Thursday, June 1, 2023

FYI: 7th Cir Reverses Class Cert for Various Failures to "Rigorously Analyze" the Putative Class Claims

The U.S. Court of Appeals for the Seventh Circuit recently reversed a trial court's certification of a putative class action for various failures to "rigorously analyze" the claims prior to certifying the class.

 

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

 

The plaintiff student attended a university (University) during the spring of 2020. During the Spring of 2020, the Covid-19 pandemic resulted in the university closing its campus, canceling one week of class and conducting the remainder of the semester's classes virtually.

 

The University never rescheduled the week of canceled classes. As a result, the Spring 2020 Semester was only fourteen weeks instead of the planned fifteen weeks of classes listed in the University's 2019-2020 Academic Catalog. The Academic Catalog also expressly stated that the catalog served as a contract between a student and the University. The catalog also established that during the Spring 2020 Semester the University charged all full-time, on-campus students $17,100 in tuition and an $85 activity fee. The University provided pro-rata refunds for room and board to students who were forced to leave their on-campus housing, but it did not provide refunds for tuition or activity fees.

 

Plaintiff filed a putative class action complaint on behalf of himself and all others similarly situated against the University. He alleged that the Academic Catalog constituted a contract between the students and the University and the University's changes to its curriculum resulted in a breach of contract and unjust enrichment.

 

The trial court eventually certified two (2) classes of all students during the Spring 2020 semester who paid or on whose behalf whose payment was made for tuition ("Tuition Class"), and a separate class for the activity fee ("Activity Class"). The University timely filed an interlocutory appeal of the trial court's certifications.

 

The Seventh Circuit reviewed the trial court's decision for an abuse of discretion. A trial court can abuse its discretion when it commits legal error. See Santiago v. City of Chicago, 19 F.4th 1010, 1016 (7th Cir. 2021). In the Seventh Circuit, this is a deferential standard but it must also be exacting because a decision regarding certification can have a considerable impact on the playing field of litigation. Orr v. Shicker, 953 F.3d 490, 497 (7th Cir. 2020).

 

To certify a class under Federal Rule of Civil Procedure 23, a Plaintiff must first meet the following four requirements: 1) numerosity, 2) commonality, 3) typicality, and 4) adequacy of representation. Fed. R. Civ. P. 23(a).  Additionally, when certification is sought under Rule 23(b)(3), common questions of law or fact must "predominate" over individual inquiries, and class treatment must be the superior method of resolving the controversy." Santiago, 19 F.4th at 1016.

 

On appeal the University specifically challenged the trial court's analysis of the commonality and predominance requirements.

 

In order for class plaintiffs to meet their burden under the commonality standard, a "claim must depend on a common contention and that common contention … must be of such a nature that it is capable of class wide resolution — which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.'" Ross v. Gossett, 33 F.4th 433, 437 (7th Cir. 2022). Rule 23(b)(3) also requires the common question(s) to 'predominate' over the individual ones." See Howard v. Cook Cnty. Sheriff's Off., 989 F.3d 587, 607 (7th Cir. 2021).

 

When analyzing the certification of a class, the trial court must "rigorously analyze" the claims prior to certifying the class. Rule 23 does not set forth an exact pleading standard, but a party seeking class certification must affirmatively demonstrate their compliance with Rule 23(b)(3) by proving that there are sufficiently numerous parties, common questions of law or fact, etc." See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350 (2011).

 

On appeal, the University argued that the trial court erred by basing its certification decision solely on Plaintiff's allegations, without fully assessing the record. The Seventh Circuit first found that the trial court's certification order referred to Plaintiff's allegations without addressing his proffered evidence or examining how he would prove his allegations with common evidence under Rule 23(b). The Appellate Court also found that the trial court's predominance analysis only merely accepted Plaintiff's proffered common questions without referring to the common evidence presented to answer those questions that the trial court.  This, the Seventh Circuit held, amounted to an abuse of discretion.

 

Additionally, the University also argued that the trial court did not identify or separately analyze the elements of Plaintiff's claims, and further argued this was critical to the court's predominance analysis. To determine "which issues are common, individual, and predominant," the court must "circumscribe[e] the claims and break them down into their constituent elements." Santiago, 19 F.4th at 1018; see also Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 815 (7th Cir. 2012).

 

The Seventh Circuit noted that the trial court's certification order was also deficient in this regard. The trial court's order only addressed one common question for each class without explaining that question's relative importance to each claim regarding whether any individual questions exist, or how the common question predominates over individual ones. The Appellate Court explained that the trial court's order should have been more detailed by identifying the elements of Plaintiff's two claims and separately analyzed them to better understand the relationship between each claim's common and individual questions. As a result, the trial court did not conduct the rigorous analysis required by Rule 23. Therefore, the trial court abused its discretion in certifying the Tuition and Activity Classes. See Beaton v. SpeedyPC Software, 907 F.3d 1018, 1025 (7th Cir. 2018).

 

Lastly, the University also argued that the trial court inappropriately rejected its arguments regarding the adequacy of Plaintiff's proof as "more closely related to the merits" of Plaintiff's claims. In addressing this issue, the Seventh Circuit noted at the class certification stage, a trial court "must walk a balance between evaluating evidence to determine whether a common question exists and predominates, without weighing that evidence to determine whether the plaintiff class will ultimately prevail on the merits." See Ross v. Gossett, 33 F.4th 433, 437 (7th Cir. 2022). The Appellate Court disagreed with the University, and explained how the trial court's analysis is not whether plaintiffs will be able to prove the elements on the merits, but only whether their proof will be common for all plaintiffs, win or lose. See In re Allstate Corp. Sec. Litig., 966 F.3d 595, 603 (7th Cir. 2020).

 

Accordingly, the Seventh Circuit vacated the trial court's certification of the Tuition and Activity Classes and remanded the case back to the trial court 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

 

 

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

  

 

 

 

 

Tuesday, May 30, 2023

FYI: Montana Enacts Comprehensive Consumer Data Privacy Law

Montana Gov. Greg Gianforte recently signed into law the Montana Consumer Data Privacy Act, making Montana the ninth state to enact a comprehensive consumer data privacy law, following California, Virginia, Colorado, Utah, Connecticut, Iowa, Indiana, and Tennessee.

 

The new Montana law will take effect Oct. 1, 2024.

 

APPLICABILITY

 

The law applies to persons that conduct business in Montana or persons that produce products or services that are "targeted" to residents of Montana and:

 

- control or process the personal data of not less than 50,000 consumers, excluding personal data controlled or processed solely for the purpose of completing a payment transaction; or

- control or process the personal data of not less than 25,000 consumers and derive more than 25% of gross revenue from the sale of personal data.

 

EXEMPTIONS

 

Importantly, the law exempts financial institutions and affiliates, or personal data subject to the Gramm-Leach-Bliley Act. Other exemptions include covered entities or business associates governed by the Health Insurance Portability and Accountability Act, and the use of personal information to the extent the activity is regulated by and authorized under the Fair Credit Reporting Act.

 

CONSUMER RIGHTS

 

Consumers are provided the right to:

 

- confirm whether a controller is processing the consumer's personal data and to access the personal data;

- correct inaccuracies in the consumer's personal data;

- delete personal data about the consumer;

- obtain a copy of the consumer's personal data previously provided by the consumer;

- opt out of the processing of personal data if the purpose is for targeted advertising, sale of the personal data, or profiling in furtherance of solely automated decisions that produce legal or similarly significant effects concerning the consumer.

 

SENSITIVE DATA

 

A controller may not process "sensitive data" without a consumer's consent.

 

"Sensitive data" includes:

 

- data revealing racial or ethnic origin, religious beliefs, a mental or physical health condition or diagnosis, information about a person's sex life, sexual orientation, or citizenship or immigration status;

- the processing of genetic or biometric data for the purpose of uniquely identifying an individual;

- personal data collected from a known child; or

- precise geolocation data.

 

CONTRACT REQUIREMENTS

 

A contract between a controller and a processor must include certain provisions to:

 

- ensure that each person processing personal data is subject to a duty of confidentiality with respect to the personal data;

- at the controller's direction, delete or return all personal data to the controller as requested;

- on the reasonable request of the controller, make available to the controller all information in the processor's possession necessary to demonstrate the processor's compliance;

- engage any subcontractor pursuant to a written contract that requires the subcontractor to meet the obligations of the processor with respect to the personal data; and

- allow and cooperate with reasonable assessments by the controller or the controller's designated assessor.

 

DATA PROTECTION ASSESSMENTS

 

A controller must conduct and document a data protection assessment if the processing involves:

 

- targeted advertising;

- the sale of personal data;

- certain profiling;

- sensitive data.

 

ENFORCEMENT

 

The Attorney General has the exclusive authority to enforce the law. Prior to taking any action, the Attorney General must provide a controller or processor 60 days to cure the violation. In the absence of a cure, civil penalties not to exceed $7,500 may be sought for each violation. The cure provision expires April 1, 2026.

 

IMPRESSION

 

The Montana law is very similar to the non-California data privacy laws recently enacted, so it should cause few additional compliance challenges.

 

For a chart comparing the state comprehensive data privacy acts, and more information and insight from Maurice Wutscher on data privacy and security laws and legislation, please click here.

 

 

 

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

 

 

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

  

 

 

 

 

Friday, May 26, 2023

FYI: 8th Cir Holds Total Revenues from Disputed Practice Can Satisfy CAFA's $5MM Requirement

The U.S. Court of Appeals for the Eighth Circuit recently held that the total amount of money received from a challenged practice can be used to satisfy the federal Class Action Fairness Act's jurisdictional requirement of $5 million in controversy.

 

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

 

A consumer filed a class action lawsuit against a retail company in Missouri state court. The consumer alleged that the company engaged in misleading and deceptive marketing practices by selling cough suppressants with dextromethorphan hydrobromide and a "non-drowsy" label.

 

The company removed the case to federal court under the federal Class Action Fairness Act (CAFA), and the consumer moved to have the case remanded back to state court, arguing that the company did not meet CAFA's jurisdictional requirement of $5 million in controversy.

 

The company filed a brief in opposition to the remand motion and attached a declaration from one of its senior managers. The senior manager asserted in his affidavit that there was more than $5 million in controversy based on three possible remedies identified in the complaint: (1) the total amount of product sales during the relevant time period; (2) the sales lost if the court enjoined the company from selling the products; and/or (3) the attorneys' fees awarded to the consumer's counsel if the consumer were to prevail.

 

The federal trial court remanded, finding that the company did not show that the amount in controversy was greater than $5 million because the company did not provide enough detail to show that the amount in controversy exceeded $5 million. The court also concluded that injunctive costs were not part of the amount in controversy and the company did not specify the amount of the attorneys' fees with enough detail to be considered. The company timely appealed to the Eighth Circuit under 28 U.S.C. § 1453(c).

 

A party can remove a class action to federal court under CAFA if three conditions are met: 1) minimum diversity exists, 2) the proposed class has at least 100 members, and 3) there is more than $5 million in controversy. Leflar v. Target Corp., 57 F.4th 600, 603 (8th Cir. 2023) (citing 28 U.S.C. § 1332). Here, the parties agreed that the first two conditions were met, but disagreed on whether there was more than $5 million in controversy.

 

When a plaintiff contests the amount in controversy after removal, the party seeking to remove under CAFA must establish the amount in controversy by a preponderance of the evidence. Lizama v. Victoria's Secret Stores, LLC, 36 F.4th 762, 765 (8th Cir. 2022). However, the amount in controversy is not established by a preponderance of the evidence if a court must resort 'to conjecture, speculation, or star gazing.'" Waters v. Ferrara Candy Co., 873 F.3d 633, 636 (8th Cir. 2017).

 

The Eighth Circuit concluded that the senior manager's declaration was sufficient to support a finding that the amount in controversy exceeded $5 million. The Court reasoned that a removing party's burden of describing how the controversy exceeds $5 million is a pleading requirement, not an evidentiary requirement. Hartis v. Chicago Title Ins. Co., 694 F.3d 935, 944 (8th Cir. 2012). "[D]istrict courts must 'accept' the allegations in the notice if they are 'made in good faith.'" Leflar, 57 F.4th at 604.

 

Additionally, the Eighth Circuit held that the total amount of revenue generated from a challenged activity can be a measure of the amount in controversy. Raskas v. Johnson & Johnson, 719 F.3 884, 888 (8th Cir. 2013). Specifically, the Court determined that, when a lawsuit questions part of a transaction, an affidavit describing the total sales of the product at issue during the relevant time period meets the amount in controversy requirement. Id. at 87.

 

Because the Eighth Circuit found that total revenue received satisfies the amount in controversy requirement, it declined to discuss the inclusion of — or sufficiency of the evidence for — compliance costs or attorneys' fees.

 

Accordingly, the Eighth Circuit reversed the federal trial court's order remanding the case to state court.

 

 

 

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

 

 

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

  

 

 

 

 

Tuesday, May 23, 2023

FYI: TX Sup Ct Rules Mortgagee Could Not Avoid Foreclosure SOL With Equitable Subrogation Claim

The Supreme Court of Texas recently held that a mortgagee's foreclosure action was time-barred and that the doctrine of equitable subrogation did not provide the lender with an alternative timely claim.

 

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

 

A mortgagee whose predecessor refinanced the borrowers' original mortgage loans accelerated the borrowers' notes after they stopped making mortgage payments. However, the mortgagee did not initiate foreclosure proceedings until after its claim to enforce its lien was time-barred under the relevant Texas four-year statute of limitations.

 

The issue in the first round of appeals was whether the common-law doctrine of equitable subrogation provided the mortgagee with an alternative means of foreclosure. By balancing the equities, including the mortgagee's purported negligence in allowing the statute of limitations to expire, the intermediate Court of Appeals held that the trial court did not err by denying the mortgagee's claim for equitable relief and rendering judgment for the borrowers.

 

While the lender's first petition for review was pending with the Texas Supreme Court, the Texas Supreme Court ruled in a separate case, Federal Home Loan Mortgage Corp. v. Zepeda, that, in the mortgage-lending context specifically, a refinance lender's negligence in preserving its own lien plays no part in its entitlement to enforce an earlier lien through equitable subrogation. 601 S.W.3d 766-67 (Tex. 2020). Thus, because the Intermediate Court of Appeals' equity-balancing analysis conflicted with the Texas Supreme Court's holding in Zepeda, the Texas Supreme Court reversed the Court of Appeals' judgment and remanded with an instruction to address the borrowers' claim that the mortgagee's equitable-subrogation claim was time-barred.

 

On remand, the Court of Appeals concluded that any equitable subrogation claim that the mortgagee could have asserted would have accrued when the mortgagee accelerated the borrowers' notes and, therefore, this claim was time-barred too. The mortgagee again appealed to the Texas Supreme Court.

 

In its second appeal, the mortgagee argued that the statute of limitations on a refinance lender's subrogation claim should not begin to run until the maturity date of the notes on the original debts that were later refinanced.

 

However, the Texas Supreme Court concluded that the accrual rule urged by the mortgagee was incompatible with "the dual nature of a note and deed of trust" under Texas law. Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013). The Court reasoned that, in a refinance transaction, the original note is paid and then ceases to exist; it no longer has a maturity date and a new note between the borrower and the refinance lender is executed.

 

The Texas Supreme Court held that equitable subrogation actually transfers to a refinance lender the original creditor's security interest so that the refinance lender has an alternative lien to foreclose on if its own lien is later determined to be invalid. See Federal Home Loan Mortgage Corp. v. Zepeda, 601 S.W.3d 766 & n.13 (Tex. 2020).

 

Nevertheless, the Court stressed that a refinance lender only has one foreclosure claim, which accrues when the note made in the refinancing transaction is accelerated. Subrogation provides the refinance lender with the alternative remedy of foreclosing on the original creditor's lien in case its own is deemed invalid, not an additional claim and not a separate statute of limitations period. LaSalle Bank National Association v. White, 246 S.W.3d 616, 619 (Tex. 2007).

 

Accordingly, the Texas Supreme Court held that any claim the mortgagee would have had through subrogation to foreclose on the original creditor's lien would have accrued at the same time the mortgagee's own claim accrued, when the mortgagee accelerated the borrowers' refinanced loans. Because the mortgagee did not initiate foreclosure within four years of that date, the Court concluded that its claim was time-barred.

 

 

 

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

 

 

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

  

 

 

 

 

Saturday, May 20, 2023

FYI: 7th Cir Holds Allegations of "Confusion" and "Alarm" Not Enough for Article III Standing

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a consumer's lawsuit against a debt collector, holding that the consumer lacked Article III standing to sue because his allegations of ╩║confusion" and "alarm" were not sufficiently concrete to result in an injury in fact.

 

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

 

The consumer previously leased an apartment, and when he filed for Chapter 7 bankruptcy, he listed as a debt pastdue rent he allegedly owed the property management company. The bankruptcy court proceeded to grant the consumer a discharge, including any debt owed to the property manager.

 

That bankruptcy discharge was listed on the consumer's credit reports, but the property manager was not notified of the consumer's bankruptcy. 10 weeks before the discharge, the property manager placed the consumer's account with a collection agency. Over the next 18 months, the collection agency sent the consumer two collection letters, stating that if payment was made, the collector "will update credit data it may have previously submitted regarding this debt."

 

The week before the consumer received the second letter, he filed suit under the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692e for allegedly demanding payment of a debt not owed and Section 1692c(c) for purportedly failing to cease communications and cease collections. The consumer alleged that the collection agency's continued communications "confused and alarmed" him. The collection agency did not give information to a credit reporting agency — before or after his bankruptcy discharge.

 

The trial court dismissed the consumer's complaint for lack of Article III standing, and the consumer timely appealed.

 

Article III of the U.S. Constitution limits the jurisdiction of federal courts to cases and controversies. U.S. CONST. art. III, § 2. To establish Article III standing to sue, "[a] plaintiff must have (1) a concrete and particularized injury in fact (2) that is traceable to the defendant's conduct and (3) that can be redressed by judicial relief." Pierre v. Midland Credit Mgmt., Inc., 29 F.4th 934, 937 (7th Cir. 2022).

 

On the first element, a concrete injury is "'real,' and not 'abstract.'" Spokeo, Inc. v. Robins, 578 U.S. 330, 340 (2016). "Qualifying injuries are those with a close relationship to a harm traditionally recognized as providing a basis for a lawsuit in American courts." Pierre, 29 F.4th at 938.

 

The Seventh Circuit began by noting that the ruing of the Supreme Court of United States in TransUnion LLC v. Ramirez limited the intangible harms that can be considered concrete. 141 S. Ct. 2190, 2210 (2021). Specifically, the Supreme Court held that a risk of harm qualifies as a concrete injury only for claims for "forwardlooking, injunctive relief to prevent the harm from occurring." Id.

 

The Seventh Circuit reasoned that the Supreme Court's TransUnion decision weakened the consumer's standing argument because he was only seeking monetary damages in this action. Additionally, although the consumer claimed that he was "confused and alarmed" about the status of his bankruptcy discharge and his credit score, he provided no facts showing that his emotional response led to actionable injury. Because the consumer did not "otherwise act to [his] detriment in response to anything," Pierre, 29 F.4th at 939, the Court concluded that the risk he pled of possible futility to his bankruptcy or potential harm to his credit did not satisfy the standing requirement of a concrete and particularized injury in fact.

 

Resisting this conclusion, the consumer argued that his injuries were of the same kind held actionable under common law invasion of privacy tort theories, specifically "invasion of privacy" and "intrusion upon seclusion." An intangible harm can qualify as a concrete injury in fact, but only when the harm bears a "close relationship" to a traditional harm given redress in courts at common law. Spokeo, 578 U.S. at 340–341.

 

The Seventh Circuit observed that ╩║invasion of privacy" and "intrusion upon seclusion" are actually not distinct torts. Instead, "invasion of privacy" encompasses four theories of wrongdoing, including "intrusion upon seclusion." Persinger, 20 F.4th at 1192. Intrusion upon seclusion "occurs when a person 'intrudes … upon the solitude or seclusion of another or his private affairs or concerns' and this 'intrusion would be highly offensive to a reasonable person.'" Persinger, 20 F.4th at 1192 (quoting RESTATEMENT (SECOND) OF TORTS § 652B).

 

The Seventh Circuit noted that the phrase "intrusion upon seclusion" did not appear in the consumer's complaint or his supporting declaration. Conceding that the consumer did not need to include this precise phrase in his pleadings, the Court determined that none of his allegations spoke to such a theory of injury in any way. Instead, the consumer's appellate briefing tried to shoehorn his allegations within that tort theory.

 

Furthermore, each time the consumer invoked "intrusion upon seclusion," he claimed that the collection agency's letters undermined his belief that his bankruptcy discharge created a "fresh start." However, the Court held that this specific injury was not actionable under the "intrusion upon seclusion" theory, as the potential for the consumer's bankruptcy case to be undone presented only a risk of harm.              

                                                                                                                                                                                                                            

Accordingly, the Seventh Circuit concluded that the trial court correctly found that the consumer had not alleged a concrete and particularized injury in fact, and that there was no Article III standing. Therefore, the Court affirmed the dismissal of the case for lack of standing.

 

 

 

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

 

 

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

  

 

 

 

 

Thursday, May 18, 2023

FYI: Ill App Ct (1st Dist) Holds Trial Court Improperly Denied Borrower's Estate Opportunity to Show Lack of Capacity

The Appellate Court of Illinois, First District, recently reversed a trial court's order striking an affirmative defense to a foreclosure, vacated the foreclosure rulings, and remanded the matter for further proceedings.

 

Specifically, the Appellate Court held that an estate administrator's affirmative defense alleging that the deceased mortgagor's dementia denied her the requisite mental capacity to execute the mortgage loan documents was sufficient to withstand the reverse mortgage lender's motion to strike and that the administrator should have been granted the opportunity to amend his affirmative defense prior to the entry of summary judgment.

 

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

 

In response to a foreclosure action brought by a reverse mortgage mortgagee, the administrator of the mortgagor's estate raised an affirmative defense that the mortgagor was mentally incompetent to execute the mortgage documents due to her dementia.

 

The mortgagee moved to strike the affirmative defense arguing that, because the mortgagor had never been adjudicated incompetent by a court, nor had a court-appointed guardian administering her affairs, the defense was insufficient at law. The mortgagee also moved for summary judgment.

 

In his responses to both of the mortgagee's motions, the administrator presented new factual materials as exhibits, including an affidavit from the mortgagor's son stating that, when he lived at the subject property with his mother, she was approached by an individual who worked for the mortgagee's predecessor in interest and was urged to sign a reverse mortgage to help pay her debts and obtain money to rehabilitate the property. Although the mortgagor's son purportedly told the individual that his mother was not competent to sign any contracts because she was diagnosed with "severe dementia," she signed the mortgage documents anyway at the individual's behest.

 

After briefing on the motion to strike, the trial court expressed concern about whether a deceased contracting party could be retroactively proven to have been incompetent at the time of signing a contract. Therefore, the court entered a judgment of foreclosure and sale and struck the affirmative defense.

 

The mortgagee then purchased the foreclosed property at a judicial sale for a full credit bid. The administrator made similar arguments in opposition to the lender's motion for confirmation of the sale as he had against summary judgment, but the trial court again rejected these arguments and entered a final judgment confirming the sale. The administrator timely appealed.

 

On appeal, the administrator contended that the trial court erred in striking the affirmative defense and that the materials he submitted in opposition to the mortgagee's motions were sufficient to create a genuine issue of material fact.

 

An affirmative defense admits the legal sufficiency of the cause of action but "asserts new matter by which the plaintiff's apparent right to recovery is defeated." Vroegh v. J&M Forklift, 165 Ill. 2d 523, 530 (1995). A defendant must state the facts establishing an affirmative defense with the same degree of specificity that is required of a plaintiff stating a cause of action. International Insurance Co. v. Sargent & Lundy, 242 Ill. App. 3d 614, 630 (1993). Moreover, under 735 ILCS 5/2-612(b), "[n]o pleading is bad in substance which contains such information as reasonably informs the opposite party of the nature of the claim or defense which he or she is called upon to meet."

 

The First District noted that section 11a-22 of the Probate Act of 1975 (755 ILCS 5/11a-22) provides that a contract entered into by a person who has been adjudicated as incompetent is void against that person and her estate. Additionally, the Appellate Court found that there was no dispute that, at the time she signed the mortgage, the mortgagor had not been adjudicated as incompetent, and nothing in the record on appeal suggested that she was later so adjudicated.

 

However, the Appellate Court also recognized that incapacity due to mental impairment is a valid defense to a contract claim under Illinois common law. Campbell v. Freeman, 296 Ill. 536, 539 (1921) (citing Bordner v. Kelso, 293 Ill. 175 (1920), Crosby v. Dorward, 248 Ill. 471 (1911), McLaughlin v. McLaughlin, 241 Ill. 366 (1909), Baker v. Baker, 239 Ill. 82 (1909), and Sears v. Vaughan, 230 Ill. 572 (1907)). Additionally, "mental weakness of one party to a transaction, even if it is of itself insufficient to destroy a contract will, if accompanied by undue influence, inadequacy of price, ignorance and want of advice, misrepresentation or concealment be a basis for setting aside the agreement." Freiders v. Dayton, 61 Ill. App. 3d 873, 880 (1978) (citing Fewkes v. Borah, 376 Ill. 596, 601 (1941)).

 

Thus, the First District concluded that the allegations in the administrator's affirmative defense were sufficient to withstand the mortgagee's motion to strike because they contained the basic elements set forth in Illinois case law regarding incapacity of mentally impaired persons to contract. Furthermore, the Appellate Court determined that the affirmative defense contained such information as reasonably necessary to inform the mortgagee of the nature of the defense which it was called upon to meet. Therefore, the Appellate Court held that the trial court erred in striking the affirmative defense.

 

The First District next addressed the trial court's entry of judgment of foreclosure and sale. Summary judgment is appropriate "if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." 735 ILCS 5/2-1005(c).

 

The First District found that the mortgagor's son's affidavit, attached to the administrator's responses to the motion to strike and motion for summary judgment, did not present a genuine issue of material fact sufficient to overcome the mortgagee's summary judgment motion. However, the Appellate Court also held that the trial court erred by striking the administrator's affirmative defense, which was properly pleaded, while simultaneously granting summary judgment to the mortgagee. because this deprived the administrator of a fair opportunity to properly frame his defense of incapacity. As pointed out by the Appellate Court, 735 ILCS 5/2-1005(g) requires: "[b]efore or after the entry of a summary judgment, the court shall permit pleadings to be amended upon just and reasonable terms." An affirmative defense is a "pleading" within the scope of the Code. Id. §§ 2-603(a), 2-613(a).

 

Accordingly, the First District (1) reversed the trial court's order striking the administrator's affirmative defense; (2) vacated the order of foreclosure and sale; (3) vacated

the order confirming sale; and (4) remanded for further proceedings consistent with its 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

 

 

 

Alabama   |   California   |   Florida   |   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

 

Webinars

  

 

 

 

Monday, May 15, 2023

FYI: 6th Cir Holds Mortgagee's Foreclosure Action Time-Barred Under Tennessee Law

The U.S. Court of Appeals for the Sixth Circuit recently affirmed a trial court's decision granting summary judgment and dismissing a mortgagee's foreclosure action as time-barred under Tennessee law, and rejecting the mortgagee's arguments of oral modification, partial payment, and equitable estoppel, as well as its request for an equitable lien.

 

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

 

In 1997, a borrower executed a Deed of Trust (DOT) and a home equity line of credit agreement (collectively, the "Loan") in the amount of $200,000, in favor of a mortgagee, and secured by real property in Tennessee. The DOT was properly recorded and the terms of the Loan provided for monthly interest payments until the maturity date in May 10, 2007.  On that date, a final balloon payment of the entire outstanding balance would become due.

 

The Loan contained a provision that stated the mortgagee generally "may not change the terms of this agreement," with certain exceptions, including that the mortgagee "may make changes that unequivocally benefit" the borrower.

 

May 2007 passed, the mortgagee took no action, and the borrower continued making monthly interest payments until he passed away in 2009. The borrower's heirs ("heirs") continued operate a business at the property and the company's bookkeeper continued to make payments to the mortgagee. The heirs did not initiate probate proceedings and the mortgagee did not find out about the borrower's death until 2011. However, the mortgagee continued to accept over $100,000.00 total in monthly payments from 2011 until 2017.

 

The mortgagee alleged that the company's bookkeeper orally modified the maturity date until 2017. The company's bookkeeper and the heirs disputed this fact.  After the disputed 2017 maturity date, the mortgagee initiated foreclosure proceedings. In October of 2018, the mortgagee filed a foreclosure action and requested a declaration that the loan's maturity date had been extended and that it be granted the right to foreclose. The mortgagee later amended its complaint, adding a request that the court grant the mortgagee an equitable lien against the property.

 

The heirs moved for summary judgment and the trial court granted their motion holding that the statute of limitations had expired because Tennessee law provides that "liens of mortgages, deeds of trust, and assignments of realty executed to secure debts, shall be barred, and the liens discharged, unless suits to enforce the same be brought within ten (10) years from the maturity of the debt." Tenn. Code Ann. § 28- 2-111(a). Thus, the trial court held the statute of limitations expired on May 10, 2017, ten years beyond the Loan's maturity date because the heirs alleged oral extension of the maturity date was not a duly executed and acknowledged written instrument as required by Tenn. Code Ann. § 28-2-111(c).

 

In addition, the trial court disagreed that heirs were estopped from raising the statute of limitations as a defense and refused to establish an equitable lien on the property in favor of the mortgagee. Therefore, the trial court summary judgment in favor of the heirs. The mortgagee appealed.

 

On appeal, the Sixth Circuit first determined whether the Loan's maturity date was in May 2007, making the mortgagee's foreclosure suit untimely under Tennessee law, or whether the Loan's maturity date was extended to April 2017.

 

The Court of Appeals examined Tenn. Code Ann. § 28-2- 111(a) which states: "[l]iens on realty, equitable or retained in favor of vendor on the face of the deed, also liens of mortgages, deeds of trust, and assignments of realty executed to secure debts, shall be barred, and the liens discharged, unless suits to enforce the same be brought within ten (10) years from the maturity of the debt." Unless the maturity date was extended, the mortgagee's foreclosure action would not have been timely because the mortgagee's foreclosure action was brought more than ten (10) years after the 2007 maturity date.

 

As the trial court noted in granting summary judgment, Tenn. Code Ann  § 28-2- 111(c) further provides that liens on realty "may be extended without their priority or legal effectiveness being in any way impaired, for any period of time agreed upon and beyond the ten-year period from the maturity of the obligation or debt" provided that the extension is "evidenced by a written instrument . . . [that is] duly executed and acknowledged," and "filed for record with the register of the county in which the realty affected is located" and the written instrument must "contain a brief recital of the facts with reference to the original lien and shall provide that the lien shall continue, for a definite period of time in the future" Id.

 

The mortgagee did not argue that there was a written instrument that extended the maturity date. Instead, it argued that (a) that there was an oral modification to the Loan or it had the unilateral right to extend the Loan; (b) that the Loan contained a future advances provision that could extend the maturity date for up to twenty years; (c) that partial performance -- the heir's continued monthly interest payments —- excused any writing requirement; and (d) that the heirs are equitably estopped from raising the statute of limitations as a defense or the mortgagee is entitled to an equitable lien.

 

The Sixth Circuit disagreed with all of these arguments. First, the Court of Appeals rejected the argument that there was an oral modification to the loan because any extension must be in writing to satisfy the Statute of Frauds.

 

Next, the Court of Appeals also disagreed that Loan contained a future advances provision that could extend the maturity date for up to twenty years. The future advances provisions in the original DOT allowed for the borrower to receive additional loans from the mortgagee to be secured by the property, provided that the due date of any new debt "not be more than twenty years after" the original maturity date of May 10, 2007. The Sixth Circuit held that the mortgagee did not adequately address the clause in the DOT that provided that "any such commitment must be agreed to in a separate writing."

 

Regarding the mortgagee's argument that the heir's continued monthly payments constituted partial performance and excused any writing requirement, the Sixth Circuit also disagreed because "payment of principal or interest" will not "toll the statute of limitations placed on deeds of trust" under § 28- 2-111. See Slaughter v. Slaughter, 922 S.W.2d 115, 118 (Tenn. Ct. App. 1995). Although there is Tennessee case law that recognizes partial performance as an exception to the Statute of Frauds, this exception did not apply to real property. See Buice v. Scruggs Equipment Co., 250 S.W.2d 44, 47-48 (Tenn. 1952). Accordingly, the Sixth Circuit agreed with the trial court that the mortgagee could not show as a matter of law that the maturity date of the original Loan was extended, its suit is untimely under Tenn. Code Ann. § 28-2-111(a).

 

Next, the mortgagee argued that the heirs should be equitably estopped from asserting the statute of limitations as a defense based on their inequitable conduct. The mortgagee argued the inequitable conduct of the heirs resulted from the heirs not initiating probate proceedings, not timely informing the mortgagee of the borrower's death, and for claiming under oath in 2017 there were no outstanding debts on the property.

 

In Tennessee, a defendant is equitably estopped from asserting the statute of limitations as a defense "when the defendant has misled the plaintiff into failing to file suit within the statutory limitations period." Redwing v. Cath. Bishop for Diocese of Memphis, 363 S.W.3d 436, 460 (Tenn. 2012).  In addition, an equitable estoppel inquiry "is on the defendant's conduct and the reasonableness of the plaintiff's reliance on that conduct.'" Id. at 461 (quoting Hardcastle v. Harris, 170 S.W.3d 67, 85 (Tenn. Ct. App. 2004). A plaintiff must also demonstrate that its delay in filing suit was not attributable to its "own lack of diligence." Id. (quoting Hardcastle, 170 S.W.3d at 85).

 

The Sixth Circuit noted that although the mortgagee raised numerous issues concerning the heirs inequitable conduct, it was still unclear how any of these actions specifically misled the mortgagee into failing to file a timely foreclosure suit. The Court of Appeals went on the further state any delay was due to the mortgagee's own lack of diligence and failure to comply with Tennessee law requiring that lien extensions and contracts involving interests in real property be in writing. As a result, the mortgagee did not show that the heirs misled it into failing to file a suit before the limitations period had run.

 

Lastly, the Sixth Circuit examined whether the trial court erred in refusing to impose an equitable lien on the property.  Under Tennessee Law, in order to create an equitable lien, there must be "proof (1) that the parties intended to make the particular property a security for the obligation, (2) that valuable consideration passed between the parties, and (3) there is an equitable reason for imposing the lien." Ewing v. Smith, No. 85-294-II, 1986 WL 2582, at *5 (Tenn. Ct. App. Feb. 26, 1986).

 

Again, the mortgagee argued that that the evidence established that the Loan's maturity date had been extended to April 11, 2017, and that equity requires a finding that the ten-year period for enforcement did not begin to run until that date. However, the Sixth Circuit disagreed because based on the facts in the record it found there was no equitable reason to impose a lien.

 

Accordingly, the trial court's decision granting summary judgment in favor of the heirs 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   |   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

 

Webinars