June 21, 2016
The Day the Universe Changed
My parents are retired schoolteachers. Growing up, we watched our share of public television. I remember watching a British documentary by James Burke called, “The Day the Universe Changed.” This program focused on the history of science in western civilization. Scientific developments affect public perceptions of man’s place in the world. Each episode dramatically built up to a momentous change in scientific perception. For example, when scientists determined that the earth circles the sun (and not the opposite), it felt as though the “universe changed.” The title of the final episode was, “Worlds Without End: Changing Knowledge, Changing Reality.” Provocative stuff for 1985. I went on to study the history of science for four years in liberal arts college.
Property: Ownership & Possession:
In the law there is a difference between the reality of how people think and act in real life, on the one hand, and the reality of courthouse activities on the other. For example, people frequently lie when under the stress of questioning. Courts developed a comprehensive set of evidence rules to determine what documents and testimony are acceptable. The rules of evidence are not a formalization of the way people ordinarily evaluate truth-claims. As another example, outside of Court, non-lawyers understand the difference between the right of ownership and the right to possess or occupy any property. The right of ownership is superior to, and often includes the right to possess. These rights are distinct but unseverably connected. Attorneys and nonlawyers understand the difference between being an owner, a tenant, or an invited guest. By contrast, since before the Civil War, Courts in Virginia enforced the conceptual separation between the right to claim ownership and the right to evict an occupant and gain exclusive possession. The courts did this by not allowing an occupant to raise a competing claim of ownership as a defense in an eviction suit. In many cases, attorneys would have to “lawsplain” why a borrower could not effectively assert the invalidity of the foreclosure in the eviction case brought by the new buyer. Practically speaking, the borrower had to defend the eviction case while also filing another, separate lawsuit of her own to raise her claims to rightful title to protect her property rights. The rules required a financially struggling borrower to litigate overlapping issues in two separate cases at the same time against overlapping parties. If you are reading about this and think that it makes no sense, you are right, it doesn’t. But this was the way that the Virginia eviction world worked for a very long time.
Instant Legal Reform:
And then June 16, 2016 was the day the entrenched worldview of foreclosure contests and evictions in Virginia changed forever, or at least until the General Assembly holds its next session. The Supreme Court of Virginia published a new opinion overturning 150-200 years of precedent in this area. This opinion is important to anyone who lives or works in any real estate with a mortgage on it. Virginia appellate law blogger Steve Emmert observed that this decision represents a “nuclear explosion” and that “. . . dirt lawyers are going to erupt when they read . . .” This case is a game-changer that unsettles much of real estate litigation in Virginia.
My Professional Interest:
Since the foreclosure crisis exploded in 2008, I have litigated foreclosure cases in Virginia on behalf of borrowers, lenders and purchasers. Before June 16, 2016, few expected the rules of the road to change dramatically. The Supreme Court of Virginia has hundreds of years of precedent underlying the existing state of affairs. The banking industry maintains an effective lobbying presence with the General Assembly. Victims of foreclosure abuses play the game of survival; few become activists. Yet, common-sense would dictate that having two separate lawsuits (the eviction case and ownership dispute) proceeding through the court system at the same time wastes resources for everyone. This impacts borrowers the most because they are in the least favorable position to pursue multiple lawsuits at the same time.
Parrish Foreclosure Case:
Teresa and Brian Parrish took out a $206,100 deed of trust (mortgage) on a parcel of real estate in Hanover County, Virginia. This deed of trust’s provisions incorporated certain federal regulations into its terms. These regulations prohibited foreclosure if the borrower submitted a complete loss mitigation application (a.k.a., loan modification application packet) more than 37 days before the trustee’s sale. Federal National Mortgage Association (“Fannie Mae”) had an interest in the home loan. The Parrishes timely submitted their application packet. Regardless, in May 2014, ALG Trustee, LLC sold the Parris property to Fannie Mae at the foreclosure sale. Fannie Mae then filed an unlawful detainer (eviction) lawsuit against the Parrishes in the General District Court (“GDC”). The GDC is the level of the court system that most Virginians are familiar with. People go to the GDC for traffic tickets, collection cases $25,000.00 or less, evictions and “small claims” cases. In the GDC, the Parrishes did not formally seek to invalidate the foreclosure sale. Instead, they argued that they were entitled to continue to possess the property because ALG conducted the foreclosure sale while the loan modification application was pending. The GDC judge took a look at the Trustee’s Deed that ALG made to Fannie Mae and ordered the sheriff to evict the Parrish family. The Parrishes appealed the case to the Circuit Court. The Circuit Court granted a motion affirming the lower decision in Fannie Mae’s favor. The Parrishes sought review of the case by the Supreme Court. The Supreme Court of Virginia’s June 16th opinion is a mini-treatise for the new landscape of foreclosure legal challenges.
Questions of Ownership and Occupancy Are Inextricably Intertwined:
The Justices directly addressed the question of the GDC’s jurisdiction. Unlike the Circuit Court, the GDC does not have the statutory legal authority to decide competing claims to title to real estate. That said, in each post-foreclosure unlawful detainer case the GDC must base its decision on whether the presentation of the Trustee’s Deed of Foreclosure is sufficient evidence of title to grant the eviction. Under longstanding legal precedent, the Parrishes’ contention about their loan modification application would not be heard in the unlawful detainer case because the borrowers can’t invalidate the foreclosure deed in the GDC. But on June 16, 2016 that all changed. The majority found that the validity of the foreclosure purchaser’s claimed right to possess the premises cannot be severed from the validity of that buyer’s claimed title because that title is the only thing from which any right to occupy flows. “The question of which of the two parties is entitled to possession is inextricably intertwined with the validity of the foreclosure purchaser’s title.”
From this insight, one must call to question the practical requirement for the borrower to bring his own separate lawsuit against the buyer, trustee and lender to reverse the foreclosure, confirm the right to possess and other relief. Why not have a procedure where all of the related claims can be combined?
What Are Lawyers to Do Now?
Okay, now the “universe has changed.” How do borrowers raise this issue in defense of post-foreclosure evictions? Is there anything that the foreclosure buyer can do about this? The Supreme Court recognizes many reasons why a borrower might have a legitimate claim that the foreclosure sale was legally defective, including but not limited to:
- Fraud (by the lender and/or foreclosure trustee)
- Collusion (between the trustee and the purchaser)
- Gross Inadequacy of Sale Price (so low as to shock the conscience of the judge)
- Breach of the Deed of Trust (for example the regulations about the loan modification application)
The Supreme Court’s new opinion states that the homeowner could allege facts to put the validity of the foreclosure deed in doubt. By the court’s new standard, if the borrower sufficiently alleged such a claim, the GDC becomes “divested” of jurisdiction. When the judge determines that he has no jurisdiction because there is a bona-fide title dispute, he must dismiss the entire case. From there, the new buyer would have to re-file the case in the Circuit Court where the parties would then litigate everything.
I expect that the General Assembly will enact new legislation in its next session that will clarify the jurisdiction of the GDC and the procedures for post-foreclosure unlawful detainers. At least until then, purchasers and lenders will not have the same ability to use the unlawful detainer suit as a weapon in their struggles with borrowers in foreclosure contests. Homeowners’ abilities to fight foreclosures will be streamlined. Justice McClanahan wrote a dissent where she explained the meaning of this in remarking that the majority of justices,
practically eliminated the availability of the summary [i.e. expedited] proceeding of unlawful detainer to purchasers of property at foreclosure sales. The majority’s new procedure for obtaining possession operates to deprive record owners of possession until disputes over “title” are adjudicated after the record owner has sought the “appropriate” remedy in circuit court.
The Supreme Court of Virginia reversed the decision of the Circuit Court and dismissed the unlawful detainer proceeding brought against the Parrishes.
Conclusion:
I welcome the Court’s recognition that the rights of title and possession are “inextricably intertwined”. In post-foreclosure disputes between the borrower, purchaser, lender and trustee, bona fide ownership claims should certainly be decided in court before the sheriff kicks anyone out of their house. Eviction procedures should not be used as a weapon to railroad homeowners out of their houses. It makes no sense for there to be more than one legal case about the same thing. Hopefully the General Assembly will adopt new legislation accepting these revelatory developments while clarifying and streamlining court jurisdiction and procedures so that the parties need not litigate any more than is necessary to properly decide who has the right to own and possess the foreclosure property. The universe has changed, and we are closer to a future where the court procedures do not unfairly burden one side over the other and it is easier for each case to be decided on its merits and not who runs out of money first.
UPDATE: I was interviewed by Shu Bartholomew on her radio show/podcast, “On the Commons” about this Parrish v. Fannie Mae case. The podcast is now available.
Case Citation: Parrish v. Federal National Mortgage Association (Supr. Ct. Va. Jun. 16, 2016)
Photo Credit: 2012/11/12 OOFDG Defending Jodie’s Home via photopin (license)(does not depict the property discussed in this article)
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 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.
January 8, 2015
Attempt to Relitigate Foreclosure in Bankruptcy Sanctioned by Judge
In Virginia, borrowers have several options of where to bring a legal challenge to a foreclosure trustee’s sale. The shortest commute is usually the Virginia circuit court for the city or county where the property is located. Alternatively, the facts may allow suit to be brought in a federal district courthouses. Another common venue is federal bankruptcy court.
On June 18, 2014, I posted an article about a borrower, Rachel Ulrey, who managed to keep her foreclosed real estate because the lender, SunTrust Bank, failed to object to the plan in time. Ulrey’s case is a cautionary tale to lenders. Other cases show why borrowers cannot rely on lender inattention as a legal strategy. On November 12, 2014, U.S. Bankruptcy Judge Kevin Huennenkens issued an opinion illustrating why parties and their attorneys may not bring the same claim in bankruptcy court after they fail to achieve their desired result in a Virginia state court. The borrower and his attorney found their attempt to relitigate foreclosure in bankruptcy sanctioned by the judge.
Michael Pintz owned property in Sussex County, Virginia, in the name of Michael’s Enterprises of Virginia, Inc. In June 2008, he took out a $200,000 mortgage from Branch Banking & Trust. After he defaulted on payment, BB&T obtained a money judgment in Hanover Circuit Court. When BB&T sent Michael’s Enterprises a Notice of Foreclosure, he filed a request in Sussex Circuit Court to block the threatened sale. That court denied the motion. BB&T later purchased the property at a November 2013 Trustee’s Sale. In February 2014, Michael’s Enterprises filed for Chapter 11 reorganization in the U.S. Bankruptcy Court. The petition claimed the Sussex property as an asset of the corporation.
You may be wondering whether bankruptcy petitions can be used this way. When a court finds that someone filed something for an improper purpose, it may award litigation sanctions. State and federal courts in Virginia have similar rules prohibiting parties and their attorneys from advancing legal claims and defenses for improper purposes and not to vindicate the rights described in the court filing. Improper purposes include but are not limited to harassment, unnecessary delay or needless increase in the cost of litigation.
BB&T brought a Motion for Sanctions for Violation of Bankruptcy Rule 9011. The Bankruptcy Court initially deferred BB&T’s request for sanctions. Judge Huennenkens gave Michael’s Enterprises an opportunity to submit a proper bankruptcy reorganization plan before ruling on the sanctions request. The conditions imposed were not met. In October 2014, the bankruptcy court dismissed Michael’s Enterprises’ petition.
The court granted the lender’s renewed motion for sanctions. Judge Huennenkens observed that Michael’s Enterprises had had an opportunity in Virginia state court to litigate the same objectives sought in the bankruptcy petition. The court saw the new lawsuit as an attempt to attack the Virginia court’s decision and the nonjudicial foreclosure. The bankruptcy opinion doesn’t mention this, but if a party believes that a trial court made an erroneous decision, their recourse is to file a motion to reconsider and/or appeal it to the Supreme Court of Virginia. A bankruptcy court may be able to discharge or reorganize debts reduced to court judgments. However, they usually do not allow parties a do-over of unfavorable results of a state court case. Michael’s failure to present a proper reorganization plan in the face of a sanctions request made a poor impression. Judge Huennenkens found the case to be for an improper purpose and awarded BB&T $10,000 in sanctions against Michael’s Enterprises, Michael Pintz, individually, and his attorney. As of the date of this blog post, this result is currently on appeal before the U.S. District Court for the Eastern District of Virginia.
A common mistaken belief about litigation sanctions is that they are proper whenever a party or attorney loses in court. However, it is common for borrowers in foreclosure contest lawsuits have their cases dismissed on the merits or procedural grounds. Usually, the cases are brought as good faith attempts to obtain relief on the facts and circumstances of the foreclosure proceedings. In Michael’s Enterprises, however, the record of the state court actions together with the absence of a reorganization plan added up to an award of attorney’s fees, not only against the property owner but also its sole shareholder and the attorney. The facts of each case are different and require investigation and research before employing a legal strategy.
Case Citation: Branch Banking & Trust Co. v. Michael’s Enterprises of Virginia, Inc., et al, No. 14-30611-KRH (Bankr. E.D. Va. Nov. 12, 2014).
Photo Credit: taberandrew via photopin cc
December 4, 2014
Litigation over Property After the Foreclosure Law Firm Goes Out of Business
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.
Case Citation: Gloria J. Harris v. U.S. & Freedom Mortgage Corp., No. 4:14cv56 (E.D.Va. Oct. 17, 2014)(Morgan, J.)
photo credit (does not depict any properties discussed): Mike Licht, NotionsCapital.com via photopin cc
October 16, 2014
What Rights Do Lenders and Owners Have Against Property Association Foreclosure?
How are Virginia homeowners to evaluate competing threats from their mortgage bank and property association foreclosure? For many years, owners unable to pay their bills associated with their homes have focused on the threat of foreclosure from their mortgage lender.
Homeowners’ Varying Obligations to Lenders and Property Associations:
The conventional wisdom, in Virginia at least, is that homeowners should focus on keeping bills paid in the following priority: (1) local property taxes (have priority as liens, and are non-dischargable in bankruptcy), (2) mortgage lenders (monthly payments largest) (3) the monthly dues and special assessments of the homeowners association or condominium unit owners association. These notions are reinforced by mortgage lenders who escrow property taxes but not association assessments. Should owners continue to follow this in making decisions in the face of risk of payment default? Tax liens will certainly continue to enjoy a super-priority. However, a unit owner’s rights and responsibilities to their community association are of a different nature than bank mortgages. The rights of Associations to fix dues, special assessments and fines change. The General Assembly can amend the statutes. Courts make new legal interpretations. The owners can vote to change the Association Bylaws. Although the Association has significant influence over a unit owner’s rights, its lien is often overlooked to the detriment of many owners. What foreclosure, rights, if any, may an Association use to enforce its assessments? Florida and Nevada tend to be bellwethers of national trends in property associations because of their extraordinary number of condominiums and other associations. One recent case illustrates the chaos that may arise from these competing claims.
Las Vegas Foreclosure Contest Between HOA, Bank and U.S. Government:
On September 25, 2014, Judge Gloria Navarro of the U.S. District Court for Nevada issued an opinion providing clues to how Virginia homeowners may one day find themselves caught up in legal crossfires between banks and HOA’s. Emiliano & Martha Renteria owned a single-family home in Las Vegas that was a part of the Washington & Sandhill Homeowners Association (“HOA”). This is not a condominium but the issues are analogous. In September 2009, they defaulted on their Bank of America mortgage. Like Virginia, Nevada allows non-judicial foreclosure proceedings wherein title is transferred transactionally. The Court becomes involved if there is a dispute. In July 2012, the Bank-appointed Trustee foreclosed on the property. Five months later they rescinded that foreclosure. In May 2013, the Bank completed a foreclosure (in a do-over), claiming title to the property. On May 17, 2013 the Bank conveyed the home to the U.S. Department of Housing & Urban Development in a claim under the Single Family Mortgage Insurance Program.
To make matters more confusing, the HOA pursued its own foreclosure proceedings on the property at the same time to enforce its lien for the Renteria’s failure to pay their assessments. Most of the procedural aspects of Nevada condominium foreclosures are substantially different from Virginia. The HOA purchased the Renteria property at its own foreclosure sale in May 23, 2012, before the Bank’s first foreclosure sale. In July 2012, the HOA filed a release of its lien. A couple of months later, the HOA resumed its foreclosure, asserting an unpaid assessment lien of $4,983.00, this time against the Bank as owner. In October 2012, the HOA reacted to the Bank’s conveyance of the property to HUD, asserting a lien of $1,250.00 against the government. Note that this association foreclosed on a single-family home in an urban area to satisfy only $1,000-$5,000. When those demands went unpaid, the HOA abandoned this position. On October 9, 2013, the Association filed a federal lawsuit claiming ownership pursuant to the May 23, 2012 sale. In the lawsuit, the HOA disputed the Bank and HUD’s claims of title.
On September 18, 2014, the Supreme Court of Nevada ruled in a similar case that a HOA foreclosure extinguishes a mortgage lien such as that held by the Bank. Local readers may be interested that on August 28, 2014, the D.C. Court of Appeals reached a similar decision. In Nevada, Judge Navarro discussed how it is illogical for the HOA to simultaneously claim to be the rightful owner of a property and also assert an assessment claim against another party as owner. She found that under Nevada law, the Association was not permitted to waive its right to extinguish the Bank’s prior lien through foreclosure. The Court decided that the HOA’s subsequent release of the lien against the Renterias and new liens against the Bank and HUD were not valid because it had no right to change course. Had an individual investor purchased the property from the Bank’s foreclosure following the HOA’s release, he would have found himself caught up in this mess. The Court did not discuss whether these latter actions also created unwaivable rights. Judge Navarro ultimately decided that the HOA claim of title violated the U.S. Constitution. She dismissed of the Association’s lawsuit on the grounds that the HUD enjoyed an interest in the property under the Single Family Mortgage Insurance Program that could only be released under federal law. The Property Clause of the Constitution states that, only “Congress has the Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” Since the Bank’s mortgage was HUD-insured, a HOA cannot violate the government’s rights as insurer. This case is currently on appeal.
All of this caught my attention because it illustrates how HOA’s and Banks may use nonjudicial foreclosure procedures to duel over residual rights in distressed real estate. This case illustrates, if nothing else, why title examination and insurance are valuable investments to individual investors who may find themselves caught up in such a case. Well-advised home buyers must study the association bylaws and other disclosures carefully before waiving the contingency. If legal developments like this continue, associations will likely require a substantial legal reform. Otherwise, property values, especially condominiums will be in jeopardy, banks may restrict financing in fear of HOA lien priority, and investors may lose interest.
Will a Reordering of Rights of Banks and HOA’s Come to Virginia?
The competing rights of HOA’s and Banks is a critical aspect of the foreclosure crisis. On October 2, 2014, Nevada real estate attorney Bob Massi was interviewed on cable news about trends in HOA foreclosures. He predicted that lenders will start requiring borrowers to make their HOA payments into a bank escrow so that the lender’s foreclosure rights are not prejudiced by unpaid assessments.If this becomes a reality, mortgage servicers will become collection agents for associations. What remedies will owners have with respect to the escrow if they have disputes with the association over a fine? Will lenders change their underwriting guidelines to make loans more difficult for property subject to association covenants?
I expect that the issue of HOA lien priority will soon return to the Virginia Supreme Court and General Assembly. What responses to these trends can homeowners expect in Virginia? In a later installation in this new blog series about Association Foreclosure, I will discuss how a 2003 Supreme Court of Virginia decision presently limits a Condominium Association’s remedies for unpaid assessments. This Virginia opinion limits the rights of Virginia’s community association to disturb a lender’s rights under a purchase money mortgage. Given these new developments in Nevada and D.C., this 11-year-old opinion is important to every owner, association and lender with an interest in Virginia condominiums.
If you are a lender and have questions whether an association’s lien has priority over your own mortgage, contact qualified legal counsel. If you are an owner and have questions whether an attempt by your association to enforce a lien on your property runs afoul of the law or your condominium instruments, contact a real estate attorney to protect your rights.
Case citation: Washington & Sandhill Homeowners Association v. Bank of America, et al., No. 2:13-cv-01845-GMN-GWF (D.Nev. Sept. 25, 2014)(Navarro, J.).
Thanks to Shu Bartholomew, host of the weekly property rights radio show “On the Commons,” for letting me know about the Bob Massi interview.
Photo credit (photo does not depict the property discussed in this post): JoeInSouthernCA via photopin cc
