Wednesday, March 22, 2017

FYI: Fla App Ct (3rd DCA) Holds Statutory Attorney Fee Reciprocity Does Not Apply in "Lack of Standing" Foreclosure Cases

The District Court of Appeal of the State of Florida, Third District, recently reversed an award of attorney's fees to a borrower pursuant to section 57.105, Florida Statutes, holding that because the borrower prevailed on her argument that the foreclosing mortgagee lacked standing to enforce the note and mortgage, there was no contract between the parties, and therefore the borrower could not invoke the attorney's fees reciprocity provision of the statute.

 

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

 

The borrower signed a note and mortgage in 2007. The mortgage contained a provision that the lender would be entitled to recover its attorney's fees and costs in enforcing the note and mortgage.

 

The note contained a special endorsement from the original lender to a national bank, "its successors and/or assigns without recourse."  An asset securitization trust mortgagee sued to foreclose in 2009, alleging that it was the holder of the note and mortgage and was thus entitled to enforce the same.

 

The borrower answered, raising the affirmative defense that the mortgagee lacked standing "because the note was specially indorsed to an entity other than the [mortgagee], and that the [mortgagee] was not the lawful assignee of the note and mortgage." She requested attorney's fees "pursuant to the terms of the agreement between the parties and Florida Statutes, Section 57.105."

 

As you may recall, under the "reciprocity provision" in subsection 57.105(7), if there is a contract between the parties that entitles one side to recover fees as prevailing party, it is deemed reciprocal in order that if the other side wins, the other side can recover its reasonable attorney's fees.

 

The case went to trial and the trial court found that the mortgagee lacked standing because there was no evidence of an assignment of the mortgage from the original lender to the mortgagee, and entered judgment in the borrower's favor. The trial court also found that the note was never delivered to the mortgagee and, thus, it never became the holder of the note with the right to enforce it. Finally, the trial court found that the mortgagee was not a non-holder in possession entitled to enforce the note under section 673.3011(1), Florida Statutes, such that the mortgagee could not enforce the note, and reserved jurisdiction to award attorney's fees and costs.

 

The borrower filed a motion for attorney's fees, arguing that she was entitled to recover them as prevailing party based on the loan documents and subsection 57.105(7), Florida Statutes. In opposition, the mortgagee argued that because it was not a party to the note and mortgage there was no contractual or statutory basis to award fees.

 

After an evidentiary hearing, the trial court rejected the mortgagee's argument and awarded $41,120.01 in attorney's fees, prejudgment interest and expert witness fees. The mortgagee appealed.

 

The Third District began it analysis by reiterated the settled principle that Florida follows the "so-called American Rule," under which "attorney's fees may not be awarded unless authorized by contract or statute." 

 

The Court explained that "[b]ecause section 57.105(7) shifts responsibility or attorney's fees, it is in derogation of the common law and must be strictly construed. … The effect of [this section] is to statutorily transform a unilateral attorney's fees contract provision into a reciprocal provision."

 

However, the Court went on, the statute does not apply where no contract exists between the parties, citing earlier rulings from the Fourth and Fifth District Courts of Appeal.

 

Because only the parties to a contract can avail themselves of the reciprocity provision in subsection 57.105(7), and because the trial court expressly found that the mortgagee lacked standing because there was no assignment of the mortgage to it and could not enforce the note, the Third District held that the trial court erred in awarding attorney's fees to the borrower "based on a non-existent contract between the parties."

 

Accordingly, the trial court's order awarding fees 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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Tuesday, March 21, 2017

FYI: 9th Cir Holds Servicer May Have Violated UDAP by Soliciting Trial Mod Payments After Determining Borrower Ineligible

The U.S. Court of Appeals for the Ninth Circuit recently reversed an award of summary judgment in favor of a mortgage loan servicer, holding that the evidence could support a verdict that the servicer engaged in an unfair business practice by accepting trial modification plan payments when it had previously determined the borrower was not eligible for a loan modification. 

 

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

 

A borrower defaulted on her mortgage loan, and later applied for a loan modification.  The mortgage loan servicer sent her a letter offering her a "Trial Plan Agreement."  The letter specifically stated, "If you comply with all the terms of this Agreement, we'll consider a permanent workout solution for your loan once the Trial Plan has been completed."  The Agreement required the borrower to remit three equal payments of $3,280.05.  The borrower signed the Agreement and timely sent the payments.

 

Later, the servicer informed the borrower that she did not qualify "at this time" for a modification under either the federal Making Home Affordable Program ("HAMP") or under the servicer's in-house modification program because her "income [was] insufficient for the amount of credit [she] requested."  The letter also stated that "we may be able to offer other alternatives to help avoid the negative impact" of foreclosure.

 

The servicer did not provide additional reasons for its denial.  However, the servicer had also denied the borrower for a modification because:  1) the unpaid principal balance on the loan was higher than the amount allowed under the HAMP Guidelines and 2) the loan failed to satisfy the servicer's net present value ("NPV") test.  The servicer's NPV test compared the NPV expected from a modification to the NPV of the unmodified loan.  If the cash flow from a viable modification exceeds that of a non-modified loan, HAMP requires a servicer to offer a modification to a borrower.  If the NPV test generates a negative result, modification is optional.

 

The borrower then submitted a second application for a loan modification.

 

In response to the second application, the servicer sent a letter stating that it "want[ed] to help [the borrower] stay in [her] home" and confirmed receipt and review of the borrower's "verification of income documentation."  The servicer also provided three payment coupons in the amount of $2,988.49 with payment deadlines notated and stated: "After successful completion of the Trial Period Plan, [we] will send you a Modification Agreement for your signature which will modify the Loan as necessary to reflect this new payment amount."

 

Later, the servicer sent the borrower another letter informing the borrower that she was not eligible for a federal HAMP modification "because the current unpaid principal balance on [her] loan [was] higher than the program limit."  This letter also stated that the servicer was "happy" to tell the borrower that she "'may be eligible for other modification programs' and that [the servicer] may be able to offer 'other alternatives' to stave off the negative impact a possible foreclosure may have on [her] credit rating, the risk of a deficiency judgment … and the possible adverse tax effects of a foreclosure."

 

The borrower made all payments called for by the first letter and continued making such payments for a total of seven months.

 

The borrower was served with a foreclosure notice listing a foreclosure sale date.  Prior to the sale date, the servicer sent the borrower another letter encouraging her to continue to seek a modification.  The servicer told the borrower that she might "qualify for monetary incentives that will be used to pay down the principal balance of your loan if you make your modified payments on time."

 

Several months later, the servicer sent the borrower a letter denying her application, stating:  "We are unable to offer you a modification through the Home Affordable Modification Program (HAMP) or any [of the servicer's] modification programs … because you did not provide us with the documents we requested."

 

The borrower then filed an action for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of California's Unfair Competition Law ("UCL"), and violation of the federal Truth in Lending Act ("TILA"). 

 

The servicer moved to dismiss the borrower's complaint.  The trial dismissed the borrower's TILA claim but denied the servicer's motion with respect to the borrower's remaining claims.  The trial court reasoned, "If what [the borrower] alleges is true – that [the servicer's] left hand sought payments from Plaintiff pursuant to a plan designed to give her an opportunity to modify her loan while, notwithstanding [the borrower's] payment in accordance with that plan, [the servicer's] right hand continued all along with foreclosure proceedings and both hands should have known from the start that [the borrower's] loan would not be eligible for modification in any event – the Court can conceive of such allegations stating a [UCL] claim."

 

Later, the servicer brought a motion for summary judgment.  The trial court granted the servicer's motion on the ground that the borrower had failed to provide the servicer with the "requested documentation to support her loan modification request."  The trial court also rejected the borrower's breach of contract claims because the borrower had only "conclusorily" asserted that the "modification back-and-forth ripened into a contract with [the servicer]" and remarked that the borrower had not included a breach of contract claim in her first amended complaint.

 

The borrower appealed.  On appeal, the Ninth Circuit reversed the trial court's order granting summary judgment on the borrower's breach of contract claim. 

 

The Ninth Circuit held that the trial court "erred in failing to acknowledge [the borrower's] claim for breach of contract in her pro se complaint."  The Ninth Circuit noted that the borrower "explicitly styled her complaint on its first page as one for "BREACH OF CONTRACT AND BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALINGS."  The Ninth Circuit also found that "[o]nce [the borrower] made her three payments, [the servicer] was obligated by the explicit language of its offer to send her an Agreement for her signature 'which will modify the loan as necessary to reflect this new payment amount.'  [The Servicer] did not call it either a HAMP agreement or [an in-house] agreement, just an 'Agreement.'  What program the Agreement was part of is irrelevant."

 

The Ninth Circuit also reversed the District Court's order granting summary judgment on the borrower's UCL claim.  The Ninth Circuit noted that the borrower was indeed ineligible for a HAMP modification, but that "instead of determining eligibility before asking for money – a logical protocol called for by HAMP as of January 28, 2010 – [the servicer] asked [the borrower] for more payments." 

 

The Ninth Circuit held that "[t]he facts in this record would amply support a verdict on this claim in [the borrower's] favor on the ground that she was the victim of an unconscionable process."  The Ninth Circuit reasoned that "[w]ith its March 1, 2010 letter, [the servicer] deceptively enticed and invited [the borrower] into a process with the demonstrably false promise that a loan modification was within her reach if she were to make three monthly payments of $2,988.49 each.  The next day – and for the first time – [the servicer] eliminated a HAMP modification from its menu, but neither advised [the borrower] what [its in-house modification guidelines] required nor suspended additional payments until it could determine her [in-house modification] eligibility."

 

Finally, the Ninth Circuit reversed the trial court's dismissal of the borrower's TILA claim.  The Ninth Circuit cited the Supreme Court of the United States' ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015) which held that TILA's right to cancel may be exercised by a written notice from the borrower to the lender within three years after the consummation of the transaction, without need to also file a lawsuit within the three-year period. 

 

The Ninth Circuit observed that the Supreme Court decided Jesinoski after the trial court had dismissed the borrower's TILA claim.  As a result, the Ninth Circuit remanded the action to the trial court "with instructions to permit [the borrower] to amend her complaint to allege a right to rescind pursuant to Jesinoski."

 

 

 

 

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, March 20, 2017

FYI: Fla App Ct (2nd DCA) Indicates FHA "Face-to-Face" Requirement Applies to "Mortgagee and Loan Servicer"

The District Court of Appeal of the State of Florida, Second District, recently reversed a summary judgment award in favor of the borrowers in a foreclosure action, finding a triable issue of material fact existed concerning whether the face-to-face counseling requirements of 24 C.F.R. § 203.604 applied, as the mortgagee did not submit evidence "as to whether the mortgagee and loan servicer had a branch office within 200 miles of the property during the time period before three full monthly installments due on the mortgage went unpaid." 

 

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

 

A mortgagee filed a foreclosure complaint against the borrowers.  During the foreclosure action, the mortgagee assigned the note and mortgage to a different mortgagee.  The new mortgagee then substituted into the foreclosure action as the party plaintiff.

 

The borrowers moved for summary judgment arguing that "Plaintiff failed to comply with the face-to-face counseling requirements of 24 C.F.R. § 203.604." 

 

As you may recall, 24 C.F.R. § 203.604 requires that "[t]he mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid."  However, a face-to-face meeting is not required if "the mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either."  Id.

 

In support of their motion, the borrowers submitted an affidavit stating: "I never participated in any face-to-face counseling with Plaintiff," and that they "reside in the property and Plaintiff has a branch within 200 miles of the property (and has had such a branch since the time of the alleged default)."  In response, the mortgagee submitted its own affidavit stating that the mortgagee and the prior mortgagee "do not have servicing centers or branch offices located within 200 miles of the subject property."

 

The trial court granted the borrowers' motion for summary judgment and found that the mortgagee's affidavit addressed only the location of its branch offices and servicing centers at the time of summary judgment.  The trial court held that the mortgagee failed to show whether the prior mortgagee had a branch office or a servicing center within 200 miles of the subject property at the time of default.

 

The trial court then denied the mortgagee's motion for rehearing.  In support of its motion, the mortgagee provided an amended affidavit stating that it, the prior mortgagee and the original lender each did not have "servicing centers or branch offices within 200 miles of the subject property three months prior to the alleged default of June 1, 2011." 

 

The Appellate Court reversed the trial court's ruling, and held that "the amended affidavit in opposition to summary judgment filed with the motion for rehearing created a genuine issue of material fact as to whether the mortgagee and loan servicer had a branch office within 200 miles of the property during the time period before three full monthly installments due on the mortgage went unpaid." 

 

The Appellate Court also found that the mortgagee was not precluded from filing an amended affidavit in connection with its motion for rehearing.  The Appellate Court relied on Fatherly v. Cal. Fed. Bank, 703 So. 2d 1101, 1102 (Fla. 2d DCA 1997) and noted that "under Florida Rule of Civil Procedure 1.530 a judge has broad discretion to grant a rehearing of a summary judgment when the party seeking rehearing submits matters that would have created an issue precluding summary judgment if they had been raised prior to the hearing on the motion."

 

 

 

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.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

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and

 

Webinars

 

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California Finance Law Developments 

 

Saturday, March 18, 2017

FYI: 4th Cir Rejects Bankruptcy Trustee's Effort to Hold Bank Liable for Fraudulent Transfers

The U.S. Court of Appeals for the Fourth Circuit recently held that certain deposits and wire transfers into a bankrupt debtor's personal, unrestricted checking account in the ordinary course were not "transfers" under § 101(54) of the Bankruptcy Code, affirming the district court and bankruptcy court's entry of summary judgment in favor of the bank in an adversary proceeding brought by the bankruptcy trustee.

 

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

 

The debtor orchestrated a Ponzi scheme that unraveled in 2009, in which "he defrauded his friends, family, and acquaintances out of millions of dollars under the guise of investing their money in a purchase order factoring contract business."  The debtor was convicted of wire fraud and money laundering.  Eight individual creditors filed an involuntary bankruptcy petition under 11 U.S.C. § 303 against the debtor. 

 

The bankruptcy trustee filed an adversary proceeding on behalf of the bankruptcy estate against the bank where the debtor had his personal checking account, alleging that certain deposits and wire transfers from "investors" constituted fraudulent transfers "made with the actual intent to hinder, delay, or defraud creditors, and that they were therefore avoidable" under 11 U.S.C. § 548(a)(1)(A).

 

The bankruptcy court granted summary judgment in the bank's favor, reasoning that the transfers from the debtor the bank "neither diminished the bankruptcy estate nor placed the funds beyond the creditors' reach, and they were therefore not avoidable as fraudulent transfers." The district court affirmed, and the bankruptcy trustee appealed to the Fourth Circuit.

 

On appeal, the trustee argued that the bankruptcy and district courts erred because where actual fraudulent intent exists, "there is no requirement that the transactions diminish or otherwise move property away from the bankruptcy estate."

 

The bank countered that section 548(a)(1)(A) "requires that an avoidable transfer one 'of an interest of the debtor in property,'" and because the debtor deposited the checks and received wire transfers into his personal account, "he neither transferred his interest in the funds to the Bank nor diminished the bankruptcy estate, since [the debtor] at all times had access to and control of the funds."

 

The Fourth Circuit asked the parties to address the threshold question whether the transactions at issue were "transfers" at all under section 101(54) of the Bankruptcy Code before deciding whether they were avoidable transfers under subsection 548(a)(1)(A).

 

The Court found that the deposits and incoming wire transfers were not "transfers within the meaning of the Bankruptcy Code." It explained that courts are "divided on whether § 105(54)'s definition of 'transfer,' even interpreted as broadly as Congress intended, includes a debtor's deposits in his own unrestricted bank account in the regular course of business."

 

Relying on two Fourth Circuit decisions from 1930 and 1931 predating the Bankruptcy Code as well as the Supreme Court's 1904 decision in N.Y. Cty. Nat'l Bank v. Massey, which held that the deposit of money into a bank account creates an "ordinary debt" with the bank having an obligation to make the funds available to the depositor and "does not change the debtor's interest in the funds[,] the Court reasoned that "the better interpretation of 'transfer' does not include a debtor's regular deposits into his own unrestricted checking account [because] he continued to possess, control, and have custody over those funds, which were freely withdrawable at his will. Indeed, any funds in the account were at all times part of the bankruptcy estate. The Bank's mere maintenance of [debtor's] checking account does not suffice to make deposits and wire transfers in that account 'transfers' from [debtor] to the Bank." Accordingly, the Court "decline[d] to read § 101(54) to say otherwise."

 

The Fourth Circuit cautioned that it was not deciding whether "other types of deposits, such as those made to restricted checking accounts, would constitute transfers under § 101(54)", and that it held only that "when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business he has not transferred those funds to the bank that operates the account. When the debtor is still free to access those funds at will, the requisite 'disposing of' or 'parting with' property has not occurred; there has not been a 'transfer' within the meaning of § 101(54)."

 

Thus, although the Court disagreed with the bankruptcy and district courts that subject deposits and wire transfers were "transfers" within the meaning of the Bankruptcy Code, it affirmed on the narrower basis that the transactions were not avoidable transfers under § 548(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

 

 

 

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.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

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Webinars

 

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California Finance Law Developments

 

 

Friday, March 17, 2017

FYI: Statutory Interest Cannot Accrue on Charged-off Credit Cards, Says Kentucky Supreme Court

The Kentucky Supreme Court recently held that a debt buying company may not charge or collect statutory interest under section 360.010 of the Kentucky Revised Statutes on a credit card account the debt buyer acquired after the account was charged off by the original creditor.

 

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

 

A consumer's credit card account was charged off by the original creditor and was sold to a debt buying company. In a collection lawsuit, the debt buying company sought judgment for the charged-off balance plus statutory interest from the date of charge off. In response, the consumer counterclaimed alleging that because the original creditor charged off her account, the debt buyer was no longer permitted to charge interest. In seeking statutory interest, the consumer alleged the debt buying company violated the federal Fair Debt Collection Practices Act (FDCPA).

 

The Kentucky Supreme Court held that once a credit card account is charged off and the original creditor ceases sending monthly statements, federal law prohibits further contract interest charges. Because the original creditor stopped assessing contract interest, it waived its right to collect "agreed-to interest." The Court held that this waiver amounted to a waiver of any right to assess interest, including statutory interest. As the assignee of the original creditor, the debt buying company had "no greater right to collect interest" and so could not seek statutory interest as part of its collection lawsuit.

 

The Court also found that the consumer stated a claim for violations of sections 1692e and 1692f of the FDCPA arising from the debt buying company's request for statutory interest in its state court collection complaint.

 

As the consumer's case was making its way through the Kentucky state court system, the Sixth Circuit Court of Appeals in Stratton v. Portfolio Recovery Associates held a consumer stated a claim for violation of the FDCPA when a debt buying company's collection lawsuit sought statutory interest under the same section of the Kentucky Revised Statutes at issue in this case.

 

But there was a dissenting opinion in the Stratton ruling, which criticized its holding because the issue of whether statutory interest could be charged in these circumstances was undecided under Kentucky law. The dissent in Stratton concluded that imposing FDCPA liability under such circumstances "impermissibly expands the scope of the FDCPA, exposing debt collectors to liability under federal law whenever we later determine a debt collector's reasonable construction of an as-yet uninterpreted state law is wrong."

 

To establish a waiver of a known contractual right, most decisional law (including Kentucky's) requires a demonstration that the waiver was "voluntary" relinquishment of a known right. The federal regulation at the center of this case and in the Sixth Circuit's ruling in Stratton is the Truth in Lending Act's Regulation Z (12 C.F.R. 226.5(b)(2)), which governs when periodic statements must be provided for open-end credit accounts.

 

The regulation excuses the sending of a periodic statement "if the creditor has charged off the account in accordance with loan-loss provisions and will not charge any additional fees or interest on the account . . ." Following the reasoning of Stratton and this ruling by the Kentucky Supreme Court, when a creditor makes this election under Regulation Z and stops sending periodic statements, it has decided it will no longer charge interest and has waived the right to charge interest.

 

The Kentucky Supreme Court ruling was not unanimous, and the dissent noted that the majority opinion misconstrued the federal regulation. The dissent noted that federal regulations require banks to charge off accounts to prevent them from inflating their net worth with assets that are noncollectible. Second, the act of charging off an account serves the purpose of terminating further use of the card and establishes the balance owed as a liquidated sum.

 

Under Kentucky law, the dissent notes, prejudgment, statutory interest is a "matter of right on a liquidated demand." Accordingly, the dissent concluded, the majority decision "punishes banks for their compliance with federal regulations and it bestows an unearned and undeserved windfall upon delinquent debtors."

 

The dissent's view that creditors have a "right" to seek prejudgment statutory interest on a liquidated claim is also contained in decisional law in other jurisdictions. Kentucky, however, has spoken and no right exists to charge interest on charged-off credit card accounts in Kentucky.

 

 

 

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.


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

 

 

Wednesday, March 15, 2017

FYI: 8th Cir Confirms Doc Prep Fees Violate Missouri UPL Statute, Upholds Application to Out-of-State Class Members Due to Choice of Law Provision

In a "doc prep fee UPL" class action, the U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court's rulings as to class certification and application of a choice-of-law provision on a class-wide basis.

 

In so ruling, the Court also reversed and remanded the lower court's determination that the attorney's fees for the class counsel should be paid solely from the common fund in light of the fee shifting provision in the contract.

 

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

 

The named class plaintiffs purchased a boat from the defendant, a nationwide retailer of sporting goods, equipment, and vehicles.  The retailer included as part of the transaction its standard form sales agreement, and a document fee for the preparation of that agreement. 

 

Plaintiffs filed their putative class action lawsuit in Missouri state court alleging that the retailer violated Missouri statutes prohibiting the unauthorized practice of law by charging the document fee for preparing the sales agreement. See Mo. Rev. Stat. 484.010 and 484.020. 

 

Following class certification by the state court, the matter was removed to the federal trial court by the retailer, where the retailer unsuccessfully moved to decertify the class. The federal trial court required plaintiffs' counsel to analyze the defendant's customer files to determine how many transactions included the standard choice of law provision which designated Missouri as the applicable forum, and thus, the nationwide class was limited to only those agreements.  Following this review, the class was determined to consist of approximately 100,000 members.  

 

Subsequently, the trial court entered summary judgment in the plaintiffs' favor, ruling that charging a document fee for the completion of the standard sales agreement constituted unauthorized law business in violation of Missouri Statute 484.020. 

 

The trial court awarded the class damages based upon the total fee amount charged by the retailer in each transaction, and trebled this amount as provided under the applicable Missouri statute.  Although the agreements at issue also contained a fee shifting provision, the trial court further determined that the class counsel should be paid from only the actual damages portion of the common fund - not including the trebled damages award - based upon Section 4 of the Clayton Act.

 

The trial appealed the judgment and fee award.  Specifically, the retailer argued that 1) class certification was incorrect because each contract was too individualized; 2) the district court incorrectly interpreted the Missouri statute for unauthorized practice of law; and 3) it was incorrect to apply the Missouri statute for transactions which arose outside of Missouri.

 

The plaintiffs filed a cross-appeal in which they argued the trial court erred in determining the amounts of the attorney fees award by not including the trebled damages award, and in not enforcing the fee shifting provision contained in the sales agreement.

 

First, the Eighth Circuit addressed the retailer's challenge to class certification.  The Eighth Circuit noted that the challenge encompassed the lower court's determination pursuant to Fed. R. Civ. P. 23(a)(2) and (b)(3) as to the commonality and predominance of class claims, as well as the implicit requirement for ascertainability. 

 

The Court recited that a class is ascertainable when its members may be identified by reference to objective criteria. Citing Sandusky Wellness Ctr. v. Medtox Sci., Inc., 821 F.3d 992, 996 (8th Cir. 2016).  In this matter, the Court found that the class was clearly ascertainable as it simply included all consumers whose sale agreements included the Missouri choice-of-law provisions and were charged the document preparation fee.  The Court further noted that the trial court required an intensive file-by-file review specifically for the purposes of excluding non-qualifying consumers. 

 

Similarly, the Eighth Circuit found that the class met the commonality and predominance requirements.  In doing so, the Court noted that the class was defined by the retailer's own corporate policy to utilize a standard sale agreement including the Missouri choice-of-law provision, and thus, the "case presented a 'classic case for treatment as a class.'" Steinberg v. Nationwide Mut. Ins. Co., 224 F.R.D. 67, 74 (E.D.N.Y. 2004).  Therefore, the Court determined that the identified class members all had the common and predominant issue as to whether the retailer's practice of charging a document fee in the standard form violated Missouri's statute prohibiting unauthorized law practice.

 

Second, the Eighth Circuit rejected the retailer's argument that the district incorrectly interpreted the applicable Missouri statute prohibiting the unauthorized practice of law as applied to the facts.  The Court noted that prior Missouri case law held that "charging a separate fee for the completion of legal forms by non-lawyers constitutes the unauthorized practice of law business."  Carpenter v. Countrywide Home Loans, Inc., 250 S.W.3d 697, 702 (Mo. 2008).

 

In addition, the Court noted that the standard sales agreement used by the retailer included a power of attorney form which has been previously determined to be a legal form in Missouri.  Accordingly, the Eighth Circuit affirmed the judgment entered by the lower court because "once it is determined that a particular document is legal in nature, the act of charging a fee for the preparation or compilation of that document constitutes unauthorized law business, even when a non-lawyer does not exercise any legal judgment in completing the form."

 

Relatedly, the retailer argued that the trial court incorrectly based the calculation of damages on the entire document fee charged even though the charges also potentially included non-prohibited activities.  The Eighth  Circuit found these arguments to be without merit.  As noted by the Court, the specific fee at issue was charged to the customers separately from the legitimate portions of the contract, and therefore, the damages were appropriately based upon the entire fee amount.

 

Third, the Eighth Circuit determined that there was no error in applying Missouri law to the class members whose transactions occurred outside of Missouri.  In doing so, the Court found no merit in the retailer's argument that the application of the statute was penal in nature, because the State of Missouri was not a party to the action or that the State of Missouri indicated that it intended to enforce the criminal portions of the Missouri statute.  Further, the Court held that the sale agreement had a valid Missouri choice of law provision which is binding upon the contracting parties. 

 

Accordingly, the Court affirmed the judgment entered against the retailer and denied the entirety of the retailer's appeal.

 

As to the cross-appeal by the plaintiffs, the Eighth Circuit found that the trial court did err in not enforcing the fee shifting provisions of the sales agreement, and instead providing payment to the attorneys out of the common fund.

 

In doing so, the Court noted that in cases with a contractual fee-shifting provision, the court must weigh the equitable principles underlying the creation of the common fund doctrine against the fee shifting provision agreed upon by the parties.  Initially, the Eighth Circuit quickly noted that an award under a fee-shifting provision is not necessarily dispositive of the amounts due to the class counsel, and that additional amounts may be due to counsel from the common fund.  However, the mere creation of the common fund "is not sufficient to establish a finding that the common fund doctrine must be applied when awarding attorney fees."  Haggert v. Woodley, 809 F.3d 1336, 1356 (Fed. Cir.). 

 

In weighing the equities, the Eighth Circuit determined that payment of the attorneys' fees under the fee shifting provision accommodates both concerns underlying the common fund doctrine, i.e. (1) class counsel is able to recoup reasonable compensation, and (2) there is no risk that the named plaintiff unjustly pays for the fees of the class counsel.  In addition, the Court found that paying the attorneys' fees from the common fund would be inequitable because it "nullifies the class's contractual right, as a prevailing party" to recover under the fee shifting provision agreed upon by the parties under the defendant's sales agreement. 

 

Finally, the Eighth Circuit held that if on remand, the trial court found that the class counsel was owed additional fees above and beyond those due under the fee shifting provision, that the trial court was to use the common fund as a whole - including treble damages - to determine the appropriate compensation. 

 

Accordingly, the lower court's decision to pay class counsel from the common fund was reversed and the issue remanded to the lower court for a determination as to the amounts due under the fee shifting provision and otherwise.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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