December 2016 Archives - The Consumer Financial Services Blog

Archive for December 2016

7th Cir. Holds Judgment Against Bankruptcy Debtor’s Husband Did Not Violate Co-Debtor Stay

Friday, December 30th, 2016

The U.S. Court of Appeals for the Seventh Circuit recently held that a bank’s lawsuit against the husband of a debtor who had filed for bankruptcy did not violate the co-debtor stay because the husband’s credit card debts were not a consumer debt for which the debtor was personally liable.

A copy of the opinion in Smith v. Capital One Bank (USA), NA is available at: Link to Opinion.

A debtor filed for bankruptcy in 2011. During the course of the bankruptcy proceedings, a bank filed suit and obtained a judgment against the debtor’s husband on a credit card debt that he owed.

In 2015, the debtor initiated an adversary proceeding in bankruptcy court against the bank, alleging violations of the co-debtor stay, 11 U.S.C. § 1301(a); the Wisconsin Consumer Act, Wis. Stat. § 427.104; and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692(d)-(e). The debtor claimed that her husband’s credit card debt was covered by the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55.

As you may recall, in addition to automatically staying claims against the debtor, the Bankruptcy Code provides protections when co-debtors are involved. See 11 U.S.C. § 1301(a).

For the co-debtor stay to apply: (1) there must be an action to collect a consumer debt (11 U.S.C. §§ 101(8), (12)); (2) the consumer debt must be of the debtor (Id. § 102(2)); and (3) the action to collect must be against an individual that is liable on such debt with the debtor. (11 U.S.C. § 1301(a).)

Here, the parties agreed that the debtor’s husband’s credit card debt was a “consumer debt” and that the bank’s action was against the husband, but disagreed as to whether the credit card bills were a “consumer debt of the debtor,” which triggered the co-debtor stay protections, as opposed to simply being a consumer debt of the husband.

The bankruptcy court granted summary judgment for the debtor, holding that the bank’s lawsuit against the debtor’s husband violated the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55, which makes marital property available to satisfy certain kinds of debts.

On appeal, the district court reversed the bankruptcy court, holding that the husband’s credit card debt was not the debtor’s consumer debt, and the co-debtor stay did not apply despite the application of Wisconsin marital law. The district court concluded that “consumer debt of the debtor,” as used in 11 U.S.C. § 1301(a), does not include a debt for which the debtor is not personally liable but which may be satisfied from the debtor’s interest in marital property.

The debtor then appealed to the Seventh Circuit, arguing that under a broader definition of “consumer debt of the debtor,” and by operation of Wisconsin marital law, her husband’s credit card debt became her debt for purposes of the co-debtor stay.

The Seventh Circuit disagreed with the debtor, and agreed with the bank that the credit card debt was not covered by the co-debtor stay.

Relying on In re Thongta, 401 B.R. 363, 368 (Bankr. E.D. Wis. 2009), and River Rd. Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 651 (7th Cir. 2011), and noting that any attempt to collect a judgment from a spouse’s marital property would likely violate the automatic stay that already protects the filing spouse, the Court observed that interpreting the co-debtor stay to eliminate the same liability, and thus providing the same protections against collection, would impermissibly render that co-debtor stay duplicative of the automatic stay applicable to the debtor.

The Court therefore held that because the debtor did not demonstrate that her husband’s credit card debt was her own, the co-debtor stay did not apply.

Moreover, because Wisconsin courts made clear that the state’s marital laws do not give rise to liability on the part of the non-incurring spouse, the Court held that the debtor, as the non-incurring spouse, was not liable for her husband’s credit card debt.

The Court noted that, in Wisconsin, “married individuals can have both individual and marital property.” See Wis. Stat. § 766.55. “Debts incurred during marriage are ‘presumed to be incurred in the interest of the marriage or the family,’ id. § 766.55(1), and ‘[a]n obligation incurred by a spouse in the interest of the marriage or the family may be satisfied only from all marital property and all other property of the incurring spouse’ [the debtor’s husband], id. § 766.55(2)(b).” In addition, “in order to satisfy a judgment for a debt, a successful creditor ‘may proceed against either or both spouses to reach marital property available for satisfaction of the judgment.’ Id. § 803.045(3).”

The debtor contended that once the bank obtained a judgment against her husband, it created a liability on her part under the co-debtor stay.

Again, the Court disagreed. Noting that simply obtaining a judgment against a non-filing spouse who happens to have shared property interests with the filing spouse — without more — did not make the husband’s debts the debts of the filing spouse under Wisconsin law, the Seventh Circuit held that Wis. Stat. § 766.55(2) did not create a direct cause of action against the debtor. See St. Mary’s Hosp. Med. Ctr. v. Brody, 186 Wis. 2d 100, 519 N.W.2d 706, 711 (Wis. Ct. App. 1994).

Here, the bank had not attempted to sue the debtor directly, and had not sought to satisfy its judgment against the debtor’s husband from any of the debtor’s individual or marital property. Accordingly, the Court concluded the debtor had no liability for her husband’s credit card bills.

The debtor next argued that she was liable for a direct cause of action against her for her husband’s credit card debts under Wisconsin’s “doctrine of necessaries,” because Wis. Stat. § 765.001(2) provided a direct cause of action against one spouse for any marital “necessaries” incurred by the other spouse during the marriage. Essentially, the debtor argued that “the possibility of a direct cause of action against her for her husband’s credit card debts brings those debts within the co-debtor stay.”

The Seventh Circuit again disagreed, holding that because she raised this theory for the first time on appeal, it was therefore waived. Even if the argument had not been waived, the Court observed that the debtor provided no evidence that the credit card debt was for necessaries, as opposed to ordinary consumer goods, nor did she explain why this situation would trigger the co-debtor stay, as opposed to the automatic stay.

The Seventh Circuit held that since the bank in the collection proceeding was not a creditor of the debtor and the bank was not seeking payment of the credit card debts under the debtor’s bankruptcy plan, there was no risk of preferential treatment, the bank’s lawsuit against the debtor’s husband did not violate the co-debtor stay, and the debtor’s adversarial proceeding was properly dismissed.

Thus, the Seventh Circuit affirmed the judgment of the district court.

Categories : Banking, Bankruptcy, Debt Collection

Illinois Supreme Court Holds Mortgagee Trespass Not ‘Extreme and Outrageous’ as Matter of Law

By Coleman Braun

Monday, December 26th, 2016

The Supreme Court of the State of Illinois recently affirmed the dismissal of a borrower’s claims for intentional and negligent infliction of emotional distress against her mortgagee, property inspection and preservation company and its local subcontractors, who entered the home after the borrower’s default to secure the property.

In so ruling, the Court held that:

(a) a direct victim’s claim for emotional distress must include an allegation of contemporaneous physical injury or impact that caused emotional distress, or that she was a bystander in a zone of physical danger that caused her to fear for her own safety and that she suffered physical injury or illness as a result of the emotional distress; and

(b) as a matter of law, the conduct was not so extreme and outrageous that it went beyond all possible bounds of decency.

A copy of the opinion in Schweihs v. Chase Home Finance, LLC is available at: Link to Opinion.

The borrower signed a promissory note secured by a mortgage on her home in 1997 and defaulted in 2007. The mortgage contained a paragraph allowing the mortgagee to enter the property in the event of default in order to protect its rights in the property and make repairs.

The mortgagee filed a foreclosure action and obtained a final judgment of foreclosure on May 25, 2010. Under Illinois law, the borrower had the right to continue in possession until her redemption period expired on Aug. 25, 2010.

The mortgagee contracted with a company to provide property inspection and preservation services (the “preservation company”), which in turn contracted with local vendors to perform the inspections and repairs.

In June 2010, the preservation company received a report that the subject property was vacant and asked its local contractor to obtain access to the property by changing one of the locks and “winterize” the house by turning off the utilities. The local contractor hired two individual subcontractors to carry out the work order.

When the two individual subcontractors arrived at the property, they observed that the landscaping was overgrown and there was a “for sale” sign on the property. There was a car and dumpster parked in the driveway. One of the men knocked on the front door, but there was no answer.

One of the subcontractors spoke with a neighbor, who told him that the house was unoccupied, but that a woman came and went occasionally. The neighbor also said she did not recognize the car, but that there was a school nearby and sometimes people from the school would park there because the property was vacant.

The two subcontractors tried knocking on the front door again, with the same result, then proceeded through a gate to the back, where they observed through a glass door boxes and debris on the floor.

They then removed the lock to the back door and one of them entered by climbing over the boxes. Once in, he was confronted by the borrower, who asked him to leave. The subcontractor explained that he was with the mortgage company and asked the borrower to go to the front door, but when he went around she did not answer.

The borrower called the police, who investigated by speaking with the parties and neighbor, but made no arrest.

In October 2010, the borrower filed a five-count complaint against the mortgagee, the preservation company, and the two subcontractors, alleging claims for trespass, negligent trespass, private nuisance, intentional infliction of emotional distress, and negligence.

The defendants moved for summary judgment on all counts, and in response the borrower sought leave to amend by dropping the negligence claim and adding a claim for negligent infliction of emotional distress.

The trial court granted the defendants’ motions for summary judgment as to the claims for private nuisance and intentional infliction of emotional distress, but denied summary judgment as to the trespass and negligent trespass claims. The trial court then dismissed the borrower’s negligent infliction of emotional distress claim. The borrower appealed.

The Appellate Court affirmed the trial court’s ruling.

Addressing the negligent infliction of emotional distress claim first, the Appellate Court reasoned that there are “two types of victims in emotional distress cases: bystanders and direct victims.” It then found that the borrower’s negligent infliction of emotional distress allegations indicated she “was a direct victim and must allege ‘some physical impact’ from defendants’ conduct.” Because the borrower did not plead any physical contact, the Appellate Court found she could not state a claim for negligent infliction of emotional distress and that count was properly dismissed.

Turning to the intentional infliction of emotional distress claim, the Appellate Court found that summary judgment in the defendants’ favor was proper because plaintiff could not show that the defendants’ conduct was “extreme and outrageous.” One justice dissented, arguing that the majority “was wrong in continuing to require physical impact in claims for negligent infliction of emotional distress for direct victims.”

The borrower filed a petition for leave to appeal to the Illinois Supreme Court, which was granted. The Court also granted the Illinois Association of Defense Trial Counsel leave to file a brief amicus curiae in support of the defendants.

The Illinois Supreme Court first addressed the borrower’s argument that her claim for negligent infliction of emotional distress was improperly dismissed because physical impact is not a required element for such a claim by a direct victim. The defendants and amicus argued, in response, that the impact rule was still good law in Illinois “when a direct victim pleads negligent infliction of emotional distress.”

The Court reviewed the history of the cause of action of negligent infliction of emotional distress and the impact rule, noting that in order “to state a claim for negligent infliction of emotional distress, a plaintiff must allege the traditional elements of negligence: duty, breach, causation, and damages. … And until this court’s decision in Rickey, all plaintiffs were also required to allege a contemporaneous physical injury or impact. … This was known as the ‘impact rule.’ Under the impact rule, a plaintiff could recover damages if he suffered (1) emotional distress and (2) ‘a contemporaneous physical injury or impact.’ … Prior to Rickey, there was no distinction between a direct victim and a bystander in negligent infliction of emotional distress cases.”

The Illinois Supreme Court explained that in Rickey, where a mother sued on behalf of her eight-year-old son for emotional distress caused when he witnessed his brother getting choked by a subway escalator, it “adopted the ‘zone-of-physical-danger rule’ for bystanders who allege negligent infliction of emotional distress.” Under this rule, “a bystander who is in a zone of physical danger and who, because of the defendant’s negligence, has reasonable fear for his own safety is given a right of action for physical injury or illness resulting from emotional distress. … Therefore, this court held that a bystander must show physical injury or illness as a result of the emotional distress, caused by the defendant’s negligence and not a contemporaneous physical injury or impact.”

The Court further explained that in its later Corgan ruling, which involved a patient suing her therapist who held himself out to be a licensed psychologist for sexually abusing her under “treatment,” “this court made it clear that Rickey did not define the scope of negligent infliction of emotional distress as it applies to direct victims. … Corgan was a direct victim case, and the patient satisfied the impact rule; on multiple occasions, the psychologist had sexual relations with her. … Thus, Corgan is an example of the continued application of the impact rule in direct victim cases.”

Finally, the Court noted that in its Pasquale decision, “where the husband of a spectator at a drag race, who was killed when she was struck by flying debris resulting from the failure of a clutch mechanism on a race car,” it determined that the elimination of the contemporaneous injury or impact requirement for bystander recovery for emotional distress in the area of negligence did not eliminate “the element of physical harm for a bystander’s recovery for emotional distress under strict liability theory.”

The Illinois Supreme Court concluded that “[t]his precedent makes clear that a direct victim’s claims for negligent infliction of emotional distress must include an allegation of contemporaneous physical injury or impact.” Contrary to plaintiff’s argument, a close reading of Rickey, Corgan, and Pasquale “indicates that this court did not eliminate the impact rule for negligent infliction of emotional distress claims brought by direct victims.”

Turning to whether the complaint contained sufficient allegations to state a cause of action for negligent infliction of emotional distress, the Court held that while the borrower alleged that the mortgagee and property preservation company negligently trained and supervised their employees, agents and contractors who entered the premises, since plaintiff did not include an allegation of a contemporaneous physical injury or impact, “as a direct victim, she failed to allege a cause of action for negligent infliction of emotional distress” and this count was properly dismissed.

The Illinois Supreme Court then addressed the borrower’s argument that summary judgment on her intentional infliction of emotional distress claim was improper because a question of fact existed as to whether the subcontractors’ conduct in entering the property was extreme and outrageous.

“First, the conduct involved must be truly extreme and outrageous. Second, the actor must either intend that his conduct inflict severe emotional distress or know that there is at least high probability that his conduct will cause severe emotional distress. Third, the conduct must in fact cause severe emotional distress. … It is clear that the tort ‘does not extend to mere insults, indignities, threats, annoyances, petty oppressions, or other trivialities.”

The Court stressed that “[l]iability has been found only where the conduct has been so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.”

Applying this rule, the Illinois Supreme Court held that the conduct of the two subcontractors who entered the home “did not rise to the level of extreme and outrageous” because their investigation into whether the home was occupied was reasonable and they changed the lock not to take possession from the borrower, but to secure the property and make repairs.

The Court acknowledged “that under Illinois law, the sanctity of the home and right to be free from intrusion are important principles of law,” but the Court nevertheless rejected the borrower’s argument that the entry into the home was, by itself, extreme and outrageous conduct, reasoning that the borrower knew that her property was in foreclosure and was still in the redemption period, but still refused to answer the door, which prevented the subcontractors from explaining who they were and why they were there.

Finally, the Court rejected the borrower’s argument that the defendants had no right to enter the home without a court order under Illinois foreclosure laws, distinguishing between “the right to possession for residential purposes, which these statutes address, and the contractual right to enter to make repairs.”

However, because the mortgage gave the mortgagee and its agents the right to enter the property to secure it and make repairs, and the foreclosure judgment also contained language permitting repairs, the Illinois Supreme Court found that the mortgagee had “the right to enter the property to make reasonable repairs for the preservation of the property.”

The Court concluded that as a matter of law “based upon this record in the context of mortgage foreclosure proceedings, it cannot be said that the entry, after which defendants left and never returned, is conduct so extreme and outrageous that it goes beyond all possible bounds of decency.” As there was no question of fact whether the inspection was outrageous, summary judgment against the borrower was proper on her intentional infliction of emotional distress claim.

The case was remanded to the trial court for further proceedings on the borrower’s remaining claims.

Categories : Foreclosure

1st Cir. Rejects Bankruptcy Trustee’s Effort to Avoid Mortgage Due to Allegedly Defective Acknowledgment

By Patrick Kane

Tuesday, December 20th, 2016

The U.S. Court of Appeals for the First Circuit recently rejected a bankruptcy trustee’s effort to avoid a mortgage on the basis that the acknowledgment signed by the borrowers’ attorney-in-fact was defective under Massachusetts law, holding that the acknowledgment was not materially defective because as a matter of agency law the attorney-in-fact’s signature was the borrowers’ “free act and deed.”

A copy of the opinion in HSBC Bank USA, N.A. v. Lassman is available at: Link to Opinion.

The borrowers purchased a parcel of “registered land” in 1994 in North Attleboro, Mass. (the “subject property”). “Registered land” is real property for which a certificate of title is recorded with the Massachusetts Land Court, governed by chapter 184 of the Massachusetts General Laws.

In April 2004, the borrowers signed a power of attorney authorizing their attorney-in-fact to execute a mortgage encumbering the subject property. The attorney-in-fact subsequently signed a note and mortgage, which were “registered on the certificate of title” for the property in the Registry of Deeds of the Massachusetts Land Court for the county where the property was located.

Attached to the mortgage was a certificate of acknowledgment, signed by the attorney-in-fact, which attested that he appeared before the notary to sign the mortgage on behalf of the borrowers.

The borrowers filed separate bankruptcy cases. The bankruptcy trustee appointed for both cases then filed an adversary proceeding against the original lender’s successor-in-interest seeking to avoid the mortgage pursuant to 11 U.S.C. § 544(a)(3), which “put[s] the estate in the shoes of the creditor whose lien is avoided.”

The two adversary actions were consolidated. In the consolidated action, the trustee argued that subsection 544(a)(3) permits him to avoid the subject mortgage where such a transfer is voidable under state law by a bona fide purchaser, section 29 of chapter 183 of the Massachusetts General Laws requires a valid certificate of acknowledgment along with the recorded mortgage, and the subject mortgage was voidable because the certificate of acknowledgment was “materially defective” under section 29.

Specifically, the trustee argued that the certificate of acknowledgment was “materially defective” because it did not clearly state the mortgage was signed as the “free act and deed” of the borrowers. If only the attorney-in-fact appeared to sign, the bankruptcy trustee argued, then it was his “free act and deed” while acting under the power of attorney, not that of the borrowers.

The mortgagee filed a motion to dismiss, arguing:

(a) section 29 did not apply to the subject mortgage because that section is part of chapter 183, which governs “recorded land” and the encumbered property is “registered land,” governed by chapter 185;

(b) if section 29 did apply, the certificate of acknowledgment complied with its requirements because it made clear that the execution of the mortgage was the free act and deed of the borrowers; and

(c) even if the certificate of acknowledgment did not comply with the formal requirements of section 29, it still provided constructive notice of the mortgage to bona fide purchasers, which is all that state law requires to prevent a bona fide purchaser from voiding the mortgage.

The mortgagee also filed a motion asking the bankruptcy court to certify to the Massachusetts Supreme Judicial Court “the question of whether a ‘mortgage encumbering registered land, whose certificate of acknowledgment is … ambiguous regarding whether the execution … was the voluntary act of the mortgagors, but which … is noted on the certificate of title of such registered land, provides constructive notice.’”

The motion to dismiss was converted into a motion for summary judgment, after which the bankruptcy court denied both motions, ordering the mortgagee to show cause why summary judgment should not be entered in the trustee’s favor.

After briefing, the bankruptcy court granted summary judgment in the trustee’s favor, finding that (a) a certificate of acknowledgment was required for the subject mortgage by section 29, even though the property was “registered land;” (b) the certificate of acknowledgment at issue was ambiguous as to who appeared before the notary; (c) this rendered it materially defective because it was unclear whether the execution of the mortgage was the free act and deed of the mortgagors; and (d) the defective certificate of acknowledgment and other loan documents did “not suffice to provide constructive notice of the mortgage to a bona fide purchaser.”

The mortgagee appealed the bankruptcy court’s order to the district court, which reversed the bankruptcy court’s summary judgment ruling in favor of the trustee because the certificate of acknowledgment was not materially defective. The trustee appealed the district court’s order to the Circuit Court of Appeals.

On appeal, the First Circuit concluded that the certificate of acknowledgment complied with section 29 of chapter 183 and was not materially defective because even if it were read to reflect that only the attorney-in-fact appeared before the notary, it “still [did] all that it needed to do.”

The Court held that this is because the certificate of acknowledgment expressly stated that the attorney-in-fact was appearing for the borrower under the power of attorney recorded along with the mortgage, and the power of attorney specifically authorized the attorney-in-fact to sign the mortgage.

In addition, the First Circuit held, the certificates of acknowledgment accompanying the power of attorney stated that the borrowers each signed the power of attorney forms “voluntarily for [their] stated purpose.” Under the common law of agency in Massachusetts, the voluntary act and deed of an agent acting within the scope of his authority “was the voluntary act and deed of his principal.”

The Court rejected the trustee’s argument that the certificate of acknowledgment at issue was defective because its language differed from the official form for an individual acting under a power of attorney in an appendix to chapter 83 and the model certificate of acknowledgment published by the Land Court.

The First Circuit reasoned that even though the language differed, the subject certificate of acknowledgment made clear that the attorney-in-fact appeared as the borrowers’ attorney pursuant to the recorded power of attorney forms, which in turn clearly reflected that the borrowers “voluntarily granted the power to execute the mortgage to [the attorney-in-fact]. And, indeed, the [borrowers] acknowledged those power of attorney forms as their fee act and deed.” The Court held that nothing more was required under section 29.

Finally, the Court explained that the form acknowledgments were permissive, not mandatory, and the Massachusetts Supreme Judicial Court had confirmed that “[t]he acknowledgment required for proper recording of a mortgage … need not take any one specific form.”

Accordingly, the First Circuit affirmed the district court’s order in favor of the mortgagee.

Categories : Bankruptcy, Mortgage Law

MD Pa. Holds Initiation of a Call is Enough for TCPA Liability

By Allison Hayes

Friday, December 16th, 2016

The United States District Court for the Middle District of Pennsylvania recently determined that the sole issue for trial was whether the consumer should be awarded treble damages in his complaint alleging a violation of the Telephone Consumer Protection Act because “a plaintiff need not answer or hear a call to prove prohibited conduct under the TCPA, but need only prove the act of placing the call itself.”

A copy of the opinion in Manuel v. NRA Group, LLC is available at: Link to Opinion.

The consumer alleged that the issue of statutory damages was resolved by the Court during the summary judgment phase when the Court held that “[u]ncontroverted record evidence establishes that Mercury Dialer placed 146 calls to [the consumer].”

The defendant argued that the Court’s ruling during the summary judgment phase did not resolve the issue of statutory damages because the consumer must further demonstrate that he either answered his phone or heard it ring for each of the subject calls.

While the Third Circuit had not addressed the issue at hand, the Ninth Circuit has found that a “call” within the TCPA means “to communicate with or try to get into communication with a person by telephone.” Satterfield v. Simon & Schuster, Inc., 569 F.3d 946, 954 (9th Cir. 2009).

The Court relied on the Ninth Circuit’s holding and other district courts’ decisions in finding that “a plaintiff need not answer or hear a call to prove prohibited conduct under the TCPA, but need only prove the act of placing the call itself.” See, e.g., King v. Time Warner Cable, 113 F. Supp. 3d 718, 725 (S.D.N.Y. 2015); Fillichio v. M.R.S. Assocs., Inc., No. 09-61629, 2010 WL 4261442, at *3 (S.D. Fla. Oct. 19, 2010); see also Forrest v. Genpact Servs., LLC, 962 F. Supp. 2d 734, 737 (M.D. Pa. 2013),

The Court clarified for the parties that the sole issue at trial was whether the consumer should be awarded treble damages.

Categories : TCPA

NJ Fed. Court Holds 18 Calls Over Two Weeks – Mostly Unanswered – Did Not Violate FDCPA

By Morgan Hochheiser

Thursday, December 15th, 2016

The U.S. District Court for the District of New Jersey recently ruled that 18 telephone calls to a consumer over a two-week period – of which 17 were unanswered, and the last where the consumer hung up – did not violate the federal Fair Debt Collection Practices Act (FDCPA).

In so ruling, the Court also affirmed that under the federal Telephone Consumer Protection Act (TCPA), persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary.

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

The consumer had a delinquent television services account that was referred to a debt collector for collection. The consumer had previously provided his telephone number to the television services provider. This information was given to the debt collector as part of the delinquent account.

The debt collector began contacting the consumer on April 30, 2015. The debt collector called the consumer’s cell phone multiple times until May 12, 2015. On May 18, 2015, the debt collector received a letter from the consumer’s attorney demanding a stop to all calls.

As you may recall, to prevail on an FDCPA claim, a consumer must prove that (1) she is a consumer, (2) the debt collector is a debt collector, (3) the debt collector’s challenged practice involves an attempt to collect a debt as the FDCPA defines it, and (4) the debt collector has violated a provision of the FDCPA in attempting to collect the debt.

In this case, it was undisputed that the consumer was a consumer, the debt collector was a debt collector, and that the debt collector was trying to collect a debt owed to the television service provider.

The consumer specifically alleged a violation of 15 U.S.C. §§ 1962d and 1962d(5). Section 1692d of the FDCPA makes unlawful “any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.” 15 U.S.C. § 1692d. The statute identifies certain conduct that is a per se violation, including as relevant here, “causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.” Id. at 1692d(5).

The debt collector argued that the consumer could not show the 18 calls to his cellular telephone constituted a violation of § 1692d or § 1962d(5).

The consumer disputed the number of phone calls only with his personal recollection, which were contradicted by evidence shown on telephone logs. The Court found the record established the debt collector only made 18 calls to the consumer over 13 days, between the hours of 9:30 a.m. and 7 p.m., as allowed under the FDCPA.

As to whether conduct is harassing, the Court noted that “actual harassment or annoyance turns on the volume and pattern of calls made,” and “[t]here is no consensus as to the amount and pattern of calls necessary for a Court to infer a debt collector intended to annoy, abuse, or harass a debtor.” In addition, numerous courts have found that the number of calls alone cannot violate the FDCPA; there must also be outrageous conduct in order “to have the ‘natural consequence’ of harassing a debtor.”

The Court also noted that courts usually allow juries to decide whether a debt collector’s conduct is annoying, abusive or harassing. However, “if the conduct has — or does not have — the natural consequence of harassing, oppressing or abusing the consumer as a matter of law, summary judgment is appropriate.”

The Court here found that the debt collector’s calls were neither excessive nor harassing, as the calls were limited to no more than three times in one day, between regular business hours, only one call resulted in actual contact, the representative was polite, and the debt collector immediately ceased communications once requested.

Accordingly, the Court found the debt collector was entitled to summary judgment as a matter of law on the FDCPA claims.

The consumer also alleged a violation of 15 U.S.C. § 1692f, a catch-all provision for conduct that is “unfair” but not specifically identified in any section of the FDCPA. Courts have routinely found that § 1692f cannot be the basis for a separate claim for claims already addressed by another section of the FDCPA.

Here, the consumer’s claim was based upon the same conduct as the prior counts. Accordingly, the Court granted the debt collector’s motion for summary judgment as to this claim as well.

The consumer also sued for alleged violation of the TCPA. As you may recall, the TCPA prohibits the use of any automatic telephone dialing system or an artificial voice to make nonconsensual calls to cell phones.

Under the TCPA, persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary. Prior express consent extends to “[c]alls placed by a third party collector on behalf of that creditor.”

Here, the parties disagreed as to whether the consumer provided his prior express consent to be called on his cell phone.

However, the Court noted that the consumer had a contract with the television service provider where he provided his address and phone number. The consumer alleged this was insufficient to show prior consent, but he did not provide any evidence that he ever revoked the original consent.

Accordingly, the District Court granted in full the debt collector’s motion for summary judgment.

Categories : FDCPA, TCPA

Fla. App. Court (5th DCA) Holds Noncompliance with FHA Requirement Need Not Be Pleaded as Affirmative Defense in Foreclosure

By Allan Enriquez

Wednesday, December 14th, 2016

The District Court of Appeal of Florida, Fifth District, recently ruled that a specific denial that a mortgagee complied with HUD’s pre-foreclosure regulations that were incorporated into the mortgage was a denial of a condition precedent to foreclosure that shifted the burden to the mortgagee to prove compliance.

A copy of the opinion is available at: Link to Opinion.

A borrower obtained a Federal Housing Administration (FHA) mortgage loan. The note specifically incorporated federal HUD regulations, including 24 C.F.R. § 203.604(b). That section requires, among other things, that a lender have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, prior to commencing foreclosure.

The mortgagee filed a complaint to foreclose on the FHA mortgage loan. In her answer, the borrower denied the mortgagee’s allegation that it performed all conditions precedent to foreclosure, specifically the obligation to provide face-to-face counseling under 24 C.F.R § 203.604(b).

At trial, the mortgagee called one witness, a research officer for the mortgagee. Through the testimony, the mortgagee introduced and the trial court admitted into evidence the original note, the original mortgage, and the loan payment history.

After the mortgagee rested, the borrower moved for involuntary dismissal, arguing that the mortgagee failed to comply with 24 C.F.R. § 203.604 before filing the complaint. The mortgagee argued that the borrower had to establish the mortgagee’s alleged noncompliance with section 203.604 as an affirmative defense. The trial court agreed with the mortgagee.

The borrower recalled the mortgagee’s witness who testified that she did not know whether the borrower refused to participate in a face-to-face interview. The witness testified that she did not have information on the interview. However, she testified that it was the mortgagee’s practice to have face-to-face interviews on these loans.

The borrower testified that she would have participated in an interview, but the mortgagee never offered her that opportunity. After the borrower rested, she renewed her motion for involuntary dismissal. The trial court denied the involuntary dismissal and granted judgment of foreclosure for the mortgagee. The borrower appealed.

On appeal, the Fifth District noted that a plaintiff may plead a general satisfaction of all conditions precedent, but Florida Rule Civil Procedure 1.120(c) requires a defendant’s corresponding denial of performance or occurrence to be made specifically and with particularity. Moreover, the Court noted that under Florida law a specific denial of a general allegation of the performance or occurrence of a condition precedent shifts the burden to the plaintiff to prove the allegations concerning the subject matter of the specific denial.

The Court determined that a denial as to a condition precedent is not an affirmative defense, which relates only to matters of avoidance. Rather, a denial as to a condition precedent is a special form of denial that must be pleaded with specificity. The Court explained that the most common condition precedent in the mortgage foreclosure context is paragraph 22, which requires the lender to send a default letter to the borrower before foreclosure.

The Fifth District acknowledged that no Florida court had held that 24 C.F.R. § 203.604 constitutes a condition precedent to foreclosure. However, the Fifth District considered the issue in Diaz v. Wells Fargo Bank, N.A., 180 So. 3d 279 (Fla. 5th DCA 2016). There, the defendants specifically denied in their answer that the lender complied with all conditions precedent to foreclosure, including section 203.604. However, the mortgage in Diaz did not specifically incorporate the HUD regulations. Consequently, the Diaz court held that when it is unclear whether alleged condition precedent applies, the burden is on the party asserting the existence of the condition precedent to establish their applicability.

The Fifth District explained that, unlike Diaz, the borrower’s note and mortgage specifically incorporated HUD regulations, including the face-to-face interview requirement as a condition precedent to commencing foreclosure.

The Court found no meaningful reason to treat compliance with 24 C.F.R. § 203.604 in connection with an FHA mortgage differently than compliance with paragraph 22 in a standard mortgage, which the Florida courts had determined is a condition precedent.

The Fifth District was satisfied that the borrower specifically denied in her answer that the mortgagee complied with all conditions precedent, stating that the mortgagee did not engage in a face-to-face interview as mandated by 24 C.F.R. § 203.604. This, the Court held, shifted the burden back to the mortgagee to prove at trial that it complied with the section.

The Fifth District determined that the mortgagee wholly failed to meet its burden, providing no evidence that it engaged in a face-to-face interview before filing its foreclosure complaint. The Court also noted that the mortgagee additionally failed to demonstrate that any of the enumerated exceptions to the face-to-face interview requirement applied.

Accordingly, the Fifth District reversed and remanded with instructions to enter an involuntary dismissal.

Categories : Foreclosure

Fla. App. Court (2nd DCA) Rejects Argument Mortgagee Thwarted Right of Redemption by Not Providing Estoppel Letter

By Erik C. Fritz

Monday, December 12th, 2016

The District Court of Appeal of Florida, Second District, recently rejected a borrower’s objection to a foreclosure sale under the theory the mortgagee failed to provide him with an “estoppel letter,” which would have allowed him to exercise his right of redemption.

A copy of the opinion is available at: Link to Opinion.

A foreclosure judgement was entered and the property was sold via public sale. Ten days later, the borrower objected to the sale of the property. The objection was denied and a certificate of title was issued to the mortgagee.

The borrower appealed, arguing that the trial court erred in denying the motion to set aside the sale because the notice of sale failed to comply with Section 702.035, Florida Statutes (2014).

The statute provides in relevant part:

Whenever a legal advertisement, publication, or notice relating to a foreclosure proceeding is required to be placed in a newspaper, it is the responsibility of the petitioner or petitioner’s attorney to place such advertisement, publication, or notice. For counties with more than 1 million total population as reflected in the 2000 Official Decennial Census of the United States Census Bureau as shown on the official website of the United States Census Bureau, any notice of publication required by this section shall be deemed to have been published in accordance with the law if the notice is published in a newspaper that has been entered as a periodical matter at a post office in the county in which the newspaper is published, is published a minimum of 5 days a week . . . .

Fla. Stat. § 702.035.

Here, the county where the notice of sale was published has a population of more than one million. The borrower argued that the strict construction of the statute renders the statute unconstitutional special law. More specifically, citing City of Miami v. McGrath, 824 So. 2d 143, 148 (Fla. 2002), he argued that the statute “applie[s] to a particular population size and [is] tied to a specific date, so that no other entities could ever fall within the confines of the statute.”

Neither party argued and the record on appeal did not reflect that the borrower complied with Florida Rule of Civil Procedure 1.071, which requires a party challenging the constitutionality of a state statute or a county or municipal charter, ordinance or franchise, to meet certain procedural requirements. Accordingly, the Appellate Court held it could not consider the constitutional issues, because the borrower did not serve the state attorney general as required by 1.071. See Diaz v. Lopez, 167 So. 3d 455, 460 n.10 (Fla. 3d DCA 2015).

The Court noted that Section 45.031, Florida Statute is the operative statute in this case. The statute provides that “[i]n any sale of real or personal property under an order or judgment, the procedures provided in this section and [sections] 45.0315-45.035 may be followed as an alternative to any other sale procedure if so ordered by the court.” Fla. Stat. § 45.031. Here, the final judgment in this case directs that the sale be in accordance with 45.031.

Section 45.031(2) provides that “[n]otice of sale shall be published once a week for 2 consecutive weeks in a newspaper of general circulation, as defined in chapter 50, published in the county where the sale is to be held.” Fla. Stat. § 45.031(2).

The Court noted that the borrower here did not argue that the mortgagee did not comply with 45.031. Because he failed to make that argument, the Appellate Court held the borrower was not entitled to relief on this issue.

Instead, the borrower tried to argue that the trial court erred in denying his motion to set the foreclosure sale aside because the mortgagee failed to provide him with an estoppel letter, which would have allowed him to exercise his right of redemption.

Section 701.04, Florida Statutes requires that “[w]ithin [fourteen] days after receipt of the written request of a mortgagor, . . . the holder of a mortgage shall deliver or cause the servicer of the mortgage to deliver to the person making the request . . . an estoppel letter setting forth the unpaid balance of the loan secured by the mortgage.” Fla. Stat. § 701.04.

The Appellate Court held that a mortgagee’s alleged failure to comply with section 701.04 is not a basis to set aside the sale.

More specifically, the Court held that “it is simply inadequate to justify the equitable relief requested where [the borrower] was a party to the foreclosure action and received a copy of the final judgment of foreclosure which included the requisite paragraph regarding the right of redemption.”

In addition, the Court noted that the borrower ignored also section 45.031 and the court’s previous ruling in Whitburn, LLC v. Wells Fargo Bank, N.A., 190 So. 3d 1087, 1092 (Fla. 2d DCA 2015). In Whitburn, the borrower asserted that the mortgagee thwarted the borrower’s redemption rights by failing to provide an estoppel letter. Just like here, the Appellate Court in Whitburn noted that section 45.0315, Florida Statutes addresses the right of redemption, providing that “the mortgagor or the holder of any subordinate interest may cure the mortgagor’s indebtedness and prevent a foreclosure sale by paying the amount of moneys specified in the judgment, order, or decree of foreclosure.”

Accordingly, the Court affirmed the trial court’s ruling.

Categories : Foreclosure

Fla. App. Court (3rd DCA) Affirms Award of Atty’s Fees in Favor of Borrowers, Despite No Request for Fees in Answer

By Christopher P. Hahn

Friday, December 9th, 2016

The Third District Court of Appeal of the State of Florida recently affirmed a final judgment awarding attorney’s fees to the borrowers in a mortgage foreclosure action, even though the borrowers failed to raise any request for attorney’s fees in their answer and affirmative defenses to the foreclosure complaint.

In so ruling, the Court held that the mortgagee was on notice that the borrowers were seeking to recover their attorney’s fees and failed to timely object to the borrowers’ failure to plead entitlement.

A copy of the opinion is available at: Link to Opinion.

The mortgagee filed a mortgage foreclosure complaint that sought recovery of attorney’s fees pursuant to the promissory note. The borrowers answered and raised affirmative defenses, but did not plead entitlement to attorney’s fees.

A month later, the borrowers retained counsel, who filed a motion for judgment on the pleadings, which requested attorney’s fees and costs in the prayer for relief. Two days later, the borrowers, through counsel, filed a motion for summary judgment, which alleged the mortgagee wrongfully force-placed insurance on their property, thereby creating the “default,” and also sought attorney’s fees and costs.

The mortgagee responded in opposition to the motion for summary judgment, but did not object to the request for attorney’s fees.

After a hearing, the trial court granted the borrowers’ motion for summary judgment. The mortgagee moved for rehearing, which the borrowers opposed, again asking for attorney’s fees and costs in the “wherefore clause.”

While the mortgagee’s motion for rehearing was still pending, the borrowers filed a motion for attorney’s fees and costs, to which the mortgagee did not respond. The borrowers subsequently filed an amended motion for entitlement to attorney’s fees and costs, to which the mortgagee also did not respond.

Following a hearing, the trial court granted the borrowers’ amended motion for entitlement to attorney’s fees and costs, reserving as to amount.

The borrowers filed their motion to determine the amount of attorney’s fees, which the mortgagee opposed, but not on the basis that borrowers were not entitled to fees because they did not plead entitlement in their answers.

The mortgagee objected to entitlement for the first time at the hearing on the motion to determine the amount of attorney’s fees, which took place over three years after the trial court entered its order granting the borrowers’ entitlement motion.

The trial court reduced the hours and the hourly rate requested by borrowers’ counsel, but entered an order awarding $38,730 plus prejudgment interest from the date of the order granting entitlement and denied the bank’s motion for rehearing. The mortgagee appealed.

On appeal, the mortgagee argued that the borrowers were not entitled to attorney’s fees because they did not plead entitlement in their answer, citing the Florida Supreme Court’s 1991 decision in Stockman v. Downs, which held that “a claim for attorney’s fees, where based on statute or contract, must be pled, [and] [f]ailure to do so constitutes a waiver of the claim.”

The Third District Court of Appeal explained that in Stockman, the Florida Supreme Court’s main focus was notice, and set forth two exceptions to the plead or waive rule of entitlement, one of which applied to the case at bar: “Where a party has notice that an opponent claims entitlement to attorney’s fees, and by its conduct recognizes or acquiesces to that claim or otherwise fails to object to the failure to plead entitlement, that party waives any objection to the failure to plead a claim for attorney’s fees.”

The Appellate Court reasoned that although the borrowers did not plead entitlement in their answer, they put the mortgagee on notice “early on in the litigation that they were requesting attorney’s fees” beginning with the motion for judgment on the pleadings filed by borrowers’ counsel. The Court also noted that this request was repeated in subsequent motions. In addition, the Court noted that the mortgagee failed to object to the failure to plead entitlement in response to the mortgagee’s motion for summary judgment or respond to the borrowers’ two motions for entitlement.

Given the mortgagee’s “prolonged silence regarding the defendants’ entitlement to attorney’s fees,” the Third District concluded that the mortgagee’s objection to entitlement, raised for the first time at the hearing on the borrowers’ motion to determine amount, was “untimely, and thus [the bank] waived any objection to the defendant’s failure to plead entitlement.”

Accordingly, the trial court’s final judgment awarding attorney’s fees to the borrowers was affirmed.

Categories : Foreclosure

7th Cir. Rejects Defrauded Bank’s Effort to Recover Counterfeit Check Proceeds from Payee’s Bank, Payee, Federal Reserve

By Richard Payne

Tuesday, December 6th, 2016

The U.S. Court of Appeals for the Seventh Circuit recently held that a bank that honored a counterfeit check was not entitled to reimbursement from the party who deposited the check, nor from the depositing party’s bank or the Federal Reserve.

A copy of the opinion is available at: Link to Opinion.

In 2013, an attorney received an email from a person who claimed she wanted to hire him to help her recover money that she said she was owed in a divorce proceeding. The purported ex-wife subsequently told the attorney that after retaining him, her ex-husband settled, and that the attorney should expect a substantial check in the mail to cover his fee plus the amount of the settlement, which he was to pass on to her.

The check that the attorney received was drawn on the account of an Illinois corporation. The check looked like a real check but was counterfeit.

The scammers wrote the counterfeit check on the corporation’s bank account for $486,750.33 to the attorney, which he deposited in his bank. The purported ex-wife told the attorney that she needed the money and the attorney directed his bank to transfer the money to the purported ex-wife.

The corporation lost the entire $486,750.33, which was transferred out of its account by the fraudulent check.

The corporation’s bank reimbursed its defrauded customer — the corporation — and then demanded reimbursement from the attorney and his bank, as well as the Federal Reserve Bank of Atlanta. The attorney’s bank refused, and the corporation’s bank sued the attorney and his bank as well as the Federal Reserve Bank of Atlanta, which was peripherally involved in the transaction.

The trial court granted judgment for all three defendants, and the corporation’s bank appealed.

The corporation’s bank first argued that it was entitled to reimbursement on the basis of breach of warranty.

When the attorney’s bank deposited the $486,750.33 in the attorney’s account, it did so by an electronic rather than paper check, and the electronic check passed through the Federal Reserve Bank of Atlanta en route to the corporation’s bank.

The Federal Reserve Board’s Regulation J, 12 C.F.R. § 210.6(b)(3)(A), provides that when a Federal Reserve Bank presents an electronic check for payment, the electronic image must accurately represent all of the information on the front and back of the original check as of the time that the electronic image was substituted for the original paper check.

Some information that was on the original counterfeit check was missing from the electronic version, but consisted of characteristics of the check, such as watermarks, microprinting, and other physical security features that could not survive the imaging process. Their absence from the electronic image was not actionable. See Regulation CC, 12 C.F.R. § 229.51(A)(3).

Among the missing information was a warning box on the back of the check, often designed to resist scanning and so considered by the industry to be a security feature as well. This missing information, the corporation’s bank argued, was crucial.

The Seventh Circuit disagreed. Had the corporation’s bank been suspicious of the electronic image that it received from the Federal Reserve Bank of Atlanta, the Court explained that the corporation’s bank could have demanded a substitute check, which is a paper printout that is deemed the legal equivalent of the original paper check.

The Seventh Circuit noted that a demand for a substitute check would have protected the corporation’s bank, because a “bank that transfers, presents, or returns a substitute check or a paper or electronic representation of a substitute check for which it receives consideration shall indemnify the recipient … for any loss incurred by any recipient of a substitute check if that loss occurred due to the receipt of a substitute check instead of the original check.” See 12 C.F.R. § 229.53(a). The Court also noted that the corporation’s bank could also have refused to honor the electronic check.

The Seventh Circuit thus rejected the corporation’s bank’s argument, because it did not seek indemnity, and because it did not show that the information on the original check that was omitted from the electronic image would, had it appeared on the electronic image, have aroused suspicions in the corporation’s bank that would have caused it to refuse to send the $486,750.33 to the attorney’s bank.

The corporation’s bank also argued that it was entitled to restitution by mistake, pursuant to the Illinois Uniform Commercial Code, 810 ILCS 5/3-418.

The Seventh Circuit disagreed, noting that although the corporation’s bank was the victim of a mistake, Illinois law provides no remedy for such a victim against a person who took the instrument in good faith and for value. See 810 ILCS 5/3-418(c).

The Court noted that the lawyer, his bank, and the Federal Reserve Bank of Atlanta reasonably believed that they were engaged in the innocent, commonplace banking activity of forwarding a check to its intended final recipient on behalf of their client and customers. There was no claim or evidence that they knew they were participating in a fraud, or that their conduct fell below reasonable commercial standards of fair dealing, as required by 810 ILCS 5/3-103(a)(4).

The corporation’s bank also argued the attorney’s bank committed negligent spoliation of evidence in alleged violation of Illinois common law, because the attorney’s bank destroyed the original paper check after making the electronic copy that it transmitted to the Federal Reserve Bank of Atlanta.

Again the Seventh Circuit disagreed, holding that a bank has no duty to retain paper checks after an electronic substitute has been made. The Court noted that otherwise, banks would drown in paper, provided there’s a record of the contents of the paper check.

Lastly, the corporation’s bank argued that the attorney was liable for professional negligence.

Once more, the Seventh Circuit disagreed. Relying on Pelham v. Griesheimer, 92 Ill. 2d 13, 440 N.E.2d 96, 99, 64 Ill. Dec. 544 (Ill. 1982), the Seventh Circuit held that the attorney was liable only to his client, and not to the corporation’s bank, which was not his client.

The Seventh Circuit affirmed the district court’s judgment in favor of the defendant attorney, his bank, and the Federal Reserve Bank of Atlanta.

Categories : Banking

Jury Finds Mortgage Lender, CEO Liable for Almost $93 Million in FHA Fraud Case in Texas

By Ralph T. Wutscher

Monday, December 5th, 2016

A federal jury in the U.S. District Court for the Southern District of Texas found a mortgage lender and its president and CEO liable for almost $93 million in connection with alleged violations of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), before application of the trebling and per violation penalties afforded under the statutes.

The alleged violations occurred in connection with the lender’s participation in the Federal Housing Administration (FHA) mortgage insurance program.

A copy of the U.S. Department of Justice’s (DOJ) press release is available at: Link to Press Release.

The jury award in favor of the United States totaled $92,982,775 in damages, including $7,370,132 against the mortgage lender’s president and CEO specifically.

In addition, the FCA subjects the damages to trebling, and to mandatory penalties of $5,500 to $11,000 for each violation, whereas FIRREA also allows penalties for each statutory violation. The federal judge who presided over the trial will determine the total penalties and damages at a later date.

The mortgage lender was a participant in HUD’s Direct Endorsement Lender program, and underwrote FHA-insured mortgage loans. As you may recall, for FHA-insured mortgage loans, the lender must “certify to HUD that the loan was underwritten according to HUD’s guidelines.” Mortgage lenders must obtain HUD approval for each branch office from which they originate HUD-insured mortgage loans. In addition, “HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems.”

The DOJ claimed that the mortgage lender “recklessly underwrote and certified at least 1,192 loans for FHA insurance under HUD’s guidelines” and that “[t]his fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted.”

The DOJ’s press release states that the mortgage lender failed to obtain HUD approval for each branch office from which it originated FHA loans. Instead, the DOJ claimed, the mortgage lender “operated more than 100 ‘shadow’ branch offices that originated FHA loans without HUD authorization,” and “submitted loans originated by those branches to HUD using the ID numbers of approved branches.”

The government claimed that the mortgage lender’s “undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of branches whose IDs they were using. This fraudulent misconduct resulted in $7,370,132 in losses to HUD when some of those loans defaulted.”

In addition, the DOJ claimed that the mortgage lender “operated a dysfunctional quality control program and lied to HUD about it,” instead employing only “a handful of quality control employees to review loans from as many as 600 branch offices.” According to the DOJ, “many of those employees were unqualified to audit FHA-insured loans.”

In addition, the DOJ claimed that the president and CEO “personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not. When HUD auditors later asked for those quality control reports, [the mortgage lender] provided the falsified reports,” and “also falsely certified to HUD on an annual basis that [the mortgage lender] was in compliance with HUD’s quality control requirements.”

The lawsuit was originally filed as a qui tam whistleblower lawsuit in the U.S. District Court for the Southern District of New York into which the United States intervened. The action was later transferred to the U.S. District Court for the Southern District of Texas, where it went to trial.

Categories : Mortgage Law

11th Cir. Holds CAFA Jurisdiction Remains Even When Class Claims Are Dismissed Before Certification

By Allan Enriquez

Friday, December 2nd, 2016

The U.S. Court of Appeals for the Eleventh Circuit recently held that federal courts that have original subject matter jurisdiction over state law claims under the federal Class Action Fairness Act retain that jurisdiction even when the class claims are dismissed before the class is certified.

A copy of the opinion is available at: Link to Opinion.

An FBI investigation found evidence that some employees of a fuel supplier that operates the largest chain of truck stops in the United States engaged in a conspiracy to defraud the supplier’s purchasers. One purchaser filed a putative class action on behalf of itself and others similarly situated in federal court against the fuel supplier.

The purchaser brought the following state and federal law claims: (1) violations of 18 U.S.C. § 1962(c) for racketeering; (2) violation of 18 U.S.C. § 1962(d) for conspiracy to commit racketeering; (3) breach of contract under state law; (4) deceptive trade practices in violation of state law; (5) unjust enrichment under state law; (6) fraudulent misrepresentation under state law; (7) negligent misrepresentation under state law; and (8) suppression of the proper discounts owed to the class members under state law.

The purchaser based federal subject matter jurisdiction over all eight claims under CAFA, 28 U.S.C. § 1332(d). The purchaser also claimed federal question jurisdiction under 28 U.S.C. § 1331 for the federal racketeering claims, diversity jurisdiction under 28 U.S.C. § 1332(a), and supplemental jurisdiction under 28 U.S.C. § 1367.

The district court dismissed both of the purchaser’s federal racketeering claims and its state law claims for fraudulent misrepresentation, negligent misrepresentation, suppression of discounts, and deceptive practices. This left the breach of contract and unjust enrichment claims, asserted both individually and on behalf of a putative class.

While this case was pending, a rival class action suit reached a court approved settlement in the U.S. District Court for the Eastern District of Arkansas. The parties in this matter acknowledged that the Arkansas settlement would deprive the purchaser of standing to pursue its class claims. Consequently, the district court dismissed all class claims in the complaint. At this point, solely the individual breach of contract and unjust enrichment claims survived.

Meanwhile, six other separate suits were pending against the fuel supplier in five other federal judicial districts brought by parties who had opted out of the nationwide Arkansas class settlement and who were making similar claims as the corporation. The six suits were consolidated with the purchaser’s suit into one multidistrict-litigation (“MDL”) proceeding in the U.S. District Court for the Eastern District of Kentucky. Subsequently, the MDL court became aware of information that deprived it of diversity jurisdiction. Without deciding jurisdiction under CAFA, the MDL court remanded this case to the Alabama district court.

On remand, the purchaser moved to dismiss its remaining claims without prejudice in order that it could refile in Alabama state court. The district court dismissed the claims without prejudice. The fuel supplier appealed.

As you may recall, under CAFA, a federal trial court has original jurisdiction over a putative class action if the amount in controversy exceeds $5 million as aggregated from the claims of the individual class members, the suit is brought as a class action for a proposed class with at least 100 members, and any member of the class is a citizen of a state different from any defendant.

The Eleventh Circuit examined its ruling in Vega v. T-Mobile USA, Inc., 564 F.3d 1256 (11th Cir. 2009), a case removed from state to federal court. There, the Court found that a failure to certify a class does not divest the federal courts of subject matter jurisdiction under CAFA. The Court reasoned that “‘jurisdictional facts are assessed at the time of removal; and post-removal events (including non-certification, de-certification, or severance) do not deprive federal courts of subject matter jurisdiction.'”

The Eleventh Circuit noted that every circuit court since Vega to consider the question has held that post-removal events do not oust CAFA jurisdiction. In fact, the reasoning in Vega was explicitly adopted by the U.S. Court of Appeals for the Seventh Circuit in Cunningham Carter Corp. v. Learjet, Inc., 592 F.3d 80 (7th Cir. 2010).

The Eleventh Circuit clarified that a case under CAFA can be dismissed for lack of jurisdiction if those claims contain frivolous attempts to invoke CAFA jurisdiction. However, the Eleventh Circuit noted, in these cases, the federal court did not lose CAFA jurisdiction, but rather the court never had jurisdiction in the first place.

Next, the Eleventh Circuit addressed whether there is a different result in this matter because the purchaser filed directly in federal court under CAFA but wished to refile in state court.

The Court explained that there was a policy distinction between removal cases and cases initially filed in federal court. The Court cautioned that in removal cases there were concerns about forum manipulation that dictate against a plaintiff’s post-removal amendments to affect jurisdiction. As a result, the Eleventh Circuit noted, a court should guard against a plaintiff whose case was removed to federal court and who then amends its pleadings to manipulate its way back into state court.

On the other hand, the Eleventh Circuit explained that there were no forum manipulation concerns when the plaintiff chooses a federal forum and then pleads away jurisdiction through amendment. In the situation where a plaintiff files a complaint in federal court and then voluntarily amends the complaint, courts should look to the amended complaint to determine jurisdiction.

However, the Eleventh Circuit distinguished this case from those where a plaintiff files in federal court and amends out of CAFA. The parties in this action did not suggest any action by the purchaser that divested the federal courts of CAFA jurisdiction. Rather, the purchaser argued that the district court’s dismissal of the class claims after the settlement in the Arkansas case destroyed CAFA jurisdiction.

However, the Eleventh Circuit noted that the Arkansas settlement occurred after the corporation filed its complaint. Moreover, the Court noted, there was no evidence that the complaint was frivolous or deficient under CAFA at the time it was filed.

The Eleventh Circuit found no basis for distinguishing cases originally filed in federal court under CAFA from those removed to federal court when the post-filing action that did away with the class claims is not an amendment to the complaint. Accordingly, the Court held that CAFA continued to confer original federal jurisdiction over the purchaser’s remaining state law claims in the suit.

Last, the Eleventh Circuit did not agree with the trial court’s decision to analyze supplemental jurisdiction because supplemental jurisdiction has a role in CAFA cases only in those that have state-law claims that were never subject to CAFA jurisdiction. Here, there is no dispute that all eight federal and state claims were properly pleaded as CAFA claims. Consequently, the trial court had original jurisdiction over all eight claims.

Accordingly, the Eleventh Circuit reversed the trial court’s dismissal and remanded for further proceedings.

Categories : CAFA

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