Thomas Dominczyk

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FDCPA Claim Fails for Lack of Standing Under Spokeo Holds NJ Federal Court

Wednesday, January 11th, 2017

A New Jersey federal District Court recently granted a debt collector’s motion for summary judgment in a claim arising from service fees where the collection account at issue did not belong to the debtor.

A copy of the opinion in Benali v. AFNI is available at: Link to Opinion.

The plaintiff received a dunning letter from a collector allowing him to make payments by phone or online subject to a $4.95 processing fee. Similar payments made by mail would not be subject to the processing fee. Although the account at issue did not belong to him, the plaintiff filed suit on behalf of himself and a putative class for violations of the federal Fair Debt Collection Practices Act. Specifically the plaintiff alleged violations of 1692e and 1692f of the FDCPA claiming that the processing fee was not authorized by the contract.

Before addressing whether the processing fee violated the FDCPA, the District Court addressed whether the plaintiff had standing under Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to cases or controversies. Relying on the recent Supreme Court case Spokeo v. Robbins, the Court held that the plaintiff must demonstrate he suffered (1) an injury in fact; (2) that is fairly traceable to the challenged conduct of the defendant; and (3) is likely to be redressed by a favorable judicial decision.

Focusing on the injury in fact requirement, the District Court found that the purported violation was no more than a bare procedural violation divorced of any concrete harm. The plaintiff testified that the account at issue was not his account and that he thought the collection letter was a scam. Thus, the Court found that it was undisputed that there was no risk that the plaintiff would pay the $4.95 processing fee because he never had an account with the creditor. Accordingly, the Court held that the plaintiff admitted that he did not suffer any actual harm and thus lacked standing.

Although it did not address the issue regarding the $4.95 processing fee, the District Court did add a footnote that suggests that it would similarly have granted summary judgment on the processing fee if it were to go that far in light of a recent, non-precedential opinion from the Third Circuit in Szczurek v. Professional Mgmt., Inc.

Categories : FDCPA

Mass. SJC Holds Recorded Attorney’s Affidavit May Cure Defect in Certificate of Acknowledgment for Mortgage

By Thomas Dominczyk

Thursday, July 28th, 2016

In response to a request from the U.S. Court of Appeals for the First Circuit, the Supreme Judicial Court of Massachusetts recently held that a recorded attorney’s affidavit attesting to the proper acknowledgment of a recorded mortgage with a Certificate of Acknowledgment that omits the mortgagors’ names, in certain circumstances, may cure the defect in the Acknowledgment.

The Court also held that a recorded attorney’s affidavit attesting to the proper acknowledgment of a recorded mortgage with a Certificate of Acknowledgment that omits the mortgagors’ names, in certain circumstances, may provide constructive notice of the existence of the mortgage to a bona fide purchaser in combination with the mortgage.

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

Two borrowers obtained a refinance mortgage loan. The borrowers initialed the bottom of each page of the mortgage and signed the signature page. Their attorney also signed the signature page as a witness.

The mortgage contained a Certificate of Acknowledgement on a separate page. The borrowers initialed this page, but the space left open to enter the names of the persons appearing before the notary public was left blank. The acknowledgement was notarized and the mortgage was recorded.

The borrowers’ attorney later recorded an affidavit stating that through inadvertence, the names of the debtors who executed the mortgage were omitted from the notary clause. The attorney attested to witnessing them execute the mortgage voluntarily.

Some six months later, the borrowers filed a Chapter 7 Bankruptcy. The bankruptcy trustee filed an adversary complaint seeking to avoid the mortgage, arguing that the omission of the borrowers’ names on the Certificate of Acknowledgment was a material defect. The mortgagee moved for summary judgment arguing that the defect was cured with the attorney’s affidavit.

The Bankruptcy Court granted summary judgment in favor of the bankruptcy trustee. The trial court reversed and granted summary judgment to the mortgagee. The bankruptcy trustee then appealed to the First Circuit, which concluded that a proper resolution of the appeal turned on undecided issues of Massachusetts law, and certified the issues to the Supreme Judicial Court of Massachusetts.

As you may recall, under Massachusetts law, “title to real estate may be transferred by a deed which has not been acknowledged or which contains a certificate showing a defective acknowledgement, and the deed is good against the grantor and his heirs and those having actual notice, G. L. (Ter. Ed.) c. 183, § 4, but the grantor must acknowledge that he has executed the instrument as his free act and deed, and a certificate reciting that the grantor appeared before the officer making the certificate and made such acknowledgment must be attached to the instrument in order to entitle it to be recorded, G. L. (Ter. Ed.) c. 183, § 29, in order that notice of the conveyance shall be given to all the world. The certificate of acknowledgment furnishes formal proof of the authenticity of the execution of the instrument when presented for recording.” The Court noted that this statute — G. L. c. 183, § 4 — applies to mortgages, even though mortgages are not specifically mentioned.

In addition, Massachusetts General Laws c. 183, §29 states, “no deed shall be recorded unless a certificate of its acknowledgement or of the proof of its due execution, made as hereinafter provided, is endorsed upon or annexed to it, and such certificate shall be recorded at length with the deed to which it relates.” The Court noted that the reason for requiring an acknowledgement is to ensure that public notice of the transfer of title of the land in the record is accurate.

The first certified issue was whether an attorney’s affidavit, executed and recorded pursuant to G. L. c. 183, § 5B and attesting to the proper acknowledgment of a recorded mortgage that, as originally executed and recorded, omitted the name of the mortgagor from the acknowledgement may correct the material defect.

The bankruptcy trustee argued three points.

First, the bankruptcy trustee argued the principle of functus officio prohibits a public official from unilaterally recording what essentially constitutes a formal re-acknowledgement of the mortgage agreement without the assent of the borrowers. The term “functus oficio” has meant that “because of identified actions taken by one or more relevant parties, a particular pleading (e.g., a writ) or document with legal significance (e.g., a note or mortgage) was of no further legal effect and could not be the basis of any subsequent legal action.” More recently, however, the Court noted that the term has been applied as meaning “that an arbitrator is without power to modify his final award except where the controlling statute or *563 the parties authorize modification.” The Court held that it doubted that the principle would be recognized outside an arbitration context. Regardless, the Court held, when the requirements of §5B are met, they effectively supersede any continuing common-law functus officio principle.

The bankruptcy trustee then argued that the omission of the borrowers’ name in the acknowledgement is a material defect that renders the recording of the mortgage invalid, because Massachusetts G. L. c. 184 §24 provides the sole means by which to cure a defect in an acknowledgement.

The Court disagreed, noting that §24 created a statute of repose to protect the chain of title to real property from attenuated challenges. However, the Court noted, nothing in the language of §24 stated or implied that it defined the exclusive permissible method of curing any and all defects that may exist in an acknowledgment.

The Supreme Judicial Court of Massachusetts then looked to the language of §5B to determine what types of errors relating to a defective acknowledgment may properly be corrected with an attorney’s affidavit. The Court noted that §5B requires that: (1) facts contained in the affidavit must be based on the personal knowledge of the affiant; and (2) the affidavit include a certification by an attorney that the facts stated are both relevant to the title of specifically identified property and “will be of benefit and assistance in clarifying the chain of title.” The Court noted that the Legislature’s choice of the word “clarifying” suggested that the attorney’s affidavit must be limited to facts that explain what actually occurred, and are not inconsistent with the substantive facts contained in the original document.

In this case, the Supreme Judicial Court of Massachusetts held that the attorney’s affidavit was sufficient to cure the defect in the acknowledgement and the recording of the mortgage. The Court noted that the defect was the omission of the borrowers’ names in the Certificate of Acknowledgment, and that the attorney’s affidavit supplied the missing information, confirming the execution of the mortgage was proper.

Lastly, the bankruptcy trustee argued that the mortgage was recorded illegally because of the defect in the acknowledgment. The Court again disagreed, holding that the defect generally would preclude the legal recording of the mortgage, but the filed and recorded attorney’s affidavit operated to cure the original defect in the acknowledgment.

The Supreme Judicial Court of Massachusetts then answered the second certified question — i.e., whether an attorney’s affidavit, attesting to the proper acknowledgment of a previously recorded mortgage accompanied by an acknowledgment that omitted the name of the mortgagor, may provide constructive notice to a bona fide purchaser of the existence of the mortgage, by itself or in combination with the mortgage.

The Court noted that, under Massachusetts law, constructive notice arises by operation of law under Massachusetts G. L. c. 183 §4, in any case where the mortgage is properly recorded, and that a mortgage recorded with a materially defective acknowledgement is not properly recorded and does not provide constructive knowledge. However, the Court held, because the attorney’s affidavit complied with §5B, “the affidavit — not by itself but in combination with that mortgage — provides legally adequate constructive notice to a bona fide purchaser or, here, a trustee in bankruptcy.”

Accordingly, the Supreme Judicial Court of Massachusetts held that:

“An attorney’s affidavit filed pursuant to General Laws c. 183, § 5B, attesting to the proper acknowledgment of a recorded mortgage that has annexed to it an acknowledgment that omitted the mortgagors’ names, in certain circumstances may cure the defect in the acknowledgment and, in turn, effectuate a proper recording of the mortgage.”

“[I]n a case in which the § 5B attorney’s affidavit does cure the defect in the acknowledgment, the attorney’s affidavit, considered in combination with the originally recorded mortgage, provides constructive notice of the existence of the mortgage to a bona fide purchaser; in a case where the attorney’s affidavit does not cure the material defect in the acknowledgment, the affidavit, whether alone or in combination with the mortgage, does not provide constructive notice.”

Categories : Bankruptcy, Mortgage Law

ED NY Denies Class Cert on ‘Ascertainability’ Grounds, Holds ‘Probing’ Questions in Dispute Call Did Not Violate FDCPA

By Thomas Dominczyk

Monday, July 11th, 2016

The U.S. District Court for the Eastern District of New York recently granted summary judgment in favor of a debt collector, holding that the debt collector did not violate the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq., by reporting a debt as “deleted” rather than “disputed,” and by asking probing questions in response to a call from the consumer disputing the debt.

In addition, the Court denied the plaintiff’s motion for class certification on ascertainability grounds, holding that trying to decipher the debt collector’s summaries of its calls with the putative class members would not be administratively feasible.

A copy of the opinion in Huebner v. Midland Credit Management, Inc. is available at: Link to Opinion.

In 2010, the plaintiff consumer switched phone services. The new phone service provider performed some work on the phone line in order to ensure adequate service, and charged the plaintiff a $131 fee for such work. The consumer never paid the bill.

The defendant debt buyer acquired the debt from the phone company in July 2013. The debt buyer sent an initial collection letter and demanded payment for the debt. The letter was returned as undeliverable.

The consumer eventually called the debt buyer, and recorded his conversation with it. The consumer asked what he had to do to dispute the debt, but refused to answer any of the follow-up questions posed by the debt buyer.

The debt buyer marked the account as deleted following the call and instructed the major credit reporting agencies (“CRAs”) to delete the information. On the same day, following the call, the debt buyer sent the consumer a letter “advising him that it had ceased collection efforts and had instructed the CRAs to delete the information” the debt buyer had furnished regarding the account.

The debt buyer reiterated the requests to the CRAs each month for three months, in accordance with its policies and procedures.

The consumer later received a credit report. The report showed the debt buyer’s account as still due and owing, but also contained a disclaimer making it clear that it was not to be relied upon as a report from the three recognized CRAs.

The consumer filed suit against the debt buyer alleging four overlapping violations of the FDCPA, all of which essentially asserted false or misleading representations in connection with the collection of a debt.

The District Court first looked to the alleged violation of 15 U.S.C. §1692(e)(8), which states it is a violation of the FDCPA to communicate “credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.” The Court found there to be insufficient evidence in the record to this effect.

The consumer first argued that the credit report he received continued to list the debt buyer’s debt. However, the consumer did not produce any evidence that any of the three major CRAs continued to report the debt.

In addition, the Court held that the FDCPA does not make a debt collector a guarantor of the CRAs’ compliance with its furnishing requests, but rather that the debt collector only has to make the request to the CRAs.

The Court also noted that the FDCPA is not a device for a debtor to wipe out his debt. Instead, the Court held, “the purpose of the FDCPA, inter alia, is to place a halt, whether temporary or permanent, on collection efforts once a debtor alleges that a debt is not valid. It is not a device whereby a debtor can force a collection company to write down his debt to zero. It does not wipe out the debt. The collection company has to maintain the ability to, at least, file a proof of claim in bankruptcy if the debtor later seeks bankruptcy protection, as some do.”

The plaintiff then argued that the account was marked as deleted, instead of disputed. However, the Court noted that the undisputed evidence showed that the “disputed” code allowed the debt buyer free to investigate the debt, and depending on the results of the investigation, to restore the account to undisputed status, while the “deleted” code identifies a disputed account as to which no further action is going to be taken. Accordingly, a “disputed” code is a step before a “deleted” code. The Court noted that the debt buyer merely skipped the “disputed” code as it was obvious that the $131 debt was going to be more trouble than it was worth.

The Court found no violation of the FDCPA’s credit reporting accuracy provisions at 15 U.S.C. §1692(e)(8) as the debt buyer did all it was required to do in response to the consumer’s dispute.

The Court then looked to the alleged violation of 15 U.S.C. §1692e(10). This subsection prohibits a debt collector from using any false representation or deceptive means to collect or attempt to collect any debt.

The plaintiff argued that the debt buyer violated the provision by “asking too many questions when he called to dispute his debt,” and thus the least sophisticated consumer could have been deceived into believing that he had to provide the defendant with a valid reason to dispute his debt.

The Court reviewed the transcript of the call between the plaintiff and the debt buyer, that the plaintiff recorded. The Court found it obvious that the plaintiff was evading questions and harassing the collection agent. The plaintiff did not do what the least sophisticated consumer would do. The Court noted that the least sophisticated consumer would simply state that the phone company did not tell him they would be charged a service fee and that he refused to pay it.

The Court found that neither the debt buyer’s policies nor anything said in the telephone call prevented the plaintiff from disputing the debt. The debt buyer still marked the account as deleted and requested that the CRAs delete its reported information. The Court also held that the questions asked did not violate the FDCPA.

The plaintiff further alleged that the letter in which the debt buyer advised him that it was ceasing collection efforts and reporting the debt as deleted to the CRAs was a false representation under 15 U.S.C. §§ 1692e(2)(A) and 1692e(10) because, in fact, the debt buyer did not cease collection efforts and did not advise the CRAs to delete the debt.

However, as discussed above, the Court found that the record demonstrates that the debt buyer properly notified the CRAs that the plaintiff’s debt was disputed and ceased collection activities. Accordingly, the Court rejected these allegations also.

Lastly, the plaintiff alleged that the debt buyer violated 15 U.S.C.§ 1692e(2)(a), which makes it a violation to falsely represent the legal status of a debt.

However, the Court held that, as long as the debt collector has included appropriate language notifying the consumer about the debt validation procedure under the FDCPA (15 U.S.C. § 1692g), an allegation that the debt is invalid cannot alone constitute the basis for an FDCPA claim.

The Court found that the debt buyer did not violate the FDCPA by attempting to collect on the debt prior to verifying it. The Court noted that the phone company represented the amount of the debt was $131.21, and the debt buyer’s initial letter to the plaintiff provided adequate notice of how to dispute the debt. Moreover, the Court noted that after the plaintiff disputed the debt, the debt buyer was placed on notice to cease collection or verify the debt, but the debt buyer had no obligation to independently investigate the debt prior to collection.

The Court then discussed class certification of the putative class. The plaintiff proposed either a nationwide or a New York only class which he defined as follows: “All persons who, according to Defendants’ records (a) have a United States mailing address; (b) within one year before the filing of this action; (c) verbally disputed the debt; and (d) were asked probing questions regarding the reason for the dispute.”

As you may recall, Fed. R. Civ. Pro 23 requires a proposed class to have numerosity, commonality, typicality, and adequacy of the representative. A class must also be ascertainable.

The Court found two essential issues with the plaintiff’s proposed class.

First, the Court held that ascertainability requires a class to be sufficiently definite in order that it is administratively feasible for the court to determine whether a particular individual is a member.

The Court found that the plaintiff’s proposed class definition would require a two-step process: (a) first, to find the consumers to whom the debt buyer assigned a certain code within a year; and (b) then, to determine which of the consumers were asked probing questions.

In this case, the plaintiff recorded the conversation and the Court was able to review the transcript. However, the Court noted that in most cases, the debt buyer merely maintains notes on their system of the communication. Thus, the Court noted that each of the notes would have to be reviewed individually to ascertain class membership and it would be difficult to even tell if probing questions were asked based on the notes. In addition, the Court noted that the plaintiff’s use of the term “probing” was not defined and it would require a case-by-case inquiry to determine which questions have an improper deterrent effect and which do not.

Thus, the Court held that the proposed class would be unascertainable.

Next, the Court recited that adequacy of the representative requires the named plaintiff to show there is no conflict of interest between the named plaintiff and the other members of the class, and that class certification is inappropriate where a putative class representative is subject to unique defenses which threaten to become the focus of litigation.

Here, the plaintiff faced a defense unique to him – i.e., the Court believed the plaintiff would be subject to the argument that his FDCPA claims should be rejected due to his attempt to entrap the collection agent into violating the statute. This the Court held made the plaintiff an inadequate class representative.

Accordingly, the Court granted the debt buyer’s motion for summary judgment and denied the plaintiff’s motion for class certification.

Categories : FDCPA

1st Cir. Rejects Borrower’s Attempt to Permanently Enjoin Foreclosure Due to Cancellation of Prior Foreclosure Proceedings

By Thomas Dominczyk

Monday, July 11th, 2016

The U.S. Court of Appeals for the First Circuit recently held that the cancellation of a foreclosure sale prohibits a borrower from obtaining a permanent injunction to bar a foreclosure, as they would not suffer irreparable harm.

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

In 2005, the plaintiff borrowers obtained a refinance mortgage loan on their home. The borrowers defaulted on their mortgage in 2007 and again in 2009. The loan was modified but the borrowers still had not made a mortgage payment since 2009. Between 2011 and 2013, the borrowers negotiated to again modify the loan. The negotiations were unsuccessful and a foreclosure sale was scheduled for September 2013.

The borrowers then filed an action in state court and obtained a preliminary injunction barring the foreclosure sale from moving forward. The foreclosure proceedings were subsequently cancelled, but the borrowers’ lawsuit remained pending.

The mortgagee removed the action to federal court and the borrowers amended their complaint to seek a permanent injunction barring the mortgagee from foreclosing, as well as damages premised on an alleged breach of mortgage provisions obligating the lender to provide the borrower with a detailed notice of default and right to cure prior to foreclosing.

The trial court granted summary judgment in favor of the mortgagee. The trial court held that because the foreclosure proceedings were cancelled, the borrowers could not show they would suffer irreparable harm in the absence of injunctive relief, and that the borrowers had not suffered compensable monetary damages. The borrowers then appealed.

The borrowers argued they were entitled to injunctive relief because a foreclosure could occur again at any time, even though the mortgagee supposedly had not complied with the notice requirements. The First Circuit found this argument to be without merit, as it did not account for the fact that the foreclosure proceedings were cancelled.

The First Circuit also held that the borrowers did not face irreparable harm in the absence of any foreclosure proceedings, affirming the trial court’s decision.

The borrowers argued that the trial court erred by relying “exclusively” on representations made by the mortgagee, outside the summary judgment record. The First Circuit again disagreed, finding that the trial court’s exchange at oral argument with the mortgagee was merely an attempt for the trial court to clarify its understanding of the posture of the foreclosure proceedings.

Moreover, the First Circuit found that any suggestion that the trial court improperly relied on the mortgagee’s representations was disproven as the summary judgment record established the relevant facts beyond dispute.

In addition, the borrowers argued that the trial court erred by granting summary judgment in favor of the mortgagee on their breach of mortgage agreement claim. The borrowers maintained that although they did not seek monetary damages, they could have sought nominal damages at a later stage.

However, the First Circuit held it need not consider whether nominal damages were possible as the issue was waived. The Court noted that, when directly asked at oral argument, the borrowers’ counsel indicated they were not seeking nominal damages. Thus, the Court held, the borrowers could not assert this claim on appeal and waived the right to seek nominal damages.

The First Circuit accordingly affirmed the trial court’s judgment granting summary judgment in favor of the mortgagee.

Categories : Foreclosure

MD Pa. Holds Notice Explaining Tax Consequences of Debt Cancellation Could Be Misleading

By Thomas Dominczyk

Tuesday, July 5th, 2016

The U.S. District Court for the Middle District of Pennsylvania recently denied a debt collector’s motion to dismiss, holding that a collection notice describing the potential tax consequences of settlements involving cancellation of indebtedness of $600 or more may be misleading or deceptive to the least sophisticated consumer.

A copy of the opinion in Balon v. Enhanced Recovery Company, Inc. is available at: Link to Opinion.

A consumer filed a complaint against a debt collector alleging the defendant supposedly violated the federal Fair Debt Collection Practices Act (FDCPA) by sending a letter that stated that “any indebtedness of $600.00 or more, which is discharged as a result of a settlement, may be reported to the IRS as taxable income pursuant to the Internal Revenue Code 6050 (P) and related federal law. The amount of the alleged debt at the time that the letter was sent was $798.67 and the offer to settle was for $638.94. The amount of savings if the offer was accepted would be $159.73.”

As you may recall, to prevail on an FDCPA claim, a plaintiff must prove that: (1) she is a consumer, (2) the defendant is a debt collector, (3) the defendant’s challenged practice involves an attempt to collect a debt as the act defines it, and (4) the defendant has violated a provision of the FDCPA in attempting to collect the debt.

Under section 1692e of the FDCPA, “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e.

Under applicable authority in the Third Circuit, a debt collection letter is deceptive and therefore violates the FDCPA where it can reasonably be held to have two or more different meanings. In addition, when evaluating a claim for alleged deceptive conduct under section 1692e of the FDCPA, the Third Circuit employs a least sophisticated debtor standard. This standard is an objective one, meaning that the specific plaintiff need not prove that she was actually confused or mislead, only that the objective least sophisticated debtor would be.

The District Court relied on Velez v. Enhanced Recovery Company LLC, 2016 U.S. Dist. LEXIS 57832 (E.D. Pa. May 2, 2016), to address the allegations in the instant case.

In Velez, the debt collector sent the plaintiff consumer a collection letter for an amount in excess of $600. The communication included the exact same tax reporting language as in the instant case – i.e., that discharged indebtedness of $600 or more would be reported to the IRS. There, as with here, the defendant debt collector argued that the statement simply reflected the controlling statute and IRS regulation, and thus was not deceptive or misleading, and in any event was not material.

The District Court noted that its sister court in Velez found that the proposed amount of reduction of the amount due on the debt could not possibly have been reportable under the relevant circumstances, as like here it was less than a $600 reduction. The Court held that, if under the circumstances there could not have possibly been a tax reportable event, then the statement in the collection letter would have been false. The Court in Velez found that while the communication may not be false in all respects, it certainly was not completely true.

The Court held that the plaintiff consumer in this case pled a plausible claim that the communication at issue could mislead or deceive the least sophisticated debtor. In addition, the Court held, the communication was material because the least sophisticated debtor may be influenced by the communication.

The Court also held that the debt collector’s use of the conditional “may” in the challenged language did not remove from the realm of possibility that the least sophisticated debtor might be deceived into thinking that the debt collector must or will report certain settlement amounts to the IRS, even when it does not intend to, or would not be required to, under the relevant statute and regulations.

In addition, the Court held the least sophisticated debtor might be misled into thinking that there will be adverse tax consequences for settling a debt for less than the total amount due. The Court noted that, in its view, it would not be unusual for the least sophisticated debtor to believe the challenged statements suggest the debtor could get in trouble with the IRS for the refusal to pay the debt, or for obtaining any debt forgiveness of $600 or more.

Accordingly, the District Court denied the defendant debt collector’s motion to dismiss.

Categories : FDCPA

Pennsylvania Supreme Court Holds Any Entity May Be Liable for Charging Excessive Attorney’s Fees

By Thomas Dominczyk

Thursday, June 30th, 2016

In an appeal that garnered significant attention from consumer groups who filed briefs as amici curiae, the Supreme Court of Pennsylvania recently held that any entity that charges excessive attorney’s fees in connection with a foreclosure may be liable for treble damages, fines, and attorney’s fees under the Pennsylvania Loan Interest Protection Law.

A copy of the opinion in Glover v. Udren Law Offices, PC is available at: Link to Opinion.

The borrower entered into a residential mortgage in 2002, and later defaulted. In the foreclosure proceedings that followed, the mortgagee’s counsel took several actions on the mortgagee’s behalf. The parties eventually entered into a loan modification agreement.

The plaintiff then filed a putative class action against the mortgagee’s counsel alleging violation of the Pennsylvania Loan Interest Protection Law (PLIPL or “Act 6”) by supposedly charging excessive attorney’s fees. The trial court granted the mortgagee’s counsel’s motion to dismiss finding that their conduct as a debt collector was governed by the Pennsylvania Fair Credit Extension Uniformity Act (PFCEUA). The trial court also held that, because Section 406 of Act 6/PLIPL refers only to residential mortgage lenders, any violation of that provision does not give rise to a remedy against a law firm under Section 502 of Act 6/PLIPL.

The borrower appealed and a divided panel of the appellate court affirmed, holding that because the plain language of Act 6/PLIPL regulates only the conduct of residential mortgage lenders, Section 502 of Act 6/PLIPL does not authorize an action against a mortgagee’s counsel for a violation of Section 406 of the statute. The majority reasoned that, had the legislature intended Section 406 to reach law firms acting on behalf of residential mortgage lenders, it would have used express language to that effect in the text.

The Supreme Court of Pennsylvania granted appeal, consolidating the matter with another that raised the same issue.

As you may recall, Act 6 in relevant part limits the attorney’s fees that a “residential mortgage lender shall contract for or receive . . . from a residential mortgage debtor.” 41 P.S. §406. As a remedy for a violation of Act 6’s protective provisions, Section 502 permits recovery of treble damages “in a suit at law against the person who has collected such excess interest or charges.” Id. §502. “Person” is defined as “an individual, corporation, business trust, estate trust, partnership or association or any other legal entity, and shall include but not be limited to residential mortgage lenders.” Id. §101.

The issue was whether Section 502 of Act 6/PLIPL provides a remedy against any “person” who has collected unlawful attorney’s fees, or whether its reach, in this respect, was limited to residential mortgage lenders.

The borrower contended that the mortgagee’s counsel’s conduct was actionable because the law firm was a person that collected illegal fees in connection with its representation of the residential mortgage lender in foreclosure proceedings. The borrower further argued that, under the law firm’s reading of the statute, a mortgagee’s use of a surrogate (i.e. their counsel) would render any violation of Section 406 irremediable, and that this result could not have been the Legislature’s intent.

The Supreme Court of Pennsylvania first looked to the arguments raised by the consumer groups as amici curiae. The consumer groups argued that, under the lower courts’ narrow interpretation, the prohibitions of Act 6/PLIPL would be too easily evaded by residential mortgage lenders who hire attorneys and other third parties to conduct debt collection and foreclosures. Therefore, the consumer groups argued, the provisions of Act 6/PLIPL must be construed broadly to effectively prevent harmful practices that the Legislature intended.

The Supreme Court held that the plain and explicit terms of the statute permit “[a] person who has . . . paid charges prohibited or in excess of those allowed by this act” to recover treble damages “in a suit at law against the person who has collected such excess . . . charges.” 41 P.S. §502. The Court noted that the Legislature expressly defined “person” to “include but not be limited to residential mortgage lenders.” Id. §101. Therefore, the Court concluded, Section 406 restricts the circumstances under which residential mortgage lenders may contract for or receive fees, while Section 502 provides a broad remedy against anyone who has collected such fees.

The Pennsylvania Supreme Court also noted that the Legislature created strong remedies and penalties to enforce protective provisions of the statute. The Court found that the Legislature’s use of the term “person” in Section 502, which it defined to include actors other than residential mortgage lenders, suggests an intent to hold accountable any of the entities that might have engaged in the abusive practices specifically prohibited in Article IV.

The Supreme Court found that the lower courts’ holdings disregarded the important principle of statutory construction that, when a statute’s terms are plain, the courts are bound to enforce them.

Furthermore, the law firm argued that the Legislature would not have impliedly created liability for attorneys in Act 6/PLIPL, while expressly exempting them from such liability in the PFCEUA. The Supreme Court rejected this argument, noting that there are many interrelating protections contained in state and federal regulatory statues, particularly those governing consumer affairs, and that conduct that is omitted from one regulatory framework may still violate another.

Thus, the Supreme Court of Pennsylvania held that a borrower may recover under Section 502 of the Pennsylvania Loan Interest Protection Law from any entity, not solely the residential mortgage lender, that collects excessive attorney’s fees in connection with a foreclosure.

Accordingly, the Supreme Court reversed the orders of the lower courts.

Categories : Foreclosure

ED NY Holds Debtor May Not Force Mortgagee to Take Title in Collateral

By Thomas Dominczyk

Tuesday, June 14th, 2016

The U.S. District Court for the Eastern District of New York recently held that a confirmable Chapter 13 plan cannot both “vest” title to real property and “surrender” that property to a secured lender, and that the secured lender may refuse to accept the vesting in satisfaction of its claim.

Thus, the Court held that a debtor may not force the transfer of title in collateral to a secured creditor in satisfaction of the secured creditor’s claim, without the consent of the secured creditor.

A copy of the opinion in HSBC Bank USA, NA v. Zair is available at: Link to Opinion.

Two mortgagors filed for Chapter 13 bankruptcy protection. The bankruptcy plan identified a vacant residence encumbered by two mortgages. The creditor was the first-lien mortgagee.

The creditor first-lien mortgagee properly filed a proof of claim representing the principal unpaid balance on the mortgage, plus interest, fees, and pre-petition arrearages.

The debtors then filed a second amended Chapter 13 plan, which is the plan at issue. The plan provided, in relevant part: (1) the debtors would surrender the vacant property to the creditor in full satisfaction of the secured portion of the mortgage loan; (2) to the extent that the outstanding balance on the creditor’s loan exceeded the value of the vacant residence, the creditor would have 30 days to file an unsecured deficiency claim; and (3) upon confirmation of the plan, the title to the vacant residence would vest in the creditor.

The mortgagee objected to the plan, arguing that although the residence could and should be surrendered under 11 U.S.C. § 1325(a)(5)(C), it would be improper to transfer title to the vacant residence to the mortgagee without its consent.

The Bankruptcy Court disagreed, holding that while surrender and vesting are different, they are not mutually exclusive, and both options may be deployed by the debtor in a Chapter 13 plan. The mortgagee appealed to the District Court.

As you may recall, 11 U.S.C. § 1325(a)(5) provides that, as to each secured creditor, a Chapter 13 plan may only be confirmed: (1) when the secured creditor accepts the plan; (2) when the debtor surrenders the secured property; or (3) in an option known as a “cramdown,” when the debtor, over the creditor’s objection, retains the secured property, yet pays only the present value of the collateral to the creditor over the life of the plan, with the remaining balance of the debt becoming a general unsecured claim.

In addition, 11 U.S.C. § 1322(b)(9) provides that the Chapter 13 plan may provide for the vesting of property of the [bankruptcy] estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.”

The District Court noted that the Bankruptcy Code does not define vesting or surrender, but the law is well settled that vesting is a more consequential event than surrender — surrender means making the property available to be taken, and vesting means transferring title.

The mortgagee argued that to the extent the plan non-consensually vests title to the vacant residence in the mortgagee, it cannot also provide that the residence be surrendered. Accordingly, the mortgagee argued, because surrendering the property under the Bankruptcy Code is mandatory and the plan did not satisfy any other requirements for plan confirmation, the debtor’s second amended Chapter 13 plan was not confirmable.

The District Court noted that mortgagees often seek to avoid the vesting option because the mortgagee would be stuck with the collateral and be responsible for maintenance, taxes, and other obligations that come with owning the property, but with surrendering the property, the title to the property remains vested with the debtor until the property is sold at a foreclosure sale.

The debtors and trustee argued that the mortgagee’s interpretation ran counter to the Bankruptcy Code’s goal of providing a fresh start to debtors. They argued that allowing a debtor to incur expenses associated with the property in a plan, until the creditor completes a foreclosure, goes against the fresh start policy.

The District Court referenced numerous cases that were decided after the Bankruptcy Court entered its ruling in this case. See In Re Williams, 542 B.R. 514 (Bankr. D. Kan. Dec. 2, 2015) ( holding that “§ 1325(a)(5) does not permit confirmation of a plan vesting title to collateral in the secured creditor over that creditor’s objection”); see also In re Weller, 2016 U.S. Bankr. LEXIS 108 (Bankr. D. Mass. Jan. 13, 2016) (holding “a plan which vests property in a secured creditor does not fulfill the requirements of § 1325(a)(5)(C) and may not be confirmed over that secured creditor’s objection”); In Re Tosi, 2016 Bankr. LEXIS 690 (Bankr. D. Mass. Mar. 4, 2016) (holding “that the proposed plan was not confirmable because, though it had used the nomenclature of surrender, in fact it merely vested the property in the mortgage, an act that substantially modifies the mortgagee’s rights as to its collateral, and was thus inconsistent with surrender, and therefore effected no true surrender at all, merely a vesting…and vesting precludes surrender.”)

The District Court held that the mortgagee has the right to control its own remedies as to the vacant residence and cannot be subordinated to the debtors’ interest in achieving a fresh start. The Court noted that, as first-priority lienholder, the mortgagee is entitled to a full array of property rights, including its right to foreclose its security interest, or refrain from doing so.

The District Court held that there can be no dispute that exercising the option of vesting under § 1322(b)(9) as a method of forcing the mortgagee’s hand to take some action with respect to the collateral that it would not otherwise take, is a material limitation of these rights. Thus, the Court held, although the statutory language at issue does not expressly bar the possibility that real property may, under appropriate circumstances, be surrendered to and vested in the same secured creditor, the incompatibility of these concepts in situations where the creditor withholds its consent is obvious.

The District Court found its result to be particularly warranted in this case as the vacant residence was destroyed and rendered uninhabitable by a hurricane almost three years prior.

The Court also rejected the debtors’ argument that surrender is a natural first step in transferring property out of the bankruptcy estate. The Court held that this approach ignores the irreconcilable implication of rights that arise when both surrender and vesting are included in the plan without a secured creditor’s consent.

Lastly, the District Court held there was no principled basis for exalting the policy in favor of fresh starts for debtors over the Bankruptcy Code’s obvious goal of preserving the well-settled property rights of secured lenders.

In sum, the District Court held that a secured creditor’s rights under bankruptcy code § 1325(a)(5) providing for surrender in a Chapter 13 bankruptcy case are impermissibly compromised by a plan that provides for non-consensual vesting under Bankruptcy Code § 1322(b)(9) and thus the plan cannot be confirmed. Accordingly, the District Court reversed the ruling of the Bankruptcy Court.

Categories : Bankruptcy, Mortgage Law

New York App. Court Reverses Dismissal of Foreclosure Action Involving Electronic Note

By Thomas Dominczyk

Monday, June 13th, 2016

The Appellate Division of the Supreme Court of New York recently reversed the dismissal of a foreclosure action involving an electronic note, holding that the mortgagee’s evidence of the eNote transaction history and the eNote itself were sufficient to establish the mortgagee’s standing to foreclose.

A copy of the opinion in New York Community Bank v. McClendon is available at: Link to Opinion.

On Nov. 7, 2008, the borrower executed a mortgage in favor of a lender bank to secure a promissory note executed the same day for $544,000. The note was signed by electronic signature.

The lender bank was subsequently closed, and a receiver was appointed. The receiver and the plaintiff mortgagee entered into a purchase and assumption agreement pursuant to which the receiver sold the plaintiff mortgagee “all qualified contracts to which [the lender] was a party.”

The plaintiff mortgagee filed an action to foreclose the mortgage loan. The borrower moved to dismiss the foreclosure action, asserting that the plaintiff mortgagee lacked standing. In opposition to the borrower’s motion, the plaintiff mortgagee submitted, among other things, the underlying eNote, the “eNote Transfer History,” and an affidavit of a knowledgeable person at the plaintiff mortgagee.

Nevertheless, the trial court granted the borrower’s motion to dismiss, and this appeal ensued.

As you may recall, under New York law a plaintiff establishes its standing in a mortgage foreclosure action by demonstrating that, when the action was commenced, it was either the holder or assignee of the underlying note. Where the evidence shows the plaintiff had physical possession of the note prior to commencement of the foreclosure action, standing is established.

The Appellate Court confirmed that an eNote is a “transferable record” as defined by 15 U.S.C. §7021(a)(1), and that “[e]xcept as otherwise agreed, a person having control of a transferable record is the holder” under 15 U.S.C. § 7021(d). New York’s version of the UCC defines the holder as “the person in control of a negotiable electronic document of title.”

In turn, the Court noted that “[a] person has control of a transferable record if a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable record was issued or transferred.” 15 U.S.C. § 7021(b). In addition, “[d]elivery, possession, and endorsement are not required to obtain or exercise any of the rights” of a holder of a transferable record such as an eNote. 15 U.S.C. § 7021(d).

Under 15 U.S.C. § 7021(f), “reasonable proof” that a person seeking to enforce a transferable record has control of such record “may include access to the authoritative copy of the transferable record and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record.”

Here, the Appellate Court found that the eNote transfer history supplied by the plaintiff mortgagee established that the eNote was transferred from the receiver to the plaintiff mortgagee on March 23, 2010, more than two years before the foreclosure action was filed. The sworn eNote transfer history established that on March 23, 2010, the plaintiff mortgagee obtained control and became the owner of the eNote.

Thus, the Appellate Court held, the sworn eNote transfer history together with the note itself were sufficient to show the identity of the person who had control over the transferable record, and therefore were sufficient to establish the plaintiff mortgagee’s standing to foreclose as the holder of the eNote.

Accordingly, the Appellate Court held that the trial court erred in granting the borrower’s motion to dismiss the foreclosure action for lack of standing, and reversed the trial court’s ruling.

Categories : Foreclosure

NY High Court Holds Consolidated Mortgage/CEMA Retains Priority of First Mortgage

By Thomas Dominczyk

Tuesday, May 31st, 2016

The New York State Court of Appeals, the highest court in the state, recently held that a consolidated mortgage — often called a “Consolidation, Extension, & Modification Agreement” or “CEMA” — qualifies as the first mortgage of record under New York Real Property Law where there is no intervening lien.

A copy of the opinion in Plotch v. Citibank, NA is available at: Link to Opinion.

In 2000, the defendant lender extended a mortgage to a condominium unit owner for $54,000 and recorded the mortgage. The following year, the lender extended another mortgage for $38,000 and entered into a consolidation agreement with the borrower through which the two mortgages were consolidated into one single mortgage lien, which was intended to be treated as a single mortgage totaling $92,000. The second mortgage and consolidation agreement were recorded on the same day.

Approximately seven years later, the condominium owners association (COA) filed a common charges lien against the borrower for unpaid assessments, and later foreclosed.

The plaintiff in this appeal purchased the property in the COA’s foreclosure, subject to the first mortgage of record against the premises. The plaintiff then filed an action seeking a declaratory judgment that the second mortgage of $38,000 was subordinate to the COA’s subsequently recorded common charges lien under New York Real Property Law §399-z and therefore was extinguished by the COA’s successful foreclosure action.

As you may recall, New York Real Property Law §399-z states that a condominium board’s lien for unpaid common charges has priority over other liens except for certain statutory exceptions, such as the first mortgage of record. Specifically, New York Real Property Law §339-z states in relevant part that a “board of managers, on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges thereof, together with interest thereon, prior to all other liens except only . . . (ii) all sums unpaid on a first mortgage of record.”

The plaintiff foreclosure buyer argued that the “first mortgage of record” means the mortgage recorded earliest in time, and that the consolidated mortgage should be bifurcated into its component mortgages to determine which portion is the first mortgage of record.

The plaintiff relied heavily on Societe Generale v. Charles & Co. Acquisition, 157 Misc 2d 643 (Sup Ct, NY County 1993), in which the court held that the original first mortgage had priority over the condominium board’s lien. However, the Court of Appeals noted that numerous other rulings reached the opposite result of Societe Generale and held that a consolidation agreement recorded prior to the condominium board’s lien qualifies as the “first mortgage of record” under New York Real Property Law §399-z.

The Court of Appeals also noted there was no intervening lien at the time the loans were consolidated, and therefore the consolidation did not interfere with any rights of the COA. Accordingly, the Court of Appeals held that the consolidation agreement should be considered the first mortgage of record.

In addition, the Court noted the undesirable policy implications of giving priority to a common charges lien recorded years after the filing of the consolidation agreement. If the Court were to find the consolidation agreement did not qualify as the first mortgage of record, banks and condominium owners would simply take additional steps to satisfy the original mortgage, take out a new mortgage, and pay the additional fees required to achieve the same result.

The Court of Appeals also justified its ruling with reference to the New York Condominium Act, which was enacted “to stimulate greater building activity throughout the State and to allow private enterprise to supply additional housing units, particularly in the middle income rental range” (Mem of Joint Legis Comm on Hous and Urban Dev, 1964 McKinney’s Session Laws of NY at 1840). The Court held that treating consolidation agreements as the first mortgage allows condominium unit owners greater flexibility in obtaining a larger mortgage or refinancing, and thus advances the New York Condominium Act’s goals.

Thus, the Court of Appeals held that the consolidation agreement was the first mortgage of record against the premises.

Categories : Mortgage Law

3rd Cir. Rejects Attempt to Distinguish Campbell-Ewald, Holds Rule 68 Offer of Judgment Did Not Moot Claims

By Thomas Dominczyk

Monday, May 23rd, 2016

The U.S. Court of Appeals for the Third Circuit recently upheld a trial court’s ruling that an unaccepted offer of judgment under Fed. R. Civ. Pro. Rule 68, made before a plaintiff files a motion for class certification, does not make the case moot.

The copy of the opinion in Weitzner v. Sanofi Pasteur, Inc. is available at: Link to Opinion.

The named plaintiff filed a putative class action against the defendants for alleged violation of the federal Telephone Consumer Protection Act (TCPA). The plaintiff alleged that the defendants transmitted more than 10,000 facsimiles to the plaintiff and other members of the class without express invitation or permission.

On Nov. 15, 2013, before the plaintiff filed a motion for class certification, the defendants made offers of judgment under Fed. R. Civ. Pro. 68 to the named plaintiff.

The defendant offered “$1,500 for each and every facsimile advertisement sent to Plaintiff . . . as alleged in Plaintiffs’ complaint . . . and in addition any such other relief which is determined by a court of competent jurisdiction to be necessary to fully satisfy all of the individual claims of Plaintiff . . . arising out of or related to the transmission of facsimile advertisements sent to Plaintiff . . . by or on behalf of Defendants.”

The defendant also offered to pay costs and stop sending any facsimile advertisements that violated the TCPA. The plaintiff did not respond to the offers of judgment.

On Dec. 4, 2013, the defendants moved to dismiss for lack of subject matter jurisdiction under Fed. R. Civ. Pro. 12(b)(1), arguing the unaccepted offers of judgment mooted the case.

The trial court judge, relying on Weiss v. Regal Collections, 385 F.3d. 337 (3d Cir. 2004), denied the defendants’ motion to dismiss on the grounds that the plaintiff’s action could proceed because they had not engaged in “undue delay” in failing to file their motion for class certification and a successful class certification would relate back to the filing of the class complaint. The relation back of the certification of the proposed would allow for the class representative to retain standing to litigate class certification, though his individual claim might moot.

The defendants subsequently moved to certify the trial judge’s order for interlocutory appeal. The trial judge certified his order denying defendants’ motion in order that the appellate court could review the question of whether an unaccepted offer of judgment under Rule 68 in a putative class action, when the offer is made before the plaintiff files a motion for class certification pursuant to Rule 23, moots the plaintiff’s entire action including the putative class claims, and thereby deprives the court of federal subject matter jurisdiction.

As you may recall, FRCP 68 provides:

At least 14 days before the date set for trial, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service. The clerk must then enter judgment. . . . An unaccepted offer is considered withdrawn, but it does not preclude a later offer. Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs.

See Fed. R. Civ. P. 68(a)-(b).

The Third Circuit upheld the trial court’s ruling, expressly relying on Campbell-Ewald Company v. Gomez, 136 S. Ct. 663 (2016). According to the Appellate Court, the underlying allegations in Campbell-Ewald were indistinguishable from the present case.

In Campbell-Ewald, the Supreme Court of the United States held that “an unaccepted offer to satisfy [a] named plaintiff’s individual claim [is not] sufficient to render a case moot when the complaint seeks relief on behalf of the plaintiff and a class of persons similarly situated.” Id. It further held that “in accord with Rule 68 of the Federal Rules of Civil Procedure . . . an unaccepted settlement offer has no force.” Id. Accordingly, because an unaccepted settlement offer has no force, it moots neither the plaintiff’s individual claims nor the case as a whole.

The Third Circuit found that Campbell-Ewald overruled their previous holding in Weiss that an offer of compete relief will generally moot a plaintiff’s claim, as at that point the plaintiff retains no personal interest in the outcome of the litigation.

Accordingly, the Appellate Court found that an unaccepted offer of judgment under Fed. R. Civ. Pro. 68, made before a plaintiff files a motion for class certification, does not make the case moot, and thus affirmed the trial court’s order denying defendants’ motion to dismiss.

Categories : Class Actions, TCPA

WD NY Holds TCPA Claim Does Not Survive Death of Plaintiff, TCPA Damages ‘Wholly Disproportionate to Harm Suffered’

By Thomas Dominczyk

Wednesday, May 11th, 2016

The U.S. District Court for the Western District of New York recently held that claims under the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, et seq., are penal in nature and therefore do not survive the death of a plaintiff.

In so ruling, the Court held that the TCPA’s provision of damages in the amount of $500 per phone call, which could be trebled up to $1,500, is “wholly disproportionate to the harm suffered.”

Of note, the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution prohibits the imposition of “grossly excessive or arbitrary punishments on a tortfeasor,” and “courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.” See, e.g., State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003); BMW of N. Am. v. Gore, 116 S. Ct. 1589 (1996).

A copy of the opinion in Hannabury v. Hilton Grand Vacations Company, LLC is available at: Link to Opinion.

A plaintiff filed a putative class action against a timeshare vacation rental company for allegedly making two unsolicited phone calls to the plaintiff’s cell phone in attempt to sell him timeshare properties. The plaintiff alleged that the defendant used an auto-dialing system to call his cell phone, and that the defendant called twice within 12 months while he was listed on the do-not-call registry.

The plaintiff passed away on Dec. 19, 2015. At the time of his death, the plaintiff had not moved to certify the class.

The plaintiff’s estate filed a motion to substitute the plaintiff’s estate in place of the plaintiff in the action. The defendant opposed the motion, arguing that the TCPA claims did not survive the plaintiff’s death.

As you may recall, the TCPA prohibits parties from making telephone calls to a cell phone using an “automatic telephone dialing system.” 47 U.S.C. § 227(b)(I)(A). In addition, the TCPA prohibits parties from calling a number on the Federal Communications Commission’s do-not-call registry. 47 U.S.C. § 227(c)(5).

The Court began its discussion determining whether state or federal law governed the issue in this motion to substitute. The Court focused on the Supreme Court of the United States’s ruling in Mims v. Arrow Fin. Servs., LLC, 132 S. Ct. 740 (2012), that held that federal courts retain their federal-question jurisdiction over private TCPA claims and therefore federal law governs private TCPA claims in federal court.

The Court then turned to the test for survivorship. The test for survivorship turns on whether the claims are primarily penal or remedial in nature. The Court noted that claims that are remedial in nature survive a plaintiff’s death, but those that are primarily penal do not.

The Court looked to three factors to determine if a civil action is penal or remedial for the purpose of survivability: “(a) whether the purpose of the TCPA claim is to redress individual wrongs or wrongs to the public; (b) whether recovery runs to the individual or to the public and; (c) whether the recovery is disproportionate to the harm suffered.”

Turning to the first factor, whether the purpose of the TCPA claim is to redress individual wrongs or wrongs to the public, the Court found that the purpose of a private action under the TCPA is to redress wrongs to the public, and to deter such conduct.

The Court also noted that the plaintiff did not seek damages for actual monetary loss as a result of receiving the alleged phone calls. As the plaintiff did not seek redress for individual wrongs but rather for wrongs to the public, the Court found the first factor suggests the TCPA claims are penal.

As for the second factor, whether recovery runs to the individual or to the public, the Court found that damages under the TCPA run to the recipient of the alleged call, and not to the public. Thus, the Court held, the second factor suggests the TCPA claims are remedial.

As to the third factor, whether the recovery is disproportionate to the harms suffered, the Court found that a $500 award, which could be trebled up to a total of $1,500, is “wholly disproportionate to the harm suffered.” The Court noted that disproportion of damages deters conduct that violates the TCPA, and also encourages bringing an action to redress violations. Thus, the Court held that the third factor suggests the TCPA claims are penal.

In weighing these factors, the Court held that TCPA claims are penal in nature and do not survive the plaintiff’s death.

Due to the abatement of the TCPA claims, the injunction additionally sought by the plaintiff no longer would benefit him or his estate and is therefore moot.

Lastly, the Court found that as the class was never certified, the plaintiff’s claims were moot, which in turn meant that the entire action becomes moot.

Accordingly, the Court denied the plaintiff’s motion to substitute as the TCPA claims did not survive his death, and dismissed the action as moot.

Categories : TCPA

4th Cir. Confirms Sale Orders in Prior Bankruptcy Precluded Debtor’s Later Claims

By Thomas Dominczyk

Tuesday, May 3rd, 2016

The U.S. Court of Appeals for the Fourth Circuit recently affirmed the dismissal of a borrower’s lawsuit against a bank, holding that the district court correctly found that sale orders entered in a prior bankruptcy case were res judicata and precluded the borrower’s new claims.

A copy of the opinion in Providence Hall Associates v. Wells Fargo Bank, N.A. is available at: Link to Opinion.

A Virginia-based limited partnership owned real property in several states, and entered into a line of credit and loan secured by deeds of trust or mortgages. The borrower defaulted and filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

The bank filed a proof of claim, to which the debtor objected and filed an adversary complaint, which was later amended. The amended complaint alleged that the bank misrepresented that it would forego suing on the credit line, which caused the debtor to default and file bankruptcy.

The U.S. Trustee moved to convert the case to Chapter 7 or to dismiss based on the debtor’s failure to file monthly financial reports. The bank joined the motion, arguing that the debtor had also improperly used the bank’s cash collateral to pay “distributions” to its principals.

The bankruptcy judge appointed a Chapter 11 trustee instead of converting the case to a Chapter 7 proceeding or dismissing the case.

The Chapter 11 trustee obtained the bankruptcy court’s approval to sell two of the debtor’s properties to satisfy the debt owed to the bank. He also consented to the dismissal of the debtor’s adversary complaint without prejudice.

More than one year later, the debtor sued in Virginia state court and the bank removed the case to federal court. The complaint repeated the claims raised in the prior adversary complaint and alleged the bank was liable because the interest rate swap transaction was a “sham” because the LIBOR rate was illegally manipulated or “rigged.”

The bank moved to dismiss and the district court granted the motion, reasoning that the bankruptcy court’s two sale orders were preclusive on the basis of res judicata. The debtor appealed.

On appeal, the Fourth Circuit explained that “[u]nder the doctrine of res judicata, or claim preclusion, ‘[a] final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.’ … Three elements must be satisfied for res judicata to apply. ‘[T]here must be: (1) a final judgment on the merits in a prior suit; (2) an identity of the cause of action in both the earlier and the later suit; and (3) an identity of the parties or their privies in the two suits.’”

In addition, the Court explained, there are two practical considerations: first “whether the party or its privy knew or should have known of its claims at the time of the first action”; and second, “whether the court that ruled in the first suit was an effective forum to litigate the relevant claims.”

As to the first res judicata prong — whether the sale orders were final orders — the Fourth Circuit relied on decisions from the Fifth, Sixth and Seventh Circuits to find that the bankruptcy sale orders were orders or judgments on the merits.

The Court rejected the debtor’s argument that the cases relied upon by the district court were distinguishable because the debtors never objected to the sale orders or the creditor’s claim in the bankruptcy court, unlike [the debtor in the case at bar] which objected to [the bank’s] proof of claim” because, as the Fifth Circuit held in the Baudoin case, “sale orders ‘are final judgments on the merits for res judicata purposes, even though the order neither closes the bankruptcy case nor disposes of any claim.’… It is irrelevant whether an objection was made.”

The Fourth Circuit also rejected the debtor’s argument that its claims were unrelated to the sale proceedings, while in the Seventh Circuit’s Met-L-Wood case, the trustee alleged fraud surrounding the sale, reasoning that the distinction was “not a meaningful one.”

“To sell bankruptcy estate assets outside the ordinary course of business, the trustee of the estate or the debtor-in-possession must initiate the sale proceeding. … Here, the trustee moved to sell property in satisfaction of specifically identified obligations arising out of [the debtor’s] transactions with [the bank]. The bankruptcy court approved these sales, finding them to be ‘in the best interests of the Estate.’ … It would make little sense after the sales were made, the debt settled, and the bankruptcy proceeding closed, to then allow [the debtor] to challenge in a new judicial proceeding the propriety of the transactions giving rise to its now-extinguished debt. To allow such a challenge would achieve little more than upending the purpose of res judicata: promoting finality and judicial economy.”

The Court also found that “the preclusive effect of the bankruptcy court’s sale orders is consistent with the ‘fundamental purpose’ of Chapter 11 bankruptcy: ‘rehabilitation of the debtor.’ … To fulfill this objective, ‘[c]entralizaiton of disputes concerning a debtor’s legal obligations is especially critical’ because it allows ‘reorganization [to] proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.’”

Rejecting as unpersuasive the debtor’s arguments that it should “break ranks with our sister circuits and hold that the sale orders fail to satisfy the first prong of res judicata,” the Fourth Circuit found: (a) the fact that the adversary proceeding was dismissed without prejudice was irrelevant because “the sale orders are what preclude the claims now before the court”; (b) res judicata bars personal lender liability claims even though the bankruptcy sale order is an in rem proceeding; (c) because the bankruptcy trustee “could have litigated the extent of [the debtor’s] obligations to [the bank] rather than move to sell estate property in satisfaction of those obligations, and … [the debtor’s] present claims are transactionally related to the facts underlying the sale orders … [t]his gives rise to the preclusion of [the debtor’s] present claims.”

Turning to the second prong of res judicata—“an identity of claims between the first and second suit”—the Court explained that it follows the “transactional approach” which means “that ‘res judicata will bar a newly articulated claim’ if it is based on the same underlying transaction [involved in the first suit] and could have been brought in the earlier action.’”

The Fourth Circuit found the second prong was satisfied because the sale orders arose out of the same facts as the debtor’s claims in the case at bar, i.e., the loan agreements between the debtor and the bank; the sale orders provided for the satisfaction of the debtor’s obligations arising from the loan agreements; and, in the case at bar, the debtor was challenging the propriety of the sale transactions.

The Court also found that the third res judicata prong—identity of the parties or their privies—was satisfied because the trustee is in privity with the debtor in his capacity as representative of the bankruptcy estate.

Finally, the Fourth Circuit concluded that the two “additional considerations”—“whether the party or its privity knew or should have known of its claims at the time of the first action and whether the court that ruled in the first suit was an effective forum to litigate the relevant claims”—were met because the debtor offered no argument that the trustee could not effectively litigate in the bankruptcy court.

Accordingly, the district court’s judgment was affirmed.

Categories : Bankruptcy

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