July 6, 2016
What is a Notice of Trustees Sale?
Bankers and lawyers send many notices, letters and statements to borrowers struggling with their mortgage. The purpose of such paperwork is to collect on the mortgage debt. In Virginia, the Notice of Trustees Sale is very significant. In Virginia, the bank does not have to go to court first in order to obtain a foreclosure sale. The law permits the property to be sold by a trustee in a transaction outside of the direct supervision of a judge. The Foreclosure Trustee cannot conduct a valid foreclosure in Virginia without sending a proper Notice of Trustees Sale. The Trustees Sale is a public auction of the property to the highest bidder, usually on the courthouse steps. In order to protect her rights against abusive foreclosure tactics (examples discussed elsewhere on this blog), the borrower must understand the role this Notice of Trustees Sale plays. Borrowers exploring the possibility of contesting the foreclosure should retain qualified legal counsel when they receive the Notice of Trustees Sale.
When borrowers go to closing on the purchase or refinance of Virginia property, they review and sign a loan document called a Deed of Trust. Virginia judges treat Deeds of Trust as the “contract” between the borrower, lender and trustee regarding any foreclosure. The Deed of Trust imposes specific requirements on the lender if they want to foreclose. The bank is required to follow these requirements regardless as to whether the borrower is in default on the loan or not. Deeds of Trust describe what the Notice of Trustees Sale must include, who it must be sent to, requirements for it to be published in the newspaper, etc. The Virginia Code also has specific requirements about the Notice of Trustees Sale and its newspaper publication. The Notice of Trustees sale is more than a tool to intimidate the borrower or provide a courtesy to someone about to lose their home. The Notice is an essential building block. Absent this, the foreclosure is not valid.
Upon receiving the Notice of Trustees Sale, Borrowers must take seriously the trustee’s stated intention to foreclose on the property at the date written. For various reasons, lenders and trustees will cancel or postpone trustee’s sale, but they won’t do this simply upon request by the borrower. If the lender or trustee indicates that the sale has been temporarily cancelled or postponed, the borrower may request for written confirmation.
The Notice of Trustee’s Sale is an invitation to make an offer to enter into a contract for the property with the purchaser at the sale. The two main documents in a Trustees Sale are the Memorandum of Sale and the Trustee’s Deed of Foreclosure. The Memorandum of Sale is a written contract between the trustee and the new buyer. Some Deeds of Trust require that the trustee and the buyer make their contract on the terms set forth on the Notice of Trustee’s Sale. Sometimes trustees put additional terms into these Memoranda which create other contractual rights which may be of interest to the borrower. The Trustee’s Deed is the document conveying ownership of the property to the new buyer. A borrower investigating the validity of the foreclosure should carefully review the Deed of Trust, Notice of Trustees sale, Memorandum of Sale and Trustee’s Deed to determine whether any of the latter documents breach of the Deed of Trust. If the trustee refuses to provide a copy of the Memorandum of Sale, the borrower should seek the assistance of qualified legal counsel. Both the borrower and any potential purchasers are generally entitled to rely upon the terms of the Notice of Trustees Sale in making informed decisions about it. If the lender and trustee sell the property on terms and methods contrary to the Notice of Trustees Sale, then the Trustee’s Deed may be invalid. The validity of the Foreclosure Trustee’s Deed is an issue of great interest to any victim of wrongful foreclosure.
Many homeowners fighting foreclosure observe many contradictions between their loan documents, mailings received from the bankers and their lawyers, and the things they are told on the phone by the bankers and the banker’s lawyers. The banks have experienced foreclosure attorneys whom they may have instructed to aggressively pursue the foreclosure and eviction. The Notice of Trustees Sale is one of the essential “gears” in the “foreclosure factory” borrowers contend with. Receipt of this document may be the best time to contact qualified legal counsel to discuss your rights and options available for keeping your home.
Relevant Statute: Va. Code § 55-59.1. Notices required before sale by trustee to owners, lienors, etc.; if note lost.
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.
November 21, 2014
Wrongful Foreclosure Claims for Robo-Signing
Among the controversies of the mortgage foreclosure crisis is that of “Robo-Signing.” A homeowner may receive notice that the original mortgage lender assigned their rights under the loan documents to another financial institution. When a representative of a lender signs paperwork to foreclose on a property, how does the borrower (or anyone else) know whether that company has authority from the originating lender to foreclose?
Janis O’Connor owned real estate near the Appomattox-Buckingham Virginia State Forest. On March 31, 2011, Deutsche Bank foreclosed on her property for nonpayment. After the foreclosure sale, Ms. O’Connor filed suit, alleging that the foreclosure was not valid because the bank lacked the authority of a proper successor to the mortgage company that originated her loan. O’Connor filed suit on her own, without an attorney representing her.
Can a Borrower Sue for “Wrongful Foreclosure?”
Janis O’Connor sued her lender (and others) on a number of legal theories, including “Wrongful Foreclosure.” She alleges that unknown persons forged assignments of her mortgage in a fraudulent scheme to foreclose on her home. She writes that this robo-signing was exposed on the television program, “60 Minutes.” The bank brought a Motion to Dismiss. On October 6, 2014, the U.S. District Court for the Western District of Virginia found that Virginia law does not recognize a claim called “Wrongful Foreclosure.” Judge Moon observed that the borrower must be able to allege a claim for breach of loan documents, fraud, or some other recognized legal theory. Judge Moon expressed a concern that Ms. O’Connor inadequately alleged any causal relationship between the “robo-signing” and her losses.
On May 14, 2014, I posted an article to this blog about legal challenges to the validity of foreclosures on the grounds that the lender committed technical errors in navigating the loan default through the trustee’s auction. Courts are reluctant to set aside a completed foreclosure sale. The technical breaches must have a strong connection to the relief requested by the borrower.
“Show Me the Note”
The Code of Virginia addresses situations where the lender struggles to come up with documents evidencing its authority to proceed with the foreclosure. Va. Code § 55-59.1(B) requires the lender to submit to the trustee what’s called a Lost Note Affidavit. These provisions also require the lender to notify the borrower in writing that the promissory note is lost and that it will request the trustee to proceed after 14 days. The lender must include language notifying the borrower that if she believes that some other party is the true holder of the note, she must file a lawsuit asking the local circuit court to order the foreclosing bank to post bond or make some other protection against any conflicting claims. That Court would then decide whether a bond or some other security must be posted to protect the borrower. The mere absence of the original note cannot serve as a basis to reverse a foreclosure: “If the trustee proceeds to sale, the fact that the instrument is lost or cannot be produced shall not affect the authority of the trustee to sell or the validity of the sale.” Va. Code § 55-59.1(B). These provisions require borrowers to file suit before the foreclosure takes place in order to litigate over “show me the note” issues. Ms. O’Connor did not file suit until almost two years after the foreclosure sale. From the borrower’s perspective, she hasn’t been damaged until the foreclosure is complete. From the Court’s perspective, it is sometimes easier to evaluate matters prospectively than to undo the completed transaction.
Judge Moon remarks that this statute does not actually require the lender to provide the borrower with the lost note affidavit itself. The failure to provide this item cannot serve as the legal basis to reverse a bank foreclosure. Technical breaches of the notice requirements cannot, on their own, serve as a basis to invalidate a completed foreclosure sale.
Judge Moon dismissed Ms. O’Connor’s complaint, giving her leave to amend her claims for Breach of Contract and Fraud. Ms. O’Connor has filed an Amended Complaint, and the sufficiency of the amended lawsuit has not been decided by the court as of this blog post. Regardless as to how Ms. O’Connor’s case is resolved, it provides some important reminders about foreclosure contests:
- Timing of Foreclosure Contest: If a borrower wants to challenge the validity of a foreclosure, their best interests may be served in filing suit after the foreclosure notice is submitted and before the auction occurs. This does not guarantee that the “show me the note” allegation will provide a remedy for the borrower, but it does preserve the issue.
- Value of Title Insurance: Investors who desire to purchase a property in foreclosure without obtaining title insurance run the risk of being made a party to a lawsuit like Ms. O’Connor’s which may go on for months or years.
- Duties of Foreclosure Trustees: An attorney acting in the capacity as a foreclosure trustee under the loan documents may owe duties to parties other than the bank. I discuss this issue in a related May 21, 2014 blog post. However, he doesn’t have an attorney-client relationship with non-clients.
Lenders and borrowers are not the only parties that may have a property interest challenged by title problems from a past, present or future foreclosure. The purchaser in the foreclosure sale, the spouse of the borrower or purchaser, an investor in a real estate company, or a tenant may have rights at stake in foreclosure title litigation. If your property rights are threatened by such an action, contact a qualified attorney.
case citation: O’Connor v. Sand Canyon Corp., No. 6:14-CV-00024 (W.D. Va. Oct. 6, 2014)
