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Issue  204  Article  338
Published:  2/1/2013

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Violation of UPL Statute no Defense to Foreclosure
Chris Burti, Vice President and Senior Legal

Closing any mortgage loan in South Carolina has been held to be the practice of law by the South Carolina Supreme Court, see Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (2003).  The South Carolina Supreme Court has also recently held in Matrix Financial Services Corp. v. Frazier , 394 S.C. 134, 714 S.E.2d 532 (S.C. 2011) that a mortgage loan closing that was not closed by an attorney may benefit from equitable relief and in all likelihood, may not be foreclosed:

"This Court has previously held the presence of attorneys in real estate loan closings is for the protection of the public and that ‘protection of the public is of paramount concern' in loan closings. Buyers Serv., 292 S.C. at 433, 357 S.E.2d at 19. Enforcing this requirement will come as no surprise to any lender. Lenders cannot ignore established laws of this state and yet expect this Court to overlook their unlawful disregard. We take this opportunity to definitively state that a lender may not enjoy the benefit of equitable remedies when that lender failed to have attorney supervision during the loan process as required by our law. We apply this ruling to all filing dates after the issuance of this opinion."

In another equitable foreclosure case, Wachovia Bank, NA v. Coffey, 389 S.C. 68, 698 SE 2d 244 (2010) cited with approval in Matrix, the South Carolina Court of Appeals states that "Wachovia's legal causes of action are barred as well." (Citations omitted). Thus in South Carolina, it appears that public policy considerations in favor of protection of the public result in a violation of their UPL laws by a lender rendering the loan unenforceable per se.

The North Carolina Court of Appeals addressed the same issue in a unanimous opinion released on January 15, 2013, In re foreclosure of Gray, (12-854), and did not come to nearly the same conclusion as the South Carolina appellate courts. While the Court did not grant  carte blanc to lenders violating UPL statutes in North Carolina, they certainly made use of the doctrine recognized in North Carolina an uphill climb for respondents defending a foreclosure proceeding.

Robert H. Gray and Amy P. Gray (petitioners) refinanced the mortgage on their home in January 2007, with Financial Resources Mortgage, Inc. (FRM). The mortgage broker and loan originator through FRM was Jason Davis who secured a residential mortgage for petitioners through Lydian Private Bank (Lydian). John Frechette, a notary, acted as the signing agent at the closing with no attorney was present.  Petitioners allege that Davis and Frechette advised them as to their rights and obligations under the mortgage.

After the closing, the deed of trust was recorded in Cabarrus County, and petitioners began making loan payments. The note was subsequently transferred first to Washington Mutual and then again to JPMorgan Chase Bank, N.A. (respondent). In 2010, petitioners defaulted and in 2011 they received a notice of foreclosure. On November 3, 2011, the Cabarrus County Clerk of Superior Court entered an order allowing the foreclosure sale which was appealed to the trial court. After a de novo hearing, the trial court entered an order allowing the foreclosure sale from which the petitioners appealed.

On appeal, the petitioners challenged the trial court's finding that respondent "is the holder of the note sought to be foreclosed and the note evidences a valid debt owed by" petitioners. First, petitioners argued that this finding is actually a conclusion of law and the Court of Appeals agreed with this contention.

This opinion states that the Court of Appeals has held that "any determination requiring the exercise of judgment or the application of legal principles is more properly classified a conclusion of law." (citations omitted), concluding that the "determination that respondents are the holder of a valid debt requires judgment and the application of law" and thus reviewable de novo. (citations omitted).

The petitioners contended that the North Carolina Court of Appeals decision in the case of In re Bradburn, 199 N.C. App. 549, 681 S.E.2d 826 (2009) required the trial court to conclude that a valid debt did not exist in this case because the petitioners contended that In re Bradburn required the respondents to produce evidence that the underlying loan transaction was not accomplished in violation of any statute. Since the Bradburn court had held that such a conclusion required a weighing of the equities, the Court of Appeals simply rejected the petitioners' argument.

"In In re Bradburn, the foreclosing party, Paragon, initiated a foreclosure proceeding in Iredell County. There, the clerk determined that Paragon was not licensed to act as a mortgage broker or mortgage banker at the time the Bradburns executed their note and deed of trust. Accordingly, the clerk concluded that Paragon had failed to prove the existence of a valid debt because the note was unenforceable. Paragon then appealed to the trial court. The trial court conducted a de novo hearing and also found that Paragon was unlicensed and in direct violation of N.C. Gen. Stat. § 53-243.03. The trial court then concluded that due to this violation, the note and deed of trust were illegal and unenforceable, and as a result, Paragon had failed to prove the existence of a valid debt.

Paragon then appealed to this Court, arguing that the trial court erred in concluding that there was no valid debt. We held that a contract made in violation of a statute is not void ab initio, but rather, may be voidable. We then determined that "it is the province of the trial court, not the appellate court, to weigh the evidence and decide the equities. Therefore, we remand to the trial court to determine whether the Note and Deed of Trust are unenforceable under the facts and circumstances of this case." In re Bradburn, 199 N.C. App. at 556, 681 S.E.2d at 833."

The Court of Appeals found the facts of this case materially distinguishable from those presented in Bradburn. The court observes here that the petitioners did not allege any specific statutory violation by the lender. While acknowledging the implication of a violation of N.C.G.S. Section 84—4, the recited facts suggested that they had merely alleged their conclusion that a violation had occurred and had not alleged acts with sufficient specificity for the Court to determine that a violation had been properly alleged in order for the trial court to determine whether one existed and if so occurring, whether it rendered the debt invalid (weighing the equities). The Court also noted that on remand from the Court of Appeals, that the trial court in the Bradburn case subsequently found the debt to be valid, regardless of the uncontroverted statutory violation. Therefore, a statutory violation does not render the debt per se unenforceable and as a result invalid, but merely puts the question to the trial court, assuming that a sufficient factual showing has been made.

The Court of Appeals also rejected the petitioners' contention that the ruling of In re Bradburn placed an evidentiary burden upon the petitioners in a foreclosure proceeding to "show evidence that the underlying loan transactions were not accomplished in violation of any statute if the purported debtor tenders evidence suggesting otherwise." This part of the opinion is less clear. It would seem that the Court of Appeals is saying that if the respondents in a foreclosure proceeding have introduced evidence that an applicable statute has been violated, that the trial court could on that evidence alone determine that the statute had not been violated, or in the alternative, that the violation did not render debt unenforceable.

As a result, it seems that the burden rests squarely on the shoulders of the respondents to allege: the statute violated, the acts showing the violation the facts evidencing that the violation was material, the specific harm resulting from the violation, that the resulting harm was what the statute was intended to avoid and that the respondents' actions did not shift the equities. It also seems that the Court is suggesting there is no evidentiary requirement for the lender to rebut all this provided that the trial court finds in the lender's favor that all required elements have not been sufficiently alleged and an adequate evidentiary forecast has not been provided by the respondents.

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