Author Archive for Stuart Miles

5th Cir. Holds Compliance With Calif. Probate Code Makes Bank Immune from Wrongful Disbursement Claim

The U.S. Court of Appeals for the Fifth Circuit recently held that, although a bank had actual notice of an heir’s claim to her decedent father’s account funds, the bank’s compliance with the post-death affidavit provisions of California Probate § 13106(a) rendered the bank immune from liability for wrongful disbursement of the funds.

In any event, the Court also held, the decedent’s surviving spouse who withdrew the funds had a probate claim that was statutorily superior to the heir’s claim.

A copy of the opinion in Angelo v. Wells Fargo Bank is available at:  Link to Opinion.

Plaintiff heir’s father died in a mountain climbing accident.  Plaintiff heir’s father had a will leaving the money he held in two bank accounts (“subject accounts”) to the plaintiff heir.

Plaintiff heir went to a Texas branch of the defendant bank and requested information on the decedent’s accounts.  Plaintiff heir was informed that she needed a copy of the decedent’s death certificate and will (“withdrawal requirements”).  Plaintiff heir informed the defendant bank that her step-mother may try to withdraw the funds, and to place a note in the records that she was claiming the funds in the subject accounts.

The defendant bank’s employee refused, but assured plaintiff heir that the funds could not be withdrawn without the withdrawal requirements and court intervention.  Subsequently, plaintiff heir returned with copies of the withdrawal requirements and was informed that her step-mother had emptied and closed the subject accounts from a California branch of the defendant bank.

Plaintiff heir sued the defendant bank in state court for negligence, promissory estoppel, and conversion.  The defendant bank removed to federal court.  The trial court granted summary judgment for the defendant bank under California Probate Code § 13106(a).  Plaintiff heir appealed, arguing that Texas state law governed rather than the law of California and there were genuine issues of material fact.

The Fifth Circuit first found that plaintiff heir had waived her objection on choice-of-law grounds at the trial court level as she never claimed that such rules required application of Texas law to California events.

Plaintiff heir also argued that her interactions with defendant bank’s Texas branch provided the bank with actual notice of her claims, and that the trial court improperly ignored disputed factual issues regarding this argument.

Applying California law, the Fifth Circuit held that there was no issue of material fact.  The Court noted that California Probate Code § 13106(a) discharged the defendant bank “from any further liability with respect to money or property” upon receipt of a duly executed affidavit under California Probate Code §§ 13100 – 13104.

The Fifth Circuit held that, under California Probate Code § 13106(a), the defendant bank could rely on the statutory affidavit and had “no duty to inquire into the truth of any statement in the affidavit or declaration.”

The Fifth Circuit also rejected plaintiff heir’s argument that Mautner v. Peralta, 215 Cal. App. 3d 796 (1989), attributed liability to the defendant bank because the defendant bank had actual notice of her claim.  The Court explained that Mautner created an exception to California Probate Code § 13106(a) when the holder of funds has actual notice of a superior statutory claim.  However, the Court distinguished Mautner and noted that the plaintiff heir did not probate her father’s will.

Thus, the Fifth Circuit held, plaintiff heir’s only possible statutory claim arose under California’s laws of intestate succession.  The Court explained that California’s intestate laws only gave the decedent’s heirs a share in the estate not passing to the spouse, and plaintiff heir’s claim was therefore inferior to the surviving spouse’s claim.

Accordingly, the Court found that the defendant bank’s actual notice of plaintiff heir’s claim was of no import as the California statutory scheme granted defendant bank immunity from any alleged wrongful disbursement of funds, and in any event the plaintiff heir’s actual notice argument failed.  The Fifth Circuit therefore affirmed the district court’s decision.

Illinois App. Court Rejects Borrower’s Constitutional Challenge to Illinois Statutory Form Foreclosure Complaint

The Appellate Court of Illinois, First District, recently held that the form foreclosure complaint provided by the Illinois Mortgage Foreclosure Law (IMFL) complies with procedural due process guarantees of the Fifth and Fourteenth Amendments of the United States Constitution, and does not violate the Illinois Constitution’s separation of powers doctrine by usurping the Illinois judiciary’s rulemaking power.

A copy of the opinion in Wells Fargo Bank N.A. v. Bednarz is available at:  Link to Opinion.

A mortgagee foreclosed on the defendant borrower’s residential property.  The mortgagee’s complaint tracked a form complaint set forth in section 1504(a) of the IMFL.  Section 15-1504(c) of the IMFL enumerates multiple allegations that are “deemed and construed” to be included in form complaints.

The defendant borrower filed a 735 ILCS 5/2-615 motion to dismiss arguing that the form allegations contained in section 15-1504(c) of the IMFL violate procedural due process guarantees of the United States Constitution and the separation of powers doctrine of the Illinois Constitution.

The lower court denied the borrower’s motion to dismiss and entered summary judgment for the lender.  The borrower appealed challenging solely the denial of the motion to dismiss.

The Appellate Court explained that the 12 allegations that are “deemed and construed” to be included in the form complaints “take a number of innocuously and uncontested issues out of play” and “help form a balance between a lender’s interest that a foreclosure case not be bogged down by formalistic proofs over noncontroversial matters, and a mortgagor’s interest in preserving his property.”

The Appellate Court first considered the borrower’s argument that the allegations under section 15-504(c) of the IMFL are not specifically included on the face of the complaint, and therefore are hidden from unsuspecting defendants leaving them unaware of the claims they must defend.

In its rejection of this argument, the Court noted the requirements for raising a facial constitutional challenge.

The Appellate Court explained that a party must show that he “has sustained or is in immediate danger of sustaining a direct injury” from the enforcement of the statute.  In addition, the injury must be “distinct and palpable” and the statute must be unconstitutionally applied to the complaining party rather than “third parties in hypothetical situations.”

The Court noted that the borrower’s motion to dismiss did not address the effect of section 15-504(c) of the IMFL as applied to him, but rather the prejudicial effect on a hypothetical “common defendant” that may not be aware of the implied allegations.

Accordingly, the Appellate Court held that the borrower lacked standing to assert a facial constitutional challenge to section 15-504(c) of the IMFL because he failed to allege that he sustained, or was in immediate danger of sustaining, a direct injury as a result of the enforcement of the statute.

The Court also disagreed with the borrower’s argument that section 15-504(c) of the IMFL violated the separation of power’s doctrine of the Illinois Constitution because the legislature usurped “the court’s power to determine what allegations are sufficient to state a claim for mortgage foreclosure.”

The Appellate Court noted that it is well established that the “legislature has authority to impose requirements upon the judiciary governing matters of procedure and the presentation of claims.”  The test of whether such an enactment is an unconstitutional infringement is whether the requirements imposed by the legislature “unduly encroach upon the judiciary’s function or conflict with any of the supreme court’s rules.”

The Court further explained that Illinois Supreme Court Rule 1 states that Illinois’ Civil Practice Law and Code of Civil Procedure, along with the court rules, govern trial court proceedings.  As the procedures contested by the borrower are set forth in Article 15 of the Civil Practice law, mortgage foreclosure actions are governed by legislative enactment and Illinois Supreme Court Rule 1.  Therefore, the Court held, the enactment and the rules are complementary rather than conflicting.

The Appellate Court further noted that the borrower failed to allege that section 15-504 of the IMFL encroaches on the judiciary’s power to determine the sufficiency of a foreclosure complaint.  Therefore, the Court found that section 15-504(c) of the IMFL was not an unconstitutional legislative encroachment.

Accordingly, the Appellate Court affirmed the circuit court’s ruling rejecting the borrower’s arguments.

6th Cir. Rejects Borrowers’ Attempt to Invalidate Deed of Trust Based on Faulty Acknowledgement

The U.S. Court of Appeals for the Sixth Circuit recently held that two borrowers lacked standing to challenge the validity of a deed of trust in a lien priority dispute interpleader action filed by the foreclosure trustee, as the borrowers did not dispute that they executed the deed of trust, the lien placed on the property was valid, or that they were in default.

In so ruling, the Court rejected the borrowers’ argument that an alleged defect in the acknowledgement invalidated the deed of trust, because a validly recorded instrument that was not properly acknowledged shall nevertheless place “all interested parties . . . on constructive notice of the contents of the instrument.”  Tenn. Code Ann. § 66-24-101(e)(2).

A copy of the opinion in Lococo v. Medical Sav. Ins. Co. is available at:  Link to Opinion.

The borrowers executed a deed of trust (“first DOT”) on their home to secure a loan from a lender to refinance.  Although the first DOT’s acknowledgment stated it was acknowledged in Alabama, it was actually executed in Tennessee.  The first DOT was later re-recorded with the acknowledgement revised to reflect “Tennessee” instead of “Alabama” allegedly without the borrowers’ knowledge, re-execution, or acknowledgement.

The borrowers subsequently executed and recorded a second deed of trust (“second DOT”) with a separate, second lender.  The borrowers later defaulted on the loan secured by the first DOT and the substitute trustee sold the property to a third-party purchaser at a foreclosure sale resulting in a surplus.

The trustee filed an interpleader action in state court against the borrowers and various lienholders, which was removed to federal district court.

The second lender filed a motion for summary judgment claiming priority over the proceeds.  The borrowers filed a third-party complaint against the purchaser and a response to the second lender’s motion claiming that the first lender had invalid title due to the first DOT’s allegedly defective acknowledgment.

The district court granted both the second lender’s and the purchaser’s motions for summary judgment and awarded the proceeds to the second lender.  The court denied the borrowers’ motion and declined their request to certify a question of state law to the Tennessee Supreme Court.  The district court also denied the borrowers’ subsequent motion to alter the judgment arguing that the court lacked jurisdiction over the complaint.  The borrowers appealed.

On appeal, the Sixth Circuit rejected the borrowers’ arguments that the district court lacked subject matter jurisdiction over the complaint and that the complaint violated Rule 14 of the Federal Rules of Civil Procedure.  Although parties cannot waive the issue of subject matter jurisdiction, the Court noted that whether impleader was proper under Rule 14 is a different inquiry.  The Court held that Rule 14 does not extend jurisdiction, it merely sanctions an impleader procedure.  Accordingly, because the borrowers did not raise this issue in the trial court, the Sixth Circuit held it was waived.

As statutory impleader provides an independent grant of subject-matter jurisdiction, the Court determined that the district court possessed original subject-matter jurisdiction over the interpleader action under 28 U.S.C. § 1335.  The surplus funds far surpassed the statutory threshold of $500; and, the borrowers and the second lender were citizens of different states, which satisfied the minimum diversity requirement.

Further, the Court determined that resolution of the complaint required a determination of the first lender’s title and the relative priority of the other liens on the property when it foreclosed.  Accordingly, the operative facts necessary to resolve the claims in the complaint were common to those needed to determine the proper distribution of the proceeds in the interpleader.  As the complaint and the interpleader action derived from a common nucleus of operative facts, the Court found that the district court had supplemental jurisdiction over the complaint under 28 U.S.C § 1367.

The Sixth Circuit also held that the borrowers lacked prudential standing to assert that the first DOT was defective.  The Court explained that the borrowers did not dispute that they executed the first DOT, the lien placed on the property was valid, or that they were in default.

Thus, the Court held, by the borrowers asserting that the first lender’s title was invalid, they were not asserting their own rights but rather those of the second lender.

The Sixth Circuit noted that the borrowers should have asserted an argument as to the commercial reasonableness of the sale to achieve their true goals. The Court believed that the borrowers’ true intention was to invalidate the sale in order for the property to be sold at a higher price to satisfy their remaining debts.  However, the borrowers never raised a commercial reasonableness argument and therefore it was waived.

The Court last determined that the state law acknowledgement issue was moot.  The statute at issue provided that an otherwise validly recorded instrument that was not properly acknowledged shall nevertheless place “all interested parties . . . on constructive notice of the contents of the instrument.”  Tenn. Code Ann. § 66-24-101(e)(2).

Because the second lender never raised the issue and the borrowers did not have standing to raise the issue, any determination of the statute’s effect on potential priority would not have been dispositive of the case.

Accordingly, the Sixth Circuit affirmed the district court’s judgment.

5th Cir. Rejects Borrower’s Challenge to Lender’s Auto-Pay Services Under Texas DTPA

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the dismissal of a borrower’s claims against her lender arising out of a foreclosure, holding among other things that alleged discrepancies as to the lender’s automatic payment withdrawal services did not state a claim under the Texas Deceptive Trade Practices Act (DTPA).

In so ruling, the Court also affirmed the denial of a plaintiff borrower’s motion to join a non-diverse defendant holding that the motion was improperly brought for the purpose of defeating diversity jurisdiction.

A copy of the opinion in Villarreal v. Wells Fargo Bank, NA is available at:  Link to Opinion.

A borrower’s ex-husband obtained a purchase-money loan secured by a deed of trust (“DOT”).  The borrower signed the note, but not the DOT.

The borrower later underwent a divorce proceeding and was awarded legal possession of the house.  The borrower became the sole obligor on the note.  The borrower later defaulted and the lender sent statutorily required notices to the residence and her mother’s residence.  The lender eventually foreclosed on the house.

The borrower sued the lender and a local employee in Texas state court alleging breach of contract, negligence, wrongful foreclosure, and violations of the Texas DTPA.

The lender removed the action to federal court arguing that the lender’s local employee was fraudulently joined to defeat diversity jurisdiction, and also moved to dismiss the allegations raised.  The borrower dismissed the local employee, and moved to amend her substantive claims against the lender and add a claim against her husband for intentional infliction of emotional distress (“IIED”).

The district court denied the borrower’s motion to join a non-diverse defendant and granted the lender’s motion to dismiss.  The borrower appealed.

The Fifth Circuit first addressed the borrower’s purported claims.  The Court noted that a breach of contract claim has three elements under Texas state law: (1) existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of contract by the defendant; and (4) damages to the plaintiff resulting from the breach.

The borrower argued that the lender breached the loan contract by failing to send default notices to her new address, and by making automatic withdrawals from her checking account for her mortgage payments. Rejecting these arguments, the Court found that the borrower failed to allege her own performance.  In fact, the Fifth Circuit held, the default notices attached to the lender’s motion to dismiss evidenced the borrower’s failure to perform.

The Fifth Circuit next addressed the borrower’s negligence claims.  The borrower argued that the lender negligently failed to make automatic withdrawals from her checking account, and negligently failed to send her the statutorily required default notices to her new residence.  The Court recited that a negligence claim has three elements under Texas state law: (1) a legal duty; (2) a breach of duty; and (3) damages proximately caused from the breach.

The Court again rejected the borrower’s argument, holding that “if the defendant’s conduct . . . would give rise to liability only because it breaches the parties’ agreement,” the claim arises out of contract and not tort.  The Fifth Circuit found that the lender’s duties to make automatic withdrawals and send default notices arose out of the contract between her and the lender and therefore affirmed the dismissal of her negligence claim.

The Fifth Circuit then addressed the borrower’s wrongful foreclosure claims.  The Court identified the three elements of a wrongful foreclosure claim under Texas law as: (1) a defect in the foreclosure proceedings; (2) a “grossly inadequate selling price”; and (3) a “causal connection between the defect and the grossly inadequate selling price.”

The Court noted that the borrower needed to allege a “grossly inadequate selling price” unless the borrower alleged that the foreclosing mortgagee “deliberately chilled bidding at the foreclosure sale.”  The borrower alleged a defect in that the lender failed to send default notices to her new address, but did not allege a “grossly inadequate” selling price or a deliberately “chilled bidding.”  Thus, the Fifth Circuit affirmed the dismissal of her wrongful foreclosure claims.

The Court also rejected the borrower’s DTPA arguments.  A claim under the DTPA requires that: (1) the plaintiff is a consumer; (2) the defendant was false, misleading, or deceptive; and (3) the defendant’s acts were a producing cause of the plaintiff’s damages.  To qualify as a consumer under the DTPA, the borrower must have “sought or acquired goods or services” and those “goods or services . . . must form the basis of the complaint.”  The goods or services must be an “objective of the transaction and not merely incidental to it.”

The Fifth Circuit found that automatic withdrawal “services” that the lender provided were “incidental to the loan” and served no other purpose but to facilitate the loan.  Accordingly, the Court affirmed the dismissal of the borrower’s DTPA claim.

Last, the Court addressed the borrower’s appeal of the denial of her motion to add a non-diverse, indispensable party.

The Fifth Circuit noted that the district court has wide discretion on whether to allow a party to be added.  Specifically, the district court should scrutinize such an amendment and consider whether the purpose is to defeat federal jurisdiction, whether the plaintiff was dilatory in her request, and whether the plaintiff will be significantly injured by a denial.

The Court determined that the borrower’s intent in joining her ex-husband was to defeat diversity jurisdiction, that she had been dilatory by waiting more than two months before her attempt to join, and she would not be injured because she could pursue her IIED claims in state court.

Accordingly, the Fifth Circuit affirmed the district court’s ruling.

7th Cir. Holds Customer Did Not Agree to Online Contract, Adopts ‘Reasonable Communicativeness’ Test

The U.S. Court of Appeals for the Seventh Circuit recently held that, under Illinois law, a website must provide a user reasonable notice that use of the website and a click on a button constitutes assent to the terms of an agreement, in order for the agreement to be binding.

In so ruling, the Seventh Circuit adopted a two-part “reasonable communicativeness” test for the enforceability of online agreements: (1) whether the web pages presented to the customer adequately communicated all of the terms and conditions of the agreement; and (2) whether the circumstances support the reasonable assumption that the customer received reasonable notice of the terms.

A copy of the opinion in Sgouros v. TransUnion Corporation is available at:  Link to Opinion.

A customer purchased a “credit score” package from a credit reporting agency’s (CRA) website.  When the customer went to purchase a car with the credit score he obtained from the CRA, he discovered that the score he obtained from the CRA was 100 points lower than the score obtained by the car dealership.

The customer filed suit under the federal Fair Credit Reporting Act, 15 U.S.C. §1681g(f)(7)(A), the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1, et seq., and the Missouri Merchandising Practices Act, MO. REV. STAT. § 407.010.

The customer alleged that the CRA supposedly misled customers by failing to disclose that the formula it used to calculate credit scores was materially different from the formula used by lenders.  The CRA filed a motion to compel arbitration based on the arbitration agreement on the website that the customer used to purchase the credit score package.  The district court denied the CRA’s motion and held that a binding contract had not been formed.  The CRA appealed.

On appeal, the Seventh Circuit determined that it had jurisdiction to hear the suit under the Federal Arbitration Act, 9 U.S.C. § 16(a)(1)(B).  The Court noted that because arbitration is a creature of contract, the issue presented was whether an arbitration agreement existed.

The Court first examined the layout of the CRA’s website and the transaction at issue.   The customer had to complete three steps to obtain his “free credit score & $1 credit report.”  The first step required the customer to provide identifying information and select “Yes” or “No” prompts regarding tips and news about the service and special offers.  Upon clicking the submit button, the customer was brought to the second step.  Step 2 required the customer to create an account user name and password and submit his credit card information.

A service agreement was located at the bottom of the screen for the second step in a scrollable window. To view the service agreement, the customer had to click on the box and scroll down, though there was no requirement to do so.  The service agreement contained a hyperlink to a “printable version.”  The arbitration agreement at issue was located on the eighth page of the 10-page “printable version” of the service agreement.

Above a button stating “I Accept & Continue to Step 3” and beneath the scrollable service agreement window was a statement that read:

You understand that by clicking on the ‘I Accept & Continue to Step 3’ button below, you are providing ‘written instructions’ to TransUnion Interactive, Inc. authorizing TransUnion Interactive, Inc. to obtain information from your personal credit profile from Experian, Equifax and/or TransUnion. You authorize TransUnion Interactive, Inc. to obtain such information solely to confirm your identity and display your credit data to you.

The CRA claimed that the customer consented to the arbitration agreement by clicking on the “I Accept & Continue to Step 3” button.  The Court noted that, although other jurisdictions have found express consent and a binding agreement in similar circumstances, it was instead required to apply Illinois contract principles in its analysis.

The Seventh Circuit explained that Illinois uses an objective approach to evaluate the mutual assent required to form a contract.  Under Illinois law, the intent to manifest assent can be revealed by outward expressions such as words or acts.  Parties must have mutual assent as to the terms, but need not share the same subjective understanding of the terms.

The Court adopted a two-part “reasonable communicativeness” test originally developed to evaluate contracts involving cruise ship tickets.  The questions posed are: (1) whether the web pages presented to the customer adequately communicated all of the terms and conditions of the agreement; and (2) whether the circumstances support the reasonable assumption that the customer received reasonable notice of the terms.

Applying this “reasonable communicativeness” test, the Seventh Circuit found that the CRA’s website did not properly disclose the arbitration agreement to the customer.   The Court noted that the CRA’s website did not indicate that the purchase was subject to any terms and conditions, and the “service agreement” said nothing about what it governed.   In addition, the Court noted that the hyperlink only stated “printable version” and did not have any prompt to read the terms of the service agreement.

The Seventh Circuit also found that the words above the “I Accept & Continue to Step 3” button appeared to distract from the service agreement.

Thus, the Court held that Illinois law requires a website to provide a user reasonable notice that his use of the site and click on a button constitutes assent to an agreement.  More specifically, the Seventh Circuit held, a website must position a box or hyperlink containing an agreement unambiguously next to an “I Accept” button.

Therefore, the Court found that there was not mutual assent to the arbitration agreement.  Accordingly, the Seventh Circuit affirmed the district court’s denial of the agency’s motion to compel arbitration and remanded for further proceedings.

7th Cir. Confirms Borrower Lacks Standing to Raise Alleged Violations of Pooling and Servicing Agreement

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgagor is not a third-party beneficiary under a pooling and servicing agreement under New York law, and therefore lacks standing to challenge purported violations of assignments under the agreement.

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

A borrower executed a note for a loan secured by a mortgage.  The note was indorsed by the lender in blank and transferred to a residential mortgage-backed securities trust formed and governed by a pooling and servicing agreement (“PSA”).  The trust’s trustee held the note and the lender later assigned the trustee the rights associated with the borrower’s mortgage.

The borrower defaulted and the trustee foreclosed on the mortgage. The borrower subsequently filed a petition for Chapter 7 bankruptcy.  The trustee moved to modify the automatic stay to pursue the state court foreclosure action.  The borrower filed an opposition to the motion to modify the stay and an adversary complaint.

In her adversary complaint, the borrower claimed that the trustee had no interest in her mortgage.  The bankruptcy court granted the trustee’s motion and dismissed the borrower’s adversary complaint.  The district court affirmed the bankruptcy court’s orders.  The borrower appealed.

On appeal, the borrower argued that the trustee could not collect on the note because the assignment violated the PSA. Specifically, the borrower asserted that the transfers of the note and mortgage were missing intervening indorsements and that the note was transferred after the closing date of the trust.

However, the Seventh Circuit held that the borrower lacked standing to challenge the purported violations of the PSA.

As the PSA was governed by New York law, the Court noted that only an intended beneficiary of a private trust may enforce its terms.  In addition, the Seventh Circuit explained that New York courts have consistently held that a mortgagor whose loan is owned by a trust is not a beneficiary and does not have standing to challenge purported violations of a pooling and servicing agreement.

Accordingly, the Seventh Circuit held that the borrower lacked standing to raise a challenge based on violations of the PSA because she was not a third-party beneficiary under the PSA.

The borrower conceded that a mortgagor may not challenge a mortgage that is voidable, as the intended beneficiaries may later ratify the assignment. Thus, a challenge to a voidable assignment would interfere with the beneficiaries’ right of ratification.

However, the borrower attempted to distinguish the established authority by arguing that a mortgagor has prudential standing to challenge a void – and not merely voidable — assignment because a void assignment cannot be ratified by the beneficiaries.  Therefore, such a challenge would not infringe on any of the beneficiaries’ rights.

The Seventh Circuit rejected the borrowers’ theory and explained that New York courts have consistently held that assignments that fail to comply with the terms of a trust agreement are merely voidable, not void.

In addition, the Seventh Circuit explained that New York courts have nearly unanimously concluded that a beneficiary retains the authority to ratify a trustee’s ultra vires act.  Thus, a mortgagor would still lack standing because the beneficiaries’ ability to ratify any unauthorized mortgage assignment makes the assignment merely voidable.

The borrower also argued that section 10.01 of the PSA states “[t]he Trustee, the Depositor, the Master Servicer and the Sellers with the consent of the NIM Insurer may … amend this Agreement, without the consent of the Certificateholders.”  Thus, the borrower argued, the terms of the PSA prevented the certificateholders from amending the agreement, and therefore they supposedly could not ratify ultra vires assignments.

However, the Court again rejected the borrower’s argument, and explained that the PSA requires the master servicer to speak and provide consent on behalf of the certificateholders. Thus, the Seventh Circuit held, the provisions of the PSA contemplated the certificateholders having a voice in the amendment process and contesting unauthorized acts through a derivative action.  Therefore, the Court held, the PSA provided a way for the certificateholders to ratify or challenge unauthorized acts.

Last, the Seventh Circuit addressed the borrower’s assertions that:  (1) the note is void and not negotiable because the lender was a fictitious entity; and (2) the trustee is an unlicensed debt collector under Illinois law.

The Court found that neither the bankruptcy court nor the district court addressed these claims because they found that the borrower lacked standing. However, because these claims did not arise out of the PSA, the Seventh Circuit remanded to the bankruptcy court to determine whether it should abstain from hearing the adversary proceeding and allow the Illinois courts to consider the claims in the foreclosure.

Accordingly, the Seventh Circuit affirmed in part and remanded in part.

5th Cir. Holds No Waiver by Accepting Payments After Default but Before Acceleration

The U.S. Court of Appeals for the Fifth Circuit recently held that a mortgagee did not waive or abandon its right to foreclose by accepting payments after a default by the borrower, but before acceleration, when no representations were made to the borrower that payments less than the full obligation would bring the loan current.

A copy of the opinion in Martin v. Federal National Mortgage Association is available at: Link to Opinion.

A borrower obtained a loan secured by a deed of trust (“DOT”).  The DOT obligated the borrower to make monthly payments and gave the mortgagee the right to accelerate and foreclose in the event of a default.

The DOT contained the following non-waiver provisions:

  1. Borrower Not Released; Forbearance By Lender Not a Waiver. Extension of the time for payment or modification or amortization of the sums secured by this [DOT] granted by Lender to Borrower or any Successor in Interest of Borrower shall not operate to release the liability of Borrower or any Successors in Interest of Borrower. . . . Any forbearance by Lender in exercising any right or remedy including, with-out limitation, Lender’s acceptance of payments from third persons, entities or Successors in Interest of Borrower or in amounts less than the amount then due, shall not be a waiver of or preclude the exercise of any right or remedy.

In December 2009, the borrower informed the mortgagee he could not make his monthly payment on time.  His December 2009 payment was made late, but the borrower alleged he made his subsequent payments on time through June 2011.

Sixteen months later, the borrower allegedly returned from vacation to find that the mortgagee had returned his two mortgage payments for May and June 2011.  The mortgagee had also initiated foreclosure proceedings.  The mortgagee sold the property at foreclosure sale over a year later

The borrower sued the mortgagee in state court where summary judgment was granted in favor of the mortgagee.  The plaintiff borrower then brought a second state suit against the mortgagee which was dismissed with prejudice.

The plaintiff mortgagee then brought a state law quiet title action against the foreclosure purchaser claiming that the mortgagee waived its right to foreclose by accepting payments for 16 months after the initial default, and thus could not sell the home to the foreclosure purchaser.  The purchaser removed the action to federal court where the district court dismissed the plaintiff borrower’s claim.  The plaintiff borrower appealed.

On appeal, the plaintiff borrower argued that the DOT’s non-waiver provisions did not apply because he only sought to have the note reinstated and was not attempting to avoid liability under the note.  The Firth Circuit rejected this argument as frivolous.

Next, the plaintiff borrower claimed that the mortgagee waived its right to accelerate and foreclose by accepting his payments for 16 months after the initial default before accelerating the note, and by failing to foreclose until three years after default.

Analyzing the plaintiff borrower’s argument, the Court cited precedent noting that the plaintiff borrower misread the three recent rulings his argument relied upon.

The relevant Fifth Circuit rulings involved mortgagees that sent notices of acceleration after defaults by the borrowers.  The borrowers in each case argued that Section 16.035 of the Texas Civil Practices and Remedies Code barred the lenders’ right to foreclose because more than four years had passed since the lenders first accelerated the notes.  However, the Fifth Circuit found in each case that the mortgagees had not violated the four-year statute of limitations in Section 16.035 of the Texas Civil Practices and Remedies Code.

The Court held that the mortgagees in the other cases had either waived or abandoned the initial acceleration by accepting additional payments after acceleration or by representing that the borrowers could bring the loans current by making payments less than the entire obligation.

The Fifth Circuit found that the reasoning behind its other rulings did not apply here, because the mortgagee here accepted payments after the borrower’s default, but did not accept payments after the note was accelerated.

In addition, the Court, noted, the mortgagee here never made any representations to the borrower that the note could be made current by making payments less than the entire outstanding obligation.

For these reasons, the Fifth Circuit held that the DOT’s non-waiver provision allowed the mortgagee to accept payments less than the entire obligation or defer acceleration and foreclosure after default without waiving any of its rights.

Therefore, the Court held, the mortgagee only engaged in conduct that was contemplated by the DOT’s non-waiver provisions and consistent with its intent to preserve the right to accelerate and foreclose.

Accordingly, the Fifth Circuit affirmed the district court’s dismissal.

2nd Cir. Holds Providing Only ‘Current Balance’ on Increasing Debt Violates FDCPA

The U.S. Court of Appeals for the Second Circuit recently vacated the dismissal of federal Fair Debt Collection Practices Act (FDCPA) allegations that a debt collector’s notice stating the “current balance” of the debt without disclosing that the balance may increase over time due to interest and fees was “misleading” within the meaning of Section 1692e.

A copy of the opinion in Avila v. Riexinger & Associates, LLC is available at:  Link to Opinion.

The defendant debt collector sent collection notices to the plaintiff debtors notifying them that their accounts were placed for collection. The notices stated the “current balance,” but did not disclose that the “current balance” continued to accrue interest and late fees.

The plaintiff debtors filed suit alleging that the notices violated the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692.  More specifically, the plaintiff debtors claimed that the notice led them to believe that their current balance was static and that payment of that amount would satisfy their debt no matter what date it was paid.  Notably, one plaintiff debtor alleged that her account balance was accruing daily at a rate equivalent to 500 percent per year.

The defendant debt collector’s motion to dismiss was granted, even though the district court noted that the courts were divided on the issue.  The plaintiff debtors appealed.

As you may recall, 15 U.S.C. § 1692e provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in the collection of any debt.”   On appeal, the Second Circuit noted that the list of practices that fall within the prohibited conduct is not exhaustive and therefore applied two principles of statutory construction previously discussed in Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993).

In addition, the Second Circuit noted that it would apply the “least sophisticated consumer” standard, explaining that a collection notice could be misleading if it was open to more than one reasonable interpretation, at least one of which is inaccurate.

The Court rejected the district court’s ruling that the FDCPA requires disclosure only of “the amount of the debt.”  The Second Circuit reasoned that § 1692g only concerns disclosures needed to verify a debt, not the more general disclosures intended to prohibit misleading notices under § 1692e, noting that that § 1692e applies to the collection of any debt by a debt collector.

The court adopted the Seventh Circuit’s “safe harbor approach” in Miller v. Raymer, Padrick, Cobb, Nichols, & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000), which was intended to address the concern that including information regarding accruing interest and fees in a collection notice could illegally coerce consumers and invite abuse.

In Miller, the Seventh Circuit held that the inclusion of the following statement in a debt validation notice under 15 U.S.C. § 1692g would satisfy the duty to clearly state the amount due on an increasing balance debt as a matter of law:

As of the date of this letter, you owe $___ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1–800– [phone number].

However, the Second Circuit declined to require a debt collector to use the “safe harbor approach” in order to comply with § 1692e.

Rather, the Court held that a debt collector will not violate § 1692e if either: (1) the collection notice states that the amount of debt will increase over time, or (2) clearly states that the debt collector will accept the amount stated in the notice in full satisfaction of the debt if payment is made by a specific date.

As the defendant debt collector’s notices did not mention the accrual of interest and fees or provide a date by which payment would fully satisfy the debts, the Second Circuit held that the plaintiff debtors stated a claim under the FDCPA.

The Second Circuit reasoned that, if in fact interest and fees were accruing daily, the plaintiff debtors would still be liable for additional debt that accumulated before the stated balance in the notices at issue were paid.  In addition, the owner of the debt identified in the notice could sell this additional accrued interest and charges to another party for collection even after payment of the stated balance.

Accordingly, the Second Circuit vacated the district court’s dismissal and remanded for further proceedings.

WD North Carolina Grants Stay of TCPA Lawsuit Pending DC Circuit Challenge to FCC Order

The U.S. District Court of the Western District of North Carolina recently stayed proceedings in a suit pending the U.S. Court of Appeals for the District of Columbia’s ruling on challenges to the Federal Communication Commission’s Declaratory Ruling and Order, 30 FCC Rcd. 7961 (2015) (the “FCC Order”) under the federal Telephone Consumer Protection Act (TCPA).

A copy of the opinion in Abplanalp v. United Collection Bureau, Inc. is available at:  Link to Opinion.

The plaintiff’s credit card agreement contained an arbitration provision requiring that all claims against the lender, including claims against third parties to whom the plaintiff’s debt was assigned for collection, be subject to arbitration.  The card issuer assigned the plaintiff’s account to a third party debt collector.  The collector manually dialed the plaintiff’s phone from a telephone system that allegedly had the capacity to place an autodialed call.

The plaintiff filed suit in North Carolina state court against the collector alleging that the collector violated the TCPA by using an “automatic telephone dialing system” (ATDS) to contact her regarding the debt.  Although the collector manually dialed the plaintiff’s phone, the plaintiff claimed that the collector’s telephone system had the capacity to place autodialed calls and was thus an ATDS.

The collector removed the case to federal court, and then moved to dismiss and compel arbitration.  Alternatively, the collector moved to stay proceedings pending rulings in a consolidated appeal and a class action suit that could be dispositive of the plaintiff’s claims. The Court denied the collector’s motion to dismiss, but granted the collector’s motion to stay.

The Western District of North Carolina held that the plaintiff was not required to pursue her claims in arbitration because the arbitration provision in the card agreement was not binding. The Court disagreed with the collector’s assertion that the plaintiff consented to arbitration simply by using her credit card account. The Court noted that the arbitration provision was not dated, and contained neither the plaintiff’s signature nor a proof of notice. Furthermore, the arbitration provision did not contain information linking the agreement with the plaintiff’s account.  Accordingly, the Western District of North Carolina denied the collector’s motion to dismiss and compel arbitration.

However, the Court granted the collector’s motion to stay proceedings pending resolution of the DC Circuit appeal of the FCC Order.  The Court explained that several appeals of the FCC Order were consolidated by the United States Judicial Panel on Multidistrict Litigation before the Court of Appeals for the District of Columbia regarding challenges to the FCC Order defining telephone systems that qualify as an ATDS under the TCPA. The Court held that resolution of the consolidated appeals in the DC Circuit could be dispositive of the borrower’s TCPA claims, noting the lack of any rebuttal from the borrower regarding this issue.

Finally, the Court denied the collector’s motion to stay the proceedings pending final approval of the class action settlement in Graff v. United Collections Bureau, Inc., Case no. 2:12-cv-02402 (E.D.N.Y.). Although the borrower was a member of the putative settlement class in Graff, the Court denied the collector’s request to stay the proceedings as moot, noting that it already granted the stay due to the DC Circuit appeal.

Ohio Supreme Court Rules Defectively Executed Mortgage Still Provides Constructive Notice

The Supreme Court of Ohio recently held that a mortgage defectively executed but properly recorded still provides constructive notice of its contents.

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

The borrowers executed a promissory note and a mortgage.  The notary acknowledgment on the mortgage was left blank.  The mortgage was recorded with the notary section incomplete. The mortgage was later assigned.

The borrowers later initiated a Chapter 13 bankruptcy asking to avoid the mortgage as defectively executed under Ohio Rev. Code § 5301.01.  The U.S. Bankruptcy Court for the Southern District of Ohio certified the issue to the Supreme Court of Ohio. The Court agreed to answer.

The Supreme Court of Ohio began its analysis by examining the relevant parts of the statutes at issue.  Ohio Rev. Code § 5301.01(A) sets forth Ohio mortgage requirements:

A . . . mortgage . . . shall be signed by the . . . mortgagor . . . The signing shall be acknowledged by the . . . mortgagor . . . before a judge or clerk of a court of record in this state, or a county auditor, county engineer, notary public, or mayor, who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgment.

In addition, Ohio Rev. Code § 1301.401(B) provides that recording of certain documents constitutes constructive notice:

The recording with any county recorder of any document described in division (A)(1) of this section . . . shall be constructive notice to the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record, including, but not limited to, any transfer, conveyance, or assignment reflected in that record.

§ 1301.401(A)(1) names “[a]ny document described or referred to” in Ohio Rev. Code § 317.08.  The documents listed in Ohio Rev. Code § 317.08(A)(19) include “[m]ortgages, including amendments, supplements, modifications, and extensions of mortgages . . .”

The Court rejected the borrower’s argument that Ohio Rev. Code § 1304.401 only applied to transactions governed by Ohio’s Uniform Commercial Code (UCC) because it is located in the portion of the Ohio Revised Code that contains the UCC.

Instead, the Supreme Court of Ohio found that R.C. 1301.401 states that it applies to “any document described in division (A)(1)” of the section.  R.C. 1304.401(A)(1) states that documents described in § 317.08 are included in its purview.  In turn, R.C. § 317.08(A)(19) explicitly includes mortgages.  Therefore, the Court held that R.C. 1304.401 applies to all recorded mortgages in Ohio based on the unambiguous statutory language.

The Court also disagreed with the borrower’s argument that a mortgage does not provide constructive notice if it is not properly executed under Ohio Rev. Code § 5301.25(A).  The Supreme Court of Ohio explained that R.C. 1301.401 does not require that a mortgage be “properly executed” to provide constructive notice, but rather provides that if the document recorded is a “mortgage” then notice of its contents is provided.

Last, the Court also rejected the borrowers’ argument that under Ohio Rev. Code §§ 5301.01(B) and 5301.23(B) constructive notice is not provided for defectively executed mortgages.  The Supreme Court of Ohio noted that those statutes set forth two instances where defectively executed mortgages provide constructive notice.  However, the Court reasoned that this did not preclude the legislature from “recognizing other instances in which the recording of a defectively executed mortgage can provide constructive notice” and thus R.C. 1301.401 was compatible with the provisions of R.C. 5301.01(B) and 5301.23(B).

Accordingly, the Supreme Court of Ohio held that R.C. 1301.401 applies to all recorded mortgages in Ohio, and thus that statute requires that a mortgage defectively recorded under R.C. 5301.01 provides constructive notice of its contents.

9th Cir. Upholds Dismissal of False Claims Act Allegations Involving Loans Sold to GSEs

Mortgage concept. Rows of silver houses with one golden house among them isolated on white backgroundThe U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a federal False Claims Act (FCA), 31 U.S.C. §§3729-3733, lawsuit brought by private citizen plaintiffs against various mortgage lenders and servicers for supposedly making false certifications regarding loans sold to Fannie Mae and Freddie Mac.

In so ruling, the Court held that Fannie Mae and Freddie Mac were not federal instrumentalities for purposes of the FCA, 31 U.S.C. § 3729(b)(2)(A)(i).

A copy of the opinion in U.S. ex rel. Adams et al. v. Aurora Loan Services Inc. et al. is available at:  Link to Opinion.

The plaintiff private citizens brought suit under the FCA against various mortgage lenders and servicers alleging that the lenders and servicers supposedly certified mortgage loans purchased by Fannie Mae and Freddie Mac as free of certain home association liens and charges when in fact they were not.

The plaintiffs alleged that the government-sponsored enterprises (GSEs) were federal instrumentalities either under case law or due to the Federal Housing Finance Association’s (FHFA) conservatorship.  As such, the plaintiffs claimed that the allegedly false certifications were made to an “officer, employee, or agent” of the United States in violation of the FCA, 31 U.S.C. § 3729(b)(2)(A)(i).

The district court dismissed the action, holding that the GSEs were not federal instrumentalities for purposes of the FCA, 31 U.S.C. § 3729(b)(2)(A)(i), because the entities are private, albeit sponsored or charted by the federal government.  The plaintiffs appealed.

The Ninth Circuit noted that a “claim” giving rise to liability under the FCA, 31 U.S.C. § 3729(b)(2)(A)(i), requires that a demand or request for payment be “presented to an officer, employee, or agent of the United States.”  However, the Court found that the language of 12 U.S.C § 1716b and 12 U.S.C. §1452 illustrates that certain government-sponsored entities are indeed private, and not federal instrumentalities.

The plaintiffs argued that Rust v. Johnson, 597 F.2d 174 (1979), held that one of the GSEs was a federal instrumentality for state/city tax purposes.  However, the Court disagreed and explained that an entity found to be a federal instrumentality for one purpose does not mean the same entity is a federal instrumentality for another purpose. See Kuntz v. Lamar Corp., 385 F.3d 1177, 1185 (9th Cir. 2004), Lewis v. United States, 680 F.2d 1239, 1242-43 (9th Cir. 1982).  Accordingly, the Court distinguished Rust because it did not address the GSEs’ status under the FCA.

The Ninth Circuit also disagreed with the plaintiffs’ argument that the FHFA conservatorship over the GSEs transformed them into federal instrumentalities.  The Court reasoned that the conservatorship gave the FHFA “all the rights, titles, powers and privileges” of the GSEs, not the other way around.

Further, the Court noted that Lebron v. National Railroad Passenger Corp., 513 U.S. 374, did not bolster the plaintiffs’ argument regarding the effect of the FHFA’s conservatorship.  The Court explained that, unlike in Lebron, the conservatorship here did not represent the federal government’s retention of permanent authority over the GSEs.

The Court did not opine on whether the plaintiffs could otherwise state a claim under the second definition of “claim,” found in § 3729(b)(2)(A)(ii), because the plaintiffs did not raise the argument at the district level nor on appeal.  However, the Court noted that a properly pled claim under § 3729(b)(2)(A)(ii) could give rise to liability.

9th Cir. Rejects Foreclosure Buyer’s Effort to Rescind Foreclosure Sale

houseThe U.S. Court of Appeals for the Ninth Circuit recently held that, under California law, a two-year delay in failing to investigate the facts entitling a party to rescind a foreclosure sale transaction barred that equitable remedy, even though there was a genuine issue of material fact as to whether the plaintiff foreclosure buyer could have discovered material defects before the foreclosure sale.

A copy of the opinion in DM Residential Fund II v. First Tennessee Bank is available at:  Link to Opinion.

A mortgagee (“lender”) initiated a non-judicial foreclosure of residential real estate in California, and sold that property at a foreclosure sale to a third party (“buyer”).  At the time of sale, the residential property lacked a certificate of occupancy and a residential easement to provide electrical utilities to the newly constructed home. The buyer discovered the utility easement issue soon after purchasing the property. Two years later, the buyer brought an action seeking to rescind the transaction on the basis of the lender’s failure to disclose the defect.

The District Court granted summary judgment in favor of the lender against the buyer holding that the buyer was not entitled to the equitable remedy of rescission. The U.S Court of Appeals for the Ninth Circuit affirmed the district court’s decision to grant summary judgment in favor of the lender.

The Ninth Circuit noted that one issue was whether the buyer could have discovered the defect prior to the foreclosure sale.  Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767, 771 (1991).  Under that inquiry, the Court found that there was a genuine issue of material fact as to whether the buyer could have discovered the defects because 1) their due diligence exceeded industry standards; and 2) it was reasonable not to seek an occupancy certificate because the residence appeared to be constructed before 2007 and the city did not require occupancy certificates until 2010.

However, the Court relied on the language of Cal. Civ. Code s. 1691 that a party seeking rescission must do so “promptly upon discovering the facts upon discovering the facts entitling him to rescind”. Cal. Civ. Code § 1691.  The buyer paid $624,000 for a residential property and shortly thereafter discovered that it could not be supplied with electricity (absent the purchase of an additional easement). The Court referred to the cases Bancroft v. Woodward, 183 Cal. 99, 108 (1920) and Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1112 (1988) to find that a reasonable person would have been put on inquiry of the wrongdoing, and therefore the buyer would have a duty to investigate the facts supporting their equitable right to rescind.

The Ninth Circuit reasoned that the buyer could have discovered the electricity defect early on, and therefore, there was no genuine issue of material fact that the buyer was put on inquiry notice of wrongdoing. The buyer was deemed to know all facts that could be discovered from a reasonable investigation under Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797, 808-09 (2005).

The Court noted that, under Karoutas, as a foreclosing mortgagee, the lender had the same duty to disclose defects regarding property as any other seller. The lender presented evidence that the foreclosed borrower informed the buyer of the defects at the time of sale.  Thus, the Ninth Circuit held that, because the buyer did not present any evidence that it would not have been able to discover facts supporting its right to rescind at the time it discovered the defects, there was no question of material fact on that issue.

Moreover, the Ninth Circuit noted, instead of pursuing its claims, the buyer took actions inconsistent with unwinding the contract such as encumbering the property, building improvements, and attempting to sell. Therefore, the Court held that the buyer affirmed the transaction and lost its equitable right to rescind.

Because there was no genuine issue of material fact as to whether the delay deprived the buyer of the equitable right to rescind under California law, the Ninth Circuit held that the lender was entitled to summary judgment on that issue.