Monday, August 13, 2018

FYI: 9th Cir Holds 4-yr Federal "Catch-All" SOL Applies to SCRA Claims

On an issue of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held the federal catchall statute of limitations of four years under 28 U.S.C. § 1658(a) applies to private suits alleging violations of section 303(c) of the federal Servicemembers Credit Relief Act ("SCRA"). 

 

Accordingly, the Ninth Circuit affirmed the dismissal of the plaintiff's complaint as time-barred.

 

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

 

In 2006, the plaintiff ("Plaintiff"), a U.S. Marine, refinanced a mortgage loan on his home in the state of Washington with a loan from the defendant mortgagee ("Mortgagee"). On January 16, 2009, the Mortgagee initiated foreclosure proceedings.  Four months later, on May 18, 2009, the Marines recalled Plaintiff to active service in Iraq.

 

On July 21, 2010, after Plaintiff completed his service in Iraq, the Marines released him from military duty.  Following his release, Plaintiff advised the Mortgagee of his military service and requested an opportunity to refinance his loan.

 

The Mortgagee allegedly ignored his request and proceeded with a foreclosure sale of Plaintiff's home on August 20, 2010.

 

Almost six years after the sale, Plaintiff filed suit in federal district court against the Mortgagee alleging it violated section 303(c) of the SCRA, which at that time prohibited the "sale, foreclosure, or seizure of property" for a breach of a mortgage obligation if "made during, or within nine months after, the period of the servicemember's military service" unless such sale, foreclosure, or seizure occurred by court order or under waiver by the servicemember of his SCRA rights.  50 U.S.C. § 3953(c).

 

The Mortgagee moved to dismiss the complaint as time-barred, arguing that the SCRA does not contain a statute of limitations, and therefore the district court should apply the closest state-law analogue to the SCRA, which the Mortgagee argued was the Washington Consumer Protection Act (four-year limitation period), or the Deeds of Trust Act (two-year limitation period). 

 

In response, Plaintiff argued that the court need not look to a state statute, and that the Uniformed Services Employment and Reemployment Rights Act ("USERRA") was the most analogous.  The USERRA expressly provides that "there shall be no limit on the period for filing" a claim.  Plaintiff argued in the alternative that the court should apply the six-year statute of limitations for breach of contract claims. 

 

In its reply, the Mortgagee argued for the first time that 28 U.S.C. § 1658(a) should apply, which provides a four-year statute of limitations.

 

The trial court granted the Mortgagee's motion to dismiss, applying the four-year statute of limitations contained in the Washington Consumer Protection Act.  The trial court did not comment on the applicability of 28 U.S.C. § 1658(a).  The case was then appealed to the Ninth Circuit. 

 

On appeal, Plaintiff argued that the trial court erred and should have applied the limitations period of either the USERRA or breach of contract claim. The Mortgagee's primary argument on appeal was that the SCRA claim was time-barred under the catchall four-year limitations period of 28 U.S.C. § 1658(a).

 

The Ninth Circuit first noted that "[t]raditionally, when a federal statute creating a right of action did not include a limitations period, courts would apply the limitations period of the 'closest state analogue.'"  However, "in 1990, Congress established – in 28 U.S.C. § 1658(a) – a uniform, catchall limitations period for actions arising under federal statutes enacted after December 1, 1990."  Section 1658(a) provides a four-year limitation period.

 

Notably, a cause of action "'aris[es] under an Act of Congress enacted after' 1990 within the meaning of § 1658(a) if the 'plaintiff's claim against the defendant was made possible by a post-1990 enactment.'"  Further, "[s]uch enactments include amendments to preexisting statutes that create 'new rights of action and corresponding liabilities.'" 

 

The Mortgagee argued that because no private right of action for section 303(c) violations existed until 2010 when the SCRA was amended to add an express private right of action, section 1658(a) applied. 

The Ninth Circuit agreed, stating that "[t]he applicability of § 1658(a) turns on whether the 2010 amendment to the SCRA created a 'new right[] of action and corresponding liabilities' that were not available to servicemembers before 1990.'" 

 

It was undisputed that neither the SCRA nor its predecessors (which dated back to 1918) contained an express private right of action until Congress, in the Veterans' Benefits Act of 2010, added a section to the SCRA providing that servicemembers whose SCRA rights are violated may "obtain any appropriate equitable or declaratory relief . . . [and] recover all other appropriate relief, including monetary damages." 

 

However, Plaintiff argued that despite lack of an express right of action prior to 2010, servicemembers had an implied private right of action under the predecessor to the SCRA before 1990.

 

The Ninth Circuit disagreed, noting that "[n]o federal appeals court, including this Court, has ever held that these acts created a private right of action before 2010, and several district courts in this circuit and elsewhere that addressed this question have come to difference conclusions about the various sections of the SCRA."  

 

Accordingly, the Ninth Circuit held that Plaintiff's "complaint arises under an Act of Congress enacted after 1990 and is thus governed – and barred – by the four-year limitations period in 28 U.S.C. § 1658(a)."

 

 

 

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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Friday, August 10, 2018

FYI: 3rd Cir Holds Entity Whose Principal Purpose is Debt Collection is a 'Debt Collector' Regardless of Whether It Owns Debts It Collects

The U.S. Court of Appeals for the Third Circuit recently held that a purchaser of defaulted debt is a "debt collector" under the federal Fair Debt Collection Practices Act, if its "principal purpose" is to liquidate or otherwise collect on debts.

 

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

 

The borrowers, a husband and wife, had a home equity line of credit with a bank secured by a mortgage on their home. They made timely payments until receiving notice that the bank was closing. The bank was taken over by the FDIC and the loan was eventually sold to a debt buyer.  While the home was under the receivership of the FDIC, the borrowers did not receive monthly statements but attempted to periodically pay the FDIC, which did not cash or return the borrowers' attempted payments.

 

The debt buyer acquired the defaulted loan from the FDIC, which notified the borrowers of the transfer and began to collect the loan.  In its collections efforts, the debt buyer sent three letters that contained different balances owing apparently because different interest rates were being assessed.  Ultimately, the debt buyer filed a foreclosure action.

 

The borrowers contacted the debt buyer to resolve the matter and requested statements which the debt buyer allegedly refused to provide. The debt buyer's representative who spoke with the borrowers also said the home now belonged to the debt buyer and that the borrowers could do nothing about it.  Subsequently, an attorney for the debt buyer sent a demand to the borrowers demanding an even higher amount than had been asked for in the prior letters.

 

The borrowers filed suit alleging violations of the FDCPA, arguing that as a "debt collector" under the Act, the debt buyer was in violation by not being registered as a foreign business in Pennsylvania when it threatened and filed the foreclosure suit.  Of importance, the debt buyer did not contest its status as a debt collector at the pre-trial proceedings.

 

After a one-day bench trial and post-trial briefing, the lower court found the debt buyer to be a debt collector and held that the loan transaction was a "debt" as defined by the FDCPA.  Thus, the court held that the debt buyer was liable under the FDCPA and the debt buyer appealed, arguing it was not a debt collector.

 

On appeal, the Third Circuit examined Henson vs. Santander, the U.S. Supreme Court opinion of last year considering similar issues in the context of a bank that purchased defaulted debts which it in turn collected. The Third Circuit noted that the FDCPA contains two definitions of a debt collector and at issue here is whether the purchaser of a defaulted debt whose "business [is] the principal purpose of which is the collection of any debts," was not decided by the Supreme Court in Henson.

 

The debt buyer argued that the terms "creditor" and "debt collector" are mutually exclusive under the FDCPA and that it could not be both.  The Court disagreed and noted that the debt buyer had not disputed, but rather admitted that its sole business was collecting debts it had purchased.  The Court acknowledged a prior Third Circuit opinion, Check Investors, 502 F.3 at 173, holding the two terms to be mutually exclusive.  However, the Court dismissed any obligation to sort out the intent of that statement and used colorful language for holding that the debt buyer's conduct makes it clear the debt buyer is a debt collector: "Asking if [the debt buyer] is a debt collector is thus akin to asking if Popeye is a sailor.  He's no cowboy."

 

However, the Third Circuit conceded that its prior analysis of the definition of "debt collector," deeming one a debt collector merely because it acquired a loan in a defaulted status, was not valid post-Henson. 

 

The Court concluded by stating that "[the debt buyer] may be one tough gazookus when it attempts to collect the defaulted debts it has purchased, but when its conduct crosses the lines prescribed by the FDCPA, it opens itself up to the Act's penalties."  (From the song I'm Popeye the Sailor Man: "I'm one tough Gazookus / Which hates all Palookas / Wot ain't on the up and square / I biffs 'em and buffs 'em / An' always out-roughs 'em / an' none of 'em gits no-where.")

 

 

 

 

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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Wednesday, August 8, 2018

FYI: AZ Sup Ct Holds Action on Credit Card Debt Accrues When Payment is Missed in Absence of Acceleration

In a case of first impression, the Arizona Supreme Court recently addressed the question of when the statute of limitations commences on credit card debt that is subject to an optional acceleration clause.

 

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

 

The consumer obtained a credit card subject to an agreement that provided if he missed any payment the issuer could declare the balance "immediately due and payable."  The consumer missed a payment in February 2008, but subsequently made a $50 payment, which was less than the minimum payment due, in August 2008.  No notice of acceleration was ever issued.  The account was subsequently sold, and the purchaser filed a lawsuit to collect the debt in July 2014.

 

The statute of limitations for a credit card debt in Arizona is six years from accrual of the cause of action.  Ariz. Rev. Stat. § 12-548(A)(2).

 

The consumer moved for summary judgment, arguing the action was barred by the statute of limitations because the cause of action accrued when he missed his first payment.  The purchaser argued it could not accrue until the debt was accelerated, pursuant to the agreement.  The trial court agreed with the consumer.

 

The appellate court reversed, finding that the cause of action could not accrue on the entire amount owed until the consumer "failed to comply with a demand for payment in full or a notice by the lender [] that it was accelerating the debt."  Review of the decision was granted by the Arizona Supreme Court.

 

The Arizona Supreme Court noted that the appellate court relied on opinions dealing with closed-end, installment contracts that have a determinable date by when the account must be paid in full.  For those accounts, it explained, a creditor cannot prevent the statute of limitations from running simply by refusing to accelerate the debt.

 

The Court distinguished credit card accounts where the date the entire debt will become due is not certain.  Because the purpose of the statute of limitations is "to protect defendants from stale claims and uncertainty about potential unresolved claims," the Court declined to follow the analysis related to installment contracts.

 

The Court explained that allowing a creditor to prevent accrual of the cause of action on a credit card account by not accelerating the debt would "functionally eliminate the protection provided to defendants by the statute of limitations."

 

Thus, the Arizona Supreme Court held "that when a credit-card contract contains an optional acceleration clause, a cause of action to collect the entire outstanding debt accrues upon default: that is, when the debtor first fails to make a full, agreed-to minimum monthly payment."

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Sunday, August 5, 2018

FYI: 5th Cir Holds Automatic Stay Violation Claim Against Mortgagee Barred by Judicial Estoppel

The U.S. Court of Appeals for the Fifth Circuit recently held that a mortgagee's foreclosure action did not violate an automatic stay imposed during one of the plaintiff's Chapter 13 bankruptcy, where the debtor failed to amend his bankruptcy schedules to disclose his recent acquisition of the subject property from his son. 

 

In so ruling, the Fifth Circuit affirmed the trial court's judgment in favor of the mortgagee because father and son plaintiffs were judicially estopped from claiming a stay violation.

 

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

 

A borrower ("Borrower") obtained a mortgage loan from a mortgage lender ("Lender").  The Borrower subsequently entered an equity sharing agreement with his father ("Father"), which provided his father with an equitable interest in the property.  The Father voluntarily made payments to the Lender for three years, but the Lender was never informed of the equitable interest and it was never recorded.

 

The father filed for Chapter 13 bankruptcy in 2012, wherein "an [e]quity sharing agreement in son's house" was listed in the bankruptcy schedules, but the schedules did not list the property's address or Lender as a creditor.  The equity sharing agreement expired on its own terms in February 2013.

 

In January 2014, the Father surrendered his own, separate homestead property in bankruptcy and moved into the Borrower son's property.  After the Borrower and his Father stopped making payments towards the Loan in November 2014, the property was conveyed from Borrower to Father via a quit claim deed ("QCD") in January 2015.  Although the QCD was recorded, the Father did not amend his bankruptcy schedules, nor provide Lender with notice of the transfer.

 

After Lender gave notice of default, the loan was accelerated and posted for foreclosure on April 6, 2015. 

 

The debtor contended that he sent Lender a check for the delinquent payments, along with copies of his bankruptcy documents, the QCD, and the equity sharing agreement on April 28, 2015.  Lender disputed receipt of the relevant bankruptcy documents, and returned the submitted funds as insufficient to bring the loan current as of May 1, 2015. 

 

The Father alleged that he resubmitted the bankruptcy package to Lender on May 4, 2015, but the property was sold at a foreclosure sale on May 5, 2018.  After the sale, the Lender contacted Borrower and provided him two weeks to redeem the property, which Borrower declined to do.

 

The Borrower and his Father (collectively, "Plaintiffs") instead filed suit against Lender alleging wrongful foreclosure and violations of the Emergency Stabilization Act and the bankruptcy automatic stay under § 362(a), seeking actual damages of $50,000 and punitive damages in the amount of $450,000.  After the Lender removed the action to federal court, Plaintiffs filed a second state court action against the Lender.  The two actions were eventually consolidated in federal court.

 

Following a bench trial, the trial court held that the Plaintiffs' claims lacked merit and that they were judicially estopped from pursing claims for violation of the automatic stay imposed by the Father's bankruptcy filing.  Accordingly, judgment was entered in Lender's favor, Plaintiffs were denied a motion for new trial, and several exhibits presented by Plaintiffs in the lower court were denied admittance upon review of Lender's objections following these Orders. 

 

This appeal followed.

 

Primarily, the Fifth Circuit noted that Plaintiffs waived their claims for wrongful foreclosure and violation of the Emergency Stabilization Act by failing to argue them in their appellate briefing.  See N.W. Enterprises, Inc. v. City of Houston, 352 F.3d 162, 183 n.24 (5th Cir. 2003).  Accordingly, the only issues on appeal were (i) the Lender's purported violation of the automatic stay under § 362(a); (ii) Plaintiff's request for a new trial, and; (iii) the post-judgment evidentiary rulings.

 

As you may recall, judicial estoppel has three elements: (1) the party against whom estoppel is sought has asserted a position plainly inconsistent with a prior position, (2) a court accepted the prior position, and (3) the party did not act inadvertently. Allen v. C & H Distribs., L.L.C., 813 F.3d 566, 572 (5th Cir. 2015).  (citing Flugence v. Axis Surplus Ins. Co. (In re Flugence), 738 F.3d 126, 129 (5th Cir. 2013)).

 

Here, the Fifth Circuit found that the first and second elements of judicial estoppel were satisfied by the Father's failure to amend his bankruptcy schedules to disclose the quitclaim deed or his putative claims against Lender.  See Love, 677 F.3d at 261-62 (quoting Jethroe v. Omnova Sols., Inc., 412 F.3d 598, 600 (5th Cir. 2005)) ("Judicial estoppel is particularly appropriate where… a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset"); Allen, 813 F.3d at 572 (quoting Flugence, 738 F. 3d at 129) (Chapter 13 debtors have a continuing obligation to amend financial schedules to disclose assets acquired post-petition).

 

As to the third element of judicial estoppel, in order to establish the defense of inadvertence, a party is require to prove (1) that it did not know about the inconsistency or (2) that it lacked a motive for concealment. See Allen, 813 F.3d at 573. 

 

Here, the Fifth Circuit concluded that the Father was aware he had received the QCD and his claims against Lender, and had a motive to conceal his changed financial status.  Id. at 574 (a motive to conceal is "self-evident" when a debtor fails to disclose an asset to the bankruptcy court due to the "potential financial benefit resulting from the nondisclosure").  Accordingly, because the Father could not establish the defense of inadvertence, the Court held that the third element of judicial estoppel was satisfied.

 

Because the trial court did not abuse its discretion in holding that the Father was judicially estopped from claiming Lender violated the automatic stay and entering judgment in Lender's favor, the Fifth Circuit held that did not abuse its discretion in denying his motion for a new trial for the same reason.

 

Lastly, the Fifth Circuit concluded that Plaintiffs failed to demonstrate, or even argue in their briefing that the lower court abused its discretion by excluding several of their exhibits over Lender's objections that such exhibits were either not adequately disclosed, irrelevant or unauthenticated.  Moreover, the excluded evidence had no bearing on lender's judicial estoppel defense.

 

Accordingly, the trial court's judgment in favor of Lender and against the Borrower and his Father 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   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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Friday, August 3, 2018

FYI: 6th Cir Holds BK Debtor's Challenge to Mortgage Not Barred by Rooker-Feldman

The U.S. Court of Appeals for the Sixth Circuit recently held that a debtor's claim seeking to use a bankruptcy trustee's § 544(a) strong-arm power to avoid a mortgage on the ground that it was never perfected did not require appellate review of the state court foreclosure judgment, and therefore was not barred by the Rooker-Feldman doctrine.

 

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

 

In 2003, the debtor ("Debtor") and her husband took out a home-equity loan secured by a mortgage on their home in Kentucky.  The original mortgagee did not immediately record the mortgage, and while the mortgage remained unrecorded, the Debtor and her husband filed a Chapter 7 bankruptcy.

 

While the bankruptcy was pending, the mortgagee recorded the mortgage in violation of the automatic stay, although the issue was never raised.  The loan was not reaffirmed, and the bankruptcy court entered a discharge order.

 

A decade later, the new owner of the mortgage loan sought to foreclose the Debtor's home in Kentucky state court.  On August 22, 2014, the state court entered an in rem judgment of foreclosure, and ordered a foreclosure sale.  The foreclosure sale was scheduled for September 30, 2014, but one day before the sale, the Debtor filed a voluntary Chapter 13 petition.

 

The Debtor then filed an adversary complaint against the new mortgagee ("Mortgagee") seeking to avoid the mortgage through the so-called "strong arm" power conferred by 11 U.S.C. § 544(a), which permits the bankruptcy trustee to "avoid transfers of the property that would be avoidable by certain hypothetical parties." 

 

Specifically, the Debtor sought to use the strong-arm power to avoid the mortgage on the ground that it was never properly perfected because it was recorded in violation of the automatic stay, and actions taken to perfect a lien are "invalid" if they violate the automatic stay.  The parties filed cross-motions for summary judgment, which were initially denied. 

 

In a renewed motion for summary judgment, the Debtor presented an "alternate argument" that the mortgage lien never attached in the first place, and thus the Mortgagee had no valid lien to enforce.  In support, the Debtor argued that the mortgage contained conflicting language about when its lien would attach to the collateral. One section could be read to mean the mortgage lien attached when the mortgage was signed, while another section could be reach to mean that the lien would not attach until it was recorded. 

 

Based on the latter section, the Debtor argued that the lien could not attach until it was recorded, and that because it was not recorded before the Chapter 7 bankruptcy was filed, and because the recording during the bankruptcy was invalid, the mortgage remained unattached and the unsecured debt was discharged in 2004. 

 

In response, the Mortgagee argued that the lien attached when the Debtor signed the mortgage, and that the bankruptcy court lacked jurisdiction under the Rooker-Feldman doctrine because the Debtor was effectively asking the bankruptcy court to sit as an appellate court over the state court's final foreclosure judgment.

 

The bankruptcy court granted summary judgment in favor of the Debtor, concluding that the mortgage agreement unambiguously did not attach until it was recorded.  The bankruptcy court also rejected the Mortgagee's Rooker-Feldman argument based on the Sixth Circuit decision in Hamilton v. Herr (In re Hamilton), 540 F.3d 367 (6th Cir. 2008), which recognized a narrow exception to Rooker-Feldman under which a federal bankruptcy court may determine whether a state-court decision correctly interpreted a prior bankruptcy discharge order.

 

The matter was appealed to the Bankruptcy Appellate Panel ("BAP"), which reversed.  The BAP concluded that the mortgage agreement was unambiguous, but in the opposite way.  That is, the BAP held that the mortgage unambiguously provided that its lien attached when the parties signed it.  Thus, the BAP ruled that the state court's judgment was not void ab initio under In re Hamilton because it correctly construed the discharge order, and therefore the BAP held that Rooker-Feldman deprived the bankruptcy court of subject matter jurisdiction. 

 

The matter was then appealed to the Sixth Circuit.

 

On appeal, the Sixth Circuit first noted that "[t]o determine whether the Rooker-Feldman doctrine bars this action, we must distinguish between [the Debtor's] two different claims." 

 

The first claim sought "to avoid the mortgage on the ground that its lien never attached, that [the Mortgagee] therefore lacks an enforceable mortgage altogether, and that the Kentucky court wrongly enforced it."  The second claim sought "to use the trustee's § 544(a) strong-arm power to avoid the mortgage on the ground that it was never perfected, regardless of whether the Kentucky court properly acted when it did."

The Sixth Circuit concluded that the Rooker-Feldman doctrine barred the first claim but not the second.

 

In so ruling, the Court noted that the first claim was barred because where "the source of the injury is the state court decision," then Rooker-Feldman applies.  As the Debtor's requested relief sought a "declaration that the . . . mortgage is unenforceable and that the court order foreclosing said mortgage, entered by the [Kentucky state court] be declared unenforceable," the "request effectively asks the bankruptcy court to vacate the state-court judgment, and thus it clearly identifies the state-court judgment as the source of [the Debtor's] injury."  Accordingly, the Rooker-Feldman doctrine applied.

 

Moreover, the Sixth Circuit ruled that the In re Hamilton doctrine did not apply, because it was only created to reconcile Rooker-Feldman with the protection for debtors provided by section 524(a), but 524(a) only protects debtors from being personally liable for discharged debts. 

 

"When a debtor forecloses on a lien, the debtor's personal liability is not at stake, and therefore § 524(a) does not come into the picture."  Thus, Hamilton did not apply as the state court only entered an in rem judgment of foreclosure.

 

However, the Sixth Circuit held that the Debtor's second claim, which sought "to use the trustee's § 544(a) strong-arm power to avoid the mortgage on the ground that it was never perfected," was not barred by Rooker-Feldman because it did "not require federal appellate review of the state court's judgment."

 

Instead, "the bankruptcy court could hold for [the Debtor] on this claim without finding any error in the state court's judgment whatsoever," because the state-court foreclosure judgment determined only that the mortgage debt "is secured by a certain mortgage," which "constitutes a valid second mortgage upon the real estate."  It did not make any findings with regard to perfection.  

 

"No Rooker-Feldman problem is presented, then, because the bankruptcy court need not review the state court's judgment at all." 

 

However, "[n]either the bankruptcy court nor the BAP passed on that claim, and the parties have not focused on its merits in their briefing before this court."  Therefore, the matter was remanded 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   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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


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

 

Financial Services Law Updates

 

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and

 

Webinars

 

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Monday, July 30, 2018

FYI: 8th Cir Rejects Arguments That Collecting Interest Not Allowed Under State Law Did Not Violate FDCPA

The U.S. Court of Appeals for the Eighth Circuit recently held that seeking to collect compound interest in violation of state usury law results in a misrepresentation of the amount of a debt in material violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692, et seq. ("FDCPA").

 

In so ruling, the Eighth Circuit reversed and remanded the trial court's judgment against the consumer, in part, as to his claims for alleged violation of the FDCPA based on a letter that sought to collect compound interest on the subject debt, in violation of Minnesota's usury statute.

 

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

 

A consumer cardholder ("consumer") received a letter from a law firm ("law firm") regarding credit card debt in his name, and asserting that the consumer owed an "account balance of $17,230.29 consist[ing] of the principal balance of $13,205.30 and interest of $3,871.39 at the rate of 6.00% plus incurred costs of $153.60" (the "debt-collection letter").  Two additional letters were sent on behalf of the debt's current owner by another debt collection entity, but these letters were not at issue.

 

The consumer filed a putative class action lawsuit against the law firm, as well as a non-law firm debt collector and the owner of the debt, alleging violations of subsections § 1692e and § 1692f of the FDCPA for using "false, deceptive, or misleading representation or means" and "unfair or unconscionable means" in attempting to collect interest on the debt's principal balance not authorized by the underlying card agreement not permissible under Minnesota law.  See Minn. Stat. § 334.01(1) ("[i]n the computation of interest upon any . . . instrument or agreement, interest shall not be compounded" unless the parties have contracted for compound interest).

 

The law firm, debt collector, and debt owner moved to dismiss the amended complaint for failure to state a claim, which was granted on the grounds that the consumer failed to allege that any statement in the letters "was not only false but materially so."  The trial court denied the consumer's request for leave to file a motion for reconsider, holding that the letters' representations "regarding interest were either not material or did not violate the FDCPA."  This appeal followed.

 

The only issue considered on appeal was whether the law firm violated 15 U.S.C. 1692e and 1692f by attempting to collect, and representing plaintiff owed, compound interest on the debt in violation of Minn. Stat. 334.01.

 

Though the parties initially disputed in the lower court whether the "unsophisticated consumer" or "competent lawyer" standard should apply to the collection letter at issue, due to the fact that the consumer is a licensed attorney, the law firm chose not to contest the trial court's holding that the unsophisticated consumer standard applies, and thus the allegations were evaluated under this standard on appeal. 

 

The Eighth Circuit first examined the consumer's allegations that he did not agree to pay compound interest on the debt, and that the debt's principal balance already contained contractual interest.  

 

The trial court agreed that an unpaid credit-card debt sold to another party would include "the interest and fees [the credit-card company] originally charged." Because neither party contested this ruling on appeal, the Eighth Circuit concluded that the consumer plausibly alleged that the principal balance mentioned in the debt-collection letter included contractual interest.  See Haney v. Portfolio Recovery Assocs., L.L.C., 837 F.3d 918, 921, 924 (8th Cir. 2016) (per curiam).

 

In reviewing the debt-collection letter's assertion that the consumer owed "interest of $3,871.39 at the rate of 6.00% on "the principal balance of $13,205.30," the Eighth Circuit calculated this amount to be consistent with amounts that would have accrued on the principal balance from the date the credit card company sold the debt (April 14, 2011, according to the debt-collection letter) to the date of the debt collection letter (February 26, 2016). 

 

The Court reasoned that if the principal balance already included contractual interest, that the debt collection letter sought to collect interest on contractual interest.  Thus, the Eighth Circuit held, the consumer's amended complaint plausibly alleged that the law firm attempted to collect, and told him he owed, an amount and type of interest not permitted under state law.  See Minn. Stat. § 334.01(1);  Lampert Lumber Co. v. Ram Constr., 413 N.W.2d 878, 883 (Minn. Ct. App. 1987) ("[i]n the computation of interest upon any . . . instrument or agreement, interest shall not be compounded" unless there is a "contract to pay [such] interest.").

 

In Haney v. Portfolio Recovery Assocs., LLC, the Eighth Circuit previously held that under the unsophisticated-consumer standard, a debtor's allegations that a debt-collection letter sought to collect "an interest-on-interest amount not allowed as a matter of state law," stated valid claims under sections 1692e and 1692f of the FDCPA, but did not address whether attempts to collect a debt amount that the debtor does not legally constituted material violations of those subsections.  Haney  at 931-932. 

 

The Eighth Circuit since established that a materiality standard applies to 1692e (Hill v. Accounts Receivable Servs., LLC, 888 F.3d 343, 346 (8th Cir. 2018)), but had not yet clarified whether the standard applies to 1692f.  However, the Court did not address the issue here, because "an attempt to collect a debt not owed is a material violation of 1692f(1)."  Demarais v. Gurstel Cargo, P.A., 869 F.3d 685, 699 (8th Cir. 2017).

 

Here, the Eighth Circuit held that a false representation of the amount of debt that overstates what is owed under state law materially violates section 1692e(2)(A) as well. 

 

The Court found that the representation not only violates the plain language of the statute prohibiting the "false representation" of the "amount" of "any debt," but also because an overstatement of the debt's amount necessarily misleads the debtor about the amount he owes under his agreement with the creditor. See Hill, 888 F.3d at 345–46; cf. Demarais, 869 F.3d at 699. 

 

Although the Eighth Circuit did not outright reject the law firm's argument that the debt collection letter did not violate the FDCPA because the amount of interest stated in its letter was contractually authorized, at the pleading stage, it must accept the consumer's allegations that he did not agree to be charged compound interest and so may not be charged it.  See Minn. Stat. § 334.01(1). 

 

Moreover, the Court declined to consider the law firm's argument that a debt collector may try to collect compound interest (which state law does not allow) without materially violating the FDCPA so long as the total amount of interest sought does not exceed the maximum amount permitted under the debtor's contract, as neither of the lower court's orders support its contention that requesting less interest than the amount owed does not materially violate the FDCPA.

 

Lastly, the Eighth Circuit rejected the law firm's claims at oral argument that the trial court noted that the debt collection letter was not, in fact, a collection letter, as the trial court did not make that observation, and could not do so at the pleading stage, as doing so would conflict not only with the allegations of the amended complaint, but the plain language on the face of the debt collection letter that it "is from a debt collector and is an attempt to collect a debt."

 

Accordingly, the Eighth Circuit concluded that the trial court erred in holding that the debt-collection letter's assertion that the consumer owed, and attempts to collect, compound interest in violation of Minn. Stat. § 334.01 did not state a plausible claim under §§ 1692e and 1692f.  The Appellate Court therefore reversed the trial court's judgment only as to these claims against the law firm, and remanded 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

 

 

 

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Friday, July 27, 2018

FYI: 8th Cir Holds Civil Procedure Rules Could Not Extend Minnesota Foreclosure Deadlines

Answering a certified question from the U.S. Court of Appeals for the Eighth Circuit, the Minnesota Supreme Court recently held that a rule of civil procedure cannot be used to modify deadlines in the state's foreclosure statute.  In so ruling, the Minnesota Supreme Court concluded that to allow a rule of procedure to extend a deadline contained in the Minnesota foreclosure statute would alter the substantive rights of the litigants. 

 

At issue in the case was the borrowers' argument that the loan servicer violated the statutory requirements for handling foreclosures under Minn. Stat. § 582.043.  The statute at issue required the borrowers to file a lis pendens within the statutory redemption period, but the borrowers failed to do so. 

 

The loan servicer challenged the claim based on the borrowers' failure to timely file the lis pendens, and the borrowers asserted Minnesota Rule of Civil Procedure 6.02 allowed the court to extend the deadline for filing the lis pendens. 

 

The trial court granted the servicer's motion for summary judgment, and the Eighth Circuit certified the following question to the Minnesota Supreme Court:  "May the lis pendens deadline contained in Minn. Stat. § 582.043, subpart 7(b) be extended upon a showing of excusable neglect pursuant to Minn. R. Civ. P. 6.02?" 

 

The Minnesota Supreme Court answered the question in the negative, and the Eighth Circuit accepted the answer and affirmed the district court's conclusion. 

 

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

 

The borrowers' home was sold to the mortgagee at a sheriff's sale in November of 2014.  The period in which borrowers could pay off their debt and redeem their home expired on March 1, 2015.  On March 2, 2015, borrowers sued the loan servicer for breach of contract, unjust enrichment, and injunctive relief.  On May 6, 2015, borrowers filed a lis pendens on the property.

 

The loan servicer removed the matter to federal court, where the borrowers amended their complaint to add a claim that the servicer violated Minn. Stat. § 582.043.  The borrowers also added the mortgagee as a party.  In federal court, borrowers pursued only their claim under § 582.043 and abandoned the others.

 

As you may recall, Minn. Stat. § 582.043, subpart 7(a), gives mortgagors a cause of action to set aside a foreclosure sale if the loan servicer violated the section's substantive provisions. Section 582.043, subpart 7(b), however, requires a mortgagor bringing an action under subpart 7(a) to file a lis pendens within the mortgagor's redemption period.  "The failure to record the lis pendens creates a conclusive presumption that the servicer has complied with this section."  See Minn. Stat. § 582.043, subpart 7(b).

 

Here, borrowers filed the lis pendens two months after their redemption period expired.  Therefore, the normal operation of § 582.043, subpart 7(b), would create the conclusive presumption that the servicer complied with the statute and borrowers did not have any relief.

 

Minn. R. Civ. P. 6.02, however, authorizes courts in their discretion to extend a deadline in certain circumstances. As relevant here, Rule 6.02 provides: "When by statute . . . an act is required or allowed to be done at or within a specified time, the court for cause shown may . . . upon motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect . . . ."

 

The borrowers argued that if Rule 6.02 was used to extend the deadline in § 582.043, subpart 7(b), then the failure to file the lis pendens within the redemption period would not automatically trigger the provision's conclusive presumption, and the borrowers would still have a viable claim for relief.

 

The loan servicer and mortgagee moved for summary judgment on the ground that borrowers failed to timely file their lis pendens.  The borrowers admitted they were late in filing the lis pendens, but urged the trial court to extend the deadline for "excusable neglect" under Rule 6.02.  The trial court concluded that Rule 6.02 could not be used to extend the lis pendens deadline, and granted summary judgment in favor of the servicer and the mortgagee.

 

The borrowers appealed to the U.S. Court of Appeals for the Eighth Circuit.  Because the issue on appeal addressed the application of Rule 6.02, the Eighth Circuit certified the following question to the Minnesota Supreme Court: "May the lis pendens deadline contained in Minn. Stat. Sec. 582.043, subpart 7(b) be extended upon a showing of excusable neglect pursuant to Minn. R. Civ. P. 6.02?"

 

The Minnesota Supreme Court accepted the certified question and issued an opinion answering the question in the negative.

 

The Supreme Court explained that Minnesota 's Rules of Civil Procedure cannot modify substantive law, and determined that "extending the deadline in Section 582.043, subpart 7(b), would alter the substantive rights of the litigants."  Thus, the Minnesota Supreme Court concluded that "Rule 6.02 may not be used to extend this deadline."

 

The Eighth Circuit accepted the Minnesota Supreme Court's opinion.  Because Rule 6.02 could not be used to extend the deadline to file the lis pendens, and because it was undisputed that the borrowers had not timely filed their lis pendens, the Eighth Circuit held that the trial court correctly concluded borrowers were not entitled to relief under Section 582.043.  Accordingly, the Eighth 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   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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


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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments