed on or after October 1, 2018.

The act creates a rebuttable presumption that the defendant has waived any defense to the foreclosure if a lienholder submits documents filed in the bankruptcy case evidencing the debtor’s intent to surrender the subject property — provided those documents have not been withdrawn by the defendant. Additionally, if a final order is entered in the defendant’s bankruptcy case which discharges the defendant’s debts or confirms the repayment plan that provides for the surrender of a property, that also creates the same rebuttable presumption. The defendant is not precluded, however, from raising a defense in the foreclosure action based on an action or inaction of the lienholder that is subsequent to the filing of the document in the bankruptcy case which evidenced the defendant’s intention to surrender the mortgaged property to the lienholder.

This law will allow the plaintiff’s counsel in foreclosure proceedings to swiftly rebut defenses filed by borrowers who have surrendered the subject property in their bankruptcy case, as those defenses will be deemed as waived. Pleadings and orders entered in the bankruptcy cases can be reviewed to provide the state court with appropriate documentation evidencing the defendant’s intent to surrender the subject property.

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New York: More on Enforcing Forbearance Agreements

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

Must a borrower scrupulously adhere to the requirements of a forbearance agreement to derive benefit from it? A concise appellate decision and order confirms that, indeed, punctilious performance is required. [Interaudi Bank v. Moorgate Investments Limited, 145 A.D.3d 549, 44 N.Y.S.3d 35 (1st Dept. 2016)].

Because it seems that courts tend to be liberal in finding breaches to be de minimis, lenders and their counsel may often be skeptical that settlement agreements or forbearance agreements will be strictly enforced. Interestingly, though, and certainly gratifyingly from the point of view of a lender or servicer, such agreements are enforced with regularity according to their very terms. Such is the lesson of the subject case, and the story is but a short one.

A defaulted mortgage elicited a mortgage foreclosure action, which in turn led to a forbearance agreement whereby an extension of the loan maturity date was granted — specifically conditioned, however, upon the plaintiff’s receipt of $1,000,000 towards reduction in the principal sum. The source of this $1,000,000 was to be from proceeds of certain art sales by the loan payment guarantor at two auctions (to be conducted on a denominated date in November 2015). Importantly, the agreement stated that time was of the essence for this compliance.

The borrower-defendants, however, failed to comply with the terms of this condition. The monies were not paid and, thus, the loan maturity date was not extended.

While the trial court under these circumstances declined to grant summary judgment to the foreclosing plaintiff, the Appellate Court (the First Department) reversed, concluding that the agreement was clear and the failure to perform by the borrower (guarantor, actually) meant that the loan maturity was not extended and the foreclosure could proceed.

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South Carolina: Appellate Review of Quiet Title Action after Tax Sale

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

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

In the recent 2018 South Carolina Court of Appeals case, Equivest Financial, LLC v. Ravenel, which involved a quiet title action on a property sold at tax sale, the appellant (Ravenel) raised multiple issues on appeal. Specifically, the appellant asserted that: (1) the trial court erred in failing to take testimony; (2) the tax sale was void because the property was not levied, advertised, and sold in the name of the true owner; (3) judicial estoppel does not apply because Ravenel was not a party to the previous action; and (4) the delinquent tax collector did not comply with statutory requirements in sending notice to Ravenel. The court addressed these arguments by finding that: (1) the attorney for the appellant did not preserve the first issue for appeal, and (2) the doctrine of res judicata applied, barring the appellant from raising the other issues.

Background
The facts, briefly, are that Ravenel (just prior to filing bankruptcy) conveyed the subject property to her children for five dollars in consideration. In the subsequent bankruptcy proceeding, Ravenel failed to indicate this perceived fraudulent conveyance in her schedules; likewise, Ravenel did not tell her children about the conveyance or physically deliver the deed to them. After Ravenel filed bankruptcy she failed to pay her annual property taxes. As required by statute, the Charleston County Delinquent Tax Collector (DTC) sent notices to the children based on their addresses listed on the most recent deed of record. After multiple attempts to notify the children of the delinquent taxes on the property (i.e., notice by publication, issuance of a final notice of property redemption, and a failure of Ravenel to pay the redemption amount of $27,849.06), the property was sold at tax sale to Equifunding, who conveyed the property to the respondent in this action, Equivest Financial LLC. After this conveyance, Ravenel’s children brought a quiet title action, seeking to have the tax deed set aside. This case deals with the appeal of that action.1 The main issues in the appeal related to the doctrines of judicial estoppel and res judicata.

Judicial Estoppel

First, the court considered whether Ravenel was judicially estopped from claiming a position inconsistent with the one that she held in a previous court action. The five elements of judicial estoppel are: (1) two inconsistent positions taken by the same party or parties in privity with one another; (2) the positions must be taken in the same or related proceedings involving the same party or parties in privity with each other; (3) the party taking the position must have been successful in maintaining that position and have received some benefit; (4) the inconsistency must be part of an intentional effort to mislead the court; and (5) the two positions must be totally inconsistent.2

In the present case, with respect to the third element, the court found that Ravenel was not successful in establishing that she was the true owner of the property. Here, Equivest Financial LLC was found to be the true owner of the property by the trial court; therefore, the court of appeals found that judicial estoppel did not apply.

Res Judicata

Second, the court considered whether the elements of res judicata were met and thereby barred all other claims. The court found the three-element test was met: (1) the action involves the same identity of the parties or their privies; (2) the subject matter is identical; and (3) the prior suit adjudicated the issue with a final, valid judgment on the merits.3

In this case, Ravenel’s interests were essentially the same interests as her children’s interests in the property. Accordingly, Ravenel was deemed to be the real individual in interest with regard to the subject property. Further, the court found that the subject matter element was met because the case presented to the court was the identical issue surrounding whether the tax sale was valid. Finally, the court found that the trial court heard the first case in full and made a ruling on the issue, which the court of appeals affirmed. Due to the fact that the three elements of res judicata were met, all claims were barred.


1 Equivest Fin., LLC v. Scarborough, 2013 WL 8541673, Op. No. 2013-UP-495 (S.C. Ct. App. filed Dec. 23, 2013).
2 Auto-Owners Ins. Co. v. Rhodes, 405 S.C. 584, 598, 748 S.E.2d 781, 788 (2013).
3 7 S.C. Jur. Estoppel and Waiver § 27 (1991).

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Attorney Fees and Costs Recoverable against Foreclosed Borrowers in Virginia Unlawful Detainer Actions (Effective 7/1/18)

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

In the 2018 regular session, foreclosure purchasers realized a benefit by way of House Bill 311. Signed into law by the governor on March 9, 2018, and becoming effective July 1, 2018, this bill provides for additional remedies (including reasonable attorney fees and costs) against borrowers who fail to vacate after foreclosure. Virginia courts are adherent to the “American Rule,” which only permits a prevailing party to recover attorney fees and costs where contractually permitted or authorized by statute. For this reason, attorney fees and costs for post-foreclosure eviction actions have not been available in the Commonwealth. Most, if not all, common deed of trust forms fail to address recovery of post-foreclosure fees and costs associated with obtaining possession, and Virginia statute did not provide such a remedy.

Specifically, House Bill 311 amends Virginia Code § 8.01-126 (the Virginia unlawful detainer statute) and addresses the legal status of foreclosed borrowers who occupy the property on the date of foreclosure. The newly minted § 8.01-126(C)(4) states that foreclosed borrowers are “tenants-at-sufferance” and such tenancy is terminable by sending a written 3-day notice of termination. The new statute effectively negates Johnson v. Goldberg, 207 Va. 487 (1966), where the Virginia Supreme Court held that foreclosed borrowers, as tenants-at-sufferance, are not entitled to any notice to quit or vacate. After expiration of the notice, the foreclosure purchaser is permitted to file an unlawful detainer. Where notices to vacate mailed to foreclosed borrowers are currently more a requirement of court custom and preference, they will become a material condition to seeking possession as a matter of law.

The new section also enables claims for damages and fair rental value, in addition to attorney fees and court costs: “Such tenant shall be responsible for payment of fair market rental [sic] from the date of such foreclosure until the date the tenant vacates the dwelling unit, as well as damages, and for payment of reasonable attorney’s fees and court costs.” While these new remedies can be sought as part of the unlawful detainer, this new provision seems to also provide an avenue for a separate cause of action where the borrower vacates after the expiration of the termination notice, but prior to filing the unlawful detainer, and the property has been detained for a significant time thereafter and/or has been damaged by the borrower. Similarly, such remedies could be sought after a “lock out” pursuant to an order of possession, or through bifurcation of the unlawful detainer action into a ruling on possession and a later hearing, post-lock out, to determine “final rent and damages.” Bifurcation is commonly used in landlord/tenant cases.

Operationally, when the statute becomes effective, notices to vacate should be revised to recite this statue’s applicability to borrowers — and that failure to vacate may subject them to a claim for fair rental value, damages, and reasonable attorney fees and costs. This may give greater incentive to borrowers to timely vacate rather than exploit the administrative time required by the judicial eviction process. Perhaps it will also compel borrowers to evaluate the merits of contesting the eviction more prudently. It should be noted that this statute does not apply to occupancy by foreclosed tenants of the borrower, which is addressed by Virginia Code § 55-225.10(C).

 

While these remedies will be available come July 1, 2018, whether to pursue them should be carefully considered by servicers and outsourcers, as Virginia general district courts will likely require witnesses to establish these monetary claims (which are separate and apart from merely seeking possession). Seeking these new remedies may add additional time, cost, and effort to the standard eviction process where possession is the primary desired outcome. A monetary judgment, after all, may only be as good as its collectability.

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Virginia Legislature Adds New Sale Notice Requirements for Deceased Borrowers and Their Estates

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

House Bill 755/Senate Bill 422 (relates to foreclosure after death of owner) — For those who practice in both judicial and nonjudicial foreclosure states, the different treatment of deceased borrowers and their estates is readily apparent. In Maryland (quasi-judicial) and the District of Columbia (judicial), for example, the personal representative of the estate must be served with the foreclosure pleadings. If such fiduciary has not yet been established, one must be appointed to proceed. Notices of sale and all other filings are mailed to the personal representative.

By contrast, Virginia, a nonjudicial state, does not require the appointment of a personal representative to foreclose — not even to receive notice of sale. Virginia Code § 55-59.1(A) only compels that sale notice be sent to the present owner at the “last known address as such owner and address appear in the records of the party secured” and does not specifically address heirs and personal representatives. Notices of sale must be mailed no more than 14 days prior to sale.

Although not requiring a personal representative to foreclose, the Virginia legislature’s passage of House Bill 755/Senate Bill 422 does amend Virginia Code § 55-59.1(A) to include additional deceased borrower notice requirements. The amendment expands the source from which entitled notice recipients are derived to also include recorded probate documents. Effective July 1, 2018, Virginia Code § 55-59.1(A) will read in part:


If the secured party has received notification that the owner of the property to be sold is deceased, the notice required by clause (a) shall be given to (1) the last known address of such owner as such address appears in the records of the party secured; (2) any personal representative of the deceased’s estate whose appointment is recorded among the records of the circuit court where the property is located, at the address of the personal representative that appears in such records; and (3) any heirs of the deceased who are listed on the list of heirs recorded among the records of the circuit court where the property is located, at the addresses of the heirs that appear in such records.


The amended statute will legally entitle personal representatives and heirs to notice of sale, if the probate documents have been recorded. The statute does limit the notice address for these individuals to what is specifically referenced in the probate documents.

This statute also presents new concerns and quagmires. In many cases the servicer may be aware of the deceased borrower at referral — but probate instruments have yet to be recorded. Unlike subordinate deeds of trust and association statements of lien, which must be recorded more than 30 days prior to sale to trigger the right to notice, the amended statute does not contain the same “safe harbor” language regarding the recording of the probate documents in relation to the sale date. Where an allegation of failure to notify is advanced, it is uncertain how Virginia courts will interpret this distinction where the probate documents are recorded prior to sale but after the last pre-sale title update and the mailing of notices. How title insurers will treat this scenario is equally uncertain. Another new issue is that not all “heirs” listed on a “List of Heirs” are legal heirs under Virginia law. On face value, the amended statute seems to confer standing to challenge the foreclosure on notice grounds to individuals with no cognizable legal interest in the property.

Virginia best practice has traditionally been to direct notice to heirs and personal representatives appearing on the referral, foreclosure correspondence, and the pre-foreclosure title searches and updates, regardless. To this end, the amendment should not change processing in the ordinary course. However, where a notice might have been missed, resort can no longer be made to the statute’s limiting language confining the entitled recipient to whoever appears in the servicer’s records. With this new statutory amendment and the current industry focus on successors-in-interest, it is more important than ever for Virginia trustee firms and servicers to timely communicate concerning deceased borrowers and any known heirs or personal representatives.

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The Sixth Circuit Applies Spokeo to Dismiss FDCPA Claims for Lack of Cognizable Injury

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

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

On February 16, 2018 the U.S. Court of Appeals for the Sixth Circuit vacated summary judgment and dismissed claims under the Fair Debt Collection Practices Act (FDCPA) against an Ohio attorney and his firm in Hagy v. Demers & Adams, 2018 U.S. App. LEXIS 3710, 2018 FED App. 0032P (6th Cir.). Drawing on the U.S. Supreme Court’s holding in Spokeo, Inc. v. Robins, 578 U.S. __, 136 S. Ct. 1540 (2016), the Sixth Circuit found that the debtors failed to show that the violation caused any harm and, therefore, failed to establish standing under U.S. Const. Art. III.1 (The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

The underlying facts of the dispute are quite plain and begin in 2002, when the Hagys obtained a note and mortgage on a mobile home and property upon which the home rested.2 Eight years later the Hagys defaulted on their loan, and foreclosure proceedings were commenced.3 Settlement was achieved and thereafter, on June 30, 2010, the lender’s counsel, Demers & Adams, sent the Hagys’ attorney a letter advising that no deficiency judgment would be pursued.4 The Hagys filed suit.5 In addition to claims against their lender for telephonic collection attempts on a waived debt, the Hagys filed claims against Demers & Adams, alleging that the June 30th letter failed to disclose that it was from a debt collector, in violation of 15 U.S.C. 1692e(11). On the FDCPA claims, the Hagys were awarded statutory damages, costs, and over $74,000 in attorneys’ fees.7 Demers & Adams appealed.

Among other errors, Demers & Adams asserted that the district court lacked jurisdiction due to the Hagys’ lack of standing.8 In consideration of this argument, the Sixth Circuit noted that any dispute set forth before a federal court under U.S. Const. Art. III must, at a minimum, contain a particular injury caused by the defendant to be remedied by the court.9 The appellate court found that no such burden was met.10 The court agreed that Demers had a duty under the FDCPA to include a required disclosure in its correspondence, and that the duty was breached; however, the court held that Congress lacked the authority to create an injury on behalf of a claimant.11

The Sixth Circuit observed that no harm or injury was caused by the letter from Demers; in fact, the letter served to give the Hagys peace of mind. Leaning on Spokeo, the court agreed that “a bare procedural violation” does not equate to actual harm or injury.12 Further, in its finding of summary judgment, the district court had relied on Church v. Accretive Health, Inc. for its holding that a bare violation sufficed to create an injury. Church has since been rejected by the Sixth Circuit Court of Appeals.13 Because no cognizable injury existed, or was even alleged, the FDCPA claims were dismissed for lack of standing.

While the holding in Hagy appears to extend further protection to debt collectors in the Sixth Circuit, it should be noted that the underlying facts in Hagy are somewhat incredibly favorable to the debt collector. The court makes mention throughout its opinion that the very letter upon which the lawsuit was based served to help the debtors — not to hurt them. Moreover, the debtors admitted that the letter did just that. Such a perfect set of facts are few and far between.

Since Spokeo was first reported nearly two years ago, the decision has been interpreted and applied numerous times. Interpretations of Spokeo in the context of the FDCPA have resulted in findings of the existence of standing despite a lack of tangible injury in the majority of cases.14 Without a similarly favorable fact pattern, despite Hagy, this debtor-friendly trend may continue.

 


Hagy v. Demers & Adams, 2018 U.S. App. LEXIS 3710, 2018 FED App. 0032P (6th Cir.), citing Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 194 L. Ed. 2d 635, 2016 U.S. LEXIS 3046, 84 U.S.L.W. 4263, 100 Empl. Prac. Dec. (CCH) P45, 556, 26 Fla. L. Weekly Fed. S 128.
2  Hagy v. Demers & Adams, 2018 U.S. App. LEXIS 3710, 2018 FED App. 0032P (6th Cir.) [*2].
3  Id., [*2].
4  Id.
5  Id., [*3].
 Id.
7  Id., [*5].
8  Id.
9  Id., [*6]; citing, Lujan v. Defenders of Wildlife, 504 U.S. 555, 112 S. Ct. 2130, 119 L. Ed. 2d 351, 1992 U.S. LEXIS 3543, 60 U.S.L.W. 4495, 92 Cal. Daily Op. Service 4985, 92 Daily Journal DAR 7876, 92 Daily Journal DAR 8967, 22 ELR 20913, 34 ERC (BNA) 1785, 6 Fla. L. Weekly Fed. S 374.
10  Id.
11  Id., [*7].
12  Id., [*9]; citing, Spokeo, 136 S. Ct. at 1550.
13  Id., citing, Lyshe v. Levy, 854 F.3d 855, 2017 U.S. App. LEXIS 6855, 2017 FED App. 0088P (6th Cir.), 2017 WL 1404182, declining to follow Church v. Accretive Health, Inc., 654 Fed. Appx. 990, 2016 U.S. App. LEXIS 12414.
14  Ezra Church, Brian Ercole, Christina Vitale, Warren Rissier, Ken Kliebard, The Meaning of Spokeo, 365 Days and 430 Decisions Later, Law360, New York, Mary 15, 2017.


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District of Columbia: Treacherous Footing Continues for Lenders Facing Condominium Association Foreclosure Sales

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by Matthew Fischer and Christianna Kersey
Cohn, Goldberg, & Deutsch, LLC – USFN Member (District of Columbia)

Continuing the tectonic shifts begun with its decision in Chase Plaza Condominium Ass’n v. JPMorgan Chase Bank, N.A., 98 A.3d 166, (D.C. 2014), the Court of Appeals recently issued an opinion in Liu v. U.S. Bank, N.A. No. 16-CV-262, CAR-6539-14 (D.C. Mar. 1, 2018) that further undermines the position of mortgage lenders after a condominium association initiates a foreclosure sale.

As readers will recall, in Chase Plaza, the court interpreted D.C. § 42-1901 and its provisions regarding the six-month “super-priority” of condominium association liens to wipe out mortgage lenders, including those in “first” position. As a result of that 2014 decision, a number of related cases have been working their way through the superior court to the court of appeals. In Liu, the appellate court overturned a superior court’s grant of summary judgment for the bank and, once again, ruled in favor of third-party purchasers at a condominium association foreclosure auction.

The Liu opinion expanded upon the ruling in Chase Plaza holding that, even in the face of a sale allegedly conducted “subject to the first mortgage or deed of trust,” a holder of a deed of trust in first position could still be wiped out. The court of appeals ruled that the statute specifically prohibited the ability of the condominium association to apparently “waive” the super-priority status per D.C. Code. § 42-1901.07. In footnote 9 of the decision, the appellate court explicitly withheld its views over a “split-lien” and how it would rule in the event that the condominium lien at issue were longer than six months. In Liu, the lien was for less than six months and, thus, the court side-stepped the question for now. More importantly, the court of appeals found little merit in the bank’s argument for equitable estoppel based upon a reasonable reliance on the stated terms of sale, due to both the action of the bank (which attempted to pay off the condominium association lien) and the “expression provision” of the statute among other reasons.

In footnote 9, the appellate court also avoids the issue as to whether the foreclosure sale should be set aside due to the bank’s stated desire to not seek to set aside the sale. The opinion in Liu, therefore, offers some possible avenues of attack for future litigants. First, the court leaves open the question of how it would treat a lien that was in excess of six months. Second, the court seems to invite mortgage lenders to seek to have sales in question set aside, though such arguments might be better suited to the superior court. Finally, different facts could present a stronger case for equitable estoppel in the event that a mortgage lender did not seek to pay off a condominium lien, and failed to do so.

Closing Words
Despite this latest ruling, concerns of mortgage lenders were addressed by the Council of the District of Columbia in passage of the Condominium Owner Bill of Rights and Responsibilities Amendment Act of 2016. This legislation directly dealt with issues arising out of Chase Plaza and its progeny, by specifically requiring that a condominium association send notice to any holder of a first deed of trust (or first mortgage of record), their successors and assigns, including assignees, trustees, substitute trustees, and MERS. Moreover, the legislation requires the association to expressly state whether the foreclosure sale is either for the six-month priority lien, not subject to the first deed of trust, or for more than the six-month priority lien (which is subject to the first deed of trust).

While boding well for the future, the Amendment Act does not address condominium association foreclosures that occurred prior to its enactment, leaving mortgage lenders stranded until these pre-Chase Plaza cases work their way completely through the courts.

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Kansas Unlicensed Creditors Beware: Maryland Appellate Ruling’s Potential Impact on Creditors Enforcing Kansas Consumer Debts

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

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

In Kansas, creditors who originate, take assignments of, and enforce consumer obligations must be aware of — and comply with — the Kansas Uniform Consumer Credit Code (UCCC) and its supervision and licensing requirements. See K.S.A. 16a-2-301. A creditor’s failure to comply with these requirements could result in the creditor being unable to use the Kansas courts to enforce its debts, and can potentially put finalized judgments, including foreclosures, at risk. Clearly, creditors and creditors’ counsel need to be well informed of the Kansas UCCC and how the failure to follow it can short-circuit any, otherwise straightforward, lawsuit. Several states have adopted statutes similar to the Kansas UCCC and its regulatory scheme; one such state is Maryland.

Maryland Backdrop
A Maryland appellate decision found that a creditor’s failure to obtain proper licensure completely prevented it from foreclosing on mortgage loans. That appellate decision is styled Blackstone v. Sharma, 161 A.3d 718 (Md. Ct. Spec. App. 2017). [For convenient reference, also see “Maryland: Foreign Statutory Trust (which acquired a Loan Post-Default) is a ‘Collection Agency’ and Prohibited from Foreclosing without a Debt Collection License” (USFN e-Update, June 2017 ed.)].

Blackstone applies the Maryland Collection Agency Licensing Act. The Maryland case arises from mortgage loans that were assigned to an unlicensed creditor who sought to foreclose the deeds of trust that secured the mortgage loans. The borrowers challenged the foreclosures asserting that, without a license, any judgment that the creditor obtained against them would be void. The Maryland trial court and appellate court agreed with the borrowers and ruled that the creditor’s foreclosure actions were barred.

The Blackstone case has drawn national attention because it not only calls into question pending Maryland foreclosure cases, it also casts doubt over completed foreclosures that could be set aside as void. The Blackstone case is not over yet; Maryland’s highest court held oral argument in November 2017, and a decision is widely anticipated.

Kansas Context
The effect of Blackstone on Kansas foreclosures is not clear. As noted above, the Kansas UCCC requires that creditors enforcing consumer mortgages be licensed (like the Maryland statute). In 2013 the Kansas Court of Appeals looked at the licensing issue in Brand Investments, LLC v. Adams, 303 P.3d 727 (Kan. Ct. App. 2013) (Affirmed. Decision without published opinion).

Brand was a foreclosure action in which — over a year after the foreclosure judgment — the borrower challenged the creditor’s right to foreclose because the creditor was not licensed, as required by the Kansas UCCC. The borrower’s legal argument was that, because the creditor was unlicensed, the creditor lacked standing to bring the foreclosure action. Accordingly, the borrower contended that the Kansas trial court lacked subject matter jurisdiction to hear the case and, therefore, the foreclosure judgment was void as a matter of law. In a nuanced opinion, the Kansas Court of Appeals rejected the borrower’s argument.

The Kansas Court of Appeal’s opinion distinguished “standing” from the “capacity to sue.” The court described that a party’s standing to sue arises when a party suffers a cognizable injury and there is a causal connection between the injury and the challenged conduct. In slight contrast, the court described a party’s capacity to sue as the right to come to court for relief concerning the subject of the action. That subtle distinction is important because the lack of standing is jurisdictional and a challenge to a judgment entered by a court that lacks subject matter jurisdiction can be challenged and defeated at any time — i.e., there is no certainty or finality for a judgment entered with this defect. However, the lack of capacity to sue is an affirmative defense. If a borrower does not timely raise lack of capacity as an affirmative defense, then the defense is waived, and the foreclosure judgment is far harder to challenge after the fact —particularly if a year or more passes after the judgment is entered.

Based on this distinction, the Kansas Court of Appeals ruled that the creditor’s failure to obtain a license did not create a standing issue but, instead, only a lack-of-capacity-to-sue question. In this case, the borrower failed to timely assert an affirmative defense based upon the creditor not being licensed. Therefore, the issue was deemed to be waived and the creditor’s foreclosure judgment was affirmed.

In Closing
Although Brand was a victory for the creditor, it’s a cautionary tale. Creditors should be mindful of the UCCC licensing requirement in Kansas prior to purchasing loans or initiating collection in the state.

In short, Maryland’s Blackstone decision creates a wave of uncertainty regarding the legality of numerous completed and pending mortgage foreclosure actions in Maryland (and elsewhere with similar licensing requirements). However, the Kansas Court of Appeals decision in Brand suggests that if a borrower fails to timely raise the licensing issue (or at least within a year of the judgment being entered) then even an unlicensed creditor could successfully foreclose (in the absence of a timely challenge), and that judgment would be difficult to set aside later. As noted above, however, Brand is an unpublished Kansas appellate court decision and the law is subject to change.

Creditors (and attorneys representing them) seeking to acquire and enforce consumer debts in Kansas can obtain regulatory and licensing information from the State Bank Commissioner of Kansas at http://www.osbckansas.org/cml/applications.html.

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South Carolina: Pending Legislation Update

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

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

House Bill 4520
This bill is currently before the South Carolina House. If enacted, it would provide that there be a derivation clause requirement on all deeds and mortgages, executed after June 1, 2018, to include a clause setting forth the name of the party who prepared the mortgage. To be successfully recorded by the clerk of court/registrar of deeds, HB 4520, in effect, will require that all deeds and mortgages include identifying contact information regarding the preparer of the instrument.

One possible reason for this proposed bill is for the state lawmakers to seek compliance, by mortgage lenders and banks, with the state’s extremely strict Unauthorized Practice of Law requirements that a South Carolina-licensed attorney be involved in all aspects of real estate mortgage closing. See Matrix Financial Services Corp. v. Frazer, 384 S.C. 134, 714 S.E.2d 532 (2011), citing State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E. 2d 15 (1987) (Performing a title search, preparing title and loan documents, and closing a loan without the supervision of an attorney constitutes the unauthorized practice of law).

Senate Bill 864
This bill is pending in the South Carolina Senate. It relates to the filing and recording of fees that may be charged by the registrar of deeds. SB 864 includes a $35 flat rate fee for certain documents to be filed and recorded, as well as a flat fee of $10 for other specified documents. SB 864 parallels its companion bill, which is currently at the same stage before the South Carolina House as bill 3337.

Senate Bill 833
This proposed bill is presently before the South Carolina Senate. If passed, SB 833 will authorize the governing body of a state county to create a procedure and method of enforcement that requires owners of residential and/or commercial real property to keep the property clean; free of rubbish, conditions that constitute a nuisance, debris, and other disorders that make the property unsightly.

Status Check — Go to http://www.scstatehouse.gov/billsearch.php. Then enter a bill number to view the current status of the proposed bill and its contents.

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Connecticut State Court Interprets Interplay between Connecticut General Statute § 49-15(b) and Bankruptcy Code § 362(c)(4)(A)

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by Linda J. St. Pierre
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

In a recent case, the court was asked to decide whether Connecticut General Statute § 49-15(b) automatically reopens the law day in a judgment of strict foreclosure when: (1) an owner files a petition for relief under the bankruptcy code after entry of a judgment, but before the law day passes; and (2) there is no automatic stay in effect under 11 U.S.C. § 362. [U.S. Bank, as Trustee for the BS Arm Trust, Mortgage Pass-Through Certificates, Series 2005-1 v. Morawska (Conn. Super. Ct. 2018)].

State Statute
Connecticut General Statute § 49-15(b) provides in relevant part “Upon the filing of a bankruptcy petition by a mortgagor under Title 11 of the United States Code, any judgment against the mortgagor foreclosing the title to real estate by strict foreclosure shall be opened automatically without action by any party or the court, provided, the provisions of such judgment, other than the establishment of law days, shall not be set aside under this subsection, provided no such judgment shall be opened after the title has become absolute in any encumbrancer or the mortgagee, or any person claiming under such encumbrancer or mortgage.”

Background – Multiple Bankruptcy Filings
During the pendency of the underlying foreclosure action, the owner of the property filed bankruptcy four times. The last bankruptcy she filed was within one year of her two prior bankruptcy filings, which were both dismissed within that one-year period. Pursuant to 11 U.S.C. § 362(c)(4)(A) and (B), “if a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b), the stay under (a) shall not go into effect upon the filing of the later case ….” By virtue of § 362(c)(4)(A), the later-filed bankruptcy by the owner did not implement the automatic stay. As a result, the plaintiff moved for an order affirming that title had vested in the plaintiff absolutely.

Court’s Analysis
The court granted the plaintiff’s motion deeming title vested. In its analysis, the court raised three points. First, it noted that a literal and narrow reading of § 49-15(b) conflicts with the expressed intent of state and federal law. Second, a narrow, conservative construction of § 49-15(b) does not address the problem of repeated bad-faith bankruptcy filings in foreclosure actions identified by both state and federal law. Third, as a matter of statutory construction, the first sentence of § 49-15(b), standing alone, requires resetting of the law days after any filing of a bankruptcy petition before the law days have run. However, the last sentence (which must be read in conjunction with the first sentence) states that in order to move forward with resetting the law days, a mortgagor must file an affidavit affirming that the “automatic stay authorized pursuant to 11 U.S.C. § 362” has been terminated. The first sentence, therefore, contemplates that law days must be reset due to operation of an automatic stay. Thus, if no automatic stay comes into play, the law day will pass.

Author’s Note: Connecticut is a judicial state. Author’s firm represented the plaintiff in the case summarized in this article.


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Oregon: Proof of Standing Clarified in Appellate Ruling

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by John Thomas
McCarthy & Holthus, LLP – USFN Member (Washington)

On February 28, 2018 the Oregon Court of Appeals issued an opinion reversing and remanding the trial court’s summary judgment decision in favor of the foreclosing plaintiff, on the basis that the loan servicer’s declaration in support of its motion for summary judgment did not establish that the plaintiff was the holder of the note at the time that the judicial foreclosure was initiated (as it contained inadmissible hearsay on that point). [U.S. Bank National Association, as Trustee for the Structured Asset Investment Loan Trust, 2005-10 v. McCoy, 290 Or. App. 525 (2018)].

Generally, to have standing, a loan beneficiary seeking to foreclose judicially must hold the note (negotiable instrument) at the time that the foreclosure complaint is filed. Although the servicer’s summary judgment declaration in McCoy asserted that “[Plaintiff] was the holder at the time this foreclosure action was initiated and remains the holder of the Note and beneficiary of the Deed of Trust,” the borrower moved to strike the testimony as inadmissible hearsay. In agreeing with the borrower, the Court of Appeals observed that the servicer’s declaration did not establish that the witness had personal knowledge as to the whereabouts of the note, nor was there a business record accompanying the declaration specific to the possession of the note.

As a result of McCoy, servicers should anticipate more challenges to foreclosures from borrowers (and potentially judges) where a servicer’s affidavit filed in support of a dispositive motion for entry of judgement does not adequately demonstrate either that the witness has personal knowledge of the possession of the note at the time the foreclosure was filed, or does not include a record of the collateral file whereabouts (containing the promissory note) attached to the declaration as an exhibit (such as a screen printout).

Servicers should expect a more thorough declaration for execution along these lines from default counsel.

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CFPB Issues Final Rule re Bankruptcy Periodic Statements

Posted By Rachel Ramirez, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

 

by USFN Staff

The Consumer Financial Protection Bureau (CFPB or Bureau) has issued a final rule on the timing requirements for bankruptcy periodic statements. According to the CFPB: “The final rule gives mortgage servicers more latitude in providing periodic statements to consumers entering or exiting bankruptcy, as required by the Bureau’s 2016 mortgage servicing rule.”

Excerpted directly from the March 8, 2018 CFPB release, “[t]he Truth in Lending Act requires mortgage servicers to provide periodic statements to borrowers, and the Bureau has developed sample forms for servicers to use. The 2016 mortgage servicing rule requires that servicers send modified periodic statements or coupon books to certain consumers in bankruptcy starting April 19, 2018. The rule also addressed the timing for servicers to transition to providing or ceasing to provide modified periodic statements to consumers entering or exiting bankruptcy. After issuing the rule, however, the Bureau learned that certain technical aspects of the timing of this transition may create unintended challenges and be subject to different legal interpretations. In October 2017, the Bureau sought public comment on a proposed rule that would provide greater certainty to help servicers comply. Today the CFPB is finalizing that proposed rule. Specifically, the final rule provides a clear single-statement exemption for servicers to make the transition, superseding the single-billing-cycle exemption included in the 2016 rule.

The effective date for the rule is April 19, 2018, the same date that the other sections of the 2016 rule relating to bankruptcy-specific periodic statements and coupon books become effective.”

 

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Connecticut: Appellate Court Holds that Failure to Schedule an Asset on Bankruptcy Schedules Strips Debtor of Standing to Prosecute

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Linda J. St. Pierre
McCalla Raymer Leibert Pierce LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

A decision was rendered in Beck and Beck, LLC v. Costello, AC 39034 (Conn. App. Ct. 2017), which held that the debtor in a Chapter 7 case lacked standing to bring amended counterclaims and cross claims against the plaintiff because of a failure to properly list the counterclaims and cross claims on his bankruptcy petition.

Background
This decision stems from an action brought in the state superior court against the debtor seeking unpaid legal fees. During the pendency of that case, the debtor filed an answer, a special defense, and a four-count counterclaim alleging breach of contract, breach of the implied covenant of good faith and fair dealing, professional malpractice, and violation of the Connecticut Unfair Trade Practices Act. The plaintiff in that action then filed a motion to strike (due to legal insufficiency), which was granted. The debtor proceeded to file amended counterclaims and cross claims that were essentially identical to the original ones. These were also stricken at the request of the plaintiff, on the same grounds. The debtor appealed that decision.

Bankruptcy Court
During the pendency of the state court appeal, the debtor filed a voluntary Chapter 7 petition. He checked “none” on Schedule B where the form asked for a description of “[o]ther contingent and unliquidated claims of every nature, including counterclaims of the debtor.” The bankruptcy trustee issued a report of no distribution, determining that there was no property available for distribution, and the bankruptcy case was subsequently closed.

State Superior Court
Prior to oral argument on the appeal, the plaintiff filed a motion to dismiss the debtor’s counterclaims on the basis that the claims had not been abandoned by the Chapter 7 trustee and, therefore, remained property of the estate — the real party in interest as to the claims. The appellate court remanded that issue back to the superior court for a decision on standing. The trial court, upon the filing of a motion to dismiss by the plaintiff on the same standing arguments, granted the motion to dismiss, determining that the debtor did not have standing because the bankruptcy trustee had not abandoned the counterclaims and cross claims. This appeal followed.

State Appellate Review
During his appeal, the debtor contended that the bankruptcy trustee abandoned the counterclaims and cross claims when she filed her report of no distribution. The plaintiff countered that the trustee never abandoned those claims because the bankruptcy trustee was not made aware of the counterclaims and cross claims that the defendant had pending against the plaintiff.

The appellate court held in favor of the plaintiff, stating “that upon the filing of a bankruptcy petition, all prepetition causes of action become the property of the bankruptcy estate [citation omitted]; and that in order to revest in the debtor through abandonment, the assets must be properly scheduled. … Because the defendant failed to include the counterclaims and cross claims on his schedule B—personal property form, we conclude that the bankruptcy estate owns the defendant’s amended counterclaims and cross claims. … Accordingly, the [trial] court correctly determined that the defendant lacks the requisite standing to bring the amended counterclaims and cross claims against the plaintiff and counterclaim defendant. The judgment is affirmed.”

Closing
This decision provides a powerful argument to creditors who face post-bankruptcy dilatory and costly litigation.

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Kansas: Court of Appeals Reaffirms Need to Prove Standing at “First Legal Filing”

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

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

Kallevig Decision (April 2017)
In April 2017 the Kansas Supreme Court made a significant and dramatic ruling that the plaintiff in a foreclosure action must prove its standing at the filing of any petition to foreclose mortgage (also referred to as a “first legal filing”). See FV-I, Inc. v. Kallevig, 306 Kan. 204 (2017).

In summation, Kallevig found: (1) under the Uniform Commercial Code, as “the holder of the instrument,” a plaintiff must show that the note was made payable to the plaintiff or was endorsed in blank and that the plaintiff was in possession of the note; and (2) “either in the pleadings, upon motion for summary judgment, or at trial [the plaintiff must demonstrate] that it was in possession of the note with enforcement rights at the time it filed the foreclosure action,” and that a lack of standing cannot be cured by a post-petition assignment granting enforcement rights in the note.

Dixon Decision (September 2017)
More recently, in Deutsche Bank National Trust Co. (as Indenture Trustee) v. Dixon, 2017 Kan. App. Unpub. LEXIS 834 (Kan. Ct. App. 2017), the Kansas Court of Appeals bolstered the notion that it is in a foreclosing plaintiff’s best interest to prove standing prior to the initiation of a foreclosure action via a properly endorsed note.

Dixon involved an assertion from the borrower that the plaintiff lacked standing to bring a 2012 foreclosure action. The borrower’s argument was “that the allonge to the note was not attached to the note when the endorsement was executed, rendering the endorsement ineffective in creating a bearer instrument in the hands of [Deutsche Bank National Trust Company].”

The complex procedural background involves a first foreclosure action that was filed in 2007 by a predecessor in interest to the plaintiff in the second foreclosure action. (Standing in this subsequent foreclosure action is at the center of the 2017 Dixon decision discussed in this article.) After a transfer of the loan, and issues regarding inconsistencies as to the actual owner of the note, the first foreclosure action was ultimately dismissed by the district court. In any event, when the second foreclosure action was filed in 2012, the petition to foreclose attached a copy of the promissory note with an allonge endorsed in blank.

In this second foreclosure action, the borrower relied on several cases in support of his argument that there was no evidence that the allonge was actually affixed to the note, specifically:


In re Shapoval, 441 B.R. 392 (Bankr. D. Mass. 2010), involving a Massachusetts bankruptcy court requiring additional evidence as to the bank’s standing to file a claim in the debtor’s bankruptcy case where the bank submitted a copy of the note without any endorsement and, later, an unattached allonge that contained an endorsement in blank.

Guzman v. Deutsche Bank National Trust Co., 179 So. 3d 543 (Fla. Dist. App. 2015), in which the Florida District Court of Appeals held that the bank lacked standing because it did not provide any evidence that the endorsements predated the filing of the initial petition, and standing could not be established by presenting an undated allonge after the proceeding commenced.

U.S. Bank Natl. v. George, 50 N.E.3d 1049 (Ohio App. 2015), where the copy of the note attached to an affidavit (intended to cure a break in the chain of endorsements giving U.S. Bank standing) did not actually contain any endorsement to U.S. Bank. Thus, because there was no unbroken chain of endorsements from the original lender to U.S. Bank, U.S. Bank was not entitled to a summary judgment of foreclosure.


In Dixon, the appellate court distinguished the matter before it from these three cases due to the fact that the plaintiff attached a copy of the note with an attached allonge, endorsed in blank, at the time it filed the subject foreclosure action, as well as with its summary judgment motion. In further support of its decision, the court went on to explain that the rationale for requiring an endorsement or allonge attached to the note is to avoid fraud and to promote the general “policy of providing a traceable chain of title, thereby promoting the free and unimpeded negotiability of instruments.”

Assertions that the plaintiff in Dixon had “unclean hands” and that dismissal of a number of the borrower’s counterclaims was improper were also rejected by the appellate court, but are outside the scope of this article. The district court’s decision granting summary judgment in favor of the plaintiff-bank was affirmed.

Conclusion
The takeaway from the Dixon decision is that, in Kansas, the best practice for establishing standing to bring a foreclosure action is to be able to demonstrate that the plaintiff was in possession of the properly endorsed note (whether special or in blank) and that the plaintiff is the of-record assignee of the mortgage — as of the date of filing the foreclosure petition.

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Florida: State Court Ruling that Standing is Not Transferable (After Suit is Filed) is Reversed by Appellate Court

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

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

A Florida appellate court reversed a final judgment, which had been entered in favor of a borrower in a foreclosure action based on the bank’s alleged lack of standing. [US Bank, NA as Legal Title Trustee for Truman 2012 SC2 Title Trust v. Glicken, 2017 Fla. App. LEXIS 15541 (Fla. 5th DCA Oct. 27, 2017).]

Background
The original plaintiff (Wells Fargo) filed a one-count foreclosure complaint against the borrower; copies of the note, allonge, and mortgage were attached to the complaint. The allonge attached to the note (and the complaint) contained a blank indorsement from the original lender. While the foreclosure was pending, Wells Fargo “assigned the mortgage and transferred possession of the note to US Bank.” The lower court entered an order substituting US Bank as the party plaintiff. US Bank filed the original note, allonge, and mortgage with the trial court. The note and allonge were identical to the copies attached to the complaint. The case proceeded to trial and, at the close of evidence, the borrower sought an involuntary dismissal of the case, asserting that US Bank lacked standing.

The defendant contended that US Bank lacked standing at the time of trial because no evidence had been admitted showing that Wells Fargo assigned the note, not just the mortgage, to US Bank. The lower court agreed (to the extent that it found US Bank lacked standing) and dismissed the bank’s foreclosure, holding:


“Standing is not transferrable and US Bank was not the holder of the note as of the date of the filing. It wasn’t the attorney enact [sic] of the—Wells Fargo. It wasn’t a successor in interest, it wasn’t purchased by, there was no way in which the two entities became one entity. There are a number of ways in which this happens, it evolves [sic] in a variety of lawsuits we see. In this case, you cannot transfer by selling the note. You cannot transfer standing. My ruling here is for the defendant.”


The lower court entered a final judgment in favor of the borrower, and an appeal on behalf of US Bank was filed in the Fifth District Court of Appeals (Fifth DCA).

Appellate Review
The Fifth DCA reversed the ruling, explaining that the lower court erred in its findings regarding standing. The appellate court pointed out that the note is a negotiable instrument and, once indorsed in blank, it can be transferred by possession alone; neither an assignment of the note nor evidence of an assignment is necessary if a party has actual possession of the original, endorsed note. The Fifth DCA concluded that US Bank presented sufficient evidence of its standing to foreclose when it attached the note and allonge with a blank indorsement to the foreclosure complaint, and then proffered the identical note and allonge at trial.

As stated in the appellate court’s decision, “When the note with an undated blank indorsement has been attached to the original complaint, this is sufficient to prove standing provided that the plaintiff produces the original note at trial or files it with the trial court with the same indorsement and there are no subsequent contradictory indorsements.”

Editor’s Note: The author’s firm represented the appellant, US Bank, NA as Legal Title Trustee for Truman 2012 SC2 Title Trust, in the subject case.

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Connecticut: Appellate Court Affirms Trial Court’s Order for Borrowers to Reimburse Future Tax & Insurance Advances by Lender

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

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

The Connecticut appellate decision in JPMorgan Chase Bank, N.A. v. Essaghof, 177 Conn. App. 144 (Oct. 10, 2017), as well as the strong language used in that decision, is extremely positive for foreclosing lenders — and may have application in other equitable judicial foreclosure jurisdictions. The Essaghof foreclosure action began in early 2009 and was heavily litigated through trial, concluding in July 2015, during which time the lender expended in excess of $330,000 for real estate taxes and homeowner’s insurance.

Trial Court Grants Equitable Relief
After losing at trial and in their attempts for a reversal at the trial court level, the borrowers took an appeal in December 2015. In response to the mounting costs caused by the borrowers’ delays, the lender brought a motion for equitable relief, requesting that the trial court order the borrowers to reimburse the lender for all future tax and insurance advances. In February 2016 the trial court granted that motion, ruling that the obligation to maintain taxes and insurance is not an issue of the foreclosure, and that it would not be affected by the trial court and appellate litigation. The borrowers amended their appeal to challenge the trial court’s authority to enter the equitable order.

Appellate Analysis
After a review of the authority granted trial courts to “examine all relevant factors to ensure that complete justice is done,” the appellate court upheld both the trial court’s authority to make the ruling and the ruling itself. In one of the strongest statements in recent years, the appellate court eviscerated the borrower’s claims and explicitly confirmed for other trial courts that they, too, are empowered to take such actions when they believe it is warranted. Specifically, the court stated:


“We cannot conceive of any abuse of discretion on the part of the trial court. The court understandably was concerned that, absent an order requiring the defendants to pay for their own property taxes and homeowner’s insurance, they would experience a windfall because they would be allowed to live on their property for free at the plaintiff’s expense until the conclusion of the foreclosure proceedings. Such a result is plainly within the realm of issues that the court’s equitable powers were designed to address. … The court did not abuse its discretion in determining that a balancing of the equities justified ordering the defendants to pay for expenses that they would have been required to pay no matter the outcome of this case.” Id. at 162.


The Takeaway
One of the larger concerns faced by foreclosing lenders during lengthy litigation is the expense incurred through continued advances. The Connecticut Appellate Court confirmed that a trial court may require that those costs be borne by a borrower. The borrowers have petitioned the Connecticut Supreme Court for certification.

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Circuit Split Deepens: Tenth Circuit Opines that Colorado Nonjudicial Foreclosure Activity is Not Debt Collection under the FDCPA

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Holly Shilliday and Andrew Boylan
McCarthy & Holthus LLP – USFN Member (Washington)

In a published opinion — and adding to the current split among the circuits — the Tenth Circuit Court of Appeals has ruled that the Fair Debt Collection Practices Act (FDCPA), set forth in 15 U.S.C. §§ 1692 – 1692p, does not apply to nonjudicial foreclosure proceedings in the state of Colorado. Obduskey v. Wells Fargo Bank, 2018 U.S. App. Lexis 1275 (10th Cir., Jan. 19, 2018). In a win for the industry, the court ultimately sided with the Bank (and these authors’ law firm McCarthy & Holthus) in ruling that the enforcement of a security interest, by way of a nonjudicial foreclosure proceeding, does not constitute debt collection under the FDCPA.

Background
The borrower in Obduskey defaulted on a loan secured by his personal residence. Beginning in 2009, the Bank initiated several nonjudicial foreclosures, none of which was completed. The Bank retained the Law Firm in 2014 to pursue a nonjudicial foreclosure. The Law Firm sent a debt validation letter to the borrower pursuant to 15 U.S.C. § 1692g, wherein it represented that it was retained to initiate foreclosure, stated that it “may be a debt collector,” and referenced the content under 15 U.S.C. § 1692g, including the amount owed to the current creditor, Wells Fargo. The borrower disputed the validity of the debt and alleged that the Law Firm initiated foreclosure before verifying the debt as required under the FDCPA.

The borrower’s complaint included several claims against the Bank and the Law Firm, including one for violation of the FDCPA. The district court dismissed the claims, with prejudice, upon separate motions filed by the Bank and the Law Firm. Regarding the FDCPA claim, the district court ruled that Wells Fargo was not liable because it began servicing the loan prior to default. The district court further concluded that the Law Firm was not a “debt collector” under the FDCPA because “foreclosure proceedings are not the collection of a debt.” The borrower appealed the trial court’s dismissal order.

After the parties fully briefed the case, the Tenth Circuit asked for supplemental briefing regarding whether the FDCPA applies to nonjudicial foreclosure activity. The Tenth Circuit had previously declined to address this issue due to pleading deficiencies in the complaint. [See Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231, 1239 (10th Cir. 2013); Maynard v. Cannon, 401 F. App’x 389, 395 (10th Cir. 2010).] Despite similar issues with the borrower’s complaint in this case, the court recognized the need for clarity on the issue and agreed to hear the case.

Legal Analysis
The Tenth Circuit affirmed the lower court’s dismissal order. Obduskey at *14. First, since Wells Fargo began servicing the loan before it went into default, the court agreed that the Bank was not a debt collector under 15 U.S.C. § 1692(a)(6)(F). Id. at *4-5. Next, the court examined the circuit split on whether the FDCPA applies to nonjudicial foreclosures. Obduskey at *6. Courts across the country have long been divided on this contentious issue.

The Fourth, Fifth, and Sixth Circuits (as well as the Colorado Supreme Court) have found that nonjudicial foreclosures do constitute debt collection under the FDCPA. [Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006); Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006); Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013); Shapiro & Meinhold v. Zartman, 823 P.2d 120 (Colo. 1992) (en banc).]

The Ninth Circuit reached the opposite conclusion in Ho v. ReconTrust Co., 858 F.3d 568 (9th Cir. 2016). The Ho case was closely watched, highly publicized, and saw amicus briefs from both sides of the industry (including the CFPB). Ultimately, the Ninth Circuit found that nonjudicial foreclosures do not qualify as debt collection under the federal act. In Ho, the appellate court affirmed a leading district court case in its jurisdiction, which held that “foreclosing on a trust deed is an entirely different path” than “collecting funds from a debtor.” [Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002)]. The Ninth Circuit further reasoned, in Ho, that “Following a trustee’s sale, the trustee collects money from the home’s purchaser, not from the original borrower. Because the money collected from a trustee’s sale is not money owed by a consumer, it isn’t ‘debt’ as defined by the FDCPA.”

Relying on Ho and the plain language of the statute, the Tenth Circuit concluded that the FDCPA applies to the collection of debt (i.e., money) and not to the enforcement of a security interest. Obduskey at *7-8. A nonjudicial foreclosure is the enforcement of a security interest and is not an attempt to collect money from a debtor. Id., citing Ho at 572 (quoting 15 U.S.C. § 1692a(5)).

The Tenth Circuit’s ruling hinged on the “critical differences” between nonjudicial and judicial foreclosures, including whether a deficiency action is being pursued. Obduskey at *8. Pursuant to Colorado law, a separate lawsuit must be filed in order to obtain a deficiency judgment. Id., citing C.R.S. § 38-38-106(6) (2017) and Bank of America v. Kosovich, 878 P.2d 65, 66 (Colo. App. 1994). The court also agreed with the policy considerations raised by Wells Fargo and the Law Firm, including potential conflicts between state and federal law. Obduskey at * 10-11. To avoid casting too wide of a net, the court did limit its holding to nonjudicial foreclosure proceedings and to the facts of the case at hand, finding that “[the Law Firm] did not demand payment nor use foreclosure as a threat to elicit payment.” Id. at *12-13. “It sent only one letter notifying [the borrower] that it was hired to commence foreclosure proceedings.”

Conclusion
Given the split among the circuits, the issue of the applicability of the FDCPA to nonjudicial foreclosures may be ripe for consideration by the U.S. Supreme Court.

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District Court Reverses Bankruptcy Court’s Sanction of Mortgage Servicer for Including Fees on Monthly Statements without First Filing Required Notices

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Joel W. Giddens
Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

On December 19, 2017 the U.S. District Court for Vermont reversed a $375,000 sanction. The sanction had been imposed by the chief bankruptcy judge for the District of Vermont on a mortgage servicer for billing fees to debtors without first filing the required notices under Federal Rule of Bankruptcy Procedure (FRBP) 3002.1(c) and for violation of bankruptcy court orders. The bankruptcy court imposed sanctions following a finding of contempt in three Chapter 13 bankruptcy cases on motions filed by the standing Chapter 13 trustee against the servicer. The request by the trustee asking the bankruptcy court to find the servicer in contempt was based on FRBP 3002.1(i)’s “failure to notify” section and for violation of “deem current” orders entered at the completion of two of the Chapter 13 cases.

Background in Bankruptcy Court
FRBP 3002.1, effective December 1, 2011, requires the holder of a claim secured by the debtor’s principal residence to file a detailed notice setting forth fees, expenses, or charges it seeks to recover from the debtor within 180 days after the expenditure is incurred. FRBP 3002.1(i) provides a bankruptcy judge with the authority to take certain actions if the holder fails to disclose a fee or charge, including: precluding the holder from presenting the omitted information — in any form — as evidence in any contested matter or adversary proceeding in the case (unless the failure was substantially justified or harmless); or awarding “other appropriate relief,” including reasonable expenses and attorney fees caused by the failure.

The bankruptcy court imposed a $75,000 sanction ($25,000 in each of the three cases) pursuant to FRBP 3002.1(i) for the servicer’s inclusion of property inspection fees, NSF fees, and late charges on monthly billing statements sent to the debtors over a 25-month period during their bankruptcy plans that had not been included on a FRBP 3002.1(c) notice, and were more than 180 days old. The fees included on the billing statements were fairly minimal (a total of $258.75 in one case; $86.25 in the second case; and $317.00 in the third case); the servicer admitted that they had been included in violation of the bankruptcy rule. In one of the cases, the servicer had already been sanctioned for not applying post-petition payments pursuant to the confirmed plan and had agreed to remediate its practices to comply with local Vermont bankruptcy rules. The imposition of the $300,000 sanction related to the same fees and late charges on the monthly statements and were on statements sent out to the debtors within days after the entry of the “deem current“ orders.

District Court’s Review
The bankruptcy court imposed the sanctions not only pursuant to FRBP 3002.1(i) but also pursuant to 11 U.S.C § 105(a) that provides bankruptcy judges with the authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the bankruptcy code, and pursuant to its “inherent authority.” The district court analyzed each basis used by the bankruptcy court to impose sanctions and concluded that the bankruptcy court had extended its authority beyond the bounds of the bankruptcy rules, the bankruptcy code, procedural due process, and constitutional protections in contempt proceedings.

First, the district court looked at whether FRBP 3002.1(i) authorized the imposition of punitive damages. The Chapter 13 trustee argued that the “plain language” of the rule embodies a grant of broad authority to craft appropriate remedies and that the sanction imposed by the bankruptcy court fell within the scope of that authority. The trustee pointed out that the power to impose monetary sanctions is necessary to deter mortgage creditors from attempting to collect unauthorized fees and charges, and to avoid the “absurd” result of mortgage creditors facing no negative consequences for violating the rule. The mortgage servicer contended that the history of FRBP 3002.1 (as reflected in meeting minutes of the Advisory Committee on Bankruptcy Rules) demonstrated that, in addition to attorney fees and costs, the rules’ drafters intended the scope of “other appropriate relief” to be limited to discretionary exclusion of information that should have been disclosed and did not indicate an intent to provide a basis, by itself, for disallowance of a claim entirely. The total amount of the sanction, the servicer pointed out, was more than the cumulative amount of its claims, which would be tantamount to their disallowance. That the sanction was ordered by the bankruptcy court to be paid to a non-profit legal service provider in Vermont, and that the debtors were not harmed by the servicer’s actions, was additional proof that the sanction was punitive in nature.

The district court found that the analysis of the extent of the bankruptcy court’s authority to impose sanctions under FRBP 3002.1(i) turned on this principle: “that, however broadly the language of [FRBP] 3002.1(i) sweeps, the powers it bestows cannot be without limit. At the absolute minimum, these powers cannot extend beyond the outer bounds of the Bankruptcy Court, as delineated by statute and precedent.” Because the bankruptcy court exceeded the outer bound of its authority under § 105 (as discussed later in the opinion), the district court concluded that the bankruptcy court also went beyond the scope of FRBP 3002.1.

The district court then turned to the sanction imposed by the bankruptcy court pursuant to 11 U.S.C § 105(a) and the bankruptcy court’s inherent authority. The court acknowledged that there was no debate that bankruptcy courts, like district courts, are vested with inherent authority to craft orders necessary to carry out their mission and may exercise inherent authority to respond to violations of its orders. The court further acknowledged that there was a broad consensus among circuit courts that § 105 empowered bankruptcy courts to adjudicate civil contempt and impose compensatory sanctions in a wide variety of factual and procedural contexts. The court noted, however, that there was a deep division among the appellate courts as to whether bankruptcy courts have the power to punish criminal contempt or impose punitive sanctions. There was no controlling authority in the Second Circuit. (Connecticut, New York, and Vermont comprise the Second Circuit.)

A Look to Other Circuits
After a review of the evolution of the contempt authority of bankruptcy courts and decisions in other circuits, the district court was most persuaded by the decisions that restrict the authority of bankruptcy courts to impose punitive damages. In the case of In re Dyer, 322 F.3d 1178 (9th Cir. 2003), the Ninth Circuit held that neither § 105 nor the bankruptcy court’s inherent authority were proper authority for imposition of “serious” punitive damages — specifically pointing out that § 105 contains no explicit authority to award such damages; rather, only those remedies “necessary” to enforce the bankruptcy code. Civil contempt sanctions (i.e., compensatory damages) are adequate to meet that goal, rendering serious punitive damages unnecessary. While the Dyer court declined to set an amount that rose to “serious” punitive damages, the $50,000 award at issue in that case was sufficient to fall outside of the authority conferred by § 105. The Dyer court further noted that bankruptcy courts are ill-equipped to provide the procedural protections that due process of law requires before the imposition of punishment, and that the administration of punishment by an Article I bankruptcy judge raises constitutional concerns.

In the same vein, the district court found persuasive the Fifth Circuit’s holding in In re Hipp, 895 F.2d 1503 (5th 1990). There, due to the lack of tenure and compensation protections afforded Article III judges, it was constitutionally impermissible for bankruptcy courts to exercise criminal contempt powers.

Finally, the district court found that the narrower construction of the bankruptcy court’s statutory and inherent punitive sanction was consistent with the direction of Second Circuit precedent addressing the scope of bankruptcy contempt authority in other contexts.

Another Appeal: Awaiting Second Circuit’s Ruling
In the end, the district court suggested that 11 U.S.C. § 105 makes it permissible for a bankruptcy court to enter a preliminary finding of criminal contempt with the preparation of proposed findings of fact and conclusions of law. This would allow the offending party an opportunity to make a record of objections but leave the adjudication of the objections, and entry of a final order of contempt, to the district court. Whether bankruptcy courts will follow this suggested procedure remains to be seen. While persuasive authority, the district court’s opinion is not binding precedent and is now on appeal to the Second Circuit Court of Appeals.

The district court’s opinion can be found at PHH Mortgage Corporation v. Sensenich, 2017 U.S. Dist. LEXUS 207801 (D. Vt. 2017).

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