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Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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September 2011

CURRENT LOAN SERVICER, WITH NO KNOWLEDGE OF PRIOR SERVICER’S RECORD CREATION AND MAINTENANCE POLICY, CANNOT COMPETENTLY TESTIFY TO THE AMOUNT IN DEFAULT WHERE THE AMOUNT IS DERIVED IN PART FROM THE PRIOR SERVICER’S RECORDS

The borrowers in Glarum v. LaSalle Bank Nat. Ass’n, 4D10-1372 (Fla. Dist. Ct. App. Sept. 7, 2011) admitted in their answer to a foreclosure action that they had not made payments according to the terms of the note. However, they denied the mortgagee’s allegations regarding the amount of the default. To prove the amount of the indebtedness for summary judgment, the mortgagee filed an affidavit of a loan “specialist” employed by the mortgagee’s loan servicer. The affiant averred that the borrowers were in default of their payment obligations and owed in excess of $340,000 on the note. In opposition, the borrowers filed the affiant’s deposition, wherein he explained that he derived the $340,000 figure from his company’s computer system. However, he did not know who entered the data into the computer, and he could not verify that the entries were correct at the time they were made. To calculate appellants’ payment history, the affiant also relied in part on data retrieved from a prior servicer of the loan. The appellant court reversed the entry of summary judgment finding that the affidavit constituted inadmissible hearsay. The testimony was not admissible under the business records exception because the affiant did not know who, how, or when the data entries were made into the prior servicer’s computer system. He could not state if the records were made in the regular course of business. He also had no knowledge of the prior servicer’s procedures and could only state that the data in the affidavit was accurate insofar as it replicated the numbers derived from the company’s computer system. Despite his intimate knowledge of how his company’s computer system worked, he had no knowledge of how the prior servicer’s data was produced, and he was not competent to authenticate that data. Because the mortgagee presented no competent evidence to show damages, the case was remanded where, presumably, the mortgagee will have to obtain evidence from the prior servicer to prove the amount of the judgment.

REFINANCED MORTGAGE DOES NOT QUALIFY FOR EQUITABLE SUBROGATION; REMEDY WOULD NOT BE AVAILABLE ANYWAY BECAUSE LENDER USED A NON-ATTORNEY TO PREPARE LOAN DOCUMENTS AND CLOSE THE LOAN WHICH CONSTITUTES THE UNAUTHORIZED PRACTICE OF LAW IN SOUTH CAROLINA

In 1998, the Appellant in Matrix Fin. Services Corp. v. Frazer, Opinion No. 26859, 2011 WL 3452078 (S.C. Aug. 8, 2011) defaulted the mortgagors in a lawsuit filed in California where they lived at the time. The mortgagors then purchased a home in South Carolina in January 2001 financed by a loan that was later assigned to the Plaintiff-Mortgagee. About a year later the mortgagors and the Mortgagee refinanced the loan but the new mortgage was not recorded until five months after the closing. Meanwhile, the Appellant obtained a default judgment against the mortgagors in California, and properly enrolled that judgment on October 31, 2001, before the refinanced loan with the Mortgagee had closed. The Mortgagee then foreclosed the refinanced November 2001 mortgage and the Appellant counterclaimed alleging priority because his lien was recorded first. The Mortgagee invoked the principle of equitable subrogation to gain the primary priority position which the trial court accepted in granting judgment to the Mortgagee. The court of appeals reversed. It found, first, that the Mortgagee did not meet the requirements to qualify for equitable subrogation. The court was bound by prior case law in holding that a bank could not be subrogated to the rights of its own prior mortgage. The court noted that the Mortgagee could possibly attain priority under a theory of replacement or modification but did not decide that question because the Mortgagee did not advance those theories. The court also found that even if the Mortgagee met the requirements for equitable subrogation, relief would be unavailable because of its unauthorized practice of law. The Mortgagee hired a non-attorney, Land America, to perform the title search, prepare the documents, and close the refinance loan, all admittedly without the supervision of a licensed attorney and all constituting the unauthorized practice of law. By closing the re-financed loan the Mortgagee committed the unauthorized practice of law and therefore is barred from seeking equitable relief. The court used this case “to definitively state that a lender may not enjoy the benefit of equitable remedies when that lender failed to have attorney supervision during the loan process as required by our law. We apply this ruling to all filing dates after the issuance of this opinion”.

TILA, FRAUD, AND TORT CLAIMS RAISED IN DEFENSE TO A FORECLOSURE DO NOT ENTITLE THE BORROWER TO A JURY TRIAL IN INDIANA

The mortgagee in Lucas v. U.S. Bank, N.A., 28S01-1102-CV-78, (Ind. Sept. 15, 2011) brought an action to foreclose a mortgage to which the borrower responded by filing affirmative defenses and counterclaims for fraud, breach of fiduciary duty and violations of the Truth in Lending Act. He requested jury trial on those claims and defenses. The mortgagee moved to strike the jury request and the trial court agreed reasoning that the foreclosure was essentially an equitable cause of action which meant that under Indiana law the borrower’s were not entitled to a trial by jury on any of the claims and defenses. On discretionary interlocutory appeal, the Court of Appeals reversed the trial court’s order with instructions to grant the mortgagor’s request for a jury trial on their legal claims. The supreme court reversed. In doing so it clarified Indiana law that, although the Indiana constitution entitles a party to a trial by jury on legal claims, that there is no right to a jury trial if the lawsuit as a whole is equitable and the legal causes of action are not “distinct or severable”. To make this determination a trial court must engage in a multi-pronged inquiry to assess whether a suit is essentially equitable. It must look at the suit’s substance and character, the rights and interests involved, and the relief requested. After that examination, the trial court must decide whether core questions presented in any of the joined legal claims significantly overlap with the subject matter that invokes the equitable jurisdiction of the court. If so, equity subsumes those particular legal claims to obtain more final and effectual relief for the parties despite the presence of peripheral questions of a legal nature. With regards to a mortgage foreclosure proceeding, despite the inclusion of some legal claims and requests for legal remedies, the core legal issues overlap with the foreclosure issues to a significant degree.

A TAX DEED PETITIONER IN ILLINOIS MUST PROVIDE NOTICE TO THE SERVICER AND THE ASSIGNEE WHERE MERS IS THE MORTGAGEE EVEN WHERE THEIR INTERESTS ARE NOT OF RECORD

A recent opinion by an Illinois Appellate court removes a major defense to a mortgagee or servicer’s attempt to upset a tax sale when they did not receive notice. In Re Application of the County Treasurer, No. 1–10–1966. (Ill. App. Ct. Aug. 25, 2011) largely undermines a tax deed purchaser’s argument that if a mortgagee’s interest is not recorded it is not entitled to notice. The case goes so far to say that if in the course of its due diligence the tax deed petitioner discovers the name of the servicer it must provide notice to it as well. In this case, the tax certificate holder failed to act with diligence to serve the notice of tax sale and the expiration date for redemption on the current holder of the note, which was the assignee of the lender named in recorded mortgage, and on the non-record mortgage servicer. The court found that the mortgage documents identifying the lender stated that MERS, as mortgagee, was acting as nominee not only for the lender but also for lender’s successors and assigns. Despite this the petitioner did not use the telephone number or address listed for MERS to attempt to discover the names of entities holding interests in the real property, including the current holder of the note and the mortgage servicer. The court also found that where the servicer’s identity has been discovered by the tax sale purchaser when making its diligent inquiry to determine the individuals holding an interest in the real property, the servicer will be entitled to the statutory notices, even though its interest is not of record. Although the court agreed with the trial court’s finding that the best way to receive notice is to record the document from which one’s interest was obtained, the petitioner must make a diligent inquiry and effort to also notify parties whose interest may reasonably be inferred from the public record.