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What To Expect – And Do – When You’re Expecting Foreclosure (2009-02-09)

Those of us who have been around the block a few times have seen recessions come and go. But this may be the first time that you (or a client) have experienced an economic downturn that has brought you to your knees. Despite your best efforts to keep your business afloat, you continue to fall behind on your mortgage payments, and the bank’s patience has not just worn thin – it’s worn through. The bank has initiated a foreclosure action. The clock is ticking. What do you do next? After you’ve passed along the foreclosure complaint to your attorney, there are a few options you may want to consider in consultation with your attorney, if you haven’t already done so. First, have you exhausted all your options with the bank? If you can show the bank that better times are around the corner (for example, you just entered into a potentially profitable relationship with a major distributor), the bank might be willing to enter into a forbearance agreement that would stave off foreclosure (and possibly the need to make payments) while you get your business back on its feet. Second, would the bank be willing to refinance at a lower rate of interest or for a longer term so that monthly payments fall within your diminished means? Perhaps you have an asset that you can sell to reduce the principal at the time of a refinancing. Or, you could retain ownership of the asset, but use it as additional collateral in a refinancing.

If you don’t see business improving in the foreseeable future, or if the bank’s not interested in forbearing or refinancing, another option might be for you to offer the bank the deed to the property in lieu of foreclosure. This option is especially suited to business owners who have little or no equity in the property and few other assets. This can be an attractive alternative to a bank that wants to avoid the foreclosure process and realizes that it will have little chance of collecting on a deficiency judgment if the appraised value of the property is less than the underlying debt. Similarly, the bank might give its blessing to your short sale of the property (that is, a sale for less than the amount remaining on the mortgage). Whether the bank is amenable to either a short sale or a deed in lieu, you will want your lawyer to secure a written release from the bank for any resulting deficiency. Such a release is an attainable goal considering the realities of the marketplace and your limited, or non-existent, assets.

If the bank is unwilling to forbear, even if you can demonstrate that your and/or your business’s finances will improve dramatically in the next six to twelve months, you will be forced to address the foreclosure complaint – and quickly, as there is often less time to answer a foreclosure complaint than other civil complaints. (In Connecticut, for example, foreclosure defendants have just fifteen days to file an answer, whereas defendants in other civil actions have thirty days.)

If you are unwilling to surrender without a fight, and there’s a sound legal basis for doing so, there are a number of pleading alternatives available. Generally, these pleading alternatives follow a prescribed order, so that employment of the second alternative will waive the right to go back and make use of the first alternative. First, there may be a defect in how you were served with the summons and foreclosure complaint, which could result in a lack of the court’s personal jurisdiction over you. If your attorney suspects this might be the case, he or she will want to file an appropriate motion immediately. Another alternative might be to file a request to revise the foreclosure complaint due to a lack of clarity or other defect in the pleadings that needs correcting. Yet another alternative might be a motion to strike (or dismiss, depending on the state) one or more of the claims made in the foreclosure complaint due to the bank’s failure plead the essential elements of a foreclosure claim or, for example, because the bank failed to name an indispensable or necessary party to the lawsuit – such as an unnamed subtenant – whose rights might be adversely affected if they were not considered in any judgment that might result.

If none of the foregoing alternatives are viable, or if they succeed in only slowing down the foreclosure (which, depending on the circumstances, may be a goal in itself), you may have to answer the complaint. But alternatives exist there, as well. You might succeed in foiling the foreclosure if you can assert a special defense in the answer that calls to light a defect in the making, validity, or enforcement of the note or mortgage at issue. Typical special defenses include the relevant statute of limitations and the invalidity of the lien. For example, a defective assignment might prevent the assignee from proving that it actually owns the note and mortgage, which would result in a lack of standing to bring the foreclosure. Furthermore, because foreclosure is an equitable proceeding, other defenses available to you might include fraud, mistake, unfair trade practice, and even the bank’s refusal to agree to a favorable sale of the property to a third party.

Of course, you may reach the conclusion, perhaps in consultation with your attorney, that you lack a viable alternative or defense, and time is right to walk away without a fight. You should be aware that there may be serious tax consequences requiring consultation with a tax advisor if the bank agrees to a deed in lieu, a short sale, or any other resolution that results in the forgiveness of any portion of the loan. Regardless of what you ultimately decide, it’s advisable for you to prepare a game plan with your attorney, broker, and other professionals that will protect your financial interests now and on the other side of the current recession.

This article is for general interest and education only and does not constitute legal advice. The reader is encouraged to seek legal counsel before utilizing any suggestions contained in this article.