Friday, February 15, 2019

FYI: 8th Cir Holds State Court Judgment Did Not Preclude BK Court from Enforcing Its Own Orders

The U.S. Court of Appeals for the Eight Circuit recently affirmed a trial court judgment holding a bank and its principal in contempt and sanctioning them for violating a bankruptcy discharge injunction, based on the findings in a parallel state court proceeding.

 

In so ruling, the Eight Circuit held that the state court judgment did not preclude the bankruptcy court's ability to enforce its own orders.

 

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

 

A bank issued a loan to husband and wife borrowers for their business. After the business failed, a principal at the bank counseled them to obtain bankruptcy protection.  The principal also recommended the borrowers retain a particular bankruptcy attorney to assist them.

 

The borrowers filed bankruptcy and eventually received a discharge.  After the discharge, the bank still held security interests on the borrowers' property and on the property of the husband borrower's parents, but the bank would have realized a substantial loss if it foreclosed on its security.  Therefore, instead of foreclosing, the bank sought and received commitments from the borrowers and the parents to pay new notes that were "substantially in excess of the security interests that had survived bankruptcy."

 

The borrowers and the parents defaulted on their post-bankruptcy obligation. Faced with collection efforts by the bank, the borrowers initiated a state court case in South Dakota to determine the amount they owed.  They alleged their post-bankruptcy obligations were not enforceable because they were based on an improper attempt to reaffirm discharged debt.  The bank and the principal asserted various counterclaims in response alleging that they could enforce the post-bankruptcy commitments.

 

The borrowers then filed an adversary action in bankruptcy court against the bank and the principal alleging a violation of the discharge injunction and seeking contempt sanctions.  While the adversary action was pending, the state court initially entered summary judgment in favor of the bank and the principal on several counterclaims. 

 

In turn, the bankruptcy court, found "that the state court possessed jurisdiction and authority to make discharge determinations."  The bankruptcy court therefore declined to rule on a motion to dismiss and indicated that the borrowers could return to the bankruptcy court if the state court ultimately determined that the bank or the principal had wrongly "attempted to collect discharged debt."  Although the bankruptcy court expressed doubt that it would ever re-open the adversary proceeding and in doing so seemed to grant the motion to dismiss, it expressly reserved its right to preside over proceedings in the future.

 

The state court later granted summary judgment in favor of the borrowers on the remaining counterclaims and reversed its prior summary judgment order on several counterclaims against the borrowers.  After a bench trial the court determined that the bank and the principal coerced the borrowers into reaffirming their debt and wrongly attempted to collect on discharged debt.  Separately, a jury found the bank and the principal obtained some of the post-discharge commitments through fraud.  The South Dakota Supreme Court eventually affirmed the judgment.

 

Once the state court action concluded, the borrowers returned to bankruptcy court seeking attorneys' fees and a contempt sanction for violation of the discharge injunction. The bankruptcy court found that the bank and the principal violated the discharge injunction, held them in contempt, and found them liable for attorneys' fees. 

 

The bank and the principal appealed to the Bankruptcy Appellate Panel and then to the trial court.  Both affirmed and this appeal followed.

 

The bank and the principal argued that the bankruptcy court's initial abstention and the subsequent state court judgment precluded the bankruptcy court from later issuing its sanctions order.  The Eight Circuit applied state law to examine the preclusive effect of the bankruptcy court's abstention ruling and the state court judgment.  Like the Eight Circuit, South Dakota uses a practical analysis that examines "the parties' roles and actions in the underlying proceeding."

 

The Eight Circuit noted that the bankruptcy court did not permanently abstain from presiding over the adversary proceeding.  Further, the Eighth Circuit also held that the bankruptcy court correctly determined that "the state court possessed the authority to make discharge determinations and to assess the true scope of what Appellants were actually seeking through their counterclaims." 

 

Significantly, the borrowers always expressed their intention to return to the bankruptcy court when the state action concluded.  The bank and the principal never objected to this plan.  Faced with this silence in response to the borrowers' plan, the Eight Circuit declined to thwart the borrowers "clearly expressed intentions." 

 

The Eight Circuit also rejected the argument that Apex Oil Company, Inc. v. Sparks, 406 F. 3d 538 (8th Cir. 2005) should have prevented the bankruptcy court from re-opening the adversary proceeding. Apex only held that "a bankruptcy court did not abuse its discretion in refusing to reopen a case."  It did not strip a bankruptcy court's "jurisdiction to enforce its own orders."

 

Thus, because the bankruptcy court invited the borrowers to return if the state court ruled in their favor and later accepted the case again, the bankruptcy court did not abuse its discretion when it re-opened the adversary proceeding.

 

The Eight Circuit also rejected the argument that the law of the case prevented the bankruptcy court from later entering its sanction order.  Because the bankruptcy court initially abstained from hearing the dispute, its comments on the merits at that time had no effect.  Thus, the Eight Circuit held that the bankruptcy court's initial skepticism and election to allow the state court to examine the merits did not "establish the law of the case or preclude a later ruling on the merits."

 

Finally, the Eight Circuit also rejected the argument that the bank and the principal acted in good faith because when they alleged their state court counterclaims "the law was unclear regarding the permissibility of obtaining a new commitment from a bankrupt debtor after discharge based upon a secured lender's forbearance in foreclosing on a security interest."  The Eight Circuit found no authority allowing a lienholder to "leverage a security interest to obtain a larger repayment commitment" on a "discharged personal debt."

 

Although the bank and the principal argued that they only sought to collected non-discharged debt, the state court found that they "clearly knew no unsecured debt had survived bankruptcy."  As such, given that the principal steered the borrowers into bankruptcy in the first place and then later sought to collect on the discharged debt, the bank and the principal "demonstrated a lack of good faith."

 

Thus, the Eight Circuit affirmed the judgment of the trial court affirming the judgment of the bankruptcy 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 

 

Tuesday, February 12, 2019

FYI: Cal App Ct (2d Dist) Holds Former Servicer and Trustee Entitled to Recover Attorneys' Fees

The Court of Appeals for the Second District of California held that California's fee shifting statue in California Civil Code § 1717 permitted a former loan servicer and foreclosure trustee to recover their attorneys' fees authorized by the contract, even though the deed of trust was assigned to another financial institution.

 

However, the Court vacated the trial court's award of attorneys' fees against the borrower because the deed of trust only permitted attorneys' fees to be added to the loan balance.

 

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

 

The borrower defaulted on the mortgage and sued the loan servicer and foreclosure trustee (collectively, "defendants") to stop the foreclosure.  Her complaint asserted four causes of action: (1) violation of California Civil Code § 2923.5, (2) quiet title, (3) unlawful debt collection practices in violation of the California Rosenthal Act, and (4) declaratory and injunctive relief. 

 

The trial court sustained the defendants' demurrers without leave to amend.  The appellate court affirmed the trial court's ruling on appeal.  The defendants moved for attorneys' fees pursuant to the deed of trust and the Rosenthal Act.

 

In relevant part, section 9 of the deed of trust authorizes the lender pay "reasonable attorneys' fees to protect its interest in the Property and/or rights in the Security Instrument."  Section 9 further states that "[a]ny amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument."

 

Section 14 of the deed of trust states in pertinent part:  "Lender may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument, including, but not limited to, attorney fees."

 

The defendants argued that they were entitled to attorneys' fees pursuant to sections 9 and 14 -- even though the deed of trust had been assigned to another financial institution -- because California Civil Code § 1717 authorizes courts to enforce contractual attorney fee clauses.

 

The trial court granted the motion for attorneys' fees and ordered the borrower to pay the defendants $46,827.40.  The trial court did not discuss the defendants' request for fees pursuant to the Rosenthal Act.

 

This appeal followed.

 

The first issue on appeal was whether the defendants were entitled to contractual attorneys' fees under the deed of trust even though they were neither the lender nor signatories to the promissory note or deed of trust.

 

As you may recall, California Civil Code § 1717(a) provides that "[i]n any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs." 

 

Section 1717 has been "interpreted to further provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorneys' fees should he prevail in enforcing the contractual obligation against the defendant."  Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 128.

 

Although the defendants were not the original lender identified in the note and deed of trust, the Court noted that the defendants were agents of the lender who had authority to enforce the lender's rights under the contracts.  The borrower sued the defendants for taking actions authorized by the deed of trust during their tenure as loan servicer and trustee.  Thus, in the Court's view the defendants stood in the shoes of a party to the contract and could recover attorney fees as provided by the contract pursuant to section 1717.

 

The second issue on appeal was whether the deed of trust authorized a separate award to pay attorneys' fees, as opposed to adding the fees to the loan balance.

 

The Court observed that section 9 of the deed of trust provides that any amounts disbursed by the lender "shall become additional debt of Borrower secured by this Security Instrument."  The Court held that the text of section 9 did not authorize a separate award of attorneys' fees.

 

The Court also found that the word "charge" in section 14 of the deed of trust authorizes the lender to charge the borrowers attorneys' fees it may have incurred and add those fees to the outstanding balance due under the promissory note.  In the Court's own words, "[t]here is no language in section 14 that indicates the trust deed permits a freestanding contractual attorney fees award."

 

The defendants argued that because they were no longer the active servicer or trustee of the deed of trust, their attorneys' fees were not amounts disbursed by the lender under section 9 and adding their attorneys' fees to the loan balance would be unjustified.

 

The Court found the argument unpersuasive because the defendants' right to seek attorneys' fees in the first place, despite being non-parties to the contracts, depended on their assertion that they acted as the lender's agents and stood in the lender's shoes.  As the Court explained, the defendants "must take the bitter with the sweet." 

 

Thus, the Court concluded that the deed of trust permitted the defendants to recover their attorneys' fees but did not authorize a separate fee award against the borrower.

 

The loan servicer also argued that it was entitled to attorneys' fees under the Rosenthal Act, as an independent basis for a fee award against the borrower.

 

As you may recall, the Rosenthal Act includes a provision authorizing a court to award reasonable attorneys§ fees to a "prevailing creditor upon a finding by the court that the debtor's prosecution or defense of the action was not in good faith."  Civil Code § 1788.30(c).

 

The Court determined that the borrower advanced a colorable argument in her complaint, and therefore the Rosenthal Act did not authorize an award of attorneys' fees to the loan servicer under these circumstances.

 

Accordingly, the Court reversed the order compelling the borrower to pay $46,827.40 in attorneys' fees and remanded for further proceedings consistent with its opinion.  

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

Sunday, February 10, 2019

FYI: Fla Circuit Court Holds Factoring Agreement Not a Usurious Loan Under New York Law

The Circuit Court of the First Judicial Circuit in and for Santa Rosa County, Florida recently rejected a borrower's argument that a purchase and sale agreement for future receivables constituted a "loan" that was unenforceable under New York usury law, because payment to the creditor was not absolutely guaranteed, but instead contingent, and thus, not a loan subject to the law of usury.

 

A copy of the order is attached.

 

A business funding entity ("Creditor") entered into a Purchase and Sale Agreement ("Agreement") with a pharmaceutical clinic ("Borrower"), which agreed to sell its future receivables with a face value of $586,500.00 to Lender for an upfront discounted price of $425,000.00. 

 

The Agreement was backed by a security agreement and guaranty executed by the Borrower's principals. 

 

The Agreement was for an indefinite term, contained a Reconciliation Clause (permitting the Pharmacy to request that Creditor reconcile its payments with actual receipts), but did not guarantee absolute repayment under all circumstances, providing that bankruptcy or otherwise ceasing operations would not constitute a breach or default under the Agreement. 

 

However, the parties agreed that a transfer or sale of all or substantially all of the Borrower's assets would constitute a default, and entitle the Creditor to enforcement the personal guaranty and security agreements for the full purchase amount of $568,500.

 

The Borrower defaulted by transferring its assets in violation of the Agreement.  Accordingly, the Creditor filed suit to collect amounts recoverable under the Agreement.  The Creditor moved for summary judgment, arguing that no genuine issues of material fact existed, as the Borrower had defaulted under the Agreement by improperly transferring its assets. 

 

Although the Borrower did not dispute that it defaulted under the Agreement, it argued that the Agreement was unenforceable under New York law, because if the agreement were deemed a loan, the repayment schedule amounted to a as usurious interest rate of approximately 65%.

 

Under New York law, it is presumed that a transaction is not usurious.  The defense only applies if the agreement in question is a loan or forbearance of money.  NY Capital Asset Corp. v. F & B Fuel Oil Co., Inc., 55 Mis. 3d 1229(A) at *5 (N.Y. Sup. Ct. Mar. 8, 2018). 

 

The Court noted that, in determining whether a transaction is a loan, New York courts focus upon whether the plaintiff is entitled to absolute repayment under all circumstances or whether payment rests upon a contingency.  Id. If repayment is absolute, the agreement is a loan, and the defense of usury may be applicable; however, if payment rests upon a contingency, the agreement is not considered a loan and is otherwise enforceable despite providing a return above the legal rate of interest.  Id.; Colonial Funding Network, Inc. v. Epazz, Inc., 252 F. Supp. 3d 274, 281 (S.D.N.Y. 2017)(internal citations omitted).

 

Here, the Court noted that the Creditor was not absolutely entitled to repayment under the Agreement, due to the aforementioned terms that: (i) the Borrower would not owe anything to Creditor and would not be in breach or default under this Agreement if it filed bankruptcy or otherwise ceased operations in the ordinary course of business; (ii) the Borrower agreed to sell future receipts "without recourse [except] upon an Event of Default," and; (iii) the Agreement contains a Reconciliation Clause, is for an indefinite term, and does not consider bankruptcy a default. 

 

Accordingly, the Court held, the Agreement was not a loan under New York law and, as such, was not subject to the law of usury.

 

The Court further rejected the Borrower's argument that the Agreement was a loan subject to the defense of usury due to the security and guaranty agreements ensured Creditor's entitlement to because the Creditor's right to absolute repayment was still contingent upon an Event of Default as defined in Section 3.1 of the Agreement such as the transfer of all or substantially all of the assets of the business, as took place here. 

 

Significantly, a default under the Agreement did not include the Borrower 's failure to remit payments because it "ceases operations in the ordinary course of business" under which Creditor would be entitled to nothing. Thus, the security and guaranty agreements did not guarantee the Creditor absolute repayment and do not convert the Agreement into a loan.

 

Accordingly, summary judgment was granted in favor of the Creditor, and against the Borrower, and the Court also held that Creditor was entitled to a sum of $122,423.00 plus fees and costs due under the Agreement.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

Thursday, February 7, 2019

FYI: CFPB Enters into $3.2MM UDAAP Consent Order With Online Lender

An online lender that extends payday and unsecured installment loans reached a settlement with the Consumer Financial Protection Bureau (CFPB) regarding "unfair, deceptive, or abusive acts or practices" allegations that the lender unlawfully debited consumers' bank accounts without authorization and failed to honor loan extensions to its customers.

 

Under the terms of the settlement and consent order, the lender is barred from making or initiating electronic fund transfers without valid authorization, and must pay a $3.2 million civil money penalty.

 

A copy of the consent order is available at:  Link to Consent Order

 

The respondent, an online lender ("Lender"), extends and services unsecured payday and installment loans and lines of credit to individual customers in the U.S., U.K. and Brazil. 

 

Lender purchased consumer loan applications with the consumer's bank account information from lead generators; in some instances from consumers who already had loans with Lender, but with different bank account information.  Because Lender maintained a policy to extend only one loan at a time to any consumer, if it found that the consumer already had an outstanding loan with Lender, it would deny the application.

 

Beginning in 2010, Lender allegedly used consumer bank account information obtained from loan applications purchased from lead generators to overwrite and replace the banking information it had on file with its existing customers.  Supposedly without authorization, Lender was alleged to have electronically debited payments on 5,520 consumers' outstanding loans from the new bank accounts.  Although it stopped overwriting consumers' bank account information from its lead-generator applications in June 2014, it allegedly continued to debit or attempt to debit 265 customers' accounts that had already been overwritten at least 6,425 through December 2018—in most instances supposedly without its customers' authorization.

 

As a result of the debits or attempted debits, Lender allegedly extracted millions of dollars in unauthorized debits from customers' accounts supposedly without their consent, resulting in unexpectedly low or negative balances and impositions of insufficient funds fees and other bank fees to its customers.

 

During the same relevant period, Lender also allegedly offered certain consumers who had previously repaid two or more loans, and had a debit card on file with Lender, a same-day expedited funding ("Flash Cash").  In instances where funding to the debit card on file failed, the Flash Cash funding was allegedly denied, but the loans were funded to the consumer's bank account the following day. 

 

Between May 2013 and May 2014, Lender supposedly created two records associated with these customers; one incorrectly reflecting the Flash Cash as returned with a $0 balance, and the second accurately reflecting the loan funded the following day.  When some of these consumers later requested and received loan extensions, Lender allegedly incorrectly applied the extensions to the loan files with the $0 balance, rather than the funded loan.  This allegedly resulted in 308 consumers not receiving the approved extensions, and having their accounts debited for full loan payments instead of the extension fee, resulting in unexpectedly low or negative balances and impositions of insufficient funds fees and other bank fees to its customers.

 

After consumers notified Lender of this issue in September 2013, Lender identified the source as a coding error, and implemented a coding fix in January 2014. However, when the fix failed ten days later, Lender manually disabled it, and did re-enable the fix until May 2014.  Affected customers allegedly were not informed that Lender had deducted the full loan payment amounts from their bank accounts, instead of the promised extension fee, until almost a full year later, in April 2015.

 

As you may recall, sections 1031 of the Consumer Financial Protection Act of 2010 provides the CFPB with authority to declare an act or practice to be unlawful if it "has a  has a reasonable basis to conclude that — (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition."  12 U.S.C. §§ 5531(c)(1).

 

Moreover, section 1036 prohibits any "covered person" or "service provider" "to engage in any unfair, deceptive, or abusive act or practice."  12 U.S.C. § 5536(a)(1)(B).

 

Lender (and its subsidiary entities) is subject to the CFPB's authority because it (i) extends credit and services loans offered or provided for use by consumers primarily for personal, family, or household purposes. (12 U.S.C. § 5481(15)(A)(i)) and; (ii) collects debt related to the loans it extends. 12 U.S.C. § 5481(15)(A)(x).

 

First, as to the Lender's practice of unauthorized debiting its customers' accounts, the CFPB asserted that the injury to consumers from the unauthorized debiting was not outweighed by any countervailing benefit to consumers or to competition, and the consumers supposedly could not have reasonably avoided the injury.  Moreover, the cost to Lender from refraining from the practice allegedly would not have been significant.  Accordingly, the CFPB concluded that Lender's practice of unauthorized debiting constituted an unfair act and practice in violation of section 1031(c) and 1036(a) of the CFPA, 12 U.S.C. §§ 5531(c), 5536(a)(1)(B).

 

As to Lender's failure to honor loan extensions to its consumers who applied for Flash Cash funding, the CFPB similarly concluded that injury to consumers from Lender's failure to honor loan extensions was not outweighed by any countervailing benefit to consumers or to competition.  Moreover, the CFPB again asserted that the cost of correcting Lender's software errors would not have been significant and the erroneous practice did not confer any benefit to consumers or competition. 

 

Accordingly, Lender's failure to honor loan extensions also was deemed an unfair act and practice in violation of section 1031(c) and 1036(a) of the CFPA, 12 U.S.C. §§ 5531(c), 5536(a)(1)(B).

 

Pursuant to the CFPB's Consent Order, Lender is permanently restrained and enjoined from:

debiting or attempting to debit any consumer's bank account without having obtained the consumer's express informed consent;

making or initiating electronic fund transfers from a consumer's bank account on a recurring basis without obtaining a valid authorization signed or similarly authenticated from the consumer for preauthorized electronic fund transfers from that particular bank account and providing the consumer a copy of the authorization signed or similarly authenticated by the consumer for preauthorized electronic fund transfers from the consumer's account;

failing to honor loan extensions granted to consumers, and;

debiting the full payment instead of a loan extension fee to consumers granted a loan extension.

 

As a result of the above-described violations, Lender was ordered to pay the CFPB a $3.2 million fine.  

 

Under the Consent Order, additional requirements concerning reporting, distribution of the consent order, recordkeeping, and compliance monitoring were imposed against Lender.  Although the provisions of the Consent Order do not bar, estop or prevent the CFPB or any other government agency from taking action against Lender, Lender was forever released and discharged from all potential liability for law violations concerning its unauthorized debiting and failure to honor loan extensions.

 

 

 

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

 

 

 

Tuesday, February 5, 2019

FYI: Fla Sup Ct Rules Borrower Entitled to Attorney's Fees After Voluntary Dismissal of Foreclosure Appeal

Reversing a ruling by the Fourth District Court of Appeal, the Supreme Court of Florida recently held that a mortgagee's voluntary dismissal of an appeal made the borrower the prevailing party entitled to recover appellate attorney's fees because the mortgagee maintained its right to enforce the mortgage contract that contained a prevailing party attorney's fees provision until it dismissed the appeal.

 

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

 

A mortgagee filed an in rem foreclosure action on a reverse mortgage on real property.  The borrower moved to dismiss the complaint for a variety of reasons, including that the holder lacked standing.  The trial court ultimately dismissed the complaint with prejudice, but the dismissal order did not state the reason for dismissal.

 

The mortgagee appealed to the Fourth District Court of Appeal.  After the parties submitted briefs, the mortgagee voluntarily dismissed the appeal before the Fourth District issued its ruling. 

 

The borrower then moved for appellate attorney's fees pursuant to section 57.105(7), Florida Statutes.  The Fourth District denied the borrower's motion for attorney's fees holding that the borrower could not recover fees after seeking to dismiss the complaint for lack of standing.

 

The Florida Supreme Court accepted the borrower's request for review.

 

Initially, the Florida Supreme Court noted generally that, "when a plaintiff voluntarily dismisses an action, the defendant is the prevailing party."  As such, the Court held, the Fourth District wrongly denied the borrower's appellate attorney's fees based on the mortgagee's voluntary dismissal of the appeal. 

 

The Florida Supreme Court also took issue with the Fourth District's conclusion that the trial court dismissed the complaint because the borrower argued that the mortgagee lacked standing to foreclose because it misstated the trial court's ruling and failed to address that the borrower's motion for appellate attorney's fees arose from the mortgagee's voluntary dismissal.

 

Specifically, the Florida Supreme Court found that the "trial court granted the dismissal but did not provide any reasoning for its decision."  In addition, during the appeal the borrower advanced three arguments to affirm the dismissal order, only one of which was that the holder lacked standing to foreclose.

 

The Florida Supreme Court also distinguished the Fourth District's reliance on Bank of New York Mellon Trust Co. v. Fitzgerald, 215 So. 3d 116 (Fla. 3d DCA 2017), which held that when no contract existed between a borrower and a lender, the borrower "could not invoke the reciprocity provisions of section 57.105(7)."  Here, the Court noted, unlike Fitzgerald, the trial court never made a finding of fact that a mortgage contract never existed.

 

Additionally, although the law in Florida "is clear that a party is precluded from claiming attorney's fees under a contract that has been found to have never existed," the Court noted it is also true "that when parties enter into a contract and litigation later ensues over that contract, attorney's fees may be recovered under a prevailing-party attorney's fee provision contained therein even though the contract is rescinded or held to be unenforceable."

 

Thus, the Florida Supreme Court reversed the Fourth District's ruling, and held that the borrower was the prevailing party entitled to recover appellate attorney's fees.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

Sunday, February 3, 2019

FYI: 8th Cir Vacates FCRA Class Settlement on Spokeo Grounds

The U.S. Court of Appeals for the Eighth Circuit recently vacated a trial court's order approving a class action settlement agreement because the trial court did not first determine whether the FCRA class representative had standing.

 

In so ruling, the Eighth Circuit held that a court's approval of a settlement was a judgment, which is invalid unless the court has Article III standing and subject matter jurisdiction.

 

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

 

The plaintiff filed a putative class action in Missouri state court alleging the defendant violated the federal Fair Credit Reporting Act ("FCRA"). Defendant removed the case to federal court.

 

Shortly thereafter, the parties reached a settlement agreement during mediation. Days later, the Supreme Court rendered its decision in Spokeo v. Robins, "holding that the Ninth Circuit failed to properly analyze Article III standing in assessing a claim brought under the FCRA."

 

The defendant then moved to dismiss for lack of standing, which the trial court denied, reasoning that "[plaintiff's] standing to bring the FCRA claims underlying this settlement is irrelevant to whether she has standing to enforce the parties' settlement agreement."

 

The trial court then directed the parties to "submit their settlement for approval under Fed. R. Civ. P. 23(e)" and approved the settlement. Defendant appealed.

 

On appeal, the Eighth Circuit held that "the trial court erred by not assessing standing before enforcing the settlement agreement."

 

The Court reasoned that "Article III standing must be decided first by the court and presents a question of justiciability; if it is lacking, a federal court has no subject-matter jurisdiction over the claim." In addition, the trial court has a continuing obligation to make sure that standing exists throughout the case, not just when the complaint is filed, and this applies to class actions because an order approving a settlement agreement is a judgment, which is invalid unless the court has subject matter jurisdiction to enter it.

 

The Eighth Circuit rejected the class representative's argument that the trial court did not need to address standing after Spokeo because the defendant was bound by settlement agreement even if the law changed, reasoning that Spokeo "was not a change in the substantive law bearing on [plaintiff's] claim that would have 'altered the settlement calculus.'"

 

In other words, the class representative argued that only changes in the law that directly affect Article III standing or subject matter jurisdiction matter would invalidate a settlement. However, the Eighth Circuit rejected this argument, holding that "Spokeo did not change the law of standing and thus was not a post-agreement change in the law. It merely reiterated that an Article III injury must be both particular and concrete."

 

The Eighth Circuit concluded that because there was no finding in the record reflecting whether the plaintiff had standing, the trial court's approval of the settlement would be vacated and the case remanded for a determination of whether plaintiff had standing to sue, expressing no opinion "on whether the Seventh Circuit's opinion on FCRA standing or one of the competing approaches in other circuits is best applied to the facts of this case." 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

Thursday, January 31, 2019

FYI: 2nd Cir Rules in Favor of FTC in FDCPA "Unlawful Calls" Enforcement Action

The U.S. Court of Appeals for the Second Circuit recently affirmed entry of summary judgment in favor of the Federal Trade Commission ("FTC") and against thirteen corporations and their two co-owners for violations of the Federal Trade Commission Act, 15 U.S.C. § 45(a) ("FTCA") and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA") for allegedly placing unlawful and threatening collection calls to consumers seeking to collect payday loan debt.

 

In so doing, the Second Circuit concluded that the trial court did not err in holding the offending corporations' owners jointly and severally liable for the disgorgement assessed against all defendants, which was affirmed as an appropriate amount because it was a reasonable approximation of the total amounts received by the defendant companies from consumers as a result of their unlawful acts.

 

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

 

Two individuals ("Owners") founded and co-owned corporations ("Corporations"), which were part of a single debt collection enterprise, consisting largely of collecting payday loan debts, brought from consumer-debt creditors and compiled into portfolios.

 

Their employees routinely contacted debtors by telephone, identifying themselves as "officers," "investigators," "fraud unit" and the like and accused the consumers of committing crimes by failing to pay and threatening legal action.  Some such calls were placed to friends, family members, employers or co-workers of the debtors.

 

Upon receipt of consumer complaints, the Office of the New York State Attorney General investigated the Corporations and their Owners.  Without admitting fault, the Owners, on behalf of themselves and the Corporations executed an Assurance of Discontinuance ("AOD") which agreed they were subject to specified state and federal laws, including the FDCPA, agreed to dissolve some of the Corporations, and hired a compliance officer to implement new procedures.  But shortly thereafter, the Owners incorporated new Corporations, some in other states, and continued to engage in the disavowed practices.

 

The FTC brought this action in federal court in New York alleging that the debt collection practices of the Owners and Corporations, individually, and as officers for the Corporations, had violated section 5(a) of the FTCA and the federal FDCPA. 

 

Specifically, the FTC accused the Corporations and their Owners of continuing to operate companies in which collectors continued to mask their identities, falsely accuse consumers of various crimes, and refuse to reveal to debtors the circumstances and nature of alleged debts after signing the AOD, and further sought, and received an ex parte temporary restraining order against them, freezing their assets and appointing a receiver to oversee the Corporations.

 

The FTC moved for summary judgment, requesting $10,852,396 in monetary relief and asserting that the Corporations and their Owners should be held jointly and severally liable.  One of the Owners ("Owner 1") did not dispute the Corporations' wrongdoings, but argued that he could not be held individually liable for their actions, contending that he lacked control over and knowledge of their wrongdoings.

 

The magistrate judge's report and recommendations, concluded that the FTC had proved that Owner 1 both had "the authority to control the [Corporations] and knew of their wrongdoing after executing the AOD, and that its request for monetary relief "reasonably approximate[d] the [Corporations'] unjust gains."  The trial court adopted the magistrate's report and recommendation in its entirety and entered judgment in the government's favor.  Owner 1 appealed. 

 

On appeal, Owner 1 raised three arguments: (i) that he was not given time to conduct discovery; (ii) that there were material facts at issue as to whether he could be held individually liable for the actions of the Corporate Defendants based upon his deposition testimony, and; (iii) that the disgorgement amount adopted by the trial court was grossly excessive.  The second owner submitted no brief prior to the deadline submission set by the court, and the court dismissed his appeal under Local Rule 31.2(d).

 

The Second Circuit rejected Owner 1's argument that the trial court wrongly denied an extension to discovery, citing his failure to conduct any discovery at all during the one-year period Owners requested, and waiving any such argument by failing to file an affidavit opposing summary judgment on this basis. 

 

Turning to Owner 1's argument that genuine disputes of material fact exist regarding his control of the Corporations, the Second Circuit reviewed the standards of individual liability under the FTCA and FDCPA.

 

Under the FTCA, an individual may be held liable under for a corporation's deceptive acts or practices "if, with knowledge of the deceptive nature of the scheme, he either 'participate[s] directly in the practices or acts or ha[s] authority to control them.'"  FTC v. LeadClick Media, LLC, 838 F.3d 158, 169 (2d Cir. 2016) (quoting FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573 (7th Cir. 1989)).4  

 

To prevail on the issue, the FTC must establish that consumer injury resulted from reasonable reliance upon corporate misrepresentations or omissions and that the individual defendants participated directly in the practices or acts or had authority to control them.   Amy Travel, 875 F.2d at 573 (citations omitted).  "The FTC is [also] required to establish the defendants had or should have had knowledge or awareness of the misrepresentations," but need not establish actual and explicitly knowledge of the particular deception at issue.  Id. at 574. 

 

On this score, the Court concluded that the same standard applies when the FTC brings an action to enforce the FDCPA pursuant to its authority under the FTCA.    Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 577, (2010); see also 15 U.S.C. § 1692l(a) ("[A] violation of [the FDCPA] shall be deemed an unfair or deceptive act or practice in violation of" the FTCA and is subject to enforcement "in the same manner as if the violation had been a violation of a[n] [FTC] trade regulation rule.").

 

Here, Owner 1 was a founder of all but perhaps one of the Corporate Defendants, held a 50 percent ownership stake in them, had signatory authority over their bank accounts, and served as their co-director and general manager, taking hostile customer calls and consulting with other managers even after execution of the AOD. 

 

Though he contended his deposition testimony addressed issues as to whether he exercised authority to control the Corporations' conduct, the dispositive issue here was whether he possessed the authority to do so.  As the magistrate's report and recommendations pointed out, the FTC found "numerous complaints in [Owner 1's] personal office," and his testimony evidenced that he neglected managerial duties only after executing the AOD in which he agreed to take measures to address the Corporations' deceptive conduct. 

 

The Second Circuit further agreed that Owner 1 had knowledge of the unlawful conduct prior to the 2013 AOD, and the record evidenced that he was more involved with debt collection calls prior to the 2013 AOD.

 

Because ample evidence proved that Owner 1 had knowledge of the Corporations'' violations before and after execution of the AOD, the appellate court concluded, no dispute of material fact existed requiring the trial court to deny the FTC's motion for summary judgment.

 

Lastly, Owner 1 argued that the disgorgement in the amount of $10,852,396 was grossly excessive because it was predicated on "approximately 45 calls where it claimed that fraudulent claims were made," which is "a far cry from the court's finding that the entire operation was 'permeated with fraud.'"

 

While Section 13(b)'s express text refers only to injunctive relief, the Second Circuit has also held that  "unqualified grant of statutory authority to issue an injunction under [S]ection 13(b) carries with it the full range of equitable remedies, including the power to grant consumer redress and compel disgorgement of profits,"  and established a two-step burden-shifting framework, requiring a court to look first to the FTC to 'show that its calculations reasonably approximated the amount of the defendant[s'] unjust gains' and then shift the burden 'to the defendants to show that those figures were inaccurate.' FTC v. Bronson Partners, LLC, 654 F.3d 359, 364 365 (2d Cir. 2011).  The FTC is further required to demonstrate that consumers relied on the misrepresentations at issue.

 

Here, on summary judgment the FTC submitted more than 500 complaints regarding the Owners' and their Corporations' debt collection practices, aggressive telephone scripts and audio recordings that prove wide dissemination of misrepresentations. 

 

Though Owner 1 argues that those consumer complaints are inadmissible at the summary judgment stage, he explicitly waived that argument in the trial court by failing to challenge the FTC's evidence as inadmissible, and the magistrate did not err in concluding that the Owners' and Corporations' operation was "permeated with fraud."

 

Because the FTC established a presumption of reliance, its use of the Owners'' and Corporations' gross receipts as a baseline for calculating damages was appropriate, and they failed to submit any proof that they earned "all or some of their revenue through lawful means."   See Verity Int'l, 443 F.3d at 67 (noting that burden-shifting framework requires "the FTC to first show that its calculations reasonably approximated the amount of the [Owners' and Corporations'] unjust gains, after which the burden shifts to the defendants to show that those figures were inaccurate" (internal quotation marks omitted)).

 

Accordingly, the disgorgement award was appropriate, and the trial court's judgment in the FTC's favor 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

 

 

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