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21 Cards in this Set

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Constitutional Issues with Power of Sale Foreclosure
Power of sale foreclosure can potentially raise constitutional issues based on lack of due process under the 5th and 14th amendments. In analyzing constitutional issues, ask: 1) is a constitutional issue raised? 2) What due process is required?
· Are notice requirements violated?
· Are hearing requirements violated?
What due process is required?
1) Notice
2) Hearing

Written waivers of hearing and notice are probably not enforceable because of the unfair bargaining power, especially to juniors who do not consent (indirect waiver probably not ok)
Notice
1. The minimum notice required by the constitution is notice reasonably calculated to provide actual notice – which has been interpreted as mailed notice [TX and Minn minimum requirements probably violate this] for all parties
2. Ricker v. United States: When FHA foreclosed in Maine using their minimum notice requirements of publication, the court found that express notice and a right to a hearing exist for Gs and MRs.
3. Mennonite Board of Admissions: After a tax lien foreclosure statute was challenged, supreme court determined that junior lienholders have a right to mailed notice
4. California and many other jurisdictions require notice for anyone who requests it as well. However, the “request notice” provision does not remove responsibility for state actors to provide notice to junior lienholders when junior lienholders do not specifically request notice unless it is extremely hard for the foreclosing ME to find the person in the records.
o No notice required in CA to judgment lienholders and easement holders
5. Morrison: 11th circuit decision says that the Constitution is simply not applicable whether or not there is state action because “it didn’t deprive the MR of the equity of redemption but only terminated it.” This reasoning has not been adopted anywhere else.
Hearing
o Fuentes says that the government cannot even temporarily seize something without a hearing
o Rickers requires a hearing for the MR or owner when there is state action; this hearing does not have to be a judicial hearing but the exact specifications of the hearing are not known. àProbably should be automatically triggered, fairly neutral
o Colorado: Public trustee (usually appointed by county political institutions)àconducts a modified hearing for MR and junior interests to determine whether M ought to be foreclosedàpower of sale system
Theories for finding state action
1) Direct State Action Theory: found when public official conducts foreclosure sale
2) Encouragement theory: when state statutes encourage objectionable private activityàreally only relevant in racial discrimination settings (Reitman v. Mulkey)
3) Governmental Function Theory: when private person performs inherently governmental functionàbut foreclosure of mortgages has never been the exclusive prerogative of state
4) Judicial Enforcement Theory: state courts enforce the rights of private parties (Shelley v. Kramer)àcourts have not expanded Shelley beyond the racial covenant setting
5) The Pervasiveness Theory: statutory regulation pervasively governs private activity—need close nexus between state and challenged action (Jackson v. Metropolitan Edison Co.)ànot found in POS
Private MEs and State action
1. Can use POS b/c can’t find state action to invoke application of 14th Amendment
2. Majority of states find no state action even when sheriff conducted sale
3. Cf. Maryland says there is state action
Direct Instrumentalities and State Action
· Examples: parts of cabinet agencies: federal housing authority, Farmers Holding Agency, VA, Small Business Administration
· Federal action under 5th amendment
· However, federal agencies have now enacted regulations (HUDà Single Family Foreclosure Act) requiring notice to all junior interests and quasi-hearings for MRs, which has been deemed enough to not violate due process.(Ricker)
· This applies when direct instrumentalities are the MEs.
Government Sponsored Entities (GSEs) and State Action
· Examples: FM, FM, Ginnie Mae
· In Lebron (which found state action in Amtrak) Scalia found federal action a) to the extent to which it was created for governmental objective, and b) to the extent to which federal government retains control to achieve governmental objective
· Under this reasoning, GM should probably be considered a state actor (unless we think that the holding was different because of the 1st amendment).
· FM/FM meet only prong one, GM meets both
· Most lower courts have held that FM and FM actions are not state action because they have only 5/15 directors appointed by government and securities are privately held.
· 8th circuit in Warren held that GM is not state action because it is abiding by a state statute not a federal regulationàconcurring opinion says that it is the governmental/proprietary distinction
Methods of Foreclosure under Uniform Nonjudicial Foreclosure Act
1. Negotiation: (like private marketplace); normal sale in the ordinary course of businessàif anyone objects to offer priceàforeclosing creditor must either exclude the objector, pay off the objector, or use a different method of foreclosure. 85% of price pays off debt, 15% pays off cost of process. If the 85% does not cover debt, there is a deficiency.
2. Appraisal: (like strict foreclosure); lender hires a disinterested appraiser and keeps the land. If a debtor or junior lienholder disapproves then the foreclosing creditor must either exclude the objector, pay off the objector, or use a different method of foreclosure. 85% of price pays off debt, 15% pays off cost of process. If the 85% does not cover debt, there is a deficiency.
3. Auction: (like power of sale foreclosure); lender has an absolute right to do this except in Vermont and Connecticut

lender must make available to the public, a few months before foreclosure, a preliminary title report so that
each interested purchaser does not have to do it separately
Notice requirements of UNFA
· notice must be provided to all interested parties
· two notice requirements: at default, at foreclosure
· to any who request it
Hearing allowance under UNFA
Residential debtors have a limited right to an informal hearing with the lender (does not have to be disinterested) and non-residential debtors have no rights
Redemption under UNFA
EOR allowed but not SR.
Deficiency Liability under UNFA
· no deficiency judgments for residential property (unless borrower acts in bad faith)
· fair value limitation on deficiency judgments: deficiency is only worth mortgage debt – 90% judicially determined FV
One action rule under UNFA
no one-action rule regardless of if it is a purchase money mortgage
Is cherry picking allowed under UNFA?
Yes– notice of preservation can be sent to juniors (usually lessees) as well as the required notice of foreclosure (for lessees you don’t want to preserve)
Surplus
In dealing with surplus from a senior lienholder, junior lienholders are paid first, then MRs. Lessees with favorable leases (who should get lease FMV – lease price) and easement holders (whose claims are hard to value) will have to actually file an action to establish their claims. (Note that senior lienholders will never share in a junior lienholder’s surplus; that will always just go back to MR)

If statute gives surplus to MR and his assigns, the junior lienors are usually deemed the assigns.

Restatement: Even specific language subordinating juniors claim on surplus to MR will not be effective unless it is in the junior’s mortgage.

Junior lienors not in defaultàstill get surplus (so prepaid)àrare that this is the case
Prevailing View of Reacquisition of Title by Holder of Equity of Redemption
MR or other holder of equity of redemption who purchases the mortgaged real estate at a foreclosure sale acquires title subject to any lien or other interest that was junior to the foreclosed mortgaged, even if they buy back from the purchaser. When MR has an E1 lien foreclosed, E2 will usually be wiped out. However, if MR is the purchaser at the sale, E2 will survive. This is more equitable.
The justifications for the Prevailing View of Reacquisition of Title by Holder of Equity of Redemption
· Payment theory: MR not really foreclosed; MR just paying late
· Warranty Theory: When MR contracts with E2 there is an explicit warranty that MR will not do anything to defeat the titleàcan’t foreclose on E1 to get rid of E2
· After acquired property theory: Implicit in every mortgage; when MR acquires good title to property and has previously warranted good title to E2, that good title should go to E2’s benefit (this is problematic reasoning)
What is the view when the property is reacquired by a grantee?
When MR has an E1 and an E2 lien that a G takes “subject to” and then G buys at an E1 foreclosure sale for FMV - liens, G is still liable to E2 despite the fact that G took “subject to.” The justifications given for this are:
· It would be unjust enrichment for G to not have to pay E2 when the purchase price already subtracts the price of the E2 lien
· G is primarily responsible party and if G had paid off the E1 debt, then E2 would have risen into the role of E1.
What is the view when the property is purchased by a junior interest?
A holder of a junior interest who purchases at foreclosure sale of senior acquired title free and clear of equity of redemption and juniors. When MR is foreclosed and E3 buys at the sale, E2 neither survives nor revives because E2 and E3 owe nothing to each other.
What happens if a non-BFP purchases at the sale and then later sells back to MR?
E2 will still remain, tempered by laches (unreasonable delay) so that E2 will get back interest to the point at which they discover the new lien. (Old Republic Insurance Co. v. Currie). The justifications given for this are:
· Revival (rather than survival)
· MR not really foreclosed; MR just paying late
· When MR contracts with E2 there is an explicit warranty that MR will not do anything to defeat the title
· This only applies with non-BFP purchasers because BFPs should be able to transfer good title on anyone. This is the filter principal. In Old Republic P was ME, which means P could not be a BFP.