9th Cir. Holds Creditor in Fraudulent Transfer Action May Recover Amounts Above Collateralized Debt

The U.S. Court of Appeals for the Ninth Circuit recently held that, where husband and wife debtors fraudulently transferred assets, the creditor was entitled to the full sum the creditor would have recovered and was not limited to the amount of the collateralized debt.

In so ruling, the Ninth Circuit reversed a bankruptcy court and trial court judgment in the creditor’s favor that the debt was non-dischargeable due to the debtor’s fraud, but improperly limiting the non-dischargeable debt to only the collateralized amount.

A copy of the opinion in DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer is available at:  Link to Opinion.

A bank (“lending bank”) made a commercial loan to husband and wife borrowers. The husband borrower was the sole member and manager of a cash advance business, which purchased five insurance agencies with the $1.7 million loan from the lending bank.

The cash advance business executed a promissory note for the loan and gave the lending bank a blanket security interest in all of its assets, including intangibles, and the debtors personally guaranteed the note.  The lending bank in turn financed the loan under a credit and security agreement with another bank (“financing bank”) in which the financing bank was granted a security interest in the loan to the business.

Ten months later, the lending bank defaulted on the security agreement with the financing bank and filed for bankruptcy. The financing bank and the lending bank agreed to transfer the cash advance business’s note and the personal guarantee to the financing bank.  The cash advance business formally acknowledged the assignment and agreed to pay the balance on the note to the financing bank.

Over the next several years the cash advance business repeatedly requested loan modifications and entered into several forbearance agreements with the financing bank. The cash advance business also executed an elaborate series of transfers and sales to place their assets beyond their creditors’ reach.

The cash advance business transferred $123,200 of assets to a closely-held business of which the husband owned 100 percent of the shares. The husband and wife created a family trust, of which they were the beneficiaries. The closely-held business then transferred its total assets, valued at $385,000, to another company that the husband purchased from a friend for $200. The trust then purchased that company and the company agreed to pay its $385,000 in assets to the husband. The result left all of the businesses and the trust insolvent.

The cash advance business defaulted on the loan and the debtors defaulted on the guarantee.

The financing bank filed a lawsuit against the cash advance business and husband and wife. The husband and wife then filed for bankruptcy. The financing bank’s lawsuit against the husband and wife was stayed but the lawsuit against the cash advance business proceeded and resulted in a judgment of $1.7 million.  The financing bank could not collect, however, because the cash advance business was insolvent.

The financing bank then filed an adversary action against the husband and wife in bankruptcy court alleging that they had fraudulently transferred assets under the Washington Uniform Fraudulent Transfer Act (WUFTA), Wash. Rev. Code § 19.40.041, and thus the debt was non-dischargeable under 11 U.S.C. §523(a). As you may recall, section 523(a) excepts from discharge debts obtained by actual fraud, which includes fraudulent conveyance. 11 U.S.C. § 523(a)(2)(A).

The bankruptcy court ruled in favor of the financing bank on the fraudulent transfer claim but limited the judgment to $123,200, which was the amount that was traceable to the financing bank’s security interest in the cash advance business’s assets.

The financing bank appealed and the trial court affirmed on different grounds, explaining that the financing bank could not maintain a fraudulent transfer claim on “non-collateral assets” because the financing bank could only recover assets that were the property of the debtors, meaning legally titled in the debtors’ name.

Thus, the lower court held, the financing bank could not recover any assets from the family trust or the closely-held businesses involved in the fraudulent transfers, and, to do so under WUFTA, the financing bank would have had to obtain a ruling that those entities were the alter egos of the debtors, which it had failed to do.

The financing bank appealed.

On appeal, the Ninth Circuit reversed explaining that the purpose of WUFTA is “to provide relief for creditors whose collection on a debt is frustrated by the actions of a debtor to place the putatively satisfying assets beyond the reach of the creditor,” which is also known as fraud.

The Court compared the facts of this case to others around the country under identical or similar fraud laws and concluded that, through the series of transfers, the husband “depleted the value of his assets to the detriment of his creditors” while he continued to receive payments from the trust even after he filed for bankruptcy, thereby preventing the financing bank from collecting the debt he owed. Thus, the Ninth Circuit agreed with the bankruptcy court’s finding that the debtors had engaged in actual fraud.

The Ninth Circuit reversed on the issue of the amount the financing bank could recover because it was only the fraudulent transfers that prevented the financing bank from being able to collect.

Based on 11 U.S.C. §523(a)(2)(A), if the husband had not fraudulently transferred the assets from the closely-held company, the financing bank would have been able to recover against it because a non-dischargeability claim based on a fraudulent transfer scheme between closely-held companies intended to defeat collection of a debt is actual fraud.

Thus, the Ninth Circuit held, the amount of the non-dischargeable debt was not merely the $123,200 in assets from the cash advance business, but included the $385,000 in fraudulently transferred assets.

Accordingly, the lower court’s judgment was reversed and the matter remanded.

11th Cir. Reverses Limited Atty Fee Award Where Plaintiff Had No Actual Damages But Proved Statutory Violation

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a trial court’s award of $2,500 in statutory damages to a plaintiff whose private information was improperly viewed by a sheriff’s deputy who had a romantic relationship with the plaintiff’s ex-husband in violation of the federal Driver’s Privacy Protection Act (DPPA), holding that the statute did not provide for cumulative damages of $2,500 per violation.

In so ruling, the Court reversed the trial court’s award of only 10 percent of the amount of attorney’s fees requested by the plaintiff’s counsel.

The trial court limited the attorney fee award because the plaintiff failed to prove any actual damages, therefore only recovering the statutory penalty, which the trial court likened to cases in which “a party ‘recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief,’ where ‘the only reasonable fee is usually no fee at all.’”

In reversing the trial court’s limited fee award, the Eleventh Circuit held that a plaintiff need not prove actual damages to recover the other types of remedies provided by the statute at issue, including attorney’s fees, and that the statutory penalty was a “liquidated damages” remedy rather than only “nominal damages.”

A copy of opinion in Theresa Ela v. Kathleen Destefano, et al is available at:  Link to Opinion.

The plaintiff and her husband divorced in 2010. The following year, the former husband married an Orange County sheriff’s deputy with whom he had an affair while still married to the plaintiff.

Between January 2010 and November 2011, the sheriff’s deputy, “while sitting alone in her patrol car, … used her access to law enforcement databases … to search [plaintiff’s] name.”  After the divorce, the plaintiff made a Freedom of Information Act (FOIA) request and “learned that [the sheriff’s deputy] had been searching her name on drivers’ license databases.”

The plaintiff then filed an administrative complaint with the police department and during the investigation the sheriff’s deputy admitted “that she did not have a legitimate business or law enforcement reason for accessing [plaintiff’s] information.” The deputy “was suspended for 60 hours without pay and placed on disciplinary probation for six months.”

The plaintiff sued the sheriff’s deputy for violating the DPPA and her civil rights under 42 U.S.C. § 1983, alleging that she suffered emotional distress.

The trial court granted the plaintiff’s motion for judgment as a matter of law on the issue of liability after a jury trial. The plaintiff waived her 42 U.S.C. § 1983 claim and agreed to pursue damages only under the DPPA.

At trial, the court provided the jury with a verdict form containing three interrogatories to determine damages. In response to the first interrogatory, the jury found that the sheriff’s deputy violated the DPPA 101 times. In response to the second interrogatory, the jury found that the deputy’s actions did not cause the plaintiff to suffer any actual damages. The jury did not reach the third interrogatory, which asked what amount of compensable damages were attributable to the deputy’s conduct.

The plaintiff requested $252,500 in liquidated damages: $2,500 for each of the deputy’s 101 violations of the DPPA, as well as attorney’s fees of $153,787 and costs of $4,227.44.  The trial court awarded only $2,500 in liquidated damages, $15,379 in attorney’s fees, and $4,227.44 in costs.  The trial court reasoned that the case did “not implicate the purposes of the DPPA, [the deputy] did not use or disclose [plaintiff’s] private information, and [plaintiff] did not suffer any actual damages.” As to attorney’s fees, the trial court reasoned that the reduction was justified because the plaintiff recovered none of the compensatory damages she sought and only 1 percent of her statutory damages, and therefore in the trial court’s view only 10 percent of the requested attorney’s fees was a reasonable amount. The plaintiff appealed.

On appeal, the Eleventh Circuit began by analyzing the text of the DPPA, 18 U.S.C. § 2724, which provides that “[a] person who knowingly obtains, discloses or uses personal information, from a motor vehicle record, for a purpose not permitted under this chapter shall be liable to the individual to whom the information pertains, who may bring a civil action in a United States district court.” The statute further provides that “[t]he court may award … (1) actual damages, but not less than liquidated damages in the amount of $2,500; (2) punitive damages upon proof of willful or reckless disregard of the law; (3) reasonable attorneys’ fees and other litigation costs reasonably incurred; and (4) such other preliminary and equitable relief as the court determines to be appropriate.”

The Court characterized as “an issue of first impression in this Circuit” the plaintiff’s argument that she was entitled to $2,500 per violation, pointing out that despite the plaintiff’s argument that the statutory language was clear, it found the language “far from clear.” The Eleventh Circuit noted that the text of the DPPA does not explicitly require per violation awards, but it does not seem to rule them out either.

The Eleventh Circuit held, however, that the remedy part of the statute’s use of the word “may” “does use plainly permissive language. … Not only does the use of the word “may” imply permissiveness, but we have expressly held so when interpreting this exact provision of the DPPA.”  In a prior ruling, the Court held that “[t]he use of the word ‘may’ [in § 2724(b)] suggests that the award of any damages is permissive and discretionary.”

Having found that an award of any damages was discretionary, the Court concluded that because the jury found the plaintiff did not suffer any actual damages, “[t]he district court properly used its discretion to fashion a damages award appropriate for this situation. A textual reading of § 2724 leads us to the conclusion that the district court’s discretion is only limited in the sense that it must award at least $2,500 if any violation has been shown. For awards above that amount, we review for abuse of discretion.”

The Eleventh Circuit buttressed its conclusion by noting that Congress included “cumulative damages in the criminal section of the DPPA, § 2723, … [and] ‘[i]t is well settled that where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion of exclusion.’” Thus, Congress could have, but presumably chose not to “include language that permits cumulative damages in the civil section….”

The Court pointed out that while the deputy’s “conduct here was unmistakably wrong and police officers should not be allowed to take advantage of their position of power to access private information, [since] the statute specifically provides for punitive damages to deter this conduct[,] … [r]eading ‘per violation’ into the statute’s liquidated damages clause to mandate cumulative damages would enable unharmed plaintiffs to abuse this provision.” Accordingly, the trial court’s award of $2,500 in liquidated damages was affirmed.

Turning to the issue of attorney’s fees and the trial court’s award of compensation for only “48 hours of work” when the plaintiff asked for “481 hours of attorney time,” the Court reasoned that “[t]he starting point for determining the amount of a reasonable fee is the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate. … This number is called the lodestar and ‘there is a strong presumption’ that the lodestar is the reasonable sum the attorneys deserve. … In determining whether the lodestar is reasonable, ‘the district court is to consider the 12 factors enumerated in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974). … If the lodestar is reasonable, a downward adjustment ‘is merited only if the prevailing party was partially successful in its efforts. … A district court must determine what counts as partial success on a case-by-case basis.”

The Eleventh Circuit concluded that the trial court mistakenly “did not start its analysis with the lodestar and erred in its approach to the Johnson factors,” giving too much weight to the “eighth … factor, the amount involved and the results obtained. While those are certainly relevant considerations, especially for determining an appropriate downward adjustment, under the circumstances of this case we find that the district court went too far by reducing the requested fees by 90%.”

The Court disagreed with the trial court’s reasoning that the case was similar “to one in which a party ‘recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief,’ where ‘the only reasonable fee is usually no fee at all.’”

The Eleventh Circuit held that a plaintiff “’need not prove actual damages to recover the other types of remedies listed in § 2724,’ which includes attorneys’ fees.” It also distinguished between liquidated and actual damages. “Liquidated damages are ‘[a]n amount … stipulated as a reasonable estimation of actual damages.’ … Liquidated damages are a pre-fixed amount, set here by Congress. Nominal damages are ‘a judicial declaration that the plaintiff’s right has been violated.'”  Because Congress set a fixed amount of liquidated damages, the Court concluded it “should defer to Congress’s judgment.”

Accordingly, the trial court’s judgment was affirmed as to damages, and reversed as to attorney’s fees, and the matter was remanded for recalculation of the fees.

5th Cir. Holds Threat of Lawsuit to Collect Partially Time-Barred Debt Did Not Violate FDCPA

In a split decision, the U.S. Court of Appeals for the Fifth Circuit recently decided that attorneys representing a condominium association did not violate the federal Fair Debt Collection Practices Act by threatening non-judicial foreclosure on debt that was partially but not fully time barred.

A copy of the opinion in Mahmoud v. De Moss Owners Ass’n Inc. is available at:  Link to Opinion.

The plaintiffs owned a condominium in Houston, Texas. They sued the condominium ownership, its management company and its collection lawyers concerning their efforts to collect assessments and other charges under the association’s declaration and related documents.

At the trial court level, the plaintiffs alleged common law claims of breach of contract, wrongful foreclosure, negligent misrepresentation, breach of fiduciary duty and violations of the FDCPA, the Texas Fair Debt Collection Practices Act and the Texas Deceptive Trade Practices Act. The district court granted the defendants’ motion for summary judgment and the plaintiffs appealed.  The Fifth Circuit affirmed the lower court ruling.

By way of background, the assessments stretched back several years. Arguably, some but not all of the debt was beyond the Texas four-year statute of limitations.

The Court was not swayed by the collection law firm’s argument that it was exempt from liability under section 1692f(6) of the FDCPA because it was merely enforcing security interests. The Court relied on its earlier decision in Kaltenbach v. Richards, which held that once a party satisfies the general definition of debt collector, it satisfies the definition for all purposes even when attempting to foreclose on security interests. Here, the Court concluded, there was “no serious contention” that the law firm was not a debt collector.

Turning to the 1692g claim, the collection law firm had sent a two-page letter referencing the debt. The plaintiffs claimed the validation letter “overshadowed” their FDCPA rights because it demanded that the defendants “needed to pay ‘on or before the expiration of thirty (30) days from and after” the date of the letter “or nonjudicial foreclosure would occur.”  However, section 1692g provides that a debtor has 30 days from receipt of a validation letter to make a written dispute which freezes collection activity until the debt collector provides verification. The plaintiffs alleged that the law firm’s demand for payment within 30 days of the date of the verification letter “overshadowed” the longer period provided by section 1692g, which is focused on the date the debtor receives the validation letter.

The Court disagreed, concluding that a “fair interpretation” of the letter demonstrates the plaintiffs were not deprived of their validation rights because the longer 30-day validation language was listed not once, but three times, and in bold type.

Next, the Court addressed the plaintiffs’ claim that the law firm threatened a lawsuit on time-barred debt.  Examining the Texas Property Code, the Court found that condominium assessments were “covenants running with the land” and that the unpaid assessments and other charges constituted a real property lien. The Court noted there was no Texas case law to answer what limitations period covered such real property liens, but assumed, to resolve this case, that the four-year general statute would bar a small portion of the overall debt.

Whether the letter violated the FDCPA for threatening a suit on a time-barred debt provided a more compelling argument. Just last year in Daugherty v. Convergent Outsourcing, Inc., the Fifth Circuit ruled the FDCPA was violated when a letter merely offered to “settle” a time-barred debt, but did not otherwise threaten a lawsuit.

The Court found the facts here contained important distinctions from Daugherty. First, unlike Daugherty, only a portion of the debt was alleged to be time-barred, less than 25 percent. Second, in Daugherty there was no dispute that the limitations period applicable to the entire debt had expired, but here it was uncertain whether the limitations period had run. Finally, because the letter in Daugherty did not disclose that a payment made after the debt was time barred could restart the limitations period, the letter arguably would mislead consumers in taking an action adverse to their interests.

Here, however, the plaintiffs were not misled because the condominium was ultimately foreclosed for the amount that was demanded.

In reaching its conclusion, the Court went to great lengths to stress the nature of the debt (i.e. real estate debt) and hinted that it might not rule favorably if the debt were of another type, like a credit card.

1st Cir. Rejects Borrower’s Loan Modification Fraud Allegations as Untimely

The U.S. Court of Appeals for the First Circuit recently held that a borrower cannot invoke the discovery rule to assert an otherwise untimely Massachusetts UDAAP claim (Chapter 93A) relating to a loan modification agreement, because the alleged harm was not “inherently unknowable” at the time of its occurrence.

In so ruling, the Court determined that the borrower knew he was required to make monthly payments when he signed the loan modification agreement.  Therefore, the statute of limitations began to run when the borrower stopped making payments, not when the creditor provided notice of the default.

A copy of the opinion in Rezende v. Ocwen Loan Servicing, LLC is available at:  Link to Opinion.

In August 2005, the borrower obtained two loans to refinance his mortgage loan.  The borrower executed mortgages identifying Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee “solely as nominee” for the lender and its successors and assigns.

In June 2010, MERS assigned one of the mortgages to a bank as trustee for securitized trust.

The borrower obtained a loan modification in March 2010.  But, he did not receive any statements for the modified loan until September 2010.  The borrower made payments from September 2010 through June or July 2013, at which time the defendant servicer returned his latest payment and informed him that the loan was in default.

The borrower sued the servicer and trustee (collectively, “defendants”) to stop the foreclosure.  The trial court granted the defendants’ motion for judgment on the pleadings under Fed. R. Civ. P. 12(c) and dismissed all six counts of the borrower’s complaint.

On appeal, the borrower argued that the trial court’s entry of judgment was premature and challenged the court’s findings that: (1) he lacked standing to raise a quiet title claim, and (2) his claim under Massachusetts’s consumer protection law (“Chapter 93A claim”) was time barred.

Initially, the Court found that the defendants’ Rule 12(c) motion was timely filed on January 25, 2016, and the motion was not heard until May 25, 2016. The Court noted that the borrower had ample time to seek leave to amend his complaint, but he chose not to do so.  Because the borrower failed to plead any set of facts that would entitle him to relief, the Court agreed with the trial court’s assessment that the defendants were entitled to judgment on the pleadings.

The First Circuit then turned to the issue of the borrower’s standing to quiet title.

As you may recall, under Massachusetts law, a mortgagor lacks standing to bring a quiet title action as long as the mortgage remains in effect.  See, e.g., Oum v. Wells Fargo, N.A., 842 F. Supp. 2d 407, 412 (D. Mass. 2012), abrogated on different grounds by Culhane v. Aurora Loan Servs. of Nebraska, 708 F.3d 282 (1st Cir. 2013).

The borrower argued that the defendants were responsible for his default.  However, the Court rejected the argument because “what matters is the existence of a mortgage, not whether the underlying loan is in default.”

The borrower then argued that MERS’s assignment of the mortgage to the trustee was void because MERS failed to seek permission from the bankruptcy court to assign the mortgage after the original lender had filed for bankruptcy.  However, the Court held that the borrower waived this argument by failing to cite to any authority whatsoever in support of his conclusory assertion.

Moreover, the First Circuit also held that the borrower lacked standing to challenge a mortgage assignment based upon an alleged deviation from the trust agreement.

In addition, the Court determined that the trial court correctly found that the Chapter 93A claim was time barred.

The borrower alleged that the delay caused by the defendants’ failure to provide him monthly statements between March and September 2010 was an “unfair and deceptive practice.”  But, in the First Circuit’s view, this meant that the claim accrued by September 2010 and expired by September 2014 – well before the borrower brought suit in June 2015.  See Mass. Gen. Laws ch. 260, § 5A (setting a four-year statute of limitations).

The borrower argued that the “trigger” for his claim was the defendants’ notifying him in June 2013 that he was in default, but the Court found that the predicate harm was the defendants’ failure to timely send statements to the borrower in 2010.  The Court rejected the borrower’s use of the discovery rule “to salvage his untimely claims” because, as the trial court noted, the alleged harm was not “inherently unknowable at the time of [its] occurrence.” Latson v. Plaza Home Mortg., Inc., 708 F.3d 324, 327 (1st Cir. 2013).

Specifically, the Court noted that the borrower knew he was required to make monthly payments when he signed the loan modification agreement in 2010.  The defendants’ delay in issuing statements and the borrower’s default were, in the Court’s view, not “inherently unknowable” harms.  Id.

Accordingly, the First Circuit affirmed the trial court’s judgment.

Maryland High Court Holds Utility Company Did Not Have Super Lien on Real Estate

The Court of Appeals of Maryland, the state’s highest court, recently held that a real estate development company’s recording of a declaration for utility infrastructure expenses did not create a lien on the referenced real estate, and instead it should have followed the Maryland Contract Lien Act procedures to create a lien and establish its priority for the delinquent assessments purportedly owed by a mortgagee.

A copy of the opinion in Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC is available at:  Link to Opinion.

A real estate development company purchased land for a 330-lot residential development and assumed responsibility for the construction of water and sewer facilities. The developer recorded a declaration stating that the expense of creating that infrastructure would be passed on to the future homeowners in the form of an annual assessment with the future homeowner’s liability secured by a lien granted by the homeowner on the homeowner’s property.

The homeowners were to pay the utility company for the expenses in 23 equal installments of $700 for each lot on the first of each year following conveyance of the lot to the homeowner. The declaration stated that by accepting a deed to a lot, the owner of the lot agreed to pay the annual expenses and granted the utility company a lien to secure the payment of those expenses, but the declaration did not state the value of the lien it sought to create.  The declaration further stated that the utility company could foreclose under the Maryland Contract Lien Act, Maryland Code, Real Property Article (“RP”), §14-201 et seq., if the lot owner failed to pay.

The developer and homebuilders were explicitly excluded from any obligation to pay the annual assessment while they owned the lots.  The developer recorded the declaration with a copy of the lots in the development but did not pay recordation and transfer taxes, which would have amounted to approximately $60,000.

The water and sewer infrastructure was installed and the developer contracted with a construction company to build homes on the lots. A copy of the declaration was attached to the lot purchase agreement and incorporated by reference and was disclosed to each home purchaser as part of the sales transaction.

A man purchased a lot with a home, and the recorded deed stated that it was made “subject to all easements, covenants, and restrictions of record.” When the man failed to pay the assessments, the utility company recorded two statements of lien stating that the property was covered by the declaration and subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.

The man then sold the property to a woman who financed the purchase with a loan secured by a deed of trust. In the deed conveying the property to her, the man stated that he had not encumbered the property, but he failed to reference the declaration or the statements of lien and the deed did not state that it was “subject to all easements, covenants and restrictions of record” as the previous deed had. Thus, the property was sold with the statements of lien not being paid, cleared, or released.

The woman refinanced the loan on the property and the mortgage lender conducted a two-party title search that included only the woman and the man from whom she had purchased the property. Again, when the loan closed, the statements of lien were not paid, cleared, or released.  The new loan was secured by a new deed of trust in favor of the mortgage lender, who sold the loan to a bank that later sold it to the current mortgagee.

The statements of lien expired under RP § 14–204(c) (requiring foreclosure within three years from recordation) without being paid or foreclosed. Several years later, the utility company filed for foreclosure against the property for the unpaid water and sewer charges based on the declaration. The mortgagee filed a motion to dismiss the foreclosure and a declaratory judgment action. The utility voluntarily dismissed the foreclosure lawsuit.

In the declaratory judgment action, the trial court held that the declaration was a covenant running with the land and was a “super lien” in favor of the utility that had priority over the lender’s deed of trust because it was recorded before the first homeowner purchased the lot. The trial court rejected the mortgagee’s argument that the declaration would then be invalid under the rule against perpetuities, faulted the mortgagee for not discovering the declaration in a more comprehensive title search, and ruled that the failure to pay recordation and transfer taxes with the filing of the declaration did not affect its validity.  The trial court implicitly rejected the mortgagee’s argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the declaration.

The mortgagee appealed, and the Court of Special Appeals affirmed the trial court’s ruling. The Maryland Court of Appeals granted the mortgagee’s petition for certiorari.

The Maryland Court of Appeals rejected the developer’s and utility’s argument that simply recording the declaration established a lien, explaining that doing so was inconsistent with the language and legislative history of the Maryland Contract Lien Act. The Court explained that a lien could not be created on the property by the declaration without following the “coherent framework” and procedures established by the act.

The Court of Appeals held that the declaration, as a covenant that runs with the land, fell within the statutory definition of “contract” under RP §14-201(b)(1) of the Maryland Contract Lien Act, but that the declaration did not itself create an enforceable lien without following the act’s procedures.

The Court held that, in order to create and enforce an actual lien under RP §14-202(a), the declaration should have expressly provided for the creation of a lien and expressly described the party in whose favor the lien was created and the property against which the lien was imposed. The developer and utility failed to follow those procedures.

Additionally, the Court noted, instead of paying the recordation or transfer taxes that would have established a lien, the developer and utility treated the declaration as a notice instrument that merely authorized the establishment of a lien pursuant to the Maryland Contract Lien Act.

The failure to follow the Maryland Contract Lien Act’s procedures continued when the utility pursued foreclosure. The Court of Appeals held that, in order to establish the lien under RP §14-203(a)-(b), written notice should have been given within two years of the breach of the declaration to the party whose property was subject to the lien and that notice should have included certain information specified in the statute. The Court also noted that the utility company, when seeking to enforce the lien, should have then foreclosed on it just as it would a deed of trust, as prescribed by RP § 14-204.

The Court of Appeals rejected both the developer’s and utility’s argument that Maryland common law and the Maryland Rules of foreclosure supported their separate theories that the declaration created a lien because they had misread both.  The Court also rejected the developer’s and utility’s analogizing of their responsibility for constructing the infrastructure to the responsibility of a governmental entity who does the same and receives lien priority because neither the developer nor the utility were governmental entities.

Accordingly, the judgment of the Court of Special Appeals was reversed, and the action was remanded with instructions to remand it to the trial court with instructions to vacate the declaratory judgment previously entered and enter a new declaratory judgment consistent with the opinion and assessing costs to be paid by the developer and utility.

8th Cir. Affirms Dismissal of Data Breach Class Action, But Not for Lack of Standing

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a putative class action complaint alleging various causes of action relating to the cybertheft of personally identifiable information, based in part on the plaintiffs failure to adequately allege any damages caused by the data breach or how the defendant breached the terms of its agreement .

A copy of the opinion in Kuhns v. Scottrade, Inc. is available at:  Link to Opinion.

The defendant securities brokerage firm suffered an attack by hackers in which the hackers successfully accessed the firm’s customer database extracting personally identifiable information (“PII”) for potentially millions of customers including their names, addresses, social security numbers, telephone numbers, employer information and work history.

Upon discovery of the attack, the firm alerted the appropriate authorities and following the investigation by law enforcement provided notice to all of its customers of the attack.  The firm also provided free identify repair, protection, credit monitoring and theft insurance for one year for its affected customers.

The named plaintiff in this case was one of three independently filed class actions which were consolidated.  The consolidated complaint alleged causes of action against the firm for breach of contract, breach of implied contract, unjust enrichment, declaratory judgment and a violation of the Missouri Merchandising Practices Act (MMPA), Mo. Rev. Stat. 407.025.

The firm moved to dismiss the consolidated complaint for failure to state a cause of action and for lack of subject matter jurisdiction, arguing that the plaintiffs lacked standing under Article III.  The lower court granted the firm’s motion to dismiss for lack of subject matter jurisdiction because it concluded that the plaintiffs did not suffer an injury in fact.

The named plaintiff appealed (but notably, the other consolidated plaintiffs did not), and the firm filed its own cross-appeal urging the Eighth Circuit to dismiss the claims for failure to state a claim.

On review, the Eighth Circuit rejected the lower court’s finding that the plaintiffs lacked standing, but nevertheless, affirmed the dismissal on grounds that the plaintiffs failed to state claims upon which relief can be granted.

As an aside, the plaintiff attempted to dismiss its appeal after the briefing had concluded in an attempt to join its other class plaintiffs (who did not join in the appeal) in a newly filed class complaint in California state court.  The Eighth Circuit denied plaintiff’s motion as untimely.

The Eighth Circuit’s analysis began with the terms of the brokerage agreement between the plaintiff and the firm.  Therein, the Court noted that the agreement provides that the plaintiff would pay the firm fees and commissions for purchases and sales of securities “on a per order basis.”  The agreement also contained a Privacy Policy and Security Statement which explained that the firm collected PII but would “maintain physical, electronic and procedural safeguards that comply with federal regulations to guard your nonpublic personal information” and that the firm complied “with applicable laws and regulations regarding the protection of personal information.”

The complaint alleged that the firm breached its contractual obligations in the agreement by providing deficient cybersecurity.  For his damages, the plaintiff alleged that a portion of the fees he paid to the firm were for “data management and security” and as a result of the deficient cybersecurity he received diminished services that he paid for under the agreement.

The plaintiff further alleged various damages resulting from the release and dissemination of the PII including increased risk of identity theft, financial costs for credit monitoring, decline in the value of his PII, and invasion of privacy.

In rejecting the determination that the plaintiff lacked Article III standing, the Eighth Circuit concluded that the plaintiff did have standing to pursue a breach of contract claim based upon the allegation that he did not receive the full benefit of the bargain with the firm due to the diminished services paid for data management and security.

The Court noted that prior Eighth Circuit precedent made clear that “a party to a breached contract has a judicially cognizable interest for standing purposes, regardless of the merits of the breach alleged.”  Carlson v. Gamestop, 833 F.3d 903, 908 (8th Cir. 2016).  Further, the Court stated that it was crucial “not to conflate Article III’s requirement of injury in fact with a plaintiff’s potential causes of action.”  Id. at 909.  Accordingly, the Court followed its precedent and determined that the plaintiff had sufficiently alleged a concrete and particularized breach of contract and actual injury.

Nonetheless, the Eighth Circuit found that these allegations had no merit and dismissal for failure to state a claim was appropriate.  The Court noted that because the firm had filed its cross-appeal on the issue, it was appropriate for it to review the complaint on these grounds despite the lower court’s refusal to address the issue.

The Eighth Circuit found numerous defects in the complaint in determining that it failed to plausibly state a claim.

Initially, the Court noted that the representations of the firm in the agreement concerning the maintenance of security to protect PII were merely in the nature of recitals.  Even assuming that these terms were enforceable obligations undertaken by the firm, the Court found that the complaint failed to allege any specific breach of any “applicable law of regulation” that the firm breached.

Importantly, the Eighth Circuit commented that the agreement does not affirmatively promise that it would not be hacked.

Accordingly, the Court found that the implied premise in the complaint that because the data was hacked the firm’s protections must have been inadequate was a “naked assertion devoid of further factual enhancement” that could not survive a motion to dismiss.  Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Moreover, the Eighth Circuit determined that the complaint failed to plausibly allege actual damages as required for a breach of contract claim.  There was no allegation in the complaint concerning specific actual damage resulting from the hack, and it was undisputed that since the data breach no customer had suffered fraud or identity theft that resulted in a financial loss in the more than two years between the hack and the filing of the complaint.  Prudently stated by the Court: “Massive class action litigation should be based on more than allegations of worry and inconvenience.”

Further, the Court rejected the plaintiff’s argument that the fees paid were in part for data security as the express terms of the agreement were for the purchase and sale of brokerage services “on a per order basis.”

Moving on to the other alleged claims, the Eighth Circuit found that the claims for unjust enrichment and implied contract also failed.  Similar to the inadequately alleged breach of contract claim, the Court found that it was not articulated in the complaint how the firm failed to take industry leading security measures.

For unjust enrichment, the plaintiff could not recover under this equitable theory when an express agreement covers the same subject matter. Additionally, the unjust enrichment claim also failed because it did not allege which specific portion of the brokerage fees went toward data protection.

The Eighth Circuit quickly rejected the plaintiff’s declaratory judgment claim as it was “virtually unintelligible” because it simply requested relief in the form of a declaration that the firm “stop its illegal practices” and comply with the terms of the agreement.  The Court determined this was insufficient to meet the pleading standards under Iqbal and raised considerations under Article III.

Finally, the Court rejected the MMPA claims in the complaint.  As you may recall, the MMPA is the Missouri state consumer protection statute which provides a private right of action for any person who sustains an ascertainable loss in connection with the purchase or lease of merchandise as a result of deceptive and fraudulent practices.  Mo. Rev. Stat. 407.025(1).  As with the other claims, the Court found this claim wanting for many reasons.

First, the complaint failed to plead its MMPA claim with the particularity required for claims sounding in fraud.  Second, the Court determined that the firm did not sell the plaintiff data security services, and as a result, any loss as a result of the data breach did not arise from the sale of the firm’s brokerage services to the plaintiff.  Instead, the data security measures recited in the agreement were in place to induce customers to provide their PII in order to obtain the brokerage services.  Third, the Court determined that the complaint did not plausibly state how the failure to discover the data breach was an unfair or deceptive act.

For all of these reasons, the Eighth Circuit affirmed the lower court’s dismissal of the consolidated complaint.

9th Cir. Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute

The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar’s prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada’s superpriority lien provision and invalidated a homeowners association foreclosure sale that purported to extinguish Freddie Mac’s interest in the property.

A copy of the opinion in Berezovsky v. Bank of America is available at:  Link to Opinion.

In 2013, an investor purchased a home at a homeowners association foreclosure sale for $10,500 and recorded a deed in his name. The purchaser argued that Nevada’s superpriority lien provision, Nev. Rev. Stat. § 116.3116, allowed the association to sell the home to him free and clear of any other liens.  The Federal Home Loan Mortgage Corporation (“Freddie Mac”) claimed it had a priority interest in the purchased home.

As you may recall, Freddie Mac is under Federal Housing Finance Agency conservatorship, meaning the FHFA temporarily owned and controlled Freddie Mac’s assets.  See 12 U.S.C. § 4617(b)(2)(A)(i) (FHFA acquired Freddie Mac’s “rights, titles, powers, and privileges … with respect to [its] assets” for the life of the conservatorship).

Protection of the FHFA’s assets is provided for in 12 U.S.C. § 4617(j)(3), a provision of the Housing and Economic Recovery Act of 2008 (HERA). Also known as the Federal Foreclosure Bar, 12 U.S.C. § 4617(j)(3)’s prohibition on nonconsensual foreclosure protected the FHFA’s conservatorship assets.  (“No property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FHFA], nor shall any involuntary lien attach to the property of the [FHFA].”).

The purchaser sued to quiet title in Nevada state court.  Freddie Mac intervened and counterclaimed for the property’s title, removed the case to federal district court, and moved for summary judgment.  The FHFA joined Freddie Mac’s counterclaim.  Together the federal entities argued that the purchaser did not acquire “clean title” in the home because the Federal Foreclosure Bar preempted Nevada law, and invalidated any purported extinguishment of Freddie Mac’s interest through the association foreclosure sale.  The trial court ruled in favor of the federal entities.

On appeal, the purchaser argued that the Federal Foreclosure Bar did not apply in this case, and even if it did, Freddie Mac lacked an enforceable property interest due to a split of the note and the security instrument.

First, the purchaser argued that the Federal Foreclosure Bar did not apply to private homeowners association foreclosures generally, because it protected the FHFA’s property only from state and local tax liens.

To determine whether the Federal Foreclosure Bar applied to private foreclosures, the Ninth Circuit began by examining the HERA statute’s structure and plain language.  The section titled “Property protection” did not expressly use the word “taxes.”  12 U.S.C. § 4617(j)(3).  The statute did not limit “foreclosure” to a subset of foreclosure types.  Id.

In the Ninth Circuit’s view, a plain reading of the statute revealed that the Federal Foreclosure Bar was not focused on or limited to tax liens, and therefore the provision should apply to any property for which the FHFA served as conservator and immunized such property from any foreclosure without FHFA consent.  12 U.S.C. § 4617(j)(1), (3).

The purchaser citied F.D.I.C. v. McFarland, 243 F.3d 876 (5th Cir. 2001) as support for his argument that the Federal Foreclosure Bar applied only to tax liens.

In McFarland, the Fifth Circuit interpreted 12 U.S.C. § 1825(b)(2), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that governed Federal Deposit Insurance Corporation receiverships.  The FIRREA provision is worded identically to HERA’s Federal Foreclosure Bar provision except that the word “Corporation” appeared in the former where “Agency” appeared in the latter.  Compare 12 U.S.C. § 1825(b)(2) with 12 U.S.C. § 4617(j)(3).  The court in McFarland declined to extend § 1825(b)(2) to private foreclosures.

The Ninth Circuit, however, distinguished McFarland and reasoned that the statutory framework in that case was different from the framework surrounding the Federal Foreclosure Bar.  Specifically, the Ninth Circuit found that unlike § 1825, § 4617(j) did not include any language limiting its general applicability provision to taxes alone.

Therefore, the Ninth Circuit held that the language of the Federal Foreclosure Bar cannot be fairly read as limited to tax liens.

The purchaser then argued that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and the FHFA implicitly consented to the foreclosure when they took no action to stop the sale.

The Ninth Circuit rejected this argument because the plain language of the Federal Foreclosure Bar did not require the Agency to actively resist foreclosure.  See 12 U.S.C. § 4617(j)(3) (flatly providing that “[n]o property of the Agency shall be subject to … foreclosure, or sale without the consent of the Agency”).

Thus, the Court concluded that the Federal Foreclosure Bar applied generally to private association foreclosures and specifically to this foreclosure sale.

Next, the Ninth Circuit addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law, which had triggered multiple lawsuits in Nevada.

As you may recall, “[t]he Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail.”  Gonzales v. Rich, 545 U.S. 1, 29 (2005).  Preemption arises when “compliance with both federal and state regulations is a physical impossibility, or … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  Bank of Am. v. City & Cty. Of S.F., 309 F.3d 551, 558 (9th Cir. 2002).

First, the Ninth Circuit determined that the Federal Foreclosure Bar did not demonstrate clear and manifest intent to preempt Nevada’s superpriority lien provision through an express preemption clause.  Nevertheless, the Court found that the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada’s superiority lien law.

Nevada law allowed homeowners association foreclosures under the circumstances present in this case to automatically extinguish a mortgagee’s property interest without the mortgagee’s consent.  See Nev. Rev. Stat. § 116.3116.  Because the Federal Foreclosure Bar prohibited foreclosures on FHFA property without consent, in the Ninth Circuit’s view, Nevada’s law was an obstacle to Congress’s clear and manifest goal of protecting the FHFA’s assets in the face of multiple potential threats, including threats arising from state foreclosure law.

Therefore, as the two statutes impliedly conflict, the Ninth Circuit held that the Federal Foreclosure Bar preempted the Nevada superpriority lien provision.

In addition, the purchaser argued that even if the Federal Foreclosure Bar applied to this case and was preemptive, Freddie Mac did not hold an enforceable property interest for “splitting” the note from the deed of trust, and failing to present sufficient evidence to establish its interest for purposes of summary judgment.

The Ninth Circuit rejected these arguments because Nevada law recognized that, in an agency relationship, a note holder remained a secured creditor with a property interest in the collateral even if the recorded deed of trust named only the owner’s agent.  Although the recorded deed of trust here omitted Freddie Mac’s name, Freddie Mac’s property interest is valid and enforceable under Nevada law.

Moreover, Freddie Mac introduced evidence showing that it acquired the loan secured by the subject property in 2007, and that the beneficiary of the deed of trust was Freddie Mac’s authorized loan servicer.

The Appellate Court concluded that the trial court correctly found Freddie Mac’s priority property interest enforceable under Nevada law. Accordingly, the Ninth Circuit affirmed the trial court’s summary judgment in favor of Freddie Mac and the FHFA.

8th Cir. Rejects Borrower’s Attempt to Hold Bank Liable for Alleged Bad Advice

The U.S. Court of Appeals for the Eighth Circuit recently rejected a debtor’s attempt to hold a bank liable for allegedly faulty advice provided in connection with various lending transactions, holding that the debtor could not claim reliance on the bank’s advice when the debtor had an ability to investigate the details of the transaction for itself, and the agreement between parties stated that the debtor was not relying on any of the bank’s representations in entering into the transaction.

A copy of the opinion in Bank of America, NA v. JB Hanna, LLC is available at:  Link to Opinion.

In the late 1990s, the debtor began borrowing money from the bank through floating-interest-rate loans. The bank and the debtor entered into corresponding interest rate swap agreements to fix the interest rate on the respective loans.  “An interest rate swap allows a borrower to hedge his exposure to changes in the interest rate on a floating-rate loan.”

The swap agreements between the bank and the debtor were governed by an International Swap Dealers Association (“ISDA”) Master Agreement.

In 2005, the debtor sought to borrow $4 million from the bank, but the debtor still owed the bank approximately $7.2 million on previous loans.  The debtor’s parties considered refinancing its existing debt in conjunction with the new $4 million loan to execute one $11.2 million loan agreement.  Under this arrangement, the debtor and the bank would also execute a new $4 million swap, and the two pre-existing swap agreements for the $7.2 million loan would remain in effect.

The debtor’s expert testified that this arrangement – having three separate swaps that terminate at different times – would have exposed the debtor to a floating interest rate before the $11.2 million loan matured.

Subsequently, the bank’s loan officer reviewed the terms of the arrangement with the debtor.  The loan officer discovered that the bank was proposing a five-year $11.2 million loan.  He informed the debtor that it “might want to fix the rate on the whole deal” – meaning execute one swap agreement for the entire loan – and that the debtor should let him know if it would like to pursue this option.

The bank proposed that it would unwind the two existing swaps and execute one new swap on a notional principal amount of $11.2 million.  The parties would then execute one new $11.2 million loan and one new $11.2 million swap.

The debtor agreed to the terms and entered into an interest rate swap on a notional principal of $11.2 million to terminate on Aug. 1, 2015 (“2005 Loan Agreement”).  A few months later, the debtor and the bank entered into a floating-rate loan of $11.2 million with a stated maturity date of Sept. 20, 2010 (“2005 Swap Agreement”).

Under this arrangement, the 2005 Loan Agreement matured in 2010, five years before the 2005 Swap Agreement would terminate.

The 2005 Loan Agreement matured, the debtor failed to pay the balloon amount due, and the bank declared the debtor in default.  Pursuant to cross-default provisions in the debtor’s other loan agreements, the bank accelerated all other outstanding obligations owned.  The bank then sued the debtor alleging breach of contract and breach of guaranty.  In its answer, the debtor raised several affirmative defenses, including a fraud defense, and asserted counterclaims.

The jury found the debtor did not breach any agreement with the bank, and the trial court entered judgment in favor of the debtor.  The bank appealed and the debtor cross-appealed.

On appeal, the Eighth Circuit previously determined that the jury verdict was against the great weight of the evidence and vacated the judgment, and remanded for a new trial on the bank’s breach of contract claim.

On remand, the bank moved for summary judgment on all claims against the debtor and its parties and affirmative defenses raised by the parties.  The trial court granted the bank’s motion for summary judgment because the debtor could not establish that it reasonably relied on the bank’s alleged misrepresentations. Because the trial court concluded that the debtor’s setoff defense was identical to its fraud defenses, it also granted summary judgment for the bank on the setoff defense.

This appeal followed.

The debtor raised two defenses based on the 2005 Loan Agreement and 2005 Swap Agreement (collectively, “2005 Agreements”) — fraudulent inducement, and fraudulent failure to disclose.

The debtor argued that the mismatched terms in the 10-year swap agreement and five-year loan agreement exposed it to additional risk and caused it to pay more interest overall.  The debtor accused the bank of representing that the 2005 Agreements would be a better deal for the debtor and alleged that these representations were false.  Both defenses required the debtor to show that its reliance on the bank’s allegedly fraudulent representation was reasonable.

New York law applied to the transactions at issue.  As you may recall, New York courts consider three factors to determine reasonable reliance:  “the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision.”  JP Morgan Chase Bank v. Winnick, 350 F. Supp. 2d 393, 406 (S.D.N.Y. 2004).

First, the Eighth Circuit examined the level of sophistication of each party.

Before the debtor entered into the 2005 Agreements, it had experience with these types of agreements based on previous transactions with the bank. During the discussion for these agreements, the debtor was represented by sophisticated business people, including a chief financial officer, a controller, and legal counsel.  The debtor also employed professionals, such as tax advisors and accountants, to assist it in operating its business.

Thus, the Eighth Circuit concluded that the debtor was a sophisticated party.

Next, on the relationship between the debtor and the bank, the debtor characterized the bank as a “longtime trusted advisor” and argued that it was reasonable for it to rely on the bank’s representations about the 2005 Agreements.  However, the ISDA Master Agreement that governed the 2005 Swap Agreement stated that the debtor agreed that it was “not relying on any communication (written or oral) of the [Bank] as investment advice or as a recommendation to enter into [the swap agreement].”

These facts, according to the Eighth Circuit, established that the bank was not a fiduciary of the debtor and the debtor can determine for itself whether it should enter into a particular transaction.

The Appellate Court then considered what information was available to the debtor at the time of the operative decision.  Because all relevant information was available to the debtor by the time it entered into the 2005 Swap Agreement – that is, the debtor knew the 2005 Loan Agreement matured five years before the 2005 Swap Agreement would terminate – the Appellate Court held that the debtor, as a sophisticated party engaging in an arm’s-length transaction with a lender, cannot complain that it was induced into a five-year loan when the terms were clear from the face of the agreement.

The Eighth Circuit also rejected the debtor’s argument that the bank stood to profit more from the 2005 Swap Agreement than from the original promised deal.  In the view of the Appellate Court, the potential benefit to the bank had no bearing on the debtor’s ability to investigate the details of the transaction and did not tend to show fraud.

Accordingly, the Appellate Court affirmed the judgment of the trial court in favor of the bank and against the debtor.

11th Cir. Holds Servicer Did Not Violate RESPA by Omitting Loan Owner’s Phone Number, Damages Allegations Insufficient

In an unpublished ruling, the U.S. Court of Appeals for the Eleventh Circuit recently held that a mortgage servicer did not violate the federal Real Estate Settlement Procedures Act or its implementing regulation (at 12 C.F.R. § 1024.36(d)(2)(i)(A)) by failing to provide the loan owner’s phone number in response to a borrower’s request for information (“RFI”).

In so ruling, the Court also held that:

(1) The borrower’s allegation of having expended “certified postage costs of less than $100 for mailing” was not sufficient to meet the requirement of “actual damages” under RESPA at 12 U.S.C. § 2605; and

(2) The borrower’s allegation that the servicer “has shown a pattern of disregard to the requirements imposed upon Defendants by Federal Reserve Regulation X” was not sufficient to meet the requirement of a “pattern or practice of noncompliance” under RESPA at 12 U.S.C. § 2605.

A copy of the opinion in Mejia v. Ocwen Loan Servicing, LLC is available at:  Link to Opinion.

A borrower sent an RFI to a servicer requesting the loan owner’s identity and contact information.  The servicer responded to the request identifying the loan owner and providing its contact information, but the servicer did not include the loan owner’s phone number.

The borrower filed suit in state court against the mortgage servicer alleging that the servicer violated RESPA, 12 U.S.C. 2601 et seq., because the servicer did not provide the loan owner’s phone number in response to the RFI and that the servicer demonstrated a pattern of disregard to the requirements Regulation X imposed upon the servicer.  The borrower also alleged that he incurred the following actual damages: “certified postage costs of less than $100 for mailing” the RFI along with attorney’s fees and costs.

The servicer timely removed the matter to federal court, and then moved to dismiss arguing the borrower failed to state a claim.  The servicer first argued that Regulation X and RESPA did not require it to provide the loan owner’s phone number in response to the RFI. The servicer also argued that the court should dismiss the claim for failure to allege actual damages or a pattern or practice of noncompliance as required under the relevant provisions of RESPA.

As you may recall, section 1024.36(d) of Regulation X requires that a servicer must respond:

“Not later than 10 days (excluding legal public holidays, Saturdays, and Sundays) after the servicer receives an information request for the identity of, and address or other relevant contact information for, the owner or assignee of a mortgage loan.” 12 C.F.R. § 1024.36(d)(2)(i)(A).

The trial court observed that whether section 1024.36(d) requires a servicer to provide a loan owner’s phone number in response to an RFI turns on whether “other relevant contact information” includes a phone number.

Although Regulation X and RESPA do not define this phrase, this does not end the inquiry.  The trial court analyzed whether the phrase “has a plain and unambiguous meaning with regard to the particular dispute” because “[i]f the statute’s meaning is plain and unambiguous, there is no need for further inquiry.”  United States v. Silva, 443 F.3d 795, 797-98 (11th Cir. 2006).  This analysis also applies to Regulation X.  See, e.g., O’Shannessy v. Doll, 566 F. Supp. 2d 486, 491 (E.D. Va. 2008).

The trial court noted that the regulation requires a servicer to provide “contact information, including a telephone number, for further assistance,” but this “inclusion is conspicuously missing from the applicable provision specifying the information that must be included in response to a request for the identity of the owner or assignee of the loan.” 1024.36(d)(1)(i)-(ii).

Thus, the trial court held that the plain language of § 1024.36(d) does not require a servicer to provide the phone number for the owner or assignee of a loan.

The trial court found no contrary legal authority disputing its interpretation.  The trial court therefore declined to read a requirement into section 1024.36(d) that servicers must provide the loan owner’s phone number in response to an RFI, and dismissed the borrower’s claim with prejudice.

The trial court next turned to the servicer’s motion to dismiss the borrower’s statutory damages claim.  As you may recall, under RESPA a borrower that proves a section 2605 violation may recover:

“(A) any actual damages to the borrower as a result of the failure; and

(B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section, in an amount not to exceed $2,000.” 12 U.S.C. § 2605(f)(1).

Damages are an essential element of a RESPA claim.  Renfroe v. Nationstar Mortgage, LLC, 822 F3d 1241, 1246 (11th Cir. 2016).  Moreover, “a plaintiff cannot recover pattern-or-practice damages in the absence of actual damages.” Id. at 1247 n.4.

The trial court recognized that shortly after Renfroe, the Supreme Court of the United States held that standing requires a plaintiff to have “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.”  Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016). Thus, “[t]o establish an injury in fact, a plaintiff must show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” Id. at 1548 (quoting Lujan v. Defs. Of Wildlife, 504 U.S. 555, 560 (1992)). Further, “Article III standing requires a concrete injury” for a “statutory violation.” Id. at 1549.  Here, the borrower did not suffer a “concrete injury in fact.”  Thus, the borrower “cannot assert a statutory violation.”

The trial court also examined the borrower’s claim that the servicer engaged in a pattern or practice of noncompliance with RESPA.  Pattern or practice suggests “a standard or routine way of operating.”  McLean v. GMAC Mortgage Corp., 595 F. Supp. 2d 1360, 1365 (S.D. Fla. 2009), aff’d, 398 F. App’x 467 (11th Cir. 2010). Thus, a failure to respond to one or two qualified written requests does not constitute a “pattern or practice.” Id.

Here, the borrower merely alleged that the servicer “has shown a pattern of disregard to the requirements imposed upon Defendants by Federal Reserve Regulation X.”  This bare bones and conclusory allegation failed to allege “enough facts to state a claim to relief that is plausible on its face.”  Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

Thus, the trial court concluded that the borrower’s complaint did not contain enough facts to plausibly allege that the servicer engaged in a pattern or practice of noncompliance with RESPA.

Accordingly, the trial court dismissed the borrower’s statutory damage claim because the borrower did not suffer a concrete injury in fact, and because the borrower did not sufficiently allege facts to state a claim that the servicer engaged in a pattern or practice of noncompliance with RESPA.

The borrower appealed.

The Eleventh Circuit found no merit in borrower’s claim, and summarily affirmed the trial court’s ruling in favor of the servicer and against the borrower for all the “reasons stated in the District Court’s dispositive order.”

8th Cir. Holds Deficiency Claim Time Barred Despite Intervening Bankruptcy

The U.S. Court of Appeal for the Eighth Circuit recently affirmed a bankruptcy court’s rejection of a proof of claim filed by a creditor where the claim was based upon a debt which was time barred by the creditor’s failure to comply with the applicable state law deadline for pursuing a deficiency judgment following a non-judicial foreclosure.

A copy of the opinion in Melikian Enterprises, LLLP v. McCormick is available at:  Link to Opinion.

The underlying debt at issue arose from a commercial loan from the creditor to a company owned by the debtors which was secured by a mortgage against certain real property located in Arizona.  The debtors were guarantors on the loan from the creditor.  Following the default on the loan, the creditor filed an action in the state court of Arizona to recover the balance of the note or alternatively, the deficiency balance due following a trustee’s sale of the property.

Shortly after the creditor filed the state court action, the debtors filed a petition for relief pursuant to chapter 11 of the Bankruptcy Code – effectively preventing the creditor from affecting service on the debtors in that action.  The state court dismissed the creditor’s complaint for its failure to perfect service.  In a parallel non-judicial foreclosure, the trustee’s sale of the property proceeded on Oct. 9, 2012.

The creditor then proceeded to file a proof of claim in the debtors’ chapter 11 proceeding based upon their guarantee of the loan to which the debtors objected because it allegedly failed to reflect the market value of the property.  The chapter 11 plan was approved and the bankruptcy case closed as fully administered on Nov. 14, 2013.  Due to various delays, the hearing on the debtors’ objection to the proof of claim was not heard until several months after the close of the bankruptcy matter in April 2014.

In support of their objection, the debtors argued that the creditor’s claim was barred by Arizona law because the creditor failed to maintain a deficiency action within 90 days of the trustee’s sale. In opposition to the objection, the creditor argued that the Arizona law was preempted by various provisions of the Bankruptcy Code.

The bankruptcy court determined that automatic stay provisions of Section 362 of the Bankruptcy Code impliedly preempted the state law concerning the 90-day deadline — by preventing the creditor from perfecting service on the debtors — but, Section 108(c) provided for the resumption of any state limitations following the expiration of the automatic stay. Under this legal framework, the bankruptcy court determined that the creditor was required to proceed with its deficiency action per Arizona state law no later than Dec. 16, 2013 which it failed to do so.  Thus, the bankruptcy court concluded that the creditor’s claim was barred.

The creditor appealed to the district court which upheld the bankruptcy court’s ruling, and subsequently, this appeal was brought to the Eighth Circuit.

On appeal the creditor raised four primary arguments: (1) the Bankruptcy Code broadly preempts the Arizona law such that the creditor was not required to comply with the statutory deadlines due to the bankruptcy; (2) the mere filing of its state court action was sufficient to comply with the Arizona law; (3) the bankruptcy court had exclusive jurisdiction over the claim which obviate the need for a separate state court action for the deficiency; and (4) the limitations imposed by the Arizona law never lapsed.

The Eighth Circuit began its analysis by explaining the extent of implied preemption of state law by the Bankruptcy Code.

As explained by the Court, preemption may be “implied, for example, when federal and state laws directly conflict, when state law stands as an obstacle to accomplishing the purpose of federal law, or when federal law is so pervasive that it reflects an intent to occupy the regulatory field.” Symens v. SmithKline Beecham Corp., 152 F.3d 1050, 1053 (8th Cir. 1998).  Absent clear congressional intent, there is a general presumption against implied preemption.

The creditor argued that the mandatory language of Section 502 of the Bankruptcy Code concerning the adjudication of claims precluded the need to comply with the Arizona time limits for deficiency judgments.

Section 502 states that the bankruptcy court “shall determine the amount of [a] claim” following a hearing. The Court disagreed, and explained that the right to a claim arises in the first instance from the underlying substantive law creating the debtor’s obligation, and thus, the bankruptcy courts must “consult state law in determining the validity of most claims.”  Travelers Cas. & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 450 (2007).

The applicable Arizona statute provides that “[W]ithin ninety days after the date of [a trustee’s sale], an action may be maintained to recover a deficiency judgment] against any person” obligated — directly or indirectly — under the contract secured by the deed of trust.  Ariz. Rev. Stat. s. 33-814(A) (“Section 33-814”).  If no action is brought within that timeline the statute provides that “the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.” Id. at s. 33-814(D).  Per the courts in Arizona, this provision has been deemed a statute of repose.

The Court determined that Section 502 did not impliedly preempt Section 33-814 of the Arizona Statute. Consequently, the Eighth Circuit held, the bankruptcy court correctly looked to the Arizona statute to determine the validity of the creditor’s proof of claim.

Similarly, the Court rejected the creditor’s argument that Section 362 of the Bankruptcy Code impliedly preempted Section 33-814 because it made it impossible to comply with the 90-day deadline in Section 33-814. The Court declined to directly address whether or not the automatic stay of Section 362 preempted state law, because it held that Section 108 of the Bankruptcy Code governed this situation.

As you may recall, Section 108 of the Bankruptcy Code provides that if a non-bankruptcy law fixes a time period for commencing a civil action against a debtor “and such period has not expired before the date of the filing of the petition” then the period does not expire until the later of: (1) the end of the period provided by the non-bankruptcy law or (2) “30 days after notice of termination or expiration of the stay under Section 363.”

Pursuant to Section 33-814, the 90-day period at hand expired on Jan. 7, 2013 – i.e. 90 days after the trustee’s sale on Oct. 9, 2012. However, the automatic stay in the bankruptcy did not expire until Nov. 14, 2013 when the chapter 11 case was closed.  Accordingly, the Court found that the bankruptcy court correctly concluded that pursuant to Section 108(c)(2) the operative deadline for the creditor to seek a deficiency judgment under Section 33-814 lapsed on Dec. 16, 2013.

The Eighth Circuit quickly rejected the creditor’s argument that a motion filed by a co-creditor after the close of the chapter 11 was effective in extending the automatic stay.  As explained by the Court, these types of motions in reopening a chapter 11 by creditors is typically ministerial in nature and lacks independent legal significance.

The Court found no merit to the creditor’s argument that its state court complaint was sufficient to comply with Section 33-814.  In reliance on a state court opinion applying Section 33-814, the Court agreed that the state court action would have been sufficient but determined that the creditor’s failure to continue or preserve its state court action after the trustee’s sale was dispositive.  See Valley Nat’l Bank of Ariz. v. Kohlhase, 897 P.2d 738, 741 (Ariz. Ct. App. 1995).

The creditor’s argument that the bankruptcy court had exclusive jurisdiction was also unavailing.  As explained by the Eighth Circuit, regardless of the exclusive jurisdiction provided to the bankruptcy court to determine the validity of the claim under Section 502 of the Bankruptcy Code, it was still required pursuant to the Bankruptcy Code and Supreme Court precedent to apply the underlying state law framework — which the Eighth Circuit held the bankruptcy court correctly did in this matter.

Accordingly, the Eighth Circuit affirmed the bankruptcy court’s rejection of the creditor’s claim.

Illinois App. Court (1st Dist) Holds 7-Month Delay in Paying Overdue HOA Assessments May Not Extinguish HOA Lien

The Appellate Court of Illinois, First District, recently reversed a trial court order granting summary judgment in favor of a mortgage servicer and against a condominium association (COA) holding that a material question of fact existed regarding whether the servicer promptly paid assessments that accrued after the foreclosure sale, as required under section 9(g)(3) of the Illinois Condominium Property Act to extinguish the COA’s lien for pre-foreclosure sale assessments.

A copy of the opinion in Country Club Estates Condominium Association v. Bayview Loan Servicing, LLC is available at:  Link to Opinion.

In November 2014, a mortgage servicer purchased a condominium unit through a foreclosure sale.  At this time the unit had almost $14,000 in unpaid monthly assessments to the COA. Initially, the servicer refused to pay any assessments, past or present.

In April 2015, the COA sued the servicer under the Illinois Forcible Entry and Detainer Act (735 ILCS 5/9-101 et seq.) seeking possession and $18,659.26 in unpaid assessments.  Almost two months after the COA filed the lawsuit, and seven months after the servicer purchased the unit, the servicer paid the amount of assessments that accrued after the foreclosure sale.

The servicer filed a summary judgment motion arguing that under section 9(g)(3) of the Illinois Condominium Property Act (765 ILCS 605/9(g)), paying the assessments owed after the foreclosure sale extinguished the COA’s lien for pre-foreclosure sale assessments.

The trial court granted partial summary judgment to the servicer as to the pre-sale assessments and certified this issue for appeal.  This appeal followed.

On appeal, the COA argued that under 1010 Lake Shore Association v. Deutsche Bank National Trust Co., 2015 IL 118372, a foreclosure buyer must promptly pay current assessments to extinguish an association’s lien for any outstanding pre-sale assessments.

As you may recall, Section 9(g) of the Illinois Condominium Property Act states that:

“(1) If any unit owner shall fail or refuse to make any payment of the common expenses or the amount of any unpaid fine when due, the amount thereof shall constitute a lien on the interest of the unit owner in the property.

(3) The purchaser of a condominium unit at a judicial foreclosure sale shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale. Such payment confirms the extinguishment of any lien created pursuant to paragraph (1) or (2) of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses.” 765 ILCS 605/9(g).

The Appellate Court observed that a foreclosure buyer’s duty to pay monthly assessments clearly starts on “the first day of the month after the date of the judicial foreclosure sale.” Id. However, section 9(g)(3) does not contain a time limit to extinguish an association’s lien. Thus, the Appellate Court looked beyond the statute’s language to determine the legislature’s intent.

The Appellate Court noted that section 9(g)’s legislative history does not contain any debate regarding the extinguishment clause.  However, on separate occasions the legislature expressed concern about the difficulties condominium associations face when a unit owner does not pay their assessments and the unit then goes into foreclosure. The Appellate Court found these concerns “pertinent to the interpretation of section 9(g)(3).” For example, in this case the former unit owner had not paid assessments since 2011, “thus exposing the Association’s other unit owners to the obligation to pay more than their share of common expenses to cover the shortfall.”

The servicer argued that paying post-foreclosure assessments, regardless of the timing, extinguished the COA’s lien for pre-sale delinquent assessments. The Appellate Court disagreed because the Illinois Supreme Court in the 1010 Lake Shore case held that “[t]he first sentence of section 9(g)(3) plainly requires a foreclosure sale purchaser to pay common expense assessments beginning in the month following the foreclosure sale. The second sentence provides an incentive for prompt payment of those postforeclosure sale assessments.”

The servicer further argued that even with no time limit to extinguish an association’s lien, the statute still incentivizes prompt payment of assessments when they become due, because foreclosure buyers normally want to quickly unencumber and sell their new asset.

However, the Appellate Court concluded that the servicer’s seven-month delay in paying the assessments in this case belied this argument.

The servicer also argued that 1010 Lake Shore is distinguishable because the foreclosure buyer there did not pay any assessments making the court’s “prompt payment” discussion dictum. The Appellate Court rejected this distinction because it cannot ignore the Supreme Court’s dicta.  See Exelon Corp. v. Department of Revenue, 234 Ill. 2d 266, 282 (2009)

Thus, the Appellate Court held that “to extinguish an association’s lien for pre-foreclosure-sale assessments, a foreclosure buyer must make ‘prompt’ payment of current assessments.”  As a mortgage foreclosure is a proceeding in equity, “whether a particular payment is ‘prompt’ is fact-based, taking the particular circumstances and the equities of the situation into account.”

The Appellate Court next examined whether the servicer promptly paid the assessments here. The Appellate Court found that absent any extenuating circumstances, assessments should be tendered the month after purchase because to “permit indefinite delay on the part of foreclosure buyers would impose unacceptable hardship upon the buyer’s fellow unit owners, who in many instances are already losing thousands of dollars in unpaid assessments as a result of the unit’s foreclosure.”

The Appellate Court rejected the servicer’s argument that this case is analogous to Pembrook Condominium Association-One v. North Shore Trust & Savings, 2013 IL App (2d) 130288, and 5510 Sheridan Road Condominium Association v. U.S. Bank, 2017 IL App (1st) 160279, where a foreclosure buyer’s payment of post-sale assessments extinguished the condominium association’s lien for presale assessments.

In the Appellate Court’s view, Pembrook did not hold that a foreclosure buyer that fails to promptly pay post-foreclosure assessments may still claim the benefit of section 9(g)(3). Instead, the Pembrook court held only that payment made about a month and a half after the first payment became due was sufficient under the circumstances.  Further, the Court noted, there is “a material distinction between a seven-week delay and a seven-month delay in payment.”

The Sheridan Road court held that the phrase “the first day of the month after the date of the judicial foreclosure sale” set the time when the obligation to pay post-sale assessments begins. Id. However, this did not set a payment deadline.  Thus, the Appellate Court found Sheridan Road distinguishable and held “that payment must be prompt under the circumstances (though not necessarily strictly by the first of the month after the sale) to extinguish an association’s lien.”

Moreover, to the extent that Pembrook or Sheridan Road impose no time deadline on foreclosure buyers, the Appellate Court rejected that conclusion because it is inconsistent with 1010 Lake Shore.

The servicer next argued that even if 1010 Lake Shore requires prompt payment, it should not apply retroactively to this case. The Appellate Court disagreed finding that “1010 Lake Shore did not create a requirement of promptness; it merely articulated the requirement that was already implicit in the purpose underlying section 9(g)(3).”

Finally, the Appellate Court considered whether the servicer promptly paid the assessments here.  However, the record did not contain the reasons why the servicer may have delayed payment so the Appellate Court could not say that the servicer’s “tender was not prompt as a matter of law.”

Accordingly, the Appellate Court reversed the trial court’s summary judgment order and remanded the case for further proceedings consistent with its opinion.

1st Cir. Rejects Borrowers’ Attempt to Void Loan Using Massachusetts’s ‘Obsolete Mortgage’ Statute

The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of a lawsuit by borrowers seeking to enjoin a mortgage foreclosure sale, holding that (a) the original lender’s nominee, MERS, could validly assign the mortgage without holding beneficial title to the underlying property and that borrowers do not have standing to challenge a mortgage assignment based on an alleged violation of a trust’s pooling and servicing agreement; and (b) the mortgage was not void under Massachusetts’s “obsolete mortgage” statute, under which a mortgage becomes obsolete and is automatically discharged five years after the expiration of the stated term or maturity date of the mortgage, as acceleration of the note did not trigger the subject limitations period.

A copy of the opinion in Hayden v. HSBC Bank USA, National Association is available at:  Link to Opinion.

A husband and wife took out an $800,000 purchase money loan secured by a mortgage on their home in 2007. The mortgage identified Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee, acting solely as nominee for the lender and the lender’s successors and assigns. The mortgage also gave MERS power of sale over the property in the event of default.

MERS assigned the loan in 2008 to a new mortgagee. The borrowers defaulted on the loan in 2008. In 2010, the mortgagee “reassigned the mortgage to itself as trustee for [another trust].”

The borrowers “filed several bankruptcy petitions and requested injunctive relief, thereby delaying foreclosure until 2016.”   The mortgagee gave the borrowers notice of a foreclosure sale in June 2016 and, in response, the borrowers sued the mortgagee and the loan servicer to enjoin the sale.

The trial court denied the borrowers’ request for a preliminary injunction and granted the defendants’ motion to dismiss for failure to state a claim, holding that the mortgagee had the right to foreclose under Massachusetts law and the mortgage was not rendered “obsolete” or void under Massachusetts law. Mass. Gen. Laws ch. 260, § 33.  The borrowers appealed to the First Circuit.

On appeal, the First Circuit rejected the borrowers’ argument that the mortgage could not foreclose because the first assignment by MERS was invalid, finding that the trial court correctly rejected this argument because “this claim is foreclosed by precedent, which holds that MERS can validly assign a mortgage without holding beneficial title to the underlying property, … and that borrowers do not have standing to challenge a mortgage assignment based on an alleged violation of a trust’s pooling and servicing agreement.”

The Court also concluded that the district court “properly dismissed [the borrowers’] obsolete mortgage claim, which has no basis in the plain text of the statute or in precedent. Under Massachusetts’s obsolete mortgage statute … a mortgage becomes obsolete and is automatically discharged five years after the expiration of the stated term or maturity date of the mortgage.”

The Court reasoned that there was no textual support in the statute at issue — Mass. Gen. Laws ch. 260, § 33 — for the borrowers’ argument “that the acceleration of the maturity date of a note affects the five-year limitations period for the related mortgage.” It found inapposite a 2015 Massachusetts Supreme Judicial Court decision because “it makes no mention of the impact of the accelerated note on the obsolete mortgage statute’s limitations period.”

Accordingly, the trial court’s ruling was summarily affirmed.