March 18, 2015
Court Scrutinized Role of Foreclosure Law Firm Rating System
Successful law firms cultivate, among other things, professional referral sources and a reputation for responding to client needs. Can these best practices be taken too far? This topic came up in a federal court opinion issued in a class action lawsuit brought by home loan borrowers against Friedman & MacFadyen, a Richmond debt collection law firm and its foreclosure trustee affiliate.
On February 27, 2015, I wrote an entry about the Fair Debt Collection Practices Act claim in this case, Goodrow v. Friedman & MacFadyen. The law firm had a practice of sending letters to borrowers, threatening to file lawsuits. Later correspondence referred to lawsuits. However, the borrowers alleged in their class action that no such lawsuits were ever filed. The FDCPA claim sought money damages for the alleged False Representations. What would motivate a law firm to threaten to sue and later make references to non-existent suits if the goal was foreclosure? Another part of the judge’s opinion suggests an answer.
Fannie Mae and its loan servicers retained Friedman & MacFadyen and F&M Services, Inc., to collect on home loan debts by foreclosing on deeds of trusts in Virginia. The borrowers allege that this specific arrangement incentivized the law firm to complete foreclosures quickly and discouraged delays and loan modification workouts. In the foreclosure, the lender appointed F&M Services, Inc., as substitute trustee under the mortgage documents. A third-party, Lender Processing Services, Inc., played a significant role. LPS maintained a rating system for foreclosure law firms. Timely completion of matters timely would earn a firm a “green” rating. Mixed results earned a “yellow” designation. If matters got bogged down, a “red” rating could result in loss of future referrals (the opinion does not reference any colored cupcakes). This foreclosure law firm rating system played a key role in the facts of the case. LPS required the law firm to pay a referral fee for each case. At the end of each matter, Friedman & MacFayden filed a trustee’s accounting with the local Commissioner of Accounts. According to the plaintiffs, the $600.00 trustee’s commission listed on the accountings included an undisclosed referral disbursement to LPS.
The class action lawsuit accused the defendants of breaching their trustee’s duties in the foreclosures. The borrowers also alleged that the law firm engaged in impermissible “fee-splitting” with the non-lawyer referral company LPS. A foreclosure trustee is forbidden from purchasing the property at the sale. The Trustee’s own compensation is subject to review in the filed accounting. In foreclosure matters, courts in Virginia interpret a foreclosure trustee’s duties to include a duty to act impartially between the different parties who may be entitled to the property or disbursement of the proceeds of the sale, including the lender, borrower and new purchaser. Concurrent with such trustee duties, the defendants had their arrangement with Fannie Mae and LPS.
This is where the representations in the correspondence to the borrowers seem to fit in. If borrowers demanded loan modifications, made repeated inquiries, requested postponement or filed contesting lawsuits, then matters could be delayed. The law firm’s colored rating with LPS might be downgraded and cases might stop coming.
The law firm was not purchasing the properties itself in the sales at a discount. However, they were alleged to be financially benefiting from the disbursement of the proceeds of the sale in a manner not reflected in the trustee’s accounting statements. Further, any amount paid to LPS from the sale went neither to reduction of the outstanding loan amount or for allowable services in the conduct of the sale.
In considering the facts, the federal court denied the defendant’s motion to dismiss the borrowers’ Breach of Fiduciary Duty claim. The court found those claims to adequately state a legal claim that would potentially provide grounds for relief.
Whether a borrower has grounds to contest a real estate foreclosure action in court depends upon the facts and circumstances of each case. The Goodrow case illustrates how many of those circumstances may not be apparent from the face of the loan documents, correspondence or trustee’s accounting statements. If you have questions about the legality of actions taken in a foreclosure, contact a qualified attorney without delay.
case cite: Goodrow v. Friedman & MacFadyen, P.A., No. 3:11-cv-020 (E.D.Va. July 26, 2013).
(I would like to thank the generous staff member who brought in the cupcakes depicted on the featured image. They were delicious and great to photograph!)
March 12, 2015
Don’t Go it Alone on a Notice of Violation
By law, the homeowners govern mandatory property associations, whether for single-family homes or condominiums. They are roughly equivalent to the shareholders in a corporation. The property manager and employees answer to the board of directors, who in turn answers to the owners. Unfortunately, many homeowners have experiences where this structure seems turned upside down. The property managers, accountants and lawyers hired by the association explain to the board and the owners what to do.
Such a “role-reversal” occurs in circumstances where an association improperly accuses an owner of violating the rules and regulations. Homeowners are told that rules enforcement is necessary to “protect property values.” However, to a homeowner, loss of community privileges, limitation of the use of the property or payment of a fine decreases the practical value of their property. Associations sometimes take direct, unauthorized action without any due process. Usually, they begin the rule enforcement by sending a written notice of violation to the owner. This is the “opening salvo” in a process where an unassisted owner is likely at a disadvantage even when the facts and rules are favorable. Why? Associations pursue rule violations regularly. They usually hire experienced, capable community association lawyers. Property managers prepare to testify about the facts. The board members are often more familiar with the process than the other owners. It is important that owners don’t go it alone on a notice of violation.
Virginia law requires the association to follow established rules enforcement procedures:
- Complaint Made & Reviewed: Before any proceeding begins, another owner, a board member, manager or employee of the association must bring an allegation of a rule violation before the association leadership.
- Legal Grounds for Adverse Action: The General Assembly has not granted associations carte blanche authority to run their communities. Property associations do not have the broad powers of counties or cities. They only have the legal authority granted by law and properly adopted in the declarations, covenants and bylaws. Rules, regulations and resolutions must comply with these higher legal authorities. In substantial disputes, an owner is best served by consulting with an attorney who is familiar with community associations but doesn’t cater to them. Confirming the absence of legal authority requires knowing where to look, what to look for and what to do next. Each association has different documents that may affect an individual owner’s proceeding.
- Written Notice of Violation: Virginia law requires the board to send the owner a written notice of the alleged violation prior to taking any adverse action. The notice must give the owner a reasonable opportunity to correct the violation. Homeowners may need to consult with licensed contractor about the necessity or cost of any repairs that cannot be addressed on a DIY basis.
- Notice of Hearing: To continue the process, the Association must send the owner advance notice of any hearing, identifying actions that the association may decide to take. The owner is entitled to receive it at least 14 days before the hearing.
- Participation in the Hearing: Violation hearings are conducted before the Board of Directors or some other quasi-judicial body specified in the Association’s governing documents. What can a homeowner expect at the hearing? Shu Bartholomew, host of weekly radio show “On the Commons,” explains the importance of not going it alone: “The last thing a homeowner wants is to be sitting – alone – on one side of the table when 5-7-9 board members, managers, recording secretaries, attorneys, and every other Tom, Dick and Harry in a semi-official capacity on the HOA is on the other side of the table, accusing the owner of being in violation of something, that the HOA may not even have the authority to enforce. It is intimidating and a very clear picture of the imbalance of power in HOAs.” The owner should be prepared for this possibility. But owners can have a “team” too. Owners may be represented by legal counsel at the hearing. The General Assembly saw a need to pass legislation making this a statutory right. In addition to an attorney, the owners should consider inviting witnesses and supporters.
- Rules Enforcement Decision: The association must send the owner the hearing result in writing within 7 days of the hearing. The result may consist of monetary charges or suspension of privileges, such as the clubhouse, pool, gym, etc.
- Effect of Decision: Virginia law allows for unpaid fines assessed pursuant to this process, if valid, to be treated like an unsatisfied assessment against the owner’s property. The association may put a lien on the real estate. The suspension of privileges may continue until the matter is resolved.
Virginia property owners are entitled to due process in these association proceedings. An owner is best served by taking action to avoid an adverse decision. However, the internal decision-making process is not the end of the story. Owner’s rights can be defended by bringing legal action in local courts. If your association is working with a team to assess a fine, suspend your privileges or take any other action against your property rights, don’t go it alone.
Virginia Code Section 55-513 (Adoption and Enforcement of Rules)[Property Owners Association Act]
Virginia Code Section 55-79.80:2 (Suspension of services for failure to pay assessments; corrective action; assessment of charges for violations; notice; hearing; adoption and enforcement of rules)[Condominium Act]
Senate Bill No. 1008 (Statement of Unit Owners Rights & Statement of Lot Owners’ Rights)[expected to go into effect July 1, 2015]
Diving. The Ascott Kuala Lumpur via photopin (license)(to illustrate a common area privilege. Does not depict a community association property in the U.S.)
March 4, 2015
Buying a Home Through Realtors Versus Foreclosure Sales
Recently a friend shared with me her interest in purchasing a home at a foreclosure auction. Many buyers look to foreclosures in the hope of finding a bargain. Foreclosure sales occur year-round. On the other hand, “conventional” sales through realtors follow a seasonal pattern. When the ice and snow melt and winter winds retreat northward, sellers start to put their homes on the market. In March, potential buyers call real estate agents and loan officers. The first crop of “For Sale” signs is a harbinger of spring. Experienced real estate professionals and investors know that finding the right foreclosure purchase is not as simple as reading an advertisement, showing up at the sale and making a bid. But is this option right at all for families seeking a place to live? Sometimes foreclosure investments do not work out well even for seasoned investors. Today’s blog post compares buying a home through realtors versus foreclosure sales in Virginia.
- Salespersons vs. Debt Collectors: Personal interaction defines shopping experiences. Real estate agents advertise the property through internet listings, brochures, signage and open houses. With the help of their own agent, potential buyers bid against each other. In a “conventional” property sale, the buyer’s interface is through these sales and marketing professionals. By contrast, debt collection attorneys lead foreclosures in Virginia. The lender retains the attorney to collect on the current owner’s home loan debt. Interested investors go to the front of the courthouse to bid on the property at the sale. In the sale, the debt collection attorney also acts as a trustee. In a previous blog post, wrote about a foreclosure trustee’s duty of impartiality. Buyers must consider the significant difference between doing business through salespersons vs. debt collectors.
- Motives of Current Owner: Real estate transfers through realtors are voluntary. Agents list properties because the sellers want them on the market. If a buyer thought that the seller might sue them after the closing, or refuse to move out, they would never make an offer in the first place. In foreclosure, the previous owners often refuse to leave willingly. The lender or buyer may need to evict them through court in order to get physical possession of the property. Frequently a borrower suffering a foreclosure files a lawsuit against the new owner, the bank or the foreclosure trustee to test the legal validity of the sale. Foreclosure sales have a substantially higher risk of litigation than “conventional” transactions through real estate agents. Investors can’t count on being handed the prior owner’s keys.
- The Condition of the Property: Real estate agents know that sales require exposing the property to the market through internet listings, disclosures, brochures, open houses, signs and home inspections. However, investigating the features and condition of a foreclosure property is a struggle. The trustee usually provides little more than the minimum amount of advertising and disclosures. There is not much of a budget for marketing. The foreclosure property likely needs repair. When homeowners struggle to pay their bills, they often stop making repairs before defaulting on mortgage payments. Most foreclosure properties require substantial renovation before they can be occupied again.
When people shop for a home to live in, usually they want a “turn-key” proposition. They don’t want to invest time and resources before moving in or renting it out. With so many challenges and uncertainties, who would seek to buy a home at a foreclosure sale in Virginia? Well, it’s all about one’s ability to manage risks. This is why often only the bank bids at the foreclosure sale. The only other bidders may be investors who specialize in distressed real estate. If you are one of these investors, or are interested in becoming one, add a qualified attorney to your “team” to assist with the real estate, litigation and construction aspects of managing these risks.