Practice Pointers: Business Organization Issues in Landlord/Tenant Law

Landlord/tenant issues are often affected by the particular type of business organization involved in these matters.  

A landlord is either a sole proprietor or a business organization, most often a limited liability company (“LLC”) or corporation.  A sole proprietor does business in his or her name.  This is common for many residential landlords, who often are renting a unit in their home.  As a sole proprietor, the landlord personally enters into leases with the tenants and reports any rental income on their individual taxes.

One of the main drawbacks about being a sole proprietor is that the landlord is personally liable for anything that occurs as part of the landlord/tenant business.  For example, if a tenant were injured and the landlord was at fault, the landlord would be personally liable for these damages.  For this reason, landlords should consider putting their landlord/tenant business into an LLC or corporation.  Not only does this protect the landlord, it also may offer several tax advantages as well.  Landlords should consult both a business attorney and tax adviser to determine if this is the right fit for them.

Tenants need to know what type of landlord they have when dealing with a landlord/tenant matter.  This is particularly important when determining who to bring to court for a landlord/tenant case.  If the landlord is an LLC or corporation, the tenant needs to serve the businesses’s registered agent (which can be found on the Secretary of State’s website).  A registered agent is a business or individual designated to receive notice of a lawsuit, and the tenant should include the registered agent in any demand letter or legal papers sent to the landlord.

The type of business organization for a landlord is also important for court proceedings.  With the exception of small claims court, an LLC or corporation must be represented by an attorney in court.  For this reason, landlords organized as LLCs or corporations need to obtain legal counsel before bringing an eviction or other lawsuit against tenants.  Tenants, in turn, should make certain that their landlord is represented by a licensed attorney in court. 

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Breaking News: Massachusetts Reaches Settlement with National Banks Over Wrongful Foreclosures

The Commonwealth of Massachusetts reached a settlement with several large banks over illegal foreclosure practices against homeowners.  This settlement, among other things, requires these banks to pay monetary damages and assist homeowners with correcting defective title issues resulting from void foreclosures.

The settlement is a surprise to no one who is familiar with Massachusetts foreclosure law.  Banks and lenders routinely make a mess out of the foreclosure process and the state’s lawsuit is yet another example of this.  As said by the Supreme Judicial Court in one of its landmark foreclosure decisions, “what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets.”

This settlement is a reminder that any homeowner facing foreclosure should seek the advice of an attorney to learn their rights.

Rise in Deficiency Judgment Lawsuits Against Massachusetts Homeowners

The Boston Globe recently reported that Massachusetts former homeowners who have been foreclosed are facing deficiency judgment lawsuits from their lenders.  I had written about this topic before, and now it appears that these suits are occurring in greater numbers for former homeowners right here in Massachusetts.

Anyone facing one of these lawsuits should consult an attorney right away.

FAQ: I’ve Received a Notice about a Servicemembers’ Civil Relief Act Case Against Me. What Should I Do?

Question:   I’ve received a notice about a Servicemembers’ Civil Relief Act against me. What should I do?

Answer:  The Servicemembers’ Civil Relief Act (“SCRA”) is a federal law that provides certain protections for those in military service.  For foreclosure, the SCRA generally prevents lenders from foreclosing against homeowners in military service.

In Massachusetts, lenders determine whether borrowers fall under the protections of the SCRA through a court action, which is almost always brought in Land Court.  The homeowner is served with a complaint  and has a deadline for responding to the lawsuit and asserting any of their rights under the SCRA.  If the borrower fails to respond, the lender is eligible to obtain a judgment from the Land Court declaring that the homeowner is not eligible for the protections of the SCRA. Lenders typically bring SCRA cases against all borrowers they are intending to foreclose, regardless of how likely it is that the borrower may be in the military.

When faced with an SCRA complaint, homeowners who are in the military should act quickly to protect their rights.  Homeowners who are not in the military generally have no protections under the SCRA and as such, have few defenses in these cases.  However, an SCRA case is a strong indication that the lender will begin a foreclosure soon, and homeowners faced with these cases should consult with an attorney to explore their options in avoiding foreclosure.

 

Breaking News: Supreme Judicial Court Rules in Favor of Banks in City Foreclosure Ordnance Case

SJC

The Supreme Judicial Court ruled in favor of the banks today in a challenge to the City of Springfield’s foreclosure ordinances. The Court held that towns and cities are not permitted to pass local ordinances that conflict with state foreclosure law.  In essence, the Court held that the state legislature–and the state legislature alone– is responsible for Massachusetts foreclosure law.

While these local ordinances would have been beneficial to homeowners facing foreclosure, the Court’s decision makes sense.  Foreclosure law has always come from state statute and the creation of anti-foreclosure protections by local towns and cities, while noble, is a job really left for the Legislature.  I agree with the Court’s concluding remarks in the case, which read:

We recognize that the city of Springfield has attempted to address the serious problem of urban blight within its borders through these ordinances. Although we conclude that the city may not achieve its goal by ordinance as it has here attempted, a solution may be provided through the Legislature. 


Hopefully, the Court’s decision will encourage state lawmakers to take on these challenges in the upcoming legislative session.

Extend the Mortgage Forgiveness Debt Relief Act!

 

Last week, the U.S. House of Representatives passed a much needed one-year extension to the Mortgage Forgiveness Debt Relief Act of 2007.  The Senate is expected to take up this measure soon and will hopefully have it passed by the end of the year.

Few people, myself included, completely understand the tax code, but this concept is simple enough: forgiven debt is considered “income” for purposes of the income tax.  For example, if someone lends you $500 but later decides to forgive you from repaying it, the IRS considers that $500 of taxable income.

This rule is incredibly problematic for struggling homeowners who have received loan modifications or opted to do short sales of their home to avoid foreclosure.  Often, these arraignments result in the cancellation of mortgage debt for the homeowner; a necessity for avoiding foreclosure.

The problem?  Many of these homeowners, who have avoided foreclosure, faced steep tax bills as a result of this forgiven debt.  It is a problem not just for homeowners, but also realtors and attorneys who are stuck “between a rock and a hard place” in navigating this tricky area.  Hopefully, Congress will have this important measure passed by the end of 2014.

This issue is a reminder, however, that homeowners accepting any type of loss mitigation assistance should seek the advice of a tax professional when considering their options.

Breaking News: Fannie Mae/Freddie Mac Agree to Sell Back Foreclosed Properties to Prior Owners

In a welcome turn of events, Fannie Mae/Freddie Mac have agreed to begin selling foreclosed properties back to former owners or third-party organizations at market value. Previously, these organizations has refused to consider these types of deals, leaving many former homeowners who had the means to repurchase their homes from being unable to do so. Several months ago, the Commonwealth of Massachusetts lost its case against Fannie Mae/Freddie Mac to require these organizations to comply with state law that required buy-back deals for former homeowners.

This news is welcome relief for many former homeowners, who often face Fannie Mae/Freddie Mac in foreclosure cases.

Defending Against Deficiency Judgments

A recent New York Times article reports that many loan servicers and lenders are increasingly pursuing deficiency judgments against former homeowners who have gone through foreclosure.

 A deficiency judgment is the amount a former homeowner owes following a foreclosure sale.  This amount is the difference between the debt owed and the foreclosure sale price.  For example, if the former homeowner owed the lender $600,000 and the home sold at the foreclosure sale for $400,000, the deficiency judgment is $200,000.  Under Massachusetts law, the lender has two years to try and collect this judgment against the former homeowner.

In the past, lenders have rarely attempted to collect these judgments; usually, former homeowners do not have any assets to make a debt collection case worthwhile.  Moreover, a borrower can generally eliminate this debt through a bankruptcy.
Fortunately, former homeowners do have options in defending against a deficiency judgment lawsuit.  If you are facing a claim, seek legal assistance right away.

 

Breaking News: Ocwen Caught Playing Games with Loan Modification Applications

To the surprise of no one who is involved with the process of applying for loan modification, Ocwen–one of the country’s largest loan servicers–has been accused of “backdating” letters to borrowers about loan modifications.  This, in effect, would have caused many eligible borrowers from receiving the loss mitigation assistance that state and federal law requires for struggling homeowners.

I continue to be shocked by the level of incompetence and carelessness that lenders and servicers use in reviewing loan modification applications.  Homeowners who apply for loan modifications should always, always, always keep copies of everything they submit to their servicer and use some form a mailing confirmation, such as certified mail.  If a homeowner is not getting a favorable response to their application, they should consult an attorney right away.

 

Breaking News: Federal Court Rules Against State in Fannie Mae, Freddie Mac Case

 

Last week, Massachusetts U.S. District Judge Richard Stearns ruled against the Commonwealth of Massachusetts in its lawsuit against Fannie Mae and Freddie Mac.  Earlier this year, Massachusetts brought this lawsuit against Fannie Mae and Freddie Mac to enforce a new law that prohibited lenders from refusing to work with nonprofits who help former homeowners buy back foreclosed properties.

I haven’t had an opportunity to review all of the legal arguments in this case, but as a policy matter, Fannie Mae and Freddie Mac’s refusal to follow this state law is shortsighted.  These buy back programs ensure that Fannie Mae and Freddie Mac get fair market value of foreclosed properties while allowing former homeowners to remain in their homes.  It is a good deal for all involved parties and as government-sponsored enterprises, Fannie Mae and Freddie Mac should be doing much more to help homeowners in need.