Saturday, August 25, 2012

FYI: WA Sup Ct Rules MERS is Not Valid "Beneficiary" Under WA Law, State UDAP Claims Could Proceed

The Washington Supreme Court recently held that MERS is not a valid "beneficiary" under Washington law, where MERS did not hold the relevant promissory note or other debt instrument secured by a deed of trust.  The Court also allowed the borrower's claims under Washington's Consumer Protection Act to proceed, holding that "[w]hile we are unwilling to say it is per se deceptive, we agree that characterizing MERS as the beneficiary has the capacity to deceive..."
 
A copy of the opinion is available at http://www.courts.wa.gov/opinions/pdf/862061.opn.pdf
 
The opinion recites that MERS appointed trustees to initiate nonjudicial foreclosure proceedings against multiple borrowers who defaulted on their home loans.  Each deed of trust named MERS the beneficiary.  A lower court judge requested that the Washington Supreme Court answer three certified questions:  (1) Whether MERS is a lawful beneficiary under Washington law if it does not hold the promissory note; (2) If MERS is not a lawful beneficiary, what is the legal effect of same; and (3) Whether homeowners have a Consumer Protection Act claim against MERS under the facts at issue here. 
 
As you may recall, Washington's Deed of Trust Act (the "DOT Act") provides that "the trustee shall have proof that the beneficiary is the owner of any promissory note...secured by the deed of trust" and must provide the homeowner with "the name and address of the owner of any promissory notes...secured by the deed of trust" prior to foreclosure.  RCW 61.24.030(7)(a), (8)(L).  Further, Washington law provides that the trustee has a duty of good faith to the borrower, as well as to the beneficiary and grantor.  RCW 61.24.010(4). 
 
The Court concluded that because MERS never held the promissory note, it is not a lawful beneficiary. 
 
MERS attempted to avoid this result by noting that the DOT Act's definitions apply "unless the context clearly requires otherwise."  RCW 61.24.005.  MERS argued that because the Legislature was attempting to create a more efficient default remedy for lenders (in that the DOT Act provided for nonjudicial foreclosure) the legislature must not have intended to put up barriers to foreclosure.  MERS further noted that the parties had agreed by contract that it was to be the beneficiary.  Therefore, MERS contended that in this context, it should be allowed to foreclose as a beneficiary. 
 
The Court disagreed, noting that it did not find any precedent indicating that parties "can alter statutory provisions by contract." 
 
Next, MERS observed that the statutory definition of "beneficiary" is not limited to the holder of the promissory note, and instead is defined as "the holder of the instrument or document evidencing the obligations secured by the deed of trust."  RCW 61.24.005(2).  MERS therefore argued that because "instrument" and "document" are broad terms, the Legislature was referring to all of the loan documents making up the transaction, including the deed of trust. Accordingly, as the holder of the deed of trust, MERS contended that it met the statutory definition of "beneficiary." 
 
The Court again disagreed, finding that MERS' interpretation of the DOT Act would have "the deed of trust securing itself," and was therefore "untenable." 
 
The Court found more support for its position in the text of the DOT Act.  In particular, it noted that the DOT Act provides that where a beneficiary purchases a property at a trustee sale, the beneficiary is to receive a credit for "the monetary obligations secured by the deed of trust."  RCW 61.24.070.  The Court observed that if a party that did not hold the note was nevertheless a "beneficiary," then this provision would "authorize the non-holding beneficiary to credit to its bid funds to which it had no right."
 
MERS also argued that the lender was entitled to name it as its agent.  The Court did not disagree, but observed that "agency requires a specific principal that is accountable for the acts of its agent."  Here, however, the Court noted that at oral arguments, counsel for MERS were unable to identify its principals.  According, it held that MERS "has not established that it is an agent for a lawful principal." 
 
Despite the generally unfavorable result for MERS, the Court did note that nothing in its opinion "should be interpreted as preventing the parties to proceed with judicial foreclosures." 
 
The Court declined to answer the second certified question, on the grounds that the record before it was insufficient to allow for a decision. 
 
Finally, the Court determined that the consumers might have valid claims under Washington's Consumer Protection Act, depending on the facts of each particular case.  The Court held that "[w]hile we are unwilling to say it is per se deceptive, we agree that characterizing MERS as the beneficiary has the capacity to deceive..." 


 

Ralph T. Wutscher
McGinnis 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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Tuesday, August 21, 2012

FYI: 6th Cir Rules Borrowers Failed to Overcome TILA's Presumption of Delivery of Rescission Disclosures, Lender Owed No Fiduciary Duty Under Ohio Law

The U.S. Court of Appeals for the Sixth Circuit recently upheld summary judgment in favor of a bank defendant, rejecting the so-called "envelope theory" and ruling that the borrowers had no extended right to rescind their loan under the federal Truth in Lending Act, where the borrowers were unable to overcome the presumption under TILA that they received the required number of copies of the Notice of Right to Cancel. 
 
The Court also ruled that, under Ohio law:  (1) the bank was not liable for fraud because the bank owed no fiduciary duty to borrowers to disclose the yield spread premium; and  (2) borrowers' claim that a bank engaged in a civil conspiracy could proceed to trial, where questions of fact existed as to whether the bank knew of or aided a mortgage broker's improper concealment of a yield spread premium ultimately paid by borrowers. 
 
A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/12a0261p-06.pdf.
 
Using a mortgage broker ("Broker"), plaintiffs-borrowers ("Borrowers") refinanced their mortgage with a debt-consolidation loan from a bank ("Bank").  Two of Broker's employees had supposedly promised Borrowers that their mortgage payments would go down as a result of the loan. 
 
When Borrowers applied for the loan, they signed a number of documents without reading them, one of which was a "Mortgage Brokerage Business Disclosure" ("Brokerage Disclosure").  According to Brokerage Disclosure, Borrowers agreed to pay a brokerage fee of $7,000 to Broker and "additional compensation" to Bank.  The "additional compensation" consisted of the Yield Spread Premium ("YSP") that Bank would pay to Broker, the exact amount of which was to be disclosed to Borrowers at the loan closing. 
 
Broker submitted the completed loan application and Brokerage Disclosure to Bank for its review.   At the loan closing, Borrowers were supposedly informed that Broker had waived its fee, and a representative of the title company that had prepared the closing documents confirmed that such a waiver was a common practice for brokers.  As part of the closing, Borrowers signed a final settlement statement that allegedly indicated in supposedly "cryptic language" that a YSP would be paid to Broker.  Borrowers also signed the TILA Notice of Right to Cancel form acknowledging that they each received two copies of the Notice. 
 
Supposedly because of the YSP, Borrowers ended up with a variable interest-rate loan with a significantly higher interest rate than they had on their previous fixed-rate loan. 
 
Borrowers filed suit in Ohio state court against Bank, Broker, and two of Broker's employees, alleging that Broker's employees had indicated that the YSP would be waived; that Bank conspired with Broker to further Broker's alleged breach of its fiduciary duty to Borrowers to disclose the terms of the YSP; that Bank committed fraud by failing to disclose the YSP; and that Borrowers were entitled to rescind the loan under TILA because they did not receive the requisite number of copies of the Notice.
 
Bank removed the case to federal court.  All parties filed motions for summary judgment.  The court granted Bank's motion on all claims, but only granted summary judgment to Broker as to the civil conspiracy claim.  Following these rulings, Borrowers entered into a settlement with all the defendants except Bank.   
 
Borrowers appealed the grant of summary judgment in favor of Bank and the denial of their own motion.  The Sixth Circuit reversed in part, and affirmed in part.
 
As you may recall, in Ohio a civil conspiracy consists of four elements: "(1) a malicious combination; (2) two or more persons; (3) injury to person or property; and (4) existence of an unlawful act independent from the actual conspiracy."  Universal Coach, Inc. v. New York City Transit. Auth., Inc., 629 N.E.2d 28, 33 (Ohio Ct. App. 1993).  
 
In addition, under TILA "[a] creditor shall deliver two copies of the notice of the right to rescind to each consumer entitled to rescind" and ["i]f the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation. . . ."  See 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(b)(1); 12 C.F.R. § 226.23(a)(3). 
 
TILA also creates a rebuttable presumption of the delivery of required disclosures when a written acknowledgement of receipt of such disclosures is presented.  See 15 U.S.C. § 1635(c).
 
Noting that in order to show Bank's participation in a civil conspiracy, Borrowers were only required to show an understanding or common design between Bank and Broker to commit an improper act, which in this case, the Sixth Circuit explained, was Broker's alleged breach of its fiduciary duty to Borrowers.  See Gosden v. Louis, 687 N.E.2 481, 496 (Ohio Ct. App. 1996); Swayne v. Beebles Invs., Inc., 891 N.E.2d 1216, 1226 (Ohio Ct. App. 2008).  Accordingly, the Court ruled that Borrowers needed to show that Bank was aware of and aided in Broker's improper conduct of concealing the YSP. 
 
The Sixth Circuit pointed to a number of pieces of evidence suggesting that Bank had knowledge of Broker's concealment of the YSP, including the Brokerage Disclosure that Bank reviewed and which specifically stated that the amount of the additional compensation would be disclosed at closing.  This, the Court reasoned, showed in part that Bank knew that the YSP would not be disclosed until closing, a fact from which a juror could infer that Broker concealed the YSP prior to the closing.   The Court pointed out that Broker's failure to disclose the YSP during the pre-closing loan application process violated its fiduciary obligations to Borrowers and that disclosure of the YSP at the time of closing on the final settlement statement, even if the YSP notation on the settlement statement had been clear, was improperly "after-the-fact." 
 
The Sixth Circuit thus concluded that Borrowers had raised sufficient factual questions as to whether Bank knew of and aided Broker's concealment of the full terms of the mortgage to allow Borrowers to proceed to trial on the civil conspiracy claim.  
 
In so ruling, the Sixth Circuit disagreed with the district court's conclusion that finding in favor of Borrowers would create new obligations for lenders and pointed out that Ohio case law allows for lender liability based on a theory of civil conspiracy in a case such as this one.  See, e.g., Carver v. Disc. Funding Assocs., Inc., No CVH 20040126, 2004 WL 2827229, at *4 (Ohio Ct. Comm. Pl.  2004); Williams v. Aetna, 700 N.E.2d 859, 867 (Ohio 1998)(indicating that a lender could be liable for civil conspiracy by providing funds to a fiduciary whom lender knew breached his fiduciary duty).
 
As to Borrowers' fraud claim, the Sixth Circuit rejected Borrowers' assertion that Bank breached a fiduciary duty to them for its failure to disclose the YSP to them, because Bank had no fiduciary duty to disclose under Ohio law.  See Ohio Rev. Code §§ 1109.15(E), 1322(081(B)(creating detached relationship between lenders and borrowers and exempting lenders from most mortgage brokers' fiduciary duties).
  
With regard to Borrowers' TILA rescission claim, the Sixth Circuit noted that TILA created a rebuttable presumption that Borrowers had received the required disclosures when Bank produced a copy of the Notice of Right to Cancel signed by both Borrowers at closing.  That Notice, the Court stressed, clearly explained the significance of Borrowers' signatures on the form.  Observing in part that Borrowers had submitted affidavits that swore only that their package of disclosure forms remained unaltered since closing -- the so-called "envelope theory," the Court ruled that Borrowers' "envelope theory" was insufficient to rebut the presumption of proper delivery created by the signed Notice. 
 
Accordingly, the Sixth Circuit affirmed the district court's grant of summary judgment on the fraud and TILA claims.
 
 


Ralph T. Wutscher
McGinnis 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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Monday, August 20, 2012

FYI: 2nd Cir Rules Single Nationwide Class Settlement Publication Notice Insufficient to Bar Class Member's Individual FDCPA and UDAP Claims

The U.S. Court of Appeals for the Second Circuit recently held that a debtor's claim under the federal Fair Debt Collection Practices Act was not precluded by a judgment in a prior class action in which the debtor was an unnamed class member, ruling that where notice of the class action appeared only once in a national newspaper, debtor's due process rights to notice and the opportunity to opt out were not satisfied.  A copy of the opinion is attached.   
 
A debtor ("Debtor") filed suited against a debt collector ("Debt Collector"), alleging that Debt Collector violated the federal Fair Debt Collection Practices Act ("FDCPA") and the Connecticut Unfair Trade Practices Act, by supposedly placing telephone calls to Debtor without identifying itself, and by failing to disclose that Debt Collector was attempting to collect a debt and that any information obtained would be used for that purpose.
 
Debt Collector moved to dismiss, arguing that Debtor's suit was precluded on res judicata grounds because an earlier class-action settlement ("Settlement") concerning the same claims barred the suit.
 
In the prior class action, Gravina v. United Collection Bureau, Inc., No. 09 Civ. 4816 (E.D.N.Y. Nov. 29, 2010)("Gravina"), the court certified the class under Rule 23(b)(2) of the Federal Rules of Civil Procedure, and the parties entered into a settlement agreement.  In order to inform absent class members of the class action and the proposed settlement, the parties published a single notice in a nationally circulated newspaper.  
 
Noting that no objector appeared following publication of the notice, the Gravina court later entered an order approving the class-action settlement, which broadly defined the "Settlement Class" as anyone in the United States who received a telephone message from Debt Collector that did not comport with the FDCPA's requirements.  Under the Settlement, each named class representative received $1,000 in damages plus additional payment for their services to the class members.  Damages for the estimated two million unnamed class members amounted to roughly $13,000, representing 1% of Debt Collector's net worth, which amount was intended to go to a national charitable organization.   The settlement also provided injunctive relief whereby Debt Collector was to identify itself and state the debt-collection purpose of its communications.

The district court in this case dismissed Debtor's law suit, ruling that Debtor was bound by the Gravina Settlement because the newspaper notice satisfied due process, and the amount of money at stake was "miniscule" given the number of class members.
 
Debtor appealed.  The Second Circuit reversed and remanded, ruling that because Debtor had a due process right to notice that was not met by a single notice published in a nationally circulated newspaper, Debtor was not barred from pursuing her claim.
 
As you may recall, the FDCPA provides in part that in the case of class actions, named class representatives may recover up to $1,000 in damages.  See 15 U.S.C. § 1692k(a)(2)(B)(i).  Unnamed class members may recover up to $500,000 or 1% of the net worth of the debt collector, whichever is less.  See 15 U.S.C. § 1692k(a)(2)(B)(ii).
 
In addition, class certification is authorized under Rule 23(b)(2) where "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole."  Fed. R. Civ. P. 23(b)(2).  Rule 23(b)(3) authorizes class certification where common questions of law or fact predominate over any questions affecting only individual members.  Fed. R. Civ. P. 23(b)(3).
 
The Second Circuit began its analysis by noting in part that the definition of "class member" in the Gravina Settlement included persons in Debtor's position, but that res judicata did not bind class members "where to do so would violate due process."  See Stephenson v. Dow Chem. Co., 273 F.3d 249, 260 (2d Cir. 2001), aff'd in part and vacated in part, 539 U.S. 111 (2003).    
 
The Court explained that absent class members have a due process right to notice and an opportunity to opt out when the action is "predominantly" for money damages. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 & n.3 (1985)("Shutts").  Moreover, the Court noted that the U.S. Supreme Court expanded the right to notice and an opportunity to opt out under Rule 23 to include claims for money damages that are more than "incidental."  See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __, 131 S. Ct. 2541, 2558-59 (2011)(right to notice and opportunity to opt out under Rule 23 now applies not only to class actions predominantly for money damages, but also to class actions where the claim for money damages is more than "incidental").
 
Noting that the United States Supreme Court in Dukes left unresolved the question as to whether due process rights extended to actions where money damages did not predominate, the appellate court ultimately concluded that the claim in Gravina for monetary relief predominated over the claim for injunctive relief.  Cf. Robinson v. Metro-North Commuter RR. Co., 267 F.3d 147, 165 (2d Cir. 2001)(observing in part that "due process may require the enhanced procedural protections of notice and opt out for absent class members" where "non-incidental monetary relief" is involved).   Accordingly, the Second Circuit determined that in this case Debtor had a due process right to notice and an opportunity to opt out. 
 
Next, recalling that due process requires that notice be "reasonably calculated, under all the circumstances, to apprise" the absent class members of the pending class action and to provide them an opportunity to object, the Court observed that constructive notice by publication may satisfy due process where the identities of the class members are not ascertainable through due diligence.   Pointing out, however, that the district court in Gravina never determined whether the class members' identities were ascertainable,  the appellate court concluded that even if the class members were ascertainable, the single notice published in the national newspaper did not satisfy due process or Rule 23(b)(3) that allows class certification based on commonality. 
 
In so ruling, the Second Circuit among other things referred to the single notice in this case as a "mere gesture" and rejected Debt Collector's assertion that it was not required to provide the "best practicable" notice to the class members because the Gravina class action was certified under the injunctive relief provision of Rule 23(b)(2) rather than commonality under Rule 23(b)(3).  As the court explained, "certification of a class under (b)(2) does not excuse the due process requirement that unnamed class members in a class action predominantly for money damages receive the 'best practicable' notice."  See Shutts, 472 U.S. at 812. 
 
Finally, the Court also rejected Debt Collector's argument that the negligible amount of money to be awarded to the individual class members somehow justified "lesser notice,"  recognizing that single claimants may recover up to $1,000 in statutory damages whereas damages for unnamed class members are capped at potentially severely reduced levels.   The Court stated:  "Given this contrast between the damages available to unnamed class members and those available to individual plaintiffs, it was all the more important that [Debtor] receive adequate notice before being deprived of her individual right to sue."
 
Accordingly, the Second Circuit reversed the dismissal of Debtor's FDCPA claim, vacated Debtor's claim under the Connecticut Unfair Trade Practices Act, and remanded for further proceedings.
 



Ralph T. Wutscher
McGinnis 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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Sunday, August 19, 2012

FYI: 1st Cir Holds No Rescission Right for Delivering Only One Copy of Notice of Right to Cancel, Under MCCCDA

The U.S. Court of Appeals for the First Circuit recently held that, under Massachusetts law, a borrower's right to rescind a mortgage loan was not extended where the lender provided a borrower with only one copy of the Notice of Right to Cancel.
 
 
When a borrower defaulted on her home loan for a property located in Massachusetts, the lending bank (the "bank") successfully foreclosed using the "limited judicial procedure" permitted under Massachusetts law.  The bank then informed the borrower of its intention proceed with a foreclosure sale.  The borrower responded by asserting a right to rescind the mortgage, and sued to stop the foreclosure sale.  The borrower's right to rescind was premised on her allegation that (1) the bank had provided her with one copy of the notice of right to cancel, rather than two; and (2) that the bank understated the finance charge.
 
The lower court granted a preliminary injunction preventing the bank from selling the home.  The bank then moved to remove the matter to federal court, contending that jurisdiction was appropriate given the borrower's federal claims, as well as diversity of citizenship.  In the federal district court, the bank's motion to dismiss the borrower's complaint for failure to state a claim was granted.  The borrower filed a motion for reconsideration, which was denied. The borrower then appealed.  
 
On appeal, the First Circuit first considered whether the federal district court had subject matter jurisdiction to consider the matter.  This analysis was complicated by the fact that although the borrower's claims were styled as arising under state law, the bank's primary assertion in motioning to removing the matter was that the claims raised federal questions.   The First Circuit noted that  "unsettled questions as to what federal rights are displaced and what others remain where...the Federal Reserve has exempted a state from various [of] TILA's provisions" where, as here, state law establishes requirements substantially similar to those of TILA.  However, the Court found resolving those questions to be unnecessary, given that under the facts at issue here, "removal can be supported by diversity jurisdiction..." 
 
Turning to the merits of the matter, the First Circuit examined the borrower's two central claims: (1) that the bank could no longer foreclosure, because it was not the holder of the note; and (2) that the borrower had the right to rescind the loan.
 
The Court found for the bank in both instances.  It began by noting that the Supreme Judicial Court of Massachusetts recently held that a foreclosing entity must demonstrate that it holds both the mortgage and the note.  Eaton v. Federal National Mortgage Association, 969 N.E. 2d 1118, 1129-31 (2012) ("Eaton").  However, that same opinion provided that the rule would apply only to foreclosures where the notice of sale was given after the date of the opinion.  Id. at 1133.  Therefore, the First Circuit held that Eaton provided the borrower with no protection, and accordingly found the borrower's related contentions to be without merit. 
 
Next, the Court turned to the borrower's right of rescission claim, which were brought under the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA"), which as you may recall is substantially similar to the federal Truth in Lending Act.  Like TILA, under the MCCCDA, the right of rescission is extended where the borrower is not provided with certain disclosures.
 
Here, the borrower alleged that she received only one copy of her "Notice of Right to Cancel," rather than two as required by statute.  The lower court held that where a borrower receives one such notice, the rescission period is not extended.  The Court agreed, noting that although the MCCCDA says "nothing about the lack of multiple copies being a basis for rescission," the language concerning the extension of the rescission period refers to "written notice," which the Court observed was singular rather than plural.  Therefore, the Court held that "lack of notice, not the number of copies" is the "predicate for rescission." 
 
Finally, the Court examined the borrower's claims that the closing attorney overcharged her for title insurance, and therefore that the bank underdisclosed the cost of the transaction in violation of Massachusetts law.  The Court affirmed the lower court's dismissal of this claim as well, finding that "[n]othing in [the borrower's] complaint provided any...factual basis" for that claim.  The Court therefore deemed the borrower's allegations "wholly conclusory." 
 
Accordingly, the First Circuit affirmed the judgment of the lower court. 
 


Ralph T. Wutscher
McGinnis 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.


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