Statute of Frauds Bars Claims Seeking To Set Aside Foreclosure Sale Based On Oral Promises Related To Loan Modifications

The Fourth Circuit, in an unpublished opinion, recently held that an oral statement that borrowers should disregard notices of foreclosure sale while being considered for a loan modification is insufficient to set aside a properly noticed foreclosure sale. The borrowers sought to set aside a foreclosure sale on equitable grounds based on allegations that the mortgage servicer orally represented that:

  • It would provide the borrowers with a loan modification if they met certain criteria.
  • The borrowers' loan application materials were incomplete.
  • The borrowers should disregard the notice of foreclosure due to their pending loan modification.

The district court dismissed the borrowers' claims as barred by the state statute of frauds. In affirming the district court's dismissal, the Fourth Circuit majority affirmatively found that the promises may have been improper, but that they could not form the basis for a claim because the statute of frauds renders oral promises affecting real property unenforceable.

The Fourth Circuit's decision has general appeal and applicability because the court succinctly and squarely addressed a claim commonly raised in foreclosure defense through the application of a universal rule. Many borrowers claim that their lender made oral misrepresentations concerning the ability to avoid foreclosure. Invocation of the statute of frauds is another tool potentially available to lenders to defeat these common claims.

Joel E. Tasca and Daniel JT McKenna

Nevada Supreme Court To Consider 'Foreclosure Sale' Definition

Special servicers and lenders who have loans secured by real property in Nevada should be aware of a case that is on appeal in that state. Briefing is about to begin on what could be an important win, or loss, for the lending industry. The appeal involves an Eighth Judicial District ruling issued in August 2012, in which the court found that a private sale of property through receivership must include notices required in a non-judicial foreclosure. A lack of such notices precluded a recovery against the guarantor. The court also found that, because a receivership sale is a “foreclosure sale,” the trustee was precluded from recovering a deficiency.

Like many other western states, Nevada allows for non-judicial foreclosure of property upon a borrower’s default. If the Nevada Supreme Court affirms the lower court’s all-inclusive definition of a “foreclosure sale,” a special servicer or lender may have to initiate a non-judicial foreclosure and serve the accompanying statutory notices even if proceeding with a receivership sale or even in a judicial foreclosure. Another possible result is that, by opting for a private sale through receivership, the special servicer or lender may be electing to forgo any deficiency—regardless of whether the guaranty is limited or full recourse.

In U.S. Bank National Association as Trustee for the Registered Holders of ML-CFC Commercial Mortgage Trust 2007-7 Commercial Mortgage Pass-Through Certificates Series 2007-7 v. Palmilla Development, the special servicer sought the appointment of a receiver over property securing a $20 million-plus loan. The special servicer was the party directing actions and managing the loan in the trust for which U.S. Bank was the CMBS trustee (the Trustee), and the loan was secured by a personal guaranty. An Eighth Judicial District judge appointed a receiver, and later, the court granted the Trustee’s motion to sell the property through the receivership. The motion to sell was unopposed. Ultimately, the property sold for $9.5 million, leaving a deficiency for the special servicer to pursue on behalf of the trust and in the name of the Trustee.

The Trustee amended its complaint to seek a deficiency against both the borrower and the guarantor (the Defendants). Three defenses were raised:

  • Because a private sale is not a foreclosure, there is no statutory basis to pursue a deficiency.
  • The claims against the guarantor were precluded by Trustee’s failure to provide certain statutory notices.
  • The claims were time barred by Trustee’s failure to file a deficiency claim within six months, which is the deadline to file for a deficiency after the date of a foreclosure sale.

The Trustee argued that, because of the private sale, there was no “garden variety” foreclosure, and that the statutory defenses were inapplicable because the claim was one for a “straight case of contract damages,” as opposed to a deficiency as governed by statute.

In lengthy analysis, the court pointed to several statutes that stand for the proposition that a “foreclosure sale” means the sale of real property to enforce an obligation secured by a mortgage or lien on the property. This includes the exercise of a trustee’s power of sale under Nevada Revised Statutes (NRS) 107.080. Notably, this language does not limit the definition of foreclosure sale, but it does expressly include a trustee’s sale as provided by Nevada’s non-judicial foreclosure statute.

This non-judicial foreclosure statute grants to a trustee under a deed of trust the power to sell the property if the statutory process is followed. The statute is silent on whether someone who is not the trustee under a deed of trust (here, a receiver) must follow the statute, and the statute does not say it is the exclusive means of conducting a foreclosure sale. This statutory process implies that there are other “foreclosure sales” that are distinct from the non-judicial process. The interpretation that there are “foreclosure sales” outside the context of a trustee’s sale in the non-judicial foreclosure context is reinforced by Nevada’s deficiency statute, which refers separately to foreclosure sales and trustee’s sales.

Nonetheless, the district court found that the notice requirements for a trustee’s sale must be followed in any sale that can be defined as a foreclosure, including a private sale through receivership, even though a receiver is not a trustee under a deed of trust and even though NRS 107.080 applies only to such trustees.

There are already several lessons from this Eighth Judicial District decision. First, a special servicer or lender should make sure that its counsel understands, complies with, and is capable of dual tracking remedies arising under Nevada’s non-judicial foreclosure, receivership, and deficiency statutes. Second, if there is any chance that a deficiency may be pursued, the special servicer or lender should make sure to initiate a non-judicial foreclosure (and serve all appropriate notices), even if the goal is to sell via receivership sale.

Abran Vigil


Getting In: Preparation and Delivery of Leased Premises

Editor's Note: Mortgage banking companies are often tenants leasing or subleasing office space, usually in multiple locations. This is the second in a series of articles by attorneys in Ballard Spahr’s Leasing Group that explain the commercial leasing process and explore issues such as how a lease affects ongoing operations, how to plan for changing needs, the impact of foreclosure and bankruptcy, and how to get out of a lease. In this article, Stephanie Zirpoli Wittenberg, an attorney in the firm's Philadelphia office, discusses how a “work letter” addresses issues concerning the condition of a property before a tenant moves in.

The condition of the premises upon delivery is often one of the most important parts of the lease negotiation. The lease provisions addressing this issue are often contained in an exhibit or schedule to the lease, or a separate agreement, commonly referred to as the “work letter.”

Scope of the Work

The first detail to be determined is the scope of the work necessary for the tenant’s occupancy of the premises for the intended use. If the premises were constructed and occupied for a generic use (for example, general office purposes) and remain in good condition, and the new tenant is an office user as well, the scope of work may be limited (for example, repainted walls, new carpet or some new demising walls to create a desirable layout). The scope of work might be much more complicated if the building is new construction and the premises have not been previously built out, the building is older and has not been updated recently, or the new tenant’s anticipated use differs from the prior use.

The tenant should inspect the premises early in the negotiation process, and carefully consider the work necessary to make the premises ready for the tenant’s use and occupancy. Often a tenant will engage (or the landlord will make available to the tenant) an architect or space planning professional to provide advice and guidance. If the premises will be delivered “as is,” no special work will be performed before the tenant’s occupancy.

Who Will Perform the Work?

In most circumstances, either the landlord or the tenant could engage a contractor to perform the work, and a combination of such engagements often occurs. The time to complete construction and the costs of the work can often be reduced by using the landlord’s contractors since they are likely familiar with the building structure and systems and the landlord’s policies and procedures. In addition, if the landlord’s contractors are performing work elsewhere in the building, or constructing the building itself, it is often more efficient to use the same contractor for the full scope of work throughout the building.

That said, tenants often elect to use their own contractors, especially when the tenant has a preferred contractor or specialized construction requirements. If the tenant will perform the work, the landlord will always retain the right to approve the tenant’s contractor and subcontractors and the plans and specifications. The landlord also will require the tenant’s contractors to work harmoniously with the landlord’s contractors.

Cost of the Work

The cost to perform the work will be determined during the construction planning process, but this process often occurs after lease execution. To avoid a costly surprise down the road for either party, both the landlord and the tenant should develop general space planning requirements and determine the estimated cost before lease execution. Arrangements for the payment of the cost of tenant improvement work, and the allocation of risk for cost overruns, can take myriad forms.

In “turn-key” projects, the scope of the work is determined pre-lease and the landlord performs the work. Since the base rent already includes a fixed reimbursement for the landlord’s estimated costs in performing the agreed scope, in a turn-key deal the landlord assumes the risk of cost overruns and obtains the benefits of any cost savings.

Alternatively, landlords often provide a tenant improvement allowance, which is a fixed sum (usually expressed as dollars per rentable square foot of the premises) that is likewise already built into base rent. The costs of the work (regardless of whether the landlord or tenant performs it) are charged against the allowance, and the tenant pays any such costs exceeding the allowance. Before lease execution, a savvy tenant with an allowance confirms that the desired improvements can be constructed for the allowance, ensures that the tenant will not be charged for construction overruns that did not result from acts of the tenant, and requires that the tenant can spend any unused allowance for other purposes (e.g., fixtures, furnishing, or moving costs).

Since the allowance is already included in the base rent, the tenant should obtain the benefit of those unused dollars if the landlord completes the work under budget, or if the planning process reveals that the improvements required by the tenant cost less than the allowance. Landlords will push to have those excess allowance dollars spent on actual improvements to the premises (which will likely be left in the premises at the end of the term, and from which the landlord might derive some benefit), as opposed to use for the tenant’s moving costs or for furniture or equipment that the tenant will remove at the end of the term.

Depending on the economics of the deal, there may be no allowance or work built into the rent at all, placing the responsibility for footing the bill entirely on the tenant. Sometimes a landlord will offer an optional allowance, which is effectively a loan to the tenant which is repaid through base rent (calculated based on the amount “borrowed” from the landlord, the length of the term, and an assumed interest rate). Tenants should always expect to pay for change orders they request and the cost of delays they cause, and landlords typically collect a construction management fee (often expressed as a percentage of the cost of the work) whether the landlord or the tenant performs the work.

Timing of Construction and Rent Commencement Date

Since the delivery date of the premises to the tenant is tied to the start of rent payments under the lease, a landlord performing the work has an incentive to deliver the space (and collect rent) as soon as possible. Even so, and especially where the tenant has a mandatory timeframe (for example, when a tenant has to vacate its existing premises), a tenant must find ways to hold the landlord to a schedule. This is usually accomplished by providing for an outside delivery date after which the tenant can terminate the lease, but that right is not always a meaningful option for a tenant who needs to move in. Tenants with significant negotiating power will also often request liquidated damages for late delivery, for example, a rent abatement of two days for every day of late delivery, or even less common, actual damages for the tenant’s loss (e.g., reimbursement of the holdover rent at the tenant’s current space).

If the landlord is performing the work, the delivery date is typically phrased as the earlier of the date on which landlord delivered the space to the tenant with the work (as shown on the approved plans) “substantially completed” (i.e., only minor items that will not interfere with the tenant’s use of the premises are outstanding), or the date on which the tenant takes possession of the premises.  Tenants should require, at a minimum, that the landlord deliver a written certification from the architect stating that the work was substantially completed in accordance with the approved plans and complies with law, and to the extent required by law for occupancy, a certificate of occupancy (or local equivalent). Additionally, a tenant might request that a walk-through of the completed premises and preparation of a punch list of open items (which the landlord must complete within a fixed time after delivery) be conditions to delivery. Tenants should always obtain a construction warranty (usually one year) from the landlord for the work performed by the landlord.

If the tenant is performing its own work, the rent commencement date will likely be a fixed date after taking into account a reasonable construction period. In this scenario, the risk of the construction schedule is on the tenant, but the tenant should ensure that the rent commencement date is extended for each day of delay caused by the landlord.

Access during Construction

A thoughtful tenant does not wait until delivery to discover that something has gone awry in the construction process. The tenant should request that its representative have the right to attend weekly or biweekly construction meetings, have reasonable access to the premises during construction for inspections, and have access to the landlord’s books and records to audit construction costs.

In addition, since rent will likely commence immediately upon delivery, a tenant might request access to the premises before delivery to start installing fixtures and furniture (early entry should never constitute occupancy for purposes of triggering rent collection).

A Note about Landlord’s Financial Ability To Complete the Work

Landlords always review a proposed tenant’s financials to confirm that the tenant has the wherewithal to fulfill the terms of the lease. A thoughtful tenant does the same for the landlord, especially where a significant financial contribution from the landlord towards construction of the premises is in play. Tenants should also pay close attention to the terms of the subordination, non-disturbance, and attornment (SNDA) with the landlord’s lender, which routinely disavow the lender’s obligation to contribute funds or perform work on behalf of the tenant.

There are many issues involved in readying the premises for occupancy, and multiple potential solutions for each issue. This means that the work letter is often one of the most heavily negotiated parts of the lease. But a detailed work letter will reduce the number of surprises along the way for both landlord and tenant, and is the best way to ensure that the premises will “work” for the tenant and its employees and users.

- Stephanie Zirpoli Wittenberg

Collection Letter Requiring Written Dispute Violated FDCPA, Second Circuit Holds

A collection letter violated the Fair Debt Collection Practices Act (FDCPA) because it stated that the debtor could only dispute the debt in writing, the U.S. Court of Appeals for the Second Circuit has ruled.

In Hooks v. Forman, Holt, Eliades & Ravin, LLC, the Second Circuit vacated the district court’s dismissal of the complaint for failure to state a claim. Applying the “straightforward language of the statute,” the court held that the FDCPA does not require a written dispute to avoid an assumption by the debt collector that the debt is valid. The Second Circuit distinguished language in different portions of FDCPA Section 1692g, with certain portions requiring written disputes or requests from debtors for various rights to apply and another portion dealing with when a debt will be assumed to be valid.

Section 1692g requires a debt collector to send a written “validation notice” to a consumer within five days of the collector’s initial collection attempt and specifies what information the notice must contain. This section requires the notice to include statements that if the consumer disputes a debt in writing or makes a written request for the name and address of the original creditor, the collector will provide verification of the debt or the requested information. This section also requires a debt collector to cease all collection efforts if it receives a written dispute or information request until the verification or information is provided.

Section 1692g also requires the validation notice to include a statement that the debt will be assumed to be valid by the debt collector unless the consumer disputes the debt within 30 days. It is silent, however, on what form the dispute must take to avoid that assumption.

According to the Second Circuit, “giving effect to the difference creates a sensible bifurcated scheme,” because “[t]he right to dispute a debt is the most fundamental” of those set forth in Section 1692g, and “it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge.” In the court’s view, it made sense for the FDCPA to require debtors to take the “extra step” of putting a dispute in writing before claiming “the more burdensome set of rights” afforded by Section 1692g (such as requiring all debt collection efforts to cease).

Observing that the issue of whether the FDCPA requires a written dispute was one of first impression in the Second Circuit, the court noted that the Third and Ninth Circuits, the only  circuits to have considered the issue previously, had reached opposite conclusions. The Third Circuit, in its 1991 decision in Graziano v. Harrison, ruled that a debtor must send a written statement to effectively dispute a debt. (Based on Graziano, in a March 2013 decision that was the subject of a prior legal alert, the Third Circuit held that a collection letter violated the FDCPA because its invitation to call a toll-free number could be read to permit the debt to be effectively disputed by telephone.)

In the Second Circuit’s view, the Ninth Circuit’s reasoning in Camacho v. Bridgeport Financial, Inc., a 2005 decision holding that Section 1692g does not require a written dispute, was more persuasive. The Second Circuit noted that, in its decision, the Ninth Circuit had provided examples of the protections that apply when a debt collector cannot assume a debt is valid. According to the Ninth Circuit, the collector must disclose that the debt is disputed when communicating the debtor’s credit information to others, and, if the debtor owes multiple debts, the collector cannot apply a payment made by the debtor to the disputed debt.

- Barbara S. Mishkin


FTC Charges Payment Processor with ‘Assisting and Facilitating’ Debt Relief ScaM

The Federal Trade Commission recently brought an enforcement action against a company that processed credit card payments for the operator of an alleged debt relief telemarketing scam. This action serves as a reminder to banks of the need to carefully monitor their relationships with deposit customers that engage in payment processing.

In its amended complaint filed in a Florida federal court against the telemarketer, its principals, and the payment processor, the FTC charged that by “assisting and facilitating” the telemarketer’s alleged violations of the FTC’s Telemarketing Sales Rule (TSR), the processor had itself engaged in deceptive telemarketing acts and practices. Only the telemarketer and its principals were named as defendants in the original complaint, and when it was filed, the FTC obtained a temporary restraining order shutting down the telemarketer’s operations. The amended complaint, to which the processor was added as a defendant, seeks permanent injunctive relief involving all the defendants as well as other relief such as restitution, refunds, and disgorgement.

The FTC alleges in the amended complaint that the processor continued to process credit card charges for the telemarketer “despite alarmingly high chargeback rates” and that it “knew, or consciously avoided knowing, key facts” about the telemarketer’s business. Such key facts included that the company was a telemarketer selling debt relief services and collected up-front fees (which are barred by the TSR).

According to the amended complaint, the processor was aware that the telemarketer was under investigation by the Florida Attorney General and the FTC, had been placed in MasterCard’s highest fraud category, and was the subject of multiple fraud alerts from Discover. Rather than cease processing for the telemarketer, however, the complaint alleges that the processor increased the percentage it withheld from processed transactions to protect its own interests. The FTC further alleges that the processor assisted the telemarketer in its attempts to defeat chargeback requests and by making substantial cash advances.

Bank regulators have increased their scrutiny of payment processor relationships in recent years. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency have brought several civil enforcement actions against banks for engaging in allegedly unfair practices or unsafe and unsound practices through the handling of their relationships with payment processors. Several of those banks were also the subject of criminal enforcement actions brought by the U.S Department of Justice.

In guidance issued last year highlighting the risks payment processors can present for banks, the FDIC reminded banks that they cannot solely rely on the diligence performed by a processor on the merchants for whom it processes payments. The FDIC also warned that a bank’s failure to adequately manage its payment processor relationships could be viewed as facilitating unlawful activity by a processor or a processor’s merchant client and could cause the bank to be liable for such activity. (The FDIC guidance was discussed in a prior legal alert.)

- Barbara S. Mishkin


U.S. Supreme Court Upholds Class Arbitration Ruling Where Parties Asked Arbitrator To Decide the Issue

In a rare unanimous decision on an arbitration issue, the Supreme Court upheld an arbitrator's ruling permitting the arbitration to proceed on a class-wide basis. Affirming the Third Circuit in Oxford Health Plans v. Sutter, Justice Kagan, writing for the Court, held that the arbitrator's decision would not be vacated because he acted within the scope of his authority to construe the parties' arbitration agreement, regardless of whether his decision was correct.

In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp, the Supreme Court previously held that the Federal Arbitration Act (FAA) does not permit class arbitration when the parties' contract is silent on that issue. The parties in Sutter agreed that the arbitrator, rather than a court, should decide whether their contract was silent regarding class arbitration.

The Court declined to vacate the arbitrator's decision because the standard of judicial review under the FAA—whether the arbitrator exceeded his or her powers—is narrow. Since the arbitrator in Sutter based his decision on an interpretation of the parties' contract, he did not exceed his powers.

Sutter should not have any widespread impact for three reasons. First, the issue in the case—Does the agreement permit class arbitration?—arises infrequently because most arbitration agreements today contain express class action waivers. The use of such express waivers was upheld by the Supreme Court in AT&T Mobility v. Concepcion.

Second, even in the absence of a class action waiver, whether a contract permits class arbitration necessarily varies with the contractual language. Each case is unique.

Third, in Sutter, the parties agreed to let the arbitrator decide the issue of class arbitration. Frequently, however, at least one party (typically the company) argues that class arbitration is a gateway issue of arbitrability for the court to decide. In Sutter, Oxford Health Plans agreed to have the arbitrator decide this issue. As indicated in Sutter, issues of arbitrability are subject to de novo review by a court.

Ballard Spahr regularly counsels clients on how to address the issues raised in Sutter through drafting and enforcement of arbitration agreements.

- Mark J. Levin

Vermont Amends Provision Governing Mortgage Brokers Engaging in Loan Processing or Underwriting

The Office of the Comptroller of the Currency recently updated its guidance on procedures for internal appeals of supervisory decisions at various levels. The subject matter deals solely with internal appeal procedures and not with judicial review of final agency action.

The update, released as Bulletin 2013-15 on June 7, 2013, replaced a 2011 bulletin issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act. For more details, read our summary of the key changes.

- Keith R. Fisher


Nevada Adopts Uniform State Test and Exempts Loan Processors and Underwriters from MLO Licensure

Another state agency has announced that it will be adopting the new national MLO test with the Uniform State Content. The Nevada Department of Business and Industry will adopt the test effective January 1, 2014. With this announcement, a total of 32 state agencies have adopted the new test and will no longer require a separate state-specific test component as a prerequisite for MLO licensure.

Nevada also has amended its MLO licensing statute to explicitly exempt loan processors and underwriters from the definition of “residential mortgage loan originator.” Accordingly, a loan processor or underwriter who acts as an employee at the direction of and subject to the supervision and instruction of a licensed or exempt mortgage broker is exempt from MLO licensure. This amendment is effective immediately.

Oregon Amends Mortgage Licensing Exemptions

Oregon recently amended its mortgage licensing statute to remove certain exemptions. Previously, subsidiaries and affiliates of financial holding companies, bank hold companies, and savings and loan holding companies were exempt from mortgage licensure. However, Oregon has recently removed these exemptions. This means that any such entities that were previously exempt must now obtain licensure if not otherwise exempt. This amendment is effective January 1, 2014.

Oregon also recently amended its mortgage loan originator licensing statute to exempt individuals who, as a seller during any 12-month period, offer or negotiate terms for not more than three residential mortgage loans that are secured by a dwelling that did not serve as that person's residence. To claim this exemption, an individual cannot at any time hold more than eight residential mortgage loans. Otherwise, that person will need to obtain an Oregon MLO license. This amendment is effective immediately with an operative date of September 3, 2013.

- Matthew Saunig

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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