By: Larry R. Rothenberg, Esq.
A Temporary Restraining Order (TRO) barring Wells Fargo Bank and all persons acting in concert with it from conveying any interest in any of the properties owned by it in the City of Cleveland, was converted to a preliminary injunction by Cleveland Housing Court Judge, Raymond Pianka on June 18, 2009. The injunction can affect our clients who are marketing any residential REO’s located in the City of Cleveland that are titled in the name of either Wells Fargo Bank or Wells Fargo Bank as Trustee.
CHRP, a housing-advocacy group, filed the action in December, 2008, seeking a declaration that Wells Fargo’s business practices in the post-foreclosure purchase, maintenance and sale of residential properties constitute a public nuisance. CHRP requested an order restraining Wells Fargo from selling its REO residential properties without prior authorization of the court, and a permanent injunction against such practices.
The court, having previously granted the TRO, conducted a several-day hearing on CHRP’s request for a preliminary injunction. In its judgment entry and order granting the preliminary injunction, the court first examined whether CHRP had demonstrated by clear and convincing evidence that it has standing and is likely to succeed on the merits of its public nuisance claim. The court found that although other entities, such as the city, have even greater standing, CHRP, which through its subsidiaries takes part in real estate development and land assembly for neighborhood development in the city, has sufficient standing to proceed with its claim.
The court found that Wells Fargo owns perhaps the second-largest REO inventory in the city, and that its typical practice following acquisition of an REO at a foreclosure sale is to board and secure the property and keep the grass cut, but not to make any repairs prior to selling the property. Based on evidence submitted by CHRP, the court concluded that a large percentage of Wells Fargo’s REO’s were open, vandalized, littered, or had obvious structural damage or other significant defects.
Although the City of Cleveland does not have a point-of-sale ordinance, the court focused on the city’s housing code, which requires that every dwelling must have plumbing fixtures, approved heating facilities and properly installed electrical service outlets and fixtures. The interior and exterior of residential structures must be maintained in good repair. Exterior walls and the roof must be weather-tight and equipped with gutters and downspouts. Interior walls and floors must be kept free of holes, large cracks and loose or deteriorated material. The dwellings and surrounding premises must be maintained free from insects, vermin or rodents, and exterior areas must be kept free of potential health, accident or fire hazards. Garages and secondary structures must also be maintained in good repair. The court noted that the city’s housing code is enforced against the “owner” and does not provide any exception for owners of REO’s.
The court decided that Wells Fargo’s practice of merely boarding, securing, and cutting the grass, is inconsistent with the requirement of the city’s codified ordinances, and creates a threat to the health and safety of the residents of the neighborhoods because they permit attractive nuisances for juveniles or others, posing arson risks, and attracting criminal activity. The court rejected Wells Fargo’s argument that in order to comply with regulations pertaining to federally-insured loans, it must market its REO’s in as short a period of time as possible in order to maximize the profit for its investors, and therefore, it is not permitted to repair those properties. The Court stated, “While the deadlines imposed by the federal regulations may require Wells Fargo to act quickly, they are not inconsistent with the city’s ordinances.”
Based on those findings, the court stated that it was persuaded that CHRP had established by clear and convincing evidence that it is likely to succeed on the merits of that aspect of its claim for declaratory and injunctive relief. The court further found that irreparable injury would be caused to CHRP if an injunction were not granted, and that there would be little likelihood of harm to third parties if the injunction were granted. Finally, the court found that the public interest would best be served by granting the injunction.
Therefore, the court granted the preliminary injunction, which will remain in effect until CHRP’s request for a permanent injunction has been determined. The preliminary injunction requires the following:
- Wells Fargo must provide a list of all properties it owns in the City of Cleveland, indicating among other things, whether the property is boarded, whether a notice of violation has been issued, and whether a condemnation notice has been issued. An updated list is required every 14 days.
- For properties where no notices of violation or condemnation have been issued, Wells Fargo must secure permits when necessary, and immediately take action to bring those properties up to minimum code standards or demolish the properties, within 30 days of filing the list.
- For properties where a condemnation notice has been issued, Wells Fargo must immediately comply with the notice by either repairing or demolishing the property, and its failure to do so may be considered in contempt of court.
- For properties where a notice of violation was issued prior to Wells Fargo’s purchase of the property, Wells Fargo must comply with the notice and give written notification to the Director of Building and Housing, of the actions that it intends to take to comply. The Director will then establish a reasonable time for compliance.
- With respect to any boarded structure on residential property, Wells Fargo must, within 30 days of filing its list, remove the boards and bring the property into compliance with the city’s code, or apply for a permit to board the structure effectively.
- To ensure compliance with the preliminary injunction, Wells Fargo is prohibited from transferring the title to any of the properties for a sale price of $40,000.00 or less, absent demonstrated compliance with the terms of the order.
- In order to transfer a property during the period of the preliminary injunction, Wells Fargo must apply for the court’s permission to do so, and must demonstrate that it has informed the prospective purchaser of any notice of violation, condemnation, and the pendency of CHRP’s lawsuit and the preliminary injunction.
On June 22, 2009, Wells Fargo filed an appeal to the Court of Appeals and a motion for a stay of the injunction while the appeal is pending. In order for the stay to be granted, an appropriate supersedeas bond must be approved by the court and posted.
If you are marketing any residential REO’s located in the City of Cleveland that are titled in the name of either Wells Fargo Bank, or Wells Fargo Bank as Trustee, please contact us so that we may determine the effect of the injunction as it relates to the particular property.
For a complete copy of the preliminary injunction, go here.
If you have any questions on this information, please contact Mr. Larry R. Rothenberg, Esq. Larry Rothenberg is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan. Larry can be reached at (216) 685-1135 or via e-mail at firstname.lastname@example.org.
Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation. The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship. Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. ©2009
Larry R. Rothenberg
Many credit unions have no loss policies. When a member causes the credit union a loss, the member either loses services (down to a share account and the right to vote at meetings) or, in the case of some state credit unions, the member is expelled. At times, a member will come to grips with financial reality and seek rehabilitation. In most cases, all that is necessary to get back in the good graces of the credit union is to pay back the loss the member caused in the first instance. Unfortunately this simple concept becomes exponentially more difficult when the member is in the midst of a bankruptcy. During those instances a credit union needs to walk a fine line between educating the member on how restore member benefits and active debt collection. When a member asks the credit union, “How can I become a member again?” or “How can I get my services back?,” the response is easy: “Eliminate the loss.” However, if not handled carefully, this could result in the well meaning credit union violating the Federal Bankruptcy Court Stay.
The purpose of the automatic stay is to give a debtor a brief reprieve from creditors and prevent one creditor from rushing to enforce a lien to the detriment of other creditors. The stay protects the debtor and his creditors by allowing the debtor to organize his affairs, and ensures that the bankruptcy procedures operate to provide an orderly resolution of all claims.
Notwithstanding this prohibition against the collection of discharged debts, a debtor may repay debts that would otherwise be dischargeable, either by entering into a formal reaffirmation agreement or by making voluntary payments in the absence of such an agreement.
After bankruptcy debtors may repay debts as they choose without being legally obligated in the event they later become unable to fulfill their intention.
While repayment induced by harassment or duress by a creditor is clearly prohibited, it is unclear to what extent a debtor’s repayment must be free from external influences. One meaning of “voluntary” would require that the repayment be spontaneous, that is, induced by nothing other than the debtor’s own conscience. On the other hand, “voluntary” is often used to refer to actions resulting from one’s interest in experiencing gain or avoiding loss. Under this interpretation, figuring out whether or not a repayment is “voluntary” would be determined from the totality of circumstances surrounding the repayment.
With respect to credit unions specifically, courts have held that the mere cancellation of the debtor’s membership privileges, such as maintaining an interest-bearing share account for the debtor, or maintaining a checking account for the debtor, is not a withdrawal of privileges unique to union membership and therefore not so valuable as to be found coercive. However, where the creditor combines the cancellation with certain acts that result in the repayment of a discharged debt, those acts may violate the Bankruptcy Code.
Courts have discussed acts that go beyond mere cancellation. For example, a credit union violates the stay by terminating a debtor’s membership, refusing to accept his mortgage payments, and subsequently declaring the mortgage in default. Although terminating the debtor’s membership is not a coercive act, refusing mortgage payments and foreclosing on the mortgage is coercive.
Courts have consistently held that the mere cancellation of a debtor’s credit union membership, although perhaps against public policy to some extent, does not violate the automatic stay or the discharge injunction as an act to collect a dischargeable or discharged debt. When credit unions have a policy of terminating membership privileges to any member who caused it a loss, courts have held that this does not violate the automatic stay.
Courts have discussed whether notification of the credit union’s policy amounts to coercion. The consensus among the courts that have examined this issue is that it is not a violation. The rational is that nothing in the Bankruptcy Code requires a creditor to do business with a debtor; therefore, simply notifying a debtor of its policy is not a violation.
In summary, actions taken by a creditor in the process of seeking voluntary repayment of a post-petition indebtedness violates the Bankruptcy Code only if the action (1) could reasonably be expected to have a significant impact on the debtor’s determination as to whether to repay, and (2) is contrary to what a reasonable person would consider to be fair under the circumstances. Further, mere notice of a stop loss policy by a credit union does not violate Bankruptcy law, so long as the notice is not coupled with coercive acts.
If you have further questions or require additional explanation related to this topic Robert Rutkowski, Partner of WWR’s Credit Union Department or Bryan Kostura, Associate with WWR’s Bankruptcy Department would be happy to talk with you.
Filed under: repossession
The following is an article reprinted with permission from the upcoming Spring 2009 edition of The WWR Letter:
By: David A. Wolfe, Associate
Once a debtor defaults on his/her installment loan payments and collection and workout efforts fail to achieve the desired results, creditors traditionally look to repossess any collateral. While this process is often the most cost-effective approach, it is fraught with traps for the creditor, as any mistakes can bar the creditor from recovering the deficiency and subject the creditor to liability for wrongful repossession.
Secured transactions are governed by Article 9 of the Uniform Commercial Code (“UCC”), which has been adopted in most states. Repossession is a self-help method for creditors to recover their collateral and is permitted by the UCC, but only if it can be done “without breach of the peace.” While the UCC does not define “breach of peace,” some courts have held that even a debtor’s verbal protests are enough to stop the repossession. Additionally, all too often a secured party will attempt to repossess when the debtor is not in default, so it is important to be sure the debtor is truly in default at the time of the repossession. Even when the debtor is in default, the secured party may lose the right to repossess if it has established a course of accepting late payments. During loan workout efforts, debtors will often make partial payments or payments that do not fully cure any arrearages. Acceptance of these late or partial payments may prohibit a creditor from accelerating the debt and declaring the debtor in default. Unfortunately, while the security agreement may contain an “anti-waiver” provision, courts in a number of jurisdictions have diluted these clauses, ruling that the secured party’s acceptance of late or partial payments waived the non-waiver clause, or that the non-waiver clause is void as against public policy. Once it has been determined that repossession was wrongful, punitive damages may be available to the debtor, even where there are no actual damages. In some situations, the Fair Debt Collection Practices Act allows the debtor to recover attorneys’ fees. In addition, the UCC entitles a consumer whose car or other property is wrongfully repossessed to recover a statutory penalty that is often in the thousands of dollars.
The best protection for the creditor begins with its loan documents. The security agreement should have a clear and inclusive default section allowing the creditor to repossess not only upon failure to make payments, but also upon other defaults such as failure to maintain proper insurance and seizure by police or other government authorities. The security agreement should also include unambiguous cross-default and cross-collateralization clauses with other agreements that the debtor may have with the creditor. The most effective way for a creditor to protect itself against the waiver problem discussed above is to include an “anti-waiver” or “non-waiver” clause that provides that the failure of the secured party to exercise its remedies on one default will not waive its right to exercise them on any subsequent default. The file should clearly document any extensions given to the debtor. Finally, the creditor should select its repossession contractor carefully. While the majority of repossessions are now carried out by trained professionals who go out of their way to avoid confrontation, a repossession contractor’s improper actions could be imputed to the creditor, subjecting the creditor to liability.
David A. Wolfe is an Associate in the Bankruptcy and Legal Action Recovery departments of the Detroit office. He can be reached at (248) 362-6142 or email@example.com.
The following is an article reprinted with permission from the upcoming Spring 2009 edition of The WWR Letter:
By: Gail C. Hersh, Jr., Partner
On October 1, 2009, the “final rule” amending Regulation Z (“Reg Z”) (the Truth in Lending Act) goes into effect, except for some escrow requirements that will be phased in during 2010. The changes were made as part of the Home Ownership and Equity Protection Act, and revise and expand the protections to consumers in mortgage lending transactions, as well as other transactions. The new requirements will not just apply to those institutions under the watch of the Federal Reserve Board, but to all mortgage lenders.
Addressing Public Concern
The impetus for the changes to Reg Z was to address the public’s concern about perceived abuses in the sub-prime mortgage market, with that sector’s products receiving a new moniker of “average prime offer rate” derived from Freddie Mac’s Primary Mortgage Market Survey. A loan will be deemed “higher-priced” when the annual percentage rate is more than 1.5% above the index when it is secured by a first mortgage and 3.5% when it is secured by a junior mortgage. When this type of loan is secured by a borrower’s primary residence, four principal requirements are triggered:
- Lenders must assess the borrower’s ability to repay the loan;
- Lenders must verify income and assets of the borrower;
- Lenders are banned from imposing most prepayment penalties (PLEASE NOTE: Federal credit unions are not permitted to charge prepayment penalties); and
- Lenders are mandated to establish escrow of taxes and insurance.
Borrower’s Ability to Pay
Assessing a borrower’s ability to repay will likely be the area creating the most risk exposure for lenders. To establish liability of a lender, a borrower no longer needs to show a lender’s pattern of conduct in failing to assess a borrower’s ability to repay. To comply, a lender will need to assess the borrower’s ability to pay by examining the total debt to income ratio or the available income after paying of debt obligations. The lender must also confirm the borrower’s ability to pay the largest possible amount of principal and interest in all change periods in the first seven years of the loan in light of the borrower’s current obligations. Section 226.34 requires not only the verification of income but requires verification of the borrower’s obligations under subpart (a)(4)(ii)(C), and offers no guidance on what would constitute compliance.
Verification of income and assets must be done through IRS records, payroll receipts, financial institution/credit union records and other third-party documents. This is required for even self-employed applicants. Similarly reliable information should be sought for verification of the borrower’s obligations.
The revision prohibits any prepayment penalty for more than two years and any penalty if the payment can change in the first four years of the loan. So what loans can have a prepayment penalty? Fixed rate loans and loans with a first adjustment period of greater than four years may include a pre-payment penalty only in the first two years.
Escrow of taxes and insurance is mandated in all “higher-priced” first mortgage transactions. Optional insurance chosen by the borrower need not be escrowed. The escrow requirements are effective for applications received on or after April 1, 2010, with an additional delayed effective date of October 1, 2010 for applications for loans secured by manufactured housing.
One of the additional effects of the “final rule” is to trigger the required disclosures for refinances in many instances where a loan is a modification. For those modifications where the new balance exceeds the original balance, as would often be the case for either early or long-standing defaults, §226.20(a)(4) would characterize this as a refinance. As a refinance, the disclosure requirements and rescission rights under the Real Estate Sales Practices Act and the Truth in Lending Act are applicable. Raising the interest rate, adjusting a variable rate or changing the rate from fixed to variable will also trigger the disclosure requirements. Where the old note is kept in place, and only the amount (not to exceed the original amount) and payment schedule are modified, the disclosures are not required. A review of the need for disclosures should be standard practice as part of any modification, and the rule of thumb to keep in mind is “when in doubt, disclose.”
Timing of Disclosures
The timing for disclosure in nearly all residential mortgage transactions was also modified by §226.19(a)(1) to require the Good Faith Estimate be made within three days of application.
The amendments to Reg Z also include provisions restricting advertising of closed-end mortgage transactions, prohibiting collusion of lenders and appraisers, mandating that servicers apply borrower’s payments on the date received and banning servicers from pyramiding late fees.
As the October date approaches, credit unions should begin adopting procedures to ensure present and on-going compliance. Credit unions must evaluate their products for those that will be identified as “higher-priced” and make sure systems are in place to handle the new requirements. They should also review the additional requirements regarding advertising, appraisals and servicer issues thoroughly.
Gail C. Hersh, Jr. is an Associate in the Foreclosure/Evictions department of WWR’s Cincinnati office. He can be reached at (513) 333-4020 or firstname.lastname@example.org.