Bar News - December 21, 2016
Business Law and Business Litigation: The Business of Mortgage Foreclosure: Evolving Law Follows Economic Downturn
By: J. Patrick Kennedy
The economic downturn led to a dramatic increase in mortgage-related litigation in New Hampshire and other New England states, as borrowers in economic distress sought to save their homes from foreclosure by filing lawsuits and requesting injunctions. The Superior Court’s “daily docket” reports revealed numerous cases filed and hearings held on borrowers’ petitions to enjoin scheduled foreclosure auctions. The increasing number of foreclosure-related cases has resulted in trends and legal developments of interest to business litigators.
Bank and non-bank financial institutions, mortgage servicers and government-sponsored entities, such as Fannie Mae and Freddie Mac, all with interests in mortgage assets, have become accustomed to defending an increasing number of foreclosure-related actions in New Hampshire courts. Business litigation lawyers with financial institution clients must become familiar with the context in which foreclosure-related cases arise, the statutes and regulations governing federal and state-chartered banks, as well as non-bank mortgage servicers, and the many and varying types of claims asserted by borrowers facing foreclosure.
New case law in the foreclosure arena has been predominant in New Hampshire and other New England states. Foreclosure cases decided by the courts arise from the following general categories that are of relevance to New Hampshire business litigators.
actions and rights
New Hampshire is a non-judicial foreclosure state, which means the mortgage holder or its agent can conduct the foreclosure sale without first filing a lawsuit in court or obtaining a court judgment. Foreclosure procedures are governed by statute: RSA 479:25. Following the foreclosure auction, the bank or other prevailing bidder at the auction must record a foreclosure deed at the registry within 60 days, in order for title to vest and take priority over any intervening liens. But that may not end the process. Borrowers or tenants may still remain in possession of the foreclosed property.
A prevailing bidder who wants possession of a non-vacant property needs to file a court action to lawfully evict holdover borrowers or tenants of the former owners. Self-help eviction without a court judgment is unlawful in New Hampshire, which adds delay and cost to the equation.
Using any means other than court process to evict or obtain possession can be a trap for the unwary buyer at foreclosure. In Evans v. J Four Realty LLC (NH, 2013), the buyer of a resort property was required to file an eviction action in order to obtain rights to possession of an apartment on the property. Even though the longtime tenant did not have a lease, the New Hampshire Supreme Court found that the new property owner following foreclosure was her “landlord” within the meaning of RSA 540-A, and that as a tenant-at-sufferance she was entitled to statutory protection against self-help eviction. The Supreme Court remanded the case to the trial court for it to reconsider damage claims available to the wrongfully evicted holdover tenant.
In short, tenants and holdover mortgagors have procedural and substantive rights that cannot be cast aside easily by the bank or other buyer of foreclosed property. The New Hampshire Legislature has adopted comprehensive protections for tenants that include formal process including service of a written notice to quit to terminate a tenancy. A buyer of foreclosed property, whether the bank or a third-party bidder, must follow proper procedures, even though it may have no formal or leasehold relationship with a holdover occupant or tenant, to evict them.
As a practical matter, marketing and selling a property that is occupied and bound by a lease or tenancy-at-sufferance may make a foreclosed property less salable, and thereby depress bid amounts. In JPMorgan Chase Bank NA v. Grimes (NH, 2015), the Supreme Court addressed whether the prevailing auction bidder, which was the mortgagee bank, had sufficient “other good cause” to evict the property’s existing tenant to be able to market and sell the property vacant. New Hampshire’s tenant protection statute allows an eviction to proceed for “other good cause,” which is defined in the statute to include “any legitimate business or economic reason and need not be based on the action or inaction of the tenant, members of his family, or guests.”
The bank argued that its stated reason to evict in its notice to quit – to “market, sell and/or convey the property in vacant condition” – constituted legitimate economic grounds under the statute. The Supreme Court agreed, finding that there was no evidence of selective eviction or other acts of bad faith. Absent evidence that the foreclosure was undertaken illegally, or an eviction is being sought in bad faith, a desire to evict a holdover occupant to market and sell the foreclosed property vacant constitutes “other good cause” to terminate a tenancy and evict under the possessory statute, RSA 540:2, II(e).
Interplay between plea-of-title defenses & foreclosure
Borrowers frequently challenge foreclosures by arguing that the foreclosing party must prove its standing – in other words, the bank must establish that it is the rightful owner of the mortgage or the lawful assignee of the named mortgagee’s right to foreclose the equity right of redemption. In some non-judicial foreclosure states, such as Massachusetts, such a standing challenge can be raised in defense of a post-foreclosure eviction action. In such a situation, the holdover mortgagor or tenant of the property can force the plaintiff to prove its ownership of the property through all steps from loan closing, travel of the note via endorsement and the mortgage via assignment, foreclosure, to purchase at the auction, and even through any post-foreclosure assignments of the prevailing auction bid.
This can be done in New Hampshire as well, but the Legislature and courts have specified that it can only be done in Superior Court. Circuit Courts where possessory actions are filed do not have jurisdiction to adjudicate plea-of-title defenses. In Wells Fargo Bank v. Schultz (NH, 2013), the holdover mortgagor moved to dismiss a possessory action filed by the foreclosing bank in Circuit Court by arguing that the bank did not have standing to foreclose.
The Circuit Court denied the motion to dismiss on the ground that it did not possess jurisdiction to adjudicate issues affecting title to real estate under RSA 502-A:14. The New Hampshire Supreme Court agreed. It held that district court divisions lack jurisdiction to entertain title-based defenses to possessory actions. Rather, if the tenant or holdover borrower wants to defend eviction based on a title-based challenge to ownership, the defendant must file a plea-of-title action in Superior Court and provide a surety bond or other recognizance to the plaintiff in an amount set by the Circuit Court. The Circuit Court will then stay the possessory action pending a determination of valid ownership in Superior Court.
But borrowers in New Hampshire should be aware that any standing challenge or plea-of-title challenging the bank’s right to foreclose must be brought prior to the foreclosure auction to be preserved under RSA 479:25, II. In Bank of New York Mellon, as Trustee v. Dowgiert (NH, 2016), the Supreme Court held that even when a holdover mortgagor properly filed a plea-of-title challenge to a possessory action, the Superior Court properly dismissed the borrower’s standing claim as untimely because it was not raised prior to the foreclosure auction. The time period for challenges to the notice of foreclosure and conduct during the foreclosure auction is somewhat more relaxed – such claims must be brought within one year and one day of the recording of the foreclosure deed following the foreclosure auction, or they will be barred as untimely under RSA 479:25, II-a.
Following adjudication of a plea-of-title action in the bank’s favor, whether in Superior Court or after removal to federal court, the District Court Division retains jurisdiction to issue a writ of possession. Thus, as the Supreme Court held in Federal Home Loan Mortgage Corporation v. Willette (NH, 2016), the filing of a plea-of-title action in defense of a possessory action merely stays proceedings in the District Court Division until the title action has been resolved. Once that occurs, if favorable to the bank or other purchaser of the property at foreclosure, then the Circuit Court has authority to issue the requested writ of possession.
Foreclosure law intersections
with condo association rights
Foreclosure of residential property generally impacts the parties with contractual and deeded interests in the property: the owner, any tenants or other occupants, the mortgagee pursuing foreclosure, and any other lienholders. But condominium properties have other interested stakeholders; namely, the owners of other units and the condominium’s association. It is not surprising then, that cases involving the intersection of foreclosure law and condominium association rights have reached the courts.
Several issues have been litigated. First, the New Hampshire Supreme Court has concluded that a validly noticed and conducted foreclosure auction eliminates pre-foreclosure assessments levied by a condo association. Thus, in New Hampshire Housing Finance Authority v. Pinewood Estates Condominium Association (NH, 2016), the Supreme Court held that because pre-foreclosure assessments were junior to the mortgage being foreclosed, those assessments were extinguished by the foreclosure, the buyer of the unit was not liable for the unpaid assessments, and the association could not lawfully refuse to provide common services, such as provision of utilities to the unit in order to force the buyer to pay old assessments.
Foreclosing banks and lienholders of condominium units should be aware that potential liability exists for them, too. In a decision recently issued by the federal court for the District of New Hampshire, a condominium association successfully defeated a mortgagee bank’s motion to dismiss a case brought by the association to recover damages to common areas and abutting units caused by frozen, burst pipes in a unit where the bank had assumed control following its mortgagor’s loan default, but before the bank’s foreclosure auction was held. In Rolling Green at Whip-Poor-Will Condominium Townhouse Unit Owners Association v. Bank of America (D.N.H., 2016), the federal district court held that the plaintiff condo association could bring damage claims against the bank and its property management company for negligence, trespass and conversion.
Given the duration and scope of the great economic downturn, and the slow but gradual recovery, litigated cases involving foreclosure of real property are still coming up through the pipeline in state and federal court. New Hampshire courts are likely to continue to adjudicate cases involving new and evolving intersections of real property foreclosure law and business litigation issues for the foreseeable future.
J. Patrick Kennedy
J. Patrick Kennedy is senior counsel in the Boston office of Seyfarth Shaw. His practice has focused on representing state and federal banks, quasi-government entities, alternative lenders and mortgage servicers in litigated disputes before courts and government agencies in New England states.