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.
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!)
January 21, 2015
Sweet Home Chicago: Are Association Property Managers Debt Collectors?
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.
Welnowska v. Westward Management, Inc., No. 13C06244 (N.D.Ill. July 24, 2014)
Townsend v. Fed. Nat’l. Mortg. Ass’n, 923 F. Supp. 2d 828 (W.D.Va. 2013)
Photo credit (does not depict property discussed):
January 16, 2015
Federal Regulation of Nonjudicial Residential Foreclosure
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.
Case: Townsend v. Fed. Nat’l. Mortg. Ass’n, 923 F. Supp. 2d 828 (W.D.Va. 2013).
Photo Credit: taberandrew via photopin cc (to my knowledge, this property is not the subject of the cases referenced herein or any other foreclosure or debt collection proceeding)
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
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)
May 21, 2014
Dealing With Trust Issues: Fiduciary Duties of Foreclosure Trustees
In Virginia, unlike some other states, a foreclosure is a transaction and not necessarily a court proceeding. A trustee appointed by the lender auctions the property. The proceeds of the sale must be applied to reduce the outstanding loan amount and transaction costs. A Trustee has special duties to the parties as their “fiduciary.” What are the fiduciary duties of foreclosure trustees?
At real estate closings, settlement attorneys present borrowers with a document entitled “Deed of Trust.” In this document, the borrower pledges the purchased property as collateral. The Deed of Trust provides the legal framework for the lender to pursue foreclosure in a default. It also procedurally protects the borrower’s property rights. When the lender records the Deed of Trust in the land records, a lien encumbers the property until the debt is released. The Deed of Trusts names one or more persons as Trustees for the property. It describes the borrower as the creator of the trust and the bank as the beneficiary. If the borrowers avoid falling into persistent default of their loan obligations, this trust language is largely irrelevant.
If the borrower experiences economic hardship and falls behind on their payments, however, they will begin to receive notices referencing the Deed of Trust. The bank may appoint a Substitute Trustee to handle the foreclosure. The culmination of the foreclosure process is the Foreclosure Trustee’s public auction of the property to satisfy the distressed loan. What does the foreclosure process have to do with trusts and trustees? Generally, under Virginia law, a breach of a trustee’s duties gives rise to a Breach of Fiduciary Duty legal claim. Lawyers like to pursue these claims because they may impose duties and remedies not articulated in the contract. Does this trust relationship give the homeowner greater or fewer protections against breaches by the bank’s agents during the process?
On May 16, 2014, I posted an article about the materiality of technical errors committed by the mortgage investors in the foreclosure process. That post focused on two new April 2014 court opinions providing some guidance on what remedies borrowers may have for those errors. Those new court opinions also provide fresh guidance about fiduciary duties of foreclosure trustees. Today’s blog post is about dealing with trust issues in foreclosure.
Bonnie Mayo v. Wells Fargo Bank & Samuel I. White, PC:
The Deed of Trust on Bonnie Mayo’s Williamsburg home listed Wells Fargo Bank as the “beneficiary” and the foreclosure law firm Samuel I. White, PC, as the Trustee. Mayo’s post-foreclosure sale lawsuit alleged that the White Firm breached its fiduciary duties to the borrower. For example, Mayo’s Deed of Trust required the lender to state in written default notices that she may sue to assert her defenses to foreclosure. The lender’s notices did not advise her of this, and she did not sue until after the foreclosure occurred. The Federal Judge considering her claims noted that there is conflicting legal authority on the extent to which a foreclosure Trustee can be sued for Breach of Fiduciary Duty. In his April 11, 2014 opinion, Judge Jackson observed that under Virginia law, a Foreclosure Trustee is a fiduciary for both the borrowing homeowner and the mortgage investor. While courts impose those duties on Foreclosure Trustees set forth in the Deed of Trust, they are reluctant to impose all general trust law principles.
Judge Jackson concluded that in addition to those duties set forth or incorporated into the Deed of Trust, the only other imposed on Trustees is the duty of impartiality. For example a foreclosure sale must be set aside where a trustee failed to refrain from placing himself in a position where his personal interests conflicted with the interests of the borrower and the lender. For example, the Trustee may not purchase the auctioned property himself or assist the bank in setting its bid. The Federal Judge dismissed Ms. Mayo’s Breach of Fiduciary Duty claims against the White Law firm, since impartiality was not adequately pled in the lawsuit.
Squire v. Virginia Housing & Development Authority:
In an April 17, 2014 opinion, the Supreme Court of Virginia focused on the limited nature of a Foreclosure Trustee’s powers. In this case, the Deed of Trust required the lender to try to conduct a face-to-face meeting with the borrower between the default and the foreclosure. The lender’s Trustee foreclosed, even though the lender did not make such an effort. The Court observed that the trustee’s authority to foreclose is set forth in the Deed of Trust. The Trustee’s power to conduct the sale does not accrue until the specified conditions are met. The borrowers’ failure to make monthly payments does not constitute a waiver of their right to expect the lender’s appointee to follow the rules. The fact that the borrower is in default does not authorize the mortgage investor and the trustee to disregard the Borrower’s protections set forth in the Deed of Trust and any incorporated regulations.
This holding is consistent with Virginia’s practice of conducting foreclosures out of court. The procedures set forth in the deed of trust provide the lender with a means of selling the property without the time & expense of a judicial sale. If the procedural nature of those rights is not preserved, then foreclosure disputes will go to court more often, depriving the lenders of the convenience of non-judicial foreclosure.
Ms. King alleged that the Foreclosure Trustee breached its fiduciary duty by conducting the sale prior to a required face-to-face meeting with the borrower. The Supreme Court of Virginia found that the Breach of Fiduciary duty claim was improperly dismissed by the Norfolk judge. The Court sent the case back down for consideration of damages.
These two new court opinions show how breach of fiduciary duty claims against foreclosure trustees require legal interpretation of the deed of trust. If the lender and trustee digress from its procedures, impartiality may be easier to prove.
Discussed Case Opinions:
Mayo v. Wells Fargo Bank, No. 4:13-CV-163 (E.D.Va. Apr. 11, 2014)(Jackson, J.)
Squire v. Virginia Housing Development Authority, 287 Va. 507 (2014)(Powell, J.)
Credits: Trust Arch photo credit: Lars Plougmann via photopin cc Williamsburg photo credit: Corvair Owner via photopin cc (for illustrative/informational purposes only. Depicts colonial Williamsburg, not Ms. Mayo’s home)