Thursday, March 25, 2010

FYI: 7th Cir Agrees that CAFA Does Not Authorize Counter-Defs to Remove

The U.S. Court of Appeals for the Seventh Circuit upheld a district court opinion finding that the Class Action Fairness Act does not authorize counter-defendants to remove.  In so ruling, the Seventh Circuit agreed with both the Fourth and Ninth Circuit Courts of Appeals.  A copy of the opinion is attached.

 

The Class Action Fairness Act of 2005 allows any Defendant to remove a class action, without consent of the other defendants involved in the case and without diversity being required.  In this case, First Bank, commenced two state court suits against DJL Properties.  DJL Properties filed class action counterclaims in both actions.  First Bank, as counter-defendant, sought to remove the cases to federal court, under the Class Action Fairness act.  Two different federal judges then remanded each suit, on the grounds that a counter-defendant is not a defendant for the purposes of the Class Action Fairness Act.

 

In 1941, the Supreme Court determined in Shamrock Oil & Gas Corp. v. Sheets that, “a litigant who files suit in state court is a ‘plaintiff’ and cannot remove the case, even if the defendant files a counterclaim.”  The Seventh Circuit found First Bank’s argument that the Class Action Fairness Act altered this 70-year-old definition unconvincing.  Rather, the court determined that the term “defendant” “has an established meaning in legal practice, and it is vital to maintain consistent usage in order to ensure that Members of Congress, know what proposed language will do, and people can understand the meaning of statutes.”  The Court concluded that, because the statute employed “time-tested legal language,” without alteration, the standard definition should apply.  The Seventh Circuit thus affirmed the district court’s decisions to remand the cases.

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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.

 

 

 

Wednesday, March 24, 2010

FYI: FTC Shuts Down More Fraudulent Loan Mod Companies

The Federal Trade Commission acting with the states of California and Missouri shut down the operators of a mortgage foreclosure "rescue" company, and banned them from selling mortgage relief services.  A copy of the Stipulated Final Judgment is attached.

The FTC and States alleged that "U.S. Foreclosure Relief Corp.," and its operators George Escalante, Cesar Lopez, and Adrian Pomery, falsely claimed they helped 85 percent of their clients get their loans modified, and that they would get loan modifications to make consumers' homes much more affordable, all the while falsely asserting that they had a "proven track record" and the "highest standards of business ethics." They also allegedly violated state laws against charging advance fees for foreclosure consulting services. The Central District of California immediately barred the practices and froze the defendants' assets.

The FTC added as defendants H.E. Servicing, Inc., Brandon L. Moreno, and his law firm, Cresidis Legal, and charged all of the defendants with two more law violations: falsely claiming a lawyer would negotiate the terms of consumers' home loans, and falsely promising refunds if they failed. The settlement order resolves the case against the original defendants and H.E. Servicing. The case continues against Brandon L. Moreno and Cresidis Legal, a professional corporation.

In addition to banning the settling defendants from selling mortgage loan modification and foreclosure relief services, the order prohibits them from making misrepresentations about financial goods and services, such as loan terms, ability to improve someone's credit history, and how much a consumer will save by enrolling in a debt relief service.  The order also bars the defendants from making misrepresentations about any good or service, such as refund terms, government affiliation, and total cost, and from violating the FTC's Telemarketing Sales Rule.  Finally, the order bars the defendants from enforcing any contracts with their customers, and selling or otherwise disclosing customers' personal information.

The order imposes a $8.6 million judgment against George Escalante and his two companies, U.S. Foreclosure Relief and H.E. Servicing. The judgment will be suspended except for $980,000 in cash, jewelry, and vehicles that Escalante and his companies have surrendered to lenders or the court-appointed receiver, including a 2007 Cadillac Escalade, a 2008 BMW sedan, a 2007 Mercedes-Benz SUV, and a 2009 Toyota Tundra truck.  The order imposes $3.3 million and $3.4 million judgments against Cesar Lopez and Adrian Pomery, respectively, which will be suspended due to their inability to pay. The full amount will become due immediately if they are found to have misrepresented their financial condition.

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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.

 

 

 

FYI: 6th Cir Agrees Creditor's PMSI Extends to "Negative Equity" in "910 Vehicle"

The U.S. Court of Appeals for the Sixth Circuit is now eighth federal appellate court to hold that negative equity financing constitutes a purchase money obligation under the Uniform Commercial Code, that the associated security interest satisfies the UCC's definition of a purchase money security interest, and that the portion of a creditor's secured claim attributable to the payoff of negative equity qualifies for protection from cramdown in a Chapter 13 bankruptcy.  A copy of the opinion is attached.
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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.

 

 

 


From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Wednesday, March 10, 2010 1:58 PM
To: rwutscher@kahrlwutscherllp.com
Cc: socaloffice@kahrlwutscherllp.com; chicagooffice@kahrlwutscherllp.com; dcoffice@kahrlwutscherllp.com
Subject: FYI: 7th Cir Says Creditor's PMSI Extends to "Negative Equity" in "910 Vehicle"

The U.S. Court of Appeals for the Seventh Circuit recently joined several other circuit courts in holding that negative equity can be part of a purchase money security interest, and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.  A copy of the opinion is attached. 

The debtor in a Chapter 13 bankruptcy case brought in Illinois bought a car within 910 days of his bankruptcy filing which was financed by a purchase money security interest .  As part of the transaction, the debtor traded in his old car, in which he had approximately $8,000 of negative equity (meaning that he owed more on the old car then what it was worth) and therefore the financing of the new car included the "negative equity" in the old car.  The bankruptcy court denied a cramdown of the debtor's Chapter 13 plan that excluded this negative equity from the creditor's purchase money security interest in the car and this direct appeal followed.

By way of background, and as you may recall, bankruptcy "cramdown" refers to the procedure by which a debtor in a Chapter 13 bankruptcy is allowed to retain certain secured property, leaving the creditor with a bifurcated claim that is treated as secured to the extent of the present market value of the property (as calculated by the bankruptcy court), and unsecured as to any amount in excess of that value.  The debtor then makes payments to the creditor equivalent to the market value of the property.  In 2005, Congress amended Chapter 13 of the Bankruptcy Code by adding the "hanging paragraph" (so called because the paragraph is unnumbered), which prevents the bifurcation of a secured claim potentially into secured and unsecured portions when the creditor has a "purchase money security interest" in a motor vehicle acquired for the debtor's personal use within 910 days of the debtor's bank­ruptcy filing.

In affirming the bankruptcy court's holding, the issue before the appellate court was whether or not a purchase money security interest in a car includes negative equity, thus making it not subject to the cramdown procedure under the "hanging paragraph."  The Bankruptcy Code does not define a purchase money security interest and accordingly, because the rights enforced in bankruptcy are rights created by state law, the Court looked to the definition of purchase money security interest under Article 9 of the Uniform Commercial Code, in force in Illinois. 

Although the definition of purchase money security interest in Article 9 of the UCC does not explicitly mention negative equity, the Court looked to a comment to the definition, which states that "the 'price' of the collateral or the 'value given to enable' includes obligations for expenses incurred in connection with acquiring rights in the collateral."  As applied to the negative equity at issue in this case, the Court concluded that negative equity "is an obligation assumed by the buyer of the car in connection with his acquiring ownership," thus making it part of the creditor's purchase money security interest.  The Court also found that including negative equity in a purchase money security interest in a car is consistent with the Illinois Motor Vehicle Retail Installment Sales Act, which provides that negative equity is indeed a common element of a credit purchase of a car.

The Seventh Circuit went on to discuss the effect this ruling would have on a Chapter 13 debtor's other creditors, given that certain purchase money security interests enjoy priority should the purchaser default.  Ultimately, the Court noted that the justification for allowing the creditor with a purchase money security interest to enlarge his secured interest to include negative equity to the prejudice of the debtor's other creditors is the fact that including negative equity into the purchase money security interest "may be essential to the flourishing of the important market that consists of the sale of cars on credit."  Furthermore, including negative equity as part of the purchase money security interest eliminates problems that make the secured creditor worse off, such as depreciation and misvaluation of the car by a bankruptcy judge.

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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.

 

 

 


From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Sunday, October 04, 2009 4:12 PM
To: 'Ralph Wutscher'
Subject: FYI: 8th Cir Says Creditor's PMSI Extends to "Negative Equity" in "910 Vehicle"

Like the Tenth Circuit in our prior update (below), the U.S. Court of Appeals for the Eighth Circuit recently held that the negative equity financing held by a creditor on a trade-in vehicle was part of a purchase money security interest.  A creditor who holds a purchase-money security interest is entitled to protection under "hanging paragraph" of 11 U.S.C. § 1325(a). A copy of the opinion is attached.

 

In a fact pattern nearly identical to Ford v. Ford Motor Co. from the Tenth Circuit, the parties also disputed whether automobile debt could be bifurcated under 11 U.S.C. § 506(a) into secured and unsecured claims. The unsecured claim would be used to discharge the negative equity held in a trade-in vehicle.

 

The Eighth Circuit Court of Appeals conducted a similar analysis as the Tenth Circuit. The Court focused on the reach and definition of "purchase money security interest" as well as whether negative equity was "an integral part of" and "inextricably intertwined" with the sales transaction. The Eighth Circuit sided with the Tenth Circuit in concluding that the trade-in exchange is essentially a single transaction. Therefore, Plaintiffs may not bifurcate the debt for the purpose of a cramdown under 11 U.S.C. § 506(a) when the creditor has a PMSI in the full amount of the debt.   

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher
Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.krw-llp.com

 

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.

 

 

 


From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Thursday, October 01, 2009 7:47 PM
To: 'Ralph Wutscher'
Subject: FYI: 10th Cir Says Creditor's PMSI Extends to "Negative Equity" in "910 Vehicle"

The Tenth Circuit United States Court of Appeals recently held that the negative equity financing held by a creditor on a trade-in vehicle was part of a purchase money security interest.  A creditor who holds a purchase-money security interest is entitled to protection under "hanging paragraph" of 11 U.S.C. § 1325(a).  A copy of the opinion is attached.

 

The debtors financed their purchased of a new vehicle.  They also traded in their old vehicle, in which they had negative equity. Less than four months later, the debtors filed for Chapter 13 bankruptcy, and sought to bifurcate their automobile debt under 11 U.S.C. § 506(a) into secured and unsecured claims. The unsecured claim would be the portion of the debt used to discharge the negative equity in the trade-in.

 

The bankruptcy court concluded that negative equity financing was part of the creditor's purchase money security interest (PMSI) under the "hanging paragraph" in 11 U.S.C. § 1325(a) and could not be bifurcated and "crammed down" pursuant to 11 U.S.C. § 506(a).

 

In upholding the lower court's decision, the Tenth Circuit focused on the reach of "purchase money security interest," considering the term is not defined in the Bankruptcy Code nor the Bankruptcy Abuse Prevention and Consumer Protection Act, which amended the Bankruptcy Code and created the "hanging paragraph" under 11 U.S.C. § 1325(a).

 

The Court interpreted the term under state law, presuming that was the Congressional intent. The Court also analyzed whether paying off negative equity in a trade-in car was part of the "price" of the new car or part of the "value given to enable" acquisition of the new car. The Court concluded that the trade-in exchange is essentially a single transaction.

 

Therefore, according to the Tenth Circuit, debtors may not bifurcate the debt for the purpose of a cramdown under 11 U.S.C. § 506(a) when the creditor has a PMSI in the full amount of the debt.   

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher
Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.krw-llp.com

 

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.

 

 



From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Saturday, May 23, 2009 6:33 PM
To: Ralph T. Wutscher
Subject: FYI: 4th Cir Says Creditor's PMSI Extends to "Negative Equity" in "910 Vehicle"

The U.S. Court of Appeals for the Fourth Circuit recently held that a creditor's purchase money secured interest in a "910 vehicle" extends to that portion of the claim that relates to the "negative equity" in the vehicle.  A copy of the opinion is attached.
 
As you may recall, in Chapter 13 bankruptcy proceedings, the debtor has the option of retaining his property over the objection of a secured creditor with an interest in that property. See 11 U.S.C. § 1325(a)(5)(B).  In return, the secured creditor retains its lien on the collateral, and the debtor must repay the present value of the creditor's "allowed secured claim" over time.  See 11 U.S.C. § 1325(a)(5). 
 
Section 506(a)(1) of the Bankruptcy Code generally provides that the value of the allowed secured claim is equal to the value of the collateral.  See 11 U.S.C. § 506(a)(1). Thus, if the secured creditor's claim is for more than the collateral's value, Section 506(a)(1) requires the bifurcation of the claim into two components: a secured claim for the value of the col­lateral, and an unsecured claim for the balance.  Bifurcation of the secured creditor's claim is sometimes char­acterized as "stripping down" the secured claim to the collat­eral's value.
 
In 2005, Congress amended Chapter 13 of the Bankruptcy Code by adding the "hanging paragraph" (so called because the paragraph is unnumbered) to Section 1325(a).  The infamous "hanging para­graph" in Chapter 13 of the Bankruptcy Code (11 U.S.C. § 1325(a)), prevents the bifurcation (or "strip­down") of a secured claim potentially into secured and unsecured portions when the creditor has a "purchase money security interest" in a motor vehicle acquired for the debtor's personal use within 910 days of the debtor's bank­ruptcy filing.

The only issue in this case, therefore, is whether the debt was secured by a "purchase money security inter­est." 11 U.S.C. § 1325(a). In particular, the parties disputed whether the portion of the debt relating to the negative equity in the debtors' trade-in gave rise to a purchase money security interest. Thus, this appeal involved the question of how the hanging paragraph applies to a secured claim when a portion of that claim relates to the financing of "negative equity" (which, in a car transaction, refers to the difference between the value of a vehicle that the buyer trades in and the amount of the buyer's preexisting debt on that trade-in).

The Court concluded that a creditor does have a "pur­chase money security interest" for the portion of its claim relating to negative equity. The Court reasoned that negative equity financing is integral to the debtor's acquisi­tion of a new car and because this result effectuates Con­gress's intent in the hanging paragraph.  The Court declined to rule as to the proper treatment of a debt that includes non-purchase money components.
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kahrlwutscherllp.com

http://www.krw-llp.com

 

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.

 

 


From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Thursday, June 12, 2008 4:40 PM
To: Ralph T. Wutscher
Subject: FYI: 10th Cir Says Chpt 13 Debtor's Surrender of a "910 Vehicle" Does Not Prevent Unsecured Claim

The U.S. Court of Appeals for the Tenth Circuit recently held that a Chapter 13 debtor's surrender of a "910 vehicle" (i.e., a vehicle the debtor purchased within the 910 days preceding filing) does not prevent the creditor from filing an unsecured claim for deficiency based on state law.  A copy of the opinion is attached.

 

The debtors purchased vehicles for their personal use less than 910 days before filing bankruptcy petitions under Chapter 13.  The debtors entered into retail installment contracts which were assigned to the bankruptcy creditor.

 

When the debtors filed for bankruptcy, each of the vehicles was worth less than the balance due.  In their Chapter 13 plans, both debtors proposed to surrender the vehicle in full satisfaction of the creditor's claim. The creditor objected to confirmation of the plan, arguing that surrendering the vehicle would not fully satisfy the claim, and that it may assert an unsecured claim based on state law for any deficiency following liquidation.

 

As you may recall, generally, a debtor exercising the retention option under § 1325(a)(5)(B), also known as "cram down," keeps the collateral securing the debt and satisfies the debt by making monthly payments equal to the present value of the collateral, rather than the remaining balance on the loan.

 

The "cram down" is the result of § 1325(a)(B)(ii)'s requirement that the debtor pay the present value of the creditor's claim and § 506(a)'s provision for judicial valuation of claims secured by collateral.  Under § 506(a), a claim secured by a lien is separated, or bifurcated, into a secured portion reflecting the value of the property and an unsecured portion reflecting the remaining debt or deficiency. When a claim is bifurcated under § 506(a), the debtor may retain the collateral and meet the requirements of § 1325(a)(5)(B) by making payments only on the secured portion of the bifurcated claim. As a result of this process, an undersecured creditor may seek payment of a deficiency only as an unsecured creditor.

 

Since the BAPCPA, the hanging paragraph in Section 1325(a) has prevented the valuation of certain claims under Section 506(a), including so-called "910 car claims" (a claim secured by an automobile purchased less than 910 days before a Chapter 13 filing).  Under the BAPCPA, a debtor who keeps a 910 vehicle under Section 1325(a)(5)(B) must now pay the entire claim as filed, and the 910 car claim is treated as fully secured. 

 

Here, however, the debtors surrendered the vehicles under § 1325(a)(5)(C).   Because a 910 car claim is treated as fully secured when a debtor retains the vehicle under the BAPCPA, the bankruptcy court and the Bankruptcy Appellate Panel reasoned that it must also be treated as fully secured when the debtor surrenders the vehicle.   Following this logic, surrender fully satisfies the claim and precludes an unsecured claim for a deficiency.

 

Although courts agree that the hanging paragraph now prevents the application of § 506 to 910 car claims under § 1325(a)(5), they have reached different conclusions concerning the effect of this change on cases involving the surrender of a 910 vehicle.  In the present case, the bankruptcy court and the Bankruptcy Appellate Panel adopted the majority view among bankruptcy courts -- both courts concluded that, because a 910 car claim is no longer subject to bifurcation into secured and unsecured claims under § 506(a), the debtor's surrender of the vehicle under §1325(a)(5)(C) satisfies the entire claim, and the creditor may not pursue an unsecured claim, based on state law, to recover a deficiency.

 

However, the Tenth Circuit joined the growing number of courts adopting the view that, by making § 506 inapplicable to 910 car claims, the hanging paragraph in the BAPCPA does not abrogate a creditor's right to assert a deficiency claim authorized by state law.

 

Thus, the court held that:  (1) by choosing to surrender a 910 vehicle under § 1325(a)(5)(C), a debtor satisfies the requirements for plan confirmation under § 1325(a)(5) with respect to that particular allowed secured claim; and  (2) whether the creditor may bring an unsecured claim to recover a deficiency after sale of the vehicle depends on the underlying contract and state law. 

 

Let me know if you have any questions.  Thanks.       

   

 

Ralph T. Wutscher
Roberts Wutscher, LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
(312) 551-9320  Direct Dial
(866) 581-9302  Facsimile
(312) 493-0874  Mobile
 
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.

 

FYI: Fannie Announces "Alt Mod" Requirement

Fannie Mae issued the attached Lender Letter (FNMA Lender Letter LL-2010-04) announcing an alternative to the HAMP modification for borrowers who were eligible for and accepted into a HAMP trial period plan, but were subsequently not offered a HAMP permanent modification because of eligibility restrictions.

For mortgage loans in active HAMP trial period plans initiated prior to March 1, 2010, all Fannie Mae-approved servicers must consider the Alternative Modification ("Alt Mod") prior to the initiation of foreclosure for all eligible borrowers who were not offered a permanent HAMP modification after making payments under a HAMP trial period plan.

All borrowers must meet the eligibility criteria outlined in the attached Lender Letter, including that the mortgage loan is secure by 1-4 family owner occupied property, and that the monthly mortgage payment ratio based on verified income was less than 31%, the target mortgage payment ratio of 31% could not be reached using the standard HAMP modification waterfall, or the borrower failed to provide all HAMP documentation but qualifies for new streamilined documentation under the Alt Mod program.

The policies in the Lender Letter apply to all conventional mortgage loans held in Fannie Mae's portfolio and to mortgage loans that are part of an MBS pool that have the special servicing option or a shared-risk MBS pool for which Fannie Mae markets the acquired property. A borrower that entered into a trial period plan prior to March 1, 2010 will be considered eligible for the Alt Mod as long as the case is submitted to FNMA prior to the final date of the program offering, which is August 31, 2010.

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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.

 

 

FYI: 7th Cir Rejects Pl's FDCPA Survey Expert, Suggests Courts Appoint Neutral Experts

The United States Court of Appeals for the Seventh Circuit recently affirmed the lower court's rejection of the debtor's survey evidence in a putative class action brought under the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692p ("FDCPA"), and suggested courts consider appointing their own neutral experts.  A copy of the opinion is attached.

 

Debtors brought suit against Plaza Associates debt-collection agency ("Plaza"), arguing that two statements in collection letters were deceptive.  Debtors first alleged that a reduced balance settlement offer presented as "valid for a period" of set days would lead many consumers to believe that the offer represented a debtor's final opportunity to settle the debt.  Debtors also challenged a statement which invited debtors to provide "satisfactory proof" that an account was in error, arguing that such a statement implies a debtor must furnish "proof" in order to "dispute" a claim. 

 

The District Court granted summary judgment in favor of Plaza after rejecting the survey evidence presented by Debtors' expert witness, and the Seventh Circuit affirmed the decision.

 

As to the "valid for a period" language, the court explained that "a debt collector can, if authorized by the other creditor…make his initial offer a final one, [but] he cannot pretend that is a final one if it is not, in the hope the debtor will think it is final."  To address this concern, the court suggested debt-collectors could include the following safe-harbor language: "We are not obligated to renew this offer."  However, the absence of such language does not leave a "debt collector per se liable" under the FDCPA.  Rather, evidence that "a sufficiently large segment of the unsophisticated are likely to be deceived" must be produced, "the most useful sort being the kind of consumer survey described in Johnson v. Revenue Management Corp., 169 F.3d 1057, 1060-1 (7th Cir. 1999)."

 

Regarding such surveys, the Court stated that a debtor must "show that the additional language of the letters unacceptably increases the level of confusion," and that "[a] properly designed control group is vital in a survey intended to reveal whether a debt collector is confusing debtors."   And, in the case before the Court, it was confusion in the control group which was fatal to the survey's admissibility. 

 

Debtors' survey interviewed 160 people, showing half a collection letter containing the "valid for a period" and "satisfactory proof" language, and half shown a letter without that language, the control group.  For the "valid for a period" portion, respondents were asked what would happen if they did not accept the offer, and could answer three ways: offer renewable, last chance for settling, or "don't know / not sure."  For the "satisfactory proof" portion, respondents were asked if they could dispute the debt without proof and could respond three ways: yes, no, "don't know / not sure."

The Seventh Circuit found that these surveys likely created too much confusion within the control group.  For instance, the control letter did not mention a deadline for the "valid for a period" inquiry, and thus confused respondents as to how an offer could even be extended.  The "satisfactory proof" inquiry was deficient because, among other things, there was no explanation as to how a debtor could "dispute a debt." 

 

Ultimately, the Court found the surveys to be insufficient to meet the Debtors' burden and affirmed the summary judgment entered by the District Court.  The Court concluded by recognizing that suits under the FDCPA "have repeatedly come to grief because of flaws in the surveys conducted by plaintiff's experts," and suggested that courts begin considering exercising their option of appointing their own expert.     

           

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

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FYI: NY DCA Warns Banks Not to Use Text Messages to Sign Customers Up for Overdraft Services

The New York Department of Consumer Affairs Commissioner asked the Federal Reserve to prohibit financial institutions from using text messages to obtain consent from their customers before enrolling them into overdraft services, and warned firms not to "undermine new federal regulations with aggressive solicitations to enroll New Yorkers into overdraft protection services."  A copy of th press release is attached. 
 
The NY DCA took the action after learning that a marketing firm is promoting a "text message solution" to financial institutions that will need to obtain consent from their customers beginning July 1, 2010 before enrolling them into overdraft services.  The Commissioner cautioned against these aggressive marketing strategies saying they would eliminate the consumer's opportunity to make informed choices about overdraft protection services, which he claims would "defy new federal regulations of overdraft protection and threaten the financial security of consumers."   
 
In a letter to Federal Reserve Chairman Ben Bernanke, the New York Commissioner also asked that the Federal Reserve to prohibit financial institutions from using text messages to obtain consent from their customers before enrolling them into overdraft services. 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: FFIEC Issues FAQs on SAFE Act Registration for Depository Institutions

The Federal Financial Institutions Examination Council published a question and answer document regarding licensing obligations of depository institutions under  the Secure and Fair Enforcement for Mortgage Licensing Act.  See:  http://www.ffiec.gov/safeact.htm
 
 As you may recall, the SAFE Act requires individual mortgage loan originators to register with the Nationwide Mortgage Licensing System and Registry, a database established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states.  
 
The FDIC recently approved a draft final rule (attached) to put the federal registration requirement into effect, which will require registration by individual residential mortgage loan originators employed by agency-related institutions. These originators will obtain a unique identifier that will stay with them regardless of employment.  The draft rule would provide financial institutions with 180 days to complete initial registrations once the system is operational.
The FDIC's draft final rule is currently under review by the Office of Management and Budget pursuant to Executive Order 12866.
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: Ohio App Ct Rules in Favor of Mortgage Loan Investor on Various Counts

An Ohio Appellate Court recently upheld a lower court's summary judgment ruling in favor of a mortgage loan trust and originating lender.  A copy of the opinion is attached.

 

The Appellate Court found against the borrowers on all four of their arguments.  First, the court concluded that the unclean hands doctrine was inapplicable.  Second, the Court found that the mortgage agreement was not substantively unconscionable.  Third, the Court found that the parole evidence rule barred evidence of promises made by the loan officer, the only evidence in the borrowers' fraudulent inducement claim.  Fourth, the Court determined that the borrowers' TILA claims were too speculative to constitute material facts. 

 

The borrowers in this matter allege that they were offered a 30 year fixed rate mortgage by an Ameriquest loan officer to help pay for outstanding debts.  However, when the borrowers appeared at closing they were provided with documents for a variable rate mortgage.  When the borrowers complained, they received verbal assurances from the loan officer that Ameriquest would refinance the loan before the interest rate increased.  The borrowers allege they signed the loan based on this verbal promise from the loan officer.  Prior to the first rate adjustment, approximately two years after closing, attempts by the borrowers to refinance their loan were denied by Ameriquest. 

 

Soon thereafter, the borrowers stopped making payments on their loan and Deutsche Bank, the owner of the note, filed a foreclosure action.  The borrowers filed counterclaims for fraudulent inducement and TILA violations and a third-party complaint asserting fraudulent inducement and TILA claims against Ameriquest. 

 

The trial court granted summary judgment in favor of Deutsche Bank and Ameriquest, the borrowers appealed claiming genuine issues of material existed regarding the equitable defenses of unclean hands and unconscionability; that the trial court erred in ruling that the parole evidence rule barred evidence of statements and promises made by Ameriquest; and that genuine issues of material existed regarding the borrowers' TILA claim.

 

The Appellate Court found that the doctrine of unclean hands should not apply to Deutsche Bank because the doctrine only applies to conduct done by a Plaintiff.  The borrowers' argument that Deutsche was a holder of the note and took the note subject to all valid defenses, was irrelevant because the dispositive factor was that the borrowers did not allege that the specific Plaintiff in this case, Deutsche Bank, had committed wrongdoing.  As a matter of law, the borrowers could not "assert an unclean-hands defense based on the conduct of a party other than Deutsche."

 

The Appeals Court next looked to the borrowers' claim of unconscionability.  While the Court determined that unconscionability is a legally valid defense against Deutsche Bank, it concluded that there were no genuine issues of material as to whether the contract was substantively unconscionable.  The court looked at the borrowers' financial circumstances after refinancing and found a number of facts that argued against substantive unconscionability.  The court noted that the borrowers were able to immediately lower their minimum debt payments, received a significant sum at closing, were given two years before the rate increase to fix their finances, and were not subject to interest rates "so extreme as to appear unconscionable."

 

The Appellate Court then addressed the issue of the whether the parole evidence rule barred evidence of the loan officers' alleged statements, the primary evidence in the borrowers' third party fraudulent inducement claim against Ameriquest.  The parole evidence rule provides that where parties have entered into a completely integrated written contract, extrinsic evidence of prior oral agreements, which contradict the contract, are inadmissible.  The Court found that, "the parole evidence rule may not be overcome by a fraudulent inducement claim which alleges that the inducement to sign the writing was a promise, the terms of which are directly contradicted by the signed writing."  Thus, the evidence of the loan officer's alleged promise was barred by the parole evidence rule. 

 

The Appellate Court also determined that there was no genuine issue of material fact regarding the borrowers' TILA counterclaim and third-party claim.  The borrowers alleged that a number of their closing costs were not bona fide and reasonable and therefore should have been included in the finance charge.  In rejecting the borrowers' arguments, the court determined that a title search and a title examination are not synonymous tasks and that there is evidence that both were performed in relation to the borrowers' loan.  Further, the Court concluded that the borrowers were only able to speculate and could not offer actual evidence that charges assessed were not bona fide or reasonable.  Therefore, the court determined summary judgment as a matter of law was appropriate.

 

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: Supreme Court Says BK Attorneys Are "Debt Relief Agencies" Under BAPCPA

The United States Supreme Court recently held that: 1) attorneys who provide bankruptcy assistance to assisted persons are "debt relief agenc[ies]" under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"); 2) Section 526(a)(4) of the BAPCPA, which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, should be narrowly read; and 3) the disclosure provisions of Section 528 of the BAPCPA are valid as applied to the plaintiffs in this case.  A copy of the opinion is attached. 

Plaintiffs, a bankruptcy firm, a bankruptcy attorney and two of the bankruptcy firm's clients (collectively, "Milavetz"), filed a preenforcement suit in the district court seeking declaratory relief with respect to the BAPCPA's debt-relief-agency provisions.  More specifically, Milavetz asked the court to hold that it is not a "debt relief agency" as that term is defined in the BAPCPA, and therefore is not bound by a number of restrictions and requirements that apply to debt relief agencies under the BAPCPA, such as the advice (§ 526(a)(4)) and disclosure (§ 528) requirements of the BAPCPA.  In the alternative, Milavetz sought a judgment that the advice and disclosure requirements under the BAPCPA are unconstitutional as applied to attorneys.

The district court found that "debt relief agency" does not include attorneys and that §§ 526 and 528 are unconstitutional as applied to attorneys. The Eighth Circuit rejected the district court's conclusion that attorneys are not "debt relief agenc[ies]"; upheld application of § 528's disclosure requirements to attorneys; and found § 526(a)(4) unconstitutional because it broadly prohibits debt relief agencies from advising assisted persons to incur any additional debt in contemplation of bankruptcy.  The Supreme Court granted certiorari in light of a split among the Courts of Appeal as to § 526(a)(4)'s scope, and also agreed to consider the other threshold issues.

The Supreme Court agreed with the Eighth Circuit's holdings that attorneys are debt relief agenices when they provide qualifying services and accordingly that § 528's disclosure requirements apply to attorneys, but reversed its judgment that the advice provision in § 526(a)(4) is unconstitutionally overbroad.  Justice Sotomayor delivered the opinion of the Court, joined by Justices Roberts, Stevens, Kennedy, Ginsburg, Breyer and Alito and Justices Thomas and Scalia filed opinions concurring in part and concurring in the judgment.

As to whether the term "debt relief agency" includes attorneys, the Court found that "the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons," noting that a debt relief agency is "any person who provides any bankruptcy assistance to an assisted person" in return for payment, and by definition, "bankruptcy assistance" includes several services commonly performed by attorneys, such as providing legal representation with respect to a case or proceeding.  The Court also pointed to the fact that, while Congress did enumerate specific exceptions to the definition of debt relief agency, it gave no indication that it intended to exclude attorneys.  The Court rejected all of Milavetz's arguments that the term "debt relief agency" should be read to exclude attorneys, including his reliance on the fact that the definition of the term "debt relief agency" does not expressly include attorneys and his claim that reading "debt relief agency" as defined in the BAPCPA to include attorneys impermissibly impedes on an area of traditional state regulation.

In addressing the scope and validity of § 526(a)(4), which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, the Court rejected Milavetz's broad reading of the provision, noting that Milavetz's interpretation rested primarily on the incorrect view that the ordinary meaning of the phrase "in contemplation of" bankruptcy encompasses any advice given to a debtor with the awareness that he might soon file for bankruptcy, even if the advice seeks to eliminate the need to file.  Alternatively, the Government advocated a narrower construction of the statute, which rested on reading the phrase "in contemplation of" to forbid only advice to undertake actions to abuse the bankruptcy system. 
 
Ultimately, the Court held that the phrase "in contemplation of" refers to a specific type of misconduct, concluding that the section "prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose," such that the prohibition primarily targets advising a client to "load up" on debt in anticipation of bankruptcy, with the expectation of obtaining its discharge.  Under this reading of the provision, the Court looked to specific situations and noted in a footnote that "advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor's interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause" and "[a]dvice to incur additional debt to buy groceries, pay medical bills, or make other certain other purchases is also permissible"

Finally, the Court addressed the validity of § 528's challenged disclosure requirements, which requires debt relief agencies to identify themselves as such and to disclose in their advertisements for certain services that the services are with respect to or may involve bankruptcy relief.  Noting that the challenged provision regulates only commercial speech, the Court identified the standard for reviewing such requirements is intermediate scrutiny, meaning that "they must directly advance a substantial governmental interest and be no more extensive than is necessary to serve that interest."  Relying on this standard, the Court found that the disclosure requirements in § 528 both a) directly advance a substantial government interest - specifically, the deception of consumers with promise of debt relief without any reference to the possibility of filing for bankruptcy and b) are no more extensive than necessary to serve that interest given that the requirements only require a debt relief agency to give an accurate statement of the advertiser's legal status and the character of assistance provided, and do not prevent debt relief agencies from conveying any additional information.
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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.