Thursday, December 1, 2011

FYI: 1st Cir Holds Recorder's Office Delay in Recording Does Not Cause Mortgages to Be Voidable

The U.S. Court of Appeals for the First Circuit recently held in a
bankruptcy action that a lender has an unavoidable pre-petition "interest
in property" where mortgage deeds, still waiting to be recorded, had been
presented for recording three years prior to the bankruptcy filing. The
Court also held that the debtors could not avoid the mortgages as
preferential transfers because the mortgages had been presented for
recording prior to the preference period.

A copy of the opinion is available at:
http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2270P.01A.

The bankruptcy debtors here executed three mortgages to secure two loans
from a lender (the "Bank"). The Bank timely presented the mortgage
documents for recording to Puerto Rico's recording office, but, due to an
administrative backlog, the mortgage documents remained unrecorded as of
the date of the debtors' Chapter 11 bankruptcy filing three years later.
Even though the mortgages had not yet been recorded as of the date of the
bankruptcy filing, the Bank filed a secured proof of claim with respect to
loans.

The debtors then filed an adversary proceeding seeking to avoid the
mortgages under various provisions of the Bankruptcy Code governing the
automatic stay and a trustee's "strong-arm powers." The debtors asserted
that they were bona fide purchasers of the property not subject to the
Bank's claim in the property, because the Bank did not hold a pre-petition
"interest in the property." The debtors also sought to avoid the
mortgages as prohibited preferential transfers. See 11 U.S.C. §§
362(a)(5), 544(a), 547(b), 547(e)(1)(A).

Rejecting the debtors' argument that the Bank merely held an unsecured
claim because the mortgages remained unrecorded as of the petition date,
the bankruptcy court granted the Bank's motion for summary judgment. The
bankruptcy court also rejected the debtors' assertion that the mortgages
could be avoided as preferential transfers. The District Court affirmed.


On appeal to the First Circuit, the debtors challenged the application of
exceptions to the automatic stay and strong-arm powers, arguing that the
Bank never held a pre-petition "interest in the property" and could not
take post-petition steps to perfect the mortgages. The debtors again
asserted that the mortgages could be avoided as preferential pre-petition
transfers. The First Circuit affirmed the rulings in favor of the Bank in
the lower courts.

The debtors' challenge to the enforceability of the mortgages hinged on
whether the Bank, as the holder of the unrecorded mortgages, held a
pre-petition "interest in property" sufficient to provide an exception to
the automatic stay and Debtors' powers to avoid statutory liens. 11
U.S.C. §§ 362(b)(3), 546(b). As you may recall, the automatic stay in
bankruptcy bars "any act to create, perfect, or enforce any lien against
property of the estate," except where, among other things, an "interest in
property" has been perfected pre-petition. See 11 U.S.C. §§ 362(a)(4),
362(b)(3). In addition, in acquiring the status of bona fide purchasers of
real property or of judicial lien holders, debtors may ordinarily avoid
any transfer of property or obligation to the extent allowed by state law,
unless applicable law "permits perfection of an interest in property to be
effective" against one acquiring subsequent rights in the property before
the interest is perfected. See 11 U.S.C. §§ 544(a)(3), 546(b(1)(A).

Noting that in bankruptcy, the term "interest in property" is a federal
statutory term "informed" by state law, the First Circuit followed its
analysis in In re 229 Main St. Ltd. P'ship, 262 F.3d 1 (1st Cir. 2001).
There, the Court determined that the term "interest in property" is
broader than the term "lien" and that "the filing of a bankruptcy petition
does not prevent the holder of an interest in property from perfecting its
interest if, absent the bankruptcy filing, the interest holder could have
perfected its interest against an entity acquiring rights in the property
before the date of perfection."

The Court also noted that Puerto Rico's "relation back" doctrine provides
that the time at which a mortgage deed is presented for recording is the
point at which priority is established among competing property
registrations, because the act of presentment places third parties on
notice as to the existence of the mortgage. See P.R. Laws Ann. Tit. 30, §
2256. The Court pointed out that the Bank affirmatively took all steps to
effectuate the recording of the mortgage deeds and that nothing suggested
that the mortgage documents submitted for recording were in any way
defective and would not be recorded under Puerto Rico's mortgage recording
statutes. Thus, the Court concluded that the acts of presentment
"sufficiently vested" the Bank with a pre-petition interest in Debtors'
real property not subject to the automatic stay or strong arm powers.

The First Circuit also ruled that the debtors could not avoid the
mortgages as preferential transfers made during the 90-day period prior to
the commencement of the bankruptcy proceeding. In so ruling, the court
noted that the timing of a transfer depends on when and whether the
transfer was perfected, which, under Puerto Rico's relation-back doctrine,
occurred at the time of the presentment of the mortgage deeds for
recording -- almost three years before the debtors filed for bankruptcy
protection.

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.com


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Wednesday, November 30, 2011

FYI: Cal App Ct Holds Monitoring Phone Calls, Without Notice to Customer, May Violate State Law

The California Court of Appeal, Fourth District, recently held that a
business which monitors phone calls between it and its customers may
violate Section 632 of the California Penal Code, where the customer is
not notified that the call may be monitored.

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/D057440.PDF

A consumer finance company randomly monitored calls between it and various
borrowers, for quality control purposes. Most (but not all) borrowers
who called the company were advised that the conversation might be
recorded. Borrowers whom the company called for collection purposes were
not so advised.

Borrowers brought individual and class claims against the company,
alleging violations of common law, statutory and constitutional privacy
rights, including an alleged violation of California Penal Code Section
632 ("Section 632"). The lower court granted summary judgment for the
company regarding the Section 632 claim, on the grounds that the statute
prohibited eavesdropping only by a third party, whereas here, only two
parties were involved: the company and the borrower. The borrowers
appealed.

Section 632(a) of the California Penal Code imposes liability on "[e]very
person who, intentionally and without the consent of all parties to a
confidential communication ... eavesdrops upon or records the confidential
communication." A "person" is defined to include a corporation.

The Court began its analysis by noting that recent case law established
that "the crux of section 632 is the right to prevent a simultaneous
dissemination [of a communication] to an unannounced listener." See
Flanagan v. Flanagan, 27 Cal.4th 766, 768 (2002). It further noted that
the statute "contains no exceptions applicable when a business monitors a
telephone conversation even if the monitoring is for a legitimate business
purpose."

Thus, the Court held that the lender "can be held liable for directing its
supervisory employees to monitor confidential communications between
employees and customers without properly notifying the customer about the
monitoring."

With that standard in place, the Court determined that the lower court
erred in its decision to grant summary adjudication in favor of the
company on the borrowers' Section 632 claim.

However, it emphasized that "[t]his holding means only that we disagree
with the trial court's conclusion that plaintiffs' section 632 claim fails
as a matter of law. To recover, plaintiffs will need to prove the other
requisite elements of a section 632 claim, including a reasonable
expectation of privacy and that their communications were 'confidential.'"

The Court also addressed the company's contentions that the summary
judgment should be affirmed on the basis that the calls did not constitute
"confidential communication[s]," as required by the statute. The company
contended that a reasonable person would expect the conversations to be
disclosed to its employees, and that borrowers were told "at the outset of
the borrower-lender relationship" that calls might be monitored.

However, the Court noted that the fact that borrowers knew that the
contents of their telephone calls might later be disclosed to other
company employees "does not mean that [borrowers] had no reasonable
expectation that their telephone conversation were not being secretly
overheard." The Court further stated that the fact the borrowers were
initially informed that a call might be recorded did not necessarily mean
that borrowers were "adequately warned that subsequent calls would be
monitored."

Therefore, the Court held that triable issues of fact as to whether the
telephone calls constituted "confidential communication[s]" and whether
borrowers' expectations that the calls would not be monitored were
objectively reasonable. Accordingly, it directed the lower court to
vacate its order granted the summary judgment in favor of the company.

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.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,
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Tuesday, November 29, 2011

FYI: Cal App Confirms No Private Right of Action Under Truth In Savings Act, Holds Also No Related Private Right Under UCL

The California Court of Appeal, Second District, recently held there is no
private right of action under the federal Truth in Saving Act ("TISA"),
and therefore consumers cannot bring enforcement suits under California's
unfair competition law ("UCL") to redress TISA violations.

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/B230859.PDF

Plaintiffs, all of which were deposit account holders at Bank of America
(the "Bank"), brought a putative class action against the Bank alleging
that the Bank failed to properly notify them about price increases on fees
applicable to their deposit accounts, allegedly in violation of TISA.

Specifically, the plaintiffs alleged that the Bank informed the plaintiffs
on their written account statements that there were "upcoming pricing
changes" as detailed in an "enclosed brochure." The plaintiffs claimed
that the notice was not clear and conspicuous, and also claimed that the
notice did it specify the exact increase for their personal accounts or
the precise date the increase would take effect.

Based on the alleged TISA violations, the plaintiffs asserted a single
cause of action for violation of the UCL, claiming that the Bank's
practices were unlawful and unfair. The Bank demurred to the complaint,
arguing that Congress expressly prohibited a private right of action to
enforce TISA, barring the plaintiffs' UCL claim based on TISA. Plaintiffs
countered that they retained their state causes of action -- including a
UCL claim premised on TISA violations -- because TISA does not preempt
state law, nor does it expressly bar enforcement via the UCL.

The trial court sustained the demurrer. It held that the repeal of TISA's
civil enforcement provision showed that Congress intended to bar private
actions, and the UCL cannot be used to "plead around" an absolute bar to
relief. The plaintiffs then appealed.

The appellate court upheld the decision of the trial court. The appellate
court noted that originally "TISA provided a private right of action
against any depository institution that failed to comply with statutory or
regulatory disclosure requirements." However, "[i]n 1996, Congress
amended section 4310, adding a 'sunset clause' that repealed the private
right of action provision on September 30, 2001."

The Court held that "[t]he repeal of section 4310 entirely eliminated the
[private] cause of action, thereby releasing banks from future claims of
private parties to recover actual and statutory damages for TISA
violations."

As you may recall, the UCL prohibits "any unlawful, unfair or fraudulent
business act or practice." Members of the public have standing to sue
under the UCL if they have suffered injury in fact, and lost money or
property as a result of unlawful or unfair acts. The UCL "borrows
violations from other laws, making them independently actionable as unfair
competitive practices."

However, the appellate court noted that a "UCL claim may not go forward if
it is based on conduct which is absolutely privileged or immunized by
another statute." Further, "a plaintiff may not 'plead around' an
'absolute bar to relief' simply 'by recasting the cause of action as one
for unfair competition.'"

Moreover, "[w]hen specific legislation provides a 'safe harbor,'
plaintiffs may not use the general unfair competition law to assault that
harbor." When determining whether another law bars an action under the
UCL, "courts look for is some basis for concluding that the legislative
body 'intended to bar unfair competition causes of action based on'
violations of the underlying statute."

The plaintiffs argued that the ability of consumers to enforce TISA
protections survives the sunset amendment of section 4310. The Bank
countered that the 2001 repeal of the private right of action authorized
by section 4310 proves that Congress intended to bar private actions
premised on TISA violations, exclusively leaving only federal agencies to
enforce TISA.

The Court noted that while direct suits to enforce TISA were plainly
foreclosed, there was a question regarding whether indirect suits to
enforce TISA survive the sunset clause.

In deciding there was no indirect right to private suits to enforce TISA,
the Court noted "federal courts are reluctant to allow indirect lawsuits
based on violations of federal law when Congress has not authorized it."

Accordingly, the Court held that California consumers cannot "seek
injunctive relief and restitution against a bank for 'unlawful' conduct
when Congress has clearly rejected a private right to enforce TISA."

The plaintiffs also alleged the Bank's conduct was "unfair" under the UCL,
even if it was not unlawful. The Court noted that the California "Supreme
Court has not announced a definitive test for unfair business practices in
consumer cases, and the intermediate appellate courts have devised a
variety of tests." However, the Court then held that the conduct alleged
by plaintiffs was not "unfair" under the UCL.


Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.com


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error, or if you wish to be removed from our update distribution list,
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Our updates are available on the internet, in searchable format, at:
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CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.

Monday, November 28, 2011

FYI: NY Court of Appeals Says HOLA and FIRREA Do Not Preempt State Law Appraisal Claims

The New York Court of Appeals recently held that neither the federal Home
Owners' Loan Act, nor the federal Financial Institutions Reform, Recovery,
and Enforcement Act, preempts state law claims based on violations in
performing real estate appraisals for a federal savings association.

A copy of the court's opinion is available at:
http://www.nycourts.gov/ctapps/Decisions/2011/Nov11/184opn11.pdf.

This case, commenced prior to the enactment of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, was filed in state court by
New York's Attorney General against eAppraiseIT, LLC, an appraisal
management company that performed appraisal work for Washington Mutual,
Inc. (WaMu), a federally chartered savings association, that utilized the
appraisals in its mortgage lending operations.

The complaint against eAppraiseIT and its parent company, First American
Corporation, alleged that the Defendants, at WaMu's insistence, repeatedly
engaged in fraudulent and deceptive business practices by providing
inflated home appraisal values to WaMu in order to keep WaMu as a client.
The complaint further alleged that the Defendants violated appraiser
independence regulations by allowing WaMu to control eAppraiseIT's
appraisers.

Asserting federal question jurisdiction, the Defendants removed the action
to federal court and sought dismissal of the complaint. The federal
district court remanded the case back to state court, where the Defendants
moved to dismiss, arguing in part that the Home Owners' Loan Act (HOLA)
and the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) and their regulations preempted the state claims. Defendants
argued that federal law occupied the entire field of real estate
appraisals and, alternatively, that the state's attempt to regulate
eAppraiseIT conflicted with federal law insofar as state law interfered
with WaMu's ability make real estate loans.

The trial court denied the motion to dismiss, concluding that federal law
did not occupy the entire field of real estate appraisals, and that the
Defendants failed to show how state enforcement of appraisal standards
conflicts with federal law or otherwise interferes with a bank's ability
to make loans. The trial court also ruled that the complaint adequately
pleaded a cause of action under New York's General Business Law. The
Appellate Division affirmed, and Defendants were granted leave to appeal
to the Court of Appeals.

In affirming the Appellate Division's order denying the Defendants' motion
to dismiss, the Court of Appeals focused on Defendants' argument that HOLA
and FIRREA reflected congressional intent to occupy the entire field of
home lending, and thus preempted all state laws regarding the supervision
of real estate appraisal management companies.

In rejecting the Defendants' argument, the Court observed that federal
regulations limit federal preemption where state laws "only incidentally
affect the lending operations of a Federal savings association." See 12
C.F.R. § 560.2(c). The Court concluded that the Attorney General's
authority to prosecute the Defendants for unlawful and deceptive real
estate appraisals was not preempted because "at most, it would
incidentally affect" WaMu's lending operations.

The Court also noted that Congress intended a federal-state partnership as
to the regulation of real estate appraisers as evidenced in part by
FIRREA's reliance on the states to certify, license, and supervise real
estate appraisers. The Court concluded that FIRREA explicitly envisioned a
cooperative effort between federal and state authorities to ensure that
real estate appraisals comport with applicable standards.

Finally, the Court of Appeals also held that the complaint adequately
pleaded a cause of action under New York's General Business Law and that
the Attorney General had standing.

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.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.


Our updates are available on the internet, in searchable format, at:
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CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

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FYI: Cal App Says Servicer Not Estopped By Partial Performance on Loan Mod, Did Not Violate "One Form of Action" Rule

The California Court of Appeal for the Second District recently held that
a servicer's acceptance of reduced payments did not constitute acceptance
of a loan modification agreement proposed by borrowers, and further held
that the servicer did not violate the "one form of action" rule.

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/B230580.PDF

After the borrowers defaulted on their home loan, they executed a document
titled "Loan Workout Plan" (the "Workout Plan"), which provided that it
would not be effective absent execution by the lender. The lender never
executed the plan. The Workout Plan required, among other things, that
the borrowers submit various financial information to the lender.

The borrowers made four payments pursuant to the Workout Plan. Two of
these payments were accepted by the servicer, and two were returned to the
borrowers after they failed to submit required financial information.

The servicer notified the borrowers that the Workout Plan was terminated,
and foreclosed on the property. The borrowers challenged the foreclosure
sale, and the lower court entered an order of summary judgment in favor of
the servicer and lender. The borrowers appealed.

As you may recall, the so-called "one form of action" rule in California
provides that "[t]here can be but form of action for the recovery of any
debt or the enforcement of any right secured by mortgage upon real
property." Cal. Code of Civ. Proc. Sec. 726(a).

On appeal, the borrowers contended that the Workout Plan was an
enforceable contract, and that the servicer and lender were equitably
estopped from raising a statute of frauds defense, due to the fact that
the servicer accepted the reduced payments the Workout Plan provided for.
The borrowers further contended that the servicer and bank violated the
"one form of action" rule, by accepting the reduced payments and applying
them to the unpaid principal balance of the loan.

The Court rejected both arguments. It noted that neither the servicer nor
the lender executed the Workout Plan, and further noted that the borrowers
failed to provide the bank with their financial information, as required
by the Workout Plan. The Court also placed emphasis on the fact that the
lender and servicer requested financial information from the borrowers'
counsel on three separate occasions, without receiving any response.

The Court held that under these circumstances, "principles of equitable
estoppel do not apply because neither [the servicer] nor [the lender] led
the [borrowers] to believe that a permanent loan modification was
forthcoming."

The Court also rejected the borrowers' argument that the servicer and
lender violated the "one form of action" rule. The Court based its
decision on the fact that the borrowers "voluntarily paid monthly
payments.in hopes of obtaining a loan modification," and that in exchange
for these payments, the servicer and lender "suspended further foreclosure
periods for approximately six months." Therefore, the Court stated that
"[w]e do not consider the payments a set-off manifesting an election to
not foreclosure pursuant to the one-form-of-action rule," and affirmed the
judgment of the lower court.


Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.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.


Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.