Property Law Legal Research Blog

MORTGAGES: Notice of the Truth Shall Set You Free: Timely Assertion of the Right of Rescission Under the Truth in Lending Act

Posted by Steven G. Friedman on Thu, Mar 19, 2015 @ 10:03 AM

The Lawletter Vol 40 No 1

Steve Friedman, Senior Attorney, National Legal Research Group

     The federal Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601–1677, was enacted to ensure "a meaningful disclosure of credit terms" to give consumers the opportunity to make informed credit decisions. Id. § 1601(a). In relevant part, TILA grants consumers a right to rescission, no questions asked, under certain circumstances. See id. § 1635(a); 12 C.F.R. § 226.15(a)(3). Once a consumer validly exercises the right to rescind, the entire transaction is voided without any liability or encumbrances. See 15 U.S.C. § 1635(b); 12 C.F.R. § 226.15(d)(1).

     To effectively rescind, however, consumers must timely do so. Specifically, consumers must notify the lender prior to the later of "midnight of the third business day following the consummation of the transaction or the delivery of the [requisite disclosures under the Act]." 15 U.S.C. § 1635(a). Although the second alternative seems open-ended, the Act further states that in no event shall the right of rescission extend beyond "three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first." Id. § 1635(f). But what exactly must be exercised no later than three years after the transactionCthe notice of intent to rescind, or the lawsuit seeking rescission? Abrogating the law of the Eighth Circuit Court of Appeals and applying the plain language of TILA, the U.S. Supreme Court held that it was the former. See Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015), rev'g 729 F.3d 1092 (8th Cir. 2013).

     In Jesinoski, the borrowers refinanced their mortgage in February 2007, and in February 2010 (three years after the refinance), they mailed the lender a letter purporting to rescind the loan. The lender refused to recognize the rescission, and the borrowers filed suit in February 2011 (four years after the refinance). Although the parties did not dispute that the borrowers' notice was timely, the parties' dispute hinged on whether the lawsuit was timely. Agreeing with the lender, the trial court held, and the Eighth Circuit affirmed, that unless a borrower has filed a suit for rescission within three years of the consummation of the transaction, then § 1635(f) will preclude the borrower's right to rescission under TILA. See Civ. No. 11-474 (DWF/FLN), 2012 WL 1365751 (D. Minn. Apr. 19, 2012), aff'd, 729 F.3d 1092 (following Keiran v. Home Capital, Inc., 720 F.3d 721, 727-28 (8th Cir. 2013)).

     The Supreme Court granted certiorari in the matter, and Justice Scalia authored the Court's unanimous decision. In relevant part, TILA states in plain and unambiguous terms that a borrower "shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so," id. at 792 (Court's emphasis) (quoting 15 U.S.C. § 1635(a)), but it "does not also require him to sue within three years," id. Although § 1635(f) states "when the right to rescind must be exercised, it says nothing about how that right is exercised." Id. at 793 (Court's emphasis). "To the extent § 1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice." Id. Simply stated, then, only the written notice of intent to rescind, rather than a lawsuit seeking rescission, must be made within the three-year period for exercising that right under TILA. Therefore, the Supreme Court reversed the decision below and remanded the case for further proceedings.

Topics: Truth in Lending Act, mortgages, right of rescission

PROPERTY: Is an Oil and Gas Lease Subject to the Implied Covenant of Good Faith

Posted by Gale Burns on Mon, Feb 2, 2015 @ 13:02 PM

The Lawletter Vol 39 No 11

Alistair Edwards, Senior Attorney, National Legal Research Group

     It is well established that an oil and gas lease can be subject to certain implied covenants or duties. These can include, for example, the implied covenant or duty of the lessee to reasonably develop the leased property, to use reasonable care and due diligence in its operations, to act as a reasonably prudent operator, and to market. However, few courts have explored the issue of whether an oil and gas lease is subject to the basic implied covenant of good faith and fair dealing traditionally found in contracts.

     Recently, in Yoder v. Artex Oil Co., 2014-Ohio-5130, 2014 WL 6467477 (Ct. App.), the Ohio Court of Appeals held that an oil and gas lease is subject to the implied covenant of good faith and fair dealing found in contracts. To support its conclusion, the court relied on several secondary sources, as well as Ohio law. The court explained:

( ¶ 51)     Secondary sources examining implied covenants in oil and gas leases have found that contractual concepts, such as good faith and fair dealing, apply to the interpretation of the oil and gas lease. The oil and gas lease was historically seen as a transaction between two parties with unequal bargaining powers—an unsophisticated farmer negotiating with an oil and gas corporation. See Merrill, The Law Relating to Covenants Implied in Oil and Gas Leases 1926 (2d Ed 1940 & Supp.1964); Pierce, The Renaissance of Law in the Law of Oil and Gas: The Contract Dimension, 42 Washburn Law Journal 909 (2004). Implied covenants, such as the implied covenant to protect against drainage, focused on protecting the leasehold estate. Hardymon, Adrift on the Implied Covenant to Market: Regulation by Implication, 24 Energy & Min.L.Inst. 8 (2004). However, because of the nature of the oil and gas lease, courts also focused on the conduct of the parties to the oil and gas lease by applying contractually-based covenants such as good faith and fair dealing to the oil and gas lease. Hall, The Application of Oil & Gas Lease Implied Covenants in Shale Plays: Old Meets New, 32 Energy & Min.L.Inst. 8 (2011). Courts used implied covenants to fill the gaps in contracts and promote fairness and cooperation between the lessor and lessee. Id.

(¶ 52)     Turning back to Ohio case law, the Supreme Court in Harris v. Ohio Oil Co. held that an oil and gas lease is a contract and should be interpreted as such. Also under Ohio case law, it is well-established that every contract has an implied covenant of good faith and fair dealing that requires not only honesty but also reasonableness in the enforcement of the contract. PHH Mortg. Corp. v. Ramsey, 10th Dist. Franklin No. 13AP-925, 2014-Ohio-3519, ___ N.E.3d ___, ¶ 33 citing Littlejohn v. Parrish, 163 Ohio App.3d 456, 2005-Ohio-4850, 839 N.E.2d 49, ¶ 21 (1st Dist.). "'Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.'" Id. at ¶ 26, 839 N.E.2d 49, quoting Restatement of the Law 2d, Contracts, Section 205, Comment a (1981). Based on the foregoing, it can be logically concluded that an oil and gas lease is a contract, and because it is a contract, an oil and gas lease is subject to the implied covenant of good faith and fair dealing.

Id. ¶¶ 51-52, 2014 WL 6467477, at *8.

     However, the court also suggested the possibility that the implied covenant of good faith and fair dealing could be effectively disclaimed by the language of the lease. In that case, the lease contained the following provision:

     This lease contains all of the agreements and understandings of the lessor and the lessee respecting the subject matter hereof and no implied covenants or obligations are contained herein and no verbal representations or promises have been made or relied upon by lessor or lessee supplementing or modifying this lease or as an inducement thereto.

Id. ¶ 7, 2014 WL 6467477, at *2. But the court ultimately did not reach this issue, and it affirmed summary judgment in favor of the lessee on other grounds—that the lessee had acted as a reasonably prudent operator in "unitizing," or combining, the lessor's property into the 145.3-acre drilling unit at issue.

Topics: oil and gas lease, good-faith covenant, implied duties

PROPERTY: Farmer's Music Concerts on His Farm Were Not Protected by the Tennessee Right to Farm Act

Posted by Gale Burns on Mon, Sep 30, 2013 @ 16:09 PM

The Lawletter Vol 38 No 7

Alistair Edwards, Senior Attorney, National Legal Research Group

     Going all the way back to the Woodstock Festival held at Max Yasgur's 600‑acre dairy farm in New York state in 1969, outdoor music concerts have regularly been held on farmlands.  Naturally, these concerts can cause certain inconveniences for the neighbors of the farms.

     Recently, in Shore v. Maple Lane Farms, LLC, No. E2011‑00158‑COA‑R3CV, 2013 WL 4428904 (Tenn. Aug. 19, 2013) (not yet released for publication), a farmer's neighbor filed suit against the farmer for holding outdoor concerts on his farm, asserting a claim for nuisance.  The farmer defended, in part relying on the Tennessee Right to Farm Act, which purports to insulate farm operations from nuisance suits and provides in pertinent part that "it is a rebuttable presumption that a farm or farm operation . . . is not a public or private nuisance."  Tenn. Code Ann. § 43‑26‑103(a).  As used in the Act, "farm operation" is a broad term intended to include all activities connected "with the commercial production of farm products or nursery stock."  Id. § 43-26-102(2).

     However, the court refused to apply the Act to the amplified  music concert being held at the farm. In its analysis, the court explained that "the Tennessee Right to Farm Act would apply to the noise generated by the concerts at Maple Lane Farms if these concerts are somehow connected 'with the commercial production of farm products or nursery stock.'" 2013 WL 4428904, at *12. Although the court considered the concerts to be a clever "marketing and promotion effort to further the income of the farming operation," it did not consider this marketing activity to be the "commercial production of farm products or nursery stock."  Id. 
The court explained:

     We find it significant that the General Assembly chose to use the word "production" alone in its definition of "farm operation." It did not include "marketing," as other states have done in similar contexts. Marketing activities are not mentioned elsewhere in the Tennessee Right to Farm Act, and we have found no reference to marketing in the legislative history of the Act or any of its amendments. Based on the text and the legislative history of the Tennessee Right to Farm Act, no conclusion can be reached other than that, when it enacted the Act, the General Assembly was focused on the activities related to the production of farm products—that is to say, growing or raising these products. The General Assembly was not focused on the marketing of farm products for sale.

*               *             *

     Despite our diligent search, we have found nothing that suggests the General Assembly
considered noise from amplified music concerts held on a farm to necessarily have a connection with producing farm products. Nor have we found any basis to conclude that the General Assembly considered music concerts to be some sort of farm operation. The plain language of the Tennessee Right to Farm Act reflects a close connection between producing farm products and the conditions or activities shielded by the Act.

Id. at *12, *14 (footnotes omitted).

     Finally, the court concluded not only that the Act did not bar the neighbor's nuisance claim but also that the evidence was sufficient to establish a prima facie case of nuisance.  For example, the neighbor testified that the concerts had an adverse effect on her health, including  quickened pulse, headaches, and nausea, and that they affected her ability to sleep at night.
Another neighbor testified that the concerts were so loud that he could not hear television or have telephone conversations, even when his home was completely shut, and that he escaped the noise by leaving his home.  A third neighbor testified that the concerts bothered her and were so loud that she could feel vibrations in her chest, and that the concerts interfered with her ability to read in her own home.  Therefore, the supreme court reversed the judgments of the trial court and the court of appeals and remanded the case for further proceedings, charging the costs of the appeal to the farmer.

Topics: legal research, The Lawletter Vol 38 No 7, property, . Right to Farm Act did not bar nuisance claim, Shore v. Maple Lane Farms, outdoor concert, noise not part of farm operation

MORTGAGES: Standing of Mortgagee Assignee to Bring Foreclosure Action

Posted by Gale Burns on Wed, Jul 24, 2013 @ 10:07 AM

The Lawletter Vol 38 No 5

Anne Hemenway, Senior Attorney, National Legal Research Group

Both state and federal courts have recently decided numerous cases addressing the issue of standing to bring a foreclosure action.  Defendants to foreclosure proceedings often have few defenses, but they should closely scrutinize the ability of the plaintiff to bring the complaint if the plaintiff is allegedly an assignee of the noteholder and not the original lender.  It is a fundamental requisite to a foreclosure proceeding that the party seeking foreclosure have standing to seek relief.  McLean v. JP Morgan Chase Bank, N.A., 79 So. 3d 170 (Fla. Dist. Ct. App. 2012).  Furthermore, standing must be established at the time the foreclosure action is filed, not by some event subsequent to discovery of a material document. Venture Holdings & Acquisitions Group, LLC v. A.I.M. Funding Group, 75 So. 3d 773 (Fla. Dist. Ct. App. 2011); see also Countrywide Home Loans, Inc. v. Taylor, 843 N.Y.S.2d 495 (Sup. Ct. 2007) (holding that a mortgagee assignee must show proof of ownership interest in the mortgage that is the subject of the foreclosure at the time of the foreclosure action and that retroactive language in the assignment document will not suffice); In re Schwartz, 366 B.R. 265 (Bankr. D. Mass. 2007) (holding that the supposed mortgagee assignee failed to establish its right to foreclose when the assignment produced in support of the stay-of-relief motion was dated after the sale).

Courts have established different standards for standing.  The plaintiff must "submit the note bearing a special endorsement in favor of the plaintiff, an assignment from payee to the plaintiff or an affidavit of ownership proving its status as holder of the note."  Rigby v. Wells Fargo Bank, N.A., 84 So. 3d 1195, 1196 (Fla. Dist. Ct. App. 2012).  In Duke v. HSBC Mortgage Services, 79 So. 3d 778 (Fla. Dist. Ct. App. 2011), the court denied summary judgment to the assignee of a promissory note because at the time the foreclosure was filed, the complaint included as an attachment only a copy of the mortgage naming the original mortgagee as the lender, without any evidence that the note had been assigned to the plaintiff.  But see Hargrow v. Wells Fargo Bank, N.A., 491 F. App'x 534 (6th Cir. 2012) (holding that where the mortgage's chain of title was properly recorded, the mortgagee's assignee had standing to foreclose under Michigan law even though there was no corresponding assignment of interest in the debt and the record chain did not show who owned the underlying note).

To the extent that the plaintiff alleges that the instrument was lost or stolen, the Uniform Commercial Code ("U.C.C.") § 3-309 governs.  Under § 3-309(2), the original note need not be produced in the foreclosure action.  See Atl. Nat'l Trust, LLC v. McNamee, 984 So. 2d 375 (Ala. 2007).  Nevertheless, the party seeking enforcement as the assignee of a lost or stolen instrument must still demonstrate its right to enforce the instrument.  See State Street Bank & Trust Co. v. Lord, 851 So. 2d 790 (Fla. Dist. Ct. App. 2003).  Even if a lost instrument is proven to exist, the parties must still comply with the requirements of U.C.C. § 3-308.  That section provides that if the validity of signatures is questioned or denied, the person claiming the validity of the note must establish the validity before proceeding to enforce the note.  See generally Ederer v. Fisher, 183 So. 2d 39 (Fla. Dist. Ct. App. 1965).

Topics: legal research, The Lawletter Vol 38 No 5, mortgages, foreclosure action, standing at time foreclosure action is filed, assignee’s proof or ownership interest, U.C.C.C. § 3-309, Anne Hemenway

PROPERTY LAW UPDATE: A Brief Synopsis of RESPA's "Qualified Written Request"

Posted by Gale Burns on Thu, Jan 3, 2013 @ 15:01 PM

January 8, 2012

Steve Friedman, Senior Attorney, National Legal Research Group

The Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. §§ 2601-2617, is a federal consumer protection statute that regulates, among other things, the servicing of mortgage loans.  Among the several duties RESPA imposes is that loan servicers must respond promptly to any "qualified written request from the borrower (or an agent of the borrower) for information relating to the servicing of such loan."  12 U.S.C. § 2605(e)(1)(A).  If the servicer fails to adequately respond to such a request, then the borrower may recover actual damages, statutory damages if there is "a pattern or practice of noncompliance," id. § 2605(f), and the costs of suit, including reasonable attorney's fees.

The threshold inquiry for this statutory scheme is the "qualified written request."

For purposes of this subsection, a qualified written request shall be a written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that—

(i)            includes, or otherwise enables the servicer to identify, the name and account of the borrower; and

(ii)            includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower.

Id. § 2605(e)(1)(B).

With regard to the statutory definition of a "qualified written request," two federal courts of appeals have recently stated as follows:

RESPA does not require any magic language before a servicer must construe a written communication from a borrower as a qualified written request and respond accordingly.  The language of the provision is broad and clear.  To be a qualified written request, a written correspondence must reasonably identify the borrower and account and must "include a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower."  12 U.S.C. § 2605(e)(1)(B) (emphasis added).  Any reasonably stated written request for account information can be a qualified written request.  To the extent that a borrower is able to provide reasons for a belief that the account is in error, the borrower should provide them, but any request for information made with sufficient detail is enough under RESPA to be a qualified written request and thus to trigger the servicer's obligations to respond.

Catalan v. GMAC Mortg. Corp., 629 F.3d 676, 687 (7th Cir. 2011); Medrano v. Flagstar Bank FSB, No. 11-55412, 2012 WL 6183549, at *3 (9th Cir. filed Dec. 11, 2012) (quoting Catalan, 629 F.3d at 687).

Furthermore, the Ninth Circuit opinion went a step further than the Seventh Circuit one had and explicitly articulated a three-part test:

[A] borrower's written inquiry requires a response as long as it (1) reasonably identifies the borrower's name and account [12 U.S.C. § 2605(e)(1)(B)(i)], (2) either states the borrower's "reasons for the belief . . . that the account is in error" or "provides sufficient detail to the servicer regarding other information sought by the borrower," [12 U.S.C. § 2605(e)(1)(B)(ii),] and (3) seeks "information relating to the servicing of [the] loan" [12 U.S.C. § 2605(e)(1)(A)].

Medrano, 2012 WL 6183549, at *3.

Additionally, although not explicitly included in the Medrano test, the statute also clearly requires that the servicer "receive[] [the] request from the borrower (or an agent of the borrower)," 12 U.S.C. § 2605(e)(1)(A), adding what is essentially a fourth element to the Medrano test.

Whereas the first element of the Medrano test is readily and objectively understandable, the remaining elements are more subjective.  Fortunately, the above-cited federal appellate decisions have helped to give some clarity to these somewhat fuzzy requisites of § 2605(e).

The implied fourth element of the Medrano test—that the request may be from the borrower's agent rather than from the borrower directly—derives from the plain and unambiguous terms of the statute, which requires that a qualified written request come "from the borrower (or an agent of the borrower)."  Id.  In Catalan, the borrowers had sent a written request to the U.S. Department of Housing and Development ("HUD"), and HUD then forwarded the letter to the loan servicer.  The court had no "difficulty interpreting that requirement, under the circumstances of [that] case, to include HUD's intercession on the plaintiff's behalf."  629 F.3d at 688 (plaintiffs "had exhausted every reasonable avenue in their communications with [the loan servicer]," including sending multiple written correspondence to the servicer's legal counsel, with no pertinent action in response by the servicer, as well as attempting to send multiple checks to the servicer as payments on the loan, which payments were rejected).

The Catalan court's rulings on four borrower letters illustrate how subjective the determination can be on the first prong of the second element of the Medrano test—whether the borrower has sufficiently detailed to the servicer the reasons why he or she believes the account is in error.  In one letter, the borrowers had merely "set forth their expectations for how [the servicer] would handle their account going forward."  The court held that such a letter "did not raise any disputes or errors in their account."  Catalan, 629 F.3d at 688.  In another letter, the borrowers recounted their failed attempts to bring their account current and then merely asked for a "quick resolution of whatever issues remain."  Id. at 689.  The court determined that such a letter could not reasonably be construed "as a statement of [the borrowers'] belief that [the] servicing of their account was in error."  Id.

By contrast, a "three-page letter describ[ing] in great detail the difficulties the [borrowers] encountered at the hands of [the servicer]," id. at 687, was deemed clearly sufficient to be a qualified written request.  The letter included an account of how the servicer had "raised the [borrowers'] monthly payment amount without informing them of the change," and noted that "each of [the borrowers'] attempts to communicate with [the servicer] was rebuffed until [the servicer] at last acknowledged its error and dismissed its foreclosure action[.]"  Id.  In another letter, the borrowers expressly stated that they were "disputing [the servicer's] attempt to collect on the above referenced account" and, further, "that they had sent the full amount required to bring the account current, but [the servicer] had refused to process [the] checks."  Id. at 689.  Here, too, the court held that the borrowers' letter "was a statement of their belief that their account was in error."  Id.

Similarly, the subjectivity of the second prong of the second element of the Medrano test—whether sufficient detail has been provided about what information is being sought by the borrower—is likewise exemplified by the court's rulings on three borrower letters.  In one letter, the borrowers had merely "set forth their expectations for how [the servicer] would handle their account going forward."  The court determined that "their 'expectations' were not requests for information."  Id. at 688.

By contrast, the borrowers, in another of their letters, "very clearly requested specific information regarding their account—namely, an explanation of how their account balance increased from $229,098 to $428,298 over a two-month time span."  Id. at 689-90.  This letter was ruled "unequivocally" a qualified written request under RESPA.  And in another letter, which the court concluded was a qualified written request, the borrowers had asked the servicer to explain why it had cashed certain checks after it had already sold the account to another entity, and they had also requested an accounting of the funds the borrowers had paid the servicer.  Id. at 687-88.

 The third element of the Medrano test requires that the request "relat[e] to the servicing of [the] loan."  As explained by the Ninth Circuit, this requirement

ensures that the statutory duty to respond does not arise with respect to all inquiries or complaints from borrowers to servicers.  RESPA defines the term "servicing" to encompass only "receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts . . . , and making the payments of principal and interest and such other payments."  [12 U.S.C.] § 2605(i)(3).  "Servicing," so defined, does not include the transactions and circumstances surrounding a loan's origination—facts that would be relevant to a challenge to the validity of an underlying debt or the terms of a loan agreement.  Such events precede the servicer's role in receiving the borrower's payments and making payments to the borrower's creditors.  Perhaps for that reason, Congress drafted the statute so as not to include those matters.

The statute thus distinguishes between letters that relate to borrowers' disputes regarding servicing, on the one hand, and those regarding the borrower's contractual relationship with the lender, on the other.  That distinction makes sense because only servicers of loans are subject to § 2605(e)'s duty to respond—and they are unlikely to have information regarding those loans' originations.

Medrano, 2012 WL 6183549, at *3-4 (emphasis in original).

In the Medrano case, the court held that the plaintiffs' three letters were not "qualified written request[s]" under RESPA, and thus the loan servicer was not required to respond thereto, because the plaintiffs' letters were

challenges to the terms of the loan and mortgage documents and are not disputes regarding [the] servicing of the loan.  The first letter states that the loan documents did not "accurately reflect . . . the proper payment schedule represented by the loan broker."  That assertion amounts to an allegation of fraud or mistake during the closing of the loan and the drafting of the relevant documentation.  Thus, it concerns only the loan's validity and terms, not its servicing.  Likewise, in the second letter, Plaintiffs demanded that Flagstar "revise all documentation concerning the current loan" to reflect the "original terms" of the agreement.  A request for modification of a loan agreement, like one for rescission, does not concern the loan's servicing.  Finally, the sole request in the third letter is that Plaintiffs' monthly payment be reduced because they were told, when they purchased their home, that those payments would not exceed $1,900.  Again, that demand is a challenge to the terms of the loan and mortgage documents, premised on an assertion that the existing documents do not accurately reflect the true agreement between Plaintiffs and the originating lender.  Because the letter requests modification of those documents, it is not related to servicing.

Id. at *4 (emphasis in original) (footnote omitted).

Topics: legal research, property law, Steve Friedman, RESPA, qualified written request, prompt response by loan servicers required, request must be detailed/request specific informat, terms of loan and documents are not part of servic, 7th Circuit case, Catalan v. GMAC Mortg. Corp., 9th Circuit case, Medrano v. Flagstar BANK FSB

MORTGAGES: Servicer's Failure to Sign and Return Loan Modification Agreement Did Not Preclude Enforcement by Borrower

Posted by Gale Burns on Mon, Oct 1, 2012 @ 10:10 AM

The Lawletter Vol 37 No 6

Alistair Edwards, Senior Attorney, National Legal Research Group

In light of the recent and ongoing residential foreclosure crisis, the use of loan/mortgage modification agreements in the mortgage industry has become commonplace. However, homeowners will often believe that they have executed a binding loan modification with their mortgage lender, only to discover that the lender is continuing with the foreclosure of the home.

For example, in Barroso v. Ocwen Loan Servicing, LLC, No. B229112, 2012 WL 3573906 (Cal. Ct. App. Aug. 21, 2012), a California Court of Appeal analyzed whether the borrowers had a valid and enforceable loan modification agreement.  The lender—actually, the loan servicer—after being sued by the borrower following the alleged wrongful foreclosure of the home, argued that there was no binding loan modification since the servicer had unilaterally failed to sign and send executed copies of the mortgage modification agreements to the borrower.  Per the express terms of the loan modification, it would not take effect unless both the borrower and the servicer had signed the agreement and a fully executed copy had been returned to the borrower.  Despite these defects, and despite the express requirement in the agreement that it would not take effect unless signed by the servicer and returned to the borrower, the court found that a valid contract had been formed.  The court concluded that failing to find contract formation would make the contract extraordinary, harsh, unjust, or inequitable because it would grant the servicer sole control over the formation of the contract despite the borrower's alleged full performance.  The court stated:

In its brief, Ocwen argues there was no agreement to modify Barroso's loan because she did not allege that she received a copy of any modification agreement signed by both her and Ocwen.  Each modification plan offered to Barroso included language that it would not take effect unless both Barroso and Ocwen signed the agreement and a fully executed copy was returned to Barroso.  While Barroso alleges that the signed documents are in Ocwen's possession, she does not allege Ocwen's signature and return to her of any of the loan modification documents.  Significantly, at oral argument, counsel for Ocwen stated that Ocwen does not argue that its failure to sign and send executed copies of the modification agreements to Barroso precluded formation of the contract for modification. . . .

"'A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.'  (Civ.Code, § 1643; Beverly Hills Oil Co. v. Beverly Hills Unified Sch. Dist. (1968) 264 Cal.App.2d 603, 609, 70 Cal.Rptr. 640.)  'The court must avoid an interpretation which will make a contract extraordinary, harsh, unjust, or inequitable.'  (Strong v. Theis (1986) 187 Cal.App.3d 913, 920, 232 Cal.Rptr. 272.)" (Powers v. Dickson, Carlson & Campillo (1997) 54 Cal.App.4th 1102, 1111-1112, 63 Cal.Rptr.2d 261.)

The interpretation Ocwen had asserted below and in the briefing here would violate these fundamental principles of contract interpretation.  Were we to adopt that interpretation, Ocwen would have sole control over the formation of the contract despite Barroso's full performance, simply by refusing to return a signed copy to her.

Id. at *7-8.

Barroso illustrates that borrowers should be very careful when attempting to procure a binding loan modification agreement.  Even though the borrower may think that it has a valid loan modification in place (and is even paying the modified amount), the lender may later claim that no valid modification was ever formed.  In order to avoid this result, the borrower should carefully read the language of the modification agreement and insist that the lender strictly comply with all of the requirements for contract formation, either as set forth in the agreement or arising under the law.

Topics: legal research, Alistair Edwards, The Lawletter Vol 37 No 6, mortgages, loan/mortgage modification agreements, valid contract without servicer's signature, Barroso v. Ocwen Loan Servicing, California

PROPERTY LAW UPDATE: City Must Face Adverse Possession Claim . . . At Least for Now

Posted by Gale Burns on Fri, Sep 7, 2012 @ 16:09 PM

September 11, 2012

Steve Friedman, Senior Attorney, National Legal Research Group

The doctrine of adverse possession provides that title to real property may be acquired, without an affirmative conveyance thereof, if the claimant takes actual and uninterrupted possession of the property, intending to claim it as his own to the exclusion of the true owner, and makes an outward showing of such claim for a sufficient period of time.  See 2 C.J.S. Adverse Possession § 1 (Westlaw database updated May 2012); Weinstein v. Hurlbert, 2012 ME 84, ¶ 8, 45 A.3d 743, 745; Whetstone Baptist Church v. Schilling, No. SD 31412, 2012 WL 3094954, at *5 (Mo. Ct. App. July 31, 2012) (not yet released for publication).

Back in law school, I recall learning about adverse possession and thinking to myself that this ancient doctrine was probably just an academic exercise that would not have much practical application in today's world.  But as Bart Simpson says, "Au contraire mon frère!"  In the years since law school, I have worked on a great many adverse possession cases.  Most often, the dispute concerns whether the claimant's possession was sufficiently hostile or open and notorious.  See, e.g., Weinstein, 2012 ME 84, 45 A.3d 743 (holding that adverse possessors' use of property was not hostile and notorious).  And just when I thought there were no new issues to be raised regarding the doctrine, I once again stand corrected.

Virtually all jurisdictions hold that adverse possession does not apply against the State, which oftentimes includes the political subdivisions thereof.  See 2 C.J.S., supra, §§ 9, 16; e.g., Houck v. Huron County Park Dist. Bd. of Park Comm'rs, 116 Ohio St. 3d 148, 2007‑Ohio‑5586, 876 N.E.2d 1210.  And the State of Washington is no exception: "[N]o claim of right predicated upon the lapse of time shall ever be asserted against the state."  Wash. Rev. Code ("RCW") 4.16.160.

That rule sounds simple enough, right?  Well, the Supreme Court of Washington was recently asked whether RCW 4.16.160 bars a quiet title action against a municipality asserting title to real property by adverse possession where the claimant alleges that he adversely possessed the property while it still belonged to a private individual and before that private individual conveyed the property to the municipality.  See Gorman v. City of Woodinville, No. 85962-1, 2012 WL 3516888 (Wash. Aug. 16, 2012) (en banc).

James Gorman, the record title owner of a certain parcel of real estate, alleged that he had acquired title to an adjacent parcel of real estate by adverse possession prior to December 2005, the time when the subject property was dedicated to the City of Woodinville by the record title owner.  The City had identified the property as a necessary part of a capital improvement plan for improving a busy intersection to alleviate vehicle congestion and address safety concerns.  Some 19 months after the dedication to the City, in July 2007, Gorman decided to initiate the instant quiet title action against the City.

The City moved to dismiss the complaint for failure to state a claim upon which relief could be granted, asserting that the claim was precluded by RCW 4.16.160.  The trial court granted the City's motion and dismissed the claim, but the Court of Appeals of Washington reversed and remanded the case to the trial court for a determination of the validity of Gorman's claim.  The City appealed the intermediate court's decision to the supreme court.  In a unanimous decision, and as a matter of first impression, the supreme court allowed the adverse possession claim to proceed against the municipality.

Rejecting the City's arguments, the supreme court observed that "Gorman is not asserting a claim 'predicated upon the lapse of time'—the type of claim barred by RCW 4.16.160—as against the City" but, rather, is asserting that "the requisite period of time already ran against the private owner."  Id. ¶ 9 (court's emphasis).  But cf. Houck, 116 Ohio St. 3d 148, 2007‑Ohio‑5586, 876 N.E.2d 1210, at ¶ 9 (because the county park districts were immune from adverse possession, the sale of the property to the park districts effectively terminated the claimant's continuous possession prior to the expiration of the statutory period, and thus the adverse possession claim failed).

Once title is acquired by adverse possession, it cannot be divested except by those means recognized to transfer title, e.g., deed, will, or adverse possession.  See Gorman, 2012 WL 3516888, ¶ 10.  In other words, once the statutory "period has run, the [adverse] possessor is vested with title and the record owner is divested."  Whetstone Baptist, 2012 WL 3094954, at *5.  And thus Gorman was not required to bring the instant lawsuit prior to the City's acquisition of the property, because, if title had already been acquired by Gorman prior to the dedication to the City, then an earlier quiet title action would have merely clarified what was already the case—that Gorman, rather than the private party purporting to dedicate the property to the City, owned the subject real estate.

And because the private party from whom Gorman had acquired title by adverse possession did not have title to the property at the time he purported to dedicate the property to the City, the City acquired nothing thereby.  See 26 C.J.S. Dedication § 7 ("No one except the owner of an unlimited estate or an estate in fee simple, or someone expressly authorized by such an owner, can make a dedication of land." (footnotes omitted)); 26A C.J.S. Deeds § 245 ("No matter how property in a deed is described, a deed may convey only property that was owned by the grantor.").

Although the decision in Gorman was unanimous, it was not without what I would term a "quasi-dissent."  Chief Justice Barbara A. Madsen concurred in the judgment and result based on the current state of the law, but she made an impassioned plea for the state legislature to curtail, if not wholly abandon, the doctrine of adverse possession.  In short, Justice Madsen reasoned as follows:

Many of the beneficial purposes the doctrine is said to serve do not justify the doctrine in modern times.  Moreover, the doctrine's basic premise is legalization of wrongful acquisition of land by "theft," conduct that in our time we should discourage, notwithstanding the possibility of putting land to a higher or better use.  The doctrine also creates uncertainty of ownership, lying as it does outside documents in writing and the recording statutes.  I encourage the legislature to seriously consider phasing the doctrine out, at least where the adverse possessor has no colorable title or good faith belief in ownership of the land.

Id. ¶ 15 (Madsen, C.J., concurring).  As illustrated by the facts of the instant case, the City's laudable project (improving a busy intersection to alleviate vehicle congestion and address safety concerns) has been, at best, significantly delayed and made much more expensive and, at worst, precluded altogether.

Rather than just pointing out the deficiencies of adverse possession, Justice Madsen offers some solutions for fixing them.  For instance, several other western jurisdictions have legislatively curtailed the doctrine to combat the "theft" aspect of traditional adverse possession by imposing an additional requirement that the adverse possession claimant have a good-faith belief that he or she owns the property in question.  Minnesota has gone even further, providing that recordation of one's deed stands as an absolute defense to adverse possession.  Finally, Justice Madsen notes an even more drastic solution, albeit one that has yet to be adopted by any jurisdiction:  "to require the adverse possessor to pay for the land at a reasonable price, and so protect the record title holder with a liability rule rather than offering the record title holder no protection at all."  Id. ¶ 28 n.3 (citing Jeffrey Evans Stake, The Uneasy Case for Adverse Possession, 89 Geo. L.J. 2419, 2445 & n.115 (Aug. 2001) (citing Thomas W. Merrill, Property Rules, Liability Rules, and Adverse Possession, 79 Nw. U. L. Rev. 1122, 1145-54 (1984))).

So perhaps my instincts in law school were not that far off, and the doctrine of adverse possession is indeed an antiquated concept that should no longer be followed?  And perhaps I was just a little ahead of my time.

Topics: legal research, Steve Friedman, adverse possession, property, does not apply against the State, title acquired by adverse possession must be dives, only owner can make dedication, Gorman v. City of Woodinville, Washington Supreme Court, questioning whether concept is antiquated

MORTGAGES: HAMP Provides No Private Right of Action to Struggling Homeowner Against Lender

Posted by Gale Burns on Fri, Jun 15, 2012 @ 16:06 PM

The Lawletter Vol 37 No 1

Charlene Hicks, Senior Attorney, National Legal Research Group

Overall, residential mortgage borrowers have not met with much success in obtaining modifications to their existing mortgages under the federal Home Affordable Modification Program ("HAMP"), enacted during the economic crisis of 2008.  In Miller v. Chase Home Finance, LLC, No. 11-15166 Non-Arg. Calendar, 2012 WL 1345834 (11th Cir. Apr. 19, 2012), the Eleventh Circuit Court of Appeals dealt another blow to residential mortgage borrowers by ruling that neither HAMP nor the common law provides a private right of action to borrowers based on a lender's refusal to grant a permanent modification to an existing home mortgage.

In that case, Jason Miller had secured a mortgage loan from Chase's predecessor.  In 2009, Miller sought a loan modification from Chase on the ground of financial difficulties.  Although Chase agreed to temporarily modify Miller's loan, in August 2010, Chase informed Miller that it would not extend a permanent loan modification to him.  Miller then filed suit, alleging that Chase had failed to comply with its obligation under HAMP and that this failure gave rise to actions for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory estoppel.  The district court dismissed Miller's complaint for failure to state a claim upon which relief could be granted.

            Concluding that HAMP does not provide a private right of action, the Eleventh Circuit affirmed.  In making this determination, the court found that HAMP had been designed to enable the Secretary of the Treasury to restore liquidity and financial stability to the nation's financial system.  The program was not enacted "for the 'especial benefit' of struggling homeowners, even though they may benefit from HAMP's incentives to loan servicers."  Id. at *2.  Because no relevant factor favored the finding of a private right of action in favor of residential mortgage borrowers, the court ruled that Miller lacked standing to pursue his claims against Chase.

In addition, the court determined that "[t]o the extent Miller's claims fall outside of HAMP, they fail as a matter of law."  Id.  Miller's breach-of-contract claim was not independent of Chase's obligations under HAMP.  Further, under Georgia law, the implied duty of good faith imposed on Chase was inseparable from Chase's contractual obligations and could not form an independent basis for liability.  Finally, Miller did not present a viable estoppel claim, because he failed to set forth any factual allegations that Chase had promised to permanently modify his loan.  Moreover, Miller was unable to show that he had reasonably relied on any such promise by Chase.

As Miller demonstrates, courts tend to set high hurdles for a home mortgagor to overcome in order to prevail on a claim against a lender for breach of a promise concerning the underlying mortgage.  These high standards have not been ameliorated by the enactment of federal legislation designed to avert mortgage foreclosures, such as HAMP.

Topics: mortgages, HAMP, The Lawletter Vol 37 No 1, legal reseasrch, Miller v. Chase Home Finance, no private right of action under HAMP or common la, 11th Circuit

PROPERTY: RESPA Does Not Prohibit a Single Settlement‑Service Provider's Retention of an Unearned Fee

Posted by Gale Burns on Fri, Jun 15, 2012 @ 16:06 PM

The Lawletter Vol 37 No 1

Alistair Edwards, Senior Attorney, National Legal Research Group

Enacted in 1974, the Real Estate Settlement Procedures Act ("RESPA") regulates the market for real estate "settlement services," a term defined by statute to include "any service provided in connection with a real estate settlement."  12 U.S.C. § 2602(3) (Westlaw current through P.L. 112‑104 (excluding P.L. 112‑96 and 112‑102) approved 4‑2‑12).  These services include, but are not limited to

title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement.


RESPA also provides in pertinent part that "[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed."  Id. § 2607(b).  The Supreme Court recently held that this section does not prohibit a single settlement-service provider's retention of an unearned fee.  Freeman v. Quicken Loans, Inc., No. 10-1042, 2012 WL 1868063 (U.S. May 24, 2012).  Rather, in order to establish a violation of this RESPA section prohibiting the splitting of fees for which no services were provided in return, a consumer must demonstrate that a charge for settlement services was divided between two or more persons.

Writing for a unanimous Court, Justice Scalia agreed with the Fifth Circuit Court of Appeals that § 2607(b) covers only transactions in which a provider shares a part of a settlement‑service charge with one or more other persons who did nothing to earn that part. The Court stated:

In order to establish a violation of ' 2607(b), a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons. Because petitioners do not contend that respondent split the challenged charges with anyone else, summary judgment was properly granted in favor of respondent.  We therefore affirm the judgment of the Court of Appeals.

Id. at *8.

Topics: legal research, Alistair Edwards, Supreme Court, property, The Lawletter Vol 37 No 1, Real Estate Settlement Procedures Act, Freeman v. Quicken Loans, 12 U.S.C. § 2607 does not prohibit single provider

CHURCHES: Theories of Deciding Church Property Disputes

Posted by Gale Burns on Fri, Jun 15, 2012 @ 10:06 AM

The Lawletter Vol 37 No 1

Anne Hemenway, Senior Attorney, National Legal Research Group

The Establishment Clause of the First Amendment to the U.S. Constitution has long been interpreted as precluding courts from deciding ecclesiastical issues, on the ground that the courts lack subject-matter jurisdiction over disputes involving church doctrine.  Serb. E. Orthodox Diocese v. Milivojevich, 426 U.S. 696, 709 (1976) (finding that the controversy before the Court did not involve a property dispute but a religious dispute, "the resolution of which . . . is for ecclesiastical and not civil tribunals"); see also Banks v. St. Matthews Baptist Church, 706 S.E.2d 30, 33 (S.C. 2011) ("[W]hen a civil court is presented an issue that is a question of religious law or doctrine masquerading as a dispute over church property or corporate control, it must defer to the decisions of the proper church judicatories to the extent it concerns religious or doctrinal issues.").

The U.S. Supreme Court's review of church property disputes has evolved over a long period of time.  In such cases, the courts have subject-matter jurisdiction and must review the issue raised.  Early on, in Watson v. Jones, 80 U.S. (13 Wall.) 679 (1871), the Supreme Court adopted the "rule of compulsory deference" theory, which required the courts to decide property dispute issues in deference to the rule of the church in question.  This theory was substantially modified in Presbyterian Church in the United States v. Mary Elizabeth Blue Hull Memorial Presbyterian Church, 393 U.S. 440 (1969), which required courts to apply general civil laws applicable to all property disputes to church property disputes.  Later, in Jones v. Wolf, 443 U.S. 595 (1979), the Supreme Court adopted the "neutral principles" approach to determining church property issues.  The Court explained:

The primary advantages of the neutral-principles approach are that it is completely secular in operation, and yet flexible enough to accommodate all forms of religious organizations and polity.  The method relies exclusively on objective, well-established concepts of trust and property law familiar to lawyers and judges.  It thereby promises to free civil courts completely from entanglement in questions of religious doctrine, polity, and practice.

Id. at 603.

Importantly, in Jones, the Supreme Court did not overrule Watson but allowed States to decide whether to apply the compulsory-deference rule or the neutral-principles approach when confronted with church property disputes.  Even today, however, most state courts have not clearly determined which direction to take when confronted with a church property dispute, many of which concern real estate and other significant assets.  In Pearson v. Church of God, 478 S.E.2d 849 (S.C. 1996), the South Carolina Supreme Court specifically adopted the neutral-principles approach over the Watson approach.  See also Banks, 706 S.E.2d at 33.  Similarly, New York appears to have adopted the neutral-principles approach.  See Presbytery of Hudson River of Presbyt. Church (USA) v. Trs. of First Presbyterian Church & Congreg. of Ridgeberry, 895 N.Y.S.2d 417 (App. Div. 2010).  Texas courts weigh both approaches.  See Mastern v. Diocese of Nw. Tex., 335 S.W.3d 880, 886 (Tex. App. 2011).

Topics: legal research, The Lawletter Vol 37 No 1, churches, courts have subject-matter jurisdiction over prope, Anne Hemenway, Establishment Clause, compulsory deference v. neutral principles theory, State decision on which theory to apply

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