The difference between clogged arteries and clogged rights of redemption

Poor circulation or shooting pains in your arms might suggest a trip to your doctor for lack of proper circulation in your arteries, but how do you know if your redemption rights have been clogged?  And why should you care? And is it fatal?


If you have even heard the phrase "clogging the equity of redemption" before, congratulations!   If you harbor an interest to know more, then you are very special, indeed.  I had not given this legal concept much thought, until a recent exchange between several very bright colleagues on the Maryland State Bar Listserves.  And if the cool kids are talking about it, well, then count me in, too!


What is the equity of redemption? Imagine you had but one remaining payment to make to your bank, but because your payment was made one day late the bank took ownership of the property....the whole thing...lock, stock and barrel. That is the harshest of harsh results. Since the reign of Charles I, the common law has recognized that a mortgagor remains at high risk to lose title to his land right through the last payment, and has fashioned a doctrine that permits some leniency for the temporarily defaulting debtor. (follow this link to a first person account of the execution of Charles I in 1649)


The common law evolved to recognize that a mortgagor has the right to reacquire clear title to the property pledged as security upon repayment of that debt, plus interest. This is your "equity of redemption." You can find a more "lawyerly" description in a motion for summary judgment I filed, several years ago.( I have redacted information about the parties' identities and the property location.) 


Maryland takes a strong public policy position against documents that preemptively strip a borrower's right to exercise this redemption in the future.  But some private, or "hard money" lenders continue to require a borrower to execute a deed in lieu of foreclosure, when the loan is made, as added protection to the lender in case of default.  The deed in lieu is then filed away until the borrower misses a payment....and then it is pulled from the file, dusted off, and recorded in the land records.  And just like that, the borrower's title is lost to the lender, without a foreclosure action ever being filed.


This morning, I stumbled on an exchange of questions/answers on the Maryland State Bar Listserve that questioned application of the rule against clogging the equity of redemption in foreclosure cases, where a deed in lieu is negotiated AFTER the foreclosure is filed, but BEFORE the sale.


One very able foreclosure lawyer, Jeff Fisher, posited that:

The purpose of foreclosure is to put the property to a public sale so that a price for it can be obtained and, if the price is sufficient to satisfy the debt, the excess proceeds are available for the benefit of the mortgagor or those who claim under the mortgagor. It is a fundamental right. All deeds in lieu of foreclosure are subject to equitable scrutiny, even when the deed in lieu is negotiated after default occurs. If the mortgagor is just giving his equity away to his mortgagee, how is that not a clog on the equity of redemption.

Another very bright and capable lawyer, Byron Huffman, posted this rejoinder:

I respectfully disagree with Jeffrey as to the “clog on redemption” where a deed in lieu is executed post-default.  At that point, the DIL is a negotiated instrument for valuable consideration.  The clog on redemption occurs where there is no present intent of conveyance whether in connection with the original loan transaction or in connection with, say, a loan modification or forbearance.  That in my view always results in a deed in the nature of a mortgage.  Title insurance counsel may disagree with me, but where there is a negotiated DIL and a present intent of conveyance, a sale thereafter to a bona fide purchaser would be unassailable

This exchange caused me to go back through my old research. I found that in 1892, a published treatise on Maryland property law said "[t]he right to redeem, even in a mortgage context, can be itself divested by a valid mortgage foreclosure sale, or by a waiver made subsequent to, and outside the mortgage instrument itself." (you can buy the book, on Amazon, if you are a legal history buff, for about twenty bucks).

The Venable treatise continues to be quoted by the Maryland appellate courts. It was most recently quoted authoritatively in late 2010. This leads me to agree with Mr. Huffman. A deed in lieu that is negotiated later, after the initial loan transaction, should not be deemed to clog the equity of redemption. To borrow Venable's words, the waivers made in the deed in lieu are subsequent to the loan transaction, and are "outside the mortgage instrument itself."


So, my title friends, here's what I conclude: A deed in lieu that is given in the course of a foreclosure proceeding is not an impermissible clog of the equity of redemption. It is a subsequent waiver of the right of redemption.

Time for recess! Meet you all at the jungle gym.

Pennsylvania lawyer sues foreclosure firm employees for unauthorized practice of law.

Many thanks to my friend in Pennsylvania for alerting me to this interesting state court case, Loughren v. Bair, where the employees of a foreclosure law firm are being sued for their alleged unauthorized practice of law.  Here is a copy of the complaint,  or here.  If you have access to the docket system for the Allegheny Court of Common Pleas, input the case reference GD-10-021437, and you will find the entire docket.

The Amended Complaint details the allegations of the Plaintiff, a Pennsylvania lawyer, against more than a dozen firm employees who are processing foreclosures.  Among the allegations is reference to deposition testimony in a federal lawsuit, Robinson v Countrywide, 08-cv-01563,where a law firm partner admitted during deposition that foreclosure complaints were processed and even signed without attorney oversight. The testimony is recited along with facsimiles of various lawyer signatures made by the non-lawyer firm employees.  The federal case is plodding through discovery, with a recent court order requiring disclosure of portions of attorney/client fee agreements to the Plaintiff.  Use PACER to access the full docket of the federal case, which is now plodding through discovery and motions.

The state court complaint goes on to allege that foreclosures filed by the law firm violate FHA regulations, primarily because there was no oversight or review to determine whether the regulations had been satisfied before filing.  The amended complaint also collects several citations to federal court cases where non-lawyer signatures on foreclosure documents are discussed.

Bankruptcy Judge sanctions mortgage servicer for lying.

This one is a must read for anyone working in or around the mortgage foreclosure industry.  Bankruptcy Judge Elizabeth Manger sanctioned a lawyer, an affiant, and a mortgage servicer for botching the accounting of a debtor's post-petition payments, and then presenting false and incomplete affidavits and pleadings to the court in an effort to lift the automatic stay.  This particular order addresses the culpable actions of the loan servicer, LPS.

If you have PACER access, search for case #07-11862, styled as "LaRhonda Wilson" in the Eastern District of Louisiana. This will take you to the April 7, 2011 opinion of Judge Manger, where she details the "fraud perpetrated on the court, Debtors and trustees..."

If you don't have Pacer, start  with this 2010 article.  A more recent article appears in this 2011 blog post, after discovery on the issue had been concluded.

I've read the opinion and reviewed the court's docket of prior orders in the case.  Counsel for the lender was sanctioned $1,000 for filing pleadings that did not properly report payments received in his office from the debtor.  The lender, Option One and an employee who executed affidavits prepared by counsel in reliance only on information shown on a screen shot, were each sanctioned $5,000 in prior orders.  The court's docket shows these sums were actually paid in July, 2008.  This particular order is directed at the loan servicer's conduct.

After discovery and a merits trial, Judge Manger held that the affiant/employee was not qualified to execute the affidavits, and that her training by the mortgage servicer, Lender Processing Services, Inc. (a Fidelity National related entity) had been "insufficient and negligent."

This order is a wonderful cautionary tale for anyone dealing with servicers, and who regularly obtains affidavits from loan servicers in connection with litigation.  Judge Manger also cites to other bankruptcy cases that discuss different aspects of the loan servicing industry that are worth a read:  In re Stewart, 391 B.R. 327 (E.D. La. 2008) (post petition application of payments and errors in automated programs); Jones v. Wells Fargo, 366 B.R. 584 (E.D. La. 2007) (automated software and mis-application of debtor payments).

Judge Manger ends her opinion, saying that "one hopes the bottom of the barrel has been reached and that the industry will self correct. Sadly, this doesn't appear to be a reality."

Amen.

MERS is engrossing fiction, according to the NY Times.

Well worth reading.  If you haven't been chasing the recent decisions around the Country, here's a good primer on the MERS mess.  With phrases like "engrossing fiction," "cut corners," and "colossal mistakes," you can see where this article is heading.

California weighs in on MERS, not ready to slide into the ocean, just yet

On February 18, 2011, Judge Irion of the California Court of Appeal, in San Diego, issued a reported decision upholding MERS right to initiate foreclosures in California. The Gomes v. Countrywide decision is worth reading. What is remarkable are the reports about the case saying that the decision was issued only one day after oral argument.

This brief was in the can, before counsel stepped to the podium!

With California leading the nation in the volume of foreclosures, this is a real shot in the arm to the foreclosure bar.

Wall papering over the hole in the wall

The Wall Street Journal reports that the largest title insurers have made an agreement with Bank of America and other large lenders that will allow the lenders to obtain title insurance even when there is a Maryland foreclosure in the chain of title. Fear of "bad affidavits" runs deep within the industry, now.

But those of us who litigate in this area know that other ripples are crossing the pond. In lawsuits over bad settlements (whether brought by buyer, seller, or lender) the settlement officer's standard of care is always made an issue. Because of the many hats worn by a settlement officer (title agent, seller's escrow officer, buyer's escrow officer, etc.) the claim is always made that the settlement company breached its standard of care. Perhaps the settlement company is alleged to have closed over bad documents, affidavits, or it improperly disbursed, missed a lien or encumbrance, ignored closing instructions, or violated title underwriting guidelines (by the way, who would want to be in that business?).

Expect claims of "you should have known" wherever a Maryland foreclosure appears in the title chain. The agreement to insure over this stuff may make title "insurable," but it certainly doesn't mean it will always be deemed "marketable." And that claim will be made against the title agent/settlement company, in addition to the seller. And don't forget the underwriter, ready to pounce for breach of underwriting guidelines, seeking indemnity under that agency agreement!

The standard of care for a reasonable settlement company (and its non-delegable duty to search title and disclose) has been raised because of the recent "bad affidavit" issues created by our friends in the foreclosure bar. With the actual knowledge imparted by the sheer volume of reports in the popular media about the issues, the lender's remedial actions, and the Court's recent emergency rule changes, how can a settlement officer/abstractor ignore reference to a foreclosure action in the title chain? He must review that file! That is what the reasonable settlement agent in Maryland now must do...period.

The fallout begins.

So, the rules committee starts meeting, today, to discuss adjustments to foreclosure rules relating to affidavits. It appears PG County, alone, is reviewing over 14,000 open cases.

The article suggests a rule whereby the filing of a corrective affidavit would trigger a hearing where the offending lawyer would appear in court to testify to the facts and circumstances of the affidavit. Others could examine and cross-examine the lawyer.

Considering 400+ corrective affidavits by two lawyers, that is a lot of "testifying" by two men!

But who is thinking of the lawyers!

With Bank of America's announced freeze on foreclosures, nationwide, I wonder about the foreclosure mills, and the hundreds of lawyers that fan out throughout the state each day to conduct their sales. And there are the hundreds of processors (they rarely answer the phones, but they are there, trust me) who manage the pre-sale and post-sale processes. What is to become of them? Can they be bailed out?

I'm guessing they will have more time to focus on title, and generating new and more interesting title claims. C'mon folks, I'm waiting!

Another reason for all counsel in the title industry to take a deep breath.

Today, the Washington Post reported that Bank of America has suspended foreclosures in 23 states, following the admission of a foreclosure processor that she signed thousands of affidavits without reading them. In deposition testimony given in Massachussetts, the employee admitted to signing over 7,000 items per month. She also admitted to mis-identifying herself as an employee of Bank of New York Mellon.

This puts us all in a delicate position with the Circuit Courts. I routinely proffer affidavits from various bank officers, particularly where I seek default judgment orders. I have always relied upon the bona fides and representations of the client when preparing their affidavits. It now appears necessary to ask for further verification of job title and authority, doesn't it?

Add this to the list, right after "prove to me that you are the true owner of the beneficial interest in the trust before I file suit in your name."