Archive for Foreclosure

5th Cir. Holds Threat of Lawsuit to Collect Partially Time-Barred Debt Did Not Violate FDCPA

In a split decision, the U.S. Court of Appeals for the Fifth Circuit recently decided that attorneys representing a condominium association did not violate the federal Fair Debt Collection Practices Act by threatening non-judicial foreclosure on debt that was partially but not fully time barred.

A copy of the opinion in Mahmoud v. De Moss Owners Ass’n Inc. is available at:  Link to Opinion.

The plaintiffs owned a condominium in Houston, Texas. They sued the condominium ownership, its management company and its collection lawyers concerning their efforts to collect assessments and other charges under the association’s declaration and related documents.

At the trial court level, the plaintiffs alleged common law claims of breach of contract, wrongful foreclosure, negligent misrepresentation, breach of fiduciary duty and violations of the FDCPA, the Texas Fair Debt Collection Practices Act and the Texas Deceptive Trade Practices Act. The district court granted the defendants’ motion for summary judgment and the plaintiffs appealed.  The Fifth Circuit affirmed the lower court ruling.

By way of background, the assessments stretched back several years. Arguably, some but not all of the debt was beyond the Texas four-year statute of limitations.

The Court was not swayed by the collection law firm’s argument that it was exempt from liability under section 1692f(6) of the FDCPA because it was merely enforcing security interests. The Court relied on its earlier decision in Kaltenbach v. Richards, which held that once a party satisfies the general definition of debt collector, it satisfies the definition for all purposes even when attempting to foreclose on security interests. Here, the Court concluded, there was “no serious contention” that the law firm was not a debt collector.

Turning to the 1692g claim, the collection law firm had sent a two-page letter referencing the debt. The plaintiffs claimed the validation letter “overshadowed” their FDCPA rights because it demanded that the defendants “needed to pay ‘on or before the expiration of thirty (30) days from and after” the date of the letter “or nonjudicial foreclosure would occur.”  However, section 1692g provides that a debtor has 30 days from receipt of a validation letter to make a written dispute which freezes collection activity until the debt collector provides verification. The plaintiffs alleged that the law firm’s demand for payment within 30 days of the date of the verification letter “overshadowed” the longer period provided by section 1692g, which is focused on the date the debtor receives the validation letter.

The Court disagreed, concluding that a “fair interpretation” of the letter demonstrates the plaintiffs were not deprived of their validation rights because the longer 30-day validation language was listed not once, but three times, and in bold type.

Next, the Court addressed the plaintiffs’ claim that the law firm threatened a lawsuit on time-barred debt.  Examining the Texas Property Code, the Court found that condominium assessments were “covenants running with the land” and that the unpaid assessments and other charges constituted a real property lien. The Court noted there was no Texas case law to answer what limitations period covered such real property liens, but assumed, to resolve this case, that the four-year general statute would bar a small portion of the overall debt.

Whether the letter violated the FDCPA for threatening a suit on a time-barred debt provided a more compelling argument. Just last year in Daugherty v. Convergent Outsourcing, Inc., the Fifth Circuit ruled the FDCPA was violated when a letter merely offered to “settle” a time-barred debt, but did not otherwise threaten a lawsuit.

The Court found the facts here contained important distinctions from Daugherty. First, unlike Daugherty, only a portion of the debt was alleged to be time-barred, less than 25 percent. Second, in Daugherty there was no dispute that the limitations period applicable to the entire debt had expired, but here it was uncertain whether the limitations period had run. Finally, because the letter in Daugherty did not disclose that a payment made after the debt was time barred could restart the limitations period, the letter arguably would mislead consumers in taking an action adverse to their interests.

Here, however, the plaintiffs were not misled because the condominium was ultimately foreclosed for the amount that was demanded.

In reaching its conclusion, the Court went to great lengths to stress the nature of the debt (i.e. real estate debt) and hinted that it might not rule favorably if the debt were of another type, like a credit card.

Maryland High Court Holds Utility Company Did Not Have Super Lien on Real Estate

The Court of Appeals of Maryland, the state’s highest court, recently held that a real estate development company’s recording of a declaration for utility infrastructure expenses did not create a lien on the referenced real estate, and instead it should have followed the Maryland Contract Lien Act procedures to create a lien and establish its priority for the delinquent assessments purportedly owed by a mortgagee.

A copy of the opinion in Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC is available at:  Link to Opinion.

A real estate development company purchased land for a 330-lot residential development and assumed responsibility for the construction of water and sewer facilities. The developer recorded a declaration stating that the expense of creating that infrastructure would be passed on to the future homeowners in the form of an annual assessment with the future homeowner’s liability secured by a lien granted by the homeowner on the homeowner’s property.

The homeowners were to pay the utility company for the expenses in 23 equal installments of $700 for each lot on the first of each year following conveyance of the lot to the homeowner. The declaration stated that by accepting a deed to a lot, the owner of the lot agreed to pay the annual expenses and granted the utility company a lien to secure the payment of those expenses, but the declaration did not state the value of the lien it sought to create.  The declaration further stated that the utility company could foreclose under the Maryland Contract Lien Act, Maryland Code, Real Property Article (“RP”), §14-201 et seq., if the lot owner failed to pay.

The developer and homebuilders were explicitly excluded from any obligation to pay the annual assessment while they owned the lots.  The developer recorded the declaration with a copy of the lots in the development but did not pay recordation and transfer taxes, which would have amounted to approximately $60,000.

The water and sewer infrastructure was installed and the developer contracted with a construction company to build homes on the lots. A copy of the declaration was attached to the lot purchase agreement and incorporated by reference and was disclosed to each home purchaser as part of the sales transaction.

A man purchased a lot with a home, and the recorded deed stated that it was made “subject to all easements, covenants, and restrictions of record.” When the man failed to pay the assessments, the utility company recorded two statements of lien stating that the property was covered by the declaration and subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.

The man then sold the property to a woman who financed the purchase with a loan secured by a deed of trust. In the deed conveying the property to her, the man stated that he had not encumbered the property, but he failed to reference the declaration or the statements of lien and the deed did not state that it was “subject to all easements, covenants and restrictions of record” as the previous deed had. Thus, the property was sold with the statements of lien not being paid, cleared, or released.

The woman refinanced the loan on the property and the mortgage lender conducted a two-party title search that included only the woman and the man from whom she had purchased the property. Again, when the loan closed, the statements of lien were not paid, cleared, or released.  The new loan was secured by a new deed of trust in favor of the mortgage lender, who sold the loan to a bank that later sold it to the current mortgagee.

The statements of lien expired under RP § 14–204(c) (requiring foreclosure within three years from recordation) without being paid or foreclosed. Several years later, the utility company filed for foreclosure against the property for the unpaid water and sewer charges based on the declaration. The mortgagee filed a motion to dismiss the foreclosure and a declaratory judgment action. The utility voluntarily dismissed the foreclosure lawsuit.

In the declaratory judgment action, the trial court held that the declaration was a covenant running with the land and was a “super lien” in favor of the utility that had priority over the lender’s deed of trust because it was recorded before the first homeowner purchased the lot. The trial court rejected the mortgagee’s argument that the declaration would then be invalid under the rule against perpetuities, faulted the mortgagee for not discovering the declaration in a more comprehensive title search, and ruled that the failure to pay recordation and transfer taxes with the filing of the declaration did not affect its validity.  The trial court implicitly rejected the mortgagee’s argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the declaration.

The mortgagee appealed, and the Court of Special Appeals affirmed the trial court’s ruling. The Maryland Court of Appeals granted the mortgagee’s petition for certiorari.

The Maryland Court of Appeals rejected the developer’s and utility’s argument that simply recording the declaration established a lien, explaining that doing so was inconsistent with the language and legislative history of the Maryland Contract Lien Act. The Court explained that a lien could not be created on the property by the declaration without following the “coherent framework” and procedures established by the act.

The Court of Appeals held that the declaration, as a covenant that runs with the land, fell within the statutory definition of “contract” under RP §14-201(b)(1) of the Maryland Contract Lien Act, but that the declaration did not itself create an enforceable lien without following the act’s procedures.

The Court held that, in order to create and enforce an actual lien under RP §14-202(a), the declaration should have expressly provided for the creation of a lien and expressly described the party in whose favor the lien was created and the property against which the lien was imposed. The developer and utility failed to follow those procedures.

Additionally, the Court noted, instead of paying the recordation or transfer taxes that would have established a lien, the developer and utility treated the declaration as a notice instrument that merely authorized the establishment of a lien pursuant to the Maryland Contract Lien Act.

The failure to follow the Maryland Contract Lien Act’s procedures continued when the utility pursued foreclosure. The Court of Appeals held that, in order to establish the lien under RP §14-203(a)-(b), written notice should have been given within two years of the breach of the declaration to the party whose property was subject to the lien and that notice should have included certain information specified in the statute. The Court also noted that the utility company, when seeking to enforce the lien, should have then foreclosed on it just as it would a deed of trust, as prescribed by RP § 14-204.

The Court of Appeals rejected both the developer’s and utility’s argument that Maryland common law and the Maryland Rules of foreclosure supported their separate theories that the declaration created a lien because they had misread both.  The Court also rejected the developer’s and utility’s analogizing of their responsibility for constructing the infrastructure to the responsibility of a governmental entity who does the same and receives lien priority because neither the developer nor the utility were governmental entities.

Accordingly, the judgment of the Court of Special Appeals was reversed, and the action was remanded with instructions to remand it to the trial court with instructions to vacate the declaratory judgment previously entered and enter a new declaratory judgment consistent with the opinion and assessing costs to be paid by the developer and utility.

9th Cir. Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute

The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar’s prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada’s superpriority lien provision and invalidated a homeowners association foreclosure sale that purported to extinguish Freddie Mac’s interest in the property.

A copy of the opinion in Berezovsky v. Bank of America is available at:  Link to Opinion.

In 2013, an investor purchased a home at a homeowners association foreclosure sale for $10,500 and recorded a deed in his name. The purchaser argued that Nevada’s superpriority lien provision, Nev. Rev. Stat. § 116.3116, allowed the association to sell the home to him free and clear of any other liens.  The Federal Home Loan Mortgage Corporation (“Freddie Mac”) claimed it had a priority interest in the purchased home.

As you may recall, Freddie Mac is under Federal Housing Finance Agency conservatorship, meaning the FHFA temporarily owned and controlled Freddie Mac’s assets.  See 12 U.S.C. § 4617(b)(2)(A)(i) (FHFA acquired Freddie Mac’s “rights, titles, powers, and privileges … with respect to [its] assets” for the life of the conservatorship).

Protection of the FHFA’s assets is provided for in 12 U.S.C. § 4617(j)(3), a provision of the Housing and Economic Recovery Act of 2008 (HERA). Also known as the Federal Foreclosure Bar, 12 U.S.C. § 4617(j)(3)’s prohibition on nonconsensual foreclosure protected the FHFA’s conservatorship assets.  (“No property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FHFA], nor shall any involuntary lien attach to the property of the [FHFA].”).

The purchaser sued to quiet title in Nevada state court.  Freddie Mac intervened and counterclaimed for the property’s title, removed the case to federal district court, and moved for summary judgment.  The FHFA joined Freddie Mac’s counterclaim.  Together the federal entities argued that the purchaser did not acquire “clean title” in the home because the Federal Foreclosure Bar preempted Nevada law, and invalidated any purported extinguishment of Freddie Mac’s interest through the association foreclosure sale.  The trial court ruled in favor of the federal entities.

On appeal, the purchaser argued that the Federal Foreclosure Bar did not apply in this case, and even if it did, Freddie Mac lacked an enforceable property interest due to a split of the note and the security instrument.

First, the purchaser argued that the Federal Foreclosure Bar did not apply to private homeowners association foreclosures generally, because it protected the FHFA’s property only from state and local tax liens.

To determine whether the Federal Foreclosure Bar applied to private foreclosures, the Ninth Circuit began by examining the HERA statute’s structure and plain language.  The section titled “Property protection” did not expressly use the word “taxes.”  12 U.S.C. § 4617(j)(3).  The statute did not limit “foreclosure” to a subset of foreclosure types.  Id.

In the Ninth Circuit’s view, a plain reading of the statute revealed that the Federal Foreclosure Bar was not focused on or limited to tax liens, and therefore the provision should apply to any property for which the FHFA served as conservator and immunized such property from any foreclosure without FHFA consent.  12 U.S.C. § 4617(j)(1), (3).

The purchaser citied F.D.I.C. v. McFarland, 243 F.3d 876 (5th Cir. 2001) as support for his argument that the Federal Foreclosure Bar applied only to tax liens.

In McFarland, the Fifth Circuit interpreted 12 U.S.C. § 1825(b)(2), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that governed Federal Deposit Insurance Corporation receiverships.  The FIRREA provision is worded identically to HERA’s Federal Foreclosure Bar provision except that the word “Corporation” appeared in the former where “Agency” appeared in the latter.  Compare 12 U.S.C. § 1825(b)(2) with 12 U.S.C. § 4617(j)(3).  The court in McFarland declined to extend § 1825(b)(2) to private foreclosures.

The Ninth Circuit, however, distinguished McFarland and reasoned that the statutory framework in that case was different from the framework surrounding the Federal Foreclosure Bar.  Specifically, the Ninth Circuit found that unlike § 1825, § 4617(j) did not include any language limiting its general applicability provision to taxes alone.

Therefore, the Ninth Circuit held that the language of the Federal Foreclosure Bar cannot be fairly read as limited to tax liens.

The purchaser then argued that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and the FHFA implicitly consented to the foreclosure when they took no action to stop the sale.

The Ninth Circuit rejected this argument because the plain language of the Federal Foreclosure Bar did not require the Agency to actively resist foreclosure.  See 12 U.S.C. § 4617(j)(3) (flatly providing that “[n]o property of the Agency shall be subject to … foreclosure, or sale without the consent of the Agency”).

Thus, the Court concluded that the Federal Foreclosure Bar applied generally to private association foreclosures and specifically to this foreclosure sale.

Next, the Ninth Circuit addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law, which had triggered multiple lawsuits in Nevada.

As you may recall, “[t]he Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail.”  Gonzales v. Rich, 545 U.S. 1, 29 (2005).  Preemption arises when “compliance with both federal and state regulations is a physical impossibility, or … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  Bank of Am. v. City & Cty. Of S.F., 309 F.3d 551, 558 (9th Cir. 2002).

First, the Ninth Circuit determined that the Federal Foreclosure Bar did not demonstrate clear and manifest intent to preempt Nevada’s superpriority lien provision through an express preemption clause.  Nevertheless, the Court found that the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada’s superiority lien law.

Nevada law allowed homeowners association foreclosures under the circumstances present in this case to automatically extinguish a mortgagee’s property interest without the mortgagee’s consent.  See Nev. Rev. Stat. § 116.3116.  Because the Federal Foreclosure Bar prohibited foreclosures on FHFA property without consent, in the Ninth Circuit’s view, Nevada’s law was an obstacle to Congress’s clear and manifest goal of protecting the FHFA’s assets in the face of multiple potential threats, including threats arising from state foreclosure law.

Therefore, as the two statutes impliedly conflict, the Ninth Circuit held that the Federal Foreclosure Bar preempted the Nevada superpriority lien provision.

In addition, the purchaser argued that even if the Federal Foreclosure Bar applied to this case and was preemptive, Freddie Mac did not hold an enforceable property interest for “splitting” the note from the deed of trust, and failing to present sufficient evidence to establish its interest for purposes of summary judgment.

The Ninth Circuit rejected these arguments because Nevada law recognized that, in an agency relationship, a note holder remained a secured creditor with a property interest in the collateral even if the recorded deed of trust named only the owner’s agent.  Although the recorded deed of trust here omitted Freddie Mac’s name, Freddie Mac’s property interest is valid and enforceable under Nevada law.

Moreover, Freddie Mac introduced evidence showing that it acquired the loan secured by the subject property in 2007, and that the beneficiary of the deed of trust was Freddie Mac’s authorized loan servicer.

The Appellate Court concluded that the trial court correctly found Freddie Mac’s priority property interest enforceable under Nevada law. Accordingly, the Ninth Circuit affirmed the trial court’s summary judgment in favor of Freddie Mac and the FHFA.

8th Cir. Holds Deficiency Claim Time Barred Despite Intervening Bankruptcy

The U.S. Court of Appeal for the Eighth Circuit recently affirmed a bankruptcy court’s rejection of a proof of claim filed by a creditor where the claim was based upon a debt which was time barred by the creditor’s failure to comply with the applicable state law deadline for pursuing a deficiency judgment following a non-judicial foreclosure.

A copy of the opinion in Melikian Enterprises, LLLP v. McCormick is available at:  Link to Opinion.

The underlying debt at issue arose from a commercial loan from the creditor to a company owned by the debtors which was secured by a mortgage against certain real property located in Arizona.  The debtors were guarantors on the loan from the creditor.  Following the default on the loan, the creditor filed an action in the state court of Arizona to recover the balance of the note or alternatively, the deficiency balance due following a trustee’s sale of the property.

Shortly after the creditor filed the state court action, the debtors filed a petition for relief pursuant to chapter 11 of the Bankruptcy Code – effectively preventing the creditor from affecting service on the debtors in that action.  The state court dismissed the creditor’s complaint for its failure to perfect service.  In a parallel non-judicial foreclosure, the trustee’s sale of the property proceeded on Oct. 9, 2012.

The creditor then proceeded to file a proof of claim in the debtors’ chapter 11 proceeding based upon their guarantee of the loan to which the debtors objected because it allegedly failed to reflect the market value of the property.  The chapter 11 plan was approved and the bankruptcy case closed as fully administered on Nov. 14, 2013.  Due to various delays, the hearing on the debtors’ objection to the proof of claim was not heard until several months after the close of the bankruptcy matter in April 2014.

In support of their objection, the debtors argued that the creditor’s claim was barred by Arizona law because the creditor failed to maintain a deficiency action within 90 days of the trustee’s sale. In opposition to the objection, the creditor argued that the Arizona law was preempted by various provisions of the Bankruptcy Code.

The bankruptcy court determined that automatic stay provisions of Section 362 of the Bankruptcy Code impliedly preempted the state law concerning the 90-day deadline — by preventing the creditor from perfecting service on the debtors — but, Section 108(c) provided for the resumption of any state limitations following the expiration of the automatic stay. Under this legal framework, the bankruptcy court determined that the creditor was required to proceed with its deficiency action per Arizona state law no later than Dec. 16, 2013 which it failed to do so.  Thus, the bankruptcy court concluded that the creditor’s claim was barred.

The creditor appealed to the district court which upheld the bankruptcy court’s ruling, and subsequently, this appeal was brought to the Eighth Circuit.

On appeal the creditor raised four primary arguments: (1) the Bankruptcy Code broadly preempts the Arizona law such that the creditor was not required to comply with the statutory deadlines due to the bankruptcy; (2) the mere filing of its state court action was sufficient to comply with the Arizona law; (3) the bankruptcy court had exclusive jurisdiction over the claim which obviate the need for a separate state court action for the deficiency; and (4) the limitations imposed by the Arizona law never lapsed.

The Eighth Circuit began its analysis by explaining the extent of implied preemption of state law by the Bankruptcy Code.

As explained by the Court, preemption may be “implied, for example, when federal and state laws directly conflict, when state law stands as an obstacle to accomplishing the purpose of federal law, or when federal law is so pervasive that it reflects an intent to occupy the regulatory field.” Symens v. SmithKline Beecham Corp., 152 F.3d 1050, 1053 (8th Cir. 1998).  Absent clear congressional intent, there is a general presumption against implied preemption.

The creditor argued that the mandatory language of Section 502 of the Bankruptcy Code concerning the adjudication of claims precluded the need to comply with the Arizona time limits for deficiency judgments.

Section 502 states that the bankruptcy court “shall determine the amount of [a] claim” following a hearing. The Court disagreed, and explained that the right to a claim arises in the first instance from the underlying substantive law creating the debtor’s obligation, and thus, the bankruptcy courts must “consult state law in determining the validity of most claims.”  Travelers Cas. & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 450 (2007).

The applicable Arizona statute provides that “[W]ithin ninety days after the date of [a trustee’s sale], an action may be maintained to recover a deficiency judgment] against any person” obligated — directly or indirectly — under the contract secured by the deed of trust.  Ariz. Rev. Stat. s. 33-814(A) (“Section 33-814”).  If no action is brought within that timeline the statute provides that “the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.” Id. at s. 33-814(D).  Per the courts in Arizona, this provision has been deemed a statute of repose.

The Court determined that Section 502 did not impliedly preempt Section 33-814 of the Arizona Statute. Consequently, the Eighth Circuit held, the bankruptcy court correctly looked to the Arizona statute to determine the validity of the creditor’s proof of claim.

Similarly, the Court rejected the creditor’s argument that Section 362 of the Bankruptcy Code impliedly preempted Section 33-814 because it made it impossible to comply with the 90-day deadline in Section 33-814. The Court declined to directly address whether or not the automatic stay of Section 362 preempted state law, because it held that Section 108 of the Bankruptcy Code governed this situation.

As you may recall, Section 108 of the Bankruptcy Code provides that if a non-bankruptcy law fixes a time period for commencing a civil action against a debtor “and such period has not expired before the date of the filing of the petition” then the period does not expire until the later of: (1) the end of the period provided by the non-bankruptcy law or (2) “30 days after notice of termination or expiration of the stay under Section 363.”

Pursuant to Section 33-814, the 90-day period at hand expired on Jan. 7, 2013 – i.e. 90 days after the trustee’s sale on Oct. 9, 2012. However, the automatic stay in the bankruptcy did not expire until Nov. 14, 2013 when the chapter 11 case was closed.  Accordingly, the Court found that the bankruptcy court correctly concluded that pursuant to Section 108(c)(2) the operative deadline for the creditor to seek a deficiency judgment under Section 33-814 lapsed on Dec. 16, 2013.

The Eighth Circuit quickly rejected the creditor’s argument that a motion filed by a co-creditor after the close of the chapter 11 was effective in extending the automatic stay.  As explained by the Court, these types of motions in reopening a chapter 11 by creditors is typically ministerial in nature and lacks independent legal significance.

The Court found no merit to the creditor’s argument that its state court complaint was sufficient to comply with Section 33-814.  In reliance on a state court opinion applying Section 33-814, the Court agreed that the state court action would have been sufficient but determined that the creditor’s failure to continue or preserve its state court action after the trustee’s sale was dispositive.  See Valley Nat’l Bank of Ariz. v. Kohlhase, 897 P.2d 738, 741 (Ariz. Ct. App. 1995).

The creditor’s argument that the bankruptcy court had exclusive jurisdiction was also unavailing.  As explained by the Eighth Circuit, regardless of the exclusive jurisdiction provided to the bankruptcy court to determine the validity of the claim under Section 502 of the Bankruptcy Code, it was still required pursuant to the Bankruptcy Code and Supreme Court precedent to apply the underlying state law framework — which the Eighth Circuit held the bankruptcy court correctly did in this matter.

Accordingly, the Eighth Circuit affirmed the bankruptcy court’s rejection of the creditor’s claim.

Illinois App. Court (1st Dist) Holds 7-Month Delay in Paying Overdue HOA Assessments May Not Extinguish HOA Lien

The Appellate Court of Illinois, First District, recently reversed a trial court order granting summary judgment in favor of a mortgage servicer and against a condominium association (COA) holding that a material question of fact existed regarding whether the servicer promptly paid assessments that accrued after the foreclosure sale, as required under section 9(g)(3) of the Illinois Condominium Property Act to extinguish the COA’s lien for pre-foreclosure sale assessments.

A copy of the opinion in Country Club Estates Condominium Association v. Bayview Loan Servicing, LLC is available at:  Link to Opinion.

In November 2014, a mortgage servicer purchased a condominium unit through a foreclosure sale.  At this time the unit had almost $14,000 in unpaid monthly assessments to the COA. Initially, the servicer refused to pay any assessments, past or present.

In April 2015, the COA sued the servicer under the Illinois Forcible Entry and Detainer Act (735 ILCS 5/9-101 et seq.) seeking possession and $18,659.26 in unpaid assessments.  Almost two months after the COA filed the lawsuit, and seven months after the servicer purchased the unit, the servicer paid the amount of assessments that accrued after the foreclosure sale.

The servicer filed a summary judgment motion arguing that under section 9(g)(3) of the Illinois Condominium Property Act (765 ILCS 605/9(g)), paying the assessments owed after the foreclosure sale extinguished the COA’s lien for pre-foreclosure sale assessments.

The trial court granted partial summary judgment to the servicer as to the pre-sale assessments and certified this issue for appeal.  This appeal followed.

On appeal, the COA argued that under 1010 Lake Shore Association v. Deutsche Bank National Trust Co., 2015 IL 118372, a foreclosure buyer must promptly pay current assessments to extinguish an association’s lien for any outstanding pre-sale assessments.

As you may recall, Section 9(g) of the Illinois Condominium Property Act states that:

“(1) If any unit owner shall fail or refuse to make any payment of the common expenses or the amount of any unpaid fine when due, the amount thereof shall constitute a lien on the interest of the unit owner in the property.

(3) The purchaser of a condominium unit at a judicial foreclosure sale shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale. Such payment confirms the extinguishment of any lien created pursuant to paragraph (1) or (2) of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses.” 765 ILCS 605/9(g).

The Appellate Court observed that a foreclosure buyer’s duty to pay monthly assessments clearly starts on “the first day of the month after the date of the judicial foreclosure sale.” Id. However, section 9(g)(3) does not contain a time limit to extinguish an association’s lien. Thus, the Appellate Court looked beyond the statute’s language to determine the legislature’s intent.

The Appellate Court noted that section 9(g)’s legislative history does not contain any debate regarding the extinguishment clause.  However, on separate occasions the legislature expressed concern about the difficulties condominium associations face when a unit owner does not pay their assessments and the unit then goes into foreclosure. The Appellate Court found these concerns “pertinent to the interpretation of section 9(g)(3).” For example, in this case the former unit owner had not paid assessments since 2011, “thus exposing the Association’s other unit owners to the obligation to pay more than their share of common expenses to cover the shortfall.”

The servicer argued that paying post-foreclosure assessments, regardless of the timing, extinguished the COA’s lien for pre-sale delinquent assessments. The Appellate Court disagreed because the Illinois Supreme Court in the 1010 Lake Shore case held that “[t]he first sentence of section 9(g)(3) plainly requires a foreclosure sale purchaser to pay common expense assessments beginning in the month following the foreclosure sale. The second sentence provides an incentive for prompt payment of those postforeclosure sale assessments.”

The servicer further argued that even with no time limit to extinguish an association’s lien, the statute still incentivizes prompt payment of assessments when they become due, because foreclosure buyers normally want to quickly unencumber and sell their new asset.

However, the Appellate Court concluded that the servicer’s seven-month delay in paying the assessments in this case belied this argument.

The servicer also argued that 1010 Lake Shore is distinguishable because the foreclosure buyer there did not pay any assessments making the court’s “prompt payment” discussion dictum. The Appellate Court rejected this distinction because it cannot ignore the Supreme Court’s dicta.  See Exelon Corp. v. Department of Revenue, 234 Ill. 2d 266, 282 (2009)

Thus, the Appellate Court held that “to extinguish an association’s lien for pre-foreclosure-sale assessments, a foreclosure buyer must make ‘prompt’ payment of current assessments.”  As a mortgage foreclosure is a proceeding in equity, “whether a particular payment is ‘prompt’ is fact-based, taking the particular circumstances and the equities of the situation into account.”

The Appellate Court next examined whether the servicer promptly paid the assessments here. The Appellate Court found that absent any extenuating circumstances, assessments should be tendered the month after purchase because to “permit indefinite delay on the part of foreclosure buyers would impose unacceptable hardship upon the buyer’s fellow unit owners, who in many instances are already losing thousands of dollars in unpaid assessments as a result of the unit’s foreclosure.”

The Appellate Court rejected the servicer’s argument that this case is analogous to Pembrook Condominium Association-One v. North Shore Trust & Savings, 2013 IL App (2d) 130288, and 5510 Sheridan Road Condominium Association v. U.S. Bank, 2017 IL App (1st) 160279, where a foreclosure buyer’s payment of post-sale assessments extinguished the condominium association’s lien for presale assessments.

In the Appellate Court’s view, Pembrook did not hold that a foreclosure buyer that fails to promptly pay post-foreclosure assessments may still claim the benefit of section 9(g)(3). Instead, the Pembrook court held only that payment made about a month and a half after the first payment became due was sufficient under the circumstances.  Further, the Court noted, there is “a material distinction between a seven-week delay and a seven-month delay in payment.”

The Sheridan Road court held that the phrase “the first day of the month after the date of the judicial foreclosure sale” set the time when the obligation to pay post-sale assessments begins. Id. However, this did not set a payment deadline.  Thus, the Appellate Court found Sheridan Road distinguishable and held “that payment must be prompt under the circumstances (though not necessarily strictly by the first of the month after the sale) to extinguish an association’s lien.”

Moreover, to the extent that Pembrook or Sheridan Road impose no time deadline on foreclosure buyers, the Appellate Court rejected that conclusion because it is inconsistent with 1010 Lake Shore.

The servicer next argued that even if 1010 Lake Shore requires prompt payment, it should not apply retroactively to this case. The Appellate Court disagreed finding that “1010 Lake Shore did not create a requirement of promptness; it merely articulated the requirement that was already implicit in the purpose underlying section 9(g)(3).”

Finally, the Appellate Court considered whether the servicer promptly paid the assessments here.  However, the record did not contain the reasons why the servicer may have delayed payment so the Appellate Court could not say that the servicer’s “tender was not prompt as a matter of law.”

Accordingly, the Appellate Court reversed the trial court’s summary judgment order and remanded the case for further proceedings consistent with its opinion.

1st Cir. Rejects Borrowers’ Attempt to Void Loan Using Massachusetts’s ‘Obsolete Mortgage’ Statute

The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of a lawsuit by borrowers seeking to enjoin a mortgage foreclosure sale, holding that (a) the original lender’s nominee, MERS, could validly assign the mortgage without holding beneficial title to the underlying property and that borrowers do not have standing to challenge a mortgage assignment based on an alleged violation of a trust’s pooling and servicing agreement; and (b) the mortgage was not void under Massachusetts’s “obsolete mortgage” statute, under which a mortgage becomes obsolete and is automatically discharged five years after the expiration of the stated term or maturity date of the mortgage, as acceleration of the note did not trigger the subject limitations period.

A copy of the opinion in Hayden v. HSBC Bank USA, National Association is available at:  Link to Opinion.

A husband and wife took out an $800,000 purchase money loan secured by a mortgage on their home in 2007. The mortgage identified Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee, acting solely as nominee for the lender and the lender’s successors and assigns. The mortgage also gave MERS power of sale over the property in the event of default.

MERS assigned the loan in 2008 to a new mortgagee. The borrowers defaulted on the loan in 2008. In 2010, the mortgagee “reassigned the mortgage to itself as trustee for [another trust].”

The borrowers “filed several bankruptcy petitions and requested injunctive relief, thereby delaying foreclosure until 2016.”   The mortgagee gave the borrowers notice of a foreclosure sale in June 2016 and, in response, the borrowers sued the mortgagee and the loan servicer to enjoin the sale.

The trial court denied the borrowers’ request for a preliminary injunction and granted the defendants’ motion to dismiss for failure to state a claim, holding that the mortgagee had the right to foreclose under Massachusetts law and the mortgage was not rendered “obsolete” or void under Massachusetts law. Mass. Gen. Laws ch. 260, § 33.  The borrowers appealed to the First Circuit.

On appeal, the First Circuit rejected the borrowers’ argument that the mortgage could not foreclose because the first assignment by MERS was invalid, finding that the trial court correctly rejected this argument because “this claim is foreclosed by precedent, which holds that MERS can validly assign a mortgage without holding beneficial title to the underlying property, … and that borrowers do not have standing to challenge a mortgage assignment based on an alleged violation of a trust’s pooling and servicing agreement.”

The Court also concluded that the district court “properly dismissed [the borrowers’] obsolete mortgage claim, which has no basis in the plain text of the statute or in precedent. Under Massachusetts’s obsolete mortgage statute … a mortgage becomes obsolete and is automatically discharged five years after the expiration of the stated term or maturity date of the mortgage.”

The Court reasoned that there was no textual support in the statute at issue — Mass. Gen. Laws ch. 260, § 33 — for the borrowers’ argument “that the acceleration of the maturity date of a note affects the five-year limitations period for the related mortgage.” It found inapposite a 2015 Massachusetts Supreme Judicial Court decision because “it makes no mention of the impact of the accelerated note on the obsolete mortgage statute’s limitations period.”

Accordingly, the trial court’s ruling was summarily affirmed.

Fla. App. Court (5th DCA) Reverses Foreclosure Judgment That Excluded Interest, Escrow

The District Court of Appeal of the State of Florida, Fifth District, recently reversed final judgment of foreclosure entered in favor of a mortgagee that omitted interest and escrow amounts due, and remanded to the trial court to modify judgment to include these amounts.

In so ruling, the 5th DCA determined that the mortgagee met its burden to provide the trial court with figures necessary to calculate the interest and escrow amounts through its witnesses’ testimony and evidence.

The Court further reversed the trial court’s dismissal of a homeowner’s association as a party to the foreclosure action, concluding that neither the HOA nor the mortgagee had presented competent evidence to establish lien priority.

A copy of the opinion in Fogarty v. Nationstar Mortgage, LLC is available at:  Link to Opinion.

In April 2013, a mortgage servicer mailed a notice of default to the borrowers, alleging a default, and requiring immediate payment of $124,082.20 to cure the default.   After the borrowers failed to cure the default, the mortgagee filed a foreclosure complaint seeking the principal amount due on the note and mortgage, along with interest from the date of default, late charges, costs of collection, reasonable attorney’s fees, and other expenses as permitted by the mortgage.

The complaint also included the subject property’s homeowner’s association as a defendant to the foreclosure proceedings, asserting that any interest it may claim in the mortgaged property “is subordinate, junior, and inferior to the lien of [mortgagee’s] mortgage.”

In its answer and affirmative defenses, the HOA among other things sought judgment proving that its interest was superior to that of the mortgagee, citing its recorded declaration to support its purported entitlement to expenses and assessments.  The borrowers also answered and asserted lack of standing, failure to satisfy a condition precedent, and lack of certification as affirmative defenses.

At the close of trial, the borrowers moved for involuntary dismissal, arguing that the payment history was improperly admitted, and that the mortgagee had failed to establish any amounts due for interest and escrow.  The HOA also moved for involuntary dismissal, arguing that the mortgagee failed to present any evidence that its claim was superior to the HOA’s.

Despite the mortgagee’s request for judicial notice of the recorded general warranty deed and recorded mortgage to prove its priority over the HOA’s lien, the trial court entered judgment in favor of the mortgagee and against the borrowers only in the amount of the principal amount, and dismissed the HOA from the action, holding that “their lien is superior to the mortgage and they are not foreclosed.”

The borrowers appealed the final judgment of foreclosure, and the mortgagee cross-appealed the award that was limited to only principal, and the dismissal of the HOA as a superior lienholder.

The 5th DCA first considered the mortgagee’s argument that the court erred by omitting interest and escrow from the judgment.

At trial, the mortgagee’s witness testified to the fixed interest rate and unpaid principal for determination of the amount of interest due, and provided the court with the figures necessary to determine the escrow amount.  The Appellate Court concluded that these figures were supported by the payment history, and the note, which combined with the witnesses’ testimony, provided the trial court with competent, substantial evidence to easily calculate the interest and escrow amounts.

Accordingly, the 5th DCA reversed and remanded the foreclosure judgment for the trial court to modify final judgment to include interest and escrow amounts.

As to the trial court’s determination that the HOA’s lien was superior to that of the mortgagee, the Appellate Court reversed dismissal of the HOA, citing a lack of competent evidence to establish which party had a superior interest and remanded for the trial court to reinstate the HOA as a party to the litigation, and allowing either party to request an evidentiary hearing to resolve the issue.

DC Cir. Confirms Mediation Not Required Prior to Judicial Foreclosure

The U.S. Court of Appeals for the District of Columbia Circuit recently affirmed the dismissal of a borrower’s counterclaims and the entry of summary judgment in the mortgagee’s favor, holding that the borrower failed to state claims (a) for declaratory and injunctive relief for allegedly failing to properly foreclose a deed of trust; (b) for supposedly violating the federal Fair Debt Collection Practices Act (FDCPA);  (c) quiet title;  (d) for supposedly violating the Fair Credit Reporting Act (FCRA);  and (e) civil conspiracy.

In so ruling, the Court held that District of Columbia law clearly does not require mediation prior to judicial foreclosure.

A copy of the opinion in Bank of New York Mellon v. Henderson is available at:  Link to Opinion.

The borrower took out a loan in 2003 secured by a deed of trust on his home in Washington, D.C., but defaulted in 2012. The loan was assigned to the bank in 2013 by the original lender.  The mortgagee filed a foreclosure action in the Superior Court for the District of Columbia, but the case was removed to federal court by the Internal Revenue Service, which was named as a party.

The borrower raised a number of counterclaims against the mortgagee.  The trial court granted summary judgment in the mortgagee’s favor and dismissed the borrower’s counterclaims challenging the validity of the assignment of the loan and deed of trust. The borrower appealed.

The D.C. Circuit first addressed whether summary judgment was appropriate, finding that “[b]ecause [the borrower] provided no evidence to indicate the Bank is not the rightful holder of the Note, there is no dispute of material fact that the Bank holds the Note.”  The Appellate Court held that, because “D.C. law allows the holder of a note to enforce the deed of trust by judicial foreclosure, … the district court properly entered summary judgment for judicial foreclosure.”

The Court then rejected the borrower’s argument that the mortgagee violated the National Housing Act, 12 U.S.C. § 1701x(c)(5), by not providing him with “notice of the ‘availability of homeownership counseling’” and also violated D.C. law by not providing him with “notice of his right to ‘foreclosure mediation.’”

The D.C. Circuit reasoned that the mortgagee’s law firm provided the borrower with a letter “advising him of his default and of a telephone number to call for homeownership counseling,” and the borrower “does not explain why this was insufficient notice.”

The Court also disagreed that D.C. law “requires mediation prior to judicial foreclosure.”

The D.C. Circuit refused to address the borrower’s argument that the mortgagee violated the pooling and servicing and trust agreements for the loan at issue, because “even a pro se complainant must plead factual matter that permits the court to infer more than the mere possibility of misconduct.”

The Court next rejected the borrower’s FDCPA claim because that statute only applies to debt collectors, not creditors like the mortgagee here collecting its own debt.

The D.C. Circuit also rejected the borrower’s quiet title claim because his argument that the mortgagee “has no right to the property … is contradicted by the Deed of Trust signed by [the borrower].”

The Court affirmed the trial court’s dismissal of the FCRA claim on the basis that “there is no private cause of action for the alleged violations,” because the borrower did challenge the ruling in his brief and, therefore, “forfeited his claim.”

Finally, the D.C. Circuit found that the trial court correctly dismissed the civil conspiracy claim because the borrower “failed to meet the heightened pleading requirements for fraud” by not providing any evidence supporting an inference that an illegal agreement existed among the alleged conspirators, the bank, “unknown new investors,” and the mortgagee’s attorney, to defraud the borrower.

Accordingly, the trial court’s judgment in favor of the mortgagee was affirmed.

Illinois App. Court (3rd Dist) Holds Third Refiled Foreclosure Not Barred

The Appellate Court of Illinois, Third District, recently rejected a mortgagor’s argument that the Illinois single refiling rule barred a third attempt at foreclosure where the intervening foreclosure complaint was premised upon an alleged default under a loan modification agreement.

A copy of the opinion in Wells Fargo Bank, N.A. v. Norris is available at:  Link to Opinion.

The convoluted procedural and factual history for the mortgage loan at issue in this matter can be boiled down to the following:

The defendant mortgagor (who was not a signatory to the promissory note) and his ex-spouse defaulted under the terms of the subject loan for failing to make payments in 2008.

Following their default, the mortgagee filed its first foreclosure action premised upon the 2008 default, but later voluntarily dismissed the first foreclosure based upon the belief that a loan modification agreement had been reached.  Subsequently, the mortgagee filed its second foreclosure action which alleged a 2009 default of the subject loan as modified by the loan modification agreement.

The mortgagee later voluntarily dismissed the second foreclosure action – although not clear in the opinion – presumptively because the loan modification agreement was unenforceable.

Finally, the mortgagee filed its third foreclosure action alleging the same 2008 default as the first foreclosure action and no loan modification.

In the third foreclosure action, the mortgagor filed an answer and affirmative defenses in which he argued that the action was barred by the doctrines of res judicata and/or collateral estoppel due to the prior two dismissals.  Later, the mortgagor modified his defense to that the Illinois single refiling rule (735 ILCS 5/13-217) precluded the third foreclosure action.

Following briefing and oral arguments, the trial court granted summary judgment and judgment of foreclosure in the mortgagee’s favor.  The mortgagor filed his appeal, arguing in pertinent part that the single refiling rule bars the third foreclosure action.

As you may recall, Section 5/13-217 of the Illinois Code of Civil Procedure, also known as the single refiling rule, is a saving provision that grants a plaintiff the absolute right to refile his complaint within one year after a voluntary dismissal – and other non-dispositive events, e.g. dismissal for want of prosecution – or within the remaining period of limitations, whichever is greater. 735 ICLS 5/13-217; see also, Timberlake v. Illini Hospital, 175 Ill. 2d 159, 163 (Ill. 1997).

The purpose of Section 13-217 is to facilitate the hearing of cases on their merits, but has been held by the Illinois Supreme Court to be limited to only one refiling of a claim regardless of whether or not the statute of limitations has expired.  See Richter v. Prairie Farms Dairy, Inc., 2016 IL 119518, P 44.

According to the Appellate Court, the determination as to whether a case is a refiling of a prior complaint is determined based upon the principles of res judicata.  Illinois courts apply the transaction test for res judicata purposes in which separate claims will be considered to be the same cause of action if both claims arise from a single group of operative facts, regardless of whether they assert different theories of relief.  River Park, Inc. v. City of Highland Park, 184 Ill. 2d 290, 310-11 (Ill. 1998).

Applying the transactional test to the first, second and third foreclosure complaints, the Appellate Court determined that the third foreclosure was a refiling of the first foreclosure, and that the second foreclosure was not a re-filing of the first foreclosure.

In distinguishing the first and second foreclosures, the Appellate Court specifically noted that the first foreclosure was based upon a violation of the original mortgage and a 2008 default, but the second foreclosure was based upon a breach of the original mortgage and loan modification agreement with a 2009 default.

The Appellate Court also noted that the first and second foreclosures alleged different principal loan balances.  The Court concluded that it was clear the second foreclosure did not involve the same cause of action as the first foreclosure for purposes of the refiling rule, and therefore, the third foreclosure complaint was the first and only refiling of the same cause of action as the first foreclosure complaint.

Accordingly, the Appellate Court affirmed the lower court’s summary judgment and judgment of foreclosure in favor of the lender.

5th Cir. Holds Mortgage Fraud Debts Not Dischargeable

The U.S. Court of Appeals for the Fifth Circuit recently held that debts arising from a scheme to deprive mortgagees of surplus foreclosure sale proceeds were non-dischargeable, affirming the bankruptcy court’s judgment against the debtor in consolidated adversary proceedings filed by various lenders that held first mortgage liens.

A copy of the opinion in Cowin v. Countrywide Home Loans, Inc. is available at:  Link to Opinion.

The debtor orchestrated a mortgage fraud scheme by which a straw buyer acquired property subject to a first mortgage at a condominium association’s foreclosure sale. The buyer then entered into a “tax-transfer loan agreement” with two Texas companies controlled by the debtor, the purpose of which was to pay delinquent property taxes on the property. Upon paying the taxes, the tax-transfer lender received a tax-transfer lien against the property.”

The “purchaser/borrower” would then promptly default and not make payments as required under the tax-transfer loan agreement, and the debtor “would instruct the trustee of the tax-transfer deed to foreclose on the property. From the foreclosure sale proceeds, the trustee took a $1,000 fee, paid the private lenders’ tax transfer liens in full, and delivered the excess proceeds to the purchaser/borrower.”

The deeds of trust transferring title omitted language requiring the trustee to distribute surplus funds to junior lienholders according to their priority before paying the “Grantor” as required by Texas law.

A bank that was deprived of surplus sale proceeds from foreclosures on three properties sued the debtor and co-conspirators.  The debtor filed a Chapter 11 bankruptcy in February 2010, which was dismissed slightly more than a month later.  He filed a second bankruptcy case about three months later.

In November 2010, several other banks filed adversary proceedings seeking a determination of non-dischargeability, which were consolidated by the bankruptcy court.

In January 2012, the bankruptcy court dismissed the debtor’s bankruptcy case, finding that he had “abused the [bankruptcy] process by filing two Chapter 11 petitions within the last 2 years [without filing] a plan and disclosure statement.” However, by stipulation of the parties the bankruptcy court reserved jurisdiction to adjudicate the pending adversary proceeding.

The trial court case went to trial in January 2013, but settled mid-way through. The settlement provided that if the debtor failed to pay the bank $500,000 by a date certain, the bank would be entitled to seek relief from the automatic stay for entry of an agreed judgment.

In February 2013, before the bankruptcy court “issued findings and conclusions” in the consolidated adversary proceeding, the debtor filed a Chapter 7 bankruptcy, which was assigned to the same bankruptcy judge.

“The bankruptcy court lifted the automatic stay so the federal district court could enter agreed judgment, which was entered on April 24, 2013. The following day, the bankruptcy court issued its opinion in the adversary proceeding, concluding that the debtor “was liable to the … Plaintiffs for the aggregate amount of the excess proceeds, and that his debts arising from the state-law violations were nondischargeable.”

On May 16, 2013, the debtor filed a suggestion of bankruptcy “formally notifying the court of his Chapter 7 filing.” Shortly thereafter, on May 29, 2013, the bankruptcy court entered final judgment against the debtor in the adversary proceeding in the amount of $268,477.78. In addition, “[t]he bankruptcy court emphasized that its determination of nondischargeability, although rendered in adversary proceedings brought during [debtor’s] previous Chapter 11 case, applied to [his] newly filed Chapter 7 case.”

On May 30, 2013, the same bank that had obtained the agreed judgment in the district court filed an adversary proceeding in the debtor’s Chapter 7 case, seeking a determination that the judgment was not dischargeable.

The debtor appealed the bankruptcy court’s non-dischargeability opinion to the trial court on June 12, 2013.

On Sept. 30, 2014, the bankruptcy court granted partial summary judgment in the bank’s favor, finding that the debtor was collaterally estopped from challenging the earlier non-dischargeability opinion. After hearing testimony on three disputed issues of fact, the bankruptcy court held that the agreed district court judgment “was a nondischargeable debt.”

The debtor moved to certify a direct appeal to the Fifth Circuit, which the trial court granted.

On Sept. 29, 2015, the trial court affirmed the bankruptcy court’s non-dischargeability opinion. The debtor appealed this ruling also, and the two appeals were consolidated.

On appeal, the debtor argued that (a) “the bankruptcy court erred in ruling that his debts to [the banks] were nondischargeable; (b) “the bankruptcy court violated the automatic stay in his Chapter 7 case by entering the nondischargeability judgment; (c) the settlement agreement in the trial court case “extinguished all pre-settlement causes of action, including actions to determine nondischargeability[;]” (d) the bankruptcy court erred in finding that he instructed the trustee to foreclose on the [properties]”; and (e) “the bankruptcy court erred by giving preclusive effect to the [judgment in the adversary proceeding].”

The Fifth Circuit began its analysis by explaining that whether a debt is dischargeable is a question of federal law under the Bankruptcy Code, the nondischargeability of a debt “must be established by a preponderance of the evidence” and “exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start. … However, the Bankruptcy Code limits the opportunity for a new beginning to the ‘honest but unfortunate debtor.’”

The Court then turned its attention to section 523(a) of the Bankruptcy Code, which “sets forth the categories of nondischargeable debt. Relevant here, section 523(a)(4) “excepts from discharge debts ‘for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. … Section 523(a)(6) excepts from discharge debts ‘for willful and malicious injury by the debtor to another entity or to the property of another entity.”

The Fifth Circuit rejected the debtor’s argument that “the bankruptcy court erred in imputing to him the actions and intent of his co-conspirators in determining nondischargeability.”

First, the Court found that the bankruptcy court’s ruling of nondischargeability “under §§ 523(a)(4) and 523(a)(6) is sufficiently supported by factual findings regarding [the debtor’s] individual intent and conduct.”

Second, the Fifth Circuit explained that “[i]n any event, the intent and actions of [the debtor’s] co-conspirators is sufficient to support nondischargeability under § 523(a)(4)[,]” relying on its 2001 decision in Deodati v. M.M. Winkler & Assocs., which focused on the fraud exception in section 523(a)(2) and held that innocent partners that were held jointly and severally liable based on the acts of one partner could not discharge the debt because “the plain meaning of the statute is that debtors cannot discharge any debts that arise from fraud so long as they are liable to the creditor for the fraud.”

The Court applied the reasoning in Deodati to § 523(a)(4) because “a debtor cannot discharge a debt that arises from larceny so long as the debtor is liable to the creditor for the larceny. … It is the character of the debt rather than the character of the debtor that determines whether the debt is nondischargeable under § 523(a)(4).”

Because the debtor was not challenging “the bankruptcy court’s findings that he participated in the civil conspiracy to deprive [the banks] of excess proceeds from foreclosure sales or that” he was liable under state law as a result, and also did not dispute the bankruptcy court’s conclusion that he engaged in acts constituting “larceny” under § 523(a)(4), the Fifth Circuit concluded that the debtor’s “debts to [the banks] ‘arise’ from larceny and are nondischargeable in bankruptcy.”

The Fifth Circuit then turned to address the debtor’s argument “that bankruptcy court violated the automatic stay in his Chapter 7 case by entering the [nondischargeability judgment].” The Court rejected this argument because the Bankruptcy Code expressly allows creditors to file adversary actions to determine dischargeability. In addition, even assuming it was error for the bankruptcy court to enter the adversary judgment, the error was harmless because the outcome would have been the same and he “was not prejudiced by the bankruptcy court’s failure to lift the stay.”

Accordingly, the Fifth Circuit affirmed the rulings of the district court and the bankruptcy court in both adversary proceedings.

6th Cir. Rejects Municipality’s ‘Public Nuisance’ Claims Against Mortgage Lender

The U.S. Court of Appeal for the Sixth Circuit recently affirmed the dismissal of a municipality’s public nuisance claims against two different mortgage lenders for allegedly maintaining a policy of violating local and state building codes if the costs outweighed the value added to the eventual resale of foreclosed property.

A copy of the opinion in City of Cincinnati v. Deutsche Bank National Trust Company is available at:  Link to Opinion.

The municipality brought multiple claims against the mortgage lender defendants alleging various claims concerning the maintenance and condition of REO properties.  Eventually, through multiple amended pleadings, stipulations and settlements, only one common law public nuisance claim remained against one of the mortgage lenders.

As you may recall, a common law public nuisance is “an unreasonable interference with a right common to the general public.”  See, e.g., Kramer v. Angel’s Path, LLC, 882 N.E.2d 46, 51 (Ohio 2007).

As stated by the Court, the crux of the municipality’s claim is that the mortgage lender adopted a policy of violating local and state property regulations when the cost of compliance outweighed the value that could be recouped through the resale of a foreclosed property.  Notably, through the various pleading stages, the municipality agreed to dismiss any factual allegation which pertained to a specific property owned by the mortgage lender, and as reviewed on appeal, the allegations instead generally concerned the “policy” of the mortgage lender as applied to “additional nuisance properties that will become known to the City” by way of discovery.

The trial court rejected the municipality’s common law nuisance claims as a matter of law.

On appeal, the Sixth Circuit began its analysis by first distinguishing between the two types of common law public nuisances – qualified and absolute (a/k/a nuisance per se).  A qualified public nuisance claim mirrors a negligence tort in that it requires the plaintiff to show duty, breach, causation and injury.  The absolute public nuisance itself comes in two forms: the intentional creation of a public nuisance or a condition which is so abnormally dangerous that it cannot be maintained without injury regardless of the care taken.

Under either form of public nuisance, the Court found several flaws with the municipality’s claims.

As an initial matter, the Court determined that the economic loss doctrine applied to bar its claims against the mortgage lender under the qualified public nuisance theory.  As put by the Court, the economic loss rule bars tort plaintiffs from recovering a purely economic loss that “does not arise from tangible physical injury” to persons or property. Queen City Terminals v. Gen. Am. Trans., 653 N.E.2d 661, 667 (Ohio 1995).  The Circuit Court relied upon two cases from the Ohio state intermediary courts of appeal to determine that the economic loss rule applies to claims arising under the qualified public nuisance theory.  RWP, Inc. v. Fabrizi Trucking & Paving Co., No. 87382, 2006 WL 2777159, *4 (Ohio Ct. App. Sept. 28, 2006); City of Cleveland v. JP Morgan Chase Bank, No. 98656, 2013 WL 1183332, *1 (Ohio Ct. App. Mar. 21, 2013).  For this reason alone, the Circuit Court found that the municipality’s claim for qualified public nuisance was properly dismissed.

As for the municipality’s absolute public nuisance claim, the Sixth Circuit did not decide whether or not the economic loss doctrine applied under Ohio law because it found that the municipality failed to adequately plead the requisite elements for that claim.

First, as noted by the Court, the complaint only alleged that the mortgage lender “knew or should have known that they created and maintained a public nuisance.”  This language was insufficient to allege the requisite intent required for an intentional claim of absolute nuisance because as succinctly stated by the Court “knowledge does not equal intention.”

Second, the complaint as it came to the Sixth Circuit failed to identify any property owned by the mortgage lender which endangered the public health, safety or well-being.  In other words, the complaint failed to identify any nuisance properties owned by the mortgage lender.  The Court chastised the municipality’s attempt to use the discovery process to determine nuisance properties owned by the mortgage lender because “that is not how civil litigation or for that matter nuisance law works.”  Instead, nuisance law can be used by a plaintiff “only to remedy an existing nuisance, not to sue someone who may one day own (or create) a nuisance property.”  Thus, the Court determined that even under the notice pleading standard, the complaint for absolute nuisance was deficient.

The Sixth Circuit also rejected the municipality’s argument that the “policy” enacted by the mortgage lender was itself the nuisance.  Although the Court acknowledged that this policy may be probative of the mortgage lender’s intent, the Court found that the “policy” of engaging in a cost-benefit analysis “does not alone constitute a public nuisance.”  The Sixth Circuit explained that not every code violation would implicate the public’s rights to health and safety, and therefore, not every failure to comply with a code requirement amounts to a public nuisance.  At a minimum, the Court held, the municipality must connect the policy to the existence of an actual nuisance.

Third, and related to the failure to plead the existence of an actual nuisance, the Court found that the complaint suffered from a proximate cause issue.  The Sixth Circuit determined that the allegations failed to tether its claimed damages of decreased tax revenue, increased police and fire expenditures and increased administrative costs to any specific acts of the mortgage lender.  The Court found it particularly difficult to connect these alleged damages with only a general “policy” of non-conformance and “nearly impossible to disaggregate” these damages from other potential causes of these costs.

Accordingly, the Sixth Circuit affirmed the trial court and upheld the dismissal of the municipality’s claims for common law public nuisance.

Fla. App. Court (1st DCA) Holds Third-Refiled Foreclosure Action Not Barred by Res Judicata or SOL

The District Court of Appeal of the State of Florida, First District, recently affirmed the trial court’s entry of a final judgment of foreclosure, holding that because the complaint included at least some installment payments within five years of the filing of the complaint, the action was not barred by res judicata or the statute of limitations.

A copy of the opinion in Forero v. Green Tree Servicing, LLC  is available at: Link to Opinion.

Husband and wife borrowers defaulted on their mortgage loan in December 2008. The mortgagee filed a foreclosure action in February 2010, but voluntarily dismissed the case in December 2011.

The mortgagee filed a second foreclosure action in February 2013 based on the same default date of December 2008, but again voluntarily dismissed the case in April 2013.

The note and mortgage were sold and assigned in September 2013 and the new servicer sent an acceleration letter to the borrowers. The new servicer then filed a third foreclosure action in April 2014, again based on the same default date of December 2008.

The borrowers raised the defense of res judicata by operation of Rule 1.420, which provides that a second voluntary dismissal “operates as an adjudication on the merits … based on or including the same claim.” The borrowers also raised the defense that Florida’s five-year statute of limitations for foreclosures contained in section 95.11(2)(c), Florida Statutes, barred the third foreclosure action.

The third foreclosure action went to trial and the court entered judgment in the plaintiff mortgagee’s favor, but refused to award interest, late fees and “other sums” because the plaintiff mortgagee failed “to prove amounts for these items.” The borrowers appealed.

On appeal, the borrowers argued that the third foreclosure action resulting in the final judgment of foreclosure was barred by Rule 1.420(a)(1) and the statute of limitations.

The Appellate Court began by discussing Rule 1.420’s “two dismissal rule[,]” but noted that under the Fourth District Court of Appeal’s decision in Olympia Mortgage Corp. v. Pugh, the rule “itself does not actually preclude subsequent actions” because “it is the doctrine of res judicata which bars subsequent suits on the same cause of action.”

The Court then cited the Florida Supreme Court’s 2004 decision in Singleton v. Greymar Associates, which held that “the doctrine of res judicata does not necessarily bar successive foreclosure suits, regardless of whether or not the mortgagee sought to accelerate payments on the note in the first suit. … [T]he subsequent and separate alleged default created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action.”

Relying on Olympia Mortgage and Singleton, the Appellate Court reasoned that because there was no dispute that the borrowers stopped paying in December 2008 and also that no payments were made thereafter, the third foreclosure action “was not barred as res judicata, even in light of rule 1.420(a), because the open-ended series of defaults included different missed payments at issue in each suit.”

The Appellate Court also rejected the borrowers’ argument that the third foreclosure action was barred by the statute of limitations based on the Florida Supreme Court’s recent 2016 decision in Bartram v. U.S. Bank, which held that its analysis in Singleton applied equally to the statute of limitations, and “with each subsequent default, the statute of limitations runs from the date of each new default providing the mortgagee with the right, but not the obligation, to accelerate all sums then due under the note and mortgage.”

Applying Singleton, the Appellate Court concluded that the voluntary dismissal of the first two foreclosure actions did not bar a third foreclosure action “because the causes of action are not identical. The additional payments missed by the time the third action was filed, which were not bases for the previous actions because they had not yet occurred, constitute separate defaults upon which the third foreclosure action may be based. Additionally, acceleration of the note occurred at a different time.”

Because Singleton clarified that “enforcement of the note via a foreclosure action is not barred by res judicata for the defaults occurring after” dismissal of the second foreclosure action in April 2013, and the third foreclosure action “was not barred by the statute of limitations” since “each missed payment constituted a new default[,]” restarting the five-year statute of limitations on that default, the final judgment of foreclosure was affirmed.