PENNSYLVANIA CASE LAW UPDATE
Frequently, borrowers file for bankruptcy at the 11th hour to halt foreclosure sales. Once a petition for bankruptcy relief has been filed, secured creditors must cease their collection efforts to avoid violating the automatic stay. However, the automatic stay terminates upon a debtor’s dismissal and closure of the bankruptcy case. A Pennsylvania bankruptcy court recently ruled that if a foreclosure sale occurs between the time when a bankruptcy case is dismissed and when it is reinstated, the foreclosure sale is not void and does not violate the automatic stay.
In In re Parker, the debtor filed a petition for bankruptcy relief to prevent a foreclosure sale of her residence. Notably, the debtor failed to file any of the required documents at the time she filed her bare-bones petition. This was the debtor’s fourth bankruptcy filing, and as such, she was familiar with the necessary documents that must be completed and filed in Chapter 13 cases.
The debtor timely filed some, but not all, of the missing documents, and the bankruptcy court thus entered an order dismissing her case. Under section 362(c)(2)(B) of the Bankruptcy Code, at the time a case is dismissed the automatic stay is terminated.
KENTUCKY CASE LAW UPDATE
United States Bank Nat'l Ass'n v. Kinslow, 2020 Ky. App. Unpub. LEXIS 407, 2020 WL 3124443
Kinslow is an unpublished case in Kentucky, but it is significant because the ruling in the case served to strip a lender of its mortgage on the property. Bill Kinslow and his son Allen Kinslow held title to the property as joint tenants with rights of survivorship. Bill entered into a promissory note that was secured by a mortgage. Allen did not sign the promissory note or mortgage for reasons that were not explained in the case. Bill passed away and the loan went into default. The lender foreclosed on the mortgage that encumbered Bill’s ½ interest in the property. The trial court denied the foreclosure and the Court of Appeals upheld the decision. The Court of Appeals ruled that under Kentucky law regarding joint tenancy with right of survivorship, any rights the lender had in the property because of the mortgage signed by Bill were extinguished at the time of Bill's death. Therefore, the mortgagee was unenforceable – even as to Bill’s ½ interest.
OHIO CASE LAW UPDATE
Christiana Trust v. Berter, 2020-Ohio-727, (12th District 2020)
The borrowers raised a number of issues in this case. The most significant issue was their argument that they should be allowed to contest the signatures that appear on the promissory note indorsements. This could present significant problems, not least of which would involve tracking down the individuals that signed the indorsements. Courts in Ohio have not had the opportunity to address this issue in any detail. The borrowers’ argument was based on ORC 1303.35, which corresponds UCC 3-306 and 3-308. Most states have adopted UCC 3-306 and 3-308 in some version so this issue could arise across the country. The Court of Appeals ruled that ORC/UCC does not provide the borrowers with the right to contest signatures that appear on indorsements as that provision was intended to provide the maker of the promissory note with the opportunity to raise the issue of the maker’s signature being fraudulent or forged. The borrowers attempted to appeal this decision to the Ohio Supreme Court, but that court denied jurisdiction. Contrast this with the George decision below.
OHIO CASE LAW UPDATE
U.S. Bank Nat'l Ass'n v. George, 2020-Ohio-6758, (10th District 2020)
This is the second time the George case has been on appeal since 2015. The issue in George I and George II involved copies of a promissory note submitted to the court that contained different indorsements. It is important to note that Ohio is not an original promissory note state. If it were and the original promissory note was presented as evidence, the issue would not have been raised. In the George II trial the original promissory note was offered as evidence and the lender prevailed. However, in both George I and George II the Court of Appeals implied that ORC 1303.35, which corresponds UCC 3-306 and 3-308 could be used by the borrower to challenge signatures on an indorsement to a promissory note. The 10th District Court of Appeals decision in George II is inconsistent with the 12th District Court of Appeals decision in Christiana Trust v. Berter, 2020-Ohio-727, (12th District 2020), which means the Ohio Supreme Court may accept the issue in the future to resolve the conflict.
OHIO CASE LAW UPDATE
Wilmington Sav. Fund Soc'y FSB as Trust v. Woods, 2020-Ohio-4599, (2nd District 2020)
This case is of particular interest to lenders as it is the first decision in Ohio where a Court of Appeals acknowledged the right of a lender to pursue foreclosure of an equitable mortgage where the borrower is deceased, the mortgage was lost and never recorded and title to the property was transferred. The trial court judge granted a Motion for Summary Judgment filed by the heirs of the deceased borrower and held that under Ohio law, a mortgage becomes operative as to third parties only when it is recorded. Lender’s counsel argued on appeal argued that the case law relied upon by the trial court applied to bona fide purchasers for value and the heirs could not inherit an interest greater than what the decedent held. The Court of Appeals agreed and held that the heirs of a decedent do not inherit a greater interest in the estate's property than the interest held by the decedent. Therefore, the lender is entitled to pursue its foreclosure on the equitable mortgage theory.
INDIANA CASE LAW UPDATE
Blair v. EMC Mortgage, LLC, 139 N.E.3d 705, 2020 Ind. LEXIS 96, 101 U.C.C. Rep. Serv. 2d (Callaghan) 291, 2020 WL 762592
The Indiana Supreme Court addressed the statute of limitations in Blair v. EMC Mortg., LLC. The Superior Court granted the foreclosure but held that EMC was entitled to recover only payments and interest that accrued after July 3, 2006 due to the six-year statute of limitations in Indiana Code section 34-11-2-9. The Indiana Court of Appeals reversed the decision and held that by failing to make demand within a reasonable time, EMC was not entitled to recovery. The Indiana Supreme Court heard the case and rejected the reasonableness standard applied by the Court of Appeals. In addition, the Indiana Supreme Court held that Indiana has two statutes of limitations that would apply to a promissory note and mortgage, Indiana Code section 34-11-2-9 and Indiana Code section 26-1-3.1-118. The two statutes provide for three events that could trigger the statute of limitations. First, a lender can sue for a missed payment within six years of a borrower’s default. Second, a lender can exercise its option to accelerate the promissory note’s maturity date and call the full balance due. In that situation the lender must file their foreclosure case within six years of that acceleration date. Third, a lender can decide not to accelerate upon default and instead sue for the entire amount owed within six years of the note’s date of maturity.
NEW YORK CASE LAW UPDATE
U.S. Bank Trust, N.A v Moomey-Stevens, ___AD3d___, 2020 NY Slip Op 07440 [3d Dept 2020]
On appeal, the Appellate Division affirmed the Supreme Court’s post-trial decision in a foreclosure action, finding that the lender had proven its standing to bring the action as it had physical possession of original note at time the action was commenced as loan servicer's electronic inventory report, together with testimony from default servicing officer, showed that plaintiff came into physical possession of the note in 2016 before commencement of the action in 2017.
NEW YORK CASE LAW UPDATE
Aspen Shackleton III, LLC v Gordon, 189 AD3d 967 [2d Dept 2020]
On an appeal brought by an HOA seeking review of a summary judgment order issued in a foreclosure action on a modified mortgage, the Appellate Division affirmed the Supreme Court’s granting of summary judgment in favor of the lender, finding that HOA’s continuing lien for unpaid common charges created by its governing Declaration of Covenants, Restrictions, Easements, Charges and Liens, which was recorded prior to the mortgage, “merely provided for a potential lien” for unpaid common charges incurred by the borrower, and thus, gave notice “only of a potential claim” that did not have priority over the lender’s mortgage.
NEW YORK CASE LAW UPDATE
Wells Fargo Bank, N.A. v Khan, 188 AD3d 952 [2d Dept 2020]
In a rare reversal of a trial court’s denial of a reargument motion on appeal, the Appellate Division reversed the Supreme Court’s denial of the lender’s reargument motion for summary judgment in a foreclosure action, finding that the lender had established its standing to commence the action “by attaching a copy of the note, indorsed in blank, to the complaint”, and that the borrowers’ allegations of fraud “failed to raise a triable issue of fact”.
Prepared by Kristine Brown, Managing Attorney
The United States Bankruptcy Court for the Northern District of Mississippi found that for purposes of interpreting 11 USC 1322(c)(1), the debtor’s right to cure a default terminates at the conclusion of the foreclosure auction and not delivery or recordation of a trustee’s deed. The Court found that this is because the mortgagor is divested of legal title upon default and the equity of redemption upon the conclusion of the public auction. In the absence of a legal or equitable interest at the commencement of a bankruptcy case filed subsequent to the completion of the auction, the property is not property of the estate.
The firm received this positive ruling in a matter of first impression with respect to the finality of the foreclosure sale under Mississippi law. The Court found that a valid foreclosure auction constitutes a foreclosure sale and divests a debtor of both legal and equitable title to real property so that the automatic stay of 11 USC 362(a) will not come into effect to invalidate a foreclosure sale even though a deed has not been delivered or recorded. In a well reasoned memorandum, Judge Woodard affirmed the arguments put forth by Shapiro & Brown, LLC to find that the debtor’s interest terminates when the auction concludes and does not require a trustee’s deed to be delivered or recorded. In this case, the auction began at 11:05 A.M. concluded at 11:28 A.M. and the bankruptcy case was filed at 11:28 A.M. The trustee’s deed was signed and delivered on February 5th 2020 and subsequently recorded on February 12th 2020.