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Archive for January 2017

7th Cir. Opens Door to Possible CAMELS Rating Litigation Challenges

By Morgan Hochheiser
Monday, January 30th, 2017

The U.S. Court of Appeals for the Seventh Circuit recently held that the presence of capital as one of six components in the FDIC’s CAMELS rating does not mean that the rating as a whole is committed to agency discretion for the purpose of 5 U.S.C. §701(a)(2) and therefore unreviewable.

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

As you may recall, the FDIC is charged with conducting a full-scope on site examination every 12-18 months of the banks whose deposits it insures. In June 2015, the FDIC examined a bank and assigned it a 4 in the Uniform Financial Institutions Rating System, called a “CAMELS” rating. In this system, the lowest rating is a 5 and the highest rating is a 1.

The bank filed suit against the FDIC alleging the rating should have been a 3, and that the lower rating was arbitrary and capricious. The district court dismissed the suit for want of jurisdiction, ruling that the assignment of ratings is committed to agency discretion by law under 5 U.S.C. § 701(a)(2).

The Seventh Circuit held that, when a private party seeks judicial review of administrative action, 5 U.S.C. § 702 and 28 U.S.C. § 1346(a)(2) supply subject matter jurisdiction, and if there are no standards for judicial review — the usual meaning of “committed to agency discretion by law” — then the lawsuit should be dismissed on the merits because the plaintiff cannot show that the agency’s action was unlawful.  See Vahora v. Holder, 626 F.3d 907, 916–17 (7th Cir. 2010).

The Court noted that 5 U.S.C. § 701(a)(2), which prevents review of matters committed to agency discretion by law, does not refer to or limit §702, which creates subject-matter jurisdiction for claims under the Administrative Procedure Act (APA). Further, the Seventh Circuit noted that when the Supreme Court had considered arguments under §701(a)(2) on the merits, it had not remanded the cases with instructions to dismiss for want of jurisdiction.

The Seventh Circuit noted that the assignment of a CAMELS rating by the FDIC is not a final decision, where APA review would apply. The rating affects how much a bank must pay for deposit insurance, but here, the bank did not ask the FDIC to lower the rate, only the rating.  Further, the Court noted that the bank did not request review by the FDIC Supervision Appeals Review Committee.

According to the Seventh Circuit, the absence of a final decision would be grounds to dismiss the suit. The effect of CAMELS ratings on deposit insurance premiums creates a concrete stake that makes the dispute judiciable. Yet, the fact that the bank may have initiated the suit prematurely “does not require a court to dismiss the suit when the agency has acquiesced in immediate review.”

The FDIC argued that the rating is unreviewable because it has discretion to set appropriate levels of capital for a banking institution, as necessary or appropriate in light of the circumstances of the banking institution under 12 U.S.C. § 3907(a)(2). The bank argued that the CAMELS rating system uses six factors, which are rated separately, and the rating as a whole is comprehensive of those six factors, including capital adequacy.

The Tenth Circuit previously held that capital adequacy determinations are within the FDIC’s discretion and therefore unreviewable, yet management, liquidity, and interest-rate sensitivity were reviewable. See Frontier State Bank v. FDIC, 702 F.3d 588, 593–97 (10th Cir. 2012). The bank argued it was not challenging the capital adequacy factor, but the FDIC argued the bank was attempting to disguise a challenge to a decision protected by 12 U.S.C. § 3907(a)(2).

The district court did not attempt to resolve this conflict. The Seventh Circuit ordered that the trial court should address these issues on remand.

The Seventh Circuit held that “the presence of capital as one of six components in a CAMELS rating does not necessarily mean that the rating as a whole is committed to agency discretion for the purpose of §701(a)(2).”

Because the parties did not brief the question, the Seventh Circuit did not “decide whether one or more components of a CAMELS rating other than capital may be committed to agency discretion.”

Accordingly, the Seventh Circuit vacated the judgment and remanded the matter to the trial court.

Categories : Banking

3rd Cir. Rules Violation of Statute Without Concrete Harm Enough for Standing, At Least in Data Breach Cases

By Hector E. Lora
Monday, January 30th, 2017

The U.S. Court of Appeals for the Third Circuit recently reversed the dismissal of a putative class action under the federal Fair Credit Reporting Act (FCRA) based on the theft of laptops from a health insurer containing sensitive personal information, holding that the plaintiffs had standing to sue because Congress created a statutory remedy for the unauthorized transfer of personal information, the disclosure of which constituted a cognizable injury, regardless of whether the stolen information was actually used improperly.

A copy of the opinion in In re Horizon Healthcare Inc. Data Breach Litigation is available at: Link to Opinion.

The defendant insurer collected and maintained “personally identifiable information (e.g., names, dates of birth, social security numbers and addresses) and protected health information (e.g., demographic information, medical histories, test and lab results, insurance information, and other care-related data) on its customers and potential customers.” The plaintiffs were insured under the insurer’s managed-care health plans.

The insurer’s privacy policy provided that it “maintain[s] appropriate administrative, technical and physical safeguards to reasonably protect [members’] Private Information.” It also provided that if the insurer dealt with a third party as part of its business, the third party was required to agree to protect members’ information, and that the insurer would notify members “without unreasonable delay” in the event of a breach of privacy.

In November 2013, two laptop computers containing unencrypted personal information of more than 839,000 insureds were stolen from the company’s headquarters. The insurer discovered the theft a few days later and notified its affected insureds one month later, offering one year of credit monitoring and identity theft protection services to those affected.

In June 2014, the plaintiffs filed their 10-count complaint in federal district court, alleging willful and negligent violation of the FCRA, and common law and statutory claims under New Jersey law.

The plaintiffs argued that the credit monitoring and identity theft protection services offered by the defendant insurer were insufficient to remedy the consequences of the data breach. The complaint alleged that only one of the plaintiffs had his identity stolen as the result of the breach — someone submitted a false tax return to the I.R.S. and stole his and his wife’s income tax refund, although he eventually received the refund. He alleged that he incurred out-of-pocket expenses to remedy the identity theft. He also alleged that someone attempted to use his credit for an online purchase and was denied credit because his social security number “has been associated with identity theft.”

The complaint alleged that the insurer is a “consumer reporting agency” under FCRA, and that the insurer violated FCRA § 1681(b) by “furnish[ing] their information in an unauthorized fashion” because it allowed the information to end up in the hands of thieves.

Section 1681(b) requires that consumer reporting agencies “adopt reasonable procedures … for consumer credit, personnel, insurance and other information … with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information….”

The plaintiffs also alleged that by failing to protect their personal information, the insurer violated 15 U.S.C. §§ 1681a(d)(3), 1681b(g)(1) and 1681c(a)(6).

Subsection 1681a(d)(3) “imposes a restriction, with certain exceptions, on the sharing of medical information with any persons not related by common ownership or affiliated by corporate control.”

Subsection 1681b(g)(1) provides that, with certain limited exceptions, “[a] consumer reporting agency shall not furnish for employment purposes, or in connection with a credit or insurance transaction, a consumer report that contains medical information .. about a consumer.”

Subsection 1681c(a)(6) prohibits a consumer reporting agency, with certain limited exceptions, from issuing a consumer report containing “[t]he name, address, and telephone number of any medical information furnisher….”

The complaint sought actual, statutory and punitive damages, plus an injunction prohibiting the insurer from storing unencrypted personal information, attorney’s fees and costs.

FCRA provides for the recovery of actual plus statutory damages between $100 and $1,000, plus attorney’s fees and punitive damages, for willful violations. See 15 U.S.C. § 1681n. FCRA also provides for the recovery of actual damages and attorney’s fees for negligent violations. See 15 U.S.C. § 16810.

The insurer moved to dismiss the complaint for lack of subject matter jurisdiction, and for failure to state a claim. The district court dismissed the case, reasoning that plaintiffs lacked standing to sue under Article III of the U.S. Constitution because they did not adequately allege that they were actually harmed by the theft of their information. The plaintiffs appealed.

Because the district court dismissed based on lack of standing, the Third Circuit addressed only that issue and not the insurer’s arguments that it was not bound by the FCRA because it was not a “consumer reporting agency” and the FCRA did not apply to information that is stolen, only to information that is “furnished.” The Court assumed, for purposes of the appeal, that the FCRA had been violated.

The Third Circuit then explained that “‘[t]o survive a motion to dismiss [for lack of standing], a complaint must contain sufficient factual matter’ that would establish standing if accepted as true.”

The Court noted that under Supreme Court precedent “[t]here are three well-recognized elements of Article III standing: First, an ‘injury in fact,’ or an ‘invasion of a legally protected interest’ that is ‘concrete and particularized.’ … Second, a ‘causal connection between the injury and the conduct complained of[.]’ … And third, a likelihood ‘that the injury will be redressed by a favorable decision.'”

The Court clarified that while the plaintiffs undoubtedly suffered a particularized injury because their personal information was disclosed, the appeal before it focused only “on the concreteness requirement of that element.”

The plaintiffs argued that “the violation of their statutory right to have their personal information secured against unauthorized disclosure constitutes, in and of itself, an injury in fact[,]” which the district court rejected. In the alternative, the plaintiffs argued that the insurer’s failure to protect their information put them at risk of harm from identity theft and such increased risk was a concrete injury for purposes of Article III standing. The district court also rejected this argument because it found that any future risk of harm was too speculative and “attenuated” to support standing.

The Third Circuit agreed with the plaintiff’s first argument, concluding that they had standing based on the insurer’s alleged violation of the FCRA. The Court reasoned that because Congress created a statutory remedy for the unauthorized transfer of personal information in the FCRA, a violation of the statute constitutes an injury sufficient to confer Article III standing to sue, regardless of whether the information was actually used improperly.

In so ruling, the Court noted that, “with the passage of FCRA, Congress established that the unauthorized dissemination of personal information by a credit reporting agency causes an injury in and of itself – whether or not the disclosure of that information increased the risk of identity theft or some other future harm,” and that Congress “created a private right of action to enforce the provisions of FCRA, and even allowed for statutory damages for willful violations – which clearly illustrates that Congress believed that the violation of FCRA causes a concrete harm to consumers.”

Moreover, the Third Circuit noted, “since the ‘intangible harm’ that FCRA seeks to remedy has a close relationship to a harm [i.e. invasion of privacy] that has traditionally been regarded as providing a basis for a lawsuit in English or American courts,” the Court had “no trouble concluding that Congress properly defined an injury that gives rise to a case or controversy where none existed before.”

The Court relied on two recent opinions dealing with statutes protecting data privacy, which allowed individuals to sue to remedy violations of their statutory rights even in the absence of actual damages.

In the Google, Inc. Cookie Placement Consumer Privacy Litigation, decided in 2015, the Third Circuit held that “so long as an injury ‘affect[s] the plaintiff in a personal and individual way,’ the plaintiff need not ‘suffer any particular type of harm to have standing.’ … Instead, ‘the actual or threatened injury required by Article III may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing,’ even absent evidence of actual monetary loss.”

The Third Circuit in 2016 “reaffirmed Google’s holding in In re Nickelodeon Consumer Privacy Litigation, … [which] involved a class action in which the plaintiffs alleged that Viacom and Google had unlawfully collected personal information on the Internet, including what webpages the plaintiffs had visited and what videos they watched on Viacom websites.” Relying on its holding in Google, the Court reasoned that “when it comes to laws that protect privacy, a focus on economic loss is misplaced. … Instead, ‘the unlawful disclosure of legally protected information’ constituted ‘a clear de facto injury.'”

Reasoning that the plaintiffs before it “have at least as strong a basis for claiming that they were injured as the plaintiffs in Google and Nickelodeon,” the Court reversed and vacated the district court’s order of dismissal and remanded the case for further proceedings.

Categories : FCRA

Fla. Court Holds Payment Statement Sent After Consent Foreclosure Violated FCCPA, Rejects ‘Competent Attorney’ Standard

By Christopher P. Hahn
Monday, January 23rd, 2017

The Appellate Division of the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida recently reversed summary judgment in favor of a mortgage loan servicer in a case filed by a borrower under the Florida Consumer Collections Practices Act (FCCPA), holding that:

(a) the account statement at issue improperly attempted to collect a debt that was no longer owed, and was not preempted by the federal Truth in Lending Act (TILA); and

(b) sending the statement to the borrower’s attorney did not avoid liability because the “competent lawyer” standard adopted by the Seventh Circuit does not apply to the FCCPA in the Eleventh Circuit.

A copy of the opinion in Murray v. Nationstar Mortgage LLC is available at:  Link to Opinion.

The borrower signed a note and mortgage on Jan. 21, 2008. The note provided for a fixed interest rate of 6.875% for the life of the loan.  The borrower defaulted and the mortgagee sued to foreclose.

In May 2014, the parties entered into a stipulation that provided for the entry of a final judgment of foreclosure, and a waiver of any deficiency. The final judgment provided that interest on the balance owed would accrue at the legal rate for judgments under Florida law, then 4.75%.

In August 2015, the servicer sent to the borrower’s attorney an account statement attempting to collect the principal balance owed at an interest rate of 6.875%, instead of the legal rate for judgment under Florida law as provided in the final judgment of foreclosure.

In September 2015, the borrower filed a complaint alleging that the servicer violated sections 559.72 and 559.77 of the FCCPA because it attempted to collect on a debt that was no longer owed due to the terms of the joint stipulation and consent judgment of foreclosure.

The servicer moved for summary judgment, arguing that it was required to send the statement under the federal Truth in Lending Act (TILA), which preempted the FCCPA, and, alternatively, the statement was sent to borrower’s counsel, who was not misled.

After a hearing, the trial court granted the mortgagee’s motion, finding that it was entitled to judgment as a matter of law because TILA required the statement to be sent and no competent attorney would have been misled by the statement. The borrower appealed.

On appeal, the Appellate Division of the trial court explained that subsection 559.72 of the FCCPA provides that “[i]n collecting consumer debts, no person shall … [c]laim, attempt, or threaten to enforce a debt when such person knows that the debt is not legitimate, or assert the existence of some other legal right when such person knows that the right does not exist.”

Subsection 559.77(5) of the FCCPA provides that in applying section 559.72, “due consideration and great weight shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to the federal Fair Debt Collection Practices Act.”

The Appellate Division disagreed with the trial court’s reasoning that “the statement was required under TILA and thus could not violate the FCCPA as a matter of federal preemption.”

The Appellate Division explained that while federal law may preempt state law under the U.S. Constitution’s Supremacy Clause, “[i]mplied conflict preemption occurs only when it is physically impossible to simultaneously comply with both federal and state law on a topic, or where state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’”

The relevant TILA implementing regulation, 12 C.F.R. § 1026.41, requires among other things that a mortgage loan servicer “provide the consumer, for each billing cycle, a periodic statement … [that includes] the amount due, the amount of the outstanding principal balance, and the current interest rate in effect for the mortgage loan.”

The mortgagee argued that because no foreclosure sale had taken place, the note and mortgage were not extinguished and, therefore, it was required by TILA to continue sending account statements.

The Appellate Division disagreed, finding that the account statement did not comply with TILA.

The Court noted that “[i]n accordance with the joint stipulation, which waived any deficiency, and the subsequent entry of the judgment of foreclosure, the amount due is zero, the outstanding principal balance is zero, and the current interest rate is 4.75%.”  Therefore, the Appellate Division held, “[r]egardless of whether a sale has occurred, based upon the final judgment, [the servicer] is no longer able to recover the amounts listed on the account statement, therefore its account statement was not required under TILA.”

Because the statement was not required by TILA, the Court ruled it could not preempt the FCCPA “and it was error to grant summary judgment on that basis.”

Turning to the trial court’s alternative basis for granting summary judgment in the servicer’s favor, the Appellate Division explained that although the U.S. Court of Appeals for the Seventh Circuit held in 2007 in Evory v. RJM Acquisitions Funding LLC that no competent attorney would be misled by an account statement such as the one at issue, in 2016 the U.S. Court of Appeals for Eleventh Circuit, which includes Florida, held in Bishop v. Ross Earle and Bonan, P.A. that “there is ‘no basis in the FDCPA to treat false statements made to lawyers differently from false statements made to consumers themselves.’”

The Appellate Division opted to follow the Eleventh Circuit’s interpretation of the FDCPA, and held that “the competent lawyer standard employed by Evory does not apply to the FCCPA. The trial court erred by entering summary judgment based upon that standard.”

Accordingly, the trial court’s summary judgment in the servicer’s favor was reversed and the case remanded for further proceedings.

Categories : FCCPA, Mortgage Law

SCOTUS Rules Fannie Mae’s ‘Sue or Be Sued’ Clause Does Not Confer Automatic Federal Court Jurisdiction

By Hector E. Lora
Friday, January 20th, 2017

The Supreme Court of the United States recently held that the “sue-and-be-sued” clause in the Federal National Mortgage Association’s (“Fannie Mae”) charter does not confer subject matter jurisdiction on federal district courts over all cases involving Fannie Mae, and that an independent basis for subject matter jurisdiction must exist such as federal question or diversity.

A copy of the opinion in Lightfoot v. Cendant Mortgage Corp. is available at:  Link to Opinion.

Justice Sotomayor’s opinion began by reciting the history of Fannie Mae, which began with the federal government’s attempts to stabilize and strengthen the residential mortgage market during the Great Depression.

The National Housing Act of 1934 gave the Administrator of the recently-created Federal Housing Administration (FHA) authorization to form “national mortgage associations” to purchase and sell certain types of first mortgages and other first liens and to “borrow money for such purposes.” The National Housing Act also conferred on Fannie Mae the power to “sue and be sued, complain and defend, in any court of law or equity.”

In 1954, the National Housing Act was amended to restructure Fannie Mae’s charter in order that it was no longer wholly owned by the federal government. Instead, “[p]rivate shareholders held its common stock and the Department of the Treasury held its preferred stock.” Also, the language of the “sue-and-be-sued” clause was changed to “sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.”

“In 1968, Fannie Mae became fully privately owned and relinquished part of its portfolio to its new spinoff, the Government National Mortgage Association (known as Ginnie Mae).” Fannie Mae “’continue[d] to operate the secondary market operations’ but became ‘a Government-sponsored private corporation.’”

Fannie Mae currently participates in the secondary mortgage market by “purchas[ing] mortgages that meet its eligibility criteria, packages them into mortgage-backed securities, and sells those securities to investors, and it invests in mortgage-backed securities itself. One of those mortgage purchases led to Fannie Mae’s entanglement in this case.”

Turning to the facts of the case at bar, the borrower refinanced her mortgage in 1999. Fannie Mae purchased the mortgage, which the prior holder continued to service.  The borrower defaulted and the servicer/former mortgagee repurchased the mortgage from Fannie Mae and sued to foreclose.

The borrower transferred title of the property to her daughter and filed bankruptcy in an unsuccessful bid to avoid foreclosure, the property eventually being sold at a trustee’s sale in 2001.  The mother and daughter borrowers then filed suit in state court, alleging that “deficiencies in the refinancing, foreclosure, and sale of their home entitled them to relief against Fannie Mae.”

Fannie Mae removed the case to federal court based on the “sue-and-be-sued” clause in its charter which it asserted conferred federal question jurisdiction under 28 U.S.C § 1441(a).

The district court denied a motion to remand the case to state court and then dismissed the case “on claim preclusion grounds.” After further litigation, the district court entered a final judgment in Fannie Mae’s favor. The borrowers then moved to set aside the judgment under Federal Rule of Civil Procedure 60(b) based on “fraud upon the court,” which the district court denied.

The borrowers appealed, and the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal and the denial of the Rule 60(b) motion.  The borrowers moved for rehearing and the Ninth Circuit withdrew its opinion and “ordered briefing on the question whether the District Court had jurisdiction over the case under Fannie Mae’s sue-and-be-sued clause.”

The Ninth Circuit affirmed the district court’s judgment, relying on the Supreme Court’s 1992 decision in American Nat. Red Cross v. S.G, interpreting it as establishing the rule that “[w]hen a sue-and-be sued clause in a federal charter expressly authorizes suit in federal courts, it confers jurisdiction on the federal courts.”

On certiorari review, the Supreme Court reversed the Ninth Circuit, framing the question as “whether Fannie Mae’s sue-and-be-sued clause goes further and grants federal courts jurisdiction over all cases involving Fannie Mae.”

The Supreme Court noted that the dissent in the Ninth Circuit’s opinion instead interpreted the Red Cross decision “as setting out only a ‘default rule’ that provides a ‘starting point for [the] analysis … It read the ‘any court of competent jurisdiction [language] in Fannie Mae’s sue-and-be sued clause to overcome that default rule by requiring an independent source of jurisdiction in cases involving Fannie Mae.”

The Supreme Court pointed out the First and District of Columbia Circuits “have concluded that the language in Fannie Mae’s sue-and-be-sued clause grants jurisdiction to federal courts,” while four other Circuits — the Seventh, Second, Fifth and Third – “have disagreed, finding that similar language did not grant jurisdiction.”

The Court explained that it did “not face a clean slate” because it had “addressed the jurisdictional reach of sue-and-be sued clauses in five federal charters. Three clauses were held to grant jurisdiction, while two were found wanting.” These opinions “support the rule that a congressional charter’s ‘sue and be sued’ provision may be read to confer federal court jurisdiction if, but only if, it specifically mentions the federal courts.”

Turning to the clause at issue, the Supreme Court explained that while “Fannie Mae’s sue-and-be-sued clause resembles the clauses this Court has held confer jurisdiction in one important respect … it ‘specifically mentions the federal courts[,]’ [it] differs in a material respect from the three clauses the Court has held sufficient to grant federal jurisdiction.” Specifically, the clause at issue contains the qualifying words “any court of competent jurisdiction.”

The Court reasoned that “[a] court of competent jurisdiction is a court with the power to adjudicate the case before it … [a]nd a court’s subject-matter jurisdiction defines its power to hear cases.” Thus, “[i]t follows that a court of competent jurisdiction is a court with a grant of subject-matter jurisdiction covering the case before it.” Based on such basic principles, the “Court has understood the phrase ‘court of competent jurisdiction’ as a reference to a court with an existing source of subject-matter jurisdiction.”

The Supreme Court concluded that “Fannie Mae’s sue-and-be-sued clause is most naturally read not to grant federal courts subject-matter jurisdiction over all cases involving Fannie Mae. In authorizing Fannie Mae to sue and be sued ‘in any court of competent jurisdiction, State or Federal,’ it permits suit in any state or federal court already endowed with subject-matter jurisdiction over the suit.”

The Court clarified that its ruling in “Red Cross does not require a different result.”  Although some courts have interpreted that decision “to set out a rule that an express reference to the federal courts suffices to make a sue-and-be-sued clause a grant of federal jurisdiction … Red Cross contains no such rule.” Instead, the Court explained that that decision reiterates ‘the basic rule’ from earlier decisions “that a sue-and-be-sued clause conferring only a general right to sue does not grant jurisdiction to the federal courts.”

The Supreme Court rejected as unpersuasive Fannie Mae’s argument “against reading its sue-and-be-sued clause as merely capacity conferring.” First, Fannie Mae argued that the phrase “court of competent jurisdiction” “might refer to a court with personal jurisdiction over the parties before it, a court of proper venue, or a court of general, rather than specialized jurisdiction.”

However, the Court ruled, just because the clause mentions federal courts “does not resolve the jurisdictional question.” Accordingly “arguments as to why the phrase … could still have meaning if it does not carry its ordinary meaning are beside the point.”

The Court went on the explain that “even if the phrase carries additional meaning, that would not further Fannie Mae’s argument.” Taking Fannie Mae’s argument that the phrase “court of competent jurisdiction” could mean personal jurisdiction, the Court reasoned that “nothing in Fannie Mae’s sue-and-be-sued clause suggests that the reference to ‘court of competent jurisdiction’ refers only to a court with personal jurisdiction over the parties before it.” Reading the phrase to include both subject matter and personal jurisdiction “does not help Fannie Mae. So long as the sue-and-be-sued clause refers to an outside source of subject-matter jurisdiction, it does not confer subject-matter jurisdiction.”

The Court next rejected Fannie Mae’s argument that when its sue-and-be-sued clause was adopted in 1954, courts had interpreted the phrase “court of competent jurisdiction” to confer jurisdiction on federal courts and Congress relied on such decisions, known as the “prior construction canon of statutory interpretation.”

Fannie Mae pointed to “three types of statutory provisions” that supported its argument that “the phrase ‘court of competent jurisdiction’ had acquired a settled meaning by 1954.” The first two dealt with the Federal Housing Administration’s sue-and-be-sued clause and two Circuit Court of Appeals decisions from the 1940’s holding that the FHA’s sue-and-be-sued clause “overrode the general rule … that monetary claims against the United States exceeding $10,000 must be brought in the Court of Federal Claims, rather than the federal district courts.”

The Court distinguished the two cases as inapposite because “[t]hese courts did not state that their jurisdiction was founded on the sue-and-be-sued clause, as opposed to statutes governing the original jurisdiction of the federal district courts. … Thus, even assuming that two appellate court cases can ‘settle’ an issue … these two cases did not because they did not speak to the question here.”

The Court rejected Fannie Mae’s argument based on a “second set of cases [addressing] provisions authorizing suit for a violation of a statute” as well as a third set of cases that “interpreted provisions making federal jurisdiction over certain causes of action exclusive” because none of the cases “suggest that Congress in 1954 would have surveyed the jurisprudential landscape and necessarily concluded that the courts had already settled the question of whether a sue-and-be-sued clause containing the phrase ‘court of competent jurisdiction’ confers jurisdiction on the federal courts.”

The Court also rejected Fannie Mae’s argument that there was no indication that Congress intended to change the original grant of jurisdiction to federal courts enacted in 1934 when it amended the sue-and-be-sued clause in 1954 because “[t]he addition in 1954 of ‘court of competent jurisdiction,’ a phrase that, as discussed, carries a clear meaning, means that the current sue-and-be-sued clause does not confer jurisdiction.”

Finally, the Supreme Court recognized that “[s]uits involving Freddie Mac may be brought in federal court.”

However, the Court rejected Fannie Mae’s argument that because its “sibling rival, the Federal Home Loan Corporation, known as Freddie Mac,” has the power under its applicable statutes “to sue and be sued, complain and defend, in any State, Federal, or other court” and that Freddie Mac is a federal agency and civil actions against it may be removed to federal district court before trial, “there is no good reason to think that Congress gave Freddie Mac fuller access to the federal courts than it has.”

The Court explained that “[l]eaving aside the clear textual indications suggesting that Congress did just that, a plausible reason does exist.”  Namely, in 1970, “when Freddie Mac’s sue-and-be-sued clause and related jurisdictional provisions were enacted, Freddie Mac was a Government-owned corporation. … Fannie Mae, on the other hand, had already transitioned into a privately owned corporation.”

In addition, the Court reasoned that Fannie Mae’s argument “contains a deeper flaw. The doors to federal court remain open to Fannie Mae through diversity and federal question jurisdiction.”

Accordingly, the Court reversed the Ninth Circuit’s ruling.

Categories : Mortgage Law

SCOTUS to Decide Whether Entity is FDCPA ‘Debt Collector’ Merely Because It Purchases Defaulted Debt

By Brent Yarborough
Thursday, January 19th, 2017

The Supreme Court of the United States recently decided that it will review the decision of the U.S. Court of Appeals for the Fourth Circuit in Henson v. Santander Consumer USA, Inc.

As you may recall from our prior update, the U.S. Court of Appeals for the Fourth Circuit held that the fact that a debt is in default at the time it is purchased by an entity does not necessarily make that entity a “debt collector” subject to the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq.

A link to the docket is available here:  Link to Docket.

The plaintiff consumer filed a petition for a writ of certiorari with the Supreme Court of the United States, asking the Court to resolve a “deep, mature circuit conflict that has only become more entrenched with time.” The conflict refers to a circuit split over whether a creditor, such as a bank or finance company, collecting on a debt acquired in default is a “debt collector” subject to the FDCPA.

As you may recall, the FDCPA generally governs the activities of “debt collectors,” not “creditors.” Under the definition provided in the FDCPA, the following are defined as debt collectors:

  • Any person whose principal purpose is to collect debts;
  • Any person who regularly collects debts owed to another; or
  • Any person who collects its own debts, using a name other than its own.

The FDCPA also provides that a person is not a debt collector if that person is “collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity concerns a debt which was not in default at the time it was obtained by such a person.”

The FDCPA defines a “creditor” as:

  • Any person who offers or extends credit creating a debt; or
  • Any person to whom a debt is owed.

But the FDCPA further provides that a person is not a creditor if that person “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.”

The Fourth Circuit, along with the Ninth and Eleventh Circuits, has held that an entity is not a debt collector unless its principal purpose is to collect debt, it regularly collects debts owed to another, or it is collecting debt using a name other than its own.

In these circuits, if the entity does not meet the definition of a “debt collector” under one of those three tests, then it matters not that the entity is excluded from the definition of a “creditor” on the basis that the debt in question was in default at the time it was acquired. As the Eleventh Circuit put it, the exclusion from the definition of “debt collector” is not a “trap door” and it should not be “interpreted to bring entities that do not meet the definition of ‘debt collector’ within the ambit of the FDCPA solely because the debt on which they seek to collect was in default at the time they acquired it.”

The Fourth, Ninth, and Eleventh Circuits also reject the argument that an entity that takes assignment of debts in default is regularly collecting debts owed to another because the debts were owed to a different creditor at the time of default.  Under this view, as long as the entity is not collecting using a name other than its own, an entity taking assignment of accounts in default is not a “debt collector” because its principal purpose is not to collect debt, nor does it regularly collect debts owed to another.  But, under this view, a debt buyer is a “debt collector” if, for instance, the debt buyer’s principal purpose is to collect debt.

On the other side of the circuit split, the Third, Sixth and Seventh Circuits have focused on the exclusions from the definitions of “debt collector” and “creditor;” and reasoned that an entity that takes assignment of a debt in default is a debt collector, while an entity that takes assignment of a debt that is not in default is a creditor with respect to that debt. The Seventh Circuit explained that “[i]f the one who acquired the debt continues to service it, it is acting much like the original creditor that created the debt. On the other hand, if it simply acquires the debt for collection, it is acting more like a debt collector.”

Also, both the CFPB and the FTC have adopted the view that the default status of the debt at the time of acquisition determines whether the entity is a “creditor” or a “debt collector.” The CFPB took this approach in a recent consent order with a large bank, finding that the bank violated the FDCPA by failing to send validation notices on student loan accounts that were in default at the time they were acquired from another bank.

In an amicus brief, the FTC urged the Eleventh Circuit to find that a bank that acquired a portfolio of credit card accounts from another bank was a “debt collector” with respect to those accounts that were in default at the time of acquisition.

With the CFPB working to promulgate rules for first- and third-party collectors, finance companies, banks and other companies will be looking to the Supreme Court for clarity on whether they will be considered FDCPA debt collectors with respect to accounts that are in default at the time they are acquired from other lenders.

Categories : Banking, Debt Collection, FDCPA

Supreme Court Hears Oral Argument in Midland Funding v. Johnson

By Donald Maurice
Wednesday, January 18th, 2017

The U.S. Supreme Court heard oral argument Tuesday in Midland Funding v. Johnson. A primary issue before the Court is whether the federal Fair Debt Collection Practices Act is violated by the filing in a Chapter 13 bankruptcy case of a proof of claim representing a debt subject to an expired limitations period. The case originated from the Eleventh Circuit Court of Appeals, which along with its earlier decision in Crawford v. LVNV, held the FDCPA is violated in those instances. Every other Circuit Court of Appeals has since found otherwise.

The oral argument indicated that at least six justices appear to share the same concerns as the other Circuit Courts of Appeals that ultimately led to the uniform rejection of Crawford and Midland outside the Eleventh Circuit. Whether these expressions carry over into the opinion is far from certain.

A copy of the oral argument is available at: Link to Oral Argument.

Claims and ‘Enforceable’ Claims

Justice Sotomayor devoted many of her questions to whether these claims are “enforceable.” The Eleventh Circuit correctly held that debts subject to the defense of an expired limitations period are still claims within the Bankruptcy Code. The argument supporting FDCPA liability is that an expired limitations period renders a debt “unenforceable,” making it false, deceptive or unfair for a creditor to participate in a Chapter 13 case through a proof of claim. The few remarks from Justice Ginsberg echoed these sentiments.

In the first instance, as Justice Kennedy noted, the defense can be waived if not asserted, allowing a judgment to be entered. As Chief Justice Roberts pointed out, tolling may also permit judicial enforcement.

Justices Kagan, Breyer, Alito and Chief Justice Roberts posed a series of questions testing the scope of the consumer’s enforceability argument. The questioning displayed a concern that if Johnson’s position was adopted, it would not be solely limited to the defense of a limitations period, but other defenses as well, yielding unintended consequences.

The Consumer Financial Protection Bureau and Federal Trade Commission also participated in oral argument in support of the consumer. The regulators’ attorney agreed that the consumer’s position could be construed to prohibit creditor participation in Chapter 13 cases unless the creditor had a good-faith basis to believe the limitations period had not expired. Justice Breyer, on several occasions, expressed concern that these are exactly the types of issues that bankruptcy courts are tasked to resolve as part of the claims process.

CFPB, FTC Concede Filing Such Claims Not Unfair or Misleading

Under questioning from Justice Kagan, the government’s counsel conceded that if the filing of such claims were permitted by the Bankruptcy Code (as all Courts of Appeals have found), the conduct would not be unfair or misleading.

Justice Kagan asked the government’s attorney, “[I]f one looked at the Code and said, well, it seems as though these kinds of claims, although unenforceable, can be filed, if that was your view of the Code, what do you think follows from that?”

Sarah Harrington, arguing for the government responded, “So then I think it would not be unfair and it would not misleading…” Ms. Harrington went on to add that it becomes “unfair” when the creditor seeks payment of the claim.

Why Are These Claims Allowed in the First Place?

Several justices queried Midland’s attorney as to why creditors are allowed to file such claims in the first place. Midland’s counsel noted that they are permitted by the Bankruptcy Code.

Justice Sotomayor expressed dislike for the creditor’s “business model” and posed a series of questions to Midland’s counsel premised on the mistaken understanding that the FDCPA bars the collection of such debts.

In all but a handful of states, the expiration of the limitations period does not bar a collection lawsuit. As several justices noted, the limitations defense can be tolled or even waived by the consumer. Even when the limitations period has run, the debts remain collectible outside of litigation through telephone calls and letters.

Many, but not all, consumer advocates have lent support to affirming the Eleventh Circuit’s decision, which would prohibit creditor participation in many Chapter 13 cases. But this is at odds with the Chapter 13 claims process as the Fourth Circuit found in Dubois v. Atlas Acquisitions. Consumers sometimes forget to schedule some debts in their Chapter 13 petitions. These unscheduled debts are not discharged and can continued to be collected following the close of a successful Chapter 13 case for the simple reason that if the creditor did not have notice or an opportunity to be heard in the case, it would be denied its due process by the Chapter 13 discharge.

As the Fourth Circuit concluded, “Clearly, then, when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed and for the Bankruptcy Code to operate as written.” The risk of an FDCPA lawsuit would incentivize creditors against participation in Chapter 13 cases.

Decision Expected by June 30, Perhaps Earlier

The Court is likely to issue its decision before June 30. The case has taken a fast track from certification to argument and it is possible a decision could come earlier. Maurice Wutscher LLP filed an amicus curiae brief in this case on behalf of DBA International, Inc.

Categories : Bankruptcy, FDCPA

MD Fla. Holds Non-Foreclosure Collection on Time-Barred Debt Does Not Provide Basis for FDCPA or FCCPA Claim

By Hector E. Lora
Wednesday, January 18th, 2017

The U.S. District Court for the Middle District of Florida recently granted in part a mortgage loan servicer’s motion to dismiss a consumer borrower’s claims under the federal Fair Debt Collection Practices Act (FDCPA), the Florida Consumer Collection Practices Act (FCCPA), the Real Estate Settlement Procedures Act (RESPA), the federal Fair Credit Reporting Act (FCRA), and the federal Declaratory Judgment Act (DJA), holding:

(a) the borrower’s complaint stated claims under the FDCPA and FCCPA because the allegations raised a plausible inference that the servicer knew the borrower was represented by counsel;

(b) the borrower’s allegations that the statute of limitations had run on a portion of the mortgage loan debt did not provide a plausible basis for the borrower’s claims, and that the statute of limitations issue should be raised, if at all, as an affirmative defense to an actual collection or foreclosure action;

(c) the borrower’s allegations of fraudulent loan documents did not provide a plausible basis for her claims because neither the FDCPA nor the FCCPA authorize the borrower to demand: (1) ‘presentment’ of the original note from a mere debt collector; or (2) premature compliance with the standing and proof requirements of a foreclosure action;

(d) the borrower’s FCRA claim failed because it provided no well-pleaded factual allegations and simply parroted the statutory provisions; and

(e) the Court declined to exercise subject matter jurisdiction under the DJA because the relief sought was available under the FDCPA, FCCPA and RESPA.

A copy of the opinion in Garrison v. Caliber Home Loans, Inc. is available at:  Link to Opinion.

A borrower signed a promissory note in 2008 secured by a mortgage on her home. The loan went into default on December 2009 and the mortgagee sued to foreclose, but ended up voluntarily dismissing the case without prejudice in October 2014.

In November 2015, a new loan servicer began servicing the loan. One year later, the mortgagee sold the loan to a trust and notified the borrower of the new owner’s identity.

In June 2016, the borrower filed a complaint in the district court against the loan servicer, alleging that the servicer called her at least 50 times on her cellular phone trying to collect the loan knowing that the borrower was represented by counsel with respect to the loan in supposed violation of the TCPA, FDCPA, and FCCPA.

The borrower also alleged that the servicer improperly reported and attempted to collect the full amount of the unpaid debt, instead of a lesser amount because the statute of limitations had run on a portion of the debt, and failed to correct the error, in violation of the FDCPA, FCCPA, RESPA and FCRA.  Florida has a five-year statute of limitations for mortgage foreclosures, and more than five years had passed since the borrower defaulted and the prior servicer filed the foreclosure action.

The complaint sought a declaratory judgment, actual, statutory and punitive damages, attorney’s fees and costs.

The loan servicer moved to dismiss the FDCPA, FCRA, RESPA, declaratory judgment and FCCPA claims.  The District Court found that the complaint stated claims under the FDCPA and FCCPA because the allegations raised a plausible inference that the servicer knew the borrower was represented before receiving a RESPA letter from the attorney.

The Court then rejected the servicer’s argument that the statute of limitations barred the action because the defendant began servicing the loan in November 2015, and the plaintiff’s claims arose from conduct after that date.

The Court turned to address the borrower’s argument that the note and mortgage were fraudulent and that she had the right to demand “presentment” of the original note under three sections of Florida’s version of the Uniform Commercial Code dealing with negotiable instruments, and that if the servicer could not do so, its debt collection efforts necessarily violated the FDCPA and FCCPA.

The Court disagreed, rejecting the borrower’s “unsupported and confusing arguments” because “[e]ven construed broadly, neither the FDCPA nor the FCCPA provide authority for [the borrower] to demand: (1) ‘presentment’ from a mere debt collector; or (2) premature compliance with the standing and proof requirements of a foreclosure action.” The court concluded that borrower’s allegations of fraudulent loan documents “does not provide a plausible basis for [the borrower’s] claims.”

As to the borrower’s argument that the loan servicer was trying to collect on a portion of the loan balance that was time-barred, the servicer argued that (a) the statute of limitations is a defense, not a cause of action; (b) the statute of limitations does not extinguish a lien or a claim; and (c) the statute of limitations does not apply until a lawsuit to enforce the loan is filed.

In response, the borrower argued, based on a Federal Trade Commission publication and Eleventh Circuit case law, that a billing statement that attempts to collect a sum certain from a consumer, which includes an unenforceable portion, and that threatens legal action avoidable only by payment, is “coercive and misleading.”

The Court held that while the FTC publication relied upon does state that it is unlawful for a debt collector to “threaten to sue you on a time-barred claim,” because it also contained other language that debt collectors may contact consumers about time-barred claims, such “seemingly inconsistent statements … simply do not support Plaintiff’s reliance on the [statute of limitations] [i]ssue to support her claims.”

Turning to the case law cited by the borrower, the Court distinguished the Eleventh Circuit’s decisions in Crawford v. LVNV Funding LLC and Johnson v. Midland Funding, LLC as “unavailing because neither concern non-judicial debt collection activity of a partially time-barred claim. Rather, for reasons peculiar to bankruptcy proceedings, the Crawford and Johnson courts held that bankruptcy debtors can assert FDCPA adversary proceedings based on a creditor’s filing of a proof of claim that is entirely unenforceable under the applicable statute of limitations.”

Finding no specific authority supporting the borrower’s argument in a non-bankruptcy context, the Court found that the statute of limitations argument did not “provide a plausible basis for [her] claims [and that the issue] should be raised, if at all, as an affirmative defense to an actual collection or foreclosure action.”

As to the borrower’s FCRA claim that the servicer was liable for willfully or negligently reporting allegedly incorrect “delinquency information,” the Court found that these claims failed because: “aside from the wholesale incorporation by reference of paragraphs 1 through 58, Plaintiff provided no well-pled factual allegations [in the FCRA counts]; and (2) Plaintiff simply parroted certain provisions of the FCRA….” For these reasons, which amounted to impermissible “shotgun pleading,” the Court dismissed the FCRA claims.

Turning to the borrower’s RESPA claim, the Court again agreed with the servicer’s argument that it consisted only of conclusory allegations and “shotgun pleading” and accordingly dismissed it as well.

Addressing the borrower’s final claim for declaratory judgment, the Court explained that the Declaratory Judgment Act “does not establish federal jurisdiction on its own” and, even if subject matter jurisdiction exists, a court has discretion to decline to exercise it. Because the relief sought was the same available under the FDCPA, FCCPA or RESPA, the Court declined “to exercise its discretion to consider the equitable relief of a declaratory judgment.”

Accordingly, the Court dismissed the FDCPA, FCRA, RESPA, declaratory judgment and FCCPA claims without prejudice, giving the borrower 10 days to file an amended complaint, failing which the case would proceed on the remaining TCPA claim only.

 

Categories : FCCPA, FCRA, FDCPA, RESPA

9th Cir. Rejects ‘Administrative Feasibility’ or ‘Ascertainability’ Class Cert. Requirement

By Patrick R. Tira
Tuesday, January 17th, 2017

The U.S. Court of Appeals for the Ninth Circuit recently held that class action plaintiffs are not required to demonstrate that there is an administratively feasible way to determine who is in a class in order for the class to be certified.

In so ruling, the Ninth Circuit noted that the Sixth, Seventh, and Eighth Circuits have similarly ruled. See Sandusky Wellness Ctr., LLC v. Medtox Sci., Inc., 821 F.3d 992, 995–96 (8th Cir. 2016); Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015); Mullins v. Direct Digital, LLC, 795 F.3d 654, 658 (7th Cir. 2015), cert. denied, 136 S.Ct. 1161, 194 L.Ed.2d 175 (2016).

Although the Court focused on the Third Circuit’s contrary ruling, the First, Second, Fourth, and Eleventh Circuits have also held to the contrary.  See, e.g., In re Nexium Antitrust Litig., 777 F.3d 9 (1st Cir. 2015); Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), EQT Prod. Co. v. Adair, 764 F.3d 347 (4th Cir. 2014); Byrd v. Aaron’s Inc., 784 F.3d 154 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F. 3d 300 (3d Cir. 2013); Karhu v. Vital Pharmaceuticals, Inc., Case No. 14-11648 (11th Cir 2015) (unreported).

The Ninth Circuit held that a separate “administrative feasibility” or “ascertainability” prerequisite to class certification was not compatible with the language of Rule 23.  In addition, the Court opined that Rule 23’s enumerated criteria already address the policy concerns that had motivated some courts to adopt a separate administrative feasibility or ascertainability requirement, and Rule 23 did so without undermining the balance of interests inherent in certifying a class.

A copy of the opinion in Briseno v. ConAgra Foods is available at:  Link to Opinion.

Consumers who purchased cooking oil products labeled “100% Natural” filed putative class actions asserting state-law claims against the manufacturer in 11 states. The cases were consolidated in this action.

The consumers moved to certify 11 classes defined to include all persons who resided in the States of California, Colorado, Florida, Illinois, Indiana, Nebraska, New York, Ohio, Oregon, South Dakota, or Texas who had purchased the manufacturer’s products within the applicable statute of limitations periods established by the laws of their state of residence (the “Class Period”) through the final disposition of this and any and all related actions.

The manufacturer opposed class certification on the grounds that there would be no administratively feasible way to identify members of the proposed classes because consumers would not be able to reliably identify themselves as class members.  Thus, the manufacturer argued that the class was not eligible for certification.

Although the trial court acknowledged that the Third Circuit and some district courts had refused certification in similar circumstances, it declined to join in their reasoning. Instead, the trial court held that, at the certification stage, it was sufficient that the class was defined by an objective criterion — here, whether class members purchased manufacturer’s oil during the class period.

The trial court ultimately granted the consumers’ motion for class certification in part, and certified 11 statewide classes to pursue certain claims for damages under Federal Rule of Civil Procedure 23(b)(3).  The manufacturer then appealed to the Ninth Circuit pursuant to Rule 23(f).

As you may recall, Federal Rule of Civil Procedure 23 governs class action procedure in federal court.  Parties seeking class certification must satisfy each of the four requirements of Rule 23(a) — numerosity, commonality, typicality, and adequacy — and at least one of the requirements of Rule 23(b). See Ellis v. Costco Wholesale Corp., 657 F.3d 970, 979–80 (9th Cir. 2011).

Rule 23(a), which is titled “prerequisites,” provides that one or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.  Rule 23(a) does not mention “administrative feasibility.”

The manufacturer argued that the Court should reverse the class certification because the district court did not require the consumers to proffer a reliable way to identify members of the certified classes here, which included consumers in 11 states who purchased the cooking oils labeled “100% Natural” during the relevant period.

The manufacturer argued that, in addition to satisfying these enumerated criteria, class proponents must also demonstrate that there is an administratively feasible way to determine who is in the class. The manufacturer claimed that the consumers did not propose any way to identify class members and could not prove that an administratively feasible method existed because consumers do not generally save grocery receipts and are unlikely to remember details about individual purchases of a low-cost product like cooking oil.

The Ninth Circuit rejected the manufacturer’s argument, holding that Rule 23(a)’s omission of “administrative feasibility” was meaningful. Relying on Silvers v. Sony Pictures Entm’t, Inc., 402 F.3d 881, 885 (9th Cir. 2005), the Court concluded that because the drafters specifically enumerated “prerequisites,” Rule 23(a) constituted an exhaustive list.

The Court of Appeals also took guidance from language used in other provisions of the Rule, noting, for example, in contrast to Rule 23(a), that Rule 23(b)(3) provides, “The matters pertinent to these findings include,” followed by four listed considerations. FED. R. CIV. P. 23(b)(3).

Relying on Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983), the Ninth Circuit reasoned that if the Rules Advisory Committee had intended to create a non-exhaustive list in Rule 23(a), it would have used similar language. The Court noted 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 or exclusion. See Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296, 78 L.Ed.2d 17 (1983).

Moreover, the Ninth Circuit noted that Rule 23(b)(3) requires a court certifying a class under that section to consider the likely difficulties in managing a class action, and held that imposing a separate administrative feasibility requirement would render that manageability criterion largely superfluous, a result that contravenes the familiar precept that a rule should be interpreted to give effect to every clause.

The Ninth Circuit also relied on the Supreme Court precedent of Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). In Amchem, the Supreme Court considered whether a settlement-only class could be certified without satisfying the requirements of Rule 23.  In holding that it could not, the Supreme Court underscored that the Federal Rules of Civil Procedure result from “an extensive deliberative process involving a Rules Advisory Committee, public commenters, the Judicial Conference, the Supreme Court, and Congress.” Id. at 620, 117 S.Ct. 2231.

Noting that in Amchem, the Supreme Court warned that the “text of a rule thus proposed and reviewed limits judicial inventiveness” and admonished that “courts are not free to amend a rule outside the process Congress ordered,” the Ninth Circuit concluded that the lesson of Amchem Products was plain: “Federal courts … lack authority to substitute for Rule 23’s certification criteria a standard never adopted.” Id. at 622, 117 S.Ct. 2231.

In sum, the Ninth Circuit concluded that the language of Rule 23 does not impose a freestanding administrative feasibility prerequisite to class certification, and, mindful of the Supreme Court’s guidance, the Court of Appeals declined to interpose an additional hurdle into the class certification process delineated in the enacted Rule.

The Ninth Circuit recognized that the Third Circuit requires putative class representatives to demonstrate “administrative feasibility” as a prerequisite to class certification. See Byrd v. Aaron’s Inc., 784 F.3d 154, 162–63 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F.3d 300, 306–08 (3d Cir. 2013). The Court noted that the rationale that the Third Circuit has given for imposing an administrative feasibility requirement is the need to mitigate the administrative burdens of trying a Rule 23(b)(3) class action.

Courts adjudicating such actions must provide notice that a class has been certified and an opportunity for absent class members to withdraw from the class. See Wal–Mart Stores, Inc. v. Dukes, 564 U.S. 338, 362, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011); accord FED. R. CIV. P. 23(c)(2)(B). The Third Circuit largely justifies its administrative feasibility prerequisite as necessary to ensure that compliance with this procedural requirement does not compromise the efficiencies Rule 23(b)(3) was designed to achieve.  See Shelton v. Bledsoe, 775 F.3d 554, 562 (3d Cir. 2015); Carrera, 727 F.3d at 307.

However, the Ninth Circuit noted that Rule 23(b)(3) already contains a specific, enumerated mechanism to achieve that goal: the manageability criterion of the superiority requirement. Rule 23(b)(3) requires that a class action be “superior to other available methods for fairly and efficiently adjudicating the controversy,” and it specifically mandates that courts consider “the likely difficulties in managing a class action.” FED. R. CIV. P. 23(b)(3)(D).

The Court also observed that the Seventh Circuit had rejected the Third Circuit’s justifications in Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015), and the Sixth Circuit followed suit in Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015). Accordingly, the Ninth Circuit concluded that Rule 23’s enumerated criteria already addressed the interests that motivated the Third Circuit and, therefore, an independent administrative feasibility requirement was unnecessary.

Moreover, relying on the Seventh Circuit case of Mullins, which observed that requiring class proponents to satisfy an administrative feasibility prerequisite “conflicts with the well-settled presumption that courts should not refuse to certify a class merely on the basis of manageability concerns,” the Ninth Circuit concluded that this presumption makes ample sense given the variety of procedural tools courts can use to manage the administrative burdens of class litigation. See Mullins, 795 F.3d at 663.

The Court further noted that Rule 23(c) already enables district courts to divide classes into subclasses or certify a class as to only particular issues. FED. R. CIV. P. 23(c)(4), (5).  The Ninth Circuit also reasoned that adopting a freestanding administrative feasibility requirement instead of assessing manageability as one component of the superiority inquiry would have practical consequences inconsistent with the policies embodied in Rule 23, noting that Rule 23(b)(3) calls for a comparative assessment of the costs and benefits of class adjudication, including the availability of “other methods” for resolving the controversy, FED. R. CIV. P. 23(b)(3).

In addition, following the reasoning of the Seventh Circuit’s Mullins, the Ninth Circuit held that a standalone administrative feasibility requirement would invite courts to consider the administrative burdens of class litigation “in a vacuum.” See Mullins, 795 F.3d at 663. The Court reasoned that the difference in approach would often be outcome determinative for cases like this one, in which administrative feasibility would be difficult to demonstrate but in which there might be no realistic alternative to class treatment. See id. at 663–64.

The Ninth Circuit therefore concluded that class actions involving inexpensive consumer goods would likely fail at the outset if administrative feasibility were a freestanding prerequisite to certification.

Again citing to the Supreme Court case, Amchem, the Court reasoned that the authors of Rule 23 opted not to make the potential administrative burdens of a class action dispositive and instead directed courts to balance the benefits of class adjudication against its costs. The Ninth Circuit held that it lacked authority to substitute its judgment for the authors of Rule 23. See Amchem Prods., 521 U.S. at 620, 117 S.Ct. 2231.

The Ninth Circuit noted that Third Circuit justified its administrative feasibility requirement as necessary to protect absent class members and to shield bona fide claimants from fraudulent claims. With respect to absent class members, the Third Circuit had expressed concern about whether courts would be able to ensure individual notice without a method for reliably identifying class members. See Byrd, 784 F.3d at 165; Carrera, 727 F.3d at 307.

The Ninth Circuit, however, believed that concern was unfounded, because neither Rule 23 nor the Due Process Clause requires actual notice to each individual class member.

As you may recall, Rule 23 requires only the “best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort.” FED. R. CIV. P. 23(c)(2)(B).  “Rule 23 rule does not insist on actual notice to all class members in all cases and recognizes it might be impossible to identify some class members for purposes of actual notice.” See Mullins, 795 F.3d at 665.

Similarly, the Ninth Circuit held, the Due Process Clause does not require actual, individual notice in all cases. See Silber v. Mabon, 18 F.3d 1449, 1453–54 (9th Cir. 1994). Courts have routinely held that notice by publication in a periodical, on a website, or even at an appropriate physical location is sufficient to satisfy due process. See, e.g., Hughes v. Kore of Ind. Enter., Inc., 731 F.3d 672, 676–77 (7th Cir. 2013).

Moreover, the Court observed that the Third Circuit’s lack-of-notice concern presumes that some harm will inure to absent class members who do not receive actual notice.

Although in theory, inadequate notice might deny an absent class member the opportunity to opt out and pursue individual litigation, the Ninth Circuit held that in reality, that risk was virtually nonexistent in low-value consumer class actions.  Such cases typically involve low-cost products and, as a result, recoveries were too small to incentivize individual litigation. The Court explained that an administrative feasibility requirement like that imposed by the Third Circuit would likely bar such actions because consumers generally do not keep receipts or other records of low-cost purchases.

The Ninth Circuit further explained that, practically speaking, a separate administrative feasibility requirement would only protect a purely theoretical interest of absent class members at the expense of any possible recovery for all class members in those cases that depend most on the class action mechanism.

The Court concluded that justifying an administrative feasibility requirement as a means of ensuring perfect recovery at the expense of any recovery would undermine the very purpose of Rule 23(b)(3), which was the “vindication of ‘the rights of groups of people who individually would be without effective strength to bring their opponents into court at all.’ ” Amchem Prods., 521 U.S. at 617, 117 S.Ct. 2231.

The Ninth Circuit noted that the Third Circuit had expressed concern that without an administrative feasibility requirement, individuals would submit illegitimate claims and thereby dilute the recovery of legitimate claimants. See Carrera, 727 F.3d at 310.

The Ninth Circuit agreed that the fraud concern of the Third Circuit might be valid in theory, but, relying again on Mullins, it concluded that, in practice, the risk of dilution based on fraudulent or mistaken claims was low. See Mullins, 795 F.3d at 667. The Court pointed to class actions involving low-cost consumer goods, noting that consumers were unlikely to risk perjury charges and spend the time and effort to submit a false claim for a de minimis monetary recovery.

Further, the Court noted that consistently low participation rates in consumer class actions made it very unlikely that non-deserving claimants would diminish the recovery of participating, bona fide class members.

Finally, observing that the Third Circuit has characterized its administrative feasibility requirement as necessary to protect the due process rights of defendants to raise individual challenges and defenses to claims, the Ninth Circuit, relying on Mazza v. Am. Honda Motor Co., Inc., 666 F.3d 581, 595 (9th Cir. 2012) and Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 594 (3d Cir. 2012), pointed out that at the class certification stage, class representatives bear the burden of demonstrating compliance with Rule 23.

The Court reminded the manufacturer that it would have the opportunity to challenge the claims of absent class members if and when they filed claims for damages. The Court explained that at the claims administration stage, other litigants have relied on claim administrators, various auditing processes, sampling for fraud detection, and follow-up notices to explain the claims process, and other techniques tailored by the parties and the court to validate claims. See Mullins, supra, 795 F.3d at 667. The Court explained that Rule 23 specifically contemplates the need for such individualized claim determinations after a finding of liability.

The manufacturer did not explain why such procedures are insufficient to safeguard its due process rights.

Given the existing opportunities to challenge the consumers’ case, the Ninth Circuit could see no reason why requiring an administratively feasible way to identify all class members at the certification stage would be necessary to protect the manufacturer’s due process rights. See Mullins, 795 F.3d at 670. Although it noted that the manufacturer might prefer to terminate the litigation at class certification rather than later challenging each individual class member’s claim to recovery, the Court concluded that there is no due process right to “a cost-effective procedure for challenging every individual claim to class membership.” Id. at 669.

Even if the concern was that claimants in cases like this would eventually offer only a self-serving affidavit as proof of class membership, the Court did not see any reason why that issue should be resolved at the class certification stage to protect a defendant’s due process rights. The Court explained that if an oil consumer pursued an individual lawsuit instead of a class action, an affidavit describing her purchases would create a genuine issue if the manufacturer disputed the affidavit, and would prevent summary judgment against the consumer. See Mullins, 795 F.3d at 669; accord FED. R. CIV. P. 56(c)(1)(A). Given that a consumer’s affidavit could force a liability determination at trial without offending the Due Process Clause, the Ninth Circuit saw no reason to refuse class certification simply because that same consumer presented her affidavit in a claims administration process after a liability determination had already been made.

Moreover, the Court explained that identification of class members would not affect a defendant’s liability in every case. For example, in this case, the consumers proposed to determine the manufacturer’s aggregate liability by (1) calculating the price premium attributable to the allegedly false statement that appeared on every unit sold during the class period, and (2) multiplying that premium by the total number of units sold during the class period.  This would affect the amount paid to each class member, but not the total amount paid by the defendant.

The Ninth Circuit agreed with the Seventh Circuit that, in cases in which aggregate liability can be calculated in such a manner, “the identity of particular class members does not implicate the defendant’s due process interest at all” because “the addition or subtraction of individual class members affects neither the defendant’s liability nor the total amount of damages it owes to the class.” See Mullins, 795 F.3d at 670; see also Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d at 1307.

For these reasons, the Ninth Circuit held that protecting a defendant’s due process rights did not necessitate an independent administrative feasibility requirement.

In conclusion, the Ninth Circuit affirmed the trial court’s ruling declining to condition class certification on the consumers’ proffer of an administratively feasible way to identify putative class members.

Categories : Class Actions

7th Cir. Rejects Alleged RESPA ‘Pattern and Practice’ Due to No Evidence of ‘Coordination’

By Coleman Braun
Monday, January 16th, 2017

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgage servicer’s response to a borrower’s written request for information complied with requirements of the federal Real Estate Settlement Procedures Act (RESPA) and, to the extent any information was missing, the borrower suffered no actual damages as a result.

In so ruling, the Seventh Circuit rejected the borrowers’ pattern or practice argument under RESPA, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because “[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn’t enough to support recovery of statutory damages.”

A copy of the opinion in Perron v. J.P. Morgan Chase Bank, N.A. is available at:  Link to Opinion.

The borrowers switched insurance carriers, but failed to inform the mortgage servicer. This resulted in the servicer paying the wrong homeowner’s insurer using money from the loan’s escrow account.

Upon learning of the error, the servicer paid the correct insurer and told the borrowers that they would receive a refund check from their former insurer, and that they needed to send the refund check back to the servicer to replenish the escrow account.

Instead of doing as instructed, the borrowers kept the refund from the insurer and did not replenish their escrow account.  This resulted in the servicer adjusting their monthly payment upward to make up for the shortfall.

The borrowers refused to pay the increased amount, even though the difference was only $66.86 per month, and the loan went into default.

The borrowers sent the servicer two letters requesting information under RESPA and demanding that the servicer replenish the escrow account because it erroneously paid the wrong insurance carrier. The servicer responded by providing a complete account history, which included a detailed escrow statement.

The borrowers then sued the servicer for allegedly violating RESPA because the servicer’s response to their request for information was supposedly inadequate and for supposedly breaching the common law implied covenant of good faith and fair dealing. The borrowers sought more than $300,000 in damages and blamed the collapse of their marriage on the servicer.

The district court entered summary judgment in the servicer’s favor, holding that there was no evidence that the servicer violated either its statutory obligations under RESPA or the common-law covenant of good faith and fair dealing. The borrowers appealed.

On appeal, the Seventh Circuit first addressed the common law claim, explaining that “Indiana does not recognize an implied covenant of good faith and fair dealing in every contractual setting; instead, the state courts have recognized an implied covenant of good faith in the context of employment contracts, insurance contracts, and certain other limited circumstances—for example, when one counterparty stands in a fiduciary, superior, or special relationship to the other.”

Because the district court assumed without deciding that the duty of good faith applied in the context of mortgage servicing, the Appellate Court adopted the same assumption.  The Seventh Circuit explained that “[a] party violates the implied duty of good faith and fair dealing when, though not breaching the express terms of the contract, he nonetheless behaves unreasonably or unfairly.”

The borrowers argued that the servicer breached this duty by holding a partial payment they made in December 2010 “in suspense.”  The Seventh Circuit rejected their argument because the servicer never agreed to accept the partial payment “in full satisfaction” of the December payment that was due, and moreover, the mortgage contained standard language allowing the servicer to accept partial payments without waiving its right to enforce the loan’s terms.

The Seventh Circuit also rejected the borrowers’ argument that the servicer had a duty to apply a 2010 escrow refund toward their December 2010 payment, reasoning that by the time the escrow refund was calculated, the account was already past due, “so even if [the bank] had applied those funds to the account, the late fees would already have accrued.” In addition, the Court noted that the borrowers could have used the escrow refund to pay the balance owed on the December payment, but chose not to do so.  The Court concluded that the servicer had no duty to do this for them.

Turning to the RESPA claim, the Seventh Circuit recited that “RESPA requires mortgage servicers to correct account errors and disclose account information when a borrower sends a written request for information.”  As you may recall, RESPA provides borrowers with a cause of action if a servicer fails to comply for actual damages resulting from the failure to comply, plus statutory damages of up to $2,000 if the borrower proves that the servicer engaged in a “pattern or practice of noncompliance.” A prevailing borrower is also entitled to recover costs and attorney’s fees.

The Seventh Circuit also explained that a servicer does not have a duty to respond to all inquiries or complaints from borrowers. Instead, RESPA “covers only written requests alleging an account error or seeking information relating to loan servicing.” The statute defines “servicing” as “receiving any periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts …, and making the payments with respect to the amounts received from the borrower as may be required” by the loan documents.

The Court continued that RESPA requires that a servicer that receives a qualified written request take one of three actions: (a) correct the account error; (b) after investigating, provide the borrower with a written explanation or clarification why the account is correct; or (c) provide the information requested to the borrower or explain why it is unavailable.

Here, the Seventh Circuit found that the servicer’s response “almost perfectly” complied with the requirements of RESPA subsection 2605(e)(2) because it provided a complete account history showing all monthly payments, how those payments were applied to principal, interest, and escrow, escrow payments and “a complete escrow accounting.”

The only things missing, the Court noted, were the name of the insurance company that received the $1,422 escrow payment and an explanation of why the December 2010 payment was correctly held in suspense.

The Seventh Circuit held, however, that this missing information had already been provided in earlier correspondence and, accordingly, even if the response “fell slightly short of full compliance as a technical matter,” the borrowers could not show “that they suffered any actual damages ‘as a result of’ any failure to comply with RESPA response duties.”

The Court also addressed the borrowers’ allegation that the servicer’s failure to respond properly caused their marriage to dissolve, finding that while “[e]motional distress damages are recoverable under RESPA, … the breakdown of a marriage is not the type of harm that faithful performance of RESPA duties avoids. This kind of harm is far too attenuated from the alleged violation to cross the proximate-cause threshold.”

The Seventh Circuit held that even though the servicer’s response was technically incomplete, “no reasonable fact finder could conclude that [the borrowers] suffered any actual damages as a result of that shortcoming.”

The Court also found that because the borrowers failed to produce any evidence showing a pattern or practice of noncompliance with RESPA, their claim for statutory damages failed.

The Seventh Circuit rejected the borrowers’ pattern or practice argument, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because “[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn’t enough to support recovery of statutory damages.”

Accordingly, the district court’s summary judgment was affirmed.

Categories : RESPA

Fla. App. Court (3rd DCA) Holds Mortgagee Failed to Prove Repairs to Property Not ‘Economically Feasible’

By Hector E. Lora
Friday, January 13th, 2017

The Court of Appeal of the State of Florida, Third District, recently reversed summary judgment in favor of a mortgagee-loss payee under a homeowner’s insurance policy, holding that the mortgagee failed to provide evidence of the value of the property after repairs, and therefore failed to show that repairing the property was not economically feasible.

A copy of the opinion Alvarez-Mejia v. Bellissimo Properties, LLC, et al. is available at: Link to Opinion.

A consumer took out a purchase money loan for $120,000 secured by a mortgage on the residential property.  The original lender assigned the mortgage to two fractional assignees, one of whom assigned it again to a limited liability company.

The property securing the loan was damaged by fire and the owner filed a claim with her homeowner’s insurance carrier. The insurer issued two checks totaling $94,162.52 jointly payable to the homeowner, the law firm representing her, and the mortgagees.

One of the mortgagees withheld the insurance proceeds, invoking a section of the mortgage that gave it the right to apply the insurance proceeds to the loan if it was not economically feasible to repair the property. An initial exterior appraisal of the home valued it at $90,000, but a contractor’s repair estimate was for $98,717. The homeowner later provided a lower revised repair estimate of $53,117.

The homeowner sued the mortgagee, alleging that she was unable to repair the property because the mortgagee refused to release the insurance proceeds. The mortgagee moved to dismiss and the homeowner filed an amended complaint raising claims for breach of contract, breach of implied covenant of good faith and fair dealing, declaratory judgment and unjust enrichment.

The mortgagee moved for summary judgment on all claims and the homeowner filed a response in opposition supported by two affidavits. The trial court granted summary judgment in favor of the mortgagee, finding that “it was not economically feasible to repair the property because the cost to repair was greater than the value of the property.”  The homeowner moved for reconsideration and rehearing, but the trial court denied the motion. The homeowner appealed.

On appeal, reviewing the summary judgment under a de novo standard, the Appellate Court pointed out that the homeowner’s affidavit in opposition to summary judgment indicated that it was economically feasible to repair the property “because the value of the property with repairs will be significantly greater than the outstanding balance on the mortgage.”

In addition, the Court noted, the mortgage did not define the term “economically feasible,” a term subject to more than one interpretation. Because the mortgagee “did not provide an estimate of the value of the property after repairs, [it] therefore did not meet its burden of proof that no genuine issue of material fact exists.”

The Court further found that summary judgment was improper because a genuine issue of material fact existed as to the cost of repairing the property. The mortgagee relied on the initial estimate that the homeowner used to obtain the insurance payout, while the homeowner relied on a revised estimate that was much less than the insurance proceeds.

Such conflicting evidence precluded summary judgment because “the trial court must not weigh material conflicting evidence or pass upon the credibility of the witness.” … Only a trier of fact may weigh evidence and determine credibility—the court was without authority to weigh the evidentiary value of the conflicting estimates.”

Accordingly, the Appellate Court reversed the summary judgment order and remanded the case for further proceedings.

Categories : Mortgage Law

FDCPA Claim Fails for Lack of Standing Under Spokeo Holds NJ Federal Court

By Thomas Dominczyk
Wednesday, January 11th, 2017

A New Jersey federal District Court recently granted a debt collector’s motion for summary judgment in a claim arising from service fees where the collection account at issue did not belong to the debtor.

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

The plaintiff received a dunning letter from a collector allowing him to make payments by phone or online subject to a $4.95 processing fee.  Similar payments made by mail would not be subject to the processing fee.  Although the account at issue did not belong to him, the plaintiff filed suit on behalf of himself and a putative class for violations of the federal Fair Debt Collection Practices Act.  Specifically the plaintiff alleged violations of 1692e and 1692f of the FDCPA claiming that the processing fee was not authorized by the contract.

Before addressing whether the processing fee violated the FDCPA, the District Court addressed whether the plaintiff had standing under Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to cases or controversies.  Relying on the recent Supreme Court case Spokeo v. Robbins, the Court held that the plaintiff must demonstrate he suffered (1) an injury in fact; (2) that is fairly traceable to the challenged conduct of the defendant; and (3) is likely to be redressed by a favorable judicial decision.

Focusing on the injury in fact requirement, the District Court found that the purported violation was no more than a bare procedural violation divorced of any concrete harm.  The plaintiff testified that the account at issue was not his account and that he thought the collection letter was a scam.  Thus, the Court found that it was undisputed that there was no risk that the plaintiff would pay the $4.95 processing fee because he never had an account with the creditor.  Accordingly, the Court held that the plaintiff admitted that he did not suffer any actual harm and thus lacked standing.

Although it did not address the issue regarding the $4.95 processing fee, the District Court did add a footnote that suggests that it would similarly have granted summary judgment on the processing fee if it were to go that far in light of a recent, non-precedential opinion from the Third Circuit in Szczurek v. Professional Mgmt., Inc.

Categories : FDCPA

1st Cir. Holds IRS 1099-A Forms Did Not Violate Discharge Injunction

By Patrick R. Tira
Wednesday, January 11th, 2017

taxThe U.S. Court of Appeals for the First Circuit recently affirmed a bankruptcy court’s ruling that a mortgagee did not violate the discharge injunction in 11 U.S.C. § 524(a) by sending IRS 1099-A forms to borrowers after their discharge, agreeing that the IRS forms were not objectively coercive attempts to collect a debt.

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

The borrowers obtained a mortgage loan secured by their home. They filed bankruptcy under Chapter 7 in 2008 and received a discharge of their personal liability for the loan in 2009.

The borrowers entered into a loan modification agreement post-discharge, which did not reaffirm their personal liability but allowed them to remain in the home as long as they made payments. The borrowers defaulted under the modification agreement, the mortgagee foreclosed and the borrowers moved out in October 2011.

In January 2012, each borrower received an IRS Form 1099-A by mail. One of the boxes on the forms was checked, stating that “the borrower was personally liable for the repayment of the debt.”  The borrowers’ attorney sent a letter to the mortgagee demanding the revocation of the 1099-A forms due to the bankruptcy discharge, which the mortgagee refused to do.

In May 2013, the borrowers filed a motion to reopen their bankruptcy case, then sued the mortgagee for trying to collect on the discharged mortgage debt in violation of the discharge injunction provisions under 11 U.S.C. § 524(a).

In June 2013, the borrowers received a pre-recorded phone call from the mortgagee requesting proof of insurance on their former home.

Both sides moved for summary judgment, and the bankruptcy court granted the borrowers’ motion, finding that the phone call violated the discharge injunction, but also finding the borrower failed to prove any damages.

The bankruptcy court granted summary judgment in the mortgagee’s favor on the remaining claims, including the borrowers’ claim that the 1099-A forms violated the discharge injunction, reasoning that they provided “no objective basis” for borrowers to believe that the mortgagee was trying to collect the mortgage debt.

The borrowers appealed the bankruptcy court’s rulings on damages and the 1099-A forms, but the district court affirmed both. The borrowers then appealed to the First Circuit.

On appeal, the Appellate Court began by explaining that under the federal Tax Code, discharged debt can count as taxable income. 26 U.S.C. § 61(a)(12). However, debt discharged in bankruptcy on a qualified principal residence is not considered taxable income. 26 U.S.C. § 108(a)(1)(A).

Section 524(a) of the Bankruptcy Code prohibits “acts to collect, recover, or offset debts discharged in bankruptcy proceedings. … To prove a discharge injunction violation, a debtor must establish that the creditor ‘(1) has notice of the debtor’s discharge …; (2) intends the actions which constituted the violation; and (3) acts in a way that improperly coerces or harasses the debtor.’”

The First Circuit noted that the parties only disputed the third element, i.e., whether the IRS forms “were an improperly coercive or harassing attempt to collect on the discharged debt.”

The Court explained that whether conduct is coercive or harassing is determined using an objective standard. “[T]he debtor’s subjective feeling of coercion or harassment is not enough.” Under the objective standard a court considers “the facts and circumstances of each case, including factors such as the ‘immediateness of any threatened action and the context in which a statement is made.’” However, “bad acts that do not have a coercive effect on the debtor do not violate the discharge.”

The First Circuit agreed with the bankruptcy court that the IRS 1099-A forms were not an improper coercive attempt to collect the discharged debt, reasoning that (a) the forms provided “tax information” but did not demand payment or threaten any legal action; (b) the forms provided the outstanding principal balance as of the foreclosure, but did not state that the borrowers owed any money to anyone; and (c) incorrectly checking the box stating that “the borrower was personally liable for repayment of the debt” did not matter because it did not change the informational nature of the form or demand payment.

The Court rejected as inapposite the borrowers’ argument, citing In re Lumb, 401 B.R. 1 (B.A.P. 1st Cir. 2009), that the IRS forms put them “between a rock and a hard place” because they either “had to pay the discharged debt or seek tax advice.”

In Lumb, unlike the case at bar, the “creditor threatened to sue the debtor’s wife to collect if the debtor did not pay up.” Post-discharge, the creditor sued, causing the debtors to incur legal fees defending “the meritless lawsuit.”  Thus, the debtor in Lumb “was in a jam: pay the discharged debt, or pay the legal fees and risk losing the lawsuit.” The First Circuit here noted “[s]o unlike in In re Lumb, where the consequence of paying to defend a bogus lawsuit was brought on by the creditor’s misdeeds, here the consequence of potentially needing tax advice was triggered by the foreclosure itself. That some consequence may have followed from the [borrowers’] receipt of the 1099-A Forms does not make that consequence coercion.”

Finally, the First Circuit rejected the borrowers’ argument that the bankruptcy court should have considered the mortgagee’s failure to correct the 1099-A forms and the May 2013 pre-recorded phone message in determining whether coercion existed, reasoning that even if the 1099-A form contained an error, “filing the 1099-A Forms did not create tax liability for the [borrowers] or any other consequences beyond those that come with foreclosure.”

However, the Court held that because “there were no consequences and no attempt to collect a debt, [the mortgagee’s] failure to retract the 1099-A Forms does not give rise to an inference of coercion.”

As to the pre-recorded call, the First Circuit reasoned that it saw no reason to find that the call made the IRS forms objectively coercive because the call was made “around a year and a half after [the borrowers] received their 1099-A Forms.”  As there was no other evidence in the record of communications between the mortgagee and borrowers after the foreclosure, and the borrowers did not explain why the one phone call rendered the 1099-A forms objectively coercive, the Court refused to do so.

The First Circuit concluded by affirming the bankruptcy court’s ruling that the mortgagee did not violate the discharge injunction, explaining that while it had “no doubt that the 1099-A Forms caused the [borrowers] stress and concern,” their “subjective feeling of coercion is not enough to prove a violation of the discharge injunction, and the [borrowers] have not presented evidence that the Forms were objectively coercive.”

Categories : Bankruptcy, Mortgage Law
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