Author Archive for Hector E. Lora – Page 2

6th Cir. Bankruptcy Panel Holds Foreclosure Deficiency Judgment May Be Avoided

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Sixth Circuit recently held that a mortgage foreclosure deficiency judgment lien may be avoided under 11 U.S.C. § 522(f)(2), reversing the bankruptcy court’s ruling to the contrary.

A copy of the opinion in In re Antoinette Pace is available at:  Link to Opinion.

The debtor filed a chapter 13 bankruptcy, listing her residence in Ohio on her schedules with a value of $147,630.  She also claimed the residence as exempt homestead in the amount of $132,900, the maximum allowed pursuant to Ohio law.

On her Schedule D, the debtor listed judicial or judgment liens as well as a secured claim held by the county treasurer for unpaid taxes as encumbrances on her homestead. The schedules did not reflect a mortgage on the home, but the debtor’s statement of financial affairs reflected a completed foreclosure action.

The debtor converted her case to a chapter 7 liquidation, and filed a motion to avoid the liens on the basis that they impaired her homestead exemption.

At the hearing on the motion, the bankruptcy court “expressed concern that Debtor willfully allowed real estate taxes … to remain unpaid to create an impairment to her homestead exemption [and] ordered Debtor to file a supplemental brief on the issue.”

After briefing, the bankruptcy court entered an order granting in part and denying in part the debtor’s motion to avoid the liens.  Instead of addressing the willful impairment issue that the bankruptcy court asked for briefs on, it held that under the § 522(f) the debtor’s homestead exemption was impaired as to the two smaller liens, one for $1,889.72 and the other for $2,975, and avoided those liens.

The bankruptcy court, however, denied the motion as to the large lien in the amount of $141,013.65 because it arose out of a mortgage foreclosure and §522(f)(2)(C) prohibited the avoidance of such liens. The debtor appealed.

On appeal, the Sixth Circuit first rejected the debtor’s argument that the bankruptcy court erred by denying the motion to avoid liens, given that nobody objected to the relief requested, reasoning that the bankruptcy court had an independent obligation to consider the merits of the motion, regardless of whether any objection was raised.

The Appellate Court then turned to whether § 522(f)(2)(C) prohibits the avoidance of a judicial lien arising from a mortgage foreclosure deficiency judgment.

This subsection provides that a debtor may avoid a lien to the extent that it impairs the debtor’s homestead exemption, if such lien is “a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5).” It then provides a formula for calculating the degree of impairment, but goes on to provide an exception that “[t]his paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.”

The Sixth Circuit noted that there is a “split in authority” on the “purely legal question of whether a mortgage deficiency judgment lien is a ‘judgment arising out of a mortgage foreclosure’ within the meaning of § 522(f)(2)(C).”  The Court also noted that the “overwhelming majority of courts” have held that mortgage deficiency liens are not judgments arising out of a mortgage foreclosure and thus are avoidable, with only two bankruptcy rulings in Connecticut in the minority.

After analyzing the different rationales relied upon by courts in the majority, which include textual analysis of § 522(f), reliance on state foreclosure law differentiating between equitable foreclosure claims and legal deficiency claims, or a combination thereof, the Sixth Circuit, found “that § 522(f)(2)(C) is unambiguous, and no review of state law or legislative history is necessary or appropriate to interpret its meaning.”

Relying on general principles of statutory construction, the Court held that, interpreting § 522(f)(2)(C) according to its plain meaning and structure, “it does not preclude avoidance of mortgage deficiency judgment liens. Rather, § 522(f)(2)(C) ‘clarifies that the entry of a foreclosure judgment does not convert the underlying consensual mortgage into a judicial lien which may be avoided.”

Accordingly, the bankruptcy court’s ruling “that § 522(f)(2)(C) precludes avoidance of a deficiency judgment lien” was reversed, and the case was remanded to the bankruptcy court for entry of an order consistent with the Court’s opinion.

8th Cir. Holds Borrower’s Post-Foreclosure Modification Allegations Not Time-Barred

The U.S. Court of Appeals for the Eighth Circuit recently reversed the dismissal of a borrower’s lawsuit against his mortgagee for failing to restore his title after a non-judicial foreclosure and subsequent execution of a loan modification agreement, holding that the borrower’s claims were not time-barred and accrued only when he tried to sell the home more than five years after the modification agreement.

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

A borrower refinanced his home mortgage loan in 2003, and defaulted in 2008. The loan servicer gave the borrower notice and held a non-judicial foreclosure sale under Missouri law, at which the mortgagee made the winning bid.

A deed conveying title of the encumbered property to the mortgagee was recorded in 2008 and then the mortgagee sued to evict the borrower.  A few months later, the borrower and mortgagee entered into an oral agreement to reinstate the mortgage by paying $6,600 and the eviction proceeding was halted.

However, the parties did not address how the borrower’s title would be restored.  The parties then signed a loan modification agreement, which once again did not specify how the borrower’s title would be restored.

In 2013, the borrower moved and decided to sell the home. However, his real estate broker discovered during a title search that the home was still titled in the mortgagee’s name.

The borrower then sued the servicer in Missouri state court.

The mortgagee intervened and removed the case to federal court, “seeking an order setting aside the deed from the foreclosure sale and enforcing the modified loan — in other words, judicial permission to proceed as if everything happened the way it was supposed to occur.”

The borrower sought damages instead of accepting a deed back to him because he no longer resided in the subject property, which had deteriorated and later declared a nuisance.

The parties filed cross-motions for summary judgment and the trial court granted the mortgagee’s motion, finding that the borrower’s claims were time-barred by Missouri’s five-year statute of limitations. The borrower appealed.

The central question before the Eighth Circuit was whether the borrower’s claims accrued in 2008 or 2013.

The Eighth Circuit explained that under Missouri law, claims generally accrue “when the damage … is sustained and is capable of ascertainment.” In addition, however, in cases involving fraud, the claim does not accrue until “discovery … of the facts constituting fraud.”

The Appellate Court concluded that it need not decide which standard applied because it found that the borrower’s “claims were all timely even under the usual, easier to trigger ‘capable of ascertainment’ standard.”

The Eighth Circuit rejected the mortgagee’s, and trial court’s, reasoning that the borrower could have discovered the status of title more than five years before filing suit, rejecting such a literal approach in reliance on a Missouri Supreme Court opinion holding that the phrase “capable of ascertainment” means when the “plaintiff has sufficient knowledge to be put on ‘inquiry notice’ of the wrong and damages….”

Relying on its interpretation of the Missouri Supreme Court’s ruling, the Eighth Circuit held that “the statute of limitations on [borrower’s] claims only started running ‘when a reasonable person would have been put on notice that an injury and substantial damages may have occurred and would have undertaken to ascertain the extent of the damages.’”

Because the Eighth Circuit found that the mortgagee could not point to anything that would have led a reasonable person to inquire why his title was not restored, the party asserting the defense bears the burden of proof, and all seemed well until the borrower tried to sell his home, the Court concluded the borrower had no duty to inquire and that his lawsuit was timely.

Thus, the trial court’s summary judgment in favor of the mortgagee was reversed and the case was remanded “for consideration of the merits of [borrower’s] claims.”

9th Cir. Bankruptcy Panel Affirms Dismissal of ‘Wrongful Securitization’ Allegations

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an adversary proceeding without leave to amend, holding that:

(a) the debtors failed to state a claim for wrongful foreclosure under California law;

(b) the debtors failed to state a claim for breach of contract or breach of the implied covenant of good faith and fair dealing because they were not third-party beneficiaries of the pooling and servicing agreement;

(c) the debtors failed to state a claim for breach of the deed of trust or breach of the implied covenant of good faith and fair dealing by executing the notice of default; and

(d) the debtors failed to state a claim for violating § 2923.5 of California’s Civil Code or for violating California’s unfair competition law.

A copy of the opinion in In re Turner is available at:  Link to Opinion.

Husband and wife borrowers obtained a loan to purchase their home in Livermore, California. The loan was secured by a deed of trust, which named a title company as trustee and a national bank as both lender and beneficiary.

The bank sold the note and deed of trust and the purchaser deposited both into a mortgage-backed securities trust pursuant to a pooling and servicing agreement (“PSA”), which named another national bank as trustee.  The language of the trust required the transfer of assets into the trust within 90 days after the trust pool’s start date, but the note and deed of trust allegedly were not deposited into the trust until 2012.

A third-party default services company recorded a notice of default against the borrowers’ property acting as agent or trustee for the beneficiary. The trustee then recorded substitution of trustee naming the default services company as trustee, after which the default services company recorded a notice of trustee’s sale.

The borrowers filed for bankruptcy shortly thereafter, but failed to pay as required by their reorganization plan, and the bank originally named as trustee filed a motion for relief from stay, which the bankruptcy court granted.

The borrowers then filed an adversary proceeding, alleging that the transfer of the deed of trust into the trust was void because it breached the PSA 90-day transfer requirement. They also alleged breach of the deed of trust and supposed violation of two California statutes.

The bankruptcy court dismissed the adversary complaint without leave to amend. The borrowers appealed to the district court, which affirmed the dismissal. They then appealed to the Ninth Circuit.

On appeal the Ninth Circuit was presented with two questions: “(1) whether the bankruptcy court correctly concluded that the [borrowers’] Adversary Complaint failed to state a claim and (2) whether the bankruptcy court erred in denying the [borrowers] leave to amend.”

The Ninth Circuit first addressed the borrowers’ claim for wrongful foreclosure, explaining that under California law a residential borrower “has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void. … Unlike a voidable transaction, a void one cannot be ratified or validated by the parties to it even if they so desire.”

The Court rejected the borrowers’ argument that the assignments of the deed of trust were void, relying on three California Courts of Appeal opinions all holding that “such an assignment is merely voidable” because “an unauthorized act by the trustee is not void but merely voidable by the beneficiary.” Thus, the Ninth Circuit found that the district court correctly dismissed the wrongful foreclosure claim.

Turning to the borrowers’ claim for breach of contract of the PSA or breach of the implied covenant of good faith and fair dealing under the PSA, the Ninth Circuit rejected the borrowers’ argument that they were third-party beneficiaries of the PSA, relying on “numerous California appellate courts [that] have held, borrowers … are not third-parties [sic] beneficiaries of the PSA.” Accordingly, the Court concluded that “the district [court] correctly ruled that the [borrowers] failed to state a claim for either breach of the express agreement or the related breach of the implied covenant of good faith and fair dealing under the PSA.”

The Ninth Circuit next rejected the borrowers’ argument that the lender/beneficiary bank breached the deed of trust because it did not sign the notice of default and its agent, the default services company, “could not record the Notice of Default because the Notice was issued three months before [the default services company] was substituted as Trustee.”

The Court reasoned that their argument lacked merit because the express terms of the deed of trust did not require the lender/beneficiary bank “to execute the Notice of Default, but rather, it can cause the Trustee to execute a written notice of default.”  Because “a substitution of trustee was recorded naming [the default services company] as Trustee … [it] had the authority to issue the Notice of Default [under Cal. Civ. Code § 2934a(d)]” which provides that “[o]nce recorded, the substitution shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section.”

The Ninth Circuit also rejected the borrowers’ argument that the bank breached the implied covenant of good faith and fair dealing “by obscuring the identity of the true holder of the beneficial interest making it impossible for them to know to whom to make their mortgage payments” because they “have not alleged that their payments were not accurately credited, that they sustained any damages, or that they were not in default. Having failed to identify any prejudice, the district court properly dismissed their claims.”

The Court then addressed the borrowers’ claim that the substituted trustee violated Cal. Civ. Code § 2923.5, which provides that “[a] mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent may not record a notice of default until either thirty days after initial contact with the borrower or thirty days after satisfying the due diligence requirements.”

Because the notice of default was signed by the substitute trustee as agent for the lender/beneficiary bank, a substitution of trustee was thereafter recorded, and “[t]he only remedy for noncompliance with [Section 2923.5] is the postponement of the foreclosure sale[,]” the Court concluded that the district court correctly dismissed the borrowers’ claim under section 2923.5.

Turning to the borrowers’ remaining claim that defendants violated California’s unfair competition law (“UCL”), which “prohibits unlawful, unfair, deceptive, untrue or misleading advertising[,]” the Ninth Circuit found that the borrowers “failed to establish standing to bring a claim under the UCL.”

The Ninth Circuit reasoned that in order to have standing to bring a UCL claim, “the plaintiff must ‘(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., cause by, the unfair business practice ….”  The Court noted that a plaintiff fails “to satisfy this causation requirement if he or she would have suffered ‘the same harm whether or not a defendant complied with the law.’”

The Court concluded that the borrowers lacked standing because “they cannot establish the second prong.” Their “home would have been foreclosed regardless of the alleged deficiencies in the timing of the assignments of the [deed of trust] and Substitution of Trustee. [They] have not disputed that they stopped making payments, causing the loan to go into default.” Because it was the borrowers’ default “that triggered the lawful enforcement of the power of sale clause in the deed of trust, and the triggering of the power of sale clause subjected [the borrowers’] home to nonjudicial foreclosure, not any procedural deficiencies in the assignment … they do not  have standing to pursue a claim under the UCL.”

Finally, the Ninth Circuit found that the district court correctly dismissed the borrowers’ claims without leave to amend “because any amendment would be futile.”

The Ninth Circuit affirmed the district court’s dismissal of the borrowers’ claims without leave to amend.

SCOTUS Holds Class Plaintiffs Cannot Voluntarily Dismiss Claims to Appeal Denial of Class Cert

The Supreme Court of the United States recently held that class action plaintiffs cannot stipulate to a voluntary dismissal with prejudice, then appeal the trial court’s prior interlocutory order striking their class allegations because a voluntary dismissal does not qualify as a “final decision” under 28 U.S.C. §1291 and improperly circumvents Federal Rule of Civil Procedure 23(f).

A copy of the opinion in Microsoft Corp. v. Baker et al. is available at:  Link to Opinion.

A group of purchasers of Microsoft’s Xbox 360 gaming console filed a putative class action alleging that the Xbox was designed defectively because it scratched game discs “during normal game-playing conditions.” The trial court denied class certification, finding that “individual issues of damages and causation predominated over common issues.” The plaintiffs petitioned the U.S. Court of Appeals for the Ninth Circuit for leave to appeal the denial, which was denied. The plaintiffs then settled individually.

Two years later, a group of plaintiffs represented by some of the same counsel as in the first case filed another putative class action based on the same design defect as the first action.  The trial court in the second action denied class certification, concluding that the doctrine of “comity required adherence to the earlier certification denial and therefore struck [the] class allegations.”

The plaintiffs petitioned the Ninth Circuit under Rule 23(f) for permission to appeal the order striking the class allegations, the “functional equivalent” of an order denying class certification, arguing that the order effectively killed their case because of the small size of their individual claims compared to the cost of litigating to final judgment. The Ninth Circuit denied the petition.

Instead of settling their claims individually as in the first action, petitioning the trial court to certify the order for immediate appeal, or litigating their case and trying to persuade the trial court to reconsider its denial of class certification prior to final judgment and then appealing the final judgment, the plaintiffs moved to dismiss their case with prejudice.

The plaintiffs argued that they would appeal the order striking their class allegations after the trial court entered its final order dismissing the case. Microsoft stipulated to the dismissal, but took the position that plaintiffs had no right to appeal the order striking the class allegations after the voluntary dismissal with prejudice.

The Ninth Circuit concluded that it had jurisdiction to hear the appeal pursuant to §1291, rejecting Microsoft’s argument that the voluntary dismissal tactic improperly “circumvented Rule 23(f).”  It then “held that the District Court had abused its discretion in striking [the] class allegations” because it had misinterpreted “recent Circuit precedent … and therefore misapplied the comity doctrine.”

Microsoft filed a petition for a writ of certiorari, which was granted, asking the Supreme Court of the United States to resolve a split among the federal courts of appeals over the question of whether “federal courts of appeals have jurisdiction under §1291 and Article III of the Constitution to review an order denying class certification (or … an order striking class allegations) after the named plaintiffs have voluntarily dismissed their claims with prejudice.”

The Supreme Court began by explaining that “[u]nder §1291 of the Judicial Code, federal courts of appeals are empowered to review only ‘final decisions of the district courts[,]’” and its application of this “finality rule” was controlled by its 1978 ruling in Coopers & Lybrand v. Livesay and Federal Rule of Civil Procedure 23(f).

In Coopers & Lybrand, the Supreme Court held that “death knell” doctrine did not require “mandatory appellate jurisdiction” over a trial court’s interlocutory order “striking class allegations or denying a motion for class certification.”  Instead, the Court held, a trial court applying this doctrine should consider whether denying class certification “would end a lawsuit for all practical purposes because the value of the named plaintiff’s individual claims made it ‘economically imprudent to pursue his lawsuit to a final judgment and [only] then seek appellate review” of the refusal to certify the class.

If the denial order sounded the “death knell,” it was appealable under §1291. However, if “the plaintiff had ‘adequate incentive to continue [litigating], the order [was] considered interlocutory” and an immediate appeal was impossible. The Court clarified that just because an interlocutory order denying class certification “may induce a party to abandon his claim before final judgment is not sufficient reason for considering [it] a ‘final decision’ within the meaning of §1291.”

The Supreme Court explained that after its ruling in Coopers & Lybrand, class action plaintiffs had a difficult time obtaining immediate appellate review of an adverse class certification ruling because there were only two options: (a) obtain an order from the trial court under §1292(b) certifying that the order “involves a controlling question of law as to which there is a substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation[;]” or (b) “satisfy the extraordinary circumstances test applicable to writs of mandamus.”

In 1998, however, the Court approved Federal Rule of Civil Procedure 23(f) in response to Coopers & Lybrand.  The present Rule 23(f) gives the courts of appeals unfettered discretion to allow a “permissive interlocutory appeal” of an order granting or denying class certification.

The Supreme Court noted that Rule 23(f) thus removes the power of the trial court to defeat any opportunity to appeal a class certification ruling, while also denying a right to appeal that might be prone to abuse.

The Supreme Court did not reach the Article III standing question because it concluded that §1291 does not confer jurisdiction under the facts presented, reasoning that “[b]ecause respondents’ dismissal device subverts the final-judgment rule and the process Congress has established for refining that rule and for determining when nonfinal orders may be immediately appealed, … the tactic does not give rise to a ‘final decisio[n]’ under §1291.”

The Court explained that the “voluntary-dismissal tactic, even more than the death-knell theory, invites protracted litigation and piecemeal appeals.”

The Supreme Court rejected the argument that Rule 23(f) was irrelevant because it only addresses interlocutory orders and the case involved a final judgment, reasoning that “[i]f respondents’ voluntary-dismissal tactic could yield an appeal of right, Rule 23(f)’s careful calibration—as well as Congress’ designation of rulemaking ‘as the preferred means for determining whether and when prejudgment orders should be immediately appealable, … would be severely undermined.’”

Accordingly, the Ninth Circuit’s judgment was reversed and the case was remanded for further proceedings.

2nd Cir. Upholds Dismissal of Supposed ‘LIBOR Fraud’ Claims

The U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of LIBOR-manipulation fraud claims brought by a group of hotel-related entities and their investor against a bank and two of its subsidiaries.

In so ruling, the Second Circuit held that:

(a) the borrower and related entities lacked standing to sue because they failed to list their potential claims in their bankruptcy case and the claims were barred by the doctrine of judicial estoppel; and

(b) the claims of the investor and guarantors were untimely and barred by the law of the case.

A copy of the opinion in BPP Illinois, LLC v. Royal Bank of Scotland Group PLC is available at:  Link to Opinion.

An Illinois limited liability company obtained a $66 million loan from a local bank to finance the purchase of hotels. The loan contained a formula, tied to the U.S. Dollar London Interbank Offered Rate (LIBOR), pursuant to which the borrower paid a net interest rate of approximately 4.8%.

Two years later, the borrower and affiliated guarantors filed bankruptcy in the United States Bankruptcy Court for the Eastern District of Texas, but their schedules failed to list any potential LIBOR-fraud claim as an asset. The bankruptcy court approved the debtors’ reorganization plan, which still did not disclose any claim against the bank, and the bankruptcy case was closed.

The bankrupt borrower, its corporate affiliates that guaranteed the loan, and an investor of the borrower then sued the bank, its parent and another subsidiary, in the United States District Court for the Southern District of New York, alleging that the banking defendants fraudulently induced the borrower to take out the loan, as the result of which the borrower was forced into bankruptcy.

The trial court dismissed the fraud claims against the lender because they were barred by the applicable statute of limitations, and dismissed the guarantors’ and investor’s claims “for failure to plead fraud with sufficient particularity.”

The plaintiffs appealed, and the Second Circuit previously reversed the judgment against the borrower, but affirmed the dismissal of the other plaintiffs’ claims.

On remand, the trial court dismissed the complaint, concluding that because the supposed LIBOR-fraud claim was not listed as an asset in the bankruptcy case, the plaintiffs lacked standing to sue or, alternatively, were judicially estopped. The trial court also denied the guarantors’ and investor’s motion to amend their complaint because “amendment would be untimely and barred by the law of the case.”

On appeal for the second time, the Second Circuit explained that “[t]he doctrine of judicial estoppel prevents a party from asserting a factual position in one legal proceeding that is contrary to a position that is successfully advanced in another proceeding … [and] will ‘prevent a party who failed to disclose a claim in bankruptcy proceedings from asserting that claim after emerging from bankruptcy.”

Although whether judicial estoppel applies depends on the specific facts presented, “[g]enerally, ‘judicial estoppel will apply if: [A] a party’s later position is ‘clearly inconsistent’ with its earlier position; [B] the party’s former position has been adopted in some way by the court in the earlier proceeding; and [C] the party asserting the two positions would derive an unfair advantage against the party seeking estoppel.’”

Addressing each element in turn, the Court first held that the bankrupt borrower “was required by Fifth Circuit law [where the bankruptcy was filed] to list its LIBOR claim before confirmation” because “[t]he Fifth Circuit has recognized ‘that the Bankruptcy Code and Rules impose upon bankruptcy debtors an express, affirmative duty to disclose all assets, including contingent and unliquidated claims.’” This means that “a debtor is required to disclose all potential causes of action.”

The borrower was on notice of its potential cause of action because numerous news articles had appeared reporting on LIBOR fraud and the parent of the bank had been sued for LIBOR manipulation by others before the bankruptcy plan was confirmed.

Because under Fifth Circuit bankruptcy precedent the plaintiff’s LIBOR-fraud claim was “a known cause of action” when the plan was confirmed, the bankrupt borrower’s “failure to list it in the schedule of assets is equivalent to a representation ‘that none exist[s].’”

Second, the Court found that “the bankruptcy court ‘adopted’ [the borrower’s] position that it had no LIBOR-fraud claim … when [it] confirmed the plan” because “’adoption’ in judicial estoppel ‘is usually fulfilled … when the bankruptcy court confirms a plan pursuant to which creditors release their claims against the debtor.’”

Third, even though under its precedent “we do not always require a showing of unfair advantage,” the Second Circuit found that “the showing had been made in this case” because the borrower’s “assertion of the claims now would allow it to enjoy an unfair advantage at the expense of its former creditors, who had a right to consider the claims during the bankruptcy proceeding.”

Finally, the Court affirmed the trial court’s denial of the guarantors’ and investor’s request to amend their complaint because they had not shown good cause after the deadline to amend in the trial court’s scheduling order had passed, as required by Federal Rule of Civil Procedure 16(b).

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

8th Cir. Upholds Dismissal of TCPA Class Action Based on Consent Shown in Heavily Redacted Records

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a putative class action brought under the federal Telephone Consumer Protection Act (TCPA) for making unsolicited telemarketing calls.

The Eighth Circuit held that the plaintiff had given prior express written consent to receive the calls, and the trial court properly considered redacted business records that showed the consumer had given his prior express written consent to be called.

A copy of the opinion in Zean v. Fairview Health Services is available at:  Link to Opinion.

A consumer who purchased a medical device filed a putative class action against the seller, alleging that it violated the TCPA by making telemarketing calls and leaving voicemail messages “soliciting him to buy home medical supplies.”

The defendant moved to dismiss for failure to state a claim, arguing that the plaintiff had given his prior express written consent to contact him at his cellular phone number using an auto-dialer or prerecorded messages. In support, the defendant attached a sworn declaration from its employee authenticating heavily-redacted business records that purported to show the plaintiff gave prior express written consent to the autodialed calls and prerecorded messages.

The trial court granted the defendant’s motion to dismiss, holding that “lack of prior express consent” was a required element in order to state a prima facie case under the TCPA, and that it could consider the business records attached to the declaration because they fell within the scope of the pleadings and such records showed plaintiff gave his prior express written consent to be called on his cell phone “relating to the purchase of replacement supplies for the medical device he purchased ….” The plaintiff appealed.

On appeal, the Eighth Circuit explained that the TCPA “prohibits any person from making ‘any call (other than a call made … with the prior express consent of the called party) using an automatic telephone dialing system or an artificial or prerecorded voice … to any telephone number assigned to a … cellular telephone service.'” It also provides a private right of action for violations, and confers on the Federal Communications Commission (FCC) certain powers to adopt regulations implementing the Act.

In 1992, the FCC issued an administrative ruling providing that “persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary.”

In 2008, the FCC issued a ruling clarifying “that autodialed and prerecorded message calls to wireless numbers that are provided by the called party to a creditor in connection with an existing debt are permissible calls made with the ‘prior express consent’ of the called party. … However, ‘prior express consent is deemed to be granted only if the wireless number was provided by the consumer … during the transaction that resulted in the debt owed.’ In addition because ‘creditors are in the best position to have records … showing such consent,’ if a question arises as to whether express consent was provided, ‘the burden will be on the creditor to show it obtained the necessary prior express consent.'”

Finally, in 2015, the FCC extended its 2008 rule beyond debt collection calls, such that “regardless of the means by which a caller obtains consent, … if any question arises as to whether prior express consent was provided by a call recipient, the burden is on the caller to prove that it obtained the necessary prior express consent.”

The Court rejected the plaintiff’s argument that the trial court erred in ruling that prior express consent is part of his prima facie case rather than an affirmative defense on which the defendant bears the burden of proof, reasoning that “[r]egardless of which party bears the ultimate burden of persuasion on the question of consent, [plaintiff’s complaint] would not have stated a facially plausible claim for TCPA relief without an allegation that [defendant] did not have his ‘prior express consent.'”

Thus, the Eighth Circuit held, “whether consent is an affirmative defense is irrelevant to the Rule 12(b)(6) inquiry under [the Supreme Court’s holding in Ashcroft v. Iqbal]. If an affirmative defense ‘is apparent on the face of the complaint … [it] can provide the basis for dismissal under Rule 12(b)(6).”

The Court also rejected the plaintiff’s argument that “his prior express consent was not apparent from the face of the Complaint,” and the exhibits attached to the defendant’s declaration were not “embraced” by the four corners of the complaint.

First, the Eighth Circuit found that the declaration exhibits were embraced by the complaint because it “alleged breach of a statutory TCPA duty arising out of a contractual relationship, [appellant’s] purchase of a medical device ….” Because the complaint contained the conclusory allegation that the plaintiff did not give his express consent and the declaration exhibits were “documents reflecting the contractual relationship that refute this conclusory allegation[,]” the trial court did not err by concluding that the exhibits were embraced by the pleadings and could be considered on a motion to dismiss without converting it to a motion for summary judgment.

Second, the Court found that “authenticity is a bogus issue” because although plaintiff’s counsel objected to the trial court considering the exhibits because they were redacted, he never argued that they “were not properly authenticated in accordance with Rule 901 of the Federal Rules of Evidence.”

Thus, the Eighth Circuit held that the trial court did not commit plain error in concluding that the exhibits “were properly authenticated documents reflecting an aspect of the parties’ contractual relationship.”

The Court further explained that plaintiff’s counsel did not respond to the argument of defendant’s counsel at the hearing on the motion to dismiss that the redactions were required by the federal and state laws prohibiting the release of a person’s protected health information without written consent.

The Eighth Circuit also noted that the plaintiff did not give his written consent to disclose the redacted information, or “affirm or deny” that he signed the exhibits and “are or are not part of his contractual relationship with one or more [defendant-related] entities, or … ask the court to convert the motion to dismiss into one for summary judgment and permit limited discovery on the issues of prior express consent, the scope of any prior consent given, and the authenticity of [the exhibits]. The reason for this tactical decision is not hard to infer, because opening up these fact-intensive issues would likely preclude class certification or establish that [plaintiff] was not a member of the putative class.”

Because the complaint showed a contractual relationship, the trial court “did not err in considering the documents as reflecting [plaintiff’s] pre-purchase consent.” The district court’s judgment was affirmed.

Fla. Court Holds Alleged ‘No Lawful Basis to Debit’ Enough to State Claim Under Reg J and UCC Art 4A

The Circuit Court of the Eleventh Judicial Circuit in Miami-Dade County, Florida recently dismissed equitable and tort claims for restitution, “money had and received,” negligence, indemnification, tortious interference and conversion brought by a company against its bank for reversing a wire transfer due to fraud.  However, the Court refused to dismiss the account holder’s claim for breach of the deposit agreement.

The Court held that Regulation J (12 CFR § 210.25-210.32) and Article 4A of the Uniform Commercial Code (UCC) were incorporated into the deposit agreement at issue, and these provisions only allowed the bank to reverse the payment under the common law governing mistake and restitution.  Here, the plaintiff alleged the bank had “no lawful basis to debit” the account, which in the Court’s view was enough to state a claim for breach of the deposit agreement.

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

A wire transfer in the amount of $62,000 was credited to a company’s deposit account at a bank (the beneficiary bank), but was later reversed at the request of the originating bank, which informed the beneficiary bank that it had mistakenly wired funds from an account of its customers that had no business relationship with the recipient of the wire transfer.

By the time the fraud was discovered, the wire recipient company had delivered more than $100,000 worth of goods to a purchaser it believed had wired the money.

The wire transfer recipient company sued both its bank and the originating bank, raising seven legal and equitable claims “sounding in both contract and tort.” The banks moved to dismiss.

The Court began its opinion by noting that “the only pertinent question presented” was whether the beneficiary bank “had a legal right to debit the account.”

The beneficiary bank argued that it had the right under the deposit agreement with the plaintiff to reverse a wire transfer if it was “fraudulent, counterfeit or invalid for some other reason.” The plaintiff wire transfer recipient company argued that the deposit agreement did not apply to wire transfers and provided that “[f]und transfers through Fedwire will be governed by … Regulation J, Subpart B, and [UCC] Article 4A….”

The Court first addressed whether the deposit agreement applied to fraudulent or invalid wire transfers, finding that a wire transfer was not an “item” as defined by the “Deposits and Cashed Items” provision of the deposit agreement, and that the parties’ rights and duties were governed exclusively by the “Funds Transfer Service” section of the deposit agreement.

The “Funds Transfer Service” section provided that funds sent through “Fedwire” were governed by Regulation J and UCC Article 4A. Because there was no dispute the money was sent through “Fedwire,” the Court found that the parties’ relationship was governed by and subject to Regulation J and UCC Article 4A, which were “enacted to provide a comprehensive statutory scheme to apply to fund transfer disputes not involving the Electronic Funds Transfer Act.”

The Court explained that when Article 4A applies to a funds transfer, it provides the sole remedy, to the exclusion of “common law or other statutory claims.”

The Court then turned to the applicable UCC provision — Article 4A-211(c)(2), codified as § 670.211(3)(b), Fla. Stat. — which provides that a payment order may be cancelled or amended by the beneficiary bank after it accepts it, if it “was issued in execution of an authorized payment order.”  In addition, the Court noted that “the beneficiary’s bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.”  See Article 4A-211(c)(2); § 670.211(3)(b), Fla. Stat.

Thus, the Court held, the beneficiary bank could “charge back the funds initially wired and credited to [plaintiff wire transfer recipient company] only if [the beneficiary bank] would be entitled to reverse the initial payment by application of the common law ‘governing mistake and restitution.’”

Because the Court concluded that the provisions of the deposit agreement giving the beneficiary bank the unfettered right to reverse items credited fraudulently did not apply to wire transfers, and instead that Regulation J and the UCC applied, the plaintiff stated a cause of action for breach of contract because it alleged that its bank had “no lawful basis to debit” the account and doing so breached the deposit agreement.

Turning to the remaining equitable and tort claims, the Court dismissed the equitable claims with prejudice because of the common law rule that equitable relief is not available where an express contract exists between the parties.

The Court also dismissed the claims for negligence and indemnification against the originating bank with prejudice because that bank owed no legal duty of care to the plaintiff, which was not its customer.

Finally, the Court dismissed with prejudice the claims for tortious interference and conversion against the originating bank, finding that the bank had the right to request that the beneficiary bank return the funds under the UCC and thus could not have unlawfully interfered with the business relationship between the plaintiff and its beneficiary bank. In addition, the Court noted, because the money returned by the plaintiff’s bank “was not separate and identifiable it cannot be the subject of a claim for conversion.”

In sum, the Court denied the motion to dismiss the breach of contract claim, but granted the motion as to the other six non-contract claims. It also left intact the plaintiff’s claim for attorney’s fees based on the deposit agreement, but struck any claim for attorney’s fees as “consequential damages.”

DC Cir. Holds FCC Exceeded Its Authority Under TCPA as to ‘Solicited Fax’ Rule

The U.S. Court of Appeals for the District of Columbia Circuit recently held that the Federal Communications Commission’s 2006 Solicited Fax Rule exceeded its authority under the federal Telephone Consumer Protection Act (TCPA) to the extent that it requires opt-out notices on fax advertisements sent with the permission of the recipient (“solicited” faxes) as well as on unsolicited fax advertisements.

A copy of the opinion in Bais Yaakov of Spring Valley, et al v. FCC, et al is available at:  Link to Opinion.

A company that sells generic drugs faxed advertisements to small pharmacies containing weekly pricing information and “specials.” Many small pharmacies gave consent to receive the faxes.  The drug company was sued in a class action lawsuit for allegedly sending fax advertisements that did not include the opt-out notice required by the FCC’s Solicited Fax Rule, even though many of the recipients had given consent.

The drug company and other similarly situated companies petitioned the FCC in 2010 for a declaratory ruling “clarifying that the Act does not require an opt-out notice on solicited fax advertisements—that is, those that are sent with the recipient’s prior express permission.”  The FCC entered an administrative order declaring that the TCPA gives it the power to require opt-out notices on both solicited and unsolicited faxes, although it agreed to waive application of the rule to faxes sent prior to April 30, 2015.

The petitioners sought review of the order in the U.S. Court of Appeals for the District of Columbia Circuit pursuant to 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1).

The Court of Appeals began its opinion by explaining that the TCPA became law in 1991 and was amended in 2005 by the Junk Fax Prevention Act (collectively, the “TCPA”).

The TCPA “generally prohibits the use of ‘any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement.’”  The Court noted that the TCPA defines “unsolicited advertisement” as “any material advertising the commercial availability or quality of any property, goods or services which is transmitted to any person without that person’s prior express invitation or permission, in writing or otherwise.”

However, the D.C. Circuit noted, the TCPA allows unsolicited fax advertisements in three situations if: “(1) ‘the unsolicited advertisement is from a sender with an established business relationship with the recipient’; (2) the sender obtained the recipient’s fax number through ‘voluntary communication’ with the recipient or ‘the recipient voluntarily agreed to make’ his information available in ‘a directory, advertisement, or site on the Internet’’; and (3) the unsolicited advertisement ‘contains a notice’ … [that is] ‘clear and conspicuous’ and ‘on the first page’ … must state that the recipient may opt out from ‘future unsolicited advertisements,’ and must include a ‘cost-free mechanism’ to send an opt-out request ‘to the sender of the unsolicited advertisement.’”

The TCPA provides a private right of action to fax recipients and provides that aggrieved plaintiffs can recover from fax senders at least $500 per violation.

In 2006, the FCC promulgated the Solicited Fax Rule, which “requires a sender of a fax advertisement to include an opt-out notice on the advertisement, even when the advertisement is sent to a recipient from whom the sender ‘obtained permission.’ In other words, the FCC’s new rule mandates that the senders of solicited faxes comply with the statutory requirement that applies only to senders of unsolicited faxes.”

The Court of Appeals disagreed with the FCC’s interpretation of the TCPA, finding that the clear language of the TCPA requires an opt-out notice on unsolicited faxed ads, but does not require an opt-out notice on solicited faxes. In addition, the D.C. Circuit held, the TCPA does not provide the FCC with the power to require the inclusion of opt-out notices on solicited faxed ads.

The Court rejected the FCC’s argument that it could require opt-out notices on solicited faxes as long as Congress had not expressly prohibited it because “[t]hat theory has it backwards as a matter of basic separation of powers and administrative law. The FCC may only take action that Congress has authorized.”

Because the text of the statute did not expressly authorize the FCC to require the inclusion of opt-out notices on solicited faxes, the D.C. Circuit held that “the FCC’s Solicited Fax Rule is “unlawful to the extent that it requires opt-out notices on solicited faxes.” Because the FCC administrative order interpreted its 2006 Solicited Fax Rule, the Court vacated the order and remanded for further proceedings.

Fla. App. Court (4th DCA) Holds Borrower Prevailing on ‘Lack of Standing’ Cannot Obtain Attorney’s Fees

The District Court of Appeal of Florida for the Fourth District recently denied a borrower’s motion for appellate attorney’s fees in a contested foreclosure, holding that the reciprocity provision of section 57.105(7), Florida Statutes, does not apply where the borrower prevails based on lack of standing, unless the plaintiff mortgagee was also the original lender.

A copy of the opinion in Nationstar Mortgage LLC, etc. v. Marie Ann Glass, et al. is available at: Link to Opinion.

The trial court dismissed with prejudice a mortgagee’s amended foreclosure complaint, and the plaintiff mortgagee appealed.

The mortgagee voluntarily dismissed the appeal, and the borrower moved for appellate attorney’s fees and costs, arguing that she was entitled to recover her fees and costs based on a provision of the mortgage and based upon subsection 57.105, Florida Statutes, which provides that where there exists a contract with a provision for attorney’s fees and costs in favor of one party, it is deemed to be reciprocal.

On appeal, the Fourth District explained that “the plain language of section 57.105(7) has two requirements. First, the party must have prevailed. Second, the party had to be a party to the contract containing the fee provision.”

Because the borrower prevailed in the trial court based on her argument that the mortgagee lacked standing to sue, the Court found that “where a party prevails by arguing the plaintiff failed to establish that it had the right pursuant to the contract to bring the action, the party cannot simultaneously seek to take advantage of a fee provision in that same contract. The result is different when the plaintiff is also the originating lender [because] [i]n that situation, the lender was a party to the contract at issue.”

The borrower’s motion for appellate attorney’s fees and costs was denied, albeit without prejudice as to the costs because “a request for costs is not properly presented to the appellate court” pursuant to Florida Rule of Appellate Procedure 9.400(a).

Fla. App. Court (4th DCA) Holds Post-Foreclosure Deficiency Action Not Affected By Publication Service in Foreclosure

The District Court of Appeal of the State of Florida, Fourth District, recently held that a creditor may obtain a post-foreclosure deficiency judgment against a borrower when the borrower was personally served with process in the post-foreclosure deficiency action, and the fact that the foreclosure court only acquired in rem jurisdiction due to service by publication in the prior foreclosure did not matter.

In addition, the Appellate Court held that section 702.06, Florida Statutes, which governs deficiency judgments, is unambiguous and allows a separate suit to recover a deficiency where the foreclosure judgment did not adjudicate a claim for a deficiency judgment.

A copy of the opinion in Dyck-O’Neal, Inc. v. Meikle is available at:  Link to Opinion.

A borrower defaulted on his mortgage. The mortgagee sued to foreclose and obtained a final judgment of foreclosure. The final judgment reserved jurisdiction to enter a deficiency judgment.

The property encumbered by the mortgage was sold at judicial sale, but the proceeds were not enough to satisfy the amount owed.  The right to pursue the deficiency was assigned to a company, which sued the borrower for a deficiency judgment.

In the deficiency action, the borrower filed an answer and moved for summary judgment, arguing that the trial court lacked jurisdiction to enter a deficiency judgment “because he was served with the original foreclosure complaint by publication.”  The trial judge granted the borrower’s motion, reasoning that section 702.06, Florida Statutes, which governs deficiency judgments, was “both vague and a violation of due process.”

On appeal by the creditor, the Fourth District reversed, finding the “[lower] court’s ruling was incorrect on all accounts.”

First, relying on its 1986 decision in NCNB Natl. Bank of Florida v. Pyramid Corp., the Appellate Court held that because the borrower was personally served with process in the deficiency action, the lower court had personal jurisdiction over him, and the fact that the foreclosure court only acquired in rem jurisdiction due to service by publication was irrelevant.

Second, the Appellate Court held that the trial court misread section 702.06, noting that the Appellate Court recently held in two 2016 cases involving the same creditor that the relevant statutory language — “The complainant shall also have the right to sue at common law to recover such deficiency, unless the court in the foreclosure action has granted or denied a claim for a deficiency judgment” — was “unambiguous and permits a separate suit to recover a deficiency where the foreclosure court did not grant or deny a claim for a deficiency judgment.”

Accordingly, the trial court’s grant of summary judgment in favor of the borrower was reversed and the case was remanded.

8th Cir. Upholds Exclusion of ‘Similar Borrower’ Testimony in 8-to-1 Punitive Damages Award Case

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a punitive damages award in an approximately 8-to-1 ratio to compensatory damages to a borrower who sued her mortgage loan servicer for alleged common law invasion of privacy and for allegedly violating the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA) and the Real Estate Settlement Procedures Act (RESPA).

In so ruling, the Court also held that the trial court properly excluded the testimony of a non-party consumer who was supposedly treated similarly by the servicer to rebut the servicer’s assertions of good faith conduct, explaining that the testimony would have been unfairly prejudicial and “would result in ‘mini trials’ that would needlessly confuse and distract the jury.”

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

The borrower obtained a loan secured by a $100,000 mortgage in order to purchase her home in Missouri. She defaulted shortly thereafter and filed a Chapter 13 bankruptcy proceeding. The reorganization plan provided for payment of the mortgage arrearage over five years.

The borrower received a discharge, and asked the loan servicer to resume sending her monthly mortgage statements. The first statement she received allegedly contained several errors, including that the account was delinquent by more than $8,500.

The servicer allegedly began trying to collect the delinquent amount by placing phone calls to the borrower’s personal and work numbers. The borrower claimed she repeatedly tried to explain the problem, but the servicer’s employees, relying on incorrect records, supposedly only reiterated what the records showed.

After several months, the servicer determined it had made an accounting error and “escalated” the dispute to its research department, requesting that the borrower’s account be credited from the servicer’s “internal bankruptcy fund.” The servicer’s “cash department rejected the requested credit, however, because [the borrower] had been discharged from bankruptcy and her account no longer reflected a bankruptcy code.”

The servicer allegedly continued with its collection efforts, despite the borrower’s supposedly repeated attempts to point out the accounting errors. The borrower continued to make her monthly payments, but the servicer stopped accepting them several months after it discovered the accounting error “because its internal policy required it to accept only full payments” and according to its records the account was still delinquent.

The borrower’s counsel sent a letter to the servicer in an attempt to explain the errors. In response, the servicer “verified the debt and enclosed the note, deed of trust and a payment history.” When the borrower’s attorney asked for a substantive response, the servicer responded that a foreclosure sale was scheduled and conducted multiple inspections of the home “allegedly in preparation for the foreclosure sale.”

The borrower sued in Missouri state court and moved for a temporary restraining order stopping the foreclosure sale, alleging that the servicer’s conduct (a) violated her right of privacy under Missouri law; (b) willfully and negligently violated the FCRA; (c) violated the FDCPA; and (e) violated RESPA. The servicer removed the case to federal court and cancelled the foreclosure sale.

After several months of investigation, the servicer credited the borrower’s account $5,162, but allegedly did not remove the improper ‘lender-paid’ expenses or correct the rejection of the borrower’s monthly payments.  Accordingly, the servicer’s records continued to show a delinquency for some eight months after the lawsuit was filed, at which time the account balance was finally corrected.

At trial, the borrower testified about her efforts to get the servicer to correct its errors as well as how her credit score was adversely affected “because [the servicer] reported a delinquent debt that she did not owe.” The borrower and her doctor also testified that she “experienced symptoms of severe stress attributable to [the servicer’s conduct], including abdominal pain, vomiting, depression and anxiety.” Finally, the borrower testified that the servicer ignored her repeated requests to stop calling her, especially at work.

The servicer admitted that it made multiple errors regarding the borrower’s account, but argued that its mistakes were not “intentional or the product of an institutionalized corporate practice.”

The jury awarded the borrower $50,000 in compensatory damages and $400,000 in punitive damages on her state law invasion of privacy claim, and $50,000 in compensatory damages for the servicer’s negligent credit reporting under FCRA.  The servicer moved to alter or amend the judgment, which was denied by the trial court.

The servicer appealed, arguing there was insufficient evidence to support the jury’s award of punitive damages “because [the borrower] failed to present clear and convincing evidence that [the servicer] acted with an evil motive or with a reckless indifference to [the borrower’s] rights.”  Alternatively, the servicer argued that the punitive damages award was “unconstitutionally excessive in violation of the Due Process Clause of the Fourteenth Amendment to the United States Constitution.”

The borrower cross-appealed as to the trial court’s exclusion of testimony at trial and its jury instruction on her RESPA claim.

The Eighth Circuit began its analysis by noting that “[u]nder Missouri law, punitive damages may be awarded for invasion of privacy. … Whether the evidence is sufficient to support an award of punitive damages is a question of law, which we review de novo.”

The Court explained that because punitive damages “are an extraordinary remedy that should be awarded sparingly[,] … [b]efore punitive damages can be awarded, a plaintiff must present clear and convincing evidence of a defendant’s culpable mental state. … This standard requires proof that the defendant acted with either an evil motive or a reckless indifference to the plaintiff’s rights. … Such proof can be established by direct or circumstantial evidence. … A jury may infer that a defendant has the requisite culpable motive when evidence of the defendant’s reckless indifference to the interests and rights of the plaintiff is presented. … Such evidence supporting punitive damages need not be—and often is not—separate from the evidence supporting a substantive claim.” Since it is the jury’s job “’to evaluate evidence and decide what inferences should be drawn from it,’” the jury’s verdict will be overturned “only when ‘there is a complete absence of probative facts’ such that ‘no proof beyond speculation [supports] the verdict.’”

Concluding that the record “presents no basis to reject the jury’s determination[,]” the Eighth Circuit rejected the servicer’s argument that insufficient evidence supported the punitive damages award because it believed in good faith that its actions were lawful because the Court had rejected that same argument in a 2008 decision in which it explained that “'[s]imply presenting … evidence of good faith to the jury does not immunize a defendant from punitive damages.’”

The Eighth Circuit agreed with the borrower that evidence that the servicer acted with “reckless indifference to her rights is legally sufficient to establish the requisite mental state to support the punitive damages awarded by the jury….”  In the Court’s view, such evidence included the facts that despite the borrower’s many attempts to correct the errors and seek assistance, the servicer “aggressively pursued collection,” initiated “foreclosure and conducted inspections of her residence” instead of “suspending its efforts.”  The Court noted that “it was the jury’s responsibility to determine the credibility and weight of the evidence presented … [it] was free to reject [the servicer’s] characterization of its conduct and determine these facts and circumstances warranted punitive damages.”

Turning to the servicer’s argument the jury’s award of $400,000 in punitive damages was excessive and violated the Due Process Clause, the Eighth Circuit explained that “[a]lthough juries have considerable flexibility in determining the amount of punitive damages, the Due Process Clause serves as a governor and prohibits ‘grossly excessive civil punishment.’ … Punitive damages are grossly excessive if they ‘shock the conscience’ of the court or ‘demonstrate passion or prejudice on the part of the trier of fact.’”

The Court then addressed the following “three factors when determining whether a punitive damages award shocks the conscience or demonstrates passion or prejudice …[:] ‘(1) the degree of reprehensibility of the defendant’s conduct; (2) the disparity between actual or potential harm suffered and the punitive damages award (often stated as a ratio between the amount of the compensatory damages award and the punitive damages award); and (3) the difference between the punitive damages award and the civil penalties authorized in comparable cases.’”

Addressing each factor in turn, the Eighth Circuit first found that the servicer’s conduct was sufficiently reprehensible to warrant punitive damages because the borrower suffered physical harm in the form of severe stress that caused “abdominal pain, vomiting, depression and anxiety” rather than just economic harm and “[t]he presence of just one indicium of reprehensibility is sufficient to render conduct reprehensible and support an award of punitive damages.” In addition, “the jury specifically determined that [the servicer] acted with a reckless indifference to [the borrower’s] substantive rights[,]” which is relevant to a determination of reprehensibility.

Moreover, the Court noted that the servicer conceded that the borrower was financially vulnerable, and the conduct in question was not just an isolated incident because the servicer “invaded [the borrower’s] privacy over the course of two years through actions including making collection calls to [her] at her workplace, conducting home inspections and sending foreclosure letters.”

Turning to the second factor, the disparity between actual or potential harm suffered and the punitive damages award, the Eighth Circuit rejected the servicer’s argument that “the 8-to-1 ratio between [borrower’s] $400,000 punitive award and $50,000 compensatory award is too great.”

The Court explained that under the Supreme Court of the United States’ and Eighth Circuit’s precedent, while courts “do not apply ‘a simple mathematical formula’ to determine the constitutionality of a punitive damages award[,] … few awards exceeding a single-digit ratio of punitive to compensatory damages will satisfy due process.” However, “[a] higher ratio may be justified when the injury is hard to detect or the monetary damages are difficult to quantify.”

Relying on its 1999 decision in Morse v. S. Union Co., which approved $70,000 in compensatory damages and $400,000 in punitive damages in a case under the Age Discrimination in Employment Act, a ratio of less than 6-to-1, and where the amount of punitive damages was “less than one one-thousandth” of the employer’s net worth, the Eighth Circuit found that the 8-to-1 ratio in the case at bar “does not set off any alarm bells” given that the punitive award “also accounts for thirty-three-ten-thousandths of one percent (0.00033) of [the servicer’s] approximate $1.2 billion net worth.”

The Eighth Circuit found that the final factor, the “disparity between the punitive damages award and the civil penalties authorized or imposed in comparable cases[,]” did not violate the Due Process Clause of the 14th Amendment. The parties conceded “that there are no comparable civil penalties in this case because there is no civil penalty for invasion of privacy under Missouri law and the civil penalties for [the borrower’s] federal claims are nominal.” However, the Court noted that because there was “no way to discern which conduct the jury considered to be an invasion of [the borrower’s] privacy[,]” and in light of the similarities between this case and others in which we have upheld an award of punitive damages,” it concluded that “the absence of comparable civil penalties does not render the punitive damages award unconstitutionally excessive.”

The Court then addressed the borrower’s two arguments on cross-appeal.

First, the borrower argued that the trial court erred in excluding the testimony of a non-party consumer who was treated similarly by the servicer because such testimony “would have rebutted [the servicer’s] claims of good faith and established that [the servicer’s] conduct was reckless and reprehensible.” The Court affirmed the trial court’s exclusion of the testimony because it amounted to “improper, prejudicial propensity evidence” and “admission of such evidence would result in ‘mini trials’ that would needlessly confuse and distract the jury….”

Second, the Eighth Circuit rejected the borrower’s argument that the trial court’s jury instruction on the RESPA claim was wrong, finding that because the borrower failed to make a detailed objection on the record as required by Federal Rule of Civil Procedure 51, reversal would be proper only if the trial court committed “plain error.” “Plain error review is narrow and ‘confined to the exceptional case in which error has seriously affected the fairness, integrity, or public reputation of the judicial proceedings.”

The Court concluded that even assuming the instruction was incorrect, “such an error would not entitle [the borrower] to a reversal under plain-error review” because it did not fundamentally affect the fairness or integrity of the trial, especially in light of the fact that the borrower “recovered $500,000 in damages, a circumstance that undermines any argument that the alleged RESPA error resulted in a miscarriage of justice.”

The Eighth Circuit affirmed the jury’s award of compensatory and punitive damages on all grounds.

11th Cir. Holds Failure to File Proof of Claim in Receivership Does Not Extinguish Security Interest

The U.S. Court of Appeals for the Eleventh Circuit recently held that a court cannot extinguish a secured creditor’s state-law security interests for failure to file a proof of claim during the administration of an equity receivership over entities involved in a Ponzi scheme.

A copy of the opinion in Securities and Exchange Commission v. Wells Fargo Bank is available at:  Link to Opinion.

The U.S. Securities and Exchange Commission filed an action seeking the appointment of an equity receiver following the collapse of a Ponzi scheme.  The trial court appointed a receiver to “marshal and safeguard” the defendants’ assets for the benefit of investors.

The trial court entered an order setting up a claims administration process, which required that investors and non-investors file a proof of claim by a claim bar date providing the amount owed and supporting documents. The order did not distinguish between secured and unsecured creditors.

A bank that held mortgages securing loans against three properties under the receiver’s control filed a proof of claim as to one of the properties, but not the other two, by the claims bar date.

The bank filed a motion seeking a determination that it did not have to file a proof of claim to preserve its security interests in all three properties or, alternatively, an order allowing it to file a late claim as to the two properties for which it had not filed a proof of claim based on excusable neglect under Federal Rule of Civil Procedure 60(b). The trial court never ruled on the motion.

Later, the receiver file a motion seeking: a) a determination that the bank’s failure to submit proofs of claim for the two properties for which no claims were filed extinguished the bank’s security interests; and b) release of the proceeds of the sale of one of the two such properties.

Reasoning that even secured creditors cannot ignore court orders and the bank’s failure to comply by the claims bar date extinguished its lien rights, the trial court granted the receiver’s motion, finding that the bank’s “security interests in the two properties were not preserved due to its failure to submit Proofs of Claim.” In addition, the trial court held that the bank’s Rule 60(b) motion was “untimely and insufficient.” The bank appealed.

On appeal, the Eleventh Circuit first rejected the receiver’s argument that the bank’s appeal was untimely because it was filed more than one year after the trial court’s order establishing the claims filing process. The Court found this argument lacked merit because the “order establishing the claims filing procedure cannot be characterized as a ‘final trial court judgment that ends the ligation on the merits and leaves nothing for the court to do but execute the judgment.’” In addition, the bank was contesting the voiding of its security interest, not the claims procedure.  Because the order was not final, the bank had no notice that the trial court would extinguish its liens automatically if it did not file a proof of claim. Thus, the first order from which the bank could appeal was the trial court’s order granting the receiver’s motion.

The Eleventh Circuit then turned to the question of whether the bank’s security interests were properly terminated by the trial court, holding that while courts have inherently ‘broad powers and wide discretion to determine relief in an equity receivership[,]” a court “does not have authority to extinguish creditor’s pre-existing state law security interest….”

The Court reasoned, citing Supreme Court precedent, that “[it] is axiomatic that security interests in property are determined by state law, … and that ‘a receiver appointed by a federal court takes property subject to all liens, priorities, or privileges existing or accruing under the laws of the state.’”

Because “there [was] minimal authority with respect to a district court’s authority, in the context of a receivership, to extinguish a secured creditor’s pre-existing state law security interest by operation of its own claims administration process[,]” the Court looked to its own prior bankruptcy rulings for guidance, finding them “both analogous and instructive” because “[a]fter all, a primary purpose of both receivership and bankruptcy proceedings is to promote the efficient and orderly administration of estates for the benefit of creditors.”

The Eleventh Circuit explained that in a bankruptcy case, “a secured creditor’s lien remains intact through the bankruptcy, regardless of whether the creditor files a proof of claim.” The Court cited its own 2003 decision in In re Bateman for the proposition that “'[a]n unsecured creditor is required to file a proof [of] claim for its claim to be allowed, but filing is not mandatory for a secured creditor. In fact, a secured creditor need not do anything during the course of the bankruptcy proceeding because it will always be able to look to the underlying collateral to satisfy its lien.’”

The Court held that, although “[a] secured creditor certainly may file a proof of claim in a receivership action, in turn submitting itself to the jurisdiction of the receivership, and entitling itself to access of the general pool of receivership assets for any unsecured portion of its debt[,] … a federal district court cannot order a secured creditor to either file a proof of claim and submit its claim for determination by the receivership court, or lose its secured state-law property right that existed prior to the receivership.”

Thus, the Eleventh Circuit reversed the trial court’s order granting the receiver’s motion seeking to extinguish the liens for failing to file proofs of claim as to the two properties, and the case was remanded for further proceedings.