Wednesday, October 27, 2021

FYI: Ill App Ct (1st Dist) Rejects Borrowers' Allegations of "Wrongful Foreclosure", UDAP Violations, Other Claims

The Appellate Court of Illinois, First District, recently affirmed a trial court's dismissal with prejudice of a complaint from two borrowers alleging claims for among other things "wrongful foreclosure," wrongful eviction, fraud, consumer fraud, false imprisonment, and a due process violation under 42 U.S.C. § 1983.

 

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

 

In October 2015, a mortgagee obtained summary judgment in a foreclosure lawsuit it had filed against the borrowers. The borrowers' property was sold at a judicial sale, and an order confirming the sale was entered in November 2016. A lawsuit for forcible entry and detainer followed to evict the borrowers from the property, which no longer belonged to them.

 

However, while the mortgagee's motion for summary judgment was awaiting ruling, the borrowers attempted to remove the case to federal court.

 

The federal judge immediately flagged the notice of removal as untimely and rejected it — that is, the federal court dismissed and terminated the litigation in federal court. But the federal court never formally remanded the matter back to state court.

 

The mortgagee's position before the state foreclosure court was that jurisdiction had now re-attached in state court, and the state court judge agreed. The state court thus proceeded to enter summary judgment for the mortgagee, ultimately paving the way for the judicial sale and the later eviction proceeding.

 

The borrowers appealed the state court's entry of summary judgment, claiming that the federal court's lack of a formal remand meant that the state court never re-acquired jurisdiction, and the state court's resultant orders of summary judgment and confirmation of judicial sale were thus void. The First District agreed with the borrowers and held that the orders of summary judgment and confirmation of judicial sale were void.

 

By the time the Appellate Court's ruling was handed down in May 2018, the order of possession in the eviction proceeding had already been entered. The next business day after the decision was filed, the sheriff began to evict the borrowers from their property. The sheriff then aborted just over an hour into the eviction based on the Appellate Court's ruling.

 

The borrowers then brought suit, naming essentially every person or entity involved in the underlying foreclosure and eviction cases as a defendant, including the mortgagee that filed the foreclosure case against the borrowers; the separate entity which may or may not have briefly taken possession of the borrowers' home following the foreclosure sale; the law firm the foreclosing mortgagee hired to prosecute its foreclosure case against the borrowers; the company that conducted the judicial sale of the borrowers' home; the state court judge who presided over the foreclosure case; the state court judge who oversaw the eviction case; the county sheriff; and 20 John Doe defendants.

 

Against each of those defendants, the borrowers asserted claims for, among other things, "wrongful foreclosure," wrongful eviction, fraud, consumer fraud, false imprisonment, and a due process violation under 42 U.S.C. § 1983.

 

The trial court dismissed the complaint with prejudice on various grounds as to each defendant. This appeal followed.

 

The First District began its review by noting that the borrowers stated in their opening brief that, though they sued "multiple parties," "only [the foreclosing mortgagee] and [the judge who presided over the eviction case] are relevant to this appeal."

 

Therefore, the Appellate Court held that, by affirmatively disavowing any attempt to overturn the dismissal of any other defendants, the borrowers have abandoned any such claims. See AMCO Insurance Co. v. Erie Insurance Exchange, 2016 IL App (1st) 142660, ¶ 18 n.1; Berggren v. Hill, 401 Ill. App. 3d 475, 479 (2010).  Accordingly, the First District summarily affirmed the judgments of dismissal as to all defendants to the appeal aside from the foreclosing mortgagee and eviction judge.

 

The First District then went on to consider whether the trial court correctly dismissed the claims against the judge for the eviction case. The borrowers' claim, in essence, was that the judge should have known that the foreclosure court lacked jurisdiction over that case; he thus should have recognized a fatal defect in the eviction case stemming from that foreclosure; and he should have alerted the sheriff to that defect.

 

The trial court dismissed the claims against the judge based on absolute judicial immunity. Absolute judicial immunity protects a judge from suit for his "judicial acts," even if the judge is alleged to have acted "in excess" of his "jurisdiction" and even if the judge is alleged to have acted " 'maliciously or corruptly.' " Moncelle v. McDade, 2017 IL App (3d) 160579, ¶ 18.

 

There are two recognized exceptions to judicial immunity. The first is that "a judge is not immune from liability for nonjudicial actions, i.e., actions not taken in the judge's judicial capacity." Id. at ¶ 19.

 

The borrowers claimed that this exception applied. They argued that once the Appellate Court in the prior appeal held that the foreclosure court lost jurisdiction based on the removal to federal court, the eviction judge should have immediately notified the sheriff not to proceed with the eviction.

 

The First District rejected this argument. The Appellate Court reasoned that it was easy enough for the borrowers to say that the act of calling or emailing the sheriff is more of an "administrative" task. However, the Appellate Court held that the only way that any such "communication" would have any legal consequence whatsoever would be if the judge issued the sheriff an order staying or vacating the previous order of possession. And nobody could possibly claim that the issuance of a judicial order falls outside the judicial sphere; it is part and parcel of everyday judicial duties. Thus, the Appellate Court concluded that the first exception to judicial immunity does not apply.

 

Under the second exception to judicial immunity, " 'a judge is not immune for actions, though judicial in nature, taken in the complete absence of all jurisdiction.' " Moncelle, 2017 IL App (3d) 160579, ¶ 19. The borrowers also claimed that this exception applied because the eviction judge supposedly never truly had jurisdiction over the eviction case.

 

The First District rejected this argument for two reasons. First, the Appellate Court did not accept the premise that the judge lacked jurisdiction over the forcible entry and detainer action at any time. The Appellate Court conceded that the foreclosure court lost jurisdiction when that action was removed to federal court and that it was a problem that the forcible entry and detainer case was based on a void foreclosure order. However, the Appellate Court concluded that this was not a jurisdictional problem.

 

Furthermore, the First District held, briefly losing jurisdiction over a case, due to a removal to federal court, is not what is meant by a court acting "in the complete absence of jurisdiction." Mireles v. Waco, 502 U.S. 9, 12 (1991). That is, in this context, "the term 'jurisdiction' refers not to a judge's authority or power to act, but to the subject-matter jurisdiction of the court upon which the judge sits." Moncelle, 2017 IL App (3d) 160579, ¶ 19; see Fisher, 80 U.S. (13 Wall.) at 352.

 

The First District thus rejected the application of either exception to judicial immunity, and held that the trial court properly dismissed the claims against the eviction judge under judicial immunity.

 

The Appellate Court next considered the borrowers' argument that the trial court erred by dismissing their claims against the foreclosing mortgagee for failure to state a claim.

 

Count 1 of the complaint purported to state a claim for "wrongful foreclosure" and was predicated on the allegation that the parties proceeded with the foreclosure case despite knowing that the foreclosure court had lost — and never regained — jurisdiction due to the borrowers' notice of removal.

 

The borrowers conceded that Illinois law does not recognize a cause of action for "wrongful foreclosure." See, e.g., Acevedo v. CitiMortgage, Inc., No. 11-C-4877, 2013 WL 1283807, at *6 (N.D. Ill. Mar. 26, 2013). The borrowers, however, stated that the First District should focus on the substance, not the title, of their claims and consider their "wrongful foreclosure" claim as one for abuse of process or slander of title. See General Casualty Co. of Wisconsin v. Burke Engineering Corp., 2020 IL App (1st) 191648, ¶ 39.

 

Abuse of process is the misuse of legal process to accomplish some purpose outside the scope of the legal process itself." Selby v. O'Dea, 2020 IL App (1st) 181951, ¶ 60. To state a claim for abuse of process, the plaintiff must plead "(1) an improper motive and (2) some act in the use of legal process that is improper in the regular prosecution of proceedings." Id.

 

To establish that the defendant had an improper motive, "the plaintiff must plead facts showing that the defendant instituted proceedings against the plaintiff for a purpose 'such as extortion, intimidation, or embarrassment.' " Id. (quoting Kumar v. Bornstein, 354 Ill. App. 3d 159, 165 (2004)). And "[t]he second element requires proof that 'the process was used to accomplish some result that is beyond the purview of the process.' " Id. (quoting Kumar, 354 Ill. App. 3d at 165).

 

The First District found that the complaint alleged neither of those elements because there was no allegation that the foreclosing mortgagee filed the foreclosure action for the purpose of intimidation or harassment, as opposed to exercising its contractual right to foreclose on the property for nonpayment. Additionally, the result sought—foreclosure—was not beyond the purview of the process.

 

For much the same reason, the Appellate Court determined that Count 1 could not be read as a cognizable claim for slander of title. A cause of action for slander of title requires proof that (1) the defendant made a false and malicious publication, (2) the publication disparaged the plaintiff's title to property, and (3) the publication caused damages to the plaintiff. Chicago Title & Trust Co. v. Levine, 333 Ill. App. 3d 420, 424 (2002). While the complaint freely used the operative words, the Appellate Court held that it provided no coherent factual allegation that anything the bank did was, in fact, false or malicious.

 

The First District thus concluded that the "wrongful foreclosure" claim was properly dismissed, even if re-styled as a claim for abuse of process or slander of title.

 

The borrowers also appealed the dismissal of Count 3 and claimed that the mortgagee was liable for "wrongful eviction." However, the First District held that the borrowers had never adequately explained this cause of action either.

 

An action for an improper eviction may be brought under the Forcible Entry and Detainer Act ("FEDA") See 735 ILCS 5/9-101 et seq. But FEDA only provides a remedy for re-possession and not one for tort damages. Campana Redevelopment, LLC v. Ashland Group, LLC, 2013 IL App (2d) 120988, ¶¶ 12-13; Yale Tavern, Inc. v. Cosmopolitan National Bank, 259 Ill. App. 3d 965, 971 (1994). The First District observed that Count 3 did not seek restoration of possession of the borrowers' home, thereby preventing it from becoming a FEDA claim.

 

The Appellate Court also reasoned that if the borrowers were attempting to state a claim for some common-law tort, they were obligated, at a bare minimum — even as pro se plaintiffs —to explain what those elements were, and detail how Count 3 alleged them. The Appellate Court held that the borrowers had done neither.

 

The borrowers also appealed the dismissal of their claim under the Illinois Consumer Fraud and Deceptive Business Practices Act ("Illinois Consumer Fraud Act"), with the claim predicated on the allegation that the foreclosing mortgagee made misleading statements about the foreclosure court's jurisdiction following the borrowers' attempt to remove the matter to federal court.

 

The First District identified two fatal problems with this claim.  The first flaw was that the mortgagee's argument to the foreclosure court - that the federal judge's "dismissal" and "termination" of the case in federal court was enough to re-vest the state court with jurisdiction - was a legal position taken in court with respect to a federal statute, not any kind of actionable misrepresentation of fact. See, e.g., Stern v. Norwest Mortgage, Inc., 284 Ill. App. 3d 506, 513 (1996), aff'd, 179 Ill. 2d 160 (1997).

 

The second fatal defect was that the borrowers did not and could not allege that the misrepresentation proximately caused their injuries. Connick v. Suzuki Motor Co., 174 Ill. 2d 482, 501 (1996). It was ultimately the foreclosure court's, and only the foreclosure court's, decision to determine its own jurisdiction or lack thereof.

 

The First District thus upheld the dismissal of the claim under the Illinois Consumer Fraud Act.

 

Finally, the Appellate Court also held that the borrowers failed to state a claim for false imprisonment because the eviction was carried out by the sheriff pursuant to a lawful court order, the bank's role in the process, at most, was several steps removed from that action, and being kicked out of one's home, but not otherwise restrained or detained, is not false imprisonment.

 

Accordingly, the First District affirmed the ruling of the trial court in its entirety.

 

 

 

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, October 23, 2021

FYI: Maryland High Court Rules Debtors' Attempts to Void Judgments for Unlicensed Debt Collection Subject to 3-Year SOL

The Maryland Court of Appeals, the state's highest court, recently held that judgments obtained by an unlicensed debt buyer were not void, and that the debtors' claims for unjust enrichment and money damages under the Maryland Consumer Protection Act (MCPA) and the Maryland Consumer Debt Collection Act (MCDCA) were subject to Maryland's general three-year statute of limitations.

 

The Court also held that:

 

(a)  Maryland's class action tolling doctrine applied only to subsequent individual claims, but not to successive putative class actions; and

(b)  Putative class members should be permitted to file their individual claims without regard to whether the prior putative class action was pending in Maryland state court, federal court, or another jurisdiction.

 

Thus, the Court held, one of the debtors' claims were timely brought due to cross-jurisdictional tolling of the statute of limitations. 

 

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

 

The case arose out of two separate putative class action cases ("Action 1" and "Action 2") brought against a consumer debt buyer ("debt buyer") by consumer debtors. In both cases, the debtors alleged that debt buyer obtained judgements against them during a time period when the debt buyer did not have a license under the Maryland Collection Agency Licensing Act.

 

The cases both sought declarations that the judgments obtained by debt buyer were void, injunctive relief to prevent the debt buyer from collecting on judgments in the future and money damages arising from claims for unjust enrichment and violations of the Maryland Consumer Debt Collection Act.

 

In Action 1, the trial court granted summary judgment to each party in part, and granted a separate declaratory judgment declaring the rights of the parties. In the second action, the trial court granted the debt buyer's motion to dismiss against the debtor. Both debtors appealed.

 

Aside from a procedural issue unique to Action 1, the Court of Special Appeals resolved both claims in the same manner. The Court of Special Appeals held that the debtors declaratory judgment counts were resolved by the Court's recent decision in LVNV Funding LLC v. Finch, 463 Md. 586 (2019) ("Finch III"), and thus, the judgments obtained when debt buyer was not licensed were not void.

The Court of Special Appeals further held that because the judgments had been satisfied, the debtors were not entitled to injunctive relief as the debt buyer was no longer collecting on them.

 

Finally, the Court of Special Appeals held that debtors' claims for unjust enrichment and money damages for statutory claims were barred by the general three-year statute of limitations codified at Maryland Code, Courts and Judicial Proceedings Article § 5-101.

 

The debtors both filed petitions for writ of certiorari which the Court of Appeals granted.

 

As to the question of whether the judgment was void, the Maryland Court of Appeals agreed with the intermediate appellate court that the recent ruling in Finch III, which held that a judgment in favor of an unlicensed agency was not void, resolved the issue. As the debtors did not seek review of the decision regarding injunctive relief, the Court focused its attention on determining whether or not the debtors' claims were time barred.

 

In determining when accrual of a statute of limitations occurs, Maryland applies the discovery rule -- i.e., a claim accrues with the plaintiff knew or should have known of the wrong."  Poffenberger v. Risser, 290 Md. 631, 636 (1981). The Court upheld the lower court's determination that the accrual of the action began when the debtors made their first payments on their judgments. As such, absent a showing that (1) a different statute applied, (2) the time wasn't extended under a continuing harm theory or (3) the time was tolled, the actions were barred.

 

The Court agreed with the intermediate appellate court that the applicable statute of limitations was the general three-year statute of limitations and not the 12-year statute of limitations applicable to specialties claims as the debtors argued.

 

The Court of Appeals found the debtors' argument that they were subject to CJ § 5-102(a)(3) which provides for a 12-year statute of limitations for "actions on a judgment," unpersuasive. After ascertaining the purpose and intent of the General Assembly in enacting the statute, a review of case law and the other specialties actions listed in the statute, the Court determined that "actions on a judgment" referred to actions enforcing a judgment not any action that involves the entry of a judgment as debtors argued.

 

The debtors also argued that the continuing harm doctrine applied, because they made payments to debt buyer over a period of time. The Court again rejected the debtors argument, as the wrongful conduct at issue was the unlicensed status of the debt buyer when it filed the collection actions and obtained judgments against debtors, and the collection activities that the debtors sought to extend their accrual date for limitations purposes occurred after debt buyer became licensed.

 

The debtor in the Action 1 also argued that the statute of limitations should have been tolled because he was a putative member of a class action prior to the filing of Action 1.  However, the Court declined to expand the American Pipe class action tolling doctrine to extend to include successive class actions rather than just individual claims. The Court found tolling of successive class action suits to be inconsistent with the notions of judicial economy and efficiency that form the basis of the Maryland Rule 2-231 class certification process.

 

However, the Court did extend the doctrine to include cross-jurisdictional tolling, reasoning that once the trial court has decided that a putative class action cannot proceed as a class (including by dismissal, denial of class certification, or forum non conveniens), the putative class members should be permitted to file their individual claims without regard to whether the class action was pending in Maryland state court, federal court, or another jurisdiction.

 

After making these determinations, the Court found that the debtor in the Action 1's individual claims were timely filed as the statute of limitations was tolled via cross-jurisdictional tolling and that the debtor from the Action 2's claims were time barred as no applicable tolling applied to her claims.

 

Finally, the debtor from Action 1 argued that the intermediate appellate court did not have jurisdiction to review the trial court's ruling because the trial court's ruling and declaratory judgment did not constitute a final judgment. However, the Court of Appeals found that the trial court had rendered a final judgment in disposing of debt buyer's motion to dismiss and granting debtors motion for summary judgment.

 

Thus, the Maryland Court of Appeals affirmed the decision of the Court of Special Appeals, except as to time barring of the debtors claims in the first action, as the Court found the statute of limitations was cross-jurisdictionally tolled as to those claims.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Friday, October 15, 2021

FYI: Cal App Ct (2d Dist) Holds Court Should Decide Whether Parties Agreed to Arbitrate

The California Court of Appeal, Second Appellate District (Second District), recently granted a lender's petition for a writ of mandate compelling the trial court to vacate its order granting the borrower's petition to compel arbitration.

 

In so ruling, the Second District agreed with the lender that the trial court erred in relying on the Supreme Court of the United States' recent ruling in Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) ___ U.S. ___ [139 S.Ct. 524, 529].

 

The Second District explained that the SCOTUS in Schein considered who should decide whether the parties' dispute arising from a specific contract with an arbitration clause was arbitrable. In this case, however, the question on the borrower's petition to compel arbitration was whether the parties agreed to arbitrate their dispute over the loan documents, which did not have arbitration clauses, a question the court must decide in the first instance.

 

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

 

After the borrower defaulted on a loan to purchase a commercial aircraft, the lender filed suit alleging that the borrower breached the terms of the loan documents in various respects. The lender also alleged it had a right to sell the aircraft in the possession of a charter company as collateral for the loan and to recover money owed by the charter company to the borrower based on a subordination agreement. Furthermore, the lender asserted claims for breach of the aircraft usage agreement and conversion, but later dismissed these aircraft usage agreement claims, leaving only claims based on breach of the loan documents.

 

The trial court granted the borrower and the charter company's petition to compel arbitration, finding that the American Arbitration Association ("AAA") rules provided for delegation of the determination of whether the parties' dispute arose out of an arbitration clause and thus the arbitrator should decide whether the lender's claims were arbitrable.

 

The lender then sought a writ of mandate compelling the trial court to vacate its order granting the petition to compel arbitration. The lender asserted that the trial court erred in relying on the US Supreme Court's decision in Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) ___ U.S. ___ [139 S. Ct. 524, 529].

 

Section 1281.2 of the California Code of Civil Procedure requires the trial court to order arbitration of a controversy "[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate such controversy . . . if it determines that an agreement to arbitrate the controversy exists." Whether there is a written agreement to arbitrate "is a matter of contract, and courts must enforce arbitration contracts according to their terms." (Schein, supra, 139 S. Ct. at p. 529; accord, Rent-A- Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 67.

 

Furthermore, the SCOTUS held in Schein that the arbitrator should resolve the threshold question of whether an arbitration agreement applies to a particular dispute where the arbitration agreement delegates to the arbitrator the question of arbitrability, regardless of whether the argument for arbitration is "'wholly groundless.'" 139 S. Ct. at p. 528.

 

However, the Second District distinguished the facts here from those in Schein. It reasoned that, unlike in Schein, where the SCOTUS considered who should decide whether the parties' dispute fell within the scope of a specific contract, here the trial court was tasked with deciding in the first instance whether there was an agreement to arbitrate at all.

 

The Second District agreed with the holdings found in Moritz v. Universal City Studios LLC (2020), 54 Cal.App.5th 238 and Bautista v. Fantasy Activewear, Inc. (2020) 52 Cal.App.5th 650 that where a party seeks to arbitrate a dispute that arises from a contract without an arbitration clause, the court is not required under Schein to defer to the arbitrator on the threshold determination of arbitrability. See Bautista, supra, 52 Cal.App.5th at p. 656; Moritz, supra, 54 Cal.App.5th at p. 248.

 

Here, the Second District determined that the only agreement that contained an arbitration clause was the aircraft usage agreement entered into almost two months after the execution of the loan documents. However, after the lender voluntarily dismissed two of its causes of action, the only remaining causes of action at the time of the petition to compel arbitration related to the seven loan documents, none of which contained an arbitration clause.

 

Furthermore, the Second District found that the promissory note, loan agreement, security agreement, and assignment agreement also provided for a jury waiver, and the loan agreement provided that any disputes would be heard by a referee. Given the parties' clear expression of which courts (or referee) would hear any lawsuit arising from the loan documents, the Court concluded that the parties' failure to specify in the loan documents that the disputes would be decided by an arbitrator showed the parties' contrary intent.

 

The borrower argued that because the seven loan documents and the aircraft usage agreement were "interrelated," this supported arbitration. However, the Second District rejected this argument because, even if the loan documents had some relationship to the aircraft usage agreement, the question for the trial court was whether the parties' dispute related to the aircraft usage agreement.

The Court held that the dispute at issue did not relate to the aircraft usage agreement because nothing in the record showed that the breach of the loan documents was in any way related to the aircraft usage agreement, which simply provided the terms for the lender to obtain a discounted price for flight time on the borrower's aircraft.

 

Thus, the Second District concluded that the borrower did not meet its burden to show the parties had "clearly and unmistakably" agreed to arbitrate their dispute over the loan documents based on the arbitration clause in the aircraft usage agreement. See AT&T Technologies, Inc. v. Communications Workers of America, supra, 475 U.S. at p. 649.  Absent an agreement to arbitrate, the Court held that the trial court erred in granting the borrower's petition to compel arbitration on the issue of arbitrability.

 

Accordingly, the Appellate Court granted the lender's petition for writ of mandate and ordered that a peremptory writ of mandate should issue directing the trial court to vacate its order granting the borrower's petition to compel arbitration and motion to stay the action and to enter a new order denying the petition and motion.

 

 

 

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.


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Tuesday, October 12, 2021

FYI: 3rd Cir Clarifies Procedure for "Hybrid Wage-and-Hour" Aggregate Litigation

In a "hybrid wage-and-hour" action brought by mortgage loan officers (MLOs), the U.S. Court of Appeals for the Third Circuit recently:

 

1.  Reiterated its prior holding that "an FLSA opt-in collective action is not, by its nature, incompatible with a parallel state law Rule 23 opt-out class action", and

 

2.  Held that the trial court should not have required a trial in the FLSA opt-in collective action before deciding Rule 23 class certification on the parallel state-law claims.

 

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

 

This lawsuit involved claims by current and former MLOs against their mortgage lender employer, simultaneously alleging violations of the federal Fair Labor Standard Act (FLSA) as an opt-in collective action, and violations of parallel state laws as a Fed. R. Civ. Pro. 23(b)(3) opt-out class action.

 

Previously in the litigation, the trial court conditionally certified the FLSA collective action, and 351 of over 1,000 MLOs opted in and consented.  The trial court then scheduled the trial. The plaintiffs then filed an amended complaint asserting various state labor and employment law claims, and a motion for class certification as to the state-law claims under Rule 23.

 

The employer responded by opposing Rule 23 class certification and seeking decertification of the FLSA collective action. A special master was appointed who recommended certifying the Rule 23 class, denying the motion for decertification of the FLSA collective action, and granting final FLSA certification. The trial court adopted these recommendations.

 

The employer then filed a Rule 23(f) petition seeking permission to appeal the class certification. The petition was granted by the Third Circuit.

 

In the Rule 23(f) appeal, the Third Circuit noted numerous flaws in the trial court's consideration of the Rule 23 class certification issues. As a result, the Third Circuit reversed the trial court's class certification ruling, and remanded with instruction that the trial court must "conduct a 'rigorous' examination of the factual and legal allegations underpinning [the] claims before deciding…class certification."

 

The Third Circuit, however, declined to consider the FLSA collective action certification, reasoning that "Rule 23 class certification and FLSA certification are different creatures."

 

On remand from the Rule 23(f) appeal, and notwithstanding the Third Circuit's instruction, the trial court chose not to return to the question of class certification and instead to proceed with the scheduled trial. The employer again objected, moving to stay the trial until after the reconsideration of the Rule 23 class certification had been made as required by the Third Circuit.

 

The trial court declined to stay the trial, and the employer filed a writ of mandamus before the Third Circuit.

 

The employer requested the Appellate Court to direct the trial court not to proceed with the trial until after ruling on Rule 23 class certification and if certification was granted, to delay the trial until after the class members were given an opportunity to opt out. The employer also requested the case be reassigned to a new judge. Finally, the employer sought a stay while awaiting the Appellate Court's ruling.

 

The Third Circuit noted that "the present mandamus petition brings into sharp relief some of the potential challenges of trying a case that simultaneously includes both forms of aggregate litigation."

 

Upon review, the Third Circuit used the standard framework for a request to stay lower court proceedings pending appeal. 

 

This framework considers the following factors: (1) the likelihood of obtaining mandamus relief; (2) whether irreparable injury would be suffered by the employer absent a stay; (3) whether the plaintiffs would be substantially injured by a stay; and (4) the public interest.

 

The Third Circuit granted the stay after finding the first three factors weighed in favor of relief. The fourth factor was not taken into consideration. The Court addressed each of the first three factors in turn.

 

"To prevail on the merits of a mandamus petition, the petitioner must show that the district court clearly and indisputably erred, and that no other adequate alternative remedy exists." See In re Howmedica Osteonics Corp., 867 F.3d 390, 401 (3d Cir. 2017).

 

The bar for prevailing is lower when considering a stay pending resolution of a petition for writ of mandamus. In such instance, the applicant only has to show "a reasonable chance, or probability, of winning" relief to prevail. In re Revel AC, Inc., 802 F.3d 558, 568 (3d Cir. 2015). Thus, the Appellate Court may grant a stay as long as the ultimate likelihood of winning the mandamus is "significantly better than negligible." Id. at 357.

 

The Third Circuit found that the employer had "cleared that hurtle" based on the fact that the trial court refused to engage with the employer's objection to proceeding with the trial prior to resolving whether to certify the Rule 23 class action despite having been instructed to conduct a rigorous analysis of certification on remand and despite that the trial would resolve a fact issue central to all claims.

 

The Third Circuit reasoned that even if there were not an FLSA claim at hand, a pre-certification approach to trial would be viewed with the utmost skepticism as it goes against the history and text of Rule 23 and Supreme Court and Circuit Court precedent.

 

In effect, the Third Circuit held, conducting a trial as to the main factual question in the FLSA action would trigger the same concerns as a trial-before-certification approach. As such, the Appellate Court determined that the employer had a strong probability of prevailing on the merits of the mandamus petition.

 

The Third Circuit stressed that Rule 23 was in fact amended to include a provision requiring certification "[a]s soon as practicable after the commencement of [the] action," Fed. R. Civ. P. 23 (c)(1) (amended 2003), to avoid the very outcome that would result if the trial court were to move forward with the trial in the FLSA matter prior to certifying the Rule 23 class, i.e., allowing class members to "await developments or even final judgment to determine whether participation would be favorable to their interests." See Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538, 547 (1974).

 

The Appellate Court likened the trial court's attempt to move forward with the FLSA trial, to "foisting trial-before-certification on an unwilling Rule 23(b)(3) defendant," which the Third Circuit recognized was against the precedent of the Supreme Court of the United States, seven of the federal Circuit Courts of Appeals, and the Third Circuit itself.

 

The Third Circuit stressed that if the FLSA trial reached a conclusion in favor of the plaintiffs, it would effectively have identified and determined the merits of the class members' common factual question.

 

The Appellate Court further stated that allowing FLSA trials in hybrid wage-and-hour lawsuits prior to Rule 23 class certification to become the norm would mean employees would not likely ever opt in to an FLSA action. This would result in a win-win for the employees and would unfairly disadvantage the employer.

 

The Third Circuit further reasoned that given that the employer had a reasonable probability for success, mandamus was their only avenue to address the error of the trial court. An appeal was unavailable because there was no final ruling under 28 U.S.C. 1291 and the collateral order doctrine did not permit an immediate appeal.

 

For the reasons discussed above, the Third Circuit concluded the employer would be irreparably damaged by the airing of evidence relating to their liability prior to the certification of the Rule 23 class.

 

The Appellate Court further reasoned that the MLOs would not be injured because their damages would be held constant during the stay period should they ultimately recover and if their claim were unsuccessful the delay would make no difference.

 

Finally, the Third Circuit found that a stay did not weigh against the public interest, as the public now benefited from the discussion of the potential difficulties of prosecuting an FLSA opt-in collective action and Rule 23(b)(3) opt-out class action at the same time.

 

After explaining its decision in granting the stay, the Third Circuit determined the stay was no longer necessary.

 

The Third Circuit dismissed the request for reassignment of the trial judge as moot, as the trial judge filed a supplemental response joining the petition for the case to be reassigned.   The Third Circuit expressed confidence that the new trial judge who would be reassigned the case would follow the Third Circuit's prior direction to "conduct a 'rigorous' examination of the factual and legal allegations underpinning [the] claims before deciding…class certification."

 

As such, the stay was dissolved and the mandamus petition was dismissed in part as moot and denied in part as unnecessary.

 

 

 

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, October 9, 2021

FYI: Ill App Ct (1st Dist) Holds "Substitute Service" Effective on Adult With Cognitive Impairment

The Illinois Appellate Court, First District, recently held that substitute service can be effected under the Illinois Code of Civil Procedure when the summons is left with an adult with a cognitive impairment.

 

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

 

The plaintiff mortgagee filed a foreclosure action against the defendants. The plaintiff served the mortgagor defendants by substitute service – a copy of the summons was delivered to the defendants' home and left with their adult son.

 

The defendants' son has diagnosed autism, and the defendants claimed their son never told them about the summons and complaint, and that they had no knowledge of the foreclosure action before a default judgment was entered against them.

 

After the default was entered, a judicial foreclosure sale was scheduled. The property was sold at auction, and the plaintiff moved for confirmation of the judicial sale. At that time, defendants moved to quash service. The trial court struck the motion to quash service and confirmed the judicial sale. The defendants filed an amended motion to quash service, which the trial court also denied.  This appeal followed.

 

On appeal, the defendants argued that service of process was ineffective because it was effectuated by delivering the summons and complaint to an adult with a cognitive impairment, making it insufficient to satisfy due process.

 

As you may recall, the Illinois Code of Civil Procedure allows substitute service, through which process can be served by leaving a copy of the summons at a defendant's abode, with some family member or resident over the age of 13. 735 ILCS 5/2-203(a)(2). The process server must inform that person of the contents of the summons, and must also mail a copy of the summons to the defendant at his abode. Id.

 

The Appellate Court examined the language of the statute, and found that there was no requirement that the recipient of the substitute service be mentally competent.  The Court held that it lacked authority to add such a requirement.

 

The defendants argued that, because the statute includes a minimum age requirement, and a requirement that the process server explain the contents of the summons, it contemplates the mental capacity of the person receiving the summons.

 

The Court examined other jurisdictions and found that some other states explicitly require a level of competency on the part of the recipient of substitute service. See Wis. Stat. Ann. § 801.11(1)(b)(1) (West 2021); Cal. Civ. Proc. Code § 415.20(b)(West 2018), and that the federal rule requires that the recipient be of "suitable age and discretion." Fed. R. Civ. P. 4(e)(2)(B).

 

Although the Appellate Court noted that the defendants' arguments were reasonable, they could not prevail against the clear language of the statute. The Court also noted the plaintiff's argument that requiring a process server to assess mental capacity would add a new dimension to service beyond verifiable facts.

 

In Illinois, a process server's affidavit is prima facie evidence of proper service. Illinois Service Federal Savings & Loan Ass'n of Chicago v. Manley, 2015 IL App (1st) 143089 ¶ 37.

 

The defendants never contended that the process server failed to follow the statutory requirements. Instead, they argued only that their son could not understand the importance of the summons.

 

As a result, the Appellate Court held it did not have the authority to impose a requirement not found in the statute, and affirmed the trial court's ruling in favor of the mortgagee.

 

 

 

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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Thursday, October 7, 2021

FYI: 1st Cir Holds Defect in Massachusetts Certificate of Acknowledgement Made Mortgage Voidable

The U.S. Court of Appeals for the First Circuit recently affirmed a bankruptcy court's grant of a debtor's motion for summary judgment allowing the debtor to void a mortgage under the "strong arm" provision of the Bankruptcy Code.

 

In so ruling, the First Circuit held that the omission of a debtor's name from a certificate of acknowledgement is a material defect under Massachusetts law, and that this omission fails to charge a bona fide purchaser with constructive knowledge of the instrument. As such, the Court held that the mortgage could be avoided in bankruptcy by the debtor.

 

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

 

The appeal was brought a mortgagee after a Massachusetts bankruptcy debtor commenced an adversary action in a Chapter 11 proceeding in Bankruptcy Court.

 

The mortgagee initiated pre-foreclosure proceedings against the debtor and the filed for Chapter 11 bankruptcy. In the debtor's petition, the mortgage was identified as unliquidated and disputed. Because the debtor's name was missing from the certificate of acknowledgement, she then commenced an adversary proceeding against the mortgagee, seeking to avoid the mortgage.

 

As you may recall, "[u]nder the Bankruptcy Code, a mortgage may be avoided if a hypothetical bona fide purchaser of the mortgaged properly would not be charged with constructive notice of the mortgage." In re Daylight Dairy Products, Inc., 125 B.R. 1, 3 (Bank. D. Mass. 1991) (citing 11 U.S.C. § 544(a)). Avoidance of the mortgage leaves the debt unsecured and the creditor "to stand at the end of the line with other unsecured creditors in sharing unencumbered assets of the debtor."

 

The mortgagee argued that "[t[he recording of a mortgage with such a defect was effective to provide constructive notice of the mortgage; and, in any event, registration of the mortgage provided sufficient notice to subsequent bona fide purchasers."  The bankruptcy court disagreed, and granted summary judgment in favor of the debtor.  The district court concurred, and this appeal followed. 

 

On appeal, the First Circuit noted that Massachusetts law allows for two methods for giving constructive notice of a mortgage on real property:  properly record the mortgage in the registry of deeds (Mass. Gen. Laws ch. 183, § 4), or register the mortgage with the Land Court (Mass. Gen. Laws ch. 185, § 58.5).

 

Under Massachusetts law, "a properly recorded mortgage provides notice of a security interest, but a recording is not effective - - indeed is literally barred under Massachusetts law -- unless there is a certificate of acknowledgment or proof of its due execution attached."  Mass. Gen. Laws ch. 183, § 29.6."

 

In addition, Massachusetts law requires the grantor to "acknowledge that [he or she] has executed the instrument as [his or her] free act and deed," and the statute requires that "a certificate reciting that the grantor appeared before the officer making the certificate and made such acknowledgment . . . be attached to the instrument in order to entitle it to be recorded." Bank of Am., N.A. v. Casey, 52 N.E.3d 1030, 1035 (Mass. 2016) (quoting McOuatt, 69 N.E.2d at 809); see also Mass. Gen. Laws ch. 183, § 30 (specifying the requirements for a certificate of acknowledgment).

 

In the instant recording, there was no such certificate because the name was left blank. 

 

The First Circuit held that, based on the plain language of Massachusetts law, omitting the debtor's name would render the recording of the mortgage ineffective because there is not a proper certification of acknowledgment.

 

The First Circuit conceded there was no definitive law deeming this type of defect as material, but nevertheless held that the weight of the precedent leaned in favor of strictly construing the statutory requirements relating to certificates of acknowledgment. In fact, the Appellate Court noted, bankruptcy courts have deemed certificates of acknowledgement lacking the debtor's name to be materially defective under Massachusetts law.

 

The First Circuit reasoned that there was no reason to "resist the momentum of the precedent" especially because this type of defect is easily avoided. The Court saw no reason to "eliminate an express requirement that the Massachusetts legislature ha[d] specified as a condition for proper recording," and thus held that the recording of the mortgage was not effective to give constructive notice to third parties.

 

As to the mortgagee's second argument, that effective notice was given by registering the mortgage with the Land Court, the First Circuit found that this argument had no "toehold" in Massachusetts' statutes.

 

The mortgagee relied on Mass. Gen. Laws ch. 185, § 58, "in which the Massachusetts legislature provides that registration of a lien in the proper district 'be notice to all persons,' but that notice applies only to liens which, 'if recorded, filed or entered in the registry of deeds, affect the land to which it relates.'"

 

The First Circuit agreed with the bankruptcy's interpretation of Massachusetts law, stating that it "incorporates the filing standards for recorded land," including the acknowledgment requirement, "into the land registration system as the condition for the act of registration to be notice to third parties." In re Mbazira, 518 B.R. at 21.

 

Although the mortgagee argued that this reading of section 58 "is unsupported and would usurp the function of the Land Court's registration process," the First Circuit pointed out that they were not concerned with other kinds of notice or the other functions of the land registration system, but only with constructive notice. The Court stated actual notice to individuals who consult the land registry is unaffected. See In re Woodman, 497 B.R. 668, 670 n.2 & 673 (Bankr. D. Mass. 2013).

 

Finally, the mortgagee returned its focus back to section 58, arguing that "any document which a person could record that would affect the land would also provide notice once it is accepted for registration by the Land Court." However, the First Circuit reiterated, that because the mortgage here was lacking a proper certificate of acknowledgment, it was not a mortgage that could have been properly recorded. See Part II.A., supra; Mass. Gen. Laws ch. 183, § 29 ("No deed shall be recorded unless a certificate of acknowledgment or the proof of its execution . . . is endorsed or annexed to it.").

 

Despite the mortgagee's argument that the Land Court accepted the mortgage for registration and the mortgage appeared on the Certificate of Title, the First Circuit held that did not create constructive notice to third parties under Massachusetts law, because constructive notice is defined by state law and in Massachusetts, that requires a proper certificate of acknowledgment. See Mass. Gen. Lawsch. 185 § 58; id. ch. 183 § 4.

 

Therefore, because there was no constructive notice giving rise to a duty to conduct an investigation, the hypothetical bona fide purchaser would not be charged with inquiry notice.

 

For the above stated reasons, the First Circuit held that summary judgment was properly granted in favor of the debtor as the omission of the debtor's name from the certificate of acknowledgement created a material defect under Massachusetts law and a bona fide purchaser would not be charged with constructive knowledge of the instrument, and that the mortgage could therefore be avoided.

 

 

 

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

 

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and

 

Webinars