Monday, November 21, 2022

FYI: 7th Cir Rules Lenders' Claims Against Borrower and Guarantor Were Time-Barred

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's ruling that two lenders' claims against a borrower were barred by the applicable statute of limitations. 

 

In so ruling, the Seventh Circuit held:

 

1) Under the language of the debt instruments at issue, the statute of limitations began to accrue when an event of default occurred under the terms of the mortgage note and not under the terms of a subsequent forbearance agreement;

 

and 

 

2) Under Illinois law, the statute of limitations defense does not operate to extinguish a debt, or absolve a person in the contract from the obligation, but merely renders that obligation unenforceable in court.

 

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

 

The defendant borrower (Borrower) sought investment funds for the purpose of building a condominium development off the coast of Cancun, Mexico.  Borrower formed a limited liability company and obtained loans from lenders secured by a mortgage and evidenced by a note (note) with the limited liability company (LLC) and a personal guaranty (guaranty) from the individual borrower.  

 

Borrower's venture ultimately failed. Over ten years later, lenders sued the limited liability company and individual borrower under note and guaranty seeking to recover the funds they loaned to the borrower and LLC. 

 

The trial court granted summary judgment to Borrower because any alleged breach of the mortgage, note and guaranty were brought beyond the expiration of the applicable ten-year statute of limitations under Illinois law. The lenders appealed. 

 

Lenders' claims under the note

 

Under the terms of the note, the principal and interest on the loans were due in June of 2007.  However, the note also contained an "event of default" acceleration clause that stated "the outstanding unpaid principal balance of the note, the accrued interest thereon and all other obligations of the borrower to the bank under the loan documents shall automatically become due and payable." If the borrower admitted in writing to its inability to pay its debts as they became due, then an event of default occurred.  

 

The Seventh Circuit agreed with the trial court that two separate emails from Borrower to the lenders, and not a subsequent forbearance agreement, constituted an event of default and acceleration of the outstanding unpaid principal and interest.  The first email was a request from Borrower for an additional loan from lenders in order to satisfy a tax obligation. The subsequent email referenced additional financial troubles including the notification that all construction on the project was suspended. As a result of the event of default and acceleration, the Seventh Circuit held that statute of limitations was triggered in September of 2008. 

 

The lenders argued that a forbearance agreement entered into in November of 2008 constituted a new promise to pay , and that the 10-year statute of limitations should accrue in November of 2008. However, the Seventh Circuit did not consider this argument because it was not properly raised at the trial court. As a result, the Appellate Court affirmed the trial court's ruling that the claims brought under the note were barred by the Illinois 10-year statute of limitations. 

 

Lenders' claims under the guaranty

 

On appeal, the lenders also argued that the trial court erred in holding that the statute of limitations defense was not waived in the guaranty. In support of this argument, the lenders relied on two provisions of the guaranty. First, the lenders argued that the language of the guaranty provided that the guaranty was "continuing, absolute, and unconditional, and shall remain in full force and effect with respect to any guarantor unit satisfaction in full of the borrowers' liabilities." Second, the lenders argued that the language of the guaranty provided that the guarantor waived certain defenses, including his statute of limitations defense. 

 

The guarantor argued that general waivers regarding important statutory rights should only constitute a waiver when the language in the guaranty is explicit. Because the guaranty here did not explicitly reference any waiver of the statute of limitations, the guarantor argued that the court should not rule that he waived any statute of limitations defense. 

 

The Court noted that the guaranty stated: "the Guarantor agrees that, except as hereinafter provided, its obligations under this Guaranty shall be unconditional, irrespective of … (vii) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor." 

 

The Seventh Circuit held that this provision in the guaranty ensures that the guaranty shall be unconditional and that no legal or equitable defense can alter the status of the obligations as unconditional. However, the Court held that the statute of limitations does not impact the unconditional nature of the obligation because Illinois courts recognize that the statute of limitations is not a defense that impacts a party's obligation, and does not operate to absolve a person in the contract from the obligation.  Instead, a statute of limitations only affects a party's ability to enforce the obligation in court.

 

Thus, the Court held, under the language of the guaranty, the statute of limitations defense was not waiver.

 

As a result, the Seventh Circuit affirmed the trial court's ruling that the lenders' claims were barred by the statute of limitations. 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Friday, November 18, 2022

FYI: Companies With Lax Data Security Risk Running Afoul of FTC

In a pair of recent enforcement actions, the Federal Trade Commission cracked down on companies with allegedly lax data security measures that resulted in the theft of personal information of millions of consumers.

 

In the first enforcement action, the FTC alleged that an online marketplace company and its CEO "were alerted to security problems two years prior to the breach yet failed to take steps to protect consumers' data from hackers."

 

Specifically, in 2018 hackers infiltrated the company's servers until the login information for its cloud computing account was changed. Unfortunately, according to the FTC, the company did not address that breach with adequate security measures yet continued to represent to the public it had appropriate security protections. Two years later, an employee's account was breached, and customers' information was stolen.

 

In the second enforcement action, the FTC alleged an education technology company suffered four security breaches since 2017 but failed to undertake adequate remediation, resulting in the exfiltration of millions of consumers' personal information.

 

A number of alleged violations were common to both companies, including:

 

> Failing to require multifactor authentication

> Limiting access to consumers' personal information

> Neglecting to monitor for security threats

> Failing to develop adequate security policies

> Failing to properly train employees

 

Pursuant to the proposed consent orders, both companies are required to remediate these and other issues. Notably, the order concerning the online marketplace company extends to its CEO individually, who "will be required to implement an information security program at future companies if he moves to a business collecting consumer information from more than 25,000 individuals, and where he is a majority owner, CEO, or senior officer with information security responsibilities."

 

The FTC has published a description of the first and second consent agreement packages in the Federal Register.  The agreements are subject to public comment for 30 days after publication, following which the Commission will decide whether to make the proposed consent orders final.

 

 

 

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 14, 2022

FYI: NY DFS Announces $4.5 Million Cybersecurity Penalty, Proposes Amendments to Cybersecurity Regs

The Superintendent for the New York Department of Financial Services (DFS) recently announced a consent order assessing a $4.5 million penalty against a health insurance company for violations of the DFS Cybersecurity Regulations, 23 NYCRR, Part 500.

 

The regulations apply to a "covered entity," defined as "any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law."

 

In this case, a phishing attack likely allowed unauthorized access to six years' worth of consumers' non-public information. According to DFS, the company failed to:

 

  • implement multi-factor authentication (§ 500.12);
  • limit user access privileges (§ 500.07);
  • implement sufficient data retention and disposal processes (§ 500.13); and
  • conduct an adequate risk assessment (§ 500.09).

 

In addition to the monetary penalty, the company is required conduct a comprehensive risk assessment, to include: a) reasonably necessary changes to address material issues identified in the assessment; b) plans for revisions of controls to respond to technological developments and evolving threats; and c) plans for updating or creating additional written policies and procedures.

 

To its credit, the company's "commendable cooperation throughout [the] investigation" was acknowledged by DFS as well as its "ongoing and completed efforts to remediate the shortcomings identified in this Consent Order."  This is contained in the "Monetary Penalty" section of the Consent Order, so presumably this favorable conduct had a positive impact on the amount of the penalty.

 

PROPOSED AMENDMENTS TO CYBERSECURITY REGULATIONS

 

DFS recently announced proposed amendments to its Cybersecurity Regulations that, if implemented, would require:

 

The creation of three tiers of companies, further tailoring the regulation to a diverse set of businesses with different defensive needs. Furthermore, based on feedback from the industry and in recognition of the realities of operating a small business, the proposed amendment increases the size threshold of smaller companies that are exempt from many parts of the regulation;   

 

Enhanced governance requirements, thereby increasing accountability for cybersecurity at the Board and C-Suite levels;  

 

Additional controls to prevent initial unauthorized access to technology systems and to prevent or mitigate the spread of an attack;  

 

Requiring more regular risk and vulnerability assessments, as well as more robust incident response, business continuity and disaster recovery planning; and  

 

Directing companies to invest in regular training and cybersecurity awareness programs that are relevant to their business model and personnel.  

 

DFS is accepting public comment on the proposed amendments through Jan. 9, 2023.

 

 

 

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, November 11, 2022

FYI: CFPB On Schedule With Consumer Data Privacy Rights Rulemaking Process

The Director of the Consumer Financial Protection Bureau (CFPB) recently announced at a fintech conference that the CFPB "will launch the process to activate a dormant authority under Section 1033 of the Consumer Financial Protection Act . . . [to] provide for personal financial data rights for Americans".

 

As background, § 1033[1] of the Consumer Financial Protection Act, a/k/a, the Dodd-Frank Act, generally allows a consumer access to transactional information that a business holds related to products or services that were provided to the consumer.

 

Specifically, § 1033(a) provides:

 

Subject to rules prescribed by the Bureau, a covered person shall make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data. The information shall be made available in an electronic form usable by consumers.

 

Of course, the rulemaking process under § 1033 was actually "launched" six years ago when the CFPB issued a Request for Information, which was followed by an Advance Notice of Proposed Rulemaking in 2020 that received 100 comments.

 

SBREFA PROCESS

 

Director Chopra's announcement was aligned with the Spring 2022 Unified Agenda that indicated the CFPB would issue a Small Business Regulatory Enforcement Fairness Act Outline ("Outline") in November 2022.  In fact, the CFPB ended up slightly ahead of schedule, issuing the Outline on Oct. 27.

 

The purpose of the Outline is "to assess the impact on small entities that would be directly affected by the proposals under consideration prior to issuing a proposed rule regarding section 1033."  The CFPB will convene a Small Business Review Panel to request and receive feedback from small entity representatives, and others may submit comments by Jan. 25, 2023.

 

SBREFA OUTLINE

 

The Outline consists of 149 questions on these topics:

 

-  Coverage of data providers subject to the proposals under consideration

-  Recipients of information

-  The types of information a covered data provider would be required to make available

-  How and when information would need to be made available

-  Third party obligations

-  Record retention obligations

-  Implementation period

-  Potential impacts on small entities

 

COVERAGE OF DATA PROVIDERS

 

The CFPB is proposing rules that would require a defined subset[2] of covered persons[3] that are data providers[4] to make consumer financial information available to a consumer or an authorized third party.[5],[6],[7],[8]

 

The CFPB is beginning with these covered persons, in part, "because they both implicate payments and transaction data," noting, however, that it "intends to evaluate how to proceed with regard to other data providers in the future."

 

Initially, as proposed, the rules would apply to this subset of covered persons:

 

Financial institutions with consumer "accounts" as defined in Regulation E,[9] such as banks, credit unions and other entities holding consumer asset accounts; and

"Card issuers" as defined in Regulation Z.[10]

 

Regarding entities that meet the Regulation E definition, the CFPB identifies:

 

-  Banks and credit unions that directly or indirectly hold a consumer asset account (including a prepaid account);

-  Other persons that directly or indirectly hold an asset account belonging to a consumer (including a prepaid account); and

-  Persons that issue an access device and agree with a consumer to provide electronic fund transfer (EFT) services (including mobile wallets and other electronic payment products).

 

Regarding entities that meet the Regulation Z definition, the CFPB identifies:

 

-  Issuers of a credit card account under an open-end (not home-secured) consumer credit plan (as defined in Regulation Z § 1026.2(a)(15)(ii)), i.e., a credit card account under an open-end (not home-secured) consumer credit plan is any open-end credit account that is accessed by a credit card; and

-  Issuers that do not hold consumer credit card accounts, but that issue credit cards, such as by issuing digital credential storage wallets, notwithstanding that those transactions rely on consumer credit card accounts held at another entity.

 

The CFPB is also considering exempting some data providers from a requirement to make data available via data portals based on thresholds, such as asset size of activity level.

 

RECIPIENTS OF INFORMATION

 

The CFPB is proposing that "a covered data provider would satisfy its obligation to make information available directly to a consumer by making the information available to the consumer who requested the information or all the consumers on a jointly held account."  This section includes a discussion of third-party authorization requirements.

 

TYPES OF INFORMATION MADE AVAILABLE

 

The CFPB proposes covered data providers would make available the following types of information:

 

-  Periodic statement information for settled transactions and deposits, such as generally appear for asset and credit card accounts;

-  Information regarding prior transactions and deposits that have not yet settled, such as transaction histories commonly made available through online management portals;

-  Other information about prior transactions not typically shown on periodic statements or portals, such as data from payment networks;

-  Online banking transactions that the consumer has set up but that have not yet occurred, such as with bill pay services;

-  Account identity information, but balancing it with concerns about fraud, privacy, and security; and

-  Other information, such as:

          -  Consumer reports from consumer reporting agencies, such as credit bureaus, obtained and used by the covered data provider in deciding whether to provide an account or other financial product or service to a consumer;

          -  Fees that the covered data provider assesses in connection with its covered accounts;

          -  Bonuses, rewards, discounts, or other incentives that the covered data provider issues to consumers; and

          -  Information about security breaches that exposed a consumer's identity or financial information.

 

HOW AND WHEN INFORMATION WOULD BE MADE AVAILABLE

 

Regarding direct access to information by consumers, the CFPB proposes that "a covered data provider would be required to make available information if it has enough information to reasonably authenticate the consumer's identity and reasonably identify the information requested."  Also, with proper authentication, that "covered data providers would be required to allow consumers to export the information covered by the proposals under consideration in both human and machine-readable formats."

 

The CFPB seeks input regarding consumer identity authentication, fees, included data elements, and data formats.

 

Related proposals regarding third-party access include:

 

-  Third-party portals that do not require an authorized third party to possess or retain consumer credentials;

-  Requirements to promote the availability, security, and accuracy of information made available to authorized third parties, including establishment of a general framework under which industry-set standards and guidelines can further develop;

-  Third-party portal requirements related to factors affecting the quality, timeliness, and usability of the information;

-  Required policies and procedures or performance standards to ensure that the transmission of information through the covered data provider's third-party access portal does not introduce inaccuracies;

-  Requirements to make information available to a third party only upon receipt of a third party's authority to access information on behalf of a consumer, information sufficient to identify the scope of the information requested, and information sufficient to authenticate the third party's identity; and

-  Requirements and restrictions regarding the provision of information to third parties that is known to be inaccurate.

 

THIRD PARTY OBLIGATIONS

 

Here, the CFPB's proposals relate to the obligations of third parties, including:

 

-  Prohibiting the collection, use, or retention of consumer information beyond what is reasonably necessary to provide the product or service the consumer has requested;

-  Limitations on duration and frequency of information access;

-  Limitations on third parties' secondary use of consumer-authorized information;

-  Deletion of consumer information that is no longer reasonably necessary to provide the consumer's requested product or service, or upon the consumer's revocation of the third-party's authorization;

-  Compliance with the Safeguards Rule or Safeguards Guidelines, or development and implementation of security programs based on the third party's size and complexity and the nature of the data;

-  Requiring policies and procedures to ensure the accuracy of information collected and used;

-  Requiring periodic reminders to consumers on how to revoke authorization; and

-  Requiring a mechanism to request information about the extent and purposes of the authorized third party's access.

 

RECORD RETENTION OBLIGATIONS

 

The CFPB is seeking feedback on its proposal for "record retention requirements for covered data providers and authorized third parties to demonstrate compliance with certain requirements of the rule."

 

IMPLEMENTATION PERIOD

 

The CFPB is seeking "input on an appropriate implementation period for complying with a final rule," and how the timeframe may need to take into consideration smaller entities' ability to operationalize the requirements.

 

POTENTIAL IMPACTS ON SMALL ENTITIES

 

A major part of this section is devoted to quantifying the number of small entities that may be affected by the proposals. The CFPB provides estimates for the following:

 

Small Depository Firms

Commercial Banking and Savings Institutions

Credit Unions

Small Nondepository Firms

Software Publishers

Data Processing, Hosting, and Related Services

Sales Financing

Consumer Lending

Real Estate Credit

Financial Transactions Processing, Reserve, and Clearinghouse Activities

Other Activities Related to Credit Intermediation

Investment Banking and Securities Dealing

Securities Brokerage

Commodities Contracts Brokerage

Payroll Services

Custom Computer Programming Services

Credit Bureaus

 

IMPRESSION

 

The concepts and proposals in the Outline are similar to the consumer rights contained in the data privacy laws passed in California, Virginia, Colorado, Utah, and Connecticut, with one major difference: there is no exemption for data or entities subject to the Gramm-Leach-Bliley Act.  Thus, businesses that fit the definition of a covered data provider and have previously relied in whole or in part on those GLBA exemptions should monitor this rulemaking closely and consider the new compliance challenges it will pose.

 

[1]  12 U.S.C. § 5533.

 

[2] "Covered data provider means a financial institution, as defined in Regulation E (EFTA), or a card issuer, as defined in Regulation Z (TILA), who is a data provider."  Outline, p. 66

 

[3] "The term 'covered person' means: (A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person."  12 U.S.C. § 5481(6).

 

[4] A "data provider" means a covered person, as defined under the Dodd-Frank Act (12 U.S.C. 5481(6)), with control or possession of consumer financial information. Outline, p. 66.

 

[5] "Third party refers, generally, to data recipients or data aggregators." Outline, p. 68.

 

[6] "Data recipient means a third party that uses consumer-authorized information access to provide (1) products or services to the authorizing consumer or (2) services used by entities that provide products or services to the authorizing consumer." Outline, p. 66.

 

[7] "Data aggregator (or aggregator) means an entity that supports data recipients and data providers in enabling consumer-authorized information access." Outline, p. 66.

 

[8] "Authorized third party means a third party who has followed the procedures for authorization described in part III.B.2." Outline, p. 66.

 

[9] "'Account' means a demand deposit (checking), savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes." 12 C.F.R. § 1005.2(b)(1).

 

[10] "Card issuer means a person that issues a credit card or that person's agent with respect to the card." 12 C.F.R. § 1026.2(a)(7).

 

 

 

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 7, 2022

FYI: Cal App Ct (4th Dist) Upholds Dismissal of Challenges to PACE Loans

The California Court of Appeal, Fourth Appellate District, recently held that a group of senior citizen consumers were required to pursue administrative remedies before suing private companies to challenge their tax assessments billed under the state's Property Assessed Clean Energy program (PACE).

 

In so ruling, the Fourth District upheld the trial court's dismissal of several putative class action complaints seeking "tax refunds, an injunction against future tax assessments, and removal of tax liens" relating to PACE loans.

 

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

 

California enacted PACE as a method for homeowners to finance energy and water conservation improvements. A PACE debt is created by contract and secured by the improved property. But like a tax, the installment payments are billed and paid as a special assessment on the improved property, resulting in a first-priority tax lien in the event of default.

 

Classes of consumers in multiple putative class actions who were over 65 years old and entered into PACE contracts sued private companies who either made PACE loans to the consumers, were assigned rights to payment, and/or administered PACE programs for municipalities. The consumers alleged that the PACE financing was actually, and should have been treated as, a secured home improvement loan. The consumers also asserted that the companies engaged in unfair and deceptive business practices by violating consumer protection laws, including California Civil Code section 1804.1(j), which prohibits taking a security interest in a senior citizen's residence to secure a home improvement loan.

 

The defendant companies demurred to the complaints on the sole ground that the consumers failed to allege they first exhausted administrative remedies.

 

Generally, "a party must exhaust administrative remedies before resorting to the courts." Plantier v. Ramona Municipal Water Dist. (2019) 7 Cal.5th 372, 383. Additionally, the California Constitution gives the legislature exclusive control over the procedure under which a taxpayer may recover certain tax payments. Article XIII, section 32 provides: "After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature." It also specifies that "[t]he Legislature shall pass all laws necessary to carry out [its] provisions." Cal. Const., art. XIII, § 33.

 

​​Taxpayers have the right to challenge an inaccurate or illegal tax assessment and to claim a refund of taxes. The process is initiated by an application for assessment reduction under Civil Code section 1603, subdivision (a), which provides: "A reduction in an assessment on the local roll shall not be made unless the party affected . . . files with the county board a verified, written application showing the facts claimed to require the reduction and the applicant's opinion of the full value of the property." Under section 1610.8, the board may "cancel[ ] improper assessments." An order for refund cannot be made unless a verified claim is filed under section 5097. Lastly, the taxpayer may file an action in the superior court to recover a tax that the board has refused to refund after a duly filed claim. § 5140.

 

The trial court agreed with the defendant companies, sustained the demurrers without leave to amend, and entered a judgment of dismissal. The consumers timely appealed.

 

On appeal, the consumers primarily contended that they were not required to pursue administrative remedies because they had sued only private companies and did not challenge the municipal tax process involved. Instead, the complaints sought tax refunds, an injunction against future tax assessments, and removal of tax liens. Relying on Oakland v. California Construction Co. (1940) 15 Cal.2d 573 (Oakland), the consumers asserted that a "request by private party property owners for the return of money paid out on a void contractual obligation [is] not a challenge to an assessment lien" and, therefore, does not require that they first exhaust administrative remedies.

 

The Fourth District disagreed and held that, for the purposes of applying the exhaustion rule, the PACE assessments can only be treated as taxes. This is because, under Revenue and Taxation Code section 4801, "taxes" include "assessments collected at the same time and in the same manner as county taxes." § 4801; see Kahan v. City of Richmond (2019) 35 Cal.App.5th 721, 737. Therefore, despite their assertions to the contrary, the Court concluded that the consumers did challenge their property tax assessments.

 

The Fourth District also found the California Supreme Court's ruling in Oakland to be materially distinguishable because that case did not involve a challenge to any tax. Rather, the city of Oakland sought to void street improvement contracts based on a contractor's alleged fraud during the bidding process. Oakland, supra, 15 Cal.2d at pp. 574‒575.

 

The consumers also argued that the exhaustion rule only applies to lawsuits against the government. They found support for this view in section 5140, which provides that the "person who paid the tax" is authorized to bring a refund action against "a county or a city" to recover tax the county or city has refused to refund.

 

However, the Fourth District determined that this argument was foreclosed by the California Supreme Court's decision in Loeffler. In that case, the court held that consumers had to first exhaust administrative tax remedies before bringing an action under the Unfair Competition Law to challenge a retailer's alleged misrepresentation about whether a sale of hot coffee was subject to sales tax. Loeffler, 58 Cal.4th at pp. 1092, 1134. The California Supreme Court explained that the question of taxability had to be first decided administratively, followed by judicial review of the agency's decision. Id. at p. 1127. An injunction prohibiting retailers from collecting sales tax "could indirectly reduce the flow of tax revenue in the future" and thus involved policies the exhaustion rule was intended to address. Id. at p. 1131.

 

Similarly here, the Fourth District concluded that the consumers' PACE assessments undoubtedly would be affected by the adjudication of the complaints. The consumers alleged that the PACE loans were "void at inception for illegality" and the resulting security interest (i.e., a property tax lien) was also unlawful and "void." Because the tax rested exclusively upon the validity of the PACE financing, a judgment that the debt and security interest were illegal and void would negate the sole basis of the tax assessment.

 

The consumers also asked the Fourth District to apply a broad exception to exhaustion on the grounds that "no purpose would be served" by requiring the board to consider a pure legal issue — whether consumer protection statutes apply to these PACE loans.

 

A limited exception to the exhaustion rule has generally been recognized where " 'the administrative agency cannot provide an adequate remedy' and 'when the subject of a controversy lies outside the agency's jurisdiction.' " Williams & Fickett, supra, 2 Cal.5th at p. 1274. But in this case, the Fourth District concluded that an adequate remedy did exist because, by statute, the board "shall" refund property tax that is erroneously or illegally assessed. § 5096, subds. (b), (c).

 

Lastly, the consumers asserted that the Fourth District should still rule on whether they have stated a valid claim on the merits. However, because the demurrers were limited to whether the consumers had failed to exhaust administrative remedies, the Appellate Court held that the issue of whether the consumers' substantive claims had merit was not before it.

 

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

 

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Saturday, November 5, 2022

FYI: 7th Cir Rejects FCRA Claim for Lack of Standing at Summary Judgment Stage

The U.S. Court of Appeals for the Seventh Circuit affirmed a trial court's dismissal, on separate grounds, of a borrower's FCRA claims because the borrower lacked standing.

 

In addition, the Seventh Circuit held that the borrower's affidavit made conclusory statements with documentary support, and was therefore insufficient to defeat the lender's motion for summary judgment. 

 

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

 

The plaintiff borrower was a real estate developer who relied on loans to operate his real estate development business. A dispute arose between the borrower and his lender regarding a $1.1 million dollar mortgage loan. 

 

The borrower and lender disputed the scope of certain insurance coverage, whether certain insurance coverage was sufficient to satisfy the terms of the loan, and whether timely payments for insurance premiums were made by the borrower. The lender asserted that the borrower did not comply with the terms of the loan and the lender was forced to obtain additional insurance coverage and assess the cost of the additional insurance coverage to the borrower. The borrower allegedly did not pay the increased insurance premiums and disputed that the additional insurance was required. 

 

The lender notified various credit reporting agencies of borrower's late payments. The borrower disputed these payments were late and filed a formal dispute with the credit reporting agencies.  The borrower alleged that based on the lender's notification of the credit reporting agencies, the borrower's credit score decreased. Because of the decrease in his credit score, this allegedly prevented borrower from obtaining a new loan, purchasing new property, refinancing his loans and resulted in borrower being forced to sell certain property and forego rental income.

 

The borrower sued the lender for various claims including alleging that the lender violated the FCRA by failing to investigate the dispute borrower filed with the credit reporting agencies, and for breach of contract relating to the lender's decision to obtain force-placed insurance coverage, breach of implied duty of good faith and fair dealing, and a breach of fiduciary duty for allegedly mishandling the loan's escrow account. The lender filed a counterclaim to obtain a judgment on the loan.

 

The trial court granted summary judgment for the lender and dismissed borrower's claims. The borrower appealed.

 

THE SUMMARY JUDGMENT AFFIDAVITS

 

The borrower argued that the trial court erred by properly considering the evidence in the borrower's affidavit filed in opposition to the lender motion for summary judgment. The Seventh Circuit noted that trial courts may find affidavits as insufficient or conclusory at the summary judgment stage without making specific findings about the litigant's credibility. Credibility determinations are normally reserved for in-person testimony.

 

Throughout his affidavit, the Court noted, the borrower made numerous allegations but failed to support these allegations with documentary evidence.  For example, the borrower averred in his affidavit that he provided proof of flood insurance to the lender and that he was current on his loan payments. However, the borrower did not support these averments with documentary evidence. As result, the Seventh Circuit agreed that the borrower's affidavit lacked the substance to rebut the lender's affidavit and cause a genuine issue of a material fact.

 

In support of its motion for summary judgment, the lender also filed an affidavit. The borrower argued that the lender's affidavit was faulty because the corporate representative who signed the affidavit did not have sufficient personal knowledge. However, because the borrower did not challenge the validity of the lender's affidavit at the trial court level, the Seventh Circuit ruled that he waived this argument. 

 

Even if the borrower did not waive this claim, the Appellate Court held that borrower's arguments were without merit because the lender submitted a properly authenticated business record under Fed. R. of Evidence 803(6) and 901(b)(1). Under these rules, the corporate representative only needs to personally know of the procedure utilized by the lender to create and maintain the documents relied upon in the affidavit. The Court of Appeals affirmed the propriety of the lender's affidavit and rejected all of the borrower's arguments about the invalidity of lender's affidavit.

 

THE FCRA CLAIM FAILED FOR LACK OF STANDING

 

The borrower also argued that the trial court erred when it dismissed his FCRA claim against the lender. The Seventh Circuit affirmed the trial court's decision to dismiss the borrower's FCRA claim but on separate grounds. The Court of Appeals sua sponte held that the borrower lacked standing to even bring the FCRA claim against the lender because the borrower's injury was not fairly traceable to the alleged violation.

 

As you may recall, a plaintiff must show an injury beyond just a statutory violation. See Spokeo, Inc. v. Robins, 578 U.S. 330, 341–42 (2016). At the  summary judgment stage of litigation, a plaintiff can meet this standard by establishing specific facts that show "a concrete and particularized injury that is both fairly traceable to the challenged conduct and likely redressable by a judicial decision. Spuhler v. State Collection Serv., Inc., 983 F.3d 282, 284 (7th Cir. 2020) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992)).

 

Once a party pleads an injury, they are still required to prove causation that shows "that the defendant's actual action has caused the substantial risk of harm." Remijas v. Neiman Marcus Group, LLC, 794 F.3d 688, 696 (7th Cir. 2015) (quoting Clapper v. Amnesty Int'l USA, 568 U.S. 398, 414 n.5 (2013)).

 

The borrower's alleged damages occurred when the lender received two notices of borrower's dispute from the credit reporting agencies in January of 2012. The borrower alleged due to the lender's failure to investigate this dispute and properly respond, the borrower's credit score dropped and he was injured.

 

However, the Seventh Circuit noted that the alleged injury was related to a decrease in his credit score in 2011.  Therefore, this injury could not be fairly traced to a failure of the lender to reasonably investigate credit reporting disputes in January of 2012. Therefore, the Seventh Circuit affirmed the dismissal of the borrower's FCRA claim for lack of standing.

 

THE COMMON LAW CLAIMS ALSO FAILED

 

The borrower also argued that the trial court erred by dismissing his breach of contract and breach of fiduciary duty claims. In support of his argument, the borrower asserted that he did not receive certain contractually required notices from the lender, and was forced to sell valuable possessions for less than market value as a result.

 

The Seventh Circuit also this argument because the language of the mortgage deemed service of the notices by the lender to be effective upon mailing. Additionally, the Court of Appeals held that the evidence proffered by the borrower was too speculative to meet the required elements of a breach of contract claim, and Florida law prohibits standalone claims for breach of the implied duty of good faith and fair dealing without alleging a breach of an express contract term  Ins. Concepts & Design, Inc. v. Healthplan Servs., Inc., 785 So. 2d 1232, 1234 (Fla. Ct. App. 2001)

 

Last, the borrower argued that the lender's counterclaim for a judgment on the loan should not have been granted. The Court of Appeals held this argument was without merit because borrower only generally stated that he remained in compliance with the terms of the loan while separately admitting that the lender returned his partial payments for two years.

 

The Court of Appeals affirmed the trial court's ruling on all grounds but vacated the judgment as to the FCRA claim and remanded with instructions for the trial court to dismiss the FCRA claim on the separate ground that the borrower lacked standing because the injury was not fairly traceable to the alleged violation. 

 

 

 

 

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:

 

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and

 

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and

 

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