Wednesday, June 22, 2022

FYI: 5th Cir Holds TPP Allowed for "Grace Period", and Servicer Breached TPP by Not Providing Permanent Mod

The U.S. Court of Appeals for the Fifth Circuit recently reversed a trial court's judgment in favor of a mortgage servicer ruling that the servicer had violated its obligations under a Trial Period Plan (TPP) in connection with a proposed loan modification when the servicer failed to offer a permanent loan modification after the borrower made payments in compliance with the "grace period" provisions of the TPP.

 

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

 

The case arises out of a Trial Period Plan ("TPP") offered in response to a borrower's ("Borrower") request for assistance from his home loan Servicer ("Servicer") after Borrower defaulted on his home loan. The TPP required three payments. The TPP stated that Borrower must make the payments on January 1, February 1, and March 1.  It also contained provisions which stated the payments must be made in the month in which they were due.

 

After Borrower made the three payments in the months in which they were due, but not on the first day of each month, Servicer informed Borrower he was ineligible for the permanent modification as he failed to comply with the terms of the TPP. Servicer then posted Borrower's property for foreclosure.

 

Borrower filed suit against Servicer alleging breach of contract. The trial court granted summary judgment in favor of Servicer, declining to give force to the grace period provisions of the TPP and thus finding that Borrower failed to comply with the provisions of the TPP's payment deadlines. Borrower appealed.

 

The Borrower and secured property were located in Texas.  Under Texas law, a plaintiff in a breach of contract action must show: "(1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained by the plaintiff as a result of the breach" to establish a breach of contract claim.  Smith Int'l, Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007).

 

Servicer first argued that the TTP was not a valid binding contract. However, the Fifth Circuit found the text of the TPP made clear that Servicer intended to be bound by the terms of the TPP upon Borrower's performance.

 

The Court referenced specific provisions of the TPP in reaching this decision including the following language: "If you successfully complete the [TTP] by making the required payments, you will receive a permanent modification with an interest rate of 6.375% which will be fixed for 480 months from the date the modification is effective." The Fifth Circuit also referenced the provision stating: "If you make your new payments timely we will not conduct a foreclosure sale." And finally, the Court noted the TPP expressly defined the terms of acceptance as "[t]he terms of this offer are accepted and the terms of your [TPP] are effective on the day you make your first trial period payment, provided you have paid it on or before the last day of [January 2019]." Thus, the Court found that an enforceable contract was created when Borrower made the first trial period payment on January 18, 2019.

 

Alternatively, Servicer argued that Borrower failed to comply with the requirement of the TPP that he make payments "in a timely manner." In support of this argument, Servicer noted the TPP established monthly deadlines of January 1, February 1, and March 1, 2019 on which payments were to be made, and that Borrower failed to meet these payment deadlines.

 

The Fifth Circuit rejected this argument because the language of the TPP also established a grace period which allowed for the acceptance of payments as long as they were made "in the month in which it is due."  Although the Court noted neither the TPP nor the parties used the term "grace period" to describe the language in the TPP, the Court found it was plainly contemplated by the text.

 

In response, Servicer argued that the Fifth Circuit should ignore the grace period as it irreconcilably conflicted with the monthly deadlines, and the express statement that "time is of the essence." The Court disagreed, noting that grace periods are common features of contracts and that grace periods and deadlines are in fact designed to co-exist.

 

Finally, the Fifth Circuit noted that even if the two provisions were irreconcilably conflicted, Servicer would have had to articulate some theory as to why the deadline provision should be favored over the grace period provision. "[R]espect for text requires that 'judges must do the least damage they can.'" Id.  (quoting Herrmann v. Cencom Cable Assocs., 978 F.2d 978, 983 (7th Cir. 1992)).

 

The Fifth Circuit found Servicer's failure to provide a reason as to why favoring the deadlines would "do the least damage" to the text of the TPP fatal to its case. Id. Because "if [the Court] [we]re truly unable to discern which provision should control, the proper resolution is to apply the unintelligibility canon and to deny effect to both provisions." Id. (cleaned up). Thus, both provisions would be ignored, and the Court would have reversed accordingly.

 

Thus, the Fifth Circuit ruled that Servicer violated its obligations under the TPP by refusing to grant the permanent loan modification and proceeding with foreclosure after Borrower met his obligations. The Court therefore reversed and remanded 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

 

 

 

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Monday, June 13, 2022

FYI: 11th Cir Holds TILA Periodic Statements Can Trigger FDCPA and FCCPA Liability

The U.S. Court of Appeals for the Eleventh Circuit recently reversed a trial court's dismissal of a consumer's complaint against a mortgage servicer brought under the federal Fair Debt Collections Practices Act ("FDCPA") and the Florida Consumer Collection Practices Act ("FCCPA").

 

In so ruling, the Eleventh Circuit held that monthly mortgage statements may constitute "communications" under the FDCPA and the FCCPA if they "contain debt-collection language that is not required by the Truth in Lending Act ("TILA") or its regulations" and the context suggests that the statements are an attempt to collect or induce payment on a debt.

 

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

 

A consumer sued his mortgage servicer, claiming that several mortgage statements sent by the servicer, as required by TILA, misstated a number of items, including the principal balance due. The consumer alleged that by sending these incorrect statements, the servicer violated the FDCPA and FCCPA.

 

The trial court dismissed the consumer's complaint with prejudice, agreeing with the mortgage servicer that the statements in question were not communications in connection with the collection of a debt and therefore not covered by the FDCPA and the FCCPA. The consumer timely appealed.

 

The question on appeal was whether monthly mortgage statements required by TILA and its implementing regulations can constitute communications in connection with the collection of a debt under the FDCPA and the FCCPA.

 

The FDCPA requires that the challenged communications be "in connection with the collection of a[ ] debt." See 15 U.S.C. §§ 1692d, 1692e(10), 1692f(1). The substantive FCCPA provisions similarly require that the correspondences be made in connection with "collecting [a] . . . debt[.]" Fla. Stat. §§ 559.72(7), 559.72(9). Both statues therefore require a nexus between the communication and the collection of a debt.

 

The Eleventh Circuit has held that the FDCPA's "in connection with the collection of a[ ] debt" language asks whether the "challenged conduct is related to debt collection," i.e., is "an attempt to 'collect' [a] debt." Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F.3d 1211, 1217 (11th Cir. 2012).

 

Additionally, TILA requires mortgage lenders and/or servicers to send their mortgagees a statement once per billing cycle, updating them on a number of items. These items are the amount of the principal obligation under the mortgage; the current interest rate in effect; the date on which the interest rate may reset or adjust; the amount of any prepayment penalty that may be charged; late payment fees; a telephone number and electronic mail address that can be used to obtain information regarding the mortgage; the names and contact information of credit counseling agencies or programs reasonably available; and such other information as may be required by regulation. See 15 U.S.C. § 1638(f)(1).

 

The Eleventh Circuit here concluded that the statements, even though required by TILA, were "related to debt collection." 

 

First, the statements expressly said that they were "an attempt to collect a debt" and that "[a]ll information obtained will be used for that purpose." Second, the statements had entries for "loan due date," "payment due date," "amount due," "total amount due," "interest-bearing principal," "deferred principal," "outstanding principal," and "interest rate." Third, the statements included a "delinquency notice" box, which listed overdue payments and the amount needed to bring the account current.  Finally, the statements attached a monthly payment coupon at the bottom of the first page with the mortgage servicer's address. The coupon included late fee information and instructed the consumer to "[p]lease detach bottom portion and return with your payment" and "[m]ake checks payable to [the mortgage servicer]"

 

The Eleventh Circuit holistically viewed a communication that expressly states that it is "an attempt to collect a debt," that asks for payment of a certain amount by a certain date, and that provides for a late fee if the payment is not made on time as plausibly "related to debt collection." Reese, 678 F.3d at 1217.

 

The context of the statements also mattered to the Eleventh Circuit. By the time the mortgage servicer sent the mortgage statements, the consumer had prevailed in a foreclosure action brought by the creditor for the consumer's mortgage loan. During that litigation, the mortgage servicer was servicing the loan. Therefore, the sums listed as allegedly due and owing in the statements, along with the delinquency notice, could have been viewed as an attempt to collect (or induce payment on) a disputed and allegedly defaulted debt. See Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011); Gburek v. Litton Loan Servicing LP, 614 F.3d 380, 386 (7th Cir. 2010).

 

Although some portions of the statements could have been for informational purposes, as prescribed by TILA, the Eleventh Circuit also held that a communication can have dual purposes. See Reese, 678 F.3d at 1217.

 

Furthermore, in this case, the mortgage statements contained "this is an attempt to collect a debt" language that is not required by the TILA or its regulations. The Eleventh Circuit noted that while the FDCPA mandates that consumers be told in the "initial written communication" that a "debt collector is attempting to collect a debt and that any information obtained will be used for that purpose," 15 U.S.C. § 1692e(11), neither the FDCPA nor TILA requires the use of such language in subsequent communications or periodic statements. "A monthly statement that is in conformity with TILA may nevertheless include additional language that constitutes debt collection." Green v. Specialized Loan Servicing LLC, 766 F. App'x 777, 785 (11th Cir. 2019).

 

Therefore, the Eleventh Circuit held that monthly mortgage statements required by TILA and its regulations can plausibly constitute communications in "connection with the collection of a[ ] debt" under the FDCPA and in connection with "collecting [a] . . . debt" under the FCCPA if (a) they contain the FDCPA's "this is an attempt to collect a debt" language, (b) they request or demand payment of a certain amount by a certain date, (c) they provide for a late fee if the payment is not made on time, and (d) the history between the parties suggests that the statement is an attempt to collect on a disputed debt. See Lear v. Select Portfolio Servicing, Inc., 309 F.Supp.3d 1237, 1240 (S.D. Fla. 2018).

 

Additionally, the Eleventh Circuit considered the guidance bulletin issued in 2013 by the Consumer Financial Protection Bureau, on which the trial court relied. See Consumer Financial Protection Bureau, Implementation Guidance for Certain Mortgage Servicing Rules, CFPB Bulletin 2013-2, 2013 WL 9001249 (Oct. 15, 2013). In that bulletin, the CFPB provided an "advisory opinion" concerning the "cease communications" option provided by the FDCPA. See 15 U.S.C. § 1692c(c). The CFPB concluded that servicers who are debt collectors are generally not liable under § 1692c(c) to consumers who make a "cease communications" request if they comply with the regulations issued under federal laws like TILA, including 12 C.F.R. § 1026.41 (the periodic statement regulation).

 

However, the Eleventh Circuit recognized that an agency's interpretive bulletin provides non-controlling guidance, and its persuasiveness depends on the thoroughness, consistency, and validity of its reasoning. See Rodriguez v. Farm Stores Grocery, Inc., 518 F.3d 1259, 1268 n.5 (11th Cir. 2008). Given that the CFPB bulletin deals only with consumers who choose the "cease communications" option under the FDCPA, the Court reasoned that the bulletin's guidance did not extend to the present situation. See 15 U.S.C. § 1692k(e). Indeed, the Court determined that there is nothing in the bulletin indicating that the CFPB sought to provide an advisory opinion excluding all TILA- required periodic mortgage statements from FDCPA coverage no matter the circumstances.

 

Accordingly, the Eleventh Circuit held that a required monthly mortgage statement that generally complies with TILA and its regulations can plausibly be a communication "in connection with the collection of a[ ] debt" under the FDCPA or in connection with "collecting [a] . . . debt" under the FCCPA if it contains additional debt-collection language. Thus, the Court reversed the trial court's dismissal of the consumer's complaint and remanded 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

 

 

 

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Thursday, June 9, 2022

FYI: Ill App Ct (3rd Dist) Rejects FCRA "Punitive Damages" Claim Due to Insufficient Supporting Allegations

The Appellate Court of Illinois, Third District, recently reversed a trial court's order dismissing a debtor's federal Fair Credit Reporting Act (FCRA) counterclaim against a bank. 

 

In so ruling, the Appellate Court held that:

 

(1)  The declaration supporting the bank's motion to dismiss improperly denied substantial allegations in Debtor's FCRA counterclaim; and

 

(2) The trial court properly rejected the debtor's motion to amend his claim to include a prayer for punitive damages, because the debtor did not allege any facts to support an allegation that the bank willfully violated the FCRA.

 

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

 

The appeal arose from a collection action filed by bank ("Creditor") against a credit card account holder ("Debtor"). Debtor asserted counterclaims against Creditor including claims for violation of the federal Truth in Lending Act (TILA) and the FCRA.  Creditor moved to dismiss the counter-claims as time barred and the trial court granted the motions. Debtor appealed (the "First Appeal") and the Appellate Court affirmed the dismissal of the TILA claim but reversed the dismissal of the FCRA claim.

 

On remand, Debtor moved to amend his FCRA claim to include a prayer for relief of punitive damages and his motion was denied.

 

Creditor moved to dismiss, arguing the FCRA claim failed as a matter of law because there was no evidence that Creditor received a dispute as alleged.  Debtor also filed a cross-motion to strike Creditor's motion to dismiss and for civil contempt.

 

The trial court denied Debtor's motions and granted Creditor's motion to dismiss the FCRA claim with prejudice. Debtor appealed the orders denying leave to amend, civil contempt relief, and to strike Creditor's motion, and the order granting Creditor's motion to dismiss.

 

Debtor argued the trial court erred in granting the motion to dismiss as Creditor did not provide any admissible affirmative matter to negate his counterclaim. Creditor argued that the trial court properly ruled that Debtor's FCRA claim failed as a matter of law.

 

As you may recall, under FCRA, a furnisher party may be subject to civil liability if it fails to comply with the requirements of the FCRA. See 15 U.S.C. §§ 1681n, 1681o (2018). The FCRA requires a consumer reporting agency ("CRA") to notify a furnisher when it receives a notification from a consumer of an alleged error in the consumer's credit report. See 15 U.S.C. §§ 1681i(a), 1681s-2(b) (2018). A furnisher's duty to investigate does not arise under the FCRA until after the CRA notifies the creditor of a dispute.

 

Debtor alleged that he notified a CRA of the alleged billing errors of Creditor, that Creditor failed to correct the errors, and that Creditor continued to issue erroneous negative credit reports based on the errors.

 

With its motion to dismiss, Creditor provided the declaration of the assistant vice president and Creditor's operations consultant in Creditor's legal order and case resolution operations group. The declaration stated that Creditor had no record of receiving an automatic consumer dispute verification ("ACDV") from any CRA in reference to Debtor's account in the subject time period.

 

Debtor argued the declaration was insufficient as it was not an affidavit and did not provide any affirmative matter sufficient to support Creditor's motion to dismiss.

 

The Appellate Court found the declaration sufficient in form as the information was based on the declarant's personal knowledge, a search of Creditor's records, and was made under penalties of perjury. See Ill. S. Ct. R. 191 (eff. Jan. 4, 2013); see also 735 ILCS 5/1-109 (West 2018).

 

However, the Appellate Court also found that despite the form being sufficient, the substance of the declaration was not "affirmative matter" but instead "evidence that refutes a well-pleaded fact of the complaint." Griffin v. Universal Casualty Co., 274 Ill. App. 3d 1056, 1063 (1995) (citing Chicago Title & Trust Co. v. Weiss, 238 Ill. App. 3d 921 (1992)).

 

The Appellate Court explained that the declaration simply identified a factual matter which was not appropriate for motion to dismiss, as it denied a substantial allegation in Debtor's FCRA counterclaim. Therefore, the Appellate Court reversed the order granting Creditor's motion to dismiss.

 

Debtor next argued that the trial court erred in denying his motion to amend his claim to include a prayer for punitive damages. Punitive damages are only available where a defendant acted willfully, under the FCRA. See 15 U.S.C. § 1681n (2018). Conduct that creates "'an unjustifiably high risk of harm that is either known or so obvious that it should be known'" is willful. Redman v. RadioShack Corp., 768 F.3d 622, 627 (7th Cir. 2014) (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)).

 

The Appellate Court noted that, as the trial court correctly found, Debtor did not allege any facts to support an allegation that Creditor willfully violated the FCRA. As such, the Appellate Court found the trial court's ruling was not an abuse of discretion.

 

Finally, Debtor argued the trial court erred in denying his motion for civil contempt. Debtor argued Creditor manipulated court orders and submitted court orders without the consent of Debtor or the trial court. The Appellate Court found the record disproved this argument, and thus affirmed the denial of the motion for civil contempt.

 

Accordingly, the Appellate Court reversed the trial court's order granting Creditor's motion to dismiss and affirmed the remaining orders.

 

 

 

 

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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Monday, June 6, 2022

FYI: Ill App Ct (1st Dist) Holds "Continuing" Guaranty Applied to Later Issued Note Obligation

The Illinois Court of Appeals, First District, recently affirmed a trial court's order granting summary judgment in favor of a creditor against a guarantor, finding that the guaranty was continuing and therefore applied to a later note obligation, even though the note was issued some two years after the guaranty.

 

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

 

The case arose from a note issued by a corporate borrower in 2010 ("Note") that was subsequently assigned.  In May 2008, prior to the issuance of the Note, several individual guarantors executed a "continuing" commercial guaranty ("Guaranty") as a security on a prior 2008 note by the same borrower to the same lender. 

 

Plaintiff, the current assignee if the Note and Guaranty ("Assignee"), filed a complaint against one of the guarantor ("Guarantor") alleging breach of the guaranty.  Assignee alleged that because the borrower defaulted on the Note, Guarantor owed Assignee money under the guaranty.

 

The trial court granted summary judgment in favor of Assignee and Guarantor appealed.

 

On appeal, the Appellate Court noted that, as a guaranty is a contractual obligation, a claim for breach of guaranty is governed by the same principles as a breach of contract claim. See Riley Acquisitions, Inc. v. Drexler, 408 Ill. App. 3d 397, 402-03 (2011). Thus, to recover on the guaranty, Assignee had to establish (1) that a valid and enforceable contract existed; (2) that there was performance by the plaintiff; (3) that the defendant breached the contract; and (4) that there was a resultant injury to the plaintiff. Zirp-Burnham, L.L.C. v. E. Terrell Associates, 356 Ill. App. 3d 590, 600 (2005). ¶ 34

 

Guarantor argued that summary judgment was improper as Assignee failed to establish that it was the current assignee of the guaranty, and thus failed to establish that there was a valid and enforceable contract between the parties. Guarantor further argued that even had Assignee been the current assignee of the guaranty, there were still genuine issues of material fact as to the scope of Guarantor's liability.

 

To support his arguments, Guarantor argued that neither the Note nor the two allonges which indorsed it reference or expressly assigned the Guaranty to Assignee, so as to establish that Assignee was the current owner of the guaranty. Guarantor further argued, that at the very least, in viewing the evidence in the light most favorable to Guarantor, the trial court should have ruled that there remained a genuine issue of material fact as to the scope of his liability under the guaranty.

 

Assignee responded that Guarantor's arguments were irrelevant as the trial court properly found that the plain language of the Guaranty established that it was a "continuing" guaranty, which obligated Guarantor to all future debts arising from the previous relationship established in the 2008 note.

 

The Appellate Court agreed with Assignee and found that the guaranty was "continuing", and that the trial court correctly held summary judgment was proper.

 

A "continuing guaranty is a contract pursuant to which a person agrees to be a secondary obligor for all future obligations of the principal obligor to the obligee." TH Davidson & Co. v. Eidola Concrete, L.L.C., 2012 IL App (3d) 110641, ¶ 11 (quoting Restatement (Third) of Suretyship and Guaranty § 16 (1996)). As guaranties are construed according to general contract principles, "[w]hether a guaranty is a continuing one will depend on the language of the contract, interpreted according to the intention of the parties as manifested by their writings." 20 Ill. L. and Prac., Guaranty § 15, at 369-70 (2010); see also McLean County Bank v. Brokaw, 119 Ill. 2d 405, 412 (1988); Blackhawk Hotel Associates v. Kaufman, 85 Ill.2d 59, 64 (1981).

 

Generally, "[w]here, by the terms of written guaranty it appears that the parties look to a future course of dealing or a succession of credits," it is considered a continuing guaranty. Scovill Manufacturing Co. v. Cassidy, 275 Ill. 462, 467 (1916); Weger v. Robinson Nash Motor Co., 340 Ill. 81, 92 (1930); see also C.C.P. Ltd. Partnership v. First Source Financial, Inc., 368 Ill. App. 3d 476, 483 (2006). ¶ 40.

 

The Appellate Court ruled that a review of the guaranty in the instant matter unequivocally established that a future course of dealing was contemplated by the parties. The Court pointed to a section of the guaranty which contained a heading "CONTINUING GUARANTY" which explicitly provided the Guarantor would remain responsible for his share of the Borrowers indebtedness "now existing or hereinafter arising or acquired, on a continuing basis." The provision further stated that any payments made on the indebtedness would not discharge nor diminish Guarantor's obligations for any "remaining and succeeding indebtedness."

 

The Appellate Court further noted the Guaranty provided no limitation on the duration of the guaranty. Further, Guarantor expressly authorized the original lender, "without notice or demand" and "without lessening" the liability under the guaranty, to "make one or more additional secured or unsecured loans *** or otherwise to extend additional credit" to the corporate borrower.

Thus, the Appellate Court found there was no doubt that a future course of dealing was contemplated by the parties and that the 2008 contract was for a continuing guaranty. See e.g., Harris Bank Argo v. Midpack Corp., 151 Ill. App. 3d 293, 295-296 (1986).

 

The Appellate Court further found that Assignee's failure to attach the 2008 note to the complaint was irrelevant and the 2010 Note was proof of Borrowers' indebtedness and an obligation "hereinafter arising" under the Guaranty. Additionally, the Appellate Court found that the 2010 Note was a future obligation between the original parties referenced in the guaranty for which Guarantor was liable.

 

Guarantor further argued that Assignee should not be allowed to enforce the Guaranty as it only claimed to be the holder of the guaranty by way of assignment and that there was no assignment of the guaranty.

 

The Appellate Court disagreed, finding this was essentially an argument for lack of standing. The Appellate Court found Guarantor failed to offer any evidence to show Assignee was not the holder of the guaranty and thus failed to meet his burden of pleading and proving the affirmative defense of lack of standing.

 

The Appellate Court also held that no explicit assignment of the guaranty was needed for Assignee to enforce the Note, as it was sufficient for Assignee to show it was the holder of the Note.

 

The Appellate Court found Comment f to section 13 of the Restatement Third of law, Suretyship and Guaranty, relied on by the trial court, to be instructive here. Section 13 provides that "…It can usually be assumed that the person assigning an underlying obligation intends to assign along with it any secondary obligation supporting it. Thus, unless there is agreement to the contrary or assignment is prohibit, *** assignment of the underlying obligation also assigns the secondary obligation."  Restatement (Third) of Suretyship and Guaranty § 13, Comment f. (1996).

 

The Appellate Court ruled that the Guaranty here explicitly authorized the original lender to "assign or transfer" the Guaranty from time to time.  In addition, the Guaranty stated it "shall be binding upon and inure to the benefit of the parties, their successors and assigns." Accordingly, the Appellate Court found when the Note was assigned to Assignee, the Guaranty was assigned as well, and thus summary judgment was proper in favor of Assignee.

 

Therefore, the Appellate Court 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

 

 

 

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

 

 

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Thursday, June 2, 2022

FYI: Maryland High Court Rules CLEC Requires Forfeiture of Treble the Prohibited Interest and Fees Collected

The Maryland Court of Appeals, the state's highest court, recently held that under Maryland Commercial Law Article § 12-1018(b), a credit grantor that knowingly violates the Maryland Credit Grantor Closed End Credit Provisions is required to forfeit treble the amount of interest, fees, and charges collected in violation of the subtitle.

 

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

 

The matter arose out of a borrower's ("Borrower") purchase of a motor vehicle which he financed by closed end credit pursuant to an agreement governed by the Credit Grantor Closed End Credit Provisions ("CLEC"). The Retail Installment Sales Contract ("RISC") entered into by Borrower for the purchase of his vehicle affirmatively invoked CLEC as the governing law.

 

Borrower instituted a class action suit against the auto finance company ("Lender") alleging that Lender violated CLEC by charging convenience fees for payments made over the phone, through an automated system or on the internet. Lender removed the matter to federal court, which requires an amount in controversy exceeding $5,000,000. Borrower filed a motion to remand back to state court. As the federal district court's subject matter jurisdiction was dependent on the minimal amount in controversy, the federal trial court certified a question of law to the Maryland Court of Appeals to determine the appropriate interpretation of CL § 12-1018(b).

 

The certified question certified was:

 

"If a credit grantor is found to have knowingly violated Credit Grantor Closed End Credit Provisions ("CLEC"), Maryland Code Annotated, Commercial Law §§ 12-1001, et seq., does [CL] § 12-1018(b) require the credit grantor to return three times: (1) all amounts collected by the credit grantor in excess of the principal amount financed; (2) only those amounts collected that the borrower contends violate CLEC (in this case, the convenience fees); or (3) some other amount?"

 

In answering the question, the Maryland Court of Appeals relied upon the caselaw regarding the CLEC, a plain language analysis of CL § 12-1018(b) and a review of the legislative history.

 

The Court noted that CLEC was enacted by the Maryland General Assembly as part of the Credit Deregulation Act of 1983 to enable Maryland banks "to compete more effectively with the banks in nearby states." Patton v. Wells Fargo Fin. Md., Inc., 437 Md. 83, 88-89 (2014). In addition to providing consumer protection to borrowers in transactions involving closed end credit, CLEC also establishes parameters and regulations with which credit grantors must comply. Patton, 437 Md. at 89. In addition, CLEC provides remedies to the borrower if the grantor fails to comply with its provisions. Id. at 90. However, it is only when a creditor grantor affirmatively elects CLEC to apply to a closed end credit loan that the protections, parameters, regulations and remedies apply. See CL § 12-1013, CL § 12-1013.1.

 

Borrower argued that when a credit grantor violates CLEC, then CL § 12-1018(b) requires the grantor to forfeit three times the amount of unauthorized charges.  Borrower additionally emphasized the legislative history indicating that the penalty provisions of CLEC are identical to those of the Maryland Secondary Mortgage Loan Law (Cl § 12-413) and thus, the case law and regulatory decisions interpreting CL § 12-413 provide the appropriate damages calculation under CL § 12-1018(b).

 

Lender argued that CL § 12-1018(b) would require a credit grantor to pay three times the amount collected in excess of the principal amount financed under the RISC. Lender further argued the opinion relied on by Borrower, Bolling v. Bay Country Consumer Finance, Inc., 251 Md. App. 575 (2021) was not properly before the court.

 

Maryland CL § 12-1018(a) provides "[e]xcept for a bona fide error of computation, if a creditor grantor violates any provision of this subtitle the creditor grantor may collect only the principal amount of the loan and may not collect any interest, costs, fees, or other charges with respect to the loan." CL § 12-1018(a)(2). In conducting its analysis, the Maryland Court of Appeals analyzed case law from various state and federal courts applying Maryland law.

 

The Maryland Court of Appeals noted that there is disagreement among the other courts as to when a borrower can bring a claim under CL § 12-1018(a)(2).  However, it noted that the other courts recognize that "CLEC does not provide for any fixed statutory damages beyond the [borrower's] actual loss[,]" and "that the penalty prescribed under CL § 12-1018(a)(2) confines the credit grantor to collection of the principal amount of the loan, thereby forfeiting any outstanding interest, charges, costs, and fees[.]" The Maryland Court of Appeals noted that the principle that CL § 12-1018(a)(2) limited a credit grantor's collection to the principal loan amount informed the its understanding of CL § 12-1018(b).

 

The Maryland Court of Appeals next turned to interpretation of CL § 12-1018(b), which states in relevant part "In addition, a credit grantor who knowingly violates any provision of this subtitle shall forfeit to the borrower 3 times the amount of interest, fees, and charges collected in excess of that authorized by this subtitle."

 

The Court found that the provision provides the penalty for knowing violations of CL § 12-1018(b) and that the words "in addition" signal that this penalty is additional to the penalty set forth in CL § 12-1018(a)(2).

 

The Maryland Court of Appeals focused on the phrase "in excess of that authorized by this subtitle." The Court found this language identified the amount to be trebled as that which the credit grantor was not permitted to charge under CLEC. The Court further noted that if the intention of the Maryland General Assembly was to require the grantor to pay treble the amount collected in excess of the principal, the provision would have been written to read as such. See Peterson v. State, 467 Md. 713, 727 (2020).

 

Finally, as the Maryland Generally Assembly only expressly authorized forfeiture of "the amount of interest, fees, and charges" that are "collected in excess of that authorized by the subtitle" the Court found that the amount to be trebled under CL § 12-1018(b) are the amounts collected which are not authorized under CLEC.

 

Finally, the Maryland Court of Appeals analyzed the legislative history, noting that the history revealed that the language originated in CL § 12-413, the Maryland Secondary Mortgage Loan Law.  Although the original bill did not include the penalty provisions of CL § 12-1018(a) and (b), amendments were ultimately added that were "identical as to penalty, as to those now existing under the Maryland Secondary Mortgage Loan Law." See Senate Bill 594, Analysis of Proposed Amendments (March 28, 1983) in legislative bill file for Senate Bill 591.

 

The Court further noted that the only amendment to CL § 12-1018(b) since its enactment in 1983 was to include the word "fees" as an impermissible collection, and there was nothing in the legislative history to suggest the legislature intended CL § 12-1018(b) to not be interpreted consistently with its plain meaning. As such, the Court found that assuming the convenience fees charged by Lender in violation of CLEC were knowingly collected, the correct damages calculation under CL § 12-1018(b) was treble the amount of the convenience fees collected.

 

Therefore, the Maryland Court of Appeals held that "CL § 12-1018(b) requires a credit grantor that is found to have knowingly violated CLEC to forfeit three times the amount of interest, fees, and charges collected in violation of the subtitle."

 

 

 

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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Tuesday, May 31, 2022

FYI: Ohio Sup Ct Rejects Series of Challenges by Borrower to Foreclosure

The Supreme Court of Ohio recently rejected the latest in a serious of appeals and other challenges by a borrower to the validity of a judgment of foreclosure entered against the borrower.

 

In so ruling, the Court held that the law-of-the-case doctrine applied, where the Supreme Court in a prior appeal held that the borrower's arguments lacked merit or were waived.

 

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

 

The appeal arose out of a foreclosure action brought against a borrower ("Borrower") by a bank mortgagee ("Bank"). A final judgment of foreclosure was entered in favor of Bank and Borrower appealed.

 

In the first appeal ("Appeal One"), Borrower argued that the trial court lacked jurisdiction because she had not been properly served. The Court of Appeals found that Borrower had waived this defense and the Supreme Court did not accept the discretionary appeal.

 

Two years later, Borrower filed a prohibition action in the Court of Appeals, which sought to prevent the foreclosure sale. The complaint was dismissed on the basis that the trial court had subject-matter jurisdiction and Borrower had an adequate legal remedy by way of the appeal.

 

A year later, Borrower filed a second prohibition action in the Court of Appeals, which again sought to prevent the foreclosure sale. The court again dismissed the complaint and denied Borrower's motion for reconsideration. The Court of Appeals again reasoned that Borrower's appeal in the foreclosure action was an adequate legal remedy.

 

Borrower then filed a motion for relief from judgment in the Court of Appeals and a notice of appeal in the Supreme Court.

 

The Supreme Court denied relief in the direct appeal on the basis that Borrower had an adequate legal remedy to challenge the trial court's exercise of jurisdiction over the foreclosure action. In reaching its decision, the Supreme Court rejected Borrower's argument that the trial court lacked jurisdiction due to alleged insufficient service finding Borrower "voluntarily submitted to the jurisdiction of the common pleas court in the foreclosure action by filing an Ohio Civ. R.12(B) motion to dismiss without asserting insufficiency of service or lack of personal jurisdiction as a defense." Lundeen I,164 Ohio St. 3d 159, 2021-Ohio-1533, 172 N.E.3d 15 at ¶20. The Supreme Court also ruled that Borrower's reliance on Ohio Civ. R. 3(A) did not present a question which concerned the trial court's subject-matter jurisdiction.

 

The Court of Appeals later denied Borrower's Ohio Civ. R. 60(B) motion for relief finding the motion lacked merit as Borrower challenged personal jurisdiction and not subject matter jurisdiction, Borrower had an adequate legal remedy, and the defense of lack of service had been waived.

 

Here, in this latest action, Borrower appealed the Court of Appeals' denial of her motion for relief from judgment.

 

The Supreme Court found the appeal was based on two essential points: (1) there was no subject-matter jurisdiction over the foreclosure action as Bank supposedly failed to commence the action within Ohio Civ. R. 3(A)'s one-year limitations period; and (2) as the trial court lacked subject-matter jurisdiction, it also lacked personal jurisdiction over her.

 

In order to prevail, Borrower would have needed to establish (1) that she had a meritorious claim or defense in the event relief was granted, (2) that she was entitled to relief under one of the provisions of Ohio Civ. R . 60(B)(1) through (5), and (3) that the motion was timely.  Strack v. Pelton, 70 Ohio St.3d 172, 174, 637 N.E.2d 914 (1994).

 

Appellees argued that Borrower could not establish a meritorious claim or defense asserting that her motion failed under the law-of-the-case doctrine as the arguments were already decided by the court in Lundeen I.

 

The law-of-the-case doctrine is a "rule of practice rather than a binding rule of substantive law," which "provides that legal questions resolved by a reviewing court in a prior appeal remain the law of that case for any subsequent proceedings at both the trial and appellate levels."  Farmers State Bank v. Sponaugle, 157 Ohio St.3d 151, 2019-Ohio-2518, 133 N.E.3d 470, ¶ 22; see also State ex rel. Dannaher v. Crawford, 78 Ohio St.3d 391, 394, 678 N.E.2d 549 (1997) (recognizing that the doctrine applies to extraordinary-writ actions). In the absence of extraordinary circumstances, "an inferior court has no discretion to disregard the mandate of a superior court in a prior appeal in the same case." Nolan v.  Nolan, 11 OhioSt.3d 1, 462 N.E.2d 410 (1984), syllabus.

 

As the Supreme Court previously found Borrower's argument relating to the trial court's lack of subject matter jurisdiction under Civ.R.3(A) lacked merit and that Borrower had waived the argument of lack of personal jurisdiction for lack of service, the Supreme Court here held that Borrower could not establish a meritorious claim or defense.

 

The Supreme Court held that its prior resolutions remained the law of the case. The Court further found there was nothing "obviously unjust" in its decision which would promote not applying the doctrine. Thus, the Supreme Court held that Court of Appeals did not abuse its discretion in denying Borrower's motion for relief.

 

Borrower alternately requested the Court of Appeals grant her motion based on its inherent power to vacate a void judgment. "The authority to vacate a void judgment is not derived from Ohio Civ. R. 60(B) but rather constitutes an inherent power possessed by Ohio courts."  Patton  v.  Diemer,  35  Ohio  St.3d  68,  518  N.E.2d  941  (1988), paragraph four of the syllabus.  "The traditional rule long followed in Ohio is that a void judgment is one entered by a court lacking subject-matter jurisdiction over the case or personal jurisdiction over the parties."  State v. Hudson, 161 Ohio St.3d 166, 2020-Ohio-3849, 161 N.E.3d 608, ¶ 11 (collecting cases).

 

The Supreme Court found the judgment was not void. The Supreme Court noted the Court of Appeals was vested with subject-matter jurisdiction over the prohibition action by the Ohio Constitution. See Ohio Constitution, Article IV, Section 3(B)(1)(d). The Supreme Court further found that personal jurisdiction was conferred on the Court of Appeals to enter judgment against Borrower by Borrower when she filed her complaint seeking relief in prohibition. See Moore v. Mt. Carmel Health Sys., 162 Ohio St.3d 106, 2020-Ohio-4113, 164 N.E.3d 376, ¶ 34.

 

Thus, the Court affirmed the judgment of the Court of Appeals.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Friday, May 27, 2022

FYI: 9th Cir Reverses Ruling in Favor of Lender in FCRA "Charged Off Second" Case

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's grant of summary judgment in favor of a mortgage lender in a consumer's action.

 

The consumer had alleged that the lender violated the federal Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681, et seq., by supposedly failing to reasonably investigate the consumer's dispute concerning a foreclosed out subordinate lien loan that the lender eventually reported to credit reporting agencies as "charged off" rather than "abolished", and by supposedly providing inaccurate information to those agencies.

 

In reversing the trial court's ruling, the Ninth Circuit concluded that the consumer more than satisfied his burden to make a prima facie showing of inaccurate reporting by establishing as a matter of law that the lender's reports were "patently incorrect."  The Ninth Circuit also held that there was a genuine factual dispute about the reasonableness of the lender's investigation.

 

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

 

In this matter, the lender reported the consumer's junior mortgage loan as "past due," with accruing interest and late fees and a string of missed payments. The consumer then submitted a written dispute to a credit reporting agency, which in turn sent notice to the lender.

 

The consumer's dispute noted that he had lost his home in a foreclosure sale and no longer owed the junior mortgage loan. Furthermore, the consumer included a citation to the Arizona Revised Statutes, pointing to the provision that purportedly "abolished" the debt, the Arizona Anti- Deficiency Statute. After a second written dispute, the lender eventually reported the debt as "charged off," rather than "abolished."

 

The consumer then sued the lender under FCRA.  The consumer alleged that the lender violated FCRA by supposedly failing to reasonably investigate his dispute and by supposedly providing inaccurate information to the three national credit reporting agencies.

 

On cross-motions for summary judgment, the trial court ruled for the lender, determining that its reports to the credit reporting agencies were accurate as a matter of law and that the lender had reasonably investigated the consumer's disputes. The consumer timely appealed.

 

As you recall, the FCRA regulates how furnishers must respond to a notice of dispute from a credit reporting agency. Among other things, the furnisher must correct or delete inaccurate information after conducting an "investigation with respect to the disputed information." 15 U.S.C. § 1681s-2(b). That "investigation" must be at least "reasonable" and "non-cursory." Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1157 (9th Cir. 2009). A consumer may sue a furnisher and recover damages if the furnisher willfully or negligently violated the FCRA. 15 U.S.C. §§ 1681n, 1681o; see Syed v. M- I, LLC, 853 F.3d 492, 503 (9th Cir. 2017).

 

Here, the Ninth Circuit determined that a furnisher's duties resemble those of a credit reporting agency, which can also be found liable for failing to "follow reasonable procedures to assure maximum possible accuracy" of information on a credit report. 15 U.S.C. § 1681e(b); see also 15 U.S.C. §§ 1681n, 1681o. In such lawsuits, before a court considers the reasonableness of the agency's procedures, the consumer must make a "prima facie showing" of inaccuracy in the agency's reporting. Shaw v. Experian Info. Sols., Inc., 891 F.3d 749, 756 (9thCir. 2018) (quoting Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 890 (9th Cir. 2010)).

 

Therefore, the Ninth Circuit concluded that the key to this case rested on the Arizona Anti-Deficiency Statute, which provides that, after a trustee sale, if a mortgage deficiency remains, "no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness . . . ." Ariz. Rev. Stat. § 33- 814(G). The Court found that this statute "abolished" the consumer's liability for the debt. Baker v. Gardner, 770 P.2d 766, 772 (Ariz. 1988).

 

Thus, with the consumer's liability "abolished," the Ninth Circuit held that he was no longer obligated to repay the debt. See Black's Law Dictionary (11th ed. 2019) (defining "debt" as "[l]iability on a claim"); (defining "liable" as "[r]esponsible or answerable in law; legally obligated"). Since the consumer no longer owed a balance, the Court also concluded that his payments were not late, and the loan should not have been accruing interest or late fees.

 

Accordingly, the Ninth Circuit held that the lender's reports were "patently incorrect" and the consumer more than satisfied his burden to make a prima facie showing of inaccurate reporting. Gorman, 584 F.3d at 1163.

 

Additionally, the Ninth Circuit held that there was a genuine factual dispute about the reasonableness of the lender's investigation.

 

Federal regulations require furnishers to "establish and implement reasonable written policies" to ensure the accuracy of their reports. 12 C.F.R. § 1022.42(a). The reasonableness of a furnisher's policies depends on the "nature, size, complexity, and scope of each furnisher's activities." Id. Courts have also identified several factors that inform the reasonableness analysis, including: the furnisher's relationship to the debt and to the consumer; the level of detail in the credit reporting agency's notice of dispute; and the feasibility of implementing investigatory procedures, including training staff. See, e.g., Gorman, 584 F.3d at 1157; Felts v. Wells Fargo Bank, N.A., 893 F.3d 1305, 1312 (11th Cir. 2018); Maiteki v. Marten Transport Ltd., 828 F.3d 1272, 1275 (10th Cir. 2016); Johnson v. MBNA Am. Bank, NA, 357 F.3d 426, 432 (4th Cir. 2004).

 

With these factors at play, the Ninth Circuit concluded that it was best left up to the jury to determine the reasonableness of the lender's investigation. The Court made the same ruling for the issue of actual damages.

 

Accordingly, the Ninth Circuit reversed the trial court's grant of summary judgment in favor of the lender and remanded back to the trial court 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

 

 

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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