Friday, July 23, 2021

FYI: 7th Cir Rejects FCRA Claims Alleging Insufficient Investigation Into Ownership of Debt

The U.S. Court of Appeals for the Seventh Circuit recently affirmed judgments entered in separate cases consolidated on appeal in favor of several credit reporting agencies (CRAs) rejecting consumers' claims of violations of the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. (FCRA).

 

In so ruling, the Seventh Circuit held that the consumers' allegations concerning the identity of the owners of their debts were not factual inaccuracies that the CRAs were statutorily required to guard against and reinvestigate under sections § 1681e(b) and § 1681i of the FCRA, but primarily legal issues outside their competency.

 

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

 

Seven unrelated consumers (Consumers) incurred credit card debts that were allegedly sold and assigned to other creditors ("Debt Collectors").  The change in ownership was reported to the three prominent credit reporting agencies (CRAs). 

 

One of the Debt Collectors filed suit against three of the Consumers to collect payment, but voluntarily withdrew the suits after the Consumers claimed that the Debt Collector did not own their debts, demanded proof of ownership, and requested arbitration.   The other four Consumers were not sued but sent letters to their respective Debt Collectors similarly challenging their purported ownership of the debts.

 

The Consumers then contacted the CRAs requesting an investigation into the accuracy of their reports to determine if the purported Debt Collectors, in fact, owned the debts.  The Debt Collectors responded to the CRAs inquiries by confirming ownership, but did not produce the original sale or assignment agreement in any case.  Relying upon these representations, the CRAs informed the Consumers that the ownership was confirmed and their investigation was complete.

 

Each Consumer separately filed suits against the CRAs claiming that their inclusion of allegedly false debt ownership information on their credit reports and failure to fully investigate their claims violated sections § 1681e(b) and § 1681i of the FCRA. 

 

In each case, the trial court entered judgment on the pleadings or dismissed each suit in the CRAs favor for various reasons, but all concluding that the Consumers did not plead the type of inaccuracies in their credit reports that the CRAs had a duty to correct under the FCRA.  The instant consolidated appeal followed.

 

As you may recall, the FCRA primarily tasks furnishers (creditors, debt collectors, and the like) with providing accurate information to the CRAs, but also requires that CRAs "follow reasonable procedures to assure maximum possible accuracy of" information in credit reports (15 U.S.C. § 1681e(b)) and "conduct a reasonable reinvestigation" to determine whether information disputed by a consumer is (15 U.S.C. § 1681i(a)(1)(A)).  A threshold requirement for claims under both sections is that there must be an inaccuracy in the consumer's credit report.

 

The Seventh Circuit initially noted that it recently held in Denan v. Trans Union LLC, 959 F.3d 290 (7th Cir. 2020) that "inaccurate information under 1681i… mean[s] factually inaccurate information," rather than "legal inaccuracies" which are outside the competency of the CRAs, and that a consumer's defense to a debt is a legal question to resolve in an action against the creditor, not a duty imposed on the consumer reporting agencies by the FCRA.  Denan, 959 F.3d at 296. 

 

Here, the Consumers argued that whether the assignment of ownership to their respective debts was a factual question, thus triggering the CRAs' obligations under sections 1681e(b) and 1681i(a)(1)(A), relying upon the Court's holding in Chemetall GMBH v. ZR Energy, Inc., 320 F.3d 714, 720–21 (7th Cir. 2003), that a parties' intention to assign something is a question of fact for a jury.  The Consumers reasoned that upon receipt of a dispute, a straight-forward factual inquiry by the CRAs to request the relevant purchase and sale agreement would determine whether the creditor or debt collector owned the debt.

 

The Seventh Circuit noted that, although no clear line has been drawn between legal and factual inaccuracies in the FCRA context, review of its own decisions and that of its sister circuit courts showed that the central question is whether the alleged inaccuracy turns on applying law to facts or simply examining the facts alone.  Consumer reporting agencies are competent to make factual determinations, but they are not charged with reaching legal conclusions or resolving alleged inaccuracies under the FCRA.  Denan, 959 F. 3d at 295.

 

Unlike a challenge to the existence or amount of the debt, the Seventh Circuit concluded that the question of whether the disputed debts were assigned was a question that required a legal determination. 

 

In each case here, the CRA reached out to the Debt Collectors and asked them to confirm ownership of the debts, which they did.  Any further investigation into whether the debts were actually assigned to the Debt Collectors involved more than just determining if an assignment agreement exists, but also interpreting the legal validity of any assignment —- a legal judgment outside the scope of a CRAs competency.  See Brill v. TransUnion LLC, 838 F.3d 919, 921 (7th Cir. 2016) (holding that consumer reporting agency was not required to hire handwriting expert to determine whether plaintiff's signature was forged on loan agreement as plaintiff claimed). 

 

The Seventh Circuit further noted that the Consumers did have alternate recourse in that they could confront the creditors who are in the best position to respond to assertions that they do not own the plaintiffs' debts (Brill, 838 F.3d at 921), or make notations of their disputes on their credit reports pursuant to 15 U.S.C. § 1681i(c), to notify future employers or creditors that they dispute the ownership of these debts.

 

Because the alleged inaccuracies here involved interpreting legal rights to a debt and making legal judgments, the Seventh Circuit agreed with the trial court's holding that the CRAs bore no burden under the FCRA to determine whether the Consumer's debts were validly assigned to the Debt Collectors, and affirmed each judgment entered in the Debt Collectors' favor.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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, July 21, 2021

FYI: 9th Cir Holds Mortgagee May Challenge HOA Foreclosure Sale That Violates BK Automatic Stay

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's order granting summary judgment in favor of the buyer at a homeowners association's non-judicial foreclosure sale that was conducted in violation of the automatic stay in the borrower's bankruptcy, and against a mortgagee whose interest in the foreclosed property would have been extinguished. 

 

In so ruling, the Ninth Circuit held that a first deed of trust lienholder may set aside a completed super-priority lien foreclosure sale if the sale violates the bankruptcy automatic stay.

 

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

 

A borrower ("Borrower") obtained a loan ("Loan") secured by a deed of trust recorded against real property located in Nevada ("Property").  Borrower fell behind on his homeowners' association ("HOA") monthly dues causing the HOA to record a "Notice of Default and Election to Sell".

 

Borrower filed for Chapter 13 bankruptcy and stated his intention to surrender the Property to the appellant mortgagee ("Mortgagee") and the HOA in his bankruptcy plan. While Borrower's bankruptcy was pending, the HOA sold the Property via non-judicial foreclosure sale to ("Foreclosure Sale").

 

Mortgagee subsequently initiated litigation in which it: (1) sued the HOA and the buyer at the HOA's Foreclosure Sale to quiet title and for declaratory relief alleging the Foreclosure Sale was void and did not extinguish Mortgagee's lien on the Property; (2) sought a preliminary injunction preventing the buyer from selling and/or transferring the Property; and (3) requested an order declaring the Mortgagee could foreclose on its deed of trust.  The Mortgagee separately sued the HOA for breach of Nevada Revised Statute 116.1113 and wrongful foreclosure.

 

The buyer moved for summary judgment arguing it had superior title to the Property because the Foreclosure Sale extinguished the Mortgagee's interest in the Property.  The Mortgagee also moved for summary judgment, arguing the Foreclosure Sale did not extinguish its interest in the Property because the Foreclosure Sale violated the automatic bankruptcy stay, and thus is void.

 

The trial court granted the buyer's motion for summary judgment concluding that pursuant to Tilley v. Vucurevich (In re Pecan Groves), 951 F.2d 242, 245 (9th Cir. 1991), the Mortgagee lacked standing to assert a violation of the bankruptcy's automatic stay because the Mortgagee "was neither a party, a debtor, or a trustee in [the underlying] bankruptcy matter."

 

The trial court entered judgment in favor of the buyer and dismissed the Mortgagee's remaining claims against the HOA because "the foreclosure sale extinguished the [Mortgagee]'s deed of trust on the Property and [because] the [buyer] purchased the property free and clear of the [Mortgagee's] deed of trust." 

 

The Mortgagee timely appealed. 

 

On appeal, the Mortgagee argued the trial court erroneously applied the holding of In re Pecan Groves.  The parties did not dispute that the Mortgagee had Article III standing due to the extinguishment of the Mortgagee's interest in the Property being "fairly traced to the HOA's violation of the bankruptcy stay."  Rather, the buyer argued the Mortgagee lacked "prudential standing" because the Mortgagee's grievance did not "fall within the zone of interests protected or regulated by the statutory provision...invoked in the suit." Bennett v. Spear, 520 U.S. 154, 162 (1997).

 

The Ninth Circuit disagreed, holding the Mortgagee had standing to bring a quiet title action pursuant to Nevada Revised Statute 40.100, which permits suit "by any person against another who claims an estate or interest in real property, adverse to the person bringing the action, for the purpose of determining such adverse claim."  Thus, the Mortgagee satisfied the "zone-of-interests test" for prudential standing purposes.  See e.g., Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1302 (2017). 

 

The Court separately distinguished the In re Pecan Groves holding explaining that it "did not consider whether a creditor was precluded from advancing a quiet title action premised on violation of the automatic stay, particularly in a diversity case where state law recognizes such a claim as a basis for voiding a foreclosure sale."  The Court explained that in contrast to the facts and procedural posture of In re Pecan Groves, the Mortgagee brought its quiet title claim in accordance with Nevada precedent "invalidating HOA foreclosure sales when the HOA has violated the automatic stay."

 

Next, the Court examined whether the Foreclosure Sale violated the bankruptcy's automatic stay and whether the Foreclosure Sale was void under Nevada state law, which holds than an HOA foreclosure sale "conducted during an automatic stay in bankruptcy proceedings is invalid."  See e.g., LN Mgmt. LLC Series 5105 Portraits Place v. Green Tree Loan Servicing, LLC (Portraits Place), 399 P.3d 359, 359–60 (Nev. 2017). 

 

The Ninth Circuit held the Mortgagee's interest in the Property to be superior to the buyer's interest as the Mortgagee provided evidence demonstrating that: (1) Borrower listed the Property in his bankruptcy schedules; (2) the automatic bankruptcy stay was active through 2017; and (3) the Foreclosure Sale was conducted on September 19, 2014 while the bankruptcy stay was still in place.  Therefore, the Court concluded the Foreclosure sale was void meaning the Mortgagee was entitled to "quiet title to the Property" pursuant to Nevada Revised Statute 40.010.

 

Thus, the Court held that: (1) the Mortgagee had standing to pursue its claims against the buyer and the HOA; (2) the Mortgagee's interest as a creditor is protected by Nevada law; and (3) the Foreclosure Sale was void as a matter of law because it violated 11 U.S.C. § 362(a)'s automatic stay provisions. 

 

Accordingly, the Ninth Circuit reversed the trial court's summary judgment order in favor of the buyer, its denial of the Mortgagee's motion for summary judgment, and its dismissal of the Mortgagee's causes of action against the HOA and remanded this matter to the trial court for proceedings consistent with the instant opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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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Monday, July 19, 2021

FYI: 8th Cir Confirms Various Loss Mit and Foreclosure Communications Not Subject to FDCPA

The U.S. Court of Appeals for the Eighth Circuit recently affirmed entry of summary judgment in favor of a mortgage servicer against a borrower's claims that it violated the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692, et seq. (FDCPA).

 

In so ruing, the Eighth Circuit concluded that the communications at issue regarding denial of the borrower's loss mitigation application were not made in connection with an attempt to collect on the underlying mortgage debt, and thus not actionable under the FDCPA, and that the inclusion of boilerplate "Mini-Miranda" language stating that the communications were "for the purpose of collecting a debt" did not automatically trigger the protections of the FDCPA.

 

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

 

In September 2016, the assignee to a twice-modified mortgage loan initiated foreclosure proceedings and advised the homeowner-borrower (Borrower) that a foreclosure sale was scheduled for August 1, 2017.  The Borrower again applied for loss mitigation assistance, but was notified in March and May 2017 that his application was incomplete for failure to provide required documentation and was no longer under review.

 

On July 11, 2017, the Borrower's mortgage loan was transferred to a new servicer ("Servicer").  After being provided notice of the transfer, the Borrower spoke with a representative of the Servicer who confirmed that the August 1, 2017 foreclosure sale would proceed, and but invited the Borrower to submit a loss mitigation package if he wished to prevent the sale. 

 

The Borrower contacted the Minnesota Attorney General's (AG) Office for assistance, who agreed to represent the Borrower and whom the Borrower asserts he relied upon to relay communications and information regarding his loan from the Servicer.

 

The foreclosure sale was subsequently postponed to September 9, 2017, and later to November 14, 2017. Between August and November 2017, the Borrower submitted requests and documentation for mortgage assistance, and the Minnesota AG's Office notified the Borrower that, on November 7, 2017, the Servicer confirmed to the AG's office that the Borrower's application was complete and would force postponement of the foreclosure sale while awaiting a final determination.

 

Nevertheless, the scheduled sale proceeded on November 14, 2017 where the mortgagee purchased the property.  The Borrower subsequently received a letter from the Servicer dated two days after the sale, which advised him that his loss mitigation application had been canceled and would not be considered. 

 

During the six-month redemption period, the AG's Office requested that the Servicer rescind the sale on the Borrower's behalf.  The Servicer responded that it would not rescind the sale.  The letter explaining the decision stated that the Borrower failed to provide all requisite documentation to complete the loss mitigation application and that the home had been sold to a third-party bidder at the foreclosure sale, although it had been sold to the mortgagee.

 

The Borrower filed suit against the Servicer in Minnesota state court, alleging that the Servicer violated the FDCPA by making false representations about the Borrower's loss mitigation application and the foreclosure sale by ignoring his application and delaying communications so that the Borrower could not take advantage of his legal remedies, along with various state law claims and requests for injunctive relief seeking rescission of the foreclosure sale and preventing eviction.  The Servicer removed the action to federal court, and by the summary judgment stage, the Borrower's FDCPA claim was the lone remaining cause of action. 

 

The trial court granted summary judgment in the Servicer's favor, concluding that its communications and conduct with the Borrower were not in connection with an attempt to collect a debt and that any post-sale communications were immaterial as they had no impact on the Borrower's legal rights.  The Borrower timely appealed.

 

On appeal, the lone issue before the Eighth Circuit was whether certain challenged communications and conduct were made in connection with the collection of a debt. 

 

These included the Servicer's: (i) pre-sale letter cancelling his loss mitigation application for purported failure to provide requested documents; (ii) response to the AG's complaint; (iii) representations by phone to the AG's office that the Borrower's application was sent to underwriting and awaiting a decision, and; (iv) post-sale letter stating that the Servicer did not receive all necessary information to complete the application before the deadline (along with prior representations it was complete) and that the property was sold to a third party (when, in fact, it was sold to the mortgagee). 

 

The Borrower argued that the trial court erred in granting summary judgment because the evidence presented was sufficient to allow a jury to conclude that the Servicer used false, deceptive, and misleading representations and unfair and unconscionable means to collect on the underlying mortgage debt and erroneously narrowed the "animating purpose" test.

 

As you may recall, the Eighth Circuit employs the "animating purpose test" to consider whether certain statements for conduct are in collection with the collection a debt for the purposes of section 1692e of the FDCPA, which prohibits the use any false, deceptive, or misleading representation or means in connection with the collection of a debt.  McIvor v. Credit Control Servs., Inc., 773 F.3d 909, 914 (8th Cir. 2014).

 

Under this test, "for a communication to be in connection with the collection of a debt, an animating purpose of the communication must be to induce payment by the debtor." Id.  "Though '[t]he "animating purpose[]" of the communication is a question of fact that generally is committed to the discretion of the jurors, not the court,' where 'a reasonable jury could not find that an animating purpose of the statements was to induce payment,' summary judgment is appropriate." Goodson v. Bank of Am., N.A., 600 F. App'x 422, 431 (6th Cir. 2015).

 

The Borrower argued that the Supreme Court of the United States in Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029, 1036 (2019) indicated that nonjudicial foreclosure is a debt collection activity, even if the FDCPA exempts nonjudicial foreclosing parties from the definition of "debt collector".  Therefore, the Borrower argued, each of the identified communications in connection with the attempt to collect a debt. 

 

However, the Eighth Circuit noted that, because the SCOTUS statement in Obduskey was rendered in consideration of whether a party qualified as a "debt collector" for the purposes of the FDCPA, and not in consideration of specific communications regarding foreclosure proceedings, the communications at issue still required individual consideration.  McIvor, 773 F.3d at 915 (although nonjudicial foreclosure is a debt collection activity, it does not follow that any communication generated during a nonjudicial foreclosure is made "in connection with the collection of a debt.").

 

Reviewing the content of each of the communications, the appellate court agreed that none were made in connection with the collection of a debt. 

 

Specifically, neither the pre-sale letters to the Borrower and AG's office, nor the phone call between the Servicer and the AG's office evidenced any mention of the loan apart from identifying information and did not provide amounts due or demands for payment.  See Bailey v. Sec. Nat'l Servicing Corp., 154 F.3d 384, 388-89 (7th Cir. 1998) (holding that the communication was not made in connection with the collection of a debt because it merely described the status of the debtor's account and the consequences of missing future payments); See, e.g., Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011). 

 

To the contrary, the Eighth Circuit found that these communications arguably thwarted the Servicer's attempts to arrange for payment of the mortgage indebtedness.  Similarly, the post-sale letter contained only basic identifying information of the loan, and was not an attempt to collect a debt because the property had already been sold, and thus, any purported misrepresentations were also immaterial.  See Hill v. Accounts Receivable Servs., LLC, 888 F.3d 343, 346 (8th Cir. 2018) ("[B]ecause '[a] statement cannot mislead unless it is material, [] a false but nonmaterial statement is not actionable.'"

 

Moreover, despite the inclusion of a Mini-Miranda statements including language that the communications were "for the purpose of collecting a debt," the boilerplate language did not automatically trigger the protections of the FDCPA. Gburek v. Litton Loan Servicing LP, 614 F.3d 380, 386 n.3 (7th Cir. 2010); Goodson, 600 F. App'x at 432 ("[T]he standard disclaimer language—which stated that BANA was 'a debt collector attempting to collect a debt'—did not, by itself, transform the informational letter into debt collection activity.").

 

Because the Servicer's conduct was not made or carried out in connection with an attempt to collect a debt, the Eighth Circuit also rejected the Borrower's arguments that the Servicer ignored the Borrower's loss mitigation application and delayed communications to run out the statute of limitations on a potential claim of a violation of the Minnesota dual-tracking statute in violation of § 1692f.

 

Accordingly, the trial court's entry of summary judgment in the Servicer's favor was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Tennessee   |   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.


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and

 

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