by Reggie Corley
Scott & Corley, P.A.

USFN Member (SC)

On May 16, 2019, South Carolina House Bill 3243 (S.C. Code Section 8-21-310), the Predictable Recording Fee Act, was signed into law by Governor Henry McMaster. In doing so, South Carolina joined the ranks of 18 other states that determine real estate document recording fees based on a “predictable fee” basis. Currently, Georgia, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Mexico, North Carolina, North Dakota, South Carolina, South Dakota, Utah, Wisconsin, and Wyoming all calculate their recording fees using a predictable fee method.

The new South Carolina bill, which took effect with all county Register of Deeds/Clerk of Court offices on August 1, 2019, aims to streamline the filing of real estate documents statewide. The Predictable Recording Fee Act accomplished this by creating foreseeable fees for many commonly recorded real estate documents. The Act outlines numerous types of documents followed by a corresponding flat fee, due upon recordation. Prior to this Act, to calculate the amount owed for recording a document, most documents had a flat recording fee plus an additional variable fee. The additional variable fee was determined by the document’s total page count. When a document was submitted, the pages had to be counted for filing by the submitter. The document’s pages were then counted again, a second time, by county employees to ultimately calculate the total cost to file the document. This method was more time consuming than the new flat filing fee method.  House Bill 3243 ultimately eliminated the page counting method in favor of a predictable flat fee, based on the document type. Some examples of how real estate documents are classified and charged under the new bill are as follows: Deed to Real-Estate - $15.00; Mortgage - $25.00; Assignment of Mortgage - $10.00; Satisfaction/Release of Mortgage - $10.00; and a plat or survey not part of or attached to another document to be recorded - $25.00.

Ultimately, the benefit of the predictable fee method is to reduce the chances of penalties or documents being rejected, which can cause delays in completing real estate transactions. The predictable fee structure can save time and money for the recorder, submitter, and ultimately the consumer. Lenders, settlement agents, and lawyers filing documents on behalf of clients are just a few examples of who will benefit from this newer method of calculating recording fees.

Copyright © 2019 USFN. All rights reserved.

Fall USFN Report

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

Foreclosure attorneys in Oklahoma may see a change in the method Sheriffs employ for appraisal of real property prior to Sheriff’s Sale. The Oklahoma Legislature amended 12 O.S. §759, effective November 1, 2019.

Prior to the amendment, a Sheriff was directed to appoint three disinterested persons who have taken an oath of impartiality to make an appraisal upon actual view of the real property. While retaining this provision, the amended statute provides an alternate option for the Sheriff to appoint a “legal entity” to make the appraisal. The legal entity must also provide an affidavit of impartiality and make its appraisal upon actual view. However, the appraisal of the legal entity “shall be developed by the legal entity using at least three independent, credible sources, each of which has estimated the real value of the subject property independently.” All other provisions of §759 remain unchanged.

Effects of the new statute are uncertain. It is possible that the appraisal by a legal entity could be less expensive. Should a Sheriff choose to appoint a legal entity instead of the three disinterested persons, foreclosure attorneys might be required to amend their appraisal forms provided to the Sheriff. Additionally, the requirement that the legal entity base its appraisal on “credible sources” could provide a means for defense counsel to challenge the validity of the appraisal.

While it remains undetermined at this time which Sheriffs may be considering the alternative “legal entity” appraisal, the Sheriff of one major county in Oklahoma is examining implementation of the new option.

Copyright © 2019 USFN. All rights reserved.

October e-Update

by Lesley Bohleber, Esq.

Aldridge Pite, LLP

USFN Member (CA, GA, HI, ID, NY, OR, UT, WA)

During the September USFN Briefing, there was a statement from an audience member that couldn’t be addressed due to time constraints (“I thought we couldn't send out statements on HELOC, without authorization from Bankruptcy Attorney”). Lesley Bohleber from Aldridge Pite, LLP provides an answer below. Downloads from past USFN Briefings and a schedule of upcoming topics may be found on the USFN Briefings webpage.

Mortgage servicers typically have a firm understanding of the required procedures for servicing a conventional loan secured by a mortgage or deed of trust when a borrower files a bankruptcy petition. Conversely, home equity line of credit agreements (“HELOCs”) often pose a host of challenges in bankruptcy proceedings. HELOCs are commonly charged off by the servicer or the lien securing the HELOCs is avoided in the bankruptcy case, if there is a lack of equity to secure the claim.

As of recently, some bankruptcy courts are considering issuing General Orders regarding HELOC payment change notices which would alleviate the servicing burden on these accounts. Federal Rule of Bankruptcy Procedure 3002.1(b) requires a mortgage servicer to file a Notice of Payment Change for a loan secured by a debtor’s principal residence, if the Chapter 13 Plan provides for either the debtor or trustee to remit payment on the loan. However, Rule 3002.1 also allows for a court ordered modification of this payment change notification requirement on claims arising from a HELOC. Proposed General Orders from the Southern District of California and District of Utah would require an annual or biannual notice, respectively, that includes a post-petition payment history. If the proposed General Orders are adopted, it may still be advisable for servicers to send monthly statements to the debtor to keep the debtor apprised of any changes in the monthly payment.

Regulations currently exist regarding periodic mortgage statements for closed-end loans (See 12 CFR § 1026.41), but there is no similar guidance for open-end loans such as HELOCs. However, HELOC servicers may use Section 1026.41 and case law as a guide for determining if they should send a periodic statement to a borrower in bankruptcy.

Unless the debtor or their attorney request a servicer cease sending monthly statements, providing a statement that is purely informational in nature and not coercive or demanding payment is unlikely to be deemed a violation of the automatic stay, regardless of whether the debtor provides a servicer with written authorization to send monthly statements. The same remains true post-discharge. Recently, the United States Court of Appeals for the 11th Circuit affirmed the Bankruptcy Court’s decision finding a post-discharge informational statement on a loan secured by a property surrendered in the Chapter 13 plan did not violate the discharge injunction. See Roth v Nationstar Mortgage., LLC (In re Roth), 935 F3d 1270 (11th Cir 2019).

(Click here for an additional story on the 11th Circuit Court of Appeals’ decision on Roth v Nationstar Mortgage).

In the case of Chapter 13 debtors, whether to send a statement and the contents of the statement on a HELOC should depend on how the claim is treated in the plan. If the plan provides for post-petition payments to be made directly to the servicer by the debtor, informational statements that include the monthly payment amount and due date should be sent to inform the debtor of the monthly payment amount so long as it does not demand payment. If the HELOC claim is paid through the plan with payments disbursed by the Chapter 13 Trustee, servicers should include a disclaimer advising the debtor the statement is for informational purposes only and directing the debtor to tender payments to the trustee rather than the servicer.

If a servicer elects to continue sending statements where a statement of intention or the plan provides for the surrender of the property secured by the HELOC loan, the statement should include a disclaimer instructing the debtor to ignore the statement if they intend to surrender the property securing the loan. In a case where the plan provides for the avoidance of a lien, any statement sent should clearly advise the statement is for informational purposes only and the debtor can ignore the statement if the lien has been avoided. Finally, all mortgage statements for HELOCs in bankruptcy should include instructions for the debtor to opt out of receiving mortgage statements and a toll-free number or address to which the debtor can send a written request. Additional disclosures required by 12 CFR § 1026.41(f) for closed-end loans may be used for HELOCs for further clarification.

Copyright © 2019 USFN. All rights reserved.

by Louise Johnson, Esq.
Scott & Corley, P.A.
USFN Member (SC)

In Roth v. Nationstar Mortgage, LLC No. 17-11444 (11th Cir. 2019), the 11th Circuit Court of Appeals held that a mortgage statement sent for “informational purposes only” and with appropriate disclaimers on a discharged mortgage debt was not a violation of § 524 of the Bankruptcy Code.

The underlying facts of the case are not unusual nor uncommon.  The defendant’s Chapter 13 Plan provided that secured creditors would retain their liens.  Nationstar was the servicer (“servicer”) for one of those secured creditors whose mortgage lien “survived” the bankruptcy discharge.

The Bankruptcy Court entered the discharge order which effectively prohibited creditors from attempting to collect the discharged debt.  After the entry of the discharge order, the servicer sent Roth certain mortgage statements (“statements”) containing express disclaimers that the statements were for informational purposes only, and that the statements were not an attempt to collect a discharged debt. The statements included an “amount due,” “due date,” and that statements about the negative escrow balance does not diminish the effect of the prominent, clear, and broadly worded disclaimer.  The servicer continued to send such statements even after Roth’s attorney sent the Servicer a cease and desist letter. On appeal Roth raised the issue of whether the servicer’s statements, after the discharge, was an improper attempt to collect a debt in violation of 11 U.S.C. § 524, justifying sanctions against the Servicer.

Roth argued that the FDCPA standard of “debt collection” should apply, rather than the bankruptcy court standard of what constitutes “debt collection.”^[1] The FDCPA standard for determining if a communication is a debt collection is whether the statement would “mislead the least sophisticated consumer regarding the nature of her rights.”  Section 524(a)(2) of the bankruptcy code provides that a discharge of debt in a bankruptcy proceeding “operates as an injunction against the commencement or continuation of...an act...to collect...any such [discharged] debt.” 11 U.S.C. § 524(a)(2). The court in Roth applied the Bankruptcy standard, finding that when determining if the Informational Statement was an unlawful debt collection in violation of §524 “the objective effect” must be used, looking specifically to see if the informational Statement was used “to pressure the defendant to repay the discharged debt.” The Court emphasized that what counts as “debt collection” under one statutory scheme is not necessarily “debt collection” under the other; finding here that no debt collection attempt was present.

The 11th Circuit affirmed the lower Court’s ruling that the Statements did not violate § 524, as said Statements, with the appropriate disclosures, did not constitute an attempt to collect a debt.  Of special importance, the Roth Court declined to apply the FDCPA’s “least sophisticated consumer” standard when evaluating the Statements under § 524 of the bankruptcy code.  Rather, the Roth Court utilized a more objective standard of whether there was more than a “fair ground of doubt” as to whether the discharge order barred the servicer’s conduct.

^{[1] The FDCPA creates a civil cause of action based on certain prohibited debt collection methods, specifically a “false, deceptive, or misleading representation or means in connection with the collection of any debt” or an “unfair or unconscionable means” of debt collection. 15 U.S.C. § 1692e–f.}

Copyright © 2019 USFN. All rights reserved.

October e-Update

Below is a roundup of legislation and case law from July’s REO/Evictions USFN Briefing. Post-webinar downloads and a schedule of upcoming topics may be found on the USFN Briefings webpage.

Legislative Updates

California
by Kayo Manson-Tompkins, Esq.

The Wolf Firm

USFN Member (CA, ID, OR, WA)

California AB 1482 –Bill to Establish a Statewide Rent Control

i. If passed, Section1946.2 and Section 1947.12 will be added to the Civil Code

• Would prohibit terminating a lease of a tenant who has occupied the property for at least 12 months without “just cause.”
• Notice of violation and an opportunity to cure must be sent prior to the notice of termination
• No fault “just cause” terminations require relocation of at least one month’s rent
• If no relocation is offered, the notice of termination is void
• Would not prevent local rules or ordinances that provide a higher level of tenant protections
• Voids any waiver of rights provisions
• Limits annual rent increase to 7% plus change in cost of living or 10%, whichever is lower
• Largest impact on cities that do not already have rent control laws
• Would include all homes built in Los Angeles between 1978 and 2009, which currently are not covered by Los Angeles rent control laws

ii. Repealed as of January 1, 2023

Connecticut
by Renee Bishop, Esq.

Bendett & McHugh, PC

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

House Bill 6996 – An Act Extending the Foreclosure Mediation Program

i. This bill extends the judicial foreclosure mediation program four (4) years to July 1, 2023

House Bill 7179 – An Act Concerning Crumbling Concrete Foundations

 i. This bill makes comprehensive change to various statutes regarding crumbling concrete foundations. The most pertinent of those changes is that it requires the seller of residential property acquired by a judgment of strict foreclosure, foreclosure by sale or by deed in lieu of foreclosure to complete a newly created form regarding the foundation of the property and the potential existence of the chemical pyrrhotite. Completion of the form is only required for those properties located in municipalities that have been identified by the Capitol Region Council Governments as being affected or have potential to be affected by crumbling foundations.

ii. Included in the form is whether the seller has any knowledge related to the presence of pyrrhotite in any concrete foundation on the subject property; if the Seller is aware of any damage or deterioration in any concrete foundation on the subject property; and if the Seller is aware of any repairs or remediation to any concrete foundation on the subject property.

Senate Bill 320 –An Act Concerning Real Estate Closings and Attorneys and Law Firms Preferred by Mortgage Lenders

i. This bill provides that no person shall conduct a real estate closing unless such person is admitted as an attorney in this state. A real estate closing is defined as mortgage loan transaction secured by property in Connecticut, other than a home equity line of credit transaction or any other transaction that does not involve the issuance of mortgagee title insurance policy; or a transaction where consideration is paid to effectuate the change in ownership to real property in Connecticut.

Senate Bill 833 – An Act Concerning Validation of Conveyance Defects Association with an Instrument that was Executed Pursuant to a Power of Attorney.

i. This bill validates deeds, mortgages, assignments and releases recorded after January 1, 1997 executed pursuant to a power of attorney, where the power of attorney was not recorded in the applicable land records. This will happen so long as the deed has been of record for fifteen (15) years and no action to set aside the deed has been commenced. The only exemptions to validation will be (1) if the fiduciary in the deed is also the grantee (self-dealing), or (2) the deed fails to state that the consideration reflecting fair market value.

Senate Bill 1070 – An Act Concerning Abandoned and Blighted Property Stewardship

i. This bill establishes a very detailed legal process for the rehabilitation of abandoned properties in municipalities with populations of at least 35,000 by providing that if an owner of a residential, commercial, or industrial building fails to maintain it in accordance with applicable municipal codes, the Superior Court, upon petition of a party in interest, and after holding a hearing on the same, may appoint a receiver to make the necessary improvements, who may obtain court approved financing to accomplish the same.

ii. Notably, a receiver will not be appointed if the building is subject to a pending foreclosure action by an individual or a nongovernmental entity (which does not appear to be defined).

Georgia
by Stuart Gordan, Esq.

McCalla Raymer Leibert Pierce, LLC

USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

House Bill 492 – Writ Application Deadline

i. Requires applications for execution of a writ of possession to be made within 30 days of the issuance of the writ, unless a writ is accompanied by an affidavit showing good cause for the delay in applying for the writ.

House Bill 346 – Dispossessories Could be Retaliatory

i. Prohibits retaliation by a landlord against a tenant for taking specified actions, and provides for a defense when a dispossessory action is filed within 3 months after the certain action is taken by the tenant. This appears to have broader applicability to the traditional landlord/tenant relationship, but the bill does not contain a clear exception for post-foreclosure dispossessories. Still this applies to situations where there is a lease agreement and therefore does not apply to post-foreclosure evictions, but this is uncertain until there is a court opinion.

Illinois
by Michael Anselmo, Esq.

Anselmo Lindberg & Associates

USFN Member (IL)

Senate Bill 169 – Aldermanic Notification

i. Amends the Code of Civil Procedure. Replaces everything after the enacting clause with the provisions of the introduced bill and makes the following changes: Deletes language providing that the failure to send a copy of the notice to the alderman or to file an affidavit as required results in a fine of $500 payable to the ward in which the property is located. Provides instead that the failure to send a copy of the notice to the alderman or to file an affidavit as required shall result in a stay of the foreclosure action on a motion of a party or the court; if the foreclosure action has been stayed by an order of the court, the plaintiff shall send the notice by certified mail or by private carrier that provides proof of delivery; and after proof of delivery is tendered to the court, the court shall lift the stay of the foreclosure action.

Public Act 101-97 – Release of Mortgage Request

i. Adds a person authorized by the mortgagor, grantor, heir, legal representative, or assign to the list of those who may request that the mortgagee of real property execute and deliver a release of a mortgage or deed of trust. If any mortgagee or trustee does not, within 30 days (rather than "one month") after the payment of the debt secured by the mortgage or trust deed complies with specific requirements, then it is liable for the sum of $200 to the aggrieved party. The successor in interest to the mortgagee or trustee is not liable for the $200 penalty if it complies with specific requirements within 30 days (rather than "one month") after succeeding to the interest. Effective January 1, 2020.

Case Law Updates

Illinois
by Michael Anselmo, Esq.

Anselmo Lindberg & Associates

USFN Member (IL)

Santiago v. Deutsche Bank– 1st Dist. No 1-17-3170 (Pending) - UPDATE

1. Keep Chicago Renting Ordinance (KCRO) requires that a lender who purchases property at foreclosure sale with a bona fide tenant residing in it must either 1) pay that tenant $10,600 in relocation expenses, or 2) provide them with a lease for no more than 102% of the prior year’s rental rate.

2. Rent Control Preemption Act (RCPA)states that “A unit of local government, as defined in Section 1 of Article VII of the Illinois Constitution, shall not enact, maintain, or enforce an ordinance or resolution that would have the effect of controlling the amount of rent charged for leasing private residential or commercial property.” (emphasis added) 50 ILCS 825/5

3. Argued that requiring a lender to cap the rental rate at 102% of the tenants’ prior lease is an ordinance that controls rent in violation of the Rent Control Preemption Act.

4. UPDATE –This case is dismissed, due to settlement on behalf of the parties. No further pending appeals at this time.

Copyright © 2019 USFN. All rights reserved.

August e-Update

by Randall Szabo, Esq.
The Wolf Firm
USFN Member (CA, ID, OR, WA)

In February, Oregon Governor Kate Brown signed into law sweeping amendments to the Residential Landlord-Tenant Act (ORS Chapter 90) (“RLTA”), imposing the nation’s first statewide rent control. As a result of an emergency declaration, Senate Bill 608 (which overturns a more than 30 year-old-rent control prohibition) took effect upon passage.  At its core, the new law imposes a cap on most rental increases and a prohibition on most no-cause evictions.  While the law constitutes a massive sea of change in the world of landlord-tenant law, it may appear at first glance of little consequence to owners of REO properties, as they are generally exempt from the complex requirements of the RLTA.  However, one wrong move can bring these onerous requirements front and center.  With a good understanding of both the new law and existing foreclosure law, these results can be mitigated if not avoided altogether.

While the fanfare of SB 608 mostly surrounds its rent control provisions, more consequential, in the context of REO properties, are the substantial obstacles the law imposes on terminating tenancies. The law provides different treatment for month-to- month and fixed-term tenancies.  A landlord may terminate a month-to-month tenancy during the first year of occupancy (the tenant’s first year—not the first year the new owner takes title) without stated cause.  After the first year a month-to-month tenancy may only be terminated for a “tenant cause” or a “qualifying landlord reason.”  Similarly, a fixed-term tenancy may be terminated without cause at the end of the term if the term expires within the first year of occupancy.  However, if the term expires after the first year of occupancy, the fixed-term tenancy converts to a month-to-month tenancy unless:

a)    the landlord and tenant agree to a new fixed term;

b)    the tenant leaves voluntarily; or

c)    the landlord has a qualifying reason for termination.

“Tenant causes” for eviction include material violations of the rental agreement and other specific causes as set out in ORS Chapters 86 and 90. The “qualifying landlord” reasons for eviction are:

 a) converting the premises to a non-residential use;

 b) initiating repairs (if the premises is or will be unsafe or unfit for occupancy); and

 c) having accepted an offer to purchase the property.

 A landlord who terminates a tenancy in violation of the above could face liability of three times the monthly rent plus actual damages, and the tenant may have a defense in an action for possession.

The rent control aspect of the law is relatively straight forward. A landlord may not raise a tenant’s rent during the first year of occupancy, and after the first year may raise the rent no more than seven percent plus the consumer price index during any 12-month period.  Exceptions are listed for newer constructions (less than 15 years old at the time of the rent increase), and landlords who provide decreased rent as part of a government subsidy or program. Penalties for violating the statute are set at three times the monthly rent plus actual damages.

The issue is, are these protections applicable to REO property owners?  The answer is, perhaps. A landlord-tenant relationship may be created involuntarily.  In the context of non-judicial foreclosure, the purchaser at a trustee’s sale may inadvertently form a landlord-tenant relationship by failing to terminate the tenancy within 30 days from the date of sale.  See ORS 86.782(9)(a)(C).  While failure to timely terminate the tenancy has always had some issues, this omission now creates the more problematic tenancy which may only be terminated by following the new law’s onerous requirements.

A new owner can also run into trouble by accepting rent from the existing tenant. ORS 86.782(9)(a)(A) explicitly provides that a purchaser after a trustee’s sale becomes a landlord if the purchaser accepts rent from an existing tenant.  While it may be tempting to accept rental payments from an existing tenant, particularly one who has the ability to remain in the premises for the remainder of a lease pursuant to the Federal Protecting Tenants in Foreclosure Act, local counsel should be consulted before accepting any form of payments from an existing occupant.

Although the purchaser at a sheriff’s sale following a judicial foreclosure is generally exempt from the requirements of ORS Chapter 90, we anticipate an argument to be made to extend these prescriptive landlord-tenant relationships into the post-judicial context.  We would expect this in the situation in which a new owner follows ORS 18.946(2), which allows a tenant with an unexpired lease to remain in occupancy until the end of the lease or until the expiration of redemption “if the lessee makes the lease payments to the purchaser or redemptioner, or pays to the purchaser or redemptioner a monthly payment equal to the value of the use and occupancy of the property, whichever amount is greater”.  SB 608 provides that a trustee’s sale constitutes cause for terminating a tenancy, See e.g. SB 608 §1(3)(c)(A), however, no such provision is specified in the context of a judicial sale.   It is unknown if the legislature simply found it unnecessary given a long history of not applying landlord-tenant law in the judicial-foreclosure context.  Nonetheless, we do anticipate the issue to be raised. Thus, it is important to consult with local counsel before accepting funds from an occupant.

In the event that a landlord-tenant relationship is created, there may be no simple way to terminate the tenancy, but the new landlord does have options. As stated above, the tenancy can be terminated if the property is sold or in need of repairs, but certain conditions must be met and specific procedures followed in order to terminate the tenancy for either of these reasons. Therefore, consultation with local counsel is strongly advised. Fortunately, the creation of a tenancy to which the RLTA applies can be avoided by following these procedures:

a) within 30 days of a trustee’s sale, provide written notice of intent to terminate the tenancy; 

b) do not have communications with occupants that could be construed as agreeing to a new or continued tenancy; and

c) do not accept any payments from occupants without first consulting with counsel.
 

Copyright © 2019 USFN. All rights reserved.

August e-Update

by Aaron M. Othmer, Esq.
Martin Leigh PC
USFN Member (KS, MO)

In Kansas mortgage foreclosure actions, and as in most judicial foreclosure states, the borrower is afforded an opportunity to redeem a foreclosed property after the foreclosure sale has occurred. Redemption of a foreclosed property is controlled in Kansas by K.S.A. § 60-2414. K.S.A § 60-2414 sets forth, amongst other things, how the property is redeemed, who can redeem, and how long a party has to redeem a foreclosed property. K.S.A. § 60-2414 provides “the defendant owner may redeem any real property sold under execution, special execution or order of sale, at any time within 12 months from the day of the sale, for the amount paid by the current holder of the certificate of purchase.”  See K.S.A. K.S.A. § 60-2414(a). However, under certain circumstances, the redemption period is shortened to three months. “In the event a default occurs in the conditions of the mortgage or instrument of the most senior lien foreclosed before one-third of the original indebtedness secured by the mortgage or lien has been paid, the court shall order a redemption period of three months. K.S.A. § 60-2414(m)(emphasis added).

A key to determining the appropriate redemption period length is determining what the “original indebtedness” is. For a traditional mortgage, after the mortgage has been executed, all funds are taken out at once to pay for the property, thereby making the “original indebtedness” the “total indebtedness” for purposes of the Kansas redemption statute. Therefore, calculating the redemption period for traditional mortgages is straight-forward. At the time of default, the lender’s attorney can simply divide the unpaid principal balance by the total indebtedness of the mortgage to determine whether the redemption period is three months or 12 months. Using the formula above, if the ending percentage is greater than two-thirds or 66.67%, then the redemption period is three months. If the percentage is less than 66.67%, the redemption period is 12 months.

For reverse mortgages, the same redemption rules apply, but calculating the redemption period is not as straight forward. In a reverse mortgage transaction, the borrower mortgages their property to the lender for a total mortgage amount, like a traditional mortgage. However, instead of the lender paying all funds at once to the buy the property, the lender will either provide a lump sum amount to the borrower for the borrower to use how they see fit, or the borrower will draw funds from the lender over time not to exceed the total mortgage amount. Stated another way, a typical reverse mortgage borrower mortgages their property to the lender in exchange for the lender providing advances to the borrower, allowing the borrower to “live off the equity in their home while continuing to live there.” Reverse Mortg. Sols., Inc. v. Goldwyn, 56 Kan. App. 2d 129, 130, 425 P.3d 617, 619, 2018 WL 3320933 (Kan. Ct. App. July 6, 2018). Typically, the lender will continue to provide monthly advances or allow monthly draws by the borrower until the total mortgage amount is reached or until the borrower defaults. For most reverse mortgages, a borrower defaults if the borrower fails to pay taxes/insurance or if the borrower dies. In most reverse mortgage situations, the reverse mortgage borrower will continue receiving equity advances or continue making monthly draws without repayment of the indebtedness, thereby essentially guaranteeing a three-month redemption period. However, if the reverse mortgage borrower does repay some of the indebtedness, the question remains how the “original indebtedness” is determined for purposes of calculating the redemption period.

The Kansas Court of Appeals recently clarified the “original indebtedness” issue in Reverse Mortg. Sols., Inc. v. Goldwyn, 56 Kan. App. 2d 129, 425 P.3d 617, 2018 WL 3320933. In Goldwyn, the reverse mortgage borrower took out a mortgage with a total indebtedness of $262,500.00. Goldwyn, 56 Kan. App. 2d at 130, 425 P.3d at 619. When the borrower died, Goldwyn became the property owner, and shortly thereafter, the lender declared the entire sum of all advances due. Id.  To determine the redemption period, the court examined the language provided in K.S.A. § 60-2414(m).  Instead of looking at the amount repaid on “total indebtedness” of the mortgage ($262,500.00), the court looked at the amount repaid of the first advance amount. As stated by the Court of Appeals, the “mortgage amount…does not determine the ‘original indebtedness’: a mortgage secures the loan but there's no indebtedness until some money is taken under the loan.” Goldwyn, 56 Kan. App. 2d at 136, 425 P.3d at 622. The Court of Appeals further clarified that while “[the borrower] took additional advances from October 2007 through November 2010, those amounts would represent part of her total indebtedness but not her ‘original indebtedness.’” Id. As shown by the facts of the case, the borrower did not repay any of the sums she received from the lender. Id. Therefore, the Court of Appeals determined that the redemption period was three months under K.S.A. § 60-2414(m). Id.  

In Goldwyn, The Kansas Court of Appeals goes on to suggest that the Kansas legislature may want to consider a different approach regarding redemption periods and reverse mortgage transactions, and it’s hard not to agree with the Kansas Court of Appeals. The Kansas legislature may want to consider providing a permanent 12-month redemption period for reverse mortgages considering all reverse mortgage borrowers are elderly as required by federal law (“the youngest borrower shall be 62 years of age or older at the time of loan closing. 24 CFR 206.33.”).  As the redemption statute currently stands, the shortened redemption period puts a tremendous amount of pressure for borrowers to obtain funds to payoff or reinstate the loan, and if that cannot occur, then the borrowers are forced to find new accommodations. If the Kansas legislature does not address the issue of redemption periods for reverse mortgages, lenders may want to consider agreeing to, or providing, extensions of the redemption period on their own.
 

Copyright © 2019 USFN. All rights reserved.

August e-Update

by Robert Wichowski, Esq.
Bendett & McHugh, PC
USFN Member (CT, MA, ME, NH, RI, VT)

The First Circuit Court of Appeals has vacated their prior holding in the case of Thompson v JP Morgan Chase (915 F.3d 801.)  In vacating the prior order, the Court held that due to the precise language contained in the relevant state banking regulation (209 C.M.R. §56.04) which the notices were required to contain, together with the widespread industry support received by Chase in subsequent filings in support for Chase’s petition for rehearing, the matter should be directly certified to the Massachusetts Supreme Judicial Court and in fact certified this question to said court:

“Did the statement in the August 12, 2016, default and acceleration notice that ‘you can still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place’ render the notice inaccurate or deceptive in a manner that renders the subsequent foreclosure sale void under Massachusetts law?”

As a result, the court’s ruling as outlined here is no longer operative.  The matter will be taken up and decided by the Massachusetts Supreme Judicial Court.

Copyright © 2019 USFN. All rights reserved.

by Kim Bilderback-GSEC, CISSP

Senior Director, National Business Markets East

AT&T Cybersecurity

American self-help author Napoleon Hill is credited with saying, “Do not wait: the time will never be ‘just right.’ Start where you stand, and work with whatever tool you may have at your command and better tools will be found as you go along.”

This advice is appropriate when thinking about corpo­rate cybersecurity programs. Too many times, a client has described to me what they’re going to do. Too many times, that same client called seeking assistance with a breach.

One reason for the procrastination is cost, which organiza­tions mistakenly classify as an IT expense. Cybersecurity is actually an important component of a business risk man­agement program. The consequences of a cybersecurity breach are not just something intangible, like loss of brand trust or theft of intellectual property. They’re cold, hard cash out of a firm’s pockets due to individual lawsuits, class action lawsuits, contractual violations, or regulatory fines.

Court ruling after court ruling has made it clear that the time for action is now. Businesses of all sizes are responsible for cybersecurity and accountable for damages when they fail that responsibility. Regulators and governments are increasingly tight­ening the cybersecurity requirements and the penalties for noncompliance.

It’s becoming clearer that custom­ers and business partners, even if they cannot demonstrate monetary impact from a breach, have basis for filing lawsuits for breach damages.

In a May 2019 ruling in United States ex rel. Markus v. Aerojet Rocketdyne Holdings, Inc., et. al, a U.S. District Court ruled that a defense contrac­tor had violated the False Claims Act when it entered into, and invoiced under, U.S. government contracts despite failing to fully satisfy (or oth­erwise disclose the scope of its gaps with) its contracts’ requisite cyberse­curity controls.

Essentially making cybersecurity an even larger business risk, a recent U.S. Supreme Court ruling in Zappos. com v. Stevens confirms customers can sue companies when their data is stolen, even if that data is not used for things like identity theft or making fraudulent charges. The Zappos case will go a long way toward deciding how much liability corporations will have if customer data is exposed, regardless of how it is used.

Think cyber insurance will amelio­rate this risk? Think again. Recently, executives for the snack company Mondelez took some solace in their huge cyber breach knowing that cy­ber insurance would help cover their costs. Or, so they thought.

Mondelez, the victim of a crippling NotPetya malware attack in 2017, learned its insurer, Zurich Insurance, would not cover the attack. Zurich declared Mondelez’s losses collateral damage in a cyberwar and invoked the policy’s “war exclusion” clause. Since the U.S. government assigned responsibility for NotPetya to Rus­sia, all cyber insurers were provided justification to invoke “war exclusion” clauses to not pay claims. The issue is still in the courts.

Consider this analysis by attorneys Karen K. Karabinos, Esq. and Eric R. Mull, Esq. on the implications of Columbia Casualty v. Cottage Health System:

“While the issues surrounding a cyberattack may be complex, com­pliance with the terms and condi­tions of a cyber policy may be as simple as determining if an insured has in place and is following the practices and procedures required under the terms of the policy. As cyber liability and coverage continue to be a growing and ever-changing concern, more and more companies will turn to their insurance carriers for protection. Insureds should be mindful that their failure to answer application questions accurately, their failure to comply with certain practices relating to computer and data security, or their failure to maintain security policies, practices, and procedures may result in the forfeiture of coverage, and in turn, exposure to substantial costs and liability.”

Finally, there is the obligation to prevent risk from insiders. In a re­cent ruling, the UK Court of Appeal upheld a lower court’s decision that the supermarket giant Morrisons is liable for its employees’ misuse of data. In 2015, a former Morrisons employee was convicted of criminal charges for leaking employee pay­roll records. The Court of Appeal’s landmark ruling confirms that Mor­risons is “vicariously liable” for their employee’s criminal misuse of the leaked data.

Morrisons now faces a potential­ly massive payout. The Court of Appeal’s decision paves the way for compensation claims by 5,518 former and current staff members whose personal details were posted on the internet.

What to do? Implementing at least five security essentials is key to cy­bersecurity risk management.

Security Essential 1: IT Asset Dis­covery & Inventory
Think about it. How can you report something stolen if you don’t know what you’ve got in the first place?

Security Essential 2: Vulnerability Scanning
Having inventoried your IT and data assets with asset discovery, you now need to make sure the doors and windows to the assets are shut and locked. That’s what vulnerability scanning does. It scours the perime­ter to make sure all is secure – that known vulnerabilities are patched against.

Security Essential 3: Log Manage­ment & Threat Detection
Log management in cybersecurity is similar to a video camera trained on the front door of a convenience store.

The video camera records the image, date and time of everyone coming into and going out of the store. If the video is monitored indicators of po­tential crime (system compromise) can be detected, an alert sounded, and possible crime averted. Some­one coming through the door, wear­ing a mask, and brandishing a gun could be interpreted as an indicator of potential compromise yielding an alert and proactive crime prevention action taken.

The saved video recordings are a treasure trove of forensic data for the police seeking to investigate after a crime is committed. The video recordings are referenced to identify when a crime occurred, what was stolen and to identify the perpetrator. Absent the video recordings the po­lice would have little hard evidence for investigation. This is exactly what log management and threat detec­tion do for cybersecurity.

Security Essential 4: Security Awareness Training
If the budget allows to manage one cyber risk, this is it. In a 2018 article, cybersecurity expert Michelle Drolet wrote, “The sad truth is that employees are the weakest link in cyber defenses. They are vul­nerable to phishing scams and ran­somware. They also make mistakes. Sometimes they don’t fully under­stand compliance requirements and sensitive data is mishandled.”

“81% of hacking-related breaches over the last year leveraged stolen or weak passwords and 1 in 14 users admitted being tricked into following a link or opening an attachment they shouldn’t have,” said Drolet.

Security Essential 5: Email/Web Filtering
Email alone is the top cybersecurity threat vector. Deploying inexpen­sive technologies that scan emails and monitor web browsing actively detecting and preventing access by known viruses or malicious websites delivers an effective risk manage­ment ROI.

When thinking about implementing cybersecurity measures, it’s import­ant to repeat Napoleon Hill’s warning: “Do not wait.” It may not be a conve­nient moment to implement cyber­security security essentials, but the time is right. Legislation, regulations, and court rulings all show that the consequences of not doing so can have profound risk implications to your business.

Copyright © 2019 USFN. All rights reserved.

Summer USFN Report

Shawnika L. Harris, Esq.
Barrett Daffin Frappier Turner & Engel, LLP
BDF Law Group (TX, GA, CO, CA, NV and AZ)



In Germain v. US Bank National Association, an opinion out of the 5th Circuit Court of Appeals, the court clarifies a servicer’s obligations in reviewing multiple loss mitigation applications. Additionally, the court sends a warning to borrowers and attorneys who manipulate statutory and judicial safeguards in order to escape the borrower’s mortgage obligations.

In July of 2012, Ocwen Loan Servicing, LLC (“servicer”) began servicing Germain’s loan. By August, Germain defaulted on the loan and the servicer-initiated foreclosure proceedings. Germain submitted his first request for a loan modification, which was denied on the basis that the owner of the note did not allow for modification. Germain brought the loan out of default, and the servicer did not continue processing the borrower’s loss mitigation application.

Over the next two years, Germain went in and out of default several times, filed for bankruptcy, which was later dismissed, and submitted two more applications for a loan modification. The servicer denied each request and presented alternative loss mitigation options. Germain failed to take advantage of any options presented.

In February 2014, the borrower again submitted a loss mitigation application and requested a loan modification. The request was denied in writing on the grounds that the owner of the loan did not allow for loan modification and other loss mitigation options were presented, including the option of a short sale.

In 2015, the servicer accelerated the loan and Germain filed suit alleging two primary claims: (1) the servicer was in violation of the Real Estate Settlement Procedure Act (“RESPA”) by failing to provide a written explanation of its loss mitigation analysis for all four times the borrower submitted an application, and (2) violating the Texas Debt Collection Act (“TDCA”) by proceeding with foreclosure without complying with RESPA and urging Germain to submit loss mitigation applications knowing that it would be treated as a loan modification and subsequently denied.

Section 1024.41 (c) and (d) of the Code of Federal Regulations, relied on by the borrower, states that the loan servicer must evaluate the borrower for all loss mitigation options and provide a written explanation of all options or the specific reasons the borrower was denied for loss mitigation. Section 1024.41(i), which states the servicer is only required to comply with the requirements of sections (c) and (d) for one complete loss mitigation application for the borrower’s mortgage account came into effect in 2014. The court in Germain ruled that servicers should be credited for its compliance, even if that compliance occurred prior to the effective date of the statute.

The court relies on the analysis in Campbell v. Nationstar Mortgage out of the 6^th Circuit and the district court opinion in Allen v. Wells Fargo Bank, N.A to determine whether section 1024.41 should apply retroactively in this instance. In Campbell, the court concluded that 1024.41 could not be applied retroactively because doing so would have imposed a duty on the servicer to not foreclose on the property when no such duty existed at the time of the foreclosure. The court in Allen reasoned that a servicer’s past conduct should apply when reading 1024.41(i) because failing to do so would exclude an entire category of borrowers from the limitation on duplicative requests where there was no intention to exclude such borrowers.

The court in Germain reconciles these seemingly conflicting opinions by delineating the difference between applying 1024.41 retroactively to impose a new duty to prior actions and crediting the servicer for its compliance with 1024.41 prior to the effective date of the statute. In other words, section 1024.41(i) should be retroactively applied because the purpose of the statute was to bring servicers into compliance, not make compliant servicers repeat their compliance.

Germain also raised TDCA violation claims which the court quickly dismantled. Germain alleged that the servicer violated the TDCA by threatening to foreclose on the property without complying with RESPA, and “urging [him] to submit a loss mitigation application, although the Defendants knew that [his] application would be treated as a loan modification and would be summarily denied without consideration.” The first TDCA claim was dismissed by the court based on their findings that the servicer was not in violation of RESPA. Germain’s second TDCA claim relied on language in Tex. Fin. Code § 392.304(a)(14) and (19) which forbids fraudulently, deceptively, or falsely misrepresenting the nature of services rendered by the debt collector or any other false representation to collect a debt or obtain information from the consumer. Germain argued that the servicer violated this provision by encouraging Germain to submit loss mitigation applications that would be treated as a request for loan modification and subsequently denied. The court disagreed, reasoning that the servicer did not promise a loan modification, nor did Germain offer any evidence that the servicer requested loss mitigation materials knowing the application would be denied. Further, the servicer provided Germain with several loss mitigation options other than a loan modification, including the option of a short sale. Germain failed to take advantage of any of the suggested options.  

What does the Germain decision mean for mortgage servicers?
First, servicers are only required to comply with the requirements of 1024.41(i) for a single complete loss mitigation application for the borrower’s mortgage loan account. The purpose of the statute is to eliminate the necessity for servicers to review and advise findings on duplicative loss mitigation applications. To be in compliance with 10241.41 the servicer must provide the borrower with one complete written notification of its loss mitigation determination, an explanation for any rejections, and any available options the servicer will provide the borrower. In addition, the court determined that when a servicer has previously provided the borrower with the name of the owner of the note, and that owner has not changed, the servicer’s compliance with 1024.41 is not defeated because the writing does not include the name of the note holder.

Additionally, servicers are not required to raise section 1024.41(i) as an affirmative defense. Germain argued that he did not receive proper notice and adequate time to prepare for the servicer’s motion to dismiss because 1024.41(i) was not raised as an affirmative defense, relying on Amarchand v. CitiMortgage, Inc. where the court contended that section 1024.41(i) was better raised an affirmative defense. The court in Germain disagreed. The court determined that when the defendant raised section 1024.41(i) in their motion for summary judgment, it was an expansion of the denial in their answer, arguing that they did not violate RESPA because they did, in fact, comply with the statute. Therefore, 1024.41(i) should not be considered an affirmative defense, and servicers are not required to raise it as such.

Finally, section 1024.41(i) should be applied retroactively for servicers who were in compliance with the statute prior to its effective date to eliminate the necessity for repeated compliance. The court looks at whether the statute expressly invokes retroactivity, and if not, the court must determine whether the new provision attaches new legal consequences to events completed prior to enactment. Although the court believes that section 1024.41 is not retroactive as a whole, the language of the statute takes into account the servicers past actions. If the servicer was not in compliance prior to the effective date of the statute, their foreclosures cannot be challenged on the basis of compliance because doing so would impose a duty not present at the time of the foreclosure sale. However, if the servicer provided a complete written explanation of their loss mitigation determination to the borrower, the 5th circuit contends that retroactivity applies in order to credit the servicer for the prior compliance.

In the ad hominem conclusion, the Germain court sends a clear message to borrowers and attorneys using the protections put in place to protect borrower’s interests as a weapon to avoid making payments.

“The history of this case demonstrates beyond cavil that Germain has spent the last 10 years gaming the system through a series of applications for loan modification, a flawed bankruptcy filing, and the institution of this lawsuit. Doing so has enabled him to achieve his one overarching goal: The prolonged occupancy of his residence with little or no payment on his mortgage debt. With the help of cunning counsel, Germain used the intended shield of RESPA, TDCA, and various state and federal laws as a sword to avoid (or at least minimize) his mortgage payments while continuing the decade-long occupancy of his encumbered house. Today's termination of Germain's abuse of the system is long overdue. We caution Germain, and his present and future counsel, if any, that further machinations to prolong this litigation or delay foreclosure proceedings could and likely will be met with sanctions.”

Germain is a win for the industry. It eliminates the need for duplicative response and provides protections for servicers who began CFPB compliance prior to the effective date of the rules.  It also eases the pleading requirements in defending suits alleging CFPB violations. The court also makes clear it will not tolerate continued gamesmanship by borrowers and their counsel to delay foreclosures.

Copyright © 2019 USFN. All rights reserved.

Summer USFN Report

Melissa Coutts, Esq. and Andrew J. Boylan, Esq.
McCarthy & Holthus, LLP
USFN MEMBER (AZ, CA, CO, ID, NM, NV, OR, TX, WA)



In Black Sky Capital, LLC v. Cobb[i], the Supreme Court of California recently held that where a creditor holds two deeds of trust on the same property, a nonjudicial foreclosure of the senior lien does not preclude the creditor from obtaining a monetary judgment on the extinguished junior lien, where there is no allegation of evasive loan splitting or other “gamesmanship scenarios.”

California’s anti-deficiency statute[ii] prohibits a creditor from collecting a deficiency judgment — that is, the difference between the amount of indebtedness and the fair market value of the property — following a nonjudicial foreclosure, even if the property is sold for less than the amount of the outstanding debt.

For the past 20 years, the leading case on this topic has been Simon v. Superior Court[iii], which held that “where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust’s power of sale, thereby eliminating the security for its junior deed of trust, Section 580d [California’s anti-deficiency statute]…bars recovery of any ‘deficiency’ balance due on the obligation the junior deed of trust secured.” Thus, a creditor that forecloses on its senior deed of trust is precluded from any recovery for the amount owing under the junior deed of trust. There have been several cases following the reasoning provided in Simon, as did the trial court in this case.

However, both the Court of Appeal and Supreme Court of California disagreed with this reasoning, instead concluding that although the lienholder is the same for the senior and junior, “[a]ny debt owed on the junior note in this case has no relationship to the debt owed on the senior note.”[iv] The Supreme Court noted that the language of section 580d makes clear that it was only intended to prevent a deficiency judgment on the deed of trust securing the note that was foreclosed, and not under some other deed of trust. Therefore, the anti-deficiency analysis should only apply to the senior deed of trust.

It is important to keep in mind, however, that the Supreme Court’s decision was driven in part by the factual scenario presented in the case. The Court noted that “in Simon, the junior and senior loans were issued just four days apart, and the deeds of trust securing the loans were recorded on the same date.”[v] But in this case, the loans were issued more than two years apart and there was no “evidence of gamesmanship” or “loan splitting.” Therefore, the loans were treated separately, and since no sale occurred under the junior deed of trust, the statute does not bar a deficiency judgment with respect to the note it secured.

Although this case brings some clarity to the issue, it should not be relied upon blindly. The Court spent time reflecting that it has “consistently looked to the purposes of the statute and to the substance rather than the form of loan transactions in deciding the … applicability [of antideficiency statutes].”[vi] And although this case was distinguishable from Simon, the opinion cautions against “gamesmanship scenarios” or where there is clear evidence of intentional loan splitting. Thus, when a creditor holds both senior and junior deeds of trust, a case-by-case analysis should be undertaken to determine whether it is permitted to sue for judgment on the note secured by the junior deed of trust after completion of a nonjudicial foreclosure on the senior.

Marcos Posada
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)



The Appellate Court of Illinois has offered a bit of guidance for practitioners in prosecuting mortgage foreclosure actions. The Court in Bank of N.Y. Mellon v Wojcik, 2019 IL App (1st) 180845, was presented with the issue of whether the trial court erred in denying the defendants’ cross-motion for summary judgment in a foreclosure action concerning defendants’ condominium unit. In answering the Complaint to Foreclose, defendants’ answer denied the deemed allegation found in 735 ILCS 5/15-1504(c)(9) that any and all notices of default or election to declare the indebtedness due and payable or other notices required to be given have been properly given. Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 7.

In response, Bank of New York argued that defendants had waived their argument because there were no specific facts raised to show how the condition precedent had not been met. In essence, Bank of New York utilized the requirements of Illinois Supreme Court Rule 133(c). As the Court in Wojcik found, Rule 133(c) requires when pleading a condition precedent, e.g., sending of a notice of default, that it is sufficient to allege that the party completed the conditions on their part and that if the allegation is denied, specific facts must be alleged showing where there was a failure to perform. Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 20.

Further, relying on other Illinois decisions, the Wojcik Court stated, “[A] general denial to an allegation of the performance of a condition precedent in a contract is treated as an admission of that performance.” Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 21. Accordingly, the Court refused to allow contradiction at the summary judgment stage and instead found that the defendants’ judicial admission in their answer as to the deemed allegations of the Complaint to Foreclose did not lead to an issue of fact, thereby affirming the decision of the trial court denying defendants’ cross-motion for summary judgment.

This opinion sent a strong lesson on Illinois Supreme Court Rule 133(c): “As our supreme court has recognized: "The rules of court we have promulgated are not aspirational. They are not suggestions. They have the force of law, and the presumption must be that they will be obeyed and enforced as written." Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 24 citing Bright v. Dicke, 166 Ill. 2d 204, 210, 652 N.E.2d 275, 209 Ill. Dec. 735 (1995).

In practice, it has been common for defendants’ answers to Complaints to Foreclose to include general denials of deemed allegations, including the deemed allegation that required notices were sent. Often, when a party denies a deemed allegation, Illinois Courts have required plaintiffs, at the summary judgment stage, to establish that notices were sent, which makes this opinion particularly beneficial to plaintiffs in foreclosure matters. Adopting the approach in Wojcik in Illinois will improve judicial economy and ensure that cases are decided upon the merits rather than simply making a plaintiff jump through hoops after already establishing a prima facie case for foreclosure.

Copyright © 2019 USFN. All rights reserved.

Summer USFN Report

by Kinnera Bhoopal, Esq.

McCalla Raymer Leibert Pierce, LLC

USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

On June 3, 2019, the U.S. Supreme Court issued an opinion in Taggart v. Lorenzen, 2019 U.S. LEXIS 3890 after a series of appeals in the lower courts. The Ninth Circuit courts vacillated on the type of legal standard to apply in a bankruptcy related civil contempt case ranging from strict liability to a subjective standard. However, the U.S. Supreme Court unanimously decided that the legal standard to apply when determining whether to impose civil contempt sanctions for violating a discharge order is an objective standard termed “the fair ground of doubt.” Id. at 133.

The Petitioner, Bradley Taggart, was sued by the Sherwood Company in State Court. Before the trial started, Taggart filed a Chapter 7 bankruptcy case and received a discharge. After the discharge order was entered, Sherwood moved to recover attorney fees that were incurred post-petition from Taggart. Both the State Court and the Bankruptcy Court agreed that Taggart was liable for the attorney fees. These courts followed the guidance of a Ninth Circuit case, Boeing North American, Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018 (9th Cir. 2005). The Ybarra Court held that post-petition attorney fees stemming from pre-petition litigation were usually discharged unless the debtor “returned to the fray” post-petition. Id. at 1024. The State Court and Bankruptcy Court determined that because Taggart undertook actions with respect to the litigation with Sherwood Company following the discharge, and thus returned to the fray, Sherwood’s petition to recover attorney fees did not constitute a violation of the discharge order.  Taggart v. Lorenzen, 2019 U.S. LEXIS at 133-134. 

Taggart appealed to the Federal District Court, which concluded that Taggart did not “return to the fray” and thus remanded the case to the Bankruptcy Court. Based on the District Court’s ruling, the Bankruptcy Court held Sherwood in civil contempt for violating the discharge order employing a strict liability standard. Under this standard, any violation of the discharge order whether malicious or innocuous, reasonable or not, would be subject to sanctions. Since Sherwood was aware that a discharge order was entered and intentionally sought to collect a debt, it was held in civil contempt. In re Taggart, 522 B.R. 627 (Bankr. D. Or. 2014).

Sherwood appealed, and the Bankruptcy Appellate Panel vacated the sanctions, which the Ninth Circuit affirmed by employing a more liberal legal standard referred to as the subjective standard. Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018). The Ninth Circuit found that Sherwood had a subjective, good faith belief that the post-petition attorney fees were not discharged thus it held that Sherwood was not in civil contempt. See id. at 444. The Ninth Circuit went further to state that a good faith belief precludes a finding of civil contempt even if the creditor’s beliefs are unreasonable. Therefore, a creditor’s subjective belief of righteousness is sufficient to evade sanctions under this legal standard. See id. at 444.

Given the divergent legal standards employed by the lower courts, the U.S. Supreme Court granted certiorari to answer the narrow question of what the applicable legal standard is when a bankruptcy discharge order is violated. The Supreme Court’s analysis began with the statutory provisions of 11 U.S.C. §524 and §105, which authorize bankruptcy courts to impose civil contempt sanctions.  Section 524 of the United States Bankruptcy Code (“Bankruptcy Code”) states “a discharge order operates as an injunction against the commencement or continuation of an action, the employment of process, or an act to collect, recover or offset” a discharged debt. Given that Section 524 of the Bankruptcy Code evokes injunctions, the U.S. Supreme Court reasoned that parallels may be drawn from the long-standing history governing injunction violations, which it then applied to the bankruptcy paradigm.

The U.S. Supreme Court explained that civil contempt also exists outside of bankruptcy and in those contexts the U.S. Supreme Court has held that there should not be a finding of civil contempt when there is “a fair ground of doubt” about whether a party acted unlawfully. This is an objective standard because a party’s subjective belief that he was complying with an order will not insulate him from civil contempt if the party’s belief was objectively unreasonable. This standard also acknowledges that civil contempt is a severe remedy such that explicit notice of what constitutes unlawful conduct is necessary before holding a party in civil contempt.

Moreover, the U.S. Supreme Court noted that a problem with the strict liability standard is that it is all encompassing and would promote excessive use of an extraordinary remedy for any perceptible breach regardless of the reasonableness of a creditor’s conduct. Conversely, the subjective standard relies too heavily on a creditor’s state of mind, which is difficult to prove. Additionally, the subjective standard deviates from principles of equity because a party’s subjective belief does not have to be reasonable or prudent to evade liability.

Based upon the findings detailed above, the U.S. Supreme Court ruled that an objective standard is the prevailing legal standard to apply in bankruptcy related civil contempt cases. It further held that a creditor may be held in civil contempt for violating a bankruptcy discharge order when there is not a “fair ground of doubt” as to whether the creditor’s conduct was unlawful under the discharge order. Consequently, the Supreme Court vacated and remanded the case to the Ninth Circuit Court of Appeals to review the matter using the objective standard.

In issuing this ruling, the U.S. Supreme Court struck a balance between protecting the integrity of a bankruptcy discharge order while not exposing creditors to an excessive risk of liability. Therefore, Bankruptcy Courts in every jurisdiction are now required to use the more moderate, “fair ground of doubt,” standard when determining whether to hold a party in civil contempt for violating a bankruptcy discharge order. While the U.S. Supreme Court’s ruling is of national importance it is particularly notable for the Ninth Circuit where creditors previously enjoyed a more favorable, deferential, standard of review. However, the U.S. Supreme Court’s standard will help foster equity between the competing interests of debtors and creditors in a more clear and objective manner.

Copyright © 2019 USFN. All rights reserved.