Saturday, February 23, 2019

FYI: 4th Cir Holds Tax Payment Agreement Subject to TILA and EFTA, Plaintiff Had Spokeo Standing

The U.S. Court of Appeals for the Fourth Circuit held that a tax payment agreement entered into pursuant to Virginia Code section 58.1-3018 was a consumer credit transaction subject to federal Truth in Lending Act ("TILA") and Electronic Funds Transfer Act ("EFTA"). 

 

The Court further ruled that the plaintiff had standing to assert his EFTA claim, because the claim was not merely for "a bare procedural violation," but instead alleged "a substantive violation of the rights conferred by EFTA." 

 

Accordingly, the Fourth Circuit affirmed the trial court's denial of the Company's motion to dismiss the TILA and EFT claims. 

 

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

 

The plaintiff ("Plaintiff") entered into a Tax Payment Agreement ("TPA") with the defendant company ("Company") pursuant to Virginia Code 58.1-3018, which governs "any agreement whereby a third party contracts with a taxpayer to pay to a county, city or town on behalf of that taxpayer the local taxes, charges, fees or other obligations due and owing to the county, city or town." 

 

The terms of the agreement, including repayment periods, interest rates, and other fees, are prescribed by statute.

 

The Plaintiff owed $13,734.43 in residential property taxes to a city, and entered into a TPA with the Company to finance payment of the taxes.

 

The TPA set the interest rate at 10.95%, which was below the statutory maximum of 16%.  Additionally, the TPA required the Plaintiff to repay the Company in monthly installments for 96 months, which is the maximum period allowed by the statute. 

 

However, the Plaintiff claimed that many of the terms of the TPA included incorrect amounts, that the Company did not include an itemized list of closing costs in the documents, and that the TPA was missing certain allegedly required disclosures.  He further claimed that the TPA required him to agree to pay the Company by preauthorized electronic fund transfers ("EFTs") and that the required authorization form did not contain a space to decline to do so.

 

Accordingly, the Plaintiff brought a proposed class action complaint against the Company in federal trial court alleging violations of the TILA and EFTA, and a Virginia statute.

 

The Company filed a motion to dismiss contending that the TPA was not subject to TILA or the EFTA because it was not a consumer credit transaction, and that the TPA was exempt from the Virginia statute.  The trial court granted the motion to dismiss the Virginia statutory claim, but denied the motion to dismiss the TILA and EFTA claims. 

  

The trial court then certified for interlocutory review of (1) its decision that the Plaintiff had standing to proceed on his EFTA claims, and (2) its determination that TPAs sanctioned by Virginia Code are subject to TILA and EFTA as consumer credit transactions. 

 

In affirming the trial court, the Fourth Circuit held that (1) the Plaintiff "has standing to bring claims under EFTA because the harm that he alleges in a substantive statutory violation that subjects him to the very risks that EFTA . . . was designed to protect against," and (2) that "the TPA is subject to TILA and EFTA because the TPA is a consumer credit transaction." 

 

With respect to the standing argument, the Fourth Circuit cited Spokeo, and noted that to meet the constitutional minimum requirements for standing to sue, a "plaintiff must have . . . suffered an injury in fact, . . . that is fairly traceable to the challenged conduct of the defendant, and . . . that is likely to be redressed by a favorable judicial opinion." 

 

The Company argued that the Plaintiff did not meet the injury-in-fact requirement, which requires the plaintiff allege an injury that is "particularized," "concrete," and "actual or imminent, not conjectural or hypothetical."  The Fourth Circuit disagreed. 

 

First, the Fourth Circuit ruled that the Plaintiff's alleged injury was particularized because it stemmed from the TPA, which allegedly required him to consent to the EFT authorization when he entered into it and allegedly waived his right to cancel preauthorized EFTs as required by EFTA.

 

Second, the Fourth Circuit ruled that the Plaintiff alleged a sufficiently concrete injury, because it was not "a bare procedural violation," but instead "a substantive violation of the rights conferred by EFTA." 

 

Third, the Fourth Circuit ruled that Plaintiff alleged an "actual or imminent" injury for the purposes of standing, because the Company required the Plaintiff to agree to preauthorized EFTs, so when the time came for the Plaintiff to pay the Company, he would either need to make an EFT payment or attempt to withdraw the EFT authorization in response.

 

The Fourth Circuit therefore affirmed the trial court's ruling that the Plaintiff had standing to proceed under EFTA.

 

With respect to the argument that the TPA was not a "consumer credit transaction," the Court "first consider[ed] whether the TPA is a credit transaction and, second, whether it is a consumer transaction."

 

As you may recall, TILA defines credit as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment." 

 

Although credit has been defined to generally exclude tax liens and tax assessments in the official CFPB interpretation of TILA's implementing regulation ("Staff Commentary"), the Staff Commentary clarifies that "third-party financing of such obligations (for example, a bank loan obtained to pay off a tax lien) is credit for the purposes of the regulation." 

 

Thus, the question before the Fourth Circuit was "whether the TPA is a credit transaction on the basis that it involves third-party financing of a tax obligation." 

 

The Court determined that the TPA provided for third-party financing of a tax obligation for two reasons: (1) "it is clear from the terms of the TPA itself, which state that [the Company] will pay [the Plaintiff's] taxes in exchange for installment repayments, interest, and fees from [the Plaintiff]," and (2) because the TPA "creates third-party obligations between [the Company and Plaintiff]."

 

The Company argued that the TPA was not a credit transaction because it was different than a bank loan, but the Fourth Circuit determined that "[w]hile this may be true, it is also irrelevant," because "[w]hether an agreement is a credit transaction is not determined by how closely it resembles a bank loan," but rather "whether it provides for 'third-party financing' of a tax obligation." 

 

The Company next argued that the TPA was not a "consumer transaction" because the imposition of the underlying obligation – i.e. the property taxes – is motivated by the public welfare rather than "personal, family, or household purposes." 

 

The Fourth Circuit disagreed, noting that "the debt at issue here is not the tax that [Plaintiff] owes to the locality," but "[i]nstead it is one level removed – it is [Plaintiff's] obligation to [the Company], a third party, to repay [the Company's] financing of [Plaintiff's] tax obligation."

 

Thus, the Court held that "the TPA entered into pursuant to Virginia Code section 58.1-3018 at issue here is a consumer credit transaction subject to TILA and EFTA." 

 

Accordingly, the Fourth Circuit affirmed the trial court's denial of the Company's motion to dismiss the TILA and EFTA claims. 

 

 

 

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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Thursday, February 21, 2019

FYI: 7th Cir Holds Aggregate Credit Reporting Does Not Violate FDCPA

The U.S. Court of Appeals for the Seventh Circuit reversed a trial court judgment in favor of a borrower and against a debt collector, and ruled that reporting to a credit reporting agency ("CRA") that a debtor owed nine unpaid bills of $60 instead of one unpaid bill of $540 did not misstate the character of the debt in violation of the federal Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692e(2)(A).

 

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

 

A debt collector reported to a CRA that a debtor owed nine debts of $60 each. This credit report was factually correct as the debtor had incurred "nine debts of $60 each." 

 

The debtor sued the debt collector alleging that the credit report violated section 1692e(2)(A) of the FDCPA because it misstated the character of the debt by reporting that the debtor owed nine $60 debts instead of the $540 aggregate amount. The trial court agreed without providing any analysis, and entered judgment in favor of the debtor.

 

This appeal followed.

 

The Seventh Circuit began by examining the meaning of "character" in section 1692e(2)(A).

 

As you may recall, the FDCPA prohibits a debt collection from making any "false representation" about "the character, amount, or legal status of any debt". 15 U.S.C. § 1692e(2)(A).

 

The Seventh Circuit observed that the debtor did not contend that the debt collector misrepresented the amount of the debt.  Further, the Court noted that this section refers to the "character" and the "amount" of a debt separately.  Thus, giving meaning to each term in this section, the "character" of the debt cannot mean the same thing as the "amount" of the debt.

 

The Seventh Circuit viewed the question before it as a matter of first impression because it did not find any decisions from any court of appeals concerning whether aggregating (or not) "all amounts owed to a single creditor concerns the 'character' of a debt."

 

The Seventh Circuit determined that the word "character" in section 1692e(2)(A) referenced the "kind of obligation."  For example, "[a] secured auto loan would be of one character, an unsecured credit-card debt another, a judgment debt a third, and a subordinated debenture (an instrument junior by contract) a fourth." 

 

Viewing "character" in this light, the number of transactions "does not affect the genesis, nature, or priority of the debt and so does not concern its character."  Rather, the Seventh Circuit ruled, the "amount" instead of "character" governs reporting the size of the debt.

 

Therefore, the Seventh Circuit held that the debt collector did not misstate the "character" or "amount" of the debt, and reversed the trial court's judgment. 

 

 

 

 

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, February 17, 2019

FYI: 8th Cir Holds Repurchase Demand Did Not Need to Include Specific Time to Cure

In a mortgage loan repurchase action, the U.S. Court of Appeals for the Eighth Circuit recently reversed a trial court's order granting summary judgment in favor of an originator and seller of loans, and held that the mortgage loan purchaser adequately and substantially complied with the contract in its demands that the originator repurchase several allegedly defective loans.

 

In so ruling, the Eight Circuit determined that the trial court erred in determining that the purchaser's notice letters failed to satisfy a condition precedent to prescribe a time for the originator to correct the alleged defects, as the agreement governing the loan purchase at issue neither specified a required form of notice, nor prescribed an amount of time that must be contained within the notice.

 

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

 

A mortgage loan purchaser and reseller ("Purchaser") bought approximately 750 mortgage loans from a mortgage originator ("Originator") for more than $140 million dollars (the "Purchase").  An agreement between Purchaser and Originator governed the Purchase, and addressed the delegation of underwriting/loan-origination authority to Originator (the "Agreement"). 

 

Under the Agreement, Purchaser had sole and exclusive discretion to determine if any loans under the Agreement were defective as a result of Originator's failure to meet applicable underwriting standards or otherwise, and if Purchaser itself was required to repurchase a loan it resold to a third party. 

 

Upon notification from Purchaser, Originator was provided opportunity to "correct or cure such defect within the time prescribed by [Purchaser] to the full and complete satisfaction of [Purchaser]," and absent Purchaser's satisfaction, could be required to repurchase defective loans.  Additionally, if Purchaser was required to repurchase a loan after sale to a third party, it could in turn, demand that Originator repurchase that same loan. 

 

After Purchaser resold loans that were part of the Purchase, it was informed by the third-party purchaser that there were defects in seven (7) of the resold mortgages.  Accordingly, and per the terms of the Agreement, for each of the seven allegedly-defective loans, Purchaser sent Originator letters (i) identifying and describing the potential breach; (ii) inviting Originator to investigate the matter and send a written response within thirty (30) days, and; (iii) notifying Originator that a repurchase may be required if Purchaser did not find the resolution satisfactory. 

 

After the expressly-identified thirty days passed, Purchaser sent a follow-up letter to Originator as to each loan again describing the breach, stating that repurchase was required and citing a deadline of thirty days to respond.  After that thirty-day period expired, a third letter was sent to Originator reciting the same breaches and providing 30 days to confirm the repurchase. 

 

Some letters confirmed receipt of documentation and explanation from Originator and deemed responses to Purchaser's prior letters as unsatisfactory, while others noted that Originator failed to respond to the prior letters altogether. 

 

More than two years after sending the last letter for the seventh loan, purchaser filed suit against the Originator for breach of the Agreement.  The Originator moved for summary judgment, arguing: (1) Purchaser could not force repurchase because the agreement had been terminated; (2) Purchaser could not force repurchase because Purchaser had already foreclosed on the underlying mortgage loans; and (3) Purchaser failed to satisfy a condition precedent in that it did not prescribe a time for cure or correction.

 

Addressing only the third argument, the trial court concluded that the Agreement's phrase "upon notification by [Purchaser], correct or cure such defect within the time prescribed by [Purchaser]to the full and complete satisfaction of [Purchaser]," placed a condition precedent upon the Originator's repurchase duty, and that Purchaser's letters did not provide adequate notice because it failed to expressly "prescribe" a time for it to correct or cure the alleged defects. 

 

Specifically, the trial court concluded: (i) that the Purchaser essentially conceded that its first set of letters did not give proper notice of the alleged defect; (ii) the second set of letters failed to expressly prescribe a time for cure or correction, and; (iii) the Agreement's addendum's reference to a thirty-day response time did not serve as the prescription of a time for cure or correction. 

 

Accordingly, summary judgment was entered in favor of the Originator and against the Purchaser, whose motion for rehearing was thereafter denied.  This appeal followed.

 

On appeal, the Eight Circuit questioned whether the prescription of a time for the Originator to correct or cure an alleged breach is a condition precedent, and noted that conditions precedent are generally disfavored in Missouri.  See James E. Brady& Co. v. Eno, 992 F.2d 864, 869 (8th Cir. 1993) ("Courts should not construe contract provisions to be conditions precedent 'unless required to do so by plain, unambiguous language or by necessary implication.'" (quoting Kansas City S. Ry. v. St. Louis–San Francisco Ry., 509 S.W.2d 457, 460 (Mo. 1974))). 

 

Here, the Appellate Court perceived that both parties were undeniably aware of the Agreement's rights to cure and notice provisions.  The Court noted that, although the Agreement's notice provision indicates a time for attempting cure after Originator was made aware of the defect, it contains no language suggesting that Purchaser's right to force repurchase is conditional. 

 

As such, the Eight Circuit found that the time aspect of the notice provision defined a right for Purchaser to limit the time to cure, rather than a condition precedent to protect Originator, and its failure to do so by instead sending letters and delaying suit should not wholly eliminate Originator's obligation to repurchase defective loans.

 

In any event, the Eight Circuit stated that it need not decide whether the contested provision imposes a condition precedent, because the three letters concerning each loan, viewed collectively, satisfied Purchaser's notice obligation by identifying a defect, inviting written responses with supporting documentation, and identifying a deadline. 

 

The Court noted that nothing within the Agreement stated that the time "prescribed" for cure or correction need be in writing or indicates specific triggering words such as "cure or correct," and the clear and repeated notice provided in this case satisfied the vague requirements of the Agreement.  See Gray v. Bicknell, 86 F.3d 1472, 1479 (8th Cir. 1996) ("Under Missouri law, the nature of notice required by contract depends upon the provisions of that contract.").

 

Accordingly, the trial court's entry of judgment in Originator's favor was reversed and remanded to the trial court for further proceedings.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   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