Author Archive for Brady Hermann

Mass. SJC Holds Omission of Post-Foreclosure Notice Did Not Void Foreclosure

The Massachusetts Supreme Judicial Court (“SJC”) recently affirmed a lower court’s ruling that a mortgagee’s failure to send a post-foreclosure notice required by Mass. Gen. Laws c. 244, § 15A does not render a foreclosure void.

A copy of the opinion in Turra v. Deutsche Bank Trust Company Americas is available at:  Link to Opinion.

A mortgagee notified a borrower that he was in default under the terms of his mortgage.  The mortgagee subsequently foreclosed on the property and commenced a summary process action.  The borrower then filed suit against the mortgagee, and the mortgagee moved to dismiss the borrower’s claims.

In opposition to the mortgagee’s motion to dismiss, the borrower argued among other things that the foreclosure was void because the mortgagee failed to strictly comply with the power of sale set forth in Mass. Gen. Laws c. 183, § 21, and further regulated by Mass. Gen. Laws c. 183, §§ 11-17C.

Specifically, the borrower argued that the mortgagee failed to comply with Mass. Gen. Laws c. 244, § 15A, which states:

a mortgagee conveying title to mortgaged premises pursuant to the provisions of this chapter shall, within thirty days of taking possession or conveying title, notify . . . the office of assessor or collector of taxes of the municipality in which the premises are located and any persons, companies, districts, commissions or other entities of any kind which provide water or sewer service to the premises, of said taking possession or conveying title.

The mortgagee did not dispute that it did not provide the required post-foreclosure notice, but maintained that this omission did not render the foreclosure void.  The trial judge agreed, noting that the duty of notification set forth in Section 15A arises after foreclosure and is not a duty that affects the right to foreclose.  The borrower appealed.

On appeal, the SJC noted that it previously held that one who sells under the power of sale “must follow strictly its terms” or the sale will be “wholly void.”  U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 646 (2011).

As the SJC also noted, the requirement of strict compliance and when it is, and is not, required was further considered in several subsequent cases.  In those cases, the SJC referred to Mass. Gen. Laws c. 244, §§ 11-17C, collectively as the provisions that further regulate the power of sale set forth in Mass. Gen. Laws c. 183, § 21.

However, the SJC noted that those earlier cases all related to the relationship between a mortgagee and mortgagor.  Here, the Court noted that the obligation set forth in Section 15A to provide a post-foreclosure notice to a taxing authority or water and sewer utility involves the foreclosing mortgagee and a third party.

Thus, the Court held that a failure to comply with the provisions of Section 15A does not create any potential harm to the mortgagor.  Accordingly, the SJC held, the mortgagee’s failure to provide notice as set forth in Section 15A had no consequential effect on the borrower.

In affirming the trial court’s decision, the SJC noted that, although the language in its earlier decisions suggested that failure to strictly comply with any provision contained in Mass. Gen. Laws. c. 244, §§ 11-17C will render a foreclosure void, that was not its intent.

Accordingly, the SJC held that because Mass. Gen. Laws c. 244, § 15A does not set forth any pre-foreclosure requirements that are part of the foreclosure process, a mortgagee’s failure to comply with Section 15A’s post-foreclosure provisions does not render a foreclosure void.

Mass. Call Count Cap Violated by Debt Collector Not Leaving Voicemail Message

A Massachusetts Superior Court recently held that reaching a debtor’s voicemail, but choosing to not leave a message, is a “communication” under the Massachusetts Debt Collection Regulations, 940 Code Mass. Regs. § 704(1)(f).

A copy of the opinion in Watkins v. Glenn Associates, Inc. is available at: Link to Opinion.

The plaintiff sued for injunctive relief and to recover damages from a creditor for alleged violations of the Massachusetts Debt Collection Regulations, 940 Code Mass. Regs. § 704 et seq., which states that it is an “unfair and deceptive act or practice for a creditor to…[i]nitiat[e] a communication with any debtor via telephone…in excess of two such communications in each seven-day period…”  940 Code Mass. Regs. § 704(1)(f).

The creditor called the plaintiff’s cell phone on Dec. 17, 2014 and spoke to him regarding an alleged outstanding college tuition debt.  Five days later, the creditor called the plaintiff’s cell phone two times.  The very next day, the creditor again called the plaintiff’s cell phone two times.  Each of the four follow-up phone calls successfully connected to the plaintiff’s voicemail system, but the creditor did not leave any messages.

In reviewing the plaintiff’s Motion for Summary Judgment, the court noted that it was “undisputed that [Defendant] is a creditor, [Plaintiff] is a debtor, and that [Defendant] called [Plaintiff] regarding a debt more than twice in a seven-day period.”  Thus, “[t]he only question before the court [was] one of statutory interpretation: whether the telephone calls in question constituted ‘initiating a communication’ under the state debt collection regulations.”

Connecting to a Debtor’s Voicemail Constitutes a Communication Under Massachusetts Law

The creditor argued the calls were not a “communication” because a communication requires the successful transmittal of information, which it maintained could only be accomplished by speaking to the plaintiff or leaving a voicemail.  The court noted, however, that the collector’s position failed for two reasons.  First, the law defines communication as “conveying information directly or indirectly to any person.” 940 Code Mass. Regs. § 703.  Thus, the court reasoned, “repeatedly calling [Plaintiff’s] cell phone from a number identified as belonging to [Defendant] indirectly conveyed to [Plaintiff] its demand that he speak with [them] – again – even without [Defendant] leaving a voicemail, the calls fall squarely within the law’s definition of ‘communication.’”

Second, “[i]nsofar as the Attorney General’s Office is the department charged with enforcing particular laws, its interpretation of the protections provided thereunder is entitled to substantial deference, at least where it is not inconsistent with the plain language of the statutory provisions.’’  Smith v. Winter Place, LLC, 447 Mass. 363, 367-68 (2006).

As the court noted, in 2011, the Attorney General’s Office issued Guidance With Respect to Debt Collection Regulations, in which it stated that the primary purpose of 940 Code Mass. Regs. § 7.04 was to “limit the number of times a creditor can communicate with a debtor via telephone to try to collect a debt.”  Thus, it explained, “unsuccessful attempts by a creditor to reach a debtor via telephone may not constitute initiation of communication if the creditor is truly unable to reach the debtor or to leave a message for the debtor.”

However, the court held that “if a creditor is in fact able to leave a message for the debtor, it cannot circumvent the Debt Collection law on excessive ‘initiation of communication’ merely by choosing not to leave a voicemail.”  To hold otherwise, the court believed, “would render the limit on initiating communication meaningless and permit creditors to call ceaselessly until the debtor had no choice but to answer – an outcome clearly contrary to the stated anti-harassment purpose of the Debt Collection law.”

Thus, the court held that, even though they did not leave a message, the creditor’s four follow-up phone calls constituted “initiating communication,” resulting in a violation of 940 Code Mass. Regs. § 704(1)(f).  Accordingly, the court granted the plaintiff’s Motion for Summary Judgment.

1st Cir. Holds ‘Fairly Conducted’ Sale of Collateral Not Necessarily ‘Commercially Reasonable’

The U.S. Court of Appeals for the First Circuit recently held that a genuine dispute of material fact precluded summary judgment on the issue of whether the sale of collateral was “commercially reasonable,” even though there was no evidence that the sale was not “fairly conducted.”

A copy of the opinion in Harley-Davidson Credit Corp. v. Galvin is available at: Link to Opinion.

small plane on tarmacThe assignee of a loan secured by an interest in an aircraft sued the guarantor of the loan to collect $108,681.50, the deficiency that remained after the assignee sold the collateral through a third-party dealer.

Pursuant to the loan documents, the assignee repossessed the plane and moved it to Florida into the custody of the third-party dealer. While in the third-party dealer’s custody, the plane was vandalized and its avionics components were stolen.

Approximately two months later, the assignee sold the plane in “as-is” condition for $155,000. The sales agreement, however, required the seller to replace the missing components.

After deducting the cost of replacing the missing equipment and additional repairs, the assignee demanded payment of $108,681.50 from the guarantor and sued in New Hampshire federal district court to collect this deficiency based on diversity jurisdiction.

The assignee moved for summary judgment early in the action, which was denied without prejudice. After discovery, the assignee filed a second motion for summary judgment, which the district court granted, finding that the guarantor had not raised a genuine issue of material fact as to whether the sale was “commercially reasonable” because, the district court held, selling repossessed collateral through a dealer, if such sale is “fairly conducted,” is recognized as commercially reasonable.  The guarantor appealed.

On appeal, the First Circuit explained that the district court, based on its finding of commercial reasonableness, apparently determined that the assignee had met its initial burden and therefore shifted the burden of proof to the guarantor to raise a genuine issue of material fact.

The Court noted that the applicable Nevada law, which governed the loan documents, placed the burden on the creditor to prove that the sale of the collateral was commercially reasonable. Reasoning that the party bearing the burden of proof at trial also bears the burden of proof at the summary judgment stage, in this case to show that no reasonable trier of fact could find other than that the sale was “commercially reasonable,”  the First Circuit found that the district court prematurely shifted the burden of proof to the guarantor.

The Court rejected as misplaced the assignee’s reliance on a Nevada Supreme Court case, Jones v. Bank of Nevada, because that opinion did not hold that using a dealer alone qualifies a sale as “commercially reasonable” regardless of whether the sale was “fairly conducted.”  Instead, the First Circuit noted, the Jones ruling states the opposite: use of a dealer must also be “fairly conducted.”

The First Circuit reasoned that the assignee must show, under the facts at issue here where the repossessed collateral was vandalized while in the dealer’s care such that the plane could not be flown, that the dealer’s disposition of the collateral was in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

The Court rejected the assignee’s argument that the guarantor’s consent to using the dealer in question and communications leading up to the sale made the sale commercially reasonable, because the assignee cited no Nevada authorities in support of its interpretation of Nevada law.

Instead, the First Circuit found persuasive the guarantor’s argument that the missing avionics would likely have turned away buyers, concluding that a reasonable trier of fact could decide against the assignee.  It also agreed with the guarantor that there was a genuine dispute of material fact as to whether the dealer’s handling of the sale after the vandalism fell below the standard of reasonable commercial practices among such dealers.

The Court’s conclusion was not altered by damage that already existed at the time of repossession. Simply put, the Court held, a fact-finder could reasonably conclude that an airworthy plane would attract more interest and a higher price than would a non-airworthy plane that had been vandalized, even if the seller promised to repair the known damage. The Court noted that with a non-airworthy plane that has been vandalized, “the buyer may wonder what else happened to the plane and has no chance to test it out.”

Accordingly, the First Circuit concluded that because the assignee failed to show that no reasonable trier of fact could find other than that the sale was “commercially reasonable,” summary judgment should have been denied.  It reversed and remanded the case.

Missouri Federal Court Says ‘Benign’ Language on Envelope Does Not Violate FDCPA

The United States District Court for the Western District of Missouri recently granted a debt collector’s motion for judgment on the pleadings, holding an internal account number displayed on the envelope of a demand letter did not violate the Fair Debt Collection Practices Act (FDCPA) because it did not reveal the plaintiff was a debtor.

A copy of the opinion in McShann v. Northland Group, Inc. is available at: Link to Opinion. 

In March 2014, the debt collector sent a demand letter regarding a consumer debt owed by the plaintiff. The letter’s envelope had a window in which the plaintiff’s name, address and account number were visible. The defendant maintained the account number was not a number provided by the plaintiff, but was instead assigned by the defendant and known only internally.

The plaintiff filed suit in March 2015, alleging the demand letter violated the FDCPA because it included her personally identifiable information, specifically, the account number. After the pleadings were closed, the defendant filed a motion for judgment on the pleadings.

As the Court noted, pursuant to Fed. R. Civ. P. 12(c), “a party may move for judgment on the pleadings” any time “[a]fter the pleadings are closed – but early enough not to delay trial.” When reviewing a motion for judgment on the pleadings, courts apply the same standard applied to Rule 12(b)(6) motions to dismiss. Saterdalen v. Spencer, 725 F.3d 838, 840-41 (8th Cir. 2013). “A motion for judgment on the pleadings will be granted only where the moving party has clearly established that no material issue of fact remains and the moving party is entitled to judgment as a matter of law.” Waldron v. Boeing Co., 388 F.3d 591, 593 (8th Cir. 2004).

FDCPA Permits ‘Benign’ Language on Envelope of Demand Letter

It is a violation of the FDCPA to use “any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business.” 15 U.S.C. § 1692f(8). Here, the letter allowed the plaintiff’s account number to be visible. Thus, under the plain language of the FDCPA, the defendant’s conduct was a violation.

However, as the Court noted, the Eighth Circuit has held that adhering to the plain language of the FDCPA would “create bizarre results.” Strand v. Diversified Collection Serv., Inc., 380 F.3d 316, 318 (8th Cir. 2004). Ultimately, the Eighth Circuit has concluded that the FDCPA “does not proscribe benign language and symbols” from being visible on the outside of an envelope. Id. at 319. Accordingly, the Court reasoned the key consideration was whether the plaintiff’s account number was benign.

Information is Benign if it Does Not Reveal Recipient is a Debtor

The plaintiff argued the account number was not benign because it violated consumer privacy. The Court, however, disagreed. Instead, the Court reasoned the legislative purpose was to prohibit a debt collector from using symbols and language on envelopes that would reveal that the contents pertained to debt collection. While debtor privacy is a legitimate concern, the Court believed the purpose of the FDCPA was not to prevent disclosure of internal account numbers, but to prevent identification of the recipient as a debtor.

Accordingly, the Court held that benign information that does not reveal the recipient is a debtor may be included on an envelope. Because the account number contained on the letter to the plaintiff did not reveal she was a debtor, the Court held it was not improper under the FDCPA. Therefore, the defendant’s motion for judgment on the pleadings was granted.

Courts Outside Third Circuit Continue to Reject Douglass v. Convergent Outsourcing

Last year in Douglass v. Convergent Outsourcing, the Third Circuit Court of Appeals held that where the debt collector’s internal account number for the consumer could be seen through an envelope window, section 1692f(8) of the FDCPA is violated and the disclosure is not benign because “it is a piece of information capable of identifying [a consumer] as a debtor.” Further, the disclosure of the internal account number “has the potential to cause harm” to a debtor because it is private, non-public information.

McShann adds to the growing list of courts outside the Third Circuit that have rejected Douglass.

FDCPA Lawsuit Tossed for Failure to Disclose Claim in Bankruptcy Petition

Bankruptcy documentsThe U.S. District Court for the District of New Jersey recently dismissed a debtor’s claims for violations of the federal Fair Debt Collection Practices Act (FDCPA) and the New Jersey Truth in Consumer Contract Warranty and Notice Act (TCCWNA), holding the debtor’s failure to schedule his lawsuit as an asset of his bankruptcy estate deprived him of standing to later assert the claims.

A copy of the opinion in Lewis v. Portfolio Recovery Associates, LLC is available at: Link to Opinion.

In March 2015, the debtor filed a lawsuit alleging the defendant sent him a letter in an attempt to collect a debt that contained a “mini-Miranda” warning in a box entitled “Account Details.” According to the debtor, by mislabeling his legal rights as “Account Details,” the defendant’s correspondence was misleading and designed to confuse the debtor as to the nature of the debt and his rights.

Prior to filing his complaint, however, the debtor filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code. The Chapter 7 trustee appointed to his bankruptcy proceedings issued a report of no distribution. Shortly thereafter, he received a discharge. As a result, the defendant argued that the debtor lacked standing to sue because he failed to schedule the lawsuit as a personal asset.

Debtor Must Disclose Potential Causes of Action as Asset of Bankruptcy Estate

As the Court noted, Section 541(a)(1) of title 11 of the U.S. Code provides that a bankruptcy estate comprises “all legal or equitable interests of the debtor in property as of the commencement of the case.” In re Allen, 768 F.3d 274, 281 (3d Cir. 2014). The scope of Section 541(a)(1) is broad, and includes possible legal causes action. Id. It imposes upon a debtor an ongoing affirmative obligation to disclose all assets and liabilities to the bankruptcy court before discharge, including pending and contingent claims. A failure to list an asset as property of the bankruptcy estate does not prevent it from becoming property of the estate.

As the Court reasoned, once an asset becomes part of the bankruptcy estate, all rights held by the debtor in the asset are extinguished unless the asset is expressly and unequivocally abandoned back to the debtor. As here, when a bankruptcy trustee is appointed in a Chapter 7 case, the trustee becomes the representative of the estate and succeeds to the debtor’s rights to pursue causes of action that are the property of the estate. Thus, once an estate is created, the trustee has sole and exclusive authority to pursue claims on behalf of the estate.

Debtor Lacks Standing for Pre-Petition Claims Not Disclosed in Bankruptcy Proceeding

If a pre-petition claim is properly scheduled and a trustee does not pursue the claim prior to discharge of the bankruptcy petition, that claim is abandoned to the debtor upon discharge. However, in cases where a debtor has not scheduled a pre-petition claim, a discharge order does not cause unscheduled claims to revert back to the debtor. Therefore, a debtor lacks standing to pursue unscheduled claims because they remain property of the bankruptcy estate. Schafer v. Decision One Mortg. Corp., 2009 U.S. Dist. LEXIS 56639, *12 (E.D. Pa. July 1, 2009). In order for a debtor to obtain standing, the trustee must abandon the unscheduled claim, whether voluntarily or pursuant to a court order. 11 U.S.C. § 554(a)-(b).

Here, there was no dispute that the debtor’s claims arose prior to filing for bankruptcy. Accordingly, his claims constituted pre-petition causes of action that had to be listed as assets on the “schedule of assets and liabilities” of his bankruptcy petition.

The debtor argued that his FDCPA and TCCWNA claims were in fact listed in his petition because his bankruptcy petition listed “lawsuits” as a joint marital asset worth $5,000. The Court disagreed, holding that a generic designation of “lawsuits” fails to notify the trustee as to whom the trustee should pursue and what causes of action should be brought.

Accordingly, the Court held that the debtor had not properly listed his FDCPA and TCCWNA claims against the defendant as an asset on his bankruptcy schedules, nor demonstrated that the trustee voluntarily abandoned the claims. Therefore, the FDCPA and TCCWNA claims remained part of the bankruptcy estate and, as a result, he lacked standing to pursue them in his subsequent lawsuit.

8th Cir. Rejects FDCPA Claim Based on ‘No Personal Knowledge’ Affidavits

Eighth Circuit SealThe U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a federal Fair Debt Collection Practices Act (FDCPA) claim premised solely on the allegation that an affiant who swore to have personal knowledge of the facts did not, in fact, possess personal knowledge when he made the affidavit.

In reaching its decision the Court held that even if the affiant lacked “personal knowledge,” the plaintiff had not plausibly alleged that the content of the affidavit  contained a false statement “in any meaningful way.”

A copy of the opinion in Janson v. Katharyn B. Davis, LLC is available at:  Link to Opinion.

The plaintiff debtor was sued by his landlord in Missouri state court for unpaid rent.  The law firm retained by the landlord filed an affidavit with the complaint, signed by a lawyer in the law firm. The affidavit recited information the lawyer received from the landlord.  After a trial, judgment was entered against plaintiff debtor.

The plaintiff debtor subsequently sued the law firm alleging it violated the FDCPA because its attorney swore to an affidavit in the state court collection action without personal knowledge of the facts.  The plaintiff argued that the filing of the affidavit was a “false, deceptive, or misleading representation” made in connection with collection of a debt in violation of 15 U.S.C. § 1692e, and that it used “unfair or unconscionable means” to collect a debt in violation of 15 U.S.C. § 1692f.

Litigants Not Misled, Deceived or Otherwise Duped by Contested Affidavit

Even if the lawyer’s attestation were literally false, the plaintiff debtor had not plausibly alleged that he or anyone else was misled by that falsehood. This is because the plaintiff did not allege that the substantive information contained in the affidavit, such as the amount due and owing, was false.

Instead, the Court noted, the plaintiff’s entire FDCPA claim was based upon the allegation that the affiant swore to having personal knowledge of the facts when in fact he did “not know whether the allegations are true or not.” But whether the affiant possessed personal knowledge was a technical, immaterial matter, referencing the concurring opinion in O’Rourke v. Palisades Acquisition XVI, LLC, 635 F.3d 938, 945 (7th Cir. 2011), which explained that “[i]f a statement would not mislead the unsophisticated consumer, it does not violate the FDCPA – even if it is false in some technical sense.”

So even if the affiant lacked personal knowledge, the material statements concerning the debt, such as the amount owed, were not alleged to be false or misleading. Absent an allegation that the nature, amount or status of the debt were false, the plaintiff failed to allege that the affidavit mislead anyone “in any meaningful way” and failed to state a claim for violation of the FDCPA.

1st Cir. Holds Failure to File Probate Claim Does Not Void Mortgage Under RI Law

Flag_of_Rhode_Island_svgThe U.S. Court of Appeals for the First Circuit recently held that a failure to file a probate claim does not extinguish a mortgage lien under Rhode Island law.  In so ruling, the Court held that “the piper must be paid.”

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

The plaintiffs, a brother and sister, inherited their mother’s house.  During her lifetime, the mother had taken out a reverse mortgage secured by the house.  The mortgage securing the loan contained an acceleration clause and power of sale and became due and payable upon the mother’s death.

The mother died intestate. Her son and daughter commenced a probate proceeding in Rhode Island state court. Notice was given to creditors, including the mortgagee, but the mortgagee did not file a claim in the probate proceeding. The probate case was administered and closed, with the court granting the decedent’s interest in the property to the plaintiffs.

In late 2010, the plaintiffs received a notice of foreclosure, which was published pursuant to Rhode Island law. A foreclosure proceeding followed and the mortgagee recorded the foreclosure deed granting the property to it in November 2011.

The plaintiffs filed suit in federal district court, invoking diversity jurisdiction, challenging the validity of the mortgage assignments and the foreclosure. After the close of discovery, the mortgagee moved for summary judgment, which the trial court granted.  This appeal followed.

On appeal, the heirs argued that a) “the district court erred in determining that he lacked standing to contest the mortgage assignments;  and b) the mortgagee’s “failure to file a claim in the probate proceedings pretermitted its right to foreclose on the Property.”

The Court began by noting that in a diversity case, it looks to federal law on procedural issues, and to state law for “rules of decision” on substantive issues.

The First Circuit then discussed the “idiosyncratic nature of reverse mortgages” explaining that “[a] reverse mortgage is a loan or line of credit available to a person over the age of 62 who has equity in real estate, typically the person’s home. The loan provides the borrower with cash (usually in the form of a single lump-sum payment) and is secured by the borrower’s equity in the real estate. There are no monthly payments; instead, the loan is due and payable in full when the borrower dies, sells the home, or no longer uses the home as her principal residence.”

The typical reverse mortgage also is unique in that the loan is “non-recourse,” meaning the borrower is not personally liable and the lender looks only to the mortgaged property for repayment.

Turning to appellant’s standing argument, the Court explained that “[s]tanding is a threshold question in every case” and that “[a] plaintiff suing in federal court normally must shoulder the burden of establishing standing.”

The First Circuit further explained that “Rhode Island is a title-theory state, in which ‘a mortgagee not only obtains a lien upon the real estate by virtue of the grant of the mortgage deed but also obtains legal title to the property subject to defeasance upon payment of the debt.’”

In addition, the Court’s own precedent established that “a mortgagor has standing to challenge the assignment of a mortgage on her home to the extent that such a challenge is necessary to contest a foreclosing entity’s status qua mortgagee. … This means that a mortgagor (or a party standing in the mortgagor’s shoes) only has standing to challenge an invalid, ineffective, or otherwise void mortgage.” However, the Court noted, “a mortgagor does not have standing to challenge shortcomings in a mortgage assignment that renders it merely voidable at the election of one party but otherwise effective to pass legal title.”

Referencing that the Rhode Island Supreme Court “has embraced this void/voidable distinction with respect to real estate mortgages,” the First Circuit turned to the question of “whether the challenged mortgage assignment are void or voidable.”

The First Circuit reasoned that under Rhode Island law, “a valid mortgage or any of its assignments must be signed, acknowledged by notarization, delivered, and recorded. … It is not necessary that the mortgage and the note that is secures be held by the same entity.”

In the case at bar, there were two assignments, both of which complied with the aforementioned formalities. The parties treated them as valid.  Accordingly, the Court rejected the heirs’ argument that the assignors lacked the required authority to execute the assignment because “the summary judgment record contains no evidence sufficient to create a genuine issue of material fact in this regard. Unsupported allegations are not enough.”

Accordingly, the First Circuit ruled that “[o]n this record, the assignments are not void but, at worst, merely voidable. It follows that the district court did not err in concluding that the appellant lacked standing to challenge them.”

Turning to the heirs’ argument that the mortgagee lost its right to foreclose by not filing a claim in the probate proceeding, the Court first found that the heirs had standing to challenge the validity of the mortgage itself because under Rhode Island law, “the appellant, who has a personal stake in the outcome, has the right to ensure that the foreclosure conforms with the law.”

“Because the Rhode Island Supreme Court has not addressed whether probate extinguishes a real estate mortgage,” the First Circuit characterized its job as figuring out “how that court would likely rule if faced with the issue.”

The Court began its analysis “by tracing how the common law historically has characterized foreclosure.” Foreclosure is an equitable remedy in which “[t]he land is the real defendant.” Although technically a quasi in rem proceeding, a foreclosure “is in the nature of such a proceeding and is not intended ordinarily to act in personam.” However, “[a]bsent a statute to the contrary, a mortgagee can both sue the parties to the mortgage at common laws and pursue foreclosure. … If a deficiency results from a foreclosure sale, an action on the mortgage note normally will lie to recover that deficiency.”

The First Circuit found “much the same dichotomy between the encumbered property and the underlying debt in the venerable structures of maritime law” which has “long recognized the feasibility of separating the mortgage res from the associated debt.”

It also found a “compelling analogy … in the realm of bankruptcy law” where “a creditor may recover the deficiency on a mortgage loan through ‘an action against the debtor in rem,’ notwithstanding the debtor’s discharge in bankruptcy.”

The First Circuit pointed out that the Rhode Island Supreme Court frequently consulted “the Restatements to bring clarity to state law,” finding it noteworthy that “this splitting of in rem and in person liability is consonant with the [Restatement (Third) of Property’s] declaration that ‘a mortgage is enforceable whether or not any person is personally liable for that performance.”

The First Circuit also found “[t]his dichotomy is also consistent with section 3-814 of the Uniform Probate Code, which authorizes payment of a mortgage even if a claim has not been filed in the decedent’s estate. And finally, no less an authority than the United States Supreme Court has noted that the lender’s ‘right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying obligation.”

A survey of “the case law elsewhere” confirmed the Court’s “intuition that the Rhode Island Supreme Court, if faced with the question, would hold that the right to foreclose should be treated as separate and distinct from the right to collect the underlying debt. The upshot is that though the failure to file a claim in probate proceedings may extinguish personal liability on the note secured by the real estate mortgage, that failure does not extinguish the mortgage itself. Consequently, such a failure does not interfere with the mortgagee’s right to foreclose.”

The First Circuit rejected the heirs’ final argument that “the failure to submit a claim to the probate court within the statutorily prescribed period … bars [the mortgagee] from later foreclosing against the Property to satisfy the underlying debt” because “the statute of limitations applicable to foreclosures in Rhode Island is the general 20-year statute of limitations” and the “limitations period associated with the probate claim-filing statute … does not apply.”

The Court affirmed the district court’s summary judgment, holding that “the appellant lacks standing to challenge the interstitial mortgage assignments; and though he does have standing to challenge the effectiveness of the mortgage itself on a different ground, that challenge is fruitless.”  Accordingly, despite its failure to file a probate claim, the mortgagee “retained the right to enforce its reverse mortgage through foreclosure.”

2nd Cir. Holds ID Theft Claim Under NY’s FCRA Not Preempted by Federal FCRA

The U.S. Court of Appeals for the Second Circuit recently held that identity theft claims under New York’s Fair Credit Reporting Act based on a bank’s alleged vicarious liability for identity theft supposedly perpetrated by its employees are not preempted by the federal Fair Credit Reporting Act (FCRA).

However, to the extent that the claims could arguably be read to include the theory that the bank was liable because it furnished false information to consumer reporting agencies, the Court held that such claims are preempted under the FCRA because they plainly concern the bank’s legal responsibilities as a furnisher.

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

A bank customer sued the bank in New York state court under the New York Fair Credit Reporting Act, which “creates a cause of action for a victim to sue any person who engages in identity theft if, in turn, the theft results in the transmission of certain information about the consumer to a consumer reporting agency (i.e., a credit bureau).”

FraudThe customer alleged that over approximately three years, bank employees supposedly aided and abetted a money-laundering scheme designed to defraud the federal Medicare program. “In return for cash bribes and other gratuities, [the bank employees] assisted the money launderers in the fraudulent use of [plaintiff’s] name as a signatory for … accounts set up in the name of phony corporations. These accounts were used to deposit and pay out proceeds of the Medicare fraud scheme.”  According to the customer, bank employees supposedly also “falsified [the bank’s] records to enable the members of the money laundering scheme to make withdrawals from these accounts in [plaintiff’s] name, including for extravagant luxury purchases.”

The alleged scheme supposedly resulted in many bounced checks when the fraudulent accounts were overdrawn, which allegedly damaged the plaintiff’s credit rating. Eventually, the scheme was discovered and the fraudulent accounts were closed. In a bizarre twist, the customer, who supposedly knew nothing about the scheme, was arrested, indicted and tried for money laundering conspiracy. She was, however, acquitted after a seven-week trial.

The bank removed the case to federal district court and moved for dismissal pursuant to Fed. R. Civ. P. 12(b)(6), arguing that the plaintiff’s claims for identity theft under New York law were preempted by the FCRA. The district court granted the bank’s motion and the customer appealed.

On appeal, the Second Circuit began by discussing the principles governing preemption, which begins with the Constitution’s Supremacy Clause. Article VI, clause 2 of the Constitution provides that “the Laws of the United States … shall be the supreme Law of the Land … any Thing in the Constitution of Laws of any State to the Contrary notwithstanding.” Congress can “preempt (or invalidate) a state law by means of a federal statute … expressly or it may preempt state law implicitly in circumstances where it is clear that Congress intended to occupy the entire regulatory field, where state law stands as an obstacle to the objectives of Congress, or where compliance with both federal and state law is impossible.”

In order to discern Congress’ intent on preemption, the Court turned its focus to the plain language, structure and purpose of the FCRA, finding it significant that it “does not create a federal cause of action for victims against perpetrators of identity theft” and that “the FCRA’s applicable preemption provisions are somewhat intricate and require consideration of multiple cross-referencing statutory provisions.”

To begin with, the Second Circuit noted that section 1681(a) of the FCRA provides that it does not preempt state identity theft laws unless they are inconsistent with the FCRA and then only to the extent of such inconsistency.

However, Congress created exceptions to the general rule, including that “[n]o requirement or prohibition may be imposed under the laws of any State … with respect to any subject matter regulated under … section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies….”

Section 1681s-2 imposes certain duties on “furnishers of information to consumer reporting agencies, including that ‘[a] person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.’ ”

The Second Circuit disagreed with the bank’s argument “that plaintiff’s claims under the New York law fall within the scope of the express exception to non-preemption that is set forth in § 1681t(b)(1)(F).” The Court reasoned that “the language of the provision expresses Congress’s intent to preempt claims which are “with respect to any subject matter regulated under … section 1681s-2 … relating to the responsibilities of persons who furnish information to consumer reporting agencies … [and] therefore, must be read to preempt only those claims against furnishers that are ‘with respect to’ the subject matter regulated under § 1681s-2.”

Relying on a Supreme Court decision involving preemption under the Federal Aviation Administration Authorization Act, the Second Circuit found “that a claim is ‘with respect to’ a preempted subject matter when it concerns that subject matter.” The Court then held “that § 1681t(b)(1)(F) preempts only those claims that concern a furnisher’s responsibilities … [i.e.,] it does not preempt state law claims against a defendant who happens to be a furnisher of information to a consumer reporting agency within the meaning of the FCRA if the claims against the defendant do not also concern that defendant’s legal responsibilities as a furnisher of information under the FCRA.”

Turning to the ultimate question of whether the customer’s claims against the bank “concern [its] responsibilities as a furnisher of information under the FCRA,” the Court concluded that, “when viewed in the light most favorable to [plaintiff], the complaint plausibly alleges identity theft claims that do not concern [the bank’s] responsibilities as a furnisher. Instead, the complaint advances a theory that [the bank] is vicariously liable—presumably under a respondeat superior theory—for the identity theft allegedly perpetrated by its employees.”

The Second Circuit noted in a footnote that “[u]nder New York law, ‘[t]he doctrine of respondeat superior renders an employer vicariously liable for torts committed by an employee acting within the scope of employment. Pursuant to this doctrine, the employer may be liable when the employee acts negligently or intentionally, so long as the tortious conduct is generally foreseeable and a natural incident of the employment.’ ”

The Court found that the identity “theft could be actionable under the New York statute because it eventually resulted in an alert by someone to consumer reporting agencies … [and] it does not matter if the defendant who is sued for identity theft is also the furnisher of information to a consumer reporting agency.”

In the Second Circuit’s view, it didn’t matter who reported the adverse information about the customer to consumer reporting agencies because “the [New York] law requires only that the theft have resulted in the transmission of the information by someone to a consumer reporting agency.”

The Court concluded that “[i]n short, [the bank] could face vicarious liability under the New York law for its employees’ theft of [plaintiff’s] identity, not for any later act by [the bank] or anyone else—proper or improper—of reporting adverse information about [plaintiff] to a consumer reporting agency.”

The Second Circuit thus rejected preemption, explaining that because “[i]n our federal system, there is no question that States possess the traditional authority to provide tort remedies to their citizens as they see fit … [and] as the Supreme Court has made clear—that ‘we presume federal statutes do not … preempt state law …’ [t]his means that ‘when the text of a pre-emption clause is susceptible of more than one plausible reading, courts ordinarily accept the reading that disfavors pre-emption.’ ”

Before closing, the Court clarified, however, that to the extent that the complaint “could arguably be read to include the theory that [the bank] is liable for damages (at least in part) because it furnished false information [to consumer reporting agencies] … such claims … are preempted under the FCRA because they plainly concern [the bank’s] legal responsibilities as a furnisher.”  The Court held that “[t]his is so because § 1681t(b)(1)F) preempts any recovery for damages based on allegations of erroneous or otherwise improper furnishing—regardless of the particular statute or common law theory that plaintiff utilizes to advance her claim.”

The district court’s judgment was vacated and the case remanded for further proceedings consistent with the Second Circuit’s opinion.

Illinois Court Holds New Mortgagee May Be Substituted After Foreclosure Sale, Indicates Borrower’s Counsel May Be Sanctioned

IllinoisAppellateThe Illinois Appellate Court, First District, recently held that a failure to file a motion to substitute plaintiff in a pending foreclosure proceeding prior to the judicial sale did not invalidate the sale.

Also, considering the absence of any meaningful argument advanced on appeal, the Court further ordered counsel for defendant to show cause why he should not be sanctioned.

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

The mortgagee filed a foreclosure action, and a judgment of foreclosure was ultimately entered. Thereafter, the mortgagee transferred servicing to a new mortgagee.

The new mortgagee appeared at the judicial sale and bid the amount of indebtedness as an opening bid. The property was ultimately sold to a third party.  After the sale was conducted, the new mortgagee was substituted as plaintiff in the underlying action. Notwithstanding, the trial court issued an order confirming the sale.

The sole issue on appeal was whether the change in mortgagee between the date the judgment of foreclosure was entered and the date the sale was conducted, without substituting the new mortgagee as the plaintiff until after the date of sale, entitled the borrower to relief from the order confirming the sale.

As the Appellate Court noted, in considering a motion to confirm a judicial sale of property under the Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1101 et seq., the sale must be confirmed unless the notice of sale was not given, the terms of the sale were unconscionable, the sale was conducted fraudulently or justice was otherwise not done.  See 735 ILCS 5/15-1508(b); Wells Fargo Bank, N.A. v. McCluskey, 999 N.E.2d 321 (2013).

Here, the Appellate Court held that the first mortgagee’s failure to substitute the new mortgagee as a party-plaintiff in the foreclosure proceedings did not fall into any of the categories set forth in 735 ILCS 5/15-1508.

The Appellate Court held that the fact the new mortgagee had not been substituted as plaintiff in the caption of the foreclosure complaint had absolutely no effect on the manner in which the sale was conducted, and also noted that the borrower failed to articulate how the alleged defect prejudiced her in any way.

Given the property was sold to third parties who submitted the highest bid, the Court found no reason to disturb the trial court’s order confirming the sale.

Accordingly, the Appellate Court held that the borrower’s appeal was completely without merit.  Considering the lack of merit in any issue raised, and the absence of any meaningful argument advanced on appeal, the Court also ordered counsel for the borrower’s counsel to show cause why he should not be sanctioned.

Mass. Federal Court Imposes FCRA Preemption on State Law Claims

massThe United States District Court for the District of Massachusetts recently held that the federal Fair Credit Reporting Act (FCRA) preempts Massachusetts state law claims for violations of the Massachusetts Credit Reporting Act, Mass. Gen. Laws ch. 93, § 54A, and the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A.

The decision also held that the mere furnishing of information following a bankruptcy discharge, without more, is not actionable.

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

The decision adds to a growing split among federal courts on both issues.

Credit Reporting a Loan Modification and Bankruptcy Discharge

In 2008, Plaintiff, Mark Lance, obtained a mortgage and note for his home from National City Bank, which was acquired by PNC Bank in 2008. In August 2010, Lance filed for Chapter 7 bankruptcy, receiving a discharge order in December 2010.

In May 2013, PNC began a foreclosure against Lance’s home.  In January 2014, Lance and PNC reached an agreement resolving the foreclosure through a permanent modification to the mortgage loan.  According to Lance, although he agreed to the modification, he was no longer personally liable for the mortgage debt because of his Chapter 7 discharge and because the mortgage debt was not “reaffirmed” by him in his bankruptcy case.

In July 2014, Lance was offered employment with a bank contingent on credit and background checks.  The prospective bank employer withdrew the job offer after it found that PNC credit reported that Lance’s mortgage had been in foreclosure from May 2013 through January 2014, and had a past due balance of $99,726.

A Mortgage Lien is a “Credit Relationship” Even if Personal Liability is Discharged

Lance alleged that PNC’s act of reporting his discharged mortgage constituted an effort to collect a debt in violation of the bankruptcy discharge injunction.  PNC argued that it did not engage in misreporting because its right to enforce the mortgage was unaffected by Plaintiff’s bankruptcy discharge.

As the Court noted, it is well established that a mortgage lien on real property, including all amounts due thereunder, passes through bankruptcy unaffected.  Absent a reaffirmation, following a Chapter 7 discharge, although a debtor is not personally liable for the mortgage loan, he still “owes” the lender in the form of the property (the collateral).  The debtor must either make new arrangements with the lender to keep the property, return it to the lender, or wait for it to be foreclosed upon. Because of the mortgage lien, a “credit relationship” exists between the lender and the debtor, wrote the Court.

Here, in January 2014, more than seven months after Lance obtained the discharge, he agreed to a loan modification with PNC, evidencing Lance’s continuing credit relationship with PNC.  As a result, PNC was under no obligation under the Bankruptcy Code to change the way it reported the status of Plaintiff’s mortgage loan.

Mere Reporting of a Discharged Loan Balance Does Not State a Claim

Even assuming Lance had no credit relationship with PNC after the bankruptcy discharge, standing alone, the act of reporting a discharged debt is not a violation of § 524(a).  To violate § 524(a), a creditor must act in a way that improperly coerces or harasses the debtor. Reporting a debt to a credit reporting agency – without any evidence of harassment, coercion or some other linkage to show that the act is one likely to be effective as a debt collection device – fails to qualify on its own as an “act” that violates § 524.

Under the circumstances, the Court held that PNC’s single instance of failing to update Lance’s credit report was not so objectively coercive as to warrant relief under § 524.  Therefore, Count One of Plaintiff’s complaint was dismissed.

FCRA Preempts Mass. Credit Reporting Act Claim

The Court also dismissed Lance’s claims which alleged that PNC’s credit reporting violated the Massachusetts Credit Reporting Act under Mass. Gen. Laws ch. 93, § 54A.

PNC argued that Lance’s claims were preempted by the FCRA, which provides that “[n]o requirement or prohibition may be imposed under the laws of any State …relating to the responsibilities of persons who furnish information to consumer reporting agencies…”  15 U.S.C. § 1681t(b)(1)(F).

The Court noted that, at first glance, Lance’s Massachusetts Credit Reporting Act claim would appear to fall directly within the FRCA’s preemptive language because FCRA explicitly preempts any requirement imposed by state law that clearly relates to the responsibilities of a furnisher of credit information. The FRCA also provides an express exemption for the Massachusetts Credit Reporting Act noting that § 1681t(b)(1)(F) “shall not apply – (i) with respect to section 54A(a) of chapter 93 of the Massachusetts Annotated Laws . . . .” 15 U.S.C. § 1681t(b)(1)(F).

However, the FCRA expressly exempts only section 54A(a) of the state law from its preemptive reach. It includes no such exemption for section 54A(g) of the Massachusetts Credit Reporting Act, which creates a private cause of action for Lance to assert the state law violation.  In the Court’s view, the absence of express language exempting § 54A(g) from the FCRA’s preemption provision was fatal to Lance’s Massachusetts Credit Reporting Act claim.

Mass. Consumer Protection Act Preempted by FCRA

The Court also dismissed Lance’s claim that PNC’s credit reporting violated the Massachusetts Consumer Protection Act, Mass. Gen. Laws Ch. 93A.

PNC argued that this claim was also preempted because it was based on its reporting of Lance’s consumer credit information.  Lance argued his Chapter 93A claim survived preemption because it was based on the existence of unfair practices independent from the subject matter of  PNC’s credit furnishing obligations under FCRA.  Specifically, Lance alleged that the Chapter 93A claim was based on PNC’s unlawful debt collection by means of credit reporting, rather than the inaccurate credit reporting itself.

As the Court noted, however, Plaintiff’s argument could not withstand analysis.  The conduct at issue, and PNC’s debt collection practices – insofar as they were coextensive with its reporting on a discharged debt – were exactly the type of conduct Congress intended to regulate under the FCRA. As a result, the Court held that Plaintiff’s Chapter 93A claim was also preempted.  Accordingly, Plaintiff’s complaint was dismissed in its entirety.

NY High Court Rules Deficiency Judgment Properly Denied for Lack of Evidence of Property Value

nysealThe New York Court of Appeals recently affirmed a trial court’s denial of a motion for deficiency judgment because the lender presented conclusory, insufficient evidence about the value of the property.

In so ruling, the Court held that, even with uncontested deficiency motions, a lender that has foreclosed must present satisfactory evidence about the value of the property.  However, the Court also held that when the lender presents insufficient evidence, the trial court should give the lender at least one additional chance to present adequate evidence.

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

The lender filed its foreclosure action in March 2010.  Neither the borrower nor any other defendant contested the foreclosure suit.  In August 2011, the property was sold to the lender at a public auction for $125,000.

Shortly after the sale, the referee appointed by the trial court found that the lender was owed $793,724.75.  In November 2011, the lender moved for a deficiency judgment against the borrower.  In support, the lender submitted an affidavit of an appraiser.

The affidavit was only four paragraphs long.  Two of the paragraphs detailed the appraiser’s qualifications.  The other two paragraphs contained conclusory statements about the property.  It found the property was worth $475,000, but it contained no supporting documentation.  It mentioned the appraiser inspected the house but said nothing about the condition of it.

The borrower did not contest the motion for deficiency judgment.  Even so, the trial court denied it, finding that the evidence submitted was not sufficient.  More specifically, the trial court held the affidavit “was ‘conclusory’ and lacked ‘any specific information regarding how he reached his fair market value determination.’”  The Appellate Division affirmed.

In the Court of Appeals, the borrower again did not contest the appeal.  However, the New York State Attorney General submitted a brief opposing the lender’s arguments.

To begin, the lender argued that the trial court should have entered the deficiency judgment because there was no conflicting evidence.  The Court of Appeals disagreed.

Lender Bears Burden of Proving Value

Instead, the Court of Appeals held that the lender bears the burden of proving the value of the property when asking for a deficiency judgment.  If the lender does not present satisfactory prima facie evidence of value, the trial court should deny the request for deficiency judgment.

In so holding, the Court of Appeals harshly criticized the conclusory affidavit from the appraiser because it (1) was unsupported by any detailed analysis of the data or valuation criteria used, (2) did not attach any evidence, (3) did not describe the building’s condition, and (4) “consisted of little more than conclusory assertions of fair market value.”

In response to the lender’s argument that the motion was uncontested, the Court stated: “[I]t is of no moment that [the borrower] failed to submit any evidence in opposition to the motion.”

However, the Court of Appeals did reverse the trial court’s ruling to the extent it did not provide the lender a second chance to present evidence.  The Court found that the statute requiring trial courts to enter deficiency judgments was a “directive.”

As such, the Court held that, if a lender fails to present adequate evidence once, the trial court must give the lender the opportunity to supplement the evidence presented and make a renewed motion for a deficiency judgment.

Notably, the Court included a footnote stating that it expressed no opinion about what a trial court should do if the lender presents unsatisfactory evidence twice.  It also held that the sufficiency of the evidence is in the trial court’s discretion.

Despite giving lenders a second chance, the Court warned “[l]enders seeking deficiency judgments, however, must always strive to provide the court with all the necessary information in their first application.”