Archive for TILA

10th Cir. Rejects Action to Void Foreclosure Sale Based on Prior TILA Cancellation Demand

The U.S. Court of Appeals for the Tenth Circuit recently held that a borrowers’ federal court claim attempting to void a foreclosure sale based on a prior demand to cancel the loan under the federal Truth in Lending Act (TILA) was barred by claim preclusion for failure to raise the issue in a prior state court action.

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

The plaintiff borrowers refinanced the loan on their home in May 2007.  In 2009, the borrowers defaulted on their loan.  In March 2010, believing that their lender had failed to make TILA-required disclosures, the borrowers delivered a notice of intent to rescind.

The lender responded it did not afford any significance to the notice, and that it would “exercise all appropriate remedies under the promissory note and security instrument in the event of the borrowers’ default.”  The lender took no further action.

In June 2011, the lender assigned the deed of trust to a trustee for a mortgage loan trust, which commenced foreclosure proceedings in July 2011.

The borrowers promptly filed a Chapter 7 bankruptcy, and the trustee also filed a motion to lift the automatic stay in the bankruptcy so it could move forward with the foreclosure proceedings.

In August 2012, the borrowers filed a separate state court action seeking to quiet title, alleging they had tendered a valid instrument in payment of the note, which the trustee had rejected.  The trustee moved to dismiss the complaint for failure to state a cause of action, which motion was granted.

The borrowers ultimately received a discharge and the bankruptcy case was closed in December 2012.  The property sold in a foreclosure sale in January 2013, with the trustee being the highest bidder.

The borrowers then commenced a federal court action in August 2014, asserting a claim seeking to rescind the 2014 foreclosure in light of the 2010 notice of intent to rescind the transaction.  Both parties moved for summary judgment, and the trial court granted the trustee’s motion and denied the borrowers’ motion.

In so ruling, the trial court relied on claim preclusion, concluding that the borrowers could have raised their contention that the loan was rescinded due to the 2010 notice of rescission in the 2012 state court action.

On appeal, the Tenth Circuit first noted: “For a claim in a second judicial proceeding to be precluded by a previous judgment, there must exist: (1) finality of the first judgment, (2) identity of subject matter, (3) identity of claims for relief, and (4) identity or privity between parties to the actions.”

The borrowers argued that claim preclusion did not apply because their current claim challenged the 2013 foreclosure sale, which had not yet occurred when they filed the 2012 state court action.

However, the Tenth Circuit noted that the trustee “had commenced the foreclosure proceedings in 2011, well before the 2012 state litigation.”  In addition, the facts underlying their challenge to the foreclosure sale “certainly were known to them at the time of the 2012 state litigation.  Therefore, [the borrowers] could have used the state litigation to challenge the lender’s failure to follow the TILA rescission process.”

The borrowers next argued that the 2010 rescission was not itself a legal claim, and that the holding of the trial court improperly converted it to a claim, contrary to the Supreme Court of the United States’ holding in Jesinoski v. Countrywide Homes Loans, Inc., 135 S. Ct. 790 (2015).

The Tenth Circuit again disagreed, noting that “Jesinoski concerned whether a borrower effects rescission simply by giving notice within the three-year conditional rescission period, or whether the borrower must both give notice and file suit within that period.”  However, it did not “preclude a lender from taking the position that a tendered notice of rescission is invalid.”

The Tenth Circuit further held: “Nor are we persuaded by the [borrowers’] suggestion that under Jesinoski, a notice of rescission tendered during the conditional rescission period becomes incontestable if a lender fails to bring a lawsuit to invalidate it.”

Moreover, “it is apparent that once the lender rejected the [borrowers’] notice, they had a ‘claim’ for rescission and a ‘claim’ for TILA violations.”

Finally, the borrowers argued that the identity of claims element was not met, because the injuries in the litigations differed.  In so arguing, the borrowers alleged: “The injury alleged here is foreclosure on a deed the homeowners voided under TILA.  The injury alleged there—having nothing to do with TILA or rescission—was [the lender] rejecting purported payment of the note.”

The Tenth Circuit rejected the borrowers’ argument, noting that the “state action and the current action challenged the same mortgage loan on the same property,” that the “underlying facts are related in origin and motivation and would form a convenient trial unit,” and that in the state court action the borrowers “sought to quiet title to the property and to have the deed of trust reconveyed to them.”

The Tenth Circuit therefore held that the identity of claims element was also met, and claim preclusion applied.  Accordingly, the ruling of the district court was affirmed.

8th Cir. Holds Borrower’s Affidavit Alone Is Insufficient to Rebut TILA’s Presumption of Delivery

The U.S. Court of Appeals for the Eighth Circuit recently held that two borrowers’ conclusory affidavits by themselves were insufficient to rebut the presumption of delivery under the federal Truth in Lending Act, 15 U.S.C. § 1635(c), where the borrowers acknowledged in writing at the closing that they received the disclosures required under TILA.

A copy of the opinion in Alan Keiran v. Home Capital, Inc. is available at:  Link to Opinion.

In 2010, before the Supreme Court of the United States’ ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015), the borrowers filed this action against a bank alleging that the bank failed to provide all disclosures required under TILA, and seeking rescission of a mortgage loan, money damages, and a declaratory judgment voiding the bank’s security interest in loan.

The trial court initially granted summary judgment in favor of the bank and against the borrowers finding that: TILA’s one-year statute of limitation barred the borrowers’ claims for money damages; TILA’s three-year statute of repose barred the borrower’s rescission claim; and that borrower’s claim for money damages for refusal to rescind failed because the bank did not provide any deficient TILA notices to the borrowers at closing.

The borrowers appealed, and the Eighth Circuit affirmed holding, in part, that the borrowers had to file their TILA suit for rescission within three years instead of simply giving notice of their intent to rescind.  The Eighth Circuit also found that the borrowers’ money damage claim failed because no defects were apparent on the face of the loan documents.

The Supreme Court of the United States granted certiorari in a similar case because of a circuit split over whether TILA requires notice or the actual filing of a suit to rescind within the three-year statute of repose.  Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015).  The Supreme Court decided that TILA only requires notice of rescission within the three-year period

The Supreme Court subsequently granted the borrowers’ petition for certiorari, vacated the Eighth Circuit’s opinion in light of Jesinoski, and remanded the matter.  The Eighth Circuit in turn remanded the matter to the trial court for further proceedings.

The parties then filed cross-motions for summary judgment.  The borrowers argued that rescission was appropriate because: (1) they did not receive the two required TILA disclosure statements; (2) the statements disclosed materially inaccurate loan finance charges; and (3) the bank did not timely or adequately respond to their rescission notice.

Once again, the trial court granted summary judgment for the bank, holding that the borrowers failed to rebut the presumption of delivery of the disclosures under 15 U.S.C. § 1635(c) –  i.e., if a consumer acknowledges in writing that he or she received the required TILA disclosures, “a rebuttable presumption of delivery” arises.  Specifically, the district court found that the borrowers’ self-serving affidavits failed to rebut the presumption.

Additionally, the trial court rejected the borrowers’ claim that the disclosure statements were materially inaccurate.  Finally, the trial court held that because no TILA violation occurred, the right of rescission expired three days after closing and the bank did not have to respond to the subsequent notice of rescission.

This appeal followed.

Initially, the Eighth Circuit observed that courts broadly interpret the TILA in favor of consumers. Rand Corp. v. Yer Song Moua, 559 F.3d 842, 845 (8th Cir. 2009).

The Eighth Circuit next turned to the TILA provisions relevant to this appeal.  As you may recall, the TILA provides borrowers an unconditional three-day right to cancel for certain real estate secured loans. 15 U.S.C. §§ 1635(a) (rescission as to original lenders); 1641(c) (extending rescission to assignees).

In addition, a creditor must make required disclosures to “each consumer whose ownership interest is or will be subject to the security interest” including two copies of a notice of the right to rescind and a disclosure regarding the finance charge. 12 C.F.R. § 1026.23(a), (b)(1), 15 U.S.C. § 1602(u).  The creditor must make these disclosures “clearly and conspicuously in writing, in a form that the consumer may keep.” 12 C.F.R. § 1026.17(a)(1).

Moreover, if the creditor does not provide the required disclosures or notices, then a borrower’s “right of rescission shall expire three years after the date of consummation of the transaction.” 15 U.S.C. § 1635(f); see 12 C.F.R. § 1026.23(a)(3)(i). However, the Eighth Circuit noted that if no disclosure violation occurs, then “the right to rescind is not extended for three years and instead ends at the close of the three-day window following consummation of the loan transaction.”

The Eighth Circuit first examined the borrowers’ claim that they both did not receive a copy of the TILA disclosure statement, as required. 12 C.F.R. § 1026.17(a)(1), (d).

The Court noted that when a consumer acknowledges in writing that they received a required disclosure, this creates “a rebuttable presumption of delivery thereof.” 15 U.S.C. § 1635(c).  Here, the borrowers each signed an acknowledgment that they received a complete copy of the TILA disclosure statement. The Eighth Circuit observed that this “gives rise to the rebuttable presumption in § 1635(c).”

The borrowers’ affidavits declared they received only one TILA disclosure statement, instead of the required two.  The borrowers argued that their affidavits rebutted the presumption and created a material question of fact citing Bank of America, N.A. v. Peterson, 746 F.3d 357 (8th Cir. 2014), because Peterson cited and relied upon two cases that a borrower affidavit alone may rebut the presumption. Stutzka v. McCarville, 420 F.3d 757, 762-63 (8th Cir. 2005); and Cappuccio v. Prime Capital Funding LLC, 649 F.3d 180, 189-90 (3d Cir. 2011).

The Eighth Circuit rejected this argument.

Initially, the Eighth Circuit distinguished Peterson because there the debtors offered sufficient evidence that the bank did not provide the required documents.  Specifically, the bank in Peterson admitted its lack of TILA diligence on more than one occasion in letters to the debtors.  Also, the borrowers in Peterson asked for the required documents less than a month after closing.

The Court found that this stands in contrast to the present borrowers’ conclusory affidavits that they executed eight years after the closing.  Further, the Eighth Circuit observed that courts have found that a borrower’s conclusory denial that they received the required TILA disclosures, without any other evidence, fails to rebut section 1635’s presumptions of delivery. See e.g., Williams v. First Gov’t Mortg. & Investors Corp., 225 F.3d 738, 751 (D.C. Cir. 2000).

Additionally, the Eighth Circuit distinguished the Stutzka and Cappuccio cases.  In Stuzka, the trial court had found that the plaintiff “was not given her copies of the closing documents.”  Further, the Eighth Circuit noted, Cappuccio does not hold that any manner of affidavit is sufficient to rebut section 1635(c)’s presumption of delivery and defeat a summary judgment motion.

Quite the contrary, the Court noted, it is black letter law “that a conclusory, self-serving affidavit will not defeat an otherwise meritorious summary judgment motion.” Chavero-Linares v. Smith, 782 F.3d 1038, 1041 (8th Cir. 2015).

Thus, the Eighth Circuit held that the trial court properly entered summary judgment in favor of the bank on the borrowers’ rescission claim because section 1635’s three-day window bars their claim.

The Court next turned to the borrowers’ claim that they are entitled to rescission under TILA based on materially inaccurate finance charges in the disclosure statements.

The borrowers raised this issue for the first time in this appeal.  Thus, the Eighth Circuit found that the borrowers waived this argument.  Moreover, the Eighth Circuit concluded that even if the borrowers did not waive their argument, their claim would still fail.

As you may recall, a finance charge is deemed accurate if “the amount disclosed as the finance charge does not vary from the actual finance charge by more than an amount equal to one-half of one percent of the total amount of credit extended.” Beukes v. GMAC Mortg., LLC, 786 F.3d 649, 652 (8th Cir. 2015) (quoting 15 U.S.C. § 1605(f)(2)(A)); see also 12 C.F.R. § 1026.23(g)(1) (describing that amounts within one-half of one percent of the accurate amount shall be considered accurate).

The original lender extended $404,000 in credit to the borrowers.  As such, the Eighth Circuit observed that the borrowers would be entitled to rescission if the disclosure statement’s finance charges improperly varied by more than $2,020.

However, the borrowers claimed a $1,955 hazard insurance premium charge should have been only $1,205 and challenged various other fees. They claimed these amounts total $2,172.40.

The Eighth Circuit rejected the borrowers’ math because insurance premiums are not expressly included in the finance charge under TILA, 15 U.S.C. § 1605(c) (premiums for property damage insurance may be excluded from the total finance charge if the creditor notifies borrower that they may obtain the insurance of their choice). The disclosures here advised the borrowers of their rights to obtain insurance. Also, the Court noted, the claimed error does not violate the TILA because it is a larger and not smaller charge. See 12 C.F.R. § 1026.23(g)(1)(ii) (an inaccuracy is tolerated if it is “greater than the amount required to be disclosed”).

Subtracting the disputed insurance premium, the total fell below the $2,020 threshold. Thus, the Eighth Circuit concluded that even if the borrowers did not waive their TILA claim it still failed on the merits.

Finally, the Eighth Circuit turned to the borrowers’ argument that the bank’s lien is void because it failed to timely respond to their notice of rescission.  The Eighth Circuit flatly rejected this argument.  The Court held that the bank did not violate the TILA at closing.  Therefore, the borrowers’ right to rescind did not extend beyond three days and this claim is barred.

Accordingly, the Eighth Circuit affirmed the trial court’s summary judgment order in favor of the bank and against the borrowers.

SCOTUS Rules State Credit Card Anti-Surcharge Law Regulates Speech, Not Conduct

The Supreme Court of the United States recently held that a state law penalizing merchants for charging a surcharge for credit card payments did not restrict the amount that a store could collect when a buyer paid by credit card (i.e., a regulation on conduct).

Instead, the Court held that the state statute regulated how sellers may communicate their prices, and was therefore a regulation on speech subject to First Amendment scrutiny.

As you may recall, in Dana’s R.R. Supply v. AG, 807 F.3d 1235 (11th Cir. 2015), the U.S. Court of Appeals for the Eleventh Circuit held that a similar anti-surcharge statute was an unconstitutional restriction on commercial speech, because the pricing scheme sought to be employed was not misleading, the regulation did not advance any substantial state interest, and it was not narrowly tailored to meet constitutional scrutiny.

Accordingly, in this case, on remand the U.S. Court of Appeals for the Second Circuit may find that the state law at issue here is an unconstitutional content-based restriction on non-misleading commercial speech.

A copy of the opinion in Expressions Hair Design v. Schneiderman is available at:  Link to Opinion.

This case involves New York’s anti-surcharge statue for credit card payments.  When a customer makes a payment with a credit card, merchants are charged a processing fee by the card issuer.  The petitioners were five New York merchants (collectively, “Merchants”) who wanted to pass the processing fee along to their customers by employing different pricing for the use of a credit card, or by offering a discount for the use of cash.

As way of background, when credit cards were first introduced, contracts between card issuers and merchants barred merchants from charging credit card users higher prices than cash customers.  Congress put a partial stop to this practice in the 1974 amendments to the Truth in Lending Act (TILA).  The amendment prohibited card issuers from contractually preventing merchants from giving discounts to customers who paid cash.  See § 306, 88 Sta. 1515.  But, the amendment said nothing about credit card surcharges.

Subsequently, in 1976, another TILA amendment barred merchants from imposing surcharges on credit card payments.  Act of Feb. 27, 1976, §3(c)(1), 90 Stat. 197.  In 1981, Congress delineated the distinction between discounts and surcharges by defining “regular price” as the merchant’s “tagged or posted” price.  Cash Discount Act, § 102(a), 95 Stat. 144.  Because a surcharge was defined as an increase from the regular price, there could be no credit card surcharge where the regular price was the same as the amount charged to customers using credit cards.  The effect of all this was that a merchant could violate the surcharge ban by posting a single price and then charging credit card users more than that posted price.

Congress allowed the federal surcharge ban to expire in 1984.  However, the provision preventing credit card issuers from contractually barring discounts for cash remained.  This caused several states, including New York, to enact their own surcharge bans.  But, unlike the federal ban, New York’s anti-surcharge statute did not define the term “surcharge.”

As you may recall, New York prohibits its merchants from “impos[ing] a surcharge on a [customer] who elects to use a credit card in lieu of payment by cash, check, or similar means” (the “anti-surcharge statute”).  N.Y. Gen. Bus. Law. Ann. § 518 (2012).  A merchant who violates the anti-surcharge statute commits a misdemeanor and risks “a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.”  Id.

The Merchants argued that New York’s anti-surcharge statute restricted their constitutional right to truthful commercial speech under the First Amendment.

The trial court ruled in favor of the Merchants.  It held that the anti-surcharge statute regulated speech and violated the First Amendment under the Supreme Court’s commercial speech doctrine.  See, e.g., Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, 425 U.S. 748, 764-65 (1976) (the First Amendment provides limited protection for commercial speech based on society’s “strong interest in the free flow of [truthful and legitimate] commercial information”).

The U.S. Court of Appeals for the Second Circuit vacated the trial court’s ruling with instructions to dismiss the Merchants’ claims.  In so ruling, the Second Circuit determined that the anti-surcharge statute regulated conduct rather than speech, and therefore the anti-surcharge statute did not violate the First Amendment.

The first issue before the Supreme Court was whether the anti-surcharge statute prohibited a pricing scheme that provides a cash price and a different price for credit card customers, expressed either as a percentage surcharge or a dollars-and-cents additional amount.

The Second Circuit read “surcharge” in the anti-surcharge statute to mean “an additional amount above the seller’s regular price,” and thus concluded that the statute prohibited sellers from posting a single sticker price and charging credit card customers an additional fee.  The Supreme Court did not find any clear error in this interpretation, and also concluded that the anti-surcharge statute bars the pricing regime that the Merchants wish to employ.

On the constitutional issue, the Second Circuit concluded that the anti-surcharge statute posed no First Amendment problem because the law regulated conduct, not speech.  The Second Circuit reached this conclusion with the premise that price controls regulate conduct alone.

However, the Supreme Court disagreed.  According to the Supreme Court, the anti-surcharge statute was not a typical price regulation, as it did not limit the amount that merchants can collect from a cash or credit card payer.  Instead, the Supreme Court held, the statute regulates how sellers may communicate their prices.

Because the anti-surcharge statute regulated speech, the Supreme Court held that the Second Circuit should have conducted an inquiry into whether the statute, as a speech regulation, survived First Amendment scrutiny.

Accordingly, the Supreme Court vacated the judgment and remanded for the Second Circuit to analyze New York’s anti-surcharge statute as a speech regulation.

Calif. App. Court (2nd Dist) Holds Res Judicata Did Not Bar TILA Action Based on Prior Contract Action

The Court of Appeal of California, Second District, recently held the dismissal of a borrower’s breach of contract claim in a prior lawsuit did not bar a claim in a subsequent lawsuit for violation of the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq., even if the breach of contract and TILA claims were based on the same set of underlying facts, because the right to full disclosures under TILA was a distinct primary right from the common law rights in contract.

However, although the Appellate Court determined that the dismissal based on the doctrines of res judicata and issues preclusion was reversible error, the dismissal was affirmed because the borrower’s claims, including the TILA cause of action, were barred by the statute of limitations or otherwise failed to state a valid cause of action.

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

In the first lawsuit, the borrower’s complaint asserted causes of action for breach of contract, temporary restraining order and preliminary injunction, violation of California’s unfair competition law (UCL) in Bus. & Prof. Code § 17200, et seq., specific performance, and equitable rescission.  The borrower alleged that the lender failed to disclose fees when she refinanced the loan, and it added additional sums for “escrow option insurance” when her loan was subsequently modified.  The borrower claimed that these undisclosed sums made the loan unaffordable.

The trial court sustained the defendants’ demurrer based on several deficiencies in the complaint.  The borrower filed an amended complaint that was virtually identical to the original complaint which, once again, did not attach any of the alleged agreements or describe their terms in any greater detail.  The court sustained the defendants’ demurrer to the amended complaint without leave to amend.  The Appellate Court affirmed.  The California Supreme Court denied the borrower’s request for review.

The borrower then filed a new complaint, this time omitting the alleged breach of contract claim, and instead asserting causes of action for violation of TILA, the UCL, fraudulent omission/concealment, and injunctive relief.  The general allegations in the complaint were identical to those in the prior lawsuit.

The borrower alleged that the lender violated TILA by failing to make required disclosures with respect to the “escrow option insurance,” which was supposedly surreptitiously added to her monthly loan payment obligation.  She also alleged that the lender’s violation of TILA was an unlawful business practice in violation of the UCL, and the lender’s alleged failure to disclose the “escrow option insurance” in the loan modification agreement constituted fraudulent concealment.  According to the borrower, had she known the true facts, she would have considered other financing options, and thus requested injunctive relief preventing the sale of the property.

The lender demurred, contending that the borrower’s new complaint was barred as a matter of law by the doctrines of claim preclusion and issue preclusion.

The lender argued that the borrower was asserting the same primary right in both actions (claim preclusion), and the issues alleged had been actually litigated and decided against the borrower on the merits (issue preclusion).  The lender also argued that the TILA and fraud causes of action were untimely; the borrower lacked standing to assert a UCL claim because she failed to allege she had lost money or property as a result of the lender’s actions; and the claim for injunction was improper because injunctive relief is a remedy and not a cause of action.

In her opposition, the borrower emphasized that she had not pleaded either violation of TILA or fraud in her prior lawsuit.

The trial court sustained the defendants’ demurrer without leave to amend.  In so ruling, it found that “[t]he ‘primary right’ of Plaintiff in both actions—the right to be free from increased loan payments that were not agreed to—is the same, which means the present proceeding is on the same ‘cause of action’ as the prior proceeding.”  The trial court also ruled the claims were barred by collateral estoppel because her claims “all involve the same underlying issue—the validity of the increased loan payments that Plaintiff allegedly did not agree to,” and that issue had been litigated and decided.  Moreover, the trial court held that the TILA and fraud claims were time barred; the borrower lacked standing to bring a UCL claim; and the cause of action for injunctive relief was not a valid cause of action.  The borrower appealed.

First, the Appellate Court had to determine if the borrower’s TILA cause of action was subject to claim preclusion or issue preclusion.

As you may recall, “the doctrine of res judicata has two aspects — claim preclusion and issue preclusion.”  DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824; Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797.

“Claim preclusion ‘prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.’  Claim preclusion arises if a second suit involves (1) the same cause of action (2) between the same parties [or those in privity with them] (3) after a final judgment on the merits in the first case.”  DKN Holdings, 61 Cal.4th at 824.  “The bar applies if the cause of action could have been brought, whether or not it was actually asserted or decided in the first lawsuit.”  Busick v. Workermen’s Comp. Appeals Bd. (1972) 7 Cal.3d 967, 974.

Issue preclusion “prohibits the relitigation of issues argued and decided in a previous case even if the second suit raises a different cause of action.”  The doctrine applies “(1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party.”  DKN Holdings, 61 Cal.4th at 825.  “The doctrine differs from claim preclusion in that it operates as a conclusive determination of issues; it does not bar a cause of action.”  Id.

The Appellate Court held that the trial court erred in its ruling because different primary rights may be violated by the same wrongful conduct.  As support, the Appellate Court relied on Agarwal v. Johnson (1979) 25 Cal.3d 932, 954-955, which held that an employer’s racially discriminatory conduct may violate distinct primary rights under federal civil rights law and state tort law regarding defamation and intentional infliction of emotional distress.

In this case, although the borrower’s contract and TILA claims were largely based on the same set of underlying facts, the Appellate Court determined that the two actions do not involve the same primary rights.

The Appellate Court held that the primary right at issue in the borrower’s TILA cause of action was the right to full disclosure of the material terms of the loan and the subsequent loan modification.  This was, according to the Appellate Court, a federal statutory right distinct from the common law right to have enforced only those contractual terms which the borrower had agreed to (the claim presented by her initial lawsuit).  Thus, the Appellate Court concluded that the doctrine of claim preclusion did not bar the TILA cause of action.

Notably, the opinion was silent on whether the borrower could have, or should have, raised the TILA cause of action in the first lawsuit.  In fact, in the new complaint, the borrower alleged that she discovered the material omissions by May 2012 – well before she filed the original lawsuit in July 2013.

Turning next to issue preclusion, the Appellate Court held that the prior ruling on the merits of the borrower’s contract claim did not preclude the TILA cause of action.  This is because the adequacy of the disclosures at closing and in the loan modification agreement were neither actually litigated nor determined in the prior lawsuit.  Instead, the trial court sustained the demurrer because the borrower failed to allege sufficient facts to state a valid cause of action.  Thus, the Appellate Court concluded that the trial court erred by applying the doctrine of issue preclusion to dismiss the TILA claim.

However, the Appellate Court agreed with the trial court that the TILA cause of action was untimely under the statute of limitations.

As you may recall, most TILA actions must be filed “within one year from the date of the occurrence of the violation.”  15 U.S.C. § 1640(e).  A violation of TILA based on specific disclosures, however, may be brought within three years.  Id.; 15 U.S.C. § 1639.  The violations here allegedly occurred in 2007 and 2010.  The borrower’s current lawsuit was not filed until August 2015.  Under either the one-year or three-year statute of limitations, the  borrower’s claim was untimely.  Therefore, the Appellate Court concluded the untimely TILA cause of action was properly dismissed.

Next, the trial court had determined that the borrower lacked standing because she could not show any loss of money or property as a result of the allegedly unlawful business practices.  The Appellate Court disagreed.

In a previous decision, the Appellate Court had held that “the existence of an enforceable obligation, without more, ordinarily constitutes actual injury or injury in fact.”  Sarun v. Dignity Health (2014) 232 Cal.App.4th 1159, 1167.  Here, the borrower had alleged that she paid money to the bank in excess of what she should have owed.  According to the Appellate Court, these allegations were sufficient to allege injury in fact to confer standing to assert a UCL cause of action.

However, an action to enforce the UCL must be commenced within four years after the cause of action accrued.  Bus. & Prof. Code § 17208.  Because both the refinancing and the loan modification occurred more than four years before the new lawsuit was filed in August 2015, the Appellate Court concluded that the borrower’s UCL claim was time barred.

Relatedly, the borrower’s fraudulent concealment claim, like her TILA and UCL claims, was based on the alleged nondisclosure of material terms of the loan refinancing and loan modification.  A cause of action for fraud is governed by a three-year statute of limitations.  Code of Civ. P. 338(d).  Because the borrower alleged that she discovered the alleged fraud when her loan was supposedly forensically examined in May 2011, the cause of action filed in August 2015 was barred by the three-year statute of limitations.

Finally, the Appellate Court ruled that the borrower’s request for injunctive relief was properly dismissed because she failed to allege any valid cause of action.

Accordingly, the Appellate Court affirmed the order dismissing the action.

9th Cir. Holds Servicer May Have Violated UDAP by Soliciting Trial Mod Payments After Determining Borrower Ineligible

The U.S. Court of Appeals for the Ninth Circuit recently reversed an award of summary judgment in favor of a mortgage loan servicer, holding that the evidence could support a verdict that the servicer engaged in an unfair business practice by accepting trial modification plan payments when it had previously determined the borrower was not eligible for a loan modification.

A copy of the opinion Oskoui v. J.P. Morgan Chase Bank, N.A. is available at:  Link to Opinion.

A borrower defaulted on her mortgage loan, and later applied for a loan modification.  The mortgage loan servicer sent her a letter offering her a “Trial Plan Agreement.”  The letter specifically stated, “If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.”  The Agreement required the borrower to remit three equal payments of $3,280.05.  The borrower signed the Agreement and timely sent the payments.

Later, the servicer informed the borrower that she did not qualify “at this time” for a modification under either the federal Making Home Affordable Program (HAMP) or under the servicer’s in-house modification program because her “income [was] insufficient for the amount of credit [she] requested.”  The letter also stated that “we may be able to offer other alternatives to help avoid the negative impact” of foreclosure.

The servicer did not provide additional reasons for its denial.  However, the servicer had also denied the borrower for a modification because:  1) the unpaid principal balance on the loan was higher than the amount allowed under the HAMP Guidelines and 2) the loan failed to satisfy the servicer’s net present value (“NPV”) test.  The servicer’s NPV test compared the NPV expected from a modification to the NPV of the unmodified loan.  If the cash flow from a viable modification exceeds that of a non-modified loan, HAMP requires a servicer to offer a modification to a borrower.  If the NPV test generates a negative result, modification is optional.

The borrower then submitted a second application for a loan modification.

In response to the second application, the servicer sent a letter stating that it “want[ed] to help [the borrower] stay in [her] home” and confirmed receipt and review of the borrower’s “verification of income documentation.”  The servicer also provided three payment coupons in the amount of $2,988.49 with payment deadlines notated and stated: “After successful completion of the Trial Period Plan, [we] will send you a Modification Agreement for your signature which will modify the Loan as necessary to reflect this new payment amount.”

Later, the servicer sent the borrower another letter informing the borrower that she was not eligible for a federal HAMP modification “because the current unpaid principal balance on [her] loan [was] higher than the program limit.”  This letter also stated that the servicer was “happy” to tell the borrower that she “‘may be eligible for other modification programs’ and that [the servicer] may be able to offer ‘other alternatives’ to stave off the negative impact a possible foreclosure may have on [her] credit rating, the risk of a deficiency judgment … and the possible adverse tax effects of a foreclosure.”

The borrower made all payments called for by the first letter and continued making such payments for a total of seven months.

The borrower was served with a foreclosure notice listing a foreclosure sale date.  Prior to the sale date, the servicer sent the borrower another letter encouraging her to continue to seek a modification.  The servicer told the borrower that she might “qualify for monetary incentives that will be used to pay down the principal balance of your loan if you make your modified payments on time.”

Several months later, the servicer sent the borrower a letter denying her application, stating:  “We are unable to offer you a modification through the Home Affordable Modification Program (HAMP) or any [of the servicer’s] modification programs … because you did not provide us with the documents we requested.”

The borrower then filed an action for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of California’s Unfair Competition Law (UCL), and violation of the federal Truth in Lending Act (TILA).

The servicer moved to dismiss the borrower’s complaint.  The trial court dismissed the borrower’s TILA claim but denied the servicer’s motion with respect to the borrower’s remaining claims.  The trial court reasoned, “If what [the borrower] alleges is true – that [the servicer’s] left hand sought payments from Plaintiff pursuant to a plan designed to give her an opportunity to modify her loan while, notwithstanding [the borrower’s] payment in accordance with that plan, [the servicer’s] right hand continued all along with foreclosure proceedings and both hands should have known from the start that [the borrower’s] loan would not be eligible for modification in any event – the Court can conceive of such allegations stating a [UCL] claim.”

Later, the servicer brought a motion for summary judgment.  The trial court granted the servicer’s motion on the ground that the borrower had failed to provide the servicer with the “requested documentation to support her loan modification request.”  The trial court also rejected the borrower’s breach of contract claims because the borrower had only “conclusorily” asserted that the “modification back-and-forth ripened into a contract with [the servicer]” and remarked that the borrower had not included a breach of contract claim in her first amended complaint.

The borrower appealed.  On appeal, the Ninth Circuit reversed the trial court’s order granting summary judgment on the borrower’s breach of contract claim.

The Ninth Circuit held that the trial court “erred in failing to acknowledge [the borrower’s] claim for breach of contract in her pro se complaint.”  The Ninth Circuit noted that the borrower “explicitly styled her complaint on its first page as one for ‘BREACH OF CONTRACT AND BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALINGS.’”  The Ninth Circuit also found that “[o]nce [the borrower] made her three payments, [the servicer] was obligated by the explicit language of its offer to send her an Agreement for her signature ‘which will modify the loan as necessary to reflect this new payment amount.’  [The Servicer] did not call it either a HAMP agreement or [an in-house] agreement, just an ‘Agreement.’  What program the Agreement was part of is irrelevant.”

The Ninth Circuit also reversed the District Court’s order granting summary judgment on the borrower’s UCL claim.  The Ninth Circuit noted that the borrower was indeed ineligible for a HAMP modification, but that “instead of determining eligibility before asking for money – a logical protocol called for by HAMP as of January 28, 2010 – [the servicer] asked [the borrower] for more payments.”

The Ninth Circuit held that “[t]he facts in this record would amply support a verdict on this claim in [the borrower’s] favor on the ground that she was the victim of an unconscionable process.”  The Ninth Circuit reasoned that “[w]ith its March 1, 2010 letter, [the servicer] deceptively enticed and invited [the borrower] into a process with the demonstrably false promise that a loan modification was within her reach if she were to make three monthly payments of $2,988.49 each.  The next day – and for the first time – [the servicer] eliminated a HAMP modification from its menu, but neither advised [the borrower] what [its in-house modification guidelines] required nor suspended additional payments until it could determine her [in-house modification] eligibility.”

Finally, the Ninth Circuit reversed the trial court’s dismissal of the borrower’s TILA claim.  The Ninth Circuit cited the Supreme Court of the United States’ ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015), which held that TILA’s right to cancel may be exercised by a written notice from the borrower to the lender within three years after the consummation of the transaction, without need to also file a lawsuit within the three-year period.

The Ninth Circuit observed that the Supreme Court decided Jesinoski after the trial court had dismissed the borrower’s TILA claim.  As a result, the Ninth Circuit remanded the action to the trial court “with instructions to permit [the borrower] to amend her complaint to allege a right to rescind pursuant to Jesinoski.”

Statutory Interest Cannot Accrue on Charged-off Credit Cards, Says Kentucky Supreme Court

The Kentucky Supreme Court recently ruled that a debt buying company may not charge or collect statutory interest under section 360.010 of the Kentucky Revised Statutes on an account it acquired after it was charged off by the original creditor.

Carol Harrell’s credit card account was charged off by the original creditor on Jan. 18, 2011 and was sold to a debt buying company in November of the same year. In a collection lawsuit brought in April 2012, the debt buying company sought judgment for the charged-off balance plus statutory interest from the date of charge off. In response, Harrell counterclaimed alleging that because the original creditor charged off her account, it was no longer permitted to charge interest. In seeking statutory interest, Harrell alleged the debt buying company violated the federal Fair Debt Collection Practices Act.

The Kentucky Supreme Court held that once a credit card account is charged off and the original creditor ceases sending monthly statements, federal law prohibits further contract interest charges. Because the original creditor stopped assessing contract interest, it waived its right to collect “agreed-to interest.” That waiver amounted to a waiver of any right to assess interest, including statutory interest. As the assignee of the original creditor, the debt buying company had “no greater right to collect interest” and so could not seek statutory interest as part of its collection lawsuit.

A copy of the opinion in Unifund CCR Partners v. Harrell is available at: Link to Opinion.

FDCPA Troubles

The statutory interest sought by the debt buying company was less than $100, but that $100 claim Harrell alleged, was also a violation of the FDCPA. The Court also found that Harrell stated a claim for violations of sections 1692e and 1692f of the FDCPA arising from the debt buying company’s request for statutory interest in its state court collection complaint.

As Harrell’s case was making its way through the Kentucky state court system, the Sixth Circuit Court of Appeals in Stratton v. Portfolio Recovery Associates, held a consumer stated a claim for violation of the FDCPA when a debt buying company’s collection lawsuit sought statutory interest under the same section of the Kentucky Revised Statutes at issue in Harrell. But there was a dissenting opinion in the Stratton decision, which criticized its holding because the issue of whether statutory interest could be charged in these circumstances was undecided under Kentucky law. The dissent in Stratton concluded that imposing FDCPA liability under such circumstances “impermissibly expands the scope of the FDCPA, exposing debt collectors to liability under federal law whenever we later determine a debt collector’s reasonable construction of an as-yet uninterpreted state law is wrong.”

Does Reg Z Cause a Waiver of Statutory Interest?

To establish a waiver of a known contractual right, most decisional law (including Kentucky’s) requires a demonstration that the waiver was “voluntary” relinquishment of a known right. The federal regulation at the center of Harrell and Stratton (12 C.F.R. 226.5(b)(2)) is the Truth in Lending Act’s Regulation Z, which governs when periodic statements must be provided for open-end credit accounts. The regulation excuses the sending of a periodic statement “if the creditor has charged off the account in accordance with loan-loss provisions and will not charge any additional fees or interest on the account . . .” Following the reasoning of Stratton and Harrell, this demonstrates that when a creditor makes this election under Regulation Z, it has decided it will no longer charge interest and has waived the right.

The Harrell decision was not unanimous and the dissent noted that the majority opinion misconstrued the federal regulation. The regulation, the dissent noted, requires banks to charge off accounts to prevent them from inflating their net worth with assets that are noncollectible. Second, the act of charging off an account serves the purpose of terminating further use of the card and establishes the balance owed as a liquidated sum. Under Kentucky law, the dissent notes, prejudgment, statutory interest is a “matter of right on a liquidated demand.” The majority decision “punishes banks for their compliance with federal regulations and it bestows an unearned and undeserved windfall upon delinquent debtors.”

The dissent’s view in Harrell, that creditors have a “right” to seek prejudgment, statutory interest on a liquidated claim, is also contained in decisional law in other jurisdictions. Kentucky, however, has spoken and no right exists – at least in the context of a charged-off credit card account.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To summarize, the Second Circuit concluded as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5th Cir. Holds Tax Buyers Not Subject to TILA

The U.S. Court of Appeals for the Fifth Circuit recently held that a transfer of a tax lien to a tax buyer under Texas law does not constitute an extension of credit that is subject to the federal Truth in Lending Act (TILA).

A copy of the opinion in Billings v. Propel Financial Services, LLC is available at:  Link to Opinion.

In four consolidated cases, the plaintiffs were individuals who agreed to have the defendant property tax buyers pay their real estate taxes in exchange for the transfer of their tax liens pursuant to Sections 32.06 and 32.065 of the Texas Tax Code. The transactions were each evidenced by a promissory note executed by the plaintiff and payable to the tax buyer.

The plaintiffs each brought suit against the defendant tax buyers alleging that they committed TILA violations. The defendant tax buyers moved to dismiss, arguing that TILA did not apply because tax lien transfers are not “consumer credit transactions” under TILA.

In three of the four consolidated cases, the district court denied the defendants’ motions to dismiss, finding that TILA does not apply to the tax lien transfers. The district court certified the question for appeal.

In the fourth case, the district court held that because property taxes are not debt under Texas law, and the transfer of the tax lien to a private party does not change the nature of the obligation such that it becomes a debt, the transfer of a tax lien to a private entity is not a consumer credit transaction subject to TILA.

As you may recall, TILA’s disclosure protections apply to the offering of consumer credit by creditors, as defined by the statute. “Credit” is defined as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” 15 U.S.C. §1602(f). “Debt” is not defined by TILA and thus takes on the definition under applicable state law.

The Consumer Financial Protection Bureau (CFPB) is charged with interpreting TILA. The CFPB commentary to the implementing regulations of TILA expressly excludes “tax liens and tax assessments” from the definition of credit, but states that third-party financing of such obligations is credit for purposes of the regulation.  See 12 C.F.R. pt. 1026, Supp. I, Subpart A, cmt. 2(a)(14)(1)(ii).

Texas imposes property taxes, which are secured by a tax lien that automatically attaches to taxable property each year in favor of each taxing unit having power to tax the property. Under Texas law, a tax lien may be transferred to the person who pays the taxes on behalf of the property owner. The tax code includes a number of protections for property owners who use a tax lien transfer to defer payment of their property taxes.

The Fifth Circuit followed their holding in In re Kizzee-Jordan in determining whether the transfer of a tax lien to the tax buyers and the resulting promissory note, executed by the plaintiffs and payable to the tax buyers, extinguishes the original tax obligation and creates a new debt that is subject to TILA.  In re Kizzee-Jordan held that tax lien transfers were not extensions of credit under TILA because the transactions were merely transfers of tax obligations and, thus, did not create any new debt that would be subject to TILA.

The Court in In re Kizzee-Jordan first looked to federal bankruptcy law and concluded that a tax claim is a broad claim for the payment of taxes that is protected from modification by 11 U.S.C. § 511 of the Bankruptcy Code, and that a private entity may seek the benefit of Bankruptcy Code § 511 in pursuing such a claim.  Under Texas’s real estate tax scheme, the transferee of the tax lien is subrogated to and is entitled to exercise any right or remedy possessed by the transferring taxing unit.

The Fifth Circuit explicitly held in In re Kizzee-Jordan that a tax claim is not extinguished when the transferee pays the property taxes to the taxing authority.  Instead, the Fifth Circuit held that “a tax lien transfer under Texas law preserves the existing tax claim, and ‘changes only the entity to which the [property owners] are indebted for the taxes originally owed, not the nature of the underlying debt.'”

In applying the holding of In re Kizzee-Jordan to the instant case, the Fifth Circuit held that the payments made by the defendant tax buyers to the taxing authorities and the subsequent transfer of the tax liens did not extinguish the original tax obligations.  Stated differently, “when a lender pays a taxing authority and in exchange receives the tax lien along with an executed promissory note from the property owner under Section 32.06 of the Texas Tax Code, the lender holds the preexisting tax claim — not a new debt arising from the execution of the promissory note.”

Accordingly, the Court held, the transfers did not create new debts, but rather transferred existing tax obligations, which under Texas law are not “debts” and are therefore not subject to TILA.

The plaintiffs argued that In re Kizzee-Jordan is inapplicable due to its bankruptcy context. However, the Fifth Circuit found that In re Kizzee-Jordan interpreted the impact of a tax lien transfer under the same provision of the Texas Tax Code applicable as the instant case, and relied on interpreting the Texas Tax Code not the Bankruptcy Code.

Thus, the Fifth Circuit held that the transfer of a property tax lien is not an extension of credit subject to TILA, and accordingly affirmed one of the consolidated cases and reversed the remaining three consolidated cases.

How Spokeo May Limit Consumer Financial Services Litigation

Yesterday’s decision from the U.S. Supreme Court in Spokeo v. Robins should bolster the defense of companies subject to several federal consumer protection statutes. The ruling addresses lawsuits that claim an injury created solely by the violation of a federal statute and require the plaintiff to demonstrate not only that the statute was violated, but that the plaintiff herself suffered harm.

The opinion does not go as far as many in the consumer financial services industry would have liked (not all injuries must be “tangible”), but it does close the door on civil lawsuits many have faced. The opinion was authored by Justice Alito, with a separate concurring opinion by Justice Thomas. Justice Ginsburg authored a dissent and was joined in the dissent by Justice Sotomayor.

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

Standing and ‘Injury in Fact’

The decision concerns “standing” – whether a person can bring a lawsuit in a federal court. Standing, as the Court wrote, requires three elements: first, an injury in fact; second that the injury is “fairly traceable” to the conduct of the defendant at issue; and last, that the conduct can be likely redressed by the court.

Robins claimed Spokeo compiled a report about him that contained false information in violation of the Fair Credit Reporting Act (FCRA). The trial court dismissed his case finding Robins lacked standing because he had no tangible harm — he did not allege the information compiled by Spokeo lead to, for example, the denial of a job or credit. The Ninth Circuit Court of Appeals reversed and held that the statutory violation was enough to allow Robins his day in court; first, because his claims were associated with a violation of protections afforded to him by the FCRA and, second, because his lawsuit addressed the handling of his own credit information, and these concerns are “individualized.”

Yesterday’s decision addressed whether Robins met the first element of standing – whether he had alleged an injury in fact under the FCRA. This requires pleading harm to a “legally protected interest” that is “concrete and particularized.” The harm cannot be hypothetical or conjectural; it must be “actual or imminent.” The Court held that while Robins may have pleaded a violation of a legally protected interest under FCRA that was particular harm to him, he did not plead any actual or imminent harm stemming from the alleged FCRA violation. Simply stated, all Robins alleged was a technical violation of the FCRA, which he did not allege caused him any harm beyond a hypothetical or speculative harm.

Requires a “Concrete” Injury to Assert a Claim

In the context of a statutory violation of the FCRA, one could assert like Robins did, that a credit reporting agency’s compilation of false information certainly does demonstrate a violation of a legally protected interest. That, after all, is a purpose of the FCRA:  to promote and protect the accuracy of information reported. The harm was also “particularized.” Robins’ claim concerned the handling of his information and he filed a lawsuit seeking relief to redress the wrong done in the compilation and dissemination of that information.

The problem for Robins, and now for many who seek to assert similar lawsuits, is that all of this did not lead to any “concrete” injury. The Ninth Circuit’s decision focused only on whether the harm was particularized to Robins. It did not evaluate, the Court wrote, whether the harm was “‘real’ and not ‘abstract.’ ”

Concrete Harms Not Always Tangible

The opinion points out that there are some statutory violations whose transgression can itself cause a particularized and concrete harm. An example provided is a decision where the Federal Election Commission denied a group of voters information “that Congress had decided to make public.” The violation was of a certain statutory right (mandatory access to specific information) that, in and of itself, constituted a sufficient injury in fact (denial of access to the information). In such cases, a person need not identify any “additional harm” other than the harm Congress identified in the statute.

Robins’ case is different. While the FCRA imposes procedures that must be followed in order to curb the reporting of inaccurate information, not all inaccuracies result in a real harm. The mere fact there is an inaccuracy is not itself a sufficient, concrete harm. Although the information concerning Robins was alleged to be false and in violation of the FCRA, Robins did not point to any actual or imminent harm to him stemming from Spokeo’s conduct. “A violation of one of the FCRA’s procedural requirements may result in no harm,” wrote Justice Alito in the Court’s opinion. “An example that comes readily to mind,” the opinion continues, “is an incorrect zip code. It is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm.”

The decision does not close the door on Robins’ case. “We take no position as to whether the Ninth Circuit’s ultimate conclusion—that Robins adequately alleged an injury in fact—was correct,” the Court concluded. The Ninth Circuit’s analysis supporting its decision was flawed, the Court held, and because it did not examine whether the injury was “concrete,” the Court directed the Ninth Circuit to reexamine the case once more using its Spokeo analysis.

Curbs on FCRA, FDCPA, EFTA and TILA Lawsuits

The decision has immediate impact on FCRA claims alleging the reporting and furnishing of information. A failure to simply follow FCRA procedures will likely not withstand a Spokeo analysis absent pleading an actual harm.

The impact on Fair Debt Collection Practices Act (FDCPA) claims may be extraordinary. In determining whether a communication is false or misleading in violation of the FDCPA, courts have looked to whether the communication would violate a hypothetical “least sophisticated” or “unsophisticated” consumer. Several courts of appeals have defined the standard as an evaluation of how an imaginary consumer, who is gullible and naïve, would view the letter. As the Third Circuit Court of Appeals recently put it, “[t]he standard is an objective one, meaning that the specific plaintiff need not prove that she was actually confused or misled, only that the objective least sophisticated debtor would be.” While the standard may have some life left in it, the belief that the plaintiff herself need not demonstrate she has been harmed would be contrary to Spokeo. FDCPA lawsuits alleging false and deceptive communications may well be required to plead the plaintiff herself suffered some “particularized and concrete” injury that is “actual” or “imminent.”

Businesses facing claims under the federal Electronic Fund Transfers Act (EFTA) and Truth in Lending Act (TILA) could also benefit from Spokeo. The EFTA and TILA, like the FCRA, impose procedures on companies providing financial services to consumers. However a failure to follow these procedures does not always result in an actual or imminent harm, especially if courts find the statutes do not themselves define the harm.

TCPA Impact Less Clear

Many cases involving the Telephone Consumer Protection Act (TCPA) have been put on hold pending the Court’s decision. Spokeo’s impact is certainly positive in that the demonstration of some actual or imminent harm will be necessary to allow standing to sue. But expect plaintiffs to focus on the opinion’s language concerning Congress’ ability to pass a law that both provides a statutory protection and, in doing so, identifies the harm, which is protected by the right.

Impact on Class Actions

Spokeo has benefits to those defending class claims under these statutes. Even if the plaintiff can demonstrate a particularized and concrete injury that is actual or imminent, that same harm injury may not easily carry over to the class. The injury may be so unique to the class representative’s individual circumstances that even if the defendant’s conduct violated the statute, persons who do not share similar or specialized circumstances are not harmed.

State Court Litigation Option

The Court’s decision is limited to standing in federal courts. Many of the federal laws impacted, such as the FDCPA, TCPA, FCRA and EFTA, can also be brought in state courts. It will be up to each state to decide whether their courts can hear claims where there is no actual or imminent harm (tangible or statutorily identified) to the plaintiff. Comments from Justice Breyer during the Spokeo oral argument touched on states having “public action” statutes that allow persons to bring claims for statutory violations even where they have suffered no injury.

Moving Ahead with Spokeo

While Spokeo does not require only real, tangible harms in all cases, it does limit a wide array of claims and makes clear that not all alleged statutory violations are accompanied by a cognizable, statutory harm. Expect Spokeo to quickly make its way into consumer financial services litigation. The next few months should see several trial court decisions that will flesh out whether certain statutory protections themselves identify harms sufficient alone for standing or whether those violations require additional, real world harms. Also, because a lack of standing can be raised at any time during the life of a case, several appeals courts may right now be looking at Spokeo’s application to matters before them.