Author Archive for Erik C. Fritz

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

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

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

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

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

The statute provides in relevant part:

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

Fla. Stat. § 702.035.

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

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

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

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

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

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

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

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

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

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

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

Fla. App. Court (2nd DCA) Holds Trial Court Erred in Denying Deficiency Judgment Due to 6-Day Stale Appraisal

The District Court of Appeal of Florida, Second District, recently reversed an order denying a claim for a post-foreclosure sale deficiency judgment, holding that the trial court abused its discretion by excluding from evidence an expert’s testimony and report as to fair market value because the report was dated six days after the foreclosure sale.

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

A final judgment of foreclosure in the amount of $2.4 million was entered against the borrower company and its principal.  A third party purchased the property at a foreclosure sale for $100.  The third party moved for a deficiency judgment, presenting evidence of the foreclosure judgment, the assignment of judgment, and the certificate of sale.

At the hearing on the motion for deficiency judgment, the purchaser offered into evidence, over objection, the testimony of its expert and an appraisal report that valued the subject property at $1.9 million as of a date six days after the foreclosure sale.

The trial court sustained the objection, precluding any testimony as to fair market value, because it “deemed the expert’s testimony and report irrelevant because the appraisal was conducted six days after the foreclosure sale ‘making it impossible to calculate the deficiency.’”

Because the purchaser did not meet its burden of proving that a deficiency existed as of the date of the foreclosure sale, the trial court denied the motion for deficiency judgment. The purchaser appealed.

On appeal, reviewing the trial court’s decision to exclude the expert’s testimony under an abuse of discretion standard, the Appellate Court began by explaining that “[a] trial court may not reject expert testimony unless it is so ‘incredible, illogical, and reasonable as to be unworthy of belief.’”

The Appellate Court then concluded that the trial court’s exclusion of the expert’s testimony and report, despite there being no dispute as to his qualifications, just because the report was dated six days after the foreclosure sale, was an abuse of discretion.

The Court reasoned that while “[i]t is well-settled that for purposes of calculating a deficiency judgment, the relevant date for determining the fair market value of the property is the foreclosure sale date,” Florida law also “recognizes that a party seeking a deficiency judgment may provide testimony to link the value of property on the date of an appraisal to the value of property on the date of the foreclosure sale.”

Further, the Appellate Court could not agree that “the passage of a mere six days rendered [the] appraisal so devoid of probative value as to be irrelevant, especially in light of the court’s refusal to allow [the] expert to explain whether the intervening days affected the value of the property.”

The Court noted that “[a]ny determination that a deficiency judgment should be denied must be supported by established equitable principles and the record must disclose sufficient facts and circumstances to support that judgment.”

Accordingly, the Appellate Court reversed the trial court’s order denying the motion for deficiency judgment, and remanded the case for further proceedings.

DC Cir. Denies Lender’s Challenge to NLRB’s Ruling as to Lender’s Confidentiality, Non-Disparagement Employee Rules

The U.S. Court of Appeals for the District of Columbia Circuit recently denied a mortgage company’s petition for review and granted the National Labor Relations Board’s cross-petition for enforcement, holding that the NLRB correctly determined that the mortgage company’s workplace rules unreasonably burdened its employees’ ability to discuss legitimate employment matters, protest employer practices and organize in violation of section 7 of the National Labor Relations Act.

A copy of the opinion in Quicken Loans, Inc. v. NLRB is available at:  Link to Opinion.

A loan officer began working in the mortgage company’s Scottsdale, Arizona office and signed an employment agreement containing confidentiality and non-disparagement provisions. She resigned in 2011 and began working at a competitor.

The mortgage company sued to enforce the employment agreement, to which the loan officer responded by filing an unfair labor practice claim with the National Labor Relations Board, arguing that the confidentiality and non-disparagement rules violated Section 7 of the National Labor Relations Act (NLRA).

The NLRB filed an unfair labor practice complaint against the mortgage company alleging that the rules violated Section 8(a)(1) of the NLRA, 29 U.S.C. § 158(a)(1).

An administrative law judge (“ALJ”) held an evidentiary hearing and sustained the NLRB’s complaint, finding that both of the subject contractual provisions violated Section 8(a)(1) of the NLRA because they supposedly interfered with the exercise of loan officer employees’ Section 7 rights.

The ALJ reasoned this was “because the [confidentiality rule] flatly forbade employees from discussing ‘with others, including their fellow employees or union representatives, the wages and other benefits that they receive,’ and ‘the names, wages, benefits, addresses or telephone numbers of other employees.’” In addition, the ALJ found the non-disparagement rule “invalid because it prohibited employees from ‘publicly criticiz[ing], ridicul[ing], disparag[ing] or defam[ing] the Company or its products, services, [or] policies … through any written act or oral statement.’”

The NLRB affirmed the ALJ’s ruling, but instead of rescinding the confidentiality provision completely, the NLRB required the mortgage company to only delete certain offending language.

On appeal from the NLRB’s decision, the DC Circuit Court of Appeals began by emphasizing that its review was limited, because the NLRB’s decisions, as the agency charged by Congress with enforcing the Act, “’are entitled to considerable deference,’ … and will be sustained as long as the Board ‘faithfully applies’ the legal standards, and its textual analysis of a challenged rule is ‘reasonably defensible’ and adequately explained…..”

As you may recall, section 7 of the NLRA guarantees employees ‘the right to self-organization, to form, join or assist labor organizations, to bargain collectively through representative of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.’ … Those rights ‘necessarily encompass’ employees’ rights to … ‘seek to improve terms and conditions of employment or otherwise improve their lot as employees through channels outside the immediate employee-employer relationship ….’”

Employers that “‘interfere with, restrain, or coerce employees in the exercise of the rights guaranteed’ by section 7 commit an unfair labor practice, 29 U.S.C. § 158(a)(1), and are subject to civil sanction by the Board, id. § 160(a).”

The test of whether workplace rules violate section 7 involves “an objective inquiry into ‘whether the rules would reasonably tend to chill employees in the exercise of their statutory rights.’” Lawful employee activities can be “chilled” in two ways: (a) facially, “by, for example, explicitly barring employees from complaining to third parties about their working conditions … [or (b)] even if facially unobjectionable, a rule is invalid if (i) ‘employees would reasonably construe the language to prohibit Section 7 activity’; (ii) the rule ‘was promulgated in response to union activity’; or (iii) ‘the rule has been applied to restrict the exercise of Section 7 rights.’”

The DC Circuit Court of Appeals concluded that “[t]he Board properly determined that [the confidentiality rule], as applied to personnel information, directly impinged upon employees’ Section 7 rights … [because] personnel lists, employee rosters, and employee contact information—has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers in exercising their Section 7 rights.”

The same applied to “’handbooks’ and other types of workplace information contained in ‘personnel files’ [because the company’s] blanket prohibition directly interferes with mortgage bankers’ ability to discuss their wages and other terms and conditions of employment with their fellow employees or union organizers, which is a core Section 7 right.”

The Court rejected the mortgage company’s objections to the NLRB’s decision to exclude evidence of the former employee’s understanding of the rules because her subjective interpretation or how she actually understood the meaning of the rules was irrelevant. “The validity of a workplace rule turns not on subjective employee understandings or actual enforcement patterns, but on an objective inquiry into how a reasonable employee would understand the rule’s disputed language. Thus, ‘[t]he Board is merely required to determine whether ‘employees would reasonably construe the [disputed] language to prohibit Section 7 activity, … and not whether employees have thus construed the rule.’”

The DC Circuit Court of Appeals also rejected the mortgage company’s argument that the NLRB failed to consider the mortgage company’s legitimate interest in protecting non-public information because the NLRB confined its decision to how the confidentiality rule affected “the types of personnel information protected by Section 7 … [and] the Board left portions of the Rule protecting proprietary information intact, and it afforded … adequate room to revise and ‘narrowly tailor the … rule to achieve its goal without interfering with Section 7 activity….”

Simply put, the Court held that the mortgage company’s “claim that some sub-portion of the covered information could properly be protected does nothing to legitimate the blunderbuss sweep of its existing rule.”

Finally, the DC Circuit Court of Appeals rejected the mortgage company’s argument that the confidentiality rule’s “disputed language only protects non-public information of co-workers” because the company’s “so-called ‘widely publicized’ personnel information … is little more than a general description on its recruiting website of the mortgage banker position and the generic salary and benefits packages that might be available to successful applicants.”

Thus, the Court held, the NLRB could reasonably find that “[i]t beggars belief” “that [the company’s] mortgage bankers would view the company’s publication of such generalized information as relaxing the Rule’s explicit and absolute prohibition against employees disclosing all manner of ‘personnel information,’ including actual employee pay and benefits.”

Turning to the non-disparagement provision, the Court concluded that it “similarly flies in the teeth of Section 7,” because the provision “prohibits mortgage bankers from ‘publicly criticiz[ing], ridicul[ing], disparag[ing], or defam[ing] the Company or its products, services, policies, directors, officers, shareholders, or employees’ in any written or oral statement, including on the internet or even in private emails.”

The Court reasoned that “[t]he Board quite reasonably found that such a sweeping gag order would significantly impede mortgage bankers’ exercise of their Section 7 rights because it directly forbids them to express negative opinions about the company, its policies, and its leadership in almost any public forum.”

Because the DC Circuit Court of Appeals held that the NLRB correctly determined that the mortgage company’s employees “would reasonably construe the sweeping prohibitions [of the company’s confidentiality and non-disparagement rules] as trenching upon their rights to discuss and object to employment terms and conditions, and to coordinate efforts and organize to promote employee interests,” the Court denied the mortgage company’s petition for review and granted the NLRB’s cross-application for enforcement.

Calif. App. Court (2nd Dist) Confirms No Implied Right to HBOR Injunctive Relief

The Court of Appeal of the State of California, Second District, recently affirmed the denial of injunctive relief to a borrower who claimed a violation of Cal. Civ. Code § 2924(a)(6) of the California Homeowner Bill of Rights, holding that injunctive relief is only available under two specific HBOR provisions where the state legislature explicitly authorized such relief – i.e., Cal. Civ. Code §§ 2924.12(a)(1) and 2924.19(a)(1).

Because the borrower’s allegations did not fall under either of those sections, the Court held that the borrower was not entitled to injunctive relief.

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

Following the commencement of a nonjudicial foreclosure against a borrower, the borrower filed suit seeking an injunction to prevent the foreclosure.

The borrower alleged that the deed of trust was assigned and transferred in a manner that rendered such assignments void due to what the borrower alleged were “numerous breaks and misrepresentations in the chain of title.”  For instance, the borrower asserted that his loan was allegedly transferred from a second mortgagee to a third mortgagee on March 23, 2011, yet the original mortgagee’s beneficiary recorded an assignment four months later, purporting to transfer the loan to the second mortgagee.

On April 19, 2014, the third mortgagee recorded and filed a Substitution of Trustee, and the newly substituted trustee immediately filed a Notice of Default on the loan.

The borrower asserted, among other things, that the mortgagees lacked standing to foreclose because they were not properly assigned an interest in the deed of trust, citing Cal. Civil Code § 2924(a)(6), and for breach of contract due to the mortgagees’ alleged failure to enter into a permanent loan modification after the borrower successfully made three trial loan modification payments.

The trial court sustained the mortgagees’ demurrers (motions to dismiss), dismissed the borrower’s suit, and entered a judgment of dismissal without leave to amend.  The instant appeal followed.

As you may recall, Cal. Civil Code § 2924(a)(6) provides that only the holder of the beneficial interest under a mortgage or deed of trust may foreclose.  In the HBOR, the California Legislature authorized a private right of action to enjoin a nonjudicial trustee’s sale where a lender violates any one of nine statutory provisions.

Under Cal. Civil Code § 2924.12(a)(1), a borrower may bring an action for injunctive relief due to a material violation of Cal. Civil Code §§ 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17.  Under Section 2924.19(a)(1), a borrower may bring an action for injunctive relief due to a material violation of Sections 2923.5 or 2924.18.

The Appellate Court began its analysis by noting that while the HBOR did not apply retroactively, the HBOR’s provisions were applicable to the subject action, because the April 9, 2014 Notice of Default was recorded after the Jan. 1, 2013 effective date of the HBOR.

The Court then pointed out that while the HBOR is applicable to this case, Section 2924(a)(6) — the statutory provision specifically cited by the borrower — is not one of the nine sections that explicitly provides for injunctive relief.

Because the Legislature chose to provide for injunctive relief for some HBOR violations, but not for others, the Court found that such relief is not impliedly available for an alleged violation of Section 2924(a)(6).

The Appellate Court then reviewed the legislative history of the HBOR, finding that the HBOR’s enforcement mechanisms were drafted to avoid “frivolous claims” and attempts to “merely delay legitimate foreclosure proceedings.”  Significantly, the Conference Committee Reports stated that while damages are available post-foreclosure, prior to a foreclosure sale the only remedy that a borrower may seek is an action to enjoin a violation of the specified sections, along with any trustee’s sale.  The Court thus found a clear indication that the Legislature intended to preclude borrowers from seeking to enjoin a foreclosure sale for reasons other than those expressly authorized.

The Court then addressed the apparent tension with the California Supreme Court’s recent holding in Yvanova v. New Century Mortgage Corp., 62 Cal. 4th 919 (Cal. 2016).  In Yvanova, the California Supreme Court recognized a cause of action for wrongful foreclosure under a similar set of facts.  In Yvanova, the California Supreme Court held that after a foreclosure, a borrower may potentially “base an action for wrongful foreclosure on allegations a purported assignment of the note and deed of trust to the foreclosing party bore defects rendering the assignment void.”  See Yvanova at 923.

Here, the Court distinguished Yvanova on two grounds.  First, the instant appeal was not a wrongful foreclosure but an action brought preemptively to enjoin a foreclosure, which Yvanova did not address.  Second, Yvanova involved a foreclosure that preceded the effective date of the HBOR and thus did not address the effect of that legislation.  The Court noted that the borrower may have a post-foreclosure cause of action for damages under Yvanova; the Legislature appears to have simply made a policy decision as to pre-foreclosure injunctive relief, where foreclosure delays may occur due to litigation, even where the lenders are ultimately vindicated.

Next, the Court rejected the borrower’s argument that he should have been given leave to amend his complaint to allege violations of Cal. Civil Code § 2923.17, as the declarations required by that section were all properly filed below.  The Court noted that nothing precludes the borrower from challenging the substance of those declarations in a post-foreclosure suit, which the Court held is the borrower’s exclusive remedy for the alleged violations under the HBOR’s statutory scheme.

Finally, the Court rejected the borrower’s breach of contract claim, finding the claim barred under the two-year statute of limitations for breach of an oral contract. (Cal. Code Civ. Proc., § 339).  Accepting the borrower’s allegations as true, the latest date the breach of contract suit could have accrued was March 23, 2011; however, the original complaint was not filed below until Aug. 13, 2014, more than three years after the alleged breach.

Thus, the Appellate Court held that the plain language and legislative history of the HBOR does not authorize a court to enjoin a violation of Section 2924(a)(6), and therefore no injunctive relief is available for a violation of that section.

Moreover, the Court held that the borrower failed to show a reasonable possibility of amending his complaint to plead any of the authorized grounds for injunctive relief under the HBOR.

Accordingly, the trial court’s judgment of dismissal was affirmed on all counts.

3rd Cir. Upholds Denial of Class Cert. on ‘Ascertainable Loss,’ Causation Deficiencies

The U.S. Court of Appeals for the Third Circuit recently affirmed a denial of class certification, holding that the plaintiffs’ theory was insufficiently supported by class-wide evidence to demonstrate the fact of damages whether on the issues of “ascertainable loss” or “causal relationship,” and failed to establish that common questions would predominate over individual questions.

A copy of the opinion in Harnish v. Widener Univ. Sch. of Law is available at:  Link to Opinion.

A group of former law students filed a class action against their law school, alleging that the school violated the New Jersey Consumer Fraud Act (NJCFA) and the Delaware Consumer Fraud Act (DCFA) by allegedly intentionally publishing and marketing misleading employment statistics of its graduates.  More specifically, the students alleged that between 2005 and 2011, the school reported that 90-97 percent of its students were employed after graduation, when in fact, only 50-70 percent of graduates during that time were actually employed in full-time legal positions, which the school knew.

The law students alleged that publishing these misleading statistics enabled the school to charge its students inflated tuition – that is, higher tuition than what the school would have been able to charge had accurate employment statistics been published instead.  The students sought damages equal to the amount of the alleged tuition overpayments.

The district court below denied class certification to the students, holding that the students could not meet Federal Rule of Civil Procedure 23(b)(3)’s requirement that common questions predominate over individual questions because they had not shown that they could prove the students’ damages by common evidence.  The district court noted that the students’ proposed theory of damages relied on a “fraud-on-the-market” theory, which state courts had consistently rejected outside of the federal securities fraud context.

The students filed for interlocutory review of the denial of class certification under FRCP 23(f), which the Third Circuit granted.

As you may recall, an NJCFA/DCFA claim consists of “(1) an unlawful practice, (2) an ascertainable loss, and (3) a causal relationship between the unlawful conduct and the ascertainable loss.”  See Gonzalez v. Wilshire Credit Corp., 25 A.3d 1103, 1115 (N.J. 2011).

The Third Circuit addressed three alleged errors raised by the students:

First, the students argued that the district court below applied an improperly burdensome legal standard under FRCP 23(b)(3) by scrutinizing their class-wide evidence prior to full merits discovery.

The Third Circuit began its analysis by finding that, contrary to the students’ argument, it was entirely appropriate for the district court below to examine the students’ theory of damages and proof supporting it, since ascertainable loss and a causal relationship are core elements of liability under the NJCFA/DCFA.

The Court noted that the district court below was properly concerned with the students’ ability to demonstrate the fact of damage from the “ascertainable loss” and “causal relationship” elements class-wide.

Next, the students alleged that the district court erroneously attributed significance to the fact that some graduates do obtain full-time legal employment, supposedly ignoring that the students’ actual theory of damages – i.e., that all putative class members were charged inflated tuition, regardless of employment outcomes — is unrelated to the students’ actual employment outcomes.

The Third Circuit agreed with the students to the extent that the district court discussed the full-time legal employment of some graduates in reaching its decision below, but found that this error was harmless.  The Court noted that the inflated tuition argument was not adequately supported by class-wide evidence, precluding class-wide certification.

Finally, the students alleged that the district court below erred in equating their theory of damages with the non-cognizable “fraud-on-the-market” theory, contending that they had sufficient evidence to support a non-reliance-based inflated tuition theory.

Here, the Third Circuit agreed with the students that “fraud-on-the-market” was not the correct terminology for the students’ theory; rather, it belongs to the “price-inflation” category of theories.

However, the Court noted, like the fraud-on-the-market theory, the price-inflation theory has been consistently rejected by New Jersey and Delaware state courts outside of the federal securities fraud context.  These state courts have held that the ascertainable loss and causal relationship elements of the NJCFA and DCFA are not met by a price inflation theory.  See, e.g., Int’l Union of Operating Eng’rs Local No. 68 Welfare Fund v. Merck & Co., Inc., 192 N.J. 372, 389, 929 A.2d 1076 (N.J. 2007) (per curiam); Teamsters Local 237 Welfare Fund v. Astra Zeneca Pharm. LP, 136 A.3d 688 (Del. 2016).

In Merck, consumers were allegedly overcharged for prescription medications.  There, the New Jersey Supreme Court rejected the consumers’ attempt “to prove only that the price charged for Vioxx was higher than it should have been as a result of defendant’s fraudulent marketing campaign, and… thereby to be relieved of the usual requirements of proving an ascertainable loss.”  See Int’l Union of Operating Eng’rs Local No. 68 Welfare Fund v. Merck & Co., Inc., 192 N.J. at 1088.  There, the rejection of the consumers’ price inflation theory removed it as a potential common question entirely, leading the New Jersey Supreme Court to hold that individualized questions about how the diverse group of class members reacted to the alleged fraud predominated instead, precluding class certification.  Id. at 1087-1088.

Thus, the Third Circuit held that the students in the case at hand failed to meet the predominance requirement of Rule 23(b)(3) because the only class-wide evidence of damages offered by the students supported the non-cognizable theory of price inflation, and as such, the students were properly denied class certification.

Accordingly, the district court’s denial of class certification was affirmed.

3rd Cir. Says State Law Claims Not Preempted by Bankruptcy Code’s Involuntary Case Provisions

The U.S. Court of Appeals for the Third Circuit recently held that the Bankruptcy Code does not preempt state law claims brought by non-debtors for damages related to the filing of an involuntary bankruptcy proceeding.

A copy of the opinion in Rosenberg v. DVI Receivables XVII, LLC is available at:  Link to Opinion.

The creditors in this action initiated state court litigation against limited partnerships controlled by the debtor, alleging money owed under various leases.  During the state court proceedings, the creditors filed an involuntary bankruptcy proceeding against the debtor and the debtor’s affiliated medical imaging companies, none of which were defendants in the state court litigation.

The debtor transferred the involuntary bankruptcy case to the U.S. District Court for the Southern District of Florida, where the bankruptcy court dismissed the involuntary bankruptcy, finding among other things that two of the alleged creditors who brought the involuntary bankruptcy were not actually creditors of the debtor.

The debtor then filed an adversary proceeding against the creditors pursuant to the Bankruptcy Code, 11 U.S.C. § 303(i), seeking to recover costs, attorney’s fees, and damages for the bad faith filing of the involuntary bankruptcy.  Following several years of litigation, the U.S. Court of Appeals for the Eleventh Circuit ultimately reinstated a substantial jury verdict in favor of the debtor.

Meanwhile, the debtor’s wife and the debtor’s affiliated limited partnerships, none of which were parties to the involuntary bankruptcy proceeding, brought suit in federal court to recover damages under Florida law for tortious interference with contracts and business relationships stemming from the involuntary bankruptcy petition filed against the debtor and the debtor’s affiliated medical imaging companies.

The plaintiff debtor and his wife alleged that the involuntary bankruptcy petition had caused the debtor’s affiliated limited partnerships to be declared in default on their underlying mortgages, leading to the loss of all but one of the properties owned by the limited partnerships, and costing the debtor’s wife her interest in one of the limited partnerships.

After being transferred to the U.S. District Court for the Eastern District of Pennsylvania on the creditors’ motion, the creditors moved to dismiss, arguing that the plaintiffs’ state law tortious interference claims were preempted by the involuntary bankruptcy provisions of the Bankruptcy Code.  The trial court agreed and dismissed the complaint.  The instant appeal followed.

As you may recall, 11 U.S.C. § 303(i) of the Bankruptcy Code provides that if an involuntary bankruptcy petition is dismissed, a debtor may recover attorney’s fees, costs, and damages from its creditors.  In relevant part, § 303(i) reads:

(i) If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment-

(1) Against the petitioners and in favor of the debtor for-

(A) costs; or

(B) a reasonable attorney’s fee; or

(2) against any petitioner that filed the petition in bad faith, for-

(A) any damages proximately caused by such filing; or

(B) punitive damages

See 11 U.S.C. § 303(i).

The Third Circuit began its analysis by noting that this is a case of alleged field preemption, which “occurs when a field is ‘reserved for federal regulation, leaving no room for state regulation,’ and ‘congressional intent to supersede state laws is clear and manifest.’”  See Elassaad v. Indep. Air, Inc., 613 F.3d 119, 126 (3d Cir. 2010) (quoting Holk v. Snapple Beverage Corp., 575 F.3d 329, 336 (3d Cir. 2009).

In a case of field preemption, the Third Circuit noted, the court begins with a presumption against preemption that is only overcome when “a Congressional purpose to preempt… is clear and manifest.”  See Farina v. Nokia Inc., 625 F.3d 97, 117 (3d Cir. 2010).

To discern the preemptive intent of Congress, the court examined the text, structure, and purpose of the statute and the surrounding statutory framework.  See Medtronic, Inc. v. Lohr, 518 U.S. 470, 486 (1996).

Here, the relevant inquiry was whether it was Congress’s “clear and manifest intent” to preempt state law causes of action for non-debtors based on the filing of an involuntary bankruptcy petition.

The Third Circuit carefully examined the text, structure, and purpose of § 303(i), finding Congressional silence as to non-debtor remedies, no structural indication of field preemption, and that it would be inconsistent with the remedial purpose of § 303(i) to preempt state law remedies for non-debtors who can similarly be harmed by involuntary bankruptcy petitions.  Accordingly, the Court found that field preemption did not apply to the circumstances here.

Rejecting the creditors’ argument that Congress could have written § 303(i) such that it also provided for non-debtor remedies, as it did when enacting the provisions of 11 U.S.C. § 362(k)(1) relating to violation of the automatic stay, the Court acknowledged that while this was a plausible argument, Congressional silence does not demonstrate the “clear and manifest” intent necessary to establish field preemption.

The Third Circuit also rejected the creditors’ argument that permitting state law claims against creditors would be inconsistent with the comprehensive nature of the Bankruptcy Code and open the floodgates to state courts rewriting bankruptcy law, noting that the creditors could cite only a handful of cases where non-debtors had brought state tort claims against petitioning creditors, which substantially undermined their argument that the floodgates of litigation would be opened absent preemption.

Finally, the Third Circuit acknowledged that its ruling could not be reconciled with the Ninth Circuit’s decision in In re Miles, 430 F.3d 1083 (9th Cir. 2005).

In Miles, non-debtors were allegedly harmed by an involuntary bankruptcy and brought state law claims against the petitioning creditors in state court.  There, the creditors successfully removed the case to federal bankruptcy court.  The Ninth Circuit held that the state law tort claims were removable to federal bankruptcy court because they were “completely preempted” by § 303(i).  See In re Miles, 430 F.3d at 1093.  Finding the case properly removed to federal bankruptcy court, the Ninth Circuit affirmed the dismissal of the complaint because the non-debtors lacked standing under § 303(i) to recover damages.

Here, the Third Circuit refused to follow the Ninth Circuit’s ruling in Miles, stating that the Ninth Circuit’s Miles analysis is inconsistent with the presumption against preemption, which requires that congressional intent to preempt state law must be “clear and manifest.”

Going further, the Third Circuit noted that the Supreme Court has never recognized “complete preemption” in the Bankruptcy Code, and the Ninth Circuit appears to be the only circuit finding such preemption.  See In re Repository Techs, Inc., 601 F.3d 710, 724 (7th Cir. 2010) (declining to follow Miles).

Thus, the Third Circuit held that Bankruptcy Code § 303(i) does not preempt state law claims by non-debtors for damages based on the filing of an involuntary bankruptcy petition.

Accordingly, the Third Circuit reversed the trial court’s dismissal of the plaintiffs’ complaint and remanded for further proceedings.

Fla. App. Court (4th DCA) Holds Victory Must Be Complete to Obtain Attorney’s Fees Under FDUTPA

The District Court of Appeal of Florida, Fourth District, recently held that in order to recover fees for prevailing on a Florida Deceptive and Unfair Trade Practices Act claim, a party must prevail not only on the FDUTPA claim but also on all pleaded legal theories such that it obtains a judgment in its favor on the entire case.

A copy of the opinion in Banner v. Law Office of David J. Stern, P.A. is available at:  Link to Opinion.

A borrower filed a lawsuit against a lender’s counsel, alleging that the lender’s counsel’s conduct violated FDUTPA and the Florida Consumer Collection Practices Act.  The trial court entered a judgment in favor of the borrower on the FCCPA claim but granted summary judgment in favor of the lender’s counsel on the FDUTPA claim.

The trial court’s judgment was affirmed on appeal, and both parties moved for appellate attorney’s fees.  The borrower was initially awarded appellate attorney’s fees under the FCCPA, and the lender’s counsel was initially awarded appellate attorney’s fees under FDUTPA.

The borrower moved for rehearing on the award of appellate attorney’s fees to the lender’s counsel for prevailing on the FDUTPA claim.

As you may recall, § 501.2105, Florida Statutes, governs fee entitlement under FDUTPA.  Section 501.2105(1) provides, in relevant part, that “the prevailing party [in FDUTPA litigation], after judgment in the trial court and exhaustion of all appeals, if any, may receive his or her reasonable attorney’s fees and costs from the nonprevailing party.”  See § 501.2105(1), Fla. Stats.

The Appellate Court began its analysis by noting that the Florida Supreme Court has instructed  that “to recover attorney’s fees in a FDUTPA action, a party must prevail in the litigation; meaning that the party must receive a favorable judgment from a trial court with regard to the legal action, including the exhaustion of all appeals.”  See Diamond Aircraft Indus., Inc. v. Horowitch, 107 So. 3d 362, 368 (Fla. 2013) (citing Heindel v. Southside Chrysler-Plymouth, Inc., 476 So. 2d 266, 270 (Fla. 1st DCA 1985)).

The Court carefully examined the Heindel approach to awarding FDUTPA attorney’s fees, which reads the statute’s reference to a “judgment” in “civil litigation” to refer to the entire case containing a FDUTPA claim, such that the “prevailing party” must obtain a favorable judgment in the entire case, not just on the FDUTPA claim, in order to recover FDUPTA attorney’s fees.

Going further, the Appellate Court analyzed Hendry Tractor Co. v. Fernandez, 432 So. 2d 1315 (Fla. 1983), which the First District Court of Appeal had relied upon in reaching its Heindel decision.

In Hendry Tractor, the plaintiffs had brought alternative counts for negligence and breach of warranty/strict liability.  The jury found the defendants liable for negligence, but not for breach of warranty/strict liability, and awarded damages on the negligence claim.  The trial court had awarded costs to the plaintiffs on the negligence claim but also awarded costs to the defendants under § 57.041, Fla. Stats., for prevailing on the breach of warranty/strict liability claims.

At the time of the Hendry Tractor decision, Section 57.041(1) provided that “the party recovering judgment shall recover all his or her legal costs and charges which shall be included in the judgment.”  See § 57.041(1), Fla. Stats. (1979).

There, the Florida Supreme Court reversed the award of costs to the Hendry Tractor defendants, holding that the “net judgment was, without doubt, rendered in favor of the plaintiffs,” and that plaintiffs were “clearly the parties recovering judgment and should be awarded costs.”  See Hendry Tractor, 432 So. 2d at 1316.

Similarly, in rejecting the lender’s counsel’s argument that it was entitled to prevailing party FDUTPA attorney’s fees like the defendant in Diamond Aircraft, the Appellate Court noted that unlike in the instant case, the Diamond Aircraft defendant had ultimately prevailed on all claims, not just the FDUTPA claim, such that the Diamond Aircraft plaintiff had recovered nothing.

After completing its review of the relevant case law, the Appellate Court explicitly approved the net judgment rule articulated in Heindel and Hendry Tractor, holding that where a case involves multiple counts directed at the same conduct, “a party must (1) recover judgment on the chapter 501, part II claim, and (2) recover a net judgment in the entire case” in order to recover its attorney’s fees under FDUTPA.  See Heindel, 476 So. 2d at 270.

Applying the net judgment rule to the case at hand, the Appellate Court determined that the lender’s counsel was not entitled to recover their appellate attorney’s fees under FDUTPA, as the lender’s counsel had not recovered a net judgment on the entire case, since a judgment had been entered against them under the FCCPA.

Accordingly, the Appellate Court withdrew its previous order granting appellate attorney’s fees to the lender’s counsel for prevailing on the FDUTPA claim, and entered a new opinion denying appellate attorney’s fees to the lender’s counsel.

6th Cir. Confirms No TILA Right to Cancel for Failure to Disclose Assignment of Loan

The U.S. Court of Appeal for the Sixth Circuit recently confirmed that a mortgagee’s alleged failure to notify borrowers of an assignment of the loan does not give rise to a right to cancel under the federal Truth In Lending Act (TILA).

A copy of the opinion in Robertson v. US Bank, NA is available at:  Link to Opinion.

A mortgagee initiated a foreclosure action, and the borrowers responded with a “notice of rescission” to the mortgagee and the mortgagee’s counsel, alleging that the mortgagee had violated the federal Truth in Lending Act and that the mortgagee lacked standing to foreclose.

Prior to the foreclosure sale, the borrowers sued the mortgagee and the mortgagee’s counsel in state court, reiterating the allegations in their notice of rescission.  The mortgagee removed the case to federal court, where the parties agreed to dismiss the mortgagee’s counsel from the lawsuit.

The trial court subsequently granted the mortgagee’s motion for summary judgment, from which borrowers appealed.

As you may recall, Congress added subsection (g) to 15 U.S.C. § 1641 in the Helping Families Save their Homes Act of 2009.  Pub. L. 111-22, 123 Stat. 1658.  Section 1641(g) provides that “not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned, the new owner or assignee of the debt shall notify the borrower in writing of such transfer.”  See 15 U.S.C. § 1641(g).

In reaching its decision, the Sixth Circuit addressed four alleged errors raised by the borrowers:

First, the borrowers alleged that the mortgagee waived its right to remove the case to federal court by filing papers in state court, which included two written objections to borrowers’ motions and an answer to the complaint.

Rejecting this argument, the Appellate Court held that the mortgagee’s counsel’s filings in state court did not constitute a waiver, as waiver of the right to remove “must be clear and unequivocal.”  See Regis Assocs. v. Rank Hotels (Mgmt.) Ltd., 894 F.2d 193, 195 (6th Cir. 1990).  Here, the defensive actions taken by the mortgagee’s counsel did not constitute a “clear and unequivocal” waiver.  The Sixth Circuit noted that the Federal Rules of Civil Procedure contemplate the filing of an answer prior to the time for filing a removal motion.  See Fed. R. Civ. P. 81(c)(2).

Going further, the Court noted that even if the mortgagee’s counsel had waived its right to remove, this waiver would not be binding on the mortgagee, as the “rule of unanimity” requires that each defendant consent to removal.  See 28 U.S.C. Section 1446(b)(2)(A); Loftis v. United Parcel Serv., Inc., 342 F.3d 509, 516 (6th Cir. 2003).

Second, the borrowers alleged that they had the right to rescind the loan under TILA due to mortgagee’s failure to notify them of the assignment of the deed of trust.  The borrowers asserted that TILA’s right of rescission should be applicable to a violation of § 1641(g).

Here, the Sixth Circuit held that the notice requirement of § 1641(g) applies only to an assignment of the underlying debt, not to the debt instrument itself, which in this case was the deed of trust.

Section 1641(g) would apply to the transfer of the note, but the Court noted that the note here was transferred in 2006, more than three years before § 1641(g) became law.  At the time of the 2006 note transfer, there was no notice requirement in effect.

Moreover, the Court stated, even if the mortgagee had violated § 1641(g) through its assignment of the deed of trust in 2012, the borrowers still would not be permitted to rescind the loan, but rather would be limited to recovering money damages in an amount between $400 and $4,000 (although more could be recovered upon a showing of actual damages exceeding $4,000 due to the failure to notify).  See 15 U.S.C. § 1640(a)(2)(A)(iv), (e).

In addition, the Court added that although the initial loan agreement in December 2005 constituted a consumer credit transaction subject to § 1635(a) of the Truth in Lending Act, the assignment of the deed of trust from MERS to the mortgagee in 2012 did not constitute a consumer credit transaction, as neither party to the 2012 assignment was a consumer, nor was either party extended credit.  The Sixth Circuit noted that the borrowers were not a party to the 2012 assignment from MERS to the mortgagee, and this assignment did not affect the terms of the borrowers’ mortgage loan.

Third, the borrowers argued that the mortgagee lacked standing because the loan documentation was allegedly inadmissible hearsay evidence.

The Sixth Circuit upheld the mortgagee’s standing, holding that the mortgagee’s loan documentation was not hearsay under the “verbal acts” doctrine, as the relevant documentation, in the form of writings and statements, such as contracts, “affect the legal rights of the parties” and thus are not hearsay.  See Fed. R. Evid. 801(c).  Nor was authentication an issue, the Court held, as the documents were recorded in the public records.  See Fed. R. Evid. 902(1).  The Court held that the endorsements on the note and allonge were sufficient to prove the mortgagee’s standing.

Fourth, the borrowers alleged that the mortgagee forfeited its right to foreclose when it failed to bring a compulsory breach of contract counterclaim in response to the borrowers’ Truth in Lending Act complaint.

Here, the Sixth Circuit held that the mortgagee did not forfeit its right to foreclose by failing to bring a counterclaim because foreclosure is not a judicial remedy in Tennessee, and thus there was no reason to bring a counterclaim.  In Tennessee, a trustee may conduct a foreclosure sale without filing any court papers.

Accordingly, the trial court’s summary judgment ruling in favor of the mortgagee was affirmed on all counts.