October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In a published opinion, the U.S. Court of Appeals for the Fourth Circuit has held that filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the Fair Debt Collection Practices Act (FDCPA) when the statute of limitations does not extinguish the debt. [Dubois v. Atlas Acquisitions LLC (In re Eric Dubois), No. 15-1945 (4th Cir. Aug. 25, 2016)].

Background
Atlas purchased the defaulted debts of two debtors and filed proofs of claim in both Chapter 13 bankruptcy cases. Each debtor filed an adversary action against Atlas, alleging that because all of the debts were beyond Maryland’s statute of limitations when Atlas purchased them and filed its proofs of claim, Atlas violated 15 U.S.C. §§ 1692e (using “any false, deceptive, or misleading representation or means in connection with the collection of any debt”) and 1692f (using “unfair or unconscionable means to collect or attempt to collect any debt”). The debtors had not listed the Atlas debts in their bankruptcy schedules and did not give notice to Atlas of their bankruptcy filings. The bankruptcy court consolidated the cases and dismissed both complaints for failure to state a claim for which relief may be granted pursuant to Fed. R. Civ. P. 12(b)(6). The debtors appealed, and the Fourth Circuit permitted the appeal directly to the appellate court.

Appellate Review
The court first provided a brief overview of the purpose of bankruptcy and the reasons behind enactment of the FDCPA, setting up the justification for its holding. It then observed that “[f]ederal courts have consistently held that a debt collector violates the FDCPA by filing a lawsuit or threatening to file a lawsuit to collect a time-barred debt,” citing Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 (11th Cir. 2014) (collecting cases), cert. denied, 135 S. Ct. 1844 (2015). Dubois at 8. Surprisingly, however, the court did not reference the holding in Crawford, which opined that the filing of a proof of claim to collect stale debt in a Chapter 13 bankruptcy case violates 15 U.S.C. §§ 1692e and 1692f.

Addressing the competing arguments of Atlas and the debtors, the court first held that filing a proof of claim is debt collection activity. The “animating purpose” behind filing a proof of claim is to seek a share of the distribution of a debtor’s estate. Dubois at 10, citing Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011). “This fits squarely within the Supreme Court’s understanding of debt collection for purposes of the FDCPA.” Dubois at 10.

The court then considered whether a “claim” could include a time-barred debt. The court noted that “[t]he Bankruptcy Code defines the term ‘claim’ broadly to mean a ‘right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.’ 11 U.S.C. § 101(5)(A).” Id. at 14. The Code is designed to deal with all of the debtor’s legal obligations regardless how remote, providing the debtor with the “broadest possible remedy”. Id., citing H.R. Rep. No. 95–595, p. 309 (1977); S. Rep. No. 95–989, p. 22 (1978). Maryland’s statute of limitations does not extinguish the debt, rather it bars the remedy of a civil action to collect it — a remedy that may be revived if the debtor sufficiently acknowledges the debt’s existence. Id. at 15, citing Potterton v. Ryland Group, Inc., 424 A.2d 761, 764 (Md. 1981). Hence, because a time-barred debt still constitutes a right to payment under Maryland law, it is a “claim” for bankruptcy purposes. Dubois at 15.

In the court’s opinion “when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed and for the Bankruptcy Code to operate as written.” The Code’s claim objection and disallowal procedures will stop a creditor from engaging in further collection activity, which is preferable to allowing the debt to continue to exist (if unscheduled and no proof of claim is filed), because “[t]his is detrimental to the debtor and undermines the bankruptcy system’s interest in ‘the collective treatment of all of a debtor’s creditors at one time.’ 1 Norton Bankr. L. & Prac. 3d § 3:9.” Id., at 19.

The court offered several other considerations in support of its decision, including that the Bankruptcy Rules require claims such as these to state the last transaction and charge-off dates, allowing for easy identification of time-barred debt. Therefore, “the reasons why it is ‘unfair’ and ‘misleading’ to sue on a time-barred debt are considerably diminished in the bankruptcy context, where the debtor has additional protections and potentially benefits from having the debt treated in the bankruptcy process.” Id. at 22.

Split of Authority among the Circuits
Servicer and attorney debt collectors should be aware that whether the filing of a proof of claim on time-barred debt violates the FDCPA is an area of developing law. A few other federal courts have held such action does not violate the FDCPA; e.g., Simmons v. Roundup Funding, LLP, 622 F.3d 93 (2d Cir. 2010) — while some have arrived at the opposite conclusion; e.g., Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). Debt collectors must familiarize themselves with the law applicable to the jurisdiction in which they intend to file proofs of claim.

Editor’s Note: Recent USFN Reports have also addressed this subject. See the articles “FDCPA Trumps Bankruptcy Rules?” (Summer 2016 Ed.) and “Don’t Drink Expired milk and be Wary of Stale Claims” (Winter 2016 Ed.). Articles are archived in the Article Library at www.usfn.org.

© Copyright 2016 USFN and Hutchens Law Firm. All rights reserved.
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October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Opinions issued by the North Carolina Court of Appeals have raised concerns among foreclosure trustees and their attorneys about the extent to which North Carolina’s Rules of Civil Procedure apply to power-of-sale foreclosure proceedings. For example, in Lifestore Bank v. Mingo Tribal Pres. Trust, 235 N.C. App. 573, 577, 763 S.E.2d 6, 9 (2014), review denied, __ N.C. __, 771 S.E.2d 306 (2015), in upholding the application of N.C. R. Civ. P. Rule 41(a) (the voluntary dismissal rule) the court held that “[a] foreclosure under power of sale is a type of special proceeding, to which our Rules of Civil Procedure apply.”

Recent Decision: In re the Foreclosure by Goddard & Peterson, PLLC
Practitioners see mixed blessings in the recent decision of In Re: the Foreclosure by Goddard & Peterson, PLLC, 2016 WL3585841 (N.C. App. July 5, 2016).

Background — In Goddard & Peterson, the note holder-petitioner (Beal Bank) in the foreclosure proceeding substituted in Rogers, Townsend & Thomas (RTT) (a law firm) as trustee to the deed of trust executed by Lillian Cain. RTT later sent a foreclosure notice to Cain, followed by a letter informing her that it had been retained to foreclose the property and including the debt validation notice required by 15 U.S.C. § 1692g. Following an unexplained, lengthy delay in the foreclosure proceedings, Cain served RTT with a request to petitioner Beal Bank for admissions pursuant to N.C. R. Civ. P. Rule 36. The Request for Admissions to Beal Bank (seeking an admission that it was not the note holder) went unanswered beyond the time period to respond contained in N.C. R. Civ. P. Rule 36. Shortly thereafter, Beal Bank substituted the law firm Goddard & Peterson for RTT as trustee, and RTT commenced representation of Beal Bank in the contested foreclosure proceedings before the superior court.

At the hearing before the superior court following the appeal de novo of the clerk’s order authorizing RTT to proceed with foreclosure sale, Cain served an unfiled motion to dismiss the petition supported by the petitioner’s purported failure to answer the Request for Admissions. The judge orally denied the motion; a written order was not entered. The judge also overruled Cain’s objection to the petitioner’s introduction of an affidavit of indebtedness executed by a bank employee.

Appellate Court Procedurally Dispenses with Borrower’s Failed Motion to Dismiss — On appeal, the Court of Appeals could have taken the opportunity to narrow the holding in Mingo by ruling that discovery is not permissible in a power-of-sale foreclosure special proceeding, or at least to find that service of discovery on attorneys employed by the trustee does not constitute service on the petitioner. It did neither. Instead, it held that because the superior court had not entered a written order denying the motion to dismiss, then no appeal could be taken from it. An order is enforceable only when written, signed by the court, and entered by the clerk. West .v. Marko, 130 N.C. App. 751, 756, 504 S.E.2d 571, 574 (1998), N.C. Gen. Stat. §1A-1, Rule 58. While undoubtedly correct from a procedural standpoint, the court could have stricken the Request for Admissions on the grounds that it was served only on two RTT attorneys at a time when RTT was acting solely as substitute trustee. Surely service of legal documents on RTT (a neutral and a fiduciary, see discussion below) of materials intended for the petitioner, and with potentially dispositive effect, cannot be permissible.

Appellate Court Reviews Trustee as Fiduciary — On the positive side, the court upheld the superior court’s decision overruling Cain’s objection to RTT appearing as counsel for petitioner in the de novo hearing. Cain contended that RTT owed her a fiduciary duty when the case was in front of the superior court, and violated that duty by advocating for Beal Bank. The court acknowledged the fiduciary nature of a trustee’s role in the context of the enforcement of a deed of trust:

‘“In deed of trust relationships, the trustee is a disinterested third party acting as the agent of both [parties].’ In re Proposed Foreclosure of McDuffie, 114 N.C. App. 86, 88, 440 S.E.2d 865, 866 (1994). As such, in a typical foreclosure proceeding, trustees have a long-recognized fiduciary duty to both the debtor and the creditor. In re Foreclosure of Vogler Realty, Inc., 365 N.C. 389, 397, 722 S.E.2d 459, 465 (2012). ‘Upon default [a trustee’s] duties are rendered responsible, critical and active and he is required to act discreetly, as well as judiciously, in making the best use of the security for the protection of the beneficiaries.’ Id. (quoting Mills v. Mut. Bldg. Loan Ass’n, 216 N.C. 664, 669, 6 S.E.2d 549, 552 (1940)). More specifically, ‘the trustee is required to discharge his duties with the strictest impartiality as well as fidelity, and according to his best ability.’ Hinton v. Pritchard, 120 N.C. 1, 3, 26 S.E. 627, 627 (1897).” In re Goddard & Peterson, at *5.

The court disagreed with Cain’s contention, however, finding that RTT was removed as substitute trustee well before the superior court hearing, and noted that Cain had not explained how RTT’s representation of petitioner at the hearing either violated a legal obligation or was done in bad faith. Moreover, Cain had not alleged any injury proximately caused by RTT’s actions, observing that “‘[t]his Court has held that breach of fiduciary duty is a species of negligence or professional malpractice. Consequently, [such] claims require[ ] proof of an injury proximately caused by the breach of duty.’ Farndale Co., LLC v. Gibellini, 176 N.C. App. 60, 68, 628 S.E.2d 15, 20 (2006) (citations and internal quotation marks omitted).” In re Goddard & Peterson, at *4.

Invoking the authority of the North Carolina State Bar’s ethics opinions, the court remarked that this matter had been addressed in N.C. CPR 220 (1979), when the State Bar opined “that if a lawyer who is acting as a trustee for a deed of trust resigns his position as trustee, the lawyer may represent the petitioner bringing the foreclosure claim ‘as long as no prior conflict of interest existed because of some prior obligation to the opposing party.’” In re Goddard & Peterson, at *5.

In 1990, the Bar found that “former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust.” Id. quoting N.C. RPC 82 (1990). “N.C. RPC 90 (1990) ties it all together, and provides that: ‘[i]t has long been recognized that former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust. CPR 220, RPC 82. This is true whether the attorney resigns as trustee prior to the initiation of foreclosure proceedings or after the initiation of such proceedings when it becomes apparent that the foreclosure will be contested.’” Id. at *6.

The court went on to cite the most recent ethical opinion “which more specifically defined RPC 90, by stating: ‘[A] lawyer/trustee must explain his role in a foreclosure proceeding to any unrepresented party that is an unsophisticated consumer of legal services; if he fails to do so and that party discloses material confidential information, the lawyer may not represent the other party in a subsequent, related adversarial proceeding unless there is informed consent. N.C. Formal Opinion 5 (2013).’” Id. at 6.

Given that Cain was represented by counsel in proceedings lasting more than three years, and that she had failed to assert that she had disclosed any material confidential information to RTT when it was acting as trustee, the court found nothing in the record indicating that the superior court had erred in overruling Cain’s objection to RTT acting as counsel for petitioner.

Appellate Court Reviews Affidavit of Indebtedness Admissibility — The opinion provides further support for the use of affidavits to satisfy the superior court in a de novo hearing with respect to the enumerated findings that the court must make under N.C.G.S. § 45-21.16(d) in order to authorize the trustee to sell the secured property. Records that meet the definition of the business records exception to the hearsay rule [N.C. R. Evid. Rule 801(c)] may be introduced by a witness when the proper foundation has been laid to qualify that witness.

Petitioner Beal Bank produced an affidavit from a bank employee in support of the introduction of loan account records. In the affidavit the employee “specifically stated that her averments were ‘based upon [her] review of [petitioner’s] records relating to [respondent’s] loan and from [her] own personal knowledge of how they are kept and maintained.’ As a result, [the employee] was a qualified witness under Rule 803(6) and petitioner’s records regarding respondent’s default on her loan account were properly introduced through [the employee’s] affidavit.” Id. at 8.

The court also rejected Cain’s argument that the affiant’s statement that Beal Bank “is the holder of the loan” was inadmissible hearsay. Firstly, the foreclosure statute explicitly requires the clerk to consider the evidence of the parties and may consider affidavits and certified copies of documents. N.C. Gen. Stat. § 45–21.16(d). Id, at *8. The court had extended that requirement to de novo hearings in In re Foreclosure of Brown, 156 N.C. App. 477, 486-87, 577 S.E.2d 398, 404 (2003). On the basis that because “[a] power of sale provision in a deed of trust is a means of avoiding lengthy and costly foreclosures by action[,] this Court held that the ‘necessity for expeditious procedure’ substantially outweigh[ed] any concerns about the efficacy of allowing [the secretary] to testify by affidavit, and the trial court properly admitted her affidavit into evidence. Id. at 486, 577 S.E.2d at 404-05 (citation omitted).” In re Goddard & Peterson, at *8. The court acknowledged that whether Beal Bank was the holder was ultimately a question of law for the superior court to decide, and the fact that the affiant purported to make such a legal conclusion did not result in the affidavit being admitted in error. Id. at *9.

Lessons Learned — Trustees, their counsel, and loan servicers should be aware of the Rules of Civil Procedure and should not disregard papers served on them by borrowers and others connected to the foreclosure proceeding. Strenuous objection should be made to attempts to conduct discovery and to force other procedural and substantive activity contradictory or ill-suited to the power-of-sale foreclosure process.

Legal counsel acting as substitute trustees, or representing substitute trustees, who wish to advocate for the petitioner or note holder should refrain from soliciting or receiving confidential information or materials from the borrower, and should relieve themselves of the trustee’s duties as soon as possible.

Servicers should be mindful of the rules of evidence concerning the use of business records and the qualification of witnesses in court hearings. The vast majority of foreclosure proceedings in North Carolina involve the use of servicer employee affidavits and of business records entered into the servicer’s computerized filing systems by someone other than the person signing the foreclosure debt affidavit. Accordingly, selecting the right person to execute the affidavit and working closely with counsel to ensure that the affidavit will pass court muster are essential.

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October 11, 2016

by Caren Jacobs Castle
The Wolf Firm – USFN Member (California)

The California Legislature has passed a bill (signed by the governor on September 29, 2016), which creates additional requirements as well as potential liability for servicers when dealing with “successors in interest” to a deceased borrower. The purpose of SB1150 is to allow successors in interest to step into the shoes of the deceased borrower with respect to home retention and loss mitigation opportunities. The bill will be effective January 1, 2017. Highlights of the new legislation are discussed below.

Definitions
SB1150 applies to first lien mortgages or deeds of trust that are secured by owner-occupied residential property containing no more than four dwelling units. “Owner-occupied” is defined as the principal residence of the borrower at the time of the borrower’s death. The definition of successor in interest has been greatly limited through the legislative process. “Successor in interest” is defined in the bill as a natural person, who notifies the servicer of the death of the mortgagor, and can provide documentation that the person is the spouse, domestic partner, parent, grandparent, adult child, adult grandchild, adult sibling, or joint tenant of the deceased borrower. Additionally the successor in interest must have occupied the subject property as his/her principal residence at the time of the borrower’s death and continuously for the six months prior to the borrower’s death.

Successor in Interest Determination: Timing & Process
There are several time frames built into the SB1150 process. Upon notification to the servicer (from a person claiming to be a successor in interest) that the borrower has died, the servicer may not proceed with the recordation of a notice of default. The bill specifically requires that the foreclosure not commence and/or proceed in any fashion until the successor in interest process is completed. The cumulative review/delay time frame stated within the legislation is a minimum period of 120 days.

Upon notification of death, the servicer shall request in writing that the party provide evidence of the death of the borrower. The bill allows 30 days to provide this documentation. The evidence may be a death certificate or “other written evidence.” Once the evidence of death is validated, the servicer must request in writing that the party provide written proof that he/she is a successor in interest as defined above. SB1150 deems 90 days as a reasonable time frame for the party to provide “reasonable documentation.”

Once the documentation is received, the servicer must evaluate whether the party qualifies as a successor in interest; in other words, determine that the original borrower is deceased, the party has an ownership interest in the property, and that the party has occupied the home for six continuous months prior to the borrower’s death as his/her principal residence. While SB1150 recognizes that there may be multiple successors in interest, it only provides a statement that the servicer shall apply the provisions of the loan documents as well as federal and state law when there are multiple parties.

Successor in Interest Entitlements
Within 10 days of determining that there is a successor in interest, the servicer shall provide to the party, at a minimum, the following loan information: loan balance, interest rate and any reset dates/amounts, balloon payments, pre-payment penalties, default information, delinquency status, monthly payment amount, and payoff amount.

The servicer shall further allow the successor in interest to apply to assume the loan and may evaluate the creditworthiness of the successor subject to applicable investor guidelines. If the loan is assumable, and the successor requests a foreclosure prevention alternative simultaneously with the assumption process, the party shall be allowed to apply for an alternative that would have been available to the deceased borrower. If the successor qualifies for an alternative, the servicer shall also allow the party to assume the loan.

Successors in interest will have the same rights and remedies as the borrower under the California Homeowner’s Bill of Rights (HBOR), which allows a private right of action. This includes the right to seek an injunction preventing the foreclosure sale from going forward — as well as the right to seek economic damages, and potentially punitive damages for intentional or reckless violations equal to the greater of $50,000 or treble damages, if a sale occurred in violation of SB1150. The successor in interest is also entitled to attorney’s fees if it is the prevailing party. Unfortunately, there is no attorney fee provision should the servicer be the prevailing party. The servicer will not be liable under SB1150 if violations are remediated prior to the recordation of the trustee’s deed upon sale.

SB1150 provides that compliance with the Consumer Financial Protection Bureau (CFPB) regulations regarding successors in interest will be deemed compliance with California law, albeit we now know that the new CFPB rules regarding successors in interest will not take effect for over 18 months. The California bill will sunset January 1, 2020, unless extended.

Issue Areas
There are several issues that remain problematic with SB1150:

1. Delays in foreclosure. Upon notification of a borrower’s death by a potential successor in interest, there is built into the process a minimum of a 120-day delay (30 days for evidence of death, and 90 days for reasonable documentation to prove successor in interest).

2. Determination of a successor in interest. The bill puts the servicer in the position of having to make a legal conclusion that a party is in fact a successor in interest. This may include having to review last wills and testaments, trusts, deeds, etc. It also may require that the servicer file a court action to determine if the party is in fact a successor in interest.

3. Conflicting successors in interest. Although the bill acknowledges that there may be more than one successor in interest, it does not deal with the issue of adverse successors. Again, this may require that the servicer file a court action to resolve any and all conflicts. Note, however, that the requirements under SB1150 will not apply if the potential successor is involved in a legal dispute over the rights to the subject property.

4. Privacy/Fair Debt Collection Practices Act (FDCPA) issues. SB1150 requires that the servicer, upon determination that a party is a successor in interest, provide specified loan information without written authorization of the borrower or court order, which may violate federal privacy laws and FDCPA. The California legislature has thus far been unwilling to address these conflict of statutes/preemption issues.

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September 13, 2016

by Kristen E. Boyle
Hunt Leibert – USFN Member (Connecticut)

In a recent Connecticut Superior Court decision, the court found that a homeowner, even one with a name like HSBC Bank USA, is not negligent when a tree falls from one property to another and causes damage. [Corbin v. HSBC Bank USA, NA, No. WWM-CV-156009704S (Conn. Super. Ct. June 3, 2016)].

In Corbin, the court upheld the long-accepted standard that homeowners are not liable to one another for damages caused by natural conditions on the land. In the winter of 2015, the plaintiffs (homeowners whose property is located next to a foreclosed, bank-owned property) contacted the real estate agent tasked with selling the neighboring property, explaining that a tree on the bank’s property appeared to be damaged and decaying. The agent went to the property to inspect and take pictures of the tree — but a month to the day later, and before anything could be done, the tree fell onto the plaintiffs’ property. The falling tree destroyed a work shed filled with tools and personal belongings. The plaintiffs then brought suit for negligence and nuisance.

While the Connecticut Legislature has been discussing this very issue, no laws have been put into effect, and the court relied on the well-established use of the Restatement (Second) of Torts § 363 (1965). That section states that “neither a possessor of land, nor a vendor, lessor or other transferor, is liable for physical harm caused to others outside of the land by a natural condition of the land.” The court found that the plaintiffs failed to allege that the tree was anything other than a natural condition on the land; and, as a result, the defendant’s motion to strike both the negligence and nuisance counts was granted, as well as the defendant’s subsequent motion for judgment in its favor.

The plaintiffs had asserted that the damage to their shed and its contents caused by the tree present a basis for liability under 1 Am. Jur. 2d, § 21, given that the defendant had actual or constructive knowledge of the defective condition. The court was not persuaded by this argument and cited several Connecticut cases that continued to apply the common law rule under the Restatement in lieu of the plaintiffs’ theory. While the American Jurisprudence interpretation may be relied on in other states, Connecticut remains an exception for now.

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September 13, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Earlier this year, the North Carolina Court of Appeals affirmed the dismissal of an action brought by a former borrower seeking to enjoin the sale of the foreclosed property. [Thompson v. Nationstar Mortgage, 785 S.E.2d 186, at *2 (Table) (N.C. Ct. App. Apr. 5, 2016)].

In Thompson, the plaintiff had sought to challenge whether Nationstar held a valid debt and had the right to foreclose under the deed of trust — two findings that the clerk must make in order to authorize the foreclosure sale pursuant to N.C.G.S. § 45-21.16(d). Because the plaintiff did not appeal the clerk’s order within the 10 days required by § 45-21.16(d1), the clerk’s findings were final. Moreover, the plaintiff’s opportunity to raise any equitable claims, or any legal claims outside the findings required by § 45-21.16(d), was lost because he failed to file a separate action and to obtain an injunction under § 45-21.34 before the rights of the parties became fixed.

While not breaking any new legal ground, the Thompson opinion is a reminder of the following legal principles:

1. Once the rights of the parties to the foreclosure proceeding are fixed, after the expiration of the upset-bid period following the foreclosure sale, the doctrine of collateral estoppel “bars all claims in the present appeal based on issues already decided by the clerk in the previous foreclosure proceeding, and ‘our analysis begins with the premise that [the] plaintiff [ ] [was] in default and the foreclosure [ ] [was] proper.’ Funderburk, __ N.C. App. at __, 775 S.E.2d at 5-6.” Thompson, at *3.

2. The Court of Appeals also overruled the plaintiff’s assignment of error that the trial court failed to make findings of fact when it dismissed the case pursuant to N.C. R. Civ. P. 12(b)(6). While an action “tried upon the facts” requires the court to “find the facts specially” (N.C. R. Civ. P. 52), “the requirements of Rule 52 are inapplicable to summary dispositions under Rules 12 and 56, as the resolution by the trial court of contested evidentiary matters is not contemplated under either Rule. G & S Bus. Servs., Inc. v. Fast Fare, Inc., 94 N.C. App. 483, 489-90, 380 S.E.2d 792, 796 (1989).” Thompson, at *3.

3. Finally, the court rejected the plaintiff’s contention that the alleged joint representation of the defendants (Nationstar Mortgage and the foreclosure trustee) by the same attorneys could form the basis for civil liability. Thompson, at *3, citing McGee v. Eubanks, 77 N.C. App. 369, 374, 335 S.E.2d 178, 181-82 (1985). And even if the alleged dual representation was prohibited by the State Bar’s ethics rules (which the court did not decide) (see Rev. R. Prof. Conduct N.C. St. B. 1.7(a)), “we hold that the trial court did not err in failing to conclude that such a dual representation prevented it from ruling in favor of Defendants on their motions to dismiss.” Thompson, at *4.

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September 13, 2016

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

In a recent case, the Connecticut trial court was challenged by a vesting that occurred years prior when it implicated the Judicial Branch’s stated mission of “serv[ing] the interests of justice and the public by resolving matters brought before it in a fair, timely, efficient and open manner.” Ultimately, the court ruled to open the nearly two-year-old vesting, citing the facts of the case as a “rare case in which there is a significant failure in the judicial process.” [US Bank NA v. Tulloch, FBT-CV-09-5023011-S].

Precedent
Connecticut has long had a statutory bar on opening judgment by a mortgagor after the vesting of title. Codified currently in Conn. Gen. Stat. 49-15, this ban has served to provide foreclosing mortgagees with assurances regarding the finality of title and ensure proper reliance on the absolute title to a property taken through a foreclosure action. While often challenged unsuccessfully, the prohibition on opening judgments post-vesting was substantially weakened by Wells Fargo Bank v. Melahn, 148 Conn. App. 1 (2014). There, the appellate court determined that certain rare instances (in that case, blatant misrepresentations by the plaintiff’s foreclosure counsel) could warrant deviation from § 49-15.

There have been efforts, mostly in vain, to expand Melahn to other forms of alleged error. In Bank of New York Mellon v. Caruso, NNH-CV-12-6031454-S (Aug. 21, 2015), the trial court ruled that an error by a court-appointed attorney (in that matter, the trustee for the defendant’s disciplinarily-suspended attorney) was sufficient to revert a vesting. While part of a prior memorandum and not the motion, the Caruso court’s final holding was undoubtedly influenced by its determination that the trustee was an agent of the court and that “a dereliction of duty by that agent … must be subject to remediation by the court.”

Subject Case
In Tulloch, the factual errors were determined after an evidentiary hearing to have been committed by the court’s own clerks. Several days prior to the vesting, the defendant filed a motion to open along with a request to waive fees for same. At that time, the clerk was well aware of the time-sensitive nature of both motions and affirmatively promised to notify the defendant by phone. When no phone call was received prior to the law day, the defendant made a series of calls to the clerk’s office, culminating in a number of voicemails and a clerk finally advising the defendant to again wait for a phone call, which never came. The defendant relied on that advice to her apparent detriment and title vested. It came out in the subsequent evidentiary hearings that the motions had been lost by the clerk and found some thirteen days later.

Ultimately, Tulloch presents an extraordinarily slippery slope where vesting was rewound based on court error. By expanding the possibility of failure of process to clerical error, the trial court’s decision in Tulloch threatens the finality of title through a foreclosure action.

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September 13, 2016

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In a recent superior court case, a mortgagor filed a two-count complaint against his lender alleging a violation of the Connecticut Unfair Trade Practices Act (CUTPA) and a claim for common-law negligence. [Blanco v. Bank of America, 2016 WL 2729319, 62 Conn. L. Rptr. 190 (Conn. Super. Ct. Apr. 19, 2016)].

The basis for the CUTPA count of the complaint is alleged conduct arising out of the lender’s review and processing of the plaintiff’s application to modify his mortgage. In support of the negligence count of the complaint the plaintiff relied, in part, on provisions in the National Mortgage Settlement (NMS) and the 2011 Office of the Comptroller of Currency Consent Order with Bank of America (Consent Order) to assert that the Bank owed the borrower a duty of care.

Background: In an attempt to cure the delinquency on his loan, the plaintiff-borrower submitted a number of loan modification applications to the Bank. The application process began in April 2012 and concluded in May 2014, resulting in a permanent modification of the plaintiff-borrower’s loan. The plaintiff-borrower alleged that during this process the Bank was negligent and unscrupulous in reviewing the loan modification applications — citing examples of being told to resubmit documents as well as the misapplication of trial payments. The borrower’s lawsuit against the Bank followed. The Bank challenged the complaint as legally insufficient, and the court granted the Bank’s motion to strike both counts. [The Bank subsequently moved for judgment against the plaintiff-borrower for failing to file a substituted complaint pursuant to the Connecticut Rules of Practice. That motion, too, was granted; and the plaintiff-borrower took an appeal. The appeal is currently pending with the Connecticut Appellate Court.]

Superior Court’s Review of the CUTPA Count — This first count alleged that the Bank violated CUTPA by initiating a foreclosure action while the loan modification applications were under consideration by the Bank. In granting the Bank’s motion to strike, the trial court referred to a long history of decisions where Connecticut courts have held that refusing to negotiate a loan modification prior to proceeding to foreclosure does not rise to a violation of CUTPA.

Superior Court’s Review of the Common-Law Negligence Count — The second count related to the handling of the loan modification applications. The plaintiff-borrower cited to the NMS and the Consent Order, which detail certain actions and guidelines that a mortgage servicer must take when reviewing a loss mitigation request. The borrower contended that these guidelines imposed a duty on the Bank, and that the Bank breached its alleged duty by not reviewing the plaintiff-borrower’s loss mitigation request in accordance with them. The Bank countered that no duty of care exists between a lender and a borrower, specifically that lenders have no obligation to negotiate a loan modification with a borrower. Moreover, the Bank maintained that the borrower lacked standing to bring claims based on the NMS or the Consent Order. (The court did not address the standing argument. See Blanco, footnote 2.)

In striking the common-law negligence count, the court reasoned that to impose a duty on a lender or loan servicer in this context would ultimately frustrate the loan modification process and would likely lead to increased litigation. Entities in the defendant’s position would be less inclined to even entertain loan modification applications, which principally benefit mortgagors, if there is a chance that such entities would be exposed to civil liability.

As it stands, this Blanco decision is favorable to the loan servicing industry because the court refused to recognize a new cause of action for borrowers against their lender or mortgage servicer. However, as referenced above, the decision is currently under appellate review.

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September e-Update

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September 13, 2016

by Regina M. Slowey
Orlans Associates, P.C. – USFN Member (Michigan)

The decision in Residential Funding Co, LLV v. Saurman, 490 Mich. 909, 805 N.W.2d 183 (2011), verified that whether or not the mortgagee of record also owned the underlying note was immaterial to the right of that mortgagee to foreclose. Recently, the Michigan Court of Appeals expressly reaffirmed this right in a judicial foreclosure case.

In Select Commercial Assets, LLC v. Carrothers, the Court of Appeals (in an unpublished opinion) confirmed that the Saurman analysis applies to judicial foreclosures as well. [Select Commercial Assets, LLC v. Carrothers, No. 326968 (June 21, 2016)]. In particular, the appellate court ruled in a judicial foreclosure case that a mortgagee of record has the standing and capability to foreclose where there is undisputed evidence that the mortgage-secured debt is in default, regardless of the ownership of the note. The court ruled that the defendant-borrower’s arguments that the plaintiff must be the owner of the debt secured by the mortgage to bring a judicial action to foreclose were without merit.

This eases the burden for foreclosing entities that must use judicial action for a particular mortgage. The evidence must show that the underlying loan is in default, but similar to a foreclosure by advertisement, the foreclosing entity need only be the mortgagee of record, not the holder/owner of the note.

Editor’s Note: The author’s firm represented the plaintiff-appellee before the Michigan Court of Appeals in Select Commercial Assets, LLC v. Carrothers.

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September e-Update

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August 2, 2016

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

In Sibert v. Wells Fargo Bank, N.A., No. 3:14CV737 (E.D. Va. May 4, 2016) the U.S. District Court for the Eastern District of Virginia grappled with the question as to what effect a borrower’s discharge from, and later re-entry into, military service might have regarding application of § 533 of the Servicemembers Civil Relief Act (SCRA). Specifically, § 533(a) grants protected status to an active duty servicemember with an obligation secured by a mortgage or deed of trust that “originated before the period of the servicemember’s military service and for which the servicemember is still obligated.” § 533(c) states that a foreclosure sale against a protected borrower without court approval is not valid. In considering cross-motions for summary judgment, the court framed its ruling as turning on “interpretation of the phrase ‘originated before the period of the servicemember’s military service.’” Id. at *8.

The borrower first served in the United States Navy from July 9, 2004 to July 8, 2008. It was during this first period of service that he originated the mortgage loan. Subsequent to being honorably discharged, the borrower re-entered the military by enlisting in the United States Army in April 2009. On May 13, 2009 during this second active duty period, his home was foreclosed.

The borrower contended that the foreclosure was void under the SCRA because he originated the mortgage loan in May 2008, prior to his current service period beginning in April 2009. Under his interpretation of the statute, the only relevant military service in relation to the loan’s origination was his current active duty period, upon which he based his claim for protection. Accordingly, the borrower asserted that he was protected because his loan originated prior to his most recent active duty period. The lender, by contrast, argued that the proper interpretation of the statute was that a borrower is not protected where the loan originated during “any” active duty period. Because the borrower originated the loan at a time that he was in the military, the lender reasoned, no protection from foreclosure was applicable under the statute.

The court held that the correct interpretation of the statute is that a subsequent active duty period is not germane where the loan was originated during a prior active duty period. The court, applying standard canons of statutory construction and considering the statute as a whole, opined that the statute is concerned with the “material affect” of entering the military for the first time after previously obtaining the mortgage loan:

“For a person entering military service for the first time, the resulting change in income and lifestyle relative to when they incurred the obligation could materially affect their ability to maintain payments . . . The same is not true for someone like Sibert, who incurred an obligation while already in the military, became a civilian, and then re-joined the military. Rather than being disadvantaged by re-entering the service, someone like Sibert has the same ability to comply with the obligation as when it was first negotiated and incurred.” Id. at *11.

The court also noted that this interpretation was consistent with other state and federal cases construing application of § 527 (mortgage interest rate limitation) and § 532 (protection for installment contracts for lease or purchase) of the SCRA, where the requirement for protection turns on whether the obligation originated while the borrower was in military service.

The foreclosed borrower has noted an appeal to the U.S. Fourth Circuit Court of Appeals, so there may be more forthcoming on this interpretation of the SCRA.


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July/August e-Update

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August 2, 2016

by Jennifer M. McGrath
Hunt Leibert – USFN Member (Connecticut)

Under the Common Interest Ownership Act (CIOA), C.G.S. §§ 47-200, et seq., condominium associations have a statutory lien on every unit for common charges and fines with a nine-month priority over recorded security interests. While an association is required to give mortgagees notice prior to commencing a foreclosure on a unit, it may rely on the land records to determine the identity of mortgagees and, in cases where assignments are not timely recorded, a secured party may not have notice and could miss its law day in the event that the foreclosure goes to judgment. Consequently, liens for common charges have long been a concern for mortgagees and loan servicers, but a recent decision by the Connecticut Supreme Court has provided new grounds to challenge an association’s foreclosure action that can result in dismissal of the case.

Under CIOA, a foreclosure of common charges cannot be commenced without certain conditions precedent, including a vote by the executive board to commence the foreclosure or (in accordance with an amendment to the statute effective July 1, 2010) the option to adopt a standard foreclosure policy. C.G.S. § 47-258(m). This prerequisite was at issue in The Neighborhood Association, Inc. v. Limberger, 321 Conn. 29 (Apr. 26, 2016).

In Limberger, the plaintiff commenced a foreclosure for unpaid common charges; the defendant moved to dismiss, contending that the court lacked subject matter jurisdiction because the plaintiff failed to either vote at executive session to commence the foreclosure, or to adopt a standard foreclosure policy in accordance with CIOA procedures. In opposition, the plaintiff asserted that its executive board had in fact adopted a “standard collection policy” pursuant to CIOA. The association categorized the policy as an “internal business operating procedure,” claiming that it is not subject to the stringent requirements of notice and opportunity to comment that attach to rules adopted by an association.

CIOA does not define an internal business operating procedure. This prompted the Court to examine statutory construction rules, extra textual sources, and the legislative intent to determine whether the foreclosure policy constituted a rule. The Court reasoned that “internal business operating procedures” connotes daily business activities and not policies that impact unit owners’ rights and obligations. Accordingly, the Court held that “[g]iven the real and substantial effect that such matters could have on the circumstances under which unit owners will incur financial obligations and potentially lose their residence, we cannot reasonably construe the policy as anything but a rule.” Id. at 42. The association was, therefore, required to provide notice of the proposed foreclosure policy to all unit owners and an opportunity to comment before the rule was adopted. Having failed to comply with CIOA procedure, the plaintiff could not prove a condition precedent to commencing its foreclosure, and the Supreme Court remanded the matter with instructions to dismiss the case.

Counsel for lenders and servicers should be mindful that liens for delinquent common charges are creatures of statute. Similar to a mechanic’s lien foreclosure, an association’s failure to comply with CIOA’s statutory requirements is a jurisdictional defect that gives defendants grounds to seek dismissal for lack of subject matter jurisdiction. The ruling in Limberger also poses the question of what the decision means for cases filed since the 2010 amendment to C.G.S. § 47-258(m) where plaintiffs have made the same error in adopting foreclosure policies.

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July/August e-Update 

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August 2, 2016

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

Historically, foreclosed borrowers in Virginia have been unable to prevent possession awards in General District Court unlawful detainers by alleging defects in the foreclosure. Such challenges were deemed collateral attacks on title and outside of the statutorily created subject matter jurisdiction of the court. Circuit Courts sitting in their derivative appellate jurisdiction were similarly restrained from considering such defenses. Accordingly, foreclosure purchasers were accustomed to an unfettered path to obtaining an order of possession without much delay.

Borrowers alleging defects in a foreclosure were forced to file separate affirmative suits in the Circuit Court, challenging the sale and seeking remedies to delay enforcement of an award of possession. A recent Virginia Supreme Court decision, however, has granted borrowers a path to present defenses pertaining to challenging the foreclosure sale by mandating prosecution of certain cases in the Circuit Court, rather than in General District Court.

In Parrish v. Federal National Mortgage Association, Record Number 150454 (June 16, 2016), Virginia’s highest Court considered the foreclosed borrowers’ appeal from the Hanover Circuit Court’s award of summary judgment in an unlawful detainer that originated in the General District Court. In the “Grounds of Defense” filed in the General District Court, the Parrishes alleged that the lender violated 12 C.F.R. § 1024.41(g) by proceeding to foreclose where a complete loss mitigation package had been provided more than 37 days prior to sale. The General District Court awarded possession in favor of Fannie Mae, from which the borrowers appealed. In the appeal, Fannie Mae filed a motion for summary judgment, or alternatively, a motion in limine.

The Circuit Court granted Fannie Mae summary judgment, awarding it possession, and the Parrishes appealed to the Virginia Supreme Court. In a 5-2 decision, the Court held that the borrowers had raised a “bona fide claim” that the foreclosure sale, and resulting trustee’s deed, could be set aside. This deprived the General District Court (and the Circuit Court on appeal) of subject matter jurisdiction, requiring dismissal of the unlawful detainer without prejudice, and requiring Fannie Mae to file suit in the Circuit Court in order to obtain possession — where that court’s original jurisdiction permits it to adjudicate issues of title.

The majority in Parrish confirmed that General District Courts have never been granted jurisdiction to try matters of real estate title within actions for unlawful detainer, but they opined that this limitation created a “conundrum because some actions for unlawful detainer necessarily turn on the question of title.” The Court determined that where a plaintiff’s right of possession is based on a claim of title acquired after defendant’s entry, “[t]he question of which of the two parties is entitled to possession is inextricably intertwined with the validity of the foreclosure purchaser’s title” and, because of this intertwining, “the general district court’s lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try unlawful detainer and the court must dismiss the case without prejudice.”

The majority was careful to explain that in order to deprive the court of jurisdiction, such claims “must be legitimate.” The standard outlined by the Court is whether such allegations are sufficient to survive a demurrer had the borrower filed a complaint in the Circuit Court. Applying this newly created standard to the facts of the case, the Court held that the allegations were sufficient to have stated a bona fide claim. The grant of summary judgment was therefore vacated and the case dismissed without prejudice.

With regard to any retroactive application of the ruling, the majority indicated that where a borrower did not previously raise such challenges, the ruling was not subject to collateral attack; and that adverse decisions where the borrower had raised such issues were “voidable” and subject to collateral attack on direct appeal. The impact of Parrish will be a notable increase in costs and eviction timelines where it becomes necessary to proceed through the Circuit Court instead of the more streamlined General District Court process.

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July/August e-Update 

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August 2, 2016

by John Thomas
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)

The Washington Court of Appeals recently held that it is “settled law” that bankruptcy only discharges a borrower’s personal liability from the underlying debt, leaving the security interest or deed of trust intact. [Edmundson v. Bank of America, No. 74016-4-1 (Wash. Ct. App. July 11, 2016)].

Background: Borrowers defaulted on their mortgage in November of 2008. The following year, in June 2009, they filed a chapter 13 bankruptcy petition and obtained a discharge of their debts in December 2013. The creditor eventually commenced a nonjudicial foreclosure in October 2014. In response, and before the trustee’s foreclosure sale, the borrowers filed suit to restrain the foreclosure and to quiet title to the property, asserting that the deed of trust lien was no longer enforceable. The trial court agreed with the borrowers, ruling that the bankruptcy discharge of their personal liability on the note also discharged the deed of trust. The trial court awarded the borrowers their attorney fees.

On Appeal: The Washington Court of Appeals reversed the trial court’s decision as error, recognizing that the bankruptcy discharge did not affect the right to foreclose the lien or render the lien unenforceable. The appellate court observed that the plain terms of the deed of trust provide for the remedy of foreclosure in the event that the borrowers fail to comply with its covenants, including payment on the note.

Conclusion: This author’s firm has observed an increase in arguments by borrowers that a bankruptcy discharge bars enforcement of the deed of trust and essentially grants a free house to discharged borrowers. While this was never an accurate representation of the law, the Washington Court of Appeals has made it very clear: a bankruptcy discharge does not prohibit subsequent foreclosure. In Oregon, there is another case where the trial judge agreed with the borrower who raised a similar argument; that case is being appealed.

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July/August e-Update 

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