Thursday, September 23, 2021

FYI: 7th Cir Holds Collecting "Fees on Fees" Did Not Violate the FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently affirmed judgment in a debt collector's favor against claims that its efforts to collect attorneys' fees incurred to collect a debt— including the fees incurred in collecting the attorney's fees — violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA").

 

In so ruling, the Seventh Circuit concluded that dismissal of a related state court action brought by the debt collector to collect attorneys' fees for lack of prosecution did not have preclusive effect, and no FDCPA violation occurred because the plain language of the underlying agreement required the consumer to pay all collection costs including attorney's fee.

 

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

 

A consumer ("Consumer") incurred medical expenses for treatment provided to her minor children through a hospital system.  The written agreement signed by the Consumer at the time services were rendered (the "Agreement") provided that she agreed to pay the charges the hospital billed to her, along with "costs of collection, including attorney['s] fees and interest," if she failed to timely make payment.  After the consumer defaulted on the debt, the provider hired a company to collect the debt (the "Debt Collector") who filed a collection lawsuit.

 

After initially disputing the debt, the Consumer agreed that she owed the $1,499 in medical charges and paid that amount in full, but refused to pay the Debt Collectors' attorneys' fees.  The Debt Collector offered to accept $375 to resolve the fee dispute, which the Consumer rejected over warnings from the Debt Collector's attorneys' that prolonged litigation over the outstanding fees would result in her being liable for additional legal fees ("fees-on-fees"). 

 

The court in the collection action eventually entered judgment in the Debt Collector's favor, ordering the Consumer to pay the Debt Collector $1,725 for its incurred attorneys' fees.  The Consumer appealed the ruling.  Under then-existing state law, the appeal initiated a de novo proceeding, and the Debt Collector filed a new complaint to recover the fee award.

 

Meanwhile, prior to the small claims judgment, the Consumer separately sued the Debt Collector in federal court alleging that the Debt Collector's attempts to collect attorney's fees and fees-on-fees that were not contractually owed violated the FDCPA's prohibitions against using "any false, deceptive, or misleading representation or means in connection with the collection of any debt" (§1692e) and the use of "unfair or unconscionable means to collect or attempt to collect any debt" (§1692f). 

 

The federal trial court stayed the case to await the outcome of the state proceedings which remained dormant for nearly two years, perhaps due to the small amount at stake, and was eventually dismissed with prejudice for failure to prosecute.

 

After the stay was lifted in the federal case, the parties filed cross-motions for summary judgment.  The Consumer advanced two arguments that would provide a basis for her FDCPA claim: (i) that res judicata effectively bars the Debt Collector from arguing that the Agreement required the Consumer to pay fees-on-fees as a result of the dismissal of the Debt Collector's re-filed state court action, and; (ii) that the costs-of-collection provision in the Agreement did not contractually obligate the Consumer to pay fees-on-fees. 

 

The federal trial court rejected these arguments and entered judgment in the Debt Collector's favor.  The Consumer timely appealed. 

 

On appeal, the Seventh Circuit first reviewed the Consumer's res judicata argument, which is governed by Indiana's preclusion rules under the Full Faith and Credit Act (28 U.S.C. § 1738).  Under Indiana law, res judicata, or claim preclusion "acts as complete bar to subsequent litigation on the same claim between identical parties."  Edwards v. Edwards, 132 N.E.3d 391, 396 (Ind. Ct. App. 2019).  However, claim preclusion applies is invoked defensively "to prevent a plaintiff from asserting a claim that the plaintiff has previously litigated and lost" (Thrasher, Buschmann & Voelkel, P.C. v. Adpoint Inc., 24 N.E.3d 487, 494 (Ind. Ct. App. 2015))—and is not an available remedy for a plaintiff to reassert a claim it has already won.

 

Re-framing the Consumer's argument under issue preclusion, or collateral estoppel, which can be used 'offensively' when the "plaintiff seeks to foreclose the defendant from litigating an issue the defendant ha[d] previously litigated unsuccessfully in an action with another party" (Tofany v. NBS Imaging Sys., Inc., 616 N.E.2d 1034, 1037 (Ind. 1993)) offered no different result. 

 

Primarily, the Indiana Supreme Court has held that a dismissal for failure to prosecute does not have issue-preclusive effect because "no issue was actually litigated." Afolabi, 849 N.E.2d at 1176.  Although this was independently sufficient to defeat the Consumer's claim, the Seventh Circuit also noted that relevant state law also considers certain factors, including the "incentive to litigate the prior action" to consider the fairness of the offensive use of issue preclusion.   Tofany at 1038.  The Seventh Circuit found that this factor also defeated any issue preclusion claim, concluding that the Debt Collector had little incentive to prosecute the dispute over attorney's fees given the small amount of damages at stake.

 

For these reasons, the Seventh Circuit held that the preclusion doctrine does not apply, and the Seventh Circuit rejected the Consumer's res judicata argument.

 

Next, the Seventh Circuit addressed the Consumer's claim that the Agreement did not authorize the Debt Collector to collect fees-on-fees, and the Debt Collector's collection attempts was a false statement in violation of § 1692e and an unfair debt collection practice in violation of § 1692f. 

 

Specifically, in executing the Agreement the Consumer agreed that "[i]n the event I do not pay such charges when due, I agree to pay costs of collection, including attorney['s] fees and interest." The Consumer argued that "costs of collection" should be limited only to the cost of collecting unpaid medical bills and attorneys' fees related to collection of the bills, while the Debt Collector argued for the language to be interpreted more broadly, to include all costs associated with collection, including the cost of collecting attorneys' fees.

 

The Seventh Circuit concluded that the phrase is comprehensive, and that reading "costs of collection" to exclude fees-on-fees would "not fully compensate [the hospital] for enforcing its rights" and run contrary to Indiana law's interpretation of standard fee-shifting provisions.  Walton v. Claybridge Homeowners Ass'n, Inc., 825 N.E.2d 818, 825 (Ind. Ct. App. 2005) (Indiana law recognizes that the "purpose of a fee-shifting provision is to make the prevailing party to a contract whole."). 

 

Because the contractual language permitted the collection of fees-on-fees, the Consumer's collection attempts did not violate the FDCPA.

 

For these reasons, judgment in the Debt Collector's favor was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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

  

 

 

 

Thursday, September 16, 2021

FYI: 9th Cir Holds McGill Rule Did Not Bar Arbitration, Rejects Recent Contrary State Appellate Court Rulings

The U.S. Circuit Court of Appeals for the Ninth Circuit recently reversed a trial court's denial of a motion to compel arbitration under the Federal Arbitration Act (FAA) in a putative class action involving privacy and data-collection practices laws.

 

In so ruling, the Ninth Circuit held that, even though the named plaintiff sought "public injunctive relief" as one of its requested remedies, the California Supreme Court's ruling in McGill v. Citibank, N.A., 393 P.3d 85, 87 (Cal. 2007), "under which a contractual provision that waives the right to seek 'public injunctive relief' in all forums is unenforceable", did not apply.

 

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

 

The named plaintiff brought a putative class action of California residents alleging supposed violations of various federal and state privacy and data-collection practices laws, and sought "liquated, statutory, and punitive damages; seven specified forms of 'statewide public injunctive relief'; and attorney's fees."  The defendant moved to compel arbitration under its agreement with the named plaintiff.

 

The trial court denied the defendant's motion, ruling that because the "complaint sought 'public injunctive relief' as one of its requested remedies, the complaint implicated California's McGill rule, under which an arbitration provision that waives the right to seek 'public injunctive relief' in all forums is unenforceable."

 

This appeal followed.

 

On appeal, the Ninth Circuit first rejected the defendant's arguments that the McGill rule was preempted by the FAA, noting its recent ruling in Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019), in which the Court rejected this argument. 

 

Therefore, the remaining question on appeal was whether the defendant's enforcement of its arbitration provision violated the McGill rule.

 

The plaintiff argued that, "in addressing whether the McGill rule is implicated in this case, it is irrelevant whether his complaint 'actually includes a claim' for public injunctive relief."  The Ninth Circuit soundly rejected this argument, citing both the McGill ruling itself and its more recent progeny in the state and federal appellate courts.

 

Turning to the other arguments regarding the application of McGill, the Ninth Circuit noted that McGill arose from California Civil Code § 3513, which provides: "Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement."  Because the consumer protection statutes at issue in McGill all "authorize injunctive relief that is primarily for the benefit of the general public," the McGill Court held that "any waiver of the right to request in any forum such public injunctive relief is invalid and unenforceable under California law."

 

However, the Ninth Circuit noted that the California Supreme Court in McGill emphasized three points:

 

-  "[P]ublic injunctive relief has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public";

 

-   A "request for public injunctive relief does not constitute the pursuit of representative claims or relief on behalf of others, nor does it involve prosecuting actions on behalf of the general public" and

 

-  "[I]n contrast to private injunctive relief, which provides benefits to an individual plaintiff — or to a group of individuals similarly situated to the plaintiff, public injunctive relief involves diffuse benefits to the general public as a whole, and the general public fails to meet the class-action requirement of an ascertainable class."

 

Accordingly, the Ninth Circuit held, "public injunctive relief within the meaning of McGill is limited to forward-looking injunctions that seek to prevent future violations of law for the benefit of the general public as a whole, as opposed to a particular class of persons, and that do so without the need to consider the individual claims of any non-party."

 

As an example, the Court noted that "sort of injunctive relief sought in McGill itself, where the plaintiff sought an injunction against the use of false advertising to promote a credit protection plan," would plainly qualify as "public injunctive relief".

 

"By contrast," the Ninth Circuit explained, "when the injunctive relief being sought is for the benefit of a discrete class of persons, or would require consideration of the private rights and obligations of individual non-parties, it has been held to be private injunctive relief." 

 

In fact, the Court held that, under the plaintiff's argument, the FAA would preempt the McGill rule. 

 

"If California's McGill rule had sought to preserve, as non-waivable, the right to formally represent the claims of others, to seek retrospective relief for a particular class of persons, or to request relief that requires consideration of the individualized claims of non-parties, then such a rule would plainly 'interfere with the informal, bilateral nature of traditional consumer arbitration," which is impermissible under the FAA.

 

The Ninth Circuit declined to rely upon two recent opinions by California's Fourth District Court of Appeal in Maldonado v. Fast Auto Loans, Inc., 275 Cal. Rptr. 3d 82 (Cal. Ct. App. 2021, and Mejia v. DACM Inc., 54 Cal. App. 5th 691 (2020).  The Ninth Circuit concluded "that these decisions rested on such a patent misreading of California law that they would not be followed by the California Supreme Court."

 

Moreover, the Ninth Circuit held, "[b]y insisting that contracting parties may not waive a form of relief that is fundamentally incompatible with the sort of simplified procedures the FAA protects, the Mejia-Maldonado rule effectively bans parties from agreeing to arbitrate all of their disputes arising from such contracts. To say that such a rule is not preempted would flout Supreme Court authority" under its many rulings in favor of FAA preemption.

 

The Ninth Circuit concluded that the complaint at issue did not seek public injunctive relief.  Accordingly, the Court held that the McGill rule was not implicated, and the arbitration agreement should have been enforced.  The Appellate Court reversed the trial court's ruling, and remanded with instructions to grant the motion to compel arbitration.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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

  

 

 

 

Saturday, September 11, 2021

FYI: 6th Cir Reverses Trial Court Ruling That TCPA Was Wholly Unconstitutional After 2015 Amendments

The Sixth Circuit recently reversed a trial court's dismissal of a putative class action lawsuit alleging violations of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227(b) (TCPA).

 

The trial court dismissed the case on the basis that amendments to the TCPA in 2015 rendered the entire Act unconstitutional until the Supreme Court of the United States severed the 2015 amendments in Barr v. Am. Ass'n of Pol. Consultants, Inc., 140 S. Ct. 2335 (2020) (AAPC).  This would have made any alleged TCPA violation not actionable from the date of the amendments in 2015 until the SCOTUS severed the unconstitutional provisions in 2020.

 

In reversing the trial court's ruling, the Sixth Circuit held that AAPC applied retroactively, and the TCPA was not invalidated by the 2015 unconstitutional amendments and before the date of the AAPC ruling.  In addition, the Sixth Circuit rejected the defendant's First Amendment arguments based on the retroactive application of AAPC.

 

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

 

As you may recall, the TCPA prohibits many automated calls to cell phones and landlines.  In 2015, Congress amended the TCPA to allow robocalls if they were made "solely to collect a debt owed to or guaranteed by the United States." 47 U.S.C. § 227(b)(1)(A)(iii), (b)(1)(B).

 

However, the Supreme Court of the United States held in Barr v. Am. Ass'n of Pol. Consultants, Inc. (AAPC), 140 S. Ct. 2335 (2020), that "adding the exemption for government-debt robocalls would cause impermissible content discrimination" in violation of the First Amendment to the United States Constitution, and that "the exception was severable from the rest of the restriction, leaving the general prohibition intact." 

 

The plaintiff here received alleged non-consensual automated calls from the defendant in late 2019 and early 2020, and filed a putative class action lawsuit in federal court under the TCPA.  The defendant moved to dismiss for lack of subject matter jurisdiction.  The trial court granted the defendant's motion.

 

The trial court held that "severability is a remedy that operates only prospectively," and that the amended TCPA "was unconstitutional and therefore void for the period the exception was on the books" from 2015 to 2020.  Therefore, the trial court held, the TCPA "could not provide a basis for federal-question jurisdiction."

 

The plaintiff appealed, and the United States intervened in support of the plaintiff to defend the TCPA.

 

On appeal, the Sixth Circuit first noted that the motion to dismiss for lack of subject matter jurisdiction should have been treated as a motion to dismiss for failure to state a claim.  The Sixth Circuit explained that a trial court has jurisdiction when "the right of the petitioners to recover under their complaint will be sustained if the Constitution and laws of the United States are given one construction and will be defeated if they are given another." Here, if the plaintiff's "arguments about the continuing vitality of the [TCPA] from 2015 to 2020 are correct, she is entitled to relief."

 

The Sixth Circuit then addressed the defendant's arguments.

 

The defendant first argued that "severability is a remedy that fixes an unconstitutional statute, such that it can only apply prospectively."  Because the SCOTUS ruling in AAPC severed the unconstitutional 2015 amendment from the TCPA, the defendant argued that the amended TCPA was wholly unconstitutional from the date of the amendments in 2015 until the SCOTUS severed the unconstitutional provisions in 2020.

 

The Sixth Circuit disagreed, holding that the SCOTUS in AAPC "recognized only that the Constitution had 'automatically displace[d]' the government-debt-collector exception from the start, then interpreted what the statute has always meant in its absence," and that the SCOTUS' "legal determination applies retroactively."

 

The Court explained that, in order "to say what the law is," courts "must exercise the negative power to disregard an unconstitutional enactment." Then, "[a]fter disregarding unconstitutional enactments, we then determine what (if anything) the statute means in their absence — what is now called 'severability' analysis."  However, the Sixth Circuit continued, "those steps are all part of explaining what the statute has meant continuously since the date when it became law and applying that meaning to the parties before us."

 

Relevant here, the Sixth Circuit noted that "the Constitution itself displaces unconstitutional enactments: a legislative act contrary to the constitution is not law at all."  Because the 2015 amendments were unconstitutional, and therefore "not law at all", the Court concluded that the remainder of the TCPA stayed in full force as if the 2015 amendments were never enacted.

 

The defendant also argued that "if it can be held liable for the period from 2015 to 2020, but government-debt collectors who lacked fair notice of the unlawfulness of their actions cannot, it would recreate the same First Amendment violation the Court recognized in AAPC."

 

The Sixth Circuit disagreed again, noting that "[w]hether a debt collector had fair notice that it faced punishment for making robocalls turns on whether it reasonably believed that the statute expressly permitted its conduct. That, in turn, will likely depend in part on whether the debt collector used robocalls to collect government debt or non-government debt." 

 

Because the defendant here was not collecting on government debt, which was the subject of now unconstitutional 2015 amendments, the Sixth Circuit held that "applying the speech-neutral fair-notice defense in the speech context does not transform it into a speech restriction."

 

Accordingly, the Sixth Circuit reversed the trial court's dismissal, and the case was remanded for further proceedings.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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

  

 

 

 

Monday, September 6, 2021

FYI: 7th Cir Holds FDCPA "Debt Validation Notice" and "Caller Identification" Issues Not Enough For Standing

The U.S. Court of Appeals for the Seventh Circuit recently reversed and remanded a trial court's entry of summary judgment in favor of the plaintiff alleging violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (FDCPA), with instructions to dismiss the case for lack of subject matter jurisdiction.

 

In so ruling, the Court held that the FDCPA violations alleged by the plaintiff did not cause her any concrete harm and were simply procedural violations that Article III precludes federal courts from adjudicating.

 

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

 

A company hired the plaintiff and, in its offer letter, described a signing bonus: $3,750 payable after 30 days of employment, followed by another $3,750 after 180 days of employment. If the plaintiff voluntarily ended her employment or the company fired her for cause within 18 months, she was obligated to repay the full bonus.

 

The plaintiff collected both signing payments, but after she completed one year of employment, the company fired her. A debt collection agency, the defendant, attempted to recover the bonus payments. The debt collector mailed the plaintiff a collection letter and an agency employee called the plaintiff by telephone four times.

 

The plaintiff sued the debt collector, claiming that its letter and phone calls violated the FDCPA by failing to provide complete written notice of her statutory rights within five days of the initial communication and because the caller never identified herself as a debt collector.

 

The trial court entered summary judgment for the plaintiff and the debt collector timely appealed.

 

On appeal, the Seventh Circuit addressed the requirement of standing.  To establish standing to sue in federal court, "[t]the plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision." Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016).

 

At issue in this case was whether the plaintiff suffered an injury in fact.

 

The injury analysis often occurs at the pleading stage, where the court is limited to the complaint's "general factual allegations of injury resulting from the defendant's conduct" to evaluate standing. Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992).

 

But the burden increases at the summary-judgment stage: The plaintiff must "supply[y] evidence of 'specific facts' that, taken as true, show each element of standing." Spuhler v. State Collection Serv., Inc., 983 F.3d 282, 286 (7th Cir. 2020) (quoting Lujan, 504 U.S. at 561).

 

To be cognizable in federal court, an injury must be concrete, which is to say "'real,' and not 'abstract.'" Spokeo, 136 S. Ct. at 1548 (quoting WEBSTER'S THIRD NEW INT'L DICTIONARY 472 (1971)). Though "traditional tangible harms, such as physical harms and monetary harms," most readily qualify as concrete injuries, "[v]arious intangible harms can also be concrete." TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2204 (2021).

 

However, a plaintiff cannot establish standing simply by pointing to a mere procedural violation of a statute. Spokeo, 136 S. Ct. at 1549; Casillas, 926 F.3d at 333. Rather, she "must show that the violation harmed or 'presented an "appreciable risk of harm" to the underlying concrete interest that Congress sought to protect.'" Casillas, 926 F.3d at 333 (quoting Groshek v. Time Warner Cable, Inc., 865 F.3d 884, 887 (7th Cir. 2017)).

 

Applying those principles here, the Seventh Circuit held that the plaintiff would have suffered a concrete injury only if the debt collector's failure to provide notice of the plaintiff's statutory rights caused her to suffer a harm identified by the FDCPA, "such as paying money she did not owe" or would have disputed. Smith v. GC Servs. Ltd. P'ship, 986 F.3d 708, 710 (7th Cir. 2021).

 

In her complaint and testimony, the plaintiff alleged only that she suffered emotional harm, specifically personal humiliation, embarrassment, mental anguish, and emotional distress. Furthermore, the plaintiff testified at her deposition that she never paid the debt collector or the company any money after the debt collector contacted her, nor did she rely on the debt collector's communication to her detriment in any other way. Instead, she stated that she got less sleep and felt intimidated, worried, and embarrassed.

 

The Seventh Circuit concluded that anxiety and embarrassment are not injuries in fact for the purposes of FDCPA standing. Indeed, the Court pointed out that it already expressly rejected "stress" as constituting a concrete injury following an FDCPA violation. Pennell v. Global Tr. Mgmt., 990 F.3d 1041, 1045 (7th Cir. 2021). Likewise, the Court already found that it is not enough for a plaintiff to be "annoyed" or "intimidated" by a violation. Gunn v. Thrasher, Buschmann & Voelkel, P.C., 982 F.3d 1069, 1071 (7th Cir. 2020).

 

Accordingly, the Seventh Circuit reversed the judgment and remanded with instructions to dismiss the case for lack of jurisdiction.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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

  

 

 

 

Wednesday, September 1, 2021

FYI: Maryland High Court Holds Property Inspection Fees Limited for Mortgage Lenders, Servicers, and Assignees

The Maryland Court of Appeals – the state's highest court – recently reversed a trial court's dismissal of a putative class action alleging that a mortgage servicer and loan owner violated the Maryland Usury Law and Maryland Consumer Debt Collection Act by charging property inspection fees in connection with residential mortgage loans.

 

In so ruling, the Court held that:

 

  • The Maryland Usury Law, specifically at CL §12-121, limits the authority of a person who makes a mortgage loan, as well as servicers and assignees of the loan, to charge property inspection fees in connection with that loan.

 

  • In order "to adequately allege the requisite knowledge for purposes of [Maryland Consumer Debt Collection Act, CL §14-202(8)], a plaintiff must allege that the defendant either actually knew that it did not possess a right it claimed as part of its debt collection efforts, or recklessly disregarded the falsity of that claim."

 

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

 

The plaintiff borrower obtain a loan secured by a deed of trust on her home.  The loan was later sold and assigned, and the borrower later defaulted on the loan.  The servicer began assessing fees for "drive-by inspections" of the collateral property. 

 

The borrower objected to the fees, and eventually filed a putative class action lawsuit among other things under the Maryland Usury Law and under the Maryland Consumer Debt Collection Act (MCDCA) against the loan owner and servicer for supposedly charging illegal "drive-by inspection" fees.

 

The trial court dismissed the claim, and the borrower appealed.  The Court of Special Appeals (Maryland's intermediate appellate court) reversed, and the Maryland Court of Appeals granted the parties' petition and cross-petition for writ of certiorari.

 

The Maryland Court of Appeals noted that the first question to be resolved was "whether the addition of a definition of 'lender' to the Maryland Usury Law during [1975] code revision effected a significant change in that law – and the Maryland common law – that lay latent for more than four decades before this case arose." 

 

The second issue was whether the borrower's complaint adequately alleged that the servicer "attempted to collect an alleged debt by asserting a right to collect inspection fees with knowledge that the right did not exist, in violation of the MCDCA."

 

On the first issue, the Court noted that Maryland has regulated interest rates and fees on loans since colonial times.  The statute at issue here was codified in 1957, and now appears as the Maryland Usury Law in the state's Commercial Law Article. 

 

The specific provision at issue here -- CL §12-121, added in 1986 – restricts the charging of an inspection fee in connection with residential real property financing as follows:

 

(a) In this section, the term "lender's inspection fee" means a fee imposed by a lender to pay for a visual inspection of real property.

(b) Except as provided in subsection (c) of this section, a lender may not impose a lender's inspection fee in connection with a loan secured by residential real property.

(c) A lender's inspection fee may be charged if the inspection is needed to ascertain completion of:

(1) Construction of a new home; or

(2) Repairs, alterations, or other work required by the lender.

(d) This section does not apply to an appraisal of the value of real property by a lender or to fees imposed in connection with an appraisal.

 

The defendant loan servicer and assignee took the position that they were not covered by the term "lender" in the statute. 

 

The defendants argued that, since 1975, CL §12-101(f) "defined 'lender' as 'a person who makes a loan under this subtitle," and that the "'subtitle' referenced in that definition is the Maryland

Usury Law." 

 

The defendants also pointed to "the reference to making a loan and the absence of the word 'assignee' in CL §12-101(f)."  In addition, the defendants argued that "the text of CL §12-109.2(a)(3) includes a reference to an 'assignee of a lender,'" and therefore that "the definition of 'lender' generally applicable in the Usury Law in CL §12-101(f) must not encompass an assignee of a loan originator."

 

The Maryland Court of Appeals disagreed. 

 

In so ruling, the Court noted that "[u]nder the common law, an assignee generally has the same rights and responsibilities as its assignor – no more, no less."  Therefore, "[t]he rights and responsibilities of an assignee of a mortgage are no different," and "[a]s a general rule, an assignee of a mortgage acquires no power with respect to the mortgage that the assignor did not have."

 

Here, the Court recited that "it is a standard canon of statutory construction that statutes are not construed to repeal the common law by implication."  The Court continued that "[g]iven the ease and frequency with which loans are assigned – and have long been assigned in Maryland – it is very unlikely that the Legislature intended to change the common law so substantially without making such a purpose clear," and that "[s]imilarly lacking is any indication that the Legislature intended to narrow the scope of the Usury Law by inserting a gaping loophole in those provisions that use the term 'lender' in the context of post-origination conduct."

 

In addition, the Court pointed out that "[o]ther parts of the Usury Law, however, clearly regulate conduct that occurs later in the life of the loan," and that "[t]hese provisions, which appear to apply over the life of a loan, suggest that the term 'lender' includes not only an originator of a loan but also an assignee."

 

The Maryland Court of Appeals also referenced its ruling in Taylor v. Friedman, 344 Md. 572 (1997), in which Court stated that it held that "the prohibition in CL §12-121 was not confined to the origination of the loan."  Although the Taylor v. Friedman "case concerned whether the prohibition in CL §12-121 applied to post-default inspection fees," the Court noted that "the status of the respondent bank as an assignee of the mortgage loan was obvious from the facts."

 

In addition, the Court also referenced its ruling in Thompkins v. Mountaineer Investments, LLC, 439 Md. 118 (2014), in which it held that "held that an assignee was not liable for a violation of the [Maryland Secondary Mortgage Loan Law (SMLL)] committed by the original lender when the loan was originated, but that the assignee was subject to the requirements of the SMLL and would be liable for its own violations of the statute," and "observed that the [Maryland] Usury Law in particular contemplated that an assignee could be liable for violations of that law."

 

Moreover, the Court also noted that "[s]ince least January 2014, the Maryland Commissioner of Financial Regulation has taken the position that mortgage servicers … are subject to the prohibition on inspection fees in CL §12-121 during the life of a mortgage loan. Advisory Notice (January 7, 2014), available at https://perma.cc/2WYR-S22S".

 

Accordingly, the Maryland Court of Appeals held that the 1975 "code revision did not change Maryland law applicable to assignees of mortgage loans and that the prohibition on property inspection fees applies to" both the loan servicer and the loan owner.

 

On the second issue, the Maryland Court of Appeals noted that the MCDCA prohibits anyone collecting or attempting to collect a consider debt from, among other things, making any "[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist."  CL §14-202(8).

 

The Court first recited its ruling from Chavis v. Blibaum & Associates, P.A., ___ Md. ___, ___ (2021), issued on the same day as this one, that a plaintiff may invoke subsection (8) "when the amount claimed by the debt collector includes sums that the debt collector, to its knowledge, did not have the right to collect."  The Maryland Court of Appeals held that the complaint met this requirement.

 

In addition, again referencing its contemporaneous ruling in Chavis v. Blibaum & Associates, P.A., the Maryland Court of Appeals held that "the knowledge element is met when the law is settled, because the debt collector's recklessness in failing to discover that law is the equivalent of knowledge," and rejected the notion that "the existence of a 'potentially meritorious' argument as to the existence of the right necessarily negates knowledge."  Instead, the Court held, "the question whether a debt collector acted recklessly is a question of fact, to be determined in light of the particular circumstances."

 

The Maryland Court of Appeals summarized that, "to adequately allege the requisite knowledge for purposes of [CL §14-202(8)], a plaintiff must allege that the defendant either actually knew that it did not possess a right it claimed as part of its debt collection efforts, or recklessly disregarded the falsity of that claim."

 

Here, the Court referenced its rulings and reasoning under the Maryland Usury Law, especially the 2014 advisory notice of the Maryland Commissioner of Financial Regulation.  The Court held this was sufficient to state a claim that the servicer "had knowledge that it did not have the right to impose such a fee."

 

Accordingly, the Maryland Court of Appeals reversed the trial court's ruling, and remanded the case for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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

  

 

 

 

Sunday, August 29, 2021

FYI: 8th Cir Affirms Denial of Class Cert in UDAP Case

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court's denial of class certification, concluding that:

 

(1) the plaintiffs' nationwide class action complaint alleged violations of the Minnesota Consumer Fraud Act, and thus rebuttal evidence was permitted;

(2) the defendant company had evidence challenging the extent to which each plaintiff allegedly relied on the alleged omissions; and

(3) individualized findings on reliance were therefore required, which would likely lead to multiple mini-trials within the class action.

 

The Eighth Circuit also explained that, because the class had not been defined in such a way that anyone within it would have standing, the class could not be certified.

 

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

 

The plaintiffs filed a putative class action alleging that the defendant company failed to disclose heat defects in the all-terrain vehicles ("ATVs") sold by the company and that this artificially inflated the price of their ATVs.

 

Six plaintiffs in six states sought to certify a nationwide class under the Minnesota Consumer Fraud Act ("MCFA"). Alternatively, they asked the trial court to certify six statewide classes for ATV owners in California, Florida, Minnesota, Missouri, New York, and North Carolina, under the laws of each state.

 

The trial court denied class certification because it determined that individualized questions predominated, a class action was not a superior method for litigating, and the putative classes included members who lacked standing. The plaintiffs timely appealed.

 

In In re St. Jude Medical, Inc., the Eighth Circuit held that a trial court abused its discretion by certifying a class of plaintiffs that alleged material misrepresentations concerning heart valve replacements in violation of the MCFA. 522 F.3d 836, 841 (8th Cir. 2008). In that cases, the Court noted that fraud cases are ill-suited for class actions because they require individualized findings on whether the plaintiffs actually relied on the alleged misrepresentation. Id. at 838. The defendants there put on evidence showing that the plaintiffs did not remember whether their doctors mentioned the unique qualities of the valve. Id. at 839. Considering this rebuttal evidence, the Court held that individual issues predominated over common questions. Id. at 841.

 

The Eighth Circuit found the same reasoning applied in this case.

 

The nationwide class action complaint at issue here alleged violations of the MCFA, and the Court held that rebuttal evidence was permitted. See St. Jude, 522 F.3d at 840. The defendant company in turn had evidence challenging how much each plaintiff relied on the alleged omissions, which the Eighth Circuit concluded would require individualized findings on reliance and was likely to make for multiple mini-trials within the class action.

 

Because these individual fact issues would predominate, the Eighth Circuit held that the trial court was within its discretion to deny the plaintiffs' motion for class certification on this basis.

 

The plaintiffs also argued that the trial court should have certified six state-wide classes for the states of California, Florida, Minnesota, Missouri, New York, and North Carolina. However, the Eighth Circuit determined that at least two of these proposed classes — Minnesota and North Carolina — required individualized fact findings on the issue of reliance. See St. Jude, 522 F.3d at 838–39; see also Arnesen v. Rivers Edge Golf Club & Plantation, Inc., 781 S.E.2d 1, 7 (N.C. 2015). Therefore, the Eighth Circuit agreed with the trial court that those two putative statewide classes had individual questions that predominated.

 

The plaintiffs next argued that even if classes could not be certified for Minnesota and North Carolina, the trial court could have certified class actions for the remaining four states.

 

Under Rule 23(b)(3), even if common questions predominate, a class can only be certified if the trial court finds "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

 

The Eighth Circuit ruled that the trial court did not abuse its discretion by denying class certification for superiority reasons.

 

The trial court had found that the class action was not superior because the underlying issues in the case "would present a significant risk of jury confusion and would create enormous challenges to trial management." This was based on the observation that the proposed classes would require application of the laws of four different states to forty-three different vehicle configurations, including at least four different engines, with changing exhaust standards through the years, and various attempts by the company to remedy the problems.

 

In the Eighth Circuit's view, this scenario presented monumental manageability concerns, a certification factor under Rule 23(b)(3). The putative classes simply sought to consolidate too many claims with too many variables. Accordingly, the Court concluded that the record supported the trial court's superseding concern that the litigation would be unmanageable. See Windham v. Am. Brands, Inc., 565 F.2d 59, 70–72 (4th Cir. 1977).

 

Furthermore, the Eighth Circuit noted that "[a]lthough federal courts do not require that each member of a class submit evidence of personal standing, a class cannot be certified if it contains members who lack standing." Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023, 1034 (8th Cir. 2010).

 

To satisfy Article III standing, a plaintiff must show (1) an injury in fact; (2) a causal connection between the injury and conduct complained of; and (3) the likelihood that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992) (citation omitted). "It is well established that purchasers of an allegedly defective product have no legally recognizable claim where the alleged defect has not manifested itself in the product they own." Briehl v. Gen. Motors Corp., 172 F.3d 623, 628 (8th Cir. 1999) (citation omitted).

 

The Eighth Circuit concluded that the plaintiffs did not define their classes to make sure all proposed members had standing. Although the plaintiffs sought to certify classes for everyone who bought the ATV models in question, evidence at the class certification stage showed that not all of the ATVs manifested the alleged heat defect.

 

Indeed, the plaintiffs' own briefing before the trial court acknowledged only that "the high [exhaust gas temperatures] and low clearance create melt risks to the ATV and burn risks to the rider." "It is not enough to allege that a product line contains a defect or that a product is at risk for manifesting this defect; rather, the plaintiffs must allege that their product actually exhibited the alleged defect." O'Neil v. Simplicity, Inc., 574 F.3d 501, 503 (8th Cir. 2009).

 

Thus, because the classes had not been "defined in such a way that anyone within [them] would have standing," the Eighth Circuit held that the classes could not be certified. Avritt, 615 F.3d at 1034.

 

Accordingly, the Eighth Circuit affirmed the trial court's denial of the plaintiffs' motion for class certification.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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