Wednesday, April 26, 2017

FYI: Fla Ct (11th Jud Cir) Holds Borrower's Heir Could Raise Statute of Limitations Defense in Foreclosure

The Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida recently dismissed a second foreclosure complaint, filed more than five years after the initial complaint and alleging the same incident of default, as barred by the statute of limitations. 

 

In so ruling, the Court also held that the borrower's daughter and sole beneficiary to the property encumbered by a reverse mortgage had standing to assert the statute of limitations defense.   A copy of the order is attached.

 

In October of 2007, a borrower entered into "home equity conversion mortgage," commonly known as a "reverse mortgage."  After the borrower died in May of 2008, 100% of her homestead property was devised to her daughter.  The then-mortgagee sued to foreclose in July 2009, alleging that he was the borrower's 2008 death triggered the acceleration clause in the mortgage.  The 2009 foreclosure complaint was dismissed in 2013.

 

In September 2014, a new holder of the note ("mortgagee") filed a foreclosure complaint which alleged the same date of default — the May 2008 death of the borrower — and cited the acceleration provision of the reverse mortgage as grounds for accelerating the debt. 

 

After the borrower's daughter was granted homestead status of the property by the Probate Circuit Court of Miami-Dade County as heir to the borrower in May 2016, she moved to dismiss the foreclosure complaint on the grounds that the suit is barred by Florida's five-year statute of limitations.  A nonjury trial followed.

 

At trial, the mortgagee argued that the borrower's daughter lacked standing to assert the statute of limitations defense, as such defense is personal in nature, and she lacked privity with the note and reverse mortgage.

 

Under Florida law, a defendant may not assert a statute of limitations defense if the defendant has no relation of privity with the party who has the defense.  However, when there is privity between a person who could, if sued, plead the statute of limitations and the party offering to plead it, the party offering to plead the defense may raise it to save his or her property.

 

Here, the Court concluded that as the sole legal titleholder of the encumbered, homestead-protected property, the borrower's daughter had standing to plead a statute of limitations defense.

 

Next, the Court examined whether or not Florida's 5-year statute of limitations applied.  As you may recall, under Florida Law, when a mortgage declares the entire indebtedness due upon default of certain of its provisions or within a reasonable time thereafter, the statute of limitations to a foreclosure claim begins to run immediately when the default takes place. § 95.11(2)(c), Fla. Stat. (2016).  To determine whether a second foreclosure claim amounts to a statute of limitations violation, Florida courts examine the duration between the foreclosure actions and the types of default that triggered those actions.  See Singleton v. Greymar Assocs., 882 So. 2d 1004 (Fla. 2004) [29 Fla. L. Weekly S481a]; Deutsche Bank Tr. Co. Ams. v. Beauvais, 188 So. 3d 938 (Fla. 3d DCA 2016) [41 Fla. L. Weekly D933b].

 

Here, the Court noted that the reverse mortgage at issue permits acceleration of the debt upon the death of the borrower.  Moreover, the Court added, "a reverse mortgage, unlike a traditional, installment loan mortgage with a monthly payment obligation, does not have successive events of default where the basis for acceleration is death of the borrower. Accordingly, the loan cannot be decelerated."

 

Because both foreclosure complaints alleged the same dates of default, the Court concluded that it was "unlikely that the actions allege subsequent and different defaults as laid out in Singleton," and that the statute of limitations applied to any subsequent foreclosure action.  Thus, because the instant, second foreclosure action was filed more than five years after the borrower's 2008 death and date of alleged default, and the defaults in both foreclosure actions were the same, the Court held that the statute of limitations applied.

 

Accordingly, final judgment was entered in favor of the borrower's daughter and against 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

 

 

 

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Tuesday, April 25, 2017

FYI: 7th Cir Holds Debt Collectors Did Not Violate FDCPA By Demanding Prejudgment Interest Under Wisconsin Law

The U.S. Court of Appeals for the Seventh Circuit recently held that two debt collectors were entitled to demand payment for both principal amounts owed and interest under Wisconsin law.

 

Therefore, the Court held, the debt collectors' dunning letters demanding the principal sums owed and 5% per annum interest did not violate the federal Fair Debt Collection Practices Act, even where the demand was made prejudgment.

 

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

 

After the consumer plaintiffs failed to pay their bill for medical services received, their providers referred the debts to the defendant debt collectors. 

 

The debt collectors sent dunning letters demanding payment not only of the principal amounts owed but also of 5% per annum interest. The consumers argued that the letters violated the FDCPA in that Wisconsin law provides for interest only if a debt has been reduced to judgment, and any prejudgment request for interest is forbidden.

 

The debt collectors argued that interest under Wis. Stat. §138.04 runs automatically, and that a judgment just memorializes what state law requires.  They also argued that Wis. Stat. §426.104(4)(b), which creates a safe harbor for people who act in ways approved by the Administrator of Wisconsin's Department of Financial Institutions ("Administrator") applied, because the debt collectors sent the Administrator a letter asking if they were entitled to the interest, and because the Administrator did not respond within 60 days which is the equivalence of approval.

 

The trial court agreed with both of the debt collectors' arguments and granted summary judgment in their favor.

 

On appeal, the Seventh Circuit agreed that the Wisconsin safeharbor statute applied.  After quoting the statute, the Court held that the debt collectors were permitted to rely on the safeharbor provision, and therefore "when the defendants sent their dunning letters, they were entitled to demand payment of both the principal amounts and interest under §138.04."  Thus, the Court held the debt collectors also did not violate the FDCPA.  

 

In addressing the consumers' argument that the safeharbor statute was preempted by 15 U.S.C. §1692n, which provides that states may add but not subtract from the protections that the FDCPA offers to consumers, the Seventh Circuit held that "[Section] 1692n has nothing to do with interest — or for that matter with any other component of the debt."  Instead, the Court held, "Section 1692n deals with debt-collection practices, not how to determine the amount owed. The FDCPA itself provides that debt collectors may add interest when permitted by law."

 

In addition, the Seventh Circuit held that "[t]he safe harbor, if not §138.04 itself, permits defendants to add 5% interest to plaintiffs' debts."  Moreover, "[u]ntil the Administrator says something more, or a state court lifts the safe harbor under §426.104(4)(b) (and in addition rules that §138.04 does not by itself allow the debt collectors' practice), neither state nor federal law forbids dunning letters that demand 5% interest from debtors in Wisconsin."

 

Accordingly, the Seventh Circuit affirmed the ruling of the trial 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

 

 

 

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Monday, April 24, 2017

FYI: 9th Cir Rejects Debtor's Attempt to Avoid SBA Judgment By Disclaiming Inheritance

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the district court's judgment in favor of the United States Small Business Administration ("SBA") in a Federal Debt Collection Procedures Act, 28 U.C.S. § 3001 et seq. ("FDCPA"), lawsuit the SBA filed against a loan guarantor to satisfy a default judgment assigned to it after the guarantor disclaimed an inheritance to avoid paying the judgment. 

 

The Federal Debt Collection Procedures Act, which governs the collection of money owed to the U.S. government, should not be confused with the federal Fair Debt Collection Practices Act, which is found at 15 U.S.C. § 1692 et seq. and governs how debt collectors may collect debts from consumers.

 

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

 

The SBA, a federal government agency, guaranteed 75% of a $175,000 small business loan between a private bank and a company, and the company's owner personally guaranteed the loan. The company defaulted on the loan, and the private bank sued the company and guarantor, obtaining a default a judgment against them. When neither the company nor the guarantor satisfied the default judgment, the bank assigned the default judgment to the SBA to honor is guaranty of the loan, which totaled over $300,000.

 

The guarantor later inherited a share of his deceased father's trust, which was valued at over $150,000.  Instead of accepting the inheritance, he signed a disclaimer under California law that allowed him to renounce his share of the trust and legally pass it to his two children, thereby attempting to prevent his creditors from accessing his share of the trust.  The SBA filed a lawsuit under the FDCPA seeking to void the disclaimer under the FDCPA's prohibition of fraudulent transfers of property. 

 

The guarantor countered that California law permitted the disclaimer because it states that a disclaimer is not a voidable transfer, and that the default judgment obtained against the guarantor was not a "debt" as defined by the FDCPA.  The trial court disagreed, holding that the FDCPA pre-empted California law and that the default judgment was a debt within the meaning of the FDCPA. The guarantor appealed.

 

In affirming, the Ninth Circuit explained that the FDCPA's fraudulent transfer provision, 28 U.S.C. §3304(a), permits the federal government to void a fraudulent transfer by a debtor who owes a debt to the U.S. where the existence of the debt pre-dated the transfer, there was a transfer of assets, a lack of equivalent value in exchange of the transfer, and the debtor's insolvency at the time of the transfer. The parties' arguments focused on whether the guarantor's disclaimer qualified as a transfer of property and whether the default judgment constituted a debt within the meaning defined by the FDCPA. 

 

The guarantor argued that he had acted lawfully under the California Probate Code, which states that a disclaimer is not a voidable transfer. The Ninth Circuit held, however, that California law directly conflicted with the FDCPA, which defines "transfer" so as to include the guarantor's disclaimer because it involves "every mode…of disposing of or parting with an asset or an interest in an asset…". 28 U.S.C. §3301(6).  Thus, the Court held, the disclaimer was a transfer of property that could be voided under the FDCPA and the federal statute pre-empted state law, which the Ninth Circuit found was supported by U.S. Supreme Court precedent.

 

The guarantor's argument that the default judgment did not qualify as a debt under the FDCPA also failed.  The FDCPA defines "debt" as an amount owing to the U.S. government because of a direct loan or a loan insured or guaranteed by the U.S., includes a long list of various types of debts and financial obligations, and contains the catch-all phrase "other source of indebtedness."  28 U.S.C. §3002(3).  The Ninth Circuit found that the default judgment fit into the catch-all phrase and that limiting language attached to the catch-all phrase ("owing under the terms of a contract originally entered into by only persons other than the United States") did not prevent the default judgment from qualifying as "debt" under the statute. 

 

In reaching its ruling, the Ninth Circuit examined the statutory language and purpose of the FDCPA, the House report and legislative discussion on the statute, and case law interpreting limiting language in statutes. It reasoned that, looking beyond the label given to the debt and analyzing the source of the debt, especially the contract that the created the debt, led to the conclusion that the SBA was a party to the contract that created the debt and had statutory authority to pursue collection of it.

 

The Court rejected the guarantor's arguments that the default judgment had not been entered in favor of the U.S., but merely assigned to the SBA, that the financial obligation was merely a guaranty and not a loan, and that the SBA improperly sought to enforce the entire default judgment instead of only the portion related to the SBA loan. The Ninth Circuit found each of the arguments to be without merit or legal authority.

 

Accordingly, the Ninth Circuit affirmed the trial court's holding that the SBA was allowed to reach the guarantor's trust share because the FDCPA pre-empted California's disclaimer law and the default judgment was a debt within the statute.

 

 

 

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, April 23, 2017

FYI: Fla App Ct (4th DCA) Holds Post-Foreclosure Deficiency Action Not Affected By Publication Service in Foreclosure

The District Court of Appeal of the State of Florida, Fourth District, recently held that a creditor may obtain a post-foreclosure deficiency judgment against a borrower when the borrower was personally served with process in the post-foreclosure deficiency action, and the fact that the foreclosure court only acquired in rem jurisdiction due to service by publication in the prior foreclosure did not matter.

 

In addition, the Appellate Court held that section 702.06, Florida Statutes, which governs deficiency judgments, is unambiguous and allows a separate suit to recover a deficiency where the foreclosure judgment did not adjudicate a claim for a deficiency judgment.

 

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

 

A borrower defaulted on his mortgage. The mortgagee sued to foreclose and obtained a final judgment of foreclosure. The final judgment reserved jurisdiction to enter a deficiency judgment.

 

The property encumbered by the mortgage was sold at judicial sale, but the proceeds were not enough to satisfy the amount owed.  The right to pursue the deficiency was assigned to a company, which sued the borrower for a deficiency judgment.

 

In the deficiency action, the borrower filed an answer and moved for summary judgment, arguing that the trial court lacked jurisdiction to enter a deficiency judgment "because he was served with the original foreclosure complaint by publication."  The trial judge granted the borrower's motion, reasoning that section 702.06, Florida Statutes, which governs deficiency judgments, was "both vague and a violation of due process."

 

On appeal by the creditor, the Fourth District reversed, finding the "[lower] court's ruling was incorrect on all accounts."

 

First, relying on its 1986 decision in NCNB Natl. Bank of Florida v. Pyramid Corp., the Appellate Court held that because the borrower was personally served with process in the deficiency action, the lower court had personal jurisdiction over him, and the fact that the foreclosure court only acquired in rem jurisdiction due to service by publication was irrelevant.

 

Second, the Appellate Court held that the trial court misread section 702.06, noting that the Appellate Court recently held in two 2016 cases involving the same creditor that the relevant statutory language — "The complainant shall also have the right to sue at common law to recover such deficiency, unless the court in the foreclosure action has granted or denied a claim for a deficiency judgment" — was "unambiguous and permits a separate suit to recover a deficiency where the foreclosure court did not grant or deny a claim for a deficiency judgment."

 

Accordingly, the trial court's grant of summary judgment in favor of the borrower was reversed and the case remanded.

 

 

 

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, April 22, 2017

FYI: Ill App Ct (1st Dist) Holds Potential Chicago Foreclosure Tenant Ordinance Violation Precluded Eviction

The Appellate Court of Illinois, First District, recently reversed a summary judgment ruling in favor of a mortgagee on its post-foreclosure forcible entry and detainer claim, finding genuine disputes as to materials facts where the tenant presented evidence that she was a qualified tenant under the Chicago Protecting Tenants in Foreclosed Rental Property Ordinance (Ordinance), and that the mortgagee did not pay her the $10,600 relocation assistance fee required by the Ordinance.

 

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

 

A mortgagee became the owner of the subject property pursuant to an order approving the judicial sale in a mortgage foreclosure case.  The mortgagee filed its forcible entry and detainer complaint for possession of the property against tenant and other defendants.

 

The tenant answered the complaint and raised as an affirmative defense that she resided in the property pursuant to a valid lease and that she was entitled to a relocation assistance fee because she was a qualified tenant.  The tenant also alleged that the mortgagee's non-compliance with the Ordinance precluded a judgment in the mortgage's favor.

 

As you may recall, the Chicago Protecting Tenants in Foreclosed Rental Property Ordinance provides that:

 

"[T]he owner of a foreclosed rental property shall pay a one-time relocation assistance fee of $10,600 to a qualified tenant unless the owner offers such tenant the option to renew or extend the tenant's current rental agreement with an annual rental rate."  Chicago Municipal Code § 5-14-050(a)(1) (added June 5, 2013).

 

A "qualified tenant" means a person who: "(1) is a tenant in a foreclosed rental property on the day that a person becomes the owner of that property; and (2) has a bona fide rental agreement to occupy the rental unit as the tenant's principal residence." Chicago Municipal Code § 5-14-020 (added June 5, 2013).

 

The mortgagee filed a motion for summary judgment arguing that the order approving the judicial sale and the underlying deed entitled it to possession. 

 

The tenant responded to the motion by presenting evidence that she had resided in the property for several years prior, during, and after the foreclosure pursuant to a written lease, and was a "qualified tenant" under the Ordinance because she was a tenant in a foreclosure rental property pursuant to a "bona fide rental agreement" before the mortgagee became the owner. 

 

The original annual lease contained provisions that would convert it to a month-to-month lease after it expired.  The tenant averred in an affidavit that she paid $950 a month in rent and continued to reside in the property pursuant to a lease entered into after the borrower lost the property in the foreclosure.  Thus, the tenant argued that she was entitled to the $10,600 relocation fee and that the mortgagee was not entitled to possession of the property until it complied with the Ordinance's relocation provision.

 

In response, the mortgagee argued that the Ordinance did not apply to it because the foreclosure order wiped out the prior owner's rights, and therefore the tenant's post-foreclosure lease with the borrower was not a bona fide lease, as required.

 

The trial court granted the mortgage's motion for summary judgment.  This appeal followed.

 

Initially, the Appellate Court considered the mortgagee's argument that compliance with the Ordinance's relocation provision is not a condition precedent to a forcible entry and detainer action.

 

The mortgagee argued that failure to comply with the Ordinance could not bar this action because the Ordinance states: "The owner shall pay the relocation fee to the qualified tenant no later than seven days after the day of complete vacation of the rental unit by the qualified tenant." Chicago Municipal Code § 5-14050(b) (added June 5, 2013).  Thus, the mortgagee claimed that any obligation to pay the relocation fee is only triggered when a qualified tenant vacates the property.

 

The Appellate Court disagreed, concluding that the mortgagee's alleged failure to comply with the Ordinance's relocation provision is an affirmative defense to a forcible entry and detainer action.

 

Specifically, the Appellate Court noted that the Illinois Forcible Entry and Detainer Act states that "[t]he defendant may under a general denial of the allegations of the complaint offer in evidence any matter in defense of the action" and that "no matters not germane to the distinctive purpose of the proceeding shall be introduced by joinder, counterclaim or otherwise." 735 ILCS 5/9-106.

 

Germane in this context means "closely allied."  Rosewood Corp. v. Fisher, 46 Ill. 2d 249, 256 (1970).  The Appellate Court found that the Ordinance is "closely allied" with or "germane" to the Illinois Forcible Entry and Detainer Act because a "qualified tenant must bring a claim for relocation assistance prior to the entry of a judgment of possession of the rental unit." See Chicago Municipal Code § 5-14-050(e)(2) (added June 5, 2013).

 

Thus, the Court held, "a tenant's claim to a relocation fee from an owner, if not previously asserted in a separate legal action, must be raised during the eviction proceedings." See Chicago Municipal Code § 5-14-070(a) (added June 5, 2013) (allowing a tenant to bring a private cause of action under the Ordinance).

 

The Appellate Court observed that reading the Ordinance as a whole supports its conclusion because it states "the owner of a foreclosed property shall pay a one shall pay a one-time relocation assistance fee of $10,600 to a qualified tenant unless the owner offers such tenant the option to renew or extend the tenant's current rental agreement." Chicago Municipal Code § 5-14-050(a)(1)

 

The Appellate Court next analyzed if a genuine issue of material fact existed regarding whether tenant "was a qualified tenant pursuant to a bona fide rental agreement under the Ordinance." Specifically, the Appellate Court examined whether the initial pre-foreclosure lease constituted a bona fide rental agreement.

 

The Appellate Court observed that the original pre-foreclosure lease contained a valid month-to-month tenancy provision.  In addition, the tenant's affidavit averred that she had resided in the property since before the foreclosure pursuant to a rental agreement that required her to pay $950 a month to the property owner. 

 

Although tenant's affidavit did not also state that she paid the rent each month, the Court held she did not have to prove her case to withstand summary judgment.  In the Court's view, the evidence that tenant had a rental agreement that required her to pay rent every month on the day the mortgagee became the owner of the foreclosed property was sufficient to defeat summary judgment. Chicago Municipal Code § 5-14-020.

 

Viewing the evidence in a light most favorable to the tenant, the Appellate Court held that the trial court erred in granting summary judgment because a genuine issue of material fact exists as to whether tenant was a month-to-month tenant under the original lease when the court approved the judicial sale in favor of the mortgagee.  Thus, the mortgagee's "right to a judgment of possession is not clear and free from doubt."

 

Accordingly, the Appellate Court reversed the trial court's summary judgment order in favor of the mortgagee, and remanded the case for further proceedings consistent with its decision.

 

 

 

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, April 20, 2017

FYI: 9th Cir Holds Mortgagee's "Sold Out Second" Claim Not Barred by California's 4-Yr Statute of Limitations

The U.S. Court of Appeals for the Ninth Circuit recently reversed a ruling that disallowed an unsecured creditor's claim filed in a California bankruptcy court based on the forum state's statute of limitations. 

 

In so ruling, the Ninth Circuit held that, although courts typically apply the forum state's statute of limitations if the contract is silent on the issue, exceptional circumstances warranted the application of a longer statute of limitations here, because the creditor had no option but to enforce its claim in the forum based on where the bankruptcy petition was filed.  

 

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

 

In 2007, the plaintiff borrowers ("Borrowers") purchased a condominium in California with two loans secured by liens against the property, of which a bank ("Bank") held the junior lien.

 

Borrowers' promissory note to Bank provided in relevant part that: 

 

"[T]he Bank is a national bank located in Ohio and Bank's decision to make this Loan … was made in Ohio.  Therefore, this Note shall be governed by and construed in accordance with … the laws of Ohio … without regard to conflict of law principles."

 

Borrowers defaulted, the senior lender foreclosed, and Bank was left holding an unsecured claim in the amount of $42,000. 

 

Borrowers filed bankruptcy, and Bank filed a proof of claim based on the 2007 note.  Borrowers objected to the claim on the grounds that the claim was barred by California's applicable four-year statute of limitations.  Cal. Code Civ. Proc. § 337.  Bank argued that its claim was timely because the promissory note's choice of Ohio law incorporated Ohio's six-year statute of limitations period.  Ohio Rev. Code § 1303.16.

 

The bankruptcy court held that the promissory note selected Ohio's six-year statute of limitations period, and overruled Borrowers' objection.  The Bankruptcy Appellate Panel ("BAP") reversed.  Bank appealed from the BAP's decision.

 

As you may recall, when a contract contains a choice of law provision, federal courts will enforce that choice.  See, e.g., Flores v. Am. Seafoods Co., 335 F.3d 904, 916-19 (9th Cir. 2003).  But where a choice of law provision does not expressly include the statute of limitations, the Ninth Circuit construes it as silent on the issue.  See, e.g., Des Brisay v. Goldfield Corp., 637 F.2d 680, 682 (9th Cir. 1981).  Here, the Ninth Circuit determined that the choice of law provision at issue was materially identical to the one in Des Brisay. 

 

In Des Brisay, the Ninth Circuit applied the well-established rule that a federal right of action for which no statute of limitations was provided was subject to the limitations period which the forum state applies to analogous claims.  See, e.g., Wilson v. Garcia, 471 U.S. 261, 266-67 (1985).  However, unlike Des Brisay, this was not a federal securities case premised on an implied right of action.  This case involved a common law action on a promissory note for which both Ohio and California have statutorily prescribed a statute of limitations. 

 

To resolve this conflict of laws, the Ninth Circuit turned to the Restatement (Second) of Conflict of Laws.  See, e.g., Liberty Tool, & Mfg. (In re Vortex Fishing Systems), 277 F.3d 1057, 1069 (9th Cir. 2001). 

 

As you may recall, the 1971 version of the Restate (Second) of Conflict of Laws § 142 provides that:  "(1) An action will not be maintained if it is barred by the statute of limitations of the forum, including a provision borrower the statute of limitations of another state."  The 1988 version of § 142 is similarly worded, except that it provides a limited carve out which states "unless exceptional circumstances of the case make such a result unreasonable … The forum will apply its own statute of limitations barring the claim."

 

Here, the Ninth Circuit held that § 142 compelled the application of the longer statute of limitations under Ohio law based on "exceptional circumstances." 

 

According to the Ninth Circuit, the unique structures of the Bankruptcy Code meant that, through no fault of Bank's, there was no forum for its claim other than the one in which Borrower's bankruptcy was filed.  This was not a case filed voluntarily by Bank in California, in which a dismissal on statute of limitations grounds would be without prejudice to bringing the same claim in Ohio.  Rather, the Court held, once Borrowers declared bankruptcy, Bank was obligated to bring all of its claims in the district where Borrowers filed. 

 

Thus, the Ninth Circuit concluded that disallowing Bank's claim under California's statute of limitations would be wholly unreasonable under the circumstances. 

 

Accordingly, the Ninth Circuit reversed the BAP's judgment 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   |   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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Tuesday, April 18, 2017

FYI: 8th Cir Holds "Citizen" Does Not Equal "Resident" Under CAFA's "Local Controversy" Exception

The U.S. Court of Appeals for the Eighth Circuit recently held that "citizen" is not synonymous with "resident" under the Class Action Fairness Act (CAFA), 28 U.S.C. 1332(d), such that the class action lawsuit at issue could not be remanded to state court under CAFA's "local controversy" exception but rather should remain in federal court.

 

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

 

The plaintiff was injured in a car accident and received treatment at a hospital which required her to assign her Medicaid beneficiary rights to it. The hospital later contracted with a service provider to pursue any claims the plaintiff may have had against the responsible driver in lieu of collecting a reduced but certain payment from Arkansas Medicaid.

 

The plaintiff sued the hospital and the service provider on behalf of a class of "Arkansas-Medicaid beneficiaries" asserting that their attempt to recover under an assignment of the plaintiff's rights violated Arkansas law and that thousands who  had been treated across the state of Arkansas had been similarly damaged.  

 

The defendants removed the case to federal under CAFA. The plaintiff moved to remand under CAFA's local controversy exception, 28 U.S.C. 1332(d)(4), and the trial court agreed that more than two-thirds of the proposed class were citizens of the state.  The trial court noted that the plaintiff should amend to the complaint to assert that the class consisted of citizens rather than residents.  The plaintiff amended the complaint as instructed and the trial court ordered the case remanded to state court. The defendants sought permission to appeal, which was granted.

 

On appeal, the Eighth Circuit noted that the CAFA issue at hand was novel: how does the "resident" versus "citizen" distinction that appears in 28 U.S.C. 1332 play out in the local controversy exception?

 

The Appellate Court provided its five guiding principles behind its reasoning. First, the Eighth Circuit noted, CAFA provides broad diversity jurisdiction over class actions and the local controversy exception is narrow so that, once the defendant establishes the CAFA jurisdictional requirements, it is the plaintiff's burden to establish the local controversy requirements and any doubt should be resolved against the plaintiff.  

 

Second, the Eight Circuit held, the terms "citizen" and "resident" must be differentiated as citizenship requires permanency and residency does not require "an intent to make a place a home."  A person can be a resident of multiple states but a citizen of only one.  Thus, the Court held, residency is insufficient to establish citizenship for diversity jurisdiction.    

 

Third, the Appellate Court noted, a court must assume that Congress intended to apply the accumulated, settled meanings of terms under common law unless the statute states otherwise.  Here, the Eighth Circuit assumed Congress intended to use the common law meaning of the term "citizen" in CAFA.  

 

Fourth, at least one other ruling in the Seventh Circuit had addressed the issue of the meaning of "citizen" versus "resident" and had reached the same conclusion.  

 

Fifth, the Eighth Circuit noted, citizenship may be established by either defining the class as citizens (as opposed to residents) or by providing sound evidence of citizenship during class discovery, but cannot be based on "guesswork".  The Appellate Court explained that the trial court erred by allowing the plaintiff to amend her class definition, which the Eighth Circuit deemed "guesswork", and wrongly resolved the doubt in plaintiff's favor.  

 

The Appellate Court further pointed out that the trial court did not have the authority to permit the plaintiff to amend the complaint as the class definition prior to removal must include only local citizens in order for the local controversy exception to apply, and cited to section 1332(d)(7) which requires that for the local-controversy exception to apply, "class citizenship must be determined as of the date of the pleading giving federal jurisdiction."  

 

The Eighth Circuit concluded by pointing out that the plaintiff's lack of citizenship allegations did not defeat the district court's jurisdiction because the defendants pled in the notice of removal that the plaintiff was an Arkansas citizen, which was sufficient for federal jurisdiction.

 

Accordingly, the trial court's remand order was reversed and the appeal was returned to the trial court for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com

 

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