Monday, July 21, 2014

FYI: 2nd Cir Holds Failure to Disclose Claims in BK Does Not Bar Later Action on Claims If BK Dismissed Rather Than Discharged

The U.S. Court of Appeals for the Second Circuit recently held that a borrower who failed to disclose claims in bankruptcy was not later barred from bringing those claims because her bankruptcy petition was dismissed rather than discharged. 


The Second Circuit also reversed the district court’s grant of summary judgment as to the borrower’s TILA and fraud claims due to factual disputes, but affirmed the district court’s dismissal of the borrower’s RICO, ECOA, New York General Business Law, fraud, and negligent misrepresentation claims.


In affirming the district court’s dismissal of the borrower’s civil racketeering claim, the Second Circuit followed the Seventh Circuit’s reasoning in Tellis v. United States Fidelity & Guaranty Co., 826 F.2d 477, 478 (7th Cir. 1986) that “multiple acts of mail fraud in furtherance of a single episode of fraud involving one victim and relating to one basic transaction cannot constitute the necessary pattern” requirement of RICO.


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


In 2004, the plaintiff-borrower (“Borrower”) was in default on her first and second residential mortgages.  Borrower obtained a new loan from a lending company (“Lender”) that allowed her to avoid foreclosure.  The loan was serviced by a wholly-owned subsidiary of Lender (“Servicer”).


By 2005, Borrower was again in default.  In 2006, in order to forestall an imminent foreclosure sale, Borrower filed bankruptcy.  Borrower failed to list any claims against Lender or Servicer in her bankruptcy petition (the “Petition”).  The Petition was later dismissed.  In 2011, after a second bankruptcy filing, Borrower’s real property was sold in foreclosure.


In 2008, Borrower filed suit against both Lender and Servicer and asserted claims under RICO, ECOA, TILA, and New York General Business Law (“GBL”) § 349, as well as common-law claims of fraud and negligent misrepresentation.  Lender and Servicer moved for summary judgment and argued that Borrower lacked standing because she failed to disclose the claims in 2006 bankruptcy Petition.


In opposition to summary judgment, Borrower testified that a representative of Lender told her that Lender and Servicer were “foreclosure rescuers” and that “because of her full-time-student status and reduced work [], she could not afford to make any monthly payments on a mortgage for at least a year.”  According to Borrower, the representative “said he would ‘tailor’ for [Borrower] a one-year ‘bridge loan’ of $35,000, and that Lender would take care of her monthly payments to her mortgagees and stave off foreclosure for a year; thereafter that loan would be converted to a 30-year fixed-rate mortgage loan.  According to Borrower, the representative “urged [Borrower] to act on [Lender’s] offer promptly, telling her that since Borrower was an African-American, [her former lender] would foreclose very quickly.” 


In support of the motion for summary judgment, Lender’s loan officer “denied telling [Borrower] that he or [Lender] was a ‘foreclosure rescuer’ and denied that he ever offered her a ‘bridge loan’ or used that term. Instead, [the loan officer] stated that he told [Borrower], and always believed she understood, that the loan from [Lender] would result in a mortgage on her property.”  According to Lender’s loan officer, “he never told [Borrower] she would not have to make payments on her loan for a year, or that because she was an African-American her lenders would foreclose very quickly.”


The loan closing took place at JFK airport.  In opposition to summary judgment, Borrower testified that she “met ‘Defendants representative’ and that she ‘signed some blank pages as requested by Defendants' representative.’”  Borrower testified that “she never requested a mortgage from Servicer or Lender but that they, without her knowledge, intent, or consent, “use[d her] signatures to manufacture a mortgage" on her home in the amount of $504,000.”  Borrower further testified that “she did not receive copies of any note or mortgage” and “she did not receive closing documents” until mid-2007. 


In support of the motion for summary judgment, the attorney who handled the loan closing “denied that he asked [Borrower] to sign any blank pages, saying “I have never requested, nor have I been asked to request, that a borrower sign blank pages.”  The attorney also testified that “[t]he closing took place at JFK airport in [his] car; no one other than he and [Borrower] was present.”  The attorney testified “that he described the closing documents to [Borrower], and she reviewed them before signing them … his customary practice, like that of most lenders, was to request that the borrower sign multiple copies of documents, and to give the borrower copies at the closing.”


The district court granted Lender and Servicer’s summary judgment motions principally on standing grounds.  The district court “concluded that Borrower’s failure to disclose her claims in her 2006 bankruptcy case barred her from asserting them …”


As you may recall, Section 349(b)(3) of the Bankruptcy Code provides that unless the bankruptcy court for cause orders otherwise, “a dismissal of a case … revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case.”  11 U.S.C. § 349(b)(3).


In granting Lender’s and Servicer’s motion for summary judgment, the district court reasoned that Section 349 was overridden with respect to undisclosed claims by Section 554 of the Bankruptcy Code.  Section 554 is titled “Abandonment of property of the estate.”  Section 554 provides that unless the court orders otherwise, “any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor” and "property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.” Id. § 554(c), (d) (emphases added).  The district court concluded that because Borrower had not disclosed her claims against Lender and Servicer in her bankruptcy Petition, those claims were not “scheduled” and remained property of the bankruptcy estate even after the bankruptcy petition was dismissed.


The Second Circuit reversed and found that “if the debtor owned the property prior to the commencement of the bankruptcy case, a dismissal returns that property to the debtor.”  The Second Circuit rejected the district court’s analysis that Section 349 was overridden by Section 554.  The Second Circuit reasoned that Section 554 “has no applicability after a dismissal.  Thus, although subsections (c) and (d) of § 554 prescribe different treatments for assets at the time a bankruptcy case is ‘closed,’ depending on whether they were or were not listed in a § 521(a)(1) schedule, the dismissal of the case under § 349, automatically revesting all of the property of the estate in its prior owners, means that there are no assets remaining to be abandoned or administered.”


The Second Circuit next analyzed, in seriatim, whether the district court’s grant of summary judgment was proper vis-à-vis Borrower’s claims for violations of RICO, ECOA, and New York General Business Law, and for fraud and negligent misrepresentation.


As you may recall, to establish a Civil RICO violation under 18 U.S.C. §1962(c), “a plaintiff must show that the defendant conducted, or participated in the conduct, of a RICO enterprise's affairs through a pattern of racketeering activity.”  See, e.g., Cruz v. FXDirectDealer, LLC (FXDD), 720 F.3d 115, 120 (2d Cir. 2013).  “‘[R]acketeering activity,’” as defined in RICO, may consist of any of a number of criminal offenses, listed in 18 U.S.C. § 1961(1), including mail fraud in violation of 18 U.S.C. § 1341, and wire fraud in violation of 18 U.S.C. § 1343.


A “pattern of racketeering activity” consists of “at least two acts of racketeering activity.”  18 U.S.C. § 1961(5).  In order to prove such a “pattern,” a civil RICO plaintiff also “must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity.”  H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239 (1989) (emphasis in original). The requisite continuity may be found in “either an 'open-ended' pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a ‘closed-ended’ pattern of racketeering activity (i.e., past criminal conduct ‘extending over a substantial period of time’).” GICC Capital Corp. v. Technology Finance Group, Inc., 67 F.3d 463, 466 (2d Cir. 1995).


In support of her RICO claims, Borrower asserted that “Defendants engaged in wire fraud, consisting of interstate or international telephone conversations she had with [the loan officer] and of [Lender’s] solicitation from her of faxed documents in order to facilitate the allegedly promised bridge loan.”  Borrower also “asserted that Defendants engaged in mail fraud, consisting of Servicer’s mailing to her of mortgage statements in January and February 2005 and default notices in March and April 2005, and of sporadic mailings by Lender's counsel in 2005-2010 relating to Lender’s state-court foreclosure action.” 


The Second Circuit found that this evidence could not “permit a rational inference of either open ended or closed-ended continuity of racketeering activity.”  The Second Circuit also concluded that the Borrower’s evidence was “insufficient to show the necessary pattern and that Defendants were entitled to summary judgment dismissing her claims under § 1962(c).”  The Second Circuit cited a Seventh Circuit decision for the proposition that "multiple acts of mail fraud in furtherance of a single episode of fraud involving one victim and relating to one basic transaction cannot constitute the necessary pattern," Tellis v. United States Fidelity & Guaranty Co., 826 F.2d 477, 478 (7th Cir. 1986); see also Slaney v. The International Amateur Athletic Federation, 244 F.3d 580, 599 (7th Cir.), cert. denied, 534 U.S. 828 (2001).


The Second Circuit also affirmed the district court’s dismissal of Plaintiff’s ECOA claims.  As you may recall, the ECOA provides that it is “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction[,] . . . on the basis of race, color, religion, national origin, sex or marital status, or age.”  15 U.S.C. § 1691(a).  In opposition to Defendants' summary judgment motion, Borrower’s only references to discrimination were her assertion that the loan officer had advised her that her prior lender would foreclose very quickly because she is African-American, and a conclusory reference to “Defendants' discriminatory actions.”  The Second Circuit found that these conclusory statements were insufficient to create a genuine issue to be tried as to the discrimination element of Borrower’s ECOA claims. 


The Second Circuit also affirmed the district court’s dismissal of Borrower’s claims under the New York General Business Law.  As you may recall, the New York General Business Law makes it unlawful to engage in “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in [New York] state . . . .”  N.Y. Gen. Bus. Law § 349(a).  To state a claim under GBL § 349, a plaintiff “must prove three elements: first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the plaintiff suffered injury as a result of the deceptive act.” Stutman v. Chemical Bank, 95 N.Y.2d 24, 29, 709 N.Y.S.2d 892, 895 (2000).


To show that the challenged act or practice was consumer-oriented, a plaintiff must show that it had “a broader impact on consumers at large”: “Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute . . . .” Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 25, 623 N.Y.S.2d 529, 532 (1995).  The Second Circuit found that Borrower had failed to produce any evidence that the acts of Lender and Servicer were committed against consumers in general or indeed against anyone other than Borrower.  Thus, the Second Circuit affirmed the district court’s dismissal of Borrower’s GBL claim.


The Second Circuit also affirmed the district court’s dismissal of Borrower’s negligent misrepresentations claims.  To prevail on a claim of negligent misrepresentation under New York law, a plaintiff must show “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148, 831 N.Y.S.2d 364, 366 (2007). “[L]iability in the commercial context is ‘imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.’” Eternity Global Master Fund Limited v. Morgan Guaranty Trust Co. of New York, 375 F.3d 168, 187 (2d Cir. 2004) (quoting Kimmell v. Schaefer, 89 N.Y.2d 257, 263, 652 N.Y.S.2d 715, 719 (1996)).  


In support of her claims, Borrower’s only attempt to show the requisite special relationship between herself and Defendants consists of her argument that “Defendants claimed special expertise in bridge loans to forestall foreclosures.”  The Second Circuit found that Borrower’s argument was foreclosed by the New York Court of Appeals decision in Greenberg, Trager & Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565, 934 N.Y.S.2d 43 (2011), which held that “an arm's length borrower-lender relationship . . . does not support a cause of action for negligent misrepresentation.” Id. at 578, 934 N.Y.S.2d at 50.


The Second Circuit reversed the district court’s dismissal of Borrower’s TILA and common law fraud claims.  Borrower had testified that she had not received the disclosures required by TILA.  Because Borrower’s testimony was only contradicted by the loan closing attorney contrary oral testimony, the Court held that this was enough to avoid summary judgment as to the TILA claim.


In their motion for summary judgment on Borrower’s common law fraud claims, Lender and Servicer had argued that Borrower had not suffered any damages because her foreclosure was in fact delayed by the refinancing transaction.  In addition, Servicer argued that there was no evidence that Servicer had anything to do with the alleged conduct that forms the basis for Plaintiff's claims.  The Second Circuit rejected these arguments.  The Second Circuit noted that Borrower had presented evidence that Servicer and Lender shared a single hiring department, that the loan officer's supervisor reported to Servicer’s chief executive officer, that a Servicer vice president was involved in her loan transaction, and that a Servicer document referred to her loan as a “Servicer Credit Loan.”


The Second Circuit also determined that it could not accept Lender’s argument that Borrower had not suffered any damages as a matter of law because Borrower “was charged more than $35,000 in settlement fees in the mortgage transaction, and she eventually lost her home in foreclosure. Whether she suffered injury is a question to be answered by a factfinder.”






Ralph T. Wutscher
McGinnis Wutscher Beiramee 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


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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