Wednesday, July 8, 2020

FYI: Ill App Ct (3rd Dist) Holds Factual Disputes About Mistakenly Released Mortgage Precluded Summary Judgment

The Appellate Court of Illinois, Third District ("Third District") recently reversed entry of summary judgment and subsequent post-foreclosure orders in favor of a mortgagee, after challenges by a non-borrower mortgagor concerning the mortgagee's standing and existing obligations under the loan resulting from a "certificate of error" recorded by the original lender's nominee to rescind and disavow a purportedly mistakenly-recorded release of the mortgage.

 

In so ruling, the Appellate Court concluded that a factual dispute regarding the intent and effect of the recorded satisfaction of the mortgage and subsequent certificate of error precluded entry of summary judgment and could not be resolved absent undisputed testimony about the business records from the original lender or the undisputed business records of the original lender, all of which was not a part of the record.

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

 

In May 2006, husband and wife obtained a loan secured by a mortgage upon their residential property.  The mortgage's lender nominated MERS as the mortgagee.  Both the husband ("Non-borrower Mortgagor") and wife signed the mortgage, but only the wife ( "Borrower") executed the note which memorialized the loan.

 

Weeks after the mortgage was recorded in the county's official records (the "First Recorded Mortgage"), the mortgagee recorded a satisfaction of the mortgage (the "Release of Mortgage") releasing the borrowers from their obligations. 

 

Weeks thereafter, a certificate of error was recorded purporting to rescind and disavow the mistakenly-recorded release of the First Recorded Mortgage. 

 

Approximately one month later, the mortgage was recorded for a second time (the "Second Recorded Mortgage"), with the first page bearing the official document number of the First Recorded Mortgage from its prior recording, and a new recorded document number.

 

After the Borrower passed away in July 2009, the mortgagee executed an assignment of mortgage in April 2010, which referred only to the First Recorded Mortgage's official document number.  The assignee of the mortgage loan ("First Assignee") filed a foreclosure complaint in May 2010, which attached a copy of the mortgage and note, but not the relevant assignment.

 

In October 2014, the First Assignee executed an assignment of its interest in the First Recorded Mortgage and purported interest in the Second Recorded Mortgage to a new entity.  The assignment did not expressly transfer an interest in the note executed by the now-deceased Borrower.

 

Two subsequent assignments of the mortgage were executed on January 19, 2016 purporting to transfer an interest in the note and First Recorded Mortgage agreement, and a claimed interest in Second Recorded mortgage. 

 

The latest assignee ("Mortgagee") was substituted as party plaintiff in the foreclosure, and moved for summary judgment.  The motion was denied by the trial court (by its former presiding judge), citing a dispute of material facts regarding the Release of Mortgage and the Mortgagee's failure to present law to support its argument that the certificate of error served to rescind the Release of Mortgage.

 

After the Borrower was dismissed from the action as a result of her death, the Mortgagee moved again for summary judgment, submitting nearly identical arguments but addressing the surviving Non-borrower Mortgagor's affirmative defense that the Mortgagee lacked standing.

 

The non-borrower Mortgagor filed an amended answer and affirmative defenses to the foreclosure complaint, alleging that the mortgage was obtained for refinancing, and that he and Borrower rescinded the mortgage within the three-day right of rescission period, and received the recorded Release of Mortgage rather than any acknowledgment of rescission for the lender. 

 

The non-borrower Mortgagor's amended answer raised affirmative defenses of (1) accord and satisfaction, alleging that the release extinguished the mortgage; (2) lack of standing, alleging that only a released lien had been the subject of the assignment by MERS, acting as agent for the original lender, thus, subsequent assignees could not foreclose upon a released mortgage agreement; (3) and fraud, pertaining to several notices the original lender failed to disclose.

 

Accordingly, the non-borrower Mortgagor filed a cross-motion for summary judgment arguing that the Release of Mortgage extinguished all obligations under the mortgage and that Mortgagee lacked standing because all subsequent assignments were meaningless.

 

After consideration of the cross-motions for summary judgment, the trial court entered an order granting summary judgment in the Mortgagee's favor and against the non-borrower Mortgagor without discussion of the court's factual or legal findings.  The non-borrower Mortgagor's motions for clarification and reconsideration and request for leave to file a second amended answer and affirmative defenses were denied.

 

After a foreclosure sale was completed and the property was sold to a third-party buyer, the Mortgagee moved for approval of the sale and distribution of the property, and orders of eviction and for an in rem deficiency, which were eventually granted, directing the sheriff to evict the non-borrower Mortgagor and entering an in rem deficiency judgment exceeding $300,000.  

 

After the non-borrower Mortgagor's motions to vacate for rehearing were denied, he filed a timely notice of appeal.

 

On appeal, the Third District first addressed the non-borrower Mortgagor's argument that because the Borrower was a necessary party to the foreclosure action, that the trial court lost subject matter jurisdiction over the action upon her dismissal pursuant to the Illinois' Supreme Court's ruling in ABN AMRO Mortgage Group, Inc. v. McGahan, 237 Ill. 2d 526 (2010), which held that a foreclosing mortgagee must name a personal representative for a deceased mortgagor in a mortgage foreclosure proceeding in order for the trial court to acquire subject matter jurisdiction. Id. at 528. 

 

Acknowledging that the Borrower may have been a necessary party at the time the foreclosure action was initiated, at the time she was dismissed in 2016, the Illinois Mortgage Foreclosure Law  provided that parties necessary to a foreclosure included ""only (i) the mortgagor and (ii) other persons (but not guarantors) who owe payment of indebtedness or the performance of other obligations secured by the mortgage and against whom personal liability is asserted" (735 ILCS 5/15-1501(a) (West 2016)). 

 

Section 15-1501(h) further provided that "In no event may a deficiency judgment be sought or entered in the foreclosure case against a deceased mortgagor." (§15- 1501(h)), and no special representative for a deceased mortgagor was needed if there is a living person that holds 100% of the property as a surviving joint tenant or tenant by the entirety (§ 15-1501(h)(1)). 

 

Accordingly, under the then-existing law, the Borrower was not a necessary party and subject matter jurisdiction existed without the prior appointment of a special representative for the Borrower following her death.  See Deutsche Bank National Trust Co. v. Estate of Schoenberg, 2018 IL App (1st) 160871.

 

The Appellate Court next addressed the non-borrower Mortgagor's argument that the Release of Mortgage extinguished all contractual obligations and could not be revived by the Certificate of Error. The Court noted that the two presiding judges below reached two different conclusions regarding the effect of the Certificate of Error and whether the material facts surrounding the Release of Mortgage were disputed, and that the summary judgment entered below provided no rationale for finding in the Mortgagee's favor.

 

The Third District concluded that the contradictory factual inferences from the Release of Mortgage and Certificate of Error could not be resolved without undisputed business records from the original lender or testimony as to same on the record.  Therefore, resolution of either cross-motion for summary judgment was unwarranted and the lower court's order stood to be vacated.  See Espinoza v. Elgin, Joliet & Eastern Ry Co., 165 Ill. 2d 107, 114 (1995) (supreme court stating "where reasonable persons could draw divergent inferences from the undisputed material facts summary judgment should be denied and the issue decided by the trier of fact").

 

For this reason, the Court also could not reach the merits as to the non-borrower Mortgagor's challenge to the Mortgagee's standing under the chain of assignments of the Mortgage, which he claimed were invalidated by the Certificate of Error.

 

For these reasons, the lower court's order granting the Mortgagor's motion for summary judgment was reversed, and subsequent orders including (i) the judgment of foreclosure, (ii) eviction order, (iii) orders confirming and approving the sale and (iv) order denying the non-borrower Mortgagor's motion for leave to file a second amended answer and affirmative defenses were vacated and remanded with directions for the trial court to reach the merits of the non-borrower Mortgagor's motion for leave to file a second amended answer and affirmative defenses.

 

 

 

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, July 7, 2020

FYI: 6th Cir Holds Voluntary 401(k) Contributions Are Not "Disposable Income" for Chpt 13 BK Plans

The U.S. Court of Appeals for the Sixth Circuit recently held that wages withheld as a voluntary 401(k) contribution prior to filing bankruptcy were not considered "disposable income" under a Chapter 13 bankruptcy plan.

 

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

 

An individual debtor ("Consumer") filed a Chapter 13 bankruptcy with more than $200,000 in debt ($189,000 unsecured debt) and fewer than $39,000 in assets.

 

As you may recall, a Chapter 13 allows a consumer to satisfy her unsecured debts by paying all her disposable income to her unsecured creditors during a sixty-month commitment period.

 

Consumer proposed a bankruptcy plan that would pay her unsecured creditors sixty monthly payments of $323 based on her reported gross monthly income of $5,627 and $5,304 in claimed allowable monthly expenses. The claim expenses included $220.66 her employer withheld as a contribution to a 401(k) retirement plan.

 

The Trustee objected to consumers plan and contended that 401(k) contributions are considered disposable income. The bankruptcy court sustained the Trustee's objection. As a result, the Consumer filed amended bankruptcy plan that would pay her unsecured creditors $519 each month, which included the 401(k) contributions as part of her disposable-income calculation. Consumer then objected to her own plan to preserve it for appellate review.

 

The plan was confirmed by the bankruptcy court, and Consumer appealed.

 

The Sixth Circuit started its review by examining the Section 1325(b)(1) of the Bankruptcy Code.  This paragraph provides that, upon objection, a bankruptcy plan cannot be approved "unless . . . [it] provides that all of the debtor's projected disposable income to be received in the applicable commitment period . . . will be applied to make payments to unsecured creditors." Section 1325(b)(2) defines "disposable income" as the debtor's "current monthly income . . . less amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor." "Projected disposable income," as used in § 1325(b)(1), is not defined anywhere in the Bankruptcy Code.

 

The Court next noted that before 2005, the "overwhelming consensus" among bankruptcy courts was that wages voluntarily withheld as 401(k) contributions formed part of a debtor's disposable income. However, in 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

 

BAPCPA amended the Bankruptcy Code and added 11 U.S.C. § 541(b)(7). In relevant part, § 541(b)(7)(A) provides:

 

(b) Property of the estate does not include—

(7) any amount—

(A) withheld by an employer from the wages of employees for payment as contributions—

(i) to—

(I) [a 401(k) retirement plan]

except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).

 

The language "except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2)" is known as the "hanging paragraph" and its meaning has led to considerable disagreement and spawned four competing interpretations.

 

The leading interpretation is Baxter v. Johnson (In re Johnson), 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006) where the bankruptcy court concluded that the hanging paragraph "plainly state[s] that [401(k)] contributions 'shall not constitute disposable income.'" Id. (quoting 11 U.S.C. § 541(b)(7)). In its view, BAPCPA "placed retirement contributions outside the purview of a Chapter 13 plan." Id. Thus, Johnson held that a debtor's disposable income does not include the wages she contributes to her 401(k) plan — whether or not those contributions began prior to bankruptcy. Id.

 

In re Prigge, 441 B.R. 667 (Bankr. D. Mont. 2010), offers a competing interpretation and held that a Chapter 13 debtor may never deduct "voluntary post-petition retirement contributions in any amount regardless of whether the debtor [made] pre-petition retirement contributions." That interpretation focuses on the hanging paragraph's location within Section 541. Section 541 defines the contours of the bankruptcy estate—a concept that deals primarily with pre-petition assets. Drawing clues from that context, the Prigge interpretation construes the hanging paragraph to reach only pre-petition assets. See id.; McCullers, 451 B.R. at 504–05; Prigge, 441 B.R. at 677 n.5. In effect, this interpretation reads the hanging paragraph as excluding from disposable income under Section 1325(b)(2) only accumulated 401(k) savings—rather than an ongoing contribution amount.

 

The Sixth Circuit itself previously held that "post-petition income that becomes available to debtors after their 401(k) loans are fully repaid is 'projected disposable income'" under § 1325(b)(1). Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012). This interpretation is referred to as "Seafort-BAP" and construes the hanging paragraph to exclude the debtor's pre-petition contribution amount—rather than merely her accumulated savings—from her disposable income under § 1325(b)(2). Under this interpretation, a debtor may deduct 401(k) contributions from her disposable income if she made an equal or greater monthly contribution prior to her bankruptcy.

 

The fourth interpretation is a modified version of Seafort-BAP known as the "CMI interpretation" which construes the hanging paragraph as excluding the debtor's pre-petition contributions from the calculation of her "current monthly income"—a subcomponent of § 1325(b)(2)'s disposable-income calculation.

 

The Sixth Circuit next noted, among the four competing interpretations of the hanging paragraph, three support the consumer's view: Johnson, Seafort-BAP, and CMI. However, the Sixth Circuit has previously rejected the Johnson interpretation, which leaves Consumer with the Seafort-BAP and CMI interpretations for support. In contrast, the Prigge interpretation supports the Trustee's position, which is that voluntary retirement contributions can never be excluded from disposable income, regardless of whether the debtor was making such contributions prior to her bankruptcy.

 

In examining the competing interpretations, the Sixth Circuit relied on established canons of construction to guide its ruling.

 

First, the reenactment canon provides that whenever Congress amends a statutory provision, "a significant change in language is presumed to entail a change in meaning." Arangure v. Whitaker, 911 F.3d 333, 341 (6th Cir. 2018). The court must therefore presume that the hanging paragraph altered existing law.

 

Next, the presumption against ineffectiveness offers similar guidance. See Antonin Scalia & Bryan A. Garner, Reading Law 63 (2012). That presumption reflects "the idea that Congress presumably does not enact useless laws." United States v. Castleman, 572 U.S. 157, 178 (2014) (Scalia, J., concurring). In other words, when the plain meaning of a provision is not clear, [the court] should avoid interpretations that render the provision a "dead letter." United States v. Hayes, 555 U.S. 415, 427 (2009). Thus, the court should be skeptical of interpretations that deprive the hanging paragraph of any meaningful effect.

 

Finally, the canon against surplusage provides a related command. It conveys the familiar rule that courts should "give effect, if possible, to every word Congress used." Nat'l Ass'n of Mfrs. v. Dep't of Def., 138 S. Ct. 617, 632 (2018) (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979)).

 

The Sixth Circuit concluded that the hanging paragraph is best read to exclude from disposable income the monthly 401(k)-contribution amount that Consumer's employer withheld from her wages prior to her bankruptcy. That interpretation reads the amendment to § 541(b), which added the hanging paragraph, in a way that actually amends the statute. The Court noted that it also gives a meaningful effect — one not already accomplished by § 1325(b)(2) — to Congress's instruction in § 541(b)(7) that 401(k) contributions "shall not constitute disposable income".

 

The Sixth Circuit clarified that its holding was narrow and should not be read to curtail the good-faith analysis required by § 1325(a)(3). That provision prohibits a bankruptcy court from confirming a Chapter 13 plan unless the debtor proposed it in good faith. See Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447, 455 (6th Cir. 2009).

 

The Court's reading of the hanging paragraph may necessitate a more searching good-faith analysis to minimize the risk that a debtor contemplating bankruptcy might begin making 401(k) contributions prior to filing to lower the amount she must ultimately repay her creditors. Here, however, there was no assertion that Consumer proposed her plan in bad faith.

 

Accordingly, the Sixth Circuit vacated the bankruptcy court's order confirming the Chapter 13 plan.

 

 

 

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, July 5, 2020

FYI: 8th Cir Upholds Over 90% Reduction of Punitive Damages Award

The U.S. Court of Appeals for the Eighth Circuit recently held that a reduction of a jury's punitive damages award from $5.8 Million to only $500,000 was appropriate where the jury's award was grossly excessive and in violation of the Due Process Clause.

 

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

 

An Arkansas car dealership acquired a used Ferrari and sent it to a certified Ferrari dealership for a pre-purchase inspection. The certified dealership recommended five repairs and discussed them over the phone with the first dealership. The first dealership declined two of the five repairs, one relating to the tire pressure monitoring system and the other relating to the car's exhaust headers.

 

The Recommended Services report was not sent to the dealership at this time. The dealership advertised the car online and referenced the pre-purchase inspection.

 

A consumer noticed the ad and found the car appealing because it referenced an inspection by a reputable certified dealership. The consumer contacted the first dealership to inquire about the car and requested a copy of the pre-purchase inspection report.

 

The first dealership sent the consumer an invoice from the certified dealership that reflected the declined repair to the tire pressure monitoring system but not to the car's exhaust headers. The first dealership verbally acknowledged that it declined a recommended repair of the tire pressure monitoring system, but did not mentioned the exhaust headers. The dealership told the consumer in text messages that the car was "turnkey" and "ready to go" which led the consumer to believe the certified dealership had identified no other problems.

 

The consumer and the dealership negotiated the price of the car with the dealership referencing the pre-purchase inspection in negotiations.

 

A separate buyer contacted the certified dealership directly and was told the car's exhaust headers were beginning to crack. This buyer raised the issue with the dealership who then contacted the certified dealer to discuss. The certified dealer sent over the Recommended Services report which showed the certified dealership recommended, and dealership declined, repairs to the exhaust headers.

 

The dealership contacted the original consumer and the car was sold to the consumer with a "Buyer Guide" which included a large, checked box next to the following statement: "AS IS - NO WARRANTY. YOU WILL PAY ALL COSTS FOR ANY REPAIRS. The dealer assumes no responsibility for any repairs . . . ." The one-page purchase form included a "DISCLAIMER OF WARRANTIES" section that states [dealership] "expressly disclaims all warranties, either expressed or implied, including any implied warranty of merchantability or fitness for a particular purpose."  The first dealership did not disclose the issue with the exhaust headers.

 

The consumer had the car shipped to a local dealership where he noticed a smell of fuel on the short ride home in the car. The consumer had the car towed to a local garage specializing in Ferraris who discovered a fuel leak and the crack in the exhaust headers. The consumer told the dealership and they requested a second opinion from another certified Ferrari dealership in Washington, D.C. The D.C. dealership identified about $30,000 worth of repairs, including the fuel leak and cracked exhaust headers.

 

Dealership would not take back the car and the consumer sued the dealership. At trial, the consumer called the technician from the D.C. dealership who provided expert testimony that the cracked exhaust headers pose a safety risk to the car's occupants and because of the cars fuel leak it "could instantly ignite."

 

After parties finished presenting their evidence, the trial court denied the dealership's motion for judgment as a matter of law and submitted three claims to the jury: fraud, deceptive trade practices, and breach of warranty. The jury found for consumer on all claims and awarded him $20,201 in compensatory and incidental damages and $5.8 million in punitive damages.

 

The dealership then renewed its motion for judgment as a matter of law on all claims, and separately moved to alter or amend the judgment because it believed the jury's punitive damages award was unconstitutionally excessive. The trial court denied the renewed motion for judgment as a matter of law, but reduce the punitive damages award to $500,000.

 

Both parties appealed. The dealership argued for judgment as a matter of law on all claims, or at least, for a further reduction in punitive damages. The consumer argued for reinstatement of the jury's $5.8 million punitive damages award.

 

The Eighth Circuit first addressed whether the dealership was entitled to judgment as a matter of law. Because the availability of punitive damages depended on the success of consumer's fraud claim, the Eight Circuit first examined the fraud claim under Arkansas law.

 

The dealership analogized the case to Yarborough v. DeVilbiss Air Power, Inc., where the court granted summary judgment in favor of the defendant on a claim of fraud in the procurement of a contract for the purchase of a company under Arkansas law. 321 F.3d 728, 730–32 (8th Cir. 2003). Recognizing that Arkansas courts usually submit the question of justifiable reliance to the jury, the court in Yarborough granted summary judgment because no "reasonable jury could find that the plaintiffs' reliance was justifiable" based on the fact that "all the individuals involved were sophisticated businessmen represented by experienced counsel" and the parties altered their written agreement after the allegedly fraudulent oral guarantee was made, and the altered agreement did not include that oral guarantee. Id. at 731-732.

 

The Eighth Circuit noted here, unlike in Yarborough, none of the form documents explicitly addressed the current condition of the car. Furthermore, the Court noted that the Arkansas Court of Appeals has ruled "an 'as is' clause does not bar an action by the vendee based on claims of fraud or misrepresentation." Beatty v. Haggard, 184 S.W.3d 479, 487 (Ark. Ct. App. 2004).

 

Accordingly, the Eighth Circuit concluded the trial court did not err in denying the dealership's renewed motion for judgment as a matter of law on consumer's fraud claim. 

 

Next, the Eighth Circuit reviewed the trial court's decision to reduce the punitive damages award.

 

Under the Due Process Clause of the Fourteenth Amendment, the trial court reduced punitive damages from $5.8 Million to $500,000. The dealership argued for greater reduction, and the consumer argued there should not have been any reduction.

 

"Although juries have considerable flexibility in determining the amount of punitive damages, the Due Process Clause serves as a governor and prohibits 'grossly excessive civil punishment.'" May v. Nationstar Mortg., LLC, 852 F.3d 806, 815 (8th Cir. 2017).  The Eighth Circuit previously ruled that "[p]unitive damages are grossly excessive if they 'shock the conscience' of the court or 'demonstrate passion or prejudice on the part of the trier of fact.'" May, 852 F.3d at 815 (quoting Ondrisek v. Hoffman, 698 F.3d 1020, 1028 (8th Cir. 2012)).

 

The Court noted three factors serve as guideposts to determine whether a punitive damages award shocks the conscience: "(1) the degree of reprehensibility of the defendant's conduct; (2) the disparity between actual or potential harm suffered and the punitive damages award . . . ; and (3) the difference between the punitive damages award and the civil penalties authorized in comparable cases." Id. at 816.

 

In assessing the reprehensibility of a defendant's conduct, the Supreme Court of the United States instructs courts to consider whether the plaintiff's harm "was the result of intentional malice, trickery, or deceit, or mere accident." Campbell, 538 U.S. at 419. Here, the Eighth Circuit noted the dealership's behavior was not accidental. The Court noted that the trial record supports a finding of deceit, and the jury identified it. The Court held that this alone is sufficient to support a finding of reprehensibility. May, 852 F.3d at 816 ("The presence of just one indicium of reprehensibility is sufficient to render conduct reprehensible and support an award of punitive damages.").

 

The Eighth Circuit next considered the "disparity between actual or potential harm suffered and the punitive damages award (often stated as a ratio between the amount of the compensatory damages award and the punitive damages award)." Trickey, 705 F.3d at 802, 803 (quoting BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 580 (1996)).

 

Although the Supreme Court of the United States has rejected a strict mathematical formula, it has said that "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Campbell, 538 U.S. at 425. The Eighth Circuit has "repeatedly intimated that a four-to-one ratio is likely to survive any due process challenges given the historic use of double, treble, and quadruple damages as a punitive remedy." Trickey, 705 F.3d at 803 (quoting Wallace v. DTG Operations, Inc., 563 F.3d 357, 363 (8th Cir. 2009)).

 

Taking into account both compensatory and incidental damages, the consumer's actual harm amounts totaled $20,201.  The ratio between this harm and the jury's $5.8 million punitive damages award is 1:287. The ratio between actual harm and the trial court's reduced amount of punitive damages ($500,000) is 1:24.75.

 

The consumer argued that when potential harm is properly factored in, the 1:287 ratio becomes a low single-digit, or even negative ratio and an otherwise excessive ratio may be justified by factoring in "the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim . . . as well as the possible harm to other victims that might have resulted if similar future behavior were not deterred." TXO Prod. Corp. v. All. Res. Corp., 509 U.S. 443, 460 (1993). The consumer argued the cracked exhaust headers had the potential to cause catastrophic harm, but the Eight Circuit found the likelihood too speculative.

 

The dealership argued punitive damages must be reduced to a single digit ratio. The Eighth Circuit disagreed, noting it has affirmed ratios exceeding single digits in a case involving the fraudulent sale of a used car in Grabinski v. Blue Springs Ford Sales, Inc., 203 F.3d 1024, 1025–26 (8th Cir. 2000).

 

Finally, the Eighth Circuit considered the "disparity between the punitive damages award and the civil penalties authorized or imposed in comparable cases." May, 852 F.3d at 817 (quoting Campbell, 538 U.S. at 428). The Court once again considered Grabinski, where like the dealership, the defendants in Grabinski misrepresented the condition of the car. Id. A jury awarded Grabinski relatively low, but more than nominal, compensatory damages. Id. at 1026.

 

Collectively, the ratio between actual damages and punitive damages in Grabinski was 1:27, higher than the 1:24.75 ratio struck by the trial court in this case. Id. The Court held that this disparity does not raise due process concerns. Rather, it weighs in favor of affirming the $500,000 punitive damages award.

 

Accordingly, the Eighth Circuit affirmed the trial court's judgment substantially reducing the jury's punitive damages award.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


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Friday, July 3, 2020

FYI: 7th Cir Holds No FDCPA Violation When Amount of Debt Was Disputed, and Letters Were Sent to Debtors' Counsel

The U.S. Court of Appeals for the Seventh Circuit recently held that a debt collection verification letter that sought to collect interest on a credit card debt for months after the time when the bank that issued the card did not send monthly statements was not false, and would not have misled their attorney, in violation of the federal Fair Debt Collection Practices Act ("FDCPA").

 

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

 

The consumers defaulted on their credit card debt.  The Bank that issued the card determined that collection was unlikely and stopped sending monthly statements to the consumers, but never told them that "that they no longer owed the money."

 

The Bank sold the debt to a debt collector.  In January 2013, the debt collector sent a letter to the consumers seeking to collect almost $5,800.  The amount sought included about $1,600 in interest for months after the Bank stopped sending monthly statements to the consumers. In March 2013, the debt collector sent a second letter to the consumers demanding $6,200.

 

The consumers hired a lawyer to represent them with respect to the debt. The lawyer asked the debt collector to verify the debt.  In March 2014, the debt collector sent a response to the lawyer verifying the debt stating that $6,320.13 was the balance currently due. 

 

Although the letter did not break out the amount of interest owed, "since the original unpaid debt was only $3,226.35, the letter effectively claimed an entitlement to more than $3,000 in interest, including the $1,600" in interest that the debt collector claimed accrued before it purchased the debt.

 

Eight months after receiving the March 2014 response to their verification request, the consumers filed suit alleging that by demanding interest during the months when the Bank did not send monthly statements, "the debt collector violated 15 U.S.C. section 1692e, which prohibits "any false, deceptive, or misleading representation … in connection with the collection of any debt," including any "false representation of … the character, amount, or legal status of any debt".

 

The trial court found that the first two letters were untimely because they were sent more than a year before the borrower filed suit, and the FDCPA limitation period is one year. 15 U.S.C. §1692k(d). The debt collector sent the third verification letter within a year of the borrower filing suit, but the trial court found that this letter did not violate section 1692e because it was "factual and unproblematic." 

 

Thus, the trial court entered a judgment in the debt collector's favor, and this appeal followed.

 

On appeal, the consumers argued that the letter was "false" or "misleading" because it sought to collect amounts greater than what the debt collector was entitled to collect.  The Seventh Circuit disagreed. 

 

Instead, the Seventh Circuit held that the consumers promised to pay interest on their credit card, and there is no evidence that the debt collector used the incorrect interest rate. The credit card agreement expressly "provided that the Bank's inaction or silence would not waive any of its rights."  Thus, the claim that the debt collector pursued "is not one that any careful debt collector would know to be unenforceable."

 

Whether failing to send monthly statements together with 12 C.F.R. §1026.5(b)(2)'s requirement to mail or deliver a periodic statement for each billing cycle prevents collecting interest for the months before the Bank sold the debt is an unresolved "topic for litigation."  However, a demand for payment is not "false" simply because a court may letter disagree with a debt collector's calculation of the amount owed. Instead a "statement is false, or not, when made; there is no falsity by hindsight."

 

The Seventh Circuit held that the letter also did not violate section 1692e because the debt collector sent it to the consumers' lawyer.  Under Bravo v. Midland Credit Management, Inc., 812 F.3d 599, 603 (7th Cir. 2016), the test under section 1692e "for a letter to counsel is whether it would deceive or mislead a competent attorney." 

 

Here, if the consumer's counsel disagreed with the amount claimed in the verification letter, then he could have followed up with the debt collector or told his clients not to pay the disputed amount. The Seventh Circuit noted that the debt collector "did not need to explain to a lawyer something that the first two letters revealed, and it certainly did not need to provide a disquisition on the non-waiver clause in the contract or [its] take on 12 C.F.R. §1026.5(b)(2)."  This is because verifying a debt should "be a simple process, not an occasion for a legal brief."

 

The Seventh Circuit acknowledged a circuit split on this issue. The Second, Eight, and Tenth Circuit agree with the Seventh Circuit regarding the standard for evaluating correspondence sent to counsel. See, e.g., Kropelnicki v. Siegel, 290 F.3d 118, 128 (2d Cir. 2002); Powers v. Credit Management Services, Inc., 776 F.3d 567, 573–75 (8th Cir. 2015); Dikeman v. National Educators, Inc., 81 F.3d 949, 953–54 (10th Cir. 1996). The Third and Eleventh Circuits disagree. See, e.g., Simon v. FIA Card Services, N.A., 732 F.3d 259, 269–70 (3d Cir. 2013); Bishop v. Ross Earle & Bonan, P.A., 817 F.3d 1268, 1277 (11th Cir. 2016).

 

However, the Seventh Circuit saw no reason to abandon the standard it set it Bravo.

 

Here, the verification letter could not have misled a competent lawyer because a competent lawyer "would not deem false a demand by a potential opponent in litigation just because counsel believes that his client may be able to persuade a judge that there is a defense."

 

Thus, the Seventh Circuit affirmed the trial court's judgment order dismissing the suit.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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