Wednesday, May 23, 2018

FYI: 5th Cir Holds Mortgagee Needed to Issue New Acceleration Notice Before Foreclosing

The U.S. Court of Appeals for the Fifth Circuit held that where a mortgagee rescinded prior a notice of intent to accelerate and then filed a foreclosure action without first issuing a new notice of intent to accelerate, it failed to meet its burden to show clear and unequivocal notice of intent to accelerate prior to filing suit, and therefore was not entitled to foreclosure judgment. 

 

Accordingly, the Fifth Circuit reversed the ruling of the trial court granting summary judgment in favor of the bank, and dismissed the foreclosure action. 

 

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

 

The defendant borrowers ("Borrowers") obtained a loan from the lender, which loan was secured by a Texas Home Equity Security Instrument on the Borrowers' home.  The Borrowers' loan was subsequently assigned to the plaintiff bank ("Bank") in 2014. 

 

On April 15, 2011, one of the Bank's predecessors mailed the Borrowers a notice of default and intent to accelerate.  On June 22, 2011, the Borrowers were sent a notice of acceleration.  On March 6, 2012, the predecessor sent a notice of default and intent to accelerate, followed by another notice of acceleration on May 22, 2013.  

 

On November 3, 2014, the Bank sent the Borrowers a "Notice of Rescission of Acceleration," which stated that the lender "hereby rescinds Acceleration of the debt and maturity of the Note," and that the "Note and Security Instrument are now in effect in accordance with their original terms and conditions, as though no acceleration took place." 

 

On June 25, 2015, the Bank sued the Borrowers seeking a judgment of foreclosure or, alternatively, a judgment of equitable subrogation.  In August 2015, the Bank filed an amended complaint stating that the Bank "accelerates the maturity of the debt and provides notice of this acceleration through the service of this Amended Complaint." 

 

On August 26, 2016, the Bank moved for summary judgment, which the trial court granted.  The Borrowers appealed.

 

At issue on appeal was whether the Bank properly accelerated the note. 

 

In addressing the issue, the Fifth Circuit noted that the Bank's "lien includes an optional acceleration clause, under which the 'Lender at its option may require immediate payment in full of all sums secured by this Security Instrument.'" 

 

Under Texas law, "[e]ffective acceleration requires two acts: (1) notice of intent to accelerate, and (2) notice of acceleration."  Also, "[b]oth notices must be clear an unequivocal." 

 

The Fifth Circuit determined that the Bank's "complaint could serve as adequate notice of acceleration, but only if it was preceded by a valid notice of intent to accelerate." 

 

In determining whether there was a valid notice of intent to accelerate, the Fifth Circuit first noted that "Texas courts have not squarely confronted whether a borrower is entitled to a new round of notice when a borrower [sic] re-accelerates following an earlier rescission." 

 

Thus, "[f]orced to make an Erie guess, we hold that the Texas Supreme Court would require such notice, and that [the Bank] has therefore failed to meet its summary judgment burden." 

 

Further, "[t]he Texas Supreme Court would likely conclude that [the Bank] acted 'inconsistently' by rescinding acceleration and then re-accelerating without notice." 

 

The Fifth Circuit determined that once the Bank rescinded the notice of acceleration, the Borrowers did not have "clear and unequivocal notice that [the Bank] would exercise the option." 

 

"Because [the Bank] failed to meet its burden to show clear and unequivocal notice of intent to accelerate prior to filing suit, it is not entitled to a foreclosure judgment." 

 

Accordingly, the Fifth Circuit reversed the trial court's grant of summary judgment, and entered a judgment of dismissal.

 

 

 

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, May 20, 2018

FYI: 7th Cir Remands Putative Class Action to State Court for Lack of Spokeo Standing

The U.S. Court of Appeals for the Seventh Circuit recently held that a putative class action alleging violations of the federal Fair and Accurate Credit Transactions Act ("FACTA") could not be removed to federal court because the plaintiffs lacked Article III standing, which deprived the federal trial court of subject matter jurisdiction.

 

Accordingly, the Seventh Circuit remanded the case to the federal trial court with instructions to return the case to state court.

 

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

 

The lead plaintiffs filed a class-action complaint in Illinois state court alleging that the defendant, which operates public parking lots at the Dayton International Airport, allegedly violated 15 U.S.C. § 1681c(g)(1) (FACTA) by printing the expiration date of plaintiffs' credit cards on their parking receipts. The complaint did not allege that plaintiffs had suffered any credit card fraud or identity theft.

 

The defendant removed the case to federal court.  The defendant then moved to dismiss, arguing that because the plaintiff's had not alleged any concrete injury in fact, they lacked Article III standing to sue and the court lacked subject matter jurisdiction.

 

In response, the plaintiffs, in a surprise move designed to keep their case alive in another forum despite the lack of any concrete injury, also moved to remand the case to state court, arguing that the defendant bore the burden of establishing subject matter jurisdiction and, lacking that, the federal court had to return the case to state court.

 

The federal trial court denied the motion to remand the case to state court, reasoning that it had federal question jurisdiction because the case arose under FACTA , and therefore that it had subject matter jurisdiction under 18 U.S.C. § 1331, which gives federal courts "original jurisdiction" over claims "arising under" a federal statute.

 

The federal trial court then turned to the issue of standing, reasoning that because they did not allege any actual harm, but only statutory violations, the plaintiffs could not establish that they had standing and, accordingly, the court did not have subject matter jurisdiction. The federal trial court granted the plaintiffs leave to amend, but when they failed to do so, dismissed the case with prejudice.

 

On appeal, the Seventh Circuit note that as the party invoking federal jurisdiction, the defendant had the burden of establishing "that all elements of jurisdiction—including Article II standing—existed at the time or removal. … Removal is proper only when a case could originally have been filed in federal court."

 

The Appellate Court rejected the defendant's reasoning that removal to federal court was proper "because § 1441(a) allows removal of cases over which federal courts would have had 'original jurisdiction' and 28 U.S.C. § 1331 grants federal courts 'original jurisdiction' over claims 'arising under' a federal statute." It reasoned that "reliance on the phrase 'original jurisdiction' is not enough, because federal courts have subject-matter jurisdiction only if constitutional standing requirements also are satisfied."

 

In other words, the Seventh Circuit reasoned, under the Supreme Court's holding in Spokeo, Inc. v. Robins, in order to establish federal subject-matter jurisdiction, the removing defendant must also show that plaintiffs suffered a "concrete and particularized" injury that is "actual or imminent" and not just a technical statutory violation.

 

The Seventh Circuit noted that the plaintiffs "did not sufficiently alleged an actual injury" because merely alleging "'actual damages' in the complaint's prayer for relief does not establish Article III standing."

 

The Appellate Court concluded that because Article III standing was lacking, 28 U.S.C. § 1447(c) required that a federal trial court remand the case to state court if "at any time before final judgment it appears that the district court lacks subject matter jurisdiction."

 

In addition, the Seventh Circuit concluded that the case should not have been dismissed with prejudice because "[a] suit dismissed for lack of jurisdiction cannot also be dismissed 'with prejudice'; that's a disposition on the merits, which only a court with jurisdiction may render." Dismissal with prejudice was also not appropriate as a sanction under Federal Rule of Civil Procedure Rule 41(b) because while the plaintiffs failed to amend their complaint and "[a] willful failure to prosecute can fit the bill, … no finding of willfulness in this case justified a punitive dismissal on the merits."

 

The Appellate Court declined to award plaintiffs their attorney's fees under § 1447(c) because their "brief does not adequately develop a basis to do so." However, the Seventh Circuit pointed out the defendant's "dubious strategy has resulted in a significant waste of federal judicial resources, much of which was avoidable."

 

Accordingly, the trial court's judgment was vacated with instructions to remand the case to state 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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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Sunday, May 13, 2018

FYI: 11th Cir Vacates Dismissal of Mortgagee's Deficiency Claims Following Debtor's BK

The U.S. Court of Appeals for the Eleventh Circuit recently vacated a trial court's dismissal of a mortgagee's deficiency claims and remanded to the trial court to determine whether the voluntary dismissal of a bankrupt debtor's Chapter 11 case without a discharge had any effect on the mortgagee's right to pursue its pre-petition deficiency claims.

 

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

 

The debtor, a real estate investor and developer, filed a Chapter 11 bankruptcy case in July of 2009 after he defaulted on a series of real estate loans. The mortgagee filed proofs of claim, asserting that its real estate loans were fully secured. The debtor did not object to any of the proofs of claim.

 

The debtor filed his Chapter 11 reorganization plan in February of 2010, listing all of the subject loans in Class 19 as secured claims. The plan also provided that the debtor would sign a promissory note to the mortgagee for $150,000, representing post-petition interest, secured by real estate. In return, the mortgagee would agree that debtor was current on the subject loans through August of 2010 and the debtor would resume making payments on the loans in September of 2010.

 

The plan also created a "Class 45—a single class of all unsecured claims allowed under 11 U.S.C. §502[,]" which provided that "[a]ny secured creditor who has filed a secured claim and claims an entitlement to an unsecured claim must file an amended claim seeking entitlement to an unsecured claim by 30 days after the confirmation hearing…."

 

The plan was confirmed in 2011. The mortgagee did not amend its proofs of claim within 30 days after confirmation to claim an entitlement to an unsecured claim.

 

The debtor defaulted in 2013 on both the pre-petition loans and the post-petition promissory note. The mortgagee moved to lift the automatic stay to foreclose on the properties securing the loans, which the bankruptcy court granted.

 

The mortgagee sold the real estate securing the loans, but the proceeds were insufficient to cover the balance, resulting in the debtor owing a deficiency of more than $1.2 million, of which more than $180,000 was owed for the post-petition promissory note.

 

In November of 2015, the mortgagee moved to lift the automatic stay in order to pursue its deficiency claim against the debtor, which the debtor did not oppose, so the bankruptcy court granted the motion.

 

The mortgagee then sued the debtor in January of 2016 in the trial court to collect the deficiency owed on the pre-petition loans and post-petition the promissory note. The debtor moved to dismiss, arguing that the bank "could not seek an unsecured deficiency judgment related to its pre-petition real-estate loan because [the mortgagee] 'did not take the steps delineated in Class 45 [of the Chapter 11 plan] to assert an unsecured deficiency claim.'"

 

The trial court denied the motion to dismiss as to post-petition promissory note, reasoning that the complaint stated a plausible claim for a deficiency as to the post-petition promissory note because the note was signed post-petition, such that "any deficiency claim arising under the note would not have been included in Class 45 of [debtor's] Chapter 11 plan, which dealt only with prepetition unsecured claims." The trial court, however, granted the motion as to the deficiency owed on the pre-petition loans because they were included in Class 45. As the mortgagee had not alleged that it had complied with Chapter 11 plan's requirement relating to Class 45 deficiency claims, the trial court directed the mortgagee to allege in its amended complaint that it complied with the plan's requirements as to Class 45 deficiency claims.

 

The mortgagee filed an amended complaint, again seeking to collect both the deficiency owed on the pre-petition loans and the post-petition promissory note, but did not allege that it had complied the plan's Class 45 requirements. Instead, it argued that it did not have to comply because the debtor "did not assert in his bankruptcy case that [the mortgagee's] claims were unsecured."  Because it was oversecured when the petition was filed and the Chapter 11 plan brought the debtor current through August of 2010, the mortgagee did not have to file "a contingent unsecured claim in a speculative unknown amount to preserve its right to receive the full payment promised by the Plan, in the event that [debtor] should perhaps default at some later date…."

 

The trial court once again dismissed the mortgagee's deficiency claims as to the pre-petition loans because the mortgagee did not allege that it complied with the plan's Class 45 requirements, reasoning that the bank's "'theory of recovery … [was] antithetical to the dual purposes underlying the Bankruptcy Code,' which are to give the debtor a fresh start and to promote equality of distribution among creditors."

 

The mortgagee filed a second amended complaint, but the debtor failed to respond so the clerk entered a default against him. The debtor moved to set aside the default, which the trial court denied.

 

The mortgagee and debtor then stipulated to the entry of a judgment against him for $180,000 on the post-petition promissory note. After the trial court entered judgment, the mortgagee appealed.

 

After the appeal was fully briefed, the debtor moved to dismiss his Chapter 11 bankruptcy case, which the bankruptcy court granted.  As the bankruptcy case was dismissed, that automatic stay was automatically terminated and none of the debtor's debts were discharged.

 

The mortgagee moved the appellate court to take judicial notice of the dismissal of the bankruptcy case, which was granted.

 

On appeal, the Eleventh Circuit reasoned that the case presented two issues: first, "whether a secured creditor whose prepetition debt is oversecured at the time of the Chapter 11 filed—and who therefore fails to identify any part of the debt as unsecured—is precluded from later seeking a deficiency judgment after the debtor has failed to comply with the terms of the plan and the collateral no longer fully secures the debt. The second question … is whether, by dismissing his Chapter 11 case without a discharge, [the debtor] is now foreclosed from arguing that [the bank] cannot seek a deficiency judgment related to its pre-petition real-estate loans based on [the bank's] failure originally to identify any portion of these loans as being undersecured."

 

The Court pointed out that since the Chapter 11 case was dismissed after the appeal was fully briefed, "the effect of that dismissal, as well as the facts and circumstances surrounding it, have not been meaningfully briefed by the parties."

 

The Court went on to explain that the dismissal without a discharge "is a potentially significant event that may affect the ultimate disposition of this case and on which there has been insufficient briefing." Accordingly, based on that reason, the Court vacated the trial court's dismissal order and remanded for the trial court "to consider this newly raised issue and, if necessary, to develop a fuller factual record."

 

The Court then provided guidance to the trial court on the issues it needed to consider, pointing out that under 11 U.S.C. § 1141(a), upon confirmation a Chapter 11 plan "is binding on both the debtor and his creditors …[and] cannot be revoked unless, within 180 days after confirmation, it is shown that the plan was procured by fraud." The confirmed plan is a contract between the debtor and his creditors that replaces the creditors' pre-confirmation claims. 

 

The Court further explained that in 2005, "Congress amended § 1141 to provide that, when a debtor is an individual rather than a corporation or other business entity, 'confirmation of the plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of all payments under the plan."

 

Given that amended § 1141 requires the debtor to comply with the plan before getting a discharge and that "Chapter 13 likewise conditions a discharge on the debtor's fulfillment of his obligations under the confirmed plan, … opinions discussing the dismissal of Chapter 13 cases without a discharge could perhaps become relevant to a determination of whether and how the dismissal of [debtor's] Chapter 11 case without a discharge affects the enforceability of his confirmed Chapter 11 plan."

 

In addition, the Court noted that under 11 U.S.C. § 349(b), "unless the bankruptcy court, for cause, orders otherwise, the dismissal of a bankruptcy case" returns "the parties, as far as practicable, to the financial positions they occupied before the case was filed."

 

The Court acknowledged, however, "that § 349(b) does not provide that dismissal of a bankruptcy case without a discharge vacates a previously confirmed Chapter 11 plan or otherwise renders that plan unenforceable by the debtor. … But that silence does not necessarily mean that the confirmed plan can survive dismissal of the bankruptcy case."

 

Accordingly, the Court concluded that it would be up to the trial court to determine how the debtor's dismissal of his Chapter 11 case without a discharge affected the merits of the mortgagee's claim.

 

 

 

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   |   Massachusetts   |   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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Thursday, May 10, 2018

FYI: 9th Cir Rejects FDCPA Claim That Collector Did Not "Meaningfully Participate" in Collection

The U.S. Court of Appeals for the Ninth Circuit recently rejected a so-called "flat-rating" claim, holding that a company that sent letters demanding that hospital patients pay their overdue medical bills did not create a false or misleading impression that the company was actually participating in collecting the debts in violation of the federal Fair Debt Collection Practices Act (FDCPA), because the company meaningfully participated in the hospital's efforts to collect debts.

 

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

 

The plaintiff received treatment at a hospital but failed to pay the medical bills.  After the plaintiff ignored multiple requests for payment, the hospital referred her delinquent accounts to a collection agency.

 

The hospital and the collection agency operated together under a Subscriber Agreement where the hospital would refer delinquent patient accounts to the collection agency.  For a fixed fee, the collection agency would send letters requesting payment by check, credit card, or online at the hospital's website.

 

The collection agency sent three demand letters to the plaintiff.  In response to the third letter, the plaintiff disputed the debt and the collection agency marked the account as disputed and returned the account to the hospital.

 

In March 2014, the plaintiff filed a putative class action against the collection agency and hospital alleging violations of the federal Fair Debt Collection Practices Act (FDCPA), including but not limited to 15 U.S.C. §§ 1692e and 1692j.

 

The plaintiff alleged that the letters she received "created a false or misleading belief that [the collection agency] was meaningfully involved in the collection of a debt prior to the debt actually being sent to collection" -- a practice commonly known as flat-rating.

 

The hospital and collection agency moved for summary judgment.  In response to the motions, the plaintiff argued that even if her flat-rating claim failed, the defendants' practices violated 15 U.S.C. § 1692e(5) by falsely threatening to take further action against her if she refused to pay her debt.  The plaintiff argued that the collection agency had no actual authority to take any action against her outside of sending the demand letter.

 

The trial court granted the defendants' motion for summary judgment.  It ruled that the evidence established that the collection agency meaningfully participated in the collection of the plaintiff's debt, thereby precluding any flat-rating claim.  The trial court also struck the section 1692e(5) claim because it was raised too far into the litigation, plaintiff did not formally amend her complaint, and the claim was barred by the FDCPA's one year statute of limitations.

 

The plaintiff appealed and challenged the trial court's rejection of both her flat-rating and § 1692e(5) claims.  The plaintiff also argued that she had a viable claim under § 1692e(10) for the collection agency's allegedly deceptive acquisition of her information.

 

The Ninth Circuit began its analysis by reviewing the flat rating claim.

 

As you may recall, § 1692j prohibits "flat-rating -- the practice where a third party (usually for a flat rate) sells form letters to a creditor -- which creates the false impression that someone (usually a collection agency) besides the actual creditor is 'participating' in collecting the debt."  See White v. Goodman, 200 F.3d 1016, 1018 (7th Cir. 2000).  Flat-rating essentially involves a creditor using a third party's name for intimidation value.

 

Because it was undisputed that the collection agency furnished form letters to create the belief that it was participating in the collection of debts owed the hospital, the question presented to the Ninth Circuit was whether there was sufficient evidence in the record to support the plaintiff's contention that this impression was false.

 

Section 1692j does not define what it means for a person to participate in the collection of or in an attempt to collect a debt.  The statute makes it unlawful to:

 

design, compile, and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor of such consumer is participating in the collection of or in an attempt to collect a debt such consumer allegedly owes such creditor, when in fact such person is not so participating.

 

15 U.S.C. § 1692j(a).

 

The plaintiff argued that the collection agency must do more than merely mail form letters to "participate" sufficiently in debt-collection efforts.  For example, the plaintiff argued that the collection agency did not have authority to negotiate or to process payments from debtors, it received no proceeds from payments that were made, and it was not involved in any further action that was pursued against debtors whose accounts remained delinquent.

 

The Ninth Circuit noted that meaningful participation in the debt collection process may take a variety of forms.  It considered the amount of control the entity exercised over the collection letters it sends, the amount of contact the entity had with the debtors, whether the entity invited and responded to debtor inquiries, whether the entity received or negotiated payments, whether the entity received or retained full debtor files, and whether the entity was involved in further collection activities if the debt remained unpaid. 

 

Above all, the Ninth Circuit stated that the key is whether the entity genuinely contributed to an effort to collect another's debt. 

 

The Ninth Circuit found that while the collection agency did not process payments, it participated in the attempts to collect debts owed to the hospital because: (1) it independently screened accounts for barriers to collection, (2) it drafted and mailed the collection letters without input from the hospital, (3) its letters invited the debtor to contact the collection agency and its personnel handled such inquiries, (4) it in fact received approximately 500 calls a week from debtors and received hundreds of pieces of mail from debtors, (5) it provided debtors with information about the debt and how to repay them, (6) it maintained a website where debtors could access information about their debts and submit documents, and (7) it sometimes received and forwarded to the hospital payments it received from debtors.

 

Therefore, the Ninth Circuit determined that the collection agency's efforts were enough to have participated meaningfully in the attempts to collect debts like the plaintiff's.

 

The plaintiff argued that the trial court's conclusion was inconsistent with two out of circuit cases in which attorneys who mailed collection notices on a creditor's behalf were deemed not to have participated meaningfully.

 

In Nielsen v. Dickerson, the Seventh Circuit considered whether certain form collection letters falsely represented that the letters came "from an attorney" in violation of 15 U.S.C. § 1692e(3).  Nielsen v. Dickerson, 307 F.3d 623, 634-35 (7th Cir. 2002).  The question in Nielsen turned on whether the attorney who composed and mailed the letters in an "assembly-line fashion" was actually involved in the debt collection process.  Id., at 635.

 

The Ninth Circuit noted that Nielsen only briefly addressed the attorney's potential liability as a flat-rater under 1692j, stating that the attorney might "seem to be a natural candidate for flat-rating liability pursuant to section 1692j."  Id., at 639.  However, the Seventh Circuit in Nielsen ultimately did not decide whether the attorney violated section 1692j because any such liability would have been redundant to the attorney's liability under section 1692e(3).  Id., at 640.

 

Thus, the Ninth Circuit found that Nielsen did not support the plaintiff's argument.

 

In Vincent v. Money Store, the Second Circuit considered whether a creditor that hired a law firm to mail debt collection notices could be held liable for violation of section 1692e as its own debt collector under the FDCPA's false name exception, because the law firm was not meaningfully involved in collection efforts.  Vincent v. Money Store, 736 F.3d 88, 91 (2nd Cir. 2013). 

 

The Second Circuit applied the analysis in Nielsen and concluded that "a jury could find" that collection letters mailed by the law firm "falsely implied that [the firm] was attempting to collect [the creditor's] debts and would institute legal action against debts," when the firm "acted as a mere conduit for a collection process [the creditor] controlled." Id., at 104.

 

The Ninth Circuit was not persuaded by Vincent either because the collection agency in this case participated to a greater degree in collection efforts than the law firm in Vincent did.  The plaintiffs in Vincent presented evidence that the law firm drafted the letters jointly with the creditor, directed debtors to send nearly all communications to the creditor itself, and after mailing the demand letters "performed virtually no role in the actual debt collection process" besides verifying the existence of the debt or the identity of the creditor.  Id., at 93-95, 104.

 

Given the greater degree of participation by the collection agency in this case, the Ninth Circuit determined that Vincent was distinguishable and did not support the plaintiff's position.

 

Therefore, the Ninth Circuit held that the collection agency in this case meaningfully participated in the attempts to collect the plaintiff's debts.

 

Next, the Ninth Circuit turned to the plaintiff's arguments regarding the FDCPA's prohibition against "threat[ening] to take any action that cannot legally be taken or that is not intended to be taken." 15 U.S.C. § 1692e(5).

 

The plaintiff argued that her complaint gave the collection agency adequate notice of its need to defend against the claim, and even if it did not, she should have been given leave to amend the complaint.

 

However, the Ninth Circuit found that the plaintiff's complaint focused narrowly on her flat-rating allegations.  It never cited § 1692e(5) and did not mention the FDCPA's prohibition against threatening to take an action that is not intended or legally authorized.  And, the Ninth Circuit found that the complaint expressly disavowed such a claim by alleging that the collection agency "was not acting as a debt collector when it sent the Letters."

 

Because the plaintiff's theory of liability was that the collection agency was a flat-rater, not a true debt collector, the Ninth Circuit held that the trial court did not err in striking the claim.

 

The plaintiff further argued that she should have been granted leave to amend the complaint, and the amended claim should "relate back" to the date of her original complaint.

 

The Ninth Circuit rejected this argument because an amended complaint relates back to the date of the original complaint only where the claim arose out of the same conduct in the original pleading. 

 

The plaintiff's § 1692e(5) claim, in the Ninth Circuit's view, would not rely on the same facts and evidence because the plaintiff complaint did not allege (1) that the collection agency was a debt collector, and (2) that the collection agency threatened to take any action against her that it had no authority or intention to take.  These issues, according to the Ninth Circuit, would involve different witnesses and the trier of fact would need to determine what, if anything, the collection letters threatened to do.

 

Additionally, the Ninth Circuit determined that the plaintiff waived her claim under § 1692e(10) because the claim in nowhere to be found in the complaint, and she did not argue the claim in opposing the defendants' motions for summary judgment.

 

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the defendants.

 

 

 

 

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   |   Massachusetts   |   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 

 

Tuesday, May 8, 2018

FYI: Fla App Ct (4th DCA) Holds RIC Not Subject to State Usury Law

The District Court of Appeal of the State of Florida, Fourth District ("4th DCA") recently affirmed entry of summary judgment in favor of a motor vehicle retail seller and assignee against a consumer who alleged that the 27.81% interest charge under the retail installment contract exceeded the interest rate limit imposed by the Florida's usury statute.

 

In so ruling, the 4th DCA concluded that the financing contract at issue was not subject to the interest rate limit imposed by Florida's general usury statute, but instead by the specific controlling statute, the Florida Motor Vehicle Retail Sales Finance Act.

 

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

 

In 2009, a consumer ("Consumer") purchased a used 2004 vehicle from a licensed motor vehicle retail installment seller ("Seller").  The retail installment sales contract (the "RIC") entered between Consumer and Seller at purchase stated that the buyer may purchase for cash or credit, subject to certain financing terms, including an express disclosure that "[w]e will figure your finance charge on a daily basis at the Base Rate of 27.81% per year.  The Truth-In-Lending Disclosures are part of this contract."  The federal Truth-In-Lending ("TILA") disclosures appeared on the first page of the RIC.

 

The RIC was later assigned to a sales finance company ("Assignee"), as expressly permitted under its terms.

 

The Consumer filed in suit in Florida state court against the Assignee and two of its employees, and later added the Seller as a fourth defendant in her third amended complaint.  The Consumer alleged that the 27.81% interest charge under the RIC exceeded the 18% interest rate limit imposed by Florida's usury statute, and included five counts for criminal usury and alleging violations under Chapter 772, Florida Statutes (2009), the Civil Remedies for Criminal Practices Act. Chapter 772.101, Fla. Stat. (2009).

 

The Seller and Assignee moved for summary judgment, which was granted in their favor and against the Consumer in the trial court.  The trial court concluded that the RIC was not subject to Florida' general usury statute and that the Consumer's sworn statements and witness depositions failed to raise a genuine issue of material fact.

 

This appeal followed.

 

As you may recall, under Florida law, usury requires proof of four elements: (1) an express or implied loan; (2) a repayment requirement; (3) an agreement to pay interest in excess of the legal rate; and (4) a corrupt intent to take more than the legal rate for the money loaned. Oregrund Ltd. P'ship v. Sheive, 873 So. 2d 451, 456 (Fla. 5th DCA 2004). The buyer, as the party claiming usury, has the burden of establishing its elements. Video Trax, Inc. v. NationsBank, N.A., 33 F. Supp. 2d 1041 (S.D. Fla. 1998).

 

The Appellate Court first examined the dispute over the third element, the "legal rate of interest."

 

Under the Florida usury statute, interest exceeding 18% is usurious. § 687.02, Fla. Stat. (2009). Therefore, the usury statute conflicts with the Florida Motor Vehicle Retail Sales Finance Act, which allows the imposition of higher interest rates.  The Consumer argued that the applicable legal rate of interest that applied to the RIC was set forth in Florida's usury statute, Chapter 687, Florida Statutes (2009), while the Seller and Assignee argued that the RIC was a retail installment sales contract pursuant to Chapter 520, Florida Statutes, and therefore was not subject to Florida's general usury statute.

 

The 4th DCA agreed with the trial court that the RIC was, in fact, a retail installment sales contract, and that the Seller and Assignee were permitted to charge the interest rate permitted by the Florida Motor Vehicle Retail Sales Finance Act based upon undisputed evidence that: (i) the title of the RIC stated "Retail Installment Sale Contract" in bold; (ii) the RIC complied with statutory requirements and included the requisite "notice to buyer" and separate written itemization of amount financed; (iii) the RIC's terms fit within the statutory definition; (iv) the Seller and Assignee were licensed under the Florida Motor Vehicle Retail Sales Finance Act, and the Consumer met the definition of a buyer as defined under the Florida Motor Vehicle Retail Sales Finance Act, and; (v) the parties' conduct supported the trial court's finding that the RIC was a retail installment sales contract.

 

As the undisputed interest rate of 27.810% did not exceed the finance charge permitted by § 520.08 Fla. Stat. on the unpaid balance, it was permissible under the Florida Motor Vehicle Retail Sales Finance Act.  See Chapter 520.085, Fla. Stat. (2009).

 

The Appellate Court acknowledged that both the Florida usury statute (Chapter 687, Fla. Stat.) and the Florida Motor Vehicle Retail Sales Finance Act (Chapter 520, Fla. Stat.) embrace the same subject (allowable interest rates) and produce contradictory results (what is usurious under Chapter 687 is permissible under Chapter 520).  However, under established Florida law and basic statutory principles, when two statutes appear to conflict, a specific statute (in this case Chapter 520) will control over a general statute (Chapter 687).  See Fla. Virtual Sch. C. K12, Inc., So. 3d 97, 102 (Fla. 2014); Lunohah Invs., LLC v. Gaskell, 158 So. 3d 619, 621 (Fla. 5th DCA 2013).

 

Accordingly, the 4th DCA concludes that the Seller and Assignee were entitled to entry of summary judgment because the interest charged did not exceed the permissible rate allowed under Florida Motor Vehicle Retail Sales Finance Act and the RIC was therefore not usurious under the Florida usury statute.

 

Next, the Appellate Court examined whether or not the subject transaction constituted  a "loan" under the usury statute, which expressly applies only to "contracts for the payment of interest upon any loan, advance of money, line of credit, or forbearance to enforce the collection of a dent.  Chapter 687.02(1), Fla. Stat. (2009).

 

As to this issue, the 4th DCA agreed that summary judgment was further warranted in the Seller and Assignee's favor, because the RIC was not a "loan" under the usury statute pursuant to well-established Florida law that contracts to secure the price of property sold are not governed by general usury laws.  Perry v. Beckerman, 97 So. 2d 860, 862 (Fla. 1957) (citing Davidson, 52 So. at 139 (contract for sale of land); Scarritt Motors, 48 So. 2d at 168 (contract to purchase used car "not amenable to the charge of usury."); see also B&D Inc. of Miami v. E-Z Acceptance Corp., 186 So. 2d 29 (Fla. 3d DCA 1966) (retail installment sales contracts for used motor vehicles "are not subject to the general usury statutes"); Taylor v. First Nat'l Bank of Miami, 270 So. 2d 379 (Fla. 3d DCA 1972)(same).

 

Lastly, the 4th DCA briefly addressed the Consumer's argument  that the words "Chapter 520" were required to appear on the face of the RIC to exempt the agreement from the usury statute, pursuant to the "parity exception," Chapter 687.12, Fla. Stat.

 

As you may recall, the Florida "parity exception" permits licensed lenders to take advantage of interest rates permitted by a difference class of licensed lender so long as the lender complies "with all the requirements imposed on such a lender for the type of loan it is making," and indicates on the instrument the "specific chapter of the Florida Statutes authorizing the interest rate charged."  South Pointe Dev. Co. v. Capital Bank, 574 So. 2d 939, 941 (Fla. 3d DCA 1991)(quoting Fla. Stat. 687.12(4)).

 

Here, the parity exception did not apply to the RIC because the Seller was licensed under Florida Motor Vehicle Retail Sales Finance Act and entitled to enjoy the "rights and privileges of said statue" by virtue of its license — including the right to charge interest in a higher amount even where that interest rate exceeds the amount permitted by the usury statute.  The Appellate Court noted that only lenders "making loans.. at a rate of interest that, but for this section would not been authorized" are required to indicate on the instrument "the specific chapter of the Florida Statutes authorizing the interest rate charged."  687.12(4), Fla. Stat. (2009).

 

Accordingly, summary judgment in favor of the Seller and Assignee was affirmed.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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