Allison Tanner

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(No Transcript)
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• Allison Tanner
• Swanson Midgley, LLC
• 4600 Madison, Suite 1100
• Kansas City, MO 64112
• 816 886-4809
• atanner_at_swansonmidgley.com
• www.swansonmidgley.com

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• THE MISSOURI FORECLOSURE PROCESS for Lenders
  and Borrowers 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

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Section 1 Judicial Foreclosure
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JUDICIAL FORECLOSURE

• Judicial Foreclosure is authorized pursuant to
  RSMO 443.190. This statute authorizes any
  lender to commence the action by filing a
  petition in the circuit court in the county in
  which the real property is located. Once the
  lender has obtained judgment, a writ of execution
  is issued and the sheriff is authorized to
  conduct a foreclosure sale (rather than the
  trustee).

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JUDICIAL FORECLOSURE

• Any purchaser takes the real property subject to
  the interests of any entities or persons who were
  not parties to the case. This type of
  foreclosure is almost never used because the
  non-judicial process is quicker and cheaper, but
  it might be useful when there are possible
  defects in the deed of trust (such as a deed of
  trust which failed to include the power of sale
  language).

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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).

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Section 2 Non-Judicial Foreclosure Procedures

• Non-judicial foreclosure (foreclosure by the
  trustee of a deed of trust) is by far the most
  common 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 FORECLOSURE PROCEDURES

• If you represent the lender, close attention must
  be paid to each statutory requirement to ensure
  that a foreclosure is conducted in accordance
  with such statutory requirements.
• If you represent the borrower and are trying to
  fight a wrongful foreclosure sale, the trustees
  compliance with such statutory requirements
  should be closely examined.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Subject to any notice and cure periods required
  by the loan documents, the foreclosure process
  should normally take 45-60 days from the lenders
  authorization to the trustee to proceed with
  foreclosure.
• For a lender, this is good and means the process
  does not take long to get the property back.

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NON-JUDICIAL FORECLOSURE PROCEDURES

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

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Process for a Lenders Attorney / 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.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders 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.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Trustee should also confirm that lender is real
  party in interest (true holder of the debt), to
  ensure that the foreclosing entity has the
  original note or is the true holder of the debt
  and has standing to foreclose (to be discussed in
  the Ibanez and MERS cases).

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Ammunition for a borrowers 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?

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney / trustee should immediately
  order foreclosure report from title company.
  Search should include
• federal and state tax liens
• probate records for any indication that the
  borrower is deceased, incapacitated or disabled

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NON-JUDICIAL FORECLOSURE PROCEDURES

• court records regarding whether any decree of
  dissolution of marriage has been entered
• judgment liens
• notice of bankruptcy proceedings
• mechanics liens
• status of real estate taxes.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders 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.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should check with local
  municipality regarding registration requirements
  for foreclosing properties. (New vacant property
  registration requirements have been enacted by
  municipalities to be discussed)

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should confirm with lender that
  borrower is alive, and is not a member of the
  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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NON-JUDICIAL FORECLOSURE PROCEDURES

• 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.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders 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)

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should prepare Appointment of
  Successor Trustee, if necessary. Successor
  trustee must be a person who lives in Missouri or
  is a Missouri corporation. See Form of
  Appointment of Successor Trustee included in your
  materials.
• Send to client for signing.
• Record.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should work with lender to
  choose Sale Date and prepare Notice of Trustee's
  Sale. See form of Notice of Trustees Sale
  included in your materials. Confirm with the
  trustee that he or she will be available on that
  date prior to publication.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should
• Fax or mail notice of Trustees sale to
  publisher.
• Review proof of publication.
• Check first publication (21 days before sale).
• Update foreclosure report and confirm that no
  parties have filed a Notice of Sale pursuant to
  RSMO 443.325.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should be aware that
  publication requirements vary with the location
  of the land to be sold.
• RSMo. 443.320 requires notice to be inserted at
  least 20 times and continued to the date of the
  sale in some daily newspaper in counties having
  cities of 50,000 or more. In all other counties,
  or in any county of the first class not having a
  charter form of government, or in any county of
  the second class, and containing a portion of a
  city with a population over 350,000 notice must
  be published in a weekly newspaper for 4
  successive issues, with the last publication
  being not more than 1 week prior to the sale
  date.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• 20 to 25 days prior to sale date
• Lenders attorney should send Notice letters or
  combined acceleration/notice letters (certified
  mail, return receipt requested) at least 20 days
  prior to sale date to (and see form of notice
  letter to junior creditor or other interested
  party included in your materials) to

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NON-JUDICIAL FORECLOSURE PROCEDURES

• 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).

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should
• Collect certified mail slips (white) and save to
  be attached to Trustees' Deed.
• Collect green receipt cards to keep in the file.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• 5 Days Prior to Sale Date
• Lenders attorney should prepare Trustee's
  Deed(s). See Form of Trustees deed included in
  your materials.
• Prepare Foreclosure Dialogue. See Form of
  Foreclosure Sale Dialogue included in your
  materials.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Lenders attorney should
• Prepare any necessary corporate resolutions for
  anticipated buyer.
• Work with lender to determine bid amount.
• Obtain signed bid instructions from lender, if it
  intends to bid.
• Obtain original Note and Deed of Trust (if not
  already received).
• Prepare closing letter to title company.

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NON-JUDICIAL FORECLOSURE PROCEDURES

• Day of Sale, Lenders attorney 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 lenders 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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NON-JUDICIAL FORECLOSURE PROCEDURES

• Cry foreclosure sale.
• Adjourn to title company or law office to close
  the foreclosure sale (complete and deliver
  Trustee's Deed, deliver certified mail slips and
  original Note and Deed of Trust).

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Section 3 Statutory Requirements for
Foreclosure 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.

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STATUTORY REQUIREMENTS FOR FORECLOSURE OF JUNIOR
DEED OF TRUST

• If the loan qualifies as a second mortgage
  loan, then
• The lender may not take steps to enforce its
  interest until 30 days after notice of the
  borrowers right to cure.
• Such notice cannot be given until after an event
  of default.

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STATUTORY REQUIREMENTS FOR FORECLOSURE OF JUNIOR
DEED OF TRUST

• If the borrower cures the default, all borrowers
  rights are restored unless there is a third
  default.
• After the 3rd default, the borrower has no cure
  rights.

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Section 4 Trustee Responsibilities

• 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.

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TRUSTEE RESPONSIBILITIES

• Trustee may not self deal or act in his or her
  own best interests. It looks very suspicious for
  a trustee to purchase the property at the sale.

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TRUSTEE RESPONSIBILITIES

• A Trustee can accept (and announce at the sale) a
  bid made in writing before the sale. A good
  practice tip for Trustees to minimize exposure is
  to bring another person (such as an attorney or
  paralegal) to offer any bid on behalf of the
  lender.

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TRUSTEE RESPONSIBILITIES

• Trustee must personally conduct the sale, not
  someone designated by the Trustee.
• The Trustee has the option to continue the sale
  one time without the need to advertise or send
  new notices. The new sale date must be within 7
  days of the originally set sale date. The
  continuance must have been announced at the
  original time, place and date of the sale.

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TRUSTEE RESPONSIBILITIES

• The Trustee should offer the property both in
  parcels and in bulk. This will ensure that the
  Trustee has fulfilled his or her fiduciary
  obligation to both borrower and lender to obtain
  the best possible price for the property.

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TRUSTEE RESPONSIBILITIES

• Trustees have the ability to recess the sale for
  a short period of time to confirm a purchasers
  ability to pay the purchase price in accordance
  with the requirements set forth in the notice.

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TRUSTEE RESPONSIBILITIES

• Ammunition for borrowers attorneys
• Trustee did not fulfill its fiduciary duties to
  Borrower
• 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

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Section 5 Taxes
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STATE TAXES

• RSMO 144.150 allows a lender to make written
  request to the Director of Revenue for a
  statement of the status of sales taxes which
  might be owed by the borrower. If no response is
  received within 15 business days, the parties can
  proceed with the sale with the assumption that no
  state taxes are due.

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STATE TAXES

• If state sales tax liens are filed subsequent to
  the deed of trust, a foreclosure sale will wipe
  them out.

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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 the title 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, the IRS
  has the right to redeem the property for a period
  of 120 days from the date of the sale by paying
  to the successful bidder the purchase price plus
  interest from the sale date.

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Section 6 Post Foreclosure Sale Issues

• Redemption
• New Notice Requirements
• Obtaining Possession following Foreclosure
• Deficiency

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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.

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REDEMPTION RIGHTS

• Statutory Redemption.
• A statutory redemption right exists in Missouri
  pursuant to RSMO 443.410, but it is very
  cumbersome and, as a result, infrequently used.
• Right applies only if purchaser is the holder of
  the debt.
• Available only to original borrower, his heirs,
  devisees, executors, administrators, grantees or
  assigns.

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REDEMPTION RIGHTS

• Statutory procedure must be followed
• Borrower must give written notice to trustee
  within 10 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 clerks 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 20 days
  after the date of the sale.
• Bond must be executed by the borrower and at
  least one good surety.
• Amount of the bond must be sufficient to cover
• Interest on the debt for 1 year following the
  date of the sale
• Legal charges and costs of the sale

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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.

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REDEMPTION RIGHTS

• Within 1 year from the date of the sale, the
  borrower 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.

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Possession After Foreclosure
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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) plaintiffs entitlement
  to possession and the date of such entitlement
  (usually the date of the Trustees 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 the age of 15 who resides
  or is present at the property, or (c) posting a
  copy of the demand on the property.

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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 right to
  possession.

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New Post Sale Notice Requirements

• The federal Protecting Tenants at Foreclosure
  Act of 2009 requires that owners must give 90
  days notice to vacate or quit to residential
  tenants, unless the tenant has a bona fide
  lease in which case the lease must be honored (to
  be discussed in more depth).

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New Post Sale Notice Requirements

• RSMO 534.030 (amended effective 8/28/09)
  requires 10 business days notice to a residential
  tenant before a new owner can commence an action
  for unlawful detainer. The exact language that
  must be included in the notice is included in the
  statute. A copy is included in your materials.

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Deficiency

• If the lender is unable to recover all of its
  losses at the foreclosure sale, it is entitled to
  a deficiency judgment.
• As a practical matter, unless the lender knows
  that the borrower has other substantial assets,
  it will probably not pursue a deficiency
  judgment.
• If lender thinks borrower has assets, it may be a
  different story.

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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 Asked Questions
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FAQ ABOUT EFFECT OF FORECLOSURE

• What does a foreclosure wipe out?
• A trustees sale of a senior deed of trust wipes
  out junior encumbrances, including junior deeds
  of trust.

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FAQ ABOUT EFFECT OF FORECLOSURE

• How are the funds obtained from a foreclosure
  sale to be applied?
• Pursuant to Missouri case law, (In re Lacy, 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 as follows

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FAQ ABOUT EFFECT OF FORECLOSURE

• A. to pay expenses of the sale
• B. then to pay the balance due on the debt
  secured by the deed of trust being foreclosed
  (assuming the lender was not the high bidder)
• C. then to pay the balance to the borrower or the
  borrowers successors in interest.

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FAQ ABOUT EFFECT OF FORECLOSURE

• If there is any question about how the funds
  should be applied, an interpleader action in
  state court should be considered. See Lick Creek
  Sewer Systems, Inc. v. Bank of Bourbon, 747 S.W.
  2d 317 ( Mo. App. S. D. 1988) for questions about
  foreclosure of second deed of trust and payment
  of surplus.

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Section 8 -- Case Law and Legislative Update

• 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

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Bankruptcy

• If a borrower files for bankruptcy it stops the
  foreclosure process.
• If you represent the lender, check the bankruptcy
  records prior to crying the sale to ensure that
  no bankruptcy has been filed
• PACER system is at https//pacer.psc.uscourts.gov
  /index.html (registration is required)
• If you represent the borrower discuss the pros
  and cons of bankruptcy to stop the foreclosure
  process.

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Bankruptcy

• Co-debtor stay in a bankruptcy, a creditor may
  NOT pursue against a co-debtor or guarantor who
  has not filed for bankruptcy if the debt is a
  consumer debt.
• Consumer debt means a debt incurred by an
  individual primarily for personal, family or
  household purposes.

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Service Members Civil Relief Act of 2003

• 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 servicemembers military
  service, except upon court order.
• Check military service status at
  https//www.dmdc.osd.mil/appj/scra/scraHome.do

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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 NOT debt
  collection activity for purposes of FDCPA.

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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,
  the foreclosure action must be stayed until the
  verification is sent
• Attorney can file a lawsuit within the 30 day
  verification period without violating the FDCPA
  as long as the attorney immediately stays the
  foreclosure action while the verification process
  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 the Hope
  for Homeowners program and the Housing and
  Economic Recovery Act of 2009
• Voluntary program for lenders with no requirement
  of principal reduction, so it has helped a
  fraction of the homeowners anticipated.

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Protecting Tenants at Foreclosure Act

• All tenants must receive a 90 day notice before
  being evicted as the result of a residential
  foreclosure.
• With some exceptions, existing leases for renters
  must be honored to the end of the term of their
  leases.
• The stated exceptions are for tenants without a
  lease, tenants with a lease terminable at will
  under state law, or where the owner acquiring the
  property will occupy it as a primary residence.
  In these cases, the tenants must have 90 days to
  vacate the property.

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Protecting Tenants at Foreclosure Act

• This changes the nature of evictions on
  foreclosed properties and preempts state law,
  unless state law gives longer notice
  requirements.
• Text is included in your materials.

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State law update

• Chapter 443 generally governs foreclosures of
  deeds of trust in Missouri.
• Only current statutory change which effects
  foreclosure is RSMO 534.030 (amended effective
  8/28/09) which requires 10 business days notice
  to a residential tenant before a new owner can
  commence an action for unlawful detainer. The
  exact language that must be included in the
  notice is included in the statute. A copy is
  included in your materials. This is likely
  preempted by the 90 day notice required by the
  Protecting Tenants at Foreclosure Act, but we
  recommend giving both notices.

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Local Laws

• Check with local municipality regarding
  registration requirements for foreclosing
  properties. As of May 1, 2009, KCMO requires
  that all owners register vacant and/or
  properties in the process of being foreclosed
  within 14 days of initiation of the foreclosure
  process. Numerous municipalities in the Kansas
  City Metropolitan area and across the state of
  Missouri have adopted or are adopting variations
  on these types of requirements. Foreclosing
  lenders will need to check with each municipality
  regarding registration requirements.

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Local Laws

• See copy of ordinances that have been passed in
  Kansas City, Missouri, Lees Summit, Gladstone,
  Belton, Raymore and St. 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.

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Holder

• To enforce, the entity must be in possession of
  the instrument. The original holder and
  subsequent transferees are holders and if a
  transferee takes with no notice of default, he is
  a holder in due course.
• Payment to a party entitled to enforce is
  sufficient to extinguish the obligation.
  Therefore only a holder of a note endorsed to it
  or holder of bearer paper may enforce it.

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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 in Interest (F.R. Civ. Pro 17)

• Pursuant to Federal Rule of Civil Procedure 17,
  an action must be prosecuted in the name of the
  real party in interest.
• Typical problems arise in a motion for relief
  from stay in a bankruptcy proceeding.

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Real Party in 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 a
  securitization it would be the trustee for the
  certificate holders.
• Unless the name of the actual note holder is
  stated, the pleadings are defective.

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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.

92
To Enforce Note

• It is the holder of the note by transfer with all
  necessary transfer documentation
• It had possession of the note before it was lost
• If lost, must be prepared to post a bond
• If person seeking to enforce is an agent, it must
  show its agency status and prove that its
  principal is the holder of the note.

93
Case Law Update

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

94
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 Natl Trust Co. v. Steele,
  2008 WL 111227 (S. D. Ohio 2008) In Re
  Foreclosure Cases, 2007 WL 3232430 (N. D. Ohio
  2007) In Re Foreclosure Cases, 521 F. Supp. 2d
  650 (S. D. Ohio 2007) and In re Jones (2008 WL
  4539486 (Bkrtcy. D. Mass) (which is also a great
  example of how complicated the assignment and
  servicing issues can be to sort out).

95
Case Law Update

• Further, see, Nosek v. Ameriquest Mortgage
  Company, 386 B. R. 374 (Bankr D. Mass. 2008), in
  which court noted that during the five years
  during which the Chapter 13 proceeding was
  pending, Ameriquest had represented itself to be
  the holder of the note and mortgage, and only
  later did Ameriquest notify the court that it was
  merely the servicer.

96
Case Law Update

• During part of the pendency of the Chapter 13
  proceeding, Ameriquest had not even been assigned
  servicing rights.
• The court imposed fairly dramatic sanctions, some
  of which have been affirmed on appeal and some of
  which were vacated. See 406 B.R. 434 (D. Mass.
  2009).

97
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.

98
Case Law Update

• U.S. Bank National Association v. Ibanez, Misc
  384283 and 386755 (Trial Court, Land Court
  Department of Commonwealth of Massachusetts
  2009). Mortgage foreclosure sales (there were
  several) were noticed up and conducted by an
  entity without any recorded interest in the
  mortgage at the time of the notice and sale.
  Because foreclosing entity (the plaintiff) was
  unable 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) whether
  the plaintiff had the right to foreclose the
  mortgage since the assignment was not executed or
  recorded until after the exercise of the power of
  sale.

99
Ibanez

• The court held that the publication in the Boston
  Globe was valid.
• The present holder of the mortgage issue was
  decided against the plaintiffs. Plaintiffs
  appealed, arguing that (i) the present holder of
  the mortgage issue came as a surprise to them
  and shouldnt have been decided, (ii) had
  plaintiffs known that issue was going to be
  addressed they would have pled the case
  differently, (iii) since the defendant homeowners
  had defaulted, it was inappropriate for judgment
  to be entered against the plaintiffs,

100
Ibanez

• (iv) based on new evidence, plaintiffs were the
  present holder of the mortgage because they had
  the note (endorsed in blank) and assignment in
  blank without an identified assignee, and a
  contractual right to obtain the mortgage at those
  times and (v) if the note and mortgage endorsed
  in blank werent enough, the foreclosure sale was
  valid anyway because the plaintiffs were
  authorized by the last record holder of the
  mortgage and the plaintiffs were acting as its
  agent.

101
Ibanez

• The Land Court held that the foreclosing agent
  did not have the right to foreclose on the
  property since the assignment of the mortgage did
  not occur (either executed or recorded) until
  well after the foreclosure sale. 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
  chose and on the facts exactly as they pled them,
  they have no right to a do-over because the
  declaration was not entirely as they wished.

102
Ibanez

• The court continued Moreover, their newly
  presented facts do not lead to a different
  result. Instead they show that the plaintiffs
  themselves recognized that they needed mortgage
  assignments in 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 own making as a
  result of their failure to comply with the
  statute and the directives in their own
  securitization documents.

103
Ibanez

• In the conclusions, the Ibanez court stated
  The issues in this case are not merely problems
  with paperwork or a matter of dotting is and
  crossing ts. Instead they lie at the heart of
  the protections given to homeowners and borrowers
  by the Massachusetts legislature. To accept the
  plaintiffs argument is to allow them to take
  someones home without any demonstrable right to
  do so, based upon the assumption that they
  ultimately will be able to show that they have
  that right and the further assumption

104
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.

105
Ibanez

• Although just a trial court level case, there has
  been some discussion in the legal community that
  the Land Court is a specialized court designed to
  hear cases involving real property and so other
  courts will likely defer to its expertise, so it
  will likely become established case law. A copy
  of the Memorandum and Order are included in your
  materials.

106
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.

107
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.

108
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 Re Hawkins, 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.
  209-CV-00661-KJD-LRL.

109
MERS

• Landmark National Bank v. Kesler, 192 P. 3d 177
  (Kan. App. 2008), affirmed by 216 P. 3d 158 (Kan.
  2009) is a Kansas case in which Landmark
  National Bank brought a suit to foreclose its
  mortgage against the borrower and joined Millenia
  Mortgage Corp as a defendant because it had a
  second mortgage against the property. Neither
  Borrower nor Millenia responded, so the court
  entered a default judgment for Landmark.
  Millenia had sold the mortgage to Sovereign Bank.
  Sovereign and MERS filed a motion to set aside
  the judgment, as MERS asserted that it now held
  legal title to the mortgage on behalf of
  Sovereign as successor to Millenia.

110
MERS

• Sovereign and MERS claimed that MERS was a
  necessary party and the judgment should be set
  aside because MERS wasnt included in the
  lawsuit. The court refused to set aside the
  judgment and found that MERS was not a
  contingently necessary party in Landmarks
  foreclosure action.

111
MERS

• There has been some discussion in the legal
  community that this is not a good decision, and
  any reasonable attorney should not foreclose a
  mortgage senior to MERS without naming MERS as a
  necessary party.

112
MERS

• The Minnesota Supreme Court just decided Jackson,
  et al v. MERS as of 8/13/09. Several Minnesota
  homeowners filed suit against MERS alleging that
  MERS violated Minnesota state law by foreclosing
  without following two requirements (i) to
  identify all assignees of the mortgage in the
  county land records, and (ii) to list those
  assignees in the published foreclosure notice.

113
MERS

• MERS argued that it should be able to foreclose
  in its own name without identifying the
  successive owners of the loan which are tracked
  on its private system. The court ruled 6-1 that
  MERS did not violate Minnesota law by failing to
  disclose which lenders actually owned a
  homeowners mortgage. A copy of the decision is
  included in the materials.

114
MERS

• In Bellistri v. Ocwen Loan Servicing, LLC, 2009
  WL 531057 (Mo. App. E.D.), Bellistri purchased
  property at a tax foreclosure sale and then
  brought a quiet title action. The original
  borrower had executed a promissory note to BNC
  Mortgage Inc., but the beneficiary under the Deed
  of Trust was MERS. The Missouri Court of Appeals
  held that MERS never held the promissory note and
  thus its assignment of the Deed of Trust to Ocwen
  had no force. Therefore Ocwen does not have an
  interest in the property and lacks standing to
  seek relief.

115
MERS

• The holding in Bellistri was affirmed in
  Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.
  3rd 619 (Mo. App. E.D. 2009). The court noted
  that if the note and the deed of trust are split,
  the note becomes unsecured which makes it
  impossible for the holder of the note to
  foreclose unless the holder of the deed of trust
  is the agent of the note holder.

116
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 a
  cognizable interest in the case and lacks
  standing to seek relief.

117
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?

118
Case Law Update

• See also the following articles (included in your
  materials)
• Wheres the Note, Whos 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.

119
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/abstract1469749).

120
Case Law Update

• Amicus Brief filed in Nevada District Court Case,
  MERS v. Chong, Case No. 209-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.

121
Short Sales

• A short sale means a lender will accept a payoff
  of less than the balance due on the loan.

122
Short Sale Issues

• The IRS may consider debt forgiveness income.
• Lender may not release its right to pursue the
  borrower for the difference between what is owed
  and what it received in the short sale.
• Difficult to discuss or negotiate with a lender.
• Negative effect on borrowers credit rating.

123
Short Sales Issues

• Length of time to complete the process
• Borrower must prove hardship beyond that it is
  underwater.

124
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 borrower stating
  conditions under which modification will be
  considered, deadlines and confidentiality
  requirements.

125
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.

126
Loan Modification Issues

• If a lender requires additional security without
  advancing additional funds, and the borrower
  files bankruptcy within 90 days thereafter, the
  receipt of such additional security may be
  considered a preferential transfer which could be
  set aside by the bankruptcy trustee.

127
Loan Modification Issues

• Because of the possibility of prejudicing junior
  lienholders, lenders should get new title work to
  make sure they work out agreements with all
  junior lienholders so they do not lose priority.

128
Loan Modification Issues

• If all borrowers, guarantors or other sureties
  are not required to either execute the loan
  modification agreement or re-affirm the
  modification agreement, they might be released
  from personal liability.

129
Loan Modification Issues

• Principal forgiveness may be considered a taxable
  event by the IRS.
• Because of the prevalence of loan
  securitizations, make sure that borrower is
  negotiating with the correct entity (request
  documentation trail).

130
Loan Modification Issues

• Lender will need to get a loan title policy
  modification endorsement because a modification
  of the loan is a post-policy event that would
  be excluded from coverage.
• Some lenders require a waiver of automatic stay
  provision in the modification agreement. May or
  may not be enforceable.

131
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 and
  business risks
• Maintain professional relationships and act
  reasonably and consistently

132
Tips for Negotiations

• Communication and responsiveness are key
• Establish a preferred method of communication and
  stick with it. Email is not a secure method of
  communication, but it is a really good way of
  communicating status or questions to a lot of
  people simultaneously.

133

• Allison Tanner
• Swanson Midgley, LLC
• 4600 Madison, Suite 1100
• Kansas City, MO 64112
• 816 886-4809
• atanner_at_swansonmidgley.com
• www.swansonmidgley.com