Sunday, December 5, 2021

FYI: Cal App Ct (4th Dist) Affirms Rejection of Creditor's Affidavit on Various Evidentiary Grounds

The California Court of Appeal, Fourth District, recently affirmed a trial court's denial of a debt buyer's motion to compel arbitration, holding that an affidavit from the original creditor's employee, used by the debt buyer to prove that an arbitration agreement had been mailed to the borrower, lacked foundation and violated the secondary evidence rule.

 

The Fourth District also concluded that the business records exception to the hearsay rule did not apply.

 

A copy of the opinion is available at:  Link to Original Unpublished Opinion, and Link to Order Certifying Opinion for Publication

 

A borrower filed a putative class action lawsuit against a debt buyer based on alleged violations of the California Fair Debt Buying Practices Act (CFDBPA). The debt buyer moved to compel arbitration. It relied on an affidavit from an employee of the borrower's original creditor, which stated in part that the original creditor's records showed a credit card account agreement containing an arbitration clause was mailed to the borrower.

 

The borrower objected to the affidavit on various evidentiary grounds. The trial court sustained the objections and denied the debt buyer's motion to compel arbitration. The debt buyer timely appealed.

 

On appeal, the debt buyer contended that the trial court erred by excluding the affidavit because it was admissible under the secondary evidence rule (Cal. Evid. Code §§ 1521, 1523) and the underlying documents qualified as business records (Cal. Evid. Code § 1271).

 

As you may recall, "[t]rial court rulings on the admissibility of evidence . . . are generally reviewed for abuse of discretion."  Pannu v. Land Rover North America, Inc. (2011) 191 Cal.App.4th 1298, 1317; Christ v. Schwartz (2016) 2 Cal.App.5th 440, 446-447.

 

Section 1521(a) of the California Evidence Code provides that, "[t]he content of a writing may be proved by otherwise admissible secondary evidence. The court shall exclude secondary evidence of the content of [a] writing if the court determines either of the following: [¶] (1) A genuine dispute exists concerning material terms of the writing and justice requires the exclusion. [¶] (2) Admission of the secondary evidence would be unfair."

 

In addition, the California business records exception to the hearsay rule provides, "[e]vidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered to prove the act, condition, or event if: [¶] (a) The writing was made in the regular course of a business; [¶] (b) The writing was made at or near the time of the act, condition, or event; [¶] (c) The custodian or other qualified witness testifies to its identity and the mode of its preparation; and [¶] (d) The sources of information and method and time of preparation were such as to indicate its trustworthiness." Cal. Evid. Code, § 1271.

 

Therefore, because the affidavit from the original creditor's employee expressly referenced company records as the basis for her statement that the credit card account agreement had been mailed to the borrower, the Fourth District reasoned that, in order for the statement to be admissible, the underlying company records would have to be admissible.

 

The debt buyer argued that the underlying company records were admissible as business records under section 1271 because the affidavit stated that the employee "regularly review[s] and analyze[s] account records and transaction histories, including communications to and from cardholders."  The debt buyer asserted that this statement showed that the original creditor's "account records and transaction histories are made in the regular course of business." See Cal. Evid. Code § 1271(a).

 

However, the Fourth District held that the trial court could have reasonably found otherwise. The Appellate Court noted that, although the employee stated that she regularly reviewed and analyzed the records, she did not say anything about their preparation. Nor did she describe the specific company records she relied upon to state that the borrower had been mailed the account agreement.

 

For the same reasons, the Fourth District concluded that the trial court could have reasonably found that the affidavit was insufficient to establish that the unspecified records were "made at or near the time of the act, condition, or event" and "[t]he sources of information and method and time of preparation were such as to indicate its trustworthiness." Cal. Evid. Code § 1271(b) and (d).

 

The debt buyer also argued that the trial court erred by holding that the employee "had to attach" the account records and transaction histories she reviewed. However, the Fourth District found no such mandate in the trial court's decision and observed that the trial court only referenced the lack of records as the reason for its close examination of the affidavit, as that was the only evidence of mailing provided by the debt buyer. The Court held that the trial court was entitled to consider this circumstance when evaluating the affidavit.

 

In addition, the debt buyer argued that the employee's statements were admissible under section 1523(d) as a summary of a voluminous record. That statute provides that "[o]ral testimony of the content of a writing" may be admissible "if the writing consists of numerous accounts or other writings that cannot be examined in court without great loss of time, and the evidence sought from them is only the general result of the whole."  Cal. Evid. Code § 1523(d).

 

Setting aside whether the affidavit was oral testimony, the Fourth District concluded that the debt buyer's argument did not justify reversal.

 

First, the Appellate Court noted that the debt buyer did not argue in the trial court that the statements were admissible under this statute and subdivision. See People v. Hines (1997) 15 Cal.4th 997, 1034, fn. 4.  Second, according to the Appellate Court, the debt buyer also had not shown that the records of mailing were voluminous or otherwise satisfied the requirements of the statute.

 

Moreover, the Fourth District found that the employee's affidavit showed that she had no personal knowledge of the original creditor mailing the credit card agreement to the borrower outside what the "records show." As a result, the Appellate Court held that the contents of those records were hearsay, and the debt buyer had not shown that the trial court abused its discretion by finding the business record exception did not apply.

 

Lastly, in light of its conclusions, the Fourth District did not consider whether the trial court erred by excluding the employee's statements that she found no record of the borrower's objection to the arbitration agreement or its return as undeliverable.

 

Accordingly, the Fourth District affirmed the judgment of the trial court.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Monday, November 29, 2021

FYI: 5th Cir Rejects Borrower's Bankruptcy Claim Objection as Barred by Res Judicata

The U.S. Court of Appeals for the Fifth Circuit recently rejected a borrower's objections to a bankruptcy court's jurisdiction, and held that the doctrine of res judicata barred the borrower's claim objection as it was ultimately based on the alleged impropriety of the creditor's claim from a prior bankruptcy.

 

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

 

Two married individuals ("husband" and "wife") who owned a construction company ("Construction Company") filed separate voluntary Chapter 11 petitions for bankruptcy in 2014.

 

In 2015, husband and Construction Company filed an amended "joint" plan of reorganization. This plan set out the amounts Construction Company owed to its creditors, including the amount owed to a secured creditor ("Secured Creditor") on five promissory notes that were rolled into one note prior to the bankruptcy petitions.

 

The plan, which had an effective date of November 8, 2015, provided that Secured Creditor would have an Allowed Secured claim in the amount of $1,812,472.43. The Plan was signed by husband on behalf of himself and Construction Company and no objection was filed. The Plan was confirmed by the bankruptcy court and the order was not appealed by either party.

 

Construction Company, after making thirty-eight of the 60 payments required by the plan, stopped making payments in January 2019 when it again filed for bankruptcy.

 

In the second bankruptcy action, Secured Creditor filed a proof of claim in the amount of $1,333,695.84. Construction Company filed an objection to this claim and the bankruptcy court held a hearing on the dispute. Construction Company argued that the Secured Creditor's claim amount was incorrect because it was based on an incorrect claim amount in the 2015 Plan and it failed to account for certain payments made by Construction Company.

 

Secured Creditor pointed out that Construction Company failed to object to Secured Creditor's claim in the 2015 plan or otherwise seek appeal after the bankruptcy court confirmed the Plan.

 

The bankruptcy court overruled Construction Company's objection and allowed Secured Creditor's claim reasoning that neither husband nor Construction Company objected to or disputed the claim amount in the plan.  The bankruptcy court found that the doctrines of res judicata, judicial estoppel, and judicial admission barred Construction Company's claim objection to the extent it was premised on the impropriety of Secured Creditor's claim in the 2015 Plan.

 

Construction Company filed an appeal in the district court. The district court affirmed the judgment of the bankruptcy court and dismissed the appeal.  Construction Company then appealed to the Fifth Circuit. 

 

In its appeal, Construction Company asserted three arguments as to why the bankruptcy court erred.

 

First, Construction Company argued that the bankruptcy court lacked subject matter jurisdiction to allow Secured Creditor's claim in the second bankruptcy action.

 

Construction Company reasoned that Construction Company was not liable for the full claim amount since husband and wife were individually liable for some of the promissory notes on which the Plan directed Construction Company to make payments on. Thus, Construction Company argued, neither the Plan nor the promissory notes shifted liability for all the debt from husband and wife to Construction Company. Construction Company further argued that the Plan did not authorize the bankruptcy court to allow Secured Creditor's claim as to the entire amount owed and thus the court lacked subject matter jurisdiction to allow the same.

 

The Fifth Circuit disagreed, ruling that "[b]ankruptcy judges may hear and enter final judgments in 'all core proceedings arising under title 11, or arising in a case under title 11." Stern v. Marshal, 564 U.S. 462, 474, (2011) (quoting 28 U.S.C. 157(b)(1)). Included in the meaning of core proceedings is the "allowance or disallowance of claims against the estate." 28 U.S.C. 157(b)(2)(B). In determining whether and to what extent Secured Creditor had a claim against Construction Company, the bankruptcy court allowed a claim against an estate which is an action that falls within the bankruptcy court's jurisdiction pursuant to 157(b)(1) and (2)(B).

 

The Fifth Circuit further held that propriety of the bankruptcy's determination to allow or disallow the claim against debtor's estate was not a jurisdictional inquiry, and thus the bankruptcy court did not lack subject matter jurisdiction.

 

Next, Construction Company argued that the district court erred in affirming the bankruptcy court's order determining that res judicata barred Construction Company from objecting to Secured Creditor's claim.

 

The Fifth Circuit again disagreed, ruling that Construction Company's objection was barred because the claim in the second bankruptcy as it related to Secured Creditor's claim in the 2015 Plan being for the right amount, arose out of the same transaction that was the subject of the 2015 Plan and Construction Company could have made its arguments in the first proceeding, but it did not.

 

The Appellate Court relied on its opinions in Eubanks and Howe in determining what constitutes an identity of claims for res judicata purposes. In Eubanks, the Court held that because the debtor's liability suit "put[] into issue the same facts which would determine, inter alia, the treatment and amount of the debt owed to [the bank]," there was an identity of claims between the confirmation order and the debtor's lender liability action. Eubanks v. F.D.I.C., 977 F.2d 166, 172-173 (5th Cir. 1992). In Howe, the Court found that a debtors' lender liability claims were barred by res judicata by a plan of reorganization because "[t]he loan transaction at the heart of the [lender liability] litigation was also the source of [the creditor's] claim against the estate." In re Howe, 913 F.2d 1138, 1144 (5th Cir. 1990).

 

The Fifth Circuit determined the answer hinged on whether the transactions at the heart of Construction Company's claim objection in the second bankruptcy were the source of Secured Creditor's claim in the first bankruptcy.

 

Here, the Appellate Court found that Construction Company's claim objection arose out of the subject matter that formed the basis of Secured Creditor's claim in the first action, i.e. the amounts Construction Company owed to Secured Creditor on the underlying promissory notes.  Because the claim objection arose out of the same transaction that was the subject of the 2015 Plan and since Construction Company could have raised an objection in the first proceeding, the Fifth Circuit ruled that the lower court was correct in finding the objection barred by res judicata.

 

Finally, the Fifth Circuit held that the lower court did not clearly err in allowing the amount of Secured Creditor's claim based on the ledger and witness presented by Secured Creditor at the hearing, and the fact that any payments not accounted for in the claim were payments made after the petition and were accounted for in the latest running of the balance.

 

Thus, the Fifth Circuit affirmed the judgment of the bankruptcy court.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, November 24, 2021

FYI: Ill App Ct (2nd Dist) Holds Successive Foreclosures Not Necessarily Barred by Dismissal of Prior Actions

The Appellate Court of Illinois, Second District, recently reversed a trial court's grant of a borrower's motion to dismiss a mortgagee's foreclosure complaint and the trial court's denial of the mortgagee's motion to reconsider.

 

In so ruling, the Second District held that the "single refiling" rule found in section 13-217 of the Illinois Code of Civil Procedure did not bar the mortgagee from filing a fourth foreclosure complaint against the same borrower even after voluntarily dismissing the prior three complaints without prejudice.

 

Specifically, the Appellate Court held that the fourth foreclosure complaint arose from a different set of operative facts than the prior foreclosure complaints, and that the mortgagee's voluntary dismissals of the prior actions each constituted affirmative acts revoking the prior accelerations of the debt.

 

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

 

A mortgagee filed three separate foreclosure complaints against a borrower before deciding to voluntarily dismiss each action without prejudice. When the mortgagee filed a fourth foreclosure complaint against the same borrower, the borrower filed a motion to dismiss the complaint pursuant to section 2-619 of the Code of Civil Procedure. The borrower's motion argued that the fourth foreclosure complaint was barred by section 13-217's single refiling rule and the principles of res judicata.

 

The mortgagee responded by arguing that the default date alleged in the fourth foreclosure complaint was not the same as claimed in the prior three foreclosure complaints and, therefore, was not in violation of the single refiling rule.

 

The trial court granted the borrower's motion to dismiss and denied the mortgagee's subsequent motion to reconsider.  The mortgagee timely appealed both rulings of the trial court and the Second District consolidated the appeals.

 

Initially, the Second Judicial District noted that the issue in this case was whether the Illinois "single refiling" rule barred the current action.

 

The Illinois Code of Civil Procedure, at 735 ILCS 5/13-217 states in relevant part that, when an action "is voluntarily dismissed by the plaintiff, or… is dismissed for want of prosecution, … the plaintiff…  may commence a new action within one year or within the remaining period of limitation, whichever is greater, after… the action is voluntarily dismissed by the plaintiff."  Additionally, the Illinois Supreme Court has interpreted section 13-217 as "expressly permit[ting] one, and only one, refiling of a claim even if the statute of limitations has not expired." Flesner v. Youngs Development Co., 145 Ill. 2d 252, 254 (1991).

 

To determine whether the single refiling rule barred the filing of the fourth foreclosure complaint, the Second District used the "transactional test" derived from res judicata cases. Wilmington Savings Fund Society, FSB v. Barrera, 2020 IL App (2d) 190883, ¶ 17. The transactional test treats separate claims as the same cause of action "if they arise from a single group of operative facts." Id. ¶ 19 (quoting River Park, Inc. v. City of Highland Park, 184 Ill. 2d 290, 311 (1998)).

 

Here, the mortgagee argued that its fourth foreclosure complaint arose from a different set of facts than its prior foreclosure complaints because the fourth complaint alleged a different default date than the earlier filed complaints. The borrower, in turn, contended that all four cases arose from the same set of operative facts because the bank accelerated the note upon the first default. According to the borrower, when the mortgage first accelerated the note, all installment obligations merged into one single obligation to pay the entire balance due under the note and the mortgage.

 

"Generally, … where a money obligation is payable in installments, a separate cause of action arises on each installment." McHenry Savings Bank v. Moy, 2021 IL App (2d) 200099, ¶ 30 (quoting Brown v. Charlestowne Group, Ltd., 221 Ill. App. 3d 44, 46 (1991)). Thus, the Second Judicial District reasoned that a plaintiff may bring a separate action on each installment as it becomes due and owing or wait until several installments are due and owing and then sue for all such installments in one cause of action. Barrera, 2020 IL App (2d) 190883, ¶ 19.

 

Therefore, the Second District held that the fourth foreclosure complaint did not arise from the same set of operative facts as the prior complaints.

 

The Second District also determined that the effect of a dismissal without prejudice is to render the proceedings a nullity and to leave the parties in the same position as if the case had never been filed. Palm v. 2800 Lake Shore Drive Condominium Ass'n, 2014 IL App (1st) 111290, ¶ 42. Therefore, because the mortgagee's alleged accelerations occurred by the filing of foreclosure actions, the Court concluded that the mortgagee's voluntary dismissals of those actions constituted affirmative acts of revocation of those accelerations.

 

Consequently, in the Second District's view, the parties returned to their pre-acceleration rights and obligations upon revocation, and the borrower was obligated to make monthly installments; thus, the borrower's new payment default gave rise to a separate action.

 

Accordingly, the Second District held that the present action and the prior actions were predicated on different operative facts, the single refiling rule did not bar the mortgagee's fourth foreclosure complaint, and the trial court erred by dismissing the mortgagee's fourth complaint. The Court thus reversed the judgment of the trial court and remanded the case for further proceedings.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Saturday, November 20, 2021

FYI: Ill App Ct (2nd Dist) Rejects "Dual Tracking", Standing, Notice, Other Challenges to Foreclosure

The Appellate Court of Illinois, Second District, recently affirmed a trial court's ruling denying a borrower's motion to vacate the default judgment of foreclosure against him and confirming the judicial sale of the borrower's property.

 

In so ruling, the Second District rejected the various arguments advanced by the borrower that (1) the trial court should not have confirmed the foreclosure sale because justice was not otherwise done in the matter, (2) the trial court should have vacated the default against the borrower because he did not receive notice of the default motion and his first attorney did not appear on his behalf, (3) the borrower was in the midst of loss mitigation when the complaint was filed, and should have been allowed to complete the process, (4) the borrower did not receive notice "of the trial" in violation of his federal and state constitutional due-process rights, and (5) the mortgagee plaintiff lacked standing to bring the foreclosure action.

 

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

 

This action arose out of a June 2018 mortgage foreclosure action brought by the mortgagee (Mortgagee) against the borrower (Debtor) and other defendants. Debtor was served with a summons which warned default judgment could be entered against him if he failed to answer. Debtor failed to answer or otherwise respond to the Complaint but appeared at a October 2018 status hearing.

 

In December 2018, Mortgagee moved for a default judgment against Debtor alleging Debtor had not yet responded to the complaint. Notice of the motion was mailed to Debtor which stated the motion would be presented on the same date as the next status hearing that was scheduled at the previous hearing. Debtor did not appear at the motion hearing and the trial court granted Mortgagees motion. Notice of the default judgment was sent to Debtor.

 

In March 2019, Mortgagee served Debtor with a notice of sale which indicated the property would be sold in April 2019. Notice of sale was published in the local newspaper and Mortgagee subsequently purchased the property at auction. Shortly after the sale, Mortgagee moved to confirm the sale. When Mortgagee presented the motion to confirm sale, Debtor appeared and the trial court allowed Debtor time to file a response in opposition to the confirmation of the sale.

 

In the interim, Debtor retained an attorney and moved the trial court to vacate default. Debtor alleged he had hired a different attorney after the October 2018 status hearing. Debtor asserted he did not receive notice of the default motion, which was filed with knowledge that Debtor was out of the country, and was not aware of the default until after the January 2019 status hearing. Debtor supposedly learned the property had been sold in April 2019, at which time he contacted his former attorney and was told the attorney was gravely sick and had not appeared at the January 2019 status hearing. Debtor argued that since the sale had not yet been approved, no final order had been entered and he could seek relief.

 

Debtor also referred to section 15-1508(b)(iv) of the Illinois Mortgage Foreclosure Law, arguing the sale should not be confirmed as "justice was not otherwise done in the matter and substantial justice would be served by vacating the judgment and the sale." Debtor also indicated he intended to raise several defenses to the complaint.

 

The trial court set briefing schedules for both motions and, in the interim, Debtor's attorney asked for leave to withdraw. The motion to withdraw was granted and notice of the motion and a copy of the order granting the motion was served on Debtor. The Debtor's motion and Mortgagee's motion were heard at a September 2019 date, at which Debtor failed to appear. The trial court granted Mortgagee's motion confirming the sale and denied Debtor's motion. Debtor appealed.

 

On appeal, the Second District noted that because Debtor did not provide a report of the proceedings or an acceptable substitute, the appellate court would presume the lower court's order conformed to the law and had sufficient factual basis. Wells Fargo Bank, N.A. v. Hansen, 2016 IL App. (1st) 143720, ¶ 15 (citing Foutch v. O'Bryant, 99 Ill. 2d 389, 391-92 (1984)).

 

The Appellate Court reviewed the lower court's orders for abuse of discretion and reiterated that without a report of proceedings or acceptable alternative, the court "must presume that the [trial] court did not act arbitrarily but within the bounds of reason, keeping in mind relevant legal principles." Hansen, 2016 IL App (1st) 143720, ¶ 15. Without a record of proceedings, Debtor could only show the court abused its discretion by demonstrating it erred as a matter of law. Id. at ¶ 16.

 

Debtor raised the following arguments on appeal (1) the trial court should not have confirmed the sale because justice was not otherwise done in the matter, (2) the trial court should have vacated the default because Debtor did not receive notice of the default motion and his first attorney did not appear on his behalf, (3) he was in the midst of loss mitigation when the complaint was filed, and should have been allowed to complete the process, (4) he did not receive notice "of the trial" in violation of his federal and state constitutional due-process rights, and (5) Mortgagee lacked standing to bring the foreclosure action.

 

The Second District rejected Debtor's first argument due to the absence of a report of proceedings. The Appellate Court reasoned that because there was no record of proceedings, it was unable to determine whether the lower court balanced the parties' interests or acted arbitrarily or beyond the bounds of reason while ignoring applicable principles of law. Id. at ¶ 14. Thus, the Appellate Court presumed the lower court's order "conformed to the law and had a sufficient factual basis." Id. at ¶ 15.

 

The Second District also found Debtor's motion to vacate and object to Mortgagee's motion to confirm the sale were deficient on their face, as once a motion to confirm sale has been filed, a borrower may no longer seek to vacate default judgment of foreclosure. Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469, ¶ 27. Debtor could only do so "by filing objections to the confirmation of the sale under the provisions of section 15-1508(b)" of the Illinois Mortgage Foreclosure Law.  Id.

 

Finally, the Appellate Court held that a meritorious defense was not sufficient to vacate the sale under the "justice was not otherwise done" provision but Debtor had also to establish that justice was not done because "either the lender, through fraud or misrepresentation, prevented the borrower from raising his meritorious defenses to the complaint at an earlier time in the proceedings, or the borrower has equitable defenses that reveal he was otherwise prevented from protecting his property interests." Id. at ¶ 26.

 

Debtor's second argument -- that the trial court should have vacated default since Debtor did not receive notice of the default motion and his first attorney did not appear on his behalf -- was forfeited for failure to cite any authority in support.  Doherty v. County Faire Conversion, LLC, 2020 IL App (1st) 192385, ¶ 36. The Appellate Court further reasoned there was nothing in the record to indicate Debtor did not receive notice and the motion was presented at a hearing of which Debtor had notice.

 

The Appellate Court also found Debtor had forfeited his third argument -- e was in the midst of loss mitigation when the complaint was filed, and should have been allowed to complete the process, as he failed to raise it in the trial court and did not develop his point beyond a mere contention.

 

The fourth argument -- that Debtor did not receive notice "of the trial" in violation of his federal and state constitutional due-process rights -- was forfeited as there was no trial in the matter and Debtor did not make it clear what his argument actually was. The fifth argument -- Mortgagee lacked standing to bring the foreclosure action -- was also forfeited as Debtor failed to raise the argument of lack of standing until after Debtor was held in default and Mortgagee had moved to confirm the sale.

 

Thus, the Appellate Court ruled that the trial court properly confirmed the judicial sale and denied Debtor's motion to vacate the underlying default.

 

 

 

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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Wednesday, November 17, 2021

FYI: 11th Cir "Letter Vendor" FDCPA Ruling Vacated, Court to Rehear Case En Banc

On their own initiative, the active judges of the U.S. Court of Appeals for the Eleventh Circuit have taken a vote and will hear the appeal, en banc, in Hunstein v. Preferred Collection and Management Services, Inc.

 

In addition, the Circuit issued an order vacating the Oct. 28, 2021 substituted opinion in Hunstein.  As an en banc appeal, the matter is now considered by all of the active judges of the Eleventh Circuit Court of Appeals.

 

The Oct. 28 opinion found that the debt collector's use of a letter vendor to print and send a dunning letter to a consumer sufficiently alleged a violation of section 1692c(b) of the federal Fair Debt Collection Practices Act and that the complaint's allegation that the information was disclosed to employees of the letter vendor was sufficient to allow the plaintiff to proceed in federal court. We discuss that opinion in detail here. 

 

The effect of today's order is that the Oct. 28 opinion is no longer "law" and all the active judges of the Eleventh Circuit will consider the appeal anew.

 

We expect Chief Judge William H. Pryor, Jr. will appoint three appeal managers. The appeal managers will decide what issues will be considered on rehearing and then prepare a proposed notice to the parties listing the issues to be briefed. Before the notice is issued, the appeal managers circulate it to the en banc court. Other judges can suggest changes, but the appeal managers have significant influence over the scope of the appeal.

 

We anticipate one appeal manager will be Judge Kevin C. Newsom, the author of the vacated Oct. 28 opinion. Typically, a dissenter would also be appointed as an appeal manager, in this case that would be Judge Gerald Tjoflat. However, Judge Tjoflat is on senior status and is not an "active judge" of the Circuit. Thus, we expect another judge may fill his role. Finally, the judge who requested the poll will probably be the third appeal manager.

 

 

 

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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Friday, November 12, 2021

FYI: 11th Cir Rejects Debtors' Challenge to Real Estate Collateral Sale Approved by Bankruptcy Court

The U.S. Court of Appeals for the Eleventh Circuit recently ruled that a Debtor's appeal of a sale order was statutorily mooted by Subsection 363(m) of the Bankruptcy Code.

 

In so ruling, the Eleventh Circuit held that: (1) while the Bankruptcy Code bars relief for an appeal pursuant to 11 U.S.C. § 363(m), it does not defeat jurisdiction; and (2) Subsection 363(m) applies to appeals from any sale authorized by the bankruptcy court, not just those properly authorized by the Bankruptcy Code.

 

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

 

The underlying proceedings arose out of two separate Chapter 11 bankruptcy proceedings. The first proceeding involved two natural person debtors ("Debtors") and the second proceeding involved the company owned by Debtors in the first proceedings ("Company Debtor"). Prior to declaring bankruptcy, Debtors and Company Debtors borrowed money from Lender, each serving as guarantor for the other's debt. The loans were secured by real property.

 

After declaring bankruptcy, Company Debtor was granted permission by the bankruptcy court to acquire a debtor-in-possession loan from Lender which would "roll-up" the debt and provide an additional amount of working capital. None of the parties thought this loan would affect the Lender's lien on real property collateral.

 

Approximately a month later, Debtors filed a motion seeking approval of the sale of the real property to Lender, pursuant to 11 U.S.C. § 363(b), which provides for the sale of a bankruptcy estate's assets outside the normal course of business. The sale was approved "via a credit bid of $3.5 million" under 11 U.S.C. § 363(k). In approving the sale, the bankruptcy court expressly found that Lender was "a good faith purchaser under Section 363(m) of the Bankruptcy Code."

 

After final approval of the sale, Debtors asserted that Lender's roll-up loan to Company Debtor had paid off their own debts to Lender and eliminated Lender's lien on their real property. Debtors filed a motion to amend the sale order and stay the sale.

 

The motion was rejected by the Bankruptcy Court as: (1) the only effect the roll-up loan had on Debtors loans was making Company Debtor a co-obligor rather than a guarantor; and (2) Debtors were foreclosed from arguing that Lender lacked a biddable interest in the property after final approval of the sale.

 

The bankruptcy court further ruled that equitable estoppel, judicial estoppel, and the law of the case barred Debtors from amending the sale on the ground that Lender lacked a biddable interest in the property. The bankruptcy court also held that the roll-up loan consolidated the Company Debtor's obligations, making it an obligor or co-obligor in all debt owed to Lender without eliminating Debtors' obligations to Lender.

 

Debtors appealed the sale order and the order denying their motion to amend, and petitioned the bankruptcy court to stay the sale pending appeal. The bankruptcy court agreed to grant the stay on condition that Debtors post a supersedeas bond which they failed to do.

 

Debtors ultimately gave the executed deed to the property to Lender and the deed was duly recorded. After the sale was consummated, Lender moved to dismiss the appeal as moot under 11 U.S.C. 363(m) and the motion was granted by the district court, which held that because Debtors did not obtain a stay or prevent the sale from being completed, the trial court lacked authority to grant effective relief under the Bankruptcy Code, which rendered the appeal moot.

 

Debtors then appealed the district court's decision.  The basis for the appeal was that Lender was not a good faith purchaser under the Bankruptcy code provision which governs sales of debtor assets.

 

Under Subsection 363(m) of the Bankruptcy Code, district and appellate courts are precluded from reversing or modifying a bankruptcy court's authorization of a sale of a bankruptcy estate's property to someone who "purchased … such property in good faith" under subsection 363(b) or (c) unless the sale was stayed pending appeal. 11 U.S.C. 363(m).

 

Although the Bankruptcy Code bars relief for an appeal pursuant to subsection 363(m) it does not defeat jurisdiction. However, as any opinion on the propriety of the transaction would be advisory-only, the appellate court considers such statutory appeals moot. See Chafin v. Chafin, 568 U.S. 165, 172 (2013).

 

The Eleventh Circuit here found that subsection 363(m) applied to Debtor's appeal, holding that section 363(m) applies to appeals from any sale authorized by the bankruptcy court, not just those properly authorized by the Bankruptcy Code.

 

The Court held that Subsection 363(m) is a flat rule, but acknowledged the applicability of Subsection 363(m) is still conditioned on the presence of (1) the failure of the appellant to obtain a stay of the sale order, and (2) a sale transacted with "an entity that purchased or leased [the] property in good faith."

 

Thus, the Eleventh Circuit held that appellate courts could assess whether a buyer acted in good faith in determining whether Subsection 363(m) moots an appeal.  Here, the Appellate Court found no evidence that Lender engaged in fraudulent behavior. The Court further found that Lender's lien had value enough to support the bankruptcy court's fact-finding that Lender was a good faith purchaser.

 

Having established that Debtors appeal was covered by Subsection 363(m), the Eleventh Circuit went on to affirm the district court's ruling that the relief sought by Debtors was precluded, thereby mooting their appeal.

 

The Debtors finally argued, that rather than unwinding the sale, the Court could make Lender pay cash for the property. However, the Eleventh Circuit held that because this relief would change the sale price after the fact, it would affect the validity of the sale on appeal. Thus, the Court reasoned, if it ordered Lender to pay an amount other than that which it bid and which the bankruptcy court approved, the Court would be undoing the sale itself, which they do not have the power to do under 363(m).

 

Therefore, as the statute forbids appellate court from providing a remedy, the Eleventh Circuit held that the appeal was moot.

 

 

 

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, November 8, 2021

FYI: More on 11th Cir's FDCPA Letter Vendor Ruling : "Hunstein II - The Phantom Harm Still Stands"

Costumes, candy, and frightening movie sequels often mark the end of October. Just in time for Halloween, the U.S. Court of Appeals for the Eleventh Circuit released its own scary sequel with its substituted opinion in Hunstein v. Preferred Collection and Management Services, Inc.

 

A copy of the opinion in "Hunstein II" is available at:  Link to Opinion

 

You surely know the first chapter of this chilling tale. Hunstein's vendor-disclosure claim was vanquished in the District Court but was then shockingly revived on appeal. Preferred fought back with a petition for rehearing, which was supported by a volley of amicus briefs. Then a higher power in the form of the Supreme Court of the United States sent our phantom-harm fighters another weapon: its decision in TransUnion LLC v. Ramirez.

 

There appeared to be no way Hunstein's claim could survive the sequel. Spoiler alert: It lives, and it continues to haunt collectors in the dark forests and murky bayous of Alabama, Florida, and Georgia. Put another way, the Eleventh Circuit held for a second time that Hunstein has standing to maintain his case in federal court and that his complaint states a claim under 15 U.S.C. § 1692c(b).

 

Many anticipated that the Hunstein sequel would star an ensemble cast comprising all the judges of the Eleventh Circuit in an en banc review. Instead, the three-judge panel decided to vacate its prior opinion and substitute a new opinion after reviewing Preferred's petition, the amicus briefs, and the Supreme Court's decision in TransUnion.

Kind, Not Degree

 

Standing opinions, like horror films, are largely formulaic so by now you know the plot. The plaintiff in a federal lawsuit must allege (among other things) that he has suffered a concrete injury. He can do this by alleging a tangible harm, a risk of real harm, or an intangible injury that is nonetheless treated by courts as concrete. Hunstein's alleged statutory violation falls into this third category.

 

In many instances, the intangible harm associated with a statutory violation is a ghost that cannot be seen, heard, or felt. The federal courts simply do not acknowledge these creatures; and plaintiffs who burden the federal courts with stories of such specters are told to seek their relief elsewhere. But two types of phantom harms can be sufficiently concrete to exist in federal court: (1) harms that bear a close resemblance to a harm historically recognized as actionable, such as that associated with a common-law tort claim; and (2) intangible (but nonetheless real) harms that were previously inadequate at law, but which Congress has elevated to the status of legally cognizable injuries.

 

In its original decision, the Hunstein panel explained that the harm associated with the disclosure to a mail vendor of information related to Hunstein's debt and his son's medical condition was sufficiently analogous to the common-law tort of public disclosure of private facts. Hunstein II takes a deeper look at how closely a phantom harm must resemble the harm associated with a common-law cause of action and ultimately holds that those harms need only be similar in kind, not in degree.

 

A public disclosure of private facts occurs when one gives publicity to the private matter of another. Courts have traditionally held that a plaintiff can recover only when the private matter was publicized, which means it must have been made known to the public or to a large group of people. Hunstein's allegation that Preferred disclosed his information to the employees of a mail vendor, a relatively small group, appears to fall well short of the publicity required for a public-disclosure-of-private-facts claim. However, the majority in Hunstein II said that the difference is a matter of degree not of kind, and thus held that Hunstein's alleged harm bore a sufficiently close relationship to a harm traditionally recognized by American courts.

 

Perhaps in that same spirit, the costume judges at a Halloween party two weeks ago decided that someone in a Where's Waldo outfit qualified for the Freddy Krueger look-alike contest.[1] The would-be Waldo sported a sweater with horizontal red stripes, so his appearance was similar in kind to Freddy's even if the degree to which he resembled an undead, homicidal, knife-fingered slasher left much to be desired.[2]

 

The Impact of TransUnion v. Ramirez

 

How did Hunstein's phantom claim survive TransUnion, which was hurled like a thunderbolt from a judicial Olympus after the petition for rehearing was briefed? As you might recall, the Supreme Court in TransUnion held that class members whose credit reports contained misleading information related to a terrorist list had standing only if their reports were published to third parties. According to the Hunstein II majority, TransUnion does not foreclose Hunstein's standing but rather confirms that the Eleventh Circuit struck the right balance by drawing a line between kind and degree.

 

However, the Eleventh Circuit still had to confront TransUnion's footnote 6, which seemed eerily aimed at the spectral harm associated with a vendor disclosure. In that footnote, the Supreme Court addressed whether TransUnion "published" class members' information to its own employees and to the vendors that printed notices and mailed them to the members of the class. The Supreme Court noted that "[m]any American courts did not traditionally recognize intra-company disclosures as actionable publications for purposes of the tort of defamation…[n]or have they necessarily recognized disclosures to printing vendors as actionable publications."

 

The Supreme Court also suggested that a plaintiff who alleges damages based on internal publication to employees or publication to third-party vendors would have to show that the defendant "brought an idea to the perception of another" and that "the document was actually read and not merely processed."

 

Hunstein II brushes TransUnion's footnote 6 aside as mere dicta, noting that the plaintiffs in TransUnion forfeited that argument by raising it for the first time on appeal. The Hunstein II majority also observed that TransUnion went to trial, whereas it was reviewing a motion to dismiss. As a result, the Eleventh Circuit had "no 'evidence' by which to evaluate whether anyone at [the mail vendor] 'actually read and not merely processed' Hunstein's sensitive information." Instead, the court had to accept as true Hunstein's allegation that the defendant debt collector did disclose his son's medical information to the mail vendor's employees. The court used this allegation, along with the defendant's concession that its transmittal of information to the mail vendor was a "communication" under the FDCPA, to distinguish Hunstein's standing from that of certain class members in TransUnion.

 

So perhaps Hunstein will have to prove on remand that at least one sentient being employed by the mail vendor read the information related to his debt. Or perhaps not. The Hunstein II majority also suggests that requiring Hunstein to show that mail-vendor employees actually read his information would "transform Spokeo's 'close relationship' test into a 'perfect match' test…[and] would do the very thing that the Court [in TransUnion] said it was not doing, namely, 'requir[ing] an exact duplicate' of a common-law claim."

 

Recall that in TransUnion the Supreme Court analogized the plaintiffs' Fair Credit Reporting Act claim to the common-law tort of defamation, even though a statement generally must be false to be defamatory and the statements at issue in TransUnion were merely misleading. After all, the credit reports at issue in that case did not say that the class members were terrorists, only that their names potentially matched names on a list of suspected terrorists. Similarly, if the credit reports of Mike Myers, the Canadian comedian, and Fred Krueger, a hypothetical sleep therapist in Peoria, indicated their names were on a list of suspected demons it would not technically be defamation, but it would be close enough to support an FCRA claim.

 

Returning to Hunstein II, the publication of private information to a handful of people (or to a corporate entity) is not publicity to the degree usually required for a public-disclosure-of-private-facts claim, but the majority held that it sufficiently resembles the type of harm associated with that tort to confer standing (at least in this case).[3]

 

The Vendor-Disclosure Allegation States a Claim

 

As for the merits of Hunstein's claim, the panel again held that he stated a claim under § 1692c(b), even while acknowledging once more that its decision "runs the risk of upsetting the status quo in the debt-collection industry" and that preventing collectors from using vendors "may not purchase much in the way of 'real' consumer privacy."

 

The Hunstein II majority believed the wording of the statute compelled its decision. Like an evil incantation, Congress's words breathed life into these shadowy harms and conjured them into existence. The remedy, therefore, is to ask Congress to remove its spell. However, there is reason to believe the battle in the Eleventh Circuit has not yet concluded.

Don't Skip the Dissent, or the Footnotes

 

While the Supreme Court's decision in TransUnion did not slay the mail-vendor-disclosure claim in the way some anticipated, it did convert one of the panel's three judges. That judge wrote a blistering dissent explaining his revised conclusion that Hunstein lacked Article III standing and failed to state a claim. The dissent also highlighted several strong arguments that defendants can use to fight similar claims in other circuits.

 

Also, it's easy to skip the footnotes when reading a decision that runs 65 pages in total, but you should take time to read them.[4] Those long footnotes are where the majority responds to points raised in the dissent.

 

Will there be a Hunstein III?

 

Like the final moments in many franchise films, the dissent provides a glimpse of what we might see unfold in a potential Hunstein III. Preferred can re-petition the court to grant en banc review of the panel's substituted opinion, and the entire Eleventh Circuit might be more inclined to review Hunstein II given that at least one judge now believes the majority's decision conflicts with the Supreme Court's holding in TransUnion.

 

Have we just seen the second part of a Hunstein trilogy? Maybe, but Hunstein III is (at most) a project in early development. Stay tuned.

 

 

[1] This analogy isn't perfect, but it's probably no worse than some of the analogies we will see as courts struggle to apply the kind/degree distinction. 

 

[2] Our surprise contestant was later disqualified when the judges were unable to locate him for the final evaluation, which I suppose is a win in its own way for someone dressed like Waldo.

 

[3] The majority said that the judgment of Congress also supported a finding of standing, but it did not add much to what it said on this point in Hunstein I.

 

[4] This was a test. You passed.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

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