Sunday, October 14, 2018

FYI: 5th Cir Confirms MERS Assignment Not Defective Due to Dissolution of Originating Lender

The U.S. Court of Appeals for the Fifth Circuit recently held that a purported defect in the assignment of a security instrument — that it was executed solely as "nominee," and not as beneficiary – did not affect the rights of the beneficiary and its successors and assigns to foreclose the subject property, and entered judgment in favor of the mortgagee.

 

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

 

In May 2007, a lender ("Lender") extended a mortgage loan, evidenced by a promissory note executed by the borrower and secured by a Texas Home Equity Security Instrument ("Deed of Trust") to the borrower and his wife's ("Borrowers") property.  Mortgage Electronic Registration Systems, Inc. ("MERS") was the named beneficiary in the Deed of Trust.

 

The Lender later was dissolved and its assets were transferred to a related entity ("Lender's Successor"), and eventually placed in receivership by the FDIC, who sold substantially all of its assets to another bank in the spring of 2009.  Borrowers made their loan payments until December 2009, when their last attempted payment was returned.

 

In January 2011, MERS assigned the Deed of Trust to a different entity ("Trustee").  The next month, the mortgage servicer for the Trustee ("Servicer") notified Borrowers that the mortgage loan was being accelerated for failing to cure the default.  Borrowers still did not make any payments.

 

In April 2011 the Trustee filed a declaratory action in federal district court seeking authorization to conduct a non-judicial foreclosure sale of the Borrower's property pursuant to Texas law.  Following a bench trial, the presiding magistrate judge concluded that the assignment was void and invalid, and the Trustee as assignee did not possess the right to foreclose the Deed of Trust.

 

On appeal by the Trustee, the Fifth Circuit concluded that the magistrate incorrectly concluded that when MERS' assignment of the Deed of Trust to the Trustee as 'nominee for [Lender],' did not provide authorization for it to assign the Deed of Trust. 

 

To the contrary, the Fifth Circuit held that, under Texas law and federal precedent, because MERS was named beneficiary on the original Deed of Trust, it had the authority to transfer its right to bring a foreclosure action to a new mortgagee by valid assignment, and did so in this instance.  Deutsche Bank Nat'l Tr. Co. v. Burke, 655 F. App'x 251, 252 (5th Cir. 2016). 

 

Importantly, the Appellate Court further explained that merely because "the assignment did not state that MERS was acting in its capacity as beneficiary does not change our analysis," and it had "not found a single case from any Texas state court that has made this distinction." Id. at 254, n.1.  Accordingly, the final judgment in Borrower's favor was vacated and remanded with instructions to determine whether the Mortgagee met the remaining requirements to foreclose under Texas law.  Id.

 

On remand, while acknowledging that the Borrowers' remaining challenges to foreclosure lacked merit, the trial court magistrate judge defied the mandate and contravened the law of the case doctrine by concluding that the Fifth Circuit committed error in its prior opinion, and that failure to correct the error would result in manifest injustice. 

 

Specifically, the trial court determined that the Fifth Circuit "clearly erred" in concluding that MERS assigned the Deed of Trust because it executed the assignment as "nominee," suggesting it was acting only in an agency capacity for a principal, rather than its capacity as beneficiary.  Because the Lender's Successor was placed in receivership prior to assignment and the Trustee failed to show that the FDIC, as receiver, sold the loan to another bank, the magistrate further concluded that there was no existing successor. 

 

Thus, the magistrate judge concluded that no existing principal existed capable of assigning a right to foreclosure, and MERS' purported assignment of such right as "nominee" was "void and absolutely invalid."  The Trustee timely appealed.

 

On the instant appeal, review of the magistrate judge's interpretation of the prior remand order was de novo, including whether the law-of-the-case doctrine or mandate rule (requiring a trial court to effect the appellate mandate) determined any of the lower court's actions on remand. Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 453 (5th Cir. 2007) (quoting United States v. Elizondo, 475 F.3d 692, 695 (5th Cir. 2007)).  The instant second panel explained that it would only "reexamine issues of law addressed by a prior panel opinion in a subsequent appeal of the same case" if "(i) the evidence on a subsequent trial was substantially different, (ii) controlling authority has since made a contrary decision on the law applicable to such issues, or (iii) the decision was clearly erroneous and would work a manifest injustice," noting that the third exception has rarely been employed.  Hopwood v. Texas, 236 F.3d 256, 272 (5th Cir. 2000).

 

Here, the trial magistrate judge construed this third exception to the law of case doctrine as a license to disagree with the Fifth Circuit if it was "clearly erroneous" and would "work a manifest injustice" if not overruled.  However, the Fifth Circuit reasoned that such conduct "would lead to chaos if routinely done," and that even if the trial court had the authority to overrule the very legal point previously decided on appeal, absence intervening law or new facts, this case did not represent such extraordinary circumstances.  Id. at 272-273.

 

The Appellate Court noted that MERS indisputably had authority to assign its beneficiary rights under the Deed of Trust to the Bank under its permissible role as beneficiary and nominee thereunder, and validly did so despite its description as "nominee" on the assignment.  Harris Cty. V. MERSCORP Inc., 791 F.3d 545, 558-59 (5th Cir. 2015). 

 

Even if acting only as nominee, it was still not erroneous to conclude that MERS validly assigned the Deed of Trust on behalf of an existing successor of Lender's Successor (as the trial court purported), because the FDIC necessarily had power to assign the rights under the note, including foreclosure rights.  12 U.S.C. § 192; Concierge Nursing Ctrs., Inc. v. Antex Roofing, Inc., 433 S.W.3d 37, 45 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) ("The word 'assign' or 'assignment' in its most general sense means the transfer of property or some right or interest from one person to another.").

 

Lastly, the Fifth Circuit held that even if its prior opinion were "dead wrong," no manifest injustice would result from following the mandate — to the contrary, the Appellate Court noted, the Borrowers continued to live in the home without making payments since December 2009.  

 

Because it was undisputed that MERS as beneficiary under the Deed of Trust had the right to initiate foreclosure proceedings and transfer that right via valid assignment, the purported defect in the assignment as declared by the magistrate judge did not change the fact that MERS and its successors and assigns were entitled to foreclose Borrower's property, and no injustice would occur in allowing the foreclosure to proceed.

 

Accordingly, the Fifth Circuit reversed and rendered judgment in favor of the Trustee.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Tuesday, October 9, 2018

FYI: 11th Cir Rejects Borrower Challenges Alleging Lender Placed Insurance Overcharges and Kickbacks

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the dismissal of consolidated putative class action cases against mortgage loan servicers and an insurance company, holding that the filed-rate doctrine barred the plaintiffs' claims.

 

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

 

The plaintiffs in the two trial court cases, consolidated on appeal, alleged that their mortgage loan servicers breached the loan documents and the implied covenant of good faith and fair dealing by supposedly overcharging for "force-placed" insurance" ("FPI") when the borrowers failed to maintain the coverage required by the mortgage to protect the lender's security interest.  The claims also included allegations that the insurance company gave the servicers "rebates" or "kickbacks" that were not passed on as savings to the borrowers.

 

In addition, the plaintiffs alleged that the servicers "colluded" with the insurance company "to disguise the alleged overcharges as legitimate expenses" in violation of the federal Truth in Lending Act, 15 U.S.C. § 1601, tortiously interfered with an existing business relationship, were unjustly enriched and violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c), (d), and the Florida Deceptive and Unfair Trade Practices Act, § 501.201, Fla. Stat.

 

In one case, the lead plaintiff's insurance coverage lapsed in June of 2014. The servicer sent him a letter informing him that he needed to obtain coverage from an insurer or agent of his choosing and warned that if he failed to do so, the servicer would purchase coverage on his behalf, which would likely be much more expensive.

 

One month later, the servicer sent a second letter, which "included an insurance binder that disclosed the annual premium of the policy that [the servicer] would purchase if it did not receive proof of coverage."

 

The plaintiff borrower again failed to provide proof of coverage, so in August of 2014 the servicer purchased coverage from the defendant insurance company, which issued a one-year FPI policy. The borrower eventually purchased voluntary coverage in June of 2015.

 

The plaintiffs in the other consolidated case had similar experiences, except three were also told in writing that if FPI was purchased, "an affiliate could earn commissions or income from the transaction."

 

The defendants in both cases moved to dismiss the complaint, arguing that the plaintiffs' claims were barred by the filed-rate doctrine, which "precludes any judicial action which undermines agency rate-making authority." The trial court agreed and dismissed the cases for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The plaintiffs appealed.

 

On appeal, the insurer and one of the servicers moved to consolidate the appeals, which motion was granted.

 

The Eleventh Circuit explained that the filed-rate doctrine prohibits a "regulated entity" from charging more than the rate approved by the administrative agency authorized by law to determine the rate.

 

"Two rationales underlie the doctrine. The first, which is known as the 'nondiscrimination principle,' is that all rate-payers should be charged the same rate for the regulated entity's service. … The second, which is termed the 'nonjusticiability principle,' is that duly-empowered administrative agencies should have exclusive say over the rates charged by regulated entities because agencies are more competent than the courts at the rate-making process. … These two principles are 'applied strictly, meaning that the filed-rate doctrine bars 'a plaintiff from brining a cause of action even in the face of apparent inequities …."

 

The doctrine applies if either policy rationale "is implicated by the cause of action the plaintiff seeks to pursue."

 

The Court further explained the filed-rate doctrine bars two types of lawsuits: direct challenges to the filed rate and "facially-neutral challenges—i.e., any cause of action that is not worded as a challenge to the rate itself…." The latter "are barred when an award of damages 'would, effectively, change the rate paid by the customer-[plaintiff] to one below the filed rate paid by other customers' or 'would, in effect, result in a judicial determination of a reasonableness of that rate[.]'" The court took pains to point out that it doesn't matter "whether the plaintiff is a rate-payer."

 

The Eleventh Circuit then established a "simple framework … for determining whether the filed-rate doctrine bars a cause of action. First, we examine whether the complaint facially attacks a filed rate. … Second, if the complaint does not facially attack a filed rate, we must ask whether it implicates the nonjusticiability principle by challenging the components of a filed rate."

 

The Court then addressed "the dissent's claim that we should not apply the filed-rate doctrine." 

 

First, the majority explained that it had already made clear in its opinion in Taffett that the filed-rate doctrine applies equally to federal and state regulatory agencies.

 

Second, in response to the dissent's argument that the majority opinion did not analyze state law to determine whether the Florida and Pennsylvania had given their regulatory agencies the power to determine the reasonableness of the rate, the majority gave a "quick overview" of its "discussion in Taffett of Alabama's and Georgia's utility rate-making regimes—to help frame the ensuing Erie guess…."

 

Having concluded that the filed-rate doctrine existed in Alabama and Georgia, the majority turned to Florida, concluding that it "has enacted a similar regime with respect to insurance rates." For similar reasons, it made the same "educated guess regarding the determination of the appellate courts of Pennsylvania."

 

The Eleventh Circuit majority then reasoned that although the plaintiffs argued on appeal that they were not challenging the reasonableness of the defendant insurer's rates, "the complaints belie this claim" because, most obviously, "the plaintiffs repeatedly state that they are challenging [the insurer's] premiums." "[A]nd since these premiums are based upon rates filed with state regulators, plaintiffs are directly attacking those rates as being unreasonable as well."

 

The Court concluded that the plaintiffs "complaints therefore contain textbook examples of the sort of claims that we have previously held are barred by the nonjusticiability principle."

 

Accordingly, the Eleventh Circuit affirmed the trial court's dismissal for failure to state a claim and, incidentally, also denied a motion for judicial notice filed the loan servicer and insurer as moot.

 

One of the three appellate judge wrote a dissent longer than the opinion, arguing that first, the case should be certified "to the supreme courts of Pennsylvania and Florida and ask whether they have adopted the filed rate doctrine in some form. Second, assuming that the file rate doctrine applies in its unadulterated federal form, it does not bar a breach-of-contract claim that does not challenge a filed rate. Third, the filed rate doctrine does not—and should not—extend to lenders who are not regulated by rate-setting agencies, are not required to file rates, are not sellers of filed rates."

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Thursday, October 4, 2018

FYI: 3rd Cir Holds Statement That Debt Forgiveness "Might" Be Reported to IRS Might Violate FDCPA

The U.S. Court of Appeals for the Third Circuit held that a statement in a letter to the effect that forgiveness of the debt "might" be reported to the Internal Revenue Service ("IRS") may constitute a violation of the federal Fair Debt Collection Practices Act ("FDCPA").

 

In so ruling, the Court reiterated that "even if the language in a letter is true, it can still be deceptive where 'it can be reasonably read to have two or more different meanings, one of which is inaccurate.'" 

 

Accordingly, the Third Circuit reversed the trial court's dismissal of the action and remanded for further proceedings.

 

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

 

The defendant debt collector ("Collector") sent six letters on separate dates to the plaintiffs ("Consumers") attempting to collect various outstanding debts that had been outsourced to the Collector for collection after the Consumers defaulted on them. 

 

Each letter offered to settle the amount of indebtedness for less than the full amount owing, and contained the following language: "We are not obligated to renew this offer.  We will report forgiveness of debt as required by IRS regulations.  Reporting is not required every time a debt is canceled or settled, and might not be required in your case."

 

Since the Department of Treasury only requires an entity or organization to report a discharge of indebtedness of $600 or more to the IRS, and because each of the debts linked to the Consumers was less than $600, the Consumers claimed that the inclusion of the foregoing language was "false, deceptive and misleading" in violation of the FDCPA.

 

The Consumers filed a putative class action complaint on behalf of themselves and others similarly situated asserting violations of the FDCPA.

 

The Collector moved to dismiss on the ground that the Consumers failed to plead a plausible violation of the FDCPA.  The trial court granted the Collector's motion, and the Consumers appealed.

 

On appeal, the Third Circuit first examined the language of section 1692e of the FDCPA, which provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 

 

The Court explained that whether a collection letter is "false, deceptive, or misleading" under section 1692e is determined from the perspective of the "least sophisticated consumer."  

 

The Consumers argued that the language in the letters presented a false or misleading view of the law, which was designed to intimidate them into paying the outstanding debts listed on the debt collection letters even though the Collector knew that any discharge of the Consumers' debt would not result in a report to the IRS.

 

The Third Circuit agreed, noting that "the reporting requirement under the [IRS] code is wholly inapplicable to the [Consumers'] debts because none of them totaled $600 or more, and IRS regulations clearly state that only discharges of debt of $600 or more 'must' be included on a Form 1099-C and filed with the IRS." 

 

Thus, "[b]y including the reporting language on collection letters addressing debts of less than $600, we believe the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of the amount discharged, may be reportable." 

 

The Collector argued that in order to conclude that a consumer would be misled, one would have to read the first sentence in isolation while paying no attention to the qualifying statement that "[r]eporting is not required every time a debt is canceled or settled, and might not be required in your case." 

 

The Third Circuit disagreed, ruling that "even with this qualifying statement, the least sophisticated debtor could be left with the impression that reporting could occur," when "there was no possibility of IRS reporting in light of the fact that the debt was less than $600." 

 

The Collector further argued that the word "might" in the letters should signal to the least sophisticated debtor that only under certain circumstances would reporting occur.

 

The Court again disagreed, noting that for the Consumers, "under no set of circumstances will reporting ever occur."  The Third Circuit pointed to prior rulings that "even if the language in a letter is true, it can still be deceptive where 'it can be reasonably read to have two or more different meanings, one of which is inaccurate.'" 

 

Thus, the Court held that the Consumers "pled sufficient factual allegations that state a plausible claim upon which a court may grant relief under the FDCPA," and therefore remanded the matter for further proceedings in the trial court.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

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and

 

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California Finance Law Developments 

 

Tuesday, October 2, 2018

FYI: 11th Cir Upholds Dismissal and Suggests Sanctions for "Shotgun Pleading"

The U.S. Court of Appeals for the Eleventh Circuit recently rejected an attempt by homeowners to collaterally attack a state court mortgage foreclosure judgment, affirming the trial court's dismissal of an amended complaint with prejudice for failure to state a claim, but on alternative grounds.

 

More specifically, the Court upheld the dismissal on the grounds that, "by attempting to prosecute an incomprehensible pleading to judgment, the plaintiffs obstructed the due administration of justice" in the trial court, and by trying to defend the fatally defective complaint on appeal. The Court also ordered plaintiffs' counsel to show cause why he should not have to pay the defendants' double costs and expenses, including appellate attorney's fees, for filing a frivolous appeal.

 

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

 

One day after the foreclosure sale of their home, the plaintiff homeowners sued their lender, loan servicer, and MERS in state court in Alabama, attempting to assert 14 claims under Alabama and federal law.

 

The complaint was poorly written, making it difficult for each of the defendants to frame their answer. The gist of the complaint was that the servicer improperly declared the plaintiffs in default on their mortgage and stopped accepting their payments without providing an explanation. The plaintiffs sought a declaratory judgment that the plaintiffs were not in default on their loan, prohibiting the foreclosure plus compensatory and punitive damages for the mental anguished caused the allegedly wrongful foreclosure.

 

The defendants removed the case to the federal trial court and moved for a more definite statement under Federal Rule of Civil Procedure 12(e), arguing the complaint was a "shotgun" pleading that lumped all of the factual allegations into each count by incorporation, did not differentiate between the defendants omitted key chronological facts.

 

The trial court granted the motion and gave the plaintiffs 21 days to serve an amended complaint. On the due date, the plaintiff's counsel moved for a 7-day extension of time due to illness, which the magistrate judge granted.

 

Five days after the expiration of the extended deadline, plaintiff's counsel moved for another 7-day extension based on an illness and in the family, which the magistrate judge granted given the defendants' lack of opposition.

 

The plaintiffs timely filed their amended complaint, but it contained only minor changes and suffered from the same basic lack of clarity as before, but was even longer, two additional counts having been added.

 

One of the defendants answered the amended complaint, denying the material allegations and raising failure to state a claim as an affirmative defense. The others moved to dismiss on the same failure to state a claim basis as before.

 

On the due date of the plaintiffs' response, their attorney moved for a 7-day extension because he had been out-of-town for hearings. Because the motion was unopposed, judge granted it.

 

The plaintiffs filed their response to the motion to dismiss and the magistrate judge issued a report recommending dismissal of the amended complaint against the three moving defendants for failure to state a claim.

 

The plaintiffs objected to the magistrate judge's report and recommendation, but just before the judge was set to rule, they moved for leave to file a second amended complaint. Shortly thereafter, the defendant that had answered moved for judgment on the pleadings.

 

The trial court denied the plaintiff's motion to leave to amend, adopted the magistrate judge's report and recommendation, and dismissed the amended complaint with prejudice as to the three moving defendants. The plaintiffs then stipulated to dismissal of the amended complaint against the remaining defendant that had answered. The following day, the trial court entered final judgment, from which the plaintiffs appealed.

 

On appeal, the plaintiffs' counsel continued his tricks, moving six times to extend the deadline to file the initial brief for various reasons. The appellate court granted all six motions, setting a final deadline, which plaintiffs' counsel was unable to meet due to alleged difficulty uploading the brief. The brief was finally filed more than 3 months after it was originally due.

 

The defendants filed their response brief, but plaintiffs' counsel requested four extensions to file the reply brief, all of which were granted, and the reply brief was finally filed.

 

The Eleventh Circuit quickly affirmed the trial court's dismissal, but on different grounds, explaining that "[t]he amended complaint is an incomprehensible shotgun pleading … making it nearly impossible for Defendants and the Court to determine with any certainty which factual allegations give rise to which claims for relief. As such, the Amended Complaint patently violated Federal Rule of Civil Procedure 8, which requires a plaintiff to plead 'a short and plain statement of the claim showing that the pleader is entitled to relief.''

 

The Court went on to reiterate its prior decisions rejecting the "vices" of shotgun pleadings such as additional expense and delay in the administration of justice. "Tolerating such behavior constitutes toleration of obstruction of justice … [which] is why a trial Court retains authority to dismiss a shotgun pleading on that basis alone."

 

The Eleventh Circuit then pointed out that a trial court must give a plaintiff one chance to remedy any noncompliance with Rule 8(a) and the plaintiffs were provided that opportunity. "What matters is function, not form: the key is whether the plaintiff had fair notice of the defects and a meaningful chance to fix them. If that chance is afforded and the plaintiff fails to remedy the defects, the trial court does not abuse its discretion in dismissing the case with prejudice on shotgun pleading grounds."

 

In concluding, the Appellate Court cited Federal Rule of Appellate Procedure 38, which allows the court of appeals to "award just damages and single or double costs to the appellee" if it determines that an appeal is frivolous.

 

Because plaintiffs' counsel was on notice of the Court's precedent regarding shotgun pleadings due to the case law cited in the defendants' motion to dismiss, yet persisted and then added insult to injury by appealing his incomprehensible complaint, the court concluded that "[t]his constitutes an abuse of judicial process, a 'deliberate use of a legal procedure, whether criminal or civil, for a purpose for which it was not designed.'"

 

The Eleventh Circuit affirmed the trial court's judgment, and ordered the plaintiffs' counsel to show cause why he should not have to pay the appellees "double costs and their expenses, including the attorney's fees they incurred in defending these appeals."

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

Sunday, September 30, 2018

FYI: 8th Cir Holds CAFA Amount In Controversy Includes Future Attorney's Fees Incurred After Removal

The U.S. Court of Appeals for the Eighth Circuit held that the plaintiff could not defeat federal jurisdiction under the Class Action Fairness Act ("CAFA") based on a pre-class certification damages stipulation limiting attorneys' fees to ensure that the amount in controversy remained under CAFA's $5 million jurisdictional limit. 

 

In so ruling, the Eighth Circuit affirmed the trial court's finding that the amount in controversy for jurisdiction under the CAFA includes the amount of future attorneys' fees based on the expected length of the litigation, the risks and complexity involved, and the hourly rates charged.

 

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

 

Following a three year investigation, the National Highway Traffic Safety Administration ("NHTSA") requested that an automobile manufacturer initiate a safety recall of two kinds of SUV vehicles that faced an increased likelihood of dangerous fires in rear crashes.

 

The manufacturer responded by issuing a press release contesting the NHTSA's findings and stated that the vehicles were "safe and not defective."  Two weeks later, the manufacturer issued a second press release announcing that it had agreed with the NHTSA to a limited recall to install a trailer hitch assembly, which it asserted would improve vehicle performance in low speed accidents.

 

A consumer purchased a 2003 SUV from an unrelated third party in August of 2013, two months after the manufacturer's press releases.  The consumer did not see the press releases until months after purchasing the vehicle.

 

In June 2015, the consumer filed a filed a putative class action on behalf of all purchasers of the relevant SUV vehicles in the State of Missouri since June 4, 2013 (the date of the first press release). 

 

The consumer alleged that the manufacturer's statements that the vehicles were "safe" and "not defective" were false and misleading and violated the Missouri Merchandising Practices Act ("MMPA").  The consumer also alleged that the manufacture's proposed trailer hitch assembly did not remove the vehicles' safety defects and suggested that an appropriate remedy required the installation of a "fuel shield/skid plate."

 

The manufacturer removed the case to federal court under CAFA.  As you may recall, "CAFA provides the federal district courts with 'original jurisdiction' to hear a 'class action' if the class has more than 100 members, the parties are minimally diverse, and the 'matter in controversy exceeds the sum or value of $5,000,000.'"  Standard Fire Ins. Co. v. Knowles, 568 U.S. 588, 592 (2013) (quoting 28 U.S.C. § 1332(d)(2), (d)(5)(B)).

 

The consumer sought remand, arguing that CAFA's amount-in-controversy requirement was not satisfied.

 

The trial court determined that by a preponderance of the evidence, the "benefit of the bargain" damages alleged in this case exceeded $5,000,000 dollars if calculated as either the total value of overpayment or diminution in value damages.  The trial court reached this conclusion by finding that 8,127 unique vehicles were potentially within the class and that the average sale price of a relevant vehicle was $6,638.  Based on these facts, the trial court concluded that a reasonable jury could find damages in excess of the CAFA jurisdictional limit.

 

The consumer filed an amended complaint and argued that the court lacked subject matter jurisdiction because Missouri law required "benefit-of-the-bargain" damages to be calculated as the lesser of diminution in value or cost of repair.  Asserting that the proposed fuel shield/skid plate repair could be implemented for as little as $320 a vehicle, the consumer argued the amount in controversy would be far under CAFA§s $5,000,000 jurisdictional limit.

 

The trial court recognized that it had not fully explained the alternative damages under the MMPA, and entered an order clarifying its previous denial of remand. 

 

In the clarifying order, the trial court found that compensatory damages under the consumer's proposed measure of damages could total $3,605,010.  However, the trial court also concluded that the $5,000,000 jurisdictional limit was satisfied when including potential attorneys' fees, which it found could well exceed $1,400,000.  The court further held that a stipulation to limit attorneys' fees to ensure the amount in controversy remained under $5,000,000 did not alter the amount in controversy as a matter of law.

 

The trial court granted summary judgment in favor of the manufacturer, holding that the manufacturer's alleged misrepresentations were not made "in connection with" the consumer's purchase of his SUV.  The court denied the motion to certify the class without prejudice, indicating that the motion could be renewed within thirty days of the order.

 

The consumer appealed, challenging both subject matter jurisdiction under CAFA and the merits resolution of his claims.

 

The Eighth Circuit began its analysis with the stipulation limiting attorneys' fees and how that factored into the trial court's calculation of the amount in controversy. 

 

In analyzing the issue, the Eight Circuit acknowledged that in Rolwing v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012), a prior panel held that a damages stipulation could preclude removal under CAFA .  However, the Eighth Circuit observed that in Standard Fire, the Supreme Court concluded that precertification damages stipulations cannot defeat CAFA-jurisdiction because absent and unbound class members might later enlarge the scope of recovery beyond the stipulated amounts.  Standard Fire, 568 U.S. at 593. 

 

The Eighth Circuit noted that Standard Fire raised serious questions about the continued validity of Rolwing and it found no reason to apply a different rule to a stipulation limiting the amount of attorneys' fees in order to defeat CAFA jurisdiction.  Thus, the Eight Circuit held that the trial court properly included the jurisdictional amount the attorneys' fees that may be awarded.

 

The Eighth Circuit then observed that the trial court made findings on the total cost of repair damages based on the proof submitted by each side, which were an available form of damages under the MMPA.  The trial court also determined that attorneys' fees could exceed $1.4 million based on the expected length of the litigation, the risk and complexity involved in the case, and the hourly rates charged. 

 

In the Eight Circuit's view, the record supported the trial court's finding that the sum of the total repair cost (including labor and parts) of $3,605,010 and potential attorneys' fees would exceed $5,000,000.

 

Further, the Eight Circuit determined that the record supported the trial courts finding that the consumer's purchase had no relationship with the alleged misrepresentation.  Although actual reliance on the seller's misrepresentation by the buyer was not required, the Eighth Circuit agreed with the trial court that evidence of some factual connection between the misrepresentation and the purchase was required. 

 

Accordingly, the Eighth Circuit affirmed the trial court's denial of the motion to remand and grant of summary judgment for the manufacturer.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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