Credit Union Legal Update – Winter 2014

    By Lender Representation Credit Union

    Borrower’s Bad Faith and Emotional Distress Claims Against Foreclosing Credit Union Dismissed

    A residential construction borrower who signed a note secured by a deed of trust against his property experienced financial difficulties. His lender, Chartway Federal Credit Union, granted him a one-year interest rate reduction on the loan. He signed a loan modification agreement. Later, unable to continue making any loan payments, the borrower inquired about allowing someone to assume the loan. The credit union provided him with assumption terms. The credit union then allegedly changed those terms after the borrower identified someone willing to assume the loan. As a result, the prospective buyer did not assume the loan. After an approved short sale did not go through either, the borrower tendered a deed in lieu of foreclosure to the credit union. The credit union refused to accept it and proceeded with foreclosure. The borrower filed suit against the credit union alleging breach of an implied covenant of good faith and fair dealing and negligent infliction of emotion distress. The trial court granted the credit union’s motion to dismiss the case and the borrower appealed. The appellate court also ruled in the credit union’s favor. It reasoned that the borrower had failed to produce any written document that either modified the note or created a new agreement that required the credit union to offer new loan terms, allow an assumption or approve a short sale. Snow v. Chartway Federal Credit Union

    Anti-Deficiency Statute Does Not Bar $1.35 Million Suit Against Guarantor

    A borrower signed a $3.56 million note in favor of First Credit Union, secured by a deed of trust against commercial real estate and guaranteed by a guarantor. The guaranty included numerous waivers of legal defenses to its enforcement. The borrower, guarantor and credit union then entered into a loan modification agreement involving additional security – a home on 2.5 acres – for the loan. The borrower defaulted and the credit union foreclosed on the original collateral, making a successful credit bid of $2.4 million. After the sale, the credit union sued the guarantor for a $1.35 million deficiency without first suing the borrower or pursuing the additional collateral. A deficiency judgment was entered against the guarantor. Also awarded was $100,000 in attorney fees. On appeal, the appellate court ruled that a state statute permitted a guarantor to agree that it could be sued in a deficiency action prior to a sale of collateral. First Credit Union v. Courtney

    Denying Loan Modification Did Not Violate HAMP or Borrower’s Due Process Rights

    A member sought a loan modification under the federal HAMP program. His lender, 1st Financial Credit Union, however, was not a participating HAMP provider. Still, it reviewed his file for a possible modification before rejecting his request. The credit union later foreclosed and was the high bidder at the sale. It then filed an unlawful detainer action against the member and obtained an order awarding it possession of the property. The member retaliated by filing suit in federal court, claiming that the credit union negligently violated HAMP guidelines and violated his constitutional due process rights. The federal court dismissed the suit because HAMP does not give individuals the right to sue lenders and a non-governmental entity conducted the foreclosure under state law in accordance with the terms of the deed of trust. Blake v. 1st Financial Credit Union

    Credit Union Awarded $181,000 in Attorney Fees Pursuant to Forbearance Agreement After Foreclosure

    A church obtained a loan from Evangelical Christian Credit Union to purchase property and build a new facility. The credit union required as a condition of the loan that the church use a particular general contractor. The construction was supposed to take two years. With the project incomplete five years later, the credit union stopped paying the general contractor and construction ceased. The credit union withheld additional construction funding until the church signed a forbearance agreement. One year later, the credit union foreclosed on the property. The church then filed suit against the credit union for fraudulent inducement, wrongful foreclosure and unfair practices. It also filed a lis pendens against the property. The credit union succeeded in expunging the lis pendens and received $12,000 in attorney fees. On the day that the credit union’s demurrer to the lawsuit was to be argued, the church voluntarily dismissed the lawsuit. The credit union then sought and received an award of $181,933 in attorney fees for defending the lawsuit, relying upon an attorney fees clause in the forbearance agreement. The award was upheld on appeal. LA Open Door Presbyterian Church v. Evangelical Christian Credit Union

    Tactical Serial Bankruptcy Filings Do Not Preclude Foreclosure and Unlawful Detainer Action

    A husband signed a note in favor of Citizens Equity First Credit Union and secured by a deed of trust against real property. His wife did not sign the note. One or both of the couple filed six bankruptcy petitions over a four year period. During the fourth bankruptcy, the credit union obtained an order granting it relief from the automatic bankruptcy stay, which was recorded, and allowing it to foreclose. That case was dismissed, but the foreclosure sale did not occur until a fifth bankruptcy proceeding was pending. After the court dismissed the fifth bankruptcy, the credit union initiated an unlawful detainer action. It then filed a second motion for relief from the automatic stay in the sixth bankruptcy case, seeking permission to continue its state court action to obtain possession of the property. The bankruptcy court granted the motion for relief and the wife appealed.

    The appeal panel noted that Congress amended the Bankruptcy Code in 2005 to protect lienholders from debtor who file tactical serial bankruptcy proceedings in an attempt to prevent enforcement of liens against their property. The amendment granted jurisdiction to bankruptcy courts to grant relief from the automatic stay as to property, not just as to a debtor. Any order granting such relief is effective as to everyone with an interest in the property, including non-debtors, co-owners and even subsequent owners of the property, for two years after it is recorded. Therefore, because an order granting relief from the automatic stay was entered as to the property in the fourth bankruptcy proceeding and the subsequent bankruptcy cases were filed within two years thereafter, they did not stay enforcement of that relief order. Alakozai v. Citizens Equity First Credit Union

    Post-Foreclosure Squatter Asserting “Sovereign Powers” Lacks Any Rights to Property

    Tremont Credit Union conducted a foreclosure sale of residential property and afterwards recorded a “Certificate of Entry to Foreclose” signed by two witnesses who stated that the credit union’s agent made an open, peaceable and unopposed entry on the property to effect the foreclosure. Almost one year later, a woman recorded her own Certificate of Entry for the property. She then filed suit against the credit union to enjoin it from attempting to convey the property to anyone else. She alleged that the credit union left the property vacant and abandoned, she had taken possession and that she had “sovereign powers” over the land. The trial court dismissed her case. She had not alleged that she was in possession of the property or the owner of record at the time of the foreclosure sale. Nor was she a party to the foreclosed mortgage. Ali v. Tremont Credit Union

    Quitclaim Deed Between Spouses Does Not Transfer Homestead Interest; Mortgage signed by Only One Spouse Declared Void

    A divorced woman remarried and her new husband began living with her in the home she owned prior to their marriage. Later, they listed the home for sale and their real estate agent suggested that the husband quitclaim any interest in the property to the wife, which he did. The recorded quitclaim deed he signed transferred “all the right, title, interest and claim” in the property to the wife, but without specific mention of any homestead interest. When the property did not sell, the wife refinanced the property, signing an $84,000 note and mortgage. The husband did not sign either document. After the wife defaulted on the loan, Marine Credit Union initiated foreclosure proceedings. The trial court ruled that the quitclaim did not waive the husband’s homestead interest in the property. The state supreme court agreed, noting that a conveyance of the homestead without both spouses signatures is void, not merely voidable. The wife had not signed the quitclaim deed. Additionally, the quitclaim deed from the husband did not include the word “homestead” and, therefore, did not satisfy the requirement that any waiver of homestead rights be explicit. Thus, the mortgage was void. Fortunately, the credit union obtained a judgment on the note against the wife. Marine Credit Union v. Detlefson-Delano

    Mother’s Conveyance to Son Extinguished Her Homestead Rights

    A woman conveyed her home to her son. The son and his wife then borrowed $90,000 from Border Federal Credit Union, with the loan secured by a deed of trust against the property. After the son and his wife defaulted on the loan, a series of lawsuits ensued. First, the mother sued her son, claiming that the deed was only a mortgage and did not convey title to her son. The trial court ruled in her favor. The credit union then filed suit against the son and obtained a judgment allowing it to proceed with foreclosure on the deed of trust. In a third lawsuit, the mother sued the credit union to stop the foreclosure, claiming that the property was her homestead based upon the judgment she obtained against her son in the first lawsuit. The trial court in the third lawsuit ruled in favor of the credit union. The appeals court agreed, finding that she gave up her homestead rights in the property when she conveyed it to her son and she lacked standing to contest either the validity of the deed of trust or the foreclosure. Galindo v. Border Federal Credit Union

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