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78 Cards in this Set

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What can a MR do between default and acceleration?
Arrearages may still be paid. The MR can restate the mortgagee simply by tendering default amount + add-ons
What can a MR do between acceleration and foreclosure?
DEBT BALLOONS--MR can only restate mortgage by paying accelerated amount plus add-ons
What is the key to a successful foreclosure action?
The acceleration clause. Once an acceleration clause is triggered the MR’s equity of redemption starts and the MR must pay the full accelerated amount, including add-ons. (Note that unless otherwise provided for in the mortgage, these add-ons do not include the default interest that would have accrued had there been no acceleration)
Alternate solutions when there is no acceleration clause
1) Suing on the note after each defaulted installment and getting a judgment after each installment
2) Property capable of physical division: Severing off enough land to cover the existing default and foreclosing on that amount of land
3) Selling a percentage (tenant in common) interest in the mortgaged property when it is not severable land. The remaining calculations are the same as for the severing of the land.
4) Bifurcating the mortgage
5) “Anticipatory repudiation:” sometimes the courts will read into the contract an acceleration clause
What is an example of bifurcating the mortgage?
MR has a 500K loan with E. MR defaults. E gets a 450 first mortgage as E1. E then gets a 50K second mortgage as E2. E2 can then foreclose. P gets a fee simple absolute subject to a mortgage in favor of E1. MR gets completely wiped out. E1 ends up owning the whole building with a 450K mortgage on it.
What is a problem with using tenants in common?
With tenants in common, the tenants have a right to partition.

· So, what could happen is that the P could seek partition. So, this method doesn’t guarantee that the debtor will get to keep the land.
MR defaults triggering acceleration
o failure to pay the debt on time
o failure to pay real estate taxes
o failure to pay insurance premium
o waste
o transferring without consent
ME responsibilities in triggering acceleration
1) Common law approach: any affirmative action triggers acceleration; no notice required.
2) Texas 2-notice requirement: 1) notice of intent to accelerate unless MR pays in 30 days 2) notice of acceleration (MR can waive)
3) Restatement approach: Notice must be sent in which the date of acceleration is noted. That date can be immediate or a date in the future.
4) Contract: Usually the acceleration requirements are contracted for. E can even contract around the notice requirement.
5) Fannie Mae/Freddie Mac: this requires only 1 notice, but the 1 notice tells the date that acceleration will begin, and must be sent at least 30 days before acceleration.
Defeating acceleration
1) Some states hold that when dealing with non debt-related default, acceleration is only valid when the security is impaired (CA); however this is no defense to tax liens, which have super-priority
2) A few courts have held that with non debt-related defaults, MR can reinstate the mortgage and defeat acceleration simply by paying the default amounts (such as the back-taxes or insurance premiums)
3) Hardship exception: Over the past 100 years, the courts have sometimes defeated acceleration and allowed the MR to reinstate mortgages by paying arrearages when there is a compelling reason such as accident, mistake, good faith, and circumstances beyond the MR’s control.
4) Implying a lender waiver because lender has continually accepted late payments (problem: will this make lender less likely to accept late payments?)
5) arrearages legislation passed in ½ the states permits the MR to defeat acceleration by tendering the amount that would have been due in the absence of default and acceleration
6) Estoppel: one act by the lender that creates detrimental reliance.
Graf v. Hope Building Corp
A slight mistake on behalf of the debtor resulted in acceleration because the court decided to stick to the letter of the law. Absent misconduct/default on the part of the lender, no deacceleration.

Cardozo’s dissent to this decision made it famous: o The penalty being imposed for the inadvertent mistake by the secretary is way out of proportion to the hardship.
Federal Home Loan Mortgage Corp. v. Taylor
When Freddie Mac accelerated on a sergeant in the Philippines the court concluded that it was in the trial court judge’s discretion to determine acceleration unconscionable.
How can lenders protect against the waiver defense?
· anti-waiver clause in mortgage (although many courts will not find this dispositive)
· a letter telling MR that the next default will result in foreclosure (but then lender must follow through or there will really be a waiver)
Arrearages Legislation
o CA: in spite of valid acceleration, debtor has up to 5 days before the foreclosure sale to tender arrearages + attorney’s fees/trustee’s fees and defeat acceleration.
o PA: arrearages legislation can only be used by home buyers and can only be used 2x a year; this discourages savvy commercial borrowers
o Fannie Mae and Freddie Mac have the 5-day rule + 30 day grace period that applies as a default in states with no (or less restrictive) arrearages legislation of their own
o FHA: allows reinstatement even after proceedings have started (up to once every two years) and also has the 30 day grace period
o The problem with arrearages legislation is that it could encourage default. This can be limited by:
§ Default interest payments
§ Attorney’s fees and trustee’s fees
§ Limit the number of times this can be used (FHA loans limit it to once every two years)
Marshalling
When a lender has a promissory note secured by multiple pieces of land, foreclosure should do as little damage as possible to subordinate junior interests.
What are the two theories of marshalling?
1) the two-funds theory and
2) the theory of inverse alienation.

They will be applied when they do not prejudice the senior (ex: land dropping in value rapidly)
Two-Funds Rule
When a lender forecloses on a mortgage secured by multiple parcels and marshalling is asserted, the foreclosure must occur on land with no intervening third party interest.
What power does a G have under the two funds rule?
Should insist on having property purchased released from the mortgage. Lenders would typically agree to this because the purchase price would be applied to the debt.

If they don't do this, can still minimize damage by asserting marshalling and having E1 foreclose on other property first.
What happens if the G assumes the mortgage under the two funds rule?
Reverse application of the two-funds theory:
· When G assumed the mortgage G made a personal promise to MR to pay off the land.
· The reverse of the two funds theory will be used and G's property will be foreclosed on first so that G cannot breach the promise made to MR.

· If the mortgage is calculated as part of the purchase price, courts will require that we go against the land of the grantee first. (so, even if MR just takes subject-to)
When is the court not going to allow marshalling because of the value of the property?
If the sum total of the property is not worth the value of the debt, the court is not going to marshal b/c everything has to be sold.
Theory of Inverse Alienation
When multiple lots have been conveyed, the last conveyed will be foreclosed on first. Inverse Order of Alienation only works with subject to grantees; with assuming grantees the opposite occurs because the grantee agreed to be personally liable.
Policy reasons for the theory of inverse alienation
1) Person who buys last has the least invested.
2) Later purchaser is more likely to be on notice that prior purchasers exist.
Indiana Lawrence Bank v. PSB
Complex Marshalling Case
· 1988 Note: (MR-Z) à ILB, for 70K
o secured by 1) office 2) duplex
· 1991 Note: (MR-Z) à PSB, for 177K
o secured only by the office
· 1993 Note: (MR-Z) à ILB, for 77K
o secured by 1) office 2) duplex

· ILB forecloses on its E2 mortgages on the duplex.
o Merger is not raised (merger would have eliminated the 70K debt and promoted PSB).
o Marshalling is not raised (raising it earlier would force ILB to foreclose on the 70K loan first, thus promoting PSB).
· ILB is the purchaser for 66K. ILB wants the 66K to apply to the 77K debt only.
· Marshalling is raised after the fact and the court applies marshalling anyway and spreads around the debt.
o ILB is owed 147K total, 70K on the senior debt. 70/147 x 66 = 34K used to offset the E1 debt so that PSB has less ahead of it.
o The remainder is used to offset the 77K debt.
When is a DIL a clog on the equity of redemption?
Almost always invalid when it is not contemporaneous with the original mortgage transaction (done when the borrower gets the loan and gives a mortgage and also gives a deed to be held by the lender until default) it is a totally unenforceable clog on the equity of redemption.
What are the three main types of foreclosure?
1. Judicial Foreclosure
2. Power of sale
3. Strict Foreclosure
Judicial Foreclosure
Judicial foreclosure is the sole method of foreclosure in 40% of the states. Even in power of sale states, parties may elect to use judicial foreclosure 1) to get a deficiency judgment in states like CA, which do not allow deficiency judgments with power of sale foreclosure 2) when there is a dispute over lien priority 3) incorrect mortgage form used 4) dispute over amount owed E1, and an E2 is involved.
Basic Rule of JF
A judicial action does not bind a person unless they are made a party to an action
Purpose of foreclosure
To put P into the shoes of MR as of the millisecond before the mortgage being foreclosed was created
Necessary parties
One whose omission as a party defeats the purpose of foreclosureàall junior interests.
Senior interests
In state courts, senior interests cannot be made parties to be foreclosed on (not necessary parties), but can be made parties to determine amount of debt or priority of lien. However, if the senior lien is in default a minority of courts hold that the court may order that the property be sold free and clear of liens in a joint foreclosure with proceeds paying off liens in order of priority.

Purpose of these exceptions? To encourage potential purchasers to bid at the junior lien foreclosure sale
Lessee as a party in foreclosure
· If lease is senioràunaffected by foreclosure. P becomes lessee’s new landlord.
· If lease is junioràjoinder of the lessee in the foreclosure proceedings terminates the lease and the lessee’s obligations under it (majority: even when intentionally omitted; minority: give lessee option to join in foreclosure proceedings)
How to make a person a party to the action?
1) Actual Party: Serve as a party defendant
2) Doctrine of lis pendens: one who acquires an interest in real estate that is the subject of litigation is bound by the outcome of the litigation. Lis pendens only affects those who take title AFTER the lis pendens is filed.
3) Recording acts: Someone is made a party if defeated by the recording acts.
What are the two kinds of lis pendens?
1) Common law lis pendens: (10% of states): purchaser of real estate must check records to determine if there is any pending litigation and is deemed on constructive notice of such litigation
2) Statutory lis pendens: (majority): purchaser becomes subject to litigation on real estate if they become a purchaser after a notice of lis pendens is filed in the real estate records. If the notice is not filed until after the purchaser purchases, the only way to make them a party is to serve them as a party defendant.

Even though the CL doctrine of LP has been suspended, if Nelson has actual knowledge of the lawsuit he is bound by the outcome even if the lawsuit is not filed in the real estate records.
Example of recording acts issue
· E1 and E2 are recorded; E3 is unrecorded
· JF of E1 and a BFP buys at the sale.
· BFP takes free of the unrecorded mortgage if he has no actual knowledge of E3 without E3 being made a party.
· Some states: Nelson has to record his deed before E3 records in order to take property free and clear of E3.
· If Nelson knows actually about E3 or if E3 records before Nelson does, Nelson is on notice, and E3 has a lien on the property.
When can’t you file a lis pendens?
You can’t file a notice of LP against someone’s RE unless you have a claim against the RE. If you are just suing the MR on a tort, you cannot file LP against the RE.
Rights of Parties: Right to Redemption in Equity
The right to redemption exists up until the point of foreclosure.
· When the owner of the land (MR or G) redeems, the mortgage disappears
· When juniors redeem, it is a protection of the interest and not a complete equitable redemption that causes the mortgage to disappear. Instead, the redeeming junior is the assignee of the original mortgage and now has two separate liens on the land. For instance, if E1 is foreclosing, E2 can redeem and then steps in as both E1 and E2.
Omitted owner rights
If an owner, such as a grantee, is omitted, the grantee has the right to pay P and redeem the land from the mortgage by paying the mortgage amount rather than the purchase price.
Omitted junior rights
An omitted junior, who is to be treated as if not foreclosed upon, should have the right to
1) Foreclose on the junior mortgage subject to the senior mortgage in favor of the purchaser at the foreclosure sale (right to a public valuation). P becomes ME and
2) Redeem up from P so that J owns two liens on the land by paying P the amount of the mortgage debt. However, the senior purchaser P has stronger rights than the omitted junior and
3) Get a lien on any surplus from the sale.
What are the omitted juniors rights to SR?
Omitted junior also lose their rights to SR because in order to exercise SR, you must be foreclosed on.

The junior would have to redeem up, but that right is trumped by the purchaser’s right to redeem down. (Portland Mortgage Co.) On the other hand if a junior were made a party (such as through lis pendens), in certain states they could exercise statutory redemption. (Land Associates v. Becker)
Foreclosure sale senior purchaser rights against omitted juniors
P now acts as both “MR” and “E1”

1) Reforeclose and include the omitted junior: Sale proceeds will be used to pay off both liens in order of priority and any surplus goes to the reforeclosing party. Note however, that typically what will happen is that the P will be the new purchaser as well since P does not have to give as much money out of pocket. This will always be chosen if the land is not worth much and lien is sizeable. This is P acting as E.
2) Redeem down: Quiet title by paying the omitted junior his lien amount; redeeming down always trumps redeeming up (Murphy v. Farwell) This will always be chosen when the land value shoots up and the junior lien amount is small. This is P acting as MR.
3) Strict Foreclosure: This is a court order to the omitted junior to pay the mortgage debt within a certain amount of time or be forever extinguished. The junior would then own two mortgages. Omission must be through inadvertence or mistake untinged with bad faith. (Citicorp v. Pessin)
Courts varying views on the application of strict foreclosure by the senior purchaser against omitted juniors
1. Never allowing it because it deprives juniors of a right to public valuation of the land
2. Always allowing it because of judicial efficiency--Florida
3. Allowing it when the omitted junior has “dirty hands” – as in Citicorp v. Pessin since Pessin knew what was going on and did nothing to stop it
4. Restatement approach: Presumption against strict foreclosure with the burden on the purchaser to show: 1) omission was a result of inadvertence and mistake and 2) FMV of mortgaged real estate does not exceed the amount of encumbrances senior to the omitted junior (land holds no equity for JL)
5. This approach is never allowed if the omission was intentional.
EOR v. SR
Equitable redemption gets you the ownership of the senior lien if you are a junior.
Statutory redemption gets you the title to the land.
Why do states allow POS?
· Identical to the result of JF
· Wipes out everything junior to the interest being foreclosed
· Sells title subject to the all interests senior to the interest being foreclosed
What kind of notice is required under POS?
States vary on the kind of notice they require:
· Colorado: mail notice to everyone junior to the foreclosed interest
· Texas: mail notice to MR/owner
· Minnesota: mail notice to MR and Grantees, plus any parties in possession (lessees), but no requirements for junior lienholders, easement holders
· California: TWO NOTICE SYSTEM 1) notice of default to initiate foreclosure recorded and published (so it acts as lis pendens) then mailed within 10 days to MR, owner of real estate, all junior interests except for judgment lienholders and easement holders, and to all who request notice and 2) notice of sale to be published four times, once a week before sale; plus notice of sale must also be sent 20 days in advance to all parties in (1)

Most states will not hold that there is a constitutional requirement of notice since there is no state action.
What are the federal POS regulations that apply to mortgages held by HUD?
1) A mailed notice to everyone who has a recorded interest junior to the mortgage being foreclosed.
2) Provides for a federal foreclosure administer who acts as the trustee.
3) In general, there is no right to a hearing. Provision: “When the US proceeds under these statutes, there is no statutory redemption.”àstate SR is not applicable.
4) SR is required for federal junior interests but not when the federal government is the foreclosing interest.àthey are having their cake and eating it too.
5) This preempts state law
Problems with POS
1. More likely to have errors b/c of the lack of a judge
2. More likely that procedural and substantial defects will go unnoticed b/c of lack of other parties in the proceeding.
3. Less finality
How to create finality in POS?
1. Title insurance companies insure the finality of title
2. Adverse possession laws (CA has a five year limit, requires taxes to be paid by the adverse possessor)
3. Presumption statutes create presumptions in favor of title.
What are the three presumption statutes?
Aimed at enhancing the finality of POS foreclosure and the marketability of titles they produce.

When the trustee puts a statement on the trustee’s deed saying that everything has been complied with, the following can occur:
1) strong
2) weak
3) middle
Weak presumption statutes
(10-12 states): rebuttable presumption: weak presumption that there was compliance; burden on party trying to set aside saleà does little more than state what the law already is
Strong presumption statutes
Even a defect that would otherwise render a foreclosure sale void, the statute renders it only voidable; (Glidden): conclusive presumption: the statement is considered prima facie evidence of compliance and conclusive evidence of the validity of a foreclosure in favor of a BFP against omitted juniors (wouldn’t matter if it was a BFP if voidàso its voidable)
a. Note that in WA, where Glidden took place, an amendment has been made to the statute so that if no notice is sent, omitted juniors are treated the same way omitted juniors are treated in judicial foreclosure, thus invalidating the bulk of the statute and allowing Es to cherry pick
Middle presumption statutes
(CA): conclusive presumption for notice defects only: statement is considered prima facie evidence of compliance and conclusive evidence of the validity of a foreclosure in favor of a BFP where there is a mailings/notice defect but not in situations where there are substantive defects.

(Issue: can it be applied to procedural defects that are not mailings/notice-related? He thinks not, but it has not been litigated)
What are the three types of POS defects?
1. Void
2. Voidable
3. Inconsequential
Void defects
1. No legal or equitable title passes.
2. P must possess adversely in order to finally quiet title in the land.
3. Examples: no default, sold in wrong county
Voidable defects
1. Legal title passes to the P.
2. If P is a BFP then MR’s equitable rights are cut off as well. If P not a BFP, sale set aside.
3. Example: Defect in publication
Inconsequential defects
1. Legal and equitable title passes.
2. P has automatic right to legal and equitable title.
What is a BFP?
A P who 1) pays value and 2) takes without notice (constructive or actual and defects were not readily noticeable by reasonable care).

Can be a P at a foreclosure sale or a subsequent G. Cannot be the ME that purchases at its own sale.
Purchaser at the foreclosure sale as a BFP
Even if a person pays value at the foreclosure sale, they can defeat BFP status
· Constructive notice: if there are things which reasonable examination of the title should have revealed, in which case they will be considered “on notice”
· If things occurred at the sale which should have put the purchaser on notice (such as no junior lienors showing up at the sale)
· Actual notice
Subsequent grantee as a BFP
A subsequent grantee is more likely to be a BFP than a purchaser at the foreclosure. The subsequent grantee is still responsible for examination of title and actual notice, but is not responsible for occurrences at the sale.
Shelter principle
Even if the purchaser of the sale was not a BFPàhe can still transfer good title to G1 if G1 is a BFP.

However, then P could be liable to MR for damages
What is the effect of substantive defects?
1. These go to the right to foreclose.
2. All substantive defects are VOID.
3. Examples include improper acceleration and no actual default.
Inadequacy of Foreclosure Sale Price
· Will never make a sale void
· Inadequate price, alone, will normally not invalidate a sale, absent fraud, unfair dealing or other irregularity in the process.
· Sale price so low that it shocks the conscience or is grossly inadequate (Krohn v. Sweetheart Properties adopts the restatement’s 20% approach (where it is permissive but not mandatory to set aside); cf Tennessee, which says that without other defects, no price is too low)
· Can be set aside when exceed the grossly inadequate amount if other defects, even minor defects, exist: In re Edry, voidable even though price was about 50% of FMV b/c court found that more aggressive advertising should have been usedà it is not enough to comply with the statute, one also has to comply with the standards of the area
Time of Sale
Void: Published time is sale is wrong (by a lot) or selling on an unusual day or hour
Place of Sale
· Void: Failure to follow statute that requires sale to take place in county where land is located.
· Voidable: Failure to follow provision in mortgage specifying the place of sale.
· Voidable: Actual place of sale varies significantly from the place specified in the ad.
Sale by Parcel or Bulk
· Should choose method most beneficial to MR (not necessarily most value b/c MR may want to keep land)
· Voidable: If violate statute dictating MR’s choice of sale options
Chilled bidding
· Void: Intentional chilled bidding from ME/T collusion.
· Voidable: Inadvertent chilled bidding: collusion between the ME and T that suppresses bidding
Caveat emptor
As is. Generally foreclosure sales are this.
ME purchase under mortgage with POS
Traditionally: ME could not purchase or it was voidable.
Now can purchase:
1) deed of trust: trustee conducts sale.
2) Mass, GA and NH: ME conducts sale but can buy from self.
3) Minn: mortgage with POS-->sale conducted by sheriff
If the T/E is aware of physical defects in the property or the title, is there an affirmative obligation to disclose to P?
· Traditional view: No
· CA: If the P could not have discovered it by reasonable due diligence (i.e., forgery) then the T/E has the obligation to inform the P
ME purchase at trustee’s sale
Ok if T is not EE or otherwise closely associated with ME.
T purchase at foreclosure sale
Voidable

T's purchase in general is void if without MRs consent.
T as EE of ME
Varying approaches:
· Virginiaàvoidable: if substantial connection between the ME and T b/c purchase of ME deemed to be an indirect purchase of T.
· Others: close connection not enoughàplace burden on T to prove “faithfulness to their trust” absent specific evidence of fraud, self-dealing or overreaching.
Does the T have a duty to ascertain whether foreclosure is justified?
No, absent unusual circumstances known to Tàno affirmative investigation or special notice to MR required
Commercially Reasonable Standard
Objective standard

Wansley (Mississippi): Trustees are expected to behave in certain ways that result in every aspect of the sale being commercially reasonableness (such as postponing sales that fall on 9/11) or else sale may be voidable

Have to follow statutes so if violates statutes, voidable no matter how reasonable
Remedies for Defective POS Foreclosure
1. Injunction against sale
2. Suit to set aside the sale
3. Damages for wrongful foreclosure
4. Filing Bankruptcy Petition
Injunction against sale
· Most common before sale is complete
· Substantive problems such as no default, invalid acceleration, etc.
· Temporary injunction: the plaintiff must post bond
o The preliminary injunction holds greater risk for being wrong (not as complete of a hearing) and thus, need to protect the defendant from being wrongfully enjoined.
o Some states require MR to tender balance owing on mortgageà is an unfair burden when arguing that debt is not even in default
§ Why should debtor have to pay for right (EOR) he validly has?
· Permanent injunction does not actually stop the foreclosure sale from happening, so if the lender does not choose to wait and find out the result of the hearing, the MR may be chilling bidding
Suit to set aside the sale
· Substantive grounds in injunction + defects in the foreclosure process
· Substantial impediment: in most courts debtors must tender into court what is owed in order to be heard
· If defect is voidableànot valid against BFP
· If voidà this is valid against BFP
Damages for wrongful foreclosure
· This is used in situations where the defect is voidable and the purchaser was a BFP
· Instead of getting land back, there are damages awarded
· Property is appraised as of the date of the wrongful foreclosure and the party wrongfully foreclosed upon gets the value they would have gotten if there had been proper foreclosure
· MR: FMV – liens
· JL: FMV – senior liens, not to exceed amount of own lien
· Punitive damages are also available
· Even if the land is available (defect made the sale void, buyer not BFP), if MR wants to get damages instead of land back, the cases tend to say that this is allowed.
Bankruptcy
· Either file a Chapter 7 or a Chapter 13
· If you have a reason under law to file a foreclosure sale under Chapter 13 you can deaccelerate and extend your payments over 3-5 years
· Trustee wears the hat of the debtor and so, now has all the debtor’s rights to attack the foreclosure
· The biggest danger of secured lenders is that a trustee in bankruptcy will find the mortgage invalidàtrustee’s fee goes up for unsecured debts
When is the land not available after a void sale?
When AP has run.