Dylan Holland Real Estate Financing (2011
Introduction to mortgage financing a. Modes of financing i. All cash sale 1. Buyer pays all cash to Seller ii. Assumption or taking subject to existing mortgage 1. Buyer takes over the Seller s existing mortgage financing and pays cash equal to the difference between the sales price of the property and the balance on the existing loan a. May take over through Assumption Agreement b. May merely take subject to the loan without an express promise to pay it i. Not personally liable, but will still have powerful economic incentive to pay the mortgage loan iii. Seller financing 1. Buyer enters into mortgage loan or installment K with Seller iv. Combination of assumption/subject to and seller financing 1. Buyer takes over the Seller s existing mortgage but must take out a loan to pay the difference between the price and loan balance a. Buyer gives Seller a note secured by a second mortgage for part of this difference v. Wrap-around financing 1. Structured like Seller financing, but the Seller has preexisting mortgage financing on the property, and does not pay it off at the time of the transfer a. Instead, the Seller is required to continue making payments on the underlying loan at the same time the Buyer makes payments on the new (wrap-around) loan b. Mortgage foreclosures i. Forecloses the borrower s ability to assert an equitable right of redemption 1. Development of the statutory right of redemption ii. Deed of trust 1. Involves the conveyance of the realty to a third person in trust to hold as security for the payment of the debt to the lender-noteholder (ME) a. Is essentially similar to a mortgage with a power of sale iii. Mortgage substitutes and clogging the equity of redemption 1. Courts do not allow clogging by the mortgage language a. So ME tries to resort to other documents with the same effect i. Installment land K is most common device 1. Vendee goes into possession and agrees to make monthly payments of principal and interest until the principal balance is paid off 2. Vendor retains legal title until the final payment is made, at which time he has a duty to execute a deed to the land The use of mortgage substitutes a. The absolute deed and conditional sale i. Humble Oil & Refining Co. v. Doerr 1. Anti-clogging rule a. MR s equity of redemption cannot be clogged and that he cannot, as part of the original mortgage transaction, cut off or surrender his right to redeem b. The debtor/MR cannot, in the inception of the instrument, as a part of or collateral to its execution, in any manner deprive himself of his equitable right to come in after a default in paying the money at the stipulated time, and thereby to redeem the land from the lien and encumbrance of the mortgage ii. American Law of Property §16.59 1. The ME is not allowed, at the time of the loan, to enter into an option or K for the purchase of the mortgaged property iii. The policy is so strong against clogging that it is applied to hold such options absolutely void and unenforceable regardless of whether there is actual oppression 1
Dylan Holland Real Estate Financing (2011)
iv. Subsequent conveyances as clogs 1. The anti-clogging doctrine is generally inapplicable to transactions that are subsequent to the execution of the mortgage a. i.e. deed in lieu of foreclosure v. Disguised real estate security transactions as mortgages in substance 1. Court look beyond the document to see if there is actually a loan transaction a. Factors i. Relationship of the parties ii. Intent of using the deed to stand as security for a debt iii. Access to legal counsel iv. Sophistication and circumstances of parties v. Adequacy of consideration 1. Where consideration received by grantor is much less than the value of his property, there is an inference that a security device, as opposed to outright sale, was intended vi. Whether Grantor retained possession of the property 1. Where a grantor continues to occupy the premises, there is an inference that a security device was intended vi. Perry v. Queen 1. is a low income homeowner with a high school education. had two defaulted properties. approached to help cure default. required the deed to s property but would allow to buy it back. a. argued that it was a mortgage loan transaction with the property acting as security for the loan from . By determining that it is a mortgage, it would require the lender to adhere to the Truth In Lending Act. 2. Proof that a conveyance was intended as a security must establish a. The GR was indebted to the GE b. The GR intended his conveyance to serve as a security device 3. Parol evidence a. Is permitted to use extrinsic evidence to prove that a transaction is a mortgage 4. Statute of frauds a. If SoF applied, it would be very difficult for a GR to admit a written document to prove that the transaction should be a mortgage i. Therefore, does not stand in the way of establishing that an absolute deed or conditional sale was a security transaction 5. NOTES a. Restatement § 3.2 Absolute Deed Intended As Security i. Parol evidence is admissible to establish that deed purporting to be an absolute conveyance was intended to serve as security for an obligation ii. Intent may be inferred from the totality of the circumstances, including 1. Statements of the parties 2. Substantial disparity between the value received by GR and FMV 3. GR retained possession of the real estate 4. GR continued to pay real estate taxes 5. GR made improvements post-conveyance 6. Nature of the parties b. Restatement §3.3 Conditional Sale Intended As Security i. Parol evidence is admissible to establish that a deed purporting to be an absolute conveyance accompanied by a written agreement conferring on the GR a right to purchase was intended to serve as a security 1. Same factors as §3.2 vii. Downs v. Ziegler 2
Dylan Holland Real Estate Financing (2011)
1. As security for repayment of debt, transferred deed to Doctors, and brought current the money due to Downs. was given the right to repurchase the property. If Doctors were not a ME, then they would have liability to . Therefore, it is the Doctors that are trying to prove that they were ME. 2. Parol evidence is admissible to show that a conveyance absolute on its face was intended as a mortgage a. Of primary importance in determining whether a transaction was intended as a security device is the presence of a subsisting obligation 3. NOTES a. Dangers in using the absolute deed as security i. A BFP is not subject to an equitable mortgage 1. If the GR remains in possession, there cannot normally be a BFP because purchase has a duty to know who is in possession ii. GE will not be able to use power of sale 1. Will likely require judicial foreclosure if treated as a mortgage b. The negative covenant as a mortgage i. Equitable Trust Co. v. Imbesi 1. Lender s loan contained a negative covenant not to convey, but the son borrowed more money and gave the Bank a mortgage. This was a breach of the covenant. When the Bank foreclosed the mortgage, the Lender sought to invalidate the mortgage as being a breach of the covenant. 2. Rule intent that the transaction be a mortgage is the predominating factor 3. Holding the covenant was a covenant. The covenant was not a mortgage because it was not intended to be a mortgage ii. There is near unanimous agreement that covenants not to convey or encumber do not create a security interest 1. The covenant not to convey does not create a security interest in exchange for the land c. Installment Land K i. Carries out the same economic function as a purchase money mortgage 1. Financing by the seller of the unpaid portion of the purchase price of the real estate ii. The land K governs the parties throughout the life of the debt 1. Different than the binder type of K a. The debt relationship after the closing date is governed by the security device and the binder K no longer has a function iii. Traditional remedies for land K default 1. Sue for installments which are due with interest thereon 2. Sue for specific performance of the K 3. Sue for damages for the breach 4. Sue to foreclose his vendee s rights 5. Sue to quiet title 6. Rescind the K iv. Russell v. Richards 1. Russell was the purchaser; Richards was the seller. Russell paid $11,188 and assumed $37,938 under a land K. Russell reduced the principal by $10,782 at her default, and the value of the property had risen by 100%. a. Trial court said there was a forfeiture, but that the forfeiture shocked the court s conscience 2. Rule a forfeiture provision under a land K is enforceable absent unfairness which shocks the conscience a. Factors: i. Amount of money already paid by Vendee ii. Period of possession by Vendee 3
Dylan Holland Real Estate Financing (2011)
iii. Market value at default iv. Rental potential and value 3. NOTES a. Burgess v. Shiplet i. Buyers under a land K cannot look to the mortgage law for alternative remedies, but must accept the remedies set forth in their K with Sellers b. Relaxing strict enforcement i. Many states refused to enforce against a defaulting vendee forfeiture clauses 1. Some have conferred on the vendee a MR s equity of redemption 2. Judicial foreclosure 3. Right to restitution to the defaulting vendee v. Petersen v Hartell 1. FACTS Decedent entered into land K with grandchildren, which grandchildren were delinquent in making payments on. Decedent attempted to cancel the K, and grandchildren sued for specific performance. 2. RULE the prohibition of punitive damages for breach of K, the strict limitations on the right to provide liquidated damages, and the provision that neither specific nor preventive relief can be granted to enforce a penalty or forfeiture in any case together establish a policy that precludes forfeiture. 3. HOLDING A vendee who has made substantial payments on a land K or substantial improvements on the property, and whose defaults, albeit willful, consist solely of failure to pay, has an unconditional right to a reasonable opportunity to complete the purchase. a. Requires paying the entire remaining balance plus damages 4. NOTES a. It is important to note what the defaulting party is asking for i. Courts may be more sympathetic for a defaulting party seeking specific performance versus asking for damages 1. Court wants to try to restore the parties to where they would otherwise be without a resulting windfall to the seller b. Restitution as an alternate form of relief for vendee i. Forfeitures may not be free, and a vendor may have to return payments received minus what the vendor has actually been damaged 1. Clampitt v AMR Corp a. One question that arises when looking to market value of property is determining when to prescribe the value b. Court concluded that the use of the forfeiture clause was not unconscionable b/c Seller got reasonable compensation for the losses it incurred i. Did not award any restitution to vendee ii. Damages to vendor in forfeiture 1. Market Value a. Where there is a liquidated damages clause, a determination of the difference between K price and FMV should be made to determine whether or not what the seller is acquiring back as a result of the forfeiture is more valuable than what he contracted to sell 2. Rental Value a. Consider the loss of rental value during the time the defaulting purchaser was in possession 3. Costs of repossession, refinancing and resale 4. Miscellaneous damages 4
Dylan Holland Real Estate Financing (2011)
vi. Sebastian v Floyd 1. FACTS Sebastian defaulted on land K with Floyd. K had a forfeiture clase that was enforced by the circuit court and appeals court. 2. RULE A rule treating the seller s interest as a lien will protect the interest of both buyer and seller a. Ordinarily the seller will receive the balance due on the K plus expenses b. In addition, the buyer s equity in the property will be protected i. Legal title remains with the seller in land K until the entire K price has been fulfilled. Equitable title passes to the buyer when the K is entered into. 3. NOTES a. Treating land K as a mortgage i. Restatement §3.4(b) 1. An installment land K creates a mortgage and will be governed procedurally and substantively by the law of mortgages ii. Determining whether more than minimal payments have been made looks at BOTH principal and interest 1. Also considers the length of time and number of payments made in determining whether a vendee had made minimal payment iii. Even if only a minimal amount has been paid on the K price, forfeiture is not appropriate unless the vendor s security is jeopardized by the vendee s acts or omissions 1. EXCEPTIONS THAT ALLOW FORFEITURE a. Vendee has abandoned the premises b. Vendee has paid minimal amount AND the security has been jeopardized b. Waiver or estoppel as a defense against forfeiture i. If a vendor accepts late payments w/o declaring default, many court say that it is the vendor s waiver of the forfeiture 1. Creates in the vendee a right analogous to an equity of redemption ii. Danelson v Robinson 1. Defaulting vendee asserted that the vendor said he was not worried about the payment, but later initiated forfeiture a. Vendor was estopped to assert forfeiture 4. The Case for the Restatement Approach a. Other Vendor remedies i. Where forfeiture is available, it may be undesirable for the vendor 1. Vendor could opt to foreclose and if the foreclosure sale yields less than what was owing, a deficiency judgment would be available 2. Vendor could sue on K obligation, obtain a judgment for that amount and collect out of vendee s assets ii. Allows a vendor to achieve indirectly what is usually available as a matter of course in mortgage law 1. Is able to have his cake and eat it too a. Specific performance b. Action for damages i. Where forfeiture is necessary to regain property, an action for damages could be barred by election of remedies doctrine c. Foreclosure of purchaser s right i. Vendor is able to seek a mortgage remedy under a device that is governed by K law 5
sue the guarantors first b/c the guaranty is wiped out when there is a forfeiture ii. Is designed to prevent double recovery for a single wrong.Dylan Holland Real Estate Financing (2011)
ii. ME remedies when K is recharacterized as a mortgage 1. Not when the notice has been sent out 3. as would be required in an action for damages ii. So if there are guarantors of the interest. NOTES i. Michigan Nat l Bank v Cote 6
. HOLDING Allowing Gershman s judgment for specific performance to be satisfied b/c they had to buy the property at sheriff s sale would in effect eliminate specific performance as a viable remedy for a K and eviscerate the election of remedies doctrine i. RULE Election of remedies doctrine i. Guarantor s obligations to vendor do not survive the forfeiture i. Summit said that this was all Gershman was entitled to under the K b. Gershman was required to convey title to the property i. Summit House v Gershman a. Mazur v Young a. Once Summit paid the judgment amount. the vendor is barred from seeking to recover the equivalent of a mortgage deficiency judgment 2. FACTS Gershman entered into land K with Summit. but also gives the vendor the advantage of not having to prove the FMV of the real estate. Treats vendors on both sides (liable and not liable) 5. The election of remedies has been made when the vendor attempts to take possession i. Does the election of remedies bar vendor s recovery of waste? 1. Choice of remedies would be effectively eliminated if vendor knew that the vendee could simply refuse to pay a money judgment and force the seller to accept the return of the property as full satisfaction of the judgment d. 1. Vendor may either seek specific performance on the K or may cancel the K. ME will not be liable for unsafe conditions on the mortgages real estate unless she is in possession or otherwise exercises dominion or control a. Premises liability of vendors 1. Gruskin v Fisher a. Summit sued to terminate the K when the market took a downturn. A judgment for the remaining balance is usually unavailable unless the K contains an acceleration clause b. Election of remedies doctrine 1. The mortgage remedy not only affords the vendor a practical substitute for a K action for damages. NOTES i. Gershmans counterclaimed for specific performance and were awarded SJ. and therefore the vendor cannot seek both specific performance and K cancellation c. Once forfeiture has been accomplished. and the property was sold to Gershman at a sheriff s sale for less than the judgment amount. Summit never paid the judgment.
the ME can acquire title by paying vendor the balance due under the land K a. Documents used in mortgaging vendee s interest i. Protecting the vendee s ME from forfeiture or foreclosure i. Usual view is that the vendor has no duty to perfect the title until the vendee makes the final payment Clearing the vendor s title after a forfeiture a. When a forfeiture occurs under circumstances where prior notice to the ME is required. The vendees then assigned their interest to the who held then held the land K 7
. Vendees attempt to overcome this by recording an affidavit or notice that incorporates the essential terms of the K Vendee s possession as notice a. Means that the ME needs adequate assurances that the land K will be paid off so that the ME will have security in the land a. will deliver an executed quitclaim deed to an escrow agent i. May be struck down as an unreasonable restraint on alienation Cascade Security Bank v Butler a. Vendors attempt to avoid predicaments by making sure that the K is not recordable i. Rights of the vendee s ME i. court find that the rights of the ME remain unimpaired 1. Prohibition on assignment by the vendee i.
7. If the vendee defaults.
8. the vendor notifies the escrow agent of the termination of the K and is able to record the deed A vendee s equity interest is mortgageable a. Vendor cannot collect delinquent real estate taxes that vendee was obligated to pay under the K When must the vendor perfect title? a.
a. ME cannot take any greater interest in the land than his MR i. ME will want a provision that allows the ME to cure any default by the vendee b. Henteges v PH Feely & Son i. ME has the burden to notify the vendor of its mortgage interest 1. Means that an equity of redemption was no eliminated and vendee may be able to exercise that right d. at the time of execution.Dylan Holland Real Estate Financing (2011)
6. will require the form to include a power of sale to obviate the need for judicial foreclosure e. Possession by a vendee under a K for deed operates as full notice of his rights to creditors of the vendor Use of deeds in escrow a. Mortgage or deed of trust 2. A land K may purport to deny the vendee the power to assign or mortgage his interest w/o the vendor s consent 1. If permitted.
11. If the vendor and vendee s ME agree. If MR is a vendee. Prudent lenders use standard financing forms to effectuate security interest in the vendee s interest 1. the vendee s interest is equitable title that may be subject to forfeiture 1. Possession by the vendee normally will prevent a lien from attaching to the vendee s interest b.
10. FACTS obtained a judgment against the vendees. Vendor is otherwise not under an obligation to notify the ME if it seeks forfeiture c. Vendee.
Some case law holds that a judgment lien does not attach to equitable interests in real estate ii. RULE A real estate K vendee s interest is real estate within the meaning of the judgment lien statute i. extends to all of the vendor's interest remaining in the land and binds the land to the extent of the unpaid purchase price v. NOTES i. holder of judgment lien against vendor 1. ME can get MR to agree to give ME possession 8
. Initiate a separate action to resolve questions related to the right to the unpaid balance of the purchase amount c. Is the vendee s interest real estate? 1. The prudent lender who wants a valid security in a vendor s interest will ALWAYS file a financing statement ii. Intermediate theory 1. Legal and equitable title remain in MR until a default. A judgment lien arises as soon as the judgment is docketed or recorded c. Majority of American jurisdictions iii. but prior to making and delivery of the deed. A judgment lien creditor s interest attaches to the full interest of the vendee iii. Is an inchoate interest to becoming the owner. Bank of Santa Fe v Garcia 1. Vendee should: a. but is not being the owner 2. or other lien on real property securing the right. Arrange to pay the balance due under the K to the court and so notify the court Rights and Duties of the Parties Prior to Foreclosure a. Title theory 1. Theories of Title i. ME in possession in lien states 1. Majority rule is that a judgment lien against a vendor after the making of the K.Dylan Holland Real Estate Financing (2011)
III. As legal titleholder. Legal title to the mortgaged real estate remains in ME until the mortgage is satisfied or foreclosed a. Cease making payments to the seller/judgment debtor b. ME has a right to immediate possession against MR ii. A vendor s interest in a land K is now an account rather than a general intangible iv. Vendee vs. mortgage. Lien theory 1. ME is regarded as owning a security interest only and both legal and equitable title remain in the MR until foreclosure a. Is the vendor s interest real estate for purposes of judgment liens? 1. A lien arises as soon as the judgment is docketed or recorded a. notwithstanding other law to the contrary i. Perfection of a security interest in a right to payment or performance also perfects a security interest in a security interest. UCC §9-308(e) a. in the absence of agreement to the contrary.
b. at which time legal title passes to the ME iv. Perfection of security interests in vendor s rights under land K 1.
A lease which is subordinate to the deed of trust is extinguished by the foreclosure sale i. THE OPTION MUST BE SUBORDINATED TO THEMORTGAGE 3. Standards is willful default. 5. Standard by which the discharge of that duty should be judged is that of a provident owner 1. NOTES a. HOLDING the lease did not survive the sale a. ISSUE Did the lease survive the foreclosure a. Cannot be extinguished by foreclosure of the mortgage 2. Fiber Form continued to pay rent to Dover. ME must operate the property no only to protect its own interest. Complete subordination of a prior lease to a subsequent mortgage is legally possible 4.
2.000 in punitive damages for an intentional unlawful entry by the bank into their home Liability of ME in possession 1. If MR abandons. but left the lease before its expiration 2. ME in possession status makes ME liable in tort for injuries resulting either through its actionable fault in utilizing the property or by reason of its failure to perform duties imposed by law upon the owner of land Avoiding ME in possession status 1. If such a lease contains an option to purchase the property. received $100. Dover argues that the lease was ratified by Fiber Form continuing to pay rent 3. ME is not bound to dig into his own pocket and so need not expend more than the rents and profits he receives b. so title was taken without the lease encumbering it. the tenant s interest will be defeated by the sale 4. but also for the benefit of the MR to pay off the debt a. ME is not entitled to make demand on the tenant to pay rent to to ME because has no privity of estate ii. recklessness and improvidence 2. RULE a. Wheeler v Community Fed Sav & Loan Ass n a. ME can usually retake possession until foreclosure ME taking possession without judicial process 1. if duly recorded.Dylan Holland Real Estate Financing (2011)
vi. Fiber Form argues that the sale extinguished the lease b. A lease that antedates a mortgage. There are limitations a. ME who goes into possession is under a duty to maintain and preserve the property i. In lien theory state. and knew of a preexisting lease by Fiber Form with the defaulting landlord. Senior vs subordinate leases i. Leases junior to the mortgage 9
. and remain in possession until a valid foreclosure sale takes place 3. If the sale of the landlord s interest is forced by one having a paramount title to that of the tenant. Dover wanted to keep the Fiber Form lease in place. ME may purchase at an invalid foreclosure sale. The lease was subordinate to the deed in trust. FACTS Dover purchased property at a trustee sale. Allows access to the rents and profits and control over the mortgage real estate pending foreclosure Dover Mobile Estates v Fiber Form Products Inc 1. is prior and SUPERIOR to the mortgage 1. ME frequently use receivership to avoid ME in possession status a.
viii. such as a ME whose interest existed at the time the lease was made.
. Lessee specifically subordinates the lease to the mortgage ii. Is an act by which one having an interest in particular real estate consents to a reduction in priority as against another holding an interest in the same real estate a. Tenant estoppel certificate 1. FACTS there was a judgment against Millette. Millette had assigned to Bank in a deed of trust. ME grants the lessee the protection of a nondisturbance clause so that any foreclosure purchaser agrees to recognize lessee s rights under the lease iii. Usually executed in a separate document executed by the tenant and ME b. ME has the right to evict junior leases as soon as default occurs in the mortgage payments a. Tenant agrees with ME that if the interest of the Landlord under the lease shall be transferred by reason of foreclosure/deed in lieu. In title and intermediate theory states. Security interests in rents 1. Bank began foreclosure proceedings. ix. Lender directly asks the tenant to confirm certain aspects of the lease. ME sends the tenant a tenant estoppel certificate.Dylan Holland Real Estate Financing (2011)
1. ME holding a senior lien agrees that in the event of foreclosure. In the Matter of Millette 1. O Neal found out about the building. whether it follows lien or title theory x. and attempted to garnish the rents. Such a lease can be extinguished by foreclosure of the mortgage 2. Lessee. Attornment agreement 1. the foreclosure purchaser will permit the lease to continue and allow the tenant to remain on the leased premises so long as the tenant continues to comply with the terms of the lease and is not in default a. by attorning. after foreclosure. Nondisturbance agreement 1. as a junior party. covenants and conditions of the lease for the balance of the term thereof with the same force and effect as if the Purchaser were the original landlord under the lease a. If ME enters under his mortgage and tenant chooses to remain and pay rent. ME needs to be able to justifiably get a valid copy of a lease during the underwriting process a. Varying priorities by agreement i. The creditor was O Neal Steel. However. Tenant shall be bound to the Purchaser under all of the terms. Also true in lien states where a clause is inserted in mortgage giving ME right to possession on default 3. creates a month-to-month tenancy b. Provides the lender with specific covenant from tenant that. Puts the tenant and lender in direct privity of K ii. agrees to be bound under the terms of the lease to any foreclosure purchaser even though. Assignment of rents agreement is enforceable in every jurisdiction. a foreclosure would otherwise terminate his leasehold obligation i. the tenant will perform for the benefit of the lender upon demand to do so iv. Subordination agreement 1.
the value of the property was well in excess of both the first and second mortgage and tax lien. is perfected in the rents when the assignment is recorded. When does the assignment become effective between MR and ME? ii. OCI only collected rents: does not establish possession or control b. 2. RULE The recording of a mortgage document containing an assignment of rents gives the ME rights superior to any subsequent third party who would seek to take a security interest in the leases and rentals pertaining thereto as a type of collateral a. to appoint a third party to act on behalf of the court at the request of one of the parties in the transaction (normally the lender) 1. Held to the standard of a provident owner to use reasonable diligence to keep the property in a good state of repair 3.Dylan Holland Real Estate Financing (2011)
2. Coleman v Hoffman 1. No K should force a court to exercise its discretion in favor of a party who stands in no need of aid i. The assignment is perfected when it is recorded. Page 382 xi. When has the lien been perfected? 1. NOTES a. OCI took an assignment of the rents. a. using its equitable powers. and Hoffman was the expected purchaser. A&H performed acts indicating possession/control: paid utility bills. A&H began paying the utility and repair costs. collected rents. Dart v Western Savings & Loan Ass n 1. Buys lender time to try to get the existing tenants to sign an attornment agreement ii. NOTES a. Inland crossclaimed to foreclose its second mortgage and to foreclose the first mortgage on Dart s home. At the time. 2. Three crucial focal points in the creation and enforcement of a rents assignment i. RULE ME who properly acquires ME in possession status is held accountable for that possession to third parties. Standards for receivership i. When does ME have the right to collect/enforce the assignment? 1. Is enforced when additional steps have been taken b. or whether it must take additional steps to perfect its interest in the rents 3. Why appoint a receiver? a. If the security is plainly adequate. in the mortgage. HOLDING Hoffman performed two acts that show possession/control: made repairs and managerial decisions. ME does not have to take additional steps to perfect its interest. ISSUE Whether ME. In April 1997 the owner defaulted on its loan. Restatement approach i. FACTS Dart owned a trailer park and Western Sought to foreclose its first mortgage. despite the presence. and hired Hoffman. RULE ME s equitable right to have a receiver arises only when he shows something more than a default a. FACTS Six month old daughter fell off balcony in July 1997. Action taken by court. Avoids termination of leases i. a receiver will not be appointed. 4. Is perfected when recorded iii. of a rent pledge or receivership clause 3. Receiverships i. which has obtained assignment of rents. Insolvency of MR and inadequacy of security are not enough to justify receivership 11
Receiver was appointed. ME has not duty (except ME in possession) has no duty to expend funds to preserve the mortgaged premises 3. HOLDING MR had most to lose and therefore the greatest incentive to act based on potential of deficiency judgment a. No violation of due process where the appointment of the receiver is based upon sworn ex-parte documents under judicial supervision and followed by an early opportunity by debtor to put the creditor to his test d. Bank sued for deficiency judgment 2. Entails the appointment of a receiver. Ability of receiver to terminate leases i. usually pending judicial foreclosure. Restatement 1. MR has a duty to maintain the premises even after a receiver is appointed c. Property became vacant. Ex parte receivership i.Dylan Holland Real Estate Financing (2011)
1. Just b/c there is an assignment of rent clause does not mean that the lender should be entitled to receivership ii. Receiver of rents and profits in mortgage is bound by the agreement between the tenant and MR-landlord. Impact of receivership and rent assignment clauses i. Prudential could have sought a deficiency judgment from MR. MR is in default b. Trustco Bank v Eakin 1. Court has power to prevent frustration by a collusive or fraudulent lease for an inadequate rental or advance payment of rent in anticipation of foreclosure action iii. Bank did not provide funds to board up the property. Prudential Insurance v Spencer s Kenosha Bowl 1. but took several months for the receiver to be qualified. ME is entitled to receivership if the MR is in default and the mortgage contains either a mortgage on the rents or a provision authorizing appointment of a receiver to take possession and collect rents upon the MR default c. ME is entitled to appointment of receiver if: a. Waste i. Must be some additional ground such as danger of loss. but it was advised to seek waste damages from Kenosha 2. Presupposes the existence of a bona fide lease a. destruction or serious impairment of the property ii. RULE A court appointed receiver in a foreclosure action is an officer of the court and not an agent of the party who procured the appointment a. without providing notice or a hearing for MR and other interested parties 1. and defaulted. and Eakins said it would not take steps to maintain. and Eakin drained the water pipes. A receiver should not be put in jeopardy personally as to his own financial status merely b/c the property is one which cannot readily be administered b. and Prudential foreclosed. RULE Waste is a species of tort
. even if the lease is less than the FMV 1. FACTS Kenosha had not assumed a prior owner s mortgage when it acquired property. Value of real estate is inadequate to satisfy mortage c. Restatement 1. waste. Prior owner defaulted. MR is committing waste b. FACTS Eakin executed a mortage with Bank for an apartment complex.
Make the MR liable for waste even if there would be no general liability on the mortgage debt d. Amount of the mortgage debt or the unpaid deficiency c. whether negligently or intentionally. Is the unreasonable conduct by the owner of a possessory estate that results in physical damage to the real estate and substantial diminution in value of the states in which others have an interest 3. is not personally liable c. Waste liability of nonassuming grantee i. Waste committed by non-owners i. NOTES a. liability exists only if the person committing it had actual knowledge of the existence of the mortgage e. Liability for waste generally does not extend to non-owners ii.Dylan Holland Real Estate Financing (2011)
a. What constitutes waste? i. Actual harm caused by the waste b. w/o ME s consent. Materially fails to comply with covenants in the mortgage e. Damages is the conduct that created the loss plus the diminution in value. When foreclosure sale yield less than debt. Grantee of mortgaged real estate who merely takes subject to the existing mortgage does not assume. Waste liability when a deficiency judgment is barred by mortgage clause or by statute i. As the loan is paid down. Retains possession of rents to which ME has the right of possession b. Impairment of security exists if the ratio of mortgage obligation to FMV is above its scheduled level a. May not exceed the least of: a. Measuring impairment of security i. Cannot exceed the deficiency judgment 4. Amount by which ME s security has been impaired f. ME has two reasons for concern 13
. ME may recover a judgment for the deficiency against anyone who is personally liable on the mortgage obligation 1. If the waste was committed by MR s consent. Limitations on recovery of damages for waste i. Lender will recover amount to put L/V ratio where scheduled to be d. ME Liability for Environmental Problems i. Physically changes the real estate. Fails to pay property taxes before delinquency d. HOLDING Waste Doctrine permits a ME to maintain an action for waste against a nonassuming grantee of MR a. Three limitations on ME s recovery of waste 1. Carefully drafted non-recourse clauses often carve out liability for waste 1. the MR a. CERCLA 1. Fails to maintain and repair in a reasonable manner c. Waste occurs when. in a manner that reduces its value b. Significantly increased potential for ME liability 2. Restatement approach 1. Loan to Value ratio 1. Restatement approach 1. the L/V improves ii.
and their water supply was contaminated 2. There was a fire loss. precluded ME from collecting 3. RULE standard mortgage clause creates an independent K of insurance. United States v Mirabile a. The Bank purchased the station at a foreclosure sale. No liability so long as not participating in management i. MR should be able. becomes subrogated to the debt and can attempt to collect from MR c. FACTS Bank held a mortgage on a gas station. CERCLA lien 1. May still be protected from liability if ME can establish that even post-foreclosure ownership is held primarily to protect his security interest in the facility 3. MR wanted the proceeds available to rebuild. Resulted in legislation to provide better guidance a. HOLDING the RCRA statute does not eliminate a cause of action in tort e. Loss payable policy a. If MR did something wrong. Lien is given SUPERPRIORITY iv. IF MR promised ME to purchase insurance. Owner is responsible if the if the contamination exposes adjacent property and is responsible for cleaning up the adjacent property and groundwater iii. MR and ME have insurable interests with respect to loss suffered by the mortgaged premises 1. ii. Standard mortgage/Union mortgage a. ME has an equitable lien on the proceeds even if it is a nonrecourse loan ii. RCRA applies to underground petroleum storage tanks 1. ME is liable if it had the capacity to influence borrower s treatment of hazardous waste even if it did not actually involve itself in the operations 5. Edwards were neighbors to station. 2. Payable to MR and ME as interests may appear. If MR neglects to pay premiums. production. engrafted upon the main K of insurance contained in the policy itself a. and foreclosed. ME will be able to recover on insurance policy even though MR has engaged in acts such as arson. ME was only liable if it participated in operational. Acquires ownership through foreclosure or deed in lieu i. Edwards v First Nat l Bank of North East 1. Hired ESSE to test the storage tanks. or waste disposal activities 4. where rebuilding is practical. Loss would be payable to MR and ME as their interests appear i. fraud. but does not allow ME s interest to be terminated by wrongful act of MR i. to insist upon the application of the insurance proceeds to rebuild the premises 14
. ME can pay the premiums on demand b. Where mortgage is not in default. Insurance and Real Estate Taxes i. ME only to the extent of its loan 2. Preforeclosure period i. If insurer pays mortgage debt in full. for the separate benefit of ME. Makes ME the owner 1.Dylan Holland Real Estate Financing (2011)
a. ME wanted the insurance proceeds applied to payments due under the mortgage. FACTS MR made purchase money mortgage to ME. Starkman v Sigmond 1. ME has a right to the insurance proceeds to the extent the casualty has impaired the ME s interest i. ME may be considered a participant in management and would have CERCLA liability b. See 415-16 ii. etc. United States v Fleet Factors a.
Fannie/Freddie approach i. HOLDING by allowing ME to take the premiums. taxes. ME utilize mortgage clauses specifically imposing the duty to pay taxes and insurance premiums on MR i. Allows ME to capture the full award when a total taking occurs (up to the amount of the debt) ii. Unless Lender and Borrower otherwise agree in writing.Dylan Holland Real Estate Financing (2011)
IV. Transfer and Discharge a. it is cutting short the terms of the loan a. Partial taking allows ME to recover the amount of the proceeds multiplied by the following fraction 1. Entitled to all the insurance proceeds up to the amount of the mortgage debt 3. ME has no right to insist on payment from insurer i. insurance proceeds shall be applied to restoration or repair of the Property damaged. Restatement approach i. Real estate taxes are a SUPERPRIORITY lien a. Transfer of MR s Interests 15
. Is the owner of the real estate now rather than the holder of the security interest iv. ME may demand that MR set up accounts with the ME into which MR will pay 1/12 of the annual taxes and insurance premiums each month 2. Partial taking i. Make failure to pay a cause for acceleration of the mortgage debt b. if the restoration or repair is economically feasible and Lender s security is not lessened 2. Disposition in eminent domain awards a. Requires escrow of association fees. Escrow Account for Taxes and Insurance 1. ME is entitled to all proceeds where the casualty loss occurs after a foreclosure purchase by the ME i. ME is entitled to the entire condemnation award. Effect of full credit bid on insurance recovery a. If mortgage debt is satisfied by the proceeds of sale. RESPA limits the cushion that a lender may collect i. How much of the proceeds may ME capture? a. or so much of it as is needed to satisfy the mortgage debt b.
3. etc. MR will lose the benefit of a long-term loan which was bargained for iii. Proceeds go to MR 5. the ME is entitled to no further payment on account thereof 1. Total amount of the sums secured immediately before the partial taking divided by FMV of property immediately before partial taking 4. Cannot exceed 1/6 of the estimated annual taxes and other escrowed items ii. Escrow accounting under RESPA a. Entitled to recover insurance proceeds only to the extent that ME s security has been impaired by the loss or damage b. Suppose ME purchases mortgaged premises at a foreclosure sale by bidding the full amount of the debt i. NOTES 1. Absent an impairment. When should rebuilding be permitted with insurance proceeds? a. Insurance recovery for losses occurring after foreclosure a. Requires aggregate computation 1. ME only recover enough to compensate for impairment of the security c. Majority approach i.
Dylan Holland Real Estate Financing (2011)
i. ME may be able to subject grantee to liability even after the MR has rescinded the assignment e. Nature of ME s rights against grantee i. Two theories 1. MR can sue grantee on the note OR foreclose the mortgage 2. MR must pay mortgage debt in full. Assumptions are not implied b. Must be an EXPRESS PROMISE i. Assuming grantee s assertion of defenses i. Lender can only pursue the Grantor of the assignment ii. MR may obtain a court order compelling grantee to pay c. Subrogation right is only to the mortgage 1. Subrogation 1. Impact of the absence of an assumption agreement i. Have made it less likely that the grantee or the land will satisfy the debt b. Assuming it a. Exoneration 1. Majority view 2. Discharge is granted on the grounds the actions of ME a. Two concepts of taking over an existing mortgage 1. ME is a third-party beneficiary of the assumption agreement a. Reimbursement and Exoneration are not available ii. If the grantee assumed. the Lender can pursue default payments from the Grantor and the Grantee of the assignment 2. Suretyship defenses i. Extent of discharge? 16
. Have made it more difficult for the MR to assert recourse 2. MR pays the mortgage in whole or in part is entitled to indemnity provided there was an assumption iii. Middleton v Hancock 1. Subject-to grantee s assertion of defenses i. Under the third-party beneficiary theory. if the ME has sufficiently relied on the assignment. RULE assumption is a promise by purchaser to make the payments and perform the other covenants in the note and mortgage a. Assuming grantee does not have the right/ability to assert defenses that would have been available to the MR against the ME b. Surety ought not be held liable under a different deal tan he originally made. Reimbursement 1. Not to the note 2. Taking subject to it a. MR who pays the debt has three avenues to proceed against the grantee i. Under an assumption. Rescission of the assumption agreement i. Grantee cannot assert defenses for the same reason as assuming grantee c. Suretyship subrogation theory d. and receives ME s note and mortgage. Major disadvantage of subrogation is that it is available only upon the surety-MR s payment in full ii. NOTES a. unless the surety consents to the change in the terms of the deal 1.
Obtain MR s consent to the modification after the mortgage is entered into. (d) states the specific exemptions to what would otherwise trigger due on sale clauses (page 475) a. FACTS grantee increased the term of the loan and increased the interest rate upon assuming the assignment of grantor-MR. Transfer of stock or p ship interests 17
. a. the lender may accelerate i. Fannie/Freddie approach a. Transfer by devise. Must be broadly written because it is strictly construed ii. but same manner as MR did not allow ME to increase the interest rate. First Federal Savings & Loan v Arena 1. Is broadly applied. Recognized only to the extent that the surety would suffer loss as a result of the impairment i. but before the modification itself is made iii. This is false b/c transfer creates the surety relationship so that the interest is still protected against the MR-grantor b. MR acts as a surety. Under this language. Obtain MR s consent after the modification is made b. but DOES NOT COVER PRIVATE BANKS 3. Include a clause in the mortgage preserving ME s claim against MR 1. Is not limited to residential loans 4. Used to protect ME against transfers that endanger mortgage security or increase the risk of default i. NOTES a. Due-on sale clauses 1. Loans covered a. Transfer to relative resulting from the death of borrower f. If all or any part of the property or any interest in it is sold or transferred. even a short-term lease or easement would suffice to trigger the lender s right to accelerate iii. HOLDING . Creation of lien subordinate to lender s security b. Transfer into trust 2. Land K vendor retains a vendor s lien for the unpaid purchase price 5. NOTES a. Transfer by divorce g. Enable ME to recall lower than market interest rate loans during periods of rising interest rates ii. Germain Act 1. and surety law provides that a surety is entitled to stand on the strict letter of the law 3. Restrictions on Transfer by MR i. . Lenders covered a. Affords ME the right to accelerate the mortgage debt and to foreclose if the mortgaged real estate is transferred w/o ME s consent a.Express clause that ME and MR agreed upon allowed for many things. descent or at death d.Dylan Holland Real Estate Financing (2011)
a. Garn St. Leasehold interest of three years or less e. Purchase money security interest for household appliances c. Application to Land K a. Events triggering acceleration 1. How can ME avoid suretyship defenses? i. 2. Although historically it was a complete discharge iii.
GNMA guaranties the securities at face value even if some of the payments due on the underlying mortgages experience default i. Transfer of ME s Interest i. Some cases have said that there is no duty to disclose ii. Transfer of the note is adequate to transfer ME s right ii. and C c. no matter how many times a property is conveyed 1. what damages can ME assert? 1. Where Fannie/Freddie is the initial Investor. So if A is the MR. Put in writing what obligations the client has and let the client know of the possible implications c. But it all depends on the language of the K b. Fannie/Freddie issues the participation certificates back to ME. and sells to B (takes subject to). the due on sale clause applies to A. Outright sale to an investor who will hold the mortgage in its portfolio 1. Waivers by lenders i. MR (note and mortgage) => ME (endorsement of note. it will issue hundreds of participation certificates to other investors in capital markets 1. and B sells to C. ME makes a huge loan that ME does not want to be exclusively at risk for i. Allows ME to determine what percentage of participation ME wants to have in the loan a. assignment of mortgage) => Investor (sales participations) => multiple investors a. Generally due on sale clause applies to every transfer. or both d. Commonly given in return for the payment to lender of an assumption fee. Lawyers are required to keep the confidence of client as long as not illegal or fraudulent ii. Concealment of transfers i. How should one advise client? 1. assignment of mortgage) => Investor a. Can accelerate the loan 2. Participation interests are tenancy in common interests ii. Sale of mortgage-backed pass-through securities 1.Dylan Holland Real Estate Financing (2011)
i. Bonds/securities are collateralized by the mortgages in groups ii. Is the typical scenario in large commercial real estate transactions. If there is a concealed transfer. Concealment by lawyers i. GNMA essentially only had to guaranty 2% of the loan b/c FHA or VA guaranteed 98% of the loan at the time MR gave ME the mortgage 18
. Successive transfers i. MR (note and mortgage) => ME (endorsement of note. Partial assignments (participations) sold to multiple investors 1. Assignment of the mortgage was recorded. Most due on sale clauses have no express covenant that the MR must disclose to the ME that a transfer is taking place 1. MR (note and mortgage) => ME (endorsement/assignment) => Issuer (sales of bonds/securities) => Multiple investors: GNMA guaranties the bonds/securities a. but not necessary to transfer ME s right i. Lenders can and do waive the right to accelerate 1. Not a trigger b/c General Partner stayed the same and the p ship was a separate legal entity ii. and ME then sells the participation certificates on the capital markets. B. Having the certificates also gives ME greater liquidity iii. an increase in interest rate. May also get damages for the difference in the old interest rate from the new interest rate e.
investors relied on rating given to the securities by the three rating agencies (Moody s. Mortgage brokers b. and that Fannie was privatized ii.Dylan Holland Real Estate Financing (2011)
iv. More and more loans were made by independent mortgage brokers i. As a fallback. Terms a. Sale of multiclass mortgage-backed securities 1. The problems arose b/c of confluence of two factors i. and had the ratings agencies supply a rating i. Brokers were unscrupulous b. Securities investors b. Increased volume through decreasing the down payments and using credit default swaps d. Would have corrected itself. Only problem was there was not enough volume a. Residential mortgage industry had restructured itself into three components a. Loosened b/c executives stood to gain substantial compensation by increasing the number of loans that they could underwrite 1. In the 1990s they deserved a AAA rating b/c the default rate was excellent 2. and Fitch s) 2. But as the underwriting standards were creatively applied. Broker would qualify borrower. Wholesale lender/securities issuers c. Standard & Poor. and receive a commission from the yield spread ii. Housing collapse (486) BOOK S VERSION a. the rating agencies failed to look at the underlying collateral a. Conduits are the loans themselves c. Most were rated AAA 1. ME had incentive to pass-through as many loans as possible b/c ME had no responsibility after the issue divided the loan amongst all of the investors c. The issuers wanted the securities to be investment-grade. leading to a price stagnation or deflation. Fundamental structural realignment in the mortgage lending industry 1. Should have been concerned about the quality of the underlying mortgages. Much of the public didn t know that the gov t was no longer guaranteeing the loans. Started soliciting lenders to sell their mortgages to them. but correction proved more severe because of another factor: ii. Prolonged period of exceptionally low interest rates 1. Perfect storm 19
. Broke down in two ways a. Tranches class of securities 2. Wall Street saw the success of Fannie/Freddie because they were public 1. but it was impractical for them to investigate thousands of individual loans ii. Commercial mortgage back securities (CMBS) b. Loosened underwriting standards i. Advent of residential mortgage securitizations i. The iBanks had no risk b/c sold them as quickly as they bought them.
Note and mortgage serve as collateral subject to the terms of a Purchase and Repurchase Agreement 1. Two transfers are made i. In essence were selling insurance against mortgage default to the securities holders a. assignee of mortgage could not foreclose it 20
. Assignment is technically unnecessary a. Kluge v Fugazy i. Houses that were dumped back on the market further increased supply and drove prices downward iii. Bank auditors took the view that mortgage backed securities had ZERO MARKET VALUE even though they were in fact returning a cash flow and producing income 1. etc to maximize on instant profits v. the institutions that had sold the credit default swaps were force to begin paying off in amounts far beyond their expectations and capacities iv. Where mortgage was assigned but note was excluded from assignment. But when housing market declined and defaults increased. The note. down payments. Known as loan warehousing i. Large upswing in foreclosures was caused by a combination of housing price deflation and an industry characterized by a huge moral hazard 1. which represents the debt. or (if the note is not negotiable) by a separate document of assignment ii. Transfer of the promissory note 1. Mechanics of mortgage transfer a. Considered to be short period escrows 2. Collateral or security transfer of notes and mortgages 1. is the principal thing being sold. Many adjustable interest rates were also beginning to reset and resulted in higher payments ii. any transfer of the note will automatically serve to transfer the mortgage as well b. Assignment of the mortgage 1. This contributed to the illiquidity of the credit markets 3. MR (note/mortgage) => ME (endorsement/assignment) => Lender (Loan $ back to ME) a. No one had a sufficient stake in ensuring that the mortgages being originated could and would be paid back 2. May be accomplished either by endorsement and delivery of the note itself. Marking the securities down to zero had the effect of reducing the bank s lending capacity by roughly 12 times the amount of the markdown a. Prices began to stagnate and borrowers could not sell their houses for enough to cover their indebtedness 1. The biggest problem was the competitive nature of the market in underwriting loans a. Institutional investors had attempted to hedge their default risk by entering into credit default swaps 1. The banks were making so much money that they relaxed underwriting standards. defaults were low and selling such insurance was highly profitable i. So long as housing prices were rising. and since the mortgage is merely security for the not.Dylan Holland Real Estate Financing (2011)
Three requirements 1. Inc 1. Without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person c. Contain an unconditional promise or order to pay a sum certain in money and no other promise 1. HOLDING Broward only took issue with the contain an unconditional promise to pay a sum certain. RULE the negotiability of a promissory note is not destroyed by the mere reference to a related security instrument. it must i. such as a mortgage a. All defenses of any party to the instrument with whom the holder has not dealt b. If the note requires one to look outside the note to determine the terms of repayment. Fraud that induced obligor to sign the instrument d. Infancy of obligor b. In re AppOnline. A holder in due course takes the instrument i. a. Discharge of the obligor in insolvency proceedings b. Restatement approach i. For value ii. lack of legal capacity. Virtually all secondary market sales by competent professional lenders involve both a delivery of a promissory note and a (recorded) assignment of its accompanying mortgage vi. or in behalf of. All claims to it on the part of any person ii. The existence of a separate agreement does not affect the note s negotiability 4. be in proper form 2. Holder must personally satisfy the necessary behavioral requirements ii. FACTS Two MEs sold mortgages and related notes to Apponline. Be assigned by the marker or drawer ii.com. a person who is entitled to enforce the obligation the mortgage secure d. Note itself must be negotiable. Be payable to the payee s order or to the instrument s bearer 3. Process by which the note is transferred must constitute proper negotiation 3. Real and personal defenses i. Be payable on demand or at a definite time iv.Dylan Holland Real Estate Financing (2011)
c. argued that the MEs were not holders in due course of the mortgages and notes involved 2.com and its subsidiary company. A holder in due course takes the instrument free from i. Broward. and remain subject to real defenses 1. Island Mortgage. Real defenses include a. It is risky to include to include in the note a clause generally incorporating the terms of the mortgage by reference 21
. serving as disbursing agent. that is. or illegality of transaction c. A mortgage may be enforced only by. NOTES a. In good faith iii. Duress. Requirement for HDC status: NEGOTIABLE NOTE i. Island s checks were dishonored. For the instrument to be negotiable. then the promise is NOT unconditional and the note is NOT negotiable iii. HDCs are free only from personal defenses.
The along must be affixed to the note d. Makes servicing very important b. Nonnegotiable notes i. and to a person entitled to enforce the instrument 22
. Purchaser is regarded as lacking good faith vii. UCC approach 1. Possession of the instrument must be transferred to the holder a. Focuses on the process by which the note is transferred 1. HDC status is lost if the purchaser of a negotiable note is too closely connected with the transferor 1. The servicer is the agent of the owner/investor and represents it in dealing with the borrower b. must be endorsed a. Avers that the note is valid and not subject to defenses by the maker e. However. Payment to the assignor of your note/mortgage is ineffective against the assignee even though a payor had no idea that there was an assignment a. Transfers of mortgage servicing 1. Performance of the obligation to the transferor is effective against the transferee if rendered before the obligor receives notice of the transfer c. Negotiable notes i.Dylan Holland Real Estate Financing (2011)
1. Is very frustrating for MR who has to constantly send mortgage payments to a separate servicer 1. Endorsement that identifies the person to whom it makes the instrument payable c. Requirements for HDC status: NEGOTIATION i. If the instrument is payable to an identified person. Cranston-Gonzalez Affordable Housing Act corrected the frustration a. in blank i. can attach an allonge i. Transfer of servicing can be transferred separate from the transfer of a note/mortgage i. Non-HDC and patent equities i. Requires lender to inform borrower of servicing practices and likelihood of the servicing being transferred viii. there is no objection to merely reciting in the note that it is secure by a mortgage c. Assignee of a note who believes that HDC protection may be lacking often wisely demands that the maker provide an estoppel certificate at the time of transfer 1. Servicing can be separated from the note/mortgage a. Will usually make the note nonnegotiable 2. Close-connectedness doctrine i. Means that it is merely a signature b. Restatement approach 1. If there is not enough room to endorse. special i. Payment problem 1. An instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument. Transferring a photocopy will not do 2.
In re Kan Jin Hwang 1. There are situations of collusion between ME and MR 1. Is the most important reason that assignees of mortgages should record a. Two requirements to qualify as a holder 1. Recording of an assignment of a mortgage is not in itself a notice of such assignment to MR where assignment is recorded subsequent to the recording of the conveyances of such premises d. the real party in interest regarding the loan is the trustee of the securitization trust. The holder of a note is entitled to enforce it. No assignment of the mortgage is necessary. How does the pledgee of a mortgage foreclose? a. MERS was set up to avoid the necessity of repeated recordation of the mortgage assignments as mortgages are traded on the secondary market 1. Collateral assignment i. a transfer of the note will automatically transfer the mortgage rights as well i. Mortgageit transferred the note to IndyMac. NOTES a.Dylan Holland Real Estate Financing (2011)
ix. Outright i. There is no evidence IndyMac ever transferred the note. RULE If a loan has been securitized. usually for cash. but the mortgage is made to MERS mas ME b. May put the underlying note and mortgage on the secondary mortgage market and sell them b. Assignee may otherwise be bound because a subsequent grantee may be a BFP xi. Recordation of mortgage assignments 1. which was taken over by the FDIC. Assignee s failure to record does not protect MR s default c. use of a separate assignment of the mortgage is customary b. one made by the assignee to the ME 2. Foreclosures in the name of MERS i. Failure to record as facilitating a wrongful release by the original ME i. Must be in possession of the instrument 2. Instrument must be payable to that person b. Without notice. Nonetheless. notwithstanding sale of the note to another party. Two types of assignments of notes/mortgages a. Recording as notice to a grantee taking title from MR i. and does not know who owns the note today. not the servicing agent for the loan a. Collateral assignments of mortgages 1. The way to transfer ownership is to transfer possession of the note a. to an investor who plans to hold it for the long term or securitize it b. and a payoff by grantee to ME is binding against the assignee e. Pledgee may simply notify MR on the underlying debt to begin making payments on that debt directly to pledgee x. An instrument may only be enforced by the holder of the note i. Note is made payable to lender. IndyMac had sold the note to MERS. FACTS Hwang filed for bankruptcy protection. 2. grantee is entitled to assume that ME still hold the note and mortgage. Lost note problem i. Loan is pledged by ME as collateral for another loan. until the note is delivered to the purchaser 3. UCC approach 23
. A sale of the loan.
It DOES NOT EXTINGUISH the mortgage 24
. Article 9 does apply to a security interest in the promissory note even though the note is secured by a real estate mortgage 3. Discharge of the debt and mortgage i. showing that the mortgage has been released 2. Filing is second rate perfection because it can be trumped by debtor giving actual possession of the note to a different creditor who pays value and lacks knowledge of the earlier transfer 1. Primarily responsible a. On the other hand. Assignee can perfect by filing a financing statement i. Perfection of security interests in notes and mortgages 1. MR if he still owns the real estate b. The person seeking to enforce the instrument i. Payment is known as a redemption 1. subsequent lien creditors. Essential element of HDC status ii. Most common method is to use a single note and mortgage for each loan a. Transfer of possession of the instrument kills two birds with one stone i. Originating ME is the lead lender i. Mortgage participations 1. Perfection gives the secured party (pledgee) priority over competing secured parties who perfect later. and subsequent purchasers of the security property 2. Perfection of HDC status a. Will generally retain the original note/mortgage and sell participation certificates 2. Perfection of a security interest in a right to payment or performance also perfects a security interest in a lien on property securing the right a. All cases refuse to treat a participation sold to a financial institution as a security i. Have the right to pay the mortgage in full (if it is due by its terms or has been accelerated by the ME) i. POSSESSION OF THE NOTE ALWAYS OBTAINS A GREATER PRIORITY 4. Participations as securities a.Dylan Holland Real Estate Financing (2011)
1. Payoff extinguishes the mortgage i. recordable in form. A person not in possession of an instrument is entitled to enforce the instrument if a. Accomplishes perfection xiii. Not primarily responsible a. the property which is the subject of the security is not the underlying real estate i. Participants want it to be security to hold the lead lender liable d. Was entitled to enforce the instrument when loss of possession occurred ii. It is the set of intangible rights created by the note and mortgage 1. A mortgage may be paid off by two classes of persons 1. ME has a duty to provide a suitable document. In collateral assignments of notes/mortgages. Has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred xii. if the participation interest is sold to an unsophisticated private individual. Why does Article 9 apply? a. it is relatively easy to convince a court that it is a security b.
Dylan Holland Real Estate Financing (2011)
a. Is not necessary b/c there is no common law duty to accept a prepayment unless the mortgage or note expressly authorize borrower to prepay v. or if results from casualty insurance proceeds 3. Tender 1. All of the fees were provided for in the promissory note. Present offer to pay off the mortgage debt in full is a tender a. prepayment fees. Attacking prepayment fees i. ME has a common law right to refuse an early tender or prepayment of principal or interest a. it assigns both the obligation (note) and the mortgage to the payor ii. any additional fees/charges. Language permitting prepayment i. Immediately stops the running of interest on the mortgage debt ii. RULE ME may charge a prepayment penalty. Custom is to provide a pay-off letter that may entail a fee i. argued that the amounts for each were unreasonable and unwarranted 2. ME disclosures 1. NOTES a. Takes the view that lenders have a common law obligation to provide a statement of the amount owing. Discloses whether or not the loan is in default among other information b. ME tries to specifically prohibit prepayment for a fixed period of time i. X dollars per month or more 2. Lenders count on the interest payments i. Instead. Under a due-on-sale clause when borrower transfers w/o approval 25
. Best chance is unconscionable 2. including late fees. even if prepayment is the result of the ME accelerating the debt. How do I know if I am tendering an adequate amount as a MR? a. default interest. Entire balance must be paid by X date if not sooner paid b. Entitles payor to a release or an assignment of the mortgage iii. Right to prepayment premium is not unlimited i. Following language permits prepayment 1. Four causes for acceleration 1. May have borrowed the money themselves and need to rely on the stream of income to make payments to depositors 2. and attorneys fees. Prepayment 1. Borrowers are very unsuccessful 1. Enforcement of the prepayment clause depends on whether the mortgage clause specifies that it will 2. Lock-out provision a. current interest rate and the basis if it is adjustable. Prepayment caused by ME s acceleration i. if the MR freely signed a promissory note entitling the ME to do so a. Cannot be charged if it is the result of being taken by eminent domain. Some argue that the prepayment is interest and therefore violates usury laws c. Restatement approach i. It is as good as actual payment i. On account of borrower s default a. FACTS defaulted on their loan and obtained a foreclosure judgment. Westmark Commercial Mtg Fund v Teenform Assoc 1. and whether the loan is in default iv.
000. Mortgage stated that the debt was $84. FACTS agreed to sell to . RULE the dispositive question in examining the validity of a mortgage is whether it provides reasonable notice to third parties of the obligation that is secured a.Dylan Holland Real Estate Financing (2011)
a. Increase from 18-36% has been upheld a. ME need not describe the obligation whose performance it secures. it cannot be secured by a mortgage 1. and claims that the mortgage failed to define any other obligation or debt in sufficient detail 2. NOTES a. 506(b) of the B ruptcy Code requires that the fee be reasonable vi. provided the parties have otherwise reach agreement identifying that obligation b. Definiteness of obligation i. the company conveyed to and wife. Devlin v Wiener 1. If found unreasonable. and in return agreed to give cash and provide a home/land/condo on the land. Unconscionability as a standard i. Question is whether the fee is collectible as a secured claim in b ruptcy 1. defaults. Some court allow prepayment premium. What amount of late charge is excessive? i. so there was a reason for the vast increase c. Increase by Three to four percent will be upheld ii. Mortgage enforcement would break down if mortgages were permitted to secure performance of obligations that could not be measured in terms of money 26
. Recorded mortgage does not need to recite with particularity all of the details of the underlying transaction i. Usually will not enforce the prepayment premium d. Split. Non-monetary obligations i. procedural or both b. others don t 4. NOTES a. conveyed to his company. What default interest rate is excessive? i. If the non-monetary obligation is not capable of being reduced to a money equivalent. Germain Act (1 to 4 family home) then a lender cannot impose a prepayment penalty 3. May be substantive.000 and gave $86. Burden is on MR b. Payment of insurance proceeds due to casualty a. Was excessive in the first place. Westmark Commercial Mtg v Tennform Assoc 1. RULE liquidated damages clauses in commercial context between sophisticated parties are presumptively reasonable a. it will be struck down vii. Larger increases will have to be analyzed for context 1. If the fee is based on the outstanding principal balance rather than on the missed installment. Must be clearly enough specified in the mortgage so that the person who becomes the owner of the property can figure out what is necessary to satisfy the obligation 3. will be struck down as a penalty 2. Payment of eminent domain award a. and conveyed the interest to wife. Must be fraud duress or unconscionability to defeat the presumption i. If it is covered by Garn-St. Prepayment fees in bankruptcy i. Default interest rates should be measured for reasonableness i.
If one holding both junior and senior mortgages forecloses the junior and purchases the property at foreclosure sale. If a junior lienholder desired to redeem. Not to transaction to wind up and terminate the mortgage relationship b. Advantageous where statutory redemption legislation mandate long postforeclosure redemption periods 2.Dylan Holland Real Estate Financing (2011)
a. ME may be perfectly willing to forego seeking a deficiency judgment c. Merger problems a. FACTS loaned to to finance construction. A promise of emotional support cannot be reduced to a monetary equivalent 1. the mortgage. Conveyance of the equity of redemption by MR to ME will not terminate the latter s mortgage as against liens or other interests that prior to the conveyance were junior to it 4. must look to whether it is the type of deed that extinguishes the mortgage relationship 3. The loan was secured by first and second deeds of trust. b. and exercised its sale powers under the second deed of trust. he cannot sue for the balance of the loan i. Is a deficiency judgment available? 27
. RULE when a party holds a first and second mortgage and forecloses on the second. then sued for the difference between sale amount and the amount of the note. Clogs are applicable only to agreements given at the time of execution of the original mortgage i. Is therefore not valid to secure the mortgage e. the lesser estate. Purchaser is presumed to have deducted the amount of the senior liens from the amount bid at foreclosure sale ii. mergers into the greater. The loan fell into arrears. Doctrine can be utilized either as a defense to the mortgage debt or as an argument that the mortgage no longer exists 2. and to ascertain that no junior interests exist ii. the fee. Mid Kansas Federal v Dynamic Development a. Deeds in lieu of foreclosure 1. Theory is that when a ME s interest and a fee title coincide and meet in the same person. A deed in lieu of foreclosure IS NOT a foreclosure and will not operate to cut off intervening lienors i. Support mortgages i. May still be treated as a mortgage if a lender requires a borrower to escrow a deed in lieu during a workout agreement i. Merger 1. Deed in Lieu of Foreclosure i. As a lender. Attractive for several reasons a. would be no means of determining the amount necessary to accomplish redemption c. Avoid the delay and expense of foreclosure b. Not a clog on the equitable right of redemption a. and is extinguished a. rule is that MR s personal liability for the debt secured by the first mortgage is extinguished 1. Merger. Merger rights doctrine states that the purchaser at a foreclosure sale of a junior lien takes subject to all senior liens a. ME who is about to accept a deed in lieu is very wise to have the title examined. Would be no means of determining whether a foreclosure sale produced a surplus or deficiency b.
NOTES a. Restatement approach a. On the other hand. and eventually began to escrow all payments. FACTS made a loan to . stating it was insufficient. bad faith or an unconscionable act on the part of the lender ii. Foreclosure a. he suffers the whole debt to become due and payable. continued to attempt to make payments. ME must perform some overt act evidencing intention to accelerate the loan b. 2. Acceleration is options as opposed to automatic 1. Judicial discretion to permit reinstatement i. Even if there is not inconsistent prior pattern of forbearance. the mortgage is reinstated 2. Deficiency liability continues to exist unless the parties specifically agree to cancel it V. Hope was unable to make up the deficiency until he returned From Europe. ME s post-acceleration acceptance of arrearages only serves to reduce the mortgage obligation and will not defeat acceleration ii. RULE If from the mere negligence of the MR in performing his K. One payment was returned. ME may be estopped to accelerate based on a single transaction 28
. Waiver and estoppel i. Restatement approach 1. a. MR should obtain a formal cancellation of the promissory note or other evidence of the debt i. Hope signed the check. Tender before acceleration i. Suppose the mortgage contains an acceleration clause. w/o loss of negotiability. of a provision providing for acceleration whenever a mortgage covenant is breached c. Permits acceleration in the event of a default and allow foreclosure for the full amount of the mortgage debt 2. courts will rarely find abandonment ii. but the note does not 1. Note and mortgage inconsistency i. Federal Home Loan Mtg Corp v Taylor 1.Dylan Holland Real Estate Financing (2011)
a. Must show fraud. Acceleration and Marshaling i. Discretion to defeat acceleration exists only if ME has waived right to accelerate. was in the Air Force and stationed in the Philippines and regularly made payments. Graf v Hope Bldg Corp 1. All courts recognize that acceleration may be defeated by ME waiver 1. FACTS Graf was the holder of two notes of hope. 2. accepting late payments for a substantial period of time 2. If MR tenders arrearages prior to acceleration. i. Generosity is a voluntary attribute b. UCC approach a. Graf foreclosed in the meantime.e. bad faith or conduct making the acceleration unconscionable d. Permits inclusion in the mortgage note. according to the terms of the mortgage. RULE Court in equity may refuse to foreclose a mortgage when an acceleration of the due date of a debt would be inequitable or unjust and the circumstances would render the acceleration unconscionable 3. Hope s secretary miscalculated the interest payment. no court will interfere to relieve him from the payment thereof according to the conditions of his own agreement. or has engaged in fraud. and left for Europe.
where possible. but very few actually had their loans adjusted a.e. The Act did not work well 1. the Gov t would insure the loan ii. Thought they could get more money by foreclosing quickly and reselling the property i. The new loan would be at a fixed interest rate and would be payable over 30 years a. If the loan was rewritten. Absence of acceleration clause i. b. SBT requested that BND marshal its security by selling mineral rights first. Two funds rule i. Is an attempt. Is an equitable doctrine that may dictate the order in which ME must foreclose when the mortgage covers more than one parcel of land a. Fannie/Freddie contained important acceleration limitations 1. and as with most federal programs. Millions of people were eligible. it takes significant time to get up and running b. Afforded MR the right to defeat acceleration until five days prior to foreclosure by payment of the arrearages and ME s reasonable cost g. Hansen settled a lawsuit with SBT and gave SBT a mortgage on the surface rights only. It was too complicated of a federal program. Encouraged lenders to accept write-down in the loan balance on a defaulted home loan 1. Marshaling 1. Court may still allow acceleration by using the concept of anticipatory repudiation iii. There is an equitable right that the senior lienholder treat the junior lienholder fairly in the foreclosure of assets i. i. Lenders didn t like the program.Dylan Holland Real Estate Financing (2011)
1. to sell only so much of the property as is necessary to pay the debt. which was what TARP was intended to do c. Hansen defaulted on SBT loan. or all parcels or lots. BND began to foreclose surface and mineral rights. Lenders did not use the TARP funds to cushion the blow that would have occurred had it participated in the Act. HOLDING Court ruled that the mineral rights could be sold separate of the surface rights. FNMA-FHLMC form language i. and later on the BND loan. Purpose is to give the debtor an opportunity to redeem from any. Inverse Order of Alienation Rule 29
. ME tries to accelerate after giving oral assurance that acceleration will be postponed while MR tries to sell e. i. Matter of Estate of Hansen a. and to get the highest possible price for the land sold 3. HOPE for Homeowners Act of 2008 i. In return for lender s participation. No one knew who would get the up-side if the land appreciated in value d. to avoid the unnecessary wiping out of junior interests 2. FACTS Hansen borrowed from BND which had a mortgage covering the surface and mineral rights. Required detailed mailed notice and thirty-day grace period 2. junior liens had to be extinguished f.
Then after expiration of a time period. the parcels alienated or encumbered be sold in reverse order of alienation b. Then foreclosed on his interest w/o making a party. Necessary-proper party distinction 1. Foreclosure is in court. Foreclosure should. Impact of foreclosure on senior interests 1. Used only in DE 2. the grantees may insist that the land retained by grantor or original owner be sold first to satisfy the lien i. Used in certain circumstances by other states such as where there has been an abandonment of the property ii. ME after a default may take possession of the premises w/o legal help a. Entry w/o process & Action at law for writ of entry 1. Junior lessee as a necessary party 1. Court will issue a judgment for amount owing and will direct by writ of levari facias that the judgment be satisfied out of the proceeds of public execution sale c. Judicial Foreclosure i. HOLDING had stepped into the shoes of the MR and ME by purchasing the fee at the first foreclosure. Only used in VT and CT 1. FACTS and were the first and second mortgage holders. Instead. RULE the holder of a second mortgage cannot diminish the rights of the holder of the first mortgage by failing to make the first mortgage holder a party to a foreclosure sale on the second mortgage 3. but there is no judicial sale a. Miscellaneous Foreclosure Methods i. terminate the rights of all interested parties who are subject to the mortgage being foreclosed a. Failure to do so w/in that time period will result in the mortgaged property vesting in the ME w/o sale i. foreclose its mortgage w/o naming as a party. defaulting MR is given a period of time by court to pay the mortgage debt. the general rule is that the foreclosure of the leased premises nullifies and extinguishes the lease v. Where a portion of land subject to a lien has been alienated. Senior lienor is not necessary b/c he is not subject to or subordinate to the mortgage being foreclosed a. there is no sale of the premises iii.Dylan Holland Real Estate Financing (2011)
a. Scire Facias 1. Strict foreclosure 1. Where the mortgage is senior to the lease. Senior lienor s interest will not be terminated or prejudiced by the junior foreclosure iv. Where a lease is senior to a mortgage. Where original owner has alienated all of the land subject to the lien in separate parcels successively. NOTES 30
. Where holder of a junior interest is not made a party that interest is neither terminated nor otherwise prejudiced by the foreclosure iii. the lessee and lease are unaffected by foreclosure a. MR s equity of redemption is forever barred 2. ME obtains a writ of scire facias which is an order to show cause to MR why the land should not be taken in execution to satisfy the defaulted mortgage obligation a. if successful. Party is necessary if failure to join him will not accomplish the purposes for foreclosure b. Murphy v Farwell 1. Results in strict foreclosure. and was able to pay the second mortgage 4. Is the majority method of foreclosure ii. sued to redeem the property. 2.
Lis Pendens doctrine i. Citicorp Mtg v Pessin 31
. But the foreclosure purchaser stands as assignee of the mortgage and may re-foreclose against the omitted owner 3. Rights of omitted owner a. Purchaser who is a BFP will take free of a junior interest if it is equitable only b. Sale is subject to the first mortgage. Two remedies (maybe three) 1. If the foreclosure sale of the senior lien produced a surplus. If the omitted junior has not taken any action. If the omitted party is owner of the entire redemption interest. Foreclosure by junior of his own lien. and the right to redeem the loan stays outstanding i. Junior may tender to the buyer at the senior foreclosure sale the balance which was owed on the senior lien at the time of foreclosure. Lack of knowledge or notice of the subordinate interest of another does not excuse a foreclosing ME from making such a person a party to the suit 1. Rights of foreclosure purchaser a. The lien stays outstanding.Dylan Holland Real Estate Financing (2011)
a. Omitted Party Problem 1. the purchaser may simply pay off the junior lien and thereby clear title a. Redemption 1. Strict foreclosure 1. with resulting judicial sale i. Was the purchaser at the foreclosure a BFP 1. This time. Foreclosure a. then the junior lien is eliminated ii. Redemption a. Recording the lis pendens makes a subsequent ME take subject to the result of the outcome of the existing foreclosure action vi. Method of analysis i. his interest is NOT terminated by that action a. Three remedies when the junior exercises one of the above remedies i. the foreclosure sale is entirely void as to his interest i. Rights of omitted lienor a. and compel an assignment of a revived senior lien to the junior lienor 3. the junior can assert a lien on the surplus funds 4. When any party having the right to redeem is omitted from a foreclosure action. If yes. Purchaser succeeds to the rights of the ME even though the sale is void as to an omitted party 2. make sure to include the junior lienor iii. Third remedy? a. Amount to a judicial decree that the junior lien be canceled unless the junior pays off the senior debt w/in certain time period vii. which is revived or recognized as still subsisting for this purpose 2. Not always available 2. but to the rights of the foreclosed MR as well ii. Purchaser succeeds not only to the rights of the ME. was the second mortgage recorded? a. Re-foreclose the first mortgage 1. If no.
If there has never been a foreclosure of the junior lien. sought to foreclose by judicial sale. Holds public sale of the mortgaged 32
. A complaint was prepared on 10/13 and filed on 10/19 to foreclose by Citi. On the same day. FACTS Holcom gave mortgage to Citi. PMC then foreclosed the mortgage and purchased at the foreclosure sale. Equitable redemption only exists until the interest is foreclosed. NOTES a. General considerations 1. Holcom gave a second mortgage to Grillo. Power of Sale Foreclosure i. PMC filed suit against CPA to require CPA to redeem or be barred from claim. RULE statutory redemption starts after the foreclosure and sale itself and is one last chance for the previous owner and any lien creditors to regain the property a. 2. Land Assoc v Becker 1. Grillo assigned its mortgage to Pessin. two trust deeds and a judgment went on the record. In event of foreclosure. but. RULE strict foreclosure is available when a foreclosing ME fails to discover an outstanding junior ME 3. The parties that held the trust deeds were not joined in the foreclosure a. PMC paid the amount of the judgment at 9:30AM and CPA tried to redeem at 10:30AM. Sometimes cannot be exercised until the equitable right has been eliminated viii. when such a right is exercised. The assignment was recorded on 10/16. Statutory right has a finite application according to the statute 1. After the complaint was filed. Availability of strict foreclosure i. Deed of trust is the most commonly used mortgage instrument a. HOLDING doctrine of lis pendens controls a. then there is no statutory right of redemption. Equitable right continues until it has been eliminated by foreclosure ii. was given a sheriff s deed. junior is not entitled to a conveyance of the property 1. The three lien holder assigned their interests to Bautista. Is merely entitled to an assignment of the security interest of the senior mortgage ix. 2. Should be available only where the senior purchaser can establish that the omission was the result of inadvertence or mistake and that the FMV of the mortgaged real estate does not exceed the amount of encumbrances senior to the junior lien b. FACTS CPA obtained a judgment against MR. while statutory redemption only begins after the interest is foreclosed 3. FACTS was a land K vendor. Bautista s predecessors were not lienholders of record when the initial complaint was filed d. Portland Mrtg v Creditors Protective Ass n 1. Restatement approach 1. MR-trustor conveys the real estate to a trustee who holds the property in trust for the ME-beneficiary until full payment of the debt i. RULE one who purchases property at a foreclosure sale may extinguish a junior lienor s right to redeem it by simply paying the debt for which the junior lien is security a. only the equitable right of redemption i. Equitable redemption vs Statutory redemption i. 2. and assigned the deed to E&B. power of sale is exercised by trustee 1. Junior lienor who was omitted in the foreclosure of the senior mortgage. still has the valuable right of redemption available to him.Dylan Holland Real Estate Financing (2011)
1. Citi also recorded a notice of lis pendens.
Usually less rigorous than those associated with judicial foreclosure i. Cost in time and money is substantially lower than judicial foreclosure 4. FACTS bought two parcels of land. RULE a foreclosure sale must be set aside if the price was grossly inadequate when compared to the FMV of the property on the date of foreclosure and the proceedings of the sale were defective i. Attack power of sale foreclosure 1. Injunction suit against a pending foreclosure b. Has an obligation to conduct a fair sale c. improper place/time of sale. Foreclosure sale prices of 50% or more of FMV are routinely upheld 1. made a bid for $1 over the remaining debt. Three remedies a.Dylan Holland Real Estate Financing (2011)
a. Courts may require MR seeking injunction to tender the amount due under the mortgage into the court iii. Action for damages against the foreclosing ME or trustee ii. Advantages of power of sale foreclosure a. Foreclosure process a. Has obligations to both the lender and the borrower a. Right of ME to foreclose a. selling too much/little of the mortgage security iv. Common foreclosure defects 1. Suit in equity to set aside a sale c. court is not warranted to invalidate a sale in excess of 20% of FMV iii. After notice is provided. and wanted to buy the property. defective notice. Trustee in a deed of trust is a fiduciary 1. Notice requirements under power of sale foreclosure vary a. one from Mortimer Moore and other from Marion Moore. Sale is usually not judicially supervised 2. Judicial finality provides substantial insulation against subsequent collateral attack even on technically defective judicial foreclosure proceedings ii. Baskurt v Beal a. Defects in the exercise of the power 1. Void-voidable distinction 33
. Deed to the property was held in trust by . Tender requirement 1. May assert that there was not default or no right to accelerate 2. defaulted. Disadvantages of power of sale vs judicial foreclosure a. NOTES i. Federal legislation makes power of sale foreclosure ineffective against a junior federal tax lien unless written notice is provided to the United States at least 25 days prior to the sale 3. Absent foreclosure procedural defects. sought to have the sale set aside b. Foreclosure sale was set. Court is warranted to invalidate a sale where the price is less than 20% of the FMV 2. 10-40% should not be confirmed absent good reasons why it should be ii. Judicial foreclosure prevents any defects from arising b. a sale is held and the proceeds are used to pay off the debt of the party that initiated the foreclosure by advertisement b. Restatement approach 1. Chilled bidding. When all of the debt was paid except for 80% of the second note.
vii. Trustee is not obligated to contact MR or otherwise examine if there actually has been a default a. UNLESS the deed of trust says otherwise Trustee as a foreclosure purchaser 1. Two types of chilled bidding i. Rights are cut off if conveyed to BFP Who is a BFP? 1.
ix. HUD a. Restatement approach a. UNLESS has express consent of the MR-trustor Inadequate foreclosure price 1. Had no actual notice of the defects b.
xi. Is the basis to set aside sale b. Not warranted in in invalidating in excess of 20% unless procedural defects Sales by parcel or in bulk 1. Collusion between ME and other can void the sale ii. Purchaser is not on reasonable notice from recorded documents c. trustee or foreclosing ME is confronted by choice of whether to sell one parcel at a time or to sell the parcels in bulk a. Irregular conduct by ME that suppresses bidding is characterized as chilled bidding a. Is a fiduciary for both the MR and ME and must act impartially 2.
x. perhaps by adverse possession 2. Power of sale foreclosure is ineffective against a junior federal tax lien unless written notice provided to United States at least 25 days prior to the sale 34
.Dylan Holland Real Estate Financing (2011)
v. Trustee may not purchase the premises at a sale she conducts a. Court is warranted to invalidate where the price is less than 20% of FMV ii. Required to pursue the method that will be the most beneficial to MR Chilled bidding 1. No title is passed to the sale purchaser or subsequent grantees.
vi. Voidable a. Defects are not such that a person attending the sale exercising reasonable care would have been aware of the defect Trustee as a fiduciary 1. Bare legal title passes to the sale purchaser. Presumes that the foreclosure sale price is reasonable 2. Three criteria a. subject to the rights of redemption of those injured by the defective exercise of the power of sale i. grossly inadequate standard i. Innocent mistakes Junior federal tax liens 1. except. Void a. Can rely on the request of ME to pursue power of sale foreclosure i. Where a mortgage obligation is secured by more than one parcel.
b. Difference between the market value of the real estate and the aggregate amount of liens thereon as of the date of sale iii. Trustee makes no warranty of title and is generally subject to no duty to investigate or describe outstanding liens 2. notice defects. gave 30 days to pay the full balance after default. Trustee did not make the other lienholders aware of the sale. Power of sale almost never provides for a hearing.Dylan Holland Real Estate Financing (2011)
2. Winning bid was for $1. then commenced foreclosure and hired auctioneer to sell the property. Damages for wrongful foreclosure 1. Several states have presumption statutes that are aimed at enhancing the finality of power of sale foreclosure and the marketability of titles they produce a. the sale is VOIDABLE a. did the bare minimum in advertising the sale. If a BFP takes the property at sale. instructed auctioneer not to promote the sale. Trustee or ME liability to foreclosure purchaser 1. Conclusive presumption for BFP all aspects of foreclosure i. NOTES i. In re Edry a. then the MR s recourse is damages a. FACTS held mortgage by assignment on s home. OSB started its own foreclosure. judicial or otherwise prior to foreclosure 35
. Conclusive presumption for BFP notice only i. Mount Bay defaulted on the loan to Glidden. Trustee learned of OSB s foreclosure sale. Unless trying to deliberately perpetrate a fraud. RULE foreclosing ME seeking to exercise power of sale must use reasonable diligence to protect the MR s interests. Trustee tried to undo the sale after realizing OSB had not been notified. Glidden brought this action to declare the sale void. which was less than half of FMV. Affords greatest protection for BFP ii. Power of sale in ME 1. b. Procedural defects. Presumption of statutes 1. Only protects BFP from notice defects c.000 over the debt. Makes things difficult b/c 80% of the time the ME is the only bidder ii. OSB and Municipal. Purchaser is presumed to have adequately investigated existing liens b. Constitutional Problems with Power of Sale 1. NOTES i. Glidden v Municipal Authority of Tacoma a. Rebuttable presumptions b. General rule is that foreclosure purchaser takes a property subject to prior liens and interests accruing prior to consummation of the sale a. Municipal Authority learned of the sale through a posted notice. in addition to the minimum requirements prescribed by statute c. Many state hold that where ME exercises power of sale and purchases the property. FACTS Mount Bay borrowed from Glidden. trustee or ME cannot be held liable even if he knew there was an existing lien 3. At trustee s sale. and may protect when ME had not substantive right to foreclose iii. Glidden bid amount of debt and Municipal bid $200 more.
Dylan Holland Real Estate Financing (2011)
2. lender must provide notice and an opportunity to be heard a. Rickers sought declaratory judgment that the sale was void b. and INTELLIGENTLY MADE 2. At a minimum. NOTES i. FACTS Rickers purchased a potato farm. It does not have to be a judicial hearing a. KNOWING. Waiver of due process rights 1. and executed 5 promissory notes to FmHA. and intelligently made c. Some states have enacted statutes that allow parties that want notice to record a request to receive notice a. Mennonite Bd of Missions v Adams a. waiver of a constitutional right must be voluntary. Rickers lived on the property. If the hearing officer is not a neutral party. Hearing requirement 1. Lack of awareness by the parties of the significance of waiver 36
. There are also decisions that hold such statutes to be unconstitutional i. Ricker v United States a. Have to provide notice to certain parties even if the request was not recorded iii. or by personal service i. Notice by publication is not enough with respect to a person whose address is known. May be an administrative hearing as long as it is done impartially i. In Ricker the court held that MR s attempted waiver was invalid a. In Fuentes waivers were ineffective for different reasons a. Request for notice statutes 1. K did not provide specifically for a waiver of constitutional rights b. there is a question of whether it is an adequate hearing iv. knowing. HOLDING sale was void b/c it violated their due process rights under Fifth Amendment i. The best way to win a constitutional challenge would be to bring a suit to enjoin foreclosure for failure to have a hearing 2. FmHA foreclosed. Notice requirement 1. FmHA mailed a notice of acceleration and published a notice of foreclosure. constructive notice alone does not satisfy the mandate of Mullane ii. But unless ME is not reasonably identifiable. Court invalidated a North Carolina power of sale statute that required only notice by newspaper 2. Turner v Blackburn a. Executed a sixth loan for the harvest of potatoes in one season. Not VOLUNTARY. Emphasized that when the ME is identified in a mortgage that is publicly recorded. and had to give a mortgage. Deprived of property w/o due process of law 1. and if they are known to be an interested party ii. constructive notice by publication must be supplemented by notice mailed to ME s last known address. To be effective.
FACTS Borrower challenged the foreclosure having been denied Fifth Amendment due process and hearing b. Therefore. There has not been a challenge as to whether Warren is still good law iv. and yet SCOTUS found the corp to be part of the government 2. Uniform Nonjudicial Foreclosure Act 1. Federal power of sale legislation 1. Creditor notifies debtor and junior lienors of the foreclosure amount that it is willing to offer i. There was no bargaining power over the K terms v. Court said that GNMA was simply acting under the K to the mortgage. If disapproves. NOTES i. HUD provides all the due process required of the Fifth Amendment b. d. HOLDING GNMA is not wholly owned by federal government although it operates under federal authority i. Warren v Gov t Nat l Mrtg Assoc a. Fourteenth Amendment requires State action before the amendment is applicable a. MR who fails to respond to notices of delinquency waives the right to be heard 3. exclude the 37
. Extent to which the federal government retains control over the corporation s efforts to achieve its objectives 3. a court will not reach the notice or hearing issues b. Power of sale statutes continue to provide an effective foreclosure method for nongovernmental ME even where the statutes are noticeably deficient in the notice and hearing arena 4. Same thing as a short sale a. Methods of foreclosure a. Two prong test a.Dylan Holland Real Estate Financing (2011)
c. Unless sufficient state action is found in connection with power of sale foreclosure. GNMA was acting like a private party enforcing a K. Foreclosure by negotiated sale 1. By offering MR a chance to explain the failure to make mortgage payments. Conventional foreclosure (auction sale) 1. Can disapprove the sale if they are dissatisfied with the amount ii. Amtrak should be treated as the federal government for First Amendment purposes a. Two statutes authorize power of sale foreclosure of all residential mortgages held by HUD 2. foreclosing creditor has three choices: discontinue negotiated sale. Amtrak clearly acting in a proprietary function. Lisbon v United States a. Extent to which the corporation was formed for the furtherance of government objectives b. RULE standard is that the must exist a sufficiently close nexus between the government and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the government itself c. Conducting by representative of the foreclosing creditor ii. Impact of the Lebron v National RR Passenger Corp decision 1. Three methods i.
Procedural requirement on a junior lienor to preserve a claim to surplus in a judicial foreclosure i. Entitled to be paid out of that surplus in the order of priority they enjoyed prior to foreclosure ii. ISSUE whether junior ME or debtor s assignee of rights of redemption is entitled to surplus 2. and therefore did not have the ability to foreclose the mortgage in the first place. Growing bar of attorneys took the stance that power of sale foreclosures should be challenged for failure of the ME to meet the statutory requirements 2. or pay off the objecting party. Bank of America v BA Mrtg 1. if that party holds a lien iii. is distributed to the holder of the equity of 3. This case had wide ranging impact b/c it came down when there was a sense that as a result of the vast pools of mortgages. Surplus stands in the place of the foreclosed real estate and the liens and interests that previously attached to that real estate now attach to the surplus i. Senior lien claim on junior surplus i. Does not liquidate the property. The banks moved to have the judgment set aside. Who is entitled to foreclose b. NOTES a. The judge ruled that the foreclosure sales were invalid because neither bank had been assigned the mortgage. If he fails to do so there is no valid execution of the power. The surplus is applied to liens and other interests terminated by foreclosure in order of their priority and the remaining balance. Bank Nat l Ass n v Ibanez (CLASS HANDOUT) 1. Have to be aware if representing a junior lienor that there may be certain requirements that you have to follow b. ME treated the problems as minor defects when there was a clear sense that the MR was in default i. that there were problems in foreclosing a.S.US Bank foreclosed n Ibanez on the same day that Wells Fargo foreclosed on the LaRace mortgage. FACTS . if any. The court gave leave to produce such documents. The newly submitted documents did not provide adequate showing that the banks were the assignees prior to the foreclosure 3. Foreclosure by appraisal 1. Only those whose interests were cut off by the foreclosure have a valid claim on surplus 38
. RULE One who sells under a power of sale must FOLLOW STRICTLY ITS TERMS. and contended that the documents might exist that could demonstrate an assignment of the mortgage preforeclosure. Generally 1. The surplus from a foreclosure sale represents the remnant of equity of redemption and security wiped out by the foreclosure a. but leaves it in the hands of the secured creditor v. HOLDING Junior ME had recorded its lien before the assignee obtained the equity of redemption from MR. Notice requirements e. Both banks were assigned the mortgage only after the foreclosure. Disbursement of Foreclosure Sale Proceeds i. RULE Restatement approach a. U. Therefore Junior ME had a higher priority to the surplus 4. and the sale is WHOLLY VOID a.Dylan Holland Real Estate Financing (2011)
objecting party from the effect of foreclosure. Accomplishes only the first function of foreclosure: evaluation of the collateral a.
Payment of surplus to holder of non-possessory junior interests i. Second mortgage that is revived usually contains a warranty that the MR agrees that he will defend the title against all lawful claims. Junior lienor s claim may be barred by laches if it does not bring an action to revive the lien when it has notice 2. Three theories i. Even where the mortgage obligation is completely non-recourse.
1. the junior mortgages revive as liens on the property a. Warranty of title 1. Thus. the FMV of their interests as of the date of foreclosure d. Acceptance of surplus as ratifying foreclosure i. MR reacquisition from a BFP i. Acquisition of title by junior interest holders i. Such persons are entitled to receive. Restatement approach a. Generally. A purchase by junior lienor or other junior interest at a validly conducted foreclosure of senior lien cuts off the right of both the holder of the equity of redemption and other junior interests as well a. When MR purchases the property at the sale. actions by MR that undermine ability of ME to realize on the benefits of that agreement are discouraged b. Permitting foreclosure of the first mortgage is a breach of the warranty iii. Yes. MR has warranted that the mortgaged premises shall be security for the debt and that the MR will produce the property if the debt is not paid b. MR is in effect paying the first mortgage and the second mortgage moves into first position ii.Dylan Holland Real Estate Financing (2011)
f. There are good reasons to allow MR to reacquire title from BFP free and clear of previously foreclosed interests c. the MR agrees to the satisfaction of that obligation out of the mortgaged real estate 1. NOTES a. Payment theory 1. Junior lienor s right to surplus where MR claims homestead rights i. Reacquisition by non-recourse MR or subsequent grantee i. a property owner s homestead interest in property takes priority over the interests of other creditors 1. There is no revival of other junior interests 39
. An owner s homestead interest is subordinate to the interest of a deed of trust beneficiary Reacquisition of Title by MR i. the senior mortgage remains intact and only other junior liens would have a right to the surplus c. Old Republic Ins v Currie 1. if a Junior ME forecloses. EXCEPTION a. in order of their preforeclosure priority. Acceptance of a surplus derived from a foreclosure sale waives the MR s right to attack the foreclosure e. Thus. Restatement approach 1. RULE If the MR is the purchaser at a foreclosure sale or subsequently reacquires the property. What if an easement is eliminated? Is there a right to the surplus? 1. Covenant to defend title 1.
Foreclose on the real estate first and if the proceeds are insufficient to satisfy the mortgage obligation. cannot start foreclosure proceedings 2. and before sale ii. Amount of debt = principal balance. United States v Stadium Apartments Inc 1. costs to preserve assets. the reason for our decision is different than argued by MR and assignee.Dylan Holland Real Estate Financing (2011)
g. Notice requirements before getting judgment. ME has two options 1. the equitable right of redemption ends 1. Some states require ME to choose one of the two options 1. Majority of states place limit on deficiency judgments a. obtain a deficiency judgment a. the junior lien is revived 2. Since the assignee redeemed within the exclusive statutory period granted to a debtor. HOLDING although we hold a junior lienor cannot redeem in this case. Time limits within which you can obtain a judgment iii. About half of the states provide for a statutory right of redemption a. if a deficiency remains. FHA obtained a default judgment. Redemption by a junior lienor gives it the same title the foreclosure sale purchaser would have obtained had there been no redemption 1. the MR s statutory redemption right is assignable b. FHA has a policy of bidding FMV at foreclosure sale. FACTS Prudential assigned the mortgage to FHA after a developer defaulted. Calculating the deficiency a. In most jurisdictions. If you are foreclosing. Procedural limitations i. Redemption by junior lienor i. foreclose on the mortgaged real estate for the balance 2. The statutory redemption period is contrary to its interest as ME iv. Farmers Production Credit Assoc v McFarland 1. you have to pay the amount paid at the foreclosure sale i. Two categories for redemption statutes 1. If the MR does not redeem. When a valid foreclosure has taken place. cannot sue on the note 3. etc. Assignee of MR as redeeming party i. Statutory redemption i. One action rule iv. Once mortgage goes into default and the obligation is accelerated. Security First 40
. RULE Statutory period of redemption is not applicable to the FHA a. interest. 2. legal fees. If the debtor or assignee redeems. Most statutes use the Sale Price Amount of Debt i. Election of remedies requirement i. Obtain a judgment on the personal obligation and enforce it by levying upon any of the MR s property. 4. Scramble Method a. Anti-Deficiency Legislation i. Strict Priority a. junior liens do not revive h. and it has the property carefully appraised before bidding i. then the junior interests may redeem according to their priority 2. the junior lienor has no right to redeem a. In statutory redemption. and. In equity of redemption you have to pay the amount due on the loan b. There is no priority order in which redemptions may be made from the purchaser iii. Therefore. FHA appealed the redemption period. If you are suing on the note. May be available after judicial foreclosure or power of sale foreclosure ii. NOTES a.
HOLDING This was a purchase money mortgage. Appraiser is appointed by the court or the trustee in a deed of trust a. eliminating Deberard s interest. in return for Lim s waiver of 580(b) rights. In fair value. Bowen was allowed damages for bad faith waste a. Different from fair value legislation? i.
iii. Made a down payment and obtained a purchase money mortgage. Bowen was the only bidder at the nonjudicial foreclosure sale. court is saying that it is going to determine the value to present evidence of the value ii. Waivers of 580b i. so there is no deficiency judgment. In appraisal. and Yniguez filed for bankruptcy. K of guaranty gives rise to a separate and independent obligation from that which binds the principal debtor a. After Bankruptcy Court lifted the stay. Lim defaulted again and the first deed of trust was foreclosed. Refinanced mortgages are not purchase money Talbot v Hustwit 1.Dylan Holland Real Estate Financing (2011)
ii. FACTS Lim agreed to buy a shopping center from Deberard. Virtually all post-default waivers of 580b are UNENFORCEABLE ii. Power of sale proceedings Deberard Properties v Lim 1. ISSUE whether or not waiver of the prohibition on collecting a deficiency on the deed of trust was effective 3. NOTES a. 2. HOLDING waiver of the deficiency judgment rights was not justified because the same property secured its note. FACTS Hustwits were guarantors of a loan that Talbott made to a trust 2.
iv. FACTS Bowen sold Yniguez a motel. 2. Deficiencies may be sought against the guarantors Bowen v Yniguez 1.
b. Bowen recorded a notice of default. Takes the basic concept of how to derive a deficiency and change it a. Purchase money mortgages 2. Deberard agreed to reduce the interest rate on the note and to reduce the monthly payments. the appointed appraiser determines the value California has a prohibition on deficiency judgments from 1. Waste is still limited to the amount that could have been available in a deficiency judgment if the bid was less than the debt 41
. Deberard sued on the note. Forced appraisal legislation 1. Deberard began with a risky subordinated interest and ended up in the same position 4. RULE 580a does not apply to guarantors. Fair value legislation 1. However. Has to be due to malicious destruction or neglect beyond the inability to pay for things b. Bowen initiated foreclosure.
v. Lim assumed a first deed of trust and a second deed of trust was given back to sellers. Rather than the amount received at the sale less the debt ii. Lim defaulted. Substantive limitations i. Virtually all California homeowners are protected against deficiency judgments on institutional purchase-money mortgages 1. Agreed to subordinate its deed trust. Deficiency is the FMV at the time of the sale less the debt i. Bowen sued for bad faith waste.
Nevada approach a. foreclose on the mortgaged real estate for the balance 2. Mid Kansas Fed S&L v Dynamic Development Corp 1. Anti-deficiency statutes and the full credit bid problem i. NOTES a.
. had to be utilized as a dwelling 3. Obtaining the appointment of a receiver OR assignment of rent a. A draw against a letter of credit does not violate the one action rule 3. Restatement approach i. Obtain a judgment on the personal obligation and enforce it by levying upon any of the MR s property. MR may use the rule both defensively and as a sanction 2. California s One Action Rule 1. after acceleration. the deficiency judgment statute did not apply 4. Protect MR against multiplicity of actions ii. Statutes of Limitation 1. See page 760 vii. Automatically tolls all statutes of limitation during the period of service that would otherwise run against a serviceperson 42
i. the identity of the MR as either homeowner or developer is irrelevant a.Dylan Holland Real Estate Financing (2011)
i. Permits deficiency judgments even though the mortgage is purchase money or is being foreclosed by power of sale 1. CERCLA a. ISSUE whether the anti-deficiency statutes apply to a residential developer and whether a lender may recover the balance owing on the first notes after it has acquired title to the property at the foreclosure sale of it second deed of trust? 2. Has a list of actions that are not actions under the rule i. In the event of default. if a deficiency remains. RULE So long as the subject PROPERTIES fit within the statutory definition. Adopts the fair value approach by giving MR the right to insist that the greater of the FMV or sale price be used in calculating the deficiency Servicemembers Civil Relief Act i. HOLDING Commercial residential properties for eventual resale as dwellings are not utilized as a dwelling. ME s sole remedy is foreclosure action and that any deficiency claim must be sought in that proceeding a. Had to be two acres or less. ME is permitted to waive its security interest in environmentally impaired real estate and proceed against the MR as an unsecured creditor 5. NOTES a. Rejects the one action rule iii. and. Compel a creditor who has taken a mortgage on land to exhaust the security before attempting to reach any unmortgaged property to satisfy the claim b. Two fold purpose i. ME. Had there been a full credit bid. Is not an action for the purposes of the rule i. obtain a deficiency judgment ii. There is no violation of the rule in including a receivership request in a judicial foreclosure action 4. Therefore. there would have been no ability to collect on bad faith waste 3. Foreclose on the real estate first and if the proceeds are insufficient to satisfy the mortgage obligation. Bowen tells us that anti-deficiency legislation does not bar most actions against MR for fraud or bad faith waste vi. may either 1.
Creditors may occasionally be given retroactive relief to avoid the stay and be allowed to foreclose 1. Creditor violated stay w/o actual/constructive knowledge of stay b. Not easy to get a. Chapter 12 d. Except by judicial order v. Straight bankruptcy b.
a. whether judicial or power of sale. Mortgages and Deeds of Trust 1. or seize the mortgaged real estate during the term of service or for nine months thereafter a. Installment Land K 1. EXCEPTION 1. ME risks liability for damages and being punished for contempt ii. Introductory concepts 1. After a default in payment of obligation consummated prior to service.Dylan Holland Real Estate Financing (2011)
j. Straight Bankruptcy (Ch. SCOTUS said there is not requirement to show that being in the service made it difficult or impossible to redeem a. then the period to redeem is extended ii. foreclose. Foreclosure consummated in violation of a stay is void i. If the person is in the service. No equity in property of the estate c. Limits interest to six percent during military service on obligations incurred before entering service even though a higher rate was originally agreed upon iii. are automatically stayed by the filing of petition for bankruptcy i. Cannot get a waiver before the person is in active duty Bankruptcy i. Automatic stay a. Waiver by Servicemember 1. All foreclosure proceedings. Failure to grant retroactive relief would cause unnecessary expense to creditor ii. Action brought by HUD b. Court may condition its order on repayment of all or part of the deposit and prior installments iv. Rights can be waived after the servicemember is engaged in service a. Chapter 7 i. Four types of bankruptcy a. Is the equivalent of Chapter 11 for individuals 2. Ground for relief from stay existed and would have been granted if filed e. Rehabilitation. Chapter 13 i. Vendor may not terminate or rescind the K or repossess the land except by judicial action i. 7) 43
. Chapter 11 i. Reorganization of corporate debtors. Property was not necessary for effective reorganization d. Default under an installment land K entered into prior to military service a. Extends the time for redemption under state statutory redemption by a period equal to MR s period of service 2. Maximum Rate of Interest 1. the ME may not sell. not liquidation is the purpose c.
A lien is void to the extent that it secures a claim against the debtor that is not an allowed secured claim b. real estate will be sold to the court either 1. Trustee has a legitimate interest in the mortgaged real estate only if MR has equity in that real estate a. Debtor is able to continue to operate the estate as a debtor in possession i. Bifurcation of the under-water mortgage a. Debtor in possession is entitled to exercise the avoidance powers of a Ch. Subject to the existing mortgages/liens 2. Section 544 a. Free and clear of them a. Stay no longer applies uniformly to all debtors a. Trustee s avoidance powers 1. ME may be provided with an alternative or additional lien equal in value to the decrease in value of ME s interest 44
. Chapter 11 Reorganization 1. Trustee is normally not appointed 1. Section 361 sets out three ways to provide it a. Transfers made by debtor w/in two years of the bankruptcy may be set aside by trustee if made with intent to hinder. Trustee will always be able to defeat any mortgage of the debtor that is unrecorded as of the commencement of bankruptcy 3. Debtor-MR and trustees will not be permitted to bifurcate a mortgage debt into secured and unsecured claims so as to deprive ME of any postvaluation increase in the value of the real estate v. Section 547 a. Deed in lieu given to ME by insolvent debtor w/in two years of bankruptcy may be set aside if the debtor receives less than reasonably equivalent value for the transfer 4. Even if the debtor waives it after the commencement of bankruptcy 2. Afford trustee. 7 Trustee 2. If ME seeks relief from stay and equity does exist. Is considered an extraordinary remedy ii. delay or defraud any creditor i. irrespective of knowledge. NOTES 1. Limits the stay for debtors who have had a case pending within the past year 2. Those liens will be transferred to the sale proceeds and satisfied in order of their priority iii.Dylan Holland Real Estate Financing (2011)
1. Is the rehabilitation of the debtor. If equity is found to exist. Section 548 a. Gives the trustee the benefit of any defense available to the debtor against the ME i. Mortgages given w/in 90 days of MR s bankruptcy will be voidable by trustee iv. Dewsnu v Timm i. rather than liquidation a. When adequate protection is lacking. Trustee may be required to make periodic cash payment to ME in an amount sufficient to compensate for decrease in value of ME s interest b. the status of a BFP of real property from the debtor who has perfected under state law i. Bankruptcy Abuse and Consumer Protection Act i. Constructive fraud is increasingly used for real estate that yield less than its reasonably equivalent value ii. Section 558 a. trustee should abandon the real estate to ME who then can proceed to foreclose i.
Trustee is passive a. The concept of cure in section 1322(b)(5) contains the power to deaccelerate ii. De-acceleration of Home Mortgage The Taddeo Case a.000 unsecured portion can.000 obligation is secured by a mortgage. If the debtor presents a plan that exceeds three years. but less than five years. Stay relief for ME a. Consequently debtors can cure their default and thereafter maintain their payments b. MR must lack equity in the mortgaged real estate ii. Chapter 13 Wage Earner Plan 1. Unsecured creditors must be paid no less than they would receive in Ch.Dylan Holland Real Estate Financing (2011)
VI. Debtor remains in possession during proceedings i. 13 petition to acceleration would prompt unseemly and wasteful races to the courthouse 5. to develop and perform under a plan for the repayment of his debts over an extended period a.000. under court supervision/protection. Majority of courts upheld debtor s ability to bifurcate the unsecured portion of the loan from the secured portion of the loan i. Any other relief that will give ME realization of indubitable equivalent of its interest 3. 13 to debtor is that it permits the debtor to protect its assets a. Designed to catch-up debt within three years i. Suppose that a $100. Two requirements i. The stay provisions apply 2. 7 liquidation c. the court may approve the plan if it improves the amount paid to creditors 2. but the home is only worth $65. Benefit to creditors is that their losses will be significantly less than if their debtors opt for straight bankruptcy 3. except when it is secured by a mortgage on the debtor s principal residence i. Purchase Money Mortgages i. thus. Bifurcation and the Undersecured Home Mortgage a. Is a mortgage that MR grants to enable the MR to acquire ownership of the mortgaged land 45
. Except alimony and child support b. be modified Priority problems a. The ban on modification in section 1322(b)(2) does not limit the debtors exercise of their curative powers under the section 1. Special stay provisions protect third parties who have guaranteed the debtor s debt or put up property to secure it a. In re Taddeo i. Purpose is to enable an individual. At the end of the program the debts are paid off or discharged a. The $35. So what if the lender has to accelerate the debt? 1.
c. Conditioning a debtor s right to cure on its having filed a Ch. Section 1301 stays ME who holds consumer debt from foreclosing against the real estate of third parties that has been used as security for MR s non-business related debt 4. Secured claims may be modified. Benefit of Ch. Is also set up so that the party can use some of the avoidance powers of the trustee 1. Real estate must not be necessary to an effective reorganization vi.
Recording acts. RULE third parties who lend money used to purchase real estate in exchange for a mortgage hold special priority over all other recorded liens and judgments a. Restatement approach 1. FACTS Bank made a loan to Dunn notwithstanding that there was judgment lien in place against the property. Subsequent interests that arise through MR are another matter a. rather than vendor preference will govern 46
. NOTES a. Third party purchase money mortgage a. Bank sought foreclosure and declaration that its mortgage held priority over the lien 2. Generally. Arises when buyer obtains a loan from a third party (bank). Suppose that both the vendor and the third party lender are aware of each other a. Vendor PMM vs Third Party PMM 1. Suppose that neither party has notice of the other s mortgage a. PMM may be junior to a subsequent mortgage if not recorded iii. Proceeds of a mortgage loan used not only to acquire title. recording acts will not change the result b/c they grant priority only to a subsequent purchaser w/o notice 4. Kentucky Legal Systems v Dunn 1. Vendor s mortgage should be senior. uses the proceeds to pay the purchase price of the land. Vendor will prevail. Purchase money lender has priority 1.Dylan Holland Real Estate Financing (2011)
1. Vendor purchase money mortgage a. as they should be given first priority regardless of whether they had notice of any kind of interest/lien 3. when there is a dispute between a vendor PMM and a third party PMM. Construction loan as purchase money mortgage i. Does not need to search for judgment liens. Even where proceeds of the loan are used exclusively for improving the mortgaged real estate. the vendor s mortgage has priority unless it can be resolve by the recording acts 2. Impact of recording acts 1. but also to construct a building on the land is treated entirely as a purchase money mortgage 2. Restatement approach i. Suppose that only one of the parties has notice of the other a. the mortgage will receive purchase money treatment a. and grants the third party a mortgage to secure the buyer s repayment of the loan ii. third party cannot gain priority simply by recording first 3. Unless agreed otherwise by the parties or specified by statute b. Arises when seller of land agrees to extend credit to the buyer for some portion of the land s purchase price and the buyer grants mortgage on the land to secure the buyer s obligation to pay the remaining purchase price 2. PMM need NEVER be recorded to protect ME against judgment liens or other claims that arise against MR prior to MR s acquisition of title 2. So long as it is given as part of the same transaction in which the real estate was acquired ii.
First Sec Bank of Utah v Shiew a. Until the mortgage is satisfied 2. RULE when the mortgage is intended to cover subsequently acquired property. Treats a recorded mortgage with an after acquired property provision as unrecorded as against those who later purchase interests in the after acquired real estate iii. FACTS Mortgages were given Gay to Pou and to Hickson. Most prudent lenders would have the borrower execute both a real estate mortgage covering the land and an Article 9 security agreement covering the personal property b. Restatement approach 1. The subsequent loan did not make mention of the dragnet clause in the home loan. An after acquired property clause is not necessary for a mortgage to attach to subsequent improvements made on the real estate 1. or else the language must clearly manifest the intention of the parties a. Dragnet clause 1. ISSUE whether the mortgage to Pou covers the property specifically described in the mortgage to Hickson by virtue of the after acquired property clause 3. Yes. Hickson Lumber v Gay Lumber 1. States that the real estate covered by the mortgage will stand as security not only for the loan now being made. RULE in the absence of clear evidence of a contrary intention. NOTES a. either express terms should be used to that end. Bank filed an action against the cattle loan. The party lacking notice should prevail b. It is less common for a real estate mortgage to contain an after acquired property clause ii. FACTS Shiew purchased a home with loan from Bank. A cannot grant B any rights in an object of property that A does not have in the first place 2. a mortgage containing a dragnet clause will not be extended to cover future advances unless: i.Dylan Holland Real Estate Financing (2011)
i. After Acquired Property Clause and Dragnet Clause i. the advances are of the same kind and quality or relate to the same transaction or series of transactions as the principal obligation. UCC permits the seller and creditor to enter into one security agreement that is sufficient to cover both the seller s existing on-hand inventory and all inventory subsequently acquired by the seller a. b. Shiews obtained a subsequent loan from a different branch of the same Bank for cattle. if it bears a functional relation to the property originally mortgaged ii. Is an after acquired property provision in a mortgage effective to cover personal property? i. Courts will not enforce the after acquired property clause in a mortgage against anyone who can set up an equity of equal dignity in his own behalf 4. Nemo dat principle a. The Pou mortgage had an after acquired property clause 2. Relationship to accession and the law of fixtures i. Recording act and chain of title problems i. but also for any other debt for which the borrower is already liable to the lender or for which the borrower may become liable to the lender in the future a. 47
. Is because of law of accessions or law of fixtures c. Article 9 of UCC authorizes a debtor to grant a security interest in both present and after acquired property 1.
or unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor c. Future advances under Restatement 1. Bank of America s predecessor. NOTES i. Senior ME can enter into agreement with MR modifying the terms w/o first having to notify any junior lienors 1. The mortgage describes with reasonable specificity the additional type of transaction in which advances will be secured ii. Permits a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance i. Where there is an extension of time. Bank of America then refinanced the property. Boone converted the payment to his own use. Replacement of senior mortgages: impact on junior interests i. and contemporaneously takes a new mortgage. Restatement approach 1. their consent is required ii. unless i. Houston filed a complaint against Boone and obtained a judgment. there is no loss of priority ii. Pervasive rule is that a senior ME who discharges it mortgage of record and takes and records a replacement mortgage nevertheless retains the priority of the original mortgage unless paramount equities exist or ME intended a subordination of the mortgage b. Three approaches 1. he will not. but constructive knowledge does not a. NOTES a. Replacement and Modification of Senior Mortgages i. at the time of making the advances. Modification of senior mortgages: impact on junior interests i. in the absence of paramount inequities. Houston was not paid amount due. that the mortgage will secure them c. If senior mortgage is modified by the parties. Houston Lumber v Skaggs 1. held the deed. FACTS Skaggs gave Bank a mortgage for money to construct a home. Norwest. To be secured under a dragnet clause: a. RULE equitable subrogation a. But if the modification prejudices the rights of the junior lienors or impairs the security. IS MAJORITY VIEW 48
. Extension of time i. except to the extent that the modification is materially prejudicial c. Bank released the construction loan mortgage and simultaneously filed a permanent loan mortgage 2. be held to have subordinated his security to an intervening lien a. RULE where the holder of a senior mortgage discharges it of record. the mortgage as modified retains priority as against the junior interest in the real estate. BoA argued that it had a priority over the judgment lien because it succeeded to Norwest. The advances must be made in a transaction similar in character to the mortgage transaction. FACTS Houston paid David Boone.Dylan Holland Real Estate Financing (2011)
ii. 2. Skaggs hired Houston as a contractor. Actual knowledge of an existing lien precludes application of equitable subrogation. The parties specifically agree. Unless the circumstances of the transaction indicate this to have been his intention 3. and quitclaimed the property to his wife in a divorce. Houston v Bank of America 1.
Construction mortgages a. Goods that are purely personal property do not become part of real estate mortgage.000 more than the previous loan. the code nevertheless awards priority to the chattel claim if i. Such advances prevail over purchase money security interests in goods 5. Ketchams granted another mortgage to FNB to secure a business loan. A fixture filing was made before or within 20 days after the goods were affixed to the premises so as to become fixtures 4. Restatement approach: disregards actual or constructive notice if the junior lienholder is not prejudiced 3. Each and every deed made and recorded shall be notice to and take precedence of any subsequent purchaser d. Incorporated building materials i. Obtained refinancing from Countrywide. Prior real estate ME a. the ME would want to know the economic reason for requiring ME to subordinate
. FACTS Ketcham had a mortgage with BNY. Are the only items of concern under the UCC priority system c. Real estate ME with priority may consent to subordinate his claim to the security interest of the fixture financer i. RULE Opposite of Houston a. Special protection for construction ME so long as the mortgage is recorded before the goods are affixed i. Any goods that become fixtures during course of construction.Dylan Holland Real Estate Financing (2011)
2. the first party to make a fixture filing or record his real estate mortgage attains priority 3. the BoA loan was $5. HOLDING Court adopts Restatement approach a. Bars the application of equitable subrogation when a lien holder possesses either actual or constructive notice of an existing lien 3. Before doing it. Fixtures i. As between subsequent ME and prior chattel security interest in fixtures. Fixtures i. FNB claimed first priority under the recording statutes and Countrywide claimed priority by equitable subrogation 2. Subsequent real estate mortgages a. The only question is whether the payor reasonably expected to get security with a priority equal to the mortgage being paid i. Tri-partite concept consists of three classes a. No security interest exists in ordinary building materials incorporated into an improvement on the land irrespective of whether local law classifies such materials as fixtures b. It is a purchase money security interest ii. Purely personal property i. Even though a real estate mortgage precedes a chattel ME s interest. the construction ME enjoys priority to the extent of all advances made under the mortgage to finance the construction 1. However. Exceptions favoring fixture financers a. UCC concept of fixtures 1. BoA was not subrogated as to the amount that exceeded the previous loan iii. Countrywide Home Loans v First Nat l Bank of Steamboat 1. even though a chattel security interest is never perfected 2.
See the example on 893-894 ii. Thus. If the lease was senior to the foreclosed mortgage. RULE if the crops is mature and no longer drawing any nutrients or sustenance from the real estate. who gets the crops? 1. UCC overruled Maplewood i. NOTES a. when the foreclosure takes place. Severance analysis from Fletcher 2. Once a crop matures and is no longer being supported by the soil a constructive severance occurs so that the crop thereafter bears the same relation to the land on which it stood as it would if stored in a warehouse or barn 2. Unsevered annual crops produced primarily through the labor and industry of the land s possessor are treated for this purpose as personalty b. UCC gives priority to the tenant/debtor s fixture claimant as against the realty ME if the tenant has the right as against the MR to remove the fixtures from the mortgaged property i. it is personalty and does not pass with the land a. Court held that a secured party s right to priority in a fixture was limited to its removal and that a secured party had no claim against the land itself 1. the tenant is entitled to the crops b/c his lease rights were unaffected by the foreclosure ii. Lien priority i. if a borrower has a farm and has a first mortgage loan and grows crops. So the question is which mortgage are you foreclosing when you foreclose the wraparound mortgage Subdivisions a.Dylan Holland Real Estate Financing (2011)
VII. Rights in Crops i. Unless the lease gets wiped out by foreclosure 6. Maplewood Bank v Sears i. Subordination of the Purchase Money Mortgage 1. What if the borrower leases the land to a farmer. Economics of the wraparound mortgage 1. The wraparound portion of the mortgage is second in priority a.
b. Fixture secured party s rights in a real estate foreclosure sale a. Allows a fixture secured party to choose to enforce its interest either under Article 9 or under applicable state real estate law e. Foreclosing wraparound mortgages 1. and foreclosure occurs? ii. no claim to the proceeds of the foreclosure sale b. Wrap-Around Mortgages i.
. Many courts use emblements to defeat the foreclosure puracher a. Fletcher v Stillman 1. Foreclosure purchaser vs holder of Article 9 security interest in crop i. If the lease is subordinate and destroyed by foreclosure the results vary 1. If fixtures are installed by MR s tenant. A perfected security interest in crops has priority over the conflicting interest of the holder of the mortgage on the real property on which the crops are growing f. Question is. Some courts reject lessee s post-foreclosure claim to the crop a. Foreclosure purchaser vs MR s lessee i.