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Foreclosure Title Issues

Kevin J. Dunlevy

Beisel & Dunlevy, P.A.

Types of Foreclosure: Non-Judicial

• Non-judicial foreclosure– Does not require a court action– AKA foreclosure by advertisement, power of sale foreclosure,

deed of trust transfer– Advantages

• Quicker and less expensive• Frivolous counterclaims/defenses less likely because the debtor has to

initiate a court action– Disadvantages

• Constitutional due process problems, restricted or repealed in some states

• Anti-deficiency statutes• Title is less certain, 26 matters in White Pages• Long statutes of limitations, curative act• More difficulty completing service, eliminating junior liens

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Types of Foreclosure: Judicial

• Judicial foreclosure– AKA foreclosure by action, must commence a court proceeding– Advantages: Allows lender to foreclose

• Foreclose mortgage without power of sale• Foreclose unrecordable or defective mortgage or assignments• Foreclose equitable mortgage• Obtain a deficiency judgment• Foreclose a mortgage containing dragnet or after-acquired property clause• Foreclose against a mortgage debtor in the military service• Enforce assignments of rents or receivership provisions• Suit on guaranty or replevin can be brought in same suit• Cure title defects• Reform documents• Foreclose on multiple mortgages or on separate tracts of land in a single action• Determination of priority of the mortgage over other liens • Greater finality to the foreclosure process• Four matters in White Pages

Types of Foreclosure: Judicial

• Judicial foreclosure, disadvantages– Slower because court action is required

– More expensive

– May encourage the borrower to make frivolous claims

– Debtor more likely to file bankruptcy

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Curing Title Problems

• Commonly discovered when mortgage goes into default/referred to foreclosing attorney

• Can prevent lender from obtaining clean title through foreclosure, lenders want to sell REO as soon as possible

• Order pre-foreclosure title commitment

Legal Description Errors• Two categories: completely wrong and judgment calls

– Example: Lot 11 instead of Lot 1, may result in total failure of title or an unperfected mortgage– Example: Omitting Block 1 in a plat with only one block , may not be fatal

• Essentials of a platted legal description: lot, block, plat name, county, state• Less clear:

– Typos in the plat name– Inclusion or omission of the municipality– Referring to the wrong county

• Government survey descriptions must include: section, range and township number– Many omit references to the base line, meridian, county and state– Problems with lengthy metes and bounds descriptions, use PDFs– Mortgage references attached legal description, but none attached

• A valid legal description is one that can be located on the ground by a surveyor• May take survey to prove validity of seemingly defective legal description

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Error in Borrowers Name, Non-Joinder

• Error in borrower’s name– Spelled incorrectly– “Sounds the Same” Title Standard may permit– Affidavit of identity

• Non-joinder of spouse– Purchase money mortgage, but deed to both spouses– Void mortgage under 507.02 as against non-signing spouse

• Record owner not signing– Is interest encumbered by mortgage?– If foreclose without adding party, obtain title to partial interest– Borrower owns the property subject to a life estate, life tenant

fails to join in the mortgage– Vendee on contract for deed not signing mortgage

Non-lien Encumbrances, Unreleased Mortgages

• Non-lien encumbrances– Important to determine what non-lien encumbrances will be

extinguished – Common post-foreclosure encumbrances issues include:

• Restrictive covenants • Easements

• Prior unreleased liens– No satisfaction recorded, paid or fraud?

• Unrecorded mortgages– Holder of unrecorded mortgage may assert priority under

Race-Notice Recording Act

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Lien Priority Disputes

• Unfunded satisfactions– Of a prime mortgage, should be viewed with suspicion – Could be an unrecorded mortgage or forgery

• Mechanics liens– Common in new developments and improvements to

existing buildings– Construction project fails due to unexpected difficult

construction, lack of economic viability, disputes between the owner and builder, the owner’s inability to pay or other factors

Lien Priority Disputes: Mechanic’s Liens

• Mechanic’s liens may have priority if work was performed before the recording of the mortgage

• Photos are typically taken by a lender prior to recording to ensure no work has begun

• Lien statement may simply be a sign of a dispute between the owner and a single contractor over the quality of construction of a minor improvement

• Could signal a failed commercial project, may be first of many • Possible that the owner and builder will settle their dispute and lien

released• Liens may start years of expensive litigation over priority disputes

between the lien claimants, the owners and mortgage creditors

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Lien Priority Disputes: Tax Liens

• Tax liens– State and federal governments record liens against the

property of delinquent taxpayers– Failure to eliminate tax liens is common title problem in

foreclosure and contract for deed cancellation– Notice and judicial procedure are in 26 U.S.C. § 7425

• Elimination of federal tax liens– If federal tax lien prior to mortgage, lien can only be

eliminated by payment or U.S. consent to sale of its lien– If the notice is properly given and the IRS does not redeem

from the foreclosure, the federal tax lien is eliminated

Insider Tips: Tax Liens

• Notice, foreclosure by action– U.S. must be joined in the action or the junior tax lien will not be affected by

the proceeding– Complaint should be personally served on the U.S. Attorney for the district in

which the property is located and by certified mail on the Attorney General– U.S. has 60 days to answer the complaint

• Notice, foreclosure by advertisement– 30 days prior to the date of sheriff’s sale, a state and federal tax lien search

should be made– If a federal tax lien is present, at least 25 days prior to the sale notice of the sale

should be given by certified mail to the District Director of the IRS. – Similar notice requirements for state tax liens. – Several tax lien searches may be necessary to bracket the 30 days prior to the

sheriff’s sale date– May need to postpone sheriff’s sale to give adequate notice

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Insider Tips: Tax Liens

• Request the taxing authority to acknowledge receipt of notice• Foreclosure by action is the safest way to eliminate tax liens• IRS can redeem from a senior mortgage foreclosure within 120 days

of the sale or the state redemption period, whichever is longer– If the state redemption period is less than 120 days, the IRS right of

redemption is a cloud on title until 120 days expire• Federal government can foreclose on homestead and non-homestead

property– MN may only foreclose on non-homestead property– In MN, homestead property cannot be sold without payment of tax lien

• Affidavit of non-identity will frequently eliminate tax lien title• Problems for persons with common names• Fraudulent affidavits of non-identity

Solving Priority and Lien Issues

• Junior lender may claim equitable subrogation– Party who pays off a prior lien steps into the shoes

of that prior lender up to amount of the prior loan – More detail below

• Other liens may be given priority over prior mortgages – Examples: environmental or owner’s association

liens

• Judgment creditors don’t often assert priority

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Foreclosure Notices

• Statutory notices must be served on borrowers/occupants/tenants, see White Pages

• Voluntary foreclosure and deeds-in-lieu require borrower’s cooperation, clean title

• Resolving title problem with borrower cooperation– Corrective deeds and mortgages, easements,

boundary lines

Other Issues: Fraud

• Fraud– Fraudulent title documents can create title problems

• Invalidity of forged documents, abstract versus Torrens

– Can include• Identity fraud, individual and corporate• Forged signatures (mortgage satisfactions)• Fraudulent notarizations (phony notary commissions)• Mortgage flip (dupe or accomplice, high purchase agreement and appraisal)• Affinity frauds, religious, ethic, social group• Con artists drawn to ND oil boom• Hard money lenders• Construction fraud• Watch for telltale signs of phony documents

• Fraudulent conveyances, Uniform Voidable Transfers Act (UVTA) – Insolvent debtor conveys asset to hide from creditor– More detail below

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Other Issues:Equity Stripping

• Borrower in foreclosure conveys property to speculator. Borrower remains in property under lease, option, contract for deed.

• Chapter 325N may apply• Borrower defaults on “arrangement” and

speculator takes equity• Lenders often victims

– Speculator gives mortgage without disclosing the “arrangement”

– Debtor claims equitable mortgage, constructive notice– Courts look at purchase agreements

Other Issues:Bankruptcy

• Bankruptcy creates title problems because all property owned by the debtor becomes property of the estate

• To clear the title through the bankruptcy, the property must be – Exempted by debtor– Abandoned by trustee– Sold by trustee– Foreclosed after stay relief– Bankruptcy dismissed or debtor discharged, deemed

abandoned

• Bankruptcy documentation to clear title

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Voidable Preferences (§ 547)

& Fraudulent Transfers (§ 548)

Voidable Preferences (§ 547)• Public Policy: “circling the drain”/ orderly distribution

• Made during insolvency (presumption of insolvency)

• On account of an antecedent debt

• On or within 90 days before the date of filing the petition

• Presumption of insolvency during the preference period

• Exception for course of business

Fraudulent Transfers (§ 548)

• Transfer on or within one year, and– intended to hinder, delay or defraud, or

– received less than a reasonable equivalent value (approximately 70%)

• UVTA: State law regarding fraudulent transfers reaches back six (6) years (§ 544).

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Guide to perfection…

Thirty-day grace period allowed to perfect the lien from a refinance or purchase money security without violating the automatic stay (formerly 10 days for refinance and 20 days for purchase money security) 11 USC § 547 (c) and (e) 2

This does not affect bona fide purchaser status of trustee.

Other Issues:Reinstatement and Redemption

• Reinstatement is bringing the loan current before the sheriff’s sale and is the cheapest way to stop a foreclosure.

• Debtor postponement to extend reinstatement period.

• Redemption by debtor, pay the amount bid at the sheriff’s sale and other statutory amounts.

• Redemption by junior creditors, preserves junior liens by paying amount bid, plus statutory amount.

• Redemption speculators are dangerous.

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Insider Tips: Other Issues

• Foreclosing attorney should review file for possible defenses, errors in documents, waiver of default.

• Foreclosing attorney and title examiners should review surveys, tax statements, GIS, for other land, correct property subject to mortgage, location of improvements.

Equitable Mortgages

• Financial arrangement between creditor and debtor that is considered a mortgage in disguise.

• Despite peculiarities of form or appearance of a non-security deal, [the financial arrangements] are given the effect of a mortgage when examined by a court with equitable powers. Kurz v. Gramhill, 269 N.W. 2d 68 (Minn. 1978).

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Examples of Equitable Mortgages:

• Assignment of vendor’s interest or sheriff’s certificate as collateral

• Deed in lieu and contract for deed back• Sale and lease back• Contract for deed• Lease• Creditors may assert if loan documents defective• Anything with money and real estate, except a

mortgage

Equitable Subrogation

Used when:

• Creditor refinances an existing lien and the loan documents are defective

• An intervening lien asserts priority

• No negligence (minority rule)

• Freely given in Wisconsin

• Favored doctrine in North Dakota

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Claiming Equitable Subrogation

• Creditor must foreclose by action or obtain declaratory judgment to establish lien validity or priority.

• Title companies may claim contractual subrogation rights through title policies if:

- Insured collects on title claim; and

- Insured had claims against prior owners or other parties.

Constructive Trust

• If property or funds are obtained through fraud, the creditor may assert constructive trust.

• The court may award the defrauded party a constructive trust against the fraudster’s property obtained with fraudulent funds.

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Uniform Voidable Transfers Act

• If an owner conveys property to avoid a creditor, the creditor may be able to unwind the transaction:

-The creditor must sue the debtor

-The creditor must also sue the titleholder unless

the creditor is certain the title is held by a good-

faith purchaser

UVTA Badges of Fraud part 1

1. Property transferred to an insider2. Debtor retained possession or control of the

property3. Transfer was concealed4. Debtor was threatened with a lawsuit at the time

of transfer5. Transfer amount was substantially all debtor’s

assets6. Debtor absconded7. Debtor removed or concealed assets

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UVTA Badges of Fraud part 2

8. Consideration was not reasonably equivalent to the value of the asset transferred

9. Debtor was insolvent or became insolvent shortly after the transfer

10. Transfer occurred near the time a substantial debt was incurred

11. Debtor transferred the essential assets of a business to a creditor, who then transferred the assets to an insider.

Asserting Claims and Remedies under UVTA

• Creditor must show as many of the 11 badges of fraud as possible.

• If the court finds a fraudulent transfer, the remedies are very broad, including return of the property or proceeds and receivership.

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Reformation

• Mutual mistake

• Scrivener’s error

• Unilateral mistake with bad conduct

• Legal descriptions, dollar amounts, names of parties

Show me the Note Claims

• Successful in states that specifically require a wet ink note delivered to court to foreclose.

• UCC lost note affidavit works in some states.

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MERS Claims

• Mortgage Electronic Registration System, or MERS, was intended to facilitate secondary market real estate transactions.

• MERS statute in MN intended to clear title, validates MERS transactions in MN.

Strict Compliance Claims

• Strict compliance versus substantial compliance with prejudice

• May be the end of non-judicial foreclosure in Minnesota

• Cert to MN Supreme Court of HOA service of occupant issue may be final nail in coffin

• HUD, FHA, VA may require judicial foreclosures due to foreclosure challenges

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Foreclosure Defense Attorneys• Debtors pay ½ mortgage payment to

foreclosure defense attorney as long as debtor keeps the house.

• Over a million in revenue for solo attorney.

• Suspended and sanctioned for frivolous pleadings.

• Registered property under Torrens system for delay value.

• Used “church” to shelter income.

Scams Against Homeowners

• Foreclosure rescue scams, use of trusts

• Attempt to get down stroke from debtor, than vanish

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Freeman

• Posse comitatus types

• Believe no federal government exists

• Believe that Magna Carta and local sheriff are the only sources of governmental power

Redemption Scams

• Redemption scams to strip equity

• Related entities to avoid 325N foreclosure reconveyance

• Public policy supports redemption and it can be done honestly, but there are plenty of crooks out there

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Issues Relating to Proof

• Proving up amount due with competent evidence

• Proving up ownership of the note and mortgage, corporate authority, recorded assignments, entity names, powers of attorney, pooling and servicing trusts