the missouri foreclosure process - for lenders' and borrowers' attorneys 3 page

8/13/2019 The Missouri Foreclosure Process - For Lenders' and Borrowers' Attorneys 3 Page

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Allison Tanner

Swanson Midgley, LLC

4600 Madison, Suite 1100

Kansas City, MO 64112

816 886-4809

[email protected]

www.swansonmidgley.com

THE MISSOURI FORECLOSURE

PROCESS – for Lenders’ andBorrowers’ attorneys


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THE FORECLOSURE PROCESSIN MISSOURI

Section 1 – Judicial Foreclosure

Section 2 – Non-Judicial Foreclosure Procedures

Section 3 – Statutory Requirements for Foreclosure of a

Junior Deed of Trust

Section 4 – Trustee Responsibilities

Section 5 – Taxes

Section 6 – Post Foreclosure Sale Issues

Section 7 – FAQ

Section 8 – Case Law and Legislative Update

Section 1 – Judicial Foreclosure

JUDICIAL FORECLOSURE

Judicial Foreclosure is authorized pursuantto RSMO § 443.190. This statute authorizesany lender to commence the action by filing apetition in the circuit court in the county inwhich the real property is located. Once thelender has obtained judgment, a writ ofexecution is issued and the sheriff isauthorized to conduct a foreclosure sale(rather than the trustee).


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JUDICIAL FORECLOSURE

Any purchaser takes the real propertysubject to the interests of any entities orpersons who were not parties to the case.This type of foreclosure is almost never usedbecause the non-judicial process is quickerand cheaper, but it might be useful whenthere are possible defects in the deed of trust(such as a deed of trust which failed toinclude the power of sale language).

EQUITABLE JUDICIAL FORECLOSURE

Equitable judicial foreclosure is authorized pursuant

to RSMO § 443.280. This type of foreclosure is used

when a lender needs preliminary equitable relief,

such as a need to set aside a cancellation of record

of a deed of trust or where the legal description in

the deed of trust must be corrected. Then the

parties would proceed to judicial foreclosure. See,

Louis v. Andrea, 338 S. W. 2d 96 (Mo. 1960).

Section 2 – Non-Judicial ForeclosureProcedures

Non-judicial foreclosure (foreclosure by the

trustee of a deed of trust) is by far the mostcommon method of foreclosure in Missouri,

authorized pursuant to Chapter 443, RSMO.

It is almost completely a statutory-driven

process.


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NON-JUDICIAL FORECLOSUREPROCEDURES

If you represent the lender, close attentionmust be paid to each statutory requirementto ensure that a foreclosure is conducted inaccordance with such statutoryrequirements.

If you represent the borrower and are tryingto fight a wrongful foreclosure sale, thetrustee’s compliance with such statutoryrequirements should be closely examined.


Subject to any notice and cure periods

required by the loan documents, theforeclosure process should normally take 45-60 days from the lender’s authorization to the

trustee to proceed with foreclosure.

For a lender, this is good and means the

process does not take long to get theproperty back.


For a borrower, this is bad and means thereis not much time to fight the process.


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Process for a Lender’s Att orney / Trustee:

30 to 40 Days Prior to Sale Date:

Attorney should receive authorization from lender to

proceed with foreclosure. Lender should also send

copies to attorney of all loan documents and confirm

that it has the original note.


Lender’s attorney or trustee should also

confirm with lender that borrower is actually

in default under the terms of the loan

documents, which should include review of

the notice(s) sent to borrower to confirm that

any applicable requirements have been

satisfied.


Trustee should also confirm that lender isreal party in interest (true holder of the debt),

to ensure that the foreclosing entity has theoriginal note or is the true holder of the debtand has standing to foreclose (to be

discussed in the Ibanez and MERS cases).


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Ammunition for a borrower’s attorney – does

foreclosing lender have the original note?

Were proper statutory and loan document

notices requirements complied with? Is

lender true holder of debt so that it has

standing to foreclose?


Lender’s attorney / trustee should

immediately order foreclosure report fromtitle company. Search should include:

federal and state tax liens

probate records for any indication that the

borrower is deceased, incapacitated ordisabled


court records regarding whether any decreeof dissolution of marriage has been entered

judgment liens

notice of bankruptcy proceedings

mechanics’ liens

status of real estate taxes.


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Lender’s attorney should send default and demand

letter(s), and acceleration letter(s) if necessary. See

form of default letter and form of acceleration letter

included in your materials.

– Any party requesting notice at least 40 days prior to sale, in

compliance with RSMO § 443.325.

– Owners of record 40 days prior to sale.


Lender’s attorney should check with local

municipality regarding registrationrequirements for foreclosing properties.(New vacant property registration

requirements have been enacted bymunicipalities – to be discussed)


Lender’s attorney should confirm with lender

that borrower is alive, and is not a member ofthe armed forces. If borrower has died or if

there is any indication that borrower is a

member of the armed forces, the trustee

must comply with special statutory provisions

(to be discussed).


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– If borrower has died, see RSMO § 443.300

(foreclosure stayed by 6 months)

– If borrower is a member of the armed forces,

trustee must comply with the Servicemembers’

Civil Relief Act of 2003 (to be discussed). No

foreclosure against such a protected person can

be undertaken without consent of a court.


Lender’s attorney should:

Have a CERCLA search performed.

Perform state and local UCC searches.

Perform federal tax lien search (do NOT

depend on the title company)


Lender’s attorney should prepare Appointment of Successor Trustee, ifnecessary. Successor trustee must be aperson who lives in Missouri or is a Missouricorporation. See Form of Appointment ofSuccessor Trustee included in yourmaterials. – Send to client for signing.

– Record.


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Lender’s attorney should work with lender to

choose Sale Date and prepare Notice ofTrustee's Sale. See form of Notice ofTrustee’s Sale included in your materials.

Confirm with the trustee that he or she will beavailable on that date prior to publication.


Lender’s attorney should

Fax or mail notice of Trustee’s sale topublisher.

Review proof of publication. Check first publication (21 days before sale).

Update foreclosure report and confirm thatno parties have filed a “Notice of Sale”

pursuant to RSMO § 443.325.


Lender’s attorney should be aware that publicationrequirements vary with the location of the land to be sold.

RSMo.§ 443.320 requires notice to be inserted at least 20 timesand continued to the date of the sale in some daily newspaperin counties having cities of 50,000 or more. In all othercounties, or in any county of the first class not having a charterform of government, or in any county of the second class, andcontaining a portion of a city with a population over 350,000notice must be published in a weekly newspaper for 4successive issues, with the last publication being not more than1 week prior to the sale date.


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20 to 25 days pri or to sale date:

Lender’s attorney should send Notice lettersor combined acceleration/notice letters

(certified mail, return receipt requested) atleast 20 days prior to sale date to (and seeform of notice letter to junior creditor or other

interested party included in your materials)to:


Grantors in deed of trust (if different from owners of

record),

Any other interested party (e.g., guarantors, subordinate

lien holders),

IRS (notice must be sent at least 25 days prior to sale

date). If an IRS lien exists and no notice is sent to the

IRS, the foreclosed property will be subject to the IRS

lien (1954 I.R.C. § 7425).


Lender’s attorney should

Collect certified mail slips (white) and save tobe attached to Trustees' Deed.

Collect green receipt cards to keep in the file.


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5 Days Prior to Sale Date:

Lender’s attorney should prepare Trustee'sDeed(s). See Form of Trustee’s deed

included in your materials.

Prepare Foreclosure Dialogue. See Form of

Foreclosure Sale Dialogue included in yourmaterials.


Lender’s attorney should;

Prepare any necessary corporate resolutions foranticipated buyer.

Work with lender to determine bid amount.

Obtain signed bid instructions from lender, if itintends to bid.

Obtain original Note and Deed of Trust (if not alreadyreceived).

Prepare closing letter to title company.


Day of Sale, Lender’s attorn ey should:

Check bankruptcy court records on day of sale;PACER system is at

https://pacer.psc.uscourts.gov/index.html

(registration is required)

Note that lender’s attorney should also check on

bankruptcy of any co-debtor or guarantor

Acquire Affidavit of Publication from publisher and

take original to the foreclosure sale.


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Cry foreclosure sale.

Adjourn to title company or law office to closethe foreclosure sale (complete and deliver

Trustee's Deed, deliver certified mail slipsand original Note and Deed of Trust).

Section 3 – Statutory Requirements forForeclosure of a Junior Deed of Trust

Pursuant to § 408.551-408.562, Certain additional

statutory requirements may apply to foreclosure of a

junior deed of trust:

– If it is a “second mortgage loan,” defined in RSMO §408.231

as a loan secured in whole or in part by a lien or residential

real estate that is already subject to at least one prior

mortgage loan; and

– If it is a loan on which the interest rate charged is to be

calculated at the rate allowed by RSMO § 408.232.

STATUTORY REQUIREMENTS FORFORECLOSURE OF JUNIOR DEED OF TRUST

If the loan qualifies as a “second mortgageloan”, then:

– The lender may not take steps to enforce its

interest until 30 days after notice of the borrower’s

right to cure.

– Such notice cannot be given until after an event of

default.


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STATUTORY REQUIREMENTS FORFORECLOSURE OF JUNIOR DEED OF TRUST

– If the borrower cures the default, all borrower’s

rights are restored unless there is a third default.

– After the 3rd default, the borrower has no cure

rights.

Section 4 – Trustee Responsibili ties

A Trustee is considered to be in a fiduciary

relationship with both the borrower and the lender.

A Trustee cannot make any statements or

representations regarding the state of the property or

title which might have the effect of “chilling” the

bidding. Requiring bidders to prove that they are

financially capable of purchasing the property does

not “chill” the bidding.

TRUSTEE RESPONSIBILITIES

Trustee may not “self deal” or act in his orher own best interests. It looks very

suspicious for a trustee to purchase theproperty at the sale.


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A Trustee can accept (and announce at the

sale) a bid made in writing before the sale. Agood practice tip for Trustees to minimizeexposure is to bring another person (such as

an attorney or paralegal) to offer any bid onbehalf of the lender.


Trustee must personally conduct the sale,not someone designated by the Trustee.

The Trustee has the option to continue thesale one time without the need to advertiseor send new notices. The new sale datemust be within 7 days of the originally setsale date. The continuance must have beenannounced at the original time, place anddate of the sale.


The Trustee should offer the property both inparcels and in bulk. This will ensure that the

Trustee has fulfilled his or her fiduciaryobligation to both borrower and lender toobtain the best possible price for the

property.


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Trustees have the ability to recess the sale

for a short period of time to confirm apurchaser’s ability to pay the purchase pricein accordance with the requirements set forth

in the notice.


Ammunition for borrower’s attorneys:

Trustee did not fulfill its fiduciary duties toBorrower

Trustee “chilled” the bidding or self-dealt

Trustee did not actually conduct the sale

Trustee conducted the sale improperly and

did not obtain the best price for the property

Section 5 – Taxes


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STATE TAXES

RSMO § 144.150 allows a lender to make

written request to the Director of Revenue fora statement of the status of sales taxeswhich might be owed by the borrower. If no

response is received within 15 businessdays, the parties can proceed with the salewith the assumption that no state taxes are

due.

STATE TAXES

If state sales tax liens are filed subsequent to

the deed of trust, a foreclosure sale will wipethem out.

REAL ESTATE TAXES

The amounts due to the government for real estate

taxes take priority over any Deed of Trust, so all

outstanding real estate taxes create a cloud on thetitle to foreclosed property whether the taxes were

due prior or after the recording of the Deed of Trust.

The lender could pay the taxes and include any such

amounts as part of its debt, or it could choose not to

pay them and any third party purchaser at the sale

would become liable.


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FEDERAL TAXES

IRS Redemption Rights.

If there is an IRS lien on the property, theIRS has the right to redeem the property for a

period of 120 days from the date of the saleby paying to the successful bidder thepurchase price plus interest from the sale

date.

Section 6 – Post Foreclosure SaleIssues

Redemption

New Notice Requirements

Obtaining Possession following Foreclosure

Deficiency

REDEMPTION RIGHTS

Can the borrower redeem?

Equitable redemption Statutory redemption


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REDEMPTION RIGHTS

Equitable Redemption. Equitable redemption is

allowed in Missouri when the borrower seeks

relief because of fraud or other defect in the sale.

Damage to the borrower is usually proven by

evidence that the property sold for inadequate

consideration; but inadequate consideration alone

is not enough for equitable relief.

REDEMPTION RIGHTS

Statutory Redemption.

A statutory redemption right exists in Missouripursuant to RSMO § 443.410, but it is verycumbersome and, as a result, infrequently used.

Right applies only if purchaser is the holder of thedebt.

Available only to original borrower, his heirs,devisees, executors, administrators, grantees orassigns.

REDEMPTION RIGHTS

Statutory procedure must be followed:

–

Borrower must give written notice to trustee within10 days prior to the sale or at the sale that

borrower intends to redeem the property.

– Borrower must file a bond and a motion for its

approval within 20 days after the sale, in the

circuit clerk’s office.

– Borrower must also give notice to the purchaser

at the sale.


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REDEMPTION RIGHTS

– Bond must be approved by the court within 20days after the date of the sale.

– Bond must be executed by the borrower and atleast one good surety.

Amount of the bond must be sufficient tocover: – Interest on the debt for 1 year following the date

of the sale;

– Legal charges and costs of the sale;

REDEMPTION RIGHTS

– Interest accrued before the sale date on any prior

encumbrance that is past due and that was paid by the

purchaser plus interest on such prior encumbrance that will

accrue for 1 year following the sale date;

– taxes and assessments accrued or accruing during the

period of 1 year from the sale;

– interest at the rate of 6% on all sums paid by the purchaser

at the sale;

– damages for all waste committed or suffered by the

borrower during the period of 1 year from the sale date.

REDEMPTION RIGHTS

Within 1 year from the date of the sale, theborrower must pay the following in order to

complete the redemption:

– Full amount of the debt secured by the deed of

trust and interest to the date of payment;

– Full amount paid by the purchaser for interest and

principal on any prior encumbrance on the

property;


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REDEMPTION RIGHTS

– Taxes and assessments paid by the purchaser;

– Legal charges and costs of foreclosure sale.

Possession After Foreclosure

Unlawful Detainer

The only issue is the right to possession.

Owner is entitled to file suit by filing a petition,

verified by affidavit, in the court where the property is

located.

Petition should state: (1) the defendant has held

over after he no longer has the right to possess the

property, (2) plaintiff’s entitlement to possession and

the date of such entitlement (usually the date of the

Trustee’s Deed),


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Unlawful Detainer

(3) written demand was made and (4) the

reasonable rental value of the property.

Demand for possession is made by (a)

delivering written demand to the occupant,(b) leaving a copy with someone over theage of 15 who resides or is present at the

property, or (c) posting a copy of the demandon the property.

Unlawful Detainer

Summonses are served the same as in other

civil actions

No counterclaims are allowed in Unlawful

Detainer actions as the only issue is the rightto possession.

New Post Sale Notice Requirements

The federal “Protecting Tenants atForeclosure Act of 2009” requires that

owners must give 90 days notice to vacate orquit to residential tenants, unless the tenanthas a “bona fide” lease in which case the

lease must be honored (to be discussed inmore depth).


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New Post Sale Notice Requirements

RSMO § 534.030 (amended effective8/28/09) requires 10 business days notice toa residential tenant before a new owner cancommence an action for unlawful detainer.

The exact language that must be included inthe notice is included in the statute. A copy isincluded in your materials.

Deficiency

If the lender is unable to recover all of itslosses at the foreclosure sale, it is entitled toa deficiency judgment.

As a practical matter, unless the lenderknows that the borrower has othersubstantial assets, it will probably not pursuea deficiency judgment.

If lender thinks borrower has assets, it may

be a different story.

Deficiency

If a lender sues for a deficiency, the likely responses

will be:

Chapter 7 bankruptcy by borrower

Offer to settle for little or nothing

Default judgment, but no ability to collect

OR the borrower will hire an attorney to mount a

vigorous defense and the foreclosure sale will be

scrutinized to see if there were any technical

problems that could vacate the sale.


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Section 7 – Frequently AskedQuestions

FAQ ABOUT EFFECT OFFORECLOSURE

What does a foreclosure wipe out?

A trustee’s sale of a senior deed of trustwipes out junior encumbrances, including

junior deeds of trust.


How are the funds obtained from a

foreclosure sale to be applied?

Pursuant to Missouri case law, (In reLacy, 112 S.W.2d 594 (Mo .App. E.D. 1937)and Farris v. Hendrichs, 413 S.W.2d 185(Mo. 1967)), the funds must be applied asfollows:


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A. to pay expenses of the sale

B. then to pay the balance due on the debtsecured by the deed of trust being foreclosed(assuming the lender was not the highbidder)

C. then to pay the balance to the borrower orthe borrower’s successors in interest.


If there is any question about how the funds

should be applied, an interpleader action instate court should be considered. See LickCreek Sewer Systems, Inc. v. Bank of

Bourbon, 747 S.W. 2d 317 ( Mo. App. S. D.1988) for questions about foreclosure ofsecond deed of trust and payment of surplus.

Section 8 -- Case Law and LegislativeUpdate

Federal Laws that affect foreclosure

State and Local Laws that affect foreclosure Recent Case Law that affects foreclosure


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Federal Laws

Bankruptcy (Title 11, USC)

Service Members Civil Relief Act of 2003(updated 1940 Soldiers and Sailors Relief

Act) (50 USC §§ 501-596)

Fair Debt Collection Practices Act (15 USC §1601, et seq.)

Hope for Homeowners program

Protecting Tenants at Foreclosure Act

Bankruptcy

If a borrower files for bankruptcy it stops theforeclosure process.

If you represent the lender, check the bankruptcyrecords prior to crying the sale to ensure that nobankruptcy has been filed:

PACER system is athttps://pacer.psc.uscourts.gov/index.html(registration is required)

If you represent the borrower – discuss the pros andcons of bankruptcy to stop the foreclosure process.

Bankruptcy

Co-debtor stay – in a bankruptcy, a creditormay NOT pursue against a co-debtor or

guarantor who has not filed for bankruptcy ifthe debt is a “consumer debt”.

“Consumer debt” means a debt incurred byan individual primarily for personal, family orhousehold purposes.


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Service Members Civil Relief Act of2003

If borrower is a member of the armed forces, foreclosing

trustee must comply with the Service Members Civil Relief

Act of 2003.

A sale, foreclosure or seizure of property shall not be valid if

made during or within 90 days after the period of the

servicemember’s military service, except upon court order.

Check military service status at:

https://www.dmdc.osd.mil/appj/scra/scraHome.do

FDCPA

Fair Debt Collection Practices Act is often

raised as a defense.

Courts have generally held that an attorney

or lender foreclosing on a mortgage is NOTdebt collection activity for purposes ofFDCPA.

FDCPA

But, see, McDaniel v. South & Associates, P.C., 325 F. Supp.1210 (D. Kan. 2004) holding:

The filing of a foreclosure petition which also seeks a personal judgment is a debt collection activity under the FDCPA;

If borrower request verification under the FDCPA, theforeclosure action must be stayed until the verification is sent;

Attorney can file a lawsuit within the 30 day verification periodwithout violating the FDCPA as long as the attorneyimmediately stays the foreclosure action while the verificationprocess is ongoing.


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Hope for Homeowners Act

New program for borrowers at risk of default.

See materials for some basic facts about theHope for Homeowners program and the

Housing and Economic Recovery Act of 2009

Voluntary program for lenders with no

requirement of principal reduction, so it hashelped a fraction of the homeownersanticipated.


All tenants must receive a 90 day notice before being evictedas the result of a residential foreclosure.

With some exceptions, existing leases for renters must behonored to the end of the term of their leases.

The stated exceptions are for tenants without a lease, tenantswith a lease terminable at will under state law, or where theowner acquiring the property will occupy it as a primaryresidence. In these cases, the tenants must have 90 days tovacate the property.


This changes the nature of evictions onforeclosed properties and preempts state

law, unless state law gives longer noticerequirements.

Text is included in your materials.


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State law update

Chapter 443 generally governs foreclosures of deeds of trust inMissouri.

Only current statutory change which effects foreclosure isRSMO § 534.030 (amended effective 8/28/09) which requires10 business days notice to a residential tenant before a newowner can commence an action for unlawful detainer. Theexact language that must be included in the notice is includedin the statute. A copy is included in your materials. This is likelypreempted by the 90 day notice required by the ProtectingTenants at Foreclosure Act, but we recommend giving bothnotices.

Local Laws

Check with local municipality regarding registrationrequirements for foreclosing properties. As of May1, 2009, KCMO requires that all “owners” registervacant and/or properties in the process of beingforeclosed within 14 days of initiation of theforeclosure process. Numerous municipalities in theKansas City Metropolitan area and across the stateof Missouri have adopted or are adopting variationson these types of requirements. Foreclosing lenderswill need to check with each municipality regarding

registration requirements.

Local Laws

See copy of ordinances that have beenpassed in Kansas City, Missouri, Lee’s

Summit, Gladstone, Belton, Raymore andSt. Louis (as of March 12)


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Case Law Update

Foreclosure actions are being thrown out of

court, particularly in the bankruptcy context,

because the courts are finding that the

servicers who are bringing the foreclosure

actions are not real parties in interest and do

not have proper standing to foreclose.

Holder

To enforce, the entity must be in possessionof the instrument. The original holder andsubsequent transferees are “holders” and if atransferee takes with no notice of default, heis a “holder in due course.”

Payment to a party entitled to enforce issufficient to extinguish the obligation.Therefore only a holder of a note endorsed toit or holder of bearer paper may enforce it.

Holder

Article 3 of the UCC governs negotiable instruments

(notes and drafts).

Defines a negotiable instrument as “an unconditional

promise or order to pay a fixed amount of money,

with or without interest . . .”

Negotiable instruments are transferred from the

original payor by negotiation. Order paper must be

endorsed (such as a check drawn on a bank).

Bearer paper must be delivered.


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Real Party i n Interest (F.R. Civ. Pro 17)

Pursuant to Federal Rule of Civil Procedure

17, an action must be prosecuted in thename of the real party in interest.

Typical problems arise in a motion for relieffrom stay in a bankruptcy proceeding.

Real Party i n Interest (F.R. Civ. Pro 17)

The real party in interest in a federal action to

enforce a note is the holder of the note. In asecuritization it would be the trustee for thecertificate holders.

Unless the name of the actual note holder isstated, the pleadings are defective.

Standing

Servicing agent may be a party in interest, but may

not have standing.

Federal Courts have power authorized by Article III

of the Constitution and statutes enacted by

Congress. A plaintiff must have constitutional

standing for a federal court to have jurisdiction.

Servicing agent would only have standing if it can

show that it has agency status and that its principal

is the holder of the note.


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Standing

Also see Deutsche Bank National Trust Co. v.

McRae, 2010 Westlaw 309105 (N. J. Supp. 1/25/10).

In this case, the foreclosure defendant did not

appear and did not file any response but the court

raised the standing issue itself independently and

dismissed after it determined that the filings did not

support the verified complaint stating that the plaintiff

was the owner of the note and mortgage.

To Enforce Note

It is the holder of the note by transfer with allnecessary transfer documentation

It had possession of the note before it waslost

If lost, must be prepared to post a bond

If person seeking to enforce is an agent, itmust show its agency status and prove thatits principal is the holder of the note.

Case Law Update

See In re Hwang, 396 B. R. 757 (C. D. Ca., 2008) in whichcourt held, among other things, that the motion for relief fromstay to enforce mortgage note could not be pursued by bankthat had previously assigned its rights under note to anotherentity, and that at most retained only loan servicing rights,without joinder of party that owned the note following theassignment. Court also noted that bank to which mortgagenote was payable and which was in physical possession of thenote qualified as the “holder” of the note, even though it hadassigned its rights under the note to another entity, which hadfurther sold the note as part of a securitization transaction.


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Case Law Update

See, also, In re Vargas, 396 B. R. 511 (C. D. Ca.,2008); In re Hayes, 393 B. R. 259 (D. Mass. 2008);Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL111227 (S. D. Ohio 2008); In Re Foreclosure Cases,2007 WL 3232430 (N. D. Ohio 2007); In ReForeclosure Cases, 521 F. Supp. 2d 650 (S. D. Ohio2007) and In re Jones (2008 WL 4539486 (Bkrtcy. D.Mass) (which is also a great example of howcomplicated the assignment and servicing issuescan be to sort out).

Case Law Update

Further, see, Nosek v. Ameriquest MortgageCompany, 386 B. R. 374 (Bankr D. Mass.2008), in which court noted that during thefive years during which the Chapter 13proceeding was pending, Ameriquest hadrepresented itself to be the holder of the noteand mortgage, and only later did Ameriquestnotify the court that it was merely theservicer.

Case Law Update

During part of the pendency of the Chapter13 proceeding, Ameriquest had not even

been assigned servicing rights.

The court imposed fairly dramatic sanctions,

some of which have been affirmed on appealand some of which were vacated. See 406B.R. 434 (D. Mass. 2009).


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Case Law Update

See In re Jacobson, 2009 WL 567188 (Bkrtcy. W.D. Wash.), in

which court held that the entity that claimed to be only a

servicer for deed of trust note, and that it neither asserted any

beneficial interest in note nor claimed it could enforce note in its

own right, was not a real party in interest in whose name motion

for relief from stay to foreclose on property which secured note

could be prosecuted; and alleged servicing agent failed to

establish that it had standing to pursue motion for relief from

stay in order to enforce deed of trust.

Case Law Update

U.S. Bank National Association v. Ibanez, Misc 384283 and386755 (Trial Court, Land Court Department of Commonwealthof Massachusetts 2009). Mortgage foreclosure sales (therewere several) were noticed up and conducted by an entitywithout any recorded interest in the mortgage at the time of thenotice and sale. Because foreclosing entity (the plaintiff) wasunable to get title insurance, it brought the actions to obtain

judgment on two issues: (1) whether the notices were valid,having been published in the Boston Globe, and (2) whetherthe plaintiff had the right to foreclose the mortgage since theassignment was not executed or recorded until after theexercise of the power of sale.

Ibanez

The court held that the publication in the BostonGlobe was valid.

The “present holder of the mortgage” issue wasdecided against the plaintiffs. Plaintiffs appealed,arguing that (i) the “present holder of the mortgage”issue came as a surprise to them and shouldn’t havebeen decided, (ii) had plaintiffs known that issue wasgoing to be addressed they would have pled thecase differently, (iii) since the defendanthomeowners had defaulted, it was inappropriate for judgment to be entered against the plaintiffs,


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Ibanez

(iv) based on new evidence, plaintiffs were the“present holder of the mortgage” because they hadthe note (endorsed in blank) and assignment inblank without an identified assignee, and acontractual right to obtain the mortgage at thosetimes and (v) if the note and mortgage endorsed inblank weren’t enough, the foreclosure sale was validanyway because the plaintiffs were authorized by thelast record holder of the mortgage and the plaintiffswere acting as its agent.

Ibanez

The Land Court held that the foreclosing agent didnot have the right to foreclose on the property sincethe assignment of the mortgage did not occur (eitherexecuted or recorded) until well after the foreclosuresale. The court stated as follows:

“The plaintiffs cannot credibly claim surprise at the judgment that was entered and, having asked for(and received) a declaration on issues they choseand on the facts exactly as they pled them, theyhave no right to a “do-over” because the declarationwas not entirely as they wished.”

Ibanez

The court continued: “Moreover, their newlypresented facts do not lead to a different result.

Instead they show that the plaintiffs themselvesrecognized that they needed mortgage assignmentsin recordable form explicitly to them (not in blank)prior to their initiation of the foreclosure process. . .They also show that the problem the plaintiffs face(the present title defect) is entirely of their ownmaking as a result of their failure to comply with thestatute and the directives in their own securitizationdocuments.”


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Ibanez

In the conclusions, the Ibanez court stated: “Theissues in this case are not merely problems withpaperwork or a matter of dotting i’s and crossing t’s.Instead they lie at the heart of the protections givento homeowners and borrowers by the Massachusettslegislature. To accept the plaintiff’s argument is toallow them to take someone’s home without anydemonstrable right to do so, based upon theassumption that they ultimately will be able to showthat they have that right and the further assumption

Ibanez

that the potential bidders will be undeterred by the

lack of a demonstrable legal foundation for the sale

and will nonetheless bid full value in the expectation

that that foundation will ultimately be produced, even

if it takes a year or more. The law recognizes the

troubling nature of these assumptions, the harm

caused if those assumptions prove erroneous, and

commands otherwise.”

Ibanez

Although just a trial court level case, therehas been some discussion in the legalcommunity that the Land Court is aspecialized court designed to hear casesinvolving real property and so other courtswill likely defer to its expertise, so it will likelybecome established case law. A copy of theMemorandum and Order are included in yourmaterials.


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Case Law Update / MERS

Mortgage Electronic Registration Systems, Inc.

(“MERS”) is a national electronic registration and

tracking system that was designed to simplify

tracking of mortgage loan ownership and servicing

rights. Once MERS becomes the beneficiary of

record of a lender, it remains the beneficiary when

the ownership or servicing rights are transferred.

MERS

MERS was designed to eliminate the need to prepare and record

assignments when trading mortgage loans for ease in securitizing

such loans.

However, MERS does not have legal title to the mortgages registered

on its database and the underlying notes have never been transferred

to it.

Now the situation is arising where MERS is attempting to foreclose on

property.

Cases are coming out which are deciding whether MERS has standing

and is the real party in interest entitled to foreclose on real property.

MERS

In these cases, courts have found that MERS does

not have standing and is not the real party in interest

to be entitled to foreclose on real property. See In ReHawkins, 2009 WL 901766 (Bkrtcy. D. Nev.); In Re

Sheridan, 2009 WL 631355 (Bkrtcy. D. Idaho);

Novastar Mortgage, Inc. v. Snyder , 2008 WL

4560794 (N. D. Ohio); MERS v. Lisa Marie Chong,

Lenard E. Schwartzer, Bankruptcy Trustee, et al.,

Dist. Ct. Case No. 2:09-CV-00661-KJD-LRL.


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MERS

Landmark National Bank v. Kesler , 192 P. 3d 177 (Kan. App.2008), affirmed by 216 P. 3d 158 (Kan. 2009) is a Kansas casein which Landmark National Bank brought a suit to foreclose itsmortgage against the borrower and joined Millenia MortgageCorp as a defendant because it had a second mortgage againstthe property. Neither Borrower nor Millenia responded, so thecourt entered a default judgment for Landmark. Millenia hadsold the mortgage to Sovereign Bank. Sovereign and MERSfiled a motion to set aside the judgment, as MERS asserted thatit now held legal title to the mortgage on behalf of Sovereign assuccessor to Millenia.

MERS

Sovereign and MERS claimed that MERS

was a necessary party and the judgmentshould be set aside because MERS wasn’tincluded in the lawsuit. The court refused to

set aside the judgment and found that MERSwas not a contingently necessary party inLandmark’s foreclosure action.

MERS

There has been some discussion in the legalcommunity that this is not a good decision,

and any reasonable attorney should notforeclose a mortgage senior to MERS withoutnaming MERS as a necessary party.


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MERS

The Minnesota Supreme Court just decidedJackson, et al v. MERS as of 8/13/09.Several Minnesota homeowners filed suitagainst MERS alleging that MERS violatedMinnesota state law by foreclosing withoutfollowing two requirements: (i) to identify allassignees of the mortgage in the county landrecords, and (ii) to list those assignees in thepublished foreclosure notice.

MERS

MERS argued that it should be able toforeclose in its own name without identifyingthe successive owners of the loan which aretracked on its private system. The courtruled 6-1 that MERS did not violateMinnesota law by failing to disclose whichlenders actually owned a homeowner’smortgage. A copy of the decision is includedin the materials.

MERS

In Bellistri v. Ocwen Loan Servicing, LLC, 2009 WL531057 (Mo. App. E.D.), Bellistri purchased property

at a tax foreclosure sale and then brought a quiettitle action. The original borrower had executed apromissory note to BNC Mortgage Inc., but thebeneficiary under the Deed of Trust was MERS. TheMissouri Court of Appeals held that MERS neverheld the promissory note and thus its assignment ofthe Deed of Trust to Ocwen had no force. ThereforeOcwen does not have an interest in the property andlacks standing to seek relief.


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MERS

The holding in Bellistri was affirmed in

Bellistri v. Ocwen Loan Servicing, LLC, 284S.W. 3rd 619 (Mo. App. E.D. 2009). Thecourt noted that if the note and the deed of

trust are split, the note becomes unsecuredwhich makes it impossible for the holder ofthe note to foreclose unless the holder of the

deed of trust is the agent of the note holder.

MERS

As MERS never held the note, its assignment

of the deed of trust, separate from the note,to Ocwen had no force. Thus Ocwen lacks acognizable interest in the case and lacks

standing to seek relief.

MERS

Questions:

Since MERS claims no interest in the note and is

merely the servicer/tracker of the mortgage

assignment, how does MERS claim standing as “real

party in interest” to foreclose?

How can a servicer defend a lawsuit and have legal

standing to oppose contractual issues of the loan it is

servicing if it does not name and defend the suit in

the name of its principal?


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Case Law Update

See also the following articles (included in your

materials):

“Where’s the Note, Who’s the Holder: Enforcement

of Promissory Note Secured by Real Estate” by Hon.

Samuel L. Bufford, United States Bankruptcy Judge,

Central District of California, Los Angeles, CA and

(Formerly Hon.) R. Glen Ayers, Langley & Banack,

San Antonio, TX, presented at the American

Bankruptcy Institute, April 3, 2009, Washington, D.C.

Case Law Update

The Concept of Securitization, by Kenneth S.

Jannette, Esq.

“Show Me the Original Note and I Will Show You the

Money” by O. Max Gardner III

Foreclosure, Subprime Mortgage Lending, and the

Mortgage Electronic Registration System, by

Christopher L. Peterson (which is somewhat

inflammatory and apparently still in draft form – see

http://ssrn.com/abstract=1469749).

Case Law Update

Amicus Brief filed in Nevada District Court Case,

MERS v. Chong, Case No. 2:09-CV-00661-KJD-LRL

Arizona Legal Studies Discussion Paper No. 09-35

“Underwater and Not Walking Away: Shame, Fear

and the Social Management of the Housing Crisis”

by Brent T. White, James E. Rogers College of Law

at the University of Arizona.


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Short Sales

A short sale means a lender will accept a

payoff of less than the balance due on theloan.

Short Sale Issues

The IRS may consider debt forgiveness

income.

Lender may not release its right to pursue

the borrower for the difference between whatis owed and what it received in the shortsale.

Difficult to discuss or negotiate with a lender.

Negative effect on borrower’s credit rating.

Short Sales Issues

Length of time to complete the process

Borrower must prove hardship beyond that itis underwater.


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Loan Modifications

A loan modification is just a change in the

terms of a loan.

With some loans, lender may want to have a

“pre-negotiation agreement” with borrowerstating conditions under which modificationwill be considered, deadlines and

confidentiality requirements.

Loan Modification Issues

Any material modification of a loan that would

adversely affect the holder of a subordinate lien or

encumbrance can lose priority if entered into without

the consent of the junior lienholder. (Either complete

loss of priority or loss to the extent prejudiced).

A “material modification” can include an increase in

the interest rate or increase in principal.


If a lender requires additional security withoutadvancing additional funds, and the borrower

files bankruptcy within 90 days thereafter, thereceipt of such additional security may beconsidered a preferential transfer which

could be set aside by the bankruptcy trustee.


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Because of the possibility of prejudicing

junior lienholders, lenders should get newtitle work to make sure they work outagreements with all junior lienholders so they

do not lose priority.


If all borrowers, guarantors or other sureties

are not required to either execute the loanmodification agreement or re-affirm themodification agreement, they might be

released from personal liability.


Principal forgiveness may be considered ataxable event by the IRS.

Because of the prevalence of loansecuritizations, make sure that borrower is

negotiating with the correct entity (requestdocumentation trail).


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Lender will need to get a loan title policy

modification endorsement because amodification of the loan is a “post-policyevent” that would be excluded from

coverage.

Some lenders require a “waiver of automatic

stay” provision in the modificationagreement. May or may not be enforceable.

Tips for Negotiations

Maintain thorough records system in a

professional business-like file

Make reasonable deadlines and stick to them

Use objectivity when evaluating legal andbusiness risks

Maintain professional relationships and actreasonably and consistently

Tips for Negotiations

Communication and responsiveness are key

Establish a preferred method ofcommunication and stick with it. Email is nota secure method of communication, but it is a

really good way of communicating status orquestions to a lot of people simultaneously.


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Allison Tanner

Swanson Midgley, LLC

4600 Madison, Suite 1100

Kansas City, MO 64112

816 886-4809

[email protected]

www.swansonmidgley.com

the missouri foreclosure process - for lenders' and borrowers' attorneys 3 page

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