FYI: 3rd Cir Affirms Class Cert in Mortgage Lending Action Involving a General Class and 5 Sub-Classes

The U.S. Court of Appeals for the Third Circuit recently affirmed certification of a nationwide class of mortgage loan borrowers that could include tens, if not hundreds, of thousands of class members. 

 

More specifically, the Court held that the putative class plaintiff borrowers' claims for violations of: (1) the federal Real Estate Settlement Procedures Act ("RESPA; (2) the federal Truth in Lending Act ("TILA"); (3) the federal Home Ownership and Equity Protection Act ("HOEPA"); and (4) the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), satisfied the certification requirements of Federal Rules of Civil Procedure 23.

 

A copy of the opinion is available at: http://www2.ca3.uscourts.gov/opinarch/134273p.pdf

 

The case is a consolidation of multiple putative class actions filed in the early 2000s. 

 

Since the initial filing and consolidation, the putative borrower plaintiffs previously sought certification of settlement classes twice, but both settlement class certifications were reversed on appeal due to concerns over intra-class conflicts, among other things. Both of the settlement attempts also included substantial numbers of "objector plaintiffs" who did not participate in the settlement class. 

 

However, following the last reversal, the objector plaintiffs and the settlement plaintiffs (collectively, the "Borrowers") joined together to seek certification of a litigation class only to resolve the intra-class conflict issues. 

 

The Borrowers alleged that they were victims of a predatory lending scheme supposedly involving a community bank, title companies and other entities (collectively the "Bank") to offer high-interest mortgage loans to "financially strapped" homeowners.  The purpose of the scheme, the Borrowers allege, was to circumvent various mortgage lending laws and provide illegal kickbacks to the organization and funnel other fees back to the organization for services it did not really perform.

 

The Borrowers also alleged that the scheme violated, among other things, RESPA, TILA, and HOEPA.  The statute of limitations for these claims is one year.  However, the first of the consolidated class action complaints were filed in the early 2000, more than a year after many of the class members loans were originated from the "period May 1998-December 2002." 

 

To try to get around the statute of limitations problem, the Borrowers claimed that equitable tolling applied to the RESPA, TILA, and HOEPA claims that would otherwise be time barred.  The Borrowers alleged equitable tolling applied because of alleged "fraudulent concealment" of the facts that form the basis of those claims.

 

The Borrowers sought certification of a general class and five sub-classes.

 

The general class included "[a]ll persons nationwide who obtained a second or subordinate, residential…mortgage loan from…" the Bank secured by a property used as that person's primary residence, "for the period May 1998-December 2002."  

 

To eliminate potential intra-class conflicts over various claims, the litigation class also includes five sub-classes.  They are as follows:

 

Sub-Class 1: (RESPA [Affiliated Business Association] Disclosure Sub-Class)… – All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from…[the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-October 1998;

 

Sub-Class 2: (RESPA Kickback Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from…[the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period October 1998-November 1999;

 

Sub-Class 3: (TILA/HOEPA Non-Equitable Tolling Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from (the Bank) that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1, 2001-May 1, 2002;

 

Sub-Class 4: (TILA/HOEPA Equitable Tolling Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from…[the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-December 2002;

 

Sub-Class 5: (RICO Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from… [the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-November 1999.

 

The U.S. District Court for the Western District of Pennsylvania granted class certification of the Borrower's general litigation and all five sub-classes in 2013.

 

On appeal, the Bank argued certification was improper because:

 

[1]  there is a fundamental conflict that undermines the adequacy of representation provided by class counsel;

[2]  the District Court conditionally certified the class and thus erred; and

[3]  the putative class does not meet the ascertainability, commonality, predominance, superiority, or manageability requirements under Fed. R. Civ. P. 23.

 

The Third Circuit rejected all of the Bank's arguments, and held that certification was proper.

 

As you may recall, to "be certified, a class must satisfy the four requirements of Rule 23(a), namely: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation."  

 

Numerosity essentially means there are a sufficient number of class members to justify use of the class action.  

 

Commonality generally means that common questions of law or fact predominate over individual ones (i.e. whether highly individualized inquires, or mini-trials would be required for the class to prove its claims). 

 

Typicality means that the claims of the putative plaintiffs are the same (and thus represent) the claims of all the members in the class.

 

Adequacy of representation means both that "the putative plaintiffs adequately represent the class," and that "class counsel is sufficiently experienced and skilled in class action litigation" to represent the putative plaintiffs and the class.  The analysis of the "adequacy element also examines the interests and incentives of the class representatives" (i.e. there cannot be a "fundament" intra-class conflict between different class members).

 

Moreover, the "parties seeking class certification bear the burden of establishing by a preponderance of the evidence that the requirements of Rule 23(a) have been met."  To meet that burden, "they must affirmatively demonstrate that there are in fact sufficiently numerous parties, common questions of law or fact, etc." 

 

If those Rule 23(a) requirements are met, "then a court must consider whether the class fits within one of the three categories of class actions set forth in Rule 23(b)."  In this case, the putative plaintiffs chose to pursue Rule 23(b)(3) claims, which in turn "requires a court to consider whether common questions of law or fact predominate and whether the class action mechanism is the superior method for adjudicating the case."

 

The manageability of class litigation is pertinent to those findings.  The Third Circuit also recognized that "an essential prerequisite of a class action, at least with respect to actions under Rule 23(b)(3), is that the class must be currently and readily ascertainable based on objective criteria."

 

The Court held that that the individualized issues raised by the Bank did not defeat the "Plaintiffs' showing of predominance" and that common issues certainly predominated over individual ones.

 

On the TILA/HOEPA claims the Third Circuit held that "even if individualized inquiries predominate on one" asserted basis for TILA/HOEPA liability, it still "does not undermine the predominance of the primary claims for TILA/HOEPA liability, namely, the delivery of inaccurate information." 

 

The Court also held that the general class and five sub-classes satisfied the adequacy of representation requirement of Rule 23(a).  It held that the "principal purpose of the adequacy requirement is to determine whether the named plaintiffs have the ability and the incentive to vigorously represent the claims of the class." 

 

Further, it explained that not "every intra-class conflict is consequential."  Here, it held that because it was "no longer dealing with a settlement class and a fixed sum to satisfy claims...[these] new circumstances are materially different from the scenarios present" in the prior appeals of this case where "subclasses were jockeying for pieces of a limited [fixed] settlement pie." 

 

By contrast here, the Third Circuit noted that "[a]ll class members can assert all of their available claims, and all class members can, at least in theory, recovery all of their damages without impacting the recovery of any other class members."  Accordingly, the Third Circuit held that there was no "fundamental" intra-class conflict.

 

The Court also held that it was not necessary to appoint separate counsel for the subclasses as a "prerequisite for certification of the subclasses."  However, it cautioned that on remand, post-certification, if "the District Court determines that any subclass's equitable tolling arguments fail, it may well be necessary to appoint separate counsel to represent newly divergent interests."

 

The Court also held that the Bank's "conditional certification" argument failed.  Following certification, the District Court had agreed to give the Borrowers "an opportunity to conduct further discovery touching on merits-related issues."  The Bank argued that this means the "District Court [improperly] conditionally certified the class." 

 

Rejecting the Bank's argument, the Third Circuit held that although the District Court had "articulated an expectation that discovery would vindicate its decision to grant class certification, we do not believe that the Court's statements were meant to indicate that the earlier ruling was conditional...[and] [w]e conclude, therefore, that the class was not conditionally certified. 

 

Turning to the commonality element, the Third Circuit explained that a "putative class satisfies Rule 23(a)'s commonality requirement if the named plaintiffs share at least one [common] question of fact or law with the grievances of the prospective class," and that the Borrowers' burden to meet that element "is not high."  Additionally, citing Walmart and other United States Supreme Court precedence, the Third Circuit held that the "common contention" or contention must be of such a nature that it "is capable of classwide resolution." 

 

Accordingly, as you may recall, under Walmart, "what matters to class certification is not the raising of common questions—even in droves—but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation."

 

Here, The Third Circuit held that the commonality element was met.  Applying Walmart the Third Circuit also distinguished this case from Walmart, holding that "[u]nlike the Walmart plaintiffs, the Plaintiffs in this case have alleged that the class was subjected to the same kind of illegal conduct by the same entities, and that the class members were harmed in the same way, albeit to potentially different extents." 

 

Thus, the Third Circuit held, whereas there was discretion by different managers and employees in Walmart, here there was no discretion where the Borrowers alleged that the bank and its co-conspirators "operated a residential mortgage assembly line that included unlawful loans characterized by illegal kickbacks," among other things.  Accordingly, the Third Circuit held that as "the Plaintiffs rightly point out" numerous "questions are common to each class member and will generate common answers."

 

Further, the Third Circuit held these "common issues" predominated over individualized ones.  Although, it also acknowledged that "some individualized determinations may be necessary to completely resolve the claims of each…class member in this case, those are not the focus of the commonality inquiry."

 

Additionally, the Third Circuit held that the Borrowers' equitable tolling arguments did not bar class certification.  The Borrowers alleged that equitable tolling based upon a "fraudulent concealment doctrine" which "operates to the stop the statute of limitations from running in circumstances when the accrual date of a claim has passed but the plaintiff's cause of action has been obscured by the defendant's conduct."

 

Third Circuit held that any individualized issues with the respect to the Borrowers' equitable tolling allegations were not so "highly individualized" as to preclude class certification.  However, it did not reach the merits of whether the Borrowers were "actually entitled to equitable tolling," but rather "only conclude[d]…that the common issues of fact and law predominate over individual ones such that the issue [of equitable tolling] is suitable for class-wide treatment on the merits." 

 

The Third Circuit also held that the Borrowers' RESPA and TILA/HOEPA claims did not preclude class certification.

 

On those claims, the Bank had argued that individualized issues predominated over common issues.  The Bank argued that the TILA/HOEPA claims presented substantial individualized issues because to prove equitable tolling based upon fraud on each of the Borrowers HUD-1s, each of the Borrowers would have to demonstrate the "organization" and its co-conspirator's took affirmative steps to mislead them. 

 

Also, the Bank argued that the RESPA claims would require individualized inquiry because there were different fees that different "plaintiffs complain about," and thus the fact finder would have to "individually analyze each borrower's loan transaction" to determine if the fees were properly represented on the HUD-1, thus resulting in thousands of mini-trials.

 

The Third Circuit disagreed.  It held that although the Borrowers allegations in support of the illegal kick-back scheme and violations of RESPA "places a potentially onerous evidentiary burden on" the Borrowers, the key elements of the RESPA claims that "are 'essential'…can potentially be proven with common evidence." 

 

Additionally, the Third Circuit held that the Borrowers' TILA/HOEPA claims did not present any "highly individualized inquiry" issues. 

 

In support of those claims, the Borrowers alleged that the Bank "improperly excluded certain charges from its APR calculation—improper charges that were added to every loan—that resulted in a materially misstated APR."  The Third Circuit held that proving these allegations would not require highly individualized inquiry, but rather to determine "whether the fees were in fact excluded from the APR calculation requires simple arithmetic."

 

Moreover the Third Circuit held that even if the Borrowers' TILA/HOEPA claims "premised on deficient HOEPA disclosures…require loan-by-loan analysis…those possible issues do not affect the principal violations of TILA/HOEPA in the Complaint."  Thus, the Third Circuit held that those issues "do not undermine the District Court's decision on predominance." 

 

The Third Circuit also held that the Borrowers' RICO claims satisfied the predominance requirements of Rule 23. 

 

The Court explained that there was no danger of individualized issues predominating over common ones for the Borrowers to prove the reliance element of their RICO claims because "they can prove their RICO claims with the same classwide evidence that will be used to prove the RESPA and TILA/HOEPA claims."  And, "where proof of the RICO violation is demonstrated through common evidence of a common scheme, reliance may be inferred on a classwide basis."

 

The Bank also argued that the RICO claims would require "a loan-by-loan and fee-by-fee analysis, and therefore, that individualized facts inquiries at the damages stage" would overwhelm individualized ones, precluding certification. 

 

However, the Court held that argument was "mistaken" because the Borrowers "do not allege that [one of the defendants] performed inadequate services in exchange for fees," but rather that "class-wide evidence demonstrates" that no services at all were provided.

 

Finally, the Third Circuit held that the certified case was sufficiently manageable under Rule 23 and that the Borrowers and sufficiently met their burden under Rule 23(b)(3) of showing that "class treatment…[is] superior to other available methods for fairly and efficiently adjudicating the controversy."

 

In sum, the Court affirmed the District Court's decision and held that the District Court did not abuse its discretion "as to any certification issue or requirement."

 

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (3rd DCA) Holds Surviving Spouse on Reverse Mortgage/HECM Could Not Be Foreclosed

The District Court of Appeal for the State of Florida, Third District, recently reversed a judgment foreclosing a reverse mortgage, holding that the surviving spouse was a "Borrower" under the terms of the mortgage, and thus the lender could not meet the condition precedent of her death in order to foreclose.

 

A copy of the opinion is available at: http://www.3dca.flcourts.org/opinions/3D13-2261.pdf

 

In 2008, husband and wife signed a promissory note secured by a "home equity conversion mortgage," commonly known as a "reverse mortgage." The wife signed the mortgage, but not the promissory note.

 

After the husband died in 2009, the lender sued to foreclose, alleging that he was the sole borrower and that his death triggered the acceleration clause in the mortgage.

 

In her answer, the wife denied that all conditions precedent to acceleration and foreclosure had been met or had occurred.

 

After a bench trial, the court entered a final judgment of foreclosure in the lender's favor, which contained no findings of fact or adjudication as to whether all conditions precedent had occurred.

 

The wife appealed, arguing that she was a co-borrower under the mortgage and that acceleration was unlawful under the federal statute governing insurability of reverse mortgages,12 U.S.C. 1715z-20(j). Under this statute, the surviving spouse argued, the mortgage could not be foreclosed until she died or no longer lived in the property as her principal residence.

 

The Appellate Court noted the issue was whether the trial court erred in construing the reverse mortgage and determining that the wife as not a "borrower" as defined therein, and that all conditions precedent to foreclosure had impliedly occurred.

 

The Court noted that it is settled Florida law that "in a mortgage foreclosure action, the plaintiff must plead and prove the occurrence of all conditions precedent."  The Court noted that, because the husband's death was the only basis for acceleration and foreclosure, if the wife was a "borrower" under the mortgage, then a condition precedent to the lender's right to foreclose had not occurred and foreclosure was improper.

 

After analyzing the plain language of the mortgage, including that it clearly reflected that both husband and wife were the "borrower," as well as the paragraph in the mortgage that reflected the condition precedent required by federal law in order to insure reverse mortgages, i.e., that the lender can accelerate only if a borrower dies and the property is not the principal residence of the surviving borrower, the Court concluded that the wife was a co-borrower under the mortgage and, thus, a condition precedent to foreclosure had not occurred.

 

The Appellate Court went on to add that, although its analysis could end there, its conclusion was buttressed by the Florida Constitution, which requires a spouse's signature in order to create a security interest against homestead property.  Also, the Court noted that the mortgage contained a covenant that the "borrower" had the right to mortgage, grant and convey the property, which would be meaningless and inaccurate since the husband, could not, by himself, encumber or convey the property.

 

Finally, the Appellate Court reasoned that its conclusion was clearly supported by the federal law governing "home equity conversion mortgages" insured by the Department of Housing and Urban Development ("HUD").

 

The parties conceded at oral argument that the reverse mortgage at issue was a "home equity conversion mortgage" insured by HUD, and the applicable statute prohibits the HUD Secretary from insuring a reverse mortgage unless the obligation to repay is deferred until the "homeowner's" death, the sale of the home, or other events specified by regulation. Moreover, the statute expressly defines "homeowner" as including the homeowner's spouse.

 

Even though the federal statute only imposed obligations on the HUD Secretary and requires certain provisions in reverse mortgages, the Court reasoned that because under applicable Florida case law, it must construe a contract in accordance with the statutes that regulate and govern the contract, and the clear purpose of the statute is to protect against displacing elderly homeowners, it would be rendered meaningless if a mortgagee could foreclose while a "homeowner," as defined by the statute, still lives in the property as his or her principal residence. 

 

The Court concluded, as a matter of law, that the wife was a "borrower" under the reverse mortgage and that the lender was required to establish, as a condition precedent to foreclosure, that (a) the wife had died, or (b) as of the date of trial, the property was not her principal residence.

 

Because the appellate record did not reflect whether the property was the wife's principal residence on the date of trial, the foreclosure judgment was reversed and the case remanded for a new trial only on the issue of whether the encumbered property was the wife's principal residence on the date of trial.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: NY High Court Rules Deficiency Judgment Properly Denied For Lack of Competent Evidence of Property Value

The New York Court of Appeals recently affirmed a trial court's denial of a motion for deficiency judgment because the lender presented conclusory, insufficient evidence about the value of the property. 

 

In so ruling, the Court held that, even with uncontested deficiency motions, a lender that has foreclosed must present satisfactory evidence about the value of the property.  However, the Court also held that when the lender presents insufficient evidence, the trial court should give the lender at least one additional chance to present adequate evidence.

 

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

 

The lender filed its foreclosure action in March 2010.  Neither the borrower nor any other defendant contested the foreclosure suit.  In August 2011, the property was sold to the lender at a public auction for $125,000.

 

Shortly after the sale, the referee appointed by the trial court found that the lender was owed $793,724.75.  In November 2011, the lender moved for a deficiency judgment against the borrower.  In support, the lender submitted an affidavit of an appraiser. 

 

The affidavit was only four paragraphs long.  Two of the paragraphs detailed the appraiser's qualifications.  The other two paragraphs contained conclusory statements about the property.  It found the property was worth $475,000, but it contained no supporting documentation.  It mentioned the appraiser inspected the house but said nothing about the condition of it.

 

The borrower did not contest the motion for deficiency judgment.  Even so, the trial court denied it, finding that the evidence submitted was not sufficient.  More specifically, the trial court held the affidavit "was 'conclusory' and lacked 'any specific information regarding how he reached his fair market value determination.'"  The Appellate Division affirmed.

 

In the Court of Appeals, the borrower again did not contest the appeal.  However, the New York State Attorney General submitted a brief opposing the lender's arguments.

 

To begin, the lender argued that the trial court should have entered the deficiency judgment because there was no conflicting evidence.  The Court of Appeals disagreed.

 

Instead, the Court of Appeals held that the lender bears the burden of proving the value of the property when asking for a deficiency judgment.  If the lender does not present satisfactory prima facie evidence of value, the trial court should deny the request for deficiency judgment.

 

In so holding, the Court of Appeals harshly criticized the conclusory affidavit from the appraiser because it (1) was unsupported by any detailed analysis of the data or valuation criteria used, (2) did not attach any evidence, (3) did not describe the building's condition, and (4) "consisted of little more than conclusory assertions of fair market value."

 

In response to the lender's argument that the motion was uncontested, the Court stated: "[I]t is of no moment that [the borrower] failed to submit any evidence in opposition to the motion."

 

However, the Court of Appeals did reverse the trial court's ruling to extent it did not provide the lender a second chance to present evidence.  The Court found that the statute requiring trial courts to enter deficiency judgments was a "directive." 

 

As such, the Court held that, if a lender fails to present adequate evidence once, the trial court must give the lender the opportunity to supplement the evidence presented and make a renewed motion for a deficiency judgment.

 

Notably, the Court included a footnote stating that it expressed no opinion about what a trial court should do if the lender presents unsatisfactory evidence twice.  It also held that the sufficiency of the evidence is in the trial court's discretion.

 

Despite giving lenders a second chance, the Court warned "[l]enders seeking deficiency judgments, however, must always strive to provide the court with all the necessary information in their first application."

  

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (2nd DCA) Rejects Mortgagee's Attempt to Limit Liability for HOA Dues After Foreclosure Completed

The District Court of Appeal of Florida, Second District, recently reversed a trial court's order in a mortgage foreclosure action limiting the liability of a loan servicer who acquired title by foreclosure for past-due condominium assessments, holding that the trial court lacked subject matter jurisdiction because the specific issue of assessments was not litigated or adjudicated by the trial court.

 

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

 

The owner of a condominium unit failed to pay his mortgage loan, resulting in the loan servicer suing to foreclose the mortgage and obtaining title at the foreclosure sale as the highest bidder.

 

The condominium association sought to collect past-due assessments and related charges from the loan servicer.

 

One year after the final judgment was entered in the foreclosure, the loan servicer filed a motion to enforce the final judgment or, in alternative, to amend the certificate of title, seeking to clarify how much in past-due assessments it owed to the condominium association.

 

The association responded to the motion, arguing that the trial court lacked jurisdiction because the order contained only a general reservation of jurisdiction. The trial court disagreed, granted the motion, and limited the servicer's liability to the lesser of the unit's unpaid common expenses and regular periodic assessments which accrued or came due during the 12 months immediately preceding the acquisition of title or one percent of the marginal mortgage debt pursuant to subsection 718.116(1)(b) of the Florida Condominium Act.

 

Citing an opinion from its sister Third District Court of Appeals, the Appellate Court quickly concluded that the trial court lacked jurisdiction, because entitlement to assessments was neither litigated nor adjudicated and the trial court did not specifically reserve jurisdiction to determine the amount of assessments pursuant to section 718.116(1)(b).

 

The Second District agreed with the reasoning of its sister court that "[i]n a foreclosure case, after entry of a final judgment and expiration of time to file a motion for rehearing or for a new trial, the trial court loses jurisdiction of the case unless jurisdiction was reserved to address that matter or the issue is allowed to be considered [post-judgment] by statute or under a provision of the Florida Rules of Civil Procedure."

 

Because the final judgment of foreclosure in the case at bar, like in the case relied upon as precedent, did not address the issue of assessments, but instead established the priority of liens against the subject property and contained only a general reservation of jurisdiction, the Court held that "[o]nce the final judgment of foreclosure was entered and the foreclosure sale took place, there was nothing left for the trial court to enforce."

 

Accordingly, the order limiting the servicer's liability for assessments was reversed, and the case remanded with instructions to dismiss for lack of jurisdiction.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: 6th Cir Confirms "Prior Express Consent" Under TCPA Can Be Obtained During Servicing or Collection

The U.S. Court of Appeals for the Sixth Circuit recently held that, under the federal Telephone Consumer Protection Act ("TCPA"), a called party gives his "prior express consent" to be called on a cellular telephone number with an automatic telephone dialing system ("ATDS") when that person gives his creditor his cellular telephone number in connection with a debt owed, even where the person provides his cellular telephone number after the transaction is originally entered into, so long as the number is provided in connection with the debt. 

 

The Sixth Circuit further ruled that a person need only provide general consent to be called on a cellular telephone, and not consent to be called using an ATDS specifically.

 

A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/15a0201p-06.pdf

 

A borrower ("Borrower") alleged he received well over a hundred telephone calls placed to his cellular telephone from his creditor ("Creditor") in connection with a mortgage loan. The Borrower provided his home and work numbers on the application for the loan. Three years later, he cancelled his home phone and replaced it with a cellphone.  After his loan transferred to the Creditor, he contacted the Creditor to advise it that his primary phone number had changed.  The Creditor then replaced Borrower's obsolete home number with his cellphone number in its records.

 

After the Borrower fell behind on his payments, the Borrower and Creditor worked out a loan modification. The Borrower provided the Creditor with his cellular telephone number. When the Borrower continued to fail to pay his mortgage payments on time, the Creditor called him to collect its payments. In July 2010, the Borrower told Creditor not to call him at work anymore, instructing Creditor to call his cellphone instead. This left his cellphone number as the only number listed in his records with the Creditor.

 

After defaulting on his mortgage, from May 2011 through January 2013, the Borrower filled out at least ten forms with Creditor to try to mitigate his losses. He provided his cellphone number on all these forms. He also provided express written consent for the Creditor to call his cellphone ("I consent to being contacted concerning this request for mortgage assistance at any cellular or mobile telephone number I have provided[,] . . . includ[ing] . . . telephone calls to my cellular or mobile telephone.").  To collect from the Borrower, the Creditor called the Borrower on the number he provided: his cellphone. In all, Creditor called the Borrower an alleged 482 times from 2009 to 2013.

 

The Borrower filed suit against Creditor in federal court, alleging that Creditor's calls constituted either knowing or negligent violations of the TCPA.  After discovery, each side moved for summary judgment, but the district court denied each motion. It held that two genuine issues of material fact existed: (1) whether Creditor used an "automatic telephone dialing system" (ATDS) to call the Borrower; and (2) whether the Borrower offered his cellphone number to Creditor, or whether Creditor "captured" the Borrower's number and called the Borrower outside the scope of his consent.

 

Prior to trial, the Borrower attempted to subpoena a Creditor witness to testify at deposition.  The Creditor succeeded in quashing the subpoena on the basis that it failed to comply with the Federal Rules of Civil Procedure.  The jury returned a general verdict for the Creditor. The district court accepted the verdict and issued judgment.

 

On appeal, the Borrower made three arguments: (A) the district court should have granted his summary-judgment motion because the record showed that the Creditor used an ATDS to call his cellphone without his prior express consent; (B) the jury instruction on "prior express consent" was too broad; and (C) the district court should have compelled a Creditor witness to testify at trial.

 

The Sixth Circuit first noted that the Borrower's post-trial appeal from the district court's denial of his pretrial summary-judgment motion cannot succeed, because a losing party may not "appeal an order denying summary judgment after a full trial on the merits." Ortiz v. Jordan, 562 U.S. 180, 184 (2011); accord Jarrett v. Epperly, 896 F.2d 1013, 1016 (6th Cir. 1990).

 

Accordingly, the Sixth Circuit held it lacked appellate jurisdiction over this portion of the Borrower's appeal.  The Borrower lost his summary-judgment motion in August 2014 but did not appeal it until November 2014—after he lost at trial.  The Sixth Circuit held that the Borrower's failure to make a Rule 50(a) motion, renew that motion after the jury verdict under Rule 50(b), and then appeal the denial of the Rule 50(b) motion was fatal to his appeal on this issue. See Maxwell v. Dodd, 662 F.3d 418, 421 (6th Cir. 2011).

 

The Sixth Circuit next addressed whether the district court's jury instructions on "prior express consent" were overly broad.  As you may recall, an appellate court's role in reviewing these instructions is merely to ensure they "adequately informed the jury of the relevant considerations" of the law. United States v. Kuehne, 547 F.3d 667, 679 (6th Cir. 2008) (citations omitted).  A district court has discretion to refuse proposed instructions, so the Sixth Circuit reviewed this challenge "for abuse of discretion."

 

As you may recall, Congress passed the TCPA in response to "[v]oluminous consumer complaints about abuses of telephone technology—for example, computerized calls dispatched to private homes." Mims v. Arrow Fin. Servs., LLC, 132 S. Ct. 740, 744 (2012). The TCPA accordingly "restricts certain kinds of telephonic and electronic" communications. Sandusky Wellness Ctr., LLC v. Medco Health Solutions, Inc., 788 F.3d 218, 221 (6th Cir. 2015). For example, the TCPA prohibits any person from making "any call" to someone's cellphone "(other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice." 47 U.S.C. § 227(b)(1)(A)(iii).

 

The court's jury instruction on this issue read, in full:

 

"'Prior express consent' means that before Defendant made a call to Plaintiff's cellular telephone number, Plaintiff had given an invitation or permission to receive calls to that number. Autodialed and prerecorded message calls to wireless numbers that are provided by the called party to a creditor in connection with an existing debt are permissible as calls made with the 'prior express consent' of the called party."

 

R. 54 at 75.

 

The Sixth Circuit held that this language adequately reflects the legal definition of prior express consent promulgated by the Federal Communications Commission ("FCC"). It was taken directly from the FCC's rulings—which shape the law in this area, see 47 U.S.C. § 227(b)(2). The instructions paraphrased the FCC's original definition on "prior express consent"—that a party who gives an "invitation or permission to be called at [a certain] number" has given its express consent with respect to that number. In the Matter of Rules & Regulations Implementing the Tel. Consumer Prot. Act of 1991, 7 F.C.C. Rcd. 8752, 8769 (1992). And the instructions quote verbatim the FCC's later clarification of that definition in the debtor–creditor context—that a creditor does not violate the TCPA when it calls a debtor who has "provided [his number] in connection with an existing debt." In the Matter of Rules & Regulations Implementing the Tel. Consumer Prot. Act of 1991, 23 F.C.C. Rcd. 559, 564 (2008).

 

The Borrower argued that the instruction leaves out a small excerpt from these rulings— that "prior express consent is . . . granted only if the wireless number was provided . . . during the transaction that resulted in the debt owed." According to the Borrower, that would be in 2003 when the mortgage loan was made—before Creditor obtained its interest in the mortgage and before the Borrower even had a cellphone.

 

The Sixth Circuit stated the FCC never uses the words initial or original before "transaction." It instead says that the debtor has given his consent when he gives his number "during the transaction" that involves the debt (i.e., "regarding the debt"). 23 F.C.C. Rcd. at 564–65, 567 (emphasis added). This language does not change the general definition of express consent; it instead "emphasize[s]" that creditors can call debtors only "to recover payment for obligations owed," not on any topic whatsoever. See id. at 564, 565 n.36.  Thus, the Sixth Circuit noted, this rule ensures that a debtor who gives his number outside the context of the debt has not given his consent to be called regarding the debt. FCC's Letter Brief, Re: Nigro v. Mercantile Adjustment Bureau, LLC, 2014 WL 3612689 (C.A.2), at *8–*9.

 

The Sixth Circuit acknowledged that the FCC has not explicitly addressed the issue, but that other courts have agreed with the Sixth Circuit's position.  See Moore v. Firstsource Advantage, LLC, No. 07-CV-770, 2011 WL 4345703, at *10 (W.D.N.Y. Sept. 15, 2011); Mais v. Gulf Coast Collection Bureau, Inc., 768 F.3d 1110, 1122 (11th Cir. 2014).

 

The Sixth Circuit held that a debtor does not need to give his consent to be called using an ATDS specifically; his general consent to being called on a cellphone constitutes "prior express consent" sufficient to be called using an ATDS. 

 

The FCC's regulations for telemarketers now require a more specific type of consent—namely, that the called party consents, in writing, to being called by an auto-dialer. E.g., 47 C.F.R. 64.1200(f)(8). But these telemarketer regulations do not apply in the debtor–creditor context. 23 F.C.C. Rcd. at 565. In the debt collection context, once the debtor gives his consent to be called on his cellphone, the creditor can use automated calls to that number. See id. at 564.

 

Accordingly, the Sixth Circuit held the district court's instructions adequately informed the jury of the law and did not confuse or mislead them.

 

Finally, the Sixth Circuit addressed the Borrower's argument that the district court erred in denying his request to compel the Creditor's representative to testify at trial. 

 

The Sixth Circuit found Borrower's subpoena failed several aspects of Federal Rule of Civil Procedure 45, so the district court did not abuse its discretion in quashing it. Rule 45 requires, among other things, that the party serving it to tender certain fees, Fed. R. Civ. P. 45(b)(1), comply with geographical limitations, id. at 45(c), and allow a reasonable time to comply, id. at 45(d)(3)(A)(i). Borrower's subpoena did none of these things. Therefore, court was thus within its discretion to quash it.

 

The Sixth Circuit also held that the district court was right to deny Borrower's unusual request— made after his subpoena failed—to take a "deposition" on new topics at trial because the Federal Rules of Civil Procedure do not allow for it.

 

The Sixth Circuit found that the district court also correctly rejected the Borrower's motion to compel. When all else failed—on the Friday before the Monday trial—the Borrower moved the district court to compel the Creditor to bring a witness to trial. The Sixth Circuit recognized there is no procedure for this request in the Rules.

 

Accordingly, the Sixth Circuit affirmed the district court's rulings.

 

The concurring opinion agreed with the majority's ruling to the extent that "a debtor does not need to give his consent to automated calls specifically" because the FCC regulations say as much.  The concurring opinion questioned whether the FCC correctly interpreted the TCPA when it promulgated its regulations.  Specifically, according to the concurrence, the notion that a debtor gives his prior express consent to receiving calls from a creditor using an ATDS or prerecorded voice simply by giving his cellphone number to the creditor appears contrary to both the plain language of the TCPA and the underlying legislative intent.   However, the concurrence noted that the Borrower did not challenge the FCC regulation itself.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com

 

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