May 29, 2014
On May 20th I attended the 32nd Annual Real Estate Practice Seminar sponsored by the Virginia Law Foundation. Attorney Jim Cox gave a presentation entitled, Affecting Real Estate at Death: the Virginia Real Property Transfer on Death Act. Jim Cox presented an overview of this new estate planning tool that went into effect July 1, 2013.
Use of Transfer on Death (“TOD”) beneficiary designations for depository and retirement accounts is widespread. This 2013 Act allows owners of real estate to make TOD designations by recording a Revocable Transfer on Death Deed in the public land records.
The introduction of TOD Deeds is of interest to anyone involved in estate planning or real estate settlements. The following are 8 key aspects of this development in Virginia law:
- Not Really a “Deed.” A normal deed conveys an interest in real property to the grantee. A TOD Deed is a will substitute that becomes effective only if properly recorded and not revoked prior to death. The Act’s description of this instrument as a “deed” will likely be a source of confusion.
- Formal Requirements. A TOD Deed must meet the formal requirements of the statute in order to effect the intent of the owner. It must contain granting language (a.k.a. words of conveyance) appropriate for a TOD Deed. It is not effective unless recorded in land records prior to the death of the transferor. The statute contains an optional TOD Deed form. Due to the formal requirements, I cannot image advising someone to do one of these without a qualified attorney.
- Beneficiary Does Not Need to be Notified. Although a TOD Deed becomes public when filed, the transferor does not need to notify the recipient. The beneficiary may not learn about the designation until after the transferor’s death. At some point, the local government will change the addressee on the property tax bills.
- Freely Revocable. The transferor can revoke the TOD designation at any time prior to death. In fact, a TOD Deed cannot be made irrevocable. A revocation instrument must be recorded in land records.
- Unintended Title Problems. The Act takes pains to avoid creating title defects on the transferor’s title prior to death.
- Can be Disclaimed. The beneficiary can disclaim the transfer after the death of the transferor.
- Subject to Liens. Recording a TOD Deed does not trigger a due-on-sale clause in a mortgage. At the date of death, the beneficiary’s interest is subject to any enforceable liens on the property.
- Creditor Claims & Administration Costs. The beneficiary’s interest in the property is subject to any general claims of the transferor’s creditors or the expenses of the estate administration. Such claims may attach up to one year after the date of the transferor’s death. For this reason, the TOD beneficiary’s interest in the property or the proceeds of its sale will be uncertain until that 12 month period expires. However, taxing authorities, insurance companies, HOA’s and banks will expect payment prior to the end of those 12 months.
Each family has unique estate planning needs. The Va. Real Property TOD Act is a new gadget in the toolbox for crafting a plan that addresses individual desires and circumstances. Combining TOD Deeds with other estate planning tools such as wills and trusts requires careful integration to avoid unintended consequences. Estate planning and real estate practitioners will overcome any initial reluctance to use of TOD Deeds as they become subject to the test of time.
If you learn that you are the beneficiary of a TOD deed and are uncertain as to your rights and responsibilities with respect to the property, contact an experienced real estate attorney.
May 21, 2014
In Virginia, unlike some other states, a foreclosure is a transaction and not necessarily a court proceeding. A trustee appointed by the lender auctions the property. The proceeds of the sale must be applied to reduce the outstanding loan amount and transaction costs. A Trustee has special duties to the parties as their “fiduciary.” What are the fiduciary duties of foreclosure trustees?
At real estate closings, settlement attorneys present borrowers with a document entitled “Deed of Trust.” In this document, the borrower pledges the purchased property as collateral. The Deed of Trust provides the legal framework for the lender to pursue foreclosure in a default. It also procedurally protects the borrower’s property rights. When the lender records the Deed of Trust in the land records, a lien encumbers the property until the debt is released. The Deed of Trusts names one or more persons as Trustees for the property. It describes the borrower as the creator of the trust and the bank as the beneficiary. If the borrowers avoid falling into persistent default of their loan obligations, this trust language is largely irrelevant.
If the borrower experiences economic hardship and falls behind on their payments, however, they will begin to receive notices referencing the Deed of Trust. The bank may appoint a Substitute Trustee to handle the foreclosure. The culmination of the foreclosure process is the Foreclosure Trustee’s public auction of the property to satisfy the distressed loan. What does the foreclosure process have to do with trusts and trustees? Generally, under Virginia law, a breach of a trustee’s duties gives rise to a Breach of Fiduciary Duty legal claim. Lawyers like to pursue these claims because they may impose duties and remedies not articulated in the contract. Does this trust relationship give the homeowner greater or fewer protections against breaches by the bank’s agents during the process?
On May 16, 2014, I posted an article about the materiality of technical errors committed by the mortgage investors in the foreclosure process. That post focused on two new April 2014 court opinions providing some guidance on what remedies borrowers may have for those errors. Those new court opinions also provide fresh guidance about fiduciary duties of foreclosure trustees. Today’s blog post is about dealing with trust issues in foreclosure.
Bonnie Mayo v. Wells Fargo Bank & Samuel I. White, PC:
The Deed of Trust on Bonnie Mayo’s Williamsburg home listed Wells Fargo Bank as the “beneficiary” and the foreclosure law firm Samuel I. White, PC, as the Trustee. Mayo’s post-foreclosure sale lawsuit alleged that the White Firm breached its fiduciary duties to the borrower. For example, Mayo’s Deed of Trust required the lender to state in written default notices that she may sue to assert her defenses to foreclosure. The lender’s notices did not advise her of this, and she did not sue until after the foreclosure occurred. The Federal Judge considering her claims noted that there is conflicting legal authority on the extent to which a foreclosure Trustee can be sued for Breach of Fiduciary Duty. In his April 11, 2014 opinion, Judge Jackson observed that under Virginia law, a Foreclosure Trustee is a fiduciary for both the borrowing homeowner and the mortgage investor. While courts impose those duties on Foreclosure Trustees set forth in the Deed of Trust, they are reluctant to impose all general trust law principles.
Judge Jackson concluded that in addition to those duties set forth or incorporated into the Deed of Trust, the only other imposed on Trustees is the duty of impartiality. For example a foreclosure sale must be set aside where a trustee failed to refrain from placing himself in a position where his personal interests conflicted with the interests of the borrower and the lender. For example, the Trustee may not purchase the auctioned property himself or assist the bank in setting its bid. The Federal Judge dismissed Ms. Mayo’s Breach of Fiduciary Duty claims against the White Law firm, since impartiality was not adequately pled in the lawsuit.
Squire v. Virginia Housing & Development Authority:
In an April 17, 2014 opinion, the Supreme Court of Virginia focused on the limited nature of a Foreclosure Trustee’s powers. In this case, the Deed of Trust required the lender to try to conduct a face-to-face meeting with the borrower between the default and the foreclosure. The lender’s Trustee foreclosed, even though the lender did not make such an effort. The Court observed that the trustee’s authority to foreclose is set forth in the Deed of Trust. The Trustee’s power to conduct the sale does not accrue until the specified conditions are met. The borrowers’ failure to make monthly payments does not constitute a waiver of their right to expect the lender’s appointee to follow the rules. The fact that the borrower is in default does not authorize the mortgage investor and the trustee to disregard the Borrower’s protections set forth in the Deed of Trust and any incorporated regulations.
This holding is consistent with Virginia’s practice of conducting foreclosures out of court. The procedures set forth in the deed of trust provide the lender with a means of selling the property without the time & expense of a judicial sale. If the procedural nature of those rights is not preserved, then foreclosure disputes will go to court more often, depriving the lenders of the convenience of non-judicial foreclosure.
Ms. King alleged that the Foreclosure Trustee breached its fiduciary duty by conducting the sale prior to a required face-to-face meeting with the borrower. The Supreme Court of Virginia found that the Breach of Fiduciary duty claim was improperly dismissed by the Norfolk judge. The Court sent the case back down for consideration of damages.
These two new court opinions show how breach of fiduciary duty claims against foreclosure trustees require legal interpretation of the deed of trust. If the lender and trustee digress from its procedures, impartiality may be easier to prove.
Discussed Case Opinions:
Credits: Trust Arch photo credit: Lars Plougmann via photopin cc Williamsburg photo credit: Corvair Owner via photopin cc (for illustrative/informational purposes only. Depicts colonial Williamsburg, not Ms. Mayo’s home)
May 16, 2014
If a bank makes a technical error in the foreclosure process, what difference does it make? This blog post explores new legal developments regarding the materiality of breaches of mortgage documents. Residential foreclosure is a dramatic remedy. A lender extended a large sum of credit. Borrowers stretch themselves to make a down payment, monthly payments, repairs, association dues, taxes, etc. If financial hardships present obstacles to borrowers making payments, usually they will do what they can to keep their home.
In order to foreclose, lenders must navigate a complex web of provisions in the loan documents and relevant law. Note holders frequently commit errors in processing a payment default through a foreclosure sale. Sometimes these breaches are flagrant, such as foreclosing on a property to which that lender does not hold a lien. Usually they are less significant in the prejudice to the borrower’s rights. For example, written notices may not follow contract provisions or regulations verbatim, or a notice went out a day late or by regular mail instead of certified mail. Regardless of their significance, these rules were either willingly adopted by the parties or represent public policies reduced to law.
When homeowners challenge foreclosures in Court, lenders frequently argue in defense that the errors committed by the bank in the foreclosure process are not material. One could express this argument in another way by quoting the title lyric to British band The Smiths’ 1984 song, “What difference does it make?” The lenders typically highlight that the borrowers fell behind on their payments, did not come current, and do not have a present ability to come current on their loans. Borrowers face an uphill battle convincing judges to set aside or block foreclosure trustee sales or award money damages for non-material breaches. However, last month, two new court opinions illustrate a trend towards allowing remedies to homeowners for technical breaches. A relatively small award of money damages may not give homeowners their house back, but it may provide some consolation to the borrower and provide an incentive to mortgage investors, servicers and foreclosure trustees to strengthen their compliance programs.
Content of Written Notices Required by Mortgage Documents:
On June 13, 2010, Wells Fargo Bank sent Bonnie Mayo a letter telling her he was in default on her mortgage on her Williamsburg residence. The letter indicated that if she failed to cure within 30 days, Wells Fargo would proceed with foreclosure. The letter informed her that, “[i]f foreclosure is initiated, you have the right to argue that you did keep your promises and agreements under the Mortgage Note and Mortgage, and to present any other defenses you may have.” However, the Mortgage required the lender to state in the written notice the borrower’s “right to reinstate after acceleration and right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.” Ms. Mayo’s notice did not include this language. She did not bring a lawsuit until after the date of the foreclosure sale.
In her post-foreclosure lawsuit, Mayo alleged (among other claims) that this breach entitled her to rescind the foreclosure and receive money damages. Wells Fargo moved to dismiss this claim on the grounds that the difference between the contractually required language and the actual letter was immaterial. In an April 11, 2014 opinion, Judge Raymond Jackson observed that just because a breach is non-material does not mean it is not a breach at all. He reached a conclusion contrary to a relatively recent opinion of another judge in the U.S. District Court for the Eastern District of Virginia.
Virginia courts recognize claims to set aside foreclosure sales for “weighty” reasons but not “mere technical” grounds. Judge Jackson suggested that the bar may be higher for a homeowner to set aside a foreclosure sale after it occurs than to block it from happening in the first place. The Court declined to dismiss this claim on the sufficiency of the notices. Judge Jackson found that the materiality of this breach was a factual dispute requiring additional facts and argument to resolve.
A foreclosure is less susceptible to legally challenge after a subsequent purchaser goes to closing. Thus, the bank’s omission of language informing the borrower of her right to sue prior to the foreclosure carried a heightened potential for prejudice. Whether Ms. Mayo had a likelihood of prevailing in an earlier-filed lawsuit is a different story.
Failure to Conduct a Face-to-Face Meeting Prior to Foreclosure:
In 2002, Kim Squire King financed the purchase of a home in Norfolk, Virginia, with a Virginia Housing Development Authority mortgage. Her loan documents incorporated U.S. Department of Housing & Urban Development regulations requiring a lender to make reasonable efforts to arrange a face-to-face interview with the borrower between default and foreclosure. Loss of employment caused King to go into default on her VHDA loan in March 2010. VHDA never offered King a face-to-face meeting. VHDA instituted foreclosure wherein the trustee sold King’s property to a third-party.
King filed a lawsuit seeking money damages and an order rescinding the foreclosure sale. The judge in Norfolk agreed with defense arguments that the error was not grounds to set aside the completed foreclosure or award compensatory damages. The court dismissed the lawsuit. Squire appealed to the Supreme Court of Virginia. The Justices upheld the dismissal of her request to set aside the completed foreclosure sale. The lawsuit failed to allege facts sufficient to show that the sale was fraudulent or grossly inadequate.The Supreme Court distinguished King’s situation from legal precedents where the borrower filed suit prior to the foreclosure. Surprisingly, the Court found that the trial judge erred in dismissing King’s claim for money damages arising out of the failure to arrange the face to face meeting. The Justices remanded the case to proceed on the damages issue.
When mortgage servicers and foreclosure trustees commit technical errors, what difference does it make? These new legal decisions show increasingly nuanced analysis of these particular issues. The materiality of the lender’s breach depends on a number of factors, including:
- The borrower’s apparent ability to reinstate the loan. If it is unlikely that the homeowner will get back on track, denying the bank foreclosure makes less sense.
- Did the borrower file suit before or after the foreclosure sale? A lawsuit can delay a foreclosure until the borrowers enforce their rights under the loan documents and incorporated regulations. However, unless the borrowers have a strategy to work-out the distressed loan or otherwise favorably dispose of the property, a pre-foreclosure lawsuit may only delay.
- The relationship between the technical error and the relief requested by the borrower. For example, if the loan documents require a notice to go out by certified mail and it only goes out by first class mail, but the borrower received it anyway, then there isn’t any prejudice.
- Money damages suffered by the borrower that arose out of the technical breach. Borrowers seek to keep their homes and to pay according to their abilities. The U.S. District Court for the Eastern District of Virginia and the Supreme Court of Virginia show an increasing willingness to hold lenders monetarily responsible for prejudicial lender breaches in the foreclosure process. A legal claim that partially offsets the lender’s judgment for the balance of the loan post-foreclosure may provide some consolation but may not avoid bankruptcy.
Discussed Case Opinions:
May 6, 2014
On March 5, 2014, I blogged about the oral argument before the U.S. Supreme Court in U.S. v. Benjamin Robers, a criminal mortgage fraud sentencing appeal. At stake was how Courts should credit the sale of distressed property in calculating restitution awards. The U.S. Court of Appeals for the Seventh Circuit interpreted the Mandatory Victims Restitution Act to apply the sales price obtained by the bank selling the property post foreclosure as a partial “return” of the defrauded loan proceeds. Robers appealed, arguing that he was entitled to the Fair Market Value of the property at the time of the foreclosure auction. According to Robers, the mortgage investors should bear the risk of market fluctuations post-foreclosure because they control the disposition of the collateral. See Mar. 5, 2014, How Should Courts Determine Mortgage Fraud Restitution?
Yesterday, the Supreme Court affirmed the re-sale price approach in a unanimous decision. The Court observed that the perpetrators defrauded the victim banks out of the purchase money, not the real estate. The foreclosure process did not restore the “property” to the mortgage investors until liquidation at re-sale.
The Court focused on defense arguments that the real estate market, not Robers, caused the decrease in value of collateral between the time of the foreclosures and the subsequent bank sales. Justice Stephen Breyer wrote that:
Fluctuations in property values are common. Their existence (through not direction or amount) are foreseeable. And losses in part incurred through a decline in the value of collateral sold are directly related to an offender’s having obtained collateralized property through fraud.
Breyer distinguished “market fluctuations” from actions that could break the causal chain, such as a natural disaster or decision by the victim to gift the property or sell it to an affiliate for a nominal sum. See Lance Rogers, May 6, 2014, BNA U.S. Law Week, “Justices Clarify that Restitution ‘Offset’ is Gauged at Time Lender Sells Collateral.”
Falsified mortgage applications cause a lender to make a loan that it would not otherwise extend. A restitution award mirroring what the lender would receive in a civil deficiency judgment is inadequate. The defendant’s conduct opened the door for the Court to shift the risk of post-foreclosure market fluctuation from the bank to the borrower. Robers did not single-handedly render the local real estate market illiquid. However, as Justice Sonia Sotomayor mentions in her concurrence, real estate takes time to liquidate. These banks did not unreasonably delay the liquidation process. The Court opinion did not mention the prominent role of origination fraud in the subprime mortgage crisis. The Supreme Court’s unanimous decision strongly rejected defense arguments that downward “market fluctuations” severed the causal connection between the origination fraud and the depressed sales prices obtained by the lenders.
The Court did not discuss the original purchase prices for Robers’ two homes. In many mortgage fraud schemes, loan officers find “straw purchasers” such as Mr. Robers for sellers who agree to provide kickbacks on the inflated sales prices. See Mar. 15, 2009, Milwaukee Journal-Sentinel, “Amid Subprime Rush, Swindlers Snatched $4 Million.” The perpetrators do not disclose these kickbacks to the lenders. The mortgage originators also receive origination fees from the lenders on the fraudulent closings. Under this arrangement, the purchase price will naturally reflect the highest sales price the bank’s appraiser will support. The bank is defrauded both by the fictitious qualifications of the borrower and the exaggerated sales prices.
U.S. v. Robers may result in stricter, more consistent restitution awards in mortgage fraud cases. I wonder how it will be applied in cases where the defendant presents stronger evidence that the victims acted unreasonably in liquidating the property. The opinion seems to leave discretion to District Courts to determine whether a bank’s conduct or omissions breaks the connection between the mortgage fraud and the sales price.
May 2, 2014
Earlier this week, the National Basketball Association imposed a lifetime ban on Donald Sterling, owner of the Los Angeles Clippers. Adventuress Vanessa Stiviano recorded racist and demeaning statements made by Sterling about Basketball Hall of Famer Earvin “Magic” Johnson. The recordings subsequently leaked to the public.
In 1991, I watched the first NBA Finals for the first time. Magic Johnson led the Lakers against Michael Jordan’s Chicago Bulls. The 1991 Finals made me a basketball fan. Magic was one of my favorite professional athletes. The news about Don Sterling is offensive and bizarre. Why is this scandal happening?
On March 7, 2013, Sterling’s wife, Rochelle, filed a lawsuit against Ms. Stiviano. The lawsuit alleges that Stiviano seduced Don for money. According to Rochelle, Stiviano used marital funds to purchase a $1.8 Million dollar duplex home in Los Angeles in December 2013. Rochelle seeks a court order reforming the deed to identify herself and her husband as the proper owners.
The LA Times reports that Mr. Sterling told Clippers President Andy Roeser that Stiviano said that she would “get even” with Rochelle for filing the lawsuit. Apr. 26, 2014, Bettina Boxall, Sterling’s Wife Describes Alleged Mistress as Gold Digger in Lawsuit. I wonder if Stiviano has additional embarrassing Sterling recordings that she has not yet leaked. There is a controversy over whether the recordings were consensual. How are these leaked recordings related to the lawsuit?
Rochelle alleges that Donald Sterling provided the money for Stiviano to purchase the duplex, “with the understanding that the Property would be owned by [Donald and Rochelle Sterling] and title would vest in the name of [Rochelle] and D. Sterling.” Curiously, Donald is not a Plaintiff or Defendant to this lawsuit where the spouse sues paramour. Rochelle alleges that, “D. Sterling either gifted said Property to Stiviano, without the knowledge, consent or authorization of Plaintiff, or, in the alternative, Stiviano fraudulently and wrongfully caused title to the Property to vest in her name.”
- The transfers made from Donald to Stiviano were gifts.
- Rochelle and Donald are not in divorce proceedings.
- Rochelle does not allege that any of the transfers were thefts.
- Mr. Sterling is an, “on the top of his game infamous real estate mogul.”
- Rochelle knew of Donald’s reputation for “gold plated dalliances” in general and his relationship with Stiviano in particular.
Don Sterling’s health history is an issue. ESPN reports today that Mr. Sterling has prostrate cancer.
I try to avoid predicting the outcome of pending motions, especially those in California, where I do not practice law. Can a California Judge base a ruling on new facts introduced by a defendant on demurrer?
Rochelle alleges that she and Donald are the real owners of the duplex because either:
- Donald and his wife were supposed to be the grantees on the deed, and somehow the name got switched to Stiviano; or
- Donald secreted the funds to Stiviano out of the family estate without Rochelle’s knowledge.
These allegations seem contradictory. In the first case, there was an intention for the paramour to be the nominal purchaser for the benefit of the husband and wife. Did Rochelle condone Don’s relationship with Stiviano? The alternative alleges waste of marital assets, but outside a divorce proceeding. The “constructive trust” remedy sought by Rochelle is a flexible one. However, a spouse usually cannot invalidate transfers to a “other woman” absent theft, fraud, incapacity or other conduct that voids the intent of the philanderer.
This demurrer is set for hearing on July 8, 2014. Many things could happen before then. Don Sterling’s health is an issue. The media will shift their focus to other sports after the NBA Finals and Draft wrap up in late June. Will the NBA successfully force Sterling to sell the Clippers? His lawyers will research the admissibility of the Stiviano tapes thoroughly. Regardless as to how deep they go into the playoffs, the Clippers will have an eventful off-season.