Friday, July 19, 2019

FYI: 8th Cir Affirms Cancellation of Lis Pendens Due to Imprecise Property Description and Prayer for Relief

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court's order canceling a lis pendens, finding that the description of the property at issue in the lis pendens was imprecise and did not connect to any particular request for equitable relief as required under Missouri law. 

 

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

 

The plaintiff lender ("Plaintiff") extended a $1.9 million loan ("Loan") to an entity that then made alleged fraudulent transfers of the loan proceeds to the defendant company ("Defendant"). Defendant used the fraudulently transferred Loan proceeds to purchase approximately 23.82 acres of real estate in Missouri (the "Property").

 

Plaintiff filed the instant action, and separately recorded a lis pendens against "Lot 2" of the Property (the "Lis Pendens"). 

 

Defendant filed a motion to cancel the Lis Pendens (the "Motion") arguing it was invalid under Missouri law. The trial court granted Defendant's Motion finding that the complaint "did not specifically request equitable relief, and instead seeks 'actual and exemplary damages' and 'any other relief the court deems appropriate.'"

 

Plaintiff appealed the trial court's order canceling the Lis Pendens.

 

As you may recall, "[f]or a lis pendens to have prospective effect, the judgment contemplated must adjudicate an equitable right, claim or lien, affecting or designed to affect [the] real estate in question."  Space Planners Architects, Inc. v. Frontier Town-Mo., Inc., 107 S.W.3d 398, 407 (Mo. Ct. App. 2003); see also, Mo. Rev. Stat. § 527.260. 

 

On appeal, Plaintiff argued the Lis Pendens was proper because the complaint sought equitable remedies such as "attachment of [D]efendants' assets and [the] appointment of a receiver."  The Eighth Circuit disagreed, finding that Plaintiff's complaint failed to "identify any specific property…as to which equitable relief is sought."  See e.g., Space Planners Architects, Inc. v. Frontier Town-Mo., Inc., 107 S.W.3d 398, 407 (Mo. Ct. App. 2003).

 

The Eighth Circuit noted that the complaint's description of the Property failed to: (1) specify whether it encompassed "Lot 2" as mentioned in the Lis Pendens; and (2) "connect the Property to any particular request for equitable relief." 

 

In light of the above, the Eighth Circuit held that the trial court acted within its discretion in canceling the Lis Pendens. 

 

Accordingly, the Eighth Circuit affirmed the trial court's order canceling the Lis Pendens.   

 

 

 

 

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 16, 2019

FYI: DC Cir Holds FACTA "Faulty Credit Card Receipt" Claim Enough for Spokeo Standing

The U.S. Court of Appeals for the District of Columbia Circuit held that where a company provided a consumer with a receipt that displayed her entire sixteen-digit credit card number and credit card expiration date in violation of the federal Fair and Accurate Credit Transactions Act of 2003 ("FACTA"), the consumer alleged a concrete injury in fact sufficient for standing under Spokeo, notwithstanding the fact that the consumer noticed the violation immediately and kept the receipt in a safe location. 

 

Accordingly, the D.C. Circuit reversed the judgment of the trial court granting the defendant company's motion to dismiss, and remanded the matter for further proceedings.  

 

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

 

A consumer ("Consumer") made a credit card purchase at a company ("Company") location and received a receipt that displayed her sixteen-digit credit card number, the credit card expiration date, and her credit card provider.

 

The Consumer immediately recognized that the receipt contained her personal information, and held onto it for safekeeping.  She then filed a class action lawsuit against the Company alleging a willful violation of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of sale or transaction." 

 

The Consumer alleged that the Company's conduct violated her statutory right and, as a result, exposed her to an increased risk of identity theft.  She also alleged that she was forced to take steps to safeguard the noncompliant receipt.  

 

The Company moved to dismiss the complaint for lack of standing under Spokeo.  The district court granted the motion, determining that the Consumer did not suffer an increased risk of identity theft because only she viewed the receipt containing her credit card information.  The district court also concluded that the burden of safeguarding the noncompliant receipt was insufficiently concrete to support standing. 

 

The trial court therefore held that the Consumer lacked standing, and dismissed the case for lack of subject-matter jurisdiction.

 

The Consumer appealed. 

 

On appeal, the D.C. Circuit first discussed the Spokeo ruling, wherein the Supreme Court held that plaintiff must meet three elements for standing: "(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision." 

 

The Court noted that "[c]ausation and redressability are not in dispute," rather "[t]he issue is whether [the Consumer] alleged an adequate injury in fact."

 

The Consumer argued that a violation of her statutory right under FACTA constitutes an injury in fact without any additional showing of harm, and under Spokeo, "the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact."

 

However, the D.C. Circuit noted that "[f]or a statutory violation to constitute an injury in fact, . . . the statute must protect the plaintiff's concrete interest – i.e., afford the putative plaintiff a right to be free of a harm capable of satisfying Article III."

 

The Consumer argued that FACTA is such a statute and vests consumers with a concrete interest in using their credit and debit cards without incurring an increased risk of identity theft. 

The D.C. Circuit agreed, noting that "FACTA itself does not prohibit the crimes of identity theft or fraud," rather "its truncation requirement is a 'procedure[] designed to decrease th[e] risk' that a consumer would have his identity stolen." 

 

Thus, the truncation requirement that a merchant not print more than the last five digits of a credit card number or expiration date "vests consumers with an interest in using their credit card and debit cards without facing an increased risk of identity theft."    

 

As a result, the Court held, the question "becomes whether the interest protected by FACTA – avoiding an increased risk of identity theft – is concrete."  And, in determining whether an intangible injury is concrete, "both history and the judgment of Congress play important roles." 

 

In determining that "[h]istory tilts toward concreteness," the D.C. Circuit compared FACTA's truncation requirement to a common law breach of confidence claim where a person offers private information to a third party in confidence and the third party reveals that information to another.  There, the harm "occurs when the plaintiff's trust in the breaching party is violated, whether or not the breach has other consequences." Further, "FACTA protects against the risk of the very harm the breach of contract tort makes actionable – the unauthorized disclosure of privileged information to a third party." 

 

The D.C. Circuit also gave "weight to Congress's determination that printing too much credit card information on a receipt creates a 'real' or 'de facto' harm."

 

Having determined that FACTA protects a concrete interest, the D.C. Circuit explained that it "must also determine whether the challenged violation of [the Consumer's] statutory right harmed or created a 'risk of real harm' to the concrete interests protected by FACTA."

 

The D.C. Circuit observed that "not every violation of FACTA's truncation requirement creates of identity theft," noting that "our sister courts, applying Spokeo, have unanimously concluded that a FACTA violation based solely on a failure to truncate an expiration date does not qualify as a concrete injury in fact." 

 

However, "none of these courts encountered a FACTA violation as egregious as the one committed by [the Company]," which printed the Consumer's entire credit card number and expiration date, "creating the nightmare scenario FACTA was enacted to prevent."  

 

The D.C. Circuit therefore held that "[a]lthough not every FACTA violation creates a concrete injury in fact, . . . the alleged violation of [the Consumer's] right does."

 

Thus, the Consumer "pleaded enough facts to establish standing."  Accordingly, the D.C. Circuit reversed the judgment of the trial court, and remanded the matter for further proceedings.

 

 

 

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

 

 

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Sunday, July 14, 2019

FYI: 2nd Cir Holds Post-Filing Amendment Can Divest Court of CAFA Jurisdiction

The U.S. Court of Appeals for the Second Circuit affirmed the dismissal of case for lack of jurisdiction because when the plaintiffs withdrew their class action allegations in an amended complaint it divested the court of jurisdiction under the federal Class Action Fairness Act ("CAFA"), 28 U.S.C. § 1332(d).

 

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

 

Plaintiff, an attorney on behalf of himself and a putative class sued several title insurance company defendants alleging that they had tortiously interfered with business opportunities and violated Connecticut law because under Conn. Gen. Stat. § 38a402(13) only attorneys licensed to practice in the state may act as title agents. 

 

The trial court exercised jurisdiction over the matter predicated solely on the CAFA.

 

After almost twelve years, Plaintiff filed a Fourth Amended Complaint ("FAC"). In the FAC Plaintiff voluntarily withdrew all class action allegations.  The FAC did not allege any other statutory basis to establish the trial court's jurisdiction.  The defendants then moved to dismiss arguing that the absence of any class action allegations deprived the federal court of jurisdiction under the CAFA.

 

The trial court granted the motion and dismissed the case for lack of jurisdiction. Plaintiff appealed.

 

As you may recall, the CAFA confers original jurisdiction over class actions where minimal diversity exists between the parties and the amount in controversy exceeds $5,000,000.  28 U.S.C. 8 § 1332(d).  Here, CAFA jurisdiction existed when plaintiff filed the case, and until plaintiff filed the FAC.

 

The Second Circuit observed that the only question before it was "whether the filing of the FAC, which omitted all class action allegations, divested the District Court of CAFA jurisdiction and required dismissal."

Plaintiff argued that the "time-of-filing" rule should establish jurisdiction even after he filed the FAC. 

 

As you may recall, the time of filing rule states that the federal trial court's jurisdiction "depends upon the state of things" when the plaintiff brings the action.  Plaintiff contended that the trial court continued to have CAFA jurisdiction after the FAC because jurisdiction existed when Plaintiff filed the case.  The Second Circuit rejected this argument.

 

The Second Circuit found the Supreme Court of the United States's ruling in Rockwell Int'l Corp. v. United States, 549 U.S. 457, 473–74 (2007) controlling.

 

There, the SCOTUS held that "the state of things" and "the alleged state of things" must both confer jurisdiction.  When a plaintiff voluntarily amends their complaint, the trial court must "look to the amended complaint to determine jurisdiction." 

 

Withdrawal of the allegations that conferred jurisdiction will defeat jurisdiction unless other allegations that establish jurisdiction replace them. The Second Circuit held that the trial court in this case properly determined that it lacked jurisdiction because the FAC removed the original basis for the court's jurisdiction and did not introduce "new jurisdiction-granting allegations."

 

Thus, the Second Circuit affirmed the trial court dismissal for lack of jurisdiction.

 

 

 

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

 

 

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Wednesday, July 10, 2019

FYI: 6th Cir Rejects FCRA "Credit File Disclosure" Claim for Lack of Spokeo Standing

The U.S. Court of Appeals for the Sixth Circuit recently held that a plaintiff lacked Article III standing to sue a consumer reporting agency under the federal Fair Credit Reporting Act (FCRA) for allegedly failing to disclose all information in his file.

 

In so ruling, the Sixth Circuit held that the alleged deprivation of information had no consequences for the consumer and imposed no real risk of harm to establish injury in fact.

 

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

 

The consumer reporting agency (CRA) advises merchants on whether it should accept a check from a retail customer.  The merchant sends the bank account number on the check and the customer's driver's license number, called identifiers, to the CRA to run each identifier through the CRA's system. 

 

The merchant refuses the customer's check if the CRA recommends a decline.  On the other hand, if the CRA approves the transaction, the merchant accepts the check. 

 

The customer requested a copy of his file from the CRA under the federal FCRA and provided a copy of his driver's license. 

 

As you may recall, the FCRA creates a cause of action that has three elements: (1) duty - a consumer agency must disclose "[a]ll information in the customer's file" upon request; (2) breach of duty - any consumer agency that fails to meet this requirement is liable to the affected individual; and (3) damages - the affected individual may recover statutory damages of $100 to $1,000 for a willful violation.  15 U.S.C. §§ 1681g(a)(1), 1681n(a)(1)(A).

 

The CRA's report contained 23 transactions in which the customer presented his driver's license alongside the check.  The report did not contain two transactions because those checks were not presented with the customer's license.  

 

The report contained a disclaimer indicating that the CRA had additional information not included in the report, and invited the customer to contact the CRA for more information.  Although the CRA had never advised a merchant to decline any of the customer's checks, the customer filed a complaint alleging that the CRA violated FCRA and moved for class certification. 

 

The CRA moved for summary judgment based on lack of Article III standing.  The trial court dismissed the case for lack of standing.  This appeal followed.

 

As you may recall, Article III standing requires the customer to show that he suffered an injury caused by the CRA that a judicial decision can redress.  Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992). The Sixth Circuit began its analysis by observing that "standing requires a concrete injury even in the context of a statutory violation," and "a bare procedural violation" would not "satisfy the injury-in-fact requirement of Article III."  Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1549 (2016).

 

In the Sixth Circuit's view, there were three possible ways in which the customer could establish Article III standing based on his cause of action.  

 

First, the statutory violation created an injury in fact because the violation led to a traditional injury. 

 

The Sixth Circuit noted that the customer did not allege that the CRA's conduct caused a declined check or a denied rental application.  The customer even acknowledged that the incomplete report did "have any effect on [him] whatsoever."  All in all, the Sixth Circuit found no tangible injury as applied to the customer. 

 

Second, the statutory violation did not injure the customer in any traditional way, but the risk of injury was so imminent that it satisfied Article III. 

 

As you may recall, "threatened injury must be certainly impending to constitute injury in fact," and "[a]llegations of possible future injury"  are not sufficient.  Clapper v. Amnesty Int'l USA, 568 U.S. 398, 409 (2013).

 

The Sixth Circuit found nothing in the record indicating that the CRA created a risk that the customer would suffer a check decline, or any other harm covered by FCRA. 

 

In the Sixth Circuit's view, the risk of incomplete disclosure causing the customer to suffer a check decline was highly speculative because the customer had not suffered a check decline in the five years since he requested his file from the CRA.

 

As the Sixth Circuit explained, the customer offered no evidence of what he would have done differently with a report containing the missing information and what he did with the report he received.  Under these circumstances, full disclosure by the CRA would not have reduced the risk a merchant would decline the customer's check.

 

The Sixth Court also noted that the CRA alleviated any risk of harm by including a disclaimer warning the customer that the report did not contain all linked information and instructed the customer to call to get his information.  According to the Sixth Circuit, if the customer contacted the CRA he could have learned which accounts were linked him and asked the CRA to delete any inappropriate links.

 

The Sixth Circuit concluded that the CRA's failure to disclose information created only a negligible risk that the customer would suffer a check decline.

 

Third, "the statutory violation did not create a tangible injury any traditional sense, but Congress used its authority to establish the injury in view of its identification of meaningful risks of harm in this area."

 

The customer argued that the CRA's failure to provide the two missing transactions violated FCRA and the breach of that duty created "a procedural or intangible injury."

 

However, the Sixth Circuit found that the alleged statutory violation did not harm the customer's interests under FCRA because there were no adverse consequences.  Specifically, "the undisclosed information was irrelevant to any credit assessment about [the customer]."

 

The customer argued that the possible risk of a check decline established standing under Macy v. GC Services Ltd., 897 F.3d 747 (6th Cir. 2018). 

 

In Macy, two debtors received a letter from a debt collector notifying them that their credit card accounts had been referred to the company for collection.  Macy, 897 F.3d at 751.  The debtors argued that the letter violated section 1692g(a) of the Fair Debt Collection Practices Act (FDCPA) because it failed to state that the debtors could dispute their debt "in writing" within 30 days.  Id. 

 

The Sixth Circuit in Macy concluded that the debtors had standing because the debt collector's letter created a material risk that the debtors might forfeit other protections for their concrete economic interests.  Id., at 758 ("an oral inquiry or dispute of a debt's validity has different legal consequences than a written one").

 

The Sixth Circuit explained that the difference between Macy and this case came down to a difference in how Congress exercised its power.

 

Congress enacted the FDCPA to curb abusive debt collection activities by providing a shield from imminent economic harm.  Because an oral dispute would forfeit the right to force the debt collector to verify the debt and block collections until the debt is verified, the debt collector's conduct in Macy created a greater risk of future harm that did not exist here.

 

Thus, the Sixth Court concluded that the type of incomplete disclosure the customer received did not constitute an injury in fact to confer Article III standing.

 

Accordingly, the Sixth Circuit affirmed the trial court's dismissal order.

 

 

 

 

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.


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Financial Services Law Updates

 

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Monday, July 8, 2019

FYI: 1st Cir Holds Fannie Mae Not Liable for Unauthorized Acts of Its Agents

The U.S. Court of Appeals for the First Circuit, on an issue of first impression at the federal appellate level, recently held that the Merrill doctrine -- which prevents federal government instrumentalities from being bound by the unauthorized acts of their agents -- applies to Federal National Mortgage Association ("Fannie Mae").

 

Accordingly, the First Circuit affirmed the trial court's entry of summary judgment in favor of Fannie Mae.

 

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

 

The plaintiff borrower ("Borrower") took out a loan secured by a mortgage on his home.  The lender subsequently assigned the loan to Fannie Mae, which arranged for to be serviced by a loan servicer ("Servicer").

 

Over the next eight years, the Borrower occasionally failed to make payments, though on each occasion he worked with the Servicer to cure the default. 

 

However, in the summer of 2015, the Borrower missed a payment, and received a mortgage statement providing an arrearage of $5,428.61, and requesting that he call the Servicer to bring the loan current.  After speaking with the Servicer, the Borrower mailed a check for $6,167.21 on September 17, 2015, which was to cover his arrearage and his anticipated October 2015 loan payment. 

 

Two days later, the Borrower received a notice of foreclosure of his home.  He immediately wrote the Servicer to confirm that he had sent a check sufficient to cure the default, and to request that the foreclosure be halted. The Servicer returned his check and notified him that the amount tendered was not correct.

 

The Borrower then contacted the Servicer by phone, and was told that the problem was that he had submitted a personal check, not a cashier's check.  The Borrower therefore sent the Servicer a cashier's check in the same amount.

 

However, the foreclosure proceeded and Fannie Mae acquired the property on October 16, 2015. 

 

The Servicer returned the cashier's check with instructions for the Borrower to contact his representative to confirm the amount owed. When the Borrower did so, the representative did not know the amount needed to wipe out the foreclosure and reinstate the loan.

 

The Borrower thereafter filed a complaint in state court against the Servicer and Fannie Mae asserting claims for declaratory judgment regarding he invalidity of the foreclosure, wrongful foreclosure, and seeking money damages for economic loss and emotional distress.

 

The action was removed to federal court, where the Borrower filed an amended complaint seeking only a declaratory judgment with respect to the alleged invalidity of the foreclosure.  The Servicer was dropped from the complaint as it had not participated in the foreclosure proceeding.

 

The Borrower subsequently filed another amended complaint to assert damages claims alleging violations of several state and federal debt collection and consumer protection laws and regulations, as well as common law tort claims for deceit and negligent misrepresentation.

 

After the court dismissed the statutory claims, the only claims left were the common-law claims alleging that Fannie Mae was vicariously liable for deceit and negligent misrepresentation committed by the Servicer's employees.

 

Fannie Mae thereafter filed a motion for summary judgment based on its affirmative defenses that the claims were barred under the Merrill doctrine and economic loss doctrine.

The trial court granted Fannie Mae's summary judgment motion on the basis of the Merrill doctrine, ruling that Fannie Mae was a federal instrumentality protected from vicarious liability for the unauthorized acts of its agents. 

 

The Borrower appealed. 

 

Initially, the Borrower argued that the grant of summary judgment was improper because the record was not sufficiently developed and additional discovery should have been permitted.  However, the First Circuit determined that the Borrower could not raise this argument as he had already agreed in a status conference in the trial court that "the parties are now in agreement that there's no discovery that needs to be conducted . . . to respond to the pending motion for summary judgment."

 

After disposing of the Borrower's argument regarding discovery, the First Circuit noted that "[t]he pivotal question with respect to the trial court's summary judgment ruling is whether Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine." 

 

As you will recall, the Merrill doctrine comes from Fed. Crop Ins. Co. v. Merrill, 332 U.S. 380, 384 (1947), and stands for the proposition that the federal government cannot be bound by the unauthorized acts of its agents. 

 

The "Merrill doctrine is designed, in part, to ensure appropriate protection of the public" fiscal operations, and it also "rests solidly 'upon considerations of sovereign immunity and constitutional grounds – the potential for interference with the separation of governmental powers between the legislative and executive.'"

 

However, because the Merrill doctrine only operates to safeguard federal instrumentalities, "it remains for us to determine whether Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine – a task that no other federal appellate court has yet undertaken." 

 

On that issue, the Borrower argued that because Fannie Mae is not a federal instrumentality for purposes of sovereign immunity or the Federal Tort Claims Act, it also is not for purposes of the Merrill doctrine.  The Borrower further argued that as a shareholder owned corporation, Fannie Mae is not entitled to the protections of the Merrill doctrine.

 

The First Circuit disagreed, noting that "the fact that an entity is deemed not to be a federal instrumentality for a particular purpose does not signify that the entity should not be deemed to be a federal instrumentality for some other purpose."

 

Further, "the question of instrumentality status is not determined either by Fannie Mae's corporate form or by whether Fannie Mae serves a 'proprietary' (as opposed to 'sovereign') function."  Instead, the Court held, "our inquiry hinges on whether Congress created Fannie Mae to serve an important governmental objective."

 

In reaching its determination that Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine, the First Circuit found instructive the Seventh Circuit's ruling in Mendrala v. Crown Mortg. Co., 955 F.2d 1132 (7th Cir. 1992), wherein the court looked to the governing statute of Federal Home Loan Mortgage Corporation ("Freddie Mac"), and found that Freddie Mac "has a public statutory mission: to maintain the secondary market and assist in meeting low - and moderate – income housing goals."  The Seventh Circuit determined that the mission "would be thwarted if Freddie Mac could be held 'responsible for the unauthorized actions' of its agent."

 

The First Circuit noted that "Freddie Mac and Fannie Mae are siblings under the skin," and that "like Freddie Mac, Fannie Mae serves an important governmental objective: 'to maintain the secondary mortgage market and assist in meeting low – and moderate – income housing goals."

 

Therefore, "[e]nabling Fannie Mae to be held liable for the unauthorized acts of its agents, particularly those who are employees of a private entity, would frustrate Congress's intent as expressed in the prescribed nature of Fannie Mae's authority." 

 

The First Circuit therefore held "that Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine and, thus, cannot be held liable for the unauthorized acts of its agents." 

 

Because the Borrower's claims were predicated on the theory that Fannie Mae should be held liable for the acts of the Servicer's employees, and because the record did not show that those acts were actually authorized, the First Circuit affirmed the ruling of the trial court.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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 

 

Friday, July 5, 2019

FYI: Cal App Ct (1st Dist) Rejects Servicer's Attempt to Condition Reinstatement on Payment of Deferred Amounts

The Court of Appeal of the State of California, First Appellate District, recently held that California Civil Code § 2924c permits a borrower to reinstate a modified home mortgage loan by paying only the past due modified payments and associated fees and charges, and that a servicer cannot lawfully condition reinstatement of a loan on the payment of amounts that were deferred in the loan modification.  

 

In so ruling, the Appellate Court rejected the servicer's argument that the loan modification agreement allowed it to nullify the modification upon the borrower's default and to require payment of the earlier default according to the original terms.

 

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

 

The borrowers (Borrowers) obtained a loan modification that adjusted the principal balance, reduced the interest rate and monthly payments, and deferred accrued and unpaid interest and principal, fees, and foreclosure expenses. 

 

The modification provided that failure to make modified payments as scheduled would be an event of default, the modification would be null and void at the lender's option, and the lender would have the right to enforce the loan according to the original terms.

 

The servicer (Servicer) recorded a notice of default stating that the borrowers would have to pay the four missed monthly payments and associated late charges and fees, plus all the sums that had previously been deferred under the loan modification, in order to avoid foreclosure.

 

The Borrowers asserted four causes of action against the Servicer: violation of California Civil Code § 2924c, violation of California Business and Professions Code § 17200, et seq. (UCL), breach of contract, and breach of the covenant of good faith and fair dealing. 

 

The trial court granted the Servicer's motion for summary judgment and denied the Borrowers' cross-motion for partial summary judgment. 

 

The Borrowers appealed the trial court's grant of summary judgment to the Servicer on their causes of action for violation of section 2924c and the UCL.

 

As you may recall, section 2924c(a)(1) provides that when a mortgage loan is accelerated as a result of a homeowner's default, the homeowner can reinstate the loan by paying all amounts due, "other than the portion of principal as would not then be due had no default occurred."  

 

In other words, the homeowner can cure the default and reinstate his or her loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance. 

 

The Borrowers argued that under section 2924c, the Servicer "could not lawfully condition reinstatement of their loan on the payment of amounts that were deferred in the loan modification."  They argued that requiring them to pay the deferred balance, instead of just the missed payments plus costs, "essentially requires them to waive their right of reinstatement with respect to the modified loan."

 

The Servicer argued that the loan modification gave it the option to enforce the original loan terms if the Borrowers defaulted on the modified loan, and because the under the original loan pre-modification the deferred amounts were due and owing, the deferred amounts could properly be required as a condition of reinstatement under section 2924c.b

 

The Appellate Court began its analysis by observing that the default was the failure to make payments on the modified loan.  Section 2924c gave the Borrowers the opportunity to cure their precipitating default by making up those missed payments and paying the associated fees and charges. 

 

In the Appellate Court's view, demanding the deferred amounts after the loan was modified meant that the Borrowers would have been in default throughout the term of the modified loan even if they timely made every required monthly payment. 

 

If the Borrowers had made all of their modified payments, as the Appellate Court explained, the Servicer could not have claimed the deferred amounts until the end of the loan. 

 

Thus, the Appellate Court concluded that the Servicer failed to demonstrate that the Borrowers could not prevail on their claim that Servicer violated section 2924c, and the trial court erred in granting summary judgment to the Lender on this claim.

 

Because the Servicer "failed to show that its conduct was consistent with section 2924c," the Appellate Court also held it was an error to grant summary judgment on the UCL cause of action predicated on the violation of section 2924c.

 

Accordingly, the Appellate Court reversed the judgment and remanded for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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