Federal judge questions constitutionality of Colorado foreclosure law
POSTED: 05/06/2013 06:19:38 PM MDT
UPDATED: 05/07/2013 10:20:54 AM MDT
By David Migoya
The Denver Post
Lisa Brumfiel at her home in Aurora after her hearing in federal court to stop the foreclosure proceeding. (THE DENVER POST | Joe Amon)
A federal judge on Monday made the rare move to stop the foreclosure auction of an Aurora woman's house in a case that squarely takes on the constitutionality of Colorado's foreclosure laws.
U.S. District Judge William Martinez issued a preliminary injunction against the sale of Lisa Kay Brumfiel's four-bedroom home, scheduled for Wednesday in Arapahoe County, until the judge can decide whether parts of state law are unfair to homeowners facing the loss of their house.
At issue is a provision in state law that allows lawyers to assert that their client, typically a bank, has the right to foreclose on a property even though they might not have the original mortgage paperwork to prove it.
What makes the case compelling isn't just that a federal judge was persuaded to step into an issue involving state law — extremely difficult to do — but the plaintiff in the case is a part-time saleswoman who has taken on the battle without a lawyer.
Brumfiel, 43, says she didn't know a thing about the law. Despite fumbles in decorum and formal court procedure, she has taken on U.S. Bank and Larry Castle, one of Colorado's most powerful foreclosure lawyers.
Despite several setbacks and outright losses, she has made it farther than many lawyers.
"There's an issue of fundamental rights, and I won't back down," Brumfiel said after Martinez's decision.
Though Martinez's ruling gives Brumfiel until May 15 to argue why Colorado's law violates the equal-protection clause of the 14th Amendment to the U.S. Constitution, he gave early glimpses to his thinking.
"Colorado is the only state in the country that allows an unsworn statement by an attorney for a foreclosing party — without any penalty — to say, 'Trust me, judge, these guys are the qualified holder for this deed of trust,' " Martinez said. "Is there another state that has lowered the bar for a foreclosure any lower?"
A qualified holder is typically the owner of a mortgage, such as a bank or other lender.
Brumfiel bought her tri-level home in 2006 for $169,350. It was an interest-only loan with an adjustable rate.
"I thought I could make it work," Brumfiel said.
She soon fell behind in her payments when personal issues forced her to leave her sales job in 2011. She has not paid since.
When U.S. Bank filed to foreclose later that year, Brumfiel balked because her mortgage was originally with First Franklin Mortgage.
How U.S. Bank came to hold the note was in question, and Brumfiel wanted proof. Banks often sell mortgages to one another and, rather than record those transfers at the county recorder of deeds — an expensive process — they self-track them via the Mortgage Electronic Registry System.
Though many states allow MERS to be the assignee of a mortgage and foreclose when homeowners default, Colorado doesn't. MERS often assigns ownership of the note to the foreclosing bank.
But there's no proof in public records of those transfers in ownership, because they're never recorded.
County public trustees auction foreclosed houses, but that can't happen until a district-court judge authorizes it. That occurs at a Rule 120 hearing, named for the court procedure that governs it.
Before signing, a judge is to answer two questions: Is the homeowner in default, and are they in the active military?
The judge's decision is final, cannot be appealed and allows for no discovery. Homeowners misunderstand the rule to the extent that Rule 120 hearings are rarely held. And any challenge to the decision must be taken up as a separate lawsuit, which critics say is unfair since homeowners facing foreclosure are unlikely to have the money for a lawyer.
In 1989, the Colorado Supreme Court ruled that judges must also consider at a Rule 120 hearing whether a bank has the right to foreclose, known legally as having standing.
As banks sold mortgages more and more, and MERS was to track who owned which, coming up with original paperwork to prove standing became difficult.
Then, when the mortgage crisis hit along with the economic meltdown, the flood of foreclosures made it virtually impossible to keep up.
With the backing of the state's public trustees, who are to oversee the foreclosure process impartially, Castle and other foreclosure lawyers in 2006 drafted legislation, HB 1387, that made a critical change to foreclosure rules.
Lawyers could now sign a document, called a statement of qualified holder, that was their guarantee — without the need to provide proof — that their bank client had the right to foreclose.
Critics say it takes away a homeowner's rights to due process guaranteed in the Constitution. But none has succeeded in making a challenge until Brumfiel.
"It's great the federal court is invoking fundamental constitutional principles to reviewing a foreclosure process that obviously needs to be fixed," said attorney Stephen Brunette, who has tried to change the law since.
Two legislative efforts at changing the law have failed, both by Rep. Beth McCann, D-Denver. And a voter initiative last year stalled for lack of funds to raise the signatures needed to make the ballot.
Court challenges have also failed, including at the federal level where judges are reluctant to tread on state business.
Monday's decision, however, sets the stage for a showdown over the constitutionality of the qualified-holder statement.
Castle's attorney, Phil Vagliaca, warned Martinez of treading on state business.
"What this federal court is trying to wrestle with goes way beyond just a foreclosure," Vagliaca said. "It is whether the federal court should inject itself in extreme state-court circumstances. Not without offending hundreds of years of federalism and state sovereignty."
Said Brumfiel: "This isn't about me anymore. It's not even about whether you owe the money or not. It's about someone taking something and not having to prove they can."
David Migoya: 303-954-1506,firstname.lastname@example.org/davidmigoya
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