Thursday, May 19, 2022

FYI: 9th Cir Denies Plaintiffs' Remand Motion, Holds FCRA "Informational and Privacy Interests" Sufficient for Standing

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the trial court's denial of a motion for a remand to state court and the dismissal of the plaintiffs' class action suit alleging violations of the federal Fair Credit Reporting Act (FCRA) by a credit reporting agency.
 
In so ruling, the Ninth Circuit panel concluded that:
 
-  The allegations of injury to the plaintiffs' informational and privacy interests were sufficiently concrete to support Article III standing; and
 
-  None of the information that the plaintiffs contended the credit reporting agency failed to include in its § 1681g of the FCRA disclosures is subject to disclosure under § 1681g(a)(1), (3) or (5), considered individually or in combination.
 
A copy of the opinion is available at:  Link to Opinion
 
In late 2017, a data breach in a cloud storage location revealed information on millions of households, including the households of the plaintiffs, in a large spreadsheet. Plaintiffs alleged that this information was bought from the defendant, a credit reporting agency. Following this breach, Plaintiffs requested and received from the credit reporting agency various § 1681g disclosures.
 
As you may recall, credit reporting agencies must "clearly and accurately disclose to the consumer" various items of information upon the request of the consumer.  See 15 U.S.C. § 1681g.
 
Plaintiffs filed a class action lawsuit in state court contending that the credit reporting agency failed to include in its § 1681g disclosures several pieces of information they alleged the agency was required by the FCRA to provide, including behavioral data from its marketing database and the identity of parties receiving that information, "soft inquiries" from third parties and affiliates, the identity of certain parties who procured consumer reports, and the date on which employment data was reported.
 
The credit reporting agency removed the case to federal court and filed a motion to dismiss for failure to state a claim.
 
Plaintiffs countered with a motion for remand to state court. Plaintiffs argued in their remand motion that the credit reporting agency had not met its burden of establishing Article III standing. The trial court denied Plaintiffs' motion, holding that removal under § 1441 was proper because there was no question that Plaintiffs' complaint raised issues under the FCRA, a federal law, and that there was no initial requirement for the credit reporting agency to prove subject matter jurisdiction in order to remove an action.
 
The trial court also granted the credit reporting agency's motion to dismiss, holding that none of the information missing from the § 1681g disclosures sent to Plaintiffs was required to be disclosed under the FCRA. Plaintiffs timely appealed.
 
The Ninth Circuit has adopted a two-step framework to determine whether alleged violations of FCRA provisions are sufficiently concrete to confer standing: "(1) whether the statutory provisions at issue were established to protect [a plaintiff's] concrete interests (as opposed to purely procedural rights), and if so, (2) whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests." Robins v. Spokeo, Inc., 867 F.3d 1108, 1113 (9th Cir. 2017) ("Spokeo III").
 
The Ninth Circuit held that, in this case, both Spokeo III prongs were met.
 
Regarding the first prong, the Ninth Circuit found that Plaintiffs' complaint alleged the violation of specific provisions of the FCRA established to protect concrete interests of privacy and accuracy in the reporting of consumer credit information, and not merely procedural rights.
 
As to the second prong of Spokeo III, the Ninth Circuit also held that Plaintiffs' complaint contained sufficient allegations of non-disclosure of information under § 1681g to "present a material risk of harm" to Plaintiffs' concrete interest in consumer privacy.
 
Therefore, the Ninth Circuit affirmed the trial court's denial of Plaintiff's motion to remand.
 
Plaintiffs also contended that the trial court erred in granting the credit reporting agency's motion to dismiss. They argued that various combinations of § 1681g(a)(1), (3), and (5) require that "all information" in a consumer's file must be disclosed when requested and that four specific categories of data should have been included in the credit reporting agency's §1681g disclosures: behavioral data from the marketing database and the identity of parties receiving that information, soft inquiries by third parties, the identity of all parties procuring credit reports, and the date on which employment dates were reported. The credit reporting agency responded that its § 1681g disclosures were in full compliance with the FCRA and that nothing required was omitted.
 
Plaintiffs argued that § 1681g(a)(1) encompasses "all information" maintained by a credit reporting agency, contending that the statutory language, "[a]ll information in the consumer's file at the time of the [§ 1681g] request," is entitled to "a liberal construction in favor of consumers when interpreting the FCRA," and thus includes all the information in the credit reporting agency's Admin Reports. The credit reporting agency countered that §1681g(a)(1) cannot and should not be read so broadly.
 
The Ninth Circuit agreed with the credit reporting agency and concluded that none of the information Plaintiffs contended the credit reporting agency failed to disclose is of the type that has been included in a consumer report in the past or is planned to be included in such a report in the future.
 
Next, regarding the credit reporting agency's failure to disclose several soft inquiries by third parties in the § 1681g disclosures, the Ninth Circuit held that soft inquiries were not part of Plaintiffs' "file[s]" under §1681g(a)(1), and therefore did not need to be disclosed under that provision.
 
The Ninth Circuit also determined that Plaintiffs were incorrect in contending that the soft inquiries must be disclosed under § 1681g(a)(3). Credit reporting agencies must disclose "each person… that procured a consumer report." 15 U.S.C. § 1681g(a)(3). However, the Court noted that a prerequisite of a necessary disclosure under  § 1681g(a)(3) is the actual procurement of a consumer report by an identified party and Plaintiffs nowhere alleged that the credit reporting agency actually sent the inquiring parties anything, or that whatever was sent was a consumer report.
 
Additionally, Plaintiffs further alleged that the credit reporting agency violated § 1681g(a)(5) regarding two promotional inquiries made with respect to one of the plaintiffs by two banks. The Ninth Circuit was not persuaded and reasoned that, although § 1681g(a)(5) requires disclosure of "inquiries" without reference to "consumer report," that section is limited to inquiries leading to a firm offer of credit. As Plaintiffs nowhere alleged that these two inquiries led to an offer, the Court concluded that Plaintiffs failed to sufficiently plead a violation of § 1681g(a)(5) based on the non-disclosure of the two banks' soft inquiries.
 
Plaintiffs also alleged that § 1681g(a)(1) and (3) require the credit reporting agency to disclose the behavioral data included in the marketing database in the § 1681g disclosures sent to Plaintiffs.
 
The Ninth Circuit first found that the data maintained in the database was aggregate data, organized by zip code and not individualized to any consumer. Therefore, the Court held that such aggregate data is not information that ever has been or might arguably be included in an individual consumer report and is thus not part of a consumer's "file" and not subject to disclosure under § 1681g(a)(1) of the FCRA.
 
For the same reason, the Ninth Circuit held that the credit reporting agency was not required under § 1681g(a)(3) to disclose the identity of each person who procured the behavioral data, because the behavioral data was not part of a "consumer report."
 
Finally, Plaintiffs argued that the credit reporting agency violated § 1681g(a)(1) by failing to disclose the dates on which Plaintiffs' employment dates were reported to the agency. However, the Ninth Circuit concluded that the date employment dates were reported can have no "bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living." 15 U.S.C. § 1681a(d)(1). That information, therefore, need not be included in a § 1681g disclosure.
 
Accordingly, the Ninth Circuit affirmed the trial court's denial of Plaintiffs' motion to remand to state court and its dismissal with prejudice of Plaintiffs' complaint for failure to state a claim.
 
 

 

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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Friday, May 13, 2022

FYI: Ill App (2nd Dist) Holds Feb 2020 Foreclosure Judgment Not Affected by COVID Moratoria

The Appellate Court of Illinois, Second District, recently affirmed a trial court's order denying a borrower's motions to vacate a foreclosure judgment and for leave to file an untimely answer and counterclaims, and the subsequent motion to reconsider, finding the trial court's decision did not result in substantial injustice.

 

In so ruling, the Appellate Court held that the CARES Act and Fannie Mae foreclosure moratoria could not affect a judgment of foreclosure entered in February 2020.

 

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

 

In July 2018, the interest holder of a mortgage ("Mortgagee") filed a complaint for foreclosure against a borrower ("Borrower") alleging Borrower's default.

 

Numerous orders continuing the case were entered by the trial court.  On February 14, 2020, the trial court entered an order of default and a judgment of foreclosure. The redemption period was set to expire on May 14, 2020 and the trial court ordered that property be sold if the amounts due and owing Mortgagee were not paid by that date.

 

On December 29, 2020, Borrower filed an emergency motion to vacate the order of default, set aside the sale, and for leave to file an answer and counterclaims. Both motions were denied and Borrower subsequently filed an emergency motion to reconsider the order denying the motions. The trial court denied the motion to reconsider and entered an order confirming the sale.

 

On appeal, Borrower argued that the trial court abused its discretion by denying her motions to vacate the default judgment of foreclosure and for leave to file counterclaims and her motion to reconsider the denial.  Borrower also asserted that the judgments should be reversed as they resulted in extraordinary injustice.  Alternatively, Borrower requested the Appellate Court reconsider its holding in Adler v. Bayview Loan Servicing, LLC, 2020 IL App (2d) 191019, in which the Appellate Court held that the Illinois mortgage foreclosure statute bars all claims after a deed is transferred following a judicial sale.

 

The Appellate Court first considered whether the trial court abused its discretion in denying Borrower's motions to vacate the foreclosure, for leave to file an answer and counterclaims, and to reconsider. Section 2-1301(e) of the Illinois Code of Civil Procedure (735 ILCS 5/2-1301(e)) allows that "[t]he court may in its discretion, before final order or judgment, set aside any default, and may on motion filed within 30 days after entry thereof set aside any final order or judgment upon any terms and conditions that shall be reasonable." 

 

The Appellate Court noted that in a foreclosure action, the final order is the order confirming the sale. Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115549, ¶ 12.  The overriding consideration under section 2-1301(e), is "whether it is reasonable, under the circumstances, to compel the other party to go to trial on the merits." McCluskey, 2013 IL 115469, ¶ 16.

 

The Appellate Court found that Borrower presented no basis for vacating the default judgment, and noted that her personal obligations were discharged in bankruptcy. The Appellate Court also noted Borrower failed to make any argument as to how the trial court's refusal to grant her motion to vacate itself would result in substantial injustice.

 

Instead, the Appellate Court found Borrower had "glossed over" the procedural hurdles and instead argued that denying leave to file her counterclaims would cause injustice.

 

However, Borrower conceded that "[v]acating the default would have served only to allow [her] to bring her counterclaims and avoid the permanent claims bar that resulted solely" from her novel interpretations of Illinois law.

 

As appellants are required to support their arguments with citations to relevant authority and portions of the records, and "[p]oints not argued are forfeited," the Appellate Court found that Borrower had forfeited her argument that the court's denial of her motion to vacate would result in substantial injustice.

 

In addition, as Borrower conceded that vacating the default was a prerequisite to filing her counterclaims, the Appellate Court found the trial court had properly denied her motion for leave to file counterclaims as well.

 

The Appellate Court further noted that even without Mortgagor's concessions, it would still conclude that the trial court's order did not result in substantial injustice.

 

First, the Appellate Court found that Borrower's failure to timely answer the foreclosure complaint under the circumstances, supported a finding that Mortgagor did not exercise due diligence.

Additionally, Borrower chose to seek leave to file counterclaims and a motion to reconsider rather than filing a separate action.  The Appellate Court thus found that the trial court's ruling could not have resulted in substantial injustice, as Borrower had another avenue to pursue her claims.

 

Borrower argued that she did not have an alternative venue to pursue her claims in light of the Court's recent decision in Adler, and thus the trial court's bar of her counterclaims was rendered a substantial injustice.

 

In Adler, the Appellate Court held that the Illinois "legislature intended section 15-1509(c) [of the Illinois mortgage foreclosure statute] to preclude all claims of parties to the foreclosure proceeding related to the mortgage or the subject property, except for claims regarding the interest in the proceeds of a judicial sale." (Emphasis added.) Adler, 2020 IL App (2d) 191019, ¶ 25. Thus, Borrower argued that her claims in the proposed counterclaims would be forever barred and  the trial court's denial of her motion to reconsider resulted in substantial injustice.

 

In further support of her substantial injustice argument, Borrower argued that the scope of the section 15-1509(c) claims bar was improperly expanded by Adler because it "drastically limit[ed] the rights and remedies of mortgage borrowers who are abused, defrauded, or otherwise harmed during the pendency of a foreclosure case."  Borrower also argued that foreclosure plaintiffs under Adler "will receive an automatic 'get out of jail free card' for any and all misconduct" that occurred during and before the foreclosure proceedings.

 

However, the Appellate Court declined to reconsider Adler, ruling instead that Borrower misinterpreted the extent of its holding.

 

The Appellate Court noted that the trial court's order denying leave specifically stated "[t]his ruling is without prejudice as to Defendant filing any separate claims that she may seek to file and does not operate as a bar to any such filings."  The Appellate Court clarified that nothing in the Adler ruling supported the application of section 15-1509(c) to bar claims such as those that involve intentional torts and damages unrelated to the mortgage contract. See Adler, 2020 IL App (2d), ¶ 18. The Appellate Court thus ruled that to the extent otherwise procedurally proper, Borrower was free to pursue tort claims which were unrelated to the mortgage contract or the property.

 

In addition, the Appellate Court found the denial of Borrower's motion to reconsider was appropriate as her motion was untimely filed after Mortgagee filed a motion to confirm judicial sale, rather than filing a motion to delay confirmation of the judicial sale under section 5-1508(b).  Borrower asked the trial court to vacate the order confirming judicial sale because "justice was not otherwise done," but the Appellate Court noted that 15-1508(b) only authorizes a court to delay entry of an order to confirm judicial sale, not to vacate it. In addition, Borrower raised this argument for the first time on appeal and as such it was forfeited.

 

Finally, Borrower argued the trial court's orders were arbitrary and unreasonable because the foreclosure should have been stopped pursuant to the Fannie Mae lender letter that directed affected lenders to temporarily suspend all foreclosure-related activities.

 

The Appellate Court disagreed.  The Appellate Court reasoned that the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (15 U.S.C. § 9001 et seq.) foreclosure moratorium started on March 18, 2020 and expired on May 17, 2020. Although "Fannie Mae continued to instruct servicers of federally backed mortgage loans to suspend foreclosure-related activities," the foreclosure complaint was filed in 2018 and the default judgment was entered in February of 2020 -- before either the CARES Act or Fannie Mae moratoria were in place.

 

The Appellate Court also held that the trial court's failure to rule on Borrower's arguments as to the Fannie Mae lender letter could not be arbitrary or unreasonable where Borrower never presented that argument to the court. Borrower's argument was thus forfeited on appeal.

 

Accordingly, the Appellate Court affirmed the ruling of the trial 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

 

 

 

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Saturday, May 7, 2022

FYI: 6th Cir Vacates Injunction Against Loan Officer on Noncompete and Other Employment Terms

The U.S. Court of Appeals for the Sixth Circuit recently vacated a trial court's injunction granted to enforce various noncompete, non-solicitation, and confidentiality provisions in a mortgage lender's employment agreement with a loan officer.

 

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

 

The appeal arose out of an employment agreement (the "Agreement") signed by a loan officer ("Employee") during the course of his employment with a mortgage company ("Employer"). The Agreement was entered into by Employee and Employer in March 2019, when Employee was made "a team leader/managing loan officer."

 

Pursuant to the "Restrictive Covenants" provision in the Agreement, Employee agreed that  (1) for approximately three years and six months he would not "become employed in the same or similar capacity as [he] was employed with [Employer] by … any entity that competes with [Employer] in the home mortgage banking or brokering business" within "a one hundred (100) mile radius from either [Employer]'s headquarters or any branch office…to which [Employee] [wa]s assigned," and (2) for approximately four years and six months, Employee would not "employ or seek to employ any person who [wa]s employed by [Employer] or otherwise directly or indirectly induce such person…to leave his/her employment."

 

In 2020, Employee contacted another loan company ("Competing Company") informing them that he was seeking to move himself and his team in a short time frame. By January 2021, Employee and two of his team members had left Employer and begun working at Competing Company. 

 

Employer asserted numerous claims against including for violation of the noncompete covenant, the non-solicitation covenant and the confidentiality covenant. Employer also sued Competing Company for tortious interference with business relationships and with contract.

 

Employer moved for a preliminary injunction which the trial court granted enjoining Employee and anyone in active concert of participation with him, including Competing Company, from "(1) competing with [Employer] within 100 miles of the office in which [Employee] worked; (2) soliciting [Employer]'s employees; and (3) using or disclosing [Employer]'s confidential information for their or [Company]'s competitive benefit."

 

Employee and Competing Company asked the trial court to clarify the meaning of "competing with [Employer]" and to specify the time period of the injunction but the trial court declined. Employee and Company appealed.

 

The Sixth Circuit found that, as a threshold matter, the injunction was impermissibly vague and overly broad. Pursuant to Fe. R. Civ. Pro. Rule 65(d): "Every order granting an injunction . . . must: (A) state the reasons why it issued; (B)state its terms specifically; and (C) describe in reasonable detail—and not by referring to the complaint or other document—the act or acts restrained or required."  Fed. R. Civ.  P.  65(d)(1). In addition, the injunction must be couched in unambiguous and specific terms, such that "an ordinary person reading the court's order [is] able to ascertain from the document itself exactly what conduct is proscribed." Scott v. Schedler, 826 F.3d 207, 211 (5th Cir. 2016).

 

The Sixth Circuit found the word "competing" was too vague as the main dispute in the matter was the scope of the restriction that Employer could be "employed in the same or similar capacity as [he] was employed with" Employer. The trial court never interpreted this phrase and instead issued a blanket injunction prohibiting Employee from "competing with [Employer]. The Appellate Court found that instead of resolving the vagueness of the language in the Agreement, the trial court substituted an equally vague prohibition which left to much "guesswork" for Employee and Competing Company to structure their conduct. Patriot Homes, Inc. v. Forest River Hous., Inc., 512 F.3d 412, 415 (7th Cir. 2008).

 

The Appellate Court also ruled that the injunction was "addressed to mortal human beings, yet it ha[d] no limitation on time." N.L.R.B. v. Teamsters, Chauffeurs, Helpers & Taxicab Drivers, Loc. Union 327, 419 F.2d 1281, 1283 (6th Cir. 1970). As the parties to the injunction were "left to guess about its intended direction," the Sixth Circuit found that Rule 65(d) did not permit them to endorse the trial court's injunction. See Granny Goose Foods v. Bhd. of Teamsters & Auto Truck Drivers, 415 U.S. 423, 444 (1974).

 

Employer argued that the injunction was clear as the specific conduct it prohibited could be inferred from "the facts of the case" and the "entirety" of the court's opinion. The Sixth Circuit disagreed, finding that the lower court never explained how the noncompete provision could be interpreted to bar "competing with [Employer]" writ large. In addition, the Sixth Circuit held, the lower court failed to state that the scope and duration were co-extensive with the language of the Agreement and in fact, stated that the conduct enjoined without any reference to previously quoted language.

 

The Sixth Circuit noted that even if that were not the case, the defect could not be cured by using language like "in keeping with opinions expressed herein," Mitchell v. Seaboard Sys. R.R., 883 F.2d 451, 454 (6th Cir. 1989), nor could the injunction describe the enjoined conduct by reference to the Agreement as that was another document. See Fed. R. Civ. P. 65(d)(1)(C). Thus, the Appellate Court found the injunction impermissibly vague under Rule 65(d).

 

The Sixth Circuit also held that the injunction was overbroad. When there is a risk that the injunction restrains legal conduct, or prohibits illegal conduct not the subject of the litigation or closely related to the conduct, the injunction is overbroad.  See Allard Enters., Inc. v. Advanced Programming Res., Inc., 146 F.3d 350, 360-61 (6th Cir. 1998).  The Appellate Court found that although the Agreement prohibited a specific action, the injunction was an unmitigated restraint on Employee "competing with [Employer])."

 

Thus, the Appellate Court found there was an inherent risk that the injunction scope exceeded the Agreement between the parties. The Sixth Circuit declined to modify the injunction to rectify its defects, and instead determined the question of scope of certain provisions was for the trial court to address.

 

The Sixth Circuit additionally ruled that the trial court had to reconsider the propriety of the injunction as it failed to analyze if the noncompete clause was enforceable under Ohio law. Among the four factors a court must balance when considering a motion for preliminary injunction is whether the moving party has a strong likelihood of success on the merits. City of Pontiac Retired Emps.  Ass'n v. Schimmel, 751F.3d 427, 430 (6th Cir. 2014) (en banc) (per curiam) (cleaned up). 

 

Moreover, the Sixth Circuit held that the trial court erred in failing to consider whether the noncompete covenant was reasonable, and thus, enforceable. The Appellate Court stated that Employer had no likelihood of success on the merits of the claim for breach of restrictive covenant unless it could show that the covenants were enforceable and that Employee breached them. A noncompete covenant is reasonable if it (1) is "no greater than is required for the protection of the employer"; (2) does "not impose undue hardship on the employee"; and (3) is not "injurious to the public." Chi. Title Ins. Corp. v. Magnuson, 487 F.3d 985, 991 (6th Cir. 2007) (quoting Raimonde v. Ban Vlerah, 325 N.E.2d 544, 547 (Ohio 1975)).

 

As the lower court failed to analyze the Raimonde factors and make necessary findings to conclude that the noncompete restrictions were enforceable, the Sixth Circuit there could be no likelihood of success on the breach of restrictions claim. Because a court cannot issue a preliminary injunction where there is no likelihood of success on the merits, the Appellate Court vacated the preliminary injunction as to the noncompete provision.

 

Thus, the Sixth Circuit vacated the injunction and remanded the case 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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Sunday, May 1, 2022

FYI: Cal App Ct (4th Dist) Affirms Order Compelling Compliance With District Attorneys' Rosenthal Act and TCPA Subpoena

The Court of Appeals of California, Fourth District, recently affirmed a trial court's order requiring compliance with an investigative subpoena served by a number of county district attorney's offices.

 

In so ruling, the Fourth District held:

 

1)  The subpoena respondent could not avoid investigation into whether it was subject to the California Rosenthal Fair Debt Collection Practices Act by asserting that it was not;

 

and

 

2)  The subpoena's investigation into the respondent's interactions with certain national banks was not preempted or prohibited by the federal National Bank Act.

 

A copy of the opinion is available at:  Link to Opinion, and Order Certifying Opinion for Publication

 

This action arose out of an investigation by the district attorney's offices in several counties ("DAs") in California regarding a company's ("Company") compliance with the California Rosenthal Fair Debt Collection Practices Act ("Rosenthal Act") and the federal Telephone Consumer Protection Act ("TCPA").

 

During the course of the investigation, DAs issued subpoenas to company seeking (1) collection services agreements, and other agreements between Company and its top five clients; (2) all of the call records of debt collection calls made by the top five clients to California residents; (3) the identity of any company that monitored/audited Company for compliance with debt collection practice laws; (4) policies and procedures related to collecting debt in California followed by Company; and (5) organizational charts regarding Company's corporate structure and specific identifying information regarding the structure.

 

DAs also sought information relating to a specific client ("Client") and a bank, relating to specific policies followed or dialing systems used and all call records of all debt collection calls Company made for Client and bank to residents of California.

 

Company served its objections and responses, arguing that the requests were a violation of Company's right to privacy and against unreasonable searches and seizures. Company also asserted it did not have any debt collection clients and thus denied having any of the requested agreements with clients, policies and procedures or call logs, relating to consumer debt collection. As to Client and bank, Company provided documents that were in its "custody, possession or control."

 

DAs eventually petitioned for an order compelling full compliance with the subpoena. Company opposed on the basis that as it was not a debt collector under the Rosenthal Act, and so the subpoena was invalid because it was not reasonably related to an investigation regarding debt collection.

 

The trial court granted DAs' petition and concluded that Company was a debt collector under the Rosenthal Act, the requests were relevant, and Company's original responses were incomplete.  This appeal followed.

 

On appeal, Company argued that it was not a debt collector under the Rosenthal Act, and thus the trial court erred in ordering compliance with the subpoena. Company also argued that the subpoena was improper in seeking Client's call records in violation of the federal National Bank Act. The Appellate Court found both arguments lacked merit.

 

The Rosenthal Act defines a debt collector as "any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection." Civ. Code, § 1788.2, subd. (c). "The term 'debt collection' means any act or practice in connection with the collection of consumer debts." Civ. Code, § 1788.2, subd. (b).

 

Company did not dispute that DAs had the authority to investigate whether debt collectors complied with the Rosenthal Act but instead argued that because Company was not a debt collector, the information sought in the subpoena was not reasonably relevant to the authority to investigate compliance with the Rosenthal Act. To support its argument, Company claimed only one percent of its business consisted of outbound collection-related calls, and these calls were made on behalf of only four of Company's many clients.

 

The Appellate Court found this argument lacked merit, noting an enforcement agency has the power to investigate a matter within its jurisdiction "merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." Brovelli, supra, 56 Cal.2d at p. 529. This power also allows "the authority to conduct an investigation and to subpoena records to determine whether the entity under investigation is subject to the agency's jurisdiction and whether there have been violations of provisions over which the agency has jurisdiction. Millan, Supra, 14 Cal. App: 4thh at p. 487.

 

Thus, the Appellate Court found that the DAs had the authority to subpoena Company to determine whether it was a debt collector under the Rosenthal Act, and that as such, Company could not resist the subpoena by claiming it was not a debt collector.

 

The Appellate Court rejected Company's argument that the subpoena violated the federal National Bank Act. As you may recall, the National Bank Act provides: "No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof or by any committee of Congress or of either House duly authorized."  See 12 U.S.C.§ 484, subd. (a).  State officials "may not exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records of national banks, or prosecuting enforcement actions, except in limited circumstances authorized by federal law."  See 12 C.F.R. § 7.4000(a)(1).

 

The parties agreed that Company was not a national bank subject to the National Bank Act, nut Company argued that the subpoena made an impermissible visitation on Client because (1) such officials were prohibited by the National Bank Act from examining the "records of national banks"; and (2) "[a]ny records [Company] possesse[d] regarding [Bank]" constituted records "of" a national bank within the meaning of the National Bank Act.

 

The Appellate Court found this argument implausible on its face. The Appellate Court noted the prohibition on "visitation" by state agents is for the protection of the Office of the Comptroller of the Currency's ("OCC") regulatory authority concerning national banks. The OCC however, has no authority to prosecute wrongdoing by third parties that provide services to national banks. Thus, in the view of the Appellate Court, Company's argument would curtail state law enforcement authority arbitrarily, with no federal authority to fill the gap.

 

The Appellate Court held that the National Bank Act regulations prohibit state officials from examining or requiring production of the records possessed by national banks, but they do not prohibit state officials from examining or requesting the production of other entities records of dealings with national banks.

 

Thus, the Appellate Court found the trial court's order consistent with the regulations, as it required Company to produce only records in Company's possession.

 

Accordingly, the Appellate Court affirmed the trial court's order compelling Company comply with the subpoena.

 

 

 

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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Friday, April 29, 2022

FYI: Ill Sup Ct Rejects Borrowers' Attempt to Assert Defect in Service to Void Foreclosure Judgment

The Supreme Court of Illinois recently rejected two borrowers' efforts to use a supposed defect in service of process to void a foreclosure judgment entered against them.

 

In so ruling, the Court held that:

 

1-  The third-party purchaser of the foreclosed property was a "bona fide purchaser", and this barred the borrowers' efforts to void the foreclosure judgment;

 

and

 

2-  The defense of laches can be raised in proceedings to void a judgment under section 2-202(a) of the Illinois Code of Civil Procedure.

 

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

 

The appeal arose out of a foreclosure action initiated by a bank ("Bank") against husband and wife borrowers ("Borrowers"). After Borrowers failed to appear, default and judgment of foreclosure and sale were entered. The property was sold at a judicial sale and the court subsequently confirmed the sale. Third-party respondent ("Purchaser") purchased the property.

 

More than seven years later, Borrowers filed a petition for relief from void judgments. Borrowers argued the orders entered against them were void ab initio because the court lacked personal jurisdiction over them.

 

Specifically, Borrowers claimed they were never properly served as the process server had not been appointed by the court at the time of service, thus violating section 2-202(a) of the Illinois Code of Civil Procedure.  735 ILCS 5/2-202(a).

 

Purchasers and Bank both filed motions to dismiss Borrowers' petition. Purchaser argued they were protected as bona fide purchasers as they were unaware of the alleged jurisdictional defect and the defect was not apparent on the face of the record, that the petition was barred by laches and requested improper relief. Bank argued the petition was barred by laches, was moot and requested improper relief. The trial court granted the motions to dismiss, and the appellate court affirmed.

 

On appeal to the Illinois Supreme Court, Borrowers argued that the dismissal was improper because (1) Purchasers did not qualify as bona fide purchasers; and (2) laches did not apply to petitions challenging a judgment as void.

 

The Court first addressed Illinois Code of Civil Procedure section 2-1401, which allows a party to seek relief from a final judgment, by filing a petition more than 30 days after judgment is entered. See Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 101-02 (2002); 735 ILCS 5/2-1401(a).

 

Petitions filed under this section generally must be filed within 2 years of the entry of judgment and allege certain factors.  Smith v. Airoom, Inc., 114 Ill. 2d 209, 220-21 (1986).  However, petitions for relief on the ground that the judgment was void do not need to comply with these procedural requirements. Sarkissian, 201 Ill. 2d at 104; 735 ILCS 5/2-1401(f).

 

Even if a judgment is void for lack of jurisdiction, the petitioner may be precluded from relief from a third-party purchaser pursuant to Illinois Code of Civil Procedure section 2-1401(e). In re Application of the County Collector, 397 Ill. App. 3d 535, 549 (2009).

 

Section 2-1401(e) protects bona fide purchasers' interests in property where (1) the defect in service is not apparent from the record, (2) the purchaser wasn't a party to the original action, and (3) they acquired title before the filing of the petition. U.S. Bank National Ass'n v. Rahman, 2016 IL App (2d) 150040, ¶ 26.

 

Thus, a party challenging a judgment as void where the rights of an innocent third-party purchaser has attached, can only obtain relief if the alleged personal jurisdictional defect affirmatively appears in the record. JP Morgan Chase Bank, N.A. v. Robinson, 2020 IL App (2d) 190275, ¶ 22.

 

The Illinois Supreme Court noted a lack of personal jurisdiction is apparent on the record when no inquiry beyond the face of the record is required. State Bank of Lake Zurich v. Thill, 113 Ill.2d 294, 314 (1986). The Court agreed with the appellate court's finding that the record alone did not provide "any reason to suspect that service was not in compliance with section 2-202(a)." The Court noted that the two affidavits of service in the record described the manner and date of service, but did not state the county in which service was made.

 

Borrowers argued Purchasers had constructive notice based on the order appointing the special process servicer and the proof of service. Borrowers relied on C.T.A.S.S. & &. Federal Credit Union v. Johnson, 383 Ill. App. 3d 909 (2008), where the court found that the defect was apparent on the record because the record showed "that the special process server served process before being appointed to do so" which the court found sufficient to notify third-party purchasers of a potential jurisdictional defect. Id. at 913.

 

However, the Illinois Supreme Court easily distinguished Johnson by noting that in Johnson there was no question as to the fact that service took place in Cook County. In the instant matter, the case was filed in DuPage County and there was nothing in the record that specified in which county service was made.

 

Thus, the Court found the trial court's order appointing the special process server, standing alone, did not show a jurisdictional defect because there was nothing in the record to indicate that the appointment of the process server was required for service to be effective.

 

Accordingly, the Illinois Supreme Court found the jurisdictional defect complained of did not affirmatively appear on the face of the record and that section 2-1401(e) protected Purchasers' rights in the property despite the alleged defect. See Rahman, 2016 IL App (2d) 150040, ¶ 42. The Court also found this applied equally to the Purchasers' new mortgage as it was also entitled to bona fide purchaser status and the protections of section 2-1401(e).

 

The Illinois Supreme Court next turned to the laches defense.

 

Laches bars relief for a litigant whose unreasonable delay in bringing the action prejudices the other party. Richter v. Prairie Farms Dairy, Inc., 2016 IL 119518, ¶ 51. Borrowers argued that laches could never apply to a petition seeking relief from a void judgment as such a judgment may be attacked at any time, asserting that the application of laches under the instant circumstances would effectively impose a due diligence requirement on jurisdictional challenges to void orders.

 

However, the Illinois Supreme Court found this argument confused the procedural requirements for bringing a petition under section 2-1401 with the defense of laches, noting that Borrowers' argument failed to recognize that, "in resolving a laches issue, the merits of the [section] 2-1401 petition are not a consideration." Federal National Mortgage Ass'n v. Altamirano, 2020 Ill. App (2d) 190198, ¶ 21.

Borrowers next argued that an equitable defense could not be asserted against a petition which raised a purely legal question. However, the Court found no support for this assertion, especially where Borrowers were seeking both legal and equitable relief. Thus, the Court rejected the argument.

 

The Illinois Supreme Court found that the face of the record clearly established both elements of laches. The first element "encompasses the plaintiff's delay in bringing the action while having notice or knowledge of defendant's conduct and the opportunity to file suit." Tillman v. Pritzker, 2021 IL 126387, ¶ 26 (citing Pyle v. Ferrell, 12 Ill. 2d 547, 553 (1958)). It was not disputed that Borrowers received actual notice of the foreclosure in 2011 nor that Borrowers did nothing to protect their rights for more than seven years after receiving notice. Further, Borrower's offered no explanation for their delay.

 

As to the second element, a party suffers prejudice where he or she "incurs risk, enters into obligations, or makes expenditures for improvements or taxes" while the other party remains passive. Pyle, 12 Ill. 2d at 555.

 

The Court found Bank was prejudiced because the delay increased Borrowers damages, resulting in Bank selling the property to a bona fide purchaser and prevented Bank from being able to recover the property as security for Borrowers' loan and Purchasers were prejudiced as they purchased the property for value and expended considerable sums to build their home and pay taxes and insurance.

 

Thus, the Illinois Supreme Court affirmed the trial court's judgment and the ruling of the appellate 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

 

 

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