Thursday, March 21, 2019

FYI: SCOTUS Rules FDCPA Has Extremely Limited Applicability to Persons Engaging in Nonjudicial Foreclosure Proceedings

The U.S. Supreme Court recently issued its much-anticipated opinion in Obduskey v. McCarthy & Holthus LLP, ruling the federal Fair Debt Collection Practices Act does not cover persons engaged in "non-judicial foreclosures" except with respect to a single provision contained in the FDCPA.

 

Background

 

Colorado, like many western states, has a procedure that allows a lender to foreclose property without the need to file a lawsuit.

 

Here, as you may recall, a Colorado borrower defaulted on his home loan and the mortgage servicer hired a law firm to pursue a non-judicial foreclosure.  The borrower informed the law firm he was disputing the debt and the law firm, without responding to the dispute, proceeded with the non-judicial foreclosure.

 

The borrower then filed a lawsuit against the mortgage servicer and law firm alleging, among other things, violation of the FDCPA by proceeding with the foreclosure without first providing verification of the debt in response to his dispute as required by 15 U.S.C. § 1692g(b).   The mortgage servicer and law firm filed motions to dismiss.

 

The FDCPA defines a debt collector as persons engaged "in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts." The Colorado borrower alleged this included the law firm and mortgage servicer.

 

However, the FDCPA's definition of a debt collector also states that "[the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests" for purposes of section 1692f(6). The law believed this provision excluded its efforts undertaken in the nonjudicial foreclosure.

 

The trial court agreed with the law firm and mortgage servicer and granted their motions to dismiss, determining that the mortgage servicer was not a "debt collector" under the FDCPA because the loan was not in default when it began servicing the loan.[1]  The trial court also found the law firm's nonjudicial foreclosure activities were "outside the scope of the FDCPA."

 

The borrower appealed and the U.S. Court of Appeals for the Tenth Circuit affirmed the District Court's decision, explaining that despite findings to the contrary by three other circuits (the Fourth, Fifth, and Sixth) and the Colorado Supreme Court, a nonjudicial foreclosure is not an attempt to collect money.  Therefore, the "mere act of enforcing a security interest through a non-judicial foreclosure proceeding does not fall under the FDCPA."

 

The U.S. Supreme Court granted the borrower's Petition for a Writ of Certiorari on June 28, 2018, and heard oral argument on Jan. 7, 2019.

 

The Ruling

 

The Supreme Court first looked to the language of the FDCPA which provides a "general" definition for "debt collector."[2]  However, that subsection also provides: "For the purpose of section 808(6) [15 U.S.C. § 1692f(6)][3], such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests." (emphasis added).

 

Focusing on the italicized terms above, and particularly the word "also," the Court stated the phrase "strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition.  Otherwise why add this sentence at all?"

 

Second, the Court explained that it makes sense to "treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes."  As an example, the Court noted state nonjudicial foreclosures procedures include consumer protection provisions, some of which are in conflict with the FDCPA, such as the requirement to publicize the sale.

 

Third, the Court looked to the legislative history which evidenced conflicting proposals regarding the applicability of the entire FDCPA to persons who enforce security interests.  "Given these conflicting proposals, the Act's present language has all the earmarks of a compromise: The prohibitions contained in §1692f(6) will cover security-interest enforcers, while the other 'debt collector' provisions of the Act will not."

 

Accordingly, the Court concluded with the seemingly narrow holding that "but for §1692f(6), those who engage in only nonjudicial foreclosure proceedings are not debt collectors within the meaning of the Act."

 

 

 

 

[1] The FDCPA's definition of "debt collector" excludes "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity concerns a debt which was not in default at the time it was obtained by such person." 15 U.S.C. § 1692a(6)(F)(iii).

 

[2] "The term 'debt collector' means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another."  15 U.S.C. §1692a(6).

 

[3] Section 1692f(6) prohibits: "[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property if—(A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement."

 

 

 

 

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, March 20, 2019

FYI: 6th Cir Rules Ohio Amendment on Defective Mortgage Executions Did Not Bar BK Trustee's Avoidance Action

The U.S. Court of Appeals for the Sixth Circuit held that a recent change to Ohio law involving notice of a defective lien had no bearing on a bankruptcy trustee's ability to avoid the defective lien because such notice is irrelevant to a trustee's status as a judicial lien creditor.

 

Accordingly, the Sixth Circuit affirmed the Bankruptcy Appellate Panel's upholding of the bankruptcy court's denial of the mortgagee's motion for judgment on the pleadings. 

 

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

 

The borrowers ("Borrowers") filed a Chapter 7 bankruptcy petition that included real property ("Property").  The mortgagee ("Mortgagee") held a first mortgage lien on the Property, which mortgage was recorded in 2003.

 

However, the mortgage lien was not executed in accordance with the laws of Ohio, as the Borrowers' signatures were not acknowledged before a notary public. 

 

In 2013, the Ohio legislature enacted legislation to offer further protection to mortgage holders.  Ohio Rev. Code § 1301.401(C) provides that "[a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that the record was filed with the secretary of state or tendered to a county recorder for recording."

 

The Chapter 7 Bankruptcy Trustee ("Trustee") therefore sought to avoid the Mortgagee's mortgage because it was not properly recorded.

 

The bankruptcy court stayed the proceeding pending a ruling from the Ohio Supreme Court on two certified rulings related to O.R.C. § 1304.401. 

 

Subsequently, the Ohio Supreme Court in In re Messer, 50 N.E.3d (Ohio 2016) held that O.R.C. § 1304.401 applied to all recorded mortgages, and that the statute acts to provide constructive notice of a recorded mortgage, even if the mortgage was deficiently executed. 

 

The Trustee thereafter filed an amended complaint and the Mortgagee filed an answer and motion for judgment on the pleadings. 

 

The bankruptcy court denied the Mortgagee's motion, finding that the constructive notice provided by the Ohio law had no effect on "the Trustee's ability to avoid [Mortgagee's] defectively executed mortgage as a hypothetical judicial creditor pursuant to 11 U.S.C. § 544(a)(1)."  On appeal, the Bankruptcy Appellate Panel affirmed. 

 

The matter was then appealed to the Sixth Circuit.

 

After confirming that it had jurisdiction to hear the appeal, the Sixth Circuit noted that "[b]ankruptcy trustees, in exercising their avoidance powers, may succeed to the rights of judicial lien creditors, execution creditors, and bona fide purchasers." 

 

The Sixth Circuit further observed that relevant to the issue was section 544 of the Code, which concerns the avoidance powers as a bona fide purchaser or judicial lien creditor.

 

The Court explained that "[p]reviously in Ohio, a bankruptcy trustee could avoid defectively executed mortgages by acting as a bona fide purchaser without actual notice." 

 

However, after O.R.C. § 1304.401 was enacted and in light of the Ohio Supreme Court's interpretation of that statute, "a bankruptcy trustee can . . . no longer avoid mortgages as a bona fide purchaser," because "[t]he constructive notice provision of § 1304.401 subverts the bona fide purchaser's ability to claim lack of notice."

 

But, "[n]otice . . . is not relevant to the status of a judicial lien creditor."  Instead, in Ohio "a defectively executed mortgage is invalid to a subsequent lienholder even if the subsequent mortgagee-lienholder had actual knowledge of the prior defectively executed mortgage."

 

Thus, "[u]nder Ohio law, notice – whether constructive or actual – does not affect the priority of recordings," so "regardless of notice, a defectively executed mortgage is not 'perfected' so it does not trump a subsequently perfected lien." 

 

As a result, because the Mortgagee's mortgage was "defectively executed," it did not "perfect" that mortgage, whereas the Trustee, as a judicial lien creditor, "perfected" his lien on the Property upon the Borrowers' filing of the bankruptcy. 

 

"Therefore, under Ohio law, because the Trustee was the first to record a perfected lien, the Trustee's lien has priority – the Trustee cuts ahead of [Mortgagee] in line."

 

As a result, under section 544(a)(1) the Trustee could avoid subsequent competing liens such as the Mortgagee's defectively executed mortgage, and the Trustee could avoid the defectively executed mortgage even though it had notice of it under section 1304.401, because "[s]uch notice is irrelevant for his status as a judicial lien creditor." 

 

Accordingly, the Sixth Circuit affirmed the Bankruptcy Appellate Panel's upholding of the bankruptcy court's denial of the Mortgagee's motion for judgment on the pleadings.

 

 

 

 

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, March 17, 2019

FYI: 5th Cir Holds No "Detrimental Reliance" Exception to Unilateral Withdrawal of Acceleration Notice

The U.S. Court of Appeals for the Fifth Circuit recently held that Texas law contains no detrimental reliance exception to a lender's unilateral right to withdraw an acceleration notice.

 

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

 

After a borrower defaulted on a Texas home equity fixed adjustable rate note secured by a Texas home equity security instrument. In 2010, the mortgagee through its then loan servicer sent the borrower notice of its intent to accelerate the note and demanded full payment of the debt. 

 

The mortgagee filed suit and obtained an agreement final judgment of foreclosure in 2011.  The borrower then vacated the property.

 

In 2012, the mortgagee's new loan servicer sent a new notice of default demanding less than the full amount of the debt to cure her default.  In 2015, the borrower conveyed her interest in the property to a third-party via special warranty deed.  In turn, the third-party transferred its interest in the property to a corporation (Corporation). 

 

The mortgagee's servicer re-initiated the prior foreclosure proceeding.  In response, the Corporation filed a state court action against the mortgagee and its servicer alleging that the lien on the property was void because the foreclosure was not filed within the four-year statute of limitation. 

 

The mortgagee and the servicer removed the case to federal court on diversity grounds.   The Corporation amended its complaint to allege that the borrower's detrimental reliance on the acceleration noticed barred the mortgagee and the servicer from abandoning the 2012 acceleration. 

 

The parties filed cross-motions for summary judgment.  The trial court found the Corporation could not show that it detrimentally relied on the acceleration notice and entered summary judgment in favor of the mortgagee and its servicer.

 

This appeal followed.

 

Initially, the Fifth Circuit noted that under Texas law, "[a] person must bring suit for . . . the foreclosure of a real property lien not later than four years after the day the cause of action accrues" or the lien becomes void.  Tex. Civ. Prac. & Rem. Code Ann. § 16.035(a); § 16.035(d).  Further, if the note contains an optional acceleration clause, then "the action accrues only when the holder actually exercises its option to accelerate".

 

The lender may abandon the acceleration," either by the lender's unilateral actions or by agreement, thereby suspending the limitations period until the lender exercises its option to re-accelerate the note." Requesting payment of less than the full debt owed after accelerating the full amount owed is "an unequivocal expression of the bank's intent to abandon or waive its initial acceleration".

 

In 1998, in Swoboda v. Wilshire Credit Corp., a Texas intermediate appellate court declared in dicta:  "Even if a creditor exercises the option to accelerate and makes a declaration to that effect, the election to accelerate can be revoked or withdrawn at any time, so long as the debtor has not detrimentally relied on the acceleration".  However, the Fifth Circuit observed that no Texas court "ever held detrimental reliance is an exception" to a lender's right to unilaterally withdraw an initial acceleration.  

 

In 2015, the Texas legislature passed the Texas Civil Practice and Remedies Code § 16.038; subsection (a) of which provides that:  "If the maturity date of a series of notes or obligations or a note or obligation payable in installments is accelerated, and the accelerated maturity date is rescinded or waived . . . before the limitations period expires, the acceleration is deemed rescinded and waived and the note, obligation, or series of notes or obligations shall be governed . . . as if no acceleration had occurred." 

 

This statute provides no exceptions to a lender's right to unilaterally withdraw the acceleration.   "A statute is presumed to have been enacted by the legislature with complete knowledge of the existing law and with reference to it."

 

The Texas legislature, "chose not to include in the statute any exception to the lender's right to unilaterally withdraw an acceleration notice."  The Fifth Circuit presumed it did this "with knowledge of the case law."  Thus, "it is unlikely the Texas Supreme Court would be willing to read such language into the statute."

 

Accordingly, held that "detrimental reliance is not an exception to the lender's right to unilaterally withdraw an acceleration notice under Texas law", and affirmed the trial court's order granting the mortgagee's motion for summary 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

 

 

 

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

 

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and

 

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and

 

California Finance Law Developments