April 30, 2014

by Kayo Manson-Tompkins
The Wolf Firm, A Law Corporation
USFN Member (California)

For some time now, California law has provided special protection to tenants in post-foreclosure evictions. Initially, this protection resulted in tenants receiving a 30-day post-foreclosure notice to quit instead of the otherwise standard three-day notice to quit given to the prior owners and other non-tenant occupants (California Code of Civil Procedure § 1161a(b)(3)). In 2008, California tenant protection was expanded by legislation, providing the post-foreclosure tenant a 60-day notice to quit if the tenant had a month-to-month lease or periodic tenancy. This was followed by the 2012 Amendment, providing the tenant with a 90-day notice to quit if the tenant were a bona fide tenant (§ 1161b).

Although these changes significantly increased the time period for post-foreclosure tenant evictions, evictions were made even more difficult by Assembly Bill 2610 (effective January 1, 2013). This bill amended California Civil Code § 2924.8 and California Code of Civil Procedure (CCP) §§ 415.46 and 1161b, providing even greater tenant protections (discussed below) and has basically resulted in a far greater percentage of eviction defendants claiming to be tenants and, of those purported tenants, a large percentage falsely claiming to have unexpired leases.

Special Notice to Tenants in the Notice of Trustee’s Sale — Civil Code § 2924.8 sets the stage for a difficult or elongated eviction. In addition to posting and mailing the notice of trustee sale, a foreclosure trustee must also now concurrently post and mail a separate notice in English, Spanish, Chinese, Tagalog, Vietnamese and Korean to all “Residents of property subject to foreclosure sale.” The notice advises “residents” that the foreclosure may affect their right to continue to live in the property. It notifies them that the property may be sold at foreclosure and the new owner may offer a new lease or rental agreement or give them a 90-day notice to quit. It then states that they may be able to stay longer than 90 days if they have a fixed term lease, or if they are in a “Just Cause Eviction” city, in which case they may not have to move at all. Having this language mailed and posted with the notice of trustee’s sale invites abuse. Although the legislature intended to protect tenants who were victims of borrowers collecting rents knowing that a foreclosure sale was imminent, the new requirements open the door to the creation of a lease for the specific purpose of delaying the eviction.

90-Day Notice to Quit — From 2008, as referenced above, California CCP § 1161b required tenants with a lease to be given a 60-day notice. Due to an amendment to CCP § 1161b, which became effective January 1, 2013, the purchaser at a foreclosure sale was required to give a 90-day notice. The purchaser bore the burden to prove that a tenant was not entitled to protection. Furthermore, if a fixed term lease was entered into prior to the foreclosure sale, the tenant had a right to stay in possession until the end of the lease term, unless the purchaser was able to prove that the lease was not bona fide, in which case a 90-day notice applied. It has become standard practice that judges would demand that any tenant coming forward be given a 90-day notice if the tenant presented a lease or rental agreement, regardless of arguments that they were not a bona fide tenant. In addition, California CCP § 1161c required a special notice to be attached to a post-foreclosure notice to quit, informing tenants of their rights and providing websites about where to go for help. This notice, as with the special tenant notice attached to the notice of trustee’s sale, opens the door for occupants to claim and/or create a tenancy status, which causes delays in the eviction proceedings.

Interpretation of Federal PTFA — Prior to the amendment of CCP § 1161b, on May 20, 2009, Congress enacted under Title VII the Protecting Tenants at Foreclosure Act of 2009 (PTFA) to provide bona fide tenants with a 90-day notice to quit. Although the PTFA was originally set to expire at the end of 2012, operation of the PTFA extends through the end of 2014 following passage of the Dodd-Frank financial reform bill of 2010. The amendment also clarified that notice of foreclosure shall be deemed to be the date title is transferred. Therefore, as long as a tenant’s lease is dated any time prior to the foreclosure sale itself, the tenant was protected. (Note that S. 1761 is currently pending, which would make PTFA permanent.)

A recent appellate court decision further clarifies the tenant’s rights [Nativi v. Deutsche Bank National Trust Company, 2014 S.O.S. H037715 (Cal. Ct. App. Jan. 23, 2014)]. The appellate court took great lengths to review interpretations of PTFA by Senators Kerry and Dodd, legislative history, HUD, FDIC, and OCC. All entities were in agreement that no tenant may be evicted prior to receiving a 90-day notice. Moreover, if a tenant has an unexpired lease, a landlord/tenant relationship exists until the lease expires and, thus, no notice to quit can be sent until after expiration of the lease, or if the property is subject to a rent or eviction control ordinance, or is part of a Section 8 contract, until the protections under those programs end. Of course, if the tenant fails to pay the rent or is otherwise in breach of the existing lease, the successful purchaser has the right to pursue eviction under standard landlord/tenant grounds.

In Nativi, the respondent made the argument that PTFA did not apply because the tenants occupied an illegal garage unit and thus were not bona fide tenants. However, the appellate court held that they saw no language or legislative history exempting illegal rental units from PTFA protection. The court reasoned that if they accepted the bank’s position, it would circumvent the PTFA and frustrate its fundamental public policy purpose. The appellate court further stated that rather than exercising supremacy or preemption, Congress intended to supplant less protective state law but not any state law that provided longer periods or additional protections to the tenants. The purchaser at the foreclosure sale takes subject to a bona fide tenancy for a term, but it retains the power to terminate the lease upon a breach of the lease. In addition, for those that file or remove a case to federal court for a determination, the appellate court held that PTFA did not create a private cause of action under federal law. Instead, the court found that Congress intended tenant rights established by PTFA to be enforceable under state law. (Here, too, it should be noted that S. 1761 is currently pending, which proposes to make PTFA permanent as well as grant tenants an explicit right to sue.)

Reviving the Old Claim of Right to Possession — California CCP § 415.46 was amended to “revive” the old claim of right to possession post-judgment. Initially, a typical challenge arose through an individual coming forward at the time of lockout and claiming a right to possession under CCP § 1174.3. This challenge required an additional hearing to determine whether the plaintiff had a right to possession against the claimant and, as a consequence, court dockets became crowded with these types of hearings. In an attempt to remedy this situation, California enacted CCP § 415.46 (effective January 1, 1991), which provided that if the unknown occupants were served with a Prejudgment Claim of Right to Possession (PJC) together with the complaint and did not come forward to be added as a defendant, any judgment obtained would be effective as to all unknown occupants. However, effective January 1, 2013, an exception was created for post-foreclosure rental housing units such that tenants may file a claim of right to possession under CCP § 1174.25 at any time before a judgment is entered; or under CCP § 1174.3 to object to the enforcement of judgment, whether or not a PJC was served. For post-foreclosure evictions, this amendment has rendered serving a PJC ineffective.

Purpose of Amendments vs. Abuse by Tenants — The California legislators enacted these amendments in order to protect tenants who had fallen victims to borrowers collecting rents, knowing that their homes were being foreclosed upon. The PTFA was enacted to promote public policy and for the purpose of protecting tenants from being displaced and suddenly made homeless due to a foreclosure. However, as with many public policies and laws, there are going to be those who will try to abuse the system. Many former owners will create lease agreements prior to the foreclosure sale in order to collect rents with no intention of curing their mortgage loan delinquency, or without any intent to protect the rights of the tenants to whom they rent their homes. Then, there are former owners who continue to reside in the property and rent rooms out to tenants. Nevertheless, as was evident in Nativi v. Deutsche Bank National Trust Company, the purchaser at a foreclosure sale needs to make sure that it exercises due diligence in determining who is occupying the property, as well as obtaining a copy of the tenant’s lease. If the lease has not expired, then it must be honored. If the lease has expired, or if the tenant merely has a month-to-month tenancy, then the tenant is entitled to a 90-day notice, unless the property is subject to a rent control or eviction control ordinance, or there is a Section 8 contract in effect, in which case the tenant could possibly stay longer.

Asset Managers’ Role in Light of the Amendments — Asset managers need to be aware of the California statutory changes that have created the additional tenant rights described in this article. Additionally, they must make certain that all efforts are made to investigate who is occupying the property. This investigation should include all of the following: (1) obtaining a copy of the lease, (2) obtaining proof of payment of rent, and (3) obtaining proof that utilities are in the tenant’s name. Furthermore, they need to know what jurisdictions have eviction or rent controls. As was evident with the appellate court’s position in Nativi v. Deutsche Bank, “due diligence” means more than just “driving by” the property. It is imperative to make contact with the occupants and know what obstacles are present that will impact the eviction.

© Copyright 2014 USFN. All rights reserved.
Spring 2014 USFN Report

April 30, 2014

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA
USFN Member (Ohio, Kentucky)

The USFN Bankruptcy Subcommittee has been hard at work analyzing, discussing, and debating the 354 pages of Proposed Amendments to the Federal Rules of Bankruptcy Procedure (FRBP). On August 15, 2013, new bankruptcy rules and forms were unveiled that would, amongst other things, mandate a form Chapter 13 Plan to be used nationally and require almost immediate action in bankruptcy cases to file proof of mortgage servicers’ claims. After being invited to submit comments on the new rules and forms, USFN summarized its discussions and submitted comments to the Committee on Rules of Practice and Procedure. Here is a summary:

Proposed Changes Governing POC Filing is Inconsistent with Existing Ethical and Legal Rules
The proposed rule changes attempt to resolve the challenges inherent in Chapter 13 plan confirmation hearings, which are typically held prior to existing deadlines to file proofs of claim (POC) in a case. The proposed rule shortens the time for filing a POC to 60 days after the petition date (as opposed to approximately 120 days under the current rules). The proposed rule then provides an additional 60 days for filing required documentation. Simply put, creditors have 60 days to file the POC with the figures and 120 days to file the loan documents. Unfortunately, the 120-day cushion does not apply to much more than the loan documents. If an escrow account has been established in connection with the claim, the deadline to file the required escrow account statement prepared as of the date the bankruptcy was filed with the POC will be 60 days from the bankruptcy filing. This proposed bifurcated process creates a conflict.

The previous amendments, effective in 2011, increased the detail and required documentation to support mortgage POCs and provided sanctions for incomplete filings. Further, the person signing the POC must verify: “I declare under penalty of perjury that the information provided in this claim is true and correct to the best of my knowledge, information, and reasonable belief.” Additionally, attorneys signing the POC must meet the requirements of FRBP Rule 9011 — the rule requiring the attorney filing the document to certify to the best of the attorney’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, that the proof of claim is warranted and has evidentiary support. Executing and filing a claim as allowed by the proposed rule without a review of supporting documentation raises the question of whether the signor is violating the terms of execution and possibly Rule 9011.

Proposed Changes Governing POC Filing Increases Administrative Expenses for Everyone
The bifurcated claim process creates the potential for double the amount of filings for every POC and a review of claims at two points in time instead of one, thereby increasing the administrative burden and associated costs. It is logical to presume that the claim amounts would be verified for plan feasibility at 60 days post-petition and again when the supporting documentation is later filed. Servicers, servicers’ counsel, Chapter 13 trustees and their staff, as well as borrowers and their counsel will be taxed with this additional review, with the likely result being increased costs to borrowers in higher attorney and trustee fees.

As an alternative, USFN recommended decreasing the total time for filing a POC to 90 days post-petition rather than impose a two-step process. This adjustment would allow plans to be confirmed in a timely manner, decrease administrative burdens, and allow a reasonable time for the creditors to submit fully verified claims. The National Conference of Bankruptcy Judges, whose membership is restricted to actively serving or retired bankruptcy judges, shared a similar recommendation by commenting that it “believes it would be better to set a single, longer period during which both the Proof of Claim and the attachments must be filed together rather than separate periods for different parts of a single Proof of Claim.”

Proposed Changes Governing POC Filing are Unclear as to No-Asset Chapter 7 Cases
The proposed rule can be read to require POCs in “No Asset” Chapter 7 cases, which would increase administrative burdens and costs without any benefit. As an alternative, USFN requested that the rules clearly indicate that the timeline for Chapter 7 proofs of claim is solely for those cases in which a notice of possible distribution is filed by the trustee.

Amendments Streamlining Chapter 13 Plan Confirmation
The proposals increase the burdens on mortgage creditors, while shortening timelines. In addition, the same mortgage creditors are required to comply with additional requirements imposed by the CFPB and National Mortgage Settlements. The increased responsibilities, combined with shortened timelines, conflict with the goals of increasing factual accuracy of claims and transparency. Further, the proposed rules will result in additional strains on the bankruptcy system, including courts, debtors, trustees, and creditors. This will bring more costs, which may ultimately interfere with a debtor’s ability to obtain a fresh start.

What’s Next?
The Advisory Committee will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure and will likely publish a new version of the form plan and rules, with a new comment period ending August 15, 2014. The proposed amendments would then become effective on December 1, 2015, if they are approved and if Congress does not act to defer, modify, or reject them.

© Copyright 2014 USFN. All rights reserved.
Spring 2014 USFN Report

March 31, 2014

by Lisa A. Lee
KML Law Group, P.C. – USFN Member (Pennsylvania)

On March 7, 2014, the Pennsylvania Supreme Court approved a recommendation of the Civil Procedural Rules Committee to amend Pennsylvania Rules of Civil Procedure 3129.3 and 3135. These amendments do not place any new requirements on servicers but, in one instance, do require additional actions to be taken by counsel when a sheriff’s sale is postponed to a new date.

Rule 3129.3 governs the procedure for postponing or continuing sheriff’s sales. The current rule requires that a postponed sale date must be publicly announced at the sale where the property was originally scheduled to be sold, but does not require any further notice to any party of the postponed sale date. The amendment to the Rule sets forth a new requirement that the plaintiff must: (1) file a notice of the date of the continued sale with the prothonotary at least 15 days prior to the continued sale; and (2) file a certificate with the sheriff confirming the filing of the notice.

The amended Rule also provides that the sheriff shall continue the sale to the next available date if the notice and certificate have not been timely filed. The amended Rule is specific that non-compliance with these requirements is not a basis for setting aside a sheriff’s sale unless raised prior to the delivery of the sheriff’s deed and, even then, there must be a showing of prejudice for a sale to be set aside for this reason.

Rule 3135 governs the procedure regarding sheriff’s deeds. The amendment to this Rule sets forth alternative options for use in the situation where a plaintiff has failed to provide notice of a sheriff’s sale to a junior lienholder. The amended Rule allows for a petition to be filed requesting either that the junior lien be divested, or that a sheriff’s sale be held at which the junior lienholder in question may be the only other bidder aside from the plaintiff.

These amendments to the Rules were effective April 7, 2014.

© Copyright 2014 USFN. All rights reserved.
April e-Update

March 31, 2014

by Natasha Barone
Hutchens Law Firm – USFN Member (North Carolina)

For years, the issue as to what constitutes competent evidence to prove that the lender seeking to foreclose is in fact the holder of the note at issue has been a hotly contested one in North Carolina. The North Carolina Court of Appeals and North Carolina Supreme Court have issued several opinions within the last several years, both published and unpublished, addressing the question of what is competent evidence to prove note holder status. Two such seminal cases are In re Adams, 204 N.C. App. 318 (2010), and In re Bass, 366 N.C. 464 (2013).

In recent years, and more frequently since Adams and Bass, the debtor’s bar has contended that blank endorsements are a particular cause for concern because “no one can tell who holds the note.” Typically debtor’s counsel will cite to cases holding that “mere possession” alone is insufficient to prove that a party is the holder of a note. In re Adams, at 323. Generally, this argument is unsuccessful as long as lender’s counsel provides an affidavit stating that the party seeking to foreclose is in possession of the original note.

Until earlier this year, the North Carolina Court of Appeals had not addressed the specific issue of proving the holder of a note endorsed in blank. In an unpublished opinion filed by that court in February, the appellate court held for the first time with specificity that an original note, or a copy of the original note with a blank endorsement coupled with an affidavit by the party seeking to foreclose averring that it is in possession of the original note endorsed in blank, constitutes sufficient evidence that the party seeking to foreclose is in fact the holder of the note. In re Cornish, No. COA 13-513, 2014 WL 636969 (N.C. Ct. App. Feb. 18, 2014). Although unpublished opinions are not binding authority, the Cornish case should have sufficient persuasive authority on lower courts throughout the state to resolve the “blank endorsement” dispute with finality.

© Copyright 2014 USFN. All rights reserved.
April e-Update

March 31, 2014

by Valerie Finney
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In the case of Deutsche Bank National Trust Company, Trustee v. Torres, (AC 35838), decided on March 25, 2014, the Connecticut Appellate Court reversed the Superior Court’s ruling granting a motion to dismiss filed by the self-represented borrower. The basis of the motion was an allegation that the plaintiff lacked standing to commence the foreclosure action. The appellate court concluded that the plaintiff bank had standing to foreclose because it was in possession of the original note endorsed in blank, which was provided to the trial court at the hearing on the motion.

The appellate court relied upon several recent Connecticut Appellate and Supreme Court decisions regarding standing to foreclose, specifically referring to the Uniform Commercial Code’s (C.G.S. § 42a-1-201(b)(21)(A)) definition of a holder of a note in conjunction with Connecticut General Statutes § 49-17, which “allows the holder of a note to foreclose on real property even if the mortgage has not been assigned to him.” The recent cases supporting the Torres decision were Chase Home Finance, LLC v. Fequiere, 119 Conn. App. 570 (2010); RMS Residential Properties, LLC v. Miller, 303 Conn. 224 (2011); J.E. Roberts Co. v. Signature Properties, LLC, 309 Conn. 307 (2013); and Equity One, Inc. v. Shivers, 310 Conn. 119 (2013). All of these decisions comprised the legal authority for reversing the trial court’s ruling.

Most importantly, the appellate court held that because the plaintiff had alleged itself to be the holder of the note payable to bearer and had presented the note to the judicial authority and defendant for review, the plaintiff had raised the presumption of standing, to which the defendant failed to rebut. Once a plaintiff alleges in its complaint the right to foreclose, the burden then shifts to the defendant to rebut that presumption with concrete evidence.

© Copyright 2014 USFN. All rights reserved.
April e-Update

March 28, 2014

by Kathryn A. Lachowsky
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

Nationwide Mutual Fire Insurance Co. v. Citizens Bank & Trust Co., 2014 Ark. 20, arose out of a fire that occurred in December 2009 and an insurance company denying the claim of both the insured homeowner and the mortgagee. The homeowner, Danny Ludwick, applied for insurance coverage from Nationwide Mutual Fire Insurance Co. (Nationwide) on his home located in Van Buren, Arkansas. Nationwide relied upon the information supplied in his application and supplemental application, and issued a policy insuring the home and its contents for the period of May 6, 2009, through May 6, 2010. The policy at issue contained a standard mortgage clause.

The home was later destroyed by a fire in December 2009, and Citizens Bank & Trust Co. (Citizens) had a valid mortgage on the home at the time of the application and at the time of the fire. During Nationwide’s investigation of the fire, Nationwide learned of two previous fire losses sustained by the homeowners that had not been disclosed in their application and supplemental application for insurance. According to Nationwide’s underwriting guidelines, Nationwide would not have issued the policy if the prior undisclosed fire losses had been disclosed at the time of the application. Based on this material misrepresentation, Nationwide voided the policy back to its inception and refunded the premiums paid by the homeowners.

Mortgagee Citizens submitted a timely claim to Nationwide, but Nationwide denied the claim — not on the basis of a policy exclusion, but rather on the basis that the policy was void back to its inception. At trial, Nationwide argued that its rescission of the policy voided the policy ab initio and thereby extinguished not only the homeowner’s interest, but also Citizens’ interest as mortgagee. The Crawford County Circuit Court entered its order, without explanation, granting Citizens’ motion for summary judgment and denying Nationwide’s motion. Nationwide appealed and the Arkansas Court of Appeals certified this case to the supreme court as one of first impression that is of significant public interest. The Arkansas Supreme Court affirmed the decision.

On appeal, Nationwide contended that the circuit court erred in its decision because when Nationwide rescinded the policy, the policy was void ab initio and, therefore, there was no policy in which Citizens had an interest. According to Black’s Law Dictionary, the definition of “void ab initio” is: “null from the beginning, as from the moment when a contract is entered into.” Nationwide’s position was simple: If the policy is void and a legal nullity, the mortgagee can have no interest in it. Nationwide further argued that rescission of a contract and cancellation of a contract are two distinctly different remedies based on different grounds. Cancellation takes effect only prospectively, while rescission voids the contract ab initio. Nationwide, 2014 Ark. 20, citing Ferrell v. Columbia Mut. Cas. Ins. Co., 306 Ark. 533, 537, 816 S.W.2d 593, 595 (1991).

Citizens’ argument is based on the parties’ unambiguous stipulation that the mortgage clause in the policy is a standard mortgage clause. Under Arkansas law, a standard mortgage clause serves as a separate contract between the mortgagee and the insurer, as if the mortgagee had independently applied for insurance. Nationwide, 2014 Ark. 20, see, e.g., Farmers Home Mut. Fire Ins. Co. v. Bank of Pocahontas, 355 Ark. 19, 129 S.W.3d 832 (2003). Thus, the rights of a named mortgagee in an insurance policy are not affected by any act of the insured, including improper and negligent acts. The words “any acts” as used in a standard mortgage clause do not refer merely to acts prohibited by the contract or to a failure to comply with the terms of the contract, but literally embrace any act of the mortgagor. Nationwide, 2014 Ark. 20, citing 4 Couch on Insurance § 65:48 (3rd ed.).

In its review, the supreme court acknowledged Nationwide’s argument in reply that rescission voids a policy regardless of whether the policy’s mortgage clause is a standard mortgage clause. Nationwide’s position, however, overlooks the effect of Arkansas law treating the mortgagee as having an independent contract unaffected by the acts of the insured. The justice concluded in his opinion that under Arkansas law, the standard mortgage clause serves as a separate contract between Nationwide and Citizens as if Citizens had independently applied for insurance. As such, Nationwide’s rescission of the homeowner’s policy based on the acts of the homeowner does not affect Citizens’ independent contract with Nationwide. It is important to note that this independent contract with the mortgagee cannot be defeated by any act of the insured. Farmers Home Mut. Fire Ins. Co., 355 Ark. 19, 129 S.W.3d 832. Fraudulent acts by the insured and the rescission of the policy have no affect whatsoever on the independent contract with the mortgagee.

While this issue is one of first impression in Arkansas, the conclusion is consistent with the long-settled law of Oklahoma. In 1958, the Oklahoma Supreme Court similarly held that “a mortgagee’s contract was completely independent of the insured’s rights and would be valid even though the insurance policy was void ab initio.” Nationwide, 2014 Ark. 20, citing Okla. State Union of Farmers’ Educ. & Coop. Union of Am. v. Folsom, 325 P.2d 1053, 1056 (Okla. 1958) (citing Western Assur. Co. v. Hughes, 179 Okla. 254, 66 P.2d 1056) (Okla. 1936)).

© Copyright 2014 USFN. All rights reserved.
April e-Update

March 4, 2014

by Deirdre Keady
Harmon Law Offices, P.C. – USFN Member (Massachusetts, New Hampshire)

The Bankruptcy Appellate Panel (BAP) recently issued an opinion that essentially overturned a longstanding practice in New Hampshire bankruptcy courts recognizing a debtor’s ability to include foreclosed property in a Chapter 13 reorganization, provided the foreclosure deed had not been recorded prior to the Chapter 13 filing. [TD Bank v. LaPointe (In re LaPointe), BAP No. NH 13-029 (B.A.P. 1st Cir. Feb. 24, 2014)].

Since the Beeman opinion was issued in 2009 (ruling that a debtor could file a Chapter 13 reorganization and include foreclosed property as long as the foreclosure deed was not recorded), it had become commonplace for debtors to file Chapter 13 cases post-foreclosure auction, which would then require the sales to be rescinded. Beeman was not appealed.

In the LaPointe case, the bankruptcy court denied TD Bank relief from stay to record the foreclosure deed. The facts in LaPointe were essentially the same as in Beeman. TD Bank appealed to the BAP, which ruled that the New Hampshire Bankruptcy Court erred in failing to grant the bank relief from stay and remanded the case back to the bankruptcy court to enter an order granting relief from stay. The BAP held that NH state law does not recognize a mortgagor’s right of redemption after the gavel has fallen and the memorandum of sale is signed; therefore, the bankruptcy court could not give the debtor any more rights than state law allowed.

The LaPointe case is likely to be appealed so, for now, it is still advisable to seek relief from the automatic stay prior to recording a foreclosure deed when a post-auction bankruptcy has been filed.

© Copyright 2014 USFN. All rights reserved.
March e-Update

March 4, 2014

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

In Wells Fargo Bank, N.A., Trustee v. Melahn, (AC 34726), the defendant appealed the trial court’s denial of his motion to open the judgment of strict foreclosure, which had entered in favor of the plaintiff Wells Fargo. The appellate court concluded that in “rare and exceptional circumstances” the trial court has the jurisdiction and authority to open a judgment of strict foreclosure even though title has already vested with another party. The appellate court thereby reversed the trial court’s denial and remanded the case for further proceedings.

Case Summary — On September 9, 2010, the plaintiff commenced a foreclosure action against the defendant. A judgment of strict foreclosure entered against the defendant (who had not appeared in the matter) on November 22, 2010, with a law day of January 11, 2011. Pursuant to the uniform foreclosure standing orders (form JD-CV-104), a letter must be sent to all non-appearing defendants who have an ownership interest in the property. The letter must be sent within ten days of the judgment, state that a judgment of strict foreclosure has been entered, and advise the defendant that he may lose the property on the law day if he fails to take any steps to protect his interest. The letter must be sent by regular and by certified mail, and proof of such must be filed with the court. A certificate of foreclosure cannot be filed on the land records until proof of the mailing has been filed with the court.

The plaintiff did not send the notice of judgment until January 7, 2011, some 46 days after the entry of judgment and only four days before the law day. The certified copy of the notice was not received by the defendant until January 11, 2011, his actual law day. Even though the letter was sent late and failed to provide all of the information as outlined by the standing orders, the plaintiff certified to the court that the notice had been mailed in accordance with those orders.

The defendant retained legal counsel, who filed an appearance on February 22, 2011, and a motion to dismiss was filed on March 31, 2011. Both the appearance and motion were filed after the plaintiff had taken title to the property. The court opened the judgment of strict foreclosure and granted the defendant’s motion to dismiss on July 14, 2011, some six months after title passed, based on the plaintiff’s failure to comply with the notice requirement of the standing orders. However, the plaintiff filed a motion to reargue on August 24, 2011, citing Falls Mill of Vernon Condominium Assn., Inc. v. Sudsbury, 128 Conn. App. 314, 320-21, 15 A.3d 1210 (2011), and contended that the court did not have the authority to open the judgment or dismiss the action because the law day had passed and title had already vested with the plaintiff. The defendant argued that the opening and dismissal of the judgment were a proper sanction against the plaintiff for its false certification of compliance with a court order. The trial court vacated its prior order and then denied the defendant’s motion to dismiss.

Upon appellate review, the court reiterated that “a trial court has broad discretion to make whole any party who has suffered as a result of another party’s failure to comply with a court order.” AvalonBay Communities, Inc. v. Plan & Zoning Commission, 260 Conn. 243, citing Nelson v. Nelson, 13 Conn. App. 355, 367, 536 A.2d 985 (1988) and Clement v. Clement, 34 Conn. App. 641, 647, 643 A.2d 874 (1994). The court distinguished the facts of this case from Falls Mill of Vernon Condominium Assn., Inc. v. Sudsbury, because the defendant there was not a non-appearing owner and there were no allegations that the plaintiff falsely certified compliance with a court order. The appellate court was silent on whether dismissing an action is a proper sanction for non-compliance or for a false certification, stating that the “appropriate sanction, if any, is discretionary and may be reconsidered by the court on remand.” It also was not clear if the defendant in the present matter received notice from the court advising of the judgment and law day and what impact that may have had on the court’s decision (Melahn, fn. 5).

The appellate court further addressed Conn. General Statutes § 49-15, which states that a judgment of strict foreclosure cannot be opened “after the title has become absolute in any encumbrancer.” It concluded that foreclosure is an equitable action and the trial court has continuing jurisdiction over equitable matters, particularly when a party is denied the opportunity to present a defense because of fraud, accident, mistake, or surprise. In this case, the defendant was not provided with requisite notice prior to his law day and the plaintiff misrepresented to the court its compliance with the standing orders regarding that notice. These unusual circumstances are sufficient for the trial court to retain jurisdiction in order to provide an adequate remedy.

© Copyright 2014 USFN. All rights reserved.
March e-Update

March 4, 2014

by Kevin T. Dobie
Usset, Weingarden & Liebo, PLLP - USFN Member (Minnesota)

In a helpful case for those wishing to evict occupants following a mortgage foreclosure, the Minnesota Court of Appeals determined in Deutsche Bank National Trust Company v. Hanson, __ N.W.2d __, 2014 WL 30389 (Minn. App. Jan. 6, 2014), that a district court can enter an eviction judgment in favor of a foreclosing lender without addressing the defendant’s claim that the lender’s title is flawed. A pending lawsuit regarding the validity of the mortgage does not require a stay of the eviction proceedings.

The pertinent eviction statute and prior decisions from the Minnesota Court of Appeals provide that to evict a holdover occupant a foreclosing lender need only show that (1) a foreclosure occurred, (2) the redemption period expired, (3) the eviction plaintiff is the holder of the sheriff’s certificate of sale, a successor, or assignee, and (4) the defendant is holding over. Evictions are summary proceedings and lawsuits contesting title must be filed in a separate action.

Following a mortgage foreclosure and expiration of the statutory redemption period, former owners and eviction defendants seeking to challenge the eviction in Minnesota often claim that a lender’s foreclosure is defective and, therefore, the lender cannot proceed with the eviction. These eviction defendants often start a lawsuit quickly after the eviction complaint is filed or have already filed a separate lawsuit disputing the lender’s title.

The eviction defendants frequently claim that Bjorklund v. Bjorklund Trucking Co., 753 N.W.2d 312 (Minn. App. 2008), requires the eviction court to stay the eviction pending the outcome of a separate lawsuit because, in Bjorklund, the Minnesota Court of Appeals held that a district court abused its discretion where it refused to stay an eviction action when defenses or counterclaims that are essential in the eviction are also at issue in a previously-filed lawsuit.

The Hansons argued that Bjorklund required the district court to stay the eviction until Deutsche Bank could establish the validity of the foreclosed mortgage. The Hansons did not dispute that they executed a mortgage. Instead, they claimed it was invalid because they had rescinded the loan transaction under the Truth in Lending Act. The holding in Hanson concluded that Bjorklund did not govern the foreclosure-related eviction, with the court determining that the most significant distinction was that in Bjorklund the occupant’s defense hinged on an alleged agreement to transfer the real estate to the occupant and the district court in Bjorklund found that some of the claims in the previously-filed lawsuit were essential to the transfer agreement defense. Also of note, the Bjorklund plaintiff sought to evict based on an alleged oral lease and a lease termination notice.

The Hanson court ruled that because eviction proceedings adjudicate only the right to present possession, a dispute over the validity of the mortgage [or likely the foreclosure] did not trigger the Bjorklund stay requirement. The Hansons’ claim that the lender’s title was flawed was not an issue central to the eviction proceeding and “the district court correctly concluded that it could proceed without addressing [the Hansons’ title claims].”

© Copyright 2014 USFN. All rights reserved.
March e-Update

March 4, 2014

by Andrew Nelson
Pierce & Associates, P.C. – USFN Member (Illinois)

One of the advantages of mediation is that when conducted appropriately, it creates an open forum for the parties to freely communicate to reach a mutually-beneficial alternative to foreclosure when possible. The goals and structure of mediation vastly differ from the objectives and procedures of litigation. Therefore, the two courses of action should remain separate. However, the St. Clair County mediation rules attempt to merge the two processes together to the detriment of fairness and efficacy.

Pursuant to the St. Clair County foreclosure mediation program (FMP) rules, “unless ordered by the court, no discovery shall take place until after the mediation is complete.” However Section 4 of the rules violates the aforementioned aspect of the program by essentially commanding unilateral discovery requests of the plaintiffs, imposing an onerous and undue burden on plaintiffs to produce documentation that contravenes the purpose of mediation and rises to the level of litigation.

Section 4 of the FMP rules requires lender representatives to provide the following extensive list of documents at the first pre-mediation conference:

1. Proof of the plaintiff’s standing to file the foreclosure
2. Proof of the mortgage holder’s standing and status as the real party in interest
3. Any pooling and servicing agreement
4. Loan origination documents
5. The appraisal at the time of the loan origination and any subsequent appraisal
6. Payment history records with respect to the mortgage, including all fees and costs incurred
7. An itemization of the amounts needed to cure and payoff the mortgage
8. The lender’s current loan modification packet

This author’s firm suggests that an objection is appropriate to several of the aforementioned documentation requirements because the requisites are unreasonable and burdensome within the context of a mediation program.

Proof of the Plaintiff’s Standing to File the Foreclosure Complaint
The St. Clair County foreclosure mediation program is an opt-in one. Defendants receive a mediation program notice and a foreclosure mediation request form along with their summons. Defendants must execute the mediation request form if they wish to participate in mediation. Therefore, the defendants cannot challenge the plaintiff’s standing to foreclose while simultaneously seeking mediation with the same plaintiff.

Proof of the Mortgage Holder’s Standing & Status; PSAs; Loan Origination Docs; Appraisals
The concern with the above-listed items 2, 3, 4, and 5 is that they constitute discovery requests. Court rules and Illinois Rules of Evidence govern the discovery procedure, which would be circumvented by the demands of this foreclosure mediation program. Requiring plaintiffs to produce these documents without adhering to the formality of discovery requests and without the plaintiffs’ ability to object, overextends the scope and function of the mediation program. Moreover, a plaintiff’s failure to provide these items exposes it to undue liability for failing to participate in good faith. Accordingly, this author’s firm recommends considering an objection to the production of these items as a violation of the foreclosure stay, which is to remain in effect throughout mediation.

Any challenges to the mortgage holder’s standing or to the terms of a pooling and servicing agreement are not appropriate for a mediation setting, as there is no decision maker present to resolve the dispute. Mediators must remain neutral and impartial. Therefore, these types of issues are to be addressed within the established framework of litigation in compliance with the Illinois Rules of Civil Procedure.

Conclusion
Notwithstanding that Section 4 of these FMP rules is excessively broad and obfuscates the role of the mediation process, this author’s firm remains committed to mediating in good faith. However, appropriate objections should be considered in each case.

© Copyright 2014 USFN and Pierce & Associates, P.C. All rights reserved.
March e-Update

March 4, 2014

by David W. Cowles
Tiffany & Bosco, P.A. – USFN Member (Arizona, Nevada)

Arizona may be facing a “show me the note” redux. The Arizona Court of Appeals issued its opinion in Steinberger v. McVey ex rel. Cnty. of Maricopa, __ P.3d __, 2014 WL 333575 (Ariz. Ct. App. Jan. 30, 2014), and the opinion seems to rejuvenate the “show me the note” defense to foreclosure. This is especially surprising in light of the fact that the Arizona Supreme Court shut down the “show me the note” defense in its opinion in Hogan v. Washington Mutual Bank, N.A., 230 Ariz. 584, 277 P.3d 781 (2012).

In Hogan, a “show me the note” case, the Supreme Court wrote: “[w]e hold that Arizona’s non-judicial foreclosure statutes do not require the beneficiary to prove its authority or ‘show the note’ before the trustee may commence a non-judicial foreclosure.” The court based its holding on a careful review of the relevant statutes and on policy considerations. On the policy side, the court stated: “The legislature balanced the concerns of trustors, trustees, and beneficiaries in arriving at the current statutory process. Requiring the beneficiary to prove ownership of the note to defaulting trustors before instituting non-judicial foreclosure proceedings might again make the mortgage foreclosure process ... time-consuming and expensive, and re-inject litigation, with its attendant cost and delay, into the process.”

Arizona’s state and federal courts had already concluded that the “show me the note” argument was meritless and, with Hogan, Arizona’s highest court seemed to settle the matter once and for all. At least until late January, when the Arizona Court of Appeals issued Steinberger.

Steinberger is a lengthy opinion that deals with a number of different causes of action, but it is its treatment of the “show me the note” argument and of Hogan that stands out. In Steinberger, the court of appeals holds that the plaintiff did state a cause of action based on allegations that the beneficiary lacked authority to foreclose; i.e., based on a “show me the note” argument. The court of appeals attempts to distinguish Hogan on the basis that in that case, the borrower did not “affirmatively allege” that the entity pursuing foreclosure lacked authority to do so, whereas Steinberger did so allege. And although the Steinberger opinion acknowledges that the holding in Hogan was premised partly on the idea that non-judicial foreclosure sales are intended “to operate quickly and efficiently ... and that litigation inevitably slows down the foreclosure process,” Steinberger nevertheless appears to have re-injected litigation into the non-judicial foreclosure process, at least in cases where the borrower alleges that the wrong entity is pursuing foreclosure, which is in nearly all of the “show me the note” cases.

Steinberger is likely to be appealed and, if the Arizona Supreme Court grants review, Arizona may again have clarity on this important issue.

© Copyright 2014 USFN. All rights reserved.
March e-Update

February 5, 2014

by Patricia Antonelli
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

At the January 28, 2014 meeting of the Rhode Island governor’s insurance council, the Deputy Director and Superintendent of Banking for the RI Department of Business Regulation (DBR) stated that the DBR will seek legislation that will require the licensing of mortgage loan servicers. It is expected this legislation will include RI requirements for servicers that parallel or expand upon the new requirements for mortgage loan servicers implemented at the federal level in January 2014.

The federal Consumer Financial Protection Bureau (CFPB) implemented new mortgage loan servicing regulations effective January 10, 2014. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the new regulations amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), and they amend Regulation Z, which implements the Truth in Lending Act (TILA).

The amendments to Regulation X address servicers’ error resolution obligations, changes to the “Qualified Written Request” rules, and new protections for borrowers in connection with lender-placed insurance. The amendments also address loss mitigation rules for delinquent borrowers. The amendments to Regulation Z affect servicers’ disclosure obligations regarding transfers of servicing, periodic billing statements, payment crediting and payoff statements, interest rate adjustment notices, and management of escrow accounts.

As more develops on these topics, look for future alerts regarding Rhode Island licensing requirements for mortgage loan servicers and on the changes to federal RESPA and TILA laws and regulations that affect mortgage loan servicing.

© Copyright 2014 USFN and Partridge Snow & Hahn, LLP. All rights reserved.
February e-Update

February 5, 2014

by Lanèe Borsman
Hutchens Law Firm – USFN Member (North Carolina)

House Bill 331/Session Law 2013-202

The North Carolina legislature has amended the provisions of Chapter 47 of the North Carolina General Statutes dealing with the lien of homeowners and condominium association dues. North Carolina is not a “super lien” state. When the holder of a first mortgage forecloses, the purchaser at the foreclosure sale has historically been liable only for HOA/COA dues incurred from the date of the “acquisition of title” to the property. Until now, the “acquisition of title” date was generally regarded as the date the trustee’s foreclosure deed was recorded. This was true even on an FHA loan where the assignment of the bid to HUD could mean a delay in the recording of that deed for long periods of time. The past-due HOA/COA amounts that had accrued against the borrower are pro-rated among all of the property owners, so the longer the delay in the recording of the foreclosure deed, the more concerned the homeowners shouldering the burden became, and they let their legislature know it.

The change comes via clarification of the definition of “acquisition of title.” Going forward, the determinative date is the day the “rights of the parties become fixed,” otherwise known as the end of the upset bid period, which is typically 10 days after the sale date. The result of this change is that upon the foreclosure of a first lien, any homeowners/condominium association dues will start accruing against the purchaser on the day of confirmation of the foreclosure sale, no matter when the foreclosure deed is actually recorded. FHA conveyances will have to be watched very closely now, because if the dues are not paid, HUD and the servicer risk losing the property to an HOA/COA foreclosure before the conveyance even goes on record.

© Copyright 2014 USFN. All rights reserved.
February e-Update