Author Archive for Richard Payne

2nd Cir. Attempts to Clarify Spokeo as to Alleged Violations of Statutorily Required Procedures

The U.S. Court of Appeals for the Second Circuit recently rejected an interpretation of Spokeo that would preclude all violations of statutorily mandated procedures from qualifying as concrete injuries supporting standing.

In so ruling, the Court held that some violations of statutorily mandated procedures might entail the concrete injury necessary for standing where Congress conferred the procedural right to protect a plaintiff’s concrete interests, and where the procedural violation presents a material “risk of real harm” to that underlying concrete interest.

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

As you may recall, TILA requires that credit card issuers provide credit card holders with a disclosure of the protection provided to an obligor and the creditor’s responsibilities relating to billing errors and unsatisfactory purchases. See 15 U.S.C. § 1637(a)(7).

Regulation Z states that a creditor must provide a consumer to whom it issues a credit card with a statement that described the consumer’s rights and the creditor’s responsibilities under §§ 1026.12(c) and 1026.13 and that is substantially similar to the statement found in Model Form G–3(A).

The “substantially similar” requirement strives to implement statutory § 1637(a)(7)’s mandate for a creditor statement “in a form prescribed” by Bureau regulations consistently with statutory § 1604(b)’s admonition that “nothing in this subchapter may be construed to require a creditor to use any such model form.” See 12 C.F.R. § 1026.6(b)(5)(iii).

The formal staff interpretation states that “creditors may make certain changes in the format or content of the forms and clauses and may delete any disclosures that are inapplicable to a transaction or a plan without losing the Act’s protection from liability,” provided the changes are not “so extensive as to affect the substance, clarity, or meaningful sequence of the forms and clauses.” 12 C.F.R. pt. 1026, supp. I, pt. 5, apps. G & H(1). Formatting changes, however, “may not be made” to Model Form G–3(A). Id.

The credit card obligor initiated a putative class action against the bank that issued her a credit card, seeking statutory damages under the TILA, alleging that the bank failed to clearly disclose that:

(1) cardholders wishing to stop payment on an automatic payment plan had to satisfy certain obligations;

(2) the bank was statutorily obliged not only to acknowledge billing error claims within 30 days of receipt but also to advise of any corrections made during that time;

(3) certain identified rights pertained only to disputed credit card purchases for which full payment had not yet been made, and did not apply to cash advances or checks that accessed credit card accounts; and

(4) consumers dissatisfied with a credit card purchase had to contact the bank in writing or electronically.

After the trial court awarded summary judgment in favor of the bank, the obligor appealed, arguing that the trial court erred in concluding that she failed, as a matter of law, to demonstrate that four billing-rights disclosures made to her by the bank in connection with the obligor’s opening of a credit card account violated the TILA.

The bank argued for the first time on appeal that the obligor could not maintain her TILA claims because she lacked constitutional standing. Although the bank challenged the obligor’s standing for the first time on appeal, because standing is necessary to the Second Circuit’s jurisdiction, it was obliged to decide the question of standing at the outset.

The Second Circuit rejected the bank’s argument, and concluded that the obligor satisfied the legal-interest requirement of injury in fact as to two of her claims.

In reaching its conclusion, the Second Circuit noted that to satisfy the “irreducible constitutional minimum” of Article III standing, a plaintiff must demonstrate (1) “injury in fact,” (2) a “causal connection” between that injury and the complained-of conduct, and (3) a likelihood “that the injury will be redressed by a favorable decision.”

The Second Circuit also relied on the recent Supreme Court of the United States’ ruling in Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1548, 194 L. Ed. 2d 635 (2016), which clarified that injury to a legal interest must be “concrete” as well as “particularized” to satisfy the injury-in-fact element of standing.

As you may recall, in Spokeo, the Supreme Court stated that a plaintiff cannot allege a bare statutory procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement for standing. To be “concrete,” an injury “must actually exist,” that is, it must be “real, and not abstract.” See Spokeo, Inc. v. Robins, 136 S. Ct. at 1549. However, although tangible harms are most easily recognized as concrete injuries, the Supreme Court acknowledged that some intangible harms can also qualify as such. See id. at 1549.

The Second Circuit observed that by enacting 15 U.S.C. § 1637(a)(7), Congress statutorily conferred legal interests on consumers by obligating creditors to make specified disclosures, nevertheless, the obligor only had standing to sue if she could allege concrete and particularized injury to those interests.

The bank argued that the obligor necessarily lacked standing because her TILA notice claims alleged only “a bare procedural violation,” with no showing of ensuing adverse consequences.

The Second Circuit disagreed, explaining that it did not interpret Spokeo to preclude violations of statutorily mandated procedures from qualifying as concrete injuries supporting standing, concluding that some violations of statutorily mandated procedures might entail the concrete injury necessary for standing where Congress conferred the procedural right to protect a plaintiff’s concrete interests and where the procedural violation presents a material “risk of real harm” to that concrete interest. See Spokeo, at 1549.

The Court explained that, to determine whether a procedural violation manifests injury in fact, a court must consider whether Congress conferred the procedural right in order to protect an individual’s concrete interests. Only a “person who has been accorded a procedural right to protect his concrete interests can assert that right without meeting all the normal standards for redressability and immediacy.” See Lujan, 504 U.S. at 572 n.7.

On the other hand, the Second Circuit held, where Congress has accorded procedural rights to protect a concrete interest, a plaintiff may still fail to demonstrate concrete injury where violation of the procedure at issue presents no material risk of harm to that underlying interest. Id.

Applying these principles, the Second Circuit concluded that two of the obligor’s disclosure challenges demonstrated concrete and particularized injury: those pertaining to required notice that (1) certain identified consumer rights pertain only to disputed credit card purchases not yet paid in full, and (2) a consumer dissatisfied with a credit card purchase must contact the creditor in writing or electronically.

The Second Circuit explained that the disclosure requirements serve to protect a consumer’s concrete interest in avoiding the uninformed use of credit, by requiring a creditor to notify a consumer, when he opens a credit account, of how the consumer’s own actions can affect his rights with respect to credit transactions.

According to the Court, a consumer who is not given notice of his obligations is likely not to satisfy them and, thereby, unwittingly to lose the very credit rights that the law affords him. For that reason, the Second Circuit held that a creditor’s alleged violation of each notice requirement, by itself, gives rise to a “risk of real harm” to the consumer’s concrete interest in the informed use of credit. See Spokeo, Inc. v. Robins, 136 S. Ct. at 1549.

Because she alleged such procedural violations, the Court held that the obligor was not required to allege any additional harm to demonstrate the concrete injury necessary for standing. As to these two claims, the Second Circuit explained that the obligor sued to vindicate interests particular to her — specifically, access to disclosures of her own obligations –as a person to whom credit is being extended, preliminary to making use of that credit consistent with TILA rights.

The Court held that the failure to provide such required disclosure of consumer obligations thus affected the obligor in a personal and individual way, and her suit was not a vehicle for the vindication of the value interests of concerned bystanders or the public at large.

The bank argued that the obligor’s injury was not particularized because it was not distinct from that sustained by other members of the putative class.

The Second Circuit rejected the bank’s argument because particularity requires that one sustain a grievance distinct from the body politic, not a grievance unique from that of any identifiable group of persons. The Court noted that the bank’s urged interpretation of particularized injury would render class actions inherently incompatible with Article III.

Because the obligor had sufficiently alleged that she was at a risk of concrete and particularized harm from these two challenged disclosures, the Second Circuit rejected the bank’s standing challenge to these two TILA claims.

The Court then turned its attention to the obligor’s notice pertaining to billing-error claims under automatic payment plans.

The obligor asserted that the bank violated statutory § 1637(a)(7) by failing to disclose a consumer’s obligation to provide a creditor with timely notice to stop automatic payment of a disputed charge.

The Second Circuit disagreed, noting that the obligor could not show that the bank’s failure to provide such notice to her risked concrete injury because it was undisputed that the bank did not offer an automatic payment plan at the time the obligor held the credit card at issue.

Additionally, the Court held that the obligor did not introduce any evidence that she agreed to an automatic payment plan. Thus, again relying on Spokeo, the Second Circuit held that she could not establish that the bank’s failure to make this disclosure created a “material risk of harm” — or, indeed, any risk of harm at all — to her interest in avoiding the uninformed use of credit.

The obligor argued that the bank’s assertion that it did not offer an automatic payment at the relevant time was (1) an affirmative defense not raised in its answer, (2) unsupported by facts proffered by the bank, and (3) not dispositive of the obligor’s challenge because the bank did not state that it lacked the ability to debit automatically.

The Second Circuit rejected these arguments because the obligor did not dispute the bank’s assertion that it did not offer an automatic payment plan on the credit card that the obligor held, and the obligor failed otherwise to carry her burden to proffer evidence sufficient to manifest concrete injury. Citing Lujan, the Court noted that the party invoking federal jurisdiction bears the burden of establishing elements of standing. Thus, the Second Circuit concluded that the obligor’s automatic-payment-plan-notice TILA claim was properly dismissed.

The obligor had also sued the bank for failing clearly to advise her of its obligation not only to acknowledge a reported billing error within 30 days of the consumer’s communication, but also to tell her, at the same time, if the error has already been corrected.

For purposes of determining the obligor’s standing, the Court assumed that the bank’s notice failed clearly to report its response obligation in circumstances where it had corrected a noticed billing error within 30 days of receiving consumer notification, but nevertheless concluded that such a bare procedural violation did not create the material risk of harm necessary to demonstrate concrete injury.

The Second Circuit concluded that the bare procedural violation alleged by the obligor presented an insufficient risk of harm to satisfy the concrete injury requirement of standing, particularly where, as here, a plaintiff fails to show either (1) that the creditor’s challenged notice caused her to alter her credit behavior from what it would have been upon proper notice, or (2) that, upon reported billing error, the creditor failed to honor its statutory response obligations to consumers.

The Court explained that the creditor-response obligations that are the subject of the required notice arise only if a consumer reports a billing error, and the obligor never had reason to report any billing error in her credit card statements. Thus, the Second Circuit held she did not — and could not — claim concrete injury because the challenged notice denied her information that she actually needed to deal with the bank regarding a billing error.

Additionally, the Court observed that it was not apparent that the challenged disclosure would have an effect on consumers generally, in contrast to the procedural violations where defective notices about a consumer’s own obligations could raise a sufficient degree of real risk that the unaware consumer would not meet those obligations, with ensuing harm to, if not loss of, rights under credit agreements.

The Second Circuit took care to note that its conclusion that the obligor lacked standing to sue for this particular bare procedural violation did not mean that creditors can ignore Congress’s mandate to provide consumers the requisite notices — including the correction notice creditors will have to provide in their 30-day responses to reported billing errors, observing that a consumer who sustains actual harm from a defective notice can still sue under § 1640 for damages and that the CFPB may initiate its own enforcement proceedings. See 12 U.S.C. §§ 5481(14), 5562.

Accordingly, the Second Circuit held that this disclosure challenge was also properly dismissed for lack of jurisdiction.

To pursue the disclosure challenges for which the Court identified standing, the obligor had to show that, contrary to the district court’s ruling, she introduced sufficient evidence to preclude summary judgment in favor of the bank.

The bank argued that, to the extent the obligor’s disclosure challenges relied on notice requirements established by Regulation Z and Model Form G–3(A), 15 U.S.C. § 1640 did not afford her any statutory action.

The Second Circuit disagreed, noting that § 1640(a) provides an action for statutory damages for failing to comply with the requirements of certain specified statutory provisions, including § 1637(a)(7), which requires a creditor to disclose in a form prescribed by regulations of the Bureau of the protections provided to a consumer and the responsibilities imposed on a creditor by §§ 1666 and 1666i, 15 U.S.C. § 1637(a)(7).

The bank nevertheless argued that district courts in the Second Circuit have held that statutory damages are not available for violations of Regulation Z alone, and the notion that statutory damages can be imposed on the theory that Regulation Z “implements” TILA, where TILA itself has not been violated, has been rejected by courts in the Second Circuit.

The Second Circuit found the bank’s cited cases to be factually distinguishable because they rejected statutory damages claims for violations of parts of Regulation Z that did not implement one of the statutory provisions of the TILA enumerated in § 1640(a). By contrast, the Court held, the obligor here sought statutory damages for the bank’s failure to properly disclose the protections of §§ 1666 and 1666i, the TILA provisions expressly enumerated in § 1637(a)(7), which in turn is expressly enforceable through statutory damages under § 1640(a).

The Court observed that neither the TILA nor case precedent supported the bank’s efforts to segregate a statute from its implementing regulations. See 15 U.S.C. § 1602(z). Instead, the Second Circuit held that the law treats a statute and its implementing regulations as one. See Global Crossing Telecomms., Inc. v. Metrophones Telecomms., Inc., 550 U.S. 45, 54, 127 S. Ct. 1513, 167 L. Ed. 2d 422 (2007) (“Insofar as the statute’s language is concerned, to violate a regulation that lawfully implements the statute’s requirements is to violate the statute.”).

The Court emphasized that such segregation would be particularly unwarranted — likely, in the Court’s view, impossible — here because § 1637(a)(7) does not simply require a creditor to disclose the protection and responsibilities specified in §§ 1666 and 1666i.  The Second Circuit noted that, by its terms, the statute requires a creditor to make such disclosure in a form prescribed by regulations of the Bureau, and the plain language of § 1637(a)(7) indicates that the disclosure requirement imposed therein can only be understood by reference to the form prescribed by regulations. See 15 U.S.C. § 1637(a)(7).

Thus, the Second Circuit held that because Congress mandated that § 1637(a)(7) disclosures be in a form prescribed by regulations, the obligor could sue for statutory damages under § 1640(a) for a violation of § 1637(a)(7) that relies on Model Form G–3(A), as prescribed by Regulation Z.

Having concluded that the obligor had standing to assert her disclosure claims, the Court then considered the obligor’s argument that the district court erred in concluding that her disclosure challenges failed as a matter of law.

The obligor contended that the bank violated § 1637(a)(7) by departing from the Model Form in notifying her that § 1666i(a) affords claims and defenses only with respect to unsatisfactory purchases made with credit cards — not purchases made with cash advances or checks acquired by credit card — and that § 1666i(b) limits protection to amounts still due on the purchase.

The obligor specifically faulted the bank for omitting from its notice the Model Form’s second and third numbered paragraphs, which reiterate limitations to credit card transactions and amounts outstanding.

The Second Circuit rejected the obligor’s argument, agreeing with the trial court that the billing-rights notice was “substantially similar” to Model Form G–3(A) and, thus, failed as a matter of law to demonstrate a violation of § 1637(a)(7).

The Court noted that the model forms were promulgated pursuant to 15 U.S.C. § 1604(b), which specifically states that “nothing in this subchapter may be construed to require a creditor to use any such model form.” See 15 U.S.C. § 1604(b).

Additionally, the Court explained that 15 U.S.C. § 1604(b) creates a “safe harbor” from liability, because it states that a creditor “shall be deemed to be in compliance with the disclosure provisions of this subchapter with respect to other than numerical disclosures” if the creditor (1) uses the appropriate model form, or (2) uses the model form, changing it (A) to delete information not required by the applicable law, or (B) to re-arrange the format if, by doing so, the creditor “does not affect the substance, clarity, or meaningful sequence of the disclosure.” See 15 U.S.C. § 1604(b).

The Second Circuit further explained that when Regulation Z implemented § 1637(a)(7)’s mandate consistent with § 1604(b), it provided a model form — Model Form G–3(A) — and acknowledged that a creditor can satisfy its statutory obligation by providing a consumer with a statement of billing rights that is “substantially similar” to that model form: creditors may make certain changes to model forms “without losing the Act’s protection from liability,” citing, as examples, the deletion of inapplicable disclosures or the rearrangement of the sequences of disclosures. See 12 C.F.R. § 1026.6(b)(5)(iii); 12 C.F.R. pt. 1026, supp. I, pt. 5, apps. G & H, G(3)(i).

The obligor urged the Court to construe these examples as defining the outer perimeter of a statement qualifying as “substantially similar” to Model Form G-3(A). To the extent the bank’s statement included further changes from the model form, the obligor argued that the Court could not conclude that her challenge failed as a matter of law.

The Second Circuit again disagreed, noting that the two cited examples were not the only permissible changes identified in the staff interpretation. See id. at apps. G & H(1).

The Court explained that Regulation Z, like TILA itself, recognizes that statements seeking to comply with § 1637(a)(7) can fall into three categories: (1) those that “shall be deemed to be in compliance” because they use the model form or depart from that form only in specifically approved ways, (2) those that can be in compliance if “substantially similar” to the model form, and (3) those that cannot be deemed compliant because they deviate substantively from the model form.

The Second Circuit held that the bank’s disclosure statement did not fall within the first category because a safe harbor is available only for the deletion of disclosures that are inapplicable to the transaction at issue, not for the deletion of disclosures that are applicable but possibly redundant.

Thus, the Court considered whether, as the district court had concluded, the challenged disclosure could be deemed “substantially similar” as a matter of law.  The Court noted that TILA “does not require perfect disclosure, but only disclosure which clearly reveals to consumers the cost of credit.”

The Second Circuit concluded that the obligor’s challenge to the bank’s disclosure of “purchase” and “outstanding balance” limitations on consumer rights to dispute unsatisfactory credit card purchases failed as a matter of law because the disclosure was substantially similar to the relevant part of Model Form G–3(A).

The obligor argued that the bank violated § 1637(a)(7) by failing to advise her that a consumer must report an unsatisfactory purchase to a creditor in writing.

The Second Circuit rejected the obligor’s argument because, while § 1637(a)(7) requires a creditor to disclose the protections and obligations of 15 U.S.C. § 1666i — which pertain to unsatisfactory credit card purchases — “in a form prescribed by regulations of the Bureau,” nothing in § 1666i conditions the protections on a consumer giving written notice.

The obligor argued that Model Form G–3(A), which requires a creditor to advise the consumer to contact the creditor in writing or electronically” if dissatisfied with the purchase provided such a limitation.  See 12 C.F.R. pt. 1026, app. G–3(A).

The Court, without deciding whether Model Form G–3(A) could impose a written notice limitation on § 1666i protections, held that because the model form language is explicitly optional, the bank could not be found to have violated statutory § 1637(a)(7) by failing to include such language in its own disclosure.

Accordingly, the Second Circuit held that summary judgment was correctly entered in favor of the bank on the obligor’s written-notice challenge.

Although the Court recognized the obligor’s standing to sue the bank for alleged violation of § 1637(a)(7) in giving inadequate notice of (1) limitations on rights pertaining to credit card purchases, and (2) a writing requirement to challenge unsatisfactory purchases, the Second Circuit concluded that these disclosure challenges failed on the merits and, accordingly, affirmed the award of summary judgment to the bank on these challenges.

To summarize, the Second Circuit concluded as follows:

  1. Because alleged defects in the bank’s notice of consumer rights with respect to (a) limitations on rights in the event of unsatisfactory credit card purchases, and (b) requirement of written notice of unsatisfactory purchases could cause consumers unwittingly not to satisfy their own obligations and thereby to lose their rights, the alleged defects raised a sufficient degree of the risk of real harm necessary to concrete injury and Article III standing.
  1. Because the obligor failed to demonstrate sufficient risk of harm to a concrete TILA interest from the bank’s alleged failure to give notice about (a) time limitations applicable to automatic payment plans and (b) the obligation to acknowledge a reported billing error within 30 days if the error had already been corrected, she lacked standing to pursue these bare procedural violations and, thus, the Court dismissed these TILA claims for lack of jurisdiction.
  1. The bank’s notice that certain TILA protections applied only to unsatisfactory credit card purchases that were not paid in full is substantially similar to Model Form G–3(A) and, therefore, cannot as a matter of law demonstrate a violation of 15 U.S.C. § 1637(a)(7).
  1. Because neither the TILA nor its implementing regulations require unsatisfactory purchases to be reported in writing, the bank’s alleged failure to disclose such a requirement could not support a § 1637(a)(7) claim.

Accordingly, the Court dismissed the obligor’s appeal and affirmed the award of summary judgment. It also affirmed the termination of the motion for class certification as moot.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Calif. App. Court Holds Consumer Properly Rejected Pre-Suit Offer With General Release, Confidentiality Clauses

The California Court of Appeal, Fourth Appellate District, recently held that a successful consumer plaintiff was entitled to $185,000 in attorney’s fees and costs, even though she rejected a settlement offer containing an appropriate remedy before she filed suit.

In so ruling, the Court held that rejecting the pre-litigation settlement offer was not unreasonable, as the offer required the consumer to agree to a broad release of claims and a confidentiality clause, and especially as the confidentiality provision in particular was unlawful as to the consumer’s Song-Beverly Consumer Warranty Act, Cal. Civ. Code § 1790, et seq. (“Song-Beverly Act”) claims.

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

A car buyer filed a complaint against a car dealer and manufacturer for violations of the Song-Beverly Act and other statutes, alleging the used vehicle she purchased had numerous defects that the dealer and manufacturer were unable to repair. After the parties settled the lawsuit as to all issues except attorney’s fees, the trial court awarded the buyer more than $185,000 in attorney’s fees and costs.

The dealer and manufacturer appealed, contending that the buyer was not entitled to attorney’s fees or costs because she could have avoided litigation by settling the matter earlier. The dealer had made a prelitigation offer in response to a notice required by the Consumers Legal Remedies Act, Cal. Civ. Code, § 1750 et seq., for the buyer’s claim under that statute. The dealer and manufacturer argued that they had offered the buyer an appropriate remedy before she filed her complaint, but that she unreasonably refused to agree to a general release and a confidentiality clause.

As you may recall, the Song-Beverly Act generally provides that a prevailing buyer may recover reasonable attorney’s fees.  See Cal. Civ. Code § 1794.

Relying on McKenzie v. Ford Motor Co. (2015) 238 Cal. App. 4th 695, the Court of Appeal noted that under the Song-Beverly Act, the dealer’s requirement of a confidentiality provision was unlawful, and the dealer’s and manufacturer’s appeals were premised on their mistaken belief the buyer should have accepted the settlement offer with the conditions notwithstanding statutory and case law.

The Court therefore held that the buyer’s rejection of the dealer’s pre-litigation settlement offer was reasonable and the failure to resolve the case earlier was not attributable solely to her obstinacy or a desire to generate fees.

The dealer and manufacturer additionally contended that the fee award should have been reduced because there was insufficient evidence to show that her attorney’s hours and hourly rate were reasonable given the litigation’s lack of risk and complexity, and because the buyer ignored repeated offers of restitution, filed an unnecessary lawsuit, and engaged in unnecessary litigation activity. They further argued that the buyer’s counsel should not be compensated at a higher rate than the $300 per hour that the dealer paid its counsel.

The Court of Appeal disagreed, noting that until the case actually settled, the buyer had to conduct discovery and prepare to prove liability on her varied claims with their varied elements. She also had to be prepared to counter the affirmative defenses asserted by the dealer and manufacturer.

Because the trial court, which considered the evidence and observed the buyer’s counsel’s lawyering skills firsthand, determined that he charged an appropriate hourly rate, the Court of Appeal concluded that the trial court did not abuse its discretion in basing its fee award on a rate of $575 per hour.

Accordingly, the Court of Appeal affirmed the trial court’s award of the buyer’s attorney’s fees and awarded her costs on appeal.

7th Cir. Rules Borrowers Alleged Enough for Standing, But RESPA Claim Failed at Summary Judgment Due to Lack of Damages

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgage loan servicer violated the federal Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq., by failing to properly respond to the borrowers’ request for information, but because the borrowers failed to provide evidence of damages stemming from the violation, the servicer was entitled to summary judgment.

In so ruling, the Court held that the borrowers sufficiently alleged a concrete injury in fact that was fairly traceable to the servicer’s alleged violation of RESPA in order to have standing under Spokeo, but that “[w]hether the allegations are sufficient to overcome a motion for summary judgment is a different matter entirely.”

A copy of the opinion in Diedrich v. Ocwen Loan Servicing, LLC is available at:  Link to Opinion.

As you may recall, RESPA imposes a duty on mortgage loan servicers to respond promptly to a borrower’s written request for information.  See 12 U.S.C. § 2605(e).

The borrowers sent the mortgage loan servicer a borrower information request, asking for information about their loan account, payments made, and the interest rates applied to their account. The servicer informed the borrowers that it could not identify a problem with their account, and that they needed to identify more information or else it would not be able to respond to their request.

The borrowers then filed an action against the servicer under RESPA and Wisconsin law for allegedly failing to properly respond to their request for information regarding their escrow account.

The borrowers subsequently moved for summary judgment on their RESPA claim and on their Wis. Stat. § 224.77(1) claims. The servicer filed a cross motion for summary judgment on all of the borrowers’ claims.  The U.S. District Court for the Eastern District of Wisconsin granted the servicer’s motion for summary judgment based on the borrowers’ failure to demonstrate any resulting damages, and the borrowers appealed.

The Seventh Circuit first addressed whether the borrowers had standing to sue.  In order to have standing, “[t]he plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016).  The Supreme Court of the United States clarified the requirements for standing and noted that the injury must be concrete and not just a “bare procedural violation divorced from any concrete harm.”  Spokeo, 136 S. Ct. 1540.

Thus, the Seventh Circuit looked to see whether the borrowers pled sufficient factual allegations supporting their assertion that they suffered an injury in fact that was fairly traceable to the loan servicer’s alleged violation of RESPA.

The Court noted the borrowers’ allegations that they suffered damage to their credit, and that the servicer forced them to pay greater payments and a higher interest rate than that negotiated in their loan modification.

Based on these allegations, the Seventh Circuit held that the borrowers “sufficiently alleged an injury for purposes of standing, even if those allegations are not sufficient to survive summary judgment.”

The Seventh Circuit further noted that “[a]lleging injury for purposes of standing is not the same as submitting adequate evidence of injury under the statute to survive a motion for summary judgment,” and “[w]hether the allegations are sufficient to overcome a motion for summary judgment is a different matter entirely.”

After examining the borrowers’ evidence submitted at summary judgment, the Court found that even taking all of the borrowers’ facts as true, “they simply have not alleged any causal connection between the injury they allege, including the claim for emotional damages, and [the servicer’s] failure to respond to the qualified written request for information, as opposed to the foreclosure on their loan, the loan modification process, or the litigation in general.”

The Seventh Circuit held that the borrowers failed to provide evidence sufficient to support an award of actual damages to pursue their RESPA claims, noting that the borrowers failed to allege any causal connection between their injuries and the servicer’s failure to respond to their qualified written request for information.

In so ruling, the Court also held that “simply having to file suit, however, does not suffice as a harm warranting actual damages.”

The borrowers argued that their claims of emotional distress, which allegedly stemmed from the servicer’s actions, were sufficient to survive a motion for summary judgment.  However, the Seventh Circuit disagreed, holding that the borrowers failed to provide sufficient evidence to demonstrate that their injuries arose from the servicer’s inadequate response to a request for information under RESPA.

The Court also held that for the same reasons that the borrowers’ claims were insufficient under RESPA, the borrowers had not set forth sufficient evidence to overcome the servicer’s motion for summary judgment on the Wisconsin state law claim. The Court held that the borrowers failed to meet their burden of setting forth sufficient evidence to demonstrate an injury under Wisconsin law.

Accordingly, the Seventh Circuit affirmed the district court’s award of summary judgment in favor of the servicer as to both the RESPA and the Wisconsin state law claims.

9th Cir. Holds Foreclosure Trustee Not FDCPA ‘Debt Collector’

The U.S. Court of Appeals for the Ninth Circuit recently held that the trustee of a California deed of trust securing a real estate loan was not a “debt collector” under the federal Fair Debt Collection Practices Act, because the trustee was not attempting to collect money from the borrower.

In so ruling, the Court held that “actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect ‘debt’ as that term is defined by the FDCPA.”

The Court also vacated the dismissal of the borrower’s federal Truth In Lending Act claim, confirming its prior ruling in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), that a mortgagor need not allege the ability to repay in order to state a TILA rescission claim.

A copy of the opinion in Ho v. ReconTrust Co. is available at:  Link to Opinion.

A borrower sought damages under the FDCPA, alleging that the foreclosure trustee initiated a California non-judicial foreclosure and sent her a notice of default and a notice of sale that misrepresented the amount of debt she owed.  The borrower also sought to rescind her mortgage transaction under TILA.

The trial court granted the servicer’s motion to dismiss the borrower’s FDCPA claims, and dismissed her TILA claim.

The borrower appealed, arguing that the foreclosure trustee was a “debt collector” under the FDCPA because the notice of default and the notice of sale constituted attempts to collect debt and threatened foreclosure unless she brought her account current.

The Ninth Circuit disagreed, holding that the California foreclosure trustee would only be liable if it had attempted to collect money from the borrower.

As you may recall, the FDCPA imposes liability on “debt collectors.”  Under the FDCPA, the word “debt” is defined as an “obligation . . . of a consumer to pay money.”  15 U.S.C. § 1692a(5).  The FDCPA’s definition of “debt collector” includes entities that regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another.

Distinguishing rulings from the Fourth and Sixth Circuits, and agreeing with the California Courts of Appeal, the Ninth Circuit held that a California foreclosure trustee was not a “debt collector” subject to the FDCPA because the foreclosure trustee was not attempting to collect money from the borrower.

Specifically, the Court noted that the Fourth Circuit’s ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006), “was more concerned with avoiding what it viewed as a ‘loophole in the [FDCPA]’ than with following the [FDCPA]’s text,” which the Ninth Circuit found improper.

The Court also noted that the Sixth Circuit’s ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013), “rests entirely on the premise that ‘the ultimate purpose of foreclosure is the payment of money,” but “the FDCPA defines debt as an ‘obligation of a consumer to pay money.’”  The Ninth Circuit emphasized that “[f]ollowing a trustee’s sale, the trustee collects money from the home’s purchaser, not from the original borrower. Because the money collected from a trustee’s sale is not money owed by a consumer, it isn’t ‘debt’ as defined by the FDCPA.”

The Ninth Circuit held that the object of a non-judicial foreclosure in California is to retake and resell the security on the loan, and thus actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect “debt” under the FDCPA.

Accordingly, the Ninth Circuit concluded that the foreclosure notices at issue were an enforcement of a security interest, rather than debt collection under the FDCPA.

The Ninth Circuit found it significant that California expressly exempts trustees of deeds of trust from liability under the California Rosenthal Act, Cal. Civ. Code. § 2924(b), the state analogue of the FDCPA, observing that holding California foreclosure trustees liable under the FDCPA would subject them to obligations that would frustrate their ability to comply with the California statutes governing non-judicial foreclosure.

The Ninth Circuit agreed with the foreclosure trustee, and, citing Sheriff v. Gillie, 136 S. Ct. 1594, 194 L. Ed. 2d 625 (2016), in which the U.S. Supreme Court instructed that the FDCPA should not be interpreted to interfere with state law unless Congress clearly intended to displace that law, the Ninth Circuit affirmed the district court’s dismissal of the FDCPA claim, declining to create a conflict with state foreclosure law in its interpretation of the term “debt collector.”

Turning to the borrower’s TILA claims, which the trial court had dismissed without prejudice, the Court noted that it recently held in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, 1032-33 (9th Cir. 2014), that a mortgagor need not allege the ability to repay the loan in order to state a rescission claim under TILA. However, this was the basis of the trial court’s dismissal of the TILA claim.

Accordingly the Ninth Circuit vacated the dismissal of the borrower’s TILA claim and remanded it to the trial court for reconsideration.  The Court also affirmed the dismissal of the borrower’s FDCPA claims, vacated the dismissal of her TILA claims, and remanded the TILA claims for reconsideration.

4th Cir. Holds Foreclosure is FDCPA ‘Debt Collection,’ Mere Servicer Need Not Provide TILA Notice of Assignment of Loan

The U.S. Court of Appeals for the Fourth Circuit recently confirmed that a law firm and its employees, who pursued foreclosure on behalf of creditors, were acting as “debt collectors” under the federal Fair Debt Collection Practices Act (FDCPA) when they pursued foreclosure proceedings against a borrower.

In so ruling, the Court also confirmed that a servicer that does not also own the mortgage loan does not have a duty to provide notice of the sale and assignment of a loan to itself under the federal Truth in Lending Act (TILA) merely because it accepts the assignment of the deed of trust.

A copy of the opinion in McCray v. Federal Home Loan Mortgage Corp. is available at:  Link to Opinion.

After obtaining a mortgage loan, the borrower sent her servicer a written request for information about the fees and costs that it was charging and how it was maintaining the escrow account on the loan. The servicer allegedly failed to respond or responded inadequately to her request and her follow-up inquiries.

The borrower stopped making payments on her mortgage loan, and went into default.  The servicer retained a law firm to pursue foreclosure. The law firm informed the borrower that the firm had been instructed to initiate foreclosure proceedings on her property.

Several of the law firm’s employees were substituted as trustees on the deed of trust to facilitate foreclosure, and the substitute trustees filed a foreclosure action.

The borrower brought an action for damages against the mortgagee, the servicer, and the law firm and its employees, alleging that they violated the FDCPA and TILA, by failing to provide her with required notices and information.

The district court granted the mortgagee, the servicer, and the law firm’s motions to dismiss the borrower’s FDCPA and TILA claims.

On appeal, the borrower argued that the district court erred in concluding that her complaint failed to allege sufficient facts to establish that the law firm and its employees were “debt collectors” subject to the FDCPA’s regulation.

As you may recall, the FDCPA defines the term “debt collector” to include “any person [1] who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or [2] who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”

The law firm and its employees argued that the borrower failed to plead any facts indicating that they had made any demands for payment, or communicated deadlines and penalties for the borrower’s failure to make any payment.

They also argued that the actions occurred in connection with the enforcement of security interests in real property, which were distinct from debt collection activity under the FDCPA. They further argued that a foreclosure action was not designed to obtain payment on an underlying debt, but to terminate the borrower’s ownership interests of the mortgagor in the property.  Finally, they argued that their activity was only incidental to a bona fide fiduciary obligation and therefore was excluded from regulation by an exception contained in the FDCPA’s definition of “debt collector.”

The Fourth Circuit disagreed with the law firm, noting that it had already decided this issue in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 375-77 (4th Cir. 2006), where it held that a law firm that provided notice that it was preparing foreclosure papers and thereafter initiated foreclosure proceedings could be a debt collector as defined by the FDCPA.

The Court reversed the district court, holding that the borrower’s debt remained a debt even after foreclosure proceedings commenced and the law firm’s actions surrounding the foreclosure proceeding were attempts to collect that debt. The Court also held that foreclosure was not excluded by the FDCPA’s exception for actions “incidental to a bona fide fiduciary obligation” because the law firm’s action in foreclosing the property and acting as substitute trustee were not “incidental,” instead it was central to a substitute trustee’s fiduciary obligation under the deed of trust.

In sum, the Fourth Circuit held that borrower’s complaint adequately alleged that the law firm and its employees were debt collectors under the FDCPA, and that their actions in pursuing foreclosure constituted a step in collecting debt and thus was debt collection activity that is regulated by the FDCPA.

The Court noted, however, that its conclusion was not to be construed to indicate, one way or the other, whether the law firm and its employees, as debt collectors, violated the FDCPA.

The borrower next argued that the district court erred in dismissing her claim that the mortgagee violated TILA by failing to give her notice of its purchase of her loan.

As you may recall, TILA at 15 U.S.C. § 1641(g) provides that the new owner or assignee of a mortgage loan must provide written notice to a borrower no later than 30 days after the date on which it is sold or otherwise transferred or assigned.

The Fourth Circuit disagreed with the borrower, affirming the district court’s dismissal of the TILA claims against the mortgagee, because Congress added this provision to TILA in 2009, and the borrower failed to allege that the sale and transfer of the mortgage loan to the mortgagee occurred after 2009.

Because the borrower seemed to concede that at least as of December 2011, she had notice that the mortgagee was the owner of her loan, the Court also affirmed the district court’s alternative conclusion that the claim was barred by TILA’s one-year statute of limitations.

Finally, the borrower contended that the district court erred in dismissing her claim against the servicer for failing to give her notice of the assignment of the deed of trust to it, in supposed violation of TILA, 15 U.S.C. § 1641(g). The district court had dismissed her claim because it concluded that the servicer received only a beneficial interest, not legal title, in order to service the loan.

On appeal, the borrower conceded that the statute is usually interpreted to mean that notice is required only when legal title to the debt obligation is transferred, but she argued that, in addition to receiving a beneficial interest, the servicer also received an ownership interest based on a line in the deed of trust that read, “The Note or a partial interest in the Note (together with this Security Instrument) can be sold.”

The Fourth Circuit disagreed with the borrower, holding that the statement only indicated that the note could be sold.  Additionally, the Court noted that the inference would be inconsistent with the borrower’s assertion that the mortgagee was in fact the owner and failed to give her timely notice of its ownership.

In short, the Court concluded that the district court did not err in dismissing this claim.

Accordingly, the Fourth Circuit affirmed in part the district court’s judgment, reversed in part, and remanded. The Court reversed the order of dismissal of the borrower’s FDCPA claims against the law firm and its employees and remanded for further proceedings, without suggesting whether or not those defendants violated the FDCPA.  As to the TILA claims, the Court affirmed.

CD Calif. Holds Non-Bank Not ‘True Lender’ on Allegedly Usurious Loans Extended in Name of Bank

The U.S. District Court of the Central District of California recently dismissed a borrower’s putative class action complaint against a non-bank that supposedly was the “true lender” for allegedly usurious student loans that were extended in the name of a bank.

In so ruling, the Court held California law requires that it must look only to the face of a transaction when assessing whether a loan falls under a statutory exemption from the usury prohibition and not look to the intent of the parties.

Under this rule, the Court held that the loans were exempt from California’s usury prohibition under the California Constitution exemption for loans made by banks.

A copy of the opinion in Beechum et al. v. Navient Solutions Inc. is available here: Link to Opinion.

On Oct. 21, 2015, the borrowers filed a putative class action complaint claiming they had been illegally charged usurious interest rates on their private student loans in supposed violation of California law.

The borrowers obtained private student loans in 2003 and 2004 using loan applications that identified a national bank as the “lender.”  The borrowers alleged that the “actual lenders” of their loans were the Student Loan Marketing Association (SLMA), or subsidiaries of the SLM Corporation (“SLM Corp.”).

The borrowers alleged that the SLMA and the SLM Corp. subsidiaries originated, underwrote, funded and bore the risk of loss as to their loans under a confidential agreement (the “Agreement”) between the SLMA and the bank.

The borrowers also alleged that the Agreement provided that the bank was required to sell the loans to SLMA at cost within 90 days of being funded. This arrangement then allegedly “enabled the SLMA and the SLM Corp. subsidiaries to make high-interest private … loans to students … attending for-profit schools without the scrutiny of any bank regulatory body, and without the market restraints faced by regulated lenders.”

The borrowers asserted that under the Agreement, SLMA and SLM Corp. subsidiaries made thousands of loans to California borrowers using banks as the nominal lender, with either SLMA or an SLM Corp. subsidiary functioning as servicer.

The borrowers alleged the non-bank defendants had been illegally charging and collecting interest at a rate greater than 10 percent.  The borrowers’ loans were originally assigned to SLMA or an SLM Corp. subsidiary after their disbursement and were subsequently sold to various other parties.

The SLMA was created pursuant to federal statute and chartered by the federal government as a government sponsored enterprise. In or about 1994, Congress required the SLMA to transition to a wholly private company no later than Sept. 30, 2008. As part of the transition, various segments and subsidiaries of the SLMA were acquired by the SLM Corp., which continued the SLMA’s operations during the transition period and after the SLMA’s dissolution.

The borrowers alleged that in an effort to circumvent federal restrictions on its ability to originate loans and to circumvent state usury laws, the SLMA and the SLM Corp. and its wholly-owned subsidiaries entered into forward purchase agreements with national bank partners, supposedly to make it appear that the lender was a national bank.

The borrowers asserted that the SLMA was effectively the “actual lender” of the loans in a number of ways. First, according to the borrowers, the bank did not have any risk of loss with respect to the loans because the SLMA provided the funds for the loans and agreed in advance to purchase the loans from the bank.  Moreover, the borrowers asserted, the SLMA controlled all aspects of marketing loans to student borrowers, and required the bank to print, package and distribute application materials in forms acceptable to the SLMA, based on a design template for such materials provided by the SLMA.

According to the borrowers, the bank was not allowed to alter the content or description of these application materials without the SLMA’s express written consent.  Instead, the borrowers asserted, the bank’s role was to add its name, state, logo and OE number to the applications, which made it appear as if the bank were the lender. In addition, the SLMA allegedly set the terms of the private loans; controlled the schools at which the loans could be made; determined which students would be approved for loans and for what amounts; and determined the interest rate on a borrower’s loan based on proprietary credit criteria established by the SLMA.

In 2004, the SLMA was dissolved and merged into the SLM Corp.  At this time, the Agreement was amended, and the SLMA’s role was assigned to two wholly-owned subsidiaries of the SLM Corp.

Based on the foregoing allegations, the borrowers asserted five state law claims: (1) unlawful and unfair business practices in violation of the California Unfair Competition Law (“UCL”); (2) usury in violation of Article XV, Section 1, of the California Constitution; (3) violation of California’s Usury Law (i.e. Cal. Civ. Code § 1916-1); (4) claim for money had and received; and (5) conversion.

The borrowers’ claims for money had and received and for conversion and violation of the UCL were predicated on the borrowers’ theory that the non-banks had violated California’s usury prohibition.  The borrowers sought restitution, compensatory and statutory damages, and injunctive relief, and sought to represent a putative class of individuals residing in California who obtained student loans and were similarly charged usurious interest rates.

The defendant non-banks argued that the borrowers’ complaint should be dismissed because: (1) the borrowers’ loans are exempt from California’s usury prohibition; and (2) the borrowers’ claims are preempted by the National Bank Act.

The Court found that the borrowers’ loans were exempt from California’s usury prohibition, and did not reach the question of whether borrowers’ claims were preempted by the National Bank Act.

The borrowers’ usury claims were based on Article XV § 1 of the California Constitution, which provides that interest charged on an obligation in excess of 10 percent is usurious and therefore cannot be collected, and the California “Usury Law,” Cal. Civ. Code § 1916-1.

Because the California constitutional provisions supersede any conflicting language in the state Usury Law, the Court looked to the controlling language of the California Constitution when assessing the borrowers’ usury claims.

The essential elements of a claim of usury in California are: (1) the transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction.

The intent sufficient to support a judgment of usury does not require a conscious attempt, with knowledge of the law, to evade it. The conscious and voluntary taking of more than the legal rate of interest constitutes usury and the only intent necessary on the part of the lender is to take the amount of interest which he receives; if that amount is more than the law allows, the offense is complete.

The usury prohibition is subject to numerous exemptions. In particular, the California Constitution exempts from the usury prohibition loans made by any bank created and operating under and pursuant to any laws of the state or of the United States of America.

The non-bank defendants argued that the borrowers’ usury claims should be dismissed because the borrowers’ loans fell within the California Constitution’s exemption for loans made by banks.  The non-bank defendants noted that the complaint itself alleged that the borrowers’ loans were originally issued by a bank.

Additionally, the non-bank defendants argued that the SLMA should not be considered the actual lender of the borrowers’ loans, because although the SLMA contracted with the bank to purchase the loans after they were issued and was involved in their issuance and disbursement, this does make SLMA the actual “lender” for purposes of the exemption from the usury prohibition.

The non-bank defendants also argued that under California law, the court could not consider whether the SLMA intended to circumvent the usury prohibition through its agreement with the bank when determining whether borrowers’ loans were exempted from the prohibition.

Countering, the borrowers argued that the court must look to the substance of the transaction rather than to its form when assessing whether a loan falls into the exemption from California’s usury prohibition.  The borrowers further argued that the SLMA’s intent is relevant to whether the borrowers’ loans were exempt from the usury prohibition.

The borrowers contended that although the bank was the lender of the borrowers’ loans “in form,” the complaint sufficiently alleged that the SLMA was for practical purposes the actual lender and that the SLMA intended to skirt the usury prohibition through its agreement to purchase the loans from the bank. Consequently, the borrowers argued, their loans did not fall under the exemption from the usury prohibition for loans issued by banks.

The Court rejected the borrowers’ arguments, noting that, even assuming the allegations in the complaint were true, the borrowers’ loans fell under the California Constitution’s exemption for loans issued by banks, and the borrowers’ complaint alleged that the loans were issued by a bank.

Although the borrowers argued the exemption did not apply to their loans because their “lender” was effectively the SLMA, they failed to cite any authority supporting this proposition.

Instead, the borrowers cited a number of cases for the proposition that the court should look to substance over form to assess whether a loan, that on its face appears non-usurious, is in fact usurious, arguing that these decisions permitted the court to look at the “substance” of the SLMA’s agreement with the bank and the SLMA’s intent in order to determine whether the borrowers’ loans were exempted from the usury prohibition.

The Court noted, however, that the cases cited by the borrowers only held that a court may consider the “substance” of a transaction over its “form” and the parties’ intent when assessing whether a transaction satisfies the elements of usury or falls under a common law exemption to the usury prohibition, and not when assessing whether the transaction or a party to the transaction fall under a constitutional or statutory exemption from the usury prohibition.

Because the Court found the borrowers’ loans were exempted from the usury prohibition, the Court concluded that the borrowers’ remaining claims for money had and received, conversion, and violation of the UCL were also subject to dismissal.

In reaching its decision, the Court relied upon Jones v. Wells Fargo Bank, 112 Cal. App. 4th 1527, 1539 (2003) and WRI Opportunity Loans II LLC v. Cooper, 154 Cal. App. 4th 525, 533 (2007), two California appellate decisions that held that the court must look only to the face of a transaction when assessing whether it falls under a statutory exemption from the usury prohibition and not look to the intent of the parties.

In Jones, the California Court of Appeal, considering a plaintiff’s claim that a shared loan appreciation agreement was usurious, noted that cases where intent to evade the usury law is at issue typically involve situations where the lender claims a transaction is not a loan at all and that the defendants’ intent was irrelevant where the agreement fit within a legally authorized exception to the general usury law.

In WRI, where two plaintiffs claimed a loan provided to their company was usurious, the California Court of Appeal re-affirmed Jones, noting that when a loan meets the requirements for a statutory exemption to the usury law, courts will not look beyond those requirements.

The borrowers attempted to distinguish Jones and WRI, arguing that those cases pertained to exempt transactions – i.e., shared appreciation loans.  The borrowers contended that when the exemption belongs to an entity in what otherwise would be a usurious transaction, the intent of the parties is critical.

The Court again rejected the borrowers’ argument. The Court noted that the borrowers cited no authority supporting the proposition that the court’s inquiry into a transaction subject to a usury exemption differs based on whether the exemption pertains to the character of the transaction or to that of a party to the transaction.

The Court concluded that the cases cited in support of the borrowers’ contentions were inapposite because they did not concern statutory or constitutional exemptions to the usury prohibition, and found Jones and WRI to be controlling.

The district court found Jones particularly on-point because it addressed a statutory exemption for certain national banks comparable to the constitutional exemption at issue in this case.  Consequently, the district court looked only to the face of the transactions at issue when assessing whether the borrowers’ loans were exempted from the usury prohibition.

Because the borrowers’ complaint alleges that the loans were issued by a bank, the district court concluded that the loans were exempted from California’s usury prohibition.

Accordingly, the Court granted the non-bank defendants’ motion to dismiss insofar as it contended the borrowers’ loans were exempted from California’s usury prohibition, and dismissed the action with prejudice.

11th Cir. Holds Bankruptcy ‘Surrender’ Requires Debtor to Give Up All Rights in Collateral

The U.S. Court of Appeals for the Eleventh Circuit recently held that the word “surrender” in the Bankruptcy Code, 11 U.S.C. § 521(a)(2), requires that debtors relinquish all of their rights to the collateral.

In so ruling, the Court ordered the borrowers to “surrender” their house to the mortgagee in a foreclosure action, and held that the bankruptcy court had the authority to compel the borrowers to fulfill their mandatory duty under 11 U.S.C. § 521(a)(2) not to oppose a foreclosure action in state court.

A copy of the opinion in David Failla, et al v. Citibank, N.A. is available at:  Link to Opinion.

A mortgagee filed a foreclosure action, which the borrowers opposed.  The borrowers filed for bankruptcy, admitting that they owned the house, that the house was collateral for the mortgage, that the mortgage was valid, and that the balance of the mortgage exceeded the value of the house.

The borrowers also filed a statement of intention, 11 U.S.C. § 521(a)(2), to surrender the house. Because the house had a negative value, the bankruptcy trustee abandoned it back to borrowers under 11 U.S.C. § 554. The borrowers continued to live in the house while they contested the foreclosure action.

The mortgagee filed a motion to compel surrender in the bankruptcy court.  The mortgagee argued that the borrowers’ opposition to the foreclosure action contradicted their statement of intention to surrender the house.  The borrowers argued that their opposition to the foreclosure action was not inconsistent with surrendering the house.

The bankruptcy court granted the mortgagee’s motion to compel surrender and ordered the borrowers to stop opposing the foreclosure action. The bankruptcy court explained that if the borrowers did not comply with its order, it might “enter an order vacating [their] discharge.”

The district court affirmed the bankruptcy court’s ruling on appeal, and the borrowers then appealed to the U.S. Court of Appeals for the Eleventh Circuit.  The Eleventh Circuit affirmed.

First, the Eleventh Circuit explained that section 521(a)(2) prevents debtors who surrender their property from opposing a foreclosure action in state court. Second, it explained that the bankruptcy court had the authority to order borrowers to stop opposing their foreclosure action.

Section 521(a)(2) states a bankruptcy debtor’s responsibilities when his schedule of assets and liabilities includes mortgaged property:

(a) The debtor shall …

(2) if an individual debtor’s schedule of assets and liabilities includes debts which are secured by property of the estate—

(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property; and

(B) within 30 days after the first date set for the meeting of creditors under section 341(a), or within such additional time as the court, for cause, within such 30-day period fixes, perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph;

except that nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as provided in section 362(h).

11 U.S.C. § 521(a)(2). “Subsection (A) requires the debtor to file a statement of intention about what he plans to do with the collateral for his debts. See Fed. R. Bankr. P. 1007(b)(2). The statement of intention must declare one of four things: the collateral is exempt, the debtor will surrender the collateral, the debtor will redeem the collateral, or the debtor will reaffirm the debt. See In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993). After the debtor issues his statement of intention, subsection (B) requires him to perform the option he declared. Id.”

The question that the Eleventh Circuit faced was whether the borrowers satisfied their declared intention to surrender their house under section 521(a)(2)(B).

To answer that question, the Court had to decide to whom borrowers had to surrender their property and whether surrender requires them to acquiesce to a creditor’s foreclosure action. The district court and the bankruptcy court concluded that the borrowers violated section 521(a)(2) by opposing the bank’s foreclosure action after filing a statement of intention to surrender their house.

The Eleventh Circuit agreed with “both the district court and the bankruptcy court that section 521(a)(2) requires debtors who file a statement of intent to surrender to surrender the property both to the trustee and to the creditor.” Even if the trustee abandons the property, the borrowers’ duty to surrender the property to the creditor remains.

The Court held that interpreting the word “surrender” to refer only to the trustee of the bankruptcy estate rendered section 521(a)(2) superfluous in connection with section 521(a)(4). Under the surplusage canon, no provision “should needlessly be given an interpretation that causes it to duplicate another provision.” Antonin Scalia & Bryan A. Garner, Reading Law 174 (2012).

Section 521(a)(4) states that “[t]he debtor shall … surrender to the trustee all property of the estate.” 11 U.S.C. § 521(a)(4). The Eleventh Circuit concluded that because section 521(a)(4) already requires the debtor to surrender all of his property to the trustee so the trustee can decide, for example, whether to liquidate it or abandon it, section 521(a)(2) must refer to some other kind of surrender.

The Court observed that when the bankruptcy code intends that a debtor must surrender his property either to the creditor or the trustee, it says so. On the one hand, the Court noted that although section 1325(a)(5)(C) states that “the debtor surrenders the property securing such claim to such holder,” which clearly contemplates surrender to a creditor, Congress did not use that language in Section 521(a)(4). On the other hand, section 521(a)(4) states that “[t]he debtor shall … surrender to the trustee all property of the estate,” which clearly contemplates surrender to the trustee. Congress did not use that language in Section 521(a)(2) either.

The Court observed that what Congress said in section 521(a)(2) is “surrender,” without specifying to whom the surrender is made, but noted that the lack of an object made sense because a debtor who decides to surrender his collateral must surrender it to both the trustee and the creditor. The debtor first surrenders it to the trustee (under § 521(a)(4)) who decides whether to liquidate it under Section § 704(a)(1), or abandon it under Section § 554. If the trustee abandons it, then the debtor surrenders it to the creditor under § 521(a)(2).

The Court observed that the word “surrender” in section 521(a)(2) is used with reference to the words “redeem” and “reaffirm,” and those words plainly refer to creditors. The Court further noted that a debtor “redeems” property by paying the creditor a particular amount, and “reaffirms” a debt by renegotiating it with the creditor. 11 U.S.C. §§ 524(c), 722.

Because context is a primary determinant of meaning, the Court concluded that the word “surrender” likely refers to a relationship with a creditor as well, noting that it said as much in dicta in In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993).

Additionally, the Court observed that other provisions of the Bankruptcy Code that provide a remedy to creditors when a debtor violates section 521(a)(2) suggest that the word “surrender” does not refer exclusively to the trustee.

The Court also noted that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109–8, § 305, 119 Stat. 23, added two sections to the Bankruptcy Code that provide remedies for creditors with respect to personal property. 11 U.S.C. §§ 362(h), 521(d).

Section 362(h) punishes a debtor who violates section 521(a)(2) by lifting the automatic stay to allow the creditor to pursue other remedies against the debtor immediately. Section 362(h) allows the trustee of the bankruptcy estate to override this remedy, but only if the trustee moves the court to “order[ ] appropriate adequate protection of the creditor’s interest.” Id. § 362(h)(2).  In addition, section 521(d) allows a creditor to consider the debtor in default because he declared bankruptcy if the debtor violates section 521(a)(2).

The Court held as irrelevant the fact that these remedies apply only to personal property, noting that section 521(a)(2) uses the generic word “property” and draws no distinction between real and personal property.

The Eleventh Circuit further noted that Congress provided additional remedies for creditors secured by personal property, but the contextual clue remains the same: these remedies for creditors reflect an obvious point about section 521(a)(2) — it is a provision that affects and protects the rights of creditors.

The Court also agreed with the bankruptcy court and the district court that “surrender” requires debtors to drop their opposition to a foreclosure. Although the bankruptcy code does not define the word “surrender,” the Court gave it its “contextually appropriate ordinary meaning.”

The Eleventh Circuit noted that Webster’s New International Dictionary defined “surrender” as “to give or deliver up possession of (anything) upon compulsion or demand,” and the Oxford English Dictionary defined “surrender” as “to give up (something) out of one’s own possession or power into that of another who has or asserts a claim to it,” but held that this meaning was not contextually appropriate. The Court noted that when the Bankruptcy Code means “physically turn over property,” it uses the word “deliver” instead of “surrender.” The Court cited as examples 11 U.S.C. §§ 542(a), 543(b)(1) and § 727(d)(2), which uses the phrase “deliver or surrender,” suggesting they are different.

The Eleventh Circuit also noted that Black’s Law Dictionary defines “surrender” as “[t]he giving up of a right or claim,” noting that Webster’s New International Dictionary defines it as “to give up completely; to resign; relinquish; as, to surrender a right, privilege, or advantage.”

The Court noted approvingly that this meaning describes a legal relationship, as opposed to a physical action, which makes sense in the context of section 521(a)(2) — a provision that describes other legal relationships like “reaffirmation” and “redemption,” and was in line with existing authorities, citing In re Pratt, 462 F.3d 14, 18–19 (1st Cir. 2006); In re White, 487 F.3d 199, 205 (4th Cir. 2007); and In re Plummer, 513 B.R. 135, 143–44 (Bankr. M.D. Fla. 2014).

Relying on In re White, 487 F.3d at 206, the Court concluded that because “surrender” means “giving up of a right or claim,” debtors who surrender their property can no longer contest a foreclosure action.

The Eleventh Circuit also held that, when the debtors act to preserve their rights to the property “by way of adversarial litigation,” they have not “relinquish[ed] … all of their legal rights to the property, including the rights to possess and use it.”

In addition, relying on In re Elowitz, 550 B.R. 603, 607 (Bankr. S.D. Fla. 2016), the Eleventh Circuit observed that ordinarily, when debtors surrender property to a creditor, the creditor obtains it immediately and is free to sell it: “[I]n order for surrender to mean anything in the context of § 521(a)(2), it has to mean that … debtor[s] … must not contest the efforts of the lienholder to foreclose on the property.” Otherwise, the Court noted, debtors could obtain a discharge in bankruptcy based, in part, on their sworn statement to surrender and enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.

The Eleventh Circuit held that the hanging paragraph in section 521(a)(2) does not give the debtor the right to oppose a foreclosure action. The hanging paragraph states that “nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as provided in section 362(h).”

Noting that the key words for purposes of this dispute are “under this title,” the Court of Appeals held that the hanging paragraph means that section 521(a)(2) does not affect the debtor’s or the trustee’s bankruptcy rights. The hanging paragraph spells out an order of operations. It does not mean that a debtor who declares he will surrender his property can then undo his surrender after the bankruptcy is over and the creditor initiates a foreclosure action.

The Eleventh Circuit also held that the outcome was not unfair. During the bankruptcy proceedings, the borrowers declared that they would surrender the property, that the mortgage was valid, and that bank had the right to foreclose, such that compelling borrowers to stop opposing the foreclosure action only required them to honor that declaration.

Relying on In re Guerra, 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016), the Eleventh Circuit observed that in bankruptcy, as in life, a person does not get to have his cake and eat it too: borrowers may not say one thing in bankruptcy court and another thing in state court, thereby making a mockery of the legal system by taking inconsistent positions.

Section 521(a)(2) requires a debtor to either redeem, reaffirm, or surrender collateral to the creditor. Having chosen to surrender, the Eleventh Circuit held that the debtor must drop his opposition to the creditor’s subsequent foreclosure action.  The Court held that, because the borrowers filed a statement of intention to surrender their house, they cannot contest the foreclosure action.

For the first time on appeal, the borrowers argued that even if they breached their duty to surrender under section 521(a)(2), the only remedy available to the bankruptcy court was to lift the automatic stay for the bank, which would allow the mortgagee to foreclose on the house in the ordinary course.

Although the mortgagee moved to strike this portion of the borrowers’ briefs, the Eleventh Circuit chose to address the argument, and reject it.  The Court held that bankruptcy courts are not limited to lifting the automatic stay. Bankruptcy courts have broad powers to remedy violations of the mandatory duties section 521(a)(2) imposes on debtors. Section 105(a), which includes section 521(a)(2), states that bankruptcy courts can “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”

Relying on Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 (2007), which held that bankruptcy judges have broad authority to take any action that is necessary or appropriate to prevent an abuse of process, the Eleventh Circuit held that a debtor who promises to surrender property in bankruptcy court and then, once his debts are discharged, breaks that promise by opposing a foreclosure action in state court has abused the bankruptcy process.

Finally, the Eleventh Circuit noted that if a bankruptcy court could only lift the automatic stay, then debtors could violate section 521(a)(2) with impunity. Because the automatic stay is always lifted at the end of the bankruptcy proceedings, the Eleventh Circuit noted this remedy does nothing to punish debtors who lie to the bankruptcy court about their intent to surrender property.

Although a creditor may be able to invoke the doctrine of judicial estoppel in state court to force debtors to keep a promise made in bankruptcy court, its availability does not affect the statutory authority of bankruptcy judges to remedy abuses that occur in their courts.  Accordingly, the Court concluded that there is nothing strange about bankruptcy judges entering orders that command a party to do something in a non-bankruptcy proceeding, because bankruptcy courts regularly exercise jurisdiction to tell parties what they can or cannot do in a non-bankruptcy forum.

The Eleventh Circuit held that, just as the bankruptcy court may order creditors who violate the automatic stay to take corrective action in the non-bankruptcy litigation, the bankruptcy court may order debtors to withdraw their affirmative defenses and dismiss their counterclaim in a foreclosure case.

Accordingly, the Court held that the bankruptcy court had the authority to compel the borrowers to fulfill their mandatory duty under section 521(a)(2) not to oppose the foreclosure action in state court, affirmed the order compelling the borrowers to surrender their home to the mortgagee, and denied as moot the mortgagee’s motion to strike.

3rd Cir. Holds No TCPA Coverage Under Businessowners Insurance Policy

The U.S. Court of Appeals for the Third Circuit recently held that a businessowners insurance policy did not cover a class action judgment that arose out of unsolicited advertisement communications in violation of the federal Telephone Consumer Protection Act.

A copy of the opinion in Auto-Owners Insurance Company v. Stevens & Ricci Inc. is available at:  Link to Opinion.

A business was solicited by an advertiser who claimed to have a fax advertising program that complied with the TCPA, 47 U.S.C. § 227. The business allowed the advertiser to fax thousands of advertisements to potential customers on its behalf.

Six years later, a class action lawsuit was filed against the business, claiming that the advertisements violated the TCPA, which prohibits the “use [of] any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement …”

In the class action, the class representative asserted that it had neither invited nor given the business permission to send the faxes, and that the unsolicited faxes had damaged the recipients by causing them to waste paper and toner in the printing process, lose the use of their fax machines when the advertisements were being received, and the faxes had also interrupted the class members’ “privacy interest.”

During the time that the unsolicited faxes were sent to the class members, the business was covered by a businessowners insurance policy. The policy obligated the insurer to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’ to which this insurance applies.”

The insurer agreed to defend the business in the class action, but reserved its right to later challenge whether the sending of unsolicited faxes fell within the terms of the insurance policy’s coverage.

One year later, the class action settled and the parties agreed to entry of judgment in favor of the class against the business for $2 million. The class also agreed to seek recovery of the judgment only from the insurer. The trial court entered an order and final judgment approving the settlement and entering the judgment against the business. In its order, the trial court specifically found that the business “did not willfully or knowingly violate the TCPA.”

By that time, the insurer had already filed a declaratory judgment action against the business to clarify its obligations under the policy and seeking a declaration that the policy did not provide coverage for the claims in the class action and that the insurer did not owe the business any duty to defend or indemnify.

The insurer and the class representative each moved for summary judgment in the declaratory judgment action, and the trial court concluded that the sending of unsolicited faxes to the class members did not cause the sort of injury that fell within the policy’s definition of either “property damage” or “advertising injury.” The trial court granted the insurer’s motion for summary judgment and denied the class representative’s cross-motion. The class representative appealed.

On appeal, the class representative first argued that the trial court did not have jurisdiction to hear the case. The insurer had brought its declaratory relief action under the Declaratory Judgment Act, 28 U.S.C. § 2201.

As you may recall, the DJA does not itself create an independent basis for federal jurisdiction, but instead provides a remedy for controversies otherwise properly within the court’s subject matter jurisdiction. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72 (1950).  Declaratory judgment actions do not directly involve the award of monetary damages, but “it is well established that the amount in controversy [in such actions] is measured by the value of the object of the litigation.” Hunt v. Wash. State Apple Advert. Comm’n, 432 U.S. 333, 347 (1977).

In bringing its declaratory judgment action, the insurer had invoked diversity jurisdiction, which requires that the parties must be completely diverse, meaning that “no plaintiff can be a citizen of the same state as any of the defendants,” and that the “matter in controversy exceeds the sum or value of $75,000.” 28 U.S.C. § 1332.

Here, there was no dispute that the parties were completely diverse, because the insurer was based and incorporated in Michigan, while the business was based and incorporated in Arizona, and the class representative was based and incorporated in Pennsylvania.

However, although the business and the class representative were ultimately fighting over the insurer’s obligation to pay a $2 million judgment against the business, that judgment was based on the settlement of the underlying class action lawsuit in which the individual claims of each class member fell well below the $75,000 amount-in-controversy threshold.

In general, the distinct claims of separate plaintiffs cannot be aggregated when determining the amount in controversy. Werwinski v. Ford Motor Co., 286 F.3d 661, 666 (3d Cir. 2002).

The class representative argued that the insurer, by adding up the potential damages owed to each of the various class members, improperly aggregated those claims to cross the jurisdictional threshold. The class representative argued that this action was a multi-party dispute between the insurer and the multiplicity of class claimants.

The insurer disagreed, arguing that the case was only between it and its insured — the business. The insurer argued that in coverage litigation commenced by an insurer, the focus is on the amount the insurer will owe to its insured or the value of its coverage obligation.

Given those two competing positions, the Third Circuit had to decide whether the case was a dispute between the insurer and the many class members (which would give rise to aggregation problems) or a dispute between the insurer and its insured concerning its overall obligation to defend and indemnify under the policy.

The Court had never previously addressed this question, and therefore relied on the opinion of the U.S. Court of Appeals for the Seventh Circuit in Meridian Security Insurance Company v. Sadowski, 441 F.3d 536 (7th Cir. 2006). There, much like this case, an insurer sought a declaratory judgment against its insured to avoid any obligation to defend a class action alleging that the insured had sent unsolicited fax advertisements in violation of the TCPA.

In Sadowski, as in this case, the underlying class action was still pending at the time the declaratory judgment action was filed. In Sadowski, the Seventh Circuit concluded that the district court indeed had diversity jurisdiction, and rejected the very same argument that the class representative advanced in this case.

According to Sadowski, the “insurer [had] not aggregated multiple parties’ claims. From its perspective there was only one claim – by its insured, for the sum of defense and indemnity costs.” The Seventh Circuit thus held that “the anti-aggregation rule does not apply … just because the unitary controversy between these parties reflects the sum of many smaller controversies.”

The Third Circuit adopted the Sadowski reasoning. Viewing this case from the perspective of the insurer at the time of filing of the declaratory judgment complaint, the Court held that the insurer’s quarrel was with the business regarding its indemnity obligation under the policy. According to the Court, the only “amount in controversy” that the insurer was then concerned with was its total indemnity and defense obligation.  Thus, the Court held that the insurer’s dispute was thus with its insured, not the class, and its overall liability was not legally certain to fall below the jurisdictional minimum.

Accordingly, the Third Circuit held that satisfaction of the amount-in-controversy requirement did not violate the anti-aggregation rule, and the trial court had diversity jurisdiction under 28 U.S.C. § 1332.

The ultimate question was whether the sending of the faxes fell under the policy’s definition of either “property damage” or “advertising injury,” as a matter of state law.

First, however, the Court of Appeal had to determine which state’s law to apply. Chamberlain v. Giampapa, 210 F.3d 154, 158 (3d Cir. 2000).

Because the policy did not contain a choice-of-law provision, the Court of Appeals had to apply the choice of law rules of the forum state to determine which state’s substantive law applied. Kruzits v. Okuma Mach. Tool, Inc., 40 F.3d 52, 55 (3d Cir. 1994). As in all applications of state law, the Court’s task was to predict how the state Supreme Court would rule if it were deciding the case. Norfolk S. Ry. Co. v. Basell USA Inc., 512 F.3d 86, 91-92 (3d Cir. 2008).

The insurer urged the Court of Appeal to apply Pennsylvania law, because Pennsylvania was the forum state for both the declaratory judgment case and the class action.

The class representative, however, argued that Arizona law should apply, emphasizing the many connections between the policy and that state – i.e., the business was based and incorporated there; the underwriting file on the policy indicates that the insurance quote was by an agency based in Arizona; the application for insurance was submitted to the insurer’s branch in Arizona and reviewed by an underwriter there; and the decision to insure the business was made entirely within the Mesa, Arizona branch. Essentially, the class representative argued that Arizona law should apply because that is where the insurance contract was formed.

Because the action was filed in the Eastern District of Pennsylvania, the Third Circuit applied Pennsylvania choice-of-law rules.

Before 1964, Pennsylvania courts applied the law of the place where the contract was formed (“lex loci contractus”). That stood in contrast to the rule in tort cases, which required application of the law of the place where the injury occurred (“lex loci delicti”). In Griffith v. United Air Lines, Inc., the Pennsylvania Supreme Court abandoned the “lex loci delicti” rule for torts “in favor of a more flexible rule which permits analysis of the policies and interests underlying the particular issue before the court.”

The Griffith court did not address whether its new flexible approach to choice-of-law questions would also apply to contract claims, thus also displacing the “lex loci contractus” rule. Nor had the Supreme Court of Pennsylvania ever addressed that issue.

The Third Circuit had, however, addressed this issue twice before. Almost 40 years ago, in Melville v. Am. Home Assurance Co., 584 F.2d 1306, 1312 (3d Cir. 1978), it predicted that Pennsylvania would extend its Griffith methodology to contract actions.

More recently, in Hammersmith v. TIG Insurance Co., 480 F.3d 220, 226-29 (3d Cir. 2007), the Third Circuit again concluded that Pennsylvania would apply Griffith’s flexible approach to choice-of-law questions in contract cases, noting that in Budtel Associates, LP v. Continental Casualty Company, the Pennsylvania Superior Court had concluded that the Commonwealth’s precedents mandated that it follow the Griffith rule in the contract law context.

The class representative argued that the previous “lex loci contractus” rule should control and that the Third Circuit should apply Arizona law. The Court rejected the class representative’s arguments, noting that the class representative cited no intervening Pennsylvania authority that called the Court’s prediction in Hammersmith into question. Accordingly, the Court applied Griffith’s flexible choice-of-law analysis.

Under the Griffith approach, “the first step in a choice of law analysis under Pennsylvania law is to determine whether a conflict exists between the laws of the competing states.” If there are no relevant differences between the laws of the two states, the court need not engage in further choice-of-law analysis, and may instead refer to the states’ laws interchangeably.

To determine whether a conflict existed, the Third Circuit had to decide whether Arizona and Pennsylvania law disagreed on the proper scope of the coverage applicable in this case.

The class representative argued that there were two significant conflicts between Arizona and Pennsylvania substantive law. First, it argued that a basic Pennsylvania principle of contract interpretation – that courts enforce unambiguous policy language – did not apply to the interpretation of insurance contracts under Arizona law. Instead, the class representative argued that Arizona courts interpret insurance contracts by looking to the reasonable expectations of the insured.

According to the class representative, in Arizona, even clear and unambiguous boilerplate language is ineffective if it contravenes the insured’s reasonable expectations.

The Third Circuit observed that the class representative was using the “reasonable expectation” test to conduct a 50-state legal survey and to argue that Arizona’s law must be whatever the prevailing legal theory was across the country since that prevailing law is inherently “reasonable.”

The class representative argued that in order for the insurer to show that its policy interpretation was consistent with a reasonable insured’s expectations, the insurer must demonstrate that the interpretation adopted explicitly or implicitly by courts nationwide is unreasonable.

The Third Circuit rejected the class representative’s argument. To begin with, the Court did not agree with the class representative that there was a conflict, noting that both states gave dispositive weight to clear and unambiguous insurance contract language.  But, even if a conflict had existed, the court held that the class representative failed to explain how or why using the “reasonable expectation” test would result in a conflict in the applicable substantive law.

Therefore, the Court rejected the class representative’s argument, noting that the argument misstated the nature of the Court’s inquiry. When sitting in diversity and conducting a choice-of-law analysis pursuant to Pennsylvania conflict principles, the Court’s job is only to evaluate any conflict between the laws of Arizona and Pennsylvania.

The class representative, however, had failed to argue that those two states’ laws were different in any way that actually changed the meaning of either of the relevant terms of the policy: “property damage” or “advertising injury.”

The Court noted that the class representative’s argument was thus not only wrong on the law (the states’ laws did not conflict in how they interpreted insurance contracts), but was also irrelevant because it failed to connect the purported conflict to the applicable law.

The class representative’s second alleged conflict was more tenable and related to the differing interpretations of Arizona and Pennsylvania courts as to the meaning of “property damage.”

The policy required that any covered “property damage” be caused by an “occurrence,” which is defined as an “accident.” The policy did not define the term “accident,” although it did exclude from coverage any property damage “expected or intended from the standpoint of the insured.”

The class representative argued that the two states define an “accident” differently. It argued that the two states’ laws conflicted over whether an insurance policy that covers “accidents” would extend to the “unintended consequences of intentional acts,” in this instance, damage to a fax recipient from an intentionally sent fax.

The class representative argued that Pennsylvania law would result in such damages being excluded from coverage, whereas Arizona law would cover its claim as an “accident.”

Once again, the Court rejected the class representative’s argument, noting that under both Pennsylvania and Arizona law the claim would be excluded from coverage.

The Court relied on the Supreme Court of Pennsylvania case of Donegal Mutual Insurance Co. v. Baumhammers, 938 A.2d 286, 292 (Pa. 2007), where the Supreme Court of Pennsylvania said that when “accident” is undefined in an insurance policy, Pennsylvania courts should treat the term as “refer[ing] to an unexpected and undesirable event occurring unintentionally ….”

Baumhammers stood for the premise that even intentional acts of third parties could still be a covered “accident.” Baumhammers involved a killing spree perpetrated by the son of the insured. The estates of several of the victims sued both the son and his parents, alleging, among other claims, negligence on the part of the parents “in failing to take possession of [his] gun and/or alert law enforcement authorities or mental health care providers about [their son’s] dangerous propensities.” The parents sought coverage under their insurance, which covered claims for bodily injury caused by an “accident.”

The Supreme Court of Pennsylvania held that, with respect to the insured parents, the shootings qualified as an “accident” under the policy, because “[t]he extraordinary shooting spree embarked upon by [the son] resulting in injuries to [the victims] cannot be said to be the natural and expected result of [his parent’s] alleged acts of negligence.” Thus, the injuries were caused by an event so unexpected, undersigned, and fortuitous as to qualify as accidental within the terms of the policy.

Here, by contrast, the Third Circuit noted that the class representative’s claimed injury was the use of ink, toner, and time that was caused by the receipt of junk faxes, which were the natural and expected result of the intentional sending of faxes, a far cry from Pennsylvania’s definition of an “accident.”

Although it did not intend injury, the business clearly intended for the third-party advertiser to send the fax advertisements to the members of the class. The Court, concluding that Pennsylvania courts would reject coverage of the claim, observed that any sender of a fax knows that its recipient will need to consume paper and toner and will temporarily lose the use of its fax line.

The Court rejected the class representative’s argument that Arizona law would cover its claim as an “accident,” noting that Arizona law defines an “accident” much the same as Pennsylvania law, relying on Lennar Corp. v. Auto-Owners Ins. Co., 151 P.3d 538, 547 (Ariz. Ct. App. 2007), and Lennar Corp. v. Auto-Owners Ins. Co., 151 P.3d 538, 547 (Ariz. Ct. App. 2007).

Thus, the Court concluded that there was no conflict between Pennsylvania and Arizona law on the question of whether the damage to the class members was covered under the policy’s definition of “property damage,” holding that under either state’s law, there is no coverage because the alleged injury was not the result of an “accident.” It was the foreseeable result of the intentional sending of faxes to the class recipients.

Finally, the class representative argued that coverage was available because the damage to class members from receipt of the junk faxes qualified as “advertising injury” under the policy. Because the class representative did not contend that the Arizona definition of “advertising injury” differed from Pennsylvania, the Court looked solely to Pennsylvania law to answer that question.

The Court again rejected the class representative’s argument, concluding that the claimed injury fell outside of the scope of the policy’s coverage.

The policy defined “advertising injury” as, among other things: “Oral or written publication of material that violates a person’s right of privacy.” Although the policy did not define the term “privacy,” numerous state and federal courts have considered whether violations of the TCPA are covered by insurance policies that include similar or identical language to that at issue.

The Third Circuit relied on the Pennsylvania Superior Court case of Telecommunications Network Design v. Brethren Mutual Insurance Co., which divided “right of privacy” into two broad categories: the privacy interest in secrecy and the privacy interest in seclusion. Secrecy-based privacy rights protect private information, while seclusion-based privacy rights protect the right to be left alone.

Citing Melrose Hotel Co. v. St. Paul Fire & Marine Ins. Co., 432 F. Supp. 2d 488, 502 (E.D. Pa. 2006),aff’d, 503 F.3d 339 (3d Cir. 2007), the Court noted that the TCPA protects only the privacy interest in seclusion by shielding people from unsolicited messages. The content of the messages is immaterial under the TCPA.

Observing that an unsolicited fax intrudes upon the right to be free from nuisance, the Third Circuit held that the purpose of the TCPA is consistent with the type of injury that the class representative alleged in its complaint.

The Court found, however, that the policy’s protection of the “right of privacy” was limited to a privacy interest the infringement of which depends upon the content of the advertisements: in other words, the privacy right to secrecy.

The Court relied on the Pennsylvania Superior Court case of Telecommunications Network Design v. Brethren – a case involving the exact same questions: identical policy language; identical underlying TCPA violation, and identical claimed damages for that violation – in which the state court ruled that the policy did not cover that injury, because the class representative’s allegations in the class action did not relate to the content of the faxed advertisements.  According to the state court in Brethren, the faxes caused the alleged damage because they were received without permission, not because of their content. At no point did the class representative allege that the unsolicited faxes included confidential or otherwise secret information about any of the class members.

Thus, the Third Circuit found that the class representative’s claims were not covered under the policy, and affirmed the judgment of the District Court.

Fla. App. Court (4th DCA) Holds Lis Pendens Expires at Judgment of Foreclosure

The District Court of Appeal of Florida, Fourth District, recently held that real property liens arising after a final judgment of foreclosure are not discharged by Florida’s lis pendens statute.

A copy of the opinion in Ober v. Town of Lauderdale-by-the-Sea is available at:  Link to Opinion.

A mortgagee recorded a lis pendens on real property as part of a foreclosure proceeding against a homeowner. Subsequently, the mortgagee obtained a final judgment of foreclosure. However, the foreclosure sale was not conducted for some four years following entry of the judgment of foreclosure.

After the foreclosure, and before the foreclosure sale occurred, the town recorded seven liens on the property related to various code violations, which arose from violations that occurred after the foreclosure was entered.

The property was later sold at a foreclosure sale, and a certificate of title was issued.  After the sale and the issuance of the certificate of title, the town imposed three more liens on the property.

The purchaser filed suit to quiet title, attempting to strike the town’s liens against the property. The town counterclaimed to foreclose the liens.  Both parties moved for summary judgment.

The trial court granted the town’s motion, denied the purchaser’s motion, and entered final judgment of foreclosure in favor of the town as to all 10 of its liens. The purchaser appealed.

As you may recall, under the Florida lis pendens provisions at Florida Stat. § 48.23(1)(d):

[T]he recording of . . . lis pendens . . . constitutes a bar to the enforcement against the property described in the notice of all interests and liens . . . unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens.

Thus, Florida Stat. § 48.23(1)(d) “not only bars enforcement of an accrued cause of action, but may also prevent the accrual of a cause of action when the final element necessary for its creation occurs beyond the time period established by the statute.”  Adhin v. First Horizon Home Loans, 44 So. 3d 1245, 1253 (Fla. 5th DCA 2010).  The Court noted that the statute does not provide an end date for the lis pendens.

On appeal, the purchaser argued that the lis pendens continues to the date of the judicial sale, which in this case was more than four years after the foreclosure. The town argued that the lis pendens applied only to liens existing or accruing prior to the date of final judgment.

The Appellate Court rejected the purchaser’s argument, looking to a related provision in the Florida statute.

The Court noted that section 48.23(1)(a) states that “[a]n action in any of the state or federal courts in this state operates as a lis pendens . . . only if a notice of lis pendens is recorded.” The Court held that the “plain meaning of this provision indicates that the action itself is the actual lis pendens, which takes effect if and when a notice is filed,” and “[t]he lis pendens therefore logically must terminate along with the action.”

From this, the Appellate Court noted that the “action” in this case was the foreclosure action initiated by the mortgagee, “which terminated thirty days after the court’s issuance of a final judgment.”

Relying upon De Pass v. Chitty, 105 So. 148, 149 (Fla. 1925), a Florida Supreme Court case that used the “until final judgment” phrase when describing the scope of a lis pendens, the Appellate Court held that a lis pendens in Florida “bars liens only through final judgment, and does not affect the validity of liens after that date, even if they are before the actual sale of the property.”

The Court noted that the case revealed a misstatement of the law in Form 1.996(a) of the Florida Rules of Civil Procedure, which provide an example foreclosure judgment that includes a provision stating “[o]n filing the certificate of sale, defendant(s) and all persons claiming under or against defendant(s) since the filing of the notice of lis pendens shall be foreclosed.”

Acknowledging the conflict between the form and its holding, the Court explained that to hold in conformity with the form would be to create a conflict between its decision and both the legislative intent and prior case law, and noted that an amendment to the Florida Civil Procedure forms would be appropriate.

Thus, the Fourth DCA ruled that the Florida lis pendens statute “serves to discharge liens that exist or arise prior to the final judgment of foreclosure unless the appropriate steps are taken to protect those interests,” but “it does not affect liens that accrue after that date.”

7th Cir. Rejects FDCPA Claims That Illinois Wage Garnishments Are Actions ‘Against Consumer’

The U.S. Court of Appeals for the Seventh Circuit recently held that a wage garnishment action under Illinois law is not a legal action “against a consumer” under the federal Fair Debt Collection Practices Act (FDCPA).

Accordingly, the Court held, an Illinois wage garnishment action need not be pursued only in the judicial district in which the debtor signed the debt agreement, or in which the debtor currently resides, under 15 U.S.C. § 1692i(a)(2).

A copy of this opinion in Etro v. Blitt & Gaines, P.C. is available at:  Link to Opinion.

Two Illinois debtors filed similar complaints against a debt collector in the U.S. District Court for the Northern District of Illinois, alleging that the debt collector violated the FDCPA by filing wage garnishment actions against the debtors’ employers in a judicial district where the debtors did not live.

In both cases, the debt collector obtained default judgments against each of the debtors. In each case, the debt collector then filed wage garnishment actions in the First Municipal District in downtown Chicago and obtained summonses against the debtors’ respective employers.

In their complaints, both debtors argued that the debt collector’s filing of the wage garnishment action in the district closest to the employers violated the FDCPA’s venue provision, 15 U.S.C. § 1692i(a)(2), because, according to the debtors, the debt collector should have filed the wage garnishment actions in the municipal district in which the debtors resided.

The debt collector moved to dismiss the debtors’ complaints on the basis that its filing of an affidavit for a wage deduction did not constitute a “legal action” against a “consumer” within the meaning of the FDCPA. The trial courts agreed with the debt collector and granted its motions to dismiss the debtors’ complaints. The debtors appealed and consolidated their appeals.

As you may recall, 15 U.S.C. § 1692i(a)(2) is aimed at preventing debt collectors from filing claims against consumers in improper venues. The debtors filed their complaints relying on 15 U.S.C. § 1692i, which provides in relevant part that “[a]ny debt collector who brings any legal action on a debt against any consumer shall … bring such action only in the judicial district or similar legal entity—(A) in which such consumer signed the contract sued upon; or (B) in which such consumer resides at the commencement of the action.” 15 U.S.C. § 1692i(a)(2).

The parties here did not dispute that: (1) each debtor qualified as “consumer” under the FDCPA; and (2) the defendant was a “debt collector” under the FDCPA. The sole issue on appeal was whether the debt collector’s wage garnishment actions constituted a “legal action … against any consumer” under § 1692i.

On appeal, the Seventh Circuit first determined the plain meaning of “legal action,” which is not defined in the FDCPA. Basing its interpretation on Black’s Law Dictionary, which was in effect at the time the FDCPA was enacted, and on the Ninth Circuit’s rulings in S&M Inv. Co. v. Tahoe Reg’l Planning Agency, 911 F.2d 324, 327 (9th Cir. 1990), and Fox v. Citicorp Credit Svcs., Inc., 15 F.3d 1507, 1515 (9th Cir. 1994).  The Seventh Circuit concluded that “legal action” under § 1692i means all judicial proceedings.

The Seventh Circuit then turned its attention to the meaning of the phrase “against any consumer” in 15 U.S.C. § 1692i(a)(2).

The debtors argued that the Seventh Circuit should interpret wage garnishment actions under Illinois law as being directed at the underlying judgment debtor and not their third-party employers because the statutory scheme requires that judgment debtors receive notice and an opportunity to contest responses given by their employers during the proceedings.

The Seventh Circuit rejected the debtors’ argument, holding that the focus of the Illinois wage deduction scheme is on the third-party employer, not the judgment debtor.

The Seventh Circuit held that, first, the summons is issued against the employer, not the debtor, and must be served upon the employer and a judgment debtor is only entitled to notice via U.S. mail. 735 ILCS 5/12?805(a).

Second, in Illinois, the debt collector serves interrogatories upon the employer who then must respond to them under oath. 735 ILCS 5/12?808(c).

Third, although “the debtor receives a copy of the employer’s answered interrogatories and may contest those answers or request a hearing to dispute whether certain wages are exempt, the only response that is necessary for the action to continue the action is the employer’s. 735 ILCS 5/12-811(a)–(b). In other words, the judgment debtor is not a necessary participant.”

Fourth, the Illinois employer may be found liable if it does not comply with the wage garnishment process, including having a conditional judgment entered against it if it fails to appear and answer in response to a summons, 735 ILCS 5/12-807(a). The Seventh Circuit observed that no such penalty exists for the judgment debtor.

Finally, the Seventh Circuit concluded that wage garnishment actions must be filed in the county where the third party employer resides, regardless of the judgment debtor’s residence. Ill. S. Ct. R. 277(d).

Due to these characteristics of an Illinois wage garnishment action, the Seventh Circuit concluded that a wage-garnishment action is a legal proceeding against an employer, not a consumer.

The Seventh Circuit based its conclusion both on precedent and the purpose behind the FDCPA. The Seventh Circuit relied on Smith v. Solomon & Solomon, P.C., 714 F.3d 73, 75 (1st Cir. 2013), in which the First Circuit analyzed a similar Massachusetts wage deduction scheme and concluded the action was “geared toward compelling the [employer] to act, not the debtor.” 714 F.3d at 76. There, the Massachusetts wage deduction scheme, like Illinois’s regime, required the summons to be issued against the employer and filed in the county where the employer resides. Id. at 75– 76. Like the Illinois scheme, the Massachusetts regime required that the debtor receive notice and “an opportunity to contest.” Id. at 76.  The Seventh Circuit also noted that the Eighth Circuit, when analyzing the same Illinois wage garnishment scheme in Hageman v. Barton, 817 F.3d 611, 618 (8th Cir. 2016), also concluded the action was not “against any consumer.”

The Seventh Circuit also noted that the Federal Trade Commission’s 1988 commentary on the FDCPA provides “[i]f a judgment is obtained in a forum that satisfies the requirements of [15 U.S.C. § 1692i], it may be enforced in another jurisdiction, because the consumer previously has had the opportunity to defend the original action in a convenient forum.” Id. (quoting Statements of General Policy or Interpretation Staff Commentary On the Fair Debt Collection Practices Act, 53 Fed. Reg. 50,097, 50,109 (Dec. 13, 1988)).

The Seventh Circuit also noted that the debtors had a chance to defend themselves in a venue that was considered appropriate under its interpretation of § 1692i at the time the suits were filed. At that time, Newsom v. Friedman, 76 F.3d 813 (7th Cir. 1996) was still good law in the Seventh Circuit. Under Newsom, Illinois circuit courts constituted a “judicial district” within the meaning of § 1292i, rejecting the Newsom plaintiff’s interpretation there that Cook County Circuit Court’s Municipal Department’s smaller units—the municipal district—could constitute a “judicial district or similar legal entity,” which, if accepted, would have required debt collectors to file their complaints in the proper municipal district.

Therefore, the Court noted that under Newsom, debt collectors would not have violated the FDCPA’s venue provision if they filed their complaint against a debtor in any municipal district in Cook County, so long as the resident resided in Cook County or the consumer signed the contract being sued upon in Cook County. The Court explained that this is what the creditors in this case did when they filed suit in Cook County Circuit Court against the debtors who were Cook County residents. The Seventh Circuit noted that it was irrelevant in Newsom that the creditors filed their complaints against the plaintiffs in the First Municipal District and not the Sixth Municipal District.

The Seventh Circuit also noted that Newsom remained intact until it was overruled in Suesz v. Med-1 Solutions, LLC, 757 F.3d 636 (7th Cir. 2014) (en banc). Under Suesz, debt collectors must now file in the proper municipal district within Cook County Circuit Court.  That decision was issued in July 2014, which the Seventh Circuit noted was too late for the debtors in this case, because the one-year statute of limitations had already run on their FDCPA claims. 15 U.S.C. § 1692k(d).

Although Suesz was made retroactive, 757 F.3d at 649–50, the Court held Suez did not invalidate the FDCPA’s statute of limitations and bring to life claims for which the limitations period had long run. The Seventh Court, relying on Soignier v. Am. Bd. of Plastic Surgery, 92 F.3d 547, 553 (7th Cir. 1996), refused to circumvent the important policies underlying a statute of limitations, which include “rapid resolution of disputes; repose for those against whom a claim could be brought; avoidance of litigation involving lost evidence or distorted testimony of witnesses.”

The debtors also argued that the Seventh Circuit should embrace the reasoning of Adkins v. Weltman, Weinberg & Reis Co., L.P.A., No. 2:11-CV-00619, 2012 WL 604249 (S.D. Ohio Feb. 24, 2012), in which the district court analyzed the Ohio wage garnishment regime and determined that “[o]nly the judgment creditor and the judgment debtor have any beneficial interest at stake in a garnishment action” and that the employer is only a “nominal ‘defendant.’”

The Seventh Circuit rejected the debtors’ argument, noting that there was a key feature that differentiated Illinois’s regime from the Ohio regime — to file a wage garnishment action in Illinois, a debt collector must file it in the county where the third party employer resides. Ill. S. Ct. R. 277(d).

Under Illinois law then, if, for example, the judgment debtor lived in Boone County and executed the contract at issue in Boone County and the debtor’s employer resided in Winnebago County, the debt collector would never be able to garnish the debtor’s wages without violating the FDCPA.

Noting that the FDCPA was created to prevent abusive debt collection practices, not to prevent law abiding debt collectors from collecting on legally enforceable debts, the Seventh Circuit declined to adopt interpretation of the unpublished decision of Adkins.  

Accordingly, the Seventh Circuit affirmed the district courts’ judgments dismissing the debtors’ complaints.