Enforcing a lost note is a common problem that creditors face. In a recent North Carolina opinion, Emerald Portfolio, LLC v. Outer Banks/Kinnakeet Associates, LLC, 790 S.E.2d 721 (2016), the North Carolina Court of Appeals analyzed the lost note issue as it applies in North Carolina foreclosures. In Emerald Portfolio, the Court was tasked with deciding whether the transferee of a lost note is entitled to enforce said note.

The facts of Emerald Portfolio are as follows. In 2006, Outer Banks/Kinnakeet Associates, LLC (OBKA) executed a promissory note and accompanying deed of trust in favor of First South Bank (FSB). On the same day, Ray and Donna Hollowell, owners of OBKA, signed guaranty agreements making them personally liable for OBKA’s payment of the note. In February 2013, FSB sold and assigned the note and deed of trust to Emerald Portfolio, LLC (Emerald). FSB never physically transferred the note to Emerald.

In 2014, Emerald filed suit against OBKA and the Hollowells for defaulting on the debt. Attached to the complaint was an affidavit from FSB’s senior vice president, which alleged FSB was the lawful owner of the note, the note was endorsed to Emerald as of February 21, 2013, and the note could not be located. The trial court held Emerald was entitled to enforce the lost note and the Hollowells were liable as guarantors. OBKA and the Hollowells appealed, arguing Emerald did not have the right to enforce the note because it was lost when it was assigned to Emerald.

In deciding the case, the Court of Appeals analyzed N.C.G.S. § 25-3-309 (North Carolina’s lost note statute and the old UCC lost note statute) and UCC § 3-309 (the current UCC lost note statute revised in 2002.) Per N.C.G.S. § 25-3-309, a person can enforce a lost note if: 1) the person possessed and was entitled to enforce the note when it was lost; 2) the loss of possession was not the result of a transfer by the person or a lawful seizure; and 3) possession of the note can not be reasonably obtained because the note was destroyed or its whereabouts are unknown. Conversely, under UCC § 3-309, a transferee need only prove that the transferor was entitled to enforce the note at the time of transfer: proving possession is not required.

The Court of Appeals held Emerald could not enforce the lost note under the North Carolina statute because FSB, not Emerald, possessed the note when it was lost. The Court reasoned Emerald would have been able to enforce the lost note under the UCC statute because Emerald acquired ownership of the note from FSB, the party who was entitled to enforce the note when it was lost. The Court’s rationale was based on the fact that the North Carolina legislature could have adopted the most recent version of the U.C.C., but decided not to do so. Thus, the amended U.C.C. statute was not an intended avenue of relief for lost notes under North Carolina law.

Emerald Portfolio is important because it enforces and highlights the limitations of North Carolina’s lost note law. In North Carolina, to enforce a lost note, you had to lose the note.

In a recent decision, North Carolina Court of Appeals held that an individual is not a surviving borrower under a deed of trust if that individual was not obligated on the underlying promissory note. In re Clayton, 802 S.E.2d 920 (2017).

In June 2008, Jackie Clayton (Respondent) and Melvin Clayton executed a deed of trust for a reverse mortgage securing an obligation signed by Mr. Clayton. Mr. Clayton was identified as the “borrower” in all loan documents whereas Respondent was identified as “borrower” only in the deed of trust. Due to Mr. Clayton’s death, the holder initiated a foreclosure of the obligation. At the foreclosure hearing the clerk of court dismissed the matter, because Respondent signed the deed of trust as a borrower, resided at the property, and was still alive. The dismissal was appealed and the Superior Court judge allowed the foreclosure to proceed, ruling that Mr. Clayton was the sole borrower under the note and his status alone controlled default and foreclosure provisions of the loan. Respondent appealed. See In re Clayton, 802 S.E.2d 920 (2017).

The main issue in Clayton is whether a party not obligated under terms of a promissory note can be considered a borrower for the purposes of default and foreclosure of the loan. The Court reasoned that the deed of trust, the note, and other contemporaneously executed loan documents should be evaluated and construed as one document. Id. at 925. Both the note and deed of trust contained similar provisions allowing acceleration and foreclosure if “[a] Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” Id. Respondent contented she was a “surviving borrower” since she executed the deed of trust as a “borrower” and the property remained her principal residence. Id.

The Court disagreed. Although Respondent signed the deed of trust as a borrower the note and corresponding loan documents were executed without her signature. The Court found that Mr. Clayton was the only contemplated borrower as he alone executed the underlying loan documents. Id. Since Respondent neither executed, signed, nor was identified as a borrower to the note or other loan documents, she was not a borrower by virtue of executing the deed of trust as one. Further supporting the interpretation that Respondent was not intended to be a “surviving borrower”, the Court pointed out that she did not qualify as a borrower under North Carolina law. Per N.C. Gen. Stat. § 53-257(2), a borrower for a reverse mortgage must be 62 years of age or older. Id. at 926. Respondent was younger than 62 years of age at the time she signed the deed of trust. Id. Due to her age and the lack of intent to be obligated under the note, respondent’s residency and vital status did not control the right of the holder to foreclose. The Court’s message in Clayton is simple: a borrower must be obligated under the promissory note.

The Northern District of Illinois provides a decision for those collecting on contingency based fees with previous conflicting case law on this issue. For our clients, the decision also emphasizes the standing of the contract underlying the balance owed.

Click on the link below to read the full article on insideARM.

Read the InsideARM coverage of the decision (opens in new tab)

On December 21, 2016, the Supreme Court of North Carolina held the principle of res judicata does not apply to a non-judicial foreclosure. See In Re Lucks, 369 N.C. 222, 794 S.E.2d 501 (2016). The Court reached this conclusion through review of the scope of allowable evidence and applicability of the North Carolina Rules of Civil Procedure in a non-judicial foreclosure. Specifically, they focused on the role of a “dismissal” and “competency, admissibility, and sufficiency” of presented evidence at a trial court hearing. Id. at 228, 794 S.E.2d at 506.

In July 2006, Gordon Lucks executed a promissory note and deed of trust encumbering his property in Buncombe County. The deed of trust contained a standard power of sale clause as used in North Carolina. According to Deutsche Bank National Trust Company (“Deutsche Bank”), noteholder of the underlying debt, Mr. Lucks defaulted on his loan in October 2010 by failure to make timely payments. Id. at 224, 794 S.E.2d at 503. In September 2013 the Ford Firm, acting as substitute trustee, initiated a special proceeding for a non-judicial foreclosure. At the foreclosure hearing, the Ford Firm failed to provide evidence they were appointed substitute trustee per N.C.G.S. §45-10. This resulted in the attending clerk “dismissing” the matter. Id. In June 2014, Cornish Law, acting as substitute trustee for the same deed of trust, initiated a new non-judicial foreclosure for the debt owed by Mr. Lucks. Id. The assistant clerk found proper documentation which established that the Ford Firm was actually trustee at the time of the original “dismissal” now brought by Cornish Law, PLLC. The Clerk reasoned that the principles of res judicata required her to dismiss the second foreclosure because the Ford Firm and Cornish Law, PLLC were “in privity” with one another, thus Cornish Law, PLLC could not proceed with the foreclosure. Id.

Deutsche Bank appealed the second dismissal to Superior Court per N.C.G.S. §45-21.16(d1). At the appeal hearing, Deutsche Bank presented evidence demonstrating the right of Cornish Law, PLLC to proceed with a non-judicial foreclosure, specifically using a power of attorney (referred to in the opinion as “Exhibit 4”) allowing a mortgage servicing company to appoint trustee on behalf of Deutsche Bank. Id., 794 S.E.2d at 504. Exhibit 4 was a fourteen-page document signed by the bank and notarized on November 21, 2013. The last page of the document revealed a recording stamp from Montgomery County Register of Deeds dated 2010. Id. at 225, 794 S.E.2d at 504. The recording information was three years prior to execution of the power of attorney, it was eleven pages instead of fourteen as represented by Deutsche Bank, and was not recorded in the county in which the witness testified where power of attorney documents are traditionally recorded[1]. Mr. Lucks objected and the trial court sustained the objection ruling that Exhibit 4 failed “to provide a proper foundation” and was “hearsay.” Id. The trial court also stated that the “the document is internally inconsistent” and “has inconsistent dates.” Id. The trial court “dismissed” the foreclosure “with prejudice” as a result. Id. Deutsche Bank appealed the trial court’s decision. The Court of Appeals held that the Rules of Evidence are relaxed for non-judicial foreclosures and reversed the trial court’s decision. Mr. Lucks appealed to the Supreme Court of North Carolina.

The Supreme Court addressed two issues in Lucks: 1) whether the principal of res judicata applies in a non-judicial foreclosure, and 2) whether the trial court abused its discretion by finding Deutsche Bank failed to establish the appointment of the substitute trustee and the effect if so. Id. at 228, 794 S.E.2d at 506-07. The Court reasoned the Rules of Civil Procedure do not apply “unless explicitly engrafted into the statute.” Id. at 226, 794 S.E.2d at 505. The Court’s rational was based on the fact that the General Assembly intentionally crafted Chapter 45 to be a “comprehensive and exclusive statutory framework” for non-judicial foreclosures. Id. at 222-223, 794 S.E.2d at 505. The Court continued the analysis by determining Chapter 45 requires a creditor to prove “its right to proceed.” Id. A clerk or trial court is granted authority through Chapter 45 to authorize or allow a foreclosure. If the clerk or trial court does not find sufficient evidence to proceed then that denial does not “implicate res judicata or collateral estoppel in the traditional sense.” Id. at 227, 794 S.E.2d at 506. Furthermore, a non-judicial foreclosure is not a judicial action. Id. at 229, 794 S.E.2d at 507. Rather, it is a special proceeding in which the clerk or trial court’s authority is limited in scope to the elements found in N.C.G.S. § 45-21.16(d). Thus, as the Court states, “the Rules of Civil Procedure and traditional doctrines of res judicata and collateral estoppel applicable to judicial actions do not apply.” Id.

The Court next reviewed the discretionary authority of admissible evidence as vested in the clerk or trial court under Chapter 45. The Court accepted the holding from the Court of Appeals which stated that the Rules of Evidence are relaxed for a non-judicial foreclosure. Id.at 228, 794 S.E.2d at 506. The Court, however, did not agree that that lower court abused discretion by sustaining borrower’s objection. A clerk or trial court has full authority to review evidence presented (or objected to) for “competency, admissibility and sufficiency” and this authority vests only with the clerk or trial court. Id. For instance, a borrower can raise evidentiary objections that negate requirements of N.C.G.S. § 45-21.16(d). This must be done at the hearing since a non-judicial foreclosure is not within the Rules of Civil Procedure (i.e., no “answer” is required to be filed and cross claims are not allowed). Although the Rules of Evidence are relaxed, the creditor must prove the right to proceed with the foreclosure. The clerk or trial court is charged with review of the borrower’s objection, and, if the evidence is insufficient, the clerk or trial court may prohibit the foreclosure from proceeding.

The Court then examined if the trial court abused its discretion by finding against Deutsche Bank with regards to the appointment of substitute trustee. The Court held discretion was not abused, because the trial court’s exclusion of Exhibit 4 was not unreasonable. Id. As the Court points out, the specific standard of review is a “showing that its ruling was manifestly unsupported by reason and could not have been the result of a reasoned decision.” Id. (quoting State v. Riddick, 315 N.C. 749, 756, 340 S.E.2d 55, 59 (1986) (citing, inter alia, White v. White, 312 N.C. 770, 777, 324 S.E.2d 829, 833 (1985))). In In Re Lucks, the trial court excluded Exhibit 4 because it was clearly inconsistent. The Court opined that due to relaxed Rules of Evidence Deutsche Bank could have proffered evidence to overcome the inconsistencies but simply did not. Thus, the trial court was within their discretion to exclude Exhibit 4. Id. at 229, 794 S.E.2d at 507.

The Court reached two conclusions in In Re Lucks: 1) the trial court did not abuse discretion by sustaining borrower’s objection to Exhibit 4, and 2) the clerk and trial court orders “dismissing” the foreclosure were erroneously entered because the traditional rules of res judicata and collateral estoppel do not apply in a non-judicial foreclosure. Id. The second conclusion has implications outside of the instant case. It impacts the entirety of non-judicial foreclosure law in North Carolina because a definitive case now exists that holds the Rules of Civil Procedure do not strictly apply to non-judicial foreclosures unless expressly provided by statute. The legislature in crafting Chapter 45 seemed to understand the relationship between creditor and debtor and that a creditor is motivated to cease a foreclosure if the debtor satisfies the debt (or past due amounts), performs other loss mitigation, or if the creditor simply does not have the evidence to proceed. As such, they seemed to intentionally relax the Rules of Evidence and the Rules of Civil Procedure for non-judicial foreclosures. The issue of res judicata has been a topic of debate in North Carolina foreclosure law. (See generally In Re Rogers Townsend & Thomas, PC, 794 S.E.2d 484 (2016); U.S. Bank Nat. Ass’n v. Pinkney, 787 S.E.2d 464 (2016); In re Garvey, 772 S.E.2d 747 (2015); Lifestore Bank v. Mingo Tribal Preservation Trust, 763 S.E.2d 6, 235 N.C. App 573 (2014)). The North Carolina Supreme Court’s holdings in In Re Lucks effectively puts an end to these debates. The Court effectively summarized its position in the following two sentences: “Non-judicial foreclosure is not a judicial action; the Rules of Civil Procedure and traditional doctrines of res judicata and collateral estoppel applicable to judicial actions do not apply. To the extent that prior case law implies otherwise, such cases are hereby overruled.” In Re Lucks, 369 N.C. at 229, 794 S.E.2d at 507.

Previously, and presumably in effort to dispose of the excessive number of foreclosure cases in Florida, some judges became more relaxed on the Florida Rules of Evidence at trial than they would have been in other cases. As the foreclosure volume has become more manageable, however, and cases are being reassigned to division judges, more stringent adherence to and understanding of the Rules is once again pivotal in proving your case.

To establish a breach of a real estate contract, the Plaintiff bears the burden of proving by a preponderance of the evidence: the existence of a contract; a breach of that contract and damages resulting from the breach. Sam Rodgers Properties, Inc. v. Chmura, 61 So.3d 432. 437 (Fla. 2d DCA 2011).

The trial witness must be knowledgeable as to the records that he or she is testifying to and be familiar with the general practices and procedures to which he or she is testifying. The witness’s knowledge can be derived from the review of the company’s records and files. Progressive Express Ins. Co. v. Camillo, 80 So.3d 394, 399 (Fla. 4th DCA 2012). A factual basis for the witness’s knowledge need not be set out where he or she is shown to be in a position where he or she would necessarily possess the knowledge. J.R. Carter v. Cessna Fin. Corp., 498 So.2d 1319, 1321 (Fla. 4th DCA 1987). There is no requirement that the witness be familiar with the actual mechanics of typing the information into the computer system. Wells Fargo Bank N.A. v. Balkissoon, 183 So.3d 1272 (Fla. 4th DCA 2016). There is generally also no requirement that the witness authenticating the business records be the person who actually prepared the business records. Bank of New York Mellon f/k/a The Bank of New York as Trustee for the Certificate Holders Cwalt, Inc. Alternaitve Loan Trust 2006-OA17 Mortgage Pass Through Certificates Series 2006-OA17 v. Johnson; 185 So.3d 594 (Fla. 5th DCA 2016).

The witness is required to be able to lay the proper foundation so that the exhibit can come into evidence. See Maslak v. Wells Fargo Bank N.A., 190 So.3d 656 (Fla. 4th DCA 2016). In Florida, a business record is admissible at trial, as an exception to hearsay, provided that a qualified witness or custodian of records can testify that the record was made at or near the time the act, transmitted from or by a person with knowledge, if the record is kept in the course of regularly conducted business activities and it is the regular practice of that business to make and keep such a record. § 90.803(6), Fla. Stat. (2017).

Much ado has recently been made by the defense bar regarding the admission of “judgment figures” at trial, defense counsel arguing that they are improper summaries. But, computer printouts, like any other business records, are admissible if a witness can testify as to the manner of its preparation, reliability, and trustworthiness. See e.g. Brown v. State, 113 So. 3d 134 (Fla. 1st DCA 2013). Data compiled and presented in printouts prepared for trial may even be admissible pursuant to §90.803(6) even though the printouts themselves are not kept in the ordinary course of business. Jackson v. State, 877 So. 2d 816 (Fla. 4th DCA 2004). The fact that the information was printed out does not deprive said printouts of its otherwise business records character.

In addition, if there are changes in servicers during the life of the loan, and the current servicer takes custody of the prior servicer’s records and integrates them with their own, the witness must have the requisite knowledge to be able to testify to those boarding procedures for those records to come into evidence. Bank of New York as Trustee for the Note-holders Cwabs Inc. Asset Backed Notes Series 2006-SD2006-SD4 v. Calloway, 157 So.3d 1064 (Fla. 4th DCA 2015).

Therefore, it is critical that a representative appearing at trial be both familiar with the business’s practices and procedures about which he or she is testifying and understand how to read and interpret said records in order to lay a proper foundation for admission. The representative need not be the individual that prepared the business record or precisely identify each group in the business’s structural hierarchy. Cayea v. CitiMortgage, Inc., 138 So. 3d 1214 (Fla. 4th DCA 2014). In fact, the witness needn’t be familiar with the physical mechanics of entering in the information into the business’s computer system. Wells Fargo Bank, N.A. v. Balkissoon, 183 So. 3d 1272 (Fla. 4th DCA 2016). However, the witness should be familiar with the general overall procedures in maintaining said records so that they may be properly admitted during trial.

Based on the foregoing, it is crucial that the witness be prepared for each trial, be familiar with each procedure they will be testifying to, and be able to interpret the records they are presenting so that a precise and clear record is before the court to facilitate the admission of said records at trial.

Re: North Carolina HB 770 (N.C.G.S. 45-10)

On August 30, 2017, the North Carolina Legislature passed into law S.L. 2017-206. This law amends several provisions of the North Carolina General Statutes, specifically N.C.G.S. 45-10. Effective immediately, the law amends subsection (a) and adds subsection (d) to N.C.G.S. § 45-10 by including language which defines a “noteholder,” clarifying an attorney’s role while representing trustees in a deed of trust, and placing limitations on the trustee’s relationship with noteholders and borrowers.

The text was amended to incorporate the term “noteholder” as the party which may substitute a trustee in a deed of trust. This was accomplished by using only the term “noteholder” in subsection (a) and defining “noteholder” with nearly identical text from the previous version of the code under new subsection (d). As was the case prior to the amendments, a substitution of trustee was conducted exclusively by the noteholder or an agent of the noteholder with proper power of attorney.

N.C.G.S. § 45-10 is amended by including new language that further clarifies the trustee’s attorney’s position of neutrality in a foreclosure proceeding. The statute now expressly states that an attorney for the trustee cannot represent a noteholder or borrower while initiating a foreclosure proceeding. It is not known what, exactly, is meant by “initiating a foreclosure,” but generally this refers to a trustee’s first act (i.e., first legal or filing of the notice of hearing). Maintaining a neutral status between the trustee and other parties (i.e., the noteholder and borrower) in a foreclosure proceeding is a long-standing requirement of attorneys in North Carolina. A statement with regards to the trustee’s neutrality is part of the requirements for the notice of hearing under N.C.G.S. § 45-21.16(c)(7)b. The amendments codify that the attorney for the trustee must not simultaneously represent either party while the foreclosure is on-going. This issue has been previously discussed in court opinions but never codified until now.

Although the trustee is a neutral party by statute, the legislature included exceptions to the general rule. First, the amendments allow an attorney representing a trustee in a foreclosure to simultaneously represent the noteholder in an “unrelated matter.” The statute does not address what is considered an “unrelated matter.” The legislative intent is to allow an attorney representing the trustee to not be subject to a conflict of interest from representing the noteholder in a separate matter. The inclusion of this language allows for the trustee to remain neutral in the foreclosure proceeding, while also allowing an escape route for the attorney should the foreclosure become contested.

An attorney who has initiated a foreclosure proceeding as trustee’s counsel may resign from representing the trustee and subsequently represent the noteholder. The amendment allows this to happen if the matter becomes “contested” (although the legislature fails to define what constitutes “contested”). This is not a new concept in representing the trustee, rather the new language acts as codification of a practice allowed under a 2013 North Carolina ethics opinion (see 2013 NC Eth. Op 5), which was upheld in the recent North Carolina Court of Appeals case, In re Goddard and Peterson, PLLC 789 S.E.2d 835 (2016).

In conclusion, the purpose of these amendments to N.C.G.S. § 45-10 is to clarify the law while codifying elements of case law and state ethic opinions. Aspects of this new law were either presented in case law, ethics opinion, or representative of a common practice by attorneys. Furthermore, these amendments seem consistent with prior changes to N.C.G.S. § 45-10, which also provided clarification and guidance as to the trustee’s relationship and appointment. There are still unknown avenues with the amendments to N.C.G.S. § 45-10 that may be expounded by litigation or clarification from the legislature (e.g., defining “initiating a foreclosure proceeding,” “contested hearing,” and “unrelated matter”). Ultimately, the changes to N.C.G.S. § 45-10 will not immediately impact the established practice of Brock & Scott, PLLC.

E-filing has begun in South Carolina! On December 9, 2015, Clarendon County became the first county in South Carolina to require that all attorneys making any filing on a new or pending civil case (including foreclosures) do so electronically via an online portal developed by the state judicial department. Pro se parties will continue to be permitted to file documents via traditional methods. The institution of e-filing practice is being supervised and mandated by the state. As such, it is anticipated that users will e-file via the same portal interface in all e-filing counties—which suggests that e-filing practice should be generally uniform throughout the state. Three other counties that share the same judicial circuit with Clarendon are scheduled to begin e-filing by mid-February 2016. No additional roll-out dates to other counties have been provided, but many more–if not all–are anticipated throughout the remainder of 2016. Eventually, e-filing will be a statewide mandatory practice. In conjunction with the development and maintenance of the portal and electronic payment processing, additional filing fees have been added—with the filing fee for a Summons and Complaint being approximately $30 higher while a motion filing fee is approximately $6 higher. Notably, all e-filed documents are available for viewing online by the general public very soon after filing. We have further noted that many other counties have recently begun making documents filed via traditional methods available for viewing online.

Associate Attorney Kristen Washburn, of Brock & Scott, PLLC, was notified on the morning of December 9, 2015 that she has the historic distinction of being the first attorney in South Carolina to file a document electronically in state court! Her picture currently welcomes all users to the e-filing portal, as shown below. We will continue to update our procedures to conform to these exciting changes. Please contact Brock & Scott, PLLC for any inquiry you may have regarding e-filing in South Carolina. Additional information can be found at the South Carolina Courts e-filing site (opens in new tab)

“In many ways, effective communication begins with mutual respect, communication that inspires, and encourages others to do their best.”-Zig Ziglar

When working as internal audit, sometimes, communicating with Operations can be challenging. More often than not, the words “Quality Assurance” or “Internal Audit” are usually associated with negativity. Let’s face it, there’s no easy way to spin internal auditing without having to tell Operations where the gaps are in their processes and, constructive or not, most people don’t like to be criticized. Like Zig Ziglar said, there has to be mutual respect. Without it, there will be a lack of communication and encouragement within the company, so how do you go about building that mutual respect? Here are 5 of the top ways to do so –

1. Be honest – no surprises. The first thing you should always remember as an internal auditor, is to be honest. Be upfront about what you plan to audit for. Before beginning any internal audit, you should provide Operations with an audit plan that explains exactly what you plan on doing. Give them the opportunity to provide feedback or make (reasonable) changes. Also, provide the managers with a copy of the audit checklists and encourage them to share them with their teams, so that everyone is aware of what’s going on, not just upper or middle level management. This will help eliminate any “surprises” of what’s forthcoming.
2. Be positive. As an internal auditor, it is your job to point out gaps in processes, what they did wrong, or what they could do better. But what did they do right? Make it part of your monthly report to management to include the positive side of what they did as well. Point out a specific employee who, based on your review, always does their part of the process correctly, or a process that your audits show is working as it should. Maybe even acknowledge a manager who took action to effectively correct an issue.
3. Don’t be afraid to ask questions, but do so without making it a challenge. It’s an auditor’s job to ask questions. However, when a question is asked in a challenging way, it is likely that you could put the person on the receiving end on the defense. This also leads back to having mutual respect between the two lines of business. For example: “Why didn’t you complete the task?” This question tells the person that you already feel as if they failed, when in reality there could be a good explanation. A better question to ask would be: “I noticed that there is a pattern of non-conformances for this task. Is this something you could take a look at?” By asking the question in this way, it gives the person the chance to review the issue and provide a more informed response instead of feeling like they need to defend themselves.
4. Give realistic recommendations. Consider available resources before making recommendations. If Operations doesn’t think it can be done – they’re going to stop listening to your recommendations. When reviewing audit results and non-conformances, feel free to provide the manager with a recommendation. If it is something outside of Operation’s power, such as hiring more staff or even replacing people with technology, then the likelihood of the recommendation being implemented is slim.
5. Participate. Ask Operations to include you in on any upcoming trainings or recurring department meetings. It’s best to not to make any recommendations without the knowledge to back it up. Internal auditors expect Operations to know what the process is, but we should also have a general idea of it as well. Understanding how Operations develops their processes can help an auditor better understand some of the gaps and provide better feedback. This also shows Operations that you take an interest in what they do as well as making you more efficient at your job as an auditor.

At the end of the day, Compliance and Operations have to stick together understand each other and work towards the same goal. Author, speaker, and executive coach, Joel Garfinkle, once said “Make sure you are understood. Don’t blame the other person for not understanding. Instead, look for ways to clarify or rephrase what you are trying to say so it can be understood.” Never assume that Operations fully understands you or that you fully understand Operations. Compliance and Operations may be separated by function, but it’s by a thin line at best.

Two statutes that control the mortgage servicing industry in Georgia were recently revised by the state legislature and signed into law by Governor Nathan Deal. Georgia House Bill 322 changes the current rules by setting the requirements for the proper attestation of security instruments as well as a specific time in which a foreclosure deed must be recorded without incurring a penalty. This bill will become law effective July 1, 2015.

The execution of a mortgage or security deed in Georgia must be signed by the maker and two witnesses in order to be recordable (O.C.GA. §44-2-15). The execution of the instrument must be witnessed or acknowledged by an official witness. In common practice, the official witness is typically a notary public. The two witnesses for the majority of security deeds are made up of the official witness, and an unofficial witness; both of whom personally witness the execution by the maker of the instrument. Another acceptable form of execution under O.C.G.A. § 44-2-16 is where the signature of the maker is completed in the presence of two unofficial witnesses and then “acknowledged” before the notary public. In this situation, the notary (or authorized officer) does not personally witness the maker executing the document but receives an acknowledgement from the maker and certifies the same on the face of the deed.

An issue has arisen due to bankruptcy trustees attempting to void certain security deeds when the deed is acknowledged by the notary and there was only one unofficial witness. As of July 1, security deeds will require the unofficial witness and notary to both be present when the maker executes the security deed in order to be considered properly executed. This new requirement will be beneficial to mortgage servicers in Georgia in that it sets forth a uniform standard for the execution of the security deed. However, closing attorneys will need to be vigilant moving forward to ensure security deeds executed outside of their office are signed, sealed and delivered in the presence of both the unofficial witness and notary and to not record deeds attested to by acknowledgement.

House Bill 322 also amends O.C.G.A. §44-14-160. This statute previously required that a foreclosure deed be filed within 90 days of the foreclosure sale. Over the years the law has created some confusion in the industry as there is no penalty stated for violating this statute. Attorneys for borrowers have attempted to use this code section to their benefit by claiming a foreclosure deed which was filed more than 90 days after a sale is void. The revised code section creates a $500 penalty for any foreclosure deed filed more than 120 days after the sale. The penalty will be assessed on the holder of the foreclosure deed at the time of filing. The establishment of a monetary penalty for late filing is beneficial to servicers by preventing the assertion in litigation that the delay renders the deed void. Since these statutes are strictly construed, the explicit penalty emplaced by the legislature will preclude differing interpretations by parties attempting to attack the enforceability of the instrument. On the other hand, this penalty creates more of an urgency to record deeds in a timely manner to avoid the penalty. Long past are the times when delays were acceptable as closing firms will need to promptly record deeds or else risk the ire of clients as well as potentially incurring liability on behalf of the firm for the penalty.

Recently, in GMAC Mortgage v. Whiddon, Florida’s First District Court of Appeals held that a trial court should not bar a servicer from filing a new foreclosure action based upon a different default date where a first foreclosure action had been previously dismissed with prejudice.[1] While its holding is nothing new to Florida law, the analysis set forth in Whiddon offer servicers and their counsel insight into the application of this principle.

The Whiddon Court explains that in December of 2010, GMAC filed its first complaint for foreclosure. The first complaint alleged that the borrowers defaulted on their loan in June 2010. The trial court dismissed the first complaint with prejudice, when GMAC did not respond or appear to the Order to Show Cause. In March 2013, GMAC filed a second compliant for foreclosure, once again alleging that borrowers defaulted on their loan in June 2010. The borrowers filed a Motion to Dismiss based on Res Judicata, stating that the previous dismissal with prejudice barred GMAC from bringing the second action. Although GMAC voluntarily dismissed, the trial court ordered the dismissal be stricken, granted the borrowers Motion to Dismiss with prejudice, and issued an order denying leave for GMAC to re-file a foreclosure action with different dates.[2] The First DCA’s decision that the trial court abused its discretion comports with the 2014 Florida Supreme Court decision in Singleton v. Greymar Associates. In that case, the Florida Supreme Court held that the doctrine of res judicata did not bar a second foreclosure action which alleged a subsequent and separate default from that alleged in first foreclosure action.[3] Hence, the trial court in Whiddon should have allowed GMAC to refile the complaint, so long as it alleged a subsequent and separate default date.

Typically, this type of issue occurs when a borrower successfully defended against a prior foreclosure action and the lender brings a subsequent foreclosure action, either alleging the same default date or subsequent dates. The mortgagor then pleads res judicata as an affirmative defense. Res judicata is a legal doctrine that bars the same parties from litigating a second lawsuit on the same claim. Trial courts were conflicted (and some still are) on how to handle this affirmative defense as some judges reasoned that that subsequent defaults were the same issue, and not different from the original claim. The Florida Supreme Court clarified this issue by clearly stating that subsequent defaults present separate and distinct issues. Mortgage contracts are unique because not only is the first default actionable, but each and every month that the borrowers fail to pay, is an entirely separate event. Since a mortgage is an installment contract, the borrowers are not only defaulting on the month they stopped paying, they are defaulting on each payment thereafter. That means that so long as the servicer through their foreclosure counsel, lists a subsequent default date on the complaint, the servicer has sufficient caselaw to support their answer to the affirmative defense for res judicata.

These recent decisions provide servicers with the long-awaited answer to the question: how should servicers pursue a new foreclosure action where the mortgagor successfully defended against a prior foreclosure action? Below, Brock & Scott provides its clients with, not only the answer, but a roadmap.

1. Review prior actions as a matter of course. Servicers and their counsel should review the foreclosure history to determine if a previous foreclosure action was taken. If a previous action is identified, counsel should review the action to determine whether the mortgagor successfully defended against the action. Whether or not an action was taken and was successful should be communicated between the servicer and counsel prior to first legal.
2. Ensure subsequent default date is supported by evidence. Upon identifying the previous successful action and communicating with the servicer, counsel should review the payment history to validate/support a subsequent default date. Once a date can be supported, counsel may use this date on the complaint. Care should be taken to ensure that the date on the subsequent complaint is different and more recent than the date in the previous action.
3. Establish and communicate written procedures. Servicers and their counsel should have processes for identifying referrals where the mortgagor successfully defended against a previous action. This process should be in writing and known to the affected departments. Just because the process is documented, does not mean it was communicated or acted upon.
4. Measure results. Servicers should measure the efficiency and effectiveness of review process. Servicers can do this by using their scorecard framework or through audits. Servicers can also request that their counsel evidence internal monitoring records.
5. Expect the unexpected. Sometimes mistakes occur and processes fail. In these instances, the Florida Supreme Court decision can serve to assist counsel as they make the appropriate steps. How did the servicer find out about the previous successful action? If the action was identified internally, inquire with counsel to see if filing an amended complaint is recommended. If opposing counsel identified the issue by pleading res judicata as an affirmative defense, the servicer should inquire with counsel on whether filing an answer with amended complaint or voluntarily dismissing the action and refiling is recommended.
6. Create a record for appeal. –If the trial court dismisses the case with prejudice, after going through all the above steps, rely on the Florida Supreme Court opinion on appeal and preserve the record.

[1] GMAC Mortg., LLC v. Whiddon, 40 Fla. L. Weekly D1082 (Fla. 1st DCA May 7, 2015).

[2] Id.

[3] Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004).