Understanding The Code of Bushido to Avoid Professional and Financial Sepuku

Eckley & Associates Video ArticleUnderstanding The Code of Bushido to Avoid Professional and Financial Sepuku

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JANUARY 1, 2011

The Samurai of ancient Japan were a fierce and greatly-respected warrior class who swore fealty to the Code of Bushido which contained not just principles of conflict but also rules of benevolent social conduct. The Code mandated the strictest honor to fellow Samurai, to one’s Samurai Master, one’s ancestors, family and to the weak.  To bring disrespect upon or loss to any of the foregoing was to bring shame upon one’s self, calling then for an immediate act of Sepuku, a bloody suicide by self-disembowelment with one’s own battle dagger, an ultimate, cleansing contrition for having failed the Code.


Though most of the modern civil law, the Bushido Code of today, has become considerably less grizzly over the last 2000 years, the pain of violating it has merely shifted the location of the bloody impact. The Code for offending others no longer calls for tearing out one’s body innards.  Instead, for the most part, it calls for excising the innards of one’s wallet…into the wallets of those who are offended.   About the same time as disembowelment for various sins went from one’s guts to one’s cash, the new name for dishonor became “defendant,” Sepuku transformed into “Bankruptcy” and if the system had any “warrior class”  left at all, God help us, it became the lawyers.  Many have lamented that in capitalistic societies these warriors also have a “Code.”  It is the “C ode of Justice” (i.e. “ju$t-u$”).  After seeing “enlightened” modern civil trials for damages in action, one wonders if death may not have been a more benign punishment than life after losing everything to a devastating civil judgment, or, worse, defending against one successfully only to get an attorney’s fees bill that puts one in the same economic place.

Transitioning this point into today’s litigation trends, it is not true as one hears that litigation has declined because there is nothing left in the Great Recessionary economy to sue over.  In fact, it is the contrary.  In good economies, people sue for a greater split of the spoils of profit; in a downbeat one, they sue in greater numbers to blame the other guy for the failure to make any profit to split.  The allure of Jackpot Justice seems at work either way.  And the mood of the litigants, judges and juries on the downside is far uglier than on the up.

This “devil’s choice” is no more evident right now than in the real estate litigation world.  Real estate professionals and real estate venture partners are being claimed against not only for failures to make a killing on a “buy” they advised in favor of, but also for not making a sale fast enough to mitigate ongoing loss when the market continues to sink.  Advising a client to “hold” property in this market as prices go the way of the Titanic seems as risky as advising them to “buy” property at “today’s rock bottom” when “tomorrow’s” will likely be deeper still.


Finding one’s self with only the “devil’s choice” is a horrible plight.  And often an avoidable one.  So this Newsletter has tried for the last several years to give everyone—from professional to novice, licensee to consumer--some timely “Head’s Up” suggestions to avoid the necessity of either the ancient or the modern form of Sepukuor at least to reveal where the exit door might be for the wiser to escape the knife.  Some issues of this Newsletter have been broader, some narrower.  But they have always been on that course.


In this Newsletter, I will cover just a few legal and practical “nuts and bolts” left over from last year.  Though a somewhat disjointed potpourri, they are all important items to know in order to avoid major professional or financial mistakes.  In my experience, they are all holes in the economic road that could swallow a professional or financial truck.  I have seen no one else try to detour them.  Let’s sheath the dagger and fix that oversight.


Here’s a whopper no one has mentioned anything about.  H.B. 2626 became effective on July 28, 2010, and is now codified at A.R.S. § 33-807.01. The statute sets forth a new notice requirement in Arizona foreclosures.  The requirement must be met prior to the non-judicial foreclosure of a principal residence, if a first deed of trust was recorded against the property on, or after, January 1, 2003 through December 31, 2008.  That covers most that we are dealing with in this Great Recession.

Specifically, the statute requires a lender to attempt to contact a borrower in writing to explore options to avoid foreclosure, at least thirty days before a notice of trustee’s sale is recorded. In Arizona, the notice of trustee’s sale initiates the non-judicial foreclosure process.  The statute also requires that the lender maintain documentation of the notice (a copy of it and a certification that it was delivered and by whom and how) in the credit file.

Here’s the rub:  Most of them did not comply with this rule!  Their foreclosures thereafter violate state law (and to the extent that state law is violated, the lender may be in additional violation of its own state and federal regulation, which prohibits it from violating state procedural laws) and make the lender liable.

Although the statute clarifies that its requirements are not applicable to lenders “compliant with the United States Department of Treasury Home Affordable Modification Program,” and other specific types of loans, 33-807.01 C. 4. of it makes it clear that if the lender acts did not comply with the federal Guidelines as the Feds issued them (almost all lenders in Arizona and until recently in California have not) then they are subject to this requirement, anyway.  And almost none of them have complied.

The vagueness of the statute’s notification requirements has encouraged the attorneys for the lenders to advise a whole (and secret backroom) system of notification to try to avoid that as a borrower defense. The trouble is, no lender has done it and, moreover, if, on demand, they produce such documents now, they are likely all forgeries, leading them into yet more trouble.  If a lender sends a notice, the borrower might contest whether the notice was “sufficient,” or whether the lender “maintained the notice in the credit file.”  If a lender fails to maintain “proper” documentation of the required notice in the credit file, the borrower may raise as an issue the lender’s failure to identify a property as a borrower’s principal residence, or a lender’s failure to comply with HAMP, HAFA, 2MP and others not only as a defense, but as an affirmative counterclaim for rescission o f the sale and/or damages.

The attorneys for the lenders are recommending that to comply with this notice the lender should adopt as minimum protocol the sending, via certified mail (return receipt requested), of a letter outlining the borrower’s options to avoid the foreclosure of his home, including the name and phone number of the lender’s or servicer’s loss mitigation department. The letter should also request that the borrower contact that department for the express purpose of “exploring options to avoid foreclosure.”  You will know if one was sent.  You should have it.  Chances are 99% you did not get it because it was never sent and when you get the “certificate” form their files that it was, it is a forgery.

The attorneys for the lenders are also recommending that the above letter should be maintained in the credit file along with a certificate of compliance, similar to the one proposed in the House Engrossed Version of H.B. 2626 (the Senate Engrossed Version was adopted). A.R.S. § 33-807.01, et. seqYou will not get it from the lender (they do not want you to have it) unless you ask for it by name.  If you would like to see what the one-that-is-not-there-now-but-will-be-magically-when-you-ask-for-it looks like, so you can contest it, e-mail us at education@eckleylaw.com and we will forward you one at no cost.


Some debtors are waiting for the lender, after denying them modifications and after rejecting all their short-sales or otherwise aborting every other federal program option with onerous, unlawful demands that go well outside and beyond the federal HAMP, HAFA and 2MP Guidelines, to suggest a deed-in-lieu of foreclosure.  Often times, in complete violation of the HAMP program, the lender will not place them in HAFA, as required by the Guidelines or, once in the HAFA program, the lender will deny the borrower the deed-back option in that Program and simply forecloses.  In most cases, it has to be for pure lender malice against the borrower, since there is no federal Program mandate requiring it.   Does the borrower have to wait for the lender to skewer them by this “slow burn to credit oblivion” or can they expedite the process and start their recovery on an accelerated basis, as it only starts ticking AFTER this i s behind them?  No.  They do not have to wait. Yes they can so that deed-back NOW!

It only takes one signature to convey back a property title and that is the borrower’s.  The lender does not have to sign it to make it official.  Borrowers are now sending lenders their keys and their own deed-back to them (not entitled “deed-in-lieu of foreclosure” because it does not have to be in order to convey back a title—it is really in essence a quitclaim deed with language releasing the borrower) and inviting the lenders to immediately take over the property without the need for foreclosure and sometimes without working through any of the programs.  In some cases, lenders accept these by holding them or by retaking the property in one way or another.  This can also stop the accumulating HOA bills, as the HOA bills the title-holder, regardless of whether they occupy the residence.  Lenders ARE NOT REQUIRED to take a deed and resolve measures cooperatively.  They may very well ignore the borrow er, send the deed back or keep it and continue with a foreclosure, but the deed-back step--if the lender acts or fails to act in some way that operates to actually or constructively accept the deed-- can build additional defenses against later adverse lender or collection actions and this is especially an important alternative on those instruments in which a deficiency is possible.  In addition, artfully drawn deed-backs can alleviate or completely offset any potential IRC Section 108 tax exposure and can even, by wording, settle potential waste and other claims, resolve interim insurance coverage issues and duties and can sometimes give good grounds to contest any later collection or adverse credit reporting over the non-payment.


The competent attorney will draft them with special provisions and recitals that can accomplish some or all of these objectives and, above all, to assure that no deed is headed or titled “deed-in-lieu-of-foreclosure” as this heading stays in the county recorder's records forever and gets picked up by credit reporters and is, in fact, not even a recital required to deed property to the lender.  The lenders’ own form deeds are not designed to do any of the above and in fact in most cases unnecessarily castigate the borrower and ask the borrower to forfeit claims rights for wrongful lender practices as part of their format.

Just how many people have been permitted or advised to file the bank’s damaging deeds-in-lieu when so much credit, tax and liability repair is possible by the more astute drafting and use of them?  Wow!

For those of you who worry about the bank losing any money or sleep over it, log to: http://www.youtube.com/user/fiercefreeleancer.


Bank deposit agreements or account agreements such as savings or checking or even brokerage accounts usually have a clause buried somewhere in the deposit agreement that states something to the effect that a “failure to pay any other debt due (the depository instruction) will allow the lender to sweep any depository account on file with the institution.  Applied as an example, if one defaults on a trust deed with XYZ Bank and also has a savings and checking or brokerage account with XYZ Bank , the depositor can lose the entire account through such a “sweep”—often without further notice by XYZ Bank other than that it did the sweep.  Remove such accounts from the lender and any of its subsidiaries and branches prior to any delinquencies or defaults!


Real estate professionals and licensees:  Are you giving your clients or assuring they are getting the kind of written legal advice about material factors contained in our Newsletters (just as above) BEFORE they engage in workout programs with their lenders or creditors?  Full WRITTEN disclosure of all options,  risks and ramifications is required (in Arizona) by Commissioner’s Rules R4-28-1101, R4-28-503c and ARS 32-2153 A and B (10) and (in California) by California Business and Professions Code; Disclosures in Real Property Transactions, 6th Ed. (2005), The Real Estate Transfer Disclosure Statement (TDS), Cal. Civ. Section 2079.13 et. seq. and Cal. Civ. Section 2956 et. seq., et. al. (log to: www.dre.ca.gov/pub_disclosures.html).

It’s  NOT “optional” that they get disclosure.  It’s a MANDATORY PROFESSIONAL DUTY!

Bet you that this kind of disclosure and advisory is just not happening and, believe me, there goes the license or savings account (or both) at some point in the future!

None of the Associations or Commissioners, including Arizona and California, have come out with a thorough, correct or complete disclosure or advisory, yet.  Not even close. Too many political influences baking the pie.  But you or your customers, clients or partners, all justly wary of the modern Real Estate Bu$hido and also contemplative of just how badly modern $epuku might really, really hurt, need one RIGHT NOW!  For a FREE, COMPLETE written Advisory of Work-Out Ramificationsform prepared by those who have “been there, done that and returned alivecontact us by e-mail at education@eckleylaw.comUSE IT! 

Look out for our future Counselor’s Corner monthlies with more hard-hitting realities that vitally affect your daily practice!  Get you and your friends on the list by giving us your e-address at education@eckleylaw.com

'Nuff said.


J. Robert Eckley is a multi-state real estate, agency and banking law attorney, successful litigator, popular writer, educator, economist, past Realtor and national speaker with an immense personal and professional involvement in forefront issues over the past three decades. He has established precedent at the Supreme Court and co-founded transactional laws, rules and forms that guide practitioners today. He has been a real estate licensee and a former Realtor for three decades, was named to numerous Commissioner's Advisory Committees and Governor’s Agency Advisory Committees, received a host of leadership and instructor awards, is a CCIM Affiliate, testified in Congress against the due-on-sale clauses in 1982, fought the clause in state and federal courts, fought against all and defended a half dozen state and nationally chartered banks and thrifts, and has received leadership awards and honors from U.S. President Reagan and former Arizona Governor Napolitano, to cover just a few of the miles he has gone.  Often as entertaining as he is practical and enlightening!  See more at eckleylaw.com