Court Nixes Feds' Attempted Forfeiture Snatch Against Recipient Of Quit Claim Deed, Despite Grantor's Subsequent Wire Fraud Indictment; Grantee's Release Of Claims In Exchange For Property Transfer, Lack Of Knowledge Of Seller's Use Of Embezzled Cash To Originally Buy Premises Enough To Trigger "Innocent Owner" Protection

From a news release, from the law firm Bryan Cave LLP:

• In a rare defeat for the United States, Bryan Cave persuaded a federal judge in the Middle District of Florida to enter summary judgment against the government in a civil forfeiture case.
  
  The case concerned the validity of a quit claim deed to real property in New York. The deed’s grantor conveyed the property as part of a settlement of disputed fraud claims with the grantee. One month later, the United States sued to invalidate the quit claim deed and to forfeit the grantee’s interest in underlying property. Shortly thereafter, a grand jury indicted the grantor for wire fraud.
  
  Bryan Cave successfully argued that the grantee was an "innocent owner" under 18 U.S.C. § 983. The court’s forty-page opinion, [...], is noteworthy for three reasons.
  
  First, the court found that the innocent owner defense applied so long as the grantee did not know that the property at issue was purchased with money obtained through fraud. Knowledge of the grantor’s criminal activity in general does not defeat the innocent owner defense.
  
  Second, the court found that the grantee had given value in exchange for the deed simply by releasing claims for fraud against the grantee. No exchange of money was necessary for the grantee to qualify as a purchaser for value.
  
  Third, the court held that the grantee’s inability to record the quit claim deed was of no consequence. The innocent owner defense applies even where the ownership interest is founded upon a deed that has not yet been recorded.
  
  Further, the grantee had standing to defend against forfeiture even though he never maintained possession of the property. The grantee exercised sufficient "dominion and control" over the property by, among other things, negotiating for the quit claim deed and hiring counsel to enforce his rights under that deed and to defend against forfeiture.

Source: Florida federal court addresses the scope of the innocent owner defense in civil forfeiture.

For the court ruling, see U.S. v. Real Property, Including All Improvements Thereon And Appurtenances Thereto, Located At 246 Main Street, Dansville, Livingston County, New York, Case No. 3:13-cv-1210-J-39PDB (M.D. Fla. July 13, 2015).

Florida Appeals Court Slams Brakes On Sloppy Foreclosing Lender's Attempt To Enforce Mortgage Where Only One Of Four Co-Owners Signed The Paperwork; Rejects Assertion That Non-Signatory Owners Ratified Mortgage Through Their Conduct

In a recent ruling by Florida's Third District Court of Appeal, the court denied a lender's attempt to foreclose a residential mortgage that was signed by only one of the four owners of the home when the loan was closed.

In bringing the foreclosure action, the lender attempted to circumvent this problem (obviously caused by sloppy loan origination, closing and title underwriting procedures, and occurring at a time in recent real estate history - late 2005 to early 2006 - that the trial court observed was one where "everybody was hoodwinking everybody") by asking the court to establish the existence of an equitable lien against property interest of all four owners by asserting the legal doctrine of ratification, and then foreclose against them on the basis of that lien.

Quoting from Citron v. Wachovia Mortgage Corp., 922 F.Supp. 2d 1309 (M.D. Fla. 2013), the court described ratification as follows:

• "Ratification is conduct that indicates an intention, with full knowledge of the facts, to affirm a contract which the person did not enter into or which is otherwise void or voidable."

The court described the application of this legal doctrine in the context of a mortgage in this excerpt:

• Ratification of a mortgage by a non-signatory property owner has been upheld in Florida in two distinct types of cases: (a) when the nonsignatory owner has received the benefit of the mortgage loan proceeds; or (b) when the non-signatory owner has authorized an attorney-in-fact to execute the mortgage on behalf of the owner.

For the reasons set forth in its ruling,(1) the appeals court rejected the application of the doctrine ratification under the facts and circumstances of this case, and declared that the property interest of the non-signing owners of the property was free of any lien.

For the ruling, see Wells Fargo Bank, N.A. v. Clavero, Case No. 3D14-520 (Fla. 3d DCA September 2, 2015).

For earlier posts on the legal doctrine of ratification, see:

• NJ Appeals Court OKs Forged Deed Used By Hubby To Swipe Estranged Wife's Interest In Marital Home Where Her Subsequent Conduct (Coupled With Title Transfer To Bona Fide Purchaser) Was Deemed To Constitute Ratification Of The 'Dirty Deed',
  .
• Voidable Or Void Ab Initio (Or "Void Unless & Until Later Ratified")?.
  .
• Sneaky Lender Uses Loan Modification 'Pre-Negotiation' Agreement To Dupe Borrower Into Inadvertently Ratifying Void Mortgage, Waiving All Rights.

-----------------------------------------

(1) From the court's ruling:

• A. Receipt of Benefit
  
  The non-signatory's receipt of mortgage loan proceeds, or receipt of a benefit from the application of those funds, may cure the failure to sign the mortgage as a matter of equitable subrogation, see Palm Beach Sav. & Loan Ass'n v. Fishbein, 619 So. 2d 267 (Fla. 1993), or ratification, see Fleet Fin. & Mortg., Inc., 707 So. 2d 949 (Fla. 4th DCA 1998).
  
  In the present case, however, neither the Parents nor the 3789 Property received a financial benefit from the loan proceeds. It is undisputed that all of the loan proceeds were utilized by the sole signatory to start the day care business. The Parents were not owners or employees of that business.
  
  We find no Florida case extending the principle of ratification to a parent's expression of a general intention to help a family member secure a loan for purposes of benefiting the family member. At oral argument, this type of indirect benefit was advanced by Wells Fargo as a worthy rationale for binding the Parents to the mortgage loan procured by Maria. We see no legal basis for extending the legal principle of ratification in such an instance, and on this record. The Washington Mutual loan circumvented the institutional lending process whereby the property owners/mortgagors sign documents informing them of the terms of the transaction, including the amount of the loan procured, federal Truth-in-Lending rights, interest rates, monthly payment amounts, and subjection of the homestead to the mortgage loan—all in a transaction in which the non-signatory owners themselves and the mortgaged property have received no benefit.
  
  Wells Fargo's reliance on the case of Citron v. Wachovia Mortgage Corp., 922 F.Supp. 2d 1309 (M.D. Fla. 2013), is unwarranted. In that case, Mr. Citron was a Florida-licensed mortgage broker. Mrs. Citron worked with him in a mortgage company, and the two had brokered some 47 mortgage loans for the lender that originally loaned money to the Citrons, World Savings. Wachovia Mortgage was the successor by merger to World Savings. The Citrons obtained hundreds of thousands of dollars of loan proceeds and invested those funds in a home later conveyed to their family trust.
  
  The Citrons sued Wachovia Mortgage in an attempt to rescind the loan for Truth-in-Lending violations and other alleged defects in the loan documents. The trial court denied any such relief because (among a number of facts in the record) the Citrons had received and had not promptly disgorged all of the direct benefits of the loan. Additionally, the Citrons had made monthly payments on the loan for over a year after learning of the alleged defects in the loan documents. "Ratification is conduct that indicates an intention, with full knowledge of the facts, to affirm a contract which the person did not enter into or which is otherwise void or voidable." 922 F.Supp. 2d at 1321 (quoting Still v. Polecat Indus., Inc., 683 So. 2d 634 (Fla. 3d DCA 1996)).
  
  In the present case, the Parents neither received loan proceeds, nor otherwise benefited from the application of those proceeds, nor made any monthly payments, nor acquired full knowledge of the material details of the mortgage loan.
  
  B. Attorney-in-Fact
  
  Section 695.01(1), Florida Statutes (2005), provides protection to creditors and purchasers who accept a conveyance or lien signed by an attorney-in-fact on behalf of a property owner (and then recorded), so long as the power of attorney itself is also recorded before the accrual of rights by "creditors or subsequent purchasers for a valuable consideration and without notice." Washington Mutual Bank could have required, but did not, such a power of attorney as a condition to the loan. And such a power of attorney is only effectual to the extent of the specific powers granted. Him v. Firstbank Fla., 89 So. 3d 1126 (Fla. 5th DCA 2012).
  
  Execution of the mortgage by an agent "previously unauthorized" may also be subject to ratification in certain instances. Branford State Bank v. Howell Co., 102 So. 649 (Fla. 1924). In that case, however, the Supreme Court of Florida held: "No rule of law is better settled than this: That the ratification of the act of an agent previously unauthorized must, in order to bind the principal, be with full knowledge of all the material facts." Id. at 650. In the present case, there was no evidence that Maria (or anyone else) informed the Parents or Hubert of all of the material facts relating to the Washington Mutual Bank loan and mortgage.
  
  Proceedings on Remand
  
  We affirm the trial court's findings that (a) Maria Castellon signed the promissory note, obtained the loan proceeds, and remains liable under the terms of the promissory note, (b) the defective Washington Mutual Bank promissory note and mortgage did not subject the Parents' homestead property to the lien of the mortgage and to sale, and (c) Wells Fargo does have an equitable lien to the extent of disbursements for property taxes and reasonable costs of insurance paid by Wells Fargo during the pendency of the foreclosure action, recoverable when the 3789 Property is no longer the Parents' homestead.
  
  We reverse that portion of the final judgment imposing and foreclosing an equitable lien for the principal or interest on the loan made by Washington Mutual Bank, with respect to the ownership interest of the Parents in the 3789 Property. On remand, the trial court should clarify that the Parents and Hubert are not personally liable for unpaid principal and interest due under the promissory note signed only by Maria.
  
  Affirmed in part, reversed in part, and remanded for further proceedings in accordance with this opinion.

Homeowners' Standing To Challenge Chain Of Title To Mortgage Being Foreclosed: Void vs. Voidable Mortgage Assignments

In a 2013 court ruling (Reinagel v. Deutsche Bank Nat'l Trust Co., 735 F.3d 220 (5th Cir. 2013)) involving a homeowner's challenge of the chain of title to a mortgage being foreclosed that allegedly involved robosigned assignments of mortgage, the 5th Circuit Court of Appeals ruled that, given the facts of the case, the homeowner lacked standing to challenge the assignments. The court applied the rule that one cannot challenge the validity of a contract to which it is neither a party nor a third-party beneficiary.

It should be noted (and emphasized), however, that (notwithstanding the propaganda put out by the banksters and their attorneys(1)) the court also reaffirmed the principle that there is an exception to this rule (regrettably for the homeowners in this case, an exception that the court, for the reasons set forth in its ruling, was unpersuaded was applicable to the particular facts of this case).

The exception the court reaffirmed (and one that has been recognized by other courts) was one where the homeowner alleges and proves that the assignment(s) of mortgage was(were) absolutely void (ie. void ab initio, void from inception, invalid, ineffective, a nullity, etc.), and not merely voidable (ie. an instrument that, while defective, is not so fatally defective as to make it invalid, and therefore is nevertheless binding on the parties to the assignment until challenged by the injured assignor or assignee, and set aside by the court).

The appeals court made this point in the following excerpt of its opinion ("The Reinagles" are the homeowners making the challenge):

• Deutsche Bank urges that "the law is well settled that a stranger to a contract lacks standing to challenge [that] contract," and that "[n]umerous federal district courts have recognized that plaintiffs lack standing to challenge the assignment of security instruments in cases similar to the present."
  
  The Reinagels rejoin that "Texas state and federal courts routinely allow a homeowner to challenge the chain of assignments by which a party claims a right to foreclose," dismissing the cases relied upon by Deutsche Bank as incorrectly decided.
  
  We agree with the Reinagels. To be sure, Texas courts have held that a non-party to a contract cannot enforce the contract unless she is an intended third-party beneficiary,[6] occasionally couching this principle in terms of "standing."[7] Here, however, the Reinagels are not attempting to enforce the terms of the instruments of assignment; to the contrary, they urge that the assignments are void ab initio.
  
  Though "the law is settled" in Texas that an obligor cannot defend against an assignee's efforts to enforce the obligation on a ground that merely renders the assignment voidable at the election of the assignor, Texas courts follow the majority rule that the obligor may defend "on any ground which renders the assignment void."[8] A contrary rule would lead to the odd result that Deutsche Bank could foreclose on the Reinagels' property though it is not a valid party to the deed of trust or promissory note, which, by Deutsche Bank's reasoning, should mean that it lacks "standing" to foreclose.

They cited the following authority for its basis for this exception in footnote 8 of its opinion:

• Tri-Cities Const., Inc. v. Am. Nat. Ins. Co., 523 S.W.2d 426, 430 (Tex. Civ. App. 1975) (citing Glass v. Carpenter, 330 S.W.2d 530, 537 (Tex. Civ. App. 1959)); see also, e.g., 6A C.J.S. ASSIGNMENTS § 132 (2013) ("A debtor may, generally, assert against an assignee ..., any matters rendering the assignment absolutely invalid ..., such as[] the nonassignability of the right attempted to be assigned, or a prior revocation of the assignment."); Murphy v. Aurora Loan Servs., LLC, 699 F.3d 1027, 1033 (8th Cir.2012) (recognizing that mortgagors can defend against foreclosure by establishing a fatal defect in the purported mortgagee's chain of title).

--------------------------

Lest one believe the type of propaganda put out by the banksters and their lawyers that there is a growing chorus of courts throughout the country holding that homeowners can't challenge mortgage assignments,(2) it is important to emphasize that, at best, such propaganda constitutes:

• an overemphasis of the general rule that states a stranger or a non-third-party beneficiary to a contract (ie. the mortgage assignment) cannot challenge the validity of said contract, and
  .
• a complete failure by the banksters and friends to acknowledge that courts have found that a non-party can challenge a contract that is absolutely void (and not merely voidable).(3)

For the ruling, see Reinagel v. Deutsche Bank Nat'l Trust Co., 735 F.3d 220 (5th Cir. 2013).

---------------------------

(1) See, for example, this misleading headline in post by one lender-favoring lawyer: Borrowers Cannot Challenge Mortgage Assignments, Says Nebraska Joining Other States).

(2) Ibid.

(3) For earlier posts providing examples of courts acknowledging the exception to the rule precluding homeowners from challenging mortgage assignments, see:

• Failure To Allege: Void (As Opposed To Merely Voidable) Transfer, Risk Of Double Payment Or Other Prejudice Is Fatal To Borrowers' Foreclosure Defense As Nebraska High Court Says Homeowners Lacked Standing To Challenge Allegedly Faulty Mortgage Assignment From One Bankster To Another,
  .
  Homeowners Have Standing To Challenge Faulty Mortgage Assignments From One Bankster To Another, But Only Where Defects Render Conveyance Absolutely Void, Not Merely Voidable,
  .
  1st Circuit: Borrower Has Standing To Challenge Mortgage Assignments When Invalid, Ineffective, Or Void; Transfers That Are Merely Voidable Are Immune From Protest,
  .
  Michigan Trial Court OKs Homeowner Challenge To Validity Of Mortgage Assignment Where Assignee's Lack Of Title Is Raised As A Defense (reversed on other grounds, HSBC Bank USA, NA v. Young, No. 313212 (Mich. App. 2014) (unpublished) (appeal denied HSBC v. Young, 2015).

Banksters Dodge 'Ticking Time Bomb' Of Crappy Massachusetts Real Estate Titles; State High Court Says Lenders Failing To Strictly Comply w/ Conditions Precedent To Exercise Of Power Of Sale Will Result In Void (As Opposed To Voidable) Foreclosure Sales, But Refuses To Apply Ruling To Past Sales

From a comment on the website of Massachusetts law firm Johnson & Borenstein, LLC:

• Mortgagees beware – the Supreme Judicial Court has ruled that a foreclosing entity must strictly comply with the provisions of the mortgage which delineate the notice of default to homeowners. This case extends the rule, set out in United States Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637 (2011), that strict compliance with the power of sale provisions and the statutory notice requirements is necessary to result in a valid foreclosure.
  
  Lesley Phillips and Linda Pinti (“Pinti”) brought suit in Superior Court seeking to prevent their eviction as a result of Harold Wilion’s summary process action against them. Wilion purchased the property at a foreclosure sale, conducted by Emigrant Mortgage Company, Inc. by exercise of the power of sale contained in the Pinti mortgage. Pinti sought a declaratory judgment that the foreclosure sale was void because Emigrant failed to comply with paragraph 22 of the mortgage, which concerns the mortgagee's provision of notice to the mortgagor of default and the right to cure, and also the remedies available to the mortgagee upon the mortgagor's failure to cure the default, including the power of sale.
  
  
  ***
  
  The Superior Court granted summary judgment in favor of Wilion, concluding that there was no requirement that Emigrant strictly comply with paragraph 22 of the mortgage, because the provision has no direct relationship to the power of sale, and dismissed Pinti’s complaint. Pinti appealed, and the SJC opted to take the case for itself.
  
  A majority of the Court interpreted a long line of mortgage foreclosure cases to stand for the proposition that a mortgagee “must strictly comply not only with the terms of the actual power of sale in the mortgage, but also with any conditions precedent to the exercise of the power that the mortgage might contain.”
  
  Relying upon an old case, Foster, Hall & Adams Co. v. Sayles, 213 Mass. 319 (1913), the SJC determined that “the sending of the prescribed notice of default is essentially a prerequisite to use of the mortgage's power of sale,” and that “the ‘terms of the mortgage’ with which strict compliance is required -- both as a matter of common law under this court's decisions and under § 21 -- include not only the provisions in paragraph 22 relating to the foreclosure sale itself, but also the provisions requiring and prescribing the preforeclosure notice of default.”
  
  The concern, the SJC said, is that the notice sent by Emigrant did not inform the homeowners that they must initiate a lawsuit to challenge the foreclosure – the notice seems to say that the homeowners will have an opportunity to raise any valid defenses in a later foreclosure action. Because Massachusetts is a nonjudicial foreclosure State, that “later” action never arrives, thereby depriving a homeowner of the opportunity to contest the foreclosure. The Court also noted that it is “hardly unfair or burdensome” to require a mortgagee to comply with the terms of its own mortgage document.
  
  The Court distinguished its decision in U.S. Bank Nat'l Ass'n v. Schumacher, 467 Mass. 421 (2014), on the grounds that G.L. c. 244, § 35A, the statute at issue in Schumacher, is not related to the exercise of the power of sale, but concerns the provision of a sufficient period of time to permit a homeowner to cure a default. Therefore, the Court decided, the defective notice sent to Phillips and Pinti rendered the foreclosure sale void.(1)
  
  Lest mortgagees become unduly concerned about pending or past foreclosures being invalidated on the grounds of a notice failure, the SJC stated that this decision is prospective only.(2)

For more, see New Requirements For Foreclosing Mortgagees Courtesy Of The Supreme Judicial Court.

For the court ruling, see Pinti v. Emigrant Mortgage Co., No. SJC-11742 (Mass. July 17, 2015).

Thanks to Deontos for the heads-up on the court ruling.

-----------------------

(1) The court's discussion on finding the foreclosure sale void, as opposed to merely voidable, follows:

• Given our conclusion, the question presents itself whether Emigrant's failure to comply strictly with the default notice provisions of paragraph 22 renders the title obtained by Wilion as a result of the subsequent foreclosure sale voidable rather than void.[23] See Chace v. Morse, 189 Mass. 559, 561-562 (1905), and cases cited. As the court observed in Chace, this is not always an easy question to answer:
  
  "The distinction between the two classes of cases [void and voidable] has not been very clearly defined, and the decisions in the different jurisdictions do not entirely agree. It has repeatedly been said that in order to make a valid sale under a power in a mortgage, the terms of the power must be strictly complied with. Roarty v. Mitchell, 7 Gray, 243 [(1856)]; Smith v. Provin, 4 Allen, 516 [(1862]). . . . Where the sale is to foreclose a mortgage for a breach of the condition, there is no authority to sell unless there is a breach, and an attempted sale would be without effect upon the right of redemption. So, where a certain notice is prescribed, a sale without any notice, or upon a notice, lacking the essential requirements of the written power, would be void as a proceeding for foreclosure. Moore v. Dick, 187 Mass. 207 [(1905)]. But if everything is done upon which jurisdiction and authority to make a sale depend, irregularities in the manner of doing it, or in the subsequent proceedings, which may affect injuriously the rights of the mortgagor, do not necessarily render the sale a nullity. The sale will be invalid so far as to enable the mortgagor, or perhaps the purchaser, to avoid it, and still be effectual if all the parties interested desire to have it stand."
  
  Id. See Bevilacqua v. Rodriguez, 460 Mass. 762, 778 (2011) ("Generally, the key question in this regard is whether the transaction is void, in which case it is a nullity such that title never left possession of the original owner, or merely voidable, in which case a bona fide purchaser may take good title").
  
  As the quoted passage from Chace, supra, suggests, a bona fide purchaser's "title is not to be affected by mere irregularities in executing a power of sale contained in a mortgage, of which irregularities he has no knowledge, actual or constructive." Rogers, 169 Mass. at 183-184. As applied to this case, therefore, the question of void versus voidable may be reframed to ask whether the failure of Emigrant, as the mortgagee, to send the plaintiffs a notice of default providing the actual information required by the terms of the mortgage concerning the plaintiffs' right "to bring a court action" in order to raise any defense to the foreclosure sale is a "mere irregularity" that does not affect the validity of the property's title.
  
  As previously discussed, in a nonjudicial foreclosure jurisdiction like Massachusetts, misstating this information in a way to suggest that a mortgagor with a defense does not need to initiate a lawsuit but may wait to respond to a foreclosure lawsuit filed by the mortgagee can have disastrous consequences for the mortgagor: if the mortgagor has a valid defense to the foreclosure sale going forward, but is not made aware that he or she must initiate an action in court against the mortgagee to raise that defense, the sale may well proceed and result in title passing to a bona fide purchaser without knowledge of the issue — at which point, and depending on the nature of the defense, the mortgagor's right to redeem his or her home may well be lost. See Bevilacqua, 460 Mass. at 777-778.[24] Emigrant's failure to provide the required and correct information on this point in the notice of default cannot fairly be described as a "mere irregularit[y] in executing a power of sale contained in a mortgage." Rogers, supra. Contrast Chace, 189 Mass. at 562. The failure renders the subsequent foreclosure sale to Wilion void.
  
  The position taken by the dissent is that strict compliance by Emigrant with the notice of default provisions in paragraph 22 was required, but that Emigrant's failure to do so did not render the foreclosure sale void. See post at ___. In the dissent's view, the result in this case is essentially controlled by our decision in Schumacher. See post at ___. The dissent reasons that § 35A, the subject of Schumacher, and the notice of default provisions in paragraph 22 are birds of a feather in terms of purpose and operation; that for the same reasons Schumacher concludes § 35A was not a statute relating to the foreclosure by sale, so paragraph 22 is not a term of the mortgage concerned with foreclosure by sale; and, consequently, as was the case in Schumacher, Emigrant's defective notice of default rendered the foreclosure sale only voidable, not void.
  
  We disagree. The dissent fails to take into account the distinction — reflected in our cases and in the language of § 21 — between the "terms of the mortgage" instrument relating to foreclosure by exercise of the power of sale, and "statutes" relating to foreclosure by the power of sale. But this distinction is a critical one. As discussed previously, that § 35A is not one of the statutes relating to foreclosure by the power of sale to which § 21 refers does not answer whether the provisions of paragraph 22 qualify as "terms of the mortgage" relating and integrally connected to the power of sale under § 21. And as to that question, this court's decisions about mortgage terms indicate that by structure and content, the notice of default required to be given under paragraph 22 is integrally connected, and operates as a prerequisite, to the proper exercise of the mortgage instrument's power of sale. Emigrant's strict compliance with the notice of default required by paragraph 22 was necessary in order for the foreclosure sale to be valid; Emigrant's failure to strictly comply rendered the sale void.

(2) Prospective vs. Retroactive effect

On this very significant point, the Massachusetts high court's desire here was to dodge, at all costs, the disaster with real estate titles that would have arisen throughout the state (the "ticking time bombs" of void - as opposed to voidable - titles) had the court applied this ruling retroactively. Some may remember that the court took this same dodge several years ago in Eaton v. Federal Nat'l Mtge. Ass'n, 462 Mass. 569 (2012).

In this regard, this case represents a significant win for the banksters in that the court decided to give this ruling prospective (ie. "going forward") effect only (although it does apply the ruling to the parties to this litigation as well), thereby rendering the ruling inapplicable to any past foreclosures (and, thus, obliterating any "ticking time bomb" problem that would have occurred with the flood of past foreclosure sales that would have been voided had the court decided to give this ruling retroactive effect).

The court addressed this point at the end of its majority opinion:

• We turn to the question whether our decision in this case should be given prospective effect only, because the failure of a mortgagee to provide the mortgagor with the notice of default required by the mortgage is not a matter of record and, therefore, where there is a foreclosure sale in a title chain, ascertaining whether clear record title exists may not be possible.
  
  We confronted the same issue in Eaton, 462 Mass. at 586-587. As Eaton also indicates, in the property law context, we have been more willing to apply our decisions prospectively than in other contexts. See id. at 588.
  
  We conclude that in this case, because of the possible [me here - "disasterous"] impact that our decision may have on the validity of titles, it is appropriate to give our decision prospective effect only: it will apply to mortgage foreclosure sales of properties that are the subject of a mortgage containing paragraph 22 or its equivalent and for which the notice of default required by paragraph 22 is sent after the date of this opinion.
  
  As in Eaton, however, and for the reasons stated there, we will apply our ruling to the parties in the present case. See id. at 589, and cases cited.[25]

The court also noted, in footnote 25 of the majority opinion, that it expressly declined to decide whether it will apply their ruling to cases currently pending on appeal:

• The parties have not argued, and we do not reach, the question whether our holding in this case should be applied to any other class of cases pending on appeal. See Galiastro v. Mortgage Elec. Registration Sys., Inc., 467 Mass. 160, 167-170 (2014).

By giving this ruling prospective, as opposed to retroactive, effect only, the court appears to reaffirm the notion held by some that, no matter how badly the banksters screw up, they can usually count on the government (ie. the court system is part of the judicial branch of government) to somehow pull their collective asses out of the fire.

Failure To Allege: Void (As Opposed To Merely Voidable) Transfer, Risk Of Double Payment Or Other Prejudice Is Fatal To Borrowers' Foreclosure Defense As Nebraska High Court Says Homeowners Lacked Standing To Challenge Allegedly Faulty Mortgage Assignment From One Bankster To Another

As has been been observed by at least one lender-favoring commentator:(1)

• Attacking sufficiency, accuracy, or validity of assignments of mortgages and deeds of trust has been among the most common strategies employed by borrowers to challenge foreclosures. Allegations regarding the status of MERS, the legal authority of the individual executing the assignment, and the timing of the assignment’s recording have all been raised and litigated in courts throughout the United States.
  
  Recently, however, the Nebraska Supreme Court joined a growing number of state courts that have rejected such arguments, citing fundamental questions about borrowers’ standing to challenge contracts in which they have no legally cognizable interest.

However, the point the commentator and others fail to emphasize, and what some courts throughout the country are either missing, or less-than-effective foreclosure defense attorneys are failing to raise, is the fact that, in order to have standing to challenge said assignments, an allegation that the assignment is absolutely void, and an allegation that some injury or prejudice (or risk thereof) due to the faulty assignment is present and must be sufficiently plead, briefed, and ultimately proven by the homeowners.

This appears to be the case in the recent ruling by the Nebraska Supreme Court referenced above.

Buried on the 16th page of the 18-page ruling, and on the basis of what it pointed out earlier in its ruling, the Nebraska high court made this observation:

• We need not decide in this case whether a borrower who is at risk of paying the same debt twice, or otherwise at risk of prejudice from an improper assignment, would have standing to challenge that assignment of its mortgage.
  
  Had the Marcuzzos established an injury that directly related back to the assignment of their mortgage, our holding may have been different.
  
  But no such injury caused by the assignment is alleged or found. Strictly applying Nebraska law, the Marcuzzos were not a party to the assignment. Nor was the assignment made for their benefit. Thus, the Marcuzzos cannot challenge the assignment contract's validity.

Clearly, the court here is telegraphing to anyone who's bothering to pay attention (ie. hopefully, homeowners in foreclosure, foreclosure defense attorneys, etc.) that challenging said assignment requires an allegation (which must be plead and proven) that the assignment is absolutely void (ie. void ab initio, invalid, ineffective, etc.) and not merely voidable, and an allegation that the homeowners face some harm or risk of harm due to the faulty assignment. In this case, the homeowner, according to the court, didn't bother to even allege a void assignment, harm, or risk of harm, much less prove it.

In laying its groundwork for this observation (which it acknowledges is an exception to the general rule that one cannot challenge the validity of a contract to which it is neither a party nor a third-party beneficiary), the court made reference to a recent federal appeals court case in which the homeowner succeeded in challenging a mortgage assignment to which it was not a party:

• Some courts while accepting this general rule have recognized an exception if the borrower can show actual prejudice by the improper assignment of the loan.[22]
  
  For example, if the borrower was at risk of paying the same debt twice, then the borrower could establish a concrete injury arising from the improper assignment of the mortgage.[23]
  
  If the borrower can show any injury that is directly traceable to the assignment of the mortgage, then, under this exception, the borrower would have standing to challenge that assignment.
  
  Only one circuit court has held that the borrower does not need to demonstrate injury in order to have standing to challenge the validity of an assignment that the borrower was not a party to.[24] But, the court strictly circumscribed the type of challenge for which a borrower may have standing.[25]
  
  In Culhane v. Aurora Loan Services of Nebraska,[26] the First Circuit Court of Appeals held that a borrower can have standing to challenge the assignment of his or her mortgage where the borrower is arguing the mortgage is invalid, ineffective, or void. Examples of void assignments include where the right attempted to be assigned is not assignable, or a prior revocation of the assignment.[27]
  
  However, the Culhane court held that a borrower does not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party, but otherwise effective to pass legal title.[28]
  
  The plaintiff in Culhane argued that the assignor of the mortgage never had valid title to the mortgage, and therefore never had the right to assign the mortgage.[29] If true, the mortgage assignment would be void ab initio.
  
  The First Circuit Court of Appeals found that the harm to the plaintiff in such circumstances would be the foreclosure, which could be traced directly to the creditor's "exercise of the authority purportedly delegated by the assignment."[30] The court also found two key facts in favor of standing in light of the allegations presented: (1) that, in Massachusetts, debtors have a statutory right under state law to ensure that any attempted foreclosure on his or her home is conducted lawfully and (2) that the mortgage contained a power of sale without prior judicial authorization.[31] The court was careful to caution that its holding was narrow, specific to Massachusetts law, and applied only when the borrower challenged the mortgage assignment as invalid, ineffective, or void.[32]
  
  We find Culhane to be distinguishable from the case at bar. The Marcuzzos did not allege a void assignment. They did not allege that MERS, or Bank of the West, had no legally cognizable right to assign under the mortgage documents.
  
  Instead, the Marcuzzos' argument is that the assignment paperwork between the assignor and Bank of the West did not follow the proper procedural framework. Even if this were true, the assignment would not be defective.[33]

----------------------------

Based on the forgoing, it appears clear that to have any chance at successfully challenging a faulty mortgage assignment, the homeowner must sufficiently plead, brief and prove that:

• the defective aspects of the assignment render it void ab initio (ie. ineffective, invalid, a nullity) and not merely voidable, and
• the homeowner faces some prejudice (ie. injury or risk of injury - risk of paying debt twice (ie. "double collection" on the part of note holder(s)), lack of assignor's right to assign, assignee's lack of title) which, as the court put it, "could be traced directly to the creditor's exercise of the authority purportedly delegated by the assignment."

For the Nebraska Supreme Court ruling, see Marcuzzo v. Bank of the West, 290 Neb. 809 (Neb. May 1, 2015).

-----------------------------------

(1) See Borrowers Cannot Challenge Mortgage Assignments, Says Nebraska Joining Other States.

(2) For earlier posts providing examples of homeowners who have successfully challenged mortgage assignments, despite the fact that they were not parties to the assignment, see:

• Homeowners Have Standing To Challenge Faulty Mortgage Assignments From One Bankster To Another, But Only Where Defects Render Conveyance Absolutely Void, Not Merely Voidable,
  .
  1st Circuit: Borrower Has Standing To Challenge Mortgage Assignments When Invalid, Ineffective, Or Void; Transfers That Are Merely Voidable Are Immune From Protest,
  .
  Michigan Trial Court OKs Homeowner Challenge To Validity Of Mortgage Assignment Where Assignee's Lack Of Title Is Raised As A Defense (reversed on other grounds, HSBC Bank USA, NA v. Young, No. 313212 (Mich. App. 2014) (unpublished) (appeal denied HSBC v. Young, 2015).

NJ Appeals Court OKs Forged Deed Used By Hubby To Swipe Estranged Wife's Interest In Marital Home Where Her Subsequent Conduct (Coupled With Title Transfer To Bona Fide Purchaser) Was Deemed To Constitute Ratification Of The 'Dirty Deed'

The following facts have been adapted from a 2013 ruling from a New Jersey appeals court:

1. On August 29, 2001, husband ("Randy") and wife ("Maria") (who had been married since 1991) acquired property together.
   .
2. In January 2003, Randy and Maria seperated, and she left the marital residence with their two children.
   .
3. On April 1, 2004, a deed (later alleged by Maria to be forged) reflecting that Maria granted Randy sole ownership of the property for $1.00 was executed.
   .
4. On April 14, 2004 (ten days later), Randy sold the home to an innocent purchaser, one Mangiliman. Mangiliman obtained mortgages to purchase the property for $429,000.
   .
5. In the summer of 2005, Maria discovered that, unbeknownst to her, Randy sold the home. At that time, she obtained copies of the April 1 and 14, 2004 deeds, and subsequently claimed that the signatures purporting to be hers on the April 1, 2004 deed and related paperwork were forged. She acknowledged at the time, however, that the mortgage on the marital residence may have been in default in March 2004.
   .
6. Upon learning about the deeds and the sale, plaintiff called Cantu. According to plaintiff, Cantu told her that he had done what he had to do and that if she did anything about it he would kill her.
   .
7. Plaintiff called her divorce lawyer, who told her that litigation to regain her interest would be costly. Because of the expense, she decided not to pursue the issue.
   .
8. For approximately the next three years, she continued to acquiesce.
   .
9. In August 2008, three years after learning about the deeds and sale of the marital residence and discussing the matter with her lawyer, plaintiff filed a complaint for divorce.
   .
10. In her divorce complaint, she states that their items of real and personal property acquired by the parties during the marriage have been distributed to each party's satisfaction.
    .
11. On February 2, 2009, a judgment of divorce was entered. It incorporates a property settlement agreement (PSA) bearing signatures of Maria and Randy that were notarized three days earlier. Among other things, and just as Maria's divorce complaint had, the PSA represented that the parties "have heretofore divided all marital assets to their satisfaction."
    .
12. In September, 2010 (over five years after discovering that Randy ripped off her one-half interest in the marital home, and then sold the home to an unwitting buyer), Maria filed a complaint to quiet title to the former marital residence against her now-ex husband, Randy, and the innocent purchaser, Mangiliman.
    .
13. During her deposition in this action, Maria gave several reasons for signing the PSA despite her awareness of the forged deed and the fact that the PSA did not provide her with any proceeds from the sale of the marital residence. She testified, "My understanding in the property settlement agreement was this was something I was signing in order to finalize my divorce." And she further explained that she did not seek a share of the proceeds because of the litigation expense. When asked why she commenced this action after the long delay, plaintiff's only response was, "I think it's fair."

----------------------------------

In assuming that the April 1, 2004 deed from Maria to Randy was forged (there was never an actual finding of forgery - the lower court disposed of the matter on summary judgment), both the lower court and the New Jersey appeals court validated the forged deed under the specific facts of this case. The relevant portion of the appeals court's ruling in reaching this determination follows (wife Maria is the plaintiff; husband Randy is referred to by his last name, Cantu; "PSA" refers to the property settlement agreement in their divorce proceeding):

• Generally, a deed that is forged is deemed void and a nullity. Sonderman v. Remington Const. Co., 127 N.J. 96, 115 (1992) (Stein, J., dissenting) (noting that a recorded deed that is a "`forgery'" or "`procured by fraud in the execution'" is void and "`the fact that it is recorded in no sense enhances its validity'" (quoting Roger A. Cunningham et al., The Law of Property § 11.9 at 782 (1984))).
  .
  Despite the general rule, a person such as plaintiff wronged by a forgery may engage in a course of conduct that bars her from obtaining redress.
  .
  One who knows a deed transferring his or her ownership in property has been transferred and does nothing to repudiate it may be deemed to have ratified the forged deed and lose the right to challenge the forgery later, when an anticipated benefit does not materialize. See Thermo Contracting Corp. v. Bank of N.J., 69 N.J. 352, 363-64 (1976) (approving and relying upon Rakestraw v. Rodrigues, 500 P.2d 1401 (Cal. 1972) (a case involving a husband's forgery of a deed to property owned by his wife, who acquiesced in and did not object to the forgery until her marriage deteriorated)); Todd v. Mutual Aid Sav. & Loan Ass'n, 19 N.J. Super. 532, 537 (Law Div. 1952) (finding ratification by successors to an incompetent who knew about and would have been prejudiced by the loss).
  .
  "Ratification requires intent to ratify plus full knowledge of all the material facts." Thermo Contracting Corp., supra, 69 N.J. at 361. While equities asserted by an innocent purchaser are irrelevant when a deed is a nullity, our cases suggest that such equities are relevant when a fraudulent deed has been ratified. See Knopf v. Alma Park, Inc., 105 N.J. Eq. 299, 301 (Ch. 1929), aff'd, 107 N.J. Eq. 140 (E. & A. 1930).
  .
  Here, plaintiff engaged in conduct amounting to a ratification. By Summer 2005, plaintiff was not only aware of the forged deed and resulting sale of her marital residence, but also had copies of the deeds, which she discussed with her attorney. Nevertheless, she did not repudiate the forged deed or act to invalidate the sale of the marital residence — a sale that relieved her of obligations under a mortgage that was in default. Her intent to ratify the deed she knew had been forged is demonstrated by her decision to forego litigation and her representation in the divorce action that she and her husband had divided all marital property to their mutual satisfaction.
  .
  We recognize that there is evidence that plaintiff's husband threatened to take her life if she took action to void the transaction. Giving plaintiff the benefit of an inference that she refrained from challenging the deed out of fear of her former husband does not change our view of her intent. In her deposition, plaintiff explained that she decided against litigation because of the expense. She is the person who filed the divorce complaint and opted to affirmatively assert her satisfaction with the division of marital property in that proceeding and urge the court to incorporate a PSA confirming her satisfaction in the judgment of divorce. That conduct compels a finding of intent to ratify the forgery and does not give rise to an inference of action taken under duress.
  .
  Respecting the balance of equities relevant to ratification, the evidence establishes, as the judge found, that Mangiliman had no way of knowing that the deed in her chain of title was forged, had been paying the mortgages and the property taxes for years and that, even though it may have declined in value, the property was Mangiliman's home. The judge determined, and we agree, that the equities favored Mangiliman, not plaintiff who had asserted in her divorce action that all marital property had been divided to her satisfaction.[3]
  .
  For the foregoing reasons, we conclude that plaintiff, acting with knowledge of the material facts — that her ownership interest in the marital residence had been obliterated with the issuance of a forged deed — and the intent to forego its repudiation, ratified the deed and is, thereby, barred from seeking redress against an innocent purchaser for value.

-----------------------------------------

After reaching this conclusion, the appeals court added a second, independent basis to support its decision not to invalidate the deed: the application of the doctrine of judicial estoppel.

• There is an additional reason for barring plaintiff's attempt to seek redress for her husband's forgery of the April 1 deed from Mangiliman. Our courts "protect the integrity of the judicial process by not permitting a litigant" to take conflicting positions or make conflicting representations in the same or related judicial proceedings. McCurrie ex rel. Town of Kearny v. Town of Kearny, 174 N.J. 523, 534 (2002); accord State v. Galicia, 210 N.J. 364, 398 (2012); see Newell v. Hudson, 376 N.J. Super. 29, 30, 38 (App. Div. 2005) (noting that judicial estoppel applies to related litigation and applying the doctrine to bar a malpractice action arising from a settled divorce case).
  .
  Although protecting judicial integrity is the purpose of this form of estoppel, courts invoke it only "when a party's inconsistent behavior will otherwise result in a miscarriage of justice." Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 365 (3d Cir. 1996); accord State v. Jenkins, 178 N.J. 347, 359 (2004) (quoting Kimball Int'l, Inc. v. Northfield Metal Prods., 334 N.J. Super. 596, 608 (App. Div. 2000), certif. denied, 167 N.J. 88 (2001)).
  .
  Plaintiff's conduct in the divorce warrants application of judicial estoppel. In that action, she attested to the truth of the allegation in her complaint, one of which was that to her knowledge all marital property had been divided to her and her husband's satisfaction. In addition, plaintiff urged the judge to incorporate the parties' PSA in the final judgment. That PSA not only memorialized her agreement that marital property had been divided to her satisfaction but also agreements favorable to her, such as the award of primary residential custody of the children and $800 monthly child support.
  .
  Plaintiff's presentation of the parties' agreement facilitated her goals — on this evidence, her goals were more likely than not foregoing a challenge to equitable distribution to obtain some terms favorable to her and finalizing her divorce. With the PSA, plaintiff was able to obtain a judgment of divorce expeditiously and without the need to demonstrate "extraordinary circumstances" and "good cause" that would have been required to obtain a judgment of divorce before equitable distribution of marital property, custody and child support had been resolved. R. 5:7-8.
  .
  To the extent that application of judicial estoppel depends upon a court's acceptance of the inconsistent position in a prior proceeding, Kimball, supra, 334 N.J. Super. at 607-08, that element is satisfied in this case. In the divorce action, the judge accepted and incorporated the PSA in its judgment.
  .
  Neither the fact that plaintiff and her former husband settled questions of custody, child support and equitable distribution nor the fact that Mangiliman was not a party to that action precludes judicial estoppel. This court and others have applied the doctrine to bar a legal malpractice action against a third party that arose from a property settlement agreement in a divorce action. See Newell, supra, 376 N.J. Super. at 30, 38-40 (applying judicial estoppel in that circumstance and discussing cases involving grants of summary judgment "in legal malpractice actions based on the doctrine of judicial estoppel where a litigant repudiates a prior, sworn inconsistent statement made in order to secure an advantage in or judicial approval of the underlying settlement"). Given that precedent, there is no principled basis for concluding that the doctrine cannot be applied here.
  .
  It is also evident that application of judicial estoppel is necessary to avoid a miscarriage of justice in this case.[4] If we were to hold otherwise, Mangiliman, the innocent purchaser of the marital residence, would be left, as the trial judge found, without a home, with the debt secured by her mortgage, and without realistic means of recovering her loss from the apparent wrongdoer, Cantu, who has at this point apparently disappeared. Noting that plaintiff knowingly misrepresented her satisfaction with the division of property, the judge found that equity could not abide upsetting title that had passed effectively to Mangiliman. We could not agree more.
  .
  The judgment declaring Mangiliman to have good and valid title, free and clear of any title, interest, right, agreement, encumbrance or lien of plaintiff, is affirmed.

For the ruling, see Estevez v. Mangiliman, No. A-2097-11T3 (App. Div. 2013) (unpublished).

See Voidable Or Void Ab Initio (Or "Void Unless & Until Later Ratified")? on a Mississippi case discussing the issue of subsequent ratification when a court decides whether or not to invalidate a forged deed.

Another Tax Deed Declared Void; County's Failure To Take Further Action When Mailed Notice Of Tax Sale To Homeowner Is Returned Unclaimed Fatal To Sale Process; Oklahoma Supremes: Gov't Can't Simply Shrug Shoulders & Say 'We Tried'

From a Justia US Law Opinion Summary:

• The question presented on appeal to the Oklahoma Supreme Court in this case was whether an owner of real property received constitutionally sufficient notice of the sale of his property for delinquent taxes when notice was provided only by publication and certified mail that was returned undelivered.
  
  Appellant-landowner neglected to pay taxes on certain real property in McIntosh County. The property was sold at a tax sale and a tax deed was issued to the buyer. The landowner filed suit seeking to invalidate the tax deed and quiet title in himself, asserting that the sale and resultant deed were void because he was not given constitutionally sufficient notice of the sale and was denied his right to redeem the property. Both the landowner and the county defendants moved for summary judgment.
  
  The trial court granted the county defendants' motion and denied the landowners. The landowner appealed, and the Court of Civil Appeals affirmed.
  
  After review, the Supreme Court held: (1) that the landowner did not receive constitutionally sufficient notice; and (2) the sale and resultant tax deed were therefore void.(1)

Source: Opinion Summary - Crownover v. Keel.

For the court ruling, see Crownover v. Keel, 2015 OK 35 (Okla. May 26, 2015) (Editor's Note: At this time, this opinion has not yet been released for publication. Until released, it is subject to revision or withdrawl).

---------------------------------------

(1) Some of the Oklahoma Supreme Court's reasoning backing its conclusion follows:

• ¶ 1 The question presented on appeal is whether an owner of real property received constitutionally sufficient notice of the sale of his property for delinquent taxes when notice was provided only by publication and certified mail that was returned undelivered. We hold that he did not.
  
  
  ***
  
  ¶ 19 The notice requirement of due process is not satisfied where, as here, notice sent via certified mail is returned undelivered and no further action is taken. The decision of the United States Supreme Court in Jones v. Flowers, 547 U.S. 220, 126 S.Ct. 1708, 164 L.Ed.2d 415 (2006), is directly on point concerning notice required to satisfy the requirements of due process prior to sale of real property for delinquent taxation.
  
  In Jones, under similar facts to this cause, the Supreme Court of the United States determined that "when mailed notice of a tax sale is returned unclaimed, the State must take additional reasonable steps to attempt to provide notice to the property owner before selling his property, if it is practicable to do so." Jones, 547 U.S. at 225. The tax sale in Jones occurred after the State published notice in a newspaper and attempted to notify the property owner—who no longer lived on the property—by certified mail twice, with the notice returned unclaimed both times. Jones, 547 U.S. at 223-224.
  
  ¶ 20 The Jones Court reaffirmed that the due process clause of the United States Constitution does not require that a property owner receive actual notice before the government may take his property. 547 U.S. at 226; Dusenberry v. United States, 534 U.S. 161, 170, 122 S.Ct. 694, 151 L.Ed.2d 597 (2002). However, the Court also noted that:
  
  .... due process requires the government to provide "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."
  
  
  . . . .
  
  .... In Mullane we stated that "when notice is a person's due ... [t]he means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it" . . .
  
  Jones, 547 U.S. at 226, 229 (quoting Mullane v. Central Bank & Trust Co., 339 U.S. 306, 314-315, 70 S.Ct. 652, 94 L.Ed. 865 (1950)).
  
  In Jones, much as in this cause, the State argued that it satisfied the notice requirement of due process through the act of sending notice via certified mail. The Court disagreed, holding:
  
  .... We do not think that a person who actually desired to inform a real property owner of an impending tax sale of a house he owns would do nothing when a certified letter sent to the owner is returned unclaimed.
  
  .... If the Commissioner prepared a stack of letters to mail to delinquent taxpayers, handed them to the postman, and then watched as the departing postman accidentally dropped the letters down a storm drain, one would certainly expect the Commissioner's office to prepare a new stack of letters and send them again. No one "desirous of actually informing" the owners would simply shrug his shoulders as the letters disappeared and say "I tried." Failure to follow up would be unreasonable, despite the fact that the letters were reasonably calculated to reach their intended recipients when delivered to the postman.
  
  Jones, 547 U.S. at 229 (emphasis added).
  
  The Jones court also stated succinctly that the property owner's failure to keep his address updated, which was required by statute, did not result in the owner somehow forfeiting his right to constitutionally sufficient notice.
  
  547 U.S. at 229. Further, "the common knowledge that property may become subject to government taking when taxes are not paid does not excuse the government from complying with its constitutional obligation of notice before taking private property." 547 U.S. at 232.
  
  ¶ 21 While the Jones Court determined that the State should have taken other reasonable measures to reach the property owner, it stopped short of requiring the state to search elsewhere for an address for the property owner, noting that an open-ended search for a new address would unduly burden the State.
  
  547 U.S. at 236. Rather, the Court suggested reasonable measures such as posting notice on the property door, or even sending notice by regular mail, which could at least have resulted in its delivery and presence on the property. Jones, 547 U.S. at 235. The Court noted that it was not its responsibility to redraft the State's notice statute, but it was sufficient that the Court was confident additional reasonable steps were available for Arkansas to employ before taking the property. Jones, 547 U.S. at 238. The Court concluded:
  
  .... There is no reason to suppose that the State will ever be less than fully zealous in its efforts to secure the tax revenue it needs. The same cannot be said for the State's efforts to ensure that its citizens receive proper notice before the State takes action against them. In this case, the State is exerting extraordinary power against a property owner-taking and selling a house he owns. It is not too much to insist that the State do a bit more to attempt to let him know about it when the notice letter addressed to him is returned unclaimed.
  
  Jones, 547 U.S. at 239.

Florida Appeals Court To Cash-Snatching Judgment Creditor: Hands Off Debtor's $458K In Home Sale Proceeds! State Exemption Against Certain Collection Activity Protects 'Homeless' Homeowner In Between Abodes

The following facts have been adapted from a recent ruling from a Florida appeals court:

1. In 2010, a judgment creditor obtained its judgment for over $740,000 against homeowner.
   .
2. Under Florida law (Florida Constitution, Article X, Section 4), the homeowner's home (with certain limitations not relevant here) is generally exempt from collection actions from creditors holding non-consensual liens (ie. non-mortgage judgment creditors). Consequently, the creditor's judgment did not create a lien on the home.
   .
3. On October 28, 2013, in connection with a divorce from his co-owner/wife, the marital home was sold. Until he could buy himself a new home, the 'now-homeless' homeowner took his $458,000+ share of the sale proceeds and dumped it into an account with a financial institution (ie. Wells Fargo), which he entitled "FL Homestead Account" and was split into three sub-accounts.
   .
4. As of February 28, 2014, a cash sub-account held $139,000+, and two securities/brokerage sub-accounts containing mutual funds and unit investment trusts held a total of $322,000+. Apparently, the value held in these accounts (now totaling $461,000+) had appreciated by a couple of thousand dollars.
   .
5. Early in 2014, the judgment creditor (obviously in the mood to get paid, now that the homeowner sold his home and his share of the now-liquidated home equity therein is being held in the form of cash and marketable securities with Wells Fargo) makes a grab for the loot sitting in the brokerage accounts by serving garnishment writs on Wells Fargo directed at those accounts (it left the $139,000+ in the cash account alone).
   .
6. The judgment creditor claimed that, because this "now-homeless" homeowner used a portion of his home sale proceeds to buy securities instead of reinvesting it in a new homestead, that portion of the money forfeited its homestead protection and should be made available to satisfy the $740,000+ money judgment.

Under Florida case law, a homeowner has a "reasonable period of time"(1) (although no court has specifically defined exactly how much time is reasonable) to reinvest the proceeds of a home sale into a new homestead without subjecting the money to creditor claims. In this case, the courts decided that taking some of the sale proceeds and temporarily investing it in mutual funds and unit investment trusts until a new home could be purchased was not inconsistent with the purposes of homestead and. accordingly, held that the funds did not lose their protected status(2) (although in its ruling, the appeals court did say that the exemption should not be applied in a way that encourages excessive speculation with the proceeds of a sale. Here, the court pointed out that there was no evidence that the securities in the brokerage account were particularly risky and the funds were kept "separate and apart" from the homeowner's other funds(3)).

Consequently, the trial court dissolved the garnishment writs, and told the judgment creditor to come back in over a month to check on the status of the money held in the accounts and that it could feel free to reassert its claim on the money at that time or thereafter.

The Florida appeals court affirmed the lower court ruling (although it did specifically point out that it was not necessarily ruling that the appreciation in value of the securities held in the accounts was also protected, since that point was not argued by the parties; maybe this was the appeals court's way of telegraphing an invitation to the judgment creditor to argue in the future that, even if the sale proceeds maintain their protected status, the accrued appreciation on those funds does not).(4)

For the appeals court ruling, see JBK Associates, Inc. v. Sill Bros., Inc., No. 4D14-3049 (Fla. App. 4th DCA, March 11, 2015).

See also:

• Garnishing Non-Cash Proceeds from Sale of a Homestead,
• Homestead Proceeds Invested In Marketable Securities May Be An Exempt “Homestead Account."

------------------------------

(1) The appeals court recited the case law applying the Florida homestead exemption protection from certain creditors' claims to the proceeds of a voluntary sale of the homestead:

• Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201 (Fla. 1962), is the seminal case on the application of the homestead exemption to the proceeds of the voluntary sale of a homestead. The Supreme Court held that
  
  the proceeds of a voluntary sale of a homestead [are] exempt from the claims of creditors just as the homestead itself is exempt if, and only if, the vendor shows, by a preponderance of the evidence an abiding good faith intention prior to and at the time of the sale of the homestead to reinvest the proceeds thereof in another homestead within a reasonable time. Moreover, only so much of the proceeds of the sale as are intended to be reinvested in another homestead may be exempt under this holding. Any surplus over and above that amount should be treated as general assets of the debtor. We further hold that in order to satisfy the requirements of the exemption the funds must not be commingled with other monies of the vendor but must be kept separate and apart and held for the sole purpose of acquiring another home. The proceeds of the sale are not exempt if they are not reinvested in another homestead in a reasonable time or if they are held for the general purposes of the vendor.

(2) The appeals court describes how Florida case law has dealt with non-cash proceeds from a homestead sale, and sale proceeds that may ultimately go uninvested:

• Non-cash proceeds of a sale of a homestead "can be eligible for exemption, so long as they serve the same function that cash proceeds do, i.e., a temporary form of the homestead, to be reinvested, to be converted back into real-property homestead within the Orange Brevard reasonable time period." Sun First Nat'l Bank of Orlando v. Gieger, 402 So. 2d 428, 432 (Fla. 5th DCA 1981) (involving a note and mortgage received as part of the sale price of a homestead). Proceeds of a sale not invested in a new homestead are not entitled to homestead protection. See Shawzin v. Donald J. Sasser, P.A., 658 So. 2d 1148, 1151 (Fla. 4th DCA 1995); Rossano v. Britesmile, Inc., 919 So. 2d 551, 552 (Fla. 3d DCA 2005).

(3) In an ostensible attempt to discourage the use of homestead funds for speculative investment activities when a homeowner is in between abodes, the appeals court observed:

• This case does not involve the speculative put and call option trading of up to 302 transactions per month that led a bankruptcy panel to conclude that such use of the proceeds was inconsistent with the purposes of Arizona's homestead exemption. In re White, 389 B.R. 693, 697, 704 (B.A.P. 9th Cir 2008).

(4) The court stated:

• Because it was not argued, we do not reach the issue of whether any profits realized from the securities, over and above the proceeds from the sale, are "held for the general purposes" of the debtor so that they are "general assets" not entitled to homestead protection. Orange Brevard, 137 So. 2d at 206.

R.I.P. - Bankruptcy Strip Offs Of Underwater 2nd Mortgages In Chapter 7 Proceedings; Supremes Sound Death Knell For Slick, But Short-Lived Way To Wipe Out Subordinate Home Loans By Some Financially Distressed Homeowners Seeking Fresh Start; 'Green Light' Remains Steady For Similar Lien Stripping In Chapter 13, "Chapter 20" Reorgs

In Washington, D.C., Forbes reports:

• The U.S. Supreme Court reversed a lower-court decision allowing debtors to “strip off” underwater second liens in Chapter 7 bankruptcy, saying precedent required it to keep such mortgage claims intact.
  
  Justice Clarence Thomas, caught between his usual adherence to the strict wording of statutes and the competing doctrine of stare decisis, ruled that a prior decision carved out an exception from bankruptcy law for mortgage liens.
  
  The unanimous decision in Bank of America v. Caulkett is a victory for lenders who said it would be unfair to require them to give up potentially valuable claims simply because a home’s current value is depressed. It’s a defeat for consumer advocates who favor using bankruptcy to reduce the amount borrowers owe against their houses, although borrowers can still strip underwater second liens through the more costly and time-consuming process of Chapter 13 bankruptcy.(1)
  
  
  ***
  
  The Supreme Court already has ruled that in Chapter 13 reorganizations, where debtors with reliable income set up a plan to repay creditors over time, second mortgages with no collateral value to back them up can be stripped.(2)

For more, see Debtors Can't Void Underwater Mortgages In Bankruptcy, Supreme Court Rules.

--------------------------------

(1) See Why the Supreme Court Might Actually Rule Against the Corporate Interest:

• The reason it matters that you can strip off a second loan in Chapter 13 bankruptcy but not Chapter 7 is that Chapter 7 is a much more affordable part of the bankruptcy code.
  
  “Chapter 13 has a payment plan, you only get the strip-off if you complete the plan,” said bankruptcy expert Bob Lawless. Only about 40 percent of Chapter 13 cases complete the payment plan, which is three times as expensive as in Chapter 7.

Editor's Note: Strip-offs in so-called "Chapter 20" bankruptcies (the colloquialism for a debtor who first files Chapter 7 bankruptcy to get a discharge of his/her debts, then files Chapter 13 bankruptcy to obtain the lien strip off) also appear to remain unaffected by this Supreme Court ruling.

It notes reminding that, in the "Chapter 20 bankruptcy" context, while the law precludes a debtor from receiving a new discharge of his/her debts in a Chapter 13 bankruptcy within four years of a Chapter 7 petition that ultimately resulted in a discharge, a debtor can still file the Chapter 13 petition without seeking discharge, but to gain the other benefits that Chapter 13 offers - automatic stay, ability to cure arrearages, the ability to adjust interest rates under plan payments, ability to strip off liens that are completely underwater, among other benefits. See generally:

• Todd, Timothy M., To Lien Strip or Not to Lien Strip: Fourth Circuit Blesses Controversial 'Chapter 20' Valueless Lien Stripping in In re Davis (July 24, 2014). South Carolina Law Review, Vol. 65, Issue 4, p. 963 (2014). Available at SSRN: http://ssrn.com/abstract=2471249
  .
• Spector, Arthur J; Homer, Ilyse M; Avron, Paul A. Eleventh Circuit: "Chapter 20" Debtors Can Strip Off Liens. American Bankruptcy Institute Journal33.8 (Aug 2014): 54-55.
  .
• National Consumer Bankruptcy Rights Center: Debtors Enjoying Growing Consensus on Chapter 20 Lien Strip Cases.

(2) Ibid.

Who's On First? Creditor's 'Anticipated' Judgment In Fraudulent Conveyance Suit Trumps Earlier-Recorded Lien Where Former Relates Back To Recording Of Lis Pendens; Debtor Used New Wife, Multiple Quit-Claims Of $10M Pacific Palisades Home In Failed Effort At Playing High Stakes Game Of "Keep Away" From Ex-Wife, Lender

In Los Angeles, California, The Recorder reports:

• [M]use Family Enterprises, Ltd. (Muse parties) made loans to BTM Funding, Inc., a company wholly owned by David T. Smith. In 2008, Smith used BTM to buy an expensive home [Editor's Note: $10 million, according to the court ruling; and formerly owned by NBA star Kobe Bryant, according to attorneys for the Muse parties]. David had BTM take title to hide the Property from his former wife during divorce proceedings.
  
  David later had the home deeded to himself by quitclaim deed from BTM. On the same day, he quitclaimed the property to his then-new wife. She later quitclaimed it to her revocable living trust. The quitclaim deeds were not recorded until 2009.
  
  David and his former wife settled their claims by having Mira Overseas Consulting Ltd., owned by David, transferred to her.
  
  In September 2010, the Muse parties filed suit against BTM and others in Los Angeles for breach of contract and fraud, and to set aside the quitclaim deeds as fraudulent transfers. The Muse parties recorded a lis pendens regarding their action and the property. A stipulated judgment on breach of contract was entered in October 2012. Upon trial of the fraudulent transfer claims, a jury found in favor of the Muse parties. An amended judgment was entered in January 2013 awarding damages and nullifying the quitclaim deeds as fraudulent transfers. The amended judgment was recorded in February 2013.
  
  In the meantime, about six months after the Los Angeles action began, Mira sued BTM and related parties in Santa Monica. The action resulted in entry of a stipulated judgment in June 2011. The Muse parties first learned of the Los Angeles action in August 2011.
  
  Mira sued the Muse parties, BTM, and others in early 2012, seeking a declaration that its judgment lien was superior to any lien that might be obtained by the Muse parties.
  
  The Muse parties cross-complained, contending that their anticipated judgment lien related back to the recording of their lis pendens. The trial court found that the Muse parties’ judgment did not relate back to the lis pendens. The Muse parties appealed.
  
  The court of appeal reversed, holding that the trial court erred in concluding the judgment did not relate back to the lis pendens.
  
  Code of Civil Procedure §405.24, relating to lis pendens, provides that the “rights and interest of the claimant in the property, as ultimately determined in the pending noticed action, shall relate back to the date of the recording of the notice.”
  
  In Kirkeby v. Superior Court (2004) 33 Cal.4th 642, the California Supreme Court that a fraudulent conveyance claim affects title to or the right to possess real property, thereby supporting the recording of a lis pendens. |
  
  Here, the action below involved the same type of property claim as that in Kirkeby. The plaintiff in Kirkeby filed a fraudulent transfer claim to void property transfers to the extent necessary to satisfy the claims set out in the plaintiff’s complaint. The court in Kirkeby reasoned that because the Uniform Fraudulent Transfer Act allows the remedy of avoidance of the transfer to the extent necessary to satisfy a creditor’s claim, a fraudulent conveyance claim seeking avoidance of transfer qualifies as a real property claim for purposes of the lis pendens statutes. The court here reasoned that a necessary corollary was that a successful claimant’s rights and interests in the property relate back to the recording of the claimant’s lis pendens.
  
  The Muse parties indisputably had the right to record a lis pendens with respect to their fraudulent transfer claim. Accordingly, their rights and interest in the property, namely, the avoidance of transfers of the property to satisfy their claims, related back to the date they recorded their lis pendens. This date was earlier than the date Mira recorded its abstract of judgment. Thus, the Muse parties’ judgment lien had priority.

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For the ruling, see Mira Overseas Consulting Ltd. v. Muse Family Enterprises, Ltd., B254298 (Cal. App. Dist. 2, Div. 2, June 2, 2015) (certified for publication).

Montana Supremes Say 'No Way' To Tax Lien Investor Who Ostensibly Attempted To Screw Property Interest Owners Out Of Their Redemption Rights By Taking Title To Tax-Delinquent Premises Without First Obtaining Mandatory Property Title Guarantee & Providing Them w/ Proper Notice

From an Opinion Summary from Justia US Law:

• Catherine E.W. Hansen Trust (Hansen Trust), which was issued a tax lien and a tax deed on certain property, filed a complaint to quiet title to the tax deed.
  
  The district court granted summary judgment for [the current property owner and the former owner, who holds a purchase money deed of trust] and declared the tax deed void as a matter of law, finding that Hansen Trust had not obtained the required property title guarantee and had not provided notice to parties listed in the title guarantee.
  
  The court subsequently directed payment of the tax lien and entered final judgment. The district court denied Hansen Trust’s post-judgment motions.
  
  The Supreme Court affirmed, holding that the district court (1) correctly granted summary judgment and declared the tax deed void after determining that Hansen Trust failed to provide adequate notice or obtain a property title guarantee; (2) did not err when it directed payment of Hansen Trust’s tax lien; and (3) did not err when it denied Hansen Trust’s post-judgment motions.(1)

Go here for the Justia Opinion Summary.

For the court ruling, see Catherine E.W. Hansen Trust v. Ward, 2015 MT 131 (May 19, 2015).

(1) With regard to the voiding of the tax deed, the Montana Supreme Court stated:

• ¶30 Under the plain language of the statute, the purchaser must notify all parties listed on the property title guarantee, excluding utilities, of the possibility that a tax deed will be issued unless the tax lien is redeemed. Section 15-18-212(1)(b), 4(a), MCA. Although "property title guarantee" is not defined, the notice requirement is mandatory. Section 15-18-212(1)(b), MCA.
  
  Moreover, the statute clearly dictates the manner in which the notice must be made (certified mail), as well as the method for determining the parties who are due notice (a property title guarantee). Section 15-18-212(4)(a), MCA; Certain, ¶ 17. Notice is a necessary aspect of due process, essential to the redemption rights of the interested parties.
  
  The plain language of the statute does not make the title guarantee optional, rather it mandates that the notice must be made to "each party . . . listed on a property title guarantee."
  
  ¶31 The District Court correctly granted summary judgment after determining that Hansen Trust failed to provide adequate notice or obtain a property title guarantee. It is undisputed that Hansen Trust did not obtain the mandatory property title guarantee. Failure to comply with this mandatory obligation renders the tax deed void.