the official publication of the american legal & financial network / vol i / issue ii
FLORIDA CASE COULD BAR FORECLOSURE AFTER FIVE YEARSp16
COMPLIANCE MSRs ON THE MOVEp12
MEMBER SPOTLIGHT ROGERS TOWNSENDp4
ON THE BOOKS TWO DISMISSAL RULEp26
alfn angle: in this issue FROM THE PRESIDENT
President & CEO Matt Bartel introduces this issue of the ALFN ANGLE and details some of this quarter’s contributions
SPOTLIGHT: ROGERS TOWNSEND
Meet three attorneys from ALFN member Rogers Townsend who talk about their culture, focus, and client relations
SNAPSHOT: NEW YORK, ILLINOIS
ALFN Members in New York and Illinois provide legal updates and analysis on case law and other hot button issues
features & contributions COMPLIANCE MSRs ON THE MOVE
Michelle Gilbert examines the increase in mortgage servicing rights transfers and regulatory oversight
COVER STORY ACCELERATING DEMAND
Robert Edwards underlines the importance of a Florida case and the ALFN’s soon-to-be filed amicus curiae brief
COMMERCIAL CRE GUARANTEES
Eric Dean offers key points to watch for in commercial real estate default scenarios
ON THE BOOKS “TWO DISMISSAL” RULE
Graham Kidner poses the question, “Does the ‘two dismissal’ rule apply to power-of-sale-foreclosures in North Carolina
ALFN ANSWERS: IN PICTURES
Photo Op: a look at ANSWERS 2014 in pictures
Get answers to servicer questions taken during a recent ALFN Bankruptcy Webinar on Rule 3002.1
Q&ALFN: IN DEPTH p39
A deeper look at Rule 3002.1 from webinar speaker Michael J. McCormick, Esq.
the off official publication of the american legal & financial network / vol i / issue ii
FLORIDA CASE COULD BAR FORECLOSURE AFTER FIVE YEARSp16
COMPLIANCE MSRs ON THE MOVEp12
MEMBER SPOTLIGHT ROGERS TOWNSENDp4
ON THE BOOKS TWO DISMISSAL RULEp26
American Legal & Financial Network (ALFN) 12400 Olive Blvd., STE 555 St. Louis, MO 63141 314.590.0859 (phone) 314.744.7738 (fax) www.alfn.org
Cade Holleman, M.A. AVP, Government Affairs & Communications firstname.lastname@example.org
Robert R. Edwards, Esq. Michelle Gilbert, Esq. Eric Dean, Esq. Graham H. Kidner, Esq. Matt Abad, Esq. Natalie Grigg, Esq.
Cade Holleman, M.A. AVP, Government Affairs & Communications email@example.com
organizational updates p30
Liz Potter SVP, Business Development & Member Relations firstname.lastname@example.org
Ashleigh Bouselli Administrative & Event Coordinator email@example.com
Vol. 1 / Issue 2 / Fall 2014
The ALFN ANGLE is a quarterly digital magazine published by the American Legal & Financial Network (ALFN) on behalf of its attorney/trustee, associate, and mortgage servicing members. Reprint permission is available by request. To contribute or advertise, please contact the ALFN directly.
BOLD PERSPECTIVES FROM UNIQUE ANGLES This Fall the ANGLE is packed with valuable insights from practitioners across the mortgage servicing industry. In our cover story, Robert Edwards details the ALFN’s efforts on a monumental case that could dramatically alter the foreclosure landscape in Florida. Over the next few weeks Edwards will lead a team of exceptional attorneys as they draft the Association’s amicus curiae brief recently approved by the Florida courts. Michelle Gilbert offers an informing look at mortgage servicing rights, file transfers, and the Consumer Financial Protection Bureau’s (CFPB) interest in a little-known facet of the mortgage servicing wheelhouse. In our quarterly commercial space, hear from Eric Dean as he details commercial real estate guarantees and provides eight points to watch for in default scenarios. Matt Abad and Natalie Grigg provide state snapshots for Illinois and New York, respectively. And don’t miss our annual insert on ANSWERS with detailed coverage of the ALFN’s Annual Leadership Conference and our inaugural JPEG: Picture the Future list of young professionals to watch. This time of year always brings thoughts of change, especially as we hit the road each fall for our regional servicer training summits, TE@CH, where we sit down with mortgage servicers to train staff on hot button issues affecting servicing operations. One thing that doesn’t change though is the constant state of flux in the servicing industry. New rules to implement, new solutions to overcome challenges, and new ways of thinking about old problems. And that’s what this publication is for—to provide our members, this industry’s best practitioners, new angles that may help you think, and work, your way to a better solution or greater achievements. We sincerely hope you enjoy this issue of the ALFN ANGLE.
MATT BARTEL PRESIDENT & CEO, ALFN
ROBERT R. EDWARDS
GENERAL COUNSEL | ROBERTSON, ANSCHUTZ & SCHNEID, P.L. REDWARDS@RASFLAW.COM
Robert R. (“Rob”) Edwards is General Counsel to the law firm of Robertson, Anschutz & Schneid, PL, in Boca Raton, Florida. Rob graduated summa cum laude from Western Carolina University in 1985 with a B.A. in English Literature and a B.S. in Political Science. In 1988, Rob graduated 5th in his class from the University of Florida Levin College of Law, where he served as a Senior Editor on Law Review. After law school, Rob spent two years clerking for a United States federal District Court Judge in Tampa, Florida, and has spent the balance of his 24-year career practicing complex commercial litigation and appeals in real estate and maritime disputes, debtor and creditor rights, fraud, civil theft, breach of contract, foreclosures, and related business matters.
MANAGING PARTNER | GILBERT GARCIA GROUP, P.A. MGILBERT@GILBERTGROUPLAW.COM
Michelle handles a wide variety of legal matters for the firm including judicial foreclosures, evictions, workouts and forbearance agreements, REO closings, deficiency actions, bankruptcy, collection matters and related litigation. Michelle has taught the Thirteenth Judicial Circuit Certified Process Servers Course since 1993. She has worked in foreclosure and creditors firms since 1989, specializing in default and litigated foreclosures, real estate closings, evictions, collections and commercial litigation. Michelle works closely with the default industry by speaking at webinars and at conferences, as well as consulting on various issues relevant to the industry.
VICE-CHAIR, COMMERCIAL & REAL ESTATE GROUP | THE WOLF FIRM ERIC.DEAN@WOLFFIRM.COM
Eric D. Dean is the Vice Chair of the Commercial & Real Estate Group of The Wolf Firm, a Law Corporation. Mr. Dean has practiced law in California for over 30 years with his practice centered on litigation and transactional matters for regulated and private lenders, loan servicers, hotel developers and operators, contractors and construction managers and commercial and mortgage brokers.
GRAHAM H. KIDNER
MANAGING PARTNER - COMPLEX LITIGATION | BROCK & SCOTT GRAHAM.KIDNER@BROCKANDSCOTT.COM
ON THE BOOKS
Graham joined Brock & Scott in July 2012 to head the firm’s new Complex Litigation Division. As the firm has expanded its operations across seven states from Maryland south to Florida, and west to Tennessee, Graham has sought to add litigation capability by helping to recruit experienced attorneys to staff the several new regional offices the firm has opened in recent months. Graham brings to his new position 21 years’ experience handling single-family loan level litigation for Freddie Mac, where in recent years he also managed the Designated Counsel Program as well as supported a number of client areas including REO marketing and disposition, and government relations.
spotlight FAST AND OPEN COMMUNICATION. PEOPLE INVESTED IN THE PROCESS. CONSTANT IMPROVEMENT. THE ROGERS TOWNSEND RECIPE FOR SUCCESS IN THE CAROLINAS. by Cade Holleman, ALFN
What’s the best way to understand clients’ needs in today’s environment? Rogers Townsend’s answer is simple: pack a bag and go ask them. Listen. Learn. Repeat. Then work internally to develop and manage processes that work best for the client. Those are the ingredients for success, the Rogers Townsend way. “When it comes down to it, our clients want fast and open communication with us. Passionate promises in advertising and marketing mean nothing if you don’t deliver. With increased competition and high expectations, we can appreciate that our clients mean business. No one has time for fluff,” says John Hearn, who leads the firm’s Default Services Department. The information and strong relationships that Rogers Townsend attorneys bring back from those invaluable visits informs the internal compliance and quality control systems—systems the firm has built in more than two decades of service to the industry. In fact, Rogers Townsend has internalized much of how mortgage
servicers operate and review their legal service providers. “It only makes sense that we measure ourselves in the same way that our clients measure us. We need to know how we are performing month-to-month in order to keep our performance high. This kind of monitoring is integral to our operation, so our approach remains proactive and not reactive,” says Mike Spicer, the Operations Attorney for the firm’s North Carolina Default Services. Spicer adds, “We can better mitigate risk when we apply solutions that work well for us and for the client.” Regulations have placed increased pressure on servicers and their business partners to comply with a number of mandates, and to be ready to act quickly when those rules change. Rob Davis, the firm’s South Carolina Operations Attorney said, “There is a culture of compliance at Rogers Townsend, and we recognize that the smallest of details make a huge impact on our work product.” When they say they’ve built a culture, they mean it. Rogers Townsend’s team knows the theme
well—EVERYONE. “We developed this internal mantra that really drives home what it means to be hyper-focused on client service. Every call, every click, every file, every lawyer, every team, EVERYONE,” Spicer said. Hearn explains, “Our team members in both North Carolina and South Carolina, from the attorney to the mailroom, understand that each of us plays an integral role in a complicated process. To serve our clients in the best possible way, we remind ourselves daily that everyone’s role is equally important. Our clients expect and deserve that each step in the process is given substantial attention.” Rogers Townsend knows, from decades of experience, how to move quickly with the tide and forge the relationships necessary to make this business of default work for EVERYONE.
PICTURED: JOHN HEARN, ESQ., PARTNER, DEFAULT SERVICES DEPARTMENT (CENTER); MIKE SPICER, ESQ., OPERATIONS ATTORNEY, NC DEFAULT SERVICES; ROB DAVIS, ESQ., OPERATIONS ATTORNEY, SC DEFAULT SERVICES (RIGHT) CONTACT ROGERS TOWNSEND: ROGERS TOWNSEND IS AN ALFN MEMBER IN SOUTH CAROLINA. TO LEARN MORE ABOUT ROGERS TOWNSEND, VISIT THEM ONLINE AT RTT-LAW.COM OR CONTACT JOHN.HEARN@RTT-LAW.COM.
EVERY CALL, EVERY CLICK, EVERY FILE, EVERY LAWYER. IT’S ‘EVERYONE’.
NEW YORK: RECENT CASE MOVES “GOOD FAITH” VS. “BAD FAITH” DEBATE TO NEW GROUND, ESTABLISHES STANDARDS TO EVALUATE by Natalie Grigg, Esq.
In 2008, New York law implemented the foreclosure settlement conference program for residential foreclosure actions. CPLR 3408. While initially voluntary, this program was amended in 2010, making settlement conferences mandatory for loans secured by owner-occupied one-to-four family dwellings or condominiums. CPRL 3408 establishes the expectation that parties will participate in conferences in “good faith.” The question of what constitutes “good faith” – or a lack thereof – has been a regular point of debate, with courts routinely referring matters to what has become known as “the Bad Faith Hearing.” There, the court referee, law clerk, or judge concludes whether or not banks have acted in good faith.
Notably, the definition of “good faith” has been omitted from New York Rules and case law until New York’s Appellate Division, Second Department released U.S. Bank, National Association, v. Sarmiento in July of 2014. In Sarmiento, Plaintiff U.S. Bank appealed a decision of the Supreme Court that found Plaintiff had failed to act in good faith during settlement conferences and granted Defendant’s motion to bar Plaintiff from collecting interest or fees. As background, the foreclosure action was commenced in May 2009 and referred to settlement conference part. From September 2009 through January 2011, approximately 18 settlement conferences were held. During that time, the parties exchanged a
significant amount of documentation, Plaintiff took efforts to review Defendant’s submissions, and offered two separate modifications to Defendant. After the second modification offer was extended, the parties continued to attend subsequent conferences but no further progress was made toward settlement. It was at that point the Referee instructed the parties to submit position statements and referred the matter for a hearing to determine whether sanctions should be imposed against Plaintiff. Based on the papers submitted, the Supreme Court found the Plaintiff had failed to negotiate in good faith and granted the Defendant’s request to: bar Plaintiff from collecting interest or fees
that had accrued on the loan from December 1, 2009 and recovering any fees and costs related to the foreclosure action; and directing Plaintiff to review the Defendant for a HAMP loan modification. On appeal, Plaintiff argued that a party to the foreclosure action could only be found to have failed to act in good faith if the party engaged in conduct equivalent to bad faith as defined under the common law. Plaintiff’s position was that because it did not act egregiously, with gross negligence, or intentional misconduct, it satisfied the good faith requirement of CPLR 3408(f). 2014 NY Slip Op at *7. In deciding whether a lack of good faith could be measured by the common law standard of bad faith or by failure to comply with HAMP guidelines, the Court looked to the underlying purpose of CPLR 3408, which was to ensure that parties come together prepared to participate in a meaningful effort at the settlement conference to reach resolution. 2014 NY Slip Op at *9. As such, the Court rejected the Plaintiff’s argument, noting that to follow the bad faith standard would permit a party to act “negligently, but just short of deliberately.” The Court decided “good faith” “should be determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution.” Id. Using this standard, the Court found that Plaintiff failed to act in good faith as their conduct “evince[d] a disregard for the settlement negotiation process” and frustrated and delayed possible resolution, substantially increased the balance owed by the Defendant, and ultimately “created an atmosphere of disorder and confusion that rendered it impossible for [the Defendant]…to rely upon the veracity
of the grounds for the plaintiff’s repeated denials….” Id. The Court thereafter upheld sanctions against Plaintiff noting that “in the absence of a specifically authorized sanction or remedy in the statutory scheme, the courts must employ appropriate, permissible, and authorized remedies, tailored to the circumstances of each given case.” 2014 NY Slip Op at *10.
The Court decided “good faith” “should be determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a solution.” While the Sarmiento decision sets a standard by which the Courts could measure failures to act in “good faith,” there is still no true definition on record. Criteria used to evaluate the conduct of lenders remains, in large part, subjective and highly dependent on the totality of the facts. Lenders and their counsel should be vigilant while within the settlement conference arena. Reference: U.S. Bank National Association v. Sarmiento, 2014 N.Y. App. Div. LEXIS 5457; 2014 NY Slip Op 05533 (2d Dept. July 30, 2014) Natalie Grigg is an attorney with New York-based ALFN member Woods Oviatt Gilman, LLP. She can be reached at ngrigg@ woodsoviatt.com
ILLINOIS: SEVEN THINGS TO LOOK FOR IN RECENT ILLINOIS LEGISLATIVE AND CASE LAW UPDATES FROM FORECLOSURE TO NON-BANK SUBSIDIARIES by Matt Abad, Esq.
If you like change, then you have to love the current default mortgage servicing industry. Changes are coming at us from all fronts, from federal to state, from legislative to new cases defining or clarifying what we thought were the requirements. Illinois is no stranger to change as it is changing the mortgage foreclosure front on a break neck pace. Some of the changes are highlighted below.
STRICT FORECLOSURE From Case law to statute, strict foreclosure now has a statutory procedure for removing missed junior lienholders in a foreclosure. The governor signed SB 2703 into law and it is effective, as of August 26, 2014. As you may recall, junior lien holders were permissible parties in Illinois, not necessary parties, to the foreclosure.
Previously if the Plaintiff missed a junior lienholder, the lien survived the foreclosure. Illinois now joins several other states in allowing the plaintiff/holder to file a strict foreclosure action after the completion of a foreclosure to remove any omitted liens. In order for the omitted lienholderâ€™s lien or interest in the property to survive, the lienholder would have to pay the plaintiffâ€™s redemption amount. If the junior lienholder pays the redemption amount, the junior lienholder would become the owner of the property. CONDOMINIUM ASSOCIATIONS RIGHT TO RENT FORECLOSED PROPERTIES The FORCIBLE ENTRY AND DETAINER ACT was amended on August 18, 2014, HB 4782 became law with an effective date of 1/1/15. The Board of managers
may lease a unit to a bona fide tenant with a term starting within 8 months after the month the stay of possession expires. The lease term may not exceed 13 months. The Board may seek to extend the lease term for one or more additional terms, not to exceed 13 months per term. Given the current mess of PTFA, IMFL and Chicago PTFA requirements, this only complicates matters.
CASE LAW UPDATES
POST FORECLOSURE SALE ISSUES WITH COA LIENS Court held that COA liens are not extinguished by foreclosure if the plaintiff purchaser fails to pay the assessments coming due after the Sheriff Sale, even if the COA was made a party defendant in the foreclosure. Plaintiff purchasers at a foreclosure sale must actually start paying the COA assessments
after the foreclosure sale to avoid losing possession of the property, or being required to pay the full amount of unpaid assessments. NON-OBLIGORS LACK STANDING UNDER TILA Only “obligors” have the right to rescind under TILA. Plaintiff filed foreclosure after the Borrower’s death. Only the Trust (Record Owner) signed the mortgage. The Note and Mortgage each contained clauses specifically excluding the Record Owner from liability. The Court found the language of the note and mortgage specifically excluding the Record Owner from liability made it clear that the Record Owner was not the obligor and therefore not entitled to rescind. CONFUSION UNDER NE RULE 113, IS THE EXACT COPY OF THE NOTE AND ASSIGNMENT NEEDED? Although Supreme Court Rule 113 requires that a plaintiff attach the note and mortgage in its current form, the Court ruled that the Illinois Mortgage Foreclosure Law does not require the plaintiff to attach any specific documentation demonstrating ownership of the note and mortgage, or the right to foreclose, other than copy of mortgage and note attached. RESIDENTIAL OR NON-RESIDENTIAL? If any portion of the property is residential (owner occupied), there is a presumption against appointment of a receiver. Plaintiff filed foreclosure on a mixed use property (farm, home) and sought the appointment of a receiver as to the farm land. The lower court allowed the appointment and the borrowers appealed. The court looked to the definition of real estate as defined under 735 ILCS 5/15-1219. As a portion of the property was residential, all of the property is
residential, the borrowers have the presumptive right to possession. BANK NON-BANK SUBSIDIARIES ARE EXEMPT FROM THE ILLINOIS COLLECTION AGENCY ACT. Several months after confirmation of the Sheriff Sale the borrower filed a motion vacate and dismiss. The borrower asserted that the original plaintiff was not properly licensed/registered under the Illinois Collection Agency Act (“ICAA”) and therefore all orders entered
From Case law to statute, strict foreclosure now has a statutory procedure for removing missed junior lienholders in a foreclosure. The [IL] governor signed SB 2703 into law and it is effective, as of August 26, 2014. were void. The court granted plaintiff’s motion to dismiss the borrower’s motion. On appeal the borrower argued that the original plaintiff was not a subsidiary and that the plaintiff mortgage servicing activities were debt collection activities covered by the ICAA. In affirming, the Appellate Court took judicial notice of other Court’s written decisions supporting the conclusion that the original plaintiff was a subsidiary of the substituted bank. Matt Abad is an attorney with Illinois-based ALFN member Kluever & Platt, LLC. He can be reached at MAbad@klueverplatt.com
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LEARN MORE AT QPWBLAW.COM OR CONTACT US AT MBARKER@QPWBLAW.COM
DON’T MISS THESE HOT TOPICS IN DALLAS: CFPB UPDATES NON-JUDICIAL FORECLOSURE UPDATES LITIGATION HOT TOPICS JUDICIAL FORECLOSURE UPDATES FORECLOSURE MEDIATION & LOSS MITIGATION UPDATES VACANT/ABANDONED PROPERTY LEGISLATION & MOBILE HOME TITLE ISSUES AND A SPECIAL NETWORKING RECEPTION
MSRs ON THE MOVE SERVICER TRANSFERS, BUSINESS RECORDS AND THE CFPB: WHAT’S LURKING IN THE SHADOWS The CFPB recently expressed heightened concern due to the continuing high volume of servicing transfers. On August 19, 2014, the CFPB issued a “…compliance bulletin and policy guidance to servicers and subservicers…in light of potential risks to consumers that may arise in connection with transfer of mortgage servicing rights.” See, CFPB 2014-1 Bulletin, Compliance Bulletin and Policy Guidance: Mortgage Servicing Transfers. Just as investors buy and sell mortgages, servicers routinely changed during the life of a loan. When a service transfer occurs and the loan goes into foreclosure, the business records associated with the loan become important in order to prove in a court of law that the subject loan is in default and the default has not been cured.
Ironically, the CFPB’s prospective oversight of servicing transfers dovetails into potential issues faced by successor servicers in using prior servicers’ business records to document loan histories. This article examines this interplay between CFPB concerns, evidentiary requirements, and best practice solutions. Remember that the CFPB is committed to identifying and resolving risks to consumer, and they included servicing transfers as part of revisions to Regulation X and to the Real Estate Settlement Procedures Act, which were effective January 10, 2014. See, generally, 12 CFR 1024.33, 12 CFR 1024.38, and 12 CFR 1024.41. The CFPB spells out for servicers exactly what they want to see: use of “…policies and procedures that are reasonably designed to
by Michelle Gilbert, Esq.
achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications.” See, 12 CFR 1024.38(a), (b)(4).
THREE: The record was kept in the ordinary course of a regularly conducted business activity; and FOUR: It was a regular practice of that business to make such a record.
These policies will be reviewed in future examinations: transmittal of all necessary documents and information at loan onboarding; extensive planning and meeting before and after transfers in order to handle all data transmission and issues (i.e., proprietary modifications, document indexing, regulatory or settlement requirements); and data validation before and after transfers. It is noted that the CFPB, at this time, sees the handoff of loss mitigation efforts from one servicer to another as being problematic in the industry.
Although “it is not necessary to call the individual who prepared the document, the witness through whom a document is being offered must be able to show each of the
In a foreclosure context, servicers prove default under the mortgage and note through business records, which record the history of loan transactions. In most states and in federal court, laws or court rules governing admission of evidence define what can and cannot be admitted as evidence to prove a case. Hearsay is generally defined as a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted, and is not admitted into evidence unless the hearsay meets the requirements for an exception to hearsay. Business records may be admitted by a qualified witness or records custodian under the business records exception if all of the following are established: ONE: The record was made at or near the time of the event; TWO: The record was made by or from information transmitted by a person with knowledge;
THE CFPB, AT THIS TIME, SEES THE HAND-OFF OF LOSS MITIGATION EFFORTS FROM ONE SERVICER TO ANOTHER AS BEING PROBLEMATIC IN THE INDUSTRY.
requirements for establishing a proper foundation.” Mazine v. M&I Bank, 67 So.3d 1129, 1132 (Fla. 1st DCA 2011). A business records witness must establish personal knowledge of the matter recorded or that the information in the record is supplied by someone with knowledge. In a foreclosure case, typical records are the original note and endorsement(s)/allonge(s), original
recorded mortgage, assignment(s) of mortgage, payment history, and Notice of Intent to Accelerate letter (also known as a breach letter). Sometimes a pooling and servicing agreement may be required, if applicable, and a servicing power of attorney may be required, again if applicable. For years, loan servicers have been able to testify to prior loan servicers’ records if a service transfer occurred during the life of the subject loan. See, generally, WAMCO XXVIII, Ltd v. Integrated
IN THE CONTEXT OF FORECLOSING, BEST PRACTICE IS TO REVIEW CURRENT SERVICER’S ONBOARDING PROCESS OF PRIOR SERVICER’S RECORDS, REVIEW BUSINESS RECORDS EXCEPTION TO HEARSAY EVIDENCE TO BE SURE THAT ALL BUSINESS RECORDS QUALIFY UNDER THIS EXCEPTION, AND CONSULT AND TRAIN WITH COUNSEL PRIOR TO SIGNING AFFIDAVITS AND INTERROGATORIES, AND PRIOR TO TESTIFYING AT DEPOSITIONS AND TRIALS. Michelle Gilbert, Esq. Electronic Environments, Inc., 903 So.2d 230 (Fla. 2d DCA 2005); Beal Bank, SSB v. Eurich, 831 N.E. 2d 909 (Mass. 2005); Brawner v. Allstate Indemnity Co., 591 F.3d 984 (8th Cir. 2009). In WAMCO XXVIII, Ltd v. Integrated Electronic Environments, Inc., 903 So.2d 230 (Fla. 2d DCA 2005), the current loan servicer testified at trial about the prior loan servicer’s onboarding process and laid the foundation for the introduction of the payment history from the prior servicer, particularly
the payment history. Specifically, the witness testified that the prior payment history was put into the current servicer’s computer system on their behalf and was kept in the ordinary course of business. 903 So.2d at 233. The Defendants objected to the introduction of the payment histories on the basis that they were hearsay and therefore should not be admitted into evidence. The trial Court overruled this objection and admitted the payment histories into evidence, which decision was affirmed on appeal. See, Id. In Beal Bank, SSB v. Eurich, 831 N.E. 2d 909 (Mass. 2005), the Massachusetts Supreme Judicial Court wrote: Given the common practice of banks buying and selling loans, we conclude that it is normal business practice to maintain accurate business records regarding such loans and to provide them to those acquiring the loan. Therefore, the bank need not provide testimony from a witness with personal knowledge regarding the maintenance of the predecessors’ business records. The bank’s reliance on this type of record keeping by others renders the records the equivalent of the bank’s own records. To hold otherwise would severely impair the ability of assignees of debt to collect the debt due because the assignee’s business records of the debt are necessarily premised on the payment records of its predecessors. 831 N.E. 2d at 914. In Brawner v. Allstate Indemnity Co., 591 F.3d 984 (8th Cir. 2009), the federal appellate court upheld Arkansas precedent that “…a record created by a third party and integrated into another entity’s records is admissible as the record of the custodian entity, so long as the custodian entity relied upon the accuracy of the record and the
other requirements of Rule 803(6) are satisfied.” 591 F.3d at 987. Some courts are questioning this precedent in residential foreclosure cases. In Hunter v. Aurora, Case no. 1D12-6071 (Fla. 1st DCA 2014), the First District Court of Appeals examined the introduction of business records, specifically, printouts of an account balance report. To establish that it held and was authorized to enforce the note, the current servicer tried to introduce into evidence computer-generated records containing an accounts balance report and service notes log of the prior servicer. The witness testified about his knowledge of industry service transfers as a basis for testing about the instant case. The Appellate Court ruled that the witness was neither a current nor a former employee of the prior servicer, and lacked personal knowledge of the prior servicer’s record-keeping procedures. Absent such personal knowledge, he was unable to substantiate when the records were made, whether the information they contain derived from a person with knowledge, whether the prior servicer regularly made such records, or whether the records belonged to the prior servicer, and therefore the business records exception to the hearsay rule was not satisfied. Current servicers will have to testify to the reliability and accuracy of prior loan servicers’ records. Witnesses must have the ability to explain the onboarding process for the subject loan, and how they obtained prior servicer records. In addition, witnesses must be able to testify to how they know and can ensure that prior servicers’ records are trustworthy and accurate and made in the regular
course of business. In the context of foreclosing, best practice is to review current servicer’s onboarding process of prior servicer’s records, review business records exception to hearsay evidence to be sure that all business records qualify under this exception, and consult and train with counsel prior to signing affidavits and interrogatories, and prior to testifying at depositions and trials. In CFPB world, servicers are required to retrieve, in a timely manner: • A complete record of the borrower’s payment history, including with the transferor servicer and all prior servicers, and • All written information the borrower has provided to the transferor servicer and all prior servicers in connection with a loss mitigation application. See, 12 CFR 1024.40(b)(2). What impact a lack of complete histories and information will have on CFPB examinations remains to be seen. Servicers are required to meet certain procedural requirements for responding to notices of error and written information requests. Prior and current servicers must respond even if the notices and requests pertain to
loans they no longer service, for up to one year after the transfer. The CFPB warns that servicing transfers can result in violations of other federal consumer protection statutes: Fair Credit Reporting Act (FCRA), if inaccurate information is reported, See, 15 U.S.C. 1681s-2(a)(1)(A); Federal Debt Collectors Practices Act (FDCPA), if inaccurate information is used to collect a debt, See, 15 U.S.C. 1692d, 1692e, 1692f; or Unfair, Deceptive Abusive Acts or Practices Act (UDAAP), if inaccurate information is used to mislead consumer, or if anything at all is done that the CFPB deems violates UDAAP. The CFPB’s explicit guidance won’t help with servicing transfers pre-dating January 10, 2014, but it does illuminate where the CFPB will focus examinations and enforcement actions. The immediate concern is ensuring borrowers do not lose loss mitigation opportunities when servicers change. Will the CFPB dig deeper into servicer transfers and examine the impact on the prosecution of default remedies? Will they inject themselves into determining the fairness of the non-judicial or judicial default process, traditionally the jurisdiction of states? Only time will shine more light in the shadows.
ABOUT THE AUTHOR Michelle Garcia Gilbert, Esquire Managing Partner Gilbert Garcia Group, P.A. 2005 Pan Am Circle, Suite 110 Tampa, Florida 33607 Direct Office: 1-813-638-8920 Cell: 1-813-810-1414 Facsimile: 1-813-443-5089 firstname.lastname@example.org www.gilbertgrouplaw.com
IN A FLORIDA APPELATE CASE, LENDERS ARGUE THAT DISMISSAL OF A FIRST FORECLOSURE ACTION EFFECTIVELY DECELERATES THE DEMAND FOR FUTURE PRINCIPAL PAYMENTS, THUS LEAVING THE LENDER THE RIGHT TO FILE A NEW ACTION SEEKING AMOUNTS NO MORE THAN FIVE YEARS PAST-DUE, AND TO RE-ACCELERATE THE DEMAND FOR PAYMENTS THAT HAVE NOT YET BECOME DUE AS OF THE DATE OF THE NEW ACTION. by Rob Edwards, Esq.
The statute of limitations for mortgage foreclosure in Florida is five years. The right to foreclose typically arises upon a borrower’s failure to make a monthly installment payment on a promissory note the mortgage secures. Each missed payment constitutes a new default, entitling the lender, or note owner,1 to bring separate actions for each default, or one action for those amounts that are past-due as of the date of filing suit. In most cases, however, the lender elects a third option: to accelerate the debt, demanding in one action a judgment of foreclosure, not only for all amounts that are past-due, but also for principal payments scheduled to become due in the future through maturity of the loan.2 Defense counsel argue that acceleration puts “at issue” before the trial court all payments that were or might ever become due the lender under the note. Accordingly, if a foreclosure action is dismissed more than five years after it is filed, the statute of limitations will have expired on all amounts that might ever have become due. The lender would be forever precluded from re-filing for any missed payments—past, present or future—and the borrower would get a “free” house. The lenders’ counterargument is that dismissal of the first action effectively decelerates the demand for future principal payments, thus leaving the lender the right to file a new action seeking amounts no more than five years past-due, and to re-accelerate the demand for payments 1 The note owner or holder is the party entitled to enforce the note and is not always the original lender, but a party who purchased the note from the original lender, which typically acts through a servicing agent. Reference to “lender” is used throughout this article for the sake of convenience. 2 Prior to acceleration, most residential mortgages require the lender to provide the borrower with 30-days’ written notice and an opportunity to cure the default.
that have not yet become due as of the date of the new action. The borrower would get to keep payments more than five-years past due, but no more. On April 25, 2014, in a case styled, U.S. Bank National Association v. Bartram,3 Florida’s Fifth District Court of Appeal (“DCA”) ruled for the lender, but certified the following question to the Florida Supreme Court as a “matter of great public importance”:
for Mr. Bartram on appeal. The firm of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC represents the lender, U.S. Bank National Association. The Florida Supreme Court has given the American Legal and Financial Network (“ALFN”) special permission to file an “amicus curiae” or, “friend of the court,” appellate brief in support of U.S. Bank. Seven ALFN member Florida law firms have volunteered their time to work on the project.
Does acceleration of payments due under a note and mortgage
The central question is whether acceleration puts the entire balance, including future installment payments, at issue. In 1963, Florida’s Second District Court of Appeal answered the question decisively, and in the affirmative, in a case styled, Stadler v. Cherry Hill Developers, Inc.4 Therein, the Second DCA concluded “[t]here can be no doubt that the accelerated balance was at issue and that the prayer of the complaint sought, not one interest installment, but the entire amount due.” That was, or might have been, the end of the inquiry had the Florida Supreme Court not issued its 2005 opinion in the case styled, Singleton v. Greymar & Associates.5
THE CENTRAL QUESTION IS WHETHER ACCELERATION PUTS THE ENTIRE BALANCE, INCLUDING FUTURE INSTALLMENT PAYMENTS, AT ISSUE. -Rob Edwards in a foreclosure action that was dismissed . . . trigger application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on all payment defaults occurring subsequent to dismissal of the first foreclosure suit? On September 11, 2014, the Florida Supreme Court accepted jurisdiction. Former U.S. Attorney Kendall B. Coffey is lead counsel 3 2014).
140 So.3d 1007, 1014 (Fla. 5th DCA
In Singleton, the lender brought consecutive foreclosure actions alleging default on a note secured by a mortgage. The trial court dismissed the first action “with prejudice,” but entered judgment for the lender in the second action. Florida’s Fourth DCA affirmed, and the borrower appealed to the Florida Supreme Court citing a conflict between the Fourth DCA’s ruling (in Singleton) and the Second DCA’s ruling in Stadler. The Florida Supreme Court sided with the Fourth DCA, holding that, “[w]hile it is true that a foreclosure action 4 1963). 5
150 So.2d 468, 472 (Fla. 2nd DCA 882 So.2d 1004 (Fla. 2005).
and an acceleration of the balance due based upon the same default may bar a subsequent action on that default, an acceleration and foreclosure predicated upon subsequent and different defaults present a separate and distinct issue.”6 In support, the Florida Supreme Court cited Olympia Mortgage Corp. v. Pugh,7 quoting it as follows: “’We disagree [with Stadler] that the election to accelerate placed future installments at issue.’” Significantly, however, neither Stadler, nor Singleton, nor Olympia dealt directly with the statute of limitations. Each dealt with a legal doctrine called “res judicata,” a Latin phrase which means “the thing has already been adjudicated.” As a general rule, the doctrine of res judicata precludes civil litigants from suing each other more than once over the same thing. It is similar to “double jeopardy” in a criminal case. Notwithstanding the fact that none of the three cases dealt with the statute of limitations, lenders’ counsel maintain that the lynchpin to both res judicata and the statute of limitations is the same: whether acceleration puts the entire balance, including future installments, at issue. According to the Florida Supreme Court in Singleton, it does not. If it does not, then a dismissal of the first foreclosure action effects a deceleration of the demand for future payments, leaving the lender with the right to file a new action for amounts no more than five years past-due, and to re-accelerate the demand for payments that have not yet become due as of the date of the new filing. To date, no less than five federal District Courts in Florida and two 6 7 2000).
Singleton, 882 So.2d at 1007. 774 So.2d 863, 866 (Fla. 4th DCA
ALFN FIRMS PARTICIPATING IN THE BARTRAM AMICUS BRIEF LEAD AUTHOR Robert R. Edwards, Esq. Robertson, Anschutz & Schneid, P.L.
CONTRIBUTING AUTHORS Curtis Herbert, Esq. and Shaib Rios, Esq. Brock & Scott, PLLC
Elizabeth R. Wellborn, Esq. ERW Law | Law Offices of Elizabeth R. Wellborn, P.A.
Andrea Tromberg, Esq. Gladstone Law Group, P.A.
Michelle Gilbert, Esq. and Lizzy J. Waterhouse, Esq. Gilbert Garcia Group, P.A.
Richard McIver, Esq. and Melissa Giasi, Esq. Kass Shuler, P.A.
Robyn Katz, Esq. and Jane E. Bond, Esq. McCalla Raymer, LLC
AMICUS BRIEF COMMITTEE CHAIR James V. Noonan, Esq. Noonan & Lieberman, Ltd.
of Florida’s five District Courts of Appeal (including the 5th DCA in Bartram) have ruled for the lender in manners consistent with the foregoing analysis.8 Other arguments in support of the lender include: 1. Reversing Bartram would be contrary to legislative intent and public policy. Generally speaking, the purpose of the statute of limitations is to protect defendants from unfair surprise and stale claims.9 No reasonable borrower should be surprised that his lender expects to be repaid the loan, particularly where the lender has been endeavoring to get repaid for five or more years from the initial default. Even if that action is dismissed, the law as it stands allows plaintiff-lenders to re-file their suits, but only for amounts not more than five years past-due (in addition to future amounts due upon re-acceleration). By enacting a five year statute of limitations, the Florida legislature deemed “not stale” actions to foreclose premised upon payments missed within five years of the date on which an action is filed. Moreover, “equity abhors forfeiture.” In other words, depriving lenders of the opportunity to foreclose for what are often questionable “defenses”10 pursued throughout years of costly, protracted litigation and appeals flies in the face of good faith and fair dealing. Yet some defense counsel trumpet their ability to exploit the system to delay the 8 Florida state courts are not bound to decisions of the federal courts on matters of Florida law, such as is at issue in this case. 9 Raymond James Financial Services, Inc. v. Phillips, 126 So.3d 186, 191 (Fla. 2013) (citations to authority omitted). 10 A common borrower defense, for example, is that the lender failed to notify the borrower that he could assert defenses. Other defenses include, “I owe the money but I don’t know who to pay;” and, “the lender hasn’t posted a $100 bond to cover my legal costs in case I win this lawsuit.” Often after such defenses and related delay tactics exhaust themselves, serial bankruptcy filings ensue thereby staying the foreclosure action by operation of federal law.
inevitable, notwithstanding their obligation under the Florida Bar’s Creed of Professionalism “not [to] use any aspect of the litigation process . . . as a means . . . to unnecessarily prolong litigation . . . .” Public policy should not award such delay. In the vast majority of cases, it is not the lender who waits more than five years to bring suit; it is the borrower through counsel who effectively delays litigation for five years, then tries to invoke the statute of limitations to preclude a second action once the initial action is dismissed, for whatever reason. 2. Reversing Bartram would undermine the sanctity of contract. A home loan is a simple concept. Borrower says to lender, “[l]oan me the money to buy this house and I’ll pay you back with interest. If I can’t pay you back, you can sell the house and apply the proceeds to my debt.” The lender agrees and loans the borrower money. What is happening in Florida and throughout the nation, however, is that borrowers in default are refusing to give up the property to permit foreclosure and sale, opting instead to retain defense counsel to keep them in the property “rent free” for as long as possible and by almost any means and maneuvers possible. [See footnote 10 above]. Reversing Bartram would undermine the sanctity of contract by allowing a borrower in default to avoid his obligations under the note and mortgage if only he and his lawyer can stall the foreclosure five years and one day, and then get it dismissed once, however technical the ground for dismissal. 3. Reversing Bartram would have an adverse economic impact. If Bartram is reversed, the windfall to borrowers who don’t repay their loans will come at the expense of lenders and of
home-owning borrowers who pay their bills. It would discourage lenders from lending and from pursuing loss-mitigation efforts, lest the additional delay caused by their doing so bring them closer to that all-conclusive statute of limitations bar. Property values would likely decline as neighborhoods populated by owners who pay their bills are pockmarked by owners who don’t, but obtained their properties, ironically, by default. The latter would be in a position to undermine the market by offering their properties for sale at a price well below what their neighbors, who paid their mortgages, could offer for comparable properties. “Strategic defaults,” where borrowers intentionally default on the premise that they will ultimately benefit thereby (particularly common with investment properties) would also likely rise as the effect of reversing Bartram would further stack the deck in the borrowers’ favor, giving them yet one more way to avoid their financial commitments. Financial Armageddon might be a reach, but it is not beyond sight. The dominoes are aligned. In short, the Florida Supreme Court should answer the certified question in the negative and affirm the 5th DCA’s opinion in Bartram.
ABOUT THE AUTHOR Robert R. Edwards is General Counsel for Florida-based ALFN member, Robertson, Anschutz & Schneid, P.L. He can be reached at email@example.com
by eric dean, esq. In many instances, the borrower of a commercial real estate loan is a single purpose entity (“SPE”) that has title to the real property collateral and collects rents and deposits directly or through a property manager. In many of these loan transactions, the principals of the SPE are required to execute an unsecured guaranty. This article discusses the possible form such guarantees may take. The guaranty will normally take one of two forms (a) an unconditional and absolute guaranty of all SPE obligations and such additional covenants as may be included in the guaranty or (b) a “limited”, “bad boy” or “carve out” guaranty that limits the Guarantors obligations by the terms of the guaranty.
THE ABSOLUTE AND UNCONDITIONAL GUARANTY The absolute and unconditional guaranty is by its terms broad and makes the Guarantor responsible for all breaches of the SPE borrower as well as additional covenants included in the guaranty and depending on the state law that controls (such as California) may follow the “independence principle” and allow for independent enforcement of the guaranty before any action is taken as to enforcement of collateral rights for the entire outstanding loan balance. Other states (such as Nevada) require that the lender exercise its rights in the collateral before remedies are sought against a Guarantor. In all states, the Guarantor is credited with the net proceeds of the liquidation of the collateral at the time of foreclosure. As a result, the Guarantor who agrees to an unconditional and absolute guaranty is exposed to liability for all breaches by the SPE borrower and co-Guarantors. In states such as California that have adopted the independence principle, upon a breach, the Guarantor is subject to the potential of immediate collection efforts by the lender for the full loan balance including the potential of a motion for a prejudgment attachment of the non-exempt business and personal assets of the Guarantor
(in which the Guarantor’s assets may be seized or liened pending further order of the Court) or a summary judgment motion (in which the lender seeks a judgment on motion and without a trial).
THE CARVE OUT, “BAD BOY” OR LIMITED GUARANTY
A guaranty is defined and limited by its express contractual terms. The obligations and risks under a limited, bad boy or carve out guaranty (hereinafter “Carve Out Guaranty”) will, therefore, depend on the express terms of the guaranty The carve out guaranty may limit a Guarantor’s risks in one or more multiple respects including (1) limiting the amount of the guaranty regardless of the actual loss of the lender (2) limiting the term of the guaranty to a limited period of time (e.g. a set number of years) (3) limiting the events that constitute a default under the terms of the guaranty. (4) requiring the lender to give notice and a cure periods before a default can be declared by the lender or (4) limiting the amount that can be claimed by the lender to actual damages relating the default not the full loan balance. The events of default in a bad boy guaranty may vary depending on the concerns of both the lender and Guarantors:
A. False Financial Information and Documents
The Lender will typically include a provision in the guaranty that any misrepresentations by a borrower or any Guarantor will allow the lender in its sole option to declare a default and accelerate the loan balance. The Guarantors will want to limit this to only misrepresentations by the Guarantor signing the guaranty not the borrower or other Guarantors, only to material misstatements made within a stated time period and provide for a notice and cure period.
b. Environmental and Toxic Waste Conditions
The lender will typically want the right to declare a default and accelerate the loan balance for any environmental conditions discovered on the property. The Guarantors will want a provision requiring notice and a reasonable cure period and to exclude items commonly used on this type of property in this geographic area.
As a result, the Guarantor who agrees to an unconditional and absolute guaranty is exposed to liability for all breaches by the SPE borrower and co-Guarantors. Eric Dean, Esq.
c. Rents and Security Deposits
The lender typically includes a provision for the immediate turnover on demand of all rents and security deposits by existing tenants and prohibit the payment of advanced rent. The SPE borrower and Guarantors typically want a provision that does not require security deposits to be held or segregated and want to include a notice and cure period before such a demand can be made.
d. Waste or Damage to the Property
Waste and property damage are typically included in a Guaranty as events giving rise to a right to accelerate. The SPE borrower and Guarantors typically propose that a default can only be called for waste or damage to the collateral caused or contributed to by the SPE borrower or its agents. The SPE Borrower and Guarantors
want to include notice and an opportunity to cure before a default or acceleration can be declared for waste or damage to the collateral.
e. Taxes, Impositions and Insurance
The requirement that taxes and impositions remaining current is commonly included in a Carve out Guaranty. The SPE borrower and Guarantors typically request a notice and cure period and a provision that if a payment arrangement is in effect with a governmental agency as to taxes or there is a good faith dispute as to what taxes are owed, no default will be declared so long as the SPE borrower is current on payments under the tax plan and as to taxes that are not in dispute.
f. Impairment of SPE Borrower or Guarantors
A change in management of the SPE borrower or as to management of the collateral is typically designated as an event default. The SPE borrower and Guarantors should insist that a change in ownership or management of the SPE entity as the result of death or incapacity is not an event of default as long as the substitute manager or ownership or the remaining active membership meets certain qualifications, There also should be discussions as to whether a lawsuit or bankruptcy by one Guarantor allows the lender to declare a default of the SPE borrower or Guarantors.
g. A Lien Against the Collateral
This typically arises where a mechanics lien or lis pendens is recorded against the collateral and commonly dealt with by inclusion of a notice and cure period or a provision for the posting of a bond.
h. Failure to Maintain The Collateral
Lenders typically require a provision that a failure to maintain the collateral in a reasonable manner is a default. Proposed Guarantors want to limit these requirements as much as possible proving the SPE borrower with as much flexibility as possible especially where the concerns arise from the actions of a tenant or an adjoining property.
In addition to the contract claims referenced above, in certain instances the Guarantor may be exposed to tort damages for â€œbad actsâ€?. This would include such things as waste, fraud and diversion of income or assets of the SPE borrower that the lender has a security interest in. The significance of tort damages versus contract damages is twofold. First, in a tort claim in addition to its actual damage claims, the lender may seek a punitive damage award over and above the lenderâ€™s actual damages to punish the Guarantor for the bad acts. Secondly, if an intentional tort judgment is entered against the Guarantor the judgment may be found to be nondischargeable in bankruptcy court. Too often borrower and its counsel ignore the guaranty when negotiating the loan documents and assume that the terms of the draft
guaranty presented by the lender and its counsel are standard and non-negotiable. In fact, the guaranty is an essential part of the loan documentation and its terms should be negotiated wherever possible. In fact, efforts to limit the guaranty should start at the time the loan commitment is being negotiated in conjunction with the negotiation of the other loan terms. Once the loan closes, the managers and Guarantors need to understand the nature of the defaults the Guarantors are personally responsible for and avoid these defaults wherever possible. Diversion of property income or other loan collateral is particularly risky and opens the Guarantor up to significant potential exposure as well as the ire of the lender. It behooves the SPE borrower and Guarantor throughout the term of the Guaranty to maintain as good a relationship and as much credibility with the lender as possible. If a problem arises or is foreseen in the future, rather than attempt to hide this problem from the lender (which may in and of itself be a default under the loan documents) it may be beneficial for the Guarantor to approach the lender at the early stages of the problem and attempt a work out rather than risk the wrath of the lender when it later discovers the problem through other means.
ABOUT THE AUTHOR Eric Dean, Esq. Vice-Chair Commercial & Real Estate Group The Wolf Firm, A Law Corporation Attorneys to the Financial Services Community 2955 Main Street, 2nd Floor Irvine, CA 92614 949-720-9200 x5230 firstname.lastname@example.org www.wolffirm.com
on the books
SPECIAL PROCEDURE POWER-OF-SALE FORECLOSURES AND THE “TWO DISMISSAL” RULE IN WAKE OF THE MINGO DECISION
Does the “two dismissal” rule apply to power-of-sale foreclosures? The recent decision in Lifestore Bank v. Mingo Tribal Preservation Trust, 2014 WL 4071229 (19 August 2014) appears to apply a broad holding to the effect that the filing and subsequent voluntary dismissal of two power-of-sale foreclosure special proceeding cases under N.C.G.A. Ch. 45 invokes the “two dismissal rule” under N.C.R. Civ. P. 41(a)(1) such that the impact of the second dismissal is an adjudication on the merits,
thus barring a third power-of-sale foreclosure proceeding. The Court went on to hold that a subsequent judicial action seeking to collect on the promissory note and foreclose the property secured by the deed of trust was not barred by the two dismissal rule. With respect to the judicial foreclosure cause of action, the Court observed that a power-of-sale foreclosure is limited in scope and review as contrasted with a judicial foreclosure. It does
not result in a judgment against the borrower, involves a discreet set of findings the clerk of court must make, and is not subject to equitable defenses. Because not all of the relief to be obtained in a judicial foreclosure action could be sought in a power-of-sale proceeding, the two-dismissal rule is not implicated. Unfortunately, in its opinion, the Court in Mingo made the conclu-
sory and unsupported assertion that the Rules of Civil Procedure apply [without reservation] to special proceeding foreclosures, citing Phil Mech. Construction Co. v. Haywood, 72 N.C. App. 318, 320-21, 325 S.E.2d 1, 2-3 (1985), which does not support the proposition for which the case was cited. Also, the Court in Mingo ignored earlier decisions of the Court of Appeals holding that some of the Rules of Civil Procedure do not apply to power-of-sale foreclosures. Perhaps more importantly, the court in Mingo failed to analyze the facts of the two sets of successive power-of-sale foreclosure special proceedings: there is no discussion of whether each foreclosure was predicated on the same or different breach dates, missed periodic loan payments, or the amounts owed. Additionally, the Court failed to discuss existing case precedent dealing with causes of action based upon contracts calling for periodic payments. An additional argument against Mingo, also not discussed in the opinion, is the public policy implication of the holding. It is commonplace for troubled borrowers to be repeatedly placed into foreclosure, only to either reinstate or agree to a loan modification. This may happen many more than two times during the life of the typical troubled home loan. If the application of the two dismissal rule is applied in the broad brush manner the decision in Mingo would seem to require, this would act as a powerful disincentive to any lender agreeing to enter into more than one loan workout agreement once foreclosure was commenced. Moreover, many servicer are constrained by the terms of the Fannie Mae/Freddie Mac Single Family Uniform Instrument, Form 3034,
that provides the borrower (if he meets certain conditions) may have the right to reinstate the loan after the foreclosure proceeding has been commenced, and if the borrower reinstates the trustee may have no choice but to file a voluntary dismissal of the foreclosure proceeding. NOT ALL OF THE RULES OF CIVIL PROCEDURE APPLY TO SPECIAL PROCEEDING FORECLOSURES. It is clear from rulings by the N.C. Court of Appeals that there is a recognized distinction between judicial foreclosures, which are legal actions, and power-of-sale foreclosures, which are special proceedings. Phil Mech. Constr. Co., Inc. v. Haywood, 72 N.C. App. 318, 320-21, 325 S.E.2d 1, 3 (1985). “A foreclosure by action consists of a formal judicial proceeding; a foreclosure by power of sale, in contrast, is a “special proceeding” “whereby ‘[t]he parties have agreed to abandon the traditional foreclosure by judicial action in favor of a private contractual remedy to foreclose’”…. “Historically, foreclosure pursuant to a power of sale in a deed of trust ha[s] been a private contract remedy.” In re Bass, 217 N.C. App. at 247, 720 S.E.2d at 22. As the Court noted in Haywood, a power-of-sale foreclosure pursuant to 45-21.1 is a special proceeding and is commenced without formal summons and complaint and with no right to a jury trial, and is not an action “instituted and prosecuted according to the ordinary rules and provisions relative to actions at law or suits in equity.” Haywood, 72 N.C. App. at 321, 325 S.E.2d at 3. Rather, it “is a contractual arrangement in a deed of trust which confers upon the trustee or mortgagee the power to sell the real property
mortgaged, without a court order, in the event of a default.” In re Foreclosure of Real Property, 156 N.C. App. 477, 486, 577 S.E.2d 398, 405 (2003). A foreclosure by power-of-sale is “a private contractual remedy.” In the Matter of Burgess, 47 N.C. App. 599, 603, 267 S.E.2d 915, 918 (1980). And the power-of-sale provision “is a means of avoiding lengthy and costly foreclosures by action.” In re Watts, 38 N.C. App. 90, 94, 247 S.E.2d 427, 429 (1978). Instead of requiring formal pleadings and dispositive motions (e.g., summary judgment), and instead of a trial – all governed by the Rules of Civil Procedure – Ch. 45 provides for a hearing conducted by the Clerk of Superior Court wherein the Clerk must make six specific statutory findings, and if the findings are made the Clerk must enter an order authorizing the trustee to sell the secured property. N.C.G.S. §45-21.16(d). Moreover, the Court of Appeals has “repeatedly held that equitable defenses may not be raised in a hearing pursuant to [section] 45-21.16, but must instead be asserted in an action to enjoin the foreclosure sale under [N.C.G.S. §] 45-21.34.” In re Raynor, ___ N.C. App. ___, 748 S.E.2d 579, 583 (2013) (citing In re Fortesque, 75 N.C. app. 127, 131, 330 S.E.2d 219, 222 (1985)). North Carolina’s Rules of Civil Procedure, Rule 1, provides that “the Rules of Civil Procedure shall govern the procedure in the superior and district courts… in all actions and proceedings of a civil nature except when a differing procedure is prescribed by statute.” North Carolina’s power-of-sale foreclosure statute, Ch. 45, prescribes some differing procedures, as well as explicitly adopting some of the Rules of Civil Procedure.
Ch. 45 does not contain its own comprehensive section controlling the procedural aspects of a special proceeding power-of-sale foreclosure. For some common or routine procedural steps, such as dismissing a special proceeding, or seeking relief from an erroneous ruling of a clerk or judge, arguably one must rely on the Rules of Civil Procedure because Ch. 45 contains no provision for such action, whereas Rules 41 and 60, respectively, do. ASSUMING AT LEAST SOME OF THE RULES OF CIVIL PROCEDURE APPLY, THE “TWO DISMISSAL” RULE SHOULD NOT BE A BAR TO FILING THREE OR MORE FORECLOSURE SPECIAL PROCEEDINGS As relevant to this discussion, Rule 41(a) provides that the effect of a voluntary dismissal by the plaintiff, before the plaintiff rests his case “operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of this or any other state or the United States, an action based on or including the same claim.” The rule is couched in terms of actions taken by a plaintiff in a civil action to dismiss his case before resting. As already discussed, a special proceeding is not an action. And, in a special proceeding foreclosure, there is no plaintiff. Additionally, there is no trial proceeding during which the foreclosure trustee “rests” his case. There is only one hearing in the case, the one held before the clerk in order for the clerk to decide whether to authorize the sale. If it is at this hearing that the trustee “rests” his case, then how does this explain the common use of the voluntary dismissal procedure after the clerk has entered her order? If a trustee voluntarily dismisses the foreclosure pro-
ceeding after he has “rested” his lawsuits stemmed from the 28 case, then such a dismissal cannot June 1995 lease, both included be governed by Rule 41(a). the same parties, and both sought relief for defendants' breach of the In the coming months we will lease agreement” (id) they were learn whether the Clerks of Supe- not based on the same claim berior Court in North Carolina’s 100 cause “more than one claim may counties will decide whether Rule arise from a single contract and 41(a) applies to a special proceed- that a dismissal with prejudice of a ing foreclosure. If we presume suit based on a default with rethat at least some Clerks will despect to some payments does not cide Rule 41(a) is applicable, and bar future claims with respect to the “two-dismissal rule” applies, subsequent payments.” Id at 459, we need to be able to show how 583 S.E.2d at 725. the current foreclosure proceeding is based on a new breach, and Until we start to see rulings from differs substantively from the prior, the Clerks of Superior Court, we dismissed, foreclosure case(s). will not know the impact the Mingo We can take advantage of other decision will have on the third, or court decisions involving financial subsequent, foreclosure proceedtransactions that involve making ing against the same borrower and periodic payments over a fixed property. period of time. In Centura Bank v. Winters, 159 N.C. App. 456, 583 The practicalities of residential S.E.2d 723 (2003) the court, in foreclosure make it inevitable that ruling on a case involving a com- there will be situations where foremercial lease agreement, observed closure cases will have to be volthat “[t]he second element of the untarily dismissed by the trustee “two dismissal” rule provides that more than twice. Key to a viable the second suit must have been “ argument challenging a motion to ‘based on or including the same dismiss a foreclosure based on the claim’ ” as the first suit. City of “two dismissal” rule will be to enRaleigh v. College Campus Apart- sure that each newly filed forecloments, Inc., 94 N.C. app. 280, 282, sure proceeding is based on a new 380 S.E.2d 163, 165 (1989).” Cen- default, involving different missed tura Bank, 159 N.C. App. at 459, payments, a different amount due, 583 S.E.2d at 725. Even though and a different breach date than the court acknowledged that “both the prior foreclosure proceeding.
ABOUT THE AUTHOR Graham H. Kidner, Esq. Managing Partner - Complex Litigation Brock & Scott Phone: 704-768-0742 Fax: 855-258-8431 email@example.com 237 Davie Ave, Suite D Statesville, NC 28677
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Today the mortgage servicing environment is in constant flux, specifically in regards to the regulatory oversight we continue to see placed on mortgage servicers, their legal service providers, and other third party vendors. The ALFN Annual Conference, ANSWERS, is structured to be the regulatory compliance event of the year where we directly address these issues with all industry stakeholders, most importantly the ALFN’s members. Our conference has always been designed to assemble some of the most respected industry leaders in a casual retreat-like setting that allows for peer-to-peer collaboration, the exchange of ideas, discussion of best practices, and ultimately, ANSWERS. Over the past 12 years we’ve hosted this conference, and take pride in providing an event that is conducive to bringing people out of their everyday routine to relax in a beautiful resort location. This ultimately allows our attendees to get comfortable discussing tough
issues and possible solutions, and to network with each other during enjoyable and unique group activities and other conference events to build long term relationships. Jerry S. Azure, Senior Vice President of Mortgage Servicing Operations with BSI Financial Services, Inc., says, “ANSWERS is one of the few conferences I know I’m attending each year. The education is well-known for its “organic” approach, coming directly from the membership and representative of what’s happening on the front lines and delivered in real time. I can’t get that or the face time with some of our most vital partners anywhere else. As a servicer, I personally feel no other conference is designed around topics I deal with on a daily basis to assist me with my needs and challenges.” With the event consistently drawing over 300 attendees, this year was no exception in terms of firsts for ANSWERS. The support received from our members was overwhelming, and resulted in more sponsors than ever before.
In addition, attendance among mortgage servicers continues to grow. This year the ALFN was proud to welcome more of these individuals than at any other point in the 12 year history of ANSWERS. We also launched our newest publication for the ALFN’s Junior Professionals & Executives Group (JPEG) called, Picture the Future. This publication showcased 11 young leaders who were nominated and then ultimately selected by a board of 15 of their industry peers, which we announced during a private evening reception during the conference. Personally, I was very impressed by all of the young leaders that were nominated, and proud to have these individuals as members of the ALFN. It is my goal that ANSWERS continue to be recognized as the preferred forum for mortgage default servicing industry solutions. You will not want to miss what we have planned for ANSWERS 2015, so be sure and save the date to attend July 19-22, 2015 at the Hyatt Regency Lake Tahoe Resort & Spa in Incline Village, Nevada.
MATT BARTEL PRESIDENT & CEO, ALFN
6 ONE: SPEAKERS RICK SHARGA (AUCTION.COM), MARK PALIM (FANNIE MAE), AND BILL EMMONS (FEDERAL RESERVE BANK OF ST. LOUIS). TWO & THREE: ATTENDEES PARTICIPATE IN AN OFF-SITE PEER NETWORKING EVENT. FOUR: JOHN BRIGGS, JENNIE CRAIG, JANE WOLL, AND SCOTT GILLEN (STEWART LENDER SERVICES). FIVE: ALFN AVP CADE HOLLEMAN (FAR LEFT) AND PRESIDENT & CEO MATT BARTEL (FAR RIGHT) POSE WITH JPEG: PICTURE THE FUTURE WINNERS SIX: BERRY LAWS, JEFF FISHER & VIC DRAPER (PROVEST) SEVEN: DEBBIE FOSTER, ERICA FUJIMOTO, LIZ POTTER, AND MAJENICA SPRINGER EIGHT: TOP LEVEL DIAMOND SPONSOR, BUTLER & HOSCH
4 ONE: JIM & AND SUZAN DELOACH, MICHELLE MIERZWA (BULTER & HOSCH) TWO: BILL NEWLAND (SERVICELINK), LINDSEY LESCH (SERVICELINK), ROSE LITTLE BRAND THREE: MATT ABAD AND MORGAN SMITH (LOAN RESOLUTION CORP.) FOUR: ATTENDEES POSE DURING AN OFF-SITE PEER NETWORKING EVENT
CONGRATULATIONS 2014 PICTURE THE FUTURE WINNERS
This year at ANSWERS the association celebrated a first in its history: a publication and reception honoring a select group of young professionals honored for their commitment to the mortgage servicing industry and highlighting their achievements. A notable cross section of young professionals were nominated from the ALFN’s attorney/trustee, associate, and servicer membership categories. Our final list, less than half of those nominated, represent some of the best and brightest young professionals in the ALFN. I want to personally congratulate my fellow nominees and those who were selected for the inaugural list, JPEG: Picture the Future.
KELLY RAE GRING, ESQ. Glasser and Glasser, P.L.C. Crown Center, Suite 600 580 East Main Street Norfolk, VA 23510 Office: 757-625-6787 Direct: 804-359-0489 email@example.com glasserlaw.com
“OUR FINAL LIST . . . REPRESENT SOME OF THE BEST AND BRIGHTEST YOUNG PROFESSIONALS IN THE ALFN.” Winners were selected, anonymously, by a panel of industry veterans who looked at a number of factors ranging from time in the industry, commitment to the field and mortgage servicing industry, efforts to formulate and share best practices, and volunteer activities, among many others. Matt Bartel, President & CEO of the ALFN, introduced our 2014 JPEG (Junior Professionals & Executives Group) chairs, who were themselves winners, at a private reception during the ALFN Annual Leadership Conference, ANSWERS, this July 2023 at the Broadmoor in Colorado Springs, Colorado. Help us in congratulating those who were selected for the 2014 JPEG: Picture the Future list. Nominations for the 2015 list will open May 1, 2015. Nominees must be currently employed by an ALFN member and be younger than 39 or have fewer than five years of industry experience. Find complete details at alfnanswers.org.
JENNIFER DLUGOLECKI Director, Client Relations + Business Development Firefly Legal
AMANDA V. GREEN, ESQ. Vice President, National Operations LOGS Network
19150 South 88th Avenue Mokena, Illinois 60448 Office: 877-963-3534 ext. 2510 Direct: 631-764-5057 Jennifer.Dlugolecki@fireflylegal.com fireflylegal.com
2121 Waukegan Rd., Suite 300 Bannockburn, IL 60015 Office: 847-770-4223 Direct: 224-315-2350 avgreen@LOGS.com logs.com
J. P. SELLERS, ESQ. Associate Attorney Mackie Wolf Zientz & Mann, P.C.
LINDSEY L. PURDY, ESQ. Associate Attorney Klatt Law
Union Plaza, Suite 1560 124 West Capitol Little Rock, Arkansas 72201 Office: 501-218-8111 Direct: 501-218-8329 jpsellers@MWZMLaw.com MWZMLaw.com
The Midland Building 206 6th Avenue, Suite 1014 Des Moines, Iowa 50309 Office: 515-244-5440 firstname.lastname@example.org klatt-law.com
JOANNE LAFONTANT-DOOLEY, ESQ. Associate Attorney Klatt Law
KIMBERLY D. RAYBORN, ESQ. Associate Attorney Bankruptcy Litigation McCalla Raymer, LLC
Oklahoma Branch 5909 NW Expressway, Suite 274 Oklahoma City, OK 73132 Office: 405-470-1374 Jlafontant@klatt-law.com klatt-law.com
1544 Old Alabama Road Roswell, Georgia 30076 Phone: 678-281-6528 email@example.com mccallaraymer.com
JILL P. JENKINS, ESQ. Associate Attorney KML Law Group, P.C.
JONATHAN L. BRODER, ESQ. Founder & CEO MyMotionCalendar.com
701 Market Street, Suite 5000 Philadelphia, PA 19106 Office: 215-627-1322 Direct: 215-825-6360 firstname.lastname@example.org www.kmllawgroup.com
1001 W. Cypress Creek Road, Ste. 407 Ft. Lauderdale, FL 33309 Office: 954-772-2586 Direct: 954-772-2650 ext. 302 email@example.com mymotioncalendar.com
JONATHAN E. GREEN, ESQ. Shareholder Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
DENISE E. CARLON, ESQ. Associate Attorney Bankruptcy Department Zucker, Goldberg & Ackerman LLC
Monarch Plaza, Suite 1600 3414 Peachtree Road, N.E. Atlanta, GA 30326 Direct: 404-221-6518 firstname.lastname@example.org www.bakerdonelson.com
200 Sheffield Street, Suite 101 Mountainside, N.J. 07092 Office: 908-233-8500 ext. 113 Direct: 908-588-9682 email@example.com zuckergoldberg.com
YOU ASK & ALFN ANSWERS.
BANKRUPTCY: RULE 3002.1 QUESTIONS RECEIVED DURING THE ON-AIR Q&A
IS THERE ANY PENDING LEGISLATION OR COURT CASES REGARDING HELOC LOANS AND THE CHALLENGES AROUND THE FILING OF THE PAYMENT CHANGE NOTICES FOR THAT CATEGORY OF HOME LOANS?
- Servicing Professional
The information provided herein is for general discussion related to ALFN webinars and should not be considered legal advice or opinion on the particular matter discussed. If you would like to discuss these or any other issues further, feel free to contact the practitioners directly.
KRISTIN: In the 9th Circuit, we have not had any case law relating to the application of 3002.1. Because none of the numerous issues arising from 3002.1 have been litigated, we have to make our recommendations on what we think that individual judges/jurisdictions will want. As a result, we are following the letter of the law. If this means filing a payment change every month because it changes every month, we do so. Unfortunately, no one has wanted to go to the expense of taking these issues up to a higher court. Also, California has had minimal litigation relating to 3002.1. As such, the opportunities to challenge the law have not availed themselves.
DAVID: Shortly after the adoption of the Rule, we were asked by a client with a large volume of HELOC loans to file motions in our various districts seeking approval to relax or waive the payment change filing requirement. We had mixed results, though we were largely successful. In Indiana, the Southern District eventually adopted a local rule that essentially allows HELOC creditors a mechanism to opt out (absent objections). In the Northern District, we typically worked out arrangements on a case-by-case basis with the Debtor and the Trustee to file one notice every six months. In Kentucky, where all post-petition mortgage payments are direct, we had similar motions granted in the Western District. In the Eastern District, which has generally been very strict in enforcing 3002.1 (notices of payment change or post-petition fees must be filed even after relief is granted), the Court granted a few of our motions but only after the Debtor consented on the record. Where the debtor objected or did not respond, our motions were denied. In districts where the loan is paid direct, common sense seems to suggest that as long as statements are being sent and the payments are calculated according to the contract, the notice should be superfluous. In Trustee pay districts, the notices are important, but we found that from an administrative perspective, many of the Trustees appreciated the six month approach as it minimized their need to adjust their records monthly. KRISTIN A. ZILBERSTEIN, ESQ. SENIOR ASSOCIATE MCCARTHY HOLTHUS LLP KZILBERSTEIN@MCCARTHYHOLTHUS.COM
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DAVID C. NALLEY, ESQ. MANAGING ATTORNEY - BANKRUPTCY REISENFELD & ASSOCIATES, LPA, LLC DAVID.NALLEY@RSLEGAL.COM
ALFN BANKRUPTCY WEBINAR: RULE 3002.1 ORGANIZED BY THE ALFN BANKRUPTCY PRACTICE GROUP
Kristin A. Zilberstein, Esq., Senior Associate, McCarthy Holthus; David C. Nalley, Esq., Managing Attorney - Bankruptcy, Reisenfeld & Associates; Michael J. McCormick, Esq., Senior Partner, Bankruptcy, McCalla Raymer. Archive available via members-only portal at alfn.org
MICHAEL J. MCCORMICK PROVIDES AN IN-DEPTH LOOK AT RULE 3002.1 BASED OFF PRACTITIONER QUESTIONS ASKED DURING A WEBINAR. Michael J. McCormick is senior partner in the Bankruptcy Department of Georgia-based ALFN member McCalla Raymer. He can be reached at firstname.lastname@example.org
MICHAEL: As mortgage servicers are aware, effective December 1, 2011, notice of payment changes during the course of a Chapter 13 case (if the property is the debtor’s principal residence) must be provided to the debtor, the debtor’s attorney and the trustee at least 21 days before the new payment amount is due. In addition, the notice shall be filed as a supplemental claim using the new official Form B10 (Supplement 1) instead of on the docket. There is no accommodation or exception for home equity lines of credit (HELOCs) or other types of loans where the payment changes on a monthly basis (or otherwise frequently) despite vociferous objection and comments by servicers, attorneys and scholars during the public comment period for the bankruptcy rules changes that ran between August, 2009 and February, 2010. One of the questions, during the webinar was whether there were any local rules or case decisions that created exceptions for full compliance with Rule 3002.1 for HELOCs. We have not litigated the issue nor are we aware of any local rules,
standing orders, or case law that prevents compliance in full with Rule 3002.1 in Alabama, Georgia, or Florida. However, we are aware of a case in Michigan and we like the reasoning of Judge Dales in In re Pillow, Case 11-11688 (W.D. Mich. 2013). In Pillow, the court granted the motion of Fifth Third Bank (“the Bank”) to relax the reporting requirements under Rule 3002.1 using Rule 9006. In reaching its decision, the court was swayed by the clerical and legal expenses associated with the preparation, filing and serving of monthly payment change notices for “nominal or negative adjustments” and determined that the notice requirements for HELOCs under Rule 3002.1 imposed a unique burden. It was this unique burden that the Bank listed as its “cause” for relaxing the 21-day deadline imposed by Rule 3002.1. Rule 3002.1 was not a rule listed in the exceptions under Rule 9006(b) (2) or Rule 9006(b)(3). After no objection by the debtor, trustee, or UST, the court entered its order relaxing the reporting requirements, concluding the Bank’s motion
established cause to modify the twenty-one day period in this case under Rule 9006(b). Nevertheless, to ensure the debtor has ample opportunity to address the impact of minor payment changes before she concludes her case, the Bank will be required file payment change notices on a quarterly basis during the final year of the debtor’s plan. As an update, the Bankruptcy Rules Committee considered a proposal recently to allow mortgage servicers to transmit an electronic file to the trustee once every six months to “settle” the net adjustments over that period since the amount of each monthly payment change is usually less than $5.00. The Committee opted instead for adding language to Rule 3002.1 that will allow each jurisdiction to pass a local rule as it sees fit creating an exception to the reporting requirements for HELOCs. This proposed change has been put in the “bullpen” for now while the other rule changes, including those intended to give effect to the proposed model Chapter 13 plan, are considered.
SAVE THE DATE
ALFN ADVOCACY DAY ASSOCIATE. ADVOCATE. ACHIEVE. Join ALFN in Washington, D.C. to speak with legislators and regulators face-to-face as we continue the dialogue on GSE reform, FDCPA, audit, compliance and other issues impacting your business, bottom line and clients.
APRIL 13-14, 2015 REGISTRATION COMING SOON AT ALFNEVENTS.ORG
THE 2015 ALFN MEDIA KIT AVAILABLE NOVEMBER 15 FIND IT AT ALFN.ORG/MEDIA_KIT
ONLY ONE MORTGAGE SERVICING ASSOCIATION HAS THE RIGHT PLATFORMS TO REACH THE RIGHT PEOPLE. AND FOR THE RIGHT PRICE, TOO.
YOU’VE GOT QUESTIONS. WE’VE GOT ANSWERS.