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Title Insurance Coverage Narrowed For Properties Sold Through Foreclosure

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Title Insurance Coverage Narrowed For Properties Sold Through Foreclosure

New York’s recently enacted Real Property Actions and Proceedings Law (“RPAPL”) § 1302-a effectively eliminates waiver of the standing defense in a home loan foreclosure action. This exposes foreclosing lenders to assaults on their foreclosure actions for elusive durations and raises questions as to the marketability and insurability of titles devolving through foreclosures. This course will cover how foreclosures are affected by RPAPL and similar statutes in other states.

Transcript

All right. Good afternoon, everyone. We're going to discuss why I believe that title insurance coverage has been narrowed for properties sold through foreclosure in the state of New York. Why do I say that? Well, there is a relatively recent statute under real property actions and proceeding law. Section 13 02a in New York. We refer to that as reportable. This statute became effective December 23rd, 2019, and it effectively makes the defense of lack of standing non waivable in the foreclosure of a home loan as a home loan as defined in section 13 046a. Now you may be thinking how is something from 2019 recent? Well, this is a this was enacted in excuse me, effective December 2019. A few months later, we were all hit with COVID. Shortly after that, we were faced with not only foreclosure but general litigation moratoriums in the courts. So there hasn't really been too many opportunities for lenders and borrowers to challenge and work with the statute. So there really is a dearth of case law available. Just a few cases that have discussed this, and we'll get into that later. But it's still too early in the process to have a definitive track and understanding of where the courts are going with this and what the, quote unquote, new norm will be once this has been adjudicated a few times. In any event, what's troubling about Apple 13 02a is that it completely upends decades of established case law and it leaves the title devolving through a foreclosure susceptible to attack four years after the foreclosure sale and the closing and years of ownership. You know, this can't go on forever, but it is unclear what the cap is going to be for various ways for a former homeowner to attack the foreclosure, for lack of standing. And that's that's very troubling. If you're the homeowner and you bought this property at a foreclosure sale, proper foreclosure is completed and all of a sudden the former borrower comes forward two, three, four, seven years later and says, you know, the lender didn't have standing. I don't think this is okay. And they find some reason to open the foreclosure and attack it. That's a problem. We can only guess how that would be unwound and what would occur. But what a nightmare that would really be if it if it were to unravel that way. So that's really the current concern. But standing even outside of the context of a foreclosure is certainly a critical element to any litigation, to any enforcement. You have to have some interest in the outcome of the action. Otherwise everybody would be susceptible to harassment by anyone for anything. So establishing standing and making sure that it exists, it's certainly the correct thing to do. And nobody is attacking that a lender certainly should have standing before they try to take somebody home that we can all agree on. But what does a plaintiff, what does a lender have to do to establish standing? Well, to establish standing, the foreclosing party must present a prima facia case that it has the legal ability to foreclose and is entitled to judgment. So the basics that a plaintiff must prove are the existence of a mortgage, proof that they hold the mortgage and of course, that there is a default under the mortgage. Otherwise we would not be discussing a foreclosure. So standing is undoubtedly the most frequently encountered defense to a foreclosure. It is very easy for a borrower to simply say lender does not have standing. Eventually they have to articulate why and they need to be able to try to prove it. But it comes up so frequently that perhaps it's not surprising there is a seemingly endless amount of case law on the subject. So what do the courts in New York say about standing? Well, standing, as we already know, is required to foreclose a mortgage, and it's demonstrated by the plaintiff's possession of the note at the inception of the action, and it affords the plaintiff legal entitlement to judgment. This is most often excuse me, this is most often accomplished by attaching the note to the complaint, demonstrating that you hold the debt. Here's the note. It's well established that in an action to foreclose a mortgage, a prima facia case is made by the plaintiffs production of the note and mortgage and proof on the part of the defendant mortgagor or any guarantor, as if applicable, that there was a default on the payment or any other material terms set forth in the mortgage. Again, we most frequently encounter a default and a foreclosure because of nonpayment, but there are many other elements in a mortgage that can trigger a default and a foreclosure. A very common one would be a conveyance without the lender's authorization. Suppose you hold title as John and Joan Smith and you decide, you know what, we want to put title in our LLC, the Smith LLC. Mr. and Mrs. Smith are still responsible, but under a different name. Some lenders may allow that if you request it, but if you simply do it, they're not going to necessarily approve of the legal conclusion that ultimately the same borrower is responsible. They don't care. You need their authorization and permission to make that conveyance. And if you don't, the lender can declare default and call the loan due and initiate a foreclosure as if you did not make payment. So there are real concerns when a lender is foreclosing. Whatever the reason, you want to make sure that they actually do have standing, they hold the note and they have the ability to enforce it. So it's quite important. Continuing with the theme of establishing standing, a plaintiff will also have standing again at the time the action is commenced when it is the holder or the assignee. Either by physical delivery or execution of a written assignment, again prior to the commencement of the action. And this relates to both the mortgage and the underlying note. Again, we keep saying at the beginning of the action, because there are countless instances where a lender is in the process of receiving a mortgage by assignment and they know it's in default, so they begin the foreclosure. But when they do that and they file their papers, they are saying to the courts, we are the holder of this mortgage, but they are not, in fact, the holder if the assignment has not gone through. Now, again, I'm not talking about the assignment not being of record, but meaning they haven't completed the assignment process or the negotiations, which means the lender at this moment or the purported lender is not in physical possession of the note and mortgage. So it would be early and improper for them to begin a foreclosure. That is a prime example of when a lender does not have standing, and that is a frequently encountered scenario. Now, again, we talked about standing in for the most part when we're talking about the originator of the mortgage. But what do we see? Quite often the assignments on the secondary market, countless assignments, four or five, six, seven, ten, you can have 30. If you're talking about a commercial mortgage that's been consolidated a few times. So how does an assignee establish standing? Well, if the plaintiff is not the originator of the mortgage, then the assignee will have standing upon receipt of an assignment of the note and mortgage. After all, the mortgage goes with the note, or if they have delivery of the note. Now, if you have the livery of the note and you're the assignee, it's not just the original note. So if the note is delivered with an assignment, that's one thing. If the note is delivered without an assignment, that alone is insufficient to establish standing. So there still needs to be either a proper endorsement on the note affixed to it, of course, or in a longe affix to the note. Now we can discuss for hours the proper way to assign and handle negotiable instruments, but that is a very separate matter. But at its most basic, the note alone will be insufficient to establish standing. So you need to have either a proper endorsement on the note and affixed to it, or on a lounge affixed to the note. If the note is delivered without an assignment, very important, and that has tripped up a lot of lenders. Continuing with assignee, standing again, either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation and afford that assignee standing. And as we know, the mortgage passes with the debt as an inseparable, inseparable incident, which is why we're talking about the note at this moment. It's not just the mortgage. Now, let me take this opportunity to say, in a perfect world, every assignment is going to be of the original note and the original mortgage and any underlying collateral subsequent to additional assignments. So those assignments and those those notes. Now, if there are allergies, if there are loss notes and therefore lost note affidavits, things of that. All of that should always be available and provided. Sometimes a file looks as if a lender is, for lack of a better term, kicking the responsibility down the road by just having everything a loss affidavit. There's no effort to find these things. It it could be tricky. But again, in a perfect world, you will have an assignee will have physical delivery of the note and the mortgage and a recorded assignment of mortgage. That's the trifecta that anybody's going to want. But here we're talking about ways to establish it, perhaps when you don't have all of those available to you. So, again, a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the action is going to afford standing to the assignee. A transfer in full of the obligation will automatically transfer the mortgage as well. Unless and this is rare, but unless the parties agree that the transfer draw is to retain the mortgage, that does happen sometimes. And that too would be a proper subject for a separate discussion. It'll take us into another universe here. Now, remember, assignments of mortgages and notes are made by either a written instrument or the assignee or physically delivering the mortgage. A note to the assignee. And there's an abundance of case law in New York. I quote one from the appellate division saying, Our courts have repeatedly held that a bonded mortgage may be transferred by delivery without a written instrument of assignment. So, again, mere possession of the note and mortgage is sufficient to establish standing, although one may not know that of record without a recorded assignment. Which is why a moment ago I said, You want all three? Certainly when you can, but as we know, that does not always happen. Unfortunately. Now, when a mortgage is represented by a bond or other instrument. An assignment of mortgage without the assignment of the note or bond is a nullity. It's an older case from 1860, 1867, but the whole thing is just as true today. Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure. I will never stop saying that is sufficient to transfer the obligation. And as we've discussed, the mortgage passes with the debt as an inseparable incident. A mortgage is but an incident to the debt, which is intended to secure a logical conclusion. Excuse me. A mortgage is but an incidence of the debt which is intended, which it is intended to secure. The logical conclusion is that a transfer of the mortgage without the debt is a nullity and no interest is assigned by it. Stated differently. The security cannot be separated from the debt and exist independently of it. So again, there are various situations where you want the note and mortgage or the note is sufficient. It will depend on challenges. It will depend on assignments. Best practice if you couldn't guess, always retain and always deliver the original note, the original assignment, the original mortgage everything. Record it and deliver it. Provide possession. Take possession of it. As a general matter, once a promissory note is tendered to and accepted by an assignee, the mortgage passes as an incident to the note. So an assignment of the debt carries with it the security, even though such security may not be formally transferred in writing. In current speak, we would say physical possession of the noted mortgage is sufficient to establish standing. And that's really the the most critical aspect here as we've come across quite a few times. A transfer of mortgage without the debt is a nullity and no interest is acquired by it. There is an abundance of case law here to quote and lots of concepts that can be explored. And as you'll see, some of these cases are going back to the 1800s and they're still cited today. This may look like it's a stale recitation, but these are still used by litigators today. That's how sacred these holdings are, about how to establish standing and what rights a lender has. And again, that is critical because the reason the lender, the mortgage industry works the way it does in part is because of the expectations of what happens if and when a loan does not quite go the way the lender and the borrower are hoping. As we all know, lenders are not in the business of owning real estate. They don't want to own properties. They're not looking to take these properties back, remove somebody from their home and sell these properties on the secondary market. That is just simply not what they want to do. But it's an unfortunate reality of the lending industry. So they lenders need to have an understanding and there is comfort in knowing, in theory what should happen in the event of a default and a foreclosure. And that's why what we're discussing here is so disconcerting. It completely upends that there are plenty of people brighter than me that will have to factor that into loan underwriting and make determinations about business risk and things of that nature. But it certainly poses a problem. And as I said at the outset, one that hasn't really been addressed by the courts just because there hasn't been enough time. So this is still very much in its nascent sea. So we are at a time where we're still speculating what will happen, what the effects will be. And to an extent it's almost anybody's guess how the courts will interpret this, but we'll see what they're starting to say. But again, the important part is there. The underlying subtext for the lenders and lenders counsel is do everything you can to ensure that standing cannot be challenged. Now, there's nothing we can say or do that will prevent a borrower from uttering the words, Hey, I don't think the lender has standing and therefore they cannot proceed and fill in the blanks with whatever language you want to use. But if a lender knows whatever the borrower says, they can't properly sell this because I hold the note, I hold the mortgage, there's a recorded assignment. All of this was done by the prior to the inception of the foreclosure action. We have proper challenges. We have proper endorsements, whatever it may be. Now, again, you can't always control that, but I think a lot can be done to make sure that that's more often the case than not. So this way, especially with the new 13 02a, there's less ammunition for a borrower to use to attack standing and less opportunity for a lender to not be in a position to defend itself. That's that's critical. Again, I encourage you to read the materials on your own, which will give you citations and statutes and things like that, that if you really want to do a deep dive on all of the minutia relating to standing and the subtle differences between with and a challenge with an endorsement, without all those things, please refer to these cases. But again, the important takeaway is establishing standing as early as possible to make sure that it cannot be a sale is going to go a long way, but we'll see more of that when we get to what the title company looks at as a result of the this new statute. Now, what are the common challenges to standing? Some may be obvious, but some may not. Let's see. Well, to begin very easy for a borrower to say, well, the plaintiff lender is not the originator of the mortgage and the assignment is not recorded. Therefore, they have no standing and they cannot foreclose. Well, it sounds compelling on its face, but is that true? Well, as we've discussed, as a matter of law in New York, the livery of the mortgage documents with the intention that there is to be an assignment suffices. That is to say there is no absolute need for a written assignment of mortgage, although of course it is strongly suggested, but it is not a requirement. But you really, really should have one. Another common way to challenge standing is for a borrower to say the lender does not have possession of the mortgage. Well, to have standing, it is not necessary to have possession of the mortgage at the time the action is commenced. This conclusion follows from the fact that the note and not the mortgage is the dispositive instrument that conveys standing to foreclose under New York law. What if the lender holds the note but not the mortgage? Well, this too, is not an infirmity to establishing standing, but the opposite is a plaintiff with a mortgage. But not the note lacks standing to foreclose. But a plaintiff with the note and not the mortgage does have standing to foreclose. Once a note is transferred again, the mortgage passes as an incident to the note and assignment of the note brings with it the mortgage as an incident of the assignment. I will readily admit that it is an odd concept to think that these instruments that are so important can be separated and even when separated still affords standing. Oliva. It is true, and just because they're separated does not mean a borrower can say now lender you don't have standing because. These are the minutia. These are the little things that can completely change the direction of an action. And by the way, what may happen when it comes to title insurance, because they're believe it or not, there are plenty of cases that the lender did not have standing at the inception of the action. They did not hold the note. They did not hold the mortgage. There wasn't an assignment. It came through later, nobody noticed. And they proceeded with the foreclosure. Nobody challenged it. Everything seems to go through. A couple of years later, they present the order for a title insurance title. Insurance company catches it and says, but the lender didn't have standing. Look at all these problems. These were things that really. Can completely change the lender's portfolio, completely upends the ability to foreclose the property, sell that property is REO. Obtain insurance for it. Standing really is the wicked beast that lurks in New York. It's like I said, the most common challenge to any foreclosure. It's almost boilerplate for a foreclosure defendant to raise standing. Dare I say, irrespective of whether or not it's an accurate statement, I don't know that I will do that. But standing is raised with a lot of frequency. Again, critical to remember. Once a note is transferred, the mortgage passes as an incident to the note and assignment of the note brings with it the mortgage as an incident of the assignment. Critical to repeat, critical to remember, because that's where the reverse can change the outcome. Any disparity between the holder of the note and the mortgagee of record does not stand as a bar to a foreclosure action because the mortgage is not the dispositive document of title. As to the mortgage loan, the holder of the note is deemed the owner of the underlying mortgage loan with standing to foreclose. Now, that is not a matter of case law, although it's certainly recited, but that is in Carmody Wait, which I think any New York attorney will tell you is a litigation bible. It is so vital to have every judge relies on that. And that will do you wonders if you can become facile with it. In any event, continuing with common challenges to standing and again, these are not dispositive. These are just a few. I was not personally served. Well, that is a problem and that is common, especially in foreclosures. But under civil proceeding laws and rules. Section 317 CPR 317 A person served with a summons other than by personal delivery to him or to his agent for service who does not appear may be allowed to defend the action within one year after he obtains knowledge of entry of the judgment. But in no event, more than five years after such entry upon the finding of the Court that he did not personally receive notice of the summons in time to defend and has a meritorious defence. And yes, I know that is a mouthful, but it is a problem for standing also under kpler, but this time under rule 5015a the court, which rendered a judgment, may relieve a party from it upon such terms. That may be just for the lack of jurisdiction to render the judgment or order. That's another way of saying if it turns out standing was not there, you can't be held accountable under that judgment. If they didn't have standing to get you. So again, whatever problems we may have or observe about this new statute isn't to suggest that a lender or any plaintiff should not be held accountable for establishing standing. We agree that is absolutely critical. It's just the method of doing so and how it can be challenged or how it can continue or the challenge can continue. That's what we find objectionable. Some additional challenges to standing may also be found under a CPR here. Rule 5015 A Again, the court, which rendered a judgment, may relieve a party from it upon such terms. That may be just an example would be upon the ground of excusable default again, very quickly on excusable default. If you find after an action that you should have raised a defense such as, Hey, I should have said that the lender didn't have standing and I didn't you can't just say mea culpa. I forgot I should have done this. Sorry. You need to have a reasonable excuse for that. So also, you need to have a reasonable excuse for your default if you want to go back and open up an action after and interpose some sort of defense that you could have availed yourself of before, It's not an opportunity for somebody to just realize I didn't know what I was doing, but now I do and I should have done this. We can get into a separate discussion about all the reasons what of what may constitute an excusable default and why you may have a reason for coming in at this later time, perhaps ineffective assistance of counsel or something like that. But again, you have to have it. So you can't just have the ability to challenge standing after the fact. You need to have a reason for having not done so at the beginning. Now again, further on challenges to standing, the court may direct and enforce restitution, and New York courts generally uphold the rights of a bona fide purchaser acquiring title out of a mortgage foreclosure. When the court granted a motion to vacate the full judgment of foreclosure and sale. Due to the lack of personal service. And then they dismissed the action now. I alluded to it before. Even when one has the legitimate ability to challenge a foreclosure and all the elements are there in favor of the borrower defendant. Once a property has been sold, it becomes very difficult to make everybody whole and unwind that transaction. So you can be faced with a situation where even though you have all of the ammunition, all of the facts of the law are on your side for the borrower, that the courts can't really come up with an equitable solution. Because what if the property has been sold two times and there was a mortgage and that mortgage was paid off? Are you going to get the proceeds back or are you going to get those funds from the lender back to the borrower and vice versa? It's mechanically these things don't always work. So even if a borrower can challenge, it's not necessarily going to lead to an unraveling of title. And I say that having nothing to do with title insurance, just the reality of a homeowner owning a property that they thought was. Purchase without issue. All of a sudden now somebody comes out of the woodworks. Can they really kick them out of their house? Can they really upset the mortgage that they now have? There's a question as to what will ultimately happen. I think there's a lot of equitable arguments on the side of the new lender and the new owner. That's why we do have CFP, bona fide protection excuse me, bona fide purchaser status and protection in New York. But this all remains to be seen, which is why it's so curious as to what will go on, what will really happen as a result of this new statute. But continuing here, what we're going to focus on now is what if a defendant doesn't challenge Stanley, or at least only indirectly? Well, if a defendant is not personally served in an action and they do not file an appearance, then that defendant may have recourse under CPR Section 317, which is defense by a person to whom the summons was not personally delivered. And also, as mentioned before, under CPR, Rule 5015, relief from a judgment or order. Now, these principles are not affected. They remain unchanged by the new statute, but service issues are ripe for standing challenges. Now, we'll get to this later on. But one thing I want to mention here is even if there is a question about can a borrower challenge standing, did they challenge standing here from a title perspective, we will take comfort in the fact that a borrower was personally served, not to suggest that a lack of personal services, improper service, but I think, as we all recall from law school and certainly from our practice, it's personal service is the most desirable for obvious reasons. So if we do have personal service and somebody appears in the action, or at least the person we served and choose not to appear, that will go further than if we're dealing with the situation where a person was not served personally. And again, that's from a title insurance analysis after the fact. Looking backwards, obviously, in a foreclosure and in any litigation, we always hope for there to be personal service. But obviously that is not always practical for various reasons. Now, in New York, motions to dismiss is under CPR 3211 and it holds that a defense that the party asserting the cause of action has no legal capacity to sue. So that had to be raised in a defendant's answer or in a pre answer motion to dismiss. Otherwise it was deemed waived. So if the bar where defendant is in the action and they do not raise. That the party asserting the cause of action here, the plaintiff has no legal capacity to sue. In other words, a lack of standing. And then the matter is concluded. It goes to judgment of foreclosure and sale and then is subsequently sold by referee's deed. That was it. The borrower was, as litigator, say, dead to rights that that was deemed waived. They can no longer raise that defense. So but they could some at some point during the course of the action. But they could. But if they didn't do it, when that action was over, that was it. They waived that right. So standing or lack of standing as an affirmative defense must be proven by the party asserting the defense. So it's not for the plaintiff to establish. It's that the defendant has to prove that the plaintiff lender does not in fact have standing for whatever reason they don't hold the note and mortgage. There was never an assignment and or there was never an assignment or. Physical delivery, whatever the various allegations may be, it becomes incumbent upon the defendant to prove that. So a plaintiff is under no obligation to plead and prove it's standing in the first instance. It is only worth standing as properly put an issue by a defendant that the plaintiff must prove its standing to defeat the asserted standing defense. So it thus becomes incumbent upon the answering defendants to submit proof sufficient to raise a genuine question of fact casting doubt on the plaintiff's prima facia showing. Once a plaintiff standing is placed an issue by the defendant. It is incumbent upon the plaintiff to prove its standing to be entitled to relief. So it goes back and forth. But you know, in New York what you're supposed to do. Even though we have case law that says a plaintiff is under no obligation to plead and prove it's standing, but it does at the same time. I know that sounds confusing, since we know a lender needs to have standing in order to properly bring an action, most lenders will attach a copy of the note and mortgage to the complaint and they will declare that they are the holder, either because it was they were the issuer of the mortgage, they were the originator, or they hold it by assignment pursuant to and they recite the assignment chain. So quite often a good lender will make it clear at the inception, nonetheless, that they are in fact the holder of the note and or mortgage or whatever the case may be, and establish it with copies and with affirmative statements. That does not stop a borrower from tendering the issue, but it makes it a lot easier for the lender to defeat, especially when they started with that information to begin with. Now, again, while that sounds like a litigation tactic or an approach, that's just something that becomes clear from the case law when they discuss it, especially when you see a lender has attached all of that, pled all of that, and the lender says, no, excuse me, a borrower says, no, the lender doesn't have the note in mortgage. Well, they attached it to the complaint. They swear they have it. A little more can be done from the lender to then substantiate that. But again, it's not the strongest argument from a borrower. When the lender comes out of the gate establishing and declaring to the court, Look at what we hold. Look at what we have in our possession. Therefore, we have standing. But it does happen. Some Notes on Standing Challenges. Again, once a plaintiff standing is placed in issue by the defendant, the plaintiff then does have to prove its standing in order to be entitled to relief. So if they did not start by saying, well, we hold the note of mortgage and here a copy is, this would obviously be the prime opportunity for them to do so. And of course, it better turn out that whatever it is they're holding, whatever it is they have that gives them standing. They had to have had that at the inception of the action, because having it after the fact does not save you. It doesn't erase the error, the defect of not having it when the foreclosure was initiated. So that is critical now. 13 02a is that new statute that is questioning title insurance in New York challenging sort of the coverage that will be given because it leaves open the question of when a borrower can challenge standing before this was instituted. So before December 23rd, 2019, standing was a waivable defense and defendants waive their affirmative defense of standing in a residential foreclosure action. Again, none of this applies to commercial in a residential foreclosure action. By failing to raise that defense in an answer or a pre answer motion to dismiss. So neglect to assert standing as a defense in an answer or a pre answer motion waived the defense. Now, while true as a matter of law and there is an abundance of case law and I just cite a few here, borrower's attorneys still raise the defense, even in cases where it doesn't apply in courts on their own. Have confronted the issue, alluded to that a moment ago. The lender says we are the holder of the note and mortgage from A, B and C to X, Y, Z dated such and such recorded on this date. It's in the amount of x we still hold it or it was assigned from this party to that party to us. And we are there for the holder. They go through everything and then a borrower's attorney says, You do not have standing, you don't hold anything. Okay, let's let's restate what we said at the beginning. That's what they're going to do. But that's what happens. Now, under Rule 3211, a defense that the party asserting the cause of action has no legal capacity to read that as no standing, it must prior to 13 02a It must have been raised in a defendant's answer or in a pre answer motion to dismissed or as stated it was deemed waived. Now, there was a constant bombardment of appellate case authorities where the issue of standing was unequivocally fixed as an affirmative defense that must be asserted by a defendant or it was deemed waived. Now that has changed. As we've discussed. So a challenge to standing is no longer a waivable defense. So if you appear in the action. For a mortgage foreclosure of a mortgage categorized as a home loan. Standing is not waived. So now, notwithstanding the provisions of CPR Section 3211 E, which states that any objection or defense based on the plaintiff's lack of standing in a foreclosure proceeding related to a home loan, again, is that home loan as defined in Apple 13 046a It shall not be waived if a defendant fails to raise the objection or defense in a responsive pleading or pre answer motion to dismiss, a defendant may not raise an objection or defense of lack of standing following a foreclosure sale. However, unless the judgment of foreclosure and sale was issued upon defendant's default. So if you appear in the action. And you do not wave. Rate. Excuse me. If you appear in the action and you do not raise standing as a defense, you do not challenge the lender standing. You do not raise it as an objection. And then there's a foreclosure sale. And you were personally served in that action. And you appeared. You can't come back and say, You know what, I didn't raise standing and I don't think you had it. That is a borrower holding onto the fence solely to disrupt and disturb title after the fact. So if the defendant appeared in the action and had the opportunity to raise it, they can't hold it in reserve and come back. But if the foreclosure is on the fault. The defendant never appeared and they have a valid. Standing challenge and a reasonable excuse for their default. They can come back at any time effectively. So says the statute and disturb the cell. Let me repeat that because it can be a little confusing. I want to remind you that the issue we're discussing with 13 02a only applies to a home loan. So again, not a commercial loan and not every other loan that is not commercial. A home loan is defined under section 13 046a as a loan, which the borrower is a natural person. That's an individual. The debt is incurred by the borrower primarily for personal family or household purposes, and the loan is secured by a mortgage on real estate, improved by a 1 to 4 family dwelling or a condominium unit residential condominium unit. Of course, in either case, used or occupied or intended to be used or occupied wholly or partly as the home or residence of one or more persons, and which is or will be occupied by the borrowers. The borrower's principal dwelling in English. That means this is not going to apply to an investment property that an LLC is is holding for weekend vacations and things like that, or Airbnb. If it's your primary residence and you own it individually. You've got a home loan. There may be some other situations, but at its most basic, if you're an individual and you have a mortgage on your primary residence and you intend to occupy it as such, then you're dealing with a home loan. And those are the most common types of foreclosures should be obvious. And also, it doesn't matter what state you're in, if you look at any headlines in your sensitive to foreclosure abuse or, you know, potential issues in the lending industry, you're going to find that it's with the home loans. It's not commercial loans, it's not investment properties, it's with home loans, which is why the courts are so serious about this. I mean, really, at its essence, you're talking about disturbing home ownership, which is a primary goal of of the American dream. Right. So to upend that and remove people from their homes, it's not taken lightly. So it is wonderful that the courts do have measures in place to try to ensure that borrowers are protected to the best of their ability. And we'll see more of that in a bit as we get to some other states. But again, this applies to a home loan as defined in section 13 046a. So what does 13 02a allow a borrower to do? If a defendant appeared in the action, its ability to raise the defense of a lack of standing continues until the moment the foreclosure is completed in New York, or foreclosure is not deemed completed until the hammer falls at the auction. Now, most places don't use a hammer these days, but effectively, once the auction sale is over and the referee deeds the property to the bank, or you sign the terms of sale and say, Great, you're now buying it. Mrs. Smith, you're the successful bidder. That's when the foreclosure is over, when the auction is complete. So any time prior to that, a borrower can, if they appeared in the action, raise a challenge to standing, in theory, not an issue for title purposes, because if they have the right to do it prior to the sale and we're only coming in after the sale, whatever issues there may have been have been worked out, either the defendant prevails or not. So in that case, it's not going to disrupt title insurance. But you do need to know that the borrower has the ability for the duration of that action when they appear to raise that so they can save it in reserve at the very last second and say, you know what, standing challenge. But they have to be able to prevail raising it. Of course, it takes away time and money, but they have to be able to prevail in order for it to create an actual issue other than the nuisance of now the time and delay of having to dispose of such such an allegation. But what if the defendant did not appear? Well, then the ability to pursue the defense of lack of standing survives the foreclosure sale lurking to assault the foreclosure sale. And it's the title devolving there through for what is a potentially uncertain duration. So I'm a defense in a foreclosure. I get served. I don't appear. I now have the ability after the foreclosure sale to raise standing as a challenge. Now there are circumstances or elements rather, that need to be met first. But they can be met. They're not they're not impossible. So that alone, those create an issue for a foreclosure purchaser. There is the chance, just based on I can stop right here and the specter of somebody coming back to perhaps attack your title. Those exist for some unlimited unknown point of time that is not of comfort to a homeowner, especially when that matter is not covered by a title insurance policy. So again, I've said it before and I'll probably say it a few more times, this new bill 13 02a contradicts the established law that a judgment of foreclosure and sale entered against a defendant is final. As to all questions at issue between the parties and concludes all matters of defense defense which were or might have been litigated in the foreclosure action. I'm going to say that again because that is something that rep Happel does not specifically address, and I believe it's an unintended consequence. The law in New York is clear that a judgment of foreclosure and sale entered against a defendant is final as to all questions between those parties, which means if you didn't raise it and the judgment of foreclosure and the sale was entered, you can't raise it. Of course, here we are discussing 13 02a which now says otherwise. But again, judgment of foreclosure and sale is a final judgment. That's that's still the law. But 13 02a says nevertheless you can still challenge it that that is a concern. Now the real concern or the most serious concern for lenders and what poses an immediate increased risk for title insurers is the unknown period of time that somebody can challenge standing. Whether or not the the challenge is legitimate is irrelevant. Just by doing so, somebody losing money, somebody has to pay to defend that. Is it the title company? Usually not, given the fact that this is now an exception. And we'll get to that in a moment. But the homeowner. So now there is a cost associated with that that I submit purchasers representing excuse me, attorneys representing purchasers of foreclosure properties need to have their clients account for in their bid, because it's conceivable that at some point in time they may be required to spend a few thousand dollars to dispose of a challenge to standing. Now, again, when I say a few thousand and I use the term nuisance, I'm saying that presupposing that any challenge to stand, they would not be a legitimate one. It would just be either under a misapprehension of the plaintiff or they would be doing it to be a thorn in somebody's side. Obviously, if there was a legitimate challenge to standing, that's a separate issue and that is something that would have to be explored a little differently. But here what we're focusing on, or the situations where it does not seem to be an issue, there doesn't seem to be a reason for there to be a challenge to standing. It was alleged. And we believe when I say we, the title insurance company purchaser purchasers counsel, there's some level of due diligence required If you want to be able to establish yourself as a BSP, you can't just assume all is well. You need to look into it. So again, we're really talking about a situation where everything is above board, but just the notion that a borrower can come around and say, Hey, I think I don't think the lender had standing and this is a problem that existing is unfortunate enough. The merits of it are almost irrelevant because, again, if it's covered by a title policy and it won't be, but if it is, the title company loses the moment they have to hire an attorney to dispose of that challenge. And if it's the homeowner, the homeowner absolutely loses. The second they have to retain counsel out of pocket to dispose of this challenge, especially if it's not a meritorious one, I would not find comfort in the thought that somebody might be able to get legal fees from the former homeowner in a litigation. It's unlikely to happen for various reasons. So really it does leave an owner exposed with some post closing liability and risk will whether a homeowner would ultimately lose title. You know, it's possible, yes. But I don't think that's the big concern. I think really what we're focusing on now is just the the nuisance time and value of having to deal with a challenge. Whether or not it's legitimate is irrelevant. Just having to deal with it is is unfortunate. Continuing with the consequences of 13 02a purchasers really are left with the risk of litigation. And as I said, there can be instances where there's a potential loss of title as wonderful as. Cattle industry is. I reluctantly have to admit there may be some that are infallible, like, excuse me, backtrack. There are some that are not infallible and may not properly grasp and analyze in action and may be missed. Some defect that might upend title. Again, title insurance is critical. I say it's vital, especially for foreclosures. You do want somebody to review the litigation history and make sure that all proper steps were taken in order to sort of validate the foreclosure, if you will. And that can be done to a point. And even if one can determine that, hey, I don't think there was a legitimate reason for somebody to challenge standing, it doesn't stop somebody from doing so. So, again, for title purposes, we may be comfortable that we're one to make. The challenge title would not be lost. Mindful that the cost associated with defending that challenge would is disproportionate to any associated premium for the transaction. It's a losing proposition for the title company, which is why this matter is accepted. This new risk where Pebble 13 02a is going to be and is, as we're about to get through an exception in title reports relating to foreclosed matters, we can't stop a borrower from raising these post-closing challenges. So 13 02a does create a new and increased risk to title insurers, most particularly when we encounter a transaction involving a home loan where the foreclosure sale has been completed and the defendant mortgage are neither answered nor appeared in the action in such circumstances, the defendant's rights to raise lack of standing as a defense continues post foreclosure sale and post closing post the insured transaction. Now, as I said, prior to the enactment of 1302, a the purchaser of a property devolving through foreclosure, they were already taking on additional risk because it was title born out of a foreclosure. But that risk became somewhat acceptable and calculated. Now there are some, I'll call them standard foreclosure exceptions that one would encounter in New York, having nothing to do with 13 02a and for example, those would be any possible issues with C Section 317, 2003 and 5015, a one and a four. Those are in order. Those are issues where the defendant is served by means other than personal delivery, which we already discussed as a general risk in and of itself. If there was an irregularity in the judicial sale, if there is excusable default for the borrower, having not raised the defense or appearing, and if there's lack of judgment of the court to render the judgment excuse me, lack of jurisdiction for the court to render judgment, those are rights that a borrower has that they can avail themselves of, notwithstanding the enactment or repayable. 1302. So those are the exceptions one would encounter in a title report for a property born out of a foreclosure. But now, because 13 02a creates an even greater risk. Purchasers of a property born out of a foreclosure will now see an additional an exception. I have in all caps printed the standard drawn out exception about what the policy is accepting. You can read it. There are versions that are significantly longer. They could take up an entire page. There are some that are a sentence. Conceptually, what is being accepted is anything that may happen as a result of 1302. A That means if a borrower tries to raise a post closing defense of a lack of standing, some challenge to standing for whatever reason, some infirmity in their allegations of standing, anything under 13 02a will not be covered by the title company. That leaves the homeowner, the new owner, with the risk of having to litigate and dispose of a standing challenge. Again, whether the borrower or former borrower has a meritorious challenge is a different story. But just by bringing it, it's a problem. You have to go to court, you have to hire an attorney. You risk losing title. Yes. But more importantly, I think the immediate concern is just the the cost associated with having to retain counsel. And that is what, 13 02a, shall we say, unintentionally invites or permits a new owner to to do so. It puts a new owner in a tough position. Now, is that to say that every single property devolving through foreclosure will have this exception if you obtain title insurance? Well. No. There are going to be facts and circumstances that would permit a title company to omit and remove this exception, which obviously means the risk is now back with the title company not on the owner. For subsequent challenges to standing based on 13 02a So what would allow a title company to omit the exception of 13 02a. Well, one thing that we request, I've only seen it once, although it's been requested quite a few times, is a certificate of merit from the plaintiff's counsel evidencing that the plaintiff was in fact the true holder and possessor of the noted mortgage and commencement of the action. We would need true copies of the original loaded mortgage to be exhibited to the certificate. So if an attorney can go on record and say, Oh, yes, absolutely, this is the fact they were the holder and possessor and make very serious affirmations about the plaintiffs status and effectively the lack of an ability for there to be a true challenge to standing that would go a long way that's meaningful to the title industry, and that would allow a title company to omit the exception. Similarly, an affidavit or affirmation from plaintiff's counsel reconfirming to the title insurance company, not to the lender, not to the client, not to parties, but naming the title company title agent, as it were, stating that the plaintiff was the holder of the noted mortgage and in possession of the original note and mortgage at the time the foreclosure action was commenced. I do, of course, allow for there to be the generic presentation of other demonstrable proof of standing. That's a nice way of saying we'll look at anything that will convince us that the lender absolutely had standing such that if there were a challenge, it could be disposed of very quickly. And there are other facts we look at, by the way, that will say convinced, but that help us decide that the odds, the risk of the former owner under certain facts coming back are limited. This is going a little off topic, but some things we would look at are the value of the property versus the sales price. If a property is completely underwater, the mortgage is 800,000, but the property is only worth 300,000. Then the odds of somebody coming forward and spending a lot of time and money to prevail in an action to put themselves in a position to have to pay off that $800,000 mortgage to take title to a property worth two or 300,000. You know, we we don't believe that that's really going to happen, does it? Sure. People do crazy things all the time. We know that we're lawyers, but from a title perspective, we don't necessarily find those facts to be problematic. Anything that suggests somebody should not want the property is more compelling to us to think that there's less of a chance, of a risk of a subsequent challenge, especially if we're also comforted that the lender had standing nonetheless. All of those factors together and sometimes independently, will be enough for us to say there is nothing doing here. Nobody's coming back. And if they do, they can't possibly prevail. So there are instances where we absolutely can and will remove this exception. But as a starting place, it's there. And until we're strongly comforted by the facts and circumstances cases that there is nothing doing with standing challenge, it's going to remain because it is a real risk. And it is one that, like I said, until we're. Persuaded otherwise that risk will stay with the prospective purchaser. Now, depending on the facts of a particular matter, some underwriters will omit the 13 02a exception solely based on the vacant status of the property. But of course, how one establishes that a property is vacant of foreclosure property, nonetheless, is not easy speaking practically. Title company is not going to drive to the property and make a determination. Purchaser's word. While of course meaningful cannot be controlling since they don't have possession of the property. Lenders and referees rarely know anything that's occurring at the property, and even if they do, it's very rare that they're in a position to commit something to writing, stating that they are certain the property is in fact vacant. So if it can be established and it can happen, that may be compelling enough to allow the 13 02a exception to be removed. But in the absence of proof that the property is vacant or any of those other elements assume that that exception is going to stay. Now, as noted, 13 02a applies to default judgments entered on or after December 23rd, 2019. That is the stated effective date of this section of Apple. Nevertheless, there is one title insurer that requires that the exception be raised irrespective of when the judgment of foreclosure and sale was entered. So if we're looking at a judgment of foreclosure and sell from October 2017 years before 1302, a even existed, perhaps even before it was even conceptualized, they're still going to say you have to raise the exception. It can be applied. Now. Why is that? The general maxim, of course, or the thought should be that unless a statute or law that's enacted says it has retroactive application, then it doesn't have retroactive application. So one would think we only need to be concerned with judgments of foreclosure and sale entered on or after December 23rd, 2019. While I believe that's true, as stated, one underwriter takes a different position, and that's due to a case called JPMorgan Chase Bank B Carducci The citation for that is 2020 NY slip up to 0072. Now in that case, both the plaintiff's notice of motion for default judgment and the judgment of foreclosure and sale were entered prior to enactment of the statute. And while the court correctly held that the foreclosed owner was still required to demonstrate a reasonable excuse for default and provide a meritorious defense, it still underscores the risk presented to title insurers because they entertained a challenge to standing after it was otherwise waived, even though the judgment of foreclosure and sale we're talking about preceded the enactment of the statute. Now, will that case be overturned? Will it be appealed? Anything's possible. But for the moment, since the court did entertain that argument, so too does one of the underwriters, which means you may not be able to get rid of it just because the the underlying judgment of foreclosure and sale predates the the enactment or the effective date of. 1302 13 02a Now another title insurer takes the position that section 13 02a is not even limited to default judgments against the borrower defendant in a home loan foreclosure but against any defendant in the foreclosure where they have defaulted. So all the elements that apply to the borrower that as spelled out in Apple 13 02a and the limited case law that interprets it, that this one underwriter also takes the position and that applies to another defendant. So if there's a credit card company that holds a small judgment and they default, the belief or the thought is that they can come forward and challenge standing at a later date. It's not for me to say whether that's accurate or not. That's an interpretation. But it is again, it underscores the risk that's out there and the difference in interpretations of this statute, which again, for the time being has not been litigated or interpreted that much. So if you think about it, of all the transactions we encounter and all the various underwriters and all the different facts, there hasn't been enough time with this statute being out there for there to be a true, cohesive approach across the industry. So like I said before, it's still in its nascent. It's going to take some time to iron out. I think the the thought of what this can do and the problems it presents are probably ultimately greater than what what will bear out over time. But again, since we don't know from a title title perspective, we have to take a more cautious approach. And I do always tell buyers, even if we omit this, whether or not we do, you know, you have to look at the underlying foreclosure and be comfortable with what's happening. While I did say before, it's worthwhile to have a title company underwrite, if you will, and review the underlying foreclosure to make sure that all rules and requirements were followed, all proper notices, the colors and the fonts and all those different things were adhered to. And that's important. You know, we can gain an understanding of what we think the merits would be of a standing challenge based on the litigation. But of course, we can't stop that challenge. So that's where there is some additional risk. Moving right along, I'm going to leave these little case citations to be read by the reader on your own when you revisit the materials. I think it will be better understood then. I wanted to point out I did say that 13 02a only applies to home loans, and that's true, but. 1304 are inapplicable to the foreclosure, to a foreclosure that was commenced after a borrower died. So 13 02a is not applicable where a borrower is deceased that way. So if you recall, a home loan is defined as having an individual as the borrower. Now that can be true at the time the home loan is originated, but if that individual borrower dies and now there is an estate and executor or something, an administrator for the estate, that's not an individual, that doesn't negate or change the home loan status nevertheless. The because of the borrower being deceased. 13 02a will not apply in that situation. So even if it was a home loan, the home loan definition is not changed, but it still will not apply if the borrower is deceased. That's a. Hopefully for everybody a very rare circumstance and instance. But worth mentioning now in New York, where do we stand today with 13 02a aside from which should be obvious, which is waiting to see what the courts will do so we can hopefully refine things a bit and find a middle ground that's more acceptable for both the prospective purchasers and the title industry. And for the moment, lenders have taken the. The expected position, which is do whatever you want. That's not an exception in our policy. And that's that's something the title industry expects and deals with. The ability to omit the exception is always going to be fact specific. So what I provided here are general considerations and general concerns raised by the enactment of 13 02a in New York. You will find in every report or you should find in every report for property devolving through a foreclosure, you should find an exception for 13 02a in some fashion, whether it's a half a paragraph, a page, or if it's just a sentence. Either way, there should be something informing you that that and any risk associated with it is not covered by your title insurance policy. Now, your report may not say unless we are presented with the following A, B, and C telling you what to provide. But if you want, by all means, certainly look back at this packet, which gives you some things to raise or at least inquire of your title company. Hey, if I'm able to establish A, B or C, would you omit the exception? And you should find that the answer is quite often yes. But again, it's going to depend on the facts. Sometimes the facts may be on your side, but you may find that the property falls in an area where there have been a lot of claims and title litigation recently where all of a sudden the title company is forced to be less flexible than they were a few months before that are less flexible than they intended to be. So there's always those external circumstances impacting the title analysis. But generally speaking, if you can determine the vacant status of the property or confirm and establish that the lender absolutely had standing, these are things that it brought to the attention of a title company can only help remove these exceptions and give more coverage to the purchaser. Again, as I said, lenders are not taking this exception. There may be rare circumstances where a lender either agrees to or is forced to, depending on the facts. But generally we recognize that's not going to happen always, even before the enactment of 1302, A but especially now, foreclosure, foreclosure bidders should investigate the occupancy of a premises to the best of their legal ability prior to bidding at a foreclosure sale. And they should factor in perhaps a few thousand dollars for possible litigation. Again, I'm not talking about a situation where you bid on a property and remove title insurance from the scenario for a moment. You bid on a property and you say, you know what, I think there's a good chance there's nothing going on here. I'm fine. You know, you put $2,000 aside to dispose of a of a nuisance motion from somebody who's raising standing after the fact. That's one thing if you put that aside. But it turns out there's a legitimate reason to challenge standing and the ammunition and the facts are on the borrower side. You may be very unfortunately, you may be unpleasantly surprised with what you're left with. So it does require some level of due diligence on the buyer side. And it's not just incumbent on the title company, but we are certainly here to do as much underwriting and review of the foreclosure, not just the title itself to help, but the prospective purchaser needs to have some sense of what's occurring and be aware of the potential risk associated with the property they're requiring. Now, I'm a New York attorney, so I speak from a New York centric position. It's what I encounter every day. It's what I see, it's what I work with. But I do find that New York, at least in this arena, is on par with a lot of other states. So even if it takes 2 to 3 times longer in New York for a foreclosure action to be completed, a lot of the elements and the concepts are quite similar. So I do want to point out standing and how it's viewed in some other states as I'm not an attorney in these states, I certainly have no opinion on the law, and I'm not suggesting that this is the absolute current state of the law in each of these states. This is based on some legal research that I've done. I recognize some of these cases may be there may be appeals pending or there may be statutes that change some of these. So, again, please do not rely on this as legal advice. But this is. Just to show how Stanley is viewed in other states and what what barriers there are for some borrowers and to an extent for some lenders. So let's have a look. Florida is pretty similar to New York, and they too agree that a crucial element in any mortgage foreclosure proceedings that the party seeking foreclosure must demonstrate that it has standing to foreclose at the time the complaint is filed. Makes perfect sense to me. Nothing is wrong with that. Florida. Florida Statute Section six 73.3011 identifies when someone has the right to enforce a promissory note and ultimately foreclose a mortgage. And they define such a person as the holder of the instrument, a non holder in possession of the instrument who has the rights of a holder, say, a servicer or a person, not a possession of the instrument who is entitled to enforce the instrument pursuant to. And then there's a list of various Florida sections of the statutes. Now, we're less concerned about enforcing actions based on this discussion, but looking to see how the ability to enforce an action may be upended because of the state's view on standing. Now, in Florida, like New York, a plaintiff alleging standing as a holder must prove it is the holder of the note and mortgage, both at the time of the trial or when the final judgment is entered. Now, that makes sense. If you start an action, then you assign the mortgage. You shouldn't be the one granted the relief. If you're if you no longer have an interest, then you no longer have standing. So, again, but they do need to show that they had standing at the time the foreclosure complaint was filed. Standing in Florida is an affirmative defense and failure to raise it in a responsive pleading generally results in a waiver. Thus, any challenges to standing must be raised in the answer or a challenge will be waived. That's in Florida, and that is what the law in New York was until December 23rd, 2019. As mentioned, lenders are required to have standing when suit is filed, even if a foreclosure defendant waives the right to challenge the lender's standing. As of the date the suit was filed, the lender still must prove its right to enforce the note. As of the time, any final judgment is entered. So while Florida. Is similar to New York and does hold that this that a standing to challenge is waivable. They do sort of hold the lender to some, dare I say, slightly higher standard by ensuring. Specifically ensuring that they remain the holder of the mortgage throughout the course of the action. It makes sense. And you have to assume that there were plenty of lenders who didn't do that, otherwise they wouldn't have had to have enacted this. So interesting. Let's move over to California, which to me is on the other end of the spectrum from Florida and New York. Under the state's Homeowner Bill of Rights borrowers, they're not automatically given anything to establish standing. It's not a requirement that the note or mortgage be affixed to the complaint or any allegations be made about it. But borrowers do have to be given a notice that they are entitled to request a copy of any assignments, if applicable. Of the borrowers mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose it. So that, you know, I think that's a little indicative of what how California views borrowers rights by telling them they have the right to request something to try to figure out if the person purporting to hold their mortgage does in fact have the right to purport it. Excuse me to to hold it and foreclose it. Prior to 2016, in California, homeowners in default could not challenge a foreclosure on the basis that the foreclosing party lacked authority to foreclose it due to defects in the assignment of the loan. So think about that. You were foreclosed, you lost your house. You're now responsible for money and. Perhaps a deficiency, whatever the case may be, credit is shot. The lender did not have the right to foreclose. And you can't do anything about it. You cannot challenge that. You had to take it. You had to accept those rights even though the lender did not have standing. That certainly does not seem just. But then in 2016 came and forgive me if I'm not pronouncing it correctly, I believe it's even over the new century mortgage Corp, which held that borrowers did in fact have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure. So that certainly is a victory and only a recent one at that. And really, I think suggests how California views. I guess, debtors rights. Despite having some opportunity to challenge a wrongful foreclosure in California, a plaintiff homeowner only has standing to sue where the defective assignment is void as opposed to void a bull. Now, that too, is a whole separate CLI course that we can get into the difference between void and voidable instruments and its impact on transactions and title insurance. But for here, you know, the court is effectively saying they're going to make a legal conclusion in advance and they're not going to allow a borrower to challenge something that can be void. It must be void. So there was a case that clarified the Ivanova holding again, apologies if I'm not pronouncing it correctly, and that is Perez V. Mortgage Electronic Registration System Systems Inc. That's a 2020 case decided by the United States Court of Appeals for the Ninth Circuit, where they confirmed that California law does not permit a pre foreclosure challenge to a party's authority to pursue foreclosure based on standing. There was a lot of there seems to be there were a lot of efforts to do that in California for a time. And some courts allowed it, I think. But ultimately, this case came along and said your lender doesn't have standing, but you can't preemptively stop them from foreclosing. It seems odd and sounds a little odd, but a borrower certainly can tender it. After the foreclosure starts, but you can't try to stop a lender from foreclosing because of a lack of standing. It makes me wonder what goes on in California. But say vie turning to Illinois. Still, from my research, I can tell you standing is an ongoing issue that's been refined over the years. I'd say in the last 10 to 15 years, the. The process for establishing standing and what the courts will do with a lack of standing and what rights they will afford to borrowers does seem to be something that is. Heading to I don't want to say a conclusion. I'm certainly not a mind reader, but it does seem that it's something that is constantly being challenged and worked on instead of just an ongoing challenge that's met with the same recitation of case law to say, no, can't do it because or yes. All right, here's what's going to happen. It seems to be a concerted effort by the legislature and I guess to an extent, some of the attorneys to find a way to sort of move the needle and define it with more clarity and make it perhaps fairer across the board. That is my $0.02. But let's read some some recitations of what's occurring in Illinois. Now, standing in Illinois is an affirmative defense that is waived, if not asserted, and it must be raised prior to the confirmation of sale. That's their final step before the foreclosure is deemed concluded. When the court's review is limited to the four elements set forth in. Forgive me for not having the the only having the abbreviation of their foreclosure. Statute section in section 15 zero eight, there's a case citation for it as well, which is Deutsche Bank, National Trust Company versus Snake. That's 2011 Illinois Appellate Division, third 100436 in Illinois. They also say that a motion to vacate can be brought at the time of confirmation of sale, regardless of the limitations of Section 15 zero eight. And that's according to Wells Fargo Bank V McCluskey. Again, lack of standing to bring an action is an affirmative defense, and the burden of proving the defense is on the party asserting it similar to New York. But when the documents in evidence demonstrate that the assignment did not occur until after the foreclosure was filed, the defendant met its burden. That was case law. So here it sounds like. In Illinois, if a borrower is going to challenge standing based on a void assignment or some defect in the assignment process, unless the documents in evidence already demonstrate that there is an issue, the defendant doesn't have to do anything. So here or there is a case where it was obvious to the court that the assignment was late, so the defendant did not have to go ahead and and support its position any further. It was just obvious from the facts. So there's some leeway there. I don't think it's as clear in New York, although it's likely apparent that that's the case. Under Illinois law, only the holder of a note may foreclose on a property, and transferring the mortgage is not enough by itself to confer the right to foreclose upon property. There was a situation in the case called Cogswell vs City Financial Mortgage Company in 2010 where the plaintiff cannot prove it was a note holder and therefore it was not entitled to foreclose in. The case was dismissed. Certainly a subtle reminder that lenders, servicers and the like should have pretty good records to show that they belong in court before they go there. But again, I want to point out that in New York we do have a distinction between the note and mortgage here. In this case, it seemed that all they had excuse me, they had everything but the note, and that was insufficient. So the note is pretty darn important in Illinois and the sacred part of debt servicing as well. In Illinois, the sufficiency of an assignment cannot be a sale of the validity or whether the assignment is void can. So here's another situation where the courts are concerned with the difference between void and voidable and what rights a borrower defendant has in order to protect themselves. And let's be honest, what we're talking about here, we're talking about people's homes. So it does make sense that there would be real hurdles for a bank to take in order to prevail. But we've seen there are some states where perhaps those barriers are more presented to the plaintiff, excuse me, to the defendant, homeowner in order to be able to defend their home ownership in a foreclosure. Okay. Turning to Texas, standing is a constitutional prerequisite to maintaining suit. In Texas, a party generally has standing to bring suit where a controversy exists between the parties that will be actually determined by the judicial declaration. Sun Great example I can think of is lender, borrower, mortgage default. Use those basic terms and there you go. It sounds to me like that lender has standing because a controversy exists between the parties. Numerous district courts in Texas have held the borrowers do not have standing to challenge the assignments of their mortgages because they are not parties to those assignments. Some district courts, of course, have recognized two exceptions, though there's what they call the primary exception, which is where an assignee of a claim sues the obligor for performance under circumstances, rendering the assignment void but not voidable. And the other is under very limited circumstances. Texas law allows a defendant suit on a negotiable instrument to assert defenses and claims held by others. Notably in Texas, only a void assignment may be challenged because the only interest or right which an obligor of a claim has in the instrument of assignment, is to insure himself that he will not have to pay the same claim twice. Courts have held that the Texas Property Code does not require a mortgagee to produce proof of ownership of the original note or deed of trust before conducting a non judicial foreclosure sale as the statute provides. In Texas, being the holder of a security instrument is only one of several ways to prove mortgagee status. Now I point this out this language in Texas to show what the disparities between states positions excuse me to to highlight the disparity across various states. Texas seems to take the side of Florida and allow a challenge when something is void, not voidable. And if you look at some of the cases from Texas and Florida, clearly the standing challenges arise more in the assignment arena, which, if you think about it, makes sense. There's more room for potential errors once mortgages and notes are being assigned and the are floating around. The more paper, the more movement, the better chances there are for things to get lost, misplaced, misstated. So that certainly makes sense. But we don't see things presented that way in New York. So seeing it that way in Florida and Texas certainly suggests, at least to this New York attorney, that that's a bigger issue in those states than perhaps elsewhere. But again, I think the underlying takeaway is the same. If you're representing a lender, you want to make sure that they have the cleanest paperwork possible with respect to the servicing and assignment of loans and how they handle and receive those assignment papers, because really, it provides a borrower with ammunition to challenge standing, which is not the goal of any lender, and certainly not what anybody wants to encounter. To the extent somebody is representing a buyer or a borrower. I think some of these cases and some of these concepts might inform someone as to what kind of defenses or possible issues exist out there that a borrower or defendant may need to avail themselves of. I like to think that the takeaway from this entire discussion is as follows Foreclosures are very different than a regular transaction. They are uniquely fact specific. And while that's true for everything that we encounter, it is absolutely more so when it comes to a foreclosure. I can tell you that I've had files where every fact you do not want to conceive of in a foreclosure was present. Everything you could think of, it was almost like watching a movie. But because the property was unquestionably vacant and we had affirmation after affirmation that that was the case, despite everything else that was going on, we were able to ensure without any further exception. Now, I'm not saying that that's unique to me, my company benchmark title, or that we any one underwriter is so great and can make magic happen. It really just shows how unique foreclosures are and how the facts of a foreclosure and every little nuance, everything that occurred, all of what's happened, by the way, prior to the attorneys involvement, the title, companies involvement, all things done by other people without our involvement to come together at the end and try to make heads or tails of it is a is an interesting endeavor, but it's worth exploring early with your title company, especially in New York, and especially in jurisdictions where parties may have continuing rights so that a purchaser is as adequately protected as they can be. I think any good attorney is going to tell a purchaser or prospective purchaser of a foreclosed property that, hey, there's additional risk here. You need to be aware of that on its own. There's always something lurking. There's there can always be back taxes, there can always be a missed party. Somebody comes forward and says, I hold a judgment, whatever the case may be, there's an inherent risk with buying a foreclosed property. But if you're in a state like New York where a borrower has the right after a foreclosure sale to attack the action and the state of title because of some perceived deficiency and standing or some other aspect of the action, be it service or something like that, that leads to an opportunity to challenge standing. You need to be aware of that, and some may need to quantify that risk before bidding or before completing the closing process. I always encourage people to contact their title insurance professional before closing or before entering into a contract, but especially in a foreclosure. Find out what's going on with your local title person before counseling your client on buying a foreclosed property. Make sure there aren't new requirements or new pitfalls. And again, sometimes what happens in title insurance is there's the standard approach. But all of a sudden, because of recent regional discourse, be it a change in politics where there is now a perceived risk of increased litigation for whatever reason, be it, there's a new there's a new taxing authority, a new representative of the taxing authority, and now back taxes are going to be pursued at a greater speed or things like that. You know, always check with your title professional. You never know what is going on behind the scenes that can actually impact the transaction. And I say that is being absolutely the most applicable to a foreclosure. These are these are liable to change at any given moment, at any time. There could be an abundance of claims in a certain for a certain underwriter or in a certain area based on a fact from. Certain types of foreclosures that would permit them to say, hey, we're not accepting these at this time. So foreclosures do change, foreclosure underwriting changes. It's not something that any one person can possibly keep track of. So stay in touch with your title insurance professional. Always inquire and invite their assistance and counseling your client on a foreclosure purchase. And remember standing challenges are lurking always.

Presenter(s)

JBJ
Jason Bergman, JD
Vice President & Senior Underwriting Counsel
Benchmark Title Agency, LLC

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