Source: https://www.usfn.org/blogpost/1296766/Article-Library?tag=&DGPCrSrt=&DGPCrPg=20
Timestamp: 2020-07-02 05:12:48
Document Index: 184792846

Matched Legal Cases: ['§ 45', '§ 45', '§ 6111', '§ 6111', '§ 6111', '§ 8', '§ 8', '§ 8', '§ 45', '§ 42', '§ 1692', '§ 1692', '§ 1692', '§ 1']

South Carolina: Supreme Court Reviews Real Estate Closing Attorney’s Scope of Duty
by Ronald C. Scott and Reginald P. Corley
The scope of the duty that a real estate closing attorney has towards a buyer’s-side client has veered into strict liability territory under a recent South Carolina Supreme Court decision.
On July 29, 2015 the opinion in Johnson v. Alexander, Appellate Case No. 2014-001167, was entered. It holds that a buyer’s attorney has a duty to ensure that good title passes to the buyer as a result of the purchase of real estate and that a breach of that duty as a result of relying on another attorney’s erroneous title search is, as a matter of law, malpractice.
Background: Amber Johnson hired attorney Stanley Alexander to perform a closing for the purchase of residential real estate. Johnson had previously hired attorney Mario Inglese for the closing. Inglese had hired Charles Feeley, also an attorney, to perform the title search. Johnson, as the client, was aware that attorney Alexander would be using attorney Feeley’s title exam during his representation of her.
Prior to the title examination and closing, the property was sold at a Charleston County delinquent tax sale on October 3, 2005. Johnson purchased the property on September 14, 2006 from the previous (tax-delinquent) owner, making transfer of title to Johnson useless. Johnson filed suit against Alexander for negligence. The trial court granted Johnson summary judgment on the basis that attorney Alexander’s pleadings and deposition exhibited that attorney Alexander singularly had a duty to ensure that Johnson, as his client, received clear and marketable title (which she did not), even though Johnson had consented to attorney Alexander using the title search product of Attorney Feeley.
The Court of Appeals overturned the trial court, stating that the question at issue was whether attorney Alexander acted reasonably in relying on attorney Feeley’s title exam — a triable factual question. The Supreme Court reversed the Court of Appeals, agreeing completely with the trial court.
The Supreme Court found that all evidence in the case indicated that attorney Alexander singularly owed a duty to ensure that Johnson received clear and marketable title as a result of her purchase, and Johnson did not. The Supreme Court suggested that the only way a real estate attorney could be relieved of not providing clear and marketable title to a buyer when retained for a closing, is if the client previously agreed to waive malpractice causes of action [which, the Supreme Court was quick to note, requires outside counsel review before such an agreement will be enforced under Rule 1.8(h) of the Rules of Professional Conduct and Rule 407 of the South Carolina Appellate Court Rules].
Accordingly and in a landmark opinion, the Supreme Court’s ruling in Johnson has now created a strict liability standard for buyer’s-side closing attorneys. It asks the question: Did clear legal title pass? If it did not, then under this decision, no matter the circumstances, the attorney has committed malpractice. The Supreme Court did not include any analysis regarding the degree of skill, care, knowledge, and judgment usually exercised by members of the profession given the situation presented to the attorney at the time, stating that the Court of Appeals “erroneously equated delegation of a task with delegation of liability.” The Supreme Court reasoned that “attorney Alexander owed Johnson [as his client] a duty and absent her agreement otherwise, he was liable for that responsibility regardless of how he chose to have it carried out.”
©Copyright 2015 USFN and Scott & Corley, P.A. All rights reserved.
South Carolina: Appellate Court Reviews the "Business Records” Exception to the Hearsay Rule
The South Carolina Court of Appeals recently held that the “business records” exception to the evidentiary rules on hearsay does not apply to testimony that relies solely upon the inspection of documents maintained by a third party. The court further ruled that when this testimony is the only source of evidence for determining the amount owed on a promissory note, the admission of such testimony is prejudicial error — requiring reversal if used to solely determine the amount of the foreclosure debt and of the underlying deficiency judgment.
In Deep Keel, LLC v. Atlantic Private Equity Group, LLC, Appellate Case No. 2013-002281, Opinion No. 5320 (June 17, 2015), Atlantic defaulted on a promissory note originally executed to Community First Bank (CFB) for a commercial loan of $2,000,000. The promissory note was secured by two parcels of land in Beaufort County. Atlantic defaulted on the note after two loan modifications, and CFB filed for foreclosure. (CFB later merged with Crescent Bank to become CresCom Bank, and the promissory note was eventually sold and assigned to Deep Keel.)
Prior to the sale and assignment, Deep Keel’s sole member, Scott Bynum, had reviewed CresCom Bank’s records, including a payment history. Bynum testified about the amounts owed by Atlantic based on this review; however, these documents were not introduced as evidence at the foreclosure hearing. In fact, Bynum’s testimony was the only evidence of the amount remaining due on the loan. Atlantic objected to Bynum’s testimony regarding the amounts owed on the basis that Bynum’s statements amounted to hearsay. Deep Keel maintained that the testimony should be admitted under the business records exception. The master in equity admitted the evidence and ordered the foreclosure, as well as a deficiency judgment against the two personal guarantors, based on Bynum’s testimony. Atlantic appealed.
The Court of Appeals agreed with Atlantic. First, the appellate court found that Bynum’s statements amounted to hearsay because his only basis for knowledge about amounts owed by Atlantic were the out-of-court statements reflected on the documents held and maintained by CresCom Bank, which he had reviewed prior to purchasing the note and mortgage. Next, the court determined that the business records exception does not protect his testimony from the evidentiary rule prohibiting hearsay. On appeal, the court reasoned that “[t]he plain language of Rule 803(6) allows for the admission of ‘[a] memorandum, report, record, or data compilation,’ not testimony describing such a document. We hold Rule 803(6) does not apply to admit live testimony offered to prove the contents of a record containing hearsay when that record is not offered in evidence.”
The appellate court also determined that the testimony was prejudicial to Atlantic, and that the deficiency judgment against the two personal guarantors must be reversed because “[w]ithout Bynum’s hearsay testimony concerning the unpaid balance, Deep Keel could not prove the amount remaining due on the debt, and the master had no basis for calculating the amount of the deficiency.”
The Deep Keel decision makes it clear that a mortgagee/assignee’s testimony alone concerning amounts owed on a loan will not be sufficient to establish the debt in a foreclosure action and to obtain a deficiency judgment against the personal guarantors. Assignees should demand and review copies of payment histories and other loan accounting information documentation in the files they purchase and be mindful to ensure that these documents remain available for litigation.
Note that this decision simultaneously upheld the master in equity’s order of foreclosure on the secured properties, as the court held that Deep Keel had properly authenticated the promissory note and mortgage, and Atlantic had admitted that payments had been untimely. Therefore, the appellate holding is limited to barring testimony, which solely relies on the review of documents maintained and under the control of a third party, as the lone source of evidence to determine the amount of the foreclosure debt and underlying deficiency judgment.
North Carolina: Deficiency Actions
Following a foreclosure sale, the general rule is that the amount of the debt is reduced by the net proceeds realized from the sale, setting the deficiency amount a foreclosing creditor may seek to recover. N.C.G.S. § 45-21.31(a)(4). However, when the foreclosing creditor is the successful high bidder at the foreclosure sale, this general rule is abrogated by N.C.G.S. § 45-21.36, which provides a borrower with two alternative defenses. [See Branch Banking & Trust Co. v. Smith, 769 S.E.2d 638, 640 (Feb. 17, 2015)]. Either the deficiency is eliminated if it is shown “that the collateral was fairly worth the amount of the entire debt,” or the deficiency may be reduced “by way of offset” where it is shown that the creditor’s high bid was “substantially less” than the actual value of the collateral. Id.
In reversing summary judgment for the creditor, the North Carolina Court of Appeals recently observed that in opposing the motion for summary judgment, the borrowers “relied on their own joint affidavit, stating that it was “made on [Defendants’] personal knowledge” and that Defendants “verily believe[ ] that the [property] was at the time of the [foreclosure] sale fairly worth the amount of the debt it secured.” United Community Bank v. Wolfe, 2015 WL 4081940 (July 7, 2015).
The value of the collateral, in a deficiency action, is generally a material fact. Id., at 2, citing Raleigh Fed. Sav. Bank v. Godwin, 99 N.C. App. 761, 763; 394 S.E.2d 294, 296 (1990). Since the “[North Carolina] Supreme Court has repeatedly held that the owner’s opinion of value is competent to prove the property’s value,” Wolfe, citing Department of Transp. v. M.M. Fowler, Inc., 361 N.C. 1, 6; 637 S.E.2d 885, 890 (2006), and the owner is presumed competent to give his opinion of the value of his property, Id., at 2, citing North Carolina State Highway Comm’n v. Helderman, 285 N.C. 645, 652; 207 S.E.2d 720, 725 (1974), the affidavit raises a genuine issue of material fact so as to prevent the entry of summary judgment.
The lesson here is that a foreclosing creditor contemplating a post-foreclosure deficiency action against a solvent borrower may want to make additional efforts to encourage a third-party sale. For example: by broadening the advertising of the sale or, where permissible, adjusting its sale bid. This may avoid the uncertainty and expense of a trial in the deficiency action.
©Copyright 2015 USFN and Hutchens Law Firm. All rights reserved.
New Hampshire: Statutory Amendment re Notice of Sale Requirements
by Adam F. Faria
On June 26, 2015 New Hampshire Governor Hassan signed into law SB 50, an act “relative to the notice required prior to foreclosure of residential property.” The provisions of the law go into effect on January 1, 2016. SB 50 serves to amend NH RSA 479:25 by distinguishing and expanding the foreclosure notice of sale period for “residential mortgages” from the notice of sale requirements for all other mortgages not defined as “residential mortgages.” The Act also provides for additional disclosures in the notice of sale where the property is an owner-occupied dwelling of four or fewer units without regard to the type of mortgage.
A “residential mortgage” as defined in RSA 397-A:1, VI-c. is, “any loan, including a first or second mortgage loan, primarily for personal, family, or household use which is secured in whole or in part by a mortgage, deed of trust, or other equivalent consensual security interest upon a dwelling or any interest in real property or in residential real estate.” In the case of “residential mortgages,” SB 50 extends the notice requirement to mortgagors under NH RSA 479:25, II. Under the current language of RSA 479:25, notice of sale must be sent to mortgagors at least twenty-five days before the sale. SB 50 increases the notice period to at least forty-five days before the sale. Additionally, while the Act maintains the existing twenty-one day notice requirement to persons having a lien of record, it extends the period under which a record lienholder is entitled to notice. The current RSA 479:25 requires notice be sent to a person having a lien of record at least thirty days before the sale. SB 50 requires notice be sent to a person having a lien of record at least fifty days prior to sale.
In the case of mortgages that do not fall under the definition of “residential mortgages,” the notice period remains unchanged. Notice to the mortgagor shall be sent twenty-five days prior to the sale; notice to a person having a lien of record shall be sent at least twenty-one days before the sale; and any person having a lien of record at least thirty days prior to the sale is entitled to notice.
Moreover, SB 50 requires the following additional disclosures be included in the notice of sale for all owner-occupied dwellings of four or fewer dwelling units: “1. The address of the mortgagee for service of process and the name of the mortgagee’s agent for service of process; and 2. Contact information for the New Hampshire Banking department, along with the statement ‘for information on getting help with housing and foreclosure issues, please call the foreclosure information hotline at [ ]. The hotline is a service of the New Hampshire banking department. There is no charge for this call.’” The Act further requires the banking department to provide a toll-free telephone number. As of the time of this writing, the banking department has not provided a toll-free telephone number.
It is unclear whether the new notice requirements contained in SB 50 are required only for notices of sale sent on or after January 1, 2016, or whether they are required for any sale that occurs on or after January 1, 2016. An additional complicating factor arises for any foreclosure sale scheduled to take place in 2015 and whose notices are compliant only with the current provisions of RSA 479:25. If that sale is postponed into 2016 when the provisions of SB 50 are in effect, it is unclear whether the sale would be a valid sale. For these reasons it behooves the prudent practitioner to begin compliance with the provisions of SB 50 at the earliest opportunity.
Foreclosure Defense Attorney in Minnesota Has Been Suspended
by Paul Weingarden and Kevin Dobie
Usset, Weingarden & Liebo PLLP – USFN Member (Minnesota)
Attorney William Bernard Butler’s war against the mortgage industry, which began in 2010 when his own home went into foreclosure (and continued even after his right to practice in the federal courts ceased in 2013), has come to a halt in state court as well. On August 12, 2015 the Minnesota Supreme Court issued an order suspending Butler for a minimum of two years, with conditions of reinstatement.
Before Butler’s formal suspension, he had litigated over 300 cases against mortgage lenders, servicers, GSEs, and their counsel. He asserted various frivolous theories, which were routinely dismissed after lengthy stalls, delays, and appeals — only to be repackaged and renewed by refiling the actions and asserting the identical facts and theories, with usually the same plaintiffs. Despite never winning a single case with these theories, Butler kept on suing, resulting in millions of dollars in lost interest and attorneys’ fees, all for the purpose of allowing his clients to remain in their homes without paying their mortgage obligations.
In late 2013, the Eighth Circuit Court of Appeals suspended Butler’s right to practice in the Eighth Circuit, and shortly thereafter the Minnesota U.S. District Court followed suit. Undaunted, Butler shifted his attention to the state courts where he asserted the same arguments in over sixty new cases, all of which had been rejected hundreds of times. Whether it was fighting evictions for “wrongful foreclosures” or starting a Torrens proceeding with the intent of re-litigating the foreclosure with old, rejected contentions, Butler pressed on — ignoring further monetary sanctions.
In CitiMortgage v. Kraus, 2015 Minn. App. Unpub. LEXIS 47 (Minn. App. 2015), after unsuccessfully asserting claims on behalf of the Krauses (whom had already litigated the validity of the foreclosure and lost at the Eighth Circuit), Butler continued to press identical theories in the post-foreclosure eviction. On January 12, 2015 the Minnesota Court of Appeals called the Krauses’ defense “one of the most frivolous that has ever been presented to this court,” and the court sanctioned Butler and the Krauses. Incredibly, Butler and the Krauses litigated the same issues yet again; and, on August 24, 2015 the Minnesota Court of Appeals once more determined that the claims had no merit. [Editor’s note: The authors’ firm represented CitiMortgage in these actions.]
For the foreseeable future, the litigation is over — and perhaps longer if Butler does not pay, or make a good faith effort to pay, court-imposed sanctions of $125,000 as well as attorneys’ fees of approximately $175,000.
Maine: New Foreclosure Laws Enacted
by Shannon Merrill and Santo Longo
The 127th Maine Legislative Session adjourned July 16, 2015. Several default- and foreclosure-related measures were enacted. What follows is a summary of the new laws, all of which are effective October 15, 2015.
Notice to Cure Requirements — New provisions in Maine’s notice of default statute (14 M.R.S.A. § 6111) require that default notices specifically state the total amount due to cure the default, and notices must also state that the amount needed to cure does not include any amounts that will become due after the date of the notice itself.
Certification of Proof of Ownership Required — Beginning October 15, 2015 foreclosure complaints must contain a certification of proof of ownership of the loan. This change does not require the owner of the loan to be the named plaintiff in the action, but it does require that the loan owner is specifically identified in the complaint. Although the statutory language is not entirely clear, it appears that this requirement can be met by the drafting attorney including appropriate language in the complaint, and that a separate certification document executed by another party will not be required.
Municipal Action regarding Abandoned Properties — A new law authorizes Maine municipalities to issue a finding that real property, or a mobile home, is “abandoned,” and then order the property owner to address identified conditions at the property. If the property owner fails to comply, the municipality can perform the work itself and seek reimbursement from the owner. The Act requires a mortgagee, when initiating a foreclosure action, to provide the municipality with the contact information of an in-state representative for the purposes of receiving communications from the municipality regarding property abandonment issues. Under the new law, when title to real property in Maine is transferred pursuant to a foreclosure judgment, the new owner becomes subject to orders to correct property conditions, as well as potential liability and enforcement. This includes foreclosing lenders who take title at foreclosure sales and hold properties in REO portfolios.
Expedited Final Hearing Process — New legislation will permit foreclosing plaintiffs to request an expedited final hearing in cases where either: (1) efforts to mediate did not result in settlement or dismissal of the action, and any party that has appeared in the action consents to the request; or (2) the defendant did not answer the complaint and any appearing party consents to the request. Once the court receives the request, the expedited final hearing will, “as the interests of justice require,” be scheduled not less than forty-five days from the date the request is filed. The burden of proof and statutory requirements for entry of judgment remain the same.
Because of the limitations contained in the statute, it appears that use of the new expedited hearing process will largely be limited to default cases with no parties in interest actively contesting the foreclosure.
Standing to Foreclose and MERS — In an effort to address property title issues created by the Maine Supreme Court’s 2014 decision in Bank of America v. Greenleaf, 2014 ME 89, the Maine legislature has passed a law that creates a presumption that a mortgage assignment, partial release, or discharge executed by a party acting as nominee for another party is valid. This includes mortgage-related instruments executed by Mortgage Electronic Registration Systems, Inc. when acting as nominee for lenders. Importantly, in regard to assignments of mortgage specifically, the presumption of validity only applies in the context of foreclosure actions if the judgment of foreclosure is obtained and the applicable appeal period has run without an appeal being filed as of October 15, 2015 (the effective date of the Act).
Power of Sale Foreclosure — New legislation modifies Maine’s nonjudicial foreclosure process. This process allows mortgagees to proceed directly to sale in certain cases where specific statutory requirements are met, and is generally only available in cases involving commercial properties. The changes are largely procedural, not substantive. Specifically, the archaic requirement that notices must be sent by “registered mail” has been updated to a more commercially-reasonable “certified mail” requirement. The bill also eliminates the requirement that (post-sale) a petition must be filed with the Maine Superior Court to correct a purely typographical error/omission in the final vesting documents.
Another Maine Court Decision Addresses Notices of Default
by Tristan Birkenmeier and Santo Longo
On August 18, 2015 the Maine Supreme Judicial Court issued its decision in Wells Fargo Bank, N.A. v. Girouard, 2015 ME 116. Girouard provides clear direction to the trial courts that entry of judgment for the defendant is required if the trial court finds that the notice of default sent to the borrower failed to strictly comply with the requirements of Maine’s notice of default statute, 14 M.R.S. § 6111.
After the Supreme Judicial Court issued its seminal decision in Bank of America v. Greenleaf, 2014 ME 89 (2014), which clarified the state statutory requirements with respect to notices of default, the Girouards filed a motion for summary judgment, contending that the notice sent by Wells Fargo failed to comply with 14 M.R.S. § 6111. Wells Fargo did not dispute the deficiencies of the notice, but asserted that because sending an adequate notice of default is a statutory prerequisite to commencing a foreclosure action, the case should be dismissed without prejudice. [There was prior Maine case law in support of this proposition. See Dutil v. Burns, 1997 ME 1, 674 A. 2d 910 (1996).] The trial court agreed, granted the defendants’ motion for summary judgment, and entered an order of dismissal without prejudice. On appeal, Maine’s high court vacated the dismissal without prejudice and remanded the case for entry of judgment for the defendants.
Prior to Girouard, there was uncertainty in the trial courts as to the proper disposition of a case after a finding that the notice of default did not strictly comply with the statutory requirements. The results varied from court to court, with some courts dismissing without prejudice, as the trial court did in Girouard. Other courts dismissed with prejudice or entered judgment for the defendants. In a few rare cases, judgment was entered for the defendants; however, the court also expressly reserved to the parties the right to re-litigate the merits of the case in a future action. Girouard leaves the trial courts with only one option: entry of judgment for the defendants.
What remains unclear after Girouard is the effect such a judgment for the defendant will have on a mortgagee’s ability to institute a second foreclosure action on the same default. In fact, the Supreme Judicial Court expressly declined to address this issue. Depending on how relevant law develops in Maine, such judgments could potentially bar re-filing. Therefore, in the wake of Girouard, it is especially important that the adequacy of the notice of default is considered before a new foreclosure action is instituted, or a pending case is brought to trial.
Illinois: Kane County’s Requirements about Recovery of Pre-Judgment Fees, Costs, Advances, and Disbursements
Editor’s Note: Supplemental information has been provided since this article was published on September 8, 2015 in the USFN e-Update (Sept. 2015 Ed.) That information, received on September 23, 2015, has been added in a separate section at the conclusion of the original article. Scroll down to view it.
In January 2015, Judge Downs replaced Judge Wojtecki as the sitting judge who hears mortgage foreclosure cases in Kane County, Illinois. Shortly thereafter, Judge Downs clarified her interpretation of the Illinois Mortgage Foreclosure Law as it relates to a plaintiff’s recovery of fees, costs, advances, and disbursements that are expended subsequent to the execution of the affidavit of indebtedness supporting the judgment of foreclosure and the entry of the judgment of foreclosure itself.
The court’s ruling: Absent a subsequent amendment to the judgment of foreclosure order, the fees, costs, advances, and disbursements expended by the plaintiff between the date of execution of the affidavit of indebtedness and the entry of the judgment of foreclosure cannot be recouped at confirmation of sale, This ruling is based on a strict reading of 735 ILCS 5/15-1508(b)(1), allowing for the collection of fees and costs arising between the entry of judgment of foreclosure and the confirmation hearing, in conjunction with 735 ILCS 5/15-1506(a)(2), which states that the affidavit of indebtedness contemplates the amount due to the mortgagee at judgment.
Inevitably there exists a gap in time — sometimes significant in scope — between the execution of the affidavit of indebtedness and the entry of judgment. During this time substantial fees, costs, advances, and disbursements may be expended for, among other things, tax payments, property preservation, hazard insurance, etc. Thus, to be able to include in a sales bid and subsequently collect these expenditures at confirmation of sale, a supplemental affidavit of indebtedness is now required to be submitted to the court. Alternatively, these expenditures (if insignificant in sum) can be excluded from the sales bid and the plaintiff can forgo amending its judgment.
Regardless of whether an amendment to judgment is sought, the court’s examination of the dates when expenditures were made requires that satisfactory detail be provided in the calculation of sales bids.
UPDATE — Subsequent Amendment to Judgment Expanded to Second District in Illinois
(information received September 23, 2015)
Recently this author’s firm advised that the judge hearing mortgage foreclosure cases in Kane County, Illinois (Judge Downs) clarified her interpretation of the Illinois Mortgage Foreclosure Law (IMFL) as it relates to the plaintiff’s recoverability of fees, costs, advances, and disbursements that are expended subsequent to the execution of the affidavit of indebtedness that supports the judgment of foreclosure and the entry of the judgment of foreclosure itself. In January 2015 Judge Downs ruled, absent a subsequent amendment to the judgment of foreclosure order, fees, costs, advances, and disbursements (expended by the plaintiff between the date of execution of the affidavit of indebtedness and the entry of the judgment of foreclosure) cannot be recouped at confirmation of sale.
The court based its ruling on a strict reading of 735 ILCS 5/15-1508(b)(1), which allows for the collection of fees and costs arising between the entry of judgment of foreclosure and the confirmation hearing, in conjunction with 735 ILCS 5/15-1506(a)(2), which states that the affidavit of indebtedness contemplates the amount due to the mortgagee at judgment.
On August 20, 2015 the Second District Appellate Court for Illinois found that the bank was not entitled to recover a $470,340 real estate tax payment where the bank could have, but did not, amend the judgment of foreclosure prior to the sale to include the prejudgment tax payment that the bank made about one month prior to the hearing on the bank’s motion for summary judgment. See BMO Harris Bank, N.A. v. Wolverine Properties, LLC, 2015 Ill. App. (2d) 140921 (Aug. 20, 2015). The general rule in Illinois is that but for conflict among districts, a decision is not confined to any particular district unless another district appellate court finds differently.
During the time between execution of the affidavit of indebtedness and the entry of judgment, substantial fees, costs, advances, and disbursements may be expended (i.e., tax payments, property preservation, hazard insurance, etc.). In order to include these expenditures in a sales bid and to subsequently collect these expenditures at confirmation of sale, a supplemental affidavit of indebtedness is now required to be submitted to the court with a motion to amend the judgment. The court must amend the judgment to include any additional pre-judgment expenditures prior to the date of sale. If amendment does not occur prior to the sale, the plaintiff will need to set aside the sale, amend the judgment, and conduct a new sale. Id. at ¶23. Alternatively, if it is not cost-effective to seek recovery of these expenditures, they can be excluded from the sales bid and the plaintiff can forgo amending its judgment.
Connecticut: A Failure to Establish Compliance Leads to More than a Dismissal
by Adam L. Avallone
A Connecticut trial court has held that a plaintiff’s failure to prove compliance with the notice provisions of Connecticut’s Emergency Mortgage Assistance Program (EMAP), C.G.S. §§ 8-265dd(b) and 8-265ee(a), deprive the court of subject matter jurisdiction. This is fatal to an action when challenged. People’s United Bank v. Wright, 2015 Conn. Super. LEXIS 694 (Conn. Super. Ct. Mar. 30, 2015).
Moreover, in a subsequent decision, the trial court awarded $13,893.75 in attorneys’ fees to counsel for the defendants for successfully defending the suit. People’s United Bank v. Wright, 2015 Conn. Super. LEXIS 1829 (Conn. Super. Ct. July 15, 2015).
The court considered C.G.S. § 8-265dd(b) and the language of C.G.S. § 8-265ee(a), which states: “no ... mortgagee may commence a foreclosure of a mortgage prior to mailing such notice.” [Emphasis added]. The court concluded that the legislature has not only forestalled a foreclosure judgment unless there has been compliance, but in a subsequent section, it has prohibited even the commencement of the action. Since it is well established in Connecticut that an action is commenced by service of process, any foreclosure writ of summons and complaint served on a mortgagor before or without compliance with the notice requirement would be a nullity.
In its ruling, the trial court considered a copy of the notice as well as deposition testimony of an employee of the servicer. The court distinguished the facts in Wright from a Connecticut Supreme Court case that found proof of regular mailing based on testimony that employees were directed to mail a letter, and further testimony of the usual custom in mailing letters for their employer. In Wright, the trial court determined that although, “a computer generated order to mail by certified mail was issued, the code number on the letter which is supposed to correspond with the order is missing on the notice.”
Further, the court concluded that not having the ability to question the employee of the servicer rendered his deposition testimony “contradictory, confusing and unreliable.” The court took issue both with the witness’ lack of personal knowledge of the general mailroom process and, more significantly, with the inability to say whether the notice was ever delivered to the mailroom. Next, the court found that a substantial basis for the witness’ assertion that certified mail was ordered was his observation of digital screens. However, the screens that the witness viewed were for a borrower other than the defendants in the present case. Further, the court noted that the letter log history, upon which the witness relied, contained only the name of the primary borrower. It did not include the name of the co-borrower, despite the letter being addressed to both borrowers.
The Wright decision makes clear that in the face of a denial of receipt, affirmative evidence of the actual sending of the notice may be required to demonstrate compliance under Connecticut’s EMAP statute.
The importance of maintaining and providing to counsel the business records and documents evidencing policies and procedures of the mailing of notices is shown in Wright. As the mailing of these notices is a condition precedent to the institution of a foreclosure action, foreclosing plaintiffs who are unable to provide proper evidence can find themselves with a substantial bill from defense counsel, as well as a dismissed action that requires restarting.
Maine High Court Clarifies Jurisdiction and Standing in Foreclosure Cases
On August 11, 2015 the Maine Supreme Judicial Court published its opinion in Homeward Residential, Inc. v. Gregor, 2015 ME 108, in which the court clarified the relationship among jurisdiction, justiciability, and standing in the context of a foreclosure action.
After a full trial on the merits, the trial court in Gregor found that Homeward failed to establish standing to foreclose on the mortgage, and the court entered judgment for the defendant. Specifically, the trial court found an unrecorded interim assignment of mortgage in the collateral file, which the court held deprived subsequent assignees (including the plaintiff) of an ownership interest in the mortgage and, thus, standing to foreclose. Importantly, the trial court went on to “reserve the right for both parties to re-litigate the issues discussed herein so that this action may not act as a bar to future action.” The borrower appealed, asserting that the trial court was without authority to reserve to Homeward the right to bring a second foreclosure action.
On appeal, the Maine Supreme Judicial Court vacated the judgment for the defendant and directed the trial court to enter a dismissal without prejudice. The Supreme Judicial Court explained that while the Maine foreclosure statutes grant subject matter jurisdiction in all foreclosure cases to the trial courts, a plaintiff may not invoke that jurisdiction unless it has standing to foreclose. Accordingly, when a party lacks standing to foreclose, the trial court is without authority to address the merits of the case, and instead can only dismiss the action. The Supreme Judicial Court went on to hold that the dismissal must be without prejudice, even though a full trial on the merits was completed, and the trial court had found independent grounds on which to enter a judgment in favor of the defendant. Most significantly, because the dismissal is without prejudice, the plaintiff is free to initiate a subsequent foreclosure action on the loan.
The most immediate impact of the Gregor decision will be on pending Maine foreclosure cases affected by the Supreme Judicial Court’s 2014 decision in Bank of America v. Greenleaf, 2014 ME 89. Greenleaf held that a mortgage assignment executed by MERS acting as nominee for the lender does not transfer full interest in the mortgage. In the wake of Greenleaf, the trial courts struggled with how to dispose of masses of cases involving MERS assignments that deprived plaintiffs of standing to foreclose. Gregor provides a clear directive that these matters are to be dismissed without prejudice (allowing the plaintiffs to re-file), provided that other aggravating factors requiring or weighing in favor of a dismissal with prejudice are not present.
The holding in Gregor provides plaintiffs with some protections and a degree of clarity regarding the law of standing and jurisdiction in Maine foreclosure cases. Nonetheless, the decision also foreshadows stricter evidentiary standards that future foreclosure plaintiffs may need to satisfy. In an important footnote, the Supreme Judicial Court commented that because the witness had obtained her knowledge of the servicer’s business practices from training alone, and not through direct observation or active participation in making entries, the witness was wholly unqualified to provide testimony regarding the business records of Homeward and the prior servicers. As a result, the Gregor decision could provide new ammunition to mortgagors and defense counsel attacking witness credibility.
North Carolina Enacts Version of Federal Protecting Tenants at Foreclosure Act
On August 5, 2015 the governor of North Carolina signed into law a bill that, among other provisions, resurrects some of the rights enjoyed by tenants under the now-defunct federal Protecting Tenants at Foreclosure Act. The federal law expired on December 31, 2014, when Congress declined to extend its terms. The new North Carolina law is effective October 1, 2015.
North Carolina Session Law 2015-178 makes a number of amendments to Chapter 45 of the North Carolina General Statutes, which sets forth North Carolina’s power of sale foreclosure process, as well as Chapter 42 of the North Carolina General Statutes, which specifies North Carolina’s landlord/tenant procedures. A new section, § 45-21.33A, provides that:
• A foreclosure sale purchaser who does not intend to occupy the property as a primary residence “shall assume title subject to the rights of any tenant to occupy the premises until the end of the remaining term of the lease or one calendar year from the date the purchaser acquires title, whichever is shorter.”
• The tenant’s rights are qualified:
o He may not be the borrower, or child, spouse, or parent of the borrower
o There must be a written lease, that is not terminable at will, and the rent must be not substantially less than fair market value
o If there is an “imminently dangerous condition” [as defined in N.C.G.S. § 42-42(a)(8)] on the premises as of the date of acquisition, then the tenant has no right to continue occupying the premises.
• The tenant must be provided with at least a 90-day notice to vacate if: (a) the purchaser will occupy the premises as his/her primary residence, (b) the tenant has only an oral lease, or (c) if the lease is terminable at will.
As was the case with the federal PTFA, it is likely that the new law will lead to litigation. Issues surround, for example, the documents necessary to prove the existence of a “written lease;” when does the lease term end; and how far below market value must the rent be before it qualifies as “substantially less”? Both identifying the tenant and communicating successfully with him to determine the salient facts about the tenancy will remain as obstacles to compliance with the new law.
Additionally, the new law provides some relief for various interested persons, which would not adversely impact foreclosing lenders:
• Tenants of borrowers in foreclosure are entitled to terminate their leases early, under certain conditions; and
• Foreclosure rescue schemes are prohibited, with limited exceptions designed to ensure such transactions are legitimate and not intended to deprive the borrower of his interest in the property.
Editor’s Note: Federal H.R. 1354 (introduced 3/13/15 to permanently extend the PTFA and sent to House Committee on Financial Services); Federal S.730 (introduced 3/12/15 to permanently extend the PTFA; read twice and sent to Senate Committee on Banking, Housing, and Urban Affairs). No status change to either bill as of September 7, 2015. Additionally, USFN has two state-by-state publications that are helpful in the post-PTFA environment: REO/Eviction Desk Guide and Eviction Timelines Matrix. They are especially effective when used together.
Sixth Circuit: A Corporation May Be a Protected “Person” Under the FDCPA
The Sixth Circuit Court of Appeals, in a case from Tennessee, held that the definition of a protected “person” under FDCPA’s enforcement provision, 15 U.S.C. § 1692k, includes a corporation. [Anarion Investments LLC v. Carrington Mortgage Services, LLC, 2015 Westlaw 4503588 (6th Cir. July 23, 2015)].
Some background: The underlying lawsuit alleged the misrepresentation in foreclosure proceedings that the foreclosure trustee was properly appointed “by an instrument duly recorded,” which “instrument” Anarion claimed did not exist. The District Court had dismissed the action brought by a corporation, on the ground that only an individual person had standing to bring such an action. Relying on the definition of “person” in the Dictionary Act, the Sixth Circuit reversed — observing that some sections of the FDCPA are expressly applicable only to individual persons, while other sections do not contain such limitation.
The Sixth Circuit majority opinion states:
“FDCPA’s enforcement provision, 15 U.S.C. § 1692k, states that ‘any debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person[.]’ 15 U.S.C. § 1692k (a) (emphasis added). The sole issue before us is whether Anarion is a ‘person’ under this provision and the Act generally. [¶] The presumptive answer to that question is yes. The federal Dictionary Act provides that, ‘[i]n determining the meaning of any Act of Congress,’ the word ‘person’ includes artificial entities — like Anarion — unless ‘the context indicates otherwise[.]’ 1 U.S.C. § 1. Here there is plenty of relevant context, since ‘person’ appears 24 times in the FDCPA. In some places, the term refers exclusively to artificial entities.” Anarion Investments LLC v. Carrington Mortgage Services, LLC, id.
The dissenting opinion strongly argued that “the context [of the FDCPA clearly and repeatedly] indicated otherwise.” The FDCPA contains several references to Congress’s intent to protect individuals from harassment and unfair collection practices, and that consumer (not business) debt, is the sole focus of the statute. The dissent warns of the precedential effect of the ruling, opening up litigation in favor of corporate plaintiffs.
The precedential effect may be somewhat limited because of the rather unusual facts: specifically, the plaintiff was the assignee of the lessee of the secured property, whose attorney was the original lessee and owner of the corporate plaintiff. The court has, nevertheless, opened the door to a new category of plaintiff that is arguably not contemplated by the purpose of the statute.
Illinois: Cook County Recorder Title Freeze Act is Enacted
by Colin Winters
On August 21, 2015 the governor of Illinois signed the Cook County Recorder Title Freeze Act into law, effective January 1, 2016. The new Act provides that in any foreclosure case in Cook County, the plaintiff may ask the court to bar any non-record claimants or the owner from recording any interest on the property during the pendency of the foreclosure action. Once this order is delivered to the Cook County Recorder, a non-record claimant or owner can only record an interest after displaying a certified court order allowing them to do so. If the recorder discovers that an interest was filed erroneously, the recorder will record a new document specifying the erroneous document and explicitly voiding it.
This legislative action is a reaction to the ever-increasing “paper terrorism” that sovereign citizens and their ilk file in a variety of court cases. Notably, in 2012, the federal government indicted (and later convicted) a sovereign citizen for filing bogus liens against multiple public officials (including a former U.S. prosecutor, a district court judge, and a former chief judge).
As such, this new Act should be read as a companion piece to the last legislative session’s acts concerning clouding title. Public Act 98-099 allowed recorders offices throughout the state to establish fraud referral and review programs, with the legislature finding that “Property fraud, including fraudulent filings intended to cloud or fraudulently transfer title to property by recording false or altered documents and deeds, is a rapidly growing problem throughout the State.” Further, Public Act 98-098 escalated the penalty for unlawful clouding of title from a misdemeanor to a class IV felony.
Plaintiffs will want to take advantage of this new Act any time there is an indication that someone may record bogus documents. For example, if the plaintiff were to receive a sovereign citizen-style pleading in a foreclosure case, it would be wise to freeze the title as soon as possible to prevent any fraudulent recording.
Unfortunately, the Cook County Recorder Title Freeze Act is not automatic; the legislature has placed the responsibility of seeking relief on the plaintiffs. Rather than proactively barring any non-record claimant or owner from recording interests, the Act requires that the plaintiff must first bring a motion to bar them, then record that order with the recorder’s office and pay the standard fee for recording. To best protect the interests of all plaintiffs, these motions should be presented at the earliest opportunity in each case.
©Copyright 2015 USFN and Anselmo Lindberg Oliver LLC. All rights reserved.
Illinois: Amendment to the Residential Mortgage License Act of 1987
Posted By USFN, Friday, July 24, 2015
by Lee Perres and Jill Rein
Last year, the Second District Court of Appeals for Illinois found that a mortgage, which was originated in violation of the Residential Mortgage Licensing Act of 1987 (Licensing Act), was void against public policy. [First Mortgage Company, LLC v. Dina, 2014 IL App. (2d) 130567 (2d Dist. Mar. 31, 2014; modified upon denial of reh’g May 22, 2014)].
Specifically, the Second District Court of Appeals found that when a mortgage was originated by a party who was not authorized under the Licensing Act, nor fell into one of the Licensing Act’s exceptions, the defendant could challenge the mortgage as void, and such challenge could be raised at any time.
On July 23, 2015 the governor of Illinois signed Public Act 99-0113 into law, which amends the Licensing Act. It is effective immediately. The amendment to the Licensing Act provides that a mortgage loan brokered, funded, originated, serviced, or purchased by a party who is not licensed shall not be held to be invalid solely on the basis of specified violations of the Licensing Act.
Editor’s Note: The authors’ firm joined in lobbying efforts to overturn the Dina decision.
Previously, we wrote of the loss mitigation requirements of Judge Waites, the senior bankruptcy judge for the District of South Carolina. Earlier this year Judge Waites mandated that, for cases assigned to him, all loss mitigation reviews must occur on the Default Mitigation Management (DMM) portal. Additionally, this bankruptcy judge required that any loss mitigation activity occurring outside the portal must be reported to the court by the creditor. The judge’s rules also mandate that reviews outside the portal may only occur if the court enters an order allowing a non-portal review. [For further background, see South Carolina: Default Mitigation Management Portal (USFN e-Update, April 2015 Ed.)].
Judge Waites has reached out to the bankruptcy bar to advise that he is still being asked to approve loan modifications where the loss mitigation review was not in the DMM portal, and the court was not contacted by the creditor regarding loss mitigation activity outside of the portal. The judge has indicated that he may hold hearings to approve these loan modifications and require a representative from the creditor to appear at the hearing to explain why the creditor did not comply with the court’s requirements. Additionally, if a creditor does not comply with the requirements in the future, it is probable that the creditor will be sanctioned by the court for this conduct.
Because of the strict requirements and the possible consequences of non-compliance, it is suggested that when a borrower whose bankruptcy case is assigned to Judge Waites contacts his lender/servicer about loss mitigation, the lender/servicer should communicate with local counsel to report the loss mitigation discussions to the court. Additionally, if a loss mitigation application is sent to the borrower or if one is received from the borrower, it is advisable that the lender/servicer have local counsel file a motion for loss mitigation review outside of the DMM portal. Finally, if the lender/servicer has any current loss mitigation reviews pending outside of the portal involving borrowers in a bankruptcy case assigned to Judge Waites, best practice strongly suggests that the lender/servicer should take action to report this review to the court as soon as possible.
Federal Drug Law Violation: Impacts Bankruptcy Code Relief?
by John Kapitan
Trott Law, P.C. – USFN Member (Michigan)
The Michigan Medical Marijuana Act (MMMA) authorizes a Michigan resident to cultivate, possess, and even distribute some amount of marijuana, or its products, without offending the laws of Michigan. Federal law, in contrast, criminalizes possession and distribution of the plant with exceptions only for federally-approved research activities.
The question of whether the business of a chapter 13 debtor (legitimate under the state laws in Michigan, but criminal under federal law) precludes a court from granting relief available under the Bankruptcy Code was recently decided in the case of In re Johnson, 2015 Bankr. LEXIS 1983 (Bankr. W.D. Mich. 2015).
In Johnson, the debtor sought relief under chapter 13 of the Bankruptcy Code to save his residence, prevent the termination of utility services, and avoid repossession of his vehicle. The United States Trustee moved to dismiss the case because the debtor was engaging in the marijuana industry and believed that the court should not enforce the protections of the Bankruptcy Code to aid violations of federal law.
According to the debtor’s Schedules, Statement of Financial Affairs, and testimony during an evidentiary hearing, the debtor’s income was derived from Social Security benefits and through the cultivation and sale of marijuana to three patients through a regulated dispensary pursuant to the MMMA. A review of the debtor’s proposed plan indicated that the monthly payment was well below his monthly Social Security benefit, and the debtor testified that none of the proceeds from his activities under the MMMA would be used to fund the plan.
Cognizant of the debtor’s dire need of bankruptcy relief, the court refrained from dismissing the case, but enjoined the debtor from conducting his medical marijuana business while the case was pending in order to provide him with limited additional time to decide whether to continue his business activity or to dismiss the case.
In reaching this decision, the court did not believe it mattered that the plan was funded solely from Social Security benefits because, as a statutory matter, the same reasons that preclude the Standing Trustee from holding contraband (or using proceeds or instrumentalities of federal criminal activity) apply to the debtor. As such, the debtor could not conduct an enterprise that admittedly violates federal criminal law while enjoying the federal benefits which the Bankruptcy Code affords him, as there is no constitutional right to obtain a discharge of one’s debts in bankruptcy. Additionally, the court noted that it is not asking too much of debtors to obey federal laws, including criminal laws, as a condition of obtaining relief under the Bankruptcy Code.
Connecticut: Recourse to Foreclose Under Theory of Ratification and Unjust Enrichment
by Nicole M. FitzGerald
On May 21, 2015 the Stamford Superior Court issued a decision favorable to foreclosing lenders when only one of the record owners of the property signs the mortgage [HSBC Bank USA, National Association, as Trustee v. D’Agostino, FST CV-09-6002754-S].
While Deutsche Bank National Trust Company, Trustee v. Perez, 146 Conn. App. 833 (2013), held that “the record did not support a finding by clear, substantial and convincing evidence that the missing signatory participated in the mortgagor’s efforts to obtain the loan or execute the mortgage and therefore the court lacked the authority to reform the mortgage by adding her signature, (emphasis added)” the court in D’Agostino found that the plaintiff bank had recourse to foreclose against the omitted mortgagor under a theory of ratification and unjust enrichment.
Ratification, unlike reformation, is defined as “the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account.” Ratification requires “acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances.” In D’Agostino, the court found that the omitted mortgagor ratified the mortgage because he had “knowledge of all of the circumstances which attended the mortgage loan transaction and intended to, did and still does accept the benefits of the transaction.”
In order for the plaintiff to obtain a recourse under the ratification theory, the court further found that the equitable cause of action of unjust enrichment was satisfied, and imposed a constructive trust as the vehicle to allow a judgment of foreclosure to be entered against the omitted mortgagor. A constructive trust arises “where a person who holds title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it.” The D’Agostino case, although only a trial court decision, is encouraging for foreclosing lenders in the wake of the Perez decision.
Editor’s Note: The author’s firm represented the plaintiff in the D’Agostino case, which is summarized here.
Connecticut: Allegations Involving Conduct in Mediation
The Connecticut Court of Appeals recently rendered a decision in U.S. Bank v. Sorrentino, upholding a lower court’s dismissal of claims made by a borrower regarding the plaintiff’s conduct in mediation. The appellate court examined a motion for summary judgment decided in favor of the plaintiff bank in the trial court. [U.S. Bank v. Sorrentino, 2015 Conn. App. LEXIS 235 (June 1, 2015)].
Connecticut has a mandatory mediation program. The statute authorizing mediation has a provision mandating that the parties act in “good faith” during the mediation. In Sorrentino, among the allegations presented as affirmative defenses and a counterclaim were the following: “The plaintiff conducted the mediation process in a manner calculated effectively to ensure that the subject loan would not qualify for modification. During this process, plaintiff continually requested documents which had already been provided; regularly claimed to have lost or misplaced documents; professed to not understand the sources and amounts of income despite repeated, good faith, efforts on the part of defendants to provide this information to plaintiff. Plaintiff, on a regular basis, assured defendants that ... they would qualify for a modification, and that ‘we want you to stay in your home and keep your home’ when, in fact, plaintiff knew that the chances for a modification were negligible.”
In Sorrentino, the appellate court considered the defenses and counterclaims that are proper in a foreclosure matter, and stated: “This court previously has held that, ‘[i]n a foreclosure action, a counterclaim must relate to the making, validity or enforcement of the mortgage note in order properly to be joined with the complaint.’” JP Morgan Chase Bank, Trustee v. Rodrigues, 109 Conn. App. 125, 133, 952 A.2d 56 (2008); see also New Haven Savings Bank v. LaPlace, 66 Conn. App. 1, 9-11, 783 A.2d 1174 (affirming summary judgment for plaintiff on counterclaims not related to making, validity or enforcement of mortgage note), cert. denied, 258 Conn. 942, 786 A.2d 426 (2001). Thus, “[c]onduct on the part of the [foreclosing party] that occurred after the loan documents were executed and not necessarily directly related solely to enforcement of the note ... properly has been found not to arise out of the same transaction as the complaint.” JP Morgan Chase Bank, Trustee v. Rodrigues, supra, 134-35, citing Southbridge Associates, LLC v. Garofalo, 53 Conn. App. 11, 16-21, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999). [U.S. Bank v. Sorrentino, supra, 2015 Conn. App. LEXIS 235, *20-21 (June 1, 2015)].
Accordingly, actions that occur after the commencement of the action are not properly brought before the court in a foreclosure action as a counterclaim.
This judicial holding seemed to be in conflict with an earlier decision with similar facts. The Sorrentino court explained that in CitiMortgage, Inc. v. Rey, 150 Conn. App. 595, 605-606, 92 A.3d 278, cert. denied, 314 Conn. 905, 99 A.3d 635 (2014), there was a reasonable nexus between the interposed counterclaims and the making, validity, or enforcement of the note or mortgage — and ruled that such a nexus was not presented in the Sorrentino case. It concluded that the plaintiff was not required to produce evidence of its conduct during the mediation because the defendants’ claims failed, as a matter of law. Further, the appellate court held that the counterclaim could not be cured by re-pleading because the counterclaim did not attack the making, validity, or enforcement of the note.
Based on Sorrentino, claims relating to Connecticut mediation — at least in most cases — cannot be used as counterclaims against lenders in the foreclosure action.
Challenge to Michigan’s Non-recourse Mortgage Loan Act Fails
by Scott W. Neal
The Borman, LLC v. 18718 Borman, LLC case, decided on February 3, 2015 by the Sixth Circuit Court of Appeals, upheld Michigan’s 2012 Non-recourse Mortgage Loan Act (NMLA). That law prevents lenders from holding guarantors of non-recourse, commercial mortgage-backed securities (CMBS) pooled loans liable for post-closing borrower insolvency.
The NMLA was enacted after the Michigan Court of Appeals’ decision in Wells Fargo Bank, NA v. Cherryland Mall Ltd. P’ship, 812 N.W.2d 799 (Mich. Ct. App. 2011), which upheld a solvency covenant in a non-recourse CMBS loan. The NMLA applies retroactively to render solvency covenants in non-recourse loans unenforceable. The Michigan Legislature reasoned that such covenants are inconsistent with the nature of non-recourse loans, are an unfair and deceptive business practice, and are against public policy.
In Borman, defendant 18718 Borman, LLC defaulted on a non-recourse secured loan, so the lender foreclosed. Plaintiff Borman, LLC, an unrelated company, purchased the property. Standing in the lender’s shoes afterwards, the plaintiff sued the defendant and its guarantor to collect an approximately $6 million deficiency. The lower court granted summary judgment in favor of the defendant, and the Sixth Circuit affirmed.
In the CMBS loan that the defendant agreed to, there was a solvency covenant that the plaintiff contended allowed it to sue not only the defendant, but also the guarantor, to obtain the deficiency. The court ruled that the NMLA made the solvency covenant in the defendant’s CMBS loan unenforceable as a matter of law, thereby preventing the plaintiff’s deficiency suit. The court also rejected the plaintiff’s various state and federal constitutional challenges to the validity of the NMLA.
This ruling should put commercial lenders and purchasers on notice that the NMLA is in full effect, the Cherryland Mall case law is no longer binding, and they will not be able to rely on suits against guarantors to collect deficiencies on CMBS loans. In other words, lender and buyer beware.
Freddie Mac is Not Liable for the Loan Servicer’s Failure to Use Escrow Funds to Maintain Property Insurance
by Steven K. Linkon
A panel of the Ninth Circuit Court of Appeals affirmed the district court’s Rule 12(b)(6) dismissal of a homeowner’s claims for breach of contract and breach of fiduciary duty brought against the Federal Home Loan Mortgage Corporation (Freddie Mac). The claims arose after Freddie Mac had purchased the homeowner’s mortgage from Taylor, Bean & Whitaker Mortgage Co., the loan originator. Taylor Bean, which had continued to service the loan after selling it to Freddie Mac, failed to pay the insurance premium from an escrow account and caused the homeowner’s insurance to be cancelled. The home was destroyed by an accidental fire. Safeco denied the homeowners insurance claim because the policy had been cancelled before the fire.
The appellate panel held that the homeowner failed to allege facts that would establish that Freddie Mac had a contractual duty to service the loan: Freddie Mac never agreed to assume the servicing obligations when it purchased the loan from Taylor Bean; the deed of trust provided that the servicing obligations would remain with Taylor Bean, and Washington law did not prohibit the arrangement.
Additionally, the Ninth Circuit held that Freddie Mac did not assume the fiduciary duty of an escrow because under the deed of trust, the duty to hold money for the insurance premiums in escrow remained with the loan servicer, Taylor Bean. [Johnson v. Federal Home Loan Mortgage Corporation (9th Cir. July 14, 2015)].
Editor’s Note: The author’s firm represented Freddie Mac in the case summarized in this article.
Massachusetts: Default Notices Must Comply Strictly with Mortgage Forms
by Thomas J. Santolucito
The Massachusetts Supreme Judicial Court (SJC) has issued its long-awaited ruling in Pinti v. Emigrant Mortgage Company, Inc. [Supreme Judicial Court No. SJC-11742, slip op. (July 17, 2015)]. In a 4-3 decision, the SJC held that a foreclosing mortgagee must send borrowers a default notice that complies strictly with the requirements of the mortgage.
Paragraph 22 of the Fannie Mae/Freddie Mac Uniform Mortgage Instrument (the mortgage form used in Pinti) requires, among other things, that a lender send a default notice informing the borrower of the right to bring an action to challenge the foreclosure based on the lack of a default. However, the notice sent in Pinti stated only that the borrower had the right to assert non-default as a defense in any judicial foreclosure proceeding.
The SJC reasoned that the statutory power of sale requires strict compliance with the mortgage terms and certain specific statutory requirements, particularly in light of the fact that Massachusetts foreclosures are typically nonjudicial. [Massachusetts is also known as a quasi-judicial foreclosure state. The first part of the foreclosure is a judicial SCRA action. The second part is a nonjudicial foreclosure sale. In its decisions, the court considers the “foreclosure process” in Massachusetts nonjudicial because it characterizes the required judicial process (a SCRA action) as not being part of the mortgage foreclosure proceedings.] Failing to comply strictly with the power of sale renders any attempted foreclosure void.
Because the default notice in Pinti did not comply with paragraph 22 — it did not affirmatively state that the borrower had the right to bring an action to challenge the foreclosure — the resulting foreclosure was void. The SJC applied its decision prospectively to cases where lenders send default notices after July 17, 2015. Despite its prospective ruling, the court left open the possibility of extending its decision to similar cases on appeal or (less likely) to cases before the trial courts. The SJC also suggested that mortgagees should record an affidavit as evidence of compliance with paragraph 22.
As a result of Pinti, servicers should review their Massachusetts default notices very carefully to ensure that they comply verbatim with the mortgage terms (note: language in either a contractual breach notice or a statutory 150-day default notice may comply with the requirements of the mortgage contract). It remains to be seen: (1) how courts will analyze default notices sent prior to July 17, 2015; (2) how title insurers will treat foreclosures relying upon default notices sent prior to July 17, 2015; or (3) what “Pinti affidavits” must contain.
Rhode Island & Mediation: Legislative Bill Partially Overrules May 2015 Court Case
by Lisa Kresge
Brennan Recupero Cascione Scungio & McAllister, LLP – USFN Member (Rhode Island)
In July 2013, Rhode Island enacted a statute that required holders of individual consumer first-lien mortgages on owner-occupied properties to send written notice to mortgagors of the right to mediation prior to the initiation of foreclosure proceedings and within 120 days of the date of default. Failure to comply with the statute results in a $1,000 a month penalty and voids the foreclosure. Under the 2013 version of the statute, mortgages that were more than 120 days delinquent as of September 13, 2013 (in other words with a date of default on or before May 16, 2013) were exempt from compliance.
As of October 6, 2014, the 2013 Statute was amended. Among other things, the 2014 amendment removed the September 13, 2013 exemption language. However, the Rhode Island Division of Banks issued regulations that kept the exemption in place. Since that time, lenders moved forward with foreclosures in reliance upon that exemption.
On May 15, 2015, the Rhode Island Superior Court issued a decision in the case entitled Fontaine v. US Bank National Association, ruling that the removal of the exemption language from the 2014 Statute mandated compliance with the 2014 Statute’s mediation requirements for all mortgages, regardless of the date of default for any foreclosures initiated on or after October 6, 2014. Thus, the Fontaine ruling forced lenders to pay stiff penalties to foreclose on properties that previously fell under the exemption and voided foreclosures that had taken place since October 6, 2014 in reliance upon the exemption.
In July, the Rhode Island legislature passed a bill to reinstate the exemption. The bill went into effect on July 2, 2015. Accordingly, lenders can proceed with Rhode Island foreclosures with a date of default on or before May 16, 2013 without having to comply with the mediation rules, including payment of the resulting penalties.
However, the amended statute is not retroactive. Accordingly, foreclosures that were initiated on or after October 6, 2014 and before July 2, 2015 (“Gap Period”) in reliance upon the exemption may be void. Lenders are well-advised to review their Rhode Island portfolios to determine if any of their foreclosures fall within this Gap Period and need to be re-foreclosed.