Friday, October 9, 2015

FYI: Ill Sup Ct Holds Trustee of Land Trust Has TILA Right to Rescind, Allows TILA Damages Claim for Failure to Rescind After Notice

The Supreme Court of Illinois recently held that the trustee of a land trust involved in a reverse mortgage loan transaction is entitled to receive disclosures, including notice of the right to rescind, under the federal Truth in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA").

 

The Court also held that, because the disclosures were not provided to the land trust trustee, the three-day right to rescind was extended to three years after the transaction and the trustee timely exercised that right. In addition, Court held the trustee's claim for statutory damages was not time-barred.

 

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

 

In July of 2009, a consumer obtained a reverse mortgage secured by her condominium unit, title to which was held by a land trust of which she was the beneficiary.

 

The mortgage contained a customary exculpatory clause, which provided that the trustee was not personally obligated on the note "and the only means of enforcing a security interest was through the property itself."  In addition, the note provided that the loan became immediately due upon the death of the borrower, the sale of the property by the borrower, or if the borrower failed to use the property as his/her principal dwelling for more than 12 consecutive months.

 

Although the loan documents, including the notice of right to cancel disclosure required by TILA (15 U.S.C. § 1635(a)), were prepared for the trustee as the mortgagor, they were delivered only to the borrower/trust beneficiary.

 

The borrower/trust beneficiary died in May of 2010, and in October of 2010 the mortgagee sued to foreclose.

 

In June of 2011, the defendant trustee sent the plaintiff mortgagee a letter purporting to exercise its right to rescind the transaction.  In July of 2011, the defendant/trustee filed a counterclaim under TILA, seeking rescission, termination of the security interest, statutory damages and attorney's fees.

 

In January of 2012, the trial court dismissed the counterclaim with prejudice. Shortly thereafter, the defendant/trustee paid the mortgagee the full amount due under the note and mortgage, and then terminated the trust, conveying the mortgaged property to a third party.

 

The mortgagee then moved to voluntarily dismiss the foreclosure action, and in March of 2012, the court dismissed the case with prejudice. The defendant/trustee appealed the dismissal of its TILA counterclaim.

 

On appeal, the defendant/trustee argued that it had the right to rescind under TILA, and timely exercised that right. The plaintiff mortgagee argued that "a land trust is not a 'consumer' as that term is defined in TILA and, therefore, [the trustee] had no standing to rescind."  The plaintiff mortgagee also argued that the trustee "had no right to rescind because the property was not [its] principal dwelling and because [the trustee] was not a party to the transaction."

 

The appellate court affirmed the circuit court's dismissal of the counterclaim in a divided opinion, reasoning that the mortgage's exculpatory clause meant that the borrower/beneficiary, not the trustee, was the "obligor," and therefore that the borrower/beneficiary was the only person entitled to rescind under TILA.

 

Although neither TILA nor its implementing Regulation Z define "obligor," the appellate court, looking to the dictionary definition, found that obligor meant "the person to whom credit is extended" and, because the trustee was not the obligor, it could not plead any set of facts under which it had the right to rescind the transaction. The appellate court also held that the trustee forfeited its claim to statutory damages because it failed to raise the issue on appeal.

 

The Illinois Supreme Court granted the trustee's petition for leave to appeal, and began its opinion by discussing the background of TILA, enacted by Congress in 1968 "to ensure credit terms are disclosed in a meaningful way so consumers can readily and knowledgeably compare the credit options available to them."

 

The Court then pointed out that Regulation Z and the Federal Reserve Board's Official Staff Commentary in effect during the period relevant here were entitled to great deference "absent some obvious repugnance to TILA."

 

After analyzing the applicable provisions of TILA, Regulation Z and Official Staff Commentary, the Court concluded that "Congress did not intend to limit rescission rights to only obligors, as that term is generally defined." The Court based its conclusion primarily on the commentary stating that "to possess the right to rescind one need not be liable (i.e., an obligor) on the underlying consumer credit transaction."

 

The Court also reasoned that the applicable provisions of TILA and commentary have existed since 1968, and "Congress has not amended TILA to exclude consumers who are not liable on the underlying credit transaction from having the right to rescind."

 

The Illinois Supreme Court found that "[t]he appellate court majority failed to take into account the fact a reverse mortgage was at issue in this case and the nature of such mortgages."  The Court noted that, because a reverse mortgage is a "nonrecourse consumer credit transaction, secured by the consumer's principal dwelling … the borrower has not undertaken any obligation to make payments … [and] … [t]here is no personal liability of any kind in such a transaction since the only recourse is against the property itself … there is no obligor within the ordinary meaning of that term."

 

The Court therefore concluded that "the appellate court erred in affirming the circuit court's finding that [the defendant trustee] has no right to rescind because it was not an 'obligor' within the meaning of TILA."

 

The Court stressed that the exculpatory clause in the mortgage, on which the appellate court relied for its decision, was "simply irrelevant." The trustee "was not personally liable nor did it undertake any type of obligation because the only recourse in a reverse mortgage is against the property itself."

 

Having held that "the right to rescind extends to 'each consumer whose ownership interest is or will be subject to the security interest' or 'is subject to the risk of loss,'" the Illinois Supreme Court turned to the question of "whether a trustee under a land trust maintains an ownership interest subject to the security interest such that it is entitled to TILA disclosures and may exercise the right to rescind."

 

The Court defined a land trust as a "form of land ownership where a trustee holds title to property for the benefit of the true owner/beneficiary of the trust." "Legal and equitable title of the property rests with the trustee, including the right to transfer and encumber the property. … However, the trustee must deal with the property as the beneficiary directs."

 

"Conversely, the beneficiary's interest in the real property changes to a personal property interest in the trust. … The beneficiary's name does not appear publicly as an owner of record either in title documents or tax records and generally the trustee is required to keep the beneficiary name(s) confidential [and] [t]he beneficiary retains certain ownership rights such as the right of possession, operation, maintenance and control along with the right to use and enjoy the property."

 

The Court then analyzed the two provisions of the Official Staff Commentary to Regulation Z that address land trusts, both of which provide that, for purposes of the definition of the term "consumer," credit extended to a land trust is considered to be extended to a natural person.  Because "the trustee of the land trust is a consumer, whose ownership interest is subject to the security interest," the Court concluded that the trustee "was entitled to TILA disclosures and has the right to rescind the transaction," reversing the appellate court's holding to the contrary.

 

The Illinois Supreme Court also rejected the plaintiff's alternative argument that the trustee's right to rescind terminated when it sold the property to a third party, reasoning that although the right to rescind terminates upon sale of the property or transfer of the consumer's interest therein, "section 1635(f) addresses only the time for exercising that right to rescind … [and] [b]ecause [the trustee] gave notice to plaintiff that it was exercising that right, its right to rescind did not terminate upon the sale of the property."

 

Relying on a 2010 bankruptcy case in which the bankruptcy court held that once the right to rescind was timely exercised, the subsequent sale of the property did not extinguish that right, the Illinois Supreme Court reasoned that "[i]f a sale of the property subsequent to the exercise of the right to rescind served to extinguish that right, a consumer would lose the right to damages based on the creditor's failure to rescind when it was legally required to do so."

 

Finally, the Illinois Supreme Court addressed the trustee's argument that it was entitled to statutory damages under TILA.

 

The Court found that the appellate court committed error by holding that the trustee forfeited its claim for statutory damages because "the circuit court never addressed this issue and, therefore, there was no order from which [the trustee] could appeal."

 

The Illinois Supreme Court also held that the trustee's "claim for damages resulting from plaintiff's failure to rescind is not time-barred as plaintiff contends," relying on a 2009 bankruptcy court decision which held that "[f]or claims of failure to effectuate rescission, the date of the occurrence of the violation is the earlier of when the creditor refuses to effectuate rescission, or twenty days after it receives the notice of rescission."

 

Because the trustee sent the notice of rescission in June of 2011, the plaintiff did not respond thereto, and the trustee filed its counterclaim in July of 2011, the trustee's "claim for statutory damages was brought within one year of the occurrence" of the violation, as required by TILA, 15 U.S.C. § 1640(e).  

 

The appellate court's judgment was reversed, and the case remanded to the trial court for further proceedings.

 

 

 

 

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

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

Wednesday, October 7, 2015

FYI: MD Pa Holds Mortgage Servicer Liable Under FDCPA for Its Attorney’s Payoff Statement + WEBINAR

Earlier this summer we explained here that the Third Circuit's decision in Kaymark spelled Fair Debt Collection Practices Act trouble for mortgage lenders and servicers who make statements seeking to recover estimated fees and costs.

 

We examined these risks in a recent webinar as well.  If you would like to view the webinar, please click here:  View Webinar

 

The U.S. District Court for the Middle District of Pennsylvania, citing Kaymark, recently held a mortgage servicer liable under the FDCPA for a reinstatement letter made by its foreclosure counsel, which included fees and costs that had not been incurred.

 

Word Placement Matters When Describing 'Anticipated' Fees

 

The borrower defaulted on her mortgage loan. Following the default, servicing was transferred. At some point, the decision does not tell us exactly when, a foreclosure action was started.

 

The borrower, through counsel, requested the amount needed to reinstate her mortgage.  Foreclosure counsel sent the borrower's attorney a letter that included the following statement: "REINSTATEMENT AMOUNT ANTICIPATED GOOD THROUGH 9/20/2013″ and then went on to list attorneys fees and costs that had not actually been incurred.

 

The borrower sued the mortgage servicer and foreclosure attorney alleging that the reinstatement letter's demand for payment of unincurred fees and costs was false and deceptive in violation of FDCPA § 1692(e)(2), (e)(10) and sought to collect amounts not authorized by any agreement or law in violation of FDCPA § 1692 f(1).

 

The Court began by noting Kaymark applied the FDCPA's "least sophisticated consumer" standard to communications, even when they are transmitted to a consumer's attorney and not to the consumer.

 

Using this standard, it concluded that when such a consumer read the reinstatement letter she would not understand that the fees and costs had not been incurred. First, because the word "anticipated" was not placed next to each fee and cost that had not been incurred. And second, because "anticipated" was placed immediately prior to "good through 9/20/2013″ which "speaks to the date that payment was due, not the amount of the fees."

 

In an earlier decision involving the same foreclosure counsel, the Court noted a similar communication escaped FDCPA liability because "the word 'anticipated' was written in parentheses next to each and every unincurred fee — six times in total."

 

Our Webinar Explores the Use and Misuse of Anticipated Fees

 

Providing statements of the amount due or of the amount required to cure a default – such as in Notices of Intention to Foreclose, periodic statements, and the like — is risky for mortgage servicers under the Kaymark decision.  And as we predicted earlier this year, Kaymark impacts how a mortgage servicer can include unincurred fees and costs in its communications with defaulted borrowers, at least in the Third Circuit (Delaware, New Jersey, Pennsylvania and the Virgin Islands).

 

Now available is a rebroadcast of our popular July 9, 2015 presentation, in which we examine Kaymark and its implications for the mortgage industry.

 

If you would like to view the webinar, please click here:  View Webinar

 

 

 

 

 

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

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

Monday, October 5, 2015

FYI: 7th Cir Rejects Heightened or Stringent "Ascertainability" Requirement for Class Certification

The U.S. Court of Appeals for the Seventh Circuit recently refused to impose a heightened "ascertainability" requirement at class certification.

 

More specifically, the Court held that plaintiffs do not have to prove at the class certification stage that there is a "reliable and administratively feasible" way to identify class members under Federal Rule of Civil Procedure 23(b)(3), and affirmed the district court's certification of a class of consumers who purchased a dietary supplement falsely advertised as scientifically tested and proven to relieve joint pain.

 

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

 

The putative class plaintiff sued the maker of a product advertised to relieve joint discomfort, "increase mobility" and "support cartilage repair" because it was "scientifically formulated" and clinically tested for maximum effectiveness." The plaintiff argued that defendant violated the Illinois state UDAP statute and similar laws in nine other states because "the primary ingredient in the supplement (glucosamine sulfate) is nothing more than a sugar pill and there is no scientific support for these claims."

 

The district court granted the plaintiff's motion to certify a class of consumers who purchased the product "within the applicable statute of limitations of the respective Class States for personal use until the date notice is disseminated."

 

The defendant sought leave to appeal under Rule 23(f) on the grounds that the district court "abused its discretion in certifying the class without first finding that the class was 'ascertainable'" and "erred by concluding that the efficacy of a health product can qualify as a 'common' question under rule 23(a)(2)." The Seventh Circuit granted defendant's petition "primarily to address the developing law of ascertainability, including among district courts within this circuit."

 

The Seventh Circuit began by discussing the state of the law in the Seventh Circuit, noting that the "'weak' version of ascertainability has long been the law in this circuit."  Under this version, in applying Rule 23's requirement that a class be clearly defined based on objective criteria, courts focus on the "adequacy of the class definition itself" and are "not focused on whether, given an adequate class definition, it would be difficult to identify particular members of the class."

 

The Court then traced the "more stringent version of ascertainability" to the Third Circuit's decision in Marcus v. BMW of North America, LLC, 687 F.3d 583 (3d Cir. 2012), in which the Third Circuit reversed the certification of a poorly defined class. On remand, the Third Circuit cautioned that if defendants' records did not identify class members, the district court should not approve a method "relying on 'potential class members' say so'" and the "reliance on class members' affidavits might not be 'proper or just.'"

 

The Seventh Circuit explained that "[a]s it stands now, the Third Circuit's test for ascertainability has two prongs: (1) the class must be 'defined with reference to objective criteria' … and (2) there must be 'a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition." It then pointed out, however, that while the second prong seemed "sensible at first glance," "[i]n practice, however, some courts have used this requirement to erect a nearly insurmountable hurdle at the class certification stage in situation where a class action is the only viable way to pursue valid but small individual claims."

 

Rejecting the defendant's argument that the Court should adopt the Third Circuit's heightened ascertainability test "because the only method of identifying class members proposed by [plaintiff] in the district court was self-identification by affidavit," the Court found that the Third Circuit had misapplied the requirements of Rule 23.  The Seventh Circuit then addressed each of the four policy reasons for requiring more than only affidavits from putative class members, finding each unpersuasive.

 

The Seventh Circuit concluded that "imposing this stringent version of ascertainability does not further any interest of Rule 23 that is not already adequately protected by the Rule's explicit requirements." On the other hand, doing so "effectively bars low-value consumer class actions, at least where plaintiffs do not have documentary proof of purchases, and sometimes even when they do."

 

Accordingly, the Court held that the district court "did not abuse its discretion by deferring until later in the litigation decisions about more detailed aspects of ascertainability and the management of any claims process. At bottom the district court was correct not to let a quest for perfect treatment on one issue become a reason to deny class certification and with it the hope of any effective relief at all."

 

 

 

 

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

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

Sunday, October 4, 2015

FYI: NJ Fed Ct Reverses Bankr Ct Ruling that Foreclosure Was Barred by NJ 6-Yr Statute of Limitations

The U.S. District Court for the District of New Jersey recently held that New Jersey's 20-year statute of limitations for residential foreclosures applied to a re-filed foreclosure action, reversing a bankruptcy court's ruling that the shorter 6-year statute of limitations period applied.

 

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

 

The borrower obtained a $520,000 mortgage loan in February of 2007.  The Mortgage and Note listed March 1, 2037 as the maturity date.  The borrower defaulted in July of 2007, and a foreclosure action was filed.  However, the foreclosure action was later dismissed for want of prosecution, and then dismissed with prejudice and the lis pendens discharged.

 

The borrower filed for bankruptcy in in March of 2014.  In the bankruptcy action, the borrower sued the servicer and loan owner seeking a declaration that the mortgage debt is unenforceable because (1) the plaintiff in the foreclosure action was allegedly not the true owner and holder of the Note and Mortgage; and (2) enforcement of the Note and Mortgage was supposedly "barred by the doctrine of payment and the statute of limitations."

 

The bankruptcy court held that the creditors' proof of claim pursuant to 11 U.S.C. § 502(b)(1) to foreclose the mortgage on the accelerated note was time-barred under New Jersey's 6-year statute of limitations.  The bankruptcy court also held that, because the creditors could not foreclose on the mortgage loan, the creditors' proof of claim in bankruptcy also was barred because the underlying lien was unenforceable.

 

The creditors appealed.

 

On appeal, the trial court noted that an action to foreclose a residential mortgage in New Jersey must be commenced by the earlier of:

 

-        "Six years from the date fixed for the making of the last payment or the maturity date set forth in the mortgage or the note … secured by the mortgage;" or

-       "Thirty-six years from the date of recording of the mortgage, or, if the mortgage is not recorded, 36 years from the date of execution, so long as the mortgage itself does not provide for a period of prepayment in excess of 30 years;" or

-       "Twenty years from the date on which the debtor defaulted."

 

N.J.S.A. § 2A:50-56.1.

 

the Court noted that the bankruptcy court interpreted the words "six years from the date fixed for making the last payment or maturity date set forth," to mean an "accelerated" mortgage or advanced maturity date.

 

However, the Court held, the word "accelerated" does not appear in the relevant subsection and is not defined.  Moreover, the Court found no indication in the record to indicate that the maturity date in the loan documents (March 1, 2037) was accelerated by the default or by the filing of the foreclosure action.

 

In addition, the Court found persuasive two state court rulings, holding that if the maturity date were accelerated to the date of default then the plain meaning of the language in the 6-year limitations period would be rendered superfluous, and that merely filing a complaint does not reasonably accelerate the mortgage and note.  See Pennymac Corp. v Crystal, No. F-31289-14 (N.J. Super. Ct. Ch. Div. May 8, 2015); Wells Fargo Bank v. Jackson, No. F-29217-14 (N.J. Super. Ct. Ch. Div. May 6, 2015).

 

The Court also held that applying the shorter 6-year statute of limitations would ignore the intended purpose of the statute.  The Court noted that the New Jersey residential foreclosure statutes of limitations have "been construed to address problems caused by the presence of residential mortgages on property records, which have been paid or which are otherwise unenforceable," and that the policy behind the statute is that "all homeowners should be given every opportunity to pay their home mortgages and that mortgagees benefit when defaulting loans return to performing status."

 

In addition, and perhaps most importantly, the Court repeated the bankruptcy court's words that "[n]o one gets a free house."  The Court held that "[d]eeming the mortgage collection claim as time-barred would be inequitable," and "would be contrary to public policy by depriving [the creditors] of any remedy for [the borrower's] default."

 

 

 

 

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

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services