Tuesday, December 1, 2020

FYI: MA SJC Holds "Hybrid" Foreclosure Notice Not Inaccurate or Deceptive

The Massachusetts Supreme Judicial Court recently held a "hybrid notice" related to foreclosure was neither inaccurate nor deceptive where the notice included overlapping reinstatement periods required by both the mortgage instrument and state statute. 

 

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

 

In June 2006 a pair of homeowners obtained a residential mortgage loan. The mortgage was a standard form "Freddie Mac/Fannie Mae" residential mortgage.

 

The standard form mortgage contained two relevant provisions. First, paragraph 22 contained notice requirements that must be met before acceleration and foreclosure. Second, paragraph 19 placed limits and conditions on the mortgagors' rights to reinstate a mortgage after acceleration, including purporting to terminate the right to reinstate "five days before sale of the Property pursuant to any power of sale contained in this Security Instrument."

 

Additionally, Massachusetts statutory law establishes notice requirements before a foreclosing mortgagee can be accelerated and foreclosed based on borrower default. Under the Massachusetts statute, the required notice must inform the mortgagor, inter alia, "that the mortgagor may redeem the property by paying the total amount due, prior to the foreclosure sale." G. L. c. 244, § 35A (c) (8).

 

Subsequently, a new mortgagee took over the borrowers' loan and in July 2009, the borrowers defaulted on the loan. On August 12, 2016, the new mortgagee sent borrowers a notice of its intention to accelerate the loan and foreclose on their home.

 

The notice conformed with both G. L. c. 244, § 35A, and paragraph 22 of the borrowers' mortgage and informed the borrowers that if they failed "to cure the default on or before [November 10, 2016], [the bank] [could] accelerate the maturity of the Loan, . . . declare all sums secured by the Security Instrument immediately due and payable, commence foreclosure proceedings, and sell the Property." The notice also informed borrowers of their right to reinstate and that they could "still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place." This notice conformed verbatim to the template required by 209 Code Mass. Regs. § 56.04.

 

A foreclosure sale occurred, and one month later the borrowers commenced an action in the state trial court to set aside the foreclosure. The borrowers argued that the conflicting statements as to the last day upon which they possibly could reinstate their mortgage -- up to the foreclosure sale, as the notice stated, or up to five days before the foreclosure sale, as the terms of the mortgage provided -- meant that the bank's notice was misleading, potentially deceptive, and therefore should render the foreclosure sale void. See, e.g., Pinti v. Emigrant Mtge. Co., 472 Mass. 226, 240 (2015).

 

The matter was removed to federal court, where the trial judge eventually granted summary judgment in favor of the mortgagee determining that strict compliance with the notice requirements of paragraph 22 did not require specifying the conditions placed upon the borrowers' right to reinstate contained in paragraph 19.

 

The U.S. Court of Appeals for the First Circuit then reversed concluding that, because the notice failed to include the five-day limitation specified in the mortgage contract, the notice was potentially deceptive and, therefore, void pursuant to Pinti.

 

On a petition for reconsideration, in which the mortgagee and numerous amici pointed out that the mortgagee was required under Massachusetts law to send the notice verbatim, the First Circuit vacated its decision and certified the following question to the Massachusetts Supreme Judicial Court:

 

"Did the statement in the August 12, 2016, default and acceleration notice that 'you can still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place' render the notice inaccurate or deceptive in a manner that renders the subsequent foreclosure sale void under Massachusetts law?"

 

The Massachusetts Supreme Judicial Court (SJC) began its analysis noting that Massachusetts is a "non-judicial foreclosure state," meaning that it allows a mortgagee to foreclose on a mortgaged property without judicial authorization, so long as the mortgage instrument grants that right by reference to the statutory power of sale. See Pinti, 472 Mass. at 232, citing U.S. Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637, 645–646 (2011); G. L. c. 183, § 21.

 

In addition, because of the "substantial power . . . to foreclose in Massachusetts without judicial oversight," the SJC has repeatedly emphasized that "one who sells under a power [of sale] must follow strictly its terms; the failure to do so results in no valid execution of the power, and the sale is wholly void." Federal Nat'l Mtge. Ass'n v. Marroquin, 477 Mass. 82, 86 (2017).

 

In Pinti, 472 Mass. at 235, the SJC summarized its jurisprudence concerning what counts as a condition precedent as "(1) terms directly concerned with the foreclosure sale authorized by the power of sale in the mortgage,[6] and (2) those prescribing actions the mortgagee must take in connection with the foreclosure sale -- whether before or after the sale takes place." Id.

 

In this matter, the Court acknowledged that the mortgagee sent one notice which satisfied the requirements of both G. L. c. 244, § 35A, and, at least facially, those of paragraph 22 of the borrowers' Fannie/Freddie Uniform Mortgage Instrument. In addition, the possibility of such a so-called "hybrid notice" was explicitly contemplated by paragraph 15 of the mortgage: "[i]f any notice required by this Security Instrument is also required under Applicable Law, the Applicable Law requirement will satisfy the corresponding requirement under this Security Instrument."

 

As such, the Court agreed with the First Circuit that Massachusetts law requires that any notice given pursuant to paragraph 22 must be accurate and not deceptive.  However, it disagreed that the notice here was potentially deceptive because the Court determined that the more generous reinstatement period provided under G. L. c. 244, § 35A, governs over the contractually imposed time limits on reinstatement articulated in paragraph 19 of the GSE Uniform Mortgage.

 

The Court found the borrowers' contention unavailing that the notice requirements of G. L. c. 244, § 35A, are "of no significance" to the mortgagee's duty to notify pursuant to paragraph 22. The Court again noted there is nothing that states a single notice could not satisfy both the requirements but rather the possibility is explicitly contemplated in the GSE Uniform Mortgage itself in paragraph 15.

 

Accordingly, because the notice in question was neither inaccurate nor deceptive, the SJC held that the statement in the August 12, 2016, default and acceleration notice that 'you can still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place' did not render the notice inaccurate or deceptive in a manner that renders the subsequent foreclosure sale void under Massachusetts law.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Friday, November 27, 2020

FYI: 1st Cir Holds HELOC Lender Not Entitled to Equitable Lien

The U.S. Court of Appeals for the First Circuit recently reversed the judgment of a trial court declaring a home equity line of credit (HELOC) invalid, but granting the holder of the HELOC an equitable lien on the HELOC's secured property.

 

In so ruling, the First Circuit determined that the trial court abused its discretion by granting the equitable lien because no transactional nexus existed, when the mortgagor did not have authority to mortgage the property, and the HELOC proceeds were not used to benefit the property or its owner.

 

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

 

In 1999, a husband and wife and their daughter acquired property in Massachusetts (the "Family Property").  Two months later, three almost-identical trusts were established for the husband, wife and daughter, with the sole beneficiary of the trust bearing his or her name (the "Husband's Trust," "Wife's Trust" and "Daughter's Trust," respectively; collectively, the "Family Trusts,"), and deeding one-third interest in the Family Property into each trust in order that the Family Trusts owned the property as tenants-in-common.

 

The wife was the trustee for the Husband's Trust and Daughter's Trust.  The husband was the trustee for the Wife's Trust.  After the wife died in 2002, a successor trustee was appointed for the Daughter's Trust, but the husband did not appoint a successor trustee for the Husband's Trust.  The deceased wife had named her husband as the executor of her will and gave him all of her personal property while dividing the remainder of her assets between two estate trusts (the "Estate Trusts"), naming the husband and daughter as its beneficiaries and the husband as trustee. The husband was entitled to the net income from the Estate Trusts during his lifetime, with the principal reserved for the daughter to be passed on upon the husband's death. 

 

While the husband was trustee of the Estate Trusts, he ignored the trusts' terms and never transferred any property into them, instead liquidating the daughter's assets and keeping the money for himself.

 

Four years after the wife's death, the husband began a relationship with a new woman, with whom he divided time between the Family Property and the new girlfriend's nearby horse farm. 

 

In April 2007, the husband purchased a new property (the "Husband's New Property"), using a combination of his own assets, assets from the wife's estate and a $500,000 home equity line of credit (the "HELOC") taken out against the Family Property, which was still owned by the Family Trusts—not the husband individually.  The HELOC was dated June 13, 2007 and named the husband, an "unmarried person" as the grantor, and did not mention any of Family Trusts that held legal title to the Family Property.

 

Upon learning of the HELOC, the daughter, through her counsel, sent a letter to the original HELOC lender disputing the HELOC's validity and advising that the Family Trusts held title to the Family Property and did not consent to the HELOC.

 

As the daughter became concerned about her father's (the husband) capacity and relationship with his new girlfriend, she petitioned the probate court to appoint a guardian for the husband (the "Guardian"), which was eventually granted.  After the Guardian negotiated a sale of the Husband's New Property for $1.75 million in April 2009, upon petition, the probate court appointed a guardian ad litem who determined that the sale was in the husband's best interest. The probate court approved the sale and the Guardian used the sale proceeds to replenish the wife's estate and provide for the husband's living expenses. The Guardian stopped making payments on the HELOC in July 2010 after he was informed by his counsel that the HELOC was invalid.

 

The husband died in 2013, leaving the daughter to become trustee of the Husband's Trust and Wife's Trust.  In June 2015, the probate court entered an Order of Final Settlement granting all of the husband's estate—approximately $1 million— to his daughter.

 

The original HELOC lender assigned the HELOC to a new entity ("Lender") through transactions in October 2015 and January 2016.  In November 2016, the daughter requested that the Lender discharge the HELOC because her father (the husband) did not hold legal title to the Family Property when it was created.  In June 2017, the daughter, conveyed the Family Property to herself as trustee of the Family Trusts.

 

In November 2017, the Lender filed suit against the daughter individually and as trustee of the Family Trusts,  seeking: (1) a declaration that the HELOC was a valid encumbrance on the Family Property, (2) an equitable lien against the Property, (3) a constructive trust on the assets of the Father's Estate, and; (4) an attachment of the Family Property due to the daughter's purported fraudulent conveyance of the Family Property to herself.

 

Upon ruling on the parties' respective motions for summary judgment, the trial court declared the HELOC was invalid because the husband did not have title to the Family Property (owned by the Family Trusts) when he obtained it in his individual capacity.  However, the trial court also held that the Lender was entitled to an equitable lien against the Family Property. 

 

Specifically, the trial court found that after the sale of the Father's Property, the proceeds from the $500,000 HELOC were returned to the father, which were inherited by the daughter after his death, and allowing the daughter to retain these funds would result in an unjust enrichment.  As to the Lender's final two claims, the trial court held that a constructive trust would be inappropriate because the daughter and Family Trusts did not obtain the assets of the Husband's Estate or the Family Property through fraud or mistake and that the Lender no basis to allege fraudulent transfer because the HELOC was not a valid encumbrance.

 

The daughter appealed on behalf of herself and the Family Trusts.

 

The issue on appeal was whether Massachusetts law allowed the trial court to grant the Lender an equitable lien on the Family Property.  The daughter argued that the trial court erred by granting the equitable lien because no owner of the Family Property agreed to encumber the property and the proceeds of the transaction did not benefit the Family Property or its true owners.

 

Because the First Circuit was tasked with interpreting Massachusetts law, and no on-point precedent from the state's highest court existed, the appellate court reviewed the Restatement (Third) of Restitution and Unjust Enrichment (which the trial court and parties relied) analogous decisions from the Massachusetts courts, and precedents in other jurisdictions to endeavor to predict how the Massachusetts Supreme Judicial Court would likely decide the question.  Butler v. Balolia, 736 F.3d 609, 613 (1st Cir. 2013); Andrew Robinson Int'l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51–52 (1st Cir. 2008).

 

According to § 56(1) of the Restatement (Third) of Restitution and Unjust Enrichment, "If a defendant is unjustly enriched by a transaction in which (a) the claimant's assets or services are applied to enhance or preserve the value of particular property to which the defendant has legal title, or more generally (b) the connection between unjust enrichment and the defendant's ownership of particular property makes it equitable that the claimant have recourse to that property for the satisfaction of the defendant's liability in restitution, the claimant may be granted an equitable lien on the property in question." Restatement (Third) of Restitution and Unjust Enrichment § 56(1) (Am. Law Inst. 2011).

 

The First Circuit noted that the Restatement makes clear that a transactional nexus must exist between the property and the events giving rise to the equitable lien, and this requirement is usually, but not necessarily, satisfied as described in § 56(1)(a). See id. at § 56 cmt. d

 

Here, while the Lender acknowledged that the HELOC proceeds were not used to enhance or maintain the Family Property, but instead for the husband to purchase the Husband's new property, it argued that his husband's agreement to repay the HELOC from the Family Property meets the requisite transactional nexus, citing the First Circuit's decision in United States v. Friedman, 143 F.3d 18, 23 (1st Cir. 1998) and the Supreme Judicial Court in Delval v. Gagnon, 99 N.E. 1095, 1096 (Mass. 1912), to support its theory.

 

The First Circuit found this argument unavailing.  Although both Friedman and Delval involved express agreements to pay creditors out of specific funds, in both cases it was undisputed that the debtors owned and controlled the assets from which they agreed to pay the creditors, unlike here, where the husband did not have the authority to pledge the Family Property.  Thus, the husband's express agreement to pay off the HELOC from the Family Property cannot support the equitable lien.

 

Next, the Lender argued that the husband's possession of the Family property and intent to encumber it provided sufficient transactional nexus, and that Pinch v. Anthony, 90 Mass. 536 (1864) controls this case.  In Pinch, the Supreme Judicial Court says that "a party may by express agreement create a charge or claim in the nature of a lien on real as well as personal estate of which he is the owner or possessor, and that equity will establish and enforce such charge or claim." Id. at 539.  Thus, the Lender contended that because the husband possessed the Family Property and intended to encumber it at the time the HELOC was originated, the Pinch court's "or possessor" language is dispositive, and ownership status of the Family Property was irrelevant.

 

This, too, was rejected by the First Circuit as an overly-broad reading of Pinch, finding that the "or possessor" language was merely nonbinding dicta, and that the Lender's interpretation was undermined by cases decided around the same time and holding that when a mortgagor purports to mortgage a property he does not own, as was the case here, equity cannot grant relief to the mortgagee.  See Pennock v. Coe, 64 U.S. 117, 127–28 (1859); Moody v. Wright, 54 Mass. 17, 32 (1847).

 

Lastly, the First Circuit's review of more recent rulings in other jurisdictions supported the daughter's position and held that an equitable lien is an improper remedy when the mortgagor could not convey title to the property and the mortgage proceeds were not used to improve the property or benefit the true owner. See Wachovia Bank, N.A. v. Coffey, 746 S.E.2d 35, 36-38 (S.C. 2013) (upholding dismissal of bank's claim for an equitable lien when a husband took out a HELOC on a property "titled in [his] [w]ife's name only," the bank never verified if the husband owned the property, and the husband used the proceeds to buy a sailboat); DFA Dairy Fin. Servs., L.P. v. Lawson Special Tr., 781 N.W.2d 664, 672 (S.D. 2010) (affirming a trial court's denial of an equitable lien when the proceeds of a mortgage were not used to preserve or improve the property and the mortgagor did not have authority to convey the property); Sorenson v. Pyeatt, 146 P.3d 1172, 1175, 1178 (Wash. 2006) (en banc) (holding that lenders had "failed to establish . . . that they are entitled to an equitable lien" when the mortgagor "forged the deeds that purported to convey title," "had no power to grant a valid security interest in the property," and "used the fraudulently obtained loan money primarily as disposable income").

 

Because the Lender could not establish any transactional nexus to support the equitable lien and did not take steps to assure the validity of any HELOC it (or its predecessor) wished to grant, the First Circuit determined that the trial court committed an error of law by granting the Lender an equitable lien against the Family Property because any benefit the daughter derived from the HELOC proceeds inherited through the husband's (her father's) estate had no relation to her interest in the Family Property.

 

Accordingly, because the grant of the lien to the Lender was an abuse of discretion, the appellate court reversed and remanded the trial court's judgment with instructions to enter judgment for the daughter, individually, and as trustee for the Family Trusts.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Saturday, November 21, 2020

FYI: Cal App Ct (5th Dist) Holds Lender's Action to Remove Prior Lien Was Time-Barred

The Court of Appeal of the State of California, Fifth District, recently held a trial court incorrectly applied the statute of limitations on an alleged quiet title claim, where the statute of limitations to foreclose a first deed of trust had already run, and the lien had been extinguished, prior to the filing of the alleged quiet title claim.

 

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

 

In 2006, an individual lender loaned the borrowers $450,000, secured by a deed of trust on one parcel of the borrowers' property. Before the loan was made, the borrowers represented there were no prior encumbrances on the property.

 

A title report showed there was a 2004 deed of trust on the property securing a $250,000 promissory note from the borrowers to a lien holder. The borrowers represented that the lien holder's deed was a mistake and obtained from the lien holder a partial reconveyance of that deed of trust to remove his lien.

 

The lender and the borrowers then modified the promissory note to prohibit the borrowers from encumbering the property again without the lender's consent while the lender's loan was unpaid.

 

Subsequently, the lender executed the promissory note, recorded the deed of trust, and completed the funding of the loan.

 

In 2007, without the lender's knowledge, the borrowers and the lien holder recorded a second deed of trust on the property, again securing the lien holder's 2004 promissory note.

 

In 2008, the lender exercised its right of acceleration, the borrowers failed to make payment, and the lender initiated a judicial foreclosure which failed to name the lien holder.  In 2011, the trial court entered a judgment in favor of the lender in the foreclosure, ordering the sale of the property and in 2014, the lender purchased the property at the foreclosure sale for a credit bid of $150,000.

 

After the borrowers' one-year redemption period expired, the lender attempted to sell the property to the owners of a neighboring property. The title search conducted at that time revealed the lien holder's recorded deed of trust.

 

In June 2016, the lender filed a quiet title action to clear title to the property. The lien holder asserted he held an interest in the property superior to the lender and raised defenses, including the expiration of the statute of limitations. The lien holder also filed a cross-complaint for declaratory relief, seeking a declaration regarding the extent to which the foreclosure action or foreclosure sale affected his interest in the property, and whether the lender could prevent him from exercising his rights under his deed of trust.

 

The trial court entered judgment in favor of the lender on the complaint and the cross-complaint. It exercised its equitable powers to correct a mistake in the prior foreclosure action -- the mistake of failing to include the lien holder as a party to that action. The trial court granted the lien holder a three-month redemption right, which it believed would put the lien holder in the same position he would have been in if he had been included in the borrower's foreclosure action. The judgment provided that, if the lien holder failed to redeem the property within the allowed time, the lender would own the property unencumbered by the lien holder's deed of trust.

 

The lien holder appealed the judgment.

 

On appeal, the lien holder argued that the trial court erred when it concluded the 60-year limitations period set out in Civil Code section 882.020 applied to the lender's action. The lien holder contends the limitations period applicable to judicial foreclosure actions, either four years under Code of Civil Procedure section 3371 or six years under Commercial Code section 3118, applies.

 

The lender responded that the trial court chose the correct statute of limitations. Alternatively, the lender asserted that its action was timely, because it was an action to quiet title on the ground of mistake, to which a three-year limitations period applies, commencing upon discovery of the cause of action.

 

Initially, the Appellate Court noted the principal purpose of the lender's action appears to be to remove the lien of the lien holder's deed of trust from the property which is ordinarily done by including the junior lienholder in the foreclosure action. Further, the trial court entered a judgment designed to have the same effect as inclusion of the lien holder in the prior foreclosure.

 

Accordingly, the Appellate Court concluded the gravamen of the lender's action was foreclosure of the lender's senior trust deed against the lien holder and therefore the statute of limitations applicable to foreclosure actions governs this case.

 

Next, the Appellate Court recognized the general statute of limitations set out in the Code of Civil Procedure for "[a]n action upon any contract, obligation or liability founded upon an instrument in writing" is four years. The Court also noted it need not consider the six-year limitations period contained in the commercial code because in this case, either time period expired before the lender filed this action.

 

The Appellate Court explained the "limitations period for bringing a judicial foreclosure action begins to run upon maturity of the obligation secured, that is, when the underlying promissory note comes due, but is unpaid."

 

In the present matter, the lender accelerated the maturity date of the promissory note, making payment due on April 5, 2008; the borrowers failed to make payment by that date. The lender filed its action for foreclosure against the borrowers within four years after that date. However, the lender did not file the action to foreclose against the lien holder until more than eight years after maturity of the note.

 

Accordingly, whether a four-year or a six-year limitations period applies, the statutory period expired before the lender filed the action.

 

The Appellate Court next examined foreclosure actions against junior lienholders. The Court explained a junior lienholder is not affected by the foreclosure of a senior lien, if the junior lien existed prior to the foreclosure and the junior lienholder was not made a party to the senior lienholder's foreclosure action.

 

To remove a junior lien, the holder of the senior lien or the buyer at the senior sale (standing in the shoes of the senior lienholder) may file a second action to foreclose the omitted party's equity of redemption or a quiet title action having the same effect.

 

Additionally, the junior lienholder may raise the statute of limitations as a defense to the senior lienholder's foreclosure action.

 

Moreover, the Appellate Court provided, under Civil Code section 2911, the lien of the deed of trust is extinguished when the statute of limitations has run on the underlying debt. Once the statute of limitations has run on the underlying obligation, i.e., the promissory note, the lienholder "cannot, by any affirmative proceedings on his part, invoke the aid of the court for the collection of his debt."

 

As a result, the expiration of the statute of limitations bars both an action on the debt and an action to foreclose the lien of the deed of trust. The expiration of the statute of limitations on a senior lien also bars the senior lienholder from asserting the priority of its lien in answer to the foreclosure complaint of a junior lienholder.

 

Here, the Appellate Court held that the limitations period on any judicial action to enforce the lender's rights under the deed of trust expired prior to the filing of their quiet title action.

 

The Appellate Court reasoned that by filing a quiet title action seeking to complete their prior judicial foreclosure and eliminate the lien holder's lien on the property, the lender has affirmatively invoked the court's assistance to foreclose the lien holder's interest in the property. The time for doing so lapsed prior to commencement of the action, and any judicial action for that purpose, including the quiet title action, is barred.

 

The Appellate Court added the lender's recorded deed of trust did not reflect the maturity date of the underlying promissory note. Accordingly, the 60-year period of Civil Code section 882.020, subdivision (a)(2), applied to it, rather than the 10-year period of Civil Code section 882.020, subdivision (a)(1). The 60-year period did not govern the lender's time for commencing the quiet title action to complete their foreclosure, however, because the time for bringing a judicial foreclosure action had "earlier expired pursuant to Section 2911" before the action was filed.

 

Consequently, the Appellate Court held the trial court erred in concluding a 60-year statute of limitations applied to this action to judicially enforce the lender's rights under the deed of trust.

 

The Appellate Court further explained, once the judgment was final, the sale was complete, and the time for seeking a deficiency judgment had lapsed, there was no further obligation under the lender's deed of trust as to which the borrowers could be in default. Consequently, after the foreclosure action was complete, the lender could not record a notice of default containing "a correct statement of some breach" that warranted a sale of the property.

 

As a result, the Appellate Court found no support for the proposition that the power of sale in the lender's deed of trust survived the judicial foreclosure sale and may still be exercised despite the previous sale of the property to satisfy the borrowers' obligation under the lender's promissory note and deed of trust.

 

Accordingly, the Appellate Court concluded the trial court cannot exercise the trustee's power of sale and the statute of limitations bars any judicial action, including the quiet title action, to enforce the lender's rights under their deed of trust against the lien holder.

 

The Appellate Court concluded, the lender did not, and could not, pursue a trustee's sale. Title to the property was transferred to the buyer at the judicial foreclosure sale, and the trustee did not retain any title that could be transferred in a subsequent trustee's sale. Hence, the Court held, the lender's action was barred by the statute of limitations.

 

Accordingly, the Appellate Court reversed the judgment of the trial court and directed it to vacate its judgment and enter a new judgment in favor of the lien holder on the complaint and the cross-complaint.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 603
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Tuesday, November 17, 2020

FYI: 9th Cir Holds Mere Reliance on Contract Provision Not Enough for FDCPA "Bona Fide Error" Defense

The U.S. Court of Appeals for the Ninth Circuit recently held that a debt collector cannot use the "bona fide error" defense to shield itself from liability under the Fair Debt Collection Practices Act ("FDCPA") by merely:

 

(1)  Requiring its creditor clients to provide accurate account information, and

(2)  Requesting verification of the account information from its creditor client, but not waiting to receive a response before trying to collect the debts.

 

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

 

A debt collection company (the "debt collector") entered into an agreement with a medical clinic pursuant to which the clinic assigned its debts for collection to the debt collector. The agreement required the creditor to provide "only accurate data and that the balances reflect legitimate, enforceable obligations of the consumer."

 

When a client referred a debt for collection, the debt collector's routine practice was to "generate[] an automatic response listing the account name and number, the total amount due, and the date of last payment." It would also "request that its clients notify [it] if they recognize any errors in any of the accounts listed."

 

The plaintiff was treated at the clinic and failed to pay the full amount owed. The clinic gave notice that she owed $614.52. When the plaintiff failed to respond, the clinic referred the account to the debt collector. The debt collector sent a letter to the clinic asking that it verify the amount owed. The next day, without waiting for a response from the clinic, the debt collector sent the plaintiff a collection letter "seeking payment of $614.52 plus $29.07 interest."

 

The plaintiff filed suit alleging that the debt collector violated the FDCPA by miscalculating the amount of interest owed.

 

The plaintiff moved for summary judgment. In opposing the plaintiff's motion, the debt collector "argued that it was entitled to the benefit of the FDCPA's bona fide error defense."

 

The trial court denied plaintiff's motion for summary judgment and entered summary judgment for the debt collector, finding that while the debt collector violated the FDCPA by miscalculating the amount of interest owed, the bona fide error defense applied.

 

On appeal, the plaintiff argued that the bona fide error defense did not apply to the debt collector "because it did not have adequate procedures in place to prevent errors of the type that occurred here." The debt collector argued that it "reasonably relied on [the clinic's] promise to provide accurate information … [and that] it followed its standard practice" after the account was assigned for collection "by requesting that [the clinic] notify it of any inaccuracies in the record of the delinquent account."

 

The Ninth Circuit began by explaining that "[t]o avoid liability, debt collectors may raise the limited affirmative defense that their conduct was 'not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.' … The burden is on the debt collector to prove this defense by a preponderance of the evidence."

 

"The bona fide error defense requires a showing that the debt collector: (1) violated the FDCPA unintentionally; (2) the violation resulted from a bona fide error; and (3) the debt collector maintained procedures reasonably adapted to avoid the violation."

 

Regarding the third element, the Ninth Circuit explained that "we have said that '[a] debt collector is not entitled under the FDCPA to sit back and wait until a creditor makes a mistake and then institute procedures to prevent a recurrence.' … Instead, the debt collector has an affirmative obligation to maintain procedures designed to avoid discoverable errors, including, but not limited to, errors in calculation and itemization.' Debt collectors … must explain 'the manner in which [their procedures] were adapted to avoid the error,'; the bona fide error defense does not shield debt collectors who unreasonably rely on creditors' representations."

 

The Court went on to note that "[w]e have previously rejected the contention that unquestioned reliance on a creditor's information can suffice as a bona fide defense."

 

Citing the Supreme Court of the United States' 2010 opinion in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, which held that "a debt collector who made a legal error interpreting the FDCOA did not qualify for the bona fide error defense[,]" the Ninth Circuit noted that "Jerman reasoned that 'the broad statutory requirement of procedures reasonably designed to avoid 'any' bona fide error indicates that the relevant procedures are ones that help to avoid errors like clerical or factual mistakes.'

 

The Eleventh Circuit followed this lead [in Owen v. I.C. Sys., Inc.] when it denied a debt collector's claim, nearly identical to [the debtor collector's] here, that an engagement contract obligating a creditor-client 'to present only accurate information on debts' qualified as a procedure reasonably adapted to avoid erroneous interest calculations."

 

After discussing cases from the Seventh, Eighth and Tenth Circuits as examples of procedures that qualified for the bona fide error defense, the Ninth Circuit held that "the contract the Eleventh Circuit found insufficient qualify for the bona fide error defense" was similar to the contract in the case before it, and that "[t]he procedures that have qualified for the bona fide error defense were consistently applied by collectors on a debt-by-debt basis; they do not include one-time agreements committing creditor-clients to provide accurate information that are later acted upon without question."

 

The Ninth Circuit distinguished the two cases relied upon by the trial court and rejected the debt collectors "fallback argument … that even if its collection service contract was insufficient to qualify for the bona fide error defense, it separately qualified because it send its creditor-clients follow up requests seeking verification of the accuracy of their information[,]" reasoning that while "[t]his is closer to the mark, … it still falls short because it is uncontested that [the debt collector] did not wait for a response from [the clinic] before it attempted to collect from [the plaintiff]."

 

Because the debt collector "does not argue that it routinely waits for creditor-clients to respond before sending collection notices to debtors," the Ninth Circuit concluded that the debt collector failed "to show that its practice of requesting account verification from its clients is genuinely calculated to catch errors of the sort that occurred here[]".

 

Accordingly, the Ninth Circuit reversed the trial court's grant of summary judgment in the debt collector's favor and remanded the case for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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