Friday, July 30, 2021

FYI: Cal App Ct (4th Dist) Holds Prior Unlawful Detainer Judgment Did Not Bar Borrowers' Current Claims

The California Court of Appeals for the Fourth Appellate District recently held that a trial court erred in ruling that several borrowers' claims were precluded by a prior unlawful detainer judgment entered against them following the foreclosure sale of their home.

 

However, as to the borrowers' federal Truth In Lending Act (TILA) claim, the Court held the allegations suffered from several defects and that the trial court correctly sustained the demurrer to this claim without leave to amend.

 

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

 

The plaintiffs were borrowers who lost title to their home in a foreclosure sale. The purchaser at the sale then brought an unlawful detainer action against them under California Code of Civil Procedure § 1161a(b)(3). A default judgment was issued, and the plaintiffs were evicted from their property.

 

The plaintiffs then filed suit against their lender and loan servicer, who were not parties to the unlawful detainer action. Generally, the plaintiffs alleged that the defendants carelessly failed to credit several payments to their loan balance. Thus, the plaintiffs contended that they were never in default and that the defendants wrongfully foreclosed on the property.

 

The trial court sustained the defendants' demurrer to the complaint, finding that all of the plaintiffs' claims were precluded by the unlawful detainer judgment except for a claim under the federal Truth in Lending Act (TILA), which was held to be defective for other reasons. The plaintiffs were denied leave to amend on all claims and timely appealed the resulting judgment.

 

The Fourth Appellate District first addressed the preclusive effect of an unlawful detainer action under § 1161a.  Section 1161a provides for a narrow and sharply focused examination of title. To establish that it is a proper plaintiff, the buyer at a foreclosure trustee's sale seeking to evict the occupant in possession must show that it acquired the property at a regularly conducted sale and thereafter "duly perfected" it title. Vella v. Hudgins (1977) 20 Cal.3d 251, 255. Additionally, only claims "directly connected with the conduct of the sale" are required to be litigated in a 1161a proceeding. Id. at 258.

 

Since only a limited range of title issues can be raised in a section 1161a unlawful detainer action, the Fourth Appellate District held that the preclusive effect of a resulting judgment is likewise limited.

 

As a result, the Fourth Appellate District concluded that the plaintiffs' non-TILA claims were not sufficiently related to the trustee's sale to be precluded by the unlawful detainer action.

 

The plaintiffs' non-TILA claims focused on activity that predated the initiation of the trustee's sale procedures - i.e., the defendants' alleged failure to apply payments to their account. Although this alleged failure eventually led to the initiation of foreclosure sale proceedings, the Court maintained that it was not directly connected to the conduct of the sale. Thus, the Court held that the plaintiffs' non-TILA claims were not required to be raised in the unlawful detainer proceeding and were not precluded by it.

 

The Fourth Appellate District also determined that the defendants' alleged carelessness in failing to credit the plaintiffs' payments was not fully and fairly litigated in the unlawful detainer proceeding. The plaintiffs did not file an answer, so a default judgment was entered against them.  Although a default judgment precludes relitigation of all issues pleaded in the complaint, Kahn v. Kahn (1977) 68 Cal.App.3d 372, 382, the Court noted that the defendants' carelessness was not raised in the unlawful detainer complaint. And, as discussed above, the plaintiffs were not required to raise the issue in the proceeding.

 

The Fourth Appellate District next addressed the plaintiffs' TILA claim. TILA requires creditors to make certain disclosures to consumers regarding consumer leases and credit transactions. 15 U.S.C. § 1631(a). A "creditor" is defined as "the person to whom the debt arising from the consumer credit transaction is initially payable."  15 U.S.C. § 1602(g). "TILA [also] provides for assignee liability if the violation is 'apparent on the face of the loan documents.'"  Romero v. Countrywide Bank, N.A. (N.D. Cal. 2010) 740 F.Supp.2d 1129, 1141; 15 U.S.C. § 1641.

 

The Court found that the defendants were not the plaintiffs' initial creditor and that the plaintiffs have not alleged that the purported TILA violation was apparent on the face of the loan documents. Thus, the Court concluded that the TILA claim was defective.

 

Lastly, regarding the trial court denying the plaintiffs leave to amend the TILA claim, the Fourth Appellate District observed that "the plaintiff bears the burden of proving there is a reasonable possibility of amendment."  Rosen v. St. Joseph Hospital of Orange County (2011) 193 Cal.App.4th 453, 458. "Where the appellant offers no allegations to support the possibility of amendment and no legal authority showing the viability of new causes of action, there is no basis for finding the trial court abused its discretion when it sustained the demurrer without leave to amend."  Id.

 

Here, the Court found that the plaintiffs did not explain to the trial court how they could cure the defects in the TILA claim and that they did not attempt to do so on appeal. Thus, the Court concluded that the trial court did not abuse its discretion when it denied leave to amend the TILA claim.

 

Accordingly, the Fourth Appellate District affirmed the judgment of the trial court as to the TILA claim, and reversed and remanded as to the remaining claims.

 

 

 

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 28, 2021

FYI: 8th Cir BAP Reverses Chpt 12 Plan Confirmation For Lack of Evidentiary Hearing on Disputed Collateral Values

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit vacated the bankruptcy court's order confirming a farm debtor's chapter 12 plan, concluding that the bankruptcy court erred by failing to hold an evidentiary hearing to determine the value of a bank's collateral where the collateral was disputed. The Panel also concluded that the bank needed to file a proof of claim.

 

The panel explained that, until the bankruptcy court held the requisite evidentiary hearing and determined the value of the bank's collateral, it was impossible to know whether the bank would be paid the allowed amount of its secured claim through the debtor's plan.

 

In addition, the Panel concluded that the record amply supported the bankruptcy court's finding of disposable income under 11 U.S.C. § 1225(b)(1)(B).

 

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

 

The farmer debtor filed a petition for relief under chapter 12 of the U.S. Bankruptcy Code. The debtor listed the bank as a secured creditor on his schedules. With his petition, the debtor filed a motion to obtain secured credit. The bank objected. The bank's "primary objection" was that the debtor's motion failed to recognize a lien the bank asserted. The bankruptcy court ultimately granted the debtor's motion.

 

Meanwhile, the bankruptcy clerk notified creditors of the need to file proofs of claim and the deadline for doing so. The bank did not file a proof of claim. After failing to obtain confirmation of two earlier plans, the debtor filed his second modified plan ("plan"). The bank objected. The bank alleged the debtor's plan failed to provide distributions of the bank's secured claim. The bank also alleged the debtor's plan was not filed in good faith, because it purported to disallow the bank's unsecured claim. The bank believed it did not need to file a proof of claim to share in any distribution to unsecured creditors. Finally, the bank alleged that the debtor's plan failed to contribute all of the debtor's disposable income.

 

The bankruptcy court accepted the debtor's valuation of the bank's collateral and thus the amount of the bank's secured claim as set forth in the debtor's plan. The bankruptcy court did so without receiving evidence, reasoning that the difference between the bank's valuation and the debtor's valuation was "minor" and did not warrant an evidentiary hearing. The bank timely appealed.

 

The bank first challenged the bankruptcy court's decision not to hold an evidentiary hearing to determine the value of the bank's collateral

 

The Panel noted that the Eighth Circuit cases First Federal Savings & Loan Association of Bismarck, Inc. v. Hulm (In re Hulm), 738 F.2d 323 (8th Cir. 1984) and Critique Services, LLC v. Reed (In re Reed), 888 F.3d 930 (8th Cir. 2018) both support the proposition that a bankruptcy court cannot make a finding regarding a disputed fact without holding an evidentiary hearing. The Panel held that while the difference in the bank's valuation and the debtor's valuation may or may not have been minor, the value of the bank's collateral was disputed. Thus the bank was entitled to an evidentiary hearing on this issue.

 

The bank next challenged the bankruptcy court's decision to disallow the bank's unsecured claim because the bank failed to file a proof of claim. The Panel observed that a creditor must file a proof of claim for its claim to be allowed. 11 U.S.C. B' 502(b)(9); Fed. R. Bankr. P. 3002(a).

 

The relevant portion of § 1111 provides:

 

A proof of claim or interest is deemed filed under section 501 of [the bankruptcy code] for any claim or interest that appears in the schedules filed under section 521(a)(1) or 1106(a)(2) of [the bankruptcy code], except a claim or interest that is scheduled as disputed, contingent, or unliquidated.

 

The bank argued that § 1111 applies in chapter 12 cases, but the Panel held the opposite.

 

Alternatively, the bank argued that its limited objection to the debtor's motion to obtain secured credit qualified as an informal proof of claim.

 

The elements necessary to achieve status as an informal proof of claim are well known. To qualify as an informal proof of claim, the document must state the nature and amount of the claim as well as indicate the claimant's intent to hold the debtor liable and pursue the claim. Maynard Savings Bank v. Michels (In re Michels), 286 B.R. 684, 691 (B.A.P. 8th Cir. 2002) (citations omitted).

 

A creditor may hold both a secured and an unsecured claim arising out of the same transaction or transactions.

 

An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property and is an unsecured claim to the extent that the value of such creditor's interest is less than the amount of such allowed claim. 11 U.S.C. § 506(a)(1) (in relevant part).

 

In this case, the Panel concluded that the bank held both a secured and an unsecured claim.

 

However, the Panel noted that the bank did not allege it held an unsecured claim pursuant to § 506(a)(1) or otherwise. In fact, the word "unsecured" did not appear anywhere in the bank's objection. On the other hand, the bank did allege it was entitled to post-petition "interest, fees, charges and attorneys' fees, costs and expenses."

 

The Panel concluded that the bank would not have been entitled to these items if any portion of its claim was unsecured. See 11 U.S.C. § 506(b). Thus, the Panel held that anyone reviewing the bank's objection would reasonably conclude that the bank's claim was oversecured. The bank's objection did not indicate that the bank intended to hold the debtor liable for an unsecured claim or to pursue an unsecured claim. Consequently, the Panel agreed with the bankruptcy court: the bank's objection did not qualify as an informal proof of an unsecured claim.

 

The bank next argued that once the bankruptcy court's order confirming the debtor's plan became a final order upon the conclusion of the appeal, the bank would be permitted to file a proof of its unsecured claim that would be timely under Fed. R. Bankr. P. 3002, which provides, in relevant part:

 

An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property.

 

Fed. R. Bankr. P. 3002(c)(3) (emphasis added). However, the Panel held that what the bank may or may not do in the future afforded it no basis for questioning the bankruptcy court's decision to disallow the bank's unsecured claim.

 

Finally, the Panel held that the record supported the bankruptcy court's finding that committing the debtor's disposable income for plan purpose payments was appropriate under § 1225(b)(1)(B). This is because neither the trustee nor anyone who was the holder of an allowed unsecured claim objected to confirmation. Additionally, the Panel determined that the requirement in § 1225(b)(1)(B) was not triggered here because the plan proposed to pay unsecured creditors in full. 11 U.S.C. § 1225(b)(1)(A). Finally, notwithstanding the fact that the requirement in § 1225(b)(1)(B) was not triggered in this case, the Panel concluded that the debtor's plan providing that the debtor's disposable income would be applied to make payments was not clearly erroneous under Fonder v. U.S., 974 F.2d 996, 999-1000 (8th Cir. 1992).

 

Accordingly, the Panel vacated the bankruptcy court's order confirming the debtor's plan and remanded for further proceedings consistent with the 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 26, 2021

FYI: EDNY Dismisses Multiple FDCPA Cases for Lack of Standing, Issues Warning to Plaintiff's Attorneys on Questionable Claims

Scolding plaintiff's attorneys who "manipulate" the FDCPA for their own personal gain, Judge Gary R. Brown of the U.S. District Court for the Eastern District of New York recently issued an opinion in a consolidated matter dismissing multiple complaints alleging debt collectors violated the FDCPA by transmitting consumer information to third-party vendors engaged to print or send dunning letters.

 

The dismissed claims were premised upon the recent decision from the U.S. Court of Appeals for the Eleventh Circuit in Hunstein v. Preferred Collection and Management Services, Inc.

 

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

 

The Court cited the actual purpose of the Fair Debt Collection Practices Act, long forgotten by the plaintiff's bar, which is to "eliminate abusive debt collection practices by debt collectors" and even highlighted a few early cases where such abusive practices occurred such as calling a consumer suffering from mental instabilities 9,500 times over 11 months and making threats of false arrests.

 

Then the Court lamented the "legions of FDCPA cases that have little to do with the purpose of the statute" that inundate the Eastern District of New York.

 

Like many judges who previously raised "serious concern that this lawsuit reflects an attempt by plaintiff and/or his attorney to manipulate the law for an improper purpose" and lamented the "cottage industry of plaintiffs' lawyers filing suits over fantasy harms the statute was never intended to prevent", the Court noted that many judges had to adopt FDCPA-specific procedures to deal with the crush of cases in the district.

 

Until now that is.

 

Analyzing the Supreme Court's recent decision in TransUnion LLC v. Ramirez in connection with the Hunstein letter vendor cases, the Court concluded that none of the plaintiffs had standing because none of them sufficiently alleged a concrete and particularized injury-of-fact sufficient to satisfy Article III standing.

 

It must also be noted that the Court was skeptical that Hunstein complaints were valid in the Second Circuit to begin with noting that Hunstein was not even binding on the courts.

 

In any event, after TransUnion v. Ramirez, there could be no doubt.

 

First, the Court noted that TransUnion itself likely disposes of Hunstein cases with its reasoning that "many American courts did not traditionally recognize intra-company disclosures as actionable publications for purposes of the tort of defamation" and rejection of the argument that TransUnion had "published" the class members' information internally to employees within TransUnion.

 

Next, given TransUnion's holding that "future risk of harm, standing alone, cannot qualify as a concrete harm," the speculative nature of the Hunstein claims could not support Article III standing.

 

Finally, the Court reasoned that the complaints as pled could not plausibly demonstrate injury-in-fact under traditional defamation or intentional infliction of emotional distress theories because "simply mailing a collection letter, even if erroneous, is a far cry from 'extreme and outrageous conduct.'"

 

After disposing of the Hunstein claims, the Court went on to address another popular theory that "the debts in question were not, in fact owed, and therefore constitute actionable deceptive practices." But because neither of those plaintiffs alleged any actual injury from receiving the purportedly false notice, the Court held that "informational violations of the statute, without alleging any harm" do not confer standing.

 

The dismissals were without prejudice of course and plaintiffs have the ability to file amended complaints properly alleging some actual injury-in-fact. Or they are free to file in New York State court and take their chances there.

 

 

 

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.


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

 

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