Saturday, June 11, 2016

FYI: Fla App Ct (5th DCA) Holds Borrower's Surrender in BK Resolves Contested Foreclosure

As an example of the conflicting and contrasting court rulings on the effect of surrender in bankruptcy (see our prior update below), the District Court of Appeal of the State of Florida, Fifth District, recently dismissed a borrower's appeal from a final judgment of foreclosure because the borrower admitted during the course of his bankruptcy proceeding that he owed the mortgage debt and stated his intention to surrender the mortgaged property.

 

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

 

A mortgage loan borrower filed for bankruptcy relief while his appeal of a foreclosure action was pending in state court.  The mortgagee filed copies of the relevant bankruptcy pleadings with the appellate court, and the appellate court granted the mortgagee's motion to take judicial notice of these documents.

 

The Fifth DCA pointed out that the bankruptcy court entered an order confirming the debt and the borrower's surrender of the property. Citing a bankruptcy court ruling from the Middle District of Florida (In re Metzler, 530 B.R. 894, 900 (Bankr. M.D. Fla. 2015), the Fifth DCA then dismissed the appeal.

 

In so ruling, the Fifth DCA held that in bankruptcy "the term 'surrender' means that a debtor must relinquish secured property and make it available to the secured creditor by refraining from taking any overt act that impedes a secured creditor's ability to foreclose its interest in secured property."

 

The Appellate Court concluded that the borrower's "actions and the orders of the bankruptcy court have fully resolved this matter."

 

 

 

 

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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From: Ralph T. Wutscher [mailto:rwutscher@mauricewutscher.com]
Sent: Friday, June 10, 2016 4:15 PM
To: Ralph T. Wutscher
Cc: Florida Office; Chicago Office; Indiana Office; Texas Office; Atlanta Office; San Francisco Office; San Diego Office; New York Office; New Jersey Office; Boston Office; Alabama Office; Philadelphia Office; Cleveland Office; Cincinnatti Office; DC Office
Subject: FYI: SD Fla Bankr Rejects Mortgagee's Attempt to Use Borrower's Surrender in BK to Resolve Contested Foreclosure

 

The U.S. Bankruptcy Court for the Southern District of Florida recently denied a creditor's motion to compel the debtor to surrender mortgaged property and also denied the debtor's motion to stay the case, holding that a chapter 7 debtor who indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee.

 

Disagreeing with other judges in the same district and elsewhere on this issue, the bankruptcy judge held that "[c]ompulsory surrender of real property collateral by a debtor to a lienholder in chapter 7 is not supported by, and indeed ignores, the express provisions of the Bankruptcy Code."

 

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

 

The debtor faced a pending mortgage foreclosure action and filed a voluntary petition under Chapter 7 of the Bankruptcy Code in June of 2014. The petition included a statement of intention reflecting that the debtor intended to surrender the mortgaged property. The property was not claimed as exempt and the debtor did not dispute the debt. The debtor also did not oppose the motion for relief from stay filed by the mortgagee.

 

The debtor received a discharge in September of 2014 and the case was administratively closed shortly thereafter, but the debtor never turned the property over to the lienholder and continued to defend against the foreclosure action.

 

The creditor filed a motion to reopen the case, arguing that the debtor's statement of intention barred him from contesting the foreclosure action. In response, the debtor argued that he was not barred from defending the foreclosure action because "'surrender' only required the Chapter 7 Debtor to 'surrender to the trustee,' and that the Bankruptcy Code clearly provides that since the trustee did not administer the surrendered Property, the Property was abandoned back to the Debtor when the bankruptcy case was closed."

 

Bankruptcy Judge Isicoff began by analyzing the text of section 521 of the Bankruptcy Code. Subsection 521(a)(2) "sets forth the obligations of an individual debtor in a chapter 7 case with respect to debts secured by property of the estate. The individual debtor must advise in a statement of intention whether he or she intends to keep the property of the estate or surrender the property and whether the debtor claims the property is exempt. If the debtor is going to keep the property then the debtor must advise whether he will be redeeming the property or reaffirming the debt secured by the property."

 

The bankruptcy judge further explained that subsection "521(a)(4) of the Bankruptcy Code directs any debtor to surrender all property of the estate to the trustee, if a trustee has been appointed. … However, to the extent that any trustee has not administered property scheduled by the debtor under 11 U.S.C. § 521(a)(1) prior to the closing of a bankruptcy case, that property is 'abandoned to the debtor … subject of course to any non-bankruptcy rights reserved to a lienholder, including the right to foreclose its security interest if appropriate."

 

Bankruptcy Judge Isicoff then noted, however, that "[n]otwithstanding the express provisions of the Bankruptcy Code, cases around the country, including cases in this district, have held that a chapter 7 debtor who indicates in his statement of intention that he is surrendering property, has, by so stating, agreed that he is surrendering to the lienholder and has, therefore, forfeited his right to contest any post-discharge action to foreclose the lienholder's security interest."

 

The court refused to follow the other rulings, instead holding that "there is no Bankruptcy Code section that provides that if a chapter 7 trustee doesn't administer surrendered real property what follows is a second surrender—surrender to the lienholder. Rather, what the Bankruptcy Code specifically provides is that what follows is the property is abandoned to the debtor."

 

Bankruptcy Judge Isicoff concluded that because "[t]hat result is what the Bankruptcy Code provides, and any modification to that result is up to Congress, not the courts", a chapter 7 debtor who "indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee. Compulsory surrender of real property collateral by a debtor to a lienholder in chapter 7 is not supported by, and indeed ignores the express provisions of the Bankruptcy Code."

 

As a result, the court found that "there is no purpose in reopening the bankruptcy case" and denied the creditor's motion to compel as well as the debtor's motion to stay.

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   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:

 

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and

 

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and

 

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Friday, June 10, 2016

FYI: SD Fla Bankr Rejects Mortgagee's Attempt to Use Borrower's Surrender in BK to Resolve Contested Foreclosure

The U.S. Bankruptcy Court for the Southern District of Florida recently denied a creditor's motion to compel the debtor to surrender mortgaged property and also denied the debtor's motion to stay the case, holding that a chapter 7 debtor who indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee.

 

Disagreeing with other judges in the same district and elsewhere on this issue, the bankruptcy judge held that "[c]ompulsory surrender of real property collateral by a debtor to a lienholder in chapter 7 is not supported by, and indeed ignores, the express provisions of the Bankruptcy Code."

 

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

 

The debtor faced a pending mortgage foreclosure action and filed a voluntary petition under Chapter 7 of the Bankruptcy Code in June of 2014. The petition included a statement of intention reflecting that the debtor intended to surrender the mortgaged property. The property was not claimed as exempt and the debtor did not dispute the debt. The debtor also did not oppose the motion for relief from stay filed by the mortgagee.

 

The debtor received a discharge in September of 2014 and the case was administratively closed shortly thereafter, but the debtor never turned the property over to the lienholder and continued to defend against the foreclosure action.

 

The creditor filed a motion to reopen the case, arguing that the debtor's statement of intention barred him from contesting the foreclosure action. In response, the debtor argued that he was not barred from defending the foreclosure action because "'surrender' only required the Chapter 7 Debtor to 'surrender to the trustee,' and that the Bankruptcy Code clearly provides that since the trustee did not administer the surrendered Property, the Property was abandoned back to the Debtor when the bankruptcy case was closed."

 

Bankruptcy Judge Isicoff began by analyzing the text of section 521 of the Bankruptcy Code. Subsection 521(a)(2) "sets forth the obligations of an individual debtor in a chapter 7 case with respect to debts secured by property of the estate. The individual debtor must advise in a statement of intention whether he or she intends to keep the property of the estate or surrender the property and whether the debtor claims the property is exempt. If the debtor is going to keep the property then the debtor must advise whether he will be redeeming the property or reaffirming the debt secured by the property."

 

The bankruptcy judge further explained that subsection "521(a)(4) of the Bankruptcy Code directs any debtor to surrender all property of the estate to the trustee, if a trustee has been appointed. … However, to the extent that any trustee has not administered property scheduled by the debtor under 11 U.S.C. § 521(a)(1) prior to the closing of a bankruptcy case, that property is 'abandoned to the debtor … subject of course to any non-bankruptcy rights reserved to a lienholder, including the right to foreclose its security interest if appropriate."

 

Bankruptcy Judge Isicoff then noted, however, that "[n]otwithstanding the express provisions of the Bankruptcy Code, cases around the country, including cases in this district, have held that a chapter 7 debtor who indicates in his statement of intention that he is surrendering property, has, by so stating, agreed that he is surrendering to the lienholder and has, therefore, forfeited his right to contest any post-discharge action to foreclose the lienholder's security interest."

 

The court refused to follow the other rulings, instead holding that "there is no Bankruptcy Code section that provides that if a chapter 7 trustee doesn't administer surrendered real property what follows is a second surrender—surrender to the lienholder. Rather, what the Bankruptcy Code specifically provides is that what follows is the property is abandoned to the debtor."

 

Bankruptcy Judge Isicoff concluded that because "[t]hat result is what the Bankruptcy Code provides, and any modification to that result is up to Congress, not the courts", a chapter 7 debtor who "indicates surrender of real property in his statement of intention is not obligated to surrender that property to the lienholder, whether or not the property is administered by the chapter 7 trustee. Compulsory surrender of real property collateral by a debtor to a lienholder in chapter 7 is not supported by, and indeed ignores the express provisions of the Bankruptcy Code."

 

As a result, the court found that "there is no purpose in reopening the bankruptcy case" and denied the creditor's motion to compel as well as the debtor's motion to stay.

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   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

 

 

Thursday, June 9, 2016

FYI: Fla App Ct (3rd DCA) Holds Evidentiary Hearing Required to Set Redemption Amount

The Third District Court of Appeal, State of Florida, recently reversed and remanded a trial court's order incorrectly setting the amount required to redeem a mortgage loan, and held that the trial court must conduct an evidentiary hearing to determine the amount needed to redeem the mortgage loan because the redemption amount was unliquidated.

 

A copy of the opinion is available at: http://www.3dca.flcourts.org/Opinions/3D14-2782.pdf

 

A mortgagee sued to foreclose its mortgage in October of 2013. The complaint alleged that the borrower owed "principal in the amount of $3,331,190.81 … as well as … interest, taxes, insurance, escrow advances, the cost of inspections and property preservation, and … expenses, including attorney's fees …."

 

Five months later, the property owner filed a motion for summary judgment, which argued that the mortgagee lacked standing. The property owner also filed a motion which "asked the trial court to determine the amount that had to be paid to redeem the mortgage."

 

The property owner's counsel scheduled the motion to redeem for a five-minute non- evidentiary hearing less than two weeks later. The trial court ordered that the owner needed to "pay $3,347,233.21 — only $16,042.40 more than the principal amount alleged in the complaint — to redeem the mortgage."

 

The trial court then entered an order approving an agreement between the property owner and another party with an interest in the property who was named in the foreclosure complaint. The next day, the property owner paid the amount provided in the redemption order and conveyed the property to a third party.

 

The mortgagee then moved for reconsideration of the redemption order, arguing that "the amount due to redeem was unliquidated and that and evidentiary hearing with adequate notice was required to determine the amount."  Attached to the motion was an affidavit stating "that the redemption amount was $4,624,169.03, or $1,276,935.82 more than the amount set by the trial court…."

 

The trial court denied the mortgagee's motion for reconsideration or alternatively to vacate the redemption order, "finding that the motion was untimely; that [the mortgagee] failed to demonstrate excusable neglect; that [it] failed to comply with rule 1.530; that damages were liquidated; the [the mortgagee] did not appeal because damages were liquidated; and the section 45.0315 [of the Florida Statutes] does not require a trial to redeem a mortgage."

 

The trial court then dismissed the foreclosure action.  The mortgagee appealed the trial court's order denying reconsideration, and the order dismissing the foreclosure.

 

On appeal, the Third District first explained that "questions of law arising from undisputed facts are reviewed de novo" and that "[w]hether damages alleged are liquidated or unliquidated is a question of law subject to de novo review." Applying that standard, it found that "both the notice and the evidence presented below were insufficient as a matter of law to support the redemption order on appeal."

 

The Appellate Court, relying on a 2015 decision from the Fifth District Court of Appeal, found that "while specific damages alleged in a complaint may be considered in some circumstances as liquidated, where, as here, the specific sum stated is claimed to be the amount due 'to date' or the minimum amount due or even the amount due exclusive of interest, attorney's fees, and costs, the amount alleged is not liquidated."

 

The Appellate Court then explained that "[i]t is well established that where damages are unliquidated, due process requires meaningful notice of a trial or hearing at which evidence will be adduced to determine the amount due…" and concluded that the twelve-days' notice of a non-evidentiary hearing on the trial court's motion calendar "was legally insufficient and in our view entitles [the mortgagee] to a reversal of the redemption order."

 

The Third District described as "baseless" the former owner's argument that there was no need for an evidentiary hearing, because the former owner did not dispute the amount alleged in the complaint and this same amount was repeated in the mortgagees unsworn estimate of the claim's value under section 28.241, Florida Statutes, which requires an estimate of the amount to determine the amount of the filing fee on a sliding scale in mortgage foreclosure actions.

 

The Appellate Court reasoned that section 45.0315, Florida Statutes, which governs the right of redemption, expressly requires payment of "any amounts due because of the exercise of a right to accelerate, plus the reasonable expenses of proceeding to foreclosure incurred to the time of tender, including reasonable attorney's fees of the creditor."

 

Moreover, the Third District also held that the filing fee statute, section 28.241, did not cure the lack of evidence presented as to these amounts. Neither the mortgagee's section 28.241 estimate of the value of its claim "nor the verified complaint, whether considered alone or together, constitute evidence of, or otherwise establish, the total amount that [the former owner] was obligated to pay to redeem as expressly required by section 45.0315."

 

The Appellate Court concluded that "the amounts due to [the mortgagee] under section 45.0315 were not liquidated when the motion to redeem was filed, at the time that motion was heard, or at any subsequent time." Because of this fact, "the burden fell on [the former owner] as the moving party to set or to have set an evidentiary hearing on its motion to redeem and to adduce evidence or spread a stipulation on the record to prove the amounts that it was obligated to pay under section 45.0315 to redeem. Otherwise, and as section 45.0315 expressly states, 'there [wa]s no right of redemption.'"

 

Accordingly, the final order dismissing the foreclosure action was reversed, the redemption order vacated, and the case remanded for an evidentiary hearing to determine the amount needed to redeem the mortgage. The Third District also ordered the mortgagee to return any sums paid under the trial court's erroneous redemption order to the former owner.

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   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, June 8, 2016

FYI: 7th Cir Holds FDCPA Allows Vicarious Liability, Neither Materiality Nor Extrinsic Evidence of Confusion Required for 1692g Claims

The U.S. Court of Appeals for the Seventh Circuit recently held that neither extrinsic evidence of confusion, nor materiality, is required for claims under § 1692g(a) of the federal Fair Debt Collection Practices Act ("FDCPA").

 

The Court also held that a company that is itself a debt collector is liable for the violations of the FDCPA by its debt collector agent.

 

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

 

The defendant creditor allegedly acquired defaulted consumer debts owned by the plaintiffs, and did not dispute that it was a debt collector within the meaning of the FDCPA.  The defendant collection law firm sent initial collection notices to the plaintiffs on behalf of the defendant creditor. The notices stated that the account had been transferred from the creditor to the law firm. The notices did not provide additional details about the relationship between the two defendants, and did not state who currently owned the debts.

 

The plaintiffs brought suit under the FDCPA, alleging that the notices violated 15 U.S.C. § 1692g(a)(2) of the FDCPA by failing to identify the current owner of the debt. They also alleged the letters violated 15 U.S.C. § 1692e, which prohibits the use of false or misleading representations or means in connection with the collection of a consumer debt.

 

The trial court certified a plaintiff class consisting of all consumers who received the letters personally, and a subclass of consumers who had been sent the letters in care of their attorneys. On cross-motions for summary judgment, the trial court ruled in favor of defendants.

 

The trial court acknowledged the form letter's ambiguity on the question of the current owner of the debt, noting that the word "transferred" could mean either conveyance of title or assignment for collection and that, applying the ordinary meaning of "transfer," the letter did not "suggest any particular form or method of conveyance."

 

Nevertheless, the trial court held that the ambiguous letter and plaintiffs' affidavits attesting to their own confusion failed to create a genuine dispute of material fact for trial under §1692e, and that the plaintiffs failed to offer evidence that the omission of the identification of the creditor met the materiality requirement implied for most §1692e claims. The trial court also rejected the plaintiffs' §1692g(a)(2) claim on the same grounds as the §1692e and e(10) claims, including lack of materiality. The plaintiffs appealed.

 

As you may recall, the FDCPA, at § 1692g(a), provides that in either the initial communication with a consumer in connection with the collection of a debt or another written notice sent within five days of the first, a debt collector must provide specific information to the consumer, including "the name of the creditor to whom the debt is owed." 15 U.S.C. § 1692g(a)(2).

 

The Seventh Circuit noted that, to satisfy § 1692g(a), the debt collector's notice must state the required information clearly enough that the recipient is likely to understand it.

 

Examining the notices at issue, the Seventh Circuit held that, standing alone, the fact that the letters merely included the creditor's name did not establish compliance with the FDCPA. Instead, the Court held that in order to comply with 15 U.S.C. § 1692g the notice must identify the creditor as the creditor to whom the debt is owed.

 

The defendants argued that the notice nevertheless complied with §1692g(a)(2) because in its entirety, the notice disclosed the legal relationship between the creditor and the law firm. However, the Seventh Circuit found that nothing in the notice pointed to the deduction that the law firm was collecting the referenced debts on the creditor's behalf, or that the creditor remained the current owner of the debt.

 

The Seventh Circuit also rejected the defendants' argument that a reasonable consumer would recognize the creditor as the debt owner.  The Court noted that, even if the consumer would recognize the creditor as the debt owner at some time in the past, the notice stated that the account had since been transferred. The Court noted that the defendants did not explain how an understanding of the creditor's former role would have shown its current role.

 

The defendants also argued that the notice included language stating the law firm would honor any payment plans or settlement arrangements the consumer may have made with the creditor. However, the Seventh Circuit noted that the defendants failed to explain how this language showed that the creditor is the current debt owner.

 

Accordingly, the Seventh Circuit held that the notices did not disclose the name of the current creditor, and therefore violated §1692g(a)(2).

 

In addition, the defendants argued that the plaintiffs were required to come forward with extrinsic evidence of actual confusion to survive summary judgment as the letters were at worst merely ambiguous.

 

The Seventh Circuit noted that claims under § 1692e claims have been sorted cases into three categories.

 

The first category includes cases in which the challenged language is plainly and clearly not misleading. No extrinsic evidence is needed to show that the creditor ought to prevail in such cases.

 

The second category includes debt collection language that is not misleading, or confusing on its face, but has the potential to be misleading to the unsophisticated consumer. In such cases, plaintiffs may prevail only by producing extrinsic evidence, such as consumer surveys, to prove that unsophisticated consumers do in fact find the challenged statements misleading or deceptive.

 

The third category is cases in which the challenged language is plainly deceptive or misleading, such that no extrinsic evidence is required for the plaintiff to prevail.

 

The defendants argued the letters were at worst in the second category, and merely susceptible to more than one interpretation. However, the Seventh Circuit held that §1692g(a)(2) requires a particular disclosure, and extrinsic evidence is not required to show consumer confusion. In the Courts words, "[s]ince the name was on the letters, some might correctly guess that [the defendant creditor] was the current creditor, but a lucky guess would have nothing to do with any disclosure the letters provided. Compliance with the clear requirements of § 1692g(a)(2) demands more."

 

The Seventh Circuit relied on Chuway v. National Action Financial Services, Inc., 362 F.3d 944 (7th Cir. 2004) which related to the debt collector's requirement of stating the amount of debt in the notice provided under 15 U.S.C. §1692g.  The Seventh Circuit in that case concluded that although the "balance" was disclosed in the letter, the reference to obtaining the "most current balance information" implied that the consumer might actually have owed some unspecified larger amount.

 

The Seventh Circuit also held in Chuway that under those circumstances, the plaintiff did not need to present extrinsic evidence of confusion. Her affidavit attesting to her own confusion, coupled with the fact that it was "apparent just from reading the letter that it is unclear," was sufficient to create a triable issue.

 

Here, the Court noted that the notice did not actually identify the creditor as the current debt owner at all and left the impression that the creditor may have transferred the debt to the law firm. The plaintiffs provided affidavits stating they were unable to determine who currently owned the debt, and thus the Court held that no further evidence of consumer confusion was necessary.

 

Next, the Seventh Circuit addressed the trial court's alternative reasoning that the violation of the FDCPA was not material. The Seventh Circuit noted that in enacting § 1692g(a)(2), Congress specifically determined that a debt collector must include in its § 1692g(a) notice the name of the creditor to whom the debt is owed.  Accordingly, the Court held that the failure to make the disclosure is a failure the FDCPA is meant to penalize, and there is no need for an individual inquiry about the materiality of any given letter recipient.

 

The defendants argued that in this particular case knowing the current creditor would not have affected consumers' rights.  However, the Seventh Circuit held that conclusion overlooked the potential for fraud. The Court noted that, unless the unsophisticated consumer makes the effort to demand verification under §1692g, a dishonest collector could confirm that the consumer should send it a payment to extinguish the debt, and that consumer would find that she had lost that money while her actual debt remained unpaid.

 

Lastly, the defendant creditor argued that even if the law firm was not entitled to summary judgment, the creditor could not be held vicariously liable for the notices the law firm drafted and sent.

 

However, the Seventh Circuit noted that the Ninth and Sixth Circuits have held that debt collectors are liable for violations of the FDCPA committed by others acting on their behalf.

 

According to the Court, the question of vicarious liability under the FDCPA turns on whether the defendant whom the plaintiff seeks to hold vicariously liable is itself a debt collector. 

 

The Seventh Circuit held that a debt collector should not be able to avoid liability for unlawful debt collection practices simply by contracting with another company to do what the law does not allow it to do itself.  On the other hand, a company that is not a debt collector would not ordinarily be subject to liability under the FDCPA at all. 

 

Here, the defendant creditor did not dispute that it was a debt collector, and therefore the Court held that the defendant creditor may be held liable for the defendant law firm's violations of the FDCPA.

 

In sum, the Seventh Circuit held that the trial court erred in holding that plaintiffs had failed to meet their burden of proof on the §1692g(a)(2) claim.  The Seventh Circuit held that, as a matter of law, the notices violated §1692g(a)(2) by failing to make the mandated identification of the creditor, and no additional showing of materiality was required. The Court also held that the defendant creditor, as a debt collector, cannot escape liability for the law firm's actions on its behalf. The judgment of the trial court was therefore reversed.

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   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

 

 

 

 

Tuesday, June 7, 2016

FYI: 8th Cir Holds Cybertheft Covered By Financial Institution Bond Applying "Concurrent Causation" Doctrine

The U.S. Court of Appeals for the Eighth Circuit recently held that a bank was entitled to recover its cybertheft losses under its financial institution bond, despite its employee's violation of the bank's internal policies and procedures, and despite the bank's failure to update its antivirus software, holding that Minnesota's "concurrent causation" doctrine applies to financial institution bonds.

 

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

 

A computer at the plaintiff bank became infected with malware, which allowed a criminal third party to transfer nearly half of a million dollars to a foreign bank account.  

 

An employee of the plaintiff bank completed a wire transfer through the Federal Reserve's FedLine system. The next day, the employee noticed two unauthorized wire transfers made to a foreign bank account.  The employee was unable to reverse the transfers and the Federal Reserve refused to reverse the transfers. Only one of the fraudulent transfers was reversed by an intermediary institution.

 

The plaintiff bank had a financial institution bond ("Bond") issued by the defendant insurer. The Bond covered losses such as those caused by employee dishonesty and forgery, as well as computer system fraud.

 

After an investigation by the defendant insurer, it was determined that a "Zeus Trojan horse" virus infected the plaintiff bank's computer and permitted access to the computer for fraudulent transfers. The plaintiff bank sought coverage for the loss under its Bond issued by the defendant insurer. The defendant insurer denied coverage based on exclusions in the Bond.

 

Specifically, the insurer claimed the loss was not covered based on employee-caused losses, exclusions for theft of confidential information, and exclusions for mechanical breakdown or deterioration of a computer system.

 

The bank filed suit on the Bond alleging a breach of contract. The trial court granted summary judgment in favor of the bank, holding that the computer systems fraud was the efficient and proximate cause of the bank's loss, and neither the employees' violations of policies and practices (no matter how numerous), the taking of confidential passwords, nor the failure to update the computer's antivirus software was the efficient and proximate cause of the plaintiff's loss.  In addition, the trial court held it was not then a 'foreseeable and natural consequence' that a hacker would make a fraudulent wire transfer. Thus, even if those circumstances 'played an essential role' in the loss, they were not 'independent and efficient causes' of the loss. The defendant insurer appealed.

 

As this was a diversity action, Minnesota law governed the interpretation of the Bond.  As you may recall, Minnesota has a "concurrent causation" doctrine, under which an insured is entitled to recover from an insurer when the cause of the loss is not excluded under the policy, even though an excluded cause may have also contributed to the loss.

 

The insurer argued that, despite the general applicability of the concurrent causation doctrine to Minnesota insurance contracts, the doctrine is supposedly not similarly applicable to financial institution bonds because a bond requires the insured to initially show that its loss directly and immediately resulted from dishonest, criminal, or malicious conduct.  Thus, the insurer argued the standard of proof is higher for financial institution bonds than under the in concurrent causation doctrine.

 

However, the Eighth Circuit held that Minnesota generally treats financial institution bonds as insurance policies, and no Minnesota case precludes the application of the concurrent causation doctrine to financial institution bonds. Thus, the Eighth Circuit found that Minnesota courts would adhere to the general rule of treating financial institution bonds as insurance policies, and interpreting them in accordance with the principles of insurance law.

 

Rejecting the insurer's argument that the Bond imposed a higher standard of proof, the Court held that the bank still had to show that its loss was directly caused by the fraudulent transfer, and that the application of the concurrent-causation doctrine did not interfere with that requirement.

 

Next, the Eighth Circuit rejected the insurer's argument that the parties drafted around the concurrent causation doctrine in the Bond.  The Court held that parties may include "anti-concurrent causation" language in contracts to prevent the application of the concurrent causation doctrine, but in those cases where courts have found the contract contains an anti-concurrent causation clause, the language used is clear and specific.  The Eight Circuit held that the Bond's reference to "indirectly" in its exclusion was not a sufficient invocation of the "anti-concurrent causation" provision, and thus that the Bond at issue in this matter did not contain such a provision.

 

Lastly, the insurer argued that the trial court erred in concluding the fraudulent hacking was the overriding, proximate cause of the loss. The Eighth Circuit relied on their application of the concurrent causation doctrine in Friedberg v. Chubb & Son, 691 F.3d 948 (8th Cir. 2012). The Friedbergs had extensive water damage in their home. The Friedbergs claimed their policy covered the water damage to their home because the loss resulted from the combination of both faulty construction and the presence of water. The policy contained exclusion for losses caused by faulty construction.

 

The Eighth Circuit held, where an excluded peril contributed to the loss, an insured may recover if a covered peril is the efficient and proximate cause of the loss. Conversely, the Court held, it follows that if an excluded peril is the efficient and proximate cause of the loss, then coverage is excluded.  The Eighth Circuit explained that, an efficient and proximate cause, in other words, is an overriding cause. Thus, the Court held, the policy did not cover the Friedbergs' loss.

 

Here, the Eighth Circuit agreed with the trial court's finding that the proximate cause of the loss was the illegal transfer of the money, and not the employee's violation of policies and procedures.

 

The Court held that an illegal wire transfer is not a foreseeable and natural consequence of the bank employee's failure to follow proper computer security policies, and that the overriding cause of the loss the bank suffered was the criminal activity of a third party.

 

Accordingly, the Eighth Circuit found that the trial court properly granted summary judgment to the bank, and affirmed the ruling.

 

 

 

 

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

 

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