Sunday, February 19, 2017

FYI: 8th Cir Upholds Class Settlement in "Excessive Property Inspection" Case, Rejects Attempt to Add Trespass Claims

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a district court's approval of a proposed class settlement in an action arising from a mortgage loan servicer's practice of automatically ordering and charging for drive-by property inspections on delinquent borrowers, holding that the district court did not abuse its discretion.

 

In so ruling, the Court also affirmed the trial court's denial of a borrower's motion to join a trespass claim to the putative class action.

 

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

 

In 2008, four borrowers filed a putative class action in the United States District Court for the Southern District of Iowa against the servicer of their mortgage loans and its affiliate, alleging that by automatically charging borrowers who had fallen behind on their mortgage payments for drive-by property inspections, the defendants violated the federal Racketeer Influenced and Corrupt Organizations Act ("RICO').

 

The parties reached a settlement at mediation that provided for the servicer to pay $25,750,000 in return for dismissal and a release of all related claims, defined to include any claims 'based upon, arising out of, or relating to, in any way, property inspection fees assessed on a mortgage serviced by [the servicer], or [its] practices in ordering or charging borrowers for property inspections."

 

The district court approved the settlement on a preliminary basis in September of 2015, scheduled a fairness hearing in January of 2016, and entered an injunction prohibiting class members from suing for any of the released claims in any other court.  Notices were then sent to more than 2.7 million class members.

 

In the interim, in 2013, another borrower (the "trespass plaintiff") sued in the United States District Court for the District of Minnesota, raising a claim for trespass based on the servicer's having changed the locks even though he still lived in the home.

 

In October of 2016, the trespass plaintiff received notice that he was included in the settlement class. He then filed a motion to transfer his individual action to the deferral trial court in Iowa for consolidation with the class action, and also filed a motion stay his individual action in the Minnesota federal court.

 

The Minnesota trial court denied his motion, reasoning that there was no basis to transfer his case for consolidation. The borrower moved for reconsideration, at which time the Minnesota trial judge asked the servicer whether the class action injunction barred the trespass plaintiff's trespass claim.

 

The servicer's counsel responded that the trespass claim was not within the scope of the released claims, but even if it were, the servicer would waive this term as to the trespass plaintiff borrower in order that he could pursue his trespass claim.  Accordingly, the Minnesota federal court denied the motion for reconsideration along with the transfer motion then dismissed the case for failure to prosecute.

 

The trespass plaintiff then filed an objection to the proposed class action settlement in the Iowa federal court arguing the terms were unfair. On the morning of the fairness hearing, he also filed a motion under Federal Rule of Civil Procedure 23 to certify his trespass claim as a "related claim" and to add himself as a class representative of this new subclass under Rule 19.

 

The Iowa federal court denied both motions because the questions of fact and law in the trespass case were not the same as those in the property inspection fee case. Thereafter, the Iowa federal court found that the settlement agreement was fair, overruled all objections and gave final approval to the settlement plus $10,000 incentive awards to each lead plaintiff. The trespass plaintiff appealed.

 

Reviewing the Iowa federal court's denial of trespass plaintiff's motion to certify the trespass claim as a related claim and create a new subclass under Rule 23 for abuse of discretion, the Eighth Circuit found that his trespass claim did not satisfy the "commonality" requirement of Rule 23(a) because "[c]ommonality requires the plaintiff to demonstrate that the class members have suffered the same injury."

 

The Eighth Circuit reasoned that, because the trespass claim was based on unlawfully entering the property but the class action was based on improperly charging inspection fees for drive-by inspections involving no entry onto the property, "no common question existed between the two actions."

 

Turning to whether the class action settlement was "fair, reasonable, and adequate" under Rule 23(e)(2), the Eighth Circuit rejected the appellants five arguments that the trial court had abused its discretion.

 

The Court rejected the trespass plaintiff's first argument, that the trial court misapplied the four-part test set forth in the Eighth Circuit's ruling in Van Horn, v. Trickey, finding the trial court "properly analyzed the Van Horn factors and concluded that they weighed in favor of approving the settlement."

 

The first factor, weighing the merits of the case against the settlement terms, weighed in favor of settlement because the Court found the plaintiff's claims were weakened by the defense that some class members had waived their right to sue for inspection fees because the fees had been rolled into principal as part of a loan modification. On the other hand, the large settlement amount ensured that the class members would receive "an adequate percentage of their damages" because they would each receive at least $5 in compensation for an average inspection fee of $15.

 

The Eighth Circuit found the second factor, the defendant's financial condition, was "neutral" as the servicer's financial condition was stable.

 

According to the Court, the third factor -- "the complexity and expense of further litigation" -- also weighed in favor of approving the settlement because going to trial would be expensive, time consuming and complex.

 

The Eighth Circuit found no error with the trial court's finding that the fourth factor, "the amount of opposition to the settlement," was neutral, because while only 13 out of 2.7 million class members objected, the trial court reasoned that could be due to "lack of time, resources, or information necessary to lodge an objection."

 

Because two factors weighed in favor of approving the settlement and were neutral, the Court concluded the trial court did not abuse its discretion in approving the settlement.

 

The Eighth Circuit also rejected as "faulty math" the appellant's second argument, that the settlement was not fair and violated the federal Class Action Fairness Act ("CAFA") because it "will 'cost' class members $10 to settle a $5 claim."

 

The Court reasoned that the class members had already paid the $15 fee and the question was how much they would recover. The Eighth Circuit noted that the appellant's argument was incorrect that "any class action settlement that does not result in class members receiving the full value of the damages alleged in the complaint would be considered a 'net loss' for the purpose of CAFA's written finding requirement" because "CAFA requires a written finding only when the settlement obligates a class member to 'pay sums to class counsel that would result in a net loss to the class member.'" The terms of the settlement at issue did not obligate class members to pay counsel or incur any expense to receive their awards and thus they would receive a net gain.

 

The Eighth Circuit also rejected the appellant's third argument, that the settlement provision barring class members from bringing claims related to the property inspection fees was unfair, reasoning that the trial court correctly pointed out in denying the motion to certify the trespass claim that no class member was required to waive their trespass claim in order to participate in the settlement because the trespass and property inspection fee claims were not related.

 

Turning to the appellant's fourth argument, that the $10,000 incentive awards to the lead plaintiffs were inadequate, the Court found that he lacked standing because he was not a named plaintiff and thus was not injured by the district court's decision to give more to the lead plaintiffs.

 

The Eighth Circuit also rejected the appellant's fifth and final argument, that the trial court erred in approving the settlement because defendants did not give the required notice to appropriate state and federal officials where a class member resides within 10 days after filing the proposed settlement, reasoning that this issue was waived because no one raised it before the district court.

 

Accordingly, the trial court's 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, February 16, 2017

FYI: 7th Cir Upholds Dismissal of Unlawful Data Retention Claim Under Spokeo

The U.S. Court of Appeals for the Seventh Circuit recently held that although a consumer's suit against a cable service provider for failing to destroy his personal information was a substantive violation of the federal Cable Communications Policy Act, it failed to allege a concrete injury sufficient to confer standing.

 

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

 

A consumer subscribed to a cable service and provided the cable service operator with his date of birth, home address, home and work telephone numbers, social security number, and credit card information. Two years later, he canceled his subscription and eight years after that, upon inquiring, learned that all the information he had given the cable service when he subscribed a decade earlier remained in the company's possession in apparent violation of federal law.

 

The federal Cable Communications Policy Act ("Cable Act") 47 U.S.C. § 551(e), provides that a cable operator "shall destroy personally identifiable information if the information is no longer necessary for the purpose for which it was collected and there are no pending requests or orders for access to such information."  47 U.S.C. § 551(e).

 

Section 551(f)(1) of the Cable Act provides that "any person aggrieved by any act of a cable operator in violation of this section may bring a civil action in a United States district court," however the consumer presented neither allegation nor evidence of having been "aggrieved" by the cable operator's violation of section 551(e).

 

The consumer filed a putative class action lawsuit against the cable operator seeking injunctive relief for alleged violations of 47 U.S.C. § 551(e).

 

The district court dismissed the suit on the ground that the consumer lacked standing. As an alternative ground for dismissal, the trial court ruled that even if the plaintiff had standing, he failed to state a claim upon which relief could be granted.  The trial court also held that the consumer could not be given an injunction, the only remedy he sought, because he had an adequate remedy at law -- namely damages, authorized by section 551(f) of the Cable Act, which he had failed to seek.

 

The consumer appealed to the Seventh Circuit.

 

As you may recall, Article III of the U.S. Constitution authorizes the federal judiciary only to decide cases or controversies.  Such a case is not, however, justiciable under federal law unless the plaintiff has a "concrete" interest in prevailing in the case, for such an interest is the sine qua non of "standing to sue." 

 

The consumer argued that the Supreme Court of the United States' recent admonishment that "Article III standing requires a concrete injury even in the context of a statutory violation," applies only to violations of statutory rights that can be categorized as "procedural" rather than "substantive." Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1549 (2016).

 

The Seventh Circuit disagreed. The Court noted that, as here, a failure to comply with a statutory requirement to destroy information could be substantive, yet need not cause a concrete injury.  The Court held that although the consumer might be able to prove a violation of the Cable Act, he had not alleged any plausible risk of harm substantial enough to be deemed "concrete" as a result of the violation. See Spokeo, supra, at 1549.

 

The Seventh Circuit assumed for the sake of argument that the cable operator had violated the statute by failing to destroy the consumer's personally identifiable information, as alleged.  However, the Court observed that although there was a risk of harm, the consumer had not alleged that the cable operator had ever given away or leaked or lost any of his personal information.

 

Accordingly, the Seventh Circuit reasoned, the consumer only had a claim that the violation of the Cable Act made him feel aggrieved.  The Court held that the consumer could not bring a claim for damages because the damages could not possibly be quantified and were not alleged.

 

As for injunctive relief in lieu of damages, the Court noted that having not alleged that he was aggrieved by the cable operator's statutory violation the consumer could not establish irreparable harm.

 

The consumer further contended that a violation of section 551(e) was a violation of a right of privacy. However, again the Seventh Circuit disagreed, observing that although violations of rights of privacy are actionable, the consumer did not allege a violation of his privacy because there is no indication that the cable operator had released, or allowed anyone to disseminate, any of his personal information.

 

The consumer's final argument was that that his personal information had economic value which the cable operator had deprived him of by retaining it.

 

The Seventh Circuit again disagreed, dismissing this argument as gibberish, and observing that the cable operator did not take the consumer's personal information away from him. 

 

Additionally, the Court noted that the duty of a cable provider to destroy a subscriber's personal information is qualified by the reference in section 551(e) to section 551(d), which authorizes disclosure of such information if "necessary to render, or conduct a legitimate business activity related to, a cable service or other service provided by the cable operator to the subscriber ... [or if] made pursuant to a court order authorizing such disclosure, if the subscriber is notified of such order by the person to whom the order is directed." 47 U.S.C. ' 551(d).

 

The Court explained that these disclosure provisions presuppose the right and indeed duty of the cable operator to retain rather than destroy subscriber personal information for specified reasons which qualified the cable operator's duty of destruction invoked by the consumer.

 

In sum, the Court held that the absence of any allegation -- let alone evidence -- of any concrete injury inflicted or likely to be inflicted on the consumer as a consequence of cable operator's continued retention of his personal information precluded the relief sought and required that it affirm the district court's judgment dismissing the consumer's suit for lack of standing.

 

 

 

 

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, February 12, 2017

FYI: 4th Cir Holds Escrow and Other Principal Residence Mortgage Loan Items Not Subject to Chapt 13 Bifurcation

The U.S. Court of Appeals for the Fourth Circuit recently held that "escrow funds, insurance proceeds, or miscellaneous proceeds" are protected by the anti-modification provisions for Chapter 13 bankruptcies as "incidental property" under the definition of "debtor's principal residence" in the federal Bankruptcy Code.

 

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

 

A debtor filed a voluntary petition for Chapter 13 bankruptcy. One of the claims against the debtor was a mortgage loan secured by a deed of trust on the debtor's primary residence.  When the debtor filed his original Chapter 13 bankruptcy plan his property was valued at $206,400 and there was an arrearage on the mortgage of $93,386.58. 

 

The debtor's bankruptcy plan included a cram-down of the mortgagee's interest in the property.  After a series of objections and amendments to the debtor's bankruptcy plan, the debtor filed an adversary complaint requesting a declaration that the mortgagee's claim be treated as a partially unsecured claim subject to modification and bifurcation in his Chapter 13 bankruptcy.

 

The debtor argued that certain provisions of the deed of trust required collateral other than real property, which the debtor argued would remove the claim from the Bankruptcy Code's anti-modification protection for mortgage loans secured by the debtor's principal residence at 11 U.S.C. § 1322(b)(2).

 

The debtor cited provisions of the deed of trust, involving escrow items, property insurance proceeds, and miscellaneous proceeds.

 

The mortgagee filed a motion to dismiss the debtor's adversary complaint, contending that the items referred to in the deed of trust cited by the debtor constituted "incidental property," which were part of the "debtor's principal residence" under 11 U.S.C. § 101(13A)(A), and which would not expose the mortgagee's mortgage loan to a Chapter 13 modification.

 

The bankruptcy court granted the mortgagee's motion to dismiss.  The debtor appealed the bankruptcy court's decision to the U.S. District Court for the District of Maryland, raising the same arguments on appeal, namely that the inclusion of miscellaneous proceeds, escrow funds, and insurance proceeds in the deed of trust constituted a waiver of the anti-modification provision of 11 U.S.C. § 1322(b)(2).

 

The district court affirmed the bankruptcy court's ruling, holding that the miscellaneous proceeds, escrow funds, and insurance proceeds provisions described benefits that were merely incidental to an interest in real property and generally were not additional security for purposes of § 1322(b)(2).

 

The district court further noted that the items at issue did not have any value of their own separate and apart from the property and the deed of trust.  IN fact, to the contrary, these items all existed only to give effect to the mortgagee's security interest, which otherwise could have been frustrated by a superior lien or by destruction or condemnation of the property.

 

The debtor appealed to the Fourth Circuit.

 

As you may recall, under Chapter 13 of the Bankruptcy Code, individual debtors may obtain adjustment of their indebtedness through a flexible repayment plan approved by a bankruptcy court. See Nobelman v. Am. Sav. Bank, 508 U.S. 324, 327, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).  Section 506(a) of the Bankruptcy Code is used in conjunction with § 1322 of the Bankruptcy Code to allow modification, or bifurcation, of a secured creditor's claim into secured and unsecured portions when the claim exceeds the value of the secured property. Id.

 

Under Section 506(a), "an allowed claim secured by a lien on the debtor's property is a secured claim to the extent of the value of the property; to the extent the claim exceeds the value of the property, it is an unsecured claim." See Nobelman, 508 U.S. at 328.

 

However, Section 1322(b)(2) provides that a bankruptcy plan may modify the rights of holders of secured claims, "other than a claim secured only by a security interest in real property that is the debtor's principal residence."  11 U.S.C. § 1322(b)(2).

 

Thus, the anti-modification clause in 11 U.S.C. § 1322(b)(2) of the Bankruptcy Code protects a mortgagee from having its claim in a Chapter 13 bankruptcy proceeding modified, if the mortgage is secured "only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). In other words, a claimant's interest in real property that is secured solely by the debtor's principal residence may not be modified or bifurcated in a Chapter 13 bankruptcy.

 

Congress clarified the meaning of "debtor's principal residence," in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). The Bankruptcy Code now defines the term as "a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether that structure is attached to real property." 11 U.S.C. § 101(13A)(A).

 

The BAPCPA also defined "incidental property," as it relates to a debtor's principal residence, as "(A) property commonly conveyed with a principal residence in the area where the real property is located; (B) all easements, rights, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds; (C) all replacements or additions."  11 U.S.C. § 101(27B).

 

With this framework in mind, the Fourth Circuit held that "escrow funds, insurance proceeds, or miscellaneous proceeds" are protected by the anti-modification provisions for Chapter 13 bankruptcies as "incidental property" under the definition of "debtor's principal residence" in the federal Bankruptcy Code

 

The debtor argued that provisions of the deed of trust, involving escrow items, property insurance proceeds, and miscellaneous proceeds constituted sufficient additional security for the mortgagee's interest such that the mortgage loan was secured by more than just an interest in real property.

 

The Fourth Circuit disagreed, relying on a Sixth Circuit ruling. In Allied Credit Corp. v. Davis, 989 F.2d 208 (6th Cir. 1993), the Sixth Circuit found that "items which are inextricably bound to the real property itself as part of the possessory bundle of rights" did not extend a lender's security beyond the real property. Id. at 213. On the topic of insurance, the Davis court explained that "hazard insurance is merely a contingent interest -- an interest that is irrelevant until the occurrence of some triggering event and not an additional security interest for the purposes of ' 1322(b)(2)." In re Davis, 989 F.2d at 211.

 

The Fourth Circuit held that this reasoning similarly applied to the miscellaneous proceeds and escrow funds that were tied to the real property at issue here.

 

The Court also relied on Akwa v. Residential Credit Solutions, Inc., No. 14-cv-02703-Akwa, 530 B.R. 309 (D. Md. 2015), which involved the same standard Fannie Mae/Freddie Mac deed of trust that was at issue in this appeal. In Akwa, the court noted that the lender was entitled to collect funds for escrow which the lender could use to pay property-related payments, like taxes, rents, as well as repairs or restoration. Akwa, 530 B.R. at 313-14.

The Court found that, as in Akwa, the deed of trust did not create "separate or additional security interests, but merely contained provisions to protect the lender's security interest in the real property." Akwa, 530 B.R. at 314. Accordingly, it held that the district court properly found, as a matter of law, that escrow funds, insurance proceeds, and miscellaneous proceeds were incidental property that did not constitute separate security interests.

 

In short, the Fourth Circuit concluded that the anti-modification clause applied to the Fannie Mae/Freddie Mac Deed of Trust at issue in this case. The Fourth Circuit did not therefore consider the effect -- if any -- of additional language in a deed purporting to create a separate security interest in escrow funds, insurance proceeds, or miscellaneous proceeds, in light of its interpretation of § 1322(b)(2).

 

The debtor also argued that both the bankruptcy court and the district court should have looked to Maryland law to determine whether the deed of trust created additional security interests in escrow funds, insurance proceeds, and miscellaneous proceeds as "real property."

 

The Fourth Circuit again disagreed, noting that the Bankruptcy Code explicitly defines "incidental property" to a debtor's principal residence, which includes both escrow funds and insurance proceeds. 11 U.S.C. § 101(27B). 

 

In addition, the Fourth Circuit noted that state laws are suspended if they conflict with the Bankruptcy Code. See Butner v. U.S., 440 U.S. 48, 54 n.9, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979). Thus, it was not necessary for the Court to examine Maryland law on this issue.

 

Even if Maryland law were to apply, the Fourth Circuit observed that it was far from clear that the resulting holding would have been favorable for the debtor.  The Court noted that a security interest is created under Maryland law when there is language present in the security instrument that leads to the logical conclusion that it was the intention of the parties to create a security interest. Here, however, the Fourth Circuit had already found that the deed of trust did not contain language granting a security interest in escrow funds, insurance proceeds, or miscellaneous proceeds. Therefore, the debtor's argument with respect to the application of Maryland law was unavailing.

 

Finally, the policy arguments that the debtor put forth were similarly rejected. The debtor asked the Fourth Circuit to ignore various cases that characterize escrow funds, insurance proceeds, and miscellaneous proceeds as "part and parcel" of real property.

 

But the Court, again citing Akwa, observed that characterizing escrow funds, insurance proceeds, and miscellaneous proceeds as additional security for purposes of § 1322(b)(2) "would completely eviscerate the anti-modification exception of § 1322(b)(2) because many deeds of trust which encumber improved real property contain these provisions to protect the lender's investment in the real property." Akwa, 530 B.R. at 313.

 

Thus, the debtor's position could not be squared with an interpretation that would render the anti-modification provision inapplicable to virtually all residential mortgages.

 

Accordingly, the Fourth Circuit held that the debtor's complaint failed to state a plausible claim for relief, and affirmed the district court's judgment in favor of the mortgagee.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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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Friday, February 10, 2017

FYI: Cal App Ct Rejects Borrower's HBOR "Dual Tracking" and SPOC Allegations

The Court of Appeals of California, Second Appellate District, recently held that a borrower failed to state a cause of action for alleged violations of the "dual tracking" and "single point of contact" provisions of California's Homeowners Bill of Rights (HBOR, Calif. Civ. Code, '§§ 2923.6, 2923.7) because:

 

(1) the borrower did not allege acceptance of a loan modification agreement within 14 days after receiving it; and

(2) the borrower's allegations demonstrated that the servicer assigned a customer service representative to process the loan modification application.

 

The Court also dismissed the borrower's allegations of lack of standing to foreclose, illegal substitution of trustee, and fraud as meritless and held that the doctrine of res judicata applied to the borrower's new theory of wrongful foreclosure which was premised on the same primary right as past litigation that had resulted in final judgments allowing foreclosure proceedings to go forward.

 

Of note, the Court prefaced its ruling by stating:

 

"'The purpose of the law of contracts is to protect the reasonable expectations of the parties.' (Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 475.) This principle applies to the law of 'mortgages.'  A person who borrows money from a bank to purchase or refinance a home has a reasonable expectation that the bank will fund the loan. The bank has a reasonable expectation that monthly mortgage payments will be made. Here, appellant's reasonable expectations were met. The bank's were not. Nonpayment of the mortgage for approximately eight years while the borrower remains in possession is an egregious abuse. Respondent argued, and the trial court agreed, that appellant is 'gaming the system.' The game is over."

 

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

 

This lawsuit was the fifth in a series of state and federal lawsuits brought by a borrower since 2009 challenging a servicer's efforts to foreclose upon his real property. The lawsuits concerned similar allegations of claimed wrongful foreclosure procedures and the bank's standing to foreclose.

 

In 1992, the borrower acquired residential property. He subsequently obtained a $500,000 loan from a lender, and executed an adjustable interest rate promissory note in favor of the lender. A deed of trust was recorded to secure the loan.

 

Sixteen years later, the Federal Deposit Insurance Corporation, as receiver for the lender, and a bank entered into a Purchase and Assumption Agreement whereby the bank purchased all right, title, and interest in the assets of the lender. The agreement also stated that the bank specifically purchased all mortgage servicing rights and obligations of the lender.

 

A year later, in 2009, the borrower defaulted on the loan, and the bank's foreclosure trustee recorded a notice of default and a notice of trustee's sale.

 

Before the foreclosure sale, the borrower filed a complaint against the foreclosure trustee and the bank, alleging that the notice of default was not properly recorded, that it was not filed in compliance with Cal. Civil Code section 2923.5, and that the notice of sale was not properly recorded. The trial court dismissed the action without leave to amend.  The borrower appealed and the Court of Appeal, affirmed the trial court's judgment of dismissal.

 

In 2011, the foreclosure trustee recorded a second notice of trustee's sale. The borrower filed a second action against the foreclosure trustee, alleging that the notice of default was defective and that the bank violated section 2923.52 by giving premature notice of sale. The trial court dismissed this action. The borrower appealed, and the Court of Appeal affirmed the trial court's judgment of dismissal.

 

In 2012, the foreclosure trustee recorded another notice of trustee's sale. In response, the borrower filed a third lawsuit against the bank, this time in federal court. In part, he repeated allegations made in his previous state court cases regarding the misspelling of his first name. The borrower also challenged bank's right to nonjudicial foreclosure.

 

The trial court granted the bank's motion to dismiss the action without leave to amend.  The borrower appealed, and the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal without leave to amend. See Gillies v. JPMorgan Chase Bank N.A. (Gillies III) (9th Cir. 2016) 644 Fed.Appx. 716.

 

In 2015, a new foreclosure trustee recorded a notice of trustee's sale setting a foreclosure sale of the property. The borrower responded by filing yet another complaint alleging violations of the California Homeowners Bill of Rights (HBOR), lack of standing to foreclose, unlawful substitution of trustee, fraud, injunctive relief, and damages. He also obtained a temporary restraining order and filed an application for a preliminary injunction.

 

Once again, the bank demurred, asserting that the borrower's allegations did not state facts sufficient to constitute a cause of action. The trial court sustained the demurrer without leave to amend, vacated the temporary restraining order, denied the borrower's request for a preliminary injunction, and dismissed the borrower's action. The borrower appealed again,

 

For his first cause of action, the borrower alleged that the bank violated the "dual-tracking" prohibition of HBOR, Cal. Civil Code ' 2923.6 (c), by proceeding with the foreclosure while his loan modification application was pending. He also alleged that the bank did not assign "a single point of contact," as required by ' 2923.7 (a).

 

As you may recall, Cal. Civ. Code § 2923.6(c)(2) permits a "mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent" to record a notice of default or notice of sale or conduct a trustee's sale if a borrower does not accept a first lien loan modification offer within 14 days of the offer.

 

Cal. Civ. Code § 2923.7(a) requires that "[u]pon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact."

 

The Court of Appeal rejected the borrower's arguments, noting that the allegations of his complaint belied his contention that the bank violated HBOR, because he did not allege that he accepted the loan modification during the four month period after he received the modification agreement and before the servicer recorded the notice of sale. 

 

In addition, the Appellate Court held that the borrower's allegations demonstrated that the bank assigned a customer service representative to whom the borrower submitted his loan modification application.

 

For his second cause of action, the borrower alleged that the bank lacked standing to foreclose because he alleged that the note and deed of trust were sold to a third party before the bank assumed the assets of the lender.

 

The Court of Appeal, taking judicial notice of the agreement between the bank and the Federal Deposit Insurance Corporation, disagreed. It dismissed the borrower allegations as speculation with no reasonable basis.

 

For his third cause of action, the borrower alleged that the bank was not the beneficiary of his trust deed and could not substitute the servicer as trustee to foreclose his property.

 

Again, the Court of Appeal disagreed, holding that it was beyond dispute that the bank succeeded to the lender's interest as beneficiary, and affirming the trial court's conclusion that that the borrower did not state a cause of action regarding the substitution of trustee.

 

In his fourth cause of action, the borrower alleged that the bank committed fraud on each occasion that it noticed a trustee's sale by misstating his name although he admitted that the misspelling was a clerical error.

 

The Appellate Court concluded that the allegation of fraud did not state a cause of action, observing no reasonable person would be confused by this minor typographical error. It noted that the notices contained the street address of the property and correctly spelled the borrower's surname.

 

Thus, the Appellate Court held that the trial court properly denied the borrower's motion for a preliminary injunction.

 

The Court also rejected the borrower's arguments concerning his new theory of wrongful foreclosure, noting that it was the same primary right that the borrower had always claimed and was precluded by the principle of res judicata. See Weikel v. TCW Realty Fund II Holding Co. (1997) 55 Cal.App.4th 1234, 1245.

 

By now, the borrower had lost three superior court cases, a federal case in the United States District Court, an appeal in the Ninth Circuit Court of Appeals. He also lost an emergency petition for relief in the Ninth Circuit as well as in the United States Bankruptcy Court.

 

The Court of Appeal admonished the borrower, who was an attorney, for not complying with lawful court orders, and continuing to tax the legal system in an attempt to retain possession of his house.

 

The Court observed that no litigant has an entitlement to file a lawsuit seeking relief from an alleged wrong and then not follow the court's ruling denying relief. By submitting to the court to resolve a dispute, a litigant who is willing to abide by an order granting relief must be willing to abide by an order denying relief. The sanctity and integrity of a final judgment must be honored or there is no such thing as a final judgment. See People v. Barragan (2004) 32 Cal.4th 236, 255.

 

The Court of Appeal therefore affirmed the trial court's dismissal of the complaint.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Tuesday, February 7, 2017

FYI: 7th Cir Rejects "Anti-Tying" Challenge to Software Company's Required Use of Bank

The U.S. Court of Appeals for the Seventh Circuit recently held that a bank's relationship with a software services company, under which the software services company required its customers to use the bank for the depositary services ancillary to the software, did not violate anti-tying provisions of the federal Bank Holding Company Act, at 12 U.S.C. § 1972. 

 

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

 

A bankruptcy trustee hired an administrative services company to provide a variety of services in a bankruptcy proceeding.  Among other things, the administrative services company provides software to bankruptcy trustees to help manage a bankruptcy, including keeping track of documents, distributing money to creditors, and complying with reporting obligations. The company uses the defendant bank as the depository for the banking services provided through the software.

 

The contract between the bankruptcy trustee and the administrative services company required the trustee to hire the bank to provide the banking services, and to deposit with the bank substantially all the funds in any bankruptcy estate in which the trustee uses the administrative services company's services. A separate contract between bankruptcy trustee and the bank authorized the bank to withdraw a monthly fee for the services it rendered in the bankruptcy proceedings.

 

The plaintiff law firm was a creditor in a bankruptcy proceeding for which the bankruptcy trustee engaged the administrative services company and the bank.  The plaintiff filed a claim in the bankruptcy and received a distribution of $12,472.55. The firm should have received $12,666.90 but the trustee deducted $194.35 to pay for a small part of the bank's fee for services.

 

The law firm alleged that the contracts between the trustee and the administrative services company, the trustee and the bank, and the company and the bank, violated the anti-tying provisions of the federal Bank Holding Company Act, at 12 U.S.C. § 1972.

 

As you may recall, 12 U.S.C. § 1972(1)(E)  states that:

 

a bank shall not in any manner extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or requirement --

 

that the customer shall not obtain some other credit, property, or service from a competitor of such bank, a bank holding company of such bank, or any subsidiary of such bank holding company, other than a condition or requirement that such bank shall reasonably impose in a credit transaction to assure the soundness of the credit.

 

The law firm alleged that by requiring the bankruptcy trustee to obtain banking services exclusively from the bank, the bank conditioned its provision of services on the bankruptcy trustee's not obtaining equivalent services from a competitor of that bank, thus violating the anti-tying provisions of the federal Bank Holding Company Act. The district court rejected this argument and dismissed the lawsuit with prejudice.

 

On appeal, the Seventh Circuit held that the law firm "fails to distinguish between exclusive dealing and a single transaction."  Here, the Court explained, the bank did not condition its provision of services to the bankruptcy trustee on his agreeing to only hire the bank in any bankruptcy proceeding in which he is the trustee.  This the Court noted would be exclusive dealing.

 

Instead, the Seventh Circuit reasoned, the bankruptcy trustee here was free to hire a different bank and a different administrative services company in his next trusteeship.  Although the bankruptcy trustee might again hire the administrative services company and the bank in a future bankruptcy, he has not committed to hiring the company or the bank.

 

Thus, the Court held, there is no exclusive dealing.

 

The Seventh Circuit recited that the anti-tying provisions of the federal Bank Holding Company Act have been interpreted as "prohibiting exclusive dealing practices -- those that attempt to prevent customers from dealing with other banks."  Exchange National Bank of Chicago v. Daniels, 768 F.2d 140, 143 (7th Cir. 1985).  However, the Court noted that the bankruptcy trustee was not forced to deal with the administrative services company and the bank, and could easily hire a different administrative services company and bank in another proceeding.

 

In addition, the Court held that there was no evidence -- or even any argument -- that the $194.35 fee deducted from the plaintiff's share of the bankruptcy distribution for the bank's services was exorbitant or that the fee would have been lower had the trustee been allowed to hire a different bank or a plurality of banks.

 

Accordingly, the Seventh Circuit affirmed the judgment of the district court.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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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