February 27, 2015
On December 4, 2014, I wrote a blog post about a borrower who brought a lawsuit against her lender after the Richmond law firm that conducted the foreclosure went out of business. The federal judge denied the bank’s motion to dismiss the borrower’s claims based on a faulty loan default notice. In that post, I mentioned that the involved law firm, Friedman & MacFadyen, was the target of class action litigation arising out of their debt collection and foreclosure practices. Of the several bases to the class action, the only one that will be discussed here has to do with False Representation liability under the Fair Debt Collection Practices Act. The lawsuit accused Friedman & MacFadyen of sending correspondence to borrowers containing false threats of lawsuits followed by notices with references to court actions that had not been filed. Put another way, the class action claimed that there was a legal thriller published in foreclosure notices to borrowers.
Someone with legal training knows whether a lawsuit is pending. A case cannot proceed unless the party is properly served with a copy. If one knows where to look, one can search court records to verify whether someone is party to a pending lawsuit. But the process of determining this is not common public knowledge. In its opinion, the federal court discussed the alleged practices of the law firm. F&M initially wrote to the borrowers to tell them, among other things, that their, “loan[s][had] been referred to this office for legal action based on a default under the terms of your Mortgage/Deed of Trust and Note.” Later correspondence suggested that a lawsuit was pending or about to be filed. However, the law firm never intended to file a lawsuit against these borrowers. Virginia is a non-judicial foreclosure state. Foreclosures routinely occur here as a trustee transaction and not normally in a lawsuit. Later firm correspondence instructed the borrower on how to obtain “withdrawal” or “dismissal” of the “action.” F&M would refer to these matters as the name of the bank “v.” the name of the borrower, the way lawyers style a lawsuit.
People tend to take a dispute more seriously once a case is active before the court. A legal action does not exist until a party files it in writing with the court’s clerk. Attorneys know that the threat or current existence of a lawsuit causes negative emotions on the part of the defendant, such as anger, fear, anxiety, avoidance or aggression. However, there is a difference between candidly informing an opposing party that suit will be filed if the dispute cannot be resolved and the facts alleged about Friedman & MacFadyen. The opinion discusses allegations that the law firm was in a client relationship where it would be rewarded for foreclosing quickly, and less rewarded for negotiating loan modifications. If the borrowers had known that there were no pending lawsuits, they may have handled their situations differently. In essence, the class action suit accused the foreclosure law firm of putting fictional accounts of lawsuits in foreclosure correspondence with the goal of obtaining favorable responses by borrowers in light of how the law firm was rewarded by its client.
Lawsuits have value for collecting on debts. They also cost money the parties filing them. Once the lawsuit is actually filed, the party and its attorneys have obligations to the court. A fictional lawsuit, on the other hand, does not require anything to be prepared, no court fees to be paid, scheduling conferences to attend or any other responsibilities. The plaintiffs’ suit included a Fair Debt Collection Practices Act claim for False Representation for what might be described as “shadow litigation” issues. In a January 16, 2015 blog post, I discussed the basics of FDCPA False Representation claims, where a debt collector uses a false, deceptive or misleading representation to collect consumer debt. In denying F&M’s motion to dismiss the lawsuit, the court observed that it would construe the foreclosure correspondence collectively to determine any tendency to mislead the borrowers.
If you have received any foreclosure-related correspondence that references a lawsuit that you cannot verify, contact a qualified attorney to discuss defense of your right to be communicated fairly with regarding your property rights.
January 21, 2015
A few days ago, Virginia state senator Chap Peterson introduced new Homeowner Bill of Rights legislation in the 2015 General Assembly. The proposal sets out certain rights of property owners in HOA and condominium communities. For example, SB1008 recites a owner’s right to due process in the association’s rule violation decision-making. I anticipate political debate on whether SB1008 simply restates existing legal protections or contributes to them. Regardless, the introduction of this bill illustrates that rule violations are a hot item in association matters. Who collects on association rule violations? Boards in most associations are comprised of unpaid volunteers. Most of an association’s day-to-day work is done by property managers hired by the board.
Federal Debt Collection Laws.
Generally, the Fair Debt Collection Practices Act (“FDCPA”) protects consumers from abusive debt-collection practices. This Act does more than provide defenses in collection lawsuits or authorize a federal agency to take regulatory action. If debt collection businesses, including law firms, violate the FDCPA, they may be liable in an independent lawsuit. Under the FDCPA, it is easier for debtors to sue collectors for false or misleading statements in correspondence. The Act also requires certain notices in correspondence, such as notifying the consumer of their right to seek verification of the debt. In my previous blog post, I provided some examples of this in the foreclosure context. Where the facts and circumstances allow, class action lawsuits may be brought for FDCPA violations. Broad application of the FDCPA against association property managers would force them to change many of their practices. For example, the Act examines whether a notice would be materially confusing to the least sophisticated consumer. Are association property managers debt collectors for purposes of the FDCPA?
Welnowska v. Westward Management, Inc.
A 2014 court case illustrates the current limitations in applying the FDCPA to association property managers. Anna Welnowska & Jerzy Sendorek owned a residential condominium unit in the Madison Manor 2 Condominium Association in Chicago, Illinois. In July 2012, Madison Manor hired Westward Management, Inc., as its “full service” property manager. Part of Westward’s duties was collection of assessments and fines. Westward mailed collections letters to Welnowska & Sendorek in the name of Madison Manor. The owners disputed the charges. Madison Manor filed a lawsuit seeking a judgment for the unpaid sums and eviction of the owners.
In August 2013, Welnowska’s & Sendorek’s attorneys filed a FDCPA lawsuit against Westward in federal court. The manager filed a motion to dismiss, arguing that it is not a “debt collector.” The FDCPA has an exception for collections activity that is “incidental to a bona fide fiduciary obligation.” 15 U.S.C. Sect. 1692a(6)(F). A fiduciary is someone, such as a trustee or corporate director, who owes a high standard of care in managing someone else’s money or property.
Westward argued that its debt collection activity was only one of many duties it had to the association. The owners argued that this exception did not apply because the debt collection was central to the fiduciary obligation, not incidental. In his July 24, 2014 decision, Judge Edmond Chang rejected the owners’ argument on the grounds that Westward had numerous non-financial, managerial obligations to the association.
Alternatively, the owners argued that the debt collection activity was entirely outside the scope of Westward’s Management Agreement with the association and thus was not “incidental to” the fiduciary obligation. This written agreement specifically excluded collection on delinquent assessments and charges except for FDCPA notices. Westward separately billed the association for the collections activity at issue in the case.
The Court found that if Westward indeed acted outside the scope of the Management Agreement, the incidental-to-a-fiduciary-obligation exception would not apply. This case illustrates why an association’s property manager does not enjoy “automatic” exception from the FDCPA. In each case where the manager asserts this defense, courts will review the Management Agreement and related facts and determine: (a) whether the FDCPA would apply absent the exception; (b) if the manager has a fiduciary obligation to the association; (c) the nature and scope of that fiduciary obligation; and (d) the relationship between the debt collection activity in the case and that fiduciary obligation. The Westward case demonstrates the challenges to homeowners in bringing a successful FDCPA claim against a property manager.
Westward sought refuge from the FDCPA under the “fiduciary” exception. Most service providers try to avoid designation as a fiduciary. Fiduciaries owe strict duties to their beneficiaries. If the court deems that there is more than one beneficiary, the court may apply a duty to the fiduciary to act impartially between them. A fiduciary may be liable to a beneficiary for a claim for Breach of Fiduciary Duty. Over the years, the General Assembly has enacted legislation imposing special duties on other types of fiduciaries, such as trustees in foreclosures and estates.
Foreclosure Trustee as Debt Collectors.
Just because a debt collector is a fiduciary doesn’t mean that he is excepted from FDCPA compliance. For example, the FDCPA applies when lawyer debt collectors act as trustees in residential foreclosures where the communications include a demand for payment. Courts have found that a debt collection attorney’s activity as a foreclosure trustee isn’t incidental to the fiduciary obligation; it is central to it. The foreclosure trustee debt collector must refrain from continuing foreclosure proceedings or litigation activity until the debt verification requirements are met. In a foreclosure sale, the debt collection attorney obtains cash applied in satisfaction of the debt. A foreclosure trustee has fiduciary obligations that go beyond merely collecting the purchase price. A foreclosure trustee has a broad set of duties under the loan documents to prepare for the sale, conduct it, and disburse the proceeds properly. While association property managers and foreclosure trustees are different types of fiduciaries, in both examples the professional has a broad set of obligations impacting more than one party.
Whether debt collection activity conducted by an association’s manager is non-abusive or “incidental to a fiduciary obligation” requires independent analysis in each case. Boards, homeowners and property managers must familiarize themselves with debt collection laws and the management agreement to determine whether the manager must comply with the strict standards of the FDCPA. If an association’s property manager is engaging in improper collections activity against you, contact a qualified attorney to discuss your rights.
Photo credit (does not depict property discussed):
January 16, 2015
Foreclosure of residential real estate is traditionally based on state law and agreements between the borrower and lender in the loan documents themselves. Each state has its own rules governing whether foreclosure should occur in or out of a court proceeding. In Virginia, the vast majority of foreclosures occur in bank-appointed trustee’s sales. State and federal courts review and supervise this activity through lawsuits brought by one or more of the parties, usually borrowers seeking to set aside trustee’s sales. However, they resist efforts to transform the foreclosure process into a judicial one, ruling on various motions brought early in cases.
The mortgage crisis is a national concern involving federal policies promoting home ownership. Is there a federal regulation of nonjudicial residential foreclosure? Through supervision of the mortgage giants Fannie Mae, Freddie Mac, and other administrative programs, the federal government is invested in the mortgage origination process. In some cases, a federal agency takes direct title to distressed home loans or the foreclosed real estate itself. I have written about some of those cases in the past few months. For example, Fannie Mae and Freddie Mac enjoy property recording tax exemptions. Also, in states like Nevada that allow homeowners associations to foreclose, government agencies find themselves in title litigation when properties are assigned to them pursuant to the terms of federal mortgage programs. In the event of default of a loan tied to a federal program, the government may find its interests aligned more on the creditor’s side.
Foreclosure is one of many remedies available to lenders to collect on defaulted home loan debt. For over 30 years, Congress has come to the aid of consumers in debt collection matters. In 1977, Congress enacted the Fair Debt Collections Practices Act to curb abusive practices by the debt collection industry against consumers. The FDCPA also has the effect of benefiting non-abusive debt collectors harmed by violating competitors. Since its enactment, Congress and the federal courts have clarified the FDCPA’s role in regulating debt collection law firms’ activity obtaining foreclosure sales and deficiency money judgments. Since an attorney’s sale of distressed Virginia real estate in a trustee’s auction is an activity outside of the traditional perception of debt collection, the role of the FDCPA in foreclosure practice has been relatively unclear until the past few years, when a slew of foreclosure contest lawsuits have tested the utility of the statute.
The FDCPA applies to lawyers collecting on home loan debts, not just non-attorney debt collection agencies. Federal courts in Virginia have recognized that the Act also applies when lawyer debt collectors act as trustees in residential foreclosures where the notices include a demand for payment. These consumer protection laws regulate, among other things, the communications between the debt collector and the consumer. In order to conduct a foreclosure practice, the attorney must send notices to the borrower. The FDCPA may provide independent causes of action against the attorney found to have engaged in abusive practices. FDCPA issues thus pervade residential foreclosure matters. Consumers, lenders, and their attorneys must be aware of how this Act affects a contested foreclosure matter. There are many ways the FDCPA may be violated in a foreclosure matter, including the following:
False Representations. Under ordinary circumstances, it is difficult for a party to prove that they are entitled to relief because their opponent is allegedly lying, cheating or stealing. These are weighty accusations; the standard for proof is high, and the defenses are many. In 15 U.S.C. § 1692e, the FDCPA changes the rules of the game in the consumer debt collection context. The consumer doesn’t need to prove that he was actually deceived by the misleading communication. Instead, the consumer must show that false representations in a debt collection communication materially affects a consumer’ ability to make intelligent decisions with respect to the alleged debt. The courts apply a “least sophisticated consumer” standard to alleged false representations. This tends to prevent application of 20/20 hindsight in the interpretation of correspondence. The court will consider whether the correspondence is susceptible to more than one interpretation, one of which is misleading. Between the FDCPA, the Deed of Trust and state law, the debt collection law firm and attorney foreclosure trustee have multiple compliance obligations in preparing correspondence to the borrower.
Validation Notices. The FDCPA goes beyond prohibiting false representations. In 15 U.S.C. § 1692g, Congress mandates that disclosures be put into debt collection correspondence. In nonjudicial foreclosure, notices to the borrower are an essential element of the process. The initial communication must contain several messages, including, but not limited to:
[A] statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector[.]
If the debtor asks for verification of the debt, the collector must cease all collections activity until the verification is made. This not only means ceasing telephone calls, letters and collections lawsuits; it also includes the nonjudicial foreclosure activity.
Since foreclosures are typically conducted by law firms that exclusively pursue debt collection activity, these provisions of the FDCPA have served as the basis for class action lawsuits. Through the FDCPA, the federal government is heavily involved in regulation of nonjudicial, residential foreclosures. Borrowers, banks and their attorneys must be cognizant of the government’s role as regulator of collection of home loans and sometimes as assignee of mortgage debt or foreclosed real estate. Ironically, consumer protection attorneys are litigating FDCPA claims in federal courts against attorneys for their debt collection work on behalf of federally subsidized mortgage giants.
December 4, 2014
On January 31, 2012, F&M Services, L.C., conducted a foreclosure sale in Hampton, Virginia. F&M was the foreclosure trustee affiliate of the Richmond law firm Friedman & MacFadyen. Freedom Mortgage Corporation appointed F&M as successor trustee for the foreclosure of Hampton property owned by Ms. Gloria J. Harris. At the sale, Freedom Mortgage purchased the property. Subsequently, Freedom assigned the property to the U.S. Department of Veterans Affairs. Ms. Harris had a VA loan on the property.
In October 2012, Friedman & MacFadyen shut down their operations. That law firm was the target of class action litigation arising out of their debt collection and foreclosure practices, including “robo-signing” and violations of federal debt collection law. This law firm was the subject of an October 25, 2012 article on RichmondBizSense.com. In 2008, Diversified Lending Group, a company owned by Bruce Friedman made an undocumented $6 Million loan to his brother Mark Friedman’s law firm. In 2010, the appointed receiver for DLG entered into an agreement with the Friedman law firm for repayment of the $6 Million. A few months later, Bruce was arrested on investment scam charges. This same foreclosure operation was conducting sales and filing foreclosure accountings for many distressed properties in Virginia.
This did not stop litigation over property after the foreclosure law firm went out of business. Ms. Harris decided to bring a lawsuit in federal court to reverse F&M’s foreclosure sale. Rather than sue the law firm or the successor trustee, she decided to bring suit against the federal government and Freedom Mortgage. Ms. Harris’s suit does not focus on the debt collection rules or “robo-signing.” She alleged that a 30-day notice sent to her by LoanCare Servicing Center, Inc. failed to include information specifically required by the loan documents. For example, the amount demanded in the notice was over-stated by one-third. She also pleads that she made an October 2010 payment that was not credited in the notice amount.
Both the government and the mortgage company brought motions to dismiss the lawsuit. District Court Judge Henry Coke Morgan, Jr. denied their motions. The Court showed appreciation of the fact that the 30-day cure notice did not comply with the specific requirements of the loan documents. Of course, on an initial motion to dismiss, the court does not entertain proof of disputed facts. Later in the litigation the Court would consider the exact amount owed at the time of the notice and Ms. Harris ability to cure the payment default if she had received an accurate and compliant cure notice.
In the continuing fallout from the mortgage crisis beginning in late 2008, the federal government frequently finds itself as a party to complex foreclosure litigation. Previously, I discussed the tax advantages Fannie Mae and Freddie Mac enjoy in recording deeds in land records. In other states, such as Nevada, the federal government finds itself as a party to lien priority disputes between banks and community associations. The collapse of foreclosure operations such as Friedman & MacFadyen may prevent them from continuing their scrutinized practices. However, the homeowners, mortgage investors and even the government may find themselves in title litigation over the sale anyway.
Many lawsuits brought by borrowers after foreclosure sales never survive the initial motions filed by the defendant lenders. Although the October 17, 2014 opinion does not mention the law firm, I wonder if F&M’s role in Ms. Harris’ foreclosure afforded her case closer attention.
If you have interest in real property that has in the title report a trustee’s deed from an now out-of-business debt collection law firm, contact a qualified attorney in order to protect your rights.