Foreclosure Defenses Checklist

© Sachin Jay Darji, 2011. Licensed under a Creative Commons Attribution 3.0 Unported License.

FORECLOSURE DEFENSE CHECKLIST

Last revised: 2/3/2011

Disclaimer: Use this document at your own risk. No legal advice is intended nor may be inferred.

1. Inconsistency in the Loan Documents.

1.1. Review loan documents.

1.2. This is especially possible if there have been one or more modifications.

2. De-Acceleration - Lender accepted a payment after giving of a notice or default or after acceleration.

3. Foreclosing Lender is not Qualified to do Business in State.

4. Statutory Defenses.

4.1. Usury (which usually comes into play in cases involving private lenders).

4.2. Lack of notice.

4.3. Statute of Limitations.

4.4. Statute of Frauds.

5. Problems in Chain of Title.

5.1. Mortgage is not recorded.

5.2. All assignments are not recorded.

5.3. An assignment was made by or to a party who was not the holder of the note (e.g., Mortgage Electronic Recording Systems [MERS] issues).

5.4. Mortgagor is not same as borrower.

5.5. Ownership of mortgage and note were split.

6. Lender’s Failure to Pay Proper Amount of Mortgage Registry Tax, Leading to Loss of Priority.

7. Require Lender to Produce the Original of the Note in Court.


8. Failure to Give Notice of Default Required under Loan Documents or by Law.

8.1. If there is inconsistency in notice requirements between loan documents and the law, use this to your advantage.

9. Failure to Allow Cure or Provide Cure Periods Stated in Loan Documents.

10. No Acceleration Clause in Note.

11. Failure to Accelerate or Failure to Give Notice of Acceleration.

12. Election of Remedies.

12.1. One action rules, no concurrent pending action rules, and similar statutes.

13. Contractual Defenses.

13.1. Lack of Consideration.

13.2. Lack of Notice.

13.3. Defective Acceleration.

13.4. Accord and Satisfaction.

13.5. Reinstatement and Tender.

13.6. Promise to Renew.

14. Equitable Defenses to a Commercial Foreclosure Action.

14.1. Equitable Estoppel.

14.2. Waiver, including.

(a) Prior communication constitutes a modification, settlement or waiver by lender..

(b) Lender knew or should have known of circumstances alleged as a default, and failed to declare a default and/or continued to fund.

14.3. Merger.

14.4. Laches.


14.5. Unclean Hands.

15. Lender Liability Defenses.

15.1. Lender failed to fund loan draws, or was untimely in loan draws.

15.2. Lender falsely claimed project was out of balance.

15.3. Lender falsely claimed project was out of balance.

15.4. Lender interfered with planning, construction, operation, sales or leasing of the project.

15.5. Lender’s failure to approve any lease, sales contract, hiring of broker or contractor, etc.

15.6. Lender imposed conditions not contained in the loan documents as a condition of continued funding.

15.7. Lender’s failure to get pre-negotiation letter.

(a) Lender’s negotiations caused borrower to justifiably rely on workout with lender, and to forbear from obtaining alternate financing..

(b) Lender orally agreed to a workout.

15.8. Oral commitments or promises were made by Lender.

15.9. Unconscionability.

15.10. Breach of duty of good faith and fair dealing.

15.11. Fraudulent Inducement.

15.12. Deepening insolvency.

16. Lender Failed to Record Notice of Lis Pendens or Notice of Pendency of Foreclosure, or Other Required Pre-Foreclosure or Pre-Sale Notices.

17. Failure to Properly Advertise or Publicize Sale.

18. Inadequacy of Auction Price at Sheriff’s Sale or UCC Foreclosure Sale – under common law, bankruptcy law, or applicable state law.

19. Force Majeure – e.g., credit crisis of 2008-2010.

20. Failure to Make Presentment.

21. Failure to Give Notice of Presentment.


22. Obligor Did Not Dishonor.

23. Failure to Give Notice of Dishonor.

24. Other Guarantor and Suretyship Defenses.

(a) Spouse was required to sign as obligor or guarantor under Equal Credit Opportunity Act – this voids spouses obligation and court has authority to equitably void the guaranty of the person making the credit application (i.e., the primary obligor/guarantor).

25. Anti-Deficiency Statutes -- foreclosure sale discharged debt as to amount of credit bid – therefore guarantor was discharged if lender bids the full amount of the debt..

26. Chilling Right of Redemption – lender’s conduct chilled the right of redemption and potential redemptions by third parties..

27. Mechanics Liens – Lender failed to pay contractors correctly; Lender paid the general contractor but not the subs directly and the general stole the money; or Lender failed to advance sufficiently.

28. Residential Loan Defenses.

28.1. Truth-in-Lending Act.

28.2. Residential Settlement Procedures Act (RESPA).

28.3. Homeowner Equity Protection Act (HOEPA) .

28.4. Fair Debt Collection Practices Act.

29. Fraud in the Origination.

30. Lender Fraud in Selling Exotic Elements of Loan – swaps, etc..

31. Lender is Not Entitled to Appointment of Receiver – failed to show waste, failure to insure, or misuse of cash flow.

32. Mortgagee in possession.

33. Lender Insecurity as the Default / Out of Balance.

33.1. Being current on note is a defense.

34. Deed-in-lieu of foreclosure. Under Illinois law, the mortgagee, with the consent of the mortgagor, takes title to the property subject to any other claims or liens affecting the property. Acceptance of a deed-in-lieu relieves from personal liability all persons who may owe payment or the performance of other obligations secured by the


mortgage except to the extent that person agrees not to be relieved in an instrument executed contemporaneously..

35. Consent Foreclosure. Unlike the deed-in-lieu option, a consent foreclosure forecloses the interests of the mortgagor and any other lien claimant, other than the United States (which can be foreclosed only through a judicial sale). In Illinois, requires that a judicial proceeding be initiated and mortgagee must waive any rights to a personal judgment for deficiency against the mortgagor or any other person liable for the indebtedness or other obligations secured by the mortgage..

36. Bankruptcy strategies.

36.1. Obtain court order denying lender the right to credit bid.

36.2. Prime the mortgage with new money in bankruptcy.

36.3. Sell property free and clear of mortgage.

36.4. Seek to deny lender the opportunity to credit bid at sale by providing indubitable equivalent of lender’s claim under §363(e) of Bankruptcy Code.

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