Thursday, January 3, 2019

FYI: 7th Cir Upholds Denial of Class Cert in TCPA Cases Due to Individualized Issues of Consent

On a consolidated appeal for purposes of disposition, the U.S. Court of Appeals for the Seventh Circuit recently affirmed the trial courts' rulings denying class certification to lead plaintiffs who received faxed advertisements that allegedly did not comply with the Telephone Consumer Protection Act (TCPA), 47 U.S.C. 227 and the Federal Communication Commission's Solicited Fax Rule.

 

In so doing, the Seventh Circuit, relying upon D.C. Circuit's 2017 decision in Bais Yaakov of Spring Valley v. FCC, regarding the validity of the FCC's 2006 Solicited Fax Rule, concluding that class treatment was not a superior mechanism for cases involving unsolicited faxes, as the question of consent is likely to vary from recipient to recipient.

 

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

 

In the first of two underlying class action cases brought by two plaintiffs ("Plaintiffs") alleging violations of the Telephone Consumer Protection Act ("TCPA"), 47 U.S.C. 227, et seq., an insurance wholesaler ("Plaintiff 1") received two identical one-page faxes from an insurance company's affiliate or subsidiary ("Insurer"), created by the insurance company's marketing department. 

 

Though Plaintiff 1 contracted with the insurance company and agreed that it "may choose to communicate with [him] through the use of.. facsimile to [his].. facsimile numbers," and provided the number at issue, the fax number was shared by seven other insurance agents, and the fax at issue was not directed to Plaintiff 1 or any specific person or entity.

 

Plaintiff 1 filed a putative class action suit in Illinois state court, raising claims against the Insurer, arguing that the faxed advertisements violated the TCPA and the FCC's Solicited Fax Rule. 

 

As you may recall, as amended by the Junk Fax Act, the TCPA prohibits the use of "any telephone facsimile machine … to send, to a telephone facsimile machine, an unsolicited advertisement."  47 U.S.C. § 227(b)(1)(C).  The TCPA defines an unsolicited advertisement to mean "any material advertising the commercial availability or quality of any property, goods, or services which is transmitted to any person without that person's prior express invitation or permission, in writing or otherwise." Id. § 227(a)(5).  Although exceptions to the prohibitions on sending unsolicited faxes exist, the faxes must contain a notice meeting certain requirements, including a statement that the recipient may opt out from future unsolicited ads.  Id. § 227(b)(2)(D).

 

The FCC's 2006 amendment to the rules governing facsimile transmissions, known as the "Solicited Fax Rule," took this requirement a step further, declaring that all faxes, not just those that are unsolicited, must include an opt-out notice that informs the recipient of the ability and means to avoid future unsolicited advertisements.  47 C.F.R. § 64.1200(a)(4)(iv).

 

The Insurer removed the action to federal court and raised affirmative defenses of pre-existing business relationship and consent, pointing to the contractual language in Plaintiff 1's contract with its parent or affiliated insurance company, and the opt-out language on the fax itself. 

 

Nonetheless, the trial court certified a class under Fed. R. Civ. P. 23(b)(3) of recipients of faxes that advertised insurance products sold by the Insurer, over the Insurer's plea that it should wait until the FCC had a chance to rule on the Insurer's request for a retroactive waiver of the "Solicited Fax Rule" and until the D.C. Circuit handed down its decision in the case of Bais Yaakov of Spring Valley v. FCC, then-pending before the D.C. Circuit. 

 

On November 2, 2016, the FCC's Consumer & Governmental Affairs Bureau granted the Insurer's petition for a waiver, and on March 31, 2017, the D.C. Circuit issued its opinion in Bais Yaakov (Bais Yaakov of Spring Valley v. FCC, 852 F.3d 1078 (D.C. Cir. 2017)), which held that the FCC had exceeded its authority under the TCPA when it issued the Solicited Fax Rule. The Insurer promptly moved to decertify the class, and the trial court did so on August 28, 2017. Plaintiff 1's petition under Rule 23(f) for immediate review of the decertification decision was granted by the Seventh Circuit.

 

In the second underlying case consolidated in this appeal, a distributor of office, technology and industrial products and supplies and its affiliates ("Distributor") sent a fax to a kennel and veterinary sanitation company ("Plaintiff 2"), advertising commercial products from one of its subsidiaries.  Plaintiff 2 filed a class-action suit against the Distributor in the Northern District of Illinois, alleging that the faxes violated the TCPA and the Solicited Fax Rule because they did not include the required opt-out language.  Plaintiff 2's case was consolidated in the trial court with a similar suit against the Distributor, initially filed in Illinois state court and removed by the Distributor to the federal trial court. 

 

After the trial court denied the Distributor's motion to dismiss or strike, the D.C. Circuit issued its decision in Bais Yaakov, which compelled the Distributor to file a motion to deny class certification.  Plaintiff 2 argued that the opt-out notice on the majority of the fax templates used by the Distributor failed to comply  with the requirements of the Solicited Fax Rule by failing to: (i) provide a fax number for opt-out requests; (2) state that it is unlawful for the sender not to respond within a reasonable time; and (3) state that the recipient must identify the fax number to which the request relates.

 

The trial court denied class certification as to Plaintiff 2, distinguishing the facts from the Seventh Circuit's ruling in in Holtzman v. Turza, 728 F.3d 682 (7th Cir. 2013) (holding that TCPA requires a compliant opt-out notice before a consent-based defense can prevail), and adopting the D.C. Circuit's ruling in Bais Yaakov striking down the Solicited Fax Rule, calling the decision "binding" or at least "persuasive."  Plaintiff 2 sought interlocutory review, which was granted by the Seventh Circuit in the instant consolidated appeal.

 

On appeal of the orders which denied class certification to Plaintiff 1 and Plaintiff 2 ("Plaintiffs"), the Seventh Circuit initially noted that the FCC's 2014 "Anda Order" (In re Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, 29 FCC Rcd. 13998 (2014)) upheld the validity of the Solicited Fax Rule, but announced that it would grant retroactive waivers in light of the confusion it had produced.  Affected parties, including the Insurer and Distributor ("Defendants") petitioned the D.C. Circuit for review of the Anda order, and the result was the Bais Yaakov decision --"that the FCC's 2006 Solicited Fax Rule is unlawful to the extent that it requires opt-out notices on solicited faxes," and "[t]he FCC's Order in this case interpreted and applied that 2006 Rule."  852 F.3d at 1083.

 

The parties in the instant appeal debated whether the D.C. Circuit's ruling was formally binding upon the appellate court under the Hobbs Act, and whether Bais Yaakov adjudicated the validity of the Anda Order, or reached all the way back to rule on the validity of the original 2006 Solicited Fax Order. As you may recall, the Hobbs Act, 28 U.S.C. 2112(a)(3) provides exclusive jurisdiction to the court of appeals to review FCC orders in either the D.C. Circuit or a regional court.

 

The Seventh Circuit concluded that the D.C. Circuit's ruling undoubtedly vacated the 2014 Anda Order held that its application of the 2006 Order, which imposed the Solicited Fax Rule, was unlawful.  Though the 2006 Order remained in effect (albeit with less force), the Seventh Circuit held that the D.C. Circuit's ruling must be construed consistently by all courts of appeals under the Hobbs Act. 

 

Thus, the only issue left before the Seventh Circuit was whether, against the backdrop of these Orders, the trial courts abused their discretion in denying class treatment.

 

For purposes of the class certification decision, the Seventh Circuit stated that the legality of Defendants' actions may end up depending on whether the fax was sent with permission (legal) or not (illegal), and may also turn on the adequacy of the opt-out notices on the faxes in question.

 

In the case of Plaintiff 1 and the Insurer, even if the Insurer somehow failed to establish his consent, it is unclear what kind of pre-existing arrangements may have existed between the Insurer and other recipients, and the question of what suffices as consent likely varied from recipient to recipient. 

 

Here, Plaintiff 1 admitted he had a pre-existing relationship with Insurer, and expressly agreed it could communicate with him by fax.  The Insurer did so, and provided an "opt-out" number on its faxes. 

 

However, even if this failed to establish his consent, as Plaintiff 1 argued, the Seventh Circuit noted that it is unclear what kind of pre-existing arrangements may have existed between the Insurer and other fax recipients of the proposed class, and an analysis of same requires individual scrutiny.  See Howland v. First Am. Title Ins. Co., 672 F.3d 525, 534 (7th Cir. 2012) (holding that a "transaction-specific inquiry prevents class treatment").  Cf. Blow v. Bijora, Inc., 855 F.3d 793, 804–06 (7th Cir. 2017) (excluding from summary judgment potential class members "who provided no consent at all or whose consent was more limited"); see also Howland v. First Am. Title Ins. Co., 672 F.3d 525, 534 (7th Cir. 2012) (holding that a "transaction-specific inquiry prevents class treatment").

 

The Seventh Circuit also considered that while the D.C. Circuit's vacation of the Anda Order may have called into doubt the legal underpinnings of the Orders retroactively waiving Defendants' compliance with the Solicited Fax Rule on faxes sent before April 30, 2015, it did not disrupt these Orders. 

 

Although this might indicate that a common question on the effect of the waivers that affects all class members exists, the Seventh Circuit held that the trial courts were within their rights to conclude that there are enough other problems with class treatment here that a class action is not a superior mechanism for adjudicating these cases. See Parko v. Shell Oil Co., 739 F.3d 1083, 1085 (7th Cir. 2014).

 

The final questions before the Seventh Circuit were whether the waivers affected the availability of a private right of action and whether it is better handled through individual litigation or a class.  Noting that the alleged violation of the Statutory Fax Rule is regulatory, and the TCPA itself does not require opt-out notice on solicited faxes, the Seventh Circuit concluded that the rule is subject to the general rule regarding "suspension, amendment, or waiver of rules," which provides, in relevant part, that "[a]ny provision of the rules may be waived by the Commission on its own motion or on petition if good cause therefor is shown." See 47 C.F.R. § 1.3.  Thus, even if the waivers were deemed invalid, issues concerning solicitation, permission, pre-existing relationships, and the like, would remain as obstacles to class treatment.

 

The Seventh Circuit noted that some potential class members may still have valid causes of action for TCPA violations, as they may not have had pre-existing contractual arrangements, provided consent to receive the faxes, or the senders of the faxes may not have received waivers of the Solicited Fax Rule from the FCC or the waivers might be flawed. 

 

Although these individuals may still pursue claims going forward, and may still go forward, because the trial courts were within their rights to conclude that there are enough other problems with class treatment here -- i.e., that a class action is not a superior mechanism for adjudicating these cases -- and did not abuse their discretion, the orders denying class certification 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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Tuesday, January 1, 2019

FYI: 11th Cir Rejects Argument That Chpt 13 Bankruptcy Discharged Mortgage Loan

The U.S. Court of Appeals for the Eleventh Circuit recently held that a mortgage loan with a post-plan maturity date was not discharged in a Chapter 13 bankruptcy because the plan did not "provide for" the debt and modify the repayment terms of the mortgage.

 

The Eleventh Circuit also held that debt was not discharged because discharge would violate 11 U.S.C. § 1322(b)(2)'s anti-modification provision for mortgages secured by the debtor's principal residence.

 

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

 

The debtor had two mortgage loans on her home that mature in 2022.  At the time she filed for Chapter 13 bankruptcy, the debtor was current on her payments to the creditor for the two mortgages. 

 

The debtor's Chapter 13 plan stated that she would make payments directly to the creditor, not through the bankruptcy trustee.  The plan did not set repayment terms for the creditor's mortgages.

 

When the debtor completed the plan payments, the bankruptcy court discharged "all debts provided for by the plan."  11 U.S.C. § 1328(a).

 

The debtor defaulted on her mortgage payments.  The creditor foreclosed on the debtor's home under the second mortgage and sought a personal judgment against the debtor on the first mortgage.

 

The creditor reopened the bankruptcy and filed an adversary proceeding to declare that the debtor's personal liability on the first mortgage had not been discharged. 

 

The bankruptcy court and the federal trial court both concluded that the first mortgage was not discharged because it was not "provided for" by the debtor's bankruptcy plan.  Both also ruled that the debt was not discharged because discharge would violate 11 U.S.C. § 1322(b)(2), which prohibits a plan from "modify[ing] the rights of holders of "a claim secured only by a security interest in real property that is the debtor's principal residence."

 

This appeal followed.

 

The debtor argued that the discharge included the creditor's first mortgage because the plan mentioned that the mortgage would be paid outside the plan. 

 

The Eleventh Circuit observed that the U.S. Supreme Court had interpreted the term "provided for" in 11 U.S.C. § 1325(a)(5) more narrowly to require that the plan either stipulate to or make a provision for the debt.  Rake v. Wade, 508 U.S. 464, 473 (1993). 

 

As you may recall, in Rake, the Supreme Court of the United States acknowledged that plans split the debt into two claims:  "the underlying debt and the arrearages."  Id.  Each plan that treated the arrearages as a distinct claim to be paid off within the life of the plan "provided for" the debt and the creditor was entitled to interest under section 1325(a)(5).  Id.

 

Applying this rubric, the Eleventh Circuit found that the debtor's plan did not modify the repayment terms for any portion of the creditor's mortgage.  Consequently, the plan did not "provide for" the debt and the mortgage was not included in the discharge.

 

The Eleventh Circuit also analyzed the debtor's plan in the context of Chapter 13. 

 

As you may recall, a Chapter 13 plan cannot unilaterally deprive secured creditors of their rights.  To modify a secured creditor's claim, a plan must meet at least three criteria:  (1) the holder of a secured claim must accept the plan; (2) the plan must provide that the secured creditor will receive the full value of the secured claim and will not lose its security interest in the debtor's property until the claim is paid; or (3) the debtor must surrender the collateral.  11 U.S.C. § 1325(a)(5).

 

The anti-modification provision in section 1322(b)(2) goes even further and expressly prohibits a plan from modifying "the rights of holders of  a claim secured only by a security interest in real property that is the debtor's principal residence."  11 U.S.C. § 1322(b)(2).

 

However, a debtor can cure pre-petition arrears on mortgage debts without violating the anti-modification provision under the exception to section 1322(b)(2) contained in section 1322(b)(5).  Nobelman v. Am. Sav. Bank, 508 U.S. 324, 330 (1993). 

 

Section 1322(b)(5) states that a plan may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any  secured claim on which the last payment is due after the date on which the final payment under the plan is due."  11 U.S.C. § 1322(b)(5).

 

Importantly, a long term debt incorporated into the plan under section 1322(b)(5) does not discharge the debt once the debtor completes the plan.  11 U.S.C. § 1328(a)(1).

 

The Eleventh Circuit explained that because the debtor chose not to address the mortgage in her plan, "[o]bligations handled like this are governed by the preexisting contractual terms, not by any provision of the plan."  The "most obvious" conclusion as the Eleventh Circuit explained was that the mortgage was not "provided for" by the plan and the debt was not discharged by the bankruptcy. 

 

The debtor relied on In re Gregory, 705 F.2d 1118 (9th Cir. 1983), a case decided before Rake, where the Ninth Circuit held that a bankruptcy plan that "provide[d] for -0- payment to unsecured creditors" still discharged the debt.  In re Gregory, 705 F.2d 1118, 1120 (9th Cir. 1983). 

 

The Eleventh Circuit distinguished Gregory because the plan in that case stipulated to terms for the unsecured creditor's debt  it proposed to pay nothing  and such treatment put the unsecured creditor on notice that the plan would affect his rights.  705 F.3d at 1122-23. 

 

As the Eleventh Circuit explained, the creditor in this case received no notice that its rights were being modified, and the creditor in Gregory was unsecured and did not have the protection of the anti-modification provision that the creditor did here.  Thus, the Eleventh Circuit found Gregory unpersuasive because it addressed materially different facts and circumstances. 

 

The Eleventh Circuit concluded that "the mere reference to a secured creditor's claim on a debtor's primary residence" was insufficient to find that the claim was "provided for" by the plan and included in the discharge.

 

The debtor argued that the creditor consented to the modification of its rights because it had notice of the plan and failed to object.

 

The Eleventh Circuit easily dispatched the argument "because the plan did not contain any modification that would be objectionable."  In the Eleventh Circuit's view, the debtor was required to specify as accurately as possible the amounts which she intends to pay the creditors and the debtor will "pay the price if there is any ambiguity" in terms of her plan.

 

The debtor also argued that the discharge was not a modification because it merely removes in personam liability and the creditor could still foreclose on the property. 

 

The Eleventh Circuit found the debtor's second argument equally unpersuasive, explaining that removal of the creditor's right to pursue in personam liability against the debtor would strip the creditor of rights provided by the original loan instruments, including its right to seek a deficiency judgment against the debtor under Florida law.  Fla. Stat. § 702.06.

 

Additionally, the debtor argued that the creditor cannot pursue her in personam for any deficiency because the creditor failed to file a proof of claim for the first mortgage.

 

As you may recall, if no proof of claim is filed at the outset of bankruptcy, the creditor typically loses its right to repayment and the debt will be discharged under section 1328(a) as "disallowed."  See 11 U.S.C. § 502(b)(9) (disallowing claims that are not "timely filed" except in certain circumstances).

 

The Eleventh Circuit noted that the debtor raised the issue for the first time on appeal and had waived this argument.  Nevertheless, the Eleventh Circuit explained that if it were to consider this issue, the creditor would still prevail on the merits. 

 

A prior panel had recognized that a secured creditor's lien survives even when it does not file a proof of claim.  In re Thomas, 883 F.2d 991, 997 (11th Cir. 1989).  The Eleventh Circuit later acknowledged that secured creditor's rights protected by the anti-modification provision in section 1322(b)(2) included in personam liability.  In re Bateman, 331 F.3d 821, 834 fn 12 (11th Cir. 2003).

 

Thus, the Eleventh Circuit determined that the creditor's mortgage passed through the bankruptcy unaffected, even though no proof of claim was filed, and the creditor retained its rights to pursue a deficiency judgment against the debtor.

 

Accordingly, the Eleventh Circuit affirmed the orders of the bankruptcy court and trial court.

 

 

 

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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