Effectively Opposing the Borrower’s Application (Winter '03)
by Janice Celotti, Of Counsel
Routh Crabtree Fennell, PS — USFN Member (OR, WA)
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It’s a common scenario. A foreclosure sale is three or four days away. And the
borrower files a complaint (or an answer in judicial foreclosure states)
contesting the foreclosure alleging breach of contract, breach of fiduciary
duty, violation of statutory foreclosure procedures, and maybe a RESPA or TILA
claim is thrown in for good measure. At the same time, the borrower files an application
for an injunction or an Order to Show Cause to prevent completion of the
foreclosure sale.
The lawsuit or defense is usually based upon (1) the alleged failure of the
lender to properly account for payments; (2) allegations of the lender’s
failure to provide an accounting, (3) the lender’s failure to abide by an
alleged oral agreement/promise to extend the foreclosure deadlines; and (4) the
assertion that the borrower did not receive the foreclosure notices. Typically,
from the one-sided declaration, the borrower makes it appear that the lender
has treated the borrower unfairly by failing to answer his legitimate questions
and properly account for payments made.
If an injunction is issued, which is an indication that the court believes
there is enough of an issue to delay the foreclosure until hearing further
arguments or reviewing certain evidence, it may take many months to resolve the
dispute. During this time, the borrower is likely to avoid paying the mortgage,
and the foreclosure process will be indefinitely stalled. However, there are
effective steps that a servicer can take to prevent this unsatisfactory state
of affairs.
Step One: Gather Complete
Information
The foreclosure file should provide a wealth of
information about the loan, including a copy of the original deed of trust and
note, as well as all assignments of record. The foreclosure file also usually
contains the Notices of Default and
The standard loan servicing/accounting records are sometimes difficult to
decipher though. They contain codes set up to track various events that are not
relevant to a dispute with a borrower. They are not intended to provide a clear
statement of when payments were received and how they were posted. However, a
review of the loan accounting records and conversation log can provide useful
information concerning the loan transaction.
A review of the accounting documents and the conversation log will usually tell
a very different story than the one told by the borrower. The history may
reveal a pattern of chronic lateness, unsubstantiated disputes, and a series of
delinquencies and extensions. This can be used to demonstrate the lender’s
willingness to work with the borrower in the past and that the foreclosure was
a result of the borrower’s simple inability or unwillingness to pay, and not
due to overzealousness or poor record keeping by the lender. The history may
also show a number of bankruptcy filings that the current attorney would not
normally be aware of.
A frequent statement is: "I made the August payment — here’s my cancelled
check." Though the borrower may have indeed sent a payment in August, or
delivered a check dated in August, because the borrower was in arrears, the
payment was applied (per the terms of the note) to whatever payment was due at
the time (e.g. April) or to an escrow shortage. The borrower’s statement that
the check was collected may be true, but his conclusion is not. The accounting
documents and conversation log are useful in presenting a more balanced picture
of what really happened in connection with the loan.
Step Two: Contact the
Borrower’s Counsel
Once some basic information concerning the loan
transaction has been obtained, it is time to assemble a complete picture of
what occurred. Contacting the borrower’s counsel to determine the true nature
of the dispute is usually helpful. Was there a forbearance agreement? Is the
accounting incorrect? Is there a mistake in the foreclosure notices? If there
appears to be any validity to the borrower’s allegations, postpone the sale
while a more thorough investigation is undertaken.
Find out from borrower’s counsel what it is that the borrower wants, and how he
intends to reinstate the loan. It may be that the borrower doesn’t have any
idea as to how to resolve the default. Discuss the alternatives. Can the
borrower be persuaded to put the house on the market at a reasonable price? If
he disagrees with the amount of the default, can an explanation for the
accounting be provided to him that will answer his questions? Does the borrower
understand that if he is ultimately unsuccessful, the legal fees incurred by
the lender may be added to his loan balance?
Step Three: The Injunction Hearing
In some instances, a temporary injunction is issued without notice to the
lender and without giving the lender an opportunity to oppose the request. The
matter is then scheduled for a subsequent hearing date on whether the
injunction should continue until the court has had an opportunity to hear all
the arguments. As a general rule, a lender should have counsel appear at the
injunction hearing. The lender’s success at the injunction hearing usually
means a complete victory against the borrower. There may be cases, however,
where it is impossible to retrieve the account records in advance of the
hearing. Even so, there are several strategies and techniques that can be
effective to prevent an injunction from issuing, or to limit its scope and
impact.
First, determine whether the case can be transferred to federal court.
Generally, the grounds for removal are diversity (parties are from different
states) or the existence of a claim based upon federal law. Ordinarily, a
Petition for Removal must be filed within 30 days of the filing of the lawsuit.
Filing a Petition for Removal automatically transfers the case to federal
court. The plaintiff must then seek to have the case moved back to state court.
The procedural requirements in federal court are more stringent and, generally,
it is less likely that the federal court will issue an injunction.
Second, assert that the borrower hasn’t met his burden for issuance of an
injunction, that the equities don’t favor the borrower, and that the borrower
has failed to timely raise his claims. For example, the borrower may file a
declaration that he did not receive the foreclosure notices. However, in most
states, receipt of foreclosure notices is not required for the notices to be
valid, and does not provide the borrower with grounds for the issuance of an
injunction. Similarly, some state statutes compel that a challenge to the
foreclosure process be asserted pre-sale, or the claim is deemed waived. Thus,
a borrower who does not file an injunction application before the foreclosure
sale may be precluded from seeking one at the time of the post-sale eviction.
Finally, a borrower who has failed to pay debt service for many months may be
hard-pressed to argue that the equities are in his favor.
Moreover, the judge may be less inclined to believe the borrower if a different
story is presented by the lender’s records of the transaction. If possible,
present a declaration to the court containing evidence of the additional or
conflicting facts not included by the plaintiff (bankruptcy filings, repeated
extensions, admissions by the borrower that he is seriously delinquent). Also,
create a record of objections to the evidence submitted by the borrower, and
ask the court to strike improper evidence.
If the court is still inclined to grant the injunction, then challenges to the
form of the injunction can be made. Ordinarily, the borrower’s proposed order
will broadly provide that the lender is enjoined from taking any steps to
complete the foreclosure. The lender should come to the hearing with an
alternate proposed order that provides conditions such as the following:
* The issuance of the injunction is conditioned upon payment of monthly debt
service, or payment of undisputed arrears;
* The borrower must post a corporate surety bond for arrearage, attorneys’
fees, and costs within 48 hours, or the injunction will automatically
dissolve;
* The injunction expires automatically after 60 days;
* The injunction doesn’t prevent the lender from starting a new foreclosure
proceeding;
* The taking of the plaintiff’s deposition and document production are ordered;
and
* If the accounting cannot be reconciled by the parties within 60 days, a
Special Master shall be appointed to reconcile the accounting and make a report
to the court within 30 days.
What’s Next?
If the borrower is unsuccessful in obtaining an injunction, he will frequently
file for bankruptcy protection. If this happens, it is important that the
bankruptcy lawyer has the benefit of the investigation and research that has
already been done on the file to assist in obtaining relief from the automatic
stay as quickly as possible.
A timely and vigorous response to a borrower’s injunction application can
prevent the indefinite suspension of debt service payments and of the
foreclosure process. The procedures discussed here are relatively easy to
implement, and can result in dramatic savings of time and money.