Thursday, February 20, 2020

FYI: CFPB Issues Statement of Policy On "Abusive" Conduct

Following its enactment, the Dodd-Frank Act left the financial services industry with uncertainty in many areas. For example, for nearly 10 years, the industry has wondered and speculated about the inclusion of a prohibition against abusive acts and practices. 

 

What exactly is abusive conduct? Is abusive conduct different from unfair, or false and misleading acts?  How will the CFPB handle enforcement?

 

The Consumer Financial Protection Bureau recently announced the long-awaited policy statement regarding the framework that it will use in enforcement activities related to the category of "abusiveness."

 

A copy of the Statement of Policy is available here:  Link to Statement of Policy

 

Overall, the objective attempts to use a common-sense view, and the principles are at least designed to promote compliance and certainty.

 

This theme is carried on with the delineated principles:

 

-  In evaluating conduct, to be abusive, the harm to consumers should outweigh the benefit.

 

-  Abusive conduct is distinguishable from unfair or deceptive violations; therefore, no "dual pleading."

 

-  Monetary relief (penalties) for abusiveness only when there has been a lack of good-faith effort to comply. CAVEAT: restitution for injured consumer regardless of whether a company acted in good faith or bad.

 

 

 

 

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, February 17, 2020

FYI: 9th Cir Affirms Dismissal of TILA Claims as Barred by FIRREA

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a consumer's Truth in Lending Act ("TILA") claim for lack of subject matter jurisdiction, holding that the claim was barred by the jurisdiction-stripping provision of the federal Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA").

 

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

 

The plaintiff refinanced his home loan in 2006 with a bank that failed and was placed into receivership by the Federal Deposit Insurance Corporation ("FDIC"). Another bank acquired the failed bank's assets through a Purchase and Assumption Agreement with the FDIC.

 

The borrower defaulted in 2009. One month before the foreclosure sale, he sent notices rescinding the loan to the defunct bank, its successor and the servicer, claiming that failed bank "violated TILA by providing him with defective notice of the right to cancel when the loan was signed."

 

The borrower filed bankruptcy then brought an adversary proceeding asserting his TILA allegations, which the bankruptcy court dismissed for lack of jurisdiction. The borrower then filed suit in the federal trial court.

 

After years of litigation and an appeal, the lender's successor in interest moved to dismiss for lack of subject matter jurisdiction, "arguing he failed to exhaust administrative remedies through the FDIC as required by FIRREA." The trial court agreed, granted the motion and entered judgment against the borrower.  This appeal followed.

 

During the pendency of the appeal, the borrower "sent the FDIC a letter explaining the alleged TILA violations and requesting assistance in rescinding the loan. … The FDIC responded a week later, explaining it was 'unable to process' his request because '[t]he financial institution referenced in your request, … is not in a FDIC Receivership.'"

 

On appeal, the Ninth Circuit explained that "FIRREA granted the FDIC, as receiver, broad powers to determine claims asserted against failed banks.' … To that end, FIRREA 'provides detailed procedures to allow the FDIC to consider certain claims against the receivership estate.' This "claims process allows the FDIC to ensure that the assets of a failed institution are distributed fairly and promptly among those with valid claims against the institution, and to expeditiously wind up the affairs of failed banks without unduly burdening the District Courts.'"

 

"Once a claim is filed, the FDIC is given authority to 'determine' claims. … This authority includes, inter alia, 'allow[ing]' claims, 'disallow[ing]' claims, and 'pay[ing] creditor claims.' … If the FDIC disallows a claims, 'the claimant may request administrative review of the claim … or file suit on such claim' in the district court whose jurisdiction covers the depository institution."

 

The Ninth Circuit then explained that "[i]f a claim has not been exhausted through this process, FIRREA strips courts of jurisdiction over "any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver …; or … any claim relating to any act or omission of such institution or the [FDIC] as receiver."

 

The Court noted that it "has interpreted this provision to be a jurisdictional exhaustion requirement" and that because the three elements required by the statute were met, "FIRREA's exhaustion requirement therefore applies" since "[a] claim under FIRREA is 'a cause of action … that gives rise to a right to payment or an equitable remedy. [Plaintiff] has a 'claim' because his cause of action gives rise to an equitable remedy—rescission."

 

The Ninth Circuit rejected the plaintiff's argument that "he does not have a 'claim' under FIRREA because his demand for rescission of his loan under TILA 'is not susceptible of resolution through the claims procedure[,]' reasoning that "none of his arguments rely on FIRREA's claims procedures or its general statutory scheme. To the contrary, his arguments are inconsistent with FIRREA's plain text."

 

The plaintiff's argument that his claim couldn't be resolved through the "claims process because TILA claims are against the current holder of the loan—not the originating bank[,]" failed because "'FIRREA does not make any distinctions based on the identity of the party form whom relief is sought.'" To hold otherwise "would 'permit claimants to avoid the provisions [of FIRREA] by brining claims against the assuming bank' and 'would encourage the very litigation that FIRREA aimed to avoid.'"

 

In addition, the Ninth Circuit held, the plaintiff's argument that "his claim is not susceptible of resolution via FIRREA because his loan was sold to a different bank before [the failed lender] was placed into receivership" failed because "FIRREA's claims process … never requires the FDIC to have possessed the loan before 'determin[ing] a claim. … And the exhaustion provision broadly applies to 'any claim relating to any action or omission of [an institution for which the FDIC has been appointed receiver]' focusing on the factual basis for the claim, not where the assets are located."

 

Agreeing with the Fourth Circuit's 2017 decision in Willner v. Dimon, which rejected as "irrelevant" the homeowners' argument that 'FIRREA's exhaustion requirement [did not] apply' because their home loan was securitized prior to the failure of the bank such that the loan never passed through the receivership estate[,]" the Ninth Circuit concluded that "[e]ven where an assets never passes through the FDIC's receivership estate, the FDIC should assess the claim first." Even though the Court was not deciding "whether or not the FDIC could have provided relief to [the plaintiff, he] was required to ask the FDIC to 'determine' his claim before filing suit."

 

The Court also rejected the borrower's argument that "his claim is not susceptible of resolution because he did not become award of his claim until months after the deadline for filing a claim" because "the FDIC still could have permitted his claim at that time [because] FIRREA contains provisions allowing the FDIC to consider claims filed after the filing period under certain circumstances. … And even had the FDIC not allowed [plaintiff's] claim, he would still have the right to seek review of that decision before a district court."

 

The Ninth Circuit next rejected the borrower's argument that the element that his claim relate to an "act or omission" by the failed bank was not met "because he has alleged '[c]laims of independent misconduct' by subsequent holders of the loan for failing to respond to his rescission letter" because "[h]is claim for rescission depends entirely on alleged misconduct by [the failed bank that allegedly provide the defective right to rescind TILA notice]. Any notice of rescission a later loan holder did not respond to would only be actionable if [the defunct bank] failed to comply with TILA's disclosure requirement at loan closing. [The borrower's] claim is 'functionally, albeit not formally against [the] failed bank.'"

 

The Court then rejected the borrower's argument that "even if all three elements of FIRREA are met, dismissal was still erroneous because filing a claim with the FDIC would have been futile" since "the Supreme Court has made clear that if exhaustion 'is a statutorily specified prerequisite'—as opposed to a judicially created one—'[t]he requirement … may not be dispensed with merely by a judicial conclusion of futility[.]'"

 

After determine that FIRREA applies, the Ninth Circuit turned to "decide whether [the borrower] has exhausted his remedies with the FDIC" and concluded that "he has not" because his "Complaint includes no allegations that he presented his TILA claim to the FDIC before filing suit." The fact that the borrower presented his claim to the FDIC after the district court's dismissal and thus arguably exhausted his administrative remedy was unavailing because "'[s]ubject matter must exist as of the time the action is commenced,' … especially in the context of administrative exhaustion. … Because subject matter jurisdiction was lacking when this action was filed, [the borrower's] later communications with the FDIC do not prevent dismissal of his TILA claim."

 

Finally, the Court rejected the borrower's "request for further discovery[,]" finding that the trial court did not abuse its discretion.

 

Accordingly, the Ninth Circuit affirmed the trial court's judgment.  

 

 

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   |   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.


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

 

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and

 

Webinars

 

and

 

California Finance Law Developments 

 

Wednesday, February 12, 2020

FYI: 9th Cir Holds Student Loan Guaranty Agency Not Subject to FDCPA

The U.S. Court of Appeals for the Ninth Circuit recently affirmed summary judgment in favor of a guaranty agency that caused a set-off against plaintiff's Social Security benefits to recover a judgment assigned to it based on a defaulted student loan.

 

In so ruling, the Court held that, even though the guaranty agency regularly attempted to collect debts owed to another (the U.S. Government) the agency was a not a debt collector as defined by the federal Fair Debt Collection Practices Act ("FDCPA") because it qualified for the fiduciary exception given that its role was broader than merely collecting a debt.

 

In addition, the Court held that the guaranty agency did not violate plaintiff's procedural due process rights because it gave proper notice of its intent to seek the Treasury set-off.

 

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

 

A borrower defaulted on his student loan. The lender obtained a judgment and assigned it to a guaranty agency, which sent the borrower a notice advising that it would seek a set-off against borrower's Social Security benefits.

 

The borrower file suit in the U.S. District Court in Hawaii alleging violations of the FDCPA and the Due Process Clause of the Fifth Amendment.

 

The trial court granted summary judgment in the defendant's favor, holding that "Defendant is not subject to the FDCPA because Defendant is not a 'debt collector[,]' and "that Defendant is not subject to the Duce Process Clause because Defendant is not a state actor. In addition, the trial court declined to exercise supplemental jurisdiction over the state-law claims. The borrower appealed.

 

On appeal, the Ninth Circuit began by discussing the statutory framework, explaining that under the Higher Education Act of 1965's Federal Family Education Loan Program, "lenders provide loans to students or their parents to help finance their education. Typically, those loans are guaranteed by guaranty agencies, which are '[s]tate or private nonprofit organization(s)' that have agreements with the Secretary of Education to administer the Loan Program. … Those agencies, in turn, receive guarantees from the United States. Guaranty agencies, therefore, operate as intermediaries between the student-loan lender and the United States."

 

When a borrower defaults, the lender must try to collect from the borrower. If it cannot, it files a claim with the guaranty agency and is "repaid the outstanding balance of the loan." The lender then assigns the loan to the guaranty agency. "The guaranty agency, in turn, is repaid by the [Dept. of Education] in exchange for undertaking 'due diligence' activities to attempt to collect the debt from the borrower … [which] include 'locating the defaulting borrower, offsetting federal and state tax refunds … initiating administrative garnishment proceedings …, and filing suit against the borrower.'"

 

The Court then turned to the FDCPA claim, explaining that "to obtain damages, Plaintiff first must establish that Defendant is a 'debt collector[,]'" which the FDCPA defines "as 'any person … who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.'"

 

The defendant guaranty agency argued that it was not a debt collector as defined by the FDCPA and even if it met the statutory definition, it was exempt "because it fulfills the criteria of the fiduciary exception, [15 U.S.C.] §1692a(6)(F)."

 

The Court disagreed with the first argument, but agreed with the second, holding that although the defendant was a "debt collector," it would affirm summary judgment because "Defendant's collection activities were 'incidental to a bona fide fiduciary obligation[,]' [as defined by] 15 U.S.C. § 1692a(6)(F)(i).

 

The Court explained that the Supreme Court of the United States in Henson v. Santander Consumer USA Inc. recently "held that a defendant who purchased a defaulted loan and sought to collect the debt was not a 'debt collector' [and that] [w]hether a lender in Defendant's position is seeking to collect a debt for its 'own account' is a question of first impression in our circuit. To answer that question, Henson requires us to focus on who ultimately would receive payments on the debt being collected."

 

The Court concluded that in the case at bar, the debt was owed to the United States and that "[t]he monies obtained from Plaintiff's Social Security benefits through Treasury offset belong to the Treasury, not to Defendant." Even "[t]hough Defendant possesses all right, title and interest in the judgment against Plaintiff, Defendant was not collecting a debt for its own 'account.'" The Court also found "that Defendant 'regularly' attempt to collect debts owed, or asserted to be owed, to the United States" because "[u]nder the applicable agreement, Defendant was obligated to receive accounts like Plaintiff's for one-year period, and Defendant received a long list of such accounts."

 

The Ninth Circuit then turned to analyze subsection 1692a(6)(F) of the FDCPA, which "exempts from the definition of debt collector 'any person collecting or attempting to collect any debt … owed or due another to the extent such activity … is incidental to a bona fide fiduciary obligation." The plaintiff conceded, the Court agreed, that "Defendant owes a fiduciary obligation to the DOE."

 

The Court reasoned that "to qualify for the fiduciary exception, Defendant's collection activity 'must not be central to' [its] fiduciary relationship."

 

Distinguishing its decision in Rowe, which "reversed the dismissal of a complaint for failure to a state a claim under the FDCPA [and where] [t]he plaintiff claimed that the defendant guaranty agency's 'sole function was to take assignment of the loan from [another agency] and to act as a collection agent[,]" the Court explained that "[t]his case differs from Rowe because Defendant has a broader role than merely collecting a debt. … For example, Defendant is obligated to release its judgment against Plaintiff if Plaintiff's debt is consolidated, rehabilitated, or repaid. Defendant is also obligated to maintain records, report to the National Student Loan Database System, and properly administer its operating fund."

 

Thus, the Court concluded "that Defendant had a broader fiduciary role with respect to Plaintiff's debt than merely collecting the debt. Therefore, Defendant's collection activity was 'incidental to' its fiduciary obligation to the DOE."

 

The Ninth Circuit then turned to plaintiff's claim for declaratory judgment and injunctive relief based on his allegation that "Defendant violated his procedural due process rights by 'arbitrarily and maliciously' garnishing his benefits."

 

"To obtain declarative and injunctive relief, Plaintiff must establish: (1) that he suffered a 'constitutional deprivation' that was 'caused by the exercise of some right or privilege created by the State or by a rule of conduct imposed by the [S]tate or by a person for whom the State is responsible,' and (2) that 'the party charged with the deprivation [is] a person who may fairly be said to be a state actor.' … Here, Plaintiff challenges only the district court's conclusion that Defendant is not a state actor."

 

The Court assumed, without deciding, that defendant was a state actor, but nonetheless affirmed "the summary judgment in Defendant's favor because Defendant did not violate Plaintiff's due process rights … [because] Defendant provided Plaintiff with notice of the debt, of Defendant's intention to seek a Treasury offset against Plaintiff's Social Security benefits, and the means by which Plaintiff could respond." The notice was sent to plaintiff's correct address and was thus "'reasonably calculated' to ensure that Plaintiff received it. … And Defendant's misstatement, that Plaintiff's debt arose from a single loan worth $8,500 rather than three loans totaling $8,500, does not violate due process."

 

Finally, the Ninth Circuit reasoned that because no federal claims remain, the trial court "did not abuse its discretion by declining to exercise supplemental jurisdiction over Plaintiff's state-law 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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   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.


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 

 

Thursday, February 6, 2020

FYI: 1st Cir Upholds Dismissal of Mass. 93A Claims Against Mortgagee and Servicer As Time-Barred

The U.S. Court of Appeals for the First Circuit recently affirmed the trial court's dismissal of a consumer's claims against the owner and loan servicer of her mortgage loan that their collection statements supposedly violated Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A, and the Massachusetts Fair Debt Collection Practices Act, Mass. Gen. Laws ch. 93, 49.

 

In so ruling, the First Circuit held that the mortgagor's claims were time-barred under the four-year statute of limitations, as her causes of action accrued at the inception of the loan, and the monthly statements were not independent violations that would bring rise to new claims.

 

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

 

The owner of a 13-acre horse farm ("Mortgagor") fell behind on her mortgage payments, and was unable to obtain refinancing from traditional lenders.  The Mortgagor allegedly met with a mortgage broker who accepted her supposedly incomplete mortgage application with no financial documentation and falsified the Mortgagor's monthly income.  A bank approved the Debtor for an adjustable-rate loan in the amount of $825,000, secured by a mortgage to the farm. 

 

The Mortgagor fell back into default in September 2008.  The mortgage was subsequently sold and assigned to another entity ("Mortgagee") on February 24, 2009.

 

To avoid a scheduled foreclosure sale, the Debtor filed for Chapter 13 bankruptcy protection in August 2010.  However, the bankruptcy proceedings were ultimately dismissed due the Mortgagor's failure to make the plan's monthly payments.  Facing threat of another foreclosure sale, the Mortgagor filed for bankruptcy again in November 2017, and that case was also dismissed. 

 

Meanwhile, the loan's servicer ("Servicer") consistently sent the Mortgagor monthly statements allegedly demanding payment, with the exception of the time periods she was in bankruptcy proceedings. The Mortgagor was still in default.

 

On September 13, 2018 the Mortgagor filed a complaint in state court against the Mortgagee and Servicer, alleging violations of Mass. Gen. Laws Ch. 93A and Ch. 93 § 49 for unfair and deceptive practices by supposedly enforcing a "predatory mortgage loan" and attempting to collect on the mortgage loan in an allegedly unfair, deceptive, or unreasonable manner.  The Mortgagor's complaint sought further relief of an injunction against foreclosure on the Property, and reformation or rescission of the mortgage.  The Mortgagee and Servicer removed the action to federal court.

 

After the Mortgagor filed an amended complaint, the Mortgagee and Servicer moved to dismiss under Rule 12(b)(6) for failure to state a claim, arguing that (i) all of the Mortgagor's claims arising out of the origination of the mortgage loan by the Mortgagee's predecessor are barred by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1821(d); (ii) that the assignee Mortgagee and Servicer were not liable for origination claims, and; (iii) that the claims were time-barred by the applicable four-year statute of limitations, Massachusetts General Laws Chapter 260, § 5A. 

 

The trial court granted the motion to dismiss on the basis that the Mortgagor's 93A claim was time-barred, and that Ch. 93 § 49 does not provide a private right of action.  This appeal ensued.

 

First, as to the Chapter 93A claims, the Mortgagor argued that the Mortgagee and Servicer's collection "committed unfair and deceptive practices by enforcing a mortgage, the terms of which are unlawful," in violation of Chapter 93A, § 2.  As you may recall, the limitations period for claims brought under Chapter 93A is four years from the date the cause of action accrues. Mass. Gen. Laws ch. 260, § 5A.

 

Here, the Mortgagor argued that her claims were not time-barred, as she received collections statements as recent as August 2018. 

 

However, the First Circuit determined that her claims, as alleged, accrued at the inception of the loan, which "was issued in violation of established principles of fairness" and "was unaffordable to O'Brien from the outset."  Because it was apparent that the required monthly payments outpaced the Mortgagor's actual income at the time she accepted the loan's terms, the "[t]he four year period . . . began to run on the signing date when the interest began to accrue," as under Massachusetts law, "the terms of written agreements are binding whether or not their signatories actually read them"  Latson, 708 F.3d at 327. 

 

The Appellate Court further rejected the Mortgagor's Chapter 93A claims because: (i) the subsequent collection statements were not independent violations because "a party's acting according to the express terms of a contract cannot be considered a breach of the duties of good faith and fair dealing." Frappier v. Countrywide Home Loans, Inc., 750 F.3d 91, 97 (1st Cir. 2014) (internal citation omitted), and; (ii) the Mortgagor failed to demonstrate "identifiable harm" separate from that caused by the underlying unfair loan as required.  See Shaulis v. Nordstrom, Inc., 865 F.3d 1, 10 (1st Cir. 2017) ("[t]o state a viable claim [under Chapter 93A], the plaintiff must allege that she has suffered an 'identifiable harm' caused by the unfair or deceptive act that is separate from the violation itself.") (internal citation omitted).

 

As to the Mortgagor's claims under Chapter 93, Section 49, the Mortgagor claimed that the that the monthly collection attempts were "unfair, deceptive or unreasonable" because they constituted enforcement of inherently unfair and deceptive loan terms.  Mass. Gen. Laws Ch. 93 § 49.  She again pointed to an August 2018 collection statement to demonstrate that her claim was not barred by the four-year statute of limitations, and further argued that the trial court erred in determining that Chapter 93, § 49 does not provide a private right of action.

 

The First Circuit determined that it need not reach the trial court's determination that no private right of action exists under Ch. 93 § 49, because the claim again relies on the alleged unfairness of the loan at origination, and no alleged action that occurred after September 13, 2014 (four years prior to filing the compliant) that gave rise to a new claim. 

 

This rationale was supported by the Mortgagor's own allegations that "the imposition of terms that were unfair at the outset continue[d] every month" through the collection statements and that "[t]he enforcement of the loan terms ha[d] been consistent throughout the life of the loan."  As such, the enforcement that the Mortgagor identified began in 2005, continued through the loan's assignment to the Mortgagor in February 2009, and thus accrued more than four years before filing suit in September 2018. See Mass. Gen. Laws Ch. 260, § 5A.

 

As the First Circuit determined that the Mortgagor's claims under both Ch. 93A and Ch. 93 § 49 were time-barred, the trial court's dismissal under Rule 12(b)(6) was affirmed.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   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.


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 

 

Sunday, February 2, 2020

FYI: 7th Cir Reverses FDCPA Dismissal Based on "Claim Splitting" But Provides Roadmap for Defendants

The U.S. Court of Appeals for the Seventh Circuit recently reversed the dismissal of a consumer's second lawsuit against a debt collector for failure to notify a credit reporting agency that the debt was disputed.

 

In so ruling, the Court held that because the debts were owed to different creditors, they were two distinct transactions giving rise to separate claims because "[e]ach failure to notify could have caused an additional harm to credit score or peace of mind." 

 

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

 

A debt collection company sent a dunning letter to the debtor seeking to collect a medical debt. The debtor sued for injury to his credit rating and mental distress, alleging that the debt collector violated section 1692e(8) of the federal Fair Debt Collection Practices Act ("FDCPA") by notifying a credit reporting agency of the debt, but not that it was disputed.

 

The same debtor had just settled a similar lawsuit against the same debt collector for sending him a letter attempting to collect a debt owed to a different creditor, but failing to notify the credit reporting agency the debt was disputed.

 

The debt collector moved to dismiss the second lawsuit, arguing that plaintiff was "gaming the system by seeking multiple recoveries for a single kind of wrong." The trial granted the motion and dismissed the second case, ruling that the debtor's second case "split his claims impermissibly."  This appeal followed.

 

On appeal, the Seventh Circuit explained that "[t]he doctrine of bar forecloses repeated suits on the same claim, even if a plaintiff advances a new legal theory or a different kind of injury." In addition, "[f]ederal law—which applies here because the first judgment was entered by a federal court, ...—defines a 'claim' by looking for a single transaction."

 

The Court reasoned that there was no need to seek a more precise definition of "claim" because plaintiff "has alleged two transactions on any understanding." The debts were owed to different creditors, and although "[t]hey involve the same statutory rule and the same debt collector[,] … the wrongs differ—[the debt collector] could have given proper notice for one debt but not the other—and the injury differs. Each failure to notify could have caused an additional harm to credit score or peace of mind."

 

By way of analogy, the Seventh Circuit explained that just as the Supreme Court of the United States held in National Railroad Passenger Corp. v. Morgan, an employment discrimination case involving the statute of limitations, that "the each discrete discriminatory act produces one claim[,]" "[d]iscrete and independently wrongful acts produce different claims, even if the same wrongdoer commits both offenses and the second wrong is similar to the first. Likewise with discrete violations of § 1692e(8). Each time a debt collector fails to give a credit agency the required notice for a debt is a stand-alone wrong. Disputes that have an independent existence may be litigated separately. Joinder in federal practice is permissive, … not mandatory[,]" except for compulsory counterclaims, which did not apply to the case at bar.

 

The Court rejected the debt collector's argument that "allowing sequential litigation is inequitable because 15 U.S.C. § 1692k(a)(2)(A) sets a maximum of $1,000 in statutory damages per case[,]" reasoning that while it's true that "[m]ultiplying the number of cases multiplies the maximum award[,]" "[j]udges aren't authorized to turn per-case caps into per-defendant caps; that choice is legislative."

 

Accordingly, the Seventh Circuit reversed the dismissal, and remanded the case to the trial court for further proceedings consistent with its ruling.

 

In so ruling, the Court explained that debt collectors are not defenseless.

 

First, a release can be drafted to cover "all disputes between the same parties, not just the dispute already in court."

 

Second, the Seventh Circuit noted that debt collectors can argue that § 1692k(a)(2)(A) gives the court discretion to award up to $1,000 in statutory damages, and that "a debtor who has already collected $1,000 in statutory damages should not receive more from the same defendant for the same sort of wrong. … Debt collectors are also free to contend, and judges to find, that the second suit entails the same 'actual damage' (§ 1692k(a)(1)) as the first, so that an additional award on that front is inappropriate. If a bill collector's first failure to notify a credit bureau damages a debtor's credit score and causes emotional distress, a second suit based on a second failure to notify the same credit bureau allows the debtor to collect only the marginal loss caused by the second wrong."

 

Finally, "a defendant who persuades a court that a sequential suit was brought to harass not only avoids an award of attorneys' fees but also becomes eligible to collect its own attorneys' fees from the debtor" pursuant to 15 U.S.C. § 1692(a)(3). The statute thus provides debt collectors with tools to discourage abusive litigation." 

 

 

 

 

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, January 27, 2020

FYI: 5th Cir Holds SCRA Does Not Apply to Louisiana Confessions of Judgment

In a case of first impression, the U.S. Court of Appeals for the Fifth Circuit recently held that the protections against default judgment under the Servicemembers Civil Relief Act ("SCRA") do not apply to the seizure and sale of real property in in rem proceedings under Louisiana law where the debtors have agreed to a confession of judgment in the mortgage or security agreement.

 

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

 

A group of individuals filed a putative class action seeking damages and declaratory and injunctive relief against two banks, two loan servicers and a federal credit union, alleging that defendants violated the SCRA by foreclosing on their properties in Louisiana state courts while they were on active military duty using confession of judgment clauses contained in the mortgages or security agreements.

 

The complaint alleged that the foreclosure actions violated sections 3931 and 3918 of the SCRA. Section 3931 "provides active duty servicemembers with protections against default judgment absent a waiver that meets certain requirements." Section 3918 sets forth "the requirements for waiving SCRA protections".

 

Four of the defendants moved to dismiss for failure to state a claim, which the trial court granted with prejudice. The remaining defendant moved for judgment on the pleadings, which was also granted with prejudice.

 

On appeal, the Fifth Circuit first rejected the borrowers' argument that the "state court orders authorizing seizure and sale" of their properties were default judgments under FCRA section 3931 because the section "does not encompass Louisiana executory proceedings where, as here, the debtors confessed judgment."

 

The Court explained that "[u]nder Louisiana law, an executory proceeding is an expedited in rem civil action … used to effect the seizure and sale of property … to enforce a mortgage … importing a confession of judgment. … By virtue of a confession of judgment, a debtor in an executor proceeding 'has appeared in the suit, and answered the demand.'"

 

Because under Louisiana law the debtors were deemed to have "appeared," the Court concluded that "§ 3931 does not apply to Louisiana executor proceedings where, as here, the debtors have confessed judgment."

 

Next, the Court rejected the borrowers' argument that "their confessions of judgment do not constitute proper waivers under the SCRA" section 3918 because "§ 3931 does not apply to Louisiana executory proceedings where the debtor has confessed judgment[," and the SCRA's "waiver requirements are therefore inapplicable because there is nothing to waive here; Appellants were never protected under § 3931 against seizures and sales ordered through Louisiana executory proceedings."

 

The Court affirmed the trial court's orders of dismissal.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct:  (312) 551-9320
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Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   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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