by Phil Schroeder, Esq. and Marcos Posada, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

Fannie Mae/Freddie Mac uniform mortgages are so ubiquitous that many in the servicing industry have certain provisions committed to memory.  For example, paragraph 22 requires that notice be sent to the borrower prior to acceleration and enumerates the content of such notice (the “Notice of Acceleration”).  In defense to foreclosure, borrowers often cite to paragraph 22 and claim no such Notice of Acceleration was given.

In response to this defense, a foreclosing plaintiff will often provide an affidavit attaching the Notice of Acceleration and attesting that the Notice of Acceleration was mailed in accordance with its usual and customary business practices. The affidavit relies on Paragraph 15 of the uniform mortgage, which states that any notice given to the borrower in connection with the mortgage is “deemed to be given to the borrower when mailed by first class mail or when actually delivered to Borrower’s notice address if sent by other means.” 

Typically, the filing of the mailing affidavit successfully rebuts the defense that the notice was not given and allows the foreclosing plaintiff to prevail on summary judgment.  However, a recent decision in the Illinois Appellate Court has given new life to this defense. 

In Deutsche Bank v. Roongseang 2019 IL App (1st) 180948 (opinion filed December 2, 2019), Illinois’ First District Appellate Court held that where a Notice of Acceleration is sent via certified mail, there is no presumption of delivery.  The appellate court scrutinized the language of paragraph 15 and found that notices sent via first class mail are deemed to be given upon mailing.  However, where a notice is mailed via certified mail it is considered to be “by other means” as provided for in paragraph 15.  Accordingly, proof of actual delivery was required in order to establish that a paragraph 22 Notice of Acceleration was given.  In Roongseang, the trial court’s entry of judgment was reversed and it was remanded because the plaintiff failed to produce the return receipt from the certified mailing which gave rise to an issue of fact as to whether the Notice of Acceleration was actually given, i.e. whether notice was actually received by the borrowers. 

The opinion in Roongseang also narrowed or undercut recent Illinois case law that had a chilling effect on the ability to raise a successful defense based on the failure to give the paragraph 22 Notice of Acceleration.  In Bank of New York Mellon v. Wojcik, 2019 IL App (1^st) 180845, the Appellate Court found that a Notice of Acceleration defense in a foreclosure action was forfeited where there was a general denial that all required notices were duly and properly sent.  Wojcik, at ¶21 (stating that “courts have repeatedly recognized that a mere general denial of the performance of the conditions precedent of a contract in a party’s responsive pleading, without allegations of specific facts, results in forfeiture of the issue of the performance of the conditions precedent of a contract”).  In Roongseang, the court narrowed the application of Wojik by finding the allegation that the notice was not sent is sufficient to plead a notice of acceleration defense.  Roongseang also undercut the holding in CitiMortgage, Inc. v. Bukowski, 2015 IL App (1st) 140780 which held that the failure to perform the condition precedent of sending notice pursuant to the mortgage is not an affirmative defense.  However, in Roongseang, the Notice of Acceleration defense was raised as an affirmative defense and allowed to proceed as such.   The opinion also quickly rejected any argument about substantial compliance or harmless error without much analysis or acknowledging a recent opinion, U.S. Bank N.A. v. Gold, 2019 IL App (2d) 180451 in the adjoining Second District of Illinois which held that where a notice of acceleration is technically defective under the terms of the mortgage, it will not provide a defense to foreclosure where there is no prejudice suffered by the defendant.

The issue in Roongseang was an matter of first impression in Illinois which could lead to additional challenges invoking the paragraph 22 notice of acceleration defense.  The production of the signed return receipt showing actual delivery of the Notice of Acceleration should be sufficient to prove compliance with paragraph 22, if the Notice was sent via certified mail.  The additional evidentiary requirements in contested litigation and burden of record keeping may outweigh any benefits of certified mailing.  If notice is sent certified or by other means, a servicer should keep its receipts.

Copyright © 2020 USFN. All rights reserved.

February USFN e-Update

by Nicole M. FitzGerald, Esq.
Bendett & McHugh, P.C.
USFN Member (CT, ME, VT)

In a recent ruling, the United States Court of Appeals for the Second Circuit affirmed that a lender has no duty to safeguard a property following a default; rather the borrower does. According to the Court ruling in Malick v. JP Morgan Chase Bank, N.A., et al., 2019 WL 6724402 (2019), a lender and its property preservation company did not owe the borrower/mortgagor a duty to act to prevent theft or damage to his property.

After obtaining a mortgage in June of 2007, which was subsequently acquired by JP Morgan Chase Bank, N.A. (the “Lender”), the borrower/mortgagor (“Malick”) defaulted approximately a year later.  Shortly thereafter, the property became unoccupied due to Malick’s (unrelated) incarceration.  While the property was vacant, the Lender, through its property preservation company, changed the locks and otherwise attempted to secure the property due to the vacancy, neglect and theft.

After Malick sued the Lender and the property preservation company for conversion, negligence, and violations of the Connecticut Fair Debt Collection Practices Act and the Connecticut Unfair Trade Practices Act, the Second Circuit affirmed the lower court’s ruling dismissing all of Malick’s claims. 

The Court found that the mortgage expressly placed a duty on Malick to maintain the property, directly quoting the mortgage: “Whether or not Borrower is residing in the Property, Borrower shall maintain the Property in order to prevent the Property from deteriorating or decreasing in value due to its condition.”  Further, the mortgage provided that “although the Lender may take action [to protect, secure, and repair the Property], Lender does not have to do so and is not under any duty or obligation to do so.” (emphasis added).

The Court also affirmed the lower court’s ruling that Malick had failed to comply with the covenants and agreements in the mortgage and had “abandoned” the property which therefore entitled the Lender to “do and pay for whatever is reasonable and appropriate” to protect its interest in the Property, including “protecting and/or assessing the value of the Property, and securing and/or repairing the Property.”

In the increasing climate of vacant properties and priority blight liens, this is a small victory for lenders. 

Copyright © 2020 USFN. All rights reserved. 

February USFN e-Update

by Brian Liebo, Esq. and Kevin Dobie, Esq.  
Usset, Weingarden & Liebo, PLLP
USFN Member (MN)

There are an ever-increasing number of people participating in programs across the country that protect the identities of certain borrowers. Unwary mortgage lenders and servicers can find themselves subject to criminal and civil penalties in certain states if they run afoul of the related laws. One such program is Minnesota’s “Safe at Home” project. 

Minnesota’s project, governed by Minnesota Statutes Chapter 5B and Minnesota Rules Chapter 8290, along with approximately 38 other states across the United States,  can provide home, work and school address confidentiality for people who fear for their safety for survivors of, among other things, domestic violence, sexual assault, or stalking. In Minnesota alone, there are over 3,000 program participants and the program is administered by the Office of the Minnesota Secretary of State.

When someone enrolls in Safe at Home, the state assigns a post office box address that the participant uses as a legal address for all purposes. Since all Safe at Home participants share the same assigned post office box, the participants are differentiated by a designated “lot number” that is unique to each participant. This lot number is not to be confused with those “lot numbers” typically contained in real property legal descriptions. The participant does not pick up their mail from that post office box. Instead, Safe at Home staff forward the first-class mail to the participant’s real residential address.  

The state certifies participants for the Safe at Home program in renewable terms of four years. Participants can lose the certification by changing their legal identity without advance notice or by using false information in conjunction with the certification. Also, certification can be lost if the mail forwarded by the Safe at Home office is returned as “undeliverable.” This latter issue is often relevant in mortgage default situations where a borrower abandons the home.

Impact of the Safe at Home Program on Mortgage Lenders and Servicers
A participant must disclose the address of the home to mortgage loan originators.  The participant will provide the lender with a Safe at Home program form, which will require the lender to conceal the mortgage record and will prohibit the sharing of their location information without signed consent from the participant.  The lender must also only use the participant’s assigned post office box address for mailed correspondence. For loans other than a home loan, such as vehicle loans or unsecured personal loans, a Safe at Home participant cannot be required to disclose their home address.

It is the responsibility of participating borrowers to affirmatively notify their lenders and servicers of their Safe at Home program participation and provide their assigned Safe at Home post office box address. If a lender or servicer wishes to contact the Safe at Home office to verify a borrower’s program participation, they must provide the potential participant’s name and lot number or name and date of birth. Thereafter, if a lender or servicer must disclose the name and address of the borrower participant to sell or service-transfer the loan, the lender must obtain the prior written consent of the participant and provide the name and contact information of the transferee to the participant, so that the participant may give the transferee the Safe at Home program notice. 

Safe at Home participants cannot, however, protect their information in property records retroactively. This means that if an individual purchases a property and obtains a mortgage without the required Safe at Home program procedures, the Safe at Home program will not apply. The Safe at Home office will not provide the required forms to individuals trying to enter the program after purchasing a home or when trying to refinance a mortgage that was not part of the program.

Once properly notified, the mortgage servicer or lender must accept a participant’s Safe at Home address as the person’s actual address of residence, school address, and as their address of employment. When mailing to a Safe at Home participant, the sender must always include the participant’s name and lot number.

A Safe at Home participant cannot be required to disclose his or her home address for financial account records. Thus, financial institutions must not require a participant to disclose his or her home address in order to be Customer Identification Program (CIP) compliant. For CIP compliance, instead of the participant’s home or business address, the financial institution is required to use a non-public, designated street address by the Office of the Minnesota Secretary of State, which can be obtained by calling (651) 201-1399.

If a mortgage servicer must serve a participant with legal process, the Office of the Minnesota Secretary of State acts as the agent for service of process for all program participants. In order for the Safe at Home office to accept service of process on behalf of a participant, the service documents must also include the participant’s name and lot number. This aspect presents an interesting issue for conducting nonjudicial foreclosures in Minnesota. The nonjudicial foreclosure statute in Minnesota requires that all “occupants” of the property be properly served with the foreclosure notices, in contrast to just all “borrowers.” Thus, service on the Secretary of State alone may be insufficient. Also, the foreclosure notices that are published and served would need to be limited as well to protect the Safe at Home borrower. Accordingly, it may be wise in such cases to proceed by judicial foreclosure, or carefully consider how the non-judicial foreclosure statutes can be complied with while also meeting the Safe at Home requirements.

Similarly, if a mortgage servicer or REO entity pursues an eviction action following foreclosure proceedings, they will want to ensure Safe at Home borrower or tenant occupants are protected from having their locations disclosed during the pendency of such an action. In various jurisdictions, it may be best to identify the case defendants as “John Doe and Mary Roe,” where acceptable to the courts, to maintain the required protections for program participants.

As a reminder, the Safe at Home participant is required to give private companies a special notice they obtain from the Safe at Home office. Receipt of the notice prohibits the private companies from sharing the participant’s name and location information with anyone unless the participant provides a prior written consent for a specific disclosure purpose. A violation of any of the provisions of the notice constitutes a misdemeanor punishable by imprisonment with a maximum time of 90 days, a fine up to $1,000, or both. 

As a practice pointer, it is critical that lenders and servicers have procedures in place to immediately identify Safe at Home participants, conceal and protect the participants’ location information system-wide, and ensure all future mailings are sent to the proper Safe at Home address. According to the Minnesota program administrator, a mortgage servicer is prohibited from even disclosing a participating borrower’s protected information to the servicer’s own agents and contractors. 

To comply with this legislation, a mortgage servicer should not share both the name and physical address of a program participant together to any third parties, absent written consent. For example, if a mortgage servicer wants a property inspection performed, the mortgage servicer should direct its vendor to inspect the physical address, without providing the name of the protected borrower to the agent conducting the inspection, unless written consent was provided by the Safe at Home participant expressly permitting the specific disclosure.

Finally, lenders and servicers will also want to coordinate with experienced, local counsel to help ensure full compliance with these types of laws through all aspects of servicing the mortgage loan.

Copyright © 2020 USFN. All rights reserved.

Winter USFN Report

by Kayo Manson-Tompkins, Esq.

The Wolf Firm

USFN Member (CA, ID, OR, WA)

California has painstaking rent control and eviction control ordinances in cities such as Los Angeles, Santa Monica, San Francisco, Oakland, and Berkeley, to name a few. Historically, however, in reality there have only been a few cities with rent control ordinances. Therefore, for most of California the standard process for post-foreclosure evictions has been used. The California legislature introduced and passed Assembly Bill 1482 designed to establish statewide rent control and despite opposition from landlords and mortgage servicers, the Governor signed the bill, which became effective January 1, 2020.

The primary purpose of this bill was to prevent landlords throughout the state from arbitrarily raising rental amounts. This Bill caps rental increases to 5% plus inflation, or 10%, whichever is lower. The Act will sunset January 1, 2030.

New Civil Code Sections 1946.2 and 1947.12 became effective January 1, 2020. These sections prohibit property owners from terminating a lease of a tenant who has been occupying the property for 12 months, without “just cause” and the “cause” must be stated within the notice. Additionally, there is a new requirement that a notice of violation and opportunity to cure must be served before the notice of termination, for those instances where the violation is curable. Furthermore, a no-fault “just cause” eviction will require relocation assistance of at least the equivalent of one month’s rent. If the relocation is not paid, the notice of termination will be declared void. These provisions cannot be waived by the tenant, and if an attempt is made to do so, the waiver of rights provision will be declared void. It is important to note that despite the “statewide” provisions there is nothing to prevent existing local rent control and eviction control ordinances from having a higher level of protection for their tenants.  

Pursuant to the California Constitution (Cal Const, Art. XI § 7), California rent control and eviction control provisions are a valid exercise of a city’s police power within that city’s own jurisdiction. More specifically it states that “a county or city may make and enforce within its limits all local, police, sanitary and other ordinances and regulations not in conflict with general laws”. The scope of this police power is subject to displacement by general state law where the charter or ordinance purports to regulate a field fully occupied by state law. (Birkenfeld v. Berkeley, (1976) 17 Cal. 3d 129).

California has 482 cities and for those cities that do not currently have a rent or eviction control ordinance, they may opt to simply abide by the provisions of the newly enacted statutes. Cities may however, if they want additional requirements, to create their own “rent control” ordinance or a “just cause” eviction ordinance. The question remains what existing ordinance(s) will become the template for drafting their ordinance. Property owners can only hope that the majority of cities will either elect to simply follow the limited provisions of Civil Code Sections 1946.2 and 1947.12 or alternatively create uniform more limited ordinances, as opposed to mirroring the rigorous existing ordinances in Los Angeles, Santa Monica, San Francisco, Oakland, and Berkeley, by way of example.  

Servicers should ensure that they have procedures in place s to determine who is occupying the property as soon after the foreclosure sale as possible. Furthermore, it is imperative that the eviction attorney be notified of whether there are tenants in the property, as the type of occupancy will require different notices, as well as a relocation fee in order to remove tenants from the premises.

This article is not intended to be an extensive or exhaustive review of all the nuances of either rent control or just cause eviction control ordinances, but rather an introductory overview of what the new statewide rent control statutes provide and how it affects the ability of a servicer to proceed with a normal post-foreclosure eviction.

Copyright © 2020 USFN. All rights reserved.

Winter USFN Report

by Blair Gisi, ESQ. 
SouthLaw, P.C. 
USFN Member (IA, KS, MO, NE)

In overturning the default judgment granted against the debtor in Coastal Credit, LLC v. McNair, 446 P.3d 495 (Kan. Ct. App. 2019), the Kansas Court of Appeals has recently made an important ruling regarding service of process on active military debtors.

The debtor in McNair was in active status in the Army and stationed in Africa when the financing contract he had entered into to purchase a car went into default.  After the default, the creditor repossessed the car, sold it, and then filed a limited action against the debtor to pursue the remaining deficiency.

While the debtor was stationed in Africa, his family was living in Manhattan, KS and in February 2014, the process server executed service upon the debtor’s family at the “usual place of abode” per the process server’s field notes.  It was also noted that that the debtor was in the military and stationed in Africa until June 2014.

The debtor failed to respond or appear to any of the subsequent pleadings and hearings and after complying with the relevant Servicemembers Civil Relief Act (SCRA) requirements, default judgment was granted against the debtor in August 2015.  When the debtor noticed his wages being garnished in October 2017, he sought to set aside the judgment and disgorge the garnished funds.

To support his motion, the debtor argued that the service was ineffective since the debtor was not served at his “usual place of abode” as defined by Coleman v. Wilson, 1995 Kan. App. Unpub. LEXIS 932 (Ct. App. Dec. 1, 1995).  In that case, this court held that a military service person's usual place of abode is where the person lives, eats, sleeps, and works at the time of the attempted service.  However, the district court denied debtor’s motion on the grounds that service on the debtor’s wife at their Manhattan, Kansas residence as the usual place of abode and that the service was valid.  Debtor timely appealed that ruling.

Focusing on the “usual place of abode” argument, which comes from Kan. Stat. Ann. § 61-3003, the Court of Appeals overturned the district court. 

The Court of Appeals began its analysis with the legislative intent of K.S.A. 2018 Supp. 77-201 which provides:

Usual place of residence' and 'usual place of abode,' when applied to the service of any process or notice, means the place usually occupied by a person. If a person has no family, or does not have family with the person, the person's office or place of business or, if the person has no place of business, the room or place where the person usually sleeps shall be construed to be the person's place of residence or abode.

Finding that the legislative intent of the statute was clear and unambiguous, the Court of Appeals applied the statute to mean that the debtor’s usual place of abode in this situation was “the room or place where he usually slept,” which at the time, was in Africa.  The Court of Appeals went on to further state that a person’s usual place of abode may be determined on a case-by-case basis and had the debtor been on vacation or brief business trip to Africa, for instance, then the Manhattan would have constituted his usual place of abode.  Here, the active military deployment to Africa for six months was enough to shift his usual place of abode from his family’s residence to Africa.

The Court of Appeals also made an interesting distinction between a family’s usual place of abode the debtor’s usual place of abode in finding that that there was ineffective service on the debtor, stating that they are not necessarily the same and that the family’s usual place of abode does not control the debtor’s usual place of abode.

When attempting service on an active military debtor, the McNair case serves as an outline for both the scrutiny the debt collector may face in obtaining a default judgment as well as the additional steps that may be necessary in ensuring the judgment can withstand that scrutiny.

Copyright © 2020 USFN. All rights reserved.

Winter USFN Report

by James Pocklington, Publications Committee Chair                         
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

and Jessica Rice, Publications Committee Vice Chair 
Trott Law, P.C.        
USFN Member (MI, MN)

2019 was an active year, with events ranging from organizational changes at USFN to landmark legal decisions like Obduskey v. McCarthy & Holthus LLP. Below are links to content that was published in USFN publications throughout the year, categorized by jurisdiction and subject matter.

Copyright © 2020 USFN. All rights reserved.

by Richard P. Haber, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

New York’s Court of Appeals (highest court) is currently considering two statute of limitations (“SOL”) cases relating to mortgage foreclosures, providing hope that 2020 will be the year that servicers and their counsel finally get some relief, or at least clarity and predictability. 

In Freedom Mtge. Corp. v. Engel, 163 A.D.3d 631 (2d Dep’t 2018), lv. app. granted 103 N.Y.S.3d 12 (APL-2019-00114), which the Court has already agreed to consider on the merits, the issue is whether a lender who exercises the right to accelerate by initiating foreclosure may revoke that election by voluntarily discontinuing the foreclosure action at a later date. The Appellate Division, Second Department found that a lender cannot, by discontinuance alone, revoke the election to accelerate a mortgage debt. However, this is inconsistent with prior New York decisions holding that the discontinuance of a case renders all allegations null and void, as if never made. There is no logical reason why the election to accelerate made in a complaint should not be deemed revoked when all other allegations are voided by the discontinuance.

In Bank of New York Mellon v. Dieudonne, 171 A.D.3d 34 (NY App. Div. Second Dept., March 13, 2019), the servicer has asked the Court of Appeals for permission to appeal from a ruling that rejected a line of cases standing for the proposition that a mortgage drawn on the Fannie Mae/Freddie Mac Uniform Instrument could not be deemed accelerated until the entry of final judgment (i.e., when the borrower loses the contractual right to cure arrears and reinstate the installment contract). In Dieudonne, the Appellate Division, Second Department, held that the lender’s right to accelerate is independent of the borrower’s right to reinstate. The Court held that “[c]ontrary to the plaintiff’s contention, the reinstatement provision in paragraph 19 of the mortgage did not prevent it from validly accelerating the mortgage debt.” Even though “[t]hat provision effectively gives the borrower the contractual option to de-accelerate the mortgage when certain conditions are met”, the lapsing of that right is not a condition precedent to acceleration.

USFN will be moving for permission to file an amicus brief in support of Freedom Mortgage in the Engel case, and has already filed a motion for permission to file an amicus brief in support of the servicer’s motion in Dieudonne. In the brief filed with its motion, USFN argued several policy reasons why SOL reform is needed as it pertains to mortgage foreclosures in New York. Among the reform suggestions offered to the Court by USFN are that Engel and Dieudonne should both be reversed. While these reversals would not necessarily be a cure-all for SOL challenges in New York, they would certainly go a long way to removing the time bar that prevents the foreclosure of many loans today. Stay tuned for updates in the coming months!

Copyright © 2019 USFN. All rights reserved.

December e-Update

by Kayo Manson-Tompkins, Esq.

The Wolf Firm

USFN Member (CA)

As part of the National Mortgage Settlement entered into in 2012, funds were allocated to the states to assist with the housing crisis and California was allotted over $400 million.  The State Legislature enacted Gov. Code 12531, which provided that funds could be used to offset general fund expenditures for the 2011-2014 fiscal years.  In 2014, the National Asian American Coalition filed a suit against the Governor, Director of Finance, and the State Controller seeking the return of the funds.   

The Court of Appeals in 2018 held that $331 million was to be returned and directed Governor Newsom to return the funds for its intended purpose.  During the 2019 legislative session, Senate Bill 113 was approved by the governor and will take effect immediately.

As a result of this bill, $331 million will be deposited into a trust for non-profit organizations to provide legal assistance to homeowners to prevent a foreclosure, defend an eviction, or to aid housing counselors in other housing related situations.  The ultimate goal will be to provide an ongoing source of funds to legal aid organizations to assist renters and homeowners.

Copyright © 2019 USFN. All rights reserved.

December e-Update

by Joseph Dunaj, Esq
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

In the case of Seminole Realty, LLC v. Sekretaev, 192 Conn. App. 405 (2019), the Connecticut Appellate Court has released an important opinion concerning the intersection of federal bankruptcy law and judgments of strict foreclosure; specifically, the effect of a bankruptcy court order imposing a stay on a pending law day.  In Seminole Realty, a judgment of strict foreclosure had initially entered in 2014, with a law day being set.  The defendant, however, engaged in a scheme to delay the foreclosure by filing multiple bankruptcy petitions to gain the benefit of the automatic bankruptcy stay under 11 U.S.C. § 362(a).  In 2018, the foreclosing plaintiff obtained an order of in rem relief under 11 U.S.C. § 362(d)(4), so that any further petition filed within two years would not impose a stay on the foreclosure.  The plaintiff then filed a Motion to Reset the law days. 

Prior to the scheduled hearing, the defendant filed another Chapter 13 Bankruptcy Petition, which did not impose a stay because of the in rem relief order.  At the hearing on the Motion to Reset, the court scheduled a law day of August 15, 2018.  On July 10, 2018, the bankruptcy court entered an order suspending the prior in rem relief order.  On September 18, 2018, the bankruptcy court then vacated its July order.  The foreclosing plaintiff then applied for an execution for ejectment, to gain possession of the premises, which was issued on November 29, 2018, from which the defendant appealed, claiming that the law days became ineffective upon the bankruptcy court’s July 10^th order imposing a stay, and thus title never vested in the plaintiff.

Prior to 2002, the general presumption in Connecticut was that a law day in a judgment of strict foreclosure was indefinitely stayed by a bankruptcy petition 11 U.S.C. § 362(a).  Citicorp Mortgage v. Mehta, 39 Conn. App. 822, 824 (1995).  That changed with the Second Circuit decision of Canney v. Merchs. Bank (In re Canney), 284 F.3d 362 (2^nd Cir. 2002).  In In re Canney, the Second Circuit held that because a strict foreclosure was merely a time limitation on a particular action (the time to redeem), and not a positive act to enforce a judgment, the limited stay of 11 U.S.C. § 108(b) applied instead.  In Provident Bank v. Lewitt, 84 Conn. App. 204 (2004), the Connecticut Appellate Court adopted the holding of In re Canney, and held that a judgment of strict foreclosure is subject to 11 U.S.C. § 108(b), and the filing of a bankruptcy petition serves to only extend a law day 60 days, rather than stay the law days indefinitely. 

The state legislature adopted Conn. Gen. Stat. § 49-15(b) in response to In re Canney and Lewitt.  Under that statute, when a mortgagor files a bankruptcy petition under any title of the Bankruptcy Code, the judgment of strict foreclosure is automatically opened by operation of law, but only as to the law days, with the other terms of the judgment remaining in place.  The effect of the statute is to prevent the passage of the law days upon the filing of a bankruptcy petition and avoid the result of In re Canney & Lewitt.  At that time (pre-BAPCPA), all bankruptcy petitions imposed a stay, and while efforts have been made to correct the now-outdated statute, the state legislature has been slow to act.

In Seminole Realty, the issue before the Appellate Court was the impact of the bankruptcy court’s July 10^th order on the pending law day.  The Appellate Court held that Conn. Gen. Stat. § 49-15(b) only applies upon the filing of a bankruptcy petition, and only applies when a petition is filed after a court sets a law day pursuant to a judgment of strict foreclosure.  Further, the Appellate Court held that when the statute does not apply, the prior case law of In re Canney and Lewitt applies.  The Appellate Court found that when the bankruptcy court imposed a stay on July 10^th, the law day was automatically extended 60 days under 11 U.S.C. § 108(b), and when the defendant failed to redeem by the expiration of his law day, title vested absolutely to the Plaintiff.

The Appellate Court’s holding in Seminole Realty has potentially broad implications.  As stated above, the court has re-affirmed the validity of the prior case law, when the strictures of Conn. Gen. Stat. § 49-15(b) do not expressly apply.  A foreclosing plaintiff would be mindful to review Seminole Realty and whether or not its holding would be beneficial to argue, especially in an aged foreclosure case with multiple bankruptcy filings.  Further, the Appellate Court in Seminole Realty, by highlighting some of the shortcomings of Conn. Gen. Stat. § 49-15(b), appears to either show its willingness to address the statute in future cases or seeks to invite the legislature to further amend the statute.  Surely, time will show how the statute will further evolve.

Copyright © 2019 USFN. All rights reserved.

December e-Update

by Nisha B. Parikh, Esq. and Steven Lindberg, Esq.
Anselmo Lindberg & Associates
USFN Member (IL)

The United States Bankruptcy Court for the District of Vermont recently imposed sanctions against a mortgage servicer for violations of Rule 3002.1(c) of the Federal Rules of Bankruptcy Procedure in three consolidated cases: In Re Gravel, In Re Beaulieu and In Re Knisley, 2019 WL 2710197 (D. Vt. June 27, 2019). Rule 3002.1(c) requires that a notice be filed itemizing all recoverable fees, expenses or charges advanced post-petition by a creditor. The notice shall be filed within 180 days of the fees being incurred and shall be served on a debtor, debtor’s counsel and the trustee. 

In the consolidated cases, which all involved violations of Rule 3002.1(c), the U.S. District Court remanded the matter back to the bankruptcy court solely to focus on the court’s authority to impose punitive sanctions for violations of the bankruptcy code, ultimately levying a $300,000.00 sanction to the mortgage servicer. In its opinion, the court held the imposition of sanctions was warranted because the mortgage servicer violated Rule 3002.1(c) by failing to file Notices of Post-petition Mortgage Fees, Expenses and Charges (PPFNs).

Further, the mortgage servicer sent the debtors approximately 25 incorrect mortgage statements listing fees and costs incurred during the bankruptcy which showed the loan to be in default, post-discharge, when the loans were already determined to be current. As a result, the Chapter 13 trustee filed a motion in each case requesting that the court impose sanctions against the servicer.

In Gravel, the court entered a Debtor Current Order on May 20, 2016, determining the debtors cured all prepetition mortgage defaults and were current on their post-petition mortgage payments and any other charges or amounts due under their mortgage. Five days after the Order was entered, the Gravels received a mortgage statement from the servicer which listed outstanding property inspection fees in the amount of $258.75, even though the servicer failed to file a PPFN for those fees during the bankruptcy.

Similar to Gravel, in Beaulieu, the debtors received a mortgage statement less than three weeks after the court entered a Debtor Current Order which included a $30.00 fee for Non-sufficient funds  and another $56.25 fee for a property inspection. Again, the servicer did not file PPFNs regarding those fees during the bankruptcy.

Finally, the Knisley case mirrors the first two. In Knisley, although a Debtor Current Order was not yet entered, the servicer sent the debtors mortgage statements that included charges of $246.50 for property inspection fees and $124.50 in late charges. These charges were over 180 days old and, similar to the other consolidated cases, the servicer again failed to file PPFNs in the bankruptcy case.

By including charges on the debtors’ mortgage statements without filing PPFNs, the servicer was found to be in direct violation of Rule 3002.1(c) in all three cases. Although the fees were technically recoverable against these debtors pursuant to their respective loan documents, the servicer did not comply with the requirements of the Bankruptcy Code. These relatively small charges ultimately cost the servicer hundreds of thousands of dollars because it did not file PPFNs, which would have allowed the fees to survive a discharge and be recoverable against the debtors.

In all Chapter 13 bankruptcy cases, a mortgage creditor has 180 days from the date charges are incurred to file a PPFN. It is best practices for PPFNs be filed every 180 days to protect a creditor’s ability to collect fees, expenses, and/or other charges incurred during the course of a bankruptcy.

Outstanding and unpaid PPFNs should also be included in a creditor’s response to the trustee’s Notice of Final Cure. This will ensure that the court, debtor(s), and trustee are fully advised of the amounts due and owing to a creditor at the time the trustee filed the notice. To avoid sanctions, it is imperative that creditors consult with their local counsel to determine what fees, expenses, and/or charges are recoverable over the course of a Chapter 13 bankruptcy and can be collected post-discharge.

The servicer is currently appealing the decision, and updates will be provided through e-Update as they become available.

Copyright © 2019 USFN. All rights reserved.

Fall USFN Report

by Jeremy B. Wilkins, Esq.

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

Capable and thoughtful attorneys are the cornerstone of any law firm or corporate legal department, and this is particularly true in today’s heavily regulated mortgage default servicing industry.  To maximize attorney competency, it is incumbent upon leadership to guarantee both a platform and the opportunity for an attorney to grow and develop during their tenure with the organization.  Therefore, a concrete plan must be set forth within each firm or corporate legal department to attain this goal.

The starting point for attorney development are the laden principles outlined with the American Bar Association’s Rules of Professional Conduct (“RPC”), specifically the conduct  governing the responsibilities of managing and supervisory attorneys (“managing” attorney).^[1]  Pursuant to Rule 5.1,managing attorneys are responsible for ensuring that the conduct of those they supervise conforms to the Rules of Professional Conduct.  This duty of oversight is a considerable obligation because requirements under the rules are often broadly defined, far reaching in scope, and juxtaposed against obligations of other individuals., For instance, all attorneys are bound to professionalism individually, but in some circumstances, liability is imputed to a managing attorney for ethical shortcomings of a subordinate attorney^[2].  Therefore, a managing attorney has every motivation to facilitate development of subordinate attorneys.  With these two ethical provisions working synergistically, attorney development becomes an essential aim for any organization.

Attorney Mentoring (Phase 1) – Striking the Right Baseline
With the oversight framework of Rule 5.1 set forth as guidance, the managing attorney must make reasonable assurances that all lawyers within the organization are abiding by the RPC. The best measure for meeting the reasonable assurances standard is a total investment in the development of the attorney. 

The first step of attorney development is a robust mentoring program commencing on their first day with the law firm.  Each attorney should be assigned a mentor that will immediately start assisting the newly hired mentee attorney with navigating through the basics, thereby cultivating an atmosphere of progressive growth through measured and strategic exposure to legal matters (including courtroom appearances), client development, and comprehension of an organization’s operations. 

When it comes to exposure to legal matters, there should be a broad-based approach to different aspects of the industry to generate maximum exposure for the attorney enhancing the attorney’s learning curve.  Diversity of legal work is paramount to long-term development.  As such, a mentoring program requires a framework that ensures valuable experiences for the mentee.  For instance, a mentor should ensure the mentee has necessary resources available to achieve early success within appointed legal work.  Essentially, this means that a mentor should help early accomplishments while developing confidence through performance.  This program must be documented to track the progress of the attorney and allow for a layering of increased legal exposure based upon the mentee attorney’s success at each stage.  This also includes the documenting of coachable moments for the mentee attorney.  This is the most effective way to learn to experience a degree of learnable remediation early on for the mentee attorney. 

Balancing training, oversight, and on-the-job performance are cornerstones of a successful mentoring program, without this equilibrium the program will be fruitless long term.  In many ways, the mentoring program is predicated upon having a successful mentor in place as this, in turn, will bolster the success of the mentee attorney’s development.  Moreover, a strong mentor will create an example for the mentee attorney, consequently establishing the foundation for a healthy cycle of the mentee attorney subsequently becoming a mentor down the road.  If the mentor does not do his or her part of the mentee attorney development, it will create a roadblock in the cycle of development, which may negatively impact organizational culture. 

The mentoring program should also emphasize the importance of client development and overall relationship development.  In the mortgage default servicing industry, long-term relationship building is a key component of an organization’s long-term success.  Law firms and corporate legal departments should embrace the view that a fundamental part of a mentee attorney’s development is learning how to cultivate relationships within the industry.  This comes with calculated exposure to industry conferences and events, as well as placing the mentee attorney in situations whereby they are interacting with clients and vendors concerning legal matters at an early stage of their development.  If the mentor fails to strike a balance with the relationship aspect of the mentee attorney’s development and maintains a protection of the old guard in the industry, any desires to build a generational organization will be impeded.  It is vital for a mentee attorney to get exposure on a calculated basis with industry clients and colleagues at a level commensurate with their demonstrated developmental proficiency.

Lastly, with respect to the mentoring platform, mentee attorneys should receive training and development in operational matters.  The mortgage default servicing industry is a unique blend of legal and operational functions.  While it is likely preferable that attorneys focus on legal issues with non-attorney staff handling operational matters, it is also important in the industry that every attorney possess a basic acumen of the operational principles, duties, and functions within the organization.  By gaining this operational understanding and appreciation, the mentee attorney will increase their overall effectiveness as an attorney and a leader within the organization.  Furthermore, it creates an environment of cohesion within the organization as the mentee attorney will effectively and naturally start adhering to oversight principles as dictated by the Rules of Professional Conduct with respect to responsibility over non-attorneys.^[3]  Producing a well-rounded attorney with a wide range of experiences early on via a strong mentoring program will bolster the organization’s attorney developmental profile in the mortgage default servicing industry.

Attorney Mentoring (Phase 2) - Continual Learning, Continued Growth, and Continued Advancement
Mentoring does not stop at the intersections of work performance and involvement in organization operations.  An attorney should never stop learning and their development is predicated upon that premise.  In addition to state mandated continual education requirements, learning must continue in practice as well.  Learning and education come in varying degrees of importance and may have varying degrees of results.  However, a mentor that encourages regular education and learning opportunities ensures the mentee attorney develops alongside changes within the mortgage default industry.  In addition to state specific organizations geared to promote educational opportunities for attorneys, there are innovative member-based institutions, such as USFN, within the industry offering a litany of educational opportunities through conferences, publications, and webinars among other services.  Recognition, awareness and exploitation of opportunities for continual learning will place a natural emphasis on successful attorney development.

As the mentee attorney matures through the mentoring platform, the growth curve should be accelerated.  The best way to heighten expectations is through additional challenges and duties.  The mentee attorney should look to engage in the training of staff and the training of industrywide partners.  This will increase the mentee attorney’s visibility inside and outside the organization.  In turn, the mentee attorney’s confidence will grow, thereby enhancing the quality and image of the organization. 

Further growth paths should include exposure to industry conferences and events as means to reward the mentee attorney, by investing in their growth acceleration.  There is no substitute for imputing confidence and faith in an attorney as means to recognize their efforts.  Moreover, such exposure can also enhance organizational strength by creating the ability to be adaptable to the everchanging industry perspectives. 

Lastly, the mentee attorney should understand that with their development comes the potential for advancement within the organization.  Mentee attorneys must see the ability to move up within the organization if their actions and performance dictate such merit.  A clear and concise attorney advancement path that comports culturally and organizationally, will further bolster attorney development as it goes hand in hand with an attorney mentoring platform. 

In conclusion, to be the best, develop the best.  In the mortgage default servicing industry, law firms and corporate legal departments should strive to have the best attorneys serving their organization.

^{[1] ABA Model Rules of Professional Conduct (Rules of Professional Conduct) Rule 5.1., or applicable state specific rule, for example North Carolina Rules of Professional Conduct Rule 5.1 – Responsibilities of Principals, Managers and Supervisory Attorneys.}  

^{[2] See Rule 5.1(c) of the Rules of Professional Conduct}

^{[3]  ABA Model Rules of Professional Conduct (Rules of Professional Conduct) Rule 5.3 – Responsibilities of Principals, Managers and Supervisory Attorneys.}  

Copyright © 2019 USFN. All rights reserved.

Fall USFN Report

by Mark S. Bosco, Esq., Leonard J. McDonald, Esq. and Megan E. Lees, Esq.
Tiffany & Bosco, P.A.
USFN Member (AZ, CA, NM and NV)

California Assembly Bill 2343, Cal. Civ. P. §§1161 and 1167 were amended and effective September 1, 2019, the Notice Period and Response Deadline in an eviction action will exclude weekends and judicial holidays. Accordingly, in counting a three-day notice to pay rent or quit, or a three-day notice to perform covenant or quit, or in responding to a complaint for unlawful detainer, Saturdays, Sundays and judicial holidays are excluded. See Cal. Civ. P. §§1161 and 1167.

Currently, weekends and judicial holidays are included in calculating the notice period and response deadline in an eviction proceeding. It is critical that all internal notice and service timelines for California evictions now excludes weekends and judicial holidays, effective September 1, 2019.

Copyright © 2019 USFN. All rights reserved.

Fall USFN Report

by Kim Pogue Jenkins, Esq.
Baer & Timberlake, P.C.
USFN Member (OK)

In a case of first impression, the Oklahoma Court of Civil Appeals held that a prior recorded mortgage held priority over a homeowners association lien, as the homeowners association lien was inchoate and unenforceable until the homeowners failed to pay assessments due. At issue in CIT Bank, N.A. v. Heirs, Personal Representatives, Devisees, Trustees, Successors and Assigns of McGee, 444 P.3d 496, 2019 OK CIV APP 36, was when a homeowners association lien becomes effective.

The real property involved is located on a residential and golf course development in Love County, Oklahoma. The Dedication of Restrictions, Conditions, Easements, Covenants, Agreements, Liens and Charges, Falconhead, Phase 1 (“Dedication”) was properly recorded on March 15, 1971. The Dedication provided that each purchaser of a lot in the subdivision would, by accepting a deed to the lot, agree to pay all assessments determined by the Falconhead Property Owners Association, Inc. (“HOA”) and that the obligation to pay would constitute a lien upon the property running with the land. Edward and Laura McGee (“homeowners”) purchased a lot in Falconhead in 1996 subject to this Dedication.  In 2005, the homeowners executed a Home Equity Conversion Mortgage in favor of Financial Freedom Senior Funding Corporation, which was recorded on November 14, 2005, and was subsequently assigned to CIT Bank, N.A. (“CIT”).  CIT filed a suit for foreclosure of its mortgage on May 13, 2016. The HOA recorded a Lien Statement on May 20, 2016, after the homeowners failed to pay assessments, and CIT amended its complaint to join the HOA in its foreclosure.

CIT moved for summary judgment, and the HOA responded with a counter-motion for summary judgment in which it claimed priority over the mortgage. The HOA asserted that its lien “came into being and existed” from the time the homeowners accepted a deed in 1996. In support of its assertion, the HOA claimed that the mortgage holder was on notice of the lien and the contents of the Dedication. The HOA cited Grindstaff v. Oaks Owners Association Inc., 386 P.3d 1035, 2016 OK CIV APP 73, to say that adhering to the terms of the Dedication is a contract between the HOA and the homeowners, and cited to First National Bank v. Melton & Holmes, 9 P.2d 703, 1932 OK 149, to say that “a legal contract which creates a lien, does so upon the date of execution of the contract where language creating the lien is in praesenti.”  The HOA interpreted the language quoted above from the Dedication to mean that the lien was created at the time of recording the Dedication, and that the duty to pay assessments constituted an actual lien on the land, not the potential to become a lien. The HOA further noted that it is irrelevant when payment of assessments or payments on a promissory note are paid or not paid; time of creation of the lien is what is relevant. (See 42 O.S. §9 “A lien may be created by contract, to take immediate effect, as security for the performance of obligations not then in existence.”)  Finally, the HOA argued that language in the Dedication provided that HOA liens thereunder would be subordinate to construction mortgages, and that the HOA could voluntarily subordinate its lien to other mortgages if it so chose. The CIT mortgage was not a construction mortgage, and the HOA did not subordinate its lien to the mortgage.

The District Court of Love County granted summary judgment in favor of CIT, finding that its mortgage lien had priority over the lien of the HOA, and the Oklahoma Court of Civil Appeals affirmed, stating that the Dedication only gave the HOA a future right to make assessments and create a lien.

In its analysis, the Court of Civil Appeals looked at case law regarding the nature and priority of other liens. Quoting First Nat’l Bank of Tulsa v. Scott, 249 P. 282, 1925 OK 986, the Court compared the HOA lien to that of an ad valorem tax lien, wherein “the lien securing payment of those taxes does not attach until the amount of the assessment is subsequently determined and the tax becomes due and delinquent.” The Court determined that any lien created by the Dedication was inchoate, as one could not determine amounts due or how to discharge the lien. The Court went on to find that a lien may become choate and attach, but it cannot take priority over a previously perfected lien. U.S. v. Home Fed. Sav. & Loan Ass’n of Tulsa, 418 P.2d 319, 1966 OK 135.

The Court also compared the HOA lien to that of a mechanics and materialmen’s lien as provided by 42 O.S. §141. A “prior recorded mortgage takes precedence over a materialmen’s lien accruing after the recording of such mortgage, even to the extent of attaching to the improvements placed upon the mortgaged premises afterwards by the materialman.” Thompson v. Smith, 420 P.2d 526, 1966 OK 214. The Court reasoned that since a portion of the HOA assessments were used for maintaining common areas in the development, the lien was analogous to a materialmen’s lien and was not entitled to priority over the prior recorded mortgage. The Court did not consider the fact that the mortgage was a reverse mortgage to be relevant to the argument. The Court concluded by finding that the HOA lien was “inchoate and did not mature into an enforceable lien until December 2015” and that the HOA “perfected its lien on May 20, 2018, well after the Bank’s mortgage had been recorded.” In holding that CIT’s mortgage lien was first in time and prior to the HOA lien, the judgment of the District Court was affirmed.

While it will remain necessary to include homeowners association lien holders in foreclosure actions in Oklahoma, mortgagees may rely on this decision and this Court’s analysis to establish priority of the prior recorded mortgage over subsequently perfected HOA liens.

Copyright © 2019 USFN. All rights reserved.

Fall USFN Report