Saturday, January 15, 2022

FYI: 9th Cir Reverses Dismissal of Loan Officer's Putative Class Claims Pursuant to Arbitration Agreement

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's order dismissing a putative class action complaint and granting the defendant lender's motion to compel arbitration pursuant to an arbitration agreement with the plaintiff loan officer.

 

The Ninth Circuit agreed with its sister circuits and held that parties cannot delegate issues of formation to the arbitrator.

 

The Court further held that the agreement at issue did not constitute a properly formed contract between the lender's former employee (the plaintiff loan officer) and the lender's parent company, with which the former employee had no employment relationship.

 

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

 

When the plaintiff was hired as a loan officer by a lender, he signed a Mutual Arbitration Agreement ("MAA") with the parent company of the lender. The MAA included a delegation clause providing that the arbitrator would have "exclusive authority to resolve any dispute relating to the formation, enforceability, applicability, or interpretation" of the MAA.

 

Following termination of the employment relationship, the former employee brought employment-related claims against the lender. The lender moved to compel arbitration and to dismiss the putative class claims. The former employee opposed the motion, contending that the MAA was never properly formed due to a failure to satisfy a condition precedent in the MAA.

 

The trial court granted the lender's motion. Citing the delegation clause, the trial court concluded that formation issues, including the former employee's condition precedent argument, could not be decided by the court, and were instead delegated to the arbitrator. The former employee timely appealed.

 

The Ninth Circuit began by noting that "t[t]he cardinal precept of arbitration is that it is 'simply a matter of contract between the parties; it is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.'" Local Joint Exec. Bd. v. Mirage Casino-Hotel, Inc., 911 F.3d 588, 595 (9th Cir. 2018) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995)). Thus, "[w]here a party contests either or both matters, the court must resolve the disagreement." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 299 (2010).

 

It is well-established that some "gateway" issues pertaining to an arbitration agreement, such as issues of validity and arbitrability, can be delegated to an arbitrator by agreement. See Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003). The issue before the Ninth Circuit was whether parties may also agree to delegate issues of formation to an arbitrator.

 

The lender argued that the trial court did not have the authority to decide whether an agreement to arbitrate existed when the parties delegated the arbitrability issues to the arbitrator. However, the Ninth Circuit disagreed, pointing out that the Fifth and Tenth Circuits have rejected that very argument. See, e.g., Edwards v. Doordash, Inc., 888 F.3d 738, 744 (5th Cir. 2018); Fedor v. United Healthcare, Inc., 976 F.3d 1100, 1104 (10th Cir. 2020).

 

Thus, the Ninth Circuit held that parties cannot delegate issues of formation to the arbitrator, even where a delegation clause exists. Here, where the former employee challenged the very existence of an agreement to arbitrate, the trial court was required to address the former employee's challenge and determine whether an agreement existed. See Granite Rock, 561 U.S. at 299–300. If no agreement to arbitrate was formed, then there was no basis upon which to compel arbitration.

 

The Ninth Circuit then analyzed whether the MAA constituted a properly formed agreement between the former employee and the parent company.

 

The Ninth Circuit reasoned that, on its face, the MAA was plainly drafted to govern an employer-employee relationship. For example, in Paragraph 1, the MAA stated that "Employee and the Company both agree all legal disputes and claims between them, including without limitation those relating to Employee's employment with the Company or any separation therefrom . . . shall be determined exclusively by final and binding arbitration."

 

However, the Ninth Circuit found that none of the MAA's provisions had any relevance to any relationship between the former employee and the parent company. All parties appeared to agree that the former employee's only employer was the lender, but, in its introductory sentence, the MAA defined the former employee's employer as the parent company alone. In fact, the Court observed that nowhere in the MAA was there any specific reference to the former employee's actual employer, the lender.

 

To the extent the lender suggested that the definition of the parent company as the employer also encompassed its subsidiaries, such as the lender, the Ninth Circuit was unconvinced. The Court instead affirmed its adherence to the fundamental principle that corporations, including parent companies and their subsidiaries, are treated as distinct entities. See Dole Food Co. v. Patrickson, 538 U.S. 468, 474 (2003).

 

Therefore, the Ninth Circuit held that the MAA, as drafted, described and governed a relationship between the former employee and the parent company that did not exist, and thus did not constitute a properly formed agreement to arbitrate.

 

Accordingly, the Ninth Circuit reversed the trial court's judgment and remanded for further proceedings consistent with this 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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Tuesday, January 11, 2022

FYI: NY App Ct Holds Strict Compliance Required for "Separate Envelope" for Pre-Foreclosure Notice

The New York Appellate Division, Second Department, recently affirmed a lower court's order granting summary judgment in favor of a borrower in a foreclosure action due to the mortgagee's failure to comply with the "separate envelope" requirement of New York's Real Property Actions and Proceedings Law 1304(2).

 

In so ruling, the Court held that strict compliance with the "separate envelope" provision of RPAPL 1304(2) is required in mortgage foreclosure actions.

 

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

 

This appeal arose out of a foreclosure action brought by the owner and holder of a note and mortgage ("Mortgagee") against a defaulting borrower ("Borrower").

 

Mortgagee moved for summary judgment on the complaint as asserted against Borrower, summary judgment in favor of Mortgagee Borrower's affirmative defenses, and for an order of reference. Borrower opposed the motion and cross-moved for summary judgment against Mortgagee for failure to comply with RPAPL 1304.

 

The trial court denied Mortgagee's motion and granted Borrower's cross-motion. Mortgagee appealed.

 

On appeal, the Appellate Division determined how to construe the "separate envelope" requirement of RPAPL 1304(2).  As you may recall, this provision mandates that "notices required by this section shall be sent…in a separate envelope from any other mailing or notice."

 

The Appellate Court found that the language of the status was clear, precise and unambiguous. The Court continued that RPAPL 1304 "contains specific, mandatory language in keeping with the underlying purpose of [the Home Equity Theft Prevention Act] to afford greater protections to homeowners confronted with foreclosure" (Aurora Loan Servs., LLC v Weisblum, 85 AD3d 95, 103), and the language in RPAPL 1304(2) with regard to the manner of service of the required notices "in a separate envelope from any other mailing or notice" "is equally precise" (Aurora Loan Servs., LLC v Weisblum, 85 AD3d at 104.

 

As RPAPL 1304(2) requires the notice must be sent "in a separate envelope from any other mailing or notice," the Appellate Court held that the inclusion of any material in the separate envelope sent to the borrower under RPAPL 1304 that is not expressly delineated in the provisions constituted a violation of the separate envelope requirement.

 

The Appellate Court reasoned that a strict approach precluding any additional material in the same envelope as the requisite notices both comported with the statutory language and also provide clarity as a bright-line rule to plaintiff lenders and "promote[d] stability and predictability" (Freedom Mtge. Corp. v Engel, 37 NY3d 1, 20) in foreclosure proceedings.

 

The Court further noted that strict interpretation of the "separate envelope" requirement was consistent with the Legislature's intent.

 

The statute, originally enacted in 2008, was amended in 2009 to include a new sentence to RPAPL 1304(2) to include the requirement that the requisite notices shall be sent in "a separate envelope from any other mailing or notice." (§ 1304[2]; see L 2009, ch 507, § 1-a [eff Jan. 14, 2010]). The "separate envelope" requirement is exclusive to that section and not found in the other notice provisions applicable to mortgage foreclosure proceedings.  See e.g. RPAPL 1303, 1305; see also UCC 9-611). 

 

Though RPAPL 1304 has been amended since its adoption, the "separate envelope" provision has consistently remained. (see e.g. L 2009, ch 507, § 1-a [eff Jan. 14, 2010]; L 2011, ch 62, part A, § 104 [eff Oct. 3, 2011]; L 2012, ch 155, § 84 [eff July 18, 2012]; L 2012, ch 155, § 85; L 2016, ch 73, part Q, §§ 6, 7 [eff Dec. 20, 2016]; L 2017, ch 58 part FF, § 1 [eff Dec. 20, 2016]; L 2018, ch 58, part HH, §§ 1, 5 [eff Apr. 12, 2018, deemed eff Apr. 20, 2017]; L 2018, ch 58, part HH, §§ 3, 4 [eff May 12, 2018]). 

 

Mortgagee argued that the Court should enact a flexible standard, evaluating whether the additional material obtained in the envelope prejudiced or assisted the borrower when ascertaining the lender's compliance with the "separate envelope" requirement. See e.g. Deutsche Bank Natl. Trust Co. v Delisser, Sup Ct, Suffolk County, Sept. 14, 2017, Heckman, J., Index No. 8685/13 [no violation of RPAPL 1304 where defendant failed to show prejudice from lender's inclusion of notice to veterans and notice regarding consumer rights]).

 

Mortgagee further argued that the Court should follow the determination of some trial courts and conclude that the inclusion of additional notice in the envelope is a de minimis deviation from the requirements of the statute and therefore, didn't constitute a failure to comply with the separate envelope requirement.

 

Finally, the dissent argued that "clarifying language" that a plaintiff includes in the envelope with the requisite notice, falls within the prescriptions of RPAPL 1304 and does not require a separate envelope.

 

However, the majority of the Appellate Court justices found that such approaches could vitiate the unambiguous requirement imposed by the Legislature of a "separate envelope" for the purposes of mailing the requisite notices or could place the burden on defendant to show a lack of prejudice or that the information was not relevant to the mandated notices.

 

The Court further held that these types of analysis would require courts to engage in the type of judicial scrutiny that New York's highest court recently rejected in mortgage foreclosure cases. (see Freedom Mtge. Corp. v Engel, 37 NY3d at 30-31). 

 

In Freedom Mtge. Corp. v. Engel, the Court of Appeals determined that an exploration of the lender's intent and scrutinization of "the course of the parties' post-discontinuance conduct and correspondence" was "unworkable from a practical standpoint" and would require a court to engage in an "exhaustive examination" of the parties' conduct (id. at 30). The Court found that determining if the additional information included in the envelope constituted information relevant, helpful, or prejudicial to the borrower would be the same sort of unworkable exercise.

 

As Mortgagee acknowledged that the envelope it sent to Borrower which contained the requisite notices, and also included other information in two notices.  Thus, the Appellate Court held, Mortgagee failed to establish, prima facia, that it strictly complied with the requirements of RPAPL 1304 and the lower court properly denied Mortgagee's motion for summary judgment. The Court further held that Borrower established prima facie his entitlement to judgment as a matter of law dismissing the complaint showing that Mortgagee failed to comply with RPAPL 1304.

 

Therefore, the Appellate Court affirmed the trial court's ruling.

 

 

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   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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Sunday, January 9, 2022

FYI: 10th Cir Reverses Dismissal of "Mistaken Area Code" TCPA Claims

The U.S. Court of Appeals for the Tenth Circuit recently reversed the dismissal for lack of personal jurisdiction of a Colorado consumer's claims raised under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227 ("TCPA") against a company that provides extended car warranties.

 

Here, the defendant company's call was placed from a Vermont area code to the Colorado resident consumer's Vermont phone number, and the defendant argued that its call to the Consumer's Vermont phone number at issue did not 'arise out of or relate to' the defendant's calls to Colorado phone numbers. 

 

Following the Supreme Court of the United States' recent ruling in Ford Motor Co. v. Montana Eighth Judicial District Court, 141 S. Ct. 1017 (2021), the Tenth Circuit concluded that specific personal jurisdiction existed between the plaintiff consumer and the defendant company, as Ford implicitly and explicitly rejected the defendant company's arguments.  The Tenth Circuit further concluded that subjecting the company to litigation over federal claims in Colorado would not violate traditional notions of fair play and substantial justice.

 

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

 

Following his purchase of a used automobile, a consumer ("Consumer") who resided in Colorado began receiving prerecorded calls to his cell phone offering to sell him an extended warranty for his car. 

 

The calls came from numbers with a Vermont area code, where the Consumer previously lived and still maintained a cell phone number with a Vermont area code. He traced one such call to a Florida limited liability company whose sole office is in Florida, that sells service contracts providing extended vehicle warranties (the "Extended Car Warranty Company"). 

 

The Consumer filed a putative class action suit against the Extended Car Warranty Company and related entities in Colorado federal court alleging violations of the TCPA and invasions of the Consumer's and class members' privacy by directing unwanted automated calls to their cell phones without consent.

 

Specifically, the Consumer alleged that the Extended Car Warranty Company "used[] telemarketing to sell vehicle service contracts . . . nationwide, including in Colorado by calling Colorado phone numbers."

 

Several defendants moved to dismiss the case for lack of personal jurisdiction in Colorado. The trial court determined that the Consumer had alleged sufficient facts to establish that the Extended Car Warranty Company purposefully directed telemarketing at Colorado.  However, the trial court also found that the call at issue to the Consumer's Vermont phone number did not arise out of, or relate to, its calls to Colorado phone numbers, and therefore granted the motions to dismiss for lack of jurisdiction.  This appeal followed.

 

The Tenth Circuit's analysis began by restating that personal jurisdiction over nonresident defendants is proper if an applicable statute authorizes service of process and if the exercise of jurisdiction comports with constitutional due process. Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063, 1070 (10th Cir. 2008). 

 

The parties agreed that the TCPA does not address service of process, but that the Federal Rules of Civil Procedure incorporate the Colorado long-arm statute, which confers personal jurisdiction to the extent permitted by the United States Constitution.  Id.; Fed. R. Civ. P. 4(k)(1)(A).  Thus, the Tenth Circuit was tasked to determine whether Colorado jurisdiction over the Consumer's and class members' claims was consistent with due process.  Id.

 

The parties also agreed that only specific, rather than general personal jurisdiction was at issue here, to determine whether the Extended Car Warranty Company was subject to the State's regulation.  

 

To determine when specific jurisdiction is properly exercised, courts are to assess two requirements: (1) that the defendant has "purposefully directed [its] activities at residents of the forum," and (2) that the suit "arise out of or relate to those activities." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985) Bristol-Myers Squibb Co. v. Superior Ct. of Cal., S.F. Cnty., 137 S. Ct. 1773, 1780 (2017).  Even when both requirements are satisfied, a defendant may still escape jurisdiction by establishing that it would be incompatible with traditional notions of fair play and substantial justice. See Burger King 471 U.S. at 476–77.

 

On appeal, the Extended Car Warranty Company argued (1) that purposeful direction must be shown by suit-related contacts, and that its calls to Colorado residents at Colorado phone numbers cannot support personal jurisdiction for Mr. Hood's claim based on a call to a Vermont phone number; (2) that the second requirement -- the suit "arise out of or relate to those activities" -- contemplates a causal connection between a defendant's forum contacts and the suit, but its calls to Colorado phone numbers did not give rise to its call to the Consumer's Vermont phone number; and (3) that subjecting the defendant to burdensome litigation in Colorado, where its contacts are weak, would violate traditional notions of fair play and substantial justice.

 

The Tenth Circuit's analysis first looked to the relationship between the claim and forum contacts, and the requirement that the plaintiff's claims "arise out of or relate to . . . activities" that the defendant purposefully directed at residents of the forum. Burger King, 471 U.S. at 472. 

 

The trial court held that there was "an insufficient connection between the forum and the underlying controversy —- a phone call to a Vermont area code —- to allow the Court to exercise specific jurisdiction" in Colorado.  However, the Tenth Circuit held that the Supreme Court of the United States' recent opinion in Ford Motor Co. v. Montana Eighth Judicial District Court, 141 S. Ct. 1017 (2021), rendered after the trial court's judgment, made clear that a causal connection is not required.

 

Ford considered two similar lawsuits, alleging death and injury, respectively, to residents of Montana and Michigan resulting from a malfunction/defect in vehicles manufactured by Ford.  See Ford, 141 S. Ct. at 1023.   Acknowledging that it purposefully availed itself of both markets through advertising and maintaining, repairing, and selling vehicles, Ford argued that because neither vehicle was designed, manufactured, or first sold in the State where the accident occurred, but entered the forum States only after resale or an owner's relocation, that it was not subject to specific jurisdiction in either forum State. Id. at 1026, 1028.  It insisted that "[j]urisdiction attaches only if the defendant's forum conduct gave rise to the plaintiff's claims." Id. at 1026.

 

Although the SCOTUS agreed that "arise out of" is a causal test, it distinguished that language from the "relate to" component of the second requirement, noting that its prior decisions repeatedly endorsed the proposition that specific jurisdiction arises when a defendant "serves a market for a product in the forum State and the product malfunctions there." Id. at 1027

 

The Tenth Circuit understood Ford to adopt the proposition that the forum state can exercise personal jurisdiction over an out-of-state defendant that has injured a resident plaintiff in the forum state if (1) the defendant has purposefully directed activity to market a product or service at residents of the forum State and (2) the plaintiff's claim arises from essentially the same type of activity, even if the activity that gave rise to the claim was not directed at forum residents. In that circumstance, the activity giving rise to the claim "relates" to the defendant's activity in the forum State. See id. at 1028–29 & n.5.

 

Adopting that rule here, the Tenth Circuit concluded that Colorado could exercise jurisdiction over the Consumer's claims because he is a Colorado resident who was allegedly injured by activity essentially identical to activity that the Extended Car Warranty Company allegedly directed at Colorado residents —- even if the call at issue was not a direct result of its telemarketing efforts directed at Colorado.  

 

It further concluded that exercising jurisdiction was consistent with due-process values as well, because the Extended Car Warranty Company was already on notice that it could be sued in Colorado where it sold service plans via telemarketing.  World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).

 

The Tenth Circuit further rejected the Extended Car Warranty Company's argument that it did not meet the 'purposeful direction' requirement to establish personal jurisdiction, concluding from Ford that purposeful direction need not be based solely on the contacts that generated the cause of action, but that it is enough if the activity forming the basis of the claim against the defendant is related to the activity of the defendant that establishes that it "purposefully directed [its] activities at residents of the forum."

 

Lastly, the Tenth Circuit was not persuaded that requiring the Extended Car Warranty Company to litigate claims for alleged violation of federal law through telemarketing in Colorado was incompatible with fair play and substantial justice, merely due to inconvenience.

 

In sum, because the Extended Car Warranty Company's arguments regarding 'purposeful direction' and 'arise out of or relate to' were respectively implicitly and explicitly rejected by Ford, and because the defendants failed to establish that proceedings in Colorado did not comport with fair play and substantial justice, the trial court's dismissal was reversed, with the matter remanded for further proceedings.

 

 

 

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   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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