Wednesday, January 18, 2017

FYI: MD Fla Holds Non-Foreclosure Collection on Time-Barred Debt Does Not Provide Basis for FDCPA or FCCPA Claim

The U.S. District Court for the Middle District of Florida recently granted in part a mortgage loan servicer's motion to dismiss a consumer borrower's claims under the federal Fair Debt Collection Practices Act ("FDCPA"), the Florida Consumer Collection Practices Act ("FCCPA"), the federal Fair Credit Reporting Act ("RESPA"), the federal Declaratory Judgment Act ("DJA"), holding:

 

(a) the borrower's complaint stated claims under the FDCPA and FCCPA because the allegations raised a plausible inference that the servicer knew the borrower was represented by counsel;

 

(b) the borrower's allegations that statute of limitations had run on a portion of the mortgage loan debt did not provide a plausible basis for borrower's claims, and that the statute of limitations issue should be raised, it at all, as an affirmative defense to an actual collection or foreclosure action;

      

(c) the borrower's allegations of fraudulent loan documents did not provide a plausible basis for her claims because neither the FDCPA nor the FCCPA authorize the borrower to demand: (1) 'presentment' of the original note from a mere debt collector; or (2) premature compliance with the standing and proof requirements of a foreclosure action;

 

(d) the borrower's FCRA claim failed because it provided no well-pled factual allegations and simply parroted the statutory provisions; and

 

(e) the Court declined to exercise subject matter jurisdiction under the DJA because the relief sought was available under the FDCPA, FCCPA and RESPA.

 

A copy of the opinion is attached.

 

A borrower signed a promissory note in 2008 secured by a mortgage on her home. The loan went into default December of 2009 and the mortgagee sued to foreclose, but ended up voluntarily dismissing the case without prejudice in October of 2014.

 

In November of 2015, a new loan servicer began servicing the loan. One year later, the mortgagee sold the loan to a trust and notified the borrower of the new owner's identity.

 

In June of 2016, the borrower filed a complaint in the district court against the loan servicer, alleging that the servicer called her at least fifty times on her cellular phone trying to collect the loan knowing that the borrower was represented by counsel with respect to the loan in supposed violation of the TCPA, FDCPA, and FCCPA.

 

The borrower also alleged that the servicer improperly reported and attempted to collect the full amount of the unpaid debt, instead of a lesser amount because the statute of limitations had run of a portion of the debt, and failed to correct the error, in violation of the FDCPA, FCCPA, RESPA and FCRA.  Florida has a five-year statute of limitations for mortgage foreclosures, and more than five years had passed since the borrower defaulted and the prior servicer filed the foreclosure action.

 

The complaint sought a declaratory judgment, actual, statutory and punitive damages, attorney's fees and costs.

 

The loan servicer moved to dismiss the FDCPA, FCRA, RESPA, declaratory judgment and FCCPA claims.  The District Court found that the complaint stated claims under the FDCPA and FCCPA because the allegations raised a plausible inference that the servicer knew the borrower was represented before receiving a RESPA letter from the attorney.

 

The Court then rejected the servicer's argument that the statute of limitations barred the action because the defendant began servicing the loan in November of 2015, and the plaintiff's claims arose from conduct after that date.

 

The Court turned to address the borrower's argument that the note and mortgage were fraudulent and that she had the right to demand "presentment" of the original note under three sections of Florida's version of the Uniform Commercial Code dealing with negotiable instruments, and that if the servicer could not do so, its debt collection efforts necessarily violated the FDCPA and FCCPA.

 

The Court disagreed, rejecting borrower's "unsupported and confusing arguments" because "[e]ven construed broadly, neither the FDCPA nor the FCCPA provide authority for [the borrower] to demand: (1) 'presentment' from a mere debt collector; or (2) premature compliance with the standing and proof requirements of a foreclosure action." The court concluded that borrower's allegations of fraudulent loan documents "does not provide a plausible basis for [the borrower's] claims."

 

As to the borrower's argument that the loan servicer was trying to collect on a portion of the loan balance that was time-barred, the servicer argued that (a) the statute of limitations is a defense, not a cause of action; (b) the statute of limitations does not extinguish a lien or a claim; and (c) the statute of limitations does not apply until a lawsuit to enforce the loan is filed.

 

In response, the borrower argued, based on a Federal Trade Commission publication and Eleventh Circuit case law, that a billing statement that attempts to collect a sum certain from a consumer, which includes an unenforceable portion, and that threatens legal action avoidable only by payment, is "coercive and misleading."

 

The Court held that while the FTC publication relied upon does state that it is unlawful for a debt collector to "threaten to sue you on a time-barred claim," because it also contained other language that debt collectors may contact consumers about time-barred claims, such "seemingly inconsistent statements … simply do not support Plaintiff's reliance on the [statute of limitations] [i]ssue to support her claims."

 

Turning to the case law cited by the borrower, the Court distinguished the Eleventh Circuit's decisions in Crawford v. LVNV Funding LLC and Johnson v. Midland Funding, LLC as "unavailing because neither concern non-judicial debt collection activity of a partially time-barred claim. Rather, for reasons peculiar to bankruptcy proceedings, the Crawford and Johnson courts held that bankruptcy debtors can assert FDCPA adversary proceedings based on a creditor's filing of a proof of claim that is entirely unenforceable under the applicable statute of limitations."

 

Finding no specific authority supporting the borrower's argument in a non-bankruptcy context, the Court found that the statute of limitations argument did not "provide a plausible basis for [her] claims [and that the issue] should be raised, it at all, as an affirmative defense to an actual collection or foreclosure action."

 

As to the borrower's FCRA claim that the servicer was liable for willfully or negligently reporting allegedly incorrect "delinquency information," the Court found that these claims failed because: "aside from the wholesale incorporation by reference of paragraphs 1 through 58, Plaintiff provided no well-pled factual allegations [in the FCRA counts]; and (2) Plaintiff simply parroted certain provisions of the FCRA…." For these reasons, which amounted to impermissible "shotgun pleading," the Court dismissed the FCRA claims.

 

Turning to borrower's RESPA claim, the Court again agreed with the servicer's argument that it consisted only of conclusory allegations and "shotgun pleading" and accordingly dismissed it as well.

 

Addressing the borrower's final claim for declaratory judgment, the Court explained that the Declaratory Judgment Act "does not establish federal jurisdiction on its own" and, even if subject matter jurisdiction exists, a court has discretion to decline to exercise it. Because the relief sought was the same available under the FDCPA, FCCPA or RESPA, the Court declined "to exercise its discretion to consider the equitable relief of a declaratory judgment."

 

Accordingly, the Court dismissed the FDCPA, FCRA, RESPA, declaratory judgment and FCCPA claims without prejudice, giving the borrower ten days to file an amended complaint, failing which the case would proceed on the remaining TCPA claim only.

 

 

 

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, January 16, 2017

FYI: 9th Cir Rejects "Administrative Feasibility" or "Ascertainability" Class Cert Requirement

The U.S. Court of Appeals for the Ninth Circuit recently held that class action plaintiffs are not required to demonstrate that there is an administratively feasible way to determine who is in a class in order for the class to be certified.

 

In so ruling, the Ninth Circuit noted that the Sixth, Seventh, and Eighth Circuits have similarly ruled. See Sandusky Wellness Ctr., LLC, v. Medtox Sci., Inc., 821 F.3d 992, 995–96 (8th Cir. 2016); Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015); Mullins v. Direct Digital, LLC, 795 F.3d 654, 658 (7th Cir. 2015), cert. denied, ––– U.S. ––––, 136 S.Ct. 1161, 194 L.Ed.2d 175 (2016). 

 

Although the Court focused on the Third Circuit's contrary ruling, the First, Second, Fourth, and Eleventh Circuits have also held to the contrary.  See, e.g., In re Nexium Antitrust Litig., 777 F.3d 9 (1st Cir. 2015); Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), EQT Prod. Co. v. Adair, 764 F.3d 347 (4th Cir. 2014); Byrd v. Aaron's Inc., 784 F.3d 154 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F. 3d 300 (3d Cir. 2013); Karhu v. Vital Pharmaceuticals, Inc., Case No. 14-11648 (11th Cir 2015)(unreported).

 

The Ninth Circuit held that a separate "administrative feasibility" or "ascertainability" prerequisite to class certification was not compatible with the language of Rule 23.  In addition, the Court opined that Rule 23's enumerated criteria already address the policy concerns that had motivated some courts to adopt a separate administrative feasibility or ascertainability requirement, and Rule 23 did so without undermining the balance of interests inherent in certifying a class. 

 

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

 

Consumers who purchased cooking oil products labeled "100% Natural" filed putative class actions asserting state-law claims against the manufacturer in eleven states. The cases were consolidated in this action.

 

The consumers moved to certify eleven classes defined to include all persons who resided in the States of California, Colorado, Florida, Illinois, Indiana, Nebraska, New York, Ohio, Oregon, South Dakota, or Texas who had purchased the manufacturer's products within the applicable statute of limitations periods established by the laws of their state of residence (the "Class Period") through the final disposition of this and any and all related actions.

 

The manufacturer opposed class certification on the grounds that there would be no administratively feasible way to identify members of the proposed classes because consumers would not be able to reliably identify themselves as class members.  Thus, the manufacturer argued that the class was not eligible for certification.

 

Although the trial court acknowledged that the Third Circuit and some district courts had refused certification in similar circumstances, it declined to join in their reasoning. Instead, the trial court held that, at the certification stage, it was sufficient that the class was defined by an objective criterion -- here, whether class members purchased manufacturer's oil during the class period.

 

The trial court ultimately granted the consumers' motion for class certification in part, and certified eleven statewide classes to pursue certain claims for damages under Federal Rule of Civil Procedure 23(b)(3).  The manufacturer then appealed to the Ninth Circuit pursuant to Rule 23(f).

 

As you may recall, Federal Rule of Civil Procedure 23 governs class action procedure in federal court.  Parties seeking class certification must satisfy each of the four requirements of Rule 23(a) — numerosity, commonality, typicality, and adequacy — and at least one of the requirements of Rule 23(b). See Ellis v. Costco Wholesale Corp., 657 F.3d 970, 979–80 (9th Cir. 2011).

 

Rule 23(a), which is titled "prerequisites," provides that one or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.  Rule 23(a) does not mention "administrative feasibility."

 

The manufacturer argued that the Court should reverse the class certification because the district court did not require the consumers to proffer a reliable way to identify members of the certified classes here, which included consumers in eleven states who purchased the cooking oils labeled "100% Natural" during the relevant period.

 

The manufacturer argued that, in addition to satisfying these enumerated criteria, class proponents must also demonstrate that there is an administratively feasible way to determine who is in the class. The manufacturer claimed that the consumers did not propose any way to identify class members and could not prove that an administratively feasible method existed because consumers do not generally save grocery receipts and are unlikely to remember details about individual purchases of a low-cost product like cooking oil.

 

The Ninth Circuit rejected the manufacturer's argument, holding that Rule 23(a)'s omission of "administrative feasibility" was meaningful. Relying on Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005), the Court concluded that because the drafters specifically enumerated "prerequisites," Rule 23(a) constituted an exhaustive list.

 

The Court of Appeals also took guidance from language used in other provisions of the Rule, noting, for example, in contrast to Rule 23(a), that Rule 23(b)(3) provides, "The matters pertinent to these findings include," followed by four listed considerations. FED. R. CIV. P. 23(b)(3).

 

Relying on Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983), the Ninth Circuit reasoned that if the Rules Advisory Committee had intended to create a non-exhaustive list in Rule 23(a), it would have used similar language. The Court noted that where Congress includes particular language in one section of a statute but omits it in another section of the same act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. See Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296, 78 L.Ed.2d 17 (1983).

 

Moreover, Ninth Circuit noted that Rule 23(b)(3) requires a court certifying a class under that section to consider the likely difficulties in managing a class action, and held that imposing a separate administrative feasibility requirement would render that manageability criterion largely superfluous, a result that contravenes the familiar precept that a rule should be interpreted to give effect to every clause.

 

The Ninth Circuit also relied on the Supreme Court precedent of Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). In Amchem, the Supreme Court considered whether a settlement-only class could be certified without satisfying the requirements of Rule 23.  In holding that it could not, the Supreme Court underscored that the Federal Rules of Civil Procedure result from "an extensive deliberative process involving a Rules Advisory Committee, public commenters, the Judicial Conference, the Supreme Court, and Congress." Id. at 620, 117 S.Ct. 2231.

 

Noting that in Amchem, the Supreme Court warned that the "text of a rule thus proposed and reviewed limits judicial inventiveness" and admonished that "courts are not free to amend a rule outside the process Congress ordered," the Ninth Circuit concluded that the lesson of Amchem Products was plain: "Federal courts ... lack authority to substitute for Rule 23's certification criteria a standard never adopted." Id. at 622, 117 S.Ct. 2231.

 

In sum, the Ninth Circuit concluded that the language of Rule 23 does not impose a freestanding administrative feasibility prerequisite to class certification, and, mindful of the Supreme Court's guidance, the Court of Appeals declined to interpose an additional hurdle into the class certification process delineated in the enacted Rule. 

 

The Ninth Circuit recognized that the Third Circuit requires putative class representatives to demonstrate "administrative feasibility" as a prerequisite to class certification. See Byrd v. Aaron's Inc., 784 F.3d 154, 162–63 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F.3d 300, 306–08 (3d Cir. 2013). The Court noted that the rationale that the Third Circuit has given for imposing an administrative feasibility requirement is the need to mitigate the administrative burdens of trying a Rule 23(b)(3) class action.

 

Courts adjudicating such actions must provide notice that a class has been certified and an opportunity for absent class members to withdraw from the class. See Wal–Mart Stores, Inc. v. Dukes, 564 U.S. 338, 362, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011); accord FED. R. CIV. P. 23(c)(2)(B). The Third Circuit largely justifies its administrative feasibility prerequisite as necessary to ensure that compliance with this procedural requirement does not compromise the efficiencies Rule 23(b)(3) was designed to achieve.  See Shelton v. Bledsoe, 775 F.3d 554, 562 (3d Cir. 2015); Carrera, 727 F.3d at 307.

 

However, the Ninth Circuit noted that Rule 23(b)(3) already contains a specific, enumerated mechanism to achieve that goal: the manageability criterion of the superiority requirement. Rule 23(b)(3) requires that a class action be "superior to other available methods for fairly and efficiently adjudicating the controversy," and it specifically mandates that courts consider "the likely difficulties in managing a class action." FED. R. CIV. P. 23(b)(3)(D).

 

The Court also observed that the Seventh Circuit had rejected the Third Circuit's justifications in Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015), and the Sixth Circuit followed suit in Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015). Accordingly, the Ninth Circuit concluded that Rule 23's enumerated criteria already addressed the interests that motivated the Third Circuit and, therefore, an independent administrative feasibility requirement was unnecessary.

 

Moreover, relying on the Seventh Circuit case of Mullins, which observed that requiring class proponents to satisfy an administrative feasibility prerequisite "conflicts with the well-settled presumption that courts should not refuse to certify a class merely on the basis of manageability concerns," the Ninth Circuit concluded that this presumption makes ample sense given the variety of procedural tools courts can use to manage the administrative burdens of class litigation. See Mullins, 795 F.3d at 663.

 

The Court further noted that Rule 23(c) already enables district courts to divide classes into subclasses or certify a class as to only particular issues. FED. R. CIV. P. 23(c)(4), (5).  The Ninth Circuit also reasoned that adopting a freestanding administrative feasibility requirement instead of assessing manageability as one component of the superiority inquiry would have practical consequences inconsistent with the policies embodied in Rule 23, noting that Rule 23(b)(3) calls for a comparative assessment of the costs and benefits of class adjudication, including the availability of "other methods" for resolving the controversy, FED. R. CIV. P. 23(b)(3).

 

In addition, following the reasoning of the Seventh Circuit's Mullins, the Ninth Circuit held that a standalone administrative feasibility requirement would invite courts to consider the administrative burdens of class litigation "in a vacuum." See Mullins, 795 F.3d at 663. The Court reasoned that the difference in approach would often be outcome determinative for cases like this one, in which administrative feasibility would be difficult to demonstrate but in which there might be no realistic alternative to class treatment. See id. at 663–64.

 

The Ninth Circuit therefore concluded that class actions involving inexpensive consumer goods would likely fail at the outset if administrative feasibility were a freestanding prerequisite to certification.

 

Again citing to the Supreme Court case, Amchem, the Court reasoned that the authors of Rule 23 opted not to make the potential administrative burdens of a class action dispositive and instead directed courts to balance the benefits of class adjudication against its costs. The Ninth Circuit held that it lacked authority to substitute its judgment for the authors of Rule 23. See Amchem Prods., 521 U.S. at 620, 117 S.Ct. 2231.

 

The Ninth Circuit noted that Third Circuit justified its administrative feasibility requirement as necessary to protect absent class members and to shield bona fide claimants from fraudulent claims. With respect to absent class members, the Third Circuit had expressed concern about whether courts would be able to ensure individual notice without a method for reliably identifying class members. See Byrd, 784 F.3d at 165; Carrera, 727 F.3d at 307.

 

The Ninth Circuit, however, believed that concern was unfounded, because neither Rule 23 nor the Due Process Clause requires actual notice to each individual class member.

 

As you may recall, Rule 23 requires only the "best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." FED. R. CIV. P. 23(c)(2)(B).  "Rule 23 rule does not insist on actual notice to all class members in all cases and recognizes it might be impossible to identify some class members for purposes of actual notice." See Mullins, 795 F.3d at 665.

 

Similarly, the Ninth Circuit held, the Due Process Clause does not require actual, individual notice in all cases. See Silber v. Mabon, 18 F.3d 1449, 1453–54 (9th Cir. 1994). Courts have routinely held that notice by publication in a periodical, on a website, or even at an appropriate physical location is sufficient to satisfy due process. See, e.g., Hughes v. Kore of Ind. Enter., Inc., 731 F.3d 672, 676–77 (7th Cir. 2013).

 

Moreover, the Court observed that the Third Circuit's lack-of-notice concern presumes that some harm will inure to absent class members who do not receive actual notice. 

 

Although in theory, inadequate notice might deny an absent class member the opportunity to opt out and pursue individual litigation, the Ninth Circuit held that in reality, that risk was virtually nonexistent in low-value consumer class actions.  Such cases typically involve low-cost products and, as a result, recoveries were too small to incentivize individual litigation. The Court explained that an administrative feasibility requirement like that imposed by the Third Circuit would likely bar such actions because consumers generally do not keep receipts or other records of low-cost purchases.

 

The Ninth Circuit further explained that, practically speaking, a separate administrative feasibility requirement would only protect a purely theoretical interest of absent class members at the expense of any possible recovery for all class members in those cases that depend most on the class action mechanism.

 

The Court concluded that justifying an administrative feasibility requirement as a means of ensuring perfect recovery at the expense of any recovery would undermine the very purpose of Rule 23(b)(3), which was the "vindication of 'the rights of groups of people who individually would be without effective strength to bring their opponents into court at all.' " Amchem Prods., 521 U.S. at 617, 117 S.Ct. 2231.

 

The Ninth Circuit noted that the Third Circuit had expressed concern that without an administrative feasibility requirement, individuals would submit illegitimate claims and thereby dilute the recovery of legitimate claimants. See Carrera, 727 F.3d at 310.

 

The Ninth Circuit agreed that the fraud concern of the Third Circuit might be valid in theory, but, relying again on Mullins, it concluded that, in practice, the risk of dilution based on fraudulent or mistaken claims was low. See Mullins, 795 F.3d at 667. The Court pointed to class actions involving low-cost consumer goods, noting that consumers were unlikely to risk perjury charges and spend the time and effort to submit a false claim for a de minimis monetary recovery.

 

Further, the Court noted that consistently low participation rates in consumer class actions made it very unlikely that non-deserving claimants would diminish the recovery of participating, bona fide class members. 

 

Finally, observing that the Third Circuit has characterized its administrative feasibility requirement as necessary to protect the due process rights of defendants to raise individual challenges and defenses to claims, the Ninth Circuit, relying on Mazza v. Am. Honda Motor Co., Inc., 666 F.3d 581, 595 (9th Cir. 2012) and Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 594 (3d Cir. 2012), pointed out that at the class certification stage, class representatives bear the burden of demonstrating compliance with Rule 23.

  

The Court reminded the manufacturer that it would have the opportunity to challenge the claims of absent class members if and when they filed claims for damages. The Court explained that at the claims administration stage, other litigants have relied on claim administrators, various auditing processes, sampling for fraud detection, and follow-up notices to explain the claims process, and other techniques tailored by the parties and the court to validate claims. See Mullins, supra, 795 F.3d at 667. The Court explained that Rule 23 specifically contemplates the need for such individualized claim determinations after a finding of liability.

 

The manufacturer did not explain why such procedures are insufficient to safeguard its due process rights.

 

Given the existing opportunities to challenge the consumers' case, the Ninth Circuit could see no reason why requiring an administratively feasible way to identify all class members at the certification stage would be necessary to protect the manufacturer's due process rights. See Mullins, 795 F.3d at 670. Although it noted that the manufacturer might prefer to terminate the litigation at class certification rather than later challenging each individual class member's claim to recovery, the Court concluded that there is no due process right to "a cost-effective procedure for challenging every individual claim to class membership." Id. at 669.

 

Even if the concern were that claimants in cases like this would eventually offer only a self-serving affidavit as proof of class membership, the Court did not see any reason why that issue should be resolved at the class certification stage to protect a defendant's due process rights. The Court explained that if an oil consumer pursued an individual lawsuit instead of a class action, an affidavit describing her purchases would create a genuine issue if the manufacturer disputed the affidavit, and would prevent summary judgment against the consumer. See Mullins, 795 F.3d at 669; accord FED. R. CIV. P. 56(c)(1)(A). Given that a consumer's affidavit could force a liability determination at trial without offending the Due Process Clause, the Ninth Circuit saw no reason to refuse class certification simply because that same consumer presented her affidavit in a claims administration process after a liability determination had already been made.

 

Moreover, the Court explained that identification of class members would not affect a defendant's liability in every case. For example, in this case, the consumers proposed to determine the manufacturer's aggregate liability by (1) calculating the price premium attributable to the allegedly false statement that appeared on every unit sold during the class period, and (2) multiplying that premium by the total number of units sold during the class period.  This would affect the amount paid to each class member, but not the total amount paid by the defendant.

 

The Ninth Circuit agreed with the Seventh Circuit that, in cases in which aggregate liability can be calculated in such a manner, "the identity of particular class members does not implicate the defendant's due process interest at all" because "the addition or subtraction of individual class members affects neither the defendant's liability nor the total amount of damages it owes to the class." See Mullins, 795 F.3d at 670; see also Six (6) Mexican Workers, 904 F.2d at 1307.

 

For these reasons, the Ninth Circuit held that protecting a defendant's due process rights did not necessitate an independent administrative feasibility requirement.

 

In conclusion, the Ninth Circuit affirmed the trial court's ruling declining to condition class certification on the consumers' proffer of an administratively feasible way to identify putative class members.

 

 

 

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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Saturday, January 14, 2017

FYI: 7th Cir Rejects Alleged RESPA "Pattern and Practice" Due to No Evidence of "Coordination"

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgage servicer's response to a borrower's written request for information complied with requirements of the federal Real Estate Settlement Procedures Act ("RESPA") and, to the extent any information was missing, the borrower suffered no actual damages as the result.

 

In so ruling, the Seventh Circuit rejected the borrowers' pattern or practice argument under RESPA, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because "[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn't enough to support recover statutory damages."

 

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

 

The borrower's switched insurance carriers, but failed to inform the mortgage servicer. This resulted in the servicer paying the wrong homeowner's insurer using money from the loan's escrow account.

 

Upon learning of the error, the servicer paid the correct insurer and told the borrowers that they would receive a refund check from their former insurer, and that they needed to send the refund check back to the servicer to replenish the escrow account.

 

Instead of doing as instructed, the borrowers kept the refund from the insurer and did not replenish their escrow account.  This resulted in the servicer adjusting their monthly payment upward to make up for the shortfall.

 

The borrowers refused to pay the increased amount, even though the difference was only $66.86 per month, and the loan went into default.

 

The borrowers sent the servicer two letters requesting information under RESPA and demanding that the servicer replenish the escrow account because it erroneously paid the wrong insurance carrier. The servicer responded by providing a complete account history, which included a detailed escrow statement.

 

The borrowers then sued the servicer for allegedly violating RESPA because the servicer's response to their request for information was supposedly inadequate and for supposedly breaching the common law implied covenant of good faith and fair dealing. The borrowers sought more than $300,000 damages and blamed the collapse of their marriage on the servicer

 

The district court entered summary judgment in the servicer's favor, holding that there was no evidence that the servicer violated either its statutory obligations under RESPA or the common-law covenant of good faith and fair dealing. The borrowers appealed.

 

On appeal, the Seventh Circuit first addressed the common law claim, explaining that "Indiana does not recognize an implied covenant of good faith and fair dealing in every contractual setting; instead, the state courts have recognized an implied covenant of good faith in the context of employment contracts, insurance contracts, and certain other limited circumstances—for example, when on counterparty stands in a fiduciary, superior, or special relationship to the other."

 

Because the district court assumed without deciding that the duty of good faith applied in the context of mortgage servicing, the Appellate Court adopted the same assumption.  The Seventh Circuit explained that "[a] party violates the implied duty of good faith and fair dealing when, though not breaching the express terms of the contract, he nonetheless behaves unreasonably or unfairly."

 

The borrowers argued that the servicer breached this duty by holding a partial payment they made in December 2010 "in suspense."  The Seventh Circuit rejected their argument because the servicer never agreed to accept the partial payment "in full satisfaction" of the December payment that was due, and moreover, the mortgage contained standard language allowing the servicer to accept partial payments without waiving its right to enforce the loan's terms.

 

The Seventh Circuit also rejected the borrowers' argument that the servicer had a duty to apply a 2010 escrow refund toward their December 2010 payment, reasoning that by the time the escrow refund was calculated, the account was already past due, "so even if [the bank] had applied those funds to the account, the late fees would already have accrued." In addition, the Court noted that the borrowers could have used the escrow refund to pay the balance owed on the December payment, but chose not to so.  The Court concluded that the servicer had no duty to do this for them.

 

Turning to the RESPA claim, the Seventh Circuit recited that "RESPA requires mortgage servicers to correct account errors and disclose account information when a borrower sends a written request for information."   As you may recall, RESPA provides borrowers with a cause of action if a servicer fails to comply for actual damages resulting from the failure to comply, plus statutory damages of up to $2,000 if the borrower proves that the servicer engaged in a "pattern or practice of noncompliance. A prevailing borrower is also entitled to recover costs and attorney's fees.

 

The Seventh Circuit also explained that a servicer does not have a duty to respond to all inquiries or complaints from borrowers. Instead, RESPA "covers only written requests alleging an account error or seeking information relating to loan servicing." The statute defines "servicing" as "receiving any periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts …, and making the payments with respect to the amounts received from the borrower as may be required" by the loan documents.

 

The Court continued that RESPA requires that a servicer that receives a qualified written request take one of three actions: (a) correct the account error; (b) after investigating, provide the borrower with a written explanation or clarification why the account is correct; or (c) provide the information requested to the borrower or explain why its unavailable.

 

Here, the Seventh Circuit found that the servicer's response "almost perfectly" complied with the requirements of RESPA subsection 2605(e)(2) because it provided a complete account history showing all monthly payments, how those payments were applied to principal, interest, and escrow, escrow payments and "a complete escrow accounting."

 

The only things missing, the Court noted, were the name of the insurance company that received the $1,422 escrow payment and an explanation of why the December 2010 payment was correctly held in suspense.

 

The Seventh Circuit held, however, that this missing information was had already been provided in earlier correspondence and, accordingly, even if the response "fell slightly short of full compliance as a technical matter," the borrowers could not show "that they suffered any actual damages 'as a result of' any failure to comply with RESPA response duties."

 

The Court also addressed the borrower's allegation that the servicer's' failure to respond properly caused their marriage to dissolve, finding that while "[e]motional distress damages are recoverable under RESPA, … the breakdown of a marriage is not the type of harm that faithful performance of RESPA duties avoids. This kind of harm is far too attenuated from the alleged violation to cross the proximate-cause threshold."

 

The Seventh Circuit held that even though the servicer's response was technically incomplete, "no reasonable fact finder could conclude that [the borrowers] suffered any actual damages as a result of that shortcoming."

 

The Court also found that because the borrowers failed to produce any evidence showing a pattern or practice of noncompliance with RESPA, their claim for statutory damages failed.

 

The Seventh Circuit rejected the borrowers' pattern or practice argument, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because "[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn't enough to support recover statutory damages."

 

Accordingly, the district court's summary judgment was affirmed.

 

 

 

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, January 12, 2017

FYI: Fla App Ct (3rd DCA) Holds Mortgagee Failed to Prove Repairs to Property Not "Economically Feasible"

The Court of Appeal of the State of Florida, Third District, recently reversed summary judgment in favor of a mortgagee-loss payee under a homeowner's insurance policy, holding that the mortgagee failed to provide evidence of the value of the property after repairs, and therefore failed to show that repairing the property was not economically feasible.

 

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

 

A consumer took out a purchase money loan for $120,000 secured by a mortgage on the residential property.  The original lender assigned the mortgage to two fractional assignees, one of whom assigned again it to a limited liability company.

 

The property securing the loan was damaged by fire and the owner filed a claim with her homeowner's insurance carrier. The insurer issued two checks totaling $94,162.52 jointly payable to the homeowner, the law firm representing her, and the mortgagees.

 

One of the mortgagees withheld the insurance proceeds, invoking a section of the mortgage that gave it the right to apply the insurance proceeds to the loan if it was not economically feasible to repair the property. An initial exterior appraisal of the home valued it at $90,000, but a contractor's repair estimate was for $98,717. The homeowner later provided a lower revised repair estimate of $53,117.

 

The homeowner sued the mortgagee, alleging that she was unable to repair the property because the mortgagee refused to release the insurance proceeds. The mortgagee moved to dismiss and the homeowner filed an amended complaint raising claims for breach of contract, breach of implied covenant of good faith and fair dealing, declaratory judgment and unjust enrichment.

 

The mortgagee moved for summary judgment on all claims and the homeowner filed a response in opposition supported by two affidavits. The trial court granted summary judgment in favor of the mortgagee, finding that "it was not economically feasible to repair the property because the cost to repair was greater than the value of the property."  The homeowner moved for reconsideration and rehearing, but the trial court denied the motion. The homeowner appealed.

 

On appeal, reviewing the summary judgment under a de novo standard, the Appellate Court pointed out that the homeowner's affidavit in opposition to summary judgment indicated that it was economically feasible to repair the property "because the value of the property with repairs will be significantly greater than the outstanding balance on the mortgage."

 

In addition, the Court noted, the mortgage did not define the term "economically feasible,' a term subject to more than one interpretation. Because the mortgagee "did not provide an estimate of the value of the property after repairs, [it] therefore did not meet its burden of proof that no genuine issue of material fact exists."

 

The Court further found that summary judgment was improper because a genuine issue of material fact existed as to the cost of repairing the property. The mortgagee relied on the initial estimate that the homeowner used to obtain the insurance pay-out, while the homeowner relied on a revised estimate that was much less than the insurance proceeds.

 

Such conflicting evidence precluded summary judgment because "the trial court must not weigh material conflicting evidence or pass upon the credibility of the witness." … Only a trier of fact may weigh evidence and determine credibility—the court was without authority to with the evidentiary value of the conflicting estimates."

 

Accordingly, the Appellate Court reversed the summary judgment order 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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