Landlord-Tenant: When Your Landlord Faces Foreclosure . . .

Posted by Cliff Tuttle

When a residential landlord loses a property through foreclosure, there is little good news for the tenant. If you have heard a rumor, a lawyer can check the court dockets and confirm the rumor, including identifying the likely month in which the sheriff’s sale will occur. He/she can also tell you the name, address and telephone number of the lender and other useful information.

It is usually a good idea to start looking for another place to live. The lender will probably encourage you to leave as soon as the property is sold. Although investors usually buy apartment buildings in ordinary sales transactions with tenants included and consider it a bonus, this is not usually the case in foreclosures. The lender usually thinks that after a foreclosure, the property will be easier to sell empty.

However, you may not be required to accept this conclusion. If your lease pre-dates the mortgage (again, a lawyer can look it up) and there is no subordination or attornment clause in the lease (requiring you to recognize the primacy of the mortgage) your lawyer may be able to keep you in the apartment for the duration of the lease. This may involve resisting post-foreclosure eviction proceedings. It is possible — just don’t try to do it yourself.

On the other hand, if you want to leave, your landlord may be in breach by permitting the property to be foreclosed. If the landlord is in default under the terms of the lease, he or she may have released you. Again, you need a lawyer AND you need a copy of the signed lease.

Sometimes the lender will ask you to pay the rent directly to it. In order to be entitled to such a payment, the landlord should produce a signed copy of an “assignment of rents.” Once again, let a lawyer look at it. Keep a copy, plus proof of your payments, in the event that your landlord threatens to sue for the rent. You don’t want to pay twice.

When making arrangements to pay the lender rent, negotiate a deal that specifies exactly how
long you will stay and provides for you to get your security deposit back.” Yes,” you say to the lender, “I know you don’t have the security deposit, but I’m never going to see it from my landlord, so I’ll pay you until May, but you’ll give me June free and I’ll move out at the end of the month.”

You may be surprised when the lender’s representative agrees. After all, he half expected you to run out without paying the last month anyway. Make sure that you get this agreement in writing.

You may discover, by the way, that the lender is quite happy to collect the rent and is in no hurry to foreclose. This situation has been turning up lately, since the real estate market is terrible and any lender would just as soon not own another rental property, at least not just yet. Some will give the borrower some time to find a buyer and (Glory Halelluia!) pay off the loan.

CLT

Category: Uncategorized

Summary of Durban Bill

Posted by Cliff Tuttle

If you would like to know a little more about the Durbin Bill (wherein Bankruptcy Judges would be empowered to modify first mortgages) than is contained in the usual press coverage, click here for a detailed but readable summary.

CLT

Category: Uncategorized

Mortgage Foreclosure: More Shift in the Balance of Power.

Posted by Cliff Tuttle

So what’s with Citigroup? The megabank is reversing a long-held and strongly-pressed position and is now publicly supporting Senator Dick Durbin’s bankruptcy reform legislation that would give bankruptcy judges the power to modify delinquent residential mortgages as to both principal and interest. In doing so, it broke ranks with J P Morgan-Chase, Wells Fargo and the other big national lenders who jointly opposed the Durbin legislation vigorously during the last Congress.

Presently, first mortgages are sacred in bankruptcy court. First lenders can generally obtain relief from the automatic stay, whereupon they proceed with the foreclosure that has been temporarily delayed by the bankruptcy filing. There has been a long-standing “cramdown” provision in the law which permits, roughly speaking, bankruptcy judges to reduce the principal of junior liens that exceed the equity in the property but this is not applied to first mortgages. Nor does it permit modification of the interest rate, as proposed by Durban. Here is an article from the New York Times about the subject.

Citigroup, as the NYT article mentions, is receiving billions in federal bailout funds. It is not too hard to imagine that the two phenomena are connected. The new Congress that was sworn in this week is shaping up to be as activist as the one that was elected with Roosevelt in 1932. When Democratic Congressional leaders ask Citi what it intends to do to earn continuing support, they don’t believe self-serving statements that it will voluntarily modify mortgages. And so, Citi “proves” its dedication to this proposition by publicly supporting the same kind of modification decreed by bankruptcy judges, although it proposes that the provision not be applied to mortgages granted going forward.

While bankruptcy judges will use such powers if given, the reasonable expectation of Congressional sponsors is that it will motivate lenders like Citi to make many more “voluntary” modifications before the judge enters the picture.

The threat of filing bankruptcy by a mortgage foreclosure defendant has up to now carried no punch. It has usually meant only delay. But if the Durban bill is enacted, relief from stay will not come so quickly or so easily. On the contrary, the lender would face the real risk of emerging from a post-Durban bankruptcy with a haircut. This increases the motivation to modify. Better to make a deal now that rolls up the arrearages in the back of the loan than to lose them altogether. So, slowly but surely, the fulcrum is moving — granting a little more leverage to the borrower and a little less to the lender. Of course, this legislation may never be adopted or may be significantly altered before passage. Nevertheless, the fact that Citi is endorsing the Durban bill, even with reservations, speaks a great deal concerning the shift in power that is already occurring.

As further evidence of this trend, Allegheny County finally made a formal announcement of its foreclosure mediation program. Beginning on Monday, January 12, Sheriff’s deputies will include a brightly colored notice with the complaint for owner-occupied mortgage foreclosure. By calling the telephone number on the sheet, the homeowner will receive a 90 day extension to negotiate a workout plan and free assistance in putting together a proposal. The matter will be mediated before Common Pleas Court Judge Michael McCarthy. The lender is required to produce a representative with the power to negotiate a modification. While a common pleas judge does not have the power to “cram down” a modification, he does have the power to hold up the foreclosure and perhaps to sanction a non-cooperative party. This may be enough power to get the job done.

To borrowers who have the ability to resume monthly payments but not to bring the loan balance current in a single payment, this development represents a crucial break. A common complaint they have with servicers for national lenders is that it is impossible to talk to someone with the authority to agree to a workout plan. The Allegheny County plan gives them that and more.

CLT

Category: Uncategorized

A Cardinal Lawyer

Posted by Cliff Tuttle

The Pittsburgh Catholic announced in the January 9, 2009 edition that Pope Benedict XVI accepted the resignation of Cardinal Adam Maida, Archbishop of Detroit. Cardinal Maida was a priest in the Diocese of Pittsburgh who became a civil lawyer and a canon lawyer. Then he became the Diocese of Pittsburgh’s lawyer, where he served with distinction for many years.

When he returned to Pittsburgh several years ago to be honored by Duquesne Law School, where he once taught as an adjunct professor, he told me that he didn’t practice law anymore but, as an Archbishop, he had a lot of lawyers working for him.

CLT

Category: Uncategorized

New York Times on How Pittsburgh is Weathering the Recession.

Posted by Cliff Tuttle

The New York Times published a story this morning in which it noted that the economic indicators for Pittsburgh were better than the rest of the nation. While most of this is not news to Pittsburghers, it makes nice reading on a frigid January day. However, as local leaders warn, it is still early in the downturn and there is no time for resting on laurels. Read the NYT article here.

CLT

Category: Uncategorized

Real Estate: When Does Local Zoning Regulation of Coal and Oil & Gas Preempt State Regulation?

Posted by Cliff Tuttle

The Commonwealth Court, in Huntley & Huntley, Inc. v. Borough Counsel of Oakmont, 929 A. 2d 1252 (2007), held that the Oil and Gas Act unconditionally preempts and supersedes a municipality’s right to determine the appropriate zoning districts in which gas drilling operations can be located.

Then, in Hoffman Mining Company, Inc. v. Zoning Hearing Board of Adams Township, No. 2122 C.D. 2007, the same Court held on October 15, 2008 that the provisions of the Surface Mining Conservation and Reclamation Act (SMCRA), providing for a 300 foot set back of gas wells from residences, does not pre-empt a municipal zoning ordinance requiring a 1,000 foot set back.

What gives here? How can the state regulation of oil and gas operations be paramount to local ordinances and state regulation of coal mining not follow the same rule?

There are plenty of reasons to expect state law in both of these fields to overrule local ordinances. Uniformity of statewide regulation of dangerous activities is one. Technical expertise of the state regulator, who is likely to be career professional in the field, over a local official without special training or knowledge is another. Consideration of issues relating to operations involving massive equipment with health, safety and environmental factors in the balance, all vital to the state but some not of particular importance to local land use regulators, is still another. In addition, everybody knows that a municipality could disingenuously exclude coal mining or oil and gas extraction from within its boundaries by adopting more zealous regulations than neighboring communities. Statewide regulation, even when stringent, has the advantage of presenting a level playing field to all.

But the reason for the different result in these two cases does not relate to any of these considerations. The answer lies in the Commonwealth Court’s close reading of the separate state statutes governing the two extractive industries.

In Huntley, the Court quoted with emphasis Section 602 of the Oil and Gas Act, providing that while ordinances adopted pursuant to the Municipalities Planning Code, inter alia, could regulate oil and gas development: “No ordinances . . . adopted pursuant to the aforementioned acts shall contain provisions which impose conditions, requirements or limitations on the same features of oil and gas well operations regulated by this act or that accomplish the same purposes as set forth in this act. The Commonwealth, by this enactment, hereby preempts and supersedes the regulation of oil and gas wells as herein defined.”

After distinguishing a contrary case by pointing out that Section 602 had been amended after the case to provide stronger preemption language, the Court stated:

“This language does not preempt all local regulation, because such a conclusion would render meaningless the amendment’s distinction between regulations that do or do not relate to ‘features’ the act addresses.”

The Court then considered what “features” were addressed by the Oil and Gas Act and declared that local ordinances are preempted in each case where the two came into conflict. This included location of wells. Since the Act provided that a well must be located more than 200 feet from a dwelling, the municipality could not impose a stricter requirement.

In Hoffman, Section 17.1 of SMCRA (pronounced “smack-ra”) is quoted as follows:

“Except with respect to ordinances adopted pursuant to . . . the ‘Pennsylvania Municipalities Planning Code,’ all local ordinances and enactments purporting to regulate surface mining are hereby superseded. The Commonwealth by this enactment hereby preempts the regulation of surface mining as herein.”

Missing from this statutory language is the critical “features” provision found in the Oil and Gas Act. Without such language, ordinances enacted pursuant to the MPC would not be preempted. This conclusion was bolstered by a series of cases wherein the Supreme Court had held that various zoning ordinances preempted SMCRA. Other cases have drawn a distinction between land use, health and safety issues, which zoning may address, and operating issues, to which zoning has little relevance. The problem with this analysis is that mine regulation deals with all of these areas and those who promulgate and enforce mining regulations of all types are likely to be experts.

There are other elements to these two cases not discussed here. The Pennsylvania Supreme Court granted a Petition for Allowance of Appeal at 950 A.2d 267 (2008) in Huntley to address whether the preemption of the Oil and Gas Act is as broad as the Commonwealth Court has declared. No reported decision has yet granted or denied any appeal in Hoffman.

Despite the differences in statutory language, there is no valid reason why oil and gas cases should go one way and coal mining cases the opposite on the same issue. The two statutory sections quoted above should be uniform. Either add the Oil and Gas Act language missing from SMCRA to that statute or cut it out of the Oil & Gas Act.

It is my own opinion that empowering municipal councils and zoning hearing boards to decide questions regarding well spacing or set backs from residences is an invitation to mischief. The fact that a finding by a group of municipal officials that a 1,000 foot set back is supported by substantial evidence (established by lay testimony at a community meeting) should not be determinative. Does that mean that the state mine regulators must enforce a 300 foot setback in one location and a 1,000 foot set back in another? Or if zoning regulations required 20 feet, would the state regulators be required to reduce their set back requirements to 20 in that locality?

It makes more sense philosophically and practically for statewide regulations on such subject to be adopted on a statewide basis by an official with the expertise to make that decision and statewide responsibility of enforcement.

CLT

Category: Uncategorized

Allegheny County Mortgage Foreclosure Mediation Begins: A Shift in the Balance of Power.

Posted by Cliff Tuttle

With little fanfare, the Court-sponsored mediation program for mortgage foreclosures was announced on January 6, in an article on the Local News page of the Post Gazette. The article said the news that Judge James, former President Judge, had signed an order of court creating the program was broken in a press release by the activist group ACORN. Read the article here. However, readers of PLBT knew about Judge James’ order around Thanksgiving. See our November 24 post: Click here.

It remains to be seen, however, which face of the mortgagor will be presented at these meetings. If the trustees of the mortgage pools (who are the real owners of the debts) take control and give the orders, mediation may be difficult. But if they leave the decisions to the original lenders, who still manage (“service”) the mortgage accounts, the outcome could be quite different.

When residential mortgages are sold into pooling trusts, the seller of the mortgage generally retains servicing — that is, it continues to receive payments and administer the account. This “servicer” receives a fee for services, a percentage of the payment deducted before sending along the balance of the proceeds to the trustee of the pool. It continues to act in most respects like the owner of the loan. The real owner, the trustee, doesn’t know or care about details of loan administration — just send the money. The servicer has policies and procedures for loan administration and the owner doesn’t interfere. This system works well enough as long as the account continues to be paid as specified in the mortgage and note.

It was anticipated, of course, that a certain percentage of loans would default. Once a specified number of days of delinquency was reached, the servicer is required to initiate foreclosure (usually in the name of the trustee) and the account would, in due course, be liquidated.

However, the number of foreclosure-eligible delinquent accounts today greatly exceeds anybody’s expectations. It doesn’t make sense to foreclose more properties than can be sold on a very depressed market. But the trust instruments provide no other remedy. Of course, this process may be delayed and impeded by legal procedures, including bankruptcy. But settlement with the borrower on terms other than payment of arrearages in full is not in the trustee’s playbook.

This policy has proven to be a financial and political disaster. As the number of foreclosed properties taken over increases, the value of the inventory spirals downward. In some places, only a handful of foreclosed residences can be sold, reducing the fair market value of the rest to zero. Each “real estate owned” property added to this traffic jam just increases losses that will never be recouped. Too many foreclosures has brought down mega-giants such as IndyMac and Washington Mutual and forced others, such as Countrywide and National City, into mergers brokered by regulators.

Servicers are mostly regulated by State and Federal agencies like the Pennsylvania Department of Banking, FDIC, OTS and OCC. They require institutions they regulate to prepare written plans and guidelines for fair administration of loans. This process goes a long distance toward protecting consumer rights.

But when trustees and servicers clash, despite bank regulators on the sideline, the trustees usually won. It has been a common occurrence that borrowers negotiate and even make payments to the servicer under a forbearance agreement, only to see the trustee order the case into foreclosure, in breach of the agreement.

That won’t be happening anymore. The lender’s representative is now required to explain himself before a judge. The power equation has shifted. The judge has the power to refuse to permit the foreclosure to proceed. If he hears about a case going to foreclosure despite a forbearance agreement, he can right that wrong. If he hears that a borrower can make payments under a reasonable plan, he has the power to make it so.

CLT

Category: Uncategorized

LandAmerica 1031: The Missing Link Lost but then Found!

Posted by Cliff Tuttle

The Post on the LandAmerica 1031 debacle, posted on November 27, 2008, continues to draw comments, the latest today.

The commenter brought to my attention that the link at the end of the post, to a LandAmerica 1031 website, was broken. Thus, the juicy irony at the other side of the link would be lost to readers who are just finding my post. Fortunately, I was able to capture this little masterpiece for posterity.

To summarize, Fidelity National, now the largest title insurance conglomerate in America, was planning in November to acquire rival LandAmerica, but declined because LandAmerica’s 1031 subsidiary was defaulting on its obligations to customers by failing to bring escrowed funds in its care to the closing table when required by agreement.

The 1031 reference is to the Section of the Internal Revenue Code which recognizes a “like kind exchange” of real estate as a non-taxable event. Section 1031 sanctions a double transaction whereby a “qualified intermediary” takes the proceeds from a sale, holds it for the seller and then delivers it to closing of a qualified transaction where the funds are used to purchase the second property. Even though there are in reality two separate transactions, IRC Sec. 1031 permits them to be treated as though the properties were exchanged.

LandAmerica 1031 was investing some of its escrow funds in securities that must be liquidated by sale at auction. When the stock market crashed . . . you guessed it! No auction bidders, no funds. So LandAmerica 1031 started defaulting and then closed its doors.

Armed with this information, the reader was asked to click a link that no longer works. Here is what used to be on the other end of the link:

“Recent defalcations and insolvencies by closely held § 1031 qualified intermediaries highlight the risks of choosing a qualified intermediary (QI) that lacks sufficient liquidity, capital reserves, and governance, to make it an appropriate financial counterparty. The risks are so great that the IRS (in Fact Sheet 2008-18) cautioned taxpayers to beware of QI bankruptcy when selecting a QI, and the possibility of a being unable to timely acquire replacement property. Now a state appellate decision out of Minnesota highlights that the risks of choosing
the wrong QI do not end when a taxpayer receives its replacement property.

In Rechtzigel Trust v. Fidelity (2008 Minn.App. LEXIS 220), the underlying facts involve a taxpayer that received her replacement property roughly a month and a half prior to the QI’s bankruptcy, and yet she was compelled to pay $102,412.20 in connection with the QI’s
bankruptcy! In the Rechtzigel case, the taxpayer’s QI received in excess of $600,000 in connection with taxpayer’s disposition of relinquished property, and later the QI disbursed in excess of $600,000 in connection with taxpayer’s acquisition of replacement property.

According to the court, unbeknownst to the taxpayer, the QI engaged in financially risky practices. Whether cause and/or effect, the QI was using funds from the taxpayer’s exchange to fund obligations of other taxpayers’ exchanges and vice versa. In the court’s words, the
QI’s financing arrangement collapsed and the QI filed for federal bankruptcy protection.

The bankruptcy trustee thereafter commenced a “preference action” against the taxpayer, seeking to recover from the taxpayer in excess of $600,000 that the QI used to purchase the replacement property. The bankruptcy trustee’s theory was that the payment by the QI for the replacement property was a transfer for
the benefit of a creditor within 90 days of filing bankruptcy and that it could therefore be avoided (recovered) under federal bankruptcy law by the bankruptcy court. The taxpayer was eventually forced to settle with the bankruptcy trustee for $102,412.20 and had no success in recovering the monies from the defendant in the case.

The case is a strong reminder for taxpayers and their advisors to diligently investigate and wisely choose their intermediary, or the exchange fee they end up paying may be a lot more than they bargained for.”

In the end, LandAmerica filed bankruptcy and immediately (same day) made a new agreement to sell its crown jewels: Lawyer’s Title, Commonwealth Title and another title subsidiary Fidelity. LandAmerica 1031 was thrown into a separate bankruptcy, where it will apparently be liquidated. The Fidelity-LandAmerica transaction was closed recently and everybody lived happily ever after except the customers of LandAmerica 1031.

CLT

Category: Uncategorized

LandAmerica Update

Posted by Cliff Tuttle

There had been talk that the Feds might intervene on antitrust grounds in the acquisition of Lawyers Title Insurance and Commonwealth Title Insurance by Fidelity National Financial. There seemed to be plenty of reasons for such an objection, since the conglomerate would control almost 50% of the title insurance business in the nation and much more in certain markets, such as Pennsylvania.

However, the legal waiting period under the Hart Scott Rodino Act expired on Thursday at midnight without intervention, paving the way for the merger to progress.

As readers of PLBT know, FNF declined to acquire LandAmerica because of the potential liability and losses incurred by its 1031 subsidiary, which was unable to bring escrow funds to closing on Section 1031 like kind exchanges because some of the funds had been invested in securities for which there was no market. However, the deal was repackaged, with LandAmerica and its 1031 subsidiary filing bankruptcy. Arrangements were announced at the time of filing to sell Lawyers and Commonwealth, plus another title insurer, United Capital, to FNF out of Bankruptcy. This way, FNF gets to buy the LandAmerica crown jewels without incurring a big liability. LandAmerica gets to ditch its 1031 company and everybody (almost) gets to live happily ever . . well, you get the idea.

As our readers also know, the Nebraska Insurance Commissioner, Ann Frohman also had to bless the deal. The two title companies are domiciled in Nebraska, which ironically makes the Nebraska Department of Insurance their prime regulators. She approved the FNF acquisition on Monday. She also approved a competing bid by Stewart Title to acquire the two LandAmerica subsidiaries, but the Bankruptcy Court in Richmond Virginia quickly killed that deal. The United Capital acquisition must still be approved by California regulators.

The acquisition of Lawyers and Commonwealth is anticipated to be approved in the Bankruptcy Court on Monday, December 22. Merry Christmas!

Crisis brings opportunity. As the President remarked, we might not bail out failing companies in normal times. Acquisitions that prevent venerable American institutions like Lawyers Title and Commonwealth Title from going down in flames are welcomed with open arms. Roll over, TR.

CLT

Category: Uncategorized

The Original Blogger: Poor Richard Still Has It.

Posted by Cliff Tuttle

Well, it seems that “DigWe”, a kind of “rate the blog post forum” on Digg, picked up my post a few days ago, “Poor Richard on Courts.” The post was apparently selected by a computer due to the use of the word “persona” in the post and all of the competing posts contained that word.

I just checked that page on DigWe and Poor Richard was temporarily in first place.

Benjamin Franklin just celebrated his 300th birthday two January’s ago and it is worth sitting up and taking note when his writing is still able to draw a crowd. I have noticed Poor Richard’s Almanac is written in a style much like blogging. I’m sure that if Franklin were living today, he’d be blogging. So here’s another Poor Richard post from 1750:

OF COURTS

If any Rogue vexatious Suits advance
Against you for your known Inheritance:
Enter by violence your fruitful Grounds,
Or take the sacred Landmark from your Bounds,
Or if your Debtors do not keep their Day,
Deny their hands and then refuse to pay:
You must with Patience all the Terms attend,
Among the common Causes that depend,
Till yours is call’d — And that long-looked-for Day
Is still encumbered with some new Delay:
Your Proofs and Deeds all on the Table spread,
Some of the B–ch perhaps are sick a-bed;
That J–ge steps out to light his pipe, while this
O’er night was boozy, and goes out to p-ss.
Some Witness miss’d; some Lawyer not in Town,
So many Rubs appear and Time is gone,
For Hearing, and the tedious Suit goes on.
Then rather let two Neighbors end your Cause,
And split the Diff’rence; tho’ you lose one Half;
Than spend the Whole, entangled in the Laws,
While Merry Lawyers sly, at both Sides laugh.”

If you want to see how Poor Richard is faring on DigWe (or even cast a vote), click here.

Category: Uncategorized

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Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

Pittsburgh Legal Back Talk

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Landlord-Tenant: When Your Landlord Faces Foreclosure . . .

Summary of Durban Bill

Mortgage Foreclosure: More Shift in the Balance of Power.

A Cardinal Lawyer

New York Times on How Pittsburgh is Weathering the Recession.

Real Estate: When Does Local Zoning Regulation of Coal and Oil & Gas Preempt State Regulation?

Allegheny County Mortgage Foreclosure Mediation Begins: A Shift in the Balance of Power.

LandAmerica 1031: The Missing Link Lost but then Found!

LandAmerica Update

The Original Blogger: Poor Richard Still Has It.

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