Starting in May 2012, bankruptcy courts in the 11th Circuit (Florida, Georgia, Alabama) began allowing debtors to void under-secured junior liens during their Chapter 7 bankruptcy cases. The recent decision by the Supreme Court in Caulkett (Bank of America, N.A. v. David B. Caulkett, 575 US ____ Slip op) has brought the trend to an abrupt halt.
Also known as a “strip-off,” the practice is commonly used in Chapter 13 cases and enables a debtor to void junior liens where there is no excess value in the secured property above the amount secured by a senior lien. In the mortgage context, a common strip-off example is as follows:
- Home Value: $ 150,000
- 1st Mortgage balance: $ 160,000
- 2nd Mortgage balance: $ 35,000
- Net Equity in secured property after deducting 1st: $ 0
- Value in secured property available for 2nd lien: $ 0
The resulting negative equity allows the debtor to void or “strip-off” the junior lien leaving the previously secured creditor with an unsecured claim.
The ability of the bankruptcy courts to order strip-offs has remained unchanged since the early 1990s. The Supreme Court’s earlier Dewsnup (Dewsnup v. Timm, 502 US 410) decision defined the limits of a common bankruptcy lien valuing tool known as “strip- down ” (reduction of a lien amount to the value of the secured property) to the exclusion of Chapter 7. Since that time, the majority of bankruptcy courts and three circuit courts have read the Dewsnup case broadly as also preventing strip- off in Chapter 7. With the McNeal (In re McNeal, 735 F.3d 1263) decision by the 11th Circuit Court of Appeals, the scope of Dewsnup was limited to Chapter 7 strip- down and therefore did not prevent strip- off . A substantial number of Chapter 7 cases invoking the strip-off remedy followed.
On June 1, 2015, the Supreme Court weighed back in on the issue in the Caulkett case holding that the rule in Dewsnup also applies in Chapter 7 to both strip-down and strip-off. Specifically, in an unanimous decision, the court determined that the same analysis used in the Dewsnup decision applies in the strip-off context: to the extent a secured creditor’s claim is allowed, it cannot be reduced or voided. Therefore, junior liens that find themselves under-secured after deducting the senior mortgage amount are no longer eligible to be voided on the basis of valuation alone.
While this is clearly welcome news for creditors holding secured junior liens, don’t expect the issue to be permanently resolved. The Caulkett opinion repeatedly notes that the Court was stuck with the existing, “unfortunate” case law from Dewsnup seemingly because the Court was not asked to overrule the earlier decision. Presumably, this is the roadmap for any future challenges to the Dewsnup and Caulkett prohibition of Chapter 7 strip-offs (and strip-downs). Stay tuned.
Written by Matt Pineda
For several years, the Protecting Tenants at Foreclosure Act of 2009 (Public Law 111-22) significantly affected the foreclosure process in North Carolina. The Protecting Tenants at Foreclosure Act, or “PTFA”, set post-foreclosure guidelines in the evictions process regarding foreclosed properties with preexisting tenancies. Under Section 702 of the PTFA, successors-in-interest to properties that were foreclosed assumed the interest subject to the rights of the current tenants of the properties, and in the case of a “bona fide tenant”, subject to the terms of any legitimate rental arrangement or lease entered into with the previous owner of the subject property.
The PTFA established that successors in interest to a subject property who would not be occupying the property as a primary residence would be required to allow a bona fide tenant occupying the property under a lease that was entered into prior to notice of foreclosure to occupy the premises until the end of the remaining terms of the lease. Under the PTFA the tenant was only considered a “bona fide tenant” if: 1) the mortgagor or child, spouse, or parent of the mortgagor was not the tenant 2) the lease or tenancy was the result of an arms-length transaction and 3) the receipt of rent under the lease is not substantially less than fair market rent (with some exceptions).
This section of the PTFA, as applied to North Carolina, was requiring that in situations where properties became Real Estate Owned, the foreclosing noteholders were involuntarily mandated to enter into a landlord/tenant relationship with bona fide tenants that were occupying the property under the terms of a legitimate lease with the prior owner. As many foreclosing noteholders have a regional or even national reach, this landlord/tenant relationship many times added the extra factor of finding and hiring local property managers in various areas to oversee these leases.
THE PTFA gave further protections even in situations where a tenant was a bona fide tenant without a lease, had a lease terminable at will under State law, or had an expired lease. In these cases, the successor in interest was required to send a Notice to Vacate to the occupying tenant at least 90 days before the effective date of that notice. This requirement still increased the total timeline for the foreclosure process in situations where the foreclosed property had occupying tenants and there was no lease or an expired lease.
Tennessee Senate Bill 619, signed into law by Governor Haslam on April 20, 2015, expands the current definition of “parties interested” in a foreclosure sale to include nominees or agents of the owner of the debt obligation being foreclosed. A “party interested” must be listed as such in the published notice of foreclosure sale and, although not specifically required by statute, is customarily mailed a copy of the same notice by the foreclosing trustee or substitute trustee. As currently written, T.C.A. § 35-5-104(d) defines “parties interested” as including “record holders of any mortgage, deed of trust, or other lien that will be extinguished or adversely affected by the sale and which mortgage, deed of trust, or lien, or notice or evidence thereof, was recorded more than ten (10) days prior to the first advertisement or notice in the register’s office of the county in which the real property is located”. As amended, this section will include the following sentence:
“’Parties interested’ also includes a person or entity named as nominee or agent of the owner of the obligation that is secured by the deed or a deed of trust and that is identifiable from information provided in the deed or deed of trust, which shall include a mailing address or post office box of the nominee or agent”.
This legislative change will resolve the recent conflicting Tennessee Court of Appeals decisions in Mortgage Electronic Registration Systems, Inc. v. Ditto, 2014 WL 24439 (Tenn.Ct.App. 2014) and EverBank v. Henson, 2015 WL 129081 (Tenn.Ct.App. 2015). Ditto arose in the context of a tax sale and the Appeals Court held that MERS, as the nominee listed in a properly recorded deed of trust, was not entitled to notice under the Tennessee statute governing tax sales. Although factually different as the underlying context was a foreclosure sale where MERS was not listed as an interested party, the Henson Court sharply disagreed with the Ditto holding and found that MERS, because of its ownership of legal title and interest in the lien as beneficiary of the deed of trust, fit the definition of an “interested party” found in T.C.A. § 35-5-104(d). Although this finding was insufficient to support the claim that the sale should be set aside, the Court did remand the case for a determination of MERS’ right to seek restitution for any harm that it had suffered as a result of it not being listed as an interested party. It should be noted that S.B. 619 also amends T.C.A. § 67-5-2502(c)(1)(B), the statute governing notice in tax sales, to include nominees or agents as “interested persons” requiring notice of such tax sales.
S.B. 619 takes effect on July 1, 2015. From a practical standpoint, lenders and servicers should review their procedures to ensure that nominees or agents of lenders identified in any junior deeds of trust or similar liens are properly noticed and listed in the foreclosure publication. Failure to do so is not only a Class C misdemeanor but could result in liability to any party injured by the noncompliance pursuant to T.C.A. § 35-5-107.
Written by: Tina Crivello, Compliance Officer
The Consumer Financial Protection Bureau, (CFPB), made public yesterday, over 7,700 consumer complaint narratives received since March of 2015. Across all consumer financial product types the CFPB collects complaint data on, “Continued attempts to collect debt not owed”, was the number one issue consumers submitted complaints for, accounting for 13% all complaints. When narrowed down to debt collection that number jumps to 45%.
Of the narratives made public, 29% are related to Debt Collection, followed closely by Mortgages at 22.5%.
Debt Collection
Specific to Debt Collection complaints, the majority of the narratives are related to collection of debts on products such as phone or health club contracts. Where no product line was identified almost half of the complaint narratives are consumer claims that the debt does not belong to them. Where company responses to the assertion that the debt does not belong to the consumer were made public, almost 30% of the responses indicate that the company believed they “acted appropriately as authorized by contract or law”. Credit card collection efforts rounded out the top three complaints, with billing disputes being the number one consumer issue.
Mortgage
Under the product heading of mortgages, almost half of the complaints were related to conventional fixed rate mortgages. Across all types of mortgage complaint narratives made public, the top issues identified by consumers related to loan servicing, payments or escrow account handling, as well as loan modification, collection and foreclosure. Improvements over recent years to servicer loss mitigation handling efforts have undoubtedly helped many consumers; however these numbers seem to indicate there is still room for servicers to improve their handling of servicing, loss mitigation and foreclosure processes, particularly where related to non GSE loans.
States by the Numbers
As would be expected, the states with the most complaints for debt collection and mortgage are the most populous: California, Texas and Florida. Of the 3985 responses by companies for Debt Collection and Mortgage, 1275 were officially “not disputed”, with 992 disputed and 1718 left blank. Georgia however leads the states with the most consumer disputes to company responses.
Where does the industry go from here?
It is encouraging that roughly 75% of responses from the industry were considered explanatory enough for the consumer. Additionally, less than 3% of company responses to debt collection and mortgage complaint narratives made public were not responded to timely. Of the responses not provided timely, nearly 25% were disputed by consumers, which could lead one to think there may be a correlation between timely responses and a consumer’s willingness to accept the response.
Continued focus on resolving consumer complaints in a timely manner should be paramount to anyone in the debt collection industry. By studying the data provided by the CFPB, proactive improvements, such as providing additional verification information up front, can be put in place which will help consumers and ultimately drive down expenses on the debt collection or servicer side.
2014 was a busy year in Georgia for debt collection activities. Both consumer and commercial collections increased in volume but a significant amount of pushback from consumer protection agencies and attorneys has created a gauntlet that has already taken a toll on the industry. With the lawsuits filed by the Consumer Financial Protection Bureau (“CFPB”) against Frederick J. Hanna & Associates among other agencies, it has become quite clear that volume debt collectors will face increased scrutiny for their practices and methods as enforcement is ramped up to new levels previously unseen since the enactment of the FDCPA.
On March 5, 2015 the Georgia Governor’s Office of Consumer Protection announced a $13 million dollar settlement with a Georgia firm for actions that allegedly violated the FDCPA along with the Georgia Fair Business Practices Act. As a result of this, RSB Equity Group, LLC (“RSB”) was barred from being able to collect on debt owed from over 11,000 accounts. This is a sobering reminder of the punishments that collectors face for violations of the law; both interstate and intrastate.
Georgia’s recent implementation of the federal rules of evidence has created difficulties for lawyers and judges alike to keep up with the new standards and exceptions in the integrated new Georgia code. Thankfully, many decisions recently in Georgia are clarifying these discrepancies and providing guidance to collectors in a dynamic landscape.
The Georgia Court of Appeals decided in River Forest Inc. v. Multibank 2009-1 RES-ADC Venture LLC[1] that the holder of a UCC Article 3 negotiable instrument did not need to produce the note modification in order to prevail on a motion for summary judgment. The Court of Appeals relying on persuasive authorities from other jurisdictions, ruled that so long as a note modification is not a novation, then a person seeking to recover the outstanding debt can bring suit as the “holder” of the original note.[2] Since the modification effectively only counts as a renewal of the original note, summary judgment was proper for the Plaintiffs on the suit for the underlying debt. Assuming that this decision will stand, collectors now have the option of proceeding with the original note despite being unable to produce a modification.
In another Case decided by the Georgia Court of Appeals, Hildebrand v. Bank of America, N.A.[3], the defendants argued that two separate promissory notes executed at a closing with separate deeds were “inextricably intertwined” and that the failure of the Plaintiff to confirm the amounts outstanding on the second loan after foreclosure precluded recovery.[4] Under O.C.G.A. § 44-14-161(a), if the foreclosure sale does not bring the amount secured by the mortgage then within thirty (30) days, the sale should be reported to the superior court in which the property lies for confirmation and approval of the sale so that a deficiency may be sought.[5] The Court ruled that because the loans were transferred to separate entities when the foreclosure on the first loan occurred and because there was no “dragnet clause” in the deed that was intended to secure the payment of the note and any other debt owing to the grantee either then or later, that summary judgment was proper to Bank of America, N.A. This decision will protect subsequent purchasers of notes and liens from being out of luck when it comes to the requirement of confirmation after a foreclosure sale even when the originator of the note and the note being foreclosed upon are the same party at the time of closing.
The last case that bears mentioning was also decided by the Georgia Court of Appeals in Roberts v. Community & S. Bank[6], which held that a guarantor that waives the rights to challenge the enforceability of the underlying debt and note in the personal guaranty agreement cannot attack the underlying obligation. [7] The evidentiary finding by the court was that the loan history report that was provided to prove the bank’s damages can be considered a part of the business records rather than just a summary. Even though the bank’s loan history report contained information from the bank’s predecessor in interest, these previous records may be introduced as evidence through the business records exception since the reports may be fairly considered to be data compilations. So long as a proper foundation is laid for the admissibility of these compilations, debt buyers may have more breathing room to collect on notes that have changed hands throughout the life of the loan using the business records exception to the hearsay rule. Proving damages is key to obtaining a judgment, and this common hurdle now has a demonstrable path to admit key evidence to sustain a motion for summary judgment.
Georgia is also enacting new laws which will provide more guidance to the banking and finance industry to assist creditors in determining how to effectively calculate what may be considered interest, fees, and principal on bank accounts. House bill 824 in the 2013-2014 regular session amends O.C.G.A. § 7-4-2 to remove charges on accounts from being considered interest. This legislative action will assist in preventing smaller size loans from being usurious due to default charges and overdraft charges (among others) from being applied to the interest on an account.
While the current situation has made collectors vulnerable in Georgia, there remains a very open market for those which remain compliant to obtain favorable judgments for their clients. The adoption of the revised evidence code has opened the flood gates for evidence which would be ruled inadmissible under the old Georgia Evidence Code. These recent decisions above exemplify that debt collection is still alive and well in Georgia and creditor’s collection options have not been overlooked in an increasingly debtor friendly landscape.
Note that not all of these opinions are subject to change upon reconsideration or upon the Court’s own motion. Rules of the Supreme Court of Georgia, Rule 48(h), (i) & Rules of the Court of Appeals, Rule 37(f), (g).
[1] River Forest, Inc. et al v. Multibank 2009-1 RES-ADC Venture, LLC. A14A2204. Ga. Court of App. (2015)
[2] Id.
[3] Hildebrand v. Bank of America, N.A. A14A1956. Ga. Court of App. (2015).
[4] Id.
[5] Official Code of Georgia Annotated § 44-14-161(a)-(c)
[6] Roberts v. Community & Southern Bank. A14A2258. Ga. Court of App. (2015).
[7] Id.
North Carolina Legislative Update (PDF, opens in new tab)
North Carolina House Bill 513, approved as of June 4, 2015, was passed to make technical corrections and other conforming changes to the general statutes concerning real property.
The bill includes a minor change to the satisfaction statute, making it clear that unless the satisfaction states the debt is paid, then the satisfaction removes the lien but does not remove the personal responsibility of the obligor for the debt.
The other sections of the bill address the transfer of special declarant rights for a condominium including setting forth the procedure for acquiring all special declarant rights upon acquisition of the declarant’s units in a condominium through foreclosure, tax sale, judicial sale or BK/receivership transfer.
In the event you have referred or would like to refer to our office a foreclosure file on a developer’s units in a condominium or lots in a subdivision the Firm has implemented an additional layer of attorney review to determine if we will need to take additional action post foreclosure to acquire the special declarant rights.
If you have any questions or would like more information on how this may affect your processes, please feel free to reach out to Attorney Amy Zeko, amy.zeko@brockandscott.com or 910-392-4988, x4125.