Thursday, June 10, 2021

FYI: 2nd Cir Rules in Favor of Mortgagee on New York Pre-Foreclosure Notice and Filing Issues

The U.S. Court of Appeals for the Second Circuit recently affirmed summary judgment in a mortgagee's favor against borrower claims that it failed to comply with pre-foreclosure notice and filing requirements of the New York Real Property Actions and Proceedings Law.

 

With the benefit of guidance from answers to two certified questions to the New York Court of Appeals, the Second Circuit held that:

 

- The mortgagee's deviation of its routine procedures by mailing the requisite RPAPL § 1304 90-day pre-foreclosure notice nearly a year after the default, and not "upon default," was immaterial, and coupled with the borrowers' claim the notice was not received, inadequate to rebut the presumption that the notice was properly prepared and mailed; and

 

-  Because the New York Court of Appeals concluded that under RPAPL § 1306 is satisfied as long as one borrower is listed on the pre-foreclosure filing, the mortgagee's omission of information as to the co-borrower was immaterial.

 

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

 

After husband and wife co-borrowers ("Borrowers") ceased making payments on their mortgage loan, the mortgagee ("Mortgagee") initiated foreclosure proceedings in federal court, which resulted in entry of summary judgment in the Mortgagee's favor.

 

The Borrowers appealed to the Second Circuit, arguing that the Mortgagee failed to prove compliance with pre-foreclosure notice and filing requirements of the New York Real Property Actions and Proceedings Law ("RPAPL") §§ 1304, and 1306, respectively.

 

As to the first argument, the Borrowers argued that the Mortgagee did not adequately establish that it had served them with notice at least ninety days before commencing the foreclosure action, as required. See N.Y. Real Prop. Acts. Law § 1304(1)–(2). 

 

Under New York law, lenders may create a rebuttable presumption of compliance with section 1304 by submitting "proof of a standard office mailing procedure designed to ensure that items are properly addressed and mailed, sworn to by someone with personal knowledge of the procedure" (Citibank, N.A. v. Conti- 6 Scheurer, 98 N.Y.S.3d 273, 277 (N.Y. App. Div. 2d Dep't 2019)), but its recipients may rebut the presumption by denying receipt and "showing that [the] routine office practice was not followed or was so careless that it would be unreasonable to assume that the notice was mailed." Nassau Ins. Co. v. Murray, 386 N.E.2d 1085, 1086 (N.Y. 1978).

 

In the trial court, the Mortgagee submitted copies of the 90-day notices coupled with an affidavit from its employee explaining the Mortgagee's standard procedures to create, mail and store data regarding the 90 day pre-foreclosure notice as required by section 1304, and that the Mortgagee's standard practice is to create the notice upon default.

 

The trial court held that the affidavit was sufficient under state law to create a presumption that the § 1304 notices had been mailed, but the Second Circuit was hesitant to affirm on this basis, noting that the Borrowers' denial of receipt, coupled with an undisputed deviation from the Mortgagee's standard procedure in that the notices were generated and mailed nearly a year after the date of default and not "upon default," may be adequate to rebut the presumption of mailing. 

 

Because the Second Circuit found no authority from the New York Court of Appeals establishing the quantum of evidence necessary to rebut the presumption of mailing that is established by a showing of a standard procedure, it determined that it required guidance from the New York Court of Appeals to answer this dispositive question.

 

In support of their claims that the Mortgagee failed to comply with RPAL's pre-foreclosure filing requirements under § 1306(2), the Borrowers argued that the Mortgagee's filing with state regulators was inadequate because it did not include certain information as to all borrowers on the loan. 

 

The Borrowers and Mortgagee did not dispute that the section 1306 filing was timely submitted and included the "name, address, [and] last known telephone number" of the co-borrower wife, as required under § 1306(2), but did not include this information as to the co-borrower husband. 

Observing that neither the New York Court of Appeals nor the Appellate Division opined as to whether section 1306 required a lender to file specified information about all borrowers on a multi-borrower loan, the Second Circuit determined that this argument, too, turned on an question to be answered by New York state's highest court.

 

Because the Borrowers' arguments turned on unsettled questions of state law, on January 28, 2020 the Second Circuit issued its first opinion, certifying two questions to the New York Court of Appeals:

 

(1) "Where a foreclosure plaintiff seeks to establish compliance with RPAPL § 1304 through proof of a standard office mailing procedure, and the defendant both denies receipt and seeks to rebut the presumption of receipt by showing that the mailing procedure was not followed, what showing must the defendant make to render inadequate the plaintiff's proof of compliance with § 1304?", and

 

(2) "Where there are multiple borrowers on a single loan, does RPAPL § 1306 require that a lender's filing include information about all borrowers, or does § 1306 require only that a lender's filing include information about one borrower?"

 

After the New York Court of Appeals rendered its opinion on the two certified questions on March 30, 2021 (CIT Bank N.A. v. Schiffman, No. 11, 2021 WL 1177940 (N.Y. Mar. 30, 2021), the Second Circuit issued the instant opinion.

 

As to the § 1304 notification question, the New York Court of Appeals held that the presumption of mailing, once established by proof of a routine office practice, may be rebutted by a denial of receipt plus "proof of a material deviation from an aspect of the office procedure that would call into doubt whether the notice was properly mailed, impacting the likelihood of delivery to the intended recipient." Id. at *3.

 

In other words, "the crux of the inquiry is whether the evidence of a defect casts doubt on the reliability of a key aspect of the process such that the inference that the notice was properly prepared and mailed is significantly undermined. Minor deviations of little consequence are insufficient." Id.

 

Here, while the notice was created on November 18, 2015, rather than upon the Borrowers' default in December 2014, the Second Circuit concluded that merely creating the notice later than it would have been in the ordinary course was immaterial as to whether it was properly prepared and mailed. 

 

Accordingly, under the guidance provided by the New York Court of Appeals' answer to its certified question, the Second Circuit concluded that the Borrowers failed to rebut the presumption that the Mortgagee mailed, and the Borrowers received, the required § 1304 notices. 

 

Answering the second certified question as to whether the prefiling requirements under RPAPL § 1306 require information about all borrowers, the New York Court of Appeals concluded that "[a]lthough the statute does not specify whether information must be supplied [to the Superintendent] concerning each party when there are multiple individuals or entities on a single loan" … it "is satisfied as long as one borrower is listed."  CIT, 2021 WL 1177940, at *4.

 

Thus, the Mortgagee's omission of information as to the co-borrower husband in its section 1306 was irrelevant, because it timely submitted the filing with all required information about the co-borrower wife in compliance with the statute.

 

Accordingly, following the well-reasoned opinion of the New York Court of Appeals answering its certified questions, the Second Circuit concluded that summary judgment was appropriate because no genuine dispute existed that the Mortgagee complied with the pre-foreclosure requirements of RPAPL §§ 1304 and 1306, and affirmed the trial court's judgment.

 

 

 

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 7, 2021

FYI: Cal App Ct (4th Dist) Holds Rosenthal Act May Apply to Foreclosures, "Continuing Violation" Doctrine May Apply

The Court of Appeal of the State of California, Fourth Appellate District, recently reversed in part and affirmed in part a trial court's judgment sustaining the defendant loan servicer's and loan owner's demurrer (motion to dismiss) based on res judicata.

 

In the nonpublished portion of this opinion, the Court held that, as to three of the plaintiffs' causes of action — including their California Rosenthal Act cause of action — the trial court erred by sustaining the demurrer based on res judicata.

 

As to the remaining three causes of action, the plaintiffs did not articulate any reason why res judicata did not apply, and therefore forfeited any such contention.

 

However, in the published portion of this opinion, the Court held that the Rosenthal Act could apply to a nonjudicial foreclosure, and that the continuing violation doctrine may apply to Rosenthal Act claims.  The Court also concluded that the federal court opinions the defendants relied upon were superseded by controlling decisions of the Supreme Court of the United States, the Ninth Circuit, and the California Courts of Appeal.

 

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

 

In an action filed in December 2018, the plaintiffs alleged that the defendants, a group of financial institutions, attempted to collect a debt secured by the plaintiffs' home, despite having no legal right to do so.

 

The plaintiffs raised six causes of action: (1) violation of the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) (Civ. Code, § 1788 et seq.); (2) improper substitution of trustee (Civ. Code, § 2934a, subd. (a)); (3) unfair competition (Bus. & Prof. Code, § 17200); (4) negligent misrepresentation; (5) cancellation of instruments; and (6) intentional infliction of emotional distress.

 

The trial court sustained the defendants' demurrer to the entire complaint on the ground of res judicata, riling that the plaintiffs were asserting the same causes of action as in a prior federal action that they brought, unsuccessfully, against the defendants in 2016. The plaintiffs timely appealed.

 

The plaintiffs argued on appeal that their prior federal Fair Debt Collection Practices Act (FDCPA) cause of action and their present California Rosenthal Act cause of action were not the same, for several reasons. Of these, the Fourth Appellate District considered only their argument that their current Rosenthal Act cause of action arose out of "continuing violations" which occurred after the judgment in the 2016 federal action.

 

"[C]laim preclusion does not apply to claims that were not in existence and could not have been sued upon . . . when the allegedly preclusive action was initiated." Media Rights Technologies, Inc. v. Microsoft Corp. (9th Cir. 2019) 922 F.3d 1014, 1021.

 

The plaintiffs specifically alleged that defendants violated the Rosenthal Act "by engaging in abusive and oppressive conduct within one year of the filing of the Complaint through (i) unethical mismanagement of the escrow account; (ii) refusal to correct accounting errors or adequately responding to [the plaintiffs'] repeated disputes over several years; (iii) assessment of illegal fees; and improperly attempting to collect amounts that are not due to them."

 

The Fourth Appellate District determined that at least some of these alleged violations of the Rosenthal Act took place after the federal action was filed. Thus, the Court held that the Rosenthal Act cause of action was not barred by res judicata.

 

In addition, the unfair competition cause of action expressly incorporated "[t]he violations of law alleged in" the Rosenthal Act cause of action. Because at least some of these violations allegedly occurred after the complaint in the 2016 federal action was filed, the Fourth Appellate District also concluded that the unfair competition cause of action was not barred by res judicata.

 

The Appellate Court also noted that the cancellation cause of action sought to cancel the November 2018 notice of trustee's sale. As this instrument did not exist when the 2016 federal action was filed, the Court concluded that the plaintiffs could not have sought to cancel it in that action and res judicata did not apply.

 

Regarding the remaining causes of action, the plaintiffs only argued that they did not allege them in the 2016 federal action.

 

However, the Fourth Appellate District held that this does not prevent the application of res judicata. "Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding." (Brown v. Felsen (1979) 442 U.S. 127, 131.) Thus, the Court concluded that the plaintiffs forfeited any other argument regarding these causes of action.

 

Therefore, the Fourth Appellate District held that three causes of action — under the Rosenthal Act, for unfair competition, and for cancellation of instruments — were not barred by res judicata.

 

Next, the Court considered whether the demurrer to these causes of actions could have been sustained on alternative grounds.

 

The defendants also demurred to the Rosenthal Act cause of action on the ground that "[c]onduct undertaken in connection with the foreclosure of a deed of trust is not actionable under [the Rosenthal Act]."

 

The Fourth Appellate District observed that the Rosenthal Act is modeled on the federal FDCPA. It incorporates the FDCPA, in order that a violation of the FDCPA is per se a violation of the Rosenthal Act. (Civ. Code, § 1788.17.)

 

However, the Rosenthal Act is more extensive than the FDCPA. For example, the FDCPA does not apply to creditors seeking to collect their own debts; however, the Rosenthal Act does, "so long as they do so 'in the ordinary course of business, regularly.'" Huy Thanh Vo v. Nelson & Kennard, 931 F.Supp.2d 1080, 1090 (E.D. Cal. 2013) , quoting Civ. Code § 1788.2, subd. (c).

 

The defendants argued that the Rosenthal Act does not apply to foreclosure on a trust deed by citing several federal district court opinions. However, the Fourth Appellate District held that these opinions had been undermined by subsequent decisions of the Supreme Court of the United States, the Ninth Circuit, and the California Courts of Appeal.

 

In 2019, in Obduskey v. McCarthy & Holthus LLP (2019) U.S. [139 S.Ct. 1029], the Supreme Court of the United States effectively overruled the defendants' cited opinions, holding that a loan secured by a deed of trust is a "'debt' ... primarily for personal, family, or household purposes." (Id. at pp. 1033, 1035-1040.) (see 15 U.S.C. § 1692a(5))

 

Meanwhile, in 2018, Davidson v. Seterus, Inc., 21 Cal.App.5th 283 (2018), held that a loan secured by a trust deed can be a "consumer debt" within the meaning of the Rosenthal Act. (Id. at pp. 298-300.) The Fourth Appellate District decided that this definitive construction of state law effectively overruled the contrary federal cases.

 

The Fourth Appellate District also remarked that the California Legislature recently amended the Rosenthal Act so as to state that: "[t]he term 'consumer debt' includes a mortgage debt." (Civ. Code, § 1788.2, subd. (f), Stats. 2019, ch. 545, § 2, p. 5004.)

 

The defendants also argued that the Rosenthal Act cause of action was time-barred. The limitations period under the Rosenthal Act is one year. (Civ. Code, § 1788.30, subd. (f).) The defendants asserted that the plaintiffs were aware of allegedly unlawful debt collection practices as early as 2016, when they filed the federal action.

 

The Fourth Appellate District was not persuaded and held that, at a minimum, the plaintiffs can recover any damages flowing from the most recent violations that occurred after the 2016 federal action was filed.

 

Additionally, the Fourth Appellate District concluded that the continuing violation doctrine applied. "Under the appropriate circumstances . . . , the continuing violation doctrine may apply to [Rosenthal Act] claims." (Joseph v. J.J. Mac Intyre Companies, L.L.C. (N.D. Cal. 2003) 281 F.Supp.2d 1156, 1161. "The key is whether the conduct complained of constitutes a continuing pattern and course of conduct as opposed to unrelated discrete acts." (Id. at p. 1161.) If it does, "[a]pplication of the continuing violation doctrine to these facts is not only logical by way of analogy, it is entirely consistent with . . . the Rosenthal Act's broad remedial purpose of protecting consumers." (Id. at p. 1162.) The Court thus held that the demurrer to this cause of action could not have been sustained on these grounds.

 

In demurring to the unfair competition cause of action, the defendants argued that the plaintiffs failed to allege any unlawful, unfair, or fraudulent conduct. They also argued that this cause of action was time-barred.

 

However, the Fourth Appellate District held that "[v]irtually any law — federal, state or local — can serve as a predicate for a [UCL] action." (Law Offices of Mathew Higbee v. Expungement Assistance Services (2013) 214 Cal.App.4th 544, 553.) Because the plaintiffs adequately alleged violations of the Rosenthal Act, the Court concluded that they also adequately alleged "unlawful" business practices and that it need not decide whether the plaintiffs adequately alleged any unfair or fraudulent conduct.

 

The limitations period for unfair competition is four years. (Bus. & Prof. Code § 17208.) As the Rosenthal Act cause of action was not time-barred, the Fourth Appellate District also held that the unfair competition cause of action was not time-barred. The Court thus concluded that the demurrer to this cause of action could not have been sustained on these grounds.

 

Finally, in demurring to the cause of action for cancellation of instruments, the defendants argued that the plaintiffs failed to allege any facts showing that the instruments were void or voidable — i.e., the allegations to this effect were unduly conclusory.

 

One of the elements of a cause of action for cancellation of an instrument is that the instrument is void or voidable. (Civ. Code, § 3412; Thompson v. Ioane (2017) 11 Cal.App.5th 1180, 1193-1194.) The Fourth Appellate District conceded that the plaintiffs' allegations that the March 2009 and November 2009 assignments were invalid were indeed conclusory. However, the Court also noted that the plaintiffs did specifically allege that the January 2013 substitution of trustee and the April 2014 assignment were invalid because they were executed by an agent without subscribing the name of the principal. They also specifically alleged that the January 2013 substitution of trustee was invalid because the beneficiaries had not signed and recorded a majority action affidavit.

 

The Fourth Appellate District held that these allegations were not conclusory. Because the defendants did not argue otherwise, the Court assumed that these instruments were void or voidable. The Court thus concluded that the demurrer to this cause of action could not have been sustained on this ground.

 

Accordingly, the Fourth Appellate District reversed the trial court's judgment with respect to the first (Rosenthal Act), third (unfair competition), and fifth (cancellation of instruments) causes of action. However, the judgment was affirmed with respect to the second (improper substitution of trustee), fourth (negligent misrepresentation), and sixth (intentional infliction of emotional distress) causes of action.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Wednesday, June 2, 2021

FYI: 9th Cir Holds Servicer Did Not Need to Produce Servicing Contract to Assert Federal Foreclosure Bar

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's order of summary judgment in favor of a loan servicer ("Servicer") on claims arising from a non-judicial foreclosure sale conducted by a homeowners' association ("HOA") on real property located in Las Vegas, Nevada.

 

In so ruling, the Ninth Circuit held that:

 

(1) As loan servicer for a Government Sponsored Entity ("GSE"), the Servicer had standing to invoke the federal Foreclosure Bar ("Foreclosure Bar");

 

(2) The Servicer timely invoked the Foreclosure Bar by bringing the instant quiet title action within the appliable statute of limitations;

 

(3) the Foreclosure Bar applied to the HOA foreclosure sale at issue; and

 

(4) the Foreclosure Bar preempted Nevada law regarding the priority of the HOA's lien.

 

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

 

In 2005, two borrowers obtained a $219,200.00 loan ("Loan") secured by a Deed of Trust ("DOT") recorded against real property located in Las Vegas, Nevada (the "Property"). One of the GSEs purchased the Loan in March 2005. On October 28, 2010, an assignment of the DOT was recorded assigning the DOT to the Loan's prior servicer ("Prior Servicer").

 

As a result of borrowers' failure to pay their HOA dues, the HOA foreclosed on the Property and sold it to Co-Defendant Trust (the "Trust") on October 5, 2012 (the "HOA Foreclosure").  In August 2013, an assignment of the DOT was recorded assigning the DOT to Plaintiff.  In September 2013, the Trust conveyed the Property to Co-Defendant Limited Liability Company (the "LLC Defendant").

 

On November 11, 2015, the Servicer instituted the instant action against the Trust and LLC Defendant seeking to quiet title and obtain a "declaration that [GSE's interest in the Property] was not extinguished by the HOA Foreclosure."  The trial court granted summary judgment in favor of the Servicer finding that the Foreclosure Bar prevented the extinguishment of the GSE's interest in the Property.  The LLC Defendant timely appealed the trial court's summary judgment order.

 

On appeal, LLC Defendant initially argued that the Servicer lacked standing to invoke the Foreclosure Bar.  The Ninth Circuit disagreed, explaining that the Nevada Supreme Court previously declared that a "a loan servicer has standing to assert the Federal Foreclosure Bar on behalf of . . . Fannie Mae."  Daisy Tr. v. Wells Fargo Bank, N.A., 445 P.3d 846, 847 n.1 (Nev. 2019) (en banc).

 

The Ninth Circuit separately determined that the Servicer "presented ample evidence" establishing its servicing relationship with the GSE. Indeed, this relationship, coupled with the authority the GSE "delegates to its loan servicers .. was more than sufficient to establish that [Servicer] was [the GSE's] loan servicer and had the authority to assert the Foreclosure in this case."

 

Having found that the Servicer had the requisite standing, the Ninth Circuit next determined that the Servicer timely invoked the Foreclosure Bar by bringing the instant quiet title action within the applicable six-year statute of limitations under 12 U.S.C. § 4617(b)(12)(A).

 

The LLC Defendant proceeded to argue that the HOA foreclosure extinguished the DOT before it was assigned to Plaintiff.  As you may recall, the Foreclosure Bar applies if, "at the time of the foreclosure sale; (1) [the GSE] was in FHFA conservatorship; (2) [the GSE] owned the [DOT]; and (3) [the GSE] had an agency relationship with…the beneficiary of record on the [DOT]."

 

Concerning the first factor, the Ninth Circuit noted the GSE was placed in the "FHFA's conservatorship on September 6, 2008 and remains there today."  As to the second and third elements, the Court held that both requirements were met as the Servicer introduced evidence that: (1) the GSE acquired the Loan on March 1, 2005 and continued to own it through the HOA Foreclosure; and (2) the Prior Servicer was acting as the GSE's servicer for this Loan until transferring that responsibility to the Servicer on April 30, 2013.

 

Importantly, and contrary to the LLC Defendant's argument, the Court held that the Servicer was not required to specifically produce the "Mortgage Servicing Contract" in order to establish an agency relationship with the GSE. See Daisy Tr., 445 P.3d at 849–50.

 

The LLC Defendant separately argued that the GSE did not hold an ownership interest in the Loan because the Servicer did not produce a "signed writing" in accordance with Nevada's statute of frauds.  The Ninth Circuit rejected this argument stating that the LLC Defendant was not a party to the agreement to which the GSE acquired the Loan, and thus the LLC Defendant lacked standing to raise a statute of frauds defense.

 

The Court further determined that: (1) Nevada's recording statutes did not require the GSE to be identified as the beneficiary of record in order to establish its ownership interest in the Loan; (2) it was adequate for the Loan's servicer to be listed as the Loan's beneficiary at the time of the HOA Foreclosure; and (3) even if Nevada's bona fide purchaser statutes were at issue, the LLC Defendant was not a bona fide purchaser as it had "constructive knowledge of [the GSE's] interest in the [DOT]."

 

The Ninth Circuit also held that "the Foreclosure Bar preempts the Nevada super-priority lien scheme," stating that this preemption issue has "already been clearly and repeatedly answered."

 

Lastly, the LLC Defendant argued the trial court wrongly granted the Servicer "equitable relief from the recitals in the foreclosure deed, namely the default recital."  Assuming and without deciding whether the relief was equitable in nature, the Ninth Circuit rejected this argument because the LLC Defendant failed to explain "how, under Nevada law, monetary damages constitute an adequate remedy for loss of real property rights."

 

Accordingly, and for all of the above reasons, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Servicer. 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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Monday, May 31, 2021

FYI: MA SJC Holds State False Claims Act Action Barred by Prior Public Disclosure

The Massachusetts Supreme Judicial Court recently affirmed a trial court's judgment dismissing a relator's claims alleging that the defendants, certain financial institutions, collectively engaged in and conspired to engage in fraud, holding that the suit was subject to the public disclosure bar of the Massachusetts False Claims Act (MFCA), Mass. Gen. Laws ch. 12, 5A-50.

 

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

 

The Massachusetts False Claims Act (MFCA) prohibits making fraudulent claims against the Commonwealth and its municipalities. See G. L. c. 12, §§ 5A-5O. The statute also permits enforcement of that prohibition by means of qui tam actions, in which "[a]n individual, hereafter referred to as a relator, may bring a civil action . . . on behalf of the relator and the [C]ommonwealth or any political subdivision thereof." G. L. c. 12, §§ 5A, 5C (2). The Commonwealth may intervene and take over the case. G. L. c. 12, §§ 5C (3), 5D. Successful relators are awarded a percentage of the funds recovered by the Commonwealth. G. L. c. 12, § 5F.

 

The relator commenced this action on behalf of the Commonwealth against the defendants, certain financial institutions and their subsidiaries, alleging that the defendants collectively engaged in and conspired to engage in fraud in connection with resetting interest rates for certain municipal bonds, referred to as variable rate demand obligations (VRDOs).

 

The defendants argued that dismissal was required pursuant to the MFCA's public disclosure bar because the subject transactions had previously been disclosed to the public through news media and the relator was not an original source of the information concerning the fraud. The trial court agreed with the defendants, and granted their motion to dismiss the complaint. The relator timely appealed.

 

The MCFA includes a public disclosure bar, which attempts to prevent "parasitic" suits, United States ex rel. Ondis v. Woonsocket, 587 F.3d 49, 53 (1st Cir. 2009), where a relator, "instead of plowing new ground, attempts to free-ride by merely repastinating previously disclosed badges of fraud," id., citing United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 26-27 (1st Cir. 2009), cert. denied, 561 U.S. 1005 (2010).

 

Where, as here, the Commonwealth chooses not to intervene, a multipart inquiry governs whether the public disclosure bar applies. "The first three parts of this inquiry ask: (1) whether there has been a prior, public disclosure of fraud; (2) whether that prior disclosure of fraud emanated from a source specified in the statute's public disclosure provision; and (3) whether the relator's qui tam action is [substantially the same as] that prior disclosure of fraud." United States ex rel. Poteet v. Bahler Med., Inc., 619 F.3d 104, 109 (1st Cir. 2010).

 

Where "all three questions are answered in the affirmative, the public disclosure bar applies unless the relator qualifies under the 'original source' exception." Poteet, supra at 109-110, quoting Ondis, supra at 53-54.

 

The Supreme Judicial Court determined that the defendants here must establish that "both [the] misrepresented state of facts and [the] true state of facts" were in the public domain when the relator filed his claims. Poteet, supra.

 

The Court found that the defendants' representations that they would comply with the obligations in their agreements with the VRDO issuers were set forth in several publicly available sources, including Municipal Securities Rulemaking Board (MSRB) rules that address remarketing agents' duties to VRDO issuers; Securities Industry Financial Markets Association (SIFMA) model disclosures; and the remarketing agreements, including remarketing circulars and official statements, reached between the defendants and the Commonwealth. See Poteet, 619 F.3d at 110, citing United States ex rel. Maxwell v. Kerr–McGee Oil & Gas Corp., 540 F.3d 1180, 1185 (10th Cir. 2008).

 

The Supreme Judicial Court held that these sources disclosed that the defendants undertook (purportedly falsely) to comply with their obligations to obtain the lowest possible interest rates that would have permitted a sale on the market on a given rate determination date. Thus, the Court concluded that the defendants had shown a prior public disclosure of the misrepresented state of facts alleged in the complaint.

 

Accordingly, the Supreme Judicial Court turned to the question of whether the second element of fraud was disclosed -- namely, whether there was a public disclosure of the "true state of facts so that the listener or reader may infer fraud." See Poteet, 619 F.3d at 110.

 

The Supreme Judicial Court held that it sufficed that other members of the public, albeit with sufficient expertise and after having conducted some analysis, could have identified the true state of affairs by using the data publicly available on the Electronic Municipal Market Access ("EMMA") website. United States ex rel. Findley v. FPC–Boron Employees' Club, 105 F.3d 675, 688 (D.C. Cir.), cert. denied, 522 U.S. 865 (1997), citing Springfield, 14 F.3d at 655.

 

Having determined that there was a public disclosure of the essential elements of the fraud, the Supreme Judicial Court turned to consider the second prong of the public disclosure bar: whether the prior disclosure "emanated from a source specified in the statute's public disclosure provision." Poteet, 619 F.3d at 109. Specifically, the Court considered whether the forum in which the public disclosure was made fell within any of three sources enumerated in the statute, (1) "a Massachusetts criminal, civil or administrative hearing in which the [C]ommonwealth is a party"; (2) "a Massachusetts legislative, administrative, auditor's or inspector general's report, hearing, audit or investigation"; or (3) "the news media." See G. L. c. 12, § 5G (c).

 

According to the complaint, the first publicly disclosed element of the asserted fraud, namely, the misrepresentation that the defendants would undertake to obtain the lowest interest rates that, in their judgment, would permit the sale of the VRDOs, was disclosed in the governing remarketing agreements, including in the official statements. The Supreme Judicial Court held that these official statements comprised Massachusetts "reports,"  one of the statutorily enumerated sources.

 

Additionally, the second publicly disclosed element of the fraud --namely, the assertion that the defendants were not obtaining the lowest interest rate that would permit the sale of the VRDOs, and instead were remarketing the bonds en masse in a way that did not obtain the lowest rates -- was disclosed on the EMMA website.

 

The Supreme Judicial Court held that the term "news media" is broad enough to encompass the many ways in which people in the modern world obtain financial news, including from publicly available websites on the Internet. See, e.g., United States ex rel. Repko vs. Guthrie Clinic, P.C., U.S. Dist. Ct., No. 3:04CV1556 (M.D. Pa. Sept. 1, 2011), aff'd, 490 Fed. Appx. 502 (3d Cir. Aug. 1, 2012).

The Court found that EMMA is the "official repository for information on all municipal bonds" and provides updates to bond market information by means of the Internet; the website is publicly available and widely disseminated. Therefore, the Court concluded that EMMA is much like traditional news sources that report market data and fall within the scope of the term "news media." See Poteet, 619 F.3d at 110

 

The Supreme Judicial Court next considered the third prong of the public disclosure inquiry: whether the public disclosure includes "substantially the same allegations or transactions as alleged in the action or claim." Poteet, 619 F.3d at 109. A "complaint that targets a scheme previously revealed through public disclosures is barred even if it offers greater detail about the underlying conduct." Winkelman, 827 F.3d at 210, citing Poteet, 619 F.3d at 115.

 

Here, the Supreme Judicial Court held that the publicly disclosed information was sufficient to put the Commonwealth "on the trail of the alleged fraud" without the relator's assistance. See Reed, 923 F.3d at 744, citing Fine, 70 F.3d at 571.

 

Because the public disclosure bar was applicable in this case, the Supreme Judicial Court reasoned that the complaint must be dismissed unless the relator was an "original source." See Poteet, 619 F.3d at 109-110. General Laws c. 12, § 5A, defines two types of relators who may qualify as original sources:

 

"an individual who: (1) prior to a public disclosure under paragraph (3) of [§] 5G, has voluntarily disclosed to the [C]ommonwealth or any political subdivision thereof the information on which allegations or transactions in a claim are based; or (2) has knowledge that is independent of and materially adds to the publicly-disclosed allegations or transactions, and who has voluntarily provided the information to the [C]ommonwealth or any political subdivision thereof before filing a false claims actions."

 

The relator contended that his knowledge was "independent of" EMMA because the complaint did not allege that he relied on that website to obtain the data underlying his analysis; it sufficed to defeat the defendants' motion, he argued, that the complaint alleged that his forensic analysis also used nonpublic, proprietary sources notwithstanding that the same data was available from EMMA.

 

However, the Supreme Judicial Court concluded that the relator cited no authority for the proposition that a relator may take advantage of the original source exception by using a nonpublic source to access the exact same data readily available from public sources. To the contrary, the Court noted that "when a relator's qui tam action is based solely on material elements already in the public domain, that relator is not an original source." Kennard v. Comstock Resources, Inc., 363 F.3d 1039, 1045 (10th Cir. 2004), cert. denied, 545 U.S. 1139 (2005).

 

The Court determined that the EMMA website publicly reported the same data upon which the relator relied, and the relator's analysis depended entirely on the interest rate data, which was available on EMMA. Thus, the Court concluded that the relator's analysis could not be said to be "independent of" the publicly disclosed transaction discussed. See Ondis, 587 F.3d at 59.

 

Accordingly, the Supreme Judicial Court affirmed the trial court's judgment.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Saturday, May 29, 2021

FYI: 6th Cir Agrees No Article III Standing in FACTA "Truncation" Putative Class Action

The U.S. Court of Appeals for the Sixth Circuit recently affirmed dismissal of a consumer's claims that a retail food store violated the federal Fair and Accurate Credit Transactions Act of 2003's (FACTA) "truncation requirement" by printing more digits of the consumer's credit card than permissible by statute.

 

In so ruling, the Sixth Circuit held that the alleged violation did not establish an increased risk of identity theft, and thus, did not satisfy Article III's injury in fact requirement to establish standing for her FACTA claim, agreeing with the majority of the other federal appellate courts on this issue.

 

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

 

A consumer ("Consumer")  made a purchase at a fast-food restaurant location operated by a franchisee that owns over 130 locations of the prominent burger chain, where she allegedly received an electronically printed receipt containing the first six and last four digits of her card number. 

 

As you may recall, FACTA was enacted in 2003 as an amendment to the Fair Credit Reporting Act aimed to prevent identity theft, and provides that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of sale or transaction." 15 U.S.C. § 1681c(g)(1) (the "truncation requirement").

 

The Consumer filed a putative class action complaint against the restaurant and its related corporate entities ("Restaurant") on behalf of all similarly situated customers who received allegedly noncompliant receipts from the Restaurant within two years of the suit's filing date, alleging violations of FACTA's truncation requirement.

 

The trial court dismissed the complaint without prejudice on the basis that the court lacked subject matter jurisdiction over the Consumer's claims because she failed to demonstrate any harm to her identity based upon the Restaurant's technical violation of FACTA, and that allegations of hypothetical future injury were insufficiently concrete to confer standing under Article III.  The instant appeal followed.

 

On appeal, the Sixth Circuit noted that, to satisfy Article III standing requirements, a plaintiff must show (1) she suffered an injury in fact, (2) caused by defendants, that (3) is redressable by a judicial decision (Spokeo v. Robins, 136 S. Ct. 1540, 1547 (2016)).  The appellate court further noted that the injury-in-fact requirement is not automatically satisfied by a statutory violation (Id. at 1549), but requires a "concrete injury even in the context of a statutory violation."  Thole v. U.S. Bank N.A., 140 S. Ct. 1615, 1620–21 (2020) (quoting Spokeo, 136 S. Ct. at 1549). 

 

Here, the Consumer contended that she suffered a concrete injury based on a congressional grant of a statutory right and remedy.  The Sixth Circuit acknowledged that the "the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact . . . [and] a plaintiff in such a case need not allege any additional harm beyond the one Congress has identified" (Spokeo, 136 S. Ct. at 1549).

 

However, the Sixth Circuit rejected the Consumer's claim that the risk of identity theft here constituted a concrete injury, as consistent with the findings of other circuits presented with identical facts (disclosure of the first six and last four digits of the consumer's credit card).  See Muransky, v. Godiva Chocolatier, Inc., 979 F.3d 917, 928-29 (11th Cir. 2020) (en banc); Katz v. Donna Karan Co., LLC, 872 F.3d 114, 116 (2d Cir. 2017); Noble v. Nevada Checker Cab Corp., 726 F. App'x 582, 583 (9th Cir. 2018) (first and last four digits); see also Kamal v. J. Crew Grp., Inc., 918 F.3d 102, 113 (3d Cir. 2019) (Clarification Act enacted after FACTA, which limited liability for printing the expiration date, "also expresses Congress's judgment that not all procedural violations of FACTA will amount to concrete harm").

 

The Consumer further claimed that the increased-risk-of-injury constituted real harm, arguing that FACTA creates a concrete interest "vest[ing] consumers with an interest in using their credit and debit cards without facing an increased risk of identity theft." See Jeffries v. Volume Servs. Am., Inc., 928 F.3d 1059, 1064 (D.C. Cir. 2019).  In Jeffries, the D.C. Circuit held that the plaintiff in Jeffries did suffer an injury in fact because the receipt which contained all sixteen digits and the expiration date "contained enough information to defraud [the plaintiff]."  Id. at 1067. 

 

The Sixth Circuit reasoned that the Jeffries found standing because the complaint alleged sufficient fats to establish that a violation of the statute actually caused harm or risk of harm, but that no such risk existed here, because the Consumer's complaint failed to aver how "whether the challenged violation of [the plaintiff's] statutory right harmed or created a 'risk of real harm' to the concrete interests protected by FACTA." Id. at 1065.

 

Moreover, the Consumer here did not allege that the receipt was lost, stolen, or seen by a third set of eyes, and while forcing her to safeguard her receipt can be a legitimate injury, such a hypothetical future harm is not a concrete injury.  Muransky, 979 F.3d at 931 (internal quotation omitted).

 

Lastly, the Sixth Circuit considered the Consumer's arguments that the intangible harm caused by the purported FACTA violation was analogous to common law torts of breach of confidence and invasion of privacy.  As the Supreme Court of the United States stated in Spokeo, "it is instructive to consider whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts." 136 S. Ct. at 1549.

 

The Jeffries court concluded that a FACTA violation resembles a common law breach of confidence because the truncation requirement establishes a similar relationship of trust between consumer and merchant by requiring the merchant to safeguard a customer's card information (Jeffries at 1064–65), but other circuit courts have found no resemblance. 

 

The Third Circuit in Kamal rejected the analogy because there was no allegation of disclosure of the consumer's information to a third party (Kamal, 918 F.3d at 114) while the Eleventh Circuit found any analogy lacking based on the absence of disclosure to a third party and lack of a confidential relationship that typically exists between a consumer and retailer. (Muransky at 932). 

 

Noting that the receipt was not disclosed to a third party causing injury or increased risk of harm, the Sixth Circuit agreed with the Third and Eleventh Circuit's view rejecting the Consumer's breach of confidence analogy, as well as her invasion of privacy analogy on the same basis.

 

Because the Consumer failed to satisfy Article III's injury in fact requirement, the trial court's dismissal of her FACTA claim was affirmed.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Thursday, May 27, 2021

FYI: 2nd Cir Rejects Spokeo Challenge to Putative Class Action Over Alleged Delays in Recording Mortgage Satisfactions

The U.S. Court of Appeals for the Second Circuit recently held that a borrower had Article III standing to sue in federal court for statutory damages from a mortgagee for its alleged violations of New York's mortgage satisfaction recording statutes.

 

In so ruling, the Second Circuit held that:

 

-  State legislatures may create legally protected interests whose violation supports Article III standing, subject to certain federal limitations.

 

-  The mortgagee's alleged failure to record the plaintiffs' mortgage discharge created a material risk of concrete and particularized harm to the plaintiffs by providing a basis for an unfavorable credit rating and reduced borrowing capacity.

 

-  These risks and interests, in addition to that of clouded title, which an ordinary mortgagor would have suffered (but plaintiffs did not), are similar to those protected by traditional actions at law.

 

-  The plaintiffs could pursue their claims for the statutory penalties imposed by the New York Legislature, as well as for other relief.

 

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

 

The trial court held that the plaintiffs had Article III standing to seek statutory damages from a mortgagee for its violations of New York's mortgage-satisfaction-recording statutes. N.Y. Real P. Law ("R.P.L.") § 275, N.Y. 20 Real P. Actions & Proc. L. ("R.P.A.P.L.") § 1921.

 

These statutes require mortgage lenders to record satisfactions of mortgage (also known as "certificates of discharge") within thirty days of the borrower's repayment. A failure renders the lender liable to the mortgagor for increasing statutory damages in amounts dependent on the lateness of the ultimate filing; for a ninety-day delay, the penalty is $1,500. R.P.L. § 275(1); R.P.A.P.L. § 1921(1).

 

Here, the defendant mortgagee allegedly did not record the satisfaction of the plaintiffs' mortgage until nearly  eleven months after full payment was received and almost ten months after the law required. Therefore, the plaintiffs sued for the statutory penalty and to represent a class of similarly wronged borrowers.

 

After denying the mortgagee's motion for judgment on the pleadings, the trial court certified for interlocutory appeal the question of whether the plaintiffs had Article III standing to sue the mortgagee for statutory damages and other relief. The Second Circuit accepted the certification.

 

The Second Circuit first held that the invasion of interests protected by state law can support Article III standing. The Court determined that if a statute protects against a harm bearing a "close relationship" to a harm traditionally recognized at common law, the harm alleged due to a violation of that statute constitutes a concrete injury in fact sufficient to establish Article III without any additional showing. Spokeo Inc. v. Robins, 136 S. Ct 1540, 1549 (2016).

 

In R.P.L. § 275 and R.P.A.P.L. § 1921, the New York State Legislature obligated lenders to timely file mortgage satisfactions and gave borrowers rights to claim a penalty payment in designated amounts for the mortgagee's failure to comply.

 

The Court held that the intangible rights the mortgage-satisfaction-recording statutes seek to protect and the concurrent injury from a mortgagee's violation of the statutes, i.e., the delay in recording a mortgage satisfaction, have "a close relationship to [multiple] harm[s] that ha[ve] traditionally been regarded as providing a basis for lawsuit in English or American courts." Id. Specifically, the Court concluded that the interests are similar to those in common law cloud of title and defamation suits.

 

The Second Circuit next decided that the plaintiffs' complaint supported a plausible inference that the bank's violation both (1) harmed the plaintiffs' financial reputations during the nearly ten-month period of the mortgagee's noncompliance with the thirty-day filing deadline, and (2) created a material risk of particularized harm to them during that period by impairing their credit and limiting their borrowing capacity. The Court also noted that these interests are protected by the state's statutory timely filing requirements and its imposition of a penalty payment obligation on the noncompliant bank to the wronged borrower.

 

Furthermore, the Court reasoned that, even if it were to characterize the satisfaction-of-mortgage statutes as "procedural" (as the trial court did) rather than substantive, it would still hold that the plaintiffs established a concrete injury for Article III purposes. Although Spokeo held that "a bare procedural violation, divorced from any concrete harm" does not satisfy the injury-in-fact requirement of Article III, "the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact," such as when the violation presents a "material risk of [concrete] harm." Id. at 1549-50.

 

The Second Circuit found that, during the mortgagee's alleged ten-month delay in recording the discharge of more than $50,000 in debt, there was in the Court's view a real risk of material harm to the plaintiffs of the type that the legislation would be expected to protect against. Specifically, the Court inferred that the delay adversely affected the plaintiffs' credit during the ten months, making it difficult to obtain financing had they needed it in an emergency, and left a false public record of indebtedness even if they had not attempted to borrow.

 

Because it held that a mortgagee's violation of the mortgage-satisfaction-recording statutes by itself gives rise to a risk of real harm, the Second Circuit also concluded that a mortgagor need not allege any further harm to meet the concrete injury requirement. Regardless, the Court also decided that the plaintiffs in fact suffered impaired credit and a loss in financial reputation during those ten months in which their discharge unlawfully went unrecorded.

 

Accordingly, considering these particularized actual harms and risks of harm and their general recognition in the common law, the Second Circuit held that the plaintiffs had Article III standing to pursue their claims.

 

Therefore, the Court affirmed the trial court's judgment and remanded the case for further proceedings consistent with its ruling.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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

 

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and

 

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