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7th Cir. Reduces Punitive Damage Award Against Mortgage Servicer by Over 80%

The U.S. Court of Appeals for the Seventh Circuit recently reversed as excessive a jury’s award of $3 million in punitive damages against a mortgage servicer for inadequate recordkeeping, misapplication of payments, and poor customer service.

However, the Court affirmed the jury’s award of $582,000 in compensatory damages and remanded the case to the trial court with instructions to reduce the punitive damages award to $582,000, a 1:1 ratio of compensatory to punitive damages.

A copy of the opinion in Saccameno v. U.S. Bank National Association is available at:  Link to Opinion.

A borrower filed a Chapter 13 bankruptcy case and complied with the reorganization plan by curing her mortgage default and making 42 monthly payments. The loan servicer provided her with statements showing she was not only current, but had actually paid more than what was required. Accordingly, the bankruptcy court granted her a discharge.

Unfortunately, despite this, the servicer tried to collect money that was not actually owed after the bankruptcy discharge.

One problem was that an employee mistakenly treated the discharge as a dismissal of the bankruptcy case, which meant that the bankruptcy stay had been lifted and no obstacle remained to collecting the borrower’s allegedly delinquent amount owed.

Another problem was that the servicer “manually set the due date for [debtor’s] plan payments to September 2013. … That manual setting took place in a bankruptcy module that overrode and hid [the servicer’s] active foreclosure module, which instead reflected that [the debtor] had not made a single valid payment in 2013, as each check was being placed into a suspense account and not being applied to the loan.” By incorrectly treating the bankruptcy discharge as a dismissal, the foreclosure module was re-activated. If this had not occurred, “then someone in [the servicer’s] bankruptcy department would have reconciled the plan payments with the suspense accounts before closing both modules.”

The borrower repeatedly provided paperwork showing she was current and requested an explanation. The servicer maintained its position and refused to provide an explanation.

The servicer began rejecting the borrower’s payments in September of 2013 “because each payment was not enough to cure her supposed default.” It also filed a foreclosure action in state court.

The borrower filed suit in federal court, seeking “damages under four legal theories: breach of contract, for the refused payments; the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, for the false collection letters; the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601, for the inadequate responses to [debtor’s] inquiries; and the [Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA)].”

The state UDAP claim “related to [the servicer’s] false oral and written statements regarding [debtor’s] default and its unfair practices in violation of consent decrees that [the servicer] previously had entered with various regulatory bodies. These decrees addressed, among other things, its inadequate recordkeeping, misapplication of payments, and poor customer service. Among the steps [the servicer] had consented to take was to track Chapter 13 plan payments accurately and to reconcile its accounts on discharge or dismissal.”

The case went to trial and the jury awarded the debtor “substantial damages for the pain, frustration, and emotional torment [the servicer] put her through.” Specifically, the jury awarded “$500,000 in compensatory damages based on three causes of action that could not support punitive damages” and $3 million in punitive damages plus an additional $82,000 in compensatory damages under the ICFA.

The servicer filed three post-trial motions. “The first, a motion for new trial, objected to the admission of the consent decrees. The second, a request for judgment as a matter of law, challenged the sufficiency of the evidence on every count other than the FDCPA claim[, arguing ] that the award of punitive damages was not supported by sufficient evidence. The third motion, to amend the judgment, argued that the punitive damage amount was excessive, in violation of the Due Process Clause.”

The trial court denied all three motions.

On appeal to the Seventh Circuit, the servicer challenged only the punitive damages award, which it argued was “so large that it deprives the company of property without due process of law.”

The Appellate Court first addressed the servicer’s “argument that there was insufficient evidence for the jury to award punitive damages at all[,]” explaining that “[u]nder Illinois law, punitive damages may be awarded only if ‘the defendant’s tortious conduct evinces a high degree of moral culpability, that is, when the tort is ‘committed with fraud, actual malice, deliberate violence or oppression, or when the defendant acts willfully, or with such gross negligence as to indicate a wanton disregard of the rights of others.’ … When the defendant is a corporation, … the plaintiff must demonstrate also that the corporation itself was complicit in its employees’ tortious acts.”

The Seventh Circuit rejected the servicer’s argument, finding that “[w]e are not sure how many human errors a company like [the servicer] gets before a jury can reasonably infer a conscious disregard of a person’s rights, but we are certain [the servicer] passed it.”

This is because the servicer “still has offered no real explanation for any of the errors its employees made, and never acted to correct its mistakes. This ‘unwilling[ness] to take steps to determine what occurred’ warranted punitive damages under the ICFA. The utter lack of explanation also supports a finding of corporate complicity” because it amounted to the company’s ratification of its employees’ errors and refusal to correct them. “The jury was not required to accept [the servicer’s] bare assertion that this was a unique case — especially considering the consent decrees implying it was not — and could have inferred that this is just how [the servicer] does business. For that Illinois law permits punitive damages.”

Turning to the servicer’s argument that the punitive damages award was unconstitutionally excessive, the Seventh Circuit reasoned that while the federal constitution was the outer limit on a state court’s award of punitive damages, “[a] federal court, however, can (and should) reduce a punitive damages award sometime before it reaches the outermost limits of due process.”

The Court then embarked upon an “[e]xacting de novo review of the jury’s award, in which [it] consider[ed] three guideposts: the degree of reprehensibility, the disparity between the harm suffered and the damages awarded, and the difference between the award and comparable civil penalties.”

After reviewing each guidepost, the Seventh Circuit concluded that “the $3,000,000 awarded here exceeds constitutional limits and must be reduced to $582,000.” “The number of opportunities [the servicer] had to fix its mistakes is the core fact that justifies punishment in this case.” In addition, the Court found that the servicer’s actions were more than negligent, they amounted to “reckless indifference” to the borrower’s rights, “including those rights that originated from her bankruptcy.”

However, $3 million was too much because although the servicer’s “conduct was reprehensible, [it was] not to an extreme degree. It caused no physical injuries and did not reflect an indifference to [the debtor’s] health or safety.” Also, the Court found that there was no evidence that that servicer “was acting maliciously, though the number of squandered chances it had to correct its mistakes comes close. These factors then point toward a substantial punitive damages award, but not one even approaching the $3,000,000 awarded here.”

The Seventh Circuit then turned to address the “disparity between the harm to the plaintiff and the punitive damages awarded. … This guidepost is often represented as a ratio between the compensatory and punitive damages awards.”

Although the Supreme Court of the United States has not provided strict rules clarifying how to calculate this ratio, it has provided general guidelines, including that “few awards exceeding a single-digit ratio ‘to a significant degree’ will satisfy due process. … Second, the ratio is flexible. Higher ratios may be appropriate when there are only small damages, and conversely, ‘[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit.’ … Third, the ratio should not be confined to actual harm, but also can consider potential harm.”

Applying these factors, the Court reasoned that “$582,000 is a considerable compensatory award for the indifferent, not malicious, mistreatment of a single $135,000 mortgage. Moreover, nearly all this award reflects emotional distress damages that ‘already contain [a] punitive element.’ … A ratio relative to this denominator, then, should not exceed 1:1.”

Analyzing the final “guidepost,” “the disparity between the award and ‘civil penalties authorized or imposed in comparable cases[,]’” the Court agreed with the servicer that the “$50,000 monetary penalty authorized by the ICFA” could not support a punitive damages award of $3 million because the servicer’s “actions are not so reprehensible that they might justify an award equal to the maximum penalty for 60 intentional violations. Notably, we see no evidence that [the servicer’s] actions in this case were either intentional or fraudulent, only indifferent. This aspect of the guidepost thus points to a lower award.”

Finally, the Seventh Circuit agreed the trial court correctly considered the possibility that the servicer could lose its license to service mortgages under the Illinois Residential Mortgage License Act (RMLA). First, it reasoned that “the ICFA too, allows, the attorney general to seek ‘revocation, forfeiture or suspension of any licenses … of any person to do business,’ … and though that may give way here to the more specific provisions of the RMLA, that law allows revocation of licenses for violation of ‘any … law, rule or regulation of [Illinois] or the United States,’ … presumably including the ICFA as well as RESPA.”

Second, the Court reasoned that while Illinois is not likely to take away [the servicer’s] business license for deceptively saying one customer owes a few thousand dollars on a $135,000 mortgage, no matter how unjustified the error[,] … like a criminal penalty, this weapon in Illinois’s arsenal has ‘bearing on the seriousness with which a State views the wrongful action.’ … This seriousness would be exaggerated by comparing the award here with the loss of [the servicer’s] license but would be unduly minimized by limiting an award to only the $50,000 civil penalty.”

The Court concluded that after “[c]onsidering all the factors together, we are convinced that the maximum permissible punitive damages award is $582,000. An award of this size punishes [the servicer’s] atrocious recordkeeping and service of [borrower’s] loan without equating its indifference to intentional malice. It reflects a 1:1 ratio relative to the large total compensatory award and a roughly 7:1 ratio relative to the $82,000 awarded on the ICFA claim alone, both of which are consistent with the Supreme Court’s guidance in [State Farm Mut. Auto Ins. Co. v.] Campbell. It is equivalent to the maximum punishment for less than 12, not 60, intentional violations of the ICFA, though it is also a miniscule amount compared to the value of [servicer’s] business license.”

On the final issue presented, “whether the Seventh Amendment mandates an offer of a new trial after determining the constitutional limit on the punitive damages award[,]” the Court “agree[d] with every circuit to address this question that the constitutional limit of a punitive damage award is a question of law not within the province of the jury, and thus a court is empowered to decide the maximum permissible amount without offering a new trial.”

The Seventh Circuit accordingly remanded the case to the trial court “to amend its judgment and reduce the punitive damages award to $582,000.”

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Hector E. Lora manages the firm’s Florida office and has substantial experience in all phases of complex commercial litigation, including bench and jury trials as well as appellate practice. Hector represents lenders, servicers, debt collectors and debt buyers in complex mortgage foreclosure actions, quiet title actions, federal TILA, RESPA, TCPA, and FDCPA actions and Florida FCCPA actions brought by borrowers or debtors. He also represents creditors in bankruptcy litigation, purchasers of accounts receivable or factoring companies that provide revenue-based financing to small and mid-sized businesses in collection actions, and landlords in commercial and residential evictions. Hector’s broad litigation experience includes over a decade of defending civil enforcement actions filed by the Federal Trade Commission as well as real estate contract disputes and partition actions, contested mortgage foreclosure and condominium lien foreclosure actions and the foreclosure of UCC Article 9 security interests. Hector also has advised a variety of types of businesses regarding their compliance with applicable federal and state consumer protection laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act (TCPA), the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida. For more information, see