Tuesday, August 3, 2021

FYI: CFPB: Effective Date for Debt Collection Final Rules is Nov. 30, 2021

The Consumer Financial Protection Bureau (CFPB) announced on July 30, 2021 that it will be withdrawing its earlier proposal to extend the Regulation F effective date by 60 days.

 

Thus, the original effective date of Nov. 30, 2021, will remain.

 

A copy of the announcement is available at:  Link to Announcement

 

The proposal to extend the date, discussed here, was intended to address the "disruption caused by the global COVID-19 pandemic" and "afford stakeholders additional time to review and, if applicable, to implement the Debt Collection Final Rules."  According to the CFPB, "[t]he public comments generally did not support an extension."

 

Although the comments from industry generally indicated readiness by the original effective date, a number of consumer advocates pushed for an extension.

 

Consumer advocate commenters generally supported extending the effective date, but they did not focus on whether additional time is needed to implement the rules. The alternative basis for an extension that many commenters urged, a reconsideration of the rules, was beyond the scope of the NPRM and could raise concerns under the Administrative Procedure Act.

 

However, the CFPB noted that "[n]othing in this decision precludes the CFPB from reconsidering the debt collection rules at a later date."

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Friday, July 30, 2021

FYI: Cal App Ct (4th Dist) Holds Prior Unlawful Detainer Judgment Did Not Bar Borrowers' Current Claims

The California Court of Appeals for the Fourth Appellate District recently held that a trial court erred in ruling that several borrowers' claims were precluded by a prior unlawful detainer judgment entered against them following the foreclosure sale of their home.

 

However, as to the borrowers' federal Truth In Lending Act (TILA) claim, the Court held the allegations suffered from several defects and that the trial court correctly sustained the demurrer to this claim without leave to amend.

 

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

 

The plaintiffs were borrowers who lost title to their home in a foreclosure sale. The purchaser at the sale then brought an unlawful detainer action against them under California Code of Civil Procedure § 1161a(b)(3). A default judgment was issued, and the plaintiffs were evicted from their property.

 

The plaintiffs then filed suit against their lender and loan servicer, who were not parties to the unlawful detainer action. Generally, the plaintiffs alleged that the defendants carelessly failed to credit several payments to their loan balance. Thus, the plaintiffs contended that they were never in default and that the defendants wrongfully foreclosed on the property.

 

The trial court sustained the defendants' demurrer to the complaint, finding that all of the plaintiffs' claims were precluded by the unlawful detainer judgment except for a claim under the federal Truth in Lending Act (TILA), which was held to be defective for other reasons. The plaintiffs were denied leave to amend on all claims and timely appealed the resulting judgment.

 

The Fourth Appellate District first addressed the preclusive effect of an unlawful detainer action under § 1161a.  Section 1161a provides for a narrow and sharply focused examination of title. To establish that it is a proper plaintiff, the buyer at a foreclosure trustee's sale seeking to evict the occupant in possession must show that it acquired the property at a regularly conducted sale and thereafter "duly perfected" it title. Vella v. Hudgins (1977) 20 Cal.3d 251, 255. Additionally, only claims "directly connected with the conduct of the sale" are required to be litigated in a 1161a proceeding. Id. at 258.

 

Since only a limited range of title issues can be raised in a section 1161a unlawful detainer action, the Fourth Appellate District held that the preclusive effect of a resulting judgment is likewise limited.

 

As a result, the Fourth Appellate District concluded that the plaintiffs' non-TILA claims were not sufficiently related to the trustee's sale to be precluded by the unlawful detainer action.

 

The plaintiffs' non-TILA claims focused on activity that predated the initiation of the trustee's sale procedures - i.e., the defendants' alleged failure to apply payments to their account. Although this alleged failure eventually led to the initiation of foreclosure sale proceedings, the Court maintained that it was not directly connected to the conduct of the sale. Thus, the Court held that the plaintiffs' non-TILA claims were not required to be raised in the unlawful detainer proceeding and were not precluded by it.

 

The Fourth Appellate District also determined that the defendants' alleged carelessness in failing to credit the plaintiffs' payments was not fully and fairly litigated in the unlawful detainer proceeding. The plaintiffs did not file an answer, so a default judgment was entered against them.  Although a default judgment precludes relitigation of all issues pleaded in the complaint, Kahn v. Kahn (1977) 68 Cal.App.3d 372, 382, the Court noted that the defendants' carelessness was not raised in the unlawful detainer complaint. And, as discussed above, the plaintiffs were not required to raise the issue in the proceeding.

 

The Fourth Appellate District next addressed the plaintiffs' TILA claim. TILA requires creditors to make certain disclosures to consumers regarding consumer leases and credit transactions. 15 U.S.C. § 1631(a). A "creditor" is defined as "the person to whom the debt arising from the consumer credit transaction is initially payable."  15 U.S.C. § 1602(g). "TILA [also] provides for assignee liability if the violation is 'apparent on the face of the loan documents.'"  Romero v. Countrywide Bank, N.A. (N.D. Cal. 2010) 740 F.Supp.2d 1129, 1141; 15 U.S.C. § 1641.

 

The Court found that the defendants were not the plaintiffs' initial creditor and that the plaintiffs have not alleged that the purported TILA violation was apparent on the face of the loan documents. Thus, the Court concluded that the TILA claim was defective.

 

Lastly, regarding the trial court denying the plaintiffs leave to amend the TILA claim, the Fourth Appellate District observed that "the plaintiff bears the burden of proving there is a reasonable possibility of amendment."  Rosen v. St. Joseph Hospital of Orange County (2011) 193 Cal.App.4th 453, 458. "Where the appellant offers no allegations to support the possibility of amendment and no legal authority showing the viability of new causes of action, there is no basis for finding the trial court abused its discretion when it sustained the demurrer without leave to amend."  Id.

 

Here, the Court found that the plaintiffs did not explain to the trial court how they could cure the defects in the TILA claim and that they did not attempt to do so on appeal. Thus, the Court concluded that the trial court did not abuse its discretion when it denied leave to amend the TILA claim.

 

Accordingly, the Fourth Appellate District affirmed the judgment of the trial court as to the TILA claim, and reversed and remanded as to the remaining 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   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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Wednesday, July 28, 2021

FYI: 8th Cir BAP Reverses Chpt 12 Plan Confirmation For Lack of Evidentiary Hearing on Disputed Collateral Values

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit vacated the bankruptcy court's order confirming a farm debtor's chapter 12 plan, concluding that the bankruptcy court erred by failing to hold an evidentiary hearing to determine the value of a bank's collateral where the collateral was disputed. The Panel also concluded that the bank needed to file a proof of claim.

 

The panel explained that, until the bankruptcy court held the requisite evidentiary hearing and determined the value of the bank's collateral, it was impossible to know whether the bank would be paid the allowed amount of its secured claim through the debtor's plan.

 

In addition, the Panel concluded that the record amply supported the bankruptcy court's finding of disposable income under 11 U.S.C. § 1225(b)(1)(B).

 

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

 

The farmer debtor filed a petition for relief under chapter 12 of the U.S. Bankruptcy Code. The debtor listed the bank as a secured creditor on his schedules. With his petition, the debtor filed a motion to obtain secured credit. The bank objected. The bank's "primary objection" was that the debtor's motion failed to recognize a lien the bank asserted. The bankruptcy court ultimately granted the debtor's motion.

 

Meanwhile, the bankruptcy clerk notified creditors of the need to file proofs of claim and the deadline for doing so. The bank did not file a proof of claim. After failing to obtain confirmation of two earlier plans, the debtor filed his second modified plan ("plan"). The bank objected. The bank alleged the debtor's plan failed to provide distributions of the bank's secured claim. The bank also alleged the debtor's plan was not filed in good faith, because it purported to disallow the bank's unsecured claim. The bank believed it did not need to file a proof of claim to share in any distribution to unsecured creditors. Finally, the bank alleged that the debtor's plan failed to contribute all of the debtor's disposable income.

 

The bankruptcy court accepted the debtor's valuation of the bank's collateral and thus the amount of the bank's secured claim as set forth in the debtor's plan. The bankruptcy court did so without receiving evidence, reasoning that the difference between the bank's valuation and the debtor's valuation was "minor" and did not warrant an evidentiary hearing. The bank timely appealed.

 

The bank first challenged the bankruptcy court's decision not to hold an evidentiary hearing to determine the value of the bank's collateral

 

The Panel noted that the Eighth Circuit cases First Federal Savings & Loan Association of Bismarck, Inc. v. Hulm (In re Hulm), 738 F.2d 323 (8th Cir. 1984) and Critique Services, LLC v. Reed (In re Reed), 888 F.3d 930 (8th Cir. 2018) both support the proposition that a bankruptcy court cannot make a finding regarding a disputed fact without holding an evidentiary hearing. The Panel held that while the difference in the bank's valuation and the debtor's valuation may or may not have been minor, the value of the bank's collateral was disputed. Thus the bank was entitled to an evidentiary hearing on this issue.

 

The bank next challenged the bankruptcy court's decision to disallow the bank's unsecured claim because the bank failed to file a proof of claim. The Panel observed that a creditor must file a proof of claim for its claim to be allowed. 11 U.S.C. B' 502(b)(9); Fed. R. Bankr. P. 3002(a).

 

The relevant portion of § 1111 provides:

 

A proof of claim or interest is deemed filed under section 501 of [the bankruptcy code] for any claim or interest that appears in the schedules filed under section 521(a)(1) or 1106(a)(2) of [the bankruptcy code], except a claim or interest that is scheduled as disputed, contingent, or unliquidated.

 

The bank argued that § 1111 applies in chapter 12 cases, but the Panel held the opposite.

 

Alternatively, the bank argued that its limited objection to the debtor's motion to obtain secured credit qualified as an informal proof of claim.

 

The elements necessary to achieve status as an informal proof of claim are well known. To qualify as an informal proof of claim, the document must state the nature and amount of the claim as well as indicate the claimant's intent to hold the debtor liable and pursue the claim. Maynard Savings Bank v. Michels (In re Michels), 286 B.R. 684, 691 (B.A.P. 8th Cir. 2002) (citations omitted).

 

A creditor may hold both a secured and an unsecured claim arising out of the same transaction or transactions.

 

An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property and is an unsecured claim to the extent that the value of such creditor's interest is less than the amount of such allowed claim. 11 U.S.C. § 506(a)(1) (in relevant part).

 

In this case, the Panel concluded that the bank held both a secured and an unsecured claim.

 

However, the Panel noted that the bank did not allege it held an unsecured claim pursuant to § 506(a)(1) or otherwise. In fact, the word "unsecured" did not appear anywhere in the bank's objection. On the other hand, the bank did allege it was entitled to post-petition "interest, fees, charges and attorneys' fees, costs and expenses."

 

The Panel concluded that the bank would not have been entitled to these items if any portion of its claim was unsecured. See 11 U.S.C. § 506(b). Thus, the Panel held that anyone reviewing the bank's objection would reasonably conclude that the bank's claim was oversecured. The bank's objection did not indicate that the bank intended to hold the debtor liable for an unsecured claim or to pursue an unsecured claim. Consequently, the Panel agreed with the bankruptcy court: the bank's objection did not qualify as an informal proof of an unsecured claim.

 

The bank next argued that once the bankruptcy court's order confirming the debtor's plan became a final order upon the conclusion of the appeal, the bank would be permitted to file a proof of its unsecured claim that would be timely under Fed. R. Bankr. P. 3002, which provides, in relevant part:

 

An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property.

 

Fed. R. Bankr. P. 3002(c)(3) (emphasis added). However, the Panel held that what the bank may or may not do in the future afforded it no basis for questioning the bankruptcy court's decision to disallow the bank's unsecured claim.

 

Finally, the Panel held that the record supported the bankruptcy court's finding that committing the debtor's disposable income for plan purpose payments was appropriate under § 1225(b)(1)(B). This is because neither the trustee nor anyone who was the holder of an allowed unsecured claim objected to confirmation. Additionally, the Panel determined that the requirement in § 1225(b)(1)(B) was not triggered here because the plan proposed to pay unsecured creditors in full. 11 U.S.C. § 1225(b)(1)(A). Finally, notwithstanding the fact that the requirement in § 1225(b)(1)(B) was not triggered in this case, the Panel concluded that the debtor's plan providing that the debtor's disposable income would be applied to make payments was not clearly erroneous under Fonder v. U.S., 974 F.2d 996, 999-1000 (8th Cir. 1992).

 

Accordingly, the Panel vacated the bankruptcy court's order confirming the debtor's plan and remanded for further proceedings consistent with the opinion.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   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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Monday, July 26, 2021

FYI: EDNY Dismisses Multiple FDCPA Cases for Lack of Standing, Issues Warning to Plaintiff's Attorneys on Questionable Claims

Scolding plaintiff's attorneys who "manipulate" the FDCPA for their own personal gain, Judge Gary R. Brown of the U.S. District Court for the Eastern District of New York recently issued an opinion in a consolidated matter dismissing multiple complaints alleging debt collectors violated the FDCPA by transmitting consumer information to third-party vendors engaged to print or send dunning letters.

 

The dismissed claims were premised upon the recent decision from the U.S. Court of Appeals for the Eleventh Circuit in Hunstein v. Preferred Collection and Management Services, Inc.

 

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

 

The Court cited the actual purpose of the Fair Debt Collection Practices Act, long forgotten by the plaintiff's bar, which is to "eliminate abusive debt collection practices by debt collectors" and even highlighted a few early cases where such abusive practices occurred such as calling a consumer suffering from mental instabilities 9,500 times over 11 months and making threats of false arrests.

 

Then the Court lamented the "legions of FDCPA cases that have little to do with the purpose of the statute" that inundate the Eastern District of New York.

 

Like many judges who previously raised "serious concern that this lawsuit reflects an attempt by plaintiff and/or his attorney to manipulate the law for an improper purpose" and lamented the "cottage industry of plaintiffs' lawyers filing suits over fantasy harms the statute was never intended to prevent", the Court noted that many judges had to adopt FDCPA-specific procedures to deal with the crush of cases in the district.

 

Until now that is.

 

Analyzing the Supreme Court's recent decision in TransUnion LLC v. Ramirez in connection with the Hunstein letter vendor cases, the Court concluded that none of the plaintiffs had standing because none of them sufficiently alleged a concrete and particularized injury-of-fact sufficient to satisfy Article III standing.

 

It must also be noted that the Court was skeptical that Hunstein complaints were valid in the Second Circuit to begin with noting that Hunstein was not even binding on the courts.

 

In any event, after TransUnion v. Ramirez, there could be no doubt.

 

First, the Court noted that TransUnion itself likely disposes of Hunstein cases with its reasoning that "many American courts did not traditionally recognize intra-company disclosures as actionable publications for purposes of the tort of defamation" and rejection of the argument that TransUnion had "published" the class members' information internally to employees within TransUnion.

 

Next, given TransUnion's holding that "future risk of harm, standing alone, cannot qualify as a concrete harm," the speculative nature of the Hunstein claims could not support Article III standing.

 

Finally, the Court reasoned that the complaints as pled could not plausibly demonstrate injury-in-fact under traditional defamation or intentional infliction of emotional distress theories because "simply mailing a collection letter, even if erroneous, is a far cry from 'extreme and outrageous conduct.'"

 

After disposing of the Hunstein claims, the Court went on to address another popular theory that "the debts in question were not, in fact owed, and therefore constitute actionable deceptive practices." But because neither of those plaintiffs alleged any actual injury from receiving the purportedly false notice, the Court held that "informational violations of the statute, without alleging any harm" do not confer standing.

 

The dismissals were without prejudice of course and plaintiffs have the ability to file amended complaints properly alleging some actual injury-in-fact. Or they are free to file in New York State court and take their chances there.

 

 

 

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   |   Georgia   |   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:

 

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Friday, July 23, 2021

FYI: 7th Cir Rejects FCRA Claims Alleging Insufficient Investigation Into Ownership of Debt

The U.S. Court of Appeals for the Seventh Circuit recently affirmed judgments entered in separate cases consolidated on appeal in favor of several credit reporting agencies (CRAs) rejecting consumers' claims of violations of the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. (FCRA).

 

In so ruling, the Seventh Circuit held that the consumers' allegations concerning the identity of the owners of their debts were not factual inaccuracies that the CRAs were statutorily required to guard against and reinvestigate under sections § 1681e(b) and § 1681i of the FCRA, but primarily legal issues outside their competency.

 

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

 

Seven unrelated consumers (Consumers) incurred credit card debts that were allegedly sold and assigned to other creditors ("Debt Collectors").  The change in ownership was reported to the three prominent credit reporting agencies (CRAs). 

 

One of the Debt Collectors filed suit against three of the Consumers to collect payment, but voluntarily withdrew the suits after the Consumers claimed that the Debt Collector did not own their debts, demanded proof of ownership, and requested arbitration.   The other four Consumers were not sued but sent letters to their respective Debt Collectors similarly challenging their purported ownership of the debts.

 

The Consumers then contacted the CRAs requesting an investigation into the accuracy of their reports to determine if the purported Debt Collectors, in fact, owned the debts.  The Debt Collectors responded to the CRAs inquiries by confirming ownership, but did not produce the original sale or assignment agreement in any case.  Relying upon these representations, the CRAs informed the Consumers that the ownership was confirmed and their investigation was complete.

 

Each Consumer separately filed suits against the CRAs claiming that their inclusion of allegedly false debt ownership information on their credit reports and failure to fully investigate their claims violated sections § 1681e(b) and § 1681i of the FCRA. 

 

In each case, the trial court entered judgment on the pleadings or dismissed each suit in the CRAs favor for various reasons, but all concluding that the Consumers did not plead the type of inaccuracies in their credit reports that the CRAs had a duty to correct under the FCRA.  The instant consolidated appeal followed.

 

As you may recall, the FCRA primarily tasks furnishers (creditors, debt collectors, and the like) with providing accurate information to the CRAs, but also requires that CRAs "follow reasonable procedures to assure maximum possible accuracy of" information in credit reports (15 U.S.C. § 1681e(b)) and "conduct a reasonable reinvestigation" to determine whether information disputed by a consumer is (15 U.S.C. § 1681i(a)(1)(A)).  A threshold requirement for claims under both sections is that there must be an inaccuracy in the consumer's credit report.

 

The Seventh Circuit initially noted that it recently held in Denan v. Trans Union LLC, 959 F.3d 290 (7th Cir. 2020) that "inaccurate information under 1681i… mean[s] factually inaccurate information," rather than "legal inaccuracies" which are outside the competency of the CRAs, and that a consumer's defense to a debt is a legal question to resolve in an action against the creditor, not a duty imposed on the consumer reporting agencies by the FCRA.  Denan, 959 F.3d at 296. 

 

Here, the Consumers argued that whether the assignment of ownership to their respective debts was a factual question, thus triggering the CRAs' obligations under sections 1681e(b) and 1681i(a)(1)(A), relying upon the Court's holding in Chemetall GMBH v. ZR Energy, Inc., 320 F.3d 714, 720–21 (7th Cir. 2003), that a parties' intention to assign something is a question of fact for a jury.  The Consumers reasoned that upon receipt of a dispute, a straight-forward factual inquiry by the CRAs to request the relevant purchase and sale agreement would determine whether the creditor or debt collector owned the debt.

 

The Seventh Circuit noted that, although no clear line has been drawn between legal and factual inaccuracies in the FCRA context, review of its own decisions and that of its sister circuit courts showed that the central question is whether the alleged inaccuracy turns on applying law to facts or simply examining the facts alone.  Consumer reporting agencies are competent to make factual determinations, but they are not charged with reaching legal conclusions or resolving alleged inaccuracies under the FCRA.  Denan, 959 F. 3d at 295.

 

Unlike a challenge to the existence or amount of the debt, the Seventh Circuit concluded that the question of whether the disputed debts were assigned was a question that required a legal determination. 

 

In each case here, the CRA reached out to the Debt Collectors and asked them to confirm ownership of the debts, which they did.  Any further investigation into whether the debts were actually assigned to the Debt Collectors involved more than just determining if an assignment agreement exists, but also interpreting the legal validity of any assignment —- a legal judgment outside the scope of a CRAs competency.  See Brill v. TransUnion LLC, 838 F.3d 919, 921 (7th Cir. 2016) (holding that consumer reporting agency was not required to hire handwriting expert to determine whether plaintiff's signature was forged on loan agreement as plaintiff claimed). 

 

The Seventh Circuit further noted that the Consumers did have alternate recourse in that they could confront the creditors who are in the best position to respond to assertions that they do not own the plaintiffs' debts (Brill, 838 F.3d at 921), or make notations of their disputes on their credit reports pursuant to 15 U.S.C. § 1681i(c), to notify future employers or creditors that they dispute the ownership of these debts.

 

Because the alleged inaccuracies here involved interpreting legal rights to a debt and making legal judgments, the Seventh Circuit agreed with the trial court's holding that the CRAs bore no burden under the FCRA to determine whether the Consumer's debts were validly assigned to the Debt Collectors, and affirmed each judgment entered in the Debt Collectors' favor.

 

 

 

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   |   Georgia   |   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

 

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and

 

Webinars

  

 

 

Wednesday, July 21, 2021

FYI: 9th Cir Holds Mortgagee May Challenge HOA Foreclosure Sale That Violates BK Automatic Stay

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's order granting summary judgment in favor of the buyer at a homeowners association's non-judicial foreclosure sale that was conducted in violation of the automatic stay in the borrower's bankruptcy, and against a mortgagee whose interest in the foreclosed property would have been extinguished. 

 

In so ruling, the Ninth Circuit held that a first deed of trust lienholder may set aside a completed super-priority lien foreclosure sale if the sale violates the bankruptcy automatic stay.

 

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

 

A borrower ("Borrower") obtained a loan ("Loan") secured by a deed of trust recorded against real property located in Nevada ("Property").  Borrower fell behind on his homeowners' association ("HOA") monthly dues causing the HOA to record a "Notice of Default and Election to Sell".

 

Borrower filed for Chapter 13 bankruptcy and stated his intention to surrender the Property to the appellant mortgagee ("Mortgagee") and the HOA in his bankruptcy plan. While Borrower's bankruptcy was pending, the HOA sold the Property via non-judicial foreclosure sale to ("Foreclosure Sale").

 

Mortgagee subsequently initiated litigation in which it: (1) sued the HOA and the buyer at the HOA's Foreclosure Sale to quiet title and for declaratory relief alleging the Foreclosure Sale was void and did not extinguish Mortgagee's lien on the Property; (2) sought a preliminary injunction preventing the buyer from selling and/or transferring the Property; and (3) requested an order declaring the Mortgagee could foreclose on its deed of trust.  The Mortgagee separately sued the HOA for breach of Nevada Revised Statute 116.1113 and wrongful foreclosure.

 

The buyer moved for summary judgment arguing it had superior title to the Property because the Foreclosure Sale extinguished the Mortgagee's interest in the Property.  The Mortgagee also moved for summary judgment, arguing the Foreclosure Sale did not extinguish its interest in the Property because the Foreclosure Sale violated the automatic bankruptcy stay, and thus is void.

 

The trial court granted the buyer's motion for summary judgment concluding that pursuant to Tilley v. Vucurevich (In re Pecan Groves), 951 F.2d 242, 245 (9th Cir. 1991), the Mortgagee lacked standing to assert a violation of the bankruptcy's automatic stay because the Mortgagee "was neither a party, a debtor, or a trustee in [the underlying] bankruptcy matter."

 

The trial court entered judgment in favor of the buyer and dismissed the Mortgagee's remaining claims against the HOA because "the foreclosure sale extinguished the [Mortgagee]'s deed of trust on the Property and [because] the [buyer] purchased the property free and clear of the [Mortgagee's] deed of trust." 

 

The Mortgagee timely appealed. 

 

On appeal, the Mortgagee argued the trial court erroneously applied the holding of In re Pecan Groves.  The parties did not dispute that the Mortgagee had Article III standing due to the extinguishment of the Mortgagee's interest in the Property being "fairly traced to the HOA's violation of the bankruptcy stay."  Rather, the buyer argued the Mortgagee lacked "prudential standing" because the Mortgagee's grievance did not "fall within the zone of interests protected or regulated by the statutory provision...invoked in the suit." Bennett v. Spear, 520 U.S. 154, 162 (1997).

 

The Ninth Circuit disagreed, holding the Mortgagee had standing to bring a quiet title action pursuant to Nevada Revised Statute 40.100, which permits suit "by any person against another who claims an estate or interest in real property, adverse to the person bringing the action, for the purpose of determining such adverse claim."  Thus, the Mortgagee satisfied the "zone-of-interests test" for prudential standing purposes.  See e.g., Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1302 (2017). 

 

The Court separately distinguished the In re Pecan Groves holding explaining that it "did not consider whether a creditor was precluded from advancing a quiet title action premised on violation of the automatic stay, particularly in a diversity case where state law recognizes such a claim as a basis for voiding a foreclosure sale."  The Court explained that in contrast to the facts and procedural posture of In re Pecan Groves, the Mortgagee brought its quiet title claim in accordance with Nevada precedent "invalidating HOA foreclosure sales when the HOA has violated the automatic stay."

 

Next, the Court examined whether the Foreclosure Sale violated the bankruptcy's automatic stay and whether the Foreclosure Sale was void under Nevada state law, which holds than an HOA foreclosure sale "conducted during an automatic stay in bankruptcy proceedings is invalid."  See e.g., LN Mgmt. LLC Series 5105 Portraits Place v. Green Tree Loan Servicing, LLC (Portraits Place), 399 P.3d 359, 359–60 (Nev. 2017). 

 

The Ninth Circuit held the Mortgagee's interest in the Property to be superior to the buyer's interest as the Mortgagee provided evidence demonstrating that: (1) Borrower listed the Property in his bankruptcy schedules; (2) the automatic bankruptcy stay was active through 2017; and (3) the Foreclosure Sale was conducted on September 19, 2014 while the bankruptcy stay was still in place.  Therefore, the Court concluded the Foreclosure sale was void meaning the Mortgagee was entitled to "quiet title to the Property" pursuant to Nevada Revised Statute 40.010.

 

Thus, the Court held that: (1) the Mortgagee had standing to pursue its claims against the buyer and the HOA; (2) the Mortgagee's interest as a creditor is protected by Nevada law; and (3) the Foreclosure Sale was void as a matter of law because it violated 11 U.S.C. § 362(a)'s automatic stay provisions. 

 

Accordingly, the Ninth Circuit reversed the trial court's summary judgment order in favor of the buyer, its denial of the Mortgagee's motion for summary judgment, and its dismissal of the Mortgagee's causes of action against the HOA and remanded this matter to the trial court for proceedings consistent with the instant opinion.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Monday, July 19, 2021

FYI: 8th Cir Confirms Various Loss Mit and Foreclosure Communications Not Subject to FDCPA

The U.S. Court of Appeals for the Eighth Circuit recently affirmed entry of summary judgment in favor of a mortgage servicer against a borrower's claims that it violated the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692, et seq. (FDCPA).

 

In so ruing, the Eighth Circuit concluded that the communications at issue regarding denial of the borrower's loss mitigation application were not made in connection with an attempt to collect on the underlying mortgage debt, and thus not actionable under the FDCPA, and that the inclusion of boilerplate "Mini-Miranda" language stating that the communications were "for the purpose of collecting a debt" did not automatically trigger the protections of the FDCPA.

 

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

 

In September 2016, the assignee to a twice-modified mortgage loan initiated foreclosure proceedings and advised the homeowner-borrower (Borrower) that a foreclosure sale was scheduled for August 1, 2017.  The Borrower again applied for loss mitigation assistance, but was notified in March and May 2017 that his application was incomplete for failure to provide required documentation and was no longer under review.

 

On July 11, 2017, the Borrower's mortgage loan was transferred to a new servicer ("Servicer").  After being provided notice of the transfer, the Borrower spoke with a representative of the Servicer who confirmed that the August 1, 2017 foreclosure sale would proceed, and but invited the Borrower to submit a loss mitigation package if he wished to prevent the sale. 

 

The Borrower contacted the Minnesota Attorney General's (AG) Office for assistance, who agreed to represent the Borrower and whom the Borrower asserts he relied upon to relay communications and information regarding his loan from the Servicer.

 

The foreclosure sale was subsequently postponed to September 9, 2017, and later to November 14, 2017. Between August and November 2017, the Borrower submitted requests and documentation for mortgage assistance, and the Minnesota AG's Office notified the Borrower that, on November 7, 2017, the Servicer confirmed to the AG's office that the Borrower's application was complete and would force postponement of the foreclosure sale while awaiting a final determination.

 

Nevertheless, the scheduled sale proceeded on November 14, 2017 where the mortgagee purchased the property.  The Borrower subsequently received a letter from the Servicer dated two days after the sale, which advised him that his loss mitigation application had been canceled and would not be considered. 

 

During the six-month redemption period, the AG's Office requested that the Servicer rescind the sale on the Borrower's behalf.  The Servicer responded that it would not rescind the sale.  The letter explaining the decision stated that the Borrower failed to provide all requisite documentation to complete the loss mitigation application and that the home had been sold to a third-party bidder at the foreclosure sale, although it had been sold to the mortgagee.

 

The Borrower filed suit against the Servicer in Minnesota state court, alleging that the Servicer violated the FDCPA by making false representations about the Borrower's loss mitigation application and the foreclosure sale by ignoring his application and delaying communications so that the Borrower could not take advantage of his legal remedies, along with various state law claims and requests for injunctive relief seeking rescission of the foreclosure sale and preventing eviction.  The Servicer removed the action to federal court, and by the summary judgment stage, the Borrower's FDCPA claim was the lone remaining cause of action. 

 

The trial court granted summary judgment in the Servicer's favor, concluding that its communications and conduct with the Borrower were not in connection with an attempt to collect a debt and that any post-sale communications were immaterial as they had no impact on the Borrower's legal rights.  The Borrower timely appealed.

 

On appeal, the lone issue before the Eighth Circuit was whether certain challenged communications and conduct were made in connection with the collection of a debt. 

 

These included the Servicer's: (i) pre-sale letter cancelling his loss mitigation application for purported failure to provide requested documents; (ii) response to the AG's complaint; (iii) representations by phone to the AG's office that the Borrower's application was sent to underwriting and awaiting a decision, and; (iv) post-sale letter stating that the Servicer did not receive all necessary information to complete the application before the deadline (along with prior representations it was complete) and that the property was sold to a third party (when, in fact, it was sold to the mortgagee). 

 

The Borrower argued that the trial court erred in granting summary judgment because the evidence presented was sufficient to allow a jury to conclude that the Servicer used false, deceptive, and misleading representations and unfair and unconscionable means to collect on the underlying mortgage debt and erroneously narrowed the "animating purpose" test.

 

As you may recall, the Eighth Circuit employs the "animating purpose test" to consider whether certain statements for conduct are in collection with the collection a debt for the purposes of section 1692e of the FDCPA, which prohibits the use any false, deceptive, or misleading representation or means in connection with the collection of a debt.  McIvor v. Credit Control Servs., Inc., 773 F.3d 909, 914 (8th Cir. 2014).

 

Under this test, "for a communication to be in connection with the collection of a debt, an animating purpose of the communication must be to induce payment by the debtor." Id.  "Though '[t]he "animating purpose[]" of the communication is a question of fact that generally is committed to the discretion of the jurors, not the court,' where 'a reasonable jury could not find that an animating purpose of the statements was to induce payment,' summary judgment is appropriate." Goodson v. Bank of Am., N.A., 600 F. App'x 422, 431 (6th Cir. 2015).

 

The Borrower argued that the Supreme Court of the United States in Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029, 1036 (2019) indicated that nonjudicial foreclosure is a debt collection activity, even if the FDCPA exempts nonjudicial foreclosing parties from the definition of "debt collector".  Therefore, the Borrower argued, each of the identified communications in connection with the attempt to collect a debt. 

 

However, the Eighth Circuit noted that, because the SCOTUS statement in Obduskey was rendered in consideration of whether a party qualified as a "debt collector" for the purposes of the FDCPA, and not in consideration of specific communications regarding foreclosure proceedings, the communications at issue still required individual consideration.  McIvor, 773 F.3d at 915 (although nonjudicial foreclosure is a debt collection activity, it does not follow that any communication generated during a nonjudicial foreclosure is made "in connection with the collection of a debt.").

 

Reviewing the content of each of the communications, the appellate court agreed that none were made in connection with the collection of a debt. 

 

Specifically, neither the pre-sale letters to the Borrower and AG's office, nor the phone call between the Servicer and the AG's office evidenced any mention of the loan apart from identifying information and did not provide amounts due or demands for payment.  See Bailey v. Sec. Nat'l Servicing Corp., 154 F.3d 384, 388-89 (7th Cir. 1998) (holding that the communication was not made in connection with the collection of a debt because it merely described the status of the debtor's account and the consequences of missing future payments); See, e.g., Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011). 

 

To the contrary, the Eighth Circuit found that these communications arguably thwarted the Servicer's attempts to arrange for payment of the mortgage indebtedness.  Similarly, the post-sale letter contained only basic identifying information of the loan, and was not an attempt to collect a debt because the property had already been sold, and thus, any purported misrepresentations were also immaterial.  See Hill v. Accounts Receivable Servs., LLC, 888 F.3d 343, 346 (8th Cir. 2018) ("[B]ecause '[a] statement cannot mislead unless it is material, [] a false but nonmaterial statement is not actionable.'"

 

Moreover, despite the inclusion of a Mini-Miranda statements including language that the communications were "for the purpose of collecting a debt," the boilerplate language did not automatically trigger the protections of the FDCPA. Gburek v. Litton Loan Servicing LP, 614 F.3d 380, 386 n.3 (7th Cir. 2010); Goodson, 600 F. App'x at 432 ("[T]he standard disclaimer language—which stated that BANA was 'a debt collector attempting to collect a debt'—did not, by itself, transform the informational letter into debt collection activity.").

 

Because the Servicer's conduct was not made or carried out in connection with an attempt to collect a debt, the Eighth Circuit also rejected the Borrower's arguments that the Servicer ignored the Borrower's loss mitigation application and delayed communications to run out the statute of limitations on a potential claim of a violation of the Minnesota dual-tracking statute in violation of § 1692f.

 

Accordingly, the trial court's entry of summary judgment in the Servicer's favor was affirmed.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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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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