Tuesday, November 12, 2019

FYI: 3rd Cir Holds Failure to Turn Over Collateral Repossessed Prior to Bankruptcy Does Not Violate Automatic Stay

The U.S. Court of Appeals for the Third Circuit recently held, in a case of first impression in that Circuit, that a secured creditor's failure to turn over collateral repossessed prior to the filing of the bankruptcy petition does not violate the automatic stay.

 

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

 

The debtor's automobile was repossessed after she defaulted on her installment loan. She then filed a voluntary petition under Chapter 13 of the Bankruptcy Code, notified her creditors and demanded the return of the automobile.

 

The creditors did not comply, and the debtor filed a motion for turnover and for sanctions for violating the automatic stay.

 

The Bankruptcy Court entered an order requiring the creditors to return the automobile to the debtor because the automobile was property of the estate under section 542(a) of the Bankruptcy Code, but denied the request for sanctions.

 

In so ruling, the Bankruptcy Court adopted the minority view "that a creditor does not violate the stay in regard to property of the estate if it merely maintains the status quo."  The majority view is "that Section 542(a)'s turnover provision 'is self-effectuating' because 'it does not allow for the possibility of defenses to turnover.'"

 

The District Court affirmed the Bankruptcy Court, and the debtor appealed to the Third Circuit.

 

On appeal, the Third Circuit noted that it was presented with an issue of first impression: "whether, upon notice of the debtor's bankruptcy, a secured creditor's failure to return collateral that was repossessed pre-bankruptcy petition is a violation of the automatic stay."

 

The Court answered "no," joining the minority position taken by the Tenth and D.C. Circuits, "holding that a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor's collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy because failure to return the collateral received pre-petition does not constitute 'an act … to exercise control over property of the estate …'" under Code section 362(a)(3). The Court thus affirmed the District Court's order affirming the Bankruptcy Court.

 

The Third Circuit rejected the majority position, held by the Second, Seventh, Eighth, Ninth and Eleventh Circuits, that "a secured creditor, upon learning of the bankruptcy filing, must return the collateral to the debtor and failure to do so violates the automatic stay …" because doing so violates section 362(a)'s prohibition on any "act … to exercise control of property over the estate."  Under these rulings, "Section 362(a)(3)'s automatic stay provision and Section 542(s)'s turnover provision operate together[,] … a violation of the turnover provision results in a violation of the automatic stay."

 

The Court began by examining the statutory language of section 362(a)(3), explaining that "[i]f we ultimately determine that a provision 'is clear and unambiguous, [we] must simply apply it.' However, if we find that a provision is ambiguous, 'we then turn to pre-Code practice and legislative history to find meaning.'"

 

Although the Third Circuit agreed "that Section 362(a)(3) is unambiguous, [it declined] to hold that a plain reading of that Section compels the conclusion that the creditors in this case violated the automatic stay by failing to turn over the [automobile] to [the debtor]."

 

First, the Court concluded that "the text of Section 362(a)(3) requires a post-petition affirmative act to exercise control over property of the estate." It then reasoned that in the case at bar, "a post-petition affirmative act to exercise control over the [automobile] is not present." This is because the car was repossessed before the debtor filed bankruptcy. After the filing of the petition, "the creditors merely passively retained that same possession and control." Thus, "the requisite post-petition affirmative 'act … to exercise control over' the car was lacking.

 

The Third Circuit further reasoned that its conclusion "is bolstered by the legislative purpose and underlying policy goals of the automatic stay. It is well-established that one of the automatic stay's primary purposes is 'to maintain the status quo between the debtor and [his] creditors, thereby affording the parties and the [Bankruptcy] Court an opportunity to appropriately resolve competing economic interests in an orderly and effective way.'"

 

By retaining possession of the car "after learning of the bankruptcy filing, the creditors preserved the pre-petition status quo. To hold that such a retention of possession violates the automatic stay would directly contravene the status-quo aims of the automatic stay."

 

The Third Circuit rejected the debtor's argument that section 542(a) turnover provision was "self-executing," reasoning that "a creditor's obligation to turn over estate property to the debtor is not automatic. Rather the turnover provision requires the debtor to bring an adversary proceeding in Bankruptcy Court in order to give the Court the opportunity to determine whether the property is subject to turnover under Section 542(a)."

 

 

 

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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Sunday, November 10, 2019

FYI: 11th Cir Reverses Denial of Class Cert in Challenge to Post-Discharge Mortgage Statements

In putative class action of borrowers who received mortgage statements after a bankruptcy discharge, the U.S. Court of Appeals for the Eleventh Circuit recently reversed a trial court order denying certification for failure to establish predominance.

 

In so ruling, the Eleventh Circuit held that a mortgage servicer's affirmative defense that it is not liable under the federal Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., and the Florida Consumer Collection Practices Act ("FCCPA"), Fla. Stat. § 559.55 et seq., because the only remedy for violating a discharge injunction is under the Bankruptcy Code requires no individualized inquiries and is common to all class members.

 

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

 

The named-plaintiff borrowers obtained a home loan secured by a mortgage.  After the borrowers defaulted, the note holder filed foreclosure.  The borrowers then filed for Chapter 7 bankruptcy protection.  The borrowers did not reaffirm the debt, vacated the property, and the bankruptcy court entered a discharge order pursuant to section 524(a)(2) that relieved them from any personal liability on the mortgage debt.

 

After the discharge order, the note holder's mortgage servicer sent the borrowers multiple monthly statement for their mortgage loan.  In response the borrowers sued the mortgage servicer on behalf of themselves and a putative class alleging claims arising out of the FDCPA and the FCCPA.

 

The named-plaintiff borrowers alleged that the servicer violated the FDCPA because the monthly mortgage statements "attempted to collect a debt and represented that it had a legal right to collect upon discharged monetary amounts." This allegedly violated the FDCPA's prohibition against using "false, deceptive, or misleading representation[s]" including by making false representations about "the character, amount, or legal status of [a] debt." 15 U.S.C. § 1692e(2)(A). The named-plaintiff borrowers claimed that sending the monthly statements falsely represented that the servicer "had a legal right to collect the mortgage debt from the [borrowers] and also falsely represented the legal status of the debt."

 

The named-plaintiff borrowers also claimed that the servicer violated the FCCPA as the mortgage statements allegedly "claim[ed] and attempt[ed] to enforce a debt which was not legitimate and not due and owing." Fla. Stat. § 559.72(9).

 

Relevant to this appeal, the servicer raised an affirmative defenses that the Bankruptcy Code precluded the FDCPA and FCCPA claims.

 

The borrowers moved for class certification and asked the trial court to certify the following class:

 

"All Florida consumers who (1) have or had a residential mortgage loan serviced by [the servicer], which [the servicer] obtained when the loan was in default; (2) received a Chapter 7 discharge of their personal liability on the mortgage debt; and (3) were sent a mortgage statement dated September 11, 2013 or later, in substantially the same form [as mortgage statements the borrowers received that] was mailed to the debtor's home address in connection with the discharged mortgage debt.

 

The trial court determined that the named-plaintiff borrowers failed to establish predominance as required under Federal Rule of Civil Procedure Rule 23(b)(3), and denied the motion for class certification.

 

The trial court found that the class included members who, like the named-plaintiff borrowers, vacated their homes, as well as members who did not leave their homes. The trial court determined that the servicer's preemption defense would only apply when borrowers remained in their homes and the exception to discharge injunctions in section 524(j) applied.  As such, the trial court then reasoned that it would be necessary to conduct individualized inquiries "for every class member to determine whether the § 524(j) exception applied, and if so, whether the Bankruptcy Code precluded and/or preempted the FDCPA and FCCPA."

This interlocutory appeal followed.

 

The Eleventh Circuit framed the question before it as follows: "whether the district court abused its discretion in deciding that common issues did not predominate for the alleged claims."

 

As you may recall, Rule 23(b)(3) requires a trial court to determine whether "the issues in the class action that are subject to generalized proof and thus applicable to the class as a whole, . . . predominate over those issues that are subject only to individualized proof."  To accomplish this the court must "identify the parties' claims and defenses and their elements" and "then classify these issues as common questions or individual questions by predicting how the parties will prove them at trial." "Common questions are ones where the same evidence will suffice for each member, and individual questions are ones where the evidence will vary from member to member." The court then must "determine whether the common questions predominate over the individual ones."

 

Regarding the FDCPA claim, the Eleventh Circuit found that the trial court erred when it found that the servicer's Bankruptcy Code preemption affirmative defense only applied "to class members who remained in their homes." Instead, because the servicer's affirmative defense "potentially barred every class member's FDCPA claim, the district court was required to treat the defense as raising a common issue."

 

The Eleventh Circuit observed that section 1692e(2)(A) of the FDCPA bars a debt collector from making "any false, deceptive, or misleading representation . . . in connection with the collection of any debt," which includes making a false representation about "the character, amount, or legal status of any debt." Here, the named-plaintiff borrowers alleged that the servicer violated this section by attempting "to collect a mortgage debt that had been discharged."

 

The servicer's preemption affirmative defense asserted "that the Bankruptcy Code provides the only remedy for a claim that a creditor violated a bankruptcy court's discharge injunction and thus bars an FDCPA claim resting on the creditor's attempt to collect a debt in violation of a bankruptcy court's discharge injunction."

 

The Eleventh Circuit determined that trial court erred because whether the Bankruptcy Code precludes an FDCPA "claim that a creditor engaged in false or deceptive conduct by trying to collect a debt in violation of a discharge injunction is common to all class members."

 

Specifically, according to the Eleventh Circuit, the trial court wrongly ignored the borrowers' allegations that the servicer violated discharge injunctions when it sent mortgage statements to class members who left their homes "as section 524(a) provides that a bankruptcy court's discharge order operates as an injunction that bars any act to collect a discharged debt as a personal liability of the debtor." 11 U.S.C. § 524(a)(2). Thus, the servicer's affirmative defense "that it is not liable under the FDCPA because the only remedy for violation of a discharge injunction is under the Bankruptcy Code applies to all class members," regardless of whether they vacated their properties.

 

This error, the Eleventh Circuit held, requires vacating the class certification order because when a trial court "improperly categorizes a question as presenting a common or an individual issue" in determining predominance, it abuses its discretion.

 

The Eleventh Circuit did not decide whether the servicer's preclusion affirmative defense is "meritorious — that is, whether the Bankruptcy Code actually precludes or displaces any remedy available under the FDCPA and FCCPA" and specifically noted that it has not yet "addressed this question, which has split the circuits."  Compare, Walls Wells Fargo Bank, N.A., 276 F.3d 502, 511 (9th Cir. 2002) ("Because [the debtor's] remedy for violation of § 524 no matter how cast lies in the Bankruptcy Code, her simultaneous FDCPA claim is precluded."), with Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86, 91 (2d Cir. 2016) ("the Bankruptcy Code does not broadly repeal the FDCPA for purposes of FDCPA claims based on conduct that would constitute alleged violations of the discharge injunction.")

 

Turning to the alleged FCCPA claim, the Eleventh Circuit reached the same conclusion.  The servicer raised the same defense that the Bankruptcy Code preempted each class member's FCCPA claim. For the same reasons that it used concerning the FDCPA claim, the Eleventh Circuit determined that the trial court abused its discretion in finding that the preemption affirmative defense raised an individualized issue instead of an issue common to all class members.

 

Therefore, the Eleventh Circuit reversed the trial court's order denying class certification, and remanded for the trial court to reconsider whether common questions of law or fact predominate given that whether the Bankruptcy Code preempted the alleged claims raises a common, rather than an individualized, issue.

 

 

 

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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Monday, November 4, 2019

FYI: Cal App Ct (1st Dist) Refuses to Enforce Predispute Jury Waiver Despite Forum Selection Clause

The Court of Appeal of the State of California, First Appellate District, recently held that a forum selection clause in favor of a New York forum was unenforceable where the clause included a predispute jury trial waiver, which is unenforceable under California law but which would have been enforceable under New York law. 

 

Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court. 

 

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

 

The plaintiff storeowner ("Plaintiff") filed a lawsuit against the defendant company ("Defendant") alleging that the Defendant supposedly defrauded the Plaintiff regarding a lease agreement for credit card processing equipment.

 

The complaint alleged causes of action for fraud, rescission, injunctive relief, and violation of the California Business and Professions Code section 17200.  The complaint also attached a lease agreement, which provided that New York law would apply to all disputes between the parties, and that all disputes "shall be instituted and prosecuted exclusively in the federal or state court located in the State and County of New York."  Further, the agreement provided that "YOU AND WE WAIVE, INSOFAR AS PERMITTED BY LAW, TRIAL BY JURY IN ANY DISPUTE."

 

The Defendant moved to dismiss the complaint based on the forum selection clause of the lease agreement.  The trial court granted the dismissal, and the matter was appealed. 

  

On appeal, the Appellate Court first observed that "California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable," but "California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state's public policy."

 

The Appellate Court also noted that a party opposing enforcement of a forum selection clause ordinarily bears the burden of proving why it should not be enforced, but the burden is "reversed when the claims at issue are based on unwaivable rights created by California statutes [in which case] the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually designated forum" will not diminish the substantive rights afforded under California law.

 

The Plaintiff argued that the forum selection clause impacted his substantive rights under California law because it includes a predispute waiver of the right to a jury trial and such right is unwaivable, even voluntarily, under California law.  Thus, the Plaintiff argued that the trial court erred in failing to place the burden on the Defendant to prove litigating in New York would not result in a diminution of his substantive rights under California law.

 

The Defendant argued that the Plaintiff's lawsuit did not involve claims based on unwaivable rights under a statutory scheme and therefore the burden should not shift to the Defendant.

In siding with the Plaintiff, the Appellate Court held that "enforcing the forum selection claim here would be contrary to California's fundamental public policy protecting the jury trial right and prohibiting courts from enforcing predispute jury trial waivers."

 

Although the Plaintiff's claims were not based on a statutory scheme which includes an antiwaiver provision, the "complaint includes a demand for a jury trial, which [the Plaintiff] correctly argues is unwaivable in predispute contracts under California law."  The right to a jury trial "is inviolate under the California Constitution, and which may only be waived by the methods enumerated by the Legislature." 

 

However, "[w]hile California law holds predispute jury trial waivers are unenforceable, it is undisputed that under New York law there is no similar prohibition." 

 

The Appellate Court next considered whether the right to jury trial was a substantive or procedural right, which it noted "is an open question."

 

After analyzing the issue, the Appellate Court determined that "even if the rule is considered procedural, it is intimately bound up with the state's substantive decision making" and "serves substantive state policies" of preserving the right to jury trial, which is "an interest the California Constitution zealously guards."

 

Thus, the Appellate Court held that "because enforcement of the forum selection clause here has the potential to contravene a fundamental California policy of zealously guarding the inviolate right to a jury trial, which is unwaivable by predispute agreements, [the Defendant] bears the burden of showing that litigation in New York" will not diminish the Plaintiff's substantive rights under California law.

 

The Defendant argued that the only issue to be decided was the enforcement of the forum selection clause, and that the issue of whether to enforce the jury trial waiver should be decided by a New York court. 

 

The Appellate Court disagreed, ruling that "enforcing the forum selection clause in favor of New York will put the issue of enforceability of the jury trial waiver contained in the same agreement before the New York court," and "[b]ecause New York permits predispute jury trial waivers, and California does not, enforcing the forum selection clause has the potential to operate as a waiver of a right the Legislature and our high court have declared unwaivable."

 

The Appellate Court therefore held that "the trial court erred in enforcing the forum selection clause in favor of a New York forum where the clause includes a predispute jury trial waiver, which . . . is unenforceable under California law."

 

Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court, and remanded the matter for entry of a new order denying the motion 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

 

 

 

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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Thursday, October 31, 2019

FYI: 5th Cir Holds BK Courts Cannot Enforce Discharge Injunctions from Other Districts

The U.S. Court of Appeals for the Fifth Circuit recently held that a bankruptcy court lacks the power to enforce discharge injunctions entered in other districts, and that the debtors' particular private education loans were not excepted from discharge.

 

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

 

Two debtors obtained student loans, one to prepare for his bar exam, and the other to fund tuition and expenses to attend a vocational school, from a "for-profit, public corporation whose loans are not part of any governmental loan program." The loans were then transferred to a loan servicing company.

 

Both debtors filed for Chapter 7 bankruptcy, one in Texas and the other in Virginia. Both listed the loans on their schedules and neither disputed the debt. Both received general discharges. After the discharges, the loan servicer made telephone calls and sent e-mails demanding repayment.

 

One of the debtors filed an adversary proceeding in the same Texas bankruptcy court that granted him the discharge, seeking a temporary injunction barring further collection efforts, a declaratory judgment that his student loan had been discharged, and an order holding the loan servicer in contempt for violating the discharge injunction.

 

The second debtor joined in an amended complaint "seeking to certify a nationwide class of those who (1) obtained prepetition private education loans from [the loan servicer] or related companies to cover expenses at an institution not accredited under Title IV; (2) later filed for bankruptcy and were issued discharge orders; (3) have never reaffirmed their prepetition private education loan debt; and (4) are being induced to pay their allegedly discharged private education loans."

 

The loan servicer moved for summary judgment, "arguing that a bankruptcy court has no jurisdiction to interpret and enforce discharge orders entered by courts in other judicial districts and that the plaintiffs' education loans were nondischargeable."

 

The bankruptcy court denied the motion, finding that "the general rule giving an issuing court sole authority to enforce its own injunctions [did not apply] to the automatic injunction created by statute when a bankruptcy court grants a discharge under 11 U.S.C. § 727." The court also held that the subject "private loans" "were not within the ambit of the Bankruptcy Code's bar on the discharge of some student loans."

 

The bankruptcy court "authorized an interlocutory appeal, then certified the order for direct appeal [to the 5th Circuit], eschewing the usual initial appellate review by a district court." A panel of the Fifth Circuit "granted the unopposed motion to authorize the appeal."

 

On appeal, the loan servicer argued "that the bankruptcy court either has no jurisdiction to enforce the statutory injunctions arising from a bankruptcy discharge that another bankruptcy court ordered, or at least for prudential reasons may not do so. Second, … that the plaintiffs' education loans are within the category of loans that under the Bankruptcy Code are nondischargeable."

 

The Fifth Circuit first addressed whether "a bankruptcy court other than the one that granted the discharge [may] enforce the injunction[,]" finding that "[t]he question of a bankruptcy judge's injunctive reach within its own district has not been answered."

 

After analyzing the history of the bankruptcy discharge injunction, the Court found that "Congress's decision to eliminate language that seemed to allow enforcement of the discharge injunction in a new district gives weight to the argument that after the 1978 Bankruptcy Code was adopted, enforcement in … a different district was prohibited."

 

Turning to "the law that exists today[,]" the Fifth Circuit reviewed opinions from "[o]ther circuits [that] have insisted on a return to the bankruptcy court whose discharge order created the injunction[,] including the Eleventh Circuit, which] has held that only the bankruptcy court issuing the discharge has jurisdiction to enforce the injunction through contempt."

 

Although not willing to go as far as the Eleventh Circuit, the Fifth Circuit "adopt[ed] the language of the Second Circuit that returning to the issuing bankruptcy court to enforce an injunction is required at least in order to uphold 'respect for judicial process[,]' concluding that …[t]he bankruptcy court erred in holding that it could address contempt for violations of injunctions arising from discharges by bankruptcy courts in other districts."

 

Because "the bankruptcy court did not reach the issue of certification of a class," the Court warned "that because of the limitation on enforcement we have just identified, and indeed because we are aware of no prior certification of a class that includes debtors whose discharges were entered by bankruptcy courts in other districts, certifying such a class would be highly dubious."

 

The Court also left "for the court on remand the separate issue … of whether that court has authority to enforce the injunctions arising from discharges entered by any bankruptcy court in the same judicial district."

 

Turning to the issue of whether the subject loans were dischargeable, the Court examined the language of 11 U.S.C. § 523(a), which excepts from discharge certain educational loans "unless excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor's dependents[.]" It then discussed "some of the prior statutory language that the current statute has replaced or supplemented" before concluding that "[t]he loans at issue here, though obtained in order to pay expenses of education, do not qualify as 'an obligation to repay funds received as an educational benefit, scholarship, or stipend' [under subsection 523(a)(8)(A)(ii)] because their repayment was unconditional. They therefore are dischargeable."

 

Accordingly, the Fifth Circuit reversed "the bankruptcy court's determination that it has authority to enforce a discharge injunction entered by a different district's bankruptcy court[,] … [affirmed] the determination that loans such as those in issue here are dischargeable" and remanded the case to the bankruptcy court.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   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.


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Tuesday, October 29, 2019

FYI: 5th Cir Holds Bankruptcy Discharge Violations Not Always Subject to Arbitration

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a bankruptcy court order denying a bank's motion to compel arbitration, holding that when a debtor seeks to enforce a discharge injunction, a bankruptcy court may decline to compel arbitration because it implicates a bankruptcy court ability to enforce its own orders.

 

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

 

A borrower took out a student loan and subsequently filed for Chapter 13 bankruptcy. The bankruptcy court confirmed the plan.  The borrower made the payments to her creditors, including her student loan owner ("bank"), and received a discharge. 

 

The borrower initiated an adversary action in bankruptcy court alleging that the discharge included her student loan.  The bank disagreed and moved to compel arbitration.

 

The loan agreement contained the following arbitration provision:

 

"Any controversy or claim arising out of or related to this Note, or an alleged breach of this Note, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the arbitration award may be entered in any court having jurisdiction."

 

The bankruptcy court denied the motion to compel arbitration, and certified its order for interlocutory review.  This appeal followed.

 

The Fifth Circuit began its analysis by noting that under the Federal Arbitration Act courts must enforce "covered arbitration agreements according to their terms."

 

However, "a contrary congressional command" may override this mandate. Shearson v. McMahon, 482 U.S. 220, 226 (1987). A party arguing that it is not possible to reconcile the two statutes, "and that one displaces the other, bears the heavy burden of showing a clearly expressed congressional intention that such a result should follow." Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1624 (2018).

 

The Fifth Circuit observed that is has applied McMahon to hold "that bankruptcy courts may decline to enforce arbitration clauses when two requirements are met." To do so, "the proceeding must adjudicate statutory rights conferred by the Bankruptcy Code and not the debtor's prepetition legal or equitable rights." In re Nat'l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997).

 

Further, a bankruptcy court may only decline to enforce arbitration agreements when compelling arbitration "would conflict with the purposes of the Bankruptcy Code." The Bankruptcy Code's purposes include "centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders."

 

Thus, in National Gypsum, the Fifth Circuit "held that bankruptcy courts need not enforce agreements to arbitrate whether a creditor's efforts to collect a debt violated a discharge order." 11 U.S.C. § 524(a). This is because an action to enforce a debtor's right to be free from collections efforts on a discharged debt implicates a bankruptcy court ability to enforce its own orders. It "would be inconsistent with the Bankruptcy Code" to require arbitration in this situation.

 

The bank argued that the Fifth Circuit's holding in National Gypsum — that bankruptcy courts may refuse to compel arbitration when a debtor seeks to enforce a discharge injunction— is no longer good law after the Supreme Court's decision in Epic Systems. The Fifth Circuit rejected this argument finding that Epic Systems actually supports National Gypsum's "doctrinal foundation, i.e., McMahon, remains sound."

Initially, the Court noted, Epic Systems cites McMahon for support. Further, although there is a difference of tone, McMahon and Epic Systems apply a nearly identical test to determine if a statute overrides the FAA's requirement "to enforce arbitration agreements according to their terms."

 

The Fifth Circuit reasoned that the only difference is that Epic Systems indicates that the party arguing that two statutes cannot be harmonized bears the heavy burden to show a "clearly expressed" congressional intention mandating this result whereas McMahon requires the moving party to show a "deducible" congressional intent. This slight difference in emphasis "is not an unequivocal direction to overrule our precedent."

 

Moreover, the Court continued, even if the legislative history discussion in Epic Systems partially overrules McMahon to require a "clearly expressed" congressional intent instead of a "deducible" congressional intent, that would not affect National Gypsum's validity because National Gypsum did not rely on congressional intent. Instead, National Gypsum looked to the Bankruptcy Code's purpose, which "remains a valid tool for determining whether a given statute displaces the FAA."  Consequently, the Fifth Circuit determined "that National Gypsum's application of McMahon remains good law following Epic Systems."

 

Therefore, the Fifth Circuit affirmed the bankruptcy court's order denying the bank's motion to compel arbitration.

 

 

 

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:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

Sunday, October 27, 2019

FYI: 7th Cir Confirms Charging Unconscionably High Prices Alone is Not Sufficient for UDAP Claim

The U.S Court of Appeals for the Seventh Circuit recently held that charging too much for goods or services, standing alone, is insufficient to assert a claim under the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA").

 

Accordingly, the Seventh Circuit affirmed the trial court's dismissal of a putative class action filed by condominium owners related to fees charged by a property management company and its vendor to provide various documents required to be provided to prospective purchasers of condominium units.

 

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

 

The plaintiffs ("Plaintiffs") were owners of condominium units in two different buildings.  The condominium associations for both buildings retained a property management company ("Company") to manage the day-to-day operations. 

 

The Plaintiffs put their units on the market and found willing buyers.  Under the Illinois Condominium Property Act ("Condominium Act"), the condo owners were then required to provide the prospective purchasers with a number of documents, including the condo association's rules, declarations, and other documents, which are commonly referred to as the "disclosure documents."

 

Section 605/22.1(b) of the Condominium Act provides that the condo association shall furnish a unit owner with the required documents within 30 days of a written request.  Section 605/22.1(c) provides that the association may charge the unit owner a "reasonable fee covering the direct out-of-pocket cost of providing such information and copying."

 

The Company contracted with an online document service company ("Vendor") to provide a service that assembles the required disclosure documents in portable document form ("PDF"), giving condominium owners almost instantaneous electronic access to the disclosure documents.  The two Plaintiffs were charged $240 and $365, respectively, for their disclosure documents.

 

The Plaintiffs then filed a lawsuit against the Company and Vendor seeking to represent a proposed class of condominium owners "who were charged by or paid a fee" to the Vendor for disclosure documents in connection with a condominium resale.  The Complaint asserted claims for: (1) violation of the Condominium Act, (2) violation of ICFA, (3) breach of fiduciary duty, (4) civil conspiracy, and (5) unjust enrichment.

 

After the trial court dismissed the complaint, the Plaintiffs appealed. 

 

On appeal, the Seventh Circuit first analyzed the Plaintiffs' claim under the Condominium Act.  The Court noted that "[t]he statute doesn't provide an express private remedy, so the plaintiffs advance an argument that a right of action exists by necessary implication." 

 

Under Illinois law, "courts will recognize an implied right of action only if (1) the plaintiff is within the class of members the statute was enacted to benefit; (2) the plaintiff's injury is one the statute was designed to prevent; (3) a private right of action is consistent with the underlying purpose of the statute; and (4) inferring a private right of action is necessary to provide an adequate remedy for statutory violations."  

 

"All four factors must be met before a court will recognize an implied remedy," but the Seventh Circuit determined that "[n]ot one of them is satisfied here."

As the Court explained, Illinois courts have previously concluded that section 22.1 of the Condominium Act "was clearly designed to protect prospective purchasers of condominium units," as its purpose was "to prevent prospective purchasers from buying a unit without being fully informed . . ."

 

Thus, owners/sellers "are not within the class of persons the statute was designed to protect, nor have they suffered an injury the statute was designed to prevent."  Therefore, "implying a remedy for condominium sellers is neither consistent with nor necessary to effectuate the statute's purpose."

 

Accordingly, the Seventh Circuit held "that section 22.1 does not confer an implied right of action on condominium owners," and the district court "properly dismissed the Condominium Act claim."

 

Turning to the ICFA claim, the Seventh Circuit first explained that it was effectuated to protect consumers "against fraud, unfair methods of competition, and other unfair and deceptive business practices."

 

"A trade practice may be deemed unfair if it (1) 'offends public policy'; (2) is 'immoral, unethical, oppressive or unscrupulous'; or (3) 'causes substantial injury to consumers.'"  It is not necessary to establish all three criteria.

 

The Seventh Circuit determined that the Plaintiffs' ICFA claim failed for several reasons. 

 

First, the Plaintiffs' claim relied almost entirely on the alleged violation of section 22.1 of the Condominium Act, but that provision places a duty on a condominium association, which was not named in the complaint. The Plaintiffs argued that the Company and Vendor could be liable for violating ICFA because they acted on behalf of the condominium association, but the Court noted that "[t]his argument distorts basic agency law; it is essentially 'the reverse vicarious liability.'"

 

"Thus stripped of its Condominium Act premise, the [ICFA] claim rests on nothing more than a generic allegation that [the Vendor] charged too much for a PDF of the disclosure documents."  However, "Illinois courts have held that 'charging an unconscionably high price generally is insufficient to establish a claim for unfairness.'"

 

Accordingly, the Seventh Circuit held that the trial court correctly dismissed the ICFA claim.

 

With respect to the three common law claims, the Seventh Circuit held that the unjust enrichment and civil conspiracy claims failed because they are not separate causes of action under Illinois law. 

 

Moreover, the breach of fiduciary duty claim failed because it alleged only that the Company and Vendor "aided and abetted" the breach of a fiduciary duty by the condominium associations, but "the complaint does not allege facts that, if true, could support an inference that the officers or board members of either condominium association committed a fiduciary breach." 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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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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