Tuesday, June 27, 2017

FYI: 8th Cir Rules on Bankruptcy Trustee's Ability to Recover Overdraft Covering Deposits

In a bankruptcy preferential transfer dispute, the U.S. Court of Appeals for the Eight Circuit recently held that the bankruptcy trustee could recover true overdraft covering deposits, while deposits covering intra-day overdrafts were not recoverable.

 

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

 

A company filed for bankruptcy and, ninety days before filing, wired funds to its bank to cover overdrafts.  The bankruptcy trustee argued that those funds were avoidable transfers that could be recovered from the bank.

 

The bankruptcy court agreed as to some of the deposits but not others.  The trustee and the bank cross-appealed to the trial court, which affirmed.  The parties then cross-appealed again to the Eighth Circuit.  

 

The Eighth Circuit noted that, under the Bankruptcy Code, a bankruptcy trustee may "avoid" a debtor's transfer of a property interest (1) "to or for the benefit of a creditor"; (2) "for or on account of an antecedent debt owed by the debtor before such transfer was made"; (3) "made while the debtor was insolvent"; (4) "made . . . within 90 days before the date of the filing of the petition"; and (5) "that enables [the] creditor to receive more" than it would receive under Chapter 7 if the transfer had not been made. 11 U.S.C. § 547(b).

 

The trustee has the burden to prove a transfer is avoidable. § 547(g). The trustee may not avoid a transfer if a creditor proves an exception applies. § 547(c), (g).  If a transfer is avoidable, the trustee may recover it from "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." § 550(a). The trustee may not recover from a "mere conduit for an avoidable transfer." In re Reeves, 65 F.3d 670, 676 (8th Cir. 1995).

 

Here, the Eight Circuit noted that the bank's policies recognized two types of overdrafts: "intraday overdrafts," which occurred when provisional settlement or debiting caused a negative account balance, and "true overdrafts," which occurred when provisional settlements caused a negative balance that became final at the midnight deadline provided for under Iowa Code 554.4104(1)(j) and 554.4301.

 

The debtor company had two accounts, one for checking and second one that was unspecified.  The checking account was always negative during the 90 days prior to the company filing for bankruptcy, but the second account held a balance of approximately $1.4 million.  The bank netted the two accounts so that as long as the second account had balance higher than the negative checking account balance, the company had a positive balance and was treated as if no overdrafts had occurred. Near the end of the 90-day preference period, the bank transferred the $1.4 million balance to the checking account. 

 

The bankruptcy trustee sought to recover the deposits that covered the intraday and true overdrafts and the $1.4 million balance that the company had transferred to the checking account and disputed whether the accounts had been properly netted.  The bank argued that none of the deposits were recoverable and that the $1.4 million was a protected set-off.

 

The bankruptcy court had held that the trustee could recover the true overdrafts but not the intraday overdrafts and that, although the set-off was improper, it did not affect the trustee's recovery. On cross-appeal, the trial court affirmed the bankruptcy court's ruling except for holding that the bankruptcy court erred in finding the set-off improper, although the trial court agreed that the set-off error did not affect the trustee's recovery.  

 

The Eighth Circuit affirmed the bankruptcy court's holding entirely.

 

The Eight Circuit noted that, under the Bankruptcy Code, the trustee could not recover the intraday overdraft-covering deposits because intraday overdrafts do not create antecedent debt and the bank "was functioning as a mere conduit" for the intraday overdrafts. See 11 U.S.C. § 547(b)(2); Laws v. United Mo. Bank of Kansas City, N.A., 98 F.3d 1047, 1051 (8th Cir. 1996) ("[R]outine advances against uncollected deposits do not create a 'debt' to the bank."); § 550(a); In re Reeves, 65 F.3d 670, 676 (8th Cir. 1995).  

 

The Appellate Court refused to consider the trustee's argument that the intraday overdrafts were antecedent debt under 11 U.S.C. § 547 because, unless the 11 U.S.C. § 550 requirement was fulfilled — i.e., that the bank was more than a mere conduit when it received the funds to cover those overdrafts —the funds were not recoverable, an argument the trustee had failed to make. 

 

The Eighth Circuit also affirmed that the trustee could recover the company's true overdraft-covering deposits from the bank under the Bankruptcy Code because they qualified as debt.  

 

The Court applied the Bankruptcy Code's test for when a debt is incurred (i.e., "the test for when debt is incurred is whether the debtor is legally obligated to pay") and Iowa state law on overdrafts (i.e., "payment by a bank of an overdraft is considered an unsecured loan . . . and/or an extension of credit to a customer") to conclude that when the bank allowed provisional check settlements to become final, causing true overdrafts, the bank paid those overdrafts thereby making unsecured loans or extensions of credit to the company that the company was legally obligated to pay.  Thus, the Eighth Circuit held, the true overdrafts were debt. 

 

The Appellate Court rejected the bank's argument that it was a non-liable "mere conduit" as to the true overdrafts because overdrafts are different than "traditional loans" and should thus keep the true overdraft-covering deposits.

 

The Court reasoned that the bank was actually an initial transferee under 11 U.S.C. § 550 because it had dominion and control over the funds in question by virtue of the fact that it paid third parties in the amounts of the true overdrafts and, in exchange for doing so, the debtor company owed the bank a debt payable directly to the bank. Moreover, the Eight Circuit noted, when the bank received the true overdraft-covering deposits, it could use the funds for any purpose.  Thus, the Appellate Court affirmed the trial court's holding that the trustee could recover the company's true overdraft-covering deposits.

 

The Eighth Circuit also affirmed the lower court's rejection of the bank's exception-based affirmative defenses.

 

"A trustee cannot recover an otherwise avoidable transfer if the creditor proves a § 547(c) exception."  For the first exception, the Eighth Circuit found that the bank failed to show that it took the true overdraft-covering payments in exchange for an agreement to provide anything new or contemporaneous.  The Appellate Court rejected the bank's evidence of having waived overdraft charges because it did not show the parties' intent.

 

For the second exception, the Eighth Circuit affirmed that the debtor company did not incur the true overdrafts, which were debts, in the ordinary course of business.  Because there is "no precise legal test" for this exception, only a requirement to "engage in a peculiarly factual analysis", the Court examined the "cornerstone of debt inquiry", whether there is any consistency with other business transactions between the bank and company, and other relevant factors, such as whether any unusual payment methods or atypical pressure to pay were involved.  

 

The Eighth Circuit compared the number of overdrafts the company incurred during the preferential period to a time when he company was financially healthy and found that the number of true overdrafts dramatically increased during the preferential period, and that they were unplanned and discouraged, suggesting that true overdrafts were uncommon and thus inconsistent with the parties' ordinary course of business.  

 

The third possible exception, transfers creating security interests, was not raised.

 

Concerning the trustee's challenge to the bankruptcy court's calculation of the transfer recoverable from the bank, the Appellate Court affirmed the lower courts' rulings in favor of the bank on both arguments.  

 

More specifically, the Eighth Circuit affirmed the bankruptcy court's ruling that the calculation for the amount recoverable would be based on the pre-bankruptcy account balances containing the bank's posting errors, which resulted in less true overdrafts and thus less recovery for the trustee, instead of the post-bankruptcy corrected balances, which would result in more true overdraft-covering payments being avoidable. The Court explained that it would be inequitable to use the corrected balances because the company did not owe the corrected amounts until after it filed for bankruptcy, so those corrections did not result in debts under § 547.

 

The Eighth Circuit also affirmed the bankruptcy court's calculation of the bank's liability for true overdrafts based on the netting of the two accounts and rejected the lack of a written netting agreement as the netting arrangement was supported by three witness' testimony and rejected expert testimony that netting accounts did not eliminate the debt of the true overdrafts because the facts found by the bankruptcy court showed that in practice the bank and company had treated the accounts as netted.

 

The Court declined to consider a third argument because the trustee did not raise on the first appeal to the district court.

 

The final issue the Eighth Circuit affirmed was that the bankruptcy court properly ruled that the set-off did not apply to the transfer of funds between the two "netted" accounts. The trustee argued that the debtor company's transfer of its remaining $1.4 million to its checking account during the preference period was an avoidable transfer, and the bank countered that it was not because the transfer was a valid set-off protected by 11 U.S.C. § 553(a).  

 

The Eighth Circuit agreed with the bankruptcy court that, due to the netting arrangement between the two accounts, the debtor company did not incur a debt to the bank until the balance of the checking account fell below the balance of the second account.  

 

Thus, the lower courts' holdings were affirmed. 

 

 

 

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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Sunday, June 25, 2017

FYI: SD Fla Bankr Refuses to Approve Bankruptcy Plan That Relied on Medical Marijuana Lease Proceeds

The U.S. Bankruptcy Court for the Southern District of Florida recently held that a bankruptcy debtor's Chapter 11 proceeding should not be dismissed as filed in bad faith to delay or avoid foreclosure, but could not confirm the debtor's proposed plan to lease its commercial property asset to a business that generates income from medical marijuana.

 

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

 

A limited liability company ("debtor") owned 48.8% of a commercial property in Miami Beach, Florida (the "commercial property") that was secured by a mortgage held by a commercial bank ("lender") that had a long-standing relationship with the debtor.

 

The debtor and its affiliates filed a state court lawsuit raising several lender liability claims against the lender.  The lender later filed two cases against the debtor, its affiliates and guarantors to collect on some of the loans. The three cases involving three loans --all secured by the commercial property -- were eventually consolidated.

 

The state court entered summary judgment in favor of the lender in the amount of $667,113.17 and ordered the sale of the commercial property. The commercial property was redeemed prior to the foreclosure sale. Final summary judgment as to the remaining issues in the consolidated lawsuit was rendered in lender's favor in and affirmed by a state appellate court.

 

After a second appeal of the final judgment awarding lender attorney fees in an amount of $841,099.03 was affirmed, the state court set a foreclosure sale.  The night before the sale, the debtor removed the state court case to federal court which removal cancelled the foreclosure sale. Soon thereafter, the case was remanded to the state court and a second foreclosure sale was set.

 

On the eve of the second, and subsequent third foreclosure sale dates, the debtor twice removed the case to federal court, thereby cancelling the sale.  Following remand of its third failed attempt at removal, the debtor was enjoined from any further removal of the state court case.

 

After several other emergency motions to delay the foreclosure sale were denied, the debtor filed its Chapter 11 bankruptcy petition on October 4, 2016, the day before the rescheduled foreclosure sale.

Shortly thereafter, the lender filed a motion to dismiss the bankruptcy petition pursuant to 11 U.S.C. §1112(b)(1) alleging that it was filed in bad faith, citing the debtor's repeated attempts to stop the foreclosure sale by improperly remanding the action to federal court.

 

Prior to the hearing on the lender's motion to dismiss, the debtor filed a plan of reorganization and disclosure statement, which proposed, among other things, to rent space in the commercial property to a business that generates income from medical marijuana.

 

At hearing on the motion to dismiss, the Court was unpersuaded by the debtor's argument that the timing of its filing was actually a result of the debtor acting without advice of bankruptcy counsel, because the debtor's principal is a lawyer, who was responsible for filings in the previous suits and co-author of some of the pleadings filed in the bankruptcy.

 

Citing potential issues with the plan to lease the commercial property to a business that generates income from medical marijuana -- including the fact that the commercial property was not listed as one of the seven licensed dispensing organizations approved in Florida to dispense low-THC cannabis and medical cannabis -- the bankruptcy court ordered the debtor to file an amended plan that better addressed the plan's structure and either did not depend on marijuana as an income source, or briefed the issue if the amended plan was going to rely on marijuana income.

 

The first amended plan filed by the debtor still relied upon income generated from medical marijuana to make plan payments, including payments to lender tied to the amount of income generated from the marijuana business.  The debtor and lender subsequently filed their supplemental briefs on the marijuana issue.

 

The lender argued the bankruptcy action was filed in bad faith.  When determining whether a chapter 11 case should be dismissed as a bad faith filing, the court must consider factors that evidence "an intent to abuse the judicial process and the purposes of the reorganization provisions," such as "when there is no realistic possibility of an effective reorganization and it is evident that the debtor seeks merely to delay or frustrate the legitimate efforts of secured creditors to enforce their rights." lbany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670, 674 (11th Cir. 1984).

 

The Eleventh Circuit in Phoenix Piccadilly, Ltd. v. Life Insurance Co. of Virginia (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393 (11th Cir. 1988), listed a number of subjective factors in determining whether a dismissal for bad faith is appropriate. The factors include whether:

 

(i) The Debtor only has one asset, . . .;

(ii) The Debtor has few unsecured creditors whose claims are small in relation to the claims of the Secured Creditors;

(iii) The Debtor has few employees;

(iv) The Property is the subject of a foreclosure action as a result of arrearages on the debt;

(v) The Debtor's financial problems involve essentially a dispute between the Debtor and the Secured Creditors which can be resolved in the pending State Court Action; and

(vi) The timing of the Debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the Debtor's secured creditors to enforce their rights.

 

Phoenix Piccadilly, 849 F.2d at 1384-95.

 

Here, the debtor's sole asset was the commercial property (and leases relating thereto) and the debtor had no employees.  Although eight other unsecured creditors placed undisputed, non-insider, non-priority claims totaling $631,987.00, the bankruptcy court concluded that it was clear the debtor filed for chapter 11 bankruptcy to avoid a foreclosure of the commercial property and liability against the lender and various guarantors.

Next, the bankruptcy court considered whether the debtor had the ability to reorganize itself.

 

The debtor argued that it would be able to prove feasibility at confirmation, as the proposed tenant had applied for both state and federal approval to cultivate and sell marijuana.  The lender argued that its approval was unlikely due to the commercial property's proximity to a school and a synagogue.

 

Citing rulings in several other jurisdictions that declined to confirm bankruptcy plans funded by federally illegal income derived from marijuana cultivation and sale, the Court noted that in each of those cases, the marijuana source of funding was legal under the relevant state law.  See In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799, 809 (Bankr. D. Colo. 2012);  In re Jerry L. Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015); In In re Arenas, 535 B.R. 845 (10th Cir. B.A.P. 2015).  

 

Here, the issue was whether or not the proposed tenant would be approved under federal law to manufacture or sell marijuana.  Because only the University of Mississippi has ever received approval by the federal government to grow and cultivate medical marijuana, the Court reasoned that it was highly unlikely that the debtor and prospective tenant would receive approval from the federal government.

 

The Court concluded that (i) the debtor cannot rid itself of the taint of the bad faith filing (See In re Natural Land Corp., 825 F. 2d at 296; Albany Partners, 749 F.2d at 670); (ii) the amended plan was based on an enterprise illegal under federal law, and the debtor cannot satisfy the requirements of 11 U.S.C.§1129(a)(3), and; (iii) the amended plan was highly speculative and failed to meet the standards of effective reorganization established by the Supreme Court of the United States that "there must be 'a reasonable possibility of a successful reorganization within a reasonable time."  United Savings Ass'n of Texas v. Timbers of Inwood Forest, 484 U.S. 365, 376 (1988).

 

The Court noted that the case was found to be ripe for dismissal for bad faith, due to the amounts of non-insider unsecured debt, but the lender's motion to dismiss was denied in the best interest of the unsecured creditors. 

 

However, the Court reasoned that the same factors warranted relief from the automatic stay as to the lender. See Natural Land Corp., 825 F. 2d at 296.

 

Accordingly, (i) the lender's motion to dismiss was denied, with the debtor ordered to file a plan that does not rely upon marijuana as a source of income within 14 days or face conversion to a Chapter 7 filing, and; (ii) the lender was granted relief from the stay to continue the foreclosure action and set a foreclosure sale date no earlier than 75 days to be cancelled if the debtor's amended plan is confirmed, or at the earliest date allowed under state law should the debtor fail to file a plan within 14 days.

 

 

 

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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Friday, June 23, 2017

FYI: 7th Cir Rejects Narrow Reading of TCPA Consent

The U.S. Court of Appeals for the Seventh Circuit recently concluded that a consumer's consent to receive promotional information from a retailer is sufficient consent under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA") to receive other mass marketing texts. 

 

The primary issue the Seventh Circuit addressed was the scope of the consent the consumer provided when she gave her cell phone number to the retailer.  The consumer argued that she only provided her cell phone to receive special discount offers, and did not consent to "mass marketing" text messages. 

 

The Seventh Circuit rejected the argument, and determined that the marketing texts were part of the "exclusive information and special offers" she consented to receiving.  The Court determined that the texts at issue were all related to the same subject matter covered by the consumer's consent, and the consumer could not attempt to parse her consent to receive some promotional information but not others. 

 

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

 

A retailer used a vendor's software text-messaging platform to connect with its customers.  The store used a variety of methods to obtain its customers' cell phone numbers.  The customers could opt in the store's "Text Club" by providing their cell phone numbers to employees while in the store, they could text the store's name to a number posted in the stores, or they could fill out a card provided by the store.  The card specifically stated that the information would be used solely for providing "exclusive information or special offers." 

 

The vendor's text-messaging platform used a simple system to deliver text messages.  The numbers received via text were automatically loaded into the vendor's platform.  The numbers given to store employees or received on the card were manually entered into the platform. 

 

The retailer could then manage its promotional texts by accessing the vendor's web interface.  Employees could log in to the interface and draft messages to be sent to the text club members.  The store had the ability to send the texts immediately or set a future date and time for the messages to be sent.  The store had collected over 20,000 customers for its text club messages.

 

The plaintiff brought a putative class action complaint against the retailer, alleging the store violated the TCPA by using an automatic telephone dialing system ("ATDS") to send texts without the express consent of the recipient. The trial court certified a class of individuals with a series of Illinois area codes who had received automated texts from the store in the proceeding four years. Both parties then moved for summary judgment.  The trial court denied the plaintiff's motion for summary judgment, and granted the store's motion, concluding that the software platform the vendor used did not qualify as an ATDS under the TCPA.  The plaintiff appealed the granting of summary judgment, and the store cross-appealed the certification of the class.

 

On appeal, the Seventh Circuit quickly confirmed that text messages to cell phones constitute "calls" under the TCPA and, thus, the prohibitions provided by the TCPA applied to the text messages at issue. 

 

The trial court based its granting of the retailer's motion for summary judgment on the conclusion that the plaintiff had not sufficiently established the vendor's platform was an ATDS under the TCPA. 

 

As you may recall, the TCPA prohibits making any call without the prior express consent of the recipient using any ATDS to any cell number.  See 47 U.S.C. § 227(b)(1)(A)(iii).  The trial court concluded that the vendor's platform did not qualify as an ATDS based on the affidavit from one of the vendor's employees who stated that human intervention was required "nearly" every step of the way, from entering the new numbers into the platform, to determining when the texts would be sent to the consumers.

 

On appeal, the Seventh Circuit concluded that the trial court erred in granting summary judgment on the basis that the vendor's platform was not an ATDS.  According to the Seventh Circuit, the affiant's use of the word "nearly" demonstrated that human intervention was not necessary at the precise point of action prohibited by the TCPA: using technology to "push" the texts to an aggregator that sends the messages out simultaneously to hundreds or thousands of cell phone users at a pre-determined date and time.

 

The Seventh Circuit then addressed the issue the trial court did not address: the plaintiff's consent to receive text messages. 

 

The Appellate Court first looked at the evolution of consent under the TCPA.  The Court observed that the FCC explained in its 1992 Order that "persons who knowingly release their phone number have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary." 7 FCC Record at 8769, ¶ 31.  According to the Seventh Circuit, the FCC explained that "telemarketers will not violate our rules by calling a number which was provided as one at which the called party wishes to be reached." Id.

 

The Seventh Circuit then looked at another order from 2012 in which the FCC determined texts and calls that include or introduce an advertisement or constitute telemarketing require express written consent. See 47 C.F.R. § 64.1200(a)(2). Then, the Court looked at an FCC 2015 Order where the FCC clarified that the existence of a consumer's wireless number in another person's wireless phone, standing alone, does not demonstrate consent to autodialed texts. That Order also clarified that consent could be revoked "at any time and through any reasonable means." 30 FCC Rcd at 7989-90, ¶ 47.

 

Turning to the facts, the Seventh Circuit noted that plaintiff gave her cell phone number to the store on "several" different occasions. First, plaintiff signed up for what she characterized as a "frequent buyer card." The retailer also produced a "VIP" Card and a "CLIENT LIST" card with plaintiff's name and cell phone number. Both of the cards contained the following disclaimer: "INFORMATION PROVIDED TO [the company] IS USED SOLELY FOR PROVIDING YOU WITH EXCLUSIVE INFORMATION AND SPECIAL OFFERS. [The company] WILL NEVER SELL YOUR INFORMATION OR USE IT FOR ANY OTHER PURPOSE." 

 

The retailer also provided system notes reflecting plaintiff's request for a sales associate to call her when a particular pair of shoes arrived back in stock. Finally, according to the Court, the record established, and plaintiff admitted, that she texted the store's name to the vendor in order to opt into the text program.

 

Based on these facts, the Seventh Circuit concluded that plaintiff had provided her consent to receive the texts.  Plaintiff argued that she had only provided her consent to receive texts regarding discounts, but did not consent to "mass marketing" materials.  The Court rejected this argument, concluding that plaintiff's interpretation of "consent" was too narrow. The court relied on a Ninth Circuit decision that concluded "an effective consent is one that relates to the same subject matter as is covered by the challenged calls or text messages." 

 

The Court also cited an Eleventh Circuit ruling that concluded that by "voluntarily providing his cell phone number" to the defendant, the plaintiff gave his prior express consent to be contacted. 

 

Based on these rulings, the Seventh Circuit concluded that plaintiff had provided the consent required under the TCPA. 

 

The Seventh Circuit distinguished the few cases the plaintiff cited in support of her position that her consent was limited.  In those cases, according to the Seventh Circuit, the courts concluded that the consent the consumer provided did not provide "carte blanche" consent to receive all calls or texts.  The Court concluded that those cases actually supported its conclusion that the calls or texts at issue have to be tied to the purpose for which the consent was provided.

 

As to the class certification issue, the Seventh Circuit affirmed the trial court's certification of a class consisting of individuals with certain Illinois area codes who had received automated texts from the store in the proceeding four years.  The Appellate Court concluded that all of the requirements for certifying a class had been satisfied.  With its ruling on summary judgment, however, the Court determined that the entry of summary judgment was appropriate as to the class, but would not be effective as to any class members who could demonstrate that they never provided their consent to the store. 

 

Accordingly, the Seventh Circuit affirmed the trial court's granting of summary judgment and certification of a class.

 

 

 

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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Wednesday, June 21, 2017

FYI: Ill App Ct Holds Reverse Mortgage Borrower Had Mortgageable Interest Following Intestate Death of His Spouse

The Appellate Court of Illinois, First District, recently ruled that the mortgagee of a reverse mortgage loan held an interest in the secured property to the extent that the borrower inherited an interest in the property following the non-borrower's spouse's intestate death. 

 

Accordingly, the Court reversed the trial court's dismissal of the reverse mortgagee's foreclosure complaint and remanded the matter for further determination of the borrower's inherited interest in the subject property.

 

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

 

The borrower and his spouse purchased the subject property as joint tenants.  Some years later, the borrower quit claimed his interest to his spouse, but the couple continued to reside together at the subject property until the spouse's death.  As noted by the Court on appeal, the trial court record appears to indicate that the spouse died intestate leaving the borrower and a daughter - the defendant heir in the foreclosure action - as the only heirs.

 

The quit claim deed from the borrower to the wife did not provide the complete legal description for the subject property, but did identify the property by the common address.

 

Subsequent to the death of the wife, the borrower entered into a reverse mortgage which was eventually assigned to the plaintiff mortgagee in the foreclosure action. 

 

Following the borrower's death, the mortgagee initiated its foreclosure action.  The defendant heir to the borrower and spouse moved to dismiss the foreclosure complaint arguing that at the time the reverse mortgage was executed the borrower had no interest in the subject property to convey due to the quit claim deed, and therefore, the reverse mortgage was void and the foreclosure complaint should be dismissed.

 

In response, the mortgagee argued that the quit claim deed failed for lack of a sufficient description of the property being conveyed, and alternatively, that even if the quit claim deed were valid, the borrower still had a mortgageable interest in the subject property due to the intestate death of his wife.  In support of its position that the quit claim deed was insufficient, the mortgagee submitted an affidavit from an attorney with the title company who opined that the description in the quit claim deed was ambiguous on its face. 

 

The trial court rejected the mortgagee's arguments - specifically determining that the quit claim deed was valid, and that the mortgagee's affidavit was "self-serving" - and granted the heir's motion to dismiss the foreclosure action with prejudice as to the mortgagee's claims for foreclosure, quit title, reformation and declaratory judgment. 

 

The trial court also denied a request for sanctions filed by the heir pursuant to Illinois Supreme Court Rule 137 in which she argued that the foreclosure complaint was not well-grounded in fact or law.

 

The mortgagee appealed the dismissal and the heir appealed the denial of sanctions.

 

On appeal, the Appellate Court agreed with the lower court's determination that the quit claim deed sufficiently identified the subject property to validly convey the borrower's interest to the spouse.  In doing so, the Court noted that Illinois courts presume that the grantor of a quit claim deed intends to convey the property he or she owns, but if the land cannot be located from the description in the deed, the deed is void for uncertainty. 

 

However, the Court also noted that the "description is sufficient if it allows a competent surveyor to identify it with reasonable certainty."  And, the deed will not be declared void for uncertainty "if it is possible, by any reasonable rules of construction, to ascertain from the description, aided by extrinsic evidence, what property it is intended to convey." Brunotte v. DeWitt, 360 Ill. 518, 528 (1935). 

 

Here, the Appellate Court determined that although the legal description in the quitclaim deed was "truncated, it is not inaccurate."  Despite omitting several lines of the correct legal description, the Court found that the record indicated that it was undisputed that the subject property existed at the time the quitclaim deed was executed and that the borrower owned it at that time. 

 

Relying upon the presumption that the borrower intended convey the property he owned at that time, and extrinsic evidence which provided the full legal description for the subject property, the Court concluded that the quitclaim deed contained a sufficient legal description and was not void for uncertainty. 

 

As an aside, the Appellate Court explained that the fact that the borrower continued to reside at the subject property with his spouse following the conveyance by quitclaim deed was not probative of his intent.  Further, the Court noted, the fact that the borrower represented in his application for the reverse mortgage that he owned the subject property in fee simple was also not indicative of whether or not he intended to convey the subject property by quitclaim deed because it was plausible that the borrower - a layman - assumed he had inherited the property outright after his wife's death.  The Court also found that the affidavit of the title attorney submitted by the mortgagee in support of its argument that the quitclaim deed was ambiguous added no substance to the analysis because the affiant had no personal knowledge of the making of either the quitclaim deed or reverse mortgage.

 

The Appellate Court did, however, agree with the mortgagee's alternative argument that the spouse died intestate, leaving the borrower with a mortgageable interest in the subject property at the time the reverse mortgage was executed. 

 

As you may recall, under the intestacy laws of Illinois, the spouse's real and personal estate would be divided equally between the borrower and the heir, after payment of all just claims against the spouse's estate.  Further, in Illinois "a cotenant can mortgage his or her interest in a jointly held property."  Cadle Co. II v. Stauffenberg, 221 Ill. App. 3d 267, 269 (1991).  If the cotenant attempts to mortgage more than his share, the mortgage "stays in force for the actual interest of the mortgagor." Thus, the Court held, the borrower owned a half-interest in the subject property which he had a right to mortgage to the extent of his interest.

 

The Court criticized the heir's prevarication on the issue of whether or not the spouse died with or without a will.  As noted by the Court, that the heir's mere speculation that the spouse may have had a will at the time of her death is not well-taken considering that the heir "is in a good position to know whether her mother had a will, and certainly has an interest to know."  The heir's failure to introduce any evidence to the contrary allowed the mortgagee to argue on information and belief that the spouse died intestate -  it need not do anything further to prove a negative (the non-existence of a will).  The Court also noted that the fact that the spouse's estate had never been fully sorted out was not the fault or in the control of the mortgagee. 

 

Ultimately, the Court determined that factual issues existed as to whether the spouse died with or without a will, and as a consequence the interests in the subject property inherited by the borrower, which warranted further discovery.  Accordingly, the Court held that the trial court's granting of the motion to dismiss was in error and remanded the case for further proceedings on the mortgagee's claims.

 

As to the trial court's denial of sanctions requested by the heir, the First District upheld the trial court's ruling that sanctions were not appropriate.

 

Illinois Supreme Court Rule 137 provides that an attorney's signature on a pleading indicates that to the best of the attorney's knowledge "after reasonable inquiry" the pleading is "well grounded in fact and is warranted by existing law."  If a trial court finds that a violation of this rule occurred, the court may impose sanctions on the offending party including attorneys' fees. 

 

Initially, the Appellate Court rejected the heir's argument that the trial court erred in not requiring the mortgagee to provide a written response to her petition for sanctions and for failing to provide a written explanation for its denial.  In doing so, the Court noted that there are no such requirements provided for under Rule 137, and that the Court will not read these requirements into the rule. 

 

Further, the Court rebuffed the heir's arguments that the case was an "open-and-shut case" either factually or legally, and that the multiple amended pleadings submitted by the mortgagee were not an abuse of the judicial process or vexatious and harassing. 

 

Accordingly, the Appellate Court reversed the trial court's dismissal of the foreclosure complaint, upheld its denial of a sanctions award, and remanded the matter for further proceedings consistent with its opinion.

 

 

 

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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Tuesday, June 20, 2017

FYI: SCOTUS Holds Class Plaintiffs Cannot Voluntarily Dismiss Claims to Appeal Denial of Class Cert

The Supreme Court of the United States recently held that class action plaintiffs cannot stipulate to a voluntary dismissal with prejudice, then appeal the trial court's prior interlocutory order striking their class allegations because a voluntary dismissal does not qualify as a "final decision" under 28 U.S.C. §1291 and improperly circumvents Federal Rule of Civil Procedure 23(f).

 

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

 

A group of purchasers of Microsoft's Xbox 360 gaming console filed a putative class action alleging that the Xbox was designed defectively because it scratched game discs "during normal game-playing conditions." The trial court denied class certification, finding that "individual issues of damages and causation predominated over common issues." The plaintiffs' petitioned the U.S. Court of Appeals for the Ninth Circuit for leave to appeal the denial, which was denied. The plaintiffs then settled individually.

 

Two years later, a group of plaintiffs represented by some of the same counsel as in the first case filed another putative class action based on the same design defect as the first action.  The trial court in the second action denied class certification, concluding that the doctrine of "comity required adherence to the earlier certification denial therefore struck [the] class allegations."

 

The plaintiffs petitioned the Ninth Circuit under Rule 23(f) for permission to appeal the order striking the class allegations, the "functional equivalent" of an order denying class certification, arguing that the order effectively killed their case because of the small size of their individual claims compared to the cost of litigating to final judgment. The Ninth Circuit denied the petition.

 

Instead of settling their claims individually as in the first action, petitioning the trial court to certify the order for immediate appeal, or litigating their case and trying to persuade the trial court to reconsider its denial of class certification prior to final judgment and then appealing the final judgment, the plaintiffs moved to dismiss their case with prejudice.

 

The plaintiffs argued that they would appeal the order striking their class allegations after the trial court entered its final order dismissing the case. Microsoft stipulated to the dismissal, but took the position that plaintiffs had no right to appeal the order striking the class allegations after the voluntary dismissal with prejudice.

 

The Ninth Circuit concluded that it had jurisdiction to hear the appeal pursuant to § 1291, rejecting Microsoft's argument that the voluntary dismissal tactic improperly "circumvented Rule 23(f)."  It then "held that the District Court had abused its discretion in striking [the] class allegations" because it had misinterpreted "recent Circuit precedent … and therefore misapplied the comity doctrine."

 

Microsoft filed a petition for a writ of certiorari, which was granted, asking the Supreme Court of the United States to resolve a split among the federal courts of appeals over the question of whether "federal courts of appeals have jurisdiction under § 1291 and Article III of the Constitution to review an order denying class certification (or … an order striking class allegations) after the named plaintiffs have voluntarily dismissed their claims with prejudice."

 

The Supreme Court began by explaining that "[u]nder §1291 of the Judicial Code, federal courts of appeals are empowered to review only 'final decisions of the district courts[,]'" and its application of this "finality rule" was controlled by its 1978 ruling in Coopers & Lybrand v. Livesay and Federal Rule of Civil Procedure 23(f).

 

In Coopers & Lybrand, the Supreme Court held that "death knell" doctrine did not require "mandatory appellate jurisdiction" over a trial court's interlocutory order "striking class allegations or denying a motion for class certification."  Instead, the Court held, a trial court applying this doctrine should consider whether denying class certification "would end a lawsuit for all practical purposes because the value of the named plaintiff's individual claims made it 'economically imprudent to pursue his lawsuit to a final judgment and [only] then seek appellate review" of the refusal to certify the class.

 

If the denial order sounded the "death knell," it was appealable under §1291. However, if "the plaintiff had 'adequate incentive to continue [litigating], the order [was] considered interlocutory" and an immediate appeal was impossible. The Court clarified that just because an interlocutory order denying class certification "may induce a party to abandon his claim before final judgment is not sufficient reason for considering [it] a 'final decision' within the meaning of §1291."

 

The Supreme Court explained that after its ruling in Coopers & Lybrand, class action plaintiffs had a difficult time obtaining immediate appellate review of an adverse class certification ruling because there were only two options: (a) obtain an order from the trial court under §1292(b) certifying that the order "involves a controlling question of law as to which there is a substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation[;]" or (b) "satisfy the extraordinary circumstances test applicable to writs of mandamus."

 

In 1998, however, the Court approved Federal Rule of Civil Procedure 23(f) in response to Coopers & Lybrand.  The present Rule 23(f) gives the courts of appeals unfettered discretion to allow a "permissive interlocutory appeal" of an order granting or denying class certification.

 

The Supreme Court noted that Rule 23(f) thus removes the power of the trial court to defeat any opportunity to appeal a class certification ruling, while also denying a right to appeal that might be prone to abuse.

 

The Supreme Court did not reach the Article III standing question because it concluded that § 1291 does not confer jurisdiction under the facts presented, reasoning that "[b]ecause respondents' dismissal device subverts the final-judgment rule and the process Congress has established for refining that rule and for determining when nonfinal orders may be immediately appealed, … the tactic does not give rise to a 'final decision[n]' under § 1291."

 

The Court explained that the "voluntary-dismissal tactic, even more than the death-knell theory, invites protracted litigation and piecemeal appeals."

 

The Supreme Court rejected the argument that Rule 23(f) was irrelevant because it only addresses interlocutory orders and the case involved a final judgment, reasoning that "[i]f respondents' voluntary-dismissal tactic could yield an appeal of right, Rule 23(f)'s careful calibration—as well as Congress' designation of rulemaking 'as the preferred means for determining whether and when prejudgment orders should be immediately appealable, … would be severely undermined.'"

 

Accordingly, the Ninth Circuit's judgment was reversed and the case remanded 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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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