By Linda J. St. Pierre, Esq.

McCalla Raymer Leibert Pierce, LLC *

USFN Member (AL, CA, CT, FL, GA, IL, KY, MS, NV, NJ, NY, OH, OR, TC, WA)

The United States Bankruptcy Court for the District of Connecticut in the Chapter 7 case of In re Elaine M. Cole (Case# 21-21071) held on April 15, 2022, that Connecticut’s Amended Homestead Exemption applies retroactively, thus allowing a Chapter 7 debtor to claim the increased $250,000.00 exemption against claims that arose prior to the effective date of the change in the statute. 

Introduction:

Under Connecticut state law, a debtor may claim a homestead exemption in property that is owner occupied and used as a primary residence.  See Conn. Gen. Stat. §52-352a(5)  On July 12, 2021, Governor Ned Lamont signed Public Act 21-161 (“Act”) into law that amended Connecticut’s homestead exemption by repealing the prior version of the statute, renumbering its provisions, and increasing the exemption from $75,000.00 to $250,000.00 effective October 1, 2021.  See Conn. Gen. Stat. §52-352(b)(21) (“Amended Homestead Exemption”).

Factual Background:

On November 22, 2021, Elaine M. Cole (“debtor”) filed a petition under Chapter 7 (Case# 21-21071) wherein the debtor claimed the Amended Homestead Exemption of $250,000.00 on her claimed residential property located in Mystic, CT (“Property”).  On December 2, 2021, by further amendment on December 27, 2021, the Chapter 7 trustee filed an objection to the debtor’s homestead exemption claiming that although the Chapter 7 case was filed after the amendment of the homestead exemption, the debtor was ineligible to claim the increased exemption because the debtor’s unsecured creditor claims arose prior to the effective date in the change of the statute.  The trustee further claimed that the property was not the debtor’s residence at the time of the Chapter 7 filing.  Lastly, the trustee argued applying the Amended Homestead Exemption would violate the United States Constitution, Article 1 §10 (the Contracts Clause).

Court’s Analysis and Ruling:

The court first turned to whether the p0roperty was the debtor’s residence at the time of her Chapter 7 filing because if the answer was yes, then the trustee’s objection to the debtor’s Amended Homestead Exemption must be sustained which ends the court’s inquiry.  If the answer is no, then the court must determine whether the Amended Homestead Exemption applies retroactively. 

After conducting an analysis of the facts and testimony surrounding the residential status of the property at the time of the debtor’s petition filing, the court found the trustee had failed to satisfy his burden in demonstrating the debtor’s property was not the residence of the debtor at the time of her petition filing.  With that affirmative answer, the court then proceeded to determine whether the Amended Homestead Exemption applied retroactively, thus enabling the debtor the benefit of the increased exemption.

In its second analysis, the court conducted an in-depth review and analysis of Connecticut’s original 1993 enactment of the homestead exemption (“Original Homestead Exemption”) against the Amended Homestead Exemption.  The court noted that while the 1993 Act that passed the Original Homestead Exemption expressly provided within Clause 3 of that statute, “This act shall take effective October 1, 1993, and shall be applicable to any lien for any obligation or claim arising on or after that date,” the court noted the Amended Homestead Exemption made no clause reference to its applicability. The court further cited David v. Forman Sch., 54 Conn. APP. 841, 853-54 (1999) (citing State v. Magnano, 204 Conn. 259, 284 (1987) “Whether to apply a statute retroactively or prospectively depends on the intent of the legislature in enacting the statute.” The court further cited several Connecticut decisions surrounding the applicability of the Original Homestead Exemption. Ultimately, the court stated that unlike the original Act that enacted the Original Homestead Exemption, which expressly limited its applicability “to any lien for any obligation or claim arising on or after [its effective] date,” the 2021 Amended Homestead Exemption contained no clause addressing whether it applies to pre-enactment debts. The court stated it would refrain from reading an anti-retroactivity provision into the 2021 Act given there was no clear expression of legislative intent to the contrary. 

Lastly, in response to the trustee’s argument that applying the Amended Homestead Exemption would violate the United States Constitution, Article 1 §10 (the Contracts Clause), the court further stated that the Amended Homestead Exemption “while allegedly modifying the expectations of the parties, does not substantially interfere with the parties’ reasonable expectations under a contract……and does no more to the parties’ expectations than if the debtor took a second mortgage out on the property, thereby significantly reducing the amount of equity available to creditors.” 

The decision in this case arguably impairs the rights of those creditors who held liens prior to the enactment of the Amended Homestead Exemption.  Those creditors would have assumed they were entitled to any equity over and above the existing $75,000.00 homestead exemption only to now realize that they are only entitled to any equity over and above the new $250,000.00 exemption. 

@Copyright 2022

June 2022 e-Update

By James F. Lewin, Esq.

The Mortgage Law Firm, PLC *

USFN Member (AZ, CA, HI, OK, OR, WA)

A recent California Supreme Court ruling resolves an issue which has divided the lower appellate divisions and federal district courts in California for almost a decade. On March 7, 2022, in Sheen v. Wells Fargo Bank, N.A., 12 Cal. 5th 905, 2022 WL 664722 (Cal. 2022), the California Supreme Court expressly disapproved four lower appellate court decisions to the contrary and held that, when a borrower requests a loan modification, a lender owes no tort duty under general negligence principles to “process, review and respond carefully and completely to” the borrower’s application.

In Sheen, the borrower, under a second deed of trust, sued Wells Fargo Bank, N.A. (“Wells Fargo”) for negligence. Several years after purchasing his home (which purchase was secured by a first trust deed), the borrower used the home as collateral for two junior loans he took from Wells Fargo secured by second and third trust deeds. The borrower later suffered financial setbacks and missed payments on these junior loans. He submitted applications to Wells Fargo to modify the loans, but Wells Fargo did not respond. Instead, it sent letters informing him of the actions it might take because of the delinquency of his accounts. The letters did not specifically mention foreclosure. The borrower alleged that, because Wells Fargo did not provide him with a written determination regarding his eligibility for modification of the loans prior to sending him the letters, he believed the letters meant the loans had been modified such that they had become unsecured loans and his house could never be sold at a foreclosure auction, even if said loans were in default. Eventually, Wells Fargo sold the borrower’s second trust deed loan. In 2014, four years later, the new owner of the second trust deed loan foreclosed, and the borrower sued Wells Fargo.

Specifically, the borrower asserted a negligence claim against Wells Fargo, alleging that the bank owed the borrower a duty of care to process, review and respond carefully and completely to the loan modification applications he submitted.  The borrower alleged that Wells Fargo breached this duty, causing him to “forgo alternatives to foreclosure,” and hence Wells Fargo should be liable for monetary damages relating to the loss, including the value of the home, the hotel and storage costs he incurred when he had to vacate the property, and the damage to his credit rating. Wells Fargo filed a demurrer in the trial court, arguing that it owed the borrower no such duty. The court of appeal affirmed the trial court’s decision to sustain the demurrer, concluding that the relevant authorities “decisively weigh against extending tort duties into mortgage modification negotiations,” but noted “the issue of whether a tort duty exists for mortgage modification has divided California courts for years.”  The borrower appealed to the Supreme Court.

No Duty Pursuant to Statute

Initially, the Supreme Court (“Court”) noted that the borrower failed to identify any statute or regulation that required Wells Fargo to treat his loan modification applications with due care.  California’s Homeowner Bill of Rights (“HOBR”) and federal law apply only to first lien mortgage modifications, and California’s general negligence statute, Civil Code § 1714, does not impose a general duty to avoid purely economic losses.

No Duty Under Common Law: The Economic Loss Rule

Next, the Court found that because the borrower’s claim arose from, and was not independent of, the mortgage contract, it was barred by the “economic loss rule” which provides that there is no recovery in tort for negligently inflicted “purely economic losses,” meaning financial harm unaccompanied by physical or property damage.

“Plaintiff and Wells Fargo did not agree that should plaintiff default and attempt to renegotiate his loan by submitting a modification application, Wells Fargo would “process, review and respond carefully and completely to the ... applications Plaintiff submitted,” and could foreclose only after discharging such obligations. Sheen, 2022 WL 664722 at *7. To impose a tort duty in such circumstances would go further than creating obligations unnegotiated or agreed to by the parties; it would dictate terms that are contrary to the parties’ allocation of rights and responsibilities. The proposed duty would impede Wells Fargo’s right to foreclose by permitting foreclosure only after Wells Fargo discharges a tort duty to “process, review and respond carefully and completely to [a borrower’s] loan modification application[s].”

The Court further noted that California generally follows the judicially created economic loss rule within the lender-borrower context citing the “well-established principle of state law” from Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096, 283 Cal.Rptr. 53: “A financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” Moreover, citing cases from other jurisdictions, the Court noted that the application of the economic loss rule was consistent with well-reasoned decisions from other federal and state courts, including the views of other state supreme courts that have addressed the issue.

The Court further concluded no duty could be imposed through the use of the factors articulated in the Biakanja v. Irving case. See Biakania v. Irving, 49 Cal. 2d 647, 650 (Cal. 1958). Biakanja makes clear that its multifactor test finds application only when the plaintiff is a “third person not in privity” with the defendant. “Biakanja does not apply when the plaintiff and defendant are in contractual privity for purposes of the suit at hand.”

Finally, the Court distinguished the borrower’s claim from those in which tort recovery has been allowed despite the existence of a contract between the parties such as “insurance contracts” and “professional services contracts.”

Legislative Role

Deferring to the expertise of the legislature, “In sum, the Legislature is better situated than we are to tackle the “significant policy judgments affecting social policies and commercial relationships implicated in this case,”  the Court expressly declined the borrower’s invitation to

become the first state high court to create a judicial rule imposing a duty on lenders to exercise due care in processing, reviewing and responding to loan modification applications.

Bottom Line

Sheen is not a panacea for all loan modification application claims. The Court expressly acknowledged and left the door open for possible causes of action against servicers for negligent misrepresentation and promissory estoppel in the loan modification context. However, the decision may assist to reduce defense litigation costs for servicers of California loans where borrowers attempt to rely solely on a theory of general negligence when they are unable to plead or prove statutory violations of the HOBR or federal law.

@Copyright 2022

April e-Update

By EmilyBartekoske, Esq.

SouthLaw,P.C. *

USFN Member (IA, KS, MO, NE)

            Most people, myself included, when asked to think about integrating topics of diversity, equity, and inclusion into our workplaces immediately go to a handful of areas: race, gender, physical disability, sexuality, and sexual orientation. In fact, until I was presented with the opportunity to write this article, I can say that I had never given much thought to applying diversity, equity, and inclusion efforts in the workplace to the way people think. That realization came as a surprise, considering that I am a neurodivergent person.

            So what does it mean to be neurodivergent? Neurodivergent is an umbrella term first coined in the 1980’s that embraces the natural range of variation in human brain function and processing.  Essentially, neurodivergent individuals think and process information differently than the average, or neurotypical, person. People are neurodivergent if they have certain developmental, intellectual, learning, or mental health disabilities. Examples of well-known neurodiverse conditions include autism spectrum disorders, dyslexia, dyspraxia, and attention deficit hyperactivity disorder (ADHD).  Some other conditions that can sometimes cause people to be neurodivergent are Tourette syndrome, post-traumatic stress disorder, schizophrenia, and depression.

            While the vast majority of people in corporate America and in the legal profession are neurotypical, the percentages of neurodivergent employees have been increasing. In fact, a 2016 study from the Hazelden Betty Ford Clinic and American Bar Association found that 28% of lawyers suffer from depression, 19% suffer from anxiety, and 12.5% have ADHD.  Additionally, experts typically agree that the number of professionals who are neurodivergent is vastly underreported, as many professionals choose not to disclose their conditions due to fear of reprisal at work or fear of being seen as “weak” or “dumb.” Legally, the conditions that cause neurodivergence are considered disabilities, and thus, affected employees are protected under the Americans with Disabilities Act.

            While there are obviously many conditions that fall under the umbrella of neurodiversity, I want to focus mostly on ADHD, as is it one of the most common conditions that we are likely to see in our neurodiverse employees and coworkers. Furthermore, it’s one of the conditions I am most familiar with, having been diagnosed with ADHD in 2014.

            Let’s talk about what it means to be a neurodivergent person with ADHD in the workplace. First, we must dismiss the stereotype that all people with ADHD are hyper-active and disruptive. While that is one way for ADHD to present in people, there is a second way that ADHD can present which is best summed up as inattentiveness. This includes symptoms such as struggling to pay attention, difficulties with organization, forgetfulness, and being easily distracted. At the core of both presentations of ADHD are difficulties with executive function.

             Executive function is a term used to describe a group of skills that enable humans to plan, focus attention, remember, execute tasks, and multitask. While all of us struggle with these skills sometimes, people with ADHD struggle with these issues daily.  When a neurotypical person is given a newly assigned project at work, they typically will jump right in and get to work, moving fairly easily toward the final product. When a person with ADHD is given a new project, they will often feel paralyzed and unsure of where to begin. They struggle to conceptualize how long things will take, what steps are involved, what outcomes may happen, or how to even imagine what the final product will look like.  The overwhelming uncertainties can be debilitating and can make it impossible to even start the task at hand.  As a result, people with ADHD can be branded as lazy, procrastinators, and even incompetent.  Many professionals with ADHD try to hide their struggles and appear "normal" to avoid such labels, even though doing so creates internal stress, anxiety, and fears of their struggles being discovered.

What is important for both neurodivergent people and employers to understand is that in many ways, people who are neurodivergent actually can be some of the most valuable employees and assets a business can have. Studies have repeatedly shown that as a group, neurodivergent people tend to be diligent, loyal, detail-oriented, and creative problem solvers. The fact that they think differently than most other employees allows them to identify issues that typically go unnoticed. Some benefits that neurodivergent employees can bring to their careers are:

·        Attention to detail: Neurodiverse people excel at zeroing in on details that often go overlooked by others. This can mean finding additional information in documents that might otherwise be missed, or noticing patterns in data that were previously unnoticed.

·        Focus: Struggles to focus and avoid distractions are common for employees with ADHD. However, when someone with ADHD is working with a project or subject matter that interests them, they have the tendency to ‘hyperfocus.’ This can translate to them having a highly focused attention on what they’re doing for a long period of time without being distracted by other things happening around them.

·        Creativity: Studies consistently show that neurodivergent people are more creative on average than neurotypical people. When executive function is working at its best it is difficult to slow down, let thoughts wander freely, and really think about the process. Since neurodivergent people have lower executive function, they are more likely to engage in creative problem-solving and thinking outside of the box.

·        Work well under pressure: Neurodivergent people, especially those with ADHD, are used to completing tasks at the last minute because their executive function often doesn’t allow them to start a task until it absolutely has to be done. While this means that these employees won’t often be handing in projects early, it also means that when there is a crisis or a deadline that would make most people feel frantic, neurodivergent people often are calm and collected in those moments and have the ability to work quickly and efficiently.

With each of these benefits, there of course are potential downfalls. To avoid these, employers should be proactive about communicating with neurodivergent employees and providing accommodations to help these employees succeed. While there is no “one size fits all” when it comes to accommodations, implementing and allowing some simple, common things could make a big difference in the performance of neurodivergent employees. Some examples of accommodations include:

·        Flexible working arrangements: Sometimes an office setting is too distracting for neurodivergent people. Allowing employees to work from home or in their optimal environment will allow them to focus better on the work they are doing.

·        Sensory friendly environments: Many neurodivergent people also are prone to sensory overload. Things like background noise from HVAC systems or the brightness of fluorescent lighting can be very distracting. To accommodate this, employers should try to ensure workplaces are sensory friendly by using neutral colors, soft lighting, and ensuring regular maintenance of mechanical systems in the office.

·        Allowing use of headphones to minimize distractions.

·        Providing blocks of uninterrupted work time: Neurodivergent employees often have trouble getting back on track when they are interrupted in the middle of a task. Providing set times for work with no interruptions from coworkers or phone calls allows employees to work more efficiently.

·        Allow use of fidget devices: Using things such as fidget spinners, stress balls, or similar tools allow neurodivergent people to focus the hyperactive areas of their brains on the device so that the rest of their focus can be on their work.

While this list is far from exhaustive, it is a good place to start for employers who want to create a work environment that is welcoming and inclusive of its neurodivergent employees. In a society that is increasingly valuing diversity and a workforce that is increasingly valuing individuality, right now is the time for employers to be intentional about considering neurodiversity in their business plans and recruitment efforts.

@Copyright 2022

April e-Update

By Michael McKeefery, Esq.; Christianna Kersey Esq.; RichardSolomon, Esq.

Cohn, Goldberg & Deutsch, LLC *

USFN Member (DC, MD)

By Caren Castle, Esq.

The Wolf Firm, A Law Corporation *

USFN Member (CA, ID, OR, WA)

COVID-19 has brought many changes to the default industry, to say the least.  One of the most notable programs to stem from the pandemic and the American Recue Plan Act, is the U.S. Department of Treasury’s Homeowner Assistance Fund (“HAF”) program. This program is an almost $10 billion assistance package to help struggling homeowners who are behind on mortgages and other housing expenses due to the impacts of COVID-19. The program is overseen by the Department of Treasury, but will be administered specifically by states, territories, and tribes.

As of this writing, nearly 30 states, Guam, and Puerto Rico have fully launched HAF programs. Some states have been administering pilot programs while they finalize full program details, and others are still working to get their programs approved and administered. To understand what these programs will entail, let’s look at some specific examples to see the complexity and diversity in each program.

            MARYLAND: The Maryland Department of Housing and Community Development (“MD DHCD”) recently launched its Maryland Homeowner Assistance Fund program (“MD HAF”).  MD HAF assists homeowners in two primary ways.  First, MD HAF provides grants to homeowners experiencing COVID-related financial hardships.  Second, MD HAF offers deferred payment loans to homeowners.  Both programs are intended to assist homeowners in making delinquent mortgage payments and to create feasible repayment plans for loan reinstatement.  MD HAF is treated as a last resort for impacted homeowners who are denied for loss mitigation options normally offered by their mortgage servicers.      

            In general, for a borrower to be eligible for MD HAF assistance, they must have an eligible COVID-19 financial hardship occurring after January 21, 2020.  This requirement includes hardships that began prior to January 21, 2020, but continued after that date. Additionally, to receive MD HAF funds, the loan at issue must relate to a Maryland one-to-four-unit owner-occupied property, and the owner must be the borrower. Furthermore, the delinquent mortgage must have had a principal balance that did not exceed the GSE conforming loan limit at the time of origination.

            The main objective of the MD HAF program is to assist Marylanders in keeping their homes.  To that end, MD DHCD and the Maryland Commissioner of Financial Regulation (the “Commissioner”) expect mortgage servicers to sign up for the program on the MD DHCD website, and  (1) inform borrowers in default who have been denied other options of the existence of the MD HAF program, and of the fact that borrowers can submit a MD HAF application to MD DHCD; (2) reconsider borrowers for applicable loss mitigation options with MD HAF funds included in any further review; and (3) delay the filing of a foreclosure action, to the greatest extent possible, so that defaulted borrowers have sufficient time to apply for and be considered for MD HAF assistance.  According to MD DHCD and the Commissioner, the dual tracking rules set up in the Consumer Financial Protection Bureau (“CFPB”) guidelines, codified at 12 CFR §1024.41, apply once a servicer is advised that a borrower has applied for HAF assistance.  After being notified that a borrower is applying for MD HAF assistance from MD DHCD, servicers are required to wait at least 14 days for completion of a MD HAF application.  If MD HAF funds are approved contingent upon additional loss mitigation offered by the servicer, a servicer must then allow for an additional reasonable period of time for a borrower to complete a loss mitigation application directly with the servicer. 

According to guidance promulgated by MD DHCD and the Commissioner, the following actions are deemed violations of Maryland law and regulations: (1) Requiring a borrower to apply for MD HAF assistance before considering the borrower for other loss mitigation alternatives; (2) Failing to reasonably and timely cooperate in the MD HAF application process after being notified by MD DHCD that a borrower has applied for MD HAF funds more than 37 days prior to a scheduled foreclosure sale; (3) Failing to notify a borrower of existence of the MD HAF program when advising the borrower of any denial of a loss mitigation option; (4) Failing to wait 14 days after notifying the borrower of denial of an option before proceeding with a foreclosure action; (5) Refusing to reconsider a denial for loss mitigation options if the borrower has subsequently been afforded assistance through MD HAF; (6) Filing a notice of intent to foreclosure, filing an order to docket a foreclosure case, or proceeding with a foreclosure sale if the servicer is notified that the borrower has applied for MD HAF assistance more than 37 days prior to a scheduled foreclosure sale; and (7) Refusing to accept MD HAF funds if the servicer would otherwise directly accept those funds from the borrower.

            DISTRICT OF COLUMBIA: A second example is the District of Columbia’s “Pilot Program,” administered by the District of Columbia Department of Housing and Community Development (“DC DHCD”) with $50 million in Homeowner Assistance Funds made available by the U.S. Treasury. To be eligible for the District’s HAF-Pilot, a homeowner must (1) qualify for the program based on income; (2) own a condominium in the District in the following ZIP codes: 20019, 20020, 20024 and 20032; (3) have bought the condominium using a down payment and/or closing cost assistance directly from DC DHCD; and (4) be in arrears on their mortgage or other real property-related payments, such as condominium fees, property taxes, and/or homeowners’ insurance.  It is important to note that funds provided to condominium owners through the pilot program do not have to be paid back; rather, these funds are distributed in the form of a grant.  The primary objective of the District’s HAF pilot program is to assist eligible condominium owners to retain their properties. 

Income limits have been set for the D.C. program.  To be eligible for the pilot program, household income may not exceed either 100% of area median income (“AMI”) or 100% of the U.S. median income, whichever is greater.  DC DHCD has set the AMI for condominiums ranging from one-person condominiums to eight-person condominiums. 

CALIFORNIA: Last but not least, in California, the California Housing Finance Agency (“CalHFA) through its special purpose affiliate, CalHFA Homeowner Relief Corporation (“CalHRC”), is the state administrator of its HAF program.  Funds to be received total $1.055 billion, of which at least 10% is currently being distributed pursuant to the approved program.  Servicers interested in participating in the program must sign an agreement with CalHFA.

The program was designed to assist lower income and socially disadvantaged households and to aid in fully reinstating defaulted mortgages. The goal is to provide these homeowners with a “fresh start.”  The program, in its initial stage, is specifically designed to help those homeowners who were unable to receive other assistance with their delinquency.  Therefore, if a homeowner received a COVID related loan modification, for example, they would not be eligible for the California HAF program.  CalHFA does reserve the right to change its requirements going forward should funds remain available.  The program is designed to not only bring a defaulted mortgage current, but to assist the borrower with education and counseling.

The basic eligibility requirements are as follows:

1.     The homeowner, a natural person, must own and occupy the property as their primary residence and cannot own or occupy another property; and

2.     The homeowner must attest that they have experienced a “Qualified Financial Hardship” after January 21, 2020, and the attestation must describe that hardship. 

a.      Qualified Financial Hardship is defined as a material reduction in income or material increase in living expenses due to the coronavirus pandemic, which either created or increased the risk of mortgage default, foreclosure and/or displacement; and

3.     The original, unpaid principal balance of the mortgage, at the time of origination, cannot be greater than the then GSE conforming loan limit as defined under the Housing and Economic Recovery Act of 2008; and

4.     The homeowner must meet the income eligibility requirements which consists of the cumulative income of all household members; and, that income cannot exceed the area median income as adjusted for household size.    

The maximum assistance available is $80,000 and is in the form of a one-time only tax-free grant.  CalHFA disburses the funds directly to the mortgage servicer to bring the account current, including escrow deficiencies. The program is scheduled to allocate all funds on or before September 30, 2025, and to have disbursed all funds on or before September 30, 2026. 

From the above examples, it is easy to see how difficult administration of these jurisdictionally specific plans will be on the mortgage servicing industry as a whole. With over 50 possible programs, and with the CFPB closely monitoring servicer conduct, it is extremely important that servicers and law firms communicate openly and clearly with each other regarding HAF programs and the specific issues that arise from them. For more information on any state specific plan, please reach out to consult with local counsel. For links to each state-specific program, you can visit the National Council of State Housing Agencies here https://www.ncsha.org/homeowner-assistance-fund/.

@Copyright 2022

USFN Report - Spring 2022

by William N. Foshag, Esq.

Gray & Associates, LLP

USFN Member (WI)

In April 2021, the 11th Circuit held that a debt collector violated the FDCPA by sending a consumer’s information to a third-party vendor generating debt collection letters in Hunstein v. Preferred Collection and Management Services, Inc. No. 19-14434, 2021 WL 1556069, at *2 (11th Cir. Apr. 21, 2021).  Hunstein gave expansive interpretation to 15 U.S.C. § 1692c(b)’s phrase, “‘in connection with the collection of any debt,” and rejected the argument that this phrase necessarily involves a demand for payment. The court acknowledged this rigid interpretation may have widespread industry implications and suggested it would be up to Congress to amend § 1692c(b), as needed.

The court reaffirmed its decision in October 2021[i] related to Hunstein’s standing to sue, then vacated that opinion in November 2021 and agreed to reconsider the matter en banc (2021 WL 5353154 (11th Cir. Nov. 17, 2021)). Oral arguments were recently held in February 2022, again related to standing and the U.S. Supreme Court’s decision in TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021).[ii]

In the meantime, Hunstein has created ongoing confusion in the collection industry and in courts across the country, including Wisconsin. In a proposed class action suit with a nearly identical fact pattern to Hunstein, a Wisconsin consumer alleged a debt collector violated 1692c(b) for sharing information with a third party that mails collection letters in Nabozny v. Optio Sols., 21-cv-297-jdp (W.D. Wis. Feb. 8, 2022).[iii]  The Wisconsin District Court was not persuaded by Hunstein however, citing the case’s more recent procedural history, and was similarly not persuaded by decisions around the country that have followed the reasoning of Hunstein. 

Instead, the court followed decisions holding “disclosure to a third-party provider of clerical services differs from disclosure to the public in kind, not merely in degree.” Nabozny, at 6, citing Shields v. Prof'l Bureau of Collections of Md., Inc., No. 2:20-cv-02205-HLT-GEB, 2021 WL 4806383, at *8 (D. Kan. Oct. 14, 2021); Sputz v. Alltran Fin., LP, No. 21-CV-4663 (CS), 2021 WL 5772033, at *10 (S.D.N.Y. Dec. 5, 2021). 

The court also found persuasive that the CFPB has not prevented debt collectors from using vendors to send collection letters, despite the recent issuance of similar rules related to communications (85 Fed. Reg. 76, 735). Concluding,  “disclosure to such vendors is not the sort of harm the FDCPA was meant to prevent,” the Court found Nabozny did not suffer any concrete injury, lacked standing to sue, and dismissed the case. Nabozny, at 8. 

@Copyright 2022

USFN Report - Spring 2022

USFN Associate Member iMailTracking has been closely following Hunstein and the practical effects of its litigation. USFN asked Holly Baya of iMailTracking a few questions regarding Hunstein, its subsequent copycat cases, and its impact on their business and the industry.

Q: What was your initial reaction to the Hunstein case?

A: In late April 2021, I was gearing up to attend my first NCBA Conference, excited to expand my knowledge about collections, then Hunstein came along and ruined my day. We were about a year removed from the COVID-related impacts on mail, and while we felt that pain along with most of our clients, we were adjusting. This was another hit that no one needed.

Q: How did the Hunstein case initially affect your business?

A: We saw clients in the 11^th Circuit reluctantly bringing mail back in house with others outside the circuit following suit in an abundance of caution. We looked to Obduskey, and other decisions like it, taking the position that non-judicial foreclosures do not fall under the FDCPA. Further, that judicial foreclosures do not fall under the FDCPA if the law firm is not seeking a deficiency judgment. Additionally, it was our stance that any other mail that is not a “communication in connection with the attempt to collect a debt,” such as bankruptcy and litigation mail, most association mail, and even debt collector mail that does NOT ask the debtor to pay, could still be processed through a mail vendor.

That said, we are in the business of mail, not legal advice, and every firm had to take a hard look at the way they did business and determine what was best for them. We respected those decisions and learned from every conversation we had on the matter.

Q: How have you adapted?

A: We have taken the intervening time to try to come up with creative solutions to counter the arguments that were the basis of the case. This was especially important considering the surge of copycat cases that began popping up across the country, though most, thankfully, failed to gain traction. These included considerations of modified contractual language and agency arrangements. There is no one-size-fits-all solution, at least not to date, but we remain open to all ideas.

Q: How have you seen the mortgage default servicing industry react and adapt?

A: As we dug in, it became apparent this case had implications far beyond mail vendors. Any firm communication to a third-party service provider could potentially be considered an FDCPA violation. We were heartened when the appeal was filed, and more so seeing all the amicus briefs filed in support by heavy hitters across varied industries, including banking and healthcare.

Q: As you mentioned there have been several copycat cases with varied outcomes and rulings (we feature two examples in this edition). What are your solutions and ideas for moving forward?

A: The recent case out of the Eastern District of Pennsylvania highlights the need for the modernization of the FDCPA, to account for the advances in technology and best practices that have been established since its inception that serve to benefit the law firms, servicers, and ultimately the consumer. We realize it could be years before the Supreme Court would take this up, if ever, and the same goes for a congressional amendment. If the language is left open to interpretation, as it is, the ripples of the Hunstein case could be felt long after it has reached its specific resolution.

@Copyright 2022

USFN Report - Spring 2022

by RobertWichowski, Esq.

Bendett &McHugh, PC*

USFN Member (CT, MA, ME, NH, RI, VT)

The Connecticut Supreme Court in JP Morgan Chase v. Virgulak (341 Conn 750 (2022)) further clarified Connecticut’s stance on the reformation of mortgages when attempting to foreclose.

The subject mortgage was given by Theresa Virgulak, securing a note given by Robert Virgulak. The note was not signed by Theresa, and the mortgage was not signed by Robert. Robert obtained a Chapter 7 discharge of the debt through bankruptcy, and therefore, was no longer obligated on the note. Plaintiff brought the action which contained three counts: 1) it sought reformation of the mortgage to order that the mortgage secured Robert’s indebtedness; 2) it sought to have the court order that Theresa was unjustly enriched in that she benefited from the loan, and; 3) it sought foreclosure of the mortgage, as reformed.  After a one-day trial, the trial court entered judgment in favor of Theresa holding that plaintiff failed to sustain its burden of proof that it was entitled to have the mortgage reformed to include Robert, and that it failed to prove that Theresa was unjustly enriched by the loan, and therefore, the claim of foreclosure necessarily failed.

The trial court found that Robert signed the note, but the note was not signed by Theresa. The court also found that Theresa signed the mortgage which recited that it was given to secure the $533,000 note. The court further found that Theresa never signed a guarantee of the debt. Although the court held that many of the documents were signed by Theresa, including the HUD-1 settlement statement, the Truth in Lending Statement, and the Notice of Right to Cancel, the note was not signed by her. The trial court also held that even though Theresa testified that the mortgage was used to pay a prior mortgage, she did not receive any of the funds, a portion of which were also used to pay off Robert’s unsecured debt and a portion of which were used to renovate the subject property in which she lived. The record was silent as to any understanding that plaintiff may have had regarding Theresa’s responsibility under the loan. On that basis, the court found that plaintiff was not entitled to the remedy of reformation of the mortgage. Notably, the plaintiff conceded that there was no evidence that required the trial court to find that Theresa intended that the mortgage secure Robert’s debt.

The Supreme Court held there was no sufficient evidence presented and that plaintiff fell short of meeting the very high burden required to prove that there was a mutual mistake of the parties, which would require reformation of the mortgage to conform with the understanding of the parties. In making its holding, the Court reiterated its stance that reforming written instruments is something that should be done cautiously. Because there was a discharge of the debt secured by the mortgage, Theresa did not guarantee the debt, and there was insufficient evidence that she intended to, the court ruled that the documents should not be reformed. Accordingly, given that there was no debt secured by the mortgage due to the bankruptcy discharge, plaintiff could not foreclose on Theresa’s interest in the property.

This case reveals the high burden that must be met in Connecticut for those that seek to foreclose on mortgage documents where the foreclosing plaintiff is seeking to “fix” defects in the mortgage documents by adding parties or additional obligations.

@Copyright 2022

USFN Report - Spring 2022  

Lakyn Cecil joined Samuel I. White, PC in 2022 and currently oversees the Morgantown, West Virginia office of the firm, focusing her practice in the areas of real estate, mortgage banking, evictions, and title.  Prior to joining the firm, Ms. Cecil was a civil litigation attorney working in the areas of general civil, real estate, probate and estate, wills and trusts, and oil and gas.  

USFN Report - Spring 2022

Bendett & McHugh, P.C. is pleased to announce that Nicole FitzGerald has been made a principal of the firm. We are also pleased to announce that Rachel Ljunggren, Kevin Galin, Jeffrey Knickerbocker, and Sarah Billeri have been named partners at the Firm. These valued members of the Firm represent the next generation of leadership at Bendett & McHugh, P.C., and their collective contributions have and will continue to strengthen the Firm's commitment to its clients.

USFN Report - Spring 2022

By Megan C. Vogt, Esq.

Schiller, Knapp, Lefkowitz & Hertzel, LLP

USFN Member (NJ, NY, PA, VT)

The mortgage and foreclosure industry in New York is no stranger to heavy regulation, moratoria, and administrative orders from the courts.  In response to the COVID-19 pandemic, the chief administrative judge in New York did not delay in instituting new protections for borrowers, including stays of foreclosure proceedings and additional conferencing requirements, which became known collectively as “COVID conferences.”  These administrative orders were issued frequently, either adding on or overriding and overlapping previous orders, and it certainly tested the memories of attorneys and court personnel alike in keeping them all straight.

Attorneys, lenders, and servicers doing business in New York were therefore not surprised (OK, maybe some of us were a little surprised) when the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020 and Protect our Small Businesses Act of 2021 were signed into law by then-New York State Governor Andrew Cuomo. These acts were extended multiple times, with the latest extension and replacement by Chapter 417 of the New York Laws of 2021 (NY State Senate Bill S50001).  The acts, which were supported and clarified by Administrative Orders 341/20 and later 262/21, stayed foreclosure actions for a set period of time and set forth the Hardship Declaration requirements, which could stay the foreclosure action even longer if an owner/mortgagor certified (without proof) that they were experiencing a hardship due to COVID-19.  The requirements of these acts could be avoided with specific carve outs, mainly for vacant and abandoned properties.

After a long 383 days, Chapter 417 of the New York Laws of 2021 and Administrative Order 262/21 expired as of January 15, 2022.  Hardship Declarations are no longer required to be mailed to owners/mortgagors, and the stays resulting from executed Hardship Declarations were lifted.  The chief administrative judge of New York has issued a new Administrative Order (AO 35/22) making it unequivocally clear that all residential and commercial mortgage foreclosure matters may resume in normal course.  Additionally, “COVID conferences” are no longer required, as the prior administrative orders that required these conferences have been superseded by Administrative Order 35/22, which permits foreclosure actions to proceed without setting forth any further conference requirement.

While the expiration of the law comes as good news for lenders, servicers, and attorneys, there will certainly be new challenges to overcome on the horizon. Some judges may be reluctant to let go of the “COVID conferences” and continue to hold said conferences despite a low possibility of resolution.  Compliance with auction protocols and requirements that vary from county to county remain.  How the courts will handle the flood of new cases in addition to clearing out the backlog of cases that have been pending for years remains to be seen.  Additionally, there remains the possibility of the issuance of new rules and regulations that affect foreclosure actions as the world continues its struggle against the ever-changing virus and infection surges.

 For now, all that can be done is to take it one day at a time, remain current on any changes in the law, and to move forward with cases that can be moved.

Copyright @2022

USFN e-Update - February 2022

By Lisa Gordon, Esq.

Frenkel Lambert Weiss Weisman & Gordon, LLP *

USFN Member (Fl, NJ, NY)

A decision rendered by the Appellate Division Second Department on December 15, 2021, in Bank of America, NA v. Andrew Kessler, __ AD3D ____ (D67785) (2^nd Dept. 2021), has sent shockwaves through the mortgage default industry.  The case involves the validity of a 90-day notice, required by RPAPL §1304 for residential home loans, which included additional disclosures.

The 90-day notice required by NY RPAPL §1304(1) is a condition precedent to commencement of a foreclosure action in New York.  This notice requires specific language as outlined in the statute and further provides in section (2) that these notices be sent in a separate envelope from any other mailing or notice.  It was the separate envelope provision at issue in the Kessler matter.

The 90-day notice in Kessler contained seven pages, all paginated. The last page was entitled “Important Disclosures,” and it contained what most consider to be standard disclosures.  The first was a statement advising that if the recipient is a debtor in bankruptcy or a debtor previously discharged in a bankruptcy, the notice is for informational purposes only.  The second pertained to the rights of borrowers/mortgagors in the military service who are afforded significant protections from foreclosure.  The third was the debt collector statement.  The borrowers argued that the inclusion of these disclosures constituted a violation of RPAPL§1304(2).

The Appellate Division Second Department agreed with the defendants/mortgagors and held that the “inclusion of any material in the separate envelope sent to the borrower under RPAPL 1304 that is not expressly delineated in [the statute] constitutes a violation of the separate envelope requirement of RPAPL 1304(2).”  The Court further stated that it was irrelevant whether the additional material was on the same page as the notice or separately paginated as other lower courts have held and rejected the argument that the statute does not prevent additional language from being added to the notice, provided the language required by the statute is included. 

Based upon this decision, it is evident that a 90-day notice which contains any language, other than the language prescribed by the statute itself, is not compliant with RPAPL §1304.  We know of few creditors and/or mortgage servicers who do not provide such disclosures in their 90-day notices. 

The number of cases that could potentially be challenged, citing Kessler as authority, is enormous.  The ramifications of this decision will have far reaching economical and substantive impacts on mortgage servicers and everyone practicing mortgage foreclosure in the State of New York. We are hopeful that immediate leave to appeal to the New York Court of Appeals will be sought. We then must hope that leave to appeal is granted and the decision is overturned consistent with the well-reasoned sole dissenting opinion in Kessler.

The dissent noted that the additional disclosures in no way violated the content provisions of RPAPL §1304, nor did they frustrate the statute’s purpose or intent, and the statute does not explicitly prohibit the additional language.  The dissent went on to state that the plain language of the statute provides that the required language be “included” and does not prohibit the inclusion of other language beyond that which is required.  The term “include” is a term of enlargement, not limitation and thus, in the absence of a specific statutory prohibition against additional content, there is no basis for reading one into the statute.  For all these reasons, the dissent did not agree that the additional disclosures constituted a separate “mailing or notice” in violation of RPAPL §1304.

Reversal of this decision is imperative for all mortgage servicers.

Copyright @2022

USFN e-Update - February 2022

by Sonia J. Buck, Esq.

Brock & Scott, PLLC *

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

With the ongoing changes in the workforce and the manner in which large organizations such as law firms and mortgage servicers conduct business, consideration must be given to applicable employment laws that come into play when an employer downsizes its workforce. Reductions in force (RIFs) can implicate several employment laws due to the potential for affecting protected classes and other concerns. This article focuses on federal laws involving large scale employer reductions in force.

Discrimination and Disparate Impact

One important consideration involves the potential for discrimination claims associated with reductions in force. Reductions in force typically do not appear discriminatory on their face, in that they do not specifically target a protected group. Decisions are typically based on economic factors, salaries, department restructurings, and other “legitimate business decisions” not intended to impact people based on their membership in a protected class. If, however, the group of employees affected by the layoff suggests a disproportionate dismissal of older employees, females, employees with disabilities, or any other group protected by federal or state employment discrimination laws, discrimination claims could ensue. Such claims are couched in terms of “disparate impact” discrimination. Caution should be used to avoid discrimination in the form of the disproportionate impact on employees or a group of employees.

The Age Discrimination in Employment Act

The Age Discrimination in Employment Act (“ADEA”), 29 U.S.C. § 621 et seq., prohibits discrimination on the basis of age in programs and activities receiving federal financial assistance. When it comes to reductions in force, age discrimination based on disparate impact is a highly litigated issue.

In Meacham v. Knolls Atomic Power Laboratory, a research laboratory engaged in a RIF. 554 U.S. 84 (2008). To determine whom to terminate, the company asked supervisors to rank employees based on three factors: performance, flexibility, and critical skills. Id. Of the 31 employees who were let go, all but one was over the age of 40. Of these dismissed employees, 26 filed suit against Knolls for age discrimination under the ADEA. Id.

The United States Supreme Court ruled that exemption from liability for disparate impact claims under the ADEA for employer actions based on reasonable factors other than age creates an affirmative defense, for which the employer bears both the burden of production of evidence and the burden of persuasion of its merits. Id. at 87. In other words, it is up to the employer to prove beyond a preponderance of the evidence that legitimate business reasons resulted in the termination decisions. All aspects of the termination decision-making process, especially with respect to deciding which employees to fire, should be clearly documented. All RIF policies and procedures should be followed precisely and without exception. When a layoff might result in older employees being let go, there is a potential for ADEA claims. This is an example of why hiring a consultant to assist with large layoffs might be a good idea.

Worker Adjustment and Retraining Notification Act

The Worker Adjustment and Retraining Notification Act (“Warn”), 29 U.S.C. 2101 et seq., requires most employers with 100 or more employees to provide a 60-day written notice of any “plant closings or mass layoffs of employees” (reductions in workforce). A “plant closing” is “the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees excluding any part-time employees.”

Any large employer planning major RIFs must comply with the Warn Act and give proper notice. Failure to do so could result in lawsuits by affected employees and a civil penalty of up to $500 for each day of violation. 29 U.S.C. § 2104(a). This penalty may be avoided if the employer satisfies the liability to each aggrieved employee within three weeks after the closing or layoff is ordered by the employer. Id.

Uniformed Services Employment and Reemployment Rights Act

Those men and women protecting our country constitute another class of employees that should be considered in terms of any reduction in force. Federal law protects military employees through the Uniformed Services Employment and Reemployment Rights Act (USERRA), 38 U.S.C. § 4301 et seq. The intent of USERRA is to ensure that employees do not lose their civilian employment status and benefits simply due to their service to our country. USERRA provides them with the opportunity to return to their civilian employment upon completion of their military service. Employers must reinstate returning military personnel to the same position and with the same benefits, pay, and seniority they would have enjoyed had they not left their civilian job to serve the country. Also, under USERRA, for the first 30 days of an employee’s military leave, the employer must continue the employee’s existing health, dental, and life insurance at no additional cost to the employee.

If a service-member becomes disabled due to military service and becomes unable to perform the job duties, an employer is required under USERRA to employ the returning soldier in a job that is the “nearest approximation to” the prior position. In addition, a service member cannot be fired without cause for up to one year (depending on the length of military service) after reinstatement, regardless of most states’ “employment at will” status or an employer’s personnel policies. USERRA also contains anti-discrimination provisions, such that hiring, promotion, and termination decisions cannot be made solely based on present or anticipated membership in the armed services.

USERRA does contain an exception for any reductions in the workforce that would have included the military employee; however, it is the employer’s burden to prove that the defense applies. Complete and concise records for any reduction in force should be maintained to prove the service member’s position was part of the reduction.

Employment Leave and Reductions in Force

Employers should also be mindful of layoff decisions affecting employees in a job-protected leave status, such as under workers’ compensation laws, FMLA, or USERRA. An employer is prohibited from considering an employee's absence on protected leave as a factor in deciding whether to lay off that employee.  This does not mean, however, that such employees are protected from layoffs generally. An employee on leave is not protected from discharge if the employee would have been laid off regardless of their leave status. An employer must be able to prove that the employee would have been terminated had they not taken the leave. If, for example, the employee’s entire department was let go, that might be an easier showing than if only the employee on leave were impacted and none with similar positions who were not on leave.

Other Considerations

Other RIF considerations include the typical legal requirements on employers when any employee terminates for any reason. For example, COBRA notification may apply. The Consolidated Omnibus Budget Reconciliation Act (29 U.S.C. § 1161 et seq. is a health insurance program that allows eligible employees and their families continued health insurance benefits when the employees lose their job. Under COBRA, it is incumbent upon the employer to notify employees of their COBRA rights. Also, under wage and hour laws, employees need to be paid out all accrued but unused vacation time.

Union employees also have some protections from layoffs within the provisions of their union contracts, also called collective bargaining agreements (“CBAs”). The CBA between a union and the employer sets forth rules that must be followed when a union company conducts a reduction in force.

The larger the employer, the more likely it is the employer will be subject to federal laws governing reductions in the workforce, and the more risk that claims may arise. With so many employees being terminated in a RIF situation, compliance will be a top priority. Often, employers wish to utilize a professional consultant to assist them in working their way through an RIF, and to minimize risk from the beginning of the decision to reduce the workforce. Proper planning and consultations with experts are recommended to any large employer contemplating a reduction in force.

Copyright @2022

USFN Report - Winter 2022