FYI: 2nd Cir Reverses Class Settlement Citing Various Errors Under Rule 23 and CAFA

The U.S. Court of Appeals for the Second Circuit, recently reversed a trial court's approval of a settlement in a class action case, because the trial court presumed the fairness, adequacy, and reasonableness of the proposed settlement on the grounds the settlement was negotiated to at arm's-length, failed to assess the fairness, adequacy, and reasonableness of the agreed to attorney's fees and incentive payment, and erred in determining the class relief did not constitute "coupons" under the federal Class Action Fairness Act ("CAFA").

 

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

 

A group of California subscribers for an online and print newspaper filed a class action suit in the United Stated District Court of the Southern District of New York claiming a national newspaper automatically renewed subscriptions without providing the disclosures and authorizations required by California's Automatic Renewal Law, Cal. Bus. & 12 Prof. Code § 17600, et seq. (the "CARL").

Following a mediation, a settlement was reached between the parties whereby the class members would drop their claims in exchange for one-month subscriptions or pro rata cash payments. The settlement agreement also provided for the payments of substantial attorney's fees to class counsel, amounting to 76% of the cash settlement funds, and an incentive award to the class representative.

 

One of the class members objected to the proposed settlement, arguing that the settlement was unfair, the attorneys' fees calculation improperly exceeded limits set by the coupon settlement provisions of CAFA, and the incentive award was not authorized by law. The trial court disagreed, and certified the class for settlement purposes and approved the settlement. The objecting class member then filed an appeal.

 

On appeal, the objecting class member argued that the trial court erred by (1) misapplying Federal Rules of Civil Procedure Rule 23(e)'s legal standard in its review of the proposed settlement, (2) awarding $1.25 million in attorneys' fees based on a conclusion that the one-month subscriptions are not "coupons" under CAFA, and (3) awarding the class representative an incentive award of $5,000 and concluding she provided adequate representation. 

 

In assessing whether the trial court misapplied Rule 23(e)'s legal standard, the Second Circuit determined the trial court erred when it imposed a presumption of fairness, adequacy, and reasonableness to the parties proposed settlement on the ground that it was negotiated between the settling parties at arm's-length.

 

By way of background, prior to Rule 23(e)(2)'s codification, courts applied a presumption of fairness to settlement agreements resulting from arm's-length negotiations. See McReynolds v. Richards-Cantave, 588 F.3d 790, 803 (2d Cir. 2009); Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 116 (2d Cir. 2005). The codification of the arm's-length negotiation as one of the procedural factors that courts must consider when approving proposed settlements supplants its historical role as a presumption. The Second Circuit agreed with the Ninth Circuit's opinion in Roes, 1-2 v. SFBSC Mgmt., LLC, where the Ninth Circuit held that applying a presumption of fairness is inappropriate under the codified Rule 23(e)(2) because the rule does not suggest that an affirmative answer to one factor creates a favorable presumption on review of the others. 944 F.3d 1035, 1049 n.12 (9th Cir. 2019).

 

In addition, the Second Circuit held that the trial court erred when it imposed a presumption of fairness, adequacy, and reasonableness in light of the attorneys' fees awarded and incentive award.

As stated above, the codification of Rule 23(e)(2) changed the analysis courts must undertake when evaluating a settlement for approval in class actions. Rule 23(e)(2) now requires the trial court to expressly consider two factors when reviewing the substantive fairness of a settlement: (1) the adequacy of the relief provided to a class and (2) the equitable treatment of a class member. See Fed. R. Civ. P. 23(e)(2)(C)-(D). In assessing the adequacy of class relief, the court must take in into account the terms and any proposed award of attorneys' fees. The reasoning behind this, as was the case under the previous examination of awards of attorney's fees, is to prevent unwarranted windfalls for attorneys. See Goldberger v. Integrated Res., Inc., 209 F.3d 43, 47 (2d Cir. 2000).

 

The trial court is therefore required to look at both the terms of the settlement and any fee award encompassed in a settlement agreement together. See Fresno County Employees' Ret. Ass'n v. Isaacson/Weaver Fam. Tr., 925 F.3d 63, 72 (2d Cir. 2019); see also McKinney-Drobnis v. Oreshack, 16 F.4th 594, 607 (9th Cir. 2021). This same analysis is also applied to incentive payments. See Murray v. Grocery Delivery E-Servs. USA Inc., 55 F.4th 340, 353 (1st Cir. 2022).

 

Here, the Second Circuit held that the trial court reviewed the appropriateness of the attorneys' fee and incentive awards separately from its consideration of the fairness, reasonableness and adequacy of the settlement. In essence, the trial court again incorrectly applied the old test for examining the appropriateness of the settlement.

 

The Appellate Court noted that this error did not automatically require reversal of the settlement's approval; however, in the present case, this error could not be seen as harmless. The attorneys' fees awarded in this case were $1.25 million, while the total cash settlement fund was $1.65 million. As discussed below, the trial court calculated the total amount of attorneys' fees by adding the value of the one-month subscriptions to the cash set aside for pro rata distribution to class members that opt for cash. This too was in error as it violated CAFA's coupon settlement requirements as the one-month subscriptions were in fact coupons.

 

The Second Circuit next held that the trial court erred by failing to apply CAFA's coupon settlement provision when calculating the attorneys' fee awards because the one-month subscriptions are in fact coupons. A finding that the one-month subscriptions are in fact coupons therefore undermines any determination that the evaluation of the attorneys' fees awarded in the settlement was harmless error.

 

By way of background, CAFA was enacted to address concerns surrounding class actions where settlements included coupons to purchase more products from the defendants, which incentivizes attorneys to pursue settlements that provide class members with low-benefit coupons while fattening the pockets of class action attorneys who inflate their fees based on unrealistic face value of non-monetary relief. In re: Lumber Liquidators Chinese-Manufactured Flooring Prod. Mktg., Sales Pracs. & Prod. Liab. Litig., 952 F.3d 471, 488 (4th Cir. 2020). CAFA directs courts to calculate attorneys' fee awards in "coupon" settlements based on the redemption value of the coupons, rather than the face value. See 28 U.S.C. ' 1712(a). In the present case, the trial court incorrectly declined to do so because it concluded the one-month subscriptions were not coupons.

 

In examining whether the one-month subscriptions were coupons, the Appellate Court set to define what a coupon is. The Court looked to the dictionary definition of coupon, the legislative history of CAFA, and several cases that have dealt with similar issues. The New Oxford American Dictionary defines coupon as an item that entitles its user to free or discounted products or services, while the Mariam-Webster Dictionary defined it as a form surrendered in order to obtain an article, service, or accommodation. New Oxford American Dictionary 389 (2d ed. 2005); Merriam-Webster's Third New International Dictionary 266 (2002). The legislative history makes it clear that CAFA's coupon settlement provisions apply to settlements where the non-cash relief provided to class members entitles them to free or discounted products or services.

 

The Second Circuit noted that the Ninth Circuit previously looked at three non-dispositive factors in weighing whether a settlement term is a coupon under CAFA: (1) whether class members have to hand over more of their own money before they can take advantage of' a credit, (2) whether the credit is valid only for select products or services,' and (3) how much flexibility the credit provides, including whether it expires or is freely transferrable. In re Easysaver Rewards Litig., 906 F.3d 747, 755 (9th Cir. 2018), quoting In re Online DVD-Rental Antitrust Litig., 779 F.3d 934, 951 (9th Cir. 2015).

 

Here, the Appellate Court found that the one-month subscriptions at issue fell under the plain definition of the word "coupon," and even met the definition under the more restrictive Ninth Circuit evaluation. The coupons at issue are digital vouchers surrendered in order to obtain a one-month subscription to a newspaper. Under the Ninth Circuit evaluation, the Court found that in order for the class members to take advantage of the one-month subscriptions, they were required to do business with the defendants again in order to redeem the benefit provided; the one-month subscription restricts the universe of products that class members are entitled to obtain based on their subscription status; and although the subscriptions did not expire and were transferable, their low value of $3-5 means that a potential transferee has little incentive to buy the subscription from a class member rather than purchase it from the defendant newspaper directly.

 

Finally, the Appellate Court found that the incentive award did not create a conflict of interest between the class representative and other class members. The Second Circuit relied on prior precedent stating that incentive payments to class representatives, by themselves, do not create an impermissible conflict between class members and their representative. See In re Online DVD-Rental Antitrust Litig., 779 F.3d 934, 951 (9th Cir. 2015). To prevail on this issue, a claimant will need to show that something exists, outside of the payment itself, to create a conflict between the class representative and other class members as to invalidate a settlement in a class action. In addition, the Second Circuit found extensive support in its sister circuits permitting the payment of incentive payments for class representatives. In re Apple Inc. Device Performance Litig., 50 F.4th at 785-86; Jones v. Singing River Health Servs. Found., 865 F.3d 285 (5th Cir. 2017); Caligiuri v. Symantec Corp., 855 F.3d 860, 867 (8th Cir. 2017).

 

Accordingly, the Second Circuit held that the trial court erred when: it imposed a presumption of fairness, adequacy, and reasonableness to the parties proposed settlement on the ground that it was negotiated between the settling parties at arm's-length; it imposed a presumption of fairness, adequacy, and reasonableness in light of the attorneys' fees award and incentive award; and it determined that the one-months subscriptions were not coupons under CAFA. Thus, the Appellate Court vacated the trial court's approval of the settlement award and attorneys' fees and remanded the case for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: Ill App Ct (1st Dist) Rejects Borrowers' Allegations of Fraudulent Reverse Mortgage Scheme

In an action by a group of borrowers who alleged a fraudulent reverse mortgage scheme, the Appellate Court of Illinois, First District, recently affirmed the trial court's judgment against the borrowers, and held that neither the discovery rule nor the continuing violation rule tolled the five-year statute of limitations for the borrowers' declaratory judgment claims, making them untimely.

 

In so ruling, the First District also rejected the borrowers' argument that their declaratory judgment claims were "preemptive affirmative defenses" to foreclosure actions that the lender would inevitably file against them.

 

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

 

A group of borrowers brought a declaratory judgment action and alleged that a mortgage lender and one of its agents engaged in a fraudulent reverse mortgage scheme to take the borrowers' homes. Specifically, the borrowers alleged that the agent offered to renovate their homes at no cost, purportedly pursuant to a federal program that would help pay for the renovations. The borrowers signed documents that the agent claimed were necessary to participate in the program. One of these documents was a reverse mortgage with the lender.

 

According to the borrowers, when the lender issued reverse mortgage payment checks, the agent demanded that they sign them over to him. The borrowers signed the checks over to the agent because the agent claimed that they would have to pay for the home renovations themselves if they refused. The borrowers alleged that the agent did not complete renovations to their homes, and they later learned that the home renovation reimbursement program did not exist.

 

Therefore, the borrowers argued that their reverse mortgages were void because they were fraudulently procured. They also requested an order directing the defendants to return the titles to their homes.

 

The lender moved to dismiss the borrowers' complaint, arguing that the five-year statute of limitations for fraud applied to the borrowers' declaratory judgment claims premised on allegations of fraud. The trial court granted the lender's motion to dismiss and held that "ample Illinois case law" applied the five-year statute of limitations for general civil actions to declaratory judgment actions, citing Toushin v. Ruggiero, 2015 IL App (1st) 143151, ¶ 47. The borrowers timely appealed.

 

On appeal, the borrowers first argued that their declaratory judgment claims were "preemptive affirmative defenses" to foreclosure actions that the lender would inevitably file against them, such that the statute of limitations did not apply at all.

 

However, the First District found that the borrowers' declaratory judgment claims were not affirmative defenses because they sought relief beyond defeating the lender's anticipated foreclosure actions. See Carmichael v. Union Pacific R.R. Co., 2019 IL 123853, ¶ 26. The Court reasoned that the borrowers' claims were essentially claims for fraud and rescission of contract because they asked the trial court to find that the lender committed fraud and to rescind the reverse mortgages on that basis. See 23-25 Building Partnership v. Testa Produce, Inc., 381 Ill. App. 3d 751, 757 (2008). Civil fraud claims are subject to a five-year statute of limitations in Illinois, 735 ILCS 5/13–205; DeSantis v. Brauvin Realty Partners, Inc., 248 Ill. App. 3d 930, 933-34 (1993), so the Court concluded that this was the statute of limitations applicable to the borrowers' claims in this case.

 

Therefore, having concluded that the borrowers' claims were subject to a five-year statute of limitations, the First District next addressed whether the limitations period had expired when the borrowers filed their initial complaint. A plaintiff must file a civil claim of fraud within five years of when the plaintiff knew or reasonably should have known that she was defrauded. 735 ILCS 5/13–205; see also DeSantis, 248 Ill. App. 3d at 933-34. Furthermore, a plaintiff knows or reasonably should know of wrongdoing when she possesses sufficient information concerning her loss and its cause to put a reasonable person on notice to inquire further. Hermitage Corp. v. Contractors Adjustment Co., 166 Ill. 2d 72, 85-86 (1995).

 

The First District reasoned that the borrowers should have known they were defrauded when they each signed their reverse mortgage documents. The borrowers filed their initial complaint more than five years after they signed their mortgage documents, and the Court therefore concluded that their claims were untimely.

 

Nevertheless, the borrowers contended that the discovery rule and the continuing violation rule tolled the start of the limitations period on their claims.

 

The discovery rule provides that the statute of limitations does not begin running until a plaintiff knows or reasonably should know that she has suffered a loss and that her loss was wrongfully caused. Hermitage Corp., 166 Ill. 2d at 77. A plaintiff asserting the discovery rule has the burden of proving the date of discovery and "must provide enough facts to avoid application of the statute of limitations." Id. at 84-85. Although the determination of when the statute of limitations begins to run is usually a question of fact, the court may rule on it as a question of law if the facts are undisputed. Id. at 85. The lender did not dispute the dates pled in the borrowers' complaint, and the First District reasoned that this analysis was a question of law. See id.

 

After reviewing the record, the First District found that there were no specific facts alleged regarding when the borrowers knew or should have known of their injuries. Additionally, the Court observed that the lender's motion to dismiss did not dispute any of the relevant dates in the borrowers' complaint and its statute of limitations argument was based entirely on the dates of events as the borrowers alleged them. Thus, the Court held that the borrowers did not meet their burden in establishing that the discovery rule applied.

 

Finally, the borrowers contended that the continuing violation rule tolled the statute of limitations. Under the continuing violation rule, the statute of limitations does not begin to run until the date of the last injury or when the tortious acts cease. Feltmeier v. Feltmeier, 207 Ill. 2d 263, 278 (2003).  However, a "single overt act" causing "continual ill effects" is not a continuing tort. Id.

 

The First District determined that the borrowers each only alleged a single overt act: the agent fraudulently inducing them into signing a reverse mortgage with the lender. The fact that the reverse mortgages still existed and may, at some point in the future, result in foreclosure were merely "continual ill effects" resulting from the agent's initial "single overt act." See id. Thus, to the extent the borrowers argued that the agent's initial act was part of an ongoing fraudulent scheme to obtain their homes, the Court held that the borrowers failed to plead any specific facts describing such an ongoing scheme.

 

Accordingly, the First District affirmed the trial court's judgment and held that the borrowers' declaratory judgment claims were barred by the general civil five-year statute of limitations.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: Delaware Enacts Personal Data Privacy Act

Delaware Governor John Carney on Sept. 11 signed into law House Bill 154, the Delaware Personal Data Privacy Act.  This makes Delaware the 12th state to enact a comprehensive consumer data privacy law, following California, Virginia, Colorado, Utah, Connecticut,  Iowa, Indiana, Tennessee, Montana, Texas, and Oregon.

The new Delaware law will go into effect Jan. 1, 2025.

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, click here.

APPLICABILITY

The Act applies to persons that conduct business in Delaware or persons that produce products or services that are targeted to residents of Delaware and that during the preceding calendar year did any of the following:

Controlled or processed the personal data of not less than 35,000 consumers, excluding personal data controlled or processed solely for the purpose of completing a payment transaction.

Controlled or processed the personal data of not less than 10,000 consumers and derived more than 20 percent of their gross revenue from the sale of personal data.

 

EXEMPTIONS

Exemptions include, but are not limited to:

Any financial institution or affiliate of a financial institution, all as defined in 15 U.S.C. 6809, to the extent that the financial institution or affiliate is subject to Title V of the Gramm Leach Bliley Act and the rules and implementing regulations promulgated thereunder;

Data subject to the Gramm Leach Bliley Act and the rules and implementing regulations promulgated thereunder;

Protected health information under HIPAA;

Activities regulated by the Fair Credit Reporting Act.

 

CONSUMER RIGHTS

Consumers have the right to:

Confirm processing of their personal data and access such data;

Correct inaccuracies, taking into account the nature of the personal data and the purposes of the processing of the consumer's personal data;

Delete personal data provided by, or obtained about, the consumer;

Obtain a copy of the consumer's personal data processed by the controller;

Obtain a list of the categories of third parties to which the controller has disclosed the consumer's personal data;

Opt out of processing if for the purpose of targeted advertising, sale, or profiling.

 

SENSITIVE PERSONAL INFORMATION

Sensitive personal data may not be processed without the consumer's consent or, in the case of a known child, without first obtaining consent from the child's parent or lawful guardian and otherwise complying with the Delaware Online Privacy and Protection Act, specifically Del. Code Ann. tit. 6, § 1204C.

Sensitive Data means personal data that includes any of the following:

Data revealing racial or ethnic origin, religious beliefs, mental or physical health condition or diagnosis (including pregnancy), sex life, sexual orientation, status as transgender or nonbinary, citizenship status, or immigration status.

Genetic or biometric data.

Personal data of a known child.

Precise geolocation data.

 

CONTRACT REQUIREMENTS

A contract between a controller and processor must clearly set forth instructions for processing data, the nature and purpose of processing, the type of data subject to processing, the duration of processing and the rights and obligations of both parties and:

Ensure that each person processing personal data is subject to a duty of confidentiality with respect to the data.

At the controller's direction, delete or return all personal data to the controller as requested at the end of the provision of services, unless retention of the personal data is required by law.

Upon the reasonable request of the controller, make available to the controller all information in its possession necessary to demonstrate the processor's compliance with the obligations in this chapter.

After providing the controller an opportunity to object, 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.

Allow, and cooperate with, reasonable assessments by the controller or the controller's designated assessor.

 

DATA PROTECTION ASSESSMENTS

A controller that controls or processes the data of not less than 100,000 consumers must conduct and document on a "regular basis" a data protection assessment for processing activities that presents a heightened risk of harm to a consumer, including:

Processing for the purpose of targeted advertising;

Processing for the purpose of selling personal data;

Processing for the purpose of certain profiling; and

Processing sensitive data.

The "100,000 consumers" threshold excludes data controlled or processed solely for the purpose of completing a payment transaction.

ENFORCEMENT

The Act does not create a private right of action. A violation is an unlawful practice under Del. Code Ann. tit. 6, § 2513 and can be enforced solely by the Attorney General pursuant to Del. Code Ann. tit. 6, § 2522. Provided a person cannot cure a violation within 60 days, the Attorney General may seek injunctive relief and a civil penalty of not more than $10,000 for each willful violation. The opportunity to cure provision expires Dec. 31, 2025.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: Cal App Ct (2nd Dist) Holds Bank Owed Duty of Care to Deposit Customer as to Blocked Account

The California Court of Appeals, Second Appellate District, recently reversed a trial court's ruling, and held that a defendant bank owed the plaintiff law firm a duty of care based on the special relationship the bank had with the law firm as an intended beneficiary of a probate court's blocked account order.

 

In so ruling, the Appellate Court explained that, although banks do not generally have a duty to police customer accounts for suspicious activity, the bank here owed the law firm a duty to act with reasonable care in limiting distributions from the blocked account to those authorized by court order.

 

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

 

A law firm filed an action against a bank, claiming negligence in the disbursement of funds from an account containing estate funds to the sole signatory on the account, the administrator of the estate. Specifically, the law firm alleged that the bank was negligent in disbursing the entirety of the estate funds to the administrator despite a probate court order specifying that the administrator would receive at most $16,000 from the account, with most of the remaining funds to be paid to the law firm and then to other beneficiaries.

 

The trial court granted the bank's motion for summary judgment, concluding that the bank owed no duty of care to the law firm and had complied with the probate court order. The law firm timely appealed.

 

On appeal, the law firm contended it raised triable issues of fact with respect to whether the bank owed a duty to the firm, whether the bank breached any such duty, and whether the bank's conduct in distributing the funds to the administrator, who absconded with the funds, was the proximate cause of the law firm's damages.

 

In finding a duty of care, California courts consider the factors articulated by the California Supreme Court in Biakanja v. Irving (1958) 49 Cal.2d 647: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant's conduct and the injury suffered; (5) the moral blame attached to the defendant's conduct; and (6) the policy of preventing future harm. Id. at 650. However, "[d]eciding whether to impose a duty of care turns on a careful consideration of the 'the sum total' of the policy considerations at play, not a mere tallying of some finite, one size-fits-all set of factors." Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 401.

 

Here, the Second District ruled that the bank and the law firm had a special relationship because the law firm was an intended beneficiary of the blocked account order, which limited distribution of the estate funds. Therefore, the Court applied the Biakanja factors to determine whether the bank owed a duty of care to the law firm in making distributions from the blocked account.

 

Although banks do not generally have a duty to police customer accounts for suspicious activity, the Second Appellate District concluded that application of the Biakanja factors revealed that the bank here did owe the law firm, as an intended beneficiary of the blocked account order, a duty to act with reasonable care in limiting distributions from the blocked account to those authorized by court order.

 

First, the Court found that the blocked account order, by preventing disbursement of the estate funds in the blocked account without a court order authorizing payment, was intended to affect the law firm, which had a priority right to those funds. Second, it was foreseeable that distributing the entirety of the funds in the blocked account to one beneficiary, without a court order directing disbursement of the funds, would harm the other beneficiaries, including the law firm. Third, the law firm suffered injury as a result of the bank allowing the administrator to withdraw all the funds in the blocked account, depriving the law firm of any payment. Fourth, there was likewise a close connection between the bank's conduct in distributing all the funds to the administrator and the law firm's injury. Finally, the goal to prevent future harm supported the conclusion that a bank owes a duty of care to an intended beneficiary where a bank releases funds from a blocked account without court authorization.

 

The bank contended that it did not breach any duty owed to the law firm because it followed the probate court order in releasing the funds in the blocked account to the administrator as the only authorized signatory on the account. However, the Second Appellate District agreed with the law firm that the language of the court order did not direct the bank to unblock the account for release of all the funds to the administrator. While possibly the administrator's signature would have been necessary to effectuate the release of funds to the law firm and other beneficiaries, that did not mean she could withdraw any funds from the blocked account without a court order directing the bank to release the funds to her.

 

Accordingly, the Second District held that there were triable issues of fact as to whether the bank breached its duty and whether that breach caused the law firm harm by allowing the administrator to withdraw all the funds in the account. Thus, the Court reversed the trial court's summary judgment in favor of the bank.

 

 

 

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

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FYI: Ill App (1st Dist) Rejects Tenant's Challenge to Foreclosure Eviction Due to Absence of "Bona Fide Lease"

The Appellate Court of Illinois, First District, recently affirmed a trial court's order denying a tenant's emergency petition to vacate an eviction following a foreclosure action.

 

In so ruling, the First District held that both the federal Protecting Tenants at Foreclosure Act of 2009 (PTFA) and the City of Chicago "Keep Chicago Renting Ordinance" (KCRO) only apply to bona fide tenants with bona fide leases, and that the tenant failed to provide evidence of a bona fide lease.

 

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

 

A mortgagee sued to foreclose its mortgage on a two-unit apartment building. After receiving a foreclosure sale deed, the mortgagee filed a complaint for eviction and ejectment against Unknown Occupants to gain possession of the property.

 

The trial court entered a default eviction order in favor of the mortgagee. An individual who was not a party to the action ("appellant") filed an emergency petition to vacate the eviction order pursuant to Section 2-1401 (f) of the Illinois Code of Civil Procedure.

 

Appellant alleged that he received no notice of the eviction and that he had a written lease at the property. The mortgagee opposed the petition and noted that the appellant failed to intervene in the action and did not raise any meritorious defenses. The trial court held a hearing and heard testimony from the appellant. At the hearing, the trial court found that appellant's alleged lease was with a non-party entity that did not have an ownership interest in the property and that appellant also failed to provide proof of rental payments. The trial court denied the petition and an appeal ensued.

 

On appeal, the appellant argued that the 1) the mortgagee did not give him the required notice as a leaseholder; (2) the trial court erred in denying his petition to vacate the eviction order; (3) the trial court ignored the federal Protecting Tenants at Foreclosure Act of 2009 (PTFA); (4) the trial court ignored the City of Chicago "Keep Chicago Renting Ordinance" (KCRO) and the "Residential Landlord Tenant Ordinance" (RLTO); and (5) the trial court abused its discretion by denying the petition to vacate.

 

The Appellate Court first examined its jurisdiction to hear the dispute. Appellant argued that the trial court's judgment was void because the trial court lacked jurisdiction due to lack of proper notice. The Appellate Court rejected this argument and noted allegedly failing to comply with the notice requirements in eviction proceedings is not sufficient to divest a trial court's jurisdiction. Therefore, any alleged defect in the eviction notice did not deprive the trial court of jurisdiction because "the failure to comply with statutory notice requirements may serve as a defense but does not deprive the court of subject-matter jurisdiction." Prairie Mgmt. Corp. v. Bell, 289 Ill. App. 3d 746, 752 (1st Dist. 1997).

 

Next, appellant argued that the trial court's judgment was void because appellant raised a meritorious defense and due diligence with the filing of his section 2-1401 petition to vacate the eviction order. Under section 2-1401, the petitioner must set forth specific factual allegations supporting each of the following elements: (1) the existence of a meritorious defense; (2) due diligence in presenting this defense; and (3) due diligence in filing the section 2–1401 petition for relief. Warren Cnty. Soil & Water Conservation Dist. v. Walters, 2015 IL 117783, ¶ 51. (citing Smith v. Airoom, Inc., 114 Ill. 2d 209, 221, (1986)). The Appellate Court reviews the trial court's order under section 2-1401 under an abuse of discretion standard. An abuse of discretion occurs only when the trial court's ruling is "arbitrary, fanciful, unreasonable, or where no reasonable person would take the view adopted by the circuit court." Seymour v. Collins, 2015 IL 118432 ¶ 41.

 

Here, the Appellate Court held that appellant's purported lease agreement with an entity that did not own the property and failure to present adequate proof of rental payments was a failure of the appellant to present direct or circumstantial evidence to authenticate the purported lease or proof of rent payments. As a result, the Appellate Court held that the trial court did not abuse its discretion in denying the petition.

 

In examining the appellant's argument that the mortgagee's actions evicting the appellant violated the PFTA and KCRO, the Appellate Court noted that the PFTA only applies to bona fide tenants with bona fide leases. P.L. 111–22, § 702(a)(2)(A), 123 Stat. 1632, 1662 (2009). Here, the tenant's purported lease agreement with a third-party, nonowner of the property and failure to provide proof of rental payments resulted in the Appellate Court concurring with the trial court's decision that appellant did not have a bona fide lease.

 

In addition, the KCRO provides various rights to tenants of foreclosed homes and defines a qualified tenant as an individual who (1) is a tenant in a foreclosed rental property and (2) has a bona fide rental agreement to occupy the rental unit as the tenant's principal residence. See Chicago Municipal Code § 5–14–020.  Again, because the appellant was unable to prove he was a bona fide tenant or resided at the property under a bona fide lease, the Appellate Court agreed with the trial court that he was not covered by the KCRO and PFTA. As a result, the Appellate Court rejected the appellant's arguments that the mortgagee's actions violated the KCRO and PFTA.

 

Accordingly, the Appellate Court affirmed the trial court's decision denying appellant's petition.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: Cal App Ct (4th Dist) Reverses Dismissal, Holds Rosenthal Act Covers Debts "Alleged to Be Due and Owing"

The Court of Appeals of California (Fourth District) recently reversed a trial court's dismissal of a putative class action alleging solar energy system provider violated the Rosenthal Act, California's parallel version of the federal Fair Debt Collection Practices Act.

 

In so ruling, the Fourth District concluded that the operative complaint stated a cause of action under the Rosenthal Act because the plaintiff properly alleged injury due to a "consumer credit transaction" that was "alleged to be due or owing", and not simply debt that is in fact due or owing. 

 

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

 

Plaintiff purchased a home with a solar energy system. At the time of plaintiff's purchase, the prior homeowner was under contract with a company (defendant) that owned the solar energy system. The contract between defendant and prior homeowner required the prior homeowner to purchase energy produced by the system by submitting monthly payments to the company. The prior homeowner and plaintiff agreed to prepayment of all remaining monthly payments and a transfer of all solar agreement rights and obligations to plaintiff, except for the monthly payment responsibility.

 

In conjunction with the sale of the house, prepayment occurred and the parties entered into a transfer of the contract. After the sale of the property, defendant began sending plaintiff monthly bills.

 

Defendant demanded plaintiff make the monthly payments under the solar agreement. Plaintiff called defendant and explained the situation. However, plaintiff continued to receive additional bills and at least one late payment notice where defendant identified itself as a debt collector. Plaintiff contacted Defendant via phone and email but was unable to resolve the issue.

 

Ultimately, plaintiff filed a putative class action lawsuit against the defendant. Plaintiff alleged the defendant's conduct violated the California's Unfair Competition Law, Consumer Legal Remedies Act (CLRA) and the Rosenthal Act. The trial court dismissed Plaintiff's complaint for failure to state a claim. Plaintiff appealed.

 

On appeal, the Court of Appeals noted that the issue presented on appeal hinged on the statutory interpretation of certain provisions of the Rosenthal Act. Plaintiff argued the trial court erred in concluding the operative complaint did not state a cause of action under the statutory scheme because Plaintiff failed to allege a consumer credit transaction, as that term is defined by statute.

 

In addition, Plaintiff contended the trial court overlooked a key aspect of the statutory definitions which encompassed debt alleged to be due or owing, not simply debt that is in fact due or owing.

 

Defendant argued that the trial court's ruling was correct and plaintiff did not acquire anything on credit and, therefore, was not party to a consumer credit transaction to which the statutory scheme applies.

 

In California, the Rosenthal Act aims "to prohibit debt collectors from engaging in unfair or deceptive acts or practices in the collection of consumer debts and to require debtors to act fairly in entering into and honoring such debts." (§ 1788.1, subd. (b).) A "consumer debt" is defined to be "money, property, or their equivalent, due or owing or alleged to be due or owing from a natural person by reason of a consumer credit transaction." (§ 1788.2, subd. (f).)  Additionally, it requires, "debt collector[s] collecting or attempting to collect a consumer debt" to comply with the provisions of its federal counterpart, the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. § 1692 et seq.). (§ 1788.17; Davidson, supra, 21 Cal.App.5th at p. 295.)

 

The Rosenthal Act also 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." (§ 1788.2, subd. (c).) and a "consumer credit transaction" as "a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family, or household purposes." (§ 1788.2, subd. (e).

 

Under the Rosenthal Act, for a debt collection activity concerning money to be covered it must involve money due or owing, or alleged to be due or owing, by reason of a transaction in which property, services, or money is acquired on credit primarily for personal, family, or household purposes.

 

The Court of Appeals held that the allegations in plaintiff's complaint that defendant sent plaintiff bills and late payment notices about money which defendant claimed plaintiff owed satisfied the "alleged to be due or owing" component of the Rosenthal Act. It was undisputed that the plaintiff was not the individual who owed money to the defendant, but the Court of Appeals noted that this distinction did not mean that plaintiff could not state a claim against the defendant under the Rosenthal Act.

 

Next, the Court of Appeals noted how services under the solar agreement were services covered under the Rosenthal Act because the services were acquired on credit primarily for personal, family, or household purposes and therefore constituted a consumer credit action. See Davidson v. Seterus, Inc. (2018) 21 Cal.App.5th 283, 294. The Court further noted that it was irrelevant that all money due under the solar agreement was already paid and irrelevant that plaintiff was not a party to the solar agreement. The Court of Appeals clarified that their focus on appeal was what defendant's debt collection practices said about the supposed debt, and how defendant alleged the debt was due owing under the solar agreement.

 

Accordingly, the Fourth District held that the plaintiff stated a cause of action under the Rosenthal Act, ordered the trial court's judgment reversed with instructions for the trial court to vacate the judgment with instructions to enter a new order overruling the demurrer as to the plaintiff's Rosenthal Act cause of action.

 

 

 

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

 

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and

 

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