by Patrick Hruby, Esq.

Brock & Scott, PLLC *

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

Florida attorneys who handle litigated matters, including mortgage foreclosures and related actions, should be very familiar with Florida’s fee-shifting statute, Fla. Stat. § 57.105(7). That statute provides, in pertinent part:

If a contract contains a provision allowing attorney’s fees to a party when he or she is required to take any action to enforce the contract, the court may also allow reasonable attorney’s fees to the other party when that party prevails in any action, whether as a plaintiff or defendant, with respect to the contract.

In mortgage-related cases, several Florida state courts and federal courts applying Florida law have awarded the prevailing defendant attorney’s fees in various scenarios. The Florida Supreme Court recently awarded fees to the defendant in a mortgage foreclosure case where the creditor failed to prove standing on the day the suit was filed. Page v. Deutsche Bank Tr. Co. Americas, 308 So. 3d 953, 960 (Fla. 2020). The United States District Court for the Middle District of Florida affirmed the bankruptcy court, which awarded a prevailing defendant attorney’s fees for successfully defending a motion to dismiss the debtor’s bankruptcy case. In re Nabavi, 514 B.R. 895 (M.D. Fla. 2014).

In another example, the United States District Court for the Southern District of Florida awarded fees to a prevailing defendant for various claims relating to a mortgage loan modification, including breach of contract, fraudulent misrepresentation, and negligent misrepresentation, among others. Dorval v. Nationstar Mortgage LLC, No. 17-23193-CIV, 2021 WL 2210980 (S.D. Fla. Apr. 26, 2021).

In July, the United States Bankruptcy Court for the Southern District of Florida was presented with a question of first impression, “whether Fla. Stat. § 57.105(7) applies in an adversary proceeding brought solely under 11 U.S.C. § 727(a) for denial of discharge.” Valley Nat’l Bank v. Gleiber (In re Gleiber), --- B.R. ---, 2023 WL 5529650 (Bankr. S.D. Fla. 2023). Valley National Bank (“Valley”) held several loans on which the debtor, defendant Michael A. Gleiber (“debtor”), gave personal guarantees. After debtor’s Chapter 11 case converted to a Chapter 7 case, Valley filed a complaint objecting to debtor’s discharge. Id. at *1. The debtor filed an answer and affirmative defenses in which he made a demand for fees and costs under Fla. Stat. § 57.105(7). Id.

The bankruptcy court granted summary judgment in favor of the debtor. Id. Subsequently, the debtor filed a motion for fees. Id.

Ultimately, the bankruptcy court awarded fees under Fla. Stat. § 57.105(7) to the debtor as the prevailing party. In doing so, it reviewed the guarantees and the language of the statute. Each guaranty contained a section titled “Attorneys’ Fees; Expenses,” which stated:

Guarantor agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys’ fees and legal expenses for bankruptcy proceedings…

Id. The court explained the guarantees permitted Valley to unilaterally recover fees and expenses from the debtor “incurred in connection with the [guarantees].” The court further noted the complaint was an attempt to enforce the guarantees. Also, it did not matter that the complaint, if successful, would benefit other creditors. Finally, the court explained it did not matter that Valley did not seek fees in its complaint, because it could have under the guarantees. Id. As such, the Court found the first prong of § 57.105(7) was satisfied. Id. at *2.

            The court then considered whether the debtor had the right to legal fees under § 57.105(7). To make that decision, the court explained it needed to determine whether the adversary proceeding was an “action … with respect to the [guarantees]” and whether the debtor prevailed in the adversary proceeding. Id.

            The court noted that the Florida Supreme Court construes the phrase “action with respect to the contract” broadly. Id. (citing Ham v. Portfolio Recovery Assocs., 308 So.3d 942, 948 (Fla. 2020)). Here, Valley needed to prevail in the adversary proceeding to be able to enforce its rights to liquidate and collect its claims; and it was required to file the adversary proceeding to reserve its rights to do so. Id. The court characterized the relief sought as having “a clear and direct relationship to those guarantees” and, as such, was an “action with respect to the contract” under the statute. Id.

            Next, the court had to determine whether debtor was the prevailing party in the adversary proceeding. Finding that he was, the court explained that debtor was active in the litigation against the summary judgment motion and that it ruled in debtor’s favor on summary judgment. Id. Valley raised an issue that it could not have known at the time it filed the complaint that it would not have succeeded in denying debtor’s discharge under 11 U.S.C. § 727(a)(5), and the allowance of fees would lead to an inequitable result. Id. The court dismissed that argument because during the litigation, but before debtor’s motion for summary judgment, the debtor provided the information necessary for Valley to dismiss the count in the complaint seeking relief under 11 U.S.C. § 727(a)(5), but it failed to do so, and the debtor was forced to litigate that matter completely. Id. at *3.

            In its conclusion, the court stated the 11^th Circuit Court of Appeals has upheld the award of attorneys’ fees under the fee-shifting statute as to the discharge of a particular debt under 11 U.S.C. § 523(a). Id. (citing Cadle Co. v. Martinez (In re Martinez), 416 F.3d 1286 (11th Cir. 2005)). It further noted there have been several bankruptcy cases that upheld fees under § 57.105(7) in adversary proceedings that combined requests for exception to discharge of a particular debt and denial of discharge as to all debts under 11 U.S.C. § 727(a). Id. Noting that there were no reported decisions that examined an award of fees based solely on 11 U.S.C. § 727(a), the court stated it believed the 11th Circuit’s reasoning in other cases supported its award of fees to the debtor in this case.

            While the facts of this case led to a “case of first impression,” the existence of § 57.105(7) should be noted by attorneys and servicers litigating matters in Florida state court and federal courts applying Florida law. Creditors and servicers should discuss matters with counsel to ensure there is a reasonable basis for “any action with respect to the contract” to prevent it from being on the wrong side of Florida’s fee-shifting statute.

Copyright © USFN 2023

USFN e-Update - October

By Ron Chernek, Esq.

Reimer Law Co.*

USFN Member (KY, OH, WV)

Looking back at the historical evolution of the foreclosure process and the legal systems of the Roman civil law and the Common Law of England, we can trace how these ancient beginnings have shaped the concept of foreclosure over the centuries, and just how little has changed over 1,500 years.

When we review the historical aspects of the foreclosure process, it is imperative that we first understand the meaning of the term “mortgage.” In the legal publication known as Ohio Jurisprudence 2d, a mortgage is defined as “the conveyance of property to secure performance of some obligation, conditioned to become void on the due performance thereof.” In other words, property is given as security for some type of obligation that will cease when the person/entity obligated completes whatever he or she (or “it” in the case of a business entity) has promised to do. It is thought that the word “mortgage” has been derived from the Latin “mortuum vadium.” The literal translation of this term is a “dominant pledge.” This meaning appears to reflect the view that, if the obligation was not performed within the stated time, the security (property pledged) of the debtor or person/entity who made the promise would become dead or dormant.

Each state has various statutes that govern mortgages. In all states, the real estate mortgage is security for a related obligation, like a note or loan, with that obligation being the primary document and the mortgage being used to collateralize the document. In other words, the mortgage follows the note.

There are two requirements to any mortgage – the right to redeem in the mortgagor (the borrower) and the right to foreclose in the mortgagee (the lender). These concepts are basic to modern real estate practices. The borrower can repay his or her obligation and have the security interest satisfied as a result, whereas the lender retains the right to enforce its lien on the collateral if there is a default. The right of enforcement is what is known as foreclosure.

The legal purpose/reason for foreclosure involves cutting off the “equity of redemption,” or the right to retain property of the mortgagor in his or her security. In Roman civil law, often thought to be the predecessor of modern foreclosure laws, a pledge of fixtures, or land, was termed a “hypotheca.” Failure of payment as required by the pledge resulted in a procedure with notice to all interested parties whereby a hearing was held in open court on the default, and the sale of the property was publicized. The goal was to minimize damages to both parties.

Although the present system does not appear to vary in theory from that practiced by the Romans, the mortgage pledge was not recognized by feudal law in England. Not until the 16^th century did Common Law, the source of much of the law in the United States, come to accept the principle of “mortuum vadium.”

            English loans in the 11^th to 16^th centuries were unpredictable. Lenders could demand repayment at any time. If the borrower defaulted, a lender could seek a court order and the land would be forfeited to the lender by the borrower. A borrower then had the option of petitioning the king, who could then refer the matter to a lord chancellor, who had ultimate authority to rule as he saw fit. From 1618 to 1621, the lord chancellor was Sir Francis Bacon, who established the Equitable Right of Redemption, which allowed borrowers to pay off debts, even after default. The official end of the period to redeem the property was called “foreclosure,” derived from an old French word that means “to shut out.”

            In Common Law, the “mortuum vadium” was an absolute mortgage, a failure of which resulted in a forfeiture of title without any recourse to the debtor. This severe remedy was eased over a period of years by the various courts of England, known as courts of equity and chancery. As time progressed, the laws primarily stated that a mortgagee could not obtain clear title without actively demonstrating that it had a great enough interest in the property to cut off the mortgagor’s right to redeem the property, also known as the “equity of redemption.” The matters were routinely heard in a court proceeding where the parties were able to plead their respective cases.

            In the 1700s, the phrase “equity of redemption” came into common usage. In the case of Duchess of Hamilton v. Countess of Dirlton (1Ch.R. 165), the right of redemption was subject to two conditions:

1.     The mortgagor must pay the principal and interest within a reasonable time after the property was taken by the mortgagee, and

2.     The mortgagee had a right to petition the court to grant a decree ordering the debtor to pay by a fixed date or be forever barred from being able to redeem the property.

Upon obtaining a decree that cut off the equity of redemption, the mortgage obligation was satisfied by what was known as strict foreclosure. This was where the pledged property entirely became the property of the mortgagee when the right of redemption was terminated by the court’s decision. This greatly favored the mortgagee. Today, foreclosure is completed by public sale where fair conduct and bidding at the sale come into play, and surplus funds after satisfying expenses and mortgage claims and liens are generally turned back to the mortgagor.

During the Great Depression, beginning in the early 1930s, masses of homeowners were unable to make their mortgage payments. Between 1929 and 1933, personal income in the U.S. declined by 44 percent, the unemployment rate climbed to 25 percent, and housing values plummeted. The resulting defaults led to record numbers of foreclosures by mortgagees, largely banks. By 1933, a staggering 40 to 50 percent of all mortgages in the United States were in default, leading nearly 275,000 people into foreclosure as compared to 68,000 in 1926! This slide toward total collapse was one of the primary contributors to the banking crisis of the early 1930s. Twenty-seven states instituted moratoria to reduce the number of foreclosures at that time.

To combat these housing problems, the U.S. Federal Government instituted the Home Loan Bank Act of 1932. This was followed by the Home Owners’ Refinancing Act of 1933, which eventually led to the Federal Housing Authority (FHA), which was actually part of Franklin Roosevelt’s New Deal. This created federally funded long-term low-interest mortgages to refinance unstable mortgages. In 1938, the government created the Federal National Mortgage Association (Fannie Mae), which backed banks by purchasing mortgages, and thus freed up more of the banks’ money for additional mortgage and construction loans. This eventually led to the post-World War II housing boom.

In the 1950s and 1960s, the mortgage industry was fraught with discriminatory practices. Unbridled lending discrimination culminated in massive foreclosures for a disproportionate number of minority homeowners. Lenders disparately foreclosed upon upper-class, middle-class, and lower-class minority homeowners. This served to deepen racial segregation and prolonged the stagnancy in the real estate market in post-war America. This led to the Fair Housing Act of 1968, which really did very little to curb the discriminatory procedures of lending to and foreclosing on minorities.

One of the latest foreclosure crises occurred late in the first decade of the 2000s.  The financial industry was tanking, and Congress attempted to right the economy with a $700 billion bailout of the financial industry. The collapse of the housing market was largely responsible for the downturn and, as a result, the bailout did little to improve the economic situation in the U.S. In mid-2010, there was a 14 percent increase in the number of homeowners receiving default notices, and a staggering one in every 45 homes were foreclosed upon during that time period. In August 2014, the foreclosure rate was 33.7 percent, most densely in New York, New Jersey, and Florida. The problem became more widespread due to vast unemployment, and banks became more aggressive in their foreclosure efforts. 

Recently, the foreclosure industry has been greatly affected by the COVID-19 pandemic. The inception of moratoria and forbearance plans largely brought the foreclosure process to a halt. In addition, the government assisted Americans with stimulus funds in an attempt to curb the economic hardships resulting from the pandemic. Toward the end of 2021, and into 2022 and beyond, foreclosures increased dramatically as the moratoria gradually came to an end, as did the economic assistance.

In looking back at history and the evolving landscape of foreclosures, it is interesting to note that, after 1,500 years of changes in laws and rules, even with all the latest challenges to the way foreclosure is handled in our country, we have a system similar to that of the Romans. In most states, the primary instruments that have a mortgage effect are the mortgage deed and the deed of trust. To a degree, we have come full circle in adopting a foreclosure process that has recognizable similarities to the process used by our ancient ancestors.

Copyright © USFN 2023
USFN e-Update - October

By Karen Sheehan, Esq.

Frenkel Lambert Weiss Weisman & Gordon, LLP*

USFN Member (NY, FL, NJ)

New York’s Foreclosure Abuse Prevention Act (“FAPA”) has implications well beyond the Engel decision that may impact the language servicers seek to include in bankruptcy plans and/or orders. Signed into law by the governor of New York on December 30, 2022, FAPA was initiated to overturn the decision rendered by the New York Court of Appeals in Freedom Mortgage Corporation v. Engel, 37 N.Y.3d 1 (2021). The Court in Engel held that voluntary discontinuance of a foreclosure proceeding constituted deacceleration of a loan and reset the statute of limitations.

Under FAPA, CRPL §203 was amended to provide that once a cause of action for foreclosure has accrued, no party may unilaterally waive, postpone, cancel, toll, revise, or reset the accrual thereof or otherwise purport to affect a unilateral extension of the statute of limitations period prescribed by law to commence an action and to interpose the claim unless prescribed by statute.  As such, a party may not unilaterally change or reset the time at which a cause of action in foreclosure accrues, nor the time limit for commencement of an action.

CPLR §213(4) was also amended by FAPA to provide that if the statute of limitations is raised as a defense based upon a claim that the loan was previously accelerated, a plaintiff is estopped from asserting that the instrument was not validly accelerated, unless the prior action was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated. As such, an express judicial determination that a loan was not validly accelerated is now required to proceed with a new action on grounds that the loan was not previously accelerated.

In Chapter 11 Bankruptcy cases, pursuant to 11 U.S.C. §1124(2), a debtor may cure debt that was accelerated pre-petition. Although the Bankruptcy Code does not define “cure,” the courts in the 2nd District have held that a plan under 11 U.S.C. §1124(2) which provides for the curing of a default effectuates a “reversal” of the event that triggered the default and returns the parties to a pre-default status quo. See In Re: Depietto 2021 WL 3287418 (S.D.N.Y), citing In Re: FCC, 208 F.3d 137 (2d Cir. 2000); In Re Next Wave Personal Communications, Inc., 244 B.R. 253 (S.D.N.Y. 2000).

As such, secured creditors should carefully review any plan that affects a pre-petition accelerated loan, a foreclosure action, or cures a default under §1124(2). The confirmed plan becomes a new binding contract between the debtor and secured creditor pursuant to 11 U.S.C. §1141 and will establish the parties’ rights and obligations. Secured creditors may want to consider having language included in the Chapter 11 plan and/or confirmation order which provides that confirmation will be an express judicial termination that the loan is deaccelerated to avoid any future defense based upon the statute of limitations.

Copyright © 2023 USFN

USFNews - October 4, 2023

*Denotes firm is a 2022 USFN Award of Excellence recipient.

Jorge Rios-Jimenez has joined The Mortgage Law Firm (USFN Member – AZ, CA, HI, OK, OR, WA) as Director of Process Improvement & Business Development. With an exceptional 18 years of industry experience, Rios-Jimenez brings profound knowledge and expertise to the firm’s leadership team. He’ll play a pivotal role in challenging the firm’s operational metrics, delivering tailored innovative solutions, and helping propel the firm’s success to new heights.

Summer 2023 USFN Report

Gross Polowy LLC (USFN Member – NJ, NY) welcomes Mario Serra to the firm as the managing attorney of its New Jersey practice. Serra holds degrees from Seton Hall University and Quinnipiac University School of Law. He is an experienced litigator with more than 23 years of experience in serving the financial services industry, with extensive experience in default servicing of both commercial and residential loans, including foreclosure, bankruptcy, loss mitigation settlement negotiations, and commercial litigation.

Summer 2023 USFN Report

by Brigham J. Lundberg, Esq.

Halliday, Watkins & Mann, P.C.

USFN Member (UT, AK, AL, CO, ID, MN, MS, MT, ND, NE, SD, WY)

The Utah Consumer Sales Practices Act, Utah Code §§ 13-11-1 et seq. (“UCSPA”), is intended to protect consumers from deceptive, fraudulent, and unfair business practices and has frequently been used by the plaintiff’s bar in an effort to remedy perceived wrongs in various financial transactions. However, after the United States Court of Appeals for the 10th Circuit’s recent decision in Matchett v. BSI Financial Services, No. 21-4142, 2023 U.S. App. LEXIS 18563 (10th Cir. July 21, 2023), consumers ought to be wary about utilizing the UCSPA to sue mortgage servicers for charging the consumer improper fees.

Enacted in 1973, the UCSPA is meant to protect consumers in a wide array of transactions involving the sale of goods, service providers, real estate, leases, warranties, credit transactions, and the like. Violations of the UCSPA’s provisions may result in substantial penalties, such as monetary fines, injunctions, and even criminal charges. The UCSPA is intended to apply to both simple transactions (e.g., purchase of an item of furniture) and complex transactions (e.g., purchase of family home) by targeting misrepresentation, deceptive pricing, and failure to deliver products or services in a timely manner.

In Matchett, the borrower Radonna Matchett sued her mortgage servicer, claiming that BSI Financial Services (“BSI”) improperly charged her “convenience fees” on at least seven different occasions. She alleged that, between September 2017 and April 2018, BSI’s online payment system experienced frequent errors, forcing her to make her monthly payments over the phone instead of paying online. With each phone payment made, Matchett was charged a $20.00 “convenience fee.” Matchett alleged that the $20.00 fee amount was 10 to 50 times more than BSI’s actual cost of taking a phone payment. Accordingly, Matchett sued BSI in Utah state court, alleging violations of the UCSPA among other claims. The case was removed to federal district court and BSI moved to dismiss Matchett’s UCSPA claim.

The Utah federal district court granted BSI’s motion to dismiss, finding that Matchett could not state a claim for relief because the UCSPA does not regulate mortgage loans or mortgage servicers. Even if the UCSPA applied to mortgage servicers, the district court concluded, BSI’s alleged conduct did not plausibly violate the UCSPA. After Matchett’s claims were dismissed, her motions (A) to amend the complaint and re-file in state court and (B) to certify two questions of state law regarding the UCSPA to the Utah Supreme Court were both denied.

On appeal, the 10th Circuit agreed with BSI that the Court’s precedent in Berneike v. CitiMortgage, Inc., 708 F.3d 1141, 1149-50 (10th Cir. 2013), foreclosed Matchett’s UCSPA claim. In Berneike, similar facts were in play—a homeowner asserted UCSPA claims against her mortgage servicer for alleged overcharges and improper fees. The district court dismissed the homeowner’s claims and the 10th Circuit affirmed, relying on prior Utah Supreme Court precedent in Carlie v. Morgan, 922 P.2d 1 (Utah 1996) to bar UCSPA claims when the complained-of conduct is governed by other, more specific law. Because the Utah Fit Premises Act provides specific remedies to residential tenants whose rental units become uninhabitable because of health and safety violations, the Carlie court ruled that residential tenants are precluded from bringing UCSPA claims based on those violations. Similarly, the Berneike panel held that because the Mortgage Lending and Services Act (“MLSA”), Utah Code §§ 70D-2-101 et seq., specifically regulates mortgage servicing, UCSPA claims would not be allowed based on allegations of wrongful conduct in the mortgage servicing context.

By the same logic, Matchett’s UCSPA claims against BSI could not be allowed. She had alleged that BSI charged her improper fees while servicing her mortgage. And despite her argument that Utah law should only disallow UCSPA claims under Carlie when the other, more specific law provides a remedy for the defendant’s alleged conduct, the Berneike court’s broad reading of Carlie foreclosed her argument. Accordingly, in affirming the dismissal of Matchett’s claims, the 10th Circuit Court of Appeals held that it was bound by Berneike’s holding that Utah law forbids UCSPA claims by a mortgagor against a mortgage servicer based on allegedly wrongful overcharges and fees.

Going forward, mortgagors will want to carefully consider the claims they intend to bring against mortgage servicers for the purported improper charging of fees, as efforts to pursue such relief under the UCSPA will likely be unsuccessful.

Copyright @2023 USFN

USFNews - September 6

by L. Graham Arceneaux, Esq.

Graham Arceneaux & Allen, LLC

USFN Member (LA)

Louisiana is currently in a crisis when it comes to property insurance. In the wake of several hurricanes going back to 2020, more than a dozen insurance providers doing business in Louisiana have become financially insolvent. Other insurance companies pulled out of the state due to the number of claims and payouts. As a result of these natural catastrophe losses, homeowners have seen their insurance premiums increase as much as 60% to 100% in one year.

Property insurance issues are not limited to Louisiana. State Farm and Allstate have pulled back from California’s home insurance marketplace, stating increasing wildfire risk and soaring construction costs have prompted them to stop writing policies in the nation’s most populous state.

In Colorado, devastating wildfires have seen homeowner’s premiums rising significantly. Colorado state lawmakers commissioned a study which found 76% of the states’ insurance carriers decreased their exposure in Colorado in 2022 leaving the five largest insurance companies to dominate the market.

Florida, like Louisiana, has struggled to keep their insurance market healthy due to the unfortunate frequency of hurricanes impacting the state.

Insurance companies agree that the cycle of natural disasters, and their increased intensity in recent years, along with the higher costs to repair homes and the higher costs for reinsurance premiums have led to the homeowner bearing the burden of substantially increased insurance premiums.

The increase in insurance premiums in Louisiana (as previously stated) can be as much as 60% to 100% for calendar year 2023. Borrowers across the country are still dealing with persistent inflation as is evident by the Federal Reserve’s latest rate increase on July 26, 2023.

Borrowers are now watching their monthly mortgage payments increase dramatically due to the escrow shortage caused by increasing insurance premiums. Borrowers are calling their servicers and seeking some sort of relief, but finding little relief as escrow charges are not subject to modification. Insurance costs in Louisiana and other states vulnerable to natural disasters are pushing some borrowers to their financial limits.

In summary, an increase in property insurance for borrowers will necessarily increase mortgage defaults and, by extension, foreclosures. Until property insurance rates moderate, expect to see this trend in states with heightened natural disaster vulnerabilities.

Copyright @2023 USFN

USFN e-Update - August

By Nicole Murray, Esq.

Wilson & Associates, PLLC*

USFN Member (AR, MS, TN)

               In May of this year, the Arkansas Court of Appeals reversed a decision from the Pulaski County Circuit Court, Third Division, holding that the appellant’s foreclosure complaint was not barred by the statute of limitations because its prior maturities of the debt that occurred when it exercised the option to accelerate were later extinguished by filing notices of cancellation (Wilmington Savings Fund Soc’y v. Smith, 2023 Ark. App. 326 (2023)). 

               Milton Smith purchased the subject property and executed a promissory note and mortgage in favor of Bank of America on October 16, 2007. The mortgage provided that, in the event of a default, the lender had the option to declare the entire unpaid balance of the debt, including interest, immediately due and payable, and both the note and mortgage were payable in monthly installments. 

               Smith defaulted on payments on the note in December of 2009, and Bank of America filed a Notice of Default and Intention to Sell which stated that a default had occurred in the payment of the indebtedness and that the unpaid balance of the debt was now wholly due. It also set a foreclosure sale date of July 8, 2010. The sale was later canceled, and a notice of cancellation was recorded in the county records on July 8, 2010. On December 16, 2010, Bank of America recorded another Notice of Default and Intention to Sell with a foreclosure sale scheduled for February 17, 2011, which was later canceled by a recorded notice of cancellation on February 14, 2011.

               The note and mortgage were later assigned to Wilmington Savings Fund Society (“Wilmington”), and Wilmington filed a third Notice of Default and Intention to Sell on February 4, 2016, with a foreclosure sale scheduled for April 5, 2016. In response, Smith filed a complaint to quiet title alleging that the promissory note could not be enforced because no payment had been made since 2009, and thus the statute of limitations for enforcing it had expired. Meanwhile, the hazard insurance on the subject property had expired, and Wilmington sent Smith a letter notifying him that it had obtained the required hazard insurance, as permitted under the terms of the mortgage, and that the premium had been billed to an escrow account created for the loan. Wilmington also later counterclaimed alleging that it was entitled to foreclose because it was still owed the remaining principal sum, plus accrued interest and costs, and the indebtedness under the note had never been accelerated, but even if it had been, the statute of limitations had been tolled by Wilmington’s and/or its predecessors’ abandonment of acceleration as shown by the filing of the notices of cancellation.

               Smith responded with a motion for summary judgment and dismissal arguing that Wilmington’s foreclosure cause of action was barred by the five-year statute of limitation because the limitation period had run many years ago in May 2015 due to Bank of America’s original acceleration of the indebtedness on the note in May of 2010. Wilmington responded by citing Mitchell v. Federal Land Bank, 206 Ark. 253, 174 S.W.2d 671 (1943), arguing the acceleration had been waived through the unilateral actions of the mortgagee when Bank of America waived the May 2010 and December 2010 accelerations by filing notices canceling the foreclosure sales. Wilmington also cited Dunnington v. Taylor, 198 Ark. 770, 131 S.W.2d 62 (1939), arguing that even if the statute of limitation has begun to run when the debt was first accelerated in May 2010, the insurance payments made by Wilmington either tolled the statute of limitation or created a new date from which the limitations would run as each payment was made.

Smith responded by arguing that Mitchell and Dunnington were no longer binding legal precedents because Ark. Code Ann. § 16-56-111 had been amended in 1989, and prior to that date, all exceptions to the five-year limitation period had been judicially created. Smith alleged the statute of limitations had undergone a major change after the amendment because the General Assembly had only codified a part of the judicially created exceptions to the statute, but not all of them, and thus the exceptions not expressly included in the statute, such as those from Dunnington and Mitchell, were no longer binding precedent. Wilmington responded by arguing that Dunnington and Mitchell were still binding because the amendment did not include unmistakable language displaying a legislative intent to overrule them.

The circuit court ruled on the motions and entered an order on February 21, 2020, finding that the five-year statute of limitations had run, barring Wilmington from foreclosing on the subject property. In another order on April 6, 2020, the circuit court denied Wilmington’s motion for a new trial, stating that the limitation period had run and the 1989 amendment controlled. Wilmington appealed.

On appeal, the Arkansas Court of Appeals ruled that Mitchell and Dunnington remained good law and that the legislature had not intended to overrule the prior cases when it amended the statute of limitations in 1989 as shown by the lack of unmistakable language showing such intent. Applying Mitchell to the facts of the present case, the court of appeals found that Wilmington’s foreclosure action was not barred by the statute of limitations because the accelerations of the debt that occurred in May and December 2010 were later extinguished and waived as shown by the filing of the notices of cancellation in July 2010 and February 2011. The note did not mature again until Wilmington later chose to accelerate in 2016, and thus Wilmington’s foreclosure complaint filed in June of 2019 was within the five-year period and not barred by the statute of limitations.

This holding comes as good news to lenders and investors who have chosen to previously accelerate their notes and filed Notices of Default and Intention to Sell, only to later cancel the scheduled foreclosure date. The holding is good news for borrowers too because the parties can now afford to be more generous in canceling prior foreclosures to work with the borrower while no longer battling a looming statute of limitations deadline. While deceleration has long been an option to toll the statute of limitations, this holding provides a clear, concrete example of what deceleration looks like. Lenders and investors can rest assured that their interests are protected by canceling a foreclosure sale after acceleration has occurred as long as a notice of cancellation is filed to toll the statute of limitations.

Copyright @2023 USFN
USFN e-Update - August

by Miroslav Nikolov, Esq.

Rosenberg & Associates, LLC *

USFN Member (DC, MD, VA)

On May 8, 2023, Maryland Governor Wes Moore signed into law Maryland House Bill 686. House Bill 686 permits mortgage lenders, collection agencies, and certain non-depository financial institutions conducting business in the State of Maryland to operate under a single license obtained from the Maryland Office of Financial Regulation (“OFR”). House Bill 686 also requires license applicants to pay a surety bond and sets the criteria for how the amount of the surety bond will be determined.

House Bill 686 became effective on July 1, 2023. Financial institutions affected by the new law include financial services companies regulated by OFR, such as collection agencies, consumer loan lenders, installment loan lenders, sales finance companies, mortgage lenders, check cashing services, money transmitters, and debt-management businesses. The passage of this new law indicates Maryland is aiming to modernize and streamline licensing of financial service providers operating in the state. Previously, OFR required each branch of a collection agency, mortgage lender, and certain other non-depository financial services companies to obtain individual, separate licenses from OFR for each branch they maintained in the state, resulting in additional fees, paperwork, and other administrative burdens.

With respect to the licensing of mortgage lenders and originators, the new Maryland law eliminates the need for each branch to obtain a separate license from OFR. In order to comply with licensing requirements, Section 11-505 of House Bill 686 requires the applicant to maintain the following information in NMLS: “the [lender’s] legal name and any trade name used by the [lender], the address of the [lender’s] principal executive office, the address of each additional location, if any, where the [lender] does business and that the general public may reasonably view as a location that does business as a mortgage lender including any location that investigates consumer complaints or directly communicates with customers verbally, electronically, or in writing or that houses any core operational infrastructure or technology systems; conducts any core management, information security, and technology, risk and compliance, or finance functions or is otherwise required to be listed in NMLS by regulation [OFR] adopts.” Also, under Section 11-505, the mortgage lender has a duty to monitor, maintain, and update the accuracy of the aforementioned information in NMLS at all times.

Section 11-507 of House Bill 686 sets the criteria that applicants must meet to apply for a license. Under Section 11-507, to apply for a license from OFR, the mortgage lender must submit an application under oath containing the applicant’s legal name and any trade name used, the applicant’s principal executive office address, or if the applicant is not an individual, the name and residence of each control person, and the address of any additional location of the lender.

Section 11-508 requires the applicant to also post a surety bond in the amount of at least $50,000 and no more than $750,000. Factors that OFR considers in determining the amount of the surety bond include, but are not limited to, the nature and volume of the business or proposed business of the applicant, the financial condition of the licensee or applicant including the applicant’s liquidity, the applicant’s liabilities, the history of and prospects for the licensee or applicant to earn and retain income, the potential harm to consumers if licensee becomes insolvent, the quality of operations of the licensee or applicant, the quality of the management of the licensee or applicant, the nature and quality of the person that has control of the licensee or applicant and any other factor that OFR considers to be relevant.

By centralizing and streamlining the licensing process and by creating a single license under which multiple branches may operate, Maryland hopes to reduce red tape, improve efficiency, and increase transparency regarding licensing requirements for the financial services industry and consumers alike. The actual positive or negative impact the law will have on the licensing of financial service providers in Maryland remains to be seen.

Copyright @2023
USFN e-Update - August

by Patrick Hruby, Esq.

Brock & Scott, PLLC

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

            Recently, the Bankruptcy Court for the Northern District of Indiana was faced with the issue of what happens when a secured creditor fails to file a proof of claim but remains bound by the terms of a confirmed plan. In the case of In re Matter of Flores, 649 B.R. 534 (Bankr. N.D. Ind. 2023), the secured creditor, which held a lien on a motor vehicle, failed to file a proof of claim or object to the debtor’s plan that proposed to pay the claim in full over the life of the plan with interest, despite having notice of the bankruptcy case. The debtor also failed to file a claim on behalf of the secured creditor as permitted by the Federal Rules of Bankruptcy Procedure Rule 3002.

            Several months after confirmation of the plan, without a filed claim on which to distribute, the Chapter 13 trustee filed a motion to redirect the funds that were intended to be distributed to the secured creditor through the plan to the debtor’s unsecured creditors. That motion was unopposed, and the bankruptcy court entered an order which provided that the secured creditor would receive $0.00 distribution from the bankruptcy estate for failure to file a claim. While that motion was pending, instead of responding, the secured creditor filed a motion for relief from stay, alleging that it was not adequately protected because it was not being paid through the plan.

            The bankruptcy court, relying on its precedent from In re Matter of Jones, 555 B.R. 870 (Bankr. N.D. Ind. 2016), denied the motion for relief. Calling the situation a “self-inflicted wound,” the court explained that there was no cause to grant relief for lack of adequate protection when the creditor’s failure to file a proof of claim caused it to not receive payments in the bankruptcy case. Further, the court explained, adequate protection was a pre-confirmation remedy that was only meant to be a temporary measure to protect a creditor between the filing of the petition and confirmation. As such, following plan confirmation, the grounds for relief are “generally limited to post-confirmation defaults of the debtor’s plan.”

            The court also noted that confirmation of the plan is res judicata and bars issues that could have been raised prior to confirmation from being raised following confirmation (i.e., a creditor’s treatment under the plan). The result is that the confirmation order “bars a secured creditor from seeking relief from the [automatic stay] absent a post-confirmation default in carrying out the plan.”

            The Court noted that its conclusion was not a windfall for the debtor as the secured creditor’s lien remains intact and the debtor will have to address that lien following completion of the plan. For a claim secured by a motor vehicle, this is only a mildly comforting result as the collateral will continue to lose value over the life of the plan. A mortgage creditor may take more solace in the fact that its lien will survive the bankruptcy case, as property values generally increase over time, but risks and expenses will still be present.

            As the bankruptcy court succinctly stated, “[n]ot filing a claim has consequences.” A secured creditor facing a scenario where it does not get paid over the life of a Chapter 13 plan, which could last up to 60 months, is not good; especially when it could have been avoided by filing a proof of claim. The bankruptcy court in this case noted that a secured creditor cannot fail to participate in the case and expect the debtor to file a claim on its behalf. Secured creditors questioning whether to file a proof of claim should likely err on the side of caution; or, at a minimum, contact counsel to discuss.

Copyright @2023 USFN

USFNews - August 9

By Brian Liebo, Esq.

Liebo, Weingarden, Dobie & Barbee, PLLP

USFN Member (MN)

On May 25, 2023, the U.S. Supreme Court issued its decision in Tyler v. Hennepin County, Minnesota, regarding whether a homeowner is entitled to recover a surplus after a property tax forfeiture sale. (2023 WL 3632754).

The plaintiff, Geraldine Tyler, is 94 years old. In 1999, she bought a one-bedroom condominium in Minneapolis, Minnesota. In 2010, she moved from her condo to a senior community. The property taxes on the condo were not paid in Tyler’s absence, and by 2015, about $15,000 had accumulated in unpaid taxes, interest, and penalties. The county ultimately seized the condo through forfeiture proceedings and sold it for $40,000 to a new owner. That sum extinguished the $15,000 debt, but the county kept the remaining $25,000 surplus funds for its own use. Tyler brought suit claiming she was entitled to those surplus funds because the county’s retention of those funds was an unconstitutional taking.

Property Tax Forfeiture Process

Hennepin County imposes an annual tax on real property. The taxpayer has one year to pay before the taxes become delinquent.  If the taxes are not timely paid, the tax accrues interest and penalties, and the county can obtain a judgment against the property, transferring limited title to the state. This action is typically taken by a county three to five years after the first delinquent year.

The delinquent taxpayer then has three years to redeem the property and regain title by paying all taxes and late fees, among other options. During this time, the taxpayer remains the beneficial owner of the property and can continue to live in the home. If, however, the tax bill has not been paid within the three-year “redemption period,” title absolutely vests in the state, and the tax debt is extinguished. The state can keep the property or sell it to a private party. Under the existing forfeiture statute, if the property is sold, any proceeds in excess of the tax debt and the costs of sale remain with the county to be shared among the county, city, and school district. The former owner has no opportunity to recover the surplus.

Note, mortgagees may file their names and mailing addresses with the county where the land is located for the purpose of receiving notices related to forfeitures, along with paying filing fees. However, those filings expire after three years. On the other hand, taxpayers already of record with the county auditor, and mortgagees who remit taxes on the owners’ behalves with their addresses on file receive tax statements and other notices without having to pay a fee. Unfortunately, even if the county fails to provide these advance notices, there is really no recourse for the mortgagee, since such a failure does not invalidate the forfeiture per the statute.

Potentially Problematic Implications

The Supreme Court ultimately decided in favor of the plaintiff and held that Tyler was entitled to the full $25,000 surplus from the final tax forfeiture sale. This seems to be a fair result in contrast to the county retaining these substantial, excess funds. However, this result is not as simple as it seems. According to public records, Tyler was not the only one with an interest in the property. The Court recognized that the condo was subject to a $49,000 mortgage and a $12,000 lien for unpaid homeowners’ association assessments.

The Court’s sole focus was on Tyler and her right to the surplus. The Court identified that a tax sale extinguishes all other liens on a property. But, the Court did not address at all whether those junior lienholders were entitled to any of the surplus funds, even though, clearly, junior lienholders would want to claim the excess funds as well. Instead, the Court reasoned that the forfeiture sale does not extinguish the taxpayer’s debts, and the borrower remains personally liable for those debts. The Court wrote that if Tyler received the surplus from the tax sale, “she could have, at the very least, used it to reduce any such liability.” This reasoning fails to consider the frequent situations when those debts are discharged in bankruptcy, leaving those lienholders without any recourse. Nor does the opinion account for a scenario where the borrower decides to simply keep those surplus funds, hoping the junior liens will be charged off. In these circumstances, the borrower could end up with a significant windfall.

What is more troubling is that the Supreme Court only partially cited a Minnesota statute used to bolster its holding. The Court wrote the following: “Significantly, Minnesota law itself recognizes in many other contexts that a property owner is entitled to the surplus in excess of her debts. If a bank forecloses on a mortgaged property, state law entitles the homeowner to the surplus from the sale.”  This language contains a major omission from the referenced statute. That statute, Minn. Stat. § 580.10, reads, “the surplus shall be paid . . . on demand, to the mortgagor, the mortgagor’s legal representatives or assigns.” Longstanding state case law, including from the Minnesota Supreme Court, identifies that the mortgagor’s assigns include junior lienholders.

As a result of the foregoing, it is worrisome that borrowers may use this case to claim that they alone are entitled to surplus proceeds from a tax forfeiture sale, or even argue this case supports a claim that they alone are entitled to surplus funds from foreclosure sales. It is important to note that none of the junior lienholders were parties to the Tyler case. If they were, perhaps there would be a substantive discussion about those lienholders’ rights to the surplus. Also, the case was solely about whether the county or Tyler was entitled to the surplus funds, without the mention of any specific claims by the junior lienholders in the matter. Thus, those arguments may be preserved for another day. Based on the clear case law of Minnesota, any arguments that junior lienholders are not entitled to share in surpluses are tenuous at best.

As a best practice, it is critical that mortgagees closely monitor property taxes for their secured properties and ensure they remain current. Where the taxes are not being paid by the mortgagee through an escrow account, the mortgagee should regularly check property tax records to identify delinquencies, or file requests for notice with the county auditors. In the event a mortgaged property is tax-forfeited, the mortgagee should also consider intervening in any forfeiture proceedings or bringing its own action to ensure it is able to recover surplus funds upon the final sale of the tax-forfeited property.

@Copyright 2023 USFN

USFNews - July 26

By ReggieCorley, Esq.

Scott& Corley, PA

USFN Member (SC)

On May 11, 2023, the South Carolina Court of Appeals reversed the lower court’s findings in Buffalo Creek Investments, Inc. v. Stephen H. Pettus (complete case link below). This case involved a foreclosure action where the lower court judge erred by granting the mortgagors’ motion to vacate and set aside the judicial foreclosure case and sale.

Following the foreclosure order and judicial foreclosure sale of the subject property to third-party purchasers, the mortgagors filed a motion to vacate and set aside the judicial foreclosure sale. Following that hearing, the lower court judge granted the mortgagors’ motion. The successful purchasers of the subject property at the judicial foreclosure sale appealed the lower court’s order.

The issues raised by the mortgagors on appeal were: (1) Did the lower court abuse its discretion in setting aside a valid judicial foreclosure sale when it failed to recognize that the purchasers were “bona fide purchasers for value without notice;” and (2) Did the lower court abuse its discretion in setting aside a valid judicial foreclosure sale when it focused on alleged irregularities in the underlying foreclosure action and the “equities,” rather than the absence of any evidence of irregularity in the conduct of the judicial foreclosure sale?

Based on the record before it, the Court of Appeals was compelled to presume the proceedings leading to the judicial foreclosure sale were sufficient, and therefore, “that the lower court erred in not affording the successful purchasers at the foreclosure sale their proper protections under Section 15-39-870, as bona fide purchasers for value without notice.” The Court determined that the buyers at the foreclosure sale were, “. . . bona fide purchasers for value without notice because they satisfied their bid in full and received the deed pursuant to an order from the special referee,” and that the purchasers acted in good faith. Moreover, the Court found that the lower court erred by not determining that res judicata barred the mortgagors' claims (i.e., the lower court’s determination in the foreclosure order that South Carolina Supreme Court Administrative Order 2011-05-02-01 did not apply because the subject property was not “owner-occupied” since “the mortgage granted to allow the mortgagors to invest in a business”), and thus, the issues raised by the mortgagors were not properly preserved for appeal.

Finally, the Court ruled that the lower court abused its discretion in finding the purchasers’ sale price at the judicial foreclosure sale was so low as to shock the court’s conscience (i.e., the purchasers’ final bid amount was greater than 10%  of the subject property’s actual value and there were no other circumstances from with the court could infer fraud had been committed).

A link to the full opinion of the above cited case (Buffalo Creek Investments, Inc. v. Stephen H. Pettus) can be found on page 12 at the following link: https://www.sccourts.org/opinions/advSheets/no182023.pdf

South Carolina Code of Laws Section 15-39-870 can be found at the following link: https://www.scstatehouse.gov/code/t15c039.php

USFN Copyright @2023

June 2023 USFN e-Update