Wednesday, May 27, 2020

FYI: 4th Cir Holds Non-Mortgage Office Was Not "Branch Office" Under HUD F2F Rule

The U.S. Court of Appeals for the Fourth Circuit recently held that a mortgagee's office that was located within 200 miles of the mortgaged property, but did not conduct any mortgage-related business, was not a "branch office" of a "mortgagee" under the HUD rule requiring a face-to-face meeting with mortgage borrowers before filing a mortgage foreclosure action unless the mortgagee does not have a branch office within 200 miles of the borrower's home.

 

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

 

The borrower purchased her home in Virginia and fell behind on her mortgage payments. The mortgagee's trustee filed a mortgage foreclosure action.

 

The borrower sued the mortgage holder and the trustee in federal court "seeking damages and rescission of the foreclosure" because the mortgagee "improperly initiated foreclosure without first offering her a face-to-face meeting, as required by regulations promulgated by the Department of Housing and Urban Development ("HUD") and incorporated into [borrower's] deed of trust."

 

The mortgagee defendants moved to dismiss the complaint, arguing that the mortgagee "was exempt from the face-to-face meeting requirement under 24 C.F.R. § 203.604(c)(2), which excuses the meeting  when the 'mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either[,]'" because the mortgagee's "Richmond office — the only one within 200 miles of [borrower's] home — conducted no mortgage-related business and was not open to the public, [and thus] did not qualify as a 'branch office' of a 'mortgagee,' and so the exception applied."

 

The trial court dismissed the complaint, concluding that the "Richmond office was not a mortgagee's 'branch office' within the meaning of 24 C.F.R. § 203.604(c)(2)[,]" reasoning that "the 'proper interpretation of a mortgagee's branch office is one where some business related to mortgages is conducted.'"

 

The borrower appealed the dismissal of her complaint.

 

On appeal, the Fourth Circuit addressed "only one question: Does a bank office qualify as a 'branch office' of a 'mortgagee' under 24 C.F.R. § 203.604(c)(2) if it does not conduct any mortgage-related business?"

 

The Court answered "no," explaining that "the regulations generally require that a mortgagee 'must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid,' and in any event, 'at least 30 days before foreclosure is commenced.'"

 

However, "there are exceptions, and the one that is relevant here applies when '[t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.'"

 

Although the mortgagee's Richmond office was less than 200 miles from the borrower's home, the Fourth Circuit reasoned that "[w]e do not think the text of § 203.604(c)(2) can be read to encompass an office at which no mortgage-related business is conducted."

 

The Court explained that this is because the words "branch office" do not "stand alone" and must be read together with the words of a 'mortgagee,' … for purposes of a regulation governing face-to-face meetings between mortgage lenders and their borrowers. In that context, we think it is clear that what is contemplated, at a minimum, is an office at which some business related to mortgages is done."

 

The Fourth Circuit also noted that its "reading also is fully consistent with the purpose of the regulatory scheme" because "[t]he face-to-face meeting regulation was promulgated under 12 U.S.C. § 1715u(a), which requires mortgagees holding federally insured loans … to 'engage in loss mitigation actions' in order to 'provid[e] an alternative to foreclosure.' The regulation advances that statutory objective by making in-person meetings available, where reasonably feasible, to facilitate the discussion of loss-mitigation options. But an office that does no mortgage-related business at all, even if within 200 miles of a mortgagor's home, will be poorly positioned to discuss the mortgage-specific loss-mitigation options by statute, such a special forbearance, loan modification, preforeclosure sale, support for borrower housing counseling, subordinate lien resolution, borrower incentives, and deeds in lieu of foreclosure.'"

 

The Court added in closing that "defining a mortgagee's 'branch office' as one that conducts mortgage-related business is broadly consistent with the functional approach taken in other banking statutes to the 'branch office' question."  For example, "[i]n Cades v. H & R. Block, Inc. we considered 12 U.S.C. § 3, which governs 'branch banks,' and recognized that an office will not qualify unless it transacts 'branch business by accepting deposits, paying checks, or lending money.'"

 

The Fourth Circuit concluded that even though the regulation at issue does define "branch office," it agreed with the trial court "that applying the same functional analysis to § 203.604(c)(2) produces a 'common sense' definition of 'branch office' consistent with the regulatory text and purpose" and affirmed "the trial court's judgment granting the defendants' motions to dismiss." 

 

 

 

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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Monday, May 25, 2020

FYI: 7th Cir Holds Putative Class Plaintiff Had Standing On "Private" Rights Claim, But Not "Public" Rights Claim

The U.S. Court of Appeals for the Seventh Circuit recently reversed a trial court's order remanding a plaintiff's claims under the Illinois Biometric Information Privacy Act (BIPA) back to state court for lack of subject-matter jurisdiction because she lacked standing under Article III.

 

In so ruling, the Seventh Circuit concluded that the plaintiff's claims that a vending machine operator's collection and retention of her fingerprints without obtaining written release or proper written disclosure in violation of section 15(b) of BIPA established an invasion of personal rights both concrete and particularized to establish a concrete injury-in-fact necessary to confer standing under Article III. 

 

However, because the plaintiff's claims under section 15(a) for failure to provide a retention schedule and guidelines for permanently destroying the stored biometric information constituted a duty owed to the public generally, no particularized harm resulted to establish standing for this claim under Article III.

 

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

 

A call center employee ("Consumer") utilized a vending machine at her place of employment that did not accept cash, instead requiring users to establish an account to accept payment using fingerprints.  Fingerprints are "biometric identifiers" under the Illinois Biometric Information Privacy Act, 740 ILCS 14 (BIPA), which requires collectors of this material to obtain the written informed consent of any person whose data is acquired.

 

The Consumer filed a putative class action complaint in state court against the owner and operator of the vending machines ("Vendor") alleging violations of section 15(a) of the BIPA for never making a retention schedule and guidelines for permanently destroying the biometric identifiers and stored information publicly available, and; section 15(b) of the BIPA for never informing Plaintiff in writing that her biometric identifier (fingerprint) was being collected or stored, the specific purpose and length of term for which it was being collected, stored, and used, or obtaining a written release to collect, store, and use her fingerprint. 

 

Although the Consumer did not assert that she did not know that her fingerprint was being collected and stored, as she voluntarily created an account and regularly used the vending machines, she alleged that failure to make the requisite disclosures denied her the ability to give informed written consent as required by section 15(b) and resulted in the loss of the right for her, and others similarly situated, to control their biometric identifiers and information.

 

The Vendor removed the action to federal court under the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d), on the basis of diversity of citizenship and an amount in controversy exceeding $5 million.  The Consumer moved to remand the action back to state court on the basis that the trial court did not have subject-matter jurisdiction because she lacked the concrete injury-in-fact necessary to satisfy the federal requirement for Article III standing, but not required under Illinois state law. Rosenbach v. Six Flags Entm't Corp., 432 Ill. Dec. 654 (Ill. 2019). 

 

The trial court found that Vendor's alleged violations of sections 15(a) and (b) of the BIPA were bare procedural violations that caused the Consumer no concrete harm, and remanded the action to the state court for lack of standing. The Vendor's petition to appeal the remand order was accepted by the Seventh Circuit and the instant appeal ensued.

 

In a role reversal from arguments typically seen in such statutory violation cases, the Vendor assumed the burden of establishing the Consumer's Article III standing as the party invoking federal jurisdiction. 

 

As you may recall, to confer federal standing under Article III, a plaintiff must satisfy three requirements: (1) she must have suffered an actual or imminent, concrete and particularized injury-in-fact; (2) there must be a causal connection between her injury and the conduct complained of; and (3) there must be a likelihood that this injury will be redressed by a favorable decision. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992). 

 

Here, only the first element was at issue on appeal. As the Supreme Court explained in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), a "concrete" injury must actually exist but need not be tangible.  Spokeo at 1548-49.  While a legislature may "elevate to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law," "a bare procedural violation, divorced from any concrete harm," does not "satisfy the injury-in-fact requirement of Article III." Id.

 

The Vendor argued that the BIPA elevated a person's inherent right to control their body, including associated biometric identifiers and information, and that a violation or trespass upon this right is a concrete injury-in-fact for standing persons.  Although the Illinois Supreme Court did not consider federal Article III standing requirements, the Vendor argued that its analysis and holding in Rosenbach – that section 15(b) of BIPA confers a right to receive certain information from an entity that collects, stores, or uses a person's biometric information, and the violation of that right is a "real and significant" injury – also constitutes a "concrete" injury to confer federal standing under Article III here. Rosenbach, 432 Ill. Dec. at 663. 

 

Considering the Consumer's Article III standing under BIPA as a question of first impression, the Seventh Circuit looked to Spokeo, where the Supreme Court of the United States examined Article III standing for claims raised under the federal Fair Credit Reporting Act.  Although the SCOTUS in Spokeo did not rule one way or the other on the plaintiff's standing, instead finding that the Ninth Circuit used the wrong test for injury-in-fact and remanding for application for the proper test (Spokeo at 1548), Justice Thomas's concurrence drew a useful distinction between two types of injuries: the first arising when a private plaintiff asserts a violation of her own rights, and the second when a private plaintiff seeks to vindicate public rights.  Spokeo at 1551-52.

 

Applying this rubric, the Seventh Circuit found that the Consumer's claims that the Vendor's failure to comply with section 15(b) violated her personal privacy and rights was sufficient to show injury-in-fact without further tangible consequences, and confer Article III standing. 

 

Moreover, in analyzing the Consumer's section 15(b) claims as a type of "informational injury" — where information required by statute to be disclosed to the public is withheld — the Seventh Circuit reached the same result. 

 

Because the Vendor's alleged failure to provide obligatory Section 15(b) disclosures "deprived [Consumer] of the ability to give the informed consent section 15(b) mandates" this deprivation was a concrete injury.  See Bensman v. U.S. Forest Serv., 408 F.3d 945, 955–56 (7th Cir. 2005) (injury inflicted by nondisclosure is concrete if the plaintiff establishes that the withholding impaired her ability to use the information in a way the statute envisioned).

 

However, the Seventh Circuit reached a different conclusion as to the Consumer's claims under section 15(a), which obligates private entities that collect biometric information to make publicly available a data retention schedule and guidelines for permanently destroying collected biometric identifiers and information.  Because this duty is owed to the public generally, the Seventh Circuit concluded that the Consumer suffered no concrete and particularized injury as a result of the violation, and therefore lacked standing under Article III to pursue her section 15(a) claim in federal court.

 

Accordingly, the Seventh Circuit reversed the judgment of the trial court remanding the action to state court, and remanded the case to federal trial court for the Consumer's claim under section 15(b) of BIPA to proceed consistent with its opinion.

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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Thursday, May 21, 2020

FYI: SCOTUS Holds "But For" Causation Required to Plead § 1981 Race Discrimination Claim

The Supreme Court of the United States recently held that to prevail in a claim for racial discrimination under 42 U.S.C. § 1981, "a plaintiff must plead and ultimately prove that, but for race, it would not have suffered the loss of a legally protected right."

 

In so ruling, the Court vacated the judgment of the U.S. Court of Appeals for the Ninth Circuit and remanded for further proceedings to determine whether the amended complaint contained "sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face under the but-for causation standard."

 

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

 

An African-American owned entertainment company (the "network") wanted to have "one of the nation's largest cable television conglomerates [the cable TV company], carry its channels." The cable TV company refused, allegedly due to "lack of demand for [the media company's] programming, bandwidth constraints, and its preference for news and sports programming that [the network] didn't offer."

 

When negotiations stalled, the network sued "seeking billions in damages" and alleging that the cable TV company "systematically disfavored '100% African American-owned media companies'" and thereby "violated 42 U.S.C. § 1981(a), which guarantees, among other things, '[a]ll persons … the same right … to make and enforce contracts .. as is enjoyed by white citizens.'"

 

The cable TV company moved to dismiss and the trial court granted the motion for failure to state a claim. The plaintiff twice tried to amend its complaint, "[b]ut each time, the court concluded, [plaintiff's] efforts fell short of plausibly showing that, but for racial animus, [the cable TV company] would have contracted with [plaintiff]." The trial court eventually found "that further amendments would prove futile and entered a final judgment for [defendant]."

 

On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed because the trial court "used the wrong causation standard when assessing [plaintiff's] pleadings. A § 1981 plaintiff doesn't have to point to facts plausibly showing that racial animus was a 'but for' cause of the defendant's conduct. Instead, … a plaintiff must only plead facts plausibly showing that race played 'some role' in the defendant's decision making process."

 

The Supreme Court of the United States agreed to hear the case on petition for certiorari because of a split between the Ninth and Seventh Circuits.  The U.S. Court of Appeals for the Seventh Circuit previously held that "to be actionable, racial prejudice must be a but-for cause … of the refusal to transact."

 

The SCOTUS began by explaining that "[i]t is 'textbook tort law' that a plaintiff seeking redress for a defendant's legal wrong typically must prove but-for causation. … This ancient and simple … causation test … supplies the 'default' or 'background' rule against which Congress is normally presumed to have legislated when creating its own new causes of action."

 

The plaintiff argued that § 1981 created an exception to the "but-for" causation rule, and that at the pleading stage, "a § 1981 plaintiff only bears the burden of showing that race was a 'motivating factor' in the defendant's challenged decision[.]"

 

After examining "the statute's text, its history, and [its] own precedent[,]" the Court concluded "that § 1981 follows the general rule [and] a plaintiff bears the burden of showing that race was a but-for cause of its injury" both at the pleading stage and at trial.

 

The Court explained that "Congress passed the Civil Rights Act of 1866 in the aftermath of the Civil War to vindicate the rights of former slaves. … While the statute's text does not expressly discuss causation, it is suggestive."

 

The SCOTUS reasoned that the fact that the statute guarantees the "same right … as is enjoyed by white citizens" leads one to ask "what would have happened if the plaintiff had been white? This focus fits naturally with the ordinary rule that a plaintiff must prove but-for causation. … Nor does anything in the statute signal that this test should change its stripes (only) in the face of a motion to dismiss."

 

Turning to "[t]he larger structure and history of the Civil Rights Act of 1866[,]" the Court explained that while nothing in the statute expressly created a private right of action "to enforce the right to contract[,]" the Court "created a judicially implied private right of action" in 1975, "a period when the Court often 'assumed it to be a proper judicial function to provide such remedies as are necessary to make effective a statute's purpose.'"

 

Times have changed, the Court went on, because "we have come to appreciate that '[l]ike substantive federal law itself, private rights of action to enforce federal law must be created by Congress' and '[r]aising up causes of action where a statute has not created them may be a proper function for common law courts, but not for federal tribunals.'"

 

The SCOTUS looked to the fact that Congress provided for "criminal sanctions in a neighboring section" for violations "on account of" or "by reason of" a person's race as support for its conclusion that nothing in the statute "hint[s] that a different and more forgiving rule might apply at one particular stage in the litigation[,]" and, thus, "it would be more than a little incongruous for us to employ the laxer rules [plaintiff] proposes for this Court's judicially implied cause of action."

 

Furthermore, "this Court's precedents confirm all that the statute's language and history indicate." For example, the Court described its implied private right of action in 1975 as "afford[ing] a federal remedy against discrimination … on the basis of race,' language (again) strongly suggestive of a but-for causation standard."

 

Finally, the SCOTUS reasoned that its "treatment of a neighboring provision, § 1982, supplies a final telling piece of evidence." Section 1982 guarantees all citizens the same rights as white citizens to "inherit, purchase, lease, sell, hold and convey real and personal property."  Because "this Court has repeatedly held that a claim arises under § 1982 when a citizen is not allowed 'to acquire property … because of color[,] … it is unclear how we might demand less from a § 1981 plaintiff."

 

The Court rejected the plaintiff's argument that it should adopt the "'motivating factor' causation test found in Title VII of the Civil Rights Act of 1964" because "a critical examination of Title VII's history reveals more than a few reasons to be wary of any invitation to import its motivating factor test into § 1981." To summarize, the Court reasoned that "Title VII was enacted in 1964; this Court recognized its motivating factor test in 1989; and Congress replaced that rule with its own version two years later. Meanwhile, § 1981 dates back to 1866 and has never said a word about motivating factors. So we have two statutes with two distinct histories, and not a shred of evidence that Congress meant them to incorporate the same causation standard."

 

The SCOTUS also rejected the plaintiff's argument that it should adopt "the burden-shifting framework of McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802, 804 (1973)[,]" because "[l]ike the motivating factor test, McDonnell Douglas is a product of Title VII practice. … [I]t does not mention the motivating factor test, let alone endorse its use only at the pleadings stage.  Nor can this come as a surprise: This Court didn't introduce the motivating factor test into Title VII practice until years after McDonnell Douglas. For its part, McDonnell Douglas sought only to supply a tool for assessing claims, typically at summary judgment, when the plaintiff relies on indirect proof of discrimination. … Under McDonnell Douglas's terms, too, only the burden of production ever shifts to the defendant, never the burden of persuasion[,] … [s]o McDonnell Douglas can provide no basis for allowing a complaint to survive a motion to dismiss when it fails to allege essential elements of a plaintiff's claim."

 

Because the Ninth Circuit never ruled on whether the plaintiff's amended complaint contained enough facts to "'state a claim that is plausible on its face' under the but-for causation standard[,]" and instead used the wrong standard, the SCOTUS vacated the judgment and remanded the case for further proceedings.  

 

 

 

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, May 19, 2020

FYI: 8th Cir BAP Reverses Disallowance of Post-Petition Interest at Default Contract Rate

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently reversed a bankruptcy court's disallowance of post-petition interest at the default contract rate, holding that "the bankruptcy court erred in applying a liquidated damages analysis and ruling the default interest rate was an unenforceable penalty", and also erred in weighing "equitable considerations" to avoid enforcing the contractual default interest rate.

 

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

 

A pharmacy company and four related entities (collectively, the "Debtors") filed petitions for relief under Chapter 11 of the Bankruptcy Code. The "assets consisted primarily of inventory, equipment and real estate used in operating pharmacies in the southwest of Missouri." There were three secured creditors with liens on the assets.

 

The Debtors and their creditors agreed to sell the assets "at an auction sale free and clear of liens pursuant to 11 U.S.C. § 363." One of the secured creditors, in third position in order of priority, agreed to provide "debtor in possession financing and to serve as the so-called stalking horse bidder for the sale with an $8 million opening bid."

 

The bankruptcy court approved the debtor in possession financing and the bid procedures for the sale, and then entered an order approving the sale to the third-position secured creditor for almost $14,000,000. The proceeds were then distributed to the secured creditors in first and second position, leaving surplus proceeds of approximately $556,000.

 

The first-position creditor received "its full principal balance, estimated interest at the non-default rate set forth in its loan contracts, certain fees and expenses, less its share of the broker's fee for the sale." It then filed a "motion under 11 U.S.C. § 506(b) seeking allowance of ... postpetition attorney's fees plus $442.843.51 in interest calculated at an 18% default rate."

 

The Debtors and third-position secured creditor objected and, at the hearing, agreed to allow payment of postpetition attorney's fees, but not the default interest.

 

The bankruptcy court denied the first-position creditor's motion to enforce the default interest for two alternative reasons. First, "the default interest rate constituted an unenforceable penalty under Missouri law." Second, "the bankruptcy court held that the default interest rate could not be enforced based on 'equitable considerations.'" The bankruptcy court never actually ruled on the issue of "whether the default interest rate had even been triggered under the terms of the contracts."

 

The Debtors and first-position creditor appealed, arguing that (a) the default interest rate was not "an unenforceable penalty under Missouri law" because it was agreed upon in the contract and was authorized under Missouri law; (b) the bankruptcy court improperly weighed "'equitable considerations' under the plain language of 11 U.S.C. § 506(b)"; and (c) "to the extent that the bankruptcy court based its holding on a lack of default or a lack of notice, that too is erroneous under the express language of the loan documents."

 

The BAP for the Eighth Circuit began its opinion by noting that there was no dispute that under § 506(b), the "oversecured" first-position creditor was entitled to interest, reasonable attorney's fees and costs "under the agreement or State statute under which such claim arose." It then explained that the Supreme Court of the United States held in 1989 that "§ 506(b) allows all oversecured creditors, including those holding nonconsensual liens, to recover postpetition interest on their claims."

 

However, the BAP explained that although it "is clear that all oversecured creditors are entitled to postpetition interest, the Supreme Court did not set the rate at which an oversecured creditor is entitled to recover postpetition interest." It went on to explain that "'most courts have concluded that 'postpetition interest should be computed at the rate provided in the agreement, or other applicable law, under which the claim arose—the so-called contract rate of interest'", and cited to a 2001 Eighth Circuit ruling in which "we affirmed the bankruptcy court's decision that an assignee of the original lender was entitled to collect postpetition interest under Nebraska law and under § 506(b) at the 18% rate specified in the contract."

 

The BAP for the Eighth Circuit then framed the issues before it as: "(i) whether it was erroneous to apply a liquidated damages vs. penalty analysis to a contractual rate of interest set forth in a promissory note; and (ii) whether the bankruptcy court property considered equitable factors in denying the lender's claim for default interest."

 

Turning to the first issue, the Court explained that under section 502 of the Bankruptcy Code, the bankruptcy court must allow a claim unless it is unenforceable under applicable law, and that the applicable law was that of Missouri. In addition, under Missouri law, "parties to certain types of loans, such as those at issue here," can "agree in writing to any rate of interest, fees and other terms and conditions."

 

The BAP reasoned that the bankruptcy court erred when it diverged into "an analysis of liquidated damages provisions and penalty clauses," to support its reasoning that the "default interest rate constituted an unenforceable penalty under Missouri law" because although "often conflated," the two concepts are not the same.

 

Because "neither party was able to point to a single case under Missouri law which applied a liquidated damages analysis to a contractual interest rate set forth in a promissory note[,]" and the interest rate the in the different notes were not usurious under Missouri law, the BAP for the Eighth Circuit saw no reason "that an otherwise lawful interest rate can or should be denied or reduced under such an analysis."

 

In addition, the Court reasoned, "applying the liquidated damages analysis to a contractual interest rate brings into play 'reasonableness' factors that simply are not applicable to interest rates under 11 U.S.C. § 506(b)." Accordingly, "the bankruptcy court erred in applying a liquidated damages analysis and ruling the default interest rate was an unenforceable penalty."

 

The BAP then addressed the second issue: "whether the bankruptcy court property considered equitable factors in denying the lender's claim for default interest." It reasoned that even though "[i]n reviewing equitable considerations, the bankruptcy court was following what is likely the majority position … [of] a presumption in favor of the contract rate subject to rebuttal based upon equitable considerations[,]" the plain language of the statute governs unless "the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafter.'"

 

Even though the BAP for the Eighth Circuit recognized that "the statute in this case does not define the rate of interest to be applied[,] … no section of the Bankruptcy Code gives the bankruptcy court authority, equitable or otherwise, to modify a contractual interest rate prior to plan confirmation. In this case, the bankruptcy court need not have considered equitable factors in deciding the matter at hand."

 

The Court concluded that the first-position oversecured creditor "has an unqualified right to postpetition interest under § 506(b), and that interest should be computed at the rate —default as well as on-default — provided in the parties' agreement, as long as those rates are allowed under state law."

 

The decision of the bankruptcy court was reversed and the case remanded for the bankruptcy court to decide "whether and when the loans became in default and subject to the default rate of interest."

 

 

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   |   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:

 

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Sunday, May 17, 2020

FYI: 9th Cir Rules in Favor of Mortgagee Defendants in Nevada HOA Case

The U.S. Court of Appeals for the Ninth Circuit recently ruled in favor of the Federal Housing Finance Agency (FHFA), Fannie Mae, and the mortgage loan servicer in a title dispute arising from a home owner's association (HOA) lien foreclosure.

 

The Ninth Circuit confirmed that the so-called Federal Foreclosure Bar applies where the federal entity is not the record beneficiary on the deed of trust but can prove its property interest through admissible evidence, and acknowledged that the Nevada Supreme Court ruled that a HOA foreclosure extinguish the rights of the holder of a preexisting mortgage.

 

In addition, on an issue of first impression, the Court held that neither a deceased borrower nor her un-established "estate" could be sued, and because the borrower had no legal existence when the case was removed to federal court, her state of residency before death was irrelevant to diversity jurisdiction, which existed between the remaining parties.

 

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

 

In March of 2003, the borrower obtained a mortgage loan to purchase a home in Las Vegas, Nevada. Shortly thereafter, Fannie Mae purchased the loan.

 

In July of 2008, "Congress passed the Housing and Economic Recovery Act of 2008 (HERA), establishing the Federal Housing Finance Agency (FHFA). HERA contained a provision, often called the Federal Foreclosure bar, which mandates that '[n]o property of the agency shall be subject to … foreclosure… without the consent of the Agency.'" A few months later, "[a]s authorized by HERA, the FHFA took Fannie Mae into conservatorship … where it remains to this day."

 

The borrower died in October of 2009. In 2011, a homeowners' association filed a foreclosure action and the property was sold at the foreclosure sale to a management company (the "purchaser").

 

"Nevada law allows a homeowners' association to foreclose on a property that is more than a certain number of months in arrears, notwithstanding the interest of the holder of any lien that might otherwise have priority, such as a mortgage."

 

The purchaser filed a quiet-title action in Nevada state court in 2013, naming the deceased borrower and the loan servicer, which "had become the record beneficiary of the deed of trust as Fannie Mae's loan servicer."

 

The servicer "removed the case to federal court on the basis of diversity, arguing that [the dead borrower] was fraudulently joined."

 

The servicer then filed a Suggestion of Death, attaching the borrower's death certificate, and moved to substitute the dead borrowers "Estate" as the defendant. The motion mentioned that no probate case had been filed for the dead borrower, who was believed to be survived by a daughter.

 

The trial court ruled that the deceased borrower was fraudulently joined, denied the purchaser's motion to remand the case to state court, and granted the servicer's motion to dismiss, reasoning that "the joinder was fraudulent because the foreclosure had extinguished any possible right [the borrower] might have to the property."  It also denied the motion to substitute the dead borrower's Estate for the same reason.

 

The trial court dismissed the action for failure to state a claim under then-current federal court precedent that an HOA foreclosure under Nevada's law did not extinguish the rights of the holder of the first mortgage. The purchaser appealed.

 

During the pendency of the appeal, "the Nevada Supreme Court ruled … that a HOA foreclosure did indeed extinguish the rights of the holder of a preexisting mortgage." The purchaser and servicer "jointly requested that the appeal be dismissed, following which the trial court … vacated the dismissal that it had previously entered."

 

Fannie Mae and FHFA then were granted leave to intervene as parties, and moved for summary judgment on the basis of the Federal Foreclosure Bar.  "The trial court denied this motion …, ruling that the fact that Fannie Mae did not appear as the record beneficiary of the deed of trust 'create[d] a genuine issue of material fact as to whether the FHFA or Fannie Mae owned the note and deed of trust at the time of [the HOA] sale.'"

 

The purchaser filed a second motion to substitute the estate of the dead borrower, which "still did not identify a representative of the estate." Instead, it represented that the borrower's daughter, a resident of Nevada, could be served as "a beneficiary of the estate of the deceased [borrower]."

 

In 2018, the trial court entered summary judgment again, this time ruling that because the dead borrower's legal representative had not been joined as a party, "complete diversity existed." The court also denied the purchaser's motion to substitute the dead borrower's Estate because "[s]he died before the action was filed, and no legal representative ever appeared."  In addition, the trial court held that the borrower's unestablished "estate is not a juridical entity that can sue or be sued except through a representative, and [the purchaser] identifies none."

 

Turning to the merits, the trial court then granted the servicer's motion to dismiss on the grounds of then-prevailing precedent, which held that Nevada's HOA foreclosure statute was unconstitutional for lack of due process. The purchaser appealed and FHFA ad Fannie Mae cross-appealed "the trial court's denial of their motion for summary judgment on the basis of the Federal Foreclosure Bar and its denial as moot of their quiet-title and declaratory-judgment counterclaims."

 

The Ninth Circuit began its legal analysis by noting that "changes in or clarifications of the law have cause each party to abandon positions taken at the trial court. The Nevada Supreme Court, in response to a certified question …, clarified in 2018 that the HOA statute was subject to certain procedural protections of Nevada law … and thus complied with constitutional due process requirements." Thus, the servicer and "the federal financial bodies conced[ed] … that the theory on which the trial court found in their favor at summary judgment was flawed."

 

On the other hand, the purchaser had to concede that "[s]ince the trial court issued its 2015 ruling denying the federal defendants' motion for summary judgment on the grounds of the Federal Foreclosure Bar, [the Ninth Circuit has] clarified that the Federal Foreclosure Bar does indeed apply … where the federal entity is not the record beneficiary on the deed of trust but can prove its property interest through admissible evidence." The Court found this admission to be "fatal to [the purchaser's] case on the merits.

 

However, the Court had to address two arguments raised by the purchaser "as to why we lack subject-matter jurisdiction and thus that this case must be remanded to state court."

 

First, the purchaser argued that the trial court never had diversity jurisdiction because it had tried to join the deceased borrower "and the trial court's 2013 order finding this to be fraudulent rested on an erroneous, since-discarded precedent." Second, the purchaser argued that it had twice tried to have the dead borrower's "estate joined, which the trial court denied each time."

 

Addressing the first argument, the Ninth Circuit explained that "we held in another HOA-foreclosure case that attempts to join the former homeowner do not constitute fraudulent joinder." However, that case "concerned the joinder of a living owner." But the borrower in the case at bar "was dead at the time joinder was attempted." Accordingly, the Court "turn[ed] squarely to address the question: can you sue a dead person?"

 

The Court explained that it had "never had to explicitly rule before that a dead person, qua a dead person (as opposed to the dead person's estate …) cannot sue, be sued, or be joined to a lawsuit."

 

However, "at least three of our sister circuits and several trial courts, in this circuit and elsewhere, have had to address this issue. Because "a litigant's citizenship for diversity purposes is a question of federal common law, rather than state law," the Court reviewed "those cases to inform our judgment[,]" concluding that "the consensus of our sister courts is unanimous: you cannot sue a dead person."

 

The Ninth Circuit joined its "sister circuits in holding that a party cannot maintain a suit on behalf of, or against, or join, a dead person, or in any other way make a dead person (in that person's own right, and not through a properly-represented estate or successor) party to a federal lawsuit. And by extension, when a dead person is named as a party, the dead person's prior citizenship is irrelevant when determining whether the controversy 'is between … citizens of different States.' 28 U.S.C. § 1332(a)."

 

Thus, the Court held that the trial court had diversity jurisdiction when the case was removed because the quiet title action was against the servicer and deceased borrower, who, "being dead, had no legal existence and therefore was not a 'citizen[]' of any state. Whether or not substitution ought to be allowed, notwithstanding that the party had been dead ab initio, is—as we have seen—a trickier question. Luckily, it is not one we have to resolve today, nor do we."

 

Turning to the purchaser's second argument, that the trial court erred in denying its two motions to substitute the dead borrower's estate, the Ninth Circuit explained that it reviews "the decision to allow substitution under Rule 25 for an abuse of discretion." The Court reasoned that it did not have to decide today whether to adopt the [Fifth Circuit's] Mizukami rule (disallowing substitution for a dead person no matter how good the cause, because rule 25 speaks only of substituting for claims that had previously existed and thus does not apply), or a more lenient and flexible rule based on something like the Tenth Circuit's logic in Esposito. … Even if a trial court could order substitution for a party dead ab initio, under Rule 25(a), [the purchaser] cannot show that this trial court abused its discretion in declining to do so."

 

Although the purchaser sought to substitute the estate of the dead borrower, "'[a]n estate is not a person or a legal entity and cannot sue or be sued; an estate can only act by and through a personal representative and therefore any action must be brought by or against the executor or representative of the estate.'"

 

The Ninth Circuit noted that this requires the filing of a probate case, issuance of letters testamentary and appointment of a personal representative or administrator under Nevada law. Because this was never done despite the purchaser knowing it had not been done since 2013, "the request to add an unknown, and perhaps nonexistent, executor (if the motion were to be so construed) is clearly improper."

 

Because it was still not clear from the record that the dead borrower's alleged daughter was the correct legal representative of the borrower's estate, that the purchaser had made any effort to have one appointed, or that the purchaser "had sought to sue her in her personal capacity as a potential heir to the property[,]" the Court concluded that the trial court did not abuse its discretion "by denying a motion to substitute, made in this form and with such deficiencies after so much litigation. Thus diversity jurisdiction continues to exist."

 

Accordingly, the Ninth Circuit vacated the judgment of the trial court, held that the Federal Foreclosure Bar applies, and remanded the case for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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