Saturday, February 28, 2015

F is for Foreclosure

TBF Financial, LLC v. Gregoire, 2015 VT 36

By Andrew Delaney

Sometimes an opinion can be a little confusing. As the SCOV notes at the get-go, “The history of these consolidated cases appealed from Washington and Caledonia Superior Courts is unusual and convoluted.” Great—the SCOV (they’re smart) says it’s “unusual and convoluted,” and I am not a smart man. You’re going to have to bear with me here.

Defendants, the Gregoires, owned four multi-family rental properties—three in Washington County and one in Caledonia County—and loans with the bank were cross-collateralized and secured by the four properties. We could get into the whole “bank”-really-means-a-couple-different-entities thing but that’d just make this more painful than it has to be. In 2010, the bank filed foreclosure complaints. Then the parties entered a forbearance agreement, which meant that the Gregoires retained control of the properties, but the tenants paid the bank directly.

The parties stipulated to appointing a receiver, who collected rent for the bank. Mr. Gregoire was prohibited from interfering with rent collection and the receiver was supposed to report monthly to defendants and the bank. A month later—apparently due to receiver having to collect rents in person and more tenant complaints than anticipated—the parties increased the receiver’s reimbursement.

The receiver filed a report with the court which said Mr. Gregoire was renting to new tenants and collecting rent and security deposits and not turning them over to the receiver, and the bank filed an emergency motion shortly thereafter to enforce the receivership order. After a hearing, the trial court issued a supplemental order giving the receiver full control of the properties.

A few months later, the bank decided to move forward with the foreclosure, filed the original forbearance stipulation, and the parties filed two additional stipulations dealing with Mr. Gregoire’s alleged transgressions.

The bank later filed an affidavit of amounts due, which defendants “conditionally” opposed on the basis that the bank had failed to produce the underlying documentation. The same day, they also filed a motion to enforce a subpoena defendants had issued to the bank. In challenging the accounting, defendants alleged that the bank did things all-kinds-of screwy: totally overpaying the receiver, failing to pay taxes on time (while the receiver still got paid a lot and the bank was asserting that receivership income was insufficient to meet expenses), and using a workout loan officer who was unqualified to administer the loans (because her personal financial decisions weren’t so great, and she’d been in some collections trouble).

The parties then entered a stipulation that defendant would withdraw all discovery requests and the bank would provide further information, and the parties would go back to court for a hearing a month later. Defendants filed a bunch of general objections.

At the hearing, defendants alleged that the bank’s loan officer had paid a relative with receivership funds for undocumented accounting and painting services, and also made a $5K payment to a company the loan officer owned for undefined consulting services. So, yeah, gosh-diddly-darn-it—they had good reason to be s’picious.

The court at that point gave the parties an opportunity to negotiate. They came up with what the court called a “global settlement of all disputes at that time for the purposes of the foreclosure.” The court signed off on it. This became known, according to SCOV legend, as the “August 2011 stipulated order.” Basically, the parties agreed that the properties could go to public sale and any deficiencies would be applied to a New York property also in foreclosure. Defendants reserved the right to challenge the receiver’s actions, however. The court issued the judgment and decree of foreclosure, and a certificate of nonredemption was issued a couple months later.

Oh, but wait! Then the parties entered “a new stipulated forbearance agreement, which the court signed (“the October 2011 stipulated order”).” The public auctions were stayed for a year, and defendants were given control of the properties, “but were required to make monthly payments toward a new long-term payment schedule.” There was a carrot-and-stick provision. If defendants avoided default, the foreclosure would be tossed without prejudice; if they defaulted, then the stay would go ‘way, and the property would go to auction.

The October 2011 stipulation gave back control to defendants, and specifically voided the later-challenge-to-the-receiver’s-actions provision in the August 2011 stipulated order, providing that the foreclosure would be controlling and preclude any challenge to the receiver’s actions.

The bank filed for default over half a year later, noting that defendants had made only one payment under the October 2011 stipulated order. The parties extended the default by stipulation, but in another half-year, the bank filed for default again. Defendants didn’t challenge the default, but argued that it should be excused because: (1) the bank had said that properties were in good condition with taxes paid, but that wasn’t accurate; and (2) the receiver’s expenditures were questionable.

Defendants filed an affidavit alleging that the bank’s “workout officer and the receiver had colluded to siphon money from the receivership and defraud defendants and the court.” They sought to set aside the foreclosure judgments; the October 2011 stipulated order; and the order discharging the receiver. The bank argued that the defendants failed to make any credible claim in response to the default, and the October 2011 order waived the receiver-done-been-naughty claims.

This led to “a lengthy written order in response to defendants’ motions.” The trial court viewed the August 2011 (and the foreclosure judgments originating from it) and October 2011 stipulated orders as unappealed final orders and went to the relief-from-judgment rule (for you civ-pro geeks out there, it’s Rule 60(b)). The rule requires that a motion for relief from judgment based on fraud has to be filed within a year; it’d been more than a year, so that didn’t fly.

Now if it’s a fraud on the court, that’s a different story. In that case, there’s no time bar. Here, the trial court looked at it and determined that the receiver wasn’t really acting as an officer of the court, so the fraud-on-the-court rule didn’t apply.

The trial court held that the defendants didn’t have grounds to get out of the October 2011 stipulated order. There was a fifteen-month window where they could’ve raised the properties-aren’t-in-good-shape-like-the-bank-said-they-were issue, so the motion for relief for judgment on that point was untimely. For alternative grounds, the trial court looked to basic contract law, reasoning that defendants engaged “in conduct manifesting an affirmance of the agreement over the course of fifteen months.”

Thus, the trial court found defendants in default, and because the defendants hadn’t challenged the default, issued a writ of possession in the bank’s favor. Defendants filed motions to reconsider, which the trial court denied. Then they filed a request for permission to appeal, which was also denied. The SCOV accepted defendants’ request to consider the motions as a notice of appeal and granted a stay of the sales.

The SCOV notes that defendants’ arguments require examination of “both the August 2011 stipulated order and ensuing foreclosure judgments and the October 2011 stipulated order.” First, defendants argue that the August 2011 stipulated order and its progeny—okay, look I just wanted to use a fancy word; we’re talking about the foreclosures—are not final and don’t need to go the relief-from-judgment-motion route. Defendants argue alternatively that the trial court abused its discretion in denying relief from the foreclosure judgments. Failing that, defendants argue that the October 2011 stipulated order is voidable for fiduciary abuse and even duress, and also that they should’ve had “an opportunity to prove that their performance under that agreement was excused by failures on the part of the bank.”

The SCOV begins with the foreclosure judgments’ finality. It’s a question of law, so the SCOV can do whatever it wants. There are three foreclosure-specific considerations here. The SCOV first notes that foreclosure judgments are final even when a right to redeem exists, and even if ancillary proceedings are contemplated. Next, the SCOV notes that permission to appeal a foreclosure must be sought within ten days. Third, the SCOV recognizes “a strong legislative policy favoring the finality of foreclosure judgments.” I may not be a smart man, Jenny, but I know that this ain’t good for defendants.

Not too surprisingly, the SCOV opines, “In light of these considerations, we conclude that the August 2011 foreclosure orders were final, unappealed judgments.” Defendants make an argument that the October 2011 stipulated order canceled the sales, stayed the actions, and indicated the foreclosure judgments might get tossed, so the general rule shouldn’t apply in this case. The SCOV rejects it pretty quickly, reasoning that the October stipulation was entered “well after the expiration of the time for requesting an appeal of the foreclosure judgments.” And the order didn’t actually dismiss the foreclosures—remember the carrot-and-stick provision? So, the SCOV concludes that the foreclosures are unappealed final judgments.

The SCOV then turns to reviewing the relief-from-judgment motions. “Defendants argue that the bank’s fraud—and in particular, the alleged collusion between the bank’s loan officer and the receiver to redirect receivership assets for nonreceivership purposes—supports its request for relief.” The trial court’s decision whether to grant a relief-from-judgment is reviewed for abuse of discretion. Now, Jenny . . . Okay, I’ll stop.

But that’s about the size of it. The SCOV isn’t likely to find an abuse of discretion here. The SCOV reasons that, in the first place, the trial court was correct in concluding that the one-year limit applied to the fraud claim. As to the fraud-upon-the-court argument, the SCOV reasons that: (a) fraud on the court is reserved for particularly egregious acts, usually by officers of the court; and (b) even if the SCOV were to look at it as a fraud upon the court, defendants didn’t bring the claim within a reasonable time. Here, the SCOV gets into the whole you-raised-it-then-waived-it-then-raised-it-then-waived-it-again thing. No abuse of discretion here.

The SCOV turns finally to the October 2011 stipulated order and the basis for default entry. The foreclosure sales were stayed for one year, and defendants were given control over the properties. If defendants defaulted, the sole issue to be considered—according to the stipulated order—was whether or not the defendants were in default. Defendants argue that the terms of the October 2011 order aren’t “enforceable because that agreement was a product of fiduciary abuse and made under duress.” The SCOV reasons that—even if it accepts defendants’ allegations at face value—defendants fail to provide grounds for invalidating the stipulated order. Here, the SCOV notes that while a party can seek to rescind a contract induced by fraud or misrepresentation, when a party knows of the misconduct or misrepresentation and affirms the contract, that power is lost.

The SCOV looks at a restatement of contracts section and opines, “Having entered into the contract well aware of the alleged fraud, defendants retained no power to avoid the contract based on those allegations.” As to the alleged misrepresentations by the bank ‘bout the properties’ condition, well, the defendants lost that challenge too. They took the properties over and managed them for well over a year without asserting any impropriety. This concept is also known as the “you-snooze-you-lose” doctrine.

Defendants make a but-wait-the-bank-breached-its-fiduciary-duty-to-us argument. The SCOV rejects it: “There is no merit to this argument because any fiduciary duties the bank may have had at one time to defendants in this case were terminated prior to the parties’ October 2011 stipulation.” And so, the SCOV holds: “In short, by entering into the contract, and accepting its benefits for well over a year despite their knowledge of the alleged abuse of fiduciary duty and duress, defendants forfeited any ability to avoid the contract on those bases.”

As to whether the defendants should’ve had an opportunity to prove that their lack of performance was justified due to the bank’s failures, the SCOV applies the same reasoning as on the contract. Defendants knew about the problems, they didn’t do anything about it (or gained some advantage from them) and that’s that. The SCOV affirms.

this case is a bit of a you’d-better-strike-while-the-iron’s-hot lesson and it’s a bit of a you-can-get-away-with-a-lot-of-things-if-you-drag-it-out-long-enough example. I highly doubt the latter is intentional—just my take on it. Your mileage may vary.

1 comment:

  1. Nice blog........The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust."New Jersey Lawyer