FYI: Fla App Ct Holds Non-Borrower Mortgagor May Challenge Hearsay Testimony As to Amounts Due on Note

The District Court of Appeal of the State of Florida, Fourth District, recently held that the admission of hearsay testimony regarding the amount due under a note adversely affected a mortgagor’s substantial ownership and redemption rights notwithstanding the mortgagor’s lack of liability under the note.

 

A copy of the opinion is available at:  http://www.4dca.org/opinions/Oct%202014/10-15-14/4D13-3841.op.pdf

 

A mortgagor and another individual (“decedent”) executed a mortgage.  A corresponding note was executed only by decedent, who passed away before the mortgagee (“Lender”) initiated a foreclosure action.

 

The matter proceeded to a non-jury trial.  At the conclusion of Lender’s case, Mortgagor moved for involuntary dismissal, arguing there was no evidence as to the amount of debt owed on the note.  The trial court permitted lender to reopen its case to provide such evidence.  Lender presented testimony from a representative of the loan servicer.  The witness testified about the amount due under the note over the objection of Mortgagor’s counsel, who argued that the testimony was inadmissible hearsay because it concerned the contents of business records that had not been introduced into evidence.  The trial court overruled the objection and entered a final judgment of foreclosure in favor of Lender.

 

On rehearing, Lender conceded that the trial court erred in admitting hearsay testimony as to the amount due.  However, the parties disagreed as to what the court should do about the error.  Mortgagor sought dismissal, and Lender asserted that the trial court could remand for further proceedings to properly establish the amount due under the note.  Alternatively, Lender argued that because Mortgagor had not signed the note and was therefore not liable for any money damages, the appropriate course was to allow the foreclosure to proceed without future evidentiary proceedings because the proceeding was in rem as to Mortgagor. 

 

The trial court agreed with the alternative argument, allowed the in rem judgment, and denied Mortgagor’s motion for involuntary dismissal.  The Mortgagor appealed.

 

As you may recall, permitting hearsay testimony constitutes harmless error and is not grounds for a new trial unless a substantial right of a party was adversely affected.  See § 90.104(1) Fla. Stat. (2013).

 

On appeal, the Appellate Court agreed with Mortgagor’s assertion that the erroneous admission of hearsay testimony as to damages was not made harmless by virtue of Mortgagor’s non-liability for payment of the note. 

 

The Appellate Court noted that, although Mortgagor would not be responsible for any deficiency that remained after the sale of the property, Mortgagor did sign the mortgage, and the final judgment would foreclose his ownership rights by a judicial sale. 

 

In addition, the Court noted that Mortgagor had a right of redemption wherein he could prevent divestiture of his legal title upon payment of the amount of the debt specified in the judgment.  See CCC Props., Inc. v. Kane, 582 So. 2d 159, 161 (Fla. 4th DCA 1991). 

 

Therefore, the Appellate Court concluded that, even though Mortgagor was not personally liable for the debt, the amount of the debt owed was important as it related to Mortgagor’s right of redemption, specifically the amount due under the judgment in order to exercise his right to stop the foreclosure sale.

 

Accordingly, the Court affirmed the judgment of foreclosure, except as to the amount due under the note, and remanded the matter for further proceedings to determine the amount due under the note.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Email: RWutscher@mwbllp.com

 

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FYI: Ill App Ct Holds Foreclosing Mortgagee Not Entitled to Be Reimbursed for Post-Sale Tax Advances

The Illinois Appellate Court, Second District, recently ruled that a mortgagee could not be reimbursed for post-sale real estate tax advances from a judicial sale surplus.

 

A copy of the ruling is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/2ndDistrict/2131302.pdf

 

The trial court entered a judgment of foreclosure which provided that if the lender (“Lender”) was the successful bidder at the foreclosure sale “the amount due Lender, plus all costs, advances, fees, with interest incurred between entry of Judgment and confirmation of sale, shall be taken as credit in its bid.”  It also provided that the court could also approve Lender’s “fees, costs, and additional advances arising between the Judgment of Foreclosure and the Confirmation hearing, pursuant to the terms of the mortgage and [section 15-504] of the [Illinois] Code of Civil Procedure.”  The published notice of sale stated that the property was subject to real estate taxes.

 

Lender moved for confirmation of sale.  Its motion stated that it had been the successful bidder, having bid $1,905,374.78, for a surplus of $83,305.25.  Lender requested that the court apply the surplus to the unpaid outstanding taxes due on the property.  Lender advised the court that it had intended to pay the taxes before the sale, but inadvertently had included the amount of unpaid outstanding taxes as part of its bid.  Lender maintained that the surplus could be applied to the taxes pursuant to Section 5/15-1504 of the Illinois Code of Civil Procedure.  See 735 ILCS 5/15-1504(d) (“in order to protect the lien of the mortgage, it may become necessary for plaintiff to pay taxes and assessments which have been or may be levied upon the mortgaged real estate”).

 

The borrowers (“Borrowers”) moved for distribution of the surplus to them.  Borrowers maintained that allowing Lender to pay the tax lien with the sale proceeds would run contrary to the advertised terms of the sale, produce a bidding process biased in favor of Lender, circumvent the Illinois Mortgage Foreclosure Law statute, and run contrary to the established rule that a judicial sale purchaser takes a property subject to all outstanding liens, including real estate tax liens.

 

The trial court confirmed the sale and ruled that the tax payment was an advance made to protect the lien of the Lender, and therefore became an additional indebtedness.  Accordingly, Lender the surplus was applied to the payment of the preexisting real estate tax lien.

 

As you may recall, the proceeds resulting from the sale of real estate shall be applied in the following order: (a) the reasonable expenses of sale; and (b) the reasonable expenses of securing possession before sale.  See 735 ILCS 5/15-1512(a)-(b).

 

The Appellate Court rejected Lender’s argument that Borrowers had forfeited their right to challenge the foreclosure judgment through their failure to challenge the language of the judgment.  The Court noted that a foreclosure judgment is an interlocutory order that remains modifiable by the trial court until the final judgment, which is the confirmation of the sale.  See EMC Mortgage Corp. v. Kemp, 2012 IL 113419, ¶¶ 41-42, 44.  In addition, the Court held that equitable considerations did not preclude review.

 

The Appellate Court turned to Lender’s two arguments in favor of reimbursement. 

 

First, the Court noted that while Section 5/15-1508(b)(1) authorized court approval of the reimbursement of certain fees and costs arising between the entry of judgment of foreclosure and a confirmation hearing, taxes were not included in the authorized “fees and costs.” See 735 ILCS 5/15-1504(d). 

 

Next, although Lender argued that the foreclosure judgment permitted the recovery of taxes paid post-sale, the Court concluded that to the extent that the trial court’s order permitted recovery, the order constituted an abuse of discretion.

 

Accordingly, the order confirming the judicial sale was confirmed and modified to grant the surplus to Borrowers.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

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FYI: 11th Cir Holds Servicer's Response to QWR Sufficient, Allows Breach of Contract for Non-Compliance with HUD Regs on Federally-Insured Mortgage Loan

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a summary judgment in favor of a mortgagee on claims of wrongful attempted foreclosure, trespass, breach of contract and violation of the RESPA. 

 

In sum, while ultimately affirming the order on the grounds that no damages could have been sustained by the borrower, the Eleventh Circuit ruled that a breach of contract claim could exist where the purported breach arises from incorporated HUD regulations for which there is no private right of enforcement.  The Eleventh Circuit also held that the RESPA was not violated by the mortgagee’s timely QWR response, and that no causes of action lie on the mortgagor’s other claims.

 

A copy of the opinion is available at: http://www.gpo.gov/fdsys/pkg/USCOURTS-ca11-13-15340/pdf/USCOURTS-ca11-13-15340-0.pdf

 

The borrower sought the recovery of damages on the basis that the mortgagee:  1) allegedly wrongfully attempted to foreclose, 2) supposedly trespassed on her property while carrying out illegal property inspections, 3) allegedly breached the terms of the mortgage deed, and 4) allegedly violated section 2605(e)(2) of the federal Real Estate Settlement Procedures Act (“RESPA”) by failing to provide a compliant response to the mortgagor’s “qualified written request.”

 

The borrower obtained a federally-insured loan in 2008.  In 2011, the borrower defaulted on the federally-insured loan, and the mortgagee notified the borrower of its intent to foreclose. The borrower attempted to bring her account current by repeatedly making partial payments of the amount in arrears via personal checks. The mortgagee, as per its policy, rejected these payments as they were partial, and not made with certified funds.

 

Ultimately, in late 2011, the mortgagee began the process of setting a non-judicial foreclosure sale. However, prior to any such sale being set, the borrower sent in a Qualified Written Request (“QWR”) regarding the rejection of the partial payments, in response to which the mortgagee timely advised her of the reasons behind its decision to reject the attempted partial payments. Following the QWR, the borrower made no further payments. Thereafter, the subject litigation ensued. The mortgagee refrained from scheduling a sale of the property.

 

Originally, the district court granted summary judgment in favor of the mortgagee, reasoning that the mortgagor “failed to offer sufficient proof to support her claims of wrongful attempted foreclosure, trespass, and violations of the [RESPA].” The district court also held that the mortgagor failed to plead and support a cognizable claim for breach of contract.

 

However, in its opinion affirming the district court's grant of summary judgment in favor of the mortgagee, the Eleventh Circuit affirmed the order on different grounds.

 

First, the Eleventh Circuit addressed the breach of contract claim. The mortgagor had claimed that the mortgagee breached the terms of the federally-insured mortgage deed when it allegedly failed to strictly comply with “certain regulations promulgated by the Department of Housing and Urban Development (“HUD”).

 

In rejecting this claim below, the district court had held that “it would be anomalous” to allow a breach of contract claim to stand that is based upon regulations that do not provide a private right of action for violations. The Eleventh Circuit disagreed, however, holding that as the federally-insured mortgage contemplated compliance with the HUD regulations as a condition precedent to the mortgagee’s right to non-judicially foreclose, a breach of contract action would otherwise lie for the violation of that condition.

 

In doing so, the Eleventh Circuit rejected the mortgagee’s arguments that no private right of action exists to enforce HUD regulations encapsulated in a contract, that the mortgagor’s claim is barred by the first-breach doctrine, and that the mortgagor’s claim is barred under the pre-existing duty rule.

 

The Court noted that this is an issue of first instance in Georgia, as well as within the Eleventh Circuit, and nationally it appears as if courts are split on this question. See, e.g., Wells Fargo Home Mortg. Inc. v. Neal 922 A.2d 538, 543-47 (Md. 2007)(“holding that mortgagor could not assert breach of contract claim in view of fact that deed was a form not drafted by lender and HUD regulations do not create a private right of action); but see, e.g., In re Silveira, No. 11-44812-MSH, 2013 Bankr. LEXIS 1904, at *45 (Bankr. Mass. May 3, 2013)(“While these HUD regulations do not provide a mortgagor with a private right of action … if they are incorporated into the various loan documents … they become enforceable by the parties to the loan documents.”).

 

Notwithstanding the fact that it had found a contractual duty, the Eleventh Circuit further determined that there was no evidence in the record of damages arising from the alleged breach.

 

Noting that the mortgagee never actually foreclosed or executed its power of sale, and given that the terms of the mortgage at issue allow for reinstatement should “all of the outstanding monthly payments and associated fees” be paid, the Eleventh Circuit held that the mortgagor failed to present any evidence of damages caused by the mortgagee’s breach of the mortgage, and concluded that, as a result, it must affirm the grant of summary judgment below despite having rejected the district court’s rulings of law on most material points.

 

Second, in addressing the mortgagor’s RESPA claim, the Eleventh Circuit held that the mortgagee’s timely response to the mortgagor’s QWR complied with the statute, despite the mortgagor’s assertion that, at a minimum, a factual dispute existed as to whether the response was sufficient.

 

As you may recall, section 2605(e)(2) of the RESPA requires a servicer to respond to a qualified written request “after conducting an investigation, provide the borrower with a written explanation or clarification that includes – (i) to the extent applicable, a statement of the reasons for which the servicer believes the account of the borrower is correct as determined by the servicer, and (ii) the name and telephone number of an individual employed by, or the office or department of, the servicer who can provide assistance to the borrower.” Id.

 

In its timely written response to the mortgagor’s QWR, the mortgagee explained why it returned the multiple attempted partial payments. It also had explained that any payment needed to be made in full, and with certified funds. As such, the Eleventh Circuit held that the response was adequate as a matter of law. 

 

The Court further held that even if the response to the QWR had not been sufficient, no damages could have been caused under the present circumstances.

 

Finally, the Court briefly noted that ,as the mortgagee had not knowingly published untrue and derogatory information concerning the mortgagor’s financial condition, no claim for wrongful attempted foreclosure was available as a matter of law.

 

The Eleventh Circuit also quickly dispensed with the mortgagor’s claim that the mortgagee’s property inspections had constituted a trespass on her property, given that the subject mortgage deed provided the mortgagee the right to carry out such inspections.

 

Accordingly, the Eleventh Circuit affirmed the summary judgment in favor of the mortgagee.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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