Can A Court Enjoin A Lender From “Dumping” Its REO’s? Court of Appeals To Decide

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 lrothenberg@weltman.com

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
Partner
216.685.1135
lrothenberg@weltman.com

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s